[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
EFFORTS TO INFORM THE PUBLIC ABOUT SOCIAL SECURITY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SOCIAL SECURITY
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
APRIL 11, 2000
__________
Serial 106-60
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
66-357 CC WASHINGTON : 2000
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois
BILL THOMAS, California
E. CLAY SHAW, Jr., Florida
NANCY L. JOHNSON, Connecticut
AMO HOUGHTON, New York
WALLY HERGER, California
JIM McCRERY, Louisiana
DAVE CAMP, Michigan
JIM RAMSTAD, Minnesota
JIM NUSSLE, Iowa
SAM JOHNSON, Texas
JENNIFER DUNN, Washington
MAC COLLINS, Georgia
ROB PORTMAN, Ohio
PHILIP S. ENGLISH, Pennsylvania
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
ROBERT T. MATSUI, California
WILLIAM J. COYNE, Pennsylvania
SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
JIM McDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia
RICHARD E. NEAL, Massachusetts
MICHAEL R. McNULTY, New York
WILLIAM J. JEFFERSON, Louisiana
JOHN S. TANNER, Tennessee
XAVIER BECERRA, California
KAREN L. THURMAN, Florida
LLOYD DOGGETT, Texas
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
SUBCOMMITTEE ON SOCIAL SECURITY
E. CLAY SHAW, Jr., Florida, Chairman
SAM JOHNSON, Texas
MAC COLLINS, Georgia
ROB PORTMAN, Ohio
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
JIM McCRERY, Louisiana
ROBERT T. MATSUI, California
SANDER M. LEVIN, Michigan
JOHN S. TANNER, Tennessee
LLOYD DOGGETT, Texas
BENJAMIN L. CARDIN, Maryland
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 April 4, 2000, announcing the hearing................ 2
WITNESSES
Social Security Administration, Hon. Kenneth S. Apfel,
Commissioner of Social Security................................ 24
U.S. General Accounting Office, Barbara D. Bovbjerg, Associate
Director, Education, Workforce, and Income Security Issues;
Health, Education, and Human Services Division; accompanied by
Kay Brown, Assistant Director, and Ken Stockbridge, Senior
Evaluator...................................................... 33
______
Aaron, Henry J., Brookings Institution and National Academy of
Social Insurance............................................... 63
Alliance for Worker Retirement Security, and Hewlett-Packard
Company, Gary Fazzino.......................................... 49
American Academy of Actuaries, Ron Gebhardtsbauer................ 56
Hoekstra, Hon. Peter, a Representative in Congress from the State
of Michigan.................................................... 8
John, David, Heritage Foundation................................. 75
National Women's Law Center, Joan Entmacher...................... 70
Pomeroy, Hon. Earl, a Representative in Congress from the State
of North Dakota................................................ 10
Salisbury, Dallas, Employee Benefit Research Institute........... 42
Sununu, Hon. John E., a Representative in Congress form the State
of New Hampshire............................................... 14
Third Millennium, Richard Thau................................... 46
2030 Center, Hans Riemer......................................... 53
Weller, Hon. Jerry, a Representative in Congress from the State
of Illinois.................................................... 5
SUBMISSION FOR THE RECORD
Gregg, Hon. Judd, a United States Senator from the State of New
Hampshire...................................................... 88
EFFORTS TO INFORM THE PUBLIC ABOUT SOCIAL SECURITY
----------
TUESDAY, APRIL 11, 2000
House of Representatives,
Committee on Ways and Means,
Subcommittee on Social Security,
Washington, DC.
The Subcommittee met, pursuant to notice, at 3:08 p.m., in
room B-318, Rayburn House Office Building, Hon. E. Clay Shaw,
Jr. (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON SOCIAL SECURITY
CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
April 4, 2000
No. SS-15
Shaw Announces Hearing on
Efforts to Inform the Public about Social Security
Congressman E. Clay Shaw, Jr., (R-FL), Chairman, Subcommittee on
Social Security of the Committee on Ways and Means, today announced
that the Subcommittee will hold a hearing on efforts to inform the
public about the Social Security program. The hearing will take place
on Tuesday, April 11, 2000, in room B-318 Rayburn House Office
Building, beginning at 3:00 p.m.
Oral testimony at this hearing will be from invited witnesses only.
However, 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:
Americans need to have a basic understanding of the Social Security
program, its benefits, and its financing in order to make informed
decisions about Social Security's future and their own retirement
planning. This information may be provided through a variety of
sources.
For example, beginning last year, the Social Security
Administration has been mailing annual Social Security statements to
all workers age 25 and older to inform them about the Social Security
program and to help them plan for retirement. The statement provides
workers with estimates of their potential Social Security benefits
based on their earnings. The statement also provides workers with a
record of their earnings and a fact sheet about the Social Security
program.
Another important source of information about the Social Security
program is the Board of Trustees' annual report on the financial status
of the Social Security Trust Funds. This report includes a great deal
of information about Social Security's financing and the projected
economic and demographic trends which affect the program's future. The
annual report is an important source of data on the Social Security
program.
In announcing the hearing, Chairman Shaw stated: ``The mailing of
Social Security statements is an unprecedented, personalized outreach
to all American workers about Social Security and what it means to
their retirement security. American workers have the right to know as
much as possible about their financial future, including the amount of
Social Security benefits they have earned and any factors that may
qualify their confidence in getting their full benefits. This hearing
will examine what Social Security is telling taxpayers, and whether
that information is accurate, understandable, and useful.''
FOCUS OF THE HEARING:
The hearing will examine the information available to the public
about the Social Security program, its benefits and its future
financing. The hearing will also examine recommended changes to this
information and the way information is delivered to the public.
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 or MS Word format, with their name, address,
and hearing date noted on a label, by the close of business, Tuesday,
April 25, 2000, to A.L. Singleton, Chief of Staff, Committee on Ways
and Means, U.S. House of Representatives, 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 Subcommittee on Social Security office, room B-316
Rayburn 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 or
MS Word 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.
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 Shaw. We will now proceed. Good afternoon. Today's
hearing is about a simple and widely accepted truth: Knowledge
is power. It is interesting to see how much power is sitting at
that table in front of me. Only if American workers and
families understand Social Security and how it may benefit them
will they have the power to effectively plan their financial
future. So several questions logically follow: What do
Americans know about Social Security? What does the Social
Security Administration tell them today? And how can we help
Americans understand more about Social Security, so they can
better plan for their retirement?
With us today are a number of experts on these topics,
starting with Social Security Commissioner Ken Apfel. We also
are pleased to welcome witnesses from the General Accounting
Office and a number of think tanks and associations
representing young people, women, and employers. And for anyone
who thinks that a Social Security Hearing is incomplete without
testimony from an actuary and an economist, we have got those
bases covered, too.
We welcome all of our witnesses, as well as Representatives
Weller, Hoekstra, Pomeroy, and Sununu, who will lead off our
hearing. Together, we think through ways to provide workers and
beneficiaries with the most accurate, useful, and personalized
information about Social Security possible, especially given
the challenges Social Security will face paying full benefits
in the future. Getting that information out to workers and
beneficiaries now is quite essential.
As I mentioned at the outset, with that knowledge will come
the power for workers and families to decide whether and how
they must adjust their work, savings, and retirement plans for
the long haul.
Mr. Matsui.
Mr. Matsui. Thank you, Mr. Chairman. I am just going to
submit my statement for the record, given the fact that we have
five panels today. And I want to welcome all the witnesses, the
four here on this panel and, obviously, Mr. Apfel, the GAO, and
others that will be testifying. Thank you.
[The opening statement follows:]
Statement of Hon. Robert T. Matsui, a Representative in Congress from
the State of California
I would like to thank Chairman Shaw for holding this
hearing. Our topic today is extremely important. I believe the
American people deserve to receive the most accurate
information possible about the Social Security benefits they
have earned and about the future of the Social Security
program.
Last October, as required by law, the Social Security
Administration (SSA) began mailing annual individualized Social
Security Statements to every worker in the United States over
the age of 25. SSA expects to send out 125 million Statements
over the course of this fiscal year.
The Statements serve two main functions. First, they are
designed to assist workers with retirement and financial
planning by providing them with an estimate of the Social
Security benefits for which they will be eligible when they
retire, if they become disabled, or if they die at an early
age. Second, they are designed to help SSA maintain accurate
earnings records so that workers are sure to receive the
benefits that they have earned. Each Statement lists the
earnings that SSA has on record for that worker and provides
him or her with an 800 number to call if SSA's records are
incorrect.
Some Members of Congress as well as other individuals have
suggested that more information should be added to the Social
Security Statement. Clearly, in order for the American people
to make sound decisions about their own retirements and about
the changes that will have to made in the Social Security
program, they should have as much information as possible at
their disposal. But it is vitally important that that
information is thorough, objective, and easy to understand.
I am concerned, however, that the changes some would seek
could diminish, rather than enhance the public's understanding
of the Social Security program and the benefits they can expect
to receive from it.
Some proposals including one we will hear about today would
require the Statement to compare rates of return under Social
Security versus a hypothetical privatized system. Other
proposals would require the Social Security Statement and the
Trustees' Report to contain statements calling into question
the existence of the Social Security Trust Funds.
I would have serious concerns about either type of
proposal.
Of course, the most productive way to resolve the question
of what level of benefits people workers can expect to receive
from Social Security in the future is to enact legislation to
strengthen Social Security.
Rather than simply talking about Social Security Statements
or the Trustees' Report and how they may influence the public's
confidence in the future of Social Security, Congress should be
acting to bolster America's confidence in the program. Instead
of holding hearings to discuss hypothetically what may happen
once the Trust Funds are exhausted in 2037, this Subcommittee
should be marking up legislation to make it absolutely certain
that the program will be able to pay full benefits to each and
every generation of American workers.
Democrats have introduced legislation to extend the Social
Security Trust Funds beyond 2050, but that bill has not moved.
I hope we can do a little more this year than consider lock-box
proposals. As we all know, lock-boxes will do nothing to
improve Social Security's finances and will not extend the
Social Security Trust Funds by even a single day.
I look forward to hearing from Commissioner Apfel and from
Ms. Bovbjerg of the General Accounting Office about the steps
the Social Security Administration has taken to enhance the
annual Social Security Statement. I also look forward to
hearing views from the other witnesses about the usefulness of
the information contained in the Social Security Statement and
in annual Trustees' Report.
Thank you, Mr. Chairman for yielding me this time. I look
forward to working with my colleagues toward our common goal of
strengthening the Social Security program for future
generations.
Chairman Shaw. I would say to all the witnesses that we do
have your complete statement to be made a part of the record.
We are going to be interrupted with a series of votes here
shortly. I would like to try to get through as much as we can.
So I would really, particularly today because of the length of
our agenda, ask that if everyone can summarize we would be most
appreciative.
Mr. Weller.
STATEMENT OF HON. JERRY WELLER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF ILLINOIS
Mr. Weller. Mr. Chairman, Mr. Matsui, I appreciate the
opportunity to testify before a Subcommittee I am proud to be
part of. And I appreciate the opportunity to work with you as
we work to solve the challenges facing Social Security.
And as we have all shared, you know, there are few concerns
of greater priority to working families than their pension or
retirement plans. And clearly, Social Security has emerged over
the last 60-some years as a key component of retirement
planning for most working Americans, something they are very
sensitive to.
And Mr. Chairman, let me commend you and Chairman Archer
for your leadership on Social Security. And I am so proud of
what we have accomplished over the last several years with your
leadership as well as Chairman Archer's and Speaker Hastert's
leadership on stopping the raid on Social Security and ending
the unfair Social Security earnings penalty, the limit.
It was a proud day last week when the President signed the
legislation which passed unanimously with overwhelming
bipartisan support. Of course, it was a big day when the
President signed it, and of course, now that Social Security
earnings penalty is now history. And working Americans that are
seniors will be able to keep what they earn as well as their
Social Security benefits.
Today I wanted to talk about legislation that addresses
some of the challenges facing Social Security. As we know,
Social Security has some troubles ahead. It is facing
insolvency in the long term in the year 2037. And I am one of
those who believes that unless we solve this challenge now, it
is going to be more difficult in the future.
And I also believe that the public and the taxpayer have
the right to know about the challenges facing Social Security
and what it means to them. And Mr. Chairman, that is why I have
joined with my friend and colleague who has initiated this
legislation, John Sununu of New Hampshire; legislation that
addresses the public's right to know about the state of the
Social Security Trust Fund.
Our legislation, H.R. 3578, the Social Security Right To
Know Act, will better inform the public about the Social
Security system by doing two things: First, requiring that
specific information be included in the annual report of the
trustees of the Social Security Trust Fund, detailing the state
and the status of the Social Security system; and second,
requiring that the Social Security personal earnings and
benefits estimate statement include information about Social
Security solvency and what rate of return taxpayers can expect
from their Social Security wages.
The Social Security Board of trustees has just released its
report on the financial status of the Social Security and
Medicare Trust Funds. And although the report does indicate
that there has been a slight improvement from last year's
report, Social Security still has serious challenges.
The costs of maintaining the Social Security system will
begin to exceed tax receipts in 2015. And that is a watershed
year, since it also marks the time when, unless significant
reform is enacted, decisions will have to be made to decrease
benefits or increase taxes--something no one wants to do. It is
that simple: Our children and grandchildren will have to pay
the bill when Social Security is no longer solvent. And that is
wrong, and I believe the public must be made aware of it.
Mr. Chairman, we believe that by requiring the trustees to
include information regarding long-term solvency of the system,
the public will be better informed. H.R. 3578 will ensure the
public's right to know, by requiring the annual report to
include the total amount of the unfunded long-term liability of
the Social Security system. Further, the Trustees' Report will
show the amount of deficit or surplus the system will run in 75
years, under this legislation. And finally, the legislation
requires that specific language be included in the report
explaining the nature of the Social Security Trust Fund. We
believe this is an important step in ensuring the public's
right to know.
Each individual who contributes to the Social Security fund
has a right to know where their retirement money is going. The
Social Security Administration has begun mailing an annual
statement, the Social Security Personal Earnings and Benefit
Estimate Statement, to all those over age 25 who participate in
the Social Security program, regarding the status of their
benefits.
This is a good step--I have received that myself--in
ensuring that the public is well informed of their own
contributions to Social Security. But it does not explain what
rate of return they can expect to see on their benefits; nor
does it show the financial troubles that the Social Security
Trust Fund will be experiencing in the coming decades.
H.R. 3578 clarifies the annual statement, and ensures that
the Social Security Personal Earnings and Benefit Statement
includes information regarding the solvency of the trust fund.
Specifically, the bill requires that the annual statement
include solvency dates based on the Office of Chief Actuary;
ensuring that all future beneficiaries have the knowledge of
when the system will begin to go bankrupt and when it will be
insolvent.
Further, the legislation requires a statement explaining
the nature of the Social Security Trust Fund and its ability to
fund future benefits. This legislation will give beneficiaries
a clearer understanding of the status of the Social Security
system currently and in the future. And this legislation
provides workers the most up-to-date and accurate information
that can help them plan for their future.
Finally, and very importantly, the Social Security Right To
Know Act requires language explaining the average rates of
return that taxpayers can expect to receive from their Social
Security retirement tax payments. This guarantees that the
taxpayers know what they can expect to receive from their
investment, and then they can compare it to alternatives in the
marketplace: Stocks, bonds, and other investments.
Mr. Chairman, the public has a right to know what their
money is doing for them, and has a right to plan their
retirement accordingly. I believe that H.R. 3578 is an
effective means for increasing the public's awareness of the
Social Security system, the challenges that it faces; but also,
guaranteeing that Social Security beneficiaries and taxpayers
have the right to know as they make plans for their own
personal retirement.
I thank you for the opportunity to testify today, and look
forward to discussing this legislation with you.
[The prepared statement follows:]
Statement of Hon. Jerry Weller, a Representative in Congress from the
State of Illinois
Thank you, Mr. Chairman, for the opportunity to testify
today.
Mr. Chairman, first let me commend you and Chairman Archer
for your leadership on Social Security. Your leadership ensured
passage of legislation which stopped the raid on Social
Security and ended the unfair Senior Earnings Penalty. The good
news about Social Security is our efforts are paying off. The
Congress stopped the 30 year raid of the Social Security Trust
Fund last year and we will not return to the days of spending
the Social Security Trust Fund. Further, H.R. 5 is now law,
ending the unfair earnings penalty for seniors. Again, Mr.
Chairman, I commend you and Representative Sam Johnson for your
tireless efforts in seeing this legislation passed.
Nevertheless, Mr. Chairman, Social Security is in trouble.
The Social Security Trust fund is facing insolvency. Unless we
solve this problem now, the guarantee of Social Security will
not be a guarantee for future generations. Social Security
simply will not be there for those people born today. Mr.
Chairman, the public has a right to know this. We must take
steps to inform the public now what the future holds for Social
Security.
Mr. Chairman, I have joined in cosponsoring legislation
introduced by Representative John Sununu addressing the
public's right to know about the state of the Social Security
Trust Fund. H.R. 3578, The Social Security Right to Know Act,
will better inform the public about the Social Security system
by doing two things. First, requiring that specific information
be included in the Annual Report of the Trustees of the Social
Security Trust Fund detailing the state of the Social Security
System. Second, require that the Social Security Personal
Earnings and Benefits Estimate Statements include information
about Social Security's solvency and what rate of return
taxpayers can expect from their Social Security wages.
The Social Security Board of Trustees has just released its
report on the financial status of the Social Security and
Medicare Trust Funds. Although the report does indicate that
the status of the Social Security Trust fund has improved
slightly from their previous report, Social Security is still
in serious trouble. The costs of maintaining the Social
Security System will begin to exceed tax receipts in 2015. This
is a watershed year since it marks the time when, unless
significant reform is enacted, decisions will have to be made
to decrease benefits or increase taxes. It is that simple--our
children and grandchildren will have to pay the bill when
Social Security is no longer solvent. This is wrong and the
public must be made aware of it.
Mr. Chairman, by requiring that the Trustees include
information regarding the long term solvency of the system, the
public will be better informed. H.R. 3578 will ensure public
right to know by requiring the annual report to include the
total amount of the unfunded long-term liability of the Social
Security system. Further, the Trustees' report will show the
amount of deficit or surplus the system will run in 75 years
under this legislation. Finally, the legislation requires that
specific language be included in the report explaining the
nature of the Social Security Trust Fund. Mr. Chairman, this is
an important step in ensuring the public right to know.
Each individual who contributes to the Social Security fund
has the right to know where their retirement money is going.
The Social Security Administration has begun mailing an annual
statement, the Social Security Personal Earnings and Benefit
Estimate Statement, to all those over age 25 who participate in
the Social Security program regarding the status of their
benefits. This is a good first step in making sure that the
public is well-informed of their own contributions to Social
Security, but it does not explain what rate of return they can
expect to see on their benefits nor does it show the financial
troubles that the Social Security Trust Fund will be
experiencing in the coming decades.
H.R. 3578 clarifies the annual statement and ensures the
Social Security Personal Earnings and Benefit Statement
includes information regarding the solvency of the trust fund.
Specifically, the bill requires that the annual statement
include solvency dates based on the Office of the Chief
Actuary. This will ensure that all future beneficiaries have
the knowledge of when the system will begin to go bankrupt and
when it will be insolvent. Further, the legislation requires a
statement explaining the nature of the Social Security Trust
Fund and its ability to fund future benefits. This legislation
will give beneficiaries a clearer understanding of the status
of the Social Security system currently and in the future. This
legislation provides workers the most up-to-date and accurate
information that can help them decide how to plan for their
future.
Finally and very importantly, The Social Security Right to
Know Act requires language explaining the average rates of
return that taxpayers can expect to receive from their Social
Security retirement tax payments. This guarantees that the
taxpayers know what they can expect to receive from their
investment and can compare it to returns for stocks, bonds and
other investments. Mr. Chairman, the public has a right to know
what their money is doing for them and has a right to plan
their retirement accordingly.
Mr. Chairman, H.R. 3578 is an effective means for
increasing the public awareness of the Social Security system
and the problems it faces. The public has a right to know about
their Social Security. I thank you for allowing me to testify
today.
Chairman Shaw. Thank you.
Peter.
STATEMENT OF HON. PETER HOEKSTRA, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF MICHIGAN
Mr. Hoekstra. Thank you, Mr. Chairman, Mr. Matsui. I will
keep mine short. You gave my speech when you gave your opening
comments, and information is powerful.
One example of hidden information is what is missing from
every employee's annual W-2 tax form. What is missing is the
employer's share of the Federal Insurance Contributions. Their
FICA tax is what funds Social Security and Medicare.
If you take a close look at your W-2 form, you will see the
7.65 percent that every employee contributes to Social Security
and Medicare. Employers must also pay another 7.65 percent in
payroll taxes on their employees' behalf, adding up to a total
of 15.3 percent of an employee's total income. That is the
percent that is withheld.
Many workers are unaware of this employer contribution to
Social Security and Medicare, which also makes them unaware of
how much their employment actually costs. Not only does this
lack of information hide from employees the true cost of their
employment, but it also makes them uninformed about how much of
their paycheck funds two government programs which are vital
for their retirement security: Social Security and Medicare.
We can make sure that employees are informed about the real
costs of these programs by requiring W-2 forms to include the
employer's share of the payroll tax. The Right To Know National
Payroll Act, H.R. 1264, which I introduced in March 1999, would
give employees vital information on how payroll taxes affect
their employment and how much they actually contribute to
Social Security and Medicare.
Hundreds of businesses and the State of Michigan have
adopted a right-to-know payroll form in an effort to inform and
educate their employees. H.R. 1264 would complete the picture
for everyone else.
Thank you.
[The prepared statement follows:]
Statement of Hon. Peter Hoekstra, a Representative in Congress from the
State of Michigan
Tax Relief Bill Gives Employees the Right to Know
Mr. Chairman, Members of the Subcommittee, thank you for
the opportunity to testify.
Most people would agree that information is necessary to
make good decisions, whether in government, business or our
personal lives. However, sometimes information is hard to come
by or has been hidden from view.
One example of ``hidden'' information is what is missing
from every employee's annual W-2 tax form--the employer's share
of Federal Insurance Contributions Act (FICA) taxes, which fund
the Social Security and Medicare programs.
For seven out of 10 households, the FICA (also known as
payroll) tax is the greatest of all taxes they pay, not the
income tax. Yet, calls for tax reduction have focused primarily
on cuts in the income tax rate.
Why has there been little public outcry over the payroll
tax? Part of the reason is that half of the payroll tax is
hidden from employees' view. If you've ever taken a close look
at your annual W-2 form, you might have noticed boxes which
show the amount of Social Security and Medicare taxes withheld
from your paycheck. However, these amounts are only your
contributions to the payroll tax, which is 7.65 percent of your
gross income. Employers must also pay another 7.65 percent in
payroll taxes on their employees' behalf, adding up to a total
of 15.3 percent of an employee's income which is withheld.
Many workers are probably unaware of this employer
contribution to Social Security and Medicare, which also makes
them unaware of how much their employment actually costs. It is
possible that if the employer was not required to pay payroll
taxes, or if the payroll tax was reduced, a portion of this
money might go to the employee. Not only does this lack of
information hide from employees the true cost of their
employment, but it also makes them uniformed about how much of
their paycheck funds two government programs which are vital
for their retirement security--Social Security and Medicare.
Until the solvency of Social Security and Medicare can be
ensured for future generations, it is unlikely that any
reduction in the payroll tax will occur. However, we can make
sure that employees are informed about the real costs of these
programs by requiring W-2 forms to include the employer's share
of the payroll tax.
The Right to Know National Payroll Act, (H.R. 1264) which I
introduced in March 1999, would give employees vital
information on how payroll taxes affect their employment and
how much they actually contribute to Social Security and
Medicare.
Hundreds of businesses and the State of Michigan have
adopted a Right to Know payroll form in an effort to inform and
educate their employees. H.R. 1264 would complete the picture
for everyone else.
Chairman Shaw. Thank you.
Earl.
STATEMENT OF HON. EARL POMEROY, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NORTH DAKOTA
Mr. Pomeroy. Thank you, Mr. Chairman. I want to thank you
and other Members of the Subcommittee for the opportunity to
appear. Providing the American public with accurate information
about Social Security is critical to their own retiring
planning, as well as to our success in reforming the program as
a whole.
I am here as a note of discord, however. I do not think, in
testifying in particular about the bills advanced by
Congressman Sununu and Congressman Weller--I do not think that
is the way to proceed. There are two reasons I would like to
emphasize in my testimony this afternoon.
First, the importance of Social Security statements in
helping people with their own individual personal retirement
planning decisions must not be underestimated. The statement
has been advanced with very specific information about
individual earnings records and the benefits of Social Security
people can expect. Folks need really concrete information so
they can make their own retirement planning.
Second--and not to be confused with that objective--the
Social Security debate, which is going to be vigorous and
interesting, and in which the Chairman has been a very active
and thoughtful participant, should be done up here in Congress,
not through misleading, prejudicial comments imposed through
legislative mandate on this disclosure form.
Since its creation in 1935, Social Security has proven
itself to be simply the most important, successful program, in
my view, ever undertaken by the Federal Government. Social
Security provides individuals a means to live with dignity in
retirement, and protects families from unforeseen events such
as premature death or disability.
The four-page individual statement sent to workers ages 25
and older not receiving Social Security benefits I believe has
improved this program. These statements help individuals
understand how Social Security fits in for their own plan for
retirement. They help Social Security maintain accurate wage
records. And they educate the public about the program and how
it works.
First, relative to assisting workers with retirement and
financial planning, this is really extraordinarily important.
The Employee Benefits Research Institute, EBRI, estimates that
30 percent of American workers have no personal retirement
savings. Almost 50 percent have never tried to figure out how
much money they'll need for retirement.
Given the upward trend in life expectancy, merely hoping
and assuming isn't going to actually produce the nest egg
people need to have a comfortable income stream in retirement.
And so having the hard information out there in a very clear
context about this is going to help people plan, and I think
also be a very significant incentive to spur additional private
retirement savings.
Second, in receiving and maintaining accurate earnings
records, Social Security has put on the form a 1-800 number.
People look at the earnings record, they look at their records.
If there are discrepancies, they get hold of Social Security,
they clear it up. It has been a terrific thing for, in a
proactive, timely way, making certain that people's individual
records of their wage record is squaring what SSA has on file.
And finally, Social Security statements have an education
function. They explain Social Security's benefits. They explain
the financial relationship of Social Security benefits compared
to earnings. They talk about changes in retirement age--and
after all, there is a phased-in retirement age that people I
think are largely unaware of; it has been moved from 65 to 67.
And it talks about the retirement earnings test. And I also, as
Congressman Weller noted, applaud you and this Committee for
lifting and eliminating the earnings test on the over-65
population.
Now, the Gallup Poll has been used to identify whether or
not this statement is getting the job done. And I am very
pleased to say we have got a fine report card relative to its
accomplishments.
Specifically, individuals receiving a statement are
demonstrated to be more likely to know that the amount of
Social Security benefits depends upon how much they earn;
second, that Social Security pays benefits to workers who have
been disabled; third, that Social Security provides benefits to
dependents of workers who die; and fourth, that Social Security
was designed to replace only part of a total retirement income
package.
Now, the problem that I have with the legislation is that
they are, at best, confusing. They would add confusing
information and convey also a relatively inaccurate picture of
the reliability of the future Social Security benefit an
individual can assume.
I think that we are confusing policy debate with the
vanilla benefits information people need to make their own
retirement planning assessments. We just brought this online
nationally. We do not want to muck it up with information that
will be highly contested, of lower value, and ultimately will
diminish the value of this disclosure form for the hard
realities the individual household faces.
We will have our debate. We will have it up here. But let
us not start, just when we get this so broadly available to our
workers, beginning to exploit the disclosure tool to drive
policy ends.
And I will be happy to speak more specifically to the
policy objectives about the bill, the things that I object to
in the bill, during Q and A, if you would like. I am out of
time. Thank you very much.
[The prepared statement follows:]
Statement of Hon. Earl Pomeroy, a Representative in Congresss from the
State of North Dakota
Mr. Chairman, Mr. Ranking Member, Members of the
Subcommittee, thank you for the opportunity to appear before
you this afternoon. I commend you for your attention to this
issue. Providing the American public with accurate information
about Social Security is critical to their own retirement
planning as well as to our success in reforming the program as
a whole.
I would like to emphasize two main points in my remarks
this afternoon. First, I want to underscore the importance of
Social Security Statements in allowing individuals to plan for
their own retirement. We must approach any recommended changes
to Social Security Statements in that context, rather than
viewing them in terms of the debate over reform. Second, I
believe we must advance the public discussion of Social
Security's future not through these Statements, but through
discussions in Congress, with an eye toward development of a
comprehensive bipartisan plan to extend the solvency of the
program 75 years and beyond.
Social Security--America's Family Protection Program
I would like to begin by making a few remarks about the
Social Security program in general and what it has achieved
since its creation in 1935. Mr. Chairman, Social Security is
simply the most important and most successful program ever
undertaken by the federal government. Social Security provides
individuals the means to live with dignity in retirement, and
protects families from unforseen events such as premature death
or disability.
Social Security is the cornerstone of our retirement
system--it is the principal source of retirement income for two
thirds of the elderly, and makes up 90 percent of the income of
about one third of all Americans over the age of 65. Last year,
Social Security benefits lifted roughly 15 million senior
citizens out of poverty.
Social Security is also America's most successful family
protection program. Today, one in three beneficiaries is under
the age of 62, receiving either disability or survivor
benefits. Almost three in 10 of today's 20 year-olds will
become disabled before reaching retirement age, and Social
Security provides the only disability protection for three out
of four in the workplace today.
Social Security also provides survivor benefits to millions
of families coping with premature death. One in six Americans
will die before reaching age 67. Social Security helps protect
us against the economic effects of such an event by providing
survivor benefits equivalent to about a $354,000 life insurance
policy.
Mr. Chairman, Social Security has had a very personal
impact in the lives of millions of American families, including
my own. After my father passed away when I was a teenager, my
mother, my brother and I all received survivor benefits. Quite
frankly, I have no idea what my family would have done without
the protection of Social Security as we tried to regroup after
the unanticipated death of my father at a relatively young age.
The Importance of the Social Security Statement
Because Social Security plays such a critical role in every
American family, including my own, I believe that Congress has
a responsibility to ensure that the information provided to the
public is both adequate and accurate. As the General Accounting
Office (GAO) noted in its 1996 report, public confidence in
Social Security is directly linked to its understanding of the
program's benefits. In my view, one of the most critical
sources of public information on Social Security benefits is
the Social Security Statement.
As you know, Mr. Chairman, last October, the Social
Security Administration (SSA) began sending four-page
individual statements to workers ages 25 and older not
receiving Social Security benefits. The purpose of these Social
Security Statements is three-fold. First, they serve a public
education function by offering basic explanations of Social
Security's benefits, financial status, changes in the
retirement age, and the retirement earnings test. The results
of a Gallup poll showed that since October, these Statement
have played a significant role in increasing Americans'
understanding of Social Security. The survey revealed that
individuals who receive a Social Security Statement have a much
greater understanding of Social Security than those who do not.
Specifically, individuals receiving a statement are much more
likely to know that (1) the amount of Social Security benefits
depends on how much they earned; (2) Social Security pays
benefits to workers who become disabled; (3) Social Security
provides benefits to dependents of workers who die; and (4)
Social Security was designed only to provide part of total
retirement income.
Second, Social Security Statements help the Social Security
Administration maintain accurate earnings records-each
statement lists the earnings that the SSA has on record for
that worker and provides an toll-free number to call to correct
errors in SSA records. This feature of the Statements is
especially critical because Social Security benefits are
directly linked to lifetime earnings.
Finally, Social Security Statements assist workers with
retirement and financial planning by providing them with an
estimate of the Social Security benefits for which they and/or
their families will be eligible when they retire, if they
become disabled, or if they pass away. In my view, this is one
of the most critical functions of the Statements, because it
addresses the problem of inadequate savings for retirement.
According to the Employee Benefits Research Institute
(EBRI), 30 percent of American workers have no personal
retirement savings, and almost 50 percent have never tried to
figure out how much money they will need to save for
retirement. Given the upward trend in life expectancy, merely
hoping and assuming will not result in sufficient savings for
retirements that could well span decades. Not surprisingly,
additional research has indicated that lack of planning results
in substantially lower wealth holdings than households that
have done some retirement planning. I believe that annual
Social Security Statements can play a critical role in
addressing this savings crisis both by providing workers with
an estimate of their future Social Security benefits, and in
prompting them to examine how much they will need to save in
other vehicles, such as employer-sponsored pension plans.
Including Information on Rates of Return
My colleague's legislation would require Social Security
Statements to reflect the average rate of return that each
individual can expect to receive from Social Security and to
compare that rate of return to the rates of return for workers
born in every year since 1900. Presumably, the purpose of such
information would be to demonstrate to workers that internal
rates of return in the Social Security program have varied from
one generation to the next. Although rates of return have
indeed varied among generations of beneficiaries, that is not
in any way a flaw in the program's design. Social Security is
an inter-generational program, in which the first beneficiaries
naturally received a higher rate of return than beneficiaries
today. Workers retiring in 1940, for instance, experienced a
higher rate of return than later generations, because they
received benefits after only contributing for a few years. The
Social Security program was designed as a social insurance
system to enable generations of workers to protect each other.
Providing information on internal rates of return without
discussing that aspect of the program would present an
incomplete picture to the American public.
Description of the Social Security Trust Funds.
Mr. Chairman, my colleague's legislation would also require
Social Security Statements to include a paragraph to the effect
that the Social Security Trust Fund balances ``do not consist
of real economic assets.'' On the contrary, Social Security
Trust Funds consist of U.S. Treasury bonds, backed by the full
faith and credit of the United States, just as are Treasury
bonds that are in traded in the market. Furthermore, the United
States has never defaulted on any of its financial obligations.
Including the statement that the Social Security Trust Funds do
not represent real economic assets in individual Social
Security Statements would disseminate inaccurate information to
the American people, presumably with the intent of undermining
public confidence in the program. It would portray the Social
Security program as hopelessly bankrupt, when in fact modest
prudent changes can make the system solvent for 75 years.
Congress should engage the public through open debate on long-
term solvency and Social Security reform.
Mr. Chairman, I strongly believe that the American public
should be engaged in the debate about the benefits of the
current Social Security system versus any alternatives. But the
appropriate context for discussion of changes to a major
government program is not in individual Social Security
Statements, but rather, through thorough debate in Congress and
among the American people.
Personally, I believe that rather than creating a new
alternative retirement system, our central goal must be to make
the modest reforms that are needed to place Social Security on
a sound financial footing for the long term. Along with several
of my colleagues, I have cosponsored legislation that would
devote the entire Social Security surplus to reducing the
federal debt held by the public. Under this proposal, debt held
by the public would be reduced $3.1 trillion over the next 15
years and eliminated by 2015. By paying down the publicly held
debt, this proposal would dramatically reduces the federal
government's interest costs. The proposal calls for the
transfer of general fund revenue in the amount of these
interest savings to the Social Security Trust Funds over the
period 2011 to 2044 to extend the solvency of the program to at
least 2050. I support this measure in the context of Congress'
examination of programmatic reforms to extend the solvency of
the Social Security Trust Funds for another 75 years and
beyond.
Again, regardless of the specific proposal I or other
members of Congress support regarding Social Security reform,
the fact remains that the most effective and appropriate way
for Congress to engage the public in this debate is not through
individual Statements but through open discussion of all reform
proposals.
Conclusion
Mr. Chairman, as your subcommittee moves forward to
consider proposals to increase public awareness of Social
Security benefits as well as reforms to the program, I hope
that you will consider the effect of revising the Social
Security Statement on public confidence in the program and the
future of reform. Again, I thank you for the opportunity to
share my views, and I would be happy to entertain any
questions.
Chairman Shaw. Thank you.
John.
STATEMENT OF HON. JOHN E. SUNUNU, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEW HAMPSHIRE
Mr. Sununu. Thank you very much, Mr. Chairman. It is a
pleasure to testify here today. I want to commend the
Subcommittee on the effort it is putting forward to examine how
best to inform people about our Social Security system.
Planning for retirement is one of the most important
responsibilities that all American workers will face during
their lives. And as they make critical decisions in this
process, they deserve to have the most up-to-date and accurate
information possible.
As part of this effort to provide more information, earlier
this year I introduced H.R. 3578, ``The Social Security Right
To Know Act.'' It is legislation that would give those paying
Social Security taxes accurate and up-to-date information about
the taxes they pay and the benefits they can expect to receive,
in order to help make them make sound plans for their future.
By expanding access to wage statistics, clearly explaining
the status of the Social Security Trust Fund, and disclosing
the rate of return on taxes paid, I believe my legislation will
better enable individuals to understand what they can and
cannot expect the Social Security system to provide for them,
and to make sound decisions regarding retirement accordingly.
Mr. Weller has provided, I think, a thorough and detailed
description of some of the provisions, the key provisions, of
the legislation. And what I thought I might do is at least take
a minute or two to address some of the concerns that have or
that may be raised regarding the legislation.
I think critics could always argue that a piece of
information might confuse someone, somewhere. But at the same
time, I think that perspective disregards the fundamental
points made at the beginning of this hearing: that knowledge
and information represent power, and empower individuals to
make good decisions for themselves; and that information
ultimately will help consumers to make better decisions
regarding their own future.
The suggestion was made that the importance of this
information is being underestimated. I think, quite to the
contrary. This panel is an indication that the people on this
Subcommittee, that those that have introduced legislation here,
highly value and highly regard the importance of the
information.
We recognize that context can be important. And the work of
this Subcommittee and the challenge of this Subcommittee is
going to be to make sure that we are building on the value of
the existing Social Security statement, that we are providing
the best information possible. But that should not take away
from the fact that important, objectively provided information
in the end is in the consumer's best interests.
And I think, in that regard, access for researchers to have
to economic models and actuarial data is in the best interests
of not just those researchers, but those who have an interest
in Social Security itself; that facts regarding the rate of
return that an employee might get on the taxes that they pay is
certainly in the employee's best interest; and clarification
regarding the nature of the trust fund I think is of great
value.
Those on this Subcommittee that understand how the Social
Security Trust Fund works I am sure have been frustrated from
time to time, not just in talking to the public, but talking to
other Members of Congress that might labor under a
misconception of how the Social Security Trust Fund even works.
I think these are not just important pieces of information
that are keys to good decisionmaking for consumers and good
retirement planning for beneficiaries, but ultimately they are
also keys to making good decisions in carrying on a substantive
debate about reform itself. And therein lies a twofold value to
having access to good information.
Today we have a Federal projected surplus over a 10-year
period of two, three, even four billion dollars, depending on
the economic estimations that are made. But we do have the
opportunity to create a dramatically better, more modern
retirement Social Security system. Those who have carefully
considered the options for reform--among them, the Members of
this Subcommittee--recognize that we may have difficult choices
ahead, but there is a real need for bipartisan effort. And in
fact, that need has never been greater.
I believe that this modest legislation to provide
additional information will help workers better understand the
system, understand the need for reform, and understand the
options that they have for their own retirement security.
I appreciate the time and the effort of all of the Members
of the Subcommittee in understanding more about and moving
forward this important legislation. And I am happy to assist
you with any questions you might have. Thank you, Mr. Chairman.
[The prepared statement follows:]
Statement of Hon. John E. Sununu, a Representative in Congress from the
State of New Hampshire
Thank you, Mr. Chairman. It is my pleasure to testify here
today and I would like to commend the Subcommittee for its
efforts to examine how best to inform the public about our
Social Security system.
Planning for retirement security is one of the most
important responsibilities faced by all Americans during their
working lives. And as they make critical decisions in this
process, they deserve to have the most up-to-date and accurate
information possible.
As part of this effort to provide more information to
workers regarding Social Security, earlier this year I
introduced H.R. 3578, ``The Social Security Right to Know
Act.'' This legislation would give those paying Social Security
taxes accurate and up-to-date information about the taxes they
pay, and the benefits they can expect to receive in order to
help them make sound plans for their future. By expanding
access to wage statistics, clearly explaining the status of the
Social Security Trust Fund, and disclosing the rate of return
on taxes paid, my legislation will better enable individuals to
understand what they can, and can not, expect the Social
Security system to provide for them and to make sound decisions
regarding retirement.
This modest legislation will require that additional
information be included in the Annual Report of the Trustees of
the Social Security Trust Funds and the Personal Earnings and
Benefit Estimate Statements--which has been renamed ``Your
Social Security Statement.'' It also will allow the Treasury
Department's Continuous Work History Sample to be made
available to qualified researchers for statistical analysis.
There are three parts to my legislation that I would like
to explain briefly:
Part I deals with the Annual Report of the Trustees of the
Social Security Trust Funds. My legislation would require the
trustees to include addition information in both the report and
in the report's summary. Some of this can be derived from
information that is already included in the body of the report,
but this legislation would require it to be clearly and simply
stated in the summary as well. This information includes:
1. The aggregate amount of the unfunded long-term liability
of the system, and its change from the previous year's report.
2. The amount of deficit or surplus that the system will
run in the last year in the 75-year projection period included
in the report.
3. Language explaining the nature of the Social Security
trust fund, including the following wording:
``The Trust Funds balances reflect resources authorized by
Congress to pay future Social Security benefits, but do not
consist of real economic assets that can be used in the future
to fund benefits. These balances are claims against the United
States Treasury that, when redeemed, must be financed through
increased taxes, public borrowing, benefit reduction, or
elimination of other Federal expenditures.'')
Finally, Part I requires that SSA publish the economic
model and all relevant data which they use to make financial
projections.
Part II involves the ``Your Social Security Statement''
statement. This legislation would add three elements to the
statement:
1. Each statement would include the information that while
Social Security currently collects more in taxes than it pays
out in benefits each year, it will begin to run cash flow
deficits in 2015. (The Social Security trust fund will cover
the deficit through 2037, but after that point Social
Security's tax collections continue to cover only a portion of
benefits that it must pay. These dates and percentages shall be
adjusted annually based on the findings of the Office of the
Chief Actuary.)
2. Each statement would also include language similar to
that in the Annual Report which explains the nature of the
Social Security Trust Fund.
3. Each statement will include language explaining the
average rates of return that taxpayers can expect to receive
their Social Security retirement benefits as compared to the
total amount of Social Security retirement taxes that they can
be expected to pay. (This language shall include chart 2.1 from
GAO report GAO/HEHS-99-110 and the following wording:
``Inflation-adjusted rate of return estimates were more
than 10 percent for birth groups born before 1905. They fell
below 6 percent for those born in 1920, below 3 percent for
those born in about 1940, and below 2 percent for those born in
about 1960. They will reach 1 percent for those who will be
born in about 2040.'')
Part III would allow researchers to gain access to
important wage data. The Continuous Work History Sample (CWHS)
is a data base compiled by the Treasury Department for the
Social Security Administration's use in making economic
estimates about the future of programs that the agency
administers. It consists of income information over a number of
years for a random sample equal to 1 percent of the US
population.
This legislation would require the Office of Research and
Statistics of the Social Security Administration to make the
sample available to qualified researchers who will use it for
statistical research only. The Office will be able to require
researchers to reimburse all costs and to impose any reasonable
conditions to ensure that the data's security is protected. In
addition, the Office will be required to take steps to ensure
that any identifier that might compromise any individual's
identity is removed from the data prior to its being released.
Today, with a projected federal budget surplus of $4.1
trillion over the next ten years, we have the opportunity to
create a dramatically better, more modern, retirement Social
Security system. Those who have carefully considered the
options for reform recognize that the choices ahead may be
difficult, but the need for a bipartisan effort has never been
greater.
I believe that this modest step of providing fundamental
information to the public will help workers to better
understand the current system, the need for reform, and the
options they have for their own retirement security.
I appreciate the opportunity to appear before you today,
commend the hard work of the Chairman and the members of the
Subcommittee, who have been steadfast in their efforts to
better inform the public about Social Security.
I look forward to participating in this endeavor and would
be happy to assist you in any way possible.
Chairman Shaw. Thank you, John.
Mr. Matsui?
Mr. Matsui. Thank you very much, Mr. Chairman. I am going
to ask perhaps a couple of questions. The Social Security
Commissioner came out with a form that he distributed, and then
GAO made some recommendations. And of course, that form then
was revised. And I think, as Mr. Pomeroy suggested, perhaps we
should actually allow that to set in for a while and let the
American public review that plan. Then if changes need to be
made in the future, obviously we would then have that
opportunity to look at it, or maybe even make recommendations,
since this could be simply an administrative matter.
But I think all of us agree that we want to give the best,
most complete information out, so people can make long-term
financial planning decisions. And second, if in fact there need
to be corrections, they have that information, and then with
the 1-800 number they can make those changes and corrections.
The problem I have with some of the legislation that is
being discussed is that it sounds like it is an attempt to move
public opinion in a way that may be moving to private accounts.
Now, I do not want to ever question any motives behind
legislative actions, but the fact of the matter is, it would
have that tendency, if in fact the information is just rate of
return, for example, or if it compares Social Security with,
obviously, the stock market, particularly in the last decade in
terms of the stock market.
The problem is that information in and of itself is
terribly misleading. Because the administrative cost for Social
Security is less than one percent. In fact, it is 0.9 percent.
And we have had a series of hearings over the last year, year
and a half, on the whole issue of Social Security. And this is
not really the time to debate the Social Security issue. I
mean, we have other opportunities, and we have had other
opportunities on that. But this is just to inform the public on
those two principles that I mentioned: Financial planning
abilities, and certainly to correct mistakes.
But the problem that I see is that, first of all, you have
to factor in the unfunded liability, which is over $8
trillion--about five times, or four times the annual Federal
budget. And obviously, Social Security does do that; whereas
the marketplace, if you had individual accounts, would not do
that. And that has to be factored in. It would be misleading to
the public if you did not have that $8 trillion and you
actually put that into the account.
Second, you know, you could be a day trader and use your
individual account, and maybe have very minimal overhead costs;
but if you go into the market and hire one of the stock
brokers, we estimated--and, you know, there are some
variations--but it could be anywhere up to 20 percent, and as
low as 10 percent, in terms of the overall cost of maintenance
of one's account over a period of years. And if you annuitize
that, you are talking about over a 40-year period a rather
significant sum of money: Maybe overall, 20, 25 percent of
one's entire account.
In addition, I would assume that we want to annuitize. At
the end of the day, you want to annuitize whatever money you
have, so that you then could pay it out for your life
expectancy. And we have talked to some insurance companies.
Many do not even carry that, because it is too complex,
particularly if you want to put an inflation kicker in there,
the CPI. And women in particular need that, because they live
much longer than men. But that is anywhere from 15 to 20
percent, minimum, cost. And so you are talking about maybe 20,
30, 40 percent off the top. And so you need to factor that in
onto that statement, as well, and maybe make a rather lengthy
explanation of why you are adding all those factors in.
And the problem there is that it then becomes somewhat
meaningless. It does not give anyone real opportunities to
understand what this rate of return is all about. And I think
we are going to have testimony from Mr. Salisbury and from
Henry Aaron and a number of others in the fifth panel, in which
they are going to discuss how complex and perhaps impossible it
is to come up with really a rate of return for somebody 30
years old, projecting what it might be when he or she is 65 or
62 or 70 years old. And that is the problem.
I really appreciate what you are all trying to do. We want
to give as much information as we can. But I think in the last
analysis, unintentionally, you are going to be giving out very,
very misleading information that perhaps will create tremendous
problems and maybe create people taking actions that they will
someday live to regret.
Now, perhaps Mr. Weller, as a Member of the Committee, may
want to comment, or anyone else may want to comment on this.
But I think it is a serious issue. But we should restrict it
really to the issue of the statement, and how the statement
will carry out the two principles: That is, financial planning
for the individual, and how that individual can correct
mistakes.
Mr. Weller. Sure. Mr. Chairman, if I could respond to my
friend Mr. Matsui.
Chairman Shaw. Yes.
Mr. Weller. And I know Mr. Matsui shares, as I do, a
concern for ensuring that workers have a right to know. We have
worked together on the issue, addressing particularly the cash
balance conversion issue. We have partnered up on legislation
that is bipartisan and helps ensure that workers have a right
to know, if there is a change in their pension, what it means
to them when it is their turn to retire.
And I really believe that this legislation which I have
joined and cosponsor with Representative Sununu works toward
the same goal. I would point out that the language required on
the average rate of return that taxpayers can expect to receive
from the Social Security retirement tax payments only would be
listed on that form addressing the rate of return on the Social
Security tax that is paid. It does not mention requiring any
other comparisons.
Mr. Matsui. If you could just let me respond, what is the
purpose of that? Because the idea of the two principles--and I
think we all agreed to that when we passed this in the Omnibus
Act to have the Social Security Administrator implement this--
were to give accurate information, if the information is
inaccurate, so that the individual, the recipient, can then
make that correction; and two, so the individual can make a
determination on future planning.
Mr. Sununu. If I could address that?
Mr. Matsui. Well, if I may just--So why is that relevant,
unless you want to make a comparison?
Mr. Weller. Sure. And I would like to briefly respond, but
I want to yield to my----
Mr. Matsui. You cannot avoid--You cannot now say, ``Well,
we do not really want them to make that comparison,'' because
that is what this is really all about.
Mr. Weller. Well, and I am not saying that they should not
have a right to compare. You know, I am going to yield in just
a second to my friend, Mr. Sununu. But you know, I believe this
legislation really salutes the wisdom of the average worker
today. I find that workers are increasingly sophisticated when
it comes to making plans for their retirement, what the options
are.
Mr. Matsui. Would you agree, then, to put these other
points in here that I mentioned? You know, the unfunded costs,
the costs of annuitization, the costs of maintenance? Because
if we want to respect their intelligence and their judgment,
why do we not put all that in there, that if you do invest in
the private sector, these are additional costs?
Mr. Weller. Well, but I would point out that our
legislation does not require any statements regarding private
sector investments. Essentially, it is very simple. It just
points out what the rate of return is on their taxpayer
investment. They put an equivalent of 12.6 percent of their
income, which is a big chunk of someone's income over a
lifetime, that is going into the Social Security Trust Fund.
And we believe that they have a right to know what the rate of
return is. They are sophisticated.
And let me yield to my colleague now.
Mr. Sununu. Yes, if I could make a few points that I think
do go directly to concerns that have been raised. First,
regarding the unfunded liability, that is also part of this
legislation. There are three parts. One puts the information
that you raised concerns about--the nature of the unfunded
liability--in the report of the Social Security trustees.
Because I think that is important information. You raised it.
Mr. Matsui. Yes, I was only referring to that with respect
to the rate of return issue. But you are right. I have not even
discussed that other part yet.
Mr. Sununu. You talked about the nature of the unfunded
liability. You used a figure of approximately $8 trillion, I
think, and I have seen similar estimates. And we do think that
is important. And that is addressed in this legislation.
There is a second part of the legislation that deals with
economic models and actuarial models, and the fact that there
is a real value to making those available to researchers.
But regarding the rate of return information, we do not
call for a comparison of the rate of return on Social Security
to any private sector vehicle.
Mr. Matsui. Well, why do you have that information in
there? I mean, it has to be for a purpose.
Mr. Sununu. Well, because the consumer--It does have a
purpose. But we are not----
Mr. Matsui. What is the purpose?
Mr. Sununu. If I might----
Mr. Matsui. Please do.
Mr. Sununu [continuing]. At least finish my sentence here.
Rather than prejudge a particular vehicle, compare it to a
historic rate of return on the stock market, compare it to a
historic rate of return on Treasuries. We believe, I believe
the consumer is able to make that judgment. Compare it to the
rate of return that they get on their savings account. If I can
finish----
Mr. Matsui. Well, no, no. Is that what you want them to do
with that?
I have run out of time. And you are my expert. I need to
ask you these questions, because I have to make a judgment. Is
that what you want them to do, make comparisons? Because if you
do----
Mr. Sununu. Well, I am trying to answer the question. To
make a comparison to the rate of return on their IRA, their
401(k), whether they have a matching plan. I think that rate of
return, a fair estimate on the rate of return is of value.
Moreover, it is not merely a prospective rate of return. We
include historical information that ought not to be in doubt,
what was the historical rate of return for those born in a
particular year, or over particular years--prior to 1940, or
after 1940 for example. And again, those are technical issues.
And I believe that the Subcommittee is able, I hope, to make an
objective determination to what extent those kinds of estimates
on historic rate of return might be based.
Mr. Matsui. Yes, thank you. If I could just have your
answer on this one question in terms of--since you do
acknowledge that the idea is to have them make this
comparison--would you put in the annuitization issue? Because
they have to annuitization these private accounts. Would you
put in the cost of this?
Mr. Sununu. Well, amortization?
Mr. Matsui. Is that something that would be helpful to the
general public?
Mr. Sununu. What is that? Cost of maintenance for a
particular private savings vehicle, a savings account, checking
account, or IRA, or 401(k)? We have disclosure regulations. My
Fidelity mutual fund----
Chairman Shaw. If we could have in the audience no talking.
The young lady down there, I can hear every word you are
saying.
Mr. Sununu. The mutual funds that you or I might invest in
have to disclose the administrative costs of those funds. And I
think that is valuable consumer information. So that is already
being provided in the private sector. So I think there is a lot
of room for discussion about context for determining the range
of historical data that might be provided, but I do not think
the idea of providing the consumer with information about rate
of return is without merit. And I think they can make honest
judgments about different private sector vehicles themselves,
as they have to do already every day.
Mr. Pomeroy. Mr. Chairman, if I might also respond?
Chairman Shaw. Yes, we are going to have to wrap this one
up.
Mr. Matsui. But if I could have this--and I apologize.
Mr. Pomeroy. I will be very brief. You know, Mr. Sununu
said in his opening statement objectively reported information
is important. I agree with that. But the rate of return
question really does not capture the value of the disability
benefits provided through Social Security, it does not capture
the value of the survivor benefit which is loaded in. Those
have an absolute value. But if you are just doing a rate of
return calculation, that is not reflected. So it is an
erroneous figure.
Second, capturing the return over time does not in any way
reflect the natural transition dimensions of implementing the
Social Security program. Did the first participants in Social
Security get a better rate of return than our children will?
Absolutely. But that is just the nature of bringing the program
like this online, and I do not think any of us would suggest
that it should not have been brought online. But bringing a
program like this online involves those kinds of variations.
Now, putting that into a form without an adequate explanation
is going to be highly prejudicial; and what's more, I think,
not accurate.
And then finally, they say that they have got to report
that the Social Security Trust Fund is not an economic asset.
What is the public going to make of that? I do not know what it
means. The Trust Fund is funded with Federal Treasuries. And as
Chairman Archer has noted in the hearings that I have attended,
it is an absolute rock-solid commitment of the Federal
Government that has never, ever defaulted.
And so again, this is information that really is not
objective information. It does not contribute to anything.
Chairman Shaw. No, I would correct the gentleman. We have
had testimony which has been unanimous pretty much with all the
experts. The question is, are Treasury bills held by the
Federal Government a real economic asset? And the economists
tell us ``No.'' That is not my opinion, or anyone else's. That
is what the economists tell us. But from the standpoint of the
Government's obligation to pay back what it borrowed from
Social Security, I agree it is rock-solid.
Mr. Pomeroy. For the recipients' standpoint, I think they
want to know, ``Is this backed by the United States government,
and will it be there when I retire?'' And I mean, I think the
track record is one hundred percent.
Chairman Shaw. I could only answer you this way; that case
law tells us that under the existing system there are no vested
rights. I would like to change that. That is the case law. That
is not Clay Shaw talking; that is the courts talking. That is
why the Congress can change the benefits.
Mr. Pomeroy. Mr. Chairman, I look forward in trying to find
common ground with you on that question. I look forward, in the
event we cannot find common ground, to vigorous debate.
But one thing I do not think we want to do is to put
misleading--you know, where one side gets their little comments
into this universal disclosure form that needs to provide
Americans with hard information about where they are at
relative to Social Security so they can plan their own
financial savings and retirement.
Thank you, Mr. Chairman.
Chairman Shaw. I am not sure there is any disagreement in
the room.
Mr. Cardin?
Mr. Cardin. I thank you, Mr. Chairman. I am wondering
whether there has been a cost analysis done of this bill.
Because it seems to me that if we were to enact it, we would
have to increase the congressional budget by at least one
staffperson an office, to deal with the calls that we are going
to get in our congressional offices when this information hits.
We already get a lot of phone calls in our office on Social
Security. And I do not know about your office, but my person in
Baltimore who handles the calls can spend one-half hour to an
hour with one constituent on one issue. And it seems to me, to
try to explain the rate of return on their Social Security will
be challenging to each Member of Congress.
John, I am trying to figure out your definition of ``rate
of return.'' So let me just see if I can understand. I am going
to give you a chance to respond. How would you calculate the
rate of return? Someone gets this notice at 30 years of age,
let us say. And the information there projects where that
person is going to be 37 years later. Are you adding up all the
anticipated contributions that individual is making and then
using a life expectancy based upon today's life expectancy, or
what we project the life expectancy to be in 37 years for that
individual? And do you factor out the two points that Mr.
Pomeroy mentioned about the survivor benefit and disability
insurance?
Mr. Sununu. To your last point first. First, calculating
the actuarial benefit of the survivor benefit I think can be
done. And to the extent that this Subcommittee or those
involved in the final crafting of the legislation think that
ought to be considered, I think that is a very reasonable
request. But I think that is a technical problem more than
anything. And obviously, on an actuarial basis to calculate the
value of that part of the program can be done.
Mr. Cardin. On that point, would you do it based upon the
person's current family status, or the average family status in
the country?
Mr. Sununu. I think you can calculate the overall actuarial
benefit of the program based on its outlays and payments for
disability, and back those anticipated future payments out of
the trust fund itself and out of the FICA tax base itself, and
use an adjusted FICA tax base for calculating rate of return.
Mr. Cardin. The problem is that if I were to buy a
disability insurance policy, it would be based upon my current
status, not based upon an average status. So would the Social
Security Administration have to figure out what my current
status is for a disability insurance policy?
Mr. Sununu. No, based on historical payments under the
disability program----
Mr. Cardin. But I'm 30 years old; I'm not married yet.
Mr. Sununu. And therein lies perhaps a misleading
interpretation of the legislation. What the legislation calls
for is including language on the average rates of returns for
taxpayers, as compared to the total amount of taxes that they
might pay. And again, this gets back to the language, looking
at the adjusted rates of return for groups of workers born
during different decades, talking about what the forecasted
rate of return is for those born after a particular year.
And it is based on average rates of return; because I do
not think in the statement it is appropriate to suggest to
someone that the Social Security Administration, or anyone
else, knows exactly how long they are going to live.
Mr. Cardin. I think that is a good point. I guess an easier
way to get at what you are trying to do--which I disagree
with--but I think an easier way would be just to point out what
the Social Security system is as it relates to the age of your
birth and your average income. Because it is progressive. We
make no bones about it being progressive.
Mr. Sununu. That is an alternative approach to trying to
provide similar information about the nature of the program and
the benefits received relative to the taxes paid. And I am
perfectly willing to concede that there may be, again,
disagreements in the exact context of presenting this
information. But I think presenting information in and of
itself, and trying to communicate anticipated rate of return
for the program as a whole, is not in and of itself a bad idea.
Mr. Cardin. Yes, but let me make an observation. I
understand what you are trying to do. And I think the better
way to do it is to use the envelope to include additional
information, and not relate it to the individual, because
relating it to the individual would be extremely confusing.
But I would also take what Mr. Pomeroy and what Mr. Matsui
have said; in that, let us give this a chance to work first.
Let us get an evaluation of what we have already done. The
information is being sent out. We could include more
information if we thought it was useful, and if we could do it
in a way that does not try to show any particular bias to any
policy objective, but is one to try to get our constituents
more informed as to the nature of Social Security. I think we
could work on that in a bipartisan way. But I think the way
your bill is worded causes many of us to have some concerns.
And I appreciate your patience, Mr. Chairman.
Chairman Shaw. Thank you. I have just run out of patience.
[Laughter.]
Chairman Shaw. I would like to thank this panel for being
here this morning--``this morning''--this afternoon, excuse me.
I will be saying ``this evening'' pretty soon.
Mr. Commissioner, we have your full statement, which will
be put into the record. You may proceed as you see fit.
STATEMENT OF KENNETH S. APFEL, COMMISSIONER OF SOCIAL SECURITY
Mr. Apfel. Thank you, Mr. Chairman. And I will be very
brief, for the sake of the length of the hearing. Mr. Chairman,
Mr. Matsui, Mr. Weller, Mr. Cardin, Members of the
Subcommittee, thank you for inviting me to discuss one of the
Agency's premier achievements: The Social Security Statement.
One of our basic responsibilities is to help Americans
understand the importance and value of Social Security and how
it fits into their long-term financial planning. About 152
million workers support our Social Security system with their
tax contributions, and about 45 million individuals receive
monthly Social Security retirement, disability, or survivor
benefit payments.
The annual Social Security Statement is the best way we
have to help people understand the basics of Social Security,
and to help them prepare for their long-term financial
security. As you know, the statement is the new version of the
Personal Earnings and Benefit Estimate Statement that we have
made available since 1988. Since '95, we mailed the statement
to people by age grouping, and provided more than 70 million to
workers age 40 and older through March 1999.
Beginning on October 1, 1999, Social Security launched the
largest customized mailing ever undertaken by a Federal agency,
when it began mailing out the newly designed statement to 125
million workers over age 25. About a half-million statements
are mailed each day, a total of about 10 million each month.
Workers automatically receive their statements about 3 months
before their birthday.
The statements provide workers with a list of their yearly
earnings on record at Social Security, taxes paid, and benefit
estimates for the Social Security retirement, disability, and
survivors programs. And retirement benefit estimates give
workers estimates of projected benefit amounts at age 62, at
full retirement age, and at age 70, helping people plan when to
retire.
The statements also give workers a chance to review their
earnings record on which future benefit payments will be based.
And the statement provides general program information, and
tells people how to contact us if they have any questions.
The statement has been very well received. Several
financial columnists have praised its value as a financial
planning tool. And a recent survey shows that more than two-
thirds of the people who received the statement were
knowledgeable about Social Security, compared to about half of
those who did not receive the statement.
One of our goals in designing the new statement was to make
it user friendly and easily understood. We have worked very
hard to achieve this goal. Focus groups and survey
participants, as well as stakeholder organizations,
overwhelmingly found the redesigned statement an improvement
over its predecessor. I am also proud that the statement
received Vice President Gore's Plain Language Award.
Since its release in October, we have made further changes
to improve the statement. For example, we included an
explanation that the benefit estimate may be different from the
worker's actual benefit amount, because of earnings changes in
future years or changes in laws governing benefit amounts. And
we have included information on the long-term challenges facing
the program, including the projected trust fund exhaustion
date.
Should further information be included in the statement? As
you know, proposed legislation would require Social Security to
include an individualized estimate of the rates of return
workers would receive on their contributions to the Social
Security system. The intent is to provide enough information to
let workers compare Social Security with other investments.
When Social Security originally designed the current
statement, we considered, but rejected, this idea. Social
Security, like other social insurance programs such as
Medicare, is not designed in a way that would be appropriately
evaluated by individual rate of return estimates. The program
is designed to provide a foundation of income for workers and
their families when the worker retires, becomes disabled, or
dies.
Historically, the program has been judged by the extent to
which benefits replace pre-retirement earnings, or how much
those benefits help reduce poverty; not by estimates of
individual rates of return on contributions. In addition, the
General Accounting Office concluded that adding rate of return
information could significantly increase the statement's length
and complexity, and undermine our efforts to provide a
simplified but useful statement.
I believe it is germane to remember that Social Security is
a social insurance program, and that individual rate of return
information would not capture many complex aspects of the
program. These include the fact that Social Security provides
not only retirement benefits, but also dependent and survivor
benefits; that it is a family program which provides greater
benefits for larger families or that assures income replacement
rates for lower income workers that are greater than for
workers with higher incomes.
Mr. Chairman, in conclusion, let me say that Social
Security is committed to making every effort to ensure that the
public understands Social Security and its importance to them
and their families' financial future. We have, in fact, just
announced a new service: An online Social Security retirement
planner which will allow people of any age to compute estimates
of their future Social Security retirement benefits on our SSA
website. The retirement planner provides people with three
options, which allow for lesser to greater degrees of
sophistication in computing benefit estimates--all with
complete privacy.
This new service and other Agency efforts will complement
the Social Security Statement, which I strongly believe is our
most valuable tool to increase public understanding of our
programs and to help people plan for their financial future.
The statement explains and makes real to people that Social
Security is indeed a foundation on which they can build,
together with other investment options, their financial future.
I will be happy to answer any questions that you have at
this time.
[The prepared statement follows:]
[Attachments are being retained in the Committee files:]
Statement of Hon. Kenneth S. Apfel, Commissioner of Social Security
Mr. Chairman and Members of the Subcommittee:
Thank you for inviting me to discuss one of the Agency's
achievements of which I am most proud--the Social Security
Statement.
Background
Social Security touches the lives of virtually all
Americans. At least 152 million workers pay into Social
Security and more than 44.6 million individuals receive monthly
Social Security benefits because they are retired, disabled, or
dependent family members or survivors of a worker. Social
Security is the largest source of income for most elderly
Americans and keeps millions of elderly out of poverty.
Throughout its history, Social Security has made a
difference in the lives of Americans, and one of our basic
responsibilities to the public is to help Americans understand
the value of the Social Security programs and their importance
to them and their families. The Social Security Statement is
the most significant vehicle we have to increase the public's
understanding of the basic features of Social Security and
enable Americans to prepare for their long-term financial
security. As part of our ongoing public education efforts, SSA
began in 1988 to issue earnings and benefit estimate Statements
to individuals who requested them. Since then, SSA has sent
about 3 million of these statements annually.
SSA Initiated Statements
In amendments to the Social Security Act in 1989 and 1990,
Congress required SSA to send Personal Earnings and Benefit
Estimate Statements (PEBES) to workers. SSA was required to
mail a PEBES to all workers aged 60 or over in FY 1995; in FY
1996 through FY 1999 to individuals who reach age 60 in those
years; and annually to all covered workers age 25 and older
beginning in FY 2000. In addition to the PEBES mailing required
by law, SSA sent PEBES to increasingly younger individuals in
advance of the schedule in the law. SSA sent a PEBES to workers
aged 40 and older--about 73 million people--between September
1995 and March 1999.
Beginning October 1, 1999, the SSA launched the largest
customized mailing ever undertaken by a Federal agency when it
began sending a newly-designed PEBES, now called the Social
Security Statement. SSA staggers the mailing of the Statements
throughout the year, with approximately a half million
Statements delivered each day, a total of about 10 million
mailings delivered each month. The Statements are mailed so
that workers will automatically receive their Statements about
three months before their birth month.
The Statements provide workers with a list of their yearly
earnings on record at SSA, information about their eligibility
for benefits, and estimates of these benefits. Estimated
retirement benefits at age 62, at normal retirement age (the
age at which unreduced benefits are payable) and at age 70 are
provided. Thus, the Statements help individuals decide when to
retire and claim benefits. The Statement also contains
estimated totals of the Social Security taxes that have been
paid by the worker and by his/her employer over the
individual's working career. The Statements provide workers an
opportunity to review the earnings (or self-employment income)
posted on their Social Security record to ensure their record
of earnings is complete and accurate. This is an important
feature because the amount of a worker's future benefits will
be based on his or her earnings record. SSA also provides
general information and explanations to help individuals
understand their personal data and how to contact us if they
have any questions.
The new Statement, like its PEBES predecessor, provides
estimates of Social Security retirement, disability, and
survivors' benefits that workers and their families could be
eligible to receive now and in the future. To design the new
form and simplify the language, SSA used extensive public and
employee input. The new design is based on the results of
testing four prototypes with focus groups in three different
age groups (ages 25-35, 36-50, and over 50). We also obtained
additional public input through a nationwide mail survey of
16,000 randomly selected individuals from the same age groups.
We also received comments from agencies and organizations that
represent diverse sections of the public. We found that focus
group and mail survey participants alike overwhelmingly found
the redesigned Statement an improvement over PEBES.
Communicating technical and complicated information in a way
that is understandable to a diverse public can be difficult,
but SSA has worked diligently to ensure that the message in our
Social Security Statement is clear. I am proud that the Social
Security Statement received Vice President Gore's Plain
Language Award.
I am pleased to report that the results of a recent survey,
undertaken at SSA's request, revealed that receipt of a
Statement has helped in increasing Americans' understanding of
Social Security. Sixty-eight percent of the people who recalled
receiving a Statement were knowledgeable about Social Security,
as compared to 53.3 percent of persons who did not recall
receiving a Statement. The survey also found that individuals
who have received a Social Security Statement from SSA have a
significantly greater understanding of some important basic
features of Social Security. Those who have received a
Statement are significantly more likely to know that (1) the
amount of Social Security benefits depends on how much they
earned; (2) Social Security pays benefits to workers who become
disabled; (3) Social Security provides benefits to dependents
of workers who die; and (4) Social Security was designed only
to provide part of total retirement income. The survey
validates the performance measures we use to track our progress
in meeting our ``Public Understanding'' strategic goal. We
track both the increasing numbers of Statements we send to the
public and the increasing public knowledge about our programs.
Awareness of the Statement increased from 49.5 percent of the
public in 1998 to 62.2 percent (about 125 million Americans) in
1999. SSA's public education activities to announce the
Statement appear to have been very successful. This is
significant because awareness is the first step to knowledge.
Comments we have received from those who got the new
Statements indicate that the Statement not only helps the
public understand the Social Security program but assists in
financial planning. In fact, 66% of those surveyed said that
the Statement would be helpful for that purpose. In addition,
the favorable reaction from financial columnists all over the
county has reinforced for the public the importance and
usefulness of the Statement. I have attached to my testimony a
number of such columnists' reactions for inclusion in the
record.
Since its release in October, we have made further changes
to improve the presentation of the material contained in the
Statement. We have added information about Social Security's
future, pointing out that Social Security will be there when
workers retire, but that changes will be needed in order to
resolve the program's long-range financial issues. We have
included an explanation that the benefit estimate may be
different from the worker's actual benefit amount because of
changes in his or her earnings in future years and any changes
that could occur in the current laws governing benefit amounts.
We have also included information on the long-term challenges
faced by the program, including the date when benefits exceed
income and the date of the exhaustion of the trust funds.
We will continue to make changes to the Statement as
needed. SSA immediately updates the Statement for legislative
changes, when a new Trustees Report is issued or if an error is
detected. At the end of the calendar year, we update the
Statement to reflect changes in the maximum covered earnings
amount, retirement test limitations, and changes to the benefit
calculations. In conjunction with these necessary end-of-year
changes, we review public reaction, Congressional concerns, and
employee input to identify and include suggested revisions and
additions to the Statement that would make it more useful and
understandable for recipients. Of course, in the near future we
will be updating the Statement to reflect the 2000 Trustees
Report and the enactment of HR5, the bill that abolished the
Social Security earnings limit for Social Security
beneficiaries at or above the normal retirement age.
As we continue our efforts to educate the public about the
value of our programs and their role in family financial
planning, SSA will be conducting information campaigns
throughout fiscal year 2000 encouraging individuals to use the
information in the Statements to prepare for their financial
futures.
Last week, we unveiled a new electronic service to help
Americans better prepare for their financial future--an online
retirement planner. SSA's online retirement planner will allow
individuals to compute estimates of their future Social
Security retirement benefits online at the SSA internet
website--www.ssa.gov.
Our new Internet service, Social Security Retirement
Planner, will assist workers with their retirement planning by
helping them understand the amount of Social Security benefits
they can expect in retirement. With this information and with
information from their employer about private pensions, workers
will be able to make better informed decisions about their
family savings and investment needs. Social Security is the
foundation on which to build a stable financial future; but a
comfortable retirement has always rested on a three-legged
financial stool--Social Security, pensions and savings.
To maintain privacy and to protect records from
unauthorized users, none of the calculators are linked to
individual earnings records or any other information in SSA's
database. All benefit estimates are based strictly on input
from the users.
The Social Security Retirement Planner also walks
individuals through the retirement planning and application
process. The service offers valuable information on issues to
consider when contemplating retirement, what documents are
needed when applying for benefits, other potential benefits for
the worker or family members, and how and where to apply for
benefits.
Cost of Issuing the Statement
The Social Security Statement is completely funded through
SSA's administrative budget (from the Social Security Trust
Funds). The cost to produce the annual mailing to 125 million
individuals is about $70,000,000 about 56 cents per recipient.
Proposal to Revise the Statement
All of us here today are well aware of the recent debates
regarding plans to restore long-term solvency for the Social
Security program. As part of the discussions, legislation has
been proposed that would require SSA to place on the Social
Security Statement an individualized estimate of the rates of
return workers would receive on their contributions to the
Social Security program. The intent of the proposal is to
provide information that would enable workers to compare the
current Social Security program with other investments. I
mentioned earlier in my testimony that SSA conducted extensive
surveys to design a Statement that is both useful and
responsive to the public. Clearly, our goal has been to provide
a Statement that contains necessary information for the public
to understand our programs and plan for their financial
futures. As part of that effort, SSA considered but rejected
including additional information such as an individualized rate
of return on the Statements.
In September 1998, the General Accounting Office reported
that there was substantial disagreement about whether it is
appropriate to apply the rate of return concept to the Social
Security program. The GAO report said:
Supporters of such an application point out that a rate of
return would provide individuals information about the return
they receive on their contributions to the program. However,
others contend that it is inappropriate to use rate of return
estimates for Social Security because the program is designed
to pursue social insurance goals, such as ensuring that low-
wage earners have adequate income in their old age or that
dependent survivors are adequately provided for. In addition,
calculations for rates of return rely on a number of
assumptions that affect the resulting estimates. For
individuals, the actual rates of return can vary substantially
from the estimates due to various uncertainties, such as a
worker's actual retirement age and future earnings.
SSA strongly agrees that it is inappropriate to apply
individual rate of return estimates to Social Security. Social
Security, like other social insurance programs such as
Medicare, is not designed in a way that it could be
appropriately evaluated by individual rate of return estimates.
The program is designed to provide adequate income for workers
and their families when the worker retires, becomes disabled,
or dies. Historically, the program has been judged by the
extent to which benefits replace pre-retirement earnings and
how much those benefits help reduce poverty, not by estimates
of the individual rate of return on contributions.
Furthermore, the program's full value cannot be accounted
for when using individual rate of return estimates. Social
Security is more than a social insurance program that protects
people when they retire. It also protects workers against other
risks over which they have little control. Almost 3 in 10 of
today's 20 year-olds will become disabled before age 67 and 1
in 6 Americans will die before reaching age 67. Individuals
benefit from Social Security not just through their own worker
benefits but through the protection provided to workers'
families against these risks. Currently millions of Americans
are directly benefiting from that protection: about 1 in 3
beneficiaries is not a retiree but a disabled worker, dependent
of a disabled worker or a survivor of a worker who has died.
Our ability to inform workers of the rate of return on
their Social Security contributions is limited for several
reasons. For example, the Social Security program is a family
program that, generally, provides greater benefits to workers
with larger families. But our records do not include family
linkages until benefit applications have been filed. Similarly,
replacement rates for lower income workers are greater than for
workers with higher incomes. Without knowing lifetime average
earnings or the size of a worker's family, any information
provided in the Social Security Statement could significantly
misstate many workers' actual rate of return. Moreover, any
rate of return estimate would be extremely sensitive to periods
of unemployment and other related factors.
In addition, the GAO report concluded that adding rate of
return information to the Statement could significantly
increase the Statement's length and complexity and undermine
SSA's effort to provide a simplified but useful Statement. If
rate of return estimates were added to the Statement, detailed
explanations would be required about how the calculations were
made, and the assumptions that were used about the individual.
In addition, comparisons between rates of return estimates for
Social Security and private investments would need to include
the transaction and administrative costs and acknowledge the
additional risk associated with private investments.
We carefully weighed considerations to include individual
rate of return estimates when developing the Statement. In
addition to finding that individual rate of return estimates
are an inappropriate method of representing the benefits'
value, we agreed with GAO's findings that adding this
information would increase the complexity of, rather than
enhance, the Statement. Clearly it would not serve the public
to provide them with a tool that misrepresents the value of
their benefits and is so complex they would need an accountant
or an actuary to translate the information.
Conclusion
Mr. Chairman, SSA is dedicated to provide world class
service to all of the people it serves. Social Security will
continue to play a key role in the lives of Americans when they
retire, or become disabled, or die with dependents or
survivors. SSA is committed to ensuring that the public
understands Social Security and its importance to them and
their families' financial future. The Social Security Statement
has been a valuable tool to increase public understanding of
our programs, and explain that Social Security is indeed a
foundation on which they can, together with other investment
options, build their financial future. Thus, the Statement
helps people understand not only what Social Security is, but
also what it is not. I am very proud of the overwhelmingly
positive reaction the Statement has received, and we will
continue to monitor the public's reaction to it.
I will be happy to answer any questions you may have.
Chairman Shaw. Thank you.
Mr. Matsui?
Mr. Matsui. Thank you, Mr. Chairman.
I just want to thank you, Mr. Apfel, for your testimony and
for the responsiveness to the GAO in terms of the
recommendations that they have made. I think this form does
appear to be easier to understand and easier to kind of read
and figure out, so I think it has served its purpose. And I
think you and your office, in working with the GAO, have
probably made a better form for the American public.
I know that on the first form you, or at least some group,
did some opinion surveys in terms of the impact on the public,
what the public might think about, and it was all very
positive. Have you begun that with the second form? Or is it
too early yet?
Mr. Apfel. We have started that. And we have found a
significantly positive response. There is greater knowledge
about Social Security and greater knowledge of the key elements
of Social Security and the fact that it has disability
retirement, and survivors programs; that benefits are based
upon what a person's earnings are over the lifetime; that the
program is inter-generational; and that taxes paid help support
the elderly, and so forthetera. So we are finding a growing
understanding of Social Security. That is issue number one for
us.
Issue number two, then, is, how do we help people plan for
their own financial futures? And again, I think we are finding
a majority of Americans view this as a helpful document to help
them personally plan for their financial futures.
We will continue to do survey information. But we really
believe two and three and 4 years from now that this will have
an increasing impact on the American public to help them plan
for the future.
Mr. Matsui. And last, in terms of making sure that you were
not biased and your office was not biased in preparing this
form, what kinds of checks did you use? You know, because
obviously, we are going to be reforming the system.
In fact, you had stated in your statement to the American
public that it will be unfunded by 2034. And obviously, it is
an issue, what system we are going to be moving to over the
next few years. How did you ensure that there was no bias one
way or the other?
Mr. Apfel. Well, we conducted a number of focus groups. We
did mailings with thousands of Americans. We listened to
comments. We reached out to organizations, to take a look at
what we were trying to provide. And we assimilated all that
information to provide what I believe is good, solid
information for American consumers.
The General Accounting Office was quite critical of the
form years ago, and said that, ``This has got to be simplified
so that individuals can use it to help in their own personal
financial planning.'' And I believe we have met that test. I
believe this is good, solid information that has gone through a
number of focus groups, surveys with the American public,
discussions with organizations, and we are very proud it. As I
earlier stated, the form has been praised by several financial
columnists as a valuable planning tool.
I must say, one of my personal greatest prides is this
statement. I think that it is one of the best things that we
have done for years for the American public. It is important
for their own financial planning; but also, we now include
information about the long-term challenges that the system
faces: The 2015 date, when revenues start to be less than
anticipated expenses; the 2034 date, now 2037; the percentage
of benefits that can be funded after that period of time. This
is information to help people understand what Social Security
is, but also to provide some strong caveats that there is a
need for change in the future.
We hope this will complement our other efforts. And we are
very proud of what we do.
Mr. Matsui. Thank you. Thank you, Mr. Chairman.
Chairman Shaw. Mr. Collins?
Mr. Collins. Thank you, Mr. Chairman.
Mr. Commissioner, how are you today, sir?
Mr. Apfel. How are you?
Mr. Collins. Fine. I apologize for being a little bit late.
I got in on the tail-end of your comments, and was trying to
read through them hurriedly.
On the annual statement, I was trying to find the annual
cost--Oh, here it is, 125 million individuals; $70 million.
Mr. Apfel. That is correct. About 56 cents per letter. And
that includes not only the mailing cost and the processing
cost, but the fact that we now receive about two million to two
and a half million extra inquiries a year about the statement.
So people are calling to say, ``Give me more information.''
Also, the corrective actions. There are about a half-
million requests to change the earnings records on the
statement. In other words, someone will call in and say, ``In
1977 I had earnings, and it doesn't show up here.'' So it is
very important for people to be doing that now, rather than
waiting until the day before they are going to retire.
Mr. Collins. Right.
Mr. Apfel. So there are about a half-million of those. So
all of those costs together--not only the mailing cost and the
distribution cost, but the telephone calls and the corrective
actions--are all about $70 million, 56 cents per mailing.
Mr. Collins. OK. Well, now, do you see some point in time
in the future--this will be an annual review now, an annual
statement--that the time might be extended to maybe every 2
years or every 3 years, once you kind of get people into the
system and they understand and have had an opportunity correct
those measures; that then we could maybe reduce the costs by
extending it out some?
Mr. Apfel. Mr. Collins, I do not disagree with the notion
that in the future, some time in the future, there may be a
need to send this less than every year, particularly for the
youngest recipients. I would say that we are several years away
from making that assessment.
I would not recommend it at all right now. But we may find
after two or three or four or 5 years that individuals have now
read it; they are now keeping it in their financial folder;
every year they have got the information. Possibly, for some
groups, particularly younger workers, it might be better at
that point in time to have it be, say, every other year.
I would also say that in the future, particularly for older
workers, that we may want to expand this some, to provide
better information for individuals as they get near retirement,
to give them better information about their own dates about
when to retire.
So I would see that this always will be an evolving
document. Every year, I would like to be able to assess, ``How
do we make improvements in the document? How do we reach out
better to the American public? Should we customize the
information to different age brackets?'' I think those are all
good things for us to be looking at.
Right now, I would agree with Mr. Matsui and Mr. Cardin. I
would not recommend major changes this year, until we have had
a year or two under our belt.
Mr. Collins. To get a feel for it.
Mr. Apfel. But in the long run, that might make sense.
Mr. Collins. OK. Well, good. Now, you can also go to your
website and get a lot of this information, too; is that not
true?
Mr. Apfel. You can go to the website. We have just
announced the creation of a new retirement planner, where an
individual can compute estimates of their retirement benefits.
However, they cannot get this same information directly from
the planner, because it is not directly tied into our private
records.
Mr. Collins. OK.
Mr. Apfel. The decision was made two to 3 years ago not to
provide access to that information, until privacy could be
assured.
But we now have three separate calculators that people can
use to go with a number of economic assumptions, or different
options in the future, to be able to make their own projections
based upon future wages, what their disability benefits might
be, what their government pension offset might be--a whole
series of different things, that we think is a very good
service for the American public.
Mr. Collins. Well, that is good. That is really the only
question I had. And I know it is out in the future that we have
to look at that.
I want to say thanks, too, for Bill Halter and your other
staff, who jumped in here about 10 days ago when we had a truck
that broke down that had 125,000 checks on it headed for
Georgia.
Mr. Apfel. And Mr. Collins, where was that truck? I know we
found it.
Mr. Collins. I think it was in Charlotte; wasn't it? The
last I heard.
Mr. Apfel. I believe so. And you alerted us, and we jumped,
and so did the Post Office. And we got right on it, and we
fixed the problem.
Mr. Collins. You sure did. And I appreciate that very much,
and so do the people that I represent. Thank you.
Mr. Apfel. Thank you, sir.
Chairman Shaw. If that truck was headed for Florida, the
state would have closed down. [Laughter.]
Mr. Apfel. That is right.
Chairman Shaw. Commissioner, I would just like to make one
possible suggestion with regard to the statement that you do
send out: It is almost too slick. And I say that in a
complimentary way----
Mr. Apfel. We will take it.
Chairman Shaw. Because as you are reading through it, you
do not realize when you get down to your own personal
information. And if I were going to change it, I would say,
well, put all of this text first, and then put the individual's
information on one page, so they know when they are getting
down to information about themselves. I think probably a lot of
people sort of wear out before they get to it, and do not
realize this is a personal statement about them.
But the information is good, but the transition into the
personal--I say that because I was reading my own statement
that I got a couple of months ago. And I kept saying, ``Is this
about me?'' And I sort of skimmed it, because I felt I knew
most of this stuff--At least, I hope I did. Maybe I should read
it carefully. [Laughter.]
Mr. Apfel. Mr. Chairman, I know you do.
Chairman Shaw. But you know, when I got to my own personal
stuff I sort of said, ``Oh, that is me.'' Because there is
nothing on there that looks like you are getting to a
typewriter or something that has been filled in that is
personal about the individual. That is the only comment that I
have.
Mr. Apfel. Well, Mr. Shaw, it is our goal to continually
find ways to make this better. The General Accounting Office,
in testimony you are about to hear, will consider it to be a
much improved document that meets its purpose for basic
information. And it also indicates the statement is probably
not the right vehicle for a rate of return discussion, which I
think is appropriate--that I believe is the right decision: It
should not be in there.
But they also make a series of suggestions. And you have
just made another one. And we need to assess those every year
to determine how to improve the system.
Chairman Shaw. OK. That is not meant to be a criticism. It
is just a suggestion as to how I read the statement, where I
was sort of looking for my own personal stuff, and then
realized I was in the middle of it by the time I got through
it.
We thank you very much for being here, and congratulate you
on the progress you have made. Thank you.
Mr. Apfel. Thank you, sir.
Chairman Shaw. Now we are going to hear from the United
States General Accounting Office. We have got Barbara Bovbjerg.
And Barbara, I am going to learn to pronounce your name
correctly one day, instead of always having someone jump up and
tell me, whisper it in my ear.
She is the Associate Director of Education, Work force, and
Income Security Issues; Health, Education and Human Services
Division.
And Ms. Bovbjerg is accompanied by Kay Brown, the Assistant
Director of Education, Work force, and Income Security Issues;
the Health, Education and Human Services Division. And by Ken
Stockbridge, who is a senior evaluator, Education, Work force,
and Income Security Issues; Health, Education and Human
Services Division.
Welcome. We have your full statement, and it will be made a
part of the record. And we invite you to summarize as you wish.
STATEMENT OF BARBARA D. BOVBJERG, ASSOCIATE DIRECTOR,
EDUCATION, WORKFORCE, AND INCOME SECURITY ISSUES; HEALTH,
EDUCATION, AND HUMAN SERVICES DIVISION, U.S. GENERAL ACCOUNTING
OFFICE; ACCOMPANIED BY KAY BROWN, ASSISTANT DIRECTOR; AND KEN
STOCKBRIDGE, SENIOR EVALUATOR
Ms. Bovbjerg. Thank you, Mr. Chairman, Members of the
Subcommittee. I am pleased to be here today to discuss
information the public should have about Social Security, and
how that information could be provided.
Specifically, I would like to address the role that the
individualized Social Security statement plays in providing
that information. Beginning this year, the Social Security
Administration must provide such a statement to almost every
U.S. worker over age 25. Hence, this statement can be a primary
means to convey important Social Security related information
to a broad range of American workers.
I would like to organize my remarks by describing three
broad types of information the public should have about the
Social Security program, and discussing the role of the
individualized statement for each type.
First, basic information about program benefits.
Individuals need information about what benefits they can
expect from Social Security for their personal financial
planning. Workers should also be informed that their Social
Security benefit levels depend upon their average lifetime
earnings, and that the benefits are meant to be a foundation
for retirement income, not a replacement for pensions and other
forms of saving.
The individualized statement is one of the key vehicles for
providing such basic information. As such, it represents not
only an important tool for workers' financial planning, it also
provides the means for program participants to check SSA's
records of their past earnings.
Because the statement reaches a wide audience and is the
only direct communication that many workers will have with SSA
until they retire, the statement must communicate simply and
clearly. It has not always done this. SSA's programs are
complex, and it can be challenging to explain them in simple,
straightforward language, without providing so much information
that it overwhelms the reader.
In GAO's review of earlier versions of the statement, we
recommended that SSA make revisions to shorten it, to improve
its layout and design, and to simplify its explanations. The
newly revised format of the statement is indeed shorter and
better organized, and thus communicates more effectively.
Let me turn now to the second type of information
individuals need. The public should also understand the
financial status of the Social Security program. Knowing this
helps workers to understand that in the future some combination
of revenue increases and benefit reductions will be necessary
to restore solvency, and that they should view their personal
benefit estimates in that context.
In the most recent version of the statement, SSA has indeed
added information on this topic, explaining that, absent a
change in law, payroll taxes will fall short of paying full
benefits owed. More technical and detailed financial
information is available in the Trustees' Report and the annual
financial report of the U.S. Government.
These reports are widely used by experts and specialists,
but the information they contain would be difficult to convey
clearly in the statement without confusing general readers. For
this reason, such technical information should not be included
in the individualized statement, but should be readily
accessible to those who request it.
Let me now discuss the third type of information the public
should have. In addressing the Social Security solvency
problem, the public needs understandable, independent, and
objective information to appreciate the difficult choices our
Nation faces. To this end, as you know, GAO has developed
criteria to help provide balance and structure to evaluating
reform proposals. The criteria balance the extent to which
proposals would achieve sustainable solvency with the adequacy
and equity of the benefits structure, and with the feasibility
of the implementation and administration. We have observed the
importance of balancing the criteria, and have stated that no
single criterion should be considered in isolation.
Some participants in the reform debate focus especially on
the implicit rate of return as a primary indicator of program
success, and have called for rate of return estimates to be
included in the individualized statement. Substantial
controversy surrounds applying the rate of return concept to
Social Security, with some arguing--and we have heard that
today--that such a concept is inappropriate to a social
insurance program.
GAO has reported that rate of return estimates are
inherently very uncertain, especially for specific individuals,
because such rates vary with life expectancy, earnings, and
family size. We have also observed that it is crucial to
compare such returns only with those for comprehensive reform
proposals. To be clearly understood, then, any published
estimates should include an explanation of how they are
calculated, the degree of uncertainty that would pertain, and
what they can be compared to.
In our view, adding rate of return information to the
statement would make it longer and more complex, and could
undermine its purpose. Ultimately, such information should be
provided as part of a broader evaluation of reform proposals,
and in a context that focuses on reform options, not benefit
disclosures.
In conclusion, the public should have easy and timely
access to a wide range of reliable, consistent, and verifiable
information. The Social Security statement has come a long way
toward more successfully meeting its purpose of providing basic
information for individual workers. However, it is not the
right vehicle for the complex technical information that
requires extensive and complicated explanation.
That concludes my statement, Mr. Chairman. We will be happy
to answer any questions you have.
[The prepared statement of follows:]
[An attachment is being retained in the Committee files.]
Statement of Barbara D. Bovbjerg, Associate Director, Education,
Workforce, and Income Security Issues, Health, Education, and Human
Services Division, U.S. General Accounting Office
Mr. Chairman and Members of the Subcommittee:
Thank you for inviting me here today to discuss information
the public should have about Social Security and strategies for
providing that information. Social Security touches the lives
of virtually all our nation's citizens. Last year, it paid $386
billion in benefits to over 44 million beneficiaries, including
aged and disabled workers and their dependents and survivors.
Ninety percent of elderly households received Social Security
benefits, and 17 percent of such households received no income
other than Social Security. Moreover, Social Security collected
$460 billion in payroll taxes from over 150 million workers, or
96 percent of the nation's workforce. Currently, 12.4 percent
of workers' covered earnings are paid in payroll taxes, divided
equally between workers and their employers. Clearly, to help
in their personal financial planning, our citizens should know
where their Social Security payroll taxes go and what benefits
they can expect to receive. In addition, Social Security faces
a significant long-term financing shortfall because of the
aging of our population and other demographic and economic
trends. The public should also have the information it needs to
participate in the debate about Social Security's future.
Today I would like to discuss the three broad types of
information the public should have about the Social Security
program--basic information about program benefits, the current
and projected financial status of the Social Security program,
and information about proposed changes to the program. For each
type of information, I would like to focus on what role the
individualized Social Security Statement might play in
providing it. My testimony is based on work we have done over
the past few years \1\ and an assessment of the most recent
statement.
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\1\ See the list of related GAO products at the end of this
statement.
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In summary, the individualized Social Security Statement
currently plays a specific and important role in providing
some, but not all, of the information the public needs. First,
individuals should have clear and easy to understand
information about what benefits they can reasonably expect to
receive. This is the specific and primary purpose of the Social
Security Statement, which is now sent annually to nearly all
working participants. In addition, the statement helps
individuals and the Social Security Administration (SSA) ensure
that individual earnings records are accurate, which in turn is
crucial to providing accurate benefit payments. SSA has
recently revised this statement so that it more effectively
conveys this important information. Second, the public should
understand the current and projected financial status of the
Social Security program. The Social Security Statement now
contains a brief disclosure about this, but technical and
detailed information about it is more appropriately conveyed
through other vehicles, such as the annual Trustees' Report \2\
and the federal government's consolidated financial statements.
Third, the public should have information to help it evaluate
different proposals to restore solvency and make other program
changes. However, such information is complex and must be
presented in a fair, consistent, and comprehensive way that
helps the public weigh and balance the various difficult
choices that must be made. This type of information goes beyond
estimating benefits and verifying earnings, which is the Social
Security Statement's central purpose. Given the difficulties
SSA has had in making just this information clear in the
statement, adding information on reform proposals would likely
make the statement lengthy, more complex, and even more
difficult to understand. Doing so could undermine the basic
purpose of the statement.
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\2\ The 2000 Annual Report of the Board of Trustees of the Federal
Old-Age and Survivors Insurance and Disability Insurance Trust Funds,
Mar. 30, 2000.
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Background
The Social Security trust funds have a projected financial
shortfall or funding gap of approximately $3 trillion over the
next 75 years. This long-term financing problem is largely a
result of greater life expectancy, lower birth rates, and the
forthcoming retirement of the baby-boom generation. Social
Security is financed primarily on a pay-as-you-go basis, which
means that current workers pay current retirees' benefits.
Today, there are approximately 3.4 workers for every
beneficiary, and by 2030 this number is projected to fall to
2.1. Thus, in the foreseeable future relatively fewer people
will be paying into the system and more people will be drawing
benefits.
Restoring Social Security's long-term solvency will require
some combination of increased revenues and reduced
expenditures. Various options are available within the current
structure of the program including raising the retirement age,
reducing inflation adjustments, increasing payroll tax rates,
and investing trust fund reserves in higher-yielding
securities. In addition, some proposals would go beyond
restoring long-term solvency and would fundamentally alter the
program structure by setting up individual retirement savings
accounts and requiring workers to contribute to them.
Public Should Have Basic Information on Estimated Benefits to
Plan Personal Finances
Individuals need basic information on the Social Security
program for their personal financial planning. This information
includes what benefits workers can expect for themselves, their
dependents, and their survivors when they retire, become
disabled, or die. In addition, workers should understand that
their benefits depend on their average lifetime earnings.\3\
Finally, they should also understand that Social Security is
meant to be only a foundation of retirement income. Social
Security does not guarantee a benefit that meets the poverty
threshold. Therefore, if workers know what benefit levels they
can expect given their earnings history so far, they can better
understand how much to save to meet their retirement income
goals.
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\3\ The benefit formula calculates average lifetime earnings after
adjusting earnings for inflation and growth in average real wages.
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SSA's individualized Social Security Statement is one of
the key vehicles for providing the public with this basic
information about Social Security. It provides workers with an
important tool for personal financial planning because it
provides estimates of potential retirement, disability, and
survivor benefits. It also asks statement recipients to check
SSA's records of their past earnings. In this way, the
statement can help SSA correct errors in agency records and
help ensure that benefit payments are correct when workers
retire, become disabled, or die. It also explains that Social
Security benefits were not intended to be the only source of
retirement income and encourages workers to supplement their
benefits with a pension, savings, or investments. This
statement reaches a very wide audience; starting in this fiscal
year, SSA is sending the individualized Social Security
Statement annually to almost every U.S. worker aged 25 and
older--an estimated 126 million people each year.\4\ (The
statement can be found on SSA's website at http://www.ssa.gov,
where workers can also request personalized statements.)
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\4\ See 42 U.S. C. 1320b-13. SSA must send a statement to those who
are 25 years old, have a Social Security number, have wages or earnings
from self-employment, are not receiving Social Security benefits, and
have a current address obtainable by SSA.
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Because it reaches such a wide audience and is the only
direct communication many workers will have with SSA until they
retire or become disabled, the statement must communicate
simply and clearly. It has not always done this. SSA offered
benefit statements to some workers long before this fiscal
year, and we reviewed the agency's 1996 version. At that time,
we raised concerns about its usefulness.\5\ We reported that
although the public felt the statement could be a valuable tool
for retirement planning, the statement provided too much
information and failed to communicate clearly the information
its readers needed to understand SSA's current programs and
benefits. We found that the six-page statement was too long for
many readers, the purpose was unclear, and the design and
organization were not user-friendly. The statement was
disorganized--it contained a patchwork of explanations
scattered throughout, requiring the reader to flip from one
page to another to find needed information. Finally, feedback
from the public and SSA staff indicated that readers were
confused by several important explanations, such as those
describing family benefits and credits needed to be eligible
for benefits. We recommended that SSA revise the 1996 version
of the statement to improve its layout and design and to
simplify explanations. We also recommended that SSA evaluate
and test alternative formats for the statement.
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\5\ SSA Benefit Statements: Well Received by the Public but
Difficult to Comprehend (GAO/HEHS-97-19, Dec. 5, 1996).
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Consistent with our recommendations, SSA embarked on a
multi-year effort to revise its statement. The agency developed
four different prototypes and conducted focus groups to assess
layout and presentation preferences and how well the material
presented was understood. SSA then conducted a public opinion
survey of the four prototypes. Based on this information, SSA
chose for its fiscal year 2000 mailing a new four-page layout.
We believe this new statement is much improved. It is
shorter, better organized, easier to read, employs good design
principles, and in a number of cases, provides simpler
explanations. The revised statement more effectively achieves
its intended purpose of providing important basic information
on the Social Security program as well as individualized
information on earnings on record at SSA and estimated
benefits. In fact, SSA reports that in a recent survey to
measure public understanding of its programs, workers who
received the statement have a significantly greater knowledge
of the Social Security program than those who did not receive a
statement.
Naturally, further improvement is always possible. Working
with our communications consultants, we have identified some
remaining rough spots. These include:
Clarity of purpose: We believe that SSA could more
clearly and quickly spell out the statement's purpose and
inform readers that the agency wants them to take some action--
that is, check their earnings as listed on the statement and
inform SSA of missing or incorrect information.
Explaining inflation-adjustment of benefit
estimates: The statement explains that the estimates are
provided in ``current dollars.'' However, readers may not
understand what this means for their financial planning. It
means that the estimates reflect today's price level, not the
price level that will exist when they actually start to receive
benefits.
Some explanations still unclear: Other
explanations, such as the one regarding the credits required
for benefit eligibility may still leave the reader confused.\6\
Also, the revised statement no longer cautions recipients that
the estimates are based on their own individual earnings
records and may also depend on their spouses' earnings if they
have spouses.
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\6\ Credits are earned by working for employers who pay taxes to
the Social Security system. The minimum number of credits needed
varies, depending on the type of benefit and the age of the worker.
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SSA's programs are complex, and it is challenging to
explain them in simple, straightforward language without
providing so much information that it overwhelms the reader.
SSA will need to continue to revise and streamline the
statement to make it more clear and easy to understand.
Public Should Have Information on Social Security's Current and
Projected Financial Status
The public also needs to understand the fundamentals of
Social Security financing, including the program's current and
projected financial status. Workers should understand that
their contributions are not deposited into interest-bearing
accounts for each individual but are credited to the Social
Security trust funds, which are largely used to pay for current
benefits. Under current law, the trust funds must invest any
surplus in interest-bearing federal government securities. In
addition, workers should understand that though significant
surpluses are currently building up the trust funds to help pay
future benefits, this situation will deteriorate over time.
According to the most recent trustees' intermediate
projections, benefit payments will exceed cash revenues in
2015, and the trust funds will be depleted in 2037. At that
time, revenues would only be sufficient to pay for roughly 72
percent of promised benefits. Knowing this helps workers to
understand that some combination of revenue increases and
benefit reductions will be necessary to restore solvency. In
turn, workers can better understand how to view their personal
benefit estimates.
Some recent proposals to provide information to the public
call for the Social Security Statement to more fully disclose
Social Security's long-term financial outlook, the status of
the trust funds over time, and the effect on SSA's ability to
pay future benefits in the absence of changes to the program.
In its most recent version of the statement, SSA has added
information on this topic. On the first page, as part of the
message from the Commissioner, the statement now provides basic
information on the demographic reasons for the financing
problems and on the future status of the trust funds, including
the date that the trust funds will be exhausted. On the page
where the benefit estimates are provided, the statement
explains that when this date arrives, absent a change in the
law, payroll taxes collected will be enough to pay only a
portion of the benefits owed.
However, according to our communications experts, the
information is somewhat confusing and contradictory, though it
could be fixed. The Commissioner's message first reassures
readers that ``of course'' Social Security will ``be there''
when they retire and then provides the information about the
future financing problems and the resulting percentage
reduction in benefits. The statement explains that SSA is
``working to resolve these issues'' and offers a booklet with
more information upon request. Overall, the explanation may
leave readers wondering how SSA can be sure the program will be
there to pay the benefits they are expecting in the future. The
status of the trust funds and the need for change can be
clarified with minor adjustments in wording. However, the
statement does not need to go into excessive or technical
detail; not every reader of the statement will need or be
interested in this additional detail. If statement recipients
want more information, they can request the booklet listed in
the statement. This booklet, which is written in simple,
straightforward terms for a wide audience, provides additional
information on the reasons for the financing shortfall and the
difficult choices needed to ensure long-term program stability.
More technical and detailed information on the status of
the trust funds is available, however, in a number of vehicles
that are used extensively and studied by a more narrow audience
of experts and specialists. These include the annual Trustees'
Report and the annual Financial Report of the United States
Government. To be most effective and useful to the broadest
audience, the information in these reports needs to be
reliable, consistent, accessible, timely, verifiable, and
complete. We have recently noted a problem related to their
timing and consistency.\7\ The Financial Report uses data from
the previous year's Trustees' Report although a new Trustees'
report with sometimes significantly different numbers is issued
at nearly the same time. The discrepancies between the two
reports may cause confusion, which can serve to reduce
confidence in and the credibility of the government's annual
financial report. Steps should be taken in future years to
ensure that the government's Financial Report contains up-to-
date information. In addition, given the importance and
materiality of this information, the Comptroller General has
stated that the time may have come for this information to be
subject to audit.
---------------------------------------------------------------------------
\7\ Auditing the Nation's Finances: Fiscal Year 1999 Results
Continue to Highlight Major Issues Needing Resolution (GAO/T-AIMD-00-
137, Mar. 31, 2000).
---------------------------------------------------------------------------
In addition, information on the magnitude of the trust
funds' financial gap should focus not only on the next 75 years
but also beyond that to help focus on sustainability. The
conventional 75-year measure of solvency is highly transient
because the 75-year period changes by one year in each
successive year's projections. Currently, the years early in
the 75-year period have surpluses while the years at the end of
the period have large deficits. As a result, changes made to
restore solvency only for the current 75-year period will
result in future actuarial imbalances almost immediately.
Therefore, in addition to examining the 75-year actuarial
balance, examining Social Security's percentage of the federal
budget, the size of the imbalance in the 75th year, and the
trend in the annual balance at that time would help focus
attention on the issue of sustainability.
Public Should Have Information to Help It Evaluate Options for
Restoring Solvency
To address Social Security's long-term solvency problem, a
wide and often confusing variety of proposals have been
offered. To participate in the reform debate, the public needs
understandable, independent, and objective information that can
help it appreciate the difficult choices that the nation faces.
We have concluded that three broad criteria help provide
balance and structure to evaluating the alternatives. These are
1) the extent to which proposals would achieve sustainable
solvency, including how they would affect the federal budget
and the economy; 2) the balance of adequacy and equity in the
benefits structure; and 3) the feasibility of implementation
and administration.\8\ Adequacy refers to the level and
certainty of benefits, and equity refers to the relationship
between the contributions made and benefits received, sometimes
referred to as ``money's-worth.'' No single criterion should be
considered in isolation, and taken together these criteria
highlight the difficult trade-offs that exist between efforts
to achieve solvency and to maintain adequate retirement income
for current and future beneficiaries.
---------------------------------------------------------------------------
\8\ Social Security:Criteria for Evaluating Social Security Reform
Proposals (GAO/T-HEHS-99-94, Mar. 25, 1999). Also, see the list of
related GAO products at the end of this statement.
---------------------------------------------------------------------------
Some participants in the reform debate focus especially on
individual equity and on one particular measure of equity--the
implicit rate of return workers can expect on their Social
Security contributions. Accordingly, some recent proposals call
for the Social Security Statement to include estimates of the
implicit rate of return. However, substantial controversy
surrounds applying the concept of rates of return to Social
Security.\9\ Some analysts argue that rates of return on
contributions would be much higher under a new system with
individual accounts, and they would like the public to compare
its return on Social Security to returns available on market
investments. Other analysts contend that the rate of return
concept should not be applied to Social Security because it is
a social insurance program and is not designed to provide
returns on contributions.
---------------------------------------------------------------------------
\9\ Social Security: Issues in Comparing Rates of Return with
Market Investments (GAO/HEHS-99-110, Aug. 5, 1999).
---------------------------------------------------------------------------
In our work on this topic, we have observed that rate of
return estimates are inherently very uncertain, especially for
specific individuals, because of the many complex factors that
affect rates of return. Such factors include how long
individuals will live, how much they will earn, and what size
families they will have. To be clearly understood, Social
Security rate of return estimates need an explanation of how
they are calculated and how uncertain the estimates are. Also,
instead of making simple comparisons between Social Security
and historical market returns, one should make any rate of
return comparisons among comprehensive return estimates for
specific reform proposals that include all costs and benefits
of any individual accounts as well as the Social Security
components of the resulting system. In addition, such estimates
would not help individuals plan their personal finances
because, under current law, they do not have the choice of
putting their contributions into alternative investments.
Moreover, providing estimates of the implicit rate of return on
Social Security contributions could mislead readers to think
they have an interest-bearing account under the program, which
they do not. Adding rates of return to the Social Security
Statement--or for that matter any information that is not
directly relevant to the statement's purpose--would make the
statement longer and more complex and could undermine its
important and specific purpose of providing benefit estimates
and verifying earnings records.
Concluding Observations
Given the importance of Social Security to the financial
security of most Americans and the value of citizen
participation in the difficult reform decisions that lie ahead,
the public should have easy and timely access to a wide range
of reliable, consistent, and verifiable information. Much of
this information is already available; however, questions have
been raised about the best vehicles to use to make sure the
information is available to as wide an audience as possible.
Reasonable people can disagree about the best vehicle,
particularly for the more complex or technical information.
However, we believe the Social Security Statement is not the
right vehicle for this more technical information, such as
rates of return. The newly revised statement more successfully
meets its purpose of providing basic information to individual
workers. Adding the explanations necessary to fairly portray
rate of return information would likely increase the
statement's length significantly and undermine efforts to
shorten and simplify it, thereby running the risk that
recipients will not read or fully understand it.
Mr. Chairman, this concludes my prepared statement. At this
time, I will be happy to answer any questions you or other
Members of the Subcommittee may have.
GAO Contact and Staff Acknowledgments
For information regarding this testimony, please contact
Barbara Bovbjerg at (202) 512-7215. Individuals making key
contributions to this testimony include Kay Brown, Ken
Stockbridge, Elizabeth O'Toole, and Kimberly Granger.
Related GAO Products
Auditing the Nation's Finances: Fiscal Year 1999 Results
Continue to Highlight Major Issues Needing Resolution (GAO/T-
AIMD-00-137, Mar. 31, 2000).
Social Security Reform: Information on the Archer-Shaw
Proposal (GAO/AIMD/HEHS-00-56, Jan. 18, 2000).
Social Security: The President's Proposal (GAO/T-HEHS/AIMD-
00-43, Nov. 9, 1999).
Social Security: Evaluating Reform Proposals (GAO/AIMD/
HEHS-00-29, Nov. 4, 1999).
Social Security Reform: Implications of Raising the
Retirement Age (GAO/HEHS-99-112, Aug. 27, 1999).
Social Security: Issues in Comparing Rates of Return With
Market Investments (GAO/HEHS-99-110, Aug. 5, 1999).
Social Security: Implications of Private Annuities for
Individual Accounts (GAO/HEHS-99-160, July 30, 1999).
Social Security: Capital Markets and Educational Issues
Associated with Individual Accounts (GAO/GGD-99-115, June 28,
1999).
Social Security Reform: Administrative Costs for Individual
Accounts Depend on System Design (GAO/HEHS-99-131, June 18,
1999).
Social Security Reform: Implementation Issues for
Individual Accounts (GAO/HEHS-99-122, June 18, 1999).
Social Security: Criteria for Evaluating Social Security
Reform Proposals (GAO/T-HEHS-99-94, Mar. 25, 1999).
Social Security: Individual Accounts as an Element of Long-
Term Financing Reform (GAO/T-HEHS-99-86, Mar. 16, 1999).
SSA Benefit Estimate Statements: Adding Rate of Return
Information May Not Be Appropriate (GAO/HEHS-98-228, Sept. 2,
1998).
Social Security: Different Approaches for Addressing
Program Solvency (GAO/HEHS-98-33, July 22, 1998).
Social Security Financing: Implications of Government Stock
Investing for the Trust Fund, the Federal Budget, and the
Economy (GAO/AIMD/HEHS-98-74, Apr. 22, 1998).
Social Security: Restoring Long-Term Solvency Will Require
Difficult Choices (GAO/T-HEHS-98-95, Feb. 10, 1998).
SSA Benefit Statements: Well Received by the Public but
Difficult to Comprehend (GAO/HEHS-97-19, Dec. 5, 1996).
Chairman Shaw. Thank you.
Bob?
Mr. Matsui. Thank you, Mr. Chairman.
I just have one question. Has the Social Security
Administration pretty much responded to most of the issues that
you raised in response to their initial form? Do you feel
satisfied that it pretty much carries out the mandate--I
shouldn't use the word ``mandate,'' but the recommendations
that you have suggested?
Ms. Bovbjerg. Well, we are very pleased with the new
version of the statement. It is shorter. We have gone from six
pages to four pages. It is better organized. It is well
designed. It is easier to read. I think that the focus groups
and the consultants that the Agency used clearly served them
well.
As you will see in the written statement, we do have some
things that we think could still be done better. There is
always room for improvement. But we thought that this was very
responsive, and a big improvement from the last version.
Mr. Matsui. Thank you.
Chairman Shaw. I would like just to draw a parallel here
with information overload. The Federal Government has for years
been dictating how much information it has to get when you get
a loan, when you get a mortgage. And I can tell you, having
been the attorney for a number of banks before I came here, and
having recently, not too long ago, had a loan closed myself
that I signed onto, by the time you get to about the third or
fourth required document, people's eyes are just glazing over.
And you know, even though they say that they understand, you
know that they just do not have a clue; they just want to sign
everything, get their money, and get out.
And I think that there is no question but that if you do
overload these statements, that you are going to lose the value
of them. And I think that is something we have to be very, very
cautious about. And that is something I am concerned about as
far as all of the disclosures. Those are wonderful things to
have. And perhaps we should be looking at the Trustees' Report
and make that a little clearer and more concise and a little
compact and more consumer-friendly for people that are going to
be wanting to review it. I think those are very important
things.
Do you have any comment on that?
Ms. Bovbjerg. We have considered some of the Trustees'
Report information and some of the things that are provided in
that. And we think that it is really for a different audience;
that it is widely used by experts and analysts, and certainly
should be made easily and readily accessible to people who want
to see it; but it is not necessarily a document that you would
want to have the Plain Language Award for and that you would
want to send out to everybody.
I think that you want to be sure that there is technical
information in that document that the specialists and Members
of Congress need to make some of these decisions; and you want
to be sure that people can get it who would like to see it. I
think that having the website reference and the 800-number in
the statement is a step in that direction.
Chairman Shaw. Thank you. Thank you for being here.
Ms. Bovbjerg. Thank you.
Chairman Shaw. We now have a panel, and I will read your
names in the order in which you appear. Dallas Salisbury is the
president and chief executive officer of the Employee Benefit
Research Institute.
Richard--Is it ``Thau''?
Mr. Thau. ``Thau.''
Chairman Shaw. Thau--the ``H'' does not come into it--is
president of Third Millennium, New York, New York.
Gary Fazzino, the director of Federal public policy at
Hewlett-Packard Co., on behalf of the Alliance for Worker
Retirement Security.
Hans Riemer is the director of the 2030 Center. Is that
``REE-mer'' or ``RI-mer''? ``REE-mer''? I got that one right.
Ron Geb--Whoa.
Mr. Gebhardtsbauer. It took me 8 years: ``Gebhardtsbauer.''
Chairman Shaw. The senior pension fellow, American Academy
of Actuaries.
Henry Aaron, Dr. Henry Aaron, who is a senior fellow,
economic studies, at Brookings Institute.
Joan----
Ms. Entmacher. Entmacher.
Chairman Shaw. This is really something. What happened to
``Smith'' and ``Jones''? They are not with us.
Joan is the vice president and director of family economic
security of the National Women's Law Center.
And David C. John, who is a senior policy analyst, Social
Security, from the Heritage Foundation.
Mr. Salisbury, you may proceed.
Will you hand the microphone down to Mr. Salisbury?
And as I have stated for the previous panels, we do have
your full statement, which will be made a part of the record.
STATEMENT OF DALLAS SALISBURY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, EMPLOYEE BENEFIT RESEARCH INSTITUTE
Mr. Salisbury. Thank you, Mr. Chairman and Members of the
Committee. The Institute has undertaken survey work for now
nearly 20 years on public knowledge regarding Social Security,
and has found significant areas of knowledge gaps.
Probably the most important are absence of public
understanding of the level of benefits that they can expect
from Social Security, as well as the age at which they will be
eligible.
Our first survey in 1990 on the retirement age issue showed
that the vast majority of Americans underestimate the age of
eligibility for full benefits. And our 1999 survey--I
emphasize, 1999--found that only 16 percent of Americans
realize that the Social Security retirement age is moving above
the age of 65. And nearly a third believe that full Social
Security benefits are already available, or will be, below the
age of 62.
Turning to the Social Security benefits statement then, the
importance of it in helping individuals understand these two
critical points--how much they might expect to receive in
benefits, or frankly, even a reasonable estimate; and second,
at what age they will be eligible for what amount of benefit--
if the statement accomplishes nothing else, it will have
fundamentally increased public understanding of these important
programs. And in that the statement does and will help correct
these two fundamental shortcomings.
I would add per the statement and the earlier discussion on
frequency, that, if anything, we might consider that the
statement should begin going to individuals younger than the
age of 25, which is the current cutoff. And as opposed to the
suggestion in testimony that frequency might be made less
frequent for the young, I would suggest, if anything, the most
important group to receive the statements are in fact the
young, so they might come to understand how relatively small
Social Security benefits are--in fact, it is intended to be a
floor of income--and be, as a result, incented to have the
ability to begin saving and the necessity of saving early.
In terms of the content of the statement, one thing that
came out of the delegates of the Choose To Save Forum on
retirement security and personal savings here in Washington
last week was a firm recommendation that the statement actually
be somewhat expanded, even with only a sentence or two,
directing individuals to where they might go for additional
information on retirement planning and on savings calculations
to help them get started.
Second, vis-a-vis the warning language that is in the
letter at the front of the statement, to possibly actually put
a little more of that in the personal information; so that
there is a bit of a caveat, and that people understand that
these benefit amounts are simply an estimate, and that estimate
could in fact change based on many, many factors--some of their
own control, and others of political control.
Third has been the discussion and legislation related to
expected rate of return being added to the statement. Our work
simply finds it difficult, in the context of a social insurance
program with many benefits, to understand--and we have done
much work trying to figure out how one could do a reasonable
statement to individuals of rate of return--exactly how to do
that in a way that would not be highly misleading. And to this
point, even on a total program basis, we have been unable to
come up with that methodology.
Recent studies have been published; for example, a recent
study from the Heritage Foundation that both had a national
average and congressional district averages. And even looking
at the methodology there, the numbers are highly misleading in
terms of the way they deal with current Social Security Trust
Fund balances and taxes.
Now, they have disclosed that methodology, so one might say
it is not misleading. But the care one would have to take to
read all of the disclosures in order to come to that conclusion
is far more than it would be possible to include in that
individual statement without, like the loan documents, making
it far more complex than one would ever deal with.
Regarding the Trustees' Report, it does provide a
tremendous amount of disclosure information, including issues
as one goes through the final tables and appendices on issues
of risk to the system and long-term tax rates necessary to
finance the system. It would be possible to add some additional
data there, but our assessment, again, is that adding rate of
return information might in fact lead more to misunderstanding
that to enlightenment.
In conclusion, it has been a pleasure to be here today and
to provide some insights. We would be happy to provide full
reports of all of our 22 surveys on Social Security, including
we have a retirement confidence survey--our tenth--in the field
as we speak, to collect new information on public
understanding, that hopefully will provide some insight as to
whether or not those who have already received their statements
show a higher level of understanding than a year ago. Thank
you.
[The prepared statement follows:]
Statement of Dallas Salisbury, President and Chief Executive Officer,
Employee Benefit Research Institute
Mr. Chairman, and members of the Committee. I am Dallas
Salisbury, President of the Employee Benefit Research Institute
(EBRI). EBRI is a non-partisan, non-lobbying research and
education organization based here in Washington, DC.
It is my pleasure to appear before you today to discuss
efforts to inform the public on Social Security. EBRI published
and distributed its first consumer education brochure on Social
Security in 1979; its first study of Social Security in 1982;
undertook its first public opinion survey on Social Security in
1990, and the most recent in 1999. Our opinion research has
made it clear that the public does not have a good
understanding of crucial details of Social Security; our
publications seek to increase that understanding.
Rating the Social Security Administration
Our surveys show the Social Security Administration was
given a ``fair'' rating by the public in 1990 on how well it
kept Americans informed about the program. Two-thirds of
respondents in 1990 were not aware that action had been taken
to increase the normal retirement age to 67 beginning in 2000.
(EBRI-Gallup Survey Number 7, February 1990).
Expected Benefits from Social Security and Support
Our 1994 survey found that 71 percent did not expect
(correctly) to get as much out of Social Security as they had
paid in; and 46 percent agreed that taxes would have to be
raised in the future to pay benefits in the future. (EBRI/
Gallup Survey Number 56, April 1994) Our Retirement Confidence
Surveys from 1992 through 1998, which have asked a consistent
question about confidence in Social Security providing benefits
of equal value, have consistently shown one-third to be
confident and two-thirds not confident about the future value
of their benefits. Yet, the surveys also find that two-thirds
voice strong support for the program. Surveys suggest that the
public understands that their parents and grandparents rely
upon Social Security benefits.
Public Knowledge Gaps
The most significant areas in which public knowledge is
lacking relate to how much Social Security will provide in the
way of a benefit, and at what age. Surveys consistently support
two statements: First, the public is more likely to
overestimate the amount they will get from Social Security than
to underestimate it; and, second, few yet know that the normal
retirement age--as enacted by Congress--is now in the process
of moving up from 65 years and two months to 67. Only 16
percent of respondents in our 1999 Retirement Confidence Survey
knew when they would be able to get full benefits; 59 percent
cited an age too early; 5 percent an age too late; and 19
percent simply noted that they did not know. (EBRI Issue Brief
Number 216, December 1999)
The Social Security Benefit Statement
The annual Social Security statement, noted in the press
release on this hearing from Chairman Shaw, arrived in the mail
for my wife last month. It provided us with an estimate of what
benefits would be available to my wife under the current
program, at alternative ages, and a full earnings and tax
payment history. The earnings and tax payment history was
accurate. It focused on the fact that full benefits would be at
the age of 66, not 65. And, it focused us on the fact that we
will need to save a lot of money to supplement Social Security
in order to live as we would like to.
The statement provides important information that will help
correct the two most serious areas of low knowledge among the
public. First, it gives a clear picture of the Social Security
benefit that you might expect to receive. Our work suggests
that the vast majority of Americans will be struck by how small
the benefit will be, and will be motivated to save. The history
of public commentary on Social Security has--unfortunately--
been a description of a program that ``allows you to retire;''
that's unfortunate because far too many Americans have wrongly
thought this meant it would provide them with an adequate
retirement income, rather than just a base. This may well be a
reason that only one-third of those now retired did any
assessment of either their expected income or expenses prior to
taking the step of retiring, and only 52 percent of workers
have yet done so. Hopefully, the statement will serve to
increase that number in the future. Second, the statement gives
a clear picture of your retirement age options and the benefit
implications. This should provide people with an incentive to
work longer, an incentive to save more, or both, as the
recipient will now know that the normal age for full benefits
is above age 65, and moving to 67. For many Americans, this
statement may give them the first indication of how little
their parents or grandparents are currently living on, since
over two-thirds of retirees essentially have Social Security as
their only income source.
Should the Statement Provide More Information?
The hearing announcement from Chairman Shaw also raised the
question of whether the Social Security statement might provide
more information than it now does. I am aware of three areas
that have been discussed for additional information.
First--as was endorsed last week by delegates to the Choose
to Save Forum on Retirement Security and Personal Savings--
would be the addition of information on where to go for online
and print retirement planning assistance. This would include
Internet URL's for such resources as the Ballpark Estimate
Retirement Planning Worksheet.
Second would be the addition of ``warning'' language on the
benefit amount, so that the worker knows that taxes may
eventually have to be increased in order for the stated benefit
to be paid, or that a reduction in the statement benefit may be
required if the Congress and the president were not willing to
raise the necessary taxes or otherwise appropriate funds. Some
have suggested that this ``disclosure of risk'' should note
that current economic projections imply a future reduction of
Social Security benefits of up to one-third of stated values.
For more than 20 years, EBRI publications have encouraged full
and complete disclosure of the nature of pension risk. For
private defined benefit and defined contribution pension plans,
this relates to disclosure of the risk of lower benefits due to
bankruptcy, investment losses, unanticipated increases in life
expectancy, etc. For Social Security, this relates to economic
risk and insufficient tax revenue due to unanticipated factors
such as a quick increase in life expectancy. Disclosure of risk
serves to further encourage personal savings and retirement
planning.
Third would be the inclusion of an ``expected rate of
return on taxes paid'' number. I have reviewed studies on this
subject since the very first report was published in the late
1970's. I am yet to see one that is not misleading, including
some comparative research published by EBRI. I allowed EBRI to
publish the comparative work on the theory that all the numbers
were consistently misleading, but did allow a constrained
comparison of the present Social Security design with a number
of reform options. I do not believe that including such a
``rate of return'' number would be a helpful addition to the
Social Security statement, as it would not be possible to
explain all the ways that it is misleading.
For instance, I noted that my wife received her statement.
In theory, it would allow a calculation of her personal return,
were the system not an ``intra-generational'' system. Both of
us, however, have living parents who rely on Social Security.
Mine are now 86 and 83, and were it not for their income from
Social Security, I would be paying part of their living
expenses directly. Instead, the taxes I pay to Social Security
get mailed to my parents. How can that accurately be factored
into my rate of return? Such an individual-by-individual
assessment would be very expensive and difficult, if not
impossible, without substantial invasion of personal privacy.
Disability and survivor benefits in theory can be adjusted for
in the rate-of-return calculation when doing analysis on case
studies, but to provide a realistic number to each worker would
require an individual-by-individual assessment of all of one's
family members. Such is the problem that arises in a social
insurance program with multiple components and multiple
generations, and it makes a simple or objective ``rate of
return'' number impossible to produce or virtually meaningless.
Additional problems can arise in calculation as well. For
example, a recent article by the Heritage Foundation attempts
to calculate rates of return for stylized individuals from the
Social Security Old-Age and Survivors Insurance Program (OASI).
Aside from the worthiness of calculating rates of return
discussed above, the paper made a crucial economic assumption
that immediately leads to a lower rate of return being
calculated for all individuals. This crucial assumption is that
all payroll tax revenue in excess of benefits paid in each year
that has accumulated in the Social Security Trust Fund, and is
expected to continue to accumulate there until 2015, is assumed
to be never paid out as benefits. Instead, in their
calculations, payroll taxes are increased to equal the benefits
to be paid in each year after 2014. Under this assumption,
approximately $2 trillion is counted as contributions in their
report, but none of this revenue is counted as paying Social
Security benefits. Therefore, it is quite easy to show small
rates of return when $2 trillion are counted as contributions
but not as benefits, and instead more contributions are
``required'' to be raised to pay those benefits that are
directly associated with the first $2 trillion in
contributions. Consequently, either the revenue that has
accumulated or will accumulate in the Trust Fund must be
counted as paying benefits--or not counted as contributions--to
gain a potentially honest measure of rates of return for the
OASI program. I say ``potentially'' because of broader issues
noted previously. If a reader did not carefully examine the
assumptions and calculations of the Heritage paper, a seriously
incorrect interpretation would be taken away from the report.
Thus, the assumptions used in any model need to be clearly
disclosed and understood to allow individuals to correctly
evaluate any results emanating from that model. The ability to
even attempt to provide such full disclosure on the Social
Security statement would turn it into a book, not a statement.
The Trustees Report
EBRI has also published regular reports based upon the
reports issued by Trustees of the program. The late 1980s
brought the publication of a ``summary'' report by the Social
Security program, which provides a much clearer picture for the
public, and that report continues to be improved. Now,
www.ssa.gov provides a wealth of information on demand, which
can also be obtained in printed form from the agency. Analysts
have suggested over time that reporting by the Trustees could
be improved with dynamic estimates that presented future
possible outcomes as more than just three possible static
projections, as is currently done today.
EBRI has supported the development of a model that allows
such dynamic analysis, and has published a number of studies
based upon that model, which is also now being used by the
Social Security Administration, the General Accounting Office,
the AARP, and others, to aid in their analysis of the present
system and reform proposals. Prior testimony to this committee
was based upon our use of the model. Other organizations have
developed models as well. Because of their complexity, the most
important thing to assure is full disclosure of all assumptions
so that model results can be put into context and can be fully
evaluated.
Additions to the Trustees Report
The addition of rate of return information has also been
suggested for the annual Trustees report. For the reasons
previously articulated, I do not believe that this is possible
in a form that would inform more than it would mislead.
Conclusion
It has been my pleasure to appear before the Committee
today. I offer the Committee the assistance of the Employer
Benefit Research Institute and the American Savings Education
Council as you continue your work, which is vital to the
economic security to all working and retired Americans, and to
millions of survivors.
Chairman Shaw. Thank you.
Mr. Thau.
STATEMENT OF RICHARD THAU, PRESIDENT, THIRD MILLENNIUM, NEW
YORK, NEW YORK
Mr. Thau. Thank you, Mr. Chairman, for inviting Third
Millennium to participate in this dialog on Social Security,
the largest program in the Federal budget. In announcing this
hearing, Mr. Chairman, you asked whether the information being
provided to taxpayers about Social Security is ``accurate,
understandable, and useful.'' My short answer to each of these
questions is ``Maybe, yes, and partially.''
Let me explain. First, for a young worker, the retirement
benefit projections on the Social Security statement are
probably not accurate. This is because the calculations take a
worker's current salary and project it forward at its current
level for decades. Many workers receive salary increases as
they age, so a benefit calculation based on a typical young
worker's present compensation is probably artificially low.
However, since Social Security, according to the trustees, will
only be able to pay approximately three-quarters of the
benefits currently being promised to my generation, this low
number could actually, and accidentally, turn out to be
accurate.
Second, I believe that the benefit statement is
understandable to a lay person.
Third, the statement is only partially useful to young
adults. Let me explain why this is so, and how it would be far
more useful. First, the Social Security statement indicates
that ``Social Security benefits were not intended to be the
only source of income for you and your family when you retire.
You need to supplement your benefits with income from a pension
plan, savings, or investments.''
This is a critically important bit of information; yet it
could be strengthened. I suggest adding the following
personalized text: ``In order to maintain an adequate standard
of living in retirement, you will need an annual income of
approximately 70 percent--'' 7-0 percent ``--of the amount you
make before you retire. Social Security, according to the
projections and depending upon the age you retire, will provide
you only `X' or `Y' percent of the income you need. If you were
to rely solely on Social Security for your income in
retirement, you would be living near the poverty level.''
If you made that point clear in that statement, that if you
were to rely only on Social Security in retirement you would be
living at or near the poverty level, that would be, to use the
phrase, hitting people over the head with a frying pan about
how important it is at a young age to start saving and
investing for retirement.
Second, while the statement indicates how much a worker has
paid in FICA taxes to date, and estimates what benefits that
worker may receive in old age, it does not indicate how many
thousands of dollars in FICA taxes that worker will pay from
now until retirement in order to receive those benefits.
Third, the statement does not indicate, using figures from
the latest Trustees' Report, how much a worker's annual
benefits could shrink if Social Security is not reformed
between now and the time he or she reaches ages 62, 67, or 70.
Fourth, the statement does not estimate what advanced age
one needs to attain in order to receive back the value of one's
lifetime contributions.
Fifth, many adults of all ages do not understand how Social
Security works, and it would be useful to explain that there is
no interest-bearing account with their accrued benefits sitting
in a government office somewhere; rather, the statement should
say that FICA taxes paid today are used to finance the
retirement, disability, and survivor benefits of current
recipients. Future benefits will be provided by the tax dollars
of workers in the future.
Moreover, citizens will benefit from a better understanding
of the status of the Social Security Trust Fund. As the Office
of Management and Budget acknowledged last year, ``These
balances are available to finance future benefit payments 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.''
Mr. Chairman, I would be remiss if I did not point out the
``pink elephant'' in the hearing room today. While improving
the Social Security statement is important and can provide
useful information to members of my generation, Congress would
be doing far more important work if it set itself on the task
of reforming the entire Social Security system in advance of
the ``Baby Boom'' generation's retirement. America's leaders
are wasting precious time. There is no national plan whatsoever
to accommodate the massive retirement and health needs of this
generation.
For the good of America's future, Congress and the
President should act expeditiously to fix Social Security and
Medicare. If you do not, future generations will rightly wonder
why you waited so long, and only tinkered at the margins. Thank
you.
[The prepared statement follows:]
Statement of Richard Thau, President, Third Millennium, New York, New
York
Thank you, Mr. Chairman, for inviting Third Millennium to
participate in this dialogue on Social Security, the largest
program in the Federal budget.
My name is Richard Thau. I am the president and co-founder
of Third Millennium, a national, non-profit, non-partisan group
of Americans born after 1960. We are based in New York City.
My colleagues and I have appeared before Congress 18 times
over the past six years, testifying on the need to overhaul
Social Security and Medicare. We greatly appreciate the
opportunity to once again serve as a voice from within our
generation on these vital issues.
In announcing this hearing, Mr. Chairman, you asked whether
the information being provided to taxpayers about Social
Security is ``accurate, understandable and useful.'' My short
answer to each of these questions is ``maybe, yes and
partially.'' Let me explain.
First, for a young worker, the retirement benefit
projections on the Social Security Statement are probably not
accurate. This is because the calculations take a worker's
current salary and project it forward, at its current level,
for decades. Many workers receive salary increases as they age,
so a benefit calculation based on a typical young worker's
present compensation is probably artificially low. However,
since Social Security, according to the Trustees, will only be
able to pay approximately three-quarters of benefits currently
being promised to my generation, this low number could
actually, and almost accidentally, turn out to be accurate.
Second, I believe that the benefit statement is
understandable to a layperson.
Third, the statement is only partially useful to young
adults. Let me explain why this is so, and how it could be far
more useful:
a) The Social Security Statement indicates that ``Social
Security benefits were not intended to be the only source of
income for you and your family when you retire. You need to
supplement your benefits with income from a pension plan,
savings or investments.'' This is a critically important bit of
information, yet it could be strengthened. I suggest adding the
following personalized text: ``In order to maintain an adequate
standard of living in retirement, you will need an annual
income of approximately 70% of the amount you make before you
retire. Social Security, according to our projections and
depending upon the age you retire, will provide you only X to Y
percent of the income you need. If you were to rely solely on
Social Security for your income in retirement, you would be
living near the poverty level.''
b) While the statement indicates how much a worker has paid
in FICA taxes to date, and estimates what benefits that worker
may receive in old age, it does not indicate how many thousands
of dollars in FICA that worker will pay from now until
retirement in order to receive these benefits.
c) The statement does not indicate--using figures from the
latest Trustees report--how much a worker's annual benefits
could shrink if Social Security is not reformed between now and
the time he or she reaches ages 62, 67 and 70.
d) The statement does not estimate what advanced age one
needs to attain in order to receive back the value of one's
lifetime contributions.
e) Many adults--of all ages--do not understand how Social
Security works, and it would be useful to explain that there is
no interest-bearing account with their accrued benefits sitting
in a government office somewhere. Rather, the statement should
say that FICA taxes paid today are used to finance the
retirement, disability, and survivor benefits of current
recipients. Future benefits will be provided by the tax dollars
of workers in the future. Moreover, citizens would benefit from
a better understanding of the status of the Social Security
Trust Fund. As the Office of Management and Budget acknowledged
last year, ``These balances are available to finance future
benefit payments. . .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.''
Mr. Chairman, I would be remiss if I did not point out the
``pink elephant'' in the hearing room today. While improving
the Social Security Statement is important, and can provide
useful information to members of my generation, Congress would
be doing far more important work if it set itself on the task
of reforming the entire Social Security system before the Baby
Boom generation retires.
America's leaders are wasting precious time. There is no
national plan to accommodate their massive retirement and
health needs of the generation that is ahead of mine. For the
good of America's future, Congress and the President should act
expeditiously to fix Social Security and Medicare. If you
don't, future generations will rightly wonder why you waited so
long--and only tinkered at the margins.
Thank you.
Chairman Shaw. Thank you.
Mr. Fazzino.
STATEMENT OF GARY FAZZINO, DIRECTOR, FEDERAL PUBLIC POLICY,
HEWLETT-PACKARD COMPANY; ON BEHALF OF THE ALLIANCE FOR WORKER
RETIREMENT SECURITY
Mr. Fazzino. Thank you, Mr. Chairman, and Mr. Matsui, my
fellow Californian, who shares an abiding affection for
Stanford University along with me.
I am Gary Fazzino. I am director of Federal public policy
for Hewlett-Packard. Today I am testifying on behalf of the
Alliance for Worker Retirement Security, of which Hewlett-
Packard is a member. AWRS is a coalition of more than 30
organizations that support Social Security reform which will
put our Social Security system on a sound financial footing and
offer all workers the opportunity to create wealth by investing
a portion of their Social Security payroll taxes in regulated
funds.
I want to commend you and your colleagues for your hard
work on Social Security reform, and for this hearing. Hewlett-
Packard has long believed that reforming Social Security is a
critical public policy issue that needs immediate attention.
Over 3 years ago, the company initiated an effort to
provide educational materials to our employees about the future
of Social Security and Medicare. HP produced a pamphlet that
was distributed to all 65,000 HP workers in the United States,
and a copy of that pamphlet is provided to you with this
statement. And at the time, our chief executive officer, Lew
Platt, indicated that he wanted all HP employees to be better
informed about decisions that could impact their future.
HP had an overwhelmingly positive response from our
employees, many of whom wanted to continue receiving updated
information. Other employers and employer trade associations
have joined in this educational effort.
The National Association of Manufacturers has dedicated
significant resources to informing employers and employees
about the Social Security issue, including launching the AWRS
coalition last year. Included in your materials is a NAM-
created calculator with which a worker can compare his or her
promised Social Security benefit with a reformed program.
Some companies have begun including the employer's share of
FICA taxes on the worker's pay stub. And most large employers
now give workers an annual report of all payroll taxes paid,
employee and employer share. There are many such examples of
educational efforts, but indeed much more needs to take place.
The Social Security statements now being sent annually by
the Social Security Administration to nearly all workers is a
very good first step. We applaud Congress and the SSA for
making these statements available. Workers appreciate receiving
them, and it gives employers the perfect opportunity to
supplement the statements with additional information.
Now, what more do workers need to know? They need to be
given a clearer understanding of how Social Security is
financed, and the challenges facing us ahead. Believe it or
not, tens of millions of workers still think that there is a
government account with their name on it into which payroll
taxes are deposited. They believe that during their working
career the money accumulates, and then is then disbursed to
them during retirement.
This is what is behind the oft-heard statement at HP from
our employees, ``It is my money, and I am entitled to it.''
Little do they know that the taxes they pay today are
immediately transferred to today's retirees. The Social
Security statement should be made more clear in this regard.
Likewise, the Social Security statement gives the
impression that the excess payroll taxes are deposited into a
Trust Fund that acts like a bank account. Relatively few
workers understand that the trust fund holds no cash, but
contains IOUs that must be redeemed with future taxes if
promised benefits are not [sic] to be paid.
HP and other employers in this country are willing to help
in this educational effort. Information about the Social
Security system must be factual, accessible, and presented in
such a way that it is both technically accurate and not
misleading to the American public.
AWRS strongly supports H.R. 3578, Senate Bill 2364, and
Senate Bill 2294, and other measures that will help educate our
workers. We also strongly suggest that Members of Congress
follow in the footsteps of their colleagues who have held
Social Security townhall meetings in their districts.
No matter what reform measure you support, the more your
constituents--in other words, our workers--understand about the
issue, the more Congress will be doing the will of the people,
and the people of this country will be able to accept the very
difficult decisions that you have to make in the future
regarding Social Security.
AWRS member organizations and Hewlett-Packard stand ready
to help you. Thank you very much.
[The prepared statement follows:]
Statement of Gary Fazzino, Director, Federal Public Policy, Hewlett-
Packard Company, on behalf of the Alliance for Worker Retirement
Security
Good Afternoon. My name is Gary Fazzino and I am Director
of Federal Public Policy for Hewlett-Packard Company located in
Palo Alto, California. Today, I am testifying on behalf of the
Alliance for Worker Retirement Security (AWRS), of which
Hewlett-Packard is a member. AWRS is a coalition of more than
thirty organizations that support Social Security reform which
will put our Social Security system on a sound financial
footing and offer all workers the opportunity to create wealth
by investing a portion of their Social Security payroll taxes
in regulated funds. A large number of AWRS members are
employer-based trade associations, such as the National
Association of Manufacturers, the Retail Federation, the
Business Roundtable, the NFIB, and others.
I want to commend you and your colleagues for your hard
work on Social Security reform and for this hearing in order to
review the type, accuracy and amount of information that is, or
should be, available to Congress and the public in the area of
Social Security.
Hewlett-Packard has long believed that reforming Social
Security is a critical public policy issue that needs immediate
attention. We believe HP has a responsibility to provide our
workers with accurate information on their long-term financial
security, including Social Security. Over three years ago, we
initiated an effort to provide educational materials to our
employees about the future of Social Security and Medicare. HP
produced a pamphlet that was distributed to all 65,000 HP
workers in the United States. A copy of that pamphlet is
provided to you with this statement. In a cover letter to HP
employees, then-Chairman and CEO Lewis Platt, wrote:
``You may wonder, 'What is HP's motivation?' First and
foremost, it is to help you be better informed about decisions
that could impact your future. By thinking about these issues
today, you may be in a better position to plan for your
retirement. In addition, the time is right to let others know
what you would like to see happen with Social Security. . I
hope that you will share your views with us and with others,
including your elected representatives who will be making key
decisions affecting the future. . .''
HP had an overwhelmingly positive response from our
employees, many of whom wanted to continue receiving updated
information. Other employers and employer trade associations
have joined in this educational effort. The National
Association of Manufacturers has dedicated significant
resources to informing employers and employees about the Social
Security issue, including launching the AWRS coalition last
year. Included in your materials is an NAM-created
``calculator'' with which a worker can compare his/her promised
Social Security benefit with a reformed program. Some companies
have begun including the employer's share of FICA taxes on the
worker's pay stub, and most large employers now give workers an
annual report of all payroll taxes paid, employee and employer
share. There are many more examples of educational efforts, but
much more needs to take place.
Why is it so important for employers to help educate
workers? The Social Security system is like a train that we
know will soon be derailed--but not all of the passengers on
board are aware of the wreck ahead. The cost to our workers,
retirees and our entire economy could be severe. Before a
wreck--in other words, before our workers, retirees, and our
economy are derailed from their expected destination--we must
redirect the train onto a stronger, sustainable track.
The Social Security Statements now being sent annually by
the Social Security Administration (SSA) to nearly all workers
are a good first step. We applaud Congress and the SSA for
making these statements available. Workers appreciate receiving
them and it gives employers the perfect opportunity to
supplement the statements with additional information.
What more do workers need to know? They need to be given a
clearer understanding of how Social Security is financed and
the challenges facing us ahead. Believe it or not, tens of
millions of workers still think that there is a government
account with their name on it, into which payroll taxes are
deposited. They believe that during their working career, the
money accumulates and is then disbursed to them during
retirement. This is what is behind the often heard statement:
``It's my money and I'm entitled to it!'' Little do they know
that the taxes they pay today are immediately transferred to
today's retirees. The Social Security Statement should be made
more clear in this regard.
Likewise, the Social Security Statement gives the
impression that the excess payroll taxes are deposited into a
trust fund that acts like a bank account. The statement
explains the trust fund in this way: ``The excess funds are
credited to Social Security's trust funds which are expected to
grow to over $4 trillion before we need to use them to pay
benefits.'' Is it any wonder that workers believe their payroll
taxes are being held in an account for benefit payments later?
Relatively few workers understand that the trust fund holds no
cash, but contains IOUs that must be redeemed with future taxes
if promised benefits are to be paid.
We applaud Congress for no longer spending the excess
payroll taxes and using them instead to buy down public debt.
This is good for the economy and is a necessary step forward,
absent real reform of the system. However, statements from
Congress and the White House such as: ``We are going to save
every penny of Social Security and not spend it,'' only fuels
this misperception of the existence of a savings account.
HP and other employers in this country are willing to help
in the educational process. Information about the Social
Security system must be factual, accessible and presented in a
way that is both technically accurate and not misleading to the
American public.
What do we recommend? AWRS strongly supports H.R. 3578, the
``Social Security Right To Know Act,'' sponsored by Congressman
Sununu, S. 2364, a similar bill introduced by Senators Santorum
and Gregg, and other measures that will help educate our
workers. We also strongly suggest that members of Congress
follow in the footsteps of their colleagues who have held
Social Security Town Hall meetings in their districts. With
outside experts brought in to explain the problems ahead, these
Members have found the meetings to be extremely helpful in
educating their constituents and the press.
The fact is that no matter what reform measure you support,
the more your constituents--in other words, our workers--
understand about the issue, the more Congress will be doing the
``will of the people,'' and the people of this country will be
able to accept the difficult decisions that you must make in
the future. AWRS member organizations stand ready to help.
Thank you again for asking me to appear today, and I would be
happy to answer any questions.
AWRS PRINCIPLES
The Alliance for Worker Retirement Security is a broad-
based coalition of organizations dedicated to reforming the
Social Security system to ensure an adequate retirement income
and an opportunity for workers to create personal economic
wealth.
Principles of the Alliance
1. Permit workers to invest their retirement payroll taxes
(FICA) in individually-directed personal retirement accounts
(PRAs).
2. Oppose an increase in payroll taxes.
3. Guarantee a ``safety-net'' (minimum government benefit)
for all retirees.
4. Preserve the benefits of retirees and near-retirees.
5. Oppose government investment in the stock market
6. Oppose general revenue transfers (primarily income
taxes) to Social Security in the absence of structural reform.
Mission of the Alliance
Develop and implement a strategy for passage of Social
Security reform legislation that incorporates the principles of
the Alliance.
September, 1999
ALLIANCE FOR WORKER RETIREMENT SECURITY
Aetna..................................... NCR Corporation
American Bankers Association.............. National Federation of
Independent Businesses
American Farm Bureau Federation........... National Restaurant
Association
Americans for Tax Reform.................. National Retail Federation
Black America's PAC....................... Pfizer, Inc.
The Business Roundtable................... Seagrams and Sons, Inc.
Citizens for a Sound Economy.............. Securities Industry
Association
Committee for Good Common Sense........... 60 Plus Association
Council for Government Reform............. Small Business Survival
Committee
Economic Security 2000.................... Society for Human Resource
Management
Jeld-Wen Corporation...................... StorageTek
Hewlett-Packard........................... TRW
Hispanic Business Roundtable.............. Windway Capital Corporation
National Association for the Self-Employed U.S. Chamber of Commerce
National Association of Manufacturers..... United Seniors Association
National Association of Women Business National Council of Chain
Owners................................... Restaurants
Chairman Shaw. Thank you.
There is a vote on the floor. In fact, there are two votes.
I would think that we can get back here in approximately 15
minutes and conclude the hearing. But I will have to recess it
for at least that long, 15 to 20 minutes possibly. And we will
start with you when we return.
[Recess.]
Chairman Shaw. OK. Mr. Riemer.
STATEMENT OF HANS RIEMER, FOUNDER AND DIRECTOR, 2030 CENTER
Mr. Riemer. Thank you, Mr. Chairman, Mr. Matsui, and
Members of the Committee. My name is Hans Riemer, and I am the
founder and director of the 2030 Center, a public policy
organization for young adults. The 2030 Center conducts
research and public education in order to provide a voice for
young workers on important economic issues such as
strengthening Social Security and improving job opportunity.
We are concerned about Social Security because we want to
make sure that today's young workers and future generations
will be able to collect their full benefits, guaranteed. There
is no doubt that young people want Social Security to remain
financially strong. This desire is an important explanation for
why young people on a nearly two-to-one basis support using the
budget surplus for Social Security rather than a tax cut.
As you know, the Social Security Administration recently
began to send benefit statements to working Americans. These
personalized statements estimate the projected retirement,
disability, and life insurance benefits that a worker may
claim. I believe this is one of the most important developments
in the history of Social Security, and I applaud you, Mr.
Chairman, and Members of the Committee, for supporting this
remarkable legislation.
Promoting public understanding of Social Security has been
a concern of ours for some time. In 1998, Peter Hart Research
Associates, a national survey research firm, conducted a poll
for the 2030 Center that closely evaluated public attitudes--
particularly the attitudes of young workers--toward Social
Security. We discovered that efforts to inform the public about
Social Security still have a long way to go.
One of the most striking examples pertains to expectations
of future retirement benefits. Most Americans seem to think
that Social Security is going to run out of money entirely in
just a few years, or at most a decade or so; that every penny
of Social Security funds soon will be used up. This, of course,
is far from true. Even if Congress does nothing, Social
Security benefits are fully financed for at least the next 37
years. And even after then, the payroll tax at current levels
can fund at least 72 percent of promised benefits.
For most Americans this reality represents a dramatic
improvement over their current expectations. We need to do a
much better job educating the public about the present fiscal
health of the program, so that informed judgments can be made
about the future.
Another important area where improvement is needed:
Americans do not have an adequate understanding of the range of
benefits that they are earning. As you know, one-third of all
Social Security beneficiaries today--more than 13\1/2\ million
people--are not retired workers. They are disabled workers,
survivors, and their family dependents, including millions of
children.
In our poll we asked young adults if they could name any
benefit or coverage provided by Social Security other than
retirement. Fewer than 16 percent could name disability, and
only 13 percent could name survivors benefits. Fully 42 percent
said that Social Security provides no other benefits at all.
And 22 percent did not know or respond. All in all, nearly
three-fourths of all respondents were unaware of the survivors
and disability insurance coverage that protects them and their
families right now.
In other words, most young workers, upon opening their
personalized benefits statements from the Social Security
Administration, will learn for the first time that they are
also qualifying for disability and survivors insurance; that
Social Security is already there for them today. Considering
that Social Security provides about as much life insurance and
disability insurance as all private-sector providers combined,
it is a good public service indeed for the government to notify
working Americans about these important benefits.
While the current benefits statement is limited to
explaining the benefit formula guaranteed under present law, I
am aware that some have proposed to use these statements to
address other issues. I believe that any attempt to do this
should be resisted, Mr. Chairman.
I strongly believe that the mission of the Social Security
statements should remain focused and clear: To notify Americans
of their contributions and benefits under present law.
I think that these statements will send Americans precisely
the right message: Social Security provides disability and
survivors benefits, and it is the foundation of a secure
retirement, but it is not enough.
I am certain that this is an agenda that we can all
support. And I thank you for inviting me to testify before your
Committee today.
[The prepared statement follows:]
Statement of Hans Riemer, Founder and Director, 2030 Center
Thank you, Mr. Chairman, Mr. Matsui, and members of the
Committee for inviting me here to testify today. My name is
Hans Riemer, and I am the founder and director of the 2030
Center, a public policy organization for young adults. The 2030
Center conducts research and public education in order to
provide a voice for young workers on important economic issues
such as strengthening Social Security and improving job
opportunity.
We are concerned about Social Security because we want to
make sure that today's young workers and future generations
will be able to collect their full benefits--guaranteed. There
is no doubt that young people want Social Security to remain
financially strong so that it will pay full benefits to current
and future retirees. This desire is an important explanation
for why young people, on a nearly two-to-one basis, support
using the budget surplus for Social Security rather than a tax
cut.
As you know, the Social Security Administration recently
began to send ``benefit statements'' to working Americans.
These personalized statements estimate the projected
retirement, disability, and life insurance benefits that a
worker may claim. I believe this is one of the most important
developments in the history of Social Security, and I applaud
you, Mr. Chairman, and members of the committee, for supporting
this remarkable legislation.
Promoting public understanding of Social Security has been
a concern of ours for some time. In 1998, Peter Hart Research
Associates, a national survey research firm, conducted a poll
for the 2030 Center that closely evaluated public attitudes,
particularly the attitudes of young workers, towards Social
Security. We discovered that efforts to inform the public about
Social Security still have a long way to go.
One of the most striking examples of the need to improve
public education about Social Security pertains to expectations
of future retirement benefits. Most Americans seem to think
that Social Security is going to run out of money entirely in
just a few years or, at most, a decade or so--that every penny
of Social Security funds will soon be used up. This, of course,
is far from true; even if Congress does nothing, Social
Security benefits are fully financed for at least the next 37
years; and even after then, the payroll tax at current levels
can fund at least 72 percent of promised benefits. For most
Americans, this reality represents a dramatic improvement over
their current expectations. We need to do a much better job
educating the public about the present fiscal health of the
program so that informed judgments can be made about the
future.
Another important area where improvement is needed:
Americans do not have an adequate understanding of the range of
benefits they are earning. As you know, one third of all Social
Security beneficiaries today--more than 13.5 million people--
are not retired workers. They are disabled workers, survivors,
and their family dependents, including millions of children.
While about 45 million Americans are collecting Social Security
checks today, there are even more who were raised with Social
Security as a crucial source of income because a parent died or
became disabled. This aspect of Social Security is not well
understood.
For example, in our poll, we also asked young adults if
they could name any benefit or coverage provided by Social
Security other than retirement. Fewer than 16 percent could
name disability, and only 13 percent could name survivors
benefits. Fully 42 percent said that Social Security provides
no other benefits at all, and 22 percent did not know or
respond. All in all, nearly three fourths of all respondents
were unaware of the survivors and disability insurance coverage
that covers them and their families right now.
In other words, most young workers, upon opening their
personalized benefits statement from the Social Security
Administration, will learn, for the first time, that they are
also qualifying for disability and survivors insurance--that
Social Security is already there for them today. Considering
that Social Security provides about as much life insurance and
disability insurance as all private sector providers combined,
it is a good public service indeed for the government to notify
working Americans about these important benefits.
While the current benefit statement, Mr. Chairman, is
limited to explaining the concrete benefit formula guaranteed
under present law, I am aware that some have proposed to use
the statement to address other issues and concerns. With the
great many opportunities that all parties have to reach the
public with an advocacy agenda, I hope that you will use your
leadership to draw the line so that official information
provided by the U.S. Government may only be used to explain
present law, rather than various contingencies that may or may
not occur.
I strongly believe that the mission of the Social Security
statements should remain focused and clear: to notify Americans
of their contributions and benefits under present law.
Thanks to the Social Security statements, millions of
workers who are contributing to Social Security and want
benefits to be there for them will now be able to determine how
much more they need to save for their retirement.
I think that these statements will send Americans precisely
the right message: Social Security provides disability and
survivors' benefits and it is the foundation of a secure
retirement--but it is not enough.
I am certain that this is an agenda that we can all
support, and I thank you for inviting me to testify before your
committee today.
Chairman Shaw. Thank you.
Mr. Gebhardtsbauer. Thank you, Mr. Chairman. Good
afternoon----
Chairman Shaw. No, no, no, no, no, no. I have got to try
this one: Gebhardtsbauer.
Mr. Gebhardtsbauer. Very good. Yes.
Chairman Shaw. Would you try it?
Mr. Gebhardtsbauer. Sure. [Laughter.]
Mr. Gebhardtsbauer. Actually, it took me 8 years to learn
how to say it, so you have done it a lot quicker than I. It is
``Gebhardtsbauer.''
Chairman Shaw. I did get it right.
STATEMENT OF RON GEBHARDTSBAUER, SENIOR PENSION FELLOW,
AMERICAN ACADEMY OF ACTUARIES
Mr. Gebhardtsbauer. Good afternoon, Members of the
Committee and staff. I am the senior pension fellow at the
American Academy of Actuaries. The Academy is the non-partisan
professional organization of actuaries in the United States.
And we want to thank you for allowing us to testify today.
I have been specifically asked to talk about two proposed
bills that would add information to the Trustees' Report. And
in background for this, I actually looked at some of the
extensive material that Social Security has on its website.
They actually have the very first Trustees' Report from 1941,
and it is 12 pages.
But over the past 60 years, Social Security I think has
been very responsive to the public and to Congress' requests.
And so now it is 220 pages--a massive document. So you can see
why maybe they are concerned about, how much more is going to
go into it.
But I think there are a lot of good ideas that the 1999
technical panel, came up with. Experts, economists, actuaries
were in that group. And also, in these two bills. There are
some good ideas. And in fact, one, for instance, is a
projection of poverty rates in the future. Some reform bills
would raise the poverty level for people who are elderly, and
some reform bills would actually lower poverty levels. So it
would be good for you to have a projection of those poverty
levels before you vote. So you would want to see those
comparisons. But maybe it does not necessarily have to be in
the Trustees' Report. It can be somewhere, so that you can make
that vote.
But the reason why I am here today is to note that the
Academy have some concerns about some of the provisions in the
bills. So even though we like a lot of the provisions, we also
want to talk about some of our concerns, because I think there
are some unintended consequences in the bills that maybe the
sponsors did not know.
For example, they would also require budget projections.
And I think those are very valuable, too, because some bills
would use general revenue, and some bills would not. And so it
is good to have a budget projection to see what the deficits
could be like in the future. And that is understandable. You
also may want to have a budget projection to see if we can
easily redeem those bonds after the year 2015. So there are
lots of good reasons for them.
But there could be an unintended consequence. If the Social
Security actuaries are the ones that have to do those
calculations, they would do them using their own calculations
and their own assumptions, so that it would be consistent with
all their work. But then you would now have a third projection
of what the budget deficits are going to be like in the future.
And I think there would be a tendency to tell the Social
Security actuaries not to use their assumptions, but to use the
OMB's or CBO's assumptions. So I think it puts them in a
difficult position, maybe hurts their independence. And so
maybe a way to craft that--is to require CBO or OMB to do those
calculations. In fact, I think one of the bills is doing this.
The other area that I think is a concern is that in the
Sense of Congress part of one of the bills it says, ``We would
recommend that all the recommendations of the technical panel
be implemented by Social Security.'' And that is a hundred
pages. There is an awful lot of information in there. They say,
``if reasonable''; but still, I think Social Security would
feel they had to implement all of them, to the extent they
could.
And I think before you do something like that, you would
want to make sure you agree with all of the ideas in there, and
there are an awful lot. And here is one, for instance: You
require stochastic projections.
And I apologize if your eyes glaze over. This is probably
something only economists or an actuary would like. I know in
my speeches around the country at townhall forums sponsored by
members and the White House, we always give people a lot of
time to ask questions. They have never wanted a stochastic
valuation, though. And I am not sure the members here do,
either because here is what a stochastic valuation does.
Right now, we project what our best estimate is of the
future. And if we fix Social Security, then our best estimate
would say, ``Social Security is now in balance.'' But what a
stochastic valuation would do is it would say, ``Here are all
the ranges of a possible future.'' So the day after you have
solved Social Security and put it in balance, the headline in
the paper the next day would say, ``Social Security Fixed: The
Probability of Failure Is Now Only 50 Percent.'' So I am not
sure you want something like that.
I think the unintended consequence of a stochastic
valuation would be, it would force you to increase taxes or cut
benefits even more than maybe you intended. So that is a
concern. So you may want to look at that technical panel's
report, and only specify what you like out of it, instead of
saying the whole thing.
I guess the other major concern is ``money's worth.'' We
have been talking about that already. We feel at the Academy
that a ``money's worth'' or internal rate of return can be
misleading. And I think it was shown pretty well in the
exchange earlier today between Mr. Matsui and Mr. Sununu.
The response to, ``Why would it be on that benefits
statement?'' is so that you could compare it with your rate of
return on your 401(k). The only problem with that is, you are
going to see this 2 or 3 or 4 percent number from Social
Security, and your 401(k) is getting 10 or 20 percent. But that
is because all of the 401(k) money is being invested; none of
that money in your 401(k) is going to your parents. And so it
is an unfair comparison. It should not be done.
So what the Academy would say: ``Money's worth'' and
internal rate of return calculations are helpful if they are
used to, say, compare different proposals--``What is this
proposal like compared to this proposal?'' But to have an
internal rate of return by itself could be very misleading. And
I have some more information on that in my document.
And I notice I have a red light, so I want to finish up.
I guess my main point at the end is that Social Security
has implemented a lot of the recommendations coming from
Congress and the technical panels in the past. And so maybe we
might want to give them some time to kind of incorporate some
of these ideas.
But if you do want to have some of these mandated, then I
think you ought to look at them very carefully and itemize
which ones you want, before you say all of them should be done.
Thank you.
[The prepared statement follows:]
[An attachment is being retained in the Committee files.]
Statement of Ron Gebhardtsbauer, Senior Pension Fellow, American
Academy of Actuaries
The American Academy of Actuaries is the public policy
organization for actuaries of all specialties within the United
States. In addition to setting qualification standards and
standards of actuarial practice, a major purpose of the Academy
is to act as the public information organization for the
profession. The Academy is nonpartisan and assists the public
policy process through the presentation of clear, objective
analysis. The Academy regularly prepares testimony for
Congress, provides information to federal elected officials and
congressional staff, comments on proposed federal regulations,
and works closely with state officials on issues related to
insurance.
Chairman Shaw, committee members, staff, and fellow
panelists, Good Afternoon. My name is Ron Gebhardtsbauer and I
am the Senior Pension Fellow at the American Academy of
Actuaries. The Academy is the nonpartisan, public policy
professional organization for actuaries in the United States.
We at the Academy thank you for inviting us to speak at this
hearing on ``Efforts to Inform the Public about Social
Security.''
In the interest of time, I have provided the subcommittee
with copies of my full testimony on this subject, so that I can
focus on my most important points. I've been asked to discuss
two proposed bills that recommend adding information to the
Trustees Report. These are H.R. 3578 and S. 2249. I also will
comment on the 1999 Social Security Advisory Board Technical
Panel recommendations for expanding the data included in the
Trustees Report.
What Issues about Social Security Are of most Concern to the
Public?
One of the more interesting parts of my job over the past 4
years was to serve as the Social Security expert at many Town
Hall forums across the country sponsored by Members of
Congress, the White House, and several non-partisan
organizations.
At the Town Hall forums, the most frequent questions were:
Did Congress really spend our Social Security
money?
Are Social Security's bonds real money, or not?
Will Social Security be there for me when I need
it?
Are we getting a good return on our contributions?
The Questions are Really for Congress: Unfortunately, these
questions ultimately cannot be answered by a Trustees' Report
or a Benefit Statement from Social Security. They can really
only be answered by Congress. It will be difficult for Social
Security to answer these questions fully until Congress puts
Social Security back into balance. Nevertheless, the American
public can find much valuable information in the annual report
of the Social Security trustees.
The Trustees' Report
In preparation for this testimony, I reviewed Social
Security's web sites and was fascinated by how extensive they
were. For example, they have all the Trustees' Reports back to
the first one in 1941. The first one was only 12 pages. The
past was so much simpler. Yet it had many familiar items, such
as graphs and charts, optimistic and pessimistic assumptions,
caveats about how hard it is to forecast the future, and
important dates (e.g., when benefits would exceed taxes and
funds would be exhausted). Over the past 6 decades, Social
Security has responded to the needs of the public and Congress
by including many more items. Current reports are around 220
pages.
Suggestions for additional information in the Report:
However, various experts and recent advisory panels have
suggested including still more information in the Trustees'
Report. See the attached recommendations from the 1999
Technical Panel. Many of their suggestions are valuable. I will
discuss the controversial ones and provide advantages and
disadvantages, so that you can decide if you want to require
them.
For Comparing Reform Proposals: Some items would be very
helpful for comparing specific proposals (e.g., projections of
poverty rates and budget deficits). For example, some reform
proposals use Individual Accounts, which could increase poverty
rates among the elderly. Other proposals fix this by
subsidizing small accounts or coupling them with a flat
universal benefit. That could reduce poverty rates. Thus, you
may want poverty projections for comparing these proposals
before voting on them. Other reform proposals from both sides
of the aisle use General Revenues. Again, you may want a
projection of future budget deficits (such as those found in
the recent GAO Report HEHS-00-29) to compare these reforms.
Thus, some items may only be needed in certain circumstances,
and may not be needed forever, especially after you put Social
Security back in balance. Therefore, instead of requiring them
in the Trustees' Report, you may want to just encourage Social
Security to put them in a separate report and/or on their web
site. You may find that they would be happy to do that. The
Trustees have taken prior Technical Panel reports seriously and
generally respond to their suggestions. In addition, you might
give them some time to determine how best to provide them or
display them, so it may be preferable not to be too specific in
your requirements.
The Academy has also released today, Quantitative Measures
for Evaluating Social Security Reform Proposals, which provides
policy makers with a framework to evaluate the financial effect
of competing reform proposals on the program's long-term
solvency and the impact of proposed changes on the financial
needs and expectations of current and future workers. A copy of
the issue brief is attached to my testimony.
Budget Projections: There are difficulties in calculating
some of the numbers (e.g., the budget projections). The
Trustees would need to reproduce the extensive budget
projections from OMB, and would have to convert them to the
Trustees' assumptions, so that the projections are consistent.
In addition, they would have to project OMB's numbers beyond
the typical 10 years that they project them, and decisions
would have to be made on whether dynamic scoring should be
used. But this is not an insurmountable problem. GAO has made
such a projection (GAO Report: Evaluating Reform Proposals
HEHS-00-29). There may be an unintended consequence though. The
administration might push for using the OMB assumptions
instead. In the past, the actuaries strenuously objected to
using OMB's or CBO's assumptions for fear that they might be
politically motivated (however slight it might be). If the
actuaries are forced to calculate budget numbers using OMB's or
CBO's assumptions, it could harm the independence of their
work. Possible solutions would be for the bill to require using
the actuaries' assumptions, or require CBO to perform the
budget projections.
Stochastic valuations: The current report provides the
Trustees' best estimate of what they think will happen in the
future, along with an optimistic and a pessimistic projection.
A stochastic projection will estimate the probability that the
system will fail in 75 years. You may find this an interesting
piece of information and helpful if you want to quantify when a
certain reform proposal is more risky, such as a reform that
would invest in stocks. On the other hand, it can have some
drawbacks besides being complex and expensive. It can be
confusing and have unintended consequences on policy. Congress
really wants only one answer, but stochastic valuations will
provide multiple answers, and they may not be the answers you
want. For example, suppose Congress puts Social Security back
in balance the usual way using our best estimates of the
future. The next day's headline, using a stochastic valuation,
might say ``Social Security's probability of failure is now
only 50%.'' I'm not sure that is a message Congress would like.
On one hand, that is reality. On the other, it could make
Congress look bad. Would it push Congress to raise taxes
further in order to assure a lower level of failure? Thus,
using the stochastic measure could make Social Security more
expensive. In addition, arguments about the assumptions will
escalate, because the Trustees would have to determine the
shape of the distribution for each assumption, the standard
deviation from the mean, and the covariance with all the other
assumptions. If you think people are arguing about the
assumptions now, wait until you have stochastic valuations.
Money's Worth Tables: Some additions are voluminous and
would dramatically increase the size of the report with tables
of many numbers and graphs (such as money's worth tables). As
the 1999 Technical Panel suggested, this item can be shortened
by just doing prospective money's worth calculations for small
number of age and income cohorts. Retrospective returns
depending on how long you lived, whether you received a
disability benefit or survivor benefit, etc., can produce a
voluminous amount of results.
Money's Worth numbers can be misused and misleading. For
example, Social Security's assets had a yield of 7% this past
year. People are pleasantly surprised when they hear that. They
think it is lower, due to what other people say the returns are
using money's worth calculations. These implicit rate of
returns should not be compared with market returns. They can
even be negative for some people. But that's the nature of
insurance--you don't mind it when your insurance policy doesn't
pay off (e.g., you didn't get in a car accident). In that
situation, your rate of return is more than a little negative;
it's negative 100%. You didn't get any money back on your
insurance premium. You can also get negative returns on social
welfare programs and taxes, because some people pay in more
than they get back. Thus, this rate of return cannot, should
not, be compared to the yields you get on your assets. If we
decide to privatize Social Security, we will still have to pay
benefits to our parents. Thus, at least some, maybe all, of our
contributions are going to someone else. A money's worth
analysis forgets that we can't get out of that promise to our
parent's generation. In addition, in Social Security, single
people are paying taxes that help married people, and high-
income people are paying in for lower earners. If they have a
low return, it may be because their contributions are going to
others. This wasn't a problem in the past, because they would
get more from the next generation. But now the system is
mature, that won't happen again (unless fertility rates
increase dramatically or our current huge productivity gains
last forever). As you can see, individual money's worth
analysis, gets more to the question of distribution among
classes. If we want the system to have a better return, we can
invest in stocks or just increase the bond yields by
Congressional action. (Since it is Congress that keeps Social
Security from investing in stocks and corporate bonds, they
could compensate by giving them a return of 10% will just raise
our income taxes and it will add an element of politics into
the system.) There is another concern with rates of return
analysis. One way to fix Social Security would be to give it $5
trillion of General Revenues. The rates of return would look
great, but that wouldn't be fair. All sources of contributions
must be included in the calculation, so that the comparison is
not manipulated. This is not as easy as it sounds however. For
example, how would you calculate it if Congress gave Social
Security's bonds a slightly better rate of return? (Should some
of the additional investment return be included in
contributions?) Thus, providing each individual's rate of
return can be misleading, so we need to be careful, before we
require them.
One last concern for individual rates of return for Social
Security is that they depend on how Social Security will be
fixed, and who will be affected. So again, Social Security can
not adequately answer this question--only Congress can.
Social Security could just provide some of the extensive
recommendations on their Web site, not the Trustees' Reports or
benefit statements, unless you think they would be misleading
even on the web site.
Recent proposed legislation, H.R. 3578, would require
certain additional items in the Trustees' Report. We discuss
the advantages and disadvantages, so that you can assess them.
The Unfunded Liability (and Change since Prior Year): This
number is useful for reform proposals that want to move to an
advance-funded system. It is sometimes referred to as the
closed group obligation, the transition cost, or the unfunded
termination liability, and would be around $9 trillion today.
Private-sector pension plans are required to display their
unfunded termination liability prominently. However, some
people contend that it is not a relevant number for an ongoing
Social Security system, which is just a transfer system from
workers to retirees. They contend it should not appear in the
Report, because it will be confused with the open-group
unfunded number (approximately $3 trillion today). When the
system gets back in balance the open-group number will be zero,
but the closed-group number will still be around $9 trillion.
Will this confuse people? Advocates of this number say it is
important for us to acknowledge that Social Security is not
advance funded and that we have made these promises without
funding for them. I can only give the advantages and
disadvantages on this, not take a position. It is a political
issue for you to decide if you want to require it and how
prominent it should be--whether it should be in the Summary,
the Report, or just available on a website. The number is
calculated annually already, so it won't add any administrative
costs. H.R. 3578 would have to define it better. For example,
is it the number that private-sector plans must provide--the
closed group unfunded termination liability or is it the on-
going unfunded accrued liability? Is it a calculation closed to
just the people paying into the system today, or is the
calculation open to new workers coming into the system in the
future. If open, is it open forever or limited to 75 years?
H.R. 3578 has 3 versions. Only the present value calculation is
meaningful. Another would just add up nominal dollar unfunded
amounts from the future. Another uses CPI-adjusted numbers.
These two numbers are misleading and should not be used. They
can increase dramatically even in good years (e.g., if
productivity improves), which is a not a helpful result.
The Deficit in the Last Year of the Projection: This amount
is helpful for understanding the sustainability of the system
and already appears in Table III.B4 on page 183 ($7 trillion in
2075 dollars). H.R. 3578 also wants the inflation-adjusted
amount displayed more prominently. Relating it to pay or GDP
would be preferable. Chart C in the Summary shows the 2075
deficit is 6% of taxable payroll. This is more meaningful than
the $7 trillion number or even the $300 billion number which is
inflation-adjusted, because benefits and taxes increase at
rates more closely tied to pay. The further out in years, the
more the numbers become misleading by the additional
compounding over the inflation rate. This deficit is also
discussed in the Summary, which states that the benefit outgo
is 1\1/2\ times as large as the tax income in that year.
The Economic Model, Relevant Data, and Changes: We agree
that all of these items should be in an actuarial valuation. In
fact, actuarial standards of practice require that actuarial
valuations be sufficiently documented so that another actuary
can assess whether the results are reasonable. If the sponsors
are encouraging more details, I note that page 144 refers the
reader to a web site and some Actuarial Studies (which are
listed on the web) that can be requested from the Office of the
Actuary.
Quality of Trust Funds' Assets: H.R. 3578 also requires the
Trustees' Report to explain that the Trust Fund balances are
not real economic assets. This hints at the very controversial
debate on whether the money is real or not. However, I don't
know if Congress can do this without contradicting its full
faith and credit backing of the bonds. I think I know what the
sponsor wants. Prior Trustees' Reports gently expressed a
concern about how the bonds would be redeemed, which might be
acceptable. Maybe people can work together to finesse this
difference without the law getting into this controversy. The
proposed bill requires the Report to state that Congress will
need to raise taxes, increase the debt, or cut benefits to
redeem the bonds. This is a reasonable factual statement.
Technical Panel: Another bill (S. 2249) says it's the Sense
of the Senate to implement the recommendations in the 1999
Technical Panel's report. Many of them have value, and we have
discussed some of their advantages and disadvantages already.
However, some people are concerned about an unintended
consequence of referencing the 1999 Panel in the bill. You may
prefer that a bill just state its specific requirements without
referencing the Panel. Citing the Panel elevates them above the
Trustees (which includes their bosses' boss--the Commissioner
of Social Security, and also the Secretaries of Treasury, HHS,
and Labor). In addition it could give future Panels (which
might have very different ideas) more importance than you might
want, or it could give some items in the 1999 Report more
authority than you wanted. Do you agree with all of the
recommendations? How important are they? Are their benefits
worth the cost to provide them? If some of them take an
inordinate amount of space, could they be on the web instead
and referenced? Since the suggestions are from a panel of
experts, we doubt that any of their requirements would be
misleading to knowledgeable readers, but some people are
concerned that items, such as stochastic valuations and
internal rates of return, could confuse and mislead some
people. There are lots of items in those 100 pages of their
report. Some additional advantages and disadvantages of S. 2249
follow:
Emphasize income and cost rates and balances for all 75
years with the same emphasis as the actuarial solvency numbers.
It appears that all 225 numbers are being required in all the
places the solvency number appears. Since this would take a lot
of space, maybe the intent is to just have it appear up front,
prominently. Since the intent is to present measures of long-
term sustainability, maybe only the 75th year is needed, as
suggested in H.R. 3578.
Percentage Increase in Taxes/Decrease in Benefits Needed
for Solvency in all 75 years: These percentages can be
determined by a quick division from numbers in the Report
(e.g., Table II.F.13 or III.B2, or B3, or B4, or C1). They will
add to the length of the report, but can be helpful.
Effects on National Savings: These numbers can be important
when comparing certain reform proposals. For example, if
contributions are increased (whether for the Trust Fund or for
Individual Accounts) and/or benefits cut, National Savings
could increase, which could have other beneficial affects on
productivity and the economy. However, there is strong
disagreement on whether savings will increase a lot or a
little. Some would say they are unknowable. In fact, there are
disagreements even on how to measure savings (e.g., whether to
include capital gains). In addition, these numbers are
primarily of value in comparing proposals.
Effects on the Budget: Again, these numbers are valuable
when comparing certain reform proposals. For example, some
reform proposals use General Revenues, which can increase
future budget deficits. Members will want projections of these
deficits (such as those found in the recent GAO Report HEHS-00-
29) to compare these reforms. Thus, this item may only be
needed in certain circumstances, and may not be needed forever,
especially after you put Social Security back in balance.
Average Lifetime Values of Benefits (by age, income,
gender, and type of benefit): As the 1999 Technical Panel
noted, this will show that the value of lifetime benefits
received from Social Security is increasing as people live
longer. Life expectancies also show this. The panel also noted
that the lifetime values can help us compare lifetime benefits
from reform proposals that distribute benefits in different
patterns. The panel however, recommended fewer numbers for the
Trustees' Report. They suggested the larger group of numbers be
available electronically. Some panel members also suggested
that the lifetime value of taxes paid also be provided. This
would help the reader determine their money worth, the
advantages and disadvantages of which were discussed earlier.
Conclusion
Experts and panels have recommended new items for the
Trustees' Reports, many of which are valuable. Social Security
may over time accept many of them, as they have in the past.
However, if Congress chooses to mandate certain items, I would
suggest it study them thoroughly. Some recommendations may be
costly and you may want to do a cost-benefit analysis before
requiring them. Some are voluminous, so you may decide that
they are important enough to have somewhere, but not
necessarily in the Trustees' Reports. Some items are good but
they need to be defined better and clarified, so that they are
not misleading. Some items are only needed for today's reform
proposals, which is why they are not in the annual Trustees'
Report. They may not be needed in the future. However, they may
be needed as a base number from which to compare the proposals.
Thus, they can go on the web site if necessary, but they don't
have to be in the Report. Some may cause confusion or be
misleading, so you will want to be careful before adding them.
Some proposals just want more prominence for certain items,
which shouldn't be a problem, unless you think the prominence
over-emphasizes them to unwary readers. Some have unintended
consequences. For example, the 1999 Technical Panel's
recommendation for stochastic valuations could raise Social
Security taxes.
Hopefully by providing these advantages and disadvantages,
you will be able to decide which additions are important enough
to require by law.
Finally, my experience listening to participants at Town
Hall forums around the country has revealed that the public's
most important questions can not be answered by the Trustees'
Report, only by Congressional action. We at the Academy are
available now and any time in the future if you have more
questions. Thank you for inviting us to speak at this hearing.
1999 TECHNICAL PANEL TABLE OF RECOMMENDATIONS
Presentation Issues (for the Trustees Report and elsewhere)
The format can be improved to allow easier access
and understanding.
The uncertainty of projections should be displayed
more clearly and in ways that reflect better the relationship
of that uncertainty to the design of the law.
Cohort life expectancy should be shown (period
life expectancy, as now shown, is easily misunderstood).
The lifetime value of benefits (and possibly
taxes) for various types of workers over time should be
displayed.
Alternative estimates of the unfunded obligations
of the Social Security system should be presented in the
Trustees Report.
Traditional definitions of ``typical workers''--
low and average earners--result in an overstatement of the
lifetime income and benefits of the typical low-income and
average-income worker and should be revised.
Less emphasis should be placed on the 75-year
actuarial balance and more on long-term sustainability (as
reflected, for instance, in balance during the last part of the
projection period).
Benefits under existing tax rates and taxes under
existing benefit rates should be presented to better reflect
consequences of current law.
Prevalence rates for Disability Insurance, not
just incidence rates of new awards, should be displayed.
Methodology and Models
A published consistent set of criteria is
recommended for comparing reform proposals and current law.
General equilibrium modeling is necessary for
consistency and to understand interactions.
Models (micro simulation) to demonstrate
distributional effects, as well as to estimate better those
features influenced heavily by distributional factors, are
necessary and must be enhanced significantly.
Greater public access to Social Security
information should be encouraged.
Ongoing technical review of several issues is
necessary.
Modeling capabilities (stochastic modeling) are
necessary to display uncertainty and the effect of policy on
that uncertainty.
Estimation methodology would benefit from new
techniques to reflect consistency among variables.
Chairman Shaw. Thank you.
Dr. Aaron.
STATEMENT OF HENRY J. AARON, BRUCE AND VIRGINIA MACLAURY SENIOR
FELLOW, BROOKINGS INSTITUTION, AND CHAIRMAN OF THE BOARD,
NATIONAL ACADEMY OF SOCIAL INSURANCE
Mr. Aaron. Thank you very much. I have a suggestion with
respect to this gentleman's name, if it is problematic. Just
think of the Minority Leader's flower garden: ``Gephardt's
Bower.'' [Laughter.]
Mr. Aaron. It is very easy.
Mr. Gebhardtsbauer. Except he spells his name wrong, with a
``P.'' And mine is with a ``B.'' [Laughter.]
Mr. Aaron. I cover a number of points in my statement, but
in my oral remarks I want to focus on the discussion of rate of
return calculations: Should you do it in the reports? And my
answer is a clear ``No.''
And the reason is that it cannot be done right. Not that it
is not done right, not that it has not been done right; but
that it cannot be done right. Let me list five questions that
you would have to answer in order to do a reasonable evaluation
which would permit the kinds of comparisons to which attention
was just drawn.
What is full protection against inflation risk worth? No
private asset provides this protection. Social Security does.
What is full protection against financial market risk
worth? All private assets analogous to individual accounts
carry financial market risk, which the accountholder must bear.
Social Security spreads such risks over all workers and through
time. How much is such risk diversification worth?
How should one value political risk? Social Security is
subject to political risks that benefits or tax rates may be
changed. Individual accountholders are subject to the risk that
income or estate taxes could be changed in ways that affect the
value of their accumulation. How should one value each of those
kinds of risks?
How much is the insurance protection in disability and
survivors insurance worth? People regularly pay premiums that
exceed the expected payout for property and casualty,
disability, life, and health insurance. They do so because the
insurance spares them the risks that they feel ill equipped to
bear. That means that the value of such insurance exceeds its
costs, although the payments are less than the cost. How should
one estimate the extra value in the case of insurance
protection provided by Social Security against loss of income
from disability or premature death of the breadwinner?
How much is the earnings insurance provided by Social
Security worth? When workers enter the labor force, it is
usually unclear whether they are going to be high or low
earners. Social Security's benefit formula provides higher
replacement rates if earnings turn out to have been low than if
they turn out to have been high--a form of earnings insurance.
How much is it worth?
None of these questions has been answered well with respect
to Social Security. Many more equally difficult questions could
be listed. Of course, I want to stress, any good analyst could
come up with answers to almost any question at all.
Unfortunately, the answers are going to differ enormously.
What this means, I think, is that responsible people would
make radically different estimates. For that reason, mandating
the reporting of rates of return would be to mandate highly
uncertain, even arbitrary, estimates.
When workers enter the labor force, they typically do not
know anything more than their own race and sex. They do not
know what they will earn. They do not know when or whether they
will marry, or get divorced, or remarry, or have children, and
if so how many. They do not know how often or how long they
will be unemployed. They do not know if they will become
disabled, or how long they will live, and, if married, how long
their spouse will live. They do not know future asset yields or
rates of inflation. They do not know how risk averse they will
be, and how much they will pay to avoid those risks in the
future.
Not only do workers not know these things; neither does any
actuary or economist. Yet, without knowing these things it is
impossible--not difficult, but completely impossible--to
construct meaningful estimates of the rate of return on a
complex set of contingent payments such as Social Security.
Let me repeat: Some analysts can make assumptions about
each of these variables, plug them into a computer, and come up
with a numerical answer. I am simply asserting that this
numerical answer would not be worth the powder to blow it to
hell.
And if you would like me to be more clear in response to
questions, I will try to do so. [Laughter.]
[The prepared statement follows:]
Statement of Henry J. Aaron,\1\ Bruce and Virginia MacLaury Senior
Fellow, Brookings Institution, and Chairman of the Board, National
Academy of Social Insurance
Mr. Chairman:
Thank you for the invitation to testify on the quality of
information provided to workers and citizens through the annual
Social Security statements and the reports of the Trustees of
the Social Security program.
---------------------------------------------------------------------------
\1\ Bruce and Virginia MacLaury Senior Fellow, the Brookings
Institution; Chairman of the Board, National Academy of Social
Insurance. The views expressed here are my own and do not necessarily
reflect the views of the staff, officers or trustees of the Brookings
Institution or the members, staff, or directors of the National Academy
of Social Insurance.
---------------------------------------------------------------------------
The initiation of annual information reports is a major and
constructive innovation, as you stressed in your announcement
of these hearings. The Trustees Reports, which have been
available since the inception of Social Security, are a
remarkable source of information, unmatched as far as I know by
analogous releases in any other country.
Although these reports are very good indeed, it is
important and constructive to ask whether they could be better.
There has never been a data source that analysts did not
believe they could improve in some way. And I shall not break
that chain. Improvements are possible. For that reason, you are
to be congratulated on scheduling hearings to consider possible
improvements.
Having said that, I think that legislative micromanagement
of these reports is more likely to reduce their quality than to
improve it. Congress showed great wisdom in mandating these
reports. But with even greater wisdom it left the design of
these reports to non-political professionals. These civil
servants--in my view among the most dedicated and capable in
the federal government--have made and continue to make annual
improvements and modifications based on consultation with
governmental and nongovernmental professionals.
Before turning to the specifics of these reports, I want to
highlight two facts. First, the debate on Social Security
reform has benefitted from the agreement by most participants
to work from the same set of estimates about the long-term
financial status of the program. These estimates have driven
home the two key statistical facts about the status of Social
Security. Firs, the system is currently running large cash flow
surpluses and will continue to do so for many years. Second,
the program faces a projected long-term deficit.
We all realize that any changes in the program will be
phased in gradually. The proper mind-set for Social Security
reform--to borrow a term immortalized by the Supreme Court in
another context--is that we should move with all deliberate
speed to enact the reforms on which Americans and their
representatives can agree.
My second point is that agreement on the two key facts I
just mentioned has permitted debate to focus on matters that
are more important than finances and have little to do with
them--whether the Social Security system as currently designed
is the best way to serve the purposes of social insurance--to
assure basic income to American retirees, the disabled, and
survivors. My own view is that it is well designed for that
purpose. Others disagree. But the key point is that we can
focus on that debate. For the most part, we have avoided a
wonkish numbers squabble. The prospects for resolution of the
debate on structural reform of Social Security will diminish
sharply if we become occupied by squabbles about the numbers.
If the public begins to think that the experts cannot even
agree on what the numbers are, they will either get diverted
from the more important issues or they will get bored and tune
out. We should avoid a situation in which dueling estimates
contend for public attention. We should make sure that the
numbers used in public debate are done carefully, according to
reasonable assumptions and are presented in a manner that the
public can readily understand.
So much for homilies. Now I should like to apply these
principles to specific suggestions that have been advanced by
various critics of the current estimates as contained in the
Trustees Reports or the annual statements sent to workers.
Because many assumptions go into these projections, there are
many points of potential debate. I shall focus my remarks on
just two. If you wish to go into others, I should be glad to
respond to your questions.
Mortality Rates
The Technical Panel on Assumptions and Methods that
reported last November urged the Trustees approximately to
double the rate of improvement in mortality rates assumed in
projecting long term costs. The 1999 Trustees Report assumed
faster declines in mortality rates than have been observed
since the early 1980s, but slower than rates of improvement
measured over longer periods. The Technical Panel's
recommendation was based on analyses by reputable demographers
and others who served on the panel. Not all outside experts
share the Panel's views, but the projection of sharply improved
longevity can certainly be defended. Great medical advances lie
in the future. They could greatly extend life expectancy.
Unfortunately, as I have noted, the most recent trends in
mortality rates are not so encouraging--or discouraging, from
the standpoint of Social Security's finances.
For experts to miss a turning point or to expect one that
hasn't occurred yet is not unusual. Nor is it unusual for them
to change their minds. The problem is that experts often guess
wrong.
In the 1930s, few foresaw they baby boom. In the
1950s and 1960s few foresaw its end.
Five years ago, budget experts foresaw large and
explosively growing budget deficits. Today they foresee
virtually permanent budget surpluses.
Three years ago, economists believed that
unemployment much below 6 percent would trigger explosively
growing wage and price inflation. Many now maintain that 4-
percent unemployment without inflation can go on indefinitely.
Some now believe that productivity growth will
remain so high that little of the projected long-term deficit
in Social Security will remain. Other's think current rates
cannot be sustained or even believe that they will relapse to
the dismal rates that prevailed from 1973 through 1996.
The Social Security trustees often have to decide what to
do when expert judgment is not yet confirmed by the facts. The
prudent course of action, I believe, is to take account of the
experts' views, modifying assumptions a bit at first. Then, if
evidence confirms the experts' views, further adjustments are
in order.
With the amply documented history of real howlers by
experts in mind, I believe that we should admire the prudence
with which the Trustees handled the Technical Panel's
recommendations on assumptions regarding mortality rates. In
the 2000 report, the Trustees increased the assumed rate of
improvement in mortality by one-third--a sizeable shift, but
much less than the huge shift suggested by the Technical Panel.
Presumably, they found in the promise of the biological
revolution sufficient reason to increase assumed longevity. But
they sensibly decided to wait for the revolution to show up in
the numbers before making even larger shifts.
As I noted, expert judgment may change a lot--and quickly.
If the Trustees promptly and completely incorporated the
latest, best wisdom of economic or demographic experts, the 75-
year projections would oscillate crazily from year to year. The
result would be alternate bouts of euphoria and panic and a
breakdown of trust in the projections. Instead of conveying the
important message that Social Security faces a projected long
term deficit that we should close promptly, people would look
at current surpluses and shrug off the long-term projections as
undependable.
I have focused on projected mortality, but the same
cautionary note applies to other key assumptions. Productivity
growth is dramatically above what the actuaries assume. Rather
than incorporating these higher levels into long-term
projections, the Trustees raised assumed productivity growth a
modest 0.1 percentage point. The ``new economy'' is great fun.
Let's enjoy it as long as we can. But only if it lasts a decade
or more, are the Trustees likely to incorporate it fully into
long-term Social Security projections. Given the history of
trend reversals, the Trustees' practice of cautious and highly
damped adjustments to new events is the only prudent course.
Rates of Return
Oceans of financial data wash over us. Every mutual fund
routinely reports its annualized rates of return for various
past periods. Business school professors have computed rates of
return on common stocks, 30-year Treasury bonds, Treasury
bills, and just about everything else. Shouldn't Social
Security provide such data to each worker and as part of the
annual Trustees Reports? The answer, I believe, is a clear and
unambiguous ``No!; There are three reasons:
the enduring effects of Social Security's past
history on the continuing operation of the system;
the character of the Social Security benefit
package; and
the fallacies that arise from choosing incorrect
perspectives for measuring rates of return.
Social Security is a combination of annuities, insurance,
and income redistribution. Furthermore, the program's history
shapes its present and future. For workers who live to
retirement, Social Security is an annuity. For people who
become disabled or die, it is insurance that provides payments
to workers or their dependents. For low-earners and large
families, the program provides social assistance, financed by
high earners and small families. Furthermore, the program today
must deal with the consequences of the decision to pay early
beneficiaries larger benefits than their contributions merited.
Each of these factors should be taken into account in computing
rates of return. Yet no currently available analysis has done
so.
Past policy. The extremely generous benefits that Social
Security paid to early beneficiaries were financed by payroll
taxes collected from active workers. As a result, reserves
accumulated for these younger workers were tiny. Benefits
subsequently paid to those younger workers have had to be
financed by later workers. The reserves that were not
accumulated on behalf of today's workers are the unfunded
liability of the current system. Unless Congress reneges on
these benefits--which is inconceivable--it will be necessary to
collect taxes to pay those benefits. This obligation is
inescapable, whether Social Security continues in its current
form or is replaced. No mutual fund or asset group carries such
an unfunded liability. Should some system of individual
accounts replace Social Security, taxpayers would not escape
this unfunded liability.
For this reason, it would be misleading, at best--
meaningless, at worst--to compare rates of return on Social
Security with returns on individual accounts that omit the cost
of paying this unfunded liability. No such individual accounts
plan could exist, unless Congress was prepared to renege on
promises to current workers. Yet, such comparisons would be
natural and would even be encouraged by the ignorant.
The benefit package. Several analysts have presented
estimates of the rate of return on Old-Age Insurance--that is,
of retirement benefits. Unfortunately, the estimates of returns
on Old-Age Insurance are incomplete and misleading. In
contrast, no one has ever presented estimates of the rate of
return on Social Security as a whole. The reason is that
reliable data and defensible methods for estimating the rate of
return on Social Security as a whole are currently unavailable.
Let me make clear that I am not throwing stones simply at
others. More than a quarter century ago, I prepared the first
empirical estimates of the rate of return on Old-Age
Insurance.\2\ They were the best I could do at the time, but
they weren't good enough, as the discussant of my paper pointed
out. The problem was that, like many later analysts, I was
forced to make a crude and highly distorting assumption.
Because Social Security consists not only of Old-Age Insurance
but also of Survivors Insurance and Disability Insurance, one
cannot attribute the entire payroll tax to support of Old-Age
Insurance. On the average about two-thirds of the payroll tax
goes to support Old-Age Insurance.
---------------------------------------------------------------------------
\2\ Henry J. Aaron, ``Demographic Effects on the Equity of Social
Security Benefits,'' in The Economics of Public Services, Martin
Feldstein, editor, 1976.
---------------------------------------------------------------------------
I and, subsequently, others have assumed that each worker
bears the burden of about two-thirds of the payroll tax. We
have compared the present discounted value of that tax with the
present discounted value of the expected retirement benefits
that workers receive. The interest rate that equilibrates these
present expected values was the rate of return.\3\
---------------------------------------------------------------------------
\3\ I actually computed ratios of present discounted values rather
than internal rates of return, but the conceptual error described in
the text is the same.
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The purpose of my study was to test an hypothesis
originally presented by Milton Friedman, that blacks do less
well than whites under Social Security. The problem, Friedman
noted, was that blacks have briefer life expectancies and
collect retirement benefits for a briefer period than do
whites. This condition, he suggested, more than offset the
disproportionately generous benefits paid to low earners, among
whom blacks were--and are--over-represented. I found that
blacks' shorter life expectancies about offset the effects of
the benefit formula and that rates of return for blacks and
whites were rather similar.
My discussant pointed out that I had not found what I had
thought I had found. The problem, he pointed out, is that
Social Security is an integrated package of retirement,
survivors, and disability insurance benefits. The shorter life-
expectancies of blacks mean that they receive proportionately
more survivors benefits than do whites. In addition, the
shorter black life-expectancies are correlated with higher
disability rates, so that blacks receive proportionately more
disability benefits than do whites. For this reason, he pointed
out, I was wrong to assume that the same fraction of the
payroll tax supports retirement pensions for blacks and whites.
To compute the rate of return for blacks as a group or for
whites as a group, one would have to take into account the
differential value of disability and survivors benefits. I
hadn't done that. So, my computations may have been
interesting, but they did not mean what I thought they meant.
Data to solve this problem were lacking a quarter century
ago, and they are lacking still. This fact has not prevented
analysts from repeating the same mistake I made and,
unfortunately, adding new ones of their own. The Heritage
Foundation, for example, compared rates of return to blacks and
whites using life-expectancies at birth, rather than examining
when labor force entrants died and how long those who reached
retirement age actually received benefits.\4\ The result was a
gross distortion in the relative lengths of benefit payments.
For example, Heritage estimated that the average duration of
benefit receipt for black men aged 20 in 1997 would be 2.2
years. The true expectation was 8.1 years. This distortion
severed any connection between the calculations and reality.
Both former chief actuary Robert Myers and current deputy chief
actuary, Stephan Goss have written devastating critiques of
this egregious study.\5\
---------------------------------------------------------------------------
\4\ William W. Beach and Gareth G. Davis, ``Social Security's Rate
of Return,'' Heritage Foundation, January 1998
\5\ Robert J. Myers, ``A Glaring Error: Why one study of Social
Security misstates returns,'' The Actuary, September 1998, p. 5;
Stephen Goss, ``Memorandum: Problems with 'Social Security's Rate of
Return,' A Report of the Heritage Center for Data Analysis,'' February
4, 1998.
---------------------------------------------------------------------------
If one should not present bad estimates of returns on Old-
Age Insurance as estimates of returns on Old-Age Insurance and
certainly not as returns on Social Security, the question
remains as to whether it is possible to prepare good estimates
of returns on Social Security. I imagine that one day such
studies will be done. But they haven't been done yet, and a
number of very difficult problems will have to be solved before
such studies merit inclusion either in the Trustees Reports or
in annual statements to workers. Among these questions are the
following:
What is full protection against inflation risk
worth? No private asset provides this protection. Hence, it is
necessary to value this protection if fair comparisons are to
be possible between Social Security and other assets.
What is full protection against financial market
risk worth? All private assets analogous to individual accounts
carry financial market risk, which the account holder must
bear. Social Security spreads such risks over all workers and
through time. How much is such risk diversification worth?
How should one value political risk? Social
Security is subject to political risks that benefits or tax
rates may be changed. Individual account holders are subject to
the risk that income or estate tax rules may be changed in ways
that affect the value of their accumulations. How should one
value each kind of risk?
How much is the insurance protection in Disability
and Survivors Insurance worth? People regularly pay premiums
that exceed than the expected pay-out for property and
casualty, disability, life, and health insurance. They do so
because such insurance spares them risks they feel ill-equipped
to bear. This fact means that the value of such insurance
exceeds its cost although the payments are less than the cost.
How should one estimate this extra value in the case of the
insurance protection provided by Social Security against loss
of income from disability or premature death of a breadwinner.
How much is the ``earnings'' insurance provided by
Social Security worth? When workers enter the labor force, it
is usually unclear whether they will be high or low earners.
Social Security's benefit formula provides higher replacement
rates if earnings turn out to have been low than if they turn
out to have been high, a form of earnings insurance. How much
is this insurance worth?
None of these questions has been answered well with respect
to Social Security. Many more equally difficult questions could
be listed. Of course, any good analyst can come up with answers
to almost any question. Unfortunately, the answers will differ
enormously. This fact means that responsible people will make
radically different estimates. To mandate reporting of rates of
return would therefore be to mandate highly uncertain, even
arbitrary, estimates.
Perspective for Measuring Rates of Return. When workers
enter the labor force, they typically do not know anything more
than their race and sex. They do not know what they will earn.
They do not know when or whether they will marry. Or get
divorced. Or remarry. Or have children, and, if so, how many.
They do not know how often or how long they will be unemployed.
They do not know if they will become disabled or how long they
will live and, if married, how long their spouse will live.
They do not know future asset yields or rates of inflation.
They do not know how averse they will be to risk and how much
they will pay to avoid these risks.
Not only do workers not know these things, neither does any
actuary or economist. Yet without knowing these things it is
impossible--not just difficult, but completely impossible--to
construct meaningful estimates of the rates of return on a
complex set of contingent payments such as Social Security. Let
me be clear. Some analyst can make assumptions about each of
these variables, plug them into a computer and come up with a
numerical answer. I am simply asserting that this numerical
answer would not be worth the powder to blow it to hell.
Of course, as workers age, they will learn answers to many
of these questions. They will still not know how long they will
live or whether they will become disabled or what rate of
inflation will prevail when they become beneficiaries. But they
will know if they are rich or poor; married, divorced, or
single; parents or childless; well or ill; and so on. Once they
know these things, however, they will--by definition--no longer
be benefitting from the protections that are an essential part
of Social Security--the insurance against these risks.
For that reason, it makes no sense to measure the value of
Social Security to, say, a fifty-five year old by the taxes
that worker has paid and will pay and the benefits that worker
will receive. To see why, consider a fifty-five year old
homeowner who has had fire insurance since buying the home at,
say, age twenty-five. This homeowner has paid premiums for
thirty years and will continue to pay premiums. It would surely
be complete nonsense to value that insurance by comparing the
present value of all premiums the homeowner has paid and will
pay against the expected pay-outs in the event of a fire. Most
of the value of the insurance has already been achieved, in the
form of peace of mind over three decades. The best outcome
would be one in which the homeowner looks back at a lifetime of
premium payments and no cash benefits. The financial rate of
return in that case would be--. The economic return is presumed
to be positive; otherwise people would not have bought the
insurance.
In the same sense, most of us would like to look back at a
lifetime of payroll tax payments and to find that we never
collected disability insurance, our children never collected
survivors benefits, and we did not benefit from the high
replacement rates paid to low earners.
What this means is that the only potentially meaningful
calculations of rates of return would have to be made for new
labor force entrants. At that point, workers know their race
and sex, but not much else. If one thought one could answer the
questions I listed in the preceding section--as well as many
others that I could have included--then one might prepare
estimates of rates of return for race/sex groups. But I don't
think that these questions can be answered with satisfactory
confidence. And so I come to my conclusion--mandating estimates
of rates of return would be ill considered. Analysts can make
such estimates, but they would not be meaningful.
Conclusion
I have focused on two issues: legislative mandates
regarding particular assumptions and legislative mandates
regarding estimates of rates of return as part of annual
reports to workers or of the Trustees Reports. Each issue
illustrates a larger class of issues. My major purpose is to
warn about the dangers of legislative micro-management of the
contents of statistical reports, such as that of the Social
Security Trustees, or annual reports to workers. The Trustees
Reports are subject to annual review by outside experts. The
methods used in making these reports have changed. Statistical
capabilities change over time as new analytical methods arise,
as data sources expand, or, as has been increasingly the case
in some areas of late, as data sources vanish because of penny-
wise cuts in budgets of statistical agencies.
In addition, I hope that the Trustees will continue the
work now under way to construct representative life-time
earnings profiles. I would urge them to reconsider the linkage
of various assumptions now grouped in the high-or low-cost
projections. But these and other problems are best addressed by
the Trustees with the aid of outside professional consultants.
Congress has mandated, and will mandate, one-time studies of
particular questions. Where these questions are sensitive--and
virtually everything seems to be sensitive to someone--it often
mandates a responsible organization whose objectivity is not in
question, such as the National Academy of Sciences or the
Institute of Medicine to carry out such a study. If Congress
wishes to explore in greater depth the issues raised in these
hearings, it might consider a similar approach, mandating a
study by the National Academy of Sciences or the National
Academy of Social Insurance.
Chairman Shaw. Thank you. I guess you tried.
Mr. Aaron. Oh, no, I could continue, Mr. Shaw. Are you
inviting me to do so? [Laughter.]
Chairman Shaw. Ms. Entmacher.
STATEMENT OF JOAN ENTMACHER, VICE PRESIDENT AND DIRECTOR,
FAMILY ECONOMIC SECURITY, NATIONAL WOMEN'S LAW CENTER
Ms. Entmacher. Chairman Shaw, Mr. Matsui, and Members of
the Subcommittee, I appreciate the opportunity to testify on
behalf of the National Women's Law Center.
The new Social Security statement provides in a short and
clear format the essential information women need to plan for
retirement, check their earnings records, and understand the
program. This information is especially important to women, who
depend more than men on Social Security income and on the full
range of benefits that Social Security provides in addition to
worker retirement benefits.
Some have suggested that the statement also should include
information about Social Security's rate of return, as they
would define it. Some proponents have acknowledged that the
purpose of this is to encourage workers to compare Social
Security's rate of return with what they could get if they
invested those dollars privately.
We are concerned that information would be highly
misleading, as several other witnesses have already indicated.
First, as others have stressed, most of the Social Security
taxes paid by current workers are used to pay benefits to those
who are currently eligible. Once the cost of continuing to meet
those obligations is factored in, the rates of return under
Social Security and privatized systems is similar.
To emphasize how large a factor this is, last year about 85
cents of every dollar Social Security collected in taxes went
to pay benefits to current beneficiaries. About 15 cents went
into the Social Security Trust Fund, where by law it may be
invested only in U.S. Treasury securities.
If current workers could contribute their tax dollar not to
Social Security, but to save it for only themselves, they would
have a dollar to invest, not 15 cents. It would hardly be
surprising if their returns were higher. But if current workers
stop paying Social Security taxes, Social Security would not be
able to pay benefits to those who are eligible. Over half of
all women 65 and over would be plunged into poverty.
I am sure that this Subcommittee, that this chairman, that
these members, that this Congress and indeed any Congress,
would not allow that scenario to unfold.
And once the cost of paying those promised benefits is
factored into any reform plan, the rates of return under Social
Security and a privatized system would be essentially equal, as
many economists have concluded.
Second, any estimate of Social Security's rate of return
must include the value of protection against risk provided by
its secure lifetime inflation-adjusted retirement benefits.
As Mr. Aaron just said, Social Security allows people to
get a secure basic benefit that they can count on through
retirement without worrying about the state of the stock
market, the rate of inflation, or--and this is a particularly
well-grounded fear for women, given their life expectancies and
smaller other resources--the risk that they will outlive their
other assets. If women had to obtain comparable protection
privately, it would be extremely expensive, if possible at all.
Third, Social Security provides disability and life
insurance benefits that are not reflected in the investment
concept of rate of return. I think most people, if they get
through a year without experiencing a fire, flood, earthquake
or burglary, do not figure that they have gotten a bad rate of
return on their homeowner's insurance.
The protection that Social Security provides by way of
disability and life insurance would be far more expensive, or
impossible, to obtain for many people, especially older
Americans, those with preexisting conditions, and those in
dangerous occupations.
Finally, focusing on the rate of return to individual
workers ignores the social insurance values of Social Security.
Fortunately for women and millions of other Americans, Social
Security does not pay benefits in strict proportion to an
individual's contribution. Women in particular benefit from
Social Security's progressive benefit formula that provides
workers with low lifetime earnings with retirement benefits
that are a larger percentage of their average earnings, and
Social Security's protections for spouses whose lifetime
earnings have been reduced because of homemaking and caretaking
responsibility.
In conclusion, it would appear that the purpose of some of
those who talk about Social Security's rate of return is not to
better inform the public, but to undermine support for a system
that is vital to the economic security of millions of American
women and their families.
To be sure, it is important to consider ways to reform
Social Security to strengthen its financing and improve its
benefits. Social Security has been adjusted many times since it
was created to better achieve its social insurance goals. But
that, and not a debate focused on rate of return, is the
discussion that we need to have.
Thank you.
[The prepared statement follows:]
Statement of Joan Entmacher, Vice President and Director, Family
Economic Security, National Women's Law Center
Chairman Shaw and members of the Subcommittee on Social
Security, I am Joan Entmacher, Vice President and Director of
Family Economic Security of the National Women's Law Center. I
appreciate the opportunity to appear before you again to
testify about efforts to inform the public about Social
Security.
The National Women's Law Center is a non-profit
organization that has been working since 1972 to advance and
protect women's legal rights. The Center focuses on major
policy areas of importance to women and their families
including employment, education, women's health, and family
economic security, with special attention given to the concerns
of low-income women and their families. Most relevant to this
hearing, the Center has worked for more than two decades on
issues of Social Security and women. It has presented testimony
on Social Security issues affecting women to Congress over a
dozen times, as well as to the Advisory Council on Social
Security and several task forces of the Department of Health
and Human Services. The Center served on the Technical
Committee on Earnings Sharing in Social Security and co-
authored its report, and served on the Congressional Study
Group on Women and Retirement for the Select Committee on Aging
of the House of Representatives, and co-authored and presented
its Social Security recommendations. This January, the Center
presented a paper which I co-authored on ``Increasing Economic
Security for Elderly Women by Improving Social Security
Survivor Benefits,'' to the National Academy of Social
Insurance.
In October 1999, the Social Security Administration (SSA)
began mailing personalized benefit statements to workers who
are ages 25 and older and not receiving Social Security
benefits. The purpose of these statements is three-fold: 1) to
provide workers with an estimate of their Social Security
retirement benefits to help them plan for retirement; 2) to
ensure that SSA has complete and accurate earnings information;
and 3) to provide information about the range of benefits
available through Social Security.
In designing the statement, SSA faced a significant
challenge. There was a great deal of information to convey.
But, as the GAO warned in its comments on SSA's earlier version
of the Personal Earnings and Benefit Estimate Statements
(PEBES),
in general, people find forms, notices and statements
difficult to use and understand. For this reason, many people
may approach a PEBES-like statement ``with fear, frustration,
insecurity, and hesitation.''
People appreciated the information in the earlier
statement, but the public also indicated that the dense, six-
page statement ``contains too much information and is too
complex.'' \1\
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\1\ U.S. General Accounting Office (1996), SSA Benefit Statements:
Well Received by the Public but Difficult to Comprehend, GAO/HEHS-97-
19, p. 6.
---------------------------------------------------------------------------
The current statement has been completely redesigned. It is
short (four pages) and clear, but contains the essential
information people need to plan for retirement, check their
earnings records, and understand the program. A Gallup survey
found that people who have received the statement are
significantly more likely to understand that: 1) the amount of
Social Security benefits depends on how much they earned; 2)
Social Security pays benefits to workers who become disabled;
3) Social Security provides benefits to dependents of workers
who die; and 4) Social Security was designed only to provide
part of total retirement income.\2\
---------------------------------------------------------------------------
\2\ Social Security Administration (1999), News Release, ``Social
Security Begins Issuing Annual Statements to125 Million Workers,''
September 30, 1999.
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The statement also includes a message from the Commissioner
concerning the future of Social Security. It identifies the
factors that give rise to the concern about the future of
Social Security, and acknowledges the need to address long-
range financial issues. But the statement also, and
appropriately, addresses fears that Social Security won't be
there when future generations retire:
The program has changed in the past to meet the demands of
the times and must do so again. We are working to resolve long-
term financial issues to make sure Social Security will provide
a foundation of protection for future generations as it has
done in the past.
The latest report of the Social Security Trustees confirms
that the statement conveys the right message. The Trustees
project that for the next 37 years, Social Security will be
able to pay all promised benefits. And after that, Social
Security tax revenues will be sufficient to cover over 70
percent of promised benefits.\3\ There is a projected long-term
shortfall; but the size of the deficit has been declining for
three years, and the issues are manageable. In the early 1980s,
Social Security faced a far more serious and imminent financial
challenge. Congress met that challenge, and the changes adopted
in 1983 have allowed the Trust Fund to grow for decades. The
projected long-term shortfall needs to be addressed, but modest
adjustments would secure the program for even more generations
to come.
---------------------------------------------------------------------------
\3\ Board of Trustees of the Federal Old-Age and Survivors
Insurance and Disability Insurance Trust Funds (2000), 2000 Annual
Report [Social Security Trustees 2000 Annual Report].
---------------------------------------------------------------------------
The information provided by the new Social Security
statement is important for all Americans, but it is especially
important for women. Women depend more on Social Security
income in retirement than men. Social Security provides half or
more of the income of nearly two-thirds of all women 65 and
over, and 90% or more of the income of nearly one-third of such
women.\4\ To plan for a more secure future, women need to know
what their Social Security benefits are likely to be.
Information about the range of benefits available under Social
Security is also of particular use to women, who depend far
more than men on Social Security benefits other than ``retired
worker'' benefits. In 1998, 82% of adult male recipients of
Social Security benefits were retired workers. Only 18% of
adult male beneficiaries were disabled workers, spouses,
surviving spouses, or disabled adult children. In contrast,
nearly half of adult female beneficiaries, 44%, were receiving
benefits as disabled workers, spouses, surviving spouses, or
disabled adult children.\5\
---------------------------------------------------------------------------
\4\ Kathryn Porter, Kathy Larin and Wendell Primus (1999), Social
Security and Poverty Among the Elderly (Center on Budget and Policy
Priorities) [Porter, Laren and Primus (1999)].
\5\ Social Security Administration (1999), Annual Statistical
Supplement to the Social Security Bulletin: 1999.
---------------------------------------------------------------------------
Some may suggest that the statement also should include
information about Social Security's ``rate of return.'' The
Heritage Foundation, for example, has published a number of
reports that purport to provide such information, which it
defines as a comparison between the amount that workers pay
into Social Security with the benefits they expect to receive
in retirement. Its purpose is to encourage individuals to
reject Social Security in favor of private investment.
Knowing Social Security's rates of return will allow
families to compare Social Security benefits to other
investment vehicles. If the rate of return from Social Security
is lower than what the family would receive from another
investment, then allowing workers to place their Social
Security payroll tax dollars into alternative, private
investments would allow their money to grow more quickly (and
provide them with a higher retirement income in the future).
\6\
---------------------------------------------------------------------------
\6\ Gareth G. Davis and Philippe J. Lacoude (2000), What Social
Security Will Pay: Rates of Return by Congressional District 7 (The
Heritage Foundation) [Heritage Foundation Report (2000)]
---------------------------------------------------------------------------
However, comparing the ``rate of return'' from Social
Security to that available from individual private investment
(assuming either could be calculated for individuals in a
meaningful way) would be highly misleading for several reasons.
1. Most of the Social Security taxes paid by current workers
are used to pay benefits to those who are eligible. Once the
cost of continuing to meet obligations to current beneficiaries
and those nearing retirement is factored in, the ``rate of
return'' under Social Security and privatized systems is
similar.
Last year, about 85 cents out of every dollar Social
Security collected in taxes went to pay benefits to current
beneficiaries.\7\ About 15 cents went into the Social Security
Trust Fund, where by law it may be invested only in U.S.
Treasury securities.
---------------------------------------------------------------------------
\7\ Social Security Trustees 2000 Annual Report, Table I.C1.
---------------------------------------------------------------------------
If current workers could, as the Heritage Foundation
suggests, not give their tax dollar to Social Security but keep
and invest it only for themselves, they would have $1 to
invest, not 15 cents. They also would have a range of
investment choices. With six-and-a-half times as much money to
invest, it would be extremely surprising if returns were not
higher.
But if current workers stopped paying Social Security
taxes, SSA would not be able to pay benefits to those who are
eligible. Under one hypothetical scenario, SSA would have to
stop paying benefits. Over half of all women 65 and over would
be plunged into poverty; two-thirds of Americans 65 and older
would see half of their income disappear.\8\ If current workers
stopped contributing to Social Security, any increase in the
rate of return for young, high earning workers with successful
investment strategies would be offset by catastrophic declines
in the rates of return of those just entering or nearing
retirement. It is unimaginable that this Subcommittee--indeed,
that this or any other Congress--would allow that scenario to
unfold.
---------------------------------------------------------------------------
\8\ Porter, Laren and Primus (1999).
---------------------------------------------------------------------------
The ``rate of return'' comparison urged by Heritage is
fallacious because it includes the cost of paying promised
benefits when computing the rate of return for Social Security,
but argues that this cost should be ignored when estimating the
rate of return for private accounts.\9\ Once the cost of paying
those promised benefits is factored in (or if the extra funding
needed to cover those costs of transition to a private system
were credited to Social Security, especially if Social Security
were free to make a range of prudent investment choices), the
rates of return under Social Security and a privatized system
would be essentially equal.\10\
---------------------------------------------------------------------------
\9\ Heritage acknowledges that it has not included the costs of
paying benefits to those who are currently retired or close to
retirement in its calculation. Heritage Foundation Report (2000) 156.
It defends this choice by saying that it wants to provide a comparison
between what workers receive under Social Security today with ``the
returns they would have received had Congress created a Social Security
system based on private accounts in 1935'' (ibid., at 3). But Congress
did not create such a system; instead, it decided to allow workers who
had fought in World War I, and lived through the Depression, to begin
receiving Social Security benefits even though they had only paid into
the system for a few years. The pay-as-you system of financing that was
adopted dramatically reduced poverty among the elderly. But it also
created a large unfunded liability for future generations. Honoring
that obligation necessarily lowers the ``rate of return'' for current
generations. Transition costs also have been underestimated by the Cato
Institute in its comparisons of privatized retirement systems and
Social Security. Catherine Hill, Lois Shaw and Heidi Hartmann (2000),
Why Privatizing Social Security Would Hurt Women: A Response to the
Cato Institute's Proposal for Individual Accounts (Institute for
Women's Policy Research) [Hill, Shaw and Hartmann (2000)]
\10\ See, for example, Alicia H. Munnell (1999), Reforming Social
Security: The Case Against Individual Accounts (Center for Retirement
Research at Boston College) [Munnell (1999)]; Peter R. Orszag (1999),
Individual Accounts and Social Security: Does Social Security Really
Provide a Lower Rate of Return? (Center on Budget and Policy
Priorities); Peter A. Diamond (1999), Issues in Privatizing Social
Security (MIT Press for the National Academy of Social Insurance); John
Geanakoplos, Olivia S. Mitchell and Stephen P. Zeldes (1998), ``Would a
Privatized Social Security System Really Pay a Higher Return?'' in
Framing the Social Security Debate: Values, Politics and Economics,
edited by A. Douglas Arnold, Michael J. Graetz and Alicia H. Munnell
(Brookings Institution Press for the National Academy of Social
Insurance)
2. Any estimate of Social Security's ``rate of return'' must
include the value of the protection against risk provided by
---------------------------------------------------------------------------
its secure, lifetime, inflation-adjusted retirement benefits.
Social Security is designed to provide workers and their
families with a secure, basic benefit throughout
retirement.\11\ As the new Social Security statement
acknowledges, Social Security is not designed to be the only
source of income in retirement. But it is a benefit that people
can count on, without worrying about the state of the stock
market, the rate of inflation, or -and this is a particular,
and well-founded fear for women--the risk that they will
outlive their other assets.
---------------------------------------------------------------------------
\11\ Munnell (1999).
---------------------------------------------------------------------------
Women would find it difficult, if not impossible, to obtain
equivalent protection privately. If they tried to use their
savings to purchase a lifetime annuity with inflation
protection, they would see their rate of return on those
investments plummet. Most private annuities--unlike Social
Security--base monthly payments on gender, providing women with
lower lifetime benefits even when their investment is equal to
men's. Converting to an annuity--which is done all at once--
makes a woman's lifetime retirement benefits extremely
sensitive to the state of the stock market at the time of the
conversion. In addition, the costs of converting savings to a
private annuity are high; buyers give up an estimated 10-20
percent of the value of the assets they convert to an annuity.
Full protection against inflation, not currently available,
would further reduce the monthly payments from the annuity.\12\
Finally, under Social Security, lifetime protection for
surviving widows and widowers does not come at the price of
reduced worker retirement benefits. \13\
---------------------------------------------------------------------------
\12\ For a discussion of the extra cost and other difficulties
associated with annuities, see Henry J. Aaron and Robert D. Reischauer
(1998), Countdown to Reform: The Great Social Security Debate, p. 38-
41; Munnell (1999); Hill, Shaw and Hartmann (2000); GAO (1999), Social
Security Reform: Implications of Private Annuities for Individual
Accounts, GAO/HEHS-99-160.
\13\ Christina Smith FitzPatrick and Joan Entmacher (2000),
Increasing Economic Security for Elderly Women by Improving Social
Security Survivor Benefits 3 (National Women's Law Center).
3. Social Security provides disability and life insurance
benefits that are not reflected in the investment concept of
---------------------------------------------------------------------------
``rate of return.''
In addition to retirement benefits, Social Security
provides insurance to both the worker and the worker's family
against the risk of disability and early death. ``Rate of
return'' is not an appropriate concept for evaluating the
purchase of insurance. For example, many people buy homeowners'
insurance, paying premiums every year. If they got through the
year without experiencing a fire, flood, or burglary, most
people would not think that they made a bad investment. They
didn't buy insurance to get a good rate of return; they were
purchasing protection against risk.
Some analyses comparing Social Security's rate of return to
that from private accounts, however, would ignore survivor and
disability benefits. That omission significantly undervalues
the benefits provided by Social Security. Because Social
Security creates a huge insurance pool, all working Americans
receive low-cost disability and life insurance protection for
themselves and their families. The protection that Social
Security provides against these risks would be far more
expensive, if not impossible, for many people--especially older
Americans, those with pre-existing conditions, and those in
dangerous occupations--to obtain.\14\
---------------------------------------------------------------------------
\14\ The Heritage Foundation Report (2000) ignores disability
insurance and survivor insurance benefits in its rate of return
calculations, casually assuming that these benefits would be retained
``exactly as they exist under current law'' even if the retirement
system were privatized (pp. 151-152). However, the Social Security
retirement, survivor, and disability benefit programs are closely
interrelated; maintaining disability and survivor benefits independent
of retirement benefits cannot be done without creating severe
inequities and perverse incentives. Kathy Larin and Robert Greenstein
(1998), Social Security Plans that Reduce Social Security Retirement
Benefits Substantially are Likely to Cut Disability and Survivor
Benefits as Well (Center on Budget and Policy Priorities). The Cato
Institute's proposals to privatize Social Security also exclude
consideration of disability and life insurance benefits, on the
mistaken assumption that these benefits could be obtained at similar
cost privately. Hill, Shaw and Hartmann (2000). For additional
information on the higher cost of disability and life insurance
protection in privatized systems, see Barbara Kritzer (1996),
``Privatizing Social Security: The Chilean Experience,'' Social
Security Bullletin (59:3), 45-55; GAO (1999), Social Security Reform:
Experience of Alternative Plans in Texas, GAO/HEHS-99-31.
4. Focusing on the ``rate of return'' to individual workers
---------------------------------------------------------------------------
ignores the social insurance values of Social Security.
Fortunately for women and millions of other Americans,
Social Security does not pay benefits only to workers, nor does
it base benefits strictly on the level of contributions. Social
Security's progressive benefit formula provides individuals
with low lifetime earnings, who are disproportionately women,
with retirement benefits that are a larger percentage of
average lifetime earnings. Social Security also provides
protection to spouses (and ex-spouses married for ten years)
whose lifetime earnings have been reduced because of homemaking
and caretaking responsibilities. Over 98 percent of the
recipients of spouse and surviving spouse benefits are women.
Social Security also allows individuals who are entitled to
worker benefits on their own, and to benefits as a spouse or
survivor, to receive the higher benefit. Finally, as discussed
above, Social Security offers lifetime, inflation-adjusted
benefits; neither workers nor their survivors need worry that
their benefits will stop once they have a certain percentage of
contributions back.\15\
---------------------------------------------------------------------------
\15\ Joan Entmacher (1999), Testimony at the Hearing on Social
Security and Women, Subcommittee on Social Security, Committee on Ways
and Means, U.S. House of Representatives (February 3, 1999); Munnell
(1999); Hill, Shaw and Hartmann (2000).
---------------------------------------------------------------------------
CONCLUSION
It would appear that the purpose of some of those who talk
about Social Security's ``rate of return'' is not to inform,
but to undermine support for a system that is vital to the
economic security of millions of American women and their
families. To be sure, it is important to consider ways to
reform Social Security, to strengthen its financing and improve
its benefits.\16\ Social Security has been adjusted many times
since it was created to better achieve its social insurance
goals. But that, and not a debate focused on rate of return, is
the discussion we need to have.
---------------------------------------------------------------------------
\16\ For some suggestions on ways to improve benefits for women,
see FitzPatrick and Entmacher (2000) and Heidi Hartmann and Catherine
Hill (2000), Strengthening Social Security for Women: A Report from the
Working Conference on Women and Social Security (Task Force on Women
and Social Security, National Council of Women's Organizations).
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Chairman Shaw. Thank you.
Mr. John.
STATEMENT OF DAVID JOHN, SENIOR POLICY ANALYST, SOCIAL
SECURITY, HERITAGE FOUNDATION
Mr. John. Thank you for the opportunity to testify in this
hearing. This is a subject that we at the Heritage Foundation
find to be extremely important. Although my written testimony
concentrates also on the need to release the continuous work
history sample that Social Security puts together to qualified
researchers, and to make some changes to the Trustees' Report,
I am also going to concentrate on ``Your Social Security
Statement'' and some changes we recommend to that.
Let me in passing say, however, that when the Trustees'
Report was released recently, the press reports all reported
the good news that Social Security was safe for an additional
couple of years. They did not bother to mention, or could not
mention, that the unfunded liability increased by 7 percent,
and that our children and our grandchildren are now going to
face $21.6 trillion in unfunded benefit payments. And that is
in today's dollars.
The changes in the ``Your Social Security Statement'' are
contained in two versions of the Social Security Right To Know
Act, the Sununu-Weller bill, and the Santorum-Gregg bill in the
Senate; and also, in Senator John McCain's Straight Talk About
Social Security Act, which was introduced last Friday.
Essentially, all three recommend three changes to ``Your
Social Security Statement.'' Now, we at the Heritage Foundation
do salute the Social Security Administration on vastly
improving the old PEBE statement; not the least of which, most
of us can understand now what SSA is trying to say.
At the same time, we would say that there are some
improvements. Looking for instance, Mr. Chairman, at your point
that it is difficult to tell the boundary between personal
information and general information, we would recommend an
explicit, in bold statement at the time of the benefits
estimates saying, ``You will be eligible to receive full
retirement benefits in 20-whatever. In that year, Social
Security will only receive enough taxes to pay for `X'-
percentage of those benefits. Through 2037, the difference will
be made up by the Social Security OASDI Trust Fund, but after
that date changes may be required.'' This makes it personal,
and it lets them know that this is not something that is just
abstract.
We also strongly support the inclusion of President
Clinton's OMB statement about the nature of the Social Security
Trust Fund. This is similar to what the private sector is
required to report on the trust funds that deal with private
pension plans.
Last but not least is the ever-popular rate of return
discussion--which has been mentioned on rare occasions. This is
the chart that the legislation--the McCain bill and the Sununu
bill--would include, except for the red lines.
Now, what does this information tell me here? This red line
tells me that my grandmother, who was born in 1896, received a
rate of return on her Social Security taxes of about 15 percent
in real terms. That is twice what the stock market does on an
average year.
My father, who was born in 1919, receives about 8 percent,
which is about equal to what the stock market does in real
terms. In 1950, when I was born, the rate of return declined to
about 3 percent. And my 13-year-old daughter, who was born in
1986, will get below 2 percent.
Now, what this tells me is that this is not a deal that is
improving the lifetime benefits of my child. It tells me that
if I compared this with some other things--for instance, if I
look at the U.S. Treasury series ``I'' U.S. savings bonds,
which pay 3.4 percent plus inflation--that sending her money to
the government for this program is not necessarily the best use
of her funds.
Now, I am not here to criticize Social Security or the
Social Security program. It did wonderful things for my
grandmother; it is doing wonderful things for my father. I look
forward to visiting my parents again, and anything that I did
to endanger their benefits would probably mean that I would be
on the wrong side of the door.
But at the same time, my real concern is what happens to my
children, and what happens to my coming grandchildren, or
future grandchildren--At 13 I hope they are going to be delayed
for a while. But the question is, is this getting better for my
children? And the short answer is, ``No.''
Now, in the short run, there are only three ways that you
can deal with Social Security's problems: You can raise taxes;
you can cut benefits; or you can make that money work harder.
Making that money work harder through a personal retirement
account is, obviously, our eventual goal at the Heritage
Foundation.
But in the short run, it is important for Americans to have
the information that they need to understand the nature of the
Social Security system and where it is going in the future.
Again, now, it has been suggested that this might be
confusing. Well, last weekend I spent a fair portion of my time
trying to do my taxes. And I would say that any government that
expects me to understand the 1040 form and the instructions for
the 1040 form probably can explain additional information on
the Social Security statement in a way that is understandable.
I hope they do a slightly better job than they did on the 1040
form.
Thank you.
[The prepared statement follows:]
Statement of David John, Senior Policy Analyst, Social Security,
Heritage Foundation
I appreciate the opportunity to appear before you today to
discuss ways to increase the information that the public can
receive about Social Security programs. This is an extremely
important subject, and I would like to thank the Chairman for
scheduling this hearing. Let me begin by noting that while I am
the Senior Policy Analyst for Social Security at the Heritage
Foundation, the views that I express in this testimony are my
own, and should not be construed as representing any official
position of the Heritage Foundation. In addition, the Heritage
Foundation does not endorse or oppose any legislation.
Congress could begin the process of Social Security reform
this year by passing legislation to provide more information to
workers and analysts about the current program and the options
for reform. Taking such steps would help to prepare Americans
for a more informed debate on the future of Social Security,
and it would make it easier to develop a national consensus on
real reform. Moreover, these steps would cost very little, both
politically and financially. Congress need not wait for a
complete Social Security reform plan to be agreed on by all
sides before taking these important steps.
Although Social Security is the government's most popular
program, many Americans know very little about how it operates
and how its benefits compare with alternative retirement
investments. For example, millions of Americans remain
convinced that Social Security maintains a savings account in
each of their names, despite the fact that there is no direct
connection between the amount of taxes one pays and the
retirement benefits that one eventually receives.\1\ Even
academic researchers are denied access to information that
would allow them to evaluate plans that could increase the
retirement security of future generations. Moreover, few
Americans realize that the rate of return on their Social
Security taxes is averaging a mere 1.2 percent,\2\ or that the
program will reach insolvency by the year 2015 without
reform.\3\
---------------------------------------------------------------------------
\1\ The formula used to determine Social Security benefits is based
on an individual's inflation-adjusted earnings history, not on the
taxes he or she paid. Since 1940, retirement taxes have increased from
a combined employer-employee rate of 2 percent on the first $3,000 of
earnings to 10.6 percent of the first $76,200 of earnings. Meanwhile,
the benefit formula has been based on earnings throughout that period.
\2\ William W. Beach and Gareth G. Davis, ``Social Security's Rate
of Return,'' Heritage Foundation Center for Data Analysis Report No.
98-01, January 15, 1998.
\3\ 2000 Annual Report of the Board of Trustees of the Federal Old-
Age and Survivors Insurance and Disability Insurance Trust Funds
(Washington, D.C.: U.S. Government Printing Office, 2000), p. 3.
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Doing nothing with the current Social Security program
makes little sense and will serve only to make matters worse.
Testimony by U.S. Comptroller General David Walker indicates
once again that the overall cost of not enacting reform
increases every year.\4\ If serious reform is not feasible this
year, then Congress should pass three simple but extremely
important changes that would make real reform more likely in
the near future.
---------------------------------------------------------------------------
\4\ David Walker, Testimony before the Social Security Subcommittee
of the Ways and Means Committee, U.S. House of Representatives, 106th
Cong., 1st Sess., March 25, 1999.
---------------------------------------------------------------------------
1. Congress should simplify and improve Social Security's Your
Social Security Statement (YSSS).
A more accurate account of Social Security's
future financial difficulties also should be added to the YSSS.
In specific, individual's should be informed how Social
Security's cash flow deficits could affect their retirement
benefits.
Each YSSS should include information about the
actual nature of the Social Security trust funds.
Data should be included on each YSSS explaining
the recipient's estimated rate of return from his or her Social
Security retirement taxes.
Starting in October 1999, the Social Security
Administration began mailing annual YSSS statements to an
estimated 123 million workers.\5\ These statements include an
accounting of Social Security taxes the individual worker has
paid to date, the worker's eligibility status for benefits, and
an estimate of the various types of benefits the worker and/or
the family could receive under different circumstances.
---------------------------------------------------------------------------
\5\ In order to receive a YSSS statement, a worker must be at least
25 years old and have annual earnings, a Social Security number, and a
valid current address. The worker also cannot be receiving Social
Security benefits.
---------------------------------------------------------------------------
For most Americans, the YSSS statements will be their sole
source of official information on how they personally will fare
in retirement under the current system. While the new
statements are much easier to understand than the earlier
Personal Earnings and Benefit Estimate Statements (PEBES),
which they replaced, additional change are necessary.
Unfortunately, even with the improvements, much of the
information contained in the YSSS statements is both flawed and
misleading. As a result, millions of Americans may be
misinformed about how the current system works and confused
about how much retirement income they will receive. Moreover,
as the debate over preserving and improving Social Security
continues, these workers will not have the necessary
information to make an informed decision.
The worst flaws are contained in the methodology that
Social Security uses to estimate future benefits. While Social
Security uses actual salary information to the extent that it
is both available and accurate for past earnings, it then
assumes that the individual will continue to earn exactly the
same amount through retirement. This results in misleading
numbers in a number of instances. For instance, a younger
worker's benefits will be grossly understated, as the SSA model
does not allow for salary increases. Similarly, anyone with
fluctuating income, such as farmers or salespeople, could find
that their annual statements include widely differing benefit
estimates depending on whether the last year of actual earnings
information was a year of prosperity or of difficulty. Finally,
women who expect to leave the workforce temporarily to care for
children will also receive inaccurate estimates. In order to
deal with this weakness, The Heritage Foundation will shortly
unveil a website that will allow workers to develop more
accurate benefit estimates.
Equally serious is that the YSSS statements fail to
adequately inform people how the program's projected financial
difficulties could affect the payment of their benefits. While
the most recent statements include a footnote hinting at these
problems, this warning should be more explicit. The estimated
benefits section of the YSSS statement should begin with a
statement such as:
``You will be eligible to receive full retirement benefits in
20XX. In that year, Social Security will only receive enough
taxes to pay for xx% of these benefits. Through 20XX, the
difference will be made up from the Social Security OASDI trust
fund, but after that date changes may be required.''
These disclosures are similar to those required of under-
funded private pension plans by the US Department of Labor. It
is only fair to also require Social Security to meet these
standards.
Second, Congress should require the Social Security
Administration to include information on the actual nature of
the Social Security trust funds and how they differ from
private-sector trust funds. President Clinton's budget for
fiscal year 2000 accurately portrayed this distinction. Chapter
15 of the Analytical Perspectives volume for that year stated
that
``These balances are available to finance future benefit
payments. . .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.'' \6\
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\6\ Analytical Perspectives, Budget of the United States
Government, Fiscal Year 2000 (Washington, D.C.: U.S. Government
Printing Office, 1999), p. 337.
This statement should also be included in the YSSS
statements. Both workers and the media should understand that,
in discussing Social Security, the term ``trust fund'' has a
different meaning than it does in normal financial dealings.
Although private-sector trust funds contain stocks, bonds, or
other assets that can be sold for cash, Social Security's trust
funds contain only IOUs that will have to be paid with future
taxes.
Finally, the Social Security Administration should be
required to include data on the worker's estimated rate of
return on Social Security retirement taxes. One way to do this
would be to include the chart found on page 23 of GAO's August
1999 report on Social Security's rate of return.\7\
---------------------------------------------------------------------------
\7\ ``Social Security: Issues in Comparing Rates of Return wit
Market Investments,'' GAO/HEHS-99-110 (Washington, DC: U.S. Government
Printing Office, 1999).
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Because YSSS statements already are included in the federal
budget, the cost of making these modest improvements would be
minimal. By making such incremental changes to the information
Social Security provides on YSSS statements, Congress could
ensure that millions of workers and their families have better
information on the Social Security program, which would enable
them to plan more appropriately for their retirement. It also
would enhance the Social Security debate.
2. Congress should improve the annual report of the Social
Security trustees to reflect the program's long-term outlook
more accurately.
Information should be provided in the initial
summary of the Trustees' Report on any changes in Social
Security's aggregate dollar liability that have taken place
since the last report.
Information on the actual nature of the Social
Security trust funds and how they differ from private-sector
trust funds should be provided, too.
Estimates of the tax increases or benefit
reductions that would be necessary to avoid cash flow deficits
also should be included, as well as information on how delaying
action would change those estimates.
Every spring, the Social Security trustees issue an annual
report about the trust fund's financial condition. The 2000
report for the Old-Age and Survivors Insurance trust fund,
which includes the Social Security retirement program, includes
over 200 pages of charts, tables, and other very detailed
information. Unfortunately, some of the most important facts
are buried in the report, and others are missing entirely. When
the 2000 report was issued earlier this year, for example, news
stories concentrated on findings that there would be an
additional year before Social Security begins to run cash
shortfalls, and three more years before its trust fund is
exhausted. Most of the stories did not include the fact that,
in the past year, the gap between benefits that have been
promised over the next 75 years and the taxes that will be
available to pay them actually increased by 4 percent to $20.6
trillion, after adjusting for inflation.\8\
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\8\ This calculation assumes that, as occurs under current law, the
federal government spends any future surpluses produced by the Social
Security system.
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The unduly optimistic picture would have been closer to
reality if Congress had required the Social Security
Administration to include in the initial summary information on
changes in Social Security's aggregate dollar liability over
the past year. Currently, that information is included only
among the flood of charts and tables in the back.
As earlier discussed, Congress should also require the
Social Security Administration to include information on the
actual nature of the Social Security trust funds and how they
differ from private-sector trust funds. In addition to the
statement from President Clinton's budget for fiscal year 2000
that was noted in the YSSS statement section of this testimony,
the annual report should also include another quote from
Chapter 15 of the Analytical Perspectives volume:
``The Federal budget meaning of the term ``trust'' differs
significantly from the private sector usage. . .the Federal
Government owns the assets and earnings of most Federal trust
funds, and it can unilaterally raise or lower future trust fund
collections and payments, or change the purpose for which the
collections are used.'' \9\
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\9\ Analytical Perspectives, Budget of the United States
Government, Fiscal Year 2000 (Washington, D.C.: U.S. Government
Printing Office, 1999), p. 335.
The annual Trustees' Report also should include estimates
of the tax increases or benefit reductions that would be
necessary to avoid a cash flow deficit, and how delaying
actions would change those estimates. In this way, workers
would understand that, although cash flow deficits will not
appear for another 15 years, the eventual cost of reforming
Social Security increases with each passing year. Adding this
type of information to the Trustees' Report would allow
Americans to see the real state of Social Security's finances.
They would know that the crisis has been delayed, but it still
is getting worse and will cost more to resolve. Although this
realistic picture would not be popular with politicians who
would prefer avoiding difficult choices, it would be more
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honest.
3. Congress should allow all researchers access to Social
Security's Continuous Work History Sample (CWHS).
Access to the CWHS would allow private researchers
and government agencies to analyze how Social Security reforms
would affect the budget and the distribution of benefits among
various income groups. The Social Security Administration would
retain the ability to edit and format these data to protect the
privacy of individuals.
Support for the release of this information comes
from both proponents and opponents of Social Security reform.
The CWHS is a random sample of the earnings and benefit
histories of about 1 percent of all Social Security
participants. To ensure confidentiality, information that can
be used to link data to specific individuals, such as names,
addresses, and Social Security numbers, is removed from the
sample.\10\
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\10\ For additional information on the CWHS, see Gareth G. Davis,
``Empowering an Informed Debate on Social Security: Why Congress Must
Act to Ensure Access to the Continuous Work History Sample,''
unpublished memorandum available from the author on request, 1998.
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In order to make sure that Americans have the best possible
information about Social Security and any proposed reforms,
Congress should require the Social Security Administration to
release CWHS data to bona fide non-federal researchers.
Currently, access to the CWHS is restricted to a small group of
government researchers, most of whom are in the Social Security
Administration or the Department of the Treasury. The Social
Security Administration would retain the ability to edit or
format any data being released to provide additional
confidentiality protections.
Without wide access to these data, many of the central
questions of Social Security reform cannot be explored properly
by independent analysts. Because it contains real wage and
benefit histories, the CWHS could be used to carry out detailed
analysis of the effects of both the current system and any
reform proposal on key demographic groups--such as women,
minorities, and low-income workers. Without this information,
the impact of some of these plans only can be estimated.
Before access to these data was restricted in 1974, they
were used widely by private industry, state and local
governments, and academic researchers for purposes ranging from
forecasting the demand for government services to studying
changes in income distribution. Today, there is widespread
support within government and among researchers for release of
the CWHS data. Both Social Security Commissioner Kenneth Apfel
and Secretary of the Treasury Lawrence Summers endorsed the
release of the data during Senate Budget Committee hearings on
February 24, 1998. In addition, two panels of leading social
scientists from the National Research Council (a branch of the
National Academy of Sciences) have called for the release of
the CWHS data and suggested a number of ways in which the
confidentiality of the information could be preserved.\11\ And
a group of top Social Security scholars from across the
political spectrum soon will issue a letter calling for release
of the data.
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\11\ National Research Council, ``The Aging Population in the
Twenty First Century,'' Washington, D.C., 1988. National Academy Press
and National Research Council, Private Lives and Public Policies:
Confidentiality and Accessibility of Government Statistics (Washington,
D.C.: National Academy Press, 1993).
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LEGISLATION
There are currently three bills that include one or more of
these recommendations. In the House, all three are contained in
H.R. 3578, the Social Security Right to Know Act, which was
introduced by Rep. John Sununu. Currently, there are 9 co-
sponsors to the Sununu bill. The additional information
contained in this legislation would allow workers of all income
levels to have a better understanding of Social Security's
future and how it will affect them. This is extremely important
legislation.
In the Senate, S. 2364, also known as the Social Security
Right to Know Act, by Senator Rick Santorum would make similar
changes to the YSSS statements and the annual trustee's report.
Finally, the newest bill, S. 2381, the Straight Talk on Social
Security Act, was introduced last Friday by Senator John
McCain. It includes the same provisions on the YSSS statement
as the Sununu bill.
CONCLUSION
If Congress were to pass legislation that made all three of
the small changes recommended in this paper, the debate over
Social Security reform would be greatly enhanced. Providing
more information to average Americans through their annual YSSS
statements and in the Social Security trustees' annual report
would make it easier for workers to understand how reforms
could affect their retirement. And releasing Social Security's
Continuous Work History Sample to all researchers would ensure
that Americans can determine how different reforms would affect
the economy and various socioeconomic groups. Regardless of
whether Congress acts this year to deal with Social Security's
impending insolvency, these small but important measures are
long overdue.
Members of The Heritage Foundation staff testify as
individuals discussing their own independent research. The
views expressed are their own, and do not reflect an
institutional position for The Heritage Foundation or its board
of trustees.
Chairman Shaw. Thank you. And I thank all of the witnesses.
I think it is important that I read a paragraph into the
record. And this is taken from the Social Security statement.
And this is the Commissioner's statement on the front. It reads
as if it is a part of a letter. It says:
``Will Social Security be there when you retire? Of course
it will. But changes will be needed to meet the demands of the
time. We are living longer, healthier lives; 76 million `Baby
Boomers' will start retiring in about 2010; and in about 30
years there will be nearly twice as many older Americans are
there are today.''
``Social Security now takes in more in taxes than it pays
out in benefits. The excess funds are credited to Social
Security Trust Funds, which are expected to grow to over $4
trillion before we need to use them to pay benefits. In 2014--
'' that is now 2015 ``--we will begin to pay out more in
benefits than we collect in taxes. By 2034, the trust funds
will be exhausted, and the payroll taxes collected will be
enough to pay only about 71 percent of benefits owed.''
``We are working to resolve these issues. For more
information about the present and what may lie ahead, call us
or get a copy of the booklet, 'The Future of Social
Security'.''This is something that I think is very admirable,
that they put that right on the front. Because it does, in a
very fair way, state what the problem is. The only thing that I
am concerned about is that people reading this might really
think that, well, they have got until 2034, now 2037.
The Congress needs to act on this. Also, is there someone
still here from the Social Security Administration? I want to
be sure they change and correct this about the earnings limit.
You explain the earnings limit in here, and you are going to
have to change that age, I am glad to say.
Ms. Entmacher. Mr. Chairman, I was speaking with a
representative of the administration before the hearing
started, and they are working on it already.
Chairman Shaw. I would think that they would. They
certainly had a big celebration on that point.
Mr. Salisbury. Mr. Chairman, if I might, if I could ask
your indulgence?
Chairman Shaw. Yes.
Mr. Salisbury. I was at a supermarket this weekend, and
could not help seeing The Sun with the headline, ``Social
Security Benefits To Double in New government Program.'' This
was The Sun's interpretation of the change in the earnings
limit.
Mr. Portman. He is covering up that portion. [Laughter.]
Mr. Salisbury. It was covered in the stand. In the interest
of full disclosure, ``Found Dead Sea Scroll Written by Jesus
Reveals Exact Date of My Return.'' [Laughter.]
Mr. Aaron. Mr. Shaw?
Chairman Shaw. Yes.
Mr. Aaron. Could I mention one point which I think
underscores the importance of your comment about the need to
act early, rather than stall? This is the first year in which
the age at which unreduced benefits are paid has begun to be
increased. Looking at the calendar of this piece of legislation
is revealing.
It was enacted in 1983. The first people affected by it are
affected in the year 2000. It will not be fully in effect until
the year 2022. That is a 39-year period, a 39-year phase-in.
When it comes to Social Security, gradualism has always
been the order when it comes to benefit reductions, for good
and sufficient reasons. And I am convinced it will be, because
Congress would act prudently in the future. But that means, if
you want to get ready for the fact that costs are going to
outrun currently projected revenues, it is better to act soon
than late, because you are going to want to phase in gradually.
Chairman Shaw. I think you are absolutely right on that.
But there are programs out there now that can be enacted. And
if we act now, we will in no way diminish the benefits.
Mr. Matsui?
Mr. Matsui. Well, thank you, Mr. Chairman. I actually came
into this hearing with a great deal of trepidation, with four
panels and all these witnesses. And I just want to thank you. I
think the hearing was very good. I learned a lot from it, and I
appreciated all the testimony from all of the witnesses. Thank
you.
Chairman Shaw. We appreciate the thought all of the
witnesses have put into their testimony.
Mr. Portman?
Mr. Portman. Thank you, Mr. Chairman. I do not want to hold
people up. I may be the last questioner here, including my
friend, Mr. Matsui. But I did have a few questions; starting by
thanking folks for being here. I wish I could have gotten here
earlier. We are always doing three things at once--and today it
was four. But I did learn a lot.
I want to start by thanking Dallas Salisbury for EBRI's
work. Again they came out with a good product, just last month,
on savings, that I used on the floor today, about the paucity
of savings in our country and the fact that in the last 5 years
alone we have a 50-percent reduction in private savings in this
country.
And all the more reason to talk about Social Security,
because we have a general issue with regard to retirement
savings. And only half of the people now are covered by any
kind of pension plan, and so on. And we need to do more on
that. But it puts more pressure on the system that everybody
talked about today.
I have to say one thing in response to Ms. Entmacher.
Because if you have looked at the Archer-Shaw proposal or other
proposals, I think your analysis misses the point in terms of
comparing the current system with any kind of a system that has
personal accounts; by saying that when you average out the
difference between benefits that would be going to the
individual, as compared to those that would go to people who
are currently beneficiaries while that person is paying taxes,
then the rates of return are comparable.
The whole idea here is to get people in a situation where
they have, because of the higher rate of return--and you can
use 5.2 percent, or you can use a higher or a lower rate--over
time, less need for the public moneys.
So that you have to look at a generation, granted. And then
you look at two and three generations. And you end up having a
system based on projections--that, again, SSA has provided us;
and you could use other actuaries--that would indeed not
require the Social Security benefits that your grandchild would
be paying for your retirement, or my great-grandchildren for my
retirement, or grandchildren. So that is why that comparison
just troubles me a little.
And maybe you are talking about different systems than the
one that I am referring to. But if you compare apples to apples
in terms of the rate of return and in terms of the impact on
the beneficiary, I think there will be a difference. Do you
have a comment on that?
Ms. Entmacher. Yes. And I am very pleased you brought that
up. I want to give a lot of credit to Chairman Shaw for trying
to develop a proposal that protected individual benefits while
creating individual accounts; rather than simply cutting back
on guaranteed benefits. And I think that is an important
feature of what the Chairman was trying to do with his
proposal.
But I think the point I made holds up. Because in order to
create the private accounts that would be called for by the
Chairman's proposal, it would require a substantial amount of
funding that would come out of the Federal budget elsewhere;
not Social Security taxes, but revenue that could be used
either for increasing spending on programs that are important
to women, including education and Medicare, or through tax cuts
that the Chairman might be interested in.
But the point is that the money that is needed to fund the
individual accounts that are part of the Archer-Shaw proposal
needs to come from somewhere, needs to be funded somehow.
Mr. Portman. As do all benefits after the year 2014.
Ms. Entmacher. Right.
Mr. Portman. And my only point is you are looking at the
short-term, rather than the mid-term or long-term, depending on
your perspective.
Ms. Entmacher. My point is that if the money that would be
spent to fund the private accounts--which would exceed the
amount of the projected surplus within a couple of decades--if
that money were put into Social Security, and if Social
Security were allowed to invest that money, instead of the
private accounts, we could save on the costs of administering
all those private accounts. If Social Security could invest
that money in something other than T-bills, they might get a
higher rate of return. And in the end, the total returns would
be quite similar.
That is the point, that whether you look at it from the
point of view of proposals for private accounts that would
increase the money in retirement savings and thought, ``Well,
what if we put that pre-funding into Social Security--'' I
entirely agree. We have to compare apples and apples.
Mr. Portman. We have made great progress on it. But what
you said was that there is a similar rate of return to the
existing system, which you termed as privatization. And if you
are talking about a third system, which was not the system you
talked about, which would be taking general revenues and
investing them in the trust fund into some sort of a market
higher rate of return, that is a whole other debate we can
have. And we have had that debate on the Committee, as you
know, numerous times. And Alan Greenspan and others have spoken
on that.
But I think that is a different analysis. And I would just
not want to leave the impression that this is not a different
type of proposal for the mid- and long-term. All the proposals
require a transition cost. I know you all have addressed the
transition cost, and it is different depending on the proposal.
But I do think there is a creative third way here. And I
think there is agreement among the panelists here that more
information needs to be provided to people, so that at least
people have the information to be able to make an informed
decision.
I do not want to hold people, again, but let me just
suggest that Mr. John's idea of having an objective analysis
that goes beyond even what Mr. Shaw just said about the
solvency issue, I think would be very helpful.
The nature of the trust fund, I know, again, OMB has done
some of that. And I think that would be very helpful, putting
it in as plain English as possible. And having worked a lot
with the IRS, I know that is sometimes a challenge, but we have
made some progress even with the IRS in that regard.
And finally is the rate of return, on which I take Henry
Aaron's comments to heart, and I appreciate what he said about
the need to act quickly, and what you said in response to the
President's proposals recently. But I do think that there has
got to be a way to provide some unbiased information to people.
I mean, you know, Social Security is not risk-free, either.
There are risks built into the Social Security system. And the
obvious risk is, in a period of great insolvency, which after
the 2034 period spirals to the point that it is impossible for
me to imagine us being able to fund that because the taxes
would have to, after 2050, 2060, be so high that I think people
would----
Mr. Aaron. Actually not, Mr. Congressman. But that is a
different issue.
Mr. Portman. But that is a risk, in terms of analysis of
the risk.
Mr. Aaron. The force of my testimony--and we could go into
it later on, if you would like--is that your hope and desire--
which I think is a legitimate one, and one that I share; I
would like to be able to do straight-up comparisons of rates of
return--is not possible.
And the reason it is not possible in a way that would
command a reasonable consensus, and avoid destructive
controversy is the nature of the protections. We do not know
how to value them in an unambiguous fashion. I wish we did. I
would like to have those comparisons. We just do not know how
to do it.
And I want to distinguish what I am saying from the view
that it is too complicated for people to understand. That is
emphatically not the point I am making. Written clearly, people
can understand any of these complicated concepts that we are
talking about.
It is not that bureaucrats cannot write plain English that
ordinary folk can understand. They can; and they do. The
problem is, we analysts could not come to a consensus agreement
on how to do the numbers in a way that would avoid what I have
called destructive controversy.
And if I could say just a word about that: I live with
numbers; academics love to argue about them. If that becomes
the focus of the public debate--and I believe it would, if you
mandate the estimation of concepts about which there is not a
good consensus, that provoke a lot of controversy--people will
get confused, because they will be hearing different
information from different people. They will get frustrated and
annoyed, because they are hearing different information. And
they will focus on the wrong issues. They will focus on these
number issues.
The right issues, I think, are the ones that you and Mr.
Shaw have been trying to draw attention to. I may not agree
with your position on policy about them, but the question of
how best to structure a retirement system for Americans in the
21st century, whether it should be through a defined benefit
system with risks diffused, or a defined contribution system
with individual control and risks borne by the workers----
Mr. Portman. Or a third way.
Mr. Aaron [continuing]. Or by some combination of the two--
--
Mr. Portman. I mean, I would hardly call Archer-Shaw a
defined contribution system where the risk is borne by the
individual, and no risk.
Mr. Aaron. No, I would not. I would, frankly, call it a
very elaborate way of putting general revenues into the current
Social Security system.
Mr. Portman. As is the President's proposal.
Mr. Aaron. That is correct.
Mr. Portman. And you have commented on that, and I
appreciated your commentary.
But that is the sort of information that if people are
provided the right information, I think they can make an
informed decision, and people are smarter than we give them
credit for.
I also understand your point about a final number. But I
cannot believe that in the statement, which I agree is much
improved--And I enjoy reading mine now and again, wondering
what my kids' statements are going to look like in terms of
their amount that they will contribute, and what they will
expect back. But I think there can be more information as to
the solvency issue, as to the nature of the trust fund, and
then finally, something on the rate of return in general terms,
not in terms of a specific number, as you say.
And I was not here for your testimony, but I know, Mr.
Thau, you have some thoughts on that as well.
Mr. Thau. One thought, which is that the statement
implicitly gives you a rate of return. It tells me what I have
paid in taxes for this program over the course of my life. It
estimates what I am going to pay in taxes over the course of
the rest of my working life, and tells me what I am likely to
get in benefits at certain retirement ages.
You can calculate out a rate of return based upon what is
already in the statement. It seems to me, it would be possible
to make that clearer to the ordinary taxpayer, what the total
amount is that they are going to pay over a lifetime, and what
they are likely to get back.
And what the statement is missing, and what I mentioned in
my testimony, is that it does not say what you are going to pay
from now until the time you retire. It tells you what you have
paid so far, but does not add in the time between now and
retirement age. But I think that gives you some sort of
calculation of what you are going to get.
It seems to me you have an algebraic equation where you
have ``A'' plus ``Blank'' equals ``C.''
Mr. Portman. Right.
Mr. Thau. And the taxpayer does not know what ``B'' is. And
based upon that, you should be able to calculate out, you know,
what the value of this program is to you.
Mr. Portman. Since he does not have the mike, I will speak
for Dr. Aaron, and say that rate of return would be something
that somebody might compare to a rate of return they would get
on a 401(k) or even a private investment or an IRA investment;
and that there are, according to Dr. Aaron, different kinds of
risks involved in that. And I agree, there are different kinds
of risks. But I will not agree that it is risk free.
Mr. Aaron. Oh, I did not suggest that it was.
Mr. Portman. Yes.
Ms. Entmacher. If I could respond to that--And it kind of
picks up on the points that Dr. Aaron was making, but it puts
them in the context of the women that I meet with when I go out
and talk about Social Security. They are afraid of growing old
and having nothing to live on.
It is very sad to see people who are afraid that they will
live too long. And this is one of their fears. And this is
something--I mean, many of these women, particularly the older
women I meet with, they did not work much in the paid labor
force during their lives, so they are getting spousal benefits.
They are relying on the benefits that their husbands earned.
Many of them are widows; their husbands are deceased. It would
never show up on their Social Security benefits statement, if
they got one at all, because they did not have 10 years in.
And you know, this is something that is adjusted for
inflation; it comes every month; they can count on it. It is
not enough to live on. And that is one of the issues that I
think needs to be addressed: How do we improve these social
insurance goals?
But talking about improving the rate of return does not get
to the concerns. And I know a lot of those women live in your
district, Mr. Chairman. And I am sure you know and you have
heard how much these other kinds of protections--women who have
been homemakers; women who took that chance, that risk of not
looking out just for themselves, but looking out for their
families--what all those insurance protections that Dr. Aaron
enumerated mean for people. And I do not think it is that easy
to measure it. I do not think it is possible.
Chairman Shaw. I think one of the things that we have to
remember is, the purpose of the hearing was to simply get
comment on the statement and the information that is going out.
I think we will leave reform to a different day.
But to comment on some of the points that you made, I think
Mr. John has exercised a great deal of restraint, that he did
not jump out of his chair when you started talking about direct
investment by the Social Security Administration.
But I mean, you have the Heritage Foundation on 1 day that
wants to go to a privatized system. On the other side, you have
your situation, where you would like to see the Social Security
Administration do direct investment.
Ms. Entmacher. That is not exactly it.
Chairman Shaw. I think the Archer-Shaw bill is somewhat in
the middle. We preserve the Social Security system exactly the
way it is, and we do not change it. And the Heritage Foundation
does not like our plan, because we do not change it.
We leave it totally alone. And the reason we leave it
totally alone and do not change the system one iota is because
of a lot of the things that you are talking about: The
uncertainty and the fear, and the ability to be able to plan.
That is what Dr. Aaron is talking about. He talks about the
certain amount of guarantees because of the investment
structure and the commitment set forth in the language.
Unfortunately--and I think Rob has made this point pretty
clear--there are no guarantees, if Congress does not act. And
we need to act, to do something. And I think the middle-of-the-
road approach, somewhere where Chairman Archer and I are, is
about where we are going to end up.
The problem that you have, and the reason this legislation
is not moving today, is that there are so many people that do
not want to get in any type of investment in private accounts,
are against it; and the Heritage Foundation on the other side,
that does not go to a privatized system, they do not like it.
So the problem that you have, when those two gang up on you it
is tough to pass something.
Whatever we pass is not going to be the final say. Future
Congresses will look at it. If there is any fine-tuning that is
necessary, they will make that fine-tuning.
But I guess I should get back to the purpose of this
hearing, myself. But I do hope that we can move together. And
it is going to be very, very important that this be done in a
bipartisan way. Neither party is going to do a good job if they
go it alone. And the American people will not have faith in it.
And we do know that our seniors are very easily frightened
when they see that this Social Security is a lifeline that they
have and they have lost their ability to work. And it is very
important that we do not frighten them at all.
So that is the job that we have mapped out for us. I am
still hopeful that we can work with the President in getting
something done before the end of this Congress. It is becoming
a long shot. We will have to just settle for the little bit of
reform we had in doing away with the earnings penalty, and look
to the next Administration to try to get something done.
If we control the Congress and I am back, I am confident
that my name will remain on this legislation. If we do not come
back, it may be the Rangel-Matsui bill----[Laughter.]
Chairman Shaw. With our thought in it. Who knows?
But in any event, this has been a very, very good hearing,
and I appreciate all of you being here. Thank you. We are
adjourned.
[Whereupon, at 5:42 p.m., the hearing was adjourned.]
[A submission for the record follows.]
Statement of Hon. Judd Gregg, a United States Senator from the State of
New Hampshire
Thank you, Mr. Chairman, for the opportunity to submit
testimony for your Committee's hearing regarding Social
Security right-to-know legislation.
I would like to begin by commending you for your initiative
in holding this hearing. I believe the subject of the hearing
to be critical to our efforts to safeguard Social Security for
America's seniors in a responsible and bipartisan way.
I have joined many others--including several whose policy
preferences diverge from my own--in lamenting the lack of
constructive, substantive action this year to reform the Social
Security program. While too often we yield to the temptation to
blame others for that lack of action, I believe that a step
back reveals that much of our inability to achieve consensus
derives from incomplete public and Congressional understanding
of the information flow about Social Security. I believe that
these information gaps induce us to talk past one another, to
focus only on selective information, and to overlook important
facts when they are inconvenient to one's own predispositions.
I would like to begin first by detailing what I believe to
be the most damaging gaps in the methods used to present
information about the financial operations of the Social
Security system.
Secondly, I would like to discuss the manner in which we
distribute information to wage-earners and to beneficiaries
about the taxes that they pay, and the benefits that they can
expect to receive. Here, too, I believe there is evidence that
selective presentation of information leads inadvertently to a
confusing picture.
Thirdly, I would like to present what may be the most
important part of my testimony, focusing on the way that the
gaps in the first two types of information bias and distort our
legislative deliberations.
And fourth, I would like to close by giving my subjective
view of where we are in efforts to address these concerns,
including my legislative efforts, and the responses to them.
Before I begin to describe my concerns, I think it is
appropriate to begin by commending the professional,
nonpartisan work of the Social Security Administration (SSA) to
provide accurate information about the future of the Social
Security system. There is much that is right and good about the
work that they do, and indeed much of the information that I
believe that we should emphasize to the public is gleaned
either directly or indirectly from the comprehensive report of
the Social Security Trustees, from numbers generated by the
Office of the Chief Actuary of SSA. In my dealings with SSA,
especially the office of the Chief Actuary, I have found them
to be exemplary public servants who never fail to respond to
our requests in a timely and helpful way. If Congress as a
whole routinely received a report on Social Security's
financial operations that was as clear, understandable, and
transparent as the information that individual staff are able
to receive through separate requests to SSA, then the
understanding by Congress and the public of the realities of
the Social Security program would be immeasurably improved.
It is unfortunate indeed that when one notes the need for
improved and more explicit reporting on certain aspects of the
Social Security program, that this is sometimes construed as
undermining the objective, independent work that SSA currently
does. I have been concerned by some reactions to what I
consider to be straightforward, inarguable reporting
requirements as signaling that any attempt by Congress to
insist upon additional information will be regarded as an
infringement upon the independence of the Social Security
Administration. But there is a significant difference between
telling SSA how they must do their technical work, and
requiring that certain information be put clearly before
Congress when it is done. To characterize the latter as the
former undermines confidence that all share the goals of
maximizing public information about the Social Security
program.
It bears mentioning that the Social Security Administration
was granted independent status in recent years, as much to
safeguard their independence from administration policies as
from the Congress. Accordingly, Congress has as great a right
as does the administration to require SSA to provide the
information that it believes to be appropriate to its needs to
budget for the program. You can be certain that if the
President said to SSA that he wanted placed on his desk, every
year on March 31, a table of the program's projected annual
cash deficits, in dollars, that it would be there in exactly
the form requested. We might look askance at a directive by the
President that SSA change their technical assumptions, but not
at the demand for the information itself. Congress's rights in
such matters are equally great, and deserve exactly the same
response.
Reporting on the Financial Operations of the Social Security
Program
Mr. Chairman, in order to better illuminate the
inadequacies of current Social Security reporting, I would ask
you to consider the following anecdotal illustration.
Imagine that in some future year your position as Chair of
this Committee is held by a less responsible individual, who in
an election year such as this one, pushes through this
committee a proposal to double all current-law Social Security
benefits. Imagine, too, that though this Committee took no
action to fund these new benefits, it arbitrarily reallocated
$1 trillion in credits from on-budget revenues to the Social
Security Trust Fund annually for each of the next few decades.
What would be the result of this precipitous and
irresponsible action? One result, obviously, would be a vastly
worsened problem of funding these now doubly large benefits.
But another perverse result would be that the following year's
Trustees report would contain a finding that Social Security
system had been made solvent throughout the 75-year valuation
window--in other words, that's financial problems had been
fixed. According to the Trustees' report, the system would
never be insolvent.
Now, no rational person could believe that this Chairman
had resolved Social Security's problems by simply doubling
current benefit promises and rearranging the debts between
government accounts. But this is exactly what the current
measure of actuarial solvency would oblige us to report.
The remarkable thing about the current Social Security
debate is that the argument that the system is somehow
``sound'' through 2037 under current law is exactly the same
argument that would be employed to claim that this new Chairman
had fixed the Social Security system. There is absolutely no
difference between the two, and the obvious shortcomings of
this analysis have much to do with our current legislative
impasse. Anyone who accepts the argument that we face no
difficulties before 2037 must also accept the argument that we
can promise additional benefits cost-free, simply by issuing
additional credits to the Social Security Trust Fund. They are
indeed premised on the same measurement.
Each year, Congress's information on the health of the
Social Security system comes chiefly from the annual report of
the Social Security Trustees. And each year, news articles
hasten to highlight the latest projected date through which the
program is ``solvent'' according to that report. This year,
that date is 2037. One is hard-pressed to find an article about
the report that doesn't emphasize this date.
The Trustees' work is excellent and professional, but it
emphasizes information of lesser relevance to the task of
financing Social Security benefits. By highlighting the distant
insolvency date of 2037, the annual Trustees' report gives the
impression to the public that as this date moves further out or
closer in, the long-term picture has either improved or
worsened to that extent.
What Congress needs to know about the Social Security
program is not its projected insolvency date, as my
introductory anecdote shows. What it needs to know above all is
what the program will bring in, and what it will cost. What are
the projected gaps between those two, and thus what are the
sizes of general revenue commitments that must be made in
addition to collected payroll taxes, in order to pay benefits?
And because this is a long-term program that will require
considerable advance planning to reform properly, Congress
needs this information to be projected over the long haul, not
merely within the 5 or 10 year windows used by CBO and OMB
during budget consideration, for refusal to look at the bigger
picture until after this time has gone by will destroy our
ability to construct a solution to Social Security's financial
problems that is fair to all generations.
A simple summary report to Congress should simply state:
--The projected revenues that Social Security taxes will
bring in annually
--The projected annual cost of paying benefits
--And any projected gaps between those two figures that
will oblige Congress to allocate additional revenues from the
federal budget
These could be expressed either as an effective tax rate
upon national wages, as a percentage of overall federal
spending, or in dollar terms, whichever is deemed to be more
useful. In my opinion, more than one of these methods of
presentation should be used.
There is information about cash-flow balances in the
Trustees' report and on the SSA website, but the most important
such information is buried in the appendices. The appearance
given by the report is that the annual cost growth in the
Social Security system is a rather incidental bit of trivia, in
comparison with the somehow more meaningful measure of program
solvency. That is not an appropriate distribution of emphasis.
From the point of view of the federal budget, of taxpayers, and
the economy as a whole, the only thing that matters are the
program's annual revenues and its outlays, whereas
intragovernmental transfers and debt do not alter the overall
picture.
One very great problem with the focus on the insolvency
date is that the date of projected insolvency tells one next to
nothing with respect to the question of whether and how the
government will be able to pay Social Security benefits. It
doesn't tell you whether at some date in the future, the Social
Security system will have enough in payroll taxes to pay
benefits, or whether a huge allocation from general revenues
must also be raised, nor how large that would be. It doesn't
tell you whether the government has generated any savings
whatsoever, or whether it sits on top of massive debt. In fact,
when the Social Security program enters into cash deficits in
the year 2015, from the standpoint of the economy and the
taxpayer, the exact same thing happens when there is a large
and positive Trust Fund as would happen if there were no Trust
Fund at all--the government must turn to the private economy
for additional money. All that the Trust Fund balance reveals
is how much of a legal claim that one part of the government
has upon resources to be provided by another part. Assuming
that we intend to keep paying Social Security benefits
regardless of the existence of such a legal claim, the
insolvency date therefore provides little meaningful
information.
Moreover, as the Congressional Budget Office points out in
their latest analysis of the President's budget, the Trust Fund
balance can simply be changed by fiat, without doing anything
that would actually create new means to finance benefits. We
could pass a law changing the interest rate paid on debt issued
to the Social Security system, making it larger or smaller, and
thereby moving the projected ``insolvency date'' further away
or closer in. Or we could simply declare that additional
credits from the general treasury will be transferred to the
Social Security Trust Fund--as some in the current
administration and out on the campaign trail have suggested--
above and beyond whatever surplus revenues that Social Security
has actually brought in. To sum it up, we can simply decide
what the Trust Fund balance is going to be, and thus we can
simply decide what the projected ``insolvency date'' is,
without fixing anything.
For many years, the Social Security Trust Fund grew, even
though none of that money was being saved in any sense
whatsoever. The government was running on-budget deficits,
unified budget deficits, indeed deficits by any measure. Yet we
continued to account as though this were all adding to our
ability to pay Social Security benefits. Today we are starting
to make good on pledges to run a surplus both in Social
Security accounts in on-budget accounts. Yet long before the
government has generated any real net saving to back up the
huge credits made to the Social Security Trust Fund, we hear
proposals to make still more such credits, and to inflate the
Trust Fund balance still further. This does a disservice to the
principle of honest accounting, and to the taxpayers of this
country. It is a consequence of our focusing narrowly on Trust
Fund balances.
This is highly misleading. It is imperative that current
law as well as all alternative reform proposals be evaluated
for their impact on the overall federal budget, not simply the
Social Security Trust Fund. Currently, CBO and OMB reports
require Congress to look over the next 5 or 10 years at the
operations of the federal government at a whole, and we plan
for this accordingly. With Social Security, however, we look
only at the Trust Fund balance over 75 years. We see the
consequences of this in proposals to inflate the Trust Fund
balance--the part of the equation we do see--at the expense of
the part of the equation that we neglect--the on-budget
accounts. This is not responsible budgeting. And we will not
budget responsibly so long as the information that Congress
receives is focused principally on one side of the ledger only.
Selective information and inadequate emphasis is never a
good basis upon which to make policy. In the third part of my
testimony, I will show specifically how the selective emphasis
of information has distorted the Social Security reform
discussion, and has in many ways paralyzed us out of meeting
our responsibilities to the Social Security program.
Reporting to Program Participants On Contributions and Benefits
One of the more damaging misrepresentations about reform
proposals is that they compare unfavorably to ``current law.''
``Current law'' promises benefits but does not provide the
revenues to fund them long-term. Accordingly, any proposal to
place the system on a stable course must, to a first
approximation, relative to this unrealistic baseline, either
cut benefits or raise revenues. Because every reform proposal
is thus misdescribed as either raising taxes or cutting
benefits, nothing, therefore, gets done, and the system inches
closer to its day of reckoning.
One great frustration I have is that this is not even a
factually accurate representation of ``current law.'' The
Social Security Administration does not have the authority to
send out checks without financing. Thus, regardless of what
current law promises in terms of benefits, the literal
application of current law is that, once the date of insolvency
is reached, the Social Security administration would delay
sending out benefit checks, effectively reducing benefits on
average to about 72% of current promises. Literally, ``current
law'' means that we would begin to collect vastly increased
general revenues from 2015 through 2037, and then that a sudden
and precipitous series of effective benefit cuts would occur in
2037.
However, we continue to publicly describe ``current law''
as though, first, that the additional general revenue tax
collections between 2015 and 2037 will not be required, and
then that after 2037 the benefit checks would continue to be
sent out without financing. Although none of us believe that
Congress would actually permit a scenario of rapid tax hikes
followed by drastic benefit cuts to take place, it is the
literal application of what current law would require.
Proposals to shore up the system should be evaluated on whether
they promise a better future than these massive general revenue
tax collections from 2015 through 2037, and better than the
benefit cuts that would be required after 2037, rather than in
comparison to a fantasy scenario that cannot occur in any
event--the magic materialization of benefits without the
collection of tax revenues to pay for them.
This is why the 1999 Technical Panel of the Social Security
Advisory Board recommended that all representations of current
law represent one of two possibilities--one that presumes
either that we pay the benefits that current law can actually
fund--which right now is only 72% of all promises after 2037--
or that we raise taxes as is necessary to pay for all promised
benefits. Somewhere in between those two endpoints is where
reality might take us, but nowhere in that stream of
possibilities is there any scenario that corresponds to what we
currently tell the public will happen. Instead, they are sent
misleading statements that tell them the benefits that they are
promised, minus the information that the legal authority to pay
them does not exist beyond 2037, and the funding does not exist
beyond 2015. SSA's website makes the same mistake.
At all times and in all places, Mr. Chairman, statements of
benefit and tax projections should be provided in a self-
consistent manner. If, on Personal Earnings and Benefit
Statements, we tell individuals that certain benefits will be
paid, then we should also identify the changes in current
revenue streams that will be required to pay those benefits,
starting in 2015. If, on the other hand, we wish to assert that
tax collections will not be increased, then we should inform
people of the changes in their benefits that would occur
consequent to that decisions. But at all times, in fairness to
all approaches, every possible scenario should be credited for
the retirement income that it can actually fund and provide--
whether these are benefits provided from defined-contribution
personal accounts or through a defined-benefit system --and
only to the extent that it offers the financing to pay for it.
So, too, as with the first part of my statement, I believe
that information sent out to Social Security beneficiaries
should frankly acknowledge the literal application of current
law, and explain to recipients what the Trust Fund does and
does not mean, and its role as a debt owed by the US taxpayer,
not an asset of the federal government. If we continue to
wrongly imply to individual beneficiaries that benefits can
rain out of the sky without additional revenues being committed
in 2015, then we are committing an egregious public deception
that will hamstring our ability to find fair solutions.
Implications of the Information Gaps Upon Legislative Proposals
As I indicated previously, this may be the most important
section of my testimony because I intend here to show that
these matters are not mere esoterica of concern only to policy
experts, but have larger consequences for the political dynamic
that in turn are damaging to the interests of wage-earners and
beneficiaries alike.
It is my view that the shortcomings of our current
information flow are proved by the way that the current Social
Security debate has been distorted.
A first example: We know from current projections that
projected payroll tax revenues will be insufficient to pay for
Social Security benefits. But no one wants to raise the payroll
tax. On the other hand, no one wishes to be seen as cutting
Social Security benefits. In order to meet full current-law
benefits, if we do not provide a portion of those benefits
through personal accounts, then taxes would have to be raised.
But since no one wants to admit to raising taxes, proposals to
increase revenues to the system are made through the back
door--through transfers from on-budget revenues. By
transferring credits from general revenues, one requires that
taxes must be increased in the future--in many such proposals,
by tens of trillions of dollars--but one doesn't
straightforwardly admit that this is what is being done.
It is easy to see how our current scoring creates this
temptation. If we looked squarely at the entire effects of
Social Security on the federal budget as a whole, it could
clearly be seen that transfers from on-budget revenues have no
positive economic effect. The analyses of GAO, CBO and others
show this clearly. Future revenues, outlays, debt, and
everything else looks exactly the same even after one assumes
the implementation of such transfers.
But because we report annually on Social Security's
finances by looking only at the Trust Fund balance, this
creates the illusion that transfers would actually do some
good. The Trust Fund balance is higher, the insolvency date is
more distant, and the added costs on the general revenue side--
burdens on future taxpayers--go unmeasured.
I am certain that these comments will be taken as
implicitly critical of the President's proposal, and I admit
that they are. However, it should in fairness be noted that his
is not the only proposal that exploits this gap in our
information flow; many others do. Every time that a proposal
funds Social Security benefits from general revenues without
taking an action to increase those general revenues by that
amount (such as, for example, reforming the Consumer Price
Index), it is playing this shell game. This is true whether
general revenues are committed directly to fund a new benefit
or whether they are simply used to reimburse the Trust Fund.
And I think it is just as vital to say that every time an
alleged expert says to the public that ``there is no problem in
Social Security before 2037,'' they too are exploiting this gap
in the information flow.
Mr. Chairman, I believe it is absolutely critical that
Congress begin to insist that all reporting concerning Social
Security focus on all of the revenues that the program brings
to the government, as well as all of the costs that it imposes
on it. To look only at one side of the ledger, the Social
Security Trust Fund balance, has clearly induced gamesmanship
and will continue to do so. This does not serve the public
well. It advantages only those who wish to gradually turn
Social Security into a welfare program funded largely through
income taxes, and works against the interest of those who wish
to ensure, as Franklin Roosevelt wished, that there remains a
defined relationship between every generation's tax
contributions to the program, and the benefits that they
receive from it.
This leads to my second example of how selective
information has biased our evaluation process. From its
inception, Social Security was designed to be a contributory
system, distinct from welfare programs in that it was to be
funded by dedicated taxes. If we bias our discussions in favor
of proposals that funnel income taxes into the Social Security
system, we would have no record of each person's presumed
contributions to their Social Security benefits. Accordingly,
in the future, Social Security would depart increasingly from
any notion that benefits were related to contributions, and it
would be nearly impossible to tell whether various generations
and cohort groups were being treated fairly.
Currently, when we measure the fairness of the Social
Security system, we track the rate of return that each birth
cohort receives on their payroll taxes. But this becomes a
meaningless exercise once the program begins to be funded
significantly from income taxes, as on its current course it
would. If we purported to solve this problem simply by
transferring general revenues as was necessary to fund all
future benefits, it would look as though everyone was getting a
great deal from the system, even though they might be paying a
tremendous amount in income taxes to support it. The reason for
this is that we would continue to keep track of the benefits
they receive, but only a portion--the payroll tax portion--of
the tax burden that they were carrying.
So, Mr. Chairman, I believe it is vitally important,
especially as we look outward at 2015, that we begin to tell
the American public very frankly what is their individual share
of the tax burden required to support the program, from income
taxes as well as from payroll taxes. Under current projections,
the average worker in the year 2030 would need to pay not only
their 12.4% payroll tax, but also on average an additional
4.26% of their pay in income taxes, in order to pay full
benefits to seniors in that year. That is a real burden on
taxpayers at that time, and it is absolutely misleading to
pretend that it does not exist.
Last year when this Committee held hearings on Social
Security reform, an analysis was provided to the Committee on
the eve of the hearing, that purported to show that reform
proposals that contained personal accounts would produce an
inferior ``payback'' on payroll taxes, relative to current law.
In reality, each of the proposals analyzed would have
eliminated the majority of the mounting income tax burden that
is now projected to occur in the year 2015-2037. However, by
ignoring that $11.3 trillion in cost obligations, it can be
made to appear as though current law has provided something for
free that the other plans haven't, and thus its ``payback''
ratio is superior.
Everyone should remember, Mr. Chairman, that in order to
understand this problem correctly, we have to recognize that
different generations experience the Trust Fund in different
ways. A worker paying a 12.4% payroll tax in 1990 didn't have
to support a number of seniors whose benefits absorbed all of
that 12.4%, so the balance of that money could be used to
provide other government services to that taxpayer, or to
reduce other federal borrowing and/or his income tax burden.
But a worker paying a 12.4% payroll tax in 2025 will be
responsible for supporting more seniors than that 12.4% can
provide for, so he or she will have to make additional income
tax payments to pay interest and principal to the Trust Fund
from the general budget. Consequently, that wage-earner will
either get less in government services, or face higher tax or
debt service burdens. Unless one counts the costs to that
taxpayer of paying off the Trust Fund, one receives a very
misleading picture of how the system is working.
If we continue down the current road of pretending that the
Trust Fund can magically finance benefits without anyone having
to pay for those benefits, then the only result that we will
reach, analytically, is that the only responsible course is
simply to inflate the Trust Fund and to pretend that it
produces those benefits for free. Economically and
mathematically, of course, this is nonsense, but it is an
inevitable result of the practice of looking only at Trust Fund
transactions when analyzing the Social Security system.
We will never be able to make this system work fairly for
all generations so long as we succumb to a view of things that
looks only at part of the picture. It is therefore absolutely
essential that all government materials frankly note the recent
CBO and OMB findings that the Trust Fund in and of itself
cannot finance benefits, and properly account for the payroll
and income tax burdens borne by different generations as they
move through different stages of the Social Security system.
Again, we see the results of this in the proposals that
have begun to circulate this year. We see proposals to maintain
or even expand upon existing benefit promises, and to ``pay for
them'' simply by trying to make the projected cost increases
appear as invisibly as possible. This is not a responsible way
to make public policy, and future generations will rightly
scorn these activities if we do not improve upon our
information flow and thereby make our decisions with our eyes
open.
Another, third example of how misunderstandings of Social
Security's finances distort the public debate lies in the
persistent notion that if the economy grows a little bit
faster, if the Trustees' abandon ``conservative'' economic
growth estimates, then our perceived problems will all vanish.
Mr. Chairman, there is no basis for this view unless one simply
chooses to look, again, selectively and narrowly at the Trust
Fund balance.
In the first place, the Trustees are projecting a slow-down
in workforce growth, not in per-capita productivity, reflecting
a demographic reality, so it's open to question whether their
estimates are ``conservative'' at all. But the real point is
that no person who understands the inter-relationship between
Social Security and the rest of the budget can take refuge in
the idea that faster economic growth will solve Social
Security's cost-problems. While it is possible in theory that
economic growth could grow fast enough to eliminate the
actuarial deficit over 75 years, the real-world problem of
budgeting for increased Social Security costs is only affected
at the margins by economic growth. For example, under the
latest estimates, the cost of the program as a tax rate is
projected to grow by 68% over the next thirty years, from 10.3%
of the nation's taxable pay to 17.4%. Under the ``good
economy'' estimate, this cost growth would be less by less than
1% of the nation's taxable pay, meaning that projected costs
would still be well more than 50% greater than what they are
now. Looking at the whole picture is essential if we are not to
be seduced and deceived by false hopes that inaction can meet
our responsibilities.
In sum, most ``do nothing'' proposals rely significantly on
the presentation of only selective information. Only if there
is full and accurate disclosure of all costs, revenues and
benefits can the shortcomings of these prescriptions be seen.
Current Efforts to Improve Public Education
During consideration of the earnings limit legislation, I
sought to offer a simple amendment to implement the
recommendations of the 1999 Technical Panel on Assumptions and
Methods with respect to the presentation of information about
Social Security. It was not my intent, Mr. Chairman, to
interfere with your desire, or the President's desire, to have
a clean earnings limit bill. However, given that this was
likely the only substantive action to be taken by the Congress
this year in the Social Security area, I thought it important
to highlight at least the existence of the problems that
remained unsolved, by directing additional ``sunshine'' upon
Social Security's financial operations.
We received a wide range of our responses to our amendment.
Among watchdog groups whose main concern is long-range fiscal
responsibility, we received tremendous support. The Concord
Coalition, for example, supported our efforts helpfully. We
also enjoyed the support of many who are committed to a
fiscally responsible long-term solution for Social Security,
including some who have not yet cosponsored reform plans.
To the extent that there were criticisms, as is often the
case, these ranged from the constructive and valid to many
based on mischaracterizations and misunderstandings. I will
presume that you are already familiar with the language of our
amendment, Mr. Chairman, and know that it would have obliged
the Social Security Trustees to implement only the Technical
Panel's recommendations regarding the presentation of clear and
relevant information, and only to the extent that the Trustees
found advisable to do so. Since the amendment was withdrawn,
and the Trustees' report has been released, many have noted
that the Trustees' report does implicitly evaluate the Tech
Panel's recommendations regarding economic and demographic
estimates, and incorporates small pieces of them. However, the
technical assumptions were not the focus of our amendment, and
although I have my own views about the technical issues, the
extent of their incorporation into the Trustees' report does
not speak to our concerns. My chief aim is to see that the
relevant information is provided to Congress within the
framework of the Trustees' assumptions--not with the
assumptions themselves.
Many who supported our objectives sought to pass a clean
earnings limit bill, including you, Mr. Chairman, and we
withdrew our amendment in deference to that desire, upon
receiving a commitment that our concerns would continue to be
pursued in this Congress. I still believe that Congress would
do well to pass legislation this year to improve reporting to
both the public and to Congress regarding the true finances of
the Social Security program. Doing so would be immeasurably
helpful to the prospects for bipartisan cooperation in future
years.
Mr. Chairman, despite the fact that you and I and many
others have put forward Social Security reform proposals in
this year of surpluses, it looks as though the likelihood of
meaningful action is small prior to this November's election.
But I believe that we can still provide a useful service if we
at least assure that Congress and the public receive the whole
story, not just part of the story, of Social Security's
finances.
That means a frank accounting of the system's entire costs
and revenues--not just as seen through the narrow window of the
Trust Fund. That means leveling with the public about what
current law can actually fund. It means reconfiguring our
public materials to honestly express what the Trust Fund is and
what it isn't. It means evaluating all proposals on a level
playing field, one that recognizes all benefits and costs
delivered under each scenario. If we continue to present only
selective information to the public and to Congress, then we
cannot expect that we will make the best decisions. We will
benefit only those who seek to obscure the realities of the
choices before us, and future taxpayers will be left with the
costs that would arise as a consequence of our inattention.
I applaud your leadership in holding this hearing, Mr.
Chairman, and I thank you again for the opportunity to submit
this testimony.
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