[Senate Hearing 107-347]
[From the U.S. Government Publishing Office]
S. Hrg. 107-347
STRAIGHT SHOOTING ON SOCIAL SECURITY:
THE TRADE-OFFS OF REFORM
=======================================================================
HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC
__________
DECEMBER 10, 2001
__________
Serial No. 107-16
Printed for the use of the Special Committee on Aging
_______
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SPECIAL COMMITTEE ON AGING
JOHN B. BREAUX, Louisiana, Chairman
HARRY REID, Nevada LARRY CRAIG, Idaho, Ranking Member
HERB KOHL, Wisconsin CONRAD BURNS, Montana
JAMES M. JEFFORDS, Vermont RICHARD SHELBY, Alabama
RUSSELL D. FEINGOLD, Wisconsin RICK SANTORUM, Pennsylvania
RON WYDEN, Oregon SUSAN COLLINS, Maine
BLANCHE L. LINCOLN, Arkansas MIKE ENZI, Wyoming
EVAN BAYH, Indiana TIM HUTCHINSON, Arkansas
THOMAS R. CARPER, Delaware PETER G. FITZGERALD, Illinois
DEBBIE STABENOW, Michigan JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri CHUCK HAGEL, Nebraska
Michelle Easton, Staff Director
Lupe Wissel, Ranking Member Staff Director
(ii)
C O N T E N T S
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Page
Opening Statement of Senator John Breaux......................... 1
Prepared statement of Senator Larry E. Craig..................... 162
Prepared statement of Senator Tom Carper......................... 162
Panel I
Dan Crippen, Director, Congressional Budget Office, Washington,
DC............................................................. 3
Barbara D. Bovbjerg, Director, Education, Workforce, and Income
Security Issues, U.S. General Accounting Office................ 119
Geoffrey Kollman, Specialist on Social Legislation, Congressional
Research Service, Washington, DC............................... 153
(iii)
STRAIGHT SHOOTING ON SOCIAL SECURITY: THE TRADE-OFFS OF REFORM
----------
MONDAY, DECEMBER 10, 2001
U.S. Senate,
Special Committee on Aging,
Washington, DC.
The committee met, pursuant to notice, at 2:04 p.m., in
room 385, Russell Senate Office Building, Hon. John Breaux
(chairman of the committee) presiding.
Present: Senator Breaux.
OPENING STATEMENT OF SENATOR JOHN BREAUX, CHAIRMAN
The Chairman. Good afternoon to everyone. Thanks for being
with us. Thanks to our panel members for being with us, as
well.
We appreciate this opportunity to discuss a very important
subject matter. The hearing today is for the purpose of giving
our colleagues and the American public a concept of a framework
in which we will be considering the very important subject of
Social Security reform.
First off, with the Presidential Social Security
Commission's final meeting which will be held tomorrow, our
hearing will weigh a number of proposals that are contained
within the commission's recommendation, recommendations that we
have already looked at in the press and had comments
editorially even before the commission's final meeting.
Second, I would like to use this hearing to draw attention
to the need to get the Social Security debate back on track. I
have been disturbed by the discussion over the past year and
have grown increasingly concerned that we have taken a giant
step backwards in the actual debate.
Furthermore, I am also worried that we have confused the
American people by muddling the real Social Security debate
beyond recognition. We need a realistic and a nonpartisan
reminder of the very serious problems that are facing Social
Security and a substantive examination of the costs and the
tradeoffs that are associated with real reform.
Last, I think it is important to highlight how we as a
nation will handle our domestic priorities following the
tragedies of September 11. I think we all wonder what can we
possibly do now? With major domestic issues like Social
Security and Medicare, we may be tempted to merely say we
cannot handle this now or that not enough money exists to
confront such big issues. I think we may hear from our experts
that pushing these big issues aside and ignoring them is simply
not an option.
I have asked three congressional arms who provide us with
objective analysis to come in this afternoon to remind us what
led us to our current Social Security predicament, and the
problems that are facing us.
My first hearing as ranking member of this committee back
in March 1997 dealt with preparing our nation's entitlement
programs for the aging of 77 million baby boomers. We heard
about Social Security in the context of the even bigger issue
of overall entitlement reform and this included looking at
Medicare and Medicaid and other mandatory spending programs
that serve this country. That hearing was one of many long and
eye-opening presentations that we have heard over the years,
warning that the demographic changes in this country will soon
cause an extraordinary collision of financial pressures.
Social Security and Medicare are facing long-term
insolvency. Medicaid is filling in for the lack of a long-term
care system in this country and will put enormous pressure on
both State and Federal budgets. We heard time and time again
that unless we acted, entitlement spending would inevitably
bear down on the Federal budget and crowd out dollars for other
discretionary investments, including education and critical
funding of our national security. We were also warned of
spiraling deficits if we did not take action to control this
unsustainable entitlement spending.
Well, just as policymakers seem to be ready to tackle some
of these issues, the budget surpluses began to disappear,
presumably making reforms more difficult. So over the past 4 or
5 years we have had an active debate on Social Security and
Medicare and both issues have been prominently featured on
Presidential and congressional agendas. Yet I firmly believe
that in these rhetorical battles we seem to have lost sight of
the big picture. The debate was more informed and realistic
during our first Aging hearing back in 1997. Recent debates
over lockboxes and surpluses and general revenue transfers have
blurred the real issues.
So here we are again today simply unable to agree on how to
shore up Social Security. While our surpluses are now drying up
and disappearing, national security has simultaneously become
our top priority. So do we just throw up our hands and say that
nothing can be done?
We cannot do that. Everything seems to have changed about
the Social Security debate except the problem; it is still
there. Entitlement reform has now become more important than
ever before. We must realize the seriousness of why we continue
to debate Social Security and Medicare. After September 11 we
now know that we will always need to be prepared for
emergencies that strain our nation's financial resources. We
simply cannot let Social Security and other entitlement
programs go unaddressed.
It is my understanding that the White House wants to use
the commission's report to begin a Social Security dialog in
this country over the next year. I hope that both parties will
be honest with the American people. We all need to be honest
that we have promised more in benefits than we can afford to
pay under the current system.
I also hope that the public takes the time to learn about
Social Security. Everyone should know the critical role that
Social Security plays in this country--that it helps keep
retirees out of poverty and provides both survivor and
disability benefits. I would also hope that Americans look at
their pay stubs, look at what their projected benefits will be
and ask themselves if they are willing to take less or are they
willing to pay more.
Today's hearing will hopefully give the American public a
chance to hear an objective and honest assessment of the tough
choices facing Social Security. The testimony we will hear
allows us to take a step back from the political battles and
remember that Social Security is heading for insolvency. The
longer we want to address the issue the more difficult it
becomes.
With that, I am pleased to welcome our first presenter this
afternoon, Mr. Dan Crippen, who is Director of the
Congressional Budget Office here in Washington. Dan, thanks for
being with us once again. Thanks for the excellent publication
that I had an opportunity to review over the weekend. I think
it really is a very worthwhile document that really helps
everybody understand where we are and where we are headed and
offers options as to how we need to approach solving this
problem.
So with that, Dan, we welcome you to the committee.
STATEMENT OF DAN CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET
OFFICE, WASHINGTON, DC
Mr. Crippen. Thank you, Mr. Chairman. As you suggested in
your opening remarks, it may be only the folks in this room who
are thinking about Social Security these days but then, like
growing older, it is better than the alternative. At least
someone is still on the job.
I am especially grateful for this opportunity, Mr.
Chairman. As you mentioned, we are taking this opportunity to
release a piece of work we have had under way for some time and
indeed had planned to release back in September but, like many
other things, got postponed. That is something we are calling a
Social Security primer, which we hope, as you say, will be
helpful to you, the committee, press, other policymakers, as a
reference document and as a way to, we hope, set up some of the
questions.
The Chairman. Was this developed, Mr. Crippen, in
connection with the commission?
Mr. Crippen. No, it was not. We have been getting
questions, of course, for the last several years along the
lines of the kinds of things we put in here, so we decided it
might be useful for everyone to compile some answers to those
questions in a basic way.
We think--I think, actually, the document is terse without
being too dense. In 12 or 13 pages we review with pretty good
detail how the program works, in another 10 or 12 pages what
the demographics look like. So it does pretty quickly, I think,
pull together a number of things.
In my remarks today, Mr. Chairman, I want to just take a
very few minutes and do a couple of things: review the
demographics, as you suggested, and talk about how one might
analyze Social Security and its reforms.
There are at least three ways we believe that one could
look at the program and any reform proposals. The first, of
course, is actuarial analysis, which is the most common and
widely used so far, that tells us what the trust fund looks
like and what the expected income and outflows are. Second
would be from the statement of the Federal budget, another
approach you mentioned in your opening remarks--what role does
Social Security play, what portion of the budget and how does
that grow in the future? Third would be from the point of
economics and the program's effect on the macroeconomy and, in
turn, the economy's effect on the program.
Because not surprisingly we at CBO are budget analysts and
economists and not actuaries, we would encourage you to at
least consider the second two approaches, but I will get back
to those momentarily.
The basic dilemma that we are facing, and I think that is a
good word that you used--it is not necessarily a problem but it
is certainly a dilemma and something that needs to be
addressed--is driven by the demographics. We have a baby boom
generation, our generation, that is about to retire and between
2010 and 2020 will almost double the number of people in Social
Security and other retirement programs. At the same time the
workforce will barely grow, something less than 10 percent,
resulting in the current three workers per retiree to drop to
two.
What that means, of course, is that it is our children who
will be paying for our retirement, just as we are paying for
our parents now, except there will be fewer of them paying for
each of us. So while we may be somewhat uncertain of the
economics of the future, we are fairly certain of these
demographics. Everyone who will retire in this time period is
certainly born today and most of the people who will be working
in this time period have been born. We may change immigration
policy and some other things that would increase the workforce,
which could be salutary as far as the program is concerned, but
we do know the basic demographics that underlie this dilemma.
We also know what the program in its current form looks
like relative to the rest of the budget. The second slide I
brought along is just a basic point that Social Security is
almost half of the current noninterest budget, along with
Medicare and Medicaid, the other primary programs for retirees.
I would, Mr. Chairman, urge, of course, as you have, and
you know more about Medicare than almost anyone in this room,
we need to, of course, consider these programs while not
necessarily together in reform, we need to understand how they
interrelate and clearly the more one pays for health care
delivery, perhaps the less you can pay in Social Security and
vice versa, but they are clearly related programs and we need
to consider them in context. That is particularly true from the
macroeconomic point of view.
This picture, however, worsens dramatically over the time
period 2010 to 2030 where Social Security, Medicare and
Medicaid will make up at least two-thirds of the budget as we
know it now. What that means then in an economic sense and the
third way one would analyze these programs and the one I want
to dwell on a bit today is that these three programs will go
from consuming about 7 percent of GDP, our current economy, to
15 percent by these relatively conservative projections. They
are conservative for a number of reasons which I can get into
but the point is quite simple. We will more than double the
take out of the economy for our retirees while producing it
with fewer workers.
Relative to our current budget we are spending around 18 or
19 percent, perhaps as much as 20 percent of GDP on Federal
programs. If these three programs are taking 15 or 16 percent,
it obviously suggests there are going to be some very dramatic
changes in our fiscal policy. That means we will have to raise
taxes by 8, 9 percent of GDP, borrow the equivalent of 10
percent of GDP every year or cut other Federal spending.
The Chairman. Let me interrupt you. Is there a percentage
that would be an acceptable percentage? What is it running
right now? Eight percent, 7 percent?
Mr. Crippen. Seven, about 7 for all three programs.
The Chairman. Seven percent now and you are pointing out
that by the year 2030 if we keep the same program we will be
running at about 15 percent?
Mr. Crippen. Correct.
The Chairman. Can we compare it to what other countries
spend on health and retirement programs? Is there a magical
number that is a good number and anything more than that is a
bad number? What is the problem with 15 percent versus 7
percent?
Mr. Crippen. Well, it is not necessarily a problem. As I
said, you pointed it out as a dilemma. We could choose to
pursue this path but it is important that we recognize in doing
it that we are going to have to make up the difference
somewhere, the difference being what we are currently spending
on the rest of the Federal budget and Social Security, relative
to the economy. That means we need an increase in taxes or
borrowing or cut other spending, as I said, as much as 10
percent of GDP.
In today's terms, since we have over a $10 trillion
economy, what that means is you would have to raise a trillion
in taxes every year, you would have to borrow a trillion
dollars every year or cut other spending by a trillion dollars
or half of the current budget, or some combination obviously of
those.
So there is no magic number. We have been running a pretty
steady number on Social Security, a little over 4 percent of
GDP, for the last couple of decades. At the same time we have
had a workforce increase. So Social Security in and of itself
has not been growing relative to the economy that much.
Medicare has been more, as you know. But economists do not have
any magic number.
All we can do is suggest this means a lot of what our kids
are producing in the future will be paying for our benefits,
and that is really the point I want to make here today, Mr.
Chairman, is that from the point of view of macroeconomics, it
does not matter a great deal what the trust fund looks like,
what the actuarial analysis shows you. What matters the most to
economists and, in turn, to budget analysts is what impact a
program has relative to the size of the economy. That is what
this chart attempts to depict. Because no matter what we do, no
matter what the balance is in the trust fund, we are going to
be taking from our children some of their earnings and, in
turn, buying with those earnings clothes, cars, food in
competition with them. So we will be commanding a high percent
in these years of economic output that our kids are making and
it really does not matter what is in the trust fund.
Let me give you an example of one way that that might make
more sense, a more concrete example. Around the year 2016, as
you know, payroll taxes will no longer be enough to pay current
year benefits to retirees. Under the current law with the trust
fund, interest payments on the outstanding bonds in the trust
fund will be paid, which will be enough, that plus payroll
taxes, to cover the benefit payments but you have to think
about what happens. What we need to do at that point is
generate cash. This is not a paper transfer. Those checks that
we send to beneficiaries are going to be cashed and there will
not be enough payroll taxes taken in.
So how do we generate the cash? Well, the Social Security
Administration goes to the Treasury and says, pay me interest.
Treasury can only pay cash interest by raising taxes, borrowing
or cutting spending. That is the only way it can come up with
those dollars. So it does not matter what is in the fund; those
dollars have to be raised in those three ways.
Think for a minute if there were not a trust fund, if there
were no balances in it or it did not exist at all. Then in
order to make good on the payments when payroll taxes would not
cover expenditures, the Federal Government, the Treasury would
have the same three options--raising taxes, increasing debt or
cutting spending.
So from a budgetary and macroeconomic point of view, at
that point the trust fund, its balances, even its existence,
matters much less than how much the retirees and the elderly
are removing, taking, consuming out of the economy.
So our basic message today, Mr. Chairman, is that there are
many ways one can analyze Social Security but we would suggest
strongly that when you are looking at reform proposals one
should not simply ask the question, what is the effect on the
trust fund? You need to go beyond that and ask not only what is
the effect on the Federal budget but how does it relate to this
kind of portrayal of the dilemma?
With that, with this fraction, if you will, there are only
two moving parts. One is the Social Security expenditures, of
course, the numerator, and the other is the denominator, which
is the size of the economy. Those are the two things you
really, at the end of the day, have to work on to make this
future look better for us and our kids. There are really only
those two moving parts.
Let me close by referring to some remarks made by not only
a predecessor of mine but the founder of CBO, Dr. Alice Rivlin,
a couple of years ago while she was at the Federal Reserve
Board. She reiterated some of these points, which I think
deserve to be entered in the record.
Dr. Rivlin said, ``I believe, however, that focussing too
narrowly on the Social Security funding question in isolation
from the more fundamental economic challenge of an aging
population risks muddling the problem and perhaps picking a
wrong answer. In any given future year a larger proportion of
older people will be competing with the workforce and the rest
of the population for shares of GDP in that year. Whatever is
produced in the future will have to suffice for all the
claimants. Societies cannot consume more than they produce for
long; nor can consumer goods feasibly be stockpiled. The first
question,'' Dr. Rivlin says, ``how to move to a higher economic
growth path, is obviously the most important as well as the
most urgent. If we can find ways to make the future workforce
more productive, both they and future retirees will benefit.
Its main urgency to pursue economic growth is that some
solutions contribute to higher growth and some do not. It is
important to choose a pro-growth solution and choose it soon.''
One of the folks still obviously involved very much in this
debate and who is thinking about it today is former Senator
Moynihan. I have over the years written down a number of what I
call Moynihan's laws and the first law, roughly translated, is
if you do not ask the right question, you will not get the
right answer. What I am suggesting, Mr. Chairman, is we need to
ask a whole lot more than just what does the trust fund look
like in order to get an answer that is sustainable for us and
our kids.
With that, I will close. Thank you.
[The prepared statement of Mr. Crippen follows:]
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The Chairman. Well, Mr. Crippen, thank you for your
observations. Thank you for the publication which I thought was
a very helpful document, the primer on Social Security. I think
it would be good if all members would have a chance to review
this as we begin this discussion.
Let me talk a little bit about the commission. You
mentioned Patrick Moynihan's memorable and very classic
statements that he would make as a member of the Finance
Committee and one of them, like you said, is if you do not ask
the right question you are not going to get the right answer.
It would seem to me that what the president was trying to
do with the commission was to ask them a question and hopefully
get the answer and it seems to me that in a certain way what
they are going to give out tomorrow is not really an answer. In
theory, commissions serve a purpose of making difficult
political recommendations that Congress does not have the
political courage to do. Having served on a couple of
commissions, I know that was what we were supposed to do--come
up with a recommendation.
It seems like the Social Security Commission has come up
with three recommendations. They are sort of sounding like
Congress. You know, on one hand you can do this, on the other
hand you can do that, but if you have a third hand, you have a
third option. So they have given us three options. I was
actually hoping that they would bite the bullet and come up
with something that was nonpolitical and leave the politics of
what we do to the Congress, where we are supposed to make the
political decisions but have them make the recommendation as to
what is the best policy, disregarding the politics, and we
would handle that later on, which has always been, I thought,
the role of a commission.
I remember our CSIS Commission on Social Security with
Senator Judd Gregg and myself and Jim Kolbe and Charlie
Stenholm in the House and others made a recommendation on
Social Security and our Medicare Commission attempted to make a
single recommendation. A document was produced. Yet with the
Social Security Presidential Commission it seems like we have
three separate recommendations. Do you have any comment on
that? One of them actually is the one that, as you pointed out,
I think has no tax increases and no benefit cuts. I mean I hear
what you are saying and that does not seem to be very realistic
in solving the problem.
Can you solve the problem in Social Security without doing
any benefit cuts and without doing any tax cuts? I mean it
would seem to me if we could solve the problem of solvency that
way we would have done it a long time ago. That is easy. Is
that realistic, though?
Mr. Crippen. I suspect not, Mr. Chairman. We are, as you
know, not in a position to make policy recommendations. On the
other hand, we are around to try to help measure the effects of
legislation and reforms.
In an economic sense what needs to happen in order to
change the outlook that I have presented here today,
particularly with this last chart, what needs to happen is the
current generation, the baby boomers, the current workers, will
probably have to reduce consumption some, increase savings
therefore in order to grow the economy more.
If you want to think of it this way, maybe we should, as
boomers, if we want to fix this problem, pay twice--once for
our parents and once for ourselves. We are paying for our
parents and a little more than they require and we have the
surpluses in the Social Security system, at least. But if we
are going to pay a second time for ourselves then we may want
to save more now and we may want to take reduced benefits when
we retire. That would allow us to pay twice but over the term
of our entire lives, not just our working lives.
So there are options that would help considerably but it
does mean that this generation is probably going to consume
less, consume less now and consume less in retirement, in order
to change the outlook of this picture a great deal. Clearly, as
I said, we need to worry about the effects of not only Social
Security reform but everything else we do, be it Medicare or
immigration policy and other things, on how the economy grows.
Without that, this problem can become untenable. But clearly to
grow the economy we need to reduce consumption. It is the
classic stuff your parents told you--save now. Unless we do
that as a country, we will not be growing the economy nearly as
much as we could and make this a much easier situation for our
kids.
The Chairman. The general proposition that I have heard
many members repeat and I was wondering if you think it is
correct is that in order to fix Social Security you do not have
a lot of options. I mean you can either reduce the benefits or
increase the taxes or revenues to pay for those benefits. Is
that pretty much a correct statement or is that an incorrect
statement?
Mr. Crippen. Well, if you define the problem as being the
trust fund and the solvency of the trust fund, that is
certainly the limit of your options. You need to increase
revenue to the trust fund or cut outflow, period. I mean there
are not a lot of other options. One, however, in addition, that
we probably need to mention is that increasing the rate of
return on the trust fund is used as a way to improve that
outlook.
I would suggest, however, none of those are necessary or
sufficient. That is to say it is not the trust fund solvency or
balances that worry us; it is, however, the impact of those
expenditures and the economy. Therefore the operation of the
trust fund may be important. If it generates surpluses that are
saved and not spent in other areas, then indeed it might be
helping that national savings and growing the economy.
But just like the argument about rate of return, unless
national savings are actually increased somehow and the capital
stock is increased and the economy grows better, raising the
rate of return does not do any good. It does not change this
picture one iota. It makes the trust fund look better so
instead of 2038 it may look like 2055 or pick a year when it
grows insolvent but it does not change this picture.
We could legislate a higher rate of return. We now pay a
rate we make up based on Treasury rates. We could pay twice
that. All we have to do is change the law. The trust fund will
look a whole lot better but it would not have any impact on
this view of the world. So many of these reforms that look only
at solvency or look only at the trust fund itself, as I said,
may not help this picture and could hurt it, as Dr. Rivlin
said.
So we need to be careful. Clearly to fix the trust fund
problem there are not many options but we should not just fix
that problem. We need to do that in the context, I would
suggest, of the Federal budget and the effects on the economy.
The Chairman. The first option that the commission is going
to recommend, I take it, includes transferring general revenues
into the program. Can you comment on that as a vehicle to help
solve this problem? Is it workable, not workable? What do you
think?
Mr. Crippen. It depends on where those general funds come
from. President Clinton actually proposed doing some pretty
large transfers of general revenues into the Social Security
program. In the case of his proposal, the funds essentially
pass through the trust fund, leaving behind, of course, the
government bonds, some called IOUs, but the cash came out the
other side and was used for other government expenditures, in
the main.
So if general revenues are transferred through the trust
fund, it gets borrowed back to the government and those funds
get expended for other programs. All you have done in this
first instance is raise the trust fund balances without doing
anything to address this problem, if this is the way you want
to address it. You have not changed economic growth. You have
not changed the obligations to the elderly. And given those
tests, it does not do much.
Now if those general funds that are transferred into the
trust fund are coming from surpluses that would otherwise be
spent either by individuals or by the government, then you may
have a net positive effect on savings, but it really depends on
what you assume the source of those funds is as to whether it
can help or hurt. It will make the trust fund look better but
again the trust fund is less interesting, I would suggest, than
looking at these kinds of effects.
Does it affect how much Social Security is as a percent of
the budget? No. Does it affect economic growth? It does not.
Does it change the obligations to retirees? It does not do
that, either. So unless it actually adds to national savings
and helps us grow the capital stock, it is another one of
those, like rate of return, that makes the trust fund look
better but does not help the problem.
The Chairman. Could you maybe give me a comment on the
three recommendations or the examples that the commission is
putting out tomorrow? The first one is a voluntary option to
invest 2 percent of the payroll in a personal account, the
second one is a voluntary option to invest 4 percent of the
payroll in a personal account and the third example they give
is a voluntary option to invest an additional 1 percent of
payroll in a personal account with a 2.5 percent match from
payroll taxes.
Can you comment on those ideas? I take it they all are
versions of trying to create individual retirement accounts but
it is a question of whether the money to do that comes from the
general revenues or whether it comes as a carve-out from the
existing payroll taxes. Can you give me some discussions on the
pluses and minuses of that?
Mr. Crippen. Well, again the test that I would suggest that
you want to look at is what effect do these reforms have on the
obligations for the elderly in the future? What does our
benefit structure look like? Second, what does it do to the
economy? It depends critically upon where the funds come to
finance those individual accounts.
If, for example, we are taking a surplus, if there were a
surplus today, and we were, instead of having the Federal
Government pay down debt held by the public, that surplus was
used to fund individual accounts, that would have a net in the
first instance--it would be a net zero impact because we are
taking savings of the Federal Government and making it savings
of individuals. So net national savings would be the same.
The Chairman. But isn't the argument that the individual
savings would bring about a higher rate of return because it
may be in the markets or a combination of the markets, as
opposed to government investing it?
Mr. Crippen. That is part of the argument. As I said, there
are two real fallacies with that. The first is if you adjust
for the risk, what economists or market analysts call the risk-
adjusted rate of return, the bond market, which is what we are
essentially paying the funds now, and the equity market are
roughly the same. So you are getting paid more but it is
because you are taking more risk, so over time, the risk-
adjusted rates of return.
But more importantly, the rate of return to the trust
funds, again whether they are individually held or whether the
government holds them, are much less important. It makes the
trust fund look better but unless the economy is actually
growing to reflect those higher returns, it does not help. We
can, as I said, legislate higher rates of return. There is no
reason would could not say that these bonds now held by the
Social Security trust funds could be paid at the S&P 500 rate.
There is absolutely no reason legislatively, morally,
economically. Whatever you want to do, you can raise the rate
of return on these funds but that will not help the problem,
just as putting them in individual accounts and raising the
rate of return will not necessarily help the problem. It
depends on whether or not those monies are new and contributing
to national savings. If you are just taking them from one pot,
splitting them up and putting them in a million other pots, it
does not matter. You have had no effect.
Now the proponents certainly would argue that there may be
ancillary effects, and we cannot deny that. If people have
their individual accounts they may save more than they would
otherwise. It may make a lot more people aware of their
retirement, the lack of retirement funding. Those are all
possible. But just in the first instance, from a macroeconomic
point of view, that alone will not solve this dilemma. It may
make the trust fund look better. We can do that by fiat.
The Chairman. The argument has been that if you put more
money into the trust fund, I guess because of investing it in a
combination of markets, stocks and bonds or a combination, you
are putting more money in there. You seem to be telling me that
that does not really matter.
Mr. Crippen. It matters only if it is new savings. Let us
say, for example, that we have these individual accounts
financed by raising Treasury debt. We issue bonds in order to
raise the money to give to individuals and their accounts. We
have the capital markets here giving you cash in return for
bonds and we are giving individuals cash over here to buy
bonds, or equities. So all we have done is move the money
around but we have not increased the amount of money in the
capital markets or in investment in capital stock. It washes
because if you borrowed it and then gave it to individuals you
would have a zero impact roughly on the capital markets and
certainly no impact on economic growth.
The Chairman. Well, what do you think? Can you comment from
an economic standpoint on what we are going to be getting as a
Congress tomorrow? Do you think it offers some realistic
options or is it, as one editorial seemed to refer to it,
really a punt on a recommendation to the Congress? I, for one,
was kind of hoping we would get a recommendation and we could
say this is great or this is not so great or it is terrible but
we just got some things--I do not want to be critical. A lot of
these people were good friends of mine and believe me, I know
the difficult task of coming up with a single recommendation on
anything but I was kind of hoping that the reason we had a
commission was to come up with a single recommendation and yet
now we seem to be coming back with a list of options. We knew
the options. We know the choices. I was trying to get some kind
of recommendation.
Can you give me a comment on what we are going to get?
Mr. Crippen. You know this history better than I. You were
a participant and I have been an observer. But even when you
have a recommendation and not a list of them, such as you did
with CSIS or even with the Medicare Commission--you had a
majority for a recommendation--trying to get that adopted is an
uphill battle. When you have a range of options and a Chinese
menu, that has to be harder. It just has to be.
So I am afraid the task before you is perhaps improved some
by the work of the commission but not made a lot easier.
The Chairman. I guess the answer is obvious but since
September 11 and the fact that surpluses have pretty much
disappeared because of requirements that we are addressing
which are important, does that affect the urgency of addressing
Social Security reform?
Mr. Crippen. First let me say that we do not know yet what
the surplus picture looks like. We are in the midst of doing
that, as we normally do, to produce for late January. Clearly
with the economy the way it is and with more spending for
homeland security, the surpluses are going to be diminished,
even in the long run. In the short run they may be nonexistent.
Nonetheless, the economy will, we believe, in the long run
still perform relatively well over the next 10 years and
produce a fair amount of Federal revenue, maybe even to the
tune of having surpluses. But I think in either event it does
not reduce the urgency of fixing or addressing Social Security.
The sooner we do it, the more likely we are to change behavior
of both our generation and that of our kids in a way that will
grow the economy and maybe let us adjust. If our benefits are
to be reduced, we can adjust ahead of time before we retire for
that reduction; we might actually increase our own savings if
our future benefits look worse. So we may have a double
positive, if you will.
But the sooner we do that, not looking to affect anybody
who is currently on the rolls or close, the dilemma that we
describe here has nothing to do current retirees. Therefore
surpluses or not surpluses in the next year or two are not the
important thing; it is making some changes now that can make
this future look different and allow us all----
The Chairman. That is the important point. I think it is
very important that Congress continue to assure existing
retirees that what we are doing today is not going to affect
them. It is going to affect people like yourself and myself and
a lot of people in the audience who are maybe part of the baby
boom generation or generation X. That is what we are talking
about legislating, a system for that group of people, not for
the group that is there now. They are fine. They are going to
have enough to take care of their needs. My father is a little
over 80 years of age. That program is not going to be adversely
affecting him one way or the other. But for my generation and
my children's generation, unless we do something it is simply
going to have some very big problems.
Well, I appreciate it very much. Again thanks for staying
on the subject. Again the primer is a very good document and it
is very, very helpful. I look forward to continuing to work
with CBO on these problems and thank you for being with us.
Mr. Crippen. I want to report, Mr. Chairman, that this
morning when I talked to my father he was more worried about
whether the ice was thick enough to walk on to fish than he was
about Social Security.
The Chairman. That is probably very correct. That is a more
imminent problem.
Let me welcome up our second panel. Again you see that what
we are doing here is trying to get some nonpartisan
presentations on these issues. I am sure there will be plenty
of time for every interest group in Washington to come up and
say what they think about the commission's recommendation and
pick it apart or agree with it or what have you but in trying
to get the three presenters we have today, we are trying to
keep it as nonpartisan as we can.
I would like to welcome Barbara Bovbjerg, who is Director
of Education, Workforce and Income Security Issues at GAO, our
General Accounting Office, for making this presentation. Mr.
Geoffrey Kollman over at CRS will be available, I take it, to
answer maybe some questions we might have. He is a specialist
on social legislation, including Social Security.
So Ms. Bovbjerg, we welcome you back to the committee and
look forward to your comments.
STATEMENT OF BARBARA D. BOVBJERG, DIRECTOR, EDUCATION,
WORKFORCE, AND INCOME SECURITY ISSUES, U.S. GENERAL ACCOUNTING
OFFICE, WASHINGTON, DC
Ms. Bovbjerg. Thank you, Chairman Breaux. It is really a
pleasure to be here and I thank you for inviting me to discuss
the challenges of addressing Social Security reform.
I hope you do not feel that I am raising my voice at you
but I have been told I need to speak really loudly because
people in the back cannot hear.
Before I begin summarizing the substance of my statement I
wanted to take this opportunity to convey to you Dave Walker,
our Controller General's, personal commitment to assisting you
in this endeavor. He very much wanted to be here today and was
quite disappointed he could not be. As we speak he is at ground
zero in New York.
He asked me to express his strong interest in these issues
we are addressing today and to let you know that he and GAO
stand ready to support Congress and this committee in the
coming months in considering how best to restore financial
stability to Social Security.
But let me return to the business at hand. Over the past
few years a wide array of proposals have been put forth to
restore Social Security's long-term solvency and now a
commission appointed by the president is deliberating possible
reform recommendations. As the debate over possible action
begins anew, you asked me here to help clarify some of the key
issues Congress and the public will face in considering options
for Social Security reform. Accordingly, my testimony today
discusses the nature and timing of the problem, GAO's framework
for evaluating reform proposals, and findings from our recent
report on Social Security's role in securing income adequacy.
First let me address the nature and the urgency of the
problem. I will do this only quite briefly, as Dr. Crippen has
already discussed the fiscal and economic challenges Social
Security presents. As he observed, the anticipated growth in
Social Security, in combination with rapid growth in Medicare
and Medicaid, will dominate the Federal Government's fiscal
future and weaken the economy. Absent reform, the Nation will
ultimately have to choose between persistent, escalating
deficits and debt, significant tax increases, or dramatic
budget cuts.
I brought a picture with me that we have used many times
before to illustrate this budgetary challenge. We call this the
haircut graph because it illustrates the budgetary scalping the
government could experience if we do not take action soon to
rein in entitlement spending.
The graph shows the actual composition of Federal spending
in the year 2000 and what it could look like in 2030 and 2050.
In our illustration we assume that the 10-year surpluses CBO
projected in August are eliminated. Of course, we do not know
what the next projections will be but we can guess they will be
considerably less optimistic than they were prior to September
11.
But if we assume that they are eliminated and we make no
changes to Social Security, Medicare or Medicaid, by 2030 under
today's levels of taxation there will be virtually no room for
any other Federal spending priorities. Those, of course,
include national defense, education, law enforcement, among
others. By 2050 we would be paying interest out of current tax
receipts but little else.
Failure to take remedial action will place unsustainable
pressure on----
The Chairman. Let me interrupt you. This is a very
important statement. If we do not do anything--we are talking
if we do not do anything, we keep it just like it is on the
current path, by about 2030 there is not going to be any money
left for anything other than----
Ms. Bovbjerg. At current levels of taxation, yes.
The Chairman. If we have no tax increases for these
programs or no reductions in the benefits of these programs,
just these three programs will be accounting for how much of
our total Federal expenditures? 100 percent?
Ms. Bovbjerg. These programs would represent about 60
percent of total Federal spending at that point but more than
100 percent of revenue collections if we kept them at the same
rate.
Now let me hasten to say that this is a picture that I can
say with confidence absolutely will not happen. The President
and the Congress will not let this happen. This would be a
calamity and Dr. Crippen spoke in some detail about economic
effects--this is just the fiscal side of it--but this is an
illustration of what could happen under the current path, as
you put it.
The Chairman. You make the point that Congress will not let
this happen. I am just wondering when are we going to do
something to not let it happen? That is the question. It is
going to take a while to get it done and you cannot wait till
2030, obviously, to get it done.
Ms. Bovbjerg. That is right. That is right. The time for
action is still now and it is still urgent, September 11
notwithstanding.
The events of September 11 have indeed necessitated
shifting our policy focus to national security and
counterterrorism but they have not changed the need to focus on
Social Security and Medicare. Instead, they have made it
potentially harder by reducing the fiscal flexibility we were
anticipating as recently as last summer.
But the Social Security problem is about more than finance.
Let me turn now to GAO's framework for evaluation. To assist
Congress in its deliberations, we have developed criteria for
evaluating Social Security reform proposals. The criteria are
groups of questions to consider. The first measures the extent
to which a proposal restores financial solvency and whether
that approach presents the potential for being sustained. That
is, would the proposal also restore structural stability to
this program over the long term? Reforms that lead to
sustainable solvency would avoid the need to revisit Social
Security finances again and again.
Our second criterion considers benefits, the balance
between retirement income adequacy and individual equity. Let
me explain.
From the beginning, Social Security benefits addressed
retirement income adequacy, in part through the program's
progressive benefit structure, providing proportionately larger
benefits to lower earners. Individual equity refers to the
relationship between contributions made and benefits received
and the program's focus on replacement of preretirement
earnings seeks to address this element, which can also be
thought of as rate of return on individual contributions.
Balancing these seemingly conflicting objectives through the
political process has resulted in the design of the current
program and should be taken into account in any proposed
reforms.
Our third criterion focuses on administrability. Program
complexity can make implementation and administration more
difficult and make it harder to explain to the public. Some
degree of complexity arises in virtually all proposed reforms
to Social Security, even those representing only incremental
changes.
The greatest potential implementing and administrative
challenges are not surprisingly associated with proposals that
would create individual accounts. This is not to say that such
proposals should not be considered but rather that the
administrative challenges associated with them should be
understood and included in any assessment of these approaches.
Our criteria aim to balance financial and economic
considerations with benefit adequacy and equity issues and
administrative challenges and to facilitate evaluating
proposals as packages. Focussing on the pros and cons of
different individual pieces will not take interactive effects
into consideration and will just make reaching consensus all
the more difficult. But in the end, the overall assessment of a
proposal will depend upon what weights individual
decisionmakers assign to the different criteria. GAO can help
explain and analyze potential impacts, but Congress will
ultimately decide what value to place on different aspects of
Social Security reform.
Finally, let me turn to a discussion of our recent report
on one aspect of these criteria--income adequacy. This report,
which we prepared at the request of Congressman Shaw, chairman
of the House Social Security Subcommittee, considers how
adequacy may be measured and how varying approaches to solvency
could affect it. We observe in this report that no single
measure of adequacy presents a complete picture. Consequently,
we used a number of measures, including dependency rates,
poverty rates, and earnings replacement rates, to make
comparisons in relative adequacy over time. We compared
simulated, fully funded benefits for different cohorts and
different earnings histories to these different adequacy
measures.
In short, we found the progressive benefit reductions,
which reduced benefits by smaller proportions for lower
earners, would result in a smaller percentage of beneficiaries
receiving benefits below poverty thresholds than proportionate
benefit reductions, which reduce benefits across the board.
Raising the retirement age is an example of a proportionate
reduction because unless people change their retirement
behavior, it represents a reduction in monthly benefits that is
applied regardless of earnings level. Indexing the initial
benefit formula to prices rather than wages is another
proportionate reduction. Of course, when such measures are
accompanied by progressive changes to the program, these
effects can be offset. Further, as I said earlier, the extent
to which adequacy is preserved must be balanced against effects
on individual equity and rates of return.
In conclusion, changes to the Social Security program
should be made sooner rather than later. Earlier action yields
the highest fiscal dividends for the Federal budget and
provides a longer period for affected future beneficiaries to
adjust their retirement planning. The events of September 11
and the need to respond to them do not change this and waiting
only makes it harder.
Today I described GAO's criteria against which reform
proposals may be measured. These may not be the same criteria
every analyst would suggest and certainly the weights different
policymakers assign to them will vary, but we believe these
criteria provide at least a foundation for devising agreeable
and feasible solutions. In seeking such solutions, policymakers
will be deciding, whether explicitly or implicitly, what
purpose Social Security should serve and what benefit levels
are adequate. Is Social Security's role to minimize the need
for means-tested public assistance? Is it to minimize poverty?
Or should the program seek simply to replace preretirement
earnings? Should it seek to maintain a certain standard of
living for beneficiaries or does it seek to preserve purchasing
power? These are not easy questions but are the heart of
assessing proposed solutions to this financial, economic and
social challenge.
Time is running out. The boomers are nearing retirement age
and once they retire our flexibility to alter the program will
begin to decline just as the financial pressures begin to
intensify. And, as my boss is fond of saying, compared to
health reform, Social Security is easy lifting. It is time to
take action.
Mr. Chairman, that concludes my statement. I have prepared
a written statement to be submitted for the record if I may.
[The prepared statement of Ms. Bovbjerg follows:]
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The Chairman. Without objection we will make that part of
our record. Thank you very much.
Compared to Medicare, Social Security is easy to fix. I am
not sure that means that Social Security is easy to fix, just
that Medicare is very, very, very difficult to fix because of
the policy changes and reinventing a medical delivery system
for this whole country is indeed a real challenge and very,
very difficult.
Mr. Kollman, I take it you do not have a statement. Do you
have any comment you want to make on what she said or a follow-
up?
STATEMENT OF GEOFFREY KOLLMAN, SPECIALIST ON SOCIAL
LEGISLATION, CONGRESSIONAL RESEARCH SERVICE, WASHINGTON, DC
Mr. Kollman. As the third support agency I think I would
just like to reiterate some of the points that were made.
The central issue and it is the one that Barbara just ended
on is this question of urgency. Why should we do something now
rather than later? I think there are several important reasons.
One, the problem is not just going to be due to the
retirement of the baby boom. It has often been said that Social
Security's problem is you have this pig going through a python,
likening the baby boom to the pig. But that implies that once
the pig is digested the problem goes away. That is not true.
What you have is a permanent aging of society, due not only to
the size of the baby boom but the fact that people are living a
lot longer and the number of workers supporting them is going
to decline and it is a downward trend that continues. So it is
a demographic phenomenon, as the director of CBO said.
Second, and Barbara's chart to the right explicitly shows
this, this is not just a Social Security issue. It is a much
larger issue. It is a burden on government that goes way beyond
Social Security.
Third, the fact that the last four trustee's reports have
tended to show some improvement, this does not alter the long-
range picture. In fact, until very recently there was a whole
slew for 25 years of trustee's reports that showed a steadily
deteriorating situation and that continues to this day. And if
you look at the last four trustee's reports, even though they
showed temporary improvements in the short range, postponing
the date of insolvency by a few years, if you look at the last
year of the projection period that has remained about the same
magnitude of problem.
Fourth, there is the looming political problem--the
complication of having an aging society. If we wait till the
baby boom is near retirement or retired, especially if all 77
million of them are about to be on the rolls or on the rolls,
then you have the problem that they have a tremendous vested
interest in the status quo and it would be very difficult to
make change at that point.
Finally, as each year passes the timeframe in which the
constraints can be imposed gradually get smaller and the longer
we wait to enact them the more precipitous they have to be.
Moreover, we need predictability in our retirement system
so people working today can plan for their future accordingly.
It is their future that is at stake.
So I just wanted to reiterate what I know the chairman has
alluded to several times as to what the urgency is here.
The Chairman. Thank you very much. You referred to the
aging of society and I have referred to it as good news/bad
news. The good news is that people are living a lot longer. The
bad news is that people are living a lot longer. Of course we,
as a society, are very pleased that medical technology has
allowed people to live longer than we did in 1935 when this
program was instituted but at the same time, recognizing that
that fact also creates a huge problem of trying to have fewer
people pay for more and more people who live longer and longer
every year.
So that is the real challenge. So the good news/bad news is
sort of the same thing and our challenge is to figure out how
to achieve the change and keep the commitment that we have to
the American people.
I take it, Ms. Bovbjerg, you have seen or at least read
some of the information about the recommendations that I take
it the commission in their last meeting hopefully will be able
to present. It seems to me, as I said to Mr. Crippen, I was
sort of hoping that we would get a recommendation and it looks
like we get a range of options with maybe three different
recommendations.
That is sort of what Congress has been doing. I mean we
know what the options are. I was hoping that someone outside
the boundary of political decisions would make a recommendation
that would be rational and substantive and get the job done and
let us worry about the politics of it.
Can you describe, Ms. Bovbjerg, what you, or Mr. Kollman,
what you consider to be the different approaches of the three
recommendations that we hear we are getting ready to get?
Ms. Bovbjerg. I wish I could.
The Chairman. I find it to be very complicated,
particularly No. 3. I do not quite understand it yet.
Ms. Bovbjerg. I think what we have seen publicly has been
very short on details so I would be really reluctant to try to
guess exactly what the commission is thinking in each of the
approaches that they have. I think we will be eagerly awaiting
what they come out with and will be very interested in seeing
the details in the actuarial scoring. We would also look
forward to applying our criteria to the different options.
But as we have said before, I think it is really important
to look at these things as complete packages and while we see
some outlines perhaps, it is difficult to know what is really
in the options from what the Commission has released so far.
The Chairman. Can you comment on one of the
recommendations? One of their proposals to index the initial
benefit determination, I take it, to growth in prices rather
than to growth in wages. Can you comment on what is the
difference in that? How would that affect what they are talking
about doing if they started indexing the benefit determination
to growth in prices rather than the growth in wages?
Ms. Bovbjerg. Well, this is something that has been
discussed before, I believe most notably in Congressman
Kasich's proposal of the past, but it is important to
understand first how Social Security benefits are calculated to
really understand what they are talking about.
When Social Security determines a recipient's initial
benefit they first have to determine the average monthly
earnings over a 35-year period and in order to do that they
have to bring all the earnings from 35 years in the past, as
well as just the last couple of years, onto the same basis.
They do this by inflating for the growth in average wages.
So then once they determine the initial benefit, that
benefit is then, over the course of the person's retirement
life, inflated for cost of living, which goes up with prices.
So there are two different kinds of indexing that occur in
Social Security--one for the initial benefit calculation and
then the other to maintain purchasing power over the time that
the person is retired.
The Chairman. The CPI adjustment?
Ms. Bovbjerg. Yes.
Mr. Kollman. But the key factor is that wages are projected
to, as they have in the past, rise more rapidly than prices. So
by indexing not just the wages but the benefit formula to the
increase in wages you have a more rapid growth in the level
than you otherwise would if you indexed them to prices.
The Chairman. So if their recommendation was put into
effect making the initial determination based on prices, that
initial determination, I take it, would be lower than under the
current system?
Mr. Kollman. Under the projections, that is correct.
The Chairman. Can you give me an elaboration on the dates
that we hear all the time between what happens, I guess, in
year 2016 versus what happens to the current system in the year
2038?
Ms. Bovbjerg. I would be happy to do that. The year 2038,
the one that I think a lot of people focus on, is when the
trust fund will no longer have enough assets to pay current
benefits. That means that when they collect payroll tax
receipts there are not enough to pay out current levels of
benefits and they do not have any more special Treasuries to
cash in. That means that they have to reduce benefits until
they have enough cash in hand to pay them out.
But 2016 is the point when that first begins. SSA does not
have enough current revenue to pay current benefits and they
come back to the Treasury with their special Treasuries, their
trust fund assets, and begin to cash them in. This means that
the rest of government has to find the cash.
So as we have been saying for a while now, the really
important date to the Federal Government is 2016. That is when
the cash from the general fund is going to have to come forward
to support----
The Chairman. The reason I asked that question is because I
have heard some members say look, do not worry; you are talking
about 2038; it is a long time from now. But actually in 2016
when the benefits that we are paying out exceed the revenues
that we are taking in--I mean the only way we are going to
continue to pay those benefits is by taking money from some
other function of government.
Ms. Bovbjerg. Either that, raise taxes or borrow.
The Chairman. Or back to cutting the benefits at that time.
So really the real critical date we are looking at is really
not 2038 but really is 2016.
Ms. Bovbjerg. And something else to think about is that to
the extent that we begin to use the Social Security cash
surplus every year, the extent we begin to rely on it, by about
2008 when the first of the boomers start to retire, that amount
is going to start to shrink until it just runs out in 2016.
So if we are reliant on the Social Security surplus, as
with were for so many years in the past, we are going to begin
to have to react to its diminishing after about 2008.
Mr. Kollman. Just to reiterate that, when you say the
problem is in 2016 there is a shortfall in that year of about
$17 billion. There is the point----
The Chairman. Excuse me. The shortfall in 2016 would be $17
billion?
Mr. Kollman. Right, between the actual revenue generated to
the system versus its outgo. That in itself is not the issue.
That has happened before in Social Security. It happened a lot
in the late 1970's and early 1980's. The problem is it grows so
rapidly from that point that just 4 years later you are up to
$99 billion in shortfall in just 4 years.
Again I want to reemphasize it is a long-term problem that
just keeps accelerating downward.
The Chairman. I would like some discussion from both of you
perhaps, if you can, on the concept of individual retirement
accounts. If we go about designing a program that would
encourage workers to invest in individual retirement accounts I
am concerned about if we do that, how do we do it? What do we
have to look out for? What do we have to be cautious of? What
do we have to make sure we are protecting?
It seemed that Mr. Crippen's statement, and I am trying to
evaluate everything he said, was that it does not really matter
how much is in the trust fund. I am not sure I have understood
what he was really talking about. And I think that for a rather
simplistic approach for some of us, we are trying to maximize
the amount of money that we have and some of us feel that
investing the funds in general government bonds is giving us
such a low rate of return that we ought to do something to
increase that rate of return.
One of the things that we've been suggesting is exactly
what I have as a Federal employee and what everyone sitting up
at this dias has as a Federal employee and that is the ability
to invest a portion of our retirement benefits into a
combination under the Federal retirement plan and a savings
plan. We can invest it in government bonds or we can invest it
in a combination of bonds and stocks or we can invest it in
what we call a high-risk account, which is basically stocks. I
think people feel that that gives us the ability to have a
higher rate of return; therefore more money is being made
available to us when we reach retirement age.
Is there an economical or mathematical reason why that
concept cannot work for the Social Security program, as well?
Ms. Bovbjerg. As I understood Dr. Crippen's response, I
thought what he was suggesting was that the important thing is
to increase saving and that it is not always clear that simply
shifting from one source of saving to another is going to
achieve a net gain.
The Chairman. But if one sort of savings--i.e., an
investment in the market or a combination--gives you a better
rate of return, does that not make more money available for the
retiree than if he just invested in something that gives a 3
percent rate of return?
Ms. Bovbjerg. It could but the rate of return on Treasuries
does not have an effect on what Social Security retirees are
receiving as a rate of return. It has an effect on what the
trust fund is receiving as a rate of return. It has an effect
on trust fund finance but not specifically on individuals'
rates of return.
One of the things I was thinking about as I listened to you
and Dr. Crippen speaking was that in my statement--I did not
emphasize it in the oral statement--we talk a little bit about
labor force growth and how really the big factor here is the
slowdown and near leveling off of the size of the labor force.
And we do talk about strategies to help people work longer,
help increase the labor force, and that is such an important
aspect of all this.
Certainly if you have individual accounts it is something
you would want to think about at the same time, because the
longer people work, the longer their account contributions
buildup----
The Chairman. That is an argument for increasing the
eligibility age for retirement is it not? I mean if people know
they can retire at 65, why work till you are 75?
Ms. Bovbjerg. It is also an argument for considering how we
have structured all of our retirement programs, not just Social
Security but our pension policies. What are the incentives for
people? Do we encourage them to work longer or are the
incentives for them to quit earlier?
The Chairman. Let me see if I understand what I think you
just said. I, as a Federal employee, do I not earn more in my
retirement benefits than I get if I invest my contributions
into the high-risk account and it turns out to be a very good
investment than if I just put it all in government bonds? Is my
retirement benefit the same no matter what I invest it in?
Ms. Bovbjerg. No, that is not what I meant to say. I am
sorry. What I was suggesting----
The Chairman. In other words, do I not do better if I
invest in something that gives me a better rate of return than
if I invest in something that gives me the lowest rate of
return?
Ms. Bovbjerg. Yes, but you would have to consider the risk
associated with both investments.
The Chairman. I understand.
Mr. Kollman. And I think that is what Dr. Crippen was
suggesting is that when you talk about a large transfer of
investments into the equity funds, that would not factor in the
risk there is in investing in equities. I know he made the
statement that he postulated, I believe, if I remember
correctly, that you would end up with a rate of return, once it
is risk-adjusted, so that what you would get from the equities
really would not be that much different than you would get from
the government long bond rate.
I am not an economist. I am just trying to remember what he
said. I believe that is the argument he made.
The Chairman. I am just trying to understand what he said.
Some of the proposals say look, we will let you invest in
the market 2 percent or whatever and if you get a better rate
of return out there, that is what you are going to get, but if
the market goes to heck, we are always going to guarantee that
you get at least what you would get under the existing Social
Security program. What does that proposal do for the good of
the system? If you say we are going to let you invest and if
you do well, great, you get it, but if you do badly, you do not
get any less than you would get under your regular Social
Security retirement program, does that help the program? It
sounds like it is a no-lose deal. That is like going to Las
Vegas and giving me $100 and saying look, go bet it any way you
want and if you win you get to keep it all but if you lose, we
are still going to give you the $100 that you left with. I do
not know that that accomplishes very much if we do that.
Can you comment on that type of a concept that some have
proposed?
Ms. Bovbjerg. It assures people that they are going to get
a certain level of benefit but, at the same time, as I recall,
the plans of that nature require general fund transfers, as
well. Actually, I think most of the proposals that we have
looked at rely on general funds to some extent but this type of
plan would require a fairly significant infusion.
The Chairman. Do you all agree with the--I asked this of
Dr. Crippen--with the general statement that I have heard?
Look, Senator or Congressman, you do not have a lot of choices
here. You are either going to decrease the benefits that we
give or you are going to increase the revenues or taxes that
are necessary to pay for those benefits because of what is
about to happen out there with the larger number of people
living a lot longer, fewer people paying the revenues to pay
for the same amount of benefits for more and more people who
live longer and longer. Is that pretty much our options or
would you classify it in a different fashion than those being
the two choices?
Ms. Bovbjerg. When Dr. Crippen was talking about that, that
is when I started thinking about helping people work longer,
considering other ways to increase the labor force. I mean we
have taken some measures to help people who have been on
welfare join the labor force. We are trying to help people with
disabilities join the labor force. We have had different
debates about immigration policy.
My guess is that Dr. Crippen would say that that was a
benefit reduction because you are asking people to work longer
and then spend less time in retirement, but that struck me as
being of a little bit different nature than just strictly the
changes within the system.
The Chairman. Mr. Kollman, do you have a comment on that?
Mr. Kollman. I think that is another way of saying there is
no free lunch. Part of the dilemma, and I do not know if it
would be eased or not but this gets to the issues of benefit
adequacy is referring to, Social Security right now is designed
as a wage replacement system so that over time, no matter what
wages do, a retiree can count that he will get a certain
proportion of his preretirement earnings replaced by Social
Security.
For example, right now if someone always earned an average
wage, he gets about 42 percent of his preretirement earnings.
Then, under the indexing system we have in place, the notion is
that someone retiring 50 years in the future under the current
system who always earned an average wage would also get 42
percent of his wages replaced.
The Chairman. How much?
Mr. Kollman. Forty-two percent, the same percentage as
today.
Because wages rise faster than prices, this means that in
the future what we are projecting is that people will have a
higher standard of living. They can purchase a higher market
basket of goods than today's retirees. On the other hand, their
relative position to the rest of society is going to be about
the same.
One option that is sometimes mentioned as it relates to the
price indexing option is if you portray the role of Social
Security not as a wage replacement system but as a system that
provides a certain market basket of goods to meet a person's
needs, which would be very similar to saying you are going to
look at it in its relationship to preventing people from being
out of poverty, that is one of the reasons that supporters of
some form of price indexing say look, you can portray this as
we are not going to cut your benefits from what today's
retirees are able to purchase, we are going to give you that
same amount, but it will not be as much as promised under
current law.
Now the big criticism of such an approach is this means the
role of Social Security in providing retirement income would go
down a lot. Instead of replacing 42 percent it might be only
replacing 27 percent of a person's earnings. And if people want
to maintain their standard of living into retirement they would
have to come up with other resources to make up that
difference.
But it is sometimes put that way and you cannot have a free
lunch in terms of yes, we can pay you today's benefits without
raising taxes or cutting benefits, but perhaps we can present
this in such a way that it can be more palatable if you
understand that we are doing something that may not be as bad
in terms of your purchasing power as one would intuitively
think.
The Chairman. That suggestion to index the initial
determination based on prices, as opposed to growth in wages,
does that address some of what you are talking about?
Mr. Kollman. Yes. The example No. 2 that the commission is
considering is basically that approach.
The Chairman. But that is just an initial determination. I
guess the regular cost of livings after that are, in fact,
earmarked to prices, as opposed to----
Mr. Kollman. Yes, their market basket purchasing power
would remain the same in retirement.
The Chairman. So that would be a helpful suggestion in
terms of what you are trying to reach.
Mr. Kollman. It is judgmental to say whether it is helpful
or not. I am just trying to point out that aside from you have
to cut benefits and you have to raise taxes, all that may be
true but in terms of are you going to do something that can be
portrayed as throwing people into poverty, then that is not
true because the poverty levels rise with prices and you are
keeping them in the same relative position to that.
The Chairman. Give me a comment. Where are we headed on the
age adjustment now under current law for eligibility, when it
is all factored in? Do you know when it would be factored in?
Mr. Kollman. It is being factored in now. Anyone born after
1937 through 1943 has had their age raised, their full
retirement age raised to 66, and we are going to have then a
hiatus until it starts going up to 67 and that occurs for
people----
The Chairman. I am in the hiatus group.
Mr. Kollman. Right. Those born between 1955 and 1960. So
anyone born after 1959 will be at the full retirement age of
67.
The Chairman. So the highest under current law that we have
is an eligibility number of 67?
Mr. Kollman. Not eligibility. That is the so-called full
retirement age.
The Chairman. For full retirement.
Mr. Kollman. The age for eligibility remains at 62. It is
just that someone retiring in the future will have more of a
so-called actuarial reduction to their benefit compared to
current law.
The Chairman. An incentive to perhaps work longer, as we
talked about.
I guess from an actuarial standpoint or from your
standpoint do you all feel that eligibility should be tied to
life expectancy? What happens? Are we ever going to go higher
than 67? Is this an option? Is it appropriate to try to tie the
full eligibility age to life expectancy so you guarantee an
individual a certain amount of time in which they will be
guaranteed retirement benefits?
I mean what are we saying to people now? Life expectancy is
about 80, I guess, almost?
Mr. Kollman. Depending on your sex.
The Chairman. I understand. I am trying to combine the two
here.
Ms. Bovbjerg. It is about 85 for women, 82 for men.
The Chairman. I think about 80 is a ballpark figure just
for thinking. So if you become eligible at 65 you have 15 years
of retirement. I was just wondering, do you have any thoughts
about maintaining that 15 years of retirement that we have
today? Certainly when we passed this program the average life
expectancy was 65 so most people did not even become eligible
under the initial determination of this program. Now it is
about 15 years of retirement if you look at the life
expectancy.
Some would say that is a good number and we should continue
that range as life expectancy moves up to 81, 82, 90 years, you
know, should the eligibility age progress at the same rate? Do
you have any thoughts on that concept?
Ms. Bovbjerg. We did some work for you a couple of years
ago on this issue and certainly it makes a great difference to
the trust fund and it is not unreasonable to think about trying
to hold retirement, the length of retirement roughly constant,
but there will be people who cannot work longer.
The Chairman. I understand.
Ms. Bovbjerg. So one of the policy tasks is to think about
how you structure other sources of support for them.
The Chairman. That is something that we on the Aging
Committee have looked at because obviously there is some manual
work that cannot be done by an older person, even though life
expectancy has increased. So the question is do you take a
disability definition and expand it to cover people who are not
really disabled but cannot perform the tasks that they were
doing before? And I recognize that and want to be helpful in
making sure that happens.
Do you all think that this is an urgent issue that we
should address, the reform issue of Social Security, or is it
not urgent at all, since we can wait till 2038?
Ms. Bovbjerg. We at GAO absolutely think it is urgent and I
hope we have not left anyone in this room thinking that we
believe we can wait.
Mr. Kollman. That is why I tried to be somewhat forceful
when I opened my mouth the first time, saying that as the third
support agency, we definitely think that there should be a
sense of urgency here, or at least that it is probably better
to do something sooner rather than later.
The Chairman. I appreciate both of you. Your offices have
been very, very helpful and I thank you. What we tried to do
today was to get some comments on this overall issue in light
of the fact that the commission will have their final meeting
tomorrow and I understand that they will make three different
recommendations.
I think that it is clear that all three what I would call
objective arms of our government have said this afternoon that
it is really urgently needed for Congress to address the
problem of Social Security and do it in an urgent fashion
because the need is very urgent to move toward solving this
problem.
And I think that all three have also said to this committee
that there are obviously no easy answers, that there are no
pain-free answers. What we have described is going to take
political courage and it is not going to be easy to solve this
very difficult problem with just easy answers. If it had been
easy answers we would have done it a long time ago.
It seems to me when I look at the three propositions that
the commission is likely to put forward tomorrow, in my
opinion, I think the first option really is not a real option.
I think it is dead as far as this Senator is concerned because
I don't think it really solves the problem. I think that is
consistent with what I heard today from three branches of
government, that that option really does not solve the problem.
It may solve some political problems but it does not solve a
problem that we were called upon to find a solution to. It does
not fix it.
So I think we should, when we get those recommendations,
quickly look to options No. 2 and 3 to see if we cannot build
on those options toward reaching a solution to this very
important problem.
I thank both of you and also Mr. Crippen for being with us.
Senator Craig has asked that I include his statement in the
record.
[The prepared statement of Senator Craig and Senator Carper
follows:]
Prepared Statement of Senator Craig
Social Security turned 65 this year. This program has
provided years of retirement security to Americans. However,
Social Security has aged, and the world has changed. It is now
time to modernize the program to adapt it to our growing
Nation. We want to ensure that current retirees and those
nearing retirement age continue to receive their promised
benefits, the benefits they have earned. For future
generations, I want to ensure that our children and
grandchildren have a retirement program that reflects the
magnificent prosperity of this country--a program that provides
financial security, flexibility, opportunities for growth, and
most of all, a program that future generations can depend upon.
On May 3, of this year, President Bush established a Social
Security Commission to study the future of our national
retirement program. The President tasked this Commission with
the responsibility of developing strategies to strengthen the
program's foundation and ensure its financial viability. This
Commission is truly an impressive bipartisan group of experts.
I have had the great fortune to work with three commission
members who were outstanding colleagues while serving in
Congress. I commend the Commission for its hard work and look
forward to its final report.
Currently, Social Security, Medicare, and Medicaid taken
together, consume 43 percent of the federal budget and 7.3
percent of our total Gross Domestic Product (GDP). To put this
in perspective, consider that all personal income taxes
collected by the federal government add up to 9 percent of the
GDP. Looking ahead, the picture becomes truly alarming: If we
assume for a moment that if the federal government's spending
were to remain at its current share of GDP, by 2030, Social
Security, Medicare, and Medicaid would consume 90 percent of
the federal budget, crowding out virtually all other government
spending.
In 1940, when benefits were first paid, there were 42
workers per retiree. In 1960, there were five workers for every
retiree. Now there are slightly more than three. This downward
trend in the ratio of workers to retirees is alarming and
requires us to consider new options for stabilizing this
important retirement program.
Just 15 years from now, Social Security payments to
beneficiaries will begin to exceed incoming Social Security
payroll taxes--and by 2038, if nothing is done, the Social
Security trust fund will be depleted.
If we do not take serious action soon, we may ultimately
face a grim long-term future that could come down to choosing
among the following: 1) massive tax increases, 2) widespread
cuts in other federal programs, or 3) deep federal borrowing
and budget deficits. To give you a basic idea of how dire these
choices will be, consider that if, in the year 2025, the
federal government chose to cover Social Security's shortfalls
through cuts in other government spending, it would have to cut
the equivalent of the entire combined budgets of the Department
of Energy, the Department of Commerce, the EPA, NASA, veteran's
programs, Head Start, and WIC.
However, if we act soon, we have a much better chance of
keeping Social Security solvent and a sound investment for our
children and our grandchildren. We can choose to strengthen the
program, provide citizens with the freedom to choose to invest,
save, and provide Americans with ownership of their retirement
funds. Indeed, a useful and essential beginning point toward
long term modernization of Social Security is, I believe, the
creation of a personal retirement account option.
Back in 1999, I held a series of hearings across the great
state of Idaho. These Senior-to-Senior forums enabled us to
explore options for the Social Security program. At those
hearings we discussed ideas that Idahoans had, the very ideas
that the commission and the Nation are now talking about. Also,
as the ranking member of the Senate Special Committee on Aging,
I continue to be dedicated to making the modernization of
Social Security a priority. Serious Social Security reform
cannot occur overnight, but Congress must find the courage to
act--and act soon. A Band-Aid will no longer be enough.
We have the opportunity to make a difference in the lives
of our children and our grandchildren. We have that ability so
long as we are willing to make some important decisions soon.
We can sit back and do nothing and leave our children with a
grim future, or we can stand up, face the task at hand, and
modernize Social Security so future generations can truly count
on retirement security. A legacy worth leaving.
------
Prepared Statement of Senator Tom Carper
I want to thank you, Chairman Breaux, for calling this
hearing. It is such a truism that it is almost cliche to say,
but with the possible exception of the war against terrorism
there is truly no more important challenge that we face as a
country today than strengthening Social Security. I, like
everyone else in this room and across our country, want to
ensure that Social Security will be there, not just for my
mother's generation, not just for my generation, but for my
children's generation and for future generations to come.
Passage of the Social Security Act of 1935 was a landmark
event in our nation's history. Social Security has become not
only the largest, but one of the most significant and
successful programs enacted by the United States Congress.
Before the advent of Social Security, the vast majority of men
who lived past the age of 65 continued to work until they died
or until they became disabled. Large segments of the nation's
elderly population lived in poverty. Even today, slightly less
than half of our nation's seniors would be poor absent Social
Security.
As a result in part of the success of Social Security, we
are confronted with what I would describe as a pleasant
problem. We have to find a way to modernize Social Security to
cope with a world in which most people not only don't expect to
work until they die, but in which an increasing number can now
expect to live for a quarter century or more in retirement. As
the miracles of modern medicine continue to make it possible
for more Americans to live well into their eighties and
nineties, and in some cases beyond, and as the post-war baby
boom generation approaches retirement, the financial pressures
on the Social Security system will inevitably grow. The
question is how we will manage to meet the demands of an aging
population and do so in a way that is consistent with a
balanced budget.
I also want to take this opportunity to commend the
President for calling attention to this issue by appointing his
commission--a commission, I might add, with a very
distinguished panel of public and private leaders. I want to
note in particular two members of that commission--a favorite
son of Delaware, Sam Beard, and a good friend of mine from my
days in the House, Tim Penny. If the President wanted to ensure
that I would take the recommendations of his commission under
careful consideration, he did the right thing by bringing on
board Sam Beard and Tim Penny.
There are just two points that I would make here at the
outset about the work of the President's commission. First,
what the President's commission is proposing is a fundamental
change, not just in the design of the Social Security program
but also in its purpose. Since its inception, Social Security
has been a social insurance program designed with the purpose
of ensuring that all Americans enjoy basic income security in
retirement. The President's commission is proposing to change
Social Security to make it an individual investment program
with the purpose of promoting individual risk-taking, wealth-
accumulation, and estate-building.
Now there is a lot to be said, in general terms, for
promoting individual risk taking, wealth-accumulation, and
estate-building. They are the very engines that drive our
entrepreneurial economy and feed our collective prosperity. The
question posed by the recommendations of the President's
commission, however, is whether this is the appropriate purpose
for which we ought to use our Social Security system, even if
it means sacrificing to some extent the effectiveness of the
program if promoting its original, intended purpose. That is
one of the central questions we need to ask ourselves in the
course of this debate.
The second point I would make is that finding a way to meet
the demands of an aging population in a way that is consistent
with a balanced budget invariably will involve tough choices. I
think we need to be very clear with ourselves and with the
public that plans to replace today's Social Security with
individual private investment accounts do not magically relieve
us of this burden. If anything, for the foreseeable future
these plans will make the choices we face a great deal more
difficult. Under all three of the plans that the President's
commission has outlined, the large Social Security surpluses we
currently enjoy will be transformed in rather short order into
substantial Social Security deficits--as early as 2005 or 2006.
Whether we like it or not, the context in which we now
approach the question of Social Security reform has changed
dramatically in just a few short months. When then-Governor
Bush unveiled his plan during the presidential campaign to
replace in part today's Social Security with private
investments it was against a backdrop of budget surpluses that
extended for as far as the eye could see. Under these
circumstances, the idea of financing two separate pension
systems at one and the same time--the traditional one for older
workers and a new and, one might say, more sexy one for younger
workers was a luxury we could afford to consider.
Today, things are different. We face some exceedingly
difficult choices if we have any intention of getting back to a
balanced budget, let alone if we intend to get back in any
serious way to paying down the national debt. The President's
budget director announced last week that even with substantial
Social Security surpluses under the current system he now
expects the federal government as a whole to run deficits
throughout the rest of the President's current term in office.
Any Social Security reform plan that now, in the name of
restoring solvency to the system, would turn Social Security
surpluses into Social Security deficits as early as 2005 or
2006 will dig ourselves into a ditch that we will not easily
crawl out of. It might just ensure that the new string of
budget deficits announced last week will ultimately run just as
long as the old string of budget deficits--not for three years
but for thirty years.
I'm glad we are focusing today on the work of the
commission and the fiscal challenge we face in seeking a way to
finance Social Security in the years to come that will be
consistent with a balanced budget. I hope this hearing will be
just what the Chairman intends it to be; a chance for some
``straight shooting on Social Security and the trade-offs of
reform.''
The Chairman. The committee will stand adjourned.
[Whereupon, at 3:35 p.m., the committee was adjourned.]