[Senate Hearing 113-864]
[From the U.S. Government Publishing Office]
S. Hrg. 113-864
STATE OF THE AMERICAN SENIOR: THE
CHANGING RETIREMENT LANDSCAPE FOR BABY BOOMERS
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HEARING
BEFORE THE
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC
__________
SEPTEMBER 25, 2013
__________
Serial No. 113-10
Printed for the use of the Special Committee on Aging
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SPECIAL COMMITTEE ON AGING
BILL NELSON, Florida, Chairman
RON WYDEN, Oregon SUSAN M. COLLINS, Maine
ROBERT P. CASEY JR, Pennsylvania BOB CORKER, Tennessee
CLAIRE McCASKILL, Missouri ORRIN HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island MARK KIRK, Illinois
KIRSTEN E. GILLIBRAND, New York DEAN HELLER, Nevada
JOE MANCHIN III, West Virginia JEFF FLAKE, Arizona
RICHARD BLUMENTHAL, Connecticut KELLY AYOTTE, New Hampshire
TAMMY BALDWIN, Wisconsin TIM SCOTT, South Carolina
JOE DONNELLY Indiana TED CRUZ, Texas
ELIZABETH WARREN, Massachusetts
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Kim Lipsky, Majority Staff Director
Priscilla Hanley, Minority Staff Director
CONTENTS
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Page
Opening Statement of Chairman Bill Nelson........................ 1
Statement of Ranking Member Susan M. Collins..................... 2
PANEL OF WITNESSES
Joanne Jacobsen, American Senior................................. 4
Olivia S. Mitchell, Ph.D., International Foundation of Employee
Benefit Plans Professor, The Wharton School, University of
Pennsylvania................................................... 6
Paula A. Calimafde, Chair, Small Business Council of America..... 8
Richard W. Johnson, Ph.D., Senior Fellow and Director, Program on
Retirement Policy, The Urban Institute......................... 11
APPENDIX
Prepared Witness Statements
Joanne Jacobsen, American Senior................................. 34
Olivia S. Mitchell, Ph.D., International Foundation of Employee
Benefit Plans Professor, The Wharton School, University of
Pennsylvania................................................... 37
Paula A. Calimafde, Chair, Small Business Council of America..... 44
Richard W. Johnson, Ph.D., Senior Fellow and Director, Program on
Retirement Policy, The Urban Institute......................... 54
Additional Statements for the Record
William K. Zinke, President, Center for Productive Longevity..... 72
STATE OF THE AMERICAN SENIOR: THE
CHANGING RETIREMENT LANDSCAPE FOR BABY BOOMERS
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WEDNESDAY, SEPTEMBER 25, 2013
U.S. Senate,
Special Committee on Aging,
Washington, DC.
The Committee met, pursuant to notice, at 2:15 p.m., in
Room 562, Dirksen Senate Office Building, Hon. Bill Nelson,
Chairman of the Committee, presiding.
Present: Senators Nelson, Manchin, Donnelly, Warren,
Collins and Scott.
OPENING STATEMENT OF SENATOR BILL NELSON, CHAIRMAN
The Chairman. Good afternoon. We welcome our witnesses. We
want to thank you for being here as we discuss the retirement
security of senior citizens, particularly Baby Boomers.
The American senior is in some difficulty of financial
trouble. Changes in the retirement system, higher health care
costs and this recent recession have all combined to put Baby
Boomers on a shakier financial footing than their parents and
their grandparents.
The American Dream--if you work hard, play by the rules,
you can be rewarded with a comfortable retirement. For some of
our seniors, that is fading away.
People today are not only retiring with less money coming,
but more money is going out to pay off expenses like debt or
medical bills, and that does not even factor in the financial
challenges faced by seniors with long-term health care needs.
So, here in the Congress, in the midst that we are now, as
we speak, going through a harangue on the floor about whether
or not we are going to pay our bills, whether or not we are
going to have a continuation of appropriations next Tuesday--
well, it is important to think about all of that impact on the
people who are already living with too little to no disposable
income.
More than three in five just in my State of Florida, on
Social Security, get at least half of their income from those
retirement benefits.
Over 3.5 million Floridians--1 in 5 residents--rely on
Medicare.
And what about the people in our State who could get
Medicaid if the State would expand its program for 1.2 million
people? Under the Affordable Care Act, if the State would
expand its eligibility, that would cover health care for 1.2
million Floridians that otherwise are between the eligibility
levels in the State Medicaid and 138 percent of poverty.
So folks between the ages of 50 and 64 are particularly
going to be affected, if they do not expand Medicaid, until
they get to the age of 65 for Medicare.
Now we have had all kinds of stories from my State about
how shaky finances are in retirement.
Michael Vita of Miami works for a financial planner. So all
of his papers and investments are in order, but even he is only
bringing in $50 more per month than he has to spend. So any
real expense that comes his way could have a real impact on his
financial well being.
Jim Marzano of Tampa says he is nowhere near where he was a
decade ago before the recession. He has been out of work a
total of three years. He kept being told he was overqualified
for jobs. Now both he and his wife are working, and between the
2 of them, they are making what he made by himself 11 years
ago. So he, too, will be working for a long time.
And so what can be done to stem this tide?
What can we do to make sure our seniors have enough money
to last them for retirement?
And that is what we are here convening today in the Aging
Committee.
This is a crisis that is not only in the making, it is
made, and I hope our witnesses today will shed some light on
this.
I want to turn to our Ranking Member, Senator Collins, for
her comments.
OPENING STATEMENT OF SENATOR SUSAN M. COLLINS
Senator Collins. Thank you very much, Mr. Chairman.
I also want to thank and welcome our new colleague to the
Senate, Senator Scott, for coming today.
The Chairman. Welcome.
Senator Scott. Thank you.
Senator Collins. I know he is very eager to play an active
role on this Committee, and it is great to have him, as well as
Senator Warren, join us as we explore this very important
topic.
On January 1, 2011, the first members of America's Baby
Boom Generation celebrated their 65th birthday. Since that day,
more than 10 million Americans have reached that milestone, and
10,000 more will be added to that number every day for the next
17 years.
After four decades in the workforce, these Americans should
be confident that they will have the resources to enjoy their
retirement years without fearing that they will run out of
money and fall into poverty. Yet, far too many American seniors
struggle to get by and have real reason to fear that they will
outlive their savings.
Nationally, 1 in 4 retired Americans has no source of
income beyond Social Security. In my State, Maine, the number
is 1 in 3. And 4 in 10 rely on that vital program for 90
percent of their retirement income.
Bear in mind that Social Security provides an average
benefit of just a little over $1,200 per month--less than
$15,000 per year. It is hard to imagine stretching those
dollars far enough to pay the bills. Certainly, a comfortable
retirement appears to be out of the question.
The importance of Social Security to low-income retirees
cannot be overstated. Social Security benefits represent 85
percent of the income of low-income retirees. By contrast,
retirees in the top income quarter receive just 17 percent of
their income from Social Security.
According to a survey published last year, more than half
of all Americans are worried they will not be able to maintain
their standard of living in retirement, up sharply from 34
percent 2 decades ago, and they are right to be concerned.
Projections published in the year 2010 by the Employee Benefit
Research Institute, known as EBRI, showed that nearly half of
the early Boomers, those between ages 56 and 62, are at risk of
not having enough money to pay for basic costs in retirement,
including uninsured health care costs.
EBRI found that the rate of inadequate retirement income
has risen across all age groups and income levels since its
previous study in 2003. Early Boomers will need to save an
additional 3 percent of compensation each year to cut in half
their chances of running out of money in retirement just to
make up for the losses they sustained in the 2008-2009
financial crisis.
To a great extent, the decline in retirement security is
traceable to the severity of that crisis, which wiped out
nearly one-quarter of the accumulated wealth of all U.S.
households. Seniors were particularly hard hit. While the weak
financial recovery has restored some of their losses, many
retirees have been forced to accept a lower standard of living
that may well be permanent.
Other factors that have weakened the retirement security of
today's retirees are rising health care costs, the need for
long-term care and the fact that Americans are living longer.
The shift from employer-based defined-benefit plans to
defined contribution pension plans, like 401(k)s, has also
played a role. Employees of smaller businesses are much less
likely to participate in employer-based retirement plans.
According to a recent GAO study, more than half of the 42
million Americans who work for businesses with fewer than 100
workers lack access to a work-based plan to save for
retirement.
Proposals to make it easier for small businesses to provide
retirement plans for their workers could make a significant
difference in financial security for many Americans as long as
they do not impose costly new mandates that discourage smaller
companies from hiring employees in the first place.
Again, Mr. Chairman, thank you for calling this important
hearing. I look forward to hearing from our witnesses.
The Chairman. And, after we hear from our witnesses, I am
going to turn over to our Committee members' questions, and
then I will do a clean-up of remaining questions of you all.
We are delighted to have you all today. Your written
testimony will be entered into the record. I would ask you to
keep your comments to about five minutes so we can get into the
questions.
And we are going to have:
Ms. Joanne Jacobsen. She is a senior. She is experiencing
some of these difficulties that we have talked about.
Dr. Olivia Mitchell, International Foundation of Employee
Benefit Plans Professor at The Wharton School.
Paula Calimafde--close. Give it to me.
Ms. Calimafde. Calimafde.
The Chairman. Calimafde.
Ms. Calimafde. You are in good company, Senator.
The Chairman. And she is Chair of the Small Business
Council of America.
And Richard Johnson--Dr. Richard Johnson--Senior Fellow and
Director, Program on Retirement Policy at The Urban Institute.
So we welcome you all.
Ms. Jacobsen, we will start with you.
STATEMENT OF JOANNE JACOBSEN, AMERICAN SENIOR
Ms. Jacobsen. Thank you, sir.
Chairman Nelson, Senators Collins, Scott, Ms. Warren, my
name is Joanne Femino Jacobsen. I am 63 years old. I was born,
grew up and lived in Massachusetts until I was 56, and I now
live in Venice, Florida, whose average age, by the way, is
67.6. So I am speaking for the other 24,000 people that live
there.
I have two sons who still live in New England--one in
Massachusetts and one in New Hampshire.
I have saved money. I supported my sons. I planned for
retirement. Yet, when I reached what should have been my
retirement age, the promise that I would receive health and
benefits for the rest of my life was broken and so were my
hopes of retiring comfortably in Florida.
Like many Baby Boomers battered by the recession, I am
still in the workforce and will probably remain on the job for
the foreseeable future. I have worked in some form since I was
15 years old. Although I dropped out of college at 20 because
my father got sick, I had a good job at the phone company, as
we used to call it, then AT&T.
I got married, got divorced, raised two sons with no
support. I worked for the phone company for 18 years, got my
bachelor's degree at night, which enabled me to get a promotion
into management. Thus, I was able to send my sons to college
and also returned to college and got my master's Degree at 50.
In January of 2002, I was laid off at age 52, 9 months
short of full retirement of 30 years. It was a time when
thousands of management employees were being laid off in
downsizing measures in many industries.
During my time at the phone company, I did all the things I
was supposed to do. Even though I was enrolled in the company's
defined benefit pension plan, I also participated in the
company savings plan. I even bought a few stocks.
I participated in financial planning offered by the
company, and I kept track of my promised and retirement
earnings benefits every year. All my booklets I have saved all
these years.
I began planning my retirement in my 30s. My goal was to
retire to Florida in my 50s. And I am results-oriented type of
person.
All of my financial and retirement planning was centered on
my employer's promised benefits and pension and retirement
health care benefits. All that was factored into my budget for
retirement.
After being laid off, I spent the next few years in three
different jobs before fulfilling one of my retirement dreams,
which was moving to Florida. Because I was concerned about what
would happen to my pension payments in retirement, given all
the turbulence of the company and changing of ownership, I took
a lump sum payout and rolled it over into an IRA.
I was not in any position to stop working, with children in
college. However, I took a series of jobs that were all,
unfortunately, adversely impacted by the recession. One company
went out of business. One government job--Sarasota County--was
eliminated. Even finding a job was tough because I suspect I
was a victim of age discrimination.
But still, at the age of 62, I felt confident enough about
my financial status to convert my IRAs into annuities and
enroll in Social Security benefits.
Six weeks after I enrolled in Social Security, out of the
blue and one day before the Affordable Care Act was ratified, I
received a letter from my company that took over the pension
plan, stating that they would no longer provide health care
benefits and would even discontinue my life insurance. Try
buying life insurance after you are 60 years old.
For those people 65 and older, the recission of these
benefits took place almost immediately, within 30 days.
For those under 65, like me, health care premiums increased
immediately. My health care premium doubled. All of the
company's subsidies for health care will stop at the end of
this year when the Affordable Care Act takes effect.
I have shopped around for health care plans. They all will
be very expensive, especially if I want long-term care at my
age. So I am back at work as a realtor to pay for health care,
and my annuities and my Social Security barely cover my basic
costs of mortgage, taxes, ever escalating insurance, car
payments, utilities, daily living, business expenses.
But then I cannot make too much money, drawing Social
Security benefits, because they will be taken away because I
have not hit the full retirement age of 66. Although I visited
my Social Security office four times in the last year, I did
not learn until coming here that the money would not be
withheld forever, that I will get an enhanced benefit at age
66.
Regardless, that does not help me now because living on a
limited budget. The last year or so, I have had to charge
doctor visits, dentist visits, along with unanticipated
expenses to my credit cards. Until now, my debt has always been
manageable, and my credit rating near 800. Now it has swollen
to five figures, and my credit rating has been diminished. I
even lost an opportunity to refinance my house because my
credit score had dropped.
So there are no vacations or cruises or luxury items for
me. There will be no thoughts of ever retiring, and I will
still be working into the unforeseeable future or until my
health holds out.
But what we are seeing here is we are witnessing the demise
of the pension system in America as major corporations divest
themselves of their fiduciary responsibilities to long-tenured
employees and retirees. These corporations have ignored their
obligation to fulfill pension benefits stated--stated in
writing--as part of the employee and retirement compensation
package, making it an option, not an obligation.
What we need here is relief. This is truly a life or death
matter. People will die for the lack of affordable and quality
health care.
So I thank you today for inviting me to share my story, and
I, ultimately, welcome your questions. Thank you.
The Chairman. Thank you, Ms. Jacobsen.
Dr. Mitchell.
STATEMENT OF OLIVIA S. MITCHELL, PH.D., INTERNATIONAL
FOUNDATION OF EMPLOYEE BENEFIT PLANS, PROFESSOR, THE WHARTON
SCHOOL, UNIVERSITY OF PENNSYLVANIA
Ms. Mitchell. Good afternoon, Senators, and thank you for
inviting me to discuss the changing face of retirement security
in America.
My name is Olivia Mitchell, and I am a professor at The
Wharton School and Director of the Pension Research Council. As
a researcher and as a Baby Boomer, I commend you for bringing
up this important issue.
I believe, like many here, that this is a very challenging
time to be reaching retirement age.
Thirty years ago, my parents retired. At that time, they
had a secure lifetime pension and a generous retiree medical
plan; interest rates were high enough to secure them a steady
income without spending down their nest eggs too quickly. They
also had inflation-protected lifetime benefits from Social
Security and Medicare, and they held no debt. Moreover, they
had four children they had sent to college, who were always
ready to help them out.
By contrast, we Boomers face a very different future. We
worry that Social Security and Medicare, as well as the
disability insurance system, are fragile. Few of us have
retiree medical coverage or traditional defined-benefit
pensions. Some of us with defined-contribution plans have not
put enough in, and what we have put in we have seen decline,
nor are we converting our assets into lifetime income so that
we cannot run out in old age. Interest rates are so low that
holding TIPS is a losing proposition. And, with longer life
spans in the offing, we very much need protection for long-term
care costs, but the products simply are not available or
unaffordable.
And the topic of my discussion today is debt. Many more
Boomers are in debt than ever before.
In a recent report, I compared three cohorts of people, age
56 to 61, in a health and retirement study. This is a study
where you can follow cohorts over their lifetimes. We focused
on people age 56 to 61 in 1992, in 2002 and in 2008.
For each group, right on the threshold of retirement, we
measured total debt as well as the ratio of debt to assets.
Additionally, we focused on patterns of financial fragility,
using both the HRS and the FINRA National Financial Capability
Study, known as NFCS. We came to two major conclusions about
older Americans' debt levels.
First, Americans today are much more likely to arrive at
retirement with debt than in the past. For the earlier group,
back in the early 1990s, about 64 percent held debt. Over 70
percent of the Boomers now do so.
Moreover, not only do more people hold debt, they hold more
debt; that is, median debt more than quadrupled between 1992 to
2008. And the top quarter of the distribution owing the most
owed $50,000 back in the early 90s. They now owe over $100,000.
This is important because Boomers retiring in the next
several years are much more likely to carry this debt into
retirement compared to previous cohorts, and since debt
payments typically rise faster than interest rates that
retirees can earn on their investments, people will likely be
more vulnerable during retirement.
Now a key reason we found that Boomers are facing
retirement with so much more debt is they spent more on housing
than did previous generations. As a result, Boomers are much
more likely to have very expensive primary residences.
Of course, some of those declined somewhat in value over
the last few years, and their mortgages values have grown
faster than the values of their homes. Median home loans
relative to assets rose from 6 percent back in the early 90s to
over 25 percent now. So Boomers will need to continue servicing
their home loans into retirement, and they are going to
continue being much more leveraged than groups in the past.
We drilled down further to look more closely at debt, and
we found that in addition to mortgage debt Boomers have had
expensive financial habits. They have not paid off their credit
cards in full. They have used their credit cards for cash
advances. They are charged fees for late payments or exceeding
their credit card bills.
Another piece of the story is medical bills are also a
source of financial problems. This has been mentioned by almost
a quarter of the Baby Boomers.
Even more striking was the fact that only about a third
said that they thought they could not come up--sorry let me say
that again. Only about a third said that they were likely to be
able to come up with $2,000 in the next month if faced with an
unexpected bill. And this is not a huge bill. This might be a
car repair bill or a moderate-size home bill.
So, in the wake of the financial crisis and the Great
Recession, we now know that more can be done to protect
Americans from these problems. We know, in particular, that
there is a strong positive link between financial literacy,
planning, saving for retirement and assets into retirement.
Those who are not financially savvy are much more likely to
have debt and have lower savings.
Now protective legislation can be useful when people lack
the opportunity to make repeated purchases such as, for
example, with annuities, where probably you buy them once. It
can also be helpful to better inform Americans when they face
potentially expensive decisions that they do not really
understand, such as buying a home, taking out a mortgage,
cashing out their 401(k) plans or taking out credit card loans.
I also believe Boomers could do better with more access to
financial advice, which could generate potentially important
rewards in the form of lower debt for those nearing retirement.
They also need more information on the benefits of delaying
claiming their Social Security benefit. In fact, a number of
Baby Boomers have already reached this conclusion on their own.
For example, delaying claiming benefits from 62 to 70, not that
that is what everyone should do, but that in itself will mean
an additional 76 percent more in monthly payments that can do a
lot to help the income streams in retirement.
Let me stop there and thank you for your attention. I am
happy to answer your questions.
The Chairman. Thank you, Dr. Mitchell.
Ms. Calimafde.
STATEMENT OF PAULA A. CALIMAFDE, CHAIR, SMALL BUSINESS COUNCIL
OF AMERICA
Ms. Calimafde. Still Calimafde.
The Small----
The Chairman. Calim----
Ms. Calimafde. Calimafde.
The Chairman. Calimafde.
Ms. Calimafde. Quite honestly, I was the kid at school who
all the teachers knew me by my first name, like the first day
of school. They did not want to deal with my last name. So,
just you can call me Paula.
So the Small Business Council of America and the Small
Business Legislative Council appreciate the opportunity today
to be submitting this testimony to you.
The SBCA is a national nonprofit organization which
represents the interests of privately held and family-owned
business in the Federal tax, health care and employee benefit
matters. Through our members, we represent well over 20,000
successful small businesses in the retail, manufacturing and
service industries.
Virtually all of our members provide health insurance and
retirement plan benefits for their employees. That is a
somewhat unusual statistic for small businesses, but that is
the SBCA's statistic.
The SBLC is a 35-year-old permanent, independent coalition
of 50 trade and professional associations that share a common
commitment to the future of small business. And, again, SBLC
members represent areas as diverse as manufacturing, retailing,
distribution, professional and technical services,
construction, transportation and agriculture.
And the way we decide our policy is it is developed by a
consensus of all those different trade associations hammering
out what they think will work in the small business area.
I am the Chair of the Small Business Council of America. I
am a member of the board of directors and a past Chair of the
SBLC. I am also a practicing tax attorney, and I practice in
the area of retirement plans and employee benefits.
And I am here today to present our views as to how
important retirement plans are to America's retirement
security, also to discuss how small business retirement plan
coverage can be increased, and finally, I wanted to discuss
ways to incentivize employees to increase their savings inside
the retirement plan.
We have some statistics that are pretty startling.
One of these statistics is--this was done by EBRI--that
individuals of all economic levels are more likely to save
inside a retirement plan than outside a retirement plan. And
the actual statistic is workers are 14 times more likely to
save in a retirement plan offered by their employer than to
save through an IRA--14 times more likely.
For those of us who work with small businesses--of course,
now this statistic applies across the board, so this goes to
mid-size and larger businesses as well--the magic is payroll
deduction.
So you have your paycheck. The contribution you are making
to the plan is automatically taken out of that paycheck. There
is nothing the employee is doing. It is all on automatic pilot.
And not only did you not have to do anything to get the money
into the retirement plan, but it is not in your pocket. So it
is much harder to think of spending it because it is not there.
I think we all have walked down the street with a dollar in
our pocket and without a dollar in our pocket, and we know what
happens. When you do not have it in your pocket, you do not
spend it.
So the retirement security of our Nation is intended to
rest primarily upon three sources, and very often you may have
heard this referred to as the three-legged stool. The first is
Social Security. The second is the voluntary private retirement
plan system. And the third is individual savings.
Today--well, we know Social Security is a defined-benefit
system. It is based on an annuity type of framework. There is
not that much choice on the part of the individuals with Social
Security. You can pick a few different start dates, and that is
about it. You cannot outlive your payments coming from Social
Security.
The qualified voluntary private retirement system today is
primarily based on a defined-contribution system, and methods
of payment out of these plans can include annuities,
installments--usually, that is coming from an IRA--lump sums or
a combination of one or more of those different methods of
payment.
The voluntary private retirement system is heavily
regulated by Department of Labor and IRS. But even though it is
heavily regulated, there is a lot of flexibility in the system
so that small businesses, and mid-size and large businesses,
are able to create retirement plans that fit their particular
business and their particular employees the best.
Of course, individual savings is totally open-ended, and
initially, it was thought that this would be done outside a
retirement plan because it really was not until the 401(k) plan
that it became clear that this was going to be a major vehicle
for Americans to save.
The Social Security system, I think we all know, is
probably in pretty good shape. I imagine with some--I do not
believe great--amounts of shoring it would be made successful,
but I can understand it would be painfully political to shore
it up.
The private retirement system is in fairly good shape in
large part due to a series of laws that were passed by Congress
in the last decades that recognized that the system had become
too complex and that there was not enough in the system for
small business owners to join the system, and the result of
that is those laws reversed it. So the cost-benefit analysis
for small business owners became so that an owner would say it
makes sense for my company to sponsor a retirement plan because
the benefits to the owners outweighed the costs and burdens
that were inherent in that system.
Let's just talk about payroll deduction quickly because we
know it is an easy and painless way to save. We know it is done
automatically by the employer, and we know it is much harder to
spend money you do not have. And the third thing about it is in
the 401(k) area, also the 403(b) plan area, employees do not
have easy access to the money.
So not only is it taken away automatically; it is sort of
locked inside. You can get to it by loans and hardship, but
neither of those are easy ways to get your money. So the money
keeps growing, tax-free.
I hope by now you are understanding that part of what I am
getting to is encouraging savings inside a retirement plan is a
very good thing for all of us to do and that we should be
trying to educate all employees, particularly younger
employees, to take advantage of this feature in their plan.
Interestingly, what we do know is it does not matter if it
is a large business, a mid-size business or a small business.
Once a plan is offered to an employee, it is almost the same
take-up rate by the employees regardless of the size of
entities. So, once again, we know that it is to the benefit of
the retirement security of our Americans to promote these plans
and encourage formation of the retirement plans, particularly
in the small business sector.
Two other things we know are very successful right now, and
it is somewhat startling.
One is auto enrollment, and what auto enrollment means is
when an employee is hired they are automatically enrolled in
the plan. To get out of the plan, you have to take steps to say
I do not want to be in the plan; take me out. So you are
automatically enrolled.
The other is auto escalation, which means that you might
start off with a 3 percent contribution being made, meaning the
employee is putting 3 percent of their income--their
compensation from that employer--into the plan. The next year
it might be 4 percent; next year, 5 percent; next year, 6
percent. That is called auto escalation.
And you would think--I mean, I would think when I first
started hearing about these is, why is this successful?
And then when I started realizing and thinking about what I
know about small business employees, not only from my own
business but from SBCA members, is inertia is a huge thing
going out there with small business employees. And I am not
sure I know why, but it is easier to be enrolled and stay
enrolled than it is to take all the steps to get yourself out
of the plan. And the same thing--it is easier to let the
savings go in the plan than to take the steps to get out of it.
So we know that that is also a very, very effective thing.
Finally--okay. Am I way over my time here?
Okay, then I will stop here.
The Chairman. Thank you, Ms. Calimafde.
Dr. Johnson.
STATEMENT OF RICHARD W. JOHNSON, PH.D., SENIOR FELLOW AND
DIRECTOR, PROGRAM ON RETIREMENT POLICY, THE URBAN INSTITUTE
Mr. Johnson. Thank you. Chairman Nelson, Ranking Member
Collins and members of the Committee, thank you for the
opportunity to testify today about the challenges confronting
our retirement income system.
As you know, concern is growing about how well future
retirees will fail. And we have been tackling this question at
The Urban Institute, and we have been using our modeling
capabilities to project retirement incomes for Boomers and
later generations, and so today I would like to share the
results from that research and some of the conclusions that I
draw from them.
So, first, a bit of good news--retirement incomes will
continue to increase over the next 30 years even after
accounting for inflation because women are earning more than
ever, productivity gains will boost average wages in the
economy, and many people are delaying retirement and working
longer.
But now the bad news--more Americans will see their living
standards fall as they enter retirement because retirement
incomes are not projected to keep pace with earnings.
Now it is not clear how much income is necessary for
retirees to live as comfortably as they did, in retirement, but
a common rule of thumb is that they need about 75 percent of
their pre-retirement earnings. And the thinking here is that
they need less money than they did while working because they
do not have to cover employment costs, they do not have to pay
payroll taxes, and they do not have to save for retirement.
Now we projected over the next 30 years the share of 70-
year-olds who cannot meet this 75 percent replacement rate
threshold will increase from 25 percent today to 30 percent. So
that is a 5 percentage point increase over about 30 years. This
decline in retirement preparedness may not qualify as a
retirement crisis, but it certainly is a worrisome trend.
And a bigger threat to retirement security, however, is
rising health care costs. Older Americans already devote a
substantial portion of their incomes to health care. Although
Medicare covers nearly all adults ages 65 and older, many end
up paying substantial costs out of pocket because of premiums,
deductibles and uncovered services. Half of all Americans ages
65 and older now spend more than 12 percent of their incomes on
health care. And among those with incomes below 200 percent of
the poverty level, half spend more than a fifth--more than 20
percent--of their incomes on health care.
Out-of-pocket health care spending by older Americans is
projected to rise sharply in coming decades as health care
costs continue to grow. A common benchmark for burdensome
health care spending is 20 percent of income. Now, if health
care spending grows at the intermediate rates assumed by the
Medicare trustees, in 2040, about 45 percent of all adults 65
and older will experience burdensome costs, including about 70
percent of those in the bottom two-fifths of the income
distribution.
Now perhaps the greatest financial risk for older Americans
is the prospect of becoming disabled and needing expensive
long-term care. One estimate indicates that 7 in 10 Americans
who survive to age 65 will eventually need long-term services
and supports and 1 in 5 will need help for 5 or more years.
Most will receive informal help from family and friends,
often creating significant financial, physical and emotional
burdens for their helpers. However, increasing numbers of older
Americans will receive home care from paid helpers, especially
as family caregivers become less available because family sizes
are falling and middle-aged women, who provide most of the
informal care today, are now working more than in the past.
And as many as half of older adults may end up in nursing
homes. Long-term care costs are prohibitive. A year of nursing
home care in a semi-private room now averages about $80,000
nationwide, with average costs as much as 75 percent higher in
certain parts of the country.
A frail, older adult receiving 60 hours of paid home care
per month--that is the median amount--would incur costs of
about $15,000 per year.
We lack a system to adequately finance these costs.
Standard health insurance plans do not cover long-term care,
and Medicare covers long-term care only in special
circumstances. Only about 12 percent of adults 65 and older
have private long-term care insurance, and there are signs that
this private market is shrinking. As a result, long-term care
costs can quickly deplete household savings, and many long-term
care recipients, especially those with extended nursing home
stays, end up going on Medicaid which requires a beneficiary
surrender nearly all of their income and wealth.
Because out-of-pocket medical and long-term care costs are
substantial and growing, seniors may need as much money in
retirement as when they were working. But according to our
projections, 45 percent of those born between 1970 and 1974
will lack enough income at age 70 to replace all of their pre-
retirement earnings.
So, as Congress grapples with these issues, I would
recommend focusing on protecting incomes for the most
vulnerable seniors, ensure Social Security's long-term
financial health and add a meaningful minimum benefit,
modernize the Supplemental Security Income Program by
increasing asset limits for beneficiaries, protect seniors from
catastrophic medical expenses by setting a limit on out-of-
pocket spending in Medicare and create a mandatory program to
help families finance long-term care.
Thank you.
The Chairman. Thank you, Dr. Johnson.
Okay, we are going to get into some questions now.
Senator Collins.
Senator Collins. Thank you, Mr. Chairman.
Ms. Jacobsen, I want to thank you very much for coming
today and sharing your personal experience. It is important
that we put a human face on the issue that we are discussing,
and you did just that in sharing your personal experience. So I
thank you for that.
I am curious about your case because it seems like you
planned. You did everything right. You were frugal. I mean, if
you had a credit rating of 800, that is awfully good. You were
paying your bills.
Ms. Jacobsen. Seven seventy-seven, to be exact.
Senator Collins. There you go.
And, yet, here you find yourself in difficult circumstances
beyond your control.
So I am wondering what happened to the pension that you
were promised because if a company goes bankrupt we have the
Pension Benefit Guaranty Corporation to which premiums are paid
that is supposed to step in.
Now you would have gotten a lower pension amount, but you
would have gotten something. So why didn't that happen in your
case; do you know?
Ms. Jacobsen. Let me clarify. I do have my pension itself
because I took it as a lump sum and rolled it into an IRA
because I did not know what the company was going to be called
tomorrow.
It is my health care benefits and my life insurance and all
the benefits that now cost us thousands of dollars a year to
come up with. So that has not been factored into the retirement
budget.
What Verizon is doing now is what they call de-risking, and
it has sold off its pensions to another company--Prudential, in
this case--to avoid paying the premiums to the PBGC.
So now it is now guaranteed to the rest of those employees.
I got out when it was, and I took the money and left.
Senator Collins. So people after you are in even worse
situations.
Ms. Jacobsen. Right, people that are collecting on
annuities now are collecting it from the mother company,
Verizon. They are collecting it from Prudential, which does not
guarantee, which is not covered by the PBGC.
Senator Collins. Very interesting. Thank you.
Ms. Jacobsen. It is called de-risking.
Senator Collins. Thank you for----
The Chairman. Could I add?
Senator Collins. Certainly.
The Chairman. But you were nine months shy of retirement.
Ms. Jacobsen. Full retirement, right.
The Chairman. What would that have given you?
Ms. Jacobsen. That would have given me more dollars for my
medical benefits.
Senator Collins. Would it have increased the size of your
pension?
Ms. Jacobsen. That, too, somewhat, yes. Correct.
Senator Collins. But, Dr. Mitchell, you made an incredibly
important point about the potential benefits for some people of
delaying claiming benefits under Social Security.
Obviously, we see a significant number of seniors
collecting Social Security at age 62, and sometimes for
excellent reasons. Some of them may be working in physically
very demanding jobs, and they need that income and cannot
continue.
But we know that minimum benefit--and Dr. Johnson touched
on this--for Social Security is extremely low. I have always
felt that when we look at Social Security reform we need to
increase that minimum benefit, but that is a whole nother
issue.
My question for you is, do you think that seniors
understand what a huge difference it makes in their Social
Security lifetime benefits, delaying the receipt?
I was shocked at the 76 percent figure that you gave, and I
follow this fairly closely.
So what should Social Security--the Social Security
Administration--be doing to make sure that seniors understand
that if they choose age 62 they are going to get far less than
if they are able to delay the receipt? Sometimes they cannot,
or there are good reasons not to.
Ms. Mitchell. Excellent question. Up until very recently,
maybe three or four years ago, the Social Security field agents
had a policy of describing this choice about when to claim your
benefits in terms of a so-called break-even level.
So, for example, they might say if you claim at 62 you get
$1,000 a month, just to pick a number out of the air. If you
work 1 more year, you will get $1,127.27 a month.
But then they would say, do you realize that you would
forfeit the $12,000 plus the interest you could have earned on
it--and they use the F-word, forfeit--if you do not live for
sure another 14 years.
Now that, obviously, gives people the cold chills, and they
think, oh, I do not want to forfeit anything, and so they tend
to be encouraged to take it early.
I will say that the Social Security field agents have moved
away from that presentation. Nonetheless, in surveys of
financial advisors, two-thirds of the financial advisors today
still use that forfeit, break-even presentation.
So you are absolutely right; we do not inform people well
enough about what a good deal it might be if you can afford to
delay it--maybe not until 70, but a year or 2. It is the best
deal going. In terms of lifetime protection, inflation index
benefits, you cannot get it anywhere else.
Senator Collins. Thank you.
And, finally, very quickly, Paula--I am not going to try.
Could you tell us just quickly, if you could pick one policy
change that you would recommend to us to encourage--not
mandate, but encourage--more small businesses to provide
retirement plans for their employees, what would it be?
Ms. Calimafde. I think I am going to answer that in the
negative. The most important thing Congress could do is not cut
back on the contribution levels to retirement plans.
In the small business world, the owners are making the
contributions to the plan, in effect, out of the profits of the
company, which if they did not put it into the retirement plan
or put it back in the business they would take out as
compensation.
So they are making the contributions for themselves and for
all their employees. And, if there is not enough of a benefit
in the plan to encourage them to save, then it makes sense for
them to take it out as compensation or put it back into the
business otherwise, but not to put it in the retirement plan.
So the number one thing is with all of the policy issues
you all are facing with debt reduction and tax expenditures,
the tax expenditure for the retirement plan system is a huge
number. And, yet, if you look at it one way, it is not even an
expenditure because the money that the government is foregoing
by having people put money into the plan and having it grow
tax-free comes back to the FISC at the time the people retire
and the money comes back.
So the real cost is the time value of money. That is what
the government is losing. But because of the way it is being
shown on the budget windows, it looks like a total loss that
never comes back in.
So I know there is a number of proposals trying to cut back
on the retirement plan contributions, and all of those would
really hurt.
Senator Collins. Thank you.
The Chairman. Senator Warren has done quite a bit of
research on senior debt as a professor.
Senator Warren.
Senator Warren. Thank you very much, Mr. Chairman.
Thank you and Ranking Member Collins for doing this
hearing. You all show such great leadership every time in
these, and getting these issues out here is powerfully
important.
I think it is fundamental that we all believe that if you
work hard you ought to be able to retire with dignity, and yet,
Social Security provides just the barest minimum for most
people. And rising costs--rising costs for food, rising costs
for health care, rising costs for drugs--are really putting the
squeeze on families.
The Chairman mentioned--you are right. I did a lot of
research on this. I spent a lot of time talking about working
on how families struggle economically.
And among the different studies I did was one that showed
that in families from 1991 to 2007 we saw 150 percent increase
in the percentage of people over the age of 65 who were forced
to file for bankruptcy--in bankruptcy because of rising medical
costs out-of-pocket, in bankruptcy because of divorce or the
death of a spouse as families break up, in bankruptcy, even at
that age, because they lost jobs that they needed to be able to
keep their budgets together.
So I have seen this, and I know it is a terrible problem. I
appreciate the work you are doing to bring this to our
attention.
And thank you, Ms. Jacobsen. As Ranking Member Collins
said, it is very important to have a personal face on this, and
I appreciate your coming here today.
I would just like to ask a question about helping people
save more for retirement--the idea of how they can best take
care of themselves. And we know from the research that if there
is an employer-sponsored plan, I think as you said, Ms.
Calimafde, that we will see more people in that plan. I think
you said 14 times as many people will get into a retirement
plan if we have got employer sponsorship of those plans.
And yet, we know from the Employment Benefits Research
Institute that about half of all employers offer no retirement
plan of any kind, and the GAO tells us that for companies that
have 100 or fewer employees the rate at which--that 72 percent
offer no retirement plans of any kind.
Now, as I understand it, for small businesses, since this
is obviously a problem, fewer small businesses are offering
retiree plans and that one of the principle reasons they talk
about are the high administrative costs--that it is very
expensive for small businesses to do this.
And so businesses have pooled together. We have the
multiple employer plans so that small businesses can work
together to try to get benefits for their employees.
Now today, I joined Chairman Nelson and Senator Murray in a
letter to the Department of Treasury encouraging them to go
forward with rulemaking to protect small businesses in the
multiple employer plans by ensuring that an entire plan will
not become disqualified in the event that one particular
company breaks the rules--the bad apple problem.
And so what I would like to do is just ask if you could--I
thought I would start with you, Ms. Calimafde--if you could
just speak briefly to the question of how important it is to
remove obstacles so that small businesses are more likely to
participate in employer-sponsored pension plans.
Ms. Calimafde. Well, that is critical, but I want to start
off by saying that I think the GAO study, as far as coverage in
the small business sector, is wrong and that there is a study
that was done in 2011 by the Social Security Administration
that relied on W2 data, rather than surveying employees.
And what they found--and I have got this exactly in my
report, but basically, if you were looking at a small
business--and I will just pick one side--that employs 25
employees but less than 50, 60 percent of those businesses
offer retirement plans. So the numbers are much better.
And, again, those of us who work in this area are not
surprised because employees very often do not even know they
are making 401(k) contributions to the plan and, even more
strangely, they do not even know their company is making
contributions for them.
So the world is not as dark as we thought. It is much
better than we thought, but that does not mean we should not
encourage more formation because the more formation--and we
know people take up the 401(k)s, so the savings in the plan. So
that is the way to go.
MEPs--I encourage and applaud you trying to get rid of the
bad apple rule. It is not a fair rule. Basically, in a MEP,
where you have a group of employers coming together, if one of
them has a plan that is disqualified, it disqualifies all the
plans that were covered.
I think the goal of a MEP, to lower administrative costs,
is a good goal. I have a feeling it would end up like a lowest
common denominator type of plan. Hopefully, it would be like a
starter plan because I have a feeling that the choices, as far
as investment choices and whatever, would not be as good as you
would normally get in a regular brokerage house or insurance
company plan.
Senator Warren. So, if I can, Mr. Chairman, can I just
follow up with one more question on pensions?
The Chairman. Yes.
Senator Warren. And then we will have this one out here
because I just think it is so important.
And that is whether we are talking about 40 percent of the
employees of small businesses not having any employer-sponsored
plan or whether we are talking about 70 percent not having
them, it is still way too many, and we are looking for ways to
try to get more people into employer-sponsored plans.
So I want to ask one more question about that, and that is
that the GAO also found that small businesses pay higher fees
than larger employers and that small businesses, because they
lack the economies of scale of larger employers, sometimes are
just left out here and that much of the increased cost comes
from the lack of expertise of the small businesses in picking
these plans and having to deal with these plans.
So, last year, the Department of Labor implemented new
401(k) employee fee disclosures to try to help small businesses
and participants better understand the fees they are paying.
And I understand that disclosures are always enormously
valuable. I am never going to object to having more disclosure.
But the real question I have is, would it be more helpful if we
just made these rules simpler and encouraged the Department of
Labor to get simpler rules out there for the employers and for
the employees?
Dr. Mitchell, would you like to speak to that?
Ms. Mitchell. Being against simplification, I think, is un-
American, but absolutely--you know, I have been working in this
area for 30 years.
Senator Warren. I am sorry Let me just say it this way.
Would it make a real difference? Maybe that is the way I should
put it.
Everyone is in favor of it, but do you think it would make
a real difference?
Ms. Mitchell. Well, the issue is that Congress has used tax
law and a number of other laws to shape the environment in
which we save for retirement. So there is a certain amount you
can put in tax-qualified. There is a certain amount you can
take out without a penalty. There are certain ages. It is very
complicated.
I do believe that the research has shown, however, that
automatic enrollment works. If you have an employer who can put
in place a pension and pop everybody into it, people stay in.
They know they should be saving for retirement.
There is also the issue of if you auto enroll people, what
do you put them into in terms of investments?
I think Congress did the right thing and the Labor
Department did the right thing in putting folks into target
date funds. Again, there is a big variety of them, but by and
large, it is better than holding your money in money market
funds for the next 70 years.
The big question is, what happens at retirement?
So those of us that have defined-contribution plans--401(k)
plans--get there with a lump sum, and then we are left adrift.
How do we manage the money so we do not outspend it in
retirement?
So I think that is the crucial issue--how to inform people,
how to make employers comfortable with helping people through
the pay-out phase.
Senator Warren. Thank you very much.
And thank you for your indulgence, Mr. Chairman.
The Chairman. Thank you, Senator Warren.
Senator Scott.
Senator Scott. Thank you, sir.
Dr. Mitchell, in the insurance business, we call that too
much month at the end of the money. Unfortunately, it is an
often occurrence.
Ms. Calimafde, a couple questions on the simplification
process for small businesses who want to engage in finding
plans--I spent, I guess, 25 years of my professional life in
the insurance business, trying to find a way to create access
and information as well as education to those employers,
especially the smaller ones--one employee to ten. They were
clueless, really, on the number of opportunities and options in
the marketplace for as little as $400 or $500 a year to get 1
plan started.
And so my question to you is a question on time horizons
and tax preferences.
One, the plans are pretty simple. You can get an age-
weighted plan from one of the major mutual fund companies for a
very small fee to get it started.
So the question really comes down to the knowledge horizon.
With all the stuff going on in small businesses, the space for
making retirement decisions seems to be eliminated because of
the lack of profit being made over the last five to seven
years.
Would you comment on the notion of positioning small
employers to make good decisions on doing the research so they
know what is available in the marketplace?
Ms. Calimafde. Great question.
And I have to applaud those in the insurance industry
because they have gotten it that the 30-second sound bite and a
single piece of paper with charts on it and colors goes a long
way with a small business owner rather than a 10-page----
Senator Scott. It does not work.
Ms. Calimafde [continuing]. Legal document where they are
going, oh, I am not going to read this today.
We do know from the Small Business Administration that half
of all small businesses do not make it through the first five
years.
Senator Scott. Right.
Ms. Calimafde. So, if you are a business in that first five
years, the chances you are sitting around thinking about
retirement benefits for yourself or anyone else----probably
not. Hopefully, you are trying to keep the business alive.
After 10 years, only a third make it through. Those are
pretty sad statistics.
However, the ones that do make it through are very stable.
And because the owners--most of the small businesses are not
going to be able to be sold. So they cannot rely on the
business for their retirement security.
And we know the nonqualified deferred compensation world,
which is so important in the larger businesses, is not in the
small business world because of the tax code.
So I would think one of the most important things would be
for accountants and insurance people to advise the small
business owners. And, in fact, we often find that it is the
accountant who is the first person to talk to the small
business owners and say, you know, you have got some profit
this year; you can put in a retirement plan.
And I agree with you. I think plans are fairly easy to be
put in, and I do not think they are that expensive. There is a
number of brokerage houses out there who are very good at doing
it now, and insurance companies. And I probably have missed
somebody else in that world, but--trade associations are
putting together plans.
I mean, the problem is not the plan, and there is some very
good investment advice out there.
If you look at a typical 401(k) plan today from the
employee's viewpoint, they can go on a web site. They can see
their different fund choices. They see how much they have
saved. They usually have a pie chart that shows them what they
have done. If they do not want to do any of that, they just go
into the default, which is almost always a target fund.
So the real magic is getting them to the plan.
Senator Scott. Yes.
Ms. Calimafde. And I really think the advisors are the key.
Senator Scott. Okay. Dr. Mitchell, perhaps on the whole
dysfunction of our tax code and how to incent more dysfunction,
my next comments will help us get there quickly.
I have a notion that the long-term care component which, of
course, is not covered by your health insurance plan--so the
whole financial literacy concept needs to include, and fuse
into it, the notion that long-term care and the activities of
daily living that is a trigger for it to start are not a part
of your health insurance, nor will it be.
So my question is really on a tax preference in the tax
code that would provide some type of tax incentives to purchase
long-term care--the impact of that.
And my second question for any of the panelists, as I run
out of time here in 35 seconds, is a question about simple
math. Part of the challenge that we face today for our seniors
will be repeated except for it will be exasperated over the
next generation. Where 50 or 60 years ago we had 16 Americans
working, we had 1 retired, and the expiration happened 3 years
later, today, we have 3 working with 1 retired, and the
expiration happens 15 years later.
So we are dealing with a problem of math, and I would love
to have someone talk about how we change the contributions that
are necessary for us to sustain a system that is based on a
formula that is obsolete.
And the first question being a question about tax
preferences as it relates to long-term care and/or those types
of things that would allow for folks to make better decisions
because they have the tax incentive to do so.
Ms. Mitchell. Well, long-term care is one of the most
fraught challenges that I think we really face.
Recently, my employer decided to offer long-term care, not
as a tax-subsidized vehicle, but as a payroll tax--a payroll
deduction off of my paycheck. And I finally bought it. I
dropped my life insurance and bought the long-term care
insurance because I figured that is the next challenge.
Two percent of employees at most, in my experience, in an
employer setting, buy long-term care when it is offered to
active workers. And you might think, well, we could wait and do
it later when we retire, but by that point you may well be
underwritten; you may be uninsurable.
And so it is a very, very big challenge.
One of the concerns also is that in an environment where we
cannot predict future medical care costs very well and we
cannot predict longevity very well, the insurance companies
themselves--and I am sure you know this from your experience--
do not really know what they are insuring.
So, as a consequence, there is a lot of passing the buck
going on and a lot of people not knowing what they can afford
to do when they do buy coverage. It gets more expensive.
All I can say is there are other models. It may be worth
your while to go take a look at what they did in Japan. They
have actually mandated long-term care insurance, which is
privately provided, but everybody from the age of 40 has to pay
into a pool. So you do not get any adverse selection, and
everybody is covered. That has not corrected the problem, but
it does mean that there is more protection.
The benefits are also means-tested, I would add. So, if
turns out you are quite wealthy when you get to retirement age,
you get less than if you do not.
Senator Scott. Thank you.
The Chairman. Thank you, Senator Scott.
You know, we passed a long-term care act, and it was so
expensive that then we had to backtrack.
Senator Manchin.
Senator Manchin. Thank you, Mr. Chairman.
And, if I could ask Dr. Mitchell, the GAO has identified
about 15 different agencies trying to give financial literacy
service. Millions and millions of dollars are being spent, and
nothing seems to be--the results have not changed.
Do you have recommendations to us about how we could help
you streamline the system?
Ms. Mitchell. I have been doing some work recently with a
colleague of mine, Annamarie Lusardi, and what we have done is
survey Baby Boomers as well as younger people and, in fact,
people all around the world about the key, fundamental, simple
financial facts that you need to know in order to be able to
make smart financial decisions.
So we have asked questions, for example--and I am not
putting you to a test. We will not make you answer.
Senator Manchin. No, I am asking you. Hold on. Hold on one
second.
Ms. Mitchell. Suppose you had $100 in a savings account.
Senator Manchin. One second.
Ms. Mitchell. Yes.
Senator Manchin. Let me ask you. We know the GAO has
identified 15 different Federal agencies spending $60 million
to $70 million a year. You are watching all this, and we are
not seeing the results, sitting here. So, if the GAO has given
us a report that there should be some consolidation, can you
identify for us the overlapping agencies that maybe should be
consolidated rather than individually keeping these alive?
Ms. Mitchell. So my answer to you would be before we decide
to consolidate we ought to figure out what is in the core
curriculum? What is it that Americans need to know?
And then with that benchmark we can go out and say, what
are these folks providing? What kind of information are they
providing?
The other issue is that Baby Boomers, and people older than
they are, are maybe not web friendly so that if a lot of the
information is on the web they are much more likely to be going
and trusting their Social Security field agency than 101
different other providers.
So we have to figure out first what they need to know, and
I think interest compounding is critical, and risk
diversification is critical. And then we ought to figure out
who is the most trusted conduit of that information and work
that route. That would be my recommendation.
Senator Manchin. I think we are on two different pages. I
am just saying there is 15.
Have you evaluated what they are trying to educate my
generation on, whether I am web friendly or not web friendly?
Do I have 15 doing the same thing? Do I have 10 doing the
same thing?
Can you recommend that this should not happen; we should
have maybe a portal with 1 or 2 doing what 15 are doing now?
That is what I would ask you to evaluate.
I only have so much time. So maybe we will get more into
that.
Ms. Mitchell. Let's talk offline because I can give you
some recommendations of useful studies.
Thank you.
Senator Manchin. Thank you so much.
Dr. Johnson, nursing home care--I was a former Governor of
the State of West Virginia, and it is a great concern. I have
an elderly population. But I just saw the inhumane treatment
when a person who has been a breadwinner all their life had to
divest themselves of all their money in order to become a
Medicaid recipient.
Something is just not right there when you take everything
away from a hardworking individual and say, guess what? Now you
are going to be a ward of the state.
There has got to be a better way to do it. Have you all
looked into that, or can you give us any recommendations or
help on that?
I have always thought need-based sliding fee scale. So my
mother or father, God forbid if they would have needed that,
they could have at least felt like they were taken care of and
providing for their own care a little bit. Now they have to
basically--in a two-year period of time, they divest all their
assets and worldly possessions in order to get down to the
poverty level so Medicaid kicks in.
Eighty percent of the people in nursing homes are on
Medicaid in my State. I do not know if that is the national
average, but I know it is high because they have learned how to
scam the system.
Mr. Johnson. That is certainly true, and our system of
financing nursing home care is almost nonexistent. So there are
kind of two approaches that have been suggested.
One is to try to get more people to purchase private
insurance. Basically, get more people to save on their own.
Either put lots of money away so you can cover this nursing
home expense when you need--and that is almost impossible to do
because the costs are so.
And the other alternative is to get them to purchase
private insurance. Right now, only 12 percent of seniors have
private insurance--private long-term care insurance. We see
that there is very little effect of tax incentives. It
increases it a little bit but not much.
We tried to have a voluntary system in the CLASS Act that
was recently repealed. That does not work because you have a
whole set of adverse selection problems. Only the sickest
people are going to join this program. That means the program
is not sustainable.
It seems to me that one solution is to include more long-
term care costs within Medicare, perhaps raising premiums,
raising taxes, raising payroll taxes, having the payroll tax
contribute and fund some of these future long-term care
benefits. That is a way, though, that you would at least avoid
this problem of people having to forego all of their assets to
get----
Senator Manchin. I am just saying here that the nursing
home industry does a great job. They take care of people and do
it well, and we are very pleased in our State with mostly all
the nursing home care that we are giving.
It has been brought to my attention that a person is
demeaned to the point where they get an allowance, where they
are allowed to have so much money and not, and this and that.
And they just even would think that--and the families, too--if
they could pay a certain percentage of that income towards a
sliding fee scale, or a means-tested, would help an awful lot
more with adding dignity and, I think, a little respect to an
elderly person who has made their way or paid their way all
their life.
And I do not know if you all have looked, and we will
talk--I know my time is up. We will talk about that later, but
that is what we are trying to find--some way with dignity and
pride, as we grow older, that we can still pay our way as much
as possible.
Thank you, Mr. Chairman.
The Chairman. I want to invite the members of the Committee
to chime in as I do some cleanup here, and feel free to
interrupt.
Ms. Jacobsen, you mentioned you see age discrimination in
trying to find employment. Tell us about that.
Ms. Jacobsen. Well, I did--I mean, when I was in between
jobs, I sent out over 100 resumes, and I had several
interviews.
I had one interview in a company in Sarasota, and I walked
in, and there were six people there going to interview me
simultaneously. And they were extremely impressed with not only
my resume but the things that I said in the meeting. In fact,
they were nudging each other and saying, did you hear that?
That was a great idea, et cetera.
The vice president sent me an email and said the next day--
it was on a Thursday--we have one more candidate, but it is
just a superficial thing. We will get back to you on Tuesday.
You are our number one candidate.
I have that on a written email.
Tuesday came. Wednesday came. Thursday, I did not hear from
him. So I sent him an email. He said, oh--email in writing--
forgot to call you. We hired somebody else.
Just enough time to do a background check--I was number one
on Thursday, and on Tuesday they forgot my name.
So----
Senator Manchin. What did the background check show?
Ms. Jacobsen. How old I was.
The Chairman. Her age.
Ms. Jacobsen. My resume does not say how old I am.
Senator Manchin. [Inaudible.]
Ms. Jacobsen. Well, thank you, but numbers are numbers.
Senator Manchin. You had a first interview?
Ms. Jacobsen. Oh, yes, with six people in the room--vice
president and several.
Senator Manchin. So they did not have a problem until
they----
The Chairman. Find out how old you are, yes.
Ms. Jacobsen. Right.
Oh, and may I make a comment? I am sorry I know this is
interjecting.
The Chairman. Certainly.
Ms. Jacobsen. But we have all concurred that this is a
problem, and what we are lacking here is financial education.
I have told my sons, this is a do-it-yourself economy. If
you do not do it for yourselves, no one else is going to do it
for you.
But how are they going to learn how to do it for you?
We need financial education in high schools and in college,
and it has got to be mandatory. You cannot let companies
default on their pension promises and then go, ah, do it
yourself.
Well, how are they going to do it themselves, if they do
not know how to do it?
Let's have financial education.
Thank you. I am sorry.
The Chairman. Thank you.
Dr. Johnson had noted that the median value of retirement
accounts held by households in the age range of 55 to 64 is
$100,000--retirement accounts.
The median retirement account balance for 55 to 64 for all
households--believe it or not, we have a study here--$12,000.
Median retirement account balance for 55 to 64 for
households with savings--$120,000.
So that does not go very far, does it, Dr. Johnson?
Mr. Johnson. No, it certainly does not. If you were to
annuitize that amount at age 65 today, you would maybe get $500
or $600 a month. So it helps. Every little bit helps, but it is
not going to allow you to live comfortably.
That really is the challenge we face--how to get those
account balances larger--and that is why people have been
talking about this auto escalation, auto enrollment, to get
people into it.
I think part of the problem is that a lot of people do not
participate at all in their 401(k) plans.
I mean, first, you have people who are not offered 401(k)
plans. Then you have people who are offered them, who do not
participate, people who participate but do not invest enough,
people who deplete some of their assets before they retire
because they dip into their assets. They take loans from this
money. They take them out when they change jobs. There are all
kinds of things that can go wrong along the way to retirement,
and it is a major problem.
I think we should also look at, though, that there is a lot
of attention--there is this thinking that the defined-benefit
world was so much better. The defined-benefit world did not
work that well for a lot of people, though. You would get a lot
of money if you stayed on the job for a long time. If you
changed jobs frequently, either by choice of your own or
because the employer went bankrupt, or because of family
reasons you had to move, you did not make much in that account
either.
The Chairman. Well, we are coming to some tough conclusions
here. Work longer is one conclusion. This certainly was not the
way it was in the previous generation.
Anybody want to offer some hope?
Ms. Calimafde. Could I make a comment?
The Chairman. Please.
Ms. Calimafde. We are saying work longer, but when Social
Security was first formed the average life expectancy, I think,
was like 65 or 66. So they were putting together a program that
had a life expectancy of 10 months or 11 months for the average
person.
Today--and it is too bad Senator Scott has left, but--one
of the problems insurance companies are having is the life
expectancy is increasing so dramatically right now that they
really do not even know how to put their life insurance
policies together.
So to say, gee, it is a shame you have to work longer; 65
today is not 65 30 years ago, 40 years ago. I would submit it
is not even the same it was 10 years ago.
I mean, if you are going to live until you are 85 or 89 or
90, maybe we want people to keep working longer so that they
can provide a function in society. But also, I would think it
would be more interesting for them to keep working longer than
all of a sudden--I do not think most of us are set up for 40-
year retirements. That is sort of not where we are.
I was also going to quickly mention that one of the things
in the tax code that I think----
The Chairman. Let me interrupt you there.
Senator Warren has a comment.
Senator Warren. So I just want to push back on that notion,
though. I understand that people are living longer, but that
does not necessarily mean that someone can work longer. Living
until you are 85 does not mean you can still manage a
construction job at 65----
Ms. Calimafde. True.
Senator Warren [continuing]. Or that you can still take
care of small children where there is lots of bending and
lifting and carrying----
Ms. Calimafde. Right.
Senator Warren [continuing]. Or that you can still work as
a nurse.
There are so many jobs, well, that require you to be
strong, that require--or that have battered people's bodies for
years.
Ms. Calimafde. Well, I agree with that, Senator, but I am
just saying that there is a lot of jobs out there where people
are being put out to pasture at age 65 and 65 is a very vital
person today.
So I am almost turning it on its head, saying these forced
retirement ages that companies are coming up with are really
not--they do not fit with today and who people are at 65 today.
Senator Warren. Maybe we are just describing different
parts of the problem----
Ms. Calimafde. Right.
Senator Warren [continuing]. Because I think I would say
this the other way around. As I understand it, we do not have
most forced retirement ages anymore.
Ms. Calimafde. We do.
Senator Warren. What we have got are people who are trying
to work and who cannot get work, or people for whom it is just
not possible to continue to work for years to come.
And the question is how we are going to manage longer
retirement periods, and I think expecting people to work until
they are 68, 70, 72 is just not realistic and, frankly, just
not right.
For those who want to work, for those who can work, for
those who can find the right kinds of jobs and part-time jobs,
I am all for it. But, if we think the solution to dealing with
the coming economic crisis around retirement is to expect
people to work until 72, I just think that is wrong. I do not
think we can do that, and I do not think we should be looking
in that direction.
Sorry, Senator.
The Chairman. Okay. I want to raise a very contentious
issue that we are going to face shortly if there is a grand
bargain, and who knows in this political environment what is
going to happen.
But one of the suggested parts of a grand bargain is to
make Social Security more actuarially sound by not increasing
the tax on higher-level income folks but, rather, altering the
CPI from the existing one to what is known as Chained CPI,
which is still being evaluated. But the essence is that it is a
lower CPI than the existing one. Therefore, seniors' monthly
payments on Social Security would be a little less.
Does anybody want to have any comment about that?
Yes, ma'am, Ms. Jacobsen.
Ms. Jacobsen. Then you are talking life and death because
it cannot get any lower and people cannot live.
Senator Manchin. Can I chime in?
Ms. Jacobsen. We are talking food. We are talking--just
food. People cannot live.
Senator Manchin. Ms. Jacobsen, I think what the Senator
might have been saying is let's say that you come to retirement
age, and you have done quite well in your life. But you have
other people that basically have not done quite as well in
their life, and they need that. That is the substance they
have.
Ms. Jacobsen. Yes.
Senator Manchin. Do you think this society--and this is a
discussion that goes on. Would society be able to have it
flexible?
Let's say my parents have done very well, and they might
not need the CPI. They might not need the cost of living.
Ms. Jacobsen. Right.
Senator Manchin. And they are above 250 percent of the
poverty guidelines. Their income is still $60,000, $70,000,
$80,000 a year of investments in that.
But someone who basically needs it to adjust to their rent
and their utilities and that would get it.
Ms. Jacobsen. Okay.
Senator Manchin. My parents would not be upset. My parents
would not be upset to say, guess what, John and Mary? You all
are not going to get the COLA, but Aunt Theresa over here will
get the COLA because she did not do quite as well.
They could live with that, but we cannot come to grips
politically with that.
Ms. Jacobsen. Right.
Senator Manchin. It is either a Chained CPI or a change in
the whole COLA. You know, the amount.
Ms. Jacobsen. Yes.
Senator Manchin. There are just some people that basically
have done very well. They are going to get their Social
Security because they paid into it, but they do not
automatically have to get, nor do I think they would demand or
think that it is unfair if they did not get a COLA so that we
could keep COLA for the people that really need it because
everybody has paid into Social Security. Right.
Does that make sense to you?
Ms. Jacobsen. It does, and I have been paying into it since
I was 15.
And you are right, but at what level? What discriminatory
level?
Senator Manchin. I will use 250 percent of the poverty
guidelines.
So take whatever the poverty guidelines are in your state--
--
Ms. Jacobsen. Right.
Senator Manchin [continuing]. And then 250 percent above
that. And, if you still had that--I am just using it
hypothetically.
But these are discussions that we have, that go on, and
they are not done in public, but it needs to be talked about.
Ms. Jacobsen. Right.
Senator Manchin. Is there a social acceptance to it?
I know I have talked to my family members who are older,
and they would say, as long as I get my Social Security back, I
am okay. I am okay if I do not get the COLA. I am still in
pretty good shape.
But I can tell you our neighbor over here; she has to have
it. She has to have it.
Ms. Jacobsen. Right. I am a generous person. I feel the
same way you do. But is everybody else going to? Are your
constituents going to?
Senator Manchin. Well, I do not know. That is why you have
to have--around here they are afraid to have your guilt by
conversation; let alone guilt by association. So they are
afraid to even talk about that.
The Chairman. And that is why I said it was a contentious
issue.
Now, interestingly, the flip side of that is you could
solve the Social Security actuarial problem. And there is an
actuarial problem, and you all have described it. We have got a
lot more people that are coming into the system than are paying
into it. A lot more people that are beneficiaries is what I
meant.
Now you could--on the level of someone's salary, $110,000,
you could impose a Social Security tax on the amount of income
above that. I do not know the specific amount of the tax, but
you could virtually solve the actuarial problem for Social
Security with that.
Senator Manchin. I think, again, what we are talking about
is if you make $250,000 a year--or, 110. You quit taking it by
6.2 percent participation. Should that go up to at least what
the value of the dollar was when we started that, when 110 went
into effect, and would it be 180 or 190 today?
There has to be a reasonable way to do it, responsible and
what nobody thinks is gouging, but just done in a way that this
would have been the natural increments that should be today.
That is where I think the cash flow might take care of itself,
but there are people that say that is just raising the taxes.
You know.
The Chairman. Senator Collins.
Senator Collins. Thank you.
I just want to point out that when the President proposed
moving to a Chained CPI he also proposed increasing the minimum
benefit, and I think when we have this discussion that that is
really important to remember.
And the minimum benefit, as I said in my opening statement,
is only about $15,000 a year.
So I think you cannot look at just the proposal for the
Chained CPI without looking at the fact that if it were
desirable to move to that you have to increase the minimum
benefit because, from my perspective, someone who has worked
their entire life should not retire in poverty. That ought to
be one of our baseline goals.
I noticed Dr. Mitchell was trying to jump in here, if we
could hear from her.
The Chairman. Sure, Dr. Mitchell.
Ms. Mitchell. With your permission, thank you.
I would only say that in the view of many economists the
issue about how to correctly measure inflation is really a
completely different discussion than the issue of whether we
can fix poverty in old age.
And in my view, personally, if the Chained CPI is a better
way to measure the cost of living for seniors, then we should
do it. But we also need to focus on the issue of inadequate
ability and control over resources and inadequate consumption.
And so I will only say in passing that I was on the
bipartisan 2001 Commission to Strengthen Social Security, and
we did propose, aside from private accounts--I am not going
there. We did propose a change in the indexation of benefits
prior to retirement, and that generated enough money to raise
survivor benefits, which are very important, and also to raise
minimum benefits to 120 percent of the poverty line.
So let's just stop there, but I wanted to bring that to
your attention.
The Chairman. Senator Warren.
Senator Warren. If I can, I just want to go back to the
point, though, that Senator Manchin raised. When Senator
Manchin talks about the difference between using a Chained CPI
for some people and perhaps not for others, what you are really
doing is just acknowledging that, at least as the Chained CPI
has been laid out, we are just talking about over time a cut in
benefits.
And I think that Senator Collins goes to the right point
when she says the fundamental question we have to address is
whether the benefits are adequate. And then we have to find the
right way to grow them over time for people, but that is the
baseline question.
And pretending that this is a question that somehow goes
away if we use a different inflation index, I think, just
misses the whole point. We have got to make sure we are paying
people enough, exactly as you said, Senator Collins, so that
people are not retiring in poverty.
The Chairman. Senator Manchin.
Senator Manchin. If I could just chime in, I have talked to
enough people on the bottom of the food chain and the top of
the food chain, and this is something socially that we have to
come to grips with as policymakers, basically. We have to have
a cost of living, or COLA, no matter what you call it. Let's
say even the present formula that we are using to do our COLAs
with. But there has to be one that adequately takes into
account the essential living costs of people that basically the
majority of their income is their Social Security check.
But, on the other hand, there are people that basically
have done so well, the 110 that they have been capped at--you
follow me? That Social Security check does not make or break
them. They do not need and do not look for it, but they do
deserve it because they have paid into it. So we do not want to
take anything away, but I have found it to be more receptive
for the people who have done well in the food chain.
I do not know where the breaking point would be. I use 250.
It could be 300 percent. You know, we could all come to an
agreement on what it should be.
But, to me, that would be a more compassionate way of doing
it and making sure the people that have not done as well are
able to have enough of an adjustment that they can keep lights
on, food on the table and take care of themselves, and the
people on the top end do not feel like you have kept a benefit
away from them. That might be something we should be looking
at.
We are looking at revamping and really reinventing the
wheel. And you said if it really represents the purchasing
power, Dr. Mitchell, then that is what should be done.
I can tell you right now it is not bought that way, as
Senator Warren had said.
And I know that we have had that presentation made to us
that Senator Collins spoke about--that there are certain
preventions and certain stop-gaps that really help people in
certain categories of the Chained CPI. It just has not been
accepted that way.
So, with that being said, would they accept another
approach?
That is all we are doing, and we are doing this out in the
public forum as today. We need to be able to talk about this
because there are certain people in my State who cannot make
it. Social Security in the State of West Virginia--60 percent
of retired seniors--that is their income.
Yes, ma'am.
Ms. Calimafde. One comment about the idea of increasing the
level at which you keep paying on Social Security is for small
businesses, particularly for those who are sole proprietors,
they end up paying Social Security for themselves as an
employee and then they pay for it for themselves as an
employer. So, as you move that number up, that would really hit
the small business community very hard.
The Chairman. Any other comments from the Senators?
[Pause.]
Well, this has been a most helpful discussion.
And I think as you, Ms. Paula, indicated, the three-legged
stool--Social Security, a person's employment pension or
retirement, and their private savings. We see how important it
is for all of them.
And any one of them may get cut, which then, Ms. Jacobsen,
gets to the point that seniors rely on that Social Security
benefit because if they have the misfortune that you have
chronicled today then what is the safety net.
Okay. Now we just got into today the discussion of having
long-term care, and what we are going to do is in another month
we are going to have a hearing on long-term care. We have
scheduled that for October the 23rd.
So thank you all for participating, and the meeting is
adjourned.
[Whereupon, at 3:53 p.m., the Committee was adjourned.]
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APPENDIX
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Prepared Witness Statements
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Additional Statements for the Record
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