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24–732 2006

HEARING ON ALTERNATIVES TO STRENGTHEN 

SOCIAL SECURITY 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED NINTH CONGRESS 

FIRST SESSION 

MAY 12, 2005 

Serial No. 109–22 

Printed for the use of the Committee on Ways and Means 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER., Illinois 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

BOB BEAUPREZ, Colorado 

MELISSA A. HART, Pennsylvania 

CHRIS CHOCOLA, Indiana 

DEVIN NUNES, California 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

ALLISON H. GILES, Chief of Staff 

JANICE MAYS, Minority Chief Counsel 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 

(III) 

C O N T E N T S 

Page 

Advisory of May 26, 2005 announcing the hearing .............................................. 2 

WITNESSES 

Cato Institute Project on Social Security Choice, Michael Tanner ...................... 78 

Center on Budget and Policy Priorities, Jason Furman ....................................... 62 

Free Enterprise Fund, Institute for Policy Innovation, Lawrence A. Hunter .... 54 

The Lindsey Group, Hon. Lawrence B. Lindsey ................................................... 6 

Lyndon B. Johnson School of Public Affairs, University of Texas at Austin, 

Hon. Kenneth S. Apfel ......................................................................................... 48 

MFS Investment Management, Robert C. Pozen .................................................. 10 

Urban Institute, Tax Policy Center, C. Eugene Steuerle ..................................... 35 

Watson Wyatt Worldwide, Sylvester J. Schieber .................................................. 16 

SUBMISSIONS FOR THE RECORD 

American Enterprise Institute, Alex Pollock, statement ...................................... 155 

California Retired Teachers Association, Sacramento, CA, Eva Hain, statement ...................................................................................................................... 160 

Elia, Joyce, Mission Viejo, CA, statement ............................................................. 162 

Englesby, Sue, Boise, ID, letter .............................................................................. 164 

Fronek, Donald, Toney, AL, letter .......................................................................... 164 

Galvin, Cecile, Laguna Niguel, CA, statement ..................................................... 165 

Gould, Francis, Vista, CA, statement .................................................................... 166 

National Association of Disability Examiners, Lansing, MI, Martha Marshall, 

letter ...................................................................................................................... 166 

National Committee to Preserve Social Security and Medicare, Barbara Kennelly, statement .................................................................................................... 167 

National Education Association, statement ........................................................... 169 

Taniashvili, Patricia, Surry, ME, statement ......................................................... 173 

Tucker, Deborah, Boynton Beach, FL, statement ................................................. 173 

University of Oklahoma College of Law, Norman, OK, Jonathan Forman, 

statement .............................................................................................................. 174 

Ward, Douglas E., Oberlin, OH, statement ........................................................... 177 

(1) 

HEARING ON ALTERNATIVES TO 

STRENGTHEN SOCIAL SECURITY 

THURSDAY, MAY 12, 2005 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The Committee met, pursuant to other business, at 10:17 a.m., 

in room 1100, Longworth House Office Building, Hon. Bill Thomas 

(Chairman of the Committee) presiding. 

[The advisory announcing the hearing follows:] 

2 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

May 12, 2005 

No. FC–8 

Thomas Announces Hearing on 

Alternatives to Strengthen 

Social Security 

Congressman Bill Thomas (R–CA), Chairman of the Committee on Ways and 

Means, today announced that the Committee will hold a hearing on alternatives to 

strengthen Social Security. The hearing will take place on Thursday, May 12, 

2005, in the main Committee hearing room, 1100 Longworth House Office 

Building, beginning at 10:00 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. 

BACKGROUND: 

In their 2005 report, the Trustees of the Social Security Trust Funds again reported that the Social Security program faces long-term financial challenges. In just 

three years, the leading edge of the baby-boomers will reach early retirement age. 

In 2017, just over a decade from now, Social Security will pay out more in benefits 

than it collects from payroll taxes. To make up the shortfall, the Treasury bills credited to the trust funds will have to be redeemed. Because no money has been set 

aside to pay these obligations, the government will have to raise taxes, cut spending, or increase the debt to honor these obligations, which are backed by the full 

faith and credit of the Federal government. 

By the time today’s 26-year-olds are eligible to retire in 2041, the trust funds will 

be exhausted and Social Security taxes will only cover about three-fourths of promised benefits. In other words, inaction will lead to a 26-percent benefit cut. 

If Social Security’s financial challenges are not addressed soon, temporary solutions—such as those adopted in 1983 when Congress last acted on Social Security— 

or dramatic benefit cuts or tax increases will be the only options available. According to the Social Security Trustees, the Comptroller General of the United States, 

and the Federal Reserve Board, the sooner lawmakers act, the more options are 

available to strengthen Social Security. 

Social Security’s Trustees have urged Congress to address Social Security’s financial challenges sooner rather than later. For more than a decade, several bipartisan 

councils and commissions, as well as many individual experts and policymakers, 

have laid out options and comprehensive proposals for strengthening Social Security. In addition to bringing the program’s finances back into balance, experts have 

also called for updating Social Security benefits to better protect families, given 

changes in our society that have occurred since the program was created 70 years 

ago. 

In announcing the hearing, Chairman Thomas stated, ‘‘The American people understand Social Security cannot meet its obligations in the future unless Congress 

takes action. We will examine potential solutions that will preserve Social Security 

for seniors and Americans nearing retirement, while improving retirement security 

for younger workers.’’ 

3 

FOCUS OF THE HEARING: 

The hearing will focus on solutions designed to strengthen Social Security to better meet the needs of 21st-century families. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘109th Congress’’ from the menu entitled, 

‘‘Hearing Archives’’ (http://waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Thursday, May 

26, 2005. Finally, please note that due to the change in House mail policy, the U.S. 

Capitol Police will refuse sealed-package deliveries to all House Office Buildings. 

For questions, or if you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

Chairman THOMAS. I would like to move to the principal order 

of business before the Committee, and that is to begin to examine 

particulars within the area of our jurisdiction of Social Security. 

The last time this Committee looked seriously at Social Security 

was in 1983. To give you an idea of how much the world has 

4 

changed, all you have to do is look at this Committee. There are 

only a few Members that are currently on this Committee that 

were on the Committee in 1983, the gentleman from New York, 

Mr. Rangel, the gentleman from California, Mr. Stark, and myself. 

I was the only Member of the Committee apparently here on the 

Subcommittee on Social Security. At that time, to a very great extent, our effort was to literally save Social Security and, in fact, 

had to delay the Cost of Living Adjustments (COLA) to be able to 

meet payments. That truly was in any definition of the term a crisis. What probably disappointed me the most was—and notwithstanding our response to meet that need—we never did do what I 

thought we should have done at that time; to examine some of the, 

I think you could use the term ‘‘inequities’’ that occurred over time 

as society aged; the way in which people work, especially women 

in terms of the home and outside of the home; the age difference 

in terms of longevity of our seniors; and a number of other aspects 

that were internal to Social Security that probably needed adjustment at that time. Now, as the chairman of the Committee on 

Ways and Means, I feel very strongly about what we need to address. 

I am pleased that a number of our witnesses addressed them 

specifically. I will be asking questions directed at what some folks 

will think are secondary issues. If we are going to look at this stuff 

once every quarter of a century, I think we do need to look at how 

much the society has changed and how we need to change the 

structure. We are going to do it in the full Committee and we are 

going to do it in the Subcommittee on Social Security. I will recognize, for the remainder of my time, the gentleman from Louisiana, 

the chairman of the Subcommittee on Social Security. 

Mr. MCCRERY. Thank you, Mr. Chairman. I commend President 

Bush for focusing on this issue and bringing the attention of the 

American people to this issue that begs for action by the Congress. 

I also commend the chairman of the full Committee, Mr. Thomas, 

for scheduling this series of hearings that we hope will provide the 

Committee with sufficient options, information, and knowledge to 

address the problems associated with the Social Security program. 

In the past, we have had a pay-as-you-go program funded by the 

payroll taxes of the current generation of workers to pay the current generation of retirees. In the past, that has been a reasonable 

approach due to the large number of workers, compared to the 

number of retirees. 

Unfortunately for those who might really like the pay-as-you-go 

system, demographic changes are taking place, have taken place, 

and are continuing to take place in our country, which, in my opinion, makes the pay-as-you-go system less viable, and perhaps even 

unsustainable. So, I think it is incumbent upon this Committee, as 

the Committee of jurisdiction, to examine ways of financing the Social Security system that are smarter and better, particularly in 

view of the burden on future generations that a pay-as-you-go system might place. Mr. Chairman, I look forward to hearing from 

these distinguished gentlemen who have undoubtedly spent many 

hours thinking about the Social Security system and how to finance 

it and look forward to their testimony. 

5 

Chairman THOMAS. I thank the gentleman. In some instances, 

it is literally years, and that is why we are privileged to have the 

witnesses in front of us. The gentleman from New York. 

Mr. RANGEL. Thank you, Mr. Chairman. Most of my time, I will 

be yielding to Congressman Levin to deal with the question of Social Security. I really, personally and politically, think that this 

sensitive issue screams out for bipartisanship. I think the President’s 60 cities in 60 days did more to polarize. I thank you for 

your bipartisan approach to this panel. Since you have six people 

supporting private accounts and two that are not, this is a long 

way in terms of working together. We are going to have a problem 

here—and I think we are starting this off as a problem by not discussing with any of the Members prior to going and making privatization the one issue that we truly believe. It is like putting KoolAid on the table if we are going to, in a bipartisan way, try to save 

this system. As long as this is on the table, we are going to have 

a problem talking. I yield to Mr. Levin. 

Mr. LEVIN. Thank you, Mr. Rangel. As you have said, this hearing is a continuation of the course that was set out upon by the 

President in the State of the Union; diverting money from Social 

Security to set up private accounts. The President set out that 

course, he said it in the State of the Union, he sent his Administration out on a 60-day tour to promote it, and he held, recently, a 

press conference at the White House, where he reconfirmed that 

commitment, and really smoothed the road for the middle-class 

benefit cuts that are inherent in private accounts. Our chairman, 

Mr. Thomas, is now suggesting that we surround this basic issue 

with assorted other issues, but in this case—and I want to emphasize this—the Democrats and the American people will not lose 

sight of the tree being cut down in the middle of the forest. 

A brief look at history; our President when he ran some decades 

ago was for private accounts. In the nineties, Mr. Thomas, our 

chairman, introduced legislation to privatize Social Security, and, 

under that, half of the payroll taxes would have been diverted into 

private accounts and guaranteed Social Security benefits would 

have been cut in half. Today, as Mr. Rangel mentioned, the six witnesses who are brought forth by the Republican majority have all 

supported privatization of Social Security. So, let me just say, 

clearly, with that as the primary goal here of the Administration, 

we will stand in opposition to that, united with the American people, not because we oppose more ideas, but because we are opposed 

to bad ideas, including: the deep benefit cuts, the diversion of Social Security moneys in trillions to risky private accounts, the 

added benefit cut to the guaranteed benefit that would come from 

the offset, and the huge amount of borrowing. 

All of these changes will destabilize Social Security, undermining 

the strong public support that has insured it for generations of 

Americans, generations. No amount of tweaking or combining it 

with other provisions can make that a good idea. With private retirement programs—and we have heard this increasingly—built on 

shifting sands, Social Security stands as the basic guaranteed foundation for retirees, disabled workers, and surviving young children. 

So, I want to emphasize in closing what Mr. Rangel has said. It 

is our hope in this hearing that we can have a real discussion of 

6 

what privatization would mean, and in doing so, our hope is that 

our colleagues will come to the same conclusion that most Americans have already reached. The President should drop his demand 

for private accounts, and in doing so, allow us to work, in a bipartisan way, as was done 20-some years ago, to strengthen Social Security and to ensure that it continues providing guaranteed benefits in the future. 

Chairman THOMAS. The Chair thanks the gentleman, and the 

Chair looks forward to working with the gentleman from Michigan 

in preparing a Members’ panel for which he can provide Members 

of his party to discus their plans for saving Social Security on an 

ongoing basis. The Chair welcomes the panel. I know Members look 

at the witnesses’ testimony prior to the hearing. I want to thank 

all of you, because taken in its entirety, it is one of the best syllabuses I have seen in going over the arguments pro and con. The 

Chair, to the best of his ability, would allow any of you to finish 

your sentences at this hearing. That wasn’t necessarily the case at 

other hearings that I have noticed in terms of an attempt to discuss programs. Members are anxious to question you. We are each 

only going to have about 5 minutes. I don’t know how long some 

of you can stay. The Chair is prepared to stay as long as is necessary to have as full and as complete a discussion as possible, and 

I will be making comments after you have provided us with your 

oral testimony. I will say to all of you that, without objection, your 

written testimony will be made a part of the record and I will just 

begin over to my left and we will just move across the panel. Mr. 

Tanner, there is no indication that the fact that you have a temporary location on the dais means anything about your presentation. It is just that this is one of our larger panels, but the Chair 

thought that it would be much better to have all of you together 

so you can actually have a dialog among yourselves, rather than, 

say, run two panels and then have someone say, ‘‘The previous 

panel said,’’ and so forth. So, the Chair apologizes, but I think in 

the end, we will have a much better chance of having as full a discussion as possible in the limited timeframe that we have. With 

that, Mr. Lindsey, if you will address us in any way you see fit 

with the time that you have. 

STATEMENT OF LAWRENCE B. LINDSEY, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, THE LINDSEY GROUP, FAIRFAX, 

VIRGINIA 

Mr. LINDSEY. Thank you, Mr. Chairman. Thank you very much 

for the invitation to be here today. I must say it is a pleasure. It 

is a particular pleasure since on the floor of the other body yesterday, I was referred to as the late Larry Lindsey—— 

[Laughter.] 

Mr. LINDSEY. I can assure you that it is a pleasure to be here 

and alive and kicking. It is surprising to me that, in the discussion 

of Social Security, promoting national savings has not been at the 

center of the debate. Last year, we Americans spent on consumption, investment, and government $1.06 for every dollar we earned. 

We balanced our collective checkbook only by selling assets we 

owned and by borrowing directly from foreigners, including institutions like the People’s Bank of China, to whom one might prefer 

7 

not to be increasingly indebted. This borrowing is directly tied to 

an ever-growing trend for us to consume foreign-produced goods, at 

the expense of American production. Done right, the reform process 

offers enormous potential for improving our savings. The first part 

of any credible Social Security reform plan is to permanently eliminate the actuarial deficit in the system. Currently, the system has 

promised to pay out in present value terms $11 trillion more than 

it will collect in revenue. There are a number of ways of closing 

this gap, but with different implications for national saving. For example, it would take a 28-percent increase in payroll taxes enacted 

now to make sure that the government collected all the money it 

needed to make benefit promises over time. This would, if three 

conditions were met, temporarily increase savings. First, the government would have to not spend the extra money on non-retirement spending. Second, the adverse effects of the tax increase on 

the economy must not lower government revenue from non-payroll 

sources. Third, private citizens faced with declining disposable incomes must cover the entire shortfall from reduced consumption, 

not by increasing their savings. 

It is unlikely that these three conditions would be met, but even 

if they were, the savings increase would be temporary. Once Social 

Security payments caught up with enhanced revenue, the plan 

would forever be moving money from one set of people who would 

spend the money, workers, to another set of people who would 

spend the money, retirees. So, even in the best case, a tax increase 

would do nothing to increase national saving over the long run. Because these conditions are unlikely to be met, the tax hike would 

not produce the intended amount of increased national savings 

even in the short run and would likely lower national savings in 

the long run. The combined adverse effects on existing personal 

saving and the disincentive effects on working and entrepreneurship are likely to be significant. This would be particularly true of 

ideas to raise or eliminate the wage cap that determines both Social Security taxes and Social Security benefits. For example, Martin Feldstein calculated that eliminating the cap would reduce net 

Federal revenue, since the behavior response by entrepreneurs to 

a tax hike that took their tax rate back up to nearly 50 percent 

would reduce Federal income tax revenue, as well as produce lower 

than expected payroll tax receipts. Moreover, such entrepreneurial 

income would be taxed and would have funded business fixed investment. 

The second way to bring the system into balance is to change the 

formula for determining benefits now in a way that gradually reduces the current growth rate in real benefits. Currently, Social Security projects a 50-percent increase in benefits, even after inflation, over the next half-century. The system would be brought into 

balance by limiting future benefits to the level of benefits enjoyed 

by those retiring from the system now, while fully indexing those 

benefits to inflation. This could be coupled—and I would think it 

is a good idea—with a generous minimum Social Security benefit, 

thus making the system both more progressive and providing a better safety net, with little adverse effect on national saving. The $11 

trillion in savings to the Social Security system by doing this could 

be viewed as a one-time improvement in the Federal Government’s 

8 

balance sheet by that amount, with an equivalent reduction for future retirees, as benefits would not rise as fast as they might now 

expect. Still, national saving would likely rise as a result in order 

to maintain the level of consumption retirement that the government previously promised but could not deliver. 

Individuals would have to gradually increase their personal saving during their working lives. This might not be easy for some 

folks. So, a second part of any Social Security reform plan that promotes national saving should include a personal account plan that 

helps people save and learn the benefits of saving by watching 

their own accounts grow. Most personal account proposals, including the President’s, would allow workers to use a portion of payroll 

taxes currently collected and direct them into a personal account. 

It has been widely noted that any shortfall to meet current benefits 

would be met by government borrowing, and therefore, the personal accounts that are funded by government borrowing do not 

raise national saving directly but simply increases government borrowing to fund private saving. What is not widely understood or reported is that for individuals to establish such an account, his or 

her regular Social Security benefit would be adjusted prospectively 

by the amount of any payroll tax that was diverted into the personal account plus interest. As a result, there is no added strain 

on Social Security resources. In fact, the system as a whole is made 

better off since funds are automatically transferred from years 

where the system has a surplus or a relatively modest shortfall to 

years where the shortfall is much bigger. Properly designed, Social 

Security personal accounts strengthen and do not weaken the solvency and safety of the Social Security system. So, long-term—— 

Chairman THOMAS. Mr. Lindsey, let me indicate, since you are 

the first and all of you really want to put a pound-and-a-half of 

sugar in a one-pound bag, that hopefully, as we discuss, the other 

points will come out. To be fair, because I am going to hold Members to 5 minutes as much as I can, if you will kind of sum it up, 

the Chair would appreciate it. 

Mr. LINDSEY. I will do that, sir. What I would recommend, as 

a personal account plan to promote savings, is that what we need 

is for individuals to make an additional contribution, that would be 

matched in a progressive way from the government revenue. The 

resulting accounts would buildup much more quickly, generate 

more earnings, and provide far more funds for retirement. The employees’ contribution would not affect their Social Security defined 

benefit in any way, but, as in the President’s plan, the Social Security system as a whole would be made whole for any diversion of 

existing payroll taxes. This proposal is not a carve-out. Nothing is 

carved out or removed from the Social Security system. The dollars 

allocated to personal accounts impose no additional strain on the 

system. This proposal is not an add-on. There is no new entitlement. In fact, adding yet another entitlement to our system would 

be among the worst things we could do for national saving. So, 

given the critical importance of saving for our Nation’s future, I 

think this approach is the best way of promoting savings over the 

long run. Thank you, Mr. Chairman. 

[The prepared statement of Mr. Lindsey follows:] 

9 

Statement of The Honorable Lawrence B. Lindsey, President and Chief 

Executive Officer, The Lindsey Group, Fairfax, Virginia 

Mr. Chairman, members of the Committee, I am honored to have been asked to 

testify today on the issue of Social Security reform. It is surprising that the issue 

of promoting national saving is not at the center of the current debate over Social 

Security reform, and that will be the focus of my comments today. 

Last year Americans spent—on consumption, investment, and government—$1.06 

for every dollar they earned. We balanced our collective checkbook only by selling 

assets we owned and by borrowing directly from foreigners, including institutions 

like the People’s Bank of China, to whom one might prefer not to be increasingly 

indebted. This borrowing is directly tied to an ever growing trend for us to consume 

foreign-produced goods at the expense of American production. Done right, the reform process offers enormous potential for improving our national saving rate and 

thus reducing the amount we will be borrowing from foreigners over the next century. 

The first part of any credible Social Security reform plan is to permanently eliminate the actuarial deficit in the system. Currently the system has promised to pay 

out, in present value terms, $11 trillion more than it will collect in revenue. There 

are a number of ways of closing this gap, but with different implications for national 

saving. 

For example, it would take a 28 percent increase in payroll taxes to make sure 

that the government collected all the money it needed to meet benefit promises over 

time. This would, if three conditions were met, temporarily increase saving. First, 

the government, in contrast with historical evidence, must not spend the extra revenue on non-retirement spending. Second, the adverse effects of the tax increase on 

the economy must not lower government revenue from non-payroll tax sources. 

Third, private citizens, faced with declining disposable incomes, must cover the entire shortfall from reduced consumption, not by reducing their saving. 

Even if these three conditions were met, the saving reduction would be temporary. 

Once Social Security payments caught up with the enhanced revenue, the plan 

would forever be moving money from one set of people who would spend the 

money—workers—to another set of people who would spend the money—retirees. 

So, even in the best case, a tax increase would do nothing to increase national saving over the long run. 

But, because these conditions are unlikely to be met, a tax hike would not produce 

the intended amount of increased national saving even in the short run, and would 

likely lower national saving in the longer run. The combined adverse effects on existing personal saving and the disincentive effects on working and on entrepreneurship, are likely significant. 

This would be particularly true of ideas to raise or eliminate the wage cap that 

determines both Social Security taxes and Social Security benefits. Martin Feldstein 

calculated that eliminating the cap would reduce net federal revenue since the behavioral response by entrepreneurs to a tax hike that took their tax rate back up 

to nearly 50 percent would reduce federal income tax revenue as well as produce 

lower than expected payroll tax receipts. Moreover, much of the entrepreneurial income that would be taxed would have funded business fixed investment. Thus, this 

particular tax idea would likely lower both national saving and economic growth. 

The second way of bringing the system into balance is to change the formula for 

determining benefits now, in a way that gradually reduces the current growth rate 

in real benefits. Currently Social Security projects a 50 percent increase in benefits, 

even after inflation, over the next half century. The system could be brought into 

balance by limiting future benefits to the level of benefits enjoyed by those retiring 

from the system now, while fully indexing those benefits to inflation. This could 

even be coupled with a generous minimum Social Security benefit, thus making the 

system both more progressive and providing a better safety net, with little adverse 

effect on national saving. The $11 trillion saving to the Social Security system of 

doing this could be viewed as a one-time improvement in the federal government’s 

balance sheet of the same amount, but with an equivalent reduction for future retirees, as benefits would not rise as fast as they might now expect. 

But, national saving would likely rise as a result. In order to maintain the level 

of consumption in retirement that the government previously promised, but could 

not deliver, individuals would have to gradually increase their personal saving during their working lives. This may not be easy for some folks. So, a second part of 

any Social Security reform that promotes national saving should include a personal 

account plan that helps people save and learn the benefits of saving by watching 

their own accounts grow. 

10 

Most personal account proposals, including the President’s, would allow workers 

to use a portion of payroll taxes currently collected and direct them into a personal 

account. It has been widely noted that any shortfall to meet current benefits would 

be met by government borrowing, and that personal accounts that are funded by 

government borrowing do not raise national saving; it simply increases government 

borrowing to fund private saving. 

But it is not widely understood that for an individual to establish an account, his 

or her regular Social Security benefit would be adjusted prospectively by the amount 

of payroll tax that is diverted into a personal account plus interest. As a result, 

there is no added strain on Social Security resources. In fact, the system as a whole 

is made better off since funds are automatically transferred from years where the 

system has a surplus, or a relatively modest shortfall, to years when the shortfall 

is much bigger. Properly designed, Social Security personal accounts strengthen, 

and do not weaken, the solvency and safety of the Social Security system. So, long 

term national saving is not harmed in any way by this approach, and is likely to 

be increased. 

Still, the national saving opportunity of Social Security reform could be further 

enhanced. The best way is to allow workers to choose a plan where they would contribute more to their retirement in return for gaining ownership and a higher return 

on their existing payroll taxes. In effect, the government could match private contributions. Many companies successfully use this approach for their own 401(k) 

plans, but the Social Security match could easily be more generous. 

Consider, for illustrative purposes, a plan that asked employees to contribute 11⁄2

percent of their wages to their own personal account, with no change in their current taxes. For only a slightly higher short run budget effect than the President’s 

proposal, Social Security could offer a four-for-one match on employee contributions 

made on the first $10,000 of earnings and a one-for-one match on contributions 

made on earnings above that amount. A worker making $10,000 would thus contribute $150 a year to his account and be matched $600 from existing payroll tax 

revenue—producing a $750 account. A worker making $50,000 would contribute 

$750 a year and be matched $1,200, producing a $1,950 personal account. The resulting accounts would build up much more quickly, generate more earnings, and 

provide far more funds for retirement. The employee’s contribution would not affect 

their Social Security defined benefit in any way. But as in the President’s plan, the 

Social Security system would be made whole for any diversion of existing payroll 

tax revenue. 

Best of all, national saving would be enhanced unambiguously. The funds being 

contributed by workers would largely be net contributions to national saving. They 

would also involve the real attributes of ownership of capital since the worker would 

unequivocally have some ‘‘skin in the game.’’ A high initial match rate would also 

create the right kind of incentives to change long term attitudes toward national 

saving, as well as being more progressive than the current Social Security system. 

This proposal is not a ‘‘carve out.’’ Nothing is carved out or removed from the Social Security system. The dollars allocated to personal accounts impose no additional 

strain on the Social Security system. This proposal is not an ‘‘add on.’’ There is no 

new entitlement. In fact, adding yet another entitlement to our system would be 

among the worst things we could do for national saving. 

Given the critical importance of saving to our nation’s economic future, it is important to make the most of the once-in-a-generation opportunity to promote national saving offered by Social Security reform. The combination of gradual reductions in the promised rate of real increase in future benefits and a personal account 

system that promotes national saving—that is neither a carve out, nor an add-on— 

is the best approach. 

Thank you. 

f 

Chairman THOMAS. Thank you, Dr. Lindsey. Mr. Pozen? 

STATEMENT OF ROBERT C. POZEN, CHAIRMAN, MFS 

INVESTMENT MANAGEMENT, BOSTON, MASSACHUSETTS 

Mr. POZEN. Thank you very much, Mr. Chairman, for this opportunity to testify. Let me begin by explaining progressive indexing, my proposal, and then I will address some issues that have 

been raised about that proposal. Progressive indexing divides workers into three main groups: low-wage workers, high-wage workers, 

11 

and median-wage workers. Low-wage workers would be everyone 

at $25,000 in average career earnings and lower; we would preserve, totally, all of their scheduled benefits. We would also preserve everyone’s benefits who is in retirement or who would retire 

before 2012. High-wage workers would be defined as $113,000 in 

average career earnings and higher and we would price index their 

initial Social Security benefits so they would grow, but they would 

grow more slowly than the current schedule. Everyone in between, 

the median-wage workers, would receive a mix of price and wage 

indexing. That means that all of them would have their benefits 

grow by more than the Consumer Price Index, but not as much as 

the current schedule. 

What is the rationale for this proposal? I believe that when Social Security was passed, there were no Individual Retirement Accounts (IRA) or 401(k)s; there weren’t really even very many defined benefit plans. Now, in 2004 alone, the tax revenue foregone 

for IRAs and 401(k)s was roughly $55 billion; if we include all private retirement programs, it was $100 billion in that year alone. 

Most of those tax subsidies go to high-wage and to some degree 

middle-wage workers, and so, I believe in order to create neutral 

government support among wage groups, we need to do more for 

low-wage workers in Social Security. Very few of them have retirement programs like 401(k)s or IRAs and they are totally dependent 

on Social Security. 

There are three main questions that have been raised. Also, 

there are technical questions that I deal with in my testimony. One 

is, some people say, ‘‘it is nice that you protect the low-wage worker, but what about the middle-wage worker?‘‘ At $25,000 in career 

earnings, that constitutes roughly 30 percent of all workers who retire in the United States. If we look at the median-wage worker, 

I think it is really too easy a criticism, and, I think, an unfair criticism to say that those people are going to get less than scheduled 

benefits. If we have a large deficit and we protect low-wage workers, we are going to have to grow Social Security benefits slower 

for someone. If we look at the median-wage worker in 2045, then 

yes, it is true that person would get, under progressive indexing, 

16 percent less than the schedule of benefits. However, if the system is not subject to a major reform, there would be an automatic, 

across-the-board, cut in 2042 and that person would suffer a 27 

percent decrease in benefits. So, we really need to think about any 

‘‘cut’’ relative to that 27 percent decrease. Another criterion is purchasing power. In 2045 under progressive indexing, the median 

worker would be looking at a 20-percent increase in the purchasing 

power of their Social Security benefits relative to today. So, yes, 

there is a reduction from the schedule, but it is actually much less 

than if the system defaulted, and, most importantly, for almost all 

workers under progressive indexing, they would get a substantial 

increase in purchasing power. 

Second, people say that they would like to have milder reductions from the schedule in the middle-wage workers, and I think 

that is a fair point. It is a political point that you will have to address. I think we have to just be realistic about what are the other 

alternatives. I suggested in my testimony that you could have a 

milder version of progressive indexing if Congress were willing to 

12 

do something on the retirement age and I suggested, for instance, 

between the years 2055 and 2079, you could move the retirement 

age back gradually from 67 to 69. That would be consistent with 

longevity expectations and it would allow you to put less freight on 

progressive indexing. We also know that people have suggested increases in payroll taxes, bringing more revenue into the system. 

Again, I think it is something that can be seriously considered, but 

people need to be realistic about how much you could get from various payroll tax increases. For example, if by 2012, the year progressive indexing begins, if we were to raise the payroll tax base 

from $90,000 to $150,000 and apply 12.4 percent to that increment, 

that closes roughly one-quarter of the deficit of Social Security. So, 

we would still have to do a substantial amount of work on the benefits side. I believe that such an increase in the base from $90,000 

to $150,000 is unfair to the workers in that wage group and that 

a fairer way to proceed would be to have a much lower rate, like 

2.9 percent, and have that applied from $90,000 all the way up to 

include all earnings, roughly on the Medicare model. Again though, 

that would only reduce the long-term deficit by about a quarter. So, 

we have to get realistic; even if we bring more revenue into the system, which some Members want to do, we still would have to combine that with some benefit constraints. 

The third issue, and it is clearly the most controversial issue, as 

a number of Congressmen have made clear, is the personal account. I have shown in a number of papers how progressive indexing could be combined with a 2 percent account along the lines of 

what the President has suggested. However, I want to make 

clear—and I have tried to in my testimony—that progressive indexing can stand alone. It alone closes 70 percent of the long-term deficit of Social Security, going from $3.8 trillion to $1.1 trillion, or it 

can be combined with various sorts of personal accounts. I strongly 

believe that it is useful as part of a package to have personal accounts because it is very difficult to say to people that we are just 

going to have some benefit constraints and some payroll tax increases. I think we need to be creative in thinking about the personal accounts. I know Chairman Thomas has suggested that we 

broaden the discussion and I have tried to suggest a number of 

ideas. We could have, basically, enhancements to IRAs if we are 

going to slow the growth of benefits for median and higher workers. We could take the cap off the Roth IRA. That would be a measure that would match with slowing the growth of benefits of highwage workers. We could also increase the low-income tax credits 

that are now available for people with income below $30,000 or 

$35,000 per year. We could expand these credits to help the median 

workers. 

Last, I would say that we can take this idea of a 2.9 percent surcharge above the base and we could think of it in two parts. We 

could think of the 1.45 percent from employees going toward solvency and the other 1.45 percent from employees as being actually 

something similar to what Larry Lindsey just suggested, as sort of 

a presumptive enrollment in IRAs so that 1.45 percent could go 

into an IRA. If people didn’t want to enroll in an IRA, if workers 

didn’t want to do this, they could opt-out. So, you could think of 

an IRA approach as applying to a part of the payroll tax a surVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HR\OC\24732.XXX 24732
13 

charge above the $90,000 base, and you could also think of a similar approach applied to all workers. All workers could have 1.45 

percent of their wages presumptively put into an IRA, but if they 

didn’t want to do that, they could opt-out. This would be a way in 

which we could encourage retirement savings, get over the inertia 

that a lot of people have in saving for retirement, and help buildup 

these other sources of retirement income if, as I think we will have 

to come to grips with, we are going to have to slow down the 

growth of Social Security benefits somewhat. Thank you very 

much, Mr. Chairman. 

Chairman THOMAS. Thank you, Mr. Pozen. I indicated I would 

try not to interrupt witness, so I didn’t do so and cut you off. 

Mr. POZEN. I appreciate that. 

[The prepared statement of Mr. Pozen follows:] 

Statement of Robert C. Pozen, Chairman, MFS Investment Management, 

Boston, Massachusetts 

Mr. Chairman and Committee Members: 

Thank you for this opportunity to testify before the Committee on Ways and 

Means. I strongly support the Committee’s efforts to reach a bipartisan consensus 

on solvency for Social Security. We must first address solvency and then focus on 

what type of personal accounts (including add-on as well as carve-out accounts) 

might be appropriate as part of a legislative package. 

Our best chance of developing a viable legislative package is to link Social Security reform with enhancements to private retirement accounts, such as the 401(k) 

plan and the individual retirement account (IRA). In the past, Social Security and 

private retirement plans have been treated as separate legislative subjects; yet 

these are two sources of retirement income that are considered together by most 

workers. In 1933 when Social Security began, the 401(k) plan and IRA were unknown; today, these programs play an important role in helping to provide retirement security. So today we should evaluate the Social Security system in light of 

the existing incentives for private retirement programs, and we should consider possible expansions of these programs in connection with any Social Security reforms. 

In this testimony, I will first explain progressive indexing and respond to a few 

early observations about the proposal; second, evaluate the impact of progressive indexing on the middle class viewed from different perspectives; third, outline several 

alternatives for adding revenue to Social Security in connection with milder benefit 

reforms; and fourth, discuss a few approaches to increasing retirement income by 

enhancing different types of personal accounts. 

I. Summary of Progressive Indexing 

Progressive indexing is a strategy to move toward Social Security solvency (with 

or without personal accounts) by reducing its long-term deficit from a present value 

of $3.8 trillion to $1.1 trillion. In general, progressive indexing would change the 

formulas for computing initial Social Security benefits at retirement for different 

groups of earners. In specific, progressive indexing would divide earners into three 

main groups as of 2012 (when progressive indexing begins): low earners with average career earnings of $25,000 per year and lower; high earners with average career 

earnings of $113,000 per year and higher; and, middle earners with average career 

earnings between $25,000 and $113,000 per year. 

Under progressive indexing, all low-wage earners (as well as all those retiring before 2012) would receive the current schedule of initial Social Security benefits— 

which increases average career earnings by the rate that American wages have 

risen over their working careers. By contrast, under progressive indexing, all highwage earners would receive initial Social Security benefits that grow more slowly 

than the current schedule because their average career earnings would be increased 

by the rate at which prices have risen over their working careers. The initial Social 

Security benefits of median-wage workers would be increased by a proportional 

blend of price and wage indexing. 

The rationale for progressive indexing is simple. Low-wage workers are almost entirely dependent on Social Security benefits for retirement income; they have minimal participation in 401(k) plans and IRAs. On the other hand, almost all highwage workers as well as most middle-wage workers do participate in private retireVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 E:\HR\OC\24732.XXX 24732
14 

ment plans. In 2004, the federal tax revenues forgone for 401(k) plans and IRAs 

were $55 billion. 

Several technical concerns about progressive indexing have been raised. First, it 

has been observed that a flat benefit would result if progressive indexing were continued into the 22nd century. My proposal for progressive indexing runs until 2079, 

the end of the conventional period for measuring system solvency, at which time the 

benefits of the top-paid workers would still be 20% higher than the benefits of lowwage earners. 

Second, some have questioned whether wages will continue to rise on average 

1.1% faster than prices over the next century, as they have over the last century. 

This concern can be met by applying to the initial Social Security benefits of the 

top earners an index designed to reflect the historic difference between wage and 

price growth—for instance, the average annual increase in wages over their careers, 

minus 1.1% per year. 

Third, the argument has been made that progressive indexing is not progressive 

since its benefit reductions would constitute only a small fraction of the pre-retirement income of a millionaire. In fact, the reductions in Social Security benefits for 

a maximum earner would be significantly larger, in both dollar and percentage 

terms, than those of a median-wage worker under progressive indexing. These larger benefit reductions are justifiable precisely because they constitute only a small 

fraction of the income of any millionaire before or after retirement. 

II. Impact on Median Workers 

Others have expressed a more substantive concern about the impact of progressive indexing on the median-wage worker, who will earn $47,000 in 2012 ($36,500 

in 2005). It has been noted that such a worker retiring at age 65 in 2045 would 

receive 16% less under progressive indexing than scheduled benefits—$16,417 rather than $19,544 (in 2004 constant dollars). Is this reduction from the schedule a 

‘‘benefit cut’’? The schedule represents the benefits we have promised but do not 

have the money to deliver—this is why the long-term deficit of Social Security has 

a present value of $3.8 trillion. If the test of a politically viable reform plan is not 

reducing scheduled benefits for median-wage workers as well as for low-wage workers, then every politically viable plan to restore Social Security will fail. 

One relevant criterion is how a reduction in scheduled benefits compares to the 

reduction that would occur if the Social Security system goes into default. If Congress does not enact Social Security reform of a major nature, the system will default in 2041 and benefit levels will automatically be reduced by roughly 27% for 

all workers in 2045. Thus, judged relative to payable benefits, the $16,417 received 

by the median-wage worker in 2045 would actually be an increase in benefits— 

$2,150 more than the $14,267 that the system can afford to pay in 2045 absent 

major reforms (in constant 2004 dollars). 

A second relevant criterion is whether that $16,417 received by the median-wage 

worker in 2045 under progressive indexing constitutes an increase or decrease in 

purchasing power relative to today’s benefits for a similarly placed worker. That 

worker in 2045 would receive a 14% increase in purchasing power as compared to 

a similar worker today—from $14,384 in 2005 to $16,417 in 2045 (expressed in 2004 

constant dollars). In other words, median workers would be able to buy 14% more 

goods and services with their monthly checks from Social Security under progressive 

indexing in 2045 than they can buy with these checks today. 

A third criterion is the impact of Social Security reform on replacement ratios— 

the percentage of pre-retirement earnings replaced by post-retirement benefits. 

Under the current schedule for Social Security, the replacement rate would be 36% 

for a median-wage worker retiring at age 65 in 2045; under progressive indexing, 

the replacement rate for that same worker would decline to 30%. However, the 

above replacement rates do not include any post-retirement income from private retirement plans like the 401(k) and IRA. A majority of median-wage workers already 

participate in such plans, and I would strongly support legislative measures to enhance participation rates for median-wage workers. 

III. Increases in Payroll Taxes 

Notwithstanding the above evaluations of the proposal for progressive indexing 

under alternative criteria, if Congress concludes that the reductions from scheduled 

benefits for median-wage workers are too large under the proposal, these can be 

softened by modifying the bend points and PIA factors utilized by the actuaries to 

implement the proposal. In that event, Congress could restore Social Security to solvency by adopting other benefit reforms (such as moving back the normal retirement age from 67 to 69 between 2055 and 2079), or by increasing revenue flow into 

the system. With regard to the latter approach, it may be helpful to calibrate the 

15 

differential impact of various possible increases in payroll taxes on the system’s solvency. 

As you are aware, the payroll tax rate of 12.4% currently applies to all earnings 

up to $90,000 per year. Should Congress decide to close the whole long-term deficit 

of Social Security through payroll taxes, it would have to extend this 12.4% rate to 

all earnings (assuming minimal retirement benefits were paid in connection with 

these new payroll taxes). Thus, attaining solvency for Social Security in this manner 

would require one of the largest tax increases in American history for all workers 

with earnings above $90,000 per year. 

Since such a huge extension of payroll taxes at 12.4% to all earnings does not appear to be politically viable, some commentators have suggested that the 12.4% rate 

be levied on all earnings up to $130,000 per year in today’s dollars—which would 

automatically rise under current law to $150,000 per year by 2012. Yet even such 

a sharp jump in the earnings base subject to a 12.4% tax rate would close only onefourth of the long-term deficit of Social Security. Moreover, this type of extension 

would be very unfair to those workers earning between $90,000 and $200,000 per 

year. Most of their earnings would be subjected to the 12.4% payroll tax, while most 

of the earnings of millionaires would escape this tax. 

If Congress chose to raise payroll taxes as part of a reform package, a more workable structure would be a surcharge of 2.9% on all earnings above $90,000—loosely 

based on the model of the Medicare tax. This structure would more fairly spread 

the burden among all high-wage earners, and would have roughly the same solvency 

impact as applying a 12.4% tax rate to all earnings up to $130,000 per year in 2005. 

In both cases, the long-term deficit of Social Security would be cut by only onefourth. Therefore, significant constraints on benefit growth would still be needed in 

order for the system to become solvent later this century. 

IV. Types of Personal Accounts 

Progressive indexing can stand alone as a strategy to move toward Social Security 

solvency, or it can be combined with various types of personal accounts. In this context, personal accounts can play two useful roles. First, they can increase the retirement income of workers, especially those who would experience slower growth in 

their Social Security benefits under progressive indexing. Second, they can provide 

a political ‘‘sweetener’’ to a legislative package otherwise containing benefit constraints and tax hikes. 

A. Carve-out Accounts 

Since progressive indexing would slow the growth of Social Security benefits for 

some workers, it could be combined with a personal retirement account (PRA) involving a voluntary allocation of a modest portion (such as 2% of earnings) of the 

12.4% in payroll taxes. Any worker who made such an allocation to a PRA would 

have to accept lower traditional Social Security benefits since he or she would be 

paying in lower amounts to the traditional system and receiving the returns on his 

or her PRA in addition to traditional benefits. These lower traditional benefits 

should be calculated using an offset rate that is the same as the actual real rate 

of return on 30-year U.S. Treasury bonds, rather than an artificially selected rate 

such as a 3% real return. A PRA would have an excellent chance of providing a 

higher return than this actual real rate of return by investing consistently in a lowcost balanced account, comprised 60% of an equity index fund and 40% of a bond 

index fund, throughout the 30 to 35 years of someone’s working life. 

Some have expressed concern that carve-out PRAs would not improve the solvency 

of the Social Security system and would increase government borrowing. However, 

as calculated by the Social Security actuaries, a combination of progressive indexing 

and a carve-out PRA with an allocation of 2% of earnings (limited to $3,000 per year 

with the limit indexed to prices) would make Social Security solvent by the end of 

2079. No government borrowing would be needed until 2030 to finance this combination, and such borrowing would be completed before 2079. Moreover, the government borrowing needed to finance this combination would be $2 trillion less than 

the government borrowing needed to finance the current schedule of Social Security 

benefits through 2079. 

B. Add-on Accounts 

For those who oppose carve-out PRAs, progressive indexing could be combined 

with various forms of add-on accounts in a legislative package. It bears emphasis 

that add-on accounts themselves would not make Social Security solvent and would 

increase the budget deficit. However, a combination of progressive indexing and 

modest expenditures for add-on accounts could be designed to substantially improve 

the solvency of Social Security. Instead of creating a new set of add-on accounts, 

16 

Congress should enhance the existing structure of IRAs in order to promote more 

retirement savings in the most efficient manner. 

One suggestion would be to transform the low-income tax credit for IRA contributions into a partially refundable tax credit. This would make the tax credit more 

effective for families with incomes below $40,000 per year, who often do not pay federal income taxes. Another suggestion would be to remove the income ceiling from 

the Roth IRA, which currently starts to phase out for families with incomes of more 

than $120,000 per year. Removing the income ceiling would be a political quid-proquo for high-wage earners with the slowest growth of Social Security benefits under 

progressive indexing. Yet another suggestion would be to allow all taxpayers to earmark a portion of any federal income tax refund for investment in an IRA. This 

would be a low-cost way to encourage retirement savings. 

C. Opt-out Accounts 

As mentioned above, if Congress chose to raise the payroll tax base, the fairest 

approach would be to impose a 2.9% surtax on all wages above $90,000 per year. 

Under this approach, what kind of retirement benefits should be associated with 

such a surtax? One possibility would be to dedicate the 1.45% of the surtax that 

would be paid by employers to improving Social Security solvency (worth about 

0.25% of payroll), and allocate the 1.45% paid by the workers to a personal account 

invested in market securities. Since the allocation of this 1.45% would not divert 

existing payroll taxes from Social Security, the funding of these personal accounts 

would not involve incremental borrowing by the federal government. But such a personal account would effectively impose a mandatory IRA contribution on high-wage 

earners. A more flexible form of this approach would be to allocate 1.45% of earnings above $90,000 to an IRA, subject to an opt—out by the worker. 

If this more flexible approach were attractive to Congress, it could also be applied 

to workers with earnings below $90,000 per year. For example, employers could be 

required to presumptively allocate to an IRA 1.45% of the annual earnings of all 

full-time workers on the job for at least one calendar year with annual earnings of 

at least $24,000. This allocation would be in addition to the payroll taxes now paid 

by such workers, but they could opt out of the presumptive allocation of this 1.45% 

to an IRA simply by notifying their employer. In practice, this flexible approach 

would harness the forces of human inertia and tax incentives to encourage retirement savings, while allowing any worker the choice of not participating in this type 

of retirement program. 

Conclusion 

Progressive indexing provides a fair and workable foundation for legislative efforts 

aimed at restoring solvency to the Social Security system. Many of the observations 

about progressive indexing can be resolved by careful legislative drafting, and the 

impact of progressive indexing on median-wage workers can be softened if Congress 

is prepared to adopt other benefit constraints or revenue raisers. Moreover, progressive indexing can be combined with various type of personal accounts that may be 

helpful in enacting a legislative package of Social Security reforms and encouraging 

retirement savings for American workers. 

Thank you again for this opportunity to testify on Social Security reform. I recognize that this subject is politically challenging for any elected official and greatly 

respect your efforts. I would be glad to answer any questions you might have on 

progressive indexing or related points discussed in this testimony. 

f 

Chairman THOMAS. Dr. Schieber, it is nice to have you with us. 

Thank you for your testimony. 

STATEMENT OF SYLVESTER J. SCHIEBER, VICE PRESIDENT, 

WATSON WYATT WORLDWIDE 

Mr. SCHIEBER. Thank you very much, Mr. Chairman, Members 

of the Committee. In my day job, I work for a company, Watson 

Wyatt Worldwide, that often works with employers on the redesign 

of their retirement plans. In these projects, there is a tendency in 

many cases to move right to restructuring the plan without stepping back and thinking about the principles that are being pursued 

in doing so. In my prepared testimony, I actually lay out a set of 

17 

principles that you might consider. I arrived at these by considering the historical goals that have been behind the system. One 

thing many people do not realize is that Franklin D. Roosevelt 

(FDR) played an extremely active role in formulating his proposals 

on Social Security. One aspect of his recommendation that was 

most important to him was that the system be funded as benefits 

were accrued. He said to do otherwise would lead to massive unfunded obligations that would burden future Congresses unfairly. 

The original legislation called for substantial funding of the pension obligations, yet FDR’s wishes were never fulfilled. Some policy 

makers wanted to use the accumulating trust funds to increase 

benefits to early recipients. Others were concerned that the accumulating trust funds were not true funding, that the money was 

not being saved. By the early fifties, the system was running on a 

pay-as-you-go basis. This issue arose again after the 1983 amendments and has arisen as the trust funds have grown to more than 

$1.5 trillion. Yet few people believe these assets are true pension 

funding. 

Social Security today provides four kinds of insurance for active 

workers. It insures that workers who die and leave juvenile children, that their dependents will be taken care of economically, because they are no longer there to provide the means for their children’s needs. No one is suggesting that this protection be significantly altered. It also insures against disability. While this program deserves careful review because it itself is underfunded, and 

because it is still relying on a definition of disability that is now 

a half-century old and because there are significant administrative 

problems, no one is suggesting that we eliminate this sort of protection from our system. It insures against bad labor market outcomes in that it provides relatively larger benefits to low-wage 

workers. This is a form of insurance that is a public good and will 

only be provided by government. If anything, this form of insurance 

should be bolstered. It also insures all of us against our own inability, or unwillingness, to begin preparing adequately for our retirement needs on a timely basis. It is this element of the system that 

FDR was adamantly committed to funding, and I believe he was 

absolutely correct in his insistence. It is here, more than any other 

element, that I believe our current system is badly flawed. Leaving 

aside whether today’s trust fund is real funding, according to the 

Social Security actuaries, last year, the value of accrued benefits 

already earned under the system increased by $1 trillion more than 

the increase in the trust fund balances. As FDR said, this is unfair 

to future generations. 

Some people argue that the transition costs from moving to a 

system that accumulates assets and allows them to be sequestered 

from other governmental fiscal operations will create massive transition costs. They are confusing the transition costs that we have 

with the current system with the costs associated with personal accounts. By the Social Security actuaries’ estimates, the 75-year 

pay-as-you-go system is underfunded by $4 trillion in present value 

terms. That means we need an extra $4 trillion in assets today, or 

the present value of equivalent reductions in benefits or increases 

in taxes, in order to balance the system. We have a $4 trillion transition cost to deliver on with current law. The costs of the sort of 

18 

individual accounts that President Bush has proposed, by comparison, is trivial, as I show in Table 5 in my prepared remarks. Having studied this system for nearly a quarter of a century now, I am 

totally convinced that FDR was extremely prescient in anticipating 

our current difficulties in failing to fund this program. Having 

grown up in Missouri as a boy, I am particularly impressed by 

FDR’s successor, Harry Truman, who often said that those who ignore history are condemned to repeat it. We ought not leave the 

next generation the problems we are now incurring because we 

now know that FDR was right and are paying the price for not living by the insurance principles that he demanded as the basis for 

Social Security. Thank you. 

[The prepared statement of Mr. Schieber follows:] 

Statement of Sylvester J. Schieber, Vice President, Watson Wyatt 

Worldwide 

Mr. Chairman and members of the Subcommittee on Social Security of the Ways 

and Means Committee of the U.S. House of Representatives, the following is a discussion about issues I believe you should consider during 2005 in your deliberations 

about the future operations of our Old-Age, Survivors and Disability Insurance system—what most people in our society call Social Security. This discussion does not 

include a specific proposal for reform of our existing system. If you want a specific 

proposal, I can offer you one but there are already many proposals available including a number of them that I have helped develop over the years. Before offering you 

a new proposal, I would need to know what you wish to achieve with our Social Security program in the future including a set of principles that would serve as its 

foundation for future generations. 

I have a set of principles that I offer as a starting point for discussion. The remainder of my testimony here supports these principles. In brief: 

• The early survivor and disability insurance programs are term insurance and 

should be preserved and modified as appropriate. • The important ‘‘safety net’’ or progressivity of the existing Social Security system is insurance for workers against bad labor market outcomes and should be 

preserved and enhanced. 

• ‘‘Retirement savings’’ under the auspices of Social Security should be real savings and not loans to be redeemed out of our children’s consumption budgets. 

• We should improve equity in the structure of benefits, especially between one 

and two-earner couples. 

• We should continue to provide a floor of protection against longevity risk by providing basic benefits in the form of annuities. 

• We should improve economic efficiency in the system, especially the linkage between contributions and benefits beyond foundation levels. 

• We should assure long-term solvency, not simply postpone insolvency. 

• We should assure that risks borne by individual participants are diversified and 

at tolerable levels—including skewing financial market risks toward those who 

are more able to bear it. • Administrative costs should be kept at tolerable levels. 

• Finally, fixing the system soon is extremely important. 

Among other things in my career, I have studied the history of our Social Security 

program to a somewhat greater extent than most people who will come before you. 

I wrote a book on Social Security in 1982 entitled, Social Security: Perspectives on 

Preserving the System published by the Employee Benefit Research Institute. In 

1998, I wrote a second book on the same subject with Professor John B. Shoven of 

Stanford University, The Real Deal: The History and Future of Social Security published by Yale University Press. For the sake of full disclosure here, I advocated in 

both of these books that our Social Security pension system should include an element of personal accounts in its structure. I did not come to this conclusion in either 

of these books because of ideological reasons. I reached the conclusion because I believe that it is ultimately the only way that one of Franklin D. Roosevelt’s original 

and deeply held goals for the system can ever be realized. I continue to believe that 

today and I continue to advocate that personal accounts should be part of our Social 

Security system because I agree with FDR’s strong belief in funding pension obligations as they are earned. 

19 

1Franklin D. Roosevelt, ‘‘Message to Congress Reviewing the Broad Objectives and Accomplishments of the Administration,’’ June 8, 1934. 2Franklin D. Roosevelt, Address to the Advisory Council on the Committee on Economic Security on the Problems of Economic and Social Security, November 14, 1934. 3Frances Perkins, The Roosevelt I Knew (New York: The Viking Press, 1946), p. 294. 

In the following discussion, I touch on a number of issues that I believe are important to your deliberations. I start with FDR’s statement about what our Social Security pension system was intended to achieve. I start here because I believe that FDR 

chose his language about this system carefully and that he deliberately meant what 

he said. I move on to discuss a problem that arose in the implementation of FDR’s 

goals, a problem that many proposals today are attempting to correct. Next, I revisit 

the ‘‘insurance principles’’ that FDR espoused in his vision of the system because 

I believe we would benefit to a great degree by returning to them. I then take up 

a discussion about transition costs associated with reform of our Social Security system because I believe there is a great deal of confusion about how costs should be 

assigned to the rebalancing of the current system’s financing versus the costs associated with individual accounts. In the final section of the discussion, I explore the 

differences in ‘‘carve-out,’’ ‘‘add-on’’ and hybrid financing of personal accounts. 

Background 

In June 1934, President Roosevelt established the Committee on Economic Security (CES) to explore the way in which our society could provide ‘‘security against 

the hazards and vicissitudes of life,’’ especially those associated with ‘‘unemployment and old age.’’1 FDR indicated that he thought a program of ‘‘social insurance’’ 

was the way to address these problems. The CES report, although dated January 

15, 1935, was not formally submitted to President Roosevelt until two days later, 

January 17. He transmitted it to the Congress on the latter date along with recommendations on legislation. The reason that there is a discrepancy in the dates 

on the CES report and its submission to the president is important in understanding FDR’s intentions about the operation of our Social Security program. 

President Roosevelt’s submission of the Social Security proposals to Congress was 

not the first time that he had been involved in developing public policy to provide 

income security to the elderly population. While he had served as governor, New 

York had implemented a state assistance program for the elderly. FDR considered 

the patchwork of state assistance programs as only a partial solution to the problems of income insecurity among the elderly. In November 1934, he addressed an 

advisory committee to the CES and laid out certain tenets of the evolving legislation. He said that when signing the Old-Age Pension Act while governor of New 

York he had expressed the ‘‘opinion that the full solution’’ to the old-age-income security problem could be achieved only on the basis of ‘‘insurance principles. It takes 

so very much money to provide even a moderate pension for everybody, that when 

the funds are raised from taxation [that] a means test’ must necessarily be made 

a condition of the grant of pensions.’’2 By referring to ‘‘insurance principles’’ he was 

saying that he believed the new Social Security benefit would have to be funded in 

order to be viable on any grounds other than means testing. 

On the afternoon of January 16, 1935, President Roosevelt was reviewing the final 

package that had been prepared by the CES for submission to Congress when he 

discovered a table in the report showing that the old-age insurance program would 

be running a significant deficit after 1965 that would require a government contribution over and above the payroll tax sometime later, around 1980. He immediately suspected an error in the report and summoned Secretary of Labor, Frances 

Perkins, and the executive director of the CES, Edwin Witte, to help sort out the 

matter. Upon being informed that the deficit was an element of the package as designed, FDR insisted that it had to be changed. In regard to the prospect that the 

old-age insurance program he was proposing would require government subsidies in 

the future, Frances Perkins quotes FDR as saying: ‘‘This is the same old dole under 

another name. It is almost dishonest to build up an accumulated deficit for the Congress of the United States to meet in 1980. We can’t do that. We can’t sell the 

United States short in 1980 any more than in 1935.’’3

FDR’s statement ties back directly and consistently with his feelings at the time 

he had signed the old-age assistance law in New York while serving as governor 

when he said the full solution to the old-age problem could only be achieved through 

a program based on ‘‘insurance principles.’’ It also follows from his statement to the 

Advisory Council the prior November when he said the old-age system had to be 

based on such principles. FDR clearly envisaged and intended to develop a plan that 

was contributory and self-supporting with an accumulation of a trust fund roughly 

commensurate with accruing benefit obligations. 

20 

4 Edwin Witte, The Development of the Social Security Act, pp. 74–75. 5Senate Report No. 628, 74th Congress, May 13, 1935, p. 9. 6 Arthur H. Vandenberg, ‘‘The $47,000,000,000 Blight,’’ The Saturday Evening Post (April 24, 

1937), vol. 209, no. 43, pp. 5–7. 

After the meeting between FDR, Secretary Perkins and Witte at the White House 

on the afternoon of January 16, the report was withdrawn from the President. Secretary Perkins set about polling the members of the CES and all agreed that the 

President’s wishes on the funding matter were to be addressed. At the President’s 

insistence, the offending table was taken out of the report and the package was 

modified to indicate that the schedules of tax rates and benefits included were merely one approach to providing old-age benefits that Congress might consider. The report was filed with the President the morning of January 17.4

The final provisions in the Social Security Act adopted in 1935 called for a schedule of payroll taxes to begin at a rate of 1 percent each on workers and their employers on the first $3,000 of annual earnings. The initial payroll tax rate paid by 

workers and their employers was to increase in half-percentage point increments 

every three years until it reached 3 percent of covered wages in 1949. The contributory funding was projected to be adequate so that no added government contribution 

would be required to finance the old-age insurance benefits. By 1980, the trust fund 

was projected to grow to $47 billion.5

Under the proposal that had been put forward by the Roosevelt Administration, 

the trust fund was to invest only in government bonds. For many people the thought 

of this accumulation, especially in the form of government bonds, was too fantastic 

to comprehend. At the time it was being considered, the total outstanding federal 

debt was only $27 billion and no one thought of the government running future deficits that could accommodate such accumulations. After all, the government had accumulated only a total of $27 billion in debt in its first 159 years of operations, and 

no one expected it to accumulate another $20 billion in the succeeding 45 years. 

Further, contemporary policymakers thought of paying down the debt after getting 

out of the Depression rather than seeing it grow in the future. There were a number 

of potential problems in the projected accumulation of the Social Security fund. 

From one end of the political spectrum, the critique of the Social Security Act focused on the relative levels of benefits that would be provided through the federal 

Old-Age Benefits program in its early years of operations and the state administered old-age assistance programs. The funding provisions, which President Roosevelt had insisted on when the Act was under development, meant that the oldage insurance program was not going to pay significant benefits until many years 

into the future. From the other end of the political spectrum, the critique of the 

original legislation focused on the notion that a trust fund invested in government 

bonds is, in reality, a scheme to borrow from future generations at the expense of 

fiscal discipline today. This argument was summarized by Senator Arthur Vandenberg: 

The Treasury collects [a] billion in pay-roll taxes—The Treasury gets a billion 

in cash. It goes into the general fund—Congress then takes it out of the Treasury by appropriating a billion to the reserve—So the Social Security Board 

hands the billion in cash back to the Secretary of the Treasury and takes from 

him a special—IOU—The Secretary of the Treasury has the billion of money— 

He can use the billion either to retire regular Government-debt obligations in 

the general market or—he can apply it on his current operating deficit. As 

things are now going, we shall have deficits—— 

What has happened, in plain language, is that the pay-roll taxes for this 

branch of social security have been used to ease the contemporary burden of the 

general public debt or to render painless another billion of current Government 

spending, while the old-age pension fund gets a promise-to-pay which another 

generation of our grandsons and granddaughters can wrestle with, decades 

hence. 

It is one of the slickest arrangements ever invented. It fits particularly well 

into the scheme of things when the Federal Government is on a perpetual 

spending spree. It provides a new source of current revenue, which while involving a bookkeeping debit, providentially eases the immediate burden of meeting 

current debts and deficits.6

The funding principles espoused by Franklin D. Roosevelt began to unravel as 

early as 1939. Because of the concerns about the implications of funding the system, 

President Roosevelt agreed to convene an Advisory Council to study the matter. 

Based on its recommendations, Congress adopted several amendments to the original 1935 legislation. Payments would begin in 1940 rather than 1942. The system 

21 

7Senate Report No. 628, 74th Congress, May 13, 1935, p. 9 and Senate Report No. 734, 75th 

Congress, 1st session, p, 17. 8Franklin D. Roosevelt, letter to Honorable Walter F. George, Chairman, Senate Finance 

Committee, and Honorable Robert L. Doughton, Chairman, House Ways and Means Committee, 

October 3, 1942. 9Franklin D. Roosevelt, Statement accompanying the signing of H.R. 5564, ‘‘An Act to fix the 

tax under the Federal Insurance Contributions Act, on Employer and Employees for calendar 

year 1945,’’ December 16, 1944. 10Sylvester J. Schieber and John B. Shoven, The Real Deal, early chapters. 11 2005 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. 12For example, see Kent Smetters, ‘‘Is the Social Security Trust Fund Worth Anything?’’ unpublished memo, The University of Pennsylvania, June, 2003; Sita Nataraj and John B. Shoven, 

‘‘Has the Unified Budget Destroyed the Federal Government Trust Funds?’’ a paper presented 

at a conference sponsored by the Office of Policy, Social Security Administration and Michigan 

Retirement Research Consortium, Washington, D.C., 12–13 August 2004; and Barry Bosworth 

and Gary Burtless, ‘‘Pension Reform and Saving,’’ a paper presented at a conference of the International Forum of the Collaboration Projects, Tokyo, Japan, 17–19 February, 2004. 13For example, see Henry J. Aaron, Alan S. Blinder, Alicia H. Munnell and Peter Orszag, 

‘‘Perspectives on the Draft Interim Report of the President’s Commission to Strengthen Social 

Security,’’ (Washington, D.C.: Center on Budget and Policy Priorities and the Century Foundation, 2001); Paul Krugman, ‘‘2016 and All That,’’ New York Times (July 22, 2001) p. 13; Alicia 

H. Munnell and R. Kent Weaver, ‘‘Social Security’s False Alarm,’’ The Christian Science Monitor 

(July 19, 2001), p. 11. 

would pay out benefits to spouses and other dependents of retirees or workers who 

died before retirement. Under the 1939 Amendments, the trust fund was projected 

to hold a balance of $6.9 billion in 1955 compared with $22.1 billion projected under 

the original legislation.7

During World War II, the system shifted even further away from advance funding. Although President Roosevelt had gone along with the 1939 Amendments’ 

three-year delay in increasing the payroll tax, he opposed the subsequent delays. 

When Congress was considering the delay in the tax increase scheduled for January 

1, 1943, FDR wrote the chairmen of the Senate Finance and House Ways and 

Means Committees. He argued that ‘‘a failure to allow the scheduled increase in 

rates to take place under present favorable circumstances would cause a real and 

justifiable fear that adequate funds will not be accumulated to meet the heavy obligations of the future and that the claims for benefits accruing under the present 

law may be jeopardized.’’8 President Roosevelt vetoed the Revenue Act of 1943 because it included a delay in the payroll tax increase, but the veto was overturned. 

At the end of 1944, in signing H.R. 5565 which delayed the increase in the payroll 

tax from January 1, 1945 to January 1, 1946, the President’s accompanying statement noted, ‘‘I have felt in the past and I still feel that the scheduled rate increase, 

which has been repeatedly postponed by Congress, should be permitted to go into 

effect. The long-run financial requirements of the Social Security System justified 

adherence to the scheduled increases.’’9

On April 12, 1945, President Roosevelt died leaving behind the Social Security 

program as the central foundation of the welfare state in America. By the time he 

died, Social Security was well on its way to operating on the pay-as-you-go financing 

basis. By the mid-1950s, the concept was completely abandoned.10 After that, the 

program ran largely on a pure pay-as-you-go basis until the mid-1980s. 

At the beginning of the 1980s, the system was facing the prospect of coming up 

short on regularly scheduled benefit payments. Early in 1983, Congress intervened 

just in time to avoid a partial default on current benefits, adopting a number of provisions to secure the program. At that time, there was absolutely no consideration 

of individual accounts as part of the solution. Over subsequent years, the trust fund 

has grown to approximately $1.7 trillion dollars. The trust funds are projected to 

peak at $3.6 trillion or so in 2022 in 2005 dollars ($5.7 trillion nominal that year), 

after which they will begin to decline.11

The implications and import of the accruing trust fund assets continue to be controversial. The general consensus seems to be that they do not add to national savings according to a number of empirical analyses. Several researchers have concluded that surplus revenues generated in national retirement income systems held 

in government bonds result in larger deficit spending in other elements of those governments’ general fund accounts.12 That conclusion is not universally embraced,13

although the folks that dispute it have not presented comparable empirical evidence 

to bolster their conclusion. 

Interestingly, in the political arena, this modern day debate is the same one that 

the Arthurs Altmeyer and Vandenberg carried on back in the 1930s. In almost the 

identical setting where Altmeyer and Vandenberg conducted the original debate, 

22 

14Senator Robert J. Kerrey, CSPAN2 tape of Senate Finance Committee Hearing on Retirement Income Policy, August 1998. 15 Arthur M. Schlesinger, Jr., The Age of Roosevelt: The Coming of the New Deal (Boston: 

Houghton Mifflin Co., 1959), vol. 2, p. 310. 16Franklin D. Roosevelt, Presidential Statement at the Signing of the Social Security Act, August 14, 1935. 

some 60 years later Senator Bob Kerrey (D–NE) and Ken Apfel, the Social Security 

Commissioner who served during the later years of the Clinton Administration, engaged in a parallel discussion in a Senate Finance Committee hearing. In this more 

recent version of the debate, Senator Kerrey summarized the conclusion that many 

observers have drawn over the last couple of decades: 

We are not prefunding . . . Are we holding the money in reserve someplace? 

We are not prefunding! The idea in 1983 was that we would prefund the baby 

boomers. We began to use it immediately for the expenditures of general government. We didn’t prefund anything. What we are doing is asking people who 

get paid by the hour to shoulder a disproportionate share of deficit reduction. 

That’s what we’re doing! And the beneficiaries on the other hand, they suffer 

under the illusion inflicted by us very often, that they have a little savings account back here. They are just getting back what they paid in. They don’t understand that it’s just a transfer from people that are being taxed at 12.4 percent.14

Revisiting the Insurance Principles That FDR Embraced 

In 1935, when President Roosevelt insisted that what he called ‘‘my Social Security program’’15 be based on insurance principles he was thinking about the program 

in the context of providing retirement benefits. The original law did not provide 

many of the sorts of protection that are included in today’s system. Indeed, in signing that original law, Roosevelt spoke of the system it created as being ‘‘a cornerstone in a structure which is being built but is by no means complete.’’16 Despite 

the fact that we have built on that cornerstone over the years, it may be worthwhile 

to review what FDR had in mind when he insisted that ‘‘insurance principles’’ be 

followed in the construction of Social Security. 

Insurance is a mechanism whereby a group of individuals can join together to 

spread the risk that they each individually face in regard to some contingency that 

creates an economic loss for those who incur that particular ‘‘vicissitude’’ of life. 

Consider, for example, a society comprised of 1,000 households where each family 

lives in their own home. Assume, for simplicity, that every family’s home is worth 

$100,000 and that each year fire strikes one family’s home completely destroying 

it. If every family attempted to cover this risk by itself, then each year one family 

would be faced with a devastating $100,000 loss. On the other hand, if all of the 

families pooled together and each contributed $100 to a home-owners’ fire insurance 

fund, each family would invest $100 per year to assure that no family incurred such 

a devastating loss. 

In order to understand what should be done in reforming our Social Security system, it is important to understand what it currently does and to rationally design 

reforms that preserve those elements we wish to preserve and to modify those that 

need to be changed to secure its ongoing operation. The current Social Security provides insurance for four hazards that workers face. It provides insurance for workers: 

1. Who die and leave juvenile dependents; 

2. Who become disabled and can no longer earn a living; 

3. Who experience bad labor market outcomes; and 

4. Who suffer from the myopia that workers have about making adequate protection for their own retirement needs. 

In addition, for retirees Social Security provides: 

1. Longevity insurance because the benefits are paid in the form of an annuity; 

2. Income protection against inflation in retirement because the annuity is indexed to account for increasing prices; and 

3. Survivor benefits. 

In an insurance context, the nature of risks that are insured under Social Security 

vary considerably from one aspect of the program to the next. 

Early-survivor insurance 

The early survivor program provides insurance protection against the vicissitude 

of workers dying and leaving juvenile children with insufficient resources to meet 

23 

their economic needs. There are two factors that define the risk that workers incur 

in this case. One is the probability that they will die and the second is the probability that they have children. Over most of the working-age years, the probability 

of dying for most workers is quite low but rises gradually as workers age. In the 

younger years of the working career, the probability of having children under the 

age of 18 is relatively high but drops off significantly as people approach retirement 

age. To show what the exposure is here, I used the 1950 birth cohort life table from 

the Office of the Actuary and the incidence of individuals by age with dependent 

children under age 18 to derive Figure 1. The left panel shows the variation on a 

scale of 0.00 to 0.25 percent. It is intended to show that there is some variation in 

the exposure here. In no year does the line get as high as 0.25 percent meaning 

that in no year were there more than 2.5 people per 1,000 dying in this birth cohort 

and leaving juvenile children over most of their exposure period. The right panel 

in Figure 1 shows the same distribution on a scale of 0.00 to 100 percent. It is intended to show that the risk exposure to this particular contingency is extremely 

small in the overall scope of things. That is not to say that when the contingency 

actually strikes a family that it has a devastating effect. Indeed, this is a case a 

lot like our opening hypothetical example of people having house fires. 

The probability of workers dying and leaving juvenile children with the need for 

economic support is a contingency that can be covered without significant expense 

to active workers. Indeed, there has been virtually no discussion of significantly 

modifying this element of the current system in any of the discussion about reforming it. As we look at reform options, we need to make sure that modifications made 

to the existing system do not result in unintended consequences in this area. There 

are certain public good features to the existing benefits and there are likely relative 

efficiencies that are realized by running them through government on a nationalized 

basis with mandatory participation for virtually all workers. 

Figure 1: Probability of Death from One Year of Age to the Next for the 

1950 Birth Cohort Times the Probability of Individuals Having Dependent Children under Age 18 in 2003 

Sources: Calculated by the author from data published by the Office of the Actuary, 

Social Security Administration and U.S. Department of Commerce, U.S. Census 

Bureau, Current Population Survey. 

Disability insurance 

The case of disability insurance provided through our existing Social Security program is similar to early-survivor benefits. The incidence of disability under the Disability Insurance (DI) program by age in 1968 is reflected in Figure 2. Once again, 

the DI program has not been widely discussed in the same context that reform of 

the retirement system has been although a number of proposals would have implicit 

implications on benefit levels in the program. Part of the reason that DI has not 

been part of the discussion is that the incidence of disability is relatively low across 

much of the age spectrum and the overall cost of benefits is significantly less than 

in the case of the old-age retirement aspects of the system. As with early-survivor 

benefits, there are almost certainly public good features to the existing benefits and 

there are likely relative efficiencies that are realized by running them through government on a nationalized basis with mandatory participation for virtually all workers. 

Just because the DI system has escaped the same scrutiny as the retirement program in recent discussion about Social Security reform does not mean that the current disability program should not be included in these discussions. This element 

of the system is underfunded and contributes to the total underfunding in the combined systems. In addition, the determination of eligibility in the current system is 

tied to a concept of being unable to work that may have made sense in the midVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00027 Fmt 6633 Sfmt 6621 E:\HR\OC\24732.XXX 24732

Insert 24732a.000
24 

twentieth century when it was postulated but makes much less sense in the ‘‘knowledge economy’’ of the twenty-first century. Finally, there are a variety of administrative issues that also plague the existing Disability Insurance system. The potential 

reform of the disability programs is an issue that should be considered outside the 

realm of reform to the retirement plan or basic benefit structure of Disability Insurance or any other facet of Social Security. 

Figure 2: Incidence of Disability under the Social Security DI Program in 

1998 by Age 

Source: Office of the Actuary, Social Security Administration, ‘‘Social Security Disability Insurance Program Worker Experience,’’ Actuarial Study No. 114, June 

1999). 

Insurance against bad labor market outcomes 

While we have not characterized it that way, the redistributive structure of our 

Social Security benefit formula is the primary way we provide insurance against bad 

labor market outcomes. At the outset of our careers, none of us knows for sure that 

we will succeed. It is not hard to find many examples of people born into the most 

modest circumstances who go on to be dramatically successful in their careers. It 

is not hard to find many other examples of people who seem to set off on a career 

marked for success who fail miserably along the way. The element of our Social Security system that pays a relatively higher monthly benefit to people who have not 

been as successful in the labor market as those who have is our way of helping the 

less fortunate have a reasonable standard of living in their latter years. 

Table 1 shows estimated internal real rates of return that will be realized by a 

set of prototypical Social Security program participants reaching age 65 in 2008 according to estimates developed by the Social Security actuaries. These workers are 

classified according to their marital and earning status and earnings levels over 

their working careers. If you focus on any particular column, you will see that the 

rate of return on lifetime contributions declines the higher up the earnings distribution that a worker ends up. This sort of ‘‘social insurance’’ provided by Social Security is not something that we can ever expect private insurance markets to provide. 

To the extent that there is a concern that people who are unsuccessful in their 

working careers not be forced to live out a retirement at a socially unacceptable 

level of living, this sort of mechanism almost certainly will have to be part of our 

retirement structure. Many reform proposals would maintain or strengthen this element of the current system. Part of the reason for that general support is the result 

of the broad dependence on Social Security for income security among the portion 

of the workforce at the lower end of the earnings distribution. 


Insert 24732a.003
25 

Table 1: Internal Real Rates of Return for Various Earnings Level Scaled 

Workers Who Will Turn Age 65 in 2008 

Qualitative 

earnings 

level 

Career 

average 

indexed 

Earnings a

Real rates of return in percentages 

Single male 

(percent) 

Single 

female 

(percent) 

One-earner 

couple 

(percent) 

Two-earner 

couple 

(percent) 

Very low $8,314 4.00 4.42 6.59 4.57 

Low 14,965 2.87 3.35 5.42 3.39 

Medium 33,256 1.82 2.35 4.40 2.31 

High 52,624 1.18 1.74 3.73 1.64 

Very high 69,418 0.57 1.19 3.25 

Source: Office of the Actuary, Social Security Administration, ‘‘Internal Real Rates of Return under the 

OASDI Program for Hypothetical Workers,’’ Actuarial Note, Number 2004.5, March 2005, p. 6. a Career average earnings level wage indexed to 2003. 

The extent to which selected workers benefit from the insurance against bad labor 

market outcomes can be seen from Table 2 which shows a distribution of Social Security Primary Insurance Amounts (PIAs) for actual workers who retired in 2003 

in comparison to the PIAs of the prototypical workers considered in Table 1. It is 

clear from this table that female workers tend to be skewed toward the lower end 

of the earnings distribution so they get a somewhat disproportionate share of this 

form of insurance provided by Social Security. While it is not reflected in the table, 

we know from other sources that older women in particular are at risk of living out 

their final years in poverty. Reform options that move the Social Security system 

more toward operating purely as a retirement savings system should include elements to maintain or enhance the income security protections built into the existing 

system for some particularly vulnerable members of our society, namely those who 

have not had a particularly successful working career. 

Table 2: Distribution of PIAs of Actual Workers Who Retired in 2003 

Relative to Prototypical Scaled Workers Developed by SSA Actuaries 

Qualitative 

earnings 

level 

Career average 

indexed 

earnings a

Percent with PIA closest to qualitative 

group level 

All males 

(percent) 

All females 

(percent) 

Total, all 

workers 

(percent) 

Very low $8,314 9.4 34.0 20.8 

Low 14,965 14.1 32.6 22.7 

Medium 33,256 26.3 24.2 25.4 

High 52,624 38.1 8.5 24.3 

Very high 69,418 12.1 0.7 6.8 

Source: Office of the Actuary, Social Security Administration, ‘‘Internal Real Rates of Return under the 

OASDI Program for Hypothetical Workers,’’ Actuarial Note, Number 2004.5, March 2005, p. 3. a Career average earnings level wage indexed to 2003. 

There is another feature of Table 1 that policymakers ought to consider in any 

deliberations to modify Social Security. Earlier we looked at the columns in the 

table to consider the insurance feature in the system intended to protect low earners. It is also important to consider the lines in the table. One thing that is apparent when looking at the table in this fashion is the disproportionately high returns 

that single-earner couple participants in the system receive. This may have been an 

intended consequence back in the 1930s and even as recently as the 1960s and 

1970s when most female spouses spent much of their prime working years as homemakers. In a modern era when the vast majority of women work outside the home 

during their prime working years, it is no longer clear that this characteristic is equitable especially taking into consideration that many non-employed spouses live in 

households where total income is relatively high. In this regard, spousal benefits 

may be considerably dampening the intended insurance feature of the system intended to skew benefits toward lower earners. 

Another aspect of modern times that is remarkably different than when Social Security’s insurance features were configured back in the 1930s, 1940s and 1950s is 

the prevalence of other income protection features in our retirement system. The dependence on Social Security for retirement security is not randomly distributed. 

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26 

17 James F. Moore and Mitchell, Olivia S., ‘‘Projected Retirement Wealth and Savings Adequacy,’’ in Olivia S. Mitchell, P. Brett Hammond, and Anna M. Rappaport, eds., Forecasting Retirement Needs and Retirement Wealth. Philadelphia: University of Pennsylvania Press, 2000, 

pp. 68–94. 

advantage certain groups. This point can best be understood by looking at people 

on the cusp of retirement as James Moore and Olivia Mitchell have done.17 Their 

analysis uses Health and Retirement Study (HRS) data. The HRS is collecting longitudinal information on a representative sample of the U.S. population between the 

ages of 51 and 61 in 1992. Sample members are being interviewed every two years. 

Moore and Mitchell used the 1994 wave of the HRS interviews to estimate the 

participating households’ wealth levels just as most of them were approaching retirement. They included four classes of wealth in their calculations: 1) net financial 

wealth, including savings accounts, investments, business assets, and non-residential real estate less outstanding debt not related to housing; 2) net housing wealth; 

3) pension wealth, or the present value of employer-sponsored retirement benefits; 

and, 4) the present value of Social Security benefits under current law. 

Table 3 has been derived from Moore and Mitchell’s analysis. The wealth measure 

used here does not include net housing wealth because most homeowners do not sell 

their homes at retirement, or if they do, they tend to buy another one. This definition of wealth includes business assets and non-residential properties. We are interested in looking at the assets of these households that can be expected to generate 

a stream of income that can be used to finance consumption during retirement. 

Table 3: Distribution of Wealth among the Near Elderly 

Position in the 

Wealth Holding 

Distribution 

Retirement Purchasing Power from: 

Personal 

Financial 

Wealth 

(percent) 

Social 

Security 

Wealth 

(percent) 

Pension 

Wealth 

(percent) 

Total 

Wealth 

(percent) 

Bottom 10th 3.4 93.6 3.0 100.0 

1⁄3 from bottom 18.1 63.4 18.5 100.0 2⁄3 from bottom 29.9 35.7 34.4 100.0 

Top 10th 65.2 10.2 24.6 100.0 

Source: James F. Moore and Mitchell, Olivia S., ‘‘Projected Retirement Wealth and Savings Adequacy,’’ in 

Olivia S. Mitchell, P. Brett Hammond, and Anna M. Rappaport, eds., Forecasting Retirement Needs and Retirement Wealth. Philadelphia: University of Pennsylvania Press, 2000, p. 72. 

Table 3 shows that the people at the bottom tenth percentile of the wealth distribution hold almost all of their wealth in the form of Social Security retirement 

benefits. Social Security benefits still account for almost two-thirds of total wealth 

for those households one-third of the way up the wealth distribution. Those twothirds of the way up have a rough parity in their wealth holdings between their social security annuity, employer-sponsored pensions and other financial wealth. 

Those at the top of the wealth distribution have very limited dependence on Social 

Security. The point of the analysis here is to show that for many workers reaching 

retirement age in our society, a disproportionate portion of their wealth has been 

accumulated under the auspices of Social Security. For many workers, however, Social Security is a relatively small share of their retirement security portfolio. We 

should be mindful that rebalancing Social Security by means of across the board reductions in benefits will have a highly skewed effect on future retirees. A 20 percent 

across the board reduction in Social Security benefits would reduce the total retirement wealth of those at the bottom 10th of the wealth distribution in Table 12 by 

nearly 19 percent. For those at the top 10th of the wealth distribution, it would reduce the total retirement wealth by about 2 percent. To the extent that we might 

shift toward individual accounts as a portion of the national base of our retirement 

security system, we should be mindful of how such a change might alter the insurance protection provided to those with low lifetime earnings. 

Insuring that workers make adequate provision for retirement income 

needs 

The fourth sort of worker insurance provided by Social Security is distinctly different than the first three. For the overwhelming majority of workers, the prospect 

of reaching an advanced age is a near certainty and retirement patterns developed 

during the twentieth century suggest most people will end up with a period at the 

end of their lives when they no longer earn a direct wage. To the extent there is 

27 

18Franklin D. Roosevelt, Presidential Statement at the Signing of the Social Security Act, August 14, 1935. 

a public interest that elderly people maintain some minimum standard of living, it 

is reasonable to force people to ‘‘save’’ some portion of their earnings to provide for 

their needs when they no longer work. If we do not require that workers save, they 

may fail to do so on their own and become wards of the state. That was one of the 

most fundamental motivations for Social Security from Franklin Roosevelt’s perspective. 

One of the amazing achievements of the U.S. Social Security pension system is 

that it has succeeded so well in providing a broad base of protection for our elderly 

citizens. Figure 3 shows the percentage of people ages 60 to 80 who reported receiving Social Security benefits in 2003. When one takes into consideration that some 

4 or 5 percent might still be in public pension plans outside of Social Security and 

that some simply failed to report correctly about their sources of income, it is clear 

the system is providing close to universal protection for those it is intended to cover. 

Figure 3: Percentage of People by Age Who Reported Receiving a Social Security Benefit in 2003 

Source: Author’s tabulations of Current Population Survey 

Given the relative certainty that most workers will get old andmost will quit 

working before death this element of the program deserves separate and careful consideration. If one harkens back to the example that we described at the outset the 

implications of the phenomenon in Figure 3 become apparent. There, we had a case 

where one family in a thousand had their house burn down each year causing them 

a catastrophic loss. In that case, the risk of such a loss could be pooled across a 

large number of people and everyone could be protected by small annual contributions. Now consider trying to provide this same sort of protection where houses 

burned with certainty at a given age and where as many as one third to one half 

of them burned each year. The cost of providing protection explodes with the virtual 

certainty of the contingency occurring for everyone and the approach for securing 

against this sort of loss would be significantly different than where the incidence 

of the problem is small. 

Given FDR’s fiscally conservative nature and the strong position he had taken on 

funding of the social insurance elements of the Social Security Act in 1935, he saw 

this legislation ‘‘as protection to future Administrations against the necessity of 

going deeply into debt to furnish relief to the needy.’’18 We know that FDR felt 

strongly about the funding of ‘‘retirement’’ benefits when he first submitted Social 

Security proposals to the Congress. His statements at the time he submitted the legislation and when he signed the bill indicate a clear concern about the long-run fiscal implications of running a pay-as-you-go system. We know that he repeatedly resisted the shift toward pay-as-you-go financing of the system once it was up and in 

operation. When he vetoed the Revenue Act of 1943 because of its provisions that 

shifted away from Social Security funding toward pay-as-you-go operations, it was 


Insert 24732a.004
28 

only the second bill that he had vetoed in his 10-year tenure as president at the 

time. 

To show how alternative pension structures operate from an economic perspective, 

consider a theoretical worker who begins working at age 25 earning $35,000 per 

year and attempts to save a bit of her annual earnings to provide for income needs 

during retirement. Assume this individual has perfect foresight and knows that her 

pay will increase 4 percent per year until she reaches age 65, when she will retire 

and receive a pension that is 35 percent of her gross earnings in here last year of 

employment, a pension indexed for inflation which we assume to be 3 percent per 

year. To simplify the process of determining how much the worker should save, we 

assume she knows that she will live to be 81.5 years of age. We also assume the 

worker anticipates receiving an annual rate of return on his assets of 5 percent per 

year. At retirement, roughly 60 percent of accumulated assets are attributable to 

interest earned on the lifetime contributions the worker has made. 

If everything goes according to plan, this worker will earn roughly $161,600 in 

her last year of employment. After her retirement savings are put aside, her disposable income will be approximately $135,700 that year. As it turns out, this worker 

will need to save 10.3 percent of her annual earnings each year in order to fulfill 

her work and retirement plans. If she does that, she should be able to receive an 

annuity of $56,550 per year, a benefit that will grow from year-to-year during retirement at the rate of price inflation. The initial benefit will be about 39 percent of 

her disposable income in her final year of work where disposable income is her total 

wage minus what she has to contribute to a pension in order to finance her retirement income. 

This pattern of asset accumulation and net balances are reflected in Figure 4. 

Over the working period, the worker’s steady saving plus interest accruing on accumulated assets gradually accelerate the growth in total assets. From a macroeconomic perspective, while the worker or the employer is contributing to the plan, 

these contributions are reflected as savings accruing in the economy. After retirement, the assets are steadily depleted over the worker’s remaining lifetime and run 

out when he dies. Net savings over the worker’s lifetime, in this example, are zero. 

Had she wished to leave a bequest to heirs, the worker would have had to save more 

during her working life or spend less during retirement. 

Figure 4: Accumulated Savings of a Hypothetical Worker Participating in 

a Funded Pension Plan 

Source: Calculated by the author. 

If the same worker described above is covered by a pay-go retirement plan, the 

dynamics of her accumulating retirement wealth are considerably different than 

those in a funded pension plan. First, her annual contributions to the retirement 

system are paid out to current retirees. Second, rather than becoming part of an 

accumulation of capital that can be invested in the economy, in most cases her contributions merely purchase an entitlement to a retirement benefit. In other words, 

it results in an unfunded obligation—what Paul Samuelson has characterized as a 


Insert 24732a.005
29 

19Paul A. Samuelson, ‘‘An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money,’’ Journal of Political Economy (December 1958), vol.66, pp. 467–482. 

‘‘consumer loan’’19—that future participants in the system are obligated to pay when 

the current worker retires. The pattern of this transaction is reflected in Figure 5, 

which turns out to be a mirror image of Figure 4. In this case, the worker’s ‘‘accumulated savings’’ from the worker’s perspective is the sum of the obligations she is 

owed. It grows on a gradually accelerating basis until the worker reaches age 65, 

and then is paid off over the remainder of her lifetime as annual retirement benefits. From a macroeconomic perspective, however, deducting payroll taxes from a 

worker’s compensation may reduce his or her consumption at that time, but the benefit paid to a retiree is usually used largely for consumption purposes. Thus, it has 

no positive effect on net savings in the economy. 

Figure 2: Accumulated Savings of a Hypothetical Worker Participating in 

a Pay-As-You-Go Pension Plan 

Source: Calculated by the author. 

From the worker’s perspective, the accumulation of pension rights through a paygo social security system is no different from accumulating wealth through personal 

savings or a funded pension. In the life-cycle context, the primary motivation for 

workers to save is to provide for their consumption after they retire. 

In both the funded and pay-go pensions, the worker is deferring consumption from 

the working period to the retirement period. In an economic context, however, there 

is an important distinction between the two approaches. In the funded plan, the deferred consumption is used to purchase assets that will finance post-retirement consumption. In the pay-go plan, the deferred consumption establishes a claim on the 

productivity of the next generation of workers. If a significant share of their retirement consumption needs will be met by a mechanism that does not require savings, 

and indeed actually creates substantial liabilities, it has the potential to lower national savings rates. A funded pension system generates real savings. 

In recent years, there has been a considerable debate among economists about 

whether our accumulating Social Security trust funds represent real savings that 

will help to ameliorate the burden that the baby boom generations pose on the retirement system. Looking at this discussion in the context of the comparison of 

funded versus pay-as-you-go financing helps to clarify the issue being debated. 

Looking back to Figure 4, it is clear that a retirement plan’s aggregate contribution to savings is the extent to which assets accumulate to cover its net obligations. 

In an aggregate context, it is not the net of the annual contributions into a trust 

fund minus the payout of current benefits and administrative expenses. It is the extent to which accruing obligations in the plan are covered by the assets in the plan. 

In the case of private pensions, actuaries are required to estimate the accrued benefit obligations at each valuation, and plan sponsors are required to report the results to the federal government. These periodic tallies of assets and obligations in 

plans can be used to track the contributions of the system to national savings. Along 


Insert 24732a.006
30 

20Steve Goss, Alice Wade, and Jason Schultz, Unfunded Obligations and Transition Cost for 

the OASDI Program (Baltimore, MD: Office of the Chief Actuary, Social Security Administration, 2004), Actuarial Note 2004.1, p. 3. 21See footnote 12 above. 

similar lines, the Social Security actuaries have calculated something they have labeled the ‘‘maximum transition cost’’ for that system in recent years. The actuaries 

report that this measure ‘‘represents the transition cost for continuing the Social Security program in a different form, with all payroll taxes for work after the valuation date credited to the new benefit form. The maximum transition cost is equivalent to the unfunded accrued obligation of plan designed to be fully advance funded 

at the time of plan termination.’’20 Once again, the tally of assets in the system and 

the accruing obligations allows us to assess the net effect of Social Security on national saving. 

The results of the Social Security liability calculations and funding levels are presented in Table 4. The results that are shown there are as of the beginning of each 

year listed in the table. The asset values actually reflect those reported by the Social 

Security Actuaries as of the end of the prior year but one day’s income would be 

relatively trivial in the context of the discussion here. The table shows that trust 

fund assets in the Social Security system grew by nearly $1.2 trillion between the 

beginning of 1996 and 2005, while total obligations increased by $6.8 trillion over 

that same period with unfunded obligations climbing by $5.6 trillion. Some people 

look at the trust fund growth and conclude that, between 1996 and 2005, Social Security contributed $1.2 trillion to U.S. saving. A number of studies cited earlier suggest that this accumulation of trust funds has actually been used to hide deficit expenditures elsewhere in the federal fiscal operations.21 Even if those dollars were 

accumulated to claim that they have added to national savings completely ignores 

the added $6.8 trillion of obligations created over the last decade for future generations of workers to finance. I strongly believe we need to find a savings mechanism 

to secure future benefit accruals for this sort of insurance. We need to return to the 

‘‘insurance principles’’ that Franklin Roosevelt was advocating when he adamantly 

demanded that his Social Security program be funded. My own personal conclusion 

is that the only way we can do that is to create a system of personal accounts that 

are part of our Social Security program that will allow us to segregate the assets 

and keep them from being used to finance other government operations. 

Table 4: Social Security Unfunded Accrued Obligations, Trust Fund Assets 

and Under Funding 

Plan obligations 

(billions) 

Trust fund 

assets 

(billions) 

System 

under funding 

(billions) 

1996 $9,421.60 $496.1 ¥$8,925.5

1997 9,293.60 567.0 ¥8,726.6

1998 10,167.80 655.5 ¥9,512.3

1999 10,933.20 762.5 ¥10,170.7

2000 11,726.00 896.1 ¥10,829.9

2001 12,756.40 1,049.4 ¥11,707.0

2002 13,374.30 1,212.5 ¥12,161.8

2003 14,007.30 1,378.0 ¥12,629.3

2004 15,027.00 1,530.8 ¥13,496.2

2005 16,225.60 1,686.8 ¥14,538.8

Sources: Author’s calculations of total plan obligations as sum of trust fund assets from the 2005 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust 

Funds plus the unfunded accrued obligations from unpublished data from the Office of the Actuary, Social Security Administration. 

Insurance protections provided in the retirement period 

It is also important to consider the post retirement benefits in the current system 

and how they might be addressed in Social Security reform proposals. The current 

system provides at least three sorts of insurance protection to the retiree population. 

The first is longevity insurance—protection against outliving one’s resources—by 

providing its benefits in the form of an annuity. The second form of insurance in 

this aspect of the system is protection against erosion against the standard of living 

achieved while working by providing a benefit indexed for inflation during retirement. The third form of insurance is spouse and survivor protection provided to people in annuity status. 

31 

22The actuaries make a distinction here between the phrase ‘‘unfunded obligation,’’ which is 

the focus of their calculation, as opposed to ‘‘unfunded liability,’’ which is the measure often calculated for underfunded employer-sponsored pensions covered under the Employee Retirement 

Income Security Act (ERISA). They note that the obligations under ERISA plans are contractual 

in nature but that is not the case with Social Security since Congress has retained the right 

to modify the plan in the future, including by cutting benefits accrued under existing law. 

One characteristic of individual accounts is the strong sentiment of ownership 

that develops around the accounts. This sense of ownership has the potential to be 

in conflict with the public interest in using the accumulated funds to provide retirement security on a broad basis. For example, if policymakers wish to assure that 

people achieve a level of income at least equal to the official poverty line, they may 

require that some portion of accumulated account balances be annuitized when a 

worker reaches retirement age. If policymakers do not impose an annuity requirement, some retirees will likely spend their resources prior to dying and then potentially present themselves for additional support at a cost to the public fisc—the classic moral hazard problem that often arises in situations like this. Similar concerns 

arise in regard to joint and survivor benefits. These issues will have to be explicitly 

addressed if individual accounts are part of Social Security reform. 

Transaction Costs Associated with Social Security Reform 

In the discussion about Social Security reform and the prospect that individual 

accounts might be part of it, there has been a great deal of misinformation spread 

about the costs associated with transition that we will incur in implementing such 

reforms. In understanding the dynamics of transition costs associated with reform, 

it is important to segment the costs associated with various aspects of any reform. 

For the sake of discussion, consider the potential for reforming the current system 

without including any element of personal accounts as part of that reform. Each 

year the Social Security actuaries calculate the ‘‘open group unfunded obligation.’’22

This measure is an estimate of the funding shortfall under current law to deliver 

benefits now scheduled over the projection period. Traditionally, the actuaries have 

estimated this amount over the 75-year projection period covered in their annual 

valuation of the program. At the beginning of 2005, they estimated the present 

value of this unfunded obligation to be $4.0 trillion. The interpretation of this value 

is that, if the trust funds held an added $4.0 trillion on January 1, 2005, then the 

scheduled collection of taxes over the next 75 years in combination with the trust 

fund balance and expected returns would cover expected expenditures over the period. 

So, we face a $4.0 trillion transition cost under current law no matter what we 

do with the program. Under law, the program does not have deficit spending authority, so benefits over the projection period must be fully financed through program 

revenues and assets. In other words, to comply with the law over the next 75 years, 

we must come up with an additional $4.0 trillion in new revenues in 2004 dollars, 

cut scheduled benefits by that amount or some combination of the two. 

In the 2005 annual trustees’ report on the Social Security system, the open group 

unfunded liability was also calculated for an ‘‘infinite’’ time frame. The estimate in 

this case was $11.1 trillion. This estimate has come under considerable criticism in 

some circles, although it was included in the annual report at the Trustees’ insistence. The problem is that our demographics today are far more favorable than they 

will be in the future. That being the case, calculating adequate financing for the 75- 

year valuation period was different last year than it is this year. The basic valuation 

released in early 2004 covered the period 2004 through 2078, and the one released 

in April 2005 covers the period 2005 through 2079. Last year’s valuation included 

2004 and this year’s valuation did not. This year’s valuation includes 2079 and last 

year’s did not. In terms of the actual calculations of the funding status of the program, 2004 was a good year because revenues exceeded expenditures, but in 2079, 

anticipated expenditures will significantly exceed revenues. If policymakers devise 

a reform that balances the program’s finances over the current 75-year valuation 

period, it will be out of balance again next year because of this limited time period 

focus. 

In 1983, policymakers adopted policies they believed would fully finance the program over the 75-year valuation period. But lo and behold! We are once again confronting a program that is underfinanced, and a substantial share of the shortfall 

is due to the passage of time and the difference in valuation periods. This is why 

many policy analysts have advocated that we consider policy options that will provide financing stability well beyond the fixed valuation period. One way of measuring whether a particular adjustment to the program will deal with the long-term 

underfunding is to look at the infinite period. An alternative way is to focus on 

32 

23Peter A. Diamond and Peter R. Orszag, Saving Social Security: A Balanced Approach 

(Washington, DC: Brookings Institution Press, 2004). 24Sylvester J. Schieber, Social Security: Perspectives on Preserving the System (Washington, 

DC: Employee Benefit Research Institute, 1982), pp. 259–261. 

whether a particular adjustment results in sufficient financing to get through the 

traditional 75-year valuation period in a way that there is a substantial trust fund 

balance at the end of the projection period and that projected net income to the system at that time will be in relatively close balance to projected expenditures. 

Financing the transition costs embedded in current law 

The most straightforward way to finance our way out of a $4.0 trillion pension 

hole reflected by the unfunded obligations from an ‘‘ongoing’’ perspective might appear to be either increasing contributions to the plan by that amount over some reasonable period, reducing benefits by that amount or some combination of the two. 

Proposals to accomplish any one of these options in the context of the current plan 

structure should be relatively transparent in terms of revealing how the transition 

costs will affect various segments of the population. 

We could simply raise the payroll tax rate starting virtually immediately by something around 1.9 percent of payroll. This would bring in approximately $4.0 trillion 

over the next 75 years in current present value terms, theoretically solving the financing problem for the formal 75-year valuation period. But it would not resolve 

the structural weaknesses in the system in the out years, and 15 or 20 years down 

the road, the program would likely be facing as big a problem as it is today. It 

would also lead to an even larger accumulation of trust fund assets over the next 

two or three decades than is now projected under current law. Given that we have 

never been able to find an effective way to actually ‘‘save’’ these trust fund accumulations, I do not believe this approach will actually help us solve the current financing problems. 

An alternative to raising the payroll tax rate would be to eliminate the cap on 

covered earnings against which payroll taxes are assessed. This would represent a 

significant deviation from the underlying philosophy that has been the foundation 

of the program since its conception and initial passage in the 1930s. Specifically, the 

system has always based benefits on the range of earnings covered under the payroll tax with the understanding that it made little sense to provide the foundation 

benefit intended under Social Security all the way to the top end of the earnings 

distribution. If we are simply going to take the cap off of earnings covered under 

the system without providing a commensurate increase in benefits to high earners, 

we will be converting the program into a welfare transfer program. To quote Franklin Roosevelt, the program would simply be the ‘‘dole under another name.’’ He 

never intended it to be that and it will likely lose further support if that is what 

it is to become. If we intend to move in that direction, then one must ask why we 

would want to finance it simply by taxing high wage earners and not include general tax revenues from all people with high incomes. While there may be resistance 

to completely eliminating the cap on earnings covered under the payroll tax, some 

proposals would significantly increase the tax cap or apply a partial tax on up the 

earnings distribution.23

Another option for covering the costs of retaining the existing program is to reduce benefits. President Bush and most other advocates of reform have established 

principles that would largely concentrate any benefit reductions on future retirees. 

The one potential exception to this generally accepted guiding principle is the occasional suggestion that the consumer price index (CPI) be modestly adjusted to correct for what many economists believe is a tendency to overstate the rate of price 

inflation. The more likely mechanisms for reducing benefits would be to adjust the 

current benefit formula in some way or to raise the age(s) for benefit eligibility 

under the program. Once again, without an effective way to actually ‘‘save’’ the resulting trust fund accumulations, I do not believe this approach will actually help 

us solve the current financing problems. 

Finding a way to partially fund Social Security obligations 

An Italian proverb says: ‘‘If a man deceives me once, shame on him. If he deceives 

me twice, shame on me.’’ In 1982, after my earlier reading of Social Security’s history and the difficulties of funding pension obligations as they accrued in the fashion that Franklin Roosevelt wanted, I proposed transferring trust fund accumulations projected for the baby boomers’ working careers into individual accounts. Further, I proposed that these accounts remain locked until workers reached retirement 

age, at which point the benefits would offset a portion of the benefits from the traditional Social Security pension.24 We did not institute such accounts when we 

33 

amended Social Security in 1983 nor did we seriously consider them. In the intervening period, we have accumulated a trust fund that is estimated to be at $1.7 trillion today but we have not changed the fundamental pay-as-you-go nature of the 

foundation to our national retirement system. If we insist on ignoring history, we 

will once again be condemned to repeating it. 

Unquestionably, we could craft legislation tomorrow that would mathematically 

rebalance Social Security within the program’s existing framework. But balancing 

the system in its current configuration would build up a much larger trust fund 

without doing anything to ensure that accumulations would be saved rather than 

squandered this time around. My objection to these approaches is that history has 

proven that we cannot actually save these trust fund accumulations to pay retirement costs down the road. What’s the point of pursuing approaches that will do 

nothing to resolve the basic dilemma? 

The Road to Accounts: Carve Out’s, Add-On’s and Hybrid Approaches 

There has been a great deal of discussion about the costs associated with creating 

personal accounts in the context of Social Security reform. Once again, I believe that 

the discussion has added little illumination to the policy matters that need to be 

addressed in reforming the system. Part of the problem is the use of the terms 

‘‘carve out’’ and ‘‘add on’’ do not precisely describe what is often being accomplished 

under various proposals. 

President Bush’s general framework for financing individual accounts has generally been described as a ‘‘carve out’’ from the existing system. Indeed, his critics 

suggest that financing the benefits in the way he proposes to do so would cost trillions of dollars over the next decade or two. I believe that this assertion is confusing 

the transition costs associated with rebalancing the current system that the President proposes with the costs associated with creating the individual accounts themselves. 

In the earlier discussion about dealing with the transition costs associated with 

rebalancing the current system, we looked at those transition costs without considering the implications of individual accounts. Now to understand the implications 

of establishing individual accounts, it is important to look at them in isolation. To 

the extent we are concerned about interaction effects, we can come back and consider them later. 

Assume for the sake of discussion that we have a worker at age 55 direct $1,000 

of his payroll taxes into the sort of individual account that President Bush has suggested. Table 5 sorts out how this $1,000 will be treated under two alternative scenarios. In both scenarios, I assume that the worker retires at age 65. For the sake 

of developing this example, I have assumed there is no inflation. Adding it would 

change the numbers but not the substance of the outcome. Under the president’s 

proposal, at retirement, this worker would have his Social Security benefit determined under whatever benefit formula applies at that particular point in time. The 

lifetime value of his Social Security annuity would be reduced by $1,343.92 based 

on the accumulated value of the $1,000 he had withdrawn from Social Security at 

age 55—that is, $1,000 compounded at 3 percent per annum over 10 years. 

Table 5: Benefit Dynamics Associated with Personal Accounts in President 

Bush’s Social Security Reform Recommendations 

Social Security lifetime benefit reduced by: 

$1,000 compounded at 3 percent per annum from the time of deposit to 

retirement date $1,343.92 

Case 1: 

Individual account value assuming 5 percent compounded annual return $1,628.89 

Segment of individual account that is required to be annuitized at retirement $1,343.92 

Retiree has extra lump sum of $284.97 

Case 2: 

Individual account value assuming 1 percent compounded annual return $1,104.62 

Segment of individual account that is required to be annuitized at retirement $1,104.62 

Retiree realizes benefit loss of ($239.30) 

Source: Derived by the author. 

In Case 1, we assume that the worker has received annual returns of 5 percent 

per year on his account. Under this assumption, the account would accumulate to 

$1,628.89 by the time he reaches age 65. Under the president’s proposal, the worker 

would be required to annuitize $1,343.92 of that to replace the withdrawal he or 

she had made at age 55. The extra $284.97 that is left after the required 

34 

25Peter A. Diamond and Peter R. Orszag, Saving Social Security: A Balanced Approach 

(Washington, D.C.: Brookings Institution Press, 2004) 

annuitization would be left for the worker to dispose of as he or she saw fit. As I 

look at this example, I do not see that there is any cost associated with this transaction. Instead of characterizing this approach as a ‘‘carve out,’’ it would be more 

appropriate to characterize it as a diversion of the payroll tax. This individual has 

simply carried out an asset swap in his retirement portfolio, moving from a share 

of his retirement assets held in the form of Social Security accumulations to that 

share being held in an alternative form of financial asset. In this particular case, 

the extra $284.97 would be the return for undertaking this swap. Some analysts 

contend that we cannot consider this $284.97 a benefit from modifying the current 

system because the worker has taken on added risk in investing in assets in the 

financial markets.25

In Case 2, I assumed that the individual received only a 1 percent annual return 

per year on his investment in assets in his personal account. At retirement, his 

$1,000 has accumulated to only $1,104.62 and he would be required to annuitize the 

whole amount. Since this is less than the annuity reduction to his Social Security 

benefit of $1,343.92, this worker would end up with $293.30 in reduced lifetime benefits under the modified system relative to staying completely in the central defined 

benefit system. In this case, the worker incurs a benefit reduction because he has 

decided to put a portion of his payroll taxes in the financial markets. President 

Bush’s proposal would seek to minimize this sort of loss by requiring that workers 

invest in broad index funds and that they move toward fixed income investments 

as they approach retirement age. 

In the aggregate, I believe the added benefits associated with this sort of system 

would outstrip the losses but there is a concern about the distribution of gains and 

losses that policymakers should consider in constructing a complete reform package. 

No matter which of these two outcomes were to play out, to attribute the diversion 

of $1,000 from the Social Security fund to the personal account as a $1,000 transition cost associated with the reform of the system is wrong. Substantial numbers 

of workers would definitely benefit by participating in this sort of system. Even for 

those who realize a loss, that loss would be relatively minor to the overall size of 

the diversion of assets from the Social Security fund to their personal account. 

Another issue that has been somewhat controversial in considering the diversion 

of payroll taxes to finance personal accounts is the prospect that that it will exacerbate the expected cash-flow shortfall in Social Security financing in the transition 

period. When commentators suggest that introducing individual accounts as part of 

Social Security reform will incur massive amounts of new debt, they generally do 

not consider the net ramifications of reform on the system. The principles that 

President George W. Bush has stipulated for reform have frequently led to this criticism. 

President Bush has said that he wants individual accounts for younger workers 

but that he opposes benefit reductions for current retirees or those close to retirement age. He has also said that he opposes new taxes. Some prognosticators look 

at this combination of principles and conclude that individual account financing has 

to come out of the current revenue stream supporting the system. They contend that 

a system that is already under funded cannot sustain an even further drain on revenues to finance the individual accounts. While that may prove to be true, the principles also imply that modifications on the benefit side of the current system will 

reduce revenue requirements over the long term. In an economic sense, using a government bond to temporarily finance a shift in the structure of financing Social Security so as to reduce ‘‘statutory obligations’’ by an amount at least equivalent to 

the bond amount does not create a cost. Once again, it is simply a swap of one sort 

of obligation for another. 

Using government bonds to help finance the transformation of Social Security 

may create larger federal budget deficits in the near term than would exist under 

current policy, even if the transformation eliminates the long-term financing shortfall. This is because we do not account for Social Security obligations on an accrual 

basis, and issuing bonds would formally recognize obligations that are not recognized in the budgetary process today. It is not clear how financial markets might 

react. In one highly publicized private case a couple of years ago, a company issued 

billions of dollars of corporate bonds to raise the funds to cover unfunded pension 

obligations, and the financial markets seemed to recognize that the borrower was 

simply swapping one sort of obligation for another without any real financial implications. It is not clear that the financial markets or the public would react any differently if the federal government did exactly the same thing in restructuring Social 

Security. 

35 

Some policymakers and analysts argue that instead of having the sort of transaction that President Bush has proposed, we should have ‘‘add-on’’ financing of the 

personal accounts. This implies that new monies would be found to finance the accounts. President Clinton actually proposed the establishment of USA accounts outside the scope of Social Security to give low-wage earners a mechanism to accumulate personal account wealth. He proposed that these accounts be financed out of 

general revenues. A number of Social Security reform proposals would use ‘‘add-on’’ 

funds to create personal accounts within the scope of a reformed system. In most 

cases, these proposals would use money from general revenues to help finance the 

accounts. Personally, I am skeptical about such proposals because of the paucity of 

spare general revenues for as far as my eyes will allow me to see. 

I personally have been associated with two reform proposals that would require 

new contributions on covered earnings as a part of the transition to a system that 

includes personal accounts. Under these proposals, a portion of the current payroll 

tax would also be diverted to the personal accounts. In that regard, such proposals 

might be characterized as a hybrid to the proposals that might depend on financing 

personal accounts through one mechanism or the other. The reason that I favor 

some new money to help finance the individual accounts is because I believe our 

retirement system generally is underfunded. The creation of personal accounts alone 

under the auspices of Social Security will not sufficiently ameliorate our savings 

shortfall. I also believe that the added contributions should be mandatory because 

there are individuals all across the earnings spectrum who are saving inadequately 

to meet their future retirement income needs. Possibly my biggest problem with the 

suggestion that we can tap general revenues to finance individual accounts is that 

I was born and raised in the Show Me State. Someone is going to have to show me 

the source of the significant general revenues that will be required to solve this 

problem. 

A number of interesting opportunities to address a myriad of concerns present 

themselves when new money is introduced into the system. First among these is 

that the saving shortfall for workers who are not adequately saving for their retirement today can be ameliorated. Second, it gives policymakers greater opportunities 

to create meaningful personal accounts while maintaining the desirable insurance 

features in the current system. Third, it provides an opportunity to solve the current 

system’s financing problems without having to intrude on any other revenue sources 

to get through the necessary transitions from the current system to the new one. 

Even to the extent there is some transition borrowing that might be required in this 

sort of reform, that borrowing could be financed completely with a temporary requirement that a portion of workers’ personal account balances be invested in temporary transition bonds that would gradually be paid off over a 30 or 40 year period. 

The analysis, conclusions and recommendations presented here are the authors 

and do not necessarily represent those of Watson Wyatt Worldwide or any of its 

other associates. 

f 

Chairman THOMAS. Thank you very much. Eugene Steuerle, 

welcome back. I hope you and Mr. Apfel like the paint job. We have 

redone the room since you folks were with us, but nice to see you 

and we look forward to your testimony. 

STATEMENT OF C. EUGENE STEUERLE, SENIOR FELLOW, 

URBAN INSTITUTE 

Mr. STEUERLE. Thank you, Mr. Chairman, Mr. Rangel, Mr. 

McCrery, Mr. Levin, and other Members of the Committee and the 

Subcommittee on Social Security. My testimony is largely driven by 

one major concern. Every year, we spend greater shares of our 

budget in areas where needs have actually declined, and yet we 

claim that we don’t have enough money leftover for our children, 

for education, for young adult men and others whose real needs are 

growing or remain unattended. Right now, our legacy is to bequeath a government to our children whose almost sole purpose is 

our consumption in retirement. In my testimony, I address four 

36 

major issues largely neglected in the debate on Social Security so 

far. First, close to one-third of the adult population is scheduled to 

be on Social Security. People already retire for about one-third of 

their adult lives and that percentage is growing. If people retired 

for the same number of years as when Social Security was young, 

they would retire about age 74 today and about age 78 in another 

60 years; that is, 150 years, approximately, from when the system 

was first built. Every year, larger shares of benefits are going to 

those who are middle-aged and smaller shares are going to those 

who are old. I have begged top officials from the White House to 

the AARP not to take the retirement age off the reform table. This 

is an arithmetic point, it is not an advocacy point. At any given tax 

rate that you are willing to compromise on, an increase in the retirement age allows us to increase lifetime benefits, it allows us to 

increase replacement rates, it allows us to increase annual benefits, 

and it allows us to devote more resources to the truly old. One reason is that people work longer. There are more revenues in the system to be distributed. 

For similar reasons, if there are to be benefit cuts, an increase 

in working years causes among the least hardships of almost any 

benefit adjustment because there are more revenues in the system. 

Some groups have shorter than expected life expectancies and we 

need to be concerned about them, but come on. It is hardly protecting them to make it a national priority to give you, me, and 

those among us who are healthy a 20th, a 21st, and a 25th year 

in retirement, so that we can supposedly protect the vulnerable. 

The way to protect vulnerable groups is to target provisions to 

them to through devices like minimum benefits. Now, a related 

means that we could use to increase the labor supply and make 

your job of reform easier is to backload benefits more. That is, to 

provide higher benefits to those who are truly old in exchange for 

lower benefits up front for those who are a bit younger. 

A second major concern I raise in my testimony is that Social Security is often quite unfair. Single heads of household—including 

these welfare recipients who we have now decided should work, as 

well as two-earner couples—face significant discrimination in the 

system. Each can receive hundreds of thousands of dollars less in 

benefits than people who pay less tax, work less, raise less children, and have less need. Some people are penalized for remarrying. Others get bonuses for marrying trophy spouses, and still others are rewarded for having or siring children later in life. These 

problems can be addressed by applying, to middle and upper income retirees, the types of equal justice benefit rules that we apply 

in private pension plans. Again, through devices like minimum 

benefits, we can actually improve the lot of the vulnerable at the 

same time. A third approach to reform is to change the default. Regardless of what other Social Security reform is undertaken, some 

rule should be adopted that automatically reacts to persistent projected deficits with balancing increases in retirement ages and/or 

reductions in the rate of growth of benefits for higher-earning 

workers. Last, a final set of proposals attempts to integrate in some 

pension and employee benefit reform, especially finding ways to increase pensions for lower- and middle-income workers. One conservative-liberal compromise that has many side benefits would be 

37 

to combine a higher wage base for Social Security with a cap on 

the inefficient tax subsidies now going for health insurance. In conclusion, we can and should fix a system that now favors middleage retirement; that reduces the share of resources every year that 

go to the truly old; that discriminates against single heads of 

households and working couples; and that, by default, automatically reduces the share of revenues available for children and for 

working families. Thank you. 

[The prepared statement of Mr. Steuerle follows:] 

Statement of C. Eugene Steuerle, Senior Fellow, Urban Institute, 

Codirector, Tax Policy Center, and Columnist, Tax Notes Magazine 

Mr. Chairman and Members of the Committee: 

Thank you for the opportunity to testify on alternatives to strengthen Social Security. I must confess my frustration at how narrowly the Social Security debate has 

usually been focused. It’s as if the public is being asked to choose a dog from the 

pound by looking only at its tail—or at best its hind legs—but not the whole dog. 

Since Social Security was first enacted, vast changes have occurred in the economy, 

life expectancy, health care, the physical demands of jobs, the labor force participation of women, the percentage of women who are left on their own to both raise children and work, the age at which one can be considered old, the consumption levels 

of the elderly relative to the non-elderly, and poverty levels of children relative to 

the old—to mention only some factors. Yet we often debate Social Security as if the 

type of system we want in 2080 should be determined by perceptions and measures 

of needs of a society in 1930, or 150 years earlier. 

The Social Security debate could and should be part of a larger one in which we 

engage our fellow citizens in choosing the best direction for society as a whole as 

better things happen to us in the way of longer lives and new health care goods 

and services. How can we really take best advantage of these new opportunities? 

How can we spread the gains from this increased level of well-being and wealth to 

create a stronger nation with opportunity for all? And how should we share the 

costs? 

Instead, the debate is upside down. Due to the ways we have designed our programs and our budgets, every year we spend greater shares of our national income 

in areas where needs have declined, and then claim we don’t have enough left over 

for areas—such as education, public safety, children, and anti-terrorism—where real 

needs remain and have often grown. I sometimes imagine sitting in the Ways and 

Means Committee room when someone from the National Institutes of Health comes 

in claiming to have found a cure, though expensive, for cancer. The members of committee, trapped in the logic of our current budget, find that instead of celebrating 

this advance, they commiserate among themselves about the increased cost for Social Security. 

As a member of the baby boom generation, I remember youthful conversations 

among my cohort, regardless of political persuasion, that centered on what type of 

government we could help create to best serve society. As now scheduled, our legacy 

is to bequeath a government whose almost sole purpose is to finance our own consumption in retirement. Not only haven’t we come close to paying for the government transfers we are scheduled to receive, but we plan to pay for them by dwindling almost to oblivion the rest of government that would serve our children and 

grandchildren. 

With the exception of the World War II period, programs for the elderly have been 

absorbing ever-higher shares of national income and of the budget for almost seven 

decades. Define ‘‘lifetime benefits’’ as the value, at age 65, of Social Security and 

Medicare benefits as if they were sitting in a 401(k) account that would earn interest but be drawn upon over retirement. In today’s dollars, lifetime benefits for an 

average-income couple have risen from about $195,000 in 1960 to $710,000 today 

($439,000 in Social Security and $271,000 in Medicare) to over $1 million for a couple retiring in about 25 years (over $1/2 million in both Social Security and Medicare—see figure 1). We cannot provide a very large portion of the population $1/2 

to $1 million packages of benefits and simultaneously encourage them to drop out 

of the workforce for the last third of their adult lives without affecting dramatically 

the services that can be provided through the budget to our children and to working 

families. 

38 

The impact on the budget is especially large beginning around 2008 because it is 

then that so many start moving from the working-age population into the retired 

population. Assume merely that Social Security, Medicare, and Medicaid continue 

on automatic pilot, that interest on the debt is paid, and that as a percent of GDP 

existing levels of revenues are allowed to rise only moderately and defense expenditures decline only modestly. Then by about 2015 no revenues are left for anything 

else—not for justice or transportation or education, not for wage subsidies or education or environmental clean-up or community development, not for the IRS or national parks—not even to turn on the lights in the Capitol. The pressure on the 

budget is not awaiting some magical date like 2018 or beyond. Social Security and 

Medicare are already spending much more than the Social Security tax for Social 

Security and Medicare, and even this accounting does not include all the other programs for the retired and elderly in the budget. The pressure on programs for children and working families is being felt right now, and the fight over the fiscal 2006 

budget makes this glaringly apparent. 

Social Security is only part of this problem, but it is an important part for four reasons: 

1. It sets the standard for how long we should work and who covers the costs associated with our longer lives and the new medical care we receive; 

2. There are many inequities and inefficiencies in Social Security that are independent of its size; 

3. By default (in absence of new legislation), Social Security is designed to absorb 

ever-larger shares of our national income, thereby squeezing out other programs, particularly discretionary expenditures, that are not treated equally in 

the budget process. 

4. A number of related employee benefit reforms would likely increase private 

saving, enhance the well-being of low- and average-income workers in retirement, and improve the solvency of Social Security. 

MAJOR ISSUE ONE: LABOR FORCE PARTICIPATION 

The facts are simple. Social Security’s current dilemma centers almost entirely on 

labor force issues—the drop in scheduled workers per retiree. Although more saving 

would be nice, whether in trust funds or accounts, we are not going to save our way 

out of this problem. Consider some of the consequences of the current system. 

The system has morphed into a middle-age retirement system. 

• Close to one-third of the adult population is scheduled to be on Social Security 

within about 25 years. Including adults on other transfer programs, we are approaching the day when the majority of the adult population will depend upon 

transfers from others for a significant share of its support. 

• People already retire on average for close to one-third of their adult lives. 

• The average Social Security annuity for a man retiring at 62 lasts 17 years, for 

a woman 20 years, and for the longer living of a couple at least 25 years. The 

numbers are even higher for those with above-average lifetime earnings. 

• When Social Security was young—for instance, in 1940 and 1950—the average 

worker retired at about age 68. To retire for an equivalent number of years on 

Social Security, a person would retire at age 74 today and age 78 in another 

60 years (figure 2). 

Almost every year a smaller share of Social Security benefits goes to the most 

vulnerable. 

• By constantly increasing benefits to middle-age retirees, at least as defined by 

life expectancy, smaller and smaller shares of Social Security benefits are being 

devoted to the elderly (figure 3). If progressivity is defined by how well the vulnerable are served, the system is becoming less progressive every year. 

The economy gets hit several ways, not just in terms of costs. 

• Among the most important, but ignored, sides of the Social Security budget 

equation is the decline in growth of the labor force, national income, and revenues (figure 4). 

• When a person retires from the labor force at late middle age, national income 

declines. But the decline is borne mainly by other workers, not by the retiree. 

For instance, when a $50,000-a-year worker retires a year earlier, national income declines by approximately $50,000, but most of those costs are shifted onto 

other workers as the retiree starts receiving about $23,500 in Social Security 

and Medicare benefits (much more in the future) and pays about $18,300 less 

in taxes (figure 5). 

39 

• Saving declines because people retire in what used to be their peak saving 

years. For instance, when a person retires for 20 years versus 15, he both saves 

for 5 years less and spends down his or society’s saving for 5 years more. 

Believe it or not, there is tremendous opportunity in all of this. People in their 

late 50s, 60s, and 70s have now become the largest underutilized pool of human resources in the economy. They represent for the first half of the 21st century what 

women did to the labor force for the last half of the 20th century. I believe the labor 

demand is there, and it is mainly our institutions, public and private, that are 

blocking us from making full use of these valuable and talented people. 

What are some of the reforms that can address these problems? 

Increase the early and normal retirement ages. We should do this even if 

there were no long-term imbalance and even if all the saving were devoted back to 

Social Security. Increasing the retirement age would allow us to devote greater resources to the truly old, since it has no effect on benefits at later ages. Relative to 

other benefit cuts, it would provide higher annual benefits, since a delay of even 

one year in retiring can often increase annual income by 8 to 10 percent for many 

individuals. At any given tax rate, it provides for a higher lifetime benefit since it 

results in increased revenues from working longer. It also provides relief for Medicare through higher Medicare taxes, and for the rest of the budget through higher 

income tax revenues. 

For all these reasons, an increase in the retirement ages (including the early retirement age, else it is just an across-the-board benefit cut) causes the least hardship of almost any benefit cut. 

I recognize that some people are concerned about groups with shorter than expected life expectancies. But attempting to address their needs by granting many 

of us who are healthy a 20th and 21st and 22nd year of transfer support and tens, 

if not hundreds, of thousands of dollars in extra benefits for retiring early is a very 

bad form of trickle-down policy. As discussed below, an increase in the retirement 

age can be combined with other provisions that help, rather than hurt, groups with 

shorter life expectancies. 

Backload benefits more. Whatever the level of lifetime benefit that is settled 

upon in a final reform package, actuarial adjustments can provide more benefits 

later and fewer earlier. These adjustments can take various forms: adjust benefits 

upward at the point that Social Security predicts that average life expectancy has 

fallen below, say, 12 years (about age 74 in 2005) and downward in earlier ages; 

provide a lower up-front benefit in exchange for post-retirement wage indexing. This 

type of adjustment has all the right effects. It progressively moves benefits to later 

ages when people have less ability to work, lower income, and less help from a 

spouse to deal with impairments. It puts labor force incentives where they are most 

effective—in late middle age, including the 60s, when most people report being in 

fair, good, or excellent health. 

Provide a well-designed minimum benefit. A minimum benefit can be designed to help most lower-income households and to reduce poverty rates (using a 

poverty standard that is adjusted for living standards or wage-indexed) among the 

elderly. With such a minimum benefit in place, any of the age-of-retirement adjustments can actually increase, rather than decrease, the relative share of benefits for 

those groups with lower life expectancies, since their life expectancies are correlated 

with lower lifetime earnings. In fact, with a good minimum benefit, we can increase 

the income of low-income people and reduce poverty rates, even relative to current 

law. 

MAJOR ISSUE TWO: SIGNIFICANT INEQUITIES AND INEFFICIENCIES 

IN THE EXISTING SYSTEM 

Social Security consistently violates notions of equal justice by taxing more or 

paying less to those who are equally situated. Many of these inequities also have 

extremely perverse anti-work and inefficiency aspects. I have approached many analysts and advocates across the ideological spectrum, and none so far has disagreed 

that these problems ought to be addressed. Their one excuse for failing to tackle 

these problems is political: that to restore equal justice affects some current winners 

whose winnings might be reduced. 

The major cause of many of these problems is provisions that initially were meant 

to help some of those who might be vulnerable, but in fact did so in a poorly targeted way. These provisions are equivalent to going to a poor area of the city and 

dropping money off a roof. In particular, the Social Security spousal and survivor 

benefit—unlike that in private pensions or even public pensions in most countries 

around the world—provides ‘‘free’’ transfers whose generosity increases the richer 

the person one marries. This benefit is free in the sense that no additional contribution is required; in the private pension system, standards of fairness argue for deterVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 E:\HR\OC\24732.XXX 24732
40 

mining spousal and survivor benefits actuarially through higher contributions or a 

lower initial worker benefit. Nor was the ‘‘free’’ benefit designed around any measure of need. Listed below are some of the problems that result: 

Single heads of household face especially egregious discrimination (the 

anti-welfare reform effect). 

Who doesn’t get the ‘‘free’’ spousal or survivor benefit? The answer, of course, is 

those without spouses (from marriages with ten years duration or longer). Here are 

some of the consequences: 

• When a mother is abandoned by her spouse, Social Security reduces her expected Social Security benefits without any change in the worker benefit owed 

to the father or to the spousal benefits he can pass onto to a new wife. • Fewer benefits are paid to many single heads of household who work more, pay 

more taxes, and raise more children than to many spouses who don’t work, 

don’t pay taxes, and don’t raise children. For instance, a single head of household who works for $20,000 a year for 40 years and raises her children will get 

lifetime benefits of about $95,000 while paying taxes of $50,000, whereas a nonworking spouse who doesn’t raise children but happens to marry someone making $100,000 a year will get about $250,000 in lifetime benefits and pay $0 in 

taxes. • Low-income minority and less-educated women are among the groups most likely to need additional help—the original purpose of the spousal and survivor 

benefit—and the least likely to receive it. 

Two-earner households often receive substantially fewer benefits than 

one-earner households (the anti—working woman effect). 

The design of spousal and survivor benefits also discriminates against two-earner 

families, with women more likely than men to get no additional benefits for their 

additional contributions. 

• A couple with each spouse earning $15,000 annually will get lifetime benefits 

of about $177,000, whereas a couple with one spouse earning $30,000 but paying no more in tax will get about $273,000—close to $100,000 more. • If a single earner in a family increases his average earnings subject to tax, 

higher benefits are provided to the household. But if a spouse also works, the 

additional taxes she pays often do not increase the household’s Social Security 

benefits. Many of these penalties tend to hit female labor force participants 

more than males, and couples who share child-rearing responsibilities more 

than those where one spouse takes on most of this effort. For example, a oneearner couple with annual earnings of about $30,000 can expect a total lifetime 

benefit of around $273,000, whereas a couple with the $30,000 split $25,500/ 

$4,500 will get lifetime benefits of about $243,000—little different than the 

amount if one spouse earned $25,500 and the other earned nothing. • Benefits for the divorced are highly variable and often unrelated to need or contributions (the divorce roulette wheel effect). 

• For the same contributions, someone who marries several times can multiply 

benefits relative to someone who marries only once. In the extreme, a worker 

can generate additional benefits for every spouse of 10 years or more—with no 

reduction in his or her own benefits. For example, if a high-wage male worker 

has three former spouses, all from marriages that lasted 10 years or longer, the 

spousal and survivor benefits payable on his earning record would be $710,000. 

Spousal and survivor benefits would be only $237,000 if he had only one spouse. 

In both cases, he is not required to share any portion of his own benefit. 

• Someone who divorces after 10 years, less one day, of marriage gets nothing 

from the shared responsibility of the marriage, even if she is left taking care 

of the children. She will receive hundreds of thousands of dollars less in benefits than someone equal in all other respects who happens to divorce after ten 

years and one day. 

• People who remarry are often subject to marriage penalties—if their new 

spouses have lower lifetime earnings than their former spouses (the marriage 

penalty effect). A woman divorced from a high-wage man after more than 10 

years of marriage would receive about $237,000 in spousal and survivor benefits. However, if she remarries and her new husband is a low earner, her benefits would fall to about $101,000—a steep penalty for remarrying. 

• A divorced person is often better off if her former spouse dies (the Agatha 

Christie effect). Upon death of a former spouse, the divorced person can start 

receiving the much larger survivor benefit; before death, only the smaller spousal benefit is provided. For example, a divorced woman whose high-wage spouse 

41 

has died before she reaches normal retirement age would receive $373,000 in 

benefits. However, if both she and her husband live into retirement and then 

she dies at average life expectancy but her husband outlives her, she can only 

expect $186,000, as she will never receive his more generous survivor benefits. 

People who marry significantly younger spouses will find that their contributions are much more likely to generate a higher package of benefits 

for the household than are the contributions of people who marry others 

of a similar age (the trophy wife and husband effect). 

Again, Social Security spousal and survivor benefits are not actuarially adjusted 

for age. If a person marries someone a lot younger, he will be more likely to generate additional survivor benefits for which he has paid nothing extra. 

People who have children later in life are much more likely to receive 

additional benefits, no matter how rich they are (the Hollywood effect). 

With longer lives, higher divorce rates, and births at later ages, it is becoming 

more common for older people, especially men, to still have children in the home 

when they start receiving retirement benefits. Under current law, they often become 

eligible for children’s benefits at the same time, regardless of need. 

People with long work histories face discrimination in the system (the 

anti-worker effect). 

Someone who works 45 years at $35,000 a year gets substantially fewer benefits than someone who works 35 years at $45,000 a year—for a single male, $165,000 

in lifetime benefits versus about $200,000. The system counts only 35 years of work, 

a rather perverse way of trying to achieve progressivity. 

Of course, there are ways to reform this system while still protecting the vulnerable. 

Determine family benefits for middle- and upper-income individuals in 

an actuarially neutral manner. Actuarial neutrality would apply private pension 

standards to middle- and upper-income households in making sure that benefits 

were shared equitably. Different forms of benefit sharing or earnings sharing could 

be tried. While transitioning to this type of system, cap existing types of family benefits that are not paid for out of additional contributions. Similarly, extend toward 

divorced persons the types of equity rules that apply in the private pensions system. 

Provide a minimum benefit that extends to spouses and divorced persons 

as well as workers. For the same level of expenditure, higher minimum benefits 

for lower-earning workers—as well as for spouses who have generated low worker 

benefits on their own records—would provide additional protections for the vulnerable. One should first require the actuarial adjustment, then figure out where additional levels of protection can best be granted. This would reduce the amount of 

transfers that are going free—without any additional contribution—to higher-income 

households. For those concerned with low-income women, whether single or survivors, it would improve their status overall. 

Count all years of work history. No one would think to deny some people their 

employer’s 401(k) contributions because they worked more than 35 years. There is 

no legitimate reason in Social Security that all years of work should not be counted. 

Redistribution can always be made to low-earning workers through the benefit formula or a minimum benefit. This change would have an additional work incentive 

effect as well; under current law, many years of work result only in a pure additional tax, with no additional benefit generated. 

MAJOR ISSUE THREE: CHANGING THE DEFAULT 

Under current policy, spending of the federal government grows automatically, by 

default, faster than tax revenues as the population ages and health costs soar. 

These defaults are threatening the economy with large, unsustainable deficits. More 

important, they deny to each generation the opportunity to orient government toward meeting current needs and its own preferences for services. Only by changing 

the budget’s auto-pilot programming can we gain the flexibility needed to continually improve government policies and services. 

Rudolph L. Penner (also a senior fellow at the Urban Institute and a former director of the Congressional Budget Office) believes there is no way to get the budget 

in order without addressing the issue of these defaults. They apply to a number of 

programs of government, but the largest are linked to Social Security and Medicare. 

As currently structured, these programs are designed to rise forever in cost faster 

than national income and revenues—an impossible scenario. In Social Security, the 

problem is caused by the combination of a constant retirement age as our health 

and life expectancy improve and wage indexing for annual benefits. 

42 

1Technically, the so-called bend points in the benefit formula could be indexed to the lower 

of wage or price growth. This approach to price indexing differs from some recent proposals that 

ratchet down future benefits derived from the current benefit formula by the difference between 

the rate of growth of wages and prices. 2The term ‘‘progressive price indexing’’ has sometimes been applied to this effort, but there 

are many ways it can be implemented. 

Regardless of what Social Security reform is undertaken, some rule should be 

adopted that would put the program back into balance over the long term should, 

for instance, the trustees report for three consecutive years that the program is likely to be in long-run deficit. This trigger should force the system’s automatic features 

to move back toward budgetary balance. 

With the trigger pulled, two of many options at that point strike me as particularly simple and easy to implement. First, the early and normal retirement ages 

could be automatically increased two months faster per year than under current law 

for everyone younger than, say, 57 in the year the trigger is pulled. Second, in those 

years, the benefit formula could be indexed to the lower of price or wage growth 

in a way that allows average real benefits to increase but more slowly than wages.1

This approach could be supplemented by a new special minimum benefit indexed 

to wage growth. Other approaches to this option can also be devised to reduce the 

growth rate of benefits more for high earners than for low earners.2

Of these two options, I prefer increasing the retirement ages, since that allows 

more revenues for the system and, consequently, for the same tax rate, a greater 

level of lifetime benefit to be generated. Other benefit reductions, as noted, hit the 

oldest beneficiaries with their greater needs as well as everyone else. For similar 

reasons, among the ‘‘progressive price indexing’’ options, I prefer creating a wageindexed minimum benefit, since that is more likely to protect the more vulnerable, 

including survivors, than is a form of progressive price indexing that continues to 

spend larger shares of revenue on increasing benefits for those with well-above-median income. But, regardless, the system must be redesigned so that, when on automatic pilot, the default option is one that leads to a responsible and sustainable 

budget. 

There is, of course, no reason to believe that these types of automatic changes will 

alone lead to a socially optimum Social Security system. For instance, they do not 

deal with the discrimination I noted above against single heads of households. The 

point of changing the defaults is, rather, to migrate from a system in which the Congress has little choice but to enact painful benefit cuts to one in which Congress 

has the opportunity to provide more generous benefits from time to time—that is, 

to play tax Santa Claus rather than Scrooge sometimes, as politics requires. 

By creating a system in which the budget automatically becomes ever more responsive and responsible to future taxpayers and beneficiaries, the door is also open 

to spending more now on programs for people who aren’t elderly—especially children—and on public investments. Or Congress might use the freed-up resources to 

make Social Security benefits more generous to those with low average lifetime 

earnings or to provide more cash to lower-income elderly to help pay for medical 

payments. And, of course, Congress can always choose to raise taxes to provide a 

higher benefit growth rate in each year, though remaining responsible means making each year’s decision to increase benefit levels independent of the next year’s. 

MAJOR ISSUE FOUR: RELATED PRIVATE RETIREMENT AND EMPLOYEE BENEFIT REFORMS 

We can only consume what we produce. That production comes from labor and 

capital. I have indicated that I consider the primary economic problem for Social Security is to take advantage of the vast pool of human talent and capital that we 

are wasting. There are a variety of ways to fix our private employment systems to 

enhance their ability to hire older workers and to induce greater saving. 

Most middle-class retirees—not just the poor—depend primarily upon 

government in their retirement. 

Over two-thirds of those approaching retirement have less in accumulated wealth 

in all forms—retirement plans, housing, and saving accounts—than the value of 

their Social Security and Medicare benefits (figure 6). 

The personal account debate reflects a search for something between a 

mandated Social Security system that for the most part is pay-as-you-go 

and discourages saving by individuals, and a private pension system 

that is not mandated, but generates little in retirement saving for most 

citizens. 

43 

I had hoped that the personal account debate would evolve toward figuring out 

how to address the difficult problem of promoting saving effectively. Our private 

pension system is not doing an adequate job of promoting saving, nor is our Social 

Security system. Some hybrid system may well be needed on this score. 

The Social Security tax base has been eroding for some time and in ways 

that are causing other problems—such as the government actually paying tax benefits in ways that increase the number of uninsured. 

The earnings base for the Social Security tax has been eroding over time for two 

reasons: first, the earnings distribution has become more unequal; and, second, 

smaller percentages of compensation are being paid in the form of cash, rather than 

tax-deferred, compensation. In the latter case, the primary problem has been the 

growth in the percent of compensation paid in the form of health benefits. To make 

matters worse, the tax subsidy for employer-provided health insurance is expected 

to cost an additional $100 billion annually (in both income tax and Social Security 

tax revenues) within a few years. And that additional expense will likely increase, 

rather than decrease, the number of persons who lack health insurance. As designed, the subsidy encourages excessive growth in the cost of medical care, thus 

leading more employees to drop insurance. 

It is hard for government to force people to save or to control the dynamics of the 

bargains between labor and management. However, some prudential steps can be 

taken. 

Reduce the tax gaming. Taxpayers now borrow and take interest deductions, 

while deferring tax on interest and other capital income in their retirement accounts. In effect, they get tax breaks for making deposits, not for saving. Such interest deductions should be restricted when the interest and other capital income is 

not being subjected to tax. 

Provide an additional incentive for plans that do a better job at providing a portable benefit for all workers. Here is one example. Many types of 

contributions to 401(k) and other plans do not benefit from the FICA exclusion accorded many defined benefit plans. Making use of this FICA tax is an alternative 

way of financing increased deposits to retirement accounts—although it, too, should 

be paid for. I suggest that some additional incentive be made available to all plans 

where all workers in the firm are guaranteed that they will walk away at least with 

6 percent of pay compounded over time by some reasonable interest rate. I would 

apply such a rule to employer and employee contributions and to any type of plan, 

whether defined benefit or defined contribution. Other pension tax benefits might 

be gradually reduced for plans that did not provide such a portable benefit. Adopting this type of rule could also allow for a simplification of pension discrimination 

rules. 

Make clearer in the law that employers can use opt-out, not just opt-in, 

methods of encouraging participation—without threat of lawsuit. Evidence 

seems fairly strong that the former method—where employees are included in a 

plan unless they formally choose to be excluded—results in much higher participation rates. In addition, default options can allow the employee contribution rate to 

rise when pay rises. 

Focus retirement plan incentives more on lower-wage workers. This might 

be done, for instance, through an increase in the savers credit. However, that credit 

should be reformed so the monies are more likely to make their way into retirement 

accounts (currently the credit is just a tax reduction that can easily be spent). The 

credit should also be made available for employer, as well as employee, contributions. 

Provide safe harbors for employers hiring or retaining older workers. 

Our current pension and retirement plan rules are designed for a world in which 

people had much lower life expectancies and labor force demands could more easily 

be met by all the baby boomers and women entering the workforce. That period is 

swiftly passing. Still, employers today are often fearful of retaining or hiring older 

workers because of threats of lawsuits under ERISA, the tax law, and age discrimination laws. Even when employers feel they are clearly acting within all these laws, 

the threat of lawsuit deters them from acting. Congress should provide safe harbors 

for the types of employee benefits that firms can provide when hiring or retaining 

older workers. 

Restore or at least prevent further erosion of the Social Security earnings base. The president and some others have offered to consider restoring the Social Security wage base to compensate for some of the former effects. But long-term 

projections of Social Security’s solvency are also affected significantly by income and 

Social Security tax incentives to receive more and more compensation in nontaxable 

forms. A cap on employer-provided health insurance would go a long way not just 

44 

to improve Social Security’s solvency (allowing for higher benefits for the same Social Security tax rate), but also to help the health insurance market and help prevent the erosion of private health insurance coverage. One should also consider extending the Social Security tax to other preferred forms of employee benefits in an 

administrable way. 

Note that the combination suggested here—a higher wage base to compensate for 

the more uneven distribution of earnings, a cap on tax subsidies for health insurance to promote a more efficient market and greater health insurance coverage, and 

reduction in other inefficiencies caused preferences for other employee benefits— 

may represent a classic conservative—liberal compromise that has many side benefits to restoring solvency to Social Security. 

CONCLUSION 

Social Security reform is possible, but focus needs to extend far beyond the narrow confines of the current debate. Many reforms are consistent with legitimate 

principles accepted by individuals of all political persuasions. We can and should fix 

a system that favors middle-age retirement in ways that reduce shares of resources 

for the truly elderly; that discriminates against single heads of households, working 

couples, and many others; and that by default automatically reduces the share of 

revenues available for programs for children and working families. We should also 

consider changes in the tax and related laws affecting employee compensation to restore solvency, increase private saving, make it easier for employers to hire older 

workers, and in other ways complement Social Security reform. 

Summary of Recommendations 

• Increase the early and normal retirement ages so that at any given tax rate, 

the system provides fewer subsidies for middle-age retirement and increased 

revenues, higher annual benefits in retirement, higher lifetime benefits, and a 

greater portion of resources to those who are truly old. 

• Backload benefits more to older ages, such as the last 12 years of life expectancy, so as to progressively increase benefits in later ages when they are needed 

more and to increase labor force incentives for individuals still in late-middle 

age, as defined by life expectancy. 

• Provide a well-designed minimum benefit to help low-income households and 

groups with less education and lower life expectancies, while simultaneously reducing poverty rates (relative to living standards or wages) among the elderly. 

• Determine family benefits for middle- and upper-income individuals in an actuarially neutral manner by applying private pension standards, making sure 

that benefits are shared equitably, and reducing or removing significant discrimination against single heads of household, many abandoned spouses, twoearner couples, many divorced persons, those who marry others close to their 

own age, some who pay significant marriage penalties for remarrying, and those 

who bear children earlier in life. 

• Provide a minimum benefit that extends to spouses and divorced persons as 

well as workers to provide additional protections for groups that are particularly vulnerable, and as an alternative to free and poorly targeted transfers to 

higher-income households. 

• Count all years of work history, providing an additional work incentive and removing the discrimination against those who work longer. 

• Ensure responsible budgetary policy by changing the default rules to guarantee 

the system automatically moves toward balance—say, through adjustments in 

the retirement ages or the rate of growth of benefits for higher-income households—whenever the Social Security trustees repeatedly report a likely long-run 

deficit. 

• Reduce the tax gaming used with retirement plans when taxpayers simultaneously report interest deductions while deferring or excluding interest and 

other retirement plan income from taxation. 

• Provide additional incentive for plans that do a better job at providing a portable benefit for all workers, such as using the FICA tax exclusion to finance 

increased deposits to retirement accounts and guaranteeing all workers in a 

qualified plan a minimum level of portable benefits. 

• Make clearer in the law that employers can use opt-out, not just opt-in, methods of encouraging retirement plan participation—without threat of lawsuit. 

• Focus retirement plan incentives more on lower-wage workers, for instance, 

through an increase in a modified savers credit, which should be adjusted so 

that it is available for employer, as well as employee, contributions and so that 

the credit is deposited in retirement accounts. 

45 

• Provide safe harbors from lawsuits for designated types of retirement and other 

benefit plans offered by employers who hire or retain older workers. 

• Restore the earnings base for Social Security by increasing the portion of cash 

wages subject to Social Security tax, capping the tax-free levels of health insurance that can be provided, and dealing with tax preferences for other employee 

benefits. 

FIGURE 1 


Insert 24732a.007
46 

FIGURE 2 

Source: C. Eugene Steuerle and Adam Carasso, The Urban Institute, 2002. Based 

on data from the Social Security Administration’s 2001 Annual Statistical Supplement, Table 5A.1. 

FIGURE 3 


Insert 24732a.008 Insert 24732a.009
47 

FIGURE 4 

Note: Projections assume no change in patterns of retirement by age and sex. 

Source: C. Eugene Steuerle and Adam Carasso, The Urban Institute, 2002. Based 

on data from the U.S. Bureaus of Census and Labor Statistics. 

FIGURE 5 


Insert 24732a.010 Insert 24732a.011
48 

FIGURE 6 

C. Eugene Steuerle is a senior fellow at the Urban Institute, codirector of the Tax 

Policy Center, and a columnist for Tax Notes Magazine. Any opinions expressed 

herein are solely the author’s and should not be attributed to any of the organizations with which he is associated. 

f 

Chairman THOMAS. Thank you very much, Gene. Welcome 

back, Mr. Apfel. The time is yours. 

STATEMENT OF HON. KENNETH S. APFEL, SID RICHARDSON 

CHAIR IN PUBLIC AFFAIRS, LYNDON B. JOHNSON SCHOOL 

OF PUBLIC AFFAIRS, UNIVERSITY OF TEXAS AT AUSTIN, 

AUSTIN, TEXAS 

Mr. APFEL. Thank you, Mr. Chairman. Mr. Chairman and Members of the Committee, I have many, many memories of time spent 

in this historic room. This room has been witness to many historic 

events when Members of Congress with differing views came together for the common good. There are sharply divergent views 

today on how to proceed on Social Security and my remarks today 

are designed to make clear my very deep concerns about the two 

key proposals now being put forward by the Administration. My 

hope, however, is that as the debate unfolds, that this room will 

again be witness to action that brings us together for the common 

good. The first proposal, of course, relates to the privatization of 

Social Security. The Administration has proposed that private accounts be established and then paid for through cuts in future Social Security benefits. Some workers may do better than current 

law and some worse. The winners and losers will be decided by the 

market. In the case of a death of the worker, the private account 

would be passed on to heirs, but so would the future Social Security benefit cuts. It is, therefore, also entirely unclear which 


Insert 24732a.012
49 

spouses or family Members will be better off or worse off under this 

scenario. 

With privatization, trying to retire at a time of down market conditions can be a very risky proposition and trying to buy an annuity at a time of economic instability can also be a risky proposition. 

Frankly, I would hate to see a future U.S. Social Security Commissioner urging America’s older workers to just keep working until 

the markets come back. Social Security ought to represent a foundation of support that can be counted on in retirement no matter 

what happens to the markets. Now, the White House argues that 

current retirees will be unaffected by privatization proposals. I do 

not in any way question the sincerity of the White House on this 

matter, but the hard reality is that redirecting current payroll tax 

revenues erodes financing for Social Security, even if those revenues are somehow made up through trillions of dollars in government borrowing. These changes destabilize Social Security’s current financing mechanisms and call into question whether and how 

benefit commitments made to current retirees will be made in the 

years ahead. Privatization is simply not a safe bet for current retirees. 

The President has also suggested that we change over to a system of sliding-scale benefit reductions to reduce future benefit commitments. About 70 percent of future retirees, those with earnings 

over $20,000 a year, would face major cutbacks. Replacement rates 

would plummet. In addition, many lower income survivors, divorced spouses, and others would see their benefits reduced. Once 

fully phased in, almost all workers would receive the same benefits 

regardless of lifetime earnings. This is a dramatic shift in Social 

Security policy because it breaks the link between what workers 

paid into the system based on their earnings and what they would 

earn in Social Security benefits. Now, it is true that the proposal 

exempts low-income workers from this aspect of the proposed benefit cuts, and I want to point out that the core objective of a progressive reform is basically sound—to make Social Security benefits structure more progressive and to soften the burden on low-income workers of restoring solvency. In addition, people with higher 

earnings are, on average, living increasingly longer lives than lowincome workers, so higher-income workers are receiving an increasingly higher share of benefits over time. While I have argued that 

modest benefit changes could be made in this area, Social Security 

benefit cuts of the magnitude contemplated by the President’s proposal, I believe, are inappropriate and risk the long-term economic 

security of the middle class. 

Lastly, combining private accounts with these sliding-scale benefit cuts, as proposed by the White House, would lead to even more 

drastic change. After paying a lifetime of payroll taxes into Social 

Security, millions of persons would receive little or no Social Security defined benefits. This is due in part to deep and broad middleclass Social Security benefit cuts combined with the fact that the 

private accounts would be paid for through even deeper reductions 

in Social Security defined benefits. If adopted, where would such a 

policy lead us? I believe the long-term sustainability of the Social 

Security retirement system would be in peril if such an approach 

50 

was enacted. This assertion is not empty rhetoric. I believe it from 

the bottom of my heart. 

What should we do? First and foremost, I do not believe that 

progress will take place until the decision to drop privatization has 

been made. We should drop consideration of privatizing part of Social Security. Once privatization is off the table, if added retirement savings is desired, and it should be, it should not come at the 

expense of Social Security. Second, Congress and the Administration need to come to a general agreement on whether added resources should be brought to bear to resolve the financing gap. In 

addition, an agreement is needed on the overall magnitude of the 

problem that you are trying to resolve. I am reminded of President 

Clinton’s words after the failure of health reform. He bit off more 

than he could chew. I urge the Committee not to fall into the same 

trap. Rather than looking for permanent solvency by trying to solve 

a potential problem that may exist in 2100, I urge you to establish 

a more modest goal of success that would clearly be more easily 

achievable. Frankly, no one knows what our fertility rates or economic growth rates will be like 100 years from now. Third, once 

privatization is no longer under consideration, I believe that Congress and the Administration need to come to agreement on the 

overall proportional mix of benefit and revenue changes needed to 

strengthen solvency. At that point, coming up with the detailed 

proposals for change, while clearly still a significant task, is one 

that I believe can be accomplished, taking into account the need for 

a more progressive benefit structure. And fourth, reform must be 

truly bipartisan. During my tenure as Commissioner at Social Security, I advised the Clinton Administration and Members of Congress on both sides of the aisle that a strong coalition for change 

must be truly bipartisan. I do not believe that changes should be 

enacted now, as some have recently been advocating, through a 

strong majority of Republicans, buttressed by a sliver of Members 

from the Democratic side of the aisle. Changes to Social Security 

must represent all Americans. Any other approach would only sow 

the seeds for future discord, when a long-term resolution of this 

issue is what the public really wants. In short, let us all come together and solve a manageable problem, not create a much bigger 

one by privatizing Social Security. Let us keep the word ‘‘secure’’ 

in Social Security for current and future generations. 

[The prepared statement of Mr. Apfel follows:] 

Statement of The Honorable Kenneth S. Apfel, Sid Richardson Chair in 

Public Affairs, Lyndon B. Johnson School of Public Affairs, University of 

Texas at Austin, Austin, Texas 

Mr. Chairman and Members of the Committee, it is an honor to be asked to testify today about the future of Social Security. I have many, many memories of times 

spent in this historic room. I sat through many hearings and mark-ups in the early 

1980’s the last time Congress made major changes to Social Security. In the late 

1980’s, I sat behind the dais when I served as a staff person to Senator Bill Bradley 

during the House/Senate Conference Committee on the Medicare Catastrophic Care 

legislation. And during the late 1990’s and in 2000, I testified many times in this 

room during my service as the Commissioner of Social Security. 

This room has been witness to many historic moments—when Members of Congress with differing views came together for the common good. I have deep respect 

for what you do here, and I know first-hand how seriously you take your responsibilities to the American people. 

51 

The future of our Social Security system is one of the most important issues facing this Committee in the early part of the 21st Century. There are sharply divergent views on how to proceed. From my experience, covering up the differences gets 

us no closer to coming together. My remarks today are designed to make clear my 

deep concerns about the two key proposals now being put forward by the Administration. My hope is that as the debate unfolds in the future that this room will 

again be witness to action that brings us together for the common good. 

It is clear that steps need to be taken to strengthen Social Security, given the demographic and economic changes that are now underway in America. I urge the 

Members, however, to be very careful in this area, because our Social Security laws 

serve as the foundation for our entire retirement system. 

It is hard to overstate the importance of Social Security. Without those monthly 

benefit payments, about half of all seniors in America would be living in poverty. 

Social Security provides the foundation of support for about one in six Americans— 

with benefit protections available over a lifetime, no matter how long one lives. 

Given the continued shift of retirement risks away from employers and toward individuals, the importance of that monthly inflation-protected Social Security benefit— 

something that can be counted on over a lifetime—becomes all the more important 

for future generations. Our social insurance programs are critically important not 

only for today’s older Americans, but also for the disabled, for widows, for families 

and for future generations. 

As the Committee deliberates on changes to Social Security, there are five issues 

I would like to address today. First, is the financing shortfall so large that drastic 

changes are needed in Social Security? Second, do private accounts help to strengthen Social Security? Third, does privatization in any way put the benefits of current 

retirees at risk? Fourth, are proposals to dramatically cut benefits—either alone or 

coupled with privatization—in the best interests of the young? And lastly, could the 

two key Social Security proposals made by the Administration—private accounts 

coupled with ‘‘sliding scale’’ benefit cuts—undermine the long term sustainability of 

our Social Security system? 

Are drastic steps needed? 

On the first issue, the Social Security financing shortfall is manageable without 

drastic changes. A doubling of the senior population will certainly place strains on 

financing Social Security, but it’s certainly not Armageddon. The system is now generating very large surpluses—about $150 billion this year. It’s been running surpluses for more than the past two decades and will likely stay in surplus for many 

years to come. Legislative changes enacted in 1983 provided stability for about a 

half a century. That was a remarkable accomplishment. 

According to projections by the Social Security Trustees and the Congressional 

Budget Office, the Social Security trust fund will not be exhausted for several decades. The system will not be ‘‘bankrupt’’ after that time. Social Security revenues 

will still be sufficient to pay between 70 percent and 80 percent of today’s benefit 

commitments. Social Security will be there in the future. I realize that many young 

people believe that Social Security will not be there for them, but the fact is that 

it will be there unless we choose to dramatically restructure our system. 

Social security’s deficit over the next 75 years translates into about a half of one 

percent of GDP. Even if one uses an even longer time frame to measure the shortfall—into eternity— a concept strongly rejected by the actuarial profession—then the 

shortfall is still only a little over 1 percent of GDP. Compare this shortfall to the 

fact that Social Security revenues now amount to about 5 percent of GDP. Does a 

1 percent shortfall represent a long-term challenge? Of course. Does it represent a 

crisis necessitating drastic action? Of course not. 

I’ve said for years that Social Security clearly faces a long-term and manageable 

challenge, and it’s a challenge that we should face up to sooner rather than later. 

The continued drum beat that we are hearing, however, about an imminent crisis 

and bankruptcy seems aimed at eroding support for our social insurance system and 

building support for radical restructuring of the program. 

Do private accounts help? 

The second question relates to whether the privatization of Social Security will 

help to solve the long-term Social Security shortfall. Absolutely not. Taking payroll 

tax revenues out of Social Security to create individual savings accounts makes the 

long-term financing problem bigger, not smaller. Unless benefits are drastically curtailed or other revenues increased, privatization only makes the financing problem 

worse. 

If a portion of payroll taxes is redirected away from paying Social Security benefits, Social Security’s financing is weakened. Rather than running surpluses for 

52 

many years into the future, the system may start running deficits almost immediately. Rather than a problem that is about a half a percent of GDP over the next 

75 years, the shortfall could easily be more than double this size. And rather than 

trust funds having resources to pay benefits for several decades, the trust funds 

could be exhausted a decade earlier. 

Future benefit commitments will most likely have to be sharply curtailed if we 

privatize parts of Social Security. The Administration has proposed that these accounts be paid for through cuts in future Social Security benefits. Under the proposal, for every dollar in payroll taxes diverted from Social Security, the worker’s 

future Social Security benefit would be cut by an equal amount, plus an interest 

charge equal to 3% above inflation. Under this proposal, some workers may do better than current law if they can beat the 3% above inflation cut. Some workers will 

do worse. The winners and losers will be decided by the market. In the case of the 

death of the worker, the private account would be passed on to heirs, but so would 

the future Social Security benefit cuts. It is therefore also unclear which spouses 

or family members will be better off or worse off under this scenario. 

There has been much debate over how many people will end up winners and how 

many will end up losers. Yale economist Robert Shiller predicts that about one third 

to two thirds of workers may be losers under the plan. I am not an expert in this 

area, but it is clear to me that there will be losers, and we won’t know for sure how 

many would end up losers for decades to come, after we see how the markets actually perform. 

It can be argued that the benefits of individual accounts may offset some of these 

problems, but they do so by shifting more retirement risk to individuals. With privatization, a growing share of retirement income will be based on the returns of the 

market. Certainly stock market investments can lead to high returns over time. We 

all know, however, that what goes up also sometimes comes down. With privatization, trying to retire in a time of down market conditions can be a risky proposition. 

And trying to buy an annuity in a time of economic instability can also be a risky 

proposition. 

It is difficult to come to terms with the real life implications of these big shifts 

in policies. Let me provide an example. For years, the supporters of privatization 

have extolled the virtues of the Chilean privatized system. During my years as Commissioner, I met the head of Chile’s system during a time of steep interest rate reductions in Chile. At the time, he was publicly urging older workers to delay retiring until the economic conditions improved so workers would not be forced into receiving inadequate annuities in retirement. This senior government official was urging older people to keep working until the bond markets came back. 

Do markets bounce back quickly? Sometimes they do. And sometimes it takes 

many, many years for markets to come back. The problem, of course, is that we 

can’t predict future market conditions. If we privatize a part of our Social Security 

system, we could find ourselves in the same situation as Chile. Frankly, I would 

hate to see a future U.S. Social Security Commissioner urging America’s older workers to ‘‘just keep working until the markets come back.’’ Social Security ought to 

represent a foundation of support that can be counted on in retirement no matter 

what happens to the markets. 

Does privatization put the benefits of current retirees at risk? 

The White House argues that current retirees will be unaffected by privatization 

proposals. I do not in any way question the sincerity of the White House on this 

matter, but the hard reality is that redirecting current payroll tax revenues erodes 

financing for Social Security, even if those revenues are somehow ‘‘made up’’ 

through massive government borrowing. These changes destabilize Social Security’s 

current financing methods. 

The creation of private accounts within Social Security calls into question whether 

and how benefit commitments made to current retirees will be made in the years 

ahead. Adding $5 trillion in new borrowing over the next couple decades could put 

added pressures on the benefit promises made to current Social Security beneficiaries—maybe not today or tomorrow, but very possibly over the next decade or 

so. The risks are real not only for Social Security commitments, but also for Medicare commitments. Privatization is simply not a safe bet for current retirees. 

How will the benefit cuts if made through ‘‘sliding scale’’ benefit reductions 

affect young workers? 

The proposal for private accounts in and of itself does not restore long term solvency to Social Security. The Administration has now suggested further benefit cuts 

to make up for most of the shortfall. Will private accounts, coupled with major alterVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00056 Fmt 6633 Sfmt 6621 E:\HR\OC\24732.XXX 24732
53 

ations in the benefit structure, be in the best interests of future beneficiaries? 

Again, the answer is no. 

The President has suggested that we change over to a system of ‘‘sliding scale’’ 

benefit reductions to reduce future benefit commitments. This idea of simply using 

a sliding scale to calculate future benefit payments sounds appealing; the supporters 

of this change argue that for future generations, lower income workers would be 

protected and higher income workers would still be receiving the same level of Social Security benefits in real terms as current retirees. 

Let’s put this proposal in proper context. Benefits for the average earner who is 

now age 25 would be cut by about 16% and the average newborn would see benefit 

cuts of about 28%. About 70% of future retirees—those with earnings over $20,000 

a year, would face major cut-backs. In addition, many lower income survivors, divorced spouses, and others would see their benefits reduced. Once fully phased in, 

almost all workers would receive the same benefits regardless of their lifetime earnings. This is a dramatic shift in Social Security policy because it breaks the link 

between what workers paid into the system based on their earnings and what they 

would earn in Social Security benefits. 

Social Security currently replaces a little less than 40 percent of pre-retirement 

earnings, with somewhat lower levels projected for the future. Financial planners 

indicate that an adequate income in retirement requires post-retirement income to 

replace at least 70 percent of pre-retirement income. If we moved to a sliding scale 

benefit cut scheme, Social Security’s ‘‘replacement rate’’ for average workers would 

be about 25% in 75 years, falling to much lower levels in the future. The foundation 

of support that Social Security provides would be seriously eroded. 

It is true that the proposal exempts low wage earners from this aspect of the proposed benefit cuts. And I want to point out that the core objective of a progressive 

reform is basically sound—to make the Social Security benefit structure somewhat 

more progressive and to soften the burden on low income workers of restoring solvency. In addition, people with higher earnings are on average living increasingly 

longer lives than lower income workers, so higher income workers are receiving an 

increasingly higher share of benefits over a lifetime basis. In effect, the Social Security benefit structure over time is becoming less progressive. While I’ve argued for 

years that modest benefit changes could be made in this area, Social Security benefit cuts of this magnitude I believe are inappropriate and risk the long term economic security of the middle class. 

The proposal also has the inadvertent affect of failing to keep revenues and expenditures in balance as economic conditions change in the future. The Congressional Research Service recently concluded that ‘‘—paradoxically, if real wages rise 

faster than projected, price indexing would result in deeper benefit cuts, even as Social Security’s unfunded 75 year liability would be shrinking.’’ In other words, the 

smaller the long term shortfall, the larger the benefit cuts. That makes no sense. 

Will private accounts coupled with ‘‘sliding scale’’ benefit cuts destabilize 

Social Security? 

Combining private accounts with sliding scale benefit cuts as proposed by the 

White House would lead to even more drastic results. For the medium wage worker 

retiring a half century from now, the defined Social Security benefit would be cut 

by two thirds. For higher wage earners—those averaging about $60,000 today—Social Security defined benefits would be cut by about 90%.After paying a lifetime of 

payroll taxes for Social Security, millions of persons would receive little or no Social 

Security benefits. This is due in part to deep and broad middle class Social Security 

benefit cuts coupled with the fact that the private accounts would be ‘‘paid for’’ 

through even deeper reductions in Social Security defined benefits. 

If adopted, where would such a policy lead us? I believe the long term sustainability of the Social Security retirement system would be in peril if such an approach was enacted. And if Social Security goes away, so does the economic security 

of tens of millions of Americans. I urge the Committee to seriously consider the full 

implications of these measures before acting. 

What should we do? 

I believe the path that we should follow is as follows: 

• First and foremost, I do not believe that progress will take place on this issue 

until there is agreement to drop consideration of privatizing part of Social Security. Privatization makes the financing problem that we face much worse. It’s 

not in the best interests of young and old alike—likely leading to drastic cuts 

in promised benefits for younger workers, as well as erosion in Social Security’s 

financing, which could also put the benefits of current retirees at risk over time. 

We need a foundation of support that will be there no matter what happens to 

54 

the markets. Once privatization is off the table, if added retirement savings is 

desired—and it should be—it should come not at the expense of Social Security. 

I suggest that the Committee consider 401-k and IRA changes to help low and 

moderate income workers save through changes in default rules or added retirement savings tax incentives targeted at low and moderate income families. 

• Second, Congress and the Administration need to come to general agreement 

on whether added resources should be brought to bear to resolve the financing 

gap. In addition, an agreement is needed on the overall magnitude of the problem that you are trying to resolve. I am reminded of President Clinton’s words 

after the failure of health reform: he bit off more than we could chew. I urge 

the Committee not to fall into the same trap. Rather than looking for ‘‘permanent solvency’’ by trying to solve a potential problem that may exist in the year 

2100, I urge you to establish a more modest goal of success that would clearly 

be more easily achievable. Frankly, who knows what our fertility rates or our 

economic growth rates will be 100 years from now? I certainly don’t. 

• Third, once privatization is no longer under consideration, I believe that Congress and the Administration need to come to agreement on the overall proportional mix of benefit and revenue changes needed to strengthen solvency. I believe the American people will support a balanced approach. At that point, coming up with the detailed proposals for change, while clearly a significant task, 

is one that I believe can be accomplished, taking into account the need for a 

more progressive benefit structure. 

• And fourth, reform must be truly bipartisan. During my tenure as Commissioner of Social Security, I advised the Clinton Administration and Members of 

Congress on both sides of the aisle that a strong coalition for change must be 

truly bipartisan. I do not believe that changes should be enacted, as some have 

recently been advocating, through a strong majority of Republicans, buttressed 

by a sliver of members from the Democratic side of the aisle. Changes to Social 

Security must represent all Americans. Any other approach would only sow the 

seeds for future discord, when a long-term resolution on this issue is what the 

public really wants. 

In 1983, the American people supported a balanced approach to legislative 

changes to the Social Security system that ensured solid financing for decades. I 

was an active participant in that process on the Senate side—I witnessed some of 

the debates that took place in this historic room. During my tenure as Commissioner and now as a professor in Texas, I have met with Americans to discuss the 

ongoing challenges we face. I believe that the American people will again support 

a balanced and bipartisan approach to strengthening Social Security for future generations. 

To summarize, a major restructuring of Social Security is unnecessary, given the 

manageable size of the long-term problem. Privatization makes the financing problem that we face much worse. It’s not in the best interests of young and old alike— 

likely leading to drastic cuts in promised benefits for younger workers, as well as 

erosion in Social Security’s financing, which could also put the benefits of current 

retirees at risk over time. Privatization coupled with sliding scale benefit cuts leads 

to very deep cut-backs in Social Security benefits for future middle class retirees 

and runs the risk of unraveling the entire Social Security system. 

In short, let us all come together and solve a manageable problem, and not create 

a much bigger one by privatizing Social Security. In the process, let us keep the 

word ‘‘secure’’ in Social Security for current and future generations. 

f 

Chairman THOMAS. Thank you very much, Mr. Apfel. Dr. 

Hunter? 

STATEMENT OF LAWRENCE A. HUNTER, VICE PRESIDENT AND 

CHIEF ECONOMIST, FREE ENTERPRISE FUND, AND SENIOR 

RESEARCH FELLOW, INSTITUTE FOR POLICY INNOVATION 

Mr. HUNTER. Thank you, Mr. Chairman. Thank you for allowing me to express the views of the Free Enterprise Fund and the 

Institute for Policy Innovation. In addition to my written statement, I have a set of design principles that the Committee asked 

that I submit for the record, and I do so. 

55 

Chairman THOMAS. Without objection. 

[The information was not received at the time of printing.] 

Mr. HUNTER. In my written statement, I explain why we believe the only way to make Social Security permanently solvent is 

to allow workers to invest about half the payroll tax through large 

personal retirement accounts. I point to the bill introduced by Committee Member Paul Ryan, H.R. 1776, as illustrative of how, contrary to conventional wisdom, properly designed, sufficiently large 

personal retirement accounts are the solution to Social Security’s 

solvency problem. I call the Committee’s attention to the way the 

Ryan bill improves retirement benefits for all workers and eliminates Social Security’s long-run deficits without cutting promised 

future Social Security benefits, without raising taxes, and without 

hiking the retirement age. I also explain why, again, contrary to 

conventional wisdom, the transition to fully funded personal accounts is similar to a corporate workout. No new debt is required. 

Existing debt is simply refinanced to provide time and to free up 

cash to restructure the operation, making it more efficient and 

more productive in the future so that it is capable of providing better retirement benefits while repaying all of the debt. Part of that 

restructuring should be spending growth restraint in the rest of the 

budget and tax reforms to improve the Federal tax code and increase economic growth. I show in the statement why the notion 

of so-called ‘‘transitions cost’’ is a fallacy and how misconceptions 

about the nature of Social Security, as it has evolved through the 

years, have led the debate over personal accounts into what I believe is now a political cul-de-sac. I conclude that in the current political climate, it is highly unlikely that Congress will be able to 

generate a sufficient bipartisan consensus this year to fix Social Security permanently and that attempting to force too much too soon, 

before the time is right, is likely to be harmful and counterproductive. It may require another election, perhaps another Presidential election, before the country is ready to embrace comprehensive reform that transforms Social Security into a permanently solvent, prefunded market-based retirement system based on personal 

retirement accounts. 

Fortunately, it is not necessary to solve the entire problem this 

year. What Congress can do, and I urge the Committee to take the 

lead in doing, is to make a downpayment on solvency by stopping 

the 20-year-old raid on the Social Security surpluses and devoting 

those surpluses and interest due the trust fund to personal retirement accounts. Stop the raid; start the accounts. The Federal Government takes the Social Security surplus each year and uses that 

money to help finance all of its other programs, from foreign aid 

to welfare. The time has come to stop this inexcusable raid and return the surplus to workers to start their own individual personal 

accounts. The trust fund should not be treated as a slush fund. Indeed, the new version of the Ryan-Sununu bill introduced just a 

couple of weeks ago, phases in the accounts so that over the first 

2 years, the account option is about half of its full size. The RyanSununu phase-in allows workers, on average, to shift about 3.2 percentage points of the full 12.4 percent payroll tax into the accounts. 

The total annual Social Security surpluses projected over the next 

10 years, counting tax revenues and interest on the trust fund 

56 

bonds, is more than sufficient to finance this Ryan-Sununu phasein option during that period. Mr. Chairman, I have attached to my 

testimony an appendix, which is a table that compares expected 

surpluses and the first 10-year phase-in of the reduced accounts. 

Congress should stop the raid on the Social Security trust fund 

and use that money to finance the first 10 years of Ryan-Sununu. 

The surplus money would then go to finance the future retirement 

benefits of today’s workers, as it was intended, rather than for 

other government spending. As Federal Reserve Chairman Alan 

Greenspan has observed, personal accounts are the only way to 

enact a true lockbox where the government can’t get its hands on 

the money and individual workers hold the key. To free up the surpluses for the accounts, Congress must reduce its spending by an 

amount equal to the surplus of Social Security taxes or expenditures each year. That would amount to about $85 billion this year. 

That money belongs to the future retirement of working people, 

and Congress should never have been spending it in the first place. 

The government currently pays the interest on Social Security 

trust fund bonds by issuing new bonds to the trust funds each year. 

To the extent needed to finance the Ryan-Sununu accounts for the 

first 10 years, those bonds would be issued instead into the accounts of each worker across the country. The bonds would be 

backed by the full faith and credit of the U.S. government and be 

marketable. Workers, consequently, would be free to choose, to sell 

those bonds on secondary markets and invest the proceeds in 

broader mutual funds if they desire. Those bonds, of course, would 

not represent new debt, but rather money the government already 

would owe to the trust fund under the current system. It would be 

highly desirable, also, to phase-in the budget process reforms over 

the next ten years contained in the Ryan-Sununu proposal. Even 

the smaller accounts adopted for the first 10 years would make a 

substantial downpayment on solvency by reducing long-term deficits. Mr. Chairman, it is time for Congress to focus on what Social 

Security reform should be about, providing a better deal for working people. It is time for Congress to stop the raid on Social Security and use the surpluses to start personal retirement accounts. 

Thank you. 

[The prepared statement of Mr. Hunter follows:] 

Statement of Lawrence A. Hunter, Ph.D. Vice President and Chief Economist, Free Enterprise Fund and Senior Research Fellow, Institute for Policy Innovation 

Introduction 

Thank you, Mr. Chairman for allowing me to express the views of the Free Enterprise Fund on ways to strengthen Social Security through personal retirement accounts. 

The basic structure of Social Security has changed very little over the years but 

two things about the program have changed dramatically, both of them as a consequence of attempting to maintain the pay-as-you-go system in the face of a steeply 

declining worker-to-beneficiary ratio. First, contribution rates (FICA tax rates) now 

comprise a greater share of workers’ income than financial analysts say is necessary 

to pre-fund an adequate retirement income if funds are invested in real assets. Second, the rate of return workers enjoy on the FICA taxes they and their employers 

pay has gone from hugely positive to barely greater than zero. 

A seeming paradox arises. Everyone is coming to realize that Social Security is 

a very bad deal for today’s workers at the same time many politicians who must 

confront Social Security’s looming insolvency insist Social Security benefits are exVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00060 Fmt 6633 Sfmt 6621 E:\HR\OC\24732.XXX 24732
57 

travagant because they soon will exceed the revenue the system generates. It is disconcerting that politicians from both sides of the partisan divide propose making a 

bad deal worse for workers by cutting promised future benefits as a means of making Social Security ‘‘solvent,’’ which is to say they are proposing what works for 

Washington rather than what works for workers. 

When politicians are forced to reconcile their claim that Social Security currently 

makes extravagant promises with the painfully obvious reality that workers realize 

pitiful rates of return on their FICA contributions, they usually resort to a non sequitur. They point out that under the current benefits formula, which indexes future 

initial Social Security benefits to the rate of real wage growth in the economy, the 

level of initial Social Security benefits increases faster than inflation, as if that result somehow is unreasonable. Zero real growth in retirement benefits is a curious 

benchmark to set for a new pre-funded, market-based retirement system and an especially odd position for advocates of personal retirement accounts to take given 

that one would expect private investment income to increase over time at least as 

fast as private-sector wages. Moreover, this explanation fails to reconcile how benefits can be at the same time both a bad deal and extravagant. 

I urge the Committee to critically examine the logic behind the argument that the 

initial level of retirement benefits should not increase faster than the rate of inflation. If you do, I believe you will discover that underlying this belief is an unwarranted presumption that workers should not expect a positive real rate of return of 

any magnitude on the FICA contributions they make throughout their working careers. To appreciate how odd this sounds to workers being urged to support marketbased personal accounts, consider the reaction one would get if he made a similar 

argument to investors in the private sector that they should not expect a rate of 

return on their investments greater than inflation. Such a suggestion would be met 

with incredulity. After all, dividends and capital gains are not welfare. Here, I suspect, is the crux of the matter. The only logical basis for concluding that Social Security retirement benefits should not increase faster than the rate of inflation is the 

premise that Social Security benefits are a form of welfare. 

While characterizing Social Security as welfare may have been valid in earlier 

days, when benefits far outstripped what workers paid into the system, it no longer 

applies. Moreover, low- and many middle-income workers today pay so much of their 

income in FICA contributions that they find it difficult or impossible to save much 

more for their retirement outside Social Security. 

American workers have a very keen sense of inconsistency on the part of politicians. They will become confused and then suspicious and eventually rebellious 

when they hear politicians on the one hand confirm their own sense that Social Security is a bad deal but then turn around and lecture them on the need to cut promised future benefits even more. In my opinion, a majority of the American people 

never will support a Social Security reform plan that is built on these contradictory 

notions. 

Current Social Security Contribution Rate is Higher than Necessary to 

Fund Full Blown Retirement Plan 

We still think of Social Security as a supplemental, back-up retirement program— 

and the benefits it promises certainly are less than adequate as the sole source of 

retirement income. The reality is, however, the FICA tax burden the program imposes on workers substantially exceeds the contribution rate a full-blown retirement 

plan would require to generate higher retirement benefits. While many people continue to think of Social Security as ‘‘social insurance,’’ it has, in fact, evolved into 

a very poorly designed, inadequate government-operated defined benefits plan built 

on a mountain of government debt and teetering on the brink of bankruptcy. Protestations of scholars and politicians to the contrary, that is how the vast majority of 

American workers perceive Social Security today. 

Workers have good reason to view Social Security this way. If the 12.4 percent 

of their income workers and their employers currently contribute to Social Security 

were invested through personal retirement accounts in real, productive assets, the 

investment income from the accounts would be more than adequate to provide workers a secure and prosperous retirement at a level substantially above what Social 

Security currently promises but can’t pay. So much so, in fact, that a portion of that 

12.4 percent could be reserved by the government as true ‘‘social insurance’’ against 

disability and other calamities that might make it impossible for a relatively small 

number of workers to accumulate sufficient assets by the end of their working careers to enjoy retirement benefits at least as generous as Social Security currently 

promises. 

The personal retirement accounts plan introduced by Congressman Paul Ryan 

(H.R. 1776) and its Senate companion introduced by Senator John Sununu (S. 857) 

58 

demonstrate this point conclusively. By allowing workers to invest between five and 

ten percent of their wages through personal retirement accounts—lower-wage workers would be able to save a larger share of their income—it is possible to generate 

sufficient investment income from the accounts to raise retirement benefits substantially above what Social Security currently promises but cannot pay. The Ryan/ 

Sununu plan leaves in place more than enough of the current 12.4 percent FICA 

contributions (about four percentage points) to finance the disability program and 

a secure government safety net equal to the level of Social Security benefits currently promised while also reducing payroll taxes eventually about two percentage 

points. 

The large personal accounts created under the Ryan/Sununu plan would be so 

powerful they would eliminate Social Security’s long-term financial crisis and eliminate Social Security deficits completely over time without the benefit cuts or tax increases or hikes in the retirement age. That is because so much of Social Security’s 

benefit obligations, ultimately 95 percent, are shifted to the accounts, thus reducing 

the federal government’s need to pay Social Security benefits. As the Chief Actuary 

stated in his analysis of the Ryan/Sununu plan, ‘‘the Social Security program would 

be expected to be solvent and to meet its benefit obligations throughout the longrange period 2003 through 2077 and beyond.’’ 

Social Security Is a Bad Deal for Today’s Workers 

For most workers in the workforce today middle aged and younger, the real rate 

of return Social Security promises to pay them on the taxes they and their employers pay into the system would be one percent to 1.5 percent, or less. For many workers, it would be zero or negative. 

Allowing workers to invest a substantial portion of their FICA contributions in 

real assets through personal retirement accounts is the only way to avoid forcing 

workers to labor their whole lives for a pittance of a handout from the government 

in retirement. Attempting to overcome the declining worker-to-beneficiary ratio by 

raising the cap on the payroll tax would reduce the currently pitiful rate of return 

from Social Security even more for higher income workers. Cutting future benefits 

through so-called ‘‘progressive price indexing’’ would reduce that rate of return for 

all but the lowest income workers. Even for the low-income workers it supposedly 

‘‘protects,’’ ‘‘progressive price indexing’’ would do nothing to improve their return. 

Raising the retirement age is just another way to reduce everyone’s rate of return 

by making them work longer to receive the same level of benefits. 

All three conventional attempts to outpace the declining worker-to-beneficiary 

ratio, i.e., to make Social Security as we know it ‘‘solvent’’ without introducing personal retirement accounts, simply make a bad deal worse for workers by asking 

them to pay more, work longer and get less. This is precisely what the Congress 

did in 1977 and again in 1983. It didn’t work then, and it won’t work now. 

President Bill Clinton recognized this reality back in 1998 when he said, ‘‘We all 

know that there are basically only three options: We can raise taxes again, which 

no one wants to do . . . We can cut benefits . . . Or we can work together to try 

to find some way to increase the rate of return. . . . Even after you take account 

of the stock market going down and maybe staying down for a few years, shouldn’t 

we consider investing some of this money, because, otherwise, we’ll have to either 

cut benefits or raise taxes to cover them, if we can’t raise the rate of return.’’ 

Small add-on accounts won’t solve the problem either. Supplemental add-on accounts that attempt to fill in for cuts in guaranteed Social Security benefits (such 

as progressive price indexing) may succeed in maintaining the overall level of a 

worker’s retirement income but will do so by raising workers’ combined contribution 

rate and lowering the overall rate of return. With add-on accounts, workers would 

end up contributing even more than the already excessive 12.4 percent or not using 

the accounts and exposing themselves to the benefit cuts under price indexing. If 

small add-on accounts are accompanied by tax increases as well, the contribution 

burden increases yet again, and the rate of return falls commensurately. Add-on accounts, therefore, are just another way to force workers to pay more for the same 

level of benefits with an added element of risk. 

Another idea under consideration, I know, is to give workers greater incentives 

to save more for their retirement by reforming the tax code, expanding IRAs, 

401(k)s and so forth. These are all good ideas but should not, in my opinion, be enacted as a substitute for fixing Social Security the right way, namely allowing workers to save a portion of the payroll taxes in personal retirement accounts. Eliminating the tax bias against saving and investing should be undertaken independently of Social Security, on efficiency grounds to make the tax code as neutral as 

possible between saving and consumption. In my opinion though, this tax reform 

should not be conceived as a means of offsetting cuts to promised future Social SecuVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00062 Fmt 6633 Sfmt 6621 E:\HR\OC\24732.XXX 24732
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rity benefits. As I observed above, too many workers already find it difficult to impossible to save much beyond the 12.4 percent they are forced to pay into Social 

Security. 

Two Persistent Myths about Social Security 

Just as the outdated image of Social Security as ‘‘social insurance’’ lingers on, so 

does the image of Social Security as some kind of welfare program. This image, contrary to current economic reality, has been reinforced by the legal status of the program over the years. Clearly, in the early days of the program, when workers received rates of return in excess of 15 percent, 25 percent, and even 35 percent for 

the earliest cohort of beneficiaries born before the turn of the century, Social Security could be considered a ‘‘welfare’’ program, i.e., people were getting from government far more than they contributed to it. 

Today, I believe the willingness, indeed the enthusiasm, of some folks to cut promised future Social Security benefits arises from failing to take into account the reality that Social Security has evolved from ‘‘social insurance’’ (i.e., ‘‘welfare’’) into a 

very poorly designed, inadequate government-operated defined benefits plan perched 

on a mountain of debt and teetering on the brink of bankruptcy. If Social Security 

is viewed as welfare, workers’ payroll taxes are not considered retirement contributions but rather as coerced tax payments that are used to pay welfare benefits to 

people who did not earn them. Thus, the welfare recipient (i.e., the Social Security 

beneficiary) should have no contractual right to the benefits. Neither should there 

be a moral, legal or political right for current workers to expect future workers to 

pay them welfare payments (i.e., Social Security benefits) when they retire even 

though they spent their entire working careers paying taxes to finance welfare (i.e., 

Social Security) benefits to their parents’ and grandparents’ generations. 

By definition, then, if Social Security is viewed as welfare, benefits promised in 

the future that cannot be financed by payroll taxes are ipso facto ‘‘extravagant,’’ 

‘‘unsustainable,’’ and, therefore, legitimately can be reduced since workers have no 

moral, legal or political claim to them. 

Failing to recognize the changed reality of the situation—Social Security has 

evolved into a very poorly designed, inadequate government-operated defined benefit’s plan built on a mountain of government debt obligations to future retirees— 

also leads to confusion about what actually transpires if and when the government 

attempts to stop the bleeding by transforming the system into a financially sound 

pre-funded retirement system. 

There is a widespread misconception that every dollar of payroll tax revenue ‘‘redirected’’ or ‘‘diverted’’ into personal retirement accounts to begin pre-funding retirement benefits generates a new ‘‘transition’’ cost because it ‘‘siphons away’’ a dollar 

from Social Security that otherwise would be available to pay current retirement 

benefits. If personal accounts are created, that revenue must be generated from 

some other source (higher taxes, existing revenue reallocated away from other 

spending, borrowing). This formulation of the so-called ‘‘transition problem’’ fails to 

recognize that every payroll-tax dollar directed into personal retirement accounts is 

actually a dollar less indebtedness incurred by the federal government. Every payroll-tax dollar not ‘‘diverted’’ into paying current retirement benefits (the real ‘‘diversion’’ is the current diversion of FICA contributions to pay current benefits) is actually a dollar that can be devoted to pre-funding future benefits, which in turn reduces a future liability of the federal government. 

There are no transition costs; there are only changes in cash flow, and compared 

to the size of the overall economy, those cash-flow changes are small. 

Allowing workers to place a share of their payroll taxes into personal accounts 

sufficiently large enough to pre-fund currently promised benefits actually reduces 

federal indebtedness. The temporary cash-flow crunch that results—the short-fall in 

available funds to pay all currently promised Social Security benefits—arises because the government would be borrowing less. Therefore, if the Congress turns 

around and decides to borrow funds to cover the cash-flow shortage, it would be simply substituting one form of debt with another. The net level of borrowing is unchanged. However, the federal government’s long-run, off-balance-sheet liability that 

must be paid out of the federal treasury to pay future retirement benefits is dramatically reduced. Devoting current payroll tax revenue to pre-funding future retirement benefits will produce greater investment income in the personal retirement accounts than the government could count on in future payroll tax revenues at current 

tax rates. This gain will relieve government of the obligation to spend so much on 

retirement benefits in the future, eventually covering virtually all future retirement 

benefits out of the personal accounts and eliminating the federal unfunded liability 

altogether. 

60 

In other words, contrary to conventional wisdom, sufficiently large personal retirement accounts do indeed solve the problem. It is only insufficiently large accounts— 

i.e., accounts not large enough to generate enough investment income to cover all 

promised Social Security benefits—that fail to solve the problem. Indeed, insufficiently large accounts leave a residual problem, which can only be covered by higher 

taxes, lower benefits or truly new borrowing. 

The irony is that an aversion to borrowing (which results from a misunderstanding of the role borrowing plays in the current program and the role it reasonably could play in creating personal accounts) has led many proponents of personal 

accounts in the name of ‘‘fiscal prudence’’ to reject large accounts and embrace small 

accounts, which only exacerbate rather than solving the solvency problem. 

This welter of confusion and disorientation has produced a fallacious chain of reasoning by even some proponents of personal retirement accounts: 

False Premise: Social Security is a welfare program so promised benefits legitimately 

can be cut without breaching any moral, legal or political obligation;.

False Premise: Allowing workers to place a substantial portion of their payroll tax 

contributions into personal retirement accounts creates a net new cost 

that cannot be financed by borrowing without adding to national 

indebtedness;.

False Conclusion: Personal Accounts, therefore, do nothing to solve Social Security’s 

financing problem;.

False Corollary: Consequently, large cuts in promised future benefits, tax increases 

and/or new borrowing are required to restore solvency to the system;.

A real solution can be outlined as follows: 

• Create sufficiently large accounts, which will solve the solvency problem; • Address the cash-flow crunch created when workers are allowed to invest a sufficient amount of their payroll tax contributions through large accounts by: 

Æ Restraining spending growth in the rest of the budget and reallocating the 

savings to help pay all promised Social Security benefits in full and on time; Æ Enacting tax reforms to raise the after-tax returns to work, saving and investing, which will generate a dynamic revenue feedback effect to help pay 

all promised Social security benefits in full and on time; Æ Refinance part of the outstanding Social Security liability by borrowing whatever is required after tax reforms and spending restraint are enacted to alleviate any remaining cash-flow crunch: 

■ Borrowing first from the funds workers save in their personal retirement 

accounts (i.e., issuing to the accounts new inflation-protected federal bonds 

backed by the full faith and credit of the United States Government with 

no restrictions on resale in the secondary bond market), and 

■ Borrowing outside the accounts in financial markets only as necessary to 

complete the refinancing. 

Make a Down Payment on Solvency: Stop the Raid and Start the Accounts 

Let me conclude by moving from the theoretically desirable to the politically practical given the current political environment. In my opinion, the time is not yet ripe 

to enact a comprehensive reform. Instead, I encourage you to tackle the one issue 

on which there is near unanimous agreement on both sides of the partisan divide, 

ceasing to squander the Social Security surpluses, and instead allowing workers to 

save the excess payroll tax revenues in personal retirement accounts. 

For decades now, the Federal government has been raiding the Social Security 

trust fund to finance other government spending. The Federal government takes the 

Social Security surplus each year and uses that money to help finance all of its 

other programs, from foreign aid to welfare. The time has come to stop this inexcusable raid and return the surplus instead to workers to start their own, individual, 

personal accounts. 

Indeed, the new version of the Ryan/Sununu bill introduced a couple of weeks ago 

phases in the accounts so that over the first 10 years the account option is half of 

its full size. The Ryan/Sununu phase-in allows workers on average to shift about 

3.2 percentage points of the full 12.4 percent payroll tax to the accounts. The total 

annual Social Security surpluses projected over the next 10 years, counting tax revenues and interest on the trust fund bonds, is more than sufficient to finance this 

Ryan/Sununu option during that period. (See Appendix) 

Congress should stop the raid on the Social Security trust funds and use that 

money to finance the first 10 years of Ryan/Sununu. The surplus money would then 

61 

go to finance the future retirement benefits of today’s workers, rather than for other 

government spending. As Fed Chairman Alan Greenspan has observed, personal accounts are the only way to enact a true lockbox where the government can’t get its 

hands on the money to fuel further runaway spending on other programs. 

To free up the surpluses for the accounts, Congress must reduce its spending by 

an amount equal to at least the surplus of Social Security taxes over expenditures 

each year. That money belongs to the future retirement of working people, and Congress should never have been spending it in the first place. 

The government currently pays the interest on the Social Security trust fund 

bonds by issuing new bonds to the trust funds each year. To the extent needed to 

finance the Ryan/Sununu accounts for the next 10 years, those bonds would be 

issued instead to the accounts of each worker across the country. Those bonds would 

be backed by the full faith and credit of the United States and be marketable. Workers, consequently, would be free to choose to sell those bonds on secondary markets 

and invest the proceeds in broader mutual funds if they desire. These bonds, of 

course, would not represent new debt, but, rather money the government already 

would owe to the trust fund under the current system. 

It also would be highly desirable to phase in the Ryan/Sununu budget process reforms over the next 10 years, including the spending limitation, which would reduce 

the rate of growth of Federal spending by one percentage point a year for eight 

years. This would produce net surpluses from the reform during the first 10 years 

and provide the foundation for expanding to the full Ryan/Sununu accounts subsequently. 

This reform would provide better benefits for working people from day one as the 

market returns earned by the accounts would be so much more than Social Security 

has even promised, let alone what it can pay. It would provide personal ownership 

and control for workers over their retirement funds, stopping the longstanding raid 

of the trust funds under the current system. 

It would empower low and moderate income workers to accumulate substantial 

personal savings and wealth for the first time, which they can leave in whole or in 

part to their families through inheritance. It would greatly boost the economy 

through lower effective tax rates and higher saving and investment. 

Finally, even the smaller accounts adopted for the first 10 years would make a substantial down payment on solvency by reducing the long-term deficits of Social Security as the benefit obligations borne by the old Social Security framework would be 

substantially reduced and taken up by the personal accounts instead. If the accounts were expanded after 10 years to the full Ryan/Sununu level of 6.4 percentage 

points on average, the long-term deficits would be eliminated entirely through this 

effect, achieving permanent solvency for Social Security. The Chief Actuary of Social 

Security has scored the Ryan/Sununu bill as achieving exactly this result. 

This result, moreover, is achieved without cuts in future promised benefits or the 

tax increases that inevitably would accompany them. Since better benefits are going 

to be provided in the future by the accounts in place of benefits financed through 

the old Social Security framework, there no longer is any need to think about eliminating that old system’s deficits through tax increases and benefit cuts. 

It’s time for Congress to focus on what Social Security reform should be about, 

providing a better deal for working people. It’s time for Congress to stop the raid 

on Social Security and use the surpluses to start personal retirement accounts. 

Thank you, Mr. Chairman. 

Appendix 

Financing the First 10 Years of Ryan/Sununu 

With the Social Security Surpluses 

(All figures in billions of constant 2005 dollars) 

Year 

Social Security 

Cash Flow Surplus 

(Taxes Minus 

Expenditures) 

Total Social Security 

Surplus (Includes 

Interest Incomes on 

Trust Funds) 

Annual Transition 

Financing Needed 

For Ryan/Sununu 

2006 84.9 183.6 124.7 

2007 88.7 194.7 137.5 

2008 90.2 204.3 143.1 

2009 84 206.3 148.5 

2010 80.2 210.9 153.9 

2011 75.6 215.1 159.0 

2012 65.3 213.2 164.2 

2013 52.9 209 168.9 

62 

Appendix—Continued 

Financing the First 10 Years of Ryan/Sununu 

With the Social Security Surpluses 

(All figures in billions of constant 2005 dollars) 

Year 

Social Security 

Cash Flow Surplus 

(Taxes Minus 

Expenditures) 

Total Social Security 

Surplus (Includes 

Interest Incomes on 

Trust Funds) 

Annual Transition 

Financing Needed 

For Ryan/Sununu 

2014 38.5 202.5 173.7 

2015 24.3 196.3 178.4 

Source: 2005 Annual Report of the Board of Trustees of the Old-Age and Survivors Insurance and Disability 

Insurance Trust Funds, March 23, 2005, Table VI.F.7; Office of the Actuary, Social Security Administration, 

Estimated Financial Effects of the ‘‘Social Security Personal Savings Guarantee and Prosperity Act of 2005,’’ 

April 20, 2005, Table 1b.c 

f 

Chairman THOMAS. Thank you very much. Dr. Furman? 

STATEMENT OF JASON FURMAN, NON-RESIDENT SENIOR FELLOW, CENTER ON BUDGET AND POLICY PRIORITIES, AND 

VISITING SCHOLAR, WAGNER GRADUATE SCHOOL OF PUBLIC SERVICE, NEW YORK UNIVERSITY, NEW YORK, NEW 

YORK 

Mr. FURMAN. Thank you, Mr. Chairman and Members of the 

Committee, for inviting me here today. As you move forward on Social Security and pension reform, I would like to propose that you 

be guided by four goals. The first is a secure retirement. The second is ensuring the solvency of Social Security. The third is reducing our debt, both over the next decade and the decades to come, 

and finally, increasing our perilously low national savings rate. Social Security and pension reform can play a role in furthering all 

four of these goals, and it is somewhat better to act sooner rather 

than later. Even more important than acting in haste is to first 

obey the Hippocratic Oath: first, do no harm. Any proposal that 

moves backward on any one of these four goals, no matter how 

worthwhile it may seem, is something that I don’t think this Committee should move forward on. In fact, one of the main proposals 

on the table is one that would move backward on all four of these 

goals simultaneously, and that is the President’s Social Security 

plan that I would like to talk about now. 

First of all, in terms of benefits, the President has proposed no 

new revenues for Social Security and, in fact, would drain trillions 

of dollars of revenues from Social Security to put them into the private accounts. This necessitates dramatic benefit cuts, and there 

are two benefit cuts that he has proposed. The first is a slidingscale benefit reduction that would apply to any worker who makes 

over $20,000 a year—that is in 2005 dollars—and it would also, 

based on an analysis the White House released last week, apply to 

a substantial number of beneficiaries who make less than $20,000 

a year. The benefit cuts would grow dramatically over time for middle-class families. By 2075, the benefit cuts would be between 28 

and 40 percent of scheduled benefits. That means replacement 

rates would be 28 to 40 percent lower. That is just the first benefit 

cut. The second one is the so-called benefit offset, which is designed 

to eventually repay the trillions of dollars that go into the private 

63 

accounts. Every dollar you put into an account, your benefit gets 

reduced by that dollar, plus 3 percent interest, plus inflation. Add 

that all together and it could reduce your benefit by 50 percent or 

more. The combination of these two benefit reductions would virtually eliminate the traditional rock-solid, guaranteed Social Security benefit, leaving it at 10 percent of your pre-retirement income 

or maybe even less. 

Would accounts make up for this difference? Numerous studies 

have been conducted on this issue and my reading of the conclusion 

is that they may make up for the second benefit cut, although even 

that is far from guaranteed. For middle-class workers, they are unlikely to make up for the first benefit reduction also. Bob Shiller, 

a Yale financial economist, found that between 32 and 71 percent 

of the time, workers would end up losing money as a result of participating in the accounts, on top of the sliding-scale benefit reduction. What does the President’s plan do for solvency? Despite having a very large reduction in benefits, it does less for solvency than 

many would think. The sliding-scale benefit reduction by itself 

would postpone Social Security’s cash flow deficits by 2 months. Social Security would still go into cash flow deficit in 2017 and would 

need to start redeeming money from the trust fund to pay benefits. 

I personally don’t think that is the most important date, but for 

those who do, that should be a source of significant concern. The 

exhaustion of the trust fund would be postponed by a few years. 

When the proposal is combined with private accounts, much of 

the benefits for solvency you would get from the benefit reductions 

go away and the benefit reductions are just used to pay for those 

accounts. In particular, the combination of the President’s accounts 

and the President’s benefit reductions would create a cash flow deficit earlier than under current law, would exhaust the trust fund 

earlier than under current law, and we would need to find the 

money to pay for the benefits, and would only solve 30 percent of 

the 75-year Social Security shortfall. In addition, the President’s 

plan would entail significant increases in the debt, $5 trillion over 

the next 20 years. The word ‘‘transition costs’’ is a misnomer because the debt would continue to grow over the current decades 

and stay elevated for at least 60 years. As a result, national savings at best would be unaffected, and more likely, for reasons I outline in my written testimony, would end up being reduced. 

There is a much better approach that this Committee could take. 

The first principle of that approach would be no debt-financed accounts, not whether they call themselves carve-out accounts, not 

whether they call themselves add-on accounts, nothing that increases the national debt, not in the next decade, not in the next 

50 years, not over an infinite horizon. Second, Social Security reform should be a balanced process, balanced both politically and 

balanced in the form that restoring Social Security solvency takes. 

Finally, we can do more to encourage people to save, even to help 

them save, separately from Social Security, and there are a number 

of bipartisan reforms to make savings easier, more automatic, and 

to increase incentives for moderate-income families while paying 

for those incentives that I would be happy to talk more about with 

the Committee at a future time. I look forward to your questions. 

[The prepared statement of Mr. Furman follows:] 

64 

1The views expressed in this testimony are mine alone. 

2 Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust 

Funds, The 2005 Annual Report of the Board of Trustees of the Federal Old-age and Survivors 

Insurance and Disability Insurance Trust Funds, (‘‘2005 Trustees Report’’). All estimates in this 

testimony are based on the Social Security Trustees’ assumptions. 3Strengthening disability security is also a critical priority but one that is beyond the scope 

of this testimony. 4Thomas Hungerford et al., ‘‘Trends in the Economic Status of the Elderly, 1976–2000’’ Social 

Security Bulletin 64:3, January 2003. 

Statement of Jason Furman,1 Non-Resident Senior Fellow, Center on Budget and Policy Priorities, and Visiting Scholar, New York University Wagner Graduate School of Public Service, New York, New York 

Mr. Chairman and other members of the Committee, thank you for the invitation 

to address you today. America currently faces major budget deficits and perilously 

low national savings. These problems are expected to grow significantly over the 

coming decades. At the same time, Americans are struggling to plan for their retirements. Reforming Social Security and our private pension system, if done correctly, 

can play a meaningful role in addressing these challenges. 

It is better to act sooner rather than later. But even more important than acting 

sooner is to obey the Hippocratic Oath: first, do no harm. If done in the wrong way, 

Social Security and pension reform could worsen our long-run fiscal outlook, depress 

national savings, and make retirement even less secure. President Bush’s Social Security proposal would have all of these effects. 

In my testimony I will first discuss the fundamental goals of Social Security and 

pension reforms. Second, I will explain why President Bush’s Social Security plan 

fails to satisfy these goals. Third, I will evaluate the idea of replacing the President’s ‘‘carveout’’ accounts with what proponents call ‘‘add-on accounts.’’ I favor 

ways to encourage moderate income families to save more, but if add-on accounts 

are not focused on that goal and fully paid for by offsets, they could set back our 

fiscal system and Americans’ retirement security. Finally, I conclude. 

I. Goals of Social Security and Pension Reform 

Social Security and pension reforms should be guided by four principal goals: 

1. Restore Social Security Solvency. If no changes are made, the Social Security Trust Fund is projected to become exhausted in 2041 and tax revenues will 

be sufficient to only pay 74 percent of scheduled benefits in that year.2 The 

pre-eminent goal of Social Security reform is to ensure that Social Security is 

sustainably solvent while using only dedicated revenue and avoiding abrupt 

and dramatic tax increases or benefit reductions in the future. 

2. Address America’s Fiscal Challenge—Both in the Short Run and Long 

Run. In fiscal year 2004, the federal government ran a unified deficit of $412 

billion, or 3.6 percent of Gross Domestic Product (GDP). Over the coming decades, the combination of phased-in tax cuts, rising health costs, and demographic changes will inexorably lead to significantly larger deficits and debt. 

Deficits of this magnitude reduce economic growth, increase the likelihood of 

an economic crisis, and will inevitably require higher taxes or lower government spending in the future. Although Social Security is not the principal 

source of these deficits, well-designed Social Security reform can and should 

play a modest role in reducing deficits both in the short run and in the long 

run. 3. Strengthen Retirement Security.3 Financial planners recommend having 

enough income in retirement to replace about 70 percent of pre-retirement income. Social Security plays a critical role in guaranteeing a comfortable retirement for most Americans: more than two-thirds of retirees rely on Social Security for more than half of their retirement income.4 But, the current Social Security system has some deficiencies, including high poverty rates for widows, 

high poverty rates for older beneficiaries, and the lack of an effective minimum 

benefit to ensure that retirees do not fall below the poverty line. To supplement 

Social Security, workers rely on defined contribution plans like 401(k)s and 

personal savings through IRAs and other vehicles. But about half of Americans 

work at companies that do not offer pensions and the current system provides 

little or no tax incentive to help moderate-income families save. Reform can 

strengthen retirement security by ensuring that future Social Security benefits 

are adequate, sustainable, and supplemented by additional savings. 

4. Increase National Savings. Increased national savings would lead to more 

investment, augmenting the capital stock and thus future economic output. Or, 

65 

5White House, ‘‘Strengthening Social Security,’’ February 2005 and Stephen Goss, Chief Actuary, Social Security Administration, ‘‘Preliminary Estimated Effects of a Proposal to Phase In 

Personal Accounts,’’ February 3, 2005. 6White House, ‘‘Fact Sheet: Strengthening Social Security for Those in Need,’’ April 28, 2005. 

This analysis assumes that the President’s plan would have the same magnitude of benefit reductions for retirees and survivors as the Pozen plan and that his plan would add a modest 

minimum benefit. This assumption is consistent with the White House fact sheet’s explicit claim 

that ‘‘this reform would solve approximately 70 percent of the funding problems facing Social 

Security.’’ 7The White House has released an actuaries’ memo showing the financial effects of the first 

10 years of individual accounts portion of the proposal. 8 All estimates are based on the assumptions of the Social Security Trustees, unless indicated 

otherwise. Additional details underlying this analysis are available in Jason Furman, ‘‘The Impact of President Bush’s Proposal on Social Security Solvency and the Budget,’’ Center on Budget and Policy Priorities May 10, 2005 and Jason Furman, ‘‘An Analysis of Using Progressive 

Price Indexing’ To Set Social Security Benefits,’’ Center on Budget and Policy Priorities, May 

2, 2005. 

higher national savings would reduce the need for foreign borrowing, which 

means that Americans would be able to consume more of our future economic 

output. Increasing national savings is the only way to expand the economic pie. 

This is the only way to ameliorate the potentially painful tradeoff between future consumption by the young and future consumption by the old. In the last 

three years, net national savings has averaged 1.6 percent of GDP—the lowest 

level in seventy years. At the same time, investment was financed by an average 4.8 percent of GDP in capital inflows from abroad, the highest level on 

record. Borrowing at this level is unsustainable and eventually this debt will 

need to be repaid. Social Security and pension reform can help increase private 

savings and reduce government dissaving (i.e., by reducing budget deficits). 

Reform should advance these four goals. Any reform that impedes progress on any 

of these goals must be rejected. For example, it would be easy to make Social Security sustainably solvent by transferring trillions of dollars to the Trust Fund, but 

that would be a fiscal disaster and it would hinder efforts to increase national savings. To give another example, it would be easy to provide new tax incentives for 

savings. But if these tax incentives are not fully paid for and well-designed they 

could worsen the long-run fiscal outlook and reduce national savings. 

II. The President’s Social Security Reform Proposal 

The President has announced two parts of his Social Security plan. In his State 

of the Union Address on February 2, he proposed private accounts, to be paid for 

by reductions in traditional Social Security benefits.5 In his April 28press conference, the President proposed sliding-scale benefit reductions modeled on investment executive Robert Pozen’s ‘‘progressive price indexing’’ plan (the White House 

fact sheet described this proposal as a ‘‘sliding scale benefit formula’’).6 The White 

House has not provided the full details of this plan, nor has it released the traditional Social Security actuaries’ memo, which provides 75-year estimates of the financial effects of the proposal and its impact on beneficiaries.7 Nevertheless, the details the White House has released are sufficient to permit analysis of the proposal 

and its ability to meet the four principal goals of Social Security and pension reform.8

A. The President’s Proposal and Social Security Solvency 

Normally the actuaries’ analysis would show the impact of the President’s proposal on solvency and the fiscal situation. In the absence of the traditional Social 

Security actuaries’ analysis, I assessed the proposal using the data in the 2005 Social Security Trustees Report, as well as standard actuarial and fiscal estimates. My 

analysis is based on the actuaries’ analysis of the Pozen proposal, the actuaries’ 

analysis of similar private-account plans, and the actuaries’ analysis of the President’s private accounts through 2015. 

The Impact of Sliding-Scale Benefit Reductions on Solvency 

The President has proposed sliding-scale reductions in Social Security benefits for 

retirees and survivors. Reductions would start in 2012 and grow over time. This proposal would postpone Social Security’s cash flow deficits by only about two months— 

Social Security would go into cash flow deficit slightly later in 2017. Although I do 

not believe the date of the onset of cash flow deficits is an analytically meaningful 

way to measure Social Security’s challenges or the impact of alternative reforms, 

those who do believe the 2017 date is meaningful should be concerned about the 

negligible impact of the President’s proposal. 

66 

9White House Fact Sheet, April 28, 2005. 

10This is not the standard measure used to evaluate the effect of a proposal on Social Security 

solvency. It is, at best, a secondary measure, and one with significant weaknesses. One could 

design a plan that would not start until 2079, with no changes until that date, but that would 

eliminate the entire Social Security shortfall in 2079. Such a plan would fail to restore solvency 

over the 75-year period or to improve the fiscal outlook for the next seven and a half decades. 11 Based on Peter Diamond and Peter Orszag, ‘‘Reducing Benefits and Subsidizing Individual 

Accounts: An Analysis of the Plans Proposed by the President’s Commission to Strengthen Social Security,’’ June 2002. In addition, this analysis assumes the President’s minimum benefit 

is similar to the ones proposed in Commission Models 2 and 3. 12This analysis updates the projections in the actuaries’ memo for the new projections in the 

2005 Trustees Report. This date was 2012, according to estimates by the Social Security actuaries based on the 2004 Trustees assumptions, see Stephen Goss, Chief Actuary, Social Security 

Administration, ‘‘Preliminary Estimated Effects of a Proposal to Phase In Personal Accounts,’’ 

February 3, 2005. This memo estimated that the accounts would cost $95 billion in 2011. This 

is larger than the $88 billion cash surplus for 2011 projected in the 2005 Trustees Report. 

Any measure that does not eliminate the entire 75-year shortfall in Social Security will result in the Trust Fund becoming exhausted at some point in the next 

75 years. The President’s sliding-scale benefit reduction plan would push back the 

exhaustion of the Social Security Trust Fund by 6 years, to 2047. After that date, 

a roughly 15 percent across-the-board benefit cut—on top of the benefit cuts that 

the President has proposed—would be required to achieve solvency. 

The White House states that its ‘‘reform would solve 70 percent of the funding 

problems facing Social Security’’.9 But the White House has subsequently acknowledged that this statement refers to the deficit in the 75th year—2079—not to the 

cumulative deficit over the next 75 years.10 Unlike the President’s proposal, the 

Pozen proposal, as Robert Pozen states, would ‘‘close the long-term deficit of Social 

Security by over 70%.’’ One-sixth of the improvements in solvency in the Pozen plan 

come from reductions in disability benefits. Taking into account the President’s 

promise to shield disability benefits and the President’s promise to provide a modest 

minimum Social Security benefit, the President’s plan will only close 59 percent of 

the 75-year deficit.11

The Impact of Individual Accounts on Solvency 

The President also proposes to allow workers to divert 4 percentage points of their 

payroll taxes (up to a maximum amount) into individual accounts. The President’s 

proposal would require workers, in effect, to repay the ‘‘loans’’ these contributions 

represent through a reduction in their traditional defined Social Security benefit. 

Diverting payroll tax revenue to private accounts would reduce the revenue available to pay Social Security benefits and thereby advance the date when the program’s benefit costs exceed its non-interest income. 

The combined effects of the President’s benefit reductions and private accounts 

proposals would accelerate the date when Social Security’s tax revenues no longer 

are sufficient to pay benefits to 2011.12 As a consequence of the President’s plan, 

Social Security will have to start using interest on the Trust Fund to pay benefits 

6 years earlier than under current law. Under the President’s benefit reductions and 

private accounts proposals, the Trust Fund would be exhausted in 2030—11 years 

earlier than under current law. 

Moreover, the President’s Social Security accounts would increase the program’s 

projected 75-year actuarial deficit by about 0.56 percent of payroll. The Social Security actuaries estimate that the deficit will be 1.92 percent of payroll. So, taken 

alone, the accounts would increase the size of the 75-year shortfall by nearly onethird. 

The accounts would substantially worsen Social Security’s projected shortfall over 

the next 75 years because under the President’s proposal reductions in Social Security benefits to repay the Trust Fund for the funds diverted into accounts would be 

made with a lag. Some of the funds diverted from Social Security to accounts over 

the next 75 years would not be repaid until after the end of the 75-year period. 

Because the accounts would increase Social Security’s shortfall over the next 75 

years, the net effect of the President’s proposed benefit reductions and accounts 

would be to close only 30 percent of Social Security’s 75-year shortfall. More than 

67 

13Some may try to argue that there would be a small cash-flow surplus in 2079 under the 

plan. This is misleading because it ignores the substantial interest payments—either by the general fund or by Social Security—associated with the accounts. The interest on the $3 trillion 

in general revenue transfers that would be necessary to pay benefits through 2079 would be 

4.2 percent of taxable payroll in 2079. 14 According to the actuaries’ memo, the Pozen plan would entail $1.9 trillion in general revenue transfers. The transfers under the President’s plan are larger both because he is proposing 

larger accounts (Pozen has two percent accounts) and smaller benefit reductions (Pozen’s plan 

would reduce disability benefits and does not contain a minimum benefit). 15 In the case of the Pozen plan, the benefit offset is taken directly out of the account and 

the account, if anything remains, is given to the estate. 16For a further discussion of this issue, see Peter Orszag, ‘‘Social Security Reform, Testimony 

Before the Senate Finance Committee,’’ April 26, 2005. 17The accounts would not be available to all workers until 2011 and they would not be phased 

fully in until 2041. That is the year in which the cap on the maximum amount that could be 

diverted to a private account each year would rise to a high enough level so that all workers 

could contribute a full 4 percent of their taxable earnings to the accounts. 

two-thirds of the shortfall would remain.13 To close this gap, the President’s plan 

would require general revenue transfers amounting to $3 trillion in present value.14

The accounts would also worsen projected solvency over the infinite horizon, but 

by a smaller percentage. This is because in a significant percentage of cases the benefit offset required to make the accounts actuarially neutral will not be collected. 

For example, if an unmarried worker dies prior to retirement his or her entire account goes to his or her estate and the benefit offset is not collected.15 Or take the 

case of the higher-earner. In many cases, his or her entire Social Security benefit 

would be less than the benefit offset associated with the account. In those cases, 

the higher earners’ entire traditional benefit would be wiped out but the Trust Fund 

would not collect the remainder of the benefit offset and solvency would be worsened. This case would apply to anyone with steady earnings at or above the payroll 

tax cap (now $90,000 a year) who retires after 2060. There are other such examples.16

B. The Fiscal Impact of the President’s Proposal 

The President’s Social Security proposal would result in a large increase in the 

debt held by the public, in the near-term and over the longer-term (i.e., the next 

60 years). 

According to the Social Security actuaries, the President’s accounts would cost 

$743 billion over the first seven fiscal years (from 2009 to 2015). Even this estimate 

is not fully reflective of the seven-year cost because the accounts would only be 

available to all workers for the last four of these seven years.17

Over longer periods, the effect on the debt would be far greater. The President’s 

accounts would add $1.5 trillion to the debt over the first ten years that the plan 

is in effect (from 2009 to 2018.) The accounts would cause the debt to increase by 

another $3.8 trillion in the decade after that, for a total of $5.3 trillion over the first 

twenty years. 

The sliding-scale benefit reductions that the President is proposing would reduce 

the debt by relatively modest amounts in coming decades. Over the first twenty 

years, those benefit reductions would reduce the debt by $400 billion. The combined 

effect of the accounts and the sliding-scale benefit reductions the White House is 

proposing would be to add $4.9 trillion to the debt over the first twenty years. 

The debt would continue to rise after twenty years, both in dollar terms and as 

a share of GDP, as shown in Figure 1. The accounts, by themselves, would lead to 

permanently elevated debt. Although the sliding-scale benefit reductions would 

eventually start to bring that debt down, the debt would remain elevated through 

2067. This would lead to higher interest payments on the debt, increasing the burden for future taxpayers. 

68 

18For an extended discussion of these issues see Jason Furman, William G. Gale and Peter 

R. Orszag, ‘‘Should the Budget Rules Be Changed To Exclude the Cost of Individual Accounts,’’ 

Tax Notes January 24, 2005. 19 Alan Greenspan Testimony, February 16, 2005. 

Some have argued that the additional debt associated with the accounts would not 

be a source of concern for financial markets or the economy more broadly. They 

argue that, over an infinite horizon, this debt diminishes or disappears and that as 

a result even the initially high levels of debt should be considered neutral from an 

overall fiscal position. The accounts causing no fiscal harm is the best case scenario. 

No one has argued that the debt associated with the accounts has any fiscal benefits. 

There is a significant probability that the debt associated with the accounts would 

harm the economy.18 The borrowing to pay for the accounts would take the form 

of ‘‘explicit debt,’’ that is government bonds. These bonds cannot be defaulted on and 

must be rolled over or serviced on an annual basis. This explicit debt would replace 

‘‘implicit debt’’ in the form of reduced future Social Security obligations. Implicit 

debt, however, is very different from explicit debt. It does not need to be rolled over 

or serviced on an annual basis. The total amount of implicit debt is based on projections and is not legally binding, unlike the tangible debt issued in the form of Treasury bonds. 

Financial markets, both in the United States and abroad, are likely to be more 

troubled by the explicit debt than they currently are by the implicit obligations of 

the U.S. government. Federal Reserve Chairman Alan Greenspan testified that if 

financial markets did not distinguish between implicit and explicit debt, then the 

borrowing associated with accounts would have no impact on the market. But he 

went on to say, ‘‘But we don’t know that. And if we were to go forward in a large 

way and we were wrong, it would be creating more difficulties than I would imagine.’’19

The record is replete with nations undergoing fiscal crises because of explicit debt. 

No nation has undergone a fiscal crisis because of implicit debt. 

Furthermore, rational financial markets would understand that the eventual repayment of the debt associated with the President’s accounts would be decades in 

the future and would depend on large and potentially politically unsustainable benefit reductions. To the degree that financial markets partially discounted these benefit reductions or factored in the possibility of a government bailout in the event 

of a major stock market crash, this added debt would have a significant impact. 

In summary, the accounts portion of the President’s plan would result in permanently higher debt than the same plan without accounts. Even when combined with 

sliding-scale benefit reductions, the debt would be elevated for more than sixty 


Insert 24732a.013
69 

20Some have proposed comparing price inflation-adjusted benefit levels over long periods of 

time. This, however, is an inappropriate standard in measuring a retirement benefit. The expectations and needs for retirement income grow with income. The amount of money that was necessary for a secure retirement in 1940 would not provide enough today. According to the Congressional Research Service, price inflation was 58.6 percent lower than wage inflation since 

1940 (Congressional Research Service, ‘‘Memorandum: Estimated Effect of Price-Indexing Social 

Security Benefits on the Number of Americans 65 and Older in Poverty,’’ January 28, 2005). 

Applying this adjustment to benefits would reduce the initial retirement benefit from $15,000 

to $6,000. The later might be enough to meaningfully contribute to a secure retirement in 1940, 

but it would fall well short in 2005. 21Pozen specifies that the plan would effect people who make over $25,000 annually in the 

year 2012 in 2012 non-inflation adjusted dollars. This number is adjusted to 2005. 

years. It is important to remember that even from the vantage point of 2067, when 

the debt would be the same as under current law, the proposal would be judged a 

failure. The goal of Social Security reform is not to leave the debt the same as under 

current law, it is to significantly reduce the debt in order to help relieve future fiscal 

pressures. The debt associated with the President’s accounts proposal would have 

no upside benefits and substantial downside risks. 

C. The Impact of the President’s Proposal on Retirement Security 

The President has not proposed any revenue increases for Social Security but instead is proposing to drain revenue from Social Security into individual accounts. 

Together, this necessitates very large reductions in traditional defined Social Security benefits. The President’s plan includes two sets of benefit reductions. The first 

benefit reduction is a sliding-scale benefit reduction that would apply to all workers 

making over $20,000 per year (and, as explained below, to some beneficiaries making even less than $20,000 per year). The second benefit reduction is the benefit offset that would apply to workers who opt for private accounts. Together, as explained 

below, these proposals would greatly diminish Social Security—the core tier of retirement security. The large majority of Americans would rely on investments that 

are subject to market risk for the large majority of their retirement income. Accounts will not necessarily make up for benefit offsets. As a result, workers would 

be left with substantially lower retirement income than they enjoy under the current-law formula. 

The First Benefit Reduction: Sliding-Scale Benefit Reductions 

The President is proposing to reduce benefits relative to the current-law benefit 

formula. This proposal would apply to the large majority of beneficiaries, whether 

or not they opt for accounts. Under the President’s proposal Social Security would 

replace a smaller and smaller amount of recipients’ pre-retirement income. These 

replacement rates are the most meaningful way to compare Social Security benefits 

over time.20

Social Security replacement rates would be reduced for all beneficiaries who make 

over $20,000 annually.21 In addition, as explained below, replacement rates would 

be reduced for some beneficiaries who make less than $20,000 annually. 

The replacement rates would be reduced more for higher-income beneficiaries. The 

Social Security actuaries have estimated that the average worker (someone who currently earns $37,000) would see his or her replacement rate reduced by 16 percent 

in 2045 and 25 percent in 2075 (see Table 1). A so-called ‘‘high earner,’’ someone 

with income 60 percent above the average (or current earnings of about $59,000) 

would see his or her replacement rate reduced by 28 percent in 2045 and 42 percent 

in 2075. The percentage reduction in benefits would be only slightly larger for people making $90,000 or $9 million annually. 

The percentage reductions in replacement rates for average workers under the 

President’s proposal are larger than the reductions in any Social Security reform 

previously undertaken. 

70 

22White House, ‘‘Interpreting the Benefit Estimates for the Pozen Provision,’’ May 2005. For 

further analysis of this White House document, see Jason Furman, ‘‘White House Distortions 

Mask Social Security Benefit Reductions,’’ May 6, 2005. 23 Jason Furman, ‘‘New White House Document Shows Many Low-Income Beneficiaries Would 

Face Social Security Benefit Cuts Under the President’s Plan,’’ Center on Budget and Policy Priorities, May 10, 2005. 

Table 1 

Social Security Benefits Under Sliding-Scale Benefit Reductions 

For Workers Retiring at Age 65 in Various Years 

(inflation-adjusted 2005 dollars) 

Current-law Formula Proposal Change 

Benefit 

Replacement 

Rate 

(percent) 

Benefit 

Replacement 

Rate 

(percent) 

Reduction 

Percentage 

Reduction 

(percent) 

Scaled Low Earner (45 percent of the average wage, or $16,470 in 2005) 

2025 $9,718 49 $9,718 49 $0 0

2045 12,041 49 12,041 49 0 0

2055 13,413 49 13,413 49 0 0

2075 16,599 49 16,599 49 0 0

Scaled Medium Earner (average wage, or $36,600 in 2005) 

2025 16,009 36 14,984 34 ¥1,025 ¥6

2045 19,837 36 16,584 30 ¥3,253 ¥16

2055 22,097 36 17,545 29 ¥4,552 ¥21

2075 27,344 36 19,715 26 ¥7,629 ¥28

Scaled High Earner (160 percent of the average wage, or $58,560 in 2005) 

2025 21,228 30 19,190 27 ¥2,038 ¥10

2045 26,302 30 19,858 23 ¥6,444 ¥25

2055 29,296 30 20,214 21 ¥9,082 ¥31

2075 36,254 30 21,100 18 ¥15,154 ¥42

Steady Maximum Earner (taxable maximum, or $90,000 in 2005) 

2025 25,929 24 22,999 21 ¥2,930 ¥11

2045 32,153 24 22,829 17 ¥,324 ¥29

2055 35,751 24 22,666 15 ¥13,085 ¥37

2075 44,236 24 22,428 12 ¥21,808 ¥49

Source: Author’s calculations based on Social Security Administration, Office of the Chief Actuary, ‘‘Estimated Financial Effects of a Comprehensive Social Security Reform Proposal Including Progressive Price Indexing—INFORMATION,’’ February 10, 2005 and Social Security Trustees, 2004 Annual Report. Note that all 

percentage reductions in benefits are taken directly from the actuaries’ memo. 

The President’s Social Security proposals have been widely reported as protecting 

benefits for the bottom 30 percent of the population, people earning less than 

$20,000 today. But a document that the White House gave reporters in a press 

briefing on May 4 contains charts which show that the bottom 20 percent of beneficiaries lose benefits, on average, under its plan.22 This happens because although 

the President’s plan protects retirees who earn benefits based on their own earnings 

histories, it does not protect people who earn benefits based on someone else’s earnings history. A substantial number of low-income beneficiaries, such as widows, surviving children and ex-spouses, would thus be subject to benefit reductions. 

The White House analysis shows that average Social Security benefits for the bottom quintile of beneficiaries (aged 62 to 76 in 2050), would be $866 a month under 

the current benefit structure, but only $822 a month under the President’s plan. 

This represents an average benefit reduction of $528 a year for beneficiaries in the 

bottom quintile. In fact, the White House numbers are likely to understate the benefit reductions for these groups for reasons described in more detail elsewhere.23

71 

The Second Benefit Reduction: The Benefit Offset for Private Accounts 

In addition to the first benefit reduction, workers who opt for the President’s proposed private accounts would be subject to a second reduction in their traditional 

defined Social Security benefit. 

Under the President’s proposal, workers could contribute up to 4 percent of tax- able wages to private accounts. These contributions would be capped at $1,000 in 

2009, with the cap increasing thereafter by $100 per year, plus wage inflation. By 

2041, all workers would be able to contribute a full 4 percent of taxable payroll to 

their accounts. Workers who elect private accounts would have their traditional Social Security benefit reduced by their contributions to the accounts, plus an interest 

charge set at 3 percent above the inflation rate. 

The combination of the sliding-scale benefit reductions and the benefit offset associated with private accounts would radically transform retirement, leaving the average worker with a fraction of the benefit he or she is entitled to today. Consider 

an average worker retiring in 2055, the first worker who would be eligible to participate fully in the President’s proposed accounts. The sliding-scale benefit reduction 

would reduce this worker’s scheduled benefit by 21 percent. The benefit offset would 

reduce the scheduled traditional Social Security benefit by 45 percent. Together, 

these two benefit reductions would reduce the traditional defined benefit by 66 percent. This worker would have a guaranteed benefit of only $7,500 annually. The majority of the workers’ retirement income would come from the individual account, 

pensions, and other savings—all of which is subject to market risk. 

These double reductions in benefits grow dramatically for higher income workers 

and workers retiring later, as Table 2 shows. For example, a worker making the 

equivalent of $59,000 in today’s wage-adjusted dollars and retiring in 2075 would 

see a 97 percent reduction in his or her traditional defined Social Security benefit. 

Virtually all of this workers retirement income would come from the individual account and other savings. 

Table 2 

Annual Social Security Defined Benefits (Excludes Account Value) 

(inflation-adjusted 2005 dollars) 

Currentlaw 

Formula 

SlidingScale 

Benefit 

Reduction 

Benefit 

Offsets 

for 4% 

Accounts 

Total Defined 

Benefit 

Percentage 

Change 

Workers Retiring in 2055 At Age 65 

Low earner $13,413 ¥$0 ¥$4,507 $8,906 ¥34% 

Medium earner 22,097 ¥4,522 ¥10,062 7,513 ¥66% 

High earner 29,296 ¥9,082 ¥16,464 3,750 ¥87% 

Maximum earner 35,751 ¥13,085 ¥19,949 2,717 ¥92% 

Workers Retiring in 2075 At Age 65 

Low earner 16,599 ¥0 ¥5,577 11,022 ¥34% 

Medium earner 27,344 ¥7,629 ¥12,414 7,301 ¥73% 

High earner 36,254 ¥15,154 ¥19,867 1,233 ¥97% 

Maximum earner 44,236 ¥21,808 ¥32,557 0 ¥100% 

Source: Author’s calculations based on Social Security Administration, Office of the Chief Actuary, ‘‘Estimated Financial Effects of a Comprehensive Social Security Reform Proposal Including Progressive Price Indexing—INFORMATION,’’ February 10, 2005 and ‘‘Preliminary Estimated Financial Effects of a Proposal to 

Phase In Personal Accounts—INFORMATION,’’ February 3, 2005. Note that the 4 percent accounts are assumed to have a maximum contribution of $1,000 in 2009, growing by $100 per year plus wage inflation, along 

the lines proposed by the President. 

When Medicare premiums are deducted from Social Security benefits, the results 

are even more dramatic. Subtracting these premiums would leave little or no traditional Social Security benefit for anyone retiring after 2055 with an income that is 

above the equivalent of about $35,000 today. These workers would have to rely entirely on their private accounts for all of their other needs. 

The combination of sliding-scale benefit reductions and carveout accounts raise 

very serious concerns about the unraveling of Social Security. The benefit offset for 

the accounts is designed in such a manner that it would lead participants to devalue 

their traditional Social Security benefits (and all the associated disability insurance, 

life insurance, and other advantages) and overvalue their private accounts. Many 

Americans would appear to get little or nothing from their traditional Social SecuVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00075 Fmt 6633 Sfmt 6621 E:\HR\OC\24732.XXX 24732
72 

24 Arthur Levitt Jr., ‘‘Reform is Good, PSAs Are Not So Good,’’ Wall Street Journal, April 26, 

2005. 25 Robert Shiller, ‘‘The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation,’’ March 2005. 26William Dudley, ‘‘Social Security Reform: Are Personal Savings Accounts Attractive?’’ Goldman Sachs U.S. Daily Comment, February 23, 2005. 27Mark Whitehouse, ‘‘Social Security Reform Plan Leans on Bullish Market,’’ Wall Street 

Journal, February 28, 2005. 28Dean Baker, Brad DeLong and Paul Krugman, ‘‘Asset Returns and Economic Growth,’’ 

March 2005. 

rity contributions, while lower-income families would still get relatively more substantial benefits. This could lead to significant political pressure to shift more of Social Security into private accounts and reduce defined benefits for lower-income 

workers. 

Would Higher Returns on Accounts Make Up for These Benefit Reductions? 

Would the accounts the President is proposing help make up for these benefit reductions? The way the accounts are structured, a participant would need to get a 

rate of return (after subtracting administrative costs) that is more than 3 percent 

above the inflation rate to make up for the second benefit reduction, the benefit offset. A rate of return well above 3 percent would generally be needed to make up 

for both sets benefit reductions. 

In effect, the President’s accounts are structured like a margin loan. If you do not 

get a high enough return to make up for the margin interest, you lose money on 

the account. If you come out ahead of the margin interest rate, your net retirement 

benefit only goes up by the degree to which your return exceeds 3 percent above 

inflation, not by the entire value of the account. In the words of former Securities 

and Exchange Commission Chairman Arthur Levitt Jr.: 

Every dollar you take out of traditional Social Security and put into a PSA must 

be paid back out of your Social Security benefit—plus interest. If this sounds a lot 

like margin investing, it should not be a surprise since the PSA plan is modeled 

on that concept: A worker investing in a PSA would hope—like a margin investor— 

that assets accrued were greater than debts (money lent plus interest). If not, he 

would end up with a smaller Social Security benefit than if he stayed in the traditional system. To come out ahead, then, an investor would have to earn a rate of 

return that exceeds the interest of the loan, plus expenses.24

The President has proposed to set up ‘‘lifecycle’’ accounts as the default option for 

investors. These accounts would switch portfolio allocations towards bonds as a 

worker nears retirement. The goal is to capture potentially higher stock market returns while reducing the risks associated with stock market investment. Noted financial economist Robert Shiller, author of Irrational Exuberance, however, showed 

that ‘‘lifecycle’’ accounts do not provide a free lunch and are still subject to considerable risks. 

Shiller conducted a simulation using historic returns from 1871 to 2004 to answer 

the question of whether or not workers would come out ahead of the 3 percent hurdle required to make up for the second benefit reduction.25 Using actual historical 

returns, Shiller found that workers opting for a ‘‘lifecycle account’’ modeled on the 

President’s proposal would end up losing money 32 percent of the time. That is, 32 

percent of the time workers would not even make enough to overcome the benefit 

offset. They would be worse off as a result of opting for the accounts. 

Shiller found a median rate of return with the lifecycle accounts of 3.4 percent 

above inflation. That is above the 3 percent hurdle required to break even on the 

private accounts but well below the 4.6 to 4.9 percent rate of return assumed by 

the Social Security actuaries. In most cases, this would not be enough to make up 

for the sliding scale benefit reduction. 

Shiller also conducted the simulation using what he considers more ‘‘realistic’’ returns reflecting international experience. He finds that workers would lose money 

on the accounts 71 percent of the time. The median rate of return would be 2.6 percent. Professor Shiller concludes that the accounts are a bad deal. This is also the 

conclusion reached by Goldman Sachs Chief Economist Bill Dudley who concluded 

that the accounts are ‘‘not an attractive proposition.’’26

Even the more realistic returns assumed for the second part of Shiller’s study are 

higher than the returns projected by a wide range of financial economists surveyed 

by the Wall Street Journal in February.27 In addition, a recent paper by economists 

Dean Baker, Brad DeLong, and Paul Krugman demonstrates that if economic 

growth slows as much as the Social Security Trustees project, stock returns are likely to be lower than in the past.28

73 

29Gary Becker, ‘‘A Political Case for Social Security Reform,’’ Wall Street Journal, February 

15, 2005. 30 Congressional Budget Office, ‘‘Long-term Analysis of Plan 2 of the President’s Commission 

to Strengthen Social Security,’’ July 21, 2004. CBO assumes a risk-adjusted rate of return on 

investment of 3.3 percent, which is CBO’s projected return on Treasury bonds, minus 0.3 percent for administrative and management fees. 31Some have argued that the benefit under the traditional system is subject to political risk. 

But these same political risks also apply to total benefits under the system with accounts. The 

remaining traditional benefit could be reduced further, a tax could be applied to individual account accumulations or withdrawals, or the government could modify the interest rate used to 

calculate benefit offsets. There is no sense in which this political risk disproportionately applies 

to the current system and thus it does not effect the comparison of the level of benefits under 

the two plans. 32Office of Management and Budget, Analytical Perspectives, Fiscal Year 2006 Budget, February 2005, p. 421. 33This is true to the degree that Treasury yields are 3 to 3.3 percent, as projected by the Social Security Trustees and CBO respectively. Workers, however, would be slightly better off from 

opting into the accounts because of the leakage: there is a chance they would not have to repay 

their full offset due to pre-retirement death, a high income, or other factors. All of these benefits, however, would be reflected in the reduction in solvency and thus would require correspondingly larger reductions in the traditional benefit. These would not be net benefits, just reallocations of existing benefits. 

Moreover, even these lower rates of return do not take into account the additional 

risks associated with equity investment. Virtually all economists agree that any assessment of the likely outcome of this margin loan should take into account the additional risks associated with investing in equities. As Gary Becker, a Nobel Laureate in economics and supporter of individual accounts explains: ‘‘There are no 

freebies from such investments since the higher return on stocks is related to their 

greater risk and other trade-offs between stocks and different assets.’’29

The Congressional Budget Office (CBO) uses what is known as ‘‘risk adjustment’’ 

in estimating the featured returns on private accounts established under Social Security plans. This means that CBO adjusts stock returns to reflect the higher risk 

that stock investments carry. Under CBO’s analyses, private accounts ‘‘are expected 

to earn an annual return of 3.0 percent [above inflation],’’ after adjustment for 

risk.30 Risk adjustment makes the balances in private accounts (which are subject 

to market risk) comparable to the value of the guaranteed Social Security benefit 

(which is not subject to market risk).31 Without adjusting for risk, comparing the 

certain balance in a traditional benefit to the uncertain balance in a private account 

is misleading and economically meaningless.32

Both CBO and the Office of Management and Budget use this risk-adjustment 

methodology when estimating the returns that the Railroad Retirement Fund will 

earn on its stock investments for the purposes of official government accounting. 

From the perspective of risk adjustment, workers would not come out ahead if 

they opt for private accounts.33 Private accounts simply introduce substantial additional risk into the core tier of retirement security without doing anything to lessen 

the sliding-scale benefit reductions the President is proposing. 

Table 3 summarizes the scenarios described in this section for an average earner 

retiring in 2075 under the President’s proposal. This worker is subject to a $7,629 

sliding-scale benefit reduction and a $12,414 benefit offset. The table shows the account annuities the worker would get under alternative investment return scenarios. 

In the risk-adjusted case, the featured case in CBO analysis, the account exactly 

makes up for the benefit offset—leaving the worker subject to the full sliding-scale 

benefit reduction. Using what Shiller describes as ‘‘realistic’’ returns on a lifecycle 

account, the account would only get a 2.6 percent return and thus fall short of even 

making up for the benefit offset leaving the worker even further behind. Actual historical returns with a lifecycle account or the returns forecast by leading economists 

surveyed by the Wall Street Journal are both 3.4 percent—enough to make up for 

the benefit offset but not nearly enough to make up for the sliding-scale benefit reduction. 

74 

34The benefit reductions in the President’s plan could lead to modest increases in national 

savings over time, although they would do relatively little to pre-fund Social Security by substantially increasing up-front savings. This subsection is concerned with the question of whether 

the accounts in the President’s proposal would further or set-back the effort to increase national 

savings. 35 Harvey S. Rosen, 2005, Public Finance Seventh Edition, p. 208. Rosen goes on to explain 

that ‘‘sophisticated schemes’’ that include additional out-of-pocket contributions could increase 

savings. The President’s carveout accounts do not have any of the features Rosen identified as 

leading to higher savings. 

Table 3 

Effect of Alternative Account Returns on Total Benefit 

(inflation-adjusted 2005 dollars) 

Sliding 

Scale 

Benefit 

Reduction 

Benefit 

Offset 

Annual 

Account 

Value 

Net 

Change 

Low Return Case (2.0%) ¥$7,629 ¥$12,414 10,316 ¥9,727

Realistic Lifecycle Return (2.6%) ¥7,629 ¥12,414 11,774 ¥8,269

Risk-Ajusted Returns (3.0%) ¥7,629 ¥12,414 12,414 ¥7,629

Historical Lifecycle Return (3.4%) ¥7,629 ¥12,414 14,125 ¥5,918

Wall Street Journal Survey (3.4%) ¥7,629 ¥12,414 14,125 ¥5,918

High Return Case (4.6%) ¥7,629 ¥12,414 18,779 ¥1,264

Notes: Lifecycle returns are the annual internal rates of return on lifecycle accounts estimated by Shiller. 

For the ‘‘historical’’ sample the average stock return is 6.8 percent annually and the average bond return is 

2.7 percent annually. The Wall Street Journal returns uses the median returns from the Wall Street Journal 

survey on February 28, 2005, assuming the same portfolio proposed by the President’s Commission to 

Strengthen Social Security. 

D. The Impact of the President’s Proposal on National Savings 

Raising net national savings should be a fundamental goal of any proposal to reform Social Security and pensions. This goal was unanimously accepted by the 

1994–96 Advisory Council and endorsed by the President’s Commission to Strengthen Social Security. Higher national savings leads to increased investment and/or reduced foreign borrowing. Either way, higher savings is the only way to increase consumption by the elderly without reducing consumption by the young. 

The President’s accounts proposal (by itself and not counting the benefit reductions), does nothing to raise national savings and could even result in lower national 

savings.34 The President’s plan would put money into accounts (representing saving) 

while contemporaneously financing these contributions with higher federal borrowing (representing dissaving). The net effect would be no increase in savings. 

One of the leading public finance textbooks, written by the current Chairman of 

the Council of Economic Advisers Harvey Rosen explains that ‘‘privatization’’ by 

itself does not raise national savings: 

Hence, privatization can help finance future retirees’ consumption only to the extent that it allows future output to increase. And the only way it can do this is by 

increasing saving. 

However, there is no reason to believe that privatization by itself would raise national savings. The government by itself has to finance its deficit one way or another. In order to induce private investors to accept government bonds that would 

have been bought by the Trust Fund, their yield has to go up (increasing the debt 

burden on taxpayers), or the yield on stocks must fall, or both. At the end of the 

day, all that takes place is a swap of public and private securities between the Trust 

Fund and private markets—no new savings is created.35 (emphasis added) 

The primary effect of the President’s accounts proposal is no change in national 

savings. As a result, the proposal fails to meet one of the principal goals for Social 

Security reform—increasing national savings. Further, two secondary effects could 

be important. 

First, the accounts would reduce savings if individuals treat them as net wealth 

and consequently decrease their 401(k)s and IRAs savings. The completely rational 

actor that inhabits economics textbooks should not change his or her savings as a 

result of the accounts: every dollar contributed to the account is matched by a dollar 

reduction in present value terms in future Social Security benefits. As a result, the 

accounts do not represent net wealth but are instead a loan. Workers will still need 

to save as much of their own money to enjoy a dignified retirement. But, the design 

of the President’s accounts (and the way in which they are often described) could 

lead many people to ignore the benefit offset associated with the account and to inVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00078 Fmt 6633 Sfmt 6621 E:\HR\OC\24732.XXX 24732
75 

36Douglas Elmendorf and Jeffrey Liebman provide evidence suggesting that individuals reduce savings by about 40 percent of the value of individual accounts but only increase savings 

by 25 percent for future reductions in Social Security benefits (like the benefit offset). As a result, they conclude that ‘‘individual accounts are likely to crowd out some other household saving.’’ Douglas W. Elmendorf and Jeffrey B. Liebman, ‘‘Social Security Reform and National Saving in an Era of Budget Surpluses,’’ Brookings Papers on Economic Activity, 2:2000. 37 Craig Copeland, ‘‘IRA Assets and Characteristics of IRA Owners,’’ EBRI Notes, December 

2002 38The President’s plan and the Shaw plan have different mechanisms for repaying the account. This difference, however, is not inherent to whether or not the plan is structured as an 

add-on or a carveout. 

correctly assume that the accounts represent new wealth. Such people could feel less 

need to save in the form of 401(k)s and IRAs.36 This would not just reduce national 

savings, it would also leave these people even less prepared for retirement. 

Second, in theory the accounts could increase savings if the higher deficits associated with accounts lead to lower government spending and/or higher taxes. In this 

case, the government would not be completely financing the accounts with borrowing and national savings would increase. This theory depends on the behavior 

of the current government and future governments. The Bush administration has 

not claimed that if accounts were passed it would propose additional reductions in 

federal programs or higher taxes to offset the increased deficit. In fact, administration officials emphasize that they do not believe there is any need for such steps 

because, they contend, the accounts are fiscally neutral over the infinite future. In 

addition, the Bush administration has not included the short-run deficit impact of 

the accounts in its budget submissions. It would be imprudent to base a major policy 

on the hope that future government spending and/or taxes would change as a result. 

As a result, the President’s accounts proposal, by itself, is likely to reduce national 

savings permanently. Even with the potentially offsetting effect of the sliding-scale 

benefit reductions, national savings would likely be lower and America as a whole 

would be poorer for several decades. 

III. Alternative Approaches to Encouraging Savings 

To encourage savings some have proposed ‘‘add-on’’ accounts for Social Security, 

additional savings incentives, and other pension reforms. Advocates argue that 

these approaches could sweeten a Social Security reform package that contains 

strong medicine such as the benefit reductions that the President proposed. But, if 

the sweetener is funded through deficit spending or does nothing to help make retirement more secure for most families, it could instead become a poison pill. Furthermore, if add-ons are poorly designed, they could reward the existing saving by 

those who need it least, while doing little to encourage future saving by the families 

who need help most. There are, however, promising approaches that could encourage savings and be enacted with or without Social Security reform. 

A. The Fiscal Impact of Add-On Accounts 

In evaluating add-on accounts, the first and most important question is: do they 

increase the deficit and the debt? If the answer is yes, then the add-on accounts 

would be a step backwards. 

Any voluntary add-on accounts for Social Security would likely be ineffective and 

counterproductive. Only 5 percent of Americans are currently contributing the maximum to their IRAs and 401(k)s.37 There is no reason that a worker would make 

additional contributions to an add-on account when they already have other tax-advantaged ways to save. The only way to encourage add-on contributions would be 

to provide new tax incentives for contributions to the Social Security accounts. But 

if the new tax incentives are not fully offset by other changes, they would worsen 

the long-run fiscal situation and thereby undermine the main goal of Social Security 

reform. 

One example is Congressman Clay Shaw’s proposal. He proposes to allow individuals to contribute 4 percent of payroll, up to a maximum of $1,000, into ‘‘Social Security Guarantee Accounts.’’ Instead of deducting this amount from payroll taxes 

and the Social Security Trust Fund (as the President proposes), the Shaw plan 

would instead fund these contributions with general revenue. The distinction between this approach to funding accounts and the President’s carveout proposal is 

purely a matter of accounting; there is no economically meaningful difference.38

Both plans would fully fund individual accounts with contemporaneous borrowing. 

In fact, if anything the Shaw approach could be more problematic because it is less 

transparent about recording the costs of the new accounts. 

76 

39 In fact, if the proposal allows workers to convert deductible IRAs to Roth-style savings accounts it can even appear to raise money in the first few years by, in effect, borrowing from 

the future at unfavorable rates. 40This is based on an extrapolation of a preliminary 10-year estimate by the Urban InstituteBrookings Tax Policy Center. 41Peter Orszag, ‘‘Progressivity and Saving: Fixing the Nation’s Upside-down Incentives for 

Savings,’’ Testimony Before the House Committee on Education and the Workforce, February 

25, 2004. 42 Eric Engen and William Gale, ‘‘The Effects of 401(k) Plans on Household Wealth: Differences Across Earnings Groups,’’ NBER Working Paper, 2000. 43For further discussion see Gene Sperling, ‘‘A Progressive Framework for Social Security Reform,’’ January 10, 2005. 44Leonard Burman, William Gale, Matthew Hall, and Peter Orszag, ‘‘Distributional Effects of 

Defined Contribution Plans and Individual Retirement Accounts,’’ Tax Policy Center Discussion 

Paper No. 16, August 2004. 

Another type of add-on account would graft proposals like Retirement Savings Accounts (RSAs) onto Social Security. For example, some Social Security reform plans 

have included a provision to allow workers at any income level to make up to $5,000 

per year in additional contributions to their private accounts. Contributions get preferential tax treatment—neither interest earned on them nor withdrawals made in 

retirement would be taxed. (This tax treatment is the same as that is accorded to 

Roth IRAs.) 

These new tax savings would have little cost in the traditional 5—or 10-year 

budget window because most of the tax benefits are deferred.39 The long-run cost, however, is substantial. A preliminary estimate is that creating a new $5,000 taxfree account would cost about 0.28 percent of payroll over 75 years or about $600 

billion in net present value, over 75 years.40 This would worsen the long-run fiscal 

outlook. 

Even otherwise desirable new tax incentives for savings—like extending and improving the saver’s credit—could be counterproductive if they promoted retirement 

savings while increasing the long-term budget deficit. 

B. Reforms to Promote Retirement Security 

Roughly half of households do not have an employer-sponsored pension. The typical household approaching retirement has a defined contribution account balance 

of $10,000.41 The assets and participation rates for moderate- and middle-income 

households are even lower. 

The economic evidence shows that savings incentives can be most effective at creating new savings when they target moderate-income families who are not saving 

much currently.42 In contrast, higher-income families are generally saving a substantial amount already. Expanding savings incentives for these families is likely 

to lead them to shift their existing saving into tax preferred vehicles. As a result, 

no new savings is created. 

The current tax system is ‘‘upside down’’—it gives the largest incentives to families that need them the least and are the least likely to save more as a result.43

Tax preferences for retirement savings, like deductions or exclusions, benefit families based on their marginal rates. If a family is paying no income taxes at all, then 

it does not benefit at all from tax incentives for savings. But these are precisely the 

families who need the most help saving and there is the most potential to genuinely 

increase savings among these moderate-income families. Yet, families in higher tax 

brackets benefit more from the tax preferences for saving. In total, the Federal government incurred $184 billion in costs on annual tax expenditures in 2003 (in 

present value terms). Of this only 3 percent goes to the bottom 40 percent of Americans while 49 percent goes to the top 10 percent of Americans.44

Carveout accounts would not change the current system at all and would not encourage new saving; they simply represent, in effect, a loan that must be repaid out 

of defined Social Security benefits. 

Add-on proposals modeled on RSAs would make the current system even worse 

by giving more than 90 percent of the benefit of the tax expenditures to the top 10 

percent of Americans. Expanding the maximum annual contribution to IRAs (raising 

it to $5,000 per person) would do nothing for the 95 percent of Americans who currently contribute less than the limit to their existing IRAs. Eliminating the income 

limit on Roth IRAs (currently set at $160,000 for married couples) would only provide benefits to high-income Americans. 

Expanded tax incentives could provide a windfall for high-income families that 

more than makes up for the reduction in their Social Security benefits. At the same 

time, these expanded incentives would not do anything to offset the reductions in 

benefits for middle-class families. To illustrate this point, consider the two hypothetical families. Both are subject to the President’s sliding-scale benefit reductions 

77 

45 A family making the maximum tax-free contributions to a balanced portfolio would have $750,000. If the contributions had been taxable, the family would only have accumulated 

$500,000. The difference is the cost of the tax cut. 46 Jane G. Gravelle, Congressional Research Service, ‘‘Effects of LSAs/RSAs Proposal on the 

Economy and the Budget,’’ January 6, 2004. 47See the Retirement Security Project at www.retirementsecurity.org for more details on these 

and other proposals. 48 Esther Duflo et al, ‘‘Saving Incentives for Low- and Middle-Income Families: Evidence from 

a Field Experiment with H&R Block,’’ Retirement Security Project No 2005–5, May 2005. 

and both have the option to contribute up to $5,000 annually to an account that 

accumulates tax free and can be withdrawn at retirement tax free: 

• The Smiths make $400,000 annually and retire in 2055. Under the sliding-scale 

benefit reduction, their annual Social Security benefit is reduced by $13,085. At 

the same time, the Smiths put $5,000 annually into the new tax-free savings 

account (previously they had saved this money in a taxable account). By the 

time they retire, the tax benefits associated with this account save them 

$250,000 in inflation-adjusted 2005 dollars.45 That is enough to buy a $17,000 

annuity—more than making up for their benefit reduction and leaving them 

ahead by $3,915 annually. • The Jones make $37,000 annually and retire in 2055. Like 95 percent of families today, they do not make enough money to contribute the maximum to their 

existing 401(k) or IRA. They have no additional money to contribute to this new 

tax-free savings account and get no tax benefits from it. As a result, they do 

not have any additional money to make up for the $4,522 reduction in their Social Security benefit, leaving them behind by $4,522 annually. 

Expanded tax incentives could even make middle-class families worse off if they 

lead businesses to drop their existing pension coverage, hurting middle-income 

Americans. On reason owners and executives of small businesses offer pensions to 

their employees is to take advantage of the tax-favored savings themselves. If they 

had alternative options for themselves, they would have less incentive to set up 

plans for their employees. According to an analysis by the Congressional Research 

Service, ‘‘some employers, particularly small employers, might drop their plans 

given the benefits of private savings accounts.’’46

In contrast, other proposals could enhance retirement security by overcoming obstacles to saving. Some proposals would not require any new tax incentives; they 

would simply make the process of saving easier and more automatic, overcoming a 

key obstacle to saving for many families. These proposals include making 401(k) 

contributions automatic and allowing taxpayers to split their tax refunds so that one 

part is deposited directly into an IRA.47

Alternatively, incentives for saving could be expanded. Currently, the saver’s cred- it provides matching contributions for joint filers making up to $50,000 This credit 

is scheduled to expire in 2006. The credit could be extended and reformed to make 

it refundable and more effective. New research from the Retirement Security Project 

conclusively demonstrates that matching incentives encourage families to save more 

and that larger matches lead to more savings.48 But the research also suggests that 

institutional changes, like a simple matching plan that deposit money directly into 

the savings account, can be a more effective way to encourage savings. More work 

on translating this into policy is needed. 

C. Designing Proposals To Increase National Savings 

Two features are essential in any plan to provide new incentives to raise national 

savings: 

1. First, the plan should be fully paid for without increasing the debt in the short 

run or the long run. Increased government borrowing, by itself, decreases national savings. 

2. Second, the plan should be targeted at encouraging genuinely new savings, not 

simply at rewarding existing savings. 

RSA-style proposals fall short on both counts. They provide windfall tax breaks 

for people who are already saving and as a result do little to increase personal saving. And, if they are not paid for, RSA-style proposals result in increasing public 

dissaving over time. The net result is lower national savings, leading to a smaller 

capital stock and more foreign borrowing. 

In contrast, pension reforms and savings incentives that make it easier and more 

affordable for middle-class families to save would help raise personal savings. And, 

if these proposals are fully paid for without increasing the deficit, they would also 

contribute to higher national savings. 

78 

IV. Conclusion 

Social Security faces a challenge and it is better to address this challenge sooner 

rather than later. But before tackling Social Security’s long-term solvency we should 

mind the words of the Hippocratic Oath and first, do no harm. Carveout accounts 

would do substantial harm: they would reduce the solvency of Social Security and 

add trillions of dollars to the debt while making retirement less secure and potentially reducing national savings. Add-on accounts that are financed by increasing 

the debt—either in the short run or the long run—would also be counterproductive 

and harmful. 

A balanced set of reforms that modestly increases Social Security’s revenues while 

modestly decreasing benefits could ensure that Social Security is sustainably solvent. Such reforms would help reduce long-term budget deficits and increase national savings. A series of reforms could also help strengthen retirement security by 

making it easier for families to save. 

Helping ensure that every American can have a stable and comfortable retirement 

must be foremost in our minds as we move forward to shore up Social Security for 

future generations. 

f 

Chairman THOMAS. Thank you very much, Dr. Furman. Mr. 

Tanner? 

STATEMENT OF MICHAEL TANNER, DIRECTOR, CATO 

INSTITUTE PROJECT ON SOCIAL SECURITY CHOICE 

Mr. TANNER. Thank you, Mr. Chairman, Members of the Committee. I do appreciate the opportunity to appear before you today 

and I would like to congratulate the Committee on holding this 

hearing. I hope that it is an indication that we have moved beyond 

the sterile and unproductive debate about whether Social Security 

is facing a crisis or just a big problem, because as frightening as 

Social Security’s financial problems are—and they truly are severe; 

the program will begin running a deficit in just 12 years and is facing unfunded obligations of about $12.8 trillion, if you include the 

cost of redeeming the Social Security trust fund as well as its other 

unfunded obligations after 2041—I believe, however, that Social Security reform must be about more than just achieving technical solvency. Now, that is not to downplay the importance of solvency. 

Any responsible Social Security reform would start the program toward sustainable solvency, not just in the short-term but over the 

long-term. While it is necessary, Social Security solvency is not sufficient. 

We could be seizing upon this opportunity to build a new and a 

better retirement program, and that program should be based on 

the fundamental American values of ownership, inheritability, and 

choice. Under the current Social Security system, you have no 

legal, contractual, or property right to your benefits. What you receive from Social Security is entirely up to the 535 Members of 

Congress, but personal retirement accounts would give workers 

ownership and control over their retirement funds. The money in 

a worker’s account would belong to that worker, and it is money 

that the politicians, with all due respect, could never take away. In 

short, workers would own their retirement. Because we don’t own 

Social Security benefits under the current system, they are not inheritable. Millions of workers who die prematurely are not able to 

pass anything on to their loved ones, but with personal retirement 

accounts, workers would be able to build a nest egg of real inheritable wealth. For middle- and low-income workers, this may be the 

79 

first time in their lives that they are able to accumulate such a 

nest egg. 

Finally, I point out that choice is part of the essence of America, 

yet when it comes to retirement, Social Security forces all Americans into a one-size-fits-all, cookie cutter retirement program; a 

system that cannot pay the benefits it has promised, and under 

which we have no right to the money we pay in. With personal retirement accounts, workers who want to remain in traditional Social Security would be free to do so, but workers who wanted a 

choice to save and invest for their retirement would have that option. With this goal in mind, not just to restore Social Security to 

solvency, but to build a better retirement program that would give 

workers more ownership, control over their money, and create an 

inheritable nest egg, the scholars at the Cato Institute developed 

a comprehensive proposal for creating privately invested, personally owned accounts as part of an overall reform of the Social Security system. This proposal is reflected in legislation, H.R. 530, that 

has been introduced by your colleague, Representative Sam Johnson, along with Representative Jeff Flake and 15 cosponsors. 

Under this proposal, workers under the age of 55 would have the 

option of diverting their half of the Social Security payroll tax, 6.2 

percent of wages, to an individual account. The employer’s portion 

of the payroll tax would continue to be paid into the Social Security 

system to provide survivors’ and disability benefits, as well as to 

partially fund continuing benefits for those already retired or nearing retirement. Workers who choose the individual account option, 

and it would be a choice, completely voluntary, would forego any 

future accrual of Social Security retirement benefits under the traditional system. However, those workers who have already paid 

into the current Social Security system and, therefore, have accrued benefits, would receive credit for those benefits in the form 

of a recognition bond. Workers who do not choose the individual account option would continue to pay into and receive benefits from 

traditional Social Security. However, for those workers, the initial 

Social Security benefit formula would be adjusted to reflect price 

indexing rather than the current wage indexing. While we have 

called for this price indexing change across the board, and it is so 

reflected in the legislation by Representatives Johnson and Flake, 

I would also suggest that we look seriously at the proposal by Mr. 

Pozen for making this change progressive. The plan also calls for 

establishing a new minimum Social Security benefit, equal to 100 

percent of the poverty level, providing for a significant increase 

over the current minimum benefit. I have attached and entered 

into the record an original copy of a Cato study setting out the details of this proposal and the rationale, as well as a report on the 

Social Security actuaries’ estimates that this program would restore Social Security to permanent sustainable solvency. I would 

suggest that, in the end, if our goal is more than technical solvency, more than just getting the lines on a chart to cross, if we 

really want the best possible Social Security system, then we need 

to have a Social Security system that gives workers ownership, control, inheritability, and choice as part of their retirement. Thank 

you, Mr. Chairman. 

[The prepared statement of Mr. Tanner follows:] 

80 

Statement of Michael Tanner, Director, Cato Institute Project on Social 

Security Choice 

Mr. Chairman, Members of the Committee 

I would like to applaud the Chairman and the Committee for holding these hearings today, and for your determination to go forward with trying to reform our nation’s troubled retirement system. I hope that this means we are at last moving beyond the sterile and unproductive debate about whether Social Security is facing a 

‘‘crisis’’ or just a big problem. 

Because whatever we call it, we cannot deny the fundamental facts. Social Security will begin to run a deficit in just 12 years—that is, it will begin to spend more 

money on benefits than it brings in through taxes. At that point, in order to continue to pay promised benefits, it will have to draw on the Social Security Trust 

Fund. We have seen much debate about the Trust Fund recently, with some suggesting that it guarantees Social Security’s solvency until 2041, or even 2052. However, as Congressional Budget Office director Douglas Holtz-Eakin has noted ‘‘[The 

Trust Fund] has no real economic resources—.The key moments for Social Security 

are in 2018. Cash-flow benefits will equal cash-flow payroll taxes, and then after 

that, the Social Security Administration will have to come back to the rest of the 

budget for additional resources to pay promised benefits.’’ 

Or as the Clinton Administration made clear in its FY2000 budget: 

‘‘These Trust Fund balances are available to finance future benefit payments—but 

only in a bookkeeping sense—. They do not consist of real economic assets that can 

be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from 

the public, or reducing benefits or other expenditures. The existence of Trust Fund 

balances, therefore, does not by itself have any impact on the government’s ability 

to pay benefits.’’ 

This is not to say that the Federal government will default on the bonds in the 

Trust Fund. I am not doubting the ‘‘full faith and credit’’ of the U.S. government. 

However, that does not relieve the Federal government from the obligation to find 

the money with which to redeem those bonds, currently $1.6 trillion in present 

value terms. To put it in perspective, think of it this way. In 2018, the first year 

after Social Security begins running a deficit, the shortfall will be roughly as much 

as the Federal government spends on such programs as Head Start and the WIC 

program. The cost rises rapidly thereafter. By roughly 2023, the cost of redeeming 

enough Trust Fund bonds to pay all the promised Social Security benefits would be 

nearly as much as the cost of funding the Departments of Interior, Commerce, Education, and the Environmental Protection Agency. By 2038, well before the theoretical exhaustion of the Trust Fund, you can add the Departments of Veterans Affairs, Energy, Housing and Urban Development, Justice, NASA, and the National 

Science Foundation. Simply redeeming the Trust Fund will begin to squeeze out all 

other domestic spending priorities. 

Beyond 2042, once the Trust Fund is exhausted, the deterioration in Social Security’s finances only increases—and never gets any better. Overall, the present value 

of Social Security’s unfunded obligations run to nearly $12.8 trillion (approximately 

$1.6 trillion to redeem the Trust Fund, and $11.1 trillion in unfunded benefits 

thereafter). 

However, as troubling as these numbers may be, I believe that the debate over 

Social Security reform should not solely—or even primarily—be a discussion of solvency. Yes, solvency is important, and any responsible Social Security reform plan 

should restore the program to solvency, not just short-term actuarial solvency, but 

permanent, sustainable solvency. 

Still solvency is not enough. Instead, Social Security reform should strive to build 

the best possible retirement system for our children and our grandchildren. Thus, 

Social Security’s current situation should not be seen as either a crisis or a problem, 

but as an opportunity to build a new and better program, based on the fundamental 

American values of ownership, inheritability, and choice. 

Under the current Social Security system you have no legal, contractual, or property rights to your benefits. What you get receive from Social Security is entirely 

up to the 535 members of Congress. But personal retirement accounts would give 

workers ownership and control over their retirement funds. The money in your account would belong to you—money the politicians (with all due respect) could never 

take away. In short, they would own their retirement. 

Because you don’t own you Social Security benefits, they are not inheritable. Millions of workers who die prematurely are not able to pass anything on to their loved 

ones. But personal retirement accounts would enable workers to build a nest egg 

of real, inheritable wealth. 

81 

1 HR 4895. 

2 HR 530. 

3 In practice, rather than reduce each check sent to beneficiaries, the Social Security Administration would stop sending out checks altogether until it accumulates sufficient funds to pay 

‘‘full’’ benefits. When those funds are exhausted, checks would again be withheld until sufficient 

funds accumulate, leading to checks starting and stopping several times over the course of a 

year. The net effect would be that total annual benefits would be reduced by the same amount 

as if each month’s benefits had been proportionally reduced. 

Choice is part of the essence of America. Yet when it comes to retirement, Congress forces all Americans into a one-size-fits-all, cookie-cutter retirement program, 

a system that cannot pay the benefits it has promised and in which we have no 

right to the money we pay in. With personal retirement accounts, workers who want 

to remain in traditional Social Security could do so. But younger workers who want 

a choice to save and invest for their retirement would have that option. 

With this goal in mind, not just to restore Social Security to solvency, but to build 

a better retirement program that would give workers more ownership and control 

over their money, scholars at the Cato Institute drew on our 25 years of experience 

studying SocialSecurity, and developed a comprehensive proposal for creating privately invested, personally owned accounts as part of an overall reform of the Social 

Security system. This proposal became the basis for legislation introduced, on July 

19, 2004, by your colleague Rep. Johnson along with 18 original co-sponsors.1 Rep. 

Johnson, together with Rep. Jeff Flake and 11 co-sponsors, reintroduced the bill in 

the 109th Congress, on January 21, 2005.2

Under this proposal, workers under the age of 55 would have the option of diverting their half of the Social Security payroll tax (6.2 percent of wages) to an individual account. The employer’s portion of the payroll tax would continue to be paid 

into the Social Security system to provide survivors and disability benefits, as well 

as to partially fund continuing benefits for those already retired or nearing retirement. Workers choosing the individual account option would forgo any future accrual of Social Security retirement benefits. However, those workers who have already paid into the current Social Security system, and therefore have accrued benefits, would receive credit for those benefits in the form of a recognition bond. This 

fully tradable bond would be a zero coupon note maturing on the date of the recipient’s normal retirement age. 

Workers who do not choose the individual account option would continue to pay 

into and receive benefits from the current Social Security system. However, for 

these workers, the initial Social Security benefit formula will be adjusted to reflect 

price-indexing rather than the current wage-indexing. The result will be to restore 

Social Security benefits to a level payable with Social Security’s available revenue, 

while ensuring that future retirees continue to receive the same level of benefits as 

those retiring today, on an inflation-adjusted basis. This change will be phased in 

over a 35-year period, beginning in 2014. 

This should not be seen as a benefit ‘‘cut.’’ Indeed, benefits will be higher in the 

future than they are today. While it is true that future benefits would be less than 

what Social Security promises, such comparisons are meaningless because unless 

there is a substantial increase in taxes, the program cannot pay the promised level 

of benefits. 

That is not merely a matter of conjecture, but a matter of law. The Social Security 

Administration is legally authorized to issue benefit checks only as long as there 

are sufficient funds available in the Social Security Trust Fund to pay those benefits. Once those funds are exhausted, in 2041 by current estimates, Social Security 

benefits will automatically be reduced to a level payable with existing tax revenues, 

approximately 73 percent of current benefit levels.3

This, then, is the proper baseline to use when discussing Social Security reform. 

Social Security must be restored to a sustainable level regardless of whether individual accounts are created. 

As the Congressional Budget Office puts it: 

A number of recent proposals to reform Social Security call for changes in the program’s benefits. The effects of those proposals are frequently illustrated by comparing the new benefits to those expected to arise under the policies put in place 

by current law—showing whether they would be higher or lower and by how much. 

However, because of scheduled changes in benefit rules, a growing economy, and improvements in life expectancy, the benefits prescribed under current law do not represent a stable baseline. Their value will vary significantly across future age coVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00085 Fmt 6633 Sfmt 6621 E:\HR\OC\24732.XXX 24732
82 

4David Koitz, ‘‘Measuring Changes to Social Security Benefits,’’ CBO Long-Range Fiscal Policy Brief no. 11, December 1, 2003. 

horts. Thus, focusing on differences from current law will not fully portray the effects of proposed benefit changes.4

I would also note that, although the Cato Plan and HR 350 apply the wage-index/ 

price-index change to all income levels, if I were rewriting the proposal at this point, 

I would give very serious consideration to the blended approach advocated by Mr. 

Pozen. Doing so would refocus Social Security benefits on those who need it most, 

and make the system more progressive. 

The plan also called for establishing a new minimum Social Security benefit equal 

to 100 percent of the poverty level, providing a significant increase over the current 

minimum benefit. I have attached the original Cato study setting out the details of 

the proposal and their rationale. 

The plan has been scored by the Social Security Administration’s Office of the Actuary (OACT), which concluded that it would eliminate Social Security’s long-range 

actuarial deficit’’ and would restore the system to permanent ‘‘sustainable solvency.’’ 

I have attached a study that the Cato Institute released last month exploring 

OACT’s findings in detail, as well as a copy of OACT’s original actuarial memo. 

However, to summarize, OACT found that: 

• The ‘‘transition cost’’ (in present value) would be approximately $6.5 trillion. 

This is roughly half the $12.8 trillion unfunded liability of the current system. 

That is, the ‘‘6.2% Solution’’ ultimately saves taxpayers $6.3 trillion. • The legislation also compares very favorably to other Social Security reform 

plans. In terms of giving workers more control and ownership of their retirement funds, the ‘‘6.2% Solution’’ clearly provides the most ‘‘bang for the buck.’’ • On a cash-flow basis, the legislation does require significant short-term transfers of General Revenue. However, by 2046, the system would begin running 

surpluses, allowing any short-term debt to be repaid. Indeed, by the end of the 

75-year actuarial window, the system would be running surpluses in excess of 

$1.8 trillion (in constant $2005) • Much of the short-term cash-flow shortfalls are due to the redemption of recognition bonds, not to the diversion of payroll taxes to the individual accounts. 

These recognition bonds convey many benefits in terms of ownership as well as 

speeding the date at which Social Security changes from deficit to surplus. They 

are essentially a prepayment of future Social Security benefits, and not a new 

expense. The Johnson-Flake bill is the only Social Security reform bill with recognition bonds. The costs of Johnson-Flake also include the cost of increasing 

the minimum Social Security benefit to 100% of poverty, a significant increase 

over the current minimum Social Security benefit. • Individual accounts would eventually accumulate assets in excess of $38 trillion 

(in constant $2005). That would lead to substantial new savings, new investment, and economic growth. • Once short-term debt is paid off, the employer portion of the payroll tax could 

be reduced to 3.04%. This would pay for disability and survivors’ benefits. 

In short, the SSA analysis shows that Johnson-Flake can provide large individual 

accounts while restoring Social Security to permanent sustainable solvency, and can 

do so in a fiscally responsible manner. While the up front costs will be significant, 

they will be less than for other big account plans, and eventually those costs will 

be more than offset by the savings to the system. 

In addition, younger workers who chose the individual account option could receive retirement resources substantially higher than what traditional Social Security can actually pay them. 

Finally, Johnson-Flake gives workers ownership and control over their retirement 

income. It would give low- and middle-income workers the opportunity to build a 

nest egg of real, inheritable wealth. It provides younger workers with greater choice. 

In short, if we measure a Social Security program not just as a matter of dollars 

and cents, but as a matter of human liberty and individual dignity, Johnson-Flake 

provides a better way to take care of our retirement. 

Thank you. 

f 

Chairman THOMAS. Thank you very much, Mr. Tanner. I know 

all of us want the best system, and part of this is reflected in the 

fact that more than 20 years ago, there were some things I thought 

83 

we ought to do and we didn’t get to them. As the least Ranking 

Member of the minority party at the time, I didn’t have a whole 

lot of influence on what we did or how we did it. Do you agree, in 

essence—and Dr. Furman, this is a quote that I found from you in 

the May 5th Wall Street Journal article basically saying, although 

everyone has a plan and there are going to be criticisms for or 

against various approaches—and obviously that is our job, to listen 

to all of the approaches and then, to the best of our ability, decide 

what we do. 

Basically, the gist of Dr. Furman’s quote was that the dumbest 

possible plan you can imagine is doing nothing. Is there general 

agreement that that is probably a good starting point for us? So, 

for those who just wish the issue would go away, maybe we do owe 

a bit of a debt of gratitude to the President for being up front on 

this issue. I know we had no time to contemplate other changes we 

might want to make back in 1983, and the idea that we are going 

to wait a Congress, or we are going to come back two Congresses, 

or we will wait for a Presidential change, it is amazing how quickly 

20 years go by. Right now, I think 20 years, in my opinion, is a 

fairly luxurious timeframe that we can’t afford. Does everyone 

agree with that, basically? Okay. 

Mr. FURMAN. If I can, I certainly don’t know anyone who thinks 

that we should let the trust fund get exhausted in 2041 and cut 

benefits by 26 percent across the board. I know I don’t support 

that. I don’t think anyone does. What I think would be even worse, 

though, is actually adding to the debt and exhausting the trust 

fund even earlier and making Social Security’s financial position 

worse. That is something that the President’s plan would do. 

Chairman THOMAS. Well, I understand, but obviously, we don’t 

think that is our goal, nor did any of those folk in earlier times 

when they made decisions that, in fact, I think have exacerbated 

our situation. They didn’t intend to do that, and to a certain extent, 

they didn’t anticipate the changing society. Next question—very 

briefly, Mr. Apfel. 

Mr. APFEL. I just wanted to say that it would be good to do 

something, absolutely, but doing something that takes us in the 

wrong direction would be a bad thing to do. We have three options: 

to do something that is basically good, do nothing, and do something that would be basically contrary to the economic security of 

middle-class Americans. I would urge that we should take a little 

more time before doing something very bad, and clearly, the two 

proposals that are before us, I think are very risky. 

Chairman THOMAS. Hopefully, we would take all the time in 

the world not to do something bad. In fact, we would never do it, 

rather than waiting a while and then doing it. In his testimony, Dr. 

Steuerle was a bit more specific about changes within the Social 

Security structure, although many of you alluded to it in your testimony. Do you think if we are going to undergo an attempt to solve 

the problems of Social Security, and, of course, solvency—and I will 

ask you a question about that in a minute—is our goal, outside, an 

ultimate goal? Should we be looking at those anomalies in part created by an aging society on the question of widows and their compensation, versus non-working widows of well-off husbands, versus 

widows of not-well-off husbands, two-earner versus one earner, the 

84 

low-income floor? That is a worthy pursuit, isn’t it, in terms of inside Social Security? Does anyone say we shouldn’t waste time 

looking at those issues to try to get fairness within the structure? 

Okay, see? There is a plus; we are all together here. 

In one way or another, some explicitly addressed the question of 

time and age. We did that in 1983 and it was a very difficult political problem. We created a 10-year hiatus on our way to 67, which 

ironically means that people are going to beat the distance between 

65 and 67 in the 1983 plan actuarially before the plan actually 

reaches the 67. So, we have fallen behind, in essence, in trying to 

create a time-relationship. There are a couple of ways of looking at 

it, and I know there is a lot of controversy, so I think most Members understand the downside. If you raise the early minimum age, 

you jeopardize folks on a disability question. If you raise the age 

higher, you have to work longer, but it is clear that some adjustment there should be looked at. The narrow question I want you 

to address is, should we continue to chase the age change? I think, 

Mr. Pozen, you suggested going from 67 to 69. Dr. Furman, when 

I read your March 21st analysis from your Center on Budget and 

Policy Priorities, I was intrigued by a phrase you had on page nine 

which said, ‘‘Changes in the benefit or tax structure under which 

benefits, payroll taxes, or the normal retirement age are indexed to 

longevity would be much better at directly tying the size of the 

benefit or tax changes to the program’s solvency needs.’’ I don’t 

know whether that was because of space, but that was dropped out 

of your more recent editions. Should we look at the question of age 

extension and/or longevity? Is that inevitably something that you 

have got to look at? 

Mr. POZEN. Yes, Mr. Chairman, I think it is something that 

needs to be looked at. I think the idea of modifying retirement age 

through longevity indexing would give people more choice. Rather 

than saying that the retirement age is moved back from 67 to 69, 

you would say you can choose to retire at 67, 68, or 69, but if you 

retire at 67, we now give you the actuarial equivalent of retiring 

at 69. That means that you get lower monthly benefits, but you get 

more monthly benefits because you are retiring earlier. So, I think 

that is probably a better way to proceed than just moving the retirement age back absolutely. Then the second issue with which 

you are very familiar with, is how soon can you do this? Any such 

change would have to be phased in. 

Chairman THOMAS. Any strong objection? He, in his testimony, 

said 69, and I think I sold him on longevity. So, are we moving in 

a way in which we are coming together? Dr. Schieber? 

Mr. SCHIEBER. I think we probably do agree. If you compare 

where we are today to, say, 1960, if you look at a typical male, he 

is retiring about 3 years earlier today than he retired back then 

and he is living about 3 years longer. We have extended his retirement period by about 50 percent. Well, if you are going to extend 

the retirement period by 50 percent, then it is going to cost a lot 

more. If you are in a situation where you are being stressed for 

funds to finance this, as we continue to add to life, one of the 

things that we ought to look at is whether or not people could remain engaged a bit longer. It would be awfully hard to make a case 

85 

that work today is of such a nature that we ought to be retiring 

a lot earlier than we used to, because we can’t bear the burden. 

Chairman THOMAS. I would tell the gentleman, just be a little 

cautious in that statement. For those of us who came from families 

in which physical labor was the way in which the bread was put 

on the table, I know that my father, in terms of his plumbing activities, was pretty—the phrase, I guess, would be pretty ‘‘used 

up‘‘—by the time he was 65. Of course, he went through the Depression, as well, and had grown up on a farm, so he got some 

early wear and tear. 

Mr. SCHIEBER. The number of those jobs in our economy are 

diminishing, and many of the tools that are available to people who 

have those kinds of jobs are reducing the burden upon them. 

Maybe we do need a transition benefit of some sort for people who 

do have physical labor jobs, but I think we have to be careful about 

making the rules for all because we have got a small number who 

have that problem. 

Chairman THOMAS. The one thing that I am interested—I know 

how difficult it was politically for us to make that age shift in 1983. 

If you did do something like longevity, you wouldn’t have to visit 

it as frequently to make adjustments with the assumption that people are going to continue to live longer. Gene? 

Mr. STEUERLE. Mr. Chairman, I think we have to be honest— 

I can say this because I don’t have to run for office, but this system 

has evolved or morphed into a middle-age retirement system. As 

long as we say 62 is old, then it sounds like those of us who say 

we can increase the retirement age sound like we are hitting on the 

old; and for a long time, being old was correlated with being poor. 

The people who are old, who are more likely to be poor, are those 

in their late seventies, eighties, and nineties. Many retirees, I 

think, now, are being deluded. They are going into retirement at 

62 with a decent income and, for a typical couple, just a typical 

couple, their annuity lasts 25 years. For a longer-living couple, it 

often lasts 30 or 35 years. They often don’t have the resources 

when one of them lives to 85, 90, and beyond, that they thought 

would be available at 62. Sometimes the government comes in the 

back door and has to back up the system with Medicaid and a lot 

of other supports. I tried to make very clear in my testimony that, 

even if we devoted all of the revenues from increasing the retirement age back to Social Security, and even if we had a current system that was totally solvent, if we increased the retirement age, we 

get more revenues in the system. We can increase replacement 

rates. We can protect the old better. We can actually give a higher 

package of lifetime benefits on an actuarial basis because we would 

have more revenues to spend. Increasing the retirement age just 

moves everything in the right way in terms of protecting the old, 

the needy, and everything else, and I think we just have to be honest about that basic fact. 

Chairman THOMAS. Well, being honest and getting enough 

votes to pass it are sometimes two different things and I am trying 

to deal in that world. My time is running short, so I want to focus 

you on a couple of other arguments, and Dr. Schieber, I think some 

of it came from your excellent history, which was condensed in a 

useful way from FDR and the origins of Social Security, and his 

86 

very strong belief that it shouldn’t be a part of the dole. The irony 

of increasing the payroll taxes is, in fact, a form of that direct 

transfer from the rich to the poor. Personal accounts, and I have 

heard a number of descriptions of personal accounts, I know particular personal accounts are the target of much discussion. Just 

the concept of personal accounts, does anyone here disagree with 

the idea that the concept of personal accounts is more consistent 

with the concept of a retirement insurance system than basically 

our current pay-as-you-go system? Don’t personal accounts kind of 

really talk about an insurance system on an annuity or a premium? 

I am asking questions. I think that is the role of the Committee. 

Mr. SCHIEBER. If you—insurance is a process of pooling risks 

across a large group of people where there is a relatively small 

probability of something happening. If you look at our disability insurance program, there aren’t a lot of people as they go through 

their working careers who become disabled. There aren’t a lot of 

people who die and leave juvenile children. So, let us say you had 

a thousand people living in a society and they had a house, each 

of them, worth $100,000, and one of those houses in this society 

burns down each year. There are two ways that losses can be covered. One, they can each put $100 into a pool each year and then 

there will be resources to cover the damage, and nobody suffers a 

catastrophic loss. Alternatively, there is no insurance and when the 

house burns down, one family in the society has a $100,000 loss 

and everybody else is perfectly fine. When you have a small contingency of something happening, you can do that through the sort of 

system we are running to cover disability. When you have a high 

probability—95 percent of the people who start to work at the early 

20s end up retiring at some juncture—we are no longer talking 

about 1 in 1,000. We are talking about 95 percent. If you want to 

secure those benefits over time, especially given the demographics 

that we have, you have to figure out how to save. You have to figure out how to accumulate some wealth so there is something financial that actually secures that benefit in retirement, and this is 

a mechanism to do it. 

Chairman THOMAS. Okay. Personal accounts—— 

Mr. FURMAN. If I—— 

Chairman THOMAS. Dr. Furman—— 

Mr. FURMAN. Yes, that question—— 

Chairman THOMAS. You mentioned the question of increased 

net savings. Dr. Lindsey talked about increased net savings. Is it 

a high priority, medium priority, or a low priority that if we talk 

about personal accounts, we take into consideration making sure 

that however they are structured, they increase net savings? 

Mr. FURMAN. Let me just say, right now, families have a tremendous number of opportunities to save and invest, if they want 

to play the slot machines, they can do that as well. They only have 

one rock-solid retirement guarantee and that is their Social Security benefit. That is not a—you don’t have a choice of getting a Social Security benefit if it is not in the law. That is not an option 

you have. You have lots of other options. So, taking that option 

away from people—— 

Chairman THOMAS. I understand what you said—— 

87 

Mr. FURMAN. Reducing that benefit to pay for something that 

you can do already, which is to invest, is not something that I 

think makes very much sense at all. 

Chairman THOMAS. I understand your concern about a particular type of personal account, but I thought you mentioned in 

your testimony the idea of making sure that we increase net savings. 

Mr. FURMAN. I think that is an important goal of any reform, 

and you are only going to get that if we ensure that any new incentives we have are paid for, or that we better utilize our existing 

savings. 

Chairman THOMAS. I understand, but you can also set up personal accounts that don’t create net savings. 

Mr. FURMAN. If you don’t pay for your accounts, you will not 

increase savings. 

Chairman THOMAS. Yes, but I am saying you can do that. 

There are people here fully capable of doing that. Dr. Lindsey? 

Mr. LINDSEY. Mr. Chairman, I think it is a high priority, I 

think it is important that when the Committee thinks through 

dealing with this problem, it consider not just Social Security, but 

broader economic issues. What I would like to add to what Mr. 

Furman said in response to your earlier question, the way to think 

about a personal account, I think, is as a discretionary account. 

Some people want to retire earlier. Some people want to retire 

later. Some people want to be prepared for their nineties. One of 

the distinctions that came from your question about early retirement is that a personal account within the Social Security system 

allows the worker or retiree more discretion over when he or she 

retires than a one-size-fits-all solution. 

Chairman THOMAS. Finally, in partial response to my friend 

from Michigan and from others who couldn’t possibly comprehend 

why, if the President has offered us an opportunity to look at Social 

Security we shouldn’t look at other retirement aspects in an aging 

society, I want to refer Members to, if you haven’t noticed it, page 

20 of Dr. Schieber’s testimony. In terms of distribution of retirement structure: on the bottom tenth, from personal financial 

wealth, 3.5 percent; from Social Security, 94 percent; from pension 

wealth, three percent; and at the top tenth, 65 percent from personal, 10 percent from Social Security, and 25 percent from pension. If, in fact, you have that significant difference between the 

lowest tenth to the top tenth, to only address Social Security and 

say you have addressed retirement in an aging society is to miss 

the point that some people count on two-thirds of their money from 

personal financial—in fact, 90 percent of their money from personal 

and retirement pension funds and others 90-plus percent from Social Security. To only deal with Social Security is to ignore what 

else is going on in the society and simply to make the point, read 

the paper about United Airlines and the question of pensions, the 

changing world of defined benefit versus defined contribution, and 

your ability to put your own money away. 

Dr. Furman, I agree there are a lot of ways to do it, but frankly, 

we haven’t been as creative or focused as we should, because to a 

certain extent, you have to incentivize people to put their money 

away. They have to see a reason to give up a current consumption 

88 

for deferred gratification. My last question, how many of you believe it is fair, it is appropriate, and it is a responsible thing to do 

that, if we are going to offer volunteer programs, in whatever area 

we are beginning to make changes in the retirement package, that 

we create a system in which, even in a voluntary structure, people 

are automatically put in and they have the option of opting out? 

Does anyone think that is not something we should look at? 

Mr. FURMAN. Again, Mr. Chairman, unless you know what they 

are opting into, it is impossible to answer that question, so—— 

Chairman THOMAS. Well, they wouldn’t be opting into it. They 

would be opting out, because we would put them into it and they 

would have the option of coming out—— 

Mr. FURMAN. Right. If your plan is to say your future Social Security benefit is going to be reduced if you are in this account, then 

opting people into that account, in fact, even having that option in 

the first place, I think would be a mistake. So, we are talking 

about—— 

Chairman THOMAS. Even with their ability to opt out—— 

Mr. FURMAN. A 401(k), their participation in 401(k) is more 

automatic, I think that is a very good idea, and Congressman 

Emanuel has—— 

Chairman THOMAS. Mr. Apfel? 

Mr. APFEL. If it is opting out of parts of the defined benefit of 

Social Security, then I would have some deep concerns—— 

Chairman THOMAS. No. I wouldn’t think that that would be 

what we are talking about. We would not do that. 

Mr. APFEL. I would like to come back to the retirement age 

issue, I hope before the end of the hearing, which is one of the 

questions—— 

Chairman THOMAS. There are a lot of people anxious to ask a 

lot of questions and I have used my Chairmanship. Last response, 

and then I will recognize the gentleman from New York. 

Mr. STEUERLE. I will just comment briefly. As you know, there 

is a broad liberal-conservative coalition examining this opt-in/optout issue, not with respect to, say, Social Security, but with respect 

to putting employees into 401(k) plans. You will also note in my 

testimony that I think one way to try to get through this divide 

over personal accounts is to think of them more as a private pension rather than a Social Security issue. Politically, the fight over 

personal accounts really is not over personal accounts. President 

Clinton had a personal account proposal, as does President Bush. 

The fight is actually over revenues for the remaining system. That 

doesn’t mean we can’t separately work on a system to try to beef 

up assets, real assets, for people. Yes, real assets contain risk— 

that is a legitimate concern—but we don’t want a world where we 

don’t have real assets. 

Chairman THOMAS. I want to thank you all because you have 

helped this Committee in shaping future full Committees and Subcommittees with the subject matter, especially that in which you 

all agree we ought to be looking at it. Thank you very much. The 

gentleman from New York? 

Mr. RANGEL. Thank you, Mr. Chairman. Let me thank all of 

you for being here. It is so difficult to frame the questions because 

we don’t have a bill before us, but just for openers, how many of 

89 

you believe that the Congress cannot fulfill its responsibilities to 

present and future beneficiaries of Social Security without having 

a private account as a part of that bill? Two of you believe that we 

cannot deal with the subject of fulfilling Social Security, that we 

have to have private accounts on the table, right? 

Mr. TANNER. I believe that if you try to come up with the gap 

between promised benefits and the amount of expected revenue in 

the system, some $12.8 trillion, and you try to do that simply 

through the tax side or through benefit side—— 

Mr. RANGEL. I didn’t say that—— 

Mr. TANNER. Then you are going to either cripple the economy 

or severely reduce benefits for workers in ways that I think would 

be disastrous. 

Mr. RANGEL. We could do it, though. That would be our political decision, since one of you made it—— 

Mr. TANNER. I question whether the economy could sustain the 

type of tax increases that would be required. 

Mr. RANGEL. Okay. Well, let me say this. A lot of you are using 

Roosevelt and Moynihan and Truman, but I haven’t heard one live 

Republican yet that is telling us what they want to do. When the 

Chairman and other Members of Congress met with the President, 

he asked us not to do anything until he put his plan together. 

Since that time, he has gone to 60 cities in 60 days, not to sell private accounts, which I thought he was going to do, but to educate 

the American people how serious the problem is, and now he says 

the Congress should come up with the answer. So, I guess he is out 

of it. 

So, I don’t know, with all of the great ideas that you gentlemen 

have, as to what this has got to do with where the President wants 

us to end up—except he made it clear to me that with anything 

that he is going to sign, private accounts has to be made a part of 

it. We hear a lot from Chairman Pozen when the President speaks, 

as opposed to most of the other White House people. I think that 

they always describe you as the Democrat. Now, I have been in 

Congress a long time and I have had a lot of distinguished people 

testify before the Committee, but I don’t ever recall since I have 

been here where they identify a professional by his party label, assuming you are a Democrat. 

Mr. POZEN. I am a Democrat. I am proud to say that there are 

certain people on the Committee that I have supported, Congressman Neal, Congressman Emanuel—— 

Mr. RANGEL. Is that intellectually—— 

Mr. POZEN. It is a political issue as to why the President chooses to do that, but I do think that the concept of progressive indexing is supported by page 20 that the Chairman pointed to in Syl 

Schieber’s testimony, because what it shows is that for the bottom 

one-third—— 

Mr. RANGEL. I am not getting to the substance. I am just saying, since you are so proud of being a Democrat, that really doesn’t 

help in terms of intellectually being right or wrong on the issue, 

does it? 

Mr. POZEN. I agree, Mr. Rangel. I am not the one who touts my 

being a Democrat. I am a registered Democrat and—— 

Mr. RANGEL. That doesn’t really improve or diminish you—— 

90 

Mr. POZEN. No, it doesn’t improve or diminish the quality of my 

ideas. I agree with that. 

Mr. RANGEL. The White House goes out of its way to identify 

you more by your party label than by what you are saying. Having 

said that, I think all—— 

Mr. POZEN. I would hope that the White House agrees with the 

concepts in progressive indexing. 

Mr. RANGEL. Take my word for it, your name would not have 

been projected as much as it is if you were not a Democrat, but I 

am proud of the fact that you know how to deal with them because 

we may have to come to you for communication, because we don’t 

know where they are coming from, or what they want to do. I totally believe that all of you should believe that an issue as sensitive 

as this, where most of the people on Social Security, no matter 

what any of you say, believe that their benefits are guaranteed, 

and their kids believe it, and their grandkids who are interested 

believe that they are entitled to this benefit. If we are going to 

have any type of revolutionary change, if we are going to repair the 

system, there has to be some pain involved in it, some political 

pain. How you can do this in a partisan way, I have no idea. How 

the President can say it is up to the Congress to repair it, I have 

no idea. 

Having said this, I think the reason people believe that these benefits are guaranteed is that we are borrowing $2 trillion to give 

the tax cuts to the wealthiest people in this country. How do we, 

in a partisan way, share with them that this system that didn’t 

take into consideration wealth or poverty, but substitute it with 

dignity, to say that at the end of the day, whether you are disabled, 

whether you are a survivor, whether you are retiring, there will be 

a cushion for you and you can depend on it. Now we have a situation, Mr. Pozen, where—I assume most of your training has been 

in investment banking. You understand that, and closing budgets. 

Clearly, in looking at your biography, there is no indication that 

you have dealt with social services, or the problems of the poor, or 

people that are surviving, or how many kids went to school, and 

I suppose other people have different views about it, but basically, 

your background has been in the investment market, is that true? 

Mr. POZEN. My background has been in the investment market, 

though I have worked with various nonprofits in the Boston area 

on a series of—— 

Mr. RANGEL. When I retire, that is what I hope to run, a nonprofit. That is where the real money is. 

[Laughter.] 

Mr. RANGEL. Having said that, it would seem to me that if we 

are going to work together on this, we are going to have to find 

some way to communicate and try to see how we can get people 

to believe that they will be better off with the changes in the private sector. Do you believe that, if people believe that they have 

some benefits guaranteed, that you could guarantee that the market is going to work for them? That is, if the market fails, as we 

see things happening today with the airlines, that there would be 

a safety net for those people who found their benefits reduced by 

Social Security, but found an increase in the private accounts? 

Could you give any type of suggested way that you in this business 

91 

can say, trust us, that you are going to be better off with this system? 

Mr. POZEN. I do believe in the safety net of Social Security and 

I think—— 

Mr. RANGEL. No, no. I was talking about the private sector—— 

Mr. POZEN. The private sector. I think that what I am trying 

to propose is that we keep the defined benefit, the guaranteed benefit for the low-wage worker, who—— 

Mr. RANGEL. I understand that—— 

Mr. POZEN. Is not able to deal with this risk very well. 

Mr. RANGEL. I am just saying that if the bottom falls out and 

the market doesn’t work, is there some way that we politically can 

say not to worry because your government will never let you down? 

Can we do that? 

Mr. POZEN. I think that is what we are trying to do, by preserving the schedule of benefits for all low-wage workers. 

Mr. RANGEL. I am not talking about low-wage workers. 

Mr. POZEN. If we were to try to guarantee against a fall in the 

stock market fall, I think that would be a bad idea. 

Mr. RANGEL. Okay. So, I am not disagreeing with you, but at 

the end of the day, if someone was to tell me in a townhall meeting: Rangel, I know you are not thinking about coming home and 

telling me I am not going to get my check. Even though there are 

people that believe that the system is going to collapse, the day 

that we don’t provide some benefit is the day we are out of business. They believe that they are entitled to these benefits. There 

is no way legally that we can tell them that, even if they are successful with the private accounts, there is going to be a guarantee 

in whole or in part, is there? 

Mr. POZEN. I think to the extent that we bring in private accounts, and they are invested in the stock market, we will not be 

able to guarantee the return. 

Mr. RANGEL. So, I would be stuck with the position that, we are 

asking you to trust us, because, we think by taking a gamble on 

the market, you will get a higher yield. The truth of the matter is, 

we can’t give you a guarantee. Now, the President oftentimes talks 

about the moneys that people have contributed to the general revenue funds, that what they get or have given has been an IOU or 

bond. Really there is a trust fund that is not worth the paper it 

is written on. You, being a lawyer and recognizing what full faith 

and credit means, do you agree with the President that the trust 

fund IOUs that have full faith and credit of the U.S. Treasury and 

this country are not worth the paper that they are written on? 

Mr. POZEN. I don’t know if that is what the President really 

meant to say—— 

Mr. RANGEL. We will straighten that out. What do you think 

about the bonds? 

Mr. POZEN. I believe that the special Treasury bonds that are 

now held by the Social Security trust fund are good money. They 

will be repaid. As we all know, at some point, they are going to run 

out and I think that the crucial thing—— 

Mr. RANGEL. I am not talking when they run out. Everything 

runs out—— 

Mr. POZEN. They are good, but we know—— 

92 

Mr. RANGEL. Anyone running a bank that would tell you that 

your deposits aren’t worth anything should be run out of the bank, 

wouldn’t you think? 

Mr. POZEN. I don’t know about—— 

Mr. RANGEL. It would be misleading the people in believing 

that their money won’t be there when they need it. Well, we will 

get to that. Let us talk about this poverty stuff. My mom threatened to disinherit me and my sister when we tried to get her to 

leave her apartment. She had her pension check from the Internal 

Ladies Garment Workers Union and she had her Social Security 

check. She was so proud of having this because she never considered it welfare. She considered herself independent, having worked 

all of her life. We hear a lot of talk on the other side about class 

warfare, but the dignity of people that have enjoyed Social Security—they knew they were Americans, that they put into the system, and they weren’t treated as though—especially by the Congress as though you get what you get when the Committee on Appropriations decides what it is going to be. Do you believe that this 

is a very sensitive area, to separate those who made $20,000 and 

have them as low-income and the other people over $20,000 as middle income, and then you have the higher income? Don’t you think 

you are taking away something from the integrity of the system 

from a social point of view by means testing it? 

Mr. POZEN. Means testing would mean that people with incomes over a certain amount would get nothing, but progressive indexing is not means testing. What I am proposing is to create a 

progressive scale of benefits. We already have differentials for people’s benefits based on the level of contribution, based on their 

wage level. What I am trying to say is that, given the point that 

was made by either Ken or Jason that longevity for higher-wage 

workers is going up faster than for low-wage earners, given the 

fact, as Mr. Schieber points out, that one-third, the lower one-third 

of wage earners, are more dependent on Social Security and have 

few IRAs or 401(k)s, what we are trying to do is provide a sliding 

scale of benefits, which we already do, but make it more of a sliding scale to help make sure that the people who need Social Security the most are getting the most. 

Mr. RANGEL. They used to call that means testing, but I assume that we have to find words to—— 

Mr. POZEN. I don’t think we really—— 

Mr. RANGEL. No? Okay. Well—— 

Mr. POZEN. We have a sliding scale—— 

Mr. RANGEL. The benefits will be based on income. 

Mr. POZEN. Benefits are now based on wage levels. We would 

just be making it a little more of a sliding scale in light of these 

other factors. 

Mr. RANGEL. Now, the President often talks about those people 

in Congress that have 401(k)s and Thrift Savings Plans, and if it 

is good enough for them, it should be good enough for the American 

people. Do you believe the way he uses the statement is accurate? 

Is he offering the people the same thing that we enjoy as Members 

of Congress? 

93 

Mr. POZEN. I understand that you, as a Member of Congress, 

have Social Security, and that the 401(k)s and IRAs would be supplemental to Social Security. 

Mr. RANGEL. That is—— 

Mr. POZEN. So, I am not sure—— 

Mr. RANGEL. That is true—— 

Mr. POZEN. Congressman, I am not representing the President 

here—— 

Mr. RANGEL. Well, he is representing you. 

[Laughter.] 

Mr. RANGEL. Now, if you want to put some distance from it, we 

can talk, but as long as he is projecting you, who truly understands 

what he wants to do—he hasn’t given us anything. He said the 

problem is ours. He promised us a bill. We don’t have it. So, we 

have the Thomas plan, we have the Shaw plan, we have got the 

McCrery plan, we have got your plan, and—— 

Chairman THOMAS. You got any that way? 

Mr. RANGEL. Well, the thing is that, I don’t really think that 

we should rush out and do more harm than good. As long as you 

have got to come up with something, we are prepared to say that 

we really think that this plan here is a detriment to us coming together in a bipartisan way. Having said that, you made it clear 

that the President is not talking about what the Congress has got. 

We have our plan in addition to Social Security. We can take 

money out of our plan. Out of your plan, you can’t take money out, 

is that correct? 

Mr. POZEN. As I said, my plan for progressive indexing stands 

with or without private accounts. I have tried to make clear in my 

testimony how it could be combined with certain types of accounts. 

It can be combined with IRAs and 401(k)s. It can be combined with 

other things. In itself, it would reduce the long-term deficit by 70 

percent and it would provide more of a sliding scale than we have 

now for benefits. 

Mr. RANGEL. My last question is, do any of you believe that we 

can successfully come up and pass a bill without a bipartisan support for it? Any of you? I don’t have any further questions. 

Chairman THOMAS. Does the gentleman from Florida wish to 

inquire? 

Mr. SHAW. Yes, I do, Mr. Chairman. Mr. Apfel, you made a 

statement which troubles me. You mentioned that you think that 

private accounts, personal accounts, individual accounts, should be 

off the table. Now, as you recall the days when you were with the 

Clinton Administration, and I was Chairman of the Subcommittee 

on Social Security, never once did anybody in the U.S. Congress, 

that I am aware of, say to President Clinton that he had to take 

certain things off the table or put it on the table as for purposes 

of trying to negotiate. I don’t think that is the right way to negotiate. I also recall that President Clinton did support some form of 

individual accounts. He saw the need for that. In fact, Mr. Archer 

met with him individually in his office, as I had met with him, and 

discussed moving the plan forward. 

So, I think that we need to clear the air here, and I think for 

anybody who is serious about negotiation, whether they are head 

of the Democrat party, the Republican party, whoever they are, 

94 

who really care about saving Social Security should come to the 

table. I think also that it is important, and I think that the Chairman said something just offhand at the end of Mr. Levin’s remark 

a while ago, that he would be glad to listen and have hearings for 

any of the Democrats that had a plan that would save Social Security. Unfortunately, the silence is deafening. There is no plan. The 

only plan that is out there that I can see that the Democrats have 

is they want the President to negotiate with himself and then lose, 

and that is a tragedy. 

Dr. Furman, you mentioned something that troubles me greatly. 

You said that people have the option of investing right now into individual accounts. I am sorry. People who are going paycheck to 

paycheck do not have that option. Their option, the only option 

they have is to pay their rent and light bill and their grocery bill, 

and those people have no chance of ever accumulating any personal 

wealth unless we go forward with a plan of Social Security that 

takes care of these people. So, saying that these folks, these lowincome people can take care of themselves is an absolute fallacy 

and I think it is a tragedy when we see that Members of Congress 

here would pass up the opportunity for low-income people to create 

some wealth during their lifetime. It is indeed a tragedy. 

Mr. APFEL. Mr. Shaw, you—— 

Mr. SHAW. Now I want to address the question of guaranteed 

plans. There are two guaranteed plans that have been put forward 

by Members of this Committee. I put one forward and Mr. Ryan 

put one forward. In either plan, they had individual accounts, yes, 

but they also had a guarantee by leaving the existing structure in 

place that existing obligations would be adhered to not only for today’s retirees, but for future retirees. This has to be the objective. 

It is very important that when you try to negotiate and push something together that you know what you are going after. You know 

what you are working toward instead of just absolutely sitting back 

and criticizing each other. That is a tragedy. One of the Members 

of Congress said not long ago that the party of the New Deal has 

become the party of the No Deal, and that is too bad. That really 

is too bad. I think that even Roosevelt himself recognized that future changes would have to be made. 

The point has been made by some of the Members of the panel, 

and I think a very good point, that maybe we should look forward 

to 20, 30, 40, 50 years instead of 75 years and beyond, and perhaps 

that is where we will have to go at the end of all of this, because 

none of the plans out there contemplate a cure for cancer. None of 

the plans out there. The lifespan of the American people is going 

to be expanded tremendously over the next decades, and it is a 

wonderful thing. Anything we do and anything we accomplish here 

today is going to have to be modified by future Congresses to make 

allowances for this great gift of life that is going to be extended by 

medical research. This is a wonderful time that we live in, but it 

is a troubling time. We need to be sure that our older Americans 

are taken care of. That should be the objective of every Member of 

this body and every Member of this Committee. Let us get rid of 

the politics. It is about the next generation. It is not about the next 

election. 

Mr. APFEL. Could I address the question of Mr. Shaw? 

95 

Mr. SHAW. I yield back. 

Chairman THOMAS. The gentleman’s time has expired, and this 

will occur with a number of witnesses. The Chair would encourage 

anyone who wishes to make a response in a written way, and it 

will be shared with the full Committee. I also believe that, for 

those of you who wish, return arrangements can certainly be arranged for you, both at the full Committee and the Subcommittee 

level. The Chair recognizes the gentlewoman from Connecticut, and 

would the gentlewoman yield just very briefly? 

Mrs. JOHNSON. Yes, sir. 

Chairman THOMAS. I thank the gentlewoman for yielding. I 

would respond to my colleague and others about the 75-year solvency question versus sustained solvency. We are all familiar with 

the usual 10-year window that we use, which means no one looks 

at the 11th year, and a lot of things can happen over an 11-year 

life that you don’t see in the 10-year life. My only concern about 

not focusing on, to a degree, sustained solvency is that when you 

look at 75 years, this year is good, next year is good, 2008 gets kind 

of worrisome, but every time you move along the current time line, 

2008 meaning baby boomers begin coming in, we are adding at the 

back end of the 75 years, a much less desirable year. What we did 

in 1983 was focus on 75 years. We just didn’t pay attention to what 

happens over the first 20, and when you add the last 20, the 75 

years disappear. 

So, if you are going to really try to make it 75 years, you have 

to look through. You have to run through the tape. You have to 

look beyond the 75 years to make sure that the bottom doesn’t fall 

out the next year. So, when you say sustained, it may be 80 or 85 

or 90 and you are going to fall short. Everyone knows that, but if 

you don’t take that approach to it, it isn’t going to be 75 years, it 

will be 20, and I thank the gentlewoman for yielding. 

Mrs. JOHNSON. Thank you, Mr. Chairman. Mr. Apfel, I would 

urge you to provide us in writing some better understanding of the 

proposals that President Clinton put forward, because he put forward a number that involved reaching into the private market to 

expand the resources of Social Security, both in the individual account or indirectly investing government money. How he governed 

those mechanisms are vague in my mind, so that would be helpful 

to us. Also, Mr. Furman, I would like to ask you to provide in writing some enlargement of the last sentence of the conclusion of your 

testimony. You were eloquent in shooting down most of the ideas 

that had been brought up. You also say at the end of your testimony—first of all, you say it is better to address this challenge 

sooner rather than later, and then you say, a balanced set of reforms that modestly increases Social Security revenues while modestly decreasing benefits could ensure that Social Security is 

sustainably solvent. I would certainly like for you to fill that out 

for me. There is not time for me to do it on my questioning time, 

which is now depleted anyway, but we need to know, what does a 

person like you, who raises some interesting points about the components of a solution that have been put on the table, thinks might 

be a modest program that could provide us with sustainable solvency. 

[The information follows:] 

96 

Additional information from Jason Furman 

Congresswoman Nancy Johnson asked me to elaborate on my statement in my 

written testimony that ‘‘A balanced set of reforms that modestly increases Social Security’s revenues while modestly decreasing benefits could ensure that Social Security is sustainably solvent.’’ 

Social Security benefits are expected to exceed Social Security revenues by 1.92 

percent of payroll over the next 75-years. The only way to restore solvency to Social 

Security is to reduce benefits or raise revenues. Every dollar raised in revenues is 

one dollar less required in benefit reductions. 

A variety of plans restore solvency over 75 years using Social Security trustees 

assumptions, including a plan developed by economists Peter Diamond and Peter 

Orszag and another plan developed by former Social Security Commissioner Bob 

Ball. In addition, Congressman Wexler has submitted a plan that appears to restore 

75-year solvency under Congressional Budget Office assumptions. All of these plans 

merit serious consideration. 

All of them include very progressive new sources of revenue, including raising the 

ceiling on payroll taxes and/or charging a lower tax rate above the cap. In addition, 

the Ball plan dedicates revenues from a reformed estate to Social Security. In addition, both the Diamond-Orszag and Ball plans gradually raise payroll tax rates. 

The Ball and Diamond-Orszag plans include modest benefit reductions, including 

correcting the Consumer Price Index used to calculate Cost-of-Living Adjustments 

(COLAs). In addition, the Diamond-Orszag plan increases benefits relative to the 

current schedule for workers with low incomes and reduces them for workers with 

middle—or higher incomes. Specifically, the Diamond-Orszag partially applies longevity indexing to benefits in addition to reducing the 15 percent PIA factor and 

making benefit adjustments to stabilize the ‘‘legacy debt’’ associated with Social Security. These benefit reductions are substantially less than the reductions proposed 

by investment-executive Robert Pozen. 

Even more important than the individual provisions is the overall balance. Specifically any plan should be: 

• Balanced between revenue increases and benefit reductions. 

• Protect replacement rates to the greatest degree possible to ensure that Social 

Security remains a key component of the core tier of retirement security. 

• Progressive, ensuring that the highest-income Americans contribute their fair 

share to restoring the solvency of Social Security. 

• Economically sound so, for example, the plan robustly restores solvency in the 

face of uncertainty about the future and does not, for example, deliver larger 

benefit reductions when Social Security is more solvent. 

I want to add something to this debate, because we cannot reform Social Security without addressing some of the inequities of 

the program, and they were not intentional inequities. Life was different. Now, life involves most women working before they have 

their children, after they have their children, or maybe just after 

they have their children, and it involves women living many, many 

decades on their own after retirement. I have been working on an 

idea that would overcome, to me, one of the really absurd aspects 

of our current Social Security system. No matter how hard I work, 

the fact that I stayed home 20 years to take care of my children 

gives me 20 zeroes in 35-year calculation. So, I think, frankly, that 

was much harder work than anything I have done since then, and 

I think we need to impute some level of income to women for at 

least 10 years of being home with their children because the evidence is just overwhelming in terms of the importance of parents 

in children’s lives. So, I want to correct that injustice by changing 

the way we calculate earnings for women. I know this will have 

cost impacts, but do you have any thoughts on other inequities that 

we need to address? The President has proposed having no Social 

Security benefit that is below the poverty income. I absolutely 

agree with him on that, and the guarantee of that. How would you 

propose we recognize the changes in women’s lives and the terrible 

97 

disparity—some of you mentioned the problem for couples, but on 

this particular issue of imputing income to women, I would be interested in your thoughts. Mr. Apfel? 

Mr. APFEL. First, I would say I remember our discussions on 

this in Connecticut when I held a town meeting with you in Connecticut. This issue came up and you had the same passion on this 

issue that you have now. 

Mrs. JOHNSON. That is right. 

Mr. APFEL. I think that this is an issue that needs to be looked 

at carefully. I think that there are a number of things that Social 

Security does that are very, very important for women, but there 

are also some problems that need to be looked into. So, there is 

nothing wrong with trying to figure out a way to improve a system 

to make it better. These are profoundly important benefits for 

women. Women are the majority of all beneficiaries and live longer 

than men. We all know these things. Something in this area, I 

think, should be looked into. I would also point out that President 

Clinton’s proposals were in addition to Social Security, not taking 

away from the Social Security defined benefits. The core question 

here is not whether more individual savings is needed. It is whether we want to have a system—— 

Mrs. JOHNSON. My time has expired, but I just would remind 

you that money coming into Social Security now goes into the general fund, and you all know that. You also know what we do with 

general fund dollars; it accumulates debt. Money going into a private account would go into an account. It is tangible. There has got 

to be some difference between flowing dollars into a tangible account that can be cashed in and dollars going into the general fund. 

If China wants to recoup a bond, they sell it in the private market 

and we pay China. We can’t do that with Social Security. There is 

a difference between the money that goes into an account. This is 

a longer discussion, but thank you for all your ideas and we will 

continue to pursue this. 

Chairman THOMAS. Does the gentleman from California, Mr. 

Stark, wish to inquire? 

Mr. STARK. Thank you, Mr. Chairman. I just want to set to rest 

this issue of Democrats coming up with a plan. When one party 

controls the White House and the Senate and the House and they 

can’t get anything done, they tend to blame the minority, and that 

is kind of—that is a cop out. Republicans control the entire Federal 

government, and if they can’t get something done with Social Security, then it rests on their shoulders. When it came time to pass 

a lousy prescription drug benefit, or the budget, they got their leadership back with the lobbyists from those foreign trips, and they 

kept us there and, by golly, they got it done. So, if you could get 

your leadership back with those lobbyists who are going to write 

your legislation and get to work, then the Republicans don’t need 

us. They could go ahead and pass a plan. To suggest that the reason they are not passing a plan is because we don’t have one is 

sophistry. It just doesn’t wash. They are in charge, and if they can’t 

run the place, then they ought to quit and we will get back and 

run it well as we used to. 

Mr. Furman, the President has proposed some benefit cuts for 

the middle class. In this stacked jury, and when I get up in front 

98 

of a jury, I certainly hope the Chairman won’t select my jury, but 

in this stacked jury, I have been hearing this discussion of income 

relating. Now, that is really a euphemism for cutting middle-class 

benefits, but you may call it in your answer, Mr. Furman, what you 

please. In these benefit cuts, he had a benefit cut for everyone who 

earned more than $20,000 a year—that is $10 an hour—and an additional privatization tax which further reduces the benefits. Can 

you give me an overview of the impact of all these cuts that are 

supposedly progressive cuts and whether they are due to the guaranteed benefit for the middle class, which the Republicans don’t 

care much about? 

Mr. FURMAN. I will be happy to, and very briefly, before that, 

a lot of people who make less than $20,000 a year, probably about 

half the people that make that, would also see their benefits reduced by this plan. The particular types of people are widows, children whose parents have died, divorced spouses, people who are 

getting the benefit on the basis of someone else’s work history who 

might have made $30,000 a year and is thus middle class by this 

definition. They themselves are very poor and are seeing their benefits cut, so I would not accept the assumption that people less 

than $20,000 a year are protected by this plan. They are not. In 

terms of middle-class families, the types of benefit reductions you 

would see relative to the benefits scheduled in current law are for 

a middle-class family retiring in 2055, 21 percent to 31 percent, 

and those benefit reductions would grow over time. On top of that, 

what you described as the privatization tax, or the benefit offset, 

would be another $10,000, $15,000 taken out of your benefit. It 

would leave you with a benefit of a few thousand dollars a year 

plus an account on top of that, but only a few thousand dollars of 

rock-solid—— 

Mr. STARK. Do you mean $2,000 or $3,000? 

Mr. FURMAN. If you take a family making about $50,000, 

$60,000 a year retiring in 2055, they would get a benefit of $4,000 

a year—— 

Mr. STARK. Members of Congress get that in 2 months. 

Mr. FURMAN. That is all they would get. In addition, they 

would have an account, and that would be subject to market risk. 

In terms of the traditional defined benefit, it would be a few thousand dollars. 

Mr. STARK. What would that account pay them, if anything? 

Mr. FURMAN. The account is subject to market risk, and Professor Shiller’s studies say that 32 to 71 percent of time, you would 

end up losing money by choosing to participate in those accounts. 

Mr. STARK. Suppose it made money. You put part of your payroll tax in over a period of time. Take a quick cut at that apple. 

What would that be, if you would annuitize that great account in 

the sky. 

Mr. FURMAN. You would get a certain amount. Table 3 in my 

written testimony goes through a variety of rate of return assumptions. If you take one from a survey that the Wall Street Journal 

did of ten prominent financial economists, if you got the rate of return that those ten people were projecting, not even counting the 

extra costs of risk, they found out you would come out about $6,000 

99 

behind if you were retiring in 2075 and you take into account both 

benefit reductions. 

Mr. STARK. It sounds like a heck of a deal. Could I yield the 

balance of my time to Mr. Levin? 

Mr. LEVIN. There isn’t much time. Thank you. 

Chairman THOMAS. I tell the gentleman he has 6 seconds left. 

[Laughter.] 

Mr. LEVIN. To Mr. Hunter, you say—— 

Chairman THOMAS. The gentleman’s time has expired. 

[Laughter.] 

Chairman THOMAS. When we come back to you, Sandy, I will 

be generous on your five, okay? Does the gentleman from California, Mr. Herger, wish to inquire? 

Mr. HERGER. Yes. Thank you, Mr. Chairman, for putting together this panel, this outstanding panel, for so aggressively—in a 

positive role—going after this issue which affects our Nation, our 

children, and our grandchildren. I applaud you for your efforts. Dr. 

Lindsey, critics of the President’s plan to create personal accounts 

assert that it would cost trillions of dollars. Would you explain why 

the U.S. economy would not be worse off, and would likely be better off, under the President’s proposal to establish personal accounts? 

Mr. LINDSEY. The personal account plan leaves the Social Security system whole because the benefit adjustment that occurs saves 

Social Security money for all the money that is moved into the personal account. So, I don’t think that it is an accurate statement to 

say that there is a cost here or that Social Security is made weaker. In fact, the Social Security system is made whole under the personal account proposal. 

Mr. HERGER. Thank you. Mr. Pozen, your plan has been accused of cutting benefits for middle-income Americans. Under your 

plan, would future retirees get less than today’s retirees, even after 

adjusting for inflation? 

Mr. POZEN. No, they would get considerably more on a purchasing power basis. They would get 20 to 30 percent more on purchasing power. The ‘‘cuts’’ mean less than the scheduled benefits 

that we can’t afford. 

Mr. HERGER. Mr. Pozen, again, which promises a higher rate 

of benefit growth to medium-wage workers, aggressive price indexing,or benefits that are payable under current program? 

Mr. POZEN. If we don’t have major reform, the benefits payable 

under the current program would be about 26 percent less in 2041 

and progressive indexing would give them a better deal than that. 

Mr. FURMAN. If I could say one thing about that, on the progressive price indexing, the trust fund would be exhausted in 2047. 

At that point, an additional 15 percent across-the-board benefit cut 

on top of the sliding scale benefit reductions would be required. 

When you take both of those into account, it is no longer necessarily the case that you are better off under payable. If you are 

doing a genuine apples-to-apples comparison, comparing the current system and what would happen when the trust fund was exhausted, you have to apply the same standard to the President’s 

plan, and you look at what happens when the trust fund is exhausted in that plan. 

100 

Mr. POZEN. Mr. Herger, I would disagree strongly with that. 

Mr. HERGER. Mr. Pozen, would you like to comment? 

Mr. POZEN. Yes. I would disagree strongly. I think that we do 

not—that analysis is only correct if we think we have to get to a 

zero percent present value—— 

Mr. FURMAN. The payable benefits do. They are based on 

zero—— 

Mr. HERGER. Mr. Chairman, I have asked Mr. Pozen to comment. Thank you. 

Mr. POZEN. My plan with progressive indexing slows down the 

growth of entitlements so that in 2079 as scored by the chief actuary, the amount of money coming into the system would be roughly 

the amount that goes out. I don’t think it is necessary to reach zero 

present value of the deficit today. What we need to do is to get the 

financing of the system to the point where we can carry the mortgage, and we can carry the mortgage if we reduce the entitlements 

and benefit growth by roughly 70 percent. 

Mr. HERGER. Dr. Steuerle, would you like to comment? 

Mr. STEUERLE. Yes, Mr. Herger, I would just like to comment 

that there are a variety of ways of doing what is called progressive 

price indexing. The bottom line is that we all know the system is 

imbalanced and we all know that, one or another, the middle class 

and the upper class are going to pay to bring it back in balance. 

We are not going to impose reform costs on the poor. We can cut 

benefits, we can increase taxes, and we can pick which generation 

is going to pay, but one way or the other, we are going to have to 

pay to get it back in balance. What we then need, given the variety 

of ways we can do things like progressive price indexing, is to sit 

down, roll up our sleeves, and look at the data on who we can protect, how we can protect them, and alternative ways of doing it. 

This is not, again, an advocacy stance. There are a variety of ways 

to deal with these issues, but we have to admit up front that one 

way or another, either through slower growth in benefits or higher 

taxes, somebody has got to pay to restore balance, and I am guessing it is going to be the middle class or the upper class. 

Mr. HERGER. Well, I want to thank you again. This idea of 

doing nothing and the fact that the Democrats have no plan, and 

with knowing how we have more and more people retiring with 

fewer people paying in, I want to thank those of you who are presenting a plan with the courage of coming forward, and I thank you 

very much. Thank you, Mr. Chairman. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Louisiana, the chairman of the Subcommittee on Social Security, wish to inquire? 

Mr. MCCRERY. Yes, Mr. Chairman. Thank you. Mr. Pozen, I believe, or at least you have been quoted as saying that under your 

progressive indexing plan, that workers making under some figure, 

I don’t know if it is $20,000 or $23,000 or $25,000, would continue 

to have their initial benefit calculation indexed to the wage index. 

Mr. POZEN. That is correct, but progressive indexing doesn’t 

begin until 2012. 

Mr. MCCRERY. Right. 

Mr. POZEN. People $25,000 a year at that point would be fully 

protected under progressive indexing as to their current schedule. 

101 

Mr. MCCRERY. Could you explain what you mean by people making $25,000 or less? 

Mr. POZEN. Those would be people who, at retirement, would have average career earnings per year of $25,000 or less. When the 

actuaries compute your initial Social Security benefits, they calculate your average career earnings and then they adjust it upward 

by the amount that wages have gone up during your career. 

Mr. MCCRERY. Thank you. So, Dr. Furman’s comments about 

your proposal affecting people who make less than—in fact, he 

used some high percentage, half, maybe, of all people making less 

than $20,000 a year would be cut, that is simply apples and oranges, isn’t it? 

Mr. POZEN. I think it is a very different analysis that he is 

making and he is trying to bring in people who might be widows 

of somebody who was in a certain situation. These are complex 

issues that should be dealt with, but I think the basic thrust of the 

protection is still at $25,000. 

Mr. FURMAN. I would be happy to provide for the record a 

White House document showing the bottom 20 percent get their 

benefits reduced. 

Mr. MCCRERY. It doesn’t matter. If you are talking about two 

different things, it doesn’t matter. You can provide all the back-up 

you want. Mr. Pozen, I would hope as—— 

Chairman THOMAS. If the Chairman would suspend briefly, 

does the gentleman refer to a document that responds to Mr. 

Pozen’s plan? 

Mr. FURMAN. The White House did an analysis—it was released last week—entitled, ‘‘Interpreting Benefit Estimates for the 

Pozen Provision.’’ That is the title of the White House analysis—— 

Chairman THOMAS. Does Mr. Pozen agree with the—— 

Mr. FURMAN. It shows that low-income, the bottom 20 percent, 

get less under—— 

Chairman THOMAS. Dr. Furman, I want to know if Mr. 

Pozen—— 

Mr. POZEN. I haven’t had a chance—— 

Chairman THOMAS. If the participants on the panel could just 

get along, we could move a lot—— 

Mr. POZEN. I haven’t had a chance to study that, Mr. Chairman. 

Chairman THOMAS. Well, obviously, the Chair will take whatever official documents are listed, but the description of those will 

be suspended, to analyze if, in fact, it is an attempt to respond to 

the plan that Mr. Pozen has, because he is here. Thank you, gentlemen, and it won’t count against him on his time. 

Mr. MCCRERY. Thank you, Mr. Chairman. It should be clear 

that Mr. Pozen, when he talks about people, whose incomes are 

less than $25,000 will continue to get the wage index calculation, 

it is referring to retirees who have an average monthly wage of 

$25,000 or less. 

Mr. POZEN. An average annually. 

Mr. MCCRERY. I am sorry, annually. That is their average over 

their 35 years of work history. 

Mr. POZEN. Correct. 

Mr. MCCRERY. Mr. Pozen, as a Democrat, I would hope that 

you would get a little tired of your fellow Democrats 

102 

mischaracterizing not only your plan, but the President’s proposals, 

for example, the continued use of the word privatization. Mr. Apfel 

used it ad nauseam today. Democrats on the panel here use it ad 

nauseam. Nobody is talking about privatizing Social Security. Get 

over it. If you refuse to take part in this debate on honest terms, 

then you are going to have a hard time getting to a bipartisan solution. We are being patient, trying to work through a number of options, and we have you here today hoping to learn more about some 

of your ideas. Unless we discuss this in honest terms, we are going 

to get nowhere. We are not privatizing. We are not proposing to 

privatize. Neither is the President. 

Means testing, another example. It is clear that Mr. Pozen’s plan 

is not means testing. It is not means testing. It is further incomerelating the benefits. The system is already—these are two different things. You either know it or you don’t. The level of ignorance that is being shown is getting pretty steep here. I am beginning to think that they are doing it on purpose. 

Mr. APFEL. Mr. McCrery? 

Mr. MCCRERY. No. In addition to that, the double-cut that Dr. 

Furman talks about, there is no double-cut. If you don’t choose the 

voluntary account, there is no double-cut. It is voluntary. We are 

not forcing anybody to take an account, and if they don’t, there is 

no double-cut. Even if they do, there is no double-cut because they 

are getting the money up front in their account that they would 

have gotten later, in the off-years. So, a lot of this disingenuous 

and sometimes outright misleading discussion that is being done by 

Democrats is counterproductive. It is not helping. We want to sit 

down with you and talk honestly about how to solve this problem, 

but you are making it very, very difficult, and I would hope that 

you would begin to sit down and talk meaningfully and honestly 

and substantively about what you want to do. 

President Clinton up here on an ABC program—it is in today’s 

Associated Press (AP) release—said, ‘‘I think the Democrats should 

say what they are for, on Social Security, in the next couple of 

weeks.’’ I do too, President Clinton, and I hope, finally, we can get 

somebody to make clear what benefit cuts and what tax increases, 

which is what Dr. Furman and Mr. Apfel have said very—that is 

their solution, tax increases and benefit cuts. Fine. Show us what 

benefit cuts and tax increases you want us to implement. Then we 

can begin the discussion. Thank you, Mr. Chairman. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Michigan, the Ranking Member on the Subcommittee on Social Security, wish to inquire? 

Mr. LEVIN. I sure do. 

[Laughter.] 

Chairman THOMAS. The gentleman has 5 minutes and 6 seconds. 

[Laughter.] 

Mr. LEVIN. Look, the person who has made this difficult is the 

President of the United States of America. He set the agenda. He 

determined the first order of business. He comes forth in his State 

of the Union and says, my answer to the Social Security shortfall, 

which he grossly exaggerated by calling it ‘‘bankrupt,’’ is private accounts. If you don’t like the term, I am sorry. It is privatization, 

103 

and the Cato Institute used to use that term. It is privatization. 

The problem you have is not our silence, it is our voices. We have 

addressed the first item on the agenda, set by the President of the 

United States, and so have the people of the United States of 

America. They don’t like changing Social Security into private accounts. They don’t want the replacement of the guaranteed benefits 

with private accounts, and you don’t want to listen to this; we are 

going to continue to make clear what the ramifications are. Now 

I am going to ask Dr. Furman—Mr. Pozen, I want to go back. 

There is an effort to mask here—I am not saying you are doing it 

intentionally. I am not going to call you a Democrat or a Republican. I think you have worked for Governor Romney, who is a Republican. I don’t care what you are. I want to talk about what the 

implications of what you have proposed. 

So, I want to go back and have Dr. Furman talk about what happens when you combine major benefit cuts that fall on the middle 

class, and Dr. Furman, you can—at some point, somebody is going 

to have to do something or other. Let us talk about what has been 

proposed here. Dr. Furman, talk in terms of the replacement rate. 

By the way, you are so right, Mr. Apfel; the former President of 

the United States, Mr. Clinton, never talked about diverting Social 

Security into private accounts. So, Dr. Furman, set the record 

straight. What is the result of combing what Mr. Pozen has proposed, what the President of the United States said makes sense, 

with private accounts. Just say it straight. 

Mr. FURMAN. Your traditional rock-solid guaranteed Social Security benefit would replace between about zero and 10 percent of 

your pre-retirement income. Everything else would be privatized, 

private, whatever you want to call it. Zero to 10 percent would be 

your Social Security benefit of your pre-retirement income, a couple 

thousand dollars a year. 

Mr. LEVIN. So, essentially what would happen over time is that 

the guaranteed benefit portion of a person who opted for private accounts would shrink, shrink, shrink, is that true? 

Mr. FURMAN. That is correct. You look at the equivalent of 

somebody making $59,000 a year, retiring in 2075, will get a Social 

Security benefit of $1,000. It will barely replace any of their preretirement income. Everything else will be private. 

Mr. LEVIN. If that is the purpose here, to replace Social Security 

with private accounts, and you can argue about what the rate of 

return would be, and Dr. Shiller has put forth what the rate of return and why it would be a bad deal. The reason people are not 

buying what the President has proposed is a combination of what 

Dr. Furman has said straight out. When you combine the privatization with the sliding-scale cuts, plus what has happened to the 

stock market, what is happening in retirement benefits, what is 

happening is that defined benefits are being replaced by defined 

contribution plans and Social Security remains the foundation 

more and more of security. Mr. Pozen, when the President says 

someone making over $20,000, that is in today’s terms, $25,000, 

years from now, everybody making over that is well off, the working people are saying clearly to the President of the United States 

and to all of you, that is a total turn-off. 

104 

We will sit down on a bipartisan basis when it is understood that 

we and the American people have responded to the first item on 

the agenda posed by the President of the United States, and that 

is privatization, personal accounts, whatever you want to call it. 

We showed that in 1983, when two-thirds of the votes in this 

House for shoring up Social Security came from Democrats, and 

Dr. Hunter, when you talk about raiding the Treasury, talk to 

them on the Republican side. Talk to them and don’t talk to us who 

supported proposals in 1993 that put this country on a path to no 

longer raid Social Security. Talk to them. 

Mr. POZEN. I would just like to clarify for the record that the 

chief actuary in the proposal that I made does not have these very 

small defined benefits left. In 2075, for the median worker—— 

Mr. LEVIN. This is on somebody’s time. This is when you combine the private accounts. 

Mr. POZEN. It all depends on what type of private account you 

combine with progressive indexing. 

Mr. LEVIN. Okay. 

Mr. POZEN. I propose the 2-percent account—— 

Mr. LEVIN. No, we are talking about the President’s account, 

Mr. Pozen, the President’s account. 

Chairman THOMAS. The gentleman’s time—— 

Mr. POZEN. I want to distinguish that very carefully from what 

I have proposed. 

Chairman THOMAS. The gentleman’s time has expired, and I 

would indicate to you, Mr. Pozen, that on any response that any 

witness did not feel they had adequate time to respond—as you 

may notice, you may have something to offer, but it is declined by 

the individuals. It shouldn’t be declined by the Committee. So, we 

look forward to any written responses you may have on any question that was asked of any witness but you didn’t have a chance 

to respond to. The gentleman from Michigan—the other gentleman 

from Michigan. 

Mr. CAMP. Thank you, Mr. Chairman. We have had some references to artificial parameters before, my friends on the other 

side, before the debate. President Clinton said, and I quote, ‘‘I 

think the Democrats should say what they are for on Social Security in the next couple of weeks. They have got time to put together 

a program.’’ He goes on to say, ‘‘I think the Democrats should have 

a plan and they should talk to the President and Congressional Republicans about it.’’ We are talking about trying to help the savings 

rate in this country. Mr. Pozen, your plan for progressive indexing 

obviously does help those at lower income levels. Are there other 

ways of helping lower income workers, maybe through programs 

like the Safe Credit Program, which has a match and a retirement 

plan, or a 401(k), that you might also discuss? 

Mr. POZEN. Yes. As I say in my testimony, I would strongly support enhancing the Low-Income Tax Credit for workers between 

roughly $25,000 a year and $50,000 a year because, unfortunately, 

given the deficit of the Social Security system, we can’t preserve 

everybody’s scheduled benefits and we could encourage them to 

save more. That credit just started a few years ago. Some of it 

needs to be made refundable. It needs to be made more attractive, 

105 

and I think that would be a very constructive way to approach a 

package here. 

Mr. CAMP. Dr. Lindsey, in response to one of the Chairman’s 

questions, you referenced discretion in retirement, and trying to 

have more discretion in retirement. Do you see any problem with 

actuarially affecting retirement benefits to allow retirees a variety 

of ages to retire from? Right now, it is 62 or 67. Is there any problem you see in a range of ages of retirement, allowing workers 

more choice and more discretion based on their decisions about 

when they would like to retire? 

Mr. LINDSEY. I think one thing the Chairman said, which is 

quite right, is that there are a large number of people in society 

who either have jobs that they can’t continue or have their lives 

change late in life. What we have is a one-size-fits-all system. One 

thing we should recognize, and Congresswoman Johnson said the 

same thing, is that life has changed. The one advantage that has 

not been mentioned enough about moving toward more discretion 

through personal accounts is that it gives people a chance to finetune their Social Security benefits in a way that best meets their 

needs, and I think the public now is more educated. The public 

knows what they need. We have a more diverse set of lifestyles. 

What we should do with personal accounts within the Social Security system is give people more power over their own lives and 

more discretion. 

Mr. CAMP. I am interested in your views on the economic impact 

of raising the Social Security cap. As a former Treasury official and 

accomplished economist, what would be the impact on jobs, for example, of an increase in the payroll cap from, say, $90,000 to 

$135,000, particularly as a lot of small businesses would be in that 

range? Have you seen a study of that kind? 

Mr. LINDSEY. I think the best study was done by Martin Feldstein, President of the National Bureau of Economic Research. 

What he pointed out was that the behavioral response, in the particular example he mentioned, which I think he actually did 

$120,000, was that the government would only take in about 30 

percent of the net revenue that was anticipated. If you remove the 

cap entirely, the government would actually lose revenue under 

doing such a plan, and that is with a very modest behavioral elasticity. It is actually very similar to the elasticity model currently 

used by the Joint Committee on Taxation. So, I think that is a losing proposition. In addition, you mentioned jobs. You are right. 

That would be a tax directly on entrepreneurship. On all tax increase proposals, I would urge the Committee to think about the 

fact that American workers are now competing with workers all 

around the world, and when you raise taxes on American workers 

or American employers, you are making America less competitive 

with countries all around the world. So, the adverse effects of the 

way we adjust the system are very, very important to think about. 

Mr. CAMP. Thank you very much. Mr. Pozen, you have the lowincome earner level at $25,000 a year in your proposal and the 

high-income earner at $113,000. What impact would there be to 

moving that low-income level up to, say, $35,000 and moving those 

figures around? Is there a particular reason why you have those 

particular numbers? 

106 

Mr. POZEN. Well, $25,000 a year was chosen because it represented 30 percent of all workers. If you see Syl Schieber’s chart, 

that lower third are the ones who are primarily dependent on Social Security. When you go up the income scale, the workers are 

much less dependent on Social Security. You could move $25,000 

up to $35,000 or $40,000, but you will lose a considerable portion 

of the solvency deficit reduction because the median wage earner 

in 2012 will probably be about $47,000. So, you could cover workers 

up to $35,000 a year in career earnings, roughly another ten percent, bringing it up from 30 to 40 percent of the workforce, but you 

would have solvency issues. So, it is a perfectly reasonable thing 

to do. We just have to come to grips with the fact that then we are 

going to need other benefit constraints or we are going to have to 

have more revenue in the system. There are no free lunches here. 

Mr. CAMP. All right, thank you, and I thank the entire panel for 

their excellent testimony today. Thank you, Mr. Chairman. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Maryland wish to inquire? 

Mr. CARDIN. Thank you, Mr. Chairman, and thank all of our 

witnesses for being here. I guess I just have a problem in that the 

suggestions that are being made here would bring a fundamental 

change to Social Security, where Social Security would be a smaller 

amount of an individual’s retirement security for future generations, whether that individual be in the lower income or middle-income or higher-income. It is one thing if that is good policy. It is 

another thing if we are doing this because of the fiscal concerns 

that we have about the solvency of Social Security, and it seems 

to me that is the driving force. It is not to modernize the system 

for good policy, it is to deal with the fiscal challenge. So, let me just 

pose a caveat here or a concern here. In 2001, we passed a major 

tax change because we had a huge surplus that was projected, and 

we found out that our 5-year projections weren’t very good. We 

missed that pretty badly, as to what happened during that 5-year 

period, or 10-year period. 

So, when we start talking about fundamental changes in Social 

Security based upon 75-year projections when we can’t project very 

well for 2 years or 5 years, I am concerned as to whether you all 

have looked at other projections that have been made. The Congressional Budget Office (CBO) says it is going to be until 2052 

that we have money, rather than 2041, which the actuaries are 

using. The actuaries nine years ago had projected the Social Security solvency problems to be 12 years earlier than it is today. My 

point is that these are moving numbers that move pretty quickly. 

If we are making fundamental changes based upon the solvency 

numbers, have you really thought out these fundamental changes 

if, in fact, the financial issues aren’t as dire as we think they are 

going to be? Maybe just to point out, in response to some of my Republican friends about what we should be doing, and I know Democrats are united and pretty strongly voice that it starts with eliminating the carve-out from Social Security for private accounts because we don’t want to dig the hole deeper. We don’t want to take 

money out of Social Security and it is difficult to come up with solutions that add more revenue or deal with benefits when the probVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00110 Fmt 6633 Sfmt 6602 E:\HR\OC\24732.XXX 24732
107 

lem is made more difficult because the President’s private accounts 

carve-out from Social Security. 

One of the suggestions that has been made, I haven’t heard too 

much discussion from the panelists, is around the Social Security 

trustees to act as fiduciaries—we had that discussion at an earlier 

time in our Committee—so that they actually take the Social Security money, invest it as any prudent trustee would for any type of 

a pension plan, and getting a better return; in other words, getting 

more revenue into Social Security and extending the solvency of Social Security without raising taxes. That would deal with a good 

part of the problem. Instead, we seem to be focusing on benefit 

cuts. It is a discussion that we need to have, but I must tell you, 

I get very concerned about benefit cuts that are related to income 

that are not predictable, and I heard you, Mr. Pozen, talk about 

this, but we don’t know what the future is going to hold on these 

different indexes. These are projections and they may very well be 

means testing the benefits in Social Security if someone gets zero 

out of the Social Security system or a minuscule amount of money 

out of the Social Security system that Dr. Furman is talking about. 

So, before we start down this path of allowing Social Security indirectly to be means tested, meaning that it no longer is a universal Social Security program, we had better be pretty sure of the 

numbers we are working with. Recent history has taught us that 

we can’t make these long-term projections, and I am somewhat disappointed by the tone of the panel in being so certain about their 

proposals and the needs for their proposals, when history has 

taught us that this has not been the case in projecting the problems of Social Security. My last point, Mr. Chairman, we did make 

major changes in the Social Security system to deal with the baby 

boomer generation. That was 1983. I was not part of Congress, but 

they made an effort to deal with 75-year solvency. It is time for us 

to look at it again. It is time for us to make adjustments, but I 

really question whether the fundamental changes that are being 

suggested by some of these panelists are the right way for us to 

proceed. Thank you, Mr. Chairman. 

Chairman THOMAS. I thank the gentleman. The Chair thinks it 

will be useful, and I will pass it out to all Members and make it 

a part of the record so that they can see the series of votes dealing 

with the issue in 1983 on the floor of the House. There were two 

particular amendments. The chairman of the Subcommittee on Social Security, J.J. Pickle, had an amendment which extended the 

retirement age, and the gentleman from Florida, Mr. Pepper, offered an amendment that raised the payroll tax. The gentleman 

might be interested in the partisan break in terms of supporting 

fundamental change versus raising the payroll tax, and we will 

make that a part of the record. 

[The information follows:] 

1983 Amendments 

January 20, 1983 (Commission Report Issue Date) 

• Report of the National Commission on Social Security Reform was issued to 

President Reagan on January 20, 1983. 

March 9, 1983 (House passed bill) 

108 

• The House passed H.R. 1900 (Social Security Act amendments 1983) by a vote 

of 282 [97R, 185D] to 148 [69R, 79D]. 

• Pickle amendment (raise the normal retirement age to 67 for those turning age 

62 in 2022): approved 228 [152R, 76D] to 202 [14R, 188D]. 

• Pepper amendment (raise payroll taxes from 6.2% to 6.73% beginning in 2010): 

failed by a vote 132 [IR, 131D] to 296 [165R, 131D]. 

March 23, 1983 (Senate passed bill) 

• The Senate passed H.R. 1900 (Social Security Act amendments 1983) by a vote 

of 88 [47R, 41D] to 9 [6R, 3D]. 

March 24., 1983 (final passage) 

• Final passage of the conference report (H.R. 1900—the Social Security amendments 1983) by both chambers. 

• House vote 243 [80R, 163D] to 102 [48R, 54D]. 

• Senate vote 58 [32R, 26D] to 14 [8R, 6D]. 

Chairman THOMAS. Does the gentleman from Minnesota wish 

to inquire? 

Mr. RAMSTAD. Thank you, Mr. Chairman. I want to thank all 

the experts on the panel here today. Let me ask you, Mr. Pozen, 

regarding your proposal for progressive indexation, a number of my 

constituents have come forward already at a town meeting, at several town meetings, middle-income earners, and they are concerned 

about projected benefits under your plan. Now, I read your testimony as saying that retirement savings would make up for reduced 

Social Security benefits for median-wage earners. Is that a correct 

statement? 

Mr. POZEN. Correct. 

Mr. RAMSTAD. Do you have any, aside from saying we should 

provide more incentives for 401(k)s and other retirement savings 

vehicles, do you have any empirical, or any of the other witnesses, 

any empirical data, projections that would support that quid pro 

quo that you maintain is there? 

Mr. POZEN. We know that the replacement ratio for median 

workers under progressive indexing in, say, 2045 would fall from 

about 36 percent to 30 percent. We know that something like 50 

to 75 percent of all median workers now participate in some form 

of private retirement program, and we know that if we want to encourage people to participate more, we have empirical evidence to 

support two strategies. 

One is to the extent that we have any sort of matching program 

or refundable tax credit which plays that equivalent role, that has 

a big positive effect in terms of people’s participation. The second 

strategy is the sort of proposal that has been discussed here about 

presumptive enrollment, in which people are presumptively enrolled in a 401(k) plan, or a program like that, and then they have 

to opt out, that overcomes inertia and really brings up the participation rates. So, those are two practical strategies that we could 

adopt to encourage people to make up the decline in the replacement rate. Most of them already are making up some, if not all of 

that, and we could do more to increase replacement by these private retirement plans. 

Mr. RAMSTAD. I also would like to ask you, Mr. Pozen, your 

plan, as I read it, would apply progressive indexing to workers with 

disabilities, as well as retired workers. Why did you choose not to 

109 

hold workers with disabilities harmless pursuant to benefit in current law? 

Mr. POZEN. That is a good question and I think that I have always tried to say that the whole issue of disability needs to be 

dealt with separately. Under my plan, I don’t try to address all the 

disability aspects. I would be receptive to a hold workers with a 

disability harmless, but that would involve some issue in terms of 

solvency, which we would have to address either through other 

benefit constraints or increases in revenues. So, we can do that, it 

is just a question of enumerating the cost. 

Mr. RAMSTAD. Please, Mr. Apfel? 

Mr. APFEL. Mr. Ramstad, I think it is important to also look— 

this was mentioned briefly before, and I think we should provide 

something in the record—at ancillary beneficiaries, such as low-income widows. The worker may very well have been protected at the 

levels that Mr. Pozen has talked about, but when that person dies, 

that is going to have an effect on benefits. So, kids, widows, some 

of the ancillary beneficiaries, who are easy to forget about, need to 

be looked at very, very carefully. These are low-income families 

who would be affected by the proposal. So, it is not quite appropriate to say that low-income people are protected. It just needs— 

the details need to be worked out very, very carefully and I think 

we should try to provide some of that for the record. 

Mr. RAMSTAD. Please, Dr. Steuerle. 

Mr. STEUERLE. Mr. Ramstad, again, this is one of those examples where, I think if we sit down and work, we can really address 

the issues. As you may know, I suggested something not too different from Mr. Pozen, a wage indexed minimum. Now, there are 

different types of wage indexed plans. For the same cost as some 

forms of progressive price indexing, you can use a minimum benefit 

to protect people at a higher level and you can protect more disabled people, you can protect more widows and spouses. The disadvantage is for, say, someone making $70,000, you don’t do as 

much wage indexing for their base; that is, for someone who is 

much higher income, you may not provide as much benefit increase 

over time. In Mr. Pozen’s proposal, everybody gets some benefit increase over time, no matter how high their income level, until you 

hit the very top. I know that this is a technical issue, but there are 

ways to address these issues, I think, that can protect more people 

at the bottom and that, independently of issues like personal accounts, would please people across the table. 

Mr. RAMSTAD. Well, I want to thank you again. Thank you for 

those responses. I must say in conclusion, Mr. Chairman, for the 

first time after listening to this panel and the dialog here, I am 

more convinced than ever that we can arrive at a bipartisan, pragmatic, and common sense solution to the Social Security dilemma 

which may not be a crisis today in terms of an imminent danger, 

but it sure as heck is a looming crisis and a problem we need to 

deal with. So, thank you very much, all of you gentlemen. I yield 

back. 

Chairman THOMAS. I thank the gentleman for his comments, 

and I, too, agree that we could reach that description that you just 

provided. My only question is, do we have enough votes to pass it? 

Does the gentleman from Washington wish to inquire? 

110 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Today’s hearing 

is important because I think we really need to deal with this issue. 

I find it interesting that all the people picked by your staff think 

that privatizing Social Security is a good idea. Assuming you and 

the President realize that privatizing Social Security is as dead as 

disco, as far as Democrats are concerned, the sooner we will get to 

the serious business of doing something about this whole proposal. 

It is not going to happen until you make that decision. The President the other day, though, finally, after he was driven out of the 

weeds by his trip on the road, found that he had to admit that the 

privatization scheme required slashing benefits for the middle 

class. Adding insult to injury, we now know the President’s plan 

will only close about one-third of the funding gap. 

Now, here we are today, having this hearing, pretending that privatization is actually going to work. We are pretending people will 

be better off losing half of their benefits. Mr. Chairman, even you 

can’t defy gravity. The President’s proposal eviscerates the guaranteed benefits of Social Security. Now, let us go to the chart. What 

you see there, currently, Social Security provides over one-third of 

pre-retirement income to retirees. The President would slash—— 

Chairman THOMAS. If the gentleman would yield briefly, on the 

back chart, for those in the audience, you can see what the gentleman from Washington is talking about. We will try to get the 

television for us, but in the meantime, the gentleman has provided 

us with charts and Members can look at the charts that he has in 

front of them. Thank you. Go ahead. 

[The information follows:] 


Insert 24732a.014
111 

Mr. MCDERMOTT. Social Security provides—thank you, Mr. 

Chairman. That is good clarification. It provides over one-third of 

pre-retirement income for retirees. The President would slash these 

benefits to almost nothing for a middle-class person that today 

earns $58,000. That is what Dr. Furman just talked about. Now, 

since when do we expect less for our children than we do for ourselves? I know some of you are saying, well, we are going to make 

it up with the stock market. Mr. Furman, is it likely that private 

accounts will make up these benefit cuts? 

Mr. FURMAN. I don’t know what is going to happen to the stock 

market. Mr. Pozen is more likely to. In my written statement, I 

presented six alternative scenarios, one that is used by CBO, one 

that is used by the actuaries, one that appeared in the Wall Street 

Journal, Shiller. In every one of the six, U.S. stock market returns 

are not enough to make up for those benefit reductions. 

Mr. MCDERMOTT. Thank you. So, those numbers sound similar 

to what numbers I have come up with, and your point, if you get 

that, you will see now with your stock account, that is how much— 

that red is how much you are going to make up. If you are at 

$58,000 today, that is what is going to happen to your Social Security. Even considering the rosiest, and this is the rosiest one out 

of the private accounts, the returns will still not make up the benefit. Now, the President’s privatization means everyone’s retirement will be tied to Wall Street—everyone’s. Now, Mr. Furman, or 

Dr. Furman, you are familiar with Robert Shiller, the Yale economist, aren’t you? Is he a good, reputable man? 

Mr. FURMAN. I think he is considered one of the top financial 

economists. 


Insert 24732a.015
112 

Mr. MCDERMOTT. He wrote a book called Irrational Exuberance and in it he examined the cycles of the stock market. 

These were the two long-term downturns in the last century. The 

first period begins in 1929 and the second period begins in 1967. 

Shiller pointed out that once you consider the impact of inflation 

and dividend payments, that people in the market before these 

slumps had to wait nearly 20 years to make their money back. 

I will put up a slide here. This is the 1967 one. This slide shows 

the last market slump. It began in 1967. A dollar invested in stocks 

in 1966 would have been worth less than a dollar when you made 

computations on inflation and you made dividend computations. 

You would have to go all the way to 1985 to come back to the same 

value you put in. Now, this is important because you don’t get to 

choose when you are going to retire. Just look at Bill here for a second. He looks nervous, right? He can’t choose when he is going to 

hit retirement age. So, during 40 of the last 76 years, the market 

has been down. Mr. Furman, people in defined contribution plans 

are already at risk in the market. If we privatize Social Security, 

aren’t we putting people in double jeopardy with having their defined contributions at their work or whatever or their 401(k)s or 

whatever, and then we add Social Security, it is really putting people at double jeopardy. 

Mr. FURMAN. I would call it 100 percent jeopardy. The entire 

benefit would be in the market. 

Mr. MCDERMOTT. Lastly, let me say something about—— 

Mr. MCCRERY. [Presiding.] The gentleman’s time has expired. 

Mr. MCDERMOTT. If anybody thinks that is a fair way to go, 

we are willing to vote on it. Just bring it up and put it on the table. 

Mr. MCCRERY. I thank the gentleman. Mr. Nussle? 

Mr. NUSSLE. Thank you, Mr. Chairman, and I want to thank 

all of our witnesses. It has been a very interesting—let me restate 

that. Your portion of this has been very interesting and I appreciate your testimony. I have held a lot of town meetings in Iowa 

and have a lot of chance to talk to a number of constituents and 

their concerns are much broader than Social Security. They are 

concerned about health care. They are concerned about their pensions. Certainly with the news that we have seen lately, they are 

concerned about their savings, prescription drugs, the value of 

their house, taxes, on and on. That, to me, is retirement security, 

and I think part of the reason why this debate, while certainly important, is far too focused and narrow because retirement security 

is much broader than that. 

It is also troubling, because I do think that there is widespread 

understanding that we do have a challenge, a problem that we do 

need to deal with, and thus far, at least, we hear that there is opposition to personal accounts, there is opposition to progressive indexing. Basically, not too many changes are being suggested. The 

one that kind of gets hinted at, that I hear particularly from those 

who don’t have a proposal that they are interested in questioning, 

is increasing taxes or changing the earnings base. In fact, I have 

had some Iowa constituents that have asked me that. There is kind 

of this popular, almost Internet, e-mail, however you want to put 

it, that basically goes like this. All you have to do is increase the 

earnings that are subject to the tax and this will take care of itself. 

113 

Just increase that and it will take care of itself, from $90,000. I 

guess my question would be, is that true, and let me start with Mr. 

Lindsey on that point. 

Mr. LINDSEY. No. Even under the most narrow set of assumptions, you might delay the point of daily insolvency, if that is what 

you want to use as the parameter, by four to 6 years. More importantly, as just about every economic study has shown, when you 

raise those taxes, you create an incentive effect across the government, not just Social Security tax revenue, but also income tax revenue. To use, again, Martin Feldstein’s example, he believes that 

we would actually see a reduction in total government revenue as 

a result of eliminating the wage cap completely. At the very least, 

whatever the number is, you will not get the projected increase. In 

addition, what you are doing is you are taxing American workers 

and American businesses and American entrepreneurs and you are 

not taxing Chinese workers or Indian workers or European workers 

or anyone else you would want to compete against. So, if we live 

in a globalized economy, I don’t see the benefit to the American 

economy or American retirees of making us carry an ever-increasing burden of these costs while others do not. 

Mr. FURMAN. Mr. Nussle, if I could—— 

Mr. NUSSLE. I actually—I am sorry. I am asking—— 

Mr. FURMAN. I have actual numbers for the question you asked 

from the Social Security actuaries. 

Mr. NUSSLE. Okay. What are your actual numbers? 

Mr. FURMAN. It is worth the Committee, if you are considering 

this proposal, being guided by that. A memo dated February 7th 

says that if you make all earnings subject to the payroll tax but 

retain the cap for benefit calculations, that would reduce the 75- 

year deficit by 2.2 percent of payroll. That is larger than the entire 

projected deficit. So, according to the Social Security actuaries’ 

memo, eliminating the cap but retaining it for the purpose of calculating benefits would eliminate the 75-year deficit. 

Mr. NUSSLE. That wasn’t the question, and that is not the popular e-mail chain letter that seems to be out there. So, I appreciate—again, this is, I think, what was being discussed earlier. You 

are comparing apples with oranges. The second thing I wanted to 

just ask Mr. Lindsey about in particular is this issue about increasing the payroll tax. I think you went into this, but this is important 

because this whole notion that you are talking about, particularly 

in the lower income, lower-skilled, entry level jobs that are in direct competition right now with, as you said, China as an example, 

I would think that an increase in the payroll tax on the front end 

would be a gigantic drag on our ability to compete in that world 

market that you are talking about. 

Mr. LINDSEY. American workers are now competing on a global 

basis and the assumptions we had in the past, in the thirties or 

the forties or the fifties, when we were creating this system, did 

not take that fact into account. I think what we really have to 

begin to do is focus on American competitiveness. That is going to 

be the key to the solvency of the Social Security system. The words 

‘‘guaranteed benefits’’ have come up. Yet in 1978, with very, very 

little notice, President Carter and the Congress cut benefits. The 

same thing had to happen in 1983. So, what benefits—what those 

114 

two, I think, point out is that the solvency of the system depends 

on the economy, and the only way you can protect future retirees 

is to have a robust U.S. economy. When we did not have a robust 

economy, such as in 1978, we ended up cutting benefits quite a bit. 

Mr. NUSSLE. Thank you. 

Mr. MCCRERY. Mr. Johnson? 

Mr. JOHNSON. Thank you, Mr. Chairman. Mr. Tanner, I would 

like to get into a little more detail with you about the recognition 

bonds that are an important and unique part of H.R. 530, our bill. 

Those bonds represent the amount of benefits that people have 

earned up through the time they opt into personal accounts. Everybody is saying it is your money, but as you know, it is not. The Supreme Court says it isn’t. It is the government’s money. We want 

to make it their money, and I wondered if you could talk about the 

recognition bond. It is a zero coupon bond and I wonder if you could 

describe that term, for those who might not be familiar with it. 

Mr. TANNER. Certainly. We are talking, essentially, about a 

bond that does not have any particular attributed interest rate to 

it. It has a face value, if you will, equal to the lifetime accrued benefit that an individual has earned, and it is payable on a certain 

date. In this case, it would be their 67th birthday. So, the bond 

would simply be issued on a particular day, and then it would be 

redeemable on their 67th birthday. The value of that bond would 

be based on the accrued lifetime benefits that the individual has 

earned. As you said, this would lock in the level of benefits that 

the individual has earned and give them actual ownership of it. I 

know that there have been several people today who have said that 

Social Security is a guaranteed, rock-bottom guaranteed, benefit. 

The fact is, it is not guaranteed either legally, as you have mentioned, under Fleming v. Nesser, nor economically, since Social Security cannot pay the future level of promised benefits. Recognition 

bonds are a way of locking in benefits for those individuals. 

Mr. JOHNSON. Well—— 

Mr. FURMAN. With benefits under the President’s plan, the accounts wouldn’t be guaranteed, either. There is an offset rate set 

at 3 percent that reduces your benefit. 

Mr. JOHNSON. I am not talking about the President’s proposal 

at this point, thank you very much. 

Mr. FURMAN. The accounts can be taxed. 

Mr. JOHNSON. That bond you talk about is fully tradable, 

meaning that a person can sell it in the open market, but they 

have to deposit the cash into a personal retirement account. So, 

Mr. Tanner, could you describe what people can do with their recognition bonds after they opt into personal accounts? 

Mr. TANNER. Certainly. Individuals who are risk averse could 

simply leave that money in their account and simply, at retirement, redeem that bond and then move that into either a program 

payment withdrawal system, or an annuity system, or even take 

part of it in a lump sum above the poverty level. They would simply leave that portion in their account. Other individuals might 

choose to sell it on the market, as long as they redeposited the 

funds from that sale back into their account, and then that money 

would be reallocated along the lines of their portfolio, which I believe under your legislation would be a default of a 65 stock/35 

115 

bond portfolio, and thereby they would actually earn a better rate 

of return than what Social Security benefits would be providing 

them. So, that would be a boost in their benefits at retirement. 

Mr. JOHNSON. A bonus, if you will, to those who are in their 

forties when they opt into that system. 

Mr. TANNER. A premium. That money, as well as these benefits, would be fully inheritable. As you know, under the current Social Security system, if you die before retirement or after retirement, you might not be able—you can’t leave the money to your 

heirs. Under your proposal, the recognition bonds would be property, the same way as the money in the individual account, and an 

individual dying in their fifties or sixties would be able to take that 

money and pass that on to their wife, their children, their church, 

or their favorite charity, wherever they want to send that money. 

Mr. JOHNSON. What you are saying is, the Social Security 

money that has been input up to date during their working period, 

is their money. 

Mr. TANNER. I think we have been very misleading to people 

in letting them believe that somehow, the money they pay into Social Security belongs to them. The fact is, as the Supreme Court 

ruled, it is simply a tax, and then there is a government spending 

program no different than, say, farm price supports that later on 

the government decides to allocate to individuals. There is not a 

connection between what you pay in and what you get out. Under 

your bill, what you are saying is that the money that they pay into 

the Social Security system, both the money they paid in the past 

and the money they paid in the future, would belong to them, become their property. It is a unique feature of your legislation and 

I think it is one of the things that most recommends it. 

Mr. JOHNSON. Thank you. In your testimony, you say comparisons to Social Security’s promised benefits are meaningless since 

current law can’t be paid. Often, we see the press use the term 

‘‘benefit cuts.’’ Compared to what today’s retirees are receiving or 

compared to what is payable, benefits aren’t being reduced at all. 

Would you clarify that issue? 

Mr. TANNER. Yes. I think this is one of the most unfair challenges that opponents of personal accounts make, or opponents of 

the progressive price indexing. They have been particularly unfair, 

I think, to Mr. Pozen in saying that, somehow, that any reduction 

in the growth of future benefits is somehow a cut. The fact is, the 

projected level of benefits in the future cannot be paid. We simply 

cannot meet those promises. All we are talking about doing is 

bringing those promises in line with reality. You might as well say 

that somehow the Social Security reform program doesn’t send 

every senior to Disneyland. It would have about as much reality as 

saying that we are cutting Social Security benefits by simply bringing them in line with what actually can be paid. 

Mr. JOHNSON. I thank the panel. Thank you, Mr. Chairman. 

Mr. MCCRERY. Mr. Lewis? 

Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman. Let me thank the Members of the panel for being here today. 

This debate about Social Security is really about whether we will 

honor the commitments we have made as a nation and as a people. 

Are we going to honor the commitment we have made to our senVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00119 Fmt 6633 Sfmt 6602 E:\HR\OC\24732.XXX 24732
116 

iors, disabled, and the children who have lost a parent? Social Security is a sacred trust, a covenant, a guaranteed benefit. A few 

days ago, the President said it again, that there is no trust fund, 

no trust fund. As I have said, there was a trust fund when the 

President decided to spend it on tax cuts. There was a trust fund 

when he decided to spend it on the war in Iraq, but there is no 

trust fund when it comes to use the trust fund for its intended purpose, to pay Social Security benefits. It is amazing, unreal, unbelievable to me. I happen to believe, Mr. Chairman, we have a moral 

obligation, a mission, and a mandate to pay those funds back. 

Every working American has paid toward that surplus and we expect it to be there to pay benefits. Mr. Apfel, is there a Social Security trust fund, and when you were Social Security Commissioner 

under President Clinton, what happened to the Social Security 

trust fund surplus? 

Mr. APFEL. There is a Social Security trust fund. It is, by law, 

available for one thing, and that is paying benefits for current and 

future beneficiaries. The moneys, as they are taken out of that 

trust fund to pay individuals, that money, therefore, is not going 

to be available to pay benefits for future beneficiaries. During the 

Clinton years, one of the very important things that took place 

was, we were starting to pay down debt with those trust funds, 

which puts us in a stronger position, I believe, to be able to grow 

as a nation. We were saving as a nation in terms of overall government savings. That is what took place during part of the Clinton 

Administration. It was one of the things that left me with some optimism that we would be able to resolve this issue, given that 

change in fiscal climate. So, during the years at the end of the 

Clinton Administration, those moneys were used to pay down debt, 

which put us in a stronger position in terms of overall national savings. The only purpose for those funds is to pay benefits for Social 

Security beneficiaries. 

Mr. LEWIS OF GEORGIA. They are dedicated, destined to pay 

benefits and nothing else and nothing less. 

Mr. APFEL. Yes. 

Mr. LEWIS OF GEORGIA. Thank you. Dr. Furman, the President has described his across-the-board cut as affecting the well-off, 

the well-heeled, the rich. As I understand it, everyone with incomes 

over $25,000 would get a benefit cut. Do you, or do you think most 

Americans view these people as well off? 

Mr. FURMAN. It is up to most Americans to decide, but I think 

most people making $35,000 a year probably don’t consider themselves rich. Percentage-wise, the benefit reductions in the plan for 

someone making $55,000 or $60,000 are almost the same as they 

are for people making $6 million a year. 

Mr. LEWIS OF GEORGIA. Dr. Furman, if I might continue with 

you, will young people in particular be burdened by the President’s 

privatization plan because they face the greatest benefit reduction 

and also will bear the burden of all of this unbelievable, God-forsaken debt? 

Mr. FURMAN. That is correct. They would see the largest 

change in their Social Security benefits. 

Mr. LEWIS OF GEORGIA. Mr. Apfel, Dr. Furman, there is a 

story in the Los Angeles Times today, and I believe it ran in the 

117 

AP yesterday, that the President’s proposal will reduce benefits for 

widows, the disabled, survivors. Could you—have you seen this 

story? Have you read this story? Would you like to elaborate? 

Mr. APFEL. I haven’t read the story, but we have talked about 

this today. If you do two things, you cut benefit commitments in 

Social Security by creating private accounts and you do the indexing proposal, the income-based cuts, it is going to have a secondary 

effect on lower income people, many lower income people, widows, 

the disabled, and so forth. So, a number of people would be affected 

by this who are in the lower income categories. I also point out 

again that this is shifting risk to individuals. It is saying that if 

the markets do fine, then maybe things are going to be fine, but 

if the markets don’t do fine, then that puts individuals at risk in 

terms of their overall security. That will be true for every person, 

rich and poor, who is in the system. 

Mr. LEWIS OF GEORGIA. Thank you very much. My time has 

expired. Thank you. 

Chairman THOMAS. [Presiding.] I thank the gentleman, and obviously, we are all following various newspaper stories with great 

interest and I find it amazing that people prefer predictions to the 

future, as to reality, versus what has occurred in the past, which 

is certain, but that is what this is partly about. Does the gentleman 

from Missouri wish to inquire? 

Mr. HULSHOF. I do, Mr. Chairman. Thank you for the recognition, and let me just say at the outset, the view up here is—— 

Chairman THOMAS. I tell the gentleman it was a real pleasure 

to call on him looking directly across the upper dais rather than 

looking down over the years, and so welcome to the upper level. Be 

careful. There is less oxygen up here. 

[Laughter.] 

Mr. HULSHOF. Thank you, Mr. Chairman. I respect the gentleman who just inquired, the gentleman from Georgia, who is a 

friend, and he spoke of a sacred trust and he used the word ‘‘covenant’’ and he used the word ‘‘promise.’’ Many of us are going to 

have the opportunity—this is graduation season and many of us 

will speak to young graduates that are leaving the college life and 

getting ready to embark upon a work career, and we are going to 

speak of hope and optimism and promise. I wonder what my friend 

from Georgia or some of you on the panel would say. What is the 

promise that we can say to that generation that is just beginning 

the workforce? 

Mr. Pozen, I applaud all of you being here, but I am particularly 

encouraged, Mr. Pozen, because I have cut out articles. Many of 

you have been well published, and particularly Mr. Pozen. I have 

got an article that you wrote that was at least published in the 

Wall Street Journal on Tuesday, May 3, and let me just paraphrase 

or actually quote the second paragraph of this editorial. ‘‘Judging 

any reform plan relative to scheduled benefits is misguided. The 

schedule represents the benefits we have promised, but do not have 

the money to deliver.’’ I think as this rhetoric—the Chairman of 

the Subcommittee on Social Security very passionately talked 

about, if we really are serious about coming up with a solution to 

these long-term demographic challenges, I think we need to tuck 

away the rhetoric. Let me just—Mr. Apfel, it is great to have you 

118 

back. I got to know you, of course, when you were the Commissioner and you would come to the Subcommittee on Social Security. 

Do you agree with that statement, that basically judging a reform 

plan relative to scheduled benefits, is that misguided? 

Mr. APFEL. I think that is one of two ways to look at benefits. 

One is scheduled benefits and one is what we have the financial 

resources to pay, given the laws that exist now. I think looking 

both ways makes sense. Looking one way or the other way alone 

does not make sense. I think looking—particularly when you look 

30 and 40 and 50 years out—we have more uncertainty when trust 

funds are going to be gone because, let us face it, the further out 

one gets, the more uncertain one is about these projections. So, it 

may very well be that in the year 2040 or 2050, that the trust 

funds will be gone and under the laws, benefits will be lower. I 

think you have to look at both models if you want to be able to 

make accurate projections. 

Mr. HULSHOF. I just got in the mail, as many, probably millions of Americans do, and that is my Social Security Administration statement. I should have brought it. I read it very carefully, 

because the very first page—and I would encourage not just my colleagues here, but all Americans that get that statement, instead of 

turning to the inside to see what that projected benefit is going to 

be, to spend some time and read the very beginning part of that 

because it is a very cogent, non-manipulative way to describe the 

challenges ahead. It states very clearly that under the current system, that in the year 2041, as the actuaries tell us, that only 73 

percent of benefits, or thereabouts, are going to be able to be covered. I think part of what the President is trying to do is present 

the challenge to the American people, and then through their elected representatives, hopefully fashioning some sort of a solution. 

Mr. APFEL. Mr. Hulshof, much of that language was language 

that I inserted during my tenure. Under current projections and 

under current laws, that language has been included for some time 

because I think it is important to help the American people understand that we do face a long-term challenge. 

Mr. HULSHOF. I would just say again, as we embark upon 

this—to me, politics is the art of the possible, and I would look to 

my colleagues on the other side to fashioning a bipartisan solution. 

Part of that—and Mr. Pozen, let me just—the red light is on, but 

my final comment would simply be, what part of voluntary do we 

not understand? If I am, as a graduating senior from a distinguished university like the University of Missouri in Columbia this 

weekend, and I am entering the workforce, and if I choose—if I 

have more confidence in the existence of flying saucers or unidentified flying objects than the fact that Social Security is going to be 

there for me in its present form, why can’t I opt out voluntarily if 

that is the path that we choose? Again, I appreciate the Chairman 

yielding and look forward to continuing this discussion. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Massachusetts, Mr. Neal, wish to inquire? 

Mr. NEAL. I do. Thank you, Mr. Chairman. Before I get to the 

Social Security issue, Mr. Lindsey, since you are here, is it still 

your position that the war in Iraq is going to cost more than $300 

billion? 

119 

Mr. LINDSEY. I am not sure that was ever my position. 

Mr. NEAL. Well, the Administration said it was going to cost $60 to $80 billion at the time, and I was just curious, because you 

seemed to suggest, with great clarity at the time, that it would be 

over $300 billion, and it seems to me as though your credibility is 

unquestioned on this issue. 

Mr. LINDSEY. Thank you for the compliment, Mr. Neal. 

[Laughter.] 

Mr. NEAL. It is the rest of the Administration I am worried 

about. 

Mr. LINDSEY. What I think is important with regard to the 

issue is that we consider not just the costs, as with all economic 

things, what you get for your money, and I think that is an issue 

that is going to play out—— 

Mr. NEAL. I want to thank you for that comment, based on the 

Administration’s performance and forecast. That is very important. 

Also, the Chairman referenced the future of Social Security and 

how difficult it is to look at all these things. I know something 

about Social Security. My sisters and I know something about it. 

We would be happy to share that experience with the doubters, as 

to what it really means in the real world. When I hear people discuss it, particularly those in academic circles who treat it as 

though it is an esoteric issue, it really is important to millions of 

Americans. That leads me to the question I want to raise with Dr. 

Furman because I know that Mr. Apfel has had a chance to talk 

to it. Would you address the President’s proposal as it relates to 

survivor benefits, Dr. Furman? 

Mr. FURMAN. Yes. Under current law, survivors’ benefits are 

computed in the same way that retirees’ benefits are. You calculate 

what you are entitled to based on what you earn, and then a child 

gets a fraction of that or a spouse would get that amount. The 

President would change that formula for retirees. The exact same 

formula would apply to survivors, as well, so that includes small 

children, widows, and these are a lot of situations where you look 

at the benefit cuts. They can be, on the order of over a lifetime, 

$50,000, $100,000. The account, even if you inherit it, is not going 

to come close to making up for that in a lot of circumstances. 

Mr. NEAL. How does the President’s present calculation work? 

Mr. FURMAN. The present calculation is basically, you calculate 

the benefit as if you are calculating a retiree’s benefit, and then if 

there is a spouse, they would get the full amount. If there are children under the age of 18, they would get a fraction of that amount. 

Mr. NEAL. Mr. Apfel, do you have any idea off the top of your 

head how many children across America receive survivors’ benefits? 

Mr. APFEL. I will have to give you the exact number for the 

record. There are clearly millions, about three kids. I can get give 

you the exact number for the record. 

Mr. NEAL. So, one could argue with some accuracy that because 

moms and dads paid into that proposal and then died prematurely, 

and not because, incidentally, they wanted to die, but they died 

prematurely, that the children received, might we argue, insurance 

benefits? 

Mr. APFEL. They do receive insurance benefits, social insurance 

benefits, progressively determined, and that provides a remarkably 

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important foundation of support. The life insurance component of 

Social Security is worth the equivalent of $400,000 per family. So, 

it is a critically important benefit, and I know about it. When my 

wife was a young girl, her dad died and she received Social Security benefits. So, this is a critically important benefit, and we have 

to be very careful here about what happens to those added benefits 

through these proposals. 

Mr. NEAL. The people who are familiar with Mr. Roosevelt’s initiative when he offered it in 1935, I think that half the people 65 

years or older in America lived below the poverty line, is that correct? 

Mr. APFEL. About half. 

Mr. NEAL. About half. Today, that number is inside of 10 percent? 

Mr. APFEL. That number is now 10 percent. In 1959, it was 

about 35 percent. So, if Social Security benefits were somehow gone 

tomorrow, about half of all older Americans would be back to living 

in poverty, the day after tomorrow. No one is proposing such a 

thing, thank heavens, but—— 

Mr. NEAL. How many women in America rely solely upon Social 

Security for their retirement benefit, do you know off the top of 

your head? 

Mr. APFEL. For older, uninsured women, the figure is about a 

third. Social Security is for virtually all of their income, virtually 

all of their income. 

Mr. NEAL. So, for those women perhaps in my mom’s generation 

and others, for some women who didn’t work at the time, they rely 

solely today on the benefit of the spouse? 

Mr. APFEL. Not a majority, but it is somewhere between a quarter and a third of all these families—— 

Mr. NEAL. A most significant number, we would all agree? 

Mr. APFEL. Absolutely. 

Mr. NEAL. Yes, sir, go ahead. 

Mr. APFEL. Mr. Neal, I again point out, I think there are ways, 

regardless of what size program you want, that we can fix up survivors’ and spouses’ benefits to do better by low-income survivors 

who are not in many cases well treated. Added benefits are paid 

for at the margin, with additional taxes and most benefits going to 

those who marry the richest people. 

Mr. NEAL. I don’t dispute in an academic setting that you are 

of good intent, pure heart, and good motive. What I am worried 

about is the Administration, as they try to settle benefits based 

upon the debt that has been run up in this country—I think that 

is what we have to be mindful of. I thank the Chairman for yielding me the time. 

Chairman THOMAS. I tell the gentleman we have the ability to 

change the law, and one of the first questions I asked the witnesses 

was, were there areas inside the Social Security system that could 

be addressed because of inequities that have been there a long 

time—way before the 1983 changes—that weren’t addressed by the 

1983 changes? Frankly, if you examine on the margin, creating a 

much fairer, more equitable Social Security system for those who 

most need it costs surprisingly little money, based upon the 

121 

amounts of money that we are talking about looking for, to make 

changes. 

That is already on the Subcommittee agenda and I am going to 

make sure that they look at all the ideas that were presented here 

and in other places because I want to state it. On the margin, 

given the problems we have with solvency, making the system fairer and more equitable, better especially for those who rely on it, 

is going to be one of the things we do, if we do anything, and I 

want to thank the gentleman for his focus in that particular area. 

Does the gentleman from Kentucky wish to inquire? 

Mr. LEWIS OF KENTUCKY. Yes. Thank you, Mr. Chairman. 

Back in February, the government Accountability Office (GAO) prepared a statement for the Committee on the Budget, and in that 

statement, GAO said that absent reform of Social Security, the Nation will ultimately have to choose among escalating Federal deficits and debt, huge tax increases, and/or dramatic budget cuts. As 

GAO’s long-term budget simulation shows, substantive reform of 

Social Security is critical to saving our fiscal future. Taking action 

soon would also serve to reduce the amount of change needed to 

ensure that Social Security is solvent, sustainable, and secure for 

current and future generations. The GAO also, before this Committee, gave us a startling number; future unfunded liabilities and 

debt is somewhere around $43 trillion, almost four times the size 

of the economy. Social Security is a big chunk of that. 

It seems to me like we need to start doing something about it 

now rather than later. As far as personal accounts, I don’t care 

whether you call them private accounts, personal accounts, individual retirements, whatever you call them, it seems to me like the 

American people would rather have the money in their hands than 

in the hands of politicians who are in Congress. For the last 50 

years, the last few decades, Congress has been spending the Social 

Security trust fund money. So, who is better able to handle their 

money, Congress or them? I personally have faith in the American 

people. I have faith in my 22-year-old daughter to be able to handle 

her personal affairs better than politicians here in Washington. 

By the way, I really take offense to anyone who challenges my 

concern and my interest in this issue when I have an 88-year-old 

father that depends on Social Security. I have a 32-year-old son 

and a 21-year-old daughter that is depending on a retirement 

sometime in their future. I am looking out for their best interest, 

and I think their best interest would be allowing them to make 

choices that—they can certainly do a better job than what has been 

done here, especially when we are facing $43 trillion of unfunded 

liabilities and debt of which Social Security is a big chunk. I just 

can’t believe that anyone wants to stick their head in the sand and 

do nothing about this problem, absolutely nothing. 

You talk about the stock market? Well, listen, if we do nothing, 

the benefits for future retirees is going to be cut 30 percent. That 

is not a good deal. So, looking at some of these opportunities to 

make it a better system and putting everything on the table and 

saying, oh, we are going to have to take this off, we are not going 

to—the Democrats have offered nothing. I really think they need 

to—this thing about liberal Democrats, what are they liberal 

about? They don’t want change for anything. They want to use the 

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same old tired ways of governing in this country that have failed 

and continue to fail, and they do not want to come up with any reform, any changes. They just want to stick to the old way of doing 

things that are broken. I am like Jim. I think some people around 

here need to get a life. Thank you, Mr. Chairman. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Arizona wish to inquire? 

Mr. HAYWORTH. Mr. Chairman, I thank you very much for the 

time. To the witnesses, thank you all for this discussion. I suppose 

we reaffirm today that politics and policy are inseparable, and that 

is scarcely a profundity on my part. Hearing some of the concerns, 

or those notions expressed as concern, that somehow it is the intent of someone to hurt survivors or to hurt the disabled or—well, 

that may not be the intent, but that will be the result. I hope we 

can put that to rest. In terms of bona fides, if we can get away 

from all sorts of stereotypes on either side of the aisle, and for purposes of full disclosure, my parents are in their early seventies. 

They depend on Social Security as the cornerstone of their retirement. So, all the demonization and all the villainy and the venom 

that is going to come here inevitably at campaign time really ought 

to be set aside, and perhaps for the purposes of this discussion, we 

can do so. 

Mr. Pozen, welcome. You discussed with my colleague, Mr. 

Ramstad, earlier the notion of holding harmless disabled workers. 

Now, I think it is important to reaffirm that protecting this segment of Social Security beneficiaries is vital. This is a population 

that depends on Social Security. We have a time-honored responsibility to those people who are disabled. What budget impact would 

there be if disabled workers are held harmless under what we 

might call Pozen indexing, or wage versus price indexing, or any 

form of indexing? 

Mr. POZEN. I don’t have the exact numbers, but my rough estimate would be that instead of solving 70 percent of the solvency 

gap in Social Security, you would probably bring it down to 65 percent or 60 percent. It all depends on how many types of situations 

you protect. I think Gene makes an excellent point. We have to distinguish in all these cases between a widow who is in poverty and 

the widow of a very wealthy person. Similarly, if somebody worked 

for Goldman Sachs for 20 years and then was disabled, we 

shouldn’t really be spending a lot of Social Security benefits on 

them. So, it would depend on the exact design of the protections. 

I think everyone is in agreement that we need, generally, to protect 

these various classes, but I think we need to start to distinguish 

between those people in these classes who are relatively affluent, 

and those people who are not. 

Mr. HAYWORTH. So, discernment as part of public policy and 

a recognition of where—— 

Mr. POZEN. Absolutely. 

Mr. HAYWORTH. Yes, sir. 

Mr. SCHIEBER. In my statement, I said the place you should 

start is on deciding what your principles are. If you want to protect 

people who have young children, then that is what your goal is and 

you design the plan around it. The idea that the President makes 

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the law, it is not in the civics lessons I took when I was young. I 

thought the laws were made here. They are not made here? 

Mr. LEVIN. The President has input. 

Mr. SCHIEBER. Well, the President certainly has input, but the 

laws are made here. You decide what your principles are and then 

you design the plan around it. You can design a plan that protects 

survivor benefits. You can design a plan that protects disability 

benefits. You are adults. You know what you want. Figure out 

what you want and design a plan. The people at this table, once 

you tell us what you want, can design a plan in a couple days for 

you. 

Mr. HAYWORTH. I think that is important again to reiterate. At 

times, we are criticized for maintaining that this is a study of the 

obvious. What has happened here, we could look at a different 

venue in much the same way. When President Kennedy challenged 

us to put a man on the moon and return him safely to Earth in 

the decade of the sixties, President Kennedy didn’t lay out, okay, 

we are going to have Project Mercury and Gemini and Apollo and 

a Saturn 5 will go to the moon with a lunar module. That was left 

to others to decide. The President proposes, the Congress disposes, 

and despite, sadly, some of the grandstanding and the speech making and the demonization of the intent, whether from the executive 

branch or here in the legislative branch, I believe there are core 

principles that, it may not profit people in the short-term politically 

to agree to, for whatever reason, but certainly would benefit this 

country to agree to. I think, to remind those who happen to join 

us to see what we are doing, we are setting up the notion of where 

we should go. Again, as we have this panel of experts, Mr. Chairman and my colleagues, the fact is, we can learn from all of these 

people and we can embrace some common goals. I thank the Chairman for the time. I thank the panel again for its testimony. 

Chairman THOMAS. The Chair would indicate that on the floor 

of the House, we are currently in a 15-minute vote and it will be 

followed by a 15-minute vote. I will ask the gentleman from Louisiana if he wishes to inquire now. Otherwise, the Committee will 

stand in recess, or after the gentleman from Louisiana inquires, 

the Committee will stand in recess. We have about ten minutes, so 

you have 5 minutes to make it. Let me say to the panel, first of 

all, thank you very much. I hope you can stay. The Chair’s intention is to have all Members of the Committee inquire. You will get 

some appropriate ironman recognition. 

[Laughter.] 

Chairman THOMAS. I also will tell you that during that half-anhour, there is some food available in the back, if you would like to 

eat, as well, if it meets your standards, and we will reconvene onehalf-hour after the gentleman from Louisiana concludes his inquiry. The gentleman from Louisiana. 

Mr. JEFFERSON. Thank you, Mr. Chairman. Wow. I will briefly, 

in reference to someone before me, talk about—I want to talk to 

you about two of them. First, there is an AP story out today which 

quotes a White House official. It says, roughly, that 15 percent of 

all retirees under President Bush’s plan would probably not be able 

to pass along a Social Security inheritance, a figure that rises to 

30 percent for those with lower lifetime wages. That is fairly a 

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quote from a White House official. I don’t know what his name is. 

There has been a lot of talk about the inheritability of these accounts as a principle reason why there ought to be adherence to 

them. So, given that that is an important idea, central to the President’s privatization ideas, and given the fact that persons of color 

have lower lifetime wages on the average, as another example, the 

President has talked about the need to make these accounts available, particularly for African-Americans, who he has talked about 

having lower life expectancies, it seems, to take some of the progressivity out of the idea of the present plan, and out of the notion 

of progressive indexing being helpful to these populations. So, with 

that in mind, I would like to ask Dr. Furman and Dr. Apfel to comment on the effect of the President’s proposal on individuals with 

lower lifetime wages, particularly as it affects this issue of 

inheritability that the President has talked so much about. 

Mr. FURMAN. I will answer briefly, and then—one of the 

things—I don’t doubt the sincerity of a lot of people, like Mr. 

Pozen, that they want to protect survivors and they want to protect 

the most vulnerable. Social Security has an exceedingly complicated formula that is used to determine benefits, and when you 

start changing that formula dramatically, you have dramatic effects that maybe you didn’t even realize or intend. I, myself, was 

even surprised at the White House analysis last week showing how 

much of the bottom 20 percent of Americans would get their benefits reduced by the plan. It was actually beyond what I had expected. So, it is not a question just of sincerity, it is a question of 

executing the plan well, and there have been many, many years to 

address these problems and they still haven’t been addressed. 

In terms of your particular question, Social Security is a very 

progressive program. African Americans disproportionately benefit 

from that. Anything that reduces the traditional approach of Social 

Security and supplements it with something that isn’t progressive, 

like accounts, will leave African Americans worse off. It is also important to understand how the inheritance works. Under the President’s plan, you inherit the account. You also inherit the benefit 

cut. If your husband agreed to have his benefits cut, you don’t just 

get his money. You get his additional benefit offset, as well. 

Mr. APFEL. There is a second issue, too, that needs to be addressed which has to do with annuities. The President’s proposal 

calls for mandatory annuities up to the poverty level. With our current Social Security system, we have a mandatory annuity system. 

There are tradeoffs to annuities and mandatory annuities, and 

there are also risks in terms of rates of return for the annuities. 

Trying to retire at time of down market conditions for the stock 

market can affect the balances coming in. Then requiring an annuity at that point in time depends a lot on what the interest rate 

conditions are at that point in time. So, one of the things that 

hasn’t received a lot of attention, has to do with both market volatility as well as annuity volatility, the volatility in the annuity 

world. For lower income people to be required with their savings 

to purchase an annuity and not other people creates some issues 

that I think need to be fully thought through. The Social Security 

system is a mandatory annuity system, but to say that for propVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00128 Fmt 6633 Sfmt 6602 E:\HR\OC\24732.XXX 24732
125 

erty, low-income people must buy an annuity and others do not creates some real tradeoffs. 

Mr. JEFFERSON. I want to ask one other thing while I have another half-minute or so. Someone earlier read from an AP article 

dated Friday, May 6, with President Clinton’s remarks. Just to 

add, there are also some remarks by Senator Lincoln Chaffee of 

Rhode Island, and basically what he says is that the President 

should call the Democrats’ bluff on this private accounts business 

by talking his talk of personal accounts and then forcing Democrats 

to come to the table to discuss the plans. As they say, they will discuss them if he drops the plans. You combine that with President 

Clinton’s remark that in 2 weeks, he feels Democrats ought to have 

something together in 2 weeks. So it sounds, frankly—if you read 

all this together and take it all in context, this is a plan that 

Democrats have been talking about, it sounds like to me, asking 

the President to drop the insistence on private accounts and, at the 

same time, going to the table to bargain about it. Is this what you 

have heard in exchanges out there from Democrats? 

Mr. APFEL. Well, certainly, if it is true that privatization is 

being dropped, but I don’t think it has been—— 

Mr. JEFFERSON. Oh, no, no. I am saying this is a proposal from 

Senator Chaffee, that the President could sharpen his pitch if he 

dropped these and brought Democrats to the table. 

Mr. APFEL. I would think that if privatization was dropped tomorrow, there would be a greater likelihood of coming together on 

a benefit and tax package that will be able to strengthen Social Security for the long term. I think privatization is the biggest obstacle to seeing that take place. 

Chairman THOMAS. You can sure take that statement to the 

bank. I think you will find that, if privatization comes off the table, 

then a progressive payment becomes the item that has to be 

dropped, ad nauseam, point after point, because frankly, there is 

no interest in engaging. In 1983, and I will place it in the record, 

the vote on the changes in Social Security, the Pickle amendment 

to sustain a change in the fundamental structure, i.e., increase the 

retirement age, had 152 Republicans voting aye and 188 Democrats 

voting no. That fundamental change was sustained by the minority, the Republicans. The Pepper amendment to simply raise the 

payroll tax even beyond the amount that we had raised plus the 

acceleration that we had put in the underlying bill, there were 165 

Republicans that voted no and there were 131 Democrats that 

voted no. A hundred-and-thirty-one voted yes. The Republicans 

sustained not going back to the same old, same old of the payroll 

tax. 

So, on both the idea of fundamental reform and not going back 

to the payroll tax, it was the minority that controlled the choice in 

front of Congress, not the majority who had, at the time, the opportunity to make the kind of specific changes we were talking about 

and to begin to anticipate the fundamental aging of the society, 

with additional changes. Their goal and their desire and their votes 

at that point was to go back to the payroll tax. The Committee 

stands in recess until 2:15 p.m., and the offer is available. 

[Recess.] 

126 

Chairman THOMAS. The Committee will reconvene, and if all of 

our guests could find seats, I would appreciate it. The Chair wants 

to thank the witnesses, and if there is anyone who has plans that 

won’t allow them to stay until all the Members who wish to inquire 

have inquired, we understand that. We appreciate the time that 

you have already provided us. With that, I would recognize the 

gentleman from Pennsylvania, if he wishes to inquire. 

Mr. ENGLISH. Thank you, Mr. Chairman, and indeed, I do. I 

have to say, this is a panel which has been refreshing not only for 

its expertise but for its diversity. Taking in some of the presentations that have been made, I guess my first question would be 

for Dr. Steuerle. You made the point that demographically, people 

are living longer, and part of the solution of a reform of Social Security, through marginal change, would be to raise the retirement 

age. One of my concerns would have to do with the guy on the shop 

floor who has been working in a physically demanding job since he 

was in his teens and he is ready to retire, and typically, he will 

retire anyway around 62 years old. I believe that tends to be the 

pattern for most people coming through a skilled but highly physically challenging work. Given that kind of experience with blue 

collar jobs, is it realistic to talk about raising the retirement age? 

Can we expect people to continue to undertake physically demanding jobs up until the age of 70? How would you deal with the early 

retirement age? 

Mr. STEUERLE. Thank you, Mr. English. You raise some of the 

very difficult issues. As I expressed earlier, my concern is that if 

you look at Social Security when it was first formed in 1940 or 

1950, the average age of retirement when jobs were very physically 

demanding was 68 for men. Now the average age of retirement is 

63, whereas 68 years of age in 1940, if you take into account life 

expectancy, is equivalent to about 74 today. So, if people today 

were retiring about as they did in 1940, they would be retiring at 

about 74, on average. Instead, they are retiring at 63. You go out 

another 60 years—and mind you, we are talking about fixing a system 60 years in the future—people would notice even if retiring 

with the same life expectancy. So, we have the dilemma that the 

system is becoming more and more a middle-age retirement system—is giving benefits to all of us, including you and me, to retire 

when we still might have 20 or 25 years of life expectancy left. 

The dilemma is, how can we protect some people who really do 

have to retire without giving benefits to everyone to retire at middle age. Close to a third of adults are scheduled, roughly, to be on 

Social Security in the near future if they retire at the same age as 

they do now. I think there are several things you could do. One, 

I think you do have to retain a good disability system to help people who are disabled. For lower income people—and these include 

the people who have the blue collar jobs—I don’t know that we can 

actually give them a different retirement age. I don’t know how to 

distinguish between types of jobs that well. I do think that one can 

increase something like minimum benefits so that their expected 

lifetime benefits, even though they might have to work another 

year, will actually even higher. So maybe they only get 12 years 

of retirement instead of 13, whereas you and I only get 20 instead 

of 21, but we can do more for them to increase their lifetime beneVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00130 Fmt 6633 Sfmt 6602 E:\HR\OC\24732.XXX 24732
127 

fits, and we can increase the replacement rates a lot in those later 

years. 

Mr. ENGLISH. That could be one piece of the puzzle. Another 

piece of the puzzle has to be how we generate revenue, and how 

we generate revenue consistent with the principles of the system. 

Dr. Schieber and Dr. Lindsey, I wonder if you could briefly comment with the remaining portion of my time. Many have proposed 

to eliminate the cap on the payroll tax as a way of generating additional revenue to address all or part of the problem in Social Security, yet it seems to me that that would have an enormous impact 

on the economy, particularly on small unincorporated businesses, 

and significantly change the extent to which individuals pay for 

and contribute to their own retirement. Your comment, Dr. 

Schieber, and then Dr. Lindsey. 

Mr. SCHIEBER. This morning we heard considerable concern 

about turning this into a welfare program, yet we have heard discussion about a proposal that would take the cap off of earnings 

for purposes of raising the payroll tax but maintaining the cap for 

defining benefits. That would seem to me to be the ultimate conversion of Social Security into a welfare program. Today, you get benefits based on the income that you have paid taxes on, and you 

would now have a whole set of your income that generated no benefit at all. I would say if you want to move in that direction, why 

would you constrain yourself just to earned income? 

Take somebody like Warren Buffet. Warren Buffet takes $100,000 in compensation, in pay, out of his company each year, 

but we know he takes a bit more than that out of the whole thing. 

Why would you just want to constrain this on people who, I guess 

I would characterize as having the misfortune of earning their income through their labor services as opposed to other things they 

do? It seems to me that would turn this into the ultimate welfare 

program, and if you want to do that, then you really should look 

at lowering benefits and making this affordable. 

Mr. LINDSEY. A related question—— 

Mr. ENGLISH. Very quickly. 

Mr. LINDSEY. Means testing. I wasn’t sure whether you would 

continue to adjust benefits as income rises. It is a little bit like losing money on each unit and trying to make it up on volume if you 

do it that way. That, I think, is one of the problems. If you didn’t 

do that, then you would, in fact, be officially means testing by any 

definition. 

Mr. ENGLISH. Thank you. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Tennessee, Mr. Tanner, wish to inquire? 

Mr. TANNER OF TENNESSEE. Thank you very much, Mr. 

Chairman, and I want to thank the panel. This has been a very interesting exchange. I want to agree with Mr. English, the diversity 

and so on has been refreshing. I think we have covered Social Security to the extent that we need to. I want to change the subject, 

if I might, because this is a very interesting academic exercise, but 

in my view, Social Security is a five-mile-an-hour tropical breeze 

and there is a hurricane two miles offshore and we are in a beach 

house, and that is the budget deficit and the trade deficit. Since we 

started this hearing, by my figures, we have in your name and 

128 

mine, this country has borrowed from foreign sources $191-plus 

million just since we started this hearing. We are borrowing over 

$1 billion a day and have been with no end in sight under anybody’s scenario. The best the Administration can offer is to cut the 

deficit in half in 5 years, and unless one has the ability to repeal 

the laws of arithmetic, I don’t know how that is going to happen 

with the budget not including expenses that we know we are going 

to incur. 

So, this is a very interesting academic exercise about what will 

happen in 2075. The problem is, the country is going to financially 

collapse long before then if one believes what the Director or Comptroller General said, David Walker, that, if we make the tax cuts 

permanent, as some in this body want to do and as some of you 

gentlemen have suggested we ought to do as public policy, and do 

nothing else, by 2040, under their calculations, every dime that 

comes to the U.S. Treasury will be going to pay interest on the national debt. Of course, we all know that the country will financially 

collapse long before that occurs. Now, the one thing I want to say, 

does anyone believe seriously that we can have a strong Social Security dollar and a nonexistent or weak U.S. Treasury dollar? No 

one would make that argument, yet that is exactly, in my judgment, where we are headed. 

Just in the last 48 months, we have transferred $50 billion a 

year out of the tax base to interest, 84 percent of that $50 billion 

going overseas because foreigners have financed 84 percent of our 

borrowing, in terms of real money, in the last 48 months. No one, 

I don’t think, any economist would seriously argue that this is a 

sustainable course of action for this country to take. So, I would 

simply like to ask, do you or do you not agree with David Walker’s 

assessment of our current budget situation, and do you or do you 

not agree that one can never have a strong Social Security system 

when the underlying U.S. Treasury is broke or nonexistent? Thank 

you very much, Mr. Chairman, and I would be interested as to anyone who wants to respond. 

Mr. FURMAN. I think that is a very good question, and we have 

a very large budget deficit today, $412 billion last year, the largest 

on record in dollar terms, and we have a projected very large deficit in the future, $43 trillion, according to GAO. I think we need 

to be addressing both of those. Now, first of all, some Social Security plans would reduce the deficit in 2075 and increase it enormously today. I think that is the wrong way to go. 

I think it is also important to understand where these deficits 

come from. The deficit last year didn’t come from Social Security. 

Social Security, in fact, ran a significant surplus. As we look forward over the next 75 years, of the $43 trillion we heard about before, $12 trillion were the tax cuts that were passed, assuming they 

are extended, $9 trillion was the prescription drug bill. Half of our 

long-term deficit was passed and signed into law in the last 5 

years. Social Security is a trivial portion of it. Now, addressing Social Security could help, and I think one should do that, but you 

shouldn’t fool yourself into thinking that that is the main source 

of the problem or the main way to get out of it. 

Mr. SCHIEBER. The idea that Social Security ran a surplus last 

year is classic Enron accounting. The actuaries calculate a number 

129 

each year. They estimate what the total accrued liability is under 

the system. If we just shut the system today and paid off the liabilities that we owe ourselves, last year, it was around $13.5 trillion. 

The most recent calculation is around $14.5 trillion. We earned a 

trillion dollars’ worth of benefits that we didn’t fund at all last 

year. 

Mr. FURMAN. Those are over—over 75 years—— 

Mr. SCHIEBER. Those are 75-year numbers. 

Mr. FURMAN. Oh, sorry. That doesn’t make any sense for a government program that we know—— 

Mr. SCHIEBER. It doesn’t make any sense to—— 

Chairman THOMAS. Could we have one witness speak at a time, 

and I believe—— 

Mr. SCHIEBER. It doesn’t make any sense if we don’t want to 

look at what we are doing to ourselves. We are running up massive 

bills that our children simply will not be able to pay and we need 

to address this problem and we need to address it right now. 

Mr. FURMAN. I agree with that, that the tax cuts—— 

Chairman THOMAS. Time has expired. Does anyone else want 

to give a quick response? 

Mr. TANNER OF TENNESEE. Just very quickly, Mr. Chairman, 

I couldn’t agree more that we have a problem with the size of government spending in this country. The problem is not the question 

of whether or not we borrow or whether or not we tax in order to 

fill that spending. The problem is the spending and the Congress’s 

inability to get a rein on spending, which includes mandatory entitlement spending, including Social Security, Medicare, and Medicaid. If you can’t get a handle on those programs in the future, the 

amount of borrowing, or the amount of taxes necessary to pay all 

those benefits, are going to cripple the economy. 

Chairman THOMAS. We may have to shift to written statements, or if you guys are clever enough, when someone else asks 

a question, you can work your answer in on the next round. I 

would only respond, Dr. Furman, that when you talked about how 

much the tax cuts were going to be, you used a phrase, if they are 

made permanent, which clearly allowed you to extrapolate into the 

future. Then, when you talked about a surplus for Social Security, 

had you said, if they are made permanent. Since we know they are 

permanent, you have to extrapolate into the future, and I believe 

that was the point that was being made, just because we have a 

very short-term surplus. 

Mr. FURMAN. I used the same assumption. The deficit in Social 

Security under current law is precisely zero trillion dollars because 

benefits are reduced automatically in 2041. I was assuming that we 

continue to pay benefits at the current level in calculating that in 

exactly the same way I was doing for the tax cuts. 

Chairman THOMAS. I am sure colleagues on this side of the 

aisle will agree with you in terms of the benefit cuts that are supposed to take place in 2041, just as they are willing to support 

modest, understandable, and controllable adjustments beginning 

today. Does the gentleman from Illinois, Mr. Weller, wish to inquire? 

Mr. WELLER. Thank you, Mr. Chairman. I want to express my 

gratitude for the patience of this panel as this has been a long but 

130 

important hearing. I would like to direct a couple of my questions 

to individuals on the panel and I would like to begin with Commissioner Apfel. What years were you the Social Security Commissioner? 

Mr. APFEL. From 1997 to 2001. 

Mr. WELLER. Okay, 1997 to 2001, so President Clinton was 

President during that time, correct? 

Mr. APFEL. Yes. 

Mr. WELLER. Because there is a lack of Democrat ideas when 

it comes to fixing Social Security for the long term, I thought I 

would discuss the one Democrat idea that has been on the table for 

a long time, and you probably recall President Clinton’s ‘‘Save Social Security First’’ State of the Union speech. It got great applause, both sides of the aisle. We all thought it was great. President Clinton, at that time, proposed investing the Social Security 

in the stock market. Were you Social Security Commissioner at 

that time? 

Mr. APFEL. Yes, I was. 

Mr. WELLER. So, was President Clinton’s proposal your idea? 

Mr. APFEL. I was involved in discussions in the White House 

about it. I supported it. What the President said at that point in 

time, when we had large budget surpluses growing, was let us use 

those budget surpluses to save Social Security first, I believe a courageous—— 

Mr. WELLER. Now, did President Clinton propose using payroll 

taxes to be invested in the stock market or did he propose general 

revenue funds? 

Mr. APFEL. What the President proposed is that some, about 15 

percent of the Social Security surpluses, which would be payroll tax 

surpluses, would be invested to try to get a slightly to modestly 

higher rate of return. That is a debatable issue as to how much of 

an increased rate of return—— 

Mr. WELLER. As one of the architects of President Clinton’s 

plan to invest Social Security payroll taxes in the stock market, 

what was your projected growth that you anticipated for those 

funds when invested in the stock market? 

Mr. APFEL. At the time, the investing in equities—if I am remembering correctly, the actuaries projected that it would resolve 

about a third of the long-term shortfall in Social Security through 

some collective investments. Since—— 

Mr. WELLER. So, what was the rate of growth? Did you have 

a projected-percent growth? Our Thrift Savings Plan that almost 

every Member of Congress has, as well as our mailman, the Thrift 

Savings Plan stock fund has about an 8 percent rate of growth over 

the last 10 years. The bond fund has about a 4 percent rate of 

growth. That is what has been demonstrated. 

Mr. APFEL. Those were projections from the actuaries. I would 

have to get back to you on the specifics. I would say that since that 

time, there has been quite a bit of debate about what those rate 

of returns would be. The fundamental difference between individual accounts and collective investment is the individual risk 

that is involved. If we have collective investment, if there is a decline in the markets, then there is, over time, a source of pooled 

resource to be able to use to provide benefits. 

131 

Mr. WELLER. Commissioner, you stated that you endorsed, as 

one of the architects, President Clinton’s plan to invest Social Security trust fund dollars in the stock market, and today you stand by 

that endorsement. You still believe that that is a good idea. 

Mr. APFEL. I think that it is one of the options that should be 

seriously considered. I still generally think that it is a good thing 

to explore, yes. 

Mr. WELLER. Okay. Thank you. 

Chairman THOMAS. Would the gentleman yield on that? 

Mr. WELLER. Sure. I would be happy to yield to the Chairman. 

Chairman THOMAS. Was that structure mandatory or voluntary? 

Mr. APFEL. Pardon me? 

Chairman THOMAS. Was it mandatory or voluntary? 

Mr. APFEL. It was centrally invested funds by—— 

Chairman THOMAS. So, individuals didn’t have a choice as to 

whether or not they were going to do the risky scheme of playing 

the stock market. 

Mr. APFEL. What the President proposed were voluntary add-on 

individual savings accounts coupled with the use of surpluses—— 

Chairman THOMAS. No, no, no, the investment in the stock 

market. I was focusing on the investment in the stock market. 

Mr. APFEL. It was a collective—— 

Mr. FURMAN. One thing to stress here—— 

Mr. WELLER. Mr. Furman, I am not speaking with you, but to 

Commissioner Apfel. 

Chairman THOMAS. I thank the gentleman for yielding. 

Mr. WELLER. Thank you, Mr. Chairman, and reclaiming my 

time, as I understand it, again, President Clinton proposed, as you 

say, collective, if I can use that term, investment of Social Security 

trust fund dollars in the stock market at that time, and Commissioner, you indicated you still feel that that is an idea that we 

should look at, is that correct, yes or no? 

Mr. APFEL. Yes. If we look at State and local pension funds, we 

see not an insignificant share that is invested in diversified portfolios, and one of the things that I think is worth exploring is 

whether to do the same thing with Social Security. The thing that 

I think is new, from my perspective over the last several years, is 

that the question about the rates of return has received a lot more 

attention, and those rates of return could be less—— 

Mr. WELLER. Commissioner, I would note, the best way to look 

at projected rates of return is to look at history, and over the last 

10 years, I know in my own personal Thrift Savings Plan, and my 

money is in the S&P 500 plan, the C plan, that has grown at a rate 

of 8 percent, on average, over the last 10 years. The bond funds 

have grown at an average rate of 4 percent. Outside economists tell 

us that the rate of return on Social Security is about eight-tenths 

of 1 percent. 

Mr. APFEL. Well, it is really—— 

Mr. WELLER. So, as you noted when you proposed investing in 

the stock fund as the Social Security Commissioner, those numbers 

have panned out, so thank you—— 

Mr. FURMAN. There is a reason every Fidelity fund says, past 

performance is no guide to future returns. 

132 

Mr. WELLER. Mr. Furman, I did not ask for your opinion. 

Mr. APFEL. Could I have the last response to that, because I 

think that, clearly, trying to have Social Security—— 

Chairman THOMAS. The gentleman from Illinois controls the 

time, and he gets to say if he wants you to respond. 

Mr. WELLER. Thank you, Mr. Chairman. I will allow the Commissioner to—I realize my time is expired, but Commissioner, 

please. 

Mr. APFEL. Thank you, sir. Trying to compare rates of return 

in a social insurance system and an investment system is apples 

to oranges. Trying to determine how an intergenerationally financed system that pools resources could compare if the money 

was available to be used in investments is comparing apples to oranges, not an appropriate comparison. 

Mr. WELLER. Thank you, Mr. Chairman. 

Chairman THOMAS. I thank the gentleman. I have to go back 

to Adam Smith and the marketplace and think that one over. Does 

the gentleman from Texas wish to inquire? 

Mr. DOGGETT. Thank you, Mr. Chairman, and thank you to the 

witnesses. It is my belief that Americans ought not to be misled 

into viewing this hearing as representing some type of academic 

discourse about the best ways to preserve Social Security for future 

generations, nor should anyone be deluded into the notion that 

those who are committed to replacing Social Security with a risky 

privatization plan are down and out in the polls and that they have 

given up on that approach. Anyone who believes, as I do, that we 

need to preserve and strengthen Social Security and who underestimates our chairman, Mr. Thomas, and who underestimates the ideological fervor behind this privatization movement, anyone does 

that at their peril and at the great risk to anyone who depends on 

a Social Security check. One Capitol Hill newspaper has already reported that a privatization plan will be before the House in July, 

and only a week ago, Chairman Thomas announced that less than 

a month from this very moment, he would probably have a bill before us, quote, ‘‘to fix Social Security for all time.’’ Well, we have 

got some steers down in Texas that have been fixed for all time 

and my concern is that the same thing is about to happen to Social 

Security. 

There is no doubt that Social Security faces a clear and present 

danger, that Social Security is in crisis, and it is a crisis that results from those who control decision making here in Washington 

and who zealously believe that community solutions, as opposed to 

individual independent plans, are just somehow inherently flawed. 

They think that every initiative that has public in front of it, as 

in public education, or ‘‘social’’ in the title, such as Social Security, 

needs to be eliminated in the form we have known them in the 

past. They think that this great country can rely on the principle 

of every person for themselves, and if you fall behind, well, you just 

need to tighten your belt and get by on your own. If they can destroy a community solution that is as effective and successful as 

Social Security has been for this last many decades, they think 

they can destroy the belief in government as a source of a solution 

to any social problem, today is merely the prelude to a preconceived 

conclusion. What is driving this privatization effort has very little 

133 

to do with concerns over solvency and everything to do with the demands of ideology. 

With all due respect to the testimony of all the witnesses here, 

whether I agree with you or not, the most remarkable aspect of 

this hearing is not who is sitting at this witness table, but who is 

not there. There is a giant gap in that witness table, as crowded 

as you are around it, and it is a gap unfilled by anyone who is here 

testifying for the Bush Administration. There is no Administration 

spokesperson to answer questions about specific legislation of a 

President who insists that privatization is non-negotiable, that it is 

the linchpin of his Social Security plan. Perhaps that is because the 

last Administration spokesperson who did sit where you are, who 

appeared here, Treasury Secretary Snow, admitted that this Administration plans to raid the Social Security trust fund for every 

dollar in it, $2.6 trillion over the next decade, and that President 

Bush will spend every one of those dollars. I have a question for 

Mr. Apfel, but Mr. Emanuel says he needs to leave and I yield a 

minute to him. I would like to come back if I have any more time. 

Mr. EMANUEL. I would like to thank my colleague from Texas. 

I will pass on to former President Clinton all the warm comments 

that he has received from the other side of the aisle, for the fact 

that I am sure—if you can all sign a card, I will pass it along. 

When he introduced his 1993 budget, which did not receive a single 

vote from the Republicans, it put us on an economic plan toward 

reducing the deficit. We added 12 years to the life of the Social Security trust fund, which was the first step to saving Social Security. I agree with Mr. Lindsey. The best thing you can do for Social 

Security is to have a growing economy, and that is exactly what 

happened in 1993. 

To all those who mentioned ‘‘Save Social Security First,’’ take a 

stroll down memory lane. ‘‘Save Social Security First’’ was about 

not doing tax cuts. It was, in fact, about investing the surplus in 

Social Security and allowing, in fact, general investments by the 

Social Security Administration to get a slightly better return and 

also allowing us to invest in Social Security and strengthen the Nation’s saving rates, as well as the individual saving rate. In fact, 

what has happened over the last 5 years is the reverse of ‘‘Social 

Security First,’’ which was a tax cut that ended up spending the 

surplus, plus whatever else we had in Social Security. 

So, to all those who want to claim President Clinton’s mantra, 

in fact, in the last 4 years, we have done everything opposite of 

what he suggested; that is, A, build a surplus, and B, save Social 

Security first before you have done a tax cut that raided it. I am 

sure his heart will be warmed by the kind comments that were 

said here. As somebody who participated in the Administration and 

also as somebody who represents over 28,000 employees from 

United Airlines, they all enjoy the security that comes with Social 

Security after what happened to them. Thank you very much to my 

colleague from Texas for yielding the time. 

[The prepared statement of Mr. Emanuel follows:] 

Opening Statement of The Honorable Rahm Emanuel, a Representative in 

Congress from the State of Illinois 

Thank you for holding this important hearing on ‘‘Alternatives to Strengthen Social Security.’’ I also want to thank our distinguished witnesses for joining us today. 

134 

President Bush’s privatization plan does nothing to address Social Security’s future solvency issues. In fact, as U.S. Comptroller General David Walker said at a 

recent Ways & Means Committee hearing, privatization would ‘‘exacerbate’’ Social 

Security’s long-term solvency problems. The President would borrow $1.8 trillion in the first ten years alone on top of 

record breaking deficits and debt, and ‘‘progressive indexing’’ would cut benefits for 

middle-class families by 40 percent to pay for private accounts. That is not a recipe 

for economic growth or retirement security. 

Although Social Security faces long-term solvency challenges, we have time to address them in a fiscally responsible, deliberative way. We should look to the 1983 

bipartisan Greenspan Commission as the model for the right way to approach these 

issues. 

Social Security is secure for the next several decades. According to the Congressional Budget Office, Social Security can pay full benefits through 2052 and more 

than 70% indefinitely thereafter through payroll tax receipts. Social Security is not 

about to go ‘‘bust’’ or bankrupt, as President Bush has claimed. 

The more the public learns about President Bush’s plan, they less they like it. The 

fact is that Americans like the security in Social Security. For millions, it is the 

linchpin of their retirement incomes. 

It is clear that privatization is not going to happen. But with savings rates at historic lows, declining from 10 percent in 1980 to just 1 percent in 2004, there is an 

emerging bipartisan consensus on the need to work together on new initiatives to 

increase family savings outside of Social Security. 

We need to look no further than yesterday’s news about United Airlines to see 

the importance of Social Security’s guaranteed retirement benefit. The announcement that United Airlines received permission to dump its pensions on the Pension 

Benefit Guaranty Corporation means reduced retirement benefits for millions of 

families. 

First it was the steel industry, now the airlines and autos may be next. Once, individuals could build a three-legged stool for retirement: a company pension, personal savings and Social Security. But with the decline of pensions and falling savings, Social Security is now the only leg remaining for millions of middle-class families. 

At the same time, middle-class families are being squeezed by job uncertainty, 

real wages falling at their fastest rate in fourteen years and rising gasoline, health 

care and education costs. Middle-class families face more risk today, not less. They 

believe that the ‘‘ownership society’’ should come with a warranty: a rock-solid, 

guaranteed Social Security benefit. 

I commend Chairman Thomas for expanding the debate to include long-term savings. I have proposed four savings initiatives that can be implemented immediately: 

legislation to make it easier for employers to automatically enroll employees in 

401(k) plans; a permanent and refundable saver’s credit; direct deposit of tax refunds into retirement accounts; and a Universal 401(k) that is portable from jobto-job. There is no shortage of good ideas in both parties, and enough overlap that 

we can pass savings legislation this year. 

We should work together to strengthen Social Security for the long-term while 

protecting its guaranteed benefit for our seniors. President Bush’s vision of privatization and benefit cuts for the middle-class will take the security out of Social Security. He should remove privatization from the table and work with us on real solutions to protect Social Security and enhance family savings. 

Thank you, Mr. Chairman. 

f 

Chairman THOMAS. Does the gentleman from Florida wish to 

inquire, and would he yield to the Chairman? 

Mr. FOLEY. Yes, I would, Mr. Chairman. 

Chairman THOMAS. Before my friend leaves, there was a different view on what happened, because, frankly, what happened 

was, the Democrat majority, along with President Clinton, passed 

one of the highest tax increases in the history of the United States. 

The American people elected a Republican Congress the didn’t 

spend all that revenue that had been raised with that tax increase 

and the surpluses began after the Congress became a Republican 

majority and not during the Democrat majority. 

135 

Mr. EMANUEL. Will you yield, Mr. Chairman? 

Chairman THOMAS. That is the view from the Congress. 

Mr. EMANUEL. Will you yield, Mr. Chairman? 

Chairman THOMAS. It is the gentleman from Florida’s time, 

and he can yield if he so chooses. 

Mr. FOLEY. I also want to remind our listeners that it was the 

tax on Social Security beneficiaries that was part of that 1993 plan. 

So, if you were receiving Social Security, in order to raise revenue, 

the President’s plan was to tax Social Security proceeds. So, they 

played a shell game. I don’t know where we came up with the fixed 

steer analogy from Texas, but on Social Security reform, the Democrats are truly shooting blanks. 

I would like to ask Mr. Apfel, during his tenure, haven’t we seen 

a lot of expansion of disability claims that may be not meritorious, 

a lot of new characteristics, a lot of new ways in which parents can 

enter their children in Supplemental Security Income (SSI), based 

on a diagnosis that is loosely constructed in order to gain family 

benefits? 

Mr. APFEL. Generally, no. It is my belief that the disability program in the United States, relative to most other developed countries, has a relatively low disability population in terms of comparison to a lot of other countries. There were changes that were made 

for children in 1996. Mr. McCrery was heavily involved. I was 

heavily involved in those during my tenure—— 

Mr. FOLEY. You don’t sense any fraud and abuse? 

Mr. APFEL. I am sure that there has to be some, but I do not 

think that this is a system, the disability system, that is rife with 

fraud and abuse, no, I do not. Is there a need for reexamination 

of disability definitions given the changes that have taken place? 

Generally, yes. I think our system is a relatively—comparing us to 

many other countries, we have a relatively lean and a very inexpensive disability system. I would urge the Committee to go very, 

very cautiously about major changes to the disability rolls. 

Mr. FOLEY. Mr. Pozen, I was humored by the Ranking Member’s constant request of explaining why you have been listed as a 

Democrat. Well, I think it is because you are an endangered species. You are one willing to step up and at least offer suggestions, 

so I applaud you for that. Thank you. 

I would like to ask Mr. Furman, you have gone through great detail, and I was very impressed by your thorough review of the system, your critique of the side accounts. You also stated a minute 

ago that in 2041, we can pay the benefits we are paying today, is 

that your comment, under the current system? 

Mr. FURMAN. No. My comment was when you talk about there 

being a $4 trillion deficit or an $11 trillion deficit, you are assuming that current scheduled benefits are continued. If you did not, 

just looked at the deficit under current law, there is no deficit at 

all because benefits are automatically reduced. 

Mr. FOLEY. Did you take a chance to look at any mechanism by 

which we can create solvency? Forget accounts. We don’t go to accounts. What would they be? 

Mr. FURMAN. There are a number of plans that are out there. 

Mr. FOLEY. Specific, yours. You have looked very thoroughly at 

the numbers. You must have crunched numbers. 

136 

Mr. FURMAN. Peter Diamond and Peter Orzag have a plan. 

Former Social Security Commissioner Bob Ball has a plan. There 

are a number of plans and they are all—— 

Mr. FOLEY. What would your thoughts be? Raise rates, retirement age? 

Mr. FURMAN. Let me—— 

Mr. FOLEY. Just so I know academically how you came up with 

your numbers. 

Mr. FURMAN. The analysis of the President’s plan doesn’t depend on any particular plan, but these other plans I referred to, to 

get sustainable solvency, one of them with much, much smaller 

benefit reductions than what the President’s plan contemplates—— 

Mr. FOLEY. Are they reductions? 

Mr. FURMAN. Some of those plans have very moderate reductions in them. 

Mr. FOLEY. Moderate reductions? 

Mr. FURMAN. Moderate—— 

Mr. FOLEY. So, it is all in the eye of the beholder. Our reductions, your reductions, in order to save it, you have to have reductions. 

Mr. FURMAN. Once you add in the private accounts, you are 

talking about a 97 percent reduction. I think anyone would describe that as pretty large. 

Mr. FOLEY. Forget the private accounts for a minute. Let us 

talk about the real system. We can academically debate private accounts. I support them. I think they are good. 

Mr. FURMAN. I would love—— 

Mr. FOLEY. They should be part of the program, but ultimately, 

you still have to fix the program, the system. It is collapsing under 

its own weight. We ignore the obvious if we sit here and say it can 

fix itself. Let us just skip this can down the road. I think all of our 

witnesses testified, there is not enough money in the system. 

Mr. FURMAN. Oh, I have testified to that—— 

Mr. FOLEY. So, all I am looking for is some clear voice to come 

out of this room on either side of the aisle and say, here is how 

we fix the system. We will take care of these new ideas possibly 

later. How do we fix the system systemically? 

Mr. FURMAN. If you would get the President to agree to only 

talk about private accounts in academic seminars, then I would 

agree to sit down and talk to him about what to do about reforming 

it. 

Mr. FOLEY. The only thing—— 

Mr. FURMAN. It is not an academic question for him. 

Mr. FOLEY. In defense of the President, if somebody tells me to 

bake a cake and says, I will give you every ingredient but the six 

eggs, the cake won’t take. So, in respect to the President, I don’t 

think you can discuss a plan without at least discussing every option. I thought Senator Leahy was profound on Fox this weekend 

when asked the question. He said, the President, we have got to 

have everything on the table, but except, but except. Well, I don’t 

know how you do it if you don’t at least have the academic exercise. 

We may be proven wrong. I welcome that debate, but to ignore it 

is a half-baked cake. 

137 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Wisconsin wish to inquire? 

Mr. RYAN. I do—— 

Chairman THOMAS. Prior to inquiring, would he yield to the 

Chair? 

Mr. RYAN. I will. 

Chairman THOMAS. I thank the gentleman. On the subject of 

disability, there can be some examination of the program, but as 

far as the Chair is concerned, there should be no discussion about 

the fact that once someone goes through the process of being determined disabled, they should not have to wait 24 months to go onto 

Medicare. The 24-month provision was put in by the former majority to save money. That is not the way you should save money in 

this system, and I would hope there would be no disagreement that 

we would make that change as we look at other unfair structures 

that have been there for far too long. I thank the gentleman for 

yielding. 

Mr. RYAN. I thank the Chairman. A couple points I want to 

make, then I want to ask a question of you, Mr. Furman. Number 

one, and I just missed the last few go-arounds, so maybe this was 

covered, but no one is talking about undoing a Social Security safety net. No one is talking about not having a safety net. One thing 

that has not been discussed here today is the issue of generational 

fairness, and that is something that isn’t discussed here. Let me 

give you a case in point. Current seniors, my mother, she is 70 

years old. She gets about a 5 percent rate of return on her payroll 

taxes that she paid now in her retirement. I, at my age, and most 

workers in my cohort are going to get about a 1 percent rate of return on our payroll taxes that we pay. My children, I have three 

young toddlers, right now, they are scheduled to get a negative one 

percent rate of return on their payroll taxes that they pay when 

they retire. That is assuming we can come up with the $4 trillion 

today we would need to set aside to pay them their promised benefits that we don’t have the money for. 

So, if you do not use personal accounts as a part of the solution, 

then you are confining future generations for sure to get much 

worse benefits relative to today’s seniors. Only through personal accounts can you achieve an equal measure of benefit under today’s 

standards. Now, the word privatization has been used over and 

over and over and over. No one is talking about giving people some 

of their payroll taxes and going outside of Social Security, taking 

it to a stockbroker and wishing them good luck, have a nice day, 

hope you invest it well. That would be privatizing it. No one is 

talking about that. What we are talking about is a system inside 

of Social Security, run by Social Security, overseen by Social Security, managed by Social Security, where workers would have a voluntary option of choosing a fund within the Social Security system 

like we have with our Thrift Savings Plan. So, we are not talking 

about going outside of the system. 

The last point I want to make is in the form of a question to you, 

Mr. Furman, and that is, looking at your testimony, on page seven, 

you refer to explicit debt versus implicit debt and you say that the 

borrowing to pay for personal accounts takes the form of explicit 

debt. Explicit debt are bonds that cannot be defaulted on and actuVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00141 Fmt 6633 Sfmt 6602 E:\HR\OC\24732.XXX 24732
138 

ally have to be paid, whereas the current system of implicit debt, 

the total amount of implicit debt is based upon projections and it 

is not legally binding. So, my question is this. If the rock-solid 

guarantee that we have, that you refer to, is an implicit debt that 

is not legally binding, yet, if you are a worker and you choose a 

personal account and your money goes into a Treasury bond, that 

is explicit debt that they actually have to pay you your benefit; 

isn’t it more of a solid guarantee that you are going to get your 

benefit if you choose a personal retirement account if it is just the 

form of a Treasury bond? 

Mr. FURMAN. Two questions. One is, financial markets treat explicit debt very differently than implicit debt. Social Security has 

a $4 trillion implicit debt. I have absolute faith that Congress is 

going to eliminate that entire implicit debt before it ever materializes—— 

Mr. RYAN. That guarantee is based on Congress willing to do 

that, right? 

Mr. FURMAN. I believe Congress will do that. 

Mr. RYAN. We have to hope Congress will do that, right? 

Mr. FURMAN. I certainly hope Congress does that. The second 

thing is a private account is no more guaranteed. The Supreme 

Court has said you can change the tax rate. You can tax withdrawals from the account. You can tax accumulations. You can 

change the offset. You can change the accumulation. If you got into 

problems of solvency in a private account system, those private accounts could be reduced just as easily as the traditional—— 

Mr. RYAN. You are saying we can’t bind the hands of a future 

Congress, right? 

Mr. FURMAN. That is correct, but what we can do is insulate 

people against market risk. 

Mr. RYAN. Right. 

Mr. FURMAN. The current benefit insulates them against market risk. An account doesn’t. They are both subject to the same political risk. Whether that is small or large, I leave it up to your 

judgment, but they are no different in the two cases. 

Mr. RYAN. Let me ask you this. Since the current benefit is up 

to what a future Congress will do, and we can’t tie the hand of a 

future Congress, the benefit guarantee in the future for people is 

whatever Congress chooses to give it—— 

Mr. FURMAN. Congress has historically honored those commitments—— 

Mr. RYAN. Sure. 

Mr. FURMAN. In fact, it has generally, in the past, had raised 

benefits over time—— 

Mr. RYAN. Well, we changed benefits—— 

Mr. FURMAN. That benefit is not subject to market risk. 

Mr. RYAN. That is the problem we are in. 

Mr. FURMAN. Your account is subject to market risk. All of the 

other risks in terms of what Congress can do, you all could change 

the tax rate to 100 percent on our income, take all our income. 

Mr. RYAN. Let me ask you this—— 

Mr. FURMAN. There are a tremendous number of risks you 

there. You can’t get rid of all of them—— 

139 

Mr. RYAN. My time is running out. Let me ask you this. You 

and I are about the same age and you and I are probably going to 

get a 1 percent rate of return if all things go well and we come up 

with the money to pay this unfunded liability. If you were given 

the personal account option, like the President’s plan provides, 

what would you do? Would you take it? 

Mr. FURMAN. It would make no financial sense for me to take 

it. I could do the same exact financial transaction right now by selling some of the bonds in my portfolio and using the money to buy 

stocks. 

Mr. RYAN. Do you have a 401(k) in a portfolio? 

Mr. FURMAN. I have a portfolio and I have bonds in it and I 

could sell them. The President’s plan gives people the option of borrowing at a relatively unfavorable interest rate. I wouldn’t recommend that anyone do that. 

Mr. RYAN. So, you would say, I am going to trust a future politician for my benefit rather than getting a bond in my account that 

they have to honor? 

Mr. FURMAN. That is not the way—the President’s plan doesn’t 

change that in any respect. It takes a benefit offset out of your existing benefit. It doesn’t give you any more security in any meaningful political sense, and it gives you less security in a market 

sense—— 

Mr. RYAN. Mr. Schieber, do you want to respond? 

Mr. SCHIEBER. Mr. Ryan, if we are going to fix your benefit by somehow filling this $4 trillion hole in, your rate of return almost 

certainly has to fall because you are going to have to put more 

taxes in to deliver that benefit, and you can’t only look at the benefit side of this program. If you are going to be taking more money 

off of people’s table, it is going to have as much of an economic effect as you are, if you adjust their benefit. 

Mr. RYAN. Thank you. My time has expired. 

Chairman THOMAS. I know a lot of you want to respond. Again, 

I can assure you, written responses to those questions will be read 

by the Committee. The Chair is tempted to ask the Members of the 

panel which tenth are you in, in Dr. Schieber’s structure, based on 

some of the analysis of how you really wouldn’t have to rely on Social Security and, therefore, it doesn’t make any difference. The 

gentleman from, by gosh, North Dakota? 

Mr. POMEROY. Thank you, Mr. Chairman. I admire Dr. 

Schieber very much. I have known him many years. I would just 

like to take one slight issue with what you just said, that basically 

you cut benefits and that hurts, or you do something else and it 

is going to hurt the same people. One idea for filling part of the 

hole, for example, would be we could reference back to the debate 

on the estate tax that my friend, Mr. Hulshof, and I had a few 

weeks ago. We have an estate tax set at $6 million per couple, moving to $7 million per couple in the year 2009. That would eliminate 

the estate tax problem for 99.7 percent of the people in this country. We could dedicate the overage as a dedicated revenue stream 

into the Social Security trust fund. That would take care of—we 

are running the numbers—some substantial percentage of the 

shortfall, potentially roughly equivalent to the benefit cut proposed 

in this progressive indexing scheme. So, because 99.7 percent 

140 

wouldn’t have any estate tax, that is one form of contribution to 

the trust fund that really would not be reflected in reduced economic consequence to the individual recipient. You know what? I 

want to get this down to brass tacks. You can respond in writing, 

my time is going to go so short. I expect you will respond. 

It is one thing for a Ph.D. Yale economist and a smart, albeit 

rightward leaning, economist-type from Wisconsin to talk about 

how they would make these funds work and what the best investment strategies might be. I am thinking of how this all works for 

your average family on Social Security. In North Dakota, the benefit is $834, average benefit. As I look at the risk on the private 

savings side, questions about pensions, conversions of pensions to 

defined contribution plans, defined contribution plans that raise 

issues relative to whether people are participating, whether people 

are saving enough, whether they are investing wisely, whether 

they are managing the assets through their retirement years, managing their longevity risk; nothing but questions, nothing but risk. 

It seems to me that an investment strategy that basically acknowledges the risk they already have on the private savings side 

and adds risk into the foundation of income in retirement, Social 

Security is a risk-on-risk investment proposition. Now, people don’t 

really manage risk portfolios in that fashion. You augment risk by 

less risk. So, risk-on-risk, at the end of the day, I believe, is going 

to really expose people. One in three, we know, depends upon that 

Social Security check for 90 percent or better of their income, two 

in three for most of their income. Now, how much risk do you want 

to put into that foundation? To me, it just flies right in the face 

of economics. I thought it was very interesting when the Secretary 

of Labor was here. She denied having taken any action with the 

Pension Benefit Guaranty Corporation (PBGC) portfolio, but indeed, she voted and signed the minutes of a board motion that 

moved the equity position of PBGC from 30 percent down to 15 to 

20 percent. If you look at risk, I am much more comfortable with 

risk in an aggregated class, like a pension fund, than one person 

with one account. How they do determines how they do. So, I think 

that there is a little schizophrenia even within the Administration. 

Equities are bad for PBGC, although the Secretary of Labor either 

didn’t know or denied her action inappropriately, versus Social Security, where risk is good, let us jump all over it. 

I want to get to the benefit cut issue that was discussed earlier 

by Congressman McDermott, and I think this really gets to the nub 

of the question. I would either ask Mr. Apfel or Dr. Furman to address this. The bottom line, when we talk intergenerational fairness, it looks to me like the progressive indexing reduction reduces 

the Social Security benefit to a dimension that that benefit, even 

when added to the private account, cannot produce an income replacement benefit that we presently enjoy under Social Security. In 

other words, the future generation is going to get less by way of 

a retirement benefit, private account and Social Security, than 

what Social Security now provides. That certainly does not seem 

like intergenerational fairness to me. I would like Apfel and 

Furman to address that. 

Mr. APFEL. Briefly, it seems to me that if our goal is to replace 

somewhere around 70 percent of pre-retirement earnings, which 

141 

seems to be about the minimum, then there ought to be a Social 

Security foundation that can be counted on no matter what happens to individual investments that ought to represent a significant 

piece of that. Combining these two proposals as the President has, 

both the privatization and the reduction in the guaranteed benefit, 

coupled with the middle-class benefit reduction that has been proposed, means that Social Security, that foundation, is going to be 

replacing an infinitesimal share over time for a very large number 

of people and growing over time. I think that is just putting too 

much on individual savings for the future; that is, putting individuals at risk over time if the foundation is going to become smaller 

and smaller and smaller. From what I have seen of the numbers, 

it doesn’t seem to me that many people will be living with more 

income. Not only will there be losers, for sure, but I think that it 

is likely that there are going to be a lot of losers, potentially, compared to current law. 

Mr. POMEROY. I thank the Chair and yield back. 

Chairman THOMAS. Thank you. Does the gentleman from 

Texas, Mr. Brady wish to inquire, and will the gentleman yield to 

the Chair very briefly? 

Mr. BRADY. I would yield to the Chairman. 

Chairman THOMAS. In 1983, we extended the age of retirement. 

Would you define that as a benefit cut? 

Mr. APFEL. It wasn’t actually—Mr. Chairman, I was heavily involved with those discussions, not as a Member but as a staff person—— 

Chairman THOMAS. It wasn’t a benefit cut? 

Mr. APFEL. It was a benefit reduction. 

Chairman THOMAS. What percentage of the population was affected by that benefit cut? 

Mr. APFEL. At that point, for the people who were then on the 

rolls, none. It was—— 

Chairman THOMAS. No, no, no. The question you just responded 

to was a prospective one in terms of the future, not the current 

rolls. I am asking you about the change in age. Is it a benefit cut? 

The answer is yes. How many did it affect? One hundred percent 

of the population. All I am doing that for is to understand, if we 

are going to argue on the point of no change in this structure and 

that certain things are ruled off the table, by definition, you cannot 

reach an agreement which will address the problem in front of us. 

That would truly reduce this discussion to an academic exercise, 

and one of the things we have as a responsibility, is to answer real 

problems, not dance on the head of a pin. The gentleman from 

Texas? 

Mr. BRADY. Thank you, Mr. Chairman. 

Mr. POMEROY. Mr. Chairman, I just have a point of inquiry, 

Mr. Chairman. Point of inquiry. 

Chairman THOMAS. Although that is not a recognizable motion, 

I am certainly willing to recognize the gentleman. 

Mr. POMEROY. I thank the Chairman. I enjoy my working relationship with the Chairman. I do want to inquire in terms of are 

we going to proceed the rest of the afternoon where you can do a 

counter-rebut to every—— 

142 

Chairman THOMAS. I tell the gentleman, if he noticed, I gave 

the time to the gentleman from Texas and the gentleman from 

Texas yielded a portion of his time to me. 

Mr. BRADY. If I may reclaim my time—— 

Mr. POMEROY. I thank the Chairman for that clarification. 

Chairman THOMAS. The gentleman from Texas. 

Mr. BRADY. I find those questions helpful, because it is important to know or at least be consistent on what effects and options 

there are across the board for future retirees. I have a district in 

east Texas that is perhaps a lot like America. It has some very 

wealthy neighborhoods. It has some very, very poor communities. 

Out of the 11 counties in my district, nine of them are heavily 

Democratic, some of them very strong in union areas. I have done 

about 30 Social Security workshops. People are smart. They get 

this. They know there is a serious problem with Social Security. 

They know the trust fund is really a debt. They know we have been 

spending the money. I have noticed just in the last two-and-a-half 

months in our workshops, whereas I used to spend the whole time 

on the problem, how we got there, what the future looks like, 

things like that, now they go right to the solutions. They want to 

know the ideas. They want to know real solutions to this problem. 

We are thankful that we have models all around us that we can 

look at, not just the Federal employee retirement system, but in 

Texas, the Galveston model. It worked for 24 years, voted in by the 

workers themselves. They get, on average, about twice their retirement paycheck as Social Security would have provided. They have 

a disability program that would embarrass the Social Security system, and they have a death benefit of between $75,000 and 

$220,000 plus keeping the account, with interest, itself. So, we 

have got some models to look at. My seniors, my workers, even our 

young people we talk to, they have an interest in personal accounts. They normally come down to this. If we can make sure the 

workers can’t touch that account, if we can make sure the government can’t touch that account, and if we can find a good, responsible way to start those, they have real, real interest in it because 

their thought is putting real money in a real account, seeing it 

grow steadily over the years, as it has in Galveston and in other 

programs. They see that as a way, one way, of really addressing 

this. So my question is, to the panelists who see personal accounts 

as part of the long-term solution, dealing with the issue of 

prefunding, and perhaps I can start with Mr. Lindsey, what ideas 

do you have for prefunding these accounts to start them in a way 

that we can afford it and that really moves us forward? 

Mr. LINDSEY. I think it is obviously, the more you can—first of 

all, the question of prefunding gets to the question about ownership. I think that if one establishes personal accounts, it is more 

difficult for the Congress to spend the money. Mr. Furman is technically correct that Congress can always change the rules on anything, but whereas history indicates that there has been no reluctance to spend the money when it is in a trust fund, I think in the 

case of IRAs or any other account or the Thrift Savings Plan, the 

Congress has respected private ownership, and I think that that 

would be one of the ways you would proceed. A necessary condition 

for prefunding the system would be to establish some kind of a priVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00146 Fmt 6633 Sfmt 6602 E:\HR\OC\24732.XXX 24732
143 

vate claim that Congress would resist. Prefunding the system obviously increases the savings rate, obviously strengthens the economy, and it is one way that the government can use compound interest to help solve the problem. As was pointed out earlier, President Clinton proposed using compound interest, investing the Social Security trust fund in the market. The only question is, can 

you protect it from being spent, and the reason for a personal account is to prevent that money from being spent. 

Mr. TANNER. Congressman, if I might real quick—— 

Mr. BRADY. Yes, sir. 

Mr. TANNER. Just on that point, today, we released a letter 

from 450 major U.S. economists, including five Nobel Laureates, 

saying that the only way to really fix Social Security is to include 

personal accounts as part of that, that that is the only way to really build ownership rights and the only way to deal with the funding issue, and this is to include individual accounts. So, this is certainly, among economists, the respected way of achieving this. 

Mr. BRADY. Well perhaps, Mr. Chairman, I could ask for a response by letter for any Members who want to respond to that and 

any ideas on how to fund and how to finance the prefunding response we make that work, and I yield back, Mr. Chairman. Thank 

you. 

Chairman THOMAS. Without objection. 

[The information was not received at the time of printing.] 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Colorado, Mr. Beauprez, wish to inquire? 

Mr. BEAUPREZ. I do, Mr. Chairman. Thank you very much. 

First of all, Commissioner Apfel, I think an observation is necessary, not really a question, but I was intrigued by your dialog 

with the gentleman from Illinois earlier and specifically the part 

about the utilization of market forces, compound interest, as Mr. 

Lindsey just referred to, as a solution kicked around back during 

the Clinton Administration. My observation, quite frankly, sir, is 

that the major thing that has changed since then is that that was 

President Clinton, and now it is President Bush talking about 

using those same market forces as perhaps a portion of the solution 

to our Social Security challenge. I think that is the most significant 

change that has occurred. 

A second observation, if I might, and Mr. Furman, I find this one 

just striking, and I am going to refer to Mr. Schieber’s chart once 

again, the oft-cited chart today, on your page 20 of your testimony. 

It is fairly clear, I guess surprising to none of us, that the working 

poor are the ones who have the fewest options to provide for their 

retirement benefits, and yet, Dr. Furman—I am not going to ask 

you a question, sir, so you don’t have to reach for the button—the 

observation is this, that the very portfolio which—and I was going 

to ask you this question, but you have already given us the answer—that you, I assume, probably have, and I assume to take advantage of the market, and I assume to build retirement benefits 

and wealth for yourself, you would want to deny to the working 

poor when we have in front of us, at least, a concept to do just that, 

to give these people, people like my parents and I were for a good 

long part of our life, frankly, an opportunity at ownership in the 

United States of America that formerly, and currently, tragically, 

144 

for mostly just the wealthy, has been available. You are going to 

deny that to the working poor who have already fewer options. I 

find that very inconsistent with the logic that usually prevails from 

that side of the aisle. 

My third observation, if I might, is that when I was an employer, 

and I proudly was until I came to this Congress just a few years 

ago, one of the days of great celebration was when we instituted 

401(k)s and deferred compensation plans that took advantage, Mr. 

Lindsey, of compound interest, rate of return, market ownership, 

those things that we are talking about here today, and I have no 

doubt why they were celebrating that. They understood that. 

So, here is my question, and I don’t think we have really gone 

this direction, although, Mr. Lindsey, you did just hint at it. If we 

can create these things called personal accounts that we have a 

concept out there of doing, and over a course of years there is another class of investors out there, and thus a pool of investment 

capital—something I as a banker always thought was one of the 

most limiting things to economic expansion—that creates jobs that 

the working poor say they always need, and I agree. Access to capital—do we not have the potential, Mr. Lindsey, of providing enormous economic stimulus through this newfound investment capital 

source? 

Mr. LINDSEY. Absolutely. In fact, I think one of the points that 

actually Mr. Pomeroy made earlier was the need that we have in 

this country to save more and to be able to invest more. That is 

going to be the ultimate foundation here. I would commend the 

personal accounts, A, as a way of restraining spending, and B, in 

my testimony, what I recommended was a way of increasing the 

saving rate using Social Security reform as an option, but you are 

right on. 

Mr. BEAUPREZ. I thank the gentleman. A further observation. 

If someone wants to opine in the time I have remaining, I would 

invite that. We have all—all of us, I am sure, on this Committee, 

probably every Member of Congress, have been counseled, lobbied, 

by all kinds of constituent groups. One thing that is absolutely obvious to me is that two groups who came to me and said, I would 

just assume you not change anything, were the folks from my 

State, Colorado, with the Public Employees Retirement Account 

(PERA), and the Federal employees who have the Thrift Savings 

Plan. I asked why is that, and they said it was because they had 

a personal account. I can direct that money and it is working. Does 

anybody want to offer an opinion contrary to that, why that is a 

bad idea? Sir? 

Mr. APFEL. I think the Federal employees who now have that 

system also have Social Security. It is one of the great things about 

the system—— 

Mr. BEAUPREZ. Are we not talking about that same possibility? 

Mr. APFEL. Well, I—— 

Mr. BEAUPREZ. Some of both. 

Mr. APFEL. It seems to me that—— 

Mr. BEAUPREZ. Yet I have heard resoundingly today that we 

want to deny that choice to a substantial part of American working 

people, and I, for the life of me, don’t get it. I yield back, Mr. Chairman. 

145 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from California, Mr. Thompson, wish to inquire? 

Mr. THOMPSON. Thank you, Mr. Chairman. I appreciate the 

opportunity to talk to these witnesses today. I just want to commend my colleague from Tennessee, Mr. Tanner, who has already 

left us, for bringing up the issue of the impossibility of having a 

strong Social Security dollar and a weak U.S. dollar. I think he was 

right on. The fact that we have this tremendous debt, $7.7 trillion 

today, a $425 billion deficit, and that doesn’t even take into account 

the $160 billion that was borrowed from Social Security to make 

ends meet this year, and now this discussion about Social Security, 

and you can call it whatever you want, privatization or personal accounts, and the fact that this adds an additional $2 trillion to that 

debt, I think puts us in a pretty tough spot. 

We have heard from some today that Social Security is a bad 

deal and that private accounts will make things fairer. I don’t 

think it is fair that we continue to pass bills that we don’t pay for, 

that we talk about proposals that are going to cut benefits to workers and that we compile a mountain of additional debt for future 

generations. Mr. Tanner spoke clearly about this, but I think it is 

important to note that in this Committee room, we saw—and I will 

pass this out for you if you would like to see it, this was from the 

Administration—that if things continue to go the way they are 

going, by 2040, we will take in as many Federal dollars as it will 

take to pay the interest on our National debt. So, if we continue 

to do things the way we are, in this regard, we are going to cut 

everything, Social Security, Medicare, Medicaid, all other programs, and I think that is important to this discussion. Mr. Pozen, 

if you would be so kind to clear something up for me. 

Mr. POZEN. Sure. 

Mr. THOMPSON. The President in April made mention of there 

being no Social Security trust fund. I don’t remember exactly what 

he said, but basically, there is no money there. There is no trust 

fund. It is a bunch of IOUs. I think this caused a great deal of concern, and I think it derailed the important debate that we should 

be having. This trust fund, is it there? Is there money? 

Mr. POZEN. We do have a trust fund, but some people are under 

the impression that these surpluses have been building up and are 

invested by that trust fund. That, unfortunately, hasn’t been the 

case—— 

Mr. THOMPSON. Not what view people have, but is there a 

trust fund and is it backed by the full faith—— 

Mr. POZEN. There is a trust fund, but it doesn’t have the surpluses invested. Instead, it has special issue Treasury bonds which 

are good money. They will be redeemed, but Congress will have to 

appropriate the money or borrow the money to fund these redemptions. So, I think it is a bit of a confusing issue, but we should not 

say that the trust fund bonds will be dishonored. They will be honored—— 

Mr. THOMPSON. Reclaiming my time, the same action that 

Congress would have to take to make good on any notes that we 

have, debt to foreign countries—— 

146 

Mr. POZEN. Yes, but this is $4 trillion debt, roughly equal to the 

amount of publicly held Treasury debt that has built up over the 

last 30 years. So, it is a big number. 

Mr. THOMPSON. Thank you. Mr. Furman, in some of your 

work, you have suggested that, in analyzing this progressive index 

plan, medium-wage income folks, $36,500, will see a benefit cut of 

about 28 percent, is that correct? 

Mr. FURMAN. In fact, that number is based on the actuaries’ office. 

Mr. THOMPSON. Well, this is particularly interesting to me, because the average median income in the seven counties in my district is $36,499, and Social Security tells me that the average person in my district gets a monthly check of $936. I think it is important to note that while we talk about a percentage here and a percentage there, that this means that the average benefactor in my 

district making $936 a month is going to see a reduction down to 

about $673 a month. So, that is a $260 cut that they are going to 

receive, and I think that is real money and I think the real dollars 

mean something to the people who depend upon Social Security to 

make ends meet at home. 

Mr. POZEN. Excuse me, Mr. Thompson, but I think you are just 

applying a percent—— 

Mr. THOMPSON. No. I have got a limited amount of time. Sorry. 

Mr. Apfel, to explore this just a little bit more, in your testimony, 

you said that workers making about $60,000 will see about a 90 

percent cut in their Social Security? 

Mr. APFEL. That is the defined benefit cut, combining both the 

private account, the reduction in the Social Security benefit, and 

the middle-income reduction through the sliding-scale system. 

Mr. THOMPSON. So, working on the same information that I got 

from the Social Security Administration, folks who make $60,000 

a year in my district are going to see a cut of $1,750 a month from 

their monthly check. I just think it is important to put numbers 

with that, because this is critical for the well-being of folks who depend on this guaranteed benefit, whether or not they have add-on 

benefits, private accounts, other investments, this guaranteed benefit component of whatever their portfolio may be. Thank you. 

Chairman THOMAS. Does the gentlewoman from Pennsylvania 

wish to inquire? 

Ms. HART. I do, Mr. Chairman. 

Chairman THOMAS. Prior to that, would the gentlewoman yield 

to the Chair? 

Ms. HART. I certainly will, Mr. Chairman. 

Chairman THOMAS. I tell the gentleman from California, if he 

is concerned about those numbers and wants to sit down and work 

with the Chairman to make sure that any structure we create 

doesn’t at all entertain those kinds of numbers, the Chair is very 

excited to do that as long as the gentleman from California doesn’t 

tell me what I have to not be able to think while we are sitting 

down and discussing, and as long as the gentleman from California 

doesn’t tell me what I can’t put on the table. I would love to sit 

down with the gentleman and make sure that the gentleman’s concerns are completely alleviated as we address the shortfall in Social 

147 

Security. I don’t know whether the ground rules that I just offered 

you would be acceptable. 

Mr. THOMPSON. You wouldn’t be able to put any wine from 

other States or other countries on the table. 

Chairman THOMAS. It is understood that if two Californians are 

going to noodle over a program, it will preferably be with wine 

from your district. We make wine in my district, but I don’t have 

a place called Napa in my district. 

[Laughter.] 

Mr. THOMPSON. I will bring the wine. 

Chairman THOMAS. I will bring the ideas. 

[Laughter.] 

Chairman THOMAS. The gentlewoman from Pennsylvania. 

Thank you for yielding. 

Ms. HART. Thank you, Mr. Chairman. As long as he doesn’t 

bring the w-h-i-n-e, I would join you. I would like to give Mr. Pozen 

an opportunity, if he could do it in 15 seconds, to finish responding 

to Mr. Thompson. 

Mr. POZEN. Yes. I think there would be no reduction in benefit 

levels from today. The Social Security benefits of the workers in 

these examples would all grow. Every one of them would grow, and 

the purchasing power of their benefits would grow. So, they would 

grow in real terms and in nominal terms. 

Ms. HART. Thank you. I actually want to take off on some of the 

subject matter that Mr. Beauprez started with, but first, I want to 

reemphasize something that I think we are not keeping at the front 

of our minds that I think is important, and that is that when Social 

Security was set up, there were gobs of workers working for every 

person who was retired and receiving Social Security benefits. 

Those who don’t see some urgency in us looking at this program 

and restructuring this program now, I think are ignoring the fact 

that the demographics have changed so drastically that we now 

only have 3.3 workers working for every person who is receiving 

Social Security benefits. That in itself is a problem, but don’t forget 

that these people who are receiving these benefits are going to be 

receiving them for a much longer period of time. There is huge 

stress on the system and it is just going to grow. Birth rates are 

down. Within the next 20 years or so, there will only be two people 

working for every person on Social Security. We are going to get 

to the point where we can’t even operate a pay-as-you-go system 

very quickly, very quickly. 

Now, I understand that people in the income bracket of those 

here at the table, and probably the Members, are not going to be 

terribly affected by changes in Social Security. We are not going to 

be dependent upon Social Security benefits for our retirement, but 

let me tell you, most of the people in my district are, and I have 

spent a lot of time out there listening to people and talking with 

them and listening to their ideas about this. I can tell you that the 

people who seem to be the most interested in this are the people 

who are going to be most affected. I had a gentleman stand up at 

a meeting not too long ago—he probably makes about $35,000 a 

year—and he said to me, ‘‘Why can’t I invest more than 4 percent 

myself?‘‘ People are a lot more sophisticated today than they were 

in 1935 and 1950, as far as investments, and I think some of the 

148 

panelists have actually been quite disrespectful to the American 

people when they suggest that these people are just going to starve 

if we give them the opportunity to invest some money. For God’s 

sake, if they made enough money to set aside to invest, they would 

love to, and that is why this gentleman and many others have 

come up to me and asked for us to make sure we give them an opportunity to actually receive a little more bang for that buck. 

Twelve-point-four percent is a lot of money. One of the—I can’t 

remember which witness, but one of you said that if 12.4 percent 

were invested out of your paycheck in a retirement plan, that alone 

could pay your retirement benefit. That might have been Mr. Tanner—I am not sure—but one of you had something to that effect 

in your testimony, and I think that is an important point to make. 

The question that I would like to ask is, mostly I am going to start 

with Mr. Pozen because I think you work a little bit in the investment field. I would expect that most of your clients, or your company’s clients, are not folks that I am talking about. 

Mr. POZEN. I think most of the low-wage workers, unfortunately, don’t have enough to invest. 

Ms. HART. Right. I have been supportive of personal retirement 

accounts, and they are personal retirement accounts because we 

are not handing the money over so that, as Harry Reid said, they 

can take it and lose it in Vegas. This is a very carefully invested 

account. Mr. Chairman, did you use my time? 

Chairman THOMAS. The Chair is watching the time and the 

gentlewoman hasn’t been indicated—the Chairman hasn’t told the 

gentlewoman her time has expired. 

Ms. HART. Oh, thank you, Mr. Chairman. 

Chairman THOMAS. However—— 

[Laughter.] 

Ms. HART. My quick question which I will ask for a very quick 

answer is, does it make sense in your view that we allow people 

to get a piece of the pie who currently don’t have enough extra 

money to invest? 

Mr. POZEN. The answer is yes, if we can get them in a balanced 

account with a long-term investing program with good diversification. 

Ms. HART. I yield back. 

Chairman THOMAS. There you go. He saved you 2 minutes. 

Does the gentleman from Indiana wish to inquire? 

Mr. CHOCOLA. Yes, Mr. Chairman. Thank you. Thank you all 

for being here. Thanks for your patience. A little later today, I hope 

to get on an airplane and fly back home to Indiana, and tomorrow 

morning, I hope to be able to take my 14-year-old son to school, to 

eighth grade. He retires, maybe in 2052, when I think any projection would say the trust fund is exhausted. He is actually interested in this idea, and so I look forward tomorrow morning when 

I take him to school to kind of share with him all your ideas on 

how we are going to solve this problem for him and all his classmates. As I go across the panel, I think I have a pretty good idea 

what I can tell him. Commissioner Apfel, I think I can tell him 

what at least you used to think when you were Commissioner. I 

am not sure I can tell him what you think today. Dr. Furman, I 

really am struggling on what to tell him you think the solution is. 

149 

I can tell him what you are against, but I want to be able to share 

with him what you are for. Can you help me out? 

Mr. FURMAN. Sure. I think one idea is something we heard 

about before, which is to take the revenue from the reformed estate 

tax, raise the exemption to $7 million, get almost everyone off of 

the estate tax, and the remainder dedicate to Social Security. That 

would be a step we could move forward. I would rather do that 

than cut benefits of the same magnitude that have been proposed 

by the President for the middle class. 

Mr. CHOCOLA. You think the small businessowners—we should 

not repeal the estate tax for the small businessowners, but let me 

just ask you, you earlier referred to the Diamond-Orzag plan, I 

think. Is that a plan that you think is a viable potential solution? 

Mr. FURMAN. I think that is certainly an option that this Committee should consider. In fact, it is the only plan the chief actuary 

has ever scored that gets sustainable solvency without general revenue transfers. 

Mr. CHOCOLA. Doesn’t that plan increase taxes by increasing 

the taxable earnings base, increasing payroll taxes, and imposing 

an additional tax on all income above the taxable earnings base? 

So, is that essentially the solution you think I ought to suggest to 

my son, that we raise taxes? Mr. FURMAN. We have a $4 trillion deficit here. Every dollar 

that we can get on the revenue side is one dollar less of benefit reductions. If your plan is $4 trillion of benefit reductions, that will 

solve the problem and that is a perfectly reasonable plan. If you 

think that is too much in the way of benefit reductions, then you 

need additional revenue. Every dollar of revenue is one dollar less 

of benefit reductions. 

Mr. CHOCOLA. Let me ask—— 

Mr. FURMAN. If you aren’t willing to get that revenue, you have 

to be willing to accept the responsibility for proposing those benefit 

cuts. 

Mr. CHOCOLA. Let me ask Dr. Hunter, I think a long time ago 

in your opening statement, you said something to the effect that 

transition costs were not new or additional debt. Could you expand 

on that a little bit? 

Mr. HUNTER. Every time payroll taxes come in the door today, 

they are, in effect, borrowed and spent. It has been characterized 

as an implicit debt, but it is a debt nevertheless. It is a debt obligation of the Federal government. If rather than spending that 

money, we invest it or allow workers to invest it in a personal account, that is a dollar less that the government is borrowing. So, 

every dollar that goes into personal accounts is actually a reduction 

in debt. 

Now, that does create a cash flow crunch. So, if the government 

turns around and borrows a new dollar to alleviate the cash flow 

crunch, it hasn’t borrowed an additional dollar. It simply refinanced the old debt, and that is a classic corporate workout. You 

refinance the debt to free up cash and then it gives you time to restructure, and what you are talking about with personal accounts 

is restructuring. It creates larger profits, more productive outcomes, and allows the personal accounts to generate higher benefits. It is not rocket science. It is not voodoo. It is not magic. We 

150 

do it all the time in the corporate world. People do it all the time 

with their homes. It is very straightforward. 

Mr. CHOCOLA. One other thing I think my son and many others 

struggle with is that we debate these particular ideas and not a 

package of good ideas, and I think ultimately, the solution is going 

to have to be a package of good ideas, and Mr. Pozen, I think I 

have heard you talk about that. Could you just comment on that? 

Mr. POZEN. Yes. I think the legislative solution has to be a 

package. If we just have benefit constraints, which I think we need, 

and increases in revenues by raising the payroll tax base, we have 

to provide some, what I call, sweetener, some positive aspect to the 

package so that voters will feel good. We also should enhance their 

retirement income through other measures, whether it be expanding the Roth IRA or the Low-Income Tax Credit. So, I think we 

definitely have to think of a package. 

Mr. CHOCOLA. So, it is somewhat misleading to be only isolating our comments and criticisms on one particular idea at a 

time. 

Mr. POZEN. Yes. I think that is unfortunate. I think we sometimes take one particular idea and push it to a limit when we are 

realistically talking about a combination of ideas. 

Mr. CHOCOLA. Yes, sir? 

Mr. STEUERLE. I have got a list of about 12 or more proposals 

in the back of my testimony—some of which have not been discussed much at all—that I think would help restore solvency. As 

I have indicated earlier, I think that we have a middle-age retirement system and I think before measuring success in terms of replacement rates, or in terms of giving them savings accounts, we 

can go an extraordinary way if we build a base system of protection 

that protects the people who are truly old. For people with 12 or 

15 years of life expectancy left, we should give them a really good 

minimum benefit. We could do that in the current system. We 

could even wipe out poverty among the elderly. Start with that as 

a base, and then buildupon it. Build in private saving if we want 

a private saving component. If some people want more middle-age 

retirement, build it upon the base. That is the way I would buildup 

the system. 

One warning I would give—and I think there is a tendency in 

politics to ignore it—is I don’t believe there is a free lunch. I am 

afraid that both the trust fund accounting issue and the personal 

account issue at times get off into the notion that somebody can 

move money around and provide a free lunch. If I take money from 

you and give it to me, I might be better off, but you are going to 

be worse off. There is no free lunch. Everything you do budgetarily 

as our Representatives involves taking from one person and giving 

to the other. Hopefully, you do it in a way in the long run enhances 

the economy, but it is not free. 

Mr. CHOCOLA. Thank you all. I yield back, Mr. Chairman. 

Chairman THOMAS. I thank the gentleman. The Chair knows 

the gentlewoman from Ohio wishes to inquire. 

Ms. TUBBS JONES. Thank you, Mr. Chairman, and thank you 

to the witnesses for sitting so long. Just in response to the free 

lunch, the poor people in this Nation have been watching the rich 

people and those who are better off than them have free lunch for 

151 

a lot of years and they are worried about the only free lunch that 

they have relied on, for years and years and years, being removed. 

What I am talking about, is not a free lunch; I am talking about 

Social Security. When I go out, and I have done probably ten or 12 

sessions on Social Security, talking to the people of my Congressional district, Social Security is something they earned. It is not 

a welfare benefit. I think that we really need to be clear that, the 

people who have paid into Social Security have paid out of their 

checks and they are expecting that all of us, regardless of our 

party, are going to guarantee them that benefit that they have 

earned that President Roosevelt said it would not be someone that 

they would be administered unto, but it would be the money paid 

out to those who have earned it. 

It is my belief that there is no way that we can continue all of 

the programming of Social Security disability, survivor benefit, retirement benefit, if we take money out of that pot to create a private fund. I have talked to lots of my constituents and what I say 

to them, in addition to that is, if your children are the age of my 

colleague over there, 14, talk to them about saving and creating 

their own retirement account and not relying upon Social Security. 

We should be debating and discussing, what are we going to do to 

increase the dollars from Social Security without causing those Social Security dollars to be indebted in order to create a private 

fund. It was never intended to be a private fund. It was never intended to be an individual account. It was not created like that. 

The people aren’t expecting that from them. Those that are want 

to change a program that has been in place and has been good to 

seniors and administered for 1 percent of its cost for 75 or more 

years. I want to go to Dr. Furman. There were several answers you 

wanted to give that you cut off from. Please feel free to use a little 

bit of my time. 

Mr. FURMAN. Well, thank you very much for that. If I went to 

my employees and told them I gave them a 401(k) plan, they would 

all cheer. If I then told them, oh, but by the way, I am taking away 

your Social Security benefit, I think they would be, at the very 

least, a little bit less excited than they were at first blush, and that 

is, in effect, the way the President’s plan works. There are ways 

to encourage families to save and moderate-income families to save, 

and I take a back seat to no one on that. We have the Savers Credit right now. It is the only tax incentive for moderate-income families to save. It expires in 2006. The President, that is the only tax 

thing passed in 2001 that he has not proposed to extend. It is the 

only thing that helps middle and moderate-income families save, 

and it is the only part of the tax cut that he wants to expire. If 

you genuinely care about encouraging wealth creation for moderate-income families, there are a lot of ways to do it that will 

genuinely make them more wealthy, not just cut your Social Security benefit and give you something else, and that would be an excellent step one could take if it was paid for, so thank you. 

Ms. TUBBS JONES. The difference between a Thrift Savings 

Plan that I and my colleagues enjoy and Federal employees enjoy 

and the proposal of a private account under Social Security is—— 

Mr. FURMAN. The difference is that somebody who retires with 

a Thrift Savings Plan is going to get about half of the income they 

152 

need in retirement from Social Security. That is the floor. It is a 

pretty minimal floor. On top of that, they are going to build using 

their 401(k)s and IRAs. I think more middle-income families do 

need to be able to build on top of that with 401(k)s and IRAs and 

we should be able to help them to do that. If you don’t want—— 

Ms. TUBBS JONES. Well, the proposed private account that is 

being proposed under Social Security is not the same kind of—that 

is going to be a deduction from—— 

Mr. FURMAN. Those plans don’t say, ‘‘here is your floor, we are 

building on top of it.’’ They pull the rug out from under you, and 

subject you entirely to the market. That is a completely different 

thing from a 401(k) plan. It has nothing to do with wealth creation 

for moderate-income families. 

Ms. TUBBS JONES. Last, deficit spending causes a dilemma for 

private, for Social Security going out into the future, is that correct? 

Mr. FURMAN. That is exactly right. I think that is exactly right. 

I agree with Gene. There is no such thing as a free lunch. Private 

accounts don’t add money to Social Security, they take it out of it. 

They make what you need to do even larger than what you would 

otherwise need to do. 

Ms. TUBBS JONES. Mr. Chairman, I am giving you 2 seconds 

back. Thank you very much. 

Chairman THOMAS. I thank the gentlewoman very much. To 

conclude this particular hearing, it is a real pleasure for the Chair 

to recognize the newest member of the Committee, and I just want 

to assure you, Mr. Nunes, that every other Member who is more 

senior to you warmly welcomes you to the Committee because all 

of them were at one time in your position and they aren’t anymore. 

Ms. TUBBS JONES. Thank God. 

Chairman THOMAS. The gentleman from California is recognized. 

Mr. NUNES. Thank you, Mr. Chairman, and it is a pleasure to 

be here with you, my colleague from California, and to come into 

the Committee for the first time on a very important debate called 

Social Security. One of the advantages of going last, if there is an 

advantage, is that I have gotten to hear everyone’s testimony. I 

have been fortunate to hear Mr. Ryan, about his plan. We have 

heard about Mr. Shaw’s plan, Mr. Bush’s plan, Mr. Thomas’s plan, 

and several plans have been discussed. Mr. Tanner pointed out 

that 450 economists, I think, today wrote a letter. Some of the Nation’s most important economists have said that we can’t solve the 

Social Security crisis without some type of private account, and I 

think there is something to be said for that. Referring back to the 

plans that have been discussed up here by my colleagues on the 

Committee on Ways and Means, I would like a yes or no answer 

to this question, please, and we will start with Mr. Lindsey. Did 

you hear any of the Democrats today offer a plan to save Social Security, Mr. Lindsey? 

Mr. LINDSEY. No. 

Mr. NUNES. Mr. Pozen, did you—— 

Chairman THOMAS. The Chair would hasten to explain the 

rules, and that is a Member has every right to ask whatever quesVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00156 Fmt 6633 Sfmt 6602 E:\HR\OC\24732.XXX 24732
153 

tion he so chooses. There is no obligation on the part of the witness 

to respond directly or otherwise. 

Mr. NUNES. Thank you, Mr. Chairman. 

Chairman THOMAS. There is an occasional free lunch. 

[Laughter.] 

Mr. NUNES. Mr. Pozen? 

Mr. POZEN. I heard a witness say the Orzag-Diamond plan, but 

I haven’t yet heard any Congressperson say they were willing to 

propose that package of several tax increases and benefit constraints. It is an honest plan, but I haven’t heard a politician adopt 

it yet. 

Mr. NUNES. Mr. Schieber? 

Mr. SCHIEBER. No. 

Mr. NUNES. Dr. Steuerle? 

Mr. STEUERLE. Pass. 

[Laughter.] 

Mr. NUNES. Mr. Apfel? 

Mr. APFEL. You asked whether elected officials have proposed 

plans? 

Mr. NUNES. Any today during this hearing where we have been 

discussing what to do about the future of Social Security. 

Mr. APFEL. I have not heard any plans that did not increase 

borrowing dramatically to pay for Social Security to solve the longterm solvency problem. 

Mr. NUNES. Have you heard plans, at least proposed, by the Republican side of the aisle? 

Mr. APFEL. That entailed drastic levels of new borrowing that 

I think put Social Security benefits at risk. 

Mr. NUNES. That is fair enough that you have your points on 

the legislation, but at least there have been plans that have been 

offered for discussion, which I think is important to have all of you 

here to analyze that, these plans, and add to the discussion, and 

I want to thank all of you for dedicating a large portion of your life 

to trying to solve these problems that we face with Social Security. 

I appreciate your opinion that there are problems with the plans 

on this side of the aisle. Well, it is better than having no plan, in 

my opinion. Dr. Hunter? 

Mr. HUNTER. I did not hear any plans from the other side of 

the aisle today, but I will tell you, and the good news is that, especially before this last Presidential election, I spent many hours on 

Capitol Hill talking to Democrats on this side and on the other side 

of the Capitol, and I will tell you that there are many who are very 

interested in personal accounts, and that is the reason I started off 

this morning by saying—it seems like a long time ago now—that 

unfortunately, the political climate may not be right to do it all, 

right now. That is the reason I encourage the Committee to do 

what I think is perhaps possible, and with the Chairman’s leadership this may actually happen, because everyone, everyone in the 

country realizes it is wrong to spend the surplus, and a good number of your colleagues on both sides of the aisle recognize that the 

best thing to do with those surpluses is to invest them. We can 

have an interesting debate on how they should be invested, but I 

think we have a real opportunity here, and you may not get very 

many Democrats right now, but I have confidence this is a long 

154 

process and this is a beginning, and I commend the Chairman for 

holding this hearing. 

Mr. NUNES. Thank you. Dr. Furman? 

Mr. FURMAN. It has been a long hearing, and I may have 

missed it, but I actually didn’t hear anyone on the Republican side, 

on this side, embrace any specific steps to improve solvency in 

terms of reducing benefits or raising revenues. If you want to 

transfer general fund revenue to Social Security, you can extend 

solvency, but I didn’t hear any specific steps. In fact—— 

Mr. NUNES. You heard specific plans laid on the table? 

Mr. FURMAN. The one specific step I heard from anyone here 

today that would improve our long-run fiscal outlook was Mr. Pomeroy and the estate tax proposal. I don’t think I heard anything 

else that would, but you can correct me if I am wrong, if anyone— 

now, I have heard a lot of things from the panel, Bob Pozen’s ideas, 

what a lot of other people have. I didn’t hear anyone up there embracing them. I only heard about ideas that would cost money, not 

save money. 

Mr. NUNES. Thank you, Dr. Furman. Mr. Tanner? 

Mr. TANNER. Yes. I heard several proposals on the Republican 

side. The proposal by Representative Johnson, by Mr. Ryan, by Mr. 

Shaw, all of them scored by the Social Security actuaries as restoring Social Security to permanent sustainable solvency. From the 

Democratic side, I did not hear any proposals at all for restoring 

solvency or fixing any of the other problems within Social Security, 

which is really a shame, because this used to be a very bipartisan 

issue. Members like your former colleague, Charlie Stenholm, or 

Members from the other body like Senator Robb, Senator Kerry, 

Senator Moynihan—all who supported individual accounts at one 

time or another and were very willing to take up Social Security 

reform in a bipartisan manner—are gone and it seems to be now 

simply a matter of misinformation and very partisan debate on 

that side of the aisle and it is a shame. I say this as someone who 

is not a Republican, that I am very disappointed. 

Mr. NUNES. Thank you, Mr. Tanner. This being my first day on 

the Committee, Mr. Chairman, I am a little bit disappointed to 

hear none of my colleagues on the Democrat side of the aisle offer 

any alternatives. I hope that the next hearing when I get to attend 

a full Committee hearing that we will actually have some ideas by 

the Democrats that have been laid out on the table. Until then, unfortunately, the Republicans have to debate amongst ourselves. We 

have many different ideas, and we are using many of your ideas 

and many of the proposals that have been put upon the table. It 

sure would be nice to have at least some input from the Democrat 

side of the aisle. With that, Mr. Chairman, thank you for the welcome to the Committee. 

Chairman THOMAS. The gentleman’s time has expired, and the 

Chair would hope that Members are on this Committee to, first of 

all, listen. Even if they have an idea of how they might want to 

solve the problem, have the courtesy of listening to other ideas, so 

that their ideas can be tested in the crucible of competition on 

ideas, i.e., which one does the best with the least and all the other 

criteria that we use to judge between plans. So, the Chair is not 

155 

upset at this time that individual Members haven’t formed or are 

willing to come forward with a particular plan. 

What the Chair is concerned a little bit about, having been on 

this Committee and on the Subcommittee at the time that we 

looked at it previously, more than 20 years ago, I can’t recall at 

any time a Member telling another Member, you cannot come to 

the table with a particular idea or I won’t come to the table to discuss ways in which you can deal with this issue. That is new. That 

is shocking to this Chairman. It is sad that people would spend the 

time and energy to get elected to office, the time and energy to get 

on this Committee, and then say, you have to drop your ideas before you get to hear mine. I have no problem with them bringing 

their ideas. I have a problem with people telling me I can’t bring 

mine, and that is not to say that my idea may be an idea that is 

out there. I just don’t think you should say that about any idea if 

you are here to try to solve problems for the American people. 

I want to thank all of you. I think it is one of the best panels 

we have had in a long time, and I say that with no exception, because I don’t want someone to sit there and not express how they 

feel based upon particular subject matter. We need the interaction 

between all of you very bright and talented people who have, as the 

gentleman from California said, spent years looking at this subject 

matter. It is not easy subject matter to deal with. Everybody says 

it is easier than Medicare. I will simply offer this evidence. We 

have changed the Medicare law three times, and we are probably 

going to change it another five. We have not addressed Social Security in more than 20 years. This opportunity, in the Chair’s opinion, cannot be missed, even if the changes are at least shoring up 

to move on to additional discussions as we mature and grow in our 

knowledge about how we can make changes. More importantly, as 

we know we have to respond to the aging Americans, the aging society, and the fact that today’s seniors, I believe, are far more competent and knowledgeable and understanding than seniors in the 

thirties, on the ways in which they can assist in taking care of 

their own lives. The hearing stands adjourned. 

[Whereupon, at 3:41 p.m., the hearing was adjourned.] 

[Submissions for the record follow:] 

Statement of Alex J. Pollock, American Enterprise Institute 

Linking ownership of property to liberty in a free society is deeply embedded in 

the American political philosophy, going back to the ideas of John Locke and the 

Founding Fathers. Personal Social Security accounts as vehicles for the expansion 

of ownership of financial assets are very much in keeping with American tradition. 

Congress should seek to make such accounts a reality. 

In the discussions of personal accounts, all proposals so far have begun with diverting cash from Social Security taxes, resulting in a diminution of receipts by the 

Treasury Department. Could personal accounts be created without diverting tax receipts? 

Consider the mandatory savings function of the Social Security system, which currently works as follows: Social Security taxes are collected by the Internal Revenue 

Service and deposited in the general fund at the Treasury Department, where they 

are spent on benefits but also on other federal programs. All the cash is spent; nothing is saved. Upon receipt of borrowed or ‘‘invested’’ Social Security funds, the 

Treasury issues bonds to the Social Security Trust Fund. The bonds represent 

Treasury liabilities held indirectly for the public. 

I suggest creating personal accounts without diverting any cash from payroll 

taxes. This could be done by changing the current structure in one key respect: the 

156 

Treasury could issue bonds directly to personal accounts, bypassing the ‘‘middle 

man’’ role of the Social Security Trust Fund, thereby creating ‘‘your own trust fund.’’ 

The personal accounts would thus be created by putting Treasury securities in 

them, not cash. The current Trust Fund is an unnecessary ‘‘middle man’’ between 

the citizens and the U.S. Treasury, who are the only actual principals involved. Cutting out this middle man makes the relationship much clearer and more honest, 

while making the citizens direct owners of top quality retirement assets. 

There are perfect Treasury bonds for these accounts: Treasury Inflation Protected 

Securities (TIPS). Inflation poses the largest threat to retirement savings, and these 

default-free instruments also fully protect against that threat, thereby minimizing 

risk. 

This should be a purely voluntary program; individuals could elect to remain in 

the current program or to receive TIPS in their personal accounts instead of future 

benefit payments of equal economic value. After a certain restricted period, individuals could choose to reinvest their assets in other financial instruments, although 

I believe a many would simply stay with the TIPS ‘‘default option.’’ Ownership 

through personal accounts would also allow for account holders to bequeath their 

assets to future generations. 

Think how much more meaningful direct ownership of these Treasury bonds in 

a personal account—in ‘‘your own trust fund’’—would be for American individuals 

and families than the obscure operations of the current Trust Fund which few understand. In my opinion, this would be an extremely popular alternative—simple, 

easy to understand, and attractive. By analogy to the federal employees’ thrift plan, 

it could be thought of as ‘‘a G–Fund for everybody.’’ 

This proposal would result in greater and more widely distributed ownership of 

financial assets among American households. It would provide assets with no default risk and no inflation risk, with the ability to pass them on to future generations. It would establish a stronger and more understandable financial relationship 

between government and citizens, since Treasury securities are much more inviolable contracts than are off-balance sheet future political promises. 

Given the opportunity, I believe the majority of Americans would prefer to accumulate inflation-protected retirement assets they actually own. They should be 

given this choice. 

A New Approach to Personal Social Security Accounts: ‘‘Your Own Trust Fund’’ 

By transforming Social Security, at least in part, to a program of greater personal 

property for the average American, voluntary personal accounts would be a key 

structural reform. 

But most current proposals for personal accounts also have serious disadvantages: 

they are complicated, to many people they are confusing and they require diverting 

a portion of payroll taxes away from the U.S. Treasury. How can there be effective 

management for millions of small accounts? Isn’t the stock market too risky? Won’t 

many people be confused by being forced to make choices they do not understand? 

Who can be sure the benefits are worth the costs and risks? 

There is, however, a better way to launch Social Security reform using private accounts and inflation-indexed Treasury bonds (or ‘‘TIPS’’), which will deliver all of 

the benefits of personal accounts with none of the costs or risks cited by their opponents. 

I propose creating personal accounts with an extremely simple and clear financial 

structure, without diverting any payroll tax receipts away from the U.S. Treasury, 

and with low cost and efficient operations. The results will be greater ownership of 

risk-free assets throughout American households, ability for inheritance, clear links 

between one’s own efforts and retirement savings, and complete clarity in the dealings between the government and the citizens. The transition could begin promptly. 

The essential proposal is this: Social Security tax payments by individuals and 

employers, and Social Security tax receipts by the government would remain the 

same as they are now. No cash would be diverted, and the Treasury would have 

the same cash receipts from Social Security taxes as it does now. But in exchange, 

Treasury would not issue bonds to the Social Security trust fund. Instead it would 

issue bonds—specifically, inflation-indexed bonds or ‘‘TIPS’’—directly to the personal 

accounts of the individual citizens themselves, which would become in effect their 

own personal trust funds. These accounts would not receive cash but would automatically receive the safest possible investment for retirement savings. 

This is proposed as a voluntary alternative covering the portion of Social Security 

taxes which represents mandatory savings. Everyone would be given the choice to 

participate in the proposed personal accounts or stay in the current Social Security 

157 

program. It is very probable that a large majority would choose the personal accounts if they are designed as recommended, but this should be a purely voluntary 

option. 

This financial structure transparently shows the real transaction which is taking 

place between the two real principals involved: the American citizen and the U.S. 

Treasury Department. It cuts out the unnecessary and confusing ‘‘middle man’’ role 

of the Social Security trust fund, which in fact is simply a Treasury liability. 

The government’s total obligations would not increase. Some Treasury debt would 

shift from being owned by the trust fund on behalf of the citizens to being owned 

directly by the citizens themselves in their own personal trust fund accounts. The 

bonds in the personal accounts would represent an increase in Treasury debt owned 

by the public, but would be issued, like bonds now sent to the government’s trust 

fund, as automatic private placements. 

Simplicity 

The simplicity of the proposed approach would remove from the current political 

debates many distracting issues, such as whether we could afford the transition 

costs, whether personal accounts would be too risky, whether Wall Street would 

reap a bonanza, and whether operating costs would be too high. It would make unnecessary the proposed delay in implementation until 2009. 

It would also remove a central objection made by the opponents of personal accounts: that Social Security must be a moral imperative, an inviolable promise and 

part of the social contract. Nothing could make Social Security more imperative, inviolable, and a contract than to turn it into a U.S. Treasury bond. Indeed, the only 

advantage which might be argued for the current Social Security structure over the 

proposed personal accounts is that the current structure leaves open the possibility 

for the government to renege on its promises and reduce benefits. This is presumably not an argument that opponents of personal accounts will wish to emphasize. 

How much of the current structure should be replaced by the proposed personal 

accounts? The answer reflects the fact that Social Security has two components: 

first, a mandatory savings program for retirement and old age, applicable to citizens 

of all levels of income; and second, a welfare or safety net program providing a minimum retirement income and disability insurance. 

The second component by definition requires commingling of funds and should remain as it is. This would include the disability portion of Social Security and the 

provision of a minimum retirement income for low income households. 

The proposed personal accounts apply to the first or mandatory savings component: which is what most Americans think their Social Security payments should 

be. A meaningful portion, ideally the entirety, of Social Security taxes which represent mandatory savings should have available this personal account option. 

The simplicity of the proposed change in the mandatory savings function is easy 

to see by reviewing the current structure of Social Security and contrasting it with 

the proposal. 

Current Structure for Mandatory Savings 

The current Social Security structure handles the mandatory savings function 

with the following process: 

A. Cash from the citizen, both directly from wages and indirectly as employer contributions which could otherwise have been wages, is sent to the government as Social Security taxes. 

B. Social Security cash goes to the U.S. Treasury. 

C. Treasury spends the cash. 

D. Treasury issues a Treasury debt obligation to the Social Security program. This 

debt is the trust fund. It is part of the total Treasury debt outstanding. 

E. The Social Security program has an obligation to pay the citizen benefits later. 

Personal Accounts and Diversion of Cash 

Under all proposals for personal Social Security accounts so far put forward, some 

portion of the citizen’s cash would not be sent to the government, but deposited instead in an individually owned retirement account. 

Numerous political and financial objections have been made to this idea. Objections to current personal accounts proposals include: 

1. The lost payroll taxes would take cash away from the Treasury. 

2. Assuming that this cash loss would not be offset by increased taxes, the national debt must correspondingly increase. 

3. This would require the bond market to absorb large increased sales of Treasury debt, perhaps pressuring domestic and foreign capital markets and resultVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00161 Fmt 6633 Sfmt 6621 E:\HR\OC\24732.XXX 24732
158 

ing in upward pressure on interest rates and additional downward pressure 

on the dollar. 

4. The individual accounts would impose difficult and intimidating decisions 

about how to invest the cash, which many people may not be equipped to 

make or indeed wish to make. 

5. In trying to make these decisions, owners of their own retirement funds may 

be induced to take excessive risk—to ‘‘roll the dice’’ or ‘‘play the slots.’’ 

6. Personal accounts call into question the government’s commitment to future 

Social Security benefits, which should be inviolable promises. 

7. Supplying mutual funds to millions of small accounts would cause high operating costs. 

8. The program would create large windfall profits for Wall Street firms. 

9. Investments in personal accounts may not appropriately match the duration 

of investments with long-term retirement needs. 

10. Transition costs mean that implementation needs to be delayed for several 

years. 

The proposed new design for personal accounts addresses every one of these objections. 

To achieve the social advantages of personal accounts, and to a significant extent 

enhance the philosophy of personally owned assets, is a major and highly desirable 

structural reform in and of itself. However, it also offers the possibility, as discussed 

below, to address the long run excess of social security benefit expense versus income. 

A New Structure for Personal Accounts 

In the proposed structure, there would be no diversion of cash from the Treasury. 

Social Security payroll taxes paid to the government and cash received by the Treasury would stay the same as under the current structure. If voluntarily chosen by 

the citizen, the portion of these taxes representing mandatory savings would be earmarked for personal accounts. However, these accounts would not receive cash, but 

automatically receive an appropriate Treasury inflation-indexed security. 

The mandatory savings function would thus work as follows: 

A. Social Security taxes would be sent to the government, as they are now. Treasury’s cash receipts would be the same as they are now. There would be no cash 

shortfall. 

B. Treasury would spend the cash, as it does now. 

C. Treasury would issue a Treasury debt obligation, but to the citizen’s personal 

account, not to the trust fund—thereby creating ‘‘your own trust fund.’’ 

That is all. Thus the citizen would have a risk-free investment very well suited 

for retirement savings: an inflation-indexed Treasury security. Treasury debt owned 

by the public in personal accounts has increased, but debt owned by the trust fund 

has decreased. Treasury owes the citizen directly and clearly, rather than indirectly 

and confusingly through the trust fund ‘‘middle man.’’ 

Since the savings are now in the form of a directly owned, actual Treasury bond 

instead of future Social Security benefits, there must of necessity be an equivalent 

reduction in future benefits to offset the acquired Treasury security. The trust fund 

does not receive Treasury bonds but by the same taken has reduced future benefit 

obligations. For the citizen, the replacement of future benefits with actual assets of 

course applies only on a going-forward basis, as the personal accounts grow. All benefits earned by past Social Security taxes, before the private accounts transition, 

would remain unchanged. 

The proposed structure is quite similar to a historically tried and true long-term 

savings program: payroll deduction for the purchase of U.S. savings bonds. It is also 

similar to a very popular option under the Thrift Savings Plan for federal government employees: the ‘‘G Fund,’’ which invests solely in U.S. Treasury obligations. 

Such analogies, as well as the basic simplicity of the structure, would make it 

easy for the public to understand. Would most people choose to create their own 

portfolio of Treasury inflation-indexed bonds rather than hoping for future payments 

from off-balance-sheet political promises? I think they would. 

Relation to Future Benefits 

If the economic value of the bonds acquired in the personal accounts is exactly 

equal to the economic value of the reduction in future off-balance-sheet future benefit promises, we would have created the many advantages of ownership, but the 

aggregate Social Security fiscal deficit would remain unchanged. However, this 

trade-off could be given a progressive structure, analogous to recent proposals for 

159 

progressive changes to Social Security indexation formulas, for high-income households. 

In other words, for the majority of households the TIPS exchange ratio would be 

1 to 1, but for high income households it could be greater than 1 to 1. Since many 

of these households believe that in any case, their Social Security taxes will inevitably increase or their future benefits be reduced, or both, the trade in exchange 

for achieving personal accounts could be viewed as advantageous. The transition to 

personal accounts would then reduce the Social Security deficit in addition to its 

other attractions. 

The Specific Treasury Bond 

The perfect candidate for which Treasury obligations should be issued to the personal Social Security accounts is clear: Treasury Inflation Protected Securities 

(TIPS). TIPS by definition preserve purchasing power against inflation, the single 

greatest risk and an essential consideration for retirement savings. 

The TIPS would be issued in automatic private placements for each personal account. Because all the TIPS involved will be book-entry securities in fully automated 

form, small accounts and small amounts could be easily handled, and operating 

costs will be low. 

Suggestions for how the details of this would work follow. Details could obviously 

vary around the essential structure. 

The TIPS should have maturities based on the individual’s expected retirement 

date. For example, a twenty-five-year-old with an expected retirement age of sixtyfive might in the first instance receive a forty-year TIPS. Note that it is proposed 

to consider creating long-term TIPS to match the needs of retirement savings. All 

interest and inflation adjustments should simply accrue, as with typical savings 

bonds, so there is no problem of investing small amounts of cash. Laddering maturities as discussed below would result in a sensible pattern of cash flow during retirement. 

The average real return of government bonds (i.e. the yield net of inflation) in the 

long term is approximately 3 percent. The long-term TIPS to be privately placed in 

the personal accounts with a restricted period could have a real yield of about this 

same 3 percent. In an average inflation of 2 or 3 percent, for example, this would 

result in a compound annual return of 5 or 6 percent, respectively. A 3 percent real 

yield would match the real 3-percent discount rate often used in calculations of the 

value of future Social Security benefits. 

For ownership to be effective, the TIPS received in the personal accounts must 

be negotiable securities. However, it would make sense to have a period after each 

private placement during which sale would be restricted. After that, the citizen 

would be entirely free to sell in order to make other eligible investments, if desired, 

provided of course that all proceeds and investments must stay in the retirement 

account until qualified for withdrawal. 

The appropriate length of the restricted period before the privately placed TIPS 

would become negotiable must be defined. A starting suggestion would be five years, 

to insure a smooth transition, while also allowing the future addition of private 

asset categories. 

The maturities of the TIPS should be based on expected retirement age but should 

not all mature at that date, which would cause a difficult decision point and large 

reinvestment risk. The idea of buying an annuity upon retirement does not address 

this problem, since if at that time interest rates are low, annuities will be unattractive to purchase—not to mention the need to address the credit risk of the annuity 

writer. A preferable approach would be to automatically ladder the maturities of the 

TIPS in the personal accounts to spread cash receipts from maturing bonds over the 

retirement years. Recall in this context that the safety net component of Social Security would also continue to function. 

Individuals who choose to continue working past retirement age would continue 

to accumulate assets in their personal accounts. This would provide an incentive to 

reduce the extended period of retirement which is a central cause of Social Security’s fiscal deficit without having to mandate changes in retirement age that would 

naturally be inappropriate in many individual cases. 

In sum, the personal accounts would represent a voluntary way to hold mandatory savings. Continuing to hold the TIPS past their restricted period would also 

be voluntary. 

But no investment decisions or risks would be forced upon the citizen. Especially 

considering those who might feel confused or intimidated, no action would be required to have a very sensible and safe investment, with zero credit risk and guaranteed inflation protection, very suitable for retirement savings, automatically proVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00163 Fmt 6633 Sfmt 6621 E:\HR\OC\24732.XXX 24732
160 

vided. This means that there is a robust ‘‘default case,’’ an important element in 

a system of choices. 

A safe prediction is that a significant proportion of these securities would never 

be sold, but would be held to maturity. There would be no rush and no pressure 

on the individual to have to do anything, unlike the case of having to invest cash. 

In addition, the restricted period should comfort any observers who might fear the 

possibility, however unlikely, of a large initial outflow of TIPS into the market. 

Benefits for an Ordinary Couple 

Suppose an ordinary couple signed up for the personal account option when they 

were both twenty-five years old, with a household income of $50,000 per year. What 

might their personal account retirement assets look like at age sixty-five, assuming 

the ‘‘default case’’ of simply holding their TIPS? 

As an example, assume the real yield on TIPS is 3 percent, average inflation of 

2.5 percent, real wage increases of 1.5 percent, and half the Social Security tax represents mandatory savings devoted to personal accounts. At age sixty-five they 

would own investments totaling over $800,000. If they worked to age seventy in line 

with their greater expected longevity and health, the personal account investments 

would total $1.15 million. 

Now suppose two-thirds of the Social Security tax represents mandatory savings 

which generate TIPS for the personal account. At sixty-five, the investments would 

be more than $1 million; and at age seventy, more than $1.5 million. 

These would be real assets, really owned by ordinary Americans. 

Conclusion 

The proposed approach would lead to personal Social Security accounts as a key 

transition and structural reform. It addresses all of the objections to private accounts, as follows: 

1. There would be no cash shortfall to the Treasury. 

2. There would be no increase in the total national obligations. Treasury debt 

owned by the public would increase, but Treasury debt owned by the ‘‘trust 

fund’’ would decrease. Off-balance-sheet future benefit liabilities would also 

decrease. If the suggested progressive structure were adopted, future liabilities would decrease by more than the value of the TIPS issued, thus reducing 

the Social Security deficit. 

3. There would be no need to market more Treasury debt—the bonds involved 

would automatically be privately placed in the personal accounts. 

4. No difficult choices would be imposed on individuals—if they do nothing, a 

very safe and appropriate retirement investment is automatically provided. 

The default case is robust. 

5. There is no pressure to take risk or ‘‘roll the dice.’’ TIPS are the exact opposite 

of the rolling dice. In particular, they directly address the biggest risk to retirement savings, namely inflation. 

6. The best way to make the promises of the government truly inviolable is to 

make them into an explicit Treasury bond. 

7. The use of TIPS would allow a low cost, efficient book entry system. 

8. With investments automatically provided, there is no windfall for Wall Street, 

and small accounts can be handled efficiently. 

9. Appropriate long-term investments matched to retirement needs are automatically provided. 

10. The proposal would allow prompt implementation of personal accounts. 

Moreover, the idea is simple and easy to understand. As a voluntary alternative 

to build personal ownership of long-term savings, I believe having ‘‘your own trust 

fund’’ would be readily chosen by a majority of Americans. 

f 

Submission of Eva Hain, California Retired Teachers Association, 

Sacramento, California 

Chairman Thomas and members of the Committee, my name is Eva Hain and I 

am president of the California Retired Teachers Association. We are a non-profit organization with 53,000 members, and we represent the interests of the 170,000 retirees who receive a pension from the California State Teachers Retirement System 

(CalSTRS). I want to thank you for convening these hearings on alternatives to 

strengthening Social Security, America’s fundamental safety net for retirees. 

161 

We believe that a basic premise of strengthening Social Security is to keep faith 

with its promise of ensuring that older Americans do not fall into poverty at the 

end of their working lives. 

The CalSTRS system is not integrated with Social Security, so many of our members are victims of the Windfall Elimination Provision and the Government Pension 

Offset. These two penalties remove that financial safety net and we find our members suffering from unexpected income losses late in life. Many women are plunged 

into poverty when their husbands die and they are denied any survivor’s benefits 

from Social Security due to the Government Pension Offset. Other teachers find 

their summer work, when they typically paid into Social Security in order to support 

their families during the school-year break, is discounted in retirement when they 

receive thousands of dollars less than they would have if they had not been teachers. The underlying assumption seems to be that teachers have their own pension and 

that should protect them from poverty. The sad truth is otherwise. CalSTRS conducted analyses in 1998 and 2005 on the adequacy of the pension benefit they provide, and in both instances found many lagging behind the amount of income they 

need to maintain an adequate lifestyle in retirement. Even with long years of teaching service, California educators who retired before 1998 were only able to replace 

about 58 percent of their income—far below what experts consider to be adequate. 

The typical female retiree receives less than $2,000 a month from her teacher’s pension, hardly sufficient in a high-cost state like California. Unlike Social Security, 

which provides full cost-of-living increases annually, teachers’ pensions in California 

are only protected at 80 percent of their original purchasing power. 

In addition, many of our members only found out about the WEP and GPO when 

they filed for their benefits. By then, it was too late to make alternative financial 

plans to ensure a secure retirement. Worse, many others mistakenly receive benefits 

for years and then are forced to pay back all money received—in one instance more 

than $40,000. In most instances, these people relied in good faith on estimates of 

benefits provided by the Social Security Administration itself. The Social Security 

Administration itself has admitted that it overpays upwards of $335 million a year 

in mistaken benefits. If Social Security doesn’t know who is affected by these penalties, how can we expect that those subject to them will understand them? 

Beyond the policy itself, you have to understand the personal financial suffering 

many people have endured because of these penalties. We have collected many, 

many such stories from our members and I want to share some of those with you 

today. 

Ruth Benjamin of San Diego had planned on Social Security payments of approxi- mately $800 per month when she retired, because that is what the Social Security 

Administration told her to expect. Instead, due to the GPO, she receives only $216 

per month plus a teacher’s pension of about $700 per month. Her husband is a retired New York City Police Department officer, who receives a police pension of approximately $1,500 per month plus a Social Security benefit of $1,000 per month. 

In their retirement planning, they opted to take a higher police pension without survivor’s benefits because they believed Ruth would be adequately provided for with 

her teacher’s pension and Social Security. Now, if she becomes a widow, she will 

have to survive on income of less than $1,000 per month due to these penalties. 

Wanda Moore of Fresno was married for 38 years to her husband, a barber. He 

paid into Social Security for 40 years and died before collecting any benefit. She was 

initially told she would receive a survivor’s benefit of $496 per month from Social 

Security before that payment was eliminated under the GPO because of her teacher’s pension. 

Carol Huntsman of San Diego began her teaching career at age 36 and was only 

able to teach for 20 years before retiring in 1996 with a monthly pension of $700. 

The twenty previous years she had worked in Social Security-covered employment 

was reduced in value by 60 percent, or $223 per month under the WEP. Fortunately 

in 2000 her teachers’ pension was increased under a law that provided minimum 

pensions to teachers with 20 years or more of service. 

Georgia Beno of Santa Ana taught for 32 years before she retired in 1989. She 

receives a pension of about $2,100 a month now. But she lost $900 a month income 

from Social Security when her husband died in 1999 and she was told she was ineligible for a survivor’s benefit. Since then, her health insurance and rent and other 

expenses continue to increase. She hasn’t taken a vacation in four years, digs into 

her savings each month to meet expenses and still has to rely on her family to help 

pay her bills. 

Claire M. Koronkiewicz of Palm Springs taught for 30 years in California before 

retiring in 1986. Today she receives a teacher’s pension of about $1,800 per month, 

after taxes. Her husband, a Purple Heart veteran of General Patton’s 3rd Army, had 

162 

a modest income as a worker in the floral industry in Los Angeles for 30 years. He 

died at age 65 after receiving three years of Social Security benefits. Claire was told 

she was eligible for $374 per month in survivor’s benefits—before that was eliminated under the GPO. Since then, she has had to sell her home because it was too 

expensive to maintain and has dipped into her savings earlier than planned to meet 

her living expenses. 

Marylyn McInnes of Visalia taught for 31 years before retiring in 1998. Her husband owned his own carpet cleaning business for 15 years and, as a self-employed 

individual, paid both the employee and employer shares of the Social Security tax. 

He received Social Security for 2 years before he died. When Marylyn applied for 

her widow’s benefit, she was told she did not qualify because of her teacher’s pension and she lost $400 a month in income. 

Elbert Bade of San Diego had a 20-year career in the U.S. Air Force. When he 

retired from the Air Force, he had a choice of a second career as a teacher or in 

the aerospace industry. Unaware of the GPO and WEP, he figured his future retirement income—assuming money from a teacher’s pension and Social Security—and 

determined that he could afford to become a teacher. He taught for 23 years and 

retired in 1997. When he applied for Social Security, he was informed of the penalties and saw his retirement income reduced by $8,400 a year. ‘‘Teaching’s a great 

career and very satisfying but no one tells you they’re going to jerk your Social Security because you were a teacher,’’ he told us. 

What all of these people have in common is that they worked hard at public service jobs all of their lives. They raised families and took care of themselves. They 

recognized they wouldn’t receive a full Social Security benefit, but they believed 

they would receive what they had earned and been promised. 

There is yet another unintended consequence of these penalties. California, like 

many states, faces severe teacher shortages in the years ahead—an estimated 

100,000 new teachers will be needed in the next 10 years just to replace retirees; 

more will be needed to accommodate our growing population. Many of our best 

teachers come from other professions. Typically they are unaware that they are giving up significant Social Security benefits in retirement to make a switch to public 

service, often at a lower salary than they were receiving from their first career. An 

estimated 50,000 current teachers fit this profile, and will retire with 20 years of 

less teaching service. That means a substantially smaller teachers’ pension and a 

significant loss of Social Security income. They willingly make the sacrifice in salary 

during their working life; they are forced to sacrifice in retirement. 

We recognize that there are financial challenges facing Social Security, if not a 

crisis. We appreciate, however, that growing numbers of Congressional Representatives understand that these penalties have not had the intended effect, that they 

penalize hard-working people of modest means. I would note that 251 Congressional 

Representatives have already signed on to HR 147, which would repeal these penalties. Any reform of the Social Security system must restore its foundation in fairness. On behalf of the California Retired Teachers Association, I would say that you 

can do no less. 

Thank you. 

The California Retired Teachers Association, founded in 1929, is the state’s largest organization dedicated to protecting the interests of retired educators who receive pensions from the California State Teachers Retirement System. 

f 

Statement of Joyce R. Elia, Mission Viejo, California 

Thank you for giving me this opportunity to write to you. 

As the Committee reviews the multitude of issues associated with Social Security, 

I ask members to consider correcting a ‘‘fix’’ that was initiated in 1983, and, to also 

not make similar mistakes this time around (such as privatization which will line 

the pockets of Wall Street and cost billions of dollars to implement). Congress has 

made the same mistake as many corporations recently in the news—they have 

‘‘spent’’ the hard-earned pension funds of workers during the stock market’s heyday 

and have now been ‘‘caught short’’. Workers in this country have had enough of the 

corporate greed and fiscal irresponsibility of government. We are tired of ‘‘paying’’ 

for everyone’s mistakes, while the corporate CEOs continue to live the ‘‘good life’’ 

with no understanding, and with a complete lack of conscience, of how the ‘‘real’’ 

people in this country live. 

The private sector continues to follow the government’s lead in cheating employees out of their retirement benefits (United Airlines, possibly General Motors, to 

163 

name a few), with the government’s blessing. At the same time, like Congress, the 

retirements for the ‘‘chosen few’’ are preserved. The hardworking, tax-paying individuals of this country deserve better and we expect you to act responsibly. President Bush espouses a Christian ethic. There is absolutely nothing ‘‘Christian’’ about 

defrauding American workers with high taxes and erosion of their pensions. 

As a current government (court) employee and former private sector employee, I 

am seeking your support of HR 147, ‘‘Social Security Fairness Act,’’ to eliminate the 

Government Pension Offset (GPO) and Windfall Elimination Provision (WEP) to Social Security. This legislation was enacted in 1983, during a period when Congress 

was looking for ways to reduce the cost of Social Security. Their decision to place 

that burden on the backs of government workers and teachers has created a fraudulent and discriminatory solution which wrecks financial havoc on the lives of affected individuals. 

The GPO and WEP will greatly affect mine and millions of other Americans’ ability to collect the full Social Security benefits that they have earned and to which 

they are entitled. This is a non-partisan issue that transcends politics and affects 

voters of all parties. 

Three years ago, a co-worker returned from her ‘‘retirement planning session’’ 

crestfallen to learn that the small pension which she had earned working for the 

Orange County Superior Court was going to dramatically impact the receipt of her 

earned (as well as her ability to collect her husband’s earned) social security benefits. Her situation will become worse, should her spouse predecease her. She will 

not be eligible for any spousal benefits, which he worked a lifetime to earn in his 

effort to provide for his wife. At the time, I was totally unaware of these two laws 

and their impacts. I had worked in the private sector for many years before ‘‘retiring’’ to raise a family. 

When I returned to the workforce in 1994, to work as a Senior Administrative 

Assistant to the CEO of the South Orange County Municipal Court (unified to Superior Court in 1998), I was not informed by the County/Court that paying into the 

County retirement system would negatively impact my ability to collect mine and/ 

or my husband’s hard-earned Social Security benefits. The County retirement plan 

is predominantly self-funded by employees, with only a small portion of the contribution coming from LOCAL (not Federal) taxes. I erroneously assumed that any 

pension I earned would supplement my earned Social Security benefits. These laws 

force me to either leave my job, friends and an important part of my life prior to 

ten years of service (vesting) or relinquish my own and my spousal rights to Social 

Security. It punishes me for doing what the government told me to do—plan for the 

future. (I would have been better off staying at home and letting the government 

subsidize me.) The outcome is discriminatory and dishonest, as well as disheartening, to a loyal hard-working employee. 

The laws are arbitrary and selective—being particularly discriminatory to women. 

Women receive only half the average pension benefits received by men and these 

laws further reduce that small sum. 

Please preserve teachers’ and government workers’ retirement benefits that they 

have paid for and deserve by passing HR147, which will repeal legislation which in 

actuality is ‘‘legalized fraud,’’ (i.e., the government has taken, or in many cases, 

continues to take monies via social security taxation, which it has no intention of 

returning by way of future benefits). Numerous teachers and public workers (many 

of whom are single Moms), have part-time employment to make ends meet. From 

those private-sector checks, social security is being deducted—when under current 

laws, that money will never be returned. If private companies acted in such a manner, they would be charged with FRAUD. 

I have included a briefing paper which expands on the legislation’s impacts. 

I urge Congress’ support and passage of this important legislation. I also urge 

Congress to look into other areas for savings: reduction/restructuring of Congressional retirement benefits; reduction in foreign national benefits, fairer taxation, to 

name but a few. 

I do not support private accounts OR melding government/teacher pensions into 

Social Security. This practice would place yet another undue burden on this class 

of individuals. Their pensions should be treated in the same manner as private sector retirement plans—separate and apart from Social Security. 

Additionally, Congress makes it increasingly difficult for individuals and families 

to save for their retirement, especially when the interest on SAVINGS accounts are 

taxed. 

f 

164 

Boise, Idaho 83706 

May 4, 2005 

Members of the House Ways and Means Committee 

I am extremely concerned about the future solvency of the Federal Old-Age and 

Survivors Insurance and Disability programs. I applaud President Bush for focusing 

attention on this important problem. I do not support his effort to change Social Security from a defined benefit program to a defined contribution program. Private accounts carved out of Social Security will only make the program’s future insolvency 

worse. 

I was born in 1955 in north Idaho, where my father was an independent logger. 

He was killed in a logging accident when I was four years old. If it hadn’t been for 

OASDI benefits, I don’t know how my family would have survived. The benefits 

were small, but my mother was able make every penny count. I didn’t realize until 

I was much older just how little income we had, or how poor we were. My mother 

had lived through the stock market crash, the Depression and WWII—so ‘frugal’ 

was her middle name, and she taught me well. I strongly believe in individual responsibility, personal financial planning and saving for your own future. But life is 

not an even playing field; many events outside of an individual’s control present 

barriers to adequately providing for your own future financial well being. We must 

retain the Social Security safety net’s ability to help keep people who have experienced hardships out of poverty. 

Because I have personal experience and know the value of OASDI benefits, I have 

read widely about numerous proposals to ‘reform’ Social Security, from many different sources, including the Social Security Board’s 2004 report, the Cato Institute, 

Reuters, NCPERS, I follow the daily happenings through many media sources, and 

I. These are my thoughts concerning a sound proposal to reform SS, I hope you will 

incorporate them into any legislation that Congress writes: 

1. Immediately end the practice of using surplus OASDI revenues to fund other 

government programs. 

2. Immediately end the practice of purchasing apparently worthless U.S. Treasury bonds with the surplus OASDI revenues. I call the bonds ‘apparently 

worthless’ since it seems the federal government does not intend to take the 

actions necessary to honor the obligation to pay back the ‘IOUs’ when they 

come due. 

3. Immediately begin investing the surplus OASDI revenues in low-risk equity 

markets to gain a higher rate of return than with U.S. Treasury bonds, but 

without the risks being placed on workers. 

4. Raise, or better yet, eliminate the payroll cap on which SS payroll taxes are 

paid. 

5. NO ‘personal accounts’ carved out of the current SS system. 402(k)s, IRAs, etc., 

are readily available not to everyone—make it easier if not mandatory that employers make options available for workers to contribute to retirement saving 

plans through payroll deduction outside of the Social Security system, and 

automatic that workers contribute—they would have to deliberately opt out. 

OASDI is not a retirement investment program, it is a social insurance program 

designed to reduce poverty among those most at risk—a safety net for older people 

and people with disabilities who do not work, cannot work, or cannot earn enough 

to sustain their independence and autonomy, and the surviving family members of 

workers who have died. Our country cannot turn its back on these citizens. 

I thank the Ways and Means Committee for this opportunity to give you my 

views. I ask Congress to do its job; thoughtfully, timely, and in a bipartisan way. 

Please, do what is right for all of our citizens. Preserve the Social Security safety 

net. 

Sincerely, 

f 

Yvonna S. Englesby 

Statement of Don Fronek, Toney, Alabama 

Social Security Comments: 

I am 67 and currently receiving Social Security Benefits after 40 + years as an 

Electrical Engineer and college professor. I have long followed the progress of the 

165 

Social Security system. I too, agree that the system needs to be changed so that others in the future may have a retirement benefit. 

The current system takes in payroll money, pays out benefits, and deposits the 

remainder of the payroll money (called the Social Security Surplus) into the U.S. 

Treasury General Fund. The Social Security surplus money is spent immediately by 

the Federal Government and an equivalent dollar amount IOU is given to the Social 

Security Trust fund. When the time comes to pay back these IOU’s, the Federal 

Government has no money set aside to do this. The first question immediately 

comes to mind, ‘‘why allow the Federal Government to spend the Social Security 

Trust Fund?’’ If this were not done, Social Security would be able to pay benefits 

longer. By investing the Social Security Trust fund in non-Government securities, 

the fund would last even longer. 

So, it is obvious to me that stopping the Federal Government from spending the 

Social Security Surplus (Trust Fund moneys) would be the first step in solving the 

many financial problems that will occur for the Social Security entitlement program 

in the future years. My question is ‘‘why hasn’t this happen long before now’’. 

f 

Statement of Cecile M. Galvin, Laguna Niguel, California 

Thank you for giving me this opportunity to write to you. 

Workers in this country have had enough of the corporate greed and fiscal irresponsibility of government. We are tired of ‘‘paying’’ for everyone’s mistakes, while 

the corporate CEO’s continue to live the ‘‘good life’’ with no understanding, and with 

a complete lack of conscience, of how the ‘‘real’’ people in this country live. 

The private sector continues to follow the government’s lead in cheating employees out of their retirement benefits. The hardworking, tax-paying individuals of this 

country deserve better and we expect you to act responsibly. They are defrauding 

American workers with high taxes and erosion of their pensions. 

As a current government (court) employee and former private sector employee, I 

am writing to enlist your support of S-349, ‘‘Social Security Fairness Act,’’ to eliminate the Government Pension Offset (GPO) and Windfall Elimination Provision 

(WEP) to Social Security. 

These are penalizing social security laws that were passed some years ago. I will 

be affected by these laws twofold. First, I have been a judicial secretary in the court 

system for almost 22 years. Prior to these years, I worked as a secretary and paid 

into social security and am eligible to receive social security benefits. Why? because 

I earned them. Had I known that I would lose two thirds of my SS when I applied 

for a position with the Orange County Municipal Court, I would not have applied. 

This was never communicated to us in writing or otherwise. 

When I married in 1957, as a wife of a brand new Ensign in the U.S. Navy I did 

not work. Most wives did not work at that time because of our life long commitment 

to our marriage and the anticipation of having children. By 1965, we were the proud 

parents of six children. It took every ounce of our income and loans to raise them 

and put them through private schools and private universities and we would not 

have it otherwise. Today, because of our ultimate sacrifice, we do not own a home, 

we do not have any savings and we live from month to month. This is our life and 

I will continue to work because my paycheck is not enough to cover our expenses 

and we are both in our 70’s. Since I am still working, I am collecting S.S. and we 

need every bit of that along with my paycheck to make ends meet. 

I am now faced with a dismal future with regards to my retirement since I turned 

71 on August 17, 2004. Secondly, when I retire, why should I lose my husband’s 

portion of SS if he qualified for it? Thirdly, if he should die before me, I would get 

nothing. How is that just? Would you leave your wife in the same predicament? How 

about your mother? Working wives should have the same rights to a spouse’s full 

benefits as non-working wives. That is only right 

This is not double dipping for us; it is double dipping for the U.S. Government 

which puts us in the poverty arena and so I will have to continue working until 

my demise or until I am unable. I would like your views on this topic. Have they 

approached you regarding these specific laws? This is a non-partisan issue and goes 

beyond politics because everyone has a relative, relatives or friends that will retire 

some day. What will you say to public employees and teachers when they find out 

that they are no longer entitled to the benefits of the SS system that they paid into? 

Hopefully, I will be guaranteed the retirement benefits paid for and deserved. I 

urge Congress’ support and passage of this important legislation. 

166 

Thank you very much for your attention to this matter that so greatly affects the 

quality of life for seniors in this country. 

Social Security should be fixed—not broken. 

f 

Statement of Francis L. Gould, Vista, California 

Thank you for giving me this opportunity to write to you. 

I am a veteran, having served in the United States Marine Corps for 22 years 

with tours in Vietnam and participation in numerous combat operations. 

However, my Social Security benefits are offset because of my military service and 

will be further offset because I work for the State of California in a judicial capacity. 

So I personally take a double offset from monies promised and earned legitimately 

under my participation in Social Security. 

Further, my wife will have her Social Security entitlement, through me, reduced 

because of my double offset. 

I wish to remind you of the millions of citizens who legitimately earned Social Security credits and are entitled to full faith and credit of our expectations. 

The private sector continues to follow the government’s lead in cheating employees out of their retirement benefits (United Airlines, possibly General Motors, to 

name a few), with the government’s blessing. At the same time, like Congress, the 

retirements for the ‘‘chosen few’’ are preserved. The hardworking, tax-paying individuals of this country deserve better and we expect you to act responsibly. President Bush espouses a Christian ethic. There is absolutely nothing ‘‘Christian’’ about 

defrauding American workers with high taxes and erosion of their pensions. 

As the program is now administered, we have been duped. In effect the government has committed legal fraud in inducing us to participate in this program and 

is now committing on an on-going basis, grand theft, in taking it from us. 

f 

National Association of Disability Examiners 

Lansing, Michigan 48911 

May 25, 2005 

The Honorable Bill Thomas, Chairman 

Committee on Ways and Means 

United States House of Representatives 

2208 Rayburn House Office Building 

Washington, DC 

Dear Mr. Thomas: 

On behalf of the National Association of Disability Examiners (NADE), I want to 

thank you and the members of your committee for your work in investigating alternatives to strengthen Social Security. This is indeed a topic that has captured the 

attention of our organization and the American public. 

NADE is a professional association whose mission is to advance the art and 

science of disability evaluation. The majority of our members work in the State Disability Determination Service (DDS) agencies and are responsible for the adjudication of claims for Social Security and Supplemental Security Income (SSI) disability 

benefits. Our members are very interested in what the future holds for the Social 

Security Disability Insurance (DI) program—both for its professionals and for its 

beneficiaries. 

We have read with interest the testimony provided at the hearing before your 

committee on May 12, 2005. While there was some limited discussion regarding the 

Social Security disability program, we were concerned that this critical program did 

not receive broader consideration. 

Social Security is absolutely vital to millions of Americans and the need to 

strengthen and preserve it for future generations has been widely discussed. However, while people with disabilities have a major stake in the Social Security reform 

debate, in much of the public discussion and analysis of the issue very little has 

been mentioned about how they, and their family members receiving auxiliary benefits, will be affected. 

With the passage of the Americans with Disabilities Act, our government made 

a commitment to people with disabilities. That commitment must continue to be 

167 

honored by giving very careful consideration to how changes in Social Security’s 

funding or benefit structure will impact the disability program and the beneficiaries 

who depend on it. 

We commend your ongoing efforts to provide a thorough analysis of the myriad 

of challenges that confront the Social Security program. One of these challenges is 

to strengthen Social Security, while protecting people with disabilities. Our organization looks forward to working with you in that quest. 

Sincerely, 

Martha A. Marshall 

f 

President 

Statement of Barbara Kennelly, National Committee to Preserve Social 

Security and Medicare 

Chairman Thomas, Ranking Member Rangel, and Members of the Committee: 

The National Committee to Preserve Social Security and Medicare represents over 

4 million members and supporters who are united in their opposition to the privatization of Social Security. The members of the National Committee understand better than anyone the importance of Social Security. Every day, over 47 million Americans—one out of every four households—experience the success of Social Security 

firsthand. This great program is the single largest source of retirement income in 

the United States, and each year it keeps 12 million seniors out of poverty. Social 

Security, unlike virtually any other retirement vehicle, provides a sound, basic income that is adjusted for inflation and that lasts as long as you live. 

The members of the National Committee are seniors who have long experience 

with the unpredictability of life. They understand the true value of Social Security 

not just for themselves, but for younger Americans as well. In fact, older Americans 

see Social Security as part of their legacy to their children and grandchildren. 

National Committee members fervently believe in Social Security. They have experienced firsthand the ‘‘hazards and vicissitudes’’ of life and believe in a collective 

societal sharing of risk to guard against them. They also truly believe carving private accounts out of Social Security will ultimately result in the dismantling of Social Security as we know it. At a press conference on April 28, President Bush reaffirmed his determination to carve private accounts out of Social Security, placing 

American’s retirement security at risk while passing along trillions of dollars of additional debt to our children and grandchildren. 

At the same time, President Bush announced his support for a plan to cut Social 

Security benefits for middle and higher-income Americans. The plan would make 

substantial cuts in benefits for over 70 percent of future retirees. All workers earning more than a modest $20,000 a year today would see significant reductions in 

their Social Security checks. A worker who earns about $37,000 today—hardly a 

royal sum—would suffer a 28 percent benefit cut. A person who earned $60,000 

would experience a reduction of over 40 percent. Ultimately, Social Security would 

be converted from a broad-based retirement income security plan into a retirement 

plan solely for the poor. Hard-working, middle-class Americans would be the big losers. 

In addition to targeting middle-class Americans, the President is insisting on his 

plan for private accounts. Such accounts not only do nothing to improve Social Security’s solvency, but, by diverting payroll taxes out of Social Security, private accounts actually accelerate insolvency. Diverting 4 percentage points of payroll taxes 

into private accounts, as the President has recommended, would drain the Trust 

Fund so quickly that the program would face a cash-flow problem in 2011 rather 

than 2017 as under current law. Moreover, the Trust Fund would become unable 

to pay full benefits by 2030, a decade earlier than if no payroll taxes had been diverted into private accounts. 

The creation of private accounts requires a massive infusion of funding spanning 

multiple generations. These costs are often obscured but are unavoidable in such a 

vast systemic change. Today, Social Security is a pay-as-you-go program, which 

means the payroll taxes paid by today’s workers go to pay the benefits of today’s 

retirees. Under privatization, however, today’s workers must also fund their own accounts. 

The result of privatization is that generations of workers end up paying twice— 

once to pay the benefits that have already been earned by current retirees, and then 

again to fund their own benefits, whether through borrowing, tax increases, cuts in 

future benefits, or some combination. A study conducted for the National Committee 

168 

in 1997 concluded that every single generation living at the time of privatization 

would end up worse off financially than if nothing at all had been done to strengthen Social Security. More recent projections by other organizations, including the 

Congressional Budget Office, have reached similar conclusions. 

The non-partisan Center on Budget and Policy Priorities has estimated that Presi- dent Bush’s private account proposal would cost an additional $5 trillion in new borrowing in the first 20 years alone. Our current public debt—which is the accumulation of all our nation’s borrowing until this point in history—stands at $4.5 trillion. 

This single proposal, therefore, would double the debt we have accumulated 

throughout this nation’s history in only two decades and require trillions of dollars 

of additional borrowing in future years. This ten trillion dollars in federal borrowing 

comes to $34,000 of debt for every man, woman and child in America. A child born 

today would still be repaying the debt well into middle age. 

The impact of trillions of dollars in additional borrowing on financial markets is 

unclear, with miscalculation potentially resulting in catastrophic consequences. Acceptance of the additional borrowing requires lenders to rely on assurances by current legislators that their successors 50 years in the future will follow through on 

the dramatic benefit cuts privatization plans will require. 

The magnitude of the cost of private accounts is so great that the dramatically 

larger borrowing must be accompanied by cuts in benefits. These cuts reduce benefits above and beyond any changes needed to restore Social Security’s solvency. 

Thus, the President’s private account plan not only imposes substantial middle-class 

benefit cuts and massive new borrowing, it subjects those people who opt for private 

accounts to a ‘‘retirement tax’’ in the form of additional reductions in their benefits. 

For every dollar a person transfers into his private account, he must pay back that 

dollar upon retirement out of his Social Security benefit—plus 3 percent interest 

above inflation, regardless of the actual balance in his account. Even a low-inflation 

environment like today’s still generates about 3 percent inflation, so in order to 

come out ahead, accounts today would have to earn over 6 percent. Economists 

project that over time, this so-called ‘‘clawback’’ or ‘‘offset’’ of benefits will reduce 

the Social Security benefit by almost half. When the two types of benefit cuts required by the President’s plan are combined, they effectively phase-out Social Security benefits for all but the lowest-income workers over time. 

To paraphrase Arthur Levitt, former Chairman of the SEC, from a recent editorial: ‘‘Borrowing against one’s Social Security to invest in the markets is a risky strategy 

that would only make sense for certain high net-worth investors who can afford to 

lose their entire investment. For the majority of workers who make less than $50,000 

a year, private accounts are not a good investment not just because the odds of coming out behind are high, but also because THESE INVESTORS VERY LIKELY MAY HAVE

NOTHING TO FALL BACK ON IF THEY LOSE THAT MONEY.’’ 

Privatization places the risks of achieving an adequate retirement income entirely 

on the individual. However, markets go up and markets go down, and woe to the 

person who must retire in a declining market. Any system based on private accounts will necessarily place a tremendous burden of ‘‘market timing’’ on future retirees. Looking at markets that are averaged out over the long-term masks the dramatic fluctuations accounts experience on a daily basis. Moreover, requiring a person to annuitize his or her private account balances adds another unpredictable 

variable—interest rates at the time of annuitization—to an already complex calculation. As a result, workers with exactly the same salary histories would inevitably 

be subject to dramatically different incomes from their private accounts based entirely on their date of retirement. 

The last issue I would bring to the Committee’s attention is the impact of private 

accounts on current retirees. Many proponents of private accounts seem to believe 

that seniors are mostly motivated by self-interest, and, if they can simply be convinced that their own checks are not at risk, they would sit this battle out. 

In my conversations with seniors, I find two schools of thought. First, there are 

a number of seniors who do not believe the Administration’s assurances that they 

would not be impacted by private accounts. These seniors look at the long-term impact of the required borrowing and reach the conclusion that even if they are ‘‘held 

harmless’’ initially, carrying that amount of debt simply is not sustainable over 

time. They believe that, once budgetary pressures build high enough, budget cutters 

will necessarily look for deeper cuts in programs such as Social Security, Medicare 

and Medicaid. The current budget debate in Congress only serves to confirm their 

suspicions. Few seniors have other sources of income, so any reductions in these 

programs would have a dramatic impact on them. 

But even those who believe they will be protected are not heading for the sidelines. That is because they truly believe in Social Security—in its guaranteed beneVerDate Aug 31 2005 05:04 Dec 27, 2006 Jkt 024732 PO 00000 Frm 00172 Fmt 6633 Sfmt 6621 E:\HR\OC\24732.XXX 24732
169 

fits, in its progressivity, in its insurance elements. And they believe in Social Security so passionately, they want to preserve it for their children and grandchildren. 

I have seen this passion to protect Social Security at every town hall meeting in 

which I have participated. Senior’s opposition to privatization is not dissipating— 

if anything, it is growing stronger. 

Private accounts that replace Social Security’s guaranteed benefits do not supplement Social Security, they undermine it. The more people realize the trade-offs required to restructure Social Security—the additional risk, the substantial middleclass benefits cuts, and the massive new federal borrowing—the more their support 

for privatization drops. Through their opposition, the American people are stating 

loudly and clearly that they prefer to strengthen the current system rather than entrusting their retirement security to the uncertainties of the investment markets. 

Because of this, Congress should renounce replacing guaranteed Social Security benefits with risky investment accounts, burdening middle-class Americans with major 

cuts in Social Security benefits, and saddling all Americans with massive new federal debt. 

f 

Statement of the National Education Association 

Chairman Thomas and Members of the Committee: 

The National Education Association (NEA) respectfully submits the following comments for inclusion in the record of the Ways and Means Committee hearing on Social Security privatization. 

NEA represents 2.7 million educators working in America’s public schools. Many 

of our members, along with millions of other public employees, rely on Social Security to help ensure a secure retirement. Teachers and education support professionals, like the majority of middle class Americans, rely on Social Security for their 

future. Educators are particularly vulnerable in their retirement security, both because of their comparatively low salaries and increasing attacks on their pension 

plans. 

Social Security is more than a retirement plan. It is our nation’s most successful 

social insurance program. Proposals to privatize the system have thus far ignored 

the impacts on children who receive survivor benefits and persons with disabilities 

who rely on Social Security to survive. The impacts on these most vulnerable populations cannot be ignored. 

NEA has three priorities for any Social Security legislation moving through Congress: 

• Opposing any efforts to privatize Social Security; 

• Ensuring that public employees who are enrolled in and have paid into other 

retirement security plans are not mandated to participate in Social Security; 

and 

• Repealing unfair offsets—the Government Pension Offset and Windfall Elimination Provision—that deny earned Social Security benefits to many public employees. 

THE CASE AGAINST PRIVATIZATION 

NEA strongly opposes any privatization of Social Security. Social Security is the 

cornerstone of the social safety net for America’s retired workers and should not be 

subject to risky, unproven schemes. Privatization carries great risk and will jeopardize the secure retirement of many Americans. 

Private Accounts Lack the Important Social Insurance Properties of Social 

Security 

Social Security adjusts for inflation; is guaranteed to last an entire lifetime, no 

matter how long; is shielded from stock market losses; and is payable to multiple 

beneficiaries across generations (e.g., to surviving family members for their lifetime). Private accounts and defined contribution pension plans have none of these 

protections. Workers investing in private accounts will assume responsibility for the 

risks that are currently covered by Social Security protections. This could lead to 

many retired employees needing extra support in their elderly years—a time when 

they should live with a sense of peace and security. 

Private Accounts Would Turn Social Security into an ‘‘Individual Insecurity’’ Program 

170 

Rather than just shifting ‘‘ownership’’ of retirement assets from the government 

to workers, Social Security privatization shifts an inordinate amount of risk away 

from the government and onto American workers. The United States’ experience 

with defined contribution pensions and 401(k) plans shows that many people fail to 

understand even the most basic aspects of investment and that many make bad investment decisions (e.g., failing to diversity their investments). Unfortunately, many 

people simply do not have adequate financial experience, training, or time to do a 

good job managing their own accounts. 

THE IMPACT OF PRIVITIZATION 

Impact on Women 

Women comprise over three-quarters of NEA’s membership. Therefore, NEA has 

a particular concern about the impact of Social Security privatization on women. 

Women traditionally have lower lifetime earnings than their male counterparts, and 

women in the education profession face comparatively lower salaries than many 

other professionals. 

Although privatization proposals say that participation in private accounts would 

be voluntary, the benefit cuts in the plan would be mandatory for everyone. These 

cuts would be devastating for women, who rely more on Social Security than men 

do. Nationally, 20 percent of adults receive Social Security benefits, including 22 

percent of women and 18 percent of men. About 24 million women, 18 million men, 

and 3 million children rely on Social Security benefits. Women comprise 58 percent 

of all Social Security beneficiaries aged 65 and older. 

According to the National Women’s Law Center, without Social Security, more 

than half of women over 65 would be poor. Social Security helps level the playing 

field for women, who on average earn less then men and have fewer years in the 

workforce. In contrast, privatization would provide benefits based only on worker 

contributions, disproportionately penalizing women for time spent out of the workforce for childcare and care of the sick and elderly. 

Social Security pays benefits that cannot be outlived, with annual cost-of-living 

adjustments. These features are particularly important to women because they tend 

to live longer than men but have fewer assets when they reach retirement. Savings 

in individual accounts could be drained by health costs, bad luck, or misjudgment 

in investments, or simply outliving one’s savings. 

Finally, women are much more likely than men to receive Social Security benefits 

as family members when a worker dies, retires, or becomes disabled. For a young 

family, Social Security provides the equivalent of a life insurance policy worth over 

$400,000 and a disability insurance policy worth over $350,000, according to the Social Security actuaries. 

Impact on Ethnic Minority Communities 

NEA has a diverse membership serving an increasingly diverse population. Some 

ten percent of NEA members are African Americans. Representation in the education profession of Hispanics is also growing. Ethnic minority students in our nation’s schools have risen from 30 percent in the late 1980s to almost 40 percent 

today. Over the next twenty years that percentage may well reach 50 percent. 

Given the diversity of our membership and the students and communities they 

serve, NEA has a strong interest in the impact of policy decisions on minority communities. In fact, NEA is currently engaged in an outreach project designed to 

strengthen partnerships with minority communities in support of public education. 

We are, therefore, deeply concerned about the impact of privatizing Social Security 

on populations such as African Americans and Hispanics. 

Impact on African Americans 

Proponents of Social Security privatization have claimed that the current program 

is unfair to African Americans. For example, President Bush has asserted that ‘‘African-American males die sooner than other males do, which means the system is 

inherently unfair to a certain group of people.’’ However, while it is true that the 

current life expectancy for African American males at birth is only 68.8 years, this 

does not mean that an African American man who has worked all his life can expect 

to die after collecting only a few years’ worth of Social Security benefits. African 

Americans’ low life expectancy is largely due to high death rates in childhood and 

young adulthood. African American men who make it to age 65 can expect to live, 

and collect benefits, for an additional 14.6 years. 

Due to certain demographic trends, African American communities benefit from 

the Social Security program in several ways: 

• Social Security is the only source of retirement income for 40 percent of African 

American seniors. In 2002, the average monthly benefit for African American 

men receiving retired worker benefits was $850, and for women was $683. The 

171 

Social Security Administration estimates the poverty rate for elderly blacks 

would more than double—from 24 percent to 65 percent—without Social Security. • Social Security survivors insurance provides significant help to African American children who would otherwise find themselves poor because of a parent’s 

death. African Americans make up approximately 13 percent of the American 

population. Twenty three percent of all children receiving Social Security survivor benefits in 2002 were African American. A recent study by the National 

Urban League Institute for Opportunity and Equality showed that the benefit 

lifted one million children out of poverty and helped another one million avoid 

extreme poverty (living below half the poverty line). The National Urban 

League study also found that an African-American man dying in his thirties 

would only have enough in his private account to cover less than two percent 

of the survivors’ benefits now provided by Social Security to his widow and children. • African American families benefit from disability insurance. In 2002, 13 percent 

of the population was African American; however, 17 percent of disabled workers receiving benefits were African American. • African American women in particular rely disproportionately on the non-retirement aspects of the program because they have a higher rate of disability than 

whites of either sex. African American women often survive deceased husbands. 

While African Americans make up 9 percent of all female beneficiaries, African 

American women constitute 18 percent of female disabled worker beneficiaries. 

Impact on Hispanics 

Like African Americans, Hispanics benefit from Social Security in a number of 

ways; 

• Social Security is the only source of retirement income for 41 percent of elderly 

Hispanics. In 2002, the average monthly benefit for Hispanic men receiving retired worker benefits was $859, and for women was $619. • The guaranteed benefit and cost-of-living adjustments of Social Security are important to Hispanics. An important feature of the Social Security system is its 

provision of a guaranteed benefit for workers and their spouses, which continues until death, with a cost-of-living adjustment (COLA) each year to index 

for inflation. Social Security beneficiaries cannot outlive the income, and their 

purchasing power does not erode over time. Because Hispanics tend to have 

higher life expectancies at age 65 than the majority of the population, elderly 

Hispanics will live more years in retirement and benefit from Social Security’s 

cost-of-living protections. Hispanic men who were age 65 in 2004 can expect to 

live to age 85, compared to age 81 for all men. Hispanic women who were age 

65 in 2004 can expect to live to age 88, compared to age 85 for all women. • Social Security disability benefits are important to Hispanics. Hispanics have 

a higher work disability rate than other Americans. While disability data from 

the Census show that the overall work disability rate was 11.9 percent in 2000, 

the work disability rate for Latinos was 16.7 percent. Thus, Hispanics are more 

likely to be in need of the disability benefits that the Social Security system 

provides. Private accounts would not provide disability protection. 

PROGRESSIVE PRICE INDEXING 

NEA is also deeply concerned about the President’s most recent proposal, which 

would alter the benefit structure through progressive indexing. While the President 

has described the proposal as reducing benefits for the most affluent Americans, it 

would result in large benefit reductions for middle-class workers, as well. In fact, 

seven of every ten workers would be affected. 

The benefit reduction for middle-class workers such as educators would be large. A teacher making $35,000 today would be subject to benefit reductions more than 

half as large as those imposed on people at the highest income levels. A worker 

making $60,000 today would be subject to benefit reductions that are nearly as 

large (as a percentage of his or her promised benefits) as the reductions that would 

be imposed on someone making several million dollars a year. For a $60,000-a-year 

worker who retires in 2045, the benefit cut would equal 25 percent, or about $6,500 

a year. 

For many workers, cuts would be deeper than if no action were taken and Social 

Security became insolvent. For workers who now make about $55,000 or more, Social Security benefits would be cut more deeply under the progressive indexing proposal than if nothing were done to restore Social Security solvency. Perhaps even 

more troubling is the fact that the benefit cuts would apply not only to retirees, but 

also to survivors, and people with disabilities. 

172 

THE CASE AGAINST MANDATORY COVERAGE 

NEA opposes mandating participation of all public employees in the Social Security system. Educators in twelve states (Alaska, California, Colorado, Connecticut, 

Illinois, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nevada, and Ohio) 

as well as selected districts in three additional states (Georgia, Rhode Island, and 

Texas) do not pay into Social Security. Instead, these states maintain separate retirement systems for educators. Some Social Security reform proponents have suggested requiring Social Security participation for all public employees as a means 

of strengthening the system. 

A federal mandate for public employee participation in the social security system 

would be detrimental to teachers and other public employees and would create financial burdens for states and city governments. Mandatory coverage would weaken 

existing state and local retirement plans that often offer benefits superior to Social 

Security. Mandatory coverage would also increase the tax burden on public-sector 

employers, eventually leading to reductions in the number of new hires, limits on 

employee wage increases, reduced cost-of-living increases for retirees, and reductions in other benefits such as health care. Mandating coverage of public employees 

will not solve the social security system’s financial difficulties. In fact, the amount 

of money gained by mandating coverage would be relatively small and would not 

solve the long-term Social Security crisis. 

REPEAL OF SOCIAL SECURITY OFFSETS 

NEA strongly supports full repeal of both the Government Pension Offset (GPO) 

and the Windfall Elimination Provision (WEP), both of which unfairly reduce earned 

Social Security benefits of some public employees. The GPO reduces public employees’ Social Security spousal or survivor benefits by two-thirds of their public pension. The WEP reduces the earned Social Security benefits of an individual who also 

receives a public pension from a job not covered by Social Security. 

The offsets penalize people who have dedicated their lives to public service by taking away benefits they have earned. Nine out of ten public employees affected by 

the GPO lose their entire spousal benefit, even though their spouse paid Social Security taxes for many years. The WEP causes hard-working people to lose a significant portion of the benefits they earned themselves. The loss of income forces some 

people into poverty. Some 300,000 individuals lose an average of $3,600 a year due 

to the GPO—an amount that can make the difference between self-sufficiency and 

poverty. Impacted people have less money to spend locally and sometimes have to 

turn to expensive government programs like food stamps to make ends meet. 

The impact of the GPO and WEP is not just felt in those states in which public 

employees are not covered by Social Security. Because people move from state to 

state, there are affected individuals everywhere. The number of people impacted 

across the country is growing every day as more and more people reach retirement 

age. 

Finally, the GPO and WEP discourage people from entering/staying in the profession. Individuals who worked in other careers are less likely to want to become 

teachers if doing so will mean a loss of earned Social Security benefits. The GPO 

and WEP are also causing current educators to leave the profession, and students 

to choose courses of study other than education. Non-Social Security states are going 

to find it increasingly difficult to attract quality educators as more folks learn about 

the GPO and WEP. 

NEA supports the Social Security Fairness Act (H.R. 147), introduced by Representatives McKeon (R–CA) and Berman (D–CA). This bipartisan legislation would 

correct the inequities in the current system by fully repealing both the GPO and 

the WEP. 

CONCLUSION 

NEA urges Congress to: 

• Reject efforts to privatize Social Security; 

• Oppose mandatory Social Security coverage for public employees; and 

• Repeal the Government Pension Offset and Windfall Elimination Provision. 

Thank you for the opportunity to submit these comments. 

f 

173 

Statement of Patricia Hall Taniashvili, Surry, Maine 

I got my first job in the summer of 1960, working as a proofreader in a newspaper 

office in coastal North Carolina. Social Security taxes were deducted from my paycheck at that time. 

After I received my B.A. degree in 1964, I taught Freshman Composition at 

Valparaiso University in Valparaiso, Indiana for a year. Social Security taxes were 

deducted from my paycheck at that time. 

From the fall of 1965 until the spring of 1968, I taught English (all students) at 

Washington County High School in Valparaiso. Social Security taxes were deducted 

from my paycheck at that time. 

After my two children were born, I returned to teaching at Hobart Junior High 

School in Hobart, Indiana, where I taught English and French from 1974–1979. Social Security taxes were deducted from my paycheck at that time. 

In 1980 I moved to Maine, and taught English and French at Calais High School 

in Calais until the spring of 1989. In order to supplement my low salary, I worked 

during the summers at the tourist information office there. Social Security taxes 

were deducted from that paycheck at that time. 

In 1989 I moved to Lamoine, Maine, and taught English for a year and a half 

at Sumner High School in Gouldsboro. 

I spent 1991 teaching English as a foreign language in Tbilisi, Republic of Georgia; at that time Georgia was a member of the U.S.S.R. 

In early 1992 I returned to Maine, and began teaching French and Spanish at 

Ellsworth High School in Ellsworth, Maine, where I am still employed. Once again, 

in order to supplement my inadequate teaching salary, I started working during the 

summers at Kneisel Hall (a chamber music school and concert series) in Blue Hill. 

Social Security taxes were deducted from that paycheck during that time. 

I don’t know when I will be able to retire. My Maine State Teachers Retirement 

pension will not cover my living expenses, especially since I do not own a house and 

must pay rent every month. I estimate that my Maine State Teachers Retirement 

pension) will be approximately $20,640 a year. Our health insurance cost will be 

well over $700 a month out of my $1,720 a month. This leaves me with $1,000 or 

less per month BEFORE taxes. 

Thanks to the Windfall Elimination provision, my full Social Security pension to which I am entitled will be reduced to only approximately $178 a month at age 62, 

approximately $293 at 65 and 10 months, or $495 at age 70. 

If I had stayed in Indiana to teach, I would have my Indiana teachers’ retirement 

pension plus the full Social Security pension to which I am entitled. Why am I being 

discriminated against because I moved to Maine? What have I done to have my Social Security pension cut? 

The final insult and irony is that after I retire from teaching, I will have to once 

again supplement my income by working at a part-time job—from which Social Security taxes will be deducted. I will never be permitted to collect the full benefit to which I am entitled from this work. 

For all of my working life, I have accepted the low pay given to teachers because 

I love teaching and I love the kids I work with. Now I am faced with the fear that 

I will have to keep working for an indefinite time, because I can’t afford to retire, 

even though I’d like to plan on it. Another fear that I have is that I will get sick 

and not be able to work, yet not be able to afford not to. 

The WEP has put me in an untenable position financially and personally. The 

elimination of a portion of my Social Security pension is unfair and immoral. The 

repeal of this law would make a huge difference to me. 

f 

Statement of Deborah Tucker, Boynton Beach, Florida 

Our government made a commitment to me which has not been fulfilled; and collected funds from me and just kept these contributions for the benefit of others. I 

am the widow of a bronze star holder who was in that ‘‘dependent’’ state for 28 

years during which all and full required payments for social security were made 

with the clear promise for retirement benefits. Because of need, I entered full time 

employment as a social worker in an Illinois public school at age50. . .unable to 

build the quite comfortable pensions allotted to those who had been in that public 

sector for all, or most of their work experience. I also worked part time, paying into 

both the teachers’ retirement system and social security at the same time. I expected that I would receive benefits in accord with payments made throughout my 

whole life as do all others such as friends who have never worked; those who 

174 

1See generally Jonathan Barry Forman, Making Social Security Work, 65 Ohio State Law 

Journal 145 (2004). 2Social Security Administration, OASDI Monthly Statistics, March 2005, Table 1 (April 2005), 

available at <http://www.ssa.gov/policy/docs/statcomps/oasdi_monthly/>. 3Social Security Bulletin, Annual Statistical Supplement: 2001, 18 (2002), available at <http:// 

www.ssa.gov/policy/docs/statcomps/>. 4 Id. at 9. 

worked in the private sector who receive both work pensions and social security; and 

those who have all of their years in those public schools. Even non citizens receive 

benefits in line with their contributions. 

I retired at age 70 and received NOTHING from the 28 years of marital payments 

(Why did we pay?); and then, as a second punishment I receive only 40% of what 

my own earned benefits should have been (Why did I pay the full amount?)..How 

many citizens would feel contented if they paid for something they did not receive? 

Everyone with whom I have spoken have been shocked and extremely grateful that 

they are not in my situation and enjoying the benefits of old age. I am still working 

part time and guess what??? I am still paying into social security. How can the 

members of Congress look away from the injustice and not try to affect fairness? 

f 

Statement of Jonathan Barry Forman, University of Oklahoma College of 

Law, Norman, Oklahoma 

I am pleased to submit this statement for the record that you are compiling on 

Alternatives to Strengthen Social Security. I am submitting this statement in my 

individual capacity as the Alfred P. Murrah Professor of Law at the University of 

Oklahoma. This statement suggests how a two-tiered Social Security system could 

help ensure that every elderly American has an adequate income throughout her 

retirement years. The first tier would provide a basic Social Security benefit to 

every older American, and those benefits would be paid for out of general revenues. 

In addition, every worker would also earn a second-tier retirement benefit based on 

earnings paid for with a much-reduced system of payroll taxes and held in individual accounts. Those individual accounts could be funded, defined contribution accounts, or they could be hypothetical accounts like those found in ‘‘cash balance’’ 

pension plans in the private sector and in the ‘‘notional account’’ Social Security systems in Italy, Poland, Sweden, and several other countries. 

REFORMING SOCIAL SECURITY 

The Social Security system includes two programs that provide monthly cash benefits to workers and their families. The Old-Age and Survivors Insurance (OASI) 

program provides benefits to retired workers and their dependents and to the survivors of insured workers, and the Disability Insurance program provides benefits 

to disabled workers and their dependents.1 A worker builds protection under these 

programs by working in employment that is covered by Social Security and paying 

the applicable payroll taxes. At present, about 96 percent of workers are working 

in covered employment. 

The OASI Program is, by far, the larger of these two programs, and it is usually 

what people mean when they talk about Social Security. In November, 2004, for example, the program paid benefits to almost 40 million retired workers and their 

families, and the average benefit was about $898 per month.2

These Social Security retirement benefits are incredibly important for the elderly 

population. For example, in the year 2000, Social Security provided 100 percent of 

income for 20 percent of elderly households and more than half of the income for 

another 44 percent of elderly households.3 Of particular note, Social Security has 

been especially successful in reducing the level of poverty among the elderly. With 

Social Security, only 9 percent of beneficiaries in the year 2000 were poor; without 

it, 48 percent would have been poor.4

SOCIAL SECURITY RETIREMENT TAXES 

Social Security retirement benefits are financed primarily through payroll taxes 

imposed on individuals working in employment or self-employment that is covered 

by the Social Security system. For 2005, employees and employers each pay a tax 

of 5.3 percent on up to $90,000 of wages earned in covered employment, for a combined OASI rate of 10.6 percent (the lion’s share of the total 15.3 percent of payroll 

175 

5Social Security Administration, Cost-of-Living Increase and Other Determinations for 2005, 69 Federal Register 62,497 (2004). 6 I.R.C. § 86. 

7 Committee on Ways and Means, U.S. House of Representatives, 2004 Green Book: Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and 

Means, Section 1, Social Security: The Old-Age, Survivors, and Disability Insurance (OASDI) 

Programs, 1–49 (Table 1–16) (2004). 8 Id. at 1–20 to 1–21, 1–49 (Table 1–16). 

that is collected for OASI, DI, and Medicare).5 Self-employed workers pay an equivalent OASI tax of 10.6 percent on up to $90,000 of net earnings (again, out of the 

total 15.3 percent that is collected for OASI, DI, and Medicare). 

Additional revenue for Social Security comes from the income taxation of Social 

Security benefits.6 The actual amount to be included is determined by applying a 

complicated two-tier formula. Basically, single taxpayers with incomes over $25,000 

(and married couples with incomes over $32,000) must include as much as half of 

their Social Security benefits in income, and single taxpayers with incomes over 

$34,000 (and married couples with incomes over $44,000) must include as much as 

85 percent of their Social Security benefits in income. 

SOCIAL SECURITY RETIREMENT BENEFITS 

Worker Benefits. Workers over the age of 62 generally are entitled to Social Security retirement benefits if they have worked in covered employment for at least 10 

years. Benefits are based on a measure of the worker’s earnings history in covered 

employment known as the average indexed monthly earnings (AIME). The AIME 

measures the worker’s career-average monthly earnings in covered employment. In 

that regard, the AIME takes into consideration only covered earnings up to the 

maximum applicable annual earnings cap. For example, no more than $90,000 of 

2005 earnings could count toward a Social Security retirement benefit. 

The starting point for determining the worker’s AIME is to determine how much 

the worker earned each year through age 60. Once those so-called ‘‘benefit computation years’’ and covered earnings for those years have been identified, the worker’s 

earnings for years prior to age 60 are indexed for wage inflation. This indexing ensures that the same relative value is given to wages no matter when they are 

earned. The year that the worker turns age 60 is the year used for indexing the 

earnings of prior years, and this indexing makes the earnings early in the worker’s 

career comparable to earnings in later years. Earnings in and after age 60 are not 

indexed but can enter into the benefit computation formula. 

The highest 35 years of earnings are then selected, and the rest of the years are 

dropped out. The AIME is then computed as the average earnings for the remaining 

35 years. 

The AIME is then linked by a formula to the monthly retirement benefit payable 

to the worker at full retirement age, a benefit known as the ‘‘primary insurance 

amount’’ (PIA). Historically, ‘‘full retirement age’’ was age 65, but it is gradually increasing to age 67 for workers born after 1959 (reaching age 62 in or after 2022 

and reaching 67 in or after 2027). For a worker turning 62 in 2005, the PIA is equal 

to 90 percent of the first $627 of the worker’s AIME, plus 32 percent of the AIME 

over $627 and through $3,779 (if any), and plus 15 percent of the AIME over $3,779 

(if any). Note that the benefit formula is designed to favor workers with relatively 

low career-average earnings. 

A worker’s benefits may be increased or decreased for several reasons. Most importantly, benefits are indexed each year for inflation as measured by the increase 

in the Consumer Price Index. 

Also of critical importance, workers who retire before their full retirement age 

have their benefits actuarially reduced. For example, a worker who turned 62 in 

2003 and had yearly earnings throughout her career equal to the average wage 

would be entitled to a worker benefit starting at full retirement age (65 and two 

months) of $1,258 a month.7 If she, instead, started to draw her benefit at age 62, 

that benefit would be actuarially reduced by about 20 percent, to $964 per month.8

As the full retirement age slowly increases to age 67, the actuarial reduction from 

the full retirement age of 67 to the early retirement age of 62 will increase to 30 

percent. 

On the other hand, benefits payable to workers who choose to retire after their 

full retirement age are actuarially increased through the delayed retirement credit. 

The delayed retirement credit increases the monthly benefit to be paid to a worker 

who delays receipt of benefits past full retirement age by 8 percent for each year 

of delay. 

176 

9Social Security and Medicare Boards of Trustees, 2005 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds 19 

(Table III.A1) (2005), available at <http://www.ssa.gov/OACT/TR/TR05/index.html>. 10 Id. at 2. 11 Id. at 59 (Table IV.B.6). 12 Id. at 3, 55. 13Department of Health and Human Services, Annual Update of the HHS Poverty Guidelines, 

70 Federal Register 8,373 (2005). $797.50 = $9,570 ÷ 12. 

Finally, the so-called ‘‘retirement earnings test’’ reduces the benefits of individuals 

who have not yet reached full retirement age and who continue to work after starting to draw Social Security retirement benefits. In 2005, for example, these early 

retirees will lose $1 of benefits for every $2 of annual earnings over $12,000. 

Family Benefits. Spouses, dependents and survivors of the worker may also receive additional monthly benefits. These family benefits are also based on the worker’s primary insurance amount (PIA). In particular, a retirement-age wife or husband of a retired worker is entitled to a monthly spousal benefit equal to 50 percent 

of the worker’s PIA. Consequently, a retired worker and spouse generally can claim 

a monthly benefit equal to 150 percent of what the retired worker alone could claim. 

Also, a retirement-age widow or widower of the worker is entitled to a monthly surviving spouse benefit equal to 100 percent of the worker’s PIA. 

Like worker benefits, family benefits are subject to the retirement earnings test. 

In addition, under the so-called ‘‘dual-entitlement rule,’’ when an individual can 

claim both a worker benefit and a benefit as a spouse, survivor, or dependent of another worker, only the larger of the two benefits is paid to the individual. 

SOCIAL SECURITY IS IN FINANCIAL TROUBLE 

The Social Security system operates largely on a pay-as-you-go basis. Social Security benefits are primarily paid out of current-year Social Security payroll taxes, and 

the Social Security Trust Funds maintain only enough reserves to cover a few years 

of benefits. In 2004, for example, the Old-Age and Survivors Insurance Trust Fund 

collected $473 billion in payroll tax contributions, paid out $415 billion in benefits, 

and had $1.5 trillion on hand at the close of the year.9

Unfortunately, however, the long-term picture is bleak. Social Security retirement 

and disability benefits will exceed trust fund income starting around 2017, and the 

system will be unable to pay full benefits after about 2041.10 The Trustees of the 

Social Security Trust Funds estimate that the deficit over the traditional 75-year 

projection period is about 1.92 percent of payroll, and the unfunded liability of the 

system is $4.0 trillion.11

The primary reason that Social Security is in financial trouble is that people are 

living longer and retiring earlier. As a result, there are a lot of Social Security beneficiaries, and there are fewer workers to support them. Of course, it is great that 

we are living longer, and it is terrific that we can expect to have long and leisurely 

retirements. But it has led to the current financing problem. 

Social Security must either find new sources of revenue, or benefits will have to 

be cut. According to the Trustees of the Social Security Trust Funds, the system 

could be brought into actuarial balance by an immediate increase in payroll taxes 

of 15 percent, an immediate reduction in benefits of 13 percent, or some combination 

of the two.12 Any delay in reform will mean even larger tax increases and/or benefit 

cuts in the future, and that is one of the reasons that President George W. Bush 

has put Social Security reform at the top of his second-term agenda. 

SOME THOUGHTS ABOUT REFORM 

The Social Security system was designed in the 1930s, and it is time to reconsider 

its structure with an eye on what we want the system to do today and into the future. Ideally, the system should ensure that every elderly American has an adequate income throughout her retirement years. One way to achieve that result 

would be to have a two-tiered Social Security system. 

The Basic Social Security Benefit. The first tier of this new Social Security system would provide a basic Social Security benefit to every older American. For example, the government might guarantee every retiree a first-tier benefit equal to, 

say, 100 percent of the poverty level. In the year 2005, for example, the poverty 

level for a single individual is $9,570, yielding a monthly benefit of about $798.13

That benefit, $798 per month, would be the benefit payable to every individual 

at full retirement age. In that regard, there is every reason to think about increasing the full retirement age to 70 and increasing the minimum retirement age to 65. 

If a $798-per-month benefit were payable at age 70, then the actuarially-reduced 

benefit at age 65 would be about 30 percent less, or $558 per month. 

177 

14 In a hypothetical account system, each worker gets a hypothetical individual account. Payroll tax contributions from workers and employers are credited to those accounts, and each year 

those accounts are also credited with investment interest. For example, a simple plan could allocate 4 percent of salary from each worker into her account each year and credit her account 

with 7 percent interest on its beginning-of-the-year balance. Each worker would receive quarterly reports showing the growing balance in her account. 

Benefits paid in subsequent years would be increased for inflation, as measured 

by the Consumer Price Index. In any event, these first-tier benefits would terminate 

at death. 

These first-tier benefits would replace the current Supplemental Security Income 

(SSI) program and all of the redistributive features of the current Social Security 

system. Also, like the current SSI program, these first-tier benefits would be paid 

for out of general revenues. 

An Additional Earnings-Related Benefit. In addition to the first-tier benefit, 

every worker would also earn an additional retirement benefit based on earnings. 

These second-tier benefits would be financed with a much-reduced system of payroll 

taxes. In effect, each worker would have an individual account—like an individual 

retirement account (IRA) or a 401(k) account. Each worker’s payroll tax ‘‘contributions’’ would then be credited to her account, along with investment income on the 

balance in that account. The accounts themselves could be funded, defined contribution accounts. Or they could be hypothetical accounts like those found in ‘‘cash balance’’ pension plans in the private sector (and in the ‘‘notional account systems’’ now 

used in Italy, Poland, Sweden, and several other countries).14

At retirement, the balance in a worker’s second-tier individual account would typically be used to purchase an additional inflation-adjusted annuity over and above 

the individual’s first-tier benefit. Workers with large enough account balances might 

also be allowed to take partial lump-sum distributions. In the case of any worker 

who died before withdrawing all of her funds, the balance in her account would go 

to her spouse or other heirs. 

Replace Spousal Benefits with Earnings Sharing. Finally, Social Security 

spousal benefits should be replaced with an ‘‘earnings sharing’’ system. Under earnings sharing, the current Social Security system’s spouse and surviving spouse benefits would be eliminated. Instead, each spouse in a married couple would be credited 

with one-half of the couple’s combined earnings during marriage. At retirement, 

each spouse’s second-tier benefit would be based on her half of the married couple’s 

earnings during marriage plus whatever she earned before or after the marriage. 

Instead of tinkering with the Social Security system, I believe that we should redesign it. In the 21st century, it would make sense for Social Security to provide 

every elderly American with an adequate income throughout her retirement years. 

A two-tiered Social Security system could achieve that result, and we should be able 

to solve Social Security’s financing problem at the same time. 

f 

Statement of Douglas E. Ward, Oberlin, Ohio 

Thank you for giving me this opportunity to write to you. 

I would like to state that I paid the required 40 Quarters into Social Security 

from the ages of 16 to 28 years old. I worked during my teen and young adult years 

in Illinois under Social Security. I then moved to Ohio to work at a better position, 

which was not under Social Security. I knew I had the required 40 quarters, else 

I may not have taken the new position in Ohio. 

I now find that 55% of my social security, which I was counting on (i.e.: $500.00/ 

mo has been reduced to $226.00/mo.) I have also discovered that when I die, my 

wife will not received any of my Social Security benefits due to the Offset provisions 

of Social Security. 

I guess I should not have taken a career in Local Government work, since the 

Federal Government is taking away my legally earned Social Security retirement 

benefits. I believe that payment of my earned social security benefit would not bankrupt the system. 

Æ