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72–508 2012

THE 2011 ANNUAL REPORT OF THE SOCIAL 

SECURITY BOARD OF TRUSTEES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON SOCIAL SECURITY 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JUNE 3, 2011

Serial No. 112–SS4 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON SOCIAL SECURITY 

SAM JOHNSON, Texas, Chairman 

KEVIN BRADY, Texas 

PAT TIBERI, Ohio 

AARON SCHOCK, Illinois 

ERIK PAULSEN, Minnesota 

RICK BERG, North Dakota 

ADRIAN SMITH, Nebraska 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

SHELLEY BERKLEY, Nevada 

FORTNEY PETE STARK, California 


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C O N T E N T S 

Page 

Advisory of June 3, 2011 announcing the hearing ................................................ 2 

WITNESSES 

Charles P. Blahous III, Ph.D.,Trustee, Social Security and Medicare Boards 

of Trustees, Testimony ........................................................................................ 9 

Robert D. Reischauer, Ph.D.,Trustee, Social Security and Medicare Boards 

of Trustees, Testimony ........................................................................................ 16 


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(1) 

THE 2011 ANNUAL REPORT OF THE SOCIAL 

SECURITY BOARD OF TRUSTEES 

FRIDAY, JUNE 3, 2011 

U. S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON SOCIAL SECURITY, 

COMMITTEE ON WAYS AND MEANS, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 9:07 a.m., in Room 

B–318, Rayburn House Office Building, the Honorable Sam Johnson [chairman of the subcommittee] presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

Chairman Johnson Announces 

Hearing on the 2011 Annual Report of the Social 

Security Board of Trustees 

Friday, May 27, 2011 

U.S. Congressman Sam Johnson (R–TX), Chairman of the House Committee on 

Ways and Means Subcommittee on Social Security announced today that the Subcommittee will hold an oversight hearing on the findings in the 2011 Annual Report 

of the Social Security Board of Trustees. The hearing will take place on Friday, 

June 3, 2011 in B–318 Rayburn House Office Building, beginning at 9:00 

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. A 

list of invited witnesses will follow. 

BACKGROUND: 

The Board of Trustees of the Federal Old-Age and Survivors Insurance (OASI) 

and the Federal Disability Insurance (DI) Trust Funds was established under the 

Social Security Act to oversee the financial operations of the OASDI Trust Funds. 

The Board is comprised of six members, four of whom serve by virtue of their positions in the Federal Government (the Secretary of the Treasury (who also serves 

as Managing Trustee), the Secretary of Labor, the Secretary of Health and Human 

Services, and the Commissioner of Social Security) and two members of the public 

who are appointed by the President and confirmed by the Senate. 

The Social Security Act requires that the Board, among other duties, report annually to the Congress on the financial status of the OASI and DI Trust Funds. The 

overview section of the 2011 report concluded, ‘‘Under the long-range intermediate 

assumptions, annual cost for the OASDI program is projected to exceed non-interest 

income in 2011 and remain higher through the remainder of the long-range period. 

The combined OASI and DI Trust Funds are expected to increase through 2022, and 

then to decline and become exhausted and unable to pay scheduled benefits in full 

on a timely basis in 2036. However, the DI Trust Fund is projected to become exhausted in 2018, so legislative action will be needed as soon as possible.’’ 

The report also projected that the reserves held in the trust funds would reach 

nearly $2.7 trillion by the end of 2011. The U.S. Treasury bonds held by the trust 

funds, which are backed by the full faith and credit of the U.S. government, will 

be used to supplement current income through 2036. However, since no funds have 

been set aside to redeem these bonds, doing so will require the Federal Government 

to raise taxes, cut spending, or borrow more. Thereafter, in the absence of intervening Congressional action or changes in projections, the Trustees project that incoming revenues would be sufficient to pay only three-quarters of scheduled benefits. 

The Trustees concluded, ‘‘Social Security will play a critical role in the lives of 

56 million beneficiaries and 158 million covered workers and their families in 2011. 

With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.’’ 


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In announcing the hearing, Chairman Sam Johnson (R–TX) stated, ‘‘This year’s 

annual report again sounds the alarm that Social Security will be unable 

to keep its promises to the hard-working Americans who pay into the system. Americans want, need and deserve a Social Security program they can 

count on and a fact-based conservation about how to get there. This hearing will begin that conversation. 

FOCUS OF THE HEARING: 

The hearing will focus on the findings in the recently released 2011 Annual Report of the Board of Trustees of the OASDI Trust Funds, the effect of the trust 

fund’s current cash flow deficit status and future exhaustion, and the cost of delaying actions to address Social Security’s fiscal challenges for workers and beneficiaries. 

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 ‘‘Hearings.’’ 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, submit all requested information. ATTACH your submission as a Word or WordPerfect document, in compliance with the formatting requirements listed below, by the close 

of business on Friday, June 23, 2011. 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 or (202) 225–3625. 

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. 

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. 

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

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

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Chairman JOHNSON. The committee will come to order. 

I want to thank our witnesses for being here today. And just 

know that we appreciate what you all do. 

You know, for over 75 years, Social Security has relied on the 

strong work ethic of American workers paying part of their hardearned wages for promise of future benefits should they retire, become disabled, or die. You are going to get money when you die. 

Seniors, those with disabilities, widows, and their families count 

on these benefits to be there for them. Yet, according to the recently released annual report of the Social Security Board of Trustees—and, Doctor, I think you have spoken on this already—unless 

we act, Social Security won’t be able to keep its promises. 

For example, Social Security’s disability insurance program will 

be unable to pay full benefits in 2018. Let’s face it, the program 

is almost broke right now. In addition, by 2036, tax income will 

cover only 77 percent of benefits. The average monthly benefit for 

a retired worker today is only about $1,175, a potential cut of about 

$270. And that is real money, especially for those that are on a 

fixed income. 

According to the trustees, Social Security is already running permanent cash flow deficits. As a result, Social Security must rely on 

general revenue to pay back, with interest, Social Security surpluses—with interest—do you hear that? We have been lying to 

ourselves for a long time. 

Over the next 10 years, Social Security’s cash shortfall will reach $416 billion. And to pay its debt to Social Security in these times 

of record deficits and debt, the Treasury is going to need to borrow 

more. And we are at our debt limit, aren’t we? We do so at our own 

economic peril. 

Today, the U.S. borrows 40 cents for every dollar it spends, a 

good amount of which comes from the Chinese, and sends the bill 

to our children and grandchildren. The bottom line is that China 

and other foreign governments are also financing our Social Security program. 

Families are right to be worried about the country’s economic future. We face great challenges. But I believe in the greatness of 

this country we call America. We need to make sure this program 

is safe, secure, and sustainable. And let’s be clear: Current and 

near retirees deserve the peace of mind of knowing they will get 

their promised retirement benefits. We are paying into it; we need 

to give them back what they have done. 

At the same time, though, we have a responsibility to ensure 

that Social Security will be there for younger workers. At the end 

of the day, Americans want, need, and deserve a Social Security 

program they can count on and a fact-based conversation about 

how to get there. 

I look forward to beginning that conversation today, and thank 

our two witnesses for the testimony we are about to hear. 

With that, I will recognize my famous ‘‘companero,’’ Mr. Becerra, 

the ranking Democrat. 

Mr. BECERRA. Mr. Chairman, thank you very much for holding 

this hearing. 

Let me begin first, Mr. Chairman, by disagreeing with you. Social Security is not broke. The trustees report for 2011 shows that 


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Social Security is once again the reliable workhorse in our economy. Social Security has weathered 13 recessions in the last 75 

years, and never once—let me repeat—never once failed to pay, on 

time and in full, every retiree, widow, child, or disabled worker the 

benefits they have earned. 

Even through the Bush recession, the worst economic upheaval 

since the Great Depression where 8 million Americans lost their 

jobs and 6.7 million Americans lost their homes, the Social Security 

surplus continued to grow. 

The Bush recession has hit American families hard. From June 

2007 to the beginning of 2009, it stripped Americans of a total of 

$19.4 trillion in household wealth. To put that in perspective, the 

Bush recession, by itself, took from Americans enough wealth to 

wash away the Nation’s entire debt and still leave America with 

a $5 trillion-plus surplus. The average family saw its wealth—the 

value of its home, retirement, and other savings and investments— 

drop by $40,000, more than 25 percent of their total net worth. In 

contrast—oh, by the way, families who own stock, they saw their 

portfolio of stock drop by more than a third. 

In contrast, Social Security remains strong, and the surplus is 

real. Social Security and seniors didn’t cause the current deficit. Indeed, Social Security has never—I repeat, never—added a single 

cent to the Nation’s debt. 

The trust fund’s income from tax revenues and interest on the 

U.S. Treasury bonds that it owns is more than what is being paid 

today in benefits. So Social Security will run a surplus of $69 billion in 2011. At the end of 2011, the Social Security Trust Fund 

will hold $2.7 trillion in U.S. Treasury bonds. And the trustees 

project that the balance will continue to grow until 2022, when it 

reaches $3.7 trillion. 

In addition to payroll contributions, the trust fund earns interest 

on the Treasury bonds—the interest is real—on Treasury bonds 

purchased with workers’ contributions. Over its lifetime, Social Security has so far collected $15.5 trillion and paid out a total of 

$12.8 trillion in benefits and administrative costs. Do the math. 

Americans have built up a $2.5 trillion surplus in their trust fund. 

The Treasury bonds held by the trust fund are real, and, just like 

all other bonds held by Treasury that have been issued over the 

last several years, they have real value. American workers know 

that their Social Security contributions are real. They see the 

amount deducted from their paychecks every week. 

In the long term, in about a quarter century, Social Security does 

face a shortfall. But this is a manageable challenge. The trustees 

report looks at Social Security solvency 75 years into the future. 

This gives Congress the ability to carefully consider how best to improve and strengthen Social Security for future generations. 

The cost of Social Security’s shortfall, which begins around 2036, 

would be reduced, for example, by allowing the Bush tax cuts for 

the wealthiest 2 percent of Americans to expire. And we know how 

important Social Security has been to so many of our seniors who, 

today, do not live in poverty. 

Mr. Chairman, I appreciate that we are holding this hearing on 

Social Security’s long-term outlook. However, as you know, the Social Security Administration has a more immediate need, which is 


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to ensure that it can get beneficiaries their Social Security benefits 

today. 

I know that you and I both believe that it is essential that the 

Social Security Administration provide today’s seniors with the 

benefits they have earned. Therefore, I would request that we also 

hold a hearing on the Social Security Administration’s operating 

budget so that we can ensure that it can continue to provide essential services to today’s beneficiaries, such as processing benefit 

claims on time and accurately, processing disability applications 

and appeals without lengthy waiting times, and answering calls 

and addressing problems for current and future beneficiaries. 

We have worked in a bipartisan way in the past to make Social 

Security and the Social Security Administration do its job and do 

it right. Most recently, we did that when we provided $500 million 

in the American Recovery and Reinvestment Act to reduce the disability backlog. Let’s not undo that type of success. Let’s continue 

to work together in a bipartisan fashion to strengthen Social Security in the long run. 

I yield back. 

Chairman JOHNSON. When we get the premise straight, we can 

work together. The system is broke, and you know it. They are borrowing money. Sure, we got pieces of paper over there, but that is 

not real money. 

Mr. BECERRA. Mr. Chairman, you tell that to any American 

who deposits money in a bank, and if the bank tells them, ‘‘That 

is not real money’’—— 

Chairman JOHNSON. I think our witnesses will confirm that. 

Mr. BECERRA [continuing]. They will tell you what they think 

about the banking system. 

Chairman JOHNSON. We have two witnesses today, both of 

them well-versed in the Social Security program. 

And I welcome you both here. 

Mr. Blahous, would you like to begin your testimony at this time, 

please? 

STATEMENT OF CHARLES P. BLAHOUS III, PH.D., TRUSTEE, 

SOCIAL SECURITY AND MEDICARE BOARD OF TRUSTEES 

Mr. BLAHOUS. Thank you, Mr. Chairman, Mr. Ranking Member, all of the members of this subcommittee. It is a great honor 

to appear before you today to discuss the findings of the latest Social Security trustees report. 

My written testimony contains some basic background information about program benefits, taxes, trust fund operations. Because 

our speaking time is limited, what I would like to do is skip over 

most of that and just make three main points in my oral remarks. 

The first point is simply this, that Social Security expenditures 

are rising and that this carries important implications both for the 

program’s own financing outlook as well as for the general Federal 

budget. 

Last year, in 2010, we reached the point, for the first time since 

the 1983 reforms, that program expenditures exceeded incoming 

program tax revenue. That deficit last year was $49 billion. This 

year, we are expecting a similar cash deficit of about $46 billion in 

2011. 


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Now, what is significant about this, or what is new about this, 

is that this is actually the first trustees report, since there have 

been public trustees, to have concluded that an era of permanent 

annual cash deficits has been reached. 

Now, as noted in the opening remarks, the trust fund balance is 

going to continue to grow in the near term because of interest payments from the general fund to the trust fund. So we are in something of an unusual period right now where we are running a deficit of tax income relative to outgoing benefit obligations but the 

trust fund balance is still rising. 

A couple of important caveats to bear in mind about the rising 

nominal balance of the trust funds: One is that, in terms of their 

ability to finance benefits, the purchasing power of the trust funds 

has actually already begun to decline relative to benefit payments. 

The so-called ‘‘trust fund ratio’’ peaked in 2008. That basically 

measures the duration of time that the trust funds could finance 

benefits in the absence of payroll tax revenue. And the reason it 

has begun to decline is that the cost of paying benefits is rising 

faster than the nominal balance of the trust funds. 

Second, while the interest payments to the trust funds increase 

the balance of the funds, they don’t have a unified budget impact. 

So what is determinative from a unified budget standpoint is the 

balance between the program’s tax income and its outgoing benefit 

obligation. 

And, third, as you alluded to, Mr. Chairman, the data that I 

have just described pertains to the combined trust funds, but the 

disability insurance trust fund, individually, is in worse shape. We 

project trust fund exhaustion in 2018. 

The second major point I would like to make is simply that costs 

are growing for a very specific reason, and that is population aging. 

Before the baby boomers started entering the retirement rolls and 

before the recession hit in 2007, the cost of paying Social Security 

benefits amounted to about 111⁄2 percent of the program’s payroll 

tax base, basically 111⁄2 percent of the taxable wages earned by 

workers. 

Now, it has risen since then, and it is going to continue to rise 

in the future. We are projecting that that will hit 17 cents on the 

dollar by the mid-2030s. And this predominantly reflects a decline 

in the ratio of workers to collectors, as the baby boomers move out 

of the workforce and into the retiree population. 

The third and final point that I would make, Mr. Chairman, is 

simply that these financial challenges, as the trustees report states 

in multiple places, should be addressed soon if we want to minimize adverse impacts on vulnerable populations, including people 

already getting benefits, low-income workers, et cetera. 

One of the things the trustee reports do is they provide for these 

illustrative examples of how much benefits or taxes would have to 

be raised in order to keep the program sound from a financial 

standpoint. And these illustrations are useful insofar as they go, 

but obviously you, as legislators, have to consider a number of policy considerations and constraints as you make policy for the program. 

So we can show you, for example, that in 2036 benefits would 

have to be reduced by 23 percent to fit within projected tax reveVerDate Nov 24 2008 15:13 Feb 03, 2012 Jkt 072508 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\72508.XXX 72508

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nues. But you might look at that and say, ‘‘Well, I don’t want to 

reduce benefits for people already receiving them.’’ Historically, 

Congress has wanted any benefit changes to be prospective, to affect new retirees, rather than people already on the rolls. 

And so, if you asked the question again and said, how much 

would benefits have to be reduced in 2036 if we confine the 

changes to new retiree claimants, the answer is, the system 

wouldn’t be in balance even if 100 percent of those benefits were 

cut off. 

So you start working through the problem backwards and ask 

yourself, well, if I want to take into account bipartisan policy reality that we don’t want to change benefits for people now in retirement or on the verge of retirement, our window for acceptable action closes much sooner. 

So I would simply summarize by saying that the essential message conveyed by the reports is that Social Security faces real and 

substantial challenges, and we will best serve the interests of the 

public if financial corrections are enacted at the earliest practicable 

time. 

Thank you. 

[The prepared statement of Mr. Blahous follows:] 


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Chairman JOHNSON. Thank you, sir. Thank you for your testimony. 

Dr. Reischauer, you are recognized. 

STATEMENT OF ROBERT D. REISCHAUER, PH.D., TRUSTEE, 

SOCIAL SECURITY AND MEDICARE BOARDS OF TRUSTEES 

Mr. REISCHAUER. Chairman Johnson and Ranking Member 

Becerra and Members of the Subcommittee, I appreciate the opportunity to discuss the 2011 trustees report with you and with my 

fellow public trustee, Dr. Blahous. 


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We divided up the topic, so you wouldn’t hear a repetition. What 

I thought I would do would be to cover the financial outlook 

changes from last year’s report to this year’s report. 

Every year, of course, the financial situation changes, sometimes 

by a little bit, sometimes by a moderate amount, sometimes by 

large and very significant amounts. As an indicator of how significant the changes are from year to year, the public and the press 

tend to focus on the dates at which the various trust funds are projected to be exhausted. 

By that metric, the changes between the 2010 and 2011 report 

are pretty small. The exhaustion date for the OASI trust fund is 

now projected to be 2038, which is 2 years earlier than last year’s 

report suggested. 

The projected exhaustion date for the DI trust fund remains unchanged, at 2018. The fact that it is unchanged shouldn’t allow us 

to sleep any easier because, of course, 2018 isn’t too far away. That 

suggests that you will be faced with making some adjustments 

sometime in the next 3 or 4 years to ensure that that trust fund 

pays on a timely basis full amounts. 

A more comprehensive measure of the trust fund’s financial condition is its actuarial balance over the 75-year valuation period. 

This balance is essentially the difference between annual income 

and costs summarized over 75 years and then expressed as a percentage of taxable payroll. An actuarial deficit can be interpreted 

as the percentage points that would have to be either added to the 

current law income rate or subtracted from the cost rate for each 

of the next 75 years to bring the system into actuarial balance. 

While the actuarial balance of the DI trust fund has not changed 

from last year, it is still minus 0.3 percent; the actuarial balance 

for the combined OASDI trust fund has deteriorated by 0.3 percentage points. So how does this look in historical perspective? Is that 

big, or is it small? With the exception of the change that took place 

between the 2008 and 2009 trustees reports, you have to go all the 

way back to the 1994 trustees report to find a bigger change from 

one year to the next. 

Now, the year-to-year changes in Social Security’s financial situation can occur for a whole lot of reasons. They occur almost inevitably because the valuation period changes when we move the 

whole estimation process forward 1 year. They also might occur because legislation is enacted, because the underlying economic and 

demographic assumptions are modified, because there are new administrative practices, or because projection methodologies and 

data are improved. 

If we look at what happened over the course of the 1-year period 

that I am contrasting, you find that the 75-year valuation period, 

which involved dropping from the year 2010 and adding the year 

2085, accounted for a sixth of the increase, 0.05 percent of the 0.30 

percent that I was talking about. 

Clearly, there was no legislation enacted during the past year 

that had a significant impact on Social Security’s long-run financial 

position. However, there were important changes in the demographic and economic assumptions that were used in this year’s report, and they did have a significant impact, as I said. 


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Lower recent and projected mortality for those age 65 and older 

account for a third of the increase. Now, in one sense, that is good 

news: People are living longer, especially good news for people like 

me who are old. And this is the projection from new data for people 

65 and over. That accounts for one-third of the deterioration in the 

long-run actuarial balance. 

There have also been changes in net immigration that have to 

do with falloff in net immigration that occurred as a result of the 

weakness in the economy. 

The 2011 report also assumes that the economic recovery is a bit 

lower, that real earnings in the base year off of which these projections are made are lower, and it takes longer for earnings to get 

back to what would be regarded as a normal level, and that we 

have slightly lower real interest rates on trust fund assets. 

Those things, all together, combine to account for about a sixth 

of the year-to-year deterioration. 

Chairman JOHNSON. Doctor, can you wind it down? Your 5 

minutes are up. 

Mr. REISCHAUER. Okay. Well, let me just close with one additional comment—— 

Chairman JOHNSON. Sure. 

Mr. REISCHAUER [continuing]. Because that was all I was really going to say about the changes. 

And that additional comment is, over the last 8 months, Dr. 

Blahous and I have had the opportunity to work closely with the 

chief actuaries and their staffs, as well as the professional staffs of 

the ex-officio members of the Board of Trustees—that is, Treasury, 

HHS, DOL, and SSA. One cannot but be impressed by the depth 

of their expertise, their objectivity, their willingness to engage in 

a free and open debate at all hours of the day and night, and their 

dedication and hard work. 

And this experience has convinced me, and I believe Chuck as 

well, that both the Congress and the public are being very wellserved by the current support for these reports in providing good 

information to the Congress for its deliberations. 

Thank you. 

[The prepared statement of Mr. Reischauer follows:] 


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Chairman JOHNSON. Thank you, sir. 

You know, you mentioned that there are actually two funds, the 

old age and the disability. And it appears to me that the disability 

fund is in worse shape than anything else. Part of that is our problem, because we haven’t had enough judges working and we 

haven’t handled the situation properly. Mr. Becerra and I have 

talked about that, and I think that we need to try to fix that. 

Under current law, the trustees are required to warn Congress 

in writing when the program is in real trouble, meaning when the 

trust fund IOU assets can only cover 20 percent of benefits for a 

given year. The chief actuary provided the unsigned copy of that 

letter at a recent staff briefing, and I will insert that into the 

record, without objection. 

Chairman JOHNSON. Hearing none, okay. 


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Dr. Blahous, what does this year’s report say about the status of 

the disability trust fund? 

Mr. BLAHOUS. Well, as you know, Mr. Chairman, from a trust 

fund financing standpoint, the disability insurance program faces 

a more severe challenge than the old-age and survivors portion of 

the program, what people think of as the retirement program. 

The disability insurance program began to show an excess of expenditures over tax income in 2005. It began to have a net draw 

on its trust fund assets by 2009. Its trust fund balance is already 

in decline; its trust fund ratio is in decline. The 20 percent trust 

fund ratio warning that you referred to is something we would hit, 

I believe, in 2017. And we are projecting trust fund exhaustion in 

2018. 

So it is in much more serious condition than the program as a 

whole. 

Chairman JOHNSON. Well, how many times has the disability 

trust fund faced exhaustion in the past, and what have we done 

about it? 

Mr. BLAHOUS. I don’t know the exact number of times, but, certainly, there have been instances where, in the past, the disability 

insurance fund has come close to that 20 percent ratio. It neared 

there in the late 1970s. It neared there in the early 1980s. It 

neared there in the early 1990s. In the early 1990s, there was a 

reallocation of the tax rates between the retirement portion of the 

program and the disability portion of the program. 

Chairman JOHNSON. Yeah, but we are stealing from the Social 

Security retirement and survivors fund to do that, which will be 

broke. 

Do you support reallocating the payroll tax to improve the financing of the disability program at the expense of the retirement 

program? That is what we have done in the past. 

Mr. BLAHOUS. Well, I want to be very careful, obviously, sitting 

here as a trustee, not speaking for Dr. Reischauer, not speaking for 

the trustees as a group. But I would—— 

Chairman JOHNSON. Your personal opinion. 

Mr. BLAHOUS. My personal opinion is that the tax rates certainly warrant review. I mean, we have a 2038 insolvency date projection for the retirement portion of the program, 2018 for disability, which, in my view, powerfully suggests that we don’t have 

the tax allocation right. I mean, if you had an appropriately proportional allocation between the funds, the two funds should be in a 

comparable state of financial health. 

So I do think it makes sense to review that allocation, though, 

as you say, it doesn’t increase or improve the net financing position 

of the program as a whole. It would just move resources from one 

side of the program to the other. 

Chairman JOHNSON. You mean that is delaying disaster, is 

what you are saying? 

Mr. BLAHOUS. Well, you could say that it is putting the two 

programs on a comparable course of concern, rather than one being 

far worse than the other. 

Chairman JOHNSON. Okay. 

Dr. Reischauer, would you like to comment on those issues? 


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Mr. REISCHAUER. I would agree with what Chuck said. Both 

programs need to be strengthened. It would be best, in my opinion, 

to address these problems together. And if they were on a comparable time pattern, that would probably facilitate—— 

Chairman JOHNSON. I think that is one thing that Mr. Becerra 

and I do agree on, that we do need to have some reform. 

And do either of you have specific suggestions as to what actions 

we ought to be considering to solve these issues? And would you 

submit your recommendations for the record? 

Mr. BLAHOUS. I am happy to follow up with specific suggestions 

for the record. 

I would just say that the way I tend to conceptually think about 

the disability program, sort of in five pieces. One is, do we have the 

tax allocation right? And I think we probably don’t. 

Second, remember, on the retirement side of the program, there 

are more levers you can pull. You can pull the retirement-age lever, 

you can pull the benefit-formula lever, you can pull the tax lever. 

You don’t have quite as many levers on the disability side because 

the retirement-age lever doesn’t do anything for you. And so, that 

suggests you almost have to look at things associated with the tax 

allocation and with the benefit formula. And I tend to believe that 

we do need to consider the rate of benefit growth above inflation, 

especially on the high-income end, in both programs. 

I also have a longstanding concern that the way that the benefit 

formula works, where it sort of mixes together its aims of keeping 

track of each individual’s wage history and also being a progressive 

redistribution, both of which are worthy goals, but, combined in 

one formula, have the effect of really dampening work incentives 

on both sides. And that is a particular problem on the disability 

side, and I am happy to follow up with more details. 

Chairman JOHNSON. Thank you, sir. 

Mr. Becerra, you are recognized. 

Mr. BECERRA. Thank you, Mr. Chairman. Let me see if I can 

dissuade you that the Social Security program is broke. At least, 

I probably can find you a couple hundred million Americans who 

would challenge that statement, because sometime this week, when 

they receive their paycheck and their paycheck stub and they look 

at that paycheck stub, they are going to see a deduction from their 

pay for a tax contribution, a FICA tax contribution, that goes to Social Security and to Medicare. 

And, gentlemen, see if you can help me with something. The 

number I have from the inception of Social Security is that American workers, through their tax contributions, through their paychecks, have contributed $13.9 trillion straight out of their pocket 

into the system, into Social Security. And please correct me, shout 

out or raise your hand, if it is a wrong number—$13.9 trillion. 

Looking at SSA’s records, I see that, since the trust fund was established in the 1930s to collect the tax contributions that Americans pay in and because we were collecting more than what was 

needed to pay the benefits for those who retired, we had excess 

contributions by American workers. Those were put into this fund, 

this trust fund. And the money was replaced with Treasury bonds, 

the most secure investment in the world, as far as I know. At least, 

that is why China continues to lend us money. 


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And, to date, since the inception of the trust fund, those Treasury bonds that are exchanged for the contributions that taxpayers 

have paid into the system, those bonds have earned $1.6 trillion in 

interest in the trust fund. That quick math, if I can still remember 

how to do that, is $15.5 trillion. 

SSA says to us that, since the beginning of Social Security in the 

1930s, we have had to pay out to Americans who have retired, who 

are disabled workers, or who are the survivors of an American 

worker who has perished and therefore can collect Social Security, 

that those Americans have been given, have been paid—Social Security has paid out to them a total of $12.7 trillion. And in terms 

of the cost of administering the program—and, by the way, the Social Security Administration runs a very tight ship here—the total 

cost for those 70-plus years is $0.1 trillion, or $100 billion, for a 

total cost to the system, to Americans, of $12.8 trillion. 

Again, with my quick math, if I subtract the $12.8 trillion that 

we have had to put out in benefits or to pay for costs and subtract 

that from all that has been collected from American taxpayers’ contributions, I net $2.7 trillion as a balance that has not been used. 

Now, Mr. Chairman, you said that the system is broke. I defy 

you to find me another, whether government program or private 

enterprise, that can say it has $2.7 trillion in reserve, ready to use 

for the purpose it was contributed. 

Chairman JOHNSON. The money isn’t there. 

Mr. BECERRA. Well, then, if that is a statement, that the money 

isn’t there, it is not that American workers didn’t contribute it with 

their taxes; it means that politicians have been stealing the money 

and lying—— 

Chairman JOHNSON. You are exactly right. 

Mr. BECERRA. Okay. 

Chairman JOHNSON. That is what has happened. 

Mr. BECERRA. Well, then we make the distinction and there I 

think we can clearly define the lines here. 

There are some politicians who say, ‘‘Continue, American worker, 

to pay those contributions in your taxes, have that deduction made, 

but while we tell you it is going to be put into a trust fund, we are 

lying to you, because we are going to use it to pay for other things 

we are not willing to pay for.’’ 

And so, Mr. Chairman, the only reason Social Security and 

American workers would not have $2.7 trillion that they can count 

on in the future to deal with the long-term challenges is because 

politicians are willing to steal the money that American workers 

have contributed for Social Security. 

Dr. Blahous, you mentioned some things that I want to get into. 

Are you fortunate enough to own your home? 

Mr. BLAHOUS. I am. 

Mr. BECERRA. Outright? 

Mr. BLAHOUS. I have a mortgage outstanding. 

Mr. BECERRA. Okay. Own your car? 

Mr. BLAHOUS. Yes. 

Mr. BECERRA. Outright? 

Mr. BLAHOUS. That one I own outright, yes. 


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Mr. BECERRA. Do me a favor, can you tell me if, in your pocket, 

you have enough money to pay for your house right now, the mortgage? 

Mr. BLAHOUS. I am a little bit short. 

Mr. BECERRA. A little bit short? You are broke. According to 

those who say Social Security can’t pay out benefits, you are broke. 

Because, see, you, yourself, used the word ‘‘cash deficits’’ to explain what Social Security is incurring, a ‘‘cash deficit.’’ What you 

are saying there is that, today, Social Security isn’t collecting from 

American workers contributions sufficient to pay for the benefits 

that are paying out. You are disregarding the more than $21⁄2 trillion that was built up in the surplus. Because, as the chairman has 

said, politicians have been using the money. 

But just for the same reason, I could today say that you are 

broke. And I guarantee you, if I look at your balance sheet, I know 

you are not broke. Social Security is not broke. Social Security, if 

people want to be cute and talk about cash deficits, well, you could 

say we are broke. But just because for the same reason you don’t 

carry hundreds of thousands of dollars in your pocket to pay off 

your mortgage or your car loan and you keep it in a bank where 

you think it will be safe, Americans trusted politicians who said 

that if you put the money in the trust fund, it will be there, the 

tax dollars you are contributing will be there, to pay benefits. 

And so, therefore, I think, Mr. Chairman, we can resolve this 

challenge that Social Security will face a quarter century from now, 

but you don’t have to steal the money out of the Social Security 

Trust Fund that Americans have contributed to take care of Social 

Security. 

Chairman JOHNSON. Well, you need to work with us to not 

steal any more money. 

Mr. BECERRA. Mr. Chairman—— 

Chairman JOHNSON. I would just about guarantee you that Dr. 

Blahous, if he decided to cash in all his reserves, could pay for his 

house. 

Mr. BECERRA. Absolutely. And if the Social Security Administration were to cash in all of its reserves out of the trust fund, it 

could pay benefits for quite some time. 

Chairman JOHNSON. Where are they going to get the money 

from? We are borrowing money from other countries. 

Mr. BECERRA. Oh, so you are essentially saying that those 

Treasury bonds that the American public owns through the trust 

fund are not real? 

Chairman JOHNSON. That is right. 

Mr. BECERRA. Okay. And so, do you tell that to China? 

Chairman JOHNSON. Well, is China going to fund it? 

Mr. BECERRA. No, Mr. Chairman, you have said that the American people have fake Treasury bonds. So are the Treasury 

bonds—— 

Chairman JOHNSON. The Treasury bonds are there, and the 

full faith of the United States Government is behind them. 

Mr. BECERRA. Okay. So they are real. 

Chairman JOHNSON. But the United States Government 

doesn’t have any money. We are borrowing it. You ought to go 


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down there and look at Treasury borrowing money like it is going 

out of style. 

Mr. BECERRA. I understand what you are saying, Mr. Chairman. But what you are saying is that Social Security should pay 

the price for the terrible spending policies of others. We did a war 

in Iraq and Afghanistan, never paid for it. So Social Security recipients should pay for that? 

Chairman JOHNSON. Well, the baby boomers have had an effect 

on it. 

Mr. BECERRA. The Bush tax cuts, trillions of dollars of Bush 

tax cuts, never paid for. So Social Security recipients should pay 

for that? 

Chairman JOHNSON. Yeah, your time has expired. 

Mr. BECERRA. But fortunately not the Social Security Trust 

Fund. 

Chairman JOHNSON. Mr. Tiberi, you are recognized. 

Mr. TIBERI. I have a headache, Mr. Chairman. 

Wow. You know, my mom—and Mr. Becerra has heard this—my 

mom and dad are pretty simple people. And they say to me, you 

know, ‘‘I watch a story on Fox News and then I watch MSNBC. I 

see the same story, and there is a different outcome to the story.’’ 

Now I know what they mean, watching this. I am thoroughly confused. 

And let me kind of recap, and maybe you two can help me, without my editorial comment. But I will give some anyway. So you say permanent cash deficit. You say $46 million cash deficit. You guys say lower mortality rates, falloff on net immigration, 

population aging—all things that are part of the trustees report. I 

have had actuaries say to me that we have fewer workers for more 

retirees that plays into this. I have had actuaries say to me that 

we not only live longer, the system has—and I think, Dr. 

Reischauer, you alluded to this—you have a system that wasn’t designed for people living as long as they are living today. So they 

worked longer, were in retirement for a shorter period of time; so 

now you have people in retirement for a longer period of time. 

So Mr. Becerra says, and we heard a little bit more about it a 

little bit ago, Social Security remains strong and the surplus is 

real. Which is different than what the trustees report says, which 

is different than what you say. 

Mr. Becerra says, Mr. Chairman agreed, that the problem is because politicians have taken from the trust fund. But then you all 

have said, we paid back the trust fund with interest. 

I get a statement from the Social Security Administration that 

says, a few years after my full retirement, I can expect to get 75 

percent of what I paid into it. Yet Mr. Becerra says the system is 

strong. And that is less than 25 years from now. 

Now, maybe—— 

Mr. BECERRA. Will the gentleman yield? 

Mr. TIBERI. Oh, you had a lot of time. If I had more time—— 

Mr. BECERRA. But you have mischaracterized what I said, Mr. 

Tiberi. I didn’t say that—— 

Chairman JOHNSON. Regular order. 

Mr. BECERRA. I just was asking—— 

Mr. TIBERI. Go ahead. 


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Mr. BECERRA. I said that the system is strong—— 

Mr. TIBERI. For 25 years. 

Mr. BECERRA [continuing]. And, for the next 25 years, it will 

pay out full benefits. 

Mr. TIBERI. Right. Well, in my statement from the Social Security Administration—I will bring it in and show you—is, in less 

than 25 years, I, if I retire at 67, will get less than 100 percent 

of the benefits that I paid. That is not from me; that is from them. 

Mr. BECERRA. Well, I would love to see that, if it is less than 

25 years. 

Mr. TIBERI. Yeah, I will show you. I will show you. And Mr. 

Schock probably has a statement that is much scarier than that. 

So we can blame the Bush-Pelosi-Reid recession for this, but the 

reality is, I think, what you are telling us, the reality is actuaries, 

numbers, right? I mean, this isn’t about politics. This isn’t about 

blaming Bush, Pelosi, politicians, quite frankly. Based upon reading the trustees report, it appears to me—and we can’t even agree 

on this—that this is actuarial, this is numbers, this is math. This 

is more people retiring, living longer, which Dr. Reischauer said is 

a good thing, and I agree. This is a country that has fewer workers 

for retirees and net immigration loss. 

Can you both expand upon that and help us clear this up? Is the 

trust fund being reimbursed by the general revenue fund with interest over the next 20 years, so that stealing of the money actually 

has been paid back? Can you comment on that? 

Mr. BLAHOUS. Sure. And, obviously, this discussion that is 

playing out today is one that you hear everywhere. It is a classic 

example of people looking at different parts of the animal. 

Mr. TIBERI. But you are the experts, so tell us. 

Mr. BLAHOUS. Right. Well, basically, there is truth in what everybody is saying. From the trust fund standpoint, they are real assets—the bonds in the trust fund are real assets of the Social Security system. They do earn interest, and it is paid from the general 

fund. 

A lot of the controversy about the trust funds has to do less with 

mechanically what is in there and are they assets for Social Security, but whether or not there is actually real saving there, whether 

there are real savings resources behind the trust fund, so that 

when the bonds need to be redeemed, we are in a position where 

we can pay those bonds back. 

I think all the things that have been said about the trust funds 

today are basically correct. I mean, the Social Security system has 

a trust fund balance of about $2.6 trillion. It is earning interest. 

The trust fund balance continues to rise. 

But there is also a lot of things that the trust fund balance 

doesn’t tell you. It tells you what assets does the Social Security 

system command that establish its authority to pay out benefits. 

But it doesn’t tell you such things as when you should take action 

to fix Social Security. If you were to wait until the point of trust 

fund depletion, you would have the harshest, least equitable outcome, relative to acting now and creating a more equitable schedule of benefits and taxes going forward. 

And it also doesn’t tell you whether or not the problem is still 

soluble. I mean, we have a very unusual situation right now. In the 


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1980s, early 1980s, when they had a Social Security crisis, they 

were able to fix it, but one of the reasons they were able to fix it 

was that the trust fund balance had been pretty small, historically, 

up to that point. So, at the point when the trust fund was running 

out, incoming taxes and outgoing benefit obligations were still pretty close together. That is not the situation we are in now. If we 

were to try to ride the trust fund for the next quarter century and 

redeem all those bonds, we would be at a point, ultimately, where 

taxes and benefits were so far apart that there would be no historical political precedent for taking short-term action to close that 

shortfall. 

So we are in a much more difficult situation. Yes, the trust fund 

is real, from the system’s perspective. It is an obligation from the 

general government’s perspective. But it also doesn’t tell you how 

soon you have to act to fix the system—— 

Chairman JOHNSON. The time of the gentleman has expired. 

Mr. Schock, you are recognized. 

Mr. SCHOCK. Well, thank you both for your testimony. 

I, too, am a bit taken back by some of our friends on the other 

side of the aisle who seem to believe that everything is rosy and 

fine. 

You have mentioned that we can pay out benefits for the next 

25 years. But, at the same time, after 25 years, what happens? 

Either one of you. 

Mr. REISCHAUER. What happens is that the Social Security 

system is not allowed to pay benefits in excess of the resources that 

are flowing in through tax revenues, plus whatever its accumulated 

asset position is. And so that is why your statement says that after 

2036 there would be a ratable reduction in your benefit of roughly 

25 percent. 

The discussion that we have been having from the trustees report assumes that these assets are real, that the Social Security 

Administration will be able to go to the Treasury and say, ‘‘Here 

are these pieces of paper; we need cash,’’ and that the Treasury 

will go and either borrow more money from the public or other 

taxes will be raised or other spending will be cut. And that is 

the—— 

Mr. SCHOCK. To make good on those Treasuries. 

Mr. REISCHAUER [continuing]. Assumption. And if those aren’t 

real, you would have a statement that would look very different. 

It would be flashing when you opened up your envelope. 

Mr. SCHOCK. So let me make sure I understand this. If I take 

Mr. Becerra’s rosy view that these are real bonds that the government will make good on—— 

Mr. BECERRA. That is a rosy view? 

Mr. SCHOCK. Well, I am just saying as opposed to our chairman’s less rosy view. Okay? All right? 

So let’s take the minority’s view, all right, that we are going to 

get all the money on this, even in the best-case scenario, in 25 

years you are going to be able to pay me or pay recipients 76 cents 

on the dollar? 

Mr. REISCHAUER. Correct. 

Mr. SCHOCK. Okay. So what this sounds like to me is what has 

happened in my State, which has now one of the largest unfunded 


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liabilities in the Nation for States, whereby when I read my statement, it says I will still be entitled to my benefit and the benefit 

will accrue each year, but I will only be paid what the Social Security Administration has cash in hand to cover, correct? 

So, basically, the money now will no longer be borrowed from the 

Treasury, but Social Security, in essence, will be borrowing this 

money from people who are expecting to receive the benefit in 

present form? 

Do you understand my question? 

Mr. REISCHAUER. Yes, I understand your question. The point 

here is that the Social Security system sets up promises to individuals: If you pay in this amount, we will pay you when you retire 

that amount, subject to—— 

Mr. SCHOCK. Only if we have the money. 

Mr. REISCHAUER [continuing]. The resources available at that 

time. 

Mr. SCHOCK. Thank you. And when I am looking at my statement, it says, based on what I have paid in, I am going to get 

about $3,000 a month if I keep working and wait until I am 70. 

What do you think I am going to make—of the $3,000 a month I 

am supposed to get, 40 years from now, not 25 years, what percent 

of that $3,000 a month should I expect if we don’t make any 

changes? 

Mr. BLAHOUS. I mean, if you didn’t make any changes, then, 

by definition, it would be 77 percent declining to 74 percent. If we 

made changes, it would be somewhere between 77 percent and—— 

Mr. SCHOCK. That is if I retired in 25 years. 

Mr. BLAHOUS. Right. But—— 

Mr. SCHOCK. And the accrued liability only increases each year, 

because if you can only pay 76 percent of your obligations in year 

1, even if you can pay 76 percent in year 2, you are not going to 

pay 76 percent because you owe 25 percent last year. Right? It becomes a snowball effect. 

Mr. BLAHOUS. Right. The percentage starts at about 77 cents 

on the dollar, and it goes down to about 74 by the end of the 75- 

year valuation period. And what legally is expected to happen is 

that this would not be manifested by the Social Security Administration’s arbitrarily doing a 23 percent cut across the board. Basically, they would have to delay the issuance of the benefit checks 

until the financing came in. So, in effect, your benefits would be 

cut 23 percent, gradually increasing to an annual benefit cut of 

about 26 percent. But it would happen simply through your getting 

fewer benefit checks. 

But roughly a quarter of your benefit. 

Mr. SCHOCK. Well, I would like to see at some point what happens each year, because I think that what is going to happen is 

something similar to what has happened in many States across 

this country, where the States have basically balanced their books 

on the back of providers who provide services to the State, and basically the State has become more and more in debt to the people 

to whom they owe money. And I would hate to see that happen to 

people who are expecting their Social Security check to live on. 

Chairman JOHNSON. Thank you. The gentleman’s time has expired. 


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Ms. Berkley, you are recognized. 

Ms. BERKLEY. Thank you, Mr. Chairman. 

I have a terrible head cold, and I dragged myself to this hearing. 

I feel like being here like I feel like having a toothache. But it is 

very important, what we are talking about. 

And I have about 408,000 Social Security recipients in the State 

of Nevada. My congressional district, which encompasses Las 

Vegas, has the fastest-growing senior population in the United 

States. So issues that affect seniors are very important to me. And 

this is about as rosy as I am going to be this morning. 

I am here to find out what it is we can do, given the fact that 

a third of the seniors that I represent have no other income but 

that Social Security check. They depend on it. They count on it. 

They don’t have supplemental income. They don’t come from rich 

families that can take care of them. They don’t have other assets. 

What do we do to keep the program solvent beyond the 75-year 

window so that other seniors—I actually heard an elected official 

in Nevada chide a group of seniors for being in the position that 

they are in because they didn’t make good choices when they were 

young. Now, when I looked out at that audience, I saw a bunch of 

World War II vets that enlisted in the Army, served their country, 

came home, married their high school sweetheart, got a job, had 

children, their children went on to lead good lives, and now they 

are retired on their Social Security. They didn’t make bad choices. 

They depended on the promises of their government to have an income that they had been paying into for many, many years since 

they started working. 

I don’t think privatizing the system is a good way to go. If you 

are somebody in my income bracket and you have an extensive 

portfolio, you can invest in stocks and not have to worry about the 

bottom falling out from under you. But for most people that depend 

on this Social Security check, they have no alternative. And I think 

it is a little too risky to play, dare I say, roulette with people’s only 

means of survival. 

So what suggestions do you have? You deal with this on a daily 

basis. What do we do as a Congress, where we obviously come from 

different positions, different belief systems, but know that this system is important enough to keep solvent and keep our seniors receiving their Social Security? 

I would like to hear it, because, as you can hear from here, we 

are nowhere near a conclusion that is going to be beneficial. And 

the longer we wait, the worse it is going to get. 

So what do you suggest we do in a political environment? This 

isn’t actuarial, obviously. If it was, it would be an easy decision. 

What do you do? How do I protect my people? 

Mr. BLAHOUS. Let me answer in two parts. 

First, I would just stress the importance of acting soon. It is very 

important, especially if you are talking from the vantage point of 

people now receiving benefits. And the reason for that, if you did 

a solution today, you could honor full benefits to people now getting 

them, you could honor benefits to people on the verge of retirement, 

and you basically would face a set of choices that would be I think 

at least comparatively benign. 


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If you wanted to, you could fix the system without raising taxes, 

and you could pay a rate of benefit growth for initial retirees going 

forward that is somewhere between the rate of inflation and wage 

indexation. If you want to pay something closer to the current benefit formula going forward, you would have to raise taxes somewhat. 

But at least you have comparatively benign—— 

Ms. BERKLEY. Are you talking payroll taxes? 

Mr. BLAHOUS. Well, I am just sort of outlining the choices 

today, that basically, within a stable tax rate right now, we can afford not only to pay today’s benefits but, actually, a level of benefits 

in the future that is somewhat higher, even relative to the inflation. Now, if you want to pay for the current benefit formula, you 

have to raise either the payroll tax base or the payroll tax rate 

somewhat to do it. 

But at least your choices today are comparatively benign. If you 

wait a while, because of all the baby boomers heading into the system, then you start facing much more difficult choices. Then you 

start facing choices of affecting people close to retirement or already in retirement or actually having real declines in benefit levels. 

And, of course, the nightmare scenario is you wait until 2036, 

and then you have the choice between a 23 percent benefit reduction and a 16.4 percent payroll tax rate. So there is a huge advantage to today’s seniors if we act earlier. 

Now, stepping back from that—and this is just my personal set 

of policy views. I am not speaking for the trustees. But I tend to 

think that the basic levers in Social Security, the three that I look 

at are: the eligibility age—right now we are living about 6 years 

longer at age 65 than when Social Security was first established, 

but we are actually—a typical beneficiary is collecting benefits 3 

years earlier, because we moved the first age of claims from 65 to 

62. 

Chairman JOHNSON. Could you summarize? 

Mr. BLAHOUS. Well, I would look at the eligibility age; the benefit formula, especially for high-income beneficiaries; and the work 

incentives provided in the system. 

Chairman JOHNSON. I think that Mr. Becerra and I are both 

energized to try to fix the system. And it can be fixed. And we 

agree with you that people who put their money in there expect to 

get a return from it. 

Ms. BERKLEY. And it is the safety net that millions of older 

Americans depend on for their very survival. 

Chairman JOHNSON. You are right. You are right. Thank you. 

Your time has expired. 

Mr. Paulsen, you are recognized. 

Mr. PAULSEN. Thank you, Mr. Chairman. 

First of all, thank you for being here and for sharing your expertise, because you are the experts, you deal with this. And I find 

much of what is in your report actually fascinating. 

Let me just follow up on some of the comments or questions that 

were offered a little earlier. 

Last night, I was signing high school graduation letters, and I 

had 800. I was signing for one of the high schools. I know a lot of 


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the kids where my daughter is graduating. And, you know, these 

high school students are essentially set to retire in about year 

2055. A long time away, right? And many of them will be going to 

college or entering the workforce. They are going to start paying 

Social Security payroll taxes. 

Can you comment, I mean, what rate of return can these young 

people expect on the taxes that they are paying? And how would 

that be different from the return of their grandparents and parents? 

Please, Mr. Blahous, first. 

Mr. BLAHOUS. A typical high school graduate today, they would 

probably expect a personal rate of return of about 11⁄2 to 2 percent 

over inflation on their Social Security contributions. That would be 

a bit less than their parents. Their parents are probably 2, 21⁄2. And their grandparents are probably 3 percent or so. 

It has been gradually drifting down, and that reflects a couple 

of things. One, it reflects population aging. So, as you have a declining ratio of workers to beneficiaries, if you want to have comparable benefit payments between generations, each succeeding 

generation has to face a higher tax rate to get it. And so that 

causes internal rates of return to be depressed over time. 

The internal returns were highest for the first recipients, the 

people who collected benefits without themselves putting in appreciable amounts into the system. So they were much higher in the 

very early years of the program. 

Mr. PAULSEN. Mr. Reischauer? 

Mr. REISCHAUER. I just want to ask Chuck a question. 

That assumes that the people retiring in 2055 don’t have a ratable reduction in their benefit. 

Mr. BLAHOUS. Actually, I am assuming the ratable reduction. 

Mr. REISCHAUER. Oh, you are. 

Mr. BLAHOUS. Yeah. There is basically—— 

Mr. REISCHAUER. So it would be higher if the system were 

fixed in some way without changing the benefit structure that exists now? 

Mr. BLAHOUS. Right. 

Mr. PAULSEN. Well, that goes to the question, then, of how does 

further delay impact these young people and future generations? I 

mean, a future delay in acting on fixing the program, right? Because this is the trustees report. It is offering us the challenge of 

2036 and, you know, 75 years out. 

Mr. BLAHOUS. I mean, I would say that delay—obviously, delay 

is costly from the perspective of your choices as legislators. But it 

is especially costly from the standpoint of younger generations, because you wind up in a situation where the effects of balancing the 

system are concentrated much more on younger participants. 

So the longer that you leave the current imbalance between 

scheduled benefits and projected revenues on the table, and you 

have cohort after cohort after cohort of baby boomers entering the 

rolls who, themselves, aren’t contributing to removing that imbalance, you are loading up on the younger generation the adverse 

consequences of that imbalance. 

So delay is particularly costly from the standpoint of younger 

workers. 


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Mr. PAULSEN. You know, it seems to me—and I don’t know the 

exact wording of the statute, but the reason we have the trustees 

report and the reason that you are out there to provide us the expertise and the benefit of your knowledge and share information 

with us, the Members of Congress, is not to give us sort of the 

snapshot of where we are right now, but it is to share the picture 

of where this program is going, right? Isn’t that what the trustees 

are responsible for? 

Mr. REISCHAUER. ‘‘Under no change in the law’’ is what we— 

We are not, with our public trustees hats on, opining on various 

methods to strengthen the system or alter it. 

Mr. PAULSEN. Right. Right. 

Well, I just think this is an important point, Mr. Chairman. I 

mean, I haven’t been in Congress very long, just for 2 years. But 

I just notice that Congress always tends to deal with short-term 

thinking. We are always thinking 6 months, 2 years. We are never 

thinking for the long term. And some of the issues that are portrayed here are no different than what faced us with AMT, estate 

taxes, or other issues. If you don’t tackle them earlier, they become 

much more difficult—the doc fix—to address down the road. And 

I think your warnings, early warnings, are really important. 

I mean, there are a couple of things that just really stick out to 

me. Right now, cash flow deficits that started earlier, they are projected to be permanent. That is right around the corner. And that 

is going to continue permanently right on down the road. And the 

gap is real. And, again, by 2036, it is either a 32 percent increase 

in taxes or it is going to be a 23 percent reduction in benefits down 

the road. I mean, that is significant. 

So I just want to thank you for being here. I know we have, 

bipartisanly, have a lot of opportunity and challenge in addressing 

this, Mr. Chairman. 

Chairman JOHNSON. Thank you, sir. I appreciate your testimony. 

Mr. Smith, you are recognized. 

Mr. SMITH. Thank you. 

I appreciate the opportunity to have a dialogue here today. I 

think we owe the American people a sincere discussion here. And 

I am kind of intrigued by the preview of some future campaign advertisements. But I hope that, as we do look at the balance, we realize the fact that there is an imbalance. 

Would you say that characterizing our situation with Social Security as an imbalance is accurate? 

Mr. REISCHAUER. As looked at over the long run, yes. 

Mr. SMITH. Right. And I appreciate that. Because I think, if 

anything, though, we can add emphasis to the fact that we have 

a commitment to seniors that we will fulfill. And as we look at trying to address things—I mean, it is fairly cut and dry as to what 

needs to be done or what could be done to address this imbalance 

long term. 

But I share the concern of my colleagues when I see young people paying out, paying into the system, and, yet, without the assurance that that balance can be achieved, because there are political 

games played here in Washington that I think come at a huge price 


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tag for the future of young Americans who want to pursue economic freedom. 

And I am one who thinks that economic freedom is one of the 

fundamental, core principles of our country, that we can make sure 

that there is the safety net well into the future for those who have 

been dealt a different hand, certainly no fault of their own oftentimes. 

But if we wanted to balance things out long term—obviously, we 

have to look at it that way—what would be the age—if the retirement age were increased, how much would we have to raise the retirement age for things to be in balance, doing nothing else? 

Mr. BECERRA. I want to hear this one. 

Mr. BLAHOUS. Yeah, it is a lot. I mean, at this point, it is a 

lot. 

With retirement-age changes, much depends on the rate at which 

you phase it in. So, you know, a lot of proposals have it going very, 

very gradually. If you look at the Simpson-Bowles proposal, they 

start phasing in a retirement-age increase by 1 month every 2 

years. You basically run out of the valuation period; the 75-year period runs out before the retirement age gets up fast enough to actually close the imbalance. So you would have to raise it much more 

dramatically. 

But I think, in theory, you would have to get it well up into the 

mid 70s, the normal retirement age, if you wanted to close the imbalance through retirement-age changes alone. The proposals that 

are often talked about to raise it to 67, 68, and 69 over time only 

solve a small fraction of the actuarial deficit. 

Mr. SMITH. Thank you. 

Mr. REISCHAUER. Just to clarify things, the normal retirement 

age is the age at which you get full benefits, and that is 66 now. 

And it will gradually rise, starting in a few years, to become 67. 

Then there is the early retirement age, at which you are eligible 

for reduced benefits. 

And so the answer to your question could also depend on whether you are moving the early end and the normal retirement age up 

together or you are just moving the normal retirement age up. And 

when you move the normal retirement age up alone, the benefits 

you receive at the early retirement age go down very significantly. 

Mr. SMITH. Okay. 

Thank you, Mr. Chairman. I yield back. 

Chairman JOHNSON. Thank you. 

Mr. Berg, you are recognized. 

Mr. BERG. Thank you, Mr. Chairman. 

Well, first of all, I just really appreciate you being here and presenting. And I can’t imagine all the work that has gone into the 

last 12 months and what your trustees have brought forward. 

I don’t know where to even start on this thing, but, you know, 

I got elected to take on some of these problems and fix the problems. And I think we have political agendas, we have financial 

agendas, we have people on a lot of different agendas here. But I 

just want to make it really, really simple. And I am not asking you 

to represent anyone except yourself. 

But if I said to you, we have to fix this problem so it is stable, 

so cash flows for the long term, what specifically would you do if 


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we said, the next 30 days we have to fix this, what would you do? 

What are the key things you would do, for both the old age and 

disability? 

Mr. BLAHOUS. Just very visibly and publicly taking off my 

trustees hat, I tend to think in terms of three main levers on Social 

Security. 

One is the eligibility age. As Dr. Reischauer said, there are moving parts even to the eligibility age. There is normal retirement 

age, there is early eligibility age. And so, to understand what you 

get at a given age of claim, you have to know a lot of things, you 

know, what those are and, also, what the basic benefit is at normal 

retirement age. 

Longevity has increased about 6 years at age 65 since Social Security was first established. But due to the establishment of early 

eligibility age, people are more typically claiming benefits at 62 

now. So a typical beneficiary is getting benefits for about 9 additional years. Even if the early eligibility age went gradually up to 

65 and the normal retirement age went gradually up to 70, you 

would still be in a position—— 

Mr. BERG. So what would your age number be? 

Mr. BLAHOUS. Well, I wouldn’t do it all through—I mean, 

again, this is personal speculation. But I think any eligibility-age 

changes have to be very gradual. And I happen to be of the view 

that it is important to raise the early eligibility age at least back 

to 65 so that people aren’t claiming earlier than they were when 

the system was first established. 

Even if the early eligibility age went back to 65 and the normal 

retirement age went to 70, people would still be claiming benefits 

no later than they were then and getting a much higher benefit because of the numerous benefit increases since then. So that is one 

lever. 

Another one is just constraining the growth of benefits on the 

higher-income end. There are sort of two families of plans to do 

that. There are the so-called progressive indexing plans, where, basically, benefits on the lower-income end rise at the rate of wage 

growth in the economy, and on the higher-income end they rise at 

the rate of inflation, and everybody else is somewhere in between. 

That is one family of plans. Another one sort of surgically gets into 

the benefit formula and changes the numbers in the benefit formula to target benefit growth on the high-income end. That is basically the Simpson-Bowles approach. They are both valid approaches, and they both have the same intended effect. 

And the last category of things I personally would look at is, 

there are a lot of very skewed work incentives in the current system. The current system, the actuarial penalty for early retirement 

claims may not be adequate. The actuarial reward for delayed retirement claims may not be adequate. This may incentivize people 

to leave the workforce earlier. 

There are quirks in the way the benefit formula works. The way 

the benefit formula works now, it is trying to do two things: It 

keeps track of your wage history so it knows whether you are a 

high-income person or a low-income person, but it is also trying to 

be progressive. It is trying to pay a higher return to people on the 

lower-income end. So what happens is, the longer you work, your 


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lifetime average earnings rises. And because of the progressivity of 

the benefit formula, your internal returns drop. 

And once you hit 35 earnings years, then your personal returns 

really plummet. So when you are a senior, you are contemplating 

whether to a transition job, a part-time job in transition to retirement, the system is basically telling you that if you keep working 

and paying payroll taxes, there is going to be almost no change if 

your benefit. 

So there are a lot of changes I would make to that just to better 

incentivize work. But, again, not speaking as a trustee. 

Mr. BERG. Thank you. 

Take a crack at it? 

Mr. REISCHAUER. Yes, I was hoping you were going to run out 

of time. But I will take off my trustees hat, as well, and say that, 

were I the czar and asked to go off in a room and try to do this 

without considering political consequences, I would first of all—— 

Chairman JOHNSON. We are going to build a wall right here. 

Mr. REISCHAUER [continuing]. Would raise the eligibility age 

and index it to longevity. Do it very gradually and not by huge 

amounts. 

I would increase the computation period over which benefits are 

calculated. Now we take your top 35 years of earnings and average 

them, and that leads to a situation where we don’t make as much 

of a distinction as I believe we should between individuals who 

have very high earnings in a few years versus somebody who works 

a long career at a relatively low wage. And so I would make an adjustment on that front. 

I would adjust the benefits in ways that would probably raise 

them at the bottom and dampen their growth at the top, and institute some kind of minimum benefit that was more adequate than 

what we have now. 

I would phase in coverage for all State and local workers, about 

a quarter of whom are now outside the system. And it leads not 

only to huge administrative complexities but certain inequitable 

situations. 

And I would raise the taxable maximum, which is now indexed 

to the growth of average wages but has led to a situation where 

the fraction of total earnings that are covered, which has bounced 

around at about 91 percent in certain years, is down in the mid to 

low 80 percent now. 

And also make an adjustment for the fact that a larger fraction 

of total compensation that people are getting now comes in the 

form of nontaxable fringe benefits, namely health insurance. 

And so, making some adjustments that way. And I think, you 

know, a balance between taxes—— 

Chairman JOHNSON. The gentleman’s time has expired. Can 

you put that—— 

Mr. REISCHAUER. As soon as I said ‘‘taxes’’? 

Chairman JOHNSON. Can you put some of that in writing, 1, 2, 

3, 4, 5, for us, please? 

Mr. REISCHAUER. Yes. Both of us will. 

Chairman JOHNSON. I would appreciate it. We probably have 

it on the record anyway, but thank you. 

Mr. Brady, you are recognized. 


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Mr. BRADY. Thank you, Mr. Chairman. 

Today’s job numbers are heartbreaking for job seekers, especially 

coming on a string of bad economic news: first-quarter GDP just 

anemic; manufacturing index going down. Consumer confidence is 

almost as low as it was more than 2 years ago. And, in fact, the 

unemployment rate at 9.1 percent is artificially low. That is because people have given up looking for work. In fact, we have the 

fewest percentage of Americans in the workforce in a quarter of a 

century. And a lot of them have given up hope, and, frankly, many 

of them will struggle to get back into the workforce. 

Who would have thought the highlight of the Obama recovery 

was two Christmases ago? We are in real trouble. And the failure 

to get this economy going has a direct impact on Social Security. 

Today, we have heard two major red flags raised. Dr. Blahous 

has said this is the first report since 1983 projecting permanent 

cash-flow deficits. And Dr. Reischauer said that, in looking at the 

75-year outlook, this is the largest single-year deterioration since 

1994. That ought to be real red flags and certainly, I think, 

counters the argument that things are just rosy in Social Security. 

You would have to be in denial to believe we don’t have a real 

problem in this program. 

These cash deficits that are now permanent, as I look at the estimations, it looks like Social Security’s cash shortfall in the next 10 

years will be $416 billion. My question is, the current deficits we 

are running, is it fair to say that Social Security’s permanent and 

growing cash-flow deficits are adding to the unified Federal deficit? 

And, if so, does that increase the burden of debt we are leaving to 

our kids and grandkids? 

Dr. Blahous, is that adding to our debt? 

Mr. BLAHOUS. I would say yes. From a trust fund standpoint, 

the trust fund balances are continuing to rise. So if you looked narrowly at the world of the Social Security Trust Fund, its balances 

are rising. But if you look at the unified Federal budget, the shortfall of tax income relative to outgoing benefit expenditures adds to 

the unified Federal deficit. 

Mr. BRADY. And, right now, we are borrowing to make up the 

difference. 

Mr. BLAHOUS. That is right. 

Mr. BRADY. Dr. Reischauer, is this adding to the unified debt? 

Mr. REISCHAUER. Yes, by definition, it is. 

Just one comment on your preamble, and that is, I said that the 

deterioration in the actuarial balance was as large or larger than 

any since the early 1990s, but a very small portion of that is due 

to economics, changed economic assumptions. Most of it was due to 

changes in demographic assumptions and improved data and—— 

Mr. BRADY. Are you concerned about—— 

Mr. REISCHAUER [continuing]. Some improved methodologies. 

Mr. BRADY. If Congress doesn’t act, are you concerned about the 

future of Social Security? 

Mr. REISCHAUER. Yes. No, I mean, I think this is a—— 

Mr. BRADY. Yes or no? 

Mr. REISCHAUER. Yes. No, yes. I said yes—— 

Mr. BRADY. No, comma, yes. Okay. I get it. 

Mr. REISCHAUER. Yes, yes. 


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Mr. BRADY. I knew that. 

Mr. REISCHAUER. You know, this is a challenge going forward. 

It is not like the debt ceiling, something that has to be addressed 

in the next few months or even the next few years. As Dr. Blahous 

has said, the sooner you address it, the better off we will be. The 

options will be greater, the ability of affected parties to respond 

will be more. 

Mr. BRADY. I know the answer to this, but there is probably a 

need to clear things up. And I stepped out for a minute. But in the 

trust fund today, we don’t have cash in the trust fund today, correct? We don’t have a Social Security Trust Fund comprised of 

cash? 

Mr. REISCHAUER. No, you don’t. But your bank account doesn’t 

have cash in it either, and yet, when you put your ATM card in, 

cash comes out. 

Mr. BRADY. Yeah. But that is because you have actually deposited cash before and the bank is holding it. Today— 

Mr. REISCHAUER. Well, the bank has actually lent it to somebody. So the bank doesn’t always even have it. 

Mr. BRADY [continuing]. The U.S. Government is holding those 

IOUs, correct? And these are nonmarketable securities. So there is 

a difference between the security sold to a firm or to China versus 

the nonmarketable securities within the trust fund. Right now, because we are running a deficit, in effect, we have borrowing authority to make up any difference each year in Social Security. 

Correct, Dr. Blahous? 

Mr. BLAHOUS. Yes, the bonds in the trust fund are special-issue 

Treasury bonds. And, basically, they earn a rate of interest that is 

pegged to a market rate of interest. But they are unusual bonds 

in the sense they are basically called as needed by the Social Security system. 

Mr. BRADY. And the call is on taxpayers and the Federal Government. 

Mr. BLAHOUS. Right. 

Mr. BRADY. So when we are running short, as we are—and you 

said permanently running short in this program—that means we 

permanently borrow to make up the difference each year. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you. 

Mr. REISCHAUER. But right now the Treasury is giving an interest payment that is larger than the amount that you have to 

borrow. So—— 

Mr. BRADY. And that has to be paid back, is another call on taxpayers and the government. 

Chairman JOHNSON. Yeah, they sell Treasuries every day. 

Have you been down there and watched them? We borrow money 

like it is going out of style. 

Mr. Becerra, you are recognized for one quick question. And 

then, we have a vote, so we will have to adjourn. 

Mr. BECERRA. Thanks. Thanks, Mr. Chairman. 

I just want to clarify, these nonmarketable special-issue bonds, 

they are not just held by Social Security, they are also held by foreign governments and other folks, as well. 

Mr. BRADY. No, that is not true. 


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Mr. BECERRA. That is true, absolutely true. It absolutely is 

true. 

Mr. BRADY. You can answer. 

Mr. BECERRA. So—— 

Chairman JOHNSON. Wait a minute. Let him respond. 

Mr. BLAHOUS. Well, I mean, I am not an expert in the broader 

set of securities sold by the Federal Government, but the bonds 

that are issued to Social Security are sort of a special-issue creation of the Social Security Act that is sort of uniquely created for 

the Social Security system. 

Mr. BECERRA. Right, backed up by the money that taxpayers 

contribute into the system. It is not as if they are fictitious bonds. 

They are bonds backed by the money that taxpayers put into it. 

Mr. BRADY. But they are different from the securities, the 

Treasuries that are held by the public. 

Mr. BECERRA. If, by that, you mean that the money that foreign countries give us is better than money that American taxpayers give to the Federal Government, then perhaps they are different. But a dollar is a dollar. 

One quick question I just wanted to ask because we have—I 

think everyone agrees that, long term, we want to do something to 

make sure that we don’t have a shortfall in Social Security but 

that, right now, the Social Security system continues to contribute. 

The question I have is this. Has the Social Security system ever 

contributed a cent to the deficit that the country faces today? 

Mr. BLAHOUS. I mean, I would state that it is contributing to 

the deficit now in 2011 and did in 2010, as well. 

Mr. BECERRA. And how is that? 

Mr. BLAHOUS. Well, basically, the amount of revenue the program is generating—— 

Mr. BECERRA. On an annual basis. 

Mr. BLAHOUS [continuing]. Is less, on an annual basis, is less 

than the amount that the program is sending out the door. 

Mr. BECERRA. And so, Dr. Blahous, then you are taking the 

fact that the money that was contributed in the last 10 years—I 

won’t even talk about the last 30 years, but the last 10 years— 

when taxpayers were contributing more than was being used by 

Social Security, that no longer exists? 

Mr. BLAHOUS. Well, no question, I understand the fundamental 

point, which is that if you take the total value of Social Security’s 

positive contributions to the budget balance since the 1980s, that 

far outweighs the negative contribution it is making in 2010 and 

2011. So I certainly recognize that point. 

Mr. BECERRA. Right, but, I mean, I think it is important for 

American taxpayers to understand what folks are saying. When 

they contribute out of their paycheck for Social Security and the 

government takes that money and says, ‘‘We don’t need it all today, 

so we are going to put some of it into Treasury bonds so that now 

we can use that money today as the Federal Government for other 

operating expenses, but you are going to hold Treasury bonds so 

that when you do retire you can collect it’’—if you say that we are 

running deficits today, then you have essentially said that those 

Treasury bonds that were backed up by the money that same worker contributed last year has evaporated. 


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Chairman JOHNSON. Yeah, let’s call it quits to the interrogation. 

And I would like to make one comment. FactCheck.org says it 

this way: Quote, ‘‘Some senior Democrats are claiming that Social 

Security does not contribute one penny to the Federal deficit. That 

is not true. The fact is, the Federal Government had to borrow $37 

billion last year to finance Social Security and will need to borrow 

more this year. The red ink is projected to total well over a half 

a trillion dollars in the coming decade.’’ 

Mr. BECERRA. FactCheck’s pants are on fire, I think. 

Chairman JOHNSON. And, with that, we are going to close the 

hearing. We have a vote going on. 

I appreciate the two of you being here. That was very good testimony. Thank you. 

The committee is adjourned. 

[Whereupon, at 10:27 a.m., the subcommittee was adjourned.] 

QUESTIONS FOR THE RECORD 

Charles P. Blahous III, Ph.D. 


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f 

Robert D. Reischauer, Ph.D. 

f 


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SUBMISSIONS FOR THE RECORD 

The Center for Fiscal Equity 


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Æ 


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