U.S. GOVERNMENT PRINTING OFFICE

52–247 CC WASHINGTON : 1999

THE FUTURE OF SOCIAL SECURITY FOR

THIS GENERATION AND THE NEXT:

IMPLICATIONS OF RAISING THE RETIREMENT

AGE

HEARING

BEFORE THE

SUBCOMMITTEE ON SOCIAL SECURITY

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

FEBRUARY 26, 1998

Serial 105–48

Printed for the use of the Committee on Ways and Means

(
ii

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON SOCIAL SECURITY

JIM BUNNING, Kentucky, Chairman

SAM JOHNSON, Texas

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

JON CHRISTENSEN, Nebraska

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

BARBARA B. KENNELLY, Connecticut

RICHARD E. NEAL, Massachusetts

SANDER M. LEVIN, Michigan

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

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 February 13, 1998, announcing the hearing ..................................... 2

WITNESSES

Social Security Administration, Hon. Kenneth S. Apfel, Commissioner ............. 6

Actuarial Sciences Associates, Christopher M. Bone ............................................ 116

American Academy of Actuaries, Ron Gebhardtsbauer ........................................ 86

American Federation of Labor and Congress of Industrial Organizations,

David A. Smith ..................................................................................................... 128

Association of Private Pension and Welfare Plans, David M. Walker ................ 122

Bernstein, Merton C., Washington University ...................................................... 67

Burkhauser, Richard V., Syracuse University ...................................................... 75

Myers, Robert J., Silver Spring, MD ...................................................................... 64

SUBMISSIONS FOR THE RECORD

Employee Benefit Research Institute, Kelly Olsen, statement ............................ 137

Forman, Jonathan Barry, University of Oklahoma, statement ........................... 139
(1)

THE FUTURE OF SOCIAL SECURITY FOR

THIS GENERATION AND THE NEXT:

IMPLICATIONS OF RAISING THE RETIREMENT AGE

THURSDAY, FEBRUARY 26, 1998

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON SOCIAL SECURITY,

Washington, DC.

The Subcommittee met, pursuant to notice, at 1:02 p.m., in room

B–318, Rayburn House Office Building, Hon. Jim Bunning (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]
2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON SOCIAL SECURITY

FOR IMMEDIATE RELEASE CONTACT: (202) 225–9263

February 13, 1998

No. SS–13

Bunning Announces Eighth Hearing in Series

on ‘‘The Future of Social Security

for this Generation and the Next’’

Congressman Jim Bunning (R–KY), Chairman, Subcommittee on Social Security

of the Committee on Ways and Means, today announced that the Subcommittee will

hold the eighth in a series of hearings on ‘‘The Future of Social Security for this

Generation and the Next.’’ At this hearing, the Subcommittee will examine the implications of raising the retirement age. The hearing will take place on Thursday,

February 26, 1998, in room B–318 Rayburn House Office Building, beginning at

1:00 p.m.

In view of the limited time available to hear witnesses, oral testimony will be

from invited witnesses only. However, any individual or organization may submit

a written statement for consideration by the Committee and for inclusion in the

printed record of the hearing.

BACKGROUND:

The Subcommittee’s first seven hearings in the series have focused on: the recommendations of the Advisory Council on Social Security, the fundamental issues to

consider when evaluating reform options, the findings of the 1997 Social Security

Board of Trustees, the experiences of other countries, the views of policy experts,

organizations with different generational perspectives, business and labor representatives, Members of Congress on Social Security reform, and the current state of public opinion on the future of Social Security.

When major changes were last made to Social Security in 1983, a provision was

included that will gradually raise the ‘‘normal’’ retirement age—the age at which

one receives unreduced benefits—from age 65 to age 66 over the period 2003 to

2008, and to age 67 from 2022 to 2027. Today, as concern continues about the longrange solvency of Social Security, proposals have been made to increase the ‘‘normal’’ retirement age even further.

A substantial portion of a growing long-range deficit in Social Security financing

is being attributed to projections of a decreasing ratio of workers to recipients in

the future, especially when the baby-boom generation begins to retire. It has been

argued by many that raising the retirement age would offset, at least to some extent, the deficit in Social Security’s long-range financing. However, there are many

issues surrounding a further increase in the retirement age that require consideration, including: projected life expectancy increases and whether those increases are

accompanied by improvements to workers’ health, effects on the labor market, the

impact on employer-sponsored benefit plans, public reaction to additional increases

in the retirement age, and the extent to which savings to the Old-Age and Survivors

Trust Fund will be offset by costs to the Disability Insurance Trust Fund, among

others.
3

In announcing the hearing, Chairman Bunning stated: ‘‘Raising the normal retirement age is one of those options that may sound simple, when you consider how

life expectancies have been rising. However, like so many of the proposed options

for Social Security reform, although they may sound easy, in fact, the impacts are

wide-spread and significant. Through this hearing, I look forward to fully exploring

both the intended and unintended effects of raising the normal retirement age.’’

FOCUS OF THE HEARING:

The Subcommittee will receive the views of actuaries, social insurance experts,

employers, and employee representatives on proposals to raise the normal retirement age. Specifically, Members of the Subcommittee would like to hear from each

witness regarding their views on the various proposals to raise the normal retirement age and what they see are the intended and unintended effects.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement for the printed

record of the hearing should submit at least six (6) single-space legal-size copies of

their statement, along with an IBM compatible 3.5-inch diskette in ASCII DOS Text

or WordPerfect 5.1 format only, with their name, address, and hearing date noted

on a label, by the close of business, Thursday, March 12, 1998, to A.L. Singleton,

Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102

Longworth House Office Building, Washington, D.C. 20515. If those filing written

statements wish to have their statements distributed to the press and interested

public at the hearing, they may deliver 200 additional copies for this purpose to the

Subcommittee on Social Security office, room B-316 Rayburn House Office Building,

at least one hour before the hearing begins.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written

statement or exhibit submitted for the printed record or any written comments in

response to a request for written comments must conform to the guidelines listed

below. Any statement or exhibit not in compliance with these guidelines will not be

printed, but will be maintained in the Committee files for review and use by the

Committee.

1. All statements and any accompanying exhibits for printing must be typed in single space

on legal-size paper and may not exceed a total of 10 pages including attachments. At the same

time written statements are submitted to the Committee, witnesses are now requested to submit

their statements on an IBM compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect

5.1 format. Witnesses are advised that the Committee will rely on electronic submissions for

printing the official hearing record.

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

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

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

by the Committee.

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments

by the Committee, must include on his statement or submission a list of all clients, persons,

or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the name, full address, a

telephone number where the witness or the designated representative may be reached and a

topical outline or summary of the comments and recommendations in the full statement. This

supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing.

Statements and exhibits or supplementary material submitted solely for distribution to the

Members, the press and the public during the course of a public hearing may be submitted in

other forms.

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

Wide Web at ‘HTTP://WWW.HOUSE.GOV/WAYSlMEANS/’.

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–
4

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.

like to welcome all our guests and those that are going to testify.

Chairman BUNNING. The Subcommittee will come to order. I’d

f Today marks our eighth hearing in the series on the Social Security future for this generation and the next. During this hearing,

we will focus on the implications of raising the retirement age.

Since our last hearing, Social Security has taken center stage. In

his State of the Union Address, the President made a commitment

to save Social Security, reserving 100 percent of future budget surpluses until necessary measures have been taken to strengthen the

Social Security system. Although clearly sounding as though the

Federal budget surplus would somehow be credited to the Social

Security Trust Funds, to the contrary, the President’s budget proposed nothing new.

There are no new Social Security Trust Fund investment strategies nor any changes to the Social Security taxes or spending.

That’s why I will introduce legislation which creates a new treasury account, the Protect Social Security Account, into which each

year’s budget surpluses will be deposited. In essence, my bill would

wall off the budget surplus so they could not be spent until a solution to the Social Security is found.

We have a fantastic window of opportunity right now to do what

we all need knows to be done. We have to do this; to reform Social

Security to make surely it remains solvent beyond the baby

boomers; beyond the year 2029, well into the next century. The fact

that today we are on the verge of a balanced budget with a potential of significant budget surpluses for the next 10 years gives us

a golden window of opportunity to strengthen the Social Security

system. We should not let that opportunity pass us.

Today, we examine the reform solution many have discussed:

Raising the retirement age. What many Americans may not yet realize, however, is that the normal retirement age, currently age 65,

will soon begin to increase beginning in the year 2000. The retirement age will gradually increase over a 22-year period to age 67.

We know people are living longer, but we also know that people are

choosing to retire early. In 1996, for example, almost three-fourths

of those who retired received reduced benefits due to retiring before

the age of 65.

Raising the normal retirement age is one of those options that

may sound simple, however, like so many of the proposed options

for Social Security reform, although they may sound easy, in fact,

the impacts are widespread and significant. Additional years of

trust fund solvency would be added by providing benefits for fewer

years or by reducing workers’ benefits even further if they retire

before reaching the normal retirement age. However, raising the

retirement age would not be advantageous for those who are unemployed or working arduous occupations. Low-wage earners who

have poor health or fewer skills would be adversely affected as

would certain minority groups with shorter lifespans. More workers
5

age 62 and older probably would continue to work at least part

time. Working seniors would be encouraged making greater use of

older workers and increasing national productivity. But retirement

income might be lower for those who cannot work longer due to employers continuing to provide incentives for older workers to retire

and make room for younger workers.

Younger individuals who already will not receive as many benefits from the program as current retirees would see even fewer benefits. Social Security disability program costs probably would be

raised as seniors would have an incentive to apply for disability

benefits rather than wait to receive full retirement benefits, especially since early retirement benefits would be subject to further reductions. In addition, costs of other disability programs: Workers’

compensation, employee pension programs, and unemployment

compensation would also likely increase.

More details on these effects and many others will be heard

today from the experts who have joined us. I look forward to hearing their views on both the intended and unintended effects of raising the normal retirement age. In the interest of time, it is our

practice to dispense with opening statements except from the

Ranking Democrat Member. All Members are welcome to submit

statements for the record. I yield such time as she may consume

to Congresswoman Kennelly for any statement she wishes to make.

Mrs. KENNELLY. Thank you, Mr. Chairman, and I enjoyed listening to your presentation and the legislation that you’re going to introduce, and I think it’s fine that both of us agree so definitely on

what should be done with the—so-called budget surplus.

But I want to welcome the Commissioner here and make a brief

statement. With today’s hearing, we begin an important year in the

discussion of Social Security reform. The President in his State of

the Union Address challenged us to save Social Security first. I’ve

recently introduced the legislation along with Ranking Member

Charlie Rangel and other Members of the Ways and Means Committee which would implement the President’s call. It would do so

by creating a Save Social Security First Fund and reserve any

budget surplus until action has been taken to strengthen Social Security for the 21st century. In my view, we need to keep old promises before we make new ones.

Raising the Social Security retirement age is among the many

proposals made to reduce Social Security outlays. Today’s witnesses

will lay out for us some of the policy considerations of lifting that

age. Some people argue that raising the retirement age makes

sense, because life expectancy has increased. Others argue that an

increase in the retirement age would fall disproportionately on certain groups of people; for example, the people who are unable to

continue working. This might include workers in heavy industry;

workers subject to downsizing, and workers in poor health.

We are lucky to have the Commissioner of Social Security with

us today and a fine panel of witnesses to share the views that they

have with us. I look forward to a full discussion on this issue. I

thank you, Mr. Chairman.

Chairman BUNNING. Thank you, Barbara. First, we will hear

from the Commissioner of the Social Security Administration, Kenneth Apfel. This is the first time a Commissioner has appeared be-
6

fore this Subcommittee during our hearing series on the future of

Social Security. I am very pleased that you could join us and hope

you will come back often. Mr. Apfel, would you like to begin?

STATEMENT OF HON. KENNETH S. APFEL, COMMISSIONER,

SOCIAL SECURITY ADMINISTRATION

Mr. APFEL. Thank you, Mr. Chairman and Members of the Subcommittee for inviting me here today to discuss the future of Social

Security for this generation and the next. I’m especially pleased

that the topic of my first hearing as Commissioner for this Subcommittee and in the House is to discuss how to begin to strengthen Social Security for the 21st century. I can think of no issue more

important for the country.

As you know, President Clinton has made Social Security reform

a top priority. The President proposed in his State of the Union

Message that none of the surpluses should be used for tax cuts or

additional spending until we address Social Security’s long-range

financing problem. He said that we must save Social Security first,

and the reasons are quite clear. Since its creation in 1935, Social

Security has become the most successful domestic government program in the nation’s history and our most effective antipoverty program, especially for older Americans. More than 9 of 10 older

Americans receive Social Security and about 40 percent are kept

out of poverty by their monthly benefit payments.

The importance of retirement income will only grow in the future. Today, there are 34 million older Americans; by 2030, that

number will have more than doubled as the 76 million baby

boomers move into retirement. At the same time, the growth in the

number of senior citizens will outpace the number of workers.

Today, there are 3.3 workers for each beneficiary; by 2030, there

will only be about 2. These demographic trends have large implications especially for the Social Security Program. These changes will

place great strains on America’s retirement system and raise serious long-range financial issues. If these issues are not addressed by

the United States now, future generations of Americans will not be

able to enjoy the same sense of economic security in retirement as

have previous generations.

The President wants the American people to become involved in

determining the future of this venerable program. He’s called for

a year-long dialog on the issue of Social Security reform and has

challenged every American to become involved. In December of this

year, the President will convene a White House conference on the

issue, and following that conference, he’s called for bipartisan negotiations on long-term Social Security reform. I believe that the

President’s plan of national discussion and bipartisan political action provides a process for measured yet timely action.

We now stand at the beginning of this process in which the options for reforming Social Security should be discussed, examined,

and debated, but any option for change should also be considered

within the context of total program reform. By that, I mean that

any change in one area, such as retirement age, would affect a degree of change that is practicable or desirable in other areas.

Let me now turn to the specific focus of this hearing: the retirement age. It’s a complex issue and raises questions that are indic-
7

ative of the tough choices facing this Nation. Too few Americans—

as you pointed out, Mr. Chairman—are aware that the normal retirement age for Social Security is already scheduled to increase beginning in the year 2000 as a result of the amendments in 1983.

Those amendments provided for a gradual increase in the age at

which unreduced benefits are first paid from age 65 to 67. The increase will be phased in over a 22-year period.

Now, some individuals propose that the normal retirement age

be raised beyond this already scheduled increase or raised faster

than is now legislated or tied to increases in longevity. In general,

the higher the age you set for full benefits, the greater the effect

in improving the program’s long-range financial condition, but asking future beneficiaries to work beyond the already legislated age

of 67 is clearly imposing a sacrifice on future workers, and the

American people have to weigh this option against the other options for improving the financial condition of Social Security.

Let’s look at some specific retirement age issues. Those who favor

a further increase usually point first to longevity. The life expectancy for a 65-year old in 1940 was 12.5 years and today it is 17.5

years and rising. Proponents of raising the normal retirement age

say that if the normal retirement age had been pegged to reflect

longevity when the 1983 amendments were passed, the normal retirement age now would be 65 and 10 months today and would

reach age 68 in 2054. Had the normal retirement age been pegged

to reflect increases in longevity since the program’s inception, it

would be over 70 today. Proponents also note that there are many

indications that the health of older workers is improving. If these

gains continue, the period of dependence, or ill health, sometimes

associated with old age could be reduced. Improved health could

herald longer periods of career productivity and with a declining

birth rate, older workers could be in demand in the future.

But others look at the notion of raising the retirement age differently. They say that there is little public support for a higher

retirement age. Three out of four workers, today, take reduced Social Security benefits just so they can retire before age 65. Workers

in heavy industry would be less able to work additional years because of the physical demands of their jobs, and even some people

not working in physically demanding jobs will face pressures. I

think of the kindergarten teacher—that’s certainly doesn’t count as

a physically demanding job—but would all 67-year-old kindergarten teachers want to continue to be kindergarten teachers past

age 67? I know from my experience, those are tough jobs. They certainly don’t count as physically demanding jobs, but they have

major workload implications for the individuals who provide that

work.

There’s a pivotal difference between longer life expectancy and

longer healthy life expectancy. A higher, full retirement age would

drive up Social Security disability claims to some extent, and I

think we’ll talk about that today. Some individuals also point to

concerns about the impact of raising the retirement age on American business practices. The effect of raising the retirement age on

employer behavior would have to be considered. How might businesses change their employment and compensation policies in response to the aging population that wants to work? Will the labor
8

market open up large numbers of jobs to older workers? These are

important questions.

Most importantly, we should remember this: While we can evaluate the merit and pitfalls of individual proposals such as increases

in the retirement age, the eventual solution to the long-range financing problem will very likely involve many elements in a larger

reform package. While we must understand the impact of each of

those elements in isolation, we must also recognize that the elements will interact in a context of a broader reform package, and

those interactions must be fully understood before any final conclusion can be reached. In the end, we need reforms that strengthen

and protect Social Security for the 21st century while maintaining

the universality, the fairness, and progressivity of the system.

We’re strongly committed to a system that maintains the basic

public trust embodied in the Social Security system that provides

a benefit that people can count on. The American public needs to

understand a number of these complex issues if they are to eventually support reform measures. They need to understand that there

are tough choices ahead. No option for resolving the long-term financing problems facing Social Security is perfect. Any proposal for

making substantive changes in the current Social Security system,

such as raising the retirement age, will need careful study and

broad public discussion. The President, of course, has said that he

wants just such discussion on the entire subject of Social Security

reform throughout this year.

The Social Security Administration will work to educate the public about what Social Security has achieved, how the program

works, and the nature of the long-range solvency problem. We’re

committed to working closely with the Members of this Subcommittee and other Members of Congress in a bipartisan effort to save

Social Security first. Thank you, and I’ll be happy to answer any

questions that you have.

[The prepared statement follows:]

Statement of Hon. Kenneth S. Apfel, Commissioner, Social Security

Administration

Thank you for inviting me here today to discuss the ‘‘Future of Social Security

for this Generation and the Next.’’ I am especially pleased that the topic of my first

hearing as Commissioner of Social Security before this Subcommittee, and in the

House of Representatives, is to discuss how we begin to strengthen Social Security

for the 21st Century. I can think of no issue more important than preserving the

program for future generations of Americans. Mr. Chairman, you and Ms. Kennelly

have already contributed a great deal of vital information to this important discussion. I commend you for the work you have done by holding this series of hearings.

These hearings will help to make the national debate on the future of Social Security successful and informative. A full and honest discussion of the issues facing Social Security will allow Americans to understand and participate in the decisions

that must be made in order to put Social Security on a sound financial footing. I

strongly support the President’s call for all Americans to be involved in the national

dialogue on Social Security in the coming year.

President Clinton’s message on Social Security in the State of the Union was

clear: Save Social Security first. Our fiscal house is now in order. For the first time

in more than a generation, the Nation will enjoy a Federal budget surplus, not only

in the coming year, but for many years to come. But the President has also stated

that any budget surplus must be reserved pending Social Security reform. He has

made it clear that he intends to work with Congress in a bipartisan effort to preserve and strengthen the program.

I am very pleased to be here today to discuss the ramifications of proposals to

raise the Social Security retirement age. Today I will review with you the Presi-
9

dent’s process for reform, and in the spirit of that process, try to provide a full overview of the issues that must be addressed when we are asked to evaluate proposals

to raise the retirement age.

PRESIDENT’S PROCESS

President Clinton wants to use this year to raise the visibility of Social Security

reform. He has challenged every American to attend a conference or forum on the

issue—or to organize and host one if none are planned in the community. This national call to action must spread to every corner of the country.

The President and Vice President will be actively involved—they will be attending

several nonpartisan conferences convened jointly by the Concord Coalition and the

AARP on Social Security reform. The first of these will take place on April 7, in

Kansas City. They will also be participating in events organized by the Pew Charitable Trust, the first of which will take place March 21.

In December of this year, the President will host a bipartisan White House conference on Social Security as a culmination of the various conferences, forums and

discussions held throughout the year. The purpose of the White House conference

is to bring together the lessons learned from the national dialogue.

Following the White House conference in December, the President and his team

will begin bipartisan negotiations with congressional leaders in early 1999. The

President is firmly committed to strengthening Social Security for the 21st Century.

PRESERVING THE SUCCESSES OF THE PROGRAM

As we begin this dialogue, we need to reflect on what features have led to Social

Security’s success. The dialogue will most certainly be about how to address the

challenges facing Social Security in the future, but it will also be about how we preserve and protect the accomplishments of the program that has served this nation

so well for over sixty years.

First of all, Social Security is dependable. Social Security has been there each and

every month. Millions of Americans count on the arrival of their Social Security benefit. Today, more than 90 percent of the elderly in this country receive Social Security. Americans of all ages must be able to count on Social Security in the future.

We have an obligation to provide a dependable source of income that Americans can

use to plan their financial future with confidence.

In addition, Social Security is efficient. Less than one penny of every dollar collected is used for administering the Social Security program. It is a program that

is portable and it is a program that provides benefits that are indexed to inflation.

Social Security is also the greatest anti-poverty program ever created. Without Social Security, nearly 50 percent of today’s elderly would be living in poverty. Social

Security doesn’t make people rich, but it gives Americans rightly deserved financial

independence. This financial protection, however, is not just for the elderly. Social

security also protects working families through disability and survivors insurance.

Social Security ensures that all workers receive an equitable benefit through a

progressive benefit formula. It is a program that is universal and fair. Proportionately larger benefits are provided to lower income workers who will need it most.

Finally, Social Security is a public trust. Social Security spreads the risk associated with disability, premature death, and old age among the entire working population and provides a guaranteed benefit that is adequate and fair.

During this discussion, we would do well to question whether changes to the program preserve and protect these important accomplishments: whether Social Security continues to be a benefit people can count on; whether the elderly, disabled, and

survivors of workers are protected from financial hardship; whether the program is

efficient; whether the program is universal and fair; and whether the program is

maintained as a basic public trust. The dialogue about how we ensure the solvency

of Social Security in the 21st century will need to include these critically important

questions.

NEED FOR PUBLIC DEBATE

As President Clinton has said, we must inform Americans about Social Security

and the issues confronting it. The President’s proposal to conduct regional forums

to raise public awareness of the problems facing Social Security acknowledges an

important truth: the broad-based participation of the American public is critical to

achieving a resolution of the long-term solvency issue. An accurate understanding

of the facts is needed as the foundation for public discussion. We have been focusing

our efforts on educating the public about Social Security programs to put them in
10

the best possible position to be able to enter into public debate about options for

the future of Social Security.

Before having discussions about reform proposals, it is important that Americans

understand the Social Security program. What do I believe Americans should understand about our Social Security program? What is it about this program that reduced to its essentials makes it of such importance to the American electorate?

I want all Americans to understand what Social Security has meant to older

Americans. The plight of older Americans used to be a disgrace. Now, Social Security provides them with a solid measure of economic security even if they outlive

the actuarial tables, and their savings. It also provides many of them, and their

children, the advantages that only living independently can offer.

I want all Americans to know that Social Security is more than a retirement program. I want younger people to know that not only will Social Security be there for

them in the future, it is there for them NOW. How many people know that 1 out

of every 3 Social Security beneficiaries is not a retiree but a disabled worker, or a

member of his or her family, or a survivor of a worker who has died? They need

to know that.

I want all Americans to know that Social Security was never intended to provide

for all of a worker’s retirement income needs. Pensions and personal savings have

always been and should be part of a sound financial retirement plan.

I want all Americans to understand that the changing demographics of the country are the primary driver of the need for change. There is an unalterable dynamic

at work: by 2030, there will be nearly twice as many older Americans as there are

today, putting great strains on our retirement system.

I want all Americans to understand the economic facts about Social Security. Beginning in 2019, the trust funds will start declining and will be exhausted by 2029,

if no changes are made to the current program. After the trust funds are exhausted,

however, annual revenues will be able to pay three-quarters of current-law benefits.

Finally, I want all Americans to understand one important fact: as attractive as

any option for change might be, there are tradeoffs that must be accepted if we

choose it. These are complex issues, and the advantages and disadvantages of each

will have to be discussed and examined.

SSA will play a vital role in helping to make understandable the elements that

will lead us to long-range solvency. We have made strengthening the public’s understanding of the Social Security programs one of our five strategic goals in our recently published Agency Strategic Plan. Through a comprehensive education campaign, Americans will better understand the value of Social Security, while recognizing that its benefits supplement savings, investments, and private pensions in planning for a comfortable retirement.

DEMOGRAPHIC CHANGES

As this Subcommittee is well aware, our population is changing. Americans are

living longer and we are having fewer children. The number of older people—those

over 65—is climbing. In fact, the population of the elderly, now 34.2 million strong—

will more than double by the year 2030, to 69.4 million.

The number of workers collecting Social Security is increasing much faster than

the number of workers contributing to Social Security. Today, there are 3.3 covered

workers for each beneficiary, but by 2030, there will be only about 2 covered workers per beneficiary.

Now is the time—when the economy is strong, the budget is balanced—to begin

to address the economic security for future generations of retirees. Now is the

time—when the program is not in crisis—to face the long-range solvency problem

and to begin to deal with it. It is important that we address this problem sooner

rather than later so that changes can be made gradually and that there will be time

for people to adjust their retirement plans.

The President’s approach—to use this year for national discussion and debate; to

bring our ideas together in a series of forums culminating in a White House conference this coming December—provides an ideal process for measured, yet timely

action.

RAISING RETIREMENT AGE

And now to turn to the focus of this hearing: The issue of retirement age, whether

it should be raised and how raising it would affect the millions of future retirees

who will depend on Social Security, is a perfect example of the complex issues and

the tough choices facing us as a Nation.

As you know, the normal retirement age is already scheduled to increase, beginning in the year 2000, as a result of the Social Security Amendments of 1983. Those
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amendments provided for a gradual increase in the age at which unreduced benefits

are first paid from 65 to 67. The increase in the retirement age will be phased in

over a 22-year period, with an 11-year hiatus at which the retirement age will remain at 66.

Some have proposed raising both the normal retirement age and the early retirement age beyond what it is under current law. The retirement age changes that are

being proposed are intended to help address the long-range solvency problem facing

Social Security. Some proposals would raise the full benefit retirement age past age

67 to 68 or even higher. In general, the higher the age is set for full benefits, the

greater the effect on improving Social Security’s long-range financial condition. Asking future beneficiaries to work beyond age 67 is clearly imposing a sacrifice on

these workers, and the American people will have to weigh this option against the

other options for improving the financial condition of Social Security.

Another element in some retirement age proposals is the rate at which the increase in the full benefit retirement age is achieved. Some proposals would simply

eliminate the present law ‘‘hiatus,’’ so that full benefits would still be paid at age

67, but about 11 years sooner than scheduled under current law. Other proposals

go beyond age 67 and do so very gradually, or relatively quickly. In general, the

faster the higher age is reached, the greater the impact on reducing the Social Security long-range deficit, but the shorter the period that people would have to plan

for the new retirement age.

LONGEVITY AND HEALTH

Proponents of raising retirement age tell people that this change makes sense because Americans are living longer. When benefits were first paid in 1935, a 65-year

old on average lived about 12.5 more years. Today, a 65-year old could expect to

live about 17.5 more years and by 2070, life expectancy at age 65 is projected to

be 20.5 years.

Because of the improvements in longevity, some experts argue that it is reasonable to continue to adjust the retirement age to encourage people to work longer.

They say it is appropriate for the ratio of years-of-work to years-of-retirement to

stay relatively constant from generation to generation. Had the normal retirement

age been pegged to reflect increases in longevity when the 1983 Amendments were

passed, the normal retirement age would be 65 and ten months today, and would

reach 68 in 2054. Had the normal retirement age been pegged to reflect increases

in longevity since the program’s inception, it would be over 70 today. While it is

quite clear that medical and technological breakthroughs have had the effect of extending life spans for many Americans, we do not know what proportion of those

extra years are spent in good health and what portion reflects extra years of illness

before death. I think we can all agree that, when we talk about raising the retirement age, there is a pivotal difference between longer life expectancy and longer

healthy life expectancy.

Some research suggests that the health of older Americans has increased through

the 1980s and into the 1990s. Arguments have been made that these gains are likely to continue, and can be expected to have the effect of reducing the period of dependence or ill health sometimes associated with old age, at the same time that life

expectancy is increasing. On the other hand, more research is needed to clarify

whether gains in longevity and health would mean most workers could extend their

worklives. Critics of raising the normal retirement age have pointed out that this

could have a disproportionately large impact on older workers in physically demanding jobs. Many analysts suggest that even if the normal retirement age is increased,

it may be important to continue to allow early retirement at age 62, with the appropriate actuarial adjustment to benefits, as I will discuss in a moment. While it is

expected that there will be fewer physically demanding jobs in the future, these jobs

will not disappear. One study released in 1986 looked into the issue of whether people would be able to extend their work careers in the future because of the decline

in the number of jobs that would require physical strength and endurance. The

study concluded that the proportion of jobs in physically demanding employment

will decline slightly from about 11 percent in 1982 to 7–9 percent in 2020.

Another consideration is the effect of raising the retirement age on employer behavior. How might firms’ employment and compensation policies change in response

to an aging population that wants to work? Older workers often earn higher wages,

often accrue more expensive pension rights that a firm must honor, and can increase an employer’s health insurance costs. On the other hand, in many respects

the older worker is a prized commodity for potential employers. Knowledge, experience, and dependability are characteristics usually associated with the older worker.
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Some have raised concerns about whether the labor market can accommodate a

steady increase in the supply of older workers. Many experts believe that the U.S.

labor market has always expanded to accommodate large, sustained increases in the

supply of workers—witness the expansion of jobs for women in the decades after

World War II, and the increased employment opportunities that met the baby

boomers’ entry into the work force. However, as skeptics point out, the continued

employment of older workers is not without problems. Skills can obsolesce and

health often deteriorates. Firms often have financial incentives to substitute cheaper

factors of production, including both younger workers and new equipment. We need

to be aware of the potential problems and employment barriers some older workers

might face if they attempt to remain in the labor market, as well as the potential

contributions they can make.

Another issue is how employer-provided pensions relate to Social Security. If the

full benefit retirement age is raised for Social Security, how will this impact on private pension protection? We need to fully examine and discuss the interaction between employer-provided pensions and Social Security.

CHANGES TO EEA

Some have proposed to leave the ‘‘earliest eligibility age,’’ or EEA, at age 62 while

raising the age at which full benefits are paid. EEA benefits are actuarially reduced

to take account of the longer period over which they will be paid. Maintaining EEA

at age 62 and raising full retirement age has the effect of stretching the interval

over which benefits need to be actuarially adjusted, and the result is that the adjustment in benefits at age 62 would need to be greater to be actuarially fair.

For any given couple, the decision to take a reduced benefit may be reasonable

to that couple when they reach age 62. The availability of benefits at 62 may make

it possible to travel, pursue hobbies, and, in general, to reap the rewards of retirement. The cost of choosing early retirement, however, is an actuarially reduced benefit throughout their retirement years. Today, almost three out of four workers retire before reaching age 65—electing reduced benefits—showing a strong preference

of the American people to retire earlier, rather than later.

RELATIONSHIP BETWEEN RETIREMENT AND DISABILITY PROGRAMS

Many have noted that issues of raising retirement age necessarily include issues

of health and ability to work. Raising the retirement age would have repercussions

for the disability program. As the normal retirement age increases, there is an increased incentive for workers eligible for early retirement benefits to apply for disability benefits because, unless they are similarly reduced, the disability benefits

will be more attractive to older workers.

Opponents of raising retirement age emphasize that some of the savings from

raising retirement age would be offset by increased costs under the disability program. Some proposals call for a reduction in disability benefits as a form of early

retirement to avoid such an outcome.

Another approach that has been suggested by some would be to make changes in

the disability benefits program to take account of those older workers who are unable to extend their work lives for health reasons. This approach was suggested by

the Greenspan Commission before the 1983 legislation to gradually raise the retirement age was enacted. As a majority of the Greenspan Commission noted:

‘‘...because some workers, particularly those in physically demanding employment

may not benefit from improvements in mortality and be able to work longer, we assume that the disability benefits program will be improved prior to implementation

of this recommendation to take account of the special problems of those between age

62 and the normal retirement age who are unable to extend their working careers

for health reasons.’’

While SSA regulations already provide more relaxed eligibility requirements for

workers who become disabled after age 55 when vocational factors are taken into

account, the question is raised as to whether this is sufficient. There is no easy answer here.

INTERACTIVE NATURE OF INDIVIDUAL ELEMENTS

This complicated relationship between retirement and disability brings me to my

final point. That is, we can evaluate proposals as to their individual merits, but the

final solution to the long-range solvency problem will very likely involve many elements comprising a larger package. While we must understand the ramifications of

each of those elements in isolation, we also must recognize that the elements will
13

interact in the context of the entire package, and that those interactions also must

be fully understood before any final conclusions can be drawn.

CONCLUSION

Raising the normal retirement age involves issues that need to be examined and

discussed by all Americans. We must hear from the people, because Social Security

is their program.

Every one of us, young and old, needs to understand that there are tough choices

ahead of us. No option for resolving the long-term financing problems facing Social

Security is perfect, and, as we have seen today in this discussion of raising retirement age, every option involves tough choices.

SSA will continue to take an active role in the process outlined by the President.

We will continue to educate the public about Social Security; how it works, what

is has achieved, and the nature of the long-range solvency problem. I look forward

to working closely with members of this Committee in a bipartisan way to fashion

solutions important to this Nation. I will be glad to answer any questions you may

have.

asked Treasury Deputy Secretary Summers about the President’s

Chairman BUNNING. Thank you, Mr. Commissioner. Yesterday, I

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proposal on Social Security, and as Commissioner of this vital program, I would like to hear your views as well. Would you please

explain for me the President’s proposal for the treatment of the

budget surpluses and reform of Social Security?

Mr. APFEL. The President has strongly suggested that we save

Social Security first by reserving the budget surpluses pending Social Security reform and that we use our current budget rules to

assure that those surpluses are not drained away through either

tax cuts or other spending increases until we address the issue of

Social Security reform. I should also indicate that our current

budget projections show that the first surpluses will arrive at the

end of fiscal year 1999, and it’s our belief that we can get this

whole issue completed, legislation enacted, before the end of fiscal

year 1999, before those first budget surpluses start to come on

stream. The President has not specifically proposed that the budget

surpluses be provided to the Social Security Trust Fund at this

time. We have not at all ruled out the possibility of a whole series

of different ways the surpluses could be used to strengthen the Social Security system. But that’s really what this year is about, how

to assure the long-term future of Social Security and how those

surpluses could be used to help strengthen Social Security.

Chairman BUNNING. In other words, in his proposed budget,

there is nothing to change the current law as far as taking the

FICA taxes and investing them in nonnegotiable bonds and then

spending that money. There is nothing—no change.

Mr. APFEL. There is no proposal to do that in this budget. We

do not think it’s necessary at this time given the fact that the surpluses will be coming on stream in 1999. I would note that you’ve

indicated an interest in legislation to organize a form of an accounting mechanism to assure that those surpluses would be

walled off. Mr. Rangel, Mrs. Kennelly, I believe, have a similar approach. We would be open to discussing those with the Congress.

At this time, we haven’t seen the need for legislation to do that because of our desire to complete action on this in 1999, but we’re not
14

at all opposed to discussing whether a specific mechanism, an accounting mechanism, should be created.

Chairman BUNNING. Certain members of the administration

have discussed transferring a part of the surplus to the trust funds.

In essence, this would mean a huge transfer of general tax receipts

into the trust funds. In your view, should any tax receipts be used

to fund Social Security? Should taxpayers feel any connection between the taxes they pay and the benefits they receive? And I’m

speaking, then, in that tax receipt about FICA tax. The budget surplus is separate. Some members of your administration suggested

that we transfer the surplus into the trust funds. I think there has

to be a connection between the FICA tax and the benefits.

Mr. APFEL. No members of the administration have proposed

that the surpluses be transferred. One of the options that needs to

be considered this year—and there’s been internal discussion and

there will be discussions all year—is this is one option that I think

deserves considerations: Whether the surpluses would be transferred in whole or in part in some form to the Social Security Trust

Fund. There are other options as well: Whether the surpluses

would be invested in equities and provided to the trust fund. Another option that some have proposed is to use the trust fund balances and invest part of those balances in equities; not transferring

new moneys into the Social Security Trust Fund, but, in effect,

using some of the surpluses in equity investments which would

also have the effect of using up part of the surpluses.

Chairman BUNNING. I want to—I don’t mean to cut you off, but

someone in the administration did suggest that, and it was Deputy

Secretary Summers, and he argued with me in testimony yesterday, and before the Senate Finance Committee he said, that maybe

when we get to $100 billion in surplus, maybe we could make a

massive transfer to the trust funds.

Mr. APFEL. I was at that hearing, sir—also testifying——

Chairman BUNNING. Well, but I’ll go get you to the testimony if

you’d like, and I don’t want to argue about what he said.

Mr. APFEL. One of the hypotheticals would be, if $100 billion

were transferred in, what would be the potential effect? But we’ve

been very clear that we have not proposed any one of those solutions, and that’s really what part of this debate is all about, sir.

Chairman BUNNING. Barbara.

Mrs. KENNELLY. Thank you, Mr. Chairman. Obviously, raising

the retirement age is likely to fall the hardest on those with little

or no pension benefits. Less than half of Americans working right

now have pension benefits. If the retirement age is raised, what

will happen to the half of America that doesn’t have pension benefits and then wait longer for their Social Security? I’m sure you’ve

thought about it, and how do you respond?

Mr. APFEL. Well, it is true that about half of all Social Security

recipients receive virtually no pension or asset income and are

heavily, heavily relying on just Social Security. Any change in the

benefit structure will fall most heavily on that group of individuals.

A change in the retirement age has the effect of affecting all individuals, particularly those nearing retirement by reducing benefits

for everyone at a given age. There are other alternatives, other
15

benefit changes, that need to be weighed and considered with regard to their effect on low-income Americans.

Mrs. KENNELLY. Well, my concern is that an awful lot of those

individuals are older, poor women with really very little to fall back

on and living literally penny to penny to penny; watching every

penny, and this is a concern because they just don’t have any other

alterative other than to be poor.

Mr. APFEL. Women retire somewhat earlier, which means they

have a somewhat deeper reduction in actual values in terms of

their benefits from Social Security. They also, because of earnings,

receive somewhat lower benefits, and they also, as you know, live

considerably longer and, potentially——

Mrs. KENNELLY. And we haven’t figured out any way for anybody

else to have the baby, so they go in and out of the work force, and

therefore have the zero earning years too. Everything’s going

against them.

Mr. APFEL. So, there are a whole number of issues——

Mrs. KENNELLY. In Social Security.

Mr. APFEL. That’s right; that’s right. But there’s a whole series

of issues about women that relate to retirement age and also any

of the other proposals that are on the table. It’s one of the reasons

that we have to look at this change combined with any other

changes that can be done in a system to determine how the entire

package that is developed in the course of the months ahead will

provide the strongest floor of protection in a progressive way for all

workers, particularly those with lower incomes.

Mrs. KENNELLY. A lot of things have not changed. Generational

relationships with more women working have but we’ve got a whole

new group of single heads of households going into the work force,

so we’ll have many of the same problems with women who stayed

at home.

So, it’s a problem that really has to continually be addressed and

it’s the reason we can’t do anything else but address the whole future of the Social Security system, and no matter how erudite you

get, you come back to that every time, so I have to mention it every

time.

Let me talk about another group. The Heritage Foundation has

argued that the African-American men get a very bad deal from Social Security because of their shorter lifespan. In addition, those

who oppose raising the retirement age point out that raising the

retirement age would disadvantage people who have a shorter life.

Now, that’s obvious; that’s very obvious, but as we do this, we have

to keep remembering why we have Social Security, and how do you

respond to that?

Mr. APFEL. If I could comment on the Heritage study. The Social

Security actuaries developed an analysis of the Heritage study on

rates of return and indicated that there were some errors that were

made in that study, and I would ask for the record if we could include the Social Security actuaries’ response to the study. One of

the conclusions was that there are significant negative rates of return which we don’t think is correct——

Chairman BUNNING. Without objection, we’ll let you put it in,

and we also will put the Heritage’s report in, so that there’s a comparison.
16

Mr. APFEL [continuing]. And if it’s their rebuttal which I heard

there was——

Chairman BUNNING. Well, we’ll let them put their report in.

Mr. APFEL. Great.

[The information follows:]
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1This rate of return calculation assumes that both adults were born in 1967.

2Total taxes paid and benefits received are expressed in 1997 inflation-adjusted dollars. Social

Security taxes are defined as Old-Age and Survivors Insurance (OASI) contributions, less (where

applicable) an amount which would buy a life insurance policy equivalent to the value of the

coverage provided by (pre-retirement) Survivors Insurance. In 1997, the tax rate for OASI is

10.7 percent of all wages and self-employment income less than $65,400, as of year-end 1997.

Unless stated otherwise, a discount rate is not applied to these amounts.

SOCIAL SECURITY’S RATE OF RETURN BY

f

WILLIAM W. BEACH AND GARETH E. DAVIS

No. 98–01 January 15, 1998

What can Americans expect in future Social Security retirement benefits? A Heritage Foundation study reveals that the Social Security system’s rate of return for

most Americans will be vastly inferior to what they could expect from placing their

payroll taxes in even the most conservative private investments. For the low-income

African-American male age 38 or younger, the news is particularly grim: He is likely

to pay more into the Social Security system than he can ever expect to receive in

benefits after inflation and taxes. Staying in the current system will likely cost him

up to $160,000 in lifetime income in 1997 dollars.

If Americans were allowed to direct their payroll taxes into safe investment accounts similar to 401(k) plans, or even super-safe U.S. Treasury bills, they would

accumulate far more money in savings for their retirement years than they are ever

likely to receive from Social Security. For example:

• Social Security pays a very low rate of return for two-income households with

children.—Social Security’s inflation-adjusted rate of return is only 1.23 percent for

an average household of two 30-year-old earners with children in which each parent

made just under $26,000 in 1996.1 Such couples will pay a total of about $320,000

in Social Security taxes over their lifetime (including employer payments) and can

expect to receive benefits of about $450,000 (in 1997 dollars, before applicable taxes)

after retiring at age 67, the retirement age when they are eligible for full Social Security Old-Age benefits.2 Had they placed that same amount of lifetime employee

and employer tax contributions into conservative tax-deferred IRA-type investmentssuch as a mutual fund composed of 50 percent U.S. government Treasury bills and

50 percent equities-they could expect a real rate of return of over 5 percent per year

prior to the payment of taxes after retirement. In this latter case, the total amount
30

3 Assuming that upon retirement this single woman is able to annuitize the lump sum at retirement that she accumulated at a real interest rate of 2.7 percent over 15 years. The current

federal income tax rates (with current rate structure, exemptions, tax bands, and deductions adjusted by inflation as mandated in current legislation) are applied against this annuity income. 4Scott A. Hodge, ed., Balancing America’s Budget: Ending the Era of Big Government (Washington, D.C.: The Heritage Foundation, 1997).

of income accumulated by retirement would equal approximately $975,000 (in 1997

dollars, before applicable taxes).

• The rate of return for some ethnic minorities is negative.—Low-income, single

African-American males born after 1959 face a negative real rate of return from Social Security. For every dollar he has paid into Social Security, a low-income, single

African-American male in his mid-20s who earned about 50 percent of the average

wage, or $12,862, in 1996 can expect to get back less than 88 cents. This negative

rate of return translates into lifetime cash losses of $13,377 (in 1997 dollars) on the

taxes paid by the employer and employee.

African-American females typically live longer than their male counterparts, yet

even they have a rate of return lower than the general population. An AfricanAmerican single mother 21 years old who in 1996 made just under $19,000 (the average for African-American females) can look forward to a real rate of return on her

Social Security taxes of only 1.2 percent. Under conservative assumptions, if she

had saved those same tax dollars in a private investment account composed of government bonds, she would have received a real return of around 3 percent per year.

With a mixed portfolio of bonds and equities, she could expect a return on her investments of at least 4.35 percent. This means that even with a low risk/low yield

portfolio composed entirely of Treasury bills, this single mother could have generated at least $93,000 more in retirement income (in after-tax 1997 dollars) than

she would enjoy under Social Security.3

• The rate of return has a damaging impact on communities.—The cumulative effects of Social Security’s dismal rates of return can be appreciated by considering

a hypothetical community. Suppose there existed a city entirely of 50,000 young,

married double-earner couples in their thirties, with each person earning the average wage, and each couple had two children. The cumulative amount such a community could save in a private pension plan by retirement with the same dollars they

currently pay in Social Security taxes is over $26 billion greater than these couples

will get in Social Security benefits. This amount is roughly equal to the amount the

federal government currently spends on food stamps each year for the whole nation,

and nearly as much as direct federal spending on education.4
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WHY RATES OF RETURN MATTER

The defenders of Social Security argue that rates of return are irrelevant to the

Old-Age and Survivors Insurance (OASI) portions of the program. Social Security,

they suggest, was intended to provide a basic but decent retirement income to beneficiaries and stop-gap incomes for surviving spouses. Future Social Security bene-
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5See Social Security Administration, ‘‘Findings and Recommendations,’’ 1997 Annual Report

of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Communication from the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, House Doc. 104–228 (Washington, D.C.:

U.S. Government Printing Office, 1997), Table R1, p. 36. 6See Martin Feldstein, ‘‘The Missing Piece in Policy Analysis: Social Security Reform,’’ A.E.A.

Papers and Proceedings, May 1996, pp. 1–14. 7Social Security Administration, 1997 Annual Report of the Board of Trustees, Table II.B1,

pp. 34–35. The percentage of wages and salaries taxed to support the Old-Age and Survivors

and Disability Insurance programs (Social Security taxes) equals the 50 percent paid directly

by the employee plus the 50 percent paid by the employer on the employee’s behalf. The employer’s half comes from wages the family would have earned had there not been a payroll tax. 8Taxable threshold levels for 1972 and 1997 adjusted by the index value for the Consumer

Price Index—All Urban Series. See Economic Report of the President (Washington, D.C.: U.S.

Government Printing Office, 1997), Table B-58, p. 365. 9 Heritage Foundation estimates based on data from the Social Security Administration’s 1997

Annual Report of the Board of Trustees, Table II.F14, p. 112. 10This is complicated by the decreasing number of firms that provide company pensions to

their workers. Rising taxes of all kinds, costly regulations, and increasing pressures on the bottom line have led many firms away from the practice of providing pensions for long-time employees. 11Data on average family consumption expenditures from U.S. Department of Labor, Bureau

of Labor Statistics, ‘‘Consumer Expenditures in 1995,’’ June 1997, Table A. This report estimates

average family income before taxes to be $36,918. Heritage analysts added $2,289 to reflect additional wages the average worker would receive if the employer’s share of Social Security was

converted to wages.

ficiaries, they argue, should be saving now for additional retirement income to supplement benefits from the Old-Age and Survivors Insurance. Thus, they argue that

comparing rates of return on private pension investments with those from a public

program intended to pay out during retirement at least 35 percent of the wages an

average worker earned prior to retirement is like comparing apples with oranges.5

This line of reasoning contains a fundamental flaw. If Social Security taxes were

low enough to allow workers to save these additional dollars for their retirement,

apologists for the system might conceivably be correct in characterizing Social Security as a pension program of last resort. But Social Security taxes are not low, and

they are crowding out the ability of most low-and middle-income Americans to save

for retirement. Thus, the rate of return on these taxes is very important, especially

for those Americans for whom Social Security is their main retirement savings.

Crowding Out Savings. As payroll taxes have risen, many more Americans have

few dollars left over for supplemental retirement investment. Over the past 25

years, Congress and the President have increased Old-Age and Survivors benefits

so often and so much that today the high payroll taxes needed to pay those current

benefits crowd out private retirement investments.6 In 1972, the average worker

(with his or her employer) paid 8.1 percent in Old-Age and Survivors payroll taxes

on the first $9,000 of wages and salary (equivalent to about $21,500 in 1997 dollars);7 in 1997, that worker paid 10.7 percent on the first $65,400 of ‘‘earned’’ income

(or the first $27,340 in 1972 dollars).8 Moreover, between 2020 and 2046, the OldAge and Survivors tax rate will have to rise to 14.4 percent from today’s 10.7 percent if benefit costs are not cut.9

Because of rising payroll taxes for retirement, increasing numbers of poor and

middle-income workers do not have the after-tax funds needed to create private supplemental pension investments.10 In fact, Social Security taxes now consume as

much of the average family’s budget as do outlays for housing, and nearly three

times more than annual health care expenses.11
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Because of the long-term financial problems of the Social Security trust fund, calculations of the rate of return for Social Security are likely to prove optimistic. The

fact is that Social Security will not be able to pay out old-age benefits to the ‘‘Baby

Boom’’ generation without additional tax increases on workers or benefit cuts. These

tax increases or benefit cuts will further reduce the Social Security rates of return

for those workers currently in their twenties, members of the so-called Generation

X, and their children. As Social Security’s rates of return fall, the relevance of rates

of return on private pensions rises. That is, members of Generation X are not simply

going to ignore the decaying prospects for adequate income during their retirement

years. Rather, they will insist increasingly on more opportunities for creating pensions to supplement Social Security’s Old-Age benefits. Thus, comparing rates of return for private and public pensions will become even more important to each new

generation.

In addition, the rate of return is important because the crowding-out effects of

high Social Security taxes on private savings for low-and middle-income workers affect the wealth that can be left to the next generation. Few aspects of Social Security are as unintended or as damaging to low-and middle-income workers as the

squeeze that high payroll taxes put on the formation of intergenerational wealth

transfers. The inability of poor workers to accumulate enough savings to leave a

nest egg to their children can mean that their children will be as dependent as their

parents could be on their monthly Social Security check. It means that poor communities will not have as much ‘‘home grown’’ capital with which to create new jobs

and sources of income. Without these new jobs and income, members of the next

generation will be less able to save for retirement than they could be. Thus, by taxing away one generation’s opportunity to help the next generation start earning at

a higher level, the Social Security system acts as a drag on future generations.

Cumulative Effect on Communities. Although a low rate of return on rising Social

Security taxes reduces the potential retirement savings of individual households, it

is important to appreciate the cumulative effect this has on communities. In both

rich and poor communities, less money accumulated in each household for retirement years means less money in the community not just for living expenses, but

also for new businesses, for sending children to college, and generally for giving the

next generation a more secure financial foundation. In short, each succeeding generation in a community is weakened financially by a poor rate of return from Social

Security.

For a very rough picture of the cumulative impact on a community, consider a

hypothetical small community of 200,000 residents. In this imaginary community,

there are 50,000 families of four; all the parents are age 30; and both parents work,

earning the average wage of $26,000 (in 1997 dollars). Assume that nobody migrates

into or out of this neighborhood. In this greatly simplified hypothetical community,

the difference between the lifetime amount of savings the parents would accumulate

by placing their Social Security tax dollars in conservative portfolios and the

amount actually obtained from Social Security would be approximately $26 billion

in 1997 dollars (based on family cases analyzed later in this study). This is the savings they must forego due to the failing Social Security tax system and, in effect,

is money drained from their community during their working years.

To be sure, this example is completely fictitious, and actual calculations for real

communities would vary widely. But this example serves to illustrate that the deficiencies of Social Security for individual households imply a significant impact on

the long-run financial health of American communities.
34
35

12 Heritage analysts reduced all rates of return and related calculations presented in this

paper by the annual inflation rates for the years between 1997 and 2040, as forecast by the

Board of Trustees of the Social Security Old-Age and Survivors Insurance Trust Fund in their

1997 annual report. This adjustment to rates of return, Social Security benefits, and privately

managed savings means that the reader is always shown sums and earnings ratios in terms

of a dollar’s purchasing power today. Thus, the statement ‘‘Social Security will pay out an annual amount of $17,000 in the year 2040’’ means that the program will pay enough to allow

a beneficiary to purchase then what $17,000 will purchase now. In order for a beneficiary to

have that much ‘‘purchasing power’’ in the year 2040, as he has today, Social Security will actually have to send this person around $100,000 annually. The difference between the two

amounts is explained by the effects of inflation on the dollar’s value, or by what a dollar will

buy in 2040 after years of decreasing value due to inflation. 13Generally speaking, a low-income earner is defined in Social Security Administration simulations as someone who earns 50 percent of the average wage. In 1996, a person defined as

low-income earned approximately $12,862 per annum.

SOCIAL SECURITY’S RATES OF RETURN FOR HOUSEHOLDS

The authors calculated Social Security’s inflation-adjusted (or ‘‘real’’) rates of return for various segments of the population and compared these returns with the

rates of return workers could receive if they were allowed to invest their Social Security taxes in safe, private retirement investments.12 These calculations show that

families at all income levels receive dismal returns for the lifetime taxes they pay.

Defenders of Social Security often argue that Old-Age and Survivors benefits help

low-income workers especially. But do they? Does Social Security give low-income

Americans a decent return on all of the taxes they pay into the system over their

lifetime of work? 13

As Chart 1 indicates, a low-income family will likely receive at best a mediocre

and at worst a very poor real rate of return from Social Security, despite the fact

that Social Security’s formulae are designed expressly to redistribute income toward

workers with low income. Single-earner low-income couples born before 1935, who

have paid much lower lifetime payroll taxes, are better than do much younger workers. However, even the best-case rate of return (5.37 percent for a single-earner couple with children in which the worker was born in 1932) lies below 7 percent, a conservative estimate of what economists estimate to be the long-range real rate of
36

14 Report of the 1994–1996 Advisory Council on Social Security, Vol. I: Findings and Recommendations, p. 35. 15 An average-income family is defined by the Social Security Administration as one in which

the earners receive the average wage earned by all of those covered by Social Security. In 1996,

earners in such families are estimated to have received $25,723.

return on equities.14 Every other low-income group lies below this rate of return,

or well below the rates of return available to Americans who have opportunities to

invest in stocks and bonds for the long term. Double-earner low-income families, as

well as single low-income males and females, fare badly under Social Security. Lowincome single males are hit particularly hard because of the lower male life expectancy and absence of spousal and survivor’s benefits. The expected real rate of return

from Social Security for low-income males falls from a high of 3.6 percent for those

born in 1932 to 1.0 percent for those born in 1976-well below what could be realized

from a prudent private investment portfolio.

Chart 2 shows rates of return for average-income families.15 All of the groups fare

badly under Social Security relative to the return that they could receive from a conservative private investment portfolio. A married couple with two children and a

single earner fare best, receiving 4.74 percent if the earner was born in 1932. This

expected rate of return falls gradually to less than 2.6 percent for those born in

1976. As in the low-income scenario, single males fare worst of all. An averageearning single male born after 1966 can expect to receive an annualized real rate

of return of less than 0.5 percent (less than one-half of 1 percent) on lifetime payroll

taxes.
37

16These amounts reflect the buildup of retirement savings in tax-deferred IRA-type investment portfolios and are prior to the payment of any applicable income taxes.

Table 1 shows selected Social Security rates of return for the general population,

for African-Americans, and for Hispanic-Americans.

WHAT DO THESE RATES OF RETURN MEAN IN DOLLAR TERMS?

Due to the power of compound interest, even what appears to be a relatively small

difference in the real rate of return can have significant implications for a family’s

lifetime accumulated wealth. In order to analyze the dollar implications of Social Security’s lower rate of return, the authors calculated the inflation-adjusted differences between Social Security’s benefits and what a fairly conservative investor

could accumulate by retirement from a portfolio split equally between long-term

U.S. Treasury bills and broad market equity funds.

A low-income single-earner couple with children whose wage earner is 41 years

old in 1997 can expect to receive about $202,000 in Social Security benefits in return for a lifetime of payroll taxes. Those 31 and 21 years old in 1997 can expect

to receive around $215,400 and $240,200, respectively, in benefits. However, by investing these same tax dollars in a portfolio made up of 50 percent U.S. Treasury

bills and 50 percent blue-chip equities, these three wage earners could accumulate

by retirement an estimated $230,200, $241,000, and $249,000 in 1997 dollars, respectively.16

Hence, staying in the Social Security program means that low-income married

couples will bear a cost of about $28,200, $25,600, and $8,800 for wage earners who

were born in 1956, 1966, and 1976, even though this group has the highest rate of

return from Social Security. Indeed, these amounts are likely to underestimate the

gain from a private retirement plan, since they do not include any of the interest

a couple can expect to earn on the accumulated sum in the period after retirement.

Social Security poses even greater costs for groups with lower rates of return than

low-income single-earner couples. A single male earning what the Social Security

Trustees call ‘‘an average income’’ (or $25,723 in 1996) is particularly hard-hit by

Social Security’s low returns. A 21-year-old single male making an average income

throughout his lifetime can expect to lose $309,400 in potential retirement income

by staying in Social Security when compared with what he would earn if he invested

his payroll taxes in a safe, conservative private retirement fund made up of 50 percent equities and 50 percent government bonds. A 31-year-old single male who earns

what the Social Security Trustees call an average income will lose $311,000 over

the income a conservative private portfolio would likely yield, while a similar 41-

year-old will forego $296,000 (in 1997 dollars).
38
39

17 Indeed, life expectancy for this African-American male is likely to be lower than the one

used. Life expectancy is closely related to earnings, and while the average African-American

male worker in the last quarter of 1996 had earnings of 82.8 percent of the national average,

the above worker has only earnings of 50 percent of the average. See footnote 11, supra.

SOCIAL SECURITY AND AFRICAN-AMERICANS

Due to generally lower life expectancies, African-Americans experience particularly poor rates of return from Social Security. This means, among other things,

that Social Security taxes impede the intergenerational accumulation of capital

among African-Americans, a group which has found it difficult to acquire capital.

In fact, even under the most optimistic assumptions, Social Security taxes actually

shrink the lifetime net earnings of some of the least advantaged members of the

community.

Despite efforts to transfer resources toward low-income individuals through Social

Security, low-income African-American males realize particularly dismal rates of return from Social Security, even under the most favorable assumptions. Chart 5

shows the real rate of return from Social Security for African-American males who

earn what the Social Security Trustees call ‘‘low-income’’ annual earnings throughout their life-about $12,862 in 1996. Chart 5 also illustrates how the best intentions

of Social Security’s defenders to help low-income minorities are frustrated by the

program’s dismal rates of return.17

An African-American, low-income single male born in 1932 and retiring today can

expect a rate of return of approximately 3.23 percent on his lifetime contributions.

However, this rate of return falls for younger African-American males. Indeed, the

expected rate of return from Social Security for those born after 1959 is negative.

This means that a typical, low-income African-American male 38 years old or younger can expect to pay more into the Social Security system than he will likely receive

after inflation and federal income taxes. Put another way, this person’s lifetime purchasing power, or the ability to buy the same goods and services in retirement that

he buys today, actually shrinks as a result of his participation in the Social Security

program.

To gauge how much of his purchasing power this future retiree may forego by

staying in Social Security, the authors calculated the amount of money that a 25-

year-old, low-income African-American male could accumulate by retirement if he
40

18The amounts below assume that the worker pays out the amount he has accumulated in

an annuity over his lifetime and receives an interest rate of 27 percent. The current federal income tax rates (with current rate structure, exemptions, tax bands, and deductions adjusted by

inflation as mandated in current legislation) are applied against this annuity income.

invested his payroll taxes privately. This inflation-adjusted sum was compared with

the amount he can expect to receive from Social Security, all in 1997 dollars.

Three scenarios for alternative rates of return are presented in Chart 6. They examine the after-federal-income tax benefits, assuming the contributions were placed

in a tax-deferred IRA-type account.18 The first scenario assumes that the worker invests 50 percent of his taxes in U.S. Treasury bills and 50 percent in a broad equity

index. The second scenario assumes that all payroll taxes are invested entirely in

T-bills. The third scenario assumes the worst case: that the worker invests 50 percent in U.S. Treasury bills and loses all of the remaining half in bad investments.

As Chart 6 shows, the current Social Security system can be expected to shrink

this individual’s net lifetime income by $13,377 in terms of 1997 dollars. He is likely

to fare better, even if he were to lose half of his invested tax dollars completely,

by an amount of $13,089, compared with Social Security’s rate of return.

Moving beyond the extreme worst-case outcome, the results are even more striking. Under conservative assumptions, a 100 percent T-bill portfolio will result in an

increase in a lifetime income net of taxes of $79,846, while a 50 percent bond/50

percent equity portfolio will likely result in a net increase in post-tax lifetime income of $145,764.
41

19The current federal income tax rates (with current rate structure, exemptions, tax bands,

and deductions adjusted by inflation as mandated in current legislation) are applied against this

annuity income.

The nature of the current Social Security system also imposes a heavy burden on

single-parent families. Chart 7 illustrates some of the total lifetime costs experienced by two typical African-American single mothers of different ages but each

earning an annual salary of $18,650 in 1996. The expected total Social Security benefits are presented in the chart, as well as the amount that each woman would have

accumulated by retirement had she been able to invest her Social Security taxes

under two sets of assumptions: (1) an ‘‘ultra-conservative’’ portfolio in which all of

her taxes were invested in U.S. Treasury bills, and (2) a portfolio in which 50 percent was invested in Treasury bills and 50 percent in a broad equity fund.

In return for a lifetime of contributions to Old-Age and Survivors Insurance, the

50-year-old single mother can expect to receive, on average, $155,903 in Social Security benefits while a 21-year-old can expect to receive $190,767. In each case, private

strategies yield much higher returns than Social Security. An ultra-conservative investment program in which all of their savings are invested in long-term government bonds would yield post-tax lifetime amounts of $213,220 and $284,098 for the

50-year-old and 21-year-old, respectively-a net gain over Social Security of $57,317

and $93,330.19

The gains from a prudently mixed portfolio of bonds and equities are even greater.

Had their taxes been invested in a mixed portfolio of 50 percent bonds and 50 percent equities, the 50-year-old would receive at least $280,016 in lifetime post-tax income and the 21-year-old would receive $382,840 (in 1997 dollars). This represents,

respectively, $124,113 and $192,073 more than they could expect to receive from Social Security.
42

20The current federal income tax rates (with current rate structure, exemptions, tax bands,

and deductions adjusted by inflation as mandated in current legislation) are applied against this

annuity income. 21 In line with upper-bound estimates of the effects of higher income on life expectancy, the

remaining life expectancy of this couple is increased by 10.2 percent for the male and 8.2 percent for the female. See footnote 28, infra.

SOCIAL SECURITY AND UPPER-MIDDLE-INCOME AMERICANS

Even for affluent groups, with their ability to supplement Social Security, the lifetime cost of the current Social Security system is by no means trivial in terms of

economic well-being. Chart 8 shows the effects on the lifetime wealth and savings

of an upper-middle-income, white married couple in New York who have two children and who, in 1996, each earned $77,166 (for a combined income of $154,332).

For such couples, the lifetime inflation-adjusted Social Security tax burden will increase from $323,500 for those born in 1932 to just over $902,050 for those born

in 1976. By contrast, this couple would likely gain enormously from private investment of their tax dollars. For couples born in 1932, 1950, and 1976, investing their

tax dollars in a broad market equity fund would generate $900,426, $2,304,370, and

$3,104,259, respectively, in after-tax lifetime 1997 dollars.20 This can be compared with their respective expected total lifetime Social Security benefits of $602,776,

682,372, and $956,959.21

The economic costs of the current system become even clearer when lost capital

accumulation and income opportunities are assessed. Not only does Social Security

reduce the income and the ability of these New York couples to save, but their reduced savings translate into less capital for expanding businesses, fewer jobs for

others, and, ultimately, a lower standard of living for the entire community.

Why would economic activity be lower if Social Security taxes come back to the

community in the form of Social Security benefits? Most economists agree that savings and investment contribute more to economic growth than personal consumption

spending. Newer and better machines make workers more productive than longer

vacations and a new pair of exercise shoes. Even new savings invested in government bonds cause interest rates to fall and increase private investment. However,

under the current pay-as-you-go system, Social Security taxes are consumed primarily in paying benefits to current retirees who spend nearly all of their income
43

22These amounts differ from the amount a lifetime income investment of their savings will

generate because they do not include interest on these amounts following retirement or the income taxes paid on them when they are drawn down by the retired couple. 23 In 1996, a little under 14.5 percent of all OASDI tax and interest receipts was added to

the OASDI trust funds. See Social Security Trustees Report, Table II, C1. 24See Michael Tanner, ‘‘Public Opinion and Social Security Privatization,’’ Cato Project on Social Security Privatization S.S.P. No. 5, August 6, 1996. 25 Based on an interest rate of 2.7 percent and a lifetime expectancy of 15 years.

on personal consumption items. In a privatized system, these funds would be transformed into investments, adding to the capital stock of the nation and enhancing

productivity and economic growth.

If the upper-middle-income couple born in 1950 had been allowed to invest their

tax dollars in U.S. Treasury bills, they would have accumulated $1.22 million in

1997 dollars by the date of retirement.22 A portfolio composed entirely of high-grade

stocks would have created $2.58 million in new private capital by retirement. For

a high-income couple born in 1972 (25 years old today), the investment of their Social Security taxes in private equities would have created $3.65 million in new capital by the date of retirement. By contrast, other than the relatively small surplus

that is invested in the trust funds, the current pay-as-you-go Social Security system

creates no new savings or capital.23

CONCLUSION

When the Social Security system began, its aim was to help ordinary Americans

and those in disadvantaged positions to have adequate financial security in their retirement years. However, as this analysis has shown, the current Social Security

system may actually decrease the lifetime well-being of many socioeconomic groups,

even under the most favorable assumptions. Among the groups who will lose out

under the current system are single mothers, low-income single males, averageincome married couples with children, and even affluent professionals. Indeed, many

ordinary Americans already understand that the Social Security system is a bad

deal. Recent surveys have shown that many workers expect to pay more, in real

terms, into the system than they ever expect to receive in retirement benefits.24

This analysis of the Social Security system almost certainly underestimates its

total economic costs. It makes no attempt, for instance, to include the benefits from

faster economic growth, higher wages, and increased employment generated by a retirement program in which individuals are allowed to invest their Social Security

tax dollars and build the wealth necessary to sustain them in their old age.

Although the debate on Social Security reform at times may focus on technical

terms (such as the ‘‘replacement ratio’’ and the trust fund’s ‘‘long-range actuarial

balance’’) which mean little or nothing to ordinary American families, there is little

doubt that the outcome of the debate will be profoundly important to them. For example, whether or not the current system will continue to exist—perhaps sustained

by benefit cuts and tax increases—is a matter of great concern to the 21-year-old

African-American single mother described earlier. Under a system where she could

invest her own tax dollars, this woman perhaps could accumulate enough to buy an

annuity upon retirement that would pay about $28,800 a year after taxes,25 almost

twice what she would receive from Social Security, or an annuity equal to her Social

Security retirement benefits and pass on the remainder, around $200,000, to her

children.

But this debate is also a concern to the thirty-something married couple who

earned a combined income of $52,000 in 1996 and struggle to put away enough for

retirement while paying over one-eighth of their income into a Social Security system that is likely to yield a real return of less than 1.7 percent on their contributions. Moreover, it will influence the life of people, perhaps not yet born, who quite

possibly could become employed by a business that is created by the retirement investment of the young high-income New York couple.
44

26 National Center for Health Statistics, Vital Statistics of the United States, 1992 Life Tables,

Vol. II, Section 6, 1997. 27This estimate has been criticized as too optimistic. Analysts have pointed out that life expectancy data since the late 1980s have shown little evidence of racial convergence. Indeed,

some claim that the gap is widening. See Paul E. Zopf, Jr., Mortality Patterns and Trends in

the United States (Westport, Conn.: Greenwood Press, 1992).

For almost every type of worker and family, retirement under Social Security

means receiving fewer dollars in old age and passing on less wealth to the next generation than they could if allowed to place their current Social Security tax dollars

in private retirement investments.

—William W. Beach is John M. Olin Senior Fellow in Economics at The Heritage

Foundation and Director of Heritage’s Center for Data Analysis.

—Gareth G. Davis is a Research Assistant at The Heritage Foundation.

APPENDIX

BASIC ASSUMPTIONS AND METHODOLOGY

The authors used The Heritage Foundation’s Social Security Rate of Return

Microsimulation Model to compare the benefits different types of families can expect

to receive from the Old-Age and Survivors Insurance (OASI) with the Social Security taxes they pay during their working lives.

The Heritage model treats taxes paid over a worker’s lifetime as a series of investments. Social Security’s rate of return is the rate of return on payroll taxes that

would buy an annuity equal in value to the Social Security benefits payments. This

yield is the difference between Old-Age and Survivors benefits payments (after subtracting any applicable income taxes) and the amounts paid to the Old-Age and Survivors Insurance trust fund through payroll taxes. Throughout the model and this

paper, all amounts are adjusted for inflation and expressed in terms of 1997 purchasing power.

The Heritage Foundation model includes both portions of Old-Age and Survivors

Insurance taxes: the share paid by employers and the share paid directly by the employee. However, in calculating the return, an amount is removed from taxes paid

that is equal to the premium on a term life insurance policy which has the same

value as benefits that are paid to children of workers (and the spouse caring for

their children) who die before retirement. This means the calculations do not unfairly include the cost of the spousal benefit when figuring the rate of return in

terms of retirement income. Heritage analysts also assume that, from 2015, tax

rates will increase by the amount that the Board of Trustees of the Social Security

Administration consider to be necessary to finance the Old-Age and Survivors Insurance benefits contained in current law.

The earnings to which OASI tax rates are applied are based on a proportion of

the Social Security Administration’s Average Wage Index. Average-income workers

are assumed to earn 100 percent of this wage, and low-income workers are assumed

to earn 50 percent of this wage. Past values of this wage are taken from historical

data contained in the Board of Trustees’ 1997 Annual Report, and future wage

growth is based on the Trustees’ best guess of what the rate of increase in the average wage will be. All workers are assumed to begin work on their 21st birthday and

to continue to work right up to the age on which they become entitled to Social Security’s full Old-Age and Survivors benefit. For those retiring in 1997, this is age

65; but under current law, this retirement age is scheduled to increase gradually

until reaching 67 for those born in 1960 and later.

The model calculates post-retirement Old-Age and Survivors benefits to individuals according to formulae stipulated in current law and the ‘‘best guess’’ economic

assumptions contained in the 1997 Annual Report of the Board of Trustees, up to

the date on which their life expectancy expires. Neither Disability Insurance taxes

nor benefits are included in the model.

The model uses life expectancies drawn from the National Center for Health Statistics’ 1992 Life Tables for the United States.26 Heritage analysts adjusted these

life tables for future changes in life expectancy, using the mid-range projections of

the 1997 Trustees Report. For African-Americans, a ‘‘convergence factor’’ is included

that assumes, in line with U.S. Census Bureau projections, that African-American

life expectancy converges with that of the general U.S. population by 2070.27 Income

itself plays a role in influencing life expectancy: For example, access to health care

and nutrition improves as income rises. Heritage analysts incorporated this influence by increasing the life expectancy of both spouses in line with scientific evidence

for workers who earned more than the average wage. However, they did not de-
45

28For an analysis of the effects of income on life expectancy, see E. Rogot, P. Sorlie, and N.

Johnson, ‘‘Life Expectancy by Employment Status, Income, and Education in the National Longitudinal Mortality Study,’’ Public Health Reports 107CH, July-August 1992, pp. 457–461, and

J. Duggan, R. Gillingham, and J. Greenless, ‘‘The Returns Paid to Early Social Security Cohorts,’’ U.S. Treasury Department, Office of the Assistant Secretary for Economic Policy, 1993. 29 As well as an undermining of the ‘‘progressivity’’ of the current system. 30 Based on the real rate of return for long-term U.S. Treasury bills. The Federal Reserve

Board’s 10-to 15-year Treasury Bond Index is used from 1950 to 1975; the 20-year Treasury

Bond is used in 1976. From 1977 on, the 30-year bond is used. 31 Based on the real rate of return for the Standard and Poors’ 500 Equity Index. 32WEFA, Inc., formerly known as Wharton Econometric Forecasting Associates, is an internationally recognized economics consulting firm. Fortune 500 companies and prominent government agencies use WEFA’s forecasts and consulting products.

crease life expectancy for workers who earned less than the average wage. The possible effect of decreased life expectancy due to poverty on the rates of return experienced by low-income individuals can be seen in Chart 9.

Statistical studies 28 have estimated that for males who earn 50 percent of the average income, their remaining life expectancy is lowered by a factor of between 5.6

percent and 12.8 percent. Even if the most conservative assumption (5.6 percent)

is used to adjust the life expectancy of a low-income single male, the result would

be a substantial reduction in his rate of return from Social Security.29

Throughout this study, comparisons are made between what families could accumulate during their working lives if they were able to invest their Social Security

Old-Age and Survivors taxes (less the life insurance premium equal to the value of

pre-retirement Survivors Insurance benefits) and what they can expect to receive,

on average, in Old-Age and Survivors benefits. Different assumptions are entertained regarding the composition of the worker’s portfolio of private investments.

For years prior to 1997, the historical inflation-adjusted rates of return on long-term

U.S. Treasury bills 30 and U.S. equities 31 are used to determine, respectively, the

rate of return on bonds and the rate of return on equities. For the period 1997 onwards, Heritage analysts used forecasts of the real rates of return on 30-year longterm U.S. Treasury bonds to estimate returns on bond investments. These forecasts

were made by WEFA, Inc., an economics consulting firm, and published in its LongTerm Macroeconomic Forecast for October 1997.32 The eventual long-run average of
46

33The 1994–1996 Social Security Advisory Committee, for example, found that a long-run real

rate of return on equities of 7 percent existed. Report of the 1994–1996 Advisory Council on

Social Security, Vol. I: Findings and Recommendations, p. 35. 34These tax rates are calculated using the intermediate assumptions in the 1997 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability

Insurance Trust Fund. 35 As defined in the 1997 Annual Report of the Board of Trustees of the Federal Old-Age and

Survivors Insurance and Disability Insurance Trust Fund, p. 208. 36 Ibid., Table II.E.2. 37 Ibid.

these forecasts is a 2.8 percent real rate of return. The annualized real rate of return on equities is assumed to be 5.7 percent, which lies at the lower boundary of

professional estimates of the long-run returns to equities.33

THE HERITAGE FOUNDATION SOCIAL SECURITY RATE OF RETURN MICROSIMULATION

MODEL

The Heritage Foundation Social Security Rate of Return Microsimulation Model

computes the expected annualized rate of return from Social Security on the basis

of the taxes that individuals or couples are projected to pay and the benefits they

can expect to receive during their lifetime. The focus of the model is not to provide

estimates of the ‘‘average’’ rates of return to existing populations, but rather to use

data to construct representative individual and family types and to estimate the

rates of return that those representative types can expect to receive.

Internal Rate of Return

The internal rate of return is defined as the rate which will set the expected discounted value of the stream of Social Security Old-Age and Survivors Insurance tax

payments (i.e., taxes [Ti]) equal to the expected discounted stream of income from

the system (i.e., benefits [Bi]).

DISCOUNT RATE:

TAXES:

The taxes paid by an individual are calculated by multiplying the individual’s taxable earnings and self-employment income in a given year by the Old-Age and Survivors Insurance (OASI) tax rate in that year. Each individual is assumed to begin

work on his or her 21st birthday and to cease working on the date on which he or

she is entitled by law to collect the full Social Security Old-Age benefit. The OASI

tax rate is taken from current law until the year 2015, after which tax rates are

adjusted annually so that income and expenditures of the Old-Age and Survivors

Insurance program are equal.34

The tax revenue in a given year is calculated by means of multiplying the earnings for that person by the OASI tax rate

Ti = xi*Wi¥Li

where x is the OASI tax rate for year i, Wi is the total taxable wage, salary, and

self-employment income for year i; and Li is an amount equivalent to the value of

a life insurance premium equal to the actuarial value of pre-retirement Survivors

Insurance coverage.

Earnings

The individual’s annual earnings are assumed to be a fixed proportion of Social

Security’s ‘‘Average Wage Index’’ 35 for employed and self-employed workers.

‘‘Average-income’’ individuals are assumed to earn 100 percent of the average

wage index during their lifetime; ‘‘low-income’’ individuals are assumed to earn 50

percent of the population’s average wage; and ‘‘high-income’’ individuals are assumed to earn 300 percent of the average wage. In 1996, the value of these amounts

was estimated to be, respectively, $12,862, $25,723, and $77,169.36

For periods subsequent to 1996, the average wage index is assumed to grow at

the rate assumed under the ‘‘intermediate’’ projections made by the Social Security

Board of Trustees in their 1997 Annual Report.37 In the case of the ‘‘Single-Earner
47

38 Based on lowest quotes available for contract from Budgetlife’s World Wide Web page,

www.budgetlife.com, on September 24, 1997. 39 As defined in the Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund, p. 216. 40 All life expectancy data used in this paper show that women have longer life expectancies

than men. 41 National Center for Health Statistics, Vital Statistics of the United States, 1992 Life Tables,

Vol. II, Section 6, 1997. 42 Ibid.

Married Couple’’ scenario, it is assumed that one spouse pays no OASI taxes during

his or her lifetime. In the case of the ‘‘Double-Earner Married’’ couple scenario, each

earner is assumed to pay OASI taxes.

Post-Retirement Old-Age and Survivors Benefits

OASI benefits are calculated on the basis of the ‘‘bend point’’ formulae—the earnings levels from which benefit amounts are calculated—as specified under current

law. For example, in order to calculate the monthly benefit amount for an individual

who first becomes eligible for full Social Security Old-Age Benefits in 1995, the individual’s Average Indexed Monthly Earnings (AIME) is calculated according to the

formulae contained in current law. Individuals receiving benefits for the first time

in 1997 are paid 90 percent of their AIME up to the $437 bend point, 32 percent

of any earnings between the $437 and $2,635 bend points, and 15 percent of any

amount in excess of $2,635 (up to the maximum amount of earnings which are taxable). For years after 1997, these bend points are indexed at rates in the ‘‘intermediate’’ range projections made in the 1997 Trustee’s Report.

Benefits are paid up to the point of the individual’s life expectancy. These tables

are adjusted to fully incorporate the effect of changes in life expectancy that are estimated by the Trustees of the Social Security Trust Funds to occur over the period

1993–2070.

Survivors Insurance

For married couples, the value of pre-retirement Survivors Insurance—paid to

children of deceased covered workers and the spouse taking care of them—is approximated by subtracting from taxes (Ti) the premium required to buy an equivalent term life insurance policy. Covered individuals are assumed to carry two 10-

year term life insurance policies over 20 years between the ages of 35 and 55. For

each covered worker turning 35 in 1997 who has two children and earns an average

wage, the Survivors Insurance policy is estimated to be equivalent to a 10-year term

life insurance policy worth $295,000. For each average-wage covered worker with

two children who turns 45 in 1997, the Survivors Insurance policy is assumed to

be equivalent to a 10-year term life insurance policy worth $194,700. The market

insurance annual premiums required to buy every $250,000 worth of insurance (in

1997) were estimated, respectively, to be $167 and $345 for a male and $150 and

$230 for a female.38 The estimates of the life insurance component are indexed to

changes in the earner’s Primary Insurance Amount, 39 which is used to calculate the

worker’s retirement benefit.

In the case of the single-earner married couple, each spouse is assumed to be the

same age. After retirement, the couple is paid 150 percent of the benefit amount

payable to a single beneficiary during the lifetime of the husband. During the period

between the death of the husband and the death of the wife, the wife is paid 100

percent of the benefit amount payable to a single recipient.40

Life Expectancy

Life expectancy by worker’s age in 1992 is estimated based on data contained in

the National Center for Health Statistics’ 1992 Life Tables.41 However these estimates reflect only the demographic conditions that prevailed in 1992 and do not reflect the long-term secular upwards trend in life expectancy that improved health

care and better nutritional standards will cause.

The Board of Trustees of the Social Security Trust Fund, for example, estimates

that between 1997 and 2070 life expectancy at birth will increase by 5.8 years for

males and 4.6 years for females, and that life expectancy at age 65 will increase

by 3 years for females and 2.9 years for males.42 In order to create life expectancy

projections that embody these projected trends, it is necessary to adjust the 1992

Life Tables.

First, Heritage analysts made a slight adjustment in the 1992 Life Tables by applying to them an age-weighted index that adjusts for the estimated increase in life

expectancy over 1992–1997:
48

43Zopf, Mortality Patterns, op. cit.

Q = E + J,

and J = ((O/65)*S + ((65¥O)/65)*X)

where

Q = 1997 ‘‘adjusted’’ static life expectancy;

J = age-weighted increase in life expectancy age between 1992 and 1997;

E = life expectancy based on 1992 ‘‘static life tables’’;

O = age in 1992 (ranges from 16 to 60); and

S and X = respectively, the increase in life expectancy at birth and age 65 over

1992–1997.

Second, Heritage analysts recognized that the gains in life expectancy in the post1997 period will not be uniform across the age distribution. The Social Security Administration estimates that life expectancy at birth will increase much faster than

life expectancy at age 65. In order to calculate the gain in life expectancy for individuals between these two points (birth and 65), an age-weighted index is used:

G = (A/73)*B + ((65¥A)/73)*x′

where

G = overall gain in life expectancy for a particular age group over 1992–2070;

A = age in 1997 (ranges in model from 21 to 65);

B = gain in life expectancy at birth between 1997 and 2070; and

x′ = gain in life expectancy at age 65 between 1997 and 2070.

G can be used to construct a projected life table for the single year 2070, where

L is life expectancy for each age group in 1997 and G is the gain in life expectancy

expected to occur for that particular age between 1997 and 2070:

L = Q + G.

However, this projection must also take into account the fact that life expectancy

gains will be distributed over time as well as across the age distribution. The gains

in life expectancy projected to occur will be spread across a period between now and

2070. The later a cohort is born, the greater the proportion of this increased longevity will be from where the cohorts can be assumed to benefit. In order to estimate

the degree to which a given cohort will benefit from this increase in life expectancy,

the following linear weighting equations were used:

‘‘Dynamic’’ Life Expectancy = Y+ R*(G)

where

Y = Q, or life expectancy in 1997;

R = ((2070¥V)/73); and where

V = year in which the individual’s life expectancy expires.

For African-Americans, Heritage analysts added a convergence factor. It is assumed in the model, in accordance with U.S. Census Bureau 43 projections, that

African-American life expectancy at birth converges with white life expectancy at

birth between 1989 and 2070. This assumption is incorporated by assuming that the

gap between African-American and white life expectancy closes by a fixed fraction

each year between 1989 and 2080. This convergence factor is assumed to increase

with the year in which an individual is born. The gap between African-American

and general population life expectancy at birth is assumed to diminish by a factor

of 1/154th (or 0.6494 percent) for each birth year between 1927 and 2080. Hence,

for each African-American born in 1932, the current gap between life expectancy

and general life expectancy is assumed to diminish by 3.25 percent; and for an African-American born in 2080, it is assumed to diminish by 100 percent.

The authors are grateful to Bruce Schobel (Fellow of the Society of Actuaries and

formerly with the Social Security Administration) for his valuable suggestions on an

early version of this study.

rate of return which is one of the conclusions of the report is inacMr. APFEL. But the issue of African-Americans receiving a lower

f

curate, and part of that is the methodology that was used in developing the report. Also, disability benefits were not taken into account. If we look at African-Americans, there is a shorter life expectancy of about 2 years compared to whites. There are also somewhat lower earnings. There is also higher disability program participation as well as survivors benefits.
49

African-Americans make up about 12 percent of the population

and receive about 20 percent of survivors and disability benefits.

There is a relationship between income and disability, and this is

the case with African-Americans, so when you take into account

survivors and disability insurance, when you look at the whole

floor of protection as well as the progressive nature of the benefit

structure, it makes up for the lower life expectancy, so I would like

to include this report in the record.

Mrs. KENNELLY. I have another thought, but will follow up in the

future. Thank you, sir.

Chairman BUNNING. Mr. Weller.

Mr. WELLER. Thank you, Mr. Chairman, and good afternoon,

Commissioner. Good to have you here.

Mr. APFEL. Great to be here.

Mr. WELLER. I represent a fairly diverse district. I represent part

of the City of Chicago and the south suburbs in Illinois and also

a lot of rural areas, so I always look for the things that are consistent when I’m listening and learning concerns in town meetings.

And the questions I always get asked—of course, we all remember

that very visual photo of the President drawing the zero on that

piece of cardboard when he unveiled his new budget proposal for

this year. And, of course, part of that—one the significant things

about the zero is it means there’s no surplus in his budget to set

aside for Social Security. And at the same time, the President unveiled a whole new list of new spending initiatives, and what do

they total? The new spending initiatives above and beyond what

we’ve funded this past year.

Mr. APFEL. I’ll have to get that.

Mr. WELLER. About $70 billion?

Mr. APFEL. I’ll have to get that for the record for you, sir.

[The information follows:]
50

Security piece; I don’t have the other pieces on the top of my head,

Mr. APFEL. As for the Social Security piece—I’ve got the Social

f

but there were a significant number of very important proposals,

all paid for through offsets. One of the things that the President

did indicate when he put out his budget request was that—again,

given the traditional PAY–GO rules that you operate under here in

the Congress—which are appropriate—that any new spending activity be offset through either reductions in spending or increases

in revenues, and the President’s proposal was consistent with that

in terms of living within the budget rules by funding new activities

through other offsets.

Mr. WELLER. Now, some might argue that one way of creating

a surplus to save Social Security would be to spend less money on

new spending initiatives, and as the Social Security Administrator,

would you suggest that Congress look at that as an approach? You

know, make these new spending initiatives a secondary priority to

saving Social Security and creating that surplus that we can then

use long term to save Social Security. Which is a bigger priority,

the new spending initiatives or saving Social Security?

Mr. APFEL. Well, the President said—and it’s something that I

strongly support—to take all budget surpluses that are projected

and reserve them pending Social Security reform. We anticipate
51

next year to be in a position to, working with this Subcommittee,

come up with a proposal to ensure the long-term security of Social

Security.

He also proposed a series of activities that were paid for throughout the budget that seem to me to be a legitimate part of government to find ways to pay for new activities by reductions or decreases in other parts——

Mr. WELLER. But these pay-fors that create revenues that are

used to offset new spending, if we would take less of those pay-fors

to offset new spending and use those pay-fors that, perhaps, the

President’s suggesting to save Social Security, which is a higher

priority for you? Is it a higher priority to save Social Security or

spend on new initiatives?

Mr. APFEL. Well, I think the budget proposal does both, and I

think that’s an appropriate activity. One, it creates the framework,

working with the Congress, to reserve the surpluses to create a

major incentive to come around the table and save Social Security

next year. Two, it also—as every budget always does—reallocates

moneys within the budget for different activities which is the tradition of budgeting for years and years, so I think both——

Mr. WELLER. One of the frustrations I hear whether I’m with

seniors or 20-year-olds just starting in the work force who are wondering whether or not their contract with Social Security is going

to be honored. Is there concern about this time honored tradition

that President and Congress have had in the past, and the President does it in his budget this year where they use the surplus in

the Social Security Trust Fund to offset new spending. How

much—in the President’s budget, how much of his new spending is

paid for offsets from the Social Security Trust Fund?

Mr. APFEL. How much of the new spending?

Mr. WELLER. Well, how much of the Social Security Trust Fund

surplus is used as part of his budget?

Mr. APFEL. If we look over the course of the last 10 and 15 years

when we were running significant budget deficits in this country,

we were in a hole in economic terms. As of next year, we are now

in a position for the first time to finally start digging out from underneath that significant debt problem. That puts us in a much

stronger position to take on the Social Security reform issue now

in this nation.

Mr. WELLER. If the President’s budget did not use the surplus in

the Social Security Trust Fund to produce on paper a balanced

budget, how large would the deficit be?

Mr. APFEL. The Social Security surpluses in the Social Security

Trust Fund are larger than—like this year, the Social Security

Trust Fund——

Mr. WELLER. Seven billion dollars? A hundred billion dollars?

Mr. APFEL. The Social Security Trust Fund surplus is projected

at almost $100 billion; money comes into the system in terms of

both added payroll revenues as well as interest coming into the

fund.

Mr. WELLER. So, if you were to remove that $100 billion surplus,

we would have a $100 billion deficit in the President’s budget.

Mr. APFEL. Well, that would be the—that’s the hypothetical.

That’s correct, sir. The point is that it’s one of the reasons why we
52

have argued very strongly about reserving those surpluses. We are

now, for the first time, in a position where we’re moving into the

surplus world where we can, for the first time, start to dig out from

the economic problems that we’ve had in the past several years. We

believe that this sets the stage by reserving those surpluses rather

than having them go to tax cuts or for added spending that would

put us in a deeper hole for dealing with the long-term Social Security issue. So, we believe it’s very important that those surpluses

be reserved pending the Social Security action that we intend——

Chairman BUNNING. The gentleman’s time has expired.

Mr. WELLER. Thank you, Mr. Chairman.

Chairman BUNNING. Mr. Neal.

Mr. NEAL. Thank you, Mr. Chairman. Commissioner, I was delighted when you, in your opening statement, noted the fact once

again, that oftentimes is lost around here, that beginning in 1935

with the inauguration of Social Security that we present this today

as the most successful domestic initiative that has ever been undertaken and, indeed, on a contractual basis from generation to

generation it gives us a sense of community, and it does tie us together as members of the American family, but—and I also speak

to this with some personal experience which we could, perhaps,

save for a later day—but I went to college on Social Security. People forget that, and I’ve never lost contact or respect for this initiative that has given many of us in this nation a chance, sometimes

against serious odds.

And the point that I make is that I’ve been involved with the

savings coalition here because I do, indeed, think we can do a better job of educating the American people as to how they prepare

for retirement. I think we lose sight of the fact in this debate just

what Social Security has accomplished, and I’m troubled by that

generation just a bit behind me that looks at Social Security, and

they do, obviously, raise questions about whether or not it’s going

to be there for them. That’s understandable, but I also think they,

for a variety of reasons, perhaps, have not zeroed in on what Social

Security did for millions and millions and millions of Americans

and how they’ve enjoyed their retirement years.

All of us go out campaigning to one religious stop and that’s the

senior center, and when we go into the senior center I dare say

there aren’t many of us who say that we ought to curtail Social Security benefits and that we ought to cut back on Social Security initiatives, and we don’t engage the grand debate in that room about

the merits of Social Security. We subscribe to a basic fact and that

is that Social Security has been an extraordinary success, and the

people in that room always know it.

But my point is as we begin these discussions about Social Security—and I wish to be part of them—how would you, if you were

to suggest things because I’m sure you’ve had discussions about

it—how would you talk about establishing a higher retirement age?

How would you begin that process? What would you say if you

were drafting the parameters of that discussion? How would you

point out to the American people that because of life expectancy

and a host of other things that people do, indeed, live longer? How

would you frame that discussion?
53

Mr. APFEL. Before answering the retirement age question, I want

to comment on your opening remarks which I think are very, very

powerful. One of things that we need to educate the American public about this year is the importance of Social Security in our lives.

Back in 1935, the plight of older Americans was a national disgrace, and Social Security provided an enormous platform for older

Americans. It’s true for young Americans today that there is a serious concern out there. I think one of the ways that we address the

retirement age issue and many of the other issues that we face is

by acknowledging that we have a long-term demographic issue that

we need to confront in this country and how it will create great

strains on our social insurance system.

And the question for young people is will Social Security be there

in the future? And the answer is, absolutely, it’s going to be there

in the future, but it’s going to have to go through some changes.

We’re going to have to make some changes. As you pointed out

about going to college, my wife, when she was a little girl her father died leaving her mother and three sisters with a Social Security check. It is part of the foundation of American life. It’s part

of our fabric. So for young Americans, it’s not only a question of

whether Social Security is going to be there 30 and 40 years from

now, it’s also a question of whether it is there now? And it is, but

given those demographic issues—those long-term demographic

issues—we’ve got some tough choices to make to assure that we

will have a foundation of support for all Americans in the future.

And one of the issues that’s got to be discussed as part of that

is whether—given the fact that life expectancy has increased—

whether people should be working longer. As the Chairman said,

I think eloquently, there are tradeoffs to every one of the options

that we confront, and on the retirement age, there’s a whole series

of them that have to be thought through very carefully: Whether

there will be jobs for older Americans; whether the people who are

working in physically demanding jobs will be able to continue to

work; what the implications for the disability system will be. Those

are some of the issues that we’ll have to think through, but is raising the retirement age one of the legitimate issues that we’ve got

to think through to assure that we can have in the 21st century

this foundation of support? I think the answer is yes, and this will

be one of the ones that we’ll have to talk through very carefully.

Mr. NEAL. For my family, for my sisters and I, it was $119 a

month, but it was the difference between that and an orphanage.

We lose sight of that here.

Mr. APFEL. Very powerful.

Mr. NEAL. I would also like to close on this comment—I thank

the Chairman for the time—I think William Buckley, that sage of

liberal thought, summed up the best when he said conservatives

hate the new deal; they just don’t want to give it up.

Mr. APFEL. Thank you, sir.

Chairman BUNNING. Mr. Collins.

Mr. COLLINS. Thank you, Mr. Chairman. Commissioner, you’re

right, there are a lot of people in—Mr. Neal, you’re right—there are

a lot of people who have benefited greatly from the Social Security

Program, and it’s one that will be here for, I assume, as long as

we have a Republic. There will have to be changes made to it. I’m
54

very much concerned of the fact that some people would like to extend the age for retirement. It’s kind of like moving the goal line

once the game has begun, so I have great concerns over that.

I have a little bit of a difference of opinion as to how the Social

Security actually came about. It was during the time of the Depression, before my time, but both of my parents lived during that

time, and we’re trying to raise families. But, to me, it was a payroll

tax sold under the disguise of an old-age pension program. Had it

been a true old-age pension program, I think a lot of those contributions to the fund would have drawn some type of return, such

as a compounded interest or some type of return on the investment, rather than just being put into the pool, and the government

use those funds at will, and then made the benefits when the time

came of eligibility. So I differ somewhat with why and how Social

Security came about.

That’s the reason I think a lot of our young people today are very

much interested in seeing a change that would allow the funds that

they contribute to be able to have a return to them based on that

vested interest of that money that’s deducted. It would be compound interest on a daily basis through interest. So I think there

are a lot of changes and a lot of things that we’re going to be looking at over the next few months or a couple of years when it comes

to Social Security.

In 1995, the President was at Warm Springs, Georgia, the country home or the little White House of Franklin Delano Roosevelt,

and he and I were standing there in the little White House having

a farewell discussion, and we had been together for a couple of

hours that day, and as he was going to fly back to Washington, I

was going to stay there in my district. And I told him, I said, ‘‘Mr.

President, I want to leave you with thought, and that is, Social Security is my old-age pension.’’ And I say it again, Social Security

is my old-age pension. I turned down the congressional pension. My

small business doesn’t have a pension program. I have an IRA, and

Social Security is my old-age pension.

But, really, Social Security has been a payroll tax on me for a

number of years—with only the return based on the benefits that

Congress will set, not what it drew based on my deposits, and a

return on those deposits, or how my family would benefit from

those deposits based on the return on those deposits.

Thank you for your time.

Chairman BUNNING. Mr. Levin.

Mr. LEVIN. Welcome. I’m sorry I missed your testimony, but I did

have a chance to read it, Mr. Apfel. Your career has been an outstanding one, and we’re glad you’re where you are.

Mr. Collins—I wasn’t going to raise this, but just so the record’s

clear. Isn’t it correct, Mr. Apfel, that for those who have retired up

until now who have been drawing benefits, they by and large have

been receiving back far more than they put into the fund?

Mr. APFEL. Yes, that’s true.

Mr. COLLINS. Will the gentleman yield on that?

Mr. LEVIN. Yes.

Mr. COLLINS. But is it not also true that, as time has changed

and the rate of taxes changed, it will also take longer for those who

are young today to receive their benefits back?
55

Mr. APFEL. That is true also. The early years of the social——

Mr. COLLINS. We understand where you’re coming from, but it

does not take away from my view that it was a payroll tax and not

a true pension program from the beginning, and I thank you for

yielding.

Mr. LEVIN. Except it was an insurance program that has paid

back recipients up to this point on the average considerably more

than they put in, even if you would add a compounding factor. And

the problem we face now is what Mr. Apfel has pointed out and the

President has pointed out: That people are living much longer, and

we’re facing a problem ahead from the baby boomers, and those

who are younger ask the question: Are they going to not receive a

pension, and Social Security? Under any circumstances a considerable portion of their benefit would be there, but whether all of the

benefit could be there, plus essentially a growth factor, as has been

true for most of those who have received Social Security up until

now, is the issue confronting us. They’ve had a growth factor,

haven’t they?

Mr. APFEL. Yes.

Mr. LEVIN. And that’s the dilemma that we face and that we

need to solve, it seems to me, together. And I think, isn’t it true,

Mr. Apfel, that’s one reason the President has suggested that we

not expend any surplus coming from Social Security until we solve

the long-range problem? Isn’t that exactly what’s motivating the

President?

Mr. APFEL. That is absolutely what’s motivating the President.

This is the most important government program in the nation’s history. There is no crisis today, but we do face a long-term issue that

we need to confront, and that this Subcommittee has been in the

leadership position. This is your eighth hearing, my first before

you, but there will be many opportunities, I’m sure, in the future.

We’ve got to take actions in the future to assure the long-term security of the Social Security system.

The goal of the President, by reserving the surpluses, calling for

the year of discussion, and then bipartisan negotiations next January, is aimed at resolving this issue next year, to increase public

confidence that Social Security will be there for future generations

by those actions.

Chairman BUNNING. Sandy, would you yield just a minute?

Mr. LEVIN. Yes.

Chairman BUNNING. So there’s no misunderstanding what you

asked and what you said, you didn’t say the surpluses in Social Security, as I heard you say; you didn’t mean that?

Mr. LEVIN. No.

Chairman BUNNING. You meant the surpluses, if there is any, in

the overall budget.

Mr. LEVIN. I think what I said was, the surplus that has come

from Social Security. Part of the reason the deficit surplus issue

would be different, if one did not take into account the present surplus in Social Security, more coming in than paid out——

Chairman BUNNING. That’s correct.

Mr. LEVIN [continuing]. What the President has been saying, as

I understand it, is the budget, the overall budget, is affected by the

present surplus coming from Social Security. It’s projected we
56

would not have one if it weren’t for that surplus, we wouldn’t have

an overall surplus in the unified budget. We should not take any

of that proposed surplus and spend it on other programs until we

have a long-term solution to Social Security. Isn’t that what the

President is saying?

Mr. APFEL. Yes, sir. The——

Chairman BUNNING. No, I can’t believe that because—and I don’t

want to get into a three-way discussion with you—for the simple

reason it’s all recycled into new debt, every penny that comes in

in the Social Security Trust Fund is recycled by selling out bonds

into new debt in the Uniform Budget.

I think the President’s statement was the exact opposite. He

said, when we get to a surplus in the overall budget—we’re in a

surplus; we’ve been in one in the Social Security Trust Fund for

years. It’s about $700 billion.

Mr. LEVIN. And that’s exactly what I said, Mr. Chairman. That’s

exactly what I said—that the surplus in the Unified Budget exists,

when it comes, it will exist, reflecting the surplus in Social Security, and therefore, before we spend any of the surplus in the Unified Budget on any other programs, we ought to solve the long-term

problem for Social Security. Isn’t that——

Mr. APFEL. And there may be uses for that surplus at that point

in time for Social Security, but that’s really what part of the debate

is about over the course of this next year.

Chairman BUNNING. Sandy, I’ll give you as much time as you

want, but the fact of the matter is that when we bring money into

the trust funds now, the law requires us to buy nonnegotiable

bonds, which in turn are used for spending under the budget right

now.

Mr. LEVIN. I’m not saying——

Chairman BUNNING. No, no, no, but——

Mr. LEVIN [continuing]. Anything different.

Chairman BUNNING [continuing]. The surplus that the President

talked about was the surplus in the overall budget——

Mr. APFEL. The Unified Budget.

Mr. LEVIN. Right.

Chairman BUNNING. And so he didn’t propose any changes. I

asked you earlier—any changes in the law as far as the FICA tax.

We’re going to still spend that money.

Mr. APFEL. We do not think that there is, as I said, a need for

a law change right now——

Chairman BUNNING. Yes, until we get to a surplus.

Mr. APFEL. Well, because we’re not going to see that surplus

right now projected until the end of next fiscal year——

Chairman BUNNING. Well, that’s debatable——

Mr. APFEL [continuing]. And by that time——

Chairman BUNNING [continuing]. Also, but I’m not going to get

into that debate with you, either, because, according to which

scorekeeper you get, Congressional Budget Office or Office of Management and Budget, you get different numbers. So we shouldn’t

debate that because we’ll find out.

Mr. LEVIN. But whatever the number is, I think the fact remains

that the Unified Budget, to the extent there’s a surplus, reflects the

surplus coming in through Social Security, and the President is
57

saying, solve the long-term problem before we use that surplus for

any other purpose.

Chairman BUNNING. Mr. Portman.

Mr. PORTMAN. Mr. Commissioner, thank you for being here

today, and I’d like to nominate Sandy Levin for President because

I think he has explained this problem in a way that the American

people need to hear it, and that’s not what I heard the President

say, incidentally, at the State of the Union, nor in his follow-up

press conferences and other communications, either from Director

Raines or from Deputy Secretary Summers yesterday. I think

Sandy Levin has it just right, which is, in fact, there is not only

a pay-as-you-go system, and we need to explain that to the American people, but there’s also a trust fund which is being borrowed

against every day, and without that trust fund surplus, we would

have no balanced budget this year, should we have one.

So I think your formulation is exactly right, but that’s not what

I’ve heard our President say to the American people, nor, when you

talk, as we did yesterday, and Jim Bunning asked the question to

the administration—in this case it was the Deputy Secretary of the

Treasury—you know, they still haven’t, frankly, figured out what

he means in terms of the mechanics of it. Save Social Security first

is very popular, and I think all of us would agree with it, but the

question is: Do you do it through the Unified Budget or do you do

it somehow with the trust fund? I’m sort of intrigued by what I

infer from what you’re saying, Mr. Levin, which is that maybe we

should focus more on that trust fund and look at it in the way it,

in fact, does operate, which is to say that, without it, we would

have no budget surplus this year. In fact, we’re in a deficit position,

if it was properly accounted for, and maybe we ought to look at the

surplus, whether it’s the $70 billion or whether it’s the $90 billion

that we’ll accumulate this year alone, and start working through

that as our vehicle to save Social Security.

Mr. LEVIN. Would the gentleman yield?

Mr. PORTMAN. So I’d be happy to yield. I do have a couple of

questions for the Commissioners, but sure.

Mr. LEVIN. I think that’s what the President is saying, that while

there is a present surplus when you look out over a number of

years, a surplus in Social Security, that gets eaten up. So you don’t

want to use that surplus until you make the long-term decisions on

financing Social Security.

Mr. PORTMAN. Again, reclaiming my time, maybe I haven’t been

as attentive as others in this room have been, but I certainly have

not heard our President talk in those terms, and I wish he would,

because honestly I think that the top priority right now is to educate the American people as to what the reality is with Social Security. And part of it, as I said earlier, is that it’s a pay-as-you-go system, and with the demographic shift, you’re going to have a problem, and the train wreck can be avoided if we begin to take steps

now. I wish he had said that in the State of the Union.

The second part is the trust fund that you’ve just explained,

which I think is the reality, again, that at least my constituents

aren’t aware of, and I think the President could play an important

role there.
58

Let me ask you a specific question on that, I, unfortunately, was

not able to be here for your testimony also, and I apologize. Unlike

Mr. Levin, I didn’t read it in advance, but I did skim it when I got

here, and it’s very good. And you talk about these conferences the

President’s holding around the country with AARP, the Concord

Coalition. We’re doing one in my district that I’m involved with—

I think probably every congressional district. And we have the

White House Conference, as you talk about, and you mentioned

some other potential forums where the President would be talking

about this issue, including a White House Conference with the

Congress sometime in early 1999.

Is the Social Security Administration involved in these conferences around the country? Are you directly involved in giving

input to the White House as we go through this process?

Mr. APFEL. Yes. In terms of the conferences, directly involved

with both the AARP and Concord Coalition, because those forums

are going to be theirs. I’ve also been in contact with Pew Charitable Trusts. As you know, the Pew Charitable Trusts is going to

be doing several forums around the country. I’ll be attending several of those as well.

The Social Security Administration will be part of this debate. I

have been actively involved through the last 4 or 5 months, since

my confirmation. I’ve been around the country many times already.

I intend to be involved over the course of this year. The Social Security Administration as a whole will also be involved actively with

our public affairs offices in the public discussions. We want to be

able to talk to the American people about the importance of Social

Security, the fact that there are the long-term issues that we need

to confront, and that we need to move forward on them. It’s one

of the roles and responsibilities that I view as central to the Social

Security Administration.

Mr. PORTMAN. So you will have a specific role in these regional

conferences as a participant?

Mr. APFEL. I don’t know about each and every one, but I know

many of them. I’ll be traveling outside more than I would like, in

terms of going around the country and being away from my family,

for them, but I think it’s very important that I be centrally involved.

Mr. PORTMAN. I think it’s essential that Social Security is directly involved.

Let me ask one other specific question, because I see my time is

running out, and that is with regard to the earnings limit. As I

looked through your testimony—and perhaps I missed some earlier

dialog on this—I didn’t see it touch on the question of the earnings

limit. In my view, it’s directly related to all questions about Social

Security, because I think the earnings limit has a perverse effect

on our economy and on our seniors.

But, specifically, to the age issue, because, as I understand the

way the earnings limit works, once you’re over the age of 70, it

would no longer apply. If we’re talking about raising the age on Social Security, and as you point out in your testimony, of course, it’s

already being raised incrementally in a steady, but slow fashion,

what is your recommendation with regard to the earnings limit? I

suppose if you raise the age to 70, there would be no earnings
59

limit, to take it out logically to the logical extension, but should the

earnings limit be changed as you change the age limit, either as

under current law or in a more aggressive fashion?

Mr. APFEL. If I could back up first and indicate, again, on the

President’s proposal, I believe he has been very clear that we would

preserve those surpluses pending Social Security reform——

Mr. PORTMAN. Which surpluses?

Mr. APFEL. The Unified Budget surpluses pending——

Mr. PORTMAN. OK, that’s what I’ve heard, too.

Mr. APFEL [continuing]. Pending Social Security reform; that the

decision as to the particular use of those surpluses within the Social Security system is one that needs to be debated this year.

Some have proposed investing some of those surpluses in equities.

Some have proposed providing them to the Social Security Trust

Fund. Some have proposed individual accounts. These are all

things that need to be debated this year. So I think the policy is

very clear, and we do hope on a bipartisan basis to work together

to develop what I think is a very important thing for the American

public, which is next year a proposal to assure long-term security

for Social Security.

On the earnings limit issue, I think it is an important one. The

administration worked with the Congress to raise the earnings

limit to $30,000 by the year 2002.

One of the issues that would have to be addressed in terms of

raising it further or eliminating it altogether is the short-term cost.

The cost of that would be about $4 or $5 billion a year. There are

not long-term costs for eliminating the earnings limit cap, because

of the way that the delayed retirement credit works, but there are

short-term costs that would have to be taken into account. So is it

something that should be considered as part of the overall reform

efforts? I would say that it absolutely should be considered. The administration does not have a position one way or the other on it,

again, because we want to see the entire package, working with the

Congress, to see how each of the individual pieces would fit in together.

Mr. PORTMAN. My time’s up, but the point I was making was the

interaction between the age issue, so you might want to——

Chairman BUNNING. Thank you, Mr. Portman. Your time has expired.

Mr. PORTMAN. Thank you, Mr. Chairman.

Chairman BUNNING. Thank you, Commissioner. I have no more

questions for you. I don’t know if anybody else does.

Mr. NEAL. Do you want to go through again what the President

said once more? [Laughter.]

Chairman BUNNING. I think he said it very clearly, what he said

in his last statement.

Thank you very much.

Mr. APFEL. It’s an honor to be here, sir.

Chairman BUNNING. Commissioner, we may be submitting additional questions in writing for you to answer for the record. We appreciate your testifying.

[Questions were submitted by Chairman Bunning to Mr. Apfel.

The questions and responses follow:]
60

1. You mention in your testimony that the Greenspan Commission (who made their

recommendations 15 years ago) suggested that changes should be made in the disability benefits program to take account of those older workers who are unable to extend their worklives for health reasons. What research have you completed on this

issue. Are you prepared to submit a legislative remedy?

Much of the SSA research that addresses the general issue of raising the retirement age (see question 4) seeks to estimate the size of the group whose health problems make further work difficult or to better understand the relationship between

ill health and retirement.

While SSA has not conducted separate studies of how particular changes in the

disability insurance program might interact with retirement age increases, SSA has

undertaken the collection and development of information to support analyses of disability program modifications. For example, SSA has created a microsimulation

model of the Social Security (OASDI) program, with an initial focus on the disability

program. (The model is based on a linkage of Social Security records to the Survey

of Income and Program Participation.) Estimates from the project show that a substantial minority (17–30 percent depending on the indicator) of OASI beneficiaries

aged 62–64 report significant health problems. When completed, the model will give

SSA the capability to analyze distributional and behavioral effects of the current

program and proposed alternatives.

SSA is also designing the Disability Evaluation Study (DES), which combines survey reports, clinical examinations, and medical evidence of record so that we can

make accurate determinations of disability rates throughout the general population.

The DES is carefully designed to include workers up to age 69 so that we can assess

alternative retirement ages and alternative disability standards for specific age

groups. Also underway is a literature review and analysis of vocational factors of

age, education, and work experience; results of that project will help frame the problem of older workers unable to extend their working lives. SSA also supported the

special disability data collection of the Health Interview Survey and supports the

Health and Retirement Survey. Both of these databases allow study of disabilities

and health problems of older workers.

Changes to the disability program to take account of increases in the retirement

age need to be consolidated in the context of Social Security reform. As with any

possible element of a solvency solution, such changes must be developed in a bipartisan manner and reflect, insofar as is possible, a consensus of the American people.

To this end, this year has been dedicated to a national dialogue on Social Security

solvency. The Agency has participated in over 5,000 events and media opportunities,

including town hall meetings and other public events. The ideas that flow from this

process should equip the Administration and the Congress with a firm foundation

on which to build together a bipartisan legislative agreement. Without the benefit

of this debate on these critical issues, it would be premature to submit legislative

remedies.

2. Your testimony mentioned nothing about the senior earnings limit, the amount

of wages seniors can earn before their benefits are offset. Have you thought about the

effects of increasing the retirement age on the earnings limit? Do we continue to need

to penalize seniors for trying to be productive?

As you know, present law provides two different earnings tests, one for beneficiaries who have reached normal retirement age and another for those who have

not.

The Administration supported the 1996 legislation which roughly tripled the earnings test to $30,000, by 2002, the amount that beneficiaries who have reached normal retirement age can earn before their benefits are reduced. In doing so, the Administration noted that ‘‘Raising the earnings test will increase the standard of living of the elderly and help the Nation’s economy by increasing the supply of workers

to the labor force.’’ One of the issues that needs to be considered as part of the solvency debate is whether further changes are warranted.

As normal retirement age increases, the number of beneficiaries subject to the

earnings test that applies before normal retirement age will increase. However,

there are issues that need to be considered with regard to liberalizing the earnings

test for beneficiaries who have not yet reached normal retirement age. Doing so

could encourage workers to file at age 62, even though they are still working (i.e.,

when they may not be as dependent on Social Security benefits) and receive permanently reduced benefits. These permanently reduced benefits may be inadequate to

support them in later years when they are unable to work.

Today, workers retiring at age 62 have their benefits reduced by 20 percent. The

amount of this reduction will increase as normal retirement age increases, reaching

30 percent when normal retirement age reaches age 67.
61

3. You say you want Americans to understand the facts about Social Security, that

the trust funds will start declining in 2021 and will be depleted by 2029. What about

the fact that outgo exceeds revenues in 2013? Shouldn’t Americans understand that

as of 2013 the government is going to have to begin paying back the money it owes

the trust funds and what that will mean to the federal budget?

I agree that the 2013 date is also very important. In 2013, OASDI expenditures

will begin to exceed annual tax revenues. At that time, some of the interest income

on the trust funds will be needed to pay benefits. It is correct that using trust fund

interest income to pay benefits, rather than to purchase Treasury securities, will

have a negative impact on the federal budget.

However, in the President’s Budget, which was submitted in February, the Office

of Management and Budget projects that the operating budget—that is, the budget

not including Social Security—will be in surplus by 2007, six years ahead of the

2013 date. As a result, by the time the trust funds need to use interest income for

benefit payments, the rest of the budget will no longer be reliant on those trust

funds. This is why it is so important to continue to pursue a course of fiscal discipline. By doing so, we will be better able to respond to the challenges associated

with the retirement of the Baby Boomer generation.

4. What research has the Social Security Administration completed on the issue of

raising the retirement age?

The work and retirement decisions of older workers have been extensively studied. A considerable amount of this research (listed below) was conducted at the Social Security Administration, or was funded by the Agency. Retirement research has

carefully documented long-term trends in the American work force, identified many

of the likely determinants of those trends, and estimated the size of the effects of

specific causal factors. The retirement literature was reviewed and summarized in

a 1996 Social Security Bulletin article (Vol. 59, No. 4, Pp. 2950).

The labor force participation rates of men aged 55 or older steadily declined from

the early 1940s until the mid-1980s. During the past decade participation rates

have risen slightly (i.e., 1–3 percentage points) for some age groups, particularly

among men 65 and older. The rate of decline in propensity to work at older ages

was particularly pronounced during the 1970s and early 1980s. The main impetus

appears to have been the increased ability of older men to afford to retire at earlier

ages. Growth in lifetime real incomes has enabled men to finance increased consumption of goods and services and earlier retirements. Much research has shown

that the availability of Social Security benefits and private pensions have been important influences in the trend for men to retire at younger ages.

Many of the retirement studies have focused on the specific retirement incentives

associated with Social Security and private pensions. To the extent that Social Security has caused individuals to accumulate more assets to finance retirement than

they would have saved in the absence of the program, then Social Security has been

at least partly responsible for the trend to earlier retirement. The best evidence suggests that Social Security benefit levels have been responsible for no more than a

quarter of the decline in older men’s labor force participation rates.

Nearly all retirement research has studied the behavior of men. Much less is

known about women’s retirement decisions. The labor market activity of older married women appears to respond positively to earnings opportunities, but is less responsive to the availability of unearned income and wealth than is the case for older

men. Their retirement decisions appear to be very much influenced by the retirement status of their husbands. The labor supply of unmarried older women is responsive to financial incentives such as wage offers, unearned income, and wealth,

including increases in Social Security wealth through additional earnings. Because

of the large changes over time in the extent of women’s lifetime labor force attachment, these findings should be confirmed with data on more recent retirees.

Research has examined specific administrative features of the retirement program

to discern which Social Security elements might be responsible for particular features of observed retirement patterns (e.g., the popularity of retirement at ages 62

and 65). Benefit amounts, the retirement test, the delayed retirement credit, and

the early and normal retirement ages have all been scrutinized. The general conclusion has been that the overall effect of Social Security on the average age of retirement is small relative to other factors that influence older workers’ labor supply

such as pensions, income levels, earnings opportunities, and health. In particular,

the influence of Social Security’s Normal Retirement Age (NRA) has been estimated

to be modest. The evidence from several of the best studies suggests that increasing

the NRA by 2 years would, other things equal, probably result in a 2–5 month increase in the average age of retirement.

Until the 1970s, researchers generally believed that health problems caused most

retirements. Since then, the view has evolved that most retirements are voluntary
62

and that individuals respond primarily to economic incentives, although health

plays a role in inducing some retirements, particularly early ones. Poor health can

cause retirement via three links: 1) it can make work more arduous and increase

preferences for retirement, 2) it can lower wage offers that the individual can command, and 3) it can decrease life expectancy. The prevalence of work-limiting health

conditions among the older population is not well-known, in part because of data

limitations.

There is some evidence that health status and capacity to work have been gradually improving since the early 1980s for individuals in their 50s and 60s. This improvement probably reflects many factors including long-term effects of healthier

lifestyles adopted by an increasing number of Americans since the1950s, improvements in medical practice, and the lessened physical requirements of many jobs. A

large majority of retirees are probably physically capable of working somewhat

longer than they have been in recent years. Nonetheless, many individuals—but a

distinct minority—have health-related work limitations that will contribute to some

hardship if either Social Security’s NRA or early retirement age is increased. Much

research remains to be done to identify and count this subset of the population, to

ascertain the nature of their impairments, (particularly as these health conditions

relate to their education levels and work experience), and to determine their socioeconomic and demographic characteristics.

Most of the best retirement research has used data from the Retirement History

Study (RHS), a database sponsored by the Social Security Administration beginning

in 1969. Thus, much of what we know about retirement is heavily dependent on the

retirement behavior of cohorts who retired a couple of decades ago and are currently

in their late 80s. To the extent that these cohorts experienced unique circumstances

during their lives (surviving the great depression, coming of age during World War

II, receiving large real transfers of wealth from the start-up phase of the Social Security system), it is possible that later birth cohorts will react differently to changing circumstances. Therefore, further study of retirement using more recent data on

current retirement such as the Health and Retirement Survey (HRS) is greatly

needed. In the next several years researchers will have an opportunity to verify

many of the findings from the earlier RHS. One key question to address will be

whether these later birth cohorts appear to respond to financial incentives any differently than the RHS cohorts. We enter this new phase of retirement research with

a provisional view that the effects of Social Security provisions in retirement patterns are probably not very large.

The following bibliography lists internal research and literature reviews and summaries of SSA-funded research on the retirement age and issues surrounding a retirement age increase.

COMPLETED STUDIES

Internal Research and Reviews

Chapman, Steven H., M. LaPlante, and G. Wilensky. 1986. ‘‘Life Expectancy and Health Status of the Aged,’’ Social Security Bulletin, Vol. 49, No. 10, pp. 24–48.

Holden, Karen C. 1988. ‘‘Physically Demanding Occupations, Health, and Work after Retirement: Findings from the New Beneficiary Survey,’’ Social Security Bulletin, Vol. 51, No. 11, pp.

3–15.

Leonesio, Michael V. 1993. ‘‘Social Security and Older Workers,’’ Social Security Bulletin, Vol.

56, No. 2, pp. 47–57.

Leonesio, Michael V. 1996. ‘‘The Economics of Retirement: A Nontechnical Guide,’’ Social Security Bulletin, Vol. 59, No. 4, pp. 29–50.

McMillen, Marilyn M. 1984. ‘‘Sex-Specific Equivalent Retirement Ages: 1940–2050,’’ Social Security Bulletin, Vol. 47, No. 3, pp. 3–10.

Packard, Michael D. and V. Reno. 1989. ‘‘A Look at Very Early Retirees,’’ Social Security Bulletin, Vol. 52, No. 3, pp. 16–29.

Program Analysis Staff. 1982. ‘‘Mortality and Early Retirement,’’ Social Security Bulletin, Vol.

45, No. 12, pp. 3–10.

Sammartino, Frank J. 1987. ‘‘The Effect of Health on Retirement,’’ Social Security Bulletin,

Vol. 50, No. 2, pp. 31–47.

Straka, John W. 1992. ‘‘The Demand for Older Workers: The Neglected Side of a Labor Market,’’ Studies in Income Distribution, No. 15. 43 pages.

U.S. Department of Health and Human Services. 1986. ‘‘Increasing the Social Security Retirement Age: Older Workers in Physically Demanding Occupations or Ill Health,’’ Social Security

Bulletin, Vol. 49, No. 10, pp. 5–23.

Weaver, David A. 1994. ‘‘The Work and Retirement Decisions of Older Women: A Literature

Review,’’ Social Security Bulletin, Vol. 57, No. 1, pp. 3–24.

Weaver, David A. 1993. Review of ‘‘As the Workforce Ages: Costs, Benefits, and Policy

Changes,’’ Social Security Bulletin, Vol. 56, No. 3, pp. 100–103.

Ycas, Martynas A. 1987. ‘‘Recent Trends in Health Near the Age of Retirement: New Findings

from the Health Interview Survey,’’ Social Security Bulletin, Vol. 50, No. 2, pp. 5–30.
63

Extramural Research Reports and Summaries

Anderson, Patricia, A. Gustman, and T. Steinmeier. 1994. ‘‘Trends in Labor-Force Participation and Retirement: A Nontechnical Summary of a Final Report to the Social Security Administration, September 1994.’’ Social Security Bulletin, Vol. 57, No. 4, pp. 55–58.

Clark, Robert and A. McDermed. 1989. ‘‘Determinants of Retirement by Married Women,’’ Social Security Bulletin, Vol 52, No. 1, pp. 33–35.

Crimmons, Eileen M. and S. Reynolds. 1997. ‘‘Trends and Differences in Health and Ability

to Work,’’ Social Security Bulletin, Vol. 60, No. 3, pp. 50–52.

Gustman, Alan L. and T. Steinmeier, 1991. ‘‘The Effects of Disability Insurance, Health Status, Mortality and Physically Demanding Occupations on Labor Force Activity and Retirement:

Estimation and Policy Simulation with an Econometric Model,’’ Final Report. Photocopy.

Hurd, Michael. 1989. ‘‘The Joint Retirement Decisions of Husbands and Wives,’’ Social Security Bulletin, Vol. 52, No. 1, pp. 29–32.

Nestel, Gilbert. 1989. ‘‘Functional Capacities of Older Men for Extended Work Lives,’’ Final

Report. Photocopy.

Peracchi, Franco and F. Welch. 1995. ‘‘Research Summary: Trends in Labor-Force Behavior

of Older Americans,’’ Social Security Bulletin, Vol. 58, No. 4, pp. 133–138.

Tolley, H. Dennis and K. Manton.1996. ‘‘Disability Adjusted Cost Savings for Changes in Normal Retirement Age,’’ Social Security Bulletin, Vol 59, No. 4, pp. 71–74.

RESEARCH UNDERWAY OR PLANNED

Several simulation models are being developed to investigate distributional effects

of retirement age changes. The models will also simulate effects of simultaneous

changes in other program features.

It is expected that the new Retirement Research Consortium will produce short

policy analysis papers on the impact of retirement-age increases on the disability

program and other critical reform topics. (For the Consortium, cooperative agreements with two universities will be in place by the end of the year.)

The impacts of changes in the early and normal retirement age and the ability

of people to work longer given later retirement ages will be assessed. For example,

planned studies include the likely effects of raising the early retirement age, focusing on financial asset levels and health and disability patterns of affected workers.

Effects on labor supply will also be examined.

Several data development efforts are continuing which provide essential data for

analysis of reform proposals. They include the Health and Retirement Survey, the

National Longitudinal Surveys of Women, the Survey of Income and Program Participation, and the Survey of Asset and Health Dynamics of the Oldest Old.

Related projects include study of labor force transitions of older workers, projections of the types of Social Security benefits that baby boomer women will receive,

and analysis of health status, beneficiary status and employment of persons in their

sixties.

Robert J. Myers, the former Chief Actuary and former Deputy

Chairman BUNNING. Testifying on the second panel today are Dr.

f

Commissioner, and the institutional memory on Social Security

here in the Congress of the United States.

Merton Bernstein is Coles professor of law, emeritus, at Washington University in St. Louis, Missouri.

Dr. Richard Burkhauser is from the Center for Policy Research

at Syracuse University in New York.

Ron Gebhardtsbauer is the senior pension fellow at the American

Academy of Actuaries.

Dr. Myers, would you please be our first to start? Pull it right

over [referring to the microphone] and let it rip.
64

STATEMENT OF HON. ROBERT J. MYERS, FORMER CHIEF

ACTUARY AND FORMER DEPUTY COMMISSIONER, SOCIAL

SECURITY ADMINISTRATION; AND FORMER EXECUTIVE

DIRECTOR, NATIONAL COMMISSION ON SOCIAL SECURITY

REFORM

Mr. MYERS. Thank you, Mr. Chairman. I’d like to begin by discussing the definition of ‘‘old age.’’ For at least the past half century, this definition in the United States has almost universally

been that people age 65 and over are classified as being in old age.

The reason for this is that age 65 is the so-called normal retirement age under the Social Security Program as it was originally established, and has been maintained static over the years of operation of the program, although, as you pointed out, in the future,

under present law, it is scheduled to rise slowly to age 67 for people reaching that age in 2027.

In my view, the definition of old age should not be a static one,

but rather it should reflect changes in longevity, taking into account also work ability and availability of employment. Age 65 was

originally selected as the normal retirement age just as a rather arbitrary thing. Age 60 was too low; age 70 seemed too high, and 65

was a nice round figure. I think, as it has worked out, that was

a quite good choice. For some people, even particularly back in the

early days, age 65 might have been too high an age because of

their ability to go on working, but on the whole I think it was a

good choice.

However, I think that a mistake in the original planning of the

system was that this age would not be indexed in some way or another to increasing longevity. The effect of increasing longevity and

continued work ability, of course, is very slow and gradual, but it

accumulates to a considerable amount. I believe that, in future

years, if longevity rises, so too should the normal retirement age,

assuming that work ability also keeps pace, as I believe that it

should.

Now if we say that age 65 was right in the beginning, and we

say, assuming that were the case, what should it be currently? If

we examine for a group of young workers entering the labor force

at age 20 and compute based on 1940 mortality what the retirement life expectancy is on the average, and also what the working

life expectancy is on the average, and say that the relationship of

those two should remain constant, then retirement expectancy is

about 21 percent of the worklife expectancy. If that were done

based on 1990 mortality, the normal retirement age would now be

about 701⁄2, and projecting it ahead a little for today’s mortality,

that normal retirement age would be 71. So you can see how significant is these slow, gradual increases in longevity.

I think that it may be a case of which comes first, the chicken

or the egg, but I think that the fact that the normal retirement age

is 65 has had an effect on when people desire to retire, and also

on the labor market and on employers’ attitudes toward employing

older workers. If we had had a gradual increase in the normal retirement age in the past, I think things would look quite a bit different now as far as work ability and work availability are concerned.
65

The actual schedule for increasing the normal retirement age

that was adopted in 1983 was only a small step, in the right direction, but it was very difficult to achieve at that time, and it was

done in the right way. It was done on a deferred basis and gradually, and anything that is done about changing the normal retirement age should be something that is gradual, and also something

that does not happen too quickly, because it is not fair to people

to suddenly change the rules of the game as to when they may retire in the next decade or so.

Very simply, Mr. Chairman, my proposal is that the normal retirement age should be increased, beginning in 2003, just as under

present law, by 2 months a year for each year-of-birth cohort. Instead of leveling it off at 66 for 11 years, and then only going to

67, I would increase it indefinitely into the future.

Now this will come perhaps as quite a shock to some people,

when I point out what this will do. This means the normal retirement age would reach 70 in the year 2037 and 75 in the year 2074.

But I believe that if people are shocked by these ages, it is because

they are considering it in a static manner of today’s economy and

today’s demography, and I think that in the future these ages will

be reasonable; in fact, they’ll probably be less than age 65 was relatively in 1940.

This proposal would reduce the long-range actuarial deficit of the

program by approximately two-thirds. The remaining third can be

obtained by several minor, relatively noncontroversial amendments, so that the system could be made secure for the future.

Thus, in summary, Mr. Chairman, I believe that the demographic problem of increasing longevity, which causes most of the

long-range actuarial deficit, should be solved by demographic

means, significantly raising the normal retirement age in a gradual

manner over the long run.

Thank you, Mr. Chairman.

[The prepared statement follows:]

Statement of Hon. Robert J. Myers, Former Chief Actuary and Former

Deputy Commissioner, Social Security Administration; and Former

Executive Director, National Commission on Social Security Reform

Mr. Chairman and Members of the Subcommittee: My name is Robert J. Myers.

I served in various actuarial capacities with the Social Security Administration and

its predecessor agencies during 1934–70; being Chief Actuary for the last 23 of those

years. In 1981–82, I was Deputy Commissioner of Social Security, and in 1982–83,

I was Executive Director of the National Commission on Social Security Reform

(Greenspan Commission).

MEANING OF CONCEPT OF ‘‘OLD-AGE’’

Commonly, the concept of ‘‘old-age’’ in the United States is considered as involving

all persons aged 65 and over. However, this static basis is not really meaningful

over the long run. Certainly, several centuries ago, it would have involved far fewer

persons than would have been reasonable. Actually, the concept should be based on

longevity and work ability, and thus it should be dynamic over time.

The element of longevity is relatively easy to measure, but this is not the case

as to work ability. The latter depends on the ever-changing nature of the labor market and the extent to which employers will adapt their employment practices to the

changing abilities of persons as they become older. I believe that, over the years.

The possibility of efficient employment of older workers, considering the offsetting

effect of long experience as against possibly declining physical ability, will keep pace

with increasing longevity. Or, in other words, as people live longer, they should:—

and will—be able to work longer. Thus, the definition of where ‘‘old-age’’ is first applicable should be a dynamic one.
66

WHY AGE 65 WAS INITIALLY SELECTED AS THE NORMAL RETIREMENT

The Normal Retirement Age (NRA) under the Social Security program was established as 65 in the original Social Security Act (1935). The NRA, which is sometimes

referred to as ‘‘the full-benefits retirement age,’’ is the youngest age at which reduced benefits are first available. Some persons believe that age 65 was selected because Bismarck used this age at the initiation of the German national pension plan

in the late 1880s, the first such program in the world. However, this was not the

case, because such age was 70.

Instead, the NRA was set at age 65 in 1935 as a matter of compromise. The Townsend Plan, which would have provided $200 per month to all retired persons

(and was really economically unsupportable), had an NRA of 60, and had strong

public support. Some private pension plans had a NRA of 65, while others, generally

in the railroad industry, had a NRA of 70. So, the ‘‘natural’’ compromise of the

round figure of 65 seemed logical for the new Social Security program.

INCREASE IN NRA MADE BY 1983 AMENDMENTS

In 1982–83, the Social Security program had serious financing problems, both

short-range and long-range. Among the benefit and financing changes made by the

1983 Amendments to solve these problems was a deferred, gradual increase in the

NRA, which in fact was the final, balancing change. As a result, under present law,

the NRA increases by 2 months for those who attain age 65 in 2003 and by an additional 2 months for each successive year-of-birth cohort until it reaches age 66 for

those who attain that age in 2009. It then remains at age 66 until rising by 2

months for those attaining age 66 in 2021. Then, there are successive 2-month increases for each further year-of-birth cohort until it reaches age 67 for those who

attain that age in 2027.

It may be noted that the plateau at age 66 for those attaining age 66 in 2009–

20 resulted from the circumstance that the change in the NRA was supposed to

produce exact estimated long-range actuarial balance for the total package of

changes. If the NRA had ‘‘logically’’ moved up steadily beginning in 2003, by 2

months per year, until reaching age 67 in 2016, a small actuarial surplus would

have been shown. Thus, the goal of a close estimated actuarial balance could only

be achieved by deferring for a few years the increase in the NRA beyond age 66.

Much opposition was present with regard to even this small increase in the NRA,

even though it was deferred and gradual. Many persons viewed retirement at age

65 (or even a few years earlier) as a basic right, regardless of work ability or employment availability. In my view, from the standpoint of the nation’s well-being,

the definition of ‘‘old-age’’ should not have been kept static over the years as longevity increased. By doing so, we have had a hidden continual liberalization of the program. Instead, we should have maintained the NRA at a level equivalent to what

it was at the start. Specifically, the relationship between the retirement-life expectancy for a person aged 20 and the working-life expectancy of such a person should

have remained about the same over the years.

Based on mortality rates in 1940, the retirement-life expectancy of a person aged

20 was 8.36 years for a NRA of 65, or 20.8 percent of the working-life expectancy

of such a person (40.18 years). Using mortality rates of 1990, such a 20.8-percent

relationship would be achieved with a NRA of 70.6 years. Thus, the increasing

schedule of NRAs legislated by the 1983 Amendments was well below the NRAs

equivalent to the relationship between the retirement-life expectancy and the

working-life expectancy for a person aged 20 with a NRA of 65 at the inception of

the program would have produced by 1990, let alone by 2027.

MY PROPOSAL FOR THE NRA IN THE FUTURE

I believe that the NRA should begin to increase for those who attain age 65 in

2003, as in present law, but when it reaches age 66, it should continue to increase

by 2 months for each year-of-birth cohort indefinitely into the future, rather than

remaining at that age for 12 years and then rising only to age 67. Thus, the NRA

would become age 70 for those who attain that age in 2037 and age 75 for those

who attain that age in 2072. At first glance, these rises might appear to be extreme,

but it should be kept in mind that, with increasing longevity and accompanying

work ability, the resulting NRAs will be well below the equivalent NRAs comparable

to a NRA of 65 in 1940 certainly for many years to come and perhaps always so.

In other words, if the NRA had originally been indexed to longevity, it would have

been higher than would arise under my proposal to revise present law.

In the event that the proposed schedule of NRAs will, after many years, apparently exceed the NRAs equivalent to what age 65 was in 1940, this will be deter-
67

minable well in advance. Appropriate action can then be taken to slow down or

eliminate future scheduled increases, and this can easily be done both actuarially

and politically.

As to the Early Retirement Age (age 62 in present law), I believe that it should

remain at age 62 until the NRA reaches age 67, and then it too should rise, always

being 5 years lower than the NRA. My proposal would have a significant effect on

the estimated long-range financial status of the program. The long-range actuarial

deficit of 2.2 percent of payroll according to the intermediate-cost estimate would

be reduced by about two-thirds. The remaining deficit could easily be handled by

such small and relatively non-controversial changes as covering all new state and

local government employees, making the provisions for income-taxing benefits the

same as are applicable to private pensions, and correcting the Consumer Price

Index.

PROPOSALS TO INDEX THE NRA TO LONGEVITY

Proposals have been made to index, beginning in some future year, the NRA

based on changes in retirement-life expectancy. In theory, this is an excellent approach, but it cannot be applied in a satisfactory manner. If the increase in the NRA

is made shortly after the increase in life expectancy has been determined to have

occurred as measured in some recent past year, the beneficiaries will not have had

sufficient advance notice so that they can plan accordingly. On the other hand, if

the indicated increase in the NRA is deferred and graded in for many years, the

change will not have been sufficiently cost effective. Of course, it may be said that

my proposal does involve indexing as a limiting factor that the Executive Branch

and Congress would undoubtedly consider continuously over the years, so as to

make ad hoc changes when indicated as being necessary.

CONCLUSIONS

The Social Security program has, according to the intermediate-cost estimate, a

serious long-range financial problem. This has been due, to a considerable extent,

to increased longevity—both in the past and very likely over the long-run future—

coupled with maintaining a static NRA in the past and with only small increases

therein scheduled for the future.

The demographic problem involved should be solved by demographic means—

namely, a continuous small annual increase in the NRA in all future years. If this

results, at some distant time, in the NRA becoming too high as measured by conditions then or relative to what age 65 was at the start of the program, it will be a

relatively easy matter both actuarially and politically to slow down or cease the

rises in the NRA. But it should be realized that the NRA should be on a dynamic

basis so as to keep pace with increasing retirement-life expectancy, considering also

work ability.

Chairman BUNNING. Go right ahead.

f

STATEMENT OF MERTON C. BERNSTEIN, COLES PROFESSOR

OF LAW, EMERITUS, WASHINGTON UNIVERSITY, ST. LOUIS,

MISSOURI; AND FORMER PRINCIPAL CONSULTANT TO THE

1983 NATIONAL COMMISSION ON SOCIAL SECURITY REFORM

Mr. BERNSTEIN. Thank you, Mr. Chairman. I want to congratulate this Subcommittee for launching these hearings. There’s no domestic issue of greater importance to all generations than securing

the future of Social Security. And I’m very much encouraged by

what I’ve been hearing.

Certainly, there’s been a tremendous amount of interest in normal retirement age. But the interest in it is exceeded only by the

extent to which it is misunderstood. Most people seem to think that

Social Security normal retirement age means the age at which

most people retire. That is not the case. Most people retire before

age 65, the current age.
68

Raising normal retirement age means simply cutting benefits—

cutting benefits for everyone who retires after the effective date of

the change. Now that is something that people don’t understand.

They don’t understand that it cuts periodic benefits, no matter at

what age they begin benefits. They don’t understand that raising

normal retirement age means cutting lifetime benefits for everyone

who retires, who becomes eligible to retire after the effective date.

This issue is primarily an issue with the baby boomers and their

children. And they ought to understand what’s involved, that it’s

their benefits that would be cut, and cut substantially, roughly 5

percent a year—5 percent for each year of raising the normal retirement age. We can’t have an intelligent discussion of this issue

until we know what it means.

I think it’s a very radical thing to do. The long-term shortfall of

Social Security is quite manageable without taking such radical

steps.

Economists frequently talk about retirement age as if it is wholly

or primarily a matter of choice. Well, for some people, happily, it

is a matter of choice. But for tremendous numbers of people it is

not a matter of choice. We have just gone through the wrenching

years of downsizing, and they’re not over. We have lost whole industries that were great employers.

For many people the reality frequently is that they’re at work;

they get an announcement that there will be downsizing of ‘‘X’’

number, ‘‘X’’ hundred or thousand of employees. That is coupled

with what’s called an early retirement incentive program. What’s

the early incentive program? It says retire early; you have one

chance to elect to do so, and we’ll carry you along until Social Security kicks in.

Those programs, which have been used again and again throughout American industry and business, put people to the test. They

know that if they don’t elect the early retirement option, they’re

likely to be laid off. So they take it. That’s not a choice in my book.

Mr. Bunning, yesterday, you may have noticed the Philip Morris

Co. announced just such a program for it plants in Richmond and

Louisville. You’ve got several hundred people who are facing just

that choice right now. Are they choosing to retire, if they elect to

go out at age 57, 58, 59? I don’t think so.

Further, rather than talking solely in terms of people choosing,

we ought to be looking at the impediments to continued employment of older people. One is higher pay. Employers, personnel directors, managers know that frequently it costs more to continue

to employ an older worker than a younger worker.

What happens? Well, frequently, that higher pay provides employers with an incentive which is, unfortunately, acted upon. Another major disincentive to the employment of older people is

health care costs. Any health insurer will charge more for older

people on the payroll than for younger people. Again, personnel

managers don’t have to be rocket scientists to know that when they

do hiring. And although discrimination based on age in employment is illegal, the law is very hard—very hard—to enforce.

I do urge upon you to consider the very many other quite appropriate measures that can be taken to assure Social Security solvency without resorting to this quite radical step.
69

[The prepared statement and attachments follow:]

Statement of Merton C. Bernstein, Coles Professor of Law, Emeritus,

Washington University, St. Louis, Missouri; and Former Principal

Consultant to the 1983 National Commission on Social Security Reform

Some advocate raising Social Security’s normal retirement age so as to trim program costs. Few proposals are as misunderstood. Many think it means that people

will work longer. But, most studies show that increases, if any, would be measured

in weeks or months, not years. In fact, raising the normal retirement age would:

(1) Reduce periodic benefits—throughout retirement—for the baby boomers

(2) Produce program savings by reducing benefits for all future retirees

(3) Increase Social Security Disability insurance outlays

(4) Provide little or no net program income gain; higher benefits for those working

longer would offset additional payroll tax

(5) Cut benefits disproportionally for the low paid

(6) Bear most heavily on those already out of the work force: those who are ill,

lack currently needed skills, worked in obsolete industries, are stranded by shutdowns

(7) Increase employer pension costs

(8) Work at cross purposes with private pension provisions and practices that permit and encourage earlier retirement

(9) Ignore disincentives to employing older workers—their higher pay and health

insurance costs

Many working people do not have the choices some advocates of change assume.

Backers of higher NRA seem to ignore that labor participation rates leveled off in

the mid-1980s. The focus on changing Social Security ignores the probably more

powerful effect of employer-sponsored plans.

1. HIGHER NORMAL RETIREMENT AGE CUTS SOCIAL SECURITY BENEFITS FOR BABY

BOOMERS

Raising normal retirement age means raising the age at which full benefits become payable. The effect is to reduce the periodic and life time benefits of all who

retire thereafter. It is an issue that affects those still working

Lifetime benefits begun either before or after normal retirement age equal, on average, benefits begun at normal retirement age. With a higher normal retirement

age, periodic benefits (the amount received each month), are reduced compared with

those payable at a lower normal retirement age.

Currently, full benefits become payable to those who start benefit receipt at normal retirement age of 65. A person beginning benefits at age 62, the earliest age

of eligibility for Social Security retirement benefits, receives 80% of a full benefit,

with proportional reductions for those beginning benefit receipt in any month prior

to age 65.

When normal retirement age becomes age 66 in the next decade, a full benefit

becomes payable to those starting receipt at that age. Benefits begun at age 65 will

be 95% of a full benefit. Those begun at age 62 will equal 75% of a full benefit.

When normal retirement age becomes 67, the benefits begun at 62 become 70% of

a full benefit. Under the 1983 amendments, the deferred retirement credit (an increase for delaying benefit receipt beyond normal retirement age) moves up slowly

until, in 2009, it becomes the full actuarial equivalent of starting benefits at normal

retirement age. From that date onward, retirements delayed past the normal retirement age would produce no savings for the program.

When normal retirement age gets raised, all benefits begun thereafter, no matter

at what age, are 5% less for each year of increase. Those reductions continue

throughout retirement.

2. PROGRAM ‘‘SAVINGS’’ COME FROM BENEFIT CUTS

When normal retirement age goes up, benefit cuts are a certainty. Reported ‘‘savings’’ derive primarily from the described benefit reductions. Indeed, the ‘‘savings’’

to the program reported by the Social Security Administration’s Office of the Actuary consist almost wholly of such benefit reductions. (See the attached 1984 memo

from the Office of the Actuary projecting program savings from the 1983 amendments raising normal retirement age in the next century. No later comparable analysis exists because the Actuary assumes almost all of the program gain derives from

benefit reductions.)

But many suppose that the system would obtain more revenue through people

working longer and therefore paying more FICA (payroll tax). Whether any signifi-
70

cant number would do so is speculative. Simulation studies project that additional

work, if any, would be measured in weeks or months, not years. Whatever the sums

so derived, they would produce little or no net gain to the Social Security program.

3. HIGHER NORMAL RETIREMENT AGE BOOSTS DISABILITY INSURANCE OUTLAYS

As the attached analysis by the Social Security Administration’s Office of the Actuary shows, increased Social Security Disability Insurance (DI) benefit payments

would cancel some of the ‘‘gain.’’ DI benefits, which are not reduced because of the

age at which they start, become regular retirement benefits when an individual on

DI reaches that age. When that normal retirement age goes up, more of those already on DI will continue on those rolls and more possible eligibles will seek them.

4. CONTINUED WORK DOES NOT IMPROVE PROGRAM INCOME; ADDITIONAL PAYROLL

TAX YIELD OFFSET BY DEFERRED RETIREMENT CREDIT AND HIGHER BENEFITS

FROM ADDITIONAL EARNINGS

Whether a significant number of people would feel impelled by the benefit cuts

to continue at work is wholly speculative. But their numbers do not matter greatly

because that additional work would not yield a significant net gain to the program.

The deferred retirement credit confers an actuarial benefit increase for each month

of delayed retirement. On average, lifetime benefits are the same, regardless of

when people start to collect benefits; and higher credited earnings may increase the

benefits due, thereby offsetting higher FICA payroll tax receipt.

Each month an individual works after the earliest age of benefit eligibility, now

62, improves his/her benefits by about 5% a year . The delay raises periodic benefits

to their actuarial equivalent. That means that the program, on average, pays out

an equal amount over the beneficiary’s lifetime no matter at what age he/she starts

receipt of benefits. In sum, no matter how long an individual delays the receipt of

benefits, the program, on average, pays out the same amount over that individual’s

lifetime.

Further, that additional work may boost the average of lifetime earnings on which

his/her benefit computation is based. Such increased credited pay would boost benefits, thereby canceling some portion of the additional FICA tax paid on the additional months of work.

These factors explain why the attached analysis by the Social Security Administration’s Office of the Actuary attribute almost all of the savings from the 1983

amendments boosting normal retirement to benefit reductions.

5. CUTS BEAR DISPROPORTIONALLY ON THE LOWER PAID

One justification claimed for raising normal retirement age is that we are living

longer, are healthier and can work longer. Further, it is claimed, the benefit reductions produced by raising the normal retirement age will be offset by longer periods

of retirement and hence longer periods of benefit payment. On average, that’s true.

But that analysis does not hold up for low-pay people, especially minority men,

who tend to die earlier than the statistical average. The low paid have higher mortality rates and have the least chance of getting average lifetime benefits.

In any event, reductions in current benefits bear most heavily on low-income people because a proportionally larger part of their income goes for essential expenditures—for food, clothing, and shelter. Indeed, it is for that very reason that the Social Security benefit formula is weighted in favor of low-income earners.

From the program’s point of view, total payout is not affected by how long people

work. Whenever benefit payments begin, on average, they total the same over a lifetime. But, from the individual’s point of view, it is the amount of current benefits

that determine one’s living standard. That is especially true for those most heavily

dependent on their Social Security benefits—people who earned low or modest pay.

6. THE HARDEST HIT: THE LOWEST PAID, THOSE ALREADY OUT OF THE WORK FORCE,

THOSE LACKING CURRENTLY-NEEDED SKILLS; THOSE WHO WORKED IN OBSOLETE

INDUSTRIES; THOSE WHO CANNOT WORK DUE TO ILLNESS OR FAMILY CIRCUMSTANCES

Program data show that almost all working people start Social Security benefit

receipt before age 65, many at the earliest possible moment. Many such takers were

out of work for six months or longer before beginning benefits. In reality, many such

people are already out of the work force for good. Plant and other unit shutdowns,

downsizing, former employment in obsolete industries, obsolete skills and illness ac-
71

count for many who begin benefit receipt at the earliest age of eligibility or soon

thereafter because they are the least able to get work.

7. RAISING RETIREMENT AGES WILL BOOST EMPLOYER PENSION COSTS

Early retirement incentive programs that seek to induce employees to retire early

typically offer bridging benefits until employees become eligible for Social Security

benefits. Delaying that time by raising the age of earliest eligibility for retirement

obviously will require employers to pay bridging benefits for a longer time. Reducing

early retirement benefits by raising normal retirement age probably would have the

same effect. When I testified in 1980 before Representative Ferraro on this subject,

John Fibiger, representing the American Council of Life Insurance declared that

employer costs would go up to offset the reduction in periodic benefits caused by

boosting normal retirement age. (Hearings about Social Security retirement age before the U.S. House Committee on Aging (p. 81, 1980).)

8. RAISING NORMAL RETIREMENT AGE WORKS AT CROSS PURPOSES WITH PRIVATE

PENSION PROVISIONS AND PRACTICES THAT PERMIT AND ENCOURAGE EARLY

RETIREMENT

For decades, private and state and local government pension plans have provided

for retirement at much earlier ages than Social Security does. It is common for private plans to permit, even encourage, retirement—with full benefits—as early as

age 62, 60, 58 and even 55. This indicates that employers find it desirable to facilitate employee retirement before Social Security provides full benefits or even reduced benefits.

Remember, too, that private pension plans receive tax favorable treatment. Why

have we never heard proposals to withhold favorable tax treatment to plans with

early retirement provisions?

Bear in mind also that private plans tend to be concentrated among the betterpaid portion of the population. Professor Burkhauser’s article and editorial (‘‘Who

Takes Early Social Security Benefits,’’ 36 Gerontology, No. 6, pp. 789 and 726 (1996)

found that more than 6 out of 10 who take Social Security early retirement also received employer pensions; 2 out of 3 early retirees (at age 62) lived in households

receiving an employer pension. From this he argues that depriving them of Social

Security prior to age 65 would not cause hardship.

Isn’t it curious that those who propose radical changes in Social Security retirement age so as to discourage early retirement make no such proposal for employersponsored plans? Do we really want policies that facilitate early retirement for highpay employees but cut benefits to all others so as to discourage their retirement?

9. OLDER WORKERS’ HIGHER PAY AND HEALTH INSURANCE COSTS DISCOURAGE THEIR

EMPLOYMENT

Currently, employers pay higher health insurance premiums for older workers

and frequently higher compensation as well. Despite the ban on discrimination in

employment based on age, these factors give employers strong incentives to minimize the employment of older workers.

One reported mass separation illustrates how powerfully these disincentives operate to curtail the employment of older people. Despite some 3,000 unfilled teaching

jobs in New York City, the Board of Education implemented its second ‘‘buy-out’’

(that is, early retirement incentive plan) so as to trim higher paid teachers from the

payroll. It seemingly did not matter that this move aggravated an existing shortage

of math and science teachers. (New York Times, July 29, 1996, page B1 (national

edition).

Moreover, the law requires employers providing health insurance to offer those eligible for Medicare the choice of making the employer’s plan primary and Medicare

secondary. I have not seen any study of either employer or employee conduct in the

light of that requirement enacted to reduce Medicare costs. But surely some employers, knowing of the possible employee election of the employer’s plan, will find them

more expensive, less attractive employees. And, as if that’s not bad enough, the law

also requires that dependents eligible for Medicare be given the same choice. You

might wonder why employees and dependents would elect the employer’s plan. The

answer: many private plans cover prescription drugs and Medicare does not.

It seems both prudent and fair to remove health-care cost and Medicare election

requirements, clearly impediments to continued employment, before trying to force

people to work longer by cutting their Social Security benefits.
72

MANY DO NOT CHOOSE TO RETIRE; THEY ARE MADE TO RETIRE

Much of the discussion about retirement age assumes that almost all people

choose to retire. That’s a decidedly questionable assumption to make in the era of

downsizing—which isn’t over yet.

Just ask the people living in the cities and towns once populated by the aircraft,

clothing, electronics, farm equipment, hat, photographic, shoe, steel, and textile industries, just ask the mayors of cities whose downtowns have died, whether employees chose to give up their jobs. For example, Missouri was the last bastion of the

domestic shoe manufacturing industry. One by one the shoe plants, strung along

Interstate 44 in small towns, shut down. Their former employees didn’t have many

choices, certainly not where they lived.

Read any story about downsizings and you will see that they feature early retirement incentive plans. When many large companies announce plans to trim hundreds or thousands of jobs, they offer older employees the choice of retiring early

with a payment to bridge the time until Social Security kicks in. Employees know

that if too few ‘‘choose’’ to retire, the necessary number will be fired. Such offers

usually get accepted and often are oversubscribed.

It is no secret that older separated employees have a tough time finding employment, let alone obtaining jobs as good as the ones they lost. Two studies of major

layoffs showed that about half of each group numbering in the hundreds of thousands got no job or ones inferior to the jobs they lost. Older employees especially

suffered economic demotion.

Many economists talk about the factors that affect employee ‘‘choice’’ whether or

not to retire. Those discussions and analyses make some daunting assumptions—

that people know what their pension plans provide, how much in benefits they can

expect under varying retirement age scenarios, and what Social Security provides

at differing ages. And how many people know and understand Social Security’s retirement test and can do the math to show the interaction of earnings and benefits

as well as apply the differing formulas for those aged 62–64 and those 65 and older?

Most people start Social Security benefit receipt well before age 65—despite the

fact that Medicare does not become available to them until age 65. That seems to

argue that the inadequacy of benefits does not discourage retirement. And how

many know that the courts allow employers to cancel their promise to pay for retiree health insurance?

I suggest, the rational choice picture drawn by economists is highly questionable—certainly for the mass of the population.

Some employed people may have sufficient knowledge about their pension plans

and Social Security benefits to make a rational choice about what their income

would be if they retired. Even if they do, can we expect that reducing periodic benefits by 5% or even 10% will shape their decision?

On top of that, to have a choice, older employees must have the prospect of continuing in a job or getting a new one. Often, that’s the rub.

RAISING AGE OF EARLIEST ELIGIBILITY—A DISASTER FOR THE LOW PAID, LOW

SKILLED AND ILL; PROGRAM SAVINGS, LITTLE OR NOTHING; ECONOMIC GAINS

SPECULATIVE AT BEST

Some advocate not only raising the normal retirement age, but also raising the

age of earliest eligibility—with quite questionable reasoning.

The employees who have no choice but to retire tend to be the people with ill

health, obsolete skills, and those marooned in communities in which the major employer has disappeared. We know that people with low income are the people who

rely most heavily on their Social Security benefits. Making them wait until age 65

could be disastrous.

What also makes this proposal questionable is the structure of Social Security

benefits. If benefits begin at age 65, they will be larger than they would be at age

62—their total, on average, should be equal actuarially over the beneficiaries’ lifetime. Put another way, changing the age of earliest retirement would not save Social Security any money on average, because the deferred retirement credit purposely makes average life-time benefits equal no matter at what age a person begins

drawing benefits.

Professor Burkhauser reasons that more people at work will produce more goods

and services, more for all of us to share. That surely is a worthy goal. We ought

to pursue that enlarged pie by removing impediments to employment of older people, by providing fuller opportunities for education and training at all ages. But

bludgeoning some people to work—primarily those without second pensions—seems

a very distasteful way to go about creating a larger pie.
73

Moreover, labor participation rates leveled off in the mid-1980’s. So, the proposal

to rectify the trend to earlier retirement is a bit like the Maginot Line. It’s designed

for the last war.

Before making any radical changes in Social Security, we should turn our attention to the costs and benefits and roles of employer-provided pensions, especially

when their coverage is shrinking, having fallen below half of the full-time work

force.

LET’S KEEP AN EYE ON DEATH RATES AND LONGEVITY

A funny thing happened to the death rate in 1993—it went up. Concomitantly,

life expectancy dropped for both males and females, both at birth and at age 65,

not by very much, to be sure. (See attached Table II. D2 from the 1997 Annual Report of the OASDI Trustees, page 63). While the death rate dropped again in 1994,

it was above the 1992 rate, with no longevity improvement at age 65 for women.

Missouri health officials speculated that the increased death rate might reflect the

greater use of living wills. A later survey elsewhere noted that health care providers

tend to ignore patient wishes on terminating life. Heightened interest in this subject

could lead to more self-determination about when to end one’s own life. Just where

that movement will go, can hardly be foretold just now. But, it could lead to much

more such decision making.

Were that to develop, earlier deaths would have only slight effect on Social Security outlays but probably a more substantial effect on Medicare expenditures. Moderating that program’s costs would make meeting Social Security’s obligations more

manageable.

SUMMARY—RAISING SOCIAL SECURITY NORMAL RETIREMENT AGE AND EARLIEST AGE

OF ELIGIBILITY MAKE QUESTIONABLE PUBLIC POLICY

Raising Social Security’s normal retirement age has an initial plausibility. But,

when the public discovers that raising normal retirement age would reduce benefits

to all qualifying for retirement thereafter, that option becomes less attractive. The

chilly public reception given to raising the age of eligibility for Medicare suggests

that changing normal retirement age will be greeted skeptically, at best.

As we explore ways to assure Social Security solvency, as the media and public

become better acquainted with the modest measures capable of achieving that desirable goal, more radical measures like changing normal retirement age will appear

less urgent and that much more undesirable.

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Chairman B

Dr. Richard Burkhauser.

UNNING. Thank you, sir.

f

STATEMENT OF RICHARD V. BURKHAUSER, SYRACUSE

UNIVERSITY, CENTER FOR POLICY RESEARCH, SYRACUSE,

NEW YORK

Mr. BURKHAUSER. Thank you, Chairman Bunning.

I’d like to agree with Mr. Neal that our Social Security system

was the best system the government could have devised to protect

older persons in the thirties. It met the needs of a country in which

average life expectancy was about age 60, and little of value to society was expected from those lucky enough to reach age 65 and beyond.

Furthermore, the Great Depression had shaken the belief that

our economy could grow enough jobs for those who wanted to work.

Under the circumstances, setting a retirement age at 65 and penalizing those who worked beyond that age through lost benefits made

some policy sense. Two major changes have occurred in our society

since the thirties that make it painfully obvious that the norms of

that long ago period do not describe our country as we approach

the 21st century.

The first is life expectancy. Life expectancy is now approaching

age 80. And even more important, most Americans can expect to

be free of severe work impairments well into their seventies. We
76

are a much healthier society, measured either by morbidity or mortality, and society has much to gain by encouraging older persons

to continue to work.

Second, our economy has proven to be the job creation marvel of

the world. Those who argued that the great transformation, for instance, of women into the work force would displace men have been

grossly proven wrong. Today, unemployment rates are lower than

they have been since the sixties.

The issues for the 21st century will revolve more around how to

retain highly skilled and healthy members of the aging baby boom

generation, of which, by the way, I’m the oldest member, than figuring out how to force older people out of the labor force, which

was much of what the early Social Security retirement benefit program was about.

The good news is that policy changes already made in the 1983

amendments to the Social Security Act are working. The trend toward earlier and earlier retirement is over. If you look at Tables

2 and figures 1 and 4 in my formal statement, you’ll see that the

labor force participation rates of men aged 60 and 64 and 65 to 69

between 1985 and 1996 are far above what straightline projections,

based on the previous 25 years of experience, would have predicted.

The same is true for older women.

Raising both early and normal retirement ages will even further

increase work at these ages, and as our healthy lifespans increase,

it makes sense to do so, both from a social and a financial perspective.

Now will there be hardships? Yes. This will cause hardships for

some. However, we have great data—the Health and Retirement

Study which the Congress has financed since 1990 through its appropriations to the National Institute on Aging. This study follows

the latest group of people moving toward early retirement age, so

we can actually see what the characteristics of people who are taking early Social Security benefits are.

In tables 3 and 4 of my formal statement, I look at the current

cohort of men and women who first took Social Security benefits at

age 62 in 1992–94, and compare them with those who postponed

benefits. The big story is, on average, early takers are as healthy

and as wealthy as postponers. The stereotype of an early taker, unable to work and lacking private pension protection, does not fit

most early takers. On average, men who take early Social Security

benefits at age 62 appear to be nearly as well off financially and

as healthy as men who postpone acceptance. Overall, women who

take early Social Security benefits at age 62 are better off financially, but less healthy than women postponers.

If you look at the typical male early Social Security taker, black

or white, that person is also eligible to receive employer pensions.

Among white males, 66 percent of early takers have employer pensions. Among black males, 61 percent have employer pensions.

The typical male taker, black or white, has no health condition

that affects his ability to work. Few male takers, black or white,

fit the stereotype of being both in poor health and dependent on Social Security as their only source of pension income. I estimate

about 7 percent of white males and 11 percent of black males fit

this stereotype.
77

1The discussion in this section of my talk is based on Burkhauser and Quinn (1997).

These results from the Health and Retirement Study suggest

that the majority of men who take early Social Security benefits at

age 62 are also eligible to receive an employer pension, are in good

health, and have assets similar to those who postpone Social Security benefits. It’s the rare male taker who is both in poor health

and dependent on Social Security.

Most older workers who retire early do so because they are financially able to. For such workers, raising the early retirement age

will not cause major hardships and will increase overall productivity.

The 1935 Rolls Royce was undoubtedly the greatest car made up

to that time, but no one would argue that the 1935 Rolls Royce is

the car that we ought to be driving around in today. There have

been changes in society and changes in technology that make this

obvious. When I argue for changes in the Social Security system I

am not arguing that the system has failed; rather, I am arguing

that our society has changed and the Social Security system should

change with it.

Thank you.

[The prepared statement follows. Additional materials are being

retained in the Committee files.]

Statement of Richard V. Burkhauser, Syracuse University, Center for

Policy Research, Syracuse, New York

The Report of the 1994–1996 Advisory Council on Social Security (1997) finds a

deterioration in the long range financial condition of Social Security and urges that

concentrated action be taken promptly to reverse this trend. Raising both the normal retirement age and the earliest age of retirement is one method of accomplishing this result.

In contemplating such increases in the retirement ages for Social Security, two

issues arise: (1) would a larger number of people stay in the work force past age

62? (2) would this cause serious and widespread economic hardship to a large number of people who would still not work past age 62? Preliminary evidence suggests

the answers are yes and no respectively. Thus, I favor raising the retirement age

as one method of adjusting Social Security policy to the improved health and life

expectancy of the baby boom generation.

I. WOULD RAISING THE EARLIEST RETIREMENT AGE TO 65 INCREASE WORK? 1

Table 1 shows the labor force participation rate of older males from 1940 through

1996. There is now general agreement that disincentives to work at older ages contained in both Social Security and employer pension plans played an important role

in the dramatic drop in retirement age from 1950 through 1985 as shown in this

Table. (See Quinn and Burkhauser 1994 for a review of the literature.) Nonetheless,

skepticism exists over the ability of policy changes to both stop this trend and increase work at older ages. In my view, not only is it possible for social policy to encourage workers to stay in the work force longer, but changes in public policy already set in motion by the 1983 Amendment to the Social Security Act, together

with a strong economy, have already ended the trend toward early retirement. Figures 1 through 4 in Burkhauser and Quinn (1997) show how profoundly the trends

in labor force participation rates have changed for older men and women since 1985.

The figures show the labor force participation rates of older men (aged 60 to 64,

aged 65 to 69) and older women (aged 55 to 59, aged 60 to 64) from 1964 through

1996, and use a linear time trend based on the 1964 to 1985 data to project labor

force participation rates from 1986 through 1996. In all cases, projected rates are

far below actual rates. Table 2 from Burkhauser and Quinn (1997) plots these differences and finds that over two million more older men and women in these age

ranges are in the labor force than would have been predicted based on past trends.

While it is difficult to disentangle the relative importance of specific policy changes

from macroeconomic factors and changes in personal characteristics that occurred
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2The discussion in this section of my talk is based on Burkhauser and Phillips (1997).

3 Under current Social Security rules, the normal retirement age will gradually increase to age

67 over the first part of the 21st century, but the earliest age of benefit eligibility will remain

age 62. Burkhauser and Quinn (1994) review the economic literature and conclude that, unless

major changes take place in employer pensions, these changes alone will have only a minor effect on employment.

over the period, it is possible to say from Table 2 that the long post-World War II

trend toward early retirement is over.

Removing disincentives to work or constructing incentives to work would have no

impact on the labor force participation of older persons if they had no desire to work

longer. But this is not the case, as McNaught, Barth, and Henderson (1989) report

using Harris poll information. This survey evidence suggests that many older Americans would like to work more than they do. Quinn and Burkhauser (1994) analyzed

the subsample of this survey who were still employed and found that a substantial

minority—over one million—expected to stop work before they wanted to. Many

more older workers preferred part-time work than had it. These are the ‘‘unexpected’’ older men and women workers captured in Table 2.

Returning the Social Security earliest retirement age to its 1960 level of age 65

as the normal retirement age is increased to 67 or higher over the next two decades

would send an important market signal to employees and employers that additional

work at older ages is expected. In my view such a change in Social Security policy

would have a substantial impact on employment at those ages. But additional research is necessary to more accurately determine the size of this change. Fortunately a major new data set—the Health and Retirement Study—will allow researchers to make such estimates.

II. WOULD RAISING THE EARLIEST RETIREMENT AGE TO 65 CAUSE WIDESPREAD

ECONOMIC HARDSHIP 2

Raising both the normal and earliest age of eligibility for Social Security benefits

would increase employment among older people and delay acceptance of Social Security benefits.3 This would both reduce the future liabilities of the Social Security

system and increase general economic production. But these advantages of returning the first age of eligibility for benefits to 65 must be weighed against the negative

impact on economic security it would cause at ages 62 through 64, especially for

those who are limited in their ability to work because of health or who have no employer pension plan to cushion their transition out of the labor force and into retirement.

Policymakers considering an increase in the minimum age for early Social Security benefits need to know how workers currently transition into retirement and to

understand the circumstances surrounding this important life event. If early beneficiaries were in good health and could work, or could rely on employer pension income to support their decision to retire earlier than age 65, then such a change,

while painful, would be unlikely to have serious economic consequences. However,

for early beneficiaries who are limited in their ability to work because of health or
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are not eligible for employer pensions, raising the early Social Security retirement

age to 65 could cause serious hardship.

Evidence from the Health and Retirement Study (HRS)

The HRS is currently following a cohort of men and women who were aged 51

to 61 in 1992 when they were first surveyed. The second wave of data, which contains information on these same people in 1994, provides a first look at the characteristics of early Social Security retirees. Using data from the HRS, Table 3 looks

at men and women who turned age 62 between wave 1 and wave 2 and compares

the employer pension eligibility, net assets, health, and household pension receipt

of those who took Social Security benefits at age 62 (takers) to those who did not

(postponers). This is done for the entire population and by race and gender groups.

(This table is an extension of work first developed in Burkhauser, Couch, and Phillips 1996.)

KEY POINTS OF TABLE 3

• On average, men who take early Social Security benefits at age 62 appear to

be as well off financially and as healthy as men who postpone acceptance.

• Overall, women who take early Social Security benefits at age 62 are better off

financially but less healthy than women postponers.

• There are clear differences between racial groups. Black men this age have substantially less wealth and poorer health than white men. Black male takers are

wealthier but in poorer health than black male postponers. Black women have substantially less wealth than white women. Black women takers are wealthier and

healthier than black women postponers.

Table 4 separates takers and postponers based on employer pension and health

status within race and gender groups.

KEY POINTS OF TABLE 4

• The typical male early Social Security taker (black or white) also is eligible to

receive an employer pension—white males 66 percent, black males 61 percent.

• The typical male taker (black or white) has no health condition that affects his

ability to work—white males (79 percent), black males (72 percent).

• Few male takers (black or white) are both in poor health and dependent on Social Security as their only source of pension income—white males (7 percent), black

males (11 percent).

• Women takers (black or white) are less likely to have an employer pension than

male takers and more likely to be in poor health.

These results from the HRS suggest that the majority of men who take early Social Security benefits at age 62 are also eligible to receive an employer pension, are

in good health, and have net assets similar to those who postpone Social Security

acceptance. It is the rare male taker who is both in poor health and dependent on

Social Security benefits as his sole source of pension income—7 percent for white

males, with only a slight increase to 11 percent for black males.

These results do not suggest that raising the earliest retirement age would be

painless or that some workers would not suffer major losses in economic well-being.

But it does suggest that in 1994, the typical male worker taking Social Security benefits at age 62 was physically able to continue working or was eligible to receive

an employer pension benefit and thus unlikely to be devastated financially by legislation raising the earliest age of eligibility for Social Security retirement benefits.
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FUTURE RESEARCH

These early results from the HRS only begin to reveal the health and economic

characteristics of today’s older workers as they make the transition between work

and retirement. As additional waves of data become available and are linked to previous data waves, as well as to Social Security records, researchers will be able to

more fully explore the transition into early retirement from a multi-period perspective. This will allow researchers to see better how the economic well-being of this

cohort changes and to measure the degree to which our retirement system protects

older people from dramatic drops in economic well-being, or even from a fall into

poverty.

More importantly, these results begin to identify the critical variables that influence the work to retirement transition. While these results suggest that the majority of workers who retire early do not have work-limiting health conditions and are

not significantly worse off financially or from a health perspective from those who

postpone early Social Security acceptance, more sophisticated analysis is necessary

to estimate the importance of health, employment conditions, and government policy

on the retirement decision of older workers.

Disentangling the importance of policy variables from changes in health is the

critical unresolved behavioral question with respect to the retirement decision. Aggregate data in Table 1 and in the figures show that the trend toward earlier retirement that characterized the American labor market from the end of World War II

through 1985 has ended. The labor force participation rates of both older men and

women are higher than straight line trends predict. Some of this increase is the result of policy changes which have reduced the anti-work aspects of Social Security.

The HRS data will enable researchers to more fully unravel the factors behind the

retirement decision by looking at how public policy variables, such as Social Security

and employer pension benefit levels, and changes in these levels based on additional

work years, interact with health and general economic conditions, which are less affected by public policy, on the retirement decision.

REFERENCES

Advisory Council on Social Security. 1997. ‘‘Report of the 1994–1996 Advisory Council on Social Security.’’ Washington, DC: Social Security Administration, January.

Burkhauser, Richard V., Kenneth A. Couch, and John W. Phillips. 1996. ‘‘Who Takes Early

Social Security Benefits: The Economic and Health Characteristics of Early Beneficiaries,’’ The

Gerontologist, 36(6) (December): 789–799.

Burkhauser, Richard V. and John W. Phillips. 1997. ‘‘Who Takes Early Social Security Benefits: Results from the Health and Retirement Study,’’ Center for Policy Research, Research Note,

The Maxwell School. Syracuse, NY: Syracuse University.

Burkhauser, Richard V. and Joseph F. Quinn. 1994. ‘‘Retirement and Labor Force Behavior

of the Elderly.’’ In Linda Martin and Samuel Preston (eds.), Demography of Aging. Washington,

DC: National Academy of Science, pp. 50–101.

Burkhauser, Richard V. and Joseph F. Quinn. 1997. ‘‘Pro-Work Policy Proposals for Older

Americans in the 21st Century,’’ Center for Policy Research Policy Brief No. 9, The Maxwell

School. Syracuse, NY: Syracuse University.

McNaught, W., M.C. Barth, and P.H. Henderson. 1989. ‘‘The Human Resource Potential of

Americans over 50,’’ Human Resource Management, 28: 455–473.

Phillips, John W. 1997. ‘‘Essays on the Accumulation and Transfer of Wealth at Older Ages,’’

Ph.D. dissertation, Department of Economics, Syracuse University. Syracuse, NY, April.

Quinn, Joseph F. 1997. ‘‘Retirement Trends and Patterns in the 1990s: The End of an Era?’’

The Public Policy and Aging Report (Summer): 10–14.

U.S. Department of Health and Human Services. 1996. Annual Supplement to the Social Security Bulletin. Washington, DC: U.S. Government Printing Office.

Congratulations.

Chairman BUNNING. You got that all in in less than 5 minutes.

f

I messed up your name the first time. So I’m going to call you

‘‘Mr. G.’’
86

STATEMENT OF RON GEBHARDTSBAUER, SENIOR PENSION

FELLOW, AMERICAN ACADEMY OF ACTUARIES

Mr. GEBHARDTSBAUER. That’s what my Dad was called.

Good afternoon, Mr. Chairman, Members of the Subcommittee.

My name is Ron Gebhardtsbauer, and I’m the senior pension fellow

with the American Academy of Actuaries. The Academy is the nonpartisan organization for actuaries in the United States, and as

such, we don’t endorse legislation. Rather, we analyze it for its advantages and disadvantages.

We’re here today to talk about raising the normal retirement age

because we’re living a lot longer, and it seems like the logical solution to solving Social Security’s financial problems. But it has many

complex interactions, as you mentioned, Mr. Chairman, with other

programs and difficult effects on various subgroups.

As my written testimony shows, I can get into a lot of those

issues, but I’d like to save time to avoid the red light and move on,

focusing on, what are some of the options that we can use in order

to make some of these ideas of raising the retirement age more

workable. For instance, using Social Security to enable people to

phase into retirement and go into part-time employment, and get

a part-time Social Security benefit.

But before I get into that, let me first talk about some of the concerns. First of all, it was mentioned earlier that raising the Social

Security normal retirement age decreases everybody’s benefits, but

one advantage of increasing the normal retirement age is it doesn’t

decrease everybody’s benefit; it doesn’t decrease the benefits for

disabled people. They will still get 100 percent of their benefit.

One other concern is that, by increasing the normal retirement

age, benefits at age 62 become smaller and smaller, and could become inadequate for some people with low incomes. There are some

options here that maybe you might want to consider, and of course

one of them is to not give a benefit age 62 anymore, to increase

the age at which you can get your benefit at the earliest age. Another idea, another option, is to maybe guarantee a benefit equal

to the poverty level, a minimum benefit of that amount.

Of course, these options not only have advantages, they also have

disadvantages. For example, not having benefits at 62 anymore

would be a special difficulty for people who have more strenuous

jobs, who often retire early, or people who are partially disabled

and can’t get a disability benefit because they’re not disabled

enough. For those people, they won’t be able to get a Social Security benefit, and they may have a hard time finding a job.

Also, there’s concerns for people who are minorities and people

with low incomes who don’t live as long, but as we discussed a little bit earlier, Social Security is not a regressive system. The tilt

in the benefit formula (and the survivor and disability benefits)

make it progressive, even for minorities who don’t live as long.

Another thing we need to think about before we raise the retirement age are these two questions: Can we work past 67? And as

discussed already, not only are we living longer, but we’re also

healthier at older ages, and in fact these studies indicate that

someone age 70 now is more healthy than someone age 65 back

around when Social Security was created.
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Another question is, will employers keep us beyond age 67? And

the evidence is there that employers are less likely to hire older

employees, and one of the reasons is because older workers, as

mentioned earlier, do cost more. Their health insurance, for instance, is more expensive. (However, their pension and postretirement health costs can be lowered, when they work longer.)

So let’s talk about the effects on employers of raising the normal

retirement age. While increasing the normal retirement age will

keep the employer’s FICA taxes down, it may shift the cost of retirement to the employers instead. They may end up with older

work forces, and their benefit costs will go up. If the employers decide that they want to encourage the employees to retire at a

younger age, they could do it by increasing their pension benefits,

but then that will also cost a lot.

We want employers to buy into this idea, too. Maybe we have an

option here. How can we get employers and employees to buy into

this? Well, I’ve got a chart over here on my left that I’d like you

to look at, and it illustrates something that would be helpful. If you

look at this chart, it shows the average annual increases in the

labor force, and back in the sixties and the seventies, because of

all the women coming into the work force and the baby boomers,

increases in the labor force were big. It’s now plummeting, though,

and in fact when you reach the year 2008, the increase in the work

force will be less than the increases in the population—for the first

time in 50 years, since 1960.

So that may change our thinking. Employers may want to

rethink their retirement strategies. Instead of pushing employees

out when they reach a certain age, they may want to encourage

employees to stay.

Well, there are ways in which Congress can help on this. If Congress, for instance, lets people choose when they want to retire and

how to phase in their retirement, instead of having Social Security

determine when you retire by using this earnings test, as we discussed earlier, then there’s more choice involved, but also it gives

employers the chance to continue employing their workers, maybe

at a part-time level, but also not have as high payroll costs, due

to the payment of a partial Social Security benefit. This could encourage employees to work longer (although part time), rather than

the earnings test which discourages work.

Also, it’s already being done. The Federal Employee Retirement

System already pays part-time benefits to part-time retirees that

have already retired. And you may want to give this option to employers to allow them to phase-in retirement for their employees by

giving them part of their pension at an age.

This has some advantages, as I mentioned before, but it also has

a disadvantage that was mentioned earlier. If you eliminate the

earnings test, you end up having cash problems now, but in the

long run it does not lose Social Security money. So that’s another

option that we might want to think about.

And I see my red light came on, so I’d better stop here.

[The prepared statement and attachments follow:]
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1Since people born in 1938 get their wages indexed one more year than people born in 1937

(and one less COLA), there is little likelihood that a notch will occur (assuming the wage index

for 1997 wages will be more than the COLA in 1999). Even a 4 year phase-in would probably

not create a noticeable notch. 2 Increasing the retirement age by 3 years from 67 to 70 would be similar to a proposal decreasing retirement benefits by about 21%.

Statement of Ron Gebhardtsbauer, Senior Pension Fellow, American

Academy of Actuaries

The American Academy of Actuaries is the public policy organization for actuaries

of all specialties within the United States. In addition to setting qualification standards and standards of actuarial practice, a major purpose of the Academy is to act

as the public information organization for the profession. The Academy is nonpartisan and assists the public policy process through the presentation of clear, objective analysis. The Academy regularly prepares testimony for Congress, provides

information to federal elected officials and congressional staff, comments on proposed federal regulations, and works closely with state officials on issues related to

insurance.

Chairman Bunning, committee members, staff, and fellow panelists, Good Afternoon. My name is Ron Gebhardtsbauer and I am the Senior Pension Fellow at the

American Academy of Actuaries. The Academy is the nonpartisan public policy organization for actuaries in the United States and does not endorse or propose legislation. Instead, we analyze the potential effects of legislation and evaluate its advantages and disadvantages relative to current law.

In the interest of time, I have provided the subcommittee with copies of my full

testimony on this subject, so that I can focus on the most important points at this

hearing, namely:

(1) What effects would an increase in the Normal Retirement Age have on individuals, employers, and the Social Security system?

(2) If Congress decides to increase the Normal Retirement Age, what should it be?

EFFECTS OF AN INCREASE IN THE NORMAL RETIREMENT AGE (NRA)

Many proposals to solve Social Security’s financial problems have suggested that

the retirement age should be increased, because our life expectancies are much

higher today than they were when Social Security was created. Currently, the Normal Retirement Age, or age for full retirement benefits, is 65, the same as it was

at the beginning of Social Security. It starts to gradually increase to age 67 in just

2 years (the year 2000) at which point the Normal Retirement Age will become 65

and 2 months for people born in 1938. If these people still retire at age 65, their

retirement benefits will be about 1% lower 1 than if the Normal Retirement Age had

remained at 65. If the NRA had increased to age 66 all in one year, benefits would

have dropped immediately by about 7%. This large decrease would be similar to the

notch baby benefit decreases which caused much alarm among the elderly in the

1980’s. Phasing in the increase in retirement age over 6 years from 2000 to 2005

avoids this problem. Eventually the NRA reaches age 67 in 2022 for people born

in 1960 and later. (A chart in my attachments provides these changes in detail,

along with the retirement ages proposed by the Advisory Council.)

EFFECTS ON INDIVIDUALS

Thus, any proposal to gradually increase the normal retirement age by 1 year is

similar to a proposal to gradually decrease the benefit formula by about 7% for people who still desire to retire at the same age.2 Because we are living longer (on average), some contend that this is not a decrease in benefits at all—it is keeping total

lifetime benefits the same. These people argue that keeping the retirement age frozen at 65 is actually a benefit increase, because benefits are gradually being paid

for more years. However, if you look at it from the point of view of money’s worth

calculations, you will see that the return for future beneficiaries will not be as good

as the returns received by current beneficiaries (but that is also because of other

factors).

Disabled beneficiaries will not be hurt. Raising the NRA will not seem like a good

idea for someone who cannot work any longer. If they qualify for a disability benefit,

however, there is good news. Disability benefits will not be reduced by an increase

in the retirement age. Disabled individuals will still get 100% of their full benefit

(or Primary Insurance Amount), no matter how young they are at disablement (and

they will get the benefit as long as they are disabled). This will encourage more people around age 65 to file for disability benefits (thus offsetting some of the savings
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3The early retirement reduction for spousal survivors at age 60 is frozen at 71.5% of the PIA

by law. 4Disability benefits can be decreased too, if so desired. The PSA proposal suggested decreasing disability benefits by the same percent as retirement benefits payable at age 65. This would

save 0.5% of covered payroll or almost 1/4th of Social Security’s total financial problem. However, in 2083 when the NRA reaches 70, this proposal would reduce disability benefits by 30%

from what someone retiring at age 70 would get. 5 Unemployment levels may be low now, but what happens when they go back up? Could the

eligibility age be indexed to unemployment levels for older workers?

of the higher NRA), and the actuaries at Social Security have taken this into account in their cost projections for the current system and the various proposals.

Current beneficiaries and some future dependents and survivors won’t be hurt.

Other people who will not be affected by an increase in the retirement age are current beneficiaries (due to the prospective phase-in), survivors that are age 60 or

younger on entitlement 3, children, and parents (or grandparents) caring for eligible

children. Of course, this means that increasing the retirement age doesn’t save quite

as much as an across the board 7% decrease in benefits, but that is intentional, and

not a surprise. 4

Inadequate Benefits: A concern with raising the Normal Retirement Age is that

it could create inadequate benefits at age 62. For example, if the normal retirement

age becomes 70, then the age 62 benefit will be only 55% of the age 70 benefit. Some

people who opted for the age 62 benefit might use up their savings quickly and need

public assistance (thus costing the government more elsewhere). This could be happening at the same time that employers are reducing their post-retirement medical

plans, and government may have to cut back on Medicare and Medicaid. Thus, retirees would need more income, not less. The Gramlich Individual Account proposal

addressed this concern by decreasing benefits by 7% but only for benefits above the

first bendpoint. Proposals to raise the NRA can also resolve this through minimum

benefits, or by increasing the earliest retirement age (i.e., the Earliest Eligibility

Age), or people could work longer.

Minimum Benefits: A minimum benefit equal to the poverty level (or some percent

of poverty) might resolve this concern about inadequate benefits. However, it would

have to be implemented carefully, since there are numerous concerns, such as:

(1) Cost,

(2) Who is eligible for it? (i.e., should someone who worked only 10 years under

Social Security get the minimum benefit?)

(3) Would it be phased in (i.e., Should someone who worked 15 years get as much

as someone with 40?)

(4) Once someone qualifies for a year of work or becomes eligible for it, there is

no more incentive to report income or pay the tax.

(5) Would it be reduced for early retirement?

(6) Would disabled beneficiaries get it? Receipt might discourage rehabilitation

and going back to work.

Increase the Earliest Retirement Age: Another solution for inadequate benefits at

age 62 is to increase the earliest retirement age when increasing the normal retirement age. This would be a revenue raiser, and it would solve 10% of Social Security’s actuarial imbalance. However, some people (such as blue-collar employees who

commonly retire at a younger age) may need Social Security income to start at age

62. The reason the earliest eligibility age was lowered to age 62 in 1961 (1956 for

women) was due to a lack of jobs and the large number of unemployed. A response

might be that people need income only if they can’t work, and the disability benefit

is for that purpose. But some older people may not be able to get jobs if unemployment levels are high 5 or if they are disabled, but not quite enough for Disability

Benefits. Finally, if proponents of keeping age 62 are correct, then they would be

just as correct about some people needing the income at age 60. Should the eligibility age be lowered to 60 or 55 then? That would be expensive, and the benefits

at age 55 would be very low.

Blue Collar Workers: As noted above, there is a concern for blue-collar workers

(and others with strenuous jobs) who are often retired or laid off early. Increasing

the retirement age affects these workers (and their employers) disproportionately.

For example, if the NRA became 70, they would need their employer-sponsored pension plan to pay pension supplements for 5 more years. Employers will resist this

due to the larger expense entailed. If pensions become much more expensive for

these workers, employers may speed up the automation of their jobs. Alternatively,

blue collar workers may need retraining to obtain another (and very different) job

to tide them over that extra 5 years until they can get a full Social Security benefit.

Getting a new job at an advanced age is quite difficult though, especially if your

prior job was very different.
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6See Chronic disability trends in elderly US populations: 1982–1994 by Manton, Corder, &

Stallard. In 1982, 14.1% of elderly between 65 and 74 were IADL (Instrumental Activities of

Daily Living) or ADL impaired or institutionalized. In 1994 this decreased to 11.5%. For ages

75 to 84, it dropped from 31.9% to 26.9%.

Low Income Workers: There is also a concern for lower income workers who often

don’t save (or can’t save) and who have little or no pension from their employer.

For them, Social Security is their primary (and sometimes only) source of income

in retirement. If they still retire at a young age, their Social Security benefits will

be much lower, which makes it much more likely that their income will be below

poverty levels. Establishing a minimum benefit will help them. Otherwise, they will

have to work longer or resort to SSI (thus increasing Federal and State costs). This

may not be as bad as it seems, since there are job opportunities for elderly workers,

but they are more likely to be at low wages.

Minorities: There is also a concern for minorities that have lower life expectancies.

This may actually be more a function of income level, and would apply to blue-collar

workers too. They often do not live as long as white collar and higher income workers. This reduces the return on the contributions they made into the system. Some

people say the benefits are regressive because of this. However, studies by Robert

L. Brown at the University of Waterloo and other actuaries show that the progressive tilt in the Social Security formula (along with the disability and survivor benefits) more than offsets their shorter life spans. This would still apply after the

change in retirement ages. A guaranteed minimum benefit could also help allay this

concern.

Partially Disabled Older Workers. Another group of concern is the older person

whose health is poor, but not poor enough to satisfy the disability definition. They

will have a difficult time getting a job. Currently, if they are age 65 or older, they

get a full benefit. In the future, that will not be so. Of course, determining whether

someone is disabled is not easy, especially at older ages. But Social Security already

has a more lenient rule for determining disablement at older ages in regulation

§ 404.1563, which may address this concern to some extent.

Finally, the number of unhealthy people at older ages is much less than the number of healthy people. Should they drive the retirement age policy for everyone?

Maybe not, but we have to answer 3 questions:

(1) Can we work past age 67?

(2) Will we work past age 67? and

(3) Will employers keep us past age 67?

Can we work past age 67? Currently about 20% of men age 70 work. In 1940 (before Social Security), the workforce participation rate for males age 70 was almost

50% (see chart). If we are healthier now and jobs are less strenuous and unemployment is down, then maybe more than 50% could work now.

Older People are More Healthy Now than in the Past: Recent studies show that

not only are we living longer, but we are healthier (physically and mentally) at older

ages than people in the past. Rates of impairment among the aged are down.6 Indeed, the average person age 70 now is probably healthier than the average person

age 65 when Social Security was created. In addition, health issues can affect the

retirement decision in different ways. The onset of a disability will induce us to retire, since we can’t work any longer. Alternatively, if we are just healthy enough

to work, there are incentives to work until we can get Medicare (or until we can

get Post-Retirement Medical coverage through our employer plan, if sooner). If we

can’t get Medicare until age 70, it may encourage some of us to work until then.

Will We Work Past Age 67? Even if we can work past age 67, will we? We may

just prefer to retire earlier. Retirement is not just a decision regarding our health,

nor is it just a decision regarding our preference for leisure over work. It is also

a financial decision. Many people don’t have the finances to retire when they want.

For example, work force participation rates in 1940 were high because the income

was needed. In the 1960s, work force participation rates for men dropped dramatically because they could get a Social Security benefit at 62 (enacted in 1961 for men

and 1956 for women) and Medicare was available (enacted in 1965). Employer Pensions and Post-Retirement Medical plans also help us retire early.

Do Later Retirements Increase National Productivity? Earlier retirements, of

course, means the nation loses out on some of the productivity that our seniors

could have given us. On the other hand, some productivity of a younger person could

be lost, when unemployment levels are high. When someone retires, it opens up the

possibilities of getting more productivity from younger people. Not only can the

younger employee be more productive, by having the job (or a better job), but now

they won’t need to worry about supporting their parents.
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7Workers over 70 can now earn a wage and not have their Social Security benefit reduced.

8See page 236 of Volume I of the 1994–1996 Advisory Council report—Item F.6.

9Post-Retirement Health plans would not have to pay amounts paid by their active employee

health costs if they are between their earliest retirement age and age 65. If the employee is

over 65, the employer plan would only benefit from the non-Medicare benefits that their postretirement health plan would have paid. However, the active employee health plan would have

to pay all health costs since Medicare is the secondary payer there. It would be difficult for

Medicare to become the secondary payer to a post-retirement plan, because then employers

would drop the plans. Employers can’t drop their active life plan (unless they drop it for all active employees) because of ADEA. 10For example, the employee could lose a temporary supplement. Or costs could decrease if

the employee is no longer accruing benefits due to a service maximum. If the employee is older

than their NRA or the first age for unreduced benefits, their retirement benefit can be suspended while they are working, if they are notified.

Can We Be Encouraged to Work Longer? (and How?) Recently, however, work

force participation rates have increased at age 70, possibly due to a relaxation of

the Social Security earnings or retirement test.7 At least some of us can work at

age 70. Completely eliminating the retirement test after age 65 would encourage

even more work. An attached chart shows that many older people have jobs that

pay at the earnings limit. These people would probably work more, produce more,

and pay more taxes if the limit were removed. While this proposal will increase current cash outlays (because some benefits would no longer be reduced), it doesn’t

hurt Social Security’s long range financial problems.8 That is because getting benefits sooner reduces future benefits (since they get less of an actuarial increase) and

it would increase FICA tax income.

Smaller pensions from our employers may also cause us to work longer. For example, 401(k) plans don’t subsidize pensions at younger ages, like traditional retirement plans. If you want to retire early, you will have to suffer the full actuarial

reduction. This may force many people to work longer.

Higher retirement ages (for Social Security and Medicare) may encourage us to

work longer, especially lower income workers who won’t be able to retire for financial reasons. It may not affect wealthier people as much, because they can rely on

their other resources.

Other proposals to decrease benefits may also encourage us to retire later. However, even though they are similar to proposals that increase the NRA, they may

not register until too late. Most people don’t know what their Social Security benefit

amount is, so decreasing it won’t affect their thinking now. Only when they reach

age 65 will they realize how much the benefits dropped. At that point, they will finally realize that they have to work until a much later age. Thus, raising the retirement age could be the more effective way of making changes to Social Security. It

is more likely to affect our thinking now than just decreasing benefits.

Congress Should Coordinate its Policies on Retirement Age: In addition, Congress

should coordinate its national retirement policy, because right now it is sending inconsistent signals. Social Security is moving its retirement age to 67, but Medicare

is still 65. In addition, the federal laws for employer-sponsored pension plans still

use age 65. (Note: If Congress amended pension law to use the same ages as Social

Security, some companies might take advantage of it. This could be a revenue raiser

for the government, because employer contributions could go down—or at least not

go up.) Another inconsistent signal is the requirement that IRA’s and certain pension benefits begin their distributions by age 701⁄2 even if the individual wants to

continue to work. Raising the 701⁄2 would defer government revenue however. You

could also raise the 591⁄2 age for earliest distributions, but that could discourage

people from putting money into IRAs and 401(k) plans, since it would lock the

money up longer. It would also be a revenue loser for the government. Of course,

much of this depends on whether there are jobs for older Americans.

Will Employers Keep Us Past Age 67? Some employers believe that older workers

may be less productive and less adaptable to change than younger workers. The

older employees can limit the promotion possibilities of younger workers to the point

that the younger employees may quit. Older employees’ benefits may also cost more.

An older worker’s employee benefits (Health Insurance, Long Term Disability, Pension, Life Insurance, Annual Leave, and Sick Leave) could cost $10,000 more per

year than those for a younger worker. On the other hand, not having to pay PostRetirement Health benefits 9 and Pension benefits 10 while the older person is working could offset this amount. However, these cost reductions in Post-Retirement

Health and Pensions don’t apply to elderly employees who were recently hired. In

fact, newly-hired elderly workers could increase employee health, post-retirement

health, and pension costs (if they work long enough to become entitled to these retirement benefits). Laws that require their full coverage can make it a very costly
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11For example, if a retiree receives 50% of his/her Social Security benefits, then the actuarial

reduction (or actuarial increase) applicable at the commencement of the remaining half of their

benefit would apply only to the remaining half of the benefit.

decision for employers to hire older workers. If these laws were somewhat relaxed,

employers might hire more older employees. For example, if an older worker can

be hired at a lower salary that compensates for the extra cost of benefits, then cost

will be less of an issue.

Employer Demand for Older Workers: An SSA publication by John Straka, The

Demand for Older Workers, asserts that employers that limit the number of older

workers (or reduce their earnings) do so for productivity and market efficiency reasons and not for prejudicial discriminatory reasons. He bases this on his theory that

(ultimately) in an efficient market, people are paid what they are worth. He also

says that job opportunities for older workers will be mostly confined to relatively

low-paying, labor-hungry sectors and occupations such as certain retail and clerical

work and part-time or temporary work (e.g., on holidays). These jobs may not be

attractive to many elderly workers who once had well-paying jobs. His position is

that the Age Discrimination in Employment Act (ADEA), shortages of younger

workers, and SSA policies to encourage work will not be adequate to both get jobs

for the elderly and safe-guard their well-being. He suggests more subsidized training and resources for older job searchers.

Labor Force Considerations: As noted above, the reason the earliest eligibility age

was lowered from 65 to 62 was due to a lack of jobs and the large number of unemployed. However, because of today’s booming economy and low levels of unemployment, this might not be as great a concern. In fact, if the Social Security retirement

age is not changed, Social Security actuaries predict that the rate of increase in the

labor force will continue to decline dramatically to less than 1% when the baby

boom starts retiring. By 2008 it will be less than the annual increase in the population for the first time since 1960 (see chart). This could lower unemployment levels (something which may have already started happening). The lack of workers

(i.e., supply) could push wages up, unless individuals become much more productive

or unless we get more workers from other countries or can convince our older workers to remain in the job market. Employers may want to keep their older employees

(at least part time). However, these good economic times may not last forever, so

the rules need to work in times when unemployment isn’t low.

Kinds of Jobs: Today’s economy is more service-oriented (and less in need of heavy

physical labor) than in 1940, which makes it easier for older individuals to work.

Factors working in the other direction, however, include the rapid pace of change

which makes it more difficult for older workers to keep up. (Training may not pay

off if the worker might retire soon.) This may be particularly true of the many jobs

in the high tech industry. These jobs are less physical, but they also change rapidly.

Part-Time Work and Phased Retirement: One way to help older employees to keep

working would be to provide more part-time opportunities for them as they phaseout to retirement. However, many employers don’t find part-time jobs very efficient,

especially if they incur the same fixed overhead and benefit costs. It is also difficult

to decrease an employee’s pay by a substantial amount. One way to make this easier

however, would be for Social Security to allow workers over age 65 to declare that

they are switching to half-time, and request half of their Social Security benefit.

Then it would be easier to pay them less. The federal retirement plans already do

this. This declaration could replace the earnings or retirement test and be done in

a way that is actuarially neutral to Social Security. 11 Essentially, this would be giving people more choice. People would choose their own retirement age and how to

phase it in, and not Social Security through the earnings test, which people dislike.

It would also bring in more payroll taxes than if the worker completely retired. Allowing employer pension plans to pay a partial pension while they are still working

(in service benefit) would be important for consistency purposes too. Mechanisms

would be needed to make sure that an employee’s pension benefit is not hurt by

low wages in their final years of employment (such as annualization of pay or indexing pay).

EFFECTS ON EMPLOYERS

Increasing Social Security’s Normal Retirement Age will keep FICA taxes down,

which employers will like. However, it may put more reliance for retirement benefits

on the private pension system—employers and employees. Thus, employers with retirement plans may end up paying for the Social Security fix anyway, through high-
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12Social Security Offset plans (and plans with temporary supplements to the Social Security

NRA will automatically get more expensive, unless employers amend them. 13 Retaining older employees could decrease post-retirement health costs, but this would be

offset to the extent that Medicare also increases its retirement age. Pension costs could also decrease for employees over the Normal Retirement Age (unless actuarial increases are provided

along with accruals). 14For example, § 1.401–1(b)(1)(i) requires that retirement plans be exclusively for retirement

and other incidentals. 15See the definition of Normal Retirement Age (65 & 5) in § 411(a)(8), the maximum distribution age of 701⁄2 for owners in § 401(a)(9), the anti-cutback rule in § 411(d)(6), and the commencement rules (65 & 10) in § 401(a)(14). 16Social Security’s actuarial reductions are somewhat liberal when interest rates are high. 17One way to remedy this is to determine average earnings over 40 years instead of over 35

years, as is currently done. However, Congress might want to allow drop out years for years

of pregnancy and child care. There is already a rule for this in certain disability calculations.

er pension contributions.12 Employers without pension plans will get off free, unless

their employees use this as a chance to demand a plan.

Alternatively, if employers don’t improve their pension benefits, employees may

end up working longer (if they can). An older work force will increase employer costs

for other employee benefits (such as employee health, disability, life insurance, annual and sick leave) by as much as $10,000 per older employee that could have been

replaced by a younger employee.13 If employers don’t want an older work force and

the associated costs, they can lay off the older employees (always a difficult thing

to do) or encourage them to retire by improving the company pension plan, which

also will be costly.

Due to a huge increase in the number of retirements that will occur early in the

next century, unemployment will probably continue to recede. When the labor force

decreases in size (i.e., low supply), wages tend to increase. This could occur unless

each worker becomes much more productive, or foreign workers are used. Later retirement ages (normal and earliest) in Social Security and employer pension plans

could help reduce this concern. Employers may want to rethink their retirement

strategies and encourage employees to stay on (at least part-time). Phased retirement may become popular, but IRS regulations 14 would need to be revised to allow

in-service distributions to be payable before a pension plan’s Normal Retirement

Age. In addition, it is quite difficult for employers to increase their Retirement Ages

in tandem with Social Security, unless pension law allows higher normal retirement

ages than age 65 and relaxes the rules against decreasing benefits.15 Otherwise, employers will have to calculate 2 separate pension amounts for service before and

after each change in the retirement age. This will be very complex. It appears that

Congress can increase Social Security retirement ages the easy way, but they won’t

allow employers to. Finally, decreased Social Security benefits could necessitate

changing the nondiscrimination rules to reduce the disparity in benefits.

EFFECTS ON THE SOCIAL SECURITY SYSTEM

Increasing the Normal Retirement Age would significantly reduce Social Security’s long-term deficit and could add additional years of solvency to the trust fund.

For example, gradually increasing the NRA to age 70 would solve about half of its

financial problems. Increasing the NRA to age 73 would nearly eliminate the deficit.

Increasing the earliest retirement age would reduce outlays (creating more surplus) in the years that it is implemented. It would also solve about 10% of the longterm deficit. This occurs even though the early retirement reductions are actuarially

equivalent,16 because they only compensate for the fact that the recipient gets the

benefits for more years. It doesn’t compensate for the fact that Social Security will

get tax contributions for fewer years.17 This is particularly significant if the NRA

moves to age 70 and the Earliest remains at 62.

Indexing the Normal Retirement Age to increases in longevity (for example, by

1 month every year or two) would keep the system from going out of balance due

to longer life spans. Then Congress wouldn’t have to continually readdress this painful issue of fixing Social Security every 20 years, unless the economy went sour or

birth rates decreased dramatically.

Medicare, on the other hand, is not helped as much by an increase in its Retirement Age. For example, age 70 would reduce Medicare’s deficit by only 0.3% of payroll or about 15% of its long-term deficit (Hospital Insurance only). This is because

(1) disabled people would continue to get the Medicare benefits anyway and (2) most

of HI’s expenses are at very old ages. This also points out, however, that most of

us are quite healthy between the ages of 65 and 70. Changing just Social Security’s

NRA to 70 (and not Medicare’s) would also help HI’s deficit, because Medicare is
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18The Trustees’ report uses composite life expectancies based solely on the death rates for the

year in question. Actual life expectancies (with an assumed mortality improvement) for people

living in that year might be more appropriate, especially in a funded system.

a secondary payer to employee health plans), but it would be less than the 15% solution cited above.

All the above changes also encourage people to work longer. If the right jobs are

available, this could increase the nation’s productivity. This in turn increases both

FIT and FICA/SECA taxes, which is good for government and can help us either

lower taxes or improve other government programs.

WHAT SHOULD THE NORMAL RETIREMENT AGE BE?

The last question is ‘‘If we do increase the retirement age, what should it be?’’

Here are some choices.

Keep the NRA at age 65. It might be easier to understand this question if we look

at extremes. Suppose for example that we lived on average to age 110. If the NRA

stayed at age 65, we would receive benefits for 45 years on average, or as many

years as we worked. Dependency ratios could be around one (1) worker per beneficiary, which is much worse than today. Thus, the system would be very expensive.

In addition, indexed life annuities at age 65 might cost 90% more than they do

today. Thus, a funded system would also be very expensive, because we would have

to save 90% more over the same 45 year working lifetime to get the same replacement ratios. It’s easy to see the financial difficulties with keeping the retirement

age fixed at 65 forever.

Pay Benefits for the Same Number of Years. Thus, one might consider indexing

the retirement age, just like we now index the initial benefit to productivity levels

at retirement. One way to do it would be for Social Security to provide benefits for

the same number of years (i.e., keep the life expectancy at NRA the same). When

Social Security was created, life expectancies at 65 were about 12.7 years.18 If we

used this method, the NRA would be around age 72 today. It would have gone up

7 years in 6 decades. In that case, the ratio of workers to beneficiaries would continually go up and thus the costs of our unfunded system would generally decline

under this suggestion. Similarly, in a funded system, the costs of buying the indexed

annuity would remain the same. However, since it can now be funded over 7 more

years (i.e., ages 65 to 72), the annual amount that needs to be saved would continually decrease.

Keep the ratio of years in retirement to the working lifetime the same. Another way

to index the retirement age would be to determine the age that maintains the same

ratio of retirement years to working years. This could be accomplished in several

ways. One example would be to divide the life expectancy at NRA by the potential

years worked (e.g., the years from age 20 to 65). This would be a compromise between freezing the NRA at 65 (which would dramatically increase costs) and freezing the life expectancy at NRA (which could dramatically decrease costs). In fact,

it was recommended by a majority of the members of the 1983 National Commission

on Social Security Reform. This idea could stabilize the costs of the system and it

wouldn’t go out of balance every year as another deficit year was added to the 75-

year projection. If this idea had been used since the creation of Social Security, the

NRA would be age 70 now. This is an easy calculation. However, it doesn’t reflect

whether our health is continuing to improve also. This could be handled by using

a health index. For example, we could look at the disablement rates (or some sort

of health index) at the NRA and prohibit an increase if the rates (or index) were

getting worse. However, this has problems. A health index could be quite subjective

and it could trap us into setting different Retirement Ages for men and women, and

for different worker classifications, minorities, or income levels. Multiple retirement

ages and provisions are some of the reasons the Chilean and other foreign systems

were collapsing, so we may not want to open that Pandora’s box.

Maintain Same Cost Levels: Another method would be to use the calculation of

the NRA to maintain a level cost for the system. Other similar methods would be

to maintain the same dependency ratio of workers to retirees. In a funded system,

it would require an actuarial calculation to maintain the same contribution or savings rate for each person. However, these methods entail a much more difficult calculation, and it would depend on many different assumptions about the future. For

example, it could mean that the NRA could go up even if we weren’t living longer—

for example, if fertility rates declined or if the economy got worse. That might not

be appropriate. In fact, it might be more appropriate for those variables to affect
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19 Congress could index the system now, or wait until the problems occur. If they decided to

index, there would need to be rules on how big the problem would have to be before change

occurred, and how to phase it in gradually. Changes could be subject to an override by Congress

and would need a cap on how much change could occur and how often a change could occur.

There are many issues which would have to be worked out on this.

the tax rates. For example, if national birth rates decline, then maybe we should

contribute more, not raise the retirement age.19

CONCLUSION

Raising the retirement age is a difficult decision and gives us much to consider.

We can’t move ahead with it unless the people understand Social Security’s financial problems and the effects of increasing the Retirement Age. It seems like an obvious fix since people are living so much longer. However, if raising the retirement

age does not work because (1) many elderly people can’t work longer (because of

health reasons or mental inability), or (2) a huge percent just end up with disability

benefits, or (3) the elderly can’t get a job for lack of demand, or (4) because people

perceive too little value for their contributions, then we will need to find other ways

to fix Social Security. Whether privatization or focusing more benefits on low income

workers (and reducing benefits for higher income workers) will solve the problem

is unclear. What is clear however, is that Social Security will cost us a lot more if

we cannot increase the retirement age (or decrease benefits). We would suggest that

Congress use 1998 to educate the public and sufficiently consider all of the ramifications of any possible solution. Once again we commend the subcommittee for taking

a leading role in educating the public on a very complex, but important topic.

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Chairman B

I’d like, since we have another panel to follow, and some of us

UNNING. Thank you very much.

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have other places to be, Dr. Burkhauser, in your testimony, you

seem the most convinced, out of all our panelists today, that not

only is it possible for Social Security policy to encourage workers

to stay in the work force longer, but that changes in the public policy in a strong economy have already ended the trend toward early

retirement. At least that’s what I heard you say.
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Would you provide more details as to how you reached this conclusion? And do your conclusions differ based on specific cohorts by

gender or by ethnic background?

Mr. BURKHAUSER. These aren’t my statistics. These come from

the Current Population Survey, which looks at the labor force participation rates of men and women by age group. If you go through

some of the tables in my formal statement, you’ll see that, since

1985, the trend toward lower labor force participation rates, which

had gone on since the fifties, has stopped, and in fact in certain age

groups over the age of 62 they actually increase. For women, that’s

happening mainly because labor force participation rates of younger women are rising, and therefore, there are more women in the

labor force in their fifties. For men, I believe it’s occurring because

men are not so much staying longer at their career jobs, but are

working in a new job after they’ve left their career jobs.

The evidence is now very strong that this trend toward earlier

and earlier retirement is over, and it’s in part due to the 1983 Social Security Amendments which have reduced a lot of the biases

in the Social Security system against working at older ages. Congress has raised the actuarial adjustment after age 65. You’ve also

raised the earnings test amounts, and these signals that work will

be rewarded have been picked up. Older people are working more

because of them.

Chairman BUNNING. Do you think the employer also adjusts?

Mr. BURKHAUSER. I think that employers are very sensitive to

the rules of the game. For instance, a few years ago, to save some

money, Congress changed the way that Medicare payments were

paid. Medicare used to be the first provider of health insurance for

older people. To save some money for the government, Congress

made private employers the first payer. If you look at where the

jobs are increasing for older people, they’re mostly in companies

that don’t have health insurance because in those companies,

whether you’re old or young doesn’t make any difference. If you

wanted to do something about allowing older workers to stay

longer in the workplace, go back to making Medicare the first provider of health care. Don’t penalize workers by lowering the value

of their Medicare protection because they want to work.

Mr. BERNSTEIN. Mr. Bunning, may I comment on that? I agree

with that. It’s in my prepared testimony, that the Medicare requirement’s not only for retirees, but for their dependents, create

a hurdle for the continued employment of older people.

Chairman BUNNING. Under a program where the employer furnished medical benefits?

Mr. BERNSTEIN. That’s correct.

Chairman BUNNING. OK.

Mr. BERNSTEIN. I would point out also that Social Security probably plays a much more minor role than private pensions do. That’s

the import of the data presented by Dr. Burkhauser. Footnote 3 of

his statement, he says, ‘‘Unless major changes take place in employer pensions, these changes alone in Social Security will have

only a minor effect on employment.’’

Mr. GEBHARDTSBAUER. Mr. Chairman, I was just wondering if I

could add one thing. Employer pension plans right now often have

used 65 as the age for retirement, and the laws in the pension law
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right now make it very difficult to increase that. Congress has increased Social Security’s retirement age to 67, but it’s more difficult for employers to do something like that now. And you might

consider some consistency there in allowing employers to do the

same thing.

Chairman BUNNING. Most employers set that as the normal retirement age, but they allow you to take early retirement, just like

Social Security, with a lesser pension or a lesser program actuarially from the 65 years. The buyouts and things that are being offered by major corporations are trying to get people to age 65, generally speaking.

Mr. BERNSTEIN. Frequently, though, when they permit people to

go out, to retire before age 65, it’s without actuarial reduction, frequently.

Chairman BUNNING. Well, as an incentive to get them out.

Mr. BERNSTEIN. No, as a regular proposition.

Chairman BUNNING. I haven’t run into many of those people.

Mr. Portman.

Mr. PORTMAN. I want to thank the panelists. I have a lot of questions, but I’m really intrigued by this notion that was raised by Mr.

Gebhardtsbauer at the end about part-time work and phased retirement and getting back to the earnings limit discussion that we

started to have earlier with the Commissioner.

I’ve read your testimony on it, and I’ve heard what you have to

say. You’ve obviously given this some thought, and I think it would

be helpful to the Subcommittee if you would flesh it out even further.

But I think what you’re saying—and correct me if I’m wrong—

is that, particularly as we get beyond this 2008 crossing of the lines

where there will be more encouragement naturally among employers to keep older workers and to provide opportunities for them, is

to allow people to take a part of their benefit, maybe half of their

Social Security benefit, and continue to work. In essence, that

would replace the earnings limit. It would have an impact similar

to the earnings limit, but not as onerous, because they could still

get half their Social Security benefit. So, in essence, the benefit

would be postponed, but they’d be working part time.

What would the impact be on the Social Security system? Have

you analyzed that?

Mr. GEBHARDTSBAUER. OK, thank you for asking. By the way,

the reason why I came up with this idea, or some of us came up

with the idea initially, was regarding choice. In the individual account area you have more choice in your retirement age than in the

Social Security area. I thought, well, what’s the concern there? I realized, oh, it’s the earnings test. That’s sort of Social Security telling you when you really are retiring. If you’re earning some money,

then you really haven’t, so they deduct something from your benefits.

Mr. PORTMAN. I guess one of the intriguing parts about it—it

does give older Americans more choice.

Mr. GEBHARDTSBAUER. Right.

Mr. PORTMAN. Many, perhaps, as Mr. Bernstein was saying earlier, don’t feel they, in fact, have.
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Mr. GEBHARDTSBAUER. In addition, as you point out, if we get to

the point where employers want more labor, they may use this idea

to keep their part-time employees, because, as we mentioned earlier, it’s more expensive to have them, but if you can reduce their

pay, then the expense doesn’t go up. So it helps you keep people

around working, but the payroll doesn’t continue to go up, and

have all these more expensive benefits.

Finally, how would you do it? You said it pretty clearly. Like the

Federal plan, for instance, a retiree can come back to work and

work, say, 60 percent, 3 days a week and get 40 percent of their

Federal benefits.

And, finally, the effect on Social Security, right now we’ve talked

about how you have a delayed retirement credit. It’s sort of an actuarial increase. If you work longer and don’t get a benefit, then

your benefit is much larger when you actually do get the benefit.

So by getting the benefit now, you’re getting less. So in the long

run, it’s about the same amount of money if the actuarial reduction

is about right or if the actuarial increase is about right.

There are a couple of other concerns, and I wanted to mention

them earlier. And one is that there are other reasons why you improve your benefit, if you continue to work, and that is, you continue to improve your 35-year average salary. But after a certain

point, after you’ve gotten 35 years, it doesn’t really help you that

much. So you might want to consider changing that to make it

more cost neutral to Social Security, so that it becomes something

like a 40-year average instead of a 35-year average. That would

make it even more cost neutral.

But initially, you would have the problem that more people

would be getting benefits now, and so cashwise up front and short

term it is a little bit more expensive. But in the long run, it’s cost

neutral to Social Security.

Mr. PORTMAN. Because of the fact they would be paying in during that period as well, and not taking the benefit as soon?

Mr. GEBHARDTSBAUER. Right.

Mr. PORTMAN. Dr. Myers.

Mr. MYERS. With regard to the suggestion that the computational period ought to be extended and be longer than 35 years and

go up to 40 years, I think this would be very undesirable because

it would primarily affect women workers, because they have

enough trouble getting 35 years, of covered employment, considering that many of them are homemakers for a while. So I think increasing the averaging period would be a step in the wrong direction.

Mr. GEBHARDTSBAUER. I have something in my testimony that

speaks to that, because that’s a very good point. What you would

do is you would have dropout years for women for child care, for

reasons like that, you drop out the years. So instead of having 40,

they would get 40 minus 5, or 35, if they had 5 years of child care

and pregnancy. In fact, that’s already done in the disability area

a little bit. So it’s not something that would be impossible to do.

Mr. BURKHAUSER. You should be careful about whether it affects

homemakers, though. Most homemakers are married. Their benefits are based primarily on their husband’s earnings, not on theirs.

What they pay into the system, They often get no additional bene-
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fits out of what they pay into the system, and there are almost no

women whose survivors’ benefits are based on their own contributions; almost they are based solely on their husband’s.

Mr. GEBHARDTSBAUER. And that’s another area where you should

be looking into making changes to the system.

Mr. PORTMAN. I’m making a general comment. I think what we

talked about today in terms of the earnings limit and its replacement by something like this has a lot of potential, and obviously

it has an impact on pension policies, you said, and I agree with you

on the age 65 and the pension policy. That’s quite controversial,

and we need to be sure it was done in concert with these other

things.

In Medicare, as you said—it reminds me a little bit of the welfare

debate. To get people to work and to encourage people to work, it

needs to be looked at at a much broader context. So I hope that

you can provide some more information on that, and other panelists as well.

I’m going to ask one final question, and I’m going to put it out

on the table here at the start, Mr. Chairman. I’m 42. Can we go

through the panel here—is this a privacy matter that we shouldn’t

get into? Dr. Myers, can you tell us your age?

Mr. MYERS. Yes, 85.

Mr. PORTMAN. Eighty-five?

Mr. Bernstein.

Mr. BERNSTEIN. Next month I’ll be 75.

Mr. PORTMAN. Seventy-five. You’re 85 and 75. I want to commend you both for your excellent testimony today.

Dr. Burkhauser, you called yourself a baby boomer.

Mr. BURKHAUSER. Fifty-two.

Mr. PORTMAN. Fifty-two—we’ll let you in on the edge.

Mr. BURKHAUSER. OK.

Mr. GEBHARDTSBAUER. And I’m in the middle of the baby boom;

I’m 45.

Mr. PORTMAN. All right, thank you, Mr. Chairman. Thank you,

gentlemen.

Chairman BUNNING. Gentlemen on this panel, I want to make

sure you understand that we may submit further questions in writing to you, since we have another panel following you. Thank you

for your testimony.

[Questions were submitted by Chairman Bunning to Mr. Myers.

The questions and responses follow:]

Question 1. In your testimony you say that you believe that as people live longer,

they should and will be able to work longer. Thus the definition of retirement age

should be a dynamic one. Yet, Dr. Myers, we know that last year three/fourth of

those who retired, retired early. Do you see it as the Congress’s job to require people

to stay in the workforce? While older individuals may in fact want to stay in the

workforce, how can we be sure that employers will make jobs available?

The first question relates to my belief that, as people live longer, they should and

will be able to work longer. I fully realize that, currently, most people retire early

and that, in the future, they may wish to also do so. However, the Social Security

program and its financing should not be an undue burden on the working population, and its costs should not be excessive because of people’s early retirement. If

people wish to retire early, they should finance it themselves.

Question 2. You mention that current law provides just over a 10-year plateau at

age 66 before the retirement age begins gradually moving up again to reach 67.

Would you provide more details as to why the law provides for this plateau?
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The second question relates to the 10-year plateau in the full-benefits retirement

age when it first reaches age 66. This was done in the 1983 Act, rather than going

continuously up to age 67, because the latter course of action would have produced

a significant estimated positive long-range actuarial balance (or surplus), and the

intention underlying the legislation was to have a very close to zero actuarial balance result.

Question 3. You propose eliminating the plateau in current law, and also continuing increasing the retirement age by two months for each year of birth indefinitely

into the future. You also advocate for raising the early retirement ago once the normal retirement age hits 67, so that it is always 5 years lower than the normal retirement ago. The remainder of the long-term deficit in your view, could be made up by

what you consider ‘‘noncontroversial’’ changes such a covering all new State and

local government employees, making the provisions for income-taxing benefits the

same as are applicable to pensions, and correcting the consumer price index. Most,

if not all of these ‘‘fixes’’ are controversial, and translate into real benefit cuts for our

young people today. Do you have any suggestions for program changes that would

be embraced by young people?

The third question relates to what I referred to as ‘‘noncontroversial’’ changes. I

used this phrase because all such changes were agreed to unanimously by the recent

Advisory Council on Social Security. I believe that these changes are reasonable and

are fair to young people. As to changes which would be embraced by young people,

within the context of the present program, most persons like neither benefit-cost reductions or tax increases, and yet one or the other (or both) seem to be needed.

Question 4. I’m interested in knowing your views on the degree to which age discrimination may ultimately prevent increased participation of older workers in the

work force.

The fourth question relates to possible age discrimination ultimately preventing

the increased participation of older workers in the work force as the full-benefits

retirement age is increased. Because such increase is very gradual, I believe that,

in one way or another, such discrimination will not occur, as the country (and especially the employers) realize that this should not occur, in the best interest of all

concerned.

Question 5. Will there be enough jobs for older workers, jobs with the level of physical activity that most persons over age 67 can perform?

The fifth question relates to whether there will be enough jobs for older workers,

considering the level of physical activity which they will have. I believe that, as in

the past, there will be fewer and fewer jobs requiring a high level of physical activity. Even more importantly, I think that, as longevity increases, so too will the ability to do physical activity at any particular age (e.g., in the distant future, a person

aged 70 will have at least as much ability to do physical activity as can a person

aged 65 today).

Question 6. Do you have thoughts on how the increasing number of older workers

might impact rates of unemployment, job opportunities, and career advancement for

younger workers?

The sixth question relates to whether the increasing number of older workers

might impact rates of unemployment, job opportunities, and career advancement for

younger workers. Considering that the relative (but not necessarily, absolute) number of younger workers will decrease over the long run, I believe that a gradual increase in the number of older workers as the full-benefit retirement age rises, would

likely work out equitably for both younger and older workers. Obviously, if older

workers tend to continue retiring at age 65 (or even earlier), this would be more

favorable job-wise for younger workers (although they would have to pay more, directly or indirectly, for the support of the aged population). However, I think that

a good and equitable balance as to employment conditions would develop as between

younger and older workers.

Gebhardtsbauer. The questions and responses follow:]

[Questions were submitted by Chairman Bunning to Mr.

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1. In your testimony, you discuss the importance, when increasing the retirement

age of avoiding any sudden decline in benefits, and therefore avoiding a ‘‘notch.’’

How was this avoided in the 1983 amendments and how can we be sure to avoid

it in the future, should an increase in the retirement age occur?

There were many changes in the 1983 amendments that did not decrease benefits

and thus avoided the notch problem. However, it did increase the Normal Retire-
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1Since people born in 1938 get their wages indexed one more year than people born in 1937

(and one less COLA), there is little likelihood that a notch will occur (assuming the wage index

for 1997 wages will be more than the COLA in 1999). Even a 4 year phase-in would probably

not create a noticeable notch. 2 It was unclear whether CSIS/NCRP mandated annuitization of their Individual Security Accounts or restricted pre-retirement withdrawals. 3The CSIS/NCRP proposal for a minimum benefit equal to the poverty level could also have

been deceptively less expensive, since poverty levels may only increase with inflation. However,

it appears that they did not take the easy (less expensive) choice. Their initial minimum benefit

is wage-indexed after 2010. This implies that productivity gains in the economy will be shared

with all retirees (at the point of their retirement), including low income ones. After retirement,

their benefit would increase with just inflation, like other retirees’ benefits.

ment Age (NRA), or age for full benefits, which could be perceived as a decrease

in benefits, if someone still takes their benefit at the same age. As I stated in my

testimony (including footnote 1), if someone born in say 1938 ‘‘still retires at age

65, their retirement benefit will be about 1% lower 1 than if the Normal Retirement

Age had remained at age 65. If the NRA had increased to age 66 all in one year,

benefits would have dropped immediately by about 7%. This large decrease would

be similar to the notch baby benefit decreases which caused much alarm among the

elderly in the 1980’s. Phasing in the increase in retirement age over 6 years from

2000 to 2005 avoids this problem.’’ As I stated in my footnote, when wage increases

exceed the CPI, it reduces (and can eliminate) the size of the notch. By a notch,

I mean someone getting a benefit in early January that is less than a similar person

(born a week earlier) retiring in late December of the prior year. In addition, the

change was delayed until the year 2000, so not much fuss was made over this

change in 1983. It only affected people who were age 45 or younger at the time.

That was probably more than enough lead time back then.

Some people do not consider increasing the retirement age as a decrease in benefits because we are living longer. They would contend that future retirees will live

longer than current retirees, and thus get benefits for just as many (or more) years.

In town hall meetings across the country sponsored by Americans Discuss Social Security and the Pew Charitable Trusts, we have found that people don’t categorize

‘‘Increasing the Retirement Age’’ with benefit decreases. In electronically-taken

votes, people ranked the 3 major benefit decreases (benefit decreases across the

board, reduced COLAs, and increased taxes on Social Security benefits) at the bottom of 10 options, while ranking ‘‘Increase the Retirement Age’’ at 3rd from the top.

See chart showing rankings at the forums.

Thus, ways to avoid the notch problem are to:

(a) Phase-in each one-year increase in Normal Retirement Age over 6 years (4

years might be enough, if wage increases are expected to exceed the CPI by more

than 1%), and

(b) Delay its effective date (so that near-retirees who are already planning their

retirement are not affected).

Other ways, of course, are to not decrease benefits directly (e.g., increase payroll

taxes, increase coverage, increase taxes on benefits, delay or reduce COLA’s, or decrease the benefits of a small group, etc.).

2. What are the advantages to creating a minimum benefit level through Social Security reform and how would that work? What are the advantages and disadvantages?

We will respond to this question, by analyzing the proposal for a minimum benefit

equal to 100% of the poverty level from the National Commission for Retirement

Policy (Center for Strategic and International Studies).

Minimum Benefit would offset benefit decreases to low paid: Under the CSIS/

NCRP proposal, Social Security would provide a minimum benefit equal to 100% of

the poverty level (currently almost $8,000 per year), beginning in 2010. This would

offset to some degree changes in their proposal that decrease benefits (e.g., Increasing the Normal Retirement Age (NRA), using more years in Average Indexed

Monthly Earnings (AIME), BLS reductions in the CPI that is used for indexing benefits, reducing survivor benefits, reducing the benefit formula, no mandatory

annuitization or pre-retirement withdrawal restrictions 2).

Cost: Of course, a minimum benefit also increases costs, but probably not as much

as expected, due to the progressive nature of the benefit formula and subsidies in

spousal benefits.3 It would reduce the costs of the Supplemental Security Income

(SSI) program.

Disincentives to Work: Flat minimum benefits can create a disincentive to work,

once their eligibility rules have been satisfied. (After that point, the marginal money’s worth can drop to zero for awhile.) The NCRP proposal reduces this concern
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4This would need to be defined. It could be say 15% of the wage base. Once reached, some

might stop working. 5Workers over 70 can now earn a wage and not have their Social Security benefit reduced.

by phasing the minimum benefit in over 40 years of work.4 Thus, the more years

worked, the greater the benefit. Under their proposal, the 60% of poverty benefit

after 20 years of work would phase into 100% after 40 years of work. A low income

person would have some disincentives to work (or report income or pay taxes) after

40 years of service, which could be reached by someone age 58. If the formula was

2 % times the number of years worked, the incentive to work would continue beyond

40 years of work. Someone with 50 years of work would then get 125% of poverty

level. This approach may not increase costs much. If you want to preserve the 60%

after 20 years of work, the formula could use 3% times the first 20 years worked.

Under this formula, someone with 50 years of work would get 120% of the poverty

level. The costs should not be much different.

Some will not receive the full poverty level benefit: In order to have incentives for

working, some people (who cannot work the full 40 years) will not receive the 100%

poverty benefit. Therefore, the NCRP proposal’s benefit reductions will create some

inadequate benefits for some people. The government may have to pay them public

assistance, which means government may have to pay the costs anyway. Furthermore, without a full poverty benefit, a proposal may then have to mandate

annuitization of the Individual Accounts.

No Minimum for 19 years of work or less: The NCRP proposal creates a large cliff

at 20 years of work, below which, a worker would get no minimum benefit. Providing proportionately lower benefits for workers with less than 20 years of work

should not cost much. The benefit would be inadequate of course, but so is the benefit after 21 years (equal to 62% of poverty level). We are unaware of any concern,

abuse, or moral hazard that minimum benefits would cause for people with short

work histories. Eliminating the 20-year requirement would be simpler, provide benefits proportional to years that contributions were made, and not have any cliff effect, which would primarily affect low-paid immigrants and women who care for

children. In fact, lowering the 20-year requirement could create incentives for people

with short work histories to work more.

Early Retirement Reductions: If the minimum poverty level benefit is not reduced

by early retirement reduction factors (and increased by delayed retirement factors)

just like other PIA benefits, there will be a strong incentive to retire when first eligible. If it is reduced, then the benefit payable before NRA will be less than the poverty level (e.g., it would be 30% less in 2029 when the NRA reaches 70 for someone

retiring at age 65). If the minimum benefit was set at 150% of poverty levels at the

NRA then the age 65 ERA benefit would be at least 100% of poverty level. The benefit could reach 150% at age 70, if the formula was 3% times years worked (e.g.,

3% x 50 years of work = 150%).

Disability Benefit: Under the NCRP proposal, it is unclear whether an individual

receiving the disability benefit would get the minimum. If yes, and if total income

exceeded income while working, there would be little incentive for rehabilitation and

returning to work. Current rules limit disability benefits so that total income is less

than 80% of average earnings, and that could help allay this concern if applied here

too.

Spouse Benefits: Should the dependent spouse of a worker receive the full poverty

minimum? If yes, then the couple will receive more than the poverty level for a couple. If the spouse receives 33% of the poverty level, it will be closer to the poverty

level for a couple. Also, we assume that the surviving spouse will also receive the

minimum poverty benefit because very elderly single women have the highest poverty levels among the elderly.

Minimum could be a windfall: The minimum could provide an individual with a

benefit that is larger than recent salary amounts for the person, and thus could encourage them to retire. Having a maximum equal to the worker’s Highest 5 year

salary average (or something similar to the disability maximum) would reduce this

problem.

3. Can Americans be encouraged to work longer? (and how?)

Retirement policy is one way to affect American’s retirement decisions. Here are

some ideas:

Retirement Ages May Be Increasing: Recently, labor force participation rates (see

charts) have increased, possibly due to (for example) a relaxation of the Social Security retirement earnings test.5 This also shows that some people can work at age

70. In addition, 401(k) plans don’t subsidize pensions at younger retirement ages,

like traditional retirement plans. If 401(k) participants want to retire early, they
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6See Chronic disability trends in elderly US populations: 1982–1994 by Manton, Corder, &

Stallard. In 1982, 14.1% of elderly between 65 and 74 were IADL (Instrumental Activities of

Daily Living) or ADL impaired or institutionalized. In 1994 this decreased to 11.5%. For ages

75 to 84, it dropped from 31.9% to 26.9%. 7See the definition of Normal Retirement Age (65 & 5) in 411(a)(8), the maximum distribution

age of 70 for owners in 401(a)(9), the anti-cutback rule in 411(d)(6), and the commencement

rules (65 & 10) in 401(a)(14). 8 IRS reg 1.401–1(b)(1)(i) requires that retirement plans be exclusively for retirement and

other incidentals.

have to suffer the full actuarial reduction. This may force many people to work

longer in the future.

Delayed Retirement Ages or Reduced Benefits: The labor force charts also show

that Americans used to work to later retirement ages. The average male worked to

age 70 before Social Security and Medicare (inter alia) inadvertently encouraged

them to retire earlier. With not only our life spans improving, but also our health

improving,6 it would be possible for most people to work longer. If Social Security,

SSI, Medicare, and Medicaid delayed or reduced benefits at younger ages, people

would be more likely to work longer in order to have a secure retirement. Eliminating benefits at younger ages would have an especially powerful effect. That’s because many people may still take reduced benefits at younger ages even if they are

not adequate.

Decrease Social Security Benefits: Proposals to decrease Social Security benefits

may also encourage us to retire later. However, even though they are similar to proposals that increase the NRA, they may not register until too late. Most people don’t

know what their Social Security benefit amount is, so decreasing it won’t affect their

thinking now. Only when they reach age 65 will they realize how much the benefits

dropped. At that point, they will finally realize that they have to work until a much

later age. Thus, raising the retirement age could be the more effective way of making changes to Social Security. It is more likely to affect our thinking now than just

decreasing benefits.

Relax or Eliminate Retirement Earnings Test: Another chart shows how Social Security has a clear and direct impact on people’s decision to work. The chart shows

that large numbers of older people work up to the retirement earnings test exempt

amounts and then stop. This not only shows that Social Security affects our decisions, it also points to another way for Social Security to encourage us to work—

by eliminating (or increasing) the retirement earnings test exempt amounts. Social

Security actuaries estimate that this would not hurt the actuarial balance. However,

it does increase cash outlays in the short term.

35-Year Average Earnings: Another way is to modify the benefit formula. Currently, many people commence benefits at age 62. That’s because, even though there

is a 20% penalty for early retirement, the Social Security PIA benefit is not improved much after a person has 35 years of work. Paying more contributions after

35 years of work does not improve the benefit much. This could be changed by determining average wages over say 40 years rather than 35 years (or NRA minus

20 minus 5 drop out years, which would automatically update it when NRA is

changed). However, this change could hurt women who leave the workforce for children. This concern can be alleviated by allowing additional drop out years for taking

care of children up to age 5 for example. The law already allows drop out years for

women caring for children for some disability calculations.

Allow/Encourage increased retirement ages in Private Sector Pension Plans: The

current Internal Revenue Code (IRC) still references age 65, 59, and 70 for various

pension-related rules.7 (A couple IRC rules reflect the new Social Security NRA, but

not many.) These ages could be updated, to encourage employers to raise the ages

in their pension plans. In addition, Congress changed the Social Security NRA without protecting prior benefit promises. If Congress gave employers some flexibility in

this area, it might make it easier for employers to increase retirement ages in their

pension plans. This should be changed only after careful study.

Provide some flexibility to employers to encourage hiring older workers: As I testified, older workers can cost more due to higher health costs, etc. If Congress added

some flexibility to the Age Discrimination in Employment Act, so that total compensation costs for older employees did not have to increase, then employers might

be more willing to hire and retain older workers. Rules making it easier to have

phased-retirement would also help. For example, IRS regulations could be changed

to allow in-service distributions to be payable before a pension plans’s NRA 8 and

partial Social Security benefits could be paid to reflect an older person’s phased retirement.

4. How is the Congress sending mixed signals about its policies on retirement age

and what issues are the most important for us to address to ensure consistency?
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9The Trustees’ report uses composite life expectancies based solely on the death rates for the

year in question. Actual life expectancies (with an assumed mortality improvement) for people

living in that year might be more appropriate, especially in a funded system. 10 Congress could index the system now, or wait until the problems occur. If they decided to

index, there would need to be rules on how big the problem would have to be before change

occurred, and how to phase it in gradually. Changes could be subject to an override by Congress

and would need a cap on how much change could occur and how often a change could occur.

There are many issues which would have to be worked out on this.

Social Security is moving its retirement age to 67, but Medicare is still 65. In addition, the federal laws for employer-sponsored pension plans still use age 65. (Note:

If Congress amended pension law to use the same ages as Social Security, some

companies might take advantage of it. This could be a revenue raiser for the government, because employer contributions could go down—or at least not go up.) Another inconsistent signal is the requirement that IRA’s and some certain pension

benefits begin their distributions by age 70 even if the individual wants to continue

to work. Raising the 70 would defer government revenue however. You could also

raise the 59 age for earliest distributions, but that could discourage people from putting money into IRAs and 401(k) plans, since it would lock the money up longer.

It would also be a revenue loser for the government.

5. What do you see as possible options for indexing the retirement age and what

are the advantages and disadvantages of each?

As provided in my written testimony, here are some choices.

Pay Benefits for the Same Number of Years. One way to index the NRA would

be for Social Security to provide benefits for the same number of years (i.e., keep

the life expectancy at NRA the same). When Social Security was created, life

expectancies at 65 were about 12.7 years 9. If we used this method, the NRA would

be around age 72 today. It would have gone up 7 years in 6 decades. (This figure

is cited to show what the effects would be if this had always been in law. If you

change the law now, you would probably not go back to the 1930’s, but start the

change at a current or future date.)

Under this method, the ratio of workers to beneficiaries would continually go up

and thus the costs of our unfunded system would generally decline under this suggestion. Similarly, in a funded system, the costs of buying the indexed annuity

would remain the same. However, since it can now be funded over 7 more years (i.e.,

ages 65 to 72), the annual amount that needs to be saved would continually decrease.

Keep the ratio of years in retirement to the working lifetime the same. Another way

to index the retirement age would be to determine the age that maintains the same

ratio of retirement years to working years. This could be accomplished in several

ways. One example would be to divide the life expectancy at NRA by the potential

years worked (e.g., the years from age 20 to 65). This would be a compromise between freezing the NRA at 65 (which would dramatically increase costs) and freezing the life expectancy at NRA (which could dramatically decrease costs). In fact,

it was recommended by a majority of the members of the 1983 National Commission

on Social Security Reform. This idea could stabilize the costs of the system and it

wouldn’t go out of balance every year as another deficit year was added to the 75-

year projection. If this idea had been used since the creation of Social Security, the

NRA would be age 70 now. This is an easy calculation. However, it doesn’t reflect

whether our health is continuing to improve also. This could be handled by using

a health index. For example, we could look at the disablement rates (or some sort

of health index) at the NRA and prohibit an increase if the rates (or index) were

getting worse. However, this has problems. A health index could be quite subjective

and it could trap us into setting different Retirement Ages for men and women, and

for different worker classifications, minorities, or income levels. Multiple retirement

ages and provisions are some of the reasons the Chilean and other foreign systems

were collapsing, so we may not want to open that Pandora’s box.

Maintain Same Cost Levels: Another method would be to use the calculation of

the NRA to maintain a level cost for the system. Other similar methods would be

to maintain the same dependency ratio of workers to retirees. In a funded system,

it would require an actuarial calculation to maintain the same contribution or savings rate for each person. However, these methods entail a much more difficult calculation, and it would depend on many different assumptions about the future. For

example, it could mean that the NRA could go up even if we weren’t living longer—

for example, if fertility rates declined or if the economy got worse. That might not

be appropriate. In fact, it might be more appropriate for those variables to affect

the tax rates. For example, if national birth rates decline, then maybe we should

contribute more, not raise the retirement age.10
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11 Especially health costs, although the existence of a post-retirement health plan or unreduced pension plan benefit can offset this higher active employer health cost.

NRA changes in law or updated by Social Security’s Actuaries: The law could

specify the increase in the retirement age, as it does now. Currently, the law stops

the increases at age 67. If, as expected, we continuing living longer, the system will

go out of balance again. A gradual increase in the retirement age would keep the

system in balance (which keeps the trust fund stable in the out years). Thus, some

proposals increase the NRA by 1 month every 2 years. Other proposals increase it

by as much as 2 months every year. One can use different periods in the past (or

in projections) to support either of these indexing proposals (or something in between).

An alternative, would be to set the increase in law, but allow the Social Security

Actuaries to adjust it if and when life spans change faster or slower than expected

(within constraints set by Congress and subject to their override). This would help

Congress avoid reopening the difficult debate on how to fix Social Security every 20

years or so. However, some people might contend that it is not appropriate for a

non-elected individual (Social Security’s Chief Actuary) or agency to adjust something this important. (However, it should be noted that BLS economists can affect

the COLA amounts, and Canada has invested similar powers in its government actuary.) Another concern is that people like to know their NRA in advance. A response would be that Congress could set constraints on the adjustments, so that no

one over age 55 would be affected.

6. I’m interested in knowing your views on the degree to which age discrimination

may ultimately prevent increased participation of older workers in the work force.

An SSA publication by John Straka, The Demand for Older Workers, asserts that

employers that limit the number of older workers (or reduce their earnings) do so

for productivity and market efficiency reasons and not for prejudicial discriminatory

reasons. He bases this on his theory that (ultimately) in an efficient market, people

are paid what they are worth. He also says that job opportunities for older workers

will be mostly confined to relatively low-paying, labor-hungry sectors and occupations such as certain retail and clerical work and part-time or temporary work (e.g.,

on holidays). These jobs may not be attractive to many elderly workers who once

had well-paying jobs. His position is that the Age Discrimination in Employment

Act (ADEA), shortages of younger workers, and SSA policies to encourage work will

not be adequate to both get jobs for the elderly and safe-guard their well-being. He

suggests more subsidized training and resources for older job searchers.

My expertise in this area is limited, so I will just discuss those areas with which

I am familiar. In my testimony I noted that in 10 years, employers may need more

workers due to the start of the retirement of the baby boomer generation. (See chart

showing declines in Increase in Labor Force.) This may already be happening. Unemployment levels are decreasing dramatically, and this could encourage the retention and hiring of older workers. Anecdotal evidence is that many older workers that

were laid off in the early 90’s have been rehired (at least on a part-time basis).

However, it is still true that the employee benefits of older workers can cost

more 11 than for a younger employee. Unless employers can offset this higher cost

somewhere else, they may prefer hiring anyone else that is cheaper (e.g., younger

workers, aliens, part-time older workers who don’t have to get employee benefits,

etc.). Thus, ironically, Congress could decrease discrimination by relaxing the Age

Discrimination in Employment Act to allow, for example, employers to offset salary

increases by increases in an employees health costs.

7. Will there be enough jobs for older workers, jobs with the level of physical activity that most persons over age 67 can perform?

The issue of whether there will be enough jobs ultimately depends on the nation’s

economy/productivity. However, as discussed above, the retirement of the baby

boomers (see chart) should dramatically increase job opportunities in the first 30

years of the next century. However, the question for older workers is not whether

the jobs are there, but whether they will get them. If as discussed in #6 above, it

is not efficient for an employer to hire the older worker, then the older worker could

lose out to younger workers, aliens, etc. Whether older workers will be able to perform the jobs of the future is better discussed by gerontologists, futurists, and others. Many will be, especially now that our economy has more service-oriented jobs

than physically-arduous ones, especially if an older worker’s knowledge is valued.

However, older blue collar workers will have to be trained for the less physically

demanding jobs. In addition, your decisions now on the NRA will apply in future

years, long after the baby boom retires. Whether there will be enough jobs then, is

difficult to predict.
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8. Do you have thoughts on how the increasing number of older workers might impact rates of unemployment, job opportunities, and career advancement for younger

workers?

The issues you note in these last 3 questions are all very important and call for

the expertise of many professionals in addition to actuaries. Raising the retirement

age and encouraging people to work longer can increase unemployment and reduce

job opportunities and advancement for younger workers.

However, the aforementioned graph of increases in labor force shows it is now

lower than in any time on the graph (and soon will be less than the increases in

the total population for the first time since 1960). Thus, you could increase the NRA

and still keep the labor force increase below the increase in the population. In fact,

you might ask the Social Security actuaries to revise this forecast based on various

proposed changes to Social Security.

We want to thank you again for holding the hearing and inviting us to testify.

We are more than happy to answer further questions or meet with you to discuss

these and other items at any time.

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the chief actuary of the Actuarial Sciences Associates. David WalkChairman BUNNING. The final panel today is Christopher Bone,

f

er is a partner and global managing director with the international

accounting and consulting firm of Arthur Andersen, and David

Smith is the director of the AFL–CIO Public Policy Department.

Mr. Bone, would you please begin?
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STATEMENT OF CHRISTOPHER M. BONE, CHIEF ACTUARY,

ACTUARIAL SCIENCES ASSOCIATES, AT&T, SOMERSET, NEW

JERSEY

Mr. BONE. Mr. Chairman, Members of the Subcommittee, thank

you for your invitation to appear. In your opening remarks and in

the last panel, we heard about the important of coordination of Social Security changes with other plans. We welcome the Subcommittee’s emphasis on Social Security as part of an integrated

U.S. retirement income system.

Numerous observers have called for Congress to act soon on

changes to Social Security to enable workers sufficient time to plan

for retirement. An integral part of the planning process will be undertaken not solely by workers, but by employers that sponsor retirement plans. In choosing amongst alternative reforms in the

near future, it is imperative that the Subcommittee consider the

role of voluntary, employer-sponsored retirement plans and the impact of Social Security reform on those plans. Failure to do may result in significant disruption to the private retirement system, and

the possible loss of valuable retirement benefits to millions of workers.

I’ll focus the remainder of this discussion on employer reactions

and issues around raising the Social Security retirement age. First,

none of the proposals that would change the retirement age would

do so sufficiently to cure Social Security’s ills singlehandedly. Thus,

in evaluating any proposals to raise retirement age, and their impact on the system, it’s important to evaluate them as part of a

package and to review the alternative reforms that could be paired

with these types of changes.

Employers’ responses to Social Security changes will be made in

the context of, at least as far as designing retirement systems, the

changes to the retirement plan that further their business and

work force goals. As we saw in the last session, as labor markets

change, it is to be anticipated that employers will react to those

changes in the labor force and design plans that are tailored to attract and retain employees at those ages.

To look at how a change in this proposal would affect the private

retirement system would require you to look at how different types

of current plans would be affected and how those changes would

change the employer’s ability to meet business objects. Thus, if we

see changes in the demographics, we can anticipate that employers

will react to those changes in the demographics at the same time,

or perhaps at a later point, than public policy reacts to them under

Social Security.

The specifics of how employers are likely to react is work that

is yet undone. Employers are interested in the different alternatives. Researchers are interested. One way to look at this is to

say, what would cause a disruption in the private sector system?

Disruptions are likely to occur if the amount and incidence of the

cost to the sponsor changes significantly or if there is a sudden and

sharp change in the behavior of plan participants.

To the extent that proposals to increase Social Security retirement age are based on an accurate scenario of the future that reflects the availability of a productive work force, employers will respond to the same trends by raising retirement ages in tandem
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with Social Security. If changes in the retirement age reflect

changes in labor pools, changes may be anticipated to have relatively small effects in terms of disruption to the current retirement plans.

There do exist a group of plans for which changes in the Social

Security normal retirement age could be anticipated to be disruptive currently. These plans provide benefits that bridge the gap between actual retirement and commencement of Social Security benefits. Any increase in the Social Security normal retirement age

that is sudden would create a cost to sponsors who would then

have to bridge these benefits for a longer period of time; however,

the cost to these types of plans to be made manageable through appropriate delay in the commencement date of any change in retirement eligibility.

The existence of a sufficiently long planning horizon can enable

these plans to adapt the general level of benefits to the changed

circumstances. It’s important to note that we have experience with

similar changes under the 1983 Social Security reforms. The long

duration before changes in the normal retirement age were effective gave employers the opportunity to adjust pension plans to the

changes.

Changes in the normal retirement age do not appear to abruptly

increase cost for employer plans, nor to unduly change the system.

Much more significant were the related changes of the Tax Reform

Act of 1986. In considering any changes to Social Security retirement ages, legislators may wish to consider the experience of the

1983 changes and provide similar timeframes for employerresponsive plans.

In addition to sharp disruption in costs, the employers are also

concerned with sharp changes in employee reactions, in particular

whether or not an employee perceives that he/she will be subject

to a sudden prolonged delay in in the ability to retire.

I think that we have issues of worker productivity. The key issue

here for employers may be changes in retirement rules to give employees the same sort of flexibility to make productive arrangements for employees in the future.

Finally, I’d like to point out that in terms of disruption to the

system, changes in Social Security normal retirement age are much

less disruptive to the system of employee provided benefits than

are certain other proposed changes, including changes in tax rates

and in payroll benefits.

Thank you.

[The prepared statement follows:]

Statement of Christopher M. Bone, Chief Actuary, Actuarial Sciences

Associates, AT&T, Somerset, New Jersey

Mr. Chairman, members of the Subcommittee, my name is Christopher M. Bone.

I am the Chief Actuary of Actuarial Sciences Associates (ASA), a benefits consulting

firm that is a wholly owned subsidiary of AT&T. I am speaking today on behalf of

ASA.

INTRODUCTION

The retirement income system in the United States has often been pictured as a

three-legged stool; the three supports of the stools being Social Security, employersponsored retirement plans and individual savings. In this analogy, significant

changes in the length or strength of one leg of the stool may be anticipated to re-
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1 EBRI Databook on Employee Benefits, 4th Edition, 1997, p. 60, Table 7.4 based on EBRI

Tabulations of March, 1975 and March 1996 Current Population Surveys 2 EBRI Databook on Employee Benefits, 4th Edition, 1997, p. 57, Table 7.1 citing 1991 Advisory Council on Social Security, Future Financial Resources of the Elderly and Lewin–VHI, Inc.,

Aging Baby Boomers, How Secure is Their Economic Future? 3 Bone, Christopher M., ‘‘Actuarial Perspectives on Implications of Social Security Reform for

Employer Sponsored Pension Plans’’, Pension Research Council Working Paper 97–16, October

1997.

quire changes in the other legs. Yet, to date, analyses of proposed social security

reforms have primarily focused on the effects of the proposed changes on the Social

Security program as a stand-alone entity. In designing effective and coherent retirement policy it is imperative that changes proposed for social security be reviewed

in light of the implications of social security reform for the second leg of the stool—

retirement plans sponsored by employers.

Numerous observers have called for Congress to act soon on changes to Social Security, to enable workers sufficient time to plan for retirement under the new rules.

An integral part of the planning process will be undertaken not solely by workers,

but by employers that sponsor retirement plans. In choosing amongst alternative reforms in the near future, I urge that the Subcommittee consider the role of voluntary, employer-sponsored retirement plans and the impact of Social Security reform on those plans. Failure to do so may result in significant disruption to the private retirement system and the possible loss of valuable retirement benefits to millions of workers.

Since the enactment of ERISA in 1974, the percentage of the elderly population

receiving pension and annuity income has risen from 24% to 36%.1 Furthermore, because of the inherent long time horizons of pension plans, these numbers significantly understate the anticipated rates of participation in the voluntary employer

based retirement system that have come about in the last 20 years; various studies

have put the projected rate of pension recipiency among the elderly as high as 77%

to 81% by the time period 2018 to 2030.2

HOW CAN WE ANTICIPATE RESPONSES OF EMPLOYERS AND EMPLOYER-SPONSORED

PLANS TO INCREASES IN THE SOCIAL SECURITY NORMAL RETIREMENT AGE?

Today’s hearing focuses on proposals to improve the solvency of the Social Security system by raising the age at which unreduced social security retirement benefits are paid. Various proposals would: • increase Social Security Normal Retirement Age to age 70 • tie increases in the Social Security Normal Retirement Age to increases in life

expectancy, • change the age at which Social Security early retirement benefits are first paid.

None of the proposals to date would change retirement ages sufficiently to cure

Social Security’s ills single-handedly. Thus, in evaluating proposals to raise retirement age it is important to also evaluate the other alternative reform proposals that

could be paired with this change.

Employers’ responses to Social Security changes will be made in the context of

designing retirement plans to further business and workforce goals. To anticipate

how employers would react to potential changes, any change in Social Security Retirement Ages must be analyzed to determine how the change would affect each of

the various current types of employer-sponsored plan designs. More specifically, the

analysis must review how the proposed change might disrupt the ability of that design to meet its business objective; whether the objective be related to cash flow,

financial statement impact or human resource goals. This is work which has, as yet,

only begun to be performed by employers and researchers. At this point it is difficult

to see, with any degree of clarity, the exact form that responses to Social Security

changes would take. However, one framework for evaluating likely changes by employers is to review potential Social Security reforms in light of: • the amount and incidence of the related cost to the sponsor of the plan, and • the effect of changes on the behavior of plan participants.3

Amount and Incidence of Employer Cost. Increases in the age of retirement decrease the underlying cost of employer-sponsored pension plans in much the same

way as they do for Social Security. However, in addition to underlying cost, the incidence of reported cost for financial statements is also of concern. Most plans for employees, regardless of sector of employment, feature an accumulation of capital or

of retirement benefits. Reported employer cost is typically a function of the accumulation of benefits per year of service. If the date of benefit commencement is delayed,

accumulation continues for a longer period and payout of benefits is over a shorter

duration. This allows the sponsor to provide the same level of annual retirement in-
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come with a lower annual outlay of cost. Thus, in an employer’s plan, delayed retirement usually reduces the employer’s annual benefit cost.

However the retirement age for social security benefits is not necessarily closely

linked to retirement age for the employer’s plan; instead, employers typically design

retirement plans to reflect employer perceptions of workforce needs. To the extent

that proposals to increase social security retirement age are based on an accurate

scenario of the future that reflects the availability of an active, productive older

workforce, employers may be expected to respond to the same trends in worker productivity by raising pension plan retirement ages in tandem with social security.

This would generally lead to slow reductions in benefit costs over time. But, to date,

employers continue to sponsor early retirement incentives in defined benefit plans

that encourage retirement well before the age of earliest retirement under social security, even as increases in Social Security Normal Retirement Age are scheduled

to begin under existing law. Thus for these plans, changes in Social Security Normal

Retirement Age might be anticipated to have relatively small current effect.

There exist a group of plans for which changes in the Social Security Normal Retirement Age can be anticipated to initially increase costs. These plans current provide benefits that ‘‘bridge’’ the gap between actual retirement and commencement

of social security benefits. Any increase in the Social Security Normal Retirement

Age would create a cost to sponsors who would then have to bridge these benefits

for a longer period of time. However, the cost to these types of plans can be made

manageable through appropriate delay in the commencement date of any change in

retirement eligibility under Social Security. The existence of a sufficiently long planning horizon may enable these plans to adapt general levels of benefits to the

changed circumstances. Alternatively, Congress could avoid disrupting the private

sector system by directly coordinating legislation to increase Social Security retirement ages with legislation that would hold sponsors of these type plans harmless

to increased benefits that are solely due to reductions in government-promised Social Security benefits.

Other employer-sponsored defined benefit plans integrate early retirement benefits very closely with social security through the provision of elective forms of benefit

that bridge the gap until social security retirement age (either early or normal) is

reached. For these type of plans cost issues are likely to be manageable. However,

there will be increased complexity of administration unless action is taken to hold

these plans harmless for changes that are designed to reflect the new Social Security changes.

It is important to note that we have experience with the cost effect of the 1983

Social Security reforms. The long duration before changes in the Social Security

Normal Retirement Age were effective gave employers the opportunity to adjust

pension plans to the changes. Legislative changes to conform the private pension

plan rules to the new Social Security law changes were part of the Tax Reform Act

of 1986, and employers were given an extended period to reflect the 1986 law. In

fact, many other changes in the Tax Reform Act have been cited as onerous and

costly, but the effects of the 1983 legislated changes in the Social Security Normal

Retirement Age do not appear to have abruptly increased costs of employer plans.

In considering any changes to Social Security Retirement Ages, legislators may wish

to consider the experience of the 1983 law changes and provide similar time frames

for employer-sponsored plans to adapt to changes in the law.

Changes in the Behavior of Plan Participants: If the Social Security Retirement

Age is increased, an employee would be forced to retire at a later age to be able

to sustain a consistent level of income. For an individual covered by both Social Security and an employer-provided pension, the delay would likely not be equal to the

total increase in Social Security retirement age, as it would be mitigated by the

compounding effect of increases in private pension accumulation. However, a delay

or a reduction in Social Security benefits could certainly act to delay retirement

somewhat, particularly for lower-paid employees that are relatively more dependent

on Social Security. (Since the progressive determination of the Social Security benefit tends to provide relatively higher Social Security benefits for lower paid workers,

motivation to accumulate other sources of retirement income is lower and reliance

on Social Security benefits is higher.) For lower paid individuals in physically demanding jobs, there are concerns that, if the Social Security retirement age is increased for these individuals without a commensurate increase in productivity for

workers nearing current Social Security retirement ages, employers may incur additional cost in providing retirement programs that maximize the productivity of the

labor force.

Similarly, many employers continue to restructure their workforces as the nature

and type of work required to compete in the economy changes. For employers that
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attempt to restructure primarily through voluntary early retirement offerings, increases in Social Security retirement ages are likely to lead to increased costs.

THE IMPORTANCE OF FLEXIBILITY FOR EMPLOYER PLANS AS WE FACE AN AGING

POPULATION

Social Security is not alone in facing the issues of an aging population. For the

country to be able to afford the retirement of the Baby Boom generation, either we

must experience very significant increases in productivity for the younger part of

the population, or employees must be able and employers must be free to enter into

imaginative and flexible arrangements that allow employees to remain employed

and productive to later ages. Current pension regulation provides an inflexible approach to the ability of employees to gradually reduce work hours with a career employer. Either an employee is active or retired. Instead of remaining productively

employed with a career employer, employees now may migrate to a retirement employer, where it possible for the employee to reduce work hours without sacrificing

pension entitlements. I urge the members to coordinate efforts on Social Security

reform with efforts to increase the flexibility of private sector retirement programs.

As an example, truly flexible retirement regulations could include changes to allow

employees to partially retire with a current employer, reducing work hours while

commencing a portion of the pension. Less traditional work arrangements will allow

employers and employees to maintain productivity and reduce pressures on Social

Security.

GAUGING THE EFFECT OF ALTERNATIVE PROPOSALS TO RAISE THE RETIREMENT AGE

ON EMPLOYER SPONSORED PLANS

Proposals that increase Social Security Normal Retirement Age, either by indexing the age to life expectancy or by raising the age to a specified starting point, will

affect employer plans in large part based on the amount of increase in normal retirement age and the amount of time that employers have to prepare before changes

are required to be made to pension plans by pension regulations and the amount

of time until actual increases in retirement age begin to apply to plan participants.

The primary driver of employer cost is the amount of increase in normal retirement

age from current law, whether the mechanism is through an indexed increase or to

a fixed age. Employers are likely to find the uncertainty inherent in an indexed retirement age, and in how an indexed normal retirement age would interact with the

complex pension rules, unattractive. The resulting uncertainty and lack of clarity

in pension regulation may provide a yet another disincentive for the establishment

of new employer-sponsored plans, but is unlikely to add enough cost to encourage

employers to terminate plans.

Proposals to increase the age of first eligibility for Social Security benefits above

age 62 have drawn much more concern. In particular, employers that are dependent

on workers in physically demanding jobs are concerned that increased retirement

demands not fall on the employer, if Social Security early retirement ages are increased. Increased pension costs for low-paying, physically-demanding work would

generally increase the labor costs for low-skilled workers. This further reduces the

ability of low-skilled workers to compete in the marketplace. Employers are also

concerned over the potential for increased disability benefit costs if the age for early

retirement under Social Security is increased.

GAUGING THE EFFECT OF INCREASING THE SOCIAL SECURITY RETIREMENT AGE VS.

OTHER TYPES OF PROPOSED SOCIAL SECURITY REFORMS

While the effect of raising the retirement age on employer plans is difficult to

specify, it may be useful to compare the effects we can see, with the projected effect

of other Social Security reform proposals. Of course, the degree to which social security reforms determine changes in employer-sponsored retirement plans will depend

on the regulatory environment for employer-sponsored plans and the desire of plan

sponsors to use plans to affect retirement decisions of their own workforce. Preliminary analysis, based on the incidence of employer cost and the effect on employee

behavior, indicates that phased-in changes in Social Security retirement ages may

be much less disruptive to the private plan system than certain other types of reforms that have been proposed:

• Increases in social security tax rates would likely affect employer-sponsored defined contribution plans, due to the interaction of decreased ability to save by lowerpaid individuals, with the nondiscrimination rules for defined contribution plans. Alternatively, Congress could act to simultaneously amend the non-discrimination
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rules to reflect anticipated effects of the increased tax rate on lower-paid individuals’ ability to save.

• Removing the limit on earnings subject to payroll taxes would require immediate redesign of the majority of private sector, defined benefit plans and presumably some defined contribution plans as well if accompanied (as anticipated) by the

elimination of permitted disparity rules at the time the cap on taxable earnings is

removed. In conjunction with the progressive nature of the determination of the social security benefit, this could accelerate the trend to a two-tier system of unfunded

pension plans for the top paid group, and a funded plan which is adequate for the

lower paid and inadequate for employees in the middle.

• Proposals to change the investment policy pursued by the Social Security Administration, or to add IRA-type Social Security individual accounts will likely have

effects not only on benefit design costs but also could change capital markets and

financial cost drivers, particularly, for large private sector plans. The administrative

implications of a switch to IRA type accounts could be extremely burdensome for

the employer who might have to maintain Social Security records and balances for

its employees, especially during periods of transition or portability of its employees

from one employer or plan to another.

Thus, many of the alternative reforms have an immediate impact on private sector plans. On the other hand, increasing the Social Security Normal Retirement Age

tends to have a delayed effect on many plan sponsors, giving employers the necessary time to implement adequate changes to their benefit structure. To reemphasize, looking back to 1983 when the Social Security Normal Retirement Age was increased to age 67, even while some legislation was incorporated in the Tax Reform

Act of 1986, the ensuing changes did not have to be made immediately. This allowed

the employers to group the change in the Social Security Normal Retirement Age

together with the other long term demographic needs of their company, and gradually change the benefit structure to coincide with the changing demographics, without disrupting the benefit programs in place. Some employers are still today making

changes to their benefit programs, to reflect the 1983 increases in the Social Security Normal Retirement Age.

CONCLUSIONS

The degree to which increasing the Social Security Normal Retirement Age determines changes in employer-sponsored retirement plans will depend on the regulatory environment governing these plans as well as the desire of plan sponsors to

affect retirement decisions of their own workforce, to meet their human resources

objectives. Changes in the regulatory environment for pension plans will be needed

to reflect changes in retirement age. Additional changes in the pension regulatory

environment are needed to help employers and employees enter into flexible arrangements to enhance employees’ productivity as they age.

Increases in retirement ages are anticipated to have long-term design implications

for sponsored plans; but these may be manageable with sufficiently long time horizons for plan sponsors to adapt to changes. Short-term cost increases may be limited

to plans that provide early retirement supplements, or are restructuring. In comparison with several other types of proposed reforms, increases in retirement ages

may prove less disruptive to private sector plans.

It is imperative that increases in the Social Security Normal Retirement Age be

evaluated not solely for effects on social security benefits, but also with respect to

effects on employer-sponsored retirement plans, and the desire and ability of employees to save on their own behalf.

Mr. Chairman and Members of the Subcommittee, I thank you for the opportunity

to appear before you, and I would be glad to answer any questions you may have.

Chairman B

Mr. Walker, please.

UNNING. Thank you very much.

f
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STATEMENT OF DAVID M. WALKER, CPA, PARTNER, GLOBAL

MANAGING DIRECTOR, ARTHUR ANDERSEN, LLP; AND MEMBER, BOARD OF DIRECTORS, ASSOCIATION OF PRIVATE

PENSION AND WELFARE PLANS

Mr. WALKER. Thank you, Mr. Chairman. It’s a pleasure to be

here this morning. The hat that I have on today is I’m on the executive Committee of the board of the Association of Private Pension

and Welfare Plans. Its members collectively represent about 100

million Americans covered by employee benefit programs.

For your benefit and the benefit of the other Subcommittee Members, I’m also a former Public Trustee of Social Security and Medicare, and currently serve with Senators Breaux and Gregg, as well

as Congressmen Stenholm and Kolbe on the CSIS’ National Commission for Retirement Policy, which is looking at reforming Social

Security and the private pension system.

Mr. Chairman, what I’d like to do is to note that the APPWP has

formed a board-level task force to look at the issue of Social Security. It’s currently deliberating and has not finalized its deliberations. When we do, we would be happy to provide our recommendations. However, in the interim, certain preliminary observations

with regard to Social Security reform and the possibility of raising

the normal retirement age I think are in order, given the subject

of this hearing.

First, APPWP believes that Social Security should be reformed in

a comprehensive manner and on a reasonably timely basis—sooner

rather than later—in order to minimize the disruptive effect, and

provide adequate lead time for employers and individuals to adjust

to the changes. We also believe that such reform needs to maintain

the importance of the Social Security Program as a foundation of

retirement security for current and future Americans. That’s a very

important element to a sound National retirement system.

We believe that increasing the normal retirement age, and possibly the early retirement age, should be seriously considered as a

possible element of overall reform, given the fact that many have

already recommended increasing normal retirement age—for example, the Committee for Economic Development. As was noted by my

colleague, that would only have resulted in about 44 percent of savings that are necessary to put the program in actuarial balance

over 75 years, but it is an important fact to consider, not only for

financial reasons, but because of work force and labor force trends.

The fact that in 1950 we had 16 people working for every person

drawing Social Security; now it’s down to 3.3 to 1, and by the year

2030, it will be less than 2 to 1.

In the final analysis, we need to analyze individual reform elements, including raising the normal retirement age or early retirement age, and other possible reform elements, to come up with a

balanced program and to consider the interactive effects of those

reform elements.

With regard to the specific possibility of raising the normal retirement age, several preliminary comments are appropriate. First,

doing so would have significant implications not only on Social Security, but also on other government programs, such as the disability program, as well as other employer-sponsored programs, such

as pension, health, disability, workers’ compensation, and so forth.
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These have to be properly analyzed and considered. It may result

in individuals needing to work longer, either on a full-time or a

part-time basis.

We believe that consideration should be given to looking at current laws that affect both government programs, as well as private

sector pension plans, to possibly allowing additional flexibility for

individuals who wish to retreat into retirement, rather than a cliff

approach into retirement, where it’s working full time on 1 day and

not working at all the next. We think it’s important, given projected labor force trends, that we look for more flexibility.

We also believe it’s important to seriously consider eliminating

the earnings test on Social Security, as a way to encourage people,

but not require people to be productive longer in the work force,

given projected skills gaps that we see ahead.

In addition, we believe that raising the normal retirement age

would serve to increase the importance of private employersponsored retirement programs as an important supplement to the

base Social Security Program. It is important to also consider ways

that the private sector could be strengthened to increasing coverage; enhancing benefit security, benefit adequately, portability

and preservation would be desirable.

And, last, but not least, Mr. Chairman, we believe that it would

be extremely important that any change in the normal retirement

age or early retirement age be phased-in over an appropriate period of time in order to allow time for individuals and employers

to be able to adapt to that change, and frankly, as a matter of fundamental fairness.

Mr. Chairman, I would be happy to answer any questions you

might have, and obviously, the APPWP and myself would be happy

to contribute in any meaningful way that you deem appropriate in

the future in this regard.

Thank you.

[The prepared statement follows:]

Statement of David M. Walker, CPA, Partner, Global Managing Director,

Arthur Andersen, LLP; and Member, Board of Directors, Association of

Private Pension and Welfare Plans

Mr. Chairman and members of the Committee, my name is David M. Walker. I

am a Partner and Global Managing Director with the international accounting and

consulting firm of Arthur Andersen LLP. My background includes serving as one of

two Public Trustees of the Social Security and Medicare Trust Funds, as Assistant

Secretary of Labor for Pension and Welfare Benefits and as head of the Pension

Benefit Guaranty Corporation (PBGC). I am also the author of a book entitled: Retirement Security: Understanding and Planning Your Financial Future. In addition,

I currently serve as a member of the National Retirement Policy Commission sponsored by the Center for Strategic and International Studies (CSIS).

I am appearing before you today on behalf of the Association of Private Pension

and Welfare Plans (APPWP—‘‘The Benefits Association’’), an organization of which

I serve as a member of the Board of Directors and the Executive Committee. As a

result, my testimony today is designed to reflect the views of the APPWP rather

than my personal views. The APPWP is the national trade association for companies

and individuals concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The APPWP’s members represent the entire

spectrum of the private employee benefits community and either sponsor directly,

service or administer employee benefit plans covering more than 100 million Americans.

Today’s subcommittee hearing is particularly focused on an examination of the

implications of raising the retirement eligibilty age under the Social Security retirement income program (i.e., the Old Age Survivors Insurance (OASI) program). In
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my oral remarks today I will first outline certain information contained in the 1997

Annual Trustees’ Report. I will then discuss some of the implications of increasing

the Social Security normal retirement age on the private pension system and on retirement security in general.

CURRENT AND PROJECTED FINANCIAL CONDITION OF THE OASI PROGRAM

The Trustees of the Social Security and Medicare programs prepare an annual accounting of these programs for the Congress and the American public. This annual

accounting is due by April 1 of each year. The 1997 Annual OASDI Trustees’ Report

(‘‘the Annual Report’’) was issued in the spring of 1997 and covers the 1996 fiscal

and calendar years. It also included a projection of the financial condition of the

OASI program over the 75-year period ending in 2071. This long-range projection

is important as a means to advise the Congress and the American people as to the

likely condition of these programs in the years in which several generations can be

expected to receive OASI program benefits. Specifically, a 75-year projection period

is necessary in order to assess the likely financial condition of the OASI program

for all individuals currently paying OASI payroll taxes, including new entrants into

the workforce.

According to the Annual Report, the OASI Trust fund held approximately $514

billion in U.S. government securities as of December 31, 1996. In addition, the OASI

program ran an approximate $56 billion surplus for the year then ended. While the

1998 Annual Report has yet to be issued, it is expected to show that OASI Trust

fund assets totaled approximately $589 billion at December 31, 1997. It is also expected to show that the surplus for the year then ended amounted to approximately

$75 billion. Importantly, under current law, all annual OASI program surpluses

must be invested in certain U.S. government or agency securities. The current government bonds held in the OASI Trust Fund bear market rates of interest at their

date of issue, carry maturities of up to 15 years and are not readily marketable.

According to the Annual Report, the OASI program met the Trustees short-term

(10-year) test of financial solvency. The OASI program did not, however, meet the

Trustees’ long-range (75-year) test of financial solvency. The Annual Report also disclosed that the estimated 75-year financial imbalance in the OASI program amounted to approximately 1.84% of taxable payroll.

The Annual Report projected that, based on the Trustees’ intermediate (best estimate) set of assumptions, the OASI Trust Fund would be exhausted in the year

2031. The projected exhaustion date is significant since, beginning in that year, the

government will no longer be able to pay full OASI benefits on a timely basis. However, while the program would not be able to pay full benefits, the OASI program

would still have a significant revenue stream for benefits and program expenses.

Specifically, the OASI program is expected to have revenues equal to approximately

75% of projected benefit payments and administrative expenses during the period

2031–2071.

Given the above, OASI program revenues would have to be increased by 33% or

benefit payments reduced by 25% beginning in 2031 in order to restore the financial

integrity of the current program. Alternatively, more timely reforms would serve to

lessen the degree of changes necessary to restore the financial integrity of the OASI

program.

The projected OASI exhaustion date of 2031 may be a number of years away,

however, history shows that it is likely to come sooner than projected. Specifically,

after Congress enacted the 1983 Social Security reforms, the Trustees’ projected

that the OASI program would have adequate assets to pay full program benefits on

a timely basis until about 2062. By 1991, the Trustees’ projected exhaustion date

had accelerated to 2045. As previously noted, the Annual Report projected the OASI

Trust Fund will be exhausted in 2031. This is 31 years sooner than predicted in

1983 and 14 years sooner than projected in 1991. All of these projected dates are

based on the Trustees’ intermediate (best estimate) assumptions for the respective

years. Unfortunately, history has generally shown that actual program experience

is likely to fall between the Trustees’ best estimate and high cost sets of assumptions. As a result, a further acceleration of the projected exhaustion date would not

be surprising.

While the Annual Report noted that the OASI Trust Fund would be able to pay

benefits on a timely basis until 2031, there is a much earlier fiscal challenge relating to the OASI program which needs to be addressed. Namely, based on the Annual Report, the OASI program is projected to enter a negative cash flow position

in the year 2014, just two years after the first ‘‘baby boomer’’ is eligible for normal

retirement. Beginning in that year, annual benefit payments and administrative expenses are expected to exceed payroll taxes and other revenues. In addition, the pro-
125

jected annual OASI deficits accelerate rapidly each year thereafter. For example,

these annual OASI cash flow deficits are expected to grow to over $358 billion in

the year 2025 alone.

Once the program begins to experience a negative cash flow position, the federal

government will generally be required to take one of three steps in order to generate

the necessary cash to pay OASI benefits and expenses on a timely basis. Specifically, beginning in 2014, the government will either have to increase OASI tax revenues, decrease OASI benefits/expenses, or revise the current nature of the government bonds held by the trust fund and sell them to willing third party investors.

Obviously, the government could also take some combination of these actions in

order to bring the OASI program into annual balance if it so chose.

IMPLICATIONS FOR EMPLOYER-SPONSORED RETIREMENT PLANS

One way that total OASI benefit payments could be reduced is to increase the age

at which normal retirement benefits are available. To date, the APPWP has not formulated a policy position with respect to the specific issue that you are examining

with today’s hearing. However, it should be recognized that changes in the eligibility

age (both for normal retirement age and early retirement age) raise a number of

important questions that extend beyond merely the impact on the fiscal integrity

of the Social Security trust funds themselves. Such a change should be considered

in the context of overall reform of the Social Security system along with its effect

on the Medicare program, the labor force, employer-sponsored benefit programs and

individuals. It is APPWP’s position that the current Social Security program must

be reformed in order to assure its long term financial integrity and sustainability.

Such reform should be comprehensive in nature and enacted sooner, rather than

later, to minimize the cost and disruption reform will have and to provide as much

opportunity as possible to prepare for the changes inherent in reform.

Raising the Social Security retirement eligibility age will have very real implications for the employer-sponsored benefits system, both retirement and health related benefits. It is important that these implications be understood and analyzed.

Many retirement plan sponsors currently coordinate normal and early retirement

eligibility under their plans with the Social Security eligibility age. In the past, employers have often used enhanced benefits under a private pension plan as a way

of adjusting the level of a company’s workforce without the necessity of layoffs. However, in the near future the United States is likely to experience a labor shortage,

particularly among skilled workers. In this regard, potentially one of the greatest

changes to the employer-sponsored retirement system that could be caused by increasing the Social Security eligibility age is a change in the retirement pattern of

workers. The primary expected change would be that workers may remain in the

workforce for longer tenures, either in the same position, or at a different job.

Another pattern that can be anticipated is an increased shift away from ‘‘traditional retirement’’ to ‘‘phased’’ or ‘‘partial retirement.’’ Traditional retirement is

when a worker totally exits the work force and commences distribution of his or her

entire retirement benefit. A phased retirement is instead when a worker remains

employed but at a reduced work schedule and earns reduced wages, but simultaneously receives a portion of his or her pension benefit. The combination of reduced

wages and a distribution of a portion of the pension benefit results in the individual

continuing to receive a similar or slightly reduced amount of income from combined

sources. Raising the Social Security normal or early retirement age would reinforce

the need to consider allowing additional flexibility under employer-sponsored retirement plans so that workers can begin receiving a portion of their retirement benefits before full retirement.

Certainly, continued employment on a part or full time basis would help meet the

economic demand for skilled workers. However, some employers may want to continue to provide incentives for older workers to retire from their jobs to make room

for younger employees. Plan sponsors who need this flexibility to recognize their

workforce realities (i.e. recognizing the inability of some industries’ workers to continue working) will face increased costs.

In addition, some individuals may need or want to retire earlier than the increased Social Security eligibility age. To the extent that employers do not supplement the difference in benefits there will be greater pressure on individuals who

want, or need, to retire earlier to rely on individual sources of retirement security,

including employer-sponsored plans. This would serve to increase the importance of

assuring that federal laws and regulations are designed to encourage the creation,

maintenance and proper funding of employer-sponsored retirement plans, including

reasonable contribution and benefit limits.
126

Also, an increased Social Security eligibility age would likely result in greater use

of employer-sponsored and government disability programs. There will likely be

greater use of worker compensation and unemployment compensation programs. In

addition, increasing the Social Security eligibility age may result in increases in the

cost of employer-provided health plans. This would translate into greater costs for

these programs due to longer coverage and greater use.

RECENT OASI PROGRAM REFORM RECOMMENDATIONS

A number of groups have recognized the projected financial imbalance associated

with the OASI program. In fact, a number of groups have called for reform of the

existing OASI program. Many of these organizations have made specific recommendations for consideration by the Congress and the Administration, including

the increase in the normal Social Security eligibility age.

The most notable OASI reform group that has already made related recommendations is the 1994–1996 Advisory Council on Social Security (the ‘‘Council’’). This

statutorily mandated group issued its report in December 1996. While the Council

agreed on the need to reform the OASI program, it did not fully agree on how to

do it.

A majority of the Council members favor speeding up the current schedule for increasing the eligibility age for full retirement benefits under Social Security. Under

current law, the eligibility age for full retirement benefits (currently 65) will gradually increase to age 66 for workers who attain age 62 in 2005. It will then remain

at age 66 for eleven more years and then gradually increase to age 67 for workers

who attain age 62 in 2022 or later. The majority of the Council members would

speed up the schedule so that the age of eligibility for full benefits increases to age

67 by the year 2011. According to the Council’s report, this change would save five

percent of Social Security’s long term actuarial deficit. After 2011, these same Council members would recommend a gradual increase in the eligibility age in the line

with longevity trends.

FINDINGS OF THE COMMITTEE FOR ECONOMIC DEVELOPMENT

In its report issued one year ago this month, the Committee for Economic Development (CED) recommended a continuous two month per year rise in the normal

retirement age beginning in the year 2000, until the age reaches 70 in year 2030.

Further, the CED recommended that increases in the normal retirement age after

2030, should be linked (indexed) to changes in average life expectancy in a way that

maintains a constant average ratio of working years to retirement years. This reduction would eliminate about 44 percent of the 75 year acturial deficit in the present

program according to CED’s report. The CED report noted that in the future an extended work life will be a necessity for most workers.

Among the members of the Committee’s Subcommittee on Social Security Reform

there was a disagreement as to whether the early retirement eligibility age should

also be raised. According to the report, benefits at early retirement should be reduced actuarially to reflect the number of years of retirement before the normal retirement age. Those retiring at age 62 currently receive about 80 percent of the benefit at age 65. The present reduction along with maintaining the early retirement

eligibility age will ensure that the penalty for early retirement at age 62 will rise

as the normal retirement age increases. A large reduction in benefits would be intended to encourage individuals to work longer or to save more to finance their early

retirement. At least some of the Subcommittee’s members were of the view that the

early retirement age should also be increased. This is because the availability of an

actuarially reduced early benefit may serve as a trap for the unwary. More specifically, individuals may mistake the availability of an early retirement benefit as an

indication that the benefit will be a sufficient safety net without understanding the

full impact of the reduction on their total retirement income. If the early retirement

age were increased, however, it would still be appropriate to consider facilitating full

access to actuarially reduced benefits as early as age 62, but only for those individuals who retire because they are unable to work.

SUMMARY

The OASI program does not face an imminent financial crisis. However, the

APPWP recognizes, and many believe, that we are beginning to experience an

emerging crisis of confidence among the American public in connection with the Social Security and Medicare programs. This emerging crisis of confidence is primarily

attributable to the growing concern regarding the financial integrity of these programs and the historical inability of the federal government to communicate can-
127

didly and deal effectively with the looming fiscal challenges facing these important

federal programs. Many of these looming fiscal challenges are the result of known

demographic trends.

Both the legislative and executive branches of the federal government have a responsibility to address this growing crisis of confidence. In addition, the private sector also has a responsibility to take steps to eliminate this emerging crisis of confidence.

While the OASI program does not face an imminent financial crisis, it does face

a midterm financial challenge due in large part to known demographic trends. The

most notable of these trends relates to the need to finance the significant OASI program obligations associated with the ‘‘baby boom generation’’ in the face of declining

worker/retiree ratios. Specifically, we face rapidly accelerating OASI program obligations beginning in 2014. In addition, the worker/retiree ratio has declined from 16:1

in 1950 to 3.3:1 today. This ratio is projected to decline to less than 2:1 by 2030.

Importantly, these demographic trends are a virtual certainty and the related implications on the financial condition of the OASI program must be addressed.

From a broader perspective, the challenges we face in connection with the OASI

program are a subset of a much larger fiscal challenge. Specifically, according to estimates by the Concord Coalition, total mandatory federal spending (e.g., entitlements and interest on the federal debt) are expected to exceed projected federal revenues before 2020, if changes are not made. In addition, entitlements alone are expected to consume more than 100% of projected federal revenues by 2030, if reforms

are not enacted. Social Security is a major part of these projected entitlement expenditures. Medicare and Medicaid represent other major dimensions of the growing

entitlement challenge.

Fair and timely action is needed to restore the financial integrity of, and public

confidence in, the OASI program. Fairness requires that any related program

changes be balanced among different generations and that certain changes be

phased-in to allow individuals time to adjust. Timely action is also appropriate since

delay will only serve to increase both the severity and the difficulty of achieving the

needed OASI program changes.

Achieving the needed OASI program reforms will require the development of nonpartisan policy options and the pursuit of bipartisan legislative action. Any successful reform package will also require a balancing of policy and political considerations. Importantly, Congressional legislative action will have to be preceded by a

concerted national campaign to educate the American public as to the nature and

extent of our challenges, various options, including raising the normal and early retirement eligibility ages, and their implications, and any recommended approaches

to reform. These hearings, Mr. Chairman, are clearly an integral part of that national dialogue.

Finally, in pursuing reform of the OASI program, policymakers must recognize

that any modification of the OASI program will also have a ripple effect on other

important retirement income programs. Specifically, OASI program reforms will also

necessitate congressional action designed to strengthen employer and union sponsored retirement income programs and individual retirement savings arrangements.

Such actions should include, but not be limited to, efforts designed to rationalize existing retirement vehicles, review current plan sponsorship requirements, facilitate

employee savings through payroll deduction, increase current contribution and benefit limits, strengthen existing minimum funding standards, eliminate inappropriate

administrative burdens, enhance pension asset portability, improve the fairness of

PBGC variable rate premium structure and encourage the preservation of pension

savings for retirement income purposes.

Chairman B

Before I call on Mr. Smith, let me tell you, it took us 10 years

UNNING. Thank you, Mr. Walker.

f

to get the earnings limit moved from where it was at the $11,250

to $30,000 over a 7-year period. It cost $7 billion to get it done. We

were trying to eliminate it, but it took 10 years and two administrations, and we finally got the second administration to sign onto

the bill. So I want you to know that I’m for eliminating it completely, but, under PAY–GO, we have to find the money to do it.

Mr. Smith.
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STATEMENT OF DAVID A. SMITH, DIRECTOR, PUBLIC POLICY

DEPARTMENT, AMERICAN FEDERATION OF LABOR AND

CONGRESS OF INDUSTRIAL ORGANIZATIONS (AFL–CIO)

Mr. SMITH. Mr. Chairman, thank you. I know I’m the last witness in a long day, so I will try to as brief as my colleagues have

set an exemplary example.

Let me try to respond to a couple of things that aren’t in my prepared testimony, but that have come up today. One of them, and

David mentioned it, as others have, is the labor market effects of

raising the retirement age. Frankly, Mr. Chairman—and this may

be unexpected coming from the AFL–CIO, but it seems to me that

this a case where we ought to assume that the market will work.

One of the questions—and I was talking with Chairman Greenspan

earlier last year about—how do you explain what’s happened to

labor force participation really at both ends of the cohort. Older

Americans coming back in, as we’ve testified, and among some

young people who have stayed out of the labor force for most of the

last decade and are finding their way back in. The answer here is

simple: A very low unemployment rate, some pressure on labor

markets, and employers figuring out ways to add men and women

who weren’t previously in the labor force.

They will do that with older Americans as well as they will continue to do it with younger Americans, and we won’t want to assume that, in the absence of a tight labor market, raising the retirement, the normal retirement age, that that will happen, or that

not raising the normal retirement age in the presence of a tight

labor market won’t yield precisely the same phenomenon we’ve

seen over the last 3 or 4 years. Working people, men and women

who have left the labor force, have been downsized or forced out,

come back in when they have those opportunities. And I would expect that that will continue regardless of what we do with the normal retirement age, as long as labor markets stay tight. We ought

to assume that the market, as you so often note, Mr. Chairman, is

pretty thoughtful about these things, and this labor market will

work in that way.

A second issue which gets raised here, which I really do want to

emphasize—when I testified before this Subcommittee last spring,

I said something to the effect that this system ought not to be

thought of as a piece of the retirement system for Americans. This

isn’t a leg of a roughly balanced three-legged stool; this is the heart

of retirement income for most Americans, and will grow in its importance over the next two decades, not diminish. Perhaps we

would wish that not to be true, but it is true.

And it’s especially true for Americans who worked in low-wage

jobs, for Americans who have worked the nightshift, who’ve worked

the dirty jobs, who’ve worked in the more dangerous jobs, and any

increase in the normal retirement age, and particularly if it were

twinned, as Dr. Myers had suggested, with a ratcheting up of the

early retirement age, would have particularly serious effects on

those Americans, people who have earned less in their lifetime and

earned less probably in a circumstance where they will more likely

to be exposed to health hazards, more likely to have been injured

in a way, while perhaps not qualifying for disability—made it

tougher for them at 62 than it did for some of the rest of us who
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had a chance to grow old somewhat more gracefully and less arduously.

A few numbers I think help illustrate that, both the reliance

question and the vulnerability question. Now 46 percent of AfricanAmerican older households rely on Social Security for 90 percent of

their retirement income. That’s a dramatically different figure than

whites; only 28 percent of white Americans rely on Social Security

for 90 percent of their retirement.

Twenty-eight percent of African-Americans 62 years or older,

only 28 percent have any pension income whatsoever. When we’re

talking about opening up this hole for a group of people, we’re not

talking mostly about people in this room. We’re talking about people who do very different jobs, are exposed to very different risks,

and make a great deal less money.

Let me—one other: Precisely that same group of people, as you

know, and as has been testified today, any increase in the retirement age is a benefit cut. It’s widely understood that Social Security is actuarially sound. Were we to push the retirement age out,

it would be a benefit cut for anybody. It would be a larger benefit

cut for those who are more likely to die sooner. And AfricanAmericans and other people of color are much more likely to die in

that window, Mr. Chairman, than either you or I are. The death

rate for males age 62 to 65 for African-Americans is 150 percent

of the death rate for the white cohort during that same period.

So we’re not talking, as some of the earliest testimony suggested,

we’re not talking about a generalized either circumstance with

which we approach retirement or a generalized impact on us from

these kinds of changes. We need to be very careful.

Thank you.

[The prepared statement follows:]

Statement of David A. Smith, Director, Public Policy Department, American

Federation of Labor and Congress of Industrial Organizations (AFL–CIO)

Good Afternoon. Mr. Chairman and Members of the Subcommittee, my name is

David Smith. I am Director of the AFL–CIO Public Policy Department. On behalf

of our 13 million members and their almost 40 million family members, I am here

today to express our great concern over proposals to increase Social Security’s retirement ages and the very serious questions that they raise about fairness toward and

protection of some of the most vulnerable members of American society.

BENEFIT CUTS THAT TARGET THE ECONOMICALLY VULNERABLE

Let me begin today by posing this question: Assuming in the first place that any

Social Security benefit cutbacks are warranted, should it be done in a way that has

the greatest negative impact on the group of workers who have spent their working

years in physically arduous jobs, who experience poor health, who have the lowest

levels of health insurance and pension coverage, and who have seen their real wages

drop significantly over recent years? I hope it strikes you as unfair, if not mean spirited, to balance the long-range finances of the nation’s principal family protection

plan on the backs of those who need it the most. That, however, is just what an

increase in the Normal Retirement Age would do.

Clearly, raising the full retirement age cuts benefits and does so in two significant

ways. First, all workers, whether they delay retirement to the new full retirement

age or continue to retire early, will get reduced lifetime benefits. Second, those who

take early retirement will also receive lower monthly benefit amounts that provide

a less adequate income throughout retirement. For example, under the current

scheduled increase in the full retirement age, an individual who elects to begin receipt at age 62 will get a monthly benefit amount equal to 70 percent of the full

retirement benefit, compared to 80 percent under the rules currently in effect. A further increase would cut this benefit even more. But this is not the whole story.
130

Keep in mind that for many retirement is not the beginning of a golden age

cruise, but rather an economically traumatic event, especially for low-wage workers

and people of color. With the cutbacks Congress enacted in 1983 beginning to take

effect for early retirees in 2002, it may yet get worse. Consider that a fourth of African Americans 60 years of age and older live in poverty, compared to less than a

tenth of White Americans. An overwhelming majority of these workers lack substantial sources of retirement income beyond Social Security. • Forty-six percent of African American older households and 44 percent of Hispanic older households rely on Social Security for 90 percent or more of their income

in retirement. And nearly a third count on it for all of their income. • By contrast 28 percent of White retirees rely on it for 90 percent of their income

and 14 percent of them count on Social Security for 100 percent. • Only 28 percent of African Americans 62 years of age or older have any public

or private pension income, compared to 43 percent of Whites of the same age. • Furthermore, asset income, while more widely received than pension benefits,

amounts to very little for most retirees regardless of race. For all of those 65 and

older, the median is $1,306. Looking at the least well off quintile, the median annual asset income is a tiny $12 a month.

Also, it is critical to remember that any Social Security cutbacks will be sliced off

of a baseline that is already quite low for the lower-income elderly. Among the poorest, the median Social Security benefit is roughly $5,500.

This background information feeds directly into discussions about raising the retirement age because an increase will hurt these already vulnerable populations the

most. The benefit cuts imposed by an increase in the retirement age have a greater

impact on those population subgroups whose members die younger, are forced to

start benefit receipt earlier, and have few alternative resources to enable delayed

receipt of Social Security or cover cuts in monthly benefit amounts. Those beneficiaries affected most are minorities, particularly African Americans, and all lowwage workers.

For workers who lack substantial alternative sources of income, any cut in Social

Security is going to be more painful than it is for those who have other legs of the

retirement stool on which they can rely. A worker who relies entirely on Social Security in retirement and retires at age 62 in 2022 and later will experience an additional 10 percent cut in benefits as a 10 percent cut in income. By contrast, an

upper income worker who relies on Social Security for only one quarter of retirement income, as the top 20 percent of the elderly do, would see less than a 4 percent

cut in total income from the same cut in early retirement benefits. The result will

be even less adequate retirement incomes for workers and families already at the

margin. The regressive nature of increases in the normal retirement age has been

confirmed by one study that looked at the effects of an immediate increase in the

Normal Retirement Age to 67. It concluded that the cut in benefits under a raised

retirement age for incomes under $25,000 would be one and one-half times higher

than for incomes above $75,000, measured as a share of lifetime income. (Wolff, Edward and Howard Chernick, ‘‘The Distributional Effects of Raising the Social Security Normal Retirement Age and Partially Indexing Benefits,’’ EPI Working Paper

No. 115, 1996.)

The argument that we should cut benefits by increasing the Normal Retirement

Age is ultimately based on two related numbers: life expectancy and the percentage

of the population in retirement. These are the same basic facts that Congress relied

on in 1983 when it voted to increase the full retirement age to 67 in the next century. It would be a mistake, however, to treat life expectancy as a predictor of the

health and well-being of the elderly and near-elderly populations. More importantly,

a generalized treatment of these populations glosses over the very substantial heterogeneity that exists regarding life expectancy, health, job situation, and alternative economic resources. The most salient differentials exist between African

Americans and White Americans, and poor/lower-income and non-poor workers.

African Americans as well as the poor and near-poor have shorter life

expectancies than the population as a whole. The differences between White and African Americans is clearly illustrated in male mortality rates. While the magnitude

of the mortality gap narrows among the elderly, a substantial difference persists.

For example, the death rate from age 62 to age 65 for African-American men is over

one and one-half times that of White men (8.9 percent versus 5.5 percent). An increased normal retirement age would disproportionately impact African American

men simply because they are more likely to retire early. There is a 15 percentage

point gap in the Labor Force Participation rates of White and African-American men

ages 60 to 64. If early retirement ages were bumped up, a smaller percentage of

age-62 African American men would survive to the higher eligibility age than White

men. While separate life expectancy numbers are less well developed for poor versus
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non-poor Americans, the available evidence also suggests a substantial gap between

the two groups. According to some estimates the mortality rates among the young

elderly may be two times higher for the poor and near poor (the bottom 20 percent

of income earners) than they are for the rest of the population.

While we do not know life expectancy by occupation, it is clear that people who

spend their work lives scrubbing floors in a nursing home, moving 5 liter engine

blocks around a factory floor, pouring steel into a Bessemer mill, or hauling bricks

around a construction site can count on a shorter life span and a shorter work life.

They are more likely to experience work place injuries and to lack the continued

physical endurance necessary to perform their jobs very far into their 60’s. We

should not be telling them that they have to postpone retirement or do with less.

Much has been made of the issue of whether near and young elderly health is

improving and will therefore enable longer working lives. While the evidence is far

from clear, it is worth noting that health trends will likely be affected by health

insurance coverage. The news on the employer-based health insurance front is not

good. Eight million fewer Americans had employer-based coverage in 1996 than in

1989, and another 8.1 million can be expected to lose coverage between now and

2002. And the lack of employer-based coverage is felt most by low-wage workers:

Whereas over 85 percent of Americans in families with $50,000 and more in income

had coverage in 1996, less than half of those in families with $15,000–$19,999 in

income did.

Of course, the response to our criticisms is that workers can simply make up the

difference in benefits by accumulating greater savings and pension benefits to enable early retirement. However, it is difficult to argue that low- and even averagewage workers will be able to save more given recent wage trends. Between 1979 and

1995 the median wage earner saw real wages decline by 6.9 percent. And wage

drops were greatest at the lowest wage levels: for workers at the tenth and twentieth percentiles real wages declined by 17 percent and 11 percent respectively. That

is not a recipe for increased worker savings, as is evidenced by the decline in the

personal savings rate from 7.4 percent to 4.7 percent (of disposable personal income)

over that same period.

CONCLUSION

In conclusion, the most critical point in any discussion about Social Security’s future is necessarily its historical and continuing role as the retirement system for average wage workers. Social Security, not pensions or savings, provides two-thirds of

the elderly with 50 percent or more of their income in retirement. Despite retirement policy rhetoric about a three-legged stool of retirement income, for too many

Americans Social Security is the only leg on which they can depend. Therefore, any

changes to Social Security—while they may seem reasonable to people who will actually have three legs of retirement income—are potentially traumatic to large numbers of American families. Raising the Normal Retirement Age is clearly a change

that would have harsh consequences for those workers that Social Security counts

among its most important beneficiaries.

Disclosure Statement: Neither the AFL–CIO nor David A. Smith received funds from

the relevant statute(s) during this fiscal or the preceding two fiscal years.

submit questions to you, individual questions on your testimony,

Chairman BUNNING. Let me also say to you that we are going to

f

but I want to ask Mr. Smith—if in fact we rule out any increase

in retirement age, what are the other suggestions that you might

have for stabilizing and making sure that we have solvency for all

the boomers and those people past the year 2029, when, if we do

nothing, we reduce it to 75 percent?

Mr. SMITH. Well, Mr. Chairman, as you know, we don’t think

doing nothing or hoping that it will——

Chairman BUNNING. I didn’t say that. I’m looking for other suggestions.

Mr. SMITH. We could—and I’ll make the suggestion that’s least

popular—we could raise taxes, either on us in a way to prefund the

trust fund or on the cohort that will begin to retire, that will be
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working in about the middle of the decade, the second decade of the

next century. There are a variety of other less traumatic things

that we could do. I think there’s a lot of imaginative work which

can be done around the notion of part-time retirement. I’m not sure

that I understand how all of those ideas would work, but it creates

another option for older American, which seems to me to be sensible and would take some pressure off the trust fund.

I’ll give the easiest answer here. We can continue to run the

economy as well as we’ve been running it. The increase in the trust

fund surplus at the end of 1997 was substantially higher than had

been projected only a year early. It’s very simple why that happened. More Americans were earning more money, and that’s good

for the trust fund. A few more years like this and we’ll actually

begin to see a material difference in the deficit that we have to

make up.

We ought to close the gaps and ensure that this almost universal

system becomes truly universal, and there are other suggestions

made, some of the consensus suggestions out of the Grahamlich

Commission which are well worth doing. I share some of Bob

Myers’ concerns about increasing the base, but I do think it might

be done in a way that doesn’t disadvantage women workers, and

we ought to look at that.

Chairman BUNNING. Mr. Bone, in your statement you discuss the

importance of sufficient long-range planning. In 1983, the longrange planning was the year 2000 all the way up for 20-some years

after that, to increase every 2 months, or thereabouts, an increase

in the age. If we plan to do anything, and all of a sudden we’re past

the year 2030 or 2035, how long a period are you talking about?

Mr. BONE. Well, I think there are two issues here. One is in the

early retirement age, if you look in the Social Security Advisory

Commission’s Report, where one of the alternatives would tie early

retirement age increases to increases in the normal retirement age,

that’s clearly too short for effective planning, because you would

have that affecting people as they reach age 62 in the very near

term future.

On the other, as far as inducing sudden cost changes to employer

plans, which might require some offsetting changes, something that

says moving the retirement age after age 66, for instance, as Mr.

Myers had suggested, allows sufficient time for employers to begin

to plan and for costs to be taken into account in redesigning plans,

as the labor markets commence to change.

Chairman BUNNING. In other words, you’re suggesting a 25- or

20-year——

Mr. BONE. I think that if you look at changes in the labor force

and look at changes in normal retirement ages that are timed to

occur around the time that we see significant reductions in the increase in labor force participation rates, that that’s going to be

more in tune with the changes that employers would naturally be

making to plans, and therefore, less disruptive to the system.

Chairman BUNNING. Mr. Portman.

Mr. PORTMAN. I think it’s great testimony; I wish everyone could

hear it in the Congress. It’s really very helpful. I have a bunch of

questions. Let me just start with a couple of the premises with

which we’re working.
133

One is the notion, Mr. Bone, you talked about, and it was also

mentioned by Mr. Walker, as to the growth of private pension

plans. Seventy-seven percent of Americans by the year 2018 are expected to be covered by some kind of a pension plan, a retirement

savings plan. Is that accurate?

Mr. BONE. That’s a study cited in one of the EBRI data books,

assuming reinvestment of lump-sum distributions; that over time—

and once again if I can respond to some of the comments over here,

I think it’s very important to look at the generational effects of

pensions as opposed to looking at current coverage by participants

within different groups. As you look at changes in labor force participation by those groups, the effect as to whether or not they’re

covered by pensions changes dramatically.

Mr. PORTMAN. OK. I’m encouraged by that. It surprises me.

Twenty percent of small businesses don’t offer any kind of pension

plan at all, and that’s 25 or fewer employees. What we’ve been

doing in Congress—Jim Bunning has been supporting this—is simplifying our pension programs. The President just made another

proposal. The Simple Plan is doing well out there, and we’re making some progress, but I would find it hard to believe that smaller

employers would move that rapidly. It’s great news. If that’s true,

we truly have a third leg, as Mr. Smith talked about earlier. At

least one of the other two legs is pretty well established.

Mr. Walker.

Mr. WALKER. There are still significant coverage gaps, which are

projected to continue, especially in the small business sector. We

still only have about 50 percent of the full-time work force who’s

covered by private pension plans. In addition, the assumption in

that study assumes that people reinvest lump sums, and the fact

of the matter is that 70 percent of the people don’t reinvest their

lump sums. We’re moving to a defined contribution system.

I think the bottom line is, while don’t get me wrong, I’m a big

believer in the private pension system; the organization that I represent believes that if you make changes in Social Security, especially raise the normal retirement age, you need to look at how you

can expand coverage, how you can strengthen that system, provide

additional flexibility and reduce burdens.

But I think the fact remains that if you look at income dispersion, that low-income individuals rely extensively on Social Security, and will continue to, as their primary form of retirement income. The facts are there.

Mr. SMITH. Mr. Walker said it all. The question here, Mr.

Portman, is not, does somebody have a pension, but does that pension amount to very much? For a substantial plurality of us, it really doesn’t. Coverage, pension coverage, in the private sector has

slipped below 50 percent, and the trend is down, not up.

Mr. PORTMAN. I think one of the challenges we have as a Congress is to figure out ways to reverse that. I happen to believe that

the legs of the stool are different, but they’re all three very important, and you’re not going to be able to back up Social Security unless you provide more pension alternatives, both defined benefit

and defined contributions, and I think particularly in the area of

defined contribution plans, we have a real opportunity with small

businesses, and that will cover a lot more Americans.
134

So I do think there are three legs we need to focus on, and yet

I’d be surprised if those numbers—and I guess the answer is really

there will be more coverage, but it may not, depending on how the

stock market goes. The coverage might not be adequate to provide

for even a basic retirement, if someone were to retire or not have

Social Security.

Mr. BONE. There are issues with the size of the benefit. I also,

though, would like to point out that, looking at a snapshot of coverage at any point in time ignores the movement of employees in

and out of jobs that are covered by pensions. So that, once again,

there is an issue of the size of the pension, and that we need to

increase accessibility of pension plans to a broader range of employers, but we do have a number of employees who move in and

out of pension coverage and retain a right from it.

Mr. PORTMAN. OK.

Mr. Walker.

Mr. WALKER. I think you’ve raised an excellent point. The Commission that I’m working on, the CSIS National Retirement Policy

Commission, is looking at all three elements of retirement income

security: Social Security, private pensions, as well as individual

savings. That’s critical. You need to look at these things comprehensively because there is an interactive effect.

Mr. PORTMAN. And all related to the age issue?

Mr. WALKER. Well, they all are impacted by the age issue. I

think we have to keep in mind the first social insurance system in

the world was created by Otto von Bismarck in the 1870’s. The normal retirement age under his program was 70; whereas the average life expectancy was 55. He had a great concept. He was going

to take care of people and it wasn’t going to cost much money. So

there was a great politician for you. But times have changed and

we’ve got to change with the times.

Mr. SMITH. Mr. Portman, you’re absolutely right. The stool needs

three legs to stand up and we need to pay attention to all of them.

I would underscore what my testimony says about the centrality of

Social Security, and two other numbers: The savings rate continues

to trend down as a share of disposal income. So whatever meager

contribution private savings now make, we should anticipate that

for the next cohort of retirees it will be even less, and pension coverage—it’s not simply the amount, although both my colleagues are

right; the amount matters a great deal, but the reach of private

pension is declining, unfortunately, has continued to even through

these last half dozen relatively robust years in the economy.

Mr. PORTMAN. To make one final point, I had a broker in today

to see me from a small town in Ohio, and he said two things. No.

1, the Simple Plan is very popular out there among small businesses. His company sold 15,000 of them last year. And second,

there’s this new Roth IRA. I hate when things are named after

politicians, but this one actually happens to be successful, which is

the third leg we talked about, and he says this thing is selling like

hotcakes. I think that’s good, because it’s also in my view simplification because you don’t worry about the IRS, once you make

your contribution. I think there is hope out there, but I would hope

that the AFL–CIO and our business partners can work with us on
135

trying to make those other two legs work better as well to back

stop it.

Thank you, Mr. Chairman.

Chairman BUNNING. Mr. Portman, I can’t resist. Just be happy

that the Simple Plan isn’t called after a politician. [Laughter.]

[Questions were submitted by Chairman Bunning to Mr. Bone.

The questions and responses follow:]

Question 1. You say that to date, employers continue to sponsor early retirement

incentives in defined benefit plans that encourage retirement well before the early retirement age as defined by Social Security (age 62), even as increases in the normal

retirement age are schedule to begin under current law. Is there anything in your

view, that will change this employer practice? In other words, will a shrinking workforce require employers to take another look at these practices in the future?

1. Specific employers are likely to continue to sponsor early retirement incentive

programs in defined benefit plans based on the particular needs of their business,

need for employees and competitive environment. These programs satisfy a need for

broad-based reductions in workforce size that are popular with both terminated and

remaining employees and offer less negative effect on morale and marketplace perception than an alternative such as layoffs. As the population of workers entering

the labor force begins to slow, I believe it likely that the number and frequency of

these programs will decrease. In a marketplace that is increasingly competitive for

employees, relatively more employers will find it easier to attain a desired workforce

size reduction through attrition. Any downward changes in asset performance of

pension plans would also serve to make the offering of these programs less attractive to employers. However, it is likely that some level of these programs will remain in place as specific employers adjust to the particular circumstances of their

evolving competitive environment.

Question 2. You suggest that Congress should hold sponsors of plans harmless to

increased benefits that are due solely to the reductions in government-promised Social Security plans. Would you provide more detail as to why this is important in

your view and do you know whether Congress instituted any ‘‘hold harmless’’ provisions when they raised the retirement age in 1983?

2. Sudden changes in the system are the types of changes for which employers

may need to be held harmless. (Employers could be held harmless by, for instance,

granting them an exemption from the requirements of Internal Revenue Code Section 411(d)(6) when employers modify plans to reflect changes in Social Security

benefit amounts.) The ability of employers to plan and adapt to changes in an unhurried and rational manner is important for many reasons: • Plans of many large employers have benefits directly linked to Social Security

benefits, retirement ages and/or the taxable wage base. • Changes in Social Security will have broad implications on the availability of

older workers.

To the extent that legislation directly impacts a plan’s benefits employers need

time to evaluate costs, redesign plans, retool administrative procedures, and communicate with employees. Pension plans are also a significant item in a company’s balance sheet, financial statement, and its ability to borrow. To the extent that protected benefits are automatically increased as a result of links to Social Security,

there could be a substantial impact on a company’s financial health. The voluntary

private sector system cannot absorb increases in costs due to unanticipated events

without significantly affecting the desire of plan sponsors to maintain plans and provide retirement benefits to employees.

All companies, including those without plans that are directly linked to Social Security, need time to assess the broader demographic implications of legislation, not

only on their benefits plans, but also on their overall business plan.

In 1983, by providing a sufficiently long-time horizon to reflect the emerging

changes in Social Security, Congress effectively provided an opportunity for employers to: • Adjust plans for future retirees through the ability to redesign the pattern of

future benefit accruals • Retain current plans for those near retirement without change.

Question 3. You discuss the importance of flexibility for employer plans to enhance

employee’s productivity as they age. Would you provide some examples for us on what

you mean and how current law prevents this needed flexibility?

3. Retirement is more than just a financial decision. It is influenced by health,

desire for leisure time, family considerations, the non-financial rewards of employment and many other factors. Current law makes it very difficult for employees to
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partially retire with their current employer and receive both pension and a reduced

wage in exchange for reduced hours. Employees desiring partial retirement generally change jobs. This results in lost productivity by both the employer and employee as training of replacement employees occurs at both the ‘‘old’’ and ‘‘new’’ jobs.

Current retirement plan law takes a ‘‘one size fits all’’ approach: you are either

active or you are retired. Among the roadblocks to partial retirement are the following:

• Distributions from pension plans cannot commence prior to Normal Retirement

Age unless an employee retires.

• Retirement distributions cannot be pro-rated to reflect part-time employment.

• Employment after Normal Retirement Age can require expensive benefit accruals and, unless confusing ‘‘suspension of benefit notices’’ are provided, actuarial increases.

• The legal definition of Normal Retirement Age itself, and many other rules that

key off NRA have been unresponsive to the increase in Social Security Retirement

Age, remaining at age 65 with five years of service.

Question 4. I’m interested in knowing your views on the degree to which age discrimination may ultimately prevent increased participation of older workers in the

work force.

4. As the number of new entrants to the labor force decreases, and if the health

status of older workers continues to improve, I personally believe that the employer’s job requirements will adapt to the available workforce. Certainly, the country

has seen periods in the past when labor force participation by older workers was

much more common than it is today. This may reflect today’s demographics which

have a relatively larger number of qualified mid-career employees in the labor force

today, rather than any acceleration of age discrimination in the recent past.

Question 5. Will there be enough jobs for older workers, jobs with the level of physical activity that most persons over age 67 can perform?

5. Projecting the number of jobs available for persons with the level of physical

ability of most persons over age 67 requires a projection of both the level of future

physical ability among older individuals and a projection of the relative amount of

physical activity required in employment. Whether increases in longevity have been

linked to improvements in physical well being of older individuals is the topic of active study. While neither a demographer nor an economist, my understanding is

that recent studies do appear to show reductions in morbidity levels as well as in

mortality rates. Levels of physical activity required to perform jobs would appear

to be decreasing in the ‘‘information economy,’’ but I am not aware of any reliable

projections of future trends in required physical activity.

Question 6. Do you have thoughts on how the increasing number of older workers

might impact rates of unemployment, job opportunities, and career advancement for

younger workers?

6. This is an interesting area of exploration and modeling, but outside my own

area of expertise. In addressing these questions, it will be imperative to link demographic studies with economic models. A discussion of these and related issues is

contained in the National Research Council Report, Assessing Policies for Retirement

Income, Needs for Data, Research, and Models, Constance F. Citro and Eric A.

Hanushek, editors, National Academy Press, 1997.

will stand adjourned.

Chairman BUNNING. Thank you all for your testimony, and we

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[Whereupon, at 3:01 p.m., the hearing was adjourned subject to

the call of the Chair.]

[Submissions for the record follow:]
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1 Cost rates are the ratio of the present value of tax income to the present value of taxable

payroll for the years in a given period. 2Saving projections are expressed relative to the current system.

Statement of Employee Benefit Research Institute, Kelly Olsen

Analysis using the EBRI–SSASIM2 Policy Simulation Model has shown that increasing the normal retirement age to 67 by the year 2011 and indexing it to longevity thereafter would save the Old-Age and Survivor’s Insurance (OASI) program a

projected 5.3 percent in total costs 1 over 75 years and 13.56 percent in annual costs

in 2070.2 In light of such positive financial implications, policymakers face the question of how a raise in the normal retirement age would affect beneficiaries. Issues

include whether increasing the normal retirement age would be an effective means

of achieving the desired policy goals, from what perspectives such a reform can be

viewed by policymakers and the public, and the extent to which such an increase

would disadvantage workers in physically demanding occupations.

In making these decisions, policymakers will likely find the following three points

of interest. First, few persons today actually wait to retire at Social Security’s normal retirement age. Since 1960, the percentage of Social Security beneficiaries with

a reduction in benefits for early retirement has grown from 11.8 percent to 71.1 percent (chart 1). In addition, Employee Benefit Research Institute tabulations of data

since 1988 have shown an increasing percentage of early retirees among those ages

55–64 (EBRI, 1997). In 1988, for example, 10.4 percent of the population ages 55–

62 were retired, compared with 12.5 percent in 1996. In 1988, 32 percent of the population ages 63–64 was retired, compared with 36.5 percent in 1996, the last date

for which data are available. These data suggest that if the goal of raising the normal retirement age is to encourage delayed retirement by raising the ‘‘age hurdle,’’

the more significant hurdle in reality for most workers is the early retirement age.

Second, an increase in the normal retirement age can, and has often been, viewed

as a benefit decrease. However, since 1960, remaining life expectancy at age 65 has

increased almost 21.7 7 percent, giving the average American an extra 3.1 years in

later life (table 1). Had the Social Security retirement ages been indexed to longevity since 1960, the normal retirement age would be 68.1 years today, and the early

retirement age would be 65.1 years. Because the retirement ages have not been indexed to longevity, beneficiaries have actually been receiving progressively larger

total expected lifetime benefits since 1960, in part because they have been living

more years on the program. Depending on one’s perspective, keeping the benefit period steady rather than growing over time is, on the one hand, a benefit cut and,

on another hand, simply a way of more closely maintaining the historical level of

benefits.
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3For additional analysis on the HRS, see Fronstin (1997).

Table 1: Life Expectancy at Age 65

Year Years of Remaining

Life Expectancy

1960 ........................................................................................................................ 14.3

1970 ........................................................................................................................ 15.2

1980 ........................................................................................................................ 16.4

1985 ........................................................................................................................ 16.7

1990 ........................................................................................................................ 17.2

1995 ........................................................................................................................ 17.4

Source: U.S. Department of Health and Human Services, 1997

Finally, the prospect of raising the normal and/or early retirement age raises

questions about the ability of some workers to continue employment until the eligibility agespecifically, workers with physically demanding occupations. While overall,

research in this area is still in need of support and continuation before such effects

can be adequately assessed, one ground-breaking study by Burkhauser, Couch, and

Phillips (1995) was done using data from the Health and Retirement Survey (HRS).3

They found that ‘‘the great majority of those who take early benefits have both good

health and economic well-being.’’ Contrary to popular conception, they found that

only about 5 percent of those taking early retirement and 2 percent of those retiring

at the normal retirement age reported a health limitation. These results suggest

that an increase in the normal retirement and/or early retirement age would not

force droves of workers in poor health to continue employment or to apply for Social

Security disability benefits.

However, whether those workers who are in poor health later in life but who are

too young to qualify for Social Security retirement benefits should be forced to rely

on disability or welfare benefits for support is an important policy issue. Today, Social Security disability benefits are issued only through a complex determination

process. As a society, we may decide that persons in their sixties should not be held

to the same disability standards as younger persons. Burkhauser et al. (1995) suggest that older workers with health limitations may be particularly vulnerable to

hardship in the face of an increased normal and/or early retirement age. Among

those who reported a health limitation at early retirement age, Burkhauser et al.

found that the incidence of poverty was high.

While certainly not an exhaustive list, the above three considerations are likely

to be important to policymakers and the public alike in deciding whether to raise

the normal retirement age. First, if delayed retirement is sought, an increase in the

early retirement age rather than (or in addition to) the normal retirement age is

a more likely impetus. Second, because of increases in life expectancy at age 65, a

raise in the normal and/or early retirement age(s) may be perceived by policymakers

and the public as a benefit cut or alternatively as simply a means of maintaining

historical benefits. Finally, while it may be unlikely that a deluge of beneficiaries

would flock to the disability and/or welfare rolls upon an increase in retirement

age(s), present research suggests that some innovative policy provisions will likely

need to be designed for those most vulnerable to adversity under such a policy reform.

REFERENCES

Employee Benefit Research Institute. EBRI Databook on Employee Benefits, Third Edition

(Washington, DC: Employee Benefit Research Institute, 1997).

Fronstin, Paul. ‘‘Employee Benefits, Retirement Patterns, and Implications for Increased Work

Life’’ EBRI Issue Brief no. 184 (Employee Benefit Research Institute, April 1997).

Burkhauser, Richard V., Kenneth A. Couch, and John W. Phillips. ‘‘Who Takes Early Social

Security Benefits: The Economic and Health Characteristics of Early Beneficiaries.’’ The

Gerontologis. (Vol. 36, No. 6): 789–799.
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1This statement is based on the author’s forthcoming article: Jonathan Barry Forman, Reforming Social Security to Encourage the Elderly to Work, 9 Stanford Law and Policy Review—

(forthcoming 1998).

U.S. Department of Health and Human Services. Public Health Service. Health United States,

1996–7. (Washington, DC: U.S. Government Printing Office, 1997).

U.S. Social Security Administration. Social Security Bulletin Annual Statistical Supplement

1997 (Washington, DC: U.S. Government Printing Office, 1997).

I am pleased to submit this statement for the record you are compiling on The

Statement of Jonathan Barry Forman, University of Oklahoma

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Future of Social Security for this Generation and the Next. I am submitting this

statement in my individual capacity as a Professor of Law at the University of Oklahoma College of Law where I teach courses on tax and pension law and research

primarily about tax, pension, and Social Security policy. The purpose of this statement is to discuss how the current Social Security system discourages the elderly

from working and to propose a solution to that problem. Specifically, I recommend

creating individual retirement savings accounts (IRSAs)—but only for elderly workers. With IRSAs for elderly workers, those who chose to remain in the work force

would no longer face the financial penalties of the current Social Security system.

Consequently, more elderly workers would stay on the job, and that would enrich

both them and the nation.1

PRIVATIZING SOCIAL SECURITY FOR ELDERLY WORKERS

Social Security is in financial trouble. The primary reason for this trouble is that

workers are living longer and retiring earlier. Of course, it’s great that we are living

longer, and it’s wonderful that we can expect to have long and leisurely retirements.

But it has led to the current financing problem, and the federal government must

soon either cut Social Security benefits or raise taxes.

In short, there are too many retirees and not enough workers to support them.

The ratio of workers-to-beneficiaries has been declining for years. There were 16.5

workers for every beneficiary in 1950, but, by 2015—soon after the baby boomers

start to retire—there will be just 2.7 workers per beneficiary.

Ironically, the current Social Security system actually compounds its own financial woes by pushing elderly workers into early retirement. A whole range of arcane

rules discourage most everybody from working past age 62. Not surprisingly, more

than half of all workers claim their Social Security benefits at age 62, and 72 percent of workers claim them by age 65.

On the bright side, however, it should be possible to improve Social Security’s finances by encouraging the elderly to stay in the work force. Keeping elderly workers

on the job would increase the worker-to-beneficiary ratio. That would bring down

costs for both Social Security and Medicare, and the work efforts of these elderly

workers would enrich them and the nation.

Demography and Destiny. The primary reason for Social Security’s financial woes

is that people are living longer but retiring earlier. For example, a boy born in 1940

had a life expectancy of just 61.4 years, but a boy born today can expect to live to

72. Similarly, a man reaching age 65 in 1940 could expect to live another 11.9 years,

but a man reaching 65 today can expect to live another 15 years.

Yet despite the fact that life expectancies have gone up, there has been a marked

trend towards earlier and earlier retirement. For example, the average age at which

workers begin receiving Social Security has fallen from 68.8 years old for men in

1940 to 63.6 years in 1994. Also, in 1995, only 16.8 percent of men and 8.8 percent

of women aged 65 or older were still working.

Social Security Discourages the Elderly From Working. The federal government

has little reason to intrude on an individual’s decision about when to retire. Nevertheless, the current Social Security system actively discourages the elderly from

working.

Once a worker reaches age 62 and is eligible to receive Social Security, delaying

the receipt of benefits can actually be quite costly. Those who delay retirement lose

current benefits, but the increases in benefits that can result from an additional

year of work rarely compensate for the benefits lost. In fact, since only 35 years of

work count for determining a worker’s Social Security benefit, each additional year

of work after age 62 usually squeezes out the benefits earned in an earlier year.
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Moreover, elderly workers must continue to pay Social Security taxes (and income

taxes) on their earnings.

Individuals who start to draw Social Security benefits at age 62 but nevertheless

keep working are particularly hard hit. The so-called retirement earnings test takes

a dollar of Social Security benefits away for each dollar of earnings in excess of

$9,120 this year. Also, in addition to paying the usual income and Social Security

taxes on earned income, these workers may have to pay income tax on up to 85 percent of their Social Security benefits. The net effect is that many workers over the

age of 62 can face confiscatory tax rates on their earned income.

Workers who wish to work past age 65 face yet another work disincentive. The

delayed retirement credit increases the monthly benefit paid to a worker who

postpones retirement past age 65 by just 5 percent for each year that a worker

postpones claiming benefits. Unfortunately, a 5-percent credit is inadequate to compensate for a year of lost benefits. The delayed retirement credit will increase

gradually to an actuarially fair 8 percent in the year 2008. Until then, however, Social Security indisputably discourages the elderly from working past age 65.

Finally, those who work until they drop leave nothing behind for their estates.

Faced with these work disincentives, it’s no surprise that more than half of elderly workers retire as soon as they can—at age 62—and that fully 72 percent of elderly workers retire by age 65.

So what can be done to encourage the elderly to remain in the work force?

One approach would be to repeal the earnings test, raise the delayed retirement

credit to 8 percent, and change the other arcane rules that discourage the elderly

from working. And Congress might want to increase Social Security’s early and normal retirement ages to, say, 65 and 70 respectively.

An alternative approach would be to privatize the Social Security system. Proponents of privatization typically call for replacing the current system with individual retirement savings accounts (IRSAs) that would operate pretty much like today’s

Individual Retirement Accounts (IRAs) and 401(k) plans. The Social Security taxes

that workers now pay to the federal government would go instead into these IRSAs

and be invested in the stock market.

Replacing all or a part of the current Social Security system with IRSAs would

help encourage the elderly to work. Unlike the current Social Security system, payroll contributions and the earnings on those contributions would remain in individual accounts, and no money would ever be taken from one worker to provide benefits for other workers or their families. Consequently, there would be no penalty for

working past age 62: IRSA contributions made by elderly workers would simply increase their own individual account balances.

Unfortunately, because there would be no redistribution under a privatized system, there would be no redistribution to those low-income retirees whose own individual account balances would provide inadequate retirement incomes. Consequently, unlike the current Social Security system, a privatized system could

leave millions of elderly Americans in poverty.

Individual Social Security Accounts for Elderly Workers. A better approach would

be to create individual retirement savings accounts—but only for elderly workers. As

under current law, those workers who chose to retire immediately at age 62 could

claim the usual Social Security benefits. For those workers who chose to work past

age 62, however, an individual retirement savings account (IRSA) would automatically be opened. These accounts would be held by the government, invested in the

stock market, and annuitized on retirement.

The starting balance in each worker’s account would be the present value of that

worker’s Social Security benefit entitlement at age 62. For example, an averagewage single man who turned 62 and retired in 1997 could claim a Social Security

benefit of $743 a month. Each year that benefit will be indexed for inflation, and

it will continue until he dies. In effect, he is entitled to an indexed lifetime annuity

with a starting payment of $743 per month. The starting balance for his IRSA

would be an amount exactly equal to the present value of that annuity—about

$116,000, according to the Social Security actuaries.

Each worker’s IRSA would be invested in a secure equity fund and credited with

investment earnings. Each IRSA would also be credited with any subsequent payroll

contributions for that worker, and monthly statements would provide workers with

information about their accounts.
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Once an elderly worker decided to retire, the balance in that worker’s account

would be reconverted into an indexed lifetime annuity. These annuities would be a

good deal larger than the benefits that were available at age 62. After all, the starting monthly payment for a worker who postponed retirement would be based upon

the worker’s then-higher account balance and then-shorter remaining life expectancy.

Moreover, the account balance of any elderly worker who died before retiring

would be included in that worker’s estate.

In short, individual Social Security accounts for the elderly would reward them

for working past age 62. As a result, more elderly workers would stay on the job,

and that would enrich both them and the nation.

Æ