U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

53–030 CC 1999

IDEAS FOR ADVANCING THE UPCOMING DEBATE

ON SAVING THE SOCIAL SECURITY SYSTEM

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

NOVEMBER 19, 1998

Serial 105–52

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

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 November 4, 1998, announcing the hearing ...................................... 2

WITNESSES

Department of the Treasury, Hon. David W. Wilcox, Assistant Secretary

for Economic Policy .............................................................................................. 21

Cogan, John F., Hoover Institution ........................................................................ 53

Gramm, Hon. Phil, a U.S. Senator from the State of Texas ................................ 9

Reischauer, Robert D., Brookings Institution ....................................................... 65

Social Security Advisory Board, Stanford G. Ross ................................................ 76

Stein, Herbert, American Enterprise Institute for Public Policy Research ........ 60

SUBMISSIONS FOR THE RECORD

DeLauro, Hon. Rosa, a Representative in Congress from the State of

Connecticut, statement ........................................................................................ 93

Edelman Financial Services, Inc., Fairfax, VA, Ric Edelman, statement and

attachments .......................................................................................................... 94

Forsman, Edwin E., Futura Magazine, Phoenix, AZ, statement ......................... 98

Generation X Committee on Social Security, Tax Reform and Economic

Justice, statement ................................................................................................ 101

National Conference of State Legislatures, Norma Anderson, and John

Hurson, letter and attachment ........................................................................... 105

Ramstad, Hon. Jim, a Representative in Congress from the State of

Minnesota, statement .......................................................................................... 108

Retired Public Employees Association, Inc., Albany, NY, Cynthia Wilson,

statement .............................................................................................................. 108

Sanders, Hon. Bernie, a Representative in Congress from the State of

Vermont, statement ............................................................................................. 109

Seidman, Laurence S., University of Delaware, statement ................................. 110

Smith, Hon. Nick, a Representative in Congress from the State of Michigan,

statement .............................................................................................................. 112

Society for Human Resource Management, Alexandria, VA, statement ............. 113
(1)

IDEAS FOR ADVANCING THE UPCOMING

DEBATE ON SAVING THE SOCIAL SECURITY

SYSTEM

THURSDAY, NOVEMBER 19, 1998

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS, Washington, DC.

The Committee met, pursuant to call, at 11:05 a.m., in room

1100, Rayburn House Office Building, Hon. Bill Archer (Chairman

of the Committee) presiding.

[The advisory announcing the hearing follows:]
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ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

FOR IMMEDIATE RELEASE CONTACT: (202) 225–9263

November 4, 1998

No. FC–14

Archer Announces Hearing on Saving Social

Security

Congressman Bill Archer (R–TX), Chairman of the Committee on Ways and

Means, today announced that the Committee will hold a hearing on ideas for advancing the upcoming debate on saving the Social Security system. The hearing will

take place on Thursday, November 19, 1998, in the main Committee hearing room,

1100 Longworth House Office Building, beginning at 11:00 a.m.

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

hearing will be from invited witnesses only. Witnesses include representatives of the

Administration, former Members of Congress, and other notable experts. However,

any individual or organization not scheduled for an oral appearance may submit a

written statement for consideration by the Committee and for inclusion in the printed record of the hearing.

BACKGROUND:

With the elderly living longer and the advent of a larger retired population from

the baby boom generation, the financial problems of the Social Security system will

be felt as soon as 2013. At that time, the program will expend more than it takes

in from payroll taxes and the Government will have to increase borrowing, reduce

spending, or raise revenues to honor its commitments to the Social Security Trust

Funds in order to pay benefits. Without reform of the system, Social Security will

be unable to pay full benefits in 2032, according to the latest report of the Social

Security Board of Trustees.

Social Security has faced financial difficulty on a number of occasions since the

mid-1970s. In certain instances, Congress and the President were facing a more immediate crisis unless action was agreed to, benefit payments were not going to be

issued. Ultimately, a bipartisan agreement was reached by the legislative and executive branches of Government. Lessons learned from these past reform efforts are

critical in creating an environment within which Social Security reform can successfully take place.

In announcing the hearing, Chairman Archer stated: ‘‘History shows that without

a climate of bipartisan cooperation and true statesmanship, there will be no hope

of truly saving Social Security. That is why I have decided to hold this hearing on

ideas for addressing the debate on saving Social Security. Because of the historic

window of opportunity before us, I am inviting the Administration and others to testify now before the opening of the new Congress.’’

FOCUS OF THE HEARING:

The Committee will seek guidance from the Administration, former Members and

other notable experts on what can be learned from the experiences of past Social

Security reform efforts, as well as recommendations on the best strategic ‘‘road

map’’ to result in a solid and fair plan to save Social Security for all Americans.
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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 six (6) single-spaced copies of their statement,

along with an IBM compatible 3.5-inch diskette in WordPerfect 5.1 format, with

their name, address, and hearing date noted on a label, by the close of business,

Thursday, December 3, 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 Committee office, room 1102 Longworth House Office Building, by close of business the day before the hearing.

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 submitted on an IBM

compatible 3.5-inch diskette in WordPerfect 5.1 format, typed in single space and may not exceed a total of 10 pages including attachments. 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, company, address,

telephone and fax numbers where the witness or the designated representative may be reached.

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–

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 Comacross the street in the Rayburn Building this morning, but hopemittee as noted above.

Chairman ARCHER. We are going to have a little competition

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fully the country will be as interested, I would hope more interested in the most important issue to affect all of us, namely Social

Security, than in the issue that is going on over in the Judiciary

Committee this morning. But surely we need to convey to the

American people that the President’s questions are not going to

deter us from doing our job, particularly on the big issues that affect all of us to such a high degree.
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Before I make my remarks this morning, I want to—well, not

only want to, I am going to express my strong fondness for Barbara

Kennelly, as well as appreciation and respect for the work she has

done on this Committee, inasmuch as this is a lame duck session

of this Congress and will be her last meeting on the Ways and

Means Committee. I hope we will have no more this year. And so,

Barbara, I think all of us are sad to see you leave, wish you well,

will miss you, and hope that you will come back often and give us

the benefit of your counsel and your advice.

[Applause.]

And I am sure there are Members of the Minority party who

would like to also express their feelings about Barbara Kennelly,

and I think Mr. Levin has asked to be recognized.

Mr. LEVIN. Unless, Mr. Coyne, would you like to go first?

Mr. COYNE. Well, thank you.

Mr. Chairman.

Chairman ARCHER. Mr. Coyne.

Mr. COYNE. I too want to express my deep appreciation for the

service that Mrs. Kennelly has given to the country and the friendship that she has provided to all of us here, and particularly her

leadership on an issue that is very important to the American people, and that is Social Security. Being the Ranking Member of the

Social Security Subcommittee was not always an easy task for anyone to assume, but Mrs. Kennelly did it well and with great dedication, and I pay tribute to her here today and wish her well in the

future.

[The opening statement follows:]

Opening Statement of Hon. William J. Coyne, a Representative in Congress

from the State of Pennsylvania

We are here today to discuss the future of Social Security. While Social Security’s

long-term financial problems are serious, we should not forget what the program

has achieved.

Social Security provides benefits to over 27 million retirees. In my Congressional

district, almost half of retirees depend on Social Security for all of their income, and

many others would be extremely poor without it. Social Security’s guaranteed benefit is particularly critical to women, minorities, and low-wage workers, who are less

likely to have any kind of private pension.

Social Security also provides benefits to 4.5 million disabled workers and over 12

million dependents and survivors. We often think of Social Security as a retirement

program, but over a third of its payments go to workers and families who lost their

main income because of death or disability.

It may take a while to come to consensus about the best way to strengthen Social

Security. I welcome a thorough discussion of the options, which will result in a better solution for Social Security. However, I am concerned that some will see this

period of discussion as an opportunity to squander the short-term surplus in the

Trust Fund on tax cuts. I believe we can work in a bipartisan way to improve Social

Security for the future. An important first step is to agree that there will be no further attempts to violate budget rules and raid the Trust Fund for tax cuts.

It is important to deal with Social Security’s future financing problems. But we

also need to protect its Trust Fund in the present and build on the successes of the

past. Many of the people who depend on Social Security have no where else to turn.

They are counting on us to address these problems without putting them at risk.

Chairman A

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

RCHER. Mr. Levin.

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We have had the honor of serving with Barbara Kennelly. She

has been one of our leaders on many issues as Vice Chair of the

Caucus. She has been a special leader on the Ways and Means

Committee on so many issues; Social Security perhaps the most important, but so many others. On child support, I remember we all

drew from her emphatic leadership on that, and so many other

issues relating to taxation and human resources.

I have had the privilege, Barbara, of serving with you on the Social Security Subcommittee, and you will truly be missed. Your

depth of knowledge and commitment has meant a lot on our side

and I think, as expressed by our Chairman, it cuts across the aisle.

This is a lame duck session but we are entirely certain, Barbara,

that you are not a lame duck. Your public service has been exemplary, and we expect in one way or another to continue our friendship and, hopefully, our relationship. The State needs that, the Nation does, and we, as your friends, do. So we say bon voyage, but

just temporarily.

Mr. LEWIS. Mr. Chairman.

Chairman ARCHER. Mr. Lewis.

Mr. LEWIS. Mr. Chairman, I would like to join you and my colleagues in wishing a friend and a colleague, the gentlewoman from

Connecticut, Mrs. Kennelly, the very best.

I have had an opportunity since being here in the Congress to

work with Barbara Kennelly, and she is always there. She is a person of strength, a person of courage, a person of vision. I have had

an opportunity to visit her district, to get to know her family, and

to stay in her home. We served together for a while as Chief Deputy Whips. This one Member will greatly miss Barbara Kennelly,

and I just want to thank her for her great service to this Committee, to the Congress, and to the American community.

I think when historians write about the Congress during this period, pick up their pens and write, they will have to say that Barbara Kennelly made a difference not just for the people of Connecticut but for the people of America. Thank you, Barbara.

Mr. STARK. Mr. Chairman.

Chairman ARCHER. Mr. Stark, you have been demoted.

Mr. STARK. I just wanted to say, Mr. Chairman, thank you for

having the vision to see me here.

Barbara sits in a chair that is normally occupied by Mr. Rangel,

our Ranking Member, and it would be remiss for me not to say how

much we will miss Barbara on this Committee, in the Congress.

As John Lewis said, many of us have visited Barbara in her

home and know her family and know her record. I think that she

will be with us for many years to come in one capacity or another.

And I look forward to continuing to work with her, because her

spirit, her determination, and her concern for all Americans, particularly the people in Connecticut, has been evidenced for a long

time, and we will miss you, Barbara.

I know we will continue to work together, and I like seeing you

snuggled right up there next to Chairman Archer. I hope in your

future years you continue to do so as he needs some help on the

Social Security issue, and I know you will be able to continue to

do that. Thank you.

[The opening statement follows:]
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Opening Statement of Hon. Pete Stark, a Representative in Congress from

the State of California

Most Americans living today were born well after the Great Depression. They are

not marked by the fear of economic loss because—as a society—they have not experienced it.

It may well be that those who have not lived through the Depression do not appreciate the need for a social safety net, such as the one provided by Social Security.

It’s true that by historical standards, the United States has enjoyed very good economic times for the past 30 years with only short recessions. Today’s adults almost

assume that a good economy will last forever.

In such a climate, more people may be less appreciative of safety nets, like Social

Security, and more convinced that self-reliance will suffice.

But economic self-reliance is only workable for those who are reasonably well off

and who understand the value of savings. Nobel prize winning economist

Modigliani, my economics professor at Massachusetts Institute of Technology,

taught me this lesson: people save only when they have money to save and perceive

the need to save. With our national savings rate at an all time low of 3.8% of disposable income. I cannot help but conclude that Americans today do not perceive the

need to save for the future.

Self-reliance also assumes a certain level of sophistication to ensure that invested

savings will grow. That requires knowledge about how to balance investment opportunities and risks. Most Americans do not have this type of advanced knowledge.

Although privatization of Social Security is the topic de jour, we have an example

of a safety net that has worked—and worked well—for over 60 years. We should

focus on maintaining its solvency past 2032, not dismantling the program. The

Gramm-Felstein proposal would lay the foundation to do just that—dismantle Social

Security.

Social Security replaces about 40% of pre-retirement wages for average earner

and 57% for low-earners. By design, it cushions those who have fewer resources to

save. In 1996, Social Security lifted 11.7 million elderly people out of poverty. Proposals have been made to redistribute the progressive payment system of Social Security in order to subsidize individual private accounts.

Two-thirds of elderly receive most of their income from Social Security. Without

Social Security, one-half of older Americans would live in poverty. In addition to the

elderly, 3.5 million non-elderly adults and 800,000 children were lifted out of poverty by Social Security in 1996.

Its mandatory nature assures that all workers start their retirement nest egg

with their first paycheck and increase their savings amounts automatically as their

wages increase. Its social insurance component shields families from a wage earner’s

untimely death or disability, and subsidizes the lowest paid wage earners with the

earnings of others.

Social Security works because it is more than an savings account for individuals—

it is a commitment that our society makes to its members that there will be a safety

net for workers and their families in the event of their disability or death during

wage earning years.

Individual accounts take care of those who are sophisticated enough to invest

their funds well; they leave the low wage folks, the unsophisticated, the disabled,

the widows with young children out in the cold. Is that what America is about?

Has the ‘‘responsibility and self-reliance’’ mantra erased any trace of collective responsibility for the less fortunate in our society? I think not.

I encourage my colleagues to work together in a bipartisan fashion to save Social

Security for future generations. Most Americans need a sound retirement system

they can rely on more than they need some fast talking Wall Street broker.

Chairman A

Mr. MCNULTY

RCHER

. For all of the reasons outlined by the other Mem-

. Mr. McNulty.

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bers, I am sorry to see Barbara leave the U.S. House of Representatives, but I would remind everyone that while Barbara will no

longer be a colleague, she will still be a friend, and that is so much

more important.

Thank you, Mr. Chairman.

Chairman ARCHER. Mr. Thomas.
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Mr. THOMAS. Thank you, Mr. Chairman. The gentlewoman from

Connecticut and I have pretty well paralleled our time on this

Committee and, as is the case with many Members of this Committee, there are quality people in the House and at some time or another they often seek higher office. So we were going to lose her

either way and it was going to be our loss.

But the thing I remember most in dealing with Barbara was

that, in the highest tradition of this Committee, although oftentimes we would come from opposite sides of a point or an argument

as we attempted to do the people’s work, it was always done in a

very pleasant, very civil way, because that is who she is. This Committee will suffer her loss in more ways than most people will realize, because what she did was quietly and constantly knit the fabric of the Ways and Means Committee together, and someone else

is going to have to do that now. It is our loss.

Mr. TANNER. Mr. Chairman.

Chairman ARCHER. Mr. Tanner.

Mr. TANNER. Thank you, Mr. Chairman. I had the privilege of

serving with Barbara on the Subcommittee over the last 2 years,

and in my opinion she is the personification of one of the highest

compliments one can pay another, and that is simply she looked for

the best in others and gave the best she had, and we are going to

miss her.

Chairman ARCHER. Mr. Houghton.

Mr. HOUGHTON. Thank you, Mr. Chairman.

This is a very important Committee, and I respect the Members

on it tremendously: Very bright people, articulate, legal craftsmen.

But the element I think we prize the most, particularly as we

strive for bipartisanship, is fairness, and I don’t think there is anybody that I have known in this Congress who represents that element of fairness the way Barbara does. Thank you.

Chairman ARCHER. Mr. Becerra.

Mr. BECERRA. Thank you, Mr. Chairman. I would like to associate myself with all the remarks that have been made and, Barbara,

only to add that we will miss you. You have left us with a paradigm of statesmanship which I hope will hold us well into the future, and I thank you for your service.

Chairman ARCHER. Mr. McDermott.

Mr. MCDERMOTT. Thank you, Mr. Chairman.

Senator Gramm, these accolades to Barbara are two-edged. One

is that we want to say goodbye to her, and we are going to miss

her an awful lot, but we also want you to know how much we think

of her, if she should by any chance be appointed by the White

House to something and needs Senate confirmation.

Senator GRAMM. Well, fortunately, she has always been very

sweet to me.

Mr. MCDERMOTT. I am pleased to hear that you will whistle her

confirmation through without any problem whatsoever. We are

sure the White House will find something, Barbara, to use your extraordinary talents toward, and it has been a real pleasure to serve

with you. Thank you.

Chairman ARCHER. Mrs. Thurman.

Mrs. THURMAN. Barbara, I have to say to you publicly that I

would not be on this Committee had it not been for your encourage8

ment. You became a friend early on. You continued to guide me

through this. I will miss your wisdom and your insight.

I think this country owes you a debt of gratitude for what you

have done in articulating better than anybody the importance of

families in our country and the struggles that they go through. I

think you also have been a model for women across this country.

You have given hope to every woman who wants to come to political life as an example that we should all follow, and you have given

us that opportunity to serve after you.

I only wish you the best, and I hope you will let me make that

phone call when I need your wisdom and guidance again.

Chairman ARCHER. The Chair plans to recognize Mr. Kleczka

and then Mrs. Kennelly for any comments that she might like to

make, and then would encourage other Members to place any comments about Mrs. Kennelly in writing in the record.

Mr. Kleczka.

Mr. KLECZKA. Thank you, Mr. Chairman.

Mr. Chairman, I would like to add my voice of thank you to Barbara Kennelly, not only for her work on the Committee but also for

her work as part of our leadership team which brought issues to

the forefront of national debate, and she did so very well.

After Jim McDermott’s remarks, I don’t know, Barbara, if I

should call you Ambassador Kennelly, or is that letting something

out of the bag? But, nevertheless, it is amazing, Bill Thomas indicated that over the years that you and he have been on the opposite sides of many issues and arguments. But in my tenure on the

Committee I always found that you were on the right side. So, Barbara, we are going to miss you, and Godspeed.

Chairman ARCHER. Mrs. Kennelly.

Mrs. KENNELLY. Thank you, Mr. Chairman. And I certainly

didn’t expect this, but I wanted to be at this meeting, a meeting

on Social Security, an issue that is incredibly important to me.

First let me thank the Members for those very, very kind words.

And please excuse us, Senator, for holding this up. We will be almost ready to go. And, Mr. Chairman, thank you very much for letting this take place. This was not planned and it moves me greatly.

I want to thank the staff for always being so incredibly nice to

me. Janice Mays has been wonderful to me. When I first came on

the Committee in 1984, I knew nothing, and she taught me a great

deal of what I know today and made me the success I was able to

be in legislation. And Sandy Wise, I want to thank you very much

for taking me through the whole picture of Social Security.

I love the nice words, I love the compliments, but I am asking

you for something else. And I look right down at the testimony that

I am about to say, and I pick one paragraph out and say to you,

the Social Security Program has some built-in protections to benefit

those who are most vulnerable. Women, in particular, benefit

greatly from Social Security. Sixty percent of Social Security beneficiaries are women, and Social Security is often the only source of

retirement income for a majority of these women.

I am saying to you, I love the kind words, but promise me that

you will remember in any changes in Social Security to remember

the women. Women, widows, people left with children alone, people

in great need, older women, the majority of older women in this
9

country have depended on Social Security. Social Security has kept

hundreds of thousands of older women out of poverty.

And as we in the new Congress, the 106th Congress, begin the

venture into reforming Social Security and protecting it and keeping it for future generations, I ask every one of you who said kind

words about me this morning and those that feel them, promise

that you will remember the women as you reform Social Security.

Think about someone who has never worked. How do they have an

individual retirement account? Think about someone left with three

children and no money. What happens to them in a new plan? Remember them, I ask you, in memory of Barbara Kennelly, who has

served many years on this Committee.

Thank you, Mr. Chairman.

Chairman ARCHER. The Chair believes it is very, very good for

us to enter into what is the end of this Congress and, in effect, the

beginning of the next Congress with what is a spirit of cordiality,

a spirit of civility, a spirit of cooperation to work on a very, very

bipartisan basis on the major issue that will face the Congress, the

next Congress, and the next generation in the next century, namely

Social Security. This cannot be solved on a partisan basis, it can

only be solved on a bipartisan basis, and today marks the beginning of our effort to save and strengthen Social Security.

It is my sense, from having talked to Members on both sides of

the aisle, that there is a strong commitment by all Republicans and

all Democrats to succeed in this effort. And to start off our hearing

this morning, my friend and colleague from the State of Texas, the

senior Senator from the State of Texas, is appearing because he

has given a lot of thought to Social Security and has asked to be

able to make a presentation to the Committee this morning.

And we more than welcome you here and we will be glad to here

your comments, Senator Gramm. So welcome to the Committee.

STATEMENT OF HON. PHIL GRAMM, A U.S. SENATOR FROM

THE STATE OF TEXAS

Senator GRAMM. Thank you, Mr. Chairman.

Chairman ARCHER. You are our leadoff hitter. I hope you end up

crossing on base before it is all over.

Senator GRAMM. Well, Mr. Chairman, first of all, I appreciate

you and the Committee giving me this opportunity. What I wanted

to do this morning was to try to make five points that I think are

relevant to this debate no matter how you come at the debate, and

I think they are basically points that ultimately there will be an

agreement that these are all relevant. In the final analysis, there

will be disputes about them as to how we deal with them.

The first point is that this is not just an American problem, this

is a worldwide problem. Our Social Security system is really a follow on to a program that started in Germany under Chancellor

Von Bismark in the 1880’s. Bismark was a political genius who

united the country, and one of the uniting principles was the recognition that it was possible to bypass a generation of effort in accumulating, saving and creating wealth by taxing current workers

to pay benefits to current retirees. And in doing so, Bismark established a system whereby the foundation of the funding of the system was a commitment to tax generations yet unborn.
10

This system started in Germany in the 1880’s. It spread all over

Europe, was in Australia by 1909, and came to the Americas in

Chile in 1925. The United States was one of the last major industrial nations to adopt it in 1935.

But all of these programs have two things in common: The first

thing is, none of them accumulate any wealth, none of them make

any investment, none of them accumulate any real rate of return,

and therefore a fundamental problem that all of these programs

worldwide have is they do not benefit from what Einstein called

the most powerful force in the universe, and that was the power

of compound interest.

The second problem with all of them is, they are all victims of

demographics. They work great when you have a very young population, when you have massive numbers of people coming into the

labor market, but they all begin to break down when you have

large numbers of retirees and relatively low numbers of workers.

We all know that America is looking 25 years from now at having

two workers per retiree, but the important thing to note is, it has

already happened. It happened in Japan.

One of the fundamental economic problems in Japan is their

aging population and the fact that the payroll tax in Japan to fund

their basic retirement programs is now over 30 cents out of every

dollar earned by every worker in Japan. Germany is facing the

same problem. They are about 20 years ahead of us. We are looking

at the certainty, if we do not change the current system and if we

preserve current benefits, that we will have to double the payroll

tax over the next 30 years to pay for Medicare and Social Security.

The second point I want to make is that there is no Social Security Trust Fund. I think one of the things that distorts this debate

is that every day we pick up a newspaper and we read about

money going into the Social Security Trust Fund. But, in reality,

if we are to reform the system and strengthen it, I think we have

got to begin by admitting that there is no Social Security Trust

Fund today. There are no investments. There is no compound interest. Nothing is paying for Social Security benefits except payroll

taxes.

Now, I can explain it in two ways, and let me try to do it. First

of all, the Social Security Trust Fund is not a debt of the Federal

Government. When interest is paid to it, it is not an outlay of the

Federal Government. If you think of it in terms of a family, let’s

say that you are throwing the newspaper and you give your mama

money to set aside for you and you assume she is putting it in the

cookie jar.

If she actually puts it into the cookie jar, it is an independent

trust fund because she can take money out of it to let you spend

it without affecting the family budget. But if she simply takes the

money and makes it part of the family budget, then there is no

money available, and the only way she can give you your money

back is if she takes it out of the family budget, works more, earns

more, spends less, or borrows more.

The reality of the situation today is that while we have piled up

a paper debt to the Social Security Administration since 1983, in

reality no expenditure can be made out of that trust fund unless

we raise taxes, unless we cut spending, or unless the Federal Gov11

ernment borrows money. And those are all the things we would

have to do if there were no trust fund. So, in reality, the trust fund

represents a moral obligation which we all share but it represents

no resource that can be used to fund Social Security.

The third point is that ultimately, if we are to have a real trust

fund, a decision is going to have to be made as to who invests the

money. And I believe that ultimately, on a bipartisan basis, we are

going to decide that government cannot invest the money. I believe

that we have had, in essence, a system since 1935 where government was supposed to invest the money.

It is very instructive, and I would urge people interested in this

subject to go back and read the debate on Social Security in 1935

and to look at the structure we established. And what you will find

is that we were supposed to raise payroll taxes in 1937–41 to build

up a trust fund which could be invested, but Congress never raised

the payroll tax. No trust fund was ever built up.

No balances were ever really established until 1983, when we

had the legislation to try to deal with the crisis in Social Security.

That created a surplus. But every penny of that surplus since that

date has gone into the general government fund and has made it

possible for us to spend more, tax less and borrow less than we

would have in its absence.

The fourth point that we are going to have to look at is how

should we integrate any new investment-based system with the old

system. There are really two approaches to it. One is to cut benefits

in the old system and count on investments to make up for those

benefit cuts. There have been several proposals that have been

made along those lines. I think when reasonable people look at it,

we are going to decide not to do it that way. The problem is you

almost always have one group of people who are losing benefits, another group of people who are gaining from the investment, and

they are generally not the same people.

I think we will decide in the end to integrate investment into the

system and use the benefits from an investment-based system to

pay benefits that are guaranteed under the old system. And I think

the good news is that we have a sufficient surplus now and projected into the future as to make it possible for us, if we are willing

to plow back most of the benefits of an investment-based system

to paying benefits to people who are already in the system, that we

can for all practical purposes avoid any changes in benefits for people who are already in the system.

The final point I would like to make, Mr. Chairman, is the President in his State of the Union Address said ‘‘Save Social Security

First.’’ We all stood and applauded. It was a great line, but to this

point it is just a slogan. At some point the President is going to

have to come forward with a proposal.

My own opinion is that unless the President does that very

quickly, that one of two things is going to happen: One, we are

going to have to go on and try to move with a program in the absence of a Presidential or executive branch proposal; or, second,

there are going to be many people who are going to conclude that

this was all a ruse to prevent Congress from cutting taxes. And I

think at that point we are going to see a movement toward having

a very substantial tax cut.
12

Certainly, our experience in the last week of this session of Congress was a very disappointing experience because, in the end, despite the fact that the administration had said all year do not use

the surplus, do not spend it, do not use it for tax cuts, the President had opposed a tax cut that would have taken $6.6 billion of

that surplus this year, but in reality in the last week of the Congress we spent $21 billion right out of the surplus, every penny of

which was taken away from Social Security, and every penny of

which we will wish we had next year when we get ready to try to

fix Social Security.

So I think these are the key points that we are going to have to

address. I think we have a historic opportunity to make the system

better. I don’t think anybody in the end will be able to defend the

status quo, because the status quo is going to mean benefit cuts

that no one can live with. The status quo is going to mean increases in taxes that no one is going to be willing to impose. And

I think there is only one thing we can do in the end that can work,

and that is to try to build investment into the system. And I think

if we do it right, we can do it on a bipartisan basis. And I thank

you, Mr. Chairman.

Chairman ARCHER. I thank you for your input, Senator Gramm.

Are there any Members of the Committee who would like to inquire of the Senator?

Mr. Crane.

Mr. CRANE. Senator, you mentioned Bismark starting the Social

Security system in Germany. What was the average lifespan at

that time in Germany, and at what age did you qualify for your

benefits?

Senator GRAMM. Well, it was pretty similar to ours. I am not

sure what the numbers were in Germany, but when we paid the

first benefits in 1937, the average life expectancy was 61. There

was no early retirement. You did not get benefits until you were

65.

So we literally had a situation where we passed the hat around,

workers put in 2 percent of the first $3,000 they earned, and that

paid benefits to one retiree. I think there were 42 workers per retiree. Today when we are passing the hat, we have 3.3 workers per

retiree and they are paying 12.4 percent out of the first $68,500

that they earn to support one retiree.

You do not have to be a mathematician to look at the demographics to understand that there are two powerful forces at work:

One is people are living much longer. And as we all get older, we

appreciate it. And the second thing is people are having fewer children. Even with our massive immigration, legal immigration coming into America, we are looking at two workers per retiree 25 to

30 years from now. And the arithmetic of that is obviously frightening.

Mr. CRANE. My recollection is that the average lifespan was in

the midfifties.

Senator GRAMM. Probably was.

Mr. CRANE. And the eligibility date was in your midsixties. So

we could solve it by the way Bismark did, by raising the age for

eligibility to 85.
13

Senator GRAMM. Well, I know you are joking, but let me respond

to that by saying I hear people talking about raising the retirement

age to 70. I have what I call a calluses test on raising the retirement age to 70. You show me somebody with calluses who believes

it is workable, and I would take it seriously.

The problem is, while we look at the fact that people are living

longer and we think since we have white collar jobs that we could

all, like Strom Thurmond, work indefinitely, the plain truth is if

you go out in the real world, you do not see people up on scaffolding or using jackhammers that are 70 years old. And I think, in

the end that if we do that, that what we are going to do is end up

with a huge number of people on disability. If you look at Sweeden,

which has taken that approach, they end up with 24 percent of

their people on disability.

So I think in the end, obviously the attractiveness economically

of raising the retirement age is you cut benefits by about $46,000

per couple by raising the retirement age to 70. The problem is, for

white collar workers it might work. I am just doubtful you are

going to see people 70 years old able to do blue collar work.

Chairman ARCHER. Anyone else wish to question?

Mr. MCCRERY. Mr. Chairman.

Chairman ARCHER. Mr. McCrery.

Mr. MCCRERY. Senator Gramm, you said if we do nothing we will

have to double the payroll tax to finance benefits. Now, some of the

later witnesses are probably going to tell us that that is not true,

we can just increase the payroll tax now by 2 percent and that will

take care of the problem.

Would you agree with that analysis, and in any event, would you

recommend that as a course of action?

Senator GRAMM. Well, there is no way a 2-percent increase in the

payroll tax will take care of the problem because every penny of it

would go into a phony trust fund and we would still have massive

tax increases 20 years from now. Nor do you gain a whole lot by

raising the wage base that you apply to—I think it is very tempting to sort of portray every debate as we can just tax rich people

a little more to pay for it. The plain truth is that to generate the

kind of revenues you need, the burden is going to have to be borne

basically by middle income workers. The more you raise the wage

base, the more unfair the system gets in terms of people putting

money into it.

If you look at the demographics of two workers per retiree 25 or

30 years from now, I think that really dictates the arithmetic.

When you figure out that you have two workers paying for Social

Security benefits and for Medicare benefits for one retiree, then I

think you start to look at how difficult that is going to be, and the

attractiveness of some kind of investment system where you can

get the power of compound interest working to help pay those benefits, to lessen the burden on the worker, starts becoming more attractive.

But I think one of the things that we are going to have to do in

the debate, and I think it is really happening in the Senate, is that

the more people have looked at the problem, the more sobering it

is and the more bipartisan the whole debate becomes. Because I

think people have realized that have really looked at these cuts,
14

really looked at raising the retirement age, really looked at means

testing and benefit cuts, have realized that in the end that is probably not going to be doable given the social fabric of society, and

raising the payroll taxes is not going to be doable.

One of the reasons Japan has this terrible structural problem is

they are becoming noncompetitive with the 30-percent-plus payroll

tax. We talk about stimulating their economy, but the reality is

that they have some very real structural problems, and this aging

population and the cost that imposes through the payroll tax is one

of their huge unsolved and, in the short run, unsolvable problems.

Mr. MCCRERY. Thank you, Mr. Chairman. Thank you, Senator.

Chairman ARCHER. Mrs. Johnson.

Mrs. JOHNSON of Connecticut. In view of the number of panelists

we have ahead of us, Senator, let me make a brief comment.

You are absolutely right. The more you look at the numbers, the

more awesome the problem. I would just like to urge you, as one

of the people in the Senate who has given this a lot of attention

and is going to continue to give it a lot of attention, to think about

the reforms that we have to think about at the same time we think

about saving Social Security. Because one of its odd flaws is that

it looks at your 30-year average, and if you have a zero earning

year in that 30 years, it is counted in because they want consecutive years.

This is a big disadvantage, particularly to young women who

typically now have a career for 8 or 10 years. Many more of them

are choosing then to stay home with their children, so they will

have those zero years. I think we really have to look at the kinds

of reforms that say your 30 consecutive earning years and do not

penalize people for dropping out of the work force to stay home to

take care of their kids.

So I think there are some new sort of value challenges in this

reform that were not as much a problem in 1982, and we should

be sure to get them on the table so that we know both what the

cost and the benefit of those would be.

Senator GRAMM. Well, let me just respond with two points. Number one, I think whatever you do in the system, you have to have

a minimum benefit where people get to the end of their work lives,

and because they have taken time out to have children or because

they have been sick or because they have been unemployed, I think

everybody has got to know if they get to the end of their lifetime

with their glass half full, that up to some minimum we are going

to fill it up. Also, one of the benefits of an investment-based system

is that during the 8 to 10 years that woman is out of the work

force, her investments will continue to grow.

Second, there are terrible inequities in the current system. The

child of a poor family that goes to work when they are 16 or 17

years of age only gets benefits on their 35 years of earnings, so everything they do before they are 30 years of age, they get no benefit for. Whereas the child of a rich family goes to college, goes to

graduate school, goes to law school, travels in Europe, finds themselves, and then starts to work at 30, every penny they pay into

the system they get credit for.

So there are terrible inequities in the system. The system is very

anti-blue-collar worker, because blue collar workers tend to start
15

working sooner and demographically they do not tend to live as

long. And I think those kind of problems, which nobody ever foresaw when the average life expectancy was 61, I think now that we

are going to go back and restructure the system in some form,

these are things we need to fix.

Mrs. JOHNSON of Connecticut. Thank you.

Chairman ARCHER. Ms. Dunn.

Ms. DUNN. Thank you, Mr. Chairman.

Senator, we talked about this last year, about using 90 percent

of the surplus we expect over the next decade for Social Security

and 10 percent for tax relief. I frankly think that it was unwise of

us to have moved off that position, but I specifically wanted to ask

you, Senator, if you could go into specifics so that everybody would

understand, when we talk about using the surplus to save Social

Security, how would you see that surplus expended in bolstering up

the system?

Senator GRAMM. Well, first of all, I think we need to admit to

ourselves that, number one, just running a surplus does nothing to

benefit Social Security. Just running a surplus, assuming we can

do it, remembering we spent a quarter of the surplus this year, but

just running a surplus reduces the indebtedness of the government

relative to what it would be otherwise. But none of that money

goes to Social Security, none of that money is invested in Social Security, and no earnings from it are available to Social Security.

The only way you can invest in Social Security is to actually have

the money invested in real assets. If you are going to pay real benefits at the end, you can pay for them only in two ways: One, at

that point taking the money away from workers in a payroll tax;

or, two, building up real assets in the interim to help pay for some

of those benefits.

So what I am talking about, and what I think increasingly people

are talking about, is a system where part of the payroll tax would

be invested. Under the proposal that I am for, the worker would

own it but the worker would not directly participate in the investment. They would choose a qualified company that would do it

under the supervision of a Social Security Investment Board, and

they would, in their working lives, build up assets.

If at the end of their working life they do not have enough to pay

for their benefits, then part of the payment would come out of the

old system, part of it would come out of their investment. If they

have enough to pay for it, then we would not have to pay for it by

payroll taxes at that point.

It can be structured in many different ways, but the point is that

in the end, unless we bring some new force into Social Security like

the power of compound interest, there is no way you can avoid either cutting benefits or raising payroll taxes and doing it dramatically. And that is what is going to produce the bipartisanship, in

my opinion, because when people look at these cuts and look at

these payroll taxes, they are going to decide that is something they

do not want to do or cannot do.

And when you start looking at alternatives, there is really only

one alternative, and that is what Franklin Roosevelt envisioned the

system as being to begin with. When you go back and read the debate and you read the proposals coming from the administration in
16

1935, the President envisioned an annuity. He used the term all

the time. And the idea was that workers would build up investments that would accumulate earnings, and they would have the

knowledge and satisfaction and guarantee of knowing they helped

fund their own retirement.

The problem is we never set up the system like that, and I think

in the end we will decide to move in that direction. But what we

have got to do is decide how to mix the new system with the old

system, and how to do it in such a way as to get people to accept

it. And quite frankly, in the end I believe that to get it accepted

during this transition period for the first 30 or 40 years, almost all

the benefits of the investment will have to go to paying off the debt

of the old system.

Ms. DUNN. Thank you.

Chairman ARCHER. Thank you, Senator. You have given us a

good start in our discussion on moving forward on saving Social Security.

The Chair at this time would invite David Wilcox to take a seat

at the witness table. And while Mr. Wilcox is moving to the witness

table, the Chair will make his opening statement.

I believe that today’s hearing is exceedingly important as we

move into finding a bipartisan solution for Social Security. It is the

beginning of this effort, and this Committee will be the focal point

for the determination in the end as to what we do on a bipartisan

basis for Social Security.

Social Security is a vital thread in our Nation’s moral and economic fabric. It has reduced poverty for seniors, it has protected

seniors, and it has given greater freedom to the continued working

generations in knowing that their parents and their grandparents

at least have a modicum of dependable income. It has helped to

make this strong Nation a great Nation, and thanks to it, we are

all better off.

I welcome President Clinton’s commitment to saving Social Security, and I look forward to undertaking the serious and bipartisan

effort. Mr. Wilcox is with us today representing the Treasury. I

welcome you and I look forward to your answers on behalf of the

administration.

But I must say that I was troubled and terribly disappointed

that Secretary Rubin refused to accept my invitation to be with us

today. He is the Chief Trustee of the Social Security system. He

should be here to set the tone for a bipartisan beginning and reaching a solution. It must be bipartisan and it must be fair. The Secretary’s absence begins the process on the wrong note and on the

wrong tone, and I regret his decision.

In all cases, I intend to proceed in a bipartisan manner. I am

fully prepared to help President Clinton get a bill through the Congress. The American people expect us to work together, and that

is what I intend to do. But make no mistake, this job will be one

of the most difficult undertakings that the Congress has ever

begun to work on.

Social Security is not going to be technically broke for 34 years,

so current beneficiaries and beneficiaries to come over the next 10,

20, 30 years will have their benefits and will receive them. They

are protected even if we do nothing. But we owe it to the next gen17

eration in the next century to move on this now. The longer we

wait, the more difficult it will be.

I believe that President Clinton faces a test, perhaps the greatest

test of his leadership, to see if he can fashion a solution to the

problem this far away from the crisis. To his credit, the President

made this our Nation’s number one priority almost 1 year ago. And

having done so, it is fair to ask the President now what he intends

to recommend to the Congress in a specific proposal to solve this

problem. Will he submit a specific plan? If so, when? And if not,

why not?

We understand that this year has been absorbed with a national

dialog on Social Security to attempt to let all the American people

have their input across this great Nation. The President will culminate this with a White House Conference next month. At the

conclusion of that bipartisan White House Conference, the time will

be there for the President to step up and accept the leadership

mantle and send to us a proposal as his recommendation for the

solution of the Social Security problem, and we will accept it happily and readily and begin to move on it.

Without a specific plan from the President, a very difficult job

will become much, much harder. Some might say it will even be

impossible. The Congress, with all of its varied ideas, varied approaches, one from another, Democrat and Republican, will have a

very, very difficult time coming together internally on an ultimate

solution.

This issue is so electric and so sensitive that I expect that there

will be, in spite of the efforts on the part of constructive people on

both sides of the aisle, there will be efforts on the part of individual

Members to get political advantage out of the issue going into the

next election. The one way to override that is for the President to

submit a proposal, defuse the issue, and give us a chance to go to

work on it.

I felt during this year that we needed a bipartisan proposal—specific proposal, not a group of alternative options—that would be designed by commission of bipartisan individuals who would get together and be forced, in the end, to submit one proposal, again with

a majority of the commission on both sides, or all sides, on a bipartisan basis, standing behind the focus of that proposal, and let the

Congress begin to work on it. That is what happened in 1982.

I was personally a Member of President Reagan’s National Commission on Social Security Reform. Without that Commission, I

know, from having been at that time a Member of the Social Security Subcommittee on the Ways and Means Committee, no resolution would have occurred.

But unfortunately, the White House felt that the creation of a

Commission was not the right way to go, and I respect their decision. But having defeated that Commission and said that we

should have this national dialog with a White House Conference,

I think it behooves the President more than ever to submit a specific plan at the end of that White House Conference.

Not simply to bundle up all of the varied proposals and inputs

from the people who attend the conference, send it up to Capitol

Hill, and say go to work on it, we will try to help you. That will

not solve this problem.
18

America needs leadership today from the one individual who was

elected by the people of this country to provide that single leadership. And, again, I say I stand ready to roll up my sleeves and to

work with the President when we receive that proposal.

If President Clinton believes that we can get this job done without his leadership or without a specific plan, I believe he will be

making the biggest miscalculation of his presidency. General principles will not get this job done, and history has shown that to be

true when we deal with the highly sensitive issue of Social Security.

Let it not be again that what we learn from history is that we

never seem to learn from history. Let us learn from history and

proceed, having learned from it. Broad outlines will not work. It

will take presidential leadership. It requires specifics. In short, it

takes a President.

If President Clinton were here today, I would close with this

message to him: Mr. President, as you and I first discussed when

we met together privately in the Oval Office in December 1996, we

cannot miss this opportunity to do this for future generations. I

know you agree with that because you spoke to it strongly in that

first meeting. Mr. President, do not miss this opportunity.

Just as only President Nixon could go to China as a Republican,

no Democrat President could have gone to China and gotten away

with it, you, Mr. President, you alone as a Democrat can change

the course of Social Security. When good presidents lead, great nations follow. Lift up our Nation, Mr. President. Put principles before politics and ideas before ambition. If you lead, we can be successful. Like no other issue, this one will test your presidency. I

think you are willing to lead. Will you be specific? I commit to you

that I will do everything necessary to strengthen and save Social

Security and to work with you.

[The opening statement follows:]

Opening Statement of Hon. Bill Archer

Today’s hearing marks the beginning of our effort to save and strengthen Social

Security.

Social Security is a vital thread in our nation’s moral and economic fabric. It has

reduced poverty, protected seniors, and enriched our families. It has helped make

a strong nation a great nation. Thanks to it, we are all better off.

I welcome President Clinton’s initiative to save Social Security first, and I look

forward to undertaking this serious and bipartisan effort.

Mr. Wilcox, I welcome you and look forward to your answers on behalf of the Administration. I must inform you, however, that I am troubled that Secretary Rubin

declined my invitation to testify. If we’re going to work on Social Security together,

it must be bipartisan and it must be fair. The Secretary’s absence begins the process

on the wrong note and I regret his decision.

In all cases, I intend to proceed in a bipartisan manner. I am fully prepared to

help President Clinton get a bill through the Congress. The American people expect

us to work together and that’s what I will do.

Make no mistake, this job will be difficult. Since Social Security won’t really be

broke for thirty-four years, President Clinton faces a test of his leadership to see

if he can fashion a solution to a problem this far from crisis.

To his credit, the President made this our nation’s number one priority almost one

year ago. Having done so, it’s fair to ask the President what he intends to do now.

Will he submit a specific plan? If so, when? If not, why not?

Without a specific plan from the President, a very difficult job will become much,

much harder. Some might say it will be impossible. If President Clinton believes he

can get this done without his leadership or without a specific plan, he may be making the biggest miscalculation of his Presidency.
19

General principles won’t get the job done. Broad outlines won’t work. It will take

Presidential leadership. It requires specifics. In short, it takes a President.

If President Clinton were here today, I would close with this message to him.

Mr. President, don’t miss this opportunity. Just as only President Nixon could go

to China, you alone can change the course of Social Security. When good Presidents

lead, great nations follow. Lift up our nation, Mr. President. Put principles before

politics and ideas before ambition. If you lead, we can be successful. Like no other

issue, this one will test your Presidency. Are you willing to lead? Will you be specific? I commit to you that I will do everything necessary to strengthen and save

Social Security. I look forward to working with you.

nelly, representing the Minority, for any statement that she might

Chairman ARCHER. And now I am happy to yield to Mrs. Kenf

like to make.

Mrs. KENNELLY. Thank you, Mr. Chairman, and as I look out at

this audience this morning, each and every individual in this room

understands that Social Security faces future financial challenges

through the increasing life expectancies and the approaching retirement of the baby boom generation. I look out and see many

faces that understand this problem, many people looking at this

situation, getting ready to resolve this situation. And I say to you

this morning, Democrats want a bipartisan, constructive approach

to strengthening Social Security for the 21st century.

Criticism is so easy, but as a great Republican President, Theodore Roosevelt said, it is not the critic who counts, not the man

who points out the strong man’s stumbles or what the doer of deeds

could have done better. The credit belongs to the man—and may

I say the woman—who is actually in the arena. If both Members

of Congress and the administration come together to work out a

truly bipartisan plan, it will serve the American people much better than if we sit and wait for the other party to give something

for us all to criticize.

I heard your remarks this morning, Mr. Chairman. I understand

with your long history, with your knowledge of the Ways and

Means Committee, with your former experience in Social Security,

I know how sincere those remarks are. But may I say to you that

the Minority welcomes Hon. David Wilcox. He is the point man for

our President at this very moment concerning Social Security matters. You may be sure that Secretary Rubin will be with this group.

I won’t be here, but these Members will be here in this room, and

the Secretary of the Treasury will be sitting right down there being

part of finding a solution to the Social Security problem.

And may I say to you loud and clear, the President of the United

States, William Clinton, will be very much involved in resolving

this situation. If nothing else, we all learned when we tried to reform health care that only the administration and only the Members of Congress can carry out and find a solution. If we let the

special interests in, if we let the special interests be the ones that

are looking for the solution and calling the tune, we will not resolve

this problem.

You say that this might be impossible. I know you, Chairman Archer. This is not impossible. You would not be Chairman of the

Ways and Means Committee if you did not look at things that were

terribly difficult and find solutions to them. No Member of the
20

Democratic team says this is impossible because we know the

American people demand that we resolve this situation, that we

make sure that the American people always have Social Security. So we come this morning, and it is a gathering and an important gathering, but it is only a gathering of the 105th Congress. Next

month or 2 months from now you will have the 106th Congress

which will have as a number one priority—I heard Speaker Livingston talk about it yesterday, I know that Mr. Gephardt is talking

about it, I know how clearly and how importantly the President of

the United States feels that this has to be resolved.

So I wish I was going to be with you. I won’t be. But I will be

watching you, like all Americans will be watching. And this is one

issue where we have to be bipartisan or we will all lose, but most

importantly, the American people will lose. So I wish you well,

Chairman Archer, I wish the Minority Members well, and I say to

all of you: Resolve this situation. You can prove once again that the

Congress of the United States is very important and they can work

with the President of the United States.

[The opening statement follows:]

Opening Statement of Hon. Barbara B. Kennelly

Mr. Chairman, Social Security faces future financial challenges due to increasing

life expectancies and the approaching retirement of the ‘‘baby boom’’ generation. The

time has come for us to consider seriously ways to address these challenges while

strengthening our system for current and future generations.

The Social Security Act of 1935 is perhaps the most successful program enacted

in the twentieth century. The creation of the Social Security program has changed

America’s way of life by providing important financial benefits to our elderly, disabled, and survivors both old and young. Indeed, if it were not for Social Security,

half of our nation’s elderly would live in poverty. Social Security provides a solid,

inflation-adjusted, guaranteed benefit that enables our seniors to live in dignity for

as long as they live.

The Social Security program has some built in protections that benefit those who

are most vulnerable. Women in particular benefit greatly from Social Security. Sixty

percent of Social Security beneficiaries are women and Social Security is often the

only source of retirement income for a majority of these women. Any proposals for

strengthening our system must consider carefully the impact change would have on

women.

Democrats want a bipartisan, constructive approach to strengthening Social Security for the 21st century. Criticism is easy. But, as the great Republican President

Theodore Roosevelt said, ‘‘It is not the critic who counts, not the man who points

out how the strong man stumbles or where the doer of deeds could have done them

better. The credit belongs to the man (or I might add, the woman) who is actually

in the arena...’’ If both members of Congress and the Administration come together

to work out a truly bipartisan plan, it will serve the American people much better

than if we sit and wait for the other party to give us something to criticize.

I am hopeful that this hearing represents a first step in a bipartisan effort, and

I welcome our distinguished panel of witnesses.

Chairman A

Without objection, Members may insert written statements in

RCHER. Thank you Mrs. Kennelly.

f

the record at this point.

[The prepared statements follow:]

Statement of Hon. Robert T. Matsui, a Representative in Congress from the

State of California

Thank you Mr. Chairman. I’d like to take a few moments to thank Barbara Kennelly for her contributions to this committee and to this institution. Her unwavering

leadership on protecting women and families will be a strong legacy as we work to21

ward Social Security reform measures next year. We will miss your guidance and

your friendship. I look forward to working with you, Barbara, in other capacities in

the future. Thank you.

Statement of Hon. Jerry Weller, a Representative in Congress from the

f

State of Illinois

Mr. Chairman,

Thank you for calling us here today for this extremely important hearing. The

106th Congress is just around the corner and we certainly have our work cut out

for us. By 2030, the number of elderly in America is expected to double more than

77 million due to the rapidly aging baby boom population. Fixing Social Security is

certainly one way to address the future needs of these retirees. The future financial

security of America’s retirees is also distinctively liked with their health care needs.

So, in addition, Congress must address the comprehensive needs of America’s retirees, not only from an income perspective, but also from a health care perspective.

Over the past two years, the Social Security Subcommittee, under the leadership

of Chairman Jim Bunning, has held a series of hearings to explore the various options for saving and strengthening Social Security. We have heard many different

views, opinions and solutions. However, we have not heard the views, opinion, or

solution from one very important person—the President of the United States. The

President talks about saving Social Security; but the President has not shown any

leadership. Chairman Archer asked the Clinton Administration to come to this hearing today and present a plan—to show some leadership on this issue. Unfortunately,

the Administration is neglecting to step forward and take a stand—taking a back

seat on one of the most important issues he will have the opportunity to work on.

As I said earlier, we in Congress have our work cut out for us. During the coming

year, we will be making some tough choices—choices that are necessary to ensure

the solvency of Social Security. I look forward to today’s hearing and would like to

wish Chairman Bunning well in his new role in the other body.

with us today. Again, I am sorry that your boss, Secretary Rubin,

Chairman ARCHER. Now, Mr. Wilcox, we are happy to have you

f

could not be with us, but we are more than pleased to have you

here, and we would be pleased to hear whatever statement or presentation you would like to make to the Committee.

STATEMENT OF HON. DAVID W. WILCOX, ASSISTANT SECRETARY FOR ECONOMIC POLICY, U.S. DEPARTMENT OF THE

TREASURY

Mr. WILCOX. Thank you very much Mr. Chairman, Members of

the Committee. I am honored and pleased to have this opportunity

to meet with you today.

Because this is my first appearance before this Committee, I

thought I might begin by briefly sketching my professional background. I am the Assistant Secretary for Economic Policy at the

Treasury Department, a post which I have held for exactly 1 year

as of this week. Prior to that, I was on the staff at the Federal Reserve Board for 10 years; for the first 5 years with responsibility

in the macroeconomic forecasting area and for the second 5 years

more directly related to monetary policy.

I am pleased to be here today to discuss with you the vitally important issue of restoring Social Security to sound financial footing.

I know that Secretary Rubin, Deputy Secretary Summers, and others in the administration look forward to working with you and the

other Members of this Committee on this crucial issue.
22

As we begin this important undertaking, it is worth returning to

fundamentals and reminding ourselves why it is so important that

we move with dispatch toward achieving a bipartisan agreement.

The case for rapid action rests on two key propositions. First, the

sooner we move, the more we can take advantage of the economy’s

extraordinary performance achieved under President Clinton’s economic strategy. Right now our economy is remarkably strong and

the budget is the healthiest it has been in a generation. Unemployment has been at or below 5 percent for 19 months. Inflation is low

and stable. Real incomes are rising again, breaking out of the pattern of stagnation that had persisted since the seventies. And for

the first time since 1969, the Federal Government has posted a

unified budget surplus.

But we may not always be in such a strong position, and we will

likely never be in a stronger position to face the major challenge

ahead of us associated with an aging society. One key fact illustrates the dramatic demographic elements that lie ahead. In 1960

the number of American workers for every Social Security beneficiary was 5.1 to 1. Today it is 3.3 to 1. In a little more than 30

years’ time when there will be twice as many elderly as there are

today, the ratio will be 2 to 1 and falling.

A second reason for moving expeditiously is that the sooner we

place Social Security on a sound financial basis, the less we have

to do to restore balance. The cost of waiting is that we would be

confronted with a more painful set of choices down the road.

As you will recall, the President in his State of the Union speech

last January called for 1 year of national dialog on Social Security.

That year is now almost over. The President and Vice President

have contributed an enormous amount of their personal time and

energy toward this enterprise. The administration conducted three

regional forums to discuss Social Security with the American people. Each forum involved Members of both parties, serving to

broaden the range of ideas explored and giving concrete evidence

of the administration’s commitment to a bipartisan process.

These forums were jointly sponsored by the Concord Coalition

and the American Association of Retired Persons in conjunction

with Americans Discuss Social Security. In addition, many Members of Congress held forums in their own States. During this process, we have heard from the American people about their concerns,

hopes, and fears about retirement and their views on Social Security.

What we have learned has been critical to the process and will

help guide us from here. One of the many lessons from these national forums is that the American people, both young and old, are

concerned about the health of the Social Security system, and are

supportive of efforts to ensure that the system will provide benefits

not only for them but for their children and grandchildren as well.

These forums have laid the groundwork for the next stage of the

reform process, including next month’s White House Conference on

Social Security.

This year of dialog has provided many opportunities for us to improve our understanding of the myriad issues involved. Through

this process, three themes have been especially clear. First, the

final reform package will no doubt assimilate a lot of good thinking
23

from many quarters, and we should be receptive toward taking

that thinking on board. The administration believes the many proposals put forward by the Members of Congress, think tanks, academics and interest groups have been constructive in fostering this

year of bipartisan discussion.

Second, it makes little sense to judge specific policy options in

isolation. They can only be adequately assessed in combination

with all the elements that would be required to accomplish the full

job.

Last, the administration believes that any plan should be consistent with the five principles that the President articulated at the regional forum held in Kansas City. I have spelled out these principles in some detail in my written testimony, but allow me just to

list them for you.

First, reforms should strengthen and protect Social Security for

the 21st century.

Second, reforms should maintain the universality and fairness of

Social Security.

Third, Social Security must provide a benefit people can depend

on.

Fourth, Social Security must continue to provide financial security for disabled and low income beneficiaries.

Finally, Social Security reform must maintain America’s fiscal

discipline.

Another step in the year of national dialog will be the White

House Conference scheduled to take place on December 8 and 9.

The administration views this conference as an outgrowth of the

public discussions and the consultations that we have been having

with Members of Congress from both sides of the aisle throughout

the past year. In the time ahead, we intend to broaden and deepen

both aspects of this communication.

We fully intend the conference to be bipartisan, to include Members of Congress, representatives of the public, and experts holding

all views. The President has always believed that the only way to

achieve Social Security reform will be on a bipartisan basis, and we

intend for this conference to reflect that view.

Throughout the year, a number of observers have asked whether

the administration might be putting forward a plan of its own for

Social Security reform, and if so, when. The bottom line answer

here is that the administration is committed to whatever course

will be most conducive toward arriving at a bipartisan agreement

that assures the American people of a stronger Social Security system.

It has been the President’s judgment thus far that for us to put

out a plan would not have been helpful and could have served to

polarize the debate. He will continue to review on an ongoing basis

whether proposing a specific plan would help move the process forward. We will obviously be consulting heavily with Members of

Congress from both parties on this important issue.

Finally, with regard to engaging the Congress on our shared objective of achieving a bipartisan agreement, the President has consistently stated his intention to begin ongoing bipartisan discussions early next year. The administration recognizes the important

role that the Ways and Means Committee will play on this crucial
24

issue. Consultation with all the Members of Congress will be important, but consultation with this Committee will be especially so,

and I fully expect the administration to pursue such consultation

vigorously as we work toward our objective of forging a bipartisan

solution to this challenge. Mr. Chairman, today virtually every working man and woman in America is protected by Social Security. As we debate which policies will best strengthen of the Social Security Program, there

should be no question of the importance of restoring financial balance to the system in a bipartisan manner as early as possible. The

administration looks forward to working with the Members of this

Committee and with others in Congress as we take on this critical

challenge. Thank you, and now I would welcome your questions. [The prepared statement follows:]

Statement of Hon. David W. Wilcox, Assistant Secretary for Economic Policy, U.S. Department of the Treasury

Mr. Chairman, Members of this Committee, I thank you for this opportunity to meet with you to discuss the vitally important issue of restoring Social Security to

sound financial footing. I know that Secretary Rubin, Deputy Secretary Summers,

and others in the Administration look forward to working with you and the other

Members of the Committee on this issue.

During my remarks today, I would like to touch on four issues: first, the reasons why it is important to move expeditiously next year to secure a bipartisan agreement to preserve and strengthen Social Security; second, what we have learned during the national dialogue of the past year; third, the principles that the President

has put forth to guide Social Security reform; fourth, how to best move forward to

reach a bipartisan agreement that puts Social Security on solid financial ground for

future generations.

THE IMPORTANCE OF SOCIAL SECURITY

As we begin this important undertaking, it is worth returning to fundamentals and reminding ourselves why it is so important that we move with dispatch toward

achieving a bipartisan agreement. The case for rapid action rests on two key propositions.

First, the sooner we move, the more we can take advantage of the economy’s extraordinary performance achieved under President Clinton’s economic strategy.

Right now our economy is remarkably strong and our budget is the healthiest it has

been in a generation.

• Unemployment has been at or below 5 percent for 19 months.

• Inflation is low and stable.

• Real incomes are rising again, breaking out of the pattern of stagnation that

had persisted since the 1970s.

• And for the first time since 1969, the Federal government has posted a unified

budget surplus.

But we may not always be in such a strong position. And we will likely never be

in a stronger position to face the major challenges ahead of us associated with an

aging society. One key fact illustrates the dramatic demographic developments that

lie ahead: In 1960, the number of American workers for every Social Security beneficiary was 5.1 to 1. Today it is 3.3 to 1. In a little more than 30 years’ time, when

there will be twice as many elderly as there are today, the ratio will be 2 to 1, and

falling.

Second, the sooner we move to place Social Security on a sound financial basis,

the less we have to do to restore balance. The cost of waiting will mean we will be

confronted with a more painful set of choices down the road.

THE PRESIDENT’S NATIONAL DIALOGUE ON SOCIAL SECURITY

As you will recall, the President in his State of the Union speech last January

called for a year of national dialogue on Social Security. That year is now almost

over. The President and Vice-President have contributed an enormous amount of

their personal time and energy in this enterprise. The Administration conducted

three regional forums to discuss Social Security with the American people. Each

forum involved Members of both parties, serving to broaden the range of ideas ex25

plored, and giving concrete evidence of the Administration’s commitment to a bipartisan process. These forums were jointly sponsored by the Concord Coalition and the

American Association of Retired Persons, in conjunction with Americans Discuss Social Security. In addition, many Members of Congress held forums in their own

states.

During this process, we have heard from the American people about their concerns, hopes, and fears about retirement, and their views on Social Security. What

we have learned has been critical to the process and will help guide us from here.

One of the main lessons from these national forums is that the American people—

both young and old—are concerned about the health of the Social Security system

and are supportive of efforts to ensure that the system will provide benefits not only

for them, but for their children and grandchildren as well. These forums have laid

the groundwork for the next stage of the reform process, including next month’s

White House conference on Social Security.

In the remainder of my remarks, I would like to outline some of the Administration views and objectives for building on the national dialogue.

THE PRESIDENT’S PRINCIPLES

This year of dialogue has provided many opportunities for us to improve our understanding of the myriad issues involved. Through this process, three themes have

been especially clear.

First, the final reform package will no doubt assimilate a lot of good thinking from

many different quarters, and we should be receptive toward taking that thinking

on board. The Administration believes the many proposals put forward by the Members of Congress, think tanks, academics, and interest groups have been constructive in fostering this year of bipartisan discussion.

Second, it makes little sense to judge specific policy options in isolation. They can

only be adequately assessed in combination with all the elements that would be required to accomplish the full job.

Third, the Administration believes that any plan should be consistent with the

five principles that the President articulated at the first Social Security forum in

Kansas City.

• First, reform should strengthen and protect Social Security for the 21st Century. Proposals should not abandon the basic program that has been one of our nation’s greatest successes. The importance of Social Security can hardly be overstated. Eighteen percent of our seniors—more than one in six—receive all of their

income from Social Security. The bottom two-thirds of the aged population, in terms

of income, receive half of their income from Social Security. Without Social Security,

nearly 50 percent of aged Americans would be in poverty.

• Second, reform should maintain the universality and fairness of Social Security.

For half a century, Social Security has been a progressive guarantee for citizens.

It should be kept this way.

• Third, Social Security must provide a benefit people can depend on. Regardless

of economic ups and downs, Social Security must provide a solid and dependable

foundation of retirement security.

• Fourth, Social Security must continue to provide financial security for disabled

and low-income beneficiaries. Unfavorable comparisons are often made between the

returns on contributions offered by Social Security and the returns offered by the

market, but Social Security is much more than just a retirement program. We must

never forget that roughly one out of three Social Security recipients is not a retiree.

Any reform must ensure that Social Security continues playing these other important roles in the future.

• Finally, Social Security reform must maintain America’s fiscal discipline. Six

years ago the deficit reached a record $290 billion. In the just-ended fiscal year we

achieved a record surplus of $70 billion in the unified budget. In choosing the way

forward on Social Security reform, we will need to continue that strong record.

MOVING FORWARD TOWARD A BIPARTISAN AGREEMENT

Another step in the year of national dialogue will be the White House Conference,

scheduled to take place on December 8th and 9th. The Administration views this

conference as an outgrowth of the public discussions and consultations that we have

been having with Members of Congress from both sides of the aisle throughout the

past year. In the time ahead, we intend to broaden and deepen both aspects of this

communication.

We fully intend the conference to be bipartisan, to include representatives of the

public, and to include experts holding all views. The President has always believed
26

that the only way to achieve Social Security reform will be on a bipartisan basis,

and we intend for this conference to reflect that view.

Throughout the year, a number of observers have asked whether the Administra- tion might be putting forward a plan of its own for Social Security reform, and if

so, when. The bottom-line answer here is that the Administration is committed to

whatever course will be most conducive toward arriving at a bipartisan agreement

that assures the American people of a stronger Social Security system. It has been

the President’s judgment thus far that for us to put out a plan would not have been

helpful and could have served to polarize the debate. He will continue to review on

an ongoing basis whether proposing a specific plan would help move the process forward. We will obviously be consulting heavily with Members of Congress from both

parties on this important issue.

Finally, with regard to engaging with Congress on our shared objective of achiev- ing a bipartisan agreement, the President has consistently stated his intention to

begin ongoing bipartisan discussions early next year. The Administration recognizes

the important role that the Ways and Means Committee will play on this crucial

issue. Consultation with all the Members of Congress will be important, but consultation with this Committee will be especially so, and I fully expect the Administration to pursue such consultation vigorously as we work toward the objective of

forging a bipartisan solution to this challenge. Mr. Chairman, today virtually every working man and woman in America is pro- tected by Social Security. As we debate which policies will best strengthen the Social

Security program, there should be no question of the importance of restoring financial balance to the system in a bipartisan manner as early as possible. The Administration looks forward to working with the Members of this Committee and with others in Congress as we take on this critical challenge. Thank you, and I would now

welcome your questions.

Chairman A

Any Member of the Committee wish to inquire?

RCHER. Thank you, Mr. Wilcox.

f

Mr. Crane.

Mr. CRANE. I am pleased to hear your presentation and the ac- knowledgments from both sides of the aisle about the nonpartisan

aspect of this, and to be sure, it is nonpartisan since it affects us

all equally. One of the things I am curious about is when did the administra- tion get concerned about this pending bankruptcy of Social Security?

Mr. WILCOX. The long-term financial health of the Social Secu- rity system has been a concern of the President’s for some long period of time.

Mr. CRANE. Like what time?

Mr. WILCOX. I am not familiar with his thinking on when he first

began to focus on the importance of this, but this has been a concern of the President’s for—on a consistent basis.

Mr. CRANE. Well, the reason I ask that, and I should yield here

to the Chairman of our Health Subcommittee, that we only took up

our awareness of the bankruptcy of Medicare like 1 year ago,

wasn’t it? Two years ago? And it was scheduled to go bankrupt in

the year 2001, not 2032. I know that we addressed that, but that

is only to buy life for another decade with respect to Medicare, and

it has the same kind of problems confronting beneficiaries that Social Security does.

One of the things I find interesting at home in town meetings is

the only folks paranoid about Social Security have white hair. And

the ones who are going to lose any benefits, the younger kids, are

the ones that are bored whenever you bring up the subject of Social

Security. They would rather listen to more meaningful topics. Yet
27

it is something that I think truly is a potential calamity if not addressed properly by Congress and the administration.

Let me ask you, since there have been many forums since the

first of this year on Social Security, have you learned anything?

Have you ruled anything in or ruled anything out in reforms?

Mr. WILCOX. Our view is that we have learned a great deal from

the forums. We have heard from the American people about how

important the Social Security system is to them. We have heard

about how many different ways Social Security affects the lives of

ordinary Americans. We have heard from people whose college educations have been funded by survivors’ benefits from Social Security. We have heard from disabled individuals whose livelihood has

been sustained by the DI, disability insurance program, of Social

Security.

We have heard from, of course, from the large number of retirees

who have counted on Social Security to provide them with a sound

financial footing. And I think one of the most important messages

that we have heard out of the forums is how supportive the American people will be of bipartisan efforts to place the program on a

sound financial footing for the longterm.

Mr. CRANE. Are tax hikes an option for saving Social Security?

Mr. WILCOX. Sir, the President has indicated that he expects to

be able to achieve a bipartisan agreement for Social Security without resorting to an increase in the payroll tax rate.

Mr. CRANE. So, you pushed aside the idea of any tax increase to

try and resolve the problems?

Mr. WILCOX. The President has indicated that he expects to be

able to do that without an increase in the payroll tax rate.

Mr. CRANE. What about benefit cuts?

Mr. WILCOX. The President, I think, quite consistently, has maintained a stance of attempting not to comment on specific proposals,

but in order to allow full discussion so that all proposals and all

avenues toward solving this problem can be explored, the President

has tried to remain in an open-minded stance, in a belief that

through a bipartisan and thorough discussion we can arrive at the

best possible solution.

Mr. CRANE. So you are saying that benefit cuts could be a consideration?

Mr. WILCOX. None of the alternatives, sir, are attractive, and

benefit adjustments are one of the approaches that might be part

of an overall package.

Mr. CRANE. And how about retirement age?

Mr. WILCOX. Again, the administration has taken the view that

as much as possible, what should be happening now is a full and

open discussion of all possible avenues toward achieving sound financial footing for this system.

Mr. CRANE. So retirement age is then under consideration too.

Let me ask one final question. That has to do with the privatization programs in Chile, for example, and Australia. I have been

told that there are disagreements on the part of some who have

looked at the privatization approach to dealing with the pending

bankruptcies of their own Social Security programs. Chile’s I have

been told is a very successful program. Over 90 percent of Chileans
28

have opted to go that route. I am not conversant with Australia’s

program.

You have looked, I am sure, at other privatization programs that

other countries have experimented with. What is your assessment?

Mr. WILCOX. Certainly, the international experience will be an

extremely helpful laboratory for us to look to for lessons in how we

proceed.

In a system of the type that Chile has adopted, England as well,

there are a number of advantages and disadvantages. The control,

for example, that individuals have over their own retirement financial destiny is an important advantage of a system of that type.

By the same token, a number of observers have expressed concern over the level of cost that is built into that system. By contrast

with our current Social Security system, wherein more than 99

cents of every dollar taken in in payroll taxes is paid out in the

form of benefits, in Chile—in both Chile and in England, 20 to 30

cents are absorbed in the form of administrative costs. So I think

there is an important cautionary aspect from the experience of

those countries, as well.

Mr. CRANE. Thank you.

Chairman ARCHER. Mr. Matsui.

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

for your testimony, Secretary Wilcox.

I just want to make a couple of observations. One, I think these

regional forums are extremely important, not so much to come up

with a specific plan but to show how important Social Security is

to the life of an average family in America.

I think in one of the hearings—one of the forums—it came out

that if we did not have Social Security, over 50 percent of the senior citizens in America today would live in poverty. And I think the

public needs to know those kinds of facts.

In addition, I think your regional forums have brought out the

fact that we need to fix the system; that over a period of time now,

it has been pretty well established among average citizens that Social Security does have a 2 percent of payroll problem over the next

35 years or so, and in fact we have a big job ahead of us. And so

I think those two points have been made by the administration.

I don’t believe that the purpose of these forums is necessarily to

come up with a specific fix. Obviously, you have got to demonstrate

that there is a need for a fix first, and I think you have pretty

much reached that point. Perhaps a little more work needs to be

done.

It is my hope that over the next year or two, depending upon

how long it takes before we actually come up with a solution, that

all of us, both parties, work together in good faith. I think that is

going to be extremely critical. Second, I think, as Representative

Kennelly said, we should not be out to try to criticize. And, third,

I think this is as important as anything else, that we shouldn’t

play the blame game, and I am afraid that has already started

today and we need to really avoid that if we possibly can.

We all know the political dimensions of Social Security and how

it could affect the parties, and it is my hope that we all try to do

this with a good deal of openness, without immediately trying to

find ways in which the other party is at fault.
29

Let me ask you, Mr. Wilcox, in terms of the issue of the surplus,

the President has said that he wants to preserve that surplus, obviously for the purpose of dealing with the Social Security problem.

Could you perhaps elaborate on why maintaining the surplus without using it for tax cuts or spending programs, big new spending

programs, is important, and why it is important not to have tax

cuts before we actually solve this problem?

Besides the fact—and I might just add this—that it will be important to show the senior population, if we have to make some

tough decisions down the road, that we are acting in good faith in

terms of their interests. So perhaps you could respond to that.

There has been a lot of talk about enormous tax cuts, and we need

to find out whether or not that is an important element.

Mr. WILCOX. Congressman, you asked why is it important to preserve the surplus. I think the simplest formulation I can give of

that is that we have an extraordinarily favorable situation over the

forecastable future. Whereas earlier we had deficits as far as the

eye can see, today we are in the wonderful position of having surpluses as far as the eye can see. Those surpluses in the unified

budget represent a very large financial asset.

We have in the Social Security system a very significant challenge ahead of us. The gist of the President’s policy to reserve

every penny of the unified budget surplus pending agreement on a

bipartisan basis toward a Social Security solution, the gist is we

should not dissipate that asset before we know the nature and form

of the solution that we intend to use in terms of putting Social Security on a sound footing.

Mr. MATSUI. Is my understanding correct that we have a 2 percent of payroll problem over the next generation, the next 35 years

or so, and by dipping into that surplus for new big spending programs or tax cuts, that this could make the 2 percent of payroll

problem worse?

Mr. WILCOX. The gist of it is that we do not know exactly how

much we are going to need, and therefore the policy is let’s set

aside every penny of that surplus until we know what course we

choose to take.

Mr. MATSUI. Not knowing what the solution is, obviously we

don’t know the impact.

Mr. WILCOX. That is exactly right. Precisely right, sir.

Mr. MATSUI. Thank you.

Chairman ARCHER. Mr. Wilcox, I had planned not to do any

questioning, but I think there are a couple of threads that need to

be pulled together just to have a foundation on which this discussion continues. It sort of piggybacks on what my friend Bob Matsui

was getting at.

When the payroll taxes come in, taken from the workers to go

into the trust fund for Social Security benefits—and I must say I

take some issue with my friend Phil Gramm’s presentation today,

and I think we need to set the record straight. Correct me if I am

wrong. When those payroll taxes are collected, they come into the

Treasury of the United States and they are immediately invested

in government bonds paying market interest rates; is that correct?

Mr. WILCOX. That is correct, sir.
30

Chairman ARCHER. And when the need for Social Security benefit payments arises every month, the Social Security Trust Fund

submits the amount of securities or reduction that are necessary to

pay those benefits every month; is that correct?

Mr. WILCOX. That is correct, sir.

Chairman ARCHER. Can those securities be redeemed for any

other spending purpose?

Mr. WILCOX. My understanding is that they cannot.

Chairman ARCHER. That is mine too. In fact, that is the law of

the land. Now, it has often been said by both liberals, moderates,

and conservatives that there is nothing in the fund, that the money

has been spent. But the money has been borrowed by the Treasury

to pay other operating bills, and the Social Security Trust Fund retains the Treasury securities to represent the moneys that will ultimately be paid in the redemption of those bonds. Now, challenge

me if anything that I say is incorrect, because I think it is very important that the Members of this Committee and the people of the

United States understand the fundamentals of Social Security.

Under those circumstances, how would it ever be possible to raid

the Social Security Trust Fund, whether it be for other General

Treasury spending or for General Treasury tax relief? Can you explain to this Committee how under any circumstances it would be

possible to raid the Social Security Trust Fund when you give a tax

relief out of the General Treasury?

Now, I am not talking about payroll tax relief. If you took payroll

taxes and reduced them, you would be taking money out of the

fund, money that would go into the fund. But inasmuch as all of

those payroll taxes are immediately invested in Treasury securities—which are, by the way, the safest investment in the world and

why interest rates are going down, because foreigners are now running to buy Treasury securities which are the safest investment in

the world. And it is those securities that are held by the Social Security Trust Fund, backed by the full faith and credit of the United

States of America.

Now, again, how would it be possible by either an appropriation

spending bill or a general tax relief bill out of the General Treasury

to raid the Social Security Trust Fund?

Mr. WILCOX. Sir, I am not sure I can answer that question without knowing the precise details of what you have in mind, but the

conversation I was having——

Chairman ARCHER. Let me it more specific. Inasmuch as the

trust fund is represented by Treasury securities that can be redeemed only to pay for Social Security benefits, which you said was

correct, in what way does a general tax reduction or tax relief bill

in any way attach to those securities? Are they going to be redeemed for the general tax reduction?

Mr. WILCOX. The gist of my conversation with Congressman Matsui was that the administration’s position is specifically with respect to the disposition of the unified budget surplus.

Chairman ARCHER. I understand. That is not the question I am

asking. I am asking you specifically whether those bonds that are

in safekeeping in the trust fund and which represent all of the payroll taxes that have been paid in, whether they can be redeemed

in any way or undermined in any way by a tax relief bill that does
31

not involve the payroll taxes? It involves income tax relief. Can

they in any way be undermined or used for that purpose?

Mr. WILCOX. As you observed, sir, my understanding is, as well,

that the only purpose for which those securities may be redeemed

is for purposes of payment of benefits.

Chairman ARCHER. All right. So the answer, then, is if the Congress elected to give tax relief on the income tax, that would in no

way legally ever be able to raid the Social Security Trust Fund

which is represented by bonds that are held in that trust fund; is

that correct?

Mr. WILCOX. That would not compromise the validity of the securities held by the Social Security Trust Fund.

Chairman ARCHER. So under no circumstances could that be expressed in the terms of ‘‘raiding’’ the Social Security Trust Fund;

correct?

Mr. WILCOX. I would hesitate to characterize what other observers might have in mind when they speak of raiding.

Chairman ARCHER. I am not asking about other observers. I am

asking you and then I want you to tell me how it would raid the

Social Security Trust Fund, inasmuch as all of those bonds are still

intact.

Mr. WILCOX. I do not think I am prepared to characterize off the

cuff whether that would constitute raiding——

Chairman ARCHER. Well, think about it a moment so it does not

have to be off the cuff.

Mr. WILCOX. I, sir, have stated that I agree with you that the

only purpose for which those bonds may be redeemed is for purposes of paying benefit obligations of the Social Security system,

and I believe we are in full agreement on that point.

Chairman ARCHER. Thank you. Because I think that is very, very

important, number one, to lay the predicate for the American people to understand.

Second, and where I disagree with my friend Phil Gramm, those

bonds that are held by the Social Security Trust Fund have the

same full faith and credit as a double A bond or any other Treasury

securities that are bought by the general public. Is that not correct?

Mr. WILCOX. That is absolutely correct. They have the same legal

standing, sir, as marketable Treasury securities.

Chairman ARCHER. So if those who say there is nothing in the

trust fund believe that inasmuch as the money has been spent and

there are only bonds held by the trust fund, would it not also be

fair to say that those Americans who have bought double A bonds

should go home and burn them because they are worthless, because

the money has already been spent?

Mr. WILCOX. My understanding is that, unlike many of us who

hold Treasury securities in an electronic form, there are literally,

my understanding, physical certificates that are held in a vault in

West Virginia, I believe.

Chairman ARCHER. That is good to know, too, but irrespective,

it is a legal obligation of the United States of America, and it is

the safest investment in the world, and the mere fact that the

money that was given to buy the bonds has been spent does not

in any way mean the bonds don’t have a very real value, does it?
32

Mr. WILCOX. They are backed by the full faith and credit of the

U.S. Treasury.

Chairman ARCHER. Absolutely. And many of my conservative

friends do not understand that.

Mr. WILCOX. Well, together we can proselytize——

Chairman ARCHER. I apologize for the time taken today, but I

think it is very, very important for people to understand exactly

what is involved here. And now, what interest return do these

bonds give to the Social Security Trust Fund today? There is the

myth that there is no compounding of interest on these bonds that

are held by the fund.

Mr. WILCOX. This is a complex topic. I will do the best I can to

give you the broad outlines of it.

The securities pay a rate which is tied to the rate actually observed in the marketplace on coupon securities with 4 years and

more to maturity. The securities are issued in a laddered set of maturities from 1 to 15 years, and all the securities of different maturity issued on the same date pay the same rate of return, which

is that average on marketable coupons of 4 years and more. And

if I have stated that incorrectly, I hope someone will correct me.

Chairman ARCHER. Well, the important thing is, I am told that

currently the rate of return on the bonds to the Social Security

Trust Fund is 7.5 percent APR.

Mr. WILCOX. I don’t know that figure off the top of my head.

Chairman ARCHER. I would like for you to research that and confirm that, but it doesn’t really matter. The important thing is that

there is a significant compounding of interest into the fund today.

And it is, for the safety of the securities that are held there, it is

one of the highest returns that you can find anywhere in the world,

for the very reason that you mentioned as to how the bonds are set

up. So it is important for everyone to know as we go into this process that there is a compounding of return to the Social Security

Trust Fund for the bonds that are held there.

[The information was subsequently received:]

The combined interest rate earned by the OASDI Trust Funds in calendar year

1997 was 7.5 percent; 7.6 percent for the OASI program and 7.0 percent for DI. The

interest rate on the special issues purchased by the Trust Funds in June 1997 was

people will learn more about it. Let me ask you one last question.

6.875 percent. (Source: 1998 Trustees Report)

Chairman ARCHER. These are all facts, and I hope the American

f

Inasmuch as the surplus, depending on how you define it, is generated by an unexpected increase in income tax revenues and a decline in spending that was not in the baseline that generate this

so-called surplus, how would you use, in your plan to save Social

Security, how will you use the General Treasury funds that are a

part of this surplus to save Social Security? What would be options

for the infusion of General Treasury funds, inasmuch as we have

already established that the payroll taxes are going in, they are

there, they stay there. That is not an issue of debate. The surplus

now we are talking about is what do we do out of the General

Treasury to save Social Security? What options would the adminis33

tration consider for the use of these General Treasury funds to save

Social Security?

Mr. WILCOX. First, Mr. Chairman, I should emphasize there is no

administration plan, and therefore I can’t speak as to how they

would be used in an administration plan. The administration policy

that does exist that is relevant to this, is the policy that we have

been discussing of reserving the unified surplus pending bipartisan

agreement on how to address this problem.

There have been a number of proposals put forward, and I expect

that you will hear in your later panels from some witnesses who

will discuss this, but there is a wide variety of proposals for how

the unified surplus might be applied to the problem of solving the

Social Security financial status.

Chairman ARCHER. Well, let me go back to the basics again.

Whatever portion of the ‘‘unified surplus’’ is a result of the payroll

taxes that are coming in, have they not already been reserved, inasmuch as they have gone into bonds and cannot be spent for anything else? Does the law not already preserve that in toto?

Mr. WILCOX. Again, I return to the basic observation that the

unified surplus is an important asset that we must preserve.

Chairman ARCHER. I understand. But I am trying to be a little

more specific because this gets confusing for the American people.

Mr. WILCOX. I appreciate that, sir.

Chairman ARCHER. And I am asking the specific question of, to

whatever degree the unified surplus is a result of the payroll taxes

going into the Social Security Trust Fund, which are represented

immediately by government bonds, they cannot be used for any

other purpose, is that not already protected under the law to be

used only to save Social Security?

Mr. WILCOX. To the extent that payroll taxes exceed benefit obligations and administrative expenses, the balance in the Social Security Trust Fund rises by that amount.

Chairman ARCHER. Yes, and to the extent that that is a part of

the unified surplus which you have referred to, that is already protected under law, is it not?

Mr. WILCOX. Well, I mean——

Chairman ARCHER. Why do we have to go back through this?

You just said it cannot be spent for anything else, it must be protected.

Mr. WILCOX. It is protected in the trust fund. The reason why

these issues are diffuse and difficult to get a hold of is that it is

impossible to identify which dollar in the unified surplus came——

Chairman ARCHER. So it is not. You know exactly how much

money is going into the Social Security Trust Fund from the payroll taxes in excess of the benefits that are paid out. You know exactly every year. It is not difficult. It is a very simple arithmetic

formula. And to the degree that that amount of money is a part

of the surplus, it is already protected, is it not? Why is it so hard

for you to say yes to that when you said yes to all of the preliminary questions?

Mr. WILCOX. Sir, the thing that I am saying yes to is the President’s determination to save the unified budget.

Chairman ARCHER. But that is a generality. I am trying to get

basic information out so we can understand exactly where we are.
34

Let me ask you one more time. To the degree that the moneys

coming into the Social Security fund each year are in excess of administrative costs and benefit outlays, to the degree that that is a

part of the unified surplus, that is already protected under law, is

it not?

Mr. WILCOX. To the degree that the payroll tax revenue exceeds

benefit obligations and administrative costs, the trust fund is going

up by that amount.

Chairman ARCHER. That is already protected for the purpose of

saving Social Security because it cannot be spent for anything else.

Now, that is a part of the unified surplus which is already protected. Now, the issue then comes to the other part, which is the

general operating Treasury and its role relative to the unified

budget, and that is a different issue. Now, inasmuch as the part

that is going into the Social Security fund and the payroll taxes is

already protected to save Social Security under the concept in the

mantra of ‘‘save Social Security first,’’ we must only be talking

about the operating Treasury moneys as their role in the surplus.

And I am asking you the question, what options are there to take

that General Treasury money to save Social Security?

Mr. WILCOX. And what I am attempting to state as clearly as

possible, sir, is that there is at this point no administration position on how the unified budget surpluses might be applied toward

the problem of addressing the Social Security problem. There have

been a wide range of proposals put forward by others and we are

interested in studying those proposals.

Chairman ARCHER. No, I understand that. But I am asking you

for specific options that you would rule in and specific options that

you would rule out relative to the use of the General Treasury surplus, whatever it might be, in the saving of Social Security. And

I hate to repeat this again, but inasmuch as we have already established that the Social Security moneys that may be a part of the

unified surplus are already committed to saving Social Security,

now let’s look at the other part, because you must be talking only

about that when you say save Social Security first before you use

any of it for tax reduction.

Mr. WILCOX. ‘‘Save Social Security’’ refers to the entirety of the

unified budget surplus.

Chairman ARCHER. Well, I am obviously not going to get an answer to this question. But what I am trying to get at is that Social

Security’s sanctity over the years has always been that it is independent of General Treasury funds; that it is an insurance contract

between the government and workers as a result of what they have

sent to the fund under the payroll tax structure, and their benefits

are directly related to what they paid in during their work life in

the payroll structure.

Now, when you start talking about the unified budget surplus as

a solution to Social Security, you must have some plan or some

ideas about how General Treasury funds are going to be infused

into the Social Security fund. And many, many people will come

unglued when that happens because they will see the sacredness

of the contract of Social Security undermined and the beginnings

of it becoming a welfare system.
35

Mr. WILCOX. Perhaps, sir, I could give an illustration of one way

that the unified surplus might be used, and this illustration has

been put forward by a number of alternative observers.

Chairman ARCHER. Since the payroll taxes are already protected,

let’s talk about how you are going to use General Treasury funds

out of the surplus to save Social Security. What options are available, in the way that you look at it?

Mr. WILCOX. One option that has been put forward by a number

of advocates would be to take those special purpose bonds that are

in the trust fund that we have been talking about and redeem

those for the purpose of purchasing private sector securities. This

option would have the effect of reducing the unified surplus.

In the first instance it would maintain the level of the Social Security Trust Fund exactly at its same level because it is a swap of

equal value assets. Dollar for dollar, it would reduce the unified

budget surplus, and so that would be a way of using the assets in

the Social Security Trust Fund, reducing the unified budget surplus for the purpose of improving the financial status of the Social

Security system.

Chairman ARCHER. OK. All right. I apologize for the length of my

inquiry, but I wanted to set some sort of basic foundation for the

balance of the discussion today.

And let me recognize Mr. Thomas.

Mr. THOMAS. Thank you, Mr. Chairman. I am already fairly

heavily engaged in a bipartisan effort to save Medicare as the administrative Chair. One of the things we have tried to do, to not

just maintain as a statement that we are in favor of a bipartisan

solution, is that we have attempted to conduct ourselves in a bipartisan way.

Mr. Secretary, I read your statement very carefully, and notwithstanding in your second paragraph the statement how to best move

forward to reach a bipartisan agreement, and then moving forward

toward a bipartisan agreement, in your opening section on the importance of Social Security, what you outline is nothing more than

a campaign statement on what has occurred over the last several

years.

Now, perhaps you didn’t intend that, but my recollection is that

President Clinton was elected in 1992 and he had a Democratic

majority in both the House and the Senate, and the American people in their wisdom decided to change that in 1994. And in three

successive elections the Republican Party has controlled the House

and the Senate, at which time the balanced budget was achieved.

And if your opening statement is going to be simply President

Clinton’s economic strategy, without any acknowledgment or willingness to admit that there has been a cooperative effort to reach

the current economic state that we are in, what you have just made

is a very partisan campaign statement, and that is your opening

statement to this Committee that you want to be bipartisan. That

kind of pitch has to stop. Saying you want to be bipartisan also has

to be followed up by being bipartisan, both in word and in deed.

President Clinton is not going to run again. If he really wants

a fundamental benefit legacy, it is not only Social Security, it will

be Medicare reform, but time is running out.
36

And I listened carefully to some of the responses to my friend

and colleague from Illinois about changes that are more often than

not kind of boilerplate discussed, and in response to the change

that was made in 1983 by the Congress, to an age change from 65

to 67, you have indicated that you did not contemplate any age

change, and that, I think, is a very clear and easy answer. The

problem is, the plan that was passed moved the retirement age

from 65 to 67, not until 2027.

So is the administration in any way contemplating an adjustment within the current legal age limit requirement? That is, moving forward the achievement of the 67 age date prior to 2027?

Mr. WILCOX. Sir, let me begin by complimenting your leadership

on the Medicare Commission——

Mr. THOMAS. I appreciate that, but I have got 5 minutes and that

light is going to move really quickly.

Mr. WILCOX. The administration is studying a wide range of proposals, including those that deal with benefit adjustment, retirement age, revenues——

Mr. THOMAS. So nothing is off the table?

Mr. WILCOX. Nothing is off the table. As I said earlier, the President has indicated that he expects to be able to accomplish this

without recourse to an increase in the payroll tax rate.

Mr. THOMAS. And you very carefully said that, and you repeated

it very carefully again, and I will reference the discussion with the

Chairman: No payroll tax rate increase. But fairly obviously there

are a number of schemes that are available to utilize dollars that

are, in fact, raised through taxes that are not rate increases. Is

that what I understand your statement to be?

Mr. WILCOX. The administration has not taken a position on

those, and we seek to leave an open and free——

Mr. THOMAS. So you haven’t ruled that out.

Mr. WILCOX. That is correct, sir.

Mr. THOMAS. So tax increases are on the table. They have not

been ruled out, but no payroll tax rate increase, and I understand

that.

Now, let me urge you folks—and I understand, your concern—

but, boy, you sound like you are bobbing and weaving, waiting for

the next election. There is no next election for this President. He

did invest a year going out, reaching out with the various hearings.

He is going to have a bipartisan conference next month. That is

1998.

In 1999, can we expect the President to offer some specifics? Not

principles. We spent a whole year searching, listening, wandering

in the wilderness for principles. Can we get some specifics at the

State of the Union? Yes or no?

Mr. WILCOX. Sir, the President will put forward a plan if and

when he determines that it would be helpful to moving the debate

ahead.

Mr. THOMAS. How about budget time, around April? Yes or no?

Mr. WILCOX. My answer would be the same.

Mr. THOMAS. How about fiscal year, around October?

Mr. WILCOX. My answer remains the same.

Mr. THOMAS. This guy is not going to run again. You are blowing

a really wonderful opportunity by acting like he is going to run
37

again. You cannot keep bobbing and weaving. It is tough and difficult, but just like we are doing on the Medicare Commission, we

are grappling with specific provisions. Principles are fine, but you

are going to have to start pulling them together.

If you are unwilling to commit by October 1, fiscal year, and you

still may be mulling over the principles, you are in fact not stating

that you are willing to join with us as a bipartisan way to solve

Medicare. You have got to think just what you are going to be saying over the next couple of months, especially leading up to and

after the State of the Union. I want a bipartisan solution, I believe

you do, but this campaign rhetoric mode has got to end.

Thank you, Mr. Chairman.

Chairman ARCHER. Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman.

Mr. Secretary, I wonder if you could outline what classes of

workers in the economy would be most at risk in a system where

Social Security benefits, both disability and retirement, are not

guaranteed to the workers?

Mr. WILCOX. I think in order to answer that, you would look to

the classes of individuals for whom Social Security currently is

most important. Social Security is extremely important for lowincome workers. The replacement rates for low-income workers are

considerably higher than for average- and high-income workers. So

clearly a core element of our concern in the design of a plan should

be to examine carefully the possible impact of a Social Security reform plan on low-income workers.

The second class of individuals for whom Social Security is extremely important is disabled individuals.

Mr. COYNE. What was that?

Mr. WILCOX. Disabled individuals. It is not commonly known

that fully 10 percent of Social Security beneficiaries are disabled.

This for a family of four, age 30, is roughly equivalent to a life insurance policy of about $300,000.

The third class of individuals for whom Social Security is extremely important is women. Women make up 60 percent of the

total number of beneficiaries of the Social Security system, and

there are a number of features of that system that make it especially important to them.

Mr. COYNE. Thank you.

Chairman ARCHER. Mr. Shaw.

Mr. SHAW. Mr. Wilcox, I would like to follow up with your answer to Mr. Coyne regarding the importance of Social Security to

your lower income people. Is the President thinking about means

testing as far as the beneficiaries of the Social Security Program

are concerned?

Mr. WILCOX. Sir, one of the principles that the President articulated in Kansas City was that Social Security should remain a universal system, although I could not speak to whether a proposal to

means test the system would threaten that principle without seeing

the precise details. Certainly, we would want to assess that proposal against the backdrop of the President’s principle.

Mr. SHAW. Dr. Wilcox, you have a very distinguished academic

background, and I can see you are visibly not very comfortable in

the spot you are in right now. You brought us a message that you
38

want to strengthen and protect Social Security. You want universality and fairness. You want to provide benefits that people can

depend upon. You want to provide financial security and fiscal discipline. Well, I guess everybody wants to do that. But I must express the disappointment of this Committee that you were not allowed to bring us today some type of solution, and that we don’t

even have a timetable in which the President would bring us that

type of solution.

As a matter of fact, I can find only one portion of your statement

which I can take some encouragement from, and that is that the

President will continue to review on an ongoing basis whether proposing a specific plan would help move the process forward. I think

the Chairman has made it very, very clear that it would be extraordinarily helpful, and I think everybody on this Committee would

agree that it would be helpful. And if there is anyone on the other

side of the aisle who thinks this would not be helpful, that that

would be destructive to the process, I would enjoy hearing that explanation.

The President was the one who made that famous statement of

‘‘Save Social Security first.’’ Why is it that the President—who said

that any tax cut would in some way invade the Social Security

Trust Fund, which you made it clear that it would not raid the Social Security fund in the more political dialog, who insisted on more

spending which did invade the surplus that we have, who has characterized himself as the defender of Social Security—why is it that

he cannot come up with a plan that would assist us?

I can assure you that this Committee is extraordinarily anxious

to work with this President on the Republican side and the Democrat side. We did it, we fought for a few years on welfare reform,

but then we came together. On this particular issue, we are running out of time. We have a limited window of opportunity, and if

it is not done during the term of this administration, it is going to

be looked back on as one of the tragedies of this administration.

But if the President would sit down and all of us could talk just

frankly, forget the rhetoric, and be open with each other, whether

it be an open session or closed session, if we could do that I think

we could come to some type of solution. I am looking forward to the

White House Conference on Social Security. But from what you

have told us today, I think that our expectations should be very

small as to what is going to come out of that conference.

What do you think will actually come out of that conference?

What do you think would be accomplished by even having the conference?

Mr. WILCOX. Oh, I think the conference will be a very important

opportunity to summarize the events of the last year from the regional forums, to engage further in the consultation with Members

of Congress, because I know the administration views that as an

essential part of the process for moving forward.

Mr. SHAW. You think a solution will come out of the conference?

You think the President might draw from the conference in order

to draw a plan to send to us?

Mr. WILCOX. I don’t think—I myself would not expect a 2-day

conference to yield a solution to the Social Security question.
39

Mr. SHAW. So you do not think the President is going to develop

a plan out of this conference. That certainly is disappointing.

I would hope the next time the President sends people down

here, particularly people such as you, from your academic background, who have so much to offer, I would hope he would give

them a longer leash so they could work with this Committee and

try to get things done and get a solution to a tremendous problem.

The American people are tired of the politics, even though the

politics of this seems to still be working. It is a tragedy. And representing the district that I represent, as one of the most elderly

in the Nation, I can say that it is most disappointing that we are

not moving forward and we are not moving the ball at all.

Thank you, Mr. Chairman.

Mr. CRANE [presiding]. Mr. Levin.

Mr. LEVIN. I am disappointed because essentially what the majority has said so far, lead by the Chairman, is that a bipartisan

solution requires that the President should go first with his specific

plan. That is essentially what you are saying. That is your definition of a bipartisan approach.

I think that sells this Congress short. I don’t think we should be

a junior partner. That wasn’t the model that was used in 1982.

That isn’t the model that was proposed by the Chairman himself,

that there be a commission. That isn’t the model that is being used

with Medicare.

Mr. SHAW. If the gentleman will yield, the President rejected the

proposal by our Chairman.

Mr. LEVIN. I don’t think it ever got out of the Senate, Mr. Shaw.

There was a lot of objection to that in the Senate.

I think there is a different model we might use, and that is to

try a bipartisan effort within this Committee. We did not do that

in the last session on any major legislation, maybe with one exception. But the rest of the proposals were written within caucus and

then essentially presented to us. So the effort to say bipartisanship

won’t work unless the President unveils a specific plan I think falls

short in terms of what we as Members of Congress can do.

The other argument used by Chairman Archer is that the President should desensitize the issue politically, otherwise we cannot

proceed, and the Nixon to China example is used, but I think that

that isn’t a good analogy. We are all deeply familiar with the Social

Security issue, and I think our constituents are, and I don’t think

that we should say a prerequisite is a specific plan from the President.

I don’t think the way to achieve a bipartisan result is to maneuver as to who goes first, and that is essentially what has been endeavored here. And I think, Mr. Wilcox, you have handled yourself

with candor and confidence.

Let me just say one last word about the surplus. ‘‘Save Social Security first,’’ as Mr. Wilcox has said, was a position that we should

not spend the unified surplus until we save Social Security first.

There would not be a surplus without the surplus in Social Security. That is what was said. And if we used moneys—and we can

argue about the emergency funds, and they were increased in part

because of an initiative from the Republican leadership in this

House—the position of the President was that if we used the uni40

fied surplus before we save Social Security, it would make much

more difficult or likely make more difficult saving Social Security

for the long run.

We are going to hear from witnesses today, including those who

propose overall privatization, whose plans, it would appear, would

depend on some use of General Treasury funds, if not this decade

or the next decade, the decade thereafter. So I think the position

as explained by Secretary Wilcox and others is very clear, that we

should not be spending the unified surplus until we make a mammoth effort to save Social Security for the long run.

I would urge that instead of trying to smoke out each other’s positions, instead of a ‘‘them’’ and ‘‘us’’ approach, that we in this

Committee set the example of starting to work on this on a bipartisan basis. We did not do that on key issues last session; we ought

to do it this session.

Mr. CRANE. Mr. Hayworth.

Mr. HAYWORTH. Thank you, Mr. Chairman, and let me apologize,

because I have the scourge of what every Congressman fears, and

that is losing one’s voice. But I know for some of my adversaries

their prayers have been answered in that regard, with my voice not

here.

Mr. Wilcox, welcome. Thank you for coming for the first time to

see us. And with all due respect to my friend from Michigan, I

would just take it a step further. Let’s set this not on a bipartisan

plane but on a nonpartisan plane. And in that spirit, one of the

basic fundamental tenets that every student learns in school, in elementary civics and government, is the notion that the President

proposes, the Congress disposes.

And on something this important, free from partisan rancor, just

simply the notion that the President proposes a plan rather than

using the bully pulpit to simply articulate principles, I think as a

notion is well deserved. And it is in that spirit, Secretary Wilcox,

that I return to your statement, quoting now from what you testified to: ‘‘It has been the President’s judgment thus far that for us

to put out a plan would not have been helpful and could have

served to polarize the debate.’’

Let me ask you, Secretary Wilcox, when was the last chance you

had to brief the President on the different alternatives and options

involved in saving Social Security?

Mr. WILCOX. I believe—time, if you will forgive me, time has run

together a little bit here lately.

Mr. HAYWORTH. Understandable.

Mr. WILCOX. Either last week, I believe, sir, or the week before.

Mr. HAYWORTH. And, again, based on that time in the last 2

weeks, the President still feels no need to step forward with a

plan?

Mr. WILCOX. The President is firmly committed toward achieving

a bipartisan solution. I can tell you, based on my own personal observation, of the seriousness that the President attaches to this enterprise. The President is engaged on this issue and he is firmly

committed toward seizing the opportunity of the current moment.

He also has exhibited enormous leadership in bringing the process

to this phase.
41

Mr. HAYWORTH. Mr. Secretary, we all agree that listening is a

very important part of leadership. I think, again, that is a nonpartisan principle. It transcends political labels.

What I would like you to convey to the administration and my

other friends who join you here from Treasury—and sadly, again,

I must also say it is unfortunate that the Secretary, for whatever

reason, could not join us here today—but let me humbly and respectfully request that, whether in the wake of this conference that

takes place at the White House in a couple of weeks or in some

other venue, that the President not hesitate to lead.

Constructive criticism is not always partisan, even in the wake,

sadly, of the Medicare debacle of 1996. A plan is not there to always be attacked, and the President does enjoy the advantage of

the bully pulpit. I would simply ask you to convey to the President

our challenge: To step up and lead.

I thank you for your attendance. I have no further comments or

questions.

Mr. CRANE. Mr. McDermott.

Mr. MCDERMOTT. Welcome, Mr. Wilcox. I don’t remember your

being up before the Committee, but you are being treated to what

in the animal kingdom is probably analogous to porcupines making

love. And given the way the last session ended, I think there is a

certain amount of reluctance on the part of the majority to make

love in this porcupine atmosphere.

The incoming Speaker has announced that his first bill will be

H.R. 1, to take Social Security off budget. Now, I don’t remember

if it is two or three times we have already done that in the Congress. If I am wrong I want to be corrected. I want to know if you

can conceive of any way that those payroll taxes can be put in such

a place that they can never be reached by the Congress. Outside

of what I think you already suggested, which was some kind of investment in the private sector, is there any other way that that can

happen?

My understanding is, if the money is gone, then it cannot be

used for any kind of tax cuts or anything else. My second question

is, if we took all the surplus and put it in the private sector, out

in Wall Street, and invested it, there would be no way it could be

used to balance the budget and still give tax cuts; am I correct?

Mr. WILCOX. As you correctly observe, sir, there have been a

number of proposals from Members of Congress and from think

tanks, academics and so forth, that would involve using the resources of the Social Security Trust Fund to purchase private sector securities. And those proposals, that act of purchasing private

sector securities would reduce the unified surplus.

Mr. MCDERMOTT. So the practice that was begun when Mr.

Reagan was President and the Senate was in the hands of the Republicans, to use that surplus as a budget balancing mechanism,

would be over; is that correct?

Mr. WILCOX. I think I would have to think through the analytics

of exactly how that would work. I am not sure I can give you a

blanket answer as to how it would work. There are different varieties of proposals.
42

Mr. CRANE. Mr. McDermott, would you yield just a second?

Wasn’t that Lyndon Johnson that folded it in so we could hide our

annual spending deficits?

Mr. MCDERMOTT. I think Senator Gramm testified it was in 1983

when the proposal was made to make, the changes, that that is

when they began using it as a part of the unified budget. Am I incorrect?

Mr. MCCRERY. No, that is not correct.

Mr. MCDERMOTT. Well, now, let the witness answer. It is my

time.

Mr. WILCOX. I have just been informed that your earlier statement is a correct statement.

Mr. MCDERMOTT. Is correct?

Mr. WILCOX. Yes, sir.

Mr. CRANE. This did not happen in 1968?

Mr. WILCOX. What did not happen?

Mr. CRANE. Folding Social Security into the budget. The total

budget.

Mr. WILCOX. I don’t recall the chronology of the various times

when Social Security has been brought in and taken off and so

forth.

Mr. MCCRERY. If the gentleman will yield, I think if you will

check, Social Security was made part of the unified budget under

President Johnson.

Mr. MCDERMOTT. If I may reclaim my time, there was no surplus

in Social Security until 1983, so that is when it began to be used.

Lyndon Johnson may have considered it, but it was not possible because they were in deficit during the war.

Mr. WILCOX. Right. I think the unified budget as a conceptual

framework was established in 1967. The emergence of substantial

surpluses, for the purpose of partial prefunding of the system, was

a consequence of the 1983 set of reforms.

Mr. MCDERMOTT. But my second point was, if it is somehow

taken off budget, and really taken off budget—we have done this

scam on the people two times at least, where we have said we have

moved Social Security off budget but we haven’t. We keep playing

a game. If we really moved it off budget, there would be no way,

without unbalancing the budget and borrowing more money, for us

to give a tax reduction, would there?

Mr. WILCOX. I believe that is correct, sir. That is right. Your

statement is correct.

Mr. MCDERMOTT. So the incoming Speaker is setting himself up

in a box where he cannot deal with any kind of tax reductions, if

I understand what you are saying.

Mr. WILCOX. I would like to consult with my budgetary expert

here.

Yes, sir, your observations are correct.

Mr. MCDERMOTT. So his only choice would be further to reduce

spending in order to give a tax break, if he was going to give a tax

break.

Mr. WILCOX. I believe that would be correct, sir.

Mr. MCDERMOTT. Thank you, and I yield back the balance of my

time.

Mr. CRANE. Let’s see. Mr. Collins.
43

Mr. COLLINS. Thank you, Mr. Chairman. I believe Mr. Wilcox has

pretty well answered my question in Mr. McDermott’s questioning,

and that was, you referenced possibly using general funds to redeem the Treasury notes that are now held for the trust fund from

that of government securities to private sector securities. Is that

what I heard?

Mr. WILCOX. What I gave was one possible mechanism where a

unified surplus could be used in a way that would strengthen the

financial standing of the Social Security system. The particular

mechanism, just to be clear, that I outlined was taking existing securities already in the trust fund, redeeming them and using the

proceeds to purchase private sector securities. This is a proposal

that a number of outside advocates have advanced as one possible

approach.

Mr. COLLINS. But the reality of that would be that there would

still be securities or IOUs in the trust fund.

Mr. WILCOX. Unless, I suppose, in the extreme one redeemed all

of the special purpose treasury securities for the purpose of purchasing private sector securities.

Mr. COLLINS. No matter where you purchase securities, it is still

an IOU to the trust fund, some type of security. There are still no

funds in the trust fund as such, and there will always be an investment of those positive cash flows in those trust funds in some type

of securities.

However, you earlier stated that the government security, as the

Chairman stated, is the safest investment in the world, but yet you

would entertain moving them from the safest investment on behalf

of those who work and have those taxes reduced from their payrolls

to another type of investment. It could possibly be even a less secure investment for the Social Security Program.

Mr. WILCOX. Right. I think you make——

Mr. COLLINS. Did I hear you say right?

Mr. WILCOX. I think you make two very important points with

which I agree. First of all, inherent in a policy proposal of the nature that I gave would be a tradeoff between risk and return. This

is a fundamental tenet of financial markets, that higher return is

not available without assuming additional risk. So to move from

special issue Treasury securities, backed by the full faith and credit

of the U.S. Treasury, to equities of private sector U.S. corporations

would be a move in advance, in the anticipation toward higher return, but also at the same time inherently involves assumption of

additional risk.

Mr. COLLINS. In other words, if you move those funds from government securities to private securities, you are increasing the risk

of those securities.

Mr. WILCOX. Absolutely.

Mr. COLLINS. Those funds that are deducted from every worker’s

payroll check.

Mr. WILCOX. Absolutely. That is an important consideration that

has to be taken into account in assessing the advisability of a proposal of this nature.

Mr. COLLINS. Well, under that type of scenario, would the trust

fund be the recipient of the return on the investment? Or do you
44

have some type of idea or plan how that would be converted to an

individual recipient as the form of investment?

Mr. WILCOX. I haven’t seen anything fully ‘‘spec’’-ed out in a way

we could hand it to the managers of the trust fund and just say

‘‘Execute this.’’ As it is commonly talked about, with sometimes the

shorthand that the academics and other nonoperational folks have

the luxury to use, what people envision is that simply in place of

those special issue securities that the trust fund currently holds,

that one might end up holding the common stock of a wide range

of U.S. companies. The S&P 500 is prominently mentioned in these

proposals as the type of thing, or even broader indexes of U.S. equities.

Mr. COLLINS. Would that not increase the possibility of politics

entering into those type of investments based on contribution lists

versus government securities?

Mr. WILCOX. Oh, I think one again would have to think very,

very carefully before undertaking a step of this nature. In return,

on the one side of the ledger, that increased prospective rate of return is very, very attractive. On the other side of the ledger one

has to take account of very important factors such as the ones you

are talking about.

Walling off these securities from political influence, the investment policy from political influence, would be of extreme importance if one were to undertake this. Proper appreciation of the additional risk being assumed by the Social Security Trust Fund, and

a full analysis of the implications of that risk for the overall fiscal

standing of the Federal Government, would have to be undertaken.

So there are a number of very important factors that would have

to be taken into account.

Mr. COLLINS. The number one risk factor is the taxpayer that

must be considered.

Mr. WILCOX. The taxpayer would be the ultimate bearer of the

risk.

Mr. COLLINS. Thank you, Mr. Chairman.

Mr. CRANE. Mr. Becerra.

Mr. BECERRA. Thank you, Mr. Chairman. In the time that I have

been here, I have seen many thousands of legislative proposals

come before the House and the Senate. We introduce legislation all

the time. We introduce scores of legislative proposals that are extremely important, of major national magnitude, and I am not

aware of on each occasion the author of that legislation or the leadership in the House or the Senate first requesting the administration’s input and the issuance of its own proposal before Members

of Congress move forward to initiate that legislative proposal and

work it through the process.

Certainly with Social Security, everyone is talking about a bipartisan process, but I know that you have been peppered with a number of questions about why the President hasn’t come forward with

his solution to the challenges facing Social Security. Let me ask

you: Are you aware of whether or not Congress has forwarded to

the President its solution to the problems facing Social Security?

Mr. WILCOX. I am not aware of that, sir.

Mr. BECERRA. The President has given us the principles he believes are most important in defining any solution for Social Secu45

rity. Are you aware of whether or not Congress has forwarded its

principles on what it believes should be most important in resolving the challenges facing Social Security?

Mr. WILCOX. I am not aware of any agreed upon set of principles

that the Congress would use.

Mr. BECERRA. So at least at this stage it appears that while the

President hasn’t come forward with any solution, neither have

those who are actually responsible for enacting legislation, Members of Congress, who must initiate the proposal, get it passed, before the President has any opportunity to sign any legislation into

law, neither have those Members of Congress forwarded to the

President what they believe would be the solution to resolve the

challenges facing Social Security; is that correct?

Mr. WILCOX. That is correct, sir.

Mr. BECERRA. And you had an opportunity to engage in, I

wouldn’t call it a dialog, but an exchange of thoughts with the

Chairman of the Committee on this whole issue of the trust fund

and whether it would be raided if we took moneys and used it for

other purposes. Let me try to play this out, because I know it gets

very confusing, as the Chairman said.

You are the government; I am a worker. I pay to you a portion

of my wages as a Social Security contribution, which ultimately

will help me and others pay for a retirement benefit that I will get

from the government. You get that money that I contribute, and

you do not just hold it. What you do is you issue a Treasury certificate, a bond or whatever other government security you have, and

you say ‘‘This certificate is now your proof that you will get that

money that you have invested into the Social Security Trust Fund

once you retire.’’

You then take the money that you take in lieu of the certificate

that you have now told me is out there to secure my money, and

you use that money for the operation of the government, for whatever purpose it might be. Is that correct?

Mr. WILCOX. Yes, sir.

Mr. BECERRA. Once you use that money, whether it is for cutting

taxes for corporations or estates or individuals or for programs that

the Federal Government operates, transportation programs, military programs, health programs, and so forth. Once you spend that

money that you initially received through that employee’s contributions, the money is gone; correct?

Mr. WILCOX. Correct.

Mr. BECERRA. At some point I get to reclaim the moneys that I

contributed, that are now secured by that government security; correct?

Mr. WILCOX. And you are the Social Security Trust Fund?

Mr. BECERRA. No, I am an employee. At some point, when I decide to retire, I get to collect the moneys that I have contributed

that have been secured through those government securities.

Mr. WILCOX. When you retire, the Federal Government pays out

a benefit which is based on your earnings record. And your earnings record was also the basis for determining what your contributions were into the system.
46

Mr. BECERRA. And all along, the American worker is being told

because the money is secured through government securities, the

money is safe.

Mr. WILCOX. Those securities that the trust fund has invested in

are on equal standing with the safest securities in the world.

Mr. BECERRA. At some point those securities will have to be paid

out. Someone will have to be able to pay for that. The government

somehow has to be able to pay for the security that it issued so it

can spend the money now in its operating budget. No money is

free. There is no program that is free here. There is cost involved,

and it is a zero sum game. If I put in a dollar, ultimately I am

going to be able to take it out at some point. And current workers,

who are on the verge of retiring, whether today or in 30 years, who

have been contributing, know that as well.

So whether or not you call this raiding the Social Security Trust

Fund or not, somewhere, if you spend $1 dollar now, you are going

to have to pay for it, whether today, tomorrow, or in 30 years. And

if you have spent it in a way that you cannot have it in your pocket

ready to pay out, you are going to have to find it from some other

source, whether you have to cut education programs, whether you

have to cut health programs, whether you have to cut military programs, because you have to ultimately pay those dollars that you

said were secured by those government securities; is that correct?

Mr. WILCOX. I believe you have given a very succinct and nice

summary of the underlying fundamental rationale, sir, for why the

President’s determination is so great for preserving the unified surpluses until a solution for Social Security can be found.

Mr. BECERRA. Mr. Chairman, I know my time has run, but I

want to ask one last question.

So if you, as government, decide you want to give a tax cut or

spend more on a government program with moneys collected

through the Social Security contributions of American workers, ultimately that money will come due and you will have to be able to

pay that worker his retirement benefits, and you have to find the

money to pay for that somewhere because you spent the money he

initially contributed on some other program once you got it.

Mr. WILCOX. I believe that would be correct, sir.

Mr. BECERRA. Thank you. Thank you, Mr. Chairman.

Mr. COYNE. Mr. Portman.

Mr. PORTMAN. Thank you, Mr. Chairman, and thank you, Mr.

Wilcox, for being here. I just want to thank my colleague for laying

out the gravity of the situation we find ourselves in and the reason,

among others, that we cannot move forward without Presidential

leadership. Whether it is a specific legislative proposal or whether

it is the answers to the dozens of questions that have been raised

today, Congress, as a practical matter, is not able to do this alone

and in the end, of course, would require Presidential signature in

order to get it done.

I would ask some of my colleagues who think we need to do this

as a Congress whether they support the Stenholm-Kolbe plan,

whether they support the Stanford plan, whether they support the

Gramm plan we basically heard today, or the Kerry plan? There

are very few cosponsors on these pieces of legislation. And the reason is there is a great fear that you get out front on these issues
47

without presidential support and leadership, at least on the basic

questions that have to be answered, that you have the limb cut out

from under you.

I don’t know if Mr. Becerra is a cosponsor of any of those legislative priorities, but we have spent a year now in a concerted effort

to gather the knowledge and wisdom of the American people, and

it has been great. I have had a lot of hearings on it, both here and

back home. We have had to exercise some hard choices in my district, and so on. It is time for leadership, and it is urgent.

I look at the testimony today, and we have something from Mr.

Cogan where he says that delaying reform for 10 years is going to

require a 25-percent benefit reduction. We have the 1994–96 Social

Security Advisory Council report saying reform will be very costly,

and said it will be necessary to reduce benefits by 15 percent even

if legislation were enacted today. This is, I think, a crisis. And to

say that it is an issue we can wait and resolve closer to the year

2034 I think is misleading to the American people.

I also note in Mr. Cogan’s testimony he says every President

from President Roosevelt has been actively engaged in this, and ensuring the solvency of the fund has been a priority and something

the administrations have taken the lead on. Having been at the

other side of Pennsylvania Avenue on this on other issues, I don’t

see how this one can be solved otherwise.

So I think we need to work together. It needs to be nonpartisan.

I agree with my colleague from Arizona on that. I think it is how

we did the IRS reforms and were successful on it. So I would urge

you to take back the message, I know you have heard it loud and

clear from everybody else, which is we need to see some answers

to these questions, if not a specific proposal.

I would just briefly ask you a couple of things. One, does the administration support the Commission that passed the House?

Mr. WILCOX. I’m sorry?

Mr. PORTMAN. Does the administration support the legislation

that Mr. Levin referred to earlier, which was for a Commission?

Mr. WILCOX. I’m not familiar with what specifically.

Mr. PORTMAN. I am not sure you were here several months ago

when that proposal came before the House. Do you recall the proposal?

Mr. WILCOX. I’m not——

Mr. PORTMAN. It was reported out of this Committee and voted

on in the House and it was not voted on in the Senate. Did the administration support that proposal? It is a yes or no answer.

The answer is no. Thank you, Linda.

Mr. WILCOX. I am advised the answer is no.

Mr. PORTMAN. It is, and that is just counter to what we heard

earlier, just to set the record clear. I think because of that, frankly,

you guys have taken on an additional responsibility, despite what

we have heard earlier today. It is clearly the responsibility of this

administration, if they do not want to have a bipartisan commission, to step up to the plate and give us some specific ideas.

I want to go through some of these ideas quickly. You said earlier, basically you will not rule out any options, which is fine, but

then every time we raise an option, you raise five or six major concerns, and there are major concerns. This is all about tradeoffs. I
48

guess, again, that would just underscore for me the need for some

leadership.

I would ask you about payroll taxes again. Is it the rate of payroll taxes that is off the table?

Mr. WILCOX. Indeed.

Mr. PORTMAN. The tax rate?

Mr. WILCOX. The President has indicated he expects to be able

to accomplish this without increasing the payroll tax rate.

Mr. PORTMAN. Does the President support or do we still have the

idea of private accounts on the table, where we take some of the

Social Security and put it into private accounts?

Mr. WILCOX. Clearly, individual accounts are on the table. The

President will be inspecting those proposals for individual accounts

very carefully for conformance with what he thinks is really a core

principle, and that is the maintenance of a predictable and secure

Social Security benefit.

Mr. PORTMAN. I would say again, there are specific proposals out

there on that from Bob Kerry to Phil Gramm, and on our side, and

I would love to know what the administration thinks about those

proposals.

I would also say that is counter to what I have heard from Vice

President Gore. Does he not represent the administration on that

position?

Mr. WILCOX. With respect to individual accounts?

Mr. PORTMAN. With respect to private accounts.

Mr. WILCOX. Oh, I think what the administration has taken off

the table—I am not familiar with what statement you may be referring to of Vice President Gore.

Mr. PORTMAN. At the Rhode Island conference the Vice President

took a strong position against what he called privatization, which

was described in that conference as individual accounts.

Mr. WILCOX. Right. I was there, and my recollection is that what

he ruled out is what he called radical

privatization.

Mr. PORTMAN. Radical. All right. None of us want to be radical,

so that is OK.

I would just make one final point, and it is in the form of a question, really. Has the administration taken a hard look at the possibility, assuming individual accounts with some private investment

is not off the table, of a nexus of reform of our pension system and

expanding the availability and access to pensions with Social Security? In other words, having portability earlier, vesting higher limits on what you can invest into private pensions being part of Social Security reform.

Mr. WILCOX. I think we have just really begun to scratch the surface on that. The Secretary and the Deputy Secretary, as you know,

feel extremely strongly about national saving measures to improve

personal saving, and they view Social Security reform in a context

as part of a fabric that will involve hard work, inspecting the pension system, and other measures to improve personal saving. We

would like to work closely with you on proposals to advance those.

Mr. PORTMAN. I think it is something that holds tremendous

promise. Time’s a-wasting. We have had a good year, a lot of debate, and I would hope the administration could help us with re49

gard to a leadership role on, again, being able to identify what options are not just on the table but are realistic, and then to help

us create that nexus, which I think is a tremendous opportunity for

the American worker to be able to put private savings together

with a reformed and much more accessible and available pension

system. And I thank you for your time today.

Mr. WILCOX. Thank you.

Mr. SHAW [presiding]. Mr. Nussle.

Mr. NUSSLE. Thank you, Mr. Chairman. My question is about the

Social Security Trust Fund itself.

My understanding is that, aside from all the history we have

heard today, that we have a separate Social Security Trust Fund;

is that correct?

Mr. WILCOX. Yes, sir.

Mr. NUSSLE. And is that walled off from the general fund?

Mr. WILCOX. That is distinct from the general fund, yes, sir.

Mr. NUSSLE. And are there any other fire walls, by legislative enactment, that are necessary, in the opinion of the administration,

in order for it to be any more off budget or any more secure or any

more fire walled, or any more separation than what we currently

have? Are you aware of anything that is necessary in order for us

to have any more separation than we currently enjoy?

Mr. SHAW. I will not charge this time against the gentleman.

Mr. NUSSLE. This is going to be a good answer.

Mr. WILCOX. I think the answer is we would like to come back

to you in written form and address this.

[The following was subsequently received:]

Question: And are there any other fire walls, by legislative enactment, that are necessary, in the opinion of the Administration, in order for it to be any more off budget

or any more secure or any more fire walled, or any more separation than what we

currently have? Are you aware of anything that is necessary in order for us to have

any more separation than we currently enjoy?

Answer: The Congressional Budget Act already has firewalls and off-budget status

for Social Security. The Budget Enforcement Act of 1990, which amended and added

to the Congressional Budget Act which existed at that time, moved Social Security

off-budget for all purposes of the Budget Act—including the annual Congressional

Budget Resolution—for all purposes of the Budget Enforcement Act, and for purposes of the President’s annual budget submission and mid-session review of the

budget.

Of special note, the requirement for pay-go neutrality (which pertains to changes

in revenues and mandatory spending programs) in the Budget Enforcement Act applies to the non-Social Security budget. The pay-go neutrality requirement is enforceable by an automatic sequester of some mandatory spending programs, including Medicare. This neutrality requirement prevents a surplus in the Social Security

portion of the budget from being used as the justification for a deficit-increasing

change in the non-Social Security budget.

Under current law, there are points of order in both the House and the Senate

which prevent surpluses or Trust Fund balances of Social Security (in general) from

being reduced by legislation. In the Senate, these points-of-order can only be waived

with a supermajority of 60 votes.

The Administration is open to examining any new ideas on how best to run responsible fiscal policy today, so that we can help meet the challenges of aging of

America. Of course, we are open to examining any new ideas and suggestions that

Members of Congress may propose. In addition, as Social Security financing legislation moves forward, if we subsequently develop any new proposals of our own, we

would want to discuss those proposals thoroughly with the Congress.
f

50

Mr. NUSSLE. Good answer. Let me ask you this. Let me tell you

what my understanding is, and I would be interested in your reaction to this.

My understanding is that the reason we are even here today having this argument is because of the unified budget. It is walled off.

My grandmother, her money she put in there is walled off; right?

Can I please call my grandma up and tell her everything is fine

with her money? Can you give her that assurance here today?

Mr. WILCOX. I think what you can call up your grandma and tell

her is that the administration and the Congress——

Mr. NUSSLE. No, no, no, no, don’t give me that, Mr. Clinton and

his principles. You tell me, Mr. Wilcox, is her money safe today?

That is what I want to know.

Mr. WILCOX. Her money is safe today, yes, sir.

Mr. NUSSLE. Thank you. That is what I want to know because

I have heard a lot of stuff, and people are running around saying

some people may not get their checks and all sorts of stuff like this.

And that is a lot of nonsense, from what I understand. And if you

think it is nonsense, I wish you would just tell me that so I can

give her and other grandmothers across the country a little confidence tonight that their money is safe.

Mr. WILCOX. That is correct, sir. I think the other part of your

message to your grandma might be that for the sake of her grandchildren and her grandchildren’s grandchildren——

Mr. NUSSLE. Do I need to play any music behind this commercial? Let’s get on with it, all right?

My understanding is the reason we are here today to discuss this

whole issue of on budget, off budget surplus, and all this other stuff

is because of this little word called ‘‘unified’’ budget. And because

the CBO, Congressional Budget Office, and the OMB, Office of

Management and Budget, report the budget surplus and/or deficit

together on the same page—which they do by, I believe by law, if

I am not mistaken—there is a reporting requirement that when

they report the figures of the budget, that there is an on budget

surplus and an off budget surplus. They are basically one line removed, and they are on the exact same page of their report. Is that

correct, based on your budget guru, too?

Mr. WILCOX. Yes, sir, they are required by law to be on the same

page.

Mr. NUSSLE. OK. If we separate that page, and we have an on

budget surplus and a Social Security surplus or balance, however

you want to put it, and put it on a separate page, how would that

grab you?

Mr. WILCOX. I don’t think it would change the fundamental analytics of fiscal responsibility.

Mr. NUSSLE. I understand that, but it would change whether or

not the Wall Street Journal or the Washington Post or the President or the Congress or a Congressman or a Congresswoman or

Senator would be able to say, ‘‘This year we ran a surplus.’’ Because that is currently what is done.

And I guess my challenge to you is, since this is where we are

coming down, I understand privatization and all that kind of stuff
51

down the road is on the table for discussion, and we will have bipartisan all sorts of things for that, but I think the real challenge

this year, if the President wants to show some leadership and

wants to really demonstrate to the American people how seriously

he wants to tackle this issue of the budget and budget surpluses

and the Social Security surplus, is to join with us to change the

law, separate the reporting mechanisms for these two different

issues, which are different.

You are basically saying it is Social Security. It shouldn’t be used

for tax cuts. It shouldn’t be used for general fund spending. We

agree. I think we could probably have a vote on that today and we

would have a huge majority vote for that.

There is only one problem. When the President submits his budget, it won’t be in balance. And when the Republicans pass their

budget, it won’t be in balance unless a whole heck of a lot of work

gets done on the spending side or on the increase of the revenue

side, and that is the reason why we are having this problem.

So my challenge to you is, let the President know that we are

willing to have this discussion, but let’s separate, let’s really separate the trust fund, and we will pass whatever law we need to do

in order to make sure he can do a reporting requirement. But let’s

separate this on budget surplus from the off budget surplus. Let’s

separate Social Security, and let’s let the President submit a budget without Social Security and without Social Security revenue included in that.

Would the administration go along with that?

He wants to give you something. I think it is the answer.

Mr. WILCOX. We will have to take that under advisement, sir.

Mr. NUSSLE. OK. You are going to let the President know that,

though?

Mr. WILCOX. Yes, sir.

Mr. NUSSLE. OK, that would be great, because that is the bottom

line here. It is the reporting of this that gets everybody mixed up.

The Republicans want to be able to say they have balanced the

budget, the President wants to be able to say he has balanced the

budget. If Social Security is in it, you can’t say that. You cannot

hold Rose Garden ceremonies, you can’t hold Capitol steps ceremonies. That is the reason this is going on.

I think for both sides, if they want to get serious about it, let’s

separate the reporting mechanisms for Social Security and let’s

separate the budget in the reporting fund mechanisms. Separate

them at least by one page. I would even suggest let’s separate them

by days or weeks, so that we cannot say we have got a balanced

budget with Social Security included.

When the President has the guts to do that, because I have already introduced legislation that is done in a bipartisan way, and

I believe we are going to have a chance to move that in the next

Congress, I believe we are going to have an opportunity to actually

get past the first hurdle. And that first hurdle is, where is the

money? Where is the money? That is what is scaring everybody

right now.

Once we get past where is the money—show me the money—

after we get past that part, then I think the rest of it, we can have

an intellectual discussion. But up until that point we have all sorts
52

of people running around the country trying to scare people that

their money isn’t there. And that is making it pretty darned difficult for my grandmother to allow me to join in this kind of discussion without her getting a little bit concerned about whether or not

her check is coming, because she has got people scaring her, telling

her that it isn’t going to come if we have this discussion.

So I would hope the President would consider that as a possible

first step reform, separating the reporting mechanism for Social Security in the budget so we can get on with the discussion and the

debate.

Mr. SHAW. Mrs. Johnson.

Mrs. JOHNSON of Connecticut. Mr. Wilcox, I am sorry I missed

your testimony, but I did look through it while I was elsewhere,

and I do want to focus just very, very briefly on the conference that

you scheduled on Social Security at the White House December 8

and 9.

First of all, it is my conclusion that minorities and women are

particularly disadvantaged under our Social Security system for a

lot of reasons. Would you agree?

Mr. WILCOX. Oh, on the contrary. I think the Social Security system is especially important to minorities and women.

Mrs. JOHNSON of Connecticut. It is especially important to them,

but it is very hard for them to get a decent benefit under it.

Mr. WILCOX. No, I think there are a number of features of the

Social Security system that are very constructive from the point of

view of——

Mrs. JOHNSON of Connecticut. I do appreciate that the Social Security system better rewards lower earners than higher earners,

but in general the pattern of women’s work lives, who they work

for and all those things, end up with women and minorities, on the

whole, leaving them for the most part with a minimum benefit.

I am concerned about your conference on Social Security for the

narrowness of its focus. I chair the Subcommittee on Oversight. We

are going to be very heavily into pension reform this year. The administration and the Treasury is very aware that we did a lot of

work on it last session and, frankly, I was very disappointed at the

lack of vision from the Treasury in terms of pension reform.

Only 50 percent of Americans have any pension benefit program.

Same percentage as many years ago. There are more employees,

there is a bigger number, but it is the same percent. And the same

people are disadvantaged under our pension laws as are disadvantaged under other health insurance laws. It is the same small employers who cannot afford to provide pension benefits to their employees.

And frankly, if we do not do something far more aggressive to

simplify our pension laws, we won’t possibly be able to help people

develop the modest savings that they desperately need. Because

living on a minimum Social Security benefit now is impossible,

with Medicare not covering drugs, for one thing, but it is going to

be even more difficult in the future because the minimum benefit

is very, very low. And while it is accommodated for inflation, inflation doesn’t well reflect the changes in cost of living in various

areas, some areas where rentals are high above the norm, for example.
53

So it does worry me that the administration is approaching reforming Social Security without looking at the real issue, which is

retirement security. And I consider Social Security a key element

of retirement security, like I consider Medicare a key element of retirement security. But if we aren’t as dead serious about pension

reform and savings reform, people won’t have retirement security.

So I would hope that you would plan the program, and I would

be delighted to work on this with you and to participate, but if we

do not lay out at that conference the public support, the dollars we

spend through the tax system to support pension savings, and

where that goes and who gets it, then we do not get a clear picture

of how public resources do and do not support retirement security.

So I would urge you to broaden the focus of your conference on

December 8 and 9 to include also pension reform and savings reform, with at least an eye to laying out the problems, as we did

in our hearings earlier this session, somewhat earlier this year, to

demonstrate truthfully the enormity of the problems of retirement

security for our people. Social Security is only one problem that is

not going to solve, as important as it is, the issue of retirement security. We have to look at how we manage our pension systems and

how the law discourages employers from participating and discourages employees from participating.

So I urge you to think that through before you solidify the program for your White House Conference on December 8 and 9.

Thank you.

Mr. SHAW. Dr. Wilcox, thank you. You have been sitting there for

well over 2 hours, so you can take a much deserved rest. Thank

you.

Mr. WILCOX. Thank you, sir.

Mr. SHAW. We next have a panel of witnesses. Hon. John F.

Cogan is a senior fellow of the Hoover Institution, Stanford, California, former Assistant Secretary of the U.S. Department of Labor,

and former Deputy Director of the Office of Management and

Budget; Dr. Herbert Stein, senior fellow of the American Enterprise Institute for Public Policy Research; Hon. Robert D.

Reischauer, senior fellow at the Brookings Institution; and Hon.

Stanford G. Ross, Chair of the Social Security Advisory Board.

We welcome all of you. We have your full statements. You may

care to summarize. We appreciate your being here.

I would say to all of you, I think it is very obvious from the

former witness that there is great hesitation in politics on taking

the first step on something that is this complicated, so perhaps you

might be able to shed some light on it and help us find the way.

Mr. Cogan.

STATEMENT OF HON. JOHN F. COGAN, SENIOR FELLOW,

HOOVER INSTITUTION, STANFORD, CALIFORNIA

Mr. COGAN. Thank you, Mr. Chairman, and thank the Committee for the opportunity to testify.

As the Committee begins its work, it might be helpful to consider

in a historical context the enormity of the challenge that lies before

you. I have prepared a chart which shows what will happen to Federal expenditures if we fail to address the Social Security financing
54

problem. The chart places these consequences in a long historical

perspective. The chart is in my testimony.

The bottom line of the chart, Mr. Chairman, is that financing the

promised benefits with taxes will require a doubling of the Social

Security and Medicare payroll tax by the year 2040. Financing

promised benefits with debt will raise Federal spending to over 40

percent of gross domestic product as interest compounds upon interest. As the chart shows, this level of spending is unprecedented

in our history, except for a single year at the peak of World War

II. This level exceeds the largest annual expenditure during the

War of 1812, the Civil War, World War I, Vietnam and Korea combined.

Regarding the process of reform, I would emphasize two points

very briefly, since both of them have been touched on before. First

and foremost, it is the case that substantial Presidential leadership

and a creditable executive branch proposal are essential to achieving effective reform on a timely basis. This is a fact of life in Social

Security’s history.

Throughout this history, the process of enacting virtually every

significant change in the program has begun with a well developed

presidential proposal. President Roosevelt presented a very specific

plan for creating the program. Presidents Truman and Eisenhower

led the efforts to make the program universal. Social Security benefits were indexed to inflation only after President Nixon proposed

to index them. President Carter’s proposals to restore the solvency

of the program were crucial in the 1977 amendments. President

Reagan, undeterred by the pasting that his proposals received in

1981, worked through the Greenspan Commission to enact the

1983 reforms.

The history of Social Security legislation is clear: A well developed presidential proposal can greatly expedite the legislative process. An ill-formulated proposal will significantly delay the process.

No presidential proposal usually means no legislative action.

A second point concerning the process that has also been made

several times here today is that bipartisanship is essential. Now,

Social Security legislation has not always been bipartisan, but

given the highly charged atmosphere within which legislation occurs, this is not surprising. In the current context, however, I do

believe that bipartisanship is very essential for the enactment of

reform. There are over 40 million beneficiaries and nearly 150 million workers who pay taxes into the system. Acceptance of a significant reform package across such a wide segment of the American

population requires that most of its elements be supported in Congress on a bipartisan basis.

Regarding the proper road to take to Social Security reform, I

would like to emphasize two points: One is that an approach to

avoid is one that attempts to build and maintain a large trust fund

reserve. Social Security’s legislative history offers a clear assessment of this approach. It won’t work. From time to time, policy decisions, wartime economic conditions, and business cycle expansions have generated the buildup of a reserve or the prospect thereof. Each time the reserves have generated pressures for greater

spending. Each time Congress has invariably responded by raising
55

benefits or expanding eligibility. As a result, the projected reserves

have never materialized.

Now, there are many that will argue that today’s situation is different. The fact of the baby boom generation nearing retirement

age might be argued to dissuade the Congress from spending the

surplus in response to the political pressure that invariably comes

with them. But I would say this: There is nothing in Congress’ past

history or recent history that suggests that they will be able to resist the pressures to spend surplus funds.

My other point is that I would recommend that the Committee

be very cautious about following the legislative approaches of 1977

and 1983. The focus of each of these laws was primarily to fix the

short-run financial problem that the program confronted. Fixing

the long-run problem that was known at the time was a low priority.

Both laws relied primarily on raising revenues to finance the existing benefits. They solved the short-run problem but they did not

solve the long-run problem. As my chart makes clear, the solution

to Social Security is in reducing long-term liabilities, not in trying

to finance the large obligations that we have promised current

beneficiaries.

In closing, let me say that I applaud the Committee for holding

these hearings. Looking at the process of reform is indeed the right

place to start, and I would be happy to elaborate on any of my

points or to answer any questions you might have.

Thank you, Mr. Chairman.

[The prepared statement follows:]

Statement of Hon. John F. Cogan, Senior Fellow, Hoover Institution,

Stanford, California

Thank you for this opportunity to appear before your committee today to discuss

the process of social security reform. There is no topic more deserving of the consideration of this committee than reform of the social security program.

Social security is financially insolvent. Although annual Social Security Trust

Fund receipts currently exceed expenditures, this situation will be reversed when

the baby-boomers begin retiring. In 2012, the fund will begin to draw upon its accounting reserves. By the year 2032, the program will have exhausted these reserves.

There are many ways to measure the enormity of the financial problem that social

security creates for the federal government. One that I have found useful is to place

the impact that social security will have on the federal budget in historical terms.

Chart 1 shows actual federal outlays as a percentage of gross domestic product

(GDP) from the year 1800 to the present and the projected outlays as a percentage

of GDP for the next 50 years.

The chart illustrates the consequences of failing to address social security’s and

Medicare’s financial problems. Without reform, federal spending on social security

and Medicare will double as a percentage of GDP by 2040. Government borrowing

to finance these higher expenditures alone will push federal spending upward to

over 40 percent of GDP in 50 years. Financing this growth will require a doubling

of the federal government’s tax claim on private sector resources. This projected

level of spending dwarfs any previous level our nation has experienced except, of

course, the level temporarily reached at the peak of World War II. A solution to the

social security problem must be found soon if we are to avoid imposing a crippling

tax burden on future generations of workers. The first portion of my testimony presents my thoughts on the means of creating a proper legislative environment for reforming the program. The second part presents my views on what we might learn

about the proper road to reform from the program’s legislative history.
56

I. CREATING A PROPER LEGISLATIVE ENVIRONMENT FOR ACHIEVING REFORM

A. Substantive Presidential Leadership and a Credible Executive Branch Proposal

are required.

When one reviews the long history of Social Security legislation, one cannot help but be impressed with the important role of the President and the Executive Branch

in this process. The process of enacting the initial Social Security program and virtually all significant changes to the program, whether expansions or contractions,

have begun with specific well-developed presidential proposals. In 1935, President Roosevelt began the legislative process of creating social secu- rity by sending to Congress a fully developed plan for the program. All of the plan’s

chief architects; Edwin Witte, Labor Secretary Frances Perkins, and Treasury Secretary Henry Morgenthau, testified before this committee on the proposed plan.

When short-comings of the proposal’s financing became apparent, the President sent

Henry Morgenthau back to this committee with a revised proposal. Over a sevenyear period following World War II, 1948–54, Presidents Truman and Eisenhower

submitted specific legislative initiatives proposing to increase benefits and expand

coverage. As a result of their initiatives and legislative action by the Congress, social security coverage was nearly universal among private sector workers by the

mid-1950s. The process of enacting the benefit hikes of the latter half of the 1960s

and early 1970s all began with presidential proposals. Although proposals for an

automatic cost-of-living-adjustment (COLA) for social security benefits had been put

forward since the 1950s, legislation creating the COLAs was not enacted until President Nixon proposed them in 1971. In 1977 the program faced its first near-term

financial crises. President Carter’s package of legislative reforms, submitted less

than five months after his inauguration, served as the starting point for the legislative reforms of that year. When it became clear in 1981 that the social security program was again in near-term financial crisis, President Reagan did not shy away

from leadership. In May of that year, he proposed a set of initiatives designed to

restore the program’s near-term solvency. Although his initiatives met with a severe

negative reaction, the president remained committed to reform. He proposed what

has become known as the Greenspan Commission. The Commission was the vehicle

by which the Executive and Legislative Branches would work together to develop

a solvency package. This package was enacted virtually intact in early 1983.

In order for any other presidential proposal to be helpful in initiating a successful

legislative process, it must not only be specific, it must be credible. A proposal that

fails the credibility test will only delay the legislative process. Credibility is often

in the eyes of the beholder. It is not easily measured nor known in advance of its

being publicly released. President Carter’s 1977 reform package was at the time

judged as credible. It received serious review in Congress, served as an impetus for

Congressional action, and large components of it were enacted into law. President
57

Reagan’s 1981 package, in retrospect, was judged by Congress as less credible. Although most of the provisions of his package had been individually proposed earlier,

they were viewed as ‘‘dead on arrival’’ when combined into a single package. These

proposals not only failed to serve as an impetus for Congressional action, they actually contributed to delay Congressional deliberations over reform. The history of social security makes clear that a specific and credible presidential proposal combined with the active involvement of senior executive branch officials

can serve to expedite the process of enacting legislation. President Roosevelt submitted his proposal to create the social security program in January of 1935. With the

help of his Committee on Economic Security, Congress enacted the new program in

only seven months. The same number of months elapsed between the submission

of President Carter’s 1977 reform package and its final passage. In 1983, only two

months elapsed between the issuance of the Greenspan Commission’s recommendations and enactment of the 1983 Amendments.

In general, a minimum criterion for a plan to be credible is that it addresses the problem at hand. In the current context, the problem is not a near-term financial

shortfall. The problem is that our society cannot afford to deliver currently promised

social security benefits to persons retiring in twenty-five years. Thus, any credible

plan must contain provisions for a reduction in future social security liabilities. A

plan that proposes to maintain these liabilities and to finance them by raising taxes

or asserting high returns on federal government investments of the social security

trust fund will not pass the credibility test.

B. Strive for Bipartisanship

Bipartisanship with adherence to principles is a well-established recipe for developing and enacting successful social security reform. Attacks that serve short-term

partisan ends generally produce failure. Throughout its long history, the social security program has been subjected to an extraordinary amount of demagoguery. Early opponents attacked the program as ‘‘a

scheme of hollowness and humbuggery,’’ and ‘‘a solemn and cruel hoax.’’ Recent reformers have been lambasted as ‘‘heartless’’ and ‘‘meanspirited.’’ Given the highly

charged atmosphere in which social security issues are usually debated, it is remarkable how often social security legislation has enjoyed widespread support from

both sides of the political aisle. This has been true not only when the Congress has

risen above partisanship to dip into the Treasury and raise benefits, as it did in

1972; it has also occurred when Congress moved to contract benefits, as it did in

1983.

In the current context, bipartisanship requires, above all else, political restraint.

The temptation to attack the other party’s proposal for short-term political advantage is ever-present. The temptation should be resisted. Inevitably, such attacks

delay the enactment of reform. In 1981, the attacks on President Reagan’s proposed

social security reform package so permeated the atmosphere that enactment of

needed reform legislation proved impossible for the remainder of the 97th Congress.

Enactment of a reform plan had to wait until the Greenspan Commission made its

recommendations and the 98th Congress convened.

In the current context, delay is costly. Each year’s delay worsens the financial

problem and deepens the magnitude of the required solution. As the 1994–96 Advisory Council on Social Security noted in its report, a reduction of just over 15 percent in social security benefits would be required to make the program solvent if

legislation were enacted today. If, however, legislation is delayed by ten years, the

required reduction rises to 25 percent.

C. Use Prudent Economic, Demographic, and Behavioral Assumptions

At the outset of the committee’s legislative deliberations, create a clear and firm

set of rules about how the budgetary impact of proposed policy alternatives will be

measured. These rules will guide the measurement of a budget baseline and your

assessments of alternative reform proposals.

Often, as many economists know, the easiest route to solving a difficult problem

is to assume it away. In the context of social security, this can be accomplished by

adopting overly optimistic economic and demographic assumptions. Avoid this temptation and err on the side of using prudent assumptions. Keep ‘‘Rosie Scenario’’

locked in the attic. This will ensure that your policy solutions are real and not illusory. It will also enable you to avoid revisiting the same issues in a short period

of time as the promised results fail to materialize.

At the same time, recognize that the economic and demographic assumptions you

adopt are only forecasts of an uncertain future. The legislative impact of many of

your provisions will occur twenty or thirty years from now. The ability of the best

economists and demographers to forecast future trends and events occurring even
58

a short time from now is severely limited. At the time of the 1977 Amendments

were passed, the best forecast indicated that the trust fund would remain solvent

until the year 2035. By the very next year, unforseen economic circumstances had

shortened the forecasted period of solvency considerably. One important dividend of proper social security reform is higher economic growth. Social security need not be a ‘‘zero-sum’’ game. Higher growth will raise the

standard of living enjoyed by our children and all subsequent generations of American citizens. Higher growth increases the amount of resources that will be available

to help finance future retirement obligations. As economists who have previously appeared before the committee have testified, the current structure of social security induces young people to save less and induces others to work less, especially as they near retirement age. Each of these unintended consequences harms economic performance. When individuals reduce their

savings and the federal government doesn’t increase its savings by an offsetting

amount, there is less money available to finance productive private sector investments. The cost of less investment is slower economic growth and, hence, a lower

standard of living for future generations. When productive individuals choose to retire early because social security imposes a financial penalty on continued labor

force participation, the economy operates at a permanently lower level and everyone

loses. Although economists may differ about the precise magnitude of the current

program’s adverse impacts, there is general agreement about their direction. The

current structure of the program is working against improvements in our standard

of living. Proper reform can make the social security program work for our economy

and an improved standard of living. The magnitude of the improvement will depend

upon the particulars of the reform plan.

D. Try to Reach Agreement on a Set of Principles at the Start of the Process

Attempt to agree to a set of principles at the outset of your deliberations before

proceeding to work out the legislative details. Finding agreement on broad principles is often easier than finding consensus on the specific means by which these

principles can be achieved. Moreover, reaching agreement on principles often facilitates reaching agreement on specifics. A few areas in which the committee should

attempt to reach agreement on principle are:

• the degree to which individuals would be permitted to invest their social security contributions in privately owned retirement accounts,

• the degree to which such investments should be regulated by the federal government,

• whether the federal government should be permitted to invest surplus social security funds in private securities, or whether such funds should continue to be exchanged for U.S. Treasury securities.

• the extent of a guaranteed minimum social security benefit and method of financing it,

• whether current retirees should be asked to bear any of the costs in terms of

lower benefits

II. LESSONS FROM THE PAST ABOUT THE PROPER ROAD TO REFORM

The history of social security legislation strongly suggests that certain approaches

to solving the program’s financial problem are not likely to work. The timely enactment of effective reform is enhanced by learning from this history, recognizing the

pitfalls of these earlier approaches, and by avoiding these earlier mistakes.

A. Attempts to Build a Large Social Security Reserve Within the Federal Budget Will

Fail

One approach to be avoided is to maintain the social security program’s current

structure and attempt to build and maintain a large reserve fund. Social security’s

legislative history offers a clear assessment of this approach: it won’t work! From

time to time throughout the program’s history, policy decisions, wartime economic

conditions, and business-cycle expansions have created large reserves or projections

thereof. Those reserves have generated pressures for greater spending. Congress has

invariably responded to this pressure by raising benefits or expanding eligibility.

During the development of the original Social Security program in 1934–35, there

was widespread recognition that the program’s future costs would be higher than

its initial costs. The demographic projections at the time were much like those of

today. The projected 30-year growth in the elderly population relative to the total

population was, in fact, larger than it is today. The issue of how to finance these

higher costs received paramount attention throughout the development of the initial

program. The original Social Security Act of August 1935 adopted a financing plan
59

under which payroll taxes would initially exceed benefit payments and a large reserve would be built. Interest earned on the reserve would be available to defray

the program’s future costs. This seemed at the time like an eminently sensible idea.

However, within four years this reserve policy collapsed under an avalanche of criticism and rising pressure to expand benefits. The criticism and the pressure came

from both sides of the political aisle. By 1939, the sizeable reserve that had seemed

such a good idea four years earlier had become a political liability. That year, Congress enacted legislation to dissipate the reserve mainly by expanding eligibility and

increasing benefits. During the 1940s, the wartime economy generated a series of annual Social Secu- rity surpluses. By 1950, the trust fund balance had grown to a level large enough

to finance benefit payments for the next decade. The large balance generated spending pressures. During the 1950s, Congress responded to this pressure every two

years. In each election year from 1950 to 1960, Congress raised eligibility or expanded benefits. The benefit increases were large. The Social Security Amendments

of 1950–54 more than doubled the typical recipient’s benefits. During the 1960s, the U.S. economy entered into a decade-long period of strong economic growth which fueled large increases in payroll tax revenue. Forecasts of

the trust fund’s near-term growth during 1965–73 were consistently the largest in

the program’s history. But, instead of holding the surplus, Congress expanded benefits. In the brief span of nine-years (1965–73), Congress enacted seven across-theboard increases that raised benefits by 83 percent, a third more than the amount

required to compensate recipients for inflation. This period of extravagance ended

with a 20 percent across-the-board benefit increase which first appeared in social

security checks five weeks before the 1972 elections. According to some observers, because the enormous future costs of financing the baby-boom generation’s benefits are so widely recognized that Congress will be able

this time to resist the inevitable political pressure to spend any surplus. However,

social security’s demographic problem is not new. Knowledge of large projected increases in the size of the beneficiary population have not previously deterred elected

officials from spending surplus social security funds. As I noted earlier, in the

1930s, the projected 30-year growth in the elderly population relative to total population, was even larger than it is today. Yet, political pressures caused the federal

government to spend the reserve by adding new categories of beneficiaries and increasing the level of benefits. In early 1950, the social security actuaries estimated

that the number of beneficiaries per worker would rise by 270 percent in the ensuing 30 years, compared to today’s 30-year estimate of only 70 percent. Yet, a few

months later, the federal government granted a 77 percent increase in benefits for

current and future retirees.

Observers also point to the absence of legislation expanding benefits during the late 1970s and 1980s as evidence to support their contention that Congress will be

able to resist the pressures to spend that come with a large reserve. Persistently

low trust fund balances during these years are the more likely reason for the lack

of benefit expansion.

B. Past Approaches Are Unlikely to Succeed in Making the Program Solvent

Only twice in social security’s history has Congress been confronted with the difficult task of addressing the prospect of financial insolvency: 1977 and 1983. In each

instance, the trust fund faced a short-term financial crisis and a long-run financial

problem. Projections made in early 1977 indicated that the trust fund’s balance

would fall to less than one month’s worth of benefits by 1982. The long-term actuarial balance reached its lowest level in the program’s history. In late 1982, the shortterm problem was much more acute. The trust fund balance would be depleted in

a matter of months. The long-term problem was less severe.

In each case, the primary means of restoring solvency was the same: rely primarily on higher revenues. In 1977, 90 percent of the projected short-term (3-year)

solution and 70 percent of the improvement in the long-term actuarial balance was

achieved by raising revenues. In 1983, the corresponding estimates were 63 percent

for the short-run and 84 for the long-run.

Given the acute nature of the short-term financial crises in 1977 and 1983 and

the extraordinary political difficulty of reducing near-term benefit payments below

previously promised levels, the heavy reliance of enacted legislation on higher revenues in the short-run is not surprising.

Many observers claim that the 1983 Amendments began the process of building

a reserve to finance future liabilities. Much of this acclamation is misplaced. First,

as is shown in Chart 2, the actual growth in the beginning of year trust fund balance relative to that year’s outgo is quite modest. Last year, the trust fund balance

was still less than two years of trust fund outlays. Second, the principal focus of
60

the 1983 Amendments was solving social security’s short-term financial crisis. As

part of this focus, the amendments were designed to build reserves sufficient only

to protect the fund against economic downturns. Any growth in the balance above

this level is due primarily to the strong economic growth since 1983.

The situation facing policymakers in 1999 is radically different from the short-run

financial crises of the late 1970s and the early 1980s. There is no short-term crisis.

Unless Congress can change its behavior from its 60-year norm of spending social

security surpluses, adding revenues will not solve the problem. To the contrary, by

attempting to add to the reserve will create political pressure to add to spending.

Dr. Stein.

Mr. SHAW. Thank you, sir.

f

STATEMENT OF HERBERT STEIN, SENIOR FELLOW, AMERICAN

ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH

Mr. STEIN. Thank you, Mr. Chairman. The last 3 hours have

been very instructive to me. I would like to comment on the question that most of you seem to be concerned with, which is who

should go first.

I think it is clear somebody has to go first, and I think the ball

is in the President’s court, just considering what time of year it is.

But I think there is another reason why the President ought to

take the leadership, other than any I have heard discussed, and

that is because I think this question involves issues that are beyond any congressional Committee; that is, it is not just a question

for the Ways and Means Committee, it is a question about the policy with respect to the budget, the long-run questions with respect

to the budget, and it is also involves important questions with respect to planning for the future growth of the American economy.

So I think it is only the President who really can integrate all

those concerns and who has the staff capacity for doing it. I think

for that reason, among others, I would look forward to his coming
61

ahead in the budget, in the economic report, in the State of the

Union, and giving us some kickoff. And I think in that way he can

raise the level of discussion to a higher point than it has commonly

been raised in the political process.

With respect to the substance of the matter, as I understand the

present situation, it has two parts. One is that the present reserves

of the Social Security system, plus the future inflow of funds from

the payroll tax, are estimated to become insufficient to pay the benefits provided by current law at some time in the next generation.

The other is that with present taxes and expenditure programs, the

unified Federal budget is in surplus and will remain so for some

years to come. The question is what to do with the combination of

conditions.

I believe we have a moral commitment not to disappoint the expectations of presently covered workers. I excuse myself from all

that. I think I have been receiving these benefits for longer than

anyone else in this room, and I am not sure that I expect to survive

to receive them after you have completed your reform. But I think

with respect to the workers who are now covered, and the younger

ones who are already receiving benefits, their expectations should

not be disappointed.

Some adjustment of benefits would be consistent with that to

take account of unexpectedly long-life expectancy and an overstatement of the inflation rate in the official measurement, but I assume

such adjustments will not bring the system into balance. If they

would, then I think we do not have much of a problem.

The gap, the excess of expected benefits over the present resources of the system, will have to be made up by transfer of income from the rest of society, from the people who are earning incomes when the next generation is retired. And nothing you do

about what is in the trust fund account, what is in some other account, will affect that. When people retire in the year 2040, their

benefits will really have to be paid out of the income that is generated in that year.

The prospective surplus can help reduce the burden of this transfer on the rest of society. The budget surplus should be saved, that

is not used to cut taxes or increase expenditures, but used to retire

publicly held Treasury debt. That will give the present holders of

the debt funds that they can invest in productive assets, which will

raise the incomes of future generations and make it easier for them

to pay the benefits expected by retired persons.

When I say they should not be used to cut taxes, They shouldn’t

be used very much. As I said in my prepared statement, I was

around when Senator Dirksen said a billion here, a billion there

adds up to money. Well, that is no longer true. A billion here, a

billion there does not add up to money in this economy.

The strength of the commitment of future income earners to support the future of Social Security beneficiaries might be increased

by depositing additional Treasury bonds in the Social Security account. That would be merely a symbolic gesture. For all that people

have been saying here this morning about how your benefits are

assured because money is in the account, if you were to decide tomorrow, I think—I think, maybe there are lawyers present—but I
62

think if you were to decide tomorrow not to pay any benefits out

of those accounts, I don’t think anybody could sue you. So nobody holds an insurance contract that he can sue you about if you don’t pay the benefits. The payment of the benefits—relies

on the moral sense of the American people and of the Congress and

of course on their political awareness.

I think it might be easier to establish the commitment of future generations to pay these benefits to the large number of retired

people if there were some securities in the account which you could

point to and say ‘‘That is yours,’’ and of course there is no necessary connection between the securities in that account and the

surplus in any budget. The Treasury could just write 500 billion

dollars’ worth of debt and put it in the Social Security account—

and it would be a claim. But I don’t recommend that because people wouldn’t understand it.

I do not believe that investing the Social Security funds collec- tively or individually in private assets would reduce the burden on

the rest of society of supporting the beneficiaries. The Social Security funds would earn higher yields. But if the Social Security

funds hold more private assets they will hold less government securities, and private investors as a whole will have to hold more government securities. To induce them to do that will require an increase in the interest rate on the government securities, on all government securities. The rest of the society, the taxpayers will indirectly pay for the higher earnings of the Social Security accounts

by paying higher interest on the publicly held debt. The critical question is whether privatizing the system in the sense of turning over to private ownership some of the funds collected by the system would increase private saving beyond the

amount of funds so transferred. This is a question on which economists are divided. And this Committee did have a report from the

CBO which was very relevant to the subject, a report on Martin

Feldstein’s proposal.

I think that unless the system were so changed as to reduce the amount of benefits covered workers expect, there would be no increase in private savings except for the amount of funds transferred to the private accounts. The amount of government savings,

the government surplus, would be reduced by the same amount. In

that case there would be no increase in total national savings, no

increase in the rate of economic growth, and no additional source

out of which to pay benefits. As I see it, privatization in the form of converting some of the Social Security accounts into privately owned accounts would have

one advantage. It would get some money out of the budget surplus

and so reduce the temptation to cut taxes or raise expenditures. I

am open minded about whether we need that kind of self-deception.

Thank you. [The prepared statement follows:]

Statement of Herbert Stein, Senior Fellow, American Enterprise Institute

for Public Policy Research

I explained to your staff director that I am not an expert on Social Security. But since he persisted in inviting me despite that, I will offer some thoughts on the subject. As I see it, our present situation is that we have a problem and an opportunity.

The problem is that by common estimates the reserves in the Social Security trust
63

fund plus the inflow of payroll tax receipts dedicated to the fund will, at some future

date, be insufficient to pay the benefits provided by existing law. The opportunity

is that by common estimates the Federal budget—the unified budget including the

trust accounts—will be in substantial surplus for the next several years, if present

tax rates and expenditure programs are continued. I emphasize the words. ‘‘by common estimates.’’ I recognize the uncertainty of all these estimates, but I am unable

to make such estimates by myself, and I only proceed on the assumption that the

estimates are correct.

So, we have two questions. What should we do about the deficit in the Social Security accounts, which will become evident some time in the future if nothing is

done? What should we do about the surplus in the unified budget that is now

present?

I shall start with the Social Security question.

One course would be to cut the benefits that are provided in existing law. The

government has no legal obligation to pay the existing benefits. No one can sue you

if you decide to change the law. But I believe that there is a moral obligation not

to disappoint the expectations on which generations of workers have counted, and

I think that most people would agree with that.

There are some changes of benefits that could be defended as not denying previous expectations. People on the average live longer than they used to live, and will

receive benefits for a longer period than was contemplated even a few years ago.

Some adjustment was made for that in 1983 by an increase in the retirement age.

A further increase could probably be justified. Also, when social security benefits

were first indexed to the cost of living, in 1972, we did not realize by how much

the official measurement might overstate the increase in the cost of living. Some adjustment for that might be justified .

Whether adjustments of this kind would be sufficient to bring the Social Security

accounts into long-run balance I don’t know. I shall be assuming that they are not

sufficient, and a significant deficit remains.

Before I proceed further I want to make clear that my adherence to the present

benefit schedule is entirely based on the fact that it has become expected. If we

could start over, I would prefer a different system, that would be smaller and cheaper, providing a low-level equal retirement benefit for everyone. In fact, it might be

a good idea to start developing a system that would apply to everyone born after

the year 2000, who could not claim that his or her expectations had been denied.

But that is a subject for another day.

So, suppose we start with the proposition that even after the benefit scale has

been adjusted the reserves and future receipts of the system will be unequal to the

planned benefits. What will be the source of the additional funds that will be needed?

The additional funds will have to come out of the income of the rest of the society—the part that is not drawing the benefits. There are two questions here. One

is how to make the transfer of income from the rest of the society to the beneficiaries as painless as possible. The other is how to make the commitment of the

rest of the society to support the beneficiaries as strong as possible.

The surplus now in prospect can provide an answer to both questions. The best

way to facilitate the support of the next generation for the social security beneficiaries of that time is to make the national income of the next generation higher—

that is, to raise the rate of economic growth over the next generation. And the most

reliable thing the government can do to raise the income of the next generation out

of which benefits will be paid is to save the budget surpluses now in prospect. By

saving them I mean refraining from cutting taxes or enlarging expenditure programs but using the surpluses to reduce the outstanding Federal debt to the public.

If we do that the savers who would otherwise be holding Federal debt will have

funds available to invest in private productive assets, and that will raise the income

of future generations.

I am not a fanatic about the surpluses. There may be tax cuts or expenditure increases of small size and large benefits that should be made. Contrary to what Senator Dirksen said about 50 years ago, a billion here and a billion there no longer

adds up to money. But I am talking about saving most of the surplus.

Even if we have done what we can to raise the income of the next generation,

how can we make sure that the active earners of the next generation will make the

payments needed for the benefits of retirees? The literal answer is that we cannot.

We cannot now commit the voters and Congress of the year 2040 to pay those benefits. But we can do some things that will add assurance. If we do not cut taxes now

or embark on additional expenditure expenditures now it will be less necessary in

the future to raise taxes or cut expenditures, which is always difficult.
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Beyond that, we of this generation could make a contribution to the Social Security reserves. That would be an act of only symbolic significance, without immediate

fiscal or economic consequences. The Secretary of the Treasury could write a check

for any amount, say $100 billion, and deposit it in the Social Security trust fund,

where it would be used to buy Treasury bonds. That would not change the unified

budget surplus, it would not change the debt held by the public, it would not change

national savings and would not change the rate of economic growth. But the symbolism might be important, because the enlarged reserve of the trust fund might seem

to make more concrete the obligation of the next generation to pay the promised

benefits.

There is no necessary connection between the size of this contribution to the social

security reserves and the size of the unified budget surplus. Nevertheless, the idea

might be easier for people to understand and accept if the policy were seen as contributing a surplus to the reserves. The surplus in the social security accounts is

automatically contributed to the reserves. By present calculations in about five

years the surplus in the unified budget will begin to exceed the surplus in the social

security accounts, That is, the rest of the budget, excluding the social security accounts, will begin to run surpluses. One possible policy would be to contribute these

surpluses, in addition to those in the social security accounts, to the social security

reserves. That might continue until the reserves were sufficient, along with future

payroll tax revenues, to pay the promised benefits for some long period into the future.

Up to this point I have not mentioned the magic word ‘‘Privatization.’’ Privatization has two meanings. The first is that the funds of the system should be invested,

in whole or in part, in private assets, instead of in Treasury securities, as they now

are. The second meaning is that the funds should be owned, in whole or in part,

privately by individual covered workers or beneficiaries.

These two meanings are not necessarily connected. One can imagine a system in

which each covered worker receives each year a Treasury non-negotiable bond with

his name on it, equal to some fraction of his contribution for that year, and redeemable for cash when he begins to draw his benefits. This bond would be his private

property, and the system could be called privatization. It would have one advantage.

It would reduce the apparent budget surplus and so reduce the temptation for the

government to spend the surplus. Otherwise this nominal form of privatization

would make no difference.

The great interest in privatization is connected with the first meaning, to invest

some of the funds in private assets, rather than in Federal securities. The attraction

of this idea is the observation that on the average private investments yield more

return than Treasury securities yield. Investment of the social security funds in private assets would increase the earnings of the system and so enable the system to

pay the planned benefits. This spread, the excess of the yield of private assets over

the yield of government securities, would seem capable of bringing the system into

balance without—and this is the critical point—without having to take anything

away from anyone.

I believe that on this critical point the argument for privatization is wrong unless

privatization adds to total saving. If it does not add to total saving it will not add

to total national income, and if it does not add to total national income the increased

earnings of the social security accounts will be balanced by less earnings of the rest

of the society. Privatization would then be an indirect way of abstracting money

from the rest of the society and transferring it to Social Security beneficiaries.

I have this schematic view of the way the transfer would occur.. There are two

kinds of assets in the country—private assets and Treasury securities. The private

assets yield more return than the Treasury securities. There are two portfolios in

the country—the Social Security accounts and the sum of private portfolios. At

present the Social Security accounts are entirely invested in Treasury securities and

they earn a lower rate of return than the private portfolios. Suppose we now decide

to invest some of the Social Security accounts in private assets, and therefore invest

less in government securities. Then more government securities have to be held in

private portfolios. But the private people whose portfolios those are cannot be forced

to hold more Treasury securities. They have to be induced to do so. And what will

induce them is a rise in the yield on the Treasury securities, narrowing the spread

between the yield on Treasury securities and the yield on private assets. So taxpayers will have to pay more interest on the Federal debt, and that is the form in

which they will transfer income to the Social Security accounts. It seems to me that

either private investors will earn less on their total assets or taxpayers will pay

more in interest on the publicly-held debt. The increase in the income of the Social

Security accounts will not be costless for the rest of the society.
65

The picture might be different if privatization resulted in an increase in total sav- ing. Then one could see an increase in the total national income and an increase

in the total earnings of assets, so that the Social Security accounts could earn more

without anyone earning less. But this seems to me an entirely unlikely development. This is probably clearest if the privatization takes the form of changing the

assets held in a collective pool in the Social Security accounts. Nothing has happened to the surplus or deficit in the Federal unified budget. And nothing has happened to make private people want to save more. The rate of return on Treasury

securities will be higher than it was and the rate of return on private assets will

be lower, because the Social Security accounts will now be in the market buying

some of those assets.

But the situation is not really different if some of the Social Security funds are returned to covered workers and they are allowed to invest them as they choose.

The amount that would be returned to them would have been saved in the Social

Security accounts anyway. They will have no different incentive to save any other

income than they already have. I understand that his is a complicated subject and that there are people whose opinion I respect who disagree with me about the consequences of privatization for

total saving. But this is where I come out. Setting up private retirement accounts

out of money that would otherwise have gone into the Social Security accounts is

a way of getting that money out of the apparent surplus and so reducing the temptation of the government to spend it. But that would happen whatever the private

retirement accounts were invested in.

In conclusion:

1. Except for possible adjustments relating to the retirement age and the indexing

formula we should meet the benefit schedules that are in current law for all workers

now covered.

2. We should preserve most of the forthcoming surplus in the unified budget—

that is, not use it for tax cuts or expenditure increases but use it to retire some

of the publicly-held debt.

3. We should contribute the publicly-held debt we are retiring to the Social Security accounts as a symbol of our intention to provide the benefits that presentlycovered workers expect under current law.

Herbert Stein is a Senior Fellow of the American Enterprise Institute. The views expressed are his own.

STATEMENT OF ROBERT D. REISCHAUER, SENIOR FELLOW,

Mr. SHAW. Mr. Reischauer.

f

BROOKINGS INSTITUTION

Mr. REISCHAUER. Mr. Chairman, Members of the Committee, I

appreciate this opportunity, which I will need to touch on several

points that are made in my prepared statement.

The first of these is that it is terribly important that we all realize how unusually favorable and yet how fragile the current policy

environment is for dealing with the Social Security issue. I say that

notwithstanding the sparring that took place with Secretary Wilcox

over the previous 2 hours. Representative democracies with 2-year

election cycles rarely address problems before action is absolutely

unavoidable.

Nevertheless, we have a situation now in which both political

leaders and the public seem willing to take up the long-run problem of Social Security several decades before it will become a full

blown crisis. This favorable policy environment has a number of

elements.

First, Members of Congress have a broad understanding about

the problem and the need for a solution. Second, the public accepts

the reality that something will have to be done sooner or later to

sustain the system. Third, many Members of Congress have exhib66

ited courage by fashioning specific proposals, some of which are

quite radical. Fourth, the President has been willing to provide

leadership and to organize the reform effort. And, finally, the budget and economic conditions that Secretary Wilcox talked about are

very favorable.

In short, the planets are aligned about as well as one could hope

for, but these conditions could deteriorate very rapidly and the window of opportunity that we now have could close abruptly, not to

reopen for several decades. If that happened, your successors will

find the options available to them severely constrained. Ideas that

are considered now will be summarily ruled off the table, and there

is a high likelihood that increased payroll taxes will constitute a

very large portion of whatever solution is adopted.

The second point I would like to touch on is that there are lessons that we can learn from past efforts to deal with Social Security’s long-term fiscal problem. These lessons are obvious but they

are worth repeating.

First, change has to be bipartisan. A party that goes forward on

its own does so at considerable peril. Neither Republicans nor

Democrats should look ahead and hope that at some point in the

future they may control both houses of Congress and the White

House and, therefore will be able to adopt their favorite restructuring of Social Security. I think divided government is, in fact, the

appropriate environment in which to reform a program as important as Social Security.

Second, significant change should be done only with long lead

times, lead times that allow affected individuals and interests sufficient time to adjust to the new regime.

And, third, many small steps are more viable than a few giant

leaps, even when both take you to the same end position.

Let me now turn to a third topic and say a few words about the

relative desirability of the two broad approaches that exist to solve

Social Security’s long-run problem, namely establishing individual

accounts that would be used to supplement a sharply scaled back

defined benefit program; and, second, strengthening the finances of

the existing defined benefit system by shaving future benefits and

increasing the program’s income in ways that preserve the underlying principles of this important program.

When evaluating these two broad approaches for reform, I urge

to you keep the fundamental purpose of the Nation’s mandatory

pension system clearly in focus. That purpose is to provide workers

with a secure and predictable basic retirement pension, one that

lasts as long as the worker and the worker’s spouse are alive and

one that provides benefits whose purchasing powers is not eroded

by inflation.

As you begin to deliberate, I also urge to you lay out explicit criteria for evaluating specific plans. My colleague Henry Aaron and

I have spelled out four such criteria in a book that will be released

on December 1 when you will all receive copies.

They are, first, the adequacy and equity of the benefits provided

by the proposed system; second, the degree to which the proposed

system protects participants against risks which they are illequipped to bear; third, the system’s administrative costs and com67

plexity; and, fourth, the impact of the new system on national saving.

Taking into consideration both the fundamental purpose of a

mandatory retirement system and the four criteria I have just listed, I have concluded that it would be best to work to strengthen

the long-term fiscal position of the existing defined benefit program. There are many ways in which that might be accomplished.

The specific measures endorsed in our book are laid out in Table

1 of my prepared statement. Together they are more than sufficient

to close the program’s long-term deficit.

Most of the specific changes included in our reform package are

familiar to those of you who have been around this debate for the

last few years. However, the largest of our proposed program

changes is not. It involves investing a portion of the trust fund’s

balances in private bonds and equities. While shifting trust fund

investments from government to private securities would not have

a direct or immediate affect on national saving, investment, the

capital stock, or production, the trust fund would earn higher returns because it would hold assets other than relatively lowyielding government securities.

This would reduce the size of the benefit cuts and payroll tax increases needed to close the program’s long-run deficit. While this

is attractive, the concern that investing the trust fund reserves in

private securities might lead to an inappropriate government influence over the private sector is valid, and if institutional safeguards

were not available to reduce the risk of political interference to a

de minimis level, I would strongly oppose such investments. I

think, however, that such safeguards can be established, and they

are laid out in some detail in our book and, in a shorter form, in

my prepared statement.

While privatizing Social Security has attractive elements, I think

that individual accounts should not be part of the Nation’s mandatory pension system for several reasons. First, such accounts introduce added risk and unpredictability into retirees’ basic pensions.

Second, it is difficult to maintain adequate social insurance in a

system in which individual accounts play an important role. Such

assistance has made Social Security the Nation’s most important

and least controversial antipoverty program. Third and finally, individual accounts unavoidably will increase the complexity and administrative costs of the Nation’s basic pension system.

Let me conclude by noting that whether we decide to strengthen

the existing defined benefit program or restructure that program

and supplement it with a system of individual accounts, the reform

is going to involve some sacrifice by taxpayers, beneficiaries, or,

most likely, both. In recent months some analysts have suggested

that this need not be the case, that there exist ways to save Social

Security that are painless. Some even go so far as to promise future beneficiaries all of the benefits called for by current law with

no increase in payroll taxes.

By and large, these plans utilize the projected unified budget

surpluses to fulfill their promises of a free lunch. These surpluses

are very uncertain and if they materialize, there are other worthwhile uses to which they could be put. This Committee should carefully consider those other uses. Moreover, it is important to realize
68

that for the next 5 years or so there are no surpluses other than

those that are being created by the Social Security Program itself.

Thank you.

[The prepared statement follows:]

Statement of Robert D. Reischauer, Senior Fellow, Brookings Institution

Mr. Chairman and Members of the Committee, I appreciate this opportunity to

discuss the future of the Social Security program with you. My statement deals with

three issues:

• The surprisingly fortuitous environment that exists today for reforming or restructuring the nation’s mandatory pension system,

• The lessons that can be drawn from past efforts to reform Social Security, and

• The broad options available to strengthen or restructure the program.

THE POLICY AND POLITICAL ENVIRONMENT

Restructuring the largest and most popular federal program, one which touches

the lives of virtually all Americans, is a monumental challenge. Such an effort can

only hope to succeed if policy makers and the public understand the nature of the

problem and the need for change, if Republicans and Democrats are willing to forgo

short-run political advantage and agree to cooperate for the long-run national good,

if the economy remains strong and the budget in surplus, and if there is strong leadership. On all of these dimensions, conditions are unusually favorable as the nation

approaches the new millennium.

Every member of Congress understands the nature of the problem. Each knows

that while Social Security currently is recording substantial surpluses which add to

the Trust Funds’ reserves, those surpluses will turn into deficits around 2021, and

by 2032 reserves will be depleted (see Figure 1). When the Trust Funds are exhausted, substantial benefit reductions or increases in payroll taxes will be needed

to sustain the program. The widespread appreciation by lawmakers of the problem

has generated a broad bipartisan commitment, at least at the rhetorical level, to address the problem sooner rather than later.

The public is also well aware of the long-run difficulties that face Social Security.

For at least a decade, the media, pundits, and politicians have bombarded Americans with the consequences of the retirement of the baby boom generation for Social

Security and Medicare. Polls indicate that most people realize that the program, as

currently structured, is not sustainable. Polls also show that the public would like

its political leaders to address the problem. Because the economy is strong, incomes

are rising, and inflation is low, the majority puts ‘‘fixing Social Security’’ high on

the list of public sector priorities—higher than expanding various social programs

or cutting taxes.

For over a decade, the unified budget deficit problem has cast a pall over virtually

all policy initiatives. With the focus on deficit reduction, any initiative to strengthen

Social Security’s financial position could have been characterized as an attempt to

balance the unified budget on the backs of Social Security beneficiaries or taxpayers.

Three multi-year deficit reduction packages, enlightened monetary policy, a strong

economy, and a hefty dollop of good luck have combined to banish the deficit

scourge, at least for the next few years. According to CBO’s baseline projections, the

unified budget should be in surplus until around the middle of the second decade

of the next century. If policies are not changed, aggregate surpluses over the next

decade will amount to roughly $1.5 trillion; if these surpluses are used to pay down

the national debt, the ratio of debt to GDP by 2015 will be lower than at any time

since before the Great Depression. Of course, over the next few years, Social Security will account for all of the projected unified budget surpluses; non-Social Security taxes are expected to fall short of covering the costs of the government’s nonSocial Security activities until after 2004 (see Figure 2). Nevertheless, the projected

unified budget surpluses should provide a bit of fiscal flexibility that policy makers

may use to ease the transition to a reformed Social Security system.
69

In the past, few politicians have been eager to lead Social Security reform efforts

because such undertakings are fraught with political risks. Over the course of the

1990s, however, many Members of Congress have put forward proposals that would

fundamentally restructure Social Security in an effort to strengthen the program for

the long term. Their courage has stimulated a lively debate and reduced the political risks of a frank discussion of this issue. Constructive as this has been, someone

of national stature must provide leadership, structure the debate, communicate with

the public, and push the effort forward when, as it inevitably will, movement stalls.

Realistically speaking, this role can only be filled by a president. Barring an immediate crisis as there existed in the early 1980s, however, few presidents will volunteer for this assignment. President Clinton, a president with a keen sense of history,
70

1From the unified budget’s perspective, interest is a wash because it is an on-budget expendi- ture and an off-budget receipt of equal size.

a desire to leave a significant legacy, and the freedom that comes with a second

term, has stepped forward to provide such leadership. It may be some time before

another chief executive is willing to fill that role. As we inch closer to beginning a national dialogue and debate on how best to en- sure that future generations have adequate incomes in retirement, both policy makers and the public should understand that a very unusual confluence of circumstances has created the current environment in which it is possible to consider

addressing Social Security’s long-run fiscal problems before they reach crisis proportions. But this environment is as fragile as it is rare. It far from guarantees that

the effort will succeed or even get off the launching pad without exploding. Rather,

it means that reform has become a long shot rather than an impossibility. Some will argue that there is no need to act preemptively. They will point out that, under current projections, the Trust Funds will not be depleted until 2032 and

that long-run projections are fraught with uncertainty. Small increases in trend economic growth, the fertility rate, immigration, or real interest rates could push the

date of insolvency off for a decade or more. The effect that small changes in current

economic conditions and those assumed for the future can have on the long-run outlook was illustrated dramatically when the 1998 Trustees report estimated that the

date at which the Trust Funds would be depleted was 2032, not 2029 as estimated

in the 1997 report. Some analysts expect the 1999 Trustees report to contain another small reprieve.

The fact that current projections do not point to an immediate crisis should not be used as an excuse to put off action. Uncertainty is a two edged sword. Current

projections of the Trust Funds’ balances could prove to be too optimistic if medical

advances and improved personal health add more to average life expectancy than

the actuaries have assumed or if economic growth falls short of expectations. Moreover, Social Security will begin to put pressure on the budget long before the Trusts

Funds are exhausted. The position of the unified budget is improved by Social Security only as long as the program’s primary surplus—its non-interest income less its

expenditures—grows.1 This primary surplus, which was about $52 billion in fiscal 1998, will begin to decline by a few billion dollars a year after 2003 (see Figure 1).

When this occurs, the unified budget’s position will begin to deteriorate if taxes are

not raised or spending is not cut. If the unified budget is in surplus, this deterioration may be viewed as acceptable because it will be attributable to the shrinking

primary surplus of Social Security. The situation will become more severe around

2021, however, when Social Security’s income, including interest receipts, falls short

of covering benefit payments and administrative expenses, forcing the program to

redeem some of the Treasury securities held by the Trust Funds. Unless the onbudget accounts are in substantial surplus at that time, the nation will be faced

with the unpleasant choice of increasing borrowing from the public, hiking taxes,

or slashing expenditures. While there may be no fiscal imperative to act this year to reform Social Security, the sooner we begin to strengthen the fiscal position of the nation’s mandatory pension system the easier decisions will be, the more gradual the process can be, the

less wrenching the adjustments need be, and the more options policy makers will

be able to consider.

Retirees and those approaching retirement often have little or no ability to com- pensate for or adjust to benefit reductions or tax increases. Both political reality and

considerations of equity, therefore, require that whatever shape reforms take they

not change significantly the rules of the game for such individuals. This judgement

is reflected in the proposals that would partially privatize Social Security, virtually

all of which leave those age 55 and older under the existing system. This means

that if decisions concerning how best to reform Social Security are postponed until

action is unavoidable two decades from now, the bulk of the large babyboom generation will not contribute to solving the problem and the burden on younger generations will be all the larger. Even a decade from now the politics of reform will be

much tougher than they are now. Starting in 2002, the fraction of the adult population age 55 and over will begin to rise more rapidly than it has during the demographic holiday the nation has enjoyed over the past decade (see Figure 3). By 2021,

when Social Security’s surpluses are projected to turn into deficits, 39 percent of the

adult population will be age 55 or older, up from 29 percent this year. The growth

in the importance of retirees and near retirees among likely voters is even more dramatic because older citizens tend to vote at higher rates than do younger Americans. While less than one third of voters in the 1996 presidential election were age

55 and over, 45 percent of voters in the elections of 2020 will be in this age group
71

if current age specific voting patterns persist. In such an environment, increased

taxation of benefits and delays or reductions in COLAs will probably be ruled out.

The longer decisions about reform are put off, the greater the role payroll tax hikes

are likely to play in the solution. Because delay constrains the policy options that

realistically can be considered to strengthen the system, it would be wise to act now

even if the program changes agreed to are not phased in for a decade or two. Favorable economic, budget and political conditions have opened a window of op- portunity for reform. This window may close abruptly and not reopen before today’s

problem has been transformed into a full blown crisis which demands precipitous

action, as was the case in 1983.

LESSONS FROM PAST EFFORTS

Policy makers have addressed Social Security’s long-run fiscal problems a number of times over the course of the last quarter century. The two most substantial initiatives—those of 1977 and 1983—were prompted by the impending exhaustion of

Trust Fund reserves. Unlike the current situation, some immediate corrective legislation was unavoidable. Despite this key difference, the experiences of the past offer

some simple and obvious lessons for the current situation.

The first of these is that policy makers should refrain from portraying the reforms they are proposing as the solution to the problems of the nation’s mandatory pension system for all times. Undoubtedly, economic, demographic, and social developments over the next half century will not follow the paths that seem most likely

today. Further adjustments may be required quite soon after any major reforms are

adopted, as was the case after the 1977 legislation was enacted.

A second obvious lesson is that significant changes are more acceptable if the

workers and taxpayers are given a considerable amount of time in which to prepare.

For example, the increase in the age at which unreduced benefits are available that

was enacted in 1983 will first affect those turning age 62 in 2000. The seventeen

year delay between enactment and implementation has given those affected fair

warning and an opportunity to change their personal saving behavior and work effort to compensate for the reduction in benefits that this change represents.

A third lesson that can be garnered from the experiences of the past is that successful reform efforts usually involve gradual, rather than abrupt, change. A giant

leap is often unacceptable whereas a series of small steps that end in the same

place is viable. For example, the two year increase—from age 65 to 67—in the age

at which unreduced benefits will be paid will take place two annual month steps

stretched over a 23 year period. Similarly, the bite imposed by subjecting a portion

of benefits to the income tax will grow gradually each year because the income

thresholds above which this policy applies are not indexed.
72

Finally, the experience of the past suggests that bipartisan cooperation is indispensable if the reform effort is to succeed. Debates over Social Security offer unlimited opportunities to engage in demagoguery for political advantage. The issues are

complex, the consequences of some reform proposals are unknown, many people do

not understand how the program now works, and the program’s benefits are vitally

important to the well being of most older Americans. Such conditions create a highly

combustible environment in which to hold a national debate about restructuring. It

will take immense self restraint and rhetorical moderation on the part of lawmakers, policy experts, and interest groups to move forward without touching off a

conflagration that could scar the political landscape so badly that few would risk

raising the issue again until the problem has become a full blown crisis. Divided

government—Republican majorities in Congress and Democratic control of the

White House—may improve the outlook because the responsibility for governing the

nation and for policy development is shared by both political parties.

EVALUATING THE BROAD OPTIONS FOR REFORM

The debate over how best to provide basic income for future retirees has been

about two broad options. Advocates of the first of these, which goes under the generic label of ‘‘privatization,’’ believe that the nation’s interests would best be served

if Social Security were scaled back and a defined-contribution pension plan consisting of individual accounts were established to supplement Social Security. Proponents of the other approach believe that it is important that the nation’s mandatory pension system remain exclusively a defined-benefit plan. They therefore seek

ways to strengthen the long-run financial position of the current system through

measures that would increase the program’s income and reduce its expenditures

while preserving Social Security’s underlying principles. Each broad approach has

advantages and disadvantages. In addition, as is so often the case, the details of

each specific proposal make a great deal of difference.

When evaluating the broad options for reform, it is important to keep the fundamental purpose of the nation’s mandatory pension system clearly in focus. That

purpose is to provide workers with a secure and predictable basic retirement pension, one that will last as long as the worker and the worker’s spouse are alive and

one whose purchasing power will not be eroded by inflation. This pension should be

viewed as the foundation upon which other sources of retirement income are built.

It is also useful to lay out explicit criteria for comparing the broad options and

specific plans. My colleague Henry J. Aaron and I have spelled out four such dimensions in a book (Countdown to Reform: The Great Social Security Debate) that will

be released by The Century Foundation Press on December 1. They are the adequacy and equity of the benefits provided by the system, the degree to which the

system protects participants against risks which they are ill equipped to bear, the

system’s administrative costs and complexity, and its impact on national saving.

Taking into consideration both the fundamental purpose of the mandatory retirement system and the four criteria enumerated above, I have concluded that it would

be best to work to strengthen the long-run fiscal position of the existing definedbenefit program. There are many ways in which this might be accomplished. The

specific measures Henry Aaron and I have endorsed in our book are laid out in

Table 1. Together, they are more than sufficient to close the program’s long-term

deficit. This means that some recommended program changes could be phased in

more gradually than we have proposed or even dropped from the package of reforms

without compromising the objective of closing the long-term deficit.
73

Table 1.—Closing the Projected Long-term Social Security Deficit

Deficit or

Change in

Deficit As

Percent of

Payroll

Proportion

of Adjusted

Long-term

Deficit

Closed

Projected long-term deficit—1998 Trustees Report ..................................... 2.19 n.a.

Effects of correcting the Consumer Price Index ........................................... ¥.45 n.a.

Adjusted long-term deficit .............................................................................. 1.74 n.a.

Program Changes

1. Gradually reduce spouse’s benefits from one-half to one-third of the

worker’s benefits and raise benefits for surviving spouses to threequarters of the couple’s combined benefit. +.15 ¥9

2. Cut benefits by increasing the unreduced benefit age—raise the age to

67 by 2011 rather than by 2022 and thereafter raise the age at which

unreduced benefits are paid to keep the fraction of adult life spent in

retirement constant. .................................................................................... ¥.49 28

3. Increase the initial age of eligibility from 62 to 64 by 2011 and thereafter raise the age of initial eligibility at the same pace as the unreduced benefit age. ........................................................................................ ¥.23 13

4. Increase the period over which earnings are averaged from 35 to 38

years. ............................................................................................................ ¥.25 14

5. Cover all newly hired state and local employees. .................................... ¥.21 12

6. Tax Social Security benefits the same as private pension income. ........ ¥.36 21

7. Gradually invest the trust fund’s balances that exceed 150 percent of

yearly benefits in common stocks and corporate bonds. .......................... ¥1.20 69

Total Program Changes ¥2.59 148

Source: Estimates from the Office of the Actuary, Social Security Administration.

The particular changes included in our reform package were chosen not simply to close the deficit. They were also intended to modernize Social Security in ways

that reflect the economic and societal developments that have occurred over the last

half century. Most of these changes are familiar to those who have followed the Social Security discussion during the past few years. However, the largest of the proposed program changes—investing a portion of the Trust Fund balances in private

equities—is not and, therefore, needs some further explanation.

Shifting Trust Fund investments from government to private securities would not have a direct or immediate effect on national saving, investment, the capital stock,

or production. The Trust Funds, however, would earn higher returns because they

would hold assets other than relatively low-yielding government bonds. This would

reduce the size of the benefit cuts and payroll tax increases needed to close the program’s long-run deficit. While this is attractive, the question which has troubled

many since the inception of Social Security concerns the possibility that Trust Fund

investments in private securities might lead to inappropriate government influence

over private companies. For example, Social Security trustees might be subject to

political pressures that would force them to sell shares in companies that produce

products some people regard as noxious (for example, cigarettes or napalm) or that

pursue business practices some people regard as objectionable (such as hiring children or paying very low wages in other countries, polluting, or not providing health

insurance for their workers) or to use their stockholder voting power to try to exercise control over private companies.

If institutional safeguards were not available to reduce the risk of such interference to a de minimis level, I would oppose such investments. But such safeguards

can be established. The core of this protection would be provided by a new institution, the Social Security Reserve Board (SSRB), which would be modeled after the

Federal Reserve Board. The governors of this independent entity would be appointed by the president and confirmed by the Senate for staggered fourteen year

terms. They could not be removed for political reasons. The SSRB would be empowered only to select on the basis of competitive bids a number of fund managers. The

fund managers would be authorized only to make passive investments in securities—bonds or stocks—of companies chosen to represent the broadest of market indexes. These investments would have to be merged with funds managed on behalf

of private account holders. To prevent the SSRB from exercising any voice in the

management of private companies, the fund managers could be required to vote the

Trust Funds’ shares solely in the economic interest of future beneficiaries.
74

Such a system would triply insulate fund management from political control by elected officials. Long-term appointments and security of tenure would protect the

SSRB from political interference. Limitation of investments to passively managed

funds and pooling with private accounts would prevent the SSRB from exercising

power by selecting shares. The diffusion of voting rights among independent fund

mangers would prevent the SSRB from using voting power to influence company

management and would protect voting rights of private shareholders from dilution.

Congress and the president would have no effective way to influence private companies through the Trust Fund unless they revamped the SSRB structure. While nothing, other than a constitutional amendment, can prevent Congress from repealing

a previously enacted law, the political costs of doing so would be high.

While ‘‘privatization’’ proposals are attractive on some dimensions, I think that individual accounts should not be part of the nation’s mandatory pension system.

Such accounts introduce added risk and unpredictability into retirees’ basic pensions. With individual accounts, benefits will vary depending on when during their

lives individuals worked and contributed to their accounts, what assets they invested their account balances in, and market values when workers retire. Unless

retirees are required to convert their individual account balances into inflationprotected annuities upon retirement, there would be no guarantee that they would

have adequate income through their final years.

Furthermore, it is difficult to maintain adequate social assistance in a system in

which individual accounts play an important role. The social assistance provided

through Social Security has helped workers with low lifetime earnings, spouses with

limited or no participation in the workforce, survivors, and divorcees. It has made

Social Security the nation’s most important and least controversial anti-poverty program.

In addition, individual accounts, unavoidably, will increase the complexity and administrative costs of the nation’s basic pension system. Added burdens will be imposed on employers, workers, and the government. Under some privatization plans,

the administrative load could be sufficiently onerous as to make the proposed system unworkable. Under other privatization plans, the impact of added administrative costs would largely be felt through reduced returns on individual account balances. Even this effect could be significant. A one percent annual charge—which is

close to the average mutual fund fee—imposed over a forty year career would reduce

the size of a retiree’s pension by about 20 percent.

CONCLUSION

Strengthening the long-run fiscal position of the existing defined-benefit Social Security program or restructuring that program and supplementing it with a system

of individual accounts is going to involve some sacrifice by taxpayers, beneficiaries,

or, most likely, both. In recent months, some analysts have suggested that this need

not be the case—that there exist ways to ‘‘save Social Security’’ that are painless.

Some even go so far as to promise that ‘‘current law’’ benefits need not be reduced

nor payroll taxes raised. By and large, these plans utilize the projected unified

budget surpluses to fulfill their promise of a free lunch.

I would like to conclude with several cautions about these tempting mirages.

• First, the projected unified budget surpluses are not manna from heaven that

have no other uses. If they are used to seed individual accounts in a privatized system rather than to pay down the national debt, debt service costs will loom larger

in the baseline budget projections and national saving may be reduced. Furthermore, if the surpluses are devoted to ‘‘saving Social Security,’’ they will not be available to sustain Medicare, fund tax relief measures, or support expanded spending

on defense, medical research, education, or other areas that many members of both

parties regard as high priorities.

• Second, as the experience of the past few years amply demonstrates, projections

of the unified budget deficit/surplus are very uncertain. Congress and the president

can enact policies that reduce surpluses, as was the case in October. But even abstracting from policy changes, estimates of the future position of the budget jump

around from year to year because economic assumptions and technical factors

change. Figure 4 provides my estimates of CBO’s ten-year baseline budget projections excluding the effects of policy changes. Between the projection released in

March 1995 and that issued in July of 1998, the projected fiscal 2005 budget situation improved by about $500 billion. While the budget projections over the last few

years have shown a steadily improving bottom line, the experience of the late 1980s

and early 1990s serves as a warning that the budget outlook can deteriorate just

as rapidly and as significantly as it can improve. Given this situation, there is a

risk to linking the future of the nation’s mandatory pension system to surpluses
75

that may or may not materialize. If the expected surpluses are not realized, a contentious debate could develop over whether the federal government should incur

deficits and borrow more money from the public so that workers can deposit these

funds in their personal retirement accounts.

• Finally, proposals that promise future beneficiaries all of the benefits called for

by current law with no increase in payroll taxes are distributionally inequitable and

represent a misdirection of scarce resources. One such plan would establish a refundable 2 percent income tax credit for deposits workers make into personal retirement accounts. The cost of this tax credit—some $3.4 trillion over the next 25

years—would be financed largely out of the projected unified budget surpluses.

Upon retirement, the account holder’s Social Security benefit would be reduced by

75 cents for every dollar of pension provided by the personal retirement account. In

other words, no one would be worse off and all those who had a positive account

balance would be better off.

Benefits under this approach would rise proportionately more for high earners

than for low earners. The contribution to individual accounts and, hence, the size

of account balances would be a constant fraction of income. Social Security benefits

are proportionately larger for low earners than for high earners. Since the plan

would reduce Social Security benefits by three-quarters of any benefits derived from

individual accounts, pensions for high earners would rise proportionately more than

would pensions of low earners as the following simple numerical example illustrates.

Monthly Amounts

Average

Earnings

Social

Security

Individual Account

Total

Pension

Change

in Pension

Low Earner .................................................... $1,000 $560 $240 $620 +11%

High Earner ................................................... $5,600 $1,375 $1,340 $1,720 +25%

Considering that high earners are more likely than low earners to be covered by

employer sponsored pension plans and are more likely to have significant personal

savings that they can use in retirement, one may question the equity of a proposal

that would use budget surpluses to boost pensions disproportionately for those who

are well off. One may also question whether the best way to ‘‘save’’ the nation’s

mandatory pension system is to increase benefits for all future retirees. It may be

that the public sector is forced to increase, above currently promised levels, the re76

sources it devotes to future retirees. But certainly the most likely area for that pressure to manifest itself is in medical care which may absorb amounts much larger

than the surpluses projected for the next decade and a half.

The views expressed in this statement are those of the author and should not be attributed to the staff, officers, or trustees of the Brookings Institution.

Mr. Ross.

Mr. SHAW. Thank you, sir.

f

STATEMENT OF STANFORD G. ROSS, CHAIR, SOCIAL SECURITY

ADVISORY BOARD

Mr. ROSS. Thank you, Mr. Chairman and Members of the Committee. I appreciate the invitation to testify today. The Committee

on Ways and Means bears a large share of the responsibility for securing the future of the Social Security Program. I commend you

for moving promptly to address this issue.

As Chair of the Social Security Advisory Board, I welcome the

opportunity to report to you on the work the Board is doing to help

with the Social Security financing debate and to address other

issues that are important to the future of Social Security. I will

also be making some remarks in my individual capacity.

We have devoted a great deal of effort to the financing issue, and

this summer we issued a report entitled ‘‘Social Security, Why Action Should Be Taken Soon.’’ It is a bipartisan report, since we are

a bipartisan Board, and it was based on professional nonpartisan

analysis. We hoped that in laying out some basic facts about the

problem, we would encourage others to find common ground in

order to develop the changes that are going to be needed to preserve the Social Security system over the long term.

In particular, I recommend that you look at two charts of the report. They graphically show why it is important to take action now

and not to wait until the so-called crisis date of roughly 2032.

Chart 9 shows that if you wait until that date and have to reduce

benefits to level of the revenues that will be available, it produces

almost unthinkable results for beneficiaries. Similarly, if you wait

until 2032 and have to address the problem by raising payroll

taxes, you will need about a 6-percentage point increase in payroll

taxes, from 12 to 18 percent. This would be an unprecedented tax

increase that would have almost unthinkable economic repercussions.

[The charts follow. The full report, ‘‘Why Action Should Be Taken

Soon,’’ is being retained in the Committee files.]
77

order to make people understand that when we say action should

The point of our report is to provide a great deal of detail in

f

be taken soon, that there are real reasons for that. It is not just

a platitude, and if it is not done, the Nation will have even more

severe problems later from things that are already built into the

system.

Second, we are holding a series of forums on the impact of raising the retirement age. We held one just a few weeks ago in the
78

Capitol. Polling data show that only one in five Americans are

aware that the retirement age is already scheduled to move from

age 65 to age 67 beginning in the year 2000. And a large majority

of the public, more than 70 percent, opposes an increase in the retirement age when presented with that option in isolation from any

other reforms.

However, because an increase in the retirement age beyond the

increase that has already been legislated is part of many reform

proposals, and could make up a significant portion of the financing

shortfall, it is important to understand the implications. We are

bringing together some of the Nation’s outstanding analysts to talk

about this subject and will make our findings available to this

Committee and the entire Congress.

Social Security is also facing a number of other serious challenges. One is the disability program, about which we recently

issued a report. This is now about a $75 billion a year program providing benefits to over 10 million people. Changes in the retirement

age will impact the disability program. And, indeed, as you go

about your work in trying to maintain solvency in the old age program, it is important to recognize that you may have to deal explicitly with the disability program. One of the problems will be establishing appropriate criteria for determining disability in older persons as part of further consideration of the retirement age issue.

We have also issued reports on increasing public understanding

of Social Security and on policy and research issues. We are now

undertaking work to assess SSA’s service to the public and expect

to issue a report on this topic early next year.

I would now like to point out one problem which I think has not

received sufficient attention, and that relates to the administrative

issues that are raised by proposals to make individual investment

accounts a part of Social Security. Many people feel that if a plan

is adopted, the administrative issues will be solved in due course.

This is one bridge we should not jump off without knowing how

and where we will land. Too much is at stake. I cannot think of

anything more likely to further undermine confidence in government and in the wisdom of policymakers than taking money from

nearly all of America’s workers to invest in the markets and not

accomplishing the task well and in a timely way.

I have great doubts about the proposals to have the Federal Government create and administer private accounts. In my view there

is a serious question about the capacity of the IRS and SSA computer systems to set up the millions of accounts that would be required in a cost-effective manner within a reasonable timeframe.

Finally, in closing, I would make two quick points. I agree very

much with those who have noted that Medicare reform is on the

table at this time. These two programs affect the same people and

depend in large part on the same payroll tax base. Even though

you can only deal with one at a time as a practical matter, I believe

that you should have an integrated strategy for addressing both

programs so that you do not exacerbate the difficulty of solving

whichever problem comes second.

Similarly, I agree with Congresswoman Johnson and others who

have noted that all parts of the retirement income system are in

need of review. Social Security reform alone will not get the job
79

done. It must be combined with a strengthening of all parts of the

retirement income system. Considering Social Security reform

within this larger context is a vital aspect of the reform process.

The task before this Committee is difficult, yet I am confident

that, as has been done in the past, the Members of this Committee

and others in Congress will find a way to come together. The Congress has amended the Social Security law many times since it was

enacted in 1935. It has never allowed the program to reach the

point where promised benefits could not be paid, and it is unthinkable that it would ever do so in the future. As you undertake your

work, I assure you that the Social Security Advisory Board, and I

myself as an individual, stand ready to assist you in any way we

can.

Thank you.

[The prepared statement follows:]

Statement of Stanford G. Ross, Chair, Social Security Advisory Board

Mr. Chairman, Mr. Rangel, and Members of the Committee, I want to thank you

for inviting me to testify today on the important subject of Saving Social Security.

As the Committee of jurisdiction in the House of Representatives, the Committee

on Ways and Means bears a large share of the responsibility for securing the future

of the Social Security program. I commend you for moving promptly to address this

issue.

As Chair of the Social Security Advisory Board, I welcome the opportunity to report to you on the work the Board is doing to help with the Social Security financing

debate and to address other issues that are also important to the future of Social

Security. I will also be making some remarks in my individual capacity.

Creation of an independent bipartisan Advisory Board was an integral part of the

1994 legislation that established the Social Security Administration as an independent agency. By providing for a standing Board, the Congress recognized the value

of having a permanent institution to which the Congress, the President, and the

Commissioner can turn for bipartisan advice and assistance.

THE MANDATE OF THE BOARD

The 1994 legislation gives the Board a challenging mandate. It directs the Board

to make recommendations with respect to the quality of service that the Social Security Administration provides to the public; the policies and regulations of the OldAge, Survivors and Disability Insurance (OASDI) and Supplemental Security Income (SSI) programs; a long-range research and program evaluation plan for SSA;

and policies that will ensure the solvency of the OASDI programs. Among its other

responsibilities, the Board is also directed to increase public understanding of Social

Security and make recommendations relating to the coordination of the OASDI and

SSI programs with the Medicare and Medicaid programs.

This is a tall order for a part-time Board that by statute is directed to meet not

less than 4 times a year, and has experienced several vacancies since it began its

work in the spring of 1996, including two vacancies at the present time. Nonetheless

the Board has undertaken an ambitious program of work, and has generally been

meeting monthly. We have issued seven reports that respond to the mandate that

you have given us and have plans to issue more in the coming months.

Last week the Board sent to each Member of Congress its first annual report for

the fiscal year 1998. The report describes the work the Board has completed and

the work that is under way. We will be issuing similar reports in future years because we believe it is important that we be fully accountable to the public.

THE BOARD’S WORK TO DATE

A point that our report makes clear, and that I would like to underscore today,

is that Social Security is facing a number of serious challenges in addition to the

issue of program solvency. Since it began, the Board has been working on a bipartisan basis to address these challenges, and we hope that our work will encourage

others to examine them as well in a professional, nonpartisan way.

I would like to describe briefly the work that we have been doing.
80

ASSURING RETIREMENT SECURITY FOR FUTURE GENERATIONS

The subject of today’s hearing—assuring retirement security for future genera- tions of American workers and their families—has been a major focus of our efforts. Many organizations and individuals have proposed plans to reform the Social Se- curity system. The Social Security Advisory Board has chosen not to add to the

abundance of specific proposals. Instead, we are working to contribute to the debate

in ways that we hope will help in finding common ground on at least some important issues. In addition to our joint efforts as a Board, each of us individually is

actively participating in the discussion about the future of Social Security. This summer we issued a report entitled ‘‘Social Security: Why Action Should Be Taken Soon.’’ Our purpose was to provide policy makers and the public with a

source of reliable information on the dimensions of the changes that are required

if the Social Security system is to maintain solvency beyond 2032, and the advantages of taking action sooner rather than later. Our report also describes various

options to address the long-range solvency problem and their impact on the deficit.

It is a bipartisan report. Our hope is it will help others come together to develop

the changes that need to be made to preserve the Social Security system over the

long term.

The Board also recently sponsored the first of what will be a series of forums on

the impact of raising the Social Security retirement age. This is one of the most sensitive public policy issues that you have before you. Polling data show that only 1

in 5 Americans is aware that the retirement age is already scheduled to move up

from age 65 to age 67, beginning in the year 2000. And a large majority of the public—more than 70 percent—opposes an increase in the retirement age when presented with that option in isolation from any other reforms.

Nonetheless, because a further increase in the retirement age is part of many reform proposals and could make up a significant portion of the financing shortfall,

it is important to understand the many implications that such a change would have

for both employees and employers. We will be bringing together some of the Nation’s

outstanding analysts on this subject to share their research findings and their experience in order to promote better understanding of the issues that are involved.

In addition to the solvency issue, the Board has been working on other matters

that are important to the future of Social Security. I would like to mention several

of them.

The Disability Programs

In fiscal year 1998, the Social Security Administration paid about $73 billion in

Disability Insurance and SSI disability benefit payments to some 10.3 million individuals. These numbers have grown rapidly in the last decade and are expected to

continue to grow, although at a reduced rate. Apart from the Social Security Administration, only the Defense, Health and Human Services, and Treasury Departments

have budgets as large as the disability programs. As recently as 1994 the Congress

had to take action to reallocate resources from the Old-Age and Survivors Insurance

program to the Disability Insurance program in order to maintain solvency, thereby

increasing the financial shortfall of the Old-Age and Survivors program.

I would also note that the increases in the retirement age that have already been

enacted, quite apart from any additional increases, could have the effect of further

increasing the number of disability beneficiaries. This would be particularly so if the

age for early retirement (age 62) is raised, as some have proposed, in order to keep

the period between the normal retirement age and the early retirement age at three

years. Indeed, the problem of appropriate criteria for determining disability in older

persons may need to be addressed explicitly by the Congress as part of further consideration of the retirement age issue. As the normal retirement age increases, older

workers will have a major incentive to apply for disability benefits as a way to gain

access to health care (Medicare for Disability Insurance beneficiaries and Medicaid

for SSI disability beneficiaries). Thus, the issues of the disability programs are an

important aspect of the future financial solvency of the Old-Age and Survivors Insurance program.

Recognizing the importance of the disability programs to policy makers and the

public, the Board has made them one of its highest priorities for review. Today, as

in the past, there are serious concerns about the lack of consistency in decision making; unexplained changes in application and allowance rates; the complexity, slowness and cost of the application and appeals process; the lack of confidence in the

system; and the fact that few beneficiaries are successfully rehabilitated so that

they can become part of the economic mainstream.

The Board has issued an initial report with recommendations that address these

concerns in the context of the existing system. Our work on disability will be ongo81

ing, because we recognize that the complex nature of the programs requires continuing scrutiny and improvements, and at some point may involve proposals for structural change.

Service to the Public

At the present time the Board is studying the Social Security Administration’s service to the public and we have held two public hearings on this subject. Over

recent months we have met with hundreds of Social Security employees at all levels

of the agency. We have heard widespread concern about the agency’s ability in the

future to provide high quality service and insure program integrity. In particular, the demographics of the SSA workforce are troubling in that a large number of employees are in the latter stages of their careers. Indeed, the expectation is that an increasing portion of the staff will retire in the next few years. Yet

at the same time, because hiring was relatively limited in the 1980s and 1990s as

the agency underwent a major downsizing of its staff, adequate numbers of experienced replacements may be lacking. High levels of retirements will coincide with an

anticipated increase in the agency’s workload, as the baby boom generation enters

the age of retirement and experiences increased incidence of disability.

The Board is concerned that public confidence in the program will be further eroded if the issues related to maintaining a high quality of service are not addressed

in timely and effective ways, and we expect to issue a report with recommendations

for action early next year.

Increasing Public Understanding

Opinion polls show that few Americans understand how Social Security financing

operates or how it relates to the overall Federal budget. The lack of understanding

of Social Security’s principles, benefits, and costs increases the difficulty of building

the consensus that is needed to resolve important policy issues. In September of last

year the Board issued a report that called upon the Social Security Administration

to take a far more active role in informing the public about the Social Security program and how Social Security, combined with pensions and savings, will fit into an

individual worker’s long-term financial planning.

Research and Policy Development

When the Social Security Administration became an independent agency in March

1995, it took on new responsibility for Social Security research and policy development, a responsibility that it formerly shared with the Department of Health and

Human Services. This was a responsibility that the agency was ill prepared to bear.

Its policy and research staffs had been disproportionately affected by downsizing

over the last couple of decades, which critically weakened its capacity to provide the

information and analysis that policy makers and the public need to make sound policy decisions.

The Board has issued two reports with recommendations on the steps that SSA

needs to take to rebuild the agency’s capabilities in these areas, and we are pleased

that this rebuilding process has begun. However, it will require the continued commitment of the Commissioner, the Office of Management and Budget, and the Congress to complete the job of providing the Social Security administration with the

capacity to engage in the quality and quantity of research and policy analysis that

the program needs to be adjusted soundly to changing circumstances.

ADMINISTRATIVE ISSUES RAISED BY INDIVIDUAL INVESTMENT ACCOUNTS

Let me turn now to what is one of the most sensitive and complex proposals before this Committee and the Congress, and that is the proposal to make individual

investment accounts a part of the Social Security system.

Although I cannot speak for the Board on this matter, I would like to express my

personal view that before making decisions, the Congress and the Administration

need to conduct a careful study of the administrative issues that are raised by this

proposal. How these accounts would be constructed and operated is a matter of critical importance to this country, and the stakes are enormous.

I have yet to see a plan presented in sufficient detail to enable us to be confident

that it can be administered in an efficient and effective way. Creating and maintaining individual investment accounts for the 147 million workers who are now covered

by Social Security would be one of the most complex administrative challenges ever

undertaken by either government or the financial services industry.

The complexity is compounded by the fact that about a third of all workers paying

Social Security payroll taxes in 1994 had covered earnings of $8400 or less. For

them, a contribution of 2 percent of payroll would provide an account equal to $168
82

or less. As a benchmark, maintaining an account in a well-run mutual fund often

costs $30 to $35 annually, although no-frills accounts may reduce the cost. If small

accounts such as these are to be administered by the private sector, the issues of

relatively high costs for small contributors and potentially heavy administrative

burdens on employers must be addressed.

As an alternative to administration by the private sector, some have suggested

that the Federal government could administer individual investment accounts, the

suggestion being that this could both lower costs and distribute the costs more appropriately. In my view there is a serious question about the capacity of the IRS

and SSA computer systems to set up the millions of accounts that would be required

in a cost-effective manner or within a reasonable time frame. Very likely the government would need to outsource a great deal of the development of the necessary systems and information technology to establish these accounts. The appropriate roles

of government and of the private sector in providing the infrastructure that would

be required to administer individual accounts is a major issue that must be addressed.

I cannot think of anything more likely to further undermine confidence in government and in the wisdom of policy makers than taking money from nearly all of

America’s workers to invest in the markets and not accomplishing the task well and

in a timely way.

Based on my experience in the government and the private sector, I urge you to

look at administrative issues carefully. They are critical regardless of how you view

the merits of making investment in individual accounts a part of the Social Security

system.

In my opinion there has been too much wishful thinking that the many problems

involved will somehow be solved in due course once a plan is enacted. This is one

bridge we should not jump off without knowing how and where we will land. Too

much is at stake.

In closing, I would like to make two additional points.

ROLE OF MEDICARE

Because Social Security and Medicare serve many of the same individuals, and

both are financed largely from payroll taxes, they share the challenge of paying for

benefits for an increasing number of older persons at the same time that growth

in the workforce is slowing. In many ways, Social Security reform is the easier of

the two reforms to make. The shortfall in Medicare is much greater, and it will

occur much sooner—within 10 years, according to the actuaries at the Health Care

Financing Administration. It will be important to consider the impact that changes

in one program may have on your ability to assure the long-range solvency of the

other. Ideally, an integrated strategy for fixing both would be the prudent way to

proceed, even though realistically you will be addressing them one at a time.

NEED TO REVIEW ALL PARTS OF THE RETIREMENT INCOME SYSTEM

Finally, it should be emphasized that all parts of the retirement income system

are in need of review. Americans as a whole are not making adequate provision for

their retirement. Social Security reform should be combined with a strengthening

of the other parts of the retirement income system, including employer pensions, individual retirement accounts, 401(k) plans, and other savings mechanisms. Considering Social Security reform within this larger context is a vital aspect of the reform

process.

Similarly, the entire health care system presents a myriad of problems that need

addressing. Considering Medicare reform within this larger context is important so

that any changes preserve, or at least do not diminish, your ability to address nonMedicare health care system issues. Again, an integrated strategy for resolving

clearly related issues would be the prudent way to proceed, even if only one issue

is being addressed at a particular time.

ASSURING SOCIAL SECURITY FOR THE FUTURE

Again, I commend this Committee for its attention to this important issue. Your

task is difficult, yet I am confident that, as has been done in the past, the Members

of this Committee and others in the Congress will find a way to come together to

assure that Social Security will be preserved for future generations. The Congress

has amended the Social Security law many times since it was enacted in 1935. It

has never allowed the program to reach the point where promised benefits could not

be paid, and it is unthinkable that it would ever do so in the future.
83

As you undertake your work, I assure you that the Social Security Advisory Board stands ready to assist you in any way we can.

Mr. M

Mr. SHAW

ATSUI

. Mr. Matsui.

. Thank you, Mr. Chairman. I would like to thank all

f

four of the panelists for their testimony. It was all very enlightening and I appreciate it. I would like to ask Dr. Ross, Chairman Ross, a question if I may. You talked about the potential administrative costs in terms of private accounts, should we move in that direction. You didn’t state

a possible number. I have heard that figures of up to 30 percent

could be administrative costs, either the Federal Government

maintaining these costs or perhaps in some other fashion. Perhaps you can answer this first. Do you have an idea of what the overall administrative costs might be? And perhaps others

could respond very quickly, because I have one or two more questions.

Mr. ROSS. I will take a first crack at it. The costs depend a great deal on how you structure the accounts, who is going to create

them, and how they are going to be maintained. As a benchmark,

an account in a well-run mutual fund runs about $30 to $35 a year. One of the things that compounds the problem is that about a third of all workers paying Social Security taxes in 1994 had covered earnings of $8,400 or less. For them, a contribution of 2 percent of payroll would provide an account equal to $186 or less. That

is a long-winded way of saying there is a real problem because of

the number and magnitude of these small accounts. I think until

you see a really specific plan, it is going to be very difficult to get

a cost number that is reliable. But it is a major problem.

Mr. MATSUI. Thank you, I perhaps will not ask the other ones that, because I think you perhaps elaborated enough, but I thank

you very much. Bob, we have been having this discussion about the unified budg- et versus the not unified budget. If in fact we either have a big

spending program that pretty much eats up the surplus or half the

surplus, or perhaps a big tax cut that eats up the surplus or half

the surplus, even though we have a guarantee that Social Security

will be paid out if we do not change the program substantially, if

we do not have the money it means we cut other social or defense

programs or we increase taxes or we have a budget deficit, a huge

budget deficit.

Is that what our choices are if we make the decision of spending

programs or tax cuts before we solve the Social Security problem?

Mr. REISCHAUER. Not quite. The formulation that you presented

was if we take half the projected surpluses and devoted them to

say a tax cut, what would happen. We would pay down the national debt more slowly, interest costs would be higher and debt

relative to gross domestic product, GDP, in 2015 would be higher

than it would otherwise be. At that point when Social Security begins to run an annual deficit, it has to begin turning in its IOUs

and collecting money from the balance of the government. We

would have to cut spending more, raise taxes more, or borrow more

from the public than we otherwise would.
84

The debt would be higher than it otherwise would be. Probably

the economy would grow a bit slower than otherwise would be the

case. And, as Dr. Stein pointed out, the pie available to support

both working people’s needs and retiree’s needs would be smaller.

Mr. MATSUI. Thank you.

Dr. Stein, you talked from a macroeconomic perspective in terms

of these private accounts, and I was impressed with your comments. If the government, or individuals, but the government is involved in these private accounts or individuals are, that means

somebody will still have to buy government bonds. And the government bonds go up in terms of the interest that the Federal Government has to pay or else, I guess, if they just go unpurchased there

is another problem to it.

What does this do in terms of the overall deficit? This is not a

freebie then, is it? Because overall we are just shifting the costs

from the Social Security system to some other function of government; is that correct?

Mr. STEIN. I think that is right. That is, I think we only change

the form of the obligation of the taxpayer. In one case he has an

obligation to the Social Security accounts, if its own funds are inadequate. In the other case in which the Social Security accounts

have bought the private assets, the taxpayer has to pay more interest, a higher rate of interest on the Federal debt that is now held

by the public in larger quantity.

I think if you go back to what Bob Reischauer says, he doesn’t

think that the privatization will add to saving, will not add to the

national income, will not add to the economic growth, then those

additional earnings by the Social Security account have to come out

of somebody else’s earnings. Or another way to look at it is say,

well, there is a certain amount of capital income in this country.

If more of that capital income is going to be earned by the Social

Security accounts, less of it is going to be earned by somebody else.

Either the taxpayer will become liable for more interest payment,

or the owners of private accounts, private assets, are going to earn

less.

So the spread between the yield on government securities and

the yield of private assets will decline if the Social Security accounts are no longer a captive buyer of Treasury securities.

Mr. MATSUI. Thank you. I want to thank all of you very much.

Dr. Cogan, I didn’t ask you a question but that is just because I

ran out of time. Thank you, thank you all.

Chairman ARCHER [presiding]. If I may, let the Chair jump in.

I apologize that I had another meeting that I could not get out of,

so I was not here to welcome all of you when you took the witness

chairs.

But is it not true that the amount of money that we have to borrow governmentally is determined by what happens within the

General Treasury rather than Social Security? In other words, if

we run an operating deficit in the General Treasury, is that not the

basis on which we have to borrow money?

Mr. STEIN. The amount that you have to borrow from the general

public——

Chairman ARCHER. No, no, I’m talking about the total debt.

Whether the debt is held by Social Security or whether it is held
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by the public, it is scored against the debt ceiling. And the total

debt that the Federal Government has must, as a result, be determined by what we do within the operating budget, within the General Treasury of the United States.

And we will, in effect, either borrow the money from the Social

Security Trust Fund or we will borrow it from the public, but the

debt will be the same in the aggregate. Whether or not we run a

Social Security surplus or not, irrespective of the amount of the Social Security surplus within the trust fund, that is the amount over

and above what is paid out in benefits and administrative costs

each year.

I think we need to be clear on that. The debt that is owed to the

trust fund has the same full faith and credit and pays market interest rates as the debt that is held by the public—or the private

sector.

Now, somehow as you begin to go through your analysis, it gets

confusing. But let’s get back to the basics, and that debt must ultimately be paid off out of General Treasury funds, not out of the

payroll tax funds.

Mr. STEIN. I think you and I disagree about what are the basics.

Chairman ARCHER. I don’t know how there could be any disagreement about that. I would be happy to have an explanation as

to why that is not accurate.

Mr. STEIN. Because I think what is basic is the rate of national

saving, and that the Federal Government’s effect on the rate of national saving is the result of its unified budget surplus or deficit.

So that it is that borrowing, it is that borrowing that is abstracting

funds from the flow of private savings and preventing it from being

invested in private productive assets. There is a certain special

quality to the borrowing that the Federal Government does from

the general public that is different from the borrowing it does from

the Social Security account.

Chairman ARCHER. But in the end, if you reduce the debt that

is held by the Social Security Trust Fund, you then increase the

debt that is held by the private sector.

Mr. STEIN. Right.

Chairman ARCHER. At any one period of time, but the aggregate

debt remains the same.

Mr. STEIN. Right.

Chairman ARCHER. OK. I just want that to be clear, because I

think that got a little confused in some of the responses to my

friend Bob Matsui. And so when people say, well, we are really

more concerned about the debt that is in the trust fund or we are

less concerned about the debt that is in the trust fund, whether it

is going to be paid off or not, and in the end you are going to have

to either cut spending or raise taxes to pay it off, the same thing

would apply if you had that debt held by the public or private sector. You still are going to have the same debt, you are still going

to have to raise taxes or cut spending in order to accommodate it.

It is still going to be a part of the debt ceiling.

Mr. STEIN. Oh, yes.

Chairman ARCHER. This is in the First Reader, and I think

the——
86

Mr. REISCHAUER. It is still part of the debt ceiling, but it doesn’t

have the same impact on national saving or economic growth.

Chairman ARCHER. It may or may not.

Mr. REISCHAUER. That is important from the standpoint of Social

Security, because our ability to provide benefits to future retirees

will depend on the future strength of the economy, not the number

of IOU’s that are floating around in one account or another account.

Chairman ARCHER. Well, Bob, to some degree I agree with that.

But it has to be a combination of both, really, and it seems to me

that we get into some of these more macro concepts of economics

and a lot of that we need to think about. But if you are taxing people to put it in the Social Security Trust Fund, you are taxing potential savings. If you are borrowing from the public and private

sector, you are taxing potential—you are taking away potential

savings.

Mr. REISCHAUER. You are mostly taking away potential consumption. We are a society that——

Chairman ARCHER. I don’t agree with that, Bob, because for right

now in my own personal financial situation, I have decided to take

assets that are invested in equities which are savings and convert

them into Treasury securities. No consumption is involved in that.

Mr. REISCHAUER. But there is somebody else who is buying your

other assets.

Chairman ARCHER. Well, perhaps. They may be buying them at

a lower price as a result of my selling, which means there is no net

increase in savings. This gets very complicated and we are not

going to solve all of it right here, but it is not as simple as sometimes it is presented to be.

But in the end, it seems to me that when we talk about whether

we are going to save Social Security with the unified budget surplus, I get lost because when somebody tells me that, they have to

also tell me how are you going to take the General Treasury dollars

and infuse them into the Social Security Trust Fund to save it. Because as I went through the fundamental analysis with Mr. Wilcox

earlier this morning, the payroll taxes are already saved. They are

in there. They cannot be spent for anything else.

So when you say we are going to save Social Security first before

we give income tax relief, you have got to be assuming that you are

going to take moneys out of the General Treasury that are part of

the unified surplus and some way infuse them into the Social Security Program in order to save it, and I wonder how you do that.

Mr. REISCHAUER. Well, if we had $100 billion surplus in our nonSocial Security accounts, the Treasury could go out and buy, on the

open market, securities that were held by individuals and give

them to the Social Security Trust Fund. But you don’t have to face

that issue because we are a long way from having a surplus in our

non-Social Security accounts.

Chairman ARCHER. I think I understand what you are saying but

I would present it differently, because the Treasury has no power

to give anything to the Social Security Trust Fund.

Mr. REISCHAUER. It would only do that if you passed legislation

instructing the Treasury to do that.
87

Chairman ARCHER. OK. So that analysis then would presume

that the Congress would change the law and permit a direct infusion of General Treasury funds raised out of the income tax revenues, and put that in the Social Security fund to stabilize it. And

I would suggest to you that——

Mr. REISCHAUER. I am not advocating that.

Chairman ARCHER. I understand, but it is fair though to think

about what are potential analyses, and—because I want to hear

what are the options, because I think there is an irrefutable opposition to every one of them, probably from AARP. And so we need

to clarify what we really mean when we say ‘‘save Social Security

first’’ before we can give an income tax reduction.

And also, it is very interesting to note that this issue popped up

this year in January for the first time. Where was it last year when

we did not have a projected surplus but had projected deficits, and

still gave tax relief? Wouldn’t that be an even greater undermining

of Social Security?

Mr. REISCHAUER. It was——

Chairman ARCHER. It disappeared then because everybody said

‘‘We are all for this and we can do this,’’ and nobody said anything

about Social Security in a worse economic environment than we

have now. And now we are told because we have a better economic

environment, we cannot give a tax reduction until we save Social

Security.

Mr. REISCHAUER. But you combine that tax cut with even larger

cuts in spending, so the net effect was deficit reduction over a 5-

and 10-year period, not over the 1-year period.

Chairman ARCHER. But, Bob, that does not matter. It does not

matter because the aggregate economic situation even with the

spending cuts was not as good as what the aggregate economic conditions are today. And we still did not see the argument that we

are in some way jeopardizing Social Security. Is that not accurate?

You are nodding, so I assume it is.

Mr. Cogan would you like to comment?

Mr. COGAN. I would offer another observation. If without a tax

cut the government spends more money, as I think they did with

this recent budget agreement, then the alternatives are not between a tax cut and reducing the national debt. They are between

higher government spending and a tax cut.

And Bob said something that is worth elaborating on in that regard. Bob said that the strength of the economy is critical for preserving Social Security’s solvency. He is absolutely right. One benefit of a tax cut—whether it is a benefit over and above debt reduction I will not get into a discussion on, I don’t think there is a very

good answer, although I don’t think that debt reduction is the alternative—one thing about the tax cut is that it will be good for

Social Security because it will stimulate the economy. It will provide for higher economic growth, and that higher economic growth

will ultimately benefit to some extent Social Security.

So I think that if the two alternatives are spending part of the

surplus as was done in the recent budget agreement, and cutting

taxes, I think you can make a compelling case on economic grounds

that it may be preferable for the Social Security Program to have

a tax cut.
88

Chairman ARCHER. Thank you for that comment.

Mr. REISCHAUER. Let me just say that I fundamentally disagree

with what John just said. We will duke it out in the hall.

Chairman ARCHER. I understand that there is a division between

the economic ranks out there as to that issue. But Bob, let me ask

you this, because I have great respect for you and I have great respect for the job you did here with CBO.

If we are to give an income tax cut this year, can there be in any

way the allegation that we have raided the Social Security Trust

Fund? And that is a simple yes or no answer. You don’t have to

go into a long explanation.

Mr. REISCHAUER. You know analysts never have yes or no answers. But in the accounting sense you are dead right.

Chairman ARCHER. OK. Now because if you had said it could,

then I would say to you we raided it double last year, then, and

it had the support of all of my Democrat friends and the President

of the United States. If in fact a tax cut, an income tax cut is raiding the Social Security Trust Fund at this present juncture in time,

we did it in spades in 1997 with the total approval of my Democrat

colleagues and the President of the United States.

I have more than exhausted my time, and I recognize Mr. Levin.

Mr. LEVIN. I would love to carry on the discussion.

Chairman ARCHER. I suspected you might be tempted.

Mr. LEVIN. I think it really underlines the utility of our having

these discussions within our own ranks. While you were gone, I

commented on the notion that the President should go first. I really

think what we need to do is to have a bipartisan discussion within

the Congress.

Bob, I also wanted to say to the Chairman, I applaud you for the

composition of this panel. You know, on a lot of issues, the majority—and we did it the same way—picks most of the witnesses and

then the minority picks its witness, and I am not sure exactly who

picked which witness. I have a hunch on some of you, but I do not

on the others. I don’t know who picked Dr. Stein, whose testimony

I think has been very helpful, or you, Chairman Ross.

I think, Mr. Chairman, the answer to your question is that when

we talked about saving Social Security first, what we meant was

that none of the unified surplus should be spent until we put Social

Security on a sound basis for the long term. And a number of the

proposals, especially of the privatization proposals, indeed would

seem to be utilizing the unified surplus in the longer run if not in

the shorter run, because there is no other way in some cases, it

would appear, to make them work unless you drew upon the general operating moneys.

And why was it not the same issue in 1997? In part it was because we paid for the tax provisions. And I know that the terminology that was used by some in the campaign maybe sticks in the

craw of you and others. I think now is the time, though, to go on

and talk about how we resolve the problem before us.

So let me just ask a quick question to Bob Reischauer. There was

reference in your testimony about the impact of Social Security on

the social safety net. I don’t think it is well understood, and it relates to women, I think, and the disabled especially. Briefly de89

scribe what the meaning is. You could call it the progressivity and

related provisions in Social Security.

Mr. REISCHAUER. The term that we have used in our book is ‘‘social assistance.’’ The Social Security Program provides a lot of social assistance that could not be provided in a purely privatized

system. That social assistance comes in various forms. It comes

through providing workers with low average lifetime earnings a

higher payback on their payroll tax contributions than workers

who have had high earnings throughout their lifetimes.

It comes through providing benefits to spouses who have not participated in the paid labor force for sufficient time over their life

to get a worker’s benefit. It comes in the form of survivors benefits.

When a spouse dies, the survivor gets 100 percent of the primary

worker’s benefit. It comes in the form of benefits for divorcees

based on their previous spouse’s earnings record. If you are an individual who has been married for 10 or more years to a worker and

you have not been remarried when you reach retirement age, you

get either a worker’s, a spouse’s, or survivor’s benefit based on the

work history of your spouse. And in a society where about half of

marriages end in divorce, this is a terribly important benefit.

There are many forms which social assistance comes. Together

they make Social Security the program that removes the most people from poverty that we have in our arsenal of public policies. It

is one that has done this job without much controversy. And so we

should think very carefully about any kind of reforms that might

jeopardize that great achievement.

Mr. LEVIN. Thank you, Mr. Chairman.

Chairman ARCHER. Thank you Mr. Levin.

Which one of you wants to go first? Ladies first. Mrs. Johnson.

Mrs. JOHNSON of Connecticut. Thank you, I would like to, if we

have time, Bob, hear you talk a little bit more about why you think

a tax cut funded by a surplus does not drive more economic growth

than spending from surplus. Because I think those are—at least

that is what I heard behind your discussion. But I do have a larger

issue. Let me put the larger issue on the table.

Mr. REISCHAUER. I would make no distinction between a tax cut

or an increase in spending.

Mrs. JOHNSON of Connecticut. Well, really the debate, what happened in the last session was we took $20 billion of the surplus for

spending. Some of us wanted to take a little of the surplus for tax

cuts, and it seems if you take surplus and you spend it for tax cuts,

you drive the economy more effectively than if you take the surplus

and spend it for spending.

Mr. REISCHAUER. That gets into the debate that I have with

John, which is which policy would produce more economic growth?

And the answer is in the detail. What kind of tax cut are you talking about? What kind of spending increases are you talking about?

By and large, I think most of the tax cuts and spending increases

that the Congress has been considering and that the administration has been proposing have very little to do with economic growth

and a whole lot to do with increased consumption.

Mrs. JOHNSON of Connecticut. OK. The issue I want to put on the

table, though, goes sort of beyond that. There has been a lot of discussion about generational equity. And those who want to spend
90

every dollar of the surplus to solve the problems in Social Security

are really taking the position that the current generation, which

sets aside 15 percent of its own income to support retirees, must

set aside 20 percent possibly of its income to support retirees. I

don’t see that as any different than outright raising Social Security

taxes.

Mr. Ross’ material shows that if you solve the Social Security

problem entirely by raising taxes, you go from 12 percent to 18 percent and eventually up higher. When you add Medicare to that, you

are basically looking at currently 15 percent up to 20 percent.

Frankly, I think that is just outright unaffordable, unaffordable

to the younger generation. They won’t be able to buy houses and

educate their children and have the quality of lifelong education

they need for their careers and so on and so forth.

So I think a 20-percent tax burden simply with the retirement

population is generationally unfair. But if you dedicate every dollar

of this surplus to that generational purpose, you probably will effectively increase taxes just as much. It will just be a different tax.

Now, I would like you to comment, because you have done a lot

of thinking about this, on this issue of generational equity. What

is our obligation to use some of this surplus for other purposes, and

to find a solution for Social Security that does not take every dollar

of the next 10 years of surpluses so that one generation can support another generation?

Mr. REISCHAUER. In a very real sense this is water over the dam,

because for the first 40 or so years we ran a pay-as-you-go Social

Security system in which beneficiaries got a tremendous payback.

And we can argue about whether that was fair or not. Many of us

think, given the wealth of the country, it was the appropriate thing

to do.

Since 1977, and then reaffirmed in 1983, we have tried to partially fund the Social Security system. Most of the reform proposals

that are being debated now suggest that we should more fully or

fully fund Social Security’s obligations for the future. I am in favor

of doing that.

But if you decide to do fund the system, there is no way around

the fact that some generations are going to have to pay twice, because $3 out of every $4 that everybody in this room is sending

into the Social Security system right now goes right out the door

to pay our parents or grandparents, our uncles and so on, and very

little is left over for us.

If we want to fully fund our retirement benefits, it is going to

cost us more as long as we decide not to cut back on the benefits

of current beneficiaries. And so this is a value judgment for society.

Should we fund the program more fully, or is it more important to

devote resources to education or to reduce taxes? That is why we

hire you.

Mrs. JOHNSON of Connecticut. That is why it makes it so very

important to look at the issue of how do we fully fund those benefits. Do we fully fund those benefits for the current generation and

the coming generations through tax increases or from one source

or another, or do we fund them in part through stimulating the investment of new capital into that system, which is what the private

investment and the compounding of a higher return would do?
91

Mr. REISCHAUER. Or as Dr. Stein as pointed out——

Mrs. JOHNSON of Connecticut. One last statement. I don’t know

whether in your book you look at whether or not the option of

doing this through—even through the pension system, so that people who had pension plans subsidized by the government would be

affected by Social Security a little differently.

Mr. REISCHAUER. We do not look at that in the book, although

I would like to reiterate what you and others have said which is

that all retirement policy should be looked at as a whole. That is

really is a terribly important point. And I agree with it completely.

Mrs. JOHNSON of Connecticut. Thank you. My time has expired.

Mr. SHAW [presiding]. Mr. Collins.

Mr. COLLINS. No.

Mr. SHAW. I have a couple of questions. I haven’t heard anybody

really touch on something that I think we should be thinking

about. Some of these graphs that have been supplied to the Committee show very clearly that we are going to reach a point where

the trust fund is going to have meltdown, whether it has private

securities in it or public securities in it. What effect is that going

to have—or has anyone done any research on the effect that you

would guess that that would have on the marketplace, when we

start putting all of these things into the marketplace and cashing

them in in order to take care of the benefits? I would throw that

out to anybody who might be able to shed some light on that.

Mr. COGAN. Well, the issuance of large amounts of debt—and believe me, financing the currently promised Social Security and

Medicare benefits would involve issuing an extraordinary amount

of debt—cannot help but slow the growth of our economy.

The issuance of debt acts as a double tax on future generations.

One tax comes from the fact that the debt has to be serviced and

the second comes from the fact that the standard of living will rise

more slowly as the higher debt retards economic growth.

Mr. REISCHAUER. Let me add a footnote to John’s answer. If the

surpluses projected by the Congressional Budget Office or by the

Treasury really materialize, and are not spent, and the assumptions are correct, by 2015, 2020, we would have very little debt. By

2015 the debt-to-GDP ratio would be lower than it has been since

before 1920. This would mean that when you tried to resolve the

Social Security problem, you could go out and borrow from the public without getting to a position anywhere near where we are today

for a few years.

But as John’s tables show very clearly, that is not the long-run

solution. It buys you maybe 5 or 10 years of time to adopt a solution, but at that point the politics of the solution would just be, I

think, impossibly difficult.

Mr. SHAW. Do any of you all care to comment on what was just

said? The point that I am trying to make, and I am probably not

making my question quite as clear as I should, is when you start

cashing in these securities, whether they be stock, personal savings

accounts, or all of these things, what effect is that going to have

on the market, whether we are talking about Treasury bills, corporate bonds, or corporate stock? Has anyone done any studies on

the effect on markets?
92

Mr. REISCHAUER. Some of John’s colleagues at Stanford have

done estimates. The real issue here is what is national and world

saving at that time. While the baby boomers might be selling their

assets, their stocks, there will be others who are younger, who are

richer than we ever hope to be, who will be buying stocks. Those

individuals might be people in Peoria or they might be people in

Singapore, now that we have an integrated world market. You really do not know what is going to happen to financial asset values

as a result of the disinvestment by baby boomers, if they had substantial individual accounts with these assets in them.

Mr. SHAW. So you don’t think it would have a marked effect on

the market?

Mr. STEIN. But it is negative as compared to not having to sell

all of those.

Mr. COGAN. There is only the question of magnitude.

Mr. REISCHAUER. Is it a small effect or large effect? My seat-ofthe-pants estimate would be a small effect. But I would defer to

others who have studied this.

Mr. COGAN. We have never had to issue as much debt in peacetime as we would. We have never had to sell off as many equities

as we would to finance the baby boom claims. So it is very much

outside of our experience. Hence, the calculations that economists

have made are very, very imprecise. As Herb and Bob said, the direction is clear but the magnitude is quite unclear.

Mr. REISCHAUER. The more interesting area, of course, is housing

values, because markets for financial securities are worldwide and

demand is insatiable. People do not own two primary residences

and people in Florida do not want to buy a house in Elmira, New

York. And so you could see, I would imagine, much more substantial effects on real estate prices in some parts of the country.

Mr. MATSUI. Mr. Chairman, may I just ask Dr. Stein, he was—

Chairman Archer and Mr. Reischauer were talking and Dr. Stein,

I think you wanted to say something. Would you mind stating what

you were going to say?

Mr. STEIN. I wanted to say something to Chairman Archer, but

he is gone so it doesn’t really matter.

Mr. MATSUI. Perhaps for the record, because I was following the

debate and I wanted to get your point of view.

Mr. STEIN. I guess basically what I am trying to say is that you

need to get this analysis out of the framework of puts and takes

within the budget, between one budget and another part of the

budget. You need to put it in the system of national accounts and

see what it does to savings and investment and consumption and

to the rate of economic growth.

So I think one consequence of all of this discussion is maybe to

raise the stage a little bit to a more general world, because these

puts and takes between the two kinds of budgets really don’t matter. What matters in the end, if you are going to pay these benefits,

is you want to have a richer economy out of which to pay them,

and how do you do that?

And doing something about the surplus is one way, and maybe

doing something about the taxes and maybe doing something about

education, and of course it may be that we are on the brink of a

new technological revolution in which the economic growth will be
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3 or 4 percent per annum and not 21⁄2 percent. That will make a

big difference in all of these things. I think you have got to put these issues in a much broader per- spective, and that is one reason why I originally said I thought we

ought to get some overall view from the President, not just about

Social Security but about what is our policy with respect to budget

surpluses. We have—even without respect to Social Security—we

have no policy in this country about budget surpluses. We only

know deficits are a bad thing. We don’t know anything about surpluses and we don’t know what we think about economic growth,

and that is all very relevant to Social Security discussions.

Mr. SHAW. It has been a very interesting panel. We very much appreciate you taking your time to be with us today. And I think

we all learned quite a bit from you. But you may be called back

because we might find ourselves in a deeper hole in a couple of

months. Who knows? Thank you very much.

[Whereupon, at 3:03 p.m., the hearing was adjourned.]

[Submissions for the record follow:]

Statement of Hon. Rosa DeLauro, a Representative in Congress from the

State of Connecticut

On November 3rd, the American people sent Congress an unmistakable and indisputable message: work together in a bipartisan manner to forge a consensus on

‘‘kitchen table’’ issues important to their families, such as Social Security reform.

Social Security is one of our nation’s greatest success stories, especially for women.

This financial safety net has kept millions of seniors out of poverty, and is an essential source of income for retired women. Although women make up roughly half of

America’s population, they account for sixty percent of Social Security beneficiaries.

Three-quarters of unmarried and widowed elderly women rely on Social Security for

over half of their income.

The aging baby boomer generation has precipitated a national debate about how

to best protect retirement security in the future. As America’s baby boomers reach

their golden years, there are fewer taxpayers to cover the cost of their retirement.

In 1950, there were 16.5 taxpayers for every Social Security recipient. By 1997, this

ratio had dropped to 3.3 taxpayers to every recipient, and it is expected to fall even

further.

The time for reform is now. As Congress considers the various Social Security reform proposals that will be presented over the coming months, it must consider the

unique potential effects these proposals may have on women.

Women spend less time in the workforce, because they take an average of 11.5

years out of their careers to care for their families. As a result, fewer women than

men have private pensions through their work: 40 percent of women, compared to

44 percent of men. These pensions tend to be worth less than those received by men.

According to the National Economic Council’s Interagency Working Group on Social

Security, among 1993–1994 new private sector pensions annuity recipients, the median annual benefit for women was $4,800. This is only half the median benefit received by men. Furthermore, during their years in the workforce, women earn an

average of 70 cents for every dollar men earn. In fact, the average female college

graduate earns little more than the average male high school graduate. Thus,

women receive lower Social Security benefits in old age.

Any changes must be thoroughly researched and carefully considered to maintain

Social Security’s successful underlying foundation—a guarantee of financial stability

in old age. Women, and all Americans who work hard and play by the rules, must

be assured that their years of hard work will be rewarded, not punished with risk

and insecurity.

In August, I joined many of my female colleagues in the House at a press conference to raise awareness of this important issue in Congress. Social Security reform will top the agenda of next year’s Congress and women, now and in the future,

have a great deal at stake in the future structure of the Social Security system. It

is essential that Congress be committed to ensuring that the financial security of

women be protected in their old age. I look forward to working with my colleagues

to meet this challenge in the coming months.
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94

Statement of Ric Edelman, Chairman, Edelman Financial Services, Inc.

Mr. Chairman, I am honored to submit this statement to the Committee on the

future of the Social Security System and what new, innovative ideas I might be able

to bring to this debate. I am also pleased that in seeking information on this issue,

the Congress has sought input from someone like me who has spent the last 15

years of his life giving families sound financial planning advice and guiding them

towards financial security. My perspective comes from my activities both as a provider of financial services and as one of the nation’s leading educators in the field of personal finance. By way

of background, I am the author of two New York Times bestsellers, The New Rules

of Moneyand The Truth About Money, with a revised edition of the latter due in

bookstores later this month. My award-winning radio program, ‘‘The Ric Edelman

Show,’’ is heard on WMAL in Washington, D.C. and WLS in Chicago. I also host

the national television show ‘‘Money University’’ on America’s Voice cable network,

write a syndicated column, publish a newsletter, and run a major advice area for

America Online. I am on the faculty of Georgetown University, and my company,

Edelman Financial Services Inc., manages almost $1 billion in client assets, establishing my firm as one of the largest financial planning companies in the nation. When I last came before this Committee’s Subcommittee on Social Security in June, I testified that giving Americans unrestrained opportunity to privately invest

their Social Security assets in the equities markets was a mistake. In point of fact,

out of the nine panelists that testified, I was the only one who did not believe that

Social Security should be completely privatized. I still do not. Why? Because the majority of Americans do not understand the basic principles of investing. Consequently, I think most people would be exposed to fraud and abuse

if left on their own to invest for retirement.

Because of my background, you might assume that I would have been strongly in favor of privatization, and the incredible amount of money which would have

flowed into the stock market and into the money management and financial planning industries. But in the end, in my estimation, the risks do outweigh the rewards. The majority of Americans do not know the proper way to invest, nor do they know how to hire

and work with a financial advisor. Although I and my colleagues are trying to make

Americans more educated about investing and becoming more involved in their own

financial future, many still do not understand such fundamental investment basics

as the power of compounding or diversification. Complicating matters would be the

contradictory advice emanating from the financial community as each organization

strives to capture the assets of American workers. Furthermore, experience shows

that most Americans tend to emphasize risk over performance when it comes to investing and left to their own discretion, far too many Americans would invest their

assets in the wrong asset classes, defeating the goal of improved performance that

this privatization issue seeks to achieve.

This could lead to great, sudden stock market outflows of Social Security assets by consumers, acting emotionally with their investments, and having a disastrous

effect on the stock market. Today, too many consumers believe that stock prices only

rise. What will be the sentiment when stocks fall, as they did recently when the

Dow fell to about 7,000 and nervous investors wondered whether to flee the market?

As I rhetorically asked in June, what happens when—not if—the nation enters a

true bear market—something that hasn’t happened for nearly 30 years? Unfortunately, there is still some critical discussion going on in some circles that urges investing Social Security assets in the private sector. If the Congress still sees

this as a possible viable alternative to securing the System’s future, I would like

to briefly reiterate my proposals on this issue:

Prior and existing Trust Fund assets should not be invested into equities.

A portion of new contributions to the Trust Fund should be directed toward equities, limited by Congress to no more than 25% of future contributions.

Each American worker should declare annually on their W–9 form what portion

of their current Social Security contributions they wish to be invested into stocks,

up to 25%.

Each annual election must be irrevocable, meaning that workers will not be able

to rescind their previous W–9 declaration, and such designated monies must not be

withdrawn from the stock market until the assets are needed to make payments to

Social Security beneficiaries. Withdrawals or redemptions for any reason—and especially because of concerns over current market conditions—must be strictly prohibited.
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1 Results based on $5,000 earning 10% per year, compounded annually. Calculation does not

reflect any charges or fees that might be applicable; such charges or fees would reduce the return. This figure is for illustrative purposes only and does not reflect the actual performance

of any particular investment. Investment results fluctuate and can decrease as well as increase.

Continued

The equity portion of the Trust Fund would be invested into a broadly-based equalization (unweighted) index comprised of at least 2,500 U.S. stocks. A

capitalization-weighted index must not be used. As explained in my book, The New

Rules of Money, index funds that mimic the S&P 500 Stock Index are poor investments, for the following reasons: In a capitalization-weighted index, like the S&P 500, the biggest companies have the biggest effect on the index, instead of each stock having an equal effect. For example, a 10% gain by the #1 company would have a much bigger impact on the

index than a 10% gain by the smallest company. It also means that the index would

buy more of the biggest stocks than the smallest stocks. And the higher a company’s

stock price gets, the more the index fund would buy it. It sounds bizarre, but it’s

true: Index funds buy more of a given stock merely because the stock has already

risen in value.

Because index funds tend to hold disproportionate amounts of stock—holding much more stock of big companies than it holds of little ones—it’s impossible to

maintain a balanced portfolio. If a stock grew in price, a typical money manager

might want to sell some of it. But in a capitalization index fund, you can’t. Instead,

the fund will buy even more—at the new higher prices. This explains why S&P

Index funds have as much money invested in the 50 biggest stocks as in the other

450 combined. The result is that such index funds make money only if the biggest

stocks make money, because big gains in little stocks don’t make much difference.

Thus, index investors were lucky in 1996: Six of the S&P 500’s biggest stocks collectively produced 26% of the index’s total gain. Put another way, just 1.2% of the

holdings produced 26% of the profits, while the other 494 stocks in the index earned

the rest. The Congress must not create an investment whose results are so dependent on such lopsided performance.

The format I propose here is similar to that currently used by the Federal Election Commission:

Previously-received federal revenue is not used for federal matching contributions.

Congress determines the maximum annual allowable contribution by each tax- payer; currently set at $3. Each taxpayer chooses whether or not to make this contribution.

Once the election is made, taxpayers cannot change their mind.

The Government determines how the assets are to be ‘‘invested,’’ or distributed,

among the candidates. The individual consumer plays no role in this decision. The Campaign Contribution program is very efficient and effective, and a similar program can be created as easily by the Social Security Trust Fund. Now I would like to turn the Committee’s attention to the underlying question I often ask my clients: ‘‘Do you think Social Security will exist when you retire?’’

When I ask that question in my financial seminars, those over age 45 say ‘‘yes’’ and

those under 45 say ‘‘no.’’ As a planner, I personally believe and tell my clients that

Social Security will continue in some form, but I make no predictions about what

the benefit levels will be or how old you’ll have to be to receive them. However, dire predictions of the demise or diminution of Social Security benefits has made many of my clients concerned that Social Security may not exist as they

know it by the time they are ready to retire, let alone be there for their children

or grandchildren. That is why I am taking this opportunity to bring to this Committee’s attention the revolutionary new retirement planning tool from Edelman Business Services

Inc., known as the Retirement InCome—for Everyone TrustTM. In just the past few months alone, hundreds of Americans have invested well over $1.25 million in the

RIC–E TrustTM as a first step towards ensuring the financial security of the kids

and grandkids they love and as an adjunct to the current Social Security System.

Let me briefly explain the history of the RIC–E TrustTM, what it is, how it works

and why I consider it a viable and complimentary addition to the present Social Security System.

More than a year ago, I took a call on my Saturday morning radio show from a

listener who wanted to save for his son’s retirement. I thought it was a crazy notion,

but it got me thinking: Imagine if you could set aside money for a child, for 50 or

60 years. The potential compounded growth, for example, could be this: $5,000 invested for 65 years, assuming the 10% annual return which the stock market has

produced since 1926, would grow to $2,451,854.1
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Figures do not take into consideration time value of money or any fluctuation in principal. Your

tax liability may vary depending on your particular circumstances. Please consult your tax advisor.

Most people only think about saving for a child’s college. That’s great, and cer- tainly worthwhile. And if you start early enough, you won’t have to struggle as

much to pay for college when the bills come. But what’s the real purpose of going

to college? For many, it’s so the child can get an education and get a good job. Then, with a good job, he or she can earn a decent wage so they can save for their own retirement and hopefully live comfortably. Well, why not cut-to-the-chase and put some

extra money away for the child’s retirement in the beginning? You see, the biggest factor in a child’s favor is time. That’s because time gives money the chance to grow, through compounding. Given enough time, a tiny sum

can grow into a fortune. Although this concept seems simple enough, making it a reality is not. There were three major issues to creating the RIC–E TrustTM: taxes, the law, and the ability to deliver it economically. First, investment profits are typically subject to taxes,

and when a trust is used as in the RIC–E TrustTM, the taxes are at the highest rate.

These taxes would be so costly, in fact, that it would be virtually pointless to even

create such a trust.

Second, if a Uniform Gift to Minors Account (UGMA) or Uniform Transfer to Minors Account (UTMA) is used, the child—by law—takes possession when he or she

turns 18 or 21. Clearly, a person that young is not thinking about retirement.

Therefore, it would be in the child’s best interest to set aside this money beyond

their reach, so it’ll be there for their retirement.

Finally, the typical costs to hire a lawyer, trustee and investment advisor would erode much of the economic gains that the trust might enjoy. After employing two accounting firms and 11 teams of lawyers, the three obstacles facing the RIC–E TrustTM have been solved. Now every parent and grandparent who opens a RIC–E TrustTM, can be assured that their contributions will be preserved for one sole purpose: helping to secure their child’s retirement. As the creator of the RIC–E TrustTM, I made enrolling as easy as possible. First, an interested consumer fills out and returns the enrollment form and one-time setup fee of $300. The consumer then receives a confirmation letter, an attorney directory and a $150 certificate towards the payment of that attorney’s fee. Since a trust is a legal document, an attorney is required to prepare the RIC–

E TrustTM. That’s why investors will receive an attorney directory, which lists the names of attorneys in their area who can prepare the trust for them. After an investor obtains the RIC–E TrustTM Specimen Trust Agreement from their attorney, I or an associate of my financial planning investment advisory firm,

Edelman Financial Services Inc., (or another individual financial advisor selected by

the client) will establish an investment account in the Trust’s name. Resources

Trust Company, one of the largest and most reputable trust companies in existence,

has agreed to serve as Trustee, and to do so for free for the entire life of the Trust,

provided that the investor uses the pre-approved Specimen Trust Agreement. Resources Trust manages more than 200,000 accounts holding nearly $14 billion in assets. An investor can select a different trust company if they wish, but they will

need a Trustee who is able to serve for the entire life of the child, and it is highly

unlikely that they will find another trust company willing to serve at no cost. When the child reaches retirement age (which is any age the investor chooses, but no younger than 59) the Trustee will distribute the assets to the child. I’ve included

more information about this and Resources Trust with my statement. Once the Specimen Trust Agreement is in place, the investor funds the Trust with their contribution ($5,000 minimum). The Trustee will have this money invested in

the proposed tax-deferred investment, with the assistance of the financial advisor

the client selects. Using a tax-deferred investment is important, because avoiding

annual income taxes allows the investor’s contribution to grow and compound over

the child’s lifetime, without paying taxes on the potential growth until his or her

retirement (more specific information on tax deferral, and on selecting a financial

advisor, is also enclosed).

After the child grows up and reaches the ‘‘age of distribution’’ (again a minimum

of age 591⁄2), he or she receives the assets from the Trust. When the child receives

the money in retirement, he or she will pay taxes at that time. In the event the

child dies before reaching the distribution age, the money reverts to their estate,

and is distributed to his or her heirs.

One important point about the RIC–E TrustTM is that each Trust is only established for one child. So, if an investor wants to provide a RIC–E TrustTM for more
97

than one child, he needs to create separate RIC–E TrustsTM. Each child can have

an unlimited number of RIC–E TrustsTM and an investor can create as many RIC–

E TrustsTM for as many children as they like.

One of my key goals as the creator of the RIC–E TrustTM was to make this revolutionary planning tool affordable to the general public. In order to accomplish that

goal, it was important that the Trust’s potential earnings not be ‘‘chiseled’’ away

with fees. That’s why it’s so important that Resources Trust Company has agreed

to serve as Trustee for free (provided that the Specimen Trust Agreement is used).

And, if I or another associate advisor of my investment advisory firm, Edelman Financial Services, serves as Financial Advisor, the applicable investment advisory

fees will be waived as well, for every RIC–E TrustTM created. The Financial Advisor

will receive compensation on the ultimate sale of the investment used to fund the

Trust. And in order for the client to enjoy those free benefits, they must have the

RIC–E TrustTM prepared by an attorney who’s a member of the RIC–E TrustTM Attorney Network, because many of these attorneys tell us that they often accept the

$150 Certificate as full payment for their services.

What do ordinary, hard-working Americans have to say about this new concept?

Here’s what three Northern Virginia families think. Walt Szczpinski, an information

technology executive and former naval officer, said he has arranged this new Trust

for his three grandchildren, so they can have a secure financial future long after

he is gone. Renee Culbertson, a marketing manager and widow, said she worries

that Social Security may not exist when her young daughter needs it. So Renee has

put money aside in the new Trust, assuring that money will be there for her child’s

‘‘golden years.’’ Financial planners John and Mary Davis felt that by investing in

this unique, planning tool, their two young girls will have a great headstart on their

retirement savings, and can focus on other financial challenges the kids will face

as they grow into adulthood.

In summary, Mr. Chairman, I want to commend you and the Committee for convening this hearing and having the political courage to air out all of the new ideas

aimed at saving -or as in the case of the RIC–E Trust—complementing, the current

Social Security System. For many years, Social Security Reform was the ‘‘third rail’’

of politics, and change was shunned by both ends of Pennsylvania Avenue. It is

healthy for this Committee to discuss changes that were unthinkable just a few

years ago—cutting benefits across the board, raising the payroll tax, raising the age

at which retirees become eligible, and yes, even letting workers contribute to their

own security accounts that the government or the workers would manage.

But as this debate moves forward, I want to point out to this Committee and the

Administration that some of the American people are not sitting idly wondering if

Social Security will be there for future generations.

Instead, many investors, as evidenced by our own clients, are taking the idea of

‘‘privatizing’’ the Social Security of their own sons and daughters and grandkids into

their own hands, by investing in retirement tools such as my own RIC–E Trust, as

a form of ‘‘safety net’’ to the current Social Security System.
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1 URL: http://www.geocities.com/∼futuralzine

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[Enclosures are being retained in the Committee files.]

My name is Ed Forsman, I am an artist living in Phoenix, Arizona, where I pubStatement of Edwin E. Forsman, Futura Magazine, Phoenix, Arizona

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lish a magazine on the Internet as part of my work. I am a private citizen representing my wife, my two children, and my two parents. I am making a copy of

this testimony available on the Internet, to encourage other citizens to step forward

and add their voices in the debate over Social Security Reform.1
99

2See Shay’s Rebellion, circa 1787

Thank you for this opportunity to file a written statement for consideration by the

committee. I, too, feel that the reform of Social Security is of the utmost importance,

particularly in light of the evidence that in just fourteen years, Social Security will,

by all accounts, be paying out more than it will be taking in.

Any discussion of meaningful, bipartisan, democratically instituted reform of the

Social Security System, must include an honest, straightforward discussion of what

reforms are needed in Congress itself. All of today’s testimony before this Committee

is in basic agreement on that point; it is the actions of Congress itself that have

brought about the need for reforming the system.

This committee does not have to be reminded that a majority in Congress have

been crying out for campaign finance reform for 30 years, yet have remained paralyzed by the very thing that is in need of reform: money. This is directly related

to any meaningful discussions involving how our nation deals in a truly democratic

fashion, with its elderly, its sick, or with raising the standards of living for all of

its citizens.

In considering the statistics cited at this Hearing in the statement of the Chairperson of the Social Security Advisory Board, only 20% of Americans are even aware

that they will be laboring an additional two years before they are allowed to rest,

and 70% of our Nation’s citizens would oppose the raising of the retirement age if

they had a say in it; yet, Congress has already passed this increase in the retirement age into law. Given the historical significance of this day, it is difficult to interpret these statistics in any other meaningful way, other than to raise the question as to why Congress is doing a far better job of informing voters about the details of a President’s sex life, than it is of informing them about what Congress is

doing in their lives.

The question as it relates to meaningful Social Security reform is not only a recognition that Congress has brought about this need for reform, but what can be

done to reform Congress?

If we are to honestly consider meaningful reform of the Social Security system,

we must unabashedly examine the nature of our system of transferring wealth from

one segment of society to another, coupled with the apparent paralysis of a Congress

in carrying out meaningful, democratically instituted reforms.

The recent DNA evidence regarding one of our most cherished national and historic figures, Thomas Jefferson, confirms that the majority of our nation’s founders

were, if not comfortable with, at least inextricably locked into a flawed system of

economics that could not function without taking advantage of another’s labor.

Historically, rising standards of living have never been permanently arrived at by

tinkering with one fund for the benefit of another, nor by the printing of money,

nor by investing in speculation. Rising standards of living have always been caused

by broadening the base of political power, and increasing democratic participation

in the institutions of power. How then do we do that now? And can our technology

assist us in this task?

Africans living in America did not attain a better standard of living because slavery was reformed; they attained it because slavery was abolished. Americans who

happened to be white and laboring under indentured servitude did not profit from

that system until they were freed from it.

The economic system adopted by our founding fathers was something they were

not strong enough to invent, like the Declaration of Independence. It was an economic system from which they were helpless to extricate themselves. It took less

than a decade in a new nation functioning under that flawed economic system before an even larger revolution took place. History records that General Washington

had to muster a larger army than he had used to throw the British out, in order

to subdue that second, American revolution; and a National Constitution had to be

formed as a result of it.2

The revolution we ought to be reexamining in our national dialog has never been

the one about throwing the British out. That revolution of 1776 with its Declaration

of Independence was a revolution concerning British subjects, rising against a British Crown.

The revolution we ought to be debating in our national discussion about Social

Security is the revolution that reached its climax in 1787. That was the first revolution of American citizens, free from external rule, who were raising a revolution

against American lawyers, bankers, and speculators who ran legislatures that controlled the printing of money.

Those same, systemic problems which gave rise to that revolution ought to be the

focus of our attention in any debate about Social Security reform.
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3 Bob Dylan, circa 1963

The first genuinely American revolution was against an economic system which

allows those with money who produce only ‘‘services,’’ to take advantage of those

who produce something tangible, but require the services of others in order to increase their productivity. It is this revolution that forced the drafting of a national

Constitution, the Bill of Rights, and the birth of our Nation.

In order to survive its infancy, our nation had to compromise with seriously

flawed, but very powerful economic institutions that have never yielded their power

willingly. It was our infant nation’s weakness that reached unwanted compromises

and allowed an outdated world financial system to stay where the British had been

forced to leave. Those compromises and that weakness quickly led to the Civil War,

followed by a series of national and world wide depressions which catapulted the

world into World Wars, the Russian Revolution, and ultimately the total waste of

a 50 year cold war. This list of human suffering will continue to expand as long as

systems are in place that allow power to take advantage of the labor of those without power, and allows money to exert more influence than humanity.

Had machines been available that could keep track of 400 million transactions per

second in 1787, the arguments of Hamilton, Jefferson, Washington, and the New

York banking interests would probably have been quite different. i.e., ‘‘If I use my

ATM card, why is there a bank between me and the Treasury where we print my

money, keep track of its debits and credits for the proper measure of my production

or consumption, and control its manufacture through a democratic process?’’ Or: ‘‘If

I can attend Congress through my modem, participate in its debates on issues that

concern me, cast my vote and have it tallied at the speed of light; what real role

should a Representative be assigned; and is there any part at all to be played by

paid lobbyists in such a democratic system, even if they come in the guise of ‘think

tanks’?’’

These are the questions that need to be addressed here and now, because what

is conspicuously absent at these, as in most Congressional Hearings, is the average

person who will be most affected: the citizen who actually produces something

consumable with his labor, and therefore should be most interested in changes proposed to the Social Security System.

What could be done to make the will of the people more audible in Hearings such

as these? For the price of a used video camera and a donated computer, this committee could make itself available to citizens who, by right, ought to be present here

and at each and every one of Congress’ meetings.

Let the Committee begin here and now. Let the American people into these Congressional committees now, then begin to listen to their advice.

To seriously consider the continual raising of the retirement age of working citizens, or schemes to recalculate the rate of inflation, or an establishment of undemocratic institutions that funnel the funds of workers into companies that produce the

likes of cigarettes, napalm and other machines of destruction; then allow ‘‘fund managers’’ familiar to Wall Street and Congress to skim a percentage off the top, is not

only marching backwards in time to drums turned upside down, it is in direct opposition to the will of the people, corrupting of everything democratic and, in light of

the statistics as they have been laid before this committee today, deserving of a general rebellion such as Shay’s, if enacted.

Today happens to be a meaningful day in history. But it is as ironic as it is symbolic, in that as a private citizen among the vast majority of citizens residing outside of Washington, D.C., I found myself having the Impeachment Hearings being

thrust upon me by commercial interests using public airways, against my will;

whereas when I voluntarily tried to attend these Hearings on Social Security, and

attend to the questions and answers surrounding my retirement; using a publicly

financed Internet, for non-commercial reasons; I was unable to attend despite my

fervent wish to do so.

This day ought to be a historic one for other reasons: for not only is it a day when

Impeachment Hearings were opened for only the third time in our Nation’s history,

it may be the first time in American history that our Nation’s citizens began to reclaim their rightful place in Congress by way of a computer revolution.

As one of our Nation’s poets once admonished, ‘‘Come Senators, Congressmen,

please heed the call, don’t stand in the doorway, don’t block up the hall.’’ 3

Respectfully submitted this 19th day of November, 1998.

EDWIN E. FORSMAN

Publisher, Futura Magazine
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Statement of the Generation X Committee on Social Security, Tax Reform

and Economic Justice

The Generation X Committee on Social Security, Tax Reform and Economic Justice welcomes this opportunity to submit comments for the record to the House

Ways and Means Committee on the process for considering legislation to save Social

Security. We believe the question of process will, in large part, define both the debate and the mix of possible solutions considered.

First, we are concerned that a process which starts with a proposal from the Administration will confine the debate to options which the White House will find politically acceptable. Such a proposal would constitute the opening salvo in the 2000

presidential elections, including limited privatization to reach out to moderate Republicans and measures to shore up the current system to please the Democratic

base. The response to these proposals will be predictable, with the Vice President’s

likely Democratic opponents challenging any privatization. The likely Republican response of many Republican members and candidates will then be attacks on the

White House plan, repeating the style of debate used to oppose the President’s

health care reform proposals in 1993 and 1994. Such a limited debate will result

in much heat and very little light.

Secondly, we believe that a piecemeal debate on Social Security reform alone, tax

reform alone, Medicaid alone and Medicare alone will result in solutions which will

neither work nor pass. Currently, there are separate discussions of each of these

issues. However, to reform one you must reform all. To make progress on these

issues, they must be considered together.

Only a global approach will result in the comprehensive reform needed to assure

the baby boom generation of a sound retirement without breaking the bank and the

backs of the succeeding generations, especially Generation X and those at the tail

end of the Baby Boom. Such comprehensive reform should also make real gains in

creating a more just society, both at home and globally, taking into account the

needs of the poor, the unborn and those who come to this country as immigrants

(both legally and illegally). While we are skeptical of the ability of the current establishment to undertake such visionary leadership, we continue to hope that such

things are possible and will offer such a comprehensive solution.

We urge the Committee, in concert with the Senate Finance Committee and the

Administration, to initiate an open and joint process which examines the full range

of available solutions to each of the areas mentioned above and how each area impacts the other. However, before such a comprehensive solution is outlined, some

ground rules are necessary.

1. Any comprehensive reform must result in the retirement of the debt held by

the public by the year 2030, if not before.

2. Any privatization or partial privatization of Social Security must duplicate the

redistributional effects of the current system, i.e., individuals who are subsidized in

retirement must be subsidized at the investment stage. Social Security works because it operates under the myth that benefit payments are not welfare. Initiating

a needs based subsidy for some retirees adds the stigma of welfare, which will lessen program participation and throw some seniors into poverty.

3. Any privatization of Social Security must be economical, with low administrative costs. Additionally, if possible, employee stock ownership and voting control

must be a component of the system.

4. Any comprehensive health care solution must address the problem of the uninsured and must eliminate waste from the system, without compromising the quality

of care. Any further Medicare and Medicaid reform must include measures which

spread cost savings to the general population, as it is markedly unfair to taxpayers

with surviving parents to bear the risk of Medicare and Medicaid system failure

while taxpayers whose parents have passed pay nothing.

5. Any tax reform must simplify or eliminate compliance for individual middle

class taxpayers and must retain some form of progressivity, with the top wage earners in the current 36% and 39.6% brackets continuing to pay a higher rate than the

general population.

6. Any general budgetary reform must eliminate incentives for wasteful spending

and tax breaks targeted at industries favored by narrow interests at the expense

of the rest of the nation. However, certain tax benefits must still be maintained and

strengthened, including tax advantages for child rearing, home ownership, health

insurance and education/training of the young. Such tax advantages are necessary

for the preservation of the family. If high enough tax benefit levels are set, abortion
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can be eliminated through economic incentives, rather than punitive measures

against women and doctors which some still desire to attempt.

Adoption of these ground rules will result in reform which benefits all segments

of society and will lift up the poor and the young, rather than favoring solely the

connected and the powerful in hope that benefits will then trickle down.

The Committee’s proposed solution will now be described. The following summary

table will be followed by a description of each of the plan elements.

Current Revenue Source Future Revenue Source Items funded

Personal Income Tax revenue

taxed at the 15%, 28% and

31% tax rates.

Business Income Tax with a

single rate, credits for family size (payable to the employee), and deductions for

material costs, home mortgage interest, health insurance and education/training

(including stipends).

Discretionary spending, Nonpension Entitlement spending

Payroll Taxes for Health Insurance, Disability Insurance and Survivors Insurance (for individuals under

retirement age).

Business Income Tax with a

single rate, etc.

Unemployment Insurance,

Disability Insurance, Medicare Insurance, Senior Medicaid, Survivors Insurance

Trust Funds

Corporate Profits Taxes ........... Business Income Tax with a

single rate, etc.

Discretionary spending, Nonpension Entitlement spending

Payroll Taxes for Old Age Insurance and Survivors Insurance (for individuals over

retirement age).

Individually managed investment accounts for employee

share (with administrative

costs paid by the employer

rather than from dividends), ESOP accounts with

equal contribution levels for

each worker for employer

share. Phased in over 40

years..

Individual pensions

Personal Income Tax revenue

taxed at the 36% and 39.6%

rates.

Personal Income Tax on all

individual income from

wages and investments over

$130,000 (except income

from municipal or federal

bonds).

Interest on the debt and debt

retirement

Self-funded prescription costs

to Medicare patients. Health

care costs born by the uninsured and hospitals (which

are then transferred to the

system).

Repayments to medical lines

of credit and medical savings accounts financed by

Business Income Taxes.

Prescription and optional

spending

BUSINESS INCOME TAXES

The Business Income Tax combines the proposals to enact a National Sales Tax/

Value Added Tax with the most popular provisions of the personal income tax. All

business income would be taxed, both individual and corporate, over $10,000.

The tax payment will be based on gross sales, less material costs (similar to a

VAT), with a tax credit for family size and tax deductions for health insurance purchases, employee mortgage interest (either paid to employees or financed through

the employer’s financial institution) and education/training costs for low and moderate income employees.

The tax rate should cover all Defense, Medicare, Social Welfare and General Government Expenses, less revenue earned from excise and gasoline taxes. Collection

and enforcement of this tax will be accomplished by the states. Collection and audit

functions of the Internal Revenue Service will be abolished.

The employee family size credit would be paid directly to employees with dependents at an equal amount per dependent-regardless of income. The credit must be

high enough to cover all expenses and be indexed to inflation. It will be paid directly

to the employee, regardless of income. This would, in effect, be a pro-life credit, as
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it would eliminate any economic incentive for abortion for workers, wives and

daughters.

Note that all industries would be required to pay taxes, as this tax is more a replacement for individual income taxes than a national sales tax. There should be

no exemption for food, as both farmers, food processors and grocers pay income

taxes on employee wages.

NON-PENSION PAYROLL TAXES

Employer and Employee contributions for Unemployment Taxes, Disability Insurance Taxes, Health Insurance Taxes and Survivors Insurance for individuals under

62 would be shifted to the Business Income Tax. OASI(62+) would be privatized in

phases—with an employee contribution based on income and an equal payment from

the employer to each worker—which would duplicate the leveling effect of the current Pension system (see below).

The Health Insurance portion of FICA will be merged with Business Income

Taxes. Business Income Taxes will include provisions for Health Insurance cost deductibility and family income equity, so that all workers and employers will be able

to afford health insurance.

CORPORATE INCOME (PROFIT) TAXES

This tax would be abolished as a separate tax, as this income would be taxed

under the business income tax. The many industry specific tax breaks must be

ended. The importance of this cannot be emphasized enough, as compliance will be

assured if everyone feels the pain.

PENSION INVESTMENTS

Most proposals privatizing Social Security ignore the central strength (and conservative criticism) of the program, it’s leveling effect. This effect is caused by the

pooling of payments by all beneficiaries, who receive a guaranteed minimum payment, provided they work the minimum number of quarters. The current systems

subsidizes poor workers at the expense of the more well off, hence the criticism of

the program and the desire to tie benefits solely to income by the privitizers. Yet,

without the leveling effect, no privatization will survive the legislative process and

will fail in implementation. If passed without leveling, privatization will throw millions of our generation into certain poverty upon retirement and widen the gap between rich and poor.

We propose that Old Age Insurance and Survivors Insurance for those over 62 be

privatized. The employee share will continue to be based on individual income. However, the employer contribution will be equal for all employees, maintaining the current system of redistribution.

The employee share would be invested in an individual investment account or a

company sponsored fund, with the employee having the option of investing these

funds in employer voting stock. To hold administrative costs down and preserve

funds for retirees, the employer would be required to pay administrative costs up

front, rather than have them come out of plan investment gains. This adds an immediate cost cutting incentive. Currently, employees contribute 5.35% of their income to OASI. Excluding survivors of non-retirees will reduce this base figure somewhat. However, transition to a non-government program will lessen the resistance

to an increased contribution. We recommend that by 2040, the contribution level

should be increased to 10% (an increase of roughly 1% of income every ten years).

See the phase in schedule below.

The employer contribution would be equal for each employee, at the national average FICA OASI contribution. This is currently 5.35% of the average national wage

(which in 1997 was $1,442). This figure should also be increased to 10% of national

average eligible earnings, in increments of 1% every decade. Corporations would invest these funds in their own voting stock, with dividend reinvestment and the employees or their representatives having control over how these shares are voted.

This proposal will provide increased funds for each firm, which will reduce resistance to the increasing size of the contribution. The contribution for employees of privately held companies would go to the individually managed accounts funded by the

employee share. For small, low wage, firm, a tax credit on the Business Income Tax

will be provided if the average company wage is below that national average. See

the following table for the phase-in schedule.
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Year Employee OASI Employee Invested Employer OASI Employer Invested

2000 4% indiv. income .... 2% indiv. income .... 4% avg. income ....... 2% avg. income

2010 3% indiv. income .... 4% indiv. income .... 3% avg. income ....... 4% avg. income

2020 2% indiv. income .... 6% indiv. income .... 2% avg. income ....... 6% avg. income

2030 1% indiv. income .... 8% indiv. income .... 1% avg. income ....... 8% avg. income

2040 none ......................... 10% indiv. income .. none ......................... 10% avg. income

During the transition, funds would be slowly shifted from FICA to individual

management. At the end of the transition period, any remaining federal beneficiaries would be capitalized with government bonds for the amount they would

have received had they participated in the plan from the start, less withdrawals to

date. Individuals over 55 at the enactment of the plan will continue to be covered

entirely under the federal system. Individuals under 30 at the enactment of the plan

will wholly covered by the new system. Individuals between these ages will receive

mixed coverage. Federal employees would chose from a menu similar to the current

thrift savings plan, with the same phase-in period percentages and the same level

of equality in employer contributions.

This phase-in assumes that 1% of both employer and employee contributions will

be transferred from the current Social Security surplus. If the current surplus does

not allow this, the schedule can be altered, with a slower start and a more rapid

conversion. Additionally, this plan requires fiscal discipline. Business income tax

revenues and federal spending (less interest on the debt) must always match, or be

in surplus to cover all retiree pension costs beyond FICA revenues.

Note that higher income individuals will receive more of their retirement income

from their own contributions, while lower income individuals will receive more income from employer contributions. The employer contribution provides a floor for retirement income.

PROGRESSIVE INCOME TAXATION

Personal Income Taxes over $130,000 would remain at a lower rate (at least the

current rate less the Business Income Tax rate) and would be dedicated to the payment of Net Interest on the Debt and its retirement. Rates could be set higher to

facilitate earlier debt retirement. After debt retirement has begun, additional debt

may only be incurred in time of war, and then only for defense, and to capitalize

the remaining Social Security beneficiaries in 2040.

Progressive income taxation must be preserved. The main reason for retaining

such a tax is practical. Without such a provision, no tax reform will pass. Any tax

reform will be dead on arrival unless the wealthy continue to pay their fair share.

This proposal, unlike the others, does that.

There are also several economic reasons to maintain progressive elements. The

first is the need to encourage consumption. Without progressive taxation, the savings sector increases at the expense of the consumption sector—leading to a need

for risky investments of the sort taken in real estate and junk bonds which led to

the Savings and Loan Crisis and the current Asian financial crisis. Currently, both

the consumption and savings sectors are strong, leading to healthy corporate profits

and a strong stock market. This came about partly through an increase in the tax

rate on the wealth sector from 31% to 36% and 39.6%.

This proposition can be tested empirically by comparing growth (in percentage

terms) with the financial margin, which equals the net of net interest and the deficit

or surplus expressed as a percentage of GDP. The financial margin is multiplied by

¥1 during Republican administrations to account for tax policy (Republican presidents cut taxes on the wealthy—requiring deficits to growth the economy, while

Democrats raise taxes on the wealthy—so that lower deficits lead to higher growth).

The slope multiplier for the financial margin can be independently verified by examining data for each administration without multiplying the financial margin by ¥1.

A final reason for progressive taxation comes from business investment strategy:

to wit, before a penny is spent on plant and equipment there must be an available

customer base with the ability to consume. No corporate investment manager will

hold his job for any length of time if he recommends investment because capital

costs are low in the absence of such a customer base. This is why, when consumption is high, companies invest and growth continues.
105

HEALTH INSURANCE

We propose dividing Medicaid into two funds

• Support for poor individuals and families (including those with HIV/AIDS),

which will be transferred to a business income tax deduction or a TANF credit. Medicaid for the non-elderly poor can be replaced by a Catastrophic/MSA/MLC plan, as

described below.

• Medicare Part C for the elderly poor. Medicare parts A, B and C should be managed as one program

Medicare trust funds can be shorn up with increased use of Medical Savings Accounts, Medical Lines of Credit and Long Term Care Credit Lines (along the lines

of a negative mortgage). Medical Savings Accounts (MSA) are becoming increasingly

popular. These can be augmented by Medical Lines of Credit (MLC), which would

cover expenses not covered by MSAs (such as chiropractic and massage therapy),

any gaps between MSAs and Catastrophic Insurance coverage and for insurance for

new employees.

Business Income Taxes must be set high enough so that some part of the burden

for the increased cost senior health is shifted to taxpayers, ending the subsidy to

those whose parents have already passed.

The Committee thanks you for the opportunity to address these issues. A copy of

this statement will be provided to the Administration. We welcome the opportunity

to testify in the future before the Committee on Ways and Means, the Senate Finance Committee and any joint task force or committee established to examine

these issues. We are also available for any questions or comments from Committee

members, members of the House, the Senate, the Administration or the general

public. Please address all such inquiries to our Chair, Michael Bindner.

NATIONAL

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CONFERENCE OF STATE LEGISLATURES

November 19, 1998

The Honorable William Archer, Chairman

Committee on Ways and Means

U.S. House of Representatives

Dear Chairman Archer:

The National Conference of State Legislatures (NCSL) commends you and the

Committee on Ways and Means for beginning the arduous task of considering the

alternatives available to reform Social Security and the process by which the House

will undertake this task. The nation’s state legislators feel very strongly about one

aspect of Social Security reform, that of the extension of mandatory Social Security

coverage to all or new state and local government employees. NCSL vigorously opposes any efforts to extend mandatory coverage to additional groups of state and

local government employees in any package to restore solvency and integrity to Social Security.

As you are aware, the Social Security Act of 1935 specifically prohibited state and

local government employees from coverage in part, because state and local government retirement plans effectively provided retirement benefits to many state and

local government employees. Most recently, the Omnibus Budget Reconciliation Act

of 1990 (OBRA 1990) required mandatory coverage of state and local employees not

covered by a public pension plan. Further, OBRA 1990 ordered that these plans

maintain minimum contribution and benefit level standards equivalent to Social Security in order to avoid mandatory coverage.

Numerous proposals intended to extend the life of Social Security offered since the

1980s have included a menu of options for bringing solvency to the nation’s largest

retirement insurance system. Many of these proposals have included plans to extend

mandatory Social Security coverage to state and local employees under the guise of

simplifying program administration and broadening participation in an important

national program. While we agree that Social Security is a valuable program that

provides benefits to the vast majority of Americans, state and local government retirement systems provide comparable and in many cases superior benefits to those

provided by Social Security as well as flexibility to specific classifications of employees who are ill-suited to participate in Social Security.

State and local government retirement systems effectively provide retirement and

supplemental benefits, such as health care, to state and local employees and their

families. These systems effectively manage retirement funds on behalf of public em106

ployees and are models for effective private retirement savings that should be studied for best practices, not raided as a short term fix to extend social security for

a limited number of years.

State and local employees earned these funds, contributed to these plans and in

many cases bargained successfully for the range of retirement benefits offered by

state and local government retirement systems. State and local employees with a

proven commitment to personal savings should not be punished for their planning

and initiative. Many of those critical of state and local government retirement plans

have stipulated that mandatory coverage is ‘‘only fair.’’ We disagree. It is not fair

to resolve the Social Security solvency problem at the expense of public employees

who have saved and planned for their retirement in good faith and in partnership

with their employers, state and local government.

Mandatory coverage is not a sound policy. Mandatory coverage would devastate

the retirement savings of state and local employees, without any guarantee that

their Social Security benefit would be equal to their benefit under their current savings plan. The General Accounting Office (GAO) argues in an August 1998 report

that by extending mandatory Social Security coverage to all newly hired state and

local government employees Social Security’s long-term actuarial deficit would fall

about 10 percent and the program would remain solvent for an additional two years.

GAO maintains that the ‘‘effect on public employers, employees, and pension plans

would depend on how state and local governments with noncovered employees respond to the additional costs and benefits associated with Social Security coverage.’’

State and local governments, as employers, would be faced with the untenable

choice of decreasing or discontinuing benefits, raising the costs to participate in the

program, or being forced to supplement these plans with additional funds from state

revenues at the expense of other valuable state and local programs. While states

are currently experiencing a lift in the economy, state and local governments might

be forced to increase borrowing, reduce spending, or raise revenues to honor our

commitments to public employees and to state retirement systems if we were unable

to reduce benefits or impose additional costs on plan participants.

Similarly, the Congressional Budget Office (CBO) routinely suggests as a means

to provide funds for federal priorities or budgeting balancing purposes that the federal government mandate coverage of state and local employees. In March of 1997,

CBO estimated that the extension of mandatory Social Security to all State and

Local workers would generate $6.9 billion dollars to the federal government over

five years. Yet, these reports fail to examine adequately the long-term consequences

of these proposals. In the out years, as these employees receive Social Security benefits the federal systems is again at risk of becoming insolvent.

We understand the immediate fiscal appeal of extending mandatory coverage, but

maintain that it would totally uproot state and local government retirement systems

supported by employee contributions. Further, reduced contributions to state and

local government plans would have a dramatic effect on the long term financing of

state and local plans, shifting the solvency problem to state and local retirement

plans that to date have performed auspiciously on behalf of employees.

An extension of mandatory coverage would impose a tremendous cost shift to

states, which we are certain would constitute an unwieldy unfunded mandate. While

seven states—California, Colorado, Illinois, Louisiana, Massachusetts, Ohio and

Texas—account for 75 percent of the employees who participate in government sponsored retirement plans, the extension of mandatory coverage affects all states. (See

attached table).

State and local government retirement plans must be fully preserved and allowed

to operate without additional intrusive and administratively cumbersome federal

regulation. We urge you to consider our concerns and resist quick fix efforts such

as extending mandatory coverage that leave so many worse off.

We appreciate your consideration of the views of the National Conference of State

Legislatures on this issue. If our staff can be of any assistance to you, please do

not hesitate to contact Gerri Madrid at (202) 624–8670 or Sheri Steisel at (202) 624–

8693.

Sincerely,

REPRESENTATIVE NORMA ANDERSON,

Co-Chair, NCSL Taskforce on Social

Security Reform, Colorado House

of Representatives

DELEGATE JOHN HURSON,

Co-Chair, NCSL Taskforce on Social

Security Reform, Maryland House

of Delegates
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Statement of Hon. Jim Ramstad, a Representative in Congress from the

State of Minnesota

Mr. Chairman, thank you for calling today’s hearing to discuss how to preserve

and protect Social Security—a program of vital importance to seniors and individuals with disabilities across the nation.

As we all know, Congress faces a daunting task in working to preserve Social Security. As the demographics of our nation change, and more and more seniors draw

benefits, the program faces its biggest challenge.

The ‘‘easy’’ solutions of increasing taxes and cutting benefits are not acceptable.

Thus we must pursue more complex resolutions to the financial problems facing this

program. In town meetings and other forums, my constituents have expressed interest in directing payroll taxes into some special, voluntary Personal Retirement Accounts, to take advantage of the power of compound interest.

Mr. Chairman, as the demands on the Social Security system grow, the country

benefits by addressing this issue before it is an overwhelming crisis. By acting now,

we will have the time and flexibility to make changes that will actually protect and

preserve the program for generations to come.

Like all of my colleagues, I am anxiously awaiting the specific proposals the Administration will send to Congress to begin this important debate. Presidential leadership will be crucial to any potential reform program. Neither Republicans nor

Democrats can solve this problem. We must work together in Congress and with the

administration to provide a safe and secure future for everyone.

Thank you again, Mr. Chairman, for calling this hearing. I look forward to hearing from today’s witnesses about their thoughts for saving this crucial program.

Statement of Cynthia Wilson, President, Retired Public Employees

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Association, Inc.

As the President of the Retired Public Employees Association, an organization of

more than 78,500 of New York State and local government retirees and their

spouses, I am writing to urge that the Committee use in-depth analyses to test reform proposals before legislation is enacted. Adequate testing should be a significant

prerequisite for development of a ‘‘solid and fair plan to save Social Security for all

Americans.’’

1. We recommend a study of the effects of various reform proposals on the economic status of separate demographic and income-level groups. This would include:

• identifying those adversely affected;

• proposing means of reducing or eliminating the negative effects; and

• estimating the cost of such interventions.

Examples of topics that would merit this type of additional study are:

• the proposal to increase from 62 to 65 the earliest age at which the old age pension could be collected; and

• the proposal to subject the small personal investment accounts of low-wage

workers to regular administrative costs.

2. We recommend a detailed investigation into the administrative issues and costs

surrounding the creation and maintenance of 147 million individual investment accounts. We support Stanford Ross, Francis Cavanaugh and Dallas Salisbury, experts

who have already expressed concerns about this issue.

3. We recommend an explicit description of how reform proposals will affect disability and survivors benefits.

4. We support John Cogan’s recommendation for creation of ‘‘a clear and firm set

of rules’’ for measuring budgetary impacts of proposed policy alternatives. In view

of the dynamic activity of the U. S. economy in the past few years, we are convinced

that it would be appropriate to recalculate, at the start of deliberations, the size of

the deficit to be made up.

5. We recommend that estimates of the financial effects of individual proposals

reflect interactions, where possible.

6. We support Herbert Stein’s suggestion of a study to evaluate the effects of reform proposals on total national savings.

7. We also support Stanford Ross’ request to review all parts of the retirement

income system.
109

8. Finally, we support recommendations made by the Technical Panel on Assump- tions and Methods to the 1994–1996 Advisory Council. This group recommended

that the evaluation of the long-range financial status should put less emphasis on

the ‘‘75-year actuarial balance’’ and the ‘‘test of long-range actuarial balance’’ and

more emphasis on the projected date the Trust Fund Ratio would fall below 100 percent. They also recommend that ‘‘when definitive legislative revisions are adopted,

subsequent long-range evaluation should compare up-dated projections with the intended results of legislation.’’ In requesting these involved calculations, we urge that the computer power and expertise as well as the available data of those in the private and academic sectors

be called on to supplement what is currently available to the Social Security Actuary and to the Committee. Since the results of these deliberations will affect millions of Americans, both

young and old, and over many years, the greatest care and thoroughness should be

taken during the process.

Statement of Hon. Bernie Sanders, a Representative in Congress from the

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State of Vermont

Mr. Chairman, I am pleased to have the opportunity to address the committee today on Social Security -a program that affects us all. Social Security is the nation’s most successful anti-poverty program, serving over 40 million Americans, including retirees, disabled individuals, widows, and orphans. While some would like for us to believe this vital program faces a ‘‘crisis,’’ the re- ality is that the Trust Fund can continue to pay out full benefits for the next 34

years, until 2032. I would not call this a crisis and neither would the 87.9 percent

of American surveyed by International Communications Research for the Institute

for America’s Future who prefer that the Congress and the President take the time

to better explain the Social Security reform options before going forward with

changes. However, given the fact that our population is aging and fewer workers

will be supporting older Americans in the future, it is imperative to take a harder

look at how we can preserve this important program for our children and grandchildren.

I am concerned that many Social Security reform proposals are advocating reduc- ing benefits, raising the retirement age, and worst of all, privatizing all or part of

the program. We need to take much less drastic steps to maintain the Social Security system. One area that has received little discussion in the Social Security debate is raising or eliminating the earnings cap, which will rise from the current $68,400 to $72,600

next year. Currently, workers and their employers each pay a 6.2 percent Social Security tax on earnings up to the maximum amount. This is one of the most regressive approaches to taxation since millionaires and billionaires stop paying all of their Social Security taxes for the year on January

1 while everyday working men and women pay these same taxes all 365 days a

year. Contrast the limits on the Social Security tax with the Medicare Hospital Insur- ance tax (1.45 percent or 2.9 percent for the self-employed). There is no maximum

limit on the Medicare tax and I think one option this committee and the Congress

as a whole should explore is eliminating or at least raising the Social Security earnings cap. This would ensure that all Americans would be paying the same tax on

their earnings. In addition to being an issue ofsimple fairness, I believe this plan

could raise enough revenue to bring needed Social Security tax relief to low-income

Americans and/or the self-employed. Self-employed individuals pay the full 12.4 percent Social Security tax themselves.

Often, paying the requisite 15.30 percent (including Medicare Hospital Insurance

taxes) is a major hardship for those Americans running their own businesses. For

example, the average farmer in Vermont earning $30,000 a year pays $4590 a year

in Social Security and Medicare Hospital Insurance taxes alone before income taxes

are factored in.

The plan to raise the earnings cap is supported by a two-to-one ratio, according

to a recent poll by the nonpartisan group, Americans Discuss Social Security. I find

it interesting that despite widespread support for raising the earnings cap, no one

seems to talk about this plan.

Eliminating the cap completely and increasing benefits accordingly would make

up 1.3 percent of the 2.19 percent actuarial gap. That takes us more than halfway

there. Factoring in a tax break for low-income Americans and the self-employed
110

would cut into the 1.3 percent, but if done in a reasonable manner, we could provide

this tax relief and still make up part of the actuarial gap. I am not contending that

this will completely take us to where we need to go, but it is a partial solution that

I believe is both fair and economically feasible.

Turning from these plausible, acceptable options, a number of other options that

have been raised as ‘‘solutions’’ to the Social Security ‘‘crisis’’ are simply unacceptable. Cutting the Consumer Price Index, or CPI, which determines Social Security

cost of living adjustments (COLAs), would be an outrageous attempt to balance the

budget on the backs of the elderly. Cutting the CPI or reducing seniors’ COLAs

would be a disaster for senior citizens, half of whom live on less than $15,000 a

year. In 1996, 12 percent of Vermont seniors lived below the poverty level. In 1999,

the Social Security COLA will only be 1.3 percent and cutting this small increase

would be disastrous to elderly Americans. We should not make our seniors choose

between paying for their prescriptions, heating bill, or groceries in order to ‘‘save

Social Security.’’

In addition, the majority of Americans oppose raising the retirement age even further. Workers age 40 and younger today will already have to wait until they are

67 to receive their normal Social Security retirement benefit. Increasing this to age

70 is an absurd idea. Many hardworking Americans simply cannot labor into their

70s and cannot afford to retire early and receive reduced benefits. I urge this committee and Congress to stand with our constituents and reject this plan.

Finally, I am deeply concerned about efforts to privatize all or part of the Social

Security system. If Members could guarantee that the market would never again

crash or we could educate every working American how to play the market without

risk and make a fortune off of it, it might be worth a shot. But we know that is

impossible. Arthur Levitt, the Chairman of the Securities and Exchange Commission, has stated that ‘‘the gap between financial knowledge and financial responsibilities is unacceptably wide. For example, more than half of all Americans do not

know the difference between a stock and a bond; only 12 percent know the difference between a load and a no-load mutual fund; only 16 percent say they have

a clear understanding of what an Individual Retirement Account is; and only 8 percent say they completely understand the expenses that their mutual funds charge.’’

What this means is that less than 20 percent of the population has a grasp on some

of the most basic investment information. Forcing them to invest their retirement

money in the stock market instead of keeping it in Social Security would be disastrous for a huge majority of our constituents. We do not know what will happen to

the stock market in the future. What will happen if our workers make poor investments and lose the money in their retirement fund? How then do we take care of

them when they retire? This is a risk that our nation cannot afford. Privatization

is a misguided route.

I am thankful for this opportunity to address the committee with my thoughts on

a fair, rational way to reform Social Security. Over forty million Americans depend

on this vital program and we need to ensure that it is there for them and for generations to come.

Statement of Laurence S. Seidman, Professor of Economics at the

University of Delaware

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My article and book present the case for funding social security. Funding social

security is not a new proposal; its basic components have been recommended by

other advocates of social security reform.

There are two middle positions between our current pay-as-you-go (PAYGO)

defined-benefit social security, and privatized defined-contribution social security.

One is PAYGO social security with supplemental individual defined-contribution accounts. The other is funded social security.

Funded social security is a defined-benefit plan. Funded social security is achieved

by preserving the current U.S. social security defined-benefit formula, and gradually

shifting the financing from payroll taxes to a mix of portfolio investment income and

payroll taxes.

Funding social security has two distinct essential elements: fund accumulation,

and portfolio diversification.

Fund accumulation requires gradually adjusting tax rates, ceilings, and benefit

rates to achieve substantial annual surpluses. Protection from the payroll tax increase is given to low-income workers by expanding the earned income tax credit.

A large permanent capital fund would then accumulate gradually over the next cen111

tury, and the fund’s annual investment income would eventually enable a permanently lower payroll tax rate. Portfolio diversification is achieved by having the social security administration contract with private investment firms (under competitive bidding) to invest this

capital fund in a conservative diversified portfolio of government bonds, and corporate stocks and bonds.

With funded social security, all investment risk is pooled: there are no individual accounts. Private investment firms manage social security’s portfolio the way they

manage the portfolio of conservative risk-averse private clients. Funded social security avoids excessive reliance on either government bonds (because the yield is

lower) or corporate stocks (because the risk is higher). The investment firm handles

stock voting as it does for private clients. Funding social security will eventually double the return that workers obtain on their saving—from 2% to 4%. In a mature PAYGO system, the return equals the

growth rate of real output—-roughly 2%. With funded social security, the return will

be roughly 4% (the average of a 6% return from corporate stocks, and a 2% return

from government bonds). This doubling of the return makes a tremendous difference

over a person’s lifetime. For example, consider a worker age 45 saving $5,000 that

year. Compounded at 2% per year it grows to $7,430 at age 65; compounded at 4%

per year it grows to $10,956. Funded social security rests on a cautious and realistic view of the stock market. It is important to emphasize two points. First, funded social security uses payroll

taxes as well as portfolio investment income to finance benefits. Second, the portfolio is conservative: government bonds constitute an important share of the social

security portfolio. Like the current U.S. social security system, funded social security is a defined- benefit plan where each retiree’s benefit is linked to the retiree’s own wage history

by a legislative formula; the benefit does not directly depend on the performance of

the portfolio. If portfolio earnings fall, then a fraction of the portfolio must be sold

to finance legislated benefits. However, if the portfolio performs poorly for several

years, then either the legislative formula must be adjusted or payroll taxes increased. Thus, indirectly, benefits are eventually affected by portfolio performance:

funded social security does not eliminate stock market risk. But it minimizes the

risk for the individual retiree by pooling the risk over all retirees, utilizing a conservative diversified portfolio invested in government and corporate bonds as well

as corporate stocks, spreading the risk over time by selling fund assets as a first

resort while adjusting the legislated benefits formula only as a last resort, and using

payroll taxes as well as portfolio investment income. It is crucial to recognize that fund accumulation and portfolio diversification are separate components. It would be possible to have fund accumulation without portfolio diversification: social security could accumulate a large fund, but invest it solely in special non-marketable low-yield government securities (as it does currently

under the U.S. Social Security system). Conversely, it would be possible to have

portfolio diversification without fund accumulation: social security could maintain

only a small fund, but invest that fund in a mixed portfolio. The term funded social

security implies both components: a large capital fund invested in a diversified portfolio.

Fund accumulation is the key to raising the capital accumulation of the economy,

while portfolio diversification is the key to capturing a larger share of the economy’s

capital income for the social security system.

Funded social security would be completely separated from the Federal budget.

Congress would be expected to balance the budget without counting social security.

One purpose of converting social security from PAYGO to funding is to raise the national saving rate. This purpose would be defeated if an increase in the social security surplus by $100 billion permitted Congress to increase the deficit in the rest

of the budget by $100 billion.

There is no way to escape a transition cost if the objective is to raise the national

saving rate through the funding of social security. Raising the saving rate entails

a short run cost in order to achieve a long run gain. The cost is borne as a combination of a transitional tax increase and a temporary slowdown in benefit growth.

To protect the capital fund from a raid, each worker would be sent an annual

statement that provides an estimate of his retirement benefit. The key to deterring

a raid on the capital fund is to make sure that current workers realize that it is

their future benefits that are being raided. If the fund is drawn down, then its investment income will be lower in future years, and so will social security benefits.

If the Social Security Administration sends each worker an annual estimate of his

expected retirement benefit, based on current tax rates, benefit rules, and the size

of the fund and its investment income, then a raid on the fund this year would re112

duce each worker’s expected benefit in next year’s annual statement. With annual

individual benefit estimates, members of Congress would be deterred from voting for

a raid.

Statement of Hon. Nick Smith, a Representative in Congress from the State

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of Michigan

We all have loved ones whose lives are better because of Social Security. Over forty million elderly and disabled Americans receive benefits. This is why we must

aggressively respond when Social Security’s actuaries tell us that the system’s unfunded liability exceeds $9 trillion. The pubic is ready for decisive action. In this

year’s election, they repudiated negative campaign attacks that distorted positions

on Social Security. They voted for reform advocates like Charlie Stenholm (D–TX)

and myself, giving us victories with comfortable margins. Some have suggested that Social Security is financially secure until 2032. That would be true if there was a real trust fund. In fact, there is no real trust fund.

All Social Security taxes being paid in are immediately spent for Social Security

benefits or other government programs. For government to pay back the unsecured

borrowing from Social Security, it must do one of three things: increase taxes, reduce other spending, or borrow more. These are the exact three alternatives that

would have to take place if there were no trust fund even in name.

While we are in a deep hole, there is an escape ladder. We can allow workers to

put aside an increasing amount of their payroll taxes into personally owned retirement accounts while we simultaneously and gradually reduce the size of future retirees’ publicly financed monthly benefits. Because workers’ ‘‘nest eggs’’ will grow

rapidly, their total retirement income, coming from two sources instead of one, will

be higher than under current law—even as federal spending on public Social Security benefits is trimmed to levels that avoids payroll tax increases. My own bill, the Social Security Solvency Act of 1997, shows how making just in- cremental changes over long periods of time can free up enough Social Security

taxes to provide funds for prudent investments that turn workers of average means

into wealthy retirees. The Social Security Administration has officially informed me

that this can be done. Reforming Social Security to include supplemental retirement

accounts is a popular idea. In surveys, over 60% of respondents support it. Many opponents of personal accounts agree that investing Social Security sur- pluses in the private capital markets will reduce the amount of tax increases or benefit cuts needed to restore the program’s financial integrity. However, they suggest

that the federal government should do the investing. This strategy has two fatal

flaws.

First, the size of the government’s equity investment will eventually grow to an imposing amount that practically guarantees unparalleled corruption. Imagine the

potential for insider trading when a few officials meet in secret to buy or sell billions

of publicly traded securities. Consider the consequences if public officials have the

ability, through stock price manipulation, to blackmail or bribe CEOs into making

campaign contributions. In the 1930’s, the architects of Social Security, FDR and

Democratic Congresses, rejected this dangerous plan. Those who support it today

must explain why the designers of the system were wrong. Second, government investment in the capital markets cannot accomplish the re- tirement security that its advocates seek. Under the existing generational transfer

system, there is no legal relationship whatsoever between the revenues that Social

Security takes in during the years that a worker contributes to Social Security and

the future benefits a worker will receive. This is not subject to debate. The Supreme

Court has confirmed this in two important cases, Flemming v. Nestor (1960), and

Richardson v. Belcher (1971):

• ‘‘It is apparent that the noncontractual interest of an employee covered by the

Act cannot be soundly analogized to that of the holder of an annuity. . . To engraft

upon the Social Security system a concept of ’accrued property rights’ would deprive

it of the flexibility and boldness in adjustment to ever-changing conditions which it

demands.’’

• ‘‘The fact that social security benefits are financed in part by taxes on an employee’s wages does not in itself limit the power of Congress to fix the levels of benefits under the Act or the conditions upon which they may be paid. Nor does an expectation interest in public benefits confer a contractual right to receive the expected amounts.’’

Even the Social Security Administration has made the point that paying Social

Security taxes does not ‘‘buy’’ anyone the right to a retirement income paid by the
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federal government: ‘‘There has been a temptation throughout the program’s history

for some people to suppose that their FICA payroll taxes entitle them to a benefit

in a legal, contractual sense. That is to say, if a person makes FICA contributions

over a number of years, Congress cannot, according to this reasoning, change the

rules in such a way that deprives a contributor of a promised future benefit. Under

this reasoning, benefits under Social Security could probably only be increased,

never decreased, if the Act could be amended at all. Congress clearly had no such

limitation in mind when crafting the law . . .’’

The point is clear. With no legal link between tax payments and retirement benefits, there is no guarantee that future retirees would reap the benefits of any investment gains the federal government might earn. The funds could go for any purpose,

from buying battleships to paying for abortions. Workers still would have no legal

right to a specified publicly funded retirement income, and they would remain at

risk.

Recent history shows this risk is not trivial. The 1977 reforms created ‘‘Notch Babies’’ who have received benefits significantly less than those granted to friends just

a few years, or even weeks, older. In 1983, Congress passed legislation that taxed

up to half of a beneficiary’s Social Security income. This new tax, coupled with a

six-month delay in cost of living increases, cut benefits to some retirees by 27%. As

part of the 1993 Budget Act, some seniors suffered benefit cuts of 14% when Congress decreed that up to 85% of these payments were taxable. The millions who

were hurt by such benefit cuts have no recourse. The only way to lock in gains for

workers’ retirement is to give them ownership of their accounts.

Opponents of personal accounts point out that investing can be risky. Over the

short run, this is true. However, there is no twelve-year or longer period in U.S.

history when investors have lost money. Long-run investing isn’t risky, but betting

on the government to keep its word decades from now surely is.

Eight Senators and six House members from both parties have introduced reform

plans that allow workers to accumulate personal retirement savings. President Clinton has said he will support personal accounts as part of overall reform. With both

ends of Pennsylvania Avenue committed to finding a solution, we have the architects and the blueprints to enact meaningful reform. It’s time to act.

Chairman Archer and Members of the Ways and Means Committee:

Statement of Society for Human Resource Management

f

Thank you for holding a hearing on saving social security and for the opportunity

to express the views of the Society for Human Resource Management. The Society

for Human Resource Management (SHRM) is the leading voice of the human resource profession. SHRM, which celebrates its 50th anniversary in 1998, provides

education and information services, conferences and seminars, government and

media representation, online services and publications to more than 100,000 professional and student members through out the world. The Society, the world’s largest

human resource management association, is a founding member of the North American Human Resource Management Association and a founding member and Secretariat of the World Federation of Personnel Management Associations (WFPMA).

SHRM is currently in the process of developing social security reform policy and

principles, which we will be releasing in early 1999.

The ability of current and future retirees in the United States to financially sustain themselves can either be facilitated or eroded by legislative initiatives, influenced by the short and long-term need for tax revenue. Individuals rely on three

main sources to finance their retirement: (1) Income from private sources (e.g. employer-sponsored retirement and health care plans); (2) Their own personal savings;

and (3) Social Security and Medicare. A critical foundation of retirement is the affordability and access to adequate health care. Economic, demographic, social, accounting and regulatory trends, as well as the demand for current income indicate

that in the long-term an increasingly large proportion of retirees may not have sufficient income and medical coverage from each of the three sources when they retire.

To provide a sound foundation for retirement planning, and minimize the number

of retirees on welfare, a national retirement policy is essential to guide the various

governmental entities, businesses and individuals in their fiscal and health care

planning. Such a policy should recognize significant trends and enable policy makers

to institute and/or revise income, taxation and retiree health care funding systems

to effectively meet longer-term challenges.
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BACKGROUND:

Today most individuals are able to retire comfortably. From 1971 to 1991, the elderly poverty rate fell from 22 percent to 12 percent. On average, workers retire earlier and live longer than in the past. However, a number of trends in the economy

and workplace suggest that it may be more difficult for American workers to retire

with a reasonable standard of living in the future. These trends are highlighted

below.

Aging Population Increases the Need for Adequate Retirement Income and Health

Care Coverage:

As the U.S. population ages rapidly and the elderly live longer, an increasing proportion of the population will depend on retirement income and retiree health care.

Without re-enforcing the traditional retirement support systems, the declining ratio

of workers to retirees will place a huge burden on Social Security, Medicare and

Medicaid. In 1990, 13% of the population was aged 65 or older, compared to 10%

in 1970. The Department of Labor projects that by 2050, 22% of the population will

be aged 65 or older.

Mobility Causes Inadequate Retirement Income:

Employees are likely to change jobs several times over their careers. Those frequently changing jobs, not always voluntarily, may be less likely to have adequate

retirement income and employer sponsored retiree health care upon retiring since

many traditional retirement programs (income and health care) provide benefits

based on length of service, and vested benefits for shorter service terminations are

frequently paid out in cash and not saved for retirement.

Firms Without Retirement Income and Retiree Health Care Plans:

The self-employed and employees of small firms, which create most new jobs, are

less likely to have employer-provided retirement programs than employees in larger

firms. According to the Employee Benefit Research Institute, in 1991, 19% of workers in firms with fewer than 25 workers were covered by an employer-sponsored retirement plan compared to 78% of employees in companies with 1,000 or more employees. Similarly, 18% of smaller employers provide employer sponsored retiree

medical coverage, while 44% of large employers provide medical coverage to retirees.

Conservative Defined Contribution Plan Investments Reduce Retirement Income:

According to the Pension and Welfare Benefits Administration (DOL), from 1975

to 1990 most of the growth in employer-sponsored plans can be attributed to an increase in the number of defined contribution plans from 207,700 to 599,200. The

shift to defined contribution plans may affect retirement savings as a result of participant’s conservative investment choices, which may lead to lower than expected

retirement standards of living. Several studies have found that participants in defined contribution plans, which generally allow participants more discretion in investment allocation, often choose low-risk, low-return investments.

Erosion of Pre-Retirement Fund Distributions:

Based on Employee Benefit Research Institute (EBRI) data, most employees

choose not to roll over their lump sum distributions, particularly small distributions,

into another retirement account when they leave a job. According to EBRI’s study,

only 22% of lump sum distributions are rolled-over into other qualified plans, while

most are used to fund current consumption or other expenses. Withholding regulations implemented in 1993 may be reducing this practice somewhat, leading to more

funds being rolled-over into other qualified plans.

Complex Regulations Deter Employer-Sponsored Plans

The complexity of existing retirement plan regulations and the substantial administrative cost of complying with them discourage employers from establishing and

maintaining retirement plans. A 1991 survey conducted by the American Academy

of Actuaries found that among those actuaries whose had been involved in a plan

termination in the previous year, the largest single reason (30%) cited was government regulations (including complex rules, the increasing cost of compliance, and

frequent changes in the retirement plan law) as the key reason employers terminate

their defined benefit retirement plans.
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Accounting Standards Changes and Medical Inflation Deter Employer Sponsored

Retiree Health Care:

The advent of requiring corporations to establish financial statement liabilities for

retiree medical programs caused businesses to focus on this major expense. As a result, many businesses have reduced or eliminated their post-retirement medical coverage. At the end of 1994, according to a recent EBRI study, fewer than 34% of retired employees are covered by employer sponsored medical plans.

Retirement Plans Are Not Significantly Under-Funded:

According to a recent report by the Pension Benefit Guaranty Corporation

(PBGC), which insures most private sector defined-benefit plans, pension underfunding fell to $31 billion in 1994 from $71 billion in 1993, and most pension plans

today are adequately funded. This represents only 1% of the $3.2 trillion held in

trust to pay current and future benefits and in spite of cutbacks in the limits on

contributions that were repeatedly enacted since 1982. Much of the under-funding

may partly be due to the highly conservative assumptions used by the PBGC. Further, the Retirement Protection Act, which Congress passed in 1993, may help prevent future pension plan failures by increasing the incentives for funding underfunded plans.

Social Security and Medicare Are Not Sufficiently Funded:

The Social Security and Medicare trust funds have been viewed as sources of government program funding, causing them to be unreliable sources of retirement support. Since the Social Security system is currently generating more revenue than

it pays in benefits, the government borrows the surplus revenue to fund other government programs. On the other hand, Medicare benefits already exceed the taxation revenue, causing the trust to decrease each year. However, as the population

continues to age, more workers will rely on Social Security and Medicare benefits

and proportionately fewer workers will be funding the benefit. The Board of Trustees for the Social Security Trust Fund advised in their 1995 Report that the Federal

Old Age and Survivors Insurance (OASDI) Trust Fund will be able to pay benefits

for about 36 years. Of more urgency is the funding of the Medicare Trust, which

its trustees report will be depleted within 7 years.

A Source of Government Revenue:

Policy makers look to retirement funds for potential revenue, to reduce the national deficit. The Treasury Department estimated the government would have

gained $64.9 billion in FY 1995 revenue if employers (including federal, state, local

and private) were taxed on the value of contributions to retirement plan funds. According to EBRI, this tax revenue loss is overstated. More than half of this is attributable to public sector retirement plans. In addition, tax expenditure discussions

focus on current revenue impact rather than the future value of taxes when retirement income would be paid out in future years.

Lower Income Individuals Depend Heavily on Social Security and EmployerSponsored Plans:

Fifty one percent of all persons employed by private businesses with pension

plans earned less than $25,000 and 89% earned less than $50,000. According to

EBRI, because most workers earn under $50,000, retirement programs primarily

benefit workers with income below this level. Individuals with fewer than 50,000

will depend most heavily in their retirement years on Social Security qualified retirement plans and Medicare, as they are least likely to have personal savings or

private medical insurance.

Impact of the Growth in the Service Sector and the Contingent Workforce:

Traditionally, employer-sponsored retirement income and retiree medical plans

have been more prevalent in the manufacturing than the service sector, where the

proportion of employment has continued to increase. Economic and demographic

shifts have also contributed to a rise in the number of seasonal, part-time, and contingent workers. These individuals may comprise as much as one-third of the workforce and are less likely to participate in employer-sponsored retirement income and

retiree medical plans. The above trends and current regulatory burdens have created the need to reexamine the employer, individual and federally funded retirement systems and implement a uniform and consistent national retirement policy.

Below is a framework of principles and specific recommendations to guide the formulation of such a national policy.
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GENERAL PRINCIPLES

SHRM believes that government shares responsibility with American workers to achieve adequate retirement income and have access to adequate medical care.

Moreover, to enable employers to help support retired employees; public policy

should encourage the voluntary establishment of retirement programs. To facilitate

sound retirement planning, we have established the following three fundamental

principles:

1. Primary Individual Responsibility for Retirement Financing: Individuals should have primary responsibility to provide for their own adequate retirement income

and health maintenance funding. Individuals should be responsible for planning and

building their own retirement resources, including anticipating their retirement expenses and the sources of funding to meet their needs. To this end, the government

should encourage or otherwise facilitate retirement (financial) needs planning of the

American worker and families, including voluntary employer education programs.

Importantly, the government should encourage individuals to provide for their own

retirement income and health maintenance, by making available tax-favored savings

vehicles.

2. Government Responsibility for Retirement Income and Medical Coverage:

Through its mandated Social Security and Medicare programs, as public policy the

government shares with the American worker the responsibility for providing some

reliable basic retirement income and health care for all individuals. Through taxation of, and an implied promise to, all American workers, these programs have become fundamental components of our country’s retirement system. The government

should also facilitate the continuation and growth of employer sponsored programs

and provides consistent tax incentives and simplified regulations to encourage employers to provide retirement benefits that otherwise would be sought from the government at greater cost to society. In addition, to enable American workers to have

an adequate and secure retirement, it is incumbent on the government to maintain

a fiscal policy that ensures low inflation over the long term.

3. Employer’s Role in Providing Retirement Benefits: Employers may find themselves voluntarily able to help workers achieve adequate retirement incomes and

maintain their health during retirement, reducing pressure on government funding

for retirees. Employers play key roles in providing retirement income and medical

coverage through payments into the Social Security and Medicare systems and voluntarily to employer sponsored retirement income and medical plans.

Upon these principles, we propose the following framework for a national retirement policy:

SPECIFIC FRAMEWORK RECOMMENDATIONS:

Individual Responsibility for Retirement Financing

1. Regulation by Individual: To avoid retirement income inequities caused by multiple retirement plans, variability in generosity or finances of employers, dual family

incomes, and complex retirement plan regulations, contributions set aside for retirement income and retiree health care should be regulated, if at all, only on an individual basis in aggregate rather than on an employer, family or retirement plan

basis. Any necessary regulations should be understandable to the general public,

and consistent with the long-term objective of individual financial stability.

2. Limitation on Retirement Plan Contributions: To obviate the need for nonqualified retirement plans, overly complex regulations, and excessive plan administration costs, all arbitrarily established limits on the dollar amounts which may be

deferred for retirement income should be eliminated. If there are concerns that a

few senior employees would inordinately benefit from tax qualified plans; limits

should only be applied to a tightly defined group of policy making executives. In

that all distributions would be taxed when received, this change would not affect

the amount of taxes paid, but only the timing of tax revenues.

3. Regulations and Access to Retirement Plan Funds: The same regulations on administration and investment of, and restrictions on access to, funds set aside for retirement should apply equally to individual retirement plans and employer sponsored plans. Access to any plan funds for retirement income or medical expenses

prior to retirement should be limited to significant life events, including purchase

of a primary residence, funding of the taxpayer’s higher education, demonstrable severe hardship, and other similar reasons acceptable to the plans administrators. All

funds distributed prior to retirement should require a scheduled payback into the

retirement plans within a reasonable time frame.

4. Facilitating Retiree Mobility: Recent federal legislation was enacted which prevents states from taxing retirement benefits based on the location earned rather
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than where received. To perpetuate this legislation ERISA pre-emption also should

be applied to state tax laws to base taxation of retirement income on receipt rather

than where income liability was incurred. This will more fairly align state tax revenues with the services required by retirees, will be more equitable between states,

and will reduce the administrative cost of retirement plans.

5. Qualified Individual Retirement Plans: Due to increased employee mobility, the number of employees working for multiple employers and/or working for employers

which don’t sponsor retirement plans, and the need to facilitate employee retirement

savings for years when an employee will not earn a vested retirement benefit, regulations and tax laws should be revised to:

a. Streamline the establishment of individual savings accounts for both retirement income and medical expenses during retirement. b. Encourage self-employed individuals and small to medium size employers to provide retirement income savings and retiree medical plans, c. Encourage personal saving for retirement, and

d. Permit retroactive contributions to individual retirement plans to make-up con- tributions subsequently permitted by regulatory change or plan operation (e.g. loss

of vesting). SHRM Board Approved Position, March 1991: SHRM supports efforts to permit

retroactive contributions to IRA’s for years for which a participant loses retirement

plan vesting (e.g., short-term employment). To provide equity with married employees, who each earn retirement benefits from separate employers, IRA contribution

eligibility should not be precluded by a spouse’s qualified retirement plan coverage.

FEDERAL GOVERNMENT PROVIDED BASIC RETIREMENT INCOME AND MEDICAL CARE

1. Mandatory Coverage. Coverage for every employee in a federal government re- tirement program (such as the current Social Security and Medicare programs)

should be mandatory. Current parallel plans (e.g. Federal & State Government, &

Railroad Retirement and religious body plans) should be consolidated with Social

Security into one successor program to produce a single consistent approach toward

a floor of retirement income.

2. Maintenance of Benefit Levels: It is important to avoid further erosion of cur- rently accrued (hence earned) Social Security and Medicare benefits. This is essential to ensure workers at every level receive the total retirement income and medical

protection on which they have based their financial planning, believing Social Security and Medicare benefits were promised by the government throughout their careers. Maintaining these benefits will also facilitate the affordability of employersponsored retirement plans, many of which assume retirees also receive federally

sponsored retirement income benefits.

3. Funding. In order that current workers and work force entrants will be assured of some minimal retirement income and retiree health care, the Social Security and

Medicare trust funds, and/or their successors, must be maintained on a financially

sound basis, in line with the funding required of individual and employer sponsored

plans. However, this should be 10 accomplished without shifting the funding burden

substantially to employers through increased taxes.

EMPLOYER-SPONSORED RETIREMENT PROGRAMS

1. Individual Retirement Savings Accounts: To encourage small employers to pro- vide retirement programs, and to facilitate transfers of retirement funds between

employers of all sizes when employees change employers, regulations should be simplified to permit and/or facilitate employers to place current retirement income and

retiree health care contributions into an employees qualified individual retirement

plan (savings) rather than necessarily establishing separate participant accounts

within those employers plans, regardless of employer size. 2. Funding Restrictions: Reform of accounting rules (i.e. FASB) and retirement plan insurance (i.e. PBGC) should encourage faster funding of unfunded obligations

and under-funded plans for retirement income and retiree health protection. For example, increasing maximum annual contributions, and using realistic or actual interest and pay assumptions would expedite funding. Public and nonprofit organizations should have identical access to plan alternatives and be subject to the same

regulations as other employers. Government policy and regulations affecting retirement plans should be consistent and hence coordinated throughout all government

agencies.

3. Investment Education: For retirement plans in which the employee bears the

risk of investment return, employers should provide employees cost-effective diversified alternatives to direct the investment of those funds. In such plans, employers

and plan administrators should be protected from unnecessary fiduciary liability to
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facilitate educating employees on the financial impact the investment choices they

make could have on their retirement income.

Either voluntarily or involuntarily, employers should be permitted to transfer (to

other qualified plans or accounts) vested benefits following termination of employment. Similarly, employers should be permitted to distribute (to other qualified

plans or accounts) all vested proceeds for any pre-retirement termination, regardless

of the amount involved. Receiving plans should be indemnified against any disqualified funds so received. Regulations should continue to permit service based vesting

schedules, permitting employers to optimize contributions for the benefit of employees who remain employed for more than a few years.

SHRM Board Approved Position, March 1991: SHRM recognizes that the lack of

a comprehensive retirement plan portability policy could adversely affect the future

retirement security of this nations workers and therefore supports efforts aimed at

enabling participants to easily transfer funds between pension plans and retirement

vehicles such as IRAs. However, portability and preservation solutions should not

interfere with the voluntary nature of the current retirement plan benefit system

by imposing burdensome and unnecessary obligations upon plan sponsors.

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