U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

23–924 2005

FIFTH IN A SERIES OF SUBCOMMITTEE HEARINGS 

ON PROTECTING AND STRENGTHENING 

SOCIAL SECURITY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON SOCIAL SECURITY 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED NINTH CONGRESS 

FIRST SESSION 

JUNE 14, 2005 

Serial No. 109–21 

Printed for the use of the Committee on Ways and Means 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

BOB BEAUPREZ, Colorado 

MELISSA A. HART, Pennsylvania 

CHRIS CHOCOLA, Indiana 

DEVIN NUNES, California 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

SUBCOMMITTEE ON SOCIAL SECURITY 

JIM MCCRERY, Louisiana, Chairman 

E. CLAY SHAW, JR., Florida 

SAM JOHNSON, Texas 

J.D. HAYWORTH, Arizona 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

SANDER M. LEVIN, Michigan 

EARL POMEROY, North Dakota 

XAVIER BECERRA, California 

STEPHANIE TUBBS JONES, Ohio 

RICHARD E. NEAL, Massachusetts 

ALLISON H. GILES, Chief of Staff 

JANICE MAYS, Minority Chief Counsel 

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

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

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

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

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

is further refined. 

iii 

C O N T E N T S 

Page 

Advisory of June 7, 2005 announcing the hearing ................................................ 2 

WITNESSES 

Watson Wyatt Worldwide, Steven A. Nyce, Ph.D. ................................................ 5 

Texas Tech University, Thomas L. Steinmeier, Ph.D. .......................................... 15 

The Urban Institute, C. Eugene Steuerle, Ph.D. .................................................. 19 

American Academy of Actuaries, Ron Gebhardtsbauer ........................................ 32 

Service Employees International Union, Valerie Long, on behalf of Gerry 

Hudson .................................................................................................................. 41 

New America Foundation, Maya C. MacGuineas ................................................. 44 

SUBMISSIONS FOR THE RECORD 

American Federation of State County and Municipal Employees (AFSCME), 

Loveless, Charles, statement ............................................................................... 76 

Barrett, Marilyn, Nantucket Public Schools, Nantucket, MA, statement .......... 73 

Cone, Ruth, Montgomery, AL, statement .............................................................. 75 

Fay, J. Douglas, Bronston, KY, statement ............................................................ 76 

Loveless, Charles, American Federation of State County and Municipal Employees (AFSCME), statement ............................................................................ 76 

Marvin, Mary, Federal Government and Private Industry Retiree, Punta 

Gorda, FL, statement ........................................................................................... 77 

(1) 

FIFTH IN A SERIES OF SUBCOMMITTEE 

HEARINGS ON PROTECTING AND 

STRENGTHENING SOCIAL SECURITY 

TUESDAY, JUNE 14, 2005 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, SUBCOMMITTEE ON SOCIAL SECURITY

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:06 p.m., in room 

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

[The advisory announcing the hearing follows:] 

2 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON SOCIAL SECURITY 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–9263 

June 07, 2005 

No. SS–5 

McCrery Announces Fifth in a Series of 

Subcommittee Hearings on Protecting and 

Strengthening Social Security 

Congressman Jim McCrery (R–LA), Chairman on Social Security of the Committee on Ways and Means, today announced that the Subcommittee will hold the 

fifth in a series of Subcommittee hearings on protecting and strengthening Social 

Security. The hearing will examine the impact of the American population’s increasing longevity on Social Security’s finances and explore ways to encourage work at 

older ages. The hearing will take place on Tuesday, June 15, 2005, in room 

B–318 Rayburn House Office Building, beginning at 2:00 p.m. 

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

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

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

BACKGROUND: 

Seventy-eight million Baby Boomers are heading toward retirement and eligibility 

for Social Security benefits. Those Baby Boomers and the generations that follow 

are living longer in retirement. Life expectancy at age 65 has increased from about 

14 years in 1940, to 18 years today, and will increase to 22 years over subsequent 

decades. In addition, American families are having fewer children, so the number 

of workers paying Social Security taxes to support the program isgrowing much 

more slowly than the number of beneficiaries. 

These demographic trends have put Social Security’s finances on an unsustainable 

path, because Social Security operates on a pay-as-you-go-basis; Social Security 

taxes paid by today’s workers fund the benefits of today’s retirees. As the population 

ages, the number of workers supporting each beneficiary is falling—from 16 to 1 in 

1950, to about 3 to 1 today, and it will reach 2 to 1 by 2040. As a result, Social 

Security’s Trustees estimate that in 2017, Social Security will pay out more in benefits than it collects from payroll taxes, and that by the time today’s 26-year-olds are 

eligible to retire in 2041, Social Security’s trust funds will be exhausted. Then, unless changes are made, revenues would cover 74 percent of promised benefits. As 

costs continue to rise faster than income, 68 percent of scheduled benefits are expected to be payable by 2079. 

Bipartisan councils and commissions, as well as many individual experts and policymakers, have laid out options for modifying Social Security to mitigate the effect 

of these demographic changes and to encourage older Americans who want to continue working to do so. 

In announcing the hearing, Chairman McCrery stated, ‘‘Our aging society creates 

both challenges and opportunities for our Nation. As we explore how to improve retirement security and protect and strengthen Social Security, we need to understand 

the impact of upcoming changes in our population.’’ 

3 

FOCUS OF THE HEARING: 

The hearing will focus on the impact of America’s aging population on Social Security’s finances, as well as options to strengthen Social Security, improve overall retirement security, and encourage individuals who want to work at older ages. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

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

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

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

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

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

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

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

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

with the formatting requirements listed below, by close of business Tuesday, June 

28, 2005. Finally, please note that due to the change in House mail policy, the U.S. 

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

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

FORMATTING REQUIREMENTS: 

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

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

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

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

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

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

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

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

hearing record. 

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

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

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

by the Committee. 

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

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

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

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

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

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

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

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

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

f 

Chairman MCCRERY. The hearing will come to order. Good 

afternoon, everyone. Welcome to the fifth in the Subcommittee 

hearing series on protecting and strengthening Social Security. 

Today we will learn more about how our society is growing older, 

and how this trend will impact Social Security’s finances. Each new 

cohort of seniors is living longer and living healthier. As everyone 

4 

in this room either is, or expects to be a senior, that is very good 

news for all of us. 

However, our increased life expectancy has implications for many 

aspects of society, including Social Security. The Social Security actuaries predict that the number of workers will grow more slowly 

than the number of beneficiaries. While 3.3 workers support each 

Social Security beneficiary today, only two workers are expected to 

support each beneficiary by 2040. This is an important statistic because Social Security is a pay-as-you-go system. The Social Security contributions of current workers pay for the benefits of current 

retirees. Along with Social Security, our aging problem has implications for our labor force. We all know that older workers can make 

valuable contributions to our economy and society. One question we 

will address today is how Social Security can be modernized to 

help, not hinder people who choose to work in their senior years. 

Eyewitnesses will share their insights into America’s future. As responsible policymakers we need to look ahead, as the policy choices 

we make today will have a major role in shaping that future. I welcome our distinguished panel. Thank you for coming today. I look 

forward to hearing your views. I would ask the Ranking Member, 

Mr. Levin, if he would like to make an opening statement? 

Mr. LEVIN. Thank you very much, and I join in welcoming all 

of you. A few of you have been at this table or another, but for others it is your first visit, so a special welcome. Today’s hearing is 

to discuss a piece of very good news, that Americans are living 

longer now and are expected to live even longer in the future, and 

to discuss its impact on Social Security, which provides retirees 

with guaranteed benefits no matter how long they live. Some of my 

colleagues may suggest that the main answer to this challenge is 

to raise the normal retirement age, the age at which one can retire 

and collect full Social Security benefits. Currently that age is rising, as we know, to 67. Workers are allowed to retire as early as 

62, but if they retire before normal retirement age, their benefits 

are reduced. 

As our population ages, it is important to ensure that older 

adults are protected from discrimination, and allowed to work as 

long as they choose, both to reduce pressure on our retirement systems, and to ensure that we fully benefit from their experience and 

talent. Many people, however, do not have the luxury of choosing 

their retirement age. Their decisions are dictated by their health, 

their employers, and other factors outside of their control. As a result—at least one result—the experience to date has been that increasing the Social Security retirement age, rather than making it 

possible for people to work longer, forces them to take reduced benefits when they retire. Accordingly, the burden of proof is on those 

who would further raise their retirement ago to show that it would 

have the desired impact. 

This is particularly true, in our judgment, for those who support 

President Bush’s proposal to privatize Social Security by diverting 

trillions of dollars to private accounts. Those accounts alone would 

make Social Security’s shortfall worse, potentially forcing much 

more draconian benefit cuts, whether via retirement age increases 

or other changes. The massive borrowing proposed by the President, nearly $5 trillion in the first 20 years of accounts alone, will 

5 

also make it more difficult for us to prepare Medicare and Medicaid 

to provide the health care and long-term care we know future retirees will need. 

Our longer lives do pose a challenge for Social Security, but they 

also make preserving Social Security’s current structure all the 

more important. Its guaranteed defined benefit, which rises with 

inflation and cannot be outlived, ensures that long-lived retirees do 

not end up in poverty. Private pensions, retirement savings, and 

investment accounts do not have these protections. Social Security’s benefits account for a larger and larger share of retirement 

income as people age. 

The President has proposed that we privatize Social Security, 

over time replacing its guaranteed benefits with risky private accounts. This change is particularly risky as we live longer, since 

the income from the accounts is not guaranteed and the private annuities the President’s plan requires people to buy from insurance 

companies would likely not be fully protected against inflation, 

leaving people to grow poorer and poorer as they age. They also 

could not offer the same level of protections for spouses and survivors, who are also living longer, as Social Security does today. 

The American people have spoken very clearly about the privatization proposals. The more they hear about them, the less they like 

them. I do believe we should discuss ways to ensure that workers 

have long and productive careers, both to support our retirement 

systems and to support our economy. Unfortunately, the President’s insistence on private accounts remains a roadblock in the 

way of our ability to craft bipartisan legislation to address the 

shortfall in 2041 or 2052. Thank you, Mr. Chairman. 

Chairman MCCRERY. Thank you, Mr. Levin. We are pleased to 

have a very distinguished panel to share their views with us today. 

Steven A. Nyce, Senior Research Associate from Watson Wyatt 

Worldwide; Thomas L. Steinmeier, Department of Economics and 

Geography at Texas Tech University in Lubbock, Texas; Gene 

Steuerle, Senior Fellow at the Urban Institute; Ron 

Gebhardtsbauer, Senior Pension Fellow, American Academy of Actuaries. Did I get that right? Okay. Valerie Long, who is here today 

in her own right as the President of the Service Employees International Union, Local 82, and the International Vice President of 

the International Executive Board. She is also here on behalf of 

Gerald Hudson. Mr. Hudson could not make it today. He is the Executive Vice President of Service Employees International Union. 

So, Ms. Long, thank you for making the effort to be here to replace 

Mr. Hudson. And Maya MacGuineas, Senior Fellow at the New 

American Foundation. Welcome to all of you. We look forward to 

your testimony. You have submitted written testimony which will 

be inserted in the record in its entirety. We would ask you to try 

to summarize that testimony in about five minutes. Dr. Nyce, we 

are going to let you start it off. You may proceed. 

STATEMENT OF STEVEN A. NYCE, PH.D., SENIOR RESEARCH 

ASSOCIATE, WATSON WYATT WORLDWIDE 

Mr. NYCE. Mr. Chairman and distinguished Committee Members, thank you for the opportunity to be here before you today to 

discuss the challenges of our aging population. My name is Steve 

6 

Nyce, and I am a senior Research Associate at the Research and 

Information Center at Watson Wyatt Worldwide. As a firm we have 

long been engaged in research concerning the aging of the U.S. 

work force and its implications for our retirement system. As we 

think about how our aging population will affect the financing of 

our pay-as-you-go retirement plan, it is generally considered in 

terms of the payroll tax rate required to sustain it. The tax rate 

required to support the system is the product of two very important 

ratios, the ratio of beneficiaries relative to workers, or the dependency ratio, and the ratio of average benefits to average covered 

earnings, or the replacement rate. The future financial problems 

with the system are almost entirely tied to the dependency ratio 

which is expected to increase significantly in the coming decades. 

Today there are roughly 3 beneficiaries for every 10 workers. By 

2040, that ratio will rise to one beneficiary for every two workers. 

While this may not seem like a significant increase, it is because 

of these demographic changes that the Social Security actuaries are 

projecting program costs to increase by over 50 percent over the 

coming decades. 

Much of the discussion around the challenges we face due to our 

aging society has revolved around retirement policy. The debate 

has centered on figuring out ways within the framework of our current budgets to honor those promises we made decades ago. However, the issues related to population aging and its economic impact go beyond simply keeping the elderly out of poverty. Instead, 

the issue is of stagnant or falling standards of living that could affect all segments of our society. In very simple terms, the amount 

of output an economy can create is determined by the number of 

workers and the efficiency with which output is produced. In more 

formal terms, the rate at which Gross Domestic Product (GDP) 

grows essentially equals the sum of labor force growth plus worker 

productivity growth. 

The United States has historically enjoyed steady economic 

growth and improvements in standards of living. By many accounts, the steady improvement in the standards of living over the 

last half century has created an appetite for continued upward mobility. In this context, the challenge with our aging population is 

that the future simply will not see the labor force growth of the 

past 30 years or so. Over the coming decade the labor force growth 

will be only about 75 percent of that seen during the nineties, and 

the growth rate projected for the 2010s will be only about one-third 

that experienced over the past decade. So, if we want to continue 

to enjoy standards of living growth similar to those we have become accustomed to, and the demographics indicate slower rates of 

labor force growth, we are going to need a significant uptake in 

productivity growth to make that happen. 

So, herein lies the crux of the aging problem. If we find that we 

are unable to fix our problems by boosting labor supply growth or 

achieving higher rates of worker efficiency, the future portends 

slower rates of improvements in standards of living. Retirement 

programs will simply become a primary mechanism used to allocate 

our disappointing outcome across various segments of our society. 

The critical question we face today is how do we share this burden 

7 

1For further discussion see Sylvester Schieber’s, ‘‘Social Security Reform,’’ Watson Wyatt Insider: Special Edition, March 2005, pp. 42–51. 

across our society? More importantly, how do we share this burden 

between generations? 

The fiscal challenges we face in the future are not all fixable 

through our Social Security system. However, there are a number 

of measures that can be taken. Encouraging greater work force participation at older ages is one of the most important avenues we 

should consider. Some of the most valuable human capital assets 

in our economy are the seasoned and educated workers in their fifties and sixties. Some avenues we may consider are raising the 

early and normal retirement ages, eliminating the earnings test, 

increasing the back-loading of benefits, and improving public 

awareness about the embedded incentives in these programs. Each 

of these measures has the potential to realign our system, and thus 

our expectations about retirement ages and benefit levels, to the 

pace of improvements and life expectancy. These measures have 

the potential to reduce the number of retirees, thus lessening the 

burden of retiree dependency. The increased number of workers 

would also increase total output, giving policymakers more flexibility in redesigning retirement programs. So, workers could realize 

the fruits of their improved productivity without having to drive 

the retiree population into poverty. As noted earlier, it is more 

than just about increasing work at older ages. It is about finding 

ways to boost work force participation among all individuals, and 

about adopting policies to enhance worker efficiency. Only by doing 

so will we be able to satisfy the wants and needs of our population 

for generations to come. Thank you, Mr. Chairman. 

[The prepared statement of Dr. Nyce follows:] 

Statement of Steven A. Nyce, Ph.D., Senior Research Associate, Watson 

Wyatt Worldwide 

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

and Means Committee of the U.S. House of Representatives, thank you very much 

for the opportunity to testify to you today about the challenges of our aging population. My name is Steve Nyce, and I am a senior research associate at the Research 

and Information Center of Watson Wyatt Worldwide. As a firm, we have long been 

engaged in research concerning the aging of the U.S. workforce and its implications 

for our retirement system. Recently, my co-author, Syl Schieber, and I have published an extensive analysis of the economic challenges that all developed societies 

will encounter due to their aging populations entitled, ‘‘The Economic Implications 

of Aging Societies: The Costs of Living Happily Ever After’’. I am very pleased to 

be here today, and all the views expressed here are my own, and should not be attributed to Watson Wyatt Worldwide. 

Aging in the Context of Social Security 1

Since the mid-1950’s, Social Security has been primarily operated on a pay-go 

basis. In the most basic sense, this means that contributions paid into the system 

are immediately paid out as benefits. However, most of these programs are not run 

as a pure pay-go basis. In practice, policy makers generally utilize a small contingency trust fund as a leveling device to sustain operations over variations in benefits and revenues across economic cycles. 

The ‘‘cost’’ of a pay-go retirement plan is generally considered in terms of the payroll tax rate required to sustain it. The tax rate required to support the system is 

the product of the number of beneficiaries relative to workers multiplied by the ratio 

of average benefits to average covered earnings. The ratio of beneficiaries to workers 

is called the dependency ratio—the number of retirees dependent on benefits relative to the number of workers supporting them. The ratio of benefits to wages in 

a retirement plan is called the replacement rate—how much of an average worker’s 

8 

2Schieber, Sylvester J., John B. Shoven, The Real Deal, (New Haven: Yale University Press, 

1999), pp. 185. 

earnings are replaced by the retirement benefit. The reason why population aging 

sets off alarms is clear from the dependency ratio measure in the costing of the program. As the ratio of pension beneficiaries to contributors rises under these plans, 

the cost of a given replacement rate rises proportionately. 

By now, most Americans are aware that our population is aging. As such, expectations are for a significant increase in old age dependency ratios in the coming decades. But the way demographics will affect costs in the future will be very different 

than it was over the last half century. Figure 1 maps the dependency ratio and the 

replacement rate under the system. First, the dotted line shows the dependency 

ratio. Between 1951 and 1977 the ratio of beneficiaries to covered workers rose from 

roughly 7 percent to over 32 percent, respectively. Certainly changing demographics, 

notably advancements in life expectancy, played a part. But most of the change was 

attributable to the way we phased in the program. In the program’s early years, 

very few people over age 65 received benefits because they had not paid payroll 

taxes during their working careers. Initially, payroll taxes were levied on all wage 

and salary workers in the private sector—roughly 60 percent of the workforce in the 

1930s. Over the years, coverage was gradually expanded to include farmers and the 

self-employed, professionals and domestic workers, and state and local government 

workers on a voluntary basis. The final sizeable expansion of coverage was the addition of newly hired federal civilian workers. It was not until the mid-1970s that the 

program actually matured. It was at that point that the percentage of people over 

65 who were receiving benefits equaled the percentage of the active workforce contributing to the program. Since that point, the dependency ratio has remained relatively stable reflecting the maturing of the system. 

Figure 1 

Historical Retiree to Worker Dependency Ratios and Average Benefit to Average Wage Ratios in the U.S. Social Security Program 

Source: Social Security Administration, Annual Statistical Supplement to the Social 

Security Bulletin, various years; and Office of the Actuary, Social Security Administration. 

The solid line in the graph represents the ratio of average benefits to average 

wages. Over much of the 1950s and 1960s, the replacement rate under the Social 

Security program was relatively constant at about 18 percent. However, in the late 

1960s the concern about poverty led Congress to expand the program. This expansion continued through much of the 1970s until the 1977 and 1983 amendments 

were implemented to stabilize the program. In fact, the rapid rise in the replacement rate in the 1970s created a string of deficits that had people talking for the 

first time about the system literally running out of money.2 When all was said and 

done, average benefits to average wages rose by nearly two-thirds over this period. 

Since its peak, program costs have been relatively flat and have remained that way 

for most of the last two decades. Expectations are for costs to remain stable for the 


Insert offset folio 23924a.001
9 

next few years until the Baby Boomers begin to retire at the end of the current decade. 

Looking to the future, we see in Figure 2 that the coming challenge in a mature 

system will be the rising rate of beneficiaries. This picture extends the series in Figure 1 using projections by the Social Security actuaries for the dependency ratio and 

the replacement rate. It is important to note that the ratio of benefits to wages in 

this picture is for the medium-earning worker who retires at age 65. This is different from the previous picture which showed the ratio of benefits to wages for all 

beneficiaries, including dependents and survivors who receive somewhat smaller 

benefits. 

Over the next forty years or so the ratio of benefits to wages will remain relatively 

flat. The subtle decline in the average-worker’s replacement reflects the rising age 

of normal retirement and the reduced benefits for an individual retiring at age 65. 

The dependency ratio, however, is much more important in terms of its long-term 

implications. As the leading edge of the baby boom begins to exit the workforce 

starting in 2008, the dependency rate will begin a long sustained rise projected to 

last the next thirty years. Today, there are roughly three beneficiaries for every ten 

workers. By 2040, that ratio will fall to one beneficiary per every two workers. 

While this may not seem like a significant increase, Social Security actuaries are 

projecting the cost rate of the program to climb from 11% to about 18% over this 

period. 

Figure 2 

Projected Retiree to Worker Dependency Ratios and Benefit to Wage Ratios 

for Hypothetical Medium Wage Workerrs Retiring at Age 65 in the U.S. 

Social Security Program 

Source: Office of the Actuary, Social Security Administration. 

A comparison between the two figures clearly shows that the financial dilemma 

facing Social Security today is of very different makeup from the earlier one. The 

financial dilemma we faced in the 1970s was almost entirely the result of economic 

factors and problems with the benefits formula. Over the 1970s, the ratio of average 

benefits to wages increased nearly 40 percent compared to a 13 percent increase in 

the dependency ratio. As such, the earlier crisis was about the replacement rate. 

Once those problems were addressed and the program reached maturity in the 

1980s, costs have remained relatively flat. The future financial problems are almost 

entirely tied to the dependency ratio. It is because of these demographic changes 

for the coming quarter century or so that the Social Security actuaries are projecting program costs to increase by over 50 percent over the coming decades. 

Aging Considerations in a Larger Economic Context 

Much of the discussion around the challenges we face due to our aging society has 

revolved around retirement policy. The debate has centered on figuring out ways 

within the framework of our current budgets to honor those promises we made decades ago. However, the issues related to population aging and its economic impact 


Insert offset folio 23924a.002
10 

goes beyond simply keeping the elderly out of poverty. Instead, the issue is of stagnant or falling standards of living that could affect all segments of our society. If 

economic growth is brought to a halt by the changing demographic composition, pension policy is naturally one of the primary mechanisms for allocating the disappointing outcome across various segments of our society. It is within this context 

that much of the angst over pension policy in the developed world is framed today. 

The challenges before Congress are much broader than that of Social Security reform. They are fundamentally about figuring out how to satisfy the wants and desires of our population. With the first of the Baby Boomers less than a decade from 

reaching the normal retirement age under Social Security, we are now faced with 

the prospect of not being able to do that. To better understand the effect of aging 

in a broader economic context, it’s useful to revisit the underlying factors that determine growth within an economy. 

A fundamental dynamic in every economy is the interplay between consumer demand for goods and services and society’s ability to meet that demand. From the 

earliest systematic study of economic behavior, economists have sought to explain 

the production of output in terms of its inputs. While there is no universal agreement on the mathematical formulation of the model, it is well understood that the 

basic building blocks of economic prosperity are determined by the number of workers and the efficiency with which output is produced. Although economists often employ complex terminology in their descriptions, at a fundamental level, economies 

operate in a very simple fashion. The rate at which gross domestic product (GDP) 

grows essentially equals the sum of labor force growth plus worker productivity 

growth (See Figure 3). 

Figure 3 

Operations of the Macro Eonomy and Why Demographics Matter 

Depends on consumer 

demand 

Demographics and work 

incentives 

Physical capital, quality of 

workers and innovation 

The United States has historically enjoyed steady economic growth and improvements in living standards. One measure of growing consumer demand is the GDP 

per capita, a reasonably good measure of the standard of living over time. By this 

measure, the United States has historically shown continued improvement—that is, 

the demand for goods and services has steadily outpaced population growth (see 

Table 1). People have generally been willing to drastically change their lifestyles in 

order to improve their standard of living. Faltering economic progress has usually 

also meant political pressure for our elected leaders to restart the growth process 

to settle a restive citizenry. This remarkable economic success story has been helped 

along by improved health and education systems, new and better physical infrastructure, technology, and the relatively strong cross-national cooperation that our 

governments have been able to establish and maintain. One cannot ignore, however, 

the role that growing labor forces have played in this prosperity. 

By many accounts, the steady improvement in the standards of living over the 

last half century has created an appetite for continued upward mobility. Expectations of future levels of U.S. output herald continuing improvement in standards of 

living over the next two decades. Based on Congressional Budget Office (CBO) estimates, annual real per capita GDP growth is projected to be roughly 2.0 percent 

over the remainder of this decade, which is consistent with historical patterns. From 

2010 to 2020, the growth in GDP per person is anticipated to slow to roughly 1.66 

percent per year, which again is roughly in line with the past. 


Insert offset folio 23924a.003
11 

Table 1: Population and Output Measures in the United States for 

Selected Periods and Expectations for the Future 

Annualized GDP growth 

rate from prior date 

(percent) 

GDP per capita in 2000 

dollars 

Annualized growth rate 

in per capita GDP from 

prior date (percent) 

1950 $11,669.73 

1960 3.48 13,845.05 1.72 

1970 4.19 18,390.54 2.88 

1980 3.19 22,658.91 2.11 

1990 3.26 28,507.01 2.32 

2000 3.28 35,659.28 2.26 

2010 2.87 43,449.48 2.00 

2020 2.48 51,237.00 1.66 

Sources: Congressional Budget Office; Census Bureau; and U.S. Department of Commerce, Bureau of Economic Analysis. 

How are we going to meet those expectations? The corollary to rising dependency 

rates shown in Figure 2 is that the future simply will not see the labor force growth 

of the past 30 or so years. Over the coming decade labor force growth will be only 

about 75 percent of that seen during the 1990s, and the growth rate projected for 

the 2010s will be only about one-third that experienced over the past decade (see 

Figure 4). This is not idle conjecture—most of the people who will make up our 

workforce over the next 20 years are already alive. We know a lot about working 

patterns, when people usually retire, and how long they are likely to live. While 

some of these patterns may change slightly over time, they are not likely to change 

drastically over the near future. 

So if we want to continue to enjoy standards of living growth similar to those in 

the past and given our expectations are as much and demographics indicate slower 

rates of labor force growth, the critical question is whether we will have enough productivity growth to make this work? Looking again to our most recent history, productivity grew by 2.66 percent per year during the 1950s and 1960s and then 

slowed. In fact, the average annual growth in productivity over the last three decades was a modest 1.5 percent. However, recent years have witnessed a resurgence 

in productivity growth, averaging roughly 2.1 percent per year during the last half 

of the 1990s and over 2.3 percent in 2002 and 2003. 

12 

Figure 4 

U.S. Civilian Labor Force Growth Rates for Selected Decades 

Sources: Lofgren, Eric P., Steven A. Nyce and Sylvester J. Schieber. (2003). ‘‘Designing Total Reward Programs for Tight Labor Markets.’’ Benefits for the Workplace 

of the Future, eds. Olivia S. Mitchell, David S. Blitzstein, Michael Gordon and Judith F. Mazo, Pension Research Council of The WhartonSchool, University of 

Pennsylvania, Philadelphia, March. 

Using the CBO’s estimates of GDP growth over the coming decade with our estimates of labor supply growth, it is relatively straight forward to solve for productivity growth rates needed to meet our expectations over the coming decade. The 

bottom line is that for us to continue to experience rising standards of living like 

those we’ve become accustomed to, we are going to need a significant rise in productivity growth. In fact, we will need to maintain productivity growth of near 2.5 percent for this entire decade to achieve the growth we desire. This is a significant divergence from that of the last three decades, which averaged roughly 1.5 percent. 

If we extend our projection period to the end of the second decade, the required rate 

of productivity growth needed to meet our desired rates of economic growth is 2.2 

percent. The lower rate reflects the CBO’s anticipated slowdown in economic growth 

over the 2010s—in part reflecting the demographic challenges ahead. While we have 

seen rising rates of productivity growth in our near term here in the US, the question is whether these are sustainable. 

So here in lies the crux of the aging problem. If we find that we are unable to fix our problems by boosting labor supply growth or achieving 

higher rates of worker efficiency, the future portends slower rates of improvements in standards of living. Retirement programs will simply become a mechanism we use to allocate our economic disappointment. The 

critical question we face today is how do we share this burden across our 

society? More importantly, how do we share this burden between generations? 

In the most basic sense, there are two possible options to achieve solvency under 

a pay-go financed system—raise taxes or reduce benefits. The worry that our current retirement systems will demand taxes that are too high articulates a concern 

that workers’ disposable income levels will fall or not keep appreciably abreast of 

improving worker productivity. If that happens, then workers will be producing 

more but receiving less, in that their productivity will not purchase the same increase in standards of living enjoyed by their parents. The worry that pension benefits will have to be reduced articulates the concern that retirees’ disposable income 

levels will fall, potentially leaving future generations of our elderly more vulnerable 

to income insecurity. 

Whatever course we choose, we must understand that the problems with a paygo financed Social Security system are not just financial. If we limit our solutions 


Insert offset folio 23924a.004
13 

3 Ehrlich, Isaac and Jinyoung Kim, ‘‘Social Security, Demographic Trends, and Economic 

Growth: Theory and Evidence from the International Experience,’’ National Bureau of Economic 

Research Working Paper No. 11121, February 2005. 

of the financing dilemma to tax increases of the active workers or the reduction of 

retiree benefits to achieve solvency, we may very well create a host of inefficiencies 

in our labor and capital markets that ultimately impede economic growth. Changes 

in the fundamentals of the system have been shown to have adverse effects on key 

demographic factors, private savings and long-term growth rates. Notably, recent research has shown that increases in payroll taxes are associated with declines in net 

marriage rates and total fertility rates.3

But the adverse effects of high payroll tax burdens on labor markets are not limited to workers. Payroll taxes are shared between both employers and employees. 

As the burden rate rises, employers may react to these higher costs creating its own 

set of economic problems. For example, in a number of EU countries with expensive 

social programs, the persistently high rates of unemployment largely result from the 

high fixed costs of hiring workers. Also higher employer taxes on labor may depress 

real wage growth, thus passing the rising costs of social insurance programs onto 

workers, which has occurred in several developed economies over the last few decades. While our demographic and economic outlook is much more favorable than 

many other developed societies, it is important that we do not become complacent 

with our own situation. If we do, there is concern we could fall into the same trap 

that countries like Germany and Japan are in today. 

The Challenges Ahead 

The basic structure and the myriad of rules that make up our retirement system 

here in the U.S. has entrenched into our culture expectations about the age we can 

retire, how much income we should receive and about the basic lifestyle we can expect to lead during the remaining years of our lives. Our most fundamental challenge is figuring out how to adjust these expectations to encourage greater workforce participation, longer working careers and greater labor market efficiency. The 

fact is our current system has not adapted rapidly enough to our changing demographic realties where surplus labor is a thing of the past. 

The fiscal challenges we face today are not all fixable through our Social Security 

system. However, there are a number of measures that can be taken. Since the 

focus of our discussion today is about ways to encourage greater workforce participation at older ages I will limit my comments to those measures. Some of the most 

valuable human capital assets in our economy are the seasoned and educated workers in their 50s and 60s. Keeping workers in the labor market longer would reduce 

the number of retirees, thus ameliorating the effect of retiree dependency. The increased number of workers would also increase total output, giving policymakers 

more flexibility in redesigning retirement programs, so workers could realize the 

fruits of their improved productivity without having to drive the retiree population 

into poverty. 

Raise the early and normal retirement ages 

When Ida May Fuller first received her check in January of 1940, her life expectancy at that point was 14.7 years. Today, an individual retiring at 65 is expected 

to live on average another 19.6 years. But when Ida May Fuller retired, the typical 

worker did so at age 65 or later; today, workers claim Social Security benefits at 

age 62 more than any other age. The fact that people are living longer is essentially 

a very good thing. But the fact is our system has not adjusted retirement ages and 

benefit levels to keep pace with improvements in life expectancy. The result has 

been increasingly longer retirement periods with greater lifetime benefits. The modernization of production techniques in manufacturing and the shift toward serviceoriented work have reduced the strenuous nature of work for most people. If work 

is becoming less strenuous and people’s ability to do it is improving, does it makes 

sense to continue to subsidize longer retirement periods when many individuals are 

still able to be productive? 

For all practical purposes, raising the retirement age is a benefit cut. But compared to other proposals that reduce benefits, the lifetime benefit for those that 

delay retirement would be higher due to the additional revenues from working 

longer. A concern of allowing individuals to take benefits at a reduced rate at the 

early retirement age is that it may result in greater numbers of individuals with 

inadequate income to meet their needs throughout retirement. Moreover, the system 

would benefit from the additional revenues as well as a reduction in the number 

of beneficiaries. 

14 

4Manchester, Joyce and Jae Song, ‘‘New Evidence on Earnings and Benefit Claims Following 

the Removal of the Retirement Earnings Test in 2000,’’ Presentation at the Tax Economists 

Forum, Wednesday, June 8, 2005. 5Gustman, Alan L. and Thomas L. Steinmeier, ‘‘The Social Security Retirement Earnings 

Test, Retirement and Benefit Claiming,’’ National Bureau of Economic Research Working Paper, 

No. 10905, November, 2004. 

The concern is that this approach does not account for those individuals with 

shorter expected lifespans. To account for these groups who typically have lower lifetime income through separate provisions makes more sense than continuing to subsidize ever-longer retirement periods. 

Eliminate all earnings tests 

Under the original earnings test, Social Security benefits for those with earnings 

above a certain threshold would lose part or all of their benefits in the year of their 

earnings. This essentially imposed an additional tax on earnings for beneficiaries 

creating a disincentive to work. However, the Senior Citizens Freedom to Work Act 

of 2000 eliminated the earnings test for Social Security beneficiaries who have 

reached the full retirement age. Given the number of years since its repeal, it is 

now possible to study its effect on labor force participation of those 65 to 69. A recent analysis provided by the Social Security Administration indicates that it has 

had favorable effects at encouraging higher earnings for some workers and at increasing workforce participation, albeit slightly.4 Prior to its repeal, earnings for individuals 65 to 69 clustered around the earnings test threshold. Eliminating the test 

shifted the percentage of workers in this age group above the earnings threshold, 

indicating an increased use of earnings to supplement Social Security benefits at 

older ages. 

The repeal of the earnings test for those between early and full retirement would 

likely have a similar effect on the decision of individuals to delay entry into full retirement. This would occur despite the benefit increases being actuarially fair. In 

fact, recent research that simulated the potential effect of the this repeal and shows 

a four percentage point per year reduction in the percentage retired from full time 

work.5

Moreover, eliminating the earnings test for those between early and full retirement may also lead to an even greater effect on workforce participation among those 

above the full retirement age. To the extent that the earnings test creates disincentives to work for those between 62 and full retirement, the workforce effects of the 

existing earnings test repeal does not account for the difficulty in increasing work 

intensity once an individual has scaled back or even outright left the labor market. 

Increase the back loading of benefits 

It is very common in the private pension system for employers to design their 

pension programs to provide low levels of benefits for short tenured younger workers and to pay a much more generous benefit for those with longer tenure. This sort 

of accrual structure of a defined benefit plan can create significant incentives for 

workers to stay with their existing employer throughout their careers. The fact that 

claims on the current Social Security system cluster around the early and normal 

retirement ages indicates a low response by individuals to the delayed retirement 

credits. Tilting the accrual structure so that older workers receive increasingly higher benefit payouts would create much greater incentives for individuals to delay 

claims and remain in the workplace. This adjustment can very sensibly be accomplished without increasing the cost burden on the system. 

Disability Program 

Discussion of the disability program has often escaped the same level of scrutiny 

that the retirement program has received—in part because the DI program is much 

smaller than OASI. But over the last two decades the liberalization of the DI system 

has lead to over a 4.5 percent annual increase in covered beneficiaries. Part of the 

problem is that the definition of ‘‘disability’’ may appear to be a reasonably objective 

determination, but in practice it is very difficult to determine whether or not an individual is capable of ‘‘substantial gainful activity’’. As work in this country becomes 

increasingly less physically demanding in our ‘‘knowledge economy’’, it might be useful to rethink not only how disability is defined but also how this definition is implemented. While many individuals currently receiving DI benefits are rightful candidates for who the program was designed to insure, there are a number of others 

within the system that maintain the skills and capabilities to be a productive resource in our economy. 

15 

Campaign for improved public awareness 

One of the greatest challenges that is often overlooked in our retirement system 

today is the lack of understanding among workers about their retirement benefits. 

Studies repeatedly find that workers fail to understand the value of the benefits 

they will receive, age at which they can receive benefits and the risks associated 

with their retirement decision. This problem is not isolated to our Social Security 

system; it is widespread throughout the private sector as well. Recent research by 

Watson Wyatt shows that one out of three workers does not even recognize that 

their employer offers a defined benefit plan. If workers do not understand the provisions of their retirement program, it is highly unlikely they will respond to the financial incentives imbedded in the plan. If we hope to fundamentally change workforce behavior of older individuals through a myriad of adjustments in the current 

program, it is critical that we engage people in the process and take measured steps 

to increasing individual’s understanding. A generous communication campaign 

around these reforms is an effective way to better equip individuals to make informed decisions. 

CONCLUDING REMARKS 

In many regards, the financial challenges we face in the future with our Social 

Security program are minor relative to those in other developed nations. This is 

largely the result of favorable fertility rates and a high propensity of both men and 

women to work at all ages. However, by no means does this portend an easy road 

ahead. When the baby boomers begin to retire as early as 2008, the demographic 

forces will become highly unfavorable for a pay-go financed system making the need 

for imminent reforms essential. 

The challenge of our aging population is much bigger than the narrow scope of 

the current debate. The challenge is about figuring out ways to meet the expectations of our population. We now face the prospects of slowing or stagnant standards 

of living. Adopting measures that create incentives for postponing retirement could 

go a long way to meeting the promises made under the current system. But it is 

more than just about increasing work at older ages. It is about finding ways to boost 

workforce participation among all individuals and about adopting policies to enhance worker productivity. If we are unable to do this, retirement policy will be one 

of the mechanisms for distributing the disappointing outcome across various segments of our population. 

Whatever path we choose to take, acting sooner rather than later is critical. The 

fact of the matter is that most people do not use the sorts of sophisticate models 

economists typically use to plan for retirement. Most people use a somewhat simpler 

model—what we might call a ‘‘looking-around’’ model. Many people look at their 

parents, older siblings and fellow workers go through life. Over time, they develop 

certain expectations and aspirations about how their own life will play out. This 

works well in a stable environment. But the looking-around model is prone to breaking down in an unstable environment like the one we face with a rapidly aging population. My fear is that the longer we delay adjusting our system, the larger the 

cuts that are likely to be required. The longer we delay getting people into other 

savings vehicles, the smaller their cash reserves will be when the real financing 

crunch hits. In short, the longer we delay taking action, the steeper the fall will be 

from the pension aspirations most people acquired from watching their parents’ generation in retirement. 

Thank you Mr. Chairman. I would be pleased to answer any questions you may 

have. 

f 

Chairman MCCRERY. Thank you, Dr. Nyce. Dr. Steinmeier? 

STATEMENT OF THOMAS L. STEINMEIER, PH.D., PROFESSOR 

OF ECONOMICS, DEPARTMENT OF ECONOMICS AND GEOGRAPHY, TEXAS TECH UNIVERSITY, LUBBOCK, TEXAS 

Mr. STEINMEIER. Chairman McCrery, Ranking Member Levin, 

and Members of the Subcommittee, thank you very much for the 

opportunity to speak here. My name is Thomas Steinmeier, and I 

am a Professor of Economics at Texas Tech University. For the 

past decade, my colleague, Alan Gustman, and I have used data in 

the Health and Retirement Study to examine how potential 

16 

changes in Social Security and pensions may affect savings and retirement decisions. A distinguishing feature of our research is the 

use of a model which allows individuals to have differing degrees 

of impatience regarding current versus future consumption. Today 

I would like to summarize four of our findings which may be of interest to the Subcommittee. 

First, changes in the early retirement age are likely to have significantly more impact on retirement than would changes in the 

normal retirement age. I should note that in these comments, I will 

use the term ‘‘retirement’’ to mean a substantial or complete withdrawal from the labor force. Currently about 15 to 20 percent of 

each cohort of individuals retires during their 62nd year, which 

under current rules is the early retirement age. Some individuals 

simply have not saved enough to retire before Social Security eligibility. Others highly value the benefits which would be lost by 

working, and tend to ignore that foregoing current benefits would 

increase future benefits. In short, they view the lost benefits more 

as a tax, which discourages work. Our model indicates that of those 

who currently retire at 62, roughly two-fifths would delay retirement to age 64 if the early retirement age were increased to that 

age. There may be some increase in disability awards, but an analysis of the pattern of new disability awards suggests it is unlikely 

to have a substantial impact on the labor force participation effects 

of increasing the early retirement age. 

Second, eliminating the current earnings test, which applies between age 62 and the normal retirement age, would also increase 

work effort, though by a smaller amount than increasing the early 

retirement age. Presently, the earnings test reduces current benefits by $1 for every $2 of earnings over a threshold amount, though 

later benefits are increased in a roughly actuarially fair manner. 

In our simulations of eliminating the earnings test, much of the impact is that fewer individuals would be working part time and more 

would be working full time. However, without the earnings test, 

more individuals would be eligible to collect benefits at ages 62 

through 64, and many would do so, which would be a drain on the 

finances of the system. This would also reduce the eventual level 

of benefits that these individuals could collect during their retirement, since they would be collecting benefits earlier, and hence, 

would be subject to a larger early retirement reduction. 

Third, increases in the early retirement reduction rate would also 

have significant effects. Model Three of the Presidential Commission’s report proposed that individuals retiring 3 years before the 

normal retirement age would get 75 percent of full benefits rather 

than the current 80 percent. Our model suggests that changing the 

reduction rate to the level specified in the Commission’s report 

would increase the percentage of 62- to 64-year-olds working full 

time by around 3 percentage points, which is a little less than 

eliminating the earnings test, but nonetheless substantial. Proposals to increase the delayed retirement credit, which increases 

benefits to individuals who delay collecting benefits beyond the normal retirement age, would have much less of an effect on retirement, primarily because the earnings test does not apply to individuals above the normal retirement age. 

17 

Fourth and finally, lump sum distributions, such as might be 

available with personal accounts, can have a significant effect on 

retirement. If lump sums are tied to retirement, individuals may 

retire earlier in order to gain access to the lump sums, especially 

if the lump sums are made available at age 62. If the lump sums 

are not tied to retirement, we can expect a non-trivial fraction of 

the population to withdraw and spend the lump sums, leaving less 

income and fewer assets available to support retirement later on. 

To make matters worse, these are likely to be individuals who have 

accumulated few other assets for retirement. I hope these remarks 

have been helpful, and I thank you for your patience in listening 

to them. I will be glad to answer any questions you may have later 

in this hearing. Thank you. 

[The prepared statement of Dr. Steinmeier follows:] 

Statement of Thomas Steinmeier, Ph.D., Professor of Economics, Texas 

Tech University, Lubbock, Texas 

Chairman McCrery, ranking member Levin, and members of the subcommittee, 

thank you very much for the opportunity to speak here. My name is Thomas 

Steinmeier, and I am a Professor of Economics at Texas Tech University. However, 

I should be clear that the views expressed here do not represent the views of the 

university. 

For the past decade my colleague Alan Gustman and I have used the data in the 

Health and Retirement Study to examine how potential changes in Social Security 

and pensions may affect retirement and saving patterns. A distinguishing feature 

of our research is the use of a model which allows individuals to have differing degrees of impatience regarding current vs. future consumption. Today I would like 

to summarize four of our findings which may be of interest to the subcommittee. 

First, changes in the early retirement age are likely to have significantly more 

impact on retirement than would changes in the normal retirement age. I should 

note that in these comments, I will use the term retirement to mean a substantial 

or complete withdrawal from the labor force. Currently about 15 to 20 percent of 

each cohort of individuals retires during their 62nd year, which under current rules 

is the early retirement age. Some individuals simply have not saved enough to retire 

before Social Security eligibility. Others value highly the benefits which would be 

lost by working and tend to ignore that foregoing current benefits would increase 

future benefits, even though those increases are roughly actuarially fair. In short, 

they view the lost benefits more as a tax, which discourages work. Our model indicates that of those who currently retire at age 62, roughly two-fifths would delay 

retirement to age 64 if the early retirement age were increased to that age. 

If the early retirement age were increased, it is possible that more individuals 

would apply for disability. However, the number of SSDI male recipients who enter 

the program at any age is relatively small; the numbers from the 2003 Statistical 

Bulletin are: 

Age Entrants 

55 21,000 

56 16,000 

57 16,500 

58 17,900 

59 19,500 

60 19,300 

61 18,100 

62 15,900 

63 9,600 

64 7,100 

If, as a result of increasing the early retirement age to 64, the number of entrants 

at ages 62 and 63 increased to 19,000, which is close to the average of the previous 

five years, the increase would only amount to around 11,500 individuals. This is 

about 0.6 percent of the approximately 1,800,000 62 and 63 year old males who are 

either disability insured or had been disability insured at the time of their retireVerDate Aug 31 2005 01:15 Mar 11, 2006 Jkt 023924 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 E:\HR\OC\23924.XXX 23924
18 

ment. This is too small a number to change the labor force participation results appreciably. 

Second, eliminating the current earnings test, which applies between age 62 and 

the normal retirement age, would also increase work effort, though by a smaller 

amount than increasing the early retirement age. Presently the earnings test reduces current benefits by $1 for every $2 of earnings over the threshold limit of 

$12,000 per year, though later benefits are increased in a roughly actuarially fair 

manner. In our simulations of eliminating the earnings test, much of the impact is 

that fewer individuals would be working part time and more would be working full 

time. However, without the earnings test, more individuals would be eligible to collect benefits at ages 62 through 64, and many would do so, which would be a drain 

on the finances of the system. This would also reduce the eventual level of annual 

benefits that these individuals could collect during their retirement, since they 

would be collecting benefits earlier and hence would be subject to a larger early retirement reduction. 

Third, increases in the early retirement reduction rate would also have significant 

effects. The Presidential Commission’s report, in its Model 3, proposed increasing 

the reduction for retiring three years before the normal retirement age from the current level of 20% to 25%. Our model suggests that changing the reduction rate to 

the level specified in the Commission’s report would increase the percentage of 62– 

64 year olds working full-time by around three percentage points, which is a little 

less than eliminating the earnings test but nonetheless substantial. Proposals to increase the delayed retirement credit, which increases benefits to individuals who 

delay collecting benefits beyond the normal retirement age, would have much less 

of an effect on retirement, primarily because the earnings test does not apply to individuals above the normal retirement age. 

Fourth, lump sum distributions, such as might be available with personal accounts, can have a large effect on retirement. If lump sums are tied to retirement, 

individuals may retire earlier in order to gain access to the lump sums, especially 

if the lump sums are made available at age 62. If the lump sums are not tied to 

retirement, we can expect a nontrivial fraction of the population to withdraw and 

spend the lump sums, leaving less income and fewer assets available to support retirement later on. To make matters worse, these are likely to be individuals who 

have accumulated few other assets for retirement. 

Our related work has generated other punch lines relevant to the design of Social 

Security policies. Four I will mention here. (1) Price indexing or longevity indexing 

has the potential to increase full-time work effort. In simulations of the proposed 

indexing schemes of the President’s Commission report, price indexing increased the 

percent of 62 year-old men working full-time in 2075 by 7 percentage points, relative to simulations with current formula benefits. The increase is 4 percentage 

points for longevity indexing. Relative to simulations with feasible benefits, which 

are benefits payable from current taxes in 2075, the numbers are smaller: a 2.5 increase in full-time work for price indexing and a very slight decrease for longevity 

indexing. (2) Despite the progressive appearance of the benefit formula, there is little redistribution among families with different earnings levels. This occurs primarily because of the greater longevity of higher-income families and because 

spouse and survivor benefits flow disproportionately to higher-income families. (3) 

High-wage immigrant families with short tenures in the U.S. get exceptionally high 

returns from Social Security. The source of this result is that many years of zeros 

get included in the average monthly earnings calculation for these individuals, and 

the resulting low average earnings causes the benefit formula to treat them in the 

same generous way that it normally treats low income workers. This anomaly could 

easily be fixed by using a relatively simple pro-rated method for computing benefits. 

(4) Regarding the proposals of the President’s Commission, the ‘‘offset’’ method the 

Commission chose to calculate benefits implies if there are further changes in the 

way traditional benefits are computed, those changes will have the same impact 

whether or not a person had selected a personal account. To the degree that returns 

in the personal accounts exceed the interest rate in the offset accounts, individuals 

with personal accounts would be in a better position to withstand cuts in traditional 

benefits. 

I hope that these remarks have been helpful, and I thank you for your patience 

in listening to them. I would like to thank the Social Security Administration and 

NIA for financial support over the years, and the Michigan Retirement Research 

Center, the National Bureau of Economic Research, and the Health and Retirement 

Study, and Texas Tech University for research support. I would be glad to answer 

any questions you may have about this work later in the hearing. 

19 

SOURCES

‘‘Offsetting the Principal in the New Social Security Accounts.’’ Tax Notes. Vol. 

107 No. 1 (April 4, 2005), pp. 109–114. 

‘‘Retirement Effects of Proposals by the President’s Commission to Strengthen Social Security.’’ National Tax Journal. Vol. 58 No. 1 (March, 2005), pp. 27–49. 

‘‘The Social Security Early Retirement Age In A Structural Model of Retirement 

and Wealth.’’ Journal of Public Economics. Vol. 89, Issues 2–3 (February 2005), pp. 

441–463. 

‘‘The Social Security Retirement Earnings Test, Retirement and Benefit Claiming.’’ National Bureau of Economic Research Working Paper 10905 (November 

2004). 

‘‘Personal Accounts and Family Retirement.’’ National Bureau of Economic Research Working Paper 10305 (February 2004). 

‘‘How Effective Is Redistribution Under the Social Security Benefits Formula?’’ 

Journal of Public Economics, Vol. 82, No. 1 (October 2001), pp. 1–28. 

‘‘Social Security Benefits of Immigrants and U.S. Born.’’ In George Borjas, editor, 

Issues in the Economics of Immigration, University of Chicago Press (2000), pp. 

309–350. 

All work is joint with Alan Gustman. National Bureau of Economic Research 

Working Papers are available at www.nber.org/papers/. All opinions and conclusions 

are those of the authors and not those of the Social Security Administration, the 

NIA, the Michigan Retirement Research Center, the National Bureau of Economic 

Research, Texas Tech University, or Dartmouth College. 

f 

Chairman MCCRERY. Thank you, Dr. Steinmeier. Dr. Steuerle? 

STATEMENT OF C. EUGENE STEUERLE, PH.D., SENIOR 

FELLOW, THE URBAN INSTITUTE 

Mr. STEUERLE. Mr. Chairman, Mr. Levin, Members of the Subcommittee, I appreciate this opportunity to testify before you on 

achieving sustainable balance in Social Security. When it comes to 

life expectancy in Social Security, which is the subject of this hearing, I believe reform requires answering publicly and directly two 

basic questions. Do we really want a Social Security system that 

is a middle-aged retirement system? Second, do we want to maintain as the number one budget priority in the Nation’s budget, to 

increase the value of Social Security and health benefits for the average income retiring couple from more than $700,000 today toward $1 million and beyond in the near future? I believe that if we 

would honestly and publicly answer those two questions, we would 

be a long way on the road toward reform. 

Begin by defining ‘‘lifetime benefits’’ as the value at age 65, of 

Social Security and Medicare benefits as if they were in a 401(k) 

account. In today’s dollars, lifetime benefits for an average income 

couple are about $400,000 in Social Security and about $700,000 in 

Social Security and Medicare. One way to think about the benefit 

side of reform is simply to place a limit on the growth rate in that 

lifetime package of benefits. 

Let me try another lens. Close to one-third of the adult population is scheduled to be on Social Security within about 25 years, 

and people are already retired for about one-third of their adult 

lives. If people retired today for the same number of years as when 

Social Security was young, that is in 1940, they would actually be 

retiring at about age 74 today. In another 60 years, they would be 

retiring at about age 78 if they were to retire for the same number 

of years of life expectancy as when the system was younger. By 

constantly increasing the benefits that go to these middle-aged reVerDate Aug 31 2005 01:15 Mar 11, 2006 Jkt 023924 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\23924.XXX 23924
20 

tirees, at least as defined by life expectancy, smaller and smaller 

shares of Social Security benefits are being devoted to people who 

are elderly. 

Believe it or not, I think there is tremendous opportunity in all 

of this. People in their fifties, sixties, and seventies are going to 

represent to the labor force for the first half of the 21st century 

what women did for the last half of the 20th century: they can be 

a major source of labor supply if we can break down the barriers 

to them providing it. Restoring Social Security to an old-aged, not 

a middle-aged, retirement system can be done partly by increasing 

the retirement ages, including both the early and the normal retirement age. A related move would be to back-load benefits more 

to help those who are older. One can also provide a better actuarial 

adjustment for working longer since we currently subsidize people 

who retire early. Such changes would progressively move benefits 

to later ages when they are needed more, and they put the labor 

force incentives in the right place, up front, when people are more 

likely to be able to increase their labor supply. 

Now, admittedly, some groups have shorter than average life 

expectancies, but attempting to address their needs by giving you 

and me a 20th, 21st, and 22nd year of retirement support is a very 

bad form of trickle down policy. Therefore, I favor meeting their 

needs by providing a good minimum benefit, one that contains substance, not just symbol, and that increases the income of the lowincome elderly. 

One question that often arises when discussion centers on work 

limitations is whether Social Security needs to provide an increasing share of benefits every year to those further from the date of 

expected death, or whether people can work longer. In my testimony I provide three pieces of evidence. First, Americans age 55 

and older, have been reporting improved health for some time now. 

Second, the physical demands of jobs have been declining over 

time. Finally, until recently, the labor force participation of those 

with similar life expectancies to those now retired was much, much 

higher. In my testimony I also suggest that absent other types of 

reforms, we think about adopting some rule for default growth in 

the system so that the system would not continually grow when 

there are projected long-term deficits. 

In summary, our current Social Security system increasingly favors middle-aged retirement and reduces both the share of Social 

Security resources for the truly elderly, and the share of total revenues of government for children and working families. A reformed 

system could easily reduce poverty rates while providing the truly 

old a lifetime benefit as good or better than most generations have 

received in the past. I provide a lot of data in my testimony trying 

to back up the statements I have made before you, and I would be 

glad to talk to you further about them. Thank you. 

[The prepared statement of Dr. Steuerle follows:] 

Statement of C. Eugene Steuerle, Ph.D., Senior Fellow, The Urban Institute, 

and Co-director, Tax Polyc Center, and Columnist, Tax Notes Magazine 

Mr. Chairman and Members of the Subcommittee: 

Thank you again for the opportunity to testify on ways to try to build a viable 

system of Social Security for the 21st century. As you have requested, much of my 

testimony will deal with our increasing inability to protect the young, the truly old, 

21 

and the vulnerable when Social Security morphs into a middle-age retirement system. 

As I have noted before the full committee a month ago, the legacy we are about 

to leave our children is a government whose almost sole purpose is to finance our 

own consumption in retirement. The impact on the budget is being felt already. 

Medicare and Medicaid long-term care are primary sources of this problem since 

they combine the old age problems of Social Security with the excessive cost growth 

that derives from an open-ended health care budget. But Social Security is the flagship around which the rest of the fleet hovers, whether it is old age health care insurance or private labor compensation schemes that the follow Social Security in encouraging people to retire in middle age. 

Define ‘‘lifetime benefits’’ as the value, at age 65, of Social Security and Medicare 

benefits as if they were sitting in a 401(k) account that would earn interest but be 

drawn upon over retirement. In today’s dollars, lifetime benefits for an average-income couple have risen from about $195,000 in 1960 to $710,000 today ($439,000 

in Social Security and $271,000 in Medicare) to over $1 million for a couple retiring 

in about 25 years (over $1⁄2 million in both Social Security and Medicare—see figure 

1). These numbers quickly reveal what is happening to the budget as a whole. We 

cannot provide a very large portion of American couples $1⁄2 to $1 million of benefits 

and simultaneously encourage them to drop out of the workforce for the last third 

of their adult lives without affecting dramatically the services that can be provided 

through the budget to our children and to working families. 

These benefit are provided so early in life that many people are ‘‘tricked’’ into believing they will be well off in retirement when such is not the case. Income may 

appear adequate to a person at age 62 or 65 when in fair to excellent health and 

there is more likely to be a spouse around to help with minor impairments. However, twenty years or more later—and most couples get benefits for more than 20 

years—the income is not enough. Social Security income falls relative to wages and 

living standards, private pension income often falls even in real terms (often because it is not wage indexed), earning power decreases, and there often is no longer 

a spouse around for mutual assistance. 

A middle-age retirement system SERVING THE VULNERABLE LESS EACH 

YEAR 

Social Security’s current dilemma centers almost entirely on the drop in scheduled 

workers per retiree. It is and remains a labor force issue. Although more saving 

would be nice, whether in trust funds or retirement accounts, we are not going to 

save our way out of this problem. Consider some of the consequences of the current 

system. 

Social Security has morphed into a middle-age retirement system. 

• Close to one-third of the adult population is scheduled to be on Social Security 

within about 25 years. Including adults on other transfer programs, we are approaching the day when the majority of the adult population will depend upon 

transfers from others for a significant share of its support. 

• People already retire on average for close to one-third of their adult lives. 

• The average Social Security annuity for a man retiring at 62 lasts 17 years, for 

a woman 20 years, and for the longer living of a couple at least 25 years. The 

life numbers are even higher for those with above-average lifetime earnings because they have above-average life expectancies. • When Social Security was young—for instance, in 1940 and 1950—the average 

worker retired at about age 68. To retire for an equivalent number of years on 

Social Security, a person would retire at age 74 today and age 78 in another 

60 years (figure 2). 

Almost every year a smaller share of Social Security benefits goes to the 

most vulnerable. 

• By constantly increasing benefits to middle-age retirees, at least as defined by 

life expectancy, smaller and smaller shares of Social Security benefits are being 

devoted to the elderly (figure 3). If progressivity is defined by how well the vulnerable are served, the system is becoming less progressive every year. 

The economy gets hit several ways, not just in terms of costs. 

• Among the most important, but ignored, sides of the Social Security budget 

equation is the decline in growth of the labor force (figure 4, with its additional 

effect on slower growth in national income and revenues). 

• When a person retires from the labor force at late middle age, national income 

declines. But the decline is borne mainly by other workers, not by the retiree. 

For instance, when a $50,000-a-year worker retires a year earlier, national inVerDate Aug 31 2005 01:15 Mar 11, 2006 Jkt 023924 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 E:\HR\OC\23924.XXX 23924
22 

come declines by approximately $50,000, but most of those costs are shifted onto 

other workers as the retiree starts receiving about $23,500 in Social Security 

and Medicare benefits (much more in the future) and pays about $18,300 less 

in taxes (figure 5). 

• Saving declines because people retire in what used to be their peak saving 

years. For instance, when a person retires for 20 years versus 15, he both saves 

for 5 years less and spends down his or society’s saving for 5 years more. 

THE OPPORTUNITY: INCREASING WORK SPANS WHILE PROTECTING 

THE VULNERABLE 

Believe it or not, there is tremendous opportunity in all of this. People in their 

late 50s, 60s, and 70s have now become the largest underutilized pool of human resources in the economy. They represent to the labor force for the first half of the 

21st century what women did for the last half of the 20th century. The labor demand, I believe, will be powerful, and it is mainly our institutions, public and private, that are blocking us from making full use of these valuable and talented people. 

Keep in mind that this labor force story differs dramatically from that of the past 

60 years. Two factors made the remarkable decline in labor force participation 

among older men possible: the entry of the baby boom population into the labor 

force and the increased labor force participation of women. The net effect over the 

post-World War II period was an adult employment rate that actually increased over 

almost all non-recession years (figure 6). What this tells me is that there is a demand for labor that very possibly would be met by this extraordinary pool of talented older workers if institutions adjusted to encourage it and let it happen. 

We don’t really know yet how all of this will play out. But if we remove the disincentives to work, increased labor force participation could make all sorts of budget 

decisions easier over the long run. Again, it is because increased labor will add both 

to national income and to revenues—thus lessening how drastically programs for 

the young AND the old have to be cut. 

RE-ORIENTING BENEFITS TOWARD the OLD 

Restoring Social Security to an old-age, not a middle-age, retirement program can 

be done partly by increasing the retirement ages (including the early retirement 

age—else it is just an across-the-board benefit cut). A related move would be to 

backload benefits more to help those who are older. Whatever the level of lifetime 

benefit settled upon in a final reform package, actuarial adjustments can provide 

more benefits later and fewer earlier. These adjustments can take various forms: adjust benefits upward when Social Security predicts that average life expectancy has 

fallen below, say, 12 years (about age 74 in 2005 and indexed for life expectancy 

in later years) and downward in earlier ages; or provide a lower up-front benefit 

in exchange for post-retirement wage indexing. 

A related adjustment would be to provide a better actuarial adjustment for working longer. Currently we subsidize people to retire early. While lifetime benefits are 

about the same for a worker retiring at, say, age 62 or 65 or 68, the worker who 

stays in the workforce contributes much more in the way of tax. A greater differential between earlier and later retirement would be appropriate both from a fairness 

and an efficiency standpoint. Note that there are two separate adjustments that 

have to be dealt with here—first, the adjustment simply for delaying the receipt of 

benefits, and, second, some adjustment for additional contributions made by those 

who work more. Among the problems with the current system in the latter category 

is the silly way that it counts only so many years of work—thus giving the worker 

who works 45 years at $35,000 (wage indexed) substantially fewer benefits than the 

worker who works 35 years at $45,000. 

These changes in retirement ages and in the lifecycle distribution of benefits have 

many positive effects. They progressively move benefits to later ages when people 

have less ability to work, lower income, and less help from a spouse to deal with 

impairments. Support in old age was the original purpose of the program. They put 

labor force incentives where they are most effective—in late middle age, including 

the 60s, when most people report being in fair, good, or excellent health. When cuts 

in benefit growth rates are required, they cause less hardship than almost any 

across-the-board benefit cut for two reasons: first, they are more likely to increase 

revenues, thus making it possible to afford a better benefit package, and second, 

they don’t affect the benefits of the truly old as long as they adjust their work lives 

in line with the changes in the retirement ages. 

I recognize that some people are concerned about groups with shorter-than-average life expectancies. But attempting to address their needs by granting many of 

us who are healthy a 20th and 21st and 22nd year of transfer support and tens, 

23 

if not hundreds, of thousands of dollars in extra benefits for retiring early is a very 

bad form of trickle-down policy. 

An increase in the retirement age can be combined with other provisions that 

help, rather than hurt, groups with shorter life expectancies. One way to do this 

is to provide a minimum benefit aimed at lower-income households and at reducing 

poverty rates (using a poverty standard adjusted for living standards or wage-indexed) among the elderly. With such a minimum benefit in place, any of the ageof-retirement adjustments can actually increase, rather than decrease, the relative 

share of benefits for groups with lower life expectancies, since their life expectancies 

are correlated with lower lifetime earnings. In fact, with a good minimum benefit, 

we can increase the income of low-income people and reduce poverty rates, even relative to current law. 

One warning is in order here, however. Some minimum benefit packages end up 

more symbol than substance. For instance, they may not be indexed for wages, so 

don’t cost much in the long run. Or they have so many years of work requirement 

that they don’t help some groups of low-income people, especially women. We need 

Social Security and other agencies to provide estimates of the effectiveness of different alternatives if we want to provide a base of protection. 

EVIDENCE ON ABILITY TO WORK 

One question that often arises is whether Social Security needs to provide an increasing share of benefits every year to those further and further from date of expected death. Three pieces of evidence are provided here: (1) health trends among 

old and near-old; (2) physical demands of jobs; and (3) the ability of people to work 

at similar ages in the years before early retirement options and other benefits were 

made available. 

First, older Americans over age 55 seem to be reporting that their health has improved. Figure 7 reports the share of older adults reporting fair or poor health in 

two groups: those age 65—74 and those age 55—64 between 1982 and 2002. Even 

among those age 65—74, the fraction reporting fair or poor health is less than onequarter. The fraction actually reporting poor health is much smaller still. The rest 

report being in good or excellent health. 

Similarly, among those age 55—59, the share with work limitations has declined 

from 27.1 percent in 1971 to 19.5 percent in 2002 (figure 8). Note that a work limitation does not mean inability to work but, rather, a limitation to do certain types 

of jobs. In any case, the trend moves in the same direction: as years pass, fewer 

people of a given age have been reporting work limitations. 

Survey results such as those just reported, of course, involve qualitative data. We 

need to check alternative evidence. A second approach is to try to find trends in 

physical limitations of jobs using a similar measure over the years. One source, 

shown in figure 9, indicates that the share of U.S. workers in physically demanding 

jobs has declined from over 20 percent in 1950 to about 8 percent in 1996. 

Finally, let us compare the labor force participation of males with a similar life 

expectancy from 1940, when Social Security first paid benefits, until 2001. In figure 

10, we see that about 86 percent of men with about 16 years of life expectancy participated in the labor force in 1940. That figure remained high until the late 1960s, 

a few years after men with a similar life expectancy became eligible for early retirement benefit and after Medicare benefits were enacted into law. After those enactments, labor force participation began a very rapid descent to less than 35 percent. 

That decline has leveled out and may be beginning to rise slowly—one more piece 

of evidence that demand for labor is shifting to older workers. 

It is hard to believe that as the physical demands of jobs have declined, people 

have become that much less capable of working. It is more likely that the higher 

levels of benefits in Social Security and Medicare, increasingly available for more 

and more years before expected death, have been the major factors driving the drop 

in labor force participation. 

CHANGING THE DEFAULT 

Under current policy, federal government spending grows automatically, by default, faster than tax revenues as the population ages and health costs soar. These 

defaults threaten the economy with large, unsustainable deficits. More important, 

they deny to each generation the opportunity to orient government toward meeting 

current needs and its own preferences for services. Only by changing the budget’s 

auto-pilot programming can we gain the flexibility needed to continually improve 

government policies and services. 

Rudolph L. Penner (also a senior fellow at the Urban Institute and a former director of the Congressional Budget Office) and I have come to believe that there is no 

way to get the budget in order without addressing the issue of these defaults. BudgVerDate Aug 31 2005 01:15 Mar 11, 2006 Jkt 023924 PO 00000 Frm 00027 Fmt 6633 Sfmt 6621 E:\HR\OC\23924.XXX 23924
24 

1Technically, there are different ways that price indexing can be approached. 

2The term ‘‘progressive price indexing’’ has sometimes been applied to this effort, but there 

are many ways to change the growth rate differentially for workers with different levels of lifetime earnings. 

et-irresponsible defaults apply to many programs of government, but the largest are 

linked to Social Security and Medicare. As currently structured, these programs are 

designed to rise forever in cost faster than national income and revenues—an impossible scenario. In Social Security, the problem is caused by the combination of more 

years of retirement support over time and wage indexing for annual benefits. 

Regardless of what Social Security reform is undertaken, some rule should be 

adopted that would put the program back into balance over the long term when, 

for instance, the trustees report for three consecutive years that the program is likely to be in long-run deficit. This trigger should force the system’s automatic features 

to move responsibly back toward budgetary balance. 

With the trigger pulled, three of many options at that point strike me as particularly simple and easy to implement. First, the early and normal retirement ages 

could be automatically increased two months faster per year than under current law 

for everyone younger than, say, 57 in the year the trigger is pulled. (See also note 

below on removing the confusing language on ‘‘early’’ and ‘‘normal’’ retirement ages.) 

Second, in those years, the benefit formula could be indexed to the lower of price 

or wage growth in a way that allows average real benefits to increase but more 

slowly than wages.1 This approach could be supplemented by a new special minimum benefit indexed to wage growth. Other approaches to this option can also be 

devised to reduce the growth rate of benefits more for high earners than for low 

earners.2 A third option is to cap the growth in benefits for households who, on av- erage, are expected to receive more than, say $400,000 in Social Security benefits, 

or more than $750,000 in Social Security and Medicare benefits. 

I generally prefer any method that tends to increase the retirement ages since 

that allows more revenues for the system and, consequently, higher lifetime benefits 

for the same tax rate. Other benefit reductions, as noted, hit the oldest beneficiaries 

with their greater needs as well as everyone else. For similar reasons, among the 

‘‘progressive price indexing’’ options, I prefer creating a wage-indexed minimum benefit since that is more likely to protect the more vulnerable, including survivors, 

than is a form of progressive price indexing that continues to spend larger shares 

of revenue on increasing benefits for succeeding generations of those with wellabove-median lifetime earnings. If restrictions are placed on lifetime benefits, then 

retirement age and benefit growth might be adjusted at the same time. But, regardless, the system must be redesigned so that, when on automatic pilot, the default 

option leads to a responsible and sustainable budget. 

There is, of course, no reason to believe that such automatic changes will alone 

lead to a socially optimum Social Security system. For instance, they do not deal 

with the discrimination in current law against single heads of households. The point 

of changing the defaults is, rather, to migrate from a system in which the Congress 

has little choice but to enact painful benefit cuts to one in which Congress has the 

opportunity to provide more generous benefits from time to time—that is, to play 

Santa Claus rather than Scrooge sometimes, as politics requires. 

By creating a system in which the budget automatically becomes ever more responsive and responsible to future taxpayers and beneficiaries, the door is also open 

to spending more now on programs for people who aren’t elderly—especially children—and on public investments. Or Congress might use the freed-up resources to 

make Social Security benefits more generous to those with low average lifetime 

earnings or to provide more cash to lower-income elderly to help pay for medical 

payments. And, of course, Congress can always choose to raise taxes to provide a 

higher benefit growth rate in each year, though remaining responsible means making each year’s decision to increase benefit levels independent of the next year’s. 

A WORD ON THE PROCESS 

One of the issues facing reformers is that the goals they seek are specified too 

tightly, denying to estimators the ability to provide options that achieve those goals 

better or to improve efficiency and equity at the same time. This may appear to be 

a technical matter, but, in fact, it is a MAJOR process issue is trying to achieve 

a benefit package that, at any given tax rate, does the most to protect the truly old 

and vulnerable. Below I list some of the dilemmas and ways that they might be resolved. 

Delemma 1: Making the System More Transparent: Changing the retirement 

age is explicit—it is not a hidden tax increase or benefit reduction. Hence, at times, 

it tends to draw more attention than do other reforms that, in truth, are much more 

25 

threatening to a good life in retirement, but are less transparent. This political reality discourages admitting to and addressing the consequences of the middle-age 

retirement system we now have in place. As I continually note, increasing work 

lives is among the least painful benefit adjustments because it puts more benefits 

in old age when needs are greater, and it increases national output and revenues. 

Dilemma 2: Addressing the Early Retirement Age. Addressing the Early Retirement Age. Increasing the normal retirement age is nothing more than an acrossthe-board benefit cut. It also does nothing to change Social Security’s misleading signal that old age somehow starts as early as 62. Those aged 62 are not ‘‘old,’’ if defined by life expectancy. Failure to adjust the early retirement age also gives reform 

much less potential to achieve in employment and revenue. 

A variety of reformers, liberal and conservative, tell me that they would privately 

favor adjusting the early retirement age but they think it is politically difficult to 

address publicly. But consider the following two alternatives in terms of language: 

• Congress raises normal retirement age to 70 (indexed for life expectancy), or 

• Congress increases earliest retirement age to 65 (indexed for life expectancy), 

the age it was when Social Security was first enacted in 1935. 

These two could easily be equivalent in terms of the total lifetime benefits provided by Social Security, depending upon design. But the latter looks a lot less radical than the former, even if the two are equivalent. 

I suggest also that Congress drop altogether the distinction between early and 

normal retirement ages. Declare an earliest retirement age and then make adjustments of one type or the other after that point. Again, to concentrate benefits at 

older ages, I would provide a bump up in benefits at older ages. 

Dilemma 3: Increase in Work by Older Workers. Increase in Work by Older 

Workers. I believe there is considerable and growing demand for older workers. But 

some of this will take time and is subject to uncertainty. Private behavior by both 

employers and employees will need to adjust to the labor market of the new century. 

Estimators, however, generally will not assume very large changes in behavior without more empirical evidence is gathered over time. One reason is that they do not 

know whether the rest of the fleet, including private pension systems, will follow 

the Social Security flagship if it moves back toward providing for old age, rather 

than middle age, retirement. However, if one adopts a system that encourages 

greater work at older ages, and at the same time, slows down the growth rate in 

benefits when there are projected imbalances, then any yet-uncounted gains from 

additional work effort would effectively allow benefits to grow more than might be 

shown in current projections. 

Dilemma 4: Choosing the Right Target. As I have noted, lifetime benefits provide a better first target for Social Security than do annual benefits, which do not 

take into account the number of years that benefits are received. As people have 

retired for more and more years, they have effectively reduced the annual benefit 

and replacement rate they could receive for the same lifetime benefit package. Congress, therefore, might consider the advantages for public presentation if limits were 

placed on lifetime benefit packages, rather than particular parameters of that package (e.g., annual benefit). Would the public really object if Congress said that the 

growth rate in lifetime benefits in Social Security and Medicare were to be limited 

for those couples who were projected to receive more than $750,000, at least during 

periods when the two systems were projected to be out of balance? Or limited for 

those couples scheduled to receive, say, more than $400,000 in lifetime benefits? The 

President could then be tasked with giving Congress alternative options from year 

to year on how this might be achieved, although a default option is again required 

if no action is taken. 

CONCLUSION 

We can and should fix a Social Security system that favors middle-age retirement 

and that continually reduces both the shares of Social Security resources for the 

truly elderly and the share of total revenues remaining for programs for children 

and working families. A reformed system can easily reduce poverty rates (adjusted 

for standard of living), while providing many others among the truly old a lifetime 

benefit as good, or better, than most generations have received in the past. It can 

also deal with other inequities and inefficiencies on which I provided more detail 

in my previous testimony, including the extraordinary discrimination against single 

heads of household and the ways that new revenues are weakly allocated to reduce 

elderly poverty further. I attach a list of suggestions, which expands somewhat on 

those I provided in my testimony to the full committee last month. 

26 

Summary of Recommendations 

• Increase the early and normal retirement ages so that at any given tax 

rate, the system provides fewer subsidies for middle-age retirement and increased revenues, higher annual benefits in retirement, higher lifetime benefits, 

and a greater portion of resources to those who are truly old. 

• Drop all language pertaining to early and normal retirement ages, and 

simply enact an earliest retirement age, with actuarial and other adjustments (e.g., a backloading of benefits to old age) to be made from there. 

• Backload benefits more to older ages, such as the last 12 years of life expectancy, so as to progressively increase benefits in later ages when they are needed 

more and to increase labor force incentives for individuals still in late-middle 

age, as defined by life expectancy. 

• Provide a well-designed minimum benefit to help low-income households 

and groups with less education and lower life expectancies, while simultaneously reducing poverty rates (relative to living standards or wages) among 

the elderly. 

• Determine family benefits for middle—and upper-income individuals in 

an actuarially neutral manner by applying private pension standards, making sure that benefits are shared equitably, and reducing or removing significant discrimination against single heads of household, many abandoned 

spouses, two-earner couples, many divorced persons, those who marry others 

close to their own age, some who pay significant marriage penalties for remarrying, and those who bear children earlier in life. 

• Provide a minimum benefit that extends to spouses and divorced persons as well as workers to provide additional protections for groups that are 

particularly vulnerable, and as an alternative to free and poorly targeted transfers to higher-income households. 

• Count all years of work history, providing an additional work incentive and 

removing the discrimination against those who work longer. 

• Ensure responsible budgetary policy by changing the default rules to 

guarantee the system automatically moves toward balance—say, through adjustments in the retirement ages or the rate of growth of annual or lifetime benefits for higher-income households—whenever the Social Security trustees repeatedly report a likely long-run deficit. 

• Design reform around lifetime benefits by, say, paring the growth rate 

of benefits for those above some amount, e.g., those scheduled to receive 

over $400,000 in Social Security benefits or more than $750,000 in Social Security and Medicare benefits. 

• Reduce the tax gaming used with retirement plans when taxpayers simultaneously report interest deductions while deferring or excluding interest and 

other retirement plan income from taxation. 

• Provide additional incentive for plans that do a better job at providing 

a portable benefit for all workers, such as using the FICA tax exclusion to 

finance increased deposits to retirement accounts and guaranteeing all workers 

in a qualified plan a minimum level of portable benefits. 

• Make clearer in the law that employers can use opt-out, not just optin, methods of encouraging retirement plan participation—without 

threat of lawsuit. 

• Focus retirement plan incentives more on lower-wage workers, for instance, through an increase in a modified savers credit, which should be adjusted so that it is available for employer, as well as employee, contributions 

and so that the credit is deposited in retirement accounts. 

• Provide safe harbors from lawsuits for designated types of retirement and 

other benefit plans offered by employers who hire or retain older workers. 

• Restore the earnings base for Social Security by increasing the portion of 

cash wages subject to Social Security tax, capping the tax-free levels of health 

insurance that can be provided, and dealing with tax preferences for other employee benefits. 

27 

Figure 1 

*Expected rather than realized benefits. Notes: The ‘‘high’’ and ‘‘average’’ wage profiles are those hypothetical profiles routinely employed by the Social Security Administration in its analyses. Lifetime amounts, rounded to the nearest thousand, 

are discounted to present value at age 65 using a 2 percent real interest rate and 

adjusted for mortality. Projections based on intermediate assumptions of the 2005 

OASDI and HI/SMI Trustees Reports. Includes Medicare Part D. Source: Adam 

Carasso and C. Eugene Steuerle, The Urban Institute, 2005. 

Figure 2 


Insert offset folio 23924a.005 Insert offset folio 23924a.006
28 

Figure 3 

Source: C. Eugene Steuerle and Adam Carasso, The Urban Institute, 2002. Based 

on data from the Social Security Administration’s 2001 Annual Statistical Supplement, Table 5A.1. 

Figure 4 

Note: Projections assume no change in patterns of retirement by age and sex. 

Source: C. Eugene Steuerle and Adam Carasso, The Urban Institute, 2002. Based 

on data from the US Bureaus of Census and Labor Statistics. 


Insert offset folio 23924a.007 Insert offset folio 23924a.008
29 

Figure 5 

Figure 6 


Insert offset folio 23924a.009 Insert offset folio 23924a.010
30 

Figure 7 

Figure 8 


Insert offset folio 23924a.011 Insert offset folio 23924a.012
31 

Figure 9 

Figure 10 

f 

Chairman MCCRERY. Thank you, Dr. Steuerle. Mr. 

Gebhardtsbauer. 


Insert offset folio 23924a.013 Insert offset folio 23924a.014
32 

STATEMENT OF RON GEBHARDTSBAUER, SENIOR PENSION 

FELLOW, AMERICAN ACADEMY OF ACTUARIES 

Mr. GEBHARDTSBAUER. Thank you. Chairman McCrery, Congressman Levin, and distinguished Committee Members, for the 

opportunity to testify. My name is Ron Gebhardtsbauer, and I am 

the Senior Pension Fellow at the American Academy of Actuaries. 

We are the non-partisan professional organization representing all 

actuaries in the U.S. In the interest of time I will quickly mention 

the major points in my written testimony, so please ask for clarification if you would like. 

Social Security’s normal retirement age recently increased from 

65 to 66. Gradually raising it further by 1 month every 2 years 

would reduce Social Security’s shortfall by about a third. While 

that reduces the increase in the annual benefit, it doesn’t have to 

reduce the increase in the total lifetime benefits because each generation is living longer, and therefore receiving more years of benefits. The 1983 amendments reduced the impact of raising the normal retirement age on workers by phasing it in gradually so that 

there would be little noticeable effect, and it only affected people 

under age 45 at enactment, thus, it had no impact for 17 years. 

In addition, we are not only living longer, we are healthier at 

older ages, and fewer jobs are physically demanding. People are 

also interested in staying active both mentally and physically, and 

jobs help promote that. Now, I will compare it with price indexation. Price indexation can reduce benefits four times faster than 

raising the normal retirement age on just an indexation basis. Also, 

price indexation reduces disability benefits, whereas indexing the 

normal retirement age doesn’t. Both ideas affect early retirees. 

Workers could still retire at age 62 and receive Social Security benefits, but the benefits would be smaller. 

The early retirement issue is important for workers in physically 

demanding jobs. If Social Security continues to pay benefits at age 

62, the benefits will be small. To avoid these inadequate early retirement benefits, some proposals also will gradually increase the 

earliest eligibility age from 62 to 65. While this only reduces Social 

Security’s shortfall by an additional 10 percent, it can have a big 

impact on when people retire since a person’s retirement date is 

very much a financial decision. This points out the importance of 

having an employer-sponsored pension system to provide supplemental benefits until Social Security is available. Proposals on tax 

reform, lifetime savings accounts, or annuity taxation substantially 

change employer incentives to offer pension plans, so care should 

be taken not to kill them. Pension plans help us to not rely on Social Security for all of our retirement needs. 

Now I want to talk about ways to keep Social Security solvent 

and sustainable. Unlike the 1983 fix, indexing retirement ages and 

price indexing can be ongoing so that Social Security does not go 

out of balance so easily due to our continually increasing lifespans. 

However, in order for this to work, Social Security will need to be 

more stable. Price indexation actually makes the initial benefit less 

stable, that is, price indexation of the initial benefit makes Social 

Security less stable because price inflation can exceed wage growth 

as it did in the seventies. Wage indexation, as we do it now, is actually more stable, because when wages and thus taxes go up more 

33 

or less than expected, the same thing will happen for benefits. That 

is not to say that price indexation should never be used. It could 

be used to gradually curtail benefits, but it only makes sense to use 

it until benefits are at the desired level. If price indexation is not 

turned off, benefits eventually become inconsequential in comparison to wages. 

Similarly, progressive price indexation could be used if you want 

to move to a Social Security system that provides more level benefits. Under a current proposal for progressive price indexation, benefits would essentially be the same for almost everyone in 65 to 75 

years. A longevity indexation provision could also help prevent Social Security from getting out of actuarial balance in the future. 

There is much disagreement on whether our lifespans will increase 

faster or slower than the intermediate projections in the trustees 

reports. A response to unexpected changes in lifespans might be to 

automatically adjust the indexation, as Eugene was mentioning. 

What should be indexed: benefits, taxes, or retirement ages? In 

order to analyze this, it helps to look at extremes. If we look in the 

distant future when people are living to, say age 150, will it make 

sense to have retirement age still at 67 and our pensions tiny, or 

will it make sense to have later retirement ages and to not have 

to continually cut benefits or raise taxes? In summary, the demographic challenges for Social Security brought about by our longer 

lifespans can be solved through continual indexation. Automatic 

changes to the indexation could reduce Social Security’s vulnerability to future changes that we can’t predict. Then Social Security 

would be less likely to go out of balance, assuring American workers that they would get their benefits from Social Security. I will 

be happy to answer your questions later. 

[The prepared statement of Mr. Gebhardtsbauer follows:] 

Statement of Ron Gebhardtsbauer, Senior Pension Fellow, American 

Academy of Actuaries 

The American Academy of Actuaries is the public policy organization for actuaries 

of all specialties within the United States. In addition to setting qualification standards and standards of actuarial practice, a major purpose of the Academy is to act 

as the public information organization for the profession. The Academy is nonpartisan and assists the public policy process through the presentation of clear, objective analysis. The Academy regularly prepares testimony for Congress, provides 

information to federal elected officials and congressional staff, comments on proposed federal regulations, and works closely with state officials on issues related to 

insurance. 

Protecting and Strengthening Social Security 

Chairman McCrery, Congressman Levin, and distinguished committee members: 

thank you for the opportunity to testify on the impact of longevity on Social Security’s finances and ways to encourage work at older ages. My name is Ron 

Gebhardtsbauer, and I am the Senior Pension Fellow at the American Academy of 

Actuaries. We are the non-partisan professional organization representing all actuaries in the U.S. and do not endorse or propose legislation. Instead, we analyze the 

potential effects of legislation and evaluate its advantages and disadvantages relative to current law. 

The Demographic Challenges for Social Security: As you noted in your announcement for this hearing, there are major demographic challenges for Social Security: the retirement of the baby boomer generation and longer life spans. Chart 

I, at the end of this testimony, graphs Social Security’s annual income and outgo. 

It shows that outgo increases rapidly for 20 or so years starting in 2008, when the 

baby boomers are first eligible for (old-age) retirement benefits. Outgo, as a percentage of covered payroll continues to increase thereafter, even though the baby 

boomers are retired, due to projected increases in our longevity. The problems do 

34 

1See Chronic disability trends in elderly US populations: 1982–1994 by Manton, Corder, & 

Stallard. In 1982, 14.1 percent of elderly between 65 and 74 were IADL (Instrumental Activities 

of Daily Living) or ADL-impaired or institutionalized. In 1994 this decreased to 11.5 percent. 

For ages 75 to 84, it dropped from 31.9 percent to 26.9 percent. 2 Based on Table V.A.4, males age 65 in 2022 will live 8.4 percent longer than males age 65 

in 2000, so the 13.3 reduction in benefits is offset by an 8.4 percent increase in years receiving 

the benefit. 

not get easier. The difference between Social Security’s outgo and income will continue to widen, unless we reduce benefits, increase taxes, and/or raise the normal 

retirement age (NRA). 

Raising Social Security’s Retirement Ages: You have asked us to discuss the 

options for raising Social Security’s retirement ages. Retirement age is at the heart 

of the issue of balancing the Social Security system by defining the appropriate cultural expectations between the period of work and retirement life. More extensive 

information on the effects of increasing retirement ages on workers, employers, and 

Social Security can be found on the Academy’s website (http://www.actuary.org/ 

socsec/background.htm). At this hearing, you expressed a particular interest in how 

raising the retirement age would affect Social Security benefits and retirement ages. 

Current Rules Increasing the Normal Retirement Age (NRA): Between 

2000 and 2005, Social Security’s normal retirement age (the age at which there is 

no reduction for early retirement) increased from age 65 to age 66. Although this 

change has already affected the benefits of people born after 1937 who retired early, 

there has been little negative feedback. That may be because: 

1. Congress made this change in 1983, many years before it affected anyone’s retirement benefit. 

2. Congress only applied the change to people under age 45 at enactment, thus 

giving workers many years to prepare for it. The change did not affect people 

who were closer to retirement, who would have had less ability to change their 

retirement plans. 

3. Congress phased the increase in NRA to age 66 gradually over the six years 

from 2000 to 2005 so there would be no reduction in initial benefits compared 

to people who retired the year before. For example, raising the normal retirement age from 65 to age 65 and two months in the year 2000, reduced benefits 

for people retiring at age 62 by about 1 percent. As wages probably increased 

by more than 1 percent over their last year of work, a retiree’s benefit is likely 

to be larger than the initial benefit of a similarly situated person who retired 

in the prior year. 

4. We are not only living longer, we are healthier at older ages, as shown by 

lower levels of impairment.1

5. Fewer jobs are physically demanding, now. 

6. More people are interested in staying active both mentally and physically, and 

jobs help to promote that. 

7. Many recent retirees may not even have realized it happened. 

The 1983 Social Security reform also increased the normal retirement age from 

age 66 to age 67, but it won’t start affecting people’s benefits until 2017. It affects 

people born after 1954, and will be fully phased in at age 67 for people born after 

1959. Thus, all these gradual changes in the NRA (from age 65 to age 67) affect 

people born after 1959, so their benefits will have been reduced by about 13 percent. 

However, because each generation is living longer, we really only decreased the 

value of lifetime benefits by around 5 percent.2 In other words, if we don’t increase 

the NRA, then we are de facto increasing Social Security lifetime benefits, because 

future generations will receive benefits for more years. If we do gradually raise the 

NRA, we can keep total lifetime benefits about the same (or the same relative to 

payroll taxes paid). 

Proposals to Increase NRA: One possible reform option would eliminate the hiatus in the increase in the NRA to age 67. Instead of waiting until 2017 to start 

increasing the NRA again, it could start next year. The Social Security actuaries 

have determined this change would eliminate only about 7 percent of Social Security’s 75-year shortfall, because it only affects people born between 1944 and 1959 

and only by a small amount. 

Another option found in the 1996 Social Security Advisory Council Report would, 

in addition to the last suggestion, very gradually increase the NRA by one month 

every two years so that the NRA would reach age 68 in 2035 for workers born in 

1973. Age 70 would be reached in 2083, but that would only affect people not yet 

born (i.e., for people born in 2021). This proposal increases the NRA only one-fourth 

35 

3 Certain other survivors are not affected by an increase in NRA, as noted in my earlier testimony on the subject of Increasing the Retirement Age, at http://www.actuary.org/pdf/ 

socialsecurity/sslfuture.pdf (page 2). 4Per the 1994–1996 Social Security Advisory Council Report Appendix III, items D1c and 

D2a. 5 In addition, people retire due to a desire for leisure, or due to the inability to work or find 

work, or due to the desire to retire after a spouse retires. 

as fast as the recent increases in NRA, and it eliminates about 36 percent of Social 

Security’s shortfall. 

Raising the NRA could eliminate the shortfall if it were done fast enough. The 

current increases in the NRA of two months per year create benefit cuts that are 

very similar to those created by price indexing the basic benefit formula, which 

would eliminate the shortfall. Thus, continuing the increases in the NRA by two 

months per year to an NRA higher than 67 would substantially reduce Social Security’s shortfall. 

Disability Retirees Not Affected: 3 Raising the NRA is different from a 

straight-forward benefit cut in one aspect. It does not affect disability benefit 

amounts, whereas decreases in the benefit formula do affect the disabled because 

the same formula is used to determine both old age and disability benefits. Because 

disability benefits are not cut when the NRA is increased, more people in their 60s 

may apply for and receive disability benefits, and the Social Security actuaries have 

reflected that in their pricing of the proposals that affect retirement ages. 

Early Retirees Are Affected: The above proposals do not change the earliest eligibility age (EEA) for retirement benefits under Social Security. Workers could still 

retire at age 62 and receive Social Security benefits. However, if the earliest retirement age stays at age 62, then those benefits become much smaller. For example, 

if we raise the NRA to age 70, then the age 62 retiree will have retired 8 years 

earlier than the NRA, which means their benefits will be only 55 percent of the benefits they would have received at the NRA. This issue of inadequate benefits is also 

important for surviving spouses, because a couple’s total benefit can drop by onethird on the death of a spouse. One way to discourage these early retirements might 

be to require the spouse to sign off on early retirement decisions (acknowledging the 

reduction in benefits due to early commencement), but that would complicate administration (e.g., if separated spouses cannot be found or if they disagree on the 

appropriate retirement age). 

This issue is important for workers in physically demanding jobs. Should Social 

Security continue to pay these benefits at an early age (even though they would be 

smaller), even though it can encourage people to retire too early, or should we increase the earliest eligibility age for Social Security benefits? This issue also affects 

employers who provide these jobs. If they need to retire workers in physically demanding jobs early, then they will find that they need to provide adequate pensions 

at those ages, which emphasizes the importance of a strong voluntary defined benefits retirement system to provide supplemental benefits until Social Security benefits are available. 

Proposals to Increase the Earliest Eligibility Age: To avoid inadequate early 

retirement benefits, some proposals also gradually increase the earliest eligibility 

age for retirement benefits from age 62 to age 65. Social Security’s actuaries noted 

that this would eliminate an additional 10 percent of the Social Security shortfall.4

This change in EEA doesn’t help Social Security much over the long run, because 

the system is designed so that a person’s total lifetime benefits have approximately 

the same value regardless of the age that one elects to commence benefits. The effect on Social Security is that a small amount of cash outlays would be delayed, 

which would help the unified budget a small amount, but the following year their 

benefits would be paid and their benefits would be slightly larger than they would 

have been had people been able to retire earlier. In addition, raising the EEA might 

encourage more unhealthy workers (especially those in physically demanding jobs) 

to apply for disability benefits, which are larger than early retirement benefits. 

Encouraging Work at Older Ages: While raising the EEA only reduces Social 

Security’s shortfall by 10 percent, it can have a large effect on when people retire, 

since a person’s retirement date is very much a financial decision.5 Raising the EEA 

can encourage people to work longer, and not retire until they can get their Social 

Security pension. Chart II, at the end of this testimony, shows that retirement ages 

quickly shifted to age 62 after Social Security allowed benefits at that age for men 

in 1961 (enacted in 1956 for women). However, in the past 20 years, workers have 

started retiring later due to: 

1. Government policy encouraging work (e.g., mandated employer-based pension 

accruals after age 65, higher Social Security earnings limit before NRA, no 

36 

6 Another reason is that some assumptions did not fare as well, such as real wage growth and 

mortality, and this will be discussed later. 

earnings limit after NRA, increased NRA, increased credits from Social Security for working beyond NRA, training programs under Older Americans Act, 

etc.); 

2. Employers converting their defined benefit plans to 401(k) arrangements, 

which will provide smaller incomes for most people and require employees to 

retain investment and longevity risks; 

3. Employers cutting back on their post-retirement medical plans so that many 

more employees wait until they can receive Medicare at age 65; and 

4. Employers compensating workers more to retain them in certain industries due 

to labor shortages, particularly now that baby boomers are starting to retire 

and the numbers of new workers may not be enough to replace the retiring 

workers. 

Increasing both the Normal and Earliest Eligibility Ages: Increasing Social 

Security’s earliest eligibility age to 65 in tandem with the increase in the NRA to 

age 70 by 2083 (described earlier) would eliminate about 46 percent of the shortfall. 

Solvency and Sustainability of Social Security: So far we have only discussed 

raising retirement ages. Another option would be to increase contributions. Increasing contributions by 1.92 percent of covered earnings would eliminate 100 percent 

of the shortfall and make the system solvent over the next 75-year period. However, 

if this is the only change, we might be back here in 20 years with a large deficit 

again, due in part to our continually increasing life spans. The same is true if we 

immediately cut all benefits by 13 percent to achieve 100 percent solvency. In fact, 

this is one reason why the 1983 fix did not last. It made the system solvent for the 

75-year period ending in 2058 (1983 + 75).6 Now the 75-year period includes many more deficit years, in which outgo is more than income due to our longer life spans. 

Thus, as long as we continue to live longer, we will need very slow and gradual increases in retirement ages (or small and continual increases in taxes or reductions 

in benefits). If we don’t want Social Security to continually go out of balance, then 

we need to not only make it solvent, but also make it sustainable. The accepted test 

for sustainability is that trust fund ratios in the final years of the 75-year period 

be level or increasing. 

Predictability: There is another reason that could bring us back to the table in 

future years, even if we have a solution that is estimated to be sustainable under 

intermediate projections. We may live longer than assumed under the intermediate 

projections, have fewer children, have higher inflation, or be less productive. In fact, 

these last two concerns become more relevant now that we are discussing price indexation (or progressive price indexation) of the initial benefit at retirement. 

Indexation of Initial Retirement Benefits: Under price indexation, if real 

wages increase less than projected under the intermediate assumptions, Social Security will receive less payroll taxes. Benefit outgo could increase more than wage income if real wages were negative like they were in the 1970s. Thus, under price indexation, the pessimistic projection of trust fund assets could still go to zero just 

when the economy is in bad shape, and benefits would have to be cut and/or taxes 

raised again. On the other hand, if real wages increase more than expected under 

the intermediate assumptions, payroll taxes would be more than expected, but benefits (only increasing with price inflation) would fall further and further behind 

wages. This would make the optimistic projection of the trust fund assets increase 

much faster than expected. If it actually happened, we would find we had cut benefits more than needed and/or increased taxes more than needed. In summary, price 

indexation would increase the spread between the optimistic and pessimistic forecasts. Social Security’s finances would be more volatile. Wage indexation reduces 

that problem, because when wages go up more than expected, benefits do too (although with a lag). 

Automatic Adjustments: Because it is impossible to predict the economy or the 

future demographics of the system, Congress might want to consider slightly modifying Social Security so that it automatically handles unexpected changes in the 

economy or the demographics of the nation. For example, indexing the initial retirement benefits to wages would make the system less volatile to unexpected changes 

in wages. 

That’s not to say that we should not use price indexation. We could use it (or 

something similar, such as increasing initial retirement benefits by wage growth 

less 1 percent) if we wanted to gradually decrease benefits, but it only makes sense 

to use it until benefits are at the desired level. If price indexation is not turned off, 

benefits eventually fall below contributions, at which point, Social Security would 

37 

7Olshansky, S.J., Passaro, D., Hershow, R., Layden, J., Carnes, BA., Brody, J., Hayflick, L., 

Butler, RN., Allison, DB., Ludwig, DS. 2005. A Possible Decline in Life Expectancy in the 

United States in the 21st Century. New England Journal of Medicine 352:1103–1110 8For example, we might not want benefits, taxes, or retirement ages to be constantly changed 

up and down, so some smoothing mechanism could be employed. In addition, Congress might 

not want to change benefits or retirement ages for people close to retirement. 9Per Social Security regulation Sec. 404.1563 

have surpluses thereafter. Some note that this gives us the option to reduce payroll 

taxes at that point in time. We could also decide now whether to return to wage 

indexation or reduce taxes at that date (although it should be noted that if we do 

not ever return to wage indexation, then benefits eventually become inconsequential 

in comparison to wages). Similarly, we could try progressive price indexation, if we 

wanted to move to a Social Security system that provides level benefits (i.e., the 

same benefit for everyone as in the United Kingdom’s tier I benefit) instead of the 

individually equitable benefits under today’s system. Under a current proposal for 

progressive price indexation, benefits would become the same amount for middle 

and upper income workers in 75 years assuming real wages grow by 1.1 percent per 

year (or 65 years assuming real wages grow at 1.3 percent per year). 

We could also automatically respond to unexpected changes in life spans. That 

would decrease the large spread between the optimistic and pessimistic projections. 

Life Spans: There is much disagreement on whether life spans will increase faster or slower than the intermediate projections in the trustees’ reports.7 Past improvement in life spans suggest that we could fully index the system to keep it in 

balance by increasing the normal retirement age very gradually (by one month 

every two years, which reduces the increase in benefits by only 1⁄4 percent per year). 

This would be less than one-fourth of the reductions in benefits under price indexation. If life spans increase more, then we would eventually have to cut benefits 

more or raise taxes more. If life spans increase less than expected, then benefits will 

have been cut too much (or taxes raised too much). A solution would be to index 

benefits, payroll taxes, or the NRA to life spans. Some call this longevity indexation. 

If life spans increase faster or slower than expected, Congress could create rules 

that automatically make an adjustment (within parameters set by Congress on how 

fast the changes could occur and how soon they could be applied).8 These adjustments would be based on historical improvements in life spans and not depend on 

the person doing the calculations. If the Social Security system is indexed by longevity, then the optimistic and pessimistic projections would not be so far apart. 

Which of those three choices (indexing benefits, taxes, or NRA) would make the 

most sense? In order to analyze this, it helps to look at the extremes. In the distant 

future, when people are living to age 150 (for example), will it make sense to still 

have the retirement age at 67 so that we are retired for 80 years (twice as long as 

our working lifetimes) and our pensions are tiny, or our contributions huge (to 

maintain the same level of benefits)? Or will it make more sense to have a later 

retirement age and not have to continually cut benefits and/or raise taxes so much? 

While raising the normal retirement age appears to be a more logical solution, we 

would still have to address the issue of unhealthy people who are not quite eligible 

for Social Security disability benefits and workers in physically demanding jobs. 

Gradually relaxing Social Security’s disability tests as is done currently at older 

ages 9 already addresses this concern to some extent. A flexible employer-sponsored 

defined benefit system, which can provide pension benefits tailored to the individual 

aspects of each company’s workforce also can be of great help. 

These longevity indexation provisions could help prevent Social Security from getting out of actuarial balance in the future, relieving Congress from having to address Social Security issues every 20 years. While it might not put Social Security 

on autopilot forever, it would be an improvement on current rules. In addition, if 

Congress ever felt uncomfortable with benefits being cut too much (or taxes going 

up too fast) by the automatic rules, they could revise them. In fact, they could give 

themselves an automatic standing order to vote on changes, with preferential rules 

requiring a vote. 

Additional Issues to Address 

In addition to the issues discussed above, you asked that we discus ways to encourage people to work at older ages. 

Consistent Laws: If Congress wants to encourage work at later ages, you may 

want to consider having consistent rules so that workers think of age 67 as the ‘‘normal’’ retirement age. For example, Medicare still uses age 65, and employer pension 

38 

10See Internal Revenue Code Sec. 411(a)(8), which defines the maximum NRA as age 65 and 

5 years of service, Sec. 401(a)(9) which defines a maximum distribution starting age of 701⁄2 for 

owners, and Sec. 401(a)(14) which sets the latest commencement date rules (age 65 and 10 years 

of service). 11 IRS regulation Sec. 1.401–1(b)(1)(i) 

plans are not allowed 10 to use a normal retirement age later than age 65. During 

these economically difficult times for employers, it might be valuable for Congress 

to consider allowing, and possibly encouraging, employers to have a normal retirement age in their pension plans that was consistent with Social Security. For example, Congress could provide employers flexibility in meeting the administratively 

complex accrual rules, if the plan sponsor increases the NRA gradually for employees who were accruing benefits. The new benefit accruals would ensure that employees’ benefits were not being reduced, without having to test them each month. 

This would not mean that employees had to work until age 67 to get their employer pension. Just as with Social Security, most employers allow employees to retire and commence pensions earlier. In fact, most employers allow early retirement 

at age 55. It would just allow employers to keep their NRA consistent with Social 

Security’s NRA, and thus keep their pension plan costs from spiraling up as we live 

longer. 

Conversions to Cash Balance Plans and Elimination of Early Retirement 

Subsidies: A new kind of defined benefit pension plan, called a cash balance plan, 

also encourages workers to retire later. Some history may be needed to explain it. 

Many employer pension plans added subsidized early retirement benefits in the 

1970s and 1980s when the labor supply was high. It helped workers retire at younger ages when the baby boomers (and many women) were looking for work. However, 

now the tide has turned and labor is not as plentiful, so employers may not want 

to encourage early retirement; they may need to retain their employees. Employers 

can eliminate their early retirement subsidies or they can convert their traditional 

pension plan to a cash balance plan. Cash balance plans promise workers an account with a guaranteed rate of return. They are easier for employees to understand 

and provide better benefits for young and mobile workers, but they can also decrease the growth in future accruals for older, long-service employees. After 20 years 

of their existence, the law is still not clear for these plans, and court cases have 

further complicated their prospects. Employers need Congress to clarify the law so 

that they can design their pension plans in an acceptable way that won’t subject 

them to expensive litigation. 

Phased Retirement: Employers are developing other ways to retain their employees, such as phased retirement programs; however, such programs face legal obstacles because an IRS regulation 11 requires that retirement plans be exclusively 

for (full) retirement. The Internal Revenue Service is to be commended for proposing 

a rule allowing employers to pay partial pensions when employees are phasing 

gradually into retirement. However, there is concern about the incredible complexity 

in the proposed rule as discussed in our letter to the IRS on this subject. Congress 

might consider clarifying the law, so employers can have phased retirement programs without having to constantly monitor an employee’s hours and adjust their 

pension amount for ups and downs in hours worked. 

Other Dangers to Employer Sponsorship of Retirement Plans: There are 

suggestions to reform the federal tax system to a consumption based tax, or provide 

equivalent tax advantages to all savings through such vehicles as Lifetime Savings 

Accounts (LSAs), or provide tax advantages to annuities purchased with non-pension funds. If there are no incentives for employers to surmount the enormous complexity and cost of providing pension plans to their workforces, they will surely face 

no alternative but to terminate their pension plans. This would be unfortunate not 

only for the retirement security of the nation’s workers, but also for employers who 

use these plans to help with workforce management issues, and for the country, 

which benefits from the large pool of pension savings that are efficiently invested 

in the economy. In addition, employer-sponsored pension plans help reduce our reliance on Social Security and help provide diversification of retirement risks over the 

three legs of the retirement stool (government retirement systems, employer-sponsored pension plans, and individual savings). If any of these proposals are acted 

upon, it is important to examine and debate how they would affect national retirement security, and consider ways to encourage employers to provide pensions for 

their employees. 

39 

Summary: The demographic challenges for Social Security brought about by the 

baby boomers’ upcoming retirements and our longer life spans can be solved 

through various gradual indexation methods. These include indexation of contributions, benefits, or the NRA to life spans and anti-volatility mechanisms to 

automatically adjust them if longevity improves faster or slower in the past. 

This indexation could reduce Social Security’s vulnerability to future changes 

that we can’t predict. Then Social Security would be less likely to go out of balance and Congress would be less likely to be called on to address these difficult 

issues. It would also help workers feel more assured that they would get their 

benefits from Social Security. 

In addition, preserving and providing flexibility to the employer-based pension 

system could help us encourage more work at older ages. It also could help us avoid 

having to pay the larger Social Security benefits prevalent in other countries. Hopefully, Congress will continue to encourage employers to provide these pension plans, 

and not discourage them, as might happen with some recent proposals. 

The Academy appreciates the opportunity to testify before this committee. 

Chart I 


Insert offset folio 23924a.015
40 

Chart II 

Chart III 

f 


Insert offset folio 23924a.016 Insert offset folio 23924a.017
41 

Chairman MCCRERY. Thank you. Ms. Long? 

STATEMENT OF VALERIE LONG, PRESIDENT, SERVICE EMPLOYEES INTERNATIONAL UNION, LOCAL 82, AND INTERNATIONAL VICE PRESIDENT, INTERNATIONAL EXECUTIVE 

BOARD, ON BEHALF OF GERALD HUDSON, EXECUTIVE VICE 

PRESIDENT, SERVICE EMPLOYEES INTERNATIONAL UNION 

Ms. LONG. Thank you, Chairman McCrery and Ranking Member Levin, and Members of the Subcommittee. First I would like to 

extend apologies for Executive Committee Member Gerald Hudson, 

who wasn’t able to make it today, and I really appreciate the opportunity to speak on behalf of 1.8 million members of the Service 

Employees International Union (SEIU) that we represent. More importantly, I would like to talk on behalf of the 8,000 property services workers of which I am privileged to represent here in Washington, D.C. I represent janitors, other building service workers, 

and ground keepers right here in the Nation’s capital. Our overall 

State council represents 25,000 workers, about 8,000 of them are 

long-term care workers that work in nursing homes, as well as 

public services. 

The majority of those people work really hard at physically demanding jobs. The kind of work that leaves you dead tired at the 

end of the day. They do it week after week, month after month, 

year after year, and at the end of decades they want to retire and 

get some rest. When we consider the proposals to provide secure 

retirement for ordinary working folks like those, the deliberations 

that you are involved in are important to those members that we 

are privileged to represent. 

A janitor’s working day, the members that I represent, is filled 

with stooping, bending, heavy lifting, having what the industry 

calls backpack bags on your back that are loud and heavy. People 

are pulling trash, pulling are stooping a lot, and many of them are 

part-time workers, who leave those jobs and go to other jobs like 

day labor jobs, food service jobs, and are doing the same demanding work, and sometimes even more demanding. It is the same in 

other industries where we represent workers. I have worked with 

a lot of our members in long-term care that work in nursing homes, 

and what they tell me is their work is extremely physical. You are 

on your feet all day, you are responding to the needs of people who 

are unable to feed, clothe, or bathe themselves because of age or 

poor health. Daily you are lifting people in and out of beds and into 

wheelchairs, turning them around in their beds, helping them take 

their baths. At any time, one slip or fall can cause permanent injury, and there are thousands of these workers who have back injuries. Nursing home work is some of the most dangerous work in 

America. While most people believe that nursing homes are safe facilities, they are actually more dangerous for workers than a coal 

mine, a steel mill, a warehouse, or a papermill. Nearly one in five 

nursing home workers will be injured or become ill on the job each 

year, more than twice the rate of other workers. 

So, it is no wonder that by the time nurse’s aides and janitors 

get to be 50 or 55, often with more than 30 years on the job, they 

start to pay close attention to what they can expect from Social Security. It won’t be much. Even unionized workers in these indusVerDate Aug 31 2005 01:15 Mar 11, 2006 Jkt 023924 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 E:\HR\OC\23924.XXX 23924
42 

tries sometimes don’t have any retirement benefits or pensions, 

and those kind of cleaning companies aren’t known for high pay either, but it can be enough to keep them out of poverty when they 

can’t work any more. That is the point. There comes a time sooner 

or later when workers really can’t physically work any more, and 

because they aren’t a lot of other jobs out there for 50—and 60- 

something building cleaners or nursing home workers, these folks 

are going to need Social Security benefits sooner rather than later. 

That is true for a lot of SEIU members like road workers, nurses, 

and home health care aides and many others. 

It is also true for millions of hard-working Americans with jobs 

in manufacturing, transportation, construction, and other physically demanding jobs. It is true too for people working in jobs 

where the stress is less physical but no less demanding, like social 

workers and prison guards. The time comes when people simply 

can’t keep working. If that time comes before the normal retirement age, they stand to collect benefits that are about 25 percent 

lower than their peers who can hold out longer. Raising the normal 

retirement age won’t magically make everyone able to work longer, 

it will only move the finish line so they must wait longer for their 

full Social Security retirement benefit, or more likely, take a bigger 

benefit cut. 

When the Social Security Act (P.L. 74–273) was amended in 1956 

and 1961 to allow early retirement, the age was set at 62, and a 

worker starting to collect benefits at that age faced a 20-percent reduction. Then the 1983 amendments increased the full retirement. 

Once full retirement age reaches 67 in 2022, the early retirement 

reduction will be 30 percent rather than 20 percent. A lot of working people can expect benefit cuts if the retirement age goes up. 

Most workers already retire before reaching full retirement age. 

About 71 percent of the people retiring in 2002 elected to receive 

early retirement benefits, and more than half of all retirees receiving benefits today began to draw their benefits at age 62. Only 4 

percent waited until 66 or later to receive benefits. Probably some 

of these early retirees were people who did well enough in their 

jobs or their investments that they could afford to stop working 

when they felt like it. I know that many of the people who elected 

to start collecting their Social Security checks at 62 or 63 did it because they had no choice: their aging bodies could no longer stand 

up to the wear and tear of their jobs, and Social Security was the 

only way to keep the wolf from the door. Changing the Social Security retirement age would do a great injustice to millions of people 

who have worked the hardest to earn a decent rest at the end of 

their working lives. Thank you. 

[The prepared statement of Ms. Long follows:] 

Statement of Valerie Long, President, International Vice President, Service 

Employees International Union, International Executive Board, on behalf 

of Gerald Hudson, Executive Vice President, Service Employees International Union 

Chairman McCrery and Ranking Member Levin: 

Thank you for the opportunity to join in this discussion of preserving and 

strengthening Social Security. I appear today on behalf of the 1.8 million members 

of the Service Employees International Union, the nation’s largest and fastest-growing labor union. SEIU members work in health care, public services, and property 

43 

services. Our members have elected me to serve them and take responsibility for 

our long-term care division, which represents nearly 500,000 nursing home and 

home care workers nationwide. 

The majority of SEIU members do hard physical work, the kind of work that 

leaves you tired at the end of the shift, worn out at the end of the week—and ready 

to retire at the end of decades on the job. I got a good sense of that work in the 

1970s, when I was a direct care worker at the Hebrew Home for the Aged in Riverdale, NY. 

Back then I had no idea that one day I would find myself testifying before Congress about work and retirement. But today when I consider proposals to provide 

a secure retirement for ordinary working folks, I think back to the people I worked 

with at the Hebrew Home, and how hard-working people like them will be affected 

by the decisions made here in the Congress of the United States. 

Things haven’t changed much in the last thirty years for nursing home workers 

and home care workers. The work of long-term care is extremely physical: you’re 

on your feet all day long, responding to all the needs of people who are unable to 

feed, clothe or bathe themselves because of age or poor health. Daily you lift people 

into wheelchairs, turn them in their beds, help them into a bath. At any time, one 

slip could cause a painful and possibly disabling back injury. 

In fact, nursing home workers have some of the most dangerous jobs in America. 

While most people believe that nursing homes are safe, clean health care facilities, 

a nursing home is actually more dangerous for workers than a coal mine, a steel 

mill, a warehouse, or a paper mill. Nearly one in five nursing home workers will 

be injured or become ill on the job each year—more than twice the rate of other 

workers. 

I could tell you about Charlie Benninger, a nurse aide in Pennsylvania who suffered a herniated disk in his spine after six years of lifting nursing home residents. 

Or Ann Davis, whose ongoing back pain resulted from breaking the fall of a resident 

in the Ohio nursing home where she worked. Or Olgarene Oliver, still working in 

pain at age 61 after 22 years of lifting, turning and supporting residents. 

So it’s no wonder that by the time nursing home workers get to be 50 or 55— 

often with more than 30 years on the job—they start to pay close attention to what 

they can expect from Social Security. It won’t be much—even union nursing homes 

aren’t known for their high pay or benefits—but it can be enough to keep them out 

of poverty when they can’t work any more. 

And that’s the point—there comes a time, sooner or later, when workers can’t 

work any more. And because there aren’t a lot of other jobs out there for fifty—and 

sixty-something nurse aides, these folks are going to need their Social Security benefits sooner, rather than later. 

That’s true for a lot of SEIU members like janitors and road workers, nurses and 

home health aides, and many others. It’s also true for millions of hard-working 

Americans with jobs in manufacturing, transportation, construction, and other physically demanding jobs. It’s true, too, for people working in jobs where the stress is 

less physical but no less demanding, like social workers and prison guards. The time 

comes when they simply cannot keep working. 

If that time comes before the ‘‘normal’’ retirement age, they stand to collect benefits that are about 25 percent lower than their peers who can hold out longer. Raising the ‘‘normal’’ retirement age won’t magically make anyone able to work longer; 

it will only move the finish line so they must wait longer for their full Social Security retirement benefit, or, more likely, take a bigger benefit cut. 

When the Social Security Act was amended in 1956 and 1961 to allow early retirement, the age was set at 62, and a worker starting to collect benefits at that age 

faced a 20 percent reduction. When the 1983 amendments increased the full retirement age, no change was made in the age for early retirement. Once full-retirement 

age reaches 67, in 2022, the early retirement reduction will be 30 percent, rather 

than 20 percent. 

A lot of working people can expect benefit cuts if the retirement age goes up. Most 

workers already retire before reaching full-retirement age. Seventy-one percent of 

the people retiring in 2002 elected to receive early retirement benefits. And more 

than half of all retirees receiving benefits today began to draw their benefits at age 

62. Only 4 percent waited until age 66 or later to begin receiving benefits. 

Probably some of those early retirees were people who did well enough in their 

jobs or their investments that they could afford to stop working when they felt like 

it. But I know that many of the people who elected to start collecting their Social 

Security checks at 62 or 63 did it because they had no choice: their aging bodies 

could no longer stand up to the wear and tear of their jobs, and Social Security was 

the only way to keep the wolf from the door. Changing the Social Security retireVerDate Aug 31 2005 01:15 Mar 11, 2006 Jkt 023924 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 E:\HR\OC\23924.XXX 23924
44 

ment age would do a great injustice to millions of Americans who have worked the 

hardest to earn a decent rest at the end of their working lives. 

f 

Chairman MCCRERY. Thank you, Ms. Long. Ms. MacGuineas. 

STATEMENT OF MAYA C. MACGUINEAS, PRESIDENT, COMMITTEE FOR A RESPONSIBLE FEDERALBUDGET, AND DIRECTOR, FISCAL POLICY PROGRAM, NEW AMERICA FOUNDATION 

Ms. MACGUINEAS. Thank you. Mr. Chairman, Members of the 

Subcommittee, for having me testify. It is a privilege to appear before you. Since Social Security began, life expectancies have grown 

while birth rates have declined, leading to a work force that will 

grow more slowly than the retired population, and an ongoing decline in the worker to beneficiary ratio. Thus, the underlying 

premise of an inter-generational pay-as-you-go transfer system has 

actually been turned upside down. In many ways, Social Security 

reform is a numbers game. We have to decide what revenues to increase and what benefits to reduce. We have to decide on the timing of these changes, and we have to decide who will be affected 

and who will be protected. The more people we protect, the more 

others will have to be affected. When it comes to dealing with the 

demographic and labor force challenges, there are some sensible 

policies that could have dynamic positive effects beyond just their 

effect on Social Security solvency. 

A sensible place to start is building adjustments into the Social 

Security system that reflect demographic changes. Longevity indexing is one such adjustment. Under longevity indexing, benefit levels 

would be adjusted based on projected increases in life expectancy. 

As life expectancies continue to grow, the amount of the annual 

benefits would be lowered to balance out that benefits would be collected over a longer period of time. So, benefits would still increase 

from one cohort to another due to wage indexing. Whereas now, 

each subsequent cohort gets a raise from wage indexing and longer 

life expectancies, that double bump up would be reduced. This 

change would offer more flexibility than increasing the retirement 

age, and it comes with less political baggage. Importantly, the 

changes would be made automatically, freeing Congress from having to continually make the tough choices of when to adjust benefits. 

Another option is something I would call progressive longevity 

indexing, and this option would use more detailed life expectancy 

projections, broken apart by economic group, reflecting that highincome individuals are living increasingly longer than those with 

lower incomes. Progressive longevity indexing would undo some of 

the disproportionate gains that are going to the better off. Like longevity indexing, the change would do nothing to make cohorts 

worse off on a lifetime basis than those that came before them. An 

additional approach to adjusting benefits is to find ways to encourage workers to remain in the workforce longer, thereby increasing 

the revenues they pay into the Social Security system and decreasing the time period over which they collect them. 

45 

The effects of the higher economic contributions and keeping people engaged in productive work for longer would be significant. One 

option would be to tie full retirement benefits to a set number of 

years of work rather than a set retirement age. For instance, workers could be entitled to full benefits after 40 years of contributions, 

which would allow somebody who began working at age 20 and 

worked straight through, to retire at 60, while somebody who may 

have spent more time in school or out of the work force would receive full benefits at a later age. People would still be able to retire 

earlier, but their benefits would be reduced accordingly, reflecting 

their fewer years of contributions. 

Another option would be a late retirement bonus. It is well established that people prefer lump sum payments to annuities, even 

when the value of the annuity would be higher. By allowing workers to choose to take some of the larger benefit they would have 

accrued from their additional years of work in the form of an up 

front payment, we could encourage people to work for a bit longer. 

Perhaps the most important change we can make is developing 

more flexible workforce options for workers who want to remain in 

the work force beyond the retirement age. With good reason, the 

idea of gradual retirement and productive aging is becoming more 

popular. Finding new ways to allow for, and encourage, flexible 

work environments will be key in both helping the solvency of the 

Social Security system and addressing the wider problems of labor 

market shortages. 

Reducing the many biases that exist against part-time work, 

both in terms of compensation and perception, will be key. For instance, allowing workers to begin collecting from their private pensions while participating in phased retirements would be one option. The solution probably does not lie in using mandates to force 

businesses to change or using the over utilized tool of tax credits 

to encourage them to do so, but instead, the combination of the 

mass exodus we are about to experience from the labor pool, and 

the many benefits of keeping talented workers active provides a 

win-win option for businesses and individuals. 

Interestingly, I think there is a tremendous opportunity here for 

the AARP and work-family communities to work together in helping make transparent what kind of more flexible work conditions 

really help people choose to stay in the workforce for longer. I am 

encouraged by the choice of the topic of today’s hearing. Both longevity indexing and more flexible work conditions offer fair and 

sensible options to help the Social Security system. None of the 

choices we confront as the result of an aging society are simple, 

and the changes I have mentioned today alone will not be sufficient 

to fix Social Security, but they are a good place to start in implementing long overdue reforms in that they would both help the Social Security system, and would also help the economy at large. 

Thank you. 

[The prepared statement of Ms. MacGuineas follows:] 

Statement of Maya C. MacGuineas, President, Committee for a Responsible 

Federal Budget and Director, Fiscal Policy Program, New America Foundation 

Good morning, Mr. Chairman and Members of the Subcommittee. Thank you for 

the opportunity to testify. It is a privilege to appear before the Subcommittee. When 

46 

1 According to the Social Security Administration, between 2005 and 2055, beneficiaries will 

grow from 47 million to 98 million, while covered workers will grow from 158 million to 194 

million. 

Social Security started in 1935, it was assumed that each generation would be larger than the previous one, leading to manageable costs on individual workers. Nobel 

Laureate Paul Samuelson wrote, ‘‘The beauty about social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges 

that far exceed anything he has paid in . . .’’ However, demographics have changed 

from what we expected when the program was designed. Life expectancies have increased while birth rates have declined, leading to a workforce that will grow more 

slowly than the retired population, and a continuation in the decline of the worker 

to beneficiary ratio. 

The first of the seventy-eight million Baby Boomers will retire in 2008. Many of 

them will spend as much as a third of their adult life in retirement. Over the next 

half century, the number of Social Security beneficiaries will more than double, 

while the number of covered workers will increase by only 22 percent.1 Thus, the 

basic underlying premise of the intergenerational, pay-as-you-go, transfer system 

has been turned upside down. 

Table 1 

At Birth At Age 65 

Male Female Male Female 

Actual 

1940 61.4 65.7 11.9 13.4 

1950 65.6 71.1 12.8 15.1 

1960 66.7 73.2 12.9 15.9 

1970 67.2 74.9 13.1 17.1 

1980 69.9 77.5 14.0 18.4 

1990 71.8 78.9 15.1 19.1 

2000 74.0 79.4 15.9 19.0 

Projected 

2010 75.4 80.0 16.6 19.2 

2025 77.0 81.2 17.5 20.0 

2050 79.4 83.2 18.9 21.4 

2075 81.3 84.9 20.2 22.7 

Source: Social Security Administration 

In many ways Social Security reform is a numbers game—we have to decide what 

revenues to increase and what benefits to reduce. We have to decide the timing of 

these changes. And we have to decide who will be affected and who will be protected—the more some are protected, the more others will have to be affected. 

But when it comes to dealing with the demographic and labor force challenges, 

there are some sensible policies that have dynamic, positive effects beyond just their 

effect on Social Security solvency. Let me be clear, I am not advocating that there 

are any free lunches out there—there are not. Social Security reform will require 

tough choices and they should be made sooner rather than later. But smart choices 

will help ease the transitions. 

When Social Security began, workers on average were not expected to live to the 

retirement age of 65 while now they are expected to live decades beyond that. 

Though the retirement age is moving (at glacial speed) towards age 67, this change 

alone will not be close to enough to return the ratio of retired years to working 

47 

years to what it once was. Supporting retirees for roughly a third of their adult life 

in retirement would require far greater levels of Social Security taxes than we have 

been willing to contribute. 

Changes to Social Security 

A sensible place to start is building adjustment into the Social Security system 

that reflect these demographic changes. Longevity indexing is one such adjustment. 

Under longevity indexing, benefit levels would be adjusted based on projected increases in life expectancy. As life expectancies continued to grow, the amount of the 

annual benefits would be lowered to balance out that benefits would be collected 

over a longer period of time. If life expectancy increases slowed down, the adjustments would slow correspondingly. Benefits would still increase from one cohort to 

the next due to the wage indexing of benefits. But whereas now each subsequent 

cohort gets a ‘‘raise’’ from wage indexing and longer life expectancies, that doublebump up would be reduced. A number of reform proposals have included longevity 

indexing in one form or another as one of their components. This reform is not untried; versions of it have been used in Italy and Sweden. 

Longevity indexing can be done in a number of ways. One option is to reduce the 

initial benefit based on life expectancy. Another is to modify the 90, 32, and 15 PIA 

formula factors to reflect life expectancy expectations or by some pre-set amount. 

Generally, proposals would rely on the Social Security Administration’s projections 

for life expectancy and adjustments would be made on a regular basis. Most proposals would exempt disability and some other auxiliary benefits from the adjustments. 

This change is similar to increasing the retirement age, but has the advantage 

that it would allow more choice about when participants retire, which offers a desirable level of flexibility. Furthermore, while increasing the retirement age (both early 

and normal) is a sensible policy, many politicians strongly oppose it. Thus, longevity 

indexing offers a policy with similar benefits but less political baggage. A second advantage is that the changes would be made automatically, thereby removing the 

need for Congress to continually make the tough choice of when to adjust benefits. 

Congress could always alter the adjustments, but automatic indexation would do 

much of the heavy lifting. 

Another option is something I would call ‘‘Progressive Longevity Indexing’’. Generally, longevity indexing is based on a single, unisex, life expectancy projection. 

However, one could use more detailed life expectancy projections, broken apart by 

economic group. This approach is easily justified by the fact that high-income individuals are living increasingly longer than those with lower incomes. Thus, the effects of growing income inequality are exacerbated by the growing inequalities in 

life spans. Progressive longevity indexing, which would allow benefits to be adjusted 

by life expectancy expectations for specific income groups, would undo some of the 

disproportionate gains going to the better-off. Like longevity indexing, the changes 

would do nothing to make cohorts worse off than those that came before them on 

a lifetime basis. 

Labor Force Alternatives 

An alternative or additional approach to adjusting benefits to reflect longer life 

expectancies is to find ways to encourage workers to remain in the workforce for 

longer, thereby increasing the revenues they pay into the Social Security system 

and decreasing the time period over which they collect benefits. The positive benefits of such policies clearly go beyond their effects on the Social Security system. The 

labor force is projected to grow far more slowly in the future than it has in the past. 

This is true even accounting for higher levels of immigration. The higher economic 

contributions from keeping people engaged in productive work for longer would be 

significant. 

One option would be to tie full retirement benefits to a set number of years of 

work rather than a set retirement age. For instance, workers could be entitled to 

full benefits after 40 years of contributions, which would allow somebody who began 

working full-time at the age of 20 and worked straight through, to retire at 60, 

while those who may have spent more time in school or out of the workforce, would 

receive full benefits at a later age. People would still be able to retire earlier, but 

their benefits would be reduced accordingly, reflecting their fewer years of contributions. This policy would undo some of the bias against workers who are in the workforce for years beyond those where they get full credit for their contributions. 

Another option would be a late retirement bonus. It is reasonably well established 

that people prefer lump-sum payments to annuities even when the value of the anVerDate Aug 31 2005 01:15 Mar 11, 2006 Jkt 023924 PO 00000 Frm 00051 Fmt 6633 Sfmt 6621 E:\HR\OC\23924.XXX 23924
48 

2Warner, John T. and Saul Pleeter, ‘‘The Personal Discount Rate: Evidence from Military 

Downsizing Programs.’’ American Economic Review, vol. 91, no. 1, March 2001, p. 33–53. Atkins, 

Allen B. and Edward A. Dyl, ‘‘The Lotto Jackpot: The Lump Sum Versus the Annuity.’’ 

Financial Practice & Education 1995. vol. 5, issue 2. p. 107–111. 3 New America Foundation’s Work and Family Program: ‘‘Working Families’ Catch-22: Inflexibility or Part-Time Penalty.’’ April 2004. 4 Ibid. 

nuity is higher.2 Thus, there is an opportunity to incentivize people to stay in the 

workforce by offering a lump-sum payment as a reward. For instance, workers who 

remained in the workforce until the age of 70, or for 45 years or more, could be offered a small immediate payout upon retirement on top of their traditional benefit. 

By allowing workers to choose to take some of the larger benefit they would have 

accrued from their additional years of work in the form of an up-front payment, 

many would be motivated to work a bit longer. You could construct this lump-sum 

payment so that it would actually save money for the Social Security system but 

still serve to encourage workers to work longer. 

Perhaps the most important change we can make on this front is developing more 

flexible workforce options for workers who want to remain in the workforce beyond 

the retirement age, but may not want the commitment or responsibility of a traditional, full-time job. 

With good reason, the idea of gradual retirement and productive aging is becoming more popular. Many workers do not want to shift abruptly from a full-time work 

environment to full-time leisure. At the same time, they do want to scale back their 

time commitments and increase the flexibility of their jobs, to allow more leisure 

time, time with the family, flexibility to deal with health issues, etc. Similarly, 

many employers are realizing they are beginning to lose a significant segment of 

their talent pool. This loss of institutional knowledge will only grow as the Baby 

Boomers start to leave the workforce. 

Finding new ways to allow for and encourage flexible work environments will be 

a key in both helping the solvency of the Social Security system and addressing the 

wider problem of labor market shortages. Currently, part-time and nonstandard 

workers receive, on average, lower hourly wages than do their full-time counterparts.3 Furthermore, only 14% of nonstandard workers receive healthcare benefits 

compared to 69% of traditional workers in the same jobs.4 The discrepancies between part and full-time coverage for pensions is similar to that of healthcare. 

Reducing the many biases that exist against part time work—both in terms of 

compensation and perception—will help to encourage workers to remain in the 

workforce well beyond when they might otherwise retire. For instance, allowing 

workers to begin collecting from their private pensions while participating in phased 

retirement would be one option to induce workers to remain in the workforce. There 

is a tremendous opportunity for advocates of flexible work from the AARP and the 

work-family community to work together on this issue. The solution does not lie in 

using mandates to force businesses to change, or using the over-utilized tool of tax 

credits to encourage them to so. Instead, the combination of the mass exodus we 

are about to experience from the labor pool and the many benefits of keeping talented workers active, provides a win-win option for businesses and individuals. 

I would like to conclude by saying that I am encouraged by the choice of topic 

for today’s hearing. Both longevity indexing and more flexible work conditions offer 

fair and sensible options to help the Social Security system. None of the choices we 

confront as the result of an aging society are simple. And the changes I have mentioned today will alone not be sufficient to fix Social Security. But they are an excellent place to start on implementing long-overdue reforms to help Social Security in 

that they offer one of the few silver linings in the Social Security debate since they 

would help both the Social Security system and the economy at large. 

f 

Chairman MCCRERY. Dr. Steuerle, I want to start with you. Ms. 

Long brought up the primary objection that I hear to increasing the 

rate of retirement, either early retirement or full retirement, and 

that is, a lot of people work in jobs which are difficult physically 

and they are just simply not able to work as long as the rest of the 

elderly society. How do you respond to that? Is there a way we can 

accommodate that concern and yet increase the age of retirement? 

49 

Mr. STEUERLE. I think there is, but I do not want to indicate 

that anything we do here is pure. If you think about the system 

and the way it is indexed, jobs have increasingly become less physically demanding over time, and we have correspondingly provided 

more and more years of retirement support. If we were to be concerned with the physical demands of jobs, we probably should have 

had many more years of retirement support back when jobs were 

more physically demanding and then accommodated fewer physical 

demands with fewer benefits over time. Also, if we look at the data 

on the health reported by people even as old as 65 to 74, the vast 

majority of whom are out of the work force altogether, I believe less 

than 10 percent reported being in poor health and less than a quarter reported being in poor or fair health. 

So, there is a very substantial number of people who are not, as 

I say, elderly. They are late middle-aged, and report being capable 

of working longer in the work force. The cost to the system of not 

having them in the work force stretches beyond the question of Social Security solvency. I would work on reforming Social Security 

lifetime benefits or on the age of retirement even if the system was 

totally solvent, because if we could get more people in the workforce, what we get are three big gains: one, we get a higher annual 

benefit, an especially important item for some of those low-income 

people who retire at 62 and find out by the time they are 80 or 

older they do not have enough income. It is not quite the same having that same income at 80 as it was at 62. Second, we get more 

revenues for the system, and not just for Social Security. Revenues 

increase throughout all of government. It helps relieve all of the 

other pressures on the budget—on children’s programs and working family programs. Three, because we get more revenues in Social Security for the same tax rate—assuming you agree to a final 

tax rate as a compromise, with more people working you get more 

revenues—we actually can increase the lifetime benefit across the 

board for everyone. 

This leaves the problem of how we adequately take care of that 

small minority who actually have very severe physical problems. 

There we have to ask questions, and they are tough questions, such 

as how to structure our Disability Insurance program, whose problems we have not really been tackling well. As many of you know, 

we have done a horrible job in that program in getting people back 

to work once we get them on the rolls. So, there are a lot of questions we have to address there. I think there are also some compromises you can make if you are going to increase the normal and 

the early retirement age. By the way, I suggest just dropping that 

terminology altogether and just having an earliest retirement age, 

and making your actuarial adjustments from there. I think there 

are other things we could do with looking at the disability payments. I suggest that even if you are not willing to deal with the 

retirement age, you could cap or provide a lower benefit up front, 

say at age 62 or 65. That would actually take care of most low-income people because that adjustment may not affect what they are 

eligible to receive in the first place. Then back-load benefits more 

so that most middle, or at least upper-income people, cannot get so 

much cash up front. They could wait a little bit longer to get the 

higher benefit, say until they have 12 or 15 years of life expectancy 

50 

instead of for all years of retirement. It is a tough question you 

raise, and I do not want to indicate that I have completely solved 

it. It is just very, very expensive to try to solve a problem for what 

may be 5, 10, or 20 percent of the population, by taking 100 percent of a population and encouraging them to duck out of the work 

force. 

Chairman MCCRERY. Thank you. Dr. Nyce, you said that if we 

limit our solutions for strengthening Social Security to tax increases and benefit cuts, it could create inefficiencies in our labor 

and capital markets that would ultimately impede economic 

growth. Could you expound upon that a little bit? What negative 

effects could result, especially if we have high payroll tax burdens? 

Mr. NYCE. In terms of the payroll tax, it essentially affects both 

sides. It affects employees as well as employers. It affects employees in the sense that employees see the payroll tax as exactly that, 

a tax, not as a contribution into the system. There has been a disconnect between the contribution into the Social Security system 

and the payout eventually that they will receive. On the employer 

side, the concern is that employers, if we look around the globe and 

see the case of France and Germany, the high social insurance 

costs in those systems has been an impediment to capital moving 

to those countries. Actually, we have seen capital moving quite rapidly out of those countries because of the higher social costs. If the 

option on the table is to increase tax rates in the future, we may 

eventually fall into the same traps as those countries. 

Chairman MCCRERY. Just to give us a little more, what has 

been the experience in those countries that have high tax burdens 

to support high social costs? You mentioned capital flowing out instead of in. 

Mr. NYCE. Standards of living have been lower. 

Chairman MCCRERY. Standards of living have been lower. 

Mr. NYCE. That is eventually what it would lead to. 

Chairman MCCRERY. What about general employment? 

Mr. NYCE. Unemployment has been much higher as well, and 

there has also been some recent research that higher payroll taxes 

have been linked to lower rates of fertility. 

Chairman MCCRERY. I would like to see that research. 

[Laughter.] 

Mr. NYCE. It is in my testimony. The paper is there for you to 

read. 

Chairman MCCRERY. Good. 

Mr. NYCE. I am not sure how much I believe it, but—— 

Chairman MCCRERY. Thank you. Thank you very much. Mr. 

Levin? 

Mr. LEVIN. I don’t think I will follow up that question. 

[Laughter.] 

Just a couple of points. Dr. Nyce, I don’t think it is correct, from 

my experience, anyway, that workers do not feel that their payroll 

tax is paid for Social Security. I don’t think that is true. The people 

I have talked to feel they earned their Social Security, and that is 

part of the resistance to change. Also, I think we face this problem. 

Right now the defined benefit plans are becoming less and less reliable, and the guaranteed portion, the guaranteed character of Social Security, therefore, is becoming more and more important. I 

51 

just warn everybody, as you talk about changing the benefit as people grow older. When there is less of a foundation for them in their 

belief, and also in reality for lots of them, there is a real problem. 

As people grow older, they are more reliant on Social Security, not 

less. 

Let me just focus in, and I will start with you, Dr. Steuerle. We 

admire your dedication, your innovations, but I think all of us here 

on this panel, and everybody else in the Congress and the White 

House, had better try to get into the shoes of our constituents and 

ask ourselves: What is it? You say it is a middle-aged benefit. I 

don’t think that is the perspective of the recipient. They like to 

think of themselves when they are 65, 67, 68 as middle-aged. I can 

attest to that. I just don’t think that that really works. So, let me 

suggest—I will take a few minutes, maybe some of my colleagues 

will follow up. I was reading these materials, and it says, ‘‘Only 4 

percent waited until age 66 or later to begin receiving benefits.’’ 

People have been telling us something by the huge proportions who 

retire early. It has been a rather persistent pattern. That statistic, 

only 4 percent waited—this is in 2002—until 66 or later to begin 

receiving benefits, that at least is a warning flag to us. Whatever 

we think here, think about what the feelings and reactions and 

conduct are of people. 

You used the words ‘‘putting them off work.’’ You used ‘‘put off.’’ 

I think I heard you correctly. People who retire early, we did not 

put them out of their jobs in most cases. Most of these retirements 

either are because of certain conditions or because of their attitude 

toward their years of retirement. It is complicated. So, I just urge 

you as you do your work to not just dismiss what people are doing 

with their feet. They are walking into retirement at age 62 often 

because they have no choice because of various attributes, but in 

many cases because that is what their family wants. Do you understand? What are the American people telling us when they retire 

before 65 if it is voluntary? What are they telling us? 

Mr. STEUERLE. Mr. Levin, when I go out and make public appearances on these issues and related matters, I present the issue 

as a matter of choices. For instance, if I relate that the child poverty rate is much above the elderly poverty rate, and I ask people 

if they really think that having, for instance, a 20th year in retirement or a 19th year or an 18th year in retirement is the national 

priority in our budget, they almost always say ‘‘no.’’ What you are 

referring to is why we choose to retire. Our choice to retire is partly 

related to the fact that we judge when we are old, by past history. 

We look at when our parents and our grandparents were old, and 

so we don’t always look at how much data have changed, although 

even that perception, I think, is changing somewhat. You are also 

referring to something that economists often call option value. If 

we are given the option of taking something now, we often will 

take it, even sometimes when it is a bad deal—like in some employer-provided plans, when employees get tricked into taking bad 

deals because they get the money up front. If you give people a 

choice to have money now or money later, they will often just take 

the money now. That is what often happens when people take the 

money. At about age 66, by the way, whether they retire or not, 

52 

they are eligible to take the money. They will take it, in part, because it is available. 

I don’t have to run for office. I don’t have to figure out how to 

turn what I consider to be a 50-year political trend around. A trend 

where we spent larger and larger shares of our National wealth on 

giving us more and more leisure in retirement. I do try to address 

the broader public issue of what do we really need to do as a society, where are our greatest need?. Are our programs really providing us too much in the way of some benefits, when we look at 

lifetime benefits at retirement? Are programs dealing with terrorism, are they dealing with our kids in the street, are they dealing with our educational system, which I think is a failure. I think 

one reason we fail to deal with this last problem is because we put 

so much money in elderly years. I think the public does respond 

when the broader issue is presented as a matter of choice. It is not 

just as if I am coming to the—or, in particular, you as an elected 

official are coming to them and just asking them to give up something. You and I are offering them something in its stead. 

Mr. LEVIN. My time is up, but I think we have to be very careful not to sell people short and consider them irrational or they 

take something just because they are not wise enough to wait 2 or 

3 more years. People are more rational than that, and they are saying something to us by their choices as to retirement. We also have 

to figure that out and not simply dismiss it. It is not political. What 

motivates here, I don’t know how many of us—I won’t say that— 

need the votes. That is not what is motivating us. It is what is true 

in the real lives of people and the choices they make and the 

choices they want to make. Thank you. Thank you, Mr. Chairman. 

Chairman MCCRERY. Yes, sir. Mr. Shaw? 

Mr. SHAW. Thank you, Mr. Chairman. Ms. Long, you mentioned 

the problem of many walks of life and having to retire early because of physical disability, such as, I know, nurses in nursing 

homes turning patients or nurses in hospitals turning patients. It 

is a burnout job, and there are a lot of problems working until you 

are 62, 66, or 67, or whatever the retirement age is. How much of 

that, though, shows up in disability payments under Supplemental 

Security Income (SSI)? 

Ms. LONG. I don’t know the statistic on that, but the discussion 

reminds me that the work force, working America, is getting older, 

and that industry, the long-term care industry, whether it is in 

nursing homes, assisted living, is going to explode in the next few 

years. That work force is going to continually be getting older as 

we are taking care of older people. It just seems to me that part 

of this debate has to bear that fact in mind, for there are people 

who want to retire in dignity and retire before their bodies fall 

apart. I am sure there are some that get disability insurance, just 

like my members, some of them collect workers’ comp because, you 

know, they cannot carry the backpack anymore. That is a horrible 

quality of life if you are being forced to wait until age 67 or longer 

before you can retire. 

Mr. SHAW. Well, the present law takes us up to 66, and then 

there is a hiatus there of some 10 years, and then it ratchets up 

to 67. Did any of you all do any research as to what would be the 

effect if you did away with that 10 year hiatus period and went 

53 

straight into just ratcheting it up to 67? Has anyone taken a look 

at that as to what effect that would have on the revenue? 

Mr. GEBHARDTSBAUER. They call that the hiatus period, you 

bring it up to 67 much quicker? 

Mr. SHAW. Yes, sir. 

Mr. GEBHARDTSBAUER. It just eliminates about 7 percent of 

Social Security’s shortfall. So, it is not a huge effect, and the reason 

is because it only affects people born between 1944 and 1959, and 

it only changes their benefits by a little amount. So, it is not huge. 

This gives me a chance to mention one other thing. You were talking about ways of addressing the concern of people in physically demanding jobs and still be able to raise the retirement age. You 

mentioned SSI, and there are also a couple other ways to address 

it, too. One is, Social Security actually has a disability definition 

that is relaxed as you get older. In your twenties, in order to qualify for disability benefits, you must not be able to do your job, but 

any job. As one gets older, it gets to the point where it is more you 

cannot do your own job because of education or physical abilities, 

so it is a little bit easier to get a disability benefit. So, that is one 

way of addressing having the retirement age go up, but still strategically address the issues of people in physically demanding jobs. 

Now, it depends on how far you want to go in this direction of 

tailoring Social Security to each different group, and they did that 

in South America, and eventually they had so many different Social Security systems for different groups that it got too unwieldy, 

too complex, and that is one reason why they went to individual 

accounts. So, you do not want to go overboard in that area, but that 

is one way of addressing people that are not able to do their physically demanding jobs. 

Now, how about partially disabled people? Maybe they do not 

satisfy the disability rule. Another way to deal with that is with 

pension plans. In the private sector a lot of employers that have 

very physically demanding jobs provide pension plans that are bigger and you can commence benefits at younger ages. So, for industries where there are physically demanding jobs, you can get it at 

an earlier age. That has always been very valuable in the past. Of 

course, as Congressman Levin mentioned, there are fewer and 

fewer companies that are providing these Defined Benefit (DB) 

plans, so one of my responses then would be to encourage companies to still provide them. Right now our rules are going in the opposite direction of discouraging employers from having these DB, 

or even any pension plan. Some of the ideas could discourage even 

defined contribution plans. We want to encourage them because 

they can address different industries in a flexible way and provide 

more pensions in those areas. 

Mr. SHAW. Mr. Chairman, I agree with Mr. Levin as far as I 

view Social Security certainly as an earned benefit. The worker is 

taxed. There is no question of any discretion as to whether to pay 

that. The courts have said that it is not an asset that the Congress 

can’t change. I think the Congress certainly views it as a responsibility, and I would certainly say here that I feel that it is our responsibility to save Social Security for all time. I compliment you 

for having this hearing. Life expectancy now is about 10 years 

more than it was back when Social Security first came online. As 

54 

Mr. Nyce just said, increasing the payroll tax also decreases fertility, and I would suggest that maybe you would want to have a 

whole hearing on that. I think we would have complete attendance 

at such a hearing. 

[Laughter.] 

That has got to be a very complex story. I think that we should 

try to work together and get this thing saved. That is our responsibility as Members of Congress, to save Social Security for all time, 

and I think it should be retained as a guaranteed benefit plan. 

Thank you. I yield back. 

Chairman MCCRERY. Thank you, Mr. Shaw. Mr. Neal? 

Mr. NEAL. Thank you very much, Mr. Chairman. I think that 

most of us here in the House can draw the distinction between 

Members of Congress who routinely serve into their seventies, their 

eighties, their nineties, and I believe in one case an individual who 

was 100 years old. That is far different than an iron worker in the 

Second District of Massachusetts. I don’t know many iron workers 

who work into their sixties, their seventies, their eighties, their 

nineties, and I think that is a very important distinction for all of 

us to draw. Let me, Ms. Long, since you raised that very point, direct this question to you. Doesn’t rising life expectancy make Social 

Security’s guaranteed benefits that cannot be outlived and full inflation protection and survivor benefits more important than ever? 

Ms. LONG. I am sorry. I did not understand the question. I am 

sorry. 

Mr. NEAL. The idea that you cannot outlive Social Security, 

doesn’t that make it more important than ever? 

Ms. LONG. Oh, absolutely. 

Mr. NEAL. For your members. 

Ms. LONG. Absolutely true, and I can’t remember which distinguished panelist said there were issues with education that might 

outweigh issues of Social Security. I don’t think in our society it 

should be an either/or. There are workers in this country who deserve to have their kids be able to go to good schools, and there 

are people who deserve to retire in dignity. There are more and 

more folks in the workplace. If you look around D.C., buildings are 

getting built. There are going to be workers that clean them. That 

work is not going away, and it is not getting easier. It is not like 

you have robots cleaning these buildings. It is very difficult, demanding work, and folks are going to be doing it for years to come. 

People deserve to be able to retire in dignity. I certainly support 

this man’s suggestion that maybe you should have a hearing on 

forcing employers to have pension plans. You know, the labor 

movement would love that. So many employers do not, and that is 

just the crux of it. I think that these are hugely difficult decisions 

that you all are making, and I support Congressman Shaw saying 

that it has to continue being something that people earn and can 

have. 

Mr. NEAL. Dr. Steuerle, your point, I understand as you have 

offered it, is well taken about how we distribute dollars here in 

Washington. Isn’t there some evidence that at least during the last 

four or 5 years that balance that you spoke of in the ideal world 

really has not been practiced? Because, overwhelmingly, benefits 

here in the last few years have gone to the very wealthy. We argue 

55 

about redistributing wealth. We certainly have redistributed it in 

Washington. It has gone to the people in the top income groups. 

Your question about spending more on the needs of children is legitimate, but I think one could argue just based upon basic charts 

and graphs that the money here clearly has been directed toward 

the wealthiest Americans. 

Mr. STEUERLE. My dilemma is that if we free up money, we 

free up resources. The question is what is done with it, and to be 

quite honest, I think the fear among those who are progressives is 

that, well, the money would just go for tax cuts and not go to meet 

other needs. The fear perhaps, among conservatives, is that the 

money is freed up and just goes for wasteful government expenditures. So, we still have to face this dilemma through the political 

process. I think it is a basic fact that the budget process has a bias 

in favor of programs that have built in automatic growth, and in 

the U.S. system—actually in a lot of industrial countries’ systems— 

that growth is basically in health and retirement. We have these 

systems that grow automatically, faster than the economy. They 

constantly squeeze everything else, and then we face the dilemma 

of what to do. Both parties say, well, I am not sure I want to free 

up the resources because I am not sure I trust everybody else to 

deal with those resources well. 

I cannot tell you how to make that compromise to make an appropriate tradeoff, but there is no doubt that there is a bias in the 

political process—in the budget process—-in favor of systems that 

have automatic growth. By the way, that includes some tax expenditures, too. Those systems that have automatic growth absorb 

most of the resources. They get their additional money automatically when every other program does not. One of two suggestions 

in my testimony that has immediate implications is to change the 

defaults in the system. Maybe we should have no default system 

that can grow faster than the economy, whether it is a tax cut or 

tax expenditure or Social Security system or Medicare system. That 

frees up the resources and puts back to the electorate to decide 

year after year how to use those additional revenues that come 

with economic growth. That is a wider political question. I cannot 

get around the dilemma: you just cannot maintain these systems 

that have such large automatic growth in them. It is not a viable 

budget in the long run. 

Mr. NEAL. Would you say that the wealthy have done okay for 

the last few years, sir, in America? 

Mr. STEUERLE. Yes. 

Mr. NEAL. Pardon? 

Mr. STEUERLE. Yes. 

Mr. NEAL. Ms. Long, could I go back to you for a second because 

of your members. One of the things we have all had the experience 

of doing here in Washington is—I will get right to this, Mr. Chairman, because I know my time has expired—attending many functions with iron workers and tin knockers, and electricians, and others. One of the things you notice very quickly are the calloused 

hands, and you will hear them say, particularly the iron workers 

and the tin knockers, that they cannot climb the heights anymore. 

They do not take early retirement because they want to give up 

what is a decent wage base. They take early retirement because 

56 

they cannot climb the iron anymore. That is the fear part of their 

lives. I think in the case of electricians and the tin knockers as 

well, that is a problem that they confront. If you just want to 

quickly respond to that, that would be fine. 

Ms. LONG. I think you are right. You know, I have most knowledge about nursing home workers and cleaners, but if you talk to 

building trades workers, laborers, electricians—I talked to a guy 

that works at Amtrak, actually fixes MARC trains and the Acela, 

the brakes, he helped fix those brakes. He talked about several of 

his coworkers who have had to leave work because they have to 

climb up on the trains, and they cannot do it anymore. You know, 

people that are in those physically demanding jobs are not talked 

about a whole lot. There are more and more of them in our society 

who do not know what they are going to do based on the choices 

that we are deliberating on today. 

Mr. NEAL. Thank you. Thank you, Mr. Chairman. 

Chairman MCCRERY. Mr. Johnson? 

Mr. JOHNSON. Thank you, Mr. Chairman. Dr. Steinmeier—and 

put that mike over there close to you—I wonder if you could discuss the issue you raise in your testimony about high-wage legal 

immigrants and that they get disproportionately higher rates of return from Social Security. I presume you are talking about H1-B 

visas and that sort of thing. 

Mr. STEINMEIER. Well, the question is how the formula works. 

It is a progressive formula with 90 percent of the first dollars of 

earnings and then 32 percent and 15 percent. The average earnings 

is taken by adding up the highest 35 years. If you don’t have 35 

years of earnings, zeros are added in the average. So, if you have 

somebody who has been in for 10 years, he may have been earning 

$60,000 a year, but his average earnings over the 35 years with all 

the zeros looks more like $17,000 to $18,000, and the benefit formula is arranged to treat somebody like that very well relative to 

the tax they have paid. 

Mr. JOHNSON. That is right, but most of those guys are high 

income, too, higher than what you are talking about. 

Mr. STEINMEIER. They are high income. The problem is that 

the system is treating those workers as low-income workers, when, 

in fact, they are high-income workers. 

Mr. JOHNSON. You also, all of you, are talking about lump 

sums, for goodness sake, as if that is a bad deal. You know, I agree 

with you. I would take the lump sum, too, if I had the opportunity. 

Most of the plans that I have seen call for an annuity to forestall 

at least part of that. Would you all like to comment on that? 

Mr. STEINMEIER. The work we have done assumes that you 

will be forced to annuitize up to some minimum poverty level, and 

what we are really talking about are lump sums beyond that. 

There is a wide variety of individuals in the country. Some of them 

are very farsighted, and some of them are not very farsighted. 

What our model is showing is that a lot of people who are not so 

very farsighted, if lump sums are available, will probably take 

them and run. 

Mr. JOHNSON. Then live in poverty. 

Mr. STEINMEIER. Or retire, and then they will be—— 

Mr. JOHNSON. Yes, and not have the same amount. 

57 

Mr. STEINMEIER. Yes. 

Mr. JOHNSON. Mr. Gebhardtsbauer, you discussed making pension law and Social Security law consistent. Social Security full 

benefits are going up at age 67. Medicare eligibility is 65. Many 

employer pensions offer full benefits at 62 or earlier. You suggest 

allowing the employers to keep their retirement age consistent with 

Social Security. You also raise the issue of phased retirement that 

permits people to collect retirement benefits and a paycheck. I wonder if you would discuss those two issues a little bit. 

Mr. GEBHARDTSBAUER. Okay. If Congress is interested in encouraging more work at older ages, one way to do it is something 

you have already done on the Social Security side—in fact, way 

back in 1983—to say 67 is now normal or it will eventually be normal. For company pension plans, the law still says you cannot use 

an age higher than 65 in a company pension plan. So, there are 

mixed signals here. 

Mr. JOHNSON. Do you think we should make that consistent 

with Social Security? 

Mr. GEBHARDTSBAUER. Right. You could allow in pension law 

for company pension plans to also use age 67 so that employees realize that, okay, age 67 now is the normal retirement age. I think 

it would change what is in our minds. It may not affect retirement 

dates as much as raising the early retirement age, but I think it 

still would encourage people to think of 67 as normal instead of 65. 

Employers cannot do that now. So, it would be good to allow that, 

but I should note that it would be difficult for employers to raise 

it to 67, too. That would be one way to allow them to do it and also 

give flexibility in how they do it. 

On the phased retirement issue, some companies are doing it, 

and there is an Internal Revenue Service (IRS) regulation out now 

that won’t allow employers to both pay a paycheck and a pension 

at the same time. Now, the IRS is coming out with a proposed regulation that says, okay, if you reduce your working period down to 

half-time, then you can get half your pension and half a paycheck. 

It is very complex, and it would be great if it could be simplified 

a little bit so that employers could do that without having to watch 

whether an employee is changing their hours, because as soon as 

you change your hours, then you have to give them more wages 

and less pension, or if they reduce their hours, you have to reduce 

their paycheck and increase their pension. 

So, some of those ideas could really work. I think employers are 

very interested in doing that because the the growth in the work 

force is getting smaller, so I think a lot of employers are going to 

want to retain their older employees, and one way to do it is say 

we will keep you on but maybe not full-time, maybe part-time, and 

they may like doing that, and getting a partial pension. So, ways 

in which Congress can encourage phased retirement would be good. 

Mr. JOHNSON. I think we should look at that. Thank you, Mr. 

Chairman. 

Chairman MCCRERY. Mr. Johnson, there is another Committee, 

authorizing Committee, that has a Subcommittee with an excellent 

Chairman that I think could take care of that. 

[Laughter.] 

Mr. JOHNSON. Like I say, we are working on it. 

58 

Chairman MCCRERY. Okay. Mr. Pomeroy? 

Mr. POMEROY. Thank you, Mr. Chairman, and thank you for 

scheduling another very interesting hearing. I really do think these 

questions of longevity get to the heart of what we need to keep in 

our minds as we look at Social Security solvency issues or, for that 

matter, privatizing Social Security. Personally, I am terribly concerned about the kind of lifestyle people are going to have in their 

nineties with the increased life expectancy they will be enjoying, 

but, on the other hand, the toll that that takes on retirement savings. Dr. Steuerle, I am very interested in your comments on 

lifecycle distribution of benefits. Do you want to explain that concept a little bit? I noted it in your testimony, but it gets to something I am quite interested in. 

Mr. STEUERLE. Well, as I say, my concern about retirement age 

is in many ways independent of the actuarial imbalance in Social 

Security. 

Mr. POMEROY. Yes. 

Mr. STEUERLE. It is partly a question that goes all the way 

back to Public Finance 101 courses, if you want, to designing programs to progressively address needs of society. It seems to me 

that Social Security is primarily—skipping over the disability part, 

and focusing on the old age part of the system—designed to provide 

benefits in old age. Going back in the history of this country, all 

the way back to the Civil War pensions, there was a sense that, 

well, at some age, a substantial portion of the population would be 

impaired enough that they probably would not be able to work. So, 

that is the point at which we would not use a disability measurement system. We would just say, well, you are old enough now, we 

will provide benefits for old-age itself. 

Over time, we have increased the number of years that people 

can receive benefits. If we wanted to provide a stock of benefits for 

people in the last 10 years of life, but then we let the system go 

to 12,13, or 15 or more years and keep increasing the number of 

years that benefits are provided, then within that pile of benefits 

we give, smaller and smaller shares are going to the people in 

those last years of life. There is a graph I have in my testimony 

that shows that it used to be that the majority of benefits among 

men went to people with less than 10 years of life expectancy. Now, 

the vast majority of those benefits go to people currently with more 

than 10 years of life expectancy. So, we are taking smaller and 

smaller shares for the people who are really old, which used to be 

one of our measures of need. We are giving larger and larger 

shares to those people who I would define as being closer to, or actually in, middle age. There are repercussions not only for the progressivity of the system but on the extent to which people work. By 

the way, Mr. Johnson, also on the extent to which people save—— 

Mr. POMEROY. You can talk about Johnson on Johnson’s time. 

[Laughter.] 

Mr. STEUERLE. They retire in their prime saving years. I am 

saying that people now they retire in what used to be their prime 

saving years. 

Mr. POMEROY. I see it in very simple ways. You have a pot of 

dough. You stretch it out longer, smaller incremental payments. To 

have it shorter, more meaningful payments. So, as I look at twoVerDate Aug 31 2005 01:15 Mar 11, 2006 Jkt 023924 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 E:\HR\OC\23924.XXX 23924
59 

thirds of the people accessing their Social Security before full retirement age, they are accepting a discounted payment. Certainly 

some absolutely need to access that benefit. They are played out. 

Chairman Thomas spoke of his father, a plumber. He said he was 

used up when he got to that retirement age. Two-thirds are not. 

Some are making a decision. They want early access to benefits. I 

think we need to do a better job of explaining the system, that that 

involves some serious tradeoffs. You have a discount for that early 

access to benefits. As the years go up from 66 and 67 that discount 

is going to be even steeper. You get a smaller payment. Well, that 

smaller payment, it may look okay in your sixties, you are going 

to work a little here, and you have some savings accumulated 

there, what about when you are in your eighties and early nineties 

when you are not going to be working and the savings are gone? 

You have got yourself on a real tight little payment. Or, for that 

matter, in the sixties, we do allow unlimited earnings in addition 

to Social Security if you are full retirement age. If you are accessing it early, you do not have that unlimited earnings opportunity. 

So, you are taking some serious tradeoffs, and with two-thirds 

exercising that option, I do not believe everyone fully understands 

that tradeoff. I do worry about that. With my time rapidly running 

here, Mr. Gebhardtsbauer, as we try to deal with longer life 

expectancies, it seems to me that the notion of a longevity risk pool 

reflected in Social Security is critically important. A massive pool 

of Americans, some live longer, some live shorter. There is a crosssubsidy within that pool. That is the way we are able to absolutely 

guarantee benefits for as long as you live. Now, it seems to me if 

we would privatize Social Security and carve into this pool of these 

private accounts, you would significantly diminish your ability to 

ensure longevity risk for the people of this country. Do you have 

a comment on that? And I see my time has elapsed. 

Mr. GEBHARDTSBAUER. I guess it depends on how you set up 

the individual accounts. Some of the proposals do require annuities. So, to the extent that it requires annuities, then you do 

spread that pool better. To the extent that you don’t require annuities, then the people who are going to live a long time are more 

likely to get annuities. The people that are not going to live very 

long won’t buy annuities. So, annuities become more expensive. So, 

it is not only more efficient, but you use that pooling better if you 

require everybody to buy an annuity. 

Mr. POMEROY. Thank you. 

Chairman MCCRERY. Mr. Ryan? 

Mr. RYAN. Thank you, Mr. Chairman. I came in a little late, 

and, Mr. Steinmeier, you were in the middle of your testimony 

talking about the earnings limit for 62 to 65. I think that was your 

testimony. Am I correct? 

Mr. STEINMEIER. Yes. 

Mr. RYAN. I wanted to ask you, Is it your analysis—and anybody else feel free to chime in—that if we removed the earnings 

limit for 62 to 65, that you would, in fact, have more people—I am 

trying to catch this. Did you say more people would retire early or 

less? 

Mr. STEINMEIER. People would retire later, but start collecting 

earlier. 

60 

Mr. RYAN. Earlier benefits. So, you are saying people would try 

and get both benefits. They would get their payments, and then 

they would also be able to work without getting the penalties. So, 

you think that that is adverse toward reaching solvency, essentially. Is that what your point is? 

Mr. STEINMEIER. I don’t do a lot of work on solvency, but they 

will start collecting the benefits earlier. 

Mr. RYAN. That is what your research has found? 

Mr. STEINMEIER. Yes. 

Mr. GEBHARDTSBAUER. That would happen, yes. If more and 

more people started collecting benefits at 62, it would be more expensive for Social Security because when people work beyond their 

35th year, as Gene was talking about, your benefit does not go up 

as much. You are putting in a full contribution, but your benefit 

is not going up as much. So, we would lose some of that. 

Mr. RYAN. Ms. MacGuineas, I wanted to ask you a question. 

You mentioned progressive longevity indexing, kind of a melding of 

the two concepts that have been talked about lately. How would 

that work in your description? Are you talking about picking a certain percentile like the progressive indexing, 30th percentile, and 

then longevity indexing on top of that while freezing the current 

calculation in place? I guess what we are all trying to get here is 

an accurate measurement for those who truly, as you mentioned 

earlier, those who truly cannot work anymore, whose bodies cannot 

get them into extra years of work. How do you find the most accurate measurement of doing that? Raising disability eligibility may 

be one way of doing it. I don’t know if that is something that workers would prefer, going on disability as a part of the retirement 

planning. Would you describe how you would meld the two, progressive indexing along with longevity indexing, to try and accomplish that end goal? 

Ms. MACGUINEAS. Right. I think a lot of the questions here 

have been focused on that there are a number of tensions between 

different goals that we have. Clearly, we want to find a way to resolve the underfunded problems of the system. One of the ways 

that makes sense is to adjust the system in a way that reflects the 

changes in demographics. That said, you want to continue to allow 

for enough flexibility so anybody who cannot work would never be 

required to work. How you create a system that allows for both is 

the real challenge here. 

Mr. RYAN. Right. 

Ms. MACGUINEAS. So, one of the interesting sort of innovations, I think, that there could be is we know that life expectancy 

is growing, but we also know that it is growing differently for different income quintiles. So, I guess quintile would be the way I 

would think about it. You could do it in different ways if you wanted. It happens that many of these workers who we are worried 

about who cannot work for longer also have lower-paying jobs and 

also have lower life expectancies. So, it seems rather punitive to 

say we are going to raise the retirement age or do a flat rate longevity indexing even knowing that this low-income manual laborer 

is, one, going to have a harder time working longer and, two, more 

likely not to collect benefits for a longer period of time. So, if we 

got a little bit more specific and said, based on these different ecoVerDate Aug 31 2005 01:15 Mar 11, 2006 Jkt 023924 PO 00000 Frm 00064 Fmt 6633 Sfmt 6602 E:\HR\OC\23924.XXX 23924
61 

nomic quintiles, this is your life expectancy, and we are going to 

adjust benefits accordingly, it is a little bit more tailor-made for 

some of the built-in unfortunate inequities that we have because 

higher-income people tend to live longer. 

Mr. RYAN. Let me ask the actuary in the room. Mr. 

Gebhardtsbauer, do you agree with that analysis that on a quintile 

basis—I know that is a little rough, but on a quintile-by-quintile 

basis it does track, as Ms. MacGuineas just mentioned? Are life 

expectancies longer for higher quintiles than lower quintiles? 

Mr. GEBHARDTSBAUER. Oh yes, right. 

Mr. RYAN. So, the question here is, actuarially does this line up? 

Ms. Long, what is your impression of that idea? 

Ms. LONG. Obviously we focused—I focused in my testimony on, 

you know, hard-working people who physically cannot do the work, 

and to that extent I would have to agree that you should not think 

there is a monolithic work force that we have in society. People 

who are rich tend to live longer and enjoy life better than folks that 

are digging ditches. I also said in my testimony that there are high 

stressors and other types of work. There is social work that is high 

stress, people who work in the criminal justice system. So, I don’t 

know—I have never heard the word ‘‘quintiles’’ before. I like that 

word. I don’t know that they would fit, do you know what I mean? 

I think that there is a way in which we need to look at how many 

different subsections there would be to make sure it is fair for folks 

who put in 30 years of life and want to retire with dignity, even 

if their hands are not calloused or even if their backs are not broken. 

Mr. RYAN. I will just close here. I cannot see the clock, but I assume it is going out. Under a personal account, not only under 

most personal account plans, you get to choose when you want to 

retire, so you can tailor-make your retirement benefit for your particular situation based upon your ability or willingness to continue 

working or not, but also through a personal account you have an 

incentive to keep working because under the current system it is 

the high 3 for your 35 years. Under a personal account, every year 

you keep working you are adding to your personal account. You are 

growing your benefit that you will get in retirement. If you want 

to annuitize the whole thing at the end, you will be able to do that 

under most of these plans. There is some level of minimum 

annuitization that occurs, but under a personal account situation 

it gives the worker the ability to custom-make their retirement 

benefit per their particular situation and an incentive to keep 

working if they want to because they keep growing their retirement 

benefit because they are putting more money into the retirement 

system through their personal retirement account. So, I think that 

is one thing that is just not mentioned here. I assume my clock is 

red. I cannot see it from here. It is something that I think we all 

need to think about as one of the solutions to fixing this very important problem. 

Chairman MCCRERY. Thank you, Mr. Ryan. I also want to point 

out, I am not averse to looking at some kind of progressive longevity index, although, to tell you the truth, I have not thought 

about it much before today. I think we should all remember that 

Social Security benefits are already quite progressive. They replace 

62 

a much higher percentage of a lower-wage worker’s income than a 

higher-wage worker’s income, and that is by design. That is to 

make it progressive. So, any index that you apply is going to be applied against an already very progressive benefit structure. Yes, 

Ms. MacGuineas? 

Ms. MACGUINEAS. A quick response, because I think that is 

right, and it is certainly up to the people who designed the system 

how progressive the system should be. My thinking was if we do 

raise the retirement age further, that will actually make the system slightly less progressive. This is a way to return it even just 

to the current levels of progressivity if you chose. 

Chairman MCCRERY. Yes, I understand that, but if you take 

the longevity index in isolation, do not raise the age of retirement, 

just take that in isolation, then I am not sure you want to further 

make that index progressive. Dr. Steuerle? 

Mr. STEUERLE. Mr. Chairman, I suggest in my testimony, a 

way to get around to this dilemma. My proposal involves meeting 

multiple objectives. To examine the current system, I did a study 

with a member of the SSA using both records and some projections. 

It turns out that Social Security does have a progressive benefit 

formula. Its progressivity is offset for people with shorter life 

expectancies, which would also largely be the people who have 

trouble working longer, by the fact that forced annuitization means 

they get fewer years of benefits. So, actually the system isn’t all 

that progressive on net: forced annuitization is roughly matched or 

offset by the fact we have the progressive benefit formula. 

What I suggest we do is focus on some level of lifetime benefit 

we would have in the future. We could make sure these lifetime 

benefit packages are of a certain level for people with certain lifetime earnings patterns. So, for instance, I suggest we bump up a 

minimum benefit; that helps the people in the bottom quintile. 

Now, I don’t think we can define that quintile well, quite honestly, 

in part because there is a big difference between women and men. 

A lot of women fall in the low earnings quintile, although they are 

very healthy. A lot of men fall in the lower earnings quintile who 

are full-time workers. There are all sorts of differences here. You 

could make use of lifetime earnings. You could develop a system 

that solved your progressivity problem by looking at lifetime benefits, and still adjusted for retirement age. There are ways to get 

around that problem. The mistake is thinking we have to change 

one parameter at a time. We could change three or four things at 

the same time to try to maintain whatever progressivity we want 

in a balanced system. 

Chairman MCCRERY. Thank you. Mr. Becerra? 

Mr. BECERRA. Thank you, Mr. Chairman. Again, like Mr. Pomeroy, I would like to thank you for another very good hearing on 

the issues of Social Security. Let me see if I can address squarely 

one question that I think you have to talk about in any discussion 

about retirement age and longevity, and that is that increasing the 

retirement age hurts, by its very, nature those who rely on it most. 

Those are lower-paid, higher-risk workers. So, any discussion about 

tinkering in any way with retirement age means that you are going 

to hit folks who have had the least amount of time and the lowest 

63 

amount of income to try to prepare for their retirement. Would 

anyone dispute that? Mr. Steuerle? 

Mr. STEUERLE. Again, the problem comes in looking at one parameter at a time. Most of the people who have shorter than normal life expectancies also have disabilities, they often lose out because they don’t even make it to 65. You know, the difference—— 

Mr. BECERRA. If they are not going to make it to age 65, 

chances are they are not going to put enough away in a nest egg, 

whether in a private account or otherwise, to have much in retirement anyhow. 

Mr. STEUERLE. If we do something like only increase the retirement age, it would proportionally cut benefits slightly more for 

those people who are in the lower earnings group, that is correct, 

slightly more. 

Mr. BECERRA. Okay. So, now—— 

Mr. STEUERLE. But if we provide a minimum benefit, we can 

more than compensate for it, that is—— 

Mr. BECERRA. Now you are talking about making some adjustments. From the get-go, if you start talking about tinkering with 

retirement age, those who you have to worry about most are going 

to be those who are lower-income and in the higher-risk jobs. You 

might find ways to try to accommodate that, but the reality is that 

any discussion about tinkering with the retirement age is going to 

hit modest-income workers most who happen to also, as Ms. Long 

has said, work very long, very tough hours, and, therefore, are in 

most need of something that is stable like Social Security. 

Mr. STEUERLE. I am also worried about the old versus the 

young, and by giving more years of benefits we are hurting the old. 

Mr. BECERRA. I do not disagree with you, but I am just saying 

if you are going to talk about this issue, you have to address 

squarely the audience that is probably going to be most concerned 

about the discussion, because whether we make adjustments, as 

you indicate, Dr. Steuerle, or not, they are the ones that are going 

to be most affected by any change that occurs. If you are higherincome, you do not have to rely on Social Security as much. If you 

are in a less risky job, you also don’t have to worry so much about 

dying before you are able to take advantage of those benefits for 

quite some time. Let me move to a second question. Does anyone 

here on this panel believe that in any reform of Social Security we 

should cut disability benefits? 

[No response.] 

Okay. I will take that silence to mean no. 

Ms. MACGUINEAS. I better speak up. I think—and, actually, I 

am going to address your first question, too. 

Mr. BECERRA. No, no, no, because my time is focused, please 

just try to address this second question, if you can. 

Ms. MACGUINEAS. I think it is impossible to analyze any one 

change to Social Security in isolation, because the one thing we 

know is that the current system is unsustainable. Some changes 

will have to be made. So, I think in order to evaluate the fairness 

of any change, you need to know what the alternative is. It is not 

the current system. It is other reforms. So, I would want to know 

what other reforms you are planning to do. 

64 

Mr. BECERRA. That is a fair answer. I think that is an answer 

that anyone in the panel could have given or anyone sitting up 

here would give, that you have got to consider everything. The reason I asked that is because if you are going to tinker with the retirement age or reduce benefits somehow because of age, then what 

you are probably doing is making some people calculate, have I 

reached the point in my life when I am working, where I am actually physically so incapable of continuing my work that I can claim 

disability benefits versus wait till that new higher retirement age? 

Or, do I continue working in a job when I am less able physically, 

and risk that I will find myself truly permanently disabled? 

My concern with, again, tinkering with the retirement age, is 

that you probably start making a lot of folks start to think, maybe 

I had better start claiming those disability benefits under Social 

Security. If that is the case and you are shifting people’s application for disability versus retirement benefits under Social Security, 

then have we really saved ourselves much money in causing people 

to make that shift toward disability payments under Social Security versus retirement age? Another question. Unemployment benefits. If we require people to work longer in their life, to age 70, 72, 

and we know how difficult sometimes it is for a worker in his or 

her older age who may become unemployed or is laid off, to be able 

to secure relatively similar employment with similar pay, and we 

know the issues of age discrimination that occur throughout the 

country. I know, Mr. Chairman, my time has expired, so I will end 

with this one question. What could the effect be on an increased 

retirement ago on States’ obligations under unemployment benefits 

to help cover now workers who have to work longer before they can 

retire, but are finding it very, very difficult to find a job to replace 

the one that they had before? 

Ms. MACGUINEAS. I think you raise really important points in 

saying that anything we do to the retirement age will also probably 

affect increased costs for disability and unemployment. I think 

those are both very valid points. The only other important factor 

is that the labor market is going to be significantly different in a 

decade and two decades from now because the labor force will be 

growing at such a slower pace, there will actually be some demandside solutions in that employers are going to want to find ways to 

keep people employed for longer because they are going to need 

more laborers than they currently have as more people move toward retirement. 

Mr. BECERRA. Although you have seen, in some cases, industries where they replace older workers with younger workers because the cost of sustaining a younger worker is far less than an 

older worker. 

Ms. MACGUINEAS. Right. Those are some of the kinds of policies that we should look at when we are thinking about how to encourage people to stay in the workforce in a more flexible way for 

longer. 

Mr. BECERRA. Excellent point, thank you. I know my time has 

expired, Mr. Chairman. If Gebhardtsbauer wants to respond—— 

Chairman MCCRERY. Sure. 

Mr. BECERRA. Thank you, Mr. Chairman. 

65 

Mr. GEBHARDTSBAUER. Just really quick. When you ask the 

actuaries at Social Security to price something that raises the retirement age, they do price in the fact that more people will take 

disability, and so they reflect that in their costs. 

Chairman MCCRERY. Mr. Brady. 

Mr. BRADY. Thank you, Mr. Chairman. Ms. MacGuineas had a 

great point there. In 20 years, maybe 25, we will be holding hearings in Congress trying to figure out ways to find enough workers 

for the jobs that are needed in America. We have got a different 

challenge there. I just wanted to follow up on the issue that Paul 

Ryan raised at the very end about the practice today where people 

don’t really relate their years of work and wages to their Social Security benefit. They don’t see the need to work an extra few years 

because they don’t see really any payoff in their retirement in Social Security, or at least they don’t make that connection. 

Several of you have suggested—I like the idea of being able to 

tailor-make your own retirement, to make it higher or lower depending on what is right for you and your family. Several of you 

have suggested modifying the benefit structure to provide greater 

rewards at older ages, for example, reducing benefits even more for 

early retirement, and as we know, 55 percent of our folks choose 

the early Social Security retirement, and providing greater benefit 

enhancements for delayed retirement. In other words, the ability to 

really create a stronger and larger retirement by working those 

extra years of your choice. Any of the panelists, could you describe 

in more detail various options for accomplishing this, for back-loading the benefits for those who choose to work longer? 

Mr. STEUERLE. Mr. Brady, I had a few comments in my testimony, and I don’t want to take too much of your time, so I will just 

refer you mainly to those. It is not just increasing the retirement 

age. One could even do a neutral exchange. For instance, if you 

have a choice between $100 today and $100 10 years from now, 

dodging discounting, I could give you $50 today and $150 10 years 

from now. It would be the same lifetime benefit package but you 

would have a substantial incentive by having that lower amount up 

front—to think about whether you wanted to work longer. We discussed this a little earlier. A lot of people make the choice. They 

look at age 62, at the amount of cash income they have, they look 

at the wage they have, they look at what their taxes are going to 

be—and they say, you know, I am pretty well off—and Mr. Pomeroy raised this issue—they say, I am going to retire. Then what 

happens is they retire when most of them have substantial human 

capital and work capability. They retire when they are more likely 

to have a spouse who can help them through some minor impairment so they don’t need a nurse or somebody else to help out. Yet 

their retirement wages relative to the economy are probably going 

to fall 20 or 30 percent 20 or 30 years from now. The price of a 

practical nurse, for instance, is something that is going up in that 

time. So, they think they are okay retiring at 62. By the time they 

hit 85 or 90 they are often in deep trouble, and the government 

sometimes has to come back and help them with nursing home and 

other care. 

We could think of a variety of ways of back-loading benefits. 

Some we could do actuarially. That is, just make actuarial adjustVerDate Aug 31 2005 01:15 Mar 11, 2006 Jkt 023924 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 E:\HR\OC\23924.XXX 23924
66 

ments for working longer. Some of them we could just do by putting more benefits on the tail end and less on the front end. If you 

are really worried about the low-income worker, you do that less 

for them. You keep some minimum base. As I say, I think we want 

to think long and hard about how we protect the low-income person 

when we do that reform. I think there are a variety of ways that 

you can think about—— 

Mr. BRADY. As an alternative to raising the age, you really can 

provide some incentives, you know, for people to voluntarily choose. 

Mr. STEUERLE. The one warning I will give you, because I have 

worked a lot with the CBO and the actuaries, is that for 50 years 

we have been in this system where a person could retire earlier 

and earlier and younger and younger, I think literally that we are 

in the midst of a multi-decade process of turning in the opposite 

direction. The estimators are going to sit there and give you the estimate, you know, when Chairman McCrery is sitting there with 

Mr. Levin and they are actually trying to add up the numbers to 

get Social Security balanced. The estimators are reluctant to give 

you huge labor supply effects even though, as Maya has suggested, 

and I think a number of us agree, there is a substantial potential 

for labor demand there. You may not get it right up front when you 

actually do the first step. It is almost like we are saying: free up 

the system, make it much easier for people to work longer. We 

think if the flagship, Social Security, starts turning in that direction, then the private pension systems, the employers and others, 

will start turning in that direction too. I have to confess, you know, 

we don’t fully know. 

Mr. BRADY. Ms. MacGuineas, you have a—— 

Ms. MACGUINEAS. Yes. One of the challenges here is that if 

you think about how you would ideally structure some of these 

changes, you might say, okay, we are going to give you a little bit 

larger of a bump up in your Social Security benefits if you choose 

to retire later, but you will still have the flexibility. However, if you 

do that, you end up having a situation where you helped the labor 

market incentives, because people are going to stay in the labor 

market longer, but actually you could potentially hurt Social Security solvency because people will then collect larger benefits. You 

also run the risk of some adverse selection, where low income people won’t take it as much, knowing that they are not going to live 

as long, and high income people will. So, you may have even 

opened up the problem a little bit more. 

The challenge I was trying to meet when I was writing about 

kind of a lump sum bonus, where instead of doing an actuarially 

fair increase, you would do one that is unfair, that gives people less 

than they would have deserved for their additional contributions, 

but you would give it in the form of a lump sum, which as long 

as there is the underlying Social Security annuity, as long as people’s basic benefit is still there and indexed for inflation and lifetime, you might, instead of giving them an additional annuity, give 

them a little bit in a lump sum which will prove enticing enough 

to that they will stay in the labor force for a little bit longer, but 

won’t drain the Social Security system of additional revenues beyond what would be fair. 

67 

Mr. BRADY. The year-end bonus versus the small amount in 

each paycheck over the years. Mr. Chairman, on a personal note, 

I have an interest in this discussion because, as you know, I have 

a 3 year old, and I figured out to pay to get them through college 

I have to work ’till I am 100. 

[Laughter.] 

So, that is why I have a real interest in incentives on the back 

end of Social Security. Thank you, Mr. Chairman. 

Chairman MCCRERY. Good question, Mr. Brady. Ms. Tubbs 

Jones. 

Ms. TUBBS JONES. Thank you, Mr. Chairman. Good afternoon, 

ladies and gentlemen. Thank you for appearing before our panel. 

I don’t know where I want to begin. It has in fact been government 

and private industry that has encouraged people to retire early by 

offering buyout programs because they wanted the older worker to 

get out to bring the younger worker in. Is that true? 

Mr. GEBHARDTSBAUER. That was true in the seventies particularly because there were a lot of new workers. 

Ms. TUBBS JONES. It is not happening in the eighties, and the 

nineties, and 2000? 

Mr. GEBHARDTSBAUER. I don’t know that it is happening 

quite to the same extent, but it is still happening. 

Ms. TUBBS JONES. So now you are offering—— 

Mr. STEUERLE. It will happen less in the future because there 

will be fewer and fewer people coming in, but huge numbers of retirees going out. 

Ms. TUBBS JONES. I don’t know what is going to happen in the 

future. Who knows what is going to happen? Perhaps we will lower 

the tax, you know, we will repeal the tax that gave the top 1 percent all the money we needed to operate Social Security and Medicare benefits, and we will be better off than we are today. Be that 

as it may. Was it you, Dr. Steuerle, who said that there are less 

people working in hard labor jobs now than previously? Was that 

you, Dr. Steuerle? 

Mr. STEUERLE. Yes. We tried to figure out what is a consistent 

data source—this is just a question of how can you find a consistent measure over time—— 

Ms. TUBBS JONES. Hold on. I know you can give me a 

great—— 

Mr. STEUERLE. In my testimony, physical demands in jobs 

have gone down. 

Ms. TUBBS JONES. Have gone down. So, let us talk about a 

service worker’s job. Those physical demand jobs are still very serious, right? A janitor’s job is still a very serious demand, hard work? 

Mr. STEUERLE. There are a lot of jobs that have severe physical 

demands and—— 

Ms. TUBBS JONES. If they have gone down, what percentage of 

the jobs are still jobs that have high physical demand? Just roughly, you don’t have to give it—— 

Mr. STEUERLE. There is a chart in my testimony. 

Ms. TUBBS JONES. Roughly tell me what the chart says. 

Mr. STEUERLE. I don’t remember off the top of my head. I am 

sorry. Let’s see, the share of U.S. workers in physically demanding 

jobs in 1950 was a little over 20 percent. By 1996 it dropped down 

68 

to about 7 percent. This is defined by the amount of weight they 

have to lift on the job. 

Ms. TUBBS JONES. Truly—there are no doctors at the table— 

but we understand that people who are not lifting weights do demanding jobs. A golfer even has a demanding job with swinging 

that club and then a lot of them end up with back trouble as a result of that. 

Mr. STEUERLE. Yes, of course. 

Ms. TUBBS JONES. So, that is not really a true reflection of 

what a demanding job is, just solely lifting weight. 

Mr. STEUERLE. It is a reflection that the physical demands of 

jobs have gone down. It doesn’t mean there are not physical demands on jobs. 

Ms. TUBBS JONES. What I am saying to you is—your statement was that lifting weight was the way in which you determined 

whether a job was a physically demanding job. That is what you 

just said, is it not? 

Mr. STEUERLE. That is correct, but—— 

Ms. TUBBS JONES. I am saying to you that there are other 

physically demanding jobs where you don’t have to lift weight and 

it is not a true reflection of physically demanding jobs that are in 

our government or in our country today. Well, anyway, you don’t 

want to answer the question, so I am going to move on. You understand what I am saying to you, sir, and I am sure everybody listening—— 

Mr. STEUERLE. There are many jobs with physical demands, 

yes. 

Ms. TUBBS JONES. Yes. That would require workers or would 

put workers in a position that they need to retire early. For example, my father carried bags for United Airlines for 40 years. Fortunately, he was able to retire at 62 and is till living at 85, but he 

is an unusual person in the midst of people who work in that type 

of job and have the opportunity to live that long that are AfricanAmerican males. You would agree with that, wouldn’t you, sir? 

Mr. STEUERLE. Yes. 

Ms. TUBBS JONES. Okay, thank you. I can’t remember who 

mentioned this, but about having a family that is capable of having 

a spouse that can take care of them while they are having minor 

illnesses, and then that may even lower the cost of health care for 

older—was that you also, Dr. Steuerle? 

Mr. STEUERLE. I was pointing out that if we want a system to 

progressively meet people when their needs are greater, their needs 

are often greater when they are single than when they are married 

because the cost of taking care of their impairments often rises. 

Ms. TUBBS JONES. Are you aware of the fact that the cost of 

the health care of a caretaker is aggravated as a result of being required to take care of a spouse? In other words, the caretaker’s 

health diminishes as great as the person that they are taking care 

of when they are at that other end of the age spectrum. 

Mr. STEUERLE. Sure, of course. 

Ms. TUBBS JONES. So, we need to factor that in when we begin 

to talk about whether that is a good ideal for deciding what happens with workers or adjusting their income. 

69 

Mr. STEUERLE. Ms. Tubbs Jones, I think we are on the same 

page—I am trying to figure out how we can design a system so it 

is progressive, and, for every dollar we spend that dollar goes 

where needs are greatest. I think we are aiming at the same target. 

Ms. TUBBS JONES. I want to be progressive also, but I am just 

trying to point out to you some of the things that you are thinking 

of as progressive are truly not progressive because people, older 

people trying to take care of other older people diminished their 

health even if it enhances the health of the person they are taking 

care of. I am out of time. Thank you, Mr. Chairman. 

Chairman MCCRERY. Thank you, Ms. Tubbs Jones. Mr. Rangel, 

would you like to inquire? 

Mr. RANGEL. Thank you, Mr. Chairman. 

Chairman MCCRERY. My pleasure. 

Mr. RANGEL. I really want to thank the witnesses because you 

can see we are going to need a lot of help if we are going to resolve 

this very complicated problem. This is especially so if we recognize 

that you either have to raise taxes, which is off of the table; we 

have to either extend the retirement age or cut the benefits. Of 

course, our job is basically to try to get solvency in terms of the 

long term so that we don’t have to revisit that. To me this screams 

out for Republicans and Democrats to be working together because 

it is nothing on this but pain, pain, pain. The only way any party 

can do it, if our constituents believe that we did the best that we 

could by them. The difficulty we have is that—do any of you believe 

that it is necessary to have private accounts on the table and to 

be a part of the solution in order to resolve what is basically our 

mandate, and that is the solvency problem, and that would be the 

person, if any, that I would want the talk with. 

[Laughter.] 

Ms. MACGUINEAS. I guess I will take a quick stab at this. I feel 

like I am answering all the unpopular questions, and I am a little 

worried about opening up this topic in this hearing. 

Mr. RANGEL. Please let me make it clear that you guys should 

not have the burden of the political aspects of it. You are experts 

in what you do. This is not going anywhere, and I guess all of us 

want to be able to walk away from this saying that we made the 

contribution because we were looking for a solution. So, if you 

agree it has to be bipartisan, then you have to be able to say that 

you believe we cannot resolve this unless we do have private accounts. 

Ms. MACGUINEAS. That is not exactly why I am making the 

point. Here is what I would say. 

Mr. RANGEL. That is exactly the question I am asking. Can we 

resolve this, in your opinion, without having private accounts on 

the table? Not whether you think we should have it. I think we 

should have taxes on the table. The President said strike that out. 

I don’t think increases in taxes is on the table, so I don’t bother 

with it. I am asking you, as a professional, do you think we can 

reach the goal of long-term solvency if we sacrificed putting private 

accounts on the table? 

70 

Ms. MACGUINEAS. I heard a couple of questions. So, yes, I 

think you can achieve long-term solvency without putting private 

accounts on the table. 

Mr. RANGEL. That was my only question. 

Ms. MACGUINEAS. Well, but I don’t—well, I guess I heard a 

couple different questions. I think in order for a bipartisan solution 

to happen, which I agree with you completely is what needs to be 

there because there has to be a lot of cover because there are a lot 

of difficult choices. Probably the best place is to start with everything on the table. That includes private accounts and that includes tax increases. Second, I think the role of private accounts 

can be—is required if you want two things, solvency and 

prefunding or building up savings in order to have the money there 

for Social Security. So, changes that we would make now instead 

of postponing them all to the future. If you think private accounts 

are a replacement for trust funds as a way to prefund the system, 

then they play a critical role. 

The key that I would put there is that it is not a replacement 

for finding ways to pay for those private accounts. I do believe that 

you also have to put taxes and spending reductions on the table in 

order to create the private accounts which would prefund the system. So, I am not sure if that answered your question, but I think 

it is best to start with everything on the table and the understanding it must be bipartisan, but the realistic understanding, 

most importantly, that none of these choices are easy. They come 

down—the tough policy choices on the revenue side, on the spending side and figuring out the fairest distribution of those choices 

and the timing so that we can spread the costs over generations 

and hopefully do it in a way that helps the economy. 

Mr. RANGEL. I appreciate that answer. Does anyone else, on the 

question of private accounts, because I support private accounts as 

an incentive for savings. I just don’t support it in connection with 

Social Security. I support having thrift accounts like we in the Congress, but we in the Congress don’t have—that doesn’t have anything to do with our pension or our Social Security. So, it is not 

that I am against private accounts and incentives for savings. I 

want to see whether we can do something with Social Security, and 

if there is anyone who believes that unless we put private accounts 

on the table that we can’t do it, then I just would want to hear 

from them, and I respect your answer. 

Ms. LONG. I guess I would say for the workers that we represent, low-wage workers, have nothing to depend on except for Social Security. There are not annuities. There are not pensions for 

the vast majority of low-income workers. A lot of folks don’t have 

savings. So, to the extent that personal accounts would replace Social Security, I don’t think that is fair to folks who put a lifetime 

into retirement—for retirement. 

Mr. STEUERLE. Mr. Rangel, I would guess—this is going to be 

very short—that if you ask every member of this panel, we would 

think of some ways of combining some private pension reforms that 

might have aspects of personal accounts in them as part of a longer 

term solution to the problems we are addressing. But, no, you don’t 

need to have the private accounts just to reach solvency in Social 

Security if that is all you are aiming for. 

71 

Mr. RANGEL. Thank you, Mr. Chairman. 

Chairman MCCRERY. Thank you, Mr. Rangel. I think Ms. 

MacGuineas answered your question very well. That is just about 

the way I would have answered it. The fact is, technically we can 

fix the solvency problem of Social Security without personal accounts or private accounts, and according to the Social Security actuaries, we can fix the Social Security solvency problem totally 

with personal accounts or private accounts, with no cuts in benefits, no change in the benefit structure, no increase in the retirement age. So, yes, it can be fixed with or without personal accounts. Whether they should be on the table is a political question 

that only we can ultimately answer, and my hope has been all 

along that we would bring everything to the table, as Ms. 

MacGuineas suggested, and so far that hasn’t been the case. 

More to the theme of this Subcommittee hearing—and Mr. Ryan 

raised this briefly at the end of his questioning, but I would like 

to give the panel a chance to respond more thoroughly—and that 

is, can having a personal account contribute to a person staying in 

the work force longer? In other words, right now Social Security is 

only on your 35 years of highest earnings, so, if you have already 

been in for 35 years you have got those earnings clocked, there is 

not much incentive, if you can get that benefit right now, to stay 

in the workforce. Your benefits are not going to get appreciably 

higher unless you expect to make a whole lot more money in the 

next few years than you have over your working life. If you have 

a personal account to which you are adding and watching it grow, 

and you know it is going to grow every year that you stay in the 

work force and add to it, wouldn’t that be an incentive to staying 

in the workforce? 

Mr. LEVIN. No guarantee that it would grow. 

Chairman MCCRERY. Ms. MacGuineas? Let me get the panelists to respond. 

Ms. MACGUINEAS. Generally I would answer the question certainly as yes. My personal belief is that in order to fix Social Security we are going to have to do something on both the revenue side 

and the benefit side. I also believe that individual accounts, if paid 

for, will prove to be far superior to the existing trust fund as a way 

of prefunding the system. In order to pay for them I think one of 

the policies to look at is to increase revenues. The reason I think 

you look at that specifically is that a revenue increase that goes to 

traditional Social Security system will have the effects more similar to a tax, where it will have more—it will create more inefficiencies in the labor force and for employers, on the employer side, 

whereas if those contributions go directly into people’s accounts it 

is less likely to have the negative economic effects. I generally 

think that will lead people to staying in the labor force longer. 

There is one risk, which is when you see your account and you 

see that full of savings, you will actually feel richer and you will 

therefore retire more quickly. So, I think that one thing that is 

very important is to make sure we show people the value of their 

accounts in terms of annuities. Whether you require annuitization 

or not is another choice, but to say the value of this $150,000 account will get you X dollars a month, so that people don’t make the 

mistake I was talking about before, which is choosing that lump 

72 

sum and overvaluing it. So, as long as we make the real value 

transparent, I think it will serve as a way to keep people in the 

work force for longer. 

Chairman MCCRERY. Any other panelists want to comment on 

this? Yes, Dr. Steinmeier. 

Mr. STEINMEIER. The Social Security already increases benefits if you delay retirement, and that is possible. You don’t have to 

collect them the minute you retire. You can leave them in there 

and opt to collect them later. Almost nobody does, so that suggests 

that there is not much effect to be had there. As I said in my earlier testimony, when you start to permit any kind of lump sums, 

then you are going to have a certain segment of the population that 

is going to take that money, and if it is tied into retirement, they 

may well retire earlier to do it. 

Mr. STEUERLE. There is some empirical evidence—and again, 

this can be interpreted two different ways—that when people have 

defined contribution plans, that is, Individual Retirement Accounts 

(IRAs), personal accounts, 401(k)s or whatever, that if they look at 

the value of a 401(k) account versus the value of a defined benefit 

pension system that has an annuity, they are more likely to work 

longer in the first case. That is, on average people with defined 

contribution plans work about 2 years longer than people with defined benefit plans of the same value. 

Now, you can consider that two different ways. You might worry 

about the risk that is associated with the defined contribution account if you haven’t annuitized it, so there could be a increased 

level of risk. Yes, there does seem to be some evidence, that in comparing one plan versus the other people work longer when they are 

absorbing a little more of the risk. They are recognizing a little 

more what they have to do in retirement, again, given two equal 

cost systems. 

Mr. GEBHARDTSBAUER. We have had some experience over 

the last 10 years in this area on assets and defined contribution 

plans, and when the defined contribution plans did really well and 

the assets went up a lot, then more people did retire at an earlier 

age. In fact, I am on the Board of the United Methodist Church’s 

pension plan. Some people’s assets did so well, they could get more 

than their salary, so they definitely retired earlier. Now that assets 

are not doing well, more people are remaining in the work force. 

You can see the labor force participation rates have actually gone 

up at ages 65 because their accounts aren’t doing as well. So, it can 

affect you in different directions depending on how the markets go, 

and also depending on whether employers are willing to hire or not 

willing to hire more people. 

Chairman MCCRERY. Thank you. Mr. Becerra, did you have a 

comment? 

Mr. BECERRA. Mr. Chairman, I just wanted to make sure we 

were clear in terms of Social Security. If I understand Social Security correctly, there still is an incentive to work beyond the 35 

years because since Social Security averages your highest 35 years, 

your initial years of work when you are young are probably paid 

at a lower rate than your final years when you are getting close 

to retiring, so the more years you put in, the better the chance is 

that you are going to knock out the years when you were younger 

73 

working and earning less and averaging out only the best 35 years 

of whatever amount of years you worked so that you end up with 

a higher benefit after you retire. I just wanted to clarify that. 

There is an engaging discussion on just the whole issue.W 

Chairman MCCRERY. I think intuitively, you know, one might 

conclude that, but the evidence suggests otherwise. 

Mr. LEVIN. Let me just quickly comment. 

Chairman MCCRERY. Sure. 

Mr. LEVIN. If you want to make the benefit more and more 

risky, people will work longer if the risk turns out to be heavy, very 

true. If people—I think a lot of people who are losing their pensions 

today are going to work longer, for sure. My guess is that people 

who work for United who are suffering these cuts will work longer 

than if the defined benefit had really been there. So, changing from 

a defined benefit to defined contribution may have people work 

longer because they are poorer. One of the strengths of Social Security is that there isn’t that risk, and I would hope that our main 

effort to get people to work longer would not be to increase the risk 

of their retirement program. 

Chairman MCCRERY. Well, if personal accounts were on the 

table, we could discuss ways of perhaps combining guaranteed benefits with the prefunding that would take place in personal accounts and solve your concern. 

Mr. LEVIN. Well, we will—I guess they called the vote, so we 

would not continue this, so we had better—— 

Chairman MCCRERY. Yes. Ms. Tubbs Jones. 

Ms. TUBBS JONES. Just very quickly. I met yesterday with several leaders of banking institutions in my community, and two of 

them actually have cash benefit plans that they offer to their retirees, and they asked me to come back to the Congress and remind 

Congress that we are still looking, they are still looking for us to 

help them know specifically what the regulations are going to be 

with regard to cash benefit plans so they can understand what they 

are supposed to do under those regulations. So, I just want to put 

that on the record so I can tell my constituents I did what they 

asked me to do. 

[Laughter.] 

Thank you, Mr. Chairman. 

Chairman MCCRERY. Thank you, Ms. Tubbs Jones. Thank all 

of the Members for coming today and participating. I want to 

thank our panelists particularly for your testimony. It was very 

good, and appreciate your patience in answering our questions. 

Thank you. The hearing is adjourned. 

[Whereupon, at 4:06 p.m., the hearing was adjourned.] 

[Submissions for the record follow:] 

Statement of Dr. Marilyn Bean Barrett, Nantucket, Massachusetts 

Thank you for the opportunity to share my experience as you consider this important topic. I am 58 years old. I grew up in New York State and have taught in 

Washington, DC and Massachusetts for 36 years. My Social Security history is this: 

In 1964, I got my first small high school summer secretarial job and began contributing small amounts each year to Social Security. During college from 1965–69, 

I had a job at a public library and at my father’s company, Crouse-Hinds, Co. in 

Syracuse, NY as a summer secretary. (SS–3/4) (SS=Social Security; PS=Public 

School) 

74 

In 1969, I began my teaching career in Marshfield, MA. After two years in public 

school teaching, I went to Vermont to get a Masters degree. At this point I had accumulated two years of social security plus a few other quarters part-time. (SS–1, PS– 

2) 

I did my student teaching in Mexico, learned Spanish and got my first job in 1972 

in Washington, DC at a private language academy. I then taught at 2 private universities and one private secondary school in Massachusetts until 1977. (SS–6, PS– 

2) When my daughter was born, my husband and I began to job share one job. My 

husband eventually went to a full time job, but I stayed half time until my daughter 

and then son, born in 1980, entered school full time in 1986. (SS–10.5, PS–2) 

Throughout this period at Northfield Mt. Hermon School in Northfield, MA, I taught 

summer school every year. As I tried to regain full time employment, the 1987 recession hit, and part-time school employees were laid off. 

My husband still had a full-time job at the school, and we had housing, so I decided to go to the University of Massachusetts, Amherst to get a doctorate in education. After starting, I applied for and was hired to be part of a special initiative 

called the Futures grant, in Lawrence, MA working with Latino youth in the public 

schools so I worked 4 days a week, traveling back and forth to the university and 

completing my first year of study. The job in Lawrence, although it worked with 

public schools, was a private foundation so it was a social security position. (SS 12, 

PS–2) 

I then got a part-time job in the Greenfield, MA public schools that allowed me 

to study and apply my learning to my teaching. After completing my doctorate in 

1994, the school system continued to have me work at part-time (.6–.85) percentages 

and hire full time younger teachers to assist me. The law stated that the years 

(1989–2000) would count as complete years of experience until such time as I got 

a full time job and then the percentages would revert to fractions of a year. So by 

2000, I had 2 years from 1969–71 and then 11 years all in the public sector. 

Through all these years, I continued teaching summers at Northfield Mt. Hermon, 

accumulating a few months a year toward social security. (SS 16, PS 13) 

In 2000, I began searching for full time work as my children were entering college. I got a research position at the School for International Training, in 

Brattleboro, VT at a cut in salary but full time. It is a private school. (SS 17, PS 

13) 

Then in 2001 I got a full-time job creating a new department for the Nantucket 

Public Schools, Nantucket, MA. My goal was to get a good job which required my 

doctorate and to try to stay at least three years at a decent full time salary so that 

when I retired, I would get a fraction of a better wage than what I had earned to 

date. Since September of 2001, I have been a teacher/administrator here and plan 

to continue. When I got this full time job, all my part-time years in Greenfield reverted to fractions so 11 years experience fell to 7. So at this time I have 2 years 

1969–71, 7 years 1989–2000, and 4 years 2001–2005 for a total of 13 years. If I 

maintain my health and teach until 65 years of age, I will have a total of 20 years 

in public institutions. Massachusetts retirement would provide me with a pension 

of 40% of the average of the last three years of my salary. If I were to retire at 

60 after 15 years, I would only get about 25% of my final salary as a teacher’s pension or less than $20,000/year. 

My private school earnings for social security have accumulated at low wage private school positions from 1972–1989 and again 2000–2001 for a total of 18 years. 

The social security benefit from these wages is small but under the double dipping 

law, I cannot receive even that amount even though both amounts are minimal compared to a reasonable living wage in my retired years because of low private school 

pay. 

At 65, I will have taught continuously, at least part time, my entire adult life but 

could conceivably receive about $30,000 a year or less. Teachers who stay in public 

schools their entire lives normally earn a pension of 80% of their final salary. Private school teachers may have TIAA–CREF or small annuities but there is no pension income or even real estate to sell because of living in school housing much of 

one’s life. I started teaching earning $5500. From 1974–1988, my salary went from 

$6,000 to $18,000. In the public school part time, my salary from 1989–2000 went 

from $24,000 to $40,000. I also worked part time as an adjunct faculty member at 

a community college from 1993–6, in the public sector but did not have enough 

hours to accrue benefits. 

From what I understand, the ‘‘double-dipping’’ law was created to prevent early 

retirees from public pension jobs like the military or the post office from going into 

private business for 20–30 years and earning a large amount of social security in 

addition to a full pension. But I believe that this law inadvertently (I hope!) discriminates against low paid or middle income working public employees who have 

75 

spent time in private or religious schools, or have worked in small businesses intermittently throughout their public career. It does not allow us to receive the proportional amount of money earned toward putting into social security over a lifetime 

in addition to working in an institution that has a pension plan. 

The Government Pension Offset (GPO) and Windfall Elimination Provision (WEP) 

affects only California, Massachusetts, Ohio, Texas, Maine, Alaska—a total of 15 

states. That distinction alone makes it inequitable. 

I hope you will vote to eliminate this law. I believe women who elected to stay 

home and/or work part time during their child-raising years as well as public servants—the firemen, police and teachers—are the main recipients of this legal discrimination. Thank you very much. 

f 

Statement of Ruth Ann Cone, Montgomery, Alabama 

I very much appreciate the opportunity to submit this written testimony on the 

Government Pension Offset (GPO) and Windfall Elimination Provision (WEP) Social 

Security provisions, and their adverse and unfair impact on me—a Federal retiree. 

Thank you for taking the time to listen to me, and many other retirees, who are 

in a similar situation as I am. 

My husband served honorably in the United States Air Force for over twenty 

years. When we first married, our assignment was overseas in England. My husband, at the time, was a Staff Sergeant. For over three years, I tried to get a job 

in the Civil Service, but back in the 1960’s, unless you had three years of career 

status Civil Service, they would not even talk to you, much less hire you. It was 

difficult trying to raise a family on a staff sergeant’s pay, so I had to work. 

We were transferred in 1970 to San Angelo, TX. I still did not have my three 

years career status with the Civil Service, so I still could not work for the government—so I entered the civilian world of working. I did have my government paperwork showing my typing and shorthand skills; but without working three consecutive years in the Civil Service, I was always unacceptable. Unfortunately most of 

the tours for servicemen back in those years were three years—so we never stayed 

in one place long enough for me to earn my career status. 

Finally, in 1973, we were sent to Italy and I was hired to work in the Civil Service as a GS–05 in 1975. However, we did not stay long enough, so I was considered 

a temporary GS employee. After returning to the states, we were assigned to Maxwell Air Force Base in Alabama. 

I had to go to Huntsville, AL to retest and get another rating. It was over a year 

before I heard anything. Finally, I received a call from the Army Corps of Engineers 

for a temporary GS position—which I took. I then was hired at Air Command and 

Staff College (ACSC) and stayed at ACSC until I had my three years status—although my husband had received orders to report to Germany. I made the decision 

to remain behind with my two children so I could get my three years and then I 

joined him several months later. I was immediately hired by the Army in Germany, 

and remained in the Civil Service for the rest of my working career. 

We moved back to Montgomery, AL, but our retirement dreams were short lived 

as my husband passed away at the age of only 56. I retired with 29 years and 8 

months. Yes, I am drawing a Civil Service Retirement System (CSRS) retirement 

check; however, I was forced to return to work in the civilian world, so that I can 

continue to pay my mortgage, utility bills, health care, etc. Although my husband 

is no longer with me, the bills are, and must be paid. 

I am simply an ordinary working woman trying to better my life in retirement 

age, and really need the Social Security spousal benefit to which I am entitled. My 

husband started working when he was 13, and continued paying into the Social Security system for 43 years. Yet, none of his contributions are being given to his family. Had I known about this, I would never have worked for the Civil Service. 

When I called the Social Security Administration office in Montgomery, Alabama, 

I was informed that I would have been entitled to my husband’s social security in 

the amount of over $1,100 a month, due to being a widow. I turned 60 back on 

March 13, 2004—which amounted to $13,200 for the year. But due to the fact I was 

a federal employee, receiving CSRS, I was not entitled to one penny—this is not 

right. We were married almost 35 years and we were not only married, but he was 

my best friend. He wanted to make sure I and my children would be taken care 

of should something happen to either of us—and I felt the same way. 

Life is precious and you must live it on a daily basis—you never know what the 

next day will bring. My husband and I lived by the motto ‘‘Cherish Yesterday, 

76 

Dream Tomorrow, Live Today’’ and I truly believe this. This is something we worked 

for all our lives, our social security benefits, and now, I am being penalized because 

I worked for the Federal Government. 

I know several years back, if a retired military officer went back to work for the 

Federal Government, he had to give up half of his retirement pay—well, they 

changed that law a year or two ago—now these generals, colonels, etc. are coming 

back to the exact job they had while in the service, receiving a full federal retirement check, a current federal retirement check and when they are eligible, they will 

receive some social security check—so what is the difference between me and others 

like me and the retired military officers???? 

In addition, I am further adversely impacted by the WEP which drastically cuts 

my own earned Social Security benefits because I also am covered by the CSRS. 

This is simply not fair. 

I love America and all it stands for. I highly respect all that our military does 

for us, and am proud that I was able to serve. However, these laws penalize federal 

workers, and are simply wrong. Please repeal them. 

f 

Statement of J. Douglas Fay, Bronston, Kentucky 

Please keep in mind that strengthening SS will require adding funds to the program. That is a given! However, you must realize that you must also pay back to 

the program money that has been taken from those who have made contributions 

over the years and have been bilked out of their entitlement. I am referring to those 

affected by GPO and WEP. 

To deny budgeting to replace those funds as too expensive is unfair to all of those 

civil servants who have given so much. When this administration has spent billions 

to fight the proverbial windmills of unnecessary war, it is unconscionable to say that 

‘‘making the pot’’ right is too expensive. 

Please plan for replacing the 40% that the Government Pension Offset and the 

Windfall Elimination Provision cut from current and future retirees, and then support H.R. 147 and S. 619. 

Teachers, Firemen, and Police Officers throughout the country are depending on 

you to do the right thing. 

f 

Statement of Charles Loveless, American Federation of State County and 

Municipal Employees (AFSCME) 

The American Federation of State, County and Municipal Employees (AFSCME) 

is a labor organization that represents 1.4 million employees who work for federal, 

state, and local governments, health care institutions and non-profit agencies. We 

submit the following statement for the record of the House Ways and Means Committee hearing on Protecting and Strengthening Social Security and Examining the 

Impact of the American Populations Increasing Longevity on Social Security’s Finances. The Subcommittee’s statement announcing this hearing noted that recent demographic trends, the increase in life expectancy and a lower birth rate leading to 

fewer workers paying Social Security taxes, has ‘‘put Social Security’s finances on 

an unsustainable path.’’ Similarly, The New York Times reported on June 12, 2005 

that ‘‘policy experts have told Congress in recent weeks that any effort to improve 

Social Security’s long-term finances should somehow deal with this jump in life expectancy by adjusting benefits, raising the retirement age, increasing taxes or creating new incentives to work longer.’’ Many proponents of radically altering the Social Security program to include private investment accounts have described these 

demographic trends as the major and newly discovered cause of the shortfall that 

Social Security is expected to experience sometime between 2041 (Social Security 

Trustees 2005 Report) and 2052 (Congressional Budget Office). 

In actuality, however, the current debate over whether the retirement age for Social Security should be raised because Americans are living longer and having fewer 

children is de ́ja` vu all over again. The 1983 bipartisan Greenspan Commission was 

fully cognizant of these same demographic statistics and structured their recommendations, including raising the retirement age to 67 by 2026 and raising the 

payroll tax rate, based on their implications. The Greenspan Commission’s recommendations went on to form the basis of the modifications that Congress made 

77 

on a largely bipartisan basis to the Social Security program and that then-President 

Ronald Reagan signed into law. 

There has been only a very minor change in the assumed rate of decline in the 

mortality rate for Social Security beneficiaries since 1983, and as such, it should 

play a very small part in determining Social Security’s financing gap. If the 1983 

assumption was adjusted, less than 5 percent of the total actuarial shortfall would 

be eliminated. In fact, when all of the demographic factors affecting Social Security’s 

current financial outlook are accounted for—fertility rates, mortality rates and immigration—demographic factors have actually improved the actuarial balance of the 

Social Security system since 1983. The small declines in mortality rates and stable 

fertility rates relative to what was predicted in 1983 have been trumped by the larger than anticipated immigration flows. 

Therefore, if everyone thought that the problem had been fixed in 1983, why has 

another actuarial deficit materialized? If the implications of increasing longevity 

and declining births were accounted for in the 1983 changes, what has happened 

that the Greenspan Commission did not foresee? According to a recent report by the 

Economic Policy Institute (EPI), 60 percent of the reemergence of Social Security’s 

long term deficit can be accounted for by two major economic trends that the Greenspan commission did not anticipate; the growth of average wages earned by U.S. 

workers slowed considerably and income inequality rose significantly. The unexpected growth in inequality also meant that Social Security lost revenue and interest on that revenue as the percentage of wages subject to the Social Security cap 

declined from the historic 90 percent level to the current 85 percent level. This loss 

in revenue, and the interest it would have earned, coupled with the two unexpected 

economic changes, combine to account for about 75 percent of Social Security’s reemerged long-term deficit. 

If lawmakers wish to address the causes of Social Security’s long term projected 

shortfall, they should focus on remedying the underlying economic causes—slow real 

wage growth and inequality—that are creating the bulk of the problem and not compel American workers to take another hit. Despite the continuing improvements in 

longevity, large segments of the American workforce simply cannot physically work 

more years. AFSCME’s members work at jobs that represent a cross-section of how 

America works. Our members work in hospitals, schools, and prisons. They climb 

trees and utility poles, drive buses and ambulances, repair roads and parklands, 

and lift sick patients and heavy machinery. These are jobs that require strength of 

mind and body. 

Some workers may want to continue working until they reach full retirement age, 

which is mandated to climb to 67, and some may want to work even longer, but 

many just do not have the option. Often a worker’s health has deteriorated to the 

point that he or she is not physically able to continue. This is especially true for 

low-income and blue-collar workers, women, African-Americans and Latinos. Social 

Security was designed as a social insurance program. Raising the retirement age 

would hurt exactly those workers for whom Social Security was created in the first 

place and who continue to depend on Social Security for the major portion of their 

post retirement income. 

AFSCME urges the Committee, the Congress and President Bush to preserve Social Security as a life long social insurance program that workers have earned by 

their many years on the job. American workers don’t deserve to have their benefits 

cut—and raising the retirement age would be a benefit cut. 

f 

Statement of Mary Ellen Marvin, Punta Gorda, Florida 

I very much appreciate the opportunity to submit this written testimony on the 

Government Pension Offset (GPO) and Windfall Elimination Provision (WEP) Social 

Security provisions, and their adverse and unfair impact on me—a federal retiree. 

First I want to thank Chairman Jim McCrery and the other legislators serving on 

this Subcommittee for conducting this important hearing. As a federal worker being 

adversely impacted by these provisions, I urge all Subcommittee members, and lawmakers, to repeal them as soon as possible and allow me to receive my full social 

security benefits. 

I took an early Civil Service Retirement in 1989, and then worked for private employers from 1991 to 2004. My Social Security earnings statement led me to believe 

that I would get about $400 per month in Social Security benefits. 

However, when I actually retired in 2004, I only received $171 per month of my 

earned Social Security benefits because I was also covered under the CSRS retireVerDate Aug 31 2005 01:38 Mar 11, 2006 Jkt 023924 PO 00000 Frm 00081 Fmt 6633 Sfmt 6602 E:\HR\OC\23924.XXX 23924
78 

ment system. If I had worked in the private sector for my whole career, then I 

would be receiving all my earned Social Security benefits with no penalties. 

I had purchased a retirement home with the assumption that I would have $400 

each month from Social Security. Now that I am receiving only $175 per month 

(with the 2005 COLA increase), I am having trouble making ends meet and am considering selling my retirement home. Receiving that extra few hundred dollars each 

month would enable me to keep my home. 

Please fix this inequitable problem. Don’t punish Americans for working for the 

federal government. 

Æ