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

29–458 PDF 2006

BANKING ON RETIREMENT SECURITY:

A GUARANTEED RATE OF RETURN

HEARING

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 23, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–41

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

CAMPBELL, JOHN, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, JR., North Carolina, 

Vice Chairman 

RICHARD H. BAKER, Louisiana 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SUE W. KELLY, New York 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

JUDY BIGGERT, Illinois 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHAEL G. OXLEY, Ohio 

BERNARD SANDERS, Vermont 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

GWEN MOORE, Wisconsin 

WM. LACY CLAY, Missouri 

JIM MATHESON, Utah 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

June 23, 2005 .................................................................................................... 1

Appendix: 

June 23, 2005 .................................................................................................... 41

WITNESSES 

THURSDAY, JUNE 23, 2005

Brock, David O., President and CEO, Community Educators Credit Union 

(FL), on behalf of Credit Union National Association ....................................... 17

Brown, Michael J., President and CEO, Harbor Federal Savings Bank (FL), 

on behalf of America’s Community Bankers ...................................................... 14

Furman, Dr. Jason, Non-Resident Senior Fellow, Center of Budget and Policy 

Priorities, Wagner Graduate School of Public Service, New York University 20

Gornto, Rick, President, First Financial Benefits, Inc. (TX) ................................ 19

Roberts, J. Lamar, President and CEO, First National Bank of Pasco (FL), 

on behalf of Independent Community Bankers of America .............................. 15

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 42

Clay, Hon. Wm. Lacy ....................................................................................... 46

Sessions, Hon. Pete .......................................................................................... 47

Brock, David O. ................................................................................................ 51

Brown, Michael J. ............................................................................................. 56

Furman, Jason .................................................................................................. 60

Gornto, Rick ...................................................................................................... 64

Roberts, J. Lamar ............................................................................................. 66

(1)

BANKING ON RETIREMENT SECURITY: 

A GUARANTEED RATE OF RETURN 

Thursday, June 23, 2005

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:08 a.m., in 

Room 2128, Rayburn House Office Building, Hon. Spencer Bachus 

[chairman of the subcommittee] presiding. 

Present: Representatives Bachus, Biggert, Tiberi, Feeney, 

Hensarling, Pearce, Neugebauer, Pryce, McHenry, Sanders, 

Maloney, Moore of Kansas, Frank, Crowley, Baca, Green, Moore of 

Wisconsin and Clay. 

Also present: Representative Sessions. 

Chairman BACHUS. Good morning. The Subcommittee on Financial Institutions and Consumer Credit will come to order. Today’s 

hearing is on banking on retirement security, a guaranteed rate of 

return. And at this time I am going to recognize Mr. Feeney, a 

Member from Florida, for an opening statement. 

Mr. FEENEY. Thank you very much, Mr. Chairman, and thank 

you for having these hearings that will provide important discussions about some options for long-term retirement savings for 

Americans. 

Mr. Chairman, we have got a number of distinguished guests 

here today. I have read all of the testimony and appreciate all of 

our witnesses. We have got a number of Floridians here today. I 

will be introducing one of those when he speaks in a moment or 

two. 

I did want to recognize a longtime friend going back 12 years 

now, Mike Brown, from the American Community Bankers. It has 

been great to work with him in my capacity in Tallahassee. It is 

great to see him visiting Washington. And when I get a chance, I 

will be introducing Mr. Roberts for his testimony. 

Mr. Chairman, one of the goals of the House Financial Services 

Committee is to bring to light the importance of retirement savings. This has become more important than ever because we have 

all heard about the situation that Social Security is in and the 

long-term challenges or crises, depending on the way you prefer to 

describe it. 

Today Social Security is collecting more money than it needs to 

pay benefits, but by the year 2017 or so, it will start running a deficit, collecting less in taxes than it pays in benefits, and that deficit 

2

will get worse every year. Already 78 percent of families pay more 

in payroll taxes than in income taxes. There are fewer workers per 

retiree today than ever before, and that ratio gets worse as we go 

along. When Social Security started, we had some 42 workers paying into the system for every beneficiary. By the year 2030, the 

ratio will be two people paying for the benefits of every retiree. 

Americans need to know they have no legal right to any part of 

the money they have paid into Social Security. In the 1960 Supreme Court case Fleming v. Nestor, the Supreme Court decided 

that Americans have absolutely no ownership rights to the money 

that they have paid into Social Security. The Government has absolutely no contractual obligation to pay any set level of Social Security benefits. 

Yesterday, certain members of the Republican Conference introduced a proposal which would move us toward some real reform by 

allowing Social Security surplus, instead of being spent every year 

by Congress, to be put into personal retirement accounts. I think 

that both as a practical matter and politically, hopefully we will 

lose some of the obstructionism and allow the Social Security surplus to be used for what it was always intended to be used for; that 

is, individual retirement savings for future seniors. 

Personal accounts would provide ownership of one’s retirement 

savings. Some argue that personal accounts are very risky. They 

point to things like Enron, which there is no proposal by any Member of Congress to suggest that people ought to be able to put all 

of their retirement savings in any stock, let alone their own company’s stock. 

Having said that, completely avoiding all risk is difficult and actually has the guaranteed problem of underperforming inflation. So 

one thing we know is that if you avoid all investment risk, you will 

be worse off as inflation eats into your long-term retirement savings. Most investors are aware that you must take some risk to 

achieve higher returns, and that, over the long term, riskier investments have provided much higher rates of return. 

But individual investors also need to know that there are some 

very conservative choices that they can make as part of any retirement portfolio. As has been mentioned, some 15 Members have 

joined me in proposing, in a letter to Chairman Thomas, that we 

have what has been referred to as a community bank option that 

would be included in any personal savings account, and that is 

what we are here to discuss today. 

Mr. Chairman, I again thank you. I look forward to hearing from 

our witnesses not just in terms of what opportunities that they provide to their current investors, but how maybe they can solve the 

long-term retirement challenges that face Americans. 

Chairman BACHUS. Thank you, Mr. Feeney. 

Mr. Frank. 

Mr. FRANK. Thank you, Mr. Chairman. And I am glad to be with 

our friends in the independent bankers, community bankers, and 

credit union communities, who do a great deal. And let me say at 

the outset there was a statement in the credit union testimony 

which had noted that CUNA has taken no position on whether or 

not there should be private accounts, but that if there are, there 

3

would be equity among financial institutions. And I very much 

agree with that. 

Let me give you an analogy. I think this latest proposal that we 

should spend countless tens of billions of dollars to send people to 

Mars is the height of foolishness. But if we were to send people to 

Mars, I would certainly want no discrimination against those who 

could be sent. So I have a similar approach here. I don’t think 

much of the idea, but I certainly agree that if we were to do this, 

I would be for full equity for the smaller institutions, and I will—

in the questioning, I think this does get to a point where I have 

agreed which is that we should be raising deposit insurance. I 

think we would agree that doing this without raising the deposit 

insurance limit would be a problem there, and this shows what I 

think is the inequity of current law, which reinforces the economic 

problems that smaller banks face by the inadequate level, it seems 

to me, of deposit insurance. 

But I then do want to talk—the gentleman from Florida mentioned this newest proposal, and I am struck. There was a recent 

proposal that said individuals should now be given ownership in 

their share of the surplus, and they can put that in a private account. 

First, up until recently, I had understood the President to be 

pooh-poohing the notion that there was a real surplus. I mean, the 

President had said when he went to, I think, West Virginia, well, 

this is just paper in here. So first—and here is what has happened. 

First people really denigrated the notion that there was a tangible 

Social Security surplus as a way to argue that we need to reduce 

benefits. In fact, if Social Security, as we know, is credited with its 

current surplus, and with the surplus that will build up until 2018, 

and with the interest that should be accruing on that, then Social 

Security is fully funded until sometime in the 2040’s. 

We have been told by people, well, wait a minute, that the surplus isn’t really there. It has been spent, the President said, in a 

variety of ways. So now what we see is a kind of a reversal of position. We have apparently gone on the part of some from a denial 

that there was this surplus that we could use to an assertion that 

there is a surplus. But it is apparently now not to be used to pay 

the benefits, and that is what puzzles me. If we fully credit the surplus that is there and that will grow for 13 years, and the interest 

on it, we do not have a problem fully funding existing Social Security benefits until sometime in 2041. That doesn’t mean we 

shouldn’t consider what we should be doing. It doesn’t seem to me 

to be a short-term crisis. 

But, in fact, what we are now told is, oh, no, there is this surplus, but instead of using it to fully fund the benefits, let us put 

it into private accounts, and then that coerces you into reducing 

the benefits. 

So I have a great deal of difficulty understanding how that pivot 

came about, and as I said, if there is a surplus, then we should use 

it for funding the benefits. 

Now, it is true that there is, according to the courts, no legal 

ownership in that surplus, but it is a matter of public policy. We 

can, in fact, take action to make sure that that surplus is used to 

fully fund benefits. And again, I want to stress what we have here 

4

is a kind of a double game going on, on the one hand a denigration 

of the reality of surplus, to argue, I think inaccurately, that there 

is a crisis and that we don’t have enough money to pay the benefits. But having made that argument, people then turn to say, 

yeah, there is a surplus, but we are not going to use it, and this 

is the issue. Instead of using the surplus as it was intended to be 

used, to pay the legally mandated level of benefits, people say, no, 

let us take that and put it into private accounts, thereby creating 

precisely the problem that would exist if did you that with fully 

funding the benefits. 

So it just does seem to me—people have said, well, what is your 

proposal for Social Security? And let me just say, this recognition 

that there is a surplus is part of it. The problem, of course, is that 

this surplus has been used to pay for tax cuts, it has been used to 

pay for the war in Iraq, and it has been used to pay for a lot of 

other things. And this reinforces to me what is the short-term answer, even the intermediate-term answer to Social Security to the 

President and to the Majority. This surplus in Social Security that 

has been used for tax cuts, that has been used for the war in Iraq, 

that has been used for other programs, put the money back. If we 

put the money back, Social Security benefits can be fully paid until 

sometime in 2041 or 2042. That gives us years to decide what other 

adjustments we should make, and that would be the answer. 

But I do want to close by agreeing that if we are, in fact, going 

to go private accounts, which I think would be a very grave error, 

that I certainly do not want to see discrimination against small financial institutions. I have been worried, let me just say in closing. 

When I came on this committee, it was called the Banking Committee. In Massachusetts, in our legislature, the equivalent committee is called the committee on banks and banking. And somebody said, do you ever think they will change the name back here 

like to the committee on banks? And I said, well, I am afraid by 

the time we get to that, it will be called the committee on ‘‘the’’ 

bank, because there may only be one in America. Maybe there will 

be one in Germany, maybe there will be one in Japan. I don’t think 

anybody wants to see that. 

I think the smaller institutions, the credit unions, and the community banks play a very important function. They are often preferred by consumers, not just individual consumers, but smaller 

business people, and so I certainly would not want to see anything 

done that would further the already unfortunate set of disadvantages they face. 

Chairman BACHUS. I thank Mr. Frank and assure him that if we 

make a list for folks going to Mars, that we will actually give preference to the Democratic side. 

Mr. FRANK. I thank you. But, Mr. Chairman, let me just say, 

only if we have reinstated proxy voting by that time. 

Chairman BACHUS. Without objection, the gentleman from Texas, 

Mr. Sessions, will be permitted to participate in today’s hearing. 

And I had already—Mr. Franks graciously consented. So, Mr. Sessions, I would like to recognize you. And I would like to also recognize the work that you and Congressman Feeney did in requesting 

this hearing and also in introducing H.R. 209 expressing the sense 

of the House of Representatives that any plan to reform Social SeVerDate 0ct 09 2002 10:14 Sep 13, 2006 Jkt 029458 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 F:\DOCS\29458.TXT HFIN PsN: TERRIE
5

curity and, I guess, include personal accounts would include the Social Security option. So at this time I am going to recognize you for 

an opening statement. 

Mr. SESSIONS. Thank you, Mr. Chairman. I have missed my 

years of—when I originally was here some 10 years ago, the service 

over here was a lot of fun, and I see that the humor has not 

stopped. And I appreciate and respect that, as well as the way it 

was accepted by the gentleman from Massachusetts in the spirit of 

fun. 

Mr. Chairman, I appreciate the opportunity to address the House 

Committee on Financial Services on the important issue of retirement security. I would also like to take this opportunity to thank 

you for your leadership vision that you have demonstrated on this 

issue for the American people. 

As Congress examines its options for providing long-term solvency of Social Security, I believe that there is one essential element that must be a part of comprehensive reform, and it is what 

we call the banking option. The banking option would allow workers to put part of their Social Security benefits in a product similar 

to a federally insured certificate of deposit, a CD, and to receive 

what is known as a guaranteed rate of return. 

I must say that much of what this hearing is about today, about 

safety and soundness that exists in the marketplace today, avenues 

by which people who need to make sure that they have regular rate 

of return, as well as the security involved, is important. 

I would also note to this committee, to this subcommittee, that 

today railroad, coal, fire, police, and teachers include those other 

workers across the United States that have their own private accounts that include many of these same options. 

Perhaps more importantly, the banking option would give riskaverse workers the opportunity to own a safe personal account that 

would guarantee a set rate of return greater than what is offered 

by Social Security, and one that is just as safe as any money in 

the bank. 

While studying measures that can serve as components of the 

comprehensive Social Security reform, I believe that Congress 

should pay particular attention to measures that have already been 

created and implemented in what we call field laboratories at the 

local level throughout America. Fortunately, one such laboratory 

for studying the real-world effects of the banking option already exists in Galveston County, Texas. It really is the birthplace of the 

banking model. 

Over 20 years ago, county employees in Galveston voted overwhelmingly to create an alternative to the Social Security system 

that gives retirees control of their own money at virtually no risk 

to the beneficiary. The results have been extraordinary, and Galveston County employees have average annual returns of 6.5 percent. Even today with our historically low interest rates, workers 

in Galveston still receive returns of 3.75 percent on their investment, which is far better than the Social Security rate of 1.8 to 2 

percent. 

Giving workers this expanded choice is an important option for 

reforming Social Security because it provides workers with the 

same or better benefits as our Social Security system does. 

6

The other important aspect of this plan is that as workers get 

closer to retirement age and more vulnerable to potential swings in 

investments rates of return, the banking option allows them to 

move their assets into a conservative investment vehicle that protects their principal from a potential market downturn. 

There is nothing new about giving Americans the ability to put 

their money into an account with guaranteed returns. There is no 

more risk than what is already inherent in the current Social Security system, and that is why I have introduced, along with my dear 

friend Congressman Tom Feeney and Congressman Paul Gillmor, 

H.Con.Res. 209, which the Chairman spoke about. This legislation 

simply expresses the sense of Congress that any Social Security reform legislation should include this banking option. And I believe 

that, listening to our witnesses here today, we can begin to further 

explore how this option can be implemented and successful for so 

many Americans. 

Mr. Chairman, thank you for the opportunity to be with you 

today, and I yield back my time. 

Chairman BACHUS. Thank you, Mr. Sessions. 

I now recognize the Ranking Member, Mr. Sanders. 

Mr. SANDERS. Thank you very much, Mr. Chairman. I look forward to hearing from our panelists. 

Let me just be very brief. There is a saying in Vermont, and, I 

suspect, all over the country, that if it ain’t broke, don’t fix it. The 

truth of the matter is that despite all that we hear from the White 

House, Social Security is not broke in either a literal or a figurative 

sense. 

Depending on the study that you look at, Social Security could 

pay out every benefit owed to every eligible American from between 

36 and 47 years. That ain’t broke. And that is under conservative 

projections of economic growth. And with modest reforms, modest 

reforms, not overhauling the whole system, not destroying the 

whole system, Social Security will be there for our kids and our 

great-grandchildren. 

I think it would be very foolish to dismantle what might likely 

be the most successful antipoverty program in the history of the 

world, one that has helped not only retirees, but has also helped 

millions of disabled people, millions of women and orphans who 

have lost breadwinners live with dignity. 

So I think we have a good system which needs modest changes, 

and what I object most to in this debate, it is not people who have 

different ideas than me. I think it is good to debate the ideas. I object to the fear-mongering that is coming from the White House, 

telling young people that Social Security is not going to be there 

when, in fact, that is simply not the case. 

Mr. Chairman let us take a look at the Galveston plan. First, Mr. 

Chairman, let us ask the question does the Galveston plan earn a 

higher rate of return than Social Security? The answer is no, it 

does not. According to the Wharton School of Business, in 14 out 

of 16 years since the creation of the Galveston plan, Social Security 

actually earned the same or higher rates of return than Galveston’s. 

Second, will privatizing Social Security lead to higher taxes? Yes, 

if the Galveston plan is our model. Payroll taxes for the Galveston 

7

plan total 13.9 percent compared to 12.4 percent under Social Security. 

Third, what would happen to the 45 million current recipients of 

Social Security if we adopted the Galveston plan? That is a question we must answer, Mr. Chairman, because you see the 5,000 

municipal employees covered by the Galveston plan, unlike the Social Security System, do not make any contributions to support current retirees. That means that if we adopted a Galveston-like plan, 

no one would be paying the $500 billion annual cost of benefits for 

the Nation’s 45 million current Social Security beneficiaries. That 

would be a disaster. 

Fourth, do people receive higher benefits under the Galveston 

plan than under Social Security? No. According to a study done by 

the Social Security Administration, the Galveston’s plan ‘‘offers a 

lower initial ongoing benefit than Social Security for single workers 

with low earnings and for married workers at the low, middle and 

high earning level. After 20 years, all of Galveston’s benefits are 

lower relative to Social Security’s.’’ 

And according to the GAO, ‘‘Low wage earners retiring today 

generally would have qualified for higher retirement incomes had 

they been under Social Security. Many median wage earners, while 

initially receiving higher benefits under the Galveston plan, would 

have eventually received larger benefits under Social Security because Social Security’s benefits are indexed for inflation.’’ 

Mr. Chairman, if you are still not convinced that replacing Social 

Security with the Galveston plan would be a disaster, listen to Galveston’s own municipal employees. Here is what Evelyn Robinson, 

who was the Galveston district court clerk for 13 years before retirement in 2004, had to say about this plan: ‘‘I didn’t come out 

ahead. My chief deputy did not come out ahead. My bookkeeper did 

not come out ahead. I personally don’t know anyone who has retired who came out ahead.’’ 

So, Mr. Chairman, I look forward to hearing the testimony, and 

thank you for calling this hearing. 

Chairman BACHUS. Thank you, Mr. Sanders. 

Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman, and thank you for 

holding this hearing. And I especially want to thank and congratulate my colleagues, Mr. Sessions and Mr. Feeney, for their leadership on this issue and helping us explore yet another option of 

what we can do to save Social Security for future generations. 

I would respectfully disagree with my colleague from Vermont. I 

recently became a father 3 years ago, so I have a 3-year-old daughter and a 21-month-old son, and if we don’t do something about Social Security now, they are going to receive a negative rate of return. I do not believe that is fair. That is inherently unfair to future generations, and I think something needs to be done. 

As my colleague from Florida pointed out, you can’t escape demographics. We have increased number of retirees who are living 

longer. We have fewer workers supporting them. And something is 

going to have to happen in our system. And if we decide to do absolutely nothing, I can tell you what is going to happen. We all know 

what is written in the current law, and that is in 2042—and maybe 

I am not going to be here, but I expect my children will be. And 

8

in 2042 there is going to be a massive benefit cut of almost onethird. And I don’t know how people feel in other parts of the Nation, but when I talk to people in my congressional district back in 

Texas, I have yet to find anybody who wants to embrace a benefit 

cut in Social Security of almost one-third, nor do they think that 

is fair for future generations. 

Additionally, if we don’t do that, we have the option of raising 

taxes. We can raise payroll taxes 42 percent. I have yet to find anybody again in my congressional district who wants to see payroll 

taxes raised 42 percent. 

Well, indeed there is another option, and that is trying to help 

Social Security become an asset-based system with real assets that 

workers own, can manage, that the government can still guarantee, 

not unlike what our Federal deposit insurance is all about. And 

that is the option that we need to explore as a Nation, and so that 

is why I have embraced personal accounts. 

Now, we are going to hear a lot of talk today about how risky 

it is to allow individual Americans the freedom to manage their 

own personal accounts. Well, I would like to point out how risky 

the current system is. Congress, over the history of Social Security, 

has raided that system to surplus 57 different times. And as the 

Ranking Minority Member has pointed out, they have spent it on 

all kinds of things that are not related to retirement security. To 

me that sounds pretty risky. 

There have been at least 20 tax increases, and every time taxes 

increase, your rate of return goes down. And that is why my grandparents, who were born in roughly 1900, when they were alive received about a 12 percent rate of return on their Social Security, 

and my children will receive a negative rate of return. Part of it 

has to do with the tax increases. 

There have been benefit cuts. I believe, Mr. Chairman, that there 

is plenty of risk of leaving our money in the hands of Washington, 

and so that is why we need to explore personal accounts and particularly the guaranteed rate of return that is federally insured 

that could be offered by our community banks and our credit 

unions. 

Mr. SANDERS. Will the gentleman yield briefly for just 1 second, 

just for a minute. Just for the record. I respect his point of view. 

I would categorically disagree with many of the assertions made by 

my friend from Texas, not the least of which the suggestion that 

the alternative is privatizing or doing nothing. There is lot that we 

can do without destroying Social Security. It is not doing nothing, 

it is making modest changes to keep a very successful program 

going. Thank you. 

Mr. HENSARLING. Well, we look forward to the Democrat plan 

then, Mr. Sanders. 

Chairman BACHUS. Thank you, Mr. Hensarling. 

Mrs. Maloney. 

Mr. FRANK. If the gentlewoman would yield. We do have a plan: 

Put the money back. Put the money back in Social Security that 

it was credited with, and then we have until 2041 to work on it. 

So if Social Security gets the money it is legally entitled to, that 

surplus that is being discussed, that is our plan is to put the 

money back. 

9

Chairman BACHUS. Okay. I think all time has expired on that. 

And when this—yes, we will recognize Mrs. Maloney. Now, are 

there members on either side—Mr. Green, do you wish to make an 

opening statement? 

Mr. GREEN. If the Chair will deem it appropriate, I will waive 

it. 

Chairman BACHUS. If you want to, we will have somebody on 

this side. Otherwise when Ms. Maloney is through—well, actually 

we do. Mr. McHenry and Mr. Green after that. 

Mrs. MALONEY. Thank you very much, Chairman Bachus. And I 

welcome my friends from the community bankers and the credit 

unions, and Dr. Furman from New York University, which is in the 

district that I represent, and is an economist who has written extensively and published on this topic. 

But I must say I am puzzled today by the timing of this hearing. 

By all accounts I truly believe this privatization movement is not 

going to go anywhere because the more the American people learn 

about it, the less they like it. And once the American people understand four simple points about the President’s proposal, then they 

understand that it makes no difference whether the private accounts are in a bank or with a broker. It is absolutely a losing 

proposition for them. And these four points I would like to briefly 

explain. 

Number one, the plan is not voluntary and will result in large 

benefit cuts because the President’s plan will change the calculation of benefits from wage indexing to price indexing, and that will 

have a result of cutting guaranteed benefits possibly by more than 

25 percent, even for the middle-class workers, even for those who 

choose not to invest in private accounts. And nothing about the 

bank option that we are considering today changes that fact. And 

the President has endorsed a substantial benefit cut for the middle 

class called progressive indexing because the benefit cuts are less 

for lower-income workers than for middle-class and higher-income 

workers. 

Under this sliding-scale benefit formula, benefits would fall behind the standard of living for almost all workers. For example, 

once fully phased in, a worker who has earned $37,000 per year 

would have a 28 percent benefit cut. A worker who has earned 

$58,000 a year would have a 42 percent benefit cut. A worker who 

has earned $90,000 a year would have a 49 percent benefit cut. 

Benefits would be cut for all workers whose annual earnings are 

more than $20,000 a year. 

Number two, in addition to being a substantial benefit cut for almost all workers, including the middle class, the Administration’s 

proposal would, over time, lead to a flat benefit amount, the socalled ‘‘clawback’’ provision. Some call it a tax; some call it a 

clawback. Whatever you want to call it. If you take money away 

from someone, I call it a tax. And at retirement, retirees who 

choose a private account would have to pay back the amount that 

they would have had, both principal and interest, had the money 

stayed in a trust fund. And under the bank option, by all predictions, the amount they have to pay back will be possibly up to 

100 percent or more of the amount in their private account. They 

could possibly lose money. 

10

Number three, the vast majority of retirees would not be able to 

pass funds from their private accounts on to their children. An essential feature of the President’s plan which is not affected by the 

bank option is that, at retirement you will be required to turn over 

the amount in your private account that is left after the privatization account in an insurance company to purchase an annuity 

which will give you a monthly income. Reliable, nonpartisan estimates indicate that this would leave little or nothing to be passed 

on to someone’s children. So only those who died before they retired 

and had money left after the clawback would have assets to pass 

on. 

And number four, the money is not yours to invest as you see 

fit. In response to criticisms that the main beneficiaries of the private accounts would be money managers, the Administration made 

clear that the investment would be limited to a few large funds. 

Most recently the Administration has indicated that to prevent 

very risky investing that could dump unlucky retirees in the taxpayers’ lap, it would require retirees to invest in life cycle accounts, 

an option in which the accountholder has no control at all over the 

funds in their account. And these problems of benefiting the money 

managers and moral hazard are equally pressing with the bank option and compel the same result. And these four points have persuaded many Americans that privatization is a bad idea, whether 

the private accounts are in the hands of a broker or a bank. 

Thank you, and I look forward to your testimony. 

Chairman BACHUS. Thank you. 

Mr. McHenry. 

Mr. MCHENRY. Thank you, Mr. Chairman. I will make this brief. 

We are the Financial Services Committee. We have oversight 

over the markets. We have oversight over banks and insurance. We 

have oversight over Wall Street. This is a wonderful opportunity to 

discuss the investment opportunities that Americans can have 

when we have personal retirement accounts, and we are trying to 

get the full range of options on the table. Those on the other side 

of the aisle, I think, are arguing that we shouldn’t do anything, 

that the marketplace is bad and dangerous and a horrible place for 

Americans to even look to. So their arguments, I think, are that 

we shouldn’t even have this hearing today because markets are innately dangerous and bad. 

And I think our perspective on this side of the aisle, and what 

Congressman Feeney—his proposal is that we should actually have 

a full range of financial opportunities and options for all Americans 

for their personal retirement accounts, if and when we do proceed 

to personal retirement accounts; that markets could actually 

produce benefits for every American of all walks of life—rich, poor, 

black, white—all walks of life. And so I think it is a healthy thing 

that we discuss some options in that regard. 

And I think we need to look at experiences of those that have 

had personal retirement accounts, much like Galveston, Texas, and 

under all press reports that I have read about Galveston, Texas, 

that all beneficiaries receive twice as much as they would, with 

their personal retirement accounts, twice as much as they would 

have under the current Social Security plan. 

11

So I think we need to look at all options. I think a wonderful federally insured manner of investing is with actually FDIC-insured 

banks. I think it is a wonderful opportunity for us to discuss this, 

and I think it is very appropriate that this is the week we are 

doing it, after the Ways and Means Committee leaders put forward 

their proposal to actually have personal retirement accounts that 

use the Social Security surplus that we have for the next 12 years, 

the Social Security surplus to actually start funding these personal 

retirement accounts and actually inject this capital into the marketplace, rather than having Washington, D.C., politicians spend it 

on pork barrel projects. So I think it is a very positive thing. 

I am looking forward to the testimony that the gentlemen here 

have to present to us, and thank you, Mr. Chairman, for hosting 

this meeting. 

Chairman BACHUS. I thank you. 

Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman, and thank you, Mr. 

Ranking Member. I, too, look forward to hearing from the outstanding panelists that we have assembled today. 

Mr. Chairman and friends, when I left my district to come to 

Congress, one of the promises that I made was that I would do all 

that I could as a Member of Congress to protect Social Security. 

And my constituents made it conspicuously clear to me that for 

many of them, Social Security is not supplemental income; for 

many of them it is the only income they have, they have absolutely 

nothing but Social Security. And for too many of them, that is not 

enough. They don’t want me to use my one precious vote to gamble 

with Social Security. 

Why are we discussing at great length Social Security as opposed 

to Medicare? Medicare as projected will face its depletion around 

2020, whereas Social Security is looking at 2041, and with some 

tweaking we can go a lot longer. My suspicion is this, friends: 

There is a surplus in Social Security. We are talking about trillions 

of dollars in Social Security that, when invested, will benefit somebody, bankers, credit unions, stock market, stock brokers. We are 

talking about Social Security because we have got a surplus. The 

house is on fire; that is Medicaid. We need to adjust the flame on 

the stove; that is Social Security. 

Rather than fight the house fire, we are finding ourselves trying 

adjust the flame on the stove. I contend that is because there is 

money to be invested. And I am just going to appeal to you to understand that I can’t go back and tell my people that I voted to 

gamble with their future. 

I thank you. I yield back the remainder of my time, Mr. Chairman. 

Chairman BACHUS. I thank the gentleman from Texas. 

That concludes our opening statements. All members are welcome to submit their written opening statements, and I will do so, 

submit mine for the record, and also associate myself with the remarks of Mr. Hensarling, Mr. Feeney, Mr. Sessions and Mr. 

McHenry. 

At this time we will recognize our panel of witnesses. Mr. Mike 

Brown is the president and CEO of Harbor Federal Savings Bank 

and is representing the America’s Community Bankers. Mr. Brown 

12

is a native of Missouri, moved to Florida in 1972; is that right? He 

has held several positions with thrifts and community banks, and 

now is president and CEO of Harbor Federal. He is active in his 

community with the regional hospital—I am just summarizing—

the theater, the Sunrise Theater, and he has just completed a 2-

year appointment on the Thrift Institutions Advisory Council to the 

Federal Reserve Board of Governors, and was a co-chair of Governor Bush’s campaign in your home county. We welcome you. 

At this time I am going to recognize Mr. Feeney to introduce Mr. 

Roberts. 

Mr. FEENEY. Thank you, Mr. Chairman. 

I think it is appropriate that Florida has three witnesses today, 

Mr. Brock, Mr. Brown, and Mr. Roberts. Among other things, Florida, while I was a State legislator, took a defined benefit plan that 

was running deficits, some years as much as $14 billion, for our 

State workers and State retirees. We have moved it into an optional defined contribution plan. Nobody is forced to move, but we 

will never again, for those people that have their own defined contribution accounts, have an unfunded liability. These people will be 

guaranteed that they have a healthy retirement. 

So it is great to have three Floridians here today. Mr. Roberts 

is an at-large director of the Independent Community Bankers of 

America, which is the Nation’s largest banking trade association 

and the only national association that exclusively serves community banks. The president of First National Bank of Pasco County, 

Mr. Roberts is a respected leader throughout the banking industry. 

In addition to serving on ICBA’s executive committee, he represents Florida on ICBA’s board of directors and serves as a member of the association’s Federal legislation committee. He has previously served as president of the Florida Bankers Association. Mr. 

Roberts has been a director and instructor for the Florida School 

of Banking, chairman of the Independent Bankers Bank of Florida, 

and chairman of the Florida Banker Insurance Trust. 

Active in civic affairs, Mr. Roberts has served in volunteer leadership positions for the housing authority, two chambers of commerce, a Habitat for Humanity affiliate, and a Rotary Club. He has 

been named citizen of the year for Zephyr Hills, Florida, and business leader of the year for Dade City, Florida. 

My office has had the pleasure of working closely with Mr. Roberts on many matters important to the banking community and to 

Florida itself. Considering his vast knowledge of community banking, I believe that he will be able to offer us much today in his testimony, and I am grateful for the opportunity to introduce him. 

Chairman BACHUS. I thank you, Mr. Feeney, and that was a very 

good introduction. 

So at this time I am going to introduce Mr. David Brock, president and CEO of Community Educators Credit Union in Florida. 

Representing CUNA, the Credit Union National Association. The 

fascinating thing about your institution is that it was started in 

1953 by a group of 10 teachers, and now has 6 traditional branches 

and 9 branches in elementary and secondary schools. And from 

that modest start to the end of 2004 it has $220 million in deposits, 

$186 million in loans. That is quite impressive. 

13

Mr. Brock is very active in his community. He serves on the 

Brevard County Foundation, which is the public schools in Brevard 

County; the Rolling Readers Space Coast, which is a program for 

disadvantaged children; and the United Way, as well as other organizations. He and Mr. Brown are both active in several other community organizations. So we welcome you to our committee. 

And at this time I would like to introduce Mr. Sessions to introduce Mr. Gornto. 

Mr. SESSIONS. Yes, Mr. Chairman. Thank you so very much. Mr. 

Chairman, it is a great pleasure for me to introduce a person who 

will be providing testimony today, Richard Gornto, who is president 

of the First Financial Benefits, Incorporated of Houston, Texas. It 

is important to note that Mr. Gornto is the plan designer of the socalled Galveston Plan, and has continued to successfully manage 

this plan and several other county plans for the past 25 years. It 

would be my hope and expectation that Mr. Gornto would be able 

to debunk any myths that may have been presented today in the 

opening phase of this hearing as Mr. Gornto would be considered 

an expert on all aspects of return, rate of return, as well as feedback about that plan. 

It is important to note that during this period of time he is past 

president, board chairman of Houston Society of Certified Financial 

Planners, trustee of Alvin Community College, board member of 

Child Advocates of Houston, board member of Alvin National Bank, 

past president and current board member of the Nolan Ryan Foundation and past board chairman of HCA Clear Lake Regional Hospital. 

Mr. Gornto came to Washington as a result of this important 

hearing, and I appreciate him taking time out of his schedule. 

Thank you, Chairman. 

Chairman BACHUS. I appreciate that. 

And at this time it is my pleasure to recognize the gentlelady 

from New York. 

Mrs. MALONEY. I thank the Chairman for allowing me this opportunity to introduce Dr. Jason Furman, and he is a nonresident 

senior fellow, Center on Budget and Policy Priorities, and visiting 

scholar from the New York University Wagner Graduate School of 

Public Service, which happens to be in the district that I am honored to represent this outstanding university. Previously Dr. 

Furman served as Special Assistant to the President for Economic 

Policy in the Clinton Administration. 

Dr. Furman has been a visiting lecturer at both Colombia and 

Yale Universities. In addition, Dr. Furman served as a staff economist at the Council of Economic Advisers and senior economic advisor to the chief economist of the World Bank. 

Dr. Furman received his Ph.D. In economics from Harvard University, and he is widely quoted in newspapers and other written 

documents on the subject that is before us today. We thank you for 

joining us today, Dr. Furman. 

Thank you. 

Chairman BACHUS. Thank you, Mrs. Maloney, and we welcome 

you, Dr. Furman. 

14

At this time we will recognize our panel of witnesses, and we will 

start with Mr. Brown and go to his left and conclude with Dr. 

Furman. So at this time, Mr. Brown, you are recognized. 

STATEMENT OF MICHAEL J. BROWN, SR., PRESIDENT AND 

CEO, HARBOR FEDERAL SAVINGS BANK (FL), REPRESENTING AMERICA’S COMMUNITY BANKERS 

Mr. BROWN. Thank you. 

Chairman Bachus, Ranking Member Sanders and members of 

the subcommittee, I am Michael Brown, Sr., president and CEO of 

Harbor Federal Savings Bank. Harbor Federal is a $2.9 billion publicly traded community financial institution serving the eastern 

coast of Florida in Fort Pierce. I am testifying on behalf of the 

American Community Bankers, where I have served as a member 

of the board of directors and continue to serve on several committees. 

Thank you for this opportunity to testify on the role of community banks in retirement security and the importance of bank deposits and other investment options in creating a solvent retirement system for America’s working men and women. 

Let me commend the hard work that Congressman Tom Feeney 

and Congressman Pete Sessions have done on this issue. They and 

their staffs have been working tirelessly to ensure that working 

families have a full range of options as part of any Social Security 

reform. 

ACB believes that allowing workers the choice of investing at 

least part of their Social Security taxes in personal accounts would 

create a more solvent system. We have been working for some time 

on this with Members of Congress and the Administration to make 

certain that workers have a full range of options for investing in 

Social Security personal accounts. 

Any Social Security reform should give workers the choice of relying on the products their community banks offer for their personal retirement accounts in addition to those investment options 

available on Wall Street. We call it the community bank option. 

Workers should have the option of seeking advice on their personal 

accounts from knowledgeable people they already know and trust, 

their hometown community banker. Community banks already 

offer a variety of federally insured retirement investments, including FDIC-insured individual retirement accounts and certificates of 

deposits. 

Workers of all ages would benefit from the community bank option. For example, some who seek greater return than the Social 

Security program currently provides may be wary of investing all 

of the retirement funds in equities and other retirement products 

that carry a higher risk. For these workers, a long-term federally 

insured deposit account from a community bank would be the most 

appropriate investment for all or part of the funds made available 

by Social Security reform. 

In addition, workers nearing retirement are traditionally advised 

to reduce their allocation in equity investments to reduce the risk. 

ACB believes that FDIC-insured accounts would benefit those older 

workers not only as a place to invest new funds, but also as a safe 

15

place in which to roll over funds from riskier personal account 

products. 

For more than 70 years, FDIC insurance has given millions of 

American families the confidence that the money they save in federally insured banks will be where they need it when they need it. 

Allowing FDIC-insured accounts for community banks as an option 

under Social Security reform would encourage workers to choose 

the personal account option, and it would increase support for reform. 

Today the shift from defined benefit plans into IRA and 401(k)-

type savings has made individuals responsible for managing their 

own assets. Retirement accounts often exceed the current $100,000 

coverage limit provided by Federal deposit insurance. A substantial 

increase in FDIC coverage for retirement accounts would strengthen the viability of the insured deposit account option. Past assessments on federally insured banks cover the cost of today’s deposit 

insurance. Deposits in FDIC insurance accounts return money to 

the local communities where workers live. Community banks invest 

these funds in their communities through loans to local businesses, 

mortgage loans to families, education loans to students and in 

many other ways. If the community bank option is adopted, it could 

result in reduced rates to borrowers and greater economic growth. 

ACB strongly believes that the community bank option should be 

available for workers choosing personal Social Security accounts. It 

will increase their choices, reduce their risk and help grow their 

communities. Thank you for giving us this opportunity to present 

our views. 

Chairman BACHUS. Thank you. 

[The prepared statement of Mr. Brown can be found on page 56 

of the appendix.] 

Chairman BACHUS. Mr. Roberts. 

STATEMENT OF J. LAMAR ROBERTS, PRESIDENT AND CEO, 

FIRST NATIONAL BANK OF PASCO (FL), REPRESENTING 

INDEPENDENT COMMUNITY BANKERS OF AMERICA 

Mr. ROBERTS. Mr. Chairman, Ranking Minority Member Frank 

and members of the committee, my name is Lamar Roberts, and 

I am president and CEO of the First National Bank of Pasco, a 

$105 million community bank in Dade City, Florida. I am also a 

member of the ICBA’s executive committee and board of directors. 

I am pleased to appear today on behalf of the ICBA and its nearly 

5,000 members to testify on ways the community banking industry 

can contribute to the retirement savings and Social Security reform 

debate. 

Today too many Americans are simply not saving enough for retirement. There is a genuine recognition that the low U.S. savings 

rate combined with the swell of baby-boomer retirees and the associated stress on the current Social Security system simply cannot 

be ignored. The ICBA supports bipartisan efforts to strengthen Social Security and retirement savings and the opportunity for new 

individual savings account contributions for community bank customers. Community banks have always served an essential role in 

the U.S. economy as a steady and trusted place for consumers to 

save for life’s events, such as retirement. 

16

Notably, ICBA would like to thank Representatives Feeney and 

Sessions for introducing House Resolution 209. This resolution conveys an important message by the House of Representatives that 

any plan to reform Social Security should also include what we call 

a community bank option. Bank CD’s are an attractive and safe 

product for the retirement savings needs of Americans, especially 

as savers look to reduce risk as they get closer to retirement. Bank 

CD’s can provide both a reasonable rate of return and preserve the 

saver’s principal. 

Involving the Nation’s community banks in the retirement savings debate is critical. That is because the savings in local community banks support community investment and job creation 

throughout main street America. We are greatly encouraged that 

lawmakers are generally considering the full range of personal investment options in the Social Security reform debate rather than 

just a limited selection of stock and bond investments. 

The bottom line is that savings reform must make sense, both on 

Wall Street and main street. Should enhanced personal savings accounts emerge as a bipartisan remedy to improve retirement savings, the structure of such accounts does demand close attention so 

that all segments of our Nation can participate in both the savings 

and associated investment opportunities. 

Allowing a community bank savings option is also very important 

to support local economic vitality. Ample personal savings is vital 

not only to meet the retirement needs, but also to provide the economic lifeblood for our communities as banks leverage private savings to meet the borrowing needs of individuals, small businesses 

and farms. 

Individuals always need to diversify their savings to help mitigate unwanted risk. As the timeless saying goes, don’t put all your 

eggs in one basket. When it comes to nest eggs, this lesson is paramount. It only stands to reason that a broad array of savings options and financial service providers should be considered in the 

Social Security reform debate so assets are not unevenly concentrated. The dispersion of our Nation’s assets and wealth helps 

preserve the safety, soundness and stability of our entire financial 

and economic system. Without solid savings flowing into our local 

communities, economic prospects are diminished. 

Other important retirement savings issues also deserve attention, and I would like to highlight just a couple. First, ICBA supports the initiative for new retirement savings accounts proposed 

by the Administration and in Congress. 

Second, the ICBA-backed Communities First Act introduced by 

Representative Jim Ryun contains a provision that would allow 

consumers to defer recognition of interest income on long-term CDs 

and reduce the top tax rate. 

In conclusion, ICBA appreciates the opportunity to testify on this 

important issue. Community banks are a safe and effective place 

for Americans to save for retirement. Should new or expanded personal accounts be part of any bipartisan retirement security reform, ICBA urges that community banks have the ability to serve 

their customers’ saving needs with a CD, RSA or similar safe bank 

product option. We believe having diversity of savings products and 

17

risk options can only better serve America’s retirement needs. 

Thank you. 

Chairman BACHUS. Thank you. 

[The prepared statement of Mr. Roberts can be found on page 66 

of the appendix.] 

Chairman BACHUS. Mr. Brock. 

STATEMENT OF DAVID O. BROCK, PRESIDENT/CEO, COMMUNITY EDUCATORS CREDIT UNION (FL), REPRESENTING 

CREDIT UNION NATIONAL ASSOCIATION 

Mr. BROCK. Chairman Bachus, Congressman Feeney and members of the subcommittee, I am David Brock. I am the president 

and chief executive officer of Community Educators Credit Union 

in Rockledge, Florida. I am here today on behalf of the Credit 

Union National Association, and I appreciate this opportunity to 

provide CUNA’s views this morning on the topic of Banking on Retirement Security: A Guaranteed Rate of Return. 

CUNA is the largest credit union trade association, representing 

approximately 90 percent of our Nation’s nearly 9,300 credit unions 

and their 86 million members. You have asked us to comment on 

Representatives Feeney and Sessions’ proposal to give workers the 

option to invest part of their Social Security into a federally insured certificate of deposit offered by a credit union, community 

bank or savings association. 

First, I should clarify that CUNA has taken no formal position 

on whether any plan to fix Social Security should include private 

accounts. 

However, if legislative changes allow workers to direct part of 

their payroll taxes into individual accounts, we believe it makes 

sense to include all financial institutions as one option for participants. 

Sound personal financial planning dictates that retirement funds 

for those nearing retirement be distributed in part in lower-risk 

safe liquid investments. Financial institutions offer such accounts. 

In fact, at year end 2004, financial institutions controlled a total 

of $270 billion in individual retirement account deposits. It is difficult to project the potential effect of allowing consumers to invest 

Social Security funds in financial institutions savings accounts 

such as certificate accounts, and because such accounts would provide a relatively low, albeit safe return on the investment, it is 

likely that it would be used more by those approaching retirement 

than by younger workers. 

This certainly would be consistent with the savings trends and 

IRA’s at my credit union, where IRA savings are significantly concentrated in those in higher age categories. In either case, however, 

an increase on the order of 10 percent of current IRA balances 

might serve as a conservative estimate of the increase in savings 

through a CD option. 

In this case, financial institutions would experience a $27 billion 

increase in savings, and credit unions would garner an estimated 

total of roughly $5 billion based on their current 18 percent share 

of the depository institution IRA market. An increase of this magnitude could have an obvious impact on the economy and the communities in which workers live. They would become more finanVerDate 0ct 09 2002 10:14 Sep 13, 2006 Jkt 029458 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 F:\DOCS\29458.TXT HFIN PsN: TERRIE
18

cially independent and be more likely to have sufficient funds to 

spend on goods in their retirement, thus stimulating the economy 

and providing or maintaining employment. 

Social Security plays a critical role in the lives of 48 million 

beneficiaries and 159 million covered workers and their families. 

The widely-acknowledged challenges facing the Social Security system are compounded by the fact that U.S. consumers generally 

save very little and specifically put very little aside in private retirement accounts. 

The U.S. personal savings rate has been on a declining path for 

roughly 2 decades. In the 1975 to 1984 period, personal savings as 

a percent of personal disposable income averaged nearly 10 percent, but fell to an average of 7 percent over the 1985 to 1994 period and to an average of less than 3 percent in the 1995 to 2004 

period. The personal savings rate at the end of April 2005 was just 

over .4 of 1 percent, near its historic low. 

Moreover, a recent Brookings Institution policy brief found that 

only about half of workers participate in an employer-based pension plan in any given year, and participation rates in individual 

retirement accounts are substantially lower. 

Further, many households approach retirement with meager defined contribution balances. Financial institutions can help close 

this gap, and credit unions in particular are uniquely positioned to 

assist consumers in doing so. Credit unions, which pay very favorable interest rates on savings accounts provide a wide variety of 

savings product alternatives to their members. 

At year end 2004, credit unions had $575 billion in savings accounts. Of this total, 22 percent was held in share certificate accounts; 18 percent was held in money market deposit accounts; and 

8 percent was an individual retirement accounts and the remainder 

in other short-term liquid accounts. 

As not-for-profit, member-owned financial cooperatives, credit 

unions have a long history of serving as trusted financial advisors 

and in providing their 86 million members with financial education 

materials, including those that stress the need for savings and retirement planning. These characteristics are reflected in the fact 

that, while credit unions have a 12 percent share of household savings held in depository institutions, they account for an approximate 18 percent share of IRA balances held in depository institutions. 

In summary, we believe that any legislative change allowing 

workers to direct part of their payroll taxes into individual accounts should include financial institution savings accounts as one 

option for participants. Financial institutions have extensive experience in providing retirement-related accounts, and financial institution accounts provide a level of liquidity and safety that is not 

available through other sources. 

Thank you. 

[The prepared statement of Mr. Brock can be found on page 51 

of the appendix.] 

19

STATEMENT OF RICK GORNTO, PRESIDENT, FIRST FINANCIAL 

BENEFITS, INC. (TX) 

Mr. GORNTO. Good morning, Mr. Chairman and members of the 

committee, in particular Mr. Sessions’ office, I would like to thank 

you for inviting me to this hearing and allowing me to speak to you 

today about this very important topic of Social Security reform. 

My name is Rick Gornto, and I am president of First Financial 

Benefits, Inc., a retirement planning design and administrative 

firm in Houston, Texas. The reason I am here today is to talk to 

you about the Galveston plan, which, by the way, is alive and well 

after 25 years, which could be used as a model, and to review with 

you how this plan was designed and how it has performed during 

the last 25 years in several counties and cities in south Texas. 

In 1980, I was asked by Don Kebodeaux, my business partner, 

County Judge Ray Holbrook, and County Attorney Bill Decker of 

Galveston County to see if I could design a privatized substitute for 

Social Security. 

During the ensuing 9 months, the plan was developed and presented to the Galveston employees and county commissioners who 

voted overwhelmingly to adopt the plan, which by the way was 

after a 2-month debate with the Social Security Administration in 

11 various meetings where we debated in front of hundreds, in effect thousands, of employees. 

At the end of the day, 72 percent voted to opt out of Social Security. The primary design features of the plan are as follows: Design 

a plan that mirrors Social Security benefits, retirement, survivorship and disability benefit, design the plan to have equal or greater 

benefits with equal or less cost than Social Security. Design the 

plan to have fixed costs over a long period of time. Design the plan 

with more flexibility than both Social Security and their current 

State retirement plan, which is the Texas county and district retirement system. Design the plan to have guaranteed returns on 

investments. That is, take no risks; don’t want to lose the money. 

Allow for hardship withdrawals in the event of medical emergencies during the term of the lifetime. They wanted this because 

they wanted that flexibility. Allow for lump sum withdrawals at retirement. Do not include a cost-of-living adjustment and design the 

plan that has private accounts and private ownership of these plan 

assets. Design the plan that the employees can leave to their estate 

and design the plan that has built in tax efficiencies. 

These plan features were drafted, and all but the hardship withdrawal option exist today, primarily because of Evelyn Robinson, 

who borrowed out most of her funds to pay for a medical illness for 

her husband prior to her retirement. That is why she got lower 

benefits. She forgot to talk about that up there. 

This plan has been very successful in meeting its intended goals, 

and there have been hundreds of people who have used these benefits for their personal retirement income replacement and their estates. The plan has discovered a diverse range of people at different 

levels as well as both union and nonunion employees. The plan investment performance has been excellent as well. 

During the past 25 years, the plan has provided returns from 15 

percent to 3.75 percent during the term of the 25 years. The guaranteed rates that have been paid have always been higher than the 

20

general prevailing interest rates in the economy, so the plan has 

always been very competitive when compared with other fixed return investments including Social Security. 

It is my intention that this plan, with a few modifications, could 

be used as a national plan. It is a plan that is based on asset-building rather than pay-as-you-go; personal ownership rather than no 

ownership; and guaranteed returns on your investment rather than 

no assurance that you will get the return that was promised. 

Today, there are 7 million government workers in America. 

There are 30 countries throughout the world that adopted Social 

Security pay-as-you-go-type plans and opted for asset-building 

plans. My view of several of these types of plans that I have reviewed show me that they will all outperform their various Social 

Security systems on an investment-return basis. 

They have all recognized the same thing that we are seeing 

today: It is better out there than it is in here. They understand 

that a pay-as-you-go system cannot survive when the next 25 years 

in America—and listen to this statistic—there is a 200 percent increase in plan beneficiaries and a 10 percent increase in workers. 

That is a 20-to-1 ratio of people taking out than people putting 

in. Unless the government can change the current demographic 

trend than no short-term salvos can fix—like increasing payroll 

taxes, extending target traffic retirement age or cutting the benefits to any reasonable level—it can’t be fixed. That vote won’t float. 

If we try to throw millions at a system over the next 25 to 35 

to 40 years, our children will eventually look up and realize that 

their fathers and mothers have left them holding the proverbial 

bag. If we are going to throw money anywhere, then let us throw 

it at a system that will survive and thrive like Galveston, Brazoria, 

and Matagorda Counties and so many others have done throughout 

the country and throughout the world. 

Thank you for having me here today, and let us please get together to make something happen for all of us. 

[The prepared statement of Mr. Gornto can be found on page 64 

of the appendix.] 

Chairman BACHUS. Thank you, Mr. Gornto. 

Now, Mr. Furman. 

STATEMENT OF JASON FURMAN, NONRESIDENT SENIOR FELLOW, CENTER OF BUDGET AND POLICY PRIORITIES, WAGNER GRADUATE SCHOOL OF PUBLIC SERVICE, NEW YORK 

UNIVERSITY 

Mr. FURMAN. Thank you, Mr. Chairman, Mrs. Maloney, for the 

kind introduction to the committee and the opportunity to address 

you today. 

The question of whether to establish individual accounts in Social Security is a contentious one. 

I want to begin my testimony by making a few points that virtually all policy analysts and economists, whether they support accounts or oppose them, would agree with. I then want to go on why 

I believe that replacing a portion of Social Security with private accounts would be a bad idea, and that, instead, we should be focused 

on strengthening Social Security while at the same time helping 

moderate-income families save, invest, and accumulate wealth 

21

through IRA’s, 401(k)’s and other vehicles outside of Social Security. 

My first point is that if accounts are established, they should not 

include a bank option. No individual account proposal scored by the 

Social Security Act raised in the last several years includes a bank 

option. Account proposals all include a Treasury bond option. This 

is the safest security there is, although guaranteed to lose money 

under individual accounts proposals like the President’s, as I will 

explain later. 

There is no financial reason to supplement this with an additional bank option. Bank accounts, including CD’s, provide a higher 

agree of liquidity in exchange for a lower rate of return. This liquidity is largely valueless in the context of a retirement account. 

More importantly, the additional monitoring and enforcement 

costs associated with a bank option would be prohibitively expensive compared to the current design of Social Security proposals. 

Every plan I am aware of, including the President’s, is organized 

through a central administrative authority that collects contributions, manages investments, and maintains records. 

This administrative structure limits choices and services and provides lower costs, although even these costs are 10 times higher 

than the costs of administering the current Social Security system. 

Establishing a bank option would entail setting up decentralized 

accounts like existing IRA’s. The losses in terms of economies of 

scale and higher administrative costs could easily eat up 30 or 40 

percent of the final account balances. 

Second, Galveston does not provide a model that is relevant for 

nationwide Social Security reform. The Galveston plan bears little 

resemblance to individual accounts. The county invests pension 

funds in the market. Workers do not have accounts. They do not 

have any control over investment decisions. Participation in the 

Galveston plan is mandatory, and the contributions are set at 13.9 

percent of payroll. 

So if your idea is to raise payroll taxes, require people to be part 

of the system, and then have the government invest the money, 

Galveston is your model. 

According to the Social Security Administration and GAO, Galveston generally provides lower benefits for its beneficiaries. It 

doesn’t provide protections for spouses, inflation and many of the 

important features of Social Security. But regardless of whether 

Galveston provides higher benefits or lower benefits, it is still irrelevant for thinking about the problem that we have as a Nation. 

The several thousand municipal employees in the Galveston plan 

do not make any contributions to support current Social Security 

beneficiaries. If the United States as a whole adopted a Galvestonlike plan, there would be no one left to pay the $500 billion annual 

cost of benefits for the Nation’s 45 million current Social Security 

beneficiaries. The United States as a whole cannot free ride in the 

same way that government employees in one relatively small county can. 

Third, there is no such thing as a higher guaranteed rate of return. The basic principle of financial markets is that you only get 

higher returns as compensation for taking greater risks. As Nobel 

Prize winner Gary Becker explained, ‘‘There are no freebies from 

22

such investments’’—he is talking about individual accounts—‘‘since 

the higher return on stocks is related to the greater risks and other 

trade-offs between stocks and different assets.’’ 

Social Security benefits are not subject to any market risk. In 

fact, Social Security provides critical insurance against becoming 

disabled, dying, or outliving one’s savings. No financial instruments 

provide this range of benefits, and if they did, they would be extremely expensive. 

Even more fundamentally, as Greg Mankiw, former chairman of 

President Bush’s Council of Economic Advisors, explained—this is 

a quote from President Bush’s former top economic advisor—‘‘Admittedly, some of Bush’s arguments are off the mark. When he 

compares the 2 percent real return a worker now gets from Social 

Security with a 6 percent real return offered by portfolio of stocks 

and bonds, he neglects to mention that the Social Security fund 

still owes a huge amount to those now or soon to be retired. This 

liability—the overhang from giving earlier generations more than 

they put into the system—doesn’t disappear with privatization.’’ 

Virtually every policy analyst and economist, whether they support or oppose accounts, would agree with my statements about the 

bank option, Galveston, and rate of return. I would, however, like 

to make one additional point. In my judgment, the risks associated 

with a proposal like the President’s or the House Republican proposal yesterday are unjustifiable. The President’s proposal would 

not increase the return to Social Security. For many beneficiaries, 

it would lower it. Under the President’s accounts, you need to get 

a real rate of return of 3 percent above inflation—that is 5.8 percent of the total annual return—just to break even from one of the 

two benefit cuts he is proposing. By way of comparison, CD’s currently have a 3.5 percent rate of return. That is a sure-fire way to 

lose money under the President’s proposal. 

As Robert Shiller noted, financial economists found, even with a 

sounder investment strategy, you lose money the majority of the 

time. In conclusion, investing in risk plays an important role in 

wealth creation and retirement security, but they should play that 

role in a separate part of the retirement system, not replace the retirement security provided by Social Security. 

Thank you and I look forward to the committee’s questions. 

[The prepared statement of Mr. Furman can be found on page 60 

of the appendix.] 

Chairman BACHUS. Thank you. 

I am going to ask for the committee’s indulgence. We are going 

to have a vote in about 30 minutes, if not sooner. What we will try 

to do is we will recognize each member for 5 minutes. If they are 

in the process of asking a question or answering a question, we will 

conclude that with the answer. But there won’t be any additional 

questions past the 5 minutes. If I can ask unanimous consent for 

that. 

At this time, the lady from Illinois is recognized. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

And thank you to the panel for all of your expertise that you 

bring today and talking about this issue. 

It is nice to have, I think, a debate that is not, let us say, spirited 

one way—that we are able to discuss this issue calmly. And I think 

23

that we need a lot more of this, because certainly the Social Security plan that we are going to have really needs to be a bipartisan 

plan. And we are going to have to reach some accommodation at 

some point, and it is a critical time that we really need to be looking at this. 

So I have just a couple of questions, first, for Mr. Brown. Many 

of the community banks are offering some type of limited retirement savings products such as the IRA’s. What type of outreach in 

financial education do you provide to help encourage your customers to invest in these products and save? 

Mr. BROWN. Well, it is something we have been doing for years. 

Quite frankly, it is a product that often sells itself because we do 

find that people clearly want to invest in their retirement. The IRA 

has been a wonderful vehicle. 

We do a lot of mailings, particularly at tax time or the time people are thinking about that year end. We do, in many cases, community outreach where we go to communities where we would also 

try to promote housing for people who are not necessarily sophisticated investors and try to talk about those things also. 

But it is an ongoing year-after-year type of thing to get people 

thinking about their retirement benefits. One of the things that I 

think would be—there is a similarity between what we are proposing today or discussing today and the IRA. That is, the beauties 

of compounding are amazing. 

When you continue to put money in on a regular basis, it compounds and builds. It is amazing how much some people have put 

aside in their IRA account, and we would encourage that the public 

has a choice of both of those. 

Mrs. BIGGERT. I think you mentioned that savings, and almost 

all of the panel did, that savings is down, that we are finding that 

people are not putting aside the money, but they are also, particularly the young people, are not putting moneys into accounts. Is 

there any way to reach the younger people? 

Mr. BROWN. Well, my own judgment is, and I am sure this is 

controversial, but I don’t think, quite frankly, the general public 

understands Social Security, and, quite frankly, I don’t think there 

is a broad confidence in it, particularly the younger people, and 

they are not counting on it. 

My sense of it is that younger workers would be glad to reach 

out to something of this nature, because they really don’t think 

that there is going to be anything there for them, and that is sad. 

Mrs. BIGGERT. I think it has been said many times that they 

think they will see a UFO before they see their Social Security. 

Mr. BROWN. Well, it is—I think there are issues with it, there 

are problems with it, and we need to deal with it. 

People, and actually having something with community banks, I 

think, would be very valuable, because it is interesting, as getting 

close to Social Security age myself, I get a mailing once a year now 

to tell me what I will have. But quite frankly, it is—it just doesn’t 

seem very real. It is very remote. 

But I think if someone can go into their bank, and they could 

check what they have in that account, it would really give them a 

sense of finishing something. Quite frankly, it probably would increase savings in general. 

24

Mrs. BIGGERT. Thank you. 

Mr. Gornto, I think the proponents of personal accounts are really concerned about the risk. Certainly, the plan that has been 

talked most about is, it starts for those under age 55 and below, 

and the other people would be still in the traditional plan. Has 

anyone, besides the one woman that you mentioned who used her 

money for the hospitalization or whatever, lost money in this? 

Mr. GORNTO. No, ma’am. Nobody has ever lost a penny in the account. In fact, we have had, it seems, a great deal of press in the 

last couple of years, and the reporters have tried to ferret out unhappy people, people who have had problems. They, as you know, 

they have a way of being able to do this very well. Evelyn was the 

only one that they could find. 

Evelyn, from—I mean, she just simply took out 35 percent of her 

money 5 years prior to retirement under the hardship option to 

provide for a heart bypass surgery for her husband, and when she 

retired, she wanted to know where her money was. She had used 

it for current dollars rather than future dollars. 

Hardship withdrawal was something that was supposed to be a 

benefit of this plan. Because we got so much bad press on it, and 

she made such a problem with it, we finally terminated that option. 

They no longer can have hardship options. 

Mrs. BIGGERT. Thank you, I see my time has expired. I yield 

back. 

Chairman BACHUS. Thank you. 

Mrs. Maloney. 

Mrs. MALONEY. Thank you. I thank all the gentlemen for their 

testimony. 

Dr. Furman, is there anything in the bank option that solves or 

lessons the clawback problem? Mr. Greenspan testified before this 

committee that the private accounts do absolutely nothing for solvency. Could you comment more on that? 

I have read the Shiller study that you referenced, and it seems 

to prove private accounts are a bad idea. And can you comment 

further and elaborate further? 

Mr. FURMAN. Sure, I would be happy to comment on all three of 

those issues. I think it is generally acknowledged now—and the 

President himself has acknowledged—that individual accounts do 

nothing to help restore solvency to Social Security. That is especially the case if you did something like the bank option. You are 

taking moneys that right now are invested, in effect, in Treasury 

and just investing them with higher administrative costs through 

another system that would require thousands or tens of thousands 

of government employees to oversee the circulation of money that 

isn’t doing anything for the system. In terms of the risks you face, 

the President’s plan is what I call offset. Others have called it a 

privatization tax or a clawback. 

What it says is, if your benefit, if your account does not grow 

more than 3 percent above inflation, that is about 5.8 percent per 

year, you will lose money. A CD right now, you get a 3.5 percent 

return. If you put your money in the CD under the President’s 

plan, it is like borrowing at 5.8 percent and investing at 3.5 percent. That is just one of the dumbest things you could imagine 

someone doing with their money. Giving someone the option to do 

25

something that stupid with their money to me does not seem to be 

good public policy. 

Finally, there are smarter things you can do with your money. 

Professor Shiller looked at them. If you do invest your money wisely, you don’t lose money. One hundred percent of the time, you only 

lose it somewhere between 32 and 71 percent of the time, depending on the particular assumptions that you use. 

Mrs. MALONEY. Could you comment on the fact that the plan is 

not voluntary and will result—some economists have written—- in 

large benefit costs because it will change the calculation of benefits 

from wage indexes to price indexing? Could you elaborate and explain more? 

Mr. FURMAN. Sure, the President’s proposal has two benefit reductions. One is a sliding scale benefit reduction. Some have called 

it progressive price indexing. That would apply to everyone, mandatory, across the board, and would result in benefit reductions for 

middle-class families of between 28 and 40 percent reduction in 

their replacement rates by 75 years. 

In addition, there are private accounts, and people who do those, 

get a second benefit reduction on top of the first one that applies 

to everyone. 

Mrs. MALONEY. Could you explain how that benefit works in the 

private—how they cut it back? 

Mr. FURMAN. The first benefit reduction or the second one? 

Mrs. MALONEY. Both of them. 

Mr. FURMAN. For the first one, right now, Social Security benefits are done according to a formula that grows with wages. That 

ensures that your benefit replaces a constant fraction of your income. You need about 70 percent of your pre-retirement income in 

retirement to have a dignified retirement. 

Social Security provides about half of that, 35 percent of your 

preretirement income, provided that 20 years ago. It is going to 

provide that about 20 years from now. That formula would change, 

and that benefit would be eroded over time, just grow with prices. 

You would have basically a 1950 standard of living going forward 

if we had had it in place before. 

The second benefit reduction says that, for every dollar you put 

in your account, your Social Security benefits are reduced by $1 

plus inflation plus 3 percent interest. That accumulates to be about 

$150,000 worth of benefit reductions at retirement. 

Mrs. MALONEY. The vast majority of retirees would not be able 

to pass funds from their private accounts on to their children, according to many economists, yet the President continues to say this 

is a benefit of that plan. 

Could you elaborate further on that aspect of it? 

Mr. FURMAN. Right. For example, if your husband dies and has 

an account, you inherit his account, but you also inherit the entire 

benefit reduction that he agreed to of the account. So when he set 

up his account, he agreed to something like a $150,000 benefit reduction. You get his account, you better hope that it has more than 

$150,000, because you are going to get his benefit reduction regardless of how much is in your account. 

Mrs. MALONEY. Could you comment on the inability of individuals to invest their money as they see fit in these private accounts 

26

and estimates about how much these private accounts will cost to 

set up? I have seen everything from $5 trillion to $10 trillion. 

Could you elaborate on the cost to the Federal deficit and the 

growth of the deficit in that respect? 

Chairman BACHUS. Dr. Furman, if you could be sort of short on 

that? 

Mr. FURMAN. Okay. The most optimistic estimate of that is 30 

basis points as a cost which is about 10 times higher than Social 

Security’s administrative costs now. There are a range of other estimates that are much higher than that, and the range is on government employees required are at the low end of the Social Security Administration, 7,700 to 50,000 or more new government employees required. 

Chairman BACHUS. Thank you. 

Mr. Feeney. 

Mrs. MALONEY. Thank you very much. 

Mr. FEENEY. Thank you, Mr. Chairman. 

Mr. Gornto, I want to turn first to your plan. We have consensus 

among actuaries that, give or take a couple hundred billion, over 

the next 75 years, there is a $2 trillion unfunded liability in what 

we have promised out in Social Security. Any American who thinks 

that there is money sitting in Ft. Knox for his or her retirement 

has been fooled. Whether it was Congress or the trustees, they 

have been fooled and misled. 

I want to know, under the Galveston plan, what your unfunded 

liability is? To what extent have you lied to people about what assets they will have when they retire up until now? 

Mr. GORNTO. Well, there is no lying, and there is no unfunded 

liability. 

Mr. FEENEY. Mr. Roberts, one of the concerns that I think is a 

legitimate one about personal ownership accounts is that, to the extent any proposal would start with very small ownership accounts, 

say $500 or $1,000 or even $1,500, a lot of large Wall Street investors have suggested that there is not a lot of incentive for big investors to take those sort of smaller startup accounts and that there 

is not enough money to make it worth their while to manage those 

accounts. That is one of the problems, if you don’t get a significant 

size account to start with. 

But with respect to community bankers, is it a huge problem for 

you? Is there a huge transactional cost? Is there a large fee associated with coming in and buying a $500 or $1,000 CD-type instrument? 

Mr. ROBERTS. There is a cost, but it is not unreasonable. With 

computers, with technology the way it is now, it can easily be handled. It can be made profitable. We accumulate funds from a lot of 

different people, all the way up from children with smaller accounts where we are trying to teach to save to those who can only 

put a small amount away. When you accumulate all this, you get 

the millions that we have to invest back in our community in the 

loans. It is an ongoing expense that we can easily handle and pay 

them a reasonable market rate and make a reasonable return for 

the bank. 

Mr. FEENEY. One of the suggestions that Dr. Furman had is that 

T-bills provide a traditionally better return than CD-type instruVerDate 0ct 09 2002 10:14 Sep 13, 2006 Jkt 029458 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 F:\DOCS\29458.TXT HFIN PsN: TERRIE
27

ments because they tend to be more liquid and more flexible. But 

to the extent that I know to a moral certainty that my—I am not 

eligible to withdraw money from a personal savings account till I 

am ready to retire, it seems to me that the banks may be able to 

offer enhanced rates of return because there would be no liquidity 

or flexibility that you have in the traditional CD offerings; is that 

right? 

Mr. ROBERTS. Yes, to some extent. I think I take exception, if I 

understand your question correctly, I think if you look at the CD 

rates and you look at the Treasury bill, the Treasury bill rates, you 

will find, they are very similar. So I don’t think you will find one 

more so than the other, and I don’t think that you will find one 

safer than the other. The U.S. Treasury, of course, has the full 

faith and credit of the government behind it. So does the FDIC insurance. 

Mr. FEENEY. As we talk about that insurance and the safety and 

solvency of the banking community since Glass-Steigel, many, 

many decades ago, as I stated earlier, all actuaries tell us we have 

about a $2 trillion unfunded liability in Social Security. 

By the way, it gets worse after 75 years, the situation goes on 

to an infinite obligation that we cannot pay for. When was the last 

time there was a significant failure within a 401(k) or an IRA in 

CD-type instruments that are held by investors to pay those investors money that they were owed in a 401(k), CD or an IRA-CD, or 

have there have been significant bank failures to meet their obligation, like we are going to be unable to meet our obligations? 

Mr. ROBERTS. Not to my knowledge. 

Mr. FEENEY. Mr. Brown, you did a wonderful job talking about, 

not just the benefits to the investors, but—and banks, but to communities themselves, there are a lot of things that community 

banks do. 

Do you want to elaborate just briefly—because we do have votes 

coming up—on the kinds of services you provide in the community 

with the money that you will hold in a CD? 

Mr. BROWN. Well, with—we are a bank that serves 7 counties in 

Florida, and we have 37 offices. One of the things that we think 

sets ourselves apart and, quite frankly, seems to be in common between the four presenters, is that we do reach out and deal with 

individuals. We certainly make loans to businesses. But the prime 

business that we do is we make home loans. We make home improvement loans, things of that nature. 

We find that we deal with all ranges of financial ranges of people’s wealth. But, primarily, we are focusing on home loans. Candidly, I think it is readily accepted, as the more money we have to 

lend, quite frankly, the better rates we are able to give for home 

loans and home improvement loans. 

Even if it doesn’t change the rate, it would change the availability. I mean, it is a function of where we are doing our best to 

lend as much as we can in the community, and we do reach out. 

And we do try to touch everyone in the markets. Just the other 

day, we had a function where we were helping with a number of 

our Latin immigrants as far as helping them, as far as opening accounts. 

28

In many cases, community banks are actually teaching people 

how to bank who are coming to this country, who are new to this 

country. That is something, certainly, that money—if we did have 

personal accounts—some could go to Wall Street. But community 

banks do something a little different than is done in Wall Street, 

and the customers that come in our door cover every spectrum of 

the wage scale. 

But, quite frankly, a lot of our growth is coming from the lowto moderate-income people who are learning how to save and who 

have goals to save for a home. Quite frankly, most of them haven’t 

yet started saving for retirement, so I think that is something that 

should be done. 

Mr. HENSARLING. [presiding] The time of the gentleman has expired. 

The gentleman from Texas, Mr. Green, is recognized for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman, and thank you, members 

of the panel. I appreciate greatly your comments. I support banks, 

community banks, credit unions. I am a member of a credit union, 

have several bank accounts, probably more than I need. 

Mr. BROWN. No. 

Mr. GREEN. But I do have them. I do have a concern that I would 

like to sort of back into, if I may. Some incident occurred that 

caused Social Security to come into being. Something happened. 

Some folks tend to believe that it may have had something to do 

with 1929 and something that occurred then. 

Is it a fair statement, Mr. Brown, that something that happened 

in 1929 had something to do with the establishment of Social Security? 

Mr. BROWN. Well, obviously, we all know what happened in 

1929. I do think that we—you know, I am not a historian, but I 

gather it was determined that we needed to set a safety net for 

peoples of all ages. 

Mr. GREEN. Exactly, a safety net. 

Mr. BROWN. If I may— 

Mr. GREEN. If I may, you have given me the magic words, safety 

net. Let me ask you this, do you think that the people who established Social Security were persons who understood that they had 

the bank option, the credit union option, the option of the stock 

market? My suspicion is that they were reasonably intelligent, and 

they knew that they had these options. But for some reason, they 

did not buy into these options at that time. 

Mr. Brown, if you could make it brief, because I would like—I 

want to respect you. 

Mr. BROWN. I suspect that they didn’t choose that at the time, 

but those were different times. We had different demographics at 

the time. We weren’t living as long. The whole world has changed 

since then. I think we need to change with it. But Social Security 

is right— 

Mr. GREEN. If I may now, because I was yielding to you, but the 

concept of a safety net, which is what you used, is still one that 

we are grappling with today. That is the one we are still grappling 

with. 

29

Now, prior to 1929, good times were here. Folk were having a big 

time in the country. We didn’t plan for the stock market to crash. 

We don’t plan for these types of events. But, unfortunately, with 

the best of intentions, they sometimes occur. When they happen, 

we want Social Security. 

The question comes, for Mr. Furman, if we should have another 

event, maybe—let us hope that it is not comparable to what happened in 1929—we are all invested in banks and credit unions, as 

I am, I have money in banks and credit unions, how is that going 

to impact us, as opposed to what we have right now with the 

Treasury? 

Mr. FURMAN. The Social Security benefit at least doesn’t change 

with the stock market. It is based on your income and replaces a 

constant fraction of your income. It is the only investment that 

most people, in effect, have that has that feature. Everything else 

is subject to market risk in one form or another. 

Mr. GREEN. If the market performs poorly, and we have what is 

the equivalent of a crash, what do we have? 

Mr. FURMAN. Well, bank deposits are insured, so you are not 

going to lose your bank deposit. But they are not guaranteed to 

keep up with inflation. They are not guaranteed to replace a certain fraction of your income. They don’t provide insurance against 

living a longer life than you expect to. They don’t have any of the 

features that make Social Security so attractive as one part of a 

person’s retirement planning. 

Mr. GREEN. I will just conclude with this, because I would like 

others to have their time. It does cause me great consternation. I 

am willing to listen to what everybody has to say and hope to visit 

with some of you individually. 

But it does cause me great consternation to know that we are 

about to make what I consider a very significant change, if we do 

this, and that that change is going to put a lot of what we consider 

our safety net at risk. 

I yield back the remainder of my time, Mr. Chairman. 

Mr. HENSARLING. The gentleman yields back. 

The gentleman from Texas, Mr. Sessions, is recognized for 5 minutes. 

Mr. SESSIONS. Thank you, Mr. Chairman. 

Mr. Gornto, I would like to go directly to you. We are on votes, 

and I will leave here in just a moment. There was some discussion 

about costs associated with running these funds that you—and I 

would like for you to confine your comments to the Galveston 

model. Can you talk to us about the cost, the management cost, the 

cost to run these models? 

Mr. GORNTO. Yes. Our costs have been less than 1 percent for the 

past 25 years. Simply that. 

Mr. SESSIONS. 1 percent. 

Mr. GORNTO. Less than 1 percent, 90 basis points. 

Mr. SESSIONS. There was just a discussion about length of time 

that Mr. Green talked about, you know, when you retire and how 

long you can keep these in. Is there any requirement or rules related to when a person can take their money out, must take their 

money out? Or could a person leave them in as long as they wanted? 

30

Mr. GORNTO. In the Galveston plan, you have several options. 

You have separation of service options, if you will. In other words, 

when somebody separates from service, they can take the funds 

with them at that time. They can roll them to another plan that 

they would go to. They can leave them in the plan until retirement. 

Our retirement—our normal retirement age is in correspondence 

or coincides with the county and district retirement plan so that 

they get full benefits, so that certain of the plans, like the paid-up 

insurance after their retirement, you know, after their retirement 

age occurs if they go to full retirement. But with respect to the retirement dollars themselves, they have separation of service availability at any time. 

That was designed that way, on a local level with that flexibility, 

because they did have a Texas county and district retirement plan. 

Had that not been there, we would have limited those options to 

receipt at retirement age only. They can retire under a variety of 

different mechanisms, if they are age 60, with 8 years, or if they 

are 30 years of service or if they have a, you know, years of service 

and age, work together, they can retire under any one of those 

three options. 

Mr. SESSIONS. Generally speaking, from a person who was on or 

went into the system, when it was formed, and they get out. In 

other words, they retire, generally, how much money, assuming 

they had not taken money out, just as an average, how much 

money does a person, quote, cash out with? 

Mr. FURMAN. We have had a variety of people who, right now, 

are currently being—been in the system for 25 years. Now, granted, a career, a working career is 35 to 40 years. If a person goes 

to work at age 20 or 22 and works till age 65 under Social Security, 

that is a 40-plus year life span. So we don’t have 40 years in our 

plan yet. 

We have 25 years. But in the 25 years that we have been in place, we have people with $300,000 and $400,000 in their account 

who will receive $300,000 and $400,000 in their accounts either in 

weigh payouts or in lump sum distributions at this time. 

Those using that same trending that we are going, even at the 

lower rate of interest rate, they will end up with substantially more 

than that in another 15 years when we have a full 4-year, you 

know, look see at the timeframes. 

Mr. SESSIONS. Mr. Gornto, thank you so much for taking your 

time to be with us today. I will tell you that you have had an opportunity to hear from the members on this side some agreement, 

some disagreement about what we are attempting to do. 

I think what you have done by presenting this Galveston model 

plan, the banking option, will allow members of this committee, the 

subcommittee and this committee, as well as our general body, to 

make wiser decisions about the inclusion of this with whatever we 

do. 

I want to thank you so much for taking your time to be with us 

today. 

Mr. Chairman, I am going to go vote. I yield back my time. 

Mr. HENSARLING. The gentleman yields back. 

The gentlelady from Wisconsin, Ms. Moore, is recognized for 5 

minutes. Ms. Moore. 

31

Ms. MOORE OF WISCONSIN. Thank you, Mr. Chairman. 

And I want to thank this panel for coming. I can see that there 

is broad agreement among all the speakers, that, indeed, one of the 

sort of hidden problems with these proposals, wherever you stand 

on private accounts, is that we don’t have enough savings, and 

those savings aren’t available, quite frankly, to invest, and I think 

that is a breakthrough, at least for me, in terms of trying to understand where the major disagreements lie. 

I can—I guess the question that I would have, first of all, is for 

Mr. Brock. In your written testimony, you talked about, if the bank 

option were available, this would immediately bring $27 million 

into financial institutions, and ultimately into the economy for 

lending. 

I want you to talk about that, and then also I would like you to 

mention the fees and the servicing fees and so forth that banks 

would garner as well. 

Mr. BROCK. Well, the assumption is, you know, that if this option 

were available, that we would increase our rate balances by 10 percent. That would create the $27 billion. The credit unions, you 

know, our structure—you know, the costs are distributed across all 

the products, and it is really hard to determine exactly what kind 

of fees would have to be charged on that kind of an account, because it would be built into the rate. I would assume that these 

kinds of accounts would be no more expensive to operate than any 

other kind of deposit or certificate account that we have. 

Ms. MOORE OF WISCONSIN. Okay. Well, I guess the next question 

would be for Dr. Furman. I was very interested in your testimony, 

because you have really talked about the security of Social Security, and the only way—very informative testimony—about the only 

way to get a higher rate of return is to take that risk. You have 

made a great argument for having accounts outside of Social Security and maintaining Social Security. 

So I guess I wanted to give you an opportunity to elaborate on 

that, because we are constantly bombarded with information about 

the ownership society and how people ought to take charge and so 

on. I guess I just want you to close the loop that some of us may 

have in our minds about the difference in ownership society or the 

example of Galveston, Texas, where the claim is that no one has 

been harmed and that everyone has been doing great. 

Mr. FURMAN. I am all in favor of an ownership society, I think 

it is a great concept but what we really need to do is follow through 

on it. So let me give you one example. The saver’s credit. It is the 

only tax incentive we have right now for low- and moderate-income 

families to help encourage them to save. It is not perfect. It needs 

to be improved in a number of ways, for lowest-income families, but 

it expires in 2006. 

It is the only part of the tax cuts that are expiring in the next 

decade that the President has not proposed to renew. The only tax 

incentive we have for moderate-income families, he would like to 

end after the year 2006. That is a good way to encourage wealth, 

along with helping families opt into—you know, automatically enroll in 401(k)’s. Low-income families get very low rate of return 

from their savings, because if they save a lot, they lose their MedVerDate 0ct 09 2002 10:14 Sep 13, 2006 Jkt 029458 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 F:\DOCS\29458.TXT HFIN PsN: TERRIE
32

icaid. They lose a lot of other benefits. We should raise those asset 

limits so those families aren’t penalized for saving. 

Finally, if you carve out a portion of Social Security, you have to 

give up your Social Security to get an account, you are not any 

wealthier because of that. What is genuine wealth creation is real 

savings and new savings. 

Ms. MOORE OF WISCONSIN. In addition to the progressive indexing proposal, which was not part of the proposal yesterday—but it 

is still on the table, according to the President—where low-income 

people would not have to, would not lose any benefits, but your testimony seems to be that everybody is going to lose with some kind 

of carve-out. So could you explain to us how that would not be the 

case with low income? 

Mr. FURMAN. Under progressive price indexing, people who make 

under $20,000 a year, retirees, get their benefits reduced. People 

who make less than $20,000 a year, according to a White House 

study, a substantial number of them get their benefits reduced if 

they are getting survivors benefits, disability benefits, or benefits 

through a spouse. Low-income families can also see their benefits 

reduced. It doesn’t protect anyone. 

Ms. MOORE OF WISCONSIN. My time has expired—because I 

wanted to ask Mr. Gornto something about Galveston, Texas. 

Chairman BACHUS. I will indulge you, because it doesn’t look like 

a long line behind you. 

Ms. MOORE OF WISCONSIN. Indulge me. 

Chairman BACHUS. Ms. Moore, you may miss your vote on the 

floor, I am not sure. 

Ms. MOORE OF WISCONSIN. Oh, I can’t do that. All right. Just 

very quickly. I am very impressed with what is being done in Galveston, Texas, but I see that the contributors have to make more 

than the 12.4 percent payroll tax to participate in this program, 

and then there is no portability. Do you have any examples of people who decided that they don’t want to work for these three counties? They wanted to walk—you know, they have to move to Milwaukee, Wisconsin? What happens to their benefits? 

Mr. FURMAN. On the contrary, it is fully portable to 401(k) rollovers or IRA rollovers. In addition to that, the extra amount that 

Galveston is putting in is not arequirement. The 12.26 percent of 

6.13 percent, which is the 1981 Social Security level, is still in 

place. The additional amount they are putting in was a voluntary 

amount they would put in because they had extra budget. It wasn’t 

a requirement for cost. 

That has been a real misunderstanding. They keep, you know, 

talking about the comparison. But the only requirement has been—

and the employees are still paying in 6.13 percent, which was the 

1981 level. The employer is just putting in a little extra, and it is 

fully portable. 

Ms. MOORE OF WISCONSIN. Well, thank you very much. I don’t 

want to miss my vote. I absolutely am going to read all of your testimony. Thank you for coming. 

Chairman BACHUS. Thank you, Ms. Moore. 

Dr. Furman, do you believe that we do have a crisis in Social Security? 

33

Mr. FURMAN. I don’t think the terminology matters a lot. We certainly have a problem or a challenge. You can call it a crisis if you 

want. 

Chairman BACHUS. We should move as quickly as possible to address the problems with Social Security? 

Mr. FURMAN. The most important thing is to not do any harm. 

But if we are doing a proposal that is constructive in moving forward, doing that sooner rather than later would certainly be better. 

Chairman BACHUS. What would be your proposal for a constructive plan to reform and strengthen Social Security? I mean, specifically? 

Mr. FURMAN. We have—the benefits we have promised are $4 

trillion larger than the taxes we are scheduled to collect over the 

next 75 years. Whether you have accounts or don’t have accounts, 

you need to reduce benefits by $4 trillion or raise revenues in some 

form by $4 trillion. I would like to do some balance combination of 

both of those. I think that progressive revenue sources have a very 

important role to play like raising the cap on taxable earnings from 

the level of today. 

Chairman BACHUS. So you would lower benefits and raise taxes? 

Mr. FURMAN. Or some combination of the two of those. There is 

no other way to solve the problem. I don’t know of any. 

Chairman BACHUS. Now, you were Senator Kerry’s advisor during the campaign? 

Mr. FURMAN. Correct. 

Chairman BACHUS. Was that your advice to him? 

Mr. FURMAN. I don’t think that political campaigns are the right 

place to undertake Social Security reform. 

Chairman BACHUS. Okay. What did you advise him, I mean, publicly? 

Mr. FURMAN. I advised him on a number of issues, but one thing 

that was very important, I think Social Security is a very small 

part of our long-term fiscal challenges. 

If you look at the tax cuts that were passed over the past couple 

of years, they cost about 3 times more than the Social Security deficit. The Social Security deficit is $4 trillion. That is pretty large. 

Tax cuts are about $12 trillion. The prescription drug benefit is 

about $9 trillion. So if you think about our overall fiscal problems 

and how we could address them, I recommended to him and I 

would recommend to you, is the most important thing that any of 

us can do. 

Chairman BACHUS. You know, the Wharton School of Business 

and others have said that those tax cuts created 3 million jobs. 

Would you concur with that conclusion? 

Mr. FURMAN. Job growth since the recovery began in, I believe, 

November 2001 has been among the slowest of any job growth recoveries. In fact, we have only just now had more private-sector 

jobs than we had in January 2001 when President Bush became 

President. So in my view, the tax cut is successful. Tax cuts should 

have been done, but there should have been more up-front stimulus 

and less long-term cost. 

Chairman BACHUS. So you don’t disagree with the tax cuts. You 

think it should have been more sooner? 

34

Mr. FURMAN. I think it should have been more bang for your 

buck, not tax cuts with long-term costs that didn’t encourage consumption economic stimulus. 

Chairman BACHUS. Well, more sooner would have actually made 

the tax cuts more expensive than they are, would they not? 

Mr. FURMAN. I actually think we could have done about the same 

magnitude. We did about $200 billion sooner. So I shouldn’t have 

said more sooner. 

Chairman BACHUS. If we create personal accounts, would the 

proposal that we are discussing today be a viable vehicle? 

Mr. FURMAN. As you may have noticed from the hearing, I don’t 

think that personal accounts are the greatest idea. That being said, 

as I look at the proposals by a range of people, the President, Senator Hagel, Congressman Shaw, Bob Posen, every single one of 

those proposals doesn’t have anything like a bank option. The problems of the bank option are not the costs of the bank managing the 

money. I think, sure, it can do that reasonably well. 

It is that needed to take 100 million different accounts and keep 

track of each one of them separately. In something like the President’s proposal, all the money goes into the Government, and then 

the Government looks, how many people wanted to invest in the 

stock market, adds up to 50 billion. They hand Barclays $50 billion, 

and they invest it in the stock market. Here you hand this group 

$5,000, that group $15,000, and then you need a monitoring and 

enforcement structure to make sure people didn’t withdraw it earlier and break the other rules. 

That is why every one of those have rejected it. In fact, I testified 

to Senator Hagel’s committee last week, and he was very strenuous 

that, no, no, this is government centralized management of the 

money to keep down costs. Every time I said, you know, it might 

have a higher cost, he said it is not going to have a higher cost because we are not going to do it that way. 

Chairman BACHUS. Well, you are talking about 20,000, 30,000 

different accounts, some investing 20, some investing 30 in different funds. Isn’t that what the Federal workers do today through 

the Thrift Savings Account? 

Mr. FURMAN. No, it is not. First of all, there is one employer, the 

TSP. And the country as a whole, there are millions of employers. 

There are a lot of administrative complications that you have that 

you don’t have with the TSP. But the TSP, assuming that you have 

a TSP, the TSP administrator doesn’t have your own personal account with your name on it keeping track of the moneys. 

They just take all the money. They figure out how many people 

wanted to invest in the stock market, including potentially you. 

They take all of that together, and they hand it to Barclays, and 

they invest it collectively. 

Chairman BACHUS. Actually, they don’t hand it—there are different funds, T-bills. 

Mr. FURMAN. No, no, most of them are invested by Barclays, one 

by the Treasury, the G Fund. But the administrative complications 

of a decentralized system is something we see in Chile and the 

U.K. Studies have found it eats up about 40 percent of your retirement balance. I have been on a lot of panels. 

35

Chairman BACHUS. I am not—generally, it doesn’t really. Understand, I am more interested, you know, in the Federal employees. 

As a Federal employee, whether you are a Congressman or a postman or an air traffic controller, the yield has been, the return on 

investment has been—the worst you could have done if you had 

made all the worst decisions on which funds would have been 3.9 

percent. The best would have been 11 percent. In my case, it is 

about 8 percent. I thought I was doing fairly conservatively. But 

how does that compare with the rate of return on Social Security? 

Mr. FURMAN. There are, you know, as I tried to explain in my 

testimony, there are three problems with comparing the rate of return in Social Security and the rate of return in the private market. One, Social Security—the private market has risks associated 

with it, market risks. Number two, the private market doesn’t provide insurance services. Then, the most important thing is, if we 

could— 

Chairman BACHUS. I think what we have done there is we have 

broken out the disability insurance. I think every proposal has 

taken the pension or the retirement component, and they have broken out the disability insurance and preserved that. 

Mr. FURMAN. Almost all of them, you are correct, take out the 

disability. Some of them don’t take out the survivors’. 

Chairman BACHUS. Let us just say, and I think we would agree, 

that one that did not break out the disability and the President 

proposes breaking out the disability— 

Mr. FURMAN. He did. But, unfortunately, not the survivors’, but 

we don’t need to get hung up on that. The most important economic 

issue is one that I tried to explain through the words of Greg 

Mankiw when quoting him. 

If we could all take our money out, we are getting about a 1.5 

percent rate of return above inflation and Social Security right 

now. If we could all take our payroll tax out, our 12.4 percent out, 

and put it in bonds, we could do a little bit better than that. The 

problem is, we are still spending $500 billion a year on the current 

senior citizens. Where is their money going to come from? 

Chairman BACHUS. What about a phase in? 

Mr. FURMAN. Well, what would happen, during the course of that 

phase in, you would have to—I would have my money getting a 

higher return on the account, but then I would be paying higher 

income taxes to support the current retirees. 

Chairman BACHUS. I think the people who get a greater return 

wouldn’t mind paying income tax on that return. It would actually 

be when they paid it— 

Mr. FURMAN. There is a mathematical theorem, and it is associated with a number of economists. Olivia Mitchell, who is a member of the President’s Social Security Commission, supports reform 

and supports private accounts. 

They have proven that how you did that transition, no matter 

how you phased it in, the cost of that transition was exactly equal 

to the difference in the rate of return between Social Security on 

the market right now, so that once you factored that transition cost 

in, no matter how you phased it in or out—if—and this is a member of the President’s Commission that explained it—you can’t get 

a higher rate of return. 

36

Chairman BACHUS. Thank you, Dr. Furman, I do appreciate your 

candor. 

Mr. Gornto, they teach you in law school, never ask a question 

you don’t know the answer to. But this Evelyn that we talked 

about earlier— 

Mr. GORNTO. This what? 

Chairman BACHUS. Evelyn, the lady. 

Mr. GORNTO. Oh, yes, Evelyn. 

Chairman BACHUS. Did she express regret that the money was 

spent on her husband’s open heart surgery? 

Mr. GORNTO. I don’t think so. 

Chairman BACHUS. Okay. So she actually doesn’t—she agrees 

that was pretty good? 

Mr. GORNTO. She agrees that that was— 

Chairman BACHUS. I would agree with her. Particularly, if they 

are still married. 

Mr. Pearce. 

Mr. PEARCE. I can’t follow that. I may have to go to the House. 

Mr. Gornto, you are described in, I think, Mr. Furman’s testimony as free riders in your Galveston system. Free rider indicates, 

it hints at someone who gets on the train and goes to their destination and then gets off without paying. 

Do you all draw—in terms of Social Security, that would indicate 

you all are drawing Social Security benefits without paying into the 

system. Do you all do that? 

Mr. GORNTO. I am sorry. I am not quite sure I understand your 

question. 

Mr. PEARCE. Do you all, are you free riders on the Social Security 

system? The accusation has been made by the gentleman sitting to 

your left. 

Mr. GORNTO. Are we free riders? 

Mr. PEARCE. In Social Security. Do you draw benefits without 

paying into the system? 

Mr. GORNTO. The— 

Mr. PEARCE. Do you draw Social Security benefits? 

Mr. GORNTO. Yeah, the Galveston County employees when they 

terminated the contract in 1980 accrued a benefit up to that point. 

Whatever they paid in they accrued, and that benefit has stayed 

with the benefit they have gotten from us. 

Mr. PEARCE. So you get Social Security benefits. 

Mr. GORNTO. Whatever had accrued to 1980 or any other type of 

job they would have, yes, sir. 

Mr. PEARCE. Okay. It is also stated that Social Security is paying 

greater benefits than in your plan. You are saying that you had 

hoped to draw equal or greater benefits to Social Security. Are you 

succeeding in that? 

MR. GORNTO. Yes. I have a chart that shows— 

Mr. PEARCE. Mr. Chairman, with a unanimous consent I would 

like to get that chart as a part of the record. 

MR. GORNTO. I think I gave it to you. 

Mr. PEARCE. Okay. Fine. Mr. Furman, you alleged exactly the opposite. Did you bring your chart showing where the benefits are not 

as great? 

37

Mr. FURMAN. I have my chart and it is from the Social Security 

Administration. 

Mr. PEARCE. Okay. But it shows that actually the benefits are 

less than in the Galveston plan. 

Mr. FURMAN. Correct. 

Mr. PEARCE. Mr. Chairman, if we could get that put into the 

record. 

Mr. Furman, you indicate that the cost on the administration can 

be 30 to 40 percent of the final account balance. When I look at 

my costs for the TSP, and that is what the President has said he 

visualizes, a TSP type program. I look at my costs and they are 

.001. Now that is 1/300th of your estimate. You range—actually I 

round off, it is .0006 of my actual cost, and that makes your estimate 500 percent overinflated. 

Can you submit the documentation by which you say that our 

costs are going to be 500 percent greater under TSP under Social 

Security of the President’s plan? 

Mr. FURMAN. Sir, would you let me explain briefly? 

Mr. PEARCE. No, I just want you to submit your documentation. 

I think it bears the scrutiny. You have made a pretty strong claim 

and I would like to see that documentation. 

Mr. FURMAN. Okay. It is not the TSP that would. It is the bank 

option. But I will submit it to you. 

Mr. PEARCE. I understand. Mr. Gornto, you said that you provide 

survivor benefits. Can you provide documentation that you actually 

do that? 

Mr. GORNTO. Yes. 

Mr. PEARCE. You said the Galveston plan has survivor benefits. 

And again Mr. Furman claims that it doesn’t. 

Mr. GORNTO. We can prove that. 

Mr. PEARCE. Mr. Furman is shaking his head. 

Mr. FURMAN. I said it doesn’t have spousal benefits for dependent spouses while you are alive. That is different from survivor’s 

benefits. 

Mr. GORNTO. I disagree. It has them. 

Mr. PEARCE. All right. I see that. Okay. Would any of you tell 

me what we do with our Social Security surpluses right now? We 

have surpluses at the current point. What do we do with those surpluses? How do we invest them? Anyone? 

Mr. FURMAN. Special issue treasury bond. 

Mr. PEARCE. Special issue treasury bonds. And what are the 

rates of return on those special interest treasury bonds? 

Mr. FURMAN. Long term projection is for 3 percent rate of return, 

above inflation about 5.8 percent. 

Mr. PEARCE. If I go down and buy a long-term bond today I can 

get— 

Mr. FURMAN. I think it is less than that today. 

Mr. PEARCE. It is somewhere down on the floor at 4 percent. Are 

we buying long-term bonds for Social Security or are we buying 

short-term bonds? I have the information that we are actually buying short-term bonds because we are not allowed to buy the longer 

term bonds. 

38

Mr. FURMAN. We buy bonds that are a special issue. They have 

the same rate of return as a maturity of 4 years and up average—

from 4 to 30-year bonds to average return. 

Mr. PEARCE. So on the—let me switch over and I will ask the 

question. Mr. Furman, I walked in on the discussion about the tax 

cuts and what should have been on tax cuts. Does the size of our 

government spending as a percent of our overall economy rise to 

the level of concern for you? 

Mr. FURMAN. I am concerned that we have seen one of the largest expansions in government. 

Mr. PEARCE. Not size, that is relative. In other words, when we 

cut taxes the idea is we depress down the size of government? 

Mr. FURMAN. I see that that theory works. We have actually seen 

a huge expansion in government spending. 

Mr. PEARCE. I mean we went from 25 percent to 23 percent. 

Now, the relationship is that as you move beyond 25 percent your 

economy stagnates and becomes very immobile. As you lower the 

percent it has greater vitality and growth. And if you want, the 

way that that has played out, you could look at the Irish miracle, 

where they have a tax rate of 10 percent, the government spending 

lowered and their economy jumped significantly. You could also 

scoot over to New Zealand where they cut the size of government 

significantly, and they graduated it up, the scale of industrialized 

economies and then if you come to current day Germany, at 52 percent, we are again at 23 percent. They haven’t created a new job 

in 10 years. 

Now, your basic assumption that we should have left the tax 

rates up would encourage us to be higher—in the higher percentage of government projects. And if we look at the other side of the 

aisle’s recommendation on spending, we could easily find ourselves 

way up in the 30 to 40 percent range if we delay the solution of 

Social Security right now, solution, use the high estimates, $3 trillion averaged out over 10 years, $300 billion. The low end is a trillion dollars. Average that out over 10 years you get 100 billion. 

If we do like you are recommending and do nothing, the esti- mates are $11 trillion to solve the problem 75 years from now. And 

divide that by 10 and you get one trillion per year solution cost 

with a $2.5 trillion budget. 

I don’t see how we can keep our economy vital; that is, the percent of government spending as a total percent of the economy. I 

don’t see how we can get where we need to be as far as a vital 

economy. If you have any comments on that. 

Mr. Chairman, I see my time has elapsed and I will let him 

close. 

Chairman BACHUS. I would appreciate that, Mr. Pearce. We are 

going to conclude our testimony at this time. Before I do, I want 

to thank the panelists for their testimony and I also want to thank 

Mr. Sessions and Mr. Feeney’s staff who were very effective in putting this hearing together as well as Marisol Garibay, who is here 

on Mr. Oxley’s staff, who coordinated this entire hearing and did 

an excellent job. I would like to commend you, Ms. Garibay. 

We do appreciate your testimony. I think the thing that we all 

agree with on both sides of the aisle is that we do have, whether 

we call it a crisis or a critical juncture in Social Security, there 

39

needs to be reform, overhaul, whatever we want to call it. And 

every year that goes by we don’t do it, it costs almost a trillion dollars a year, which is a staggering amount. And we have our baby 

boomers facing us 3 years down the road. And so we appreciate 

your testimony. 

Without objection, all written statements will be made a part of 

the record, and the Chair notes that some members may have additional questions for this panel which they may wish to submit in 

writing. 

Without objection, the hearing record will remain open for 30 

days for members to submit written questions to the witnesses and 

to place their responses in the record. This hearing is adjourned. 

[Whereupon, at 12:14 p.m., the subcommittee was adjourned.] 

(41)

A P P E N D I X

June 23, 2005

42


29458.001
43


29458.002
44


29458.003
45


29458.004
46


29458.005
47


29458.006
48


29458.007
49


29458.008
50


29458.009
51


29458.010
52


29458.011
53


29458.012
54


29458.013
55


29458.014
56


29458.015
57


29458.016
58


29458.017
59


29458.018
60


29458.019
61


29458.020
62


29458.021
63


29458.022
64


29458.023
65


29458.024
66


29458.025
67


29458.026
68


29458.027
69


29458.028
70


29458.029
71


29458.030