U.S. GOVERNMENT PRINTING OFFICE

66–357 CC WASHINGTON : 2000

EFFORTS TO INFORM THE PUBLIC ABOUT SOCIAL

SECURITY

HEARING

BEFORE THE

SUBCOMMITTEE ON SOCIAL SECURITY

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

APRIL 11, 2000

Serial 106–60

Printed for the use of the Committee on Ways and Means

(

ii

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

SCOTT MCINNIS, Colorado

RON LEWIS, Kentucky

MARK FOLEY, Florida

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

LLOYD DOGGETT, Texas

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON SOCIAL SECURITY

E. CLAY SHAW, JR., Florida, Chairman

SAM JOHNSON, Texas

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

JIM MCCRERY, Louisiana

ROBERT T. MATSUI, California

SANDER M. LEVIN, Michigan

JOHN S. TANNER, Tennessee

LLOYD DOGGETT, Texas

BENJAMIN L. CARDIN, Maryland

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

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

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

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

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

is further refined.

iii

C O N T E N T S

Page

Advisory of April 4, 2000, announcing the hearing .............................................. 2

WITNESSES

Social Security Administration, Hon. Kenneth S. Apfel, Commissioner of Social Security .......................................................................................................... 24

U.S. General Accounting Office, Barbara D. Bovbjerg, Associate Director,

Education, Workforce, and Income Security Issues; Health, Education, and

Human Services Division; accompanied by Kay Brown, Assistant Director,

and Ken Stockbridge, Senior Evaluator ............................................................. 33

Aaron, Henry J., Brookings Institution and National Academy of Social Insurance ....................................................................................................................... 63

Alliance for Worker Retirement Security, and Hewlett-Packard Company,

Gary Fazzino ........................................................................................................ 49

American Academy of Actuaries, Ron Gebhardtsbauer ........................................ 56

Hoekstra, Hon. Peter, a Representative in Congress from the State of Michigan ......................................................................................................................... 8

John, David, Heritage Foundation ......................................................................... 75

National Women’s Law Center, Joan Entmacher ................................................. 70

Pomeroy, Hon. Earl, a Representative in Congress from the State of North

Dakota ................................................................................................................... 10

Salisbury, Dallas, Employee Benefit Research Institute ...................................... 42

Sununu, Hon. John E., a Representative in Congress form the State of New

Hampshire ............................................................................................................ 14

Third Millennium, Richard Thau ........................................................................... 46

2030 Center, Hans Riemer ...................................................................................... 53

Weller, Hon. Jerry, a Representative in Congress from the State of Illinois ..... 5

SUBMISSION FOR THE RECORD

Gregg, Hon. Judd, a United States Senator from the State of New Hampshire 88

(1)

EFFORTS TO INFORM THE PUBLIC ABOUT

SOCIAL SECURITY

TUESDAY, APRIL 11, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON SOCIAL SECURITY,

Washington, DC.

The Subcommittee met, pursuant to notice, at 3:08 p.m., in room

B–318, Rayburn House Office Building, Hon. E. Clay Shaw, Jr.

(Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON SOCIAL SECURITY

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943

April 4, 2000

No. SS–15

Shaw Announces Hearing on

Efforts to Inform the Public about Social Security

Congressman E. Clay Shaw, Jr., (R–FL), Chairman, Subcommittee on Social Security of the Committee on Ways and Means, today announced that the Subcommittee

will hold a hearing on efforts to inform the public about the Social Security program. The hearing will take place on Tuesday, April 11, 2000, in room B–318 Rayburn House Office Building, beginning at 3:00 p.m.

Oral testimony at this hearing will be from invited witnesses only. However, any

individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed

record of the hearing.

BACKGROUND:

Americans need to have a basic understanding of the Social Security program, its

benefits, and its financing in order to make informed decisions about Social Security’s future and their own retirement planning. This information may be provided

through a variety of sources.

For example, beginning last year, the Social Security Administration has been

mailing annual Social Security statements to all workers age 25 and older to inform

them about the Social Security program and to help them plan for retirement. The

statement provides workers with estimates of their potential Social Security benefits

based on their earnings. The statement also provides workers with a record of their

earnings and a fact sheet about the Social Security program.

Another important source of information about the Social Security program is the

Board of Trustees’ annual report on the financial status of the Social Security Trust

Funds. This report includes a great deal of information about Social Security’s financing and the projected economic and demographic trends which affect the program’s future. The annual report is an important source of data on the Social Security program.

In announcing the hearing, Chairman Shaw stated: ‘‘The mailing of Social Security statements is an unprecedented, personalized outreach to all American workers

about Social Security and what it means to their retirement security. American

workers have the right to know as much as possible about their financial future,

including the amount of Social Security benefits they have earned and any factors

that may qualify their confidence in getting their full benefits. This hearing will examine what Social Security is telling taxpayers, and whether that information is accurate, understandable, and useful.’’

FOCUS OF THE HEARING:

The hearing will examine the information available to the public about the Social

Security program, its benefits and its future financing. The hearing will also examine recommended changes to this information and the way information is delivered

to the public.

3

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

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

record of the hearing should submit six (6) single-spaced copies of their statement,

along with an IBM compatible 3.5-inch diskette in WordPerfect or MS Word format,

with their name, address, and hearing date noted on a label, by the close of business, Tuesday, April 25, 2000, to A.L. Singleton, Chief of Staff, Committee on Ways

and Means, U.S. House of Representatives, 1102 Longworth House Office Building,

Washington, D.C. 20515. If those filing written statements wish to have their statements distributed to the press and interested public at the hearing, they may deliver 200 additional copies for this purpose to the Subcommittee on Social Security

office, room B–316 Rayburn House Office Building, by close of business the day before the hearing.

FORMATTING REQUIREMENTS:

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

or exhibit submitted for the printed record or any written comments in response to a request

for written comments must conform to the guidelines listed below. Any statement or exhibit not

in compliance with these guidelines will not be printed, but will be maintained in the Committee

files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be submitted on an IBM

compatible 3.5-inch diskette in WordPerfect or MS Word format, typed in single space and may

not exceed a total of 10 pages including attachments. Witnesses are advised that the Committee

will rely on electronic submissions for printing the official hearing record.

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

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

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

by the Committee.

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

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

or organizations on whose behalf the witness appears.

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

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

This supplemental sheet will not be included in the printed record.

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

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

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

other forms.

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

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

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

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

Chairman SHAW. We will now proceed. Good afternoon. Today’s

hearing is about a simple and widely accepted truth: Knowledge is

power. It is interesting to see how much power is sitting at that

table in front of me. Only if American workers and families understand Social Security and how it may benefit them will they have

the power to effectively plan their financial future. So several questions logically follow: What do Americans know about Social Security? What does the Social Security Administration tell them today?

And how can we help Americans understand more about Social Security, so they can better plan for their retirement?

4

With us today are a number of experts on these topics, starting

with Social Security Commissioner Ken Apfel. We also are pleased

to welcome witnesses from the General Accounting Office and a

number of think tanks and associations representing young people,

women, and employers. And for anyone who thinks that a Social

Security Hearing is incomplete without testimony from an actuary

and an economist, we have got those bases covered, too.

We welcome all of our witnesses, as well as Representatives

Weller, Hoekstra, Pomeroy, and Sununu, who will lead off our

hearing. Together, we think through ways to provide workers and

beneficiaries with the most accurate, useful, and personalized information about Social Security possible, especially given the challenges Social Security will face paying full benefits in the future.

Getting that information out to workers and beneficiaries now is

quite essential.

As I mentioned at the outset, with that knowledge will come the

power for workers and families to decide whether and how they

must adjust their work, savings, and retirement plans for the long

haul.

Mr. Matsui.

Mr. MATSUI. Thank you, Mr. Chairman. I am just going to submit my statement for the record, given the fact that we have five

panels today. And I want to welcome all the witnesses, the four

here on this panel and, obviously, Mr. Apfel, the GAO, and others

that will be testifying. Thank you.

[The opening statement follows:]

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

State of California

I would like to thank Chairman Shaw for holding this hearing. Our topic today

is extremely important. I believe the American people deserve to receive the most

accurate information possible about the Social Security benefits they have earned

and about the future of the Social Security program.

Last October, as required by law, the Social Security Administration (SSA) began

mailing annual individualized Social Security Statements to every worker in the

United States over the age of 25. SSA expects to send out 125 million Statements

over the course of this fiscal year.

The Statements serve two main functions. First, they are designed to assist workers with retirement and financial planning by providing them with an estimate of

the Social Security benefits for which they will be eligible when they retire, if they

become disabled, or if they die at an early age. Second, they are designed to help

SSA maintain accurate earnings records so that workers are sure to receive the benefits that they have earned. Each Statement lists the earnings that SSA has on

record for that worker and provides him or her with an 800 number to call if SSA’s

records are incorrect.

Some Members of Congress as well as other individuals have suggested that more

information should be added to the Social Security Statement. Clearly, in order for

the American people to make sound decisions about their own retirements and

about the changes that will have to made in the Social Security program, they

should have as much information as possible at their disposal. But it is vitally important that that information is thorough, objective, and easy to understand.

I am concerned, however, that the changes some would seek could diminish, rather than enhance the public’s understanding of the Social Security program and the

benefits they can expect to receive from it.

Some proposals including one we will hear about today would require the Statement to compare rates of return under Social Security versus a hypothetical

privatized system. Other proposals would require the Social Security Statement and

the Trustees’ Report to contain statements calling into question the existence of the

Social Security Trust Funds.

I would have serious concerns about either type of proposal.

5

Of course, the most productive way to resolve the question of what level of benefits people workers can expect to receive from Social Security in the future is to

enact legislation to strengthen Social Security.

Rather than simply talking about Social Security Statements or the Trustees’ Report and how they may influence the public’s confidence in the future of Social Security, Congress should be acting to bolster America’s confidence in the program. Instead of holding hearings to discuss hypothetically what may happen once the Trust

Funds are exhausted in 2037, this Subcommittee should be marking up legislation

to make it absolutely certain that the program will be able to pay full benefits to

each and every generation of American workers.

Democrats have introduced legislation to extend the Social Security Trust Funds

beyond 2050, but that bill has not moved. I hope we can do a little more this year

than consider lock-box proposals. As we all know, lock-boxes will do nothing to improve Social Security’s finances and will not extend the Social Security Trust Funds

by even a single day.

I look forward to hearing from Commissioner Apfel and from Ms. Bovbjerg of the

General Accounting Office about the steps the Social Security Administration has

taken to enhance the annual Social Security Statement. I also look forward to hearing views from the other witnesses about the usefulness of the information contained in the Social Security Statement and in annual Trustees’ Report.

Thank you, Mr. Chairman for yielding me this time. I look forward to working

with my colleagues toward our common goal of strengthening the Social Security

program for future generations.

Chairman SHAW. I would say to all the witnesses that we do

have your complete statement to be made a part of the record. We

are going to be interrupted with a series of votes here shortly. I

would like to try to get through as much as we can. So I would

really, particularly today because of the length of our agenda, ask

that if everyone can summarize we would be most appreciative.

Mr. Weller.

STATEMENT OF HON. JERRY WELLER, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF ILLINOIS

Mr. WELLER. Mr. Chairman, Mr. Matsui, I appreciate the opportunity to testify before a Subcommittee I am proud to be part of.

And I appreciate the opportunity to work with you as we work to

solve the challenges facing Social Security.

And as we have all shared, you know, there are few concerns of

greater priority to working families than their pension or retirement plans. And clearly, Social Security has emerged over the last

60-some years as a key component of retirement planning for most

working Americans, something they are very sensitive to.

And Mr. Chairman, let me commend you and Chairman Archer

for your leadership on Social Security. And I am so proud of what

we have accomplished over the last several years with your leadership as well as Chairman Archer’s and Speaker Hastert’s leadership on stopping the raid on Social Security and ending the unfair

Social Security earnings penalty, the limit.

It was a proud day last week when the President signed the legislation which passed unanimously with overwhelming bipartisan

support. Of course, it was a big day when the President signed it,

and of course, now that Social Security earnings penalty is now

history. And working Americans that are seniors will be able to

keep what they earn as well as their Social Security benefits.

Today I wanted to talk about legislation that addresses some of

the challenges facing Social Security. As we know, Social Security

6

has some troubles ahead. It is facing insolvency in the long term

in the year 2037. And I am one of those who believes that unless

we solve this challenge now, it is going to be more difficult in the

future.

And I also believe that the public and the taxpayer have the

right to know about the challenges facing Social Security and what

it means to them. And Mr. Chairman, that is why I have joined

with my friend and colleague who has initiated this legislation,

John Sununu of New Hampshire; legislation that addresses the

public’s right to know about the state of the Social Security Trust

Fund.

Our legislation, H.R. 3578, the Social Security Right To Know

Act, will better inform the public about the Social Security system

by doing two things: First, requiring that specific information be included in the annual report of the trustees of the Social Security

Trust Fund, detailing the state and the status of the Social Security system; and second, requiring that the Social Security personal

earnings and benefits estimate statement include information

about Social Security solvency and what rate of return taxpayers

can expect from their Social Security wages.

The Social Security Board of trustees has just released its report

on the financial status of the Social Security and Medicare Trust

Funds. And although the report does indicate that there has been

a slight improvement from last year’s report, Social Security still

has serious challenges.

The costs of maintaining the Social Security system will begin to

exceed tax receipts in 2015. And that is a watershed year, since it

also marks the time when, unless significant reform is enacted, decisions will have to be made to decrease benefits or increase

taxes—something no one wants to do. It is that simple: Our children and grandchildren will have to pay the bill when Social Security is no longer solvent. And that is wrong, and I believe the public must be made aware of it.

Mr. Chairman, we believe that by requiring the trustees to include information regarding long-term solvency of the system, the

public will be better informed. H.R. 3578 will ensure the public’s

right to know, by requiring the annual report to include the total

amount of the unfunded long-term liability of the Social Security

system. Further, the Trustees’ Report will show the amount of deficit or surplus the system will run in 75 years, under this legislation. And finally, the legislation requires that specific language be

included in the report explaining the nature of the Social Security

Trust Fund. We believe this is an important step in ensuring the

public’s right to know.

Each individual who contributes to the Social Security fund has

a right to know where their retirement money is going. The Social

Security Administration has begun mailing an annual statement,

the Social Security Personal Earnings and Benefit Estimate Statement, to all those over age 25 who participate in the Social Security program, regarding the status of their benefits.

This is a good step—I have received that myself—in ensuring

that the public is well informed of their own contributions to Social

Security. But it does not explain what rate of return they can expect to see on their benefits; nor does it show the financial troubles

7

that the Social Security Trust Fund will be experiencing in the

coming decades.

H.R. 3578 clarifies the annual statement, and ensures that the

Social Security Personal Earnings and Benefit Statement includes

information regarding the solvency of the trust fund. Specifically,

the bill requires that the annual statement include solvency dates

based on the Office of Chief Actuary; ensuring that all future beneficiaries have the knowledge of when the system will begin to go

bankrupt and when it will be insolvent.

Further, the legislation requires a statement explaining the nature of the Social Security Trust Fund and its ability to fund future

benefits. This legislation will give beneficiaries a clearer understanding of the status of the Social Security system currently and

in the future. And this legislation provides workers the most upto-date and accurate information that can help them plan for their

future.

Finally, and very importantly, the Social Security Right To Know

Act requires language explaining the average rates of return that

taxpayers can expect to receive from their Social Security retirement tax payments. This guarantees that the taxpayers know what

they can expect to receive from their investment, and then they can

compare it to alternatives in the marketplace: Stocks, bonds, and

other investments.

Mr. Chairman, the public has a right to know what their money

is doing for them, and has a right to plan their retirement accordingly. I believe that H.R. 3578 is an effective means for increasing

the public’s awareness of the Social Security system, the challenges

that it faces; but also, guaranteeing that Social Security beneficiaries and taxpayers have the right to know as they make plans

for their own personal retirement.

I thank you for the opportunity to testify today, and look forward

to discussing this legislation with you.

[The prepared statement follows:]

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

State of Illinois

Thank you, Mr. Chairman, for the opportunity to testify today.

Mr. Chairman, first let me commend you and Chairman Archer for your leadership on Social Security. Your leadership ensured passage of legislation which

stopped the raid on Social Security and ended the unfair Senior Earnings Penalty.

The good news about Social Security is our efforts are paying off. The Congress

stopped the 30 year raid of the Social Security Trust Fund last year and we will

not return to the days of spending the Social Security Trust Fund. Further, H.R.

5 is now law, ending the unfair earnings penalty for seniors. Again, Mr. Chairman,

I commend you and Representative Sam Johnson for your tireless efforts in seeing

this legislation passed.

Nevertheless, Mr. Chairman, Social Security is in trouble. The Social Security

Trust fund is facing insolvency. Unless we solve this problem now, the guarantee

of Social Security will not be a guarantee for future generations. Social Security

simply will not be there for those people born today. Mr. Chairman, the public has

a right to know this. We must take steps to inform the public now what the future

holds for Social Security.

Mr. Chairman, I have joined in cosponsoring legislation introduced by Representative John Sununu addressing the public’s right to know about the state of the Social

Security Trust Fund. H.R. 3578, The Social Security Right to Know Act, will better

inform the public about the Social Security system by doing two things. First, requiring that specific information be included in the Annual Report of the Trustees

of the Social Security Trust Fund detailing the state of the Social Security System.

Second, require that the Social Security Personal Earnings and Benefits Estimate

8

Statements include information about Social Security’s solvency and what rate of return taxpayers can expect from their Social Security wages.

The Social Security Board of Trustees has just released its report on the financial

status of the Social Security and Medicare Trust Funds. Although the report does

indicate that the status of the Social Security Trust fund has improved slightly from

their previous report, Social Security is still in serious trouble. The costs of maintaining the Social Security System will begin to exceed tax receipts in 2015. This

is a watershed year since it marks the time when, unless significant reform is enacted, decisions will have to be made to decrease benefits or increase taxes. It is

that simple—our children and grandchildren will have to pay the bill when Social

Security is no longer solvent. This is wrong and the public must be made aware of

it.

Mr. Chairman, by requiring that the Trustees include information regarding the

long term solvency of the system, the public will be better informed. H.R. 3578 will

ensure public right to know by requiring the annual report to include the total

amount of the unfunded long-term liability of the Social Security system. Further,

the Trustees’ report will show the amount of deficit or surplus the system will run

in 75 years under this legislation. Finally, the legislation requires that specific language be included in the report explaining the nature of the Social Security Trust

Fund. Mr. Chairman, this is an important step in ensuring the public right to know.

Each individual who contributes to the Social Security fund has the right to know

where their retirement money is going. The Social Security Administration has

begun mailing an annual statement, the Social Security Personal Earnings and Benefit Estimate Statement, to all those over age 25 who participate in the Social Security program regarding the status of their benefits. This is a good first step in making sure that the public is well-informed of their own contributions to Social Security, but it does not explain what rate of return they can expect to see on their benefits nor does it show the financial troubles that the Social Security Trust Fund will

be experiencing in the coming decades.

H.R. 3578 clarifies the annual statement and ensures the Social Security Personal

Earnings and Benefit Statement includes information regarding the solvency of the

trust fund. Specifically, the bill requires that the annual statement include solvency

dates based on the Office of the Chief Actuary. This will ensure that all future beneficiaries have the knowledge of when the system will begin to go bankrupt and when

it will be insolvent. Further, the legislation requires a statement explaining the nature of the Social Security Trust Fund and its ability to fund future benefits. This

legislation will give beneficiaries a clearer understanding of the status of the Social

Security system currently and in the future. This legislation provides workers the

most up-to-date and accurate information that can help them decide how to plan

for their future.

Finally and very importantly, The Social Security Right to Know Act requires language explaining the average rates of return that taxpayers can expect to receive

from their Social Security retirement tax payments. This guarantees that the taxpayers know what they can expect to receive from their investment and can compare it to returns for stocks, bonds and other investments. Mr. Chairman, the public

has a right to know what their money is doing for them and has a right to plan

their retirement accordingly.

Mr. Chairman, H.R. 3578 is an effective means for increasing the public awareness of the Social Security system and the problems it faces. The public has a right

to know about their Social Security. I thank you for allowing me to testify today.

Chairman SHAW. Thank you.

Peter.

STATEMENT OF HON. PETER HOEKSTRA, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN

Mr. HOEKSTRA. Thank you, Mr. Chairman, Mr. Matsui. I will

keep mine short. You gave my speech when you gave your opening

comments, and information is powerful.

One example of hidden information is what is missing from every

employee’s annual W-2 tax form. What is missing is the employer’s

9

share of the Federal Insurance Contributions. Their FICA tax is

what funds Social Security and Medicare.

If you take a close look at your W-2 form, you will see the 7.65

percent that every employee contributes to Social Security and

Medicare. Employers must also pay another 7.65 percent in payroll

taxes on their employees’ behalf, adding up to a total of 15.3 percent of an employee’s total income. That is the percent that is withheld.

Many workers are unaware of this employer contribution to Social Security and Medicare, which also makes them unaware of

how much their employment actually costs. Not only does this lack

of information hide from employees the true cost of their employment, but it also makes them uninformed about how much of their

paycheck funds two government programs which are vital for their

retirement security: Social Security and Medicare.

We can make sure that employees are informed about the real

costs of these programs by requiring W-2 forms to include the employer’s share of the payroll tax. The Right To Know National Payroll Act, H.R. 1264, which I introduced in March 1999, would give

employees vital information on how payroll taxes affect their employment and how much they actually contribute to Social Security

and Medicare.

Hundreds of businesses and the State of Michigan have adopted

a right-to-know payroll form in an effort to inform and educate

their employees. H.R. 1264 would complete the picture for everyone

else.

Thank you.

[The prepared statement follows:]

Statement of Hon. Peter Hoekstra, a Representative in Congress from the

State of Michigan

TAX RELIEF BILL GIVES EMPLOYEES THE RIGHT TO KNOW

Mr. Chairman, Members of the Subcommittee, thank you for the opportunity to

testify.

Most people would agree that information is necessary to make good decisions,

whether in government, business or our personal lives. However, sometimes information is hard to come by or has been hidden from view.

One example of ‘‘hidden’’ information is what is missing from every employee’s annual W–2 tax form—the employer’s share of Federal Insurance Contributions Act

(FICA) taxes, which fund the Social Security and Medicare programs.

For seven out of 10 households, the FICA (also known as payroll) tax is the greatest of all taxes they pay, not the income tax. Yet, calls for tax reduction have focused primarily on cuts in the income tax rate.

Why has there been little public outcry over the payroll tax? Part of the reason

is that half of the payroll tax is hidden from employees’ view. If you’ve ever taken

a close look at your annual W–2 form, you might have noticed boxes which show

the amount of Social Security and Medicare taxes withheld from your paycheck.

However, these amounts are only your contributions to the payroll tax, which is 7.65

percent of your gross income. Employers must also pay another 7.65 percent in payroll taxes on their employees’ behalf, adding up to a total of 15.3 percent of an employee’s income which is withheld.

Many workers are probably unaware of this employer contribution to Social Security and Medicare, which also makes them unaware of how much their employment

actually costs. It is possible that if the employer was not required to pay payroll

taxes, or if the payroll tax was reduced, a portion of this money might go to the

employee. Not only does this lack of information hide from employees the true cost

of their employment, but it also makes them uniformed about how much of their

paycheck funds two government programs which are vital for their retirement security—Social Security and Medicare.

10

Until the solvency of Social Security and Medicare can be ensured for future generations, it is unlikely that any reduction in the payroll tax will occur. However,

we can make sure that employees are informed about the real costs of these programs by requiring W–2 forms to include the employer’s share of the payroll tax.

The Right to Know National Payroll Act, (H.R. 1264) which I introduced in March

1999, would give employees vital information on how payroll taxes affect their employment and how much they actually contribute to Social Security and Medicare.

Hundreds of businesses and the State of Michigan have adopted a Right to Know

payroll form in an effort to inform and educate their employees. H.R. 1264 would

complete the picture for everyone else.

Chairman SHAW. Thank you.

Earl.

STATEMENT OF HON. EARL POMEROY, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NORTH DAKOTA

Mr. POMEROY. Thank you, Mr. Chairman. I want to thank you

and other Members of the Subcommittee for the opportunity to appear. Providing the American public with accurate information

about Social Security is critical to their own retiring planning, as

well as to our success in reforming the program as a whole.

I am here as a note of discord, however. I do not think, in testifying in particular about the bills advanced by Congressman Sununu

and Congressman Weller—I do not think that is the way to proceed. There are two reasons I would like to emphasize in my testimony this afternoon.

First, the importance of Social Security statements in helping

people with their own individual personal retirement planning decisions must not be underestimated. The statement has been advanced with very specific information about individual earnings

records and the benefits of Social Security people can expect. Folks

need really concrete information so they can make their own retirement planning.

Second—and not to be confused with that objective—the Social

Security debate, which is going to be vigorous and interesting, and

in which the Chairman has been a very active and thoughtful participant, should be done up here in Congress, not through misleading, prejudicial comments imposed through legislative mandate on

this disclosure form.

Since its creation in 1935, Social Security has proven itself to be

simply the most important, successful program, in my view, ever

undertaken by the Federal Government. Social Security provides

individuals a means to live with dignity in retirement, and protects

families from unforeseen events such as premature death or disability.

The four-page individual statement sent to workers ages 25 and

older not receiving Social Security benefits I believe has improved

this program. These statements help individuals understand how

Social Security fits in for their own plan for retirement. They help

Social Security maintain accurate wage records. And they educate

the public about the program and how it works.

First, relative to assisting workers with retirement and financial

planning, this is really extraordinarily important. The Employee

Benefits Research Institute, EBRI, estimates that 30 percent of

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American workers have no personal retirement savings. Almost 50

percent have never tried to figure out how much money they’ll need

for retirement.

Given the upward trend in life expectancy, merely hoping and assuming isn’t going to actually produce the nest egg people need to

have a comfortable income stream in retirement. And so having the

hard information out there in a very clear context about this is

going to help people plan, and I think also be a very significant incentive to spur additional private retirement savings.

Second, in receiving and maintaining accurate earnings records,

Social Security has put on the form a 1–800 number. People look

at the earnings record, they look at their records. If there are discrepancies, they get hold of Social Security, they clear it up. It has

been a terrific thing for, in a proactive, timely way, making certain

that people’s individual records of their wage record is squaring

what SSA has on file.

And finally, Social Security statements have an education function. They explain Social Security’s benefits. They explain the financial relationship of Social Security benefits compared to earnings. They talk about changes in retirement age—and after all,

there is a phased-in retirement age that people I think are largely

unaware of; it has been moved from 65 to 67. And it talks about

the retirement earnings test. And I also, as Congressman Weller

noted, applaud you and this Committee for lifting and eliminating

the earnings test on the over-65 population.

Now, the Gallup Poll has been used to identify whether or not

this statement is getting the job done. And I am very pleased to

say we have got a fine report card relative to its accomplishments.

Specifically, individuals receiving a statement are demonstrated

to be more likely to know that the amount of Social Security benefits depends upon how much they earn; second, that Social Security

pays benefits to workers who have been disabled; third, that Social

Security provides benefits to dependents of workers who die; and

fourth, that Social Security was designed to replace only part of a

total retirement income package.

Now, the problem that I have with the legislation is that they

are, at best, confusing. They would add confusing information and

convey also a relatively inaccurate picture of the reliability of the

future Social Security benefit an individual can assume.

I think that we are confusing policy debate with the vanilla benefits information people need to make their own retirement planning

assessments. We just brought this online nationally. We do not

want to muck it up with information that will be highly contested,

of lower value, and ultimately will diminish the value of this disclosure form for the hard realities the individual household faces.

We will have our debate. We will have it up here. But let us not

start, just when we get this so broadly available to our workers, beginning to exploit the disclosure tool to drive policy ends.

And I will be happy to speak more specifically to the policy objectives about the bill, the things that I object to in the bill, during

Q and A, if you would like. I am out of time. Thank you very much.

[The prepared statement follows:]

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Statement of Hon. Earl Pomeroy, a Representative in Congresss from the

State of North Dakota

Mr. Chairman, Mr. Ranking Member, Members of the Subcommittee, thank you

for the opportunity to appear before you this afternoon. I commend you for your attention to this issue. Providing the American public with accurate information about

Social Security is critical to their own retirement planning as well as to our success

in reforming the program as a whole.

I would like to emphasize two main points in my remarks this afternoon. First,

I want to underscore the importance of Social Security Statements in allowing individuals to plan for their own retirement. We must approach any recommended

changes to Social Security Statements in that context, rather than viewing them in

terms of the debate over reform. Second, I believe we must advance the public discussion of Social Security’s future not through these Statements, but through discussions in Congress, with an eye toward development of a comprehensive bipartisan plan to extend the solvency of the program 75 years and beyond.

Social Security—America’s Family Protection Program

I would like to begin by making a few remarks about the Social Security program

in general and what it has achieved since its creation in 1935. Mr. Chairman, Social

Security is simply the most important and most successful program ever undertaken

by the federal government. Social Security provides individuals the means to live

with dignity in retirement, and protects families from unforseen events such as premature death or disability.

Social Security is the cornerstone of our retirement system—it is the principal

source of retirement income for two thirds of the elderly, and makes up 90 percent

of the income of about one third of all Americans over the age of 65. Last year, Social Security benefits lifted roughly 15 million senior citizens out of poverty.

Social Security is also America’s most successful family protection program.

Today, one in three beneficiaries is under the age of 62, receiving either disability

or survivor benefits. Almost three in 10 of today’s 20 year-olds will become disabled

before reaching retirement age, and Social Security provides the only disability protection for three out of four in the workplace today.

Social Security also provides survivor benefits to millions of families coping with

premature death. One in six Americans will die before reaching age 67. Social Security helps protect us against the economic effects of such an event by providing survivor benefits equivalent to about a $354,000 life insurance policy.

Mr. Chairman, Social Security has had a very personal impact in the lives of millions of American families, including my own. After my father passed away when

I was a teenager, my mother, my brother and I all received survivor benefits. Quite

frankly, I have no idea what my family would have done without the protection of

Social Security as we tried to regroup after the unanticipated death of my father

at a relatively young age.

The Importance of the Social Security Statement

Because Social Security plays such a critical role in every American family, including my own, I believe that Congress has a responsibility to ensure that the information provided to the public is both adequate and accurate. As the General Accounting Office (GAO) noted in its 1996 report, public confidence in Social Security

is directly linked to its understanding of the program’s benefits. In my view, one

of the most critical sources of public information on Social Security benefits is the

Social Security Statement.

As you know, Mr. Chairman, last October, the Social Security Administration

(SSA) began sending four-page individual statements to workers ages 25 and older

not receiving Social Security benefits. The purpose of these Social Security Statements is three-fold. First, they serve a public education function by offering basic

explanations of Social Security’s benefits, financial status, changes in the retirement

age, and the retirement earnings test. The results of a Gallup poll showed that since

October, these Statement have played a significant role in increasing Americans’ understanding of Social Security. The survey revealed that individuals who receive a

Social Security Statement have a much greater understanding of Social Security

than those who do not. Specifically, individuals receiving a statement are much

more likely to know that (1) the amount of Social Security benefits depends on how

much they earned; (2) Social Security pays benefits to workers who become disabled;

(3) Social Security provides benefits to dependents of workers who die; and (4) Social

Security was designed only to provide part of total retirement income.

Second, Social Security Statements help the Social Security Administration maintain accurate earnings records-each statement lists the earnings that the SSA has

13

on record for that worker and provides an toll-free number to call to correct errors

in SSA records. This feature of the Statements is especially critical because Social

Security benefits are directly linked to lifetime earnings.

Finally, Social Security Statements assist workers with retirement and financial

planning by providing them with an estimate of the Social Security benefits for

which they and/or their families will be eligible when they retire, if they become disabled, or if they pass away. In my view, this is one of the most critical functions

of the Statements, because it addresses the problem of inadequate savings for retirement.

According to the Employee Benefits Research Institute (EBRI), 30 percent of

American workers have no personal retirement savings, and almost 50 percent have

never tried to figure out how much money they will need to save for retirement.

Given the upward trend in life expectancy, merely hoping and assuming will not result in sufficient savings for retirements that could well span decades. Not surprisingly, additional research has indicated that lack of planning results in substantially lower wealth holdings than households that have done some retirement planning. I believe that annual Social Security Statements can play a critical role in addressing this savings crisis both by providing workers with an estimate of their future Social Security benefits, and in prompting them to examine how much they will

need to save in other vehicles, such as employer-sponsored pension plans.

Including Information on Rates of Return

My colleague’s legislation would require Social Security Statements to reflect the

average rate of return that each individual can expect to receive from Social Security and to compare that rate of return to the rates of return for workers born in

every year since 1900. Presumably, the purpose of such information would be to

demonstrate to workers that internal rates of return in the Social Security program

have varied from one generation to the next. Although rates of return have indeed

varied among generations of beneficiaries, that is not in any way a flaw in the program’s design. Social Security is an inter-generational program, in which the first

beneficiaries naturally received a higher rate of return than beneficiaries today.

Workers retiring in 1940, for instance, experienced a higher rate of return than

later generations, because they received benefits after only contributing for a few

years. The Social Security program was designed as a social insurance system to

enable generations of workers to protect each other. Providing information on internal rates of return without discussing that aspect of the program would present an

incomplete picture to the American public.

Description of the Social Security Trust Funds.

Mr. Chairman, my colleague’s legislation would also require Social Security Statements to include a paragraph to the effect that the Social Security Trust Fund balances ‘‘do not consist of real economic assets.’’ On the contrary, Social Security Trust

Funds consist of U.S. Treasury bonds, backed by the full faith and credit of the

United States, just as are Treasury bonds that are in traded in the market. Furthermore, the United States has never defaulted on any of its financial obligations. Including the statement that the Social Security Trust Funds do not represent real

economic assets in individual Social Security Statements would disseminate inaccurate information to the American people, presumably with the intent of undermining public confidence in the program. It would portray the Social Security program

as hopelessly bankrupt, when in fact modest prudent changes can make the system

solvent for 75 years.

Congress should engage the public through open debate on long-term solvency and

Social Security reform.

Mr. Chairman, I strongly believe that the American public should be engaged in

the debate about the benefits of the current Social Security system versus any alternatives. But the appropriate context for discussion of changes to a major government program is not in individual Social Security Statements, but rather, through

thorough debate in Congress and among the American people.

Personally, I believe that rather than creating a new alternative retirement system, our central goal must be to make the modest reforms that are needed to place

Social Security on a sound financial footing for the long term. Along with several

of my colleagues, I have cosponsored legislation that would devote the entire Social

Security surplus to reducing the federal debt held by the public. Under this proposal, debt held by the public would be reduced $3.1 trillion over the next 15 years

and eliminated by 2015. By paying down the publicly held debt, this proposal would

dramatically reduces the federal government’s interest costs. The proposal calls for

the transfer of general fund revenue in the amount of these interest savings to the

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Social Security Trust Funds over the period 2011 to 2044 to extend the solvency of

the program to at least 2050. I support this measure in the context of Congress’ examination of programmatic reforms to extend the solvency of the Social Security

Trust Funds for another 75 years and beyond.

Again, regardless of the specific proposal I or other members of Congress support

regarding Social Security reform, the fact remains that the most effective and appropriate way for Congress to engage the public in this debate is not through individual

Statements but through open discussion of all reform proposals.

Conclusion

Mr. Chairman, as your subcommittee moves forward to consider proposals to increase public awareness of Social Security benefits as well as reforms to the program, I hope that you will consider the effect of revising the Social Security Statement on public confidence in the program and the future of reform. Again, I thank

you for the opportunity to share my views, and I would be happy to entertain any

questions.

Chairman SHAW. Thank you.

John.

STATEMENT OF HON. JOHN E. SUNUNU, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF NEW HAMPSHIRE

Mr. SUNUNU. Thank you very much, Mr. Chairman. It is a pleasure to testify here today. I want to commend the Subcommittee on

the effort it is putting forward to examine how best to inform people about our Social Security system.

Planning for retirement is one of the most important responsibilities that all American workers will face during their lives. And as

they make critical decisions in this process, they deserve to have

the most up-to-date and accurate information possible.

As part of this effort to provide more information, earlier this

year I introduced H.R. 3578, ‘‘The Social Security Right To Know

Act.’’ It is legislation that would give those paying Social Security

taxes accurate and up-to-date information about the taxes they pay

and the benefits they can expect to receive, in order to help make

them make sound plans for their future.

By expanding access to wage statistics, clearly explaining the

status of the Social Security Trust Fund, and disclosing the rate of

return on taxes paid, I believe my legislation will better enable individuals to understand what they can and cannot expect the Social Security system to provide for them, and to make sound decisions regarding retirement accordingly.

Mr. Weller has provided, I think, a thorough and detailed description of some of the provisions, the key provisions, of the legislation. And what I thought I might do is at least take a minute or

two to address some of the concerns that have or that may be

raised regarding the legislation.

I think critics could always argue that a piece of information

might confuse someone, somewhere. But at the same time, I think

that perspective disregards the fundamental points made at the beginning of this hearing: that knowledge and information represent

power, and empower individuals to make good decisions for themselves; and that information ultimately will help consumers to

make better decisions regarding their own future.

15

The suggestion was made that the importance of this information

is being underestimated. I think, quite to the contrary. This panel

is an indication that the people on this Subcommittee, that those

that have introduced legislation here, highly value and highly regard the importance of the information.

We recognize that context can be important. And the work of this

Subcommittee and the challenge of this Subcommittee is going to

be to make sure that we are building on the value of the existing

Social Security statement, that we are providing the best information possible. But that should not take away from the fact that important, objectively provided information in the end is in the consumer’s best interests.

And I think, in that regard, access for researchers to have to economic models and actuarial data is in the best interests of not just

those researchers, but those who have an interest in Social Security itself; that facts regarding the rate of return that an employee

might get on the taxes that they pay is certainly in the employee’s

best interest; and clarification regarding the nature of the trust

fund I think is of great value.

Those on this Subcommittee that understand how the Social Security Trust Fund works I am sure have been frustrated from time

to time, not just in talking to the public, but talking to other Members of Congress that might labor under a misconception of how the

Social Security Trust Fund even works.

I think these are not just important pieces of information that

are keys to good decisionmaking for consumers and good retirement planning for beneficiaries, but ultimately they are also keys

to making good decisions in carrying on a substantive debate about

reform itself. And therein lies a twofold value to having access to

good information.

Today we have a Federal projected surplus over a 10-year period

of two, three, even four billion dollars, depending on the economic

estimations that are made. But we do have the opportunity to create a dramatically better, more modern retirement Social Security

system. Those who have carefully considered the options for reform—among them, the Members of this Subcommittee—recognize

that we may have difficult choices ahead, but there is a real need

for bipartisan effort. And in fact, that need has never been greater.

I believe that this modest legislation to provide additional information will help workers better understand the system, understand the need for reform, and understand the options that they

have for their own retirement security.

I appreciate the time and the effort of all of the Members of the

Subcommittee in understanding more about and moving forward

this important legislation. And I am happy to assist you with any

questions you might have. Thank you, Mr. Chairman.

[The prepared statement follows:]

Statement of Hon. John E. Sununu, a Representative in Congress from the

State of New Hampshire

Thank you, Mr. Chairman. It is my pleasure to testify here today and I would

like to commend the Subcommittee for its efforts to examine how best to inform the

public about our Social Security system.

Planning for retirement security is one of the most important responsibilities

faced by all Americans during their working lives. And as they make critical deciVerDate 20-JUL-2000 16:12 Oct 23, 2000 Jkt 061710 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 K:\HEARINGS\66357.TXT WAYS3 PsN: WAYS3
16

sions in this process, they deserve to have the most up-to-date and accurate information possible.

As part of this effort to provide more information to workers regarding Social Security, earlier this year I introduced H.R. 3578, ‘‘The Social Security Right to Know

Act.’’ This legislation would give those paying Social Security taxes accurate and upto-date information about the taxes they pay, and the benefits they can expect to

receive in order to help them make sound plans for their future. By expanding access to wage statistics, clearly explaining the status of the Social Security Trust

Fund, and disclosing the rate of return on taxes paid, my legislation will better enable individuals to understand what they can, and can not, expect the Social Security system to provide for them and to make sound decisions regarding retirement.

This modest legislation will require that additional information be included in the

Annual Report of the Trustees of the Social Security Trust Funds and the Personal

Earnings and Benefit Estimate Statements—which has been renamed ‘‘Your Social

Security Statement.’’ It also will allow the Treasury Department’s Continuous Work

History Sample to be made available to qualified researchers for statistical analysis.

There are three parts to my legislation that I would like to explain briefly:

Part I deals with the Annual Report of the Trustees of the Social Security Trust

Funds. My legislation would require the trustees to include addition information in

both the report and in the report’s summary. Some of this can be derived from information that is already included in the body of the report, but this legislation would

require it to be clearly and simply stated in the summary as well. This information

includes:

1. The aggregate amount of the unfunded long-term liability of the system, and

its change from the previous year’s report.

2. The amount of deficit or surplus that the system will run in the last year in

the 75-year projection period included in the report.

3. Language explaining the nature of the Social Security trust fund, including the

following wording:

‘‘The Trust Funds balances reflect resources authorized by Congress to pay future

Social Security benefits, but do not consist of real economic assets that can be used

in the future to fund benefits. These balances are claims against the United States

Treasury that, when redeemed, must be financed through increased taxes, public borrowing, benefit reduction, or elimination of other Federal expenditures.’’)

Finally, Part I requires that SSA publish the economic model and all relevant

data which they use to make financial projections.

Part II involves the ‘‘Your Social Security Statement’’ statement. This legislation

would add three elements to the statement:

1. Each statement would include the information that while Social Security currently collects more in taxes than it pays out in benefits each year, it will begin to

run cash flow deficits in 2015. (The Social Security trust fund will cover the deficit

through 2037, but after that point Social Security’s tax collections continue to cover

only a portion of benefits that it must pay. These dates and percentages shall be adjusted annually based on the findings of the Office of the Chief Actuary.)

2. Each statement would also include language similar to that in the Annual Report which explains the nature of the Social Security Trust Fund.

3. Each statement will include language explaining the average rates of return

that taxpayers can expect to receive their Social Security retirement benefits as

compared to the total amount of Social Security retirement taxes that they can be

expected to pay. (This language shall include chart 2.1 from GAO report GAO/

HEHS–99–110 and the following wording:

‘‘Inflation-adjusted rate of return estimates were more than 10 percent for birth

groups born before 1905. They fell below 6 percent for those born in 1920, below 3

percent for those born in about 1940, and below 2 percent for those born in about

1960. They will reach 1 percent for those who will be born in about 2040.’’)

Part III would allow researchers to gain access to important wage data. The Continuous Work History Sample (CWHS) is a data base compiled by the Treasury Department for the Social Security Administration’s use in making economic estimates

about the future of programs that the agency administers. It consists of income information over a number of years for a random sample equal to 1 percent of the

US population.

This legislation would require the Office of Research and Statistics of the Social

Security Administration to make the sample available to qualified researchers who

will use it for statistical research only. The Office will be able to require researchers

to reimburse all costs and to impose any reasonable conditions to ensure that the

data’s security is protected. In addition, the Office will be required to take steps to

17

ensure that any identifier that might compromise any individual’s identity is removed from the data prior to its being released.

Today, with a projected federal budget surplus of $4.1 trillion over the next ten

years, we have the opportunity to create a dramatically better, more modern, retirement Social Security system. Those who have carefully considered the options for

reform recognize that the choices ahead may be difficult, but the need for a bipartisan effort has never been greater.

I believe that this modest step of providing fundamental information to the public

will help workers to better understand the current system, the need for reform, and

the options they have for their own retirement security.

I appreciate the opportunity to appear before you today, commend the hard work

of the Chairman and the members of the Subcommittee, who have been steadfast

in their efforts to better inform the public about Social Security.

I look forward to participating in this endeavor and would be happy to assist you

in any way possible.

Chairman SHAW. Thank you, John.

Mr. Matsui?

Mr. MATSUI. Thank you very much, Mr. Chairman. I am going

to ask perhaps a couple of questions. The Social Security Commissioner came out with a form that he distributed, and then GAO

made some recommendations. And of course, that form then was

revised. And I think, as Mr. Pomeroy suggested, perhaps we should

actually allow that to set in for a while and let the American public

review that plan. Then if changes need to be made in the future,

obviously we would then have that opportunity to look at it, or

maybe even make recommendations, since this could be simply an

administrative matter.

But I think all of us agree that we want to give the best, most

complete information out, so people can make long-term financial

planning decisions. And second, if in fact there need to be corrections, they have that information, and then with the 1–800 number

they can make those changes and corrections.

The problem I have with some of the legislation that is being discussed is that it sounds like it is an attempt to move public opinion

in a way that may be moving to private accounts. Now, I do not

want to ever question any motives behind legislative actions, but

the fact of the matter is, it would have that tendency, if in fact the

information is just rate of return, for example, or if it compares Social Security with, obviously, the stock market, particularly in the

last decade in terms of the stock market.

The problem is that information in and of itself is terribly misleading. Because the administrative cost for Social Security is less

than one percent. In fact, it is 0.9 percent. And we have had a series of hearings over the last year, year and a half, on the whole

issue of Social Security. And this is not really the time to debate

the Social Security issue. I mean, we have other opportunities, and

we have had other opportunities on that. But this is just to inform

the public on those two principles that I mentioned: Financial planning abilities, and certainly to correct mistakes.

But the problem that I see is that, first of all, you have to factor

in the unfunded liability, which is over $8 trillion—about five

times, or four times the annual Federal budget. And obviously, Social Security does do that; whereas the marketplace, if you had individual accounts, would not do that. And that has to be factored

18

in. It would be misleading to the public if you did not have that

$8 trillion and you actually put that into the account.

Second, you know, you could be a day trader and use your individual account, and maybe have very minimal overhead costs; but

if you go into the market and hire one of the stock brokers, we estimated—and, you know, there are some variations—but it could be

anywhere up to 20 percent, and as low as 10 percent, in terms of

the overall cost of maintenance of one’s account over a period of

years. And if you annuitize that, you are talking about over a 40-

year period a rather significant sum of money: Maybe overall, 20,

25 percent of one’s entire account.

In addition, I would assume that we want to annuitize. At the

end of the day, you want to annuitize whatever money you have,

so that you then could pay it out for your life expectancy. And we

have talked to some insurance companies. Many do not even carry

that, because it is too complex, particularly if you want to put an

inflation kicker in there, the CPI. And women in particular need

that, because they live much longer than men. But that is anywhere from 15 to 20 percent, minimum, cost. And so you are talking about maybe 20, 30, 40 percent off the top. And so you need

to factor that in onto that statement, as well, and maybe make a

rather lengthy explanation of why you are adding all those factors

in.

And the problem there is that it then becomes somewhat meaningless. It does not give anyone real opportunities to understand

what this rate of return is all about. And I think we are going to

have testimony from Mr. Salisbury and from Henry Aaron and a

number of others in the fifth panel, in which they are going to discuss how complex and perhaps impossible it is to come up with

really a rate of return for somebody 30 years old, projecting what

it might be when he or she is 65 or 62 or 70 years old. And that

is the problem.

I really appreciate what you are all trying to do. We want to give

as much information as we can. But I think in the last analysis,

unintentionally, you are going to be giving out very, very misleading information that perhaps will create tremendous problems and

maybe create people taking actions that they will someday live to

regret.

Now, perhaps Mr. Weller, as a Member of the Committee, may

want to comment, or anyone else may want to comment on this.

But I think it is a serious issue. But we should restrict it really

to the issue of the statement, and how the statement will carry out

the two principles: That is, financial planning for the individual,

and how that individual can correct mistakes.

Mr. WELLER. Sure. Mr. Chairman, if I could respond to my friend

Mr. Matsui.

Chairman SHAW. Yes.

Mr. WELLER. And I know Mr. Matsui shares, as I do, a concern

for ensuring that workers have a right to know. We have worked

together on the issue, addressing particularly the cash balance conversion issue. We have partnered up on legislation that is bipartisan and helps ensure that workers have a right to know, if there

is a change in their pension, what it means to them when it is

their turn to retire.

19

And I really believe that this legislation which I have joined and

cosponsor with Representative Sununu works toward the same

goal. I would point out that the language required on the average

rate of return that taxpayers can expect to receive from the Social

Security retirement tax payments only would be listed on that form

addressing the rate of return on the Social Security tax that is

paid. It does not mention requiring any other comparisons.

Mr. MATSUI. If you could just let me respond, what is the purpose of that? Because the idea of the two principles—and I think

we all agreed to that when we passed this in the Omnibus Act to

have the Social Security Administrator implement this—were to

give accurate information, if the information is inaccurate, so that

the individual, the recipient, can then make that correction; and

two, so the individual can make a determination on future planning.

Mr. SUNUNU. If I could address that?

Mr. MATSUI. Well, if I may just—So why is that relevant, unless

you want to make a comparison?

Mr. WELLER. Sure. And I would like to briefly respond, but I

want to yield to my——

Mr. MATSUI. You cannot avoid—You cannot now say, ‘‘Well, we

do not really want them to make that comparison,’’ because that

is what this is really all about.

Mr. WELLER. Well, and I am not saying that they should not

have a right to compare. You know, I am going to yield in just a

second to my friend, Mr. Sununu. But you know, I believe this legislation really salutes the wisdom of the average worker today. I

find that workers are increasingly sophisticated when it comes to

making plans for their retirement, what the options are.

Mr. MATSUI. Would you agree, then, to put these other points in

here that I mentioned? You know, the unfunded costs, the costs of

annuitization, the costs of maintenance? Because if we want to respect their intelligence and their judgment, why do we not put all

that in there, that if you do invest in the private sector, these are

additional costs?

Mr. WELLER. Well, but I would point out that our legislation does

not require any statements regarding private sector investments.

Essentially, it is very simple. It just points out what the rate of return is on their taxpayer investment. They put an equivalent of

12.6 percent of their income, which is a big chunk of someone’s income over a lifetime, that is going into the Social Security Trust

Fund. And we believe that they have a right to know what the rate

of return is. They are sophisticated.

And let me yield to my colleague now.

Mr. SUNUNU. Yes, if I could make a few points that I think do

go directly to concerns that have been raised. First, regarding the

unfunded liability, that is also part of this legislation. There are

three parts. One puts the information that you raised concerns

about—the nature of the unfunded liability—in the report of the

Social Security trustees. Because I think that is important information. You raised it.

Mr. MATSUI. Yes, I was only referring to that with respect to the

rate of return issue. But you are right. I have not even discussed

that other part yet.

20

Mr. SUNUNU. You talked about the nature of the unfunded liability. You used a figure of approximately $8 trillion, I think, and I

have seen similar estimates. And we do think that is important.

And that is addressed in this legislation.

There is a second part of the legislation that deals with economic

models and actuarial models, and the fact that there is a real value

to making those available to researchers.

But regarding the rate of return information, we do not call for

a comparison of the rate of return on Social Security to any private

sector vehicle.

Mr. MATSUI. Well, why do you have that information in there?

I mean, it has to be for a purpose.

Mr. SUNUNU. Well, because the consumer—It does have a purpose. But we are not——

Mr. MATSUI. What is the purpose?

Mr. SUNUNU. If I might——

Mr. MATSUI. Please do.

Mr. SUNUNU [continuing]. At least finish my sentence here. Rather than prejudge a particular vehicle, compare it to a historic rate

of return on the stock market, compare it to a historic rate of return on Treasuries. We believe, I believe the consumer is able to

make that judgment. Compare it to the rate of return that they get

on their savings account. If I can finish——

Mr. MATSUI. Well, no, no. Is that what you want them to do with

that?

I have run out of time. And you are my expert. I need to ask you

these questions, because I have to make a judgment. Is that what

you want them to do, make comparisons? Because if you do——

Mr. SUNUNU. Well, I am trying to answer the question. To make

a comparison to the rate of return on their IRA, their 401(k),

whether they have a matching plan. I think that rate of return, a

fair estimate on the rate of return is of value.

Moreover, it is not merely a prospective rate of return. We include historical information that ought not to be in doubt, what

was the historical rate of return for those born in a particular year,

or over particular years—prior to 1940, or after 1940 for example.

And again, those are technical issues. And I believe that the Subcommittee is able, I hope, to make an objective determination to

what extent those kinds of estimates on historic rate of return

might be based.

Mr. MATSUI. Yes, thank you. If I could just have your answer on

this one question in terms of—since you do acknowledge that the

idea is to have them make this comparison—would you put in the

annuitization issue? Because they have to annuitization these private accounts. Would you put in the cost of this?

Mr. SUNUNU. Well, amortization?

Mr. MATSUI. Is that something that would be helpful to the general public?

Mr. SUNUNU. What is that? Cost of maintenance for a particular

private savings vehicle, a savings account, checking account, or

IRA, or 401(k)? We have disclosure regulations. My Fidelity mutual

fund——

Chairman SHAW. If we could have in the audience no talking.

The young lady down there, I can hear every word you are saying.

21

Mr. SUNUNU. The mutual funds that you or I might invest in

have to disclose the administrative costs of those funds. And I

think that is valuable consumer information. So that is already

being provided in the private sector. So I think there is a lot of

room for discussion about context for determining the range of historical data that might be provided, but I do not think the idea of

providing the consumer with information about rate of return is

without merit. And I think they can make honest judgments about

different private sector vehicles themselves, as they have to do already every day.

Mr. POMEROY. Mr. Chairman, if I might also respond?

Chairman SHAW. Yes, we are going to have to wrap this one up.

Mr. MATSUI. But if I could have this—and I apologize.

Mr. POMEROY. I will be very brief. You know, Mr. Sununu said

in his opening statement objectively reported information is important. I agree with that. But the rate of return question really does

not capture the value of the disability benefits provided through

Social Security, it does not capture the value of the survivor benefit

which is loaded in. Those have an absolute value. But if you are

just doing a rate of return calculation, that is not reflected. So it

is an erroneous figure.

Second, capturing the return over time does not in any way reflect the natural transition dimensions of implementing the Social

Security program. Did the first participants in Social Security get

a better rate of return than our children will? Absolutely. But that

is just the nature of bringing the program like this online, and I

do not think any of us would suggest that it should not have been

brought online. But bringing a program like this online involves

those kinds of variations. Now, putting that into a form without an

adequate explanation is going to be highly prejudicial; and what’s

more, I think, not accurate.

And then finally, they say that they have got to report that the

Social Security Trust Fund is not an economic asset. What is the

public going to make of that? I do not know what it means. The

Trust Fund is funded with Federal Treasuries. And as Chairman

Archer has noted in the hearings that I have attended, it is an absolute rock-solid commitment of the Federal Government that has

never, ever defaulted.

And so again, this is information that really is not objective information. It does not contribute to anything.

Chairman SHAW. No, I would correct the gentleman. We have

had testimony which has been unanimous pretty much with all the

experts. The question is, are Treasury bills held by the Federal

Government a real economic asset? And the economists tell us

‘‘No.’’ That is not my opinion, or anyone else’s. That is what the

economists tell us. But from the standpoint of the Government’s obligation to pay back what it borrowed from Social Security, I agree

it is rock-solid.

Mr. POMEROY. For the recipients’ standpoint, I think they want

to know, ‘‘Is this backed by the United States government, and will

it be there when I retire?’’ And I mean, I think the track record

is one hundred percent.

Chairman SHAW. I could only answer you this way; that case law

tells us that under the existing system there are no vested rights.

22

I would like to change that. That is the case law. That is not Clay

Shaw talking; that is the courts talking. That is why the Congress

can change the benefits.

Mr. POMEROY. Mr. Chairman, I look forward in trying to find

common ground with you on that question. I look forward, in the

event we cannot find common ground, to vigorous debate.

But one thing I do not think we want to do is to put misleading—

you know, where one side gets their little comments into this universal disclosure form that needs to provide Americans with hard

information about where they are at relative to Social Security so

they can plan their own financial savings and retirement.

Thank you, Mr. Chairman.

Chairman SHAW. I am not sure there is any disagreement in the

room.

Mr. Cardin?

Mr. CARDIN. I thank you, Mr. Chairman. I am wondering whether there has been a cost analysis done of this bill. Because it seems

to me that if we were to enact it, we would have to increase the

congressional budget by at least one staffperson an office, to deal

with the calls that we are going to get in our congressional offices

when this information hits.

We already get a lot of phone calls in our office on Social Security. And I do not know about your office, but my person in Baltimore who handles the calls can spend one-half hour to an hour

with one constituent on one issue. And it seems to me, to try to

explain the rate of return on their Social Security will be challenging to each Member of Congress.

John, I am trying to figure out your definition of ‘‘rate of return.’’

So let me just see if I can understand. I am going to give you a

chance to respond. How would you calculate the rate of return?

Someone gets this notice at 30 years of age, let us say. And the information there projects where that person is going to be 37 years

later. Are you adding up all the anticipated contributions that individual is making and then using a life expectancy based upon today’s life expectancy, or what we project the life expectancy to be

in 37 years for that individual? And do you factor out the two

points that Mr. Pomeroy mentioned about the survivor benefit and

disability insurance?

Mr. SUNUNU. To your last point first. First, calculating the actuarial benefit of the survivor benefit I think can be done. And to the

extent that this Subcommittee or those involved in the final

crafting of the legislation think that ought to be considered, I think

that is a very reasonable request. But I think that is a technical

problem more than anything. And obviously, on an actuarial basis

to calculate the value of that part of the program can be done.

Mr. CARDIN. On that point, would you do it based upon the person’s current family status, or the average family status in the

country?

Mr. SUNUNU. I think you can calculate the overall actuarial benefit of the program based on its outlays and payments for disability,

and back those anticipated future payments out of the trust fund

itself and out of the FICA tax base itself, and use an adjusted

FICA tax base for calculating rate of return.

23

Mr. CARDIN. The problem is that if I were to buy a disability insurance policy, it would be based upon my current status, not

based upon an average status. So would the Social Security Administration have to figure out what my current status is for a disability insurance policy?

Mr. SUNUNU. No, based on historical payments under the disability program——

Mr. CARDIN. But I’m 30 years old; I’m not married yet.

Mr. SUNUNU. And therein lies perhaps a misleading interpretation of the legislation. What the legislation calls for is including

language on the average rates of returns for taxpayers, as compared to the total amount of taxes that they might pay. And again,

this gets back to the language, looking at the adjusted rates of return for groups of workers born during different decades, talking

about what the forecasted rate of return is for those born after a

particular year.

And it is based on average rates of return; because I do not think

in the statement it is appropriate to suggest to someone that the

Social Security Administration, or anyone else, knows exactly how

long they are going to live.

Mr. CARDIN. I think that is a good point. I guess an easier way

to get at what you are trying to do—which I disagree with—but I

think an easier way would be just to point out what the Social Security system is as it relates to the age of your birth and your average income. Because it is progressive. We make no bones about it

being progressive.

Mr. SUNUNU. That is an alternative approach to trying to provide

similar information about the nature of the program and the benefits received relative to the taxes paid. And I am perfectly willing

to concede that there may be, again, disagreements in the exact

context of presenting this information. But I think presenting information in and of itself, and trying to communicate anticipated rate

of return for the program as a whole, is not in and of itself a bad

idea.

Mr. CARDIN. Yes, but let me make an observation. I understand

what you are trying to do. And I think the better way to do it is

to use the envelope to include additional information, and not relate it to the individual, because relating it to the individual would

be extremely confusing.

But I would also take what Mr. Pomeroy and what Mr. Matsui

have said; in that, let us give this a chance to work first. Let us

get an evaluation of what we have already done. The information

is being sent out. We could include more information if we thought

it was useful, and if we could do it in a way that does not try to

show any particular bias to any policy objective, but is one to try

to get our constituents more informed as to the nature of Social Security. I think we could work on that in a bipartisan way. But I

think the way your bill is worded causes many of us to have some

concerns.

And I appreciate your patience, Mr. Chairman.

Chairman SHAW. Thank you. I have just run out of patience.

[Laughter.]

24

Chairman SHAW. I would like to thank this panel for being here

this morning—‘‘this morning’’—this afternoon, excuse me. I will be

saying ‘‘this evening’’ pretty soon.

Mr. Commissioner, we have your full statement, which will be

put into the record. You may proceed as you see fit.

STATEMENT OF KENNETH S. APFEL, COMMISSIONER OF

SOCIAL SECURITY

Mr. APFEL. Thank you, Mr. Chairman. And I will be very brief,

for the sake of the length of the hearing. Mr. Chairman, Mr. Matsui, Mr. Weller, Mr. Cardin, Members of the Subcommittee, thank

you for inviting me to discuss one of the Agency’s premier achievements: The Social Security Statement.

One of our basic responsibilities is to help Americans understand

the importance and value of Social Security and how it fits into

their long-term financial planning. About 152 million workers support our Social Security system with their tax contributions, and

about 45 million individuals receive monthly Social Security retirement, disability, or survivor benefit payments.

The annual Social Security Statement is the best way we have

to help people understand the basics of Social Security, and to help

them prepare for their long-term financial security. As you know,

the statement is the new version of the Personal Earnings and

Benefit Estimate Statement that we have made available since

1988. Since ’95, we mailed the statement to people by age grouping,

and provided more than 70 million to workers age 40 and older

through March 1999.

Beginning on October 1, 1999, Social Security launched the largest customized mailing ever undertaken by a Federal agency, when

it began mailing out the newly designed statement to 125 million

workers over age 25. About a half-million statements are mailed

each day, a total of about 10 million each month. Workers automatically receive their statements about 3 months before their

birthday.

The statements provide workers with a list of their yearly earnings on record at Social Security, taxes paid, and benefit estimates

for the Social Security retirement, disability, and survivors programs. And retirement benefit estimates give workers estimates of

projected benefit amounts at age 62, at full retirement age, and at

age 70, helping people plan when to retire.

The statements also give workers a chance to review their earnings record on which future benefit payments will be based. And

the statement provides general program information, and tells people how to contact us if they have any questions.

The statement has been very well received. Several financial columnists have praised its value as a financial planning tool. And a

recent survey shows that more than two-thirds of the people who

received the statement were knowledgeable about Social Security,

compared to about half of those who did not receive the statement.

One of our goals in designing the new statement was to make it

user friendly and easily understood. We have worked very hard to

achieve this goal. Focus groups and survey participants, as well as

stakeholder organizations, overwhelmingly found the redesigned

statement an improvement over its predecessor. I am also proud

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that the statement received Vice President Gore’s Plain Language

Award.

Since its release in October, we have made further changes to

improve the statement. For example, we included an explanation

that the benefit estimate may be different from the worker’s actual

benefit amount, because of earnings changes in future years or

changes in laws governing benefit amounts. And we have included

information on the long-term challenges facing the program, including the projected trust fund exhaustion date.

Should further information be included in the statement? As you

know, proposed legislation would require Social Security to include

an individualized estimate of the rates of return workers would receive on their contributions to the Social Security system. The intent is to provide enough information to let workers compare Social

Security with other investments.

When Social Security originally designed the current statement,

we considered, but rejected, this idea. Social Security, like other social insurance programs such as Medicare, is not designed in a way

that would be appropriately evaluated by individual rate of return

estimates. The program is designed to provide a foundation of income for workers and their families when the worker retires, becomes disabled, or dies.

Historically, the program has been judged by the extent to which

benefits replace pre-retirement earnings, or how much those benefits help reduce poverty; not by estimates of individual rates of return on contributions. In addition, the General Accounting Office

concluded that adding rate of return information could significantly

increase the statement’s length and complexity, and undermine our

efforts to provide a simplified but useful statement.

I believe it is germane to remember that Social Security is a social insurance program, and that individual rate of return information would not capture many complex aspects of the program.

These include the fact that Social Security provides not only retirement benefits, but also dependent and survivor benefits; that it is

a family program which provides greater benefits for larger families or that assures income replacement rates for lower income

workers that are greater than for workers with higher incomes.

Mr. Chairman, in conclusion, let me say that Social Security is

committed to making every effort to ensure that the public understands Social Security and its importance to them and their families’ financial future. We have, in fact, just announced a new service: An online Social Security retirement planner which will allow

people of any age to compute estimates of their future Social Security retirement benefits on our SSA website. The retirement planner provides people with three options, which allow for lesser to

greater degrees of sophistication in computing benefit estimates—

all with complete privacy.

This new service and other Agency efforts will complement the

Social Security Statement, which I strongly believe is our most valuable tool to increase public understanding of our programs and to

help people plan for their financial future. The statement explains

and makes real to people that Social Security is indeed a foundation on which they can build, together with other investment options, their financial future.

26

I will be happy to answer any questions that you have at this

time.

[The prepared statement follows:]

[Attachments are being retained in the Committee files:]

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

Mr. Chairman and Members of the Subcommittee:

Thank you for inviting me to discuss one of the Agency’s achievements of which

I am most proud—the Social Security Statement.

Background

Social Security touches the lives of virtually all Americans. At least 152 million

workers pay into Social Security and more than 44.6 million individuals receive

monthly Social Security benefits because they are retired, disabled, or dependent

family members or survivors of a worker. Social Security is the largest source of income for most elderly Americans and keeps millions of elderly out of poverty.

Throughout its history, Social Security has made a difference in the lives of Americans, and one of our basic responsibilities to the public is to help Americans understand the value of the Social Security programs and their importance to them and

their families. The Social Security Statement is the most significant vehicle we have

to increase the public’s understanding of the basic features of Social Security and

enable Americans to prepare for their long-term financial security. As part of our

ongoing public education efforts, SSA began in 1988 to issue earnings and benefit

estimate Statements to individuals who requested them. Since then, SSA has sent

about 3 million of these statements annually.

SSA Initiated Statements

In amendments to the Social Security Act in 1989 and 1990, Congress required

SSA to send Personal Earnings and Benefit Estimate Statements (PEBES) to workers. SSA was required to mail a PEBES to all workers aged 60 or over in FY 1995;

in FY 1996 through FY 1999 to individuals who reach age 60 in those years; and

annually to all covered workers age 25 and older beginning in FY 2000. In addition

to the PEBES mailing required by law, SSA sent PEBES to increasingly younger

individuals in advance of the schedule in the law. SSA sent a PEBES to workers

aged 40 and older—about 73 million people—between September 1995 and March

1999.

Beginning October 1, 1999, the SSA launched the largest customized mailing ever

undertaken by a Federal agency when it began sending a newly-designed PEBES,

now called the Social Security Statement. SSA staggers the mailing of the Statements throughout the year, with approximately a half million Statements delivered

each day, a total of about 10 million mailings delivered each month. The Statements

are mailed so that workers will automatically receive their Statements about three

months before their birth month.

The Statements provide workers with a list of their yearly earnings on record at

SSA, information about their eligibility for benefits, and estimates of these benefits.

Estimated retirement benefits at age 62, at normal retirement age (the age at which

unreduced benefits are payable) and at age 70 are provided. Thus, the Statements

help individuals decide when to retire and claim benefits. The Statement also contains estimated totals of the Social Security taxes that have been paid by the worker

and by his/her employer over the individual’s working career. The Statements provide workers an opportunity to review the earnings (or self-employment income)

posted on their Social Security record to ensure their record of earnings is complete

and accurate. This is an important feature because the amount of a worker’s future

benefits will be based on his or her earnings record. SSA also provides general information and explanations to help individuals understand their personal data and

how to contact us if they have any questions.

The new Statement, like its PEBES predecessor, provides estimates of Social Security retirement, disability, and survivors’ benefits that workers and their families

could be eligible to receive now and in the future. To design the new form and simplify the language, SSA used extensive public and employee input. The new design

is based on the results of testing four prototypes with focus groups in three different

age groups (ages 25–35, 36–50, and over 50). We also obtained additional public

input through a nationwide mail survey of 16,000 randomly selected individuals

from the same age groups. We also received comments from agencies and organizations that represent diverse sections of the public. We found that focus group and

mail survey participants alike overwhelmingly found the redesigned Statement an

improvement over PEBES. Communicating technical and complicated information in

27

a way that is understandable to a diverse public can be difficult, but SSA has

worked diligently to ensure that the message in our Social Security Statement is

clear. I am proud that the Social Security Statement received Vice President Gore’s

Plain Language Award.

I am pleased to report that the results of a recent survey, undertaken at SSA’s

request, revealed that receipt of a Statement has helped in increasing Americans’

understanding of Social Security. Sixty-eight percent of the people who recalled receiving a Statement were knowledgeable about Social Security, as compared to 53.3

percent of persons who did not recall receiving a Statement. The survey also found

that individuals who have received a Social Security Statement from SSA have a

significantly greater understanding of some important basic features of Social Security. Those who have received a Statement are significantly more likely to know that

(1) the amount of Social Security benefits depends on how much they earned; (2)

Social Security pays benefits to workers who become disabled; (3) Social Security

provides benefits to dependents of workers who die; and (4) Social Security was designed only to provide part of total retirement income. The survey validates the performance measures we use to track our progress in meeting our ‘‘Public Understanding’’ strategic goal. We track both the increasing numbers of Statements we send to

the public and the increasing public knowledge about our programs. Awareness of

the Statement increased from 49.5 percent of the public in 1998 to 62.2 percent

(about 125 million Americans) in 1999. SSA’s public education activities to announce

the Statement appear to have been very successful. This is significant because

awareness is the first step to knowledge.

Comments we have received from those who got the new Statements indicate that

the Statement not only helps the public understand the Social Security program but

assists in financial planning. In fact, 66% of those surveyed said that the Statement

would be helpful for that purpose. In addition, the favorable reaction from financial

columnists all over the county has reinforced for the public the importance and usefulness of the Statement. I have attached to my testimony a number of such columnists’ reactions for inclusion in the record.

Since its release in October, we have made further changes to improve the presentation of the material contained in the Statement. We have added information about

Social Security’s future, pointing out that Social Security will be there when workers retire, but that changes will be needed in order to resolve the program’s longrange financial issues. We have included an explanation that the benefit estimate

may be different from the worker’s actual benefit amount because of changes in his

or her earnings in future years and any changes that could occur in the current

laws governing benefit amounts. We have also included information on the longterm challenges faced by the program, including the date when benefits exceed income and the date of the exhaustion of the trust funds.

We will continue to make changes to the Statement as needed. SSA immediately

updates the Statement for legislative changes, when a new Trustees Report is issued

or if an error is detected. At the end of the calendar year, we update the Statement

to reflect changes in the maximum covered earnings amount, retirement test limitations, and changes to the benefit calculations. In conjunction with these necessary

end-of-year changes, we review public reaction, Congressional concerns, and employee input to identify and include suggested revisions and additions to the Statement that would make it more useful and understandable for recipients. Of course,

in the near future we will be updating the Statement to reflect the 2000 Trustees

Report and the enactment of HR5, the bill that abolished the Social Security earnings limit for Social Security beneficiaries at or above the normal retirement age.

As we continue our efforts to educate the public about the value of our programs

and their role in family financial planning, SSA will be conducting information campaigns throughout fiscal year 2000 encouraging individuals to use the information

in the Statements to prepare for their financial futures.

Last week, we unveiled a new electronic service to help Americans better prepare

for their financial future—an online retirement planner. SSA’s online retirement

planner will allow individuals to compute estimates of their future Social Security

retirement benefits online at the SSA internet website—www.ssa.gov.

Our new Internet service, Social Security Retirement Planner, will assist workers

with their retirement planning by helping them understand the amount of Social

Security benefits they can expect in retirement. With this information and with information from their employer about private pensions, workers will be able to make

better informed decisions about their family savings and investment needs. Social

Security is the foundation on which to build a stable financial future; but a comfortable retirement has always rested on a three-legged financial stool—Social Security, pensions and savings.

28

To maintain privacy and to protect records from unauthorized users, none of the

calculators are linked to individual earnings records or any other information in

SSA’s database. All benefit estimates are based strictly on input from the users.

The Social Security Retirement Planner also walks individuals through the retirement planning and application process. The service offers valuable information on

issues to consider when contemplating retirement, what documents are needed

when applying for benefits, other potential benefits for the worker or family members, and how and where to apply for benefits.

Cost of Issuing the Statement

The Social Security Statement is completely funded through SSA’s administrative

budget (from the Social Security Trust Funds). The cost to produce the annual mailing to 125 million individuals is about $70,000,000 about 56 cents per recipient.

Proposal to Revise the Statement

All of us here today are well aware of the recent debates regarding plans to restore long-term solvency for the Social Security program. As part of the discussions,

legislation has been proposed that would require SSA to place on the Social Security

Statement an individualized estimate of the rates of return workers would receive

on their contributions to the Social Security program. The intent of the proposal is

to provide information that would enable workers to compare the current Social Security program with other investments. I mentioned earlier in my testimony that

SSA conducted extensive surveys to design a Statement that is both useful and responsive to the public. Clearly, our goal has been to provide a Statement that contains necessary information for the public to understand our programs and plan for

their financial futures. As part of that effort, SSA considered but rejected including

additional information such as an individualized rate of return on the Statements.

In September 1998, the General Accounting Office reported that there was substantial disagreement about whether it is appropriate to apply the rate of return

concept to the Social Security program. The GAO report said:

Supporters of such an application point out that a rate of return would provide

individuals information about the return they receive on their contributions to the

program. However, others contend that it is inappropriate to use rate of return estimates for Social Security because the program is designed to pursue social insurance goals, such as ensuring that low-wage earners have adequate income in their

old age or that dependent survivors are adequately provided for. In addition, calculations for rates of return rely on a number of assumptions that affect the resulting estimates. For individuals, the actual rates of return can vary substantially from

the estimates due to various uncertainties, such as a worker’s actual retirement age

and future earnings.

SSA strongly agrees that it is inappropriate to apply individual rate of return estimates to Social Security. Social Security, like other social insurance programs such

as Medicare, is not designed in a way that it could be appropriately evaluated by

individual rate of return estimates. The program is designed to provide adequate

income for workers and their families when the worker retires, becomes disabled,

or dies. Historically, the program has been judged by the extent to which benefits

replace pre-retirement earnings and how much those benefits help reduce poverty,

not by estimates of the individual rate of return on contributions.

Furthermore, the program’s full value cannot be accounted for when using individual rate of return estimates. Social Security is more than a social insurance program that protects people when they retire. It also protects workers against other

risks over which they have little control. Almost 3 in 10 of today’s 20 year-olds will

become disabled before age 67 and 1 in 6 Americans will die before reaching age

67. Individuals benefit from Social Security not just through their own worker benefits but through the protection provided to workers’ families against these risks.

Currently millions of Americans are directly benefiting from that protection: about

1 in 3 beneficiaries is not a retiree but a disabled worker, dependent of a disabled

worker or a survivor of a worker who has died.

Our ability to inform workers of the rate of return on their Social Security contributions is limited for several reasons. For example, the Social Security program

is a family program that, generally, provides greater benefits to workers with larger

families. But our records do not include family linkages until benefit applications

have been filed. Similarly, replacement rates for lower income workers are greater

than for workers with higher incomes. Without knowing lifetime average earnings

or the size of a worker’s family, any information provided in the Social Security

Statement could significantly misstate many workers’ actual rate of return. Moreover, any rate of return estimate would be extremely sensitive to periods of unemployment and other related factors.

29

In addition, the GAO report concluded that adding rate of return information to

the Statement could significantly increase the Statement’s length and complexity

and undermine SSA’s effort to provide a simplified but useful Statement. If rate of

return estimates were added to the Statement, detailed explanations would be required about how the calculations were made, and the assumptions that were used

about the individual. In addition, comparisons between rates of return estimates for

Social Security and private investments would need to include the transaction and

administrative costs and acknowledge the additional risk associated with private investments.

We carefully weighed considerations to include individual rate of return estimates

when developing the Statement. In addition to finding that individual rate of return

estimates are an inappropriate method of representing the benefits’ value, we

agreed with GAO’s findings that adding this information would increase the complexity of, rather than enhance, the Statement. Clearly it would not serve the public

to provide them with a tool that misrepresents the value of their benefits and is

so complex they would need an accountant or an actuary to translate the information.

Conclusion

Mr. Chairman, SSA is dedicated to provide world class service to all of the people

it serves. Social Security will continue to play a key role in the lives of Americans

when they retire, or become disabled, or die with dependents or survivors. SSA is

committed to ensuring that the public understands Social Security and its importance to them and their families’ financial future. The Social Security Statement has

been a valuable tool to increase public understanding of our programs, and explain

that Social Security is indeed a foundation on which they can, together with other

investment options, build their financial future. Thus, the Statement helps people

understand not only what Social Security is, but also what it is not. I am very proud

of the overwhelmingly positive reaction the Statement has received, and we will continue to monitor the public’s reaction to it.

I will be happy to answer any questions you may have.

Chairman SHAW. Thank you.

Mr. Matsui?

Mr. MATSUI. Thank you, Mr. Chairman.

I just want to thank you, Mr. Apfel, for your testimony and for

the responsiveness to the GAO in terms of the recommendations

that they have made. I think this form does appear to be easier to

understand and easier to kind of read and figure out, so I think

it has served its purpose. And I think you and your office, in working with the GAO, have probably made a better form for the American public.

I know that on the first form you, or at least some group, did

some opinion surveys in terms of the impact on the public, what

the public might think about, and it was all very positive. Have

you begun that with the second form? Or is it too early yet?

Mr. APFEL. We have started that. And we have found a significantly positive response. There is greater knowledge about Social

Security and greater knowledge of the key elements of Social Security and the fact that it has disability retirement, and survivors

programs; that benefits are based upon what a person’s earnings

are over the lifetime; that the program is inter-generational; and

that taxes paid help support the elderly, and so forthetera. So we

are finding a growing understanding of Social Security. That is

issue number one for us.

Issue number two, then, is, how do we help people plan for their

own financial futures? And again, I think we are finding a majority

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of Americans view this as a helpful document to help them personally plan for their financial futures.

We will continue to do survey information. But we really believe

two and three and 4 years from now that this will have an increasing impact on the American public to help them plan for the future.

Mr. MATSUI. And last, in terms of making sure that you were not

biased and your office was not biased in preparing this form, what

kinds of checks did you use? You know, because obviously, we are

going to be reforming the system.

In fact, you had stated in your statement to the American public

that it will be unfunded by 2034. And obviously, it is an issue,

what system we are going to be moving to over the next few years.

How did you ensure that there was no bias one way or the other?

Mr. APFEL. Well, we conducted a number of focus groups. We did

mailings with thousands of Americans. We listened to comments.

We reached out to organizations, to take a look at what we were

trying to provide. And we assimilated all that information to provide what I believe is good, solid information for American consumers.

The General Accounting Office was quite critical of the form

years ago, and said that, ‘‘This has got to be simplified so that individuals can use it to help in their own personal financial planning.’’

And I believe we have met that test. I believe this is good, solid

information that has gone through a number of focus groups, surveys with the American public, discussions with organizations, and

we are very proud it. As I earlier stated, the form has been praised

by several financial columnists as a valuable planning tool.

I must say, one of my personal greatest prides is this statement.

I think that it is one of the best things that we have done for years

for the American public. It is important for their own financial

planning; but also, we now include information about the long-term

challenges that the system faces: The 2015 date, when revenues

start to be less than anticipated expenses; the 2034 date, now 2037;

the percentage of benefits that can be funded after that period of

time. This is information to help people understand what Social Security is, but also to provide some strong caveats that there is a

need for change in the future.

We hope this will complement our other efforts. And we are very

proud of what we do.

Mr. MATSUI. Thank you. Thank you, Mr. Chairman.

Chairman SHAW. Mr. Collins?

Mr. COLLINS. Thank you, Mr. Chairman.

Mr. Commissioner, how are you today, sir?

Mr. APFEL. How are you?

Mr. COLLINS. Fine. I apologize for being a little bit late. I got in

on the tail-end of your comments, and was trying to read through

them hurriedly.

On the annual statement, I was trying to find the annual cost—

Oh, here it is, 125 million individuals; $70 million.

Mr. APFEL. That is correct. About 56 cents per letter. And that

includes not only the mailing cost and the processing cost, but the

fact that we now receive about two million to two and a half million extra inquiries a year about the statement. So people are calling to say, ‘‘Give me more information.’’

31

Also, the corrective actions. There are about a half-million requests to change the earnings records on the statement. In other

words, someone will call in and say, ‘‘In 1977 I had earnings, and

it doesn’t show up here.’’ So it is very important for people to be

doing that now, rather than waiting until the day before they are

going to retire.

Mr. COLLINS. Right.

Mr. APFEL. So there are about a half-million of those. So all of

those costs together—not only the mailing cost and the distribution

cost, but the telephone calls and the corrective actions—are all

about $70 million, 56 cents per mailing.

Mr. COLLINS. OK. Well, now, do you see some point in time in

the future—this will be an annual review now, an annual statement—that the time might be extended to maybe every 2 years or

every 3 years, once you kind of get people into the system and they

understand and have had an opportunity correct those measures;

that then we could maybe reduce the costs by extending it out

some?

Mr. APFEL. Mr. Collins, I do not disagree with the notion that in

the future, some time in the future, there may be a need to send

this less than every year, particularly for the youngest recipients.

I would say that we are several years away from making that assessment.

I would not recommend it at all right now. But we may find after

two or three or four or 5 years that individuals have now read it;

they are now keeping it in their financial folder; every year they

have got the information. Possibly, for some groups, particularly

younger workers, it might be better at that point in time to have

it be, say, every other year.

I would also say that in the future, particularly for older workers, that we may want to expand this some, to provide better information for individuals as they get near retirement, to give them

better information about their own dates about when to retire.

So I would see that this always will be an evolving document.

Every year, I would like to be able to assess, ‘‘How do we make improvements in the document? How do we reach out better to the

American public? Should we customize the information to different

age brackets?’’ I think those are all good things for us to be looking

at.

Right now, I would agree with Mr. Matsui and Mr. Cardin. I

would not recommend major changes this year, until we have had

a year or two under our belt.

Mr. COLLINS. To get a feel for it.

Mr. APFEL. But in the long run, that might make sense.

Mr. COLLINS. OK. Well, good. Now, you can also go to your

website and get a lot of this information, too; is that not true?

Mr. APFEL. You can go to the website. We have just announced

the creation of a new retirement planner, where an individual can

compute estimates of their retirement benefits. However, they cannot get this same information directly from the planner, because it

is not directly tied into our private records.

Mr. COLLINS. OK.

Mr. APFEL. The decision was made two to 3 years ago not to provide access to that information, until privacy could be assured.

32

But we now have three separate calculators that people can use

to go with a number of economic assumptions, or different options

in the future, to be able to make their own projections based upon

future wages, what their disability benefits might be, what their

government pension offset might be—a whole series of different

things, that we think is a very good service for the American public.

Mr. COLLINS. Well, that is good. That is really the only question

I had. And I know it is out in the future that we have to look at

that.

I want to say thanks, too, for Bill Halter and your other staff,

who jumped in here about 10 days ago when we had a truck that

broke down that had 125,000 checks on it headed for Georgia.

Mr. APFEL. And Mr. Collins, where was that truck? I know we

found it.

Mr. COLLINS. I think it was in Charlotte; wasn’t it? The last I

heard.

Mr. APFEL. I believe so. And you alerted us, and we jumped, and

so did the Post Office. And we got right on it, and we fixed the

problem.

Mr. COLLINS. You sure did. And I appreciate that very much, and

so do the people that I represent. Thank you.

Mr. APFEL. Thank you, sir.

Chairman SHAW. If that truck was headed for Florida, the state

would have closed down. [Laughter.]

Mr. APFEL. That is right.

Chairman SHAW. Commissioner, I would just like to make one

possible suggestion with regard to the statement that you do send

out: It is almost too slick. And I say that in a complimentary

way——

Mr. APFEL. We will take it.

Chairman SHAW. Because as you are reading through it, you do

not realize when you get down to your own personal information.

And if I were going to change it, I would say, well, put all of this

text first, and then put the individual’s information on one page,

so they know when they are getting down to information about

themselves. I think probably a lot of people sort of wear out before

they get to it, and do not realize this is a personal statement about

them.

But the information is good, but the transition into the personal—I say that because I was reading my own statement that I

got a couple of months ago. And I kept saying, ‘‘Is this about me?’’

And I sort of skimmed it, because I felt I knew most of this stuff—

At least, I hope I did. Maybe I should read it carefully. [Laughter.]

Mr. APFEL. Mr. Chairman, I know you do.

Chairman SHAW. But you know, when I got to my own personal

stuff I sort of said, ‘‘Oh, that is me.’’ Because there is nothing on

there that looks like you are getting to a typewriter or something

that has been filled in that is personal about the individual. That

is the only comment that I have.

Mr. APFEL. Well, Mr. Shaw, it is our goal to continually find

ways to make this better. The General Accounting Office, in testimony you are about to hear, will consider it to be a much improved

document that meets its purpose for basic information. And it also

33

indicates the statement is probably not the right vehicle for a rate

of return discussion, which I think is appropriate—that I believe is

the right decision: It should not be in there.

But they also make a series of suggestions. And you have just

made another one. And we need to assess those every year to determine how to improve the system.

Chairman SHAW. OK. That is not meant to be a criticism. It is

just a suggestion as to how I read the statement, where I was sort

of looking for my own personal stuff, and then realized I was in the

middle of it by the time I got through it.

We thank you very much for being here, and congratulate you on

the progress you have made. Thank you.

Mr. APFEL. Thank you, sir.

Chairman SHAW. Now we are going to hear from the United

States General Accounting Office. We have got Barbara Bovbjerg.

And Barbara, I am going to learn to pronounce your name correctly one day, instead of always having someone jump up and tell

me, whisper it in my ear.

She is the Associate Director of Education, Work force, and Income Security Issues; Health, Education and Human Services Division.

And Ms. Bovbjerg is accompanied by Kay Brown, the Assistant

Director of Education, Work force, and Income Security Issues; the

Health, Education and Human Services Division. And by Ken

Stockbridge, who is a senior evaluator, Education, Work force, and

Income Security Issues; Health, Education and Human Services Division.

Welcome. We have your full statement, and it will be made a

part of the record. And we invite you to summarize as you wish.

STATEMENT OF BARBARA D. BOVBJERG, ASSOCIATE DIRECTOR, EDUCATION, WORKFORCE, AND INCOME SECURITY

ISSUES; HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION, U.S. GENERAL ACCOUNTING OFFICE; ACCOMPANIED

BY KAY BROWN, ASSISTANT DIRECTOR; AND KEN STOCKBRIDGE, SENIOR EVALUATOR

Ms. BOVBJERG. Thank you, Mr. Chairman, Members of the Subcommittee. I am pleased to be here today to discuss information the

public should have about Social Security, and how that information

could be provided.

Specifically, I would like to address the role that the individualized Social Security statement plays in providing that information.

Beginning this year, the Social Security Administration must provide such a statement to almost every U.S. worker over age 25.

Hence, this statement can be a primary means to convey important

Social Security related information to a broad range of American

workers.

I would like to organize my remarks by describing three broad

types of information the public should have about the Social Security program, and discussing the role of the individualized statement for each type.

First, basic information about program benefits. Individuals need

information about what benefits they can expect from Social Security for their personal financial planning. Workers should also be

34

informed that their Social Security benefit levels depend upon their

average lifetime earnings, and that the benefits are meant to be a

foundation for retirement income, not a replacement for pensions

and other forms of saving.

The individualized statement is one of the key vehicles for providing such basic information. As such, it represents not only an

important tool for workers’ financial planning, it also provides the

means for program participants to check SSA’s records of their past

earnings.

Because the statement reaches a wide audience and is the only

direct communication that many workers will have with SSA until

they retire, the statement must communicate simply and clearly. It

has not always done this. SSA’s programs are complex, and it can

be challenging to explain them in simple, straightforward language, without providing so much information that it overwhelms

the reader.

In GAO’s review of earlier versions of the statement, we recommended that SSA make revisions to shorten it, to improve its

layout and design, and to simplify its explanations. The newly revised format of the statement is indeed shorter and better organized, and thus communicates more effectively.

Let me turn now to the second type of information individuals

need. The public should also understand the financial status of the

Social Security program. Knowing this helps workers to understand that in the future some combination of revenue increases and

benefit reductions will be necessary to restore solvency, and that

they should view their personal benefit estimates in that context.

In the most recent version of the statement, SSA has indeed

added information on this topic, explaining that, absent a change

in law, payroll taxes will fall short of paying full benefits owed.

More technical and detailed financial information is available in

the Trustees’ Report and the annual financial report of the U.S.

Government.

These reports are widely used by experts and specialists, but the

information they contain would be difficult to convey clearly in the

statement without confusing general readers. For this reason, such

technical information should not be included in the individualized

statement, but should be readily accessible to those who request it.

Let me now discuss the third type of information the public

should have. In addressing the Social Security solvency problem,

the public needs understandable, independent, and objective information to appreciate the difficult choices our Nation faces. To this

end, as you know, GAO has developed criteria to help provide balance and structure to evaluating reform proposals. The criteria balance the extent to which proposals would achieve sustainable solvency with the adequacy and equity of the benefits structure, and

with the feasibility of the implementation and administration. We

have observed the importance of balancing the criteria, and have

stated that no single criterion should be considered in isolation.

Some participants in the reform debate focus especially on the

implicit rate of return as a primary indicator of program success,

and have called for rate of return estimates to be included in the

individualized statement. Substantial controversy surrounds applying the rate of return concept to Social Security, with some arguVerDate 20-JUL-2000 16:12 Oct 23, 2000 Jkt 061710 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 K:\HEARINGS\66357.TXT WAYS3 PsN: WAYS3
35

1See the list of related GAO products at the end of this statement.

ing—and we have heard that today—that such a concept is inappropriate to a social insurance program.

GAO has reported that rate of return estimates are inherently

very uncertain, especially for specific individuals, because such

rates vary with life expectancy, earnings, and family size. We have

also observed that it is crucial to compare such returns only with

those for comprehensive reform proposals. To be clearly understood, then, any published estimates should include an explanation

of how they are calculated, the degree of uncertainty that would

pertain, and what they can be compared to.

In our view, adding rate of return information to the statement

would make it longer and more complex, and could undermine its

purpose. Ultimately, such information should be provided as part

of a broader evaluation of reform proposals, and in a context that

focuses on reform options, not benefit disclosures.

In conclusion, the public should have easy and timely access to

a wide range of reliable, consistent, and verifiable information. The

Social Security statement has come a long way toward more successfully meeting its purpose of providing basic information for individual workers. However, it is not the right vehicle for the complex technical information that requires extensive and complicated

explanation.

That concludes my statement, Mr. Chairman. We will be happy

to answer any questions you have.

[The prepared statement of follows:]

[An attachment is being retained in the Committee files.]

Statement of Barbara D. Bovbjerg, Associate Director, Education, Workforce, and Income Security Issues, Health, Education, and Human Services Division, U.S. General Accounting Office

Mr. Chairman and Members of the Subcommittee:

Thank you for inviting me here today to discuss information the public should

have about Social Security and strategies for providing that information. Social Security touches the lives of virtually all our nation’s citizens. Last year, it paid $386

billion in benefits to over 44 million beneficiaries, including aged and disabled workers and their dependents and survivors. Ninety percent of elderly households received Social Security benefits, and 17 percent of such households received no income other than Social Security. Moreover, Social Security collected $460 billion in

payroll taxes from over 150 million workers, or 96 percent of the nation’s workforce.

Currently, 12.4 percent of workers’ covered earnings are paid in payroll taxes, divided equally between workers and their employers. Clearly, to help in their personal financial planning, our citizens should know where their Social Security payroll taxes go and what benefits they can expect to receive. In addition, Social Security faces a significant long-term financing shortfall because of the aging of our population and other demographic and economic trends. The public should also have

the information it needs to participate in the debate about Social Security’s future.

Today I would like to discuss the three broad types of information the public

should have about the Social Security program—basic information about program

benefits, the current and projected financial status of the Social Security program,

and information about proposed changes to the program. For each type of information, I would like to focus on what role the individualized Social Security Statement

might play in providing it. My testimony is based on work we have done over the

past few years 1 and an assessment of the most recent statement.

In summary, the individualized Social Security Statement currently plays a specific and important role in providing some, but not all, of the information the public

needs. First, individuals should have clear and easy to understand information

about what benefits they can reasonably expect to receive. This is the specific and

primary purpose of the Social Security Statement, which is now sent annually to

nearly all working participants. In addition, the statement helps individuals and the

36

2The 2000 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Mar. 30, 2000. 3The benefit formula calculates average lifetime earnings after adjusting earnings for inflation and growth in average real wages.

Social Security Administration (SSA) ensure that individual earnings records are accurate, which in turn is crucial to providing accurate benefit payments. SSA has recently revised this statement so that it more effectively conveys this important information. Second, the public should understand the current and projected financial

status of the Social Security program. The Social Security Statement now contains

a brief disclosure about this, but technical and detailed information about it is more

appropriately conveyed through other vehicles, such as the annual Trustees’ Report 2 and the federal government’s consolidated financial statements. Third, the

public should have information to help it evaluate different proposals to restore solvency and make other program changes. However, such information is complex and

must be presented in a fair, consistent, and comprehensive way that helps the public weigh and balance the various difficult choices that must be made. This type of

information goes beyond estimating benefits and verifying earnings, which is the Social Security Statement’s central purpose. Given the difficulties SSA has had in

making just this information clear in the statement, adding information on reform

proposals would likely make the statement lengthy, more complex, and even more

difficult to understand. Doing so could undermine the basic purpose of the statement.

Background

The Social Security trust funds have a projected financial shortfall or funding gap

of approximately $3 trillion over the next 75 years. This long-term financing problem is largely a result of greater life expectancy, lower birth rates, and the forthcoming retirement of the baby-boom generation. Social Security is financed primarily on a pay-as-you-go basis, which means that current workers pay current retirees’ benefits. Today, there are approximately 3.4 workers for every beneficiary,

and by 2030 this number is projected to fall to 2.1. Thus, in the foreseeable future

relatively fewer people will be paying into the system and more people will be drawing benefits.

Restoring Social Security’s long-term solvency will require some combination of increased revenues and reduced expenditures. Various options are available within

the current structure of the program including raising the retirement age, reducing

inflation adjustments, increasing payroll tax rates, and investing trust fund reserves

in higher-yielding securities. In addition, some proposals would go beyond restoring

long-term solvency and would fundamentally alter the program structure by setting

up individual retirement savings accounts and requiring workers to contribute to

them.

Public Should Have Basic Information on Estimated Benefits to Plan Personal Finances

Individuals need basic information on the Social Security program for their personal financial planning. This information includes what benefits workers can expect for themselves, their dependents, and their survivors when they retire, become

disabled, or die. In addition, workers should understand that their benefits depend

on their average lifetime earnings.3 Finally, they should also understand that Social

Security is meant to be only a foundation of retirement income. Social Security does

not guarantee a benefit that meets the poverty threshold. Therefore, if workers

know what benefit levels they can expect given their earnings history so far, they

can better understand how much to save to meet their retirement income goals.

SSA’s individualized Social Security Statement is one of the key vehicles for providing the public with this basic information about Social Security. It provides workers with an important tool for personal financial planning because it provides estimates of potential retirement, disability, and survivor benefits. It also asks statement recipients to check SSA’s records of their past earnings. In this way, the statement can help SSA correct errors in agency records and help ensure that benefit

payments are correct when workers retire, become disabled, or die. It also explains

that Social Security benefits were not intended to be the only source of retirement

income and encourages workers to supplement their benefits with a pension, savings, or investments. This statement reaches a very wide audience; starting in this

fiscal year, SSA is sending the individualized Social Security Statement annually to

almost every U.S. worker aged 25 and older—an estimated 126 million people each

37

4See 42 U.S. C. 1320b–13. SSA must send a statement to those who are 25 years old, have

a Social Security number, have wages or earnings from self-employment, are not receiving Social

Security benefits, and have a current address obtainable by SSA. 5SSA Benefit Statements: Well Received by the Public but Difficult to Comprehend (GAO/

HEHS–97–19, Dec. 5, 1996). 6 Credits are earned by working for employers who pay taxes to the Social Security system.

The minimum number of credits needed varies, depending on the type of benefit and the age

of the worker.

year.4 (The statement can be found on SSA’s website at http://www.ssa.gov, where

workers can also request personalized statements.)

Because it reaches such a wide audience and is the only direct communication

many workers will have with SSA until they retire or become disabled, the statement must communicate simply and clearly. It has not always done this. SSA offered benefit statements to some workers long before this fiscal year, and we reviewed the agency’s 1996 version. At that time, we raised concerns about its usefulness.5 We reported that although the public felt the statement could be a valuable

tool for retirement planning, the statement provided too much information and

failed to communicate clearly the information its readers needed to understand

SSA’s current programs and benefits. We found that the six-page statement was too

long for many readers, the purpose was unclear, and the design and organization

were not user-friendly. The statement was disorganized—it contained a patchwork

of explanations scattered throughout, requiring the reader to flip from one page to

another to find needed information. Finally, feedback from the public and SSA staff

indicated that readers were confused by several important explanations, such as

those describing family benefits and credits needed to be eligible for benefits. We

recommended that SSA revise the 1996 version of the statement to improve its layout and design and to simplify explanations. We also recommended that SSA evaluate and test alternative formats for the statement.

Consistent with our recommendations, SSA embarked on a multi-year effort to revise its statement. The agency developed four different prototypes and conducted

focus groups to assess layout and presentation preferences and how well the material presented was understood. SSA then conducted a public opinion survey of the

four prototypes. Based on this information, SSA chose for its fiscal year 2000 mailing a new four-page layout.

We believe this new statement is much improved. It is shorter, better organized,

easier to read, employs good design principles, and in a number of cases, provides

simpler explanations. The revised statement more effectively achieves its intended

purpose of providing important basic information on the Social Security program as

well as individualized information on earnings on record at SSA and estimated benefits. In fact, SSA reports that in a recent survey to measure public understanding

of its programs, workers who received the statement have a significantly greater

knowledge of the Social Security program than those who did not receive a statement.

Naturally, further improvement is always possible. Working with our communications consultants, we have identified some remaining rough spots. These include:

• Clarity of purpose: We believe that SSA could more clearly and quickly spell out

the statement’s purpose and inform readers that the agency wants them to take

some action—that is, check their earnings as listed on the statement and inform

SSA of missing or incorrect information.

• Explaining inflation-adjustment of benefit estimates: The statement explains

that the estimates are provided in ‘‘current dollars.’’ However, readers may not understand what this means for their financial planning. It means that the estimates

reflect today’s price level, not the price level that will exist when they actually start

to receive benefits.

• Some explanations still unclear: Other explanations, such as the one regarding

the credits required for benefit eligibility may still leave the reader confused.6 Also,

the revised statement no longer cautions recipients that the estimates are based on

their own individual earnings records and may also depend on their spouses’ earnings if they have spouses.

SSA’s programs are complex, and it is challenging to explain them in simple,

straightforward language without providing so much information that it overwhelms

the reader. SSA will need to continue to revise and streamline the statement to

make it more clear and easy to understand.

38

7 Auditing the Nation’s Finances: Fiscal Year 1999 Results Continue to Highlight Major Issues

Needing Resolution (GAO/T–AIMD–00–137, Mar. 31, 2000).

Public Should Have Information on Social Security’s Current and Projected Financial Status

The public also needs to understand the fundamentals of Social Security financing, including the program’s current and projected financial status. Workers should

understand that their contributions are not deposited into interest-bearing accounts

for each individual but are credited to the Social Security trust funds, which are

largely used to pay for current benefits. Under current law, the trust funds must

invest any surplus in interest-bearing federal government securities. In addition,

workers should understand that though significant surpluses are currently building

up the trust funds to help pay future benefits, this situation will deteriorate over

time. According to the most recent trustees’ intermediate projections, benefit payments will exceed cash revenues in 2015, and the trust funds will be depleted in

2037. At that time, revenues would only be sufficient to pay for roughly 72 percent

of promised benefits. Knowing this helps workers to understand that some combination of revenue increases and benefit reductions will be necessary to restore solvency. In turn, workers can better understand how to view their personal benefit

estimates.

Some recent proposals to provide information to the public call for the Social Security Statement to more fully disclose Social Security’s long-term financial outlook,

the status of the trust funds over time, and the effect on SSA’s ability to pay future

benefits in the absence of changes to the program. In its most recent version of the

statement, SSA has added information on this topic. On the first page, as part of

the message from the Commissioner, the statement now provides basic information

on the demographic reasons for the financing problems and on the future status of

the trust funds, including the date that the trust funds will be exhausted. On the

page where the benefit estimates are provided, the statement explains that when

this date arrives, absent a change in the law, payroll taxes collected will be enough

to pay only a portion of the benefits owed.

However, according to our communications experts, the information is somewhat

confusing and contradictory, though it could be fixed. The Commissioner’s message

first reassures readers that ‘‘of course’’ Social Security will ‘‘be there’’ when they retire and then provides the information about the future financing problems and the

resulting percentage reduction in benefits. The statement explains that SSA is

‘‘working to resolve these issues’’ and offers a booklet with more information upon

request. Overall, the explanation may leave readers wondering how SSA can be sure

the program will be there to pay the benefits they are expecting in the future. The

status of the trust funds and the need for change can be clarified with minor adjustments in wording. However, the statement does not need to go into excessive or

technical detail; not every reader of the statement will need or be interested in this

additional detail. If statement recipients want more information, they can request

the booklet listed in the statement. This booklet, which is written in simple,

straightforward terms for a wide audience, provides additional information on the

reasons for the financing shortfall and the difficult choices needed to ensure longterm program stability.

More technical and detailed information on the status of the trust funds is available, however, in a number of vehicles that are used extensively and studied by a

more narrow audience of experts and specialists. These include the annual Trustees’

Report and the annual Financial Report of the United States Government. To be

most effective and useful to the broadest audience, the information in these reports

needs to be reliable, consistent, accessible, timely, verifiable, and complete. We have

recently noted a problem related to their timing and consistency.7 The Financial Report uses data from the previous year’s Trustees’ Report although a new Trustees’

report with sometimes significantly different numbers is issued at nearly the same

time. The discrepancies between the two reports may cause confusion, which can

serve to reduce confidence in and the credibility of the government’s annual financial report. Steps should be taken in future years to ensure that the government’s

Financial Report contains up-to-date information. In addition, given the importance

and materiality of this information, the Comptroller General has stated that the

time may have come for this information to be subject to audit.

In addition, information on the magnitude of the trust funds’ financial gap should

focus not only on the next 75 years but also beyond that to help focus on sustainability. The conventional 75-year measure of solvency is highly transient because

the 75-year period changes by one year in each successive year’s projections. Currently, the years early in the 75-year period have surpluses while the years at the

39

8Social Security:Criteria for Evaluating Social Security Reform Proposals (GAO/T–HEHS–99–

94, Mar. 25, 1999). Also, see the list of related GAO products at the end of this statement. 9Social Security: Issues in Comparing Rates of Return with Market Investments (GAO/

HEHS–99–110, Aug. 5, 1999).

end of the period have large deficits. As a result, changes made to restore solvency

only for the current 75-year period will result in future actuarial imbalances almost

immediately. Therefore, in addition to examining the 75-year actuarial balance, examining Social Security’s percentage of the federal budget, the size of the imbalance

in the 75th year, and the trend in the annual balance at that time would help focus

attention on the issue of sustainability.

Public Should Have Information to Help It Evaluate Options for Restoring Solvency

To address Social Security’s long-term solvency problem, a wide and often confusing variety of proposals have been offered. To participate in the reform debate, the

public needs understandable, independent, and objective information that can help

it appreciate the difficult choices that the nation faces. We have concluded that

three broad criteria help provide balance and structure to evaluating the alternatives. These are 1) the extent to which proposals would achieve sustainable solvency, including how they would affect the federal budget and the economy; 2) the

balance of adequacy and equity in the benefits structure; and 3) the feasibility of

implementation and administration.8 Adequacy refers to the level and certainty of

benefits, and equity refers to the relationship between the contributions made and

benefits received, sometimes referred to as ‘‘money’s-worth.’’ No single criterion

should be considered in isolation, and taken together these criteria highlight the difficult trade-offs that exist between efforts to achieve solvency and to maintain adequate retirement income for current and future beneficiaries.

Some participants in the reform debate focus especially on individual equity and

on one particular measure of equity—the implicit rate of return workers can expect

on their Social Security contributions. Accordingly, some recent proposals call for

the Social Security Statement to include estimates of the implicit rate of return.

However, substantial controversy surrounds applying the concept of rates of return

to Social Security.9 Some analysts argue that rates of return on contributions would

be much higher under a new system with individual accounts, and they would like

the public to compare its return on Social Security to returns available on market

investments. Other analysts contend that the rate of return concept should not be

applied to Social Security because it is a social insurance program and is not designed to provide returns on contributions.

In our work on this topic, we have observed that rate of return estimates are inherently very uncertain, especially for specific individuals, because of the many complex factors that affect rates of return. Such factors include how long individuals

will live, how much they will earn, and what size families they will have. To be

clearly understood, Social Security rate of return estimates need an explanation of

how they are calculated and how uncertain the estimates are. Also, instead of making simple comparisons between Social Security and historical market returns, one

should make any rate of return comparisons among comprehensive return estimates

for specific reform proposals that include all costs and benefits of any individual accounts as well as the Social Security components of the resulting system. In addition, such estimates would not help individuals plan their personal finances because, under current law, they do not have the choice of putting their contributions

into alternative investments. Moreover, providing estimates of the implicit rate of

return on Social Security contributions could mislead readers to think they have an

interest-bearing account under the program, which they do not. Adding rates of return to the Social Security Statement—or for that matter any information that is

not directly relevant to the statement’s purpose—would make the statement longer

and more complex and could undermine its important and specific purpose of providing benefit estimates and verifying earnings records.

Concluding Observations

Given the importance of Social Security to the financial security of most Americans and the value of citizen participation in the difficult reform decisions that lie

ahead, the public should have easy and timely access to a wide range of reliable,

consistent, and verifiable information. Much of this information is already available;

however, questions have been raised about the best vehicles to use to make sure

the information is available to as wide an audience as possible. Reasonable people

can disagree about the best vehicle, particularly for the more complex or technical

information. However, we believe the Social Security Statement is not the right vehicle for this more technical information, such as rates of return. The newly revised

40

statement more successfully meets its purpose of providing basic information to individual workers. Adding the explanations necessary to fairly portray rate of return

information would likely increase the statement’s length significantly and undermine efforts to shorten and simplify it, thereby running the risk that recipients will

not read or fully understand it.

Mr. Chairman, this concludes my prepared statement. At this time, I will be

happy to answer any questions you or other Members of the Subcommittee may

have.

GAO Contact and Staff Acknowledgments

For information regarding this testimony, please contact Barbara Bovbjerg at

(202) 512–7215. Individuals making key contributions to this testimony include Kay

Brown, Ken Stockbridge, Elizabeth O’Toole, and Kimberly Granger.

Related GAO Products

Auditing the Nation’s Finances: Fiscal Year 1999 Results Continue to Highlight

Major Issues Needing Resolution (GAO/T–AIMD–00–137, Mar. 31, 2000).

Social Security Reform: Information on the Archer-Shaw Proposal (GAO/AIMD/

HEHS–00–56, Jan. 18, 2000).

Social Security: The President’s Proposal (GAO/T–HEHS/AIMD–00–43, Nov. 9,

1999).

Social Security: Evaluating Reform Proposals (GAO/AIMD/HEHS–00–29, Nov. 4,

1999).

Social Security Reform: Implications of Raising the Retirement Age (GAO/HEHS–

99–112, Aug. 27, 1999).

Social Security: Issues in Comparing Rates of Return With Market Investments

(GAO/HEHS–99–110, Aug. 5, 1999).

Social Security: Implications of Private Annuities for Individual Accounts (GAO/

HEHS–99–160, July 30, 1999).

Social Security: Capital Markets and Educational Issues Associated with Individual Accounts (GAO/GGD–99–115, June 28, 1999).

Social Security Reform: Administrative Costs for Individual Accounts Depend on

System Design (GAO/HEHS–99–131, June 18, 1999).

Social Security Reform: Implementation Issues for Individual Accounts (GAO/

HEHS–99–122, June 18, 1999).

Social Security: Criteria for Evaluating Social Security Reform Proposals (GAO/

T–HEHS–99–94, Mar. 25, 1999).

Social Security: Individual Accounts as an Element of Long-Term Financing Reform (GAO/T–HEHS–99–86, Mar. 16, 1999).

SSA Benefit Estimate Statements: Adding Rate of Return Information May Not

Be Appropriate (GAO/HEHS–98–228, Sept. 2, 1998).

Social Security: Different Approaches for Addressing Program Solvency (GAO/

HEHS–98–33, July 22, 1998).

Social Security Financing: Implications of Government Stock Investing for the

Trust Fund, the Federal Budget, and the Economy (GAO/AIMD/HEHS–98–74, Apr.

22, 1998).

Social Security: Restoring Long-Term Solvency Will Require Difficult Choices

(GAO/T–HEHS–98–95, Feb. 10, 1998).

SSA Benefit Statements: Well Received by the Public but Difficult to Comprehend

(GAO/HEHS–97–19, Dec. 5, 1996).

Chairman SHAW. Thank you.

Bob?

Mr. MATSUI. Thank you, Mr. Chairman.

I just have one question. Has the Social Security Administration

pretty much responded to most of the issues that you raised in response to their initial form? Do you feel satisfied that it pretty

much carries out the mandate—I shouldn’t use the word ‘‘mandate,’’ but the recommendations that you have suggested?

Ms. BOVBJERG. Well, we are very pleased with the new version

of the statement. It is shorter. We have gone from six pages to four

pages. It is better organized. It is well designed. It is easier to read.

41

I think that the focus groups and the consultants that the Agency

used clearly served them well.

As you will see in the written statement, we do have some things

that we think could still be done better. There is always room for

improvement. But we thought that this was very responsive, and

a big improvement from the last version.

Mr. MATSUI. Thank you.

Chairman SHAW. I would like just to draw a parallel here with

information overload. The Federal Government has for years been

dictating how much information it has to get when you get a loan,

when you get a mortgage. And I can tell you, having been the attorney for a number of banks before I came here, and having recently, not too long ago, had a loan closed myself that I signed

onto, by the time you get to about the third or fourth required document, people’s eyes are just glazing over. And you know, even

though they say that they understand, you know that they just do

not have a clue; they just want to sign everything, get their money,

and get out.

And I think that there is no question but that if you do overload

these statements, that you are going to lose the value of them. And

I think that is something we have to be very, very cautious about.

And that is something I am concerned about as far as all of the

disclosures. Those are wonderful things to have. And perhaps we

should be looking at the Trustees’ Report and make that a little

clearer and more concise and a little compact and more consumerfriendly for people that are going to be wanting to review it. I think

those are very important things.

Do you have any comment on that?

Ms. BOVBJERG. We have considered some of the Trustees’ Report

information and some of the things that are provided in that. And

we think that it is really for a different audience; that it is widely

used by experts and analysts, and certainly should be made easily

and readily accessible to people who want to see it; but it is not

necessarily a document that you would want to have the Plain Language Award for and that you would want to send out to everybody.

I think that you want to be sure that there is technical information in that document that the specialists and Members of Congress need to make some of these decisions; and you want to be

sure that people can get it who would like to see it. I think that

having the website reference and the 800-number in the statement

is a step in that direction.

Chairman SHAW. Thank you. Thank you for being here.

Ms. BOVBJERG. Thank you.

Chairman SHAW. We now have a panel, and I will read your

names in the order in which you appear. Dallas Salisbury is the

president and chief executive officer of the Employee Benefit Research Institute.

Richard—Is it ‘‘Thau’’?

Mr. THAU. ‘‘Thau.’’

Chairman SHAW. Thau—the ‘‘H’’ does not come into it—is president of Third Millennium, New York, New York.

42

Gary Fazzino, the director of Federal public policy at HewlettPackard Co., on behalf of the Alliance for Worker Retirement Security.

Hans Riemer is the director of the 2030 Center. Is that ‘‘REEmer’’ or ‘‘RI-mer’’? ‘‘REE-mer’’? I got that one right.

Ron Geb—Whoa.

Mr. GEBHARDTSBAUER. It took me 8 years: ‘‘Gebhardtsbauer.’’

Chairman SHAW. The senior pension fellow, American Academy

of Actuaries.

Henry Aaron, Dr. Henry Aaron, who is a senior fellow, economic

studies, at Brookings Institute.

Joan——

Ms. ENTMACHER. Entmacher.

Chairman SHAW. This is really something. What happened to

‘‘Smith’’ and ‘‘Jones’’? They are not with us.

Joan is the vice president and director of family economic security of the National Women’s Law Center.

And David C. John, who is a senior policy analyst, Social Security, from the Heritage Foundation.

Mr. Salisbury, you may proceed.

Will you hand the microphone down to Mr. Salisbury?

And as I have stated for the previous panels, we do have your

full statement, which will be made a part of the record.

STATEMENT OF DALLAS SALISBURY, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, EMPLOYEE BENEFIT RESEARCH INSTITUTE

Mr. SALISBURY. Thank you, Mr. Chairman and Members of the

Committee. The Institute has undertaken survey work for now

nearly 20 years on public knowledge regarding Social Security, and

has found significant areas of knowledge gaps.

Probably the most important are absence of public understanding

of the level of benefits that they can expect from Social Security,

as well as the age at which they will be eligible.

Our first survey in 1990 on the retirement age issue showed that

the vast majority of Americans underestimate the age of eligibility

for full benefits. And our 1999 survey—I emphasize, 1999—found

that only 16 percent of Americans realize that the Social Security

retirement age is moving above the age of 65. And nearly a third

believe that full Social Security benefits are already available, or

will be, below the age of 62.

Turning to the Social Security benefits statement then, the importance of it in helping individuals understand these two critical

points—how much they might expect to receive in benefits, or

frankly, even a reasonable estimate; and second, at what age they

will be eligible for what amount of benefit—if the statement accomplishes nothing else, it will have fundamentally increased public

understanding of these important programs. And in that the statement does and will help correct these two fundamental shortcomings.

I would add per the statement and the earlier discussion on frequency, that, if anything, we might consider that the statement

should begin going to individuals younger than the age of 25, which

is the current cutoff. And as opposed to the suggestion in testimony

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that frequency might be made less frequent for the young, I would

suggest, if anything, the most important group to receive the statements are in fact the young, so they might come to understand how

relatively small Social Security benefits are—in fact, it is intended

to be a floor of income—and be, as a result, incented to have the

ability to begin saving and the necessity of saving early.

In terms of the content of the statement, one thing that came out

of the delegates of the Choose To Save Forum on retirement security and personal savings here in Washington last week was a firm

recommendation that the statement actually be somewhat expanded, even with only a sentence or two, directing individuals to

where they might go for additional information on retirement planning and on savings calculations to help them get started.

Second, vis-a-vis the warning language that is in the letter at the

front of the statement, to possibly actually put a little more of that

in the personal information; so that there is a bit of a caveat, and

that people understand that these benefit amounts are simply an

estimate, and that estimate could in fact change based on many,

many factors—some of their own control, and others of political

control.

Third has been the discussion and legislation related to expected

rate of return being added to the statement. Our work simply finds

it difficult, in the context of a social insurance program with many

benefits, to understand—and we have done much work trying to

figure out how one could do a reasonable statement to individuals

of rate of return—exactly how to do that in a way that would not

be highly misleading. And to this point, even on a total program

basis, we have been unable to come up with that methodology.

Recent studies have been published; for example, a recent study

from the Heritage Foundation that both had a national average

and congressional district averages. And even looking at the methodology there, the numbers are highly misleading in terms of the

way they deal with current Social Security Trust Fund balances

and taxes.

Now, they have disclosed that methodology, so one might say it

is not misleading. But the care one would have to take to read all

of the disclosures in order to come to that conclusion is far more

than it would be possible to include in that individual statement

without, like the loan documents, making it far more complex than

one would ever deal with.

Regarding the Trustees’ Report, it does provide a tremendous

amount of disclosure information, including issues as one goes

through the final tables and appendices on issues of risk to the system and long-term tax rates necessary to finance the system. It

would be possible to add some additional data there, but our assessment, again, is that adding rate of return information might in

fact lead more to misunderstanding that to enlightenment.

In conclusion, it has been a pleasure to be here today and to provide some insights. We would be happy to provide full reports of

all of our 22 surveys on Social Security, including we have a retirement confidence survey—our tenth—in the field as we speak, to

collect new information on public understanding, that hopefully

will provide some insight as to whether or not those who have alVerDate 20-JUL-2000 16:12 Oct 23, 2000 Jkt 061710 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 K:\HEARINGS\66357.TXT WAYS3 PsN: WAYS3
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ready received their statements show a higher level of understanding than a year ago. Thank you.

[The prepared statement follows:]

Statement of Dallas Salisbury, President and Chief Executive Officer,

Employee Benefit Research Institute

Mr. Chairman, and members of the Committee. I am Dallas Salisbury, President

of the Employee Benefit Research Institute (EBRI). EBRI is a non-partisan, non-lobbying research and education organization based here in Washington, DC.

It is my pleasure to appear before you today to discuss efforts to inform the public

on Social Security. EBRI published and distributed its first consumer education brochure on Social Security in 1979; its first study of Social Security in 1982; undertook

its first public opinion survey on Social Security in 1990, and the most recent in

1999. Our opinion research has made it clear that the public does not have a good

understanding of crucial details of Social Security; our publications seek to increase

that understanding.

Rating the Social Security Administration

Our surveys show the Social Security Administration was given a ‘‘fair’’ rating by

the public in 1990 on how well it kept Americans informed about the program. Twothirds of respondents in 1990 were not aware that action had been taken to increase

the normal retirement age to 67 beginning in 2000. (EBRI-Gallup Survey Number

7, February 1990).

Expected Benefits from Social Security and Support

Our 1994 survey found that 71 percent did not expect (correctly) to get as much

out of Social Security as they had paid in; and 46 percent agreed that taxes would

have to be raised in the future to pay benefits in the future. (EBRI/Gallup Survey

Number 56, April 1994) Our Retirement Confidence Surveys from 1992 through

1998, which have asked a consistent question about confidence in Social Security

providing benefits of equal value, have consistently shown one-third to be confident

and two-thirds not confident about the future value of their benefits. Yet, the surveys also find that two-thirds voice strong support for the program. Surveys suggest

that the public understands that their parents and grandparents rely upon Social

Security benefits.

Public Knowledge Gaps

The most significant areas in which public knowledge is lacking relate to how

much Social Security will provide in the way of a benefit, and at what age. Surveys

consistently support two statements: First, the public is more likely to overestimate

the amount they will get from Social Security than to underestimate it; and, second,

few yet know that the normal retirement age—as enacted by Congress—is now in

the process of moving up from 65 years and two months to 67. Only 16 percent of

respondents in our 1999 Retirement Confidence Survey knew when they would be

able to get full benefits; 59 percent cited an age too early; 5 percent an age too late;

and 19 percent simply noted that they did not know. (EBRI Issue Brief Number 216,

December 1999)

The Social Security Benefit Statement

The annual Social Security statement, noted in the press release on this hearing

from Chairman Shaw, arrived in the mail for my wife last month. It provided us

with an estimate of what benefits would be available to my wife under the current

program, at alternative ages, and a full earnings and tax payment history. The

earnings and tax payment history was accurate. It focused on the fact that full benefits would be at the age of 66, not 65. And, it focused us on the fact that we will

need to save a lot of money to supplement Social Security in order to live as we

would like to.

The statement provides important information that will help correct the two most

serious areas of low knowledge among the public. First, it gives a clear picture of

the Social Security benefit that you might expect to receive. Our work suggests that

the vast majority of Americans will be struck by how small the benefit will be, and

will be motivated to save. The history of public commentary on Social Security has—

unfortunately—been a description of a program that ‘‘allows you to retire;’’ that’s

unfortunate because far too many Americans have wrongly thought this meant it

would provide them with an adequate retirement income, rather than just a base.

This may well be a reason that only one-third of those now retired did any assessment of either their expected income or expenses prior to taking the step of retiring,

45

and only 52 percent of workers have yet done so. Hopefully, the statement will serve

to increase that number in the future. Second, the statement gives a clear picture

of your retirement age options and the benefit implications. This should provide people with an incentive to work longer, an incentive to save more, or both, as the recipient will now know that the normal age for full benefits is above age 65, and

moving to 67. For many Americans, this statement may give them the first indication of how little their parents or grandparents are currently living on, since over

two-thirds of retirees essentially have Social Security as their only income source.

Should the Statement Provide More Information?

The hearing announcement from Chairman Shaw also raised the question of

whether the Social Security statement might provide more information than it now

does. I am aware of three areas that have been discussed for additional information.

First—as was endorsed last week by delegates to the Choose to Save Forum on

Retirement Security and Personal Savings—would be the addition of information on

where to go for online and print retirement planning assistance. This would include

Internet URL’s for such resources as the Ballpark Estimate Retirement Planning

Worksheet.

Second would be the addition of ‘‘warning’’ language on the benefit amount, so

that the worker knows that taxes may eventually have to be increased in order for

the stated benefit to be paid, or that a reduction in the statement benefit may be

required if the Congress and the president were not willing to raise the necessary

taxes or otherwise appropriate funds. Some have suggested that this ‘‘disclosure of

risk’’ should note that current economic projections imply a future reduction of Social Security benefits of up to one-third of stated values. For more than 20 years,

EBRI publications have encouraged full and complete disclosure of the nature of

pension risk. For private defined benefit and defined contribution pension plans,

this relates to disclosure of the risk of lower benefits due to bankruptcy, investment

losses, unanticipated increases in life expectancy, etc. For Social Security, this relates to economic risk and insufficient tax revenue due to unanticipated factors such

as a quick increase in life expectancy. Disclosure of risk serves to further encourage

personal savings and retirement planning.

Third would be the inclusion of an ‘‘expected rate of return on taxes paid’’ number. I have reviewed studies on this subject since the very first report was published

in the late 1970’s. I am yet to see one that is not misleading, including some comparative research published by EBRI. I allowed EBRI to publish the comparative

work on the theory that all the numbers were consistently misleading, but did allow

a constrained comparison of the present Social Security design with a number of reform options. I do not believe that including such a ‘‘rate of return’’ number would

be a helpful addition to the Social Security statement, as it would not be possible

to explain all the ways that it is misleading.

For instance, I noted that my wife received her statement. In theory, it would

allow a calculation of her personal return, were the system not an ‘‘intragenerational’’ system. Both of us, however, have living parents who rely on Social

Security. Mine are now 86 and 83, and were it not for their income from Social Security, I would be paying part of their living expenses directly. Instead, the taxes

I pay to Social Security get mailed to my parents. How can that accurately be

factored into my rate of return? Such an individual-by-individual assessment would

be very expensive and difficult, if not impossible, without substantial invasion of

personal privacy. Disability and survivor benefits in theory can be adjusted for in

the rate-of-return calculation when doing analysis on case studies, but to provide

a realistic number to each worker would require an individual-by-individual assessment of all of one’s family members. Such is the problem that arises in a social insurance program with multiple components and multiple generations, and it makes

a simple or objective ‘‘rate of return’’ number impossible to produce or virtually

meaningless.

Additional problems can arise in calculation as well. For example, a recent article

by the Heritage Foundation attempts to calculate rates of return for stylized individuals from the Social Security Old-Age and Survivors Insurance Program (OASI).

Aside from the worthiness of calculating rates of return discussed above, the paper

made a crucial economic assumption that immediately leads to a lower rate of return being calculated for all individuals. This crucial assumption is that all payroll

tax revenue in excess of benefits paid in each year that has accumulated in the Social Security Trust Fund, and is expected to continue to accumulate there until

2015, is assumed to be never paid out as benefits. Instead, in their calculations, payroll taxes are increased to equal the benefits to be paid in each year after 2014.

Under this assumption, approximately $2 trillion is counted as contributions in their

report, but none of this revenue is counted as paying Social Security benefits. ThereVerDate 20-JUL-2000 16:12 Oct 23, 2000 Jkt 061710 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 K:\HEARINGS\66357.TXT WAYS3 PsN: WAYS3
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fore, it is quite easy to show small rates of return when $2 trillion are counted as

contributions but not as benefits, and instead more contributions are ‘‘required’’ to

be raised to pay those benefits that are directly associated with the first $2 trillion

in contributions. Consequently, either the revenue that has accumulated or will accumulate in the Trust Fund must be counted as paying benefits—or not counted as

contributions—to gain a potentially honest measure of rates of return for the OASI

program. I say ‘‘potentially’’ because of broader issues noted previously. If a reader

did not carefully examine the assumptions and calculations of the Heritage paper,

a seriously incorrect interpretation would be taken away from the report.

Thus, the assumptions used in any model need to be clearly disclosed and understood to allow individuals to correctly evaluate any results emanating from that

model. The ability to even attempt to provide such full disclosure on the Social Security statement would turn it into a book, not a statement.

The Trustees Report

EBRI has also published regular reports based upon the reports issued by Trustees of the program. The late 1980s brought the publication of a ‘‘summary’’ report

by the Social Security program, which provides a much clearer picture for the public, and that report continues to be improved. Now, www.ssa.gov provides a wealth

of information on demand, which can also be obtained in printed form from the

agency. Analysts have suggested over time that reporting by the Trustees could be

improved with dynamic estimates that presented future possible outcomes as more

than just three possible static projections, as is currently done today.

EBRI has supported the development of a model that allows such dynamic analysis, and has published a number of studies based upon that model, which is also

now being used by the Social Security Administration, the General Accounting Office, the AARP, and others, to aid in their analysis of the present system and reform

proposals. Prior testimony to this committee was based upon our use of the model.

Other organizations have developed models as well. Because of their complexity, the

most important thing to assure is full disclosure of all assumptions so that model

results can be put into context and can be fully evaluated.

Additions to the Trustees Report

The addition of rate of return information has also been suggested for the annual

Trustees report. For the reasons previously articulated, I do not believe that this

is possible in a form that would inform more than it would mislead.

Conclusion

It has been my pleasure to appear before the Committee today. I offer the Committee the assistance of the Employer Benefit Research Institute and the American

Savings Education Council as you continue your work, which is vital to the economic

security to all working and retired Americans, and to millions of survivors.

Chairman SHAW. Thank you.

Mr. Thau.

STATEMENT OF RICHARD THAU, PRESIDENT, THIRD

MILLENNIUM, NEW YORK, NEW YORK

Mr. THAU. Thank you, Mr. Chairman, for inviting Third Millennium to participate in this dialog on Social Security, the largest

program in the Federal budget. In announcing this hearing, Mr.

Chairman, you asked whether the information being provided to

taxpayers about Social Security is ‘‘accurate, understandable, and

useful.’’ My short answer to each of these questions is ‘‘Maybe, yes,

and partially.’’

Let me explain. First, for a young worker, the retirement benefit

projections on the Social Security statement are probably not accurate. This is because the calculations take a worker’s current salary

and project it forward at its current level for decades. Many workers receive salary increases as they age, so a benefit calculation

based on a typical young worker’s present compensation is probably

47

artificially low. However, since Social Security, according to the

trustees, will only be able to pay approximately three-quarters of

the benefits currently being promised to my generation, this low

number could actually, and accidentally, turn out to be accurate.

Second, I believe that the benefit statement is understandable to

a lay person.

Third, the statement is only partially useful to young adults. Let

me explain why this is so, and how it would be far more useful.

First, the Social Security statement indicates that ‘‘Social Security

benefits were not intended to be the only source of income for you

and your family when you retire. You need to supplement your

benefits with income from a pension plan, savings, or investments.’’

This is a critically important bit of information; yet it could be

strengthened. I suggest adding the following personalized text: ‘‘In

order to maintain an adequate standard of living in retirement, you

will need an annual income of approximately 70 percent—’’ 7–0

percent ‘‘—of the amount you make before you retire. Social Security, according to the projections and depending upon the age you

retire, will provide you only ‘X’ or ‘Y’ percent of the income you

need. If you were to rely solely on Social Security for your income

in retirement, you would be living near the poverty level.’’

If you made that point clear in that statement, that if you were

to rely only on Social Security in retirement you would be living

at or near the poverty level, that would be, to use the phrase, hitting people over the head with a frying pan about how important

it is at a young age to start saving and investing for retirement.

Second, while the statement indicates how much a worker has

paid in FICA taxes to date, and estimates what benefits that worker may receive in old age, it does not indicate how many thousands

of dollars in FICA taxes that worker will pay from now until retirement in order to receive those benefits.

Third, the statement does not indicate, using figures from the

latest Trustees’ Report, how much a worker’s annual benefits could

shrink if Social Security is not reformed between now and the time

he or she reaches ages 62, 67, or 70.

Fourth, the statement does not estimate what advanced age one

needs to attain in order to receive back the value of one’s lifetime

contributions.

Fifth, many adults of all ages do not understand how Social Security works, and it would be useful to explain that there is no interest-bearing account with their accrued benefits sitting in a government office somewhere; rather, the statement should say that

FICA taxes paid today are used to finance the retirement, disability, and survivor benefits of current recipients. Future benefits will

be provided by the tax dollars of workers in the future.

Moreover, citizens will benefit from a better understanding of the

status of the Social Security Trust Fund. As the Office of Management and Budget acknowledged last year, ‘‘These balances are

available to finance future benefit payments only in a bookkeeping

sense. They do not consist of real economic assets that can be

drawn down in the future to fund benefits. Instead, they are claims

on the Treasury that, when redeemed, will have to be financed by

raising taxes, borrowing from the public, or reducing benefits or

other expenditures.’’

48

Mr. Chairman, I would be remiss if I did not point out the ‘‘pink

elephant’’ in the hearing room today. While improving the Social

Security statement is important and can provide useful information

to members of my generation, Congress would be doing far more

important work if it set itself on the task of reforming the entire

Social Security system in advance of the ‘‘Baby Boom’’ generation’s

retirement. America’s leaders are wasting precious time. There is

no national plan whatsoever to accommodate the massive retirement and health needs of this generation.

For the good of America’s future, Congress and the President

should act expeditiously to fix Social Security and Medicare. If you

do not, future generations will rightly wonder why you waited so

long, and only tinkered at the margins. Thank you.

[The prepared statement follows:]

Statement of Richard Thau, President, Third Millennium, New York, New

York

Thank you, Mr. Chairman, for inviting Third Millennium to participate in this

dialogue on Social Security, the largest program in the Federal budget.

My name is Richard Thau. I am the president and co-founder of Third Millennium, a national, non-profit, non-partisan group of Americans born after 1960. We

are based in New York City.

My colleagues and I have appeared before Congress 18 times over the past six

years, testifying on the need to overhaul Social Security and Medicare. We greatly

appreciate the opportunity to once again serve as a voice from within our generation

on these vital issues.

In announcing this hearing, Mr. Chairman, you asked whether the information

being provided to taxpayers about Social Security is ‘‘accurate, understandable and

useful.’’ My short answer to each of these questions is ‘‘maybe, yes and partially.’’

Let me explain.

First, for a young worker, the retirement benefit projections on the Social Security

Statement are probably not accurate. This is because the calculations take a worker’s current salary and project it forward, at its current level, for decades. Many

workers receive salary increases as they age, so a benefit calculation based on a typical young worker’s present compensation is probably artificially low. However, since

Social Security, according to the Trustees, will only be able to pay approximately

three-quarters of benefits currently being promised to my generation, this low number could actually, and almost accidentally, turn out to be accurate.

Second, I believe that the benefit statement is understandable to a layperson.

Third, the statement is only partially useful to young adults. Let me explain why

this is so, and how it could be far more useful:

a) The Social Security Statement indicates that ‘‘Social Security benefits were not

intended to be the only source of income for you and your family when you retire.

You need to supplement your benefits with income from a pension plan, savings or

investments.’’ This is a critically important bit of information, yet it could be

strengthened. I suggest adding the following personalized text: ‘‘In order to maintain

an adequate standard of living in retirement, you will need an annual income of approximately 70% of the amount you make before you retire. Social Security, according to our projections and depending upon the age you retire, will provide you only

X to Y percent of the income you need. If you were to rely solely on Social Security

for your income in retirement, you would be living near the poverty level.’’

b) While the statement indicates how much a worker has paid in FICA taxes to

date, and estimates what benefits that worker may receive in old age, it does not

indicate how many thousands of dollars in FICA that worker will pay from now

until retirement in order to receive these benefits.

c) The statement does not indicate—using figures from the latest Trustees report—how much a worker’s annual benefits could shrink if Social Security is not reformed between now and the time he or she reaches ages 62, 67 and 70.

d) The statement does not estimate what advanced age one needs to attain in

order to receive back the value of one’s lifetime contributions.

e) Many adults—of all ages—do not understand how Social Security works, and

it would be useful to explain that there is no interest-bearing account with their accrued benefits sitting in a government office somewhere. Rather, the statement

should say that FICA taxes paid today are used to finance the retirement, disability,

49

and survivor benefits of current recipients. Future benefits will be provided by the

tax dollars of workers in the future. Moreover, citizens would benefit from a better

understanding of the status of the Social Security Trust Fund. As the Office of Management and Budget acknowledged last year, ‘‘These balances are available to finance future benefit payments. . .only in a bookkeeping sense. They do not consist

of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits, or other

expenditures.’’

Mr. Chairman, I would be remiss if I did not point out the ‘‘pink elephant’’ in the

hearing room today. While improving the Social Security Statement is important,

and can provide useful information to members of my generation, Congress would

be doing far more important work if it set itself on the task of reforming the entire

Social Security system before the Baby Boom generation retires.

America’s leaders are wasting precious time. There is no national plan to accommodate their massive retirement and health needs of the generation that is ahead

of mine. For the good of America’s future, Congress and the President should act

expeditiously to fix Social Security and Medicare. If you don’t, future generations

will rightly wonder why you waited so long—and only tinkered at the margins.

Thank you.

Chairman SHAW. Thank you.

Mr. Fazzino.

STATEMENT OF GARY FAZZINO, DIRECTOR, FEDERAL PUBLIC

POLICY, HEWLETT-PACKARD COMPANY; ON BEHALF OF THE

ALLIANCE FOR WORKER RETIREMENT SECURITY

Mr. FAZZINO. Thank you, Mr. Chairman, and Mr. Matsui, my fellow Californian, who shares an abiding affection for Stanford University along with me.

I am Gary Fazzino. I am director of Federal public policy for

Hewlett-Packard. Today I am testifying on behalf of the Alliance

for Worker Retirement Security, of which Hewlett-Packard is a

member. AWRS is a coalition of more than 30 organizations that

support Social Security reform which will put our Social Security

system on a sound financial footing and offer all workers the opportunity to create wealth by investing a portion of their Social Security payroll taxes in regulated funds.

I want to commend you and your colleagues for your hard work

on Social Security reform, and for this hearing. Hewlett-Packard

has long believed that reforming Social Security is a critical public

policy issue that needs immediate attention.

Over 3 years ago, the company initiated an effort to provide educational materials to our employees about the future of Social Security and Medicare. HP produced a pamphlet that was distributed

to all 65,000 HP workers in the United States, and a copy of that

pamphlet is provided to you with this statement. And at the time,

our chief executive officer, Lew Platt, indicated that he wanted all

HP employees to be better informed about decisions that could impact their future.

HP had an overwhelmingly positive response from our employees, many of whom wanted to continue receiving updated information. Other employers and employer trade associations have joined

in this educational effort.

The National Association of Manufacturers has dedicated significant resources to informing employers and employees about the SoVerDate 20-JUL-2000 16:12 Oct 23, 2000 Jkt 061710 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 K:\HEARINGS\66357.TXT WAYS3 PsN: WAYS3
50

cial Security issue, including launching the AWRS coalition last

year. Included in your materials is a NAM-created calculator with

which a worker can compare his or her promised Social Security

benefit with a reformed program.

Some companies have begun including the employer’s share of

FICA taxes on the worker’s pay stub. And most large employers

now give workers an annual report of all payroll taxes paid, employee and employer share. There are many such examples of educational efforts, but indeed much more needs to take place.

The Social Security statements now being sent annually by the

Social Security Administration to nearly all workers is a very good

first step. We applaud Congress and the SSA for making these

statements available. Workers appreciate receiving them, and it

gives employers the perfect opportunity to supplement the statements with additional information.

Now, what more do workers need to know? They need to be given

a clearer understanding of how Social Security is financed, and the

challenges facing us ahead. Believe it or not, tens of millions of

workers still think that there is a government account with their

name on it into which payroll taxes are deposited. They believe

that during their working career the money accumulates, and then

is then disbursed to them during retirement.

This is what is behind the oft-heard statement at HP from our

employees, ‘‘It is my money, and I am entitled to it.’’ Little do they

know that the taxes they pay today are immediately transferred to

today’s retirees. The Social Security statement should be made

more clear in this regard.

Likewise, the Social Security statement gives the impression that

the excess payroll taxes are deposited into a Trust Fund that acts

like a bank account. Relatively few workers understand that the

trust fund holds no cash, but contains IOUs that must be redeemed

with future taxes if promised benefits are not [sic] to be paid.

HP and other employers in this country are willing to help in

this educational effort. Information about the Social Security system must be factual, accessible, and presented in such a way that

it is both technically accurate and not misleading to the American

public.

AWRS strongly supports H.R. 3578, Senate Bill 2364, and Senate

Bill 2294, and other measures that will help educate our workers.

We also strongly suggest that Members of Congress follow in the

footsteps of their colleagues who have held Social Security townhall

meetings in their districts.

No matter what reform measure you support, the more your constituents—in other words, our workers—understand about the

issue, the more Congress will be doing the will of the people, and

the people of this country will be able to accept the very difficult

decisions that you have to make in the future regarding Social Security.

AWRS member organizations and Hewlett-Packard stand ready

to help you. Thank you very much.

[The prepared statement follows:]

51

Statement of Gary Fazzino, Director, Federal Public Policy, Hewlett-Packard Company, on behalf of the Alliance for Worker Retirement Security

Good Afternoon. My name is Gary Fazzino and I am Director of Federal Public

Policy for Hewlett-Packard Company located in Palo Alto, California. Today, I am

testifying on behalf of the Alliance for Worker Retirement Security (AWRS), of

which Hewlett-Packard is a member. AWRS is a coalition of more than thirty organizations that support Social Security reform which will put our Social Security system on a sound financial footing and offer all workers the opportunity to create

wealth by investing a portion of their Social Security payroll taxes in regulated

funds. A large number of AWRS members are employer-based trade associations,

such as the National Association of Manufacturers, the Retail Federation, the Business Roundtable, the NFIB, and others.

I want to commend you and your colleagues for your hard work on Social Security

reform and for this hearing in order to review the type, accuracy and amount of information that is, or should be, available to Congress and the public in the area of

Social Security.

Hewlett-Packard has long believed that reforming Social Security is a critical public policy issue that needs immediate attention. We believe HP has a responsibility

to provide our workers with accurate information on their long-term financial security, including Social Security. Over three years ago, we initiated an effort to provide educational materials to our employees about the future of Social Security and

Medicare. HP produced a pamphlet that was distributed to all 65,000 HP workers

in the United States. A copy of that pamphlet is provided to you with this statement. In a cover letter to HP employees, then-Chairman and CEO Lewis Platt,

wrote:

‘‘You may wonder, ’What is HP’s motivation?’ First and foremost, it is to help you

be better informed about decisions that could impact your future. By thinking about

these issues today, you may be in a better position to plan for your retirement. In

addition, the time is right to let others know what you would like to see happen

with Social Security. . I hope that you will share your views with us and with others, including your elected representatives who will be making key decisions affecting the future. . .’’

HP had an overwhelmingly positive response from our employees, many of whom

wanted to continue receiving updated information. Other employers and employer

trade associations have joined in this educational effort. The National Association

of Manufacturers has dedicated significant resources to informing employers and

employees about the Social Security issue, including launching the AWRS coalition

last year. Included in your materials is an NAM-created ‘‘calculator’’ with which a

worker can compare his/her promised Social Security benefit with a reformed program. Some companies have begun including the employer’s share of FICA taxes on

the worker’s pay stub, and most large employers now give workers an annual report

of all payroll taxes paid, employee and employer share. There are many more examples of educational efforts, but much more needs to take place.

Why is it so important for employers to help educate workers? The Social Security

system is like a train that we know will soon be derailed—but not all of the passengers on board are aware of the wreck ahead. The cost to our workers, retirees

and our entire economy could be severe. Before a wreck—in other words, before our

workers, retirees, and our economy are derailed from their expected destination—

we must redirect the train onto a stronger, sustainable track.

The Social Security Statements now being sent annually by the Social Security

Administration (SSA) to nearly all workers are a good first step. We applaud Congress and the SSA for making these statements available. Workers appreciate receiving them and it gives employers the perfect opportunity to supplement the statements with additional information.

What more do workers need to know? They need to be given a clearer understanding of how Social Security is financed and the challenges facing us ahead. Believe

it or not, tens of millions of workers still think that there is a government account

with their name on it, into which payroll taxes are deposited. They believe that during their working career, the money accumulates and is then disbursed to them during retirement. This is what is behind the often heard statement: ‘‘It’s my money

and I’m entitled to it!’’ Little do they know that the taxes they pay today are immediately transferred to today’s retirees. The Social Security Statement should be

made more clear in this regard.

Likewise, the Social Security Statement gives the impression that the excess payroll taxes are deposited into a trust fund that acts like a bank account. The statement explains the trust fund in this way: ‘‘The excess funds are credited to Social

Security’s trust funds which are expected to grow to over $4 trillion before we need

52

to use them to pay benefits.’’ Is it any wonder that workers believe their payroll

taxes are being held in an account for benefit payments later? Relatively few workers understand that the trust fund holds no cash, but contains IOUs that must be

redeemed with future taxes if promised benefits are to be paid.

We applaud Congress for no longer spending the excess payroll taxes and using

them instead to buy down public debt. This is good for the economy and is a necessary step forward, absent real reform of the system. However, statements from

Congress and the White House such as: ‘‘We are going to save every penny of Social

Security and not spend it,’’ only fuels this misperception of the existence of a savings account.

HP and other employers in this country are willing to help in the educational

process. Information about the Social Security system must be factual, accessible

and presented in a way that is both technically accurate and not misleading to the

American public.

What do we recommend? AWRS strongly supports H.R. 3578, the ‘‘Social Security

Right To Know Act,’’ sponsored by Congressman Sununu, S. 2364, a similar bill introduced by Senators Santorum and Gregg, and other measures that will help educate our workers. We also strongly suggest that members of Congress follow in the

footsteps of their colleagues who have held Social Security Town Hall meetings in

their districts. With outside experts brought in to explain the problems ahead, these

Members have found the meetings to be extremely helpful in educating their constituents and the press.

The fact is that no matter what reform measure you support, the more your constituents—in other words, our workers—understand about the issue, the more Congress will be doing the ‘‘will of the people,’’ and the people of this country will be

able to accept the difficult decisions that you must make in the future. AWRS member organizations stand ready to help. Thank you again for asking me to appear

today, and I would be happy to answer any questions.

AWRS PRINCIPLES

The Alliance for Worker Retirement Security is a broad-based coalition of organizations dedicated to reforming the Social Security system to ensure an adequate retirement income and an opportunity for workers to create personal economic wealth.

Principles of the Alliance

1. Permit workers to invest their retirement payroll taxes (FICA) in individuallydirected personal retirement accounts (PRAs).

2. Oppose an increase in payroll taxes.

3. Guarantee a ‘‘safety-net’’ (minimum government benefit) for all retirees.

4. Preserve the benefits of retirees and near-retirees.

5. Oppose government investment in the stock market

6. Oppose general revenue transfers (primarily income taxes) to Social Security

in the absence of structural reform.

Mission of the Alliance

Develop and implement a strategy for passage of Social Security reform legislation

that incorporates the principles of the Alliance.

September, 1999

ALLIANCE FOR WORKER RETIREMENT SECURITY

Aetna .................................................................................................. NCR Corporation

American Bankers Association ........................................................ National Federation of

Independent Businesses

American Farm Bureau Federation ................................................ National Restaurant

Association

Americans for Tax Reform ............................................................... National Retail Federation

Black America’s PAC ........................................................................ Pfizer, Inc.

The Business Roundtable ................................................................. Seagrams and Sons, Inc.

Citizens for a Sound Economy ......................................................... Securities Industry

Association

Committee for Good Common Sense ............................................... 60 Plus Association

Council for Government Reform ...................................................... Small Business Survival

Committee

Economic Security 2000 ................................................................... Society for Human Resource

Management

53

ALLIANCE FOR WORKER RETIREMENT SECURITY—Continued

Jeld-Wen Corporation ....................................................................... StorageTek

Hewlett-Packard ............................................................................... TRW

Hispanic Business Roundtable ........................................................ Windway Capital

Corporation

National Association for the Self-Employed ................................... U.S. Chamber of Commerce

National Association of Manufacturers ........................................... United Seniors Association

National Association of Women Business Owners ......................... National Council of Chain

Restaurants

Chairman SHAW. Thank you.

There is a vote on the floor. In fact, there are two votes. I would

think that we can get back here in approximately 15 minutes and

conclude the hearing. But I will have to recess it for at least that

long, 15 to 20 minutes possibly. And we will start with you when

we return.

[Recess.]

Chairman SHAW. OK. Mr. Riemer.

STATEMENT OF HANS RIEMER, FOUNDER AND DIRECTOR,

2030 CENTER

Mr. RIEMER. Thank you, Mr. Chairman, Mr. Matsui, and Members of the Committee. My name is Hans Riemer, and I am the

founder and director of the 2030 Center, a public policy organization for young adults. The 2030 Center conducts research and public education in order to provide a voice for young workers on important economic issues such as strengthening Social Security and

improving job opportunity.

We are concerned about Social Security because we want to

make sure that today’s young workers and future generations will

be able to collect their full benefits, guaranteed. There is no doubt

that young people want Social Security to remain financially

strong. This desire is an important explanation for why young people on a nearly two-to-one basis support using the budget surplus

for Social Security rather than a tax cut.

As you know, the Social Security Administration recently began

to send benefit statements to working Americans. These personalized statements estimate the projected retirement, disability, and

life insurance benefits that a worker may claim. I believe this is

one of the most important developments in the history of Social Security, and I applaud you, Mr. Chairman, and Members of the

Committee, for supporting this remarkable legislation.

Promoting public understanding of Social Security has been a

concern of ours for some time. In 1998, Peter Hart Research Associates, a national survey research firm, conducted a poll for the 2030

Center that closely evaluated public attitudes—particularly the attitudes of young workers—toward Social Security. We discovered

that efforts to inform the public about Social Security still have a

long way to go.

One of the most striking examples pertains to expectations of future retirement benefits. Most Americans seem to think that Social

Security is going to run out of money entirely in just a few years,

54

or at most a decade or so; that every penny of Social Security funds

soon will be used up. This, of course, is far from true. Even if Congress does nothing, Social Security benefits are fully financed for

at least the next 37 years. And even after then, the payroll tax at

current levels can fund at least 72 percent of promised benefits.

For most Americans this reality represents a dramatic improvement over their current expectations. We need to do a much better

job educating the public about the present fiscal health of the program, so that informed judgments can be made about the future.

Another important area where improvement is needed: Americans do not have an adequate understanding of the range of benefits that they are earning. As you know, one-third of all Social Security beneficiaries today—more than 131⁄2 million people—are not

retired workers. They are disabled workers, survivors, and their

family dependents, including millions of children.

In our poll we asked young adults if they could name any benefit

or coverage provided by Social Security other than retirement.

Fewer than 16 percent could name disability, and only 13 percent

could name survivors benefits. Fully 42 percent said that Social Security provides no other benefits at all. And 22 percent did not

know or respond. All in all, nearly three-fourths of all respondents

were unaware of the survivors and disability insurance coverage

that protects them and their families right now.

In other words, most young workers, upon opening their personalized benefits statements from the Social Security Administration,

will learn for the first time that they are also qualifying for disability and survivors insurance; that Social Security is already there

for them today. Considering that Social Security provides about as

much life insurance and disability insurance as all private-sector

providers combined, it is a good public service indeed for the government to notify working Americans about these important benefits.

While the current benefits statement is limited to explaining the

benefit formula guaranteed under present law, I am aware that

some have proposed to use these statements to address other

issues. I believe that any attempt to do this should be resisted, Mr.

Chairman.

I strongly believe that the mission of the Social Security statements should remain focused and clear: To notify Americans of

their contributions and benefits under present law.

I think that these statements will send Americans precisely the

right message: Social Security provides disability and survivors

benefits, and it is the foundation of a secure retirement, but it is

not enough.

I am certain that this is an agenda that we can all support. And

I thank you for inviting me to testify before your Committee today.

[The prepared statement follows:]

Statement of Hans Riemer, Founder and Director, 2030 Center

Thank you, Mr. Chairman, Mr. Matsui, and members of the Committee for inviting me here to testify today. My name is Hans Riemer, and I am the founder and

director of the 2030 Center, a public policy organization for young adults. The 2030

Center conducts research and public education in order to provide a voice for young

workers on important economic issues such as strengthening Social Security and improving job opportunity.

55

We are concerned about Social Security because we want to make sure that today’s young workers and future generations will be able to collect their full benefits—guaranteed. There is no doubt that young people want Social Security to remain financially strong so that it will pay full benefits to current and future retirees. This desire is an important explanation for why young people, on a nearly twoto-one basis, support using the budget surplus for Social Security rather than a tax

cut.

As you know, the Social Security Administration recently began to send ‘‘benefit

statements’’ to working Americans. These personalized statements estimate the projected retirement, disability, and life insurance benefits that a worker may claim.

I believe this is one of the most important developments in the history of Social Security, and I applaud you, Mr. Chairman, and members of the committee, for supporting this remarkable legislation.

Promoting public understanding of Social Security has been a concern of ours for

some time. In 1998, Peter Hart Research Associates, a national survey research

firm, conducted a poll for the 2030 Center that closely evaluated public attitudes,

particularly the attitudes of young workers, towards Social Security. We discovered

that efforts to inform the public about Social Security still have a long way to go.

One of the most striking examples of the need to improve public education about

Social Security pertains to expectations of future retirement benefits. Most Americans seem to think that Social Security is going to run out of money entirely in just

a few years or, at most, a decade or so—that every penny of Social Security funds

will soon be used up. This, of course, is far from true; even if Congress does nothing,

Social Security benefits are fully financed for at least the next 37 years; and even

after then, the payroll tax at current levels can fund at least 72 percent of promised

benefits. For most Americans, this reality represents a dramatic improvement over

their current expectations. We need to do a much better job educating the public

about the present fiscal health of the program so that informed judgments can be

made about the future.

Another important area where improvement is needed: Americans do not have an

adequate understanding of the range of benefits they are earning. As you know, one

third of all Social Security beneficiaries today—more than 13.5 million people—are

not retired workers. They are disabled workers, survivors, and their family dependents, including millions of children. While about 45 million Americans are collecting

Social Security checks today, there are even more who were raised with Social Security as a crucial source of income because a parent died or became disabled. This

aspect of Social Security is not well understood.

For example, in our poll, we also asked young adults if they could name any benefit or coverage provided by Social Security other than retirement. Fewer than 16

percent could name disability, and only 13 percent could name survivors benefits.

Fully 42 percent said that Social Security provides no other benefits at all, and 22

percent did not know or respond. All in all, nearly three fourths of all respondents

were unaware of the survivors and disability insurance coverage that covers them

and their families right now.

In other words, most young workers, upon opening their personalized benefits

statement from the Social Security Administration, will learn, for the first time,

that they are also qualifying for disability and survivors insurance—that Social Security is already there for them today. Considering that Social Security provides

about as much life insurance and disability insurance as all private sector providers

combined, it is a good public service indeed for the government to notify working

Americans about these important benefits.

While the current benefit statement, Mr. Chairman, is limited to explaining the

concrete benefit formula guaranteed under present law, I am aware that some have

proposed to use the statement to address other issues and concerns. With the great

many opportunities that all parties have to reach the public with an advocacy agenda, I hope that you will use your leadership to draw the line so that official information provided by the U.S. Government may only be used to explain present law,

rather than various contingencies that may or may not occur.

I strongly believe that the mission of the Social Security statements should remain focused and clear: to notify Americans of their contributions and benefits

under present law.

Thanks to the Social Security statements, millions of workers who are contributing to Social Security and want benefits to be there for them will now be able to

determine how much more they need to save for their retirement.

I think that these statements will send Americans precisely the right message:

Social Security provides disability and survivors’ benefits and it is the foundation

of a secure retirement—but it is not enough.

56

I am certain that this is an agenda that we can all support, and I thank you for

inviting me to testify before your committee today.

Chairman SHAW. Thank you.

Mr. GEBHARDTSBAUER. Thank you, Mr. Chairman. Good

afternoon——

Chairman SHAW. No, no, no, no, no, no. I have got to try this one:

Gebhardtsbauer.

Mr. GEBHARDTSBAUER. Very good. Yes.

Chairman SHAW. Would you try it?

Mr. GEBHARDTSBAUER. Sure. [Laughter.]

Mr. GEBHARDTSBAUER. Actually, it took me 8 years to learn how

to say it, so you have done it a lot quicker than I. It is

‘‘Gebhardtsbauer.’’

Chairman SHAW. I did get it right.

STATEMENT OF RON GEBHARDTSBAUER, SENIOR PENSION

FELLOW, AMERICAN ACADEMY OF ACTUARIES

Mr. GEBHARDTSBAUER. Good afternoon, Members of the Committee and staff. I am the senior pension fellow at the American Academy of Actuaries. The Academy is the non-partisan professional organization of actuaries in the United States. And we want to thank

you for allowing us to testify today.

I have been specifically asked to talk about two proposed bills

that would add information to the Trustees’ Report. And in background for this, I actually looked at some of the extensive material

that Social Security has on its website. They actually have the very

first Trustees’ Report from 1941, and it is 12 pages.

But over the past 60 years, Social Security I think has been very

responsive to the public and to Congress’ requests. And so now it

is 220 pages—a massive document. So you can see why maybe they

are concerned about, how much more is going to go into it.

But I think there are a lot of good ideas that the 1999 technical

panel, came up with. Experts, economists, actuaries were in that

group. And also, in these two bills. There are some good ideas. And

in fact, one, for instance, is a projection of poverty rates in the future. Some reform bills would raise the poverty level for people who

are elderly, and some reform bills would actually lower poverty levels. So it would be good for you to have a projection of those poverty levels before you vote. So you would want to see those comparisons. But maybe it does not necessarily have to be in the Trustees’ Report. It can be somewhere, so that you can make that vote.

But the reason why I am here today is to note that the Academy

have some concerns about some of the provisions in the bills. So

even though we like a lot of the provisions, we also want to talk

about some of our concerns, because I think there are some unintended consequences in the bills that maybe the sponsors did not

know.

For example, they would also require budget projections. And I

think those are very valuable, too, because some bills would use

general revenue, and some bills would not. And so it is good to

have a budget projection to see what the deficits could be like in

the future. And that is understandable. You also may want to have

57

a budget projection to see if we can easily redeem those bonds after

the year 2015. So there are lots of good reasons for them.

But there could be an unintended consequence. If the Social Security actuaries are the ones that have to do those calculations,

they would do them using their own calculations and their own assumptions, so that it would be consistent with all their work. But

then you would now have a third projection of what the budget

deficits are going to be like in the future.

And I think there would be a tendency to tell the Social Security

actuaries not to use their assumptions, but to use the OMB’s or

CBO’s assumptions. So I think it puts them in a difficult position,

maybe hurts their independence. And so maybe a way to craft

that—is to require CBO or OMB to do those calculations. In fact,

I think one of the bills is doing this.

The other area that I think is a concern is that in the Sense of

Congress part of one of the bills it says, ‘‘We would recommend

that all the recommendations of the technical panel be implemented by Social Security.’’ And that is a hundred pages. There is

an awful lot of information in there. They say, ‘‘if reasonable’’; but

still, I think Social Security would feel they had to implement all

of them, to the extent they could.

And I think before you do something like that, you would want

to make sure you agree with all of the ideas in there, and there

are an awful lot. And here is one, for instance: You require

stochastic projections.

And I apologize if your eyes glaze over. This is probably something only economists or an actuary would like. I know in my

speeches around the country at townhall forums sponsored by

members and the White House, we always give people a lot of time

to ask questions. They have never wanted a stochastic valuation,

though. And I am not sure the members here do, either because

here is what a stochastic valuation does.

Right now, we project what our best estimate is of the future.

And if we fix Social Security, then our best estimate would say,

‘‘Social Security is now in balance.’’ But what a stochastic valuation

would do is it would say, ‘‘Here are all the ranges of a possible future.’’ So the day after you have solved Social Security and put it

in balance, the headline in the paper the next day would say, ‘‘Social Security Fixed: The Probability of Failure Is Now Only 50 Percent.’’ So I am not sure you want something like that.

I think the unintended consequence of a stochastic valuation

would be, it would force you to increase taxes or cut benefits even

more than maybe you intended. So that is a concern. So you may

want to look at that technical panel’s report, and only specify what

you like out of it, instead of saying the whole thing.

I guess the other major concern is ‘‘money’s worth.’’ We have

been talking about that already. We feel at the Academy that a

‘‘money’s worth’’ or internal rate of return can be misleading. And

I think it was shown pretty well in the exchange earlier today between Mr. Matsui and Mr. Sununu.

The response to, ‘‘Why would it be on that benefits statement?’’

is so that you could compare it with your rate of return on your

401(k). The only problem with that is, you are going to see this 2

or 3 or 4 percent number from Social Security, and your 401(k) is

58

getting 10 or 20 percent. But that is because all of the 401(k)

money is being invested; none of that money in your 401(k) is going

to your parents. And so it is an unfair comparison. It should not

be done.

So what the Academy would say: ‘‘Money’s worth’’ and internal

rate of return calculations are helpful if they are used to, say, compare different proposals—‘‘What is this proposal like compared to

this proposal?’’ But to have an internal rate of return by itself

could be very misleading. And I have some more information on

that in my document.

And I notice I have a red light, so I want to finish up.

I guess my main point at the end is that Social Security has implemented a lot of the recommendations coming from Congress and

the technical panels in the past. And so maybe we might want to

give them some time to kind of incorporate some of these ideas.

But if you do want to have some of these mandated, then I think

you ought to look at them very carefully and itemize which ones

you want, before you say all of them should be done. Thank you.

[The prepared statement follows:]

[An attachment is being retained in the Committee files.]

Statement of Ron Gebhardtsbauer, Senior Pension Fellow, American

Academy of Actuaries

The American Academy of Actuaries is the public policy organization for actuaries

of all specialties within the United States. In addition to setting qualification standards and standards of actuarial practice, a major purpose of the Academy is to act

as the public information organization for the profession. The Academy is nonpartisan and assists the public policy process through the presentation of clear, objective analysis. The Academy regularly prepares testimony for Congress, provides

information to federal elected officials and congressional staff, comments on proposed federal regulations, and works closely with state officials on issues related to

insurance.

Chairman Shaw, committee members, staff, and fellow panelists, Good Afternoon.

My name is Ron Gebhardtsbauer and I am the Senior Pension Fellow at the American Academy of Actuaries. The Academy is the nonpartisan, public policy professional organization for actuaries in the United States. We at the Academy thank

you for inviting us to speak at this hearing on ‘‘Efforts to Inform the Public about

Social Security.’’

In the interest of time, I have provided the subcommittee with copies of my full

testimony on this subject, so that I can focus on my most important points. I’ve been

asked to discuss two proposed bills that recommend adding information to the

Trustees Report. These are H.R. 3578 and S. 2249. I also will comment on the 1999

Social Security Advisory Board Technical Panel recommendations for expanding the

data included in the Trustees Report.

What Issues about Social Security Are of most Concern to the Public?

One of the more interesting parts of my job over the past 4 years was to serve

as the Social Security expert at many Town Hall forums across the country sponsored by Members of Congress, the White House, and several non-partisan organizations.

At the Town Hall forums, the most frequent questions were:

• Did Congress really spend our Social Security money?

• Are Social Security’s bonds real money, or not?

• Will Social Security be there for me when I need it?

• Are we getting a good return on our contributions?

The Questions are Really for Congress: Unfortunately, these questions ultimately

cannot be answered by a Trustees’ Report or a Benefit Statement from Social Security. They can really only be answered by Congress. It will be difficult for Social

Security to answer these questions fully until Congress puts Social Security back

into balance. Nevertheless, the American public can find much valuable information

in the annual report of the Social Security trustees.

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The Trustees’ Report

In preparation for this testimony, I reviewed Social Security’s web sites and was

fascinated by how extensive they were. For example, they have all the Trustees’ Reports back to the first one in 1941. The first one was only 12 pages. The past was

so much simpler. Yet it had many familiar items, such as graphs and charts, optimistic and pessimistic assumptions, caveats about how hard it is to forecast the future, and important dates (e.g., when benefits would exceed taxes and funds would

be exhausted). Over the past 6 decades, Social Security has responded to the needs

of the public and Congress by including many more items. Current reports are

around 220 pages.

Suggestions for additional information in the Report: However, various experts

and recent advisory panels have suggested including still more information in the

Trustees’ Report. See the attached recommendations from the 1999 Technical Panel.

Many of their suggestions are valuable. I will discuss the controversial ones and

provide advantages and disadvantages, so that you can decide if you want to require

them.

For Comparing Reform Proposals: Some items would be very helpful for comparing specific proposals (e.g., projections of poverty rates and budget deficits).

For example, some reform proposals use Individual Accounts, which could increase

poverty rates among the elderly. Other proposals fix this by subsidizing small accounts or coupling them with a flat universal benefit. That could reduce poverty

rates. Thus, you may want poverty projections for comparing these proposals before

voting on them. Other reform proposals from both sides of the aisle use General

Revenues. Again, you may want a projection of future budget deficits (such as those

found in the recent GAO Report HEHS–00–29) to compare these reforms. Thus,

some items may only be needed in certain circumstances, and may not be needed

forever, especially after you put Social Security back in balance. Therefore, instead

of requiring them in the Trustees’ Report, you may want to just encourage Social

Security to put them in a separate report and/or on their web site. You may find

that they would be happy to do that. The Trustees have taken prior Technical Panel

reports seriously and generally respond to their suggestions. In addition, you might

give them some time to determine how best to provide them or display them, so it

may be preferable not to be too specific in your requirements.

The Academy has also released today, Quantitative Measures for Evaluating Social Security Reform Proposals, which provides policy makers with a framework to

evaluate the financial effect of competing reform proposals on the program’s longterm solvency and the impact of proposed changes on the financial needs and expectations of current and future workers. A copy of the issue brief is attached to my

testimony.

Budget Projections: There are difficulties in calculating some of the numbers (e.g.,

the budget projections). The Trustees would need to reproduce the extensive budget

projections from OMB, and would have to convert them to the Trustees’ assumptions, so that the projections are consistent. In addition, they would have to project

OMB’s numbers beyond the typical 10 years that they project them, and decisions

would have to be made on whether dynamic scoring should be used. But this is not

an insurmountable problem. GAO has made such a projection (GAO Report: Evaluating Reform Proposals HEHS–00–29). There may be an unintended consequence though. The administration might push for using the OMB assumptions

instead. In the past, the actuaries strenuously objected to using OMB’s or CBO’s assumptions for fear that they might be politically motivated (however slight it might

be). If the actuaries are forced to calculate budget numbers using OMB’s or CBO’s

assumptions, it could harm the independence of their work. Possible solutions would

be for the bill to require using the actuaries’ assumptions, or require CBO to perform the budget projections.

Stochastic valuations: The current report provides the Trustees’ best estimate of

what they think will happen in the future, along with an optimistic and a pessimistic projection. A stochastic projection will estimate the probability that the system

will fail in 75 years. You may find this an interesting piece of information and helpful if you want to quantify when a certain reform proposal is more risky, such as

a reform that would invest in stocks. On the other hand, it can have some drawbacks besides being complex and expensive. It can be confusing and have

unintended consequences on policy. Congress really wants only one answer, but

stochastic valuations will provide multiple answers, and they may not be the answers you want. For example, suppose Congress puts Social Security back in balance the usual way using our best estimates of the future. The next day’s headline,

using a stochastic valuation, might say ‘‘Social Security’s probability of failure is

now only 50%.’’ I’m not sure that is a message Congress would like. On one hand,

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that is reality. On the other, it could make Congress look bad. Would it push Congress to raise taxes further in order to assure a lower level of failure? Thus, using

the stochastic measure could make Social Security more expensive. In addition, arguments about the assumptions will escalate, because the Trustees would have to

determine the shape of the distribution for each assumption, the standard deviation

from the mean, and the covariance with all the other assumptions. If you think people are arguing about the assumptions now, wait until you have stochastic valuations.

Money’s Worth Tables: Some additions are voluminous and would dramatically

increase the size of the report with tables of many numbers and graphs (such as

money’s worth tables). As the 1999 Technical Panel suggested, this item can be

shortened by just doing prospective money’s worth calculations for small number of

age and income cohorts. Retrospective returns depending on how long you lived,

whether you received a disability benefit or survivor benefit, etc., can produce a voluminous amount of results.

Money’s Worth numbers can be misused and misleading. For example, Social

Security’s assets had a yield of 7% this past year. People are pleasantly surprised

when they hear that. They think it is lower, due to what other people say the returns are using money’s worth calculations. These implicit rate of returns should

not be compared with market returns. They can even be negative for some people.

But that’s the nature of insurance—you don’t mind it when your insurance policy

doesn’t pay off (e.g., you didn’t get in a car accident). In that situation, your rate

of return is more than a little negative; it’s negative 100%. You didn’t get any

money back on your insurance premium. You can also get negative returns on social

welfare programs and taxes, because some people pay in more than they get back.

Thus, this rate of return cannot, should not, be compared to the yields you get on

your assets. If we decide to privatize Social Security, we will still have to pay benefits to our parents. Thus, at least some, maybe all, of our contributions are going

to someone else. A money’s worth analysis forgets that we can’t get out of that

promise to our parent’s generation. In addition, in Social Security, single people are

paying taxes that help married people, and high-income people are paying in for

lower earners. If they have a low return, it may be because their contributions are

going to others. This wasn’t a problem in the past, because they would get more

from the next generation. But now the system is mature, that won’t happen again

(unless fertility rates increase dramatically or our current huge productivity gains

last forever). As you can see, individual money’s worth analysis, gets more to the

question of distribution among classes. If we want the system to have a better return, we can invest in stocks or just increase the bond yields by Congressional action. (Since it is Congress that keeps Social Security from investing in stocks and

corporate bonds, they could compensate by giving them a return of 10% will just

raise our income taxes and it will add an element of politics into the system.) There

is another concern with rates of return analysis. One way to fix Social Security

would be to give it $5 trillion of General Revenues. The rates of return would look

great, but that wouldn’t be fair. All sources of contributions must be included in the

calculation, so that the comparison is not manipulated. This is not as easy as it

sounds however. For example, how would you calculate it if Congress gave Social

Security’s bonds a slightly better rate of return? (Should some of the additional investment return be included in contributions?) Thus, providing each individual’s

rate of return can be misleading, so we need to be careful, before we require them.

One last concern for individual rates of return for Social Security is that they depend on how Social Security will be fixed, and who will be affected. So again, Social

Security can not adequately answer this question—only Congress can.

Social Security could just provide some of the extensive recommendations on their

Web site, not the Trustees’ Reports or benefit statements, unless you think they

would be misleading even on the web site.

Recent proposed legislation, H.R. 3578, would require certain additional items in

the Trustees’ Report. We discuss the advantages and disadvantages, so that you can

assess them.

The Unfunded Liability (and Change since Prior Year): This number is useful for

reform proposals that want to move to an advance-funded system. It is sometimes

referred to as the closed group obligation, the transition cost, or the unfunded termination liability, and would be around $9 trillion today. Private-sector pension plans

are required to display their unfunded termination liability prominently. However,

some people contend that it is not a relevant number for an ongoing Social Security

system, which is just a transfer system from workers to retirees. They contend it

should not appear in the Report, because it will be confused with the open-group

unfunded number (approximately $3 trillion today). When the system gets back in

balance the open-group number will be zero, but the closed-group number will still

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be around $9 trillion. Will this confuse people? Advocates of this number say it is

important for us to acknowledge that Social Security is not advance funded and that

we have made these promises without funding for them. I can only give the advantages and disadvantages on this, not take a position. It is a political issue for you

to decide if you want to require it and how prominent it should be—whether it

should be in the Summary, the Report, or just available on a website. The number

is calculated annually already, so it won’t add any administrative costs. H.R. 3578

would have to define it better. For example, is it the number that private-sector

plans must provide—the closed group unfunded termination liability or is it the ongoing unfunded accrued liability? Is it a calculation closed to just the people paying

into the system today, or is the calculation open to new workers coming into the

system in the future. If open, is it open forever or limited to 75 years? H.R. 3578

has 3 versions. Only the present value calculation is meaningful. Another would just

add up nominal dollar unfunded amounts from the future. Another uses CPI-adjusted numbers. These two numbers are misleading and should not be used. They

can increase dramatically even in good years (e.g., if productivity improves), which

is a not a helpful result.

The Deficit in the Last Year of the Projection: This amount is helpful for understanding the sustainability of the system and already appears in Table III.B4 on

page 183 ($7 trillion in 2075 dollars). H.R. 3578 also wants the inflation-adjusted

amount displayed more prominently. Relating it to pay or GDP would be preferable.

Chart C in the Summary shows the 2075 deficit is 6% of taxable payroll. This is

more meaningful than the $7 trillion number or even the $300 billion number which

is inflation-adjusted, because benefits and taxes increase at rates more closely tied

to pay. The further out in years, the more the numbers become misleading by the

additional compounding over the inflation rate. This deficit is also discussed in the

Summary, which states that the benefit outgo is 11⁄2 times as large as the tax income in that year.

The Economic Model, Relevant Data, and Changes: We agree that all of these

items should be in an actuarial valuation. In fact, actuarial standards of practice

require that actuarial valuations be sufficiently documented so that another actuary

can assess whether the results are reasonable. If the sponsors are encouraging more

details, I note that page 144 refers the reader to a web site and some Actuarial

Studies (which are listed on the web) that can be requested from the Office of the

Actuary.

Quality of Trust Funds’ Assets: H.R. 3578 also requires the Trustees’ Report to

explain that the Trust Fund balances are not real economic assets. This hints at

the very controversial debate on whether the money is real or not. However, I don’t

know if Congress can do this without contradicting its full faith and credit backing

of the bonds. I think I know what the sponsor wants. Prior Trustees’ Reports gently

expressed a concern about how the bonds would be redeemed, which might be acceptable. Maybe people can work together to finesse this difference without the law

getting into this controversy. The proposed bill requires the Report to state that

Congress will need to raise taxes, increase the debt, or cut benefits to redeem the

bonds. This is a reasonable factual statement.

Technical Panel: Another bill (S. 2249) says it’s the Sense of the Senate to implement the recommendations in the 1999 Technical Panel’s report. Many of them have

value, and we have discussed some of their advantages and disadvantages already.

However, some people are concerned about an unintended consequence of referencing the 1999 Panel in the bill. You may prefer that a bill just state its specific requirements without referencing the Panel. Citing the Panel elevates them above the

Trustees (which includes their bosses’ boss—the Commissioner of Social Security,

and also the Secretaries of Treasury, HHS, and Labor). In addition it could give future Panels (which might have very different ideas) more importance than you

might want, or it could give some items in the 1999 Report more authority than

you wanted. Do you agree with all of the recommendations? How important

are they? Are their benefits worth the cost to provide them? If some of them take

an inordinate amount of space, could they be on the web instead and referenced?

Since the suggestions are from a panel of experts, we doubt that any of their requirements would be misleading to knowledgeable readers, but some people are concerned that items, such as stochastic valuations and internal rates of return, could

confuse and mislead some people. There are lots of items in those 100 pages of their

report. Some additional advantages and disadvantages of S. 2249 follow:

Emphasize income and cost rates and balances for all 75 years with the same emphasis as the actuarial solvency numbers. It appears that all 225 numbers are being

required in all the places the solvency number appears. Since this would take a lot

of space, maybe the intent is to just have it appear up front, prominently. Since the

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intent is to present measures of long-term sustainability, maybe only the 75th year

is needed, as suggested in H.R. 3578.

Percentage Increase in Taxes/Decrease in Benefits Needed for Solvency in all 75

years: These percentages can be determined by a quick division from numbers in

the Report (e.g., Table II.F.13 or III.B2, or B3, or B4, or C1). They will add to the

length of the report, but can be helpful.

Effects on National Savings: These numbers can be important when comparing

certain reform proposals. For example, if contributions are increased (whether for

the Trust Fund or for Individual Accounts) and/or benefits cut, National Savings

could increase, which could have other beneficial affects on productivity and the

economy. However, there is strong disagreement on whether savings will increase

a lot or a little. Some would say they are unknowable. In fact, there are disagreements even on how to measure savings (e.g., whether to include capital gains). In

addition, these numbers are primarily of value in comparing proposals.

Effects on the Budget: Again, these numbers are valuable when comparing certain

reform proposals. For example, some reform proposals use General Revenues, which

can increase future budget deficits. Members will want projections of these deficits

(such as those found in the recent GAO Report HEHS–00–29) to compare these reforms. Thus, this item may only be needed in certain circumstances, and may not

be needed forever, especially after you put Social Security back in balance.

Average Lifetime Values of Benefits (by age, income, gender, and type of benefit):

As the 1999 Technical Panel noted, this will show that the value of lifetime benefits

received from Social Security is increasing as people live longer. Life expectancies

also show this. The panel also noted that the lifetime values can help us compare

lifetime benefits from reform proposals that distribute benefits in different patterns.

The panel however, recommended fewer numbers for the Trustees’ Report. They

suggested the larger group of numbers be available electronically. Some panel members also suggested that the lifetime value of taxes paid also be provided. This

would help the reader determine their money worth, the advantages and disadvantages of which were discussed earlier.

Conclusion

Experts and panels have recommended new items for the Trustees’ Reports, many

of which are valuable. Social Security may over time accept many of them,

as they have in the past. However, if Congress chooses to mandate certain items,

I would suggest it study them thoroughly. Some recommendations may be costly

and you may want to do a cost-benefit analysis before requiring them. Some are voluminous, so you may decide that they are important enough to have somewhere,

but not necessarily in the Trustees’ Reports. Some items are good but they need to

be defined better and clarified, so that they are not misleading. Some items are only

needed for today’s reform proposals, which is why they are not in the annual Trustees’ Report. They may not be needed in the future. However, they may be needed

as a base number from which to compare the proposals. Thus, they can go on the

web site if necessary, but they don’t have to be in the Report. Some may cause confusion or be misleading, so you will want to be careful before adding them. Some

proposals just want more prominence for certain items, which shouldn’t be a problem, unless you think the prominence over-emphasizes them to unwary readers.

Some have unintended consequences. For example, the 1999 Technical Panel’s

recommendation for stochastic valuations could raise Social Security taxes.

Hopefully by providing these advantages and disadvantages, you will be able to

decide which additions are important enough to require by law.

Finally, my experience listening to participants at Town Hall forums around the

country has revealed that the public’s most important questions can not be answered by the Trustees’ Report, only by Congressional action. We at the Academy

are available now and any time in the future if you have more questions. Thank

you for inviting us to speak at this hearing.

1999 TECHNICAL PANEL TABLE OF RECOMMENDATIONS

Presentation Issues (for the Trustees Report and elsewhere)

• The format can be improved to allow easier access and understanding.

• The uncertainty of projections should be displayed more clearly and in ways

that reflect better the relationship of that uncertainty to the design of the law.

• Cohort life expectancy should be shown (period life expectancy, as now shown,

is easily misunderstood).

• The lifetime value of benefits (and possibly taxes) for various types of workers

over time should be displayed.

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• Alternative estimates of the unfunded obligations of the Social Security system

should be presented in the Trustees Report. • Traditional definitions of ‘‘typical workers’’—low and average earners—result in

an overstatement of the lifetime income and benefits of the typical low-income and

average-income worker and should be revised. • Less emphasis should be placed on the 75-year actuarial balance and more on

long-term sustainability (as reflected, for instance, in balance during the last part

of the projection period). • Benefits under existing tax rates and taxes under existing benefit rates should

be presented to better reflect consequences of current law. • Prevalence rates for Disability Insurance, not just incidence rates of new

awards, should be displayed.

Methodology and Models

• A published consistent set of criteria is recommended for comparing reform proposals and current law. • General equilibrium modeling is necessary for consistency and to understand

interactions. • Models (micro simulation) to demonstrate distributional effects, as well as to estimate better those features influenced heavily by distributional factors, are necessary and must be enhanced significantly. • Greater public access to Social Security information should be encouraged. • Ongoing technical review of several issues is necessary. • Modeling capabilities (stochastic modeling) are necessary to display uncertainty

and the effect of policy on that uncertainty. • Estimation methodology would benefit from new techniques to reflect consistency among variables.

Chairman SHAW. Thank you.

Dr. Aaron.

STATEMENT OF HENRY J. AARON, BRUCE AND VIRGINIA

MACLAURY SENIOR FELLOW, BROOKINGS INSTITUTION,

AND CHAIRMAN OF THE BOARD, NATIONAL ACADEMY OF

SOCIAL INSURANCE

Mr. AARON. Thank you very much. I have a suggestion with respect to this gentleman’s name, if it is problematic. Just think of

the Minority Leader’s flower garden: ‘‘Gephardt’s Bower.’’ [Laughter.]

Mr. AARON. It is very easy.

Mr. GEBHARDTSBAUER. Except he spells his name wrong, with a

‘‘P.’’ And mine is with a ‘‘B.’’ [Laughter.]

Mr. AARON. I cover a number of points in my statement, but in

my oral remarks I want to focus on the discussion of rate of return

calculations: Should you do it in the reports? And my answer is a

clear ‘‘No.’’

And the reason is that it cannot be done right. Not that it is not

done right, not that it has not been done right; but that it cannot

be done right. Let me list five questions that you would have to answer in order to do a reasonable evaluation which would permit the

kinds of comparisons to which attention was just drawn.

What is full protection against inflation risk worth? No private

asset provides this protection. Social Security does.

What is full protection against financial market risk worth? All

private assets analogous to individual accounts carry financial market risk, which the accountholder must bear. Social Security

spreads such risks over all workers and through time. How much

is such risk diversification worth?

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How should one value political risk? Social Security is subject to

political risks that benefits or tax rates may be changed. Individual

accountholders are subject to the risk that income or estate taxes

could be changed in ways that affect the value of their accumulation. How should one value each of those kinds of risks?

How much is the insurance protection in disability and survivors

insurance worth? People regularly pay premiums that exceed the

expected payout for property and casualty, disability, life, and

health insurance. They do so because the insurance spares them

the risks that they feel ill equipped to bear. That means that the

value of such insurance exceeds its costs, although the payments

are less than the cost. How should one estimate the extra value in

the case of insurance protection provided by Social Security against

loss of income from disability or premature death of the breadwinner?

How much is the earnings insurance provided by Social Security

worth? When workers enter the labor force, it is usually unclear

whether they are going to be high or low earners. Social Security’s

benefit formula provides higher replacement rates if earnings turn

out to have been low than if they turn out to have been high—a

form of earnings insurance. How much is it worth?

None of these questions has been answered well with respect to

Social Security. Many more equally difficult questions could be listed. Of course, I want to stress, any good analyst could come up

with answers to almost any question at all. Unfortunately, the answers are going to differ enormously.

What this means, I think, is that responsible people would make

radically different estimates. For that reason, mandating the reporting of rates of return would be to mandate highly uncertain,

even arbitrary, estimates.

When workers enter the labor force, they typically do not know

anything more than their own race and sex. They do not know

what they will earn. They do not know when or whether they will

marry, or get divorced, or remarry, or have children, and if so how

many. They do not know how often or how long they will be unemployed. They do not know if they will become disabled, or how long

they will live, and, if married, how long their spouse will live. They

do not know future asset yields or rates of inflation. They do not

know how risk averse they will be, and how much they will pay

to avoid those risks in the future.

Not only do workers not know these things; neither does any actuary or economist. Yet, without knowing these things it is impossible—not difficult, but completely impossible—to construct meaningful estimates of the rate of return on a complex set of contingent

payments such as Social Security.

Let me repeat: Some analysts can make assumptions about each

of these variables, plug them into a computer, and come up with

a numerical answer. I am simply asserting that this numerical answer would not be worth the powder to blow it to hell.

And if you would like me to be more clear in response to questions, I will try to do so. [Laughter.]

[The prepared statement follows:]

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1 Bruce and Virginia MacLaury Senior Fellow, the Brookings Institution; Chairman of the

Board, National Academy of Social Insurance. The views expressed here are my own and do not

necessarily reflect the views of the staff, officers or trustees of the Brookings Institution or the

members, staff, or directors of the National Academy of Social Insurance.

Statement of Henry J. Aaron,1 Bruce and Virginia MacLaury Senior Fellow,

Brookings Institution, and Chairman of the Board, National Academy of

Social Insurance

Mr. Chairman:

Thank you for the invitation to testify on the quality of information provided to

workers and citizens through the annual Social Security statements and the reports

of the Trustees of the Social Security program.

The initiation of annual information reports is a major and constructive innovation, as you stressed in your announcement of these hearings. The Trustees Reports,

which have been available since the inception of Social Security, are a remarkable

source of information, unmatched as far as I know by analogous releases in any

other country.

Although these reports are very good indeed, it is important and constructive to

ask whether they could be better. There has never been a data source that analysts

did not believe they could improve in some way. And I shall not break that chain.

Improvements are possible. For that reason, you are to be congratulated on scheduling hearings to consider possible improvements.

Having said that, I think that legislative micromanagement of these reports is

more likely to reduce their quality than to improve it. Congress showed great wisdom

in mandating these reports. But with even greater wisdom it left the design of these

reports to non-political professionals. These civil servants—in my view among the

most dedicated and capable in the federal government—have made and continue to

make annual improvements and modifications based on consultation with governmental and nongovernmental professionals.

Before turning to the specifics of these reports, I want to highlight two facts. First,

the debate on Social Security reform has benefitted from the agreement by most participants to work from the same set of estimates about the long-term financial status

of the program. These estimates have driven home the two key statistical facts

about the status of Social Security. Firs, the system is currently running large cash

flow surpluses and will continue to do so for many years. Second, the program faces

a projected long-term deficit.

We all realize that any changes in the program will be phased in gradually. The

proper mind-set for Social Security reform—to borrow a term immortalized by the

Supreme Court in another context—is that we should move with all deliberate speed

to enact the reforms on which Americans and their representatives can agree.

My second point is that agreement on the two key facts I just mentioned has permitted debate to focus on matters that are more important than finances and have

little to do with them—whether the Social Security system as currently designed is

the best way to serve the purposes of social insurance—to assure basic income to

American retirees, the disabled, and survivors. My own view is that it is well designed for that purpose. Others disagree. But the key point is that we can focus on

that debate. For the most part, we have avoided a wonkish numbers squabble. The

prospects for resolution of the debate on structural reform of Social Security will diminish sharply if we become occupied by squabbles about the numbers. If the public

begins to think that the experts cannot even agree on what the numbers are, they

will either get diverted from the more important issues or they will get bored and

tune out. We should avoid a situation in which dueling estimates contend for public

attention. We should make sure that the numbers used in public debate are done

carefully, according to reasonable assumptions and are presented in a manner that

the public can readily understand.

So much for homilies. Now I should like to apply these principles to specific suggestions that have been advanced by various critics of the current estimates as contained in the Trustees Reports or the annual statements sent to workers. Because

many assumptions go into these projections, there are many points of potential debate. I shall focus my remarks on just two. If you wish to go into others, I should

be glad to respond to your questions.

Mortality Rates

The Technical Panel on Assumptions and Methods that reported last November

urged the Trustees approximately to double the rate of improvement in mortality

rates assumed in projecting long term costs. The 1999 Trustees Report assumed

faster declines in mortality rates than have been observed since the early 1980s, but

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slower than rates of improvement measured over longer periods. The Technical Panel’s recommendation was based on analyses by reputable demographers and others

who served on the panel. Not all outside experts share the Panel’s views, but the

projection of sharply improved longevity can certainly be defended. Great medical

advances lie in the future. They could greatly extend life expectancy. Unfortunately,

as I have noted, the most recent trends in mortality rates are not so encouraging—

or discouraging, from the standpoint of Social Security’s finances.

For experts to miss a turning point or to expect one that hasn’t occurred yet is

not unusual. Nor is it unusual for them to change their minds. The problem is that

experts often guess wrong. • In the 1930s, few foresaw they baby boom. In the 1950s and 1960s few foresaw

its end. • Five years ago, budget experts foresaw large and explosively growing budget

deficits. Today they foresee virtually permanent budget surpluses. • Three years ago, economists believed that unemployment much below 6 percent

would trigger explosively growing wage and price inflation. Many now maintain that

4-percent unemployment without inflation can go on indefinitely. • Some now believe that productivity growth will remain so high that little of the

projected long-term deficit in Social Security will remain. Other’s think current

rates cannot be sustained or even believe that they will relapse to the dismal rates

that prevailed from 1973 through 1996.

The Social Security trustees often have to decide what to do when expert judgment is not yet confirmed by the facts. The prudent course of action, I believe, is

to take account of the experts’ views, modifying assumptions a bit at first. Then,

if evidence confirms the experts’ views, further adjustments are in order.

With the amply documented history of real howlers by experts in mind, I believe

that we should admire the prudence with which the Trustees handled the Technical

Panel’s recommendations on assumptions regarding mortality rates. In the 2000 report, the Trustees increased the assumed rate of improvement in mortality by onethird—a sizeable shift, but much less than the huge shift suggested by the Technical Panel. Presumably, they found in the promise of the biological revolution sufficient reason to increase assumed longevity. But they sensibly decided to wait for

the revolution to show up in the numbers before making even larger shifts.

As I noted, expert judgment may change a lot—and quickly. If the Trustees

promptly and completely incorporated the latest, best wisdom of economic or demographic experts, the 75-year projections would oscillate crazily from year to year.

The result would be alternate bouts of euphoria and panic and a breakdown of trust

in the projections. Instead of conveying the important message that Social Security

faces a projected long term deficit that we should close promptly, people would look

at current surpluses and shrug off the long-term projections as undependable.

I have focused on projected mortality, but the same cautionary note applies to other

key assumptions. Productivity growth is dramatically above what the actuaries assume. Rather than incorporating these higher levels into long-term projections, the

Trustees raised assumed productivity growth a modest 0.1 percentage point. The

‘‘new economy’’ is great fun. Let’s enjoy it as long as we can. But only if it lasts

a decade or more, are the Trustees likely to incorporate it fully into long-term Social

Security projections. Given the history of trend reversals, the Trustees’ practice of

cautious and highly damped adjustments to new events is the only prudent course.

Rates of Return

Oceans of financial data wash over us. Every mutual fund routinely reports its

annualized rates of return for various past periods. Business school professors have

computed rates of return on common stocks, 30-year Treasury bonds, Treasury bills,

and just about everything else. Shouldn’t Social Security provide such data to each

worker and as part of the annual Trustees Reports? The answer, I believe, is a clear

and unambiguous ‘‘No!; There are three reasons:

• the enduring effects of Social Security’s past history on the continuing operation

of the system;

• the character of the Social Security benefit package; and

• the fallacies that arise from choosing incorrect perspectives for measuring rates

of return.

Social Security is a combination of annuities, insurance, and income redistribution. Furthermore, the program’s history shapes its present and future. For workers

who live to retirement, Social Security is an annuity. For people who become disabled or die, it is insurance that provides payments to workers or their dependents.

For low-earners and large families, the program provides social assistance, financed

by high earners and small families. Furthermore, the program today must deal with

the consequences of the decision to pay early beneficiaries larger benefits than their

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2 Henry J. Aaron, ‘‘Demographic Effects on the Equity of Social Security Benefits,’’ in The Economics of Public Services, Martin Feldstein, editor, 1976. 3 I actually computed ratios of present discounted values rather than internal rates of return,

but the conceptual error described in the text is the same.

contributions merited. Each of these factors should be taken into account in computing rates of return. Yet no currently available analysis has done so.

Past policy. The extremely generous benefits that Social Security paid to early

beneficiaries were financed by payroll taxes collected from active workers. As a result, reserves accumulated for these younger workers were tiny. Benefits subsequently paid to those younger workers have had to be financed by later workers.

The reserves that were not accumulated on behalf of today’s workers are the unfunded liability of the current system. Unless Congress reneges on these benefits—

which is inconceivable—it will be necessary to collect taxes to pay those benefits. This

obligation is inescapable, whether Social Security continues in its current form or is

replaced. No mutual fund or asset group carries such an unfunded liability. Should

some system of individual accounts replace Social Security, taxpayers would not escape this unfunded liability.

For this reason, it would be misleading, at best—meaningless, at worst—to compare rates of return on Social Security with returns on individual accounts that omit

the cost of paying this unfunded liability. No such individual accounts plan could

exist, unless Congress was prepared to renege on promises to current workers. Yet,

such comparisons would be natural and would even be encouraged by the ignorant.

The benefit package. Several analysts have presented estimates of the rate of return on Old-Age Insurance—that is, of retirement benefits. Unfortunately, the estimates of returns on Old-Age Insurance are incomplete and misleading. In contrast,

no one has ever presented estimates of the rate of return on Social Security as a

whole. The reason is that reliable data and defensible methods for estimating the

rate of return on Social Security as a whole are currently unavailable.

Let me make clear that I am not throwing stones simply at others. More than

a quarter century ago, I prepared the first empirical estimates of the rate of return

on Old-Age Insurance.2 They were the best I could do at the time, but they weren’t

good enough, as the discussant of my paper pointed out. The problem was that, like

many later analysts, I was forced to make a crude and highly distorting assumption.

Because Social Security consists not only of Old-Age Insurance but also of Survivors

Insurance and Disability Insurance, one cannot attribute the entire payroll tax to

support of Old-Age Insurance. On the average about two-thirds of the payroll tax

goes to support Old-Age Insurance.

I and, subsequently, others have assumed that each worker bears the burden of

about two-thirds of the payroll tax. We have compared the present discounted value

of that tax with the present discounted value of the expected retirement benefits

that workers receive. The interest rate that equilibrates these present expected values was the rate of return.3

The purpose of my study was to test an hypothesis originally presented by Milton

Friedman, that blacks do less well than whites under Social Security. The problem,

Friedman noted, was that blacks have briefer life expectancies and collect retirement benefits for a briefer period than do whites. This condition, he suggested, more

than offset the disproportionately generous benefits paid to low earners, among

whom blacks were—and are—over-represented. I found that blacks’ shorter life

expectancies about offset the effects of the benefit formula and that rates of return

for blacks and whites were rather similar.

My discussant pointed out that I had not found what I had thought I had found.

The problem, he pointed out, is that Social Security is an integrated package of retirement, survivors, and disability insurance benefits. The shorter life-expectancies

of blacks mean that they receive proportionately more survivors benefits than do

whites. In addition, the shorter black life-expectancies are correlated with higher

disability rates, so that blacks receive proportionately more disability benefits than

do whites. For this reason, he pointed out, I was wrong to assume that the same

fraction of the payroll tax supports retirement pensions for blacks and whites. To

compute the rate of return for blacks as a group or for whites as a group, one would

have to take into account the differential value of disability and survivors benefits.

I hadn’t done that. So, my computations may have been interesting, but they did

not mean what I thought they meant.

Data to solve this problem were lacking a quarter century ago, and they are lacking still. This fact has not prevented analysts from repeating the same mistake I

made and, unfortunately, adding new ones of their own. The Heritage Foundation,

for example, compared rates of return to blacks and whites using life-expectancies

at birth, rather than examining when labor force entrants died and how long those

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4William W. Beach and Gareth G. Davis, ‘‘Social Security’s Rate of Return,’’ Heritage Foundation, January 1998 5 Robert J. Myers, ‘‘A Glaring Error: Why one study of Social Security misstates returns,’’ The

Actuary, September 1998, p. 5; Stephen Goss, ‘‘Memorandum: Problems with ’Social Security’s

Rate of Return,’ A Report of the Heritage Center for Data Analysis,’’ February 4, 1998.

who reached retirement age actually received benefits.4 The result was a gross distortion in the relative lengths of benefit payments. For example, Heritage estimated

that the average duration of benefit receipt for black men aged 20 in 1997 would

be 2.2 years. The true expectation was 8.1 years. This distortion severed any connection between the calculations and reality. Both former chief actuary Robert Myers

and current deputy chief actuary, Stephan Goss have written devastating critiques

of this egregious study.5

If one should not present bad estimates of returns on Old-Age Insurance as estimates of returns on Old-Age Insurance and certainly not as returns on Social Security, the question remains as to whether it is possible to prepare good estimates of

returns on Social Security. I imagine that one day such studies will be done. But

they haven’t been done yet, and a number of very difficult problems will have to

be solved before such studies merit inclusion either in the Trustees Reports or in

annual statements to workers. Among these questions are the following: • What is full protection against inflation risk worth? No private asset provides

this protection. Hence, it is necessary to value this protection if fair comparisons are

to be possible between Social Security and other assets. • What is full protection against financial market risk worth? All private assets

analogous to individual accounts carry financial market risk, which the account

holder must bear. Social Security spreads such risks over all workers and through

time. How much is such risk diversification worth? • How should one value political risk? Social Security is subject to political risks

that benefits or tax rates may be changed. Individual account holders are subject

to the risk that income or estate tax rules may be changed in ways that affect the

value of their accumulations. How should one value each kind of risk? • How much is the insurance protection in Disability and Survivors Insurance

worth? People regularly pay premiums that exceed than the expected pay-out for

property and casualty, disability, life, and health insurance. They do so because

such insurance spares them risks they feel ill-equipped to bear. This fact means

that the value of such insurance exceeds its cost although the payments are less

than the cost. How should one estimate this extra value in the case of the insurance

protection provided by Social Security against loss of income from disability or premature death of a breadwinner. • How much is the ‘‘earnings’’ insurance provided by Social Security worth? When

workers enter the labor force, it is usually unclear whether they will be high or low

earners. Social Security’s benefit formula provides higher replacement rates if earnings turn out to have been low than if they turn out to have been high, a form of

earnings insurance. How much is this insurance worth?

None of these questions has been answered well with respect to Social Security.

Many more equally difficult questions could be listed. Of course, any good analyst

can come up with answers to almost any question. Unfortunately, the answers will

differ enormously. This fact means that responsible people will make radically different estimates. To mandate reporting of rates of return would therefore be to mandate highly uncertain, even arbitrary, estimates.

Perspective for Measuring Rates of Return. When workers enter the labor force,

they typically do not know anything more than their race and sex. They do not

know what they will earn. They do not know when or whether they will marry. Or

get divorced. Or remarry. Or have children, and, if so, how many. They do not know

how often or how long they will be unemployed. They do not know if they will become disabled or how long they will live and, if married, how long their spouse will

live. They do not know future asset yields or rates of inflation. They do not know

how averse they will be to risk and how much they will pay to avoid these risks.

Not only do workers not know these things, neither does any actuary or economist. Yet without knowing these things it is impossible—not just difficult, but completely impossible—to construct meaningful estimates of the rates of return on a

complex set of contingent payments such as Social Security. Let me be clear. Some

analyst can make assumptions about each of these variables, plug them into a computer and come up with a numerical answer. I am simply asserting that this numerical answer would not be worth the powder to blow it to hell.

Of course, as workers age, they will learn answers to many of these questions.

They will still not know how long they will live or whether they will become disabled or what rate of inflation will prevail when they become beneficiaries. But they

69

will know if they are rich or poor; married, divorced, or single; parents or childless;

well or ill; and so on. Once they know these things, however, they will—by definition—no longer be benefitting from the protections that are an essential part of Social Security—the insurance against these risks.

For that reason, it makes no sense to measure the value of Social Security to, say,

a fifty-five year old by the taxes that worker has paid and will pay and the benefits

that worker will receive. To see why, consider a fifty-five year old homeowner who

has had fire insurance since buying the home at, say, age twenty-five. This homeowner has paid premiums for thirty years and will continue to pay premiums. It

would surely be complete nonsense to value that insurance by comparing the

present value of all premiums the homeowner has paid and will pay against the expected pay-outs in the event of a fire. Most of the value of the insurance has already

been achieved, in the form of peace of mind over three decades. The best outcome

would be one in which the homeowner looks back at a lifetime of premium payments

and no cash benefits. The financial rate of return in that case would be—. The economic return is presumed to be positive; otherwise people would not have bought

the insurance.

In the same sense, most of us would like to look back at a lifetime of payroll tax

payments and to find that we never collected disability insurance, our children

never collected survivors benefits, and we did not benefit from the high replacement

rates paid to low earners.

What this means is that the only potentially meaningful calculations of rates of

return would have to be made for new labor force entrants. At that point, workers

know their race and sex, but not much else. If one thought one could answer the

questions I listed in the preceding section—as well as many others that I could have

included—then one might prepare estimates of rates of return for race/sex groups.

But I don’t think that these questions can be answered with satisfactory confidence.

And so I come to my conclusion—mandating estimates of rates of return would be

ill considered. Analysts can make such estimates, but they would not be meaningful.

Conclusion

I have focused on two issues: legislative mandates regarding particular assumptions and legislative mandates regarding estimates of rates of return as part of annual reports to workers or of the Trustees Reports. Each issue illustrates a larger

class of issues. My major purpose is to warn about the dangers of legislative micromanagement of the contents of statistical reports, such as that of the Social Security

Trustees, or annual reports to workers. The Trustees Reports are subject to annual

review by outside experts. The methods used in making these reports have changed.

Statistical capabilities change over time as new analytical methods arise, as data

sources expand, or, as has been increasingly the case in some areas of late, as data

sources vanish because of penny-wise cuts in budgets of statistical agencies.

In addition, I hope that the Trustees will continue the work now under way to

construct representative life-time earnings profiles. I would urge them to reconsider

the linkage of various assumptions now grouped in the high-or low-cost projections.

But these and other problems are best addressed by the Trustees with the aid of

outside professional consultants. Congress has mandated, and will mandate, onetime studies of particular questions. Where these questions are sensitive—and virtually everything seems to be sensitive to someone—it often mandates a responsible

organization whose objectivity is not in question, such as the National Academy of

Sciences or the Institute of Medicine to carry out such a study. If Congress wishes

to explore in greater depth the issues raised in these hearings, it might consider

a similar approach, mandating a study by the National Academy of Sciences or the

National Academy of Social Insurance.

Chairman SHAW. Thank you. I guess you tried.

Mr. AARON. Oh, no, I could continue, Mr. Shaw. Are you inviting

me to do so? [Laughter.]

Chairman SHAW. Ms. Entmacher.

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STATEMENT OF JOAN ENTMACHER, VICE PRESIDENT AND DIRECTOR, FAMILY ECONOMIC SECURITY, NATIONAL WOMEN’S LAW CENTER

Ms. ENTMACHER. Chairman Shaw, Mr. Matsui, and Members of

the Subcommittee, I appreciate the opportunity to testify on behalf

of the National Women’s Law Center.

The new Social Security statement provides in a short and clear

format the essential information women need to plan for retirement, check their earnings records, and understand the program.

This information is especially important to women, who depend

more than men on Social Security income and on the full range of

benefits that Social Security provides in addition to worker retirement benefits.

Some have suggested that the statement also should include information about Social Security’s rate of return, as they would define it. Some proponents have acknowledged that the purpose of

this is to encourage workers to compare Social Security’s rate of return with what they could get if they invested those dollars privately.

We are concerned that information would be highly misleading,

as several other witnesses have already indicated. First, as others

have stressed, most of the Social Security taxes paid by current

workers are used to pay benefits to those who are currently eligible. Once the cost of continuing to meet those obligations is

factored in, the rates of return under Social Security and privatized

systems is similar.

To emphasize how large a factor this is, last year about 85 cents

of every dollar Social Security collected in taxes went to pay benefits to current beneficiaries. About 15 cents went into the Social Security Trust Fund, where by law it may be invested only in U.S.

Treasury securities.

If current workers could contribute their tax dollar not to Social

Security, but to save it for only themselves, they would have a dollar to invest, not 15 cents. It would hardly be surprising if their

returns were higher. But if current workers stop paying Social Security taxes, Social Security would not be able to pay benefits to

those who are eligible. Over half of all women 65 and over would

be plunged into poverty.

I am sure that this Subcommittee, that this chairman, that these

members, that this Congress and indeed any Congress, would not

allow that scenario to unfold.

And once the cost of paying those promised benefits is factored

into any reform plan, the rates of return under Social Security and

a privatized system would be essentially equal, as many economists

have concluded.

Second, any estimate of Social Security’s rate of return must include the value of protection against risk provided by its secure

lifetime inflation-adjusted retirement benefits.

As Mr. Aaron just said, Social Security allows people to get a secure basic benefit that they can count on through retirement without worrying about the state of the stock market, the rate of inflation, or—and this is a particularly well-grounded fear for women,

given their life expectancies and smaller other resources—the risk

that they will outlive their other assets. If women had to obtain

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comparable protection privately, it would be extremely expensive,

if possible at all.

Third, Social Security provides disability and life insurance benefits that are not reflected in the investment concept of rate of return. I think most people, if they get through a year without experiencing a fire, flood, earthquake or burglary, do not figure that

they have gotten a bad rate of return on their homeowner’s insurance.

The protection that Social Security provides by way of disability

and life insurance would be far more expensive, or impossible, to

obtain for many people, especially older Americans, those with preexisting conditions, and those in dangerous occupations.

Finally, focusing on the rate of return to individual workers ignores the social insurance values of Social Security. Fortunately for

women and millions of other Americans, Social Security does not

pay benefits in strict proportion to an individual’s contribution.

Women in particular benefit from Social Security’s progressive benefit formula that provides workers with low lifetime earnings with

retirement benefits that are a larger percentage of their average

earnings, and Social Security’s protections for spouses whose lifetime earnings have been reduced because of homemaking and caretaking responsibility.

In conclusion, it would appear that the purpose of some of those

who talk about Social Security’s rate of return is not to better inform the public, but to undermine support for a system that is vital

to the economic security of millions of American women and their

families.

To be sure, it is important to consider ways to reform Social Security to strengthen its financing and improve its benefits. Social

Security has been adjusted many times since it was created to better achieve its social insurance goals. But that, and not a debate

focused on rate of return, is the discussion that we need to have.

Thank you.

[The prepared statement follows:]

Statement of Joan Entmacher, Vice President and Director, Family

Economic Security, National Women’s Law Center

Chairman Shaw and members of the Subcommittee on Social Security, I am Joan

Entmacher, Vice President and Director of Family Economic Security of the National Women’s Law Center. I appreciate the opportunity to appear before you again

to testify about efforts to inform the public about Social Security.

The National Women’s Law Center is a non-profit organization that has been

working since 1972 to advance and protect women’s legal rights. The Center focuses

on major policy areas of importance to women and their families including employment, education, women’s health, and family economic security, with special attention given to the concerns of low-income women and their families. Most relevant

to this hearing, the Center has worked for more than two decades on issues of Social

Security and women. It has presented testimony on Social Security issues affecting

women to Congress over a dozen times, as well as to the Advisory Council on Social

Security and several task forces of the Department of Health and Human Services.

The Center served on the Technical Committee on Earnings Sharing in Social Security and co-authored its report, and served on the Congressional Study Group on

Women and Retirement for the Select Committee on Aging of the House of Representatives, and co-authored and presented its Social Security recommendations.

This January, the Center presented a paper which I co-authored on ‘‘Increasing Economic Security for Elderly Women by Improving Social Security Survivor Benefits,’’

to the National Academy of Social Insurance.

In October 1999, the Social Security Administration (SSA) began mailing personalized benefit statements to workers who are ages 25 and older and not receiving

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1 U.S. General Accounting Office (1996), SSA Benefit Statements: Well Received by the Public

but Difficult to Comprehend, GAO/HEHS–97–19, p. 6. 2Social Security Administration (1999), News Release, ‘‘Social Security Begins Issuing Annual

Statements to125 Million Workers,’’ September 30, 1999. 3 Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance

Trust Funds (2000), 2000 Annual Report [Social Security Trustees 2000 Annual Report]. 4Kathryn Porter, Kathy Larin and Wendell Primus (1999), Social Security and Poverty Among

the Elderly (Center on Budget and Policy Priorities) [Porter, Laren and Primus (1999)]. 5Social Security Administration (1999), Annual Statistical Supplement to the Social Security

Bulletin: 1999.

Social Security benefits. The purpose of these statements is three-fold: 1) to provide

workers with an estimate of their Social Security retirement benefits to help them

plan for retirement; 2) to ensure that SSA has complete and accurate earnings information; and 3) to provide information about the range of benefits available through

Social Security.

In designing the statement, SSA faced a significant challenge. There was a great

deal of information to convey. But, as the GAO warned in its comments on SSA’s

earlier version of the Personal Earnings and Benefit Estimate Statements (PEBES),

in general, people find forms, notices and statements difficult to use and understand. For this reason, many people may approach a PEBES-like statement ‘‘with

fear, frustration, insecurity, and hesitation.’’

People appreciated the information in the earlier statement, but the public also

indicated that the dense, six-page statement ‘‘contains too much information and is

too complex.’’ 1

The current statement has been completely redesigned. It is short (four pages)

and clear, but contains the essential information people need to plan for retirement,

check their earnings records, and understand the program. A Gallup survey found

that people who have received the statement are significantly more likely to understand that: 1) the amount of Social Security benefits depends on how much they

earned; 2) Social Security pays benefits to workers who become disabled; 3) Social

Security provides benefits to dependents of workers who die; and 4) Social Security

was designed only to provide part of total retirement income.2

The statement also includes a message from the Commissioner concerning the future of Social Security. It identifies the factors that give rise to the concern about

the future of Social Security, and acknowledges the need to address long-range financial issues. But the statement also, and appropriately, addresses fears that Social Security won’t be there when future generations retire:

The program has changed in the past to meet the demands of the times and must

do so again. We are working to resolve long-term financial issues to make sure Social Security will provide a foundation of protection for future generations as it has

done in the past.

The latest report of the Social Security Trustees confirms that the statement conveys the right message. The Trustees project that for the next 37 years, Social Security will be able to pay all promised benefits. And after that, Social Security tax revenues will be sufficient to cover over 70 percent of promised benefits.3 There is a

projected long-term shortfall; but the size of the deficit has been declining for three

years, and the issues are manageable. In the early 1980s, Social Security faced a

far more serious and imminent financial challenge. Congress met that challenge,

and the changes adopted in 1983 have allowed the Trust Fund to grow for decades.

The projected long-term shortfall needs to be addressed, but modest adjustments

would secure the program for even more generations to come.

The information provided by the new Social Security statement is important for

all Americans, but it is especially important for women. Women depend more on Social Security income in retirement than men. Social Security provides half or more

of the income of nearly two-thirds of all women 65 and over, and 90% or more of

the income of nearly one-third of such women.4 To plan for a more secure future,

women need to know what their Social Security benefits are likely to be. Information about the range of benefits available under Social Security is also of particular

use to women, who depend far more than men on Social Security benefits other than

‘‘retired worker’’ benefits. In 1998, 82% of adult male recipients of Social Security

benefits were retired workers. Only 18% of adult male beneficiaries were disabled

workers, spouses, surviving spouses, or disabled adult children. In contrast, nearly

half of adult female beneficiaries, 44%, were receiving benefits as disabled workers,

spouses, surviving spouses, or disabled adult children.5

Some may suggest that the statement also should include information about Social Security’s ‘‘rate of return.’’ The Heritage Foundation, for example, has published

a number of reports that purport to provide such information, which it defines as

a comparison between the amount that workers pay into Social Security with the

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6Gareth G. Davis and Philippe J. Lacoude (2000), What Social Security Will Pay: Rates of Return by Congressional District 7 (The Heritage Foundation) [Heritage Foundation Report (2000)] 7Social Security Trustees 2000 Annual Report, Table I.C1.

8Porter, Laren and Primus (1999).

9 Heritage acknowledges that it has not included the costs of paying benefits to those who are

currently retired or close to retirement in its calculation. Heritage Foundation Report (2000)

156. It defends this choice by saying that it wants to provide a comparison between what workers receive under Social Security today with ‘‘the returns they would have received had Congress created a Social Security system based on private accounts in 1935’’ (ibid., at 3). But Congress did not create such a system; instead, it decided to allow workers who had fought in World

War I, and lived through the Depression, to begin receiving Social Security benefits even though

they had only paid into the system for a few years. The pay-as-you system of financing that

was adopted dramatically reduced poverty among the elderly. But it also created a large unfunded liability for future generations. Honoring that obligation necessarily lowers the ‘‘rate of

return’’ for current generations. Transition costs also have been underestimated by the Cato Institute in its comparisons of privatized retirement systems and Social Security. Catherine Hill,

Lois Shaw and Heidi Hartmann (2000), Why Privatizing Social Security Would Hurt Women:

A Response to the Cato Institute’s Proposal for Individual Accounts (Institute for Women’s Policy

Research) [Hill, Shaw and Hartmann (2000)] 10See, for example, Alicia H. Munnell (1999), Reforming Social Security: The Case Against Individual Accounts (Center for Retirement Research at Boston College) [Munnell (1999)]; Peter

R. Orszag (1999), Individual Accounts and Social Security: Does Social Security Really Provide

a Lower Rate of Return? (Center on Budget and Policy Priorities); Peter A. Diamond (1999),

Issues in Privatizing Social Security (MIT Press for the National Academy of Social Insurance);

John Geanakoplos, Olivia S. Mitchell and Stephen P. Zeldes (1998), ‘‘Would a Privatized Social

Continued

benefits they expect to receive in retirement. Its purpose is to encourage individuals

to reject Social Security in favor of private investment.

Knowing Social Security’s rates of return will allow families to compare Social Security benefits to other investment vehicles. If the rate of return from Social Security is lower than what the family would receive from another investment, then allowing workers to place their Social Security payroll tax dollars into alternative, private investments would allow their money to grow more quickly (and provide them

with a higher retirement income in the future). 6

However, comparing the ‘‘rate of return’’ from Social Security to that available

from individual private investment (assuming either could be calculated for individuals in a meaningful way) would be highly misleading for several reasons.

1. Most of the Social Security taxes paid by current workers are used to pay benefits

to those who are eligible. Once the cost of continuing to meet obligations to current

beneficiaries and those nearing retirement is factored in, the ‘‘rate of return’’ under

Social Security and privatized systems is similar.

Last year, about 85 cents out of every dollar Social Security collected in taxes

went to pay benefits to current beneficiaries.7 About 15 cents went into the Social

Security Trust Fund, where by law it may be invested only in U.S. Treasury securities.

If current workers could, as the Heritage Foundation suggests, not give their tax

dollar to Social Security but keep and invest it only for themselves, they would have

$1 to invest, not 15 cents. They also would have a range of investment choices. With

six-and-a-half times as much money to invest, it would be extremely surprising if

returns were not higher.

But if current workers stopped paying Social Security taxes, SSA would not be

able to pay benefits to those who are eligible. Under one hypothetical scenario, SSA

would have to stop paying benefits. Over half of all women 65 and over would be

plunged into poverty; two-thirds of Americans 65 and older would see half of their

income disappear.8 If current workers stopped contributing to Social Security, any

increase in the rate of return for young, high earning workers with successful investment strategies would be offset by catastrophic declines in the rates of return

of those just entering or nearing retirement. It is unimaginable that this Subcommittee—indeed, that this or any other Congress—would allow that scenario to

unfold.

The ‘‘rate of return’’ comparison urged by Heritage is fallacious because it includes

the cost of paying promised benefits when computing the rate of return for Social

Security, but argues that this cost should be ignored when estimating the rate of

return for private accounts.9 Once the cost of paying those promised benefits is

factored in (or if the extra funding needed to cover those costs of transition to a private system were credited to Social Security, especially if Social Security were free

to make a range of prudent investment choices), the rates of return under Social

Security and a privatized system would be essentially equal.10

74

Security System Really Pay a Higher Return?’’ in Framing the Social Security Debate: Values,

Politics and Economics, edited by A. Douglas Arnold, Michael J. Graetz and Alicia H. Munnell

(Brookings Institution Press for the National Academy of Social Insurance) 11Munnell (1999). 12For a discussion of the extra cost and other difficulties associated with annuities, see Henry

J. Aaron and Robert D. Reischauer (1998), Countdown to Reform: The Great Social Security Debate, p. 38–41; Munnell (1999); Hill, Shaw and Hartmann (2000); GAO (1999), Social Security

Reform: Implications of Private Annuities for Individual Accounts, GAO/HEHS–99–160. 13 Christina Smith FitzPatrick and Joan Entmacher (2000), Increasing Economic Security for

Elderly Women by Improving Social Security Survivor Benefits 3 (National Women’s Law Center). 14The Heritage Foundation Report (2000) ignores disability insurance and survivor insurance

benefits in its rate of return calculations, casually assuming that these benefits would be retained ‘‘exactly as they exist under current law’’ even if the retirement system were privatized

(pp. 151–152). However, the Social Security retirement, survivor, and disability benefit programs are closely interrelated; maintaining disability and survivor benefits independent of retirement benefits cannot be done without creating severe inequities and perverse incentives.

Kathy Larin and Robert Greenstein (1998), Social Security Plans that Reduce Social Security

Retirement Benefits Substantially are Likely to Cut Disability and Survivor Benefits as Well

(Center on Budget and Policy Priorities). The Cato Institute’s proposals to privatize Social Security also exclude consideration of disability and life insurance benefits, on the mistaken assumption that these benefits could be obtained at similar cost privately. Hill, Shaw and Hartmann

(2000). For additional information on the higher cost of disability and life insurance protection

in privatized systems, see Barbara Kritzer (1996), ‘‘Privatizing Social Security: The Chilean Experience,’’ Social Security Bullletin (59:3), 45–55; GAO (1999), Social Security Reform: Experience of Alternative Plans in Texas, GAO/HEHS–99–31.

2. Any estimate of Social Security’s ‘‘rate of return’’ must include the value of the protection against risk provided by its secure, lifetime, inflation-adjusted retirement benefits.

Social Security is designed to provide workers and their families with a secure,

basic benefit throughout retirement.11 As the new Social Security statement acknowledges, Social Security is not designed to be the only source of income in retirement. But it is a benefit that people can count on, without worrying about the state

of the stock market, the rate of inflation, or -and this is a particular, and wellfounded fear for women—the risk that they will outlive their other assets.

Women would find it difficult, if not impossible, to obtain equivalent protection

privately. If they tried to use their savings to purchase a lifetime annuity with inflation protection, they would see their rate of return on those investments plummet.

Most private annuities—unlike Social Security—base monthly payments on gender,

providing women with lower lifetime benefits even when their investment is equal

to men’s. Converting to an annuity—which is done all at once—makes a woman’s

lifetime retirement benefits extremely sensitive to the state of the stock market at

the time of the conversion. In addition, the costs of converting savings to a private

annuity are high; buyers give up an estimated 10–20 percent of the value of the

assets they convert to an annuity. Full protection against inflation, not currently

available, would further reduce the monthly payments from the annuity.12 Finally,

under Social Security, lifetime protection for surviving widows and widowers does

not come at the price of reduced worker retirement benefits. 13

3. Social Security provides disability and life insurance benefits that are not reflected

in the investment concept of ‘‘rate of return.’’

In addition to retirement benefits, Social Security provides insurance to both the

worker and the worker’s family against the risk of disability and early death. ‘‘Rate

of return’’ is not an appropriate concept for evaluating the purchase of insurance.

For example, many people buy homeowners’ insurance, paying premiums every

year. If they got through the year without experiencing a fire, flood, or burglary,

most people would not think that they made a bad investment. They didn’t buy insurance to get a good rate of return; they were purchasing protection against risk.

Some analyses comparing Social Security’s rate of return to that from private accounts, however, would ignore survivor and disability benefits. That omission significantly undervalues the benefits provided by Social Security. Because Social Security creates a huge insurance pool, all working Americans receive low-cost disability

and life insurance protection for themselves and their families. The protection that

Social Security provides against these risks would be far more expensive, if not impossible, for many people—especially older Americans, those with pre-existing conditions, and those in dangerous occupations—to obtain.14

4. Focusing on the ‘‘rate of return’’ to individual workers ignores the social insurance

values of Social Security.

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15 Joan Entmacher (1999), Testimony at the Hearing on Social Security and Women, Subcommittee on Social Security, Committee on Ways and Means, U.S. House of Representatives

(February 3, 1999); Munnell (1999); Hill, Shaw and Hartmann (2000). 16For some suggestions on ways to improve benefits for women, see FitzPatrick and

Entmacher (2000) and Heidi Hartmann and Catherine Hill (2000), Strengthening Social Security

for Women: A Report from the Working Conference on Women and Social Security (Task Force

on Women and Social Security, National Council of Women’s Organizations).

Fortunately for women and millions of other Americans, Social Security does not

pay benefits only to workers, nor does it base benefits strictly on the level of contributions. Social Security’s progressive benefit formula provides individuals with

low lifetime earnings, who are disproportionately women, with retirement benefits

that are a larger percentage of average lifetime earnings. Social Security also provides protection to spouses (and ex-spouses married for ten years) whose lifetime

earnings have been reduced because of homemaking and caretaking responsibilities.

Over 98 percent of the recipients of spouse and surviving spouse benefits are

women. Social Security also allows individuals who are entitled to worker benefits

on their own, and to benefits as a spouse or survivor, to receive the higher benefit.

Finally, as discussed above, Social Security offers lifetime, inflation-adjusted benefits; neither workers nor their survivors need worry that their benefits will stop once

they have a certain percentage of contributions back.15

CONCLUSION

It would appear that the purpose of some of those who talk about Social Security’s

‘‘rate of return’’ is not to inform, but to undermine support for a system that is vital

to the economic security of millions of American women and their families. To be

sure, it is important to consider ways to reform Social Security, to strengthen its

financing and improve its benefits.16 Social Security has been adjusted many times

since it was created to better achieve its social insurance goals. But that, and not

a debate focused on rate of return, is the discussion we need to have.

Chairman SHAW. Thank you.

Mr. John.

STATEMENT OF DAVID JOHN, SENIOR POLICY ANALYST,

SOCIAL SECURITY, HERITAGE FOUNDATION

Mr. JOHN. Thank you for the opportunity to testify in this hearing. This is a subject that we at the Heritage Foundation find to

be extremely important. Although my written testimony concentrates also on the need to release the continuous work history

sample that Social Security puts together to qualified researchers,

and to make some changes to the Trustees’ Report, I am also going

to concentrate on ‘‘Your Social Security Statement’’ and some

changes we recommend to that.

Let me in passing say, however, that when the Trustees’ Report

was released recently, the press reports all reported the good news

that Social Security was safe for an additional couple of years.

They did not bother to mention, or could not mention, that the unfunded liability increased by 7 percent, and that our children and

our grandchildren are now going to face $21.6 trillion in unfunded

benefit payments. And that is in today’s dollars.

The changes in the ‘‘Your Social Security Statement’’ are contained in two versions of the Social Security Right To Know Act,

the Sununu-Weller bill, and the Santorum-Gregg bill in the Senate;

and also, in Senator John McCain’s Straight Talk About Social Security Act, which was introduced last Friday.

Essentially, all three recommend three changes to ‘‘Your Social

Security Statement.’’ Now, we at the Heritage Foundation do salute

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the Social Security Administration on vastly improving the old

PEBE statement; not the least of which, most of us can understand

now what SSA is trying to say.

At the same time, we would say that there are some improvements. Looking for instance, Mr. Chairman, at your point that it

is difficult to tell the boundary between personal information and

general information, we would recommend an explicit, in bold

statement at the time of the benefits estimates saying, ‘‘You will

be eligible to receive full retirement benefits in 20-whatever. In

that year, Social Security will only receive enough taxes to pay for

‘X’-percentage of those benefits. Through 2037, the difference will

be made up by the Social Security OASDI Trust Fund, but after

that date changes may be required.’’ This makes it personal, and

it lets them know that this is not something that is just abstract.

We also strongly support the inclusion of President Clinton’s

OMB statement about the nature of the Social Security Trust

Fund. This is similar to what the private sector is required to report on the trust funds that deal with private pension plans.

Last but not least is the ever-popular rate of return discussion—

which has been mentioned on rare occasions. This is the chart that

the legislation—the McCain bill and the Sununu bill—would include, except for the red lines.

Now, what does this information tell me here? This red line tells

me that my grandmother, who was born in 1896, received a rate

of return on her Social Security taxes of about 15 percent in real

terms. That is twice what the stock market does on an average

year.

My father, who was born in 1919, receives about 8 percent,

which is about equal to what the stock market does in real terms.

In 1950, when I was born, the rate of return declined to about 3

percent. And my 13-year-old daughter, who was born in 1986, will

get below 2 percent.

Now, what this tells me is that this is not a deal that is improving the lifetime benefits of my child. It tells me that if I compared

this with some other things—for instance, if I look at the U.S.

Treasury series ‘‘I’’ U.S. savings bonds, which pay 3.4 percent plus

inflation—that sending her money to the government for this program is not necessarily the best use of her funds.

Now, I am not here to criticize Social Security or the Social Security program. It did wonderful things for my grandmother; it is

doing wonderful things for my father. I look forward to visiting my

parents again, and anything that I did to endanger their benefits

would probably mean that I would be on the wrong side of the

door.

But at the same time, my real concern is what happens to my

children, and what happens to my coming grandchildren, or future

grandchildren—At 13 I hope they are going to be delayed for a

while. But the question is, is this getting better for my children?

And the short answer is, ‘‘No.’’

Now, in the short run, there are only three ways that you can

deal with Social Security’s problems: You can raise taxes; you can

cut benefits; or you can make that money work harder. Making

that money work harder through a personal retirement account is,

obviously, our eventual goal at the Heritage Foundation.

77

1The formula used to determine Social Security benefits is based on an individual’s inflationadjusted earnings history, not on the taxes he or she paid. Since 1940, retirement taxes have

increased from a combined employer-employee rate of 2 percent on the first $3,000 of earnings

to 10.6 percent of the first $76,200 of earnings. Meanwhile, the benefit formula has been based

on earnings throughout that period. 2William W. Beach and Gareth G. Davis, ‘‘Social Security’s Rate of Return,’’ Heritage Foundation Center for Data Analysis Report No. 98–01, January 15, 1998. 3 2000 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (Washington, D.C.: U.S. Government Printing Office,

2000), p. 3. 4David Walker, Testimony before the Social Security Subcommittee of the Ways and Means

Committee, U.S. House of Representatives, 106th Cong., 1st Sess., March 25, 1999.

But in the short run, it is important for Americans to have the

information that they need to understand the nature of the Social

Security system and where it is going in the future.

Again, now, it has been suggested that this might be confusing.

Well, last weekend I spent a fair portion of my time trying to do

my taxes. And I would say that any government that expects me

to understand the 1040 form and the instructions for the 1040 form

probably can explain additional information on the Social Security

statement in a way that is understandable. I hope they do a slightly better job than they did on the 1040 form.

Thank you.

[The prepared statement follows:]

Statement of David John, Senior Policy Analyst, Social Security, Heritage

Foundation

I appreciate the opportunity to appear before you today to discuss ways to increase the information that the public can receive about Social Security programs.

This is an extremely important subject, and I would like to thank the Chairman for

scheduling this hearing. Let me begin by noting that while I am the Senior Policy

Analyst for Social Security at the Heritage Foundation, the views that I express in

this testimony are my own, and should not be construed as representing any official

position of the Heritage Foundation. In addition, the Heritage Foundation does not

endorse or oppose any legislation.

Congress could begin the process of Social Security reform this year by passing

legislation to provide more information to workers and analysts about the current

program and the options for reform. Taking such steps would help to prepare Americans for a more informed debate on the future of Social Security, and it would make

it easier to develop a national consensus on real reform. Moreover, these steps

would cost very little, both politically and financially. Congress need not wait for

a complete Social Security reform plan to be agreed on by all sides before taking

these important steps.

Although Social Security is the government’s most popular program, many Americans know very little about how it operates and how its benefits compare with alternative retirement investments. For example, millions of Americans remain convinced that Social Security maintains a savings account in each of their names, despite the fact that there is no direct connection between the amount of taxes one

pays and the retirement benefits that one eventually receives.1 Even academic researchers are denied access to information that would allow them to evaluate plans

that could increase the retirement security of future generations. Moreover, few

Americans realize that the rate of return on their Social Security taxes is averaging

a mere 1.2 percent,2 or that the program will reach insolvency by the year 2015

without reform.3

Doing nothing with the current Social Security program makes little sense and

will serve only to make matters worse. Testimony by U.S. Comptroller General

David Walker indicates once again that the overall cost of not enacting reform increases every year.4 If serious reform is not feasible this year, then Congress should

pass three simple but extremely important changes that would make real reform

more likely in the near future.

78

5 In order to receive a YSSS statement, a worker must be at least 25 years old and have annual earnings, a Social Security number, and a valid current address. The worker also cannot

be receiving Social Security benefits. 6 Analytical Perspectives, Budget of the United States Government, Fiscal Year 2000 (Washington, D.C.: U.S. Government Printing Office, 1999), p. 337.

1. Congress should simplify and improve Social Security’s Your Social Security

Statement (YSSS).

• A more accurate account of Social Security’s future financial difficulties also

should be added to the YSSS. In specific, individual’s should be informed how Social

Security’s cash flow deficits could affect their retirement benefits.

• Each YSSS should include information about the actual nature of the Social Security trust funds.

• Data should be included on each YSSS explaining the recipient’s estimated rate

of return from his or her Social Security retirement taxes.

Starting in October 1999, the Social Security Administration began mailing annual YSSS statements to an estimated 123 million workers.5 These statements include an accounting of Social Security taxes the individual worker has paid to date,

the worker’s eligibility status for benefits, and an estimate of the various types of

benefits the worker and/or the family could receive under different circumstances.

For most Americans, the YSSS statements will be their sole source of official information on how they personally will fare in retirement under the current system.

While the new statements are much easier to understand than the earlier Personal

Earnings and Benefit Estimate Statements (PEBES), which they replaced, additional change are necessary. Unfortunately, even with the improvements, much of

the information contained in the YSSS statements is both flawed and misleading.

As a result, millions of Americans may be misinformed about how the current system works and confused about how much retirement income they will receive. Moreover, as the debate over preserving and improving Social Security continues, these

workers will not have the necessary information to make an informed decision.

The worst flaws are contained in the methodology that Social Security uses to estimate future benefits. While Social Security uses actual salary information to the

extent that it is both available and accurate for past earnings, it then assumes that

the individual will continue to earn exactly the same amount through retirement.

This results in misleading numbers in a number of instances. For instance, a younger worker’s benefits will be grossly understated, as the SSA model does not allow

for salary increases. Similarly, anyone with fluctuating income, such as farmers or

salespeople, could find that their annual statements include widely differing benefit

estimates depending on whether the last year of actual earnings information was

a year of prosperity or of difficulty. Finally, women who expect to leave the workforce temporarily to care for children will also receive inaccurate estimates. In order

to deal with this weakness, The Heritage Foundation will shortly unveil a website

that will allow workers to develop more accurate benefit estimates.

Equally serious is that the YSSS statements fail to adequately inform people how

the program’s projected financial difficulties could affect the payment of their benefits. While the most recent statements include a footnote hinting at these problems,

this warning should be more explicit. The estimated benefits section of the YSSS

statement should begin with a statement such as:

‘‘You will be eligible to receive full retirement benefits in 20XX. In that year, Social

Security will only receive enough taxes to pay for xx% of these benefits. Through

20XX, the difference will be made up from the Social Security OASDI trust fund, but

after that date changes may be required.’’

These disclosures are similar to those required of under-funded private pension

plans by the US Department of Labor. It is only fair to also require Social Security

to meet these standards.

Second, Congress should require the Social Security Administration to include information on the actual nature of the Social Security trust funds and how they differ from private-sector trust funds. President Clinton’s budget for fiscal year 2000

accurately portrayed this distinction. Chapter 15 of the Analytical Perspectives volume for that year stated that

‘‘These balances are available to finance future benefit payments. . .only in a bookkeeping sense. They do not consist of real economic assets that can be drawn down

in the future to fund benefits. Instead, they are claims on the Treasury that, when

redeemed, will have to be financed by raising taxes, borrowing from the public, or

reducing benefits, or other expenditures.’’ 6

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7 ‘‘Social Security: Issues in Comparing Rates of Return wit Market Investments,’’ GAO/

HEHS–99–110 (Washington, DC: U.S. Government Printing Office, 1999). 8This calculation assumes that, as occurs under current law, the federal government spends

any future surpluses produced by the Social Security system. 9 Analytical Perspectives, Budget of the United States Government, Fiscal Year 2000 (Washington, D.C.: U.S. Government Printing Office, 1999), p. 335.

This statement should also be included in the YSSS statements. Both workers and

the media should understand that, in discussing Social Security, the term ‘‘trust

fund’’ has a different meaning than it does in normal financial dealings. Although

private-sector trust funds contain stocks, bonds, or other assets that can be sold for

cash, Social Security’s trust funds contain only IOUs that will have to be paid with

future taxes.

Finally, the Social Security Administration should be required to include data on

the worker’s estimated rate of return on Social Security retirement taxes. One way

to do this would be to include the chart found on page 23 of GAO’s August 1999

report on Social Security’s rate of return.7

Because YSSS statements already are included in the federal budget, the cost of

making these modest improvements would be minimal. By making such incremental

changes to the information Social Security provides on YSSS statements, Congress

could ensure that millions of workers and their families have better information on

the Social Security program, which would enable them to plan more appropriately

for their retirement. It also would enhance the Social Security debate.

2. Congress should improve the annual report of the Social Security trustees to reflect

the program’s long-term outlook more accurately.

• Information should be provided in the initial summary of the Trustees’ Report

on any changes in Social Security’s aggregate dollar liability that have taken place

since the last report. • Information on the actual nature of the Social Security trust funds and how

they differ from private-sector trust funds should be provided, too. • Estimates of the tax increases or benefit reductions that would be necessary to

avoid cash flow deficits also should be included, as well as information on how delaying action would change those estimates.

Every spring, the Social Security trustees issue an annual report about the trust

fund’s financial condition. The 2000 report for the Old-Age and Survivors Insurance

trust fund, which includes the Social Security retirement program, includes over 200

pages of charts, tables, and other very detailed information. Unfortunately, some of

the most important facts are buried in the report, and others are missing entirely.

When the 2000 report was issued earlier this year, for example, news stories concentrated on findings that there would be an additional year before Social Security

begins to run cash shortfalls, and three more years before its trust fund is exhausted. Most of the stories did not include the fact that, in the past year, the gap

between benefits that have been promised over the next 75 years and the taxes that

will be available to pay them actually increased by 4 percent to $20.6 trillion, after

adjusting for inflation.8

The unduly optimistic picture would have been closer to reality if Congress had

required the Social Security Administration to include in the initial summary information on changes in Social Security’s aggregate dollar liability over the past year.

Currently, that information is included only among the flood of charts and tables

in the back.

As earlier discussed, Congress should also require the Social Security Administration to include information on the actual nature of the Social Security trust funds

and how they differ from private-sector trust funds. In addition to the statement

from President Clinton’s budget for fiscal year 2000 that was noted in the YSSS

statement section of this testimony, the annual report should also include another

quote from Chapter 15 of the Analytical Perspectives volume:

‘‘The Federal budget meaning of the term ‘‘trust’’ differs significantly from the private

sector usage. . .the Federal Government owns the assets and earnings of most Federal trust funds, and it can unilaterally raise or lower future trust fund collections

and payments, or change the purpose for which the collections are used.’’ 9

The annual Trustees’ Report also should include estimates of the tax increases or

benefit reductions that would be necessary to avoid a cash flow deficit, and how delaying actions would change those estimates. In this way, workers would understand that, although cash flow deficits will not appear for another 15 years, the

eventual cost of reforming Social Security increases with each passing year. Adding

this type of information to the Trustees’ Report would allow Americans to see the

80

10For additional information on the CWHS, see Gareth G. Davis, ‘‘Empowering an Informed

Debate on Social Security: Why Congress Must Act to Ensure Access to the Continuous Work

History Sample,’’ unpublished memorandum available from the author on request, 1998. 11 National Research Council, ‘‘The Aging Population in the Twenty First Century,’’ Washington, D.C., 1988. National Academy Press and National Research Council, Private Lives and Public Policies: Confidentiality and Accessibility of Government Statistics (Washington, D.C.: National Academy Press, 1993).

real state of Social Security’s finances. They would know that the crisis has been

delayed, but it still is getting worse and will cost more to resolve. Although this realistic picture would not be popular with politicians who would prefer avoiding difficult choices, it would be more honest.

3. Congress should allow all researchers access to Social Security’s Continuous Work

History Sample (CWHS).

• Access to the CWHS would allow private researchers and government agencies

to analyze how Social Security reforms would affect the budget and the distribution

of benefits among various income groups. The Social Security Administration would

retain the ability to edit and format these data to protect the privacy of individuals.

• Support for the release of this information comes from both proponents and opponents of Social Security reform.

The CWHS is a random sample of the earnings and benefit histories of about 1

percent of all Social Security participants. To ensure confidentiality, information

that can be used to link data to specific individuals, such as names, addresses, and

Social Security numbers, is removed from the sample.10

In order to make sure that Americans have the best possible information about

Social Security and any proposed reforms, Congress should require the Social Security Administration to release CWHS data to bona fide non-federal researchers. Currently, access to the CWHS is restricted to a small group of government researchers,

most of whom are in the Social Security Administration or the Department of the

Treasury. The Social Security Administration would retain the ability to edit or format any data being released to provide additional confidentiality protections.

Without wide access to these data, many of the central questions of Social Security reform cannot be explored properly by independent analysts. Because it contains real wage and benefit histories, the CWHS could be used to carry out detailed

analysis of the effects of both the current system and any reform proposal on key

demographic groups—such as women, minorities, and low-income workers. Without

this information, the impact of some of these plans only can be estimated.

Before access to these data was restricted in 1974, they were used widely by private industry, state and local governments, and academic researchers for purposes

ranging from forecasting the demand for government services to studying changes

in income distribution. Today, there is widespread support within government and

among researchers for release of the CWHS data. Both Social Security Commissioner Kenneth Apfel and Secretary of the Treasury Lawrence Summers endorsed

the release of the data during Senate Budget Committee hearings on February 24,

1998. In addition, two panels of leading social scientists from the National Research

Council (a branch of the National Academy of Sciences) have called for the release

of the CWHS data and suggested a number of ways in which the confidentiality of

the information could be preserved.11 And a group of top Social Security scholars

from across the political spectrum soon will issue a letter calling for release of the

data.

LEGISLATION

There are currently three bills that include one or more of these recommendations. In the House, all three are contained in H.R. 3578, the Social Security Right

to Know Act, which was introduced by Rep. John Sununu. Currently, there are 9

co-sponsors to the Sununu bill. The additional information contained in this legislation would allow workers of all income levels to have a better understanding of Social Security’s future and how it will affect them. This is extremely important legislation.

In the Senate, S. 2364, also known as the Social Security Right to Know Act, by

Senator Rick Santorum would make similar changes to the YSSS statements and

the annual trustee’s report. Finally, the newest bill, S. 2381, the Straight Talk on

Social Security Act, was introduced last Friday by Senator John McCain. It includes

the same provisions on the YSSS statement as the Sununu bill.

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CONCLUSION

If Congress were to pass legislation that made all three of the small changes recommended in this paper, the debate over Social Security reform would be greatly

enhanced. Providing more information to average Americans through their annual

YSSS statements and in the Social Security trustees’ annual report would make it

easier for workers to understand how reforms could affect their retirement. And releasing Social Security’s Continuous Work History Sample to all researchers would

ensure that Americans can determine how different reforms would affect the economy and various socioeconomic groups. Regardless of whether Congress acts this

year to deal with Social Security’s impending insolvency, these small but important

measures are long overdue.

Members of The Heritage Foundation staff testify as individuals discussing their

own independent research. The views expressed are their own, and do not reflect

an institutional position for The Heritage Foundation or its board of trustees.

Chairman SHAW. Thank you. And I thank all of the witnesses.

I think it is important that I read a paragraph into the record.

And this is taken from the Social Security statement. And this is

the Commissioner’s statement on the front. It reads as if it is a

part of a letter. It says:

‘‘Will Social Security be there when you retire? Of course it will.

But changes will be needed to meet the demands of the time. We

are living longer, healthier lives; 76 million ‘Baby Boomers’ will

start retiring in about 2010; and in about 30 years there will be

nearly twice as many older Americans are there are today.’’

‘‘Social Security now takes in more in taxes than it pays out in

benefits. The excess funds are credited to Social Security Trust

Funds, which are expected to grow to over $4 trillion before we

need to use them to pay benefits. In 2014—’’ that is now 2015 ‘‘—

we will begin to pay out more in benefits than we collect in taxes.

By 2034, the trust funds will be exhausted, and the payroll taxes

collected will be enough to pay only about 71 percent of benefits

owed.’’

‘‘We are working to resolve these issues. For more information

about the present and what may lie ahead, call us or get a copy

of the booklet, ’The Future of Social Security’.’’This is something

that I think is very admirable, that they put that right on the

front. Because it does, in a very fair way, state what the problem

is. The only thing that I am concerned about is that people reading

this might really think that, well, they have got until 2034, now

2037.

The Congress needs to act on this. Also, is there someone still

here from the Social Security Administration? I want to be sure

they change and correct this about the earnings limit. You explain

the earnings limit in here, and you are going to have to change

that age, I am glad to say.

Ms. ENTMACHER. Mr. Chairman, I was speaking with a representative of the administration before the hearing started, and

they are working on it already.

Chairman SHAW. I would think that they would. They certainly

had a big celebration on that point.

Mr. SALISBURY. Mr. Chairman, if I might, if I could ask your indulgence?

Chairman SHAW. Yes.

82

Mr. SALISBURY. I was at a supermarket this weekend, and could

not help seeing The Sun with the headline, ‘‘Social Security Benefits To Double in New government Program.’’ This was The Sun’s

interpretation of the change in the earnings limit.

Mr. PORTMAN. He is covering up that portion. [Laughter.]

Mr. SALISBURY. It was covered in the stand. In the interest of full

disclosure, ‘‘Found Dead Sea Scroll Written by Jesus Reveals Exact

Date of My Return.’’ [Laughter.]

Mr. AARON. Mr. Shaw?

Chairman SHAW. Yes.

Mr. AARON. Could I mention one point which I think underscores

the importance of your comment about the need to act early, rather

than stall? This is the first year in which the age at which unreduced benefits are paid has begun to be increased. Looking at the

calendar of this piece of legislation is revealing.

It was enacted in 1983. The first people affected by it are affected

in the year 2000. It will not be fully in effect until the year 2022.

That is a 39-year period, a 39-year phase-in.

When it comes to Social Security, gradualism has always been

the order when it comes to benefit reductions, for good and sufficient reasons. And I am convinced it will be, because Congress

would act prudently in the future. But that means, if you want to

get ready for the fact that costs are going to outrun currently projected revenues, it is better to act soon than late, because you are

going to want to phase in gradually.

Chairman SHAW. I think you are absolutely right on that. But

there are programs out there now that can be enacted. And if we

act now, we will in no way diminish the benefits.

Mr. Matsui?

Mr. MATSUI. Well, thank you, Mr. Chairman. I actually came

into this hearing with a great deal of trepidation, with four panels

and all these witnesses. And I just want to thank you. I think the

hearing was very good. I learned a lot from it, and I appreciated

all the testimony from all of the witnesses. Thank you.

Chairman SHAW. We appreciate the thought all of the witnesses

have put into their testimony.

Mr. Portman?

Mr. PORTMAN. Thank you, Mr. Chairman. I do not want to hold

people up. I may be the last questioner here, including my friend,

Mr. Matsui. But I did have a few questions; starting by thanking

folks for being here. I wish I could have gotten here earlier. We are

always doing three things at once—and today it was four. But I did

learn a lot.

I want to start by thanking Dallas Salisbury for EBRI’s work.

Again they came out with a good product, just last month, on savings, that I used on the floor today, about the paucity of savings

in our country and the fact that in the last 5 years alone we have

a 50-percent reduction in private savings in this country.

And all the more reason to talk about Social Security, because

we have a general issue with regard to retirement savings. And

only half of the people now are covered by any kind of pension

plan, and so on. And we need to do more on that. But it puts more

pressure on the system that everybody talked about today.

83

I have to say one thing in response to Ms. Entmacher. Because

if you have looked at the Archer-Shaw proposal or other proposals,

I think your analysis misses the point in terms of comparing the

current system with any kind of a system that has personal accounts; by saying that when you average out the difference between benefits that would be going to the individual, as compared

to those that would go to people who are currently beneficiaries

while that person is paying taxes, then the rates of return are comparable.

The whole idea here is to get people in a situation where they

have, because of the higher rate of return—and you can use 5.2

percent, or you can use a higher or a lower rate—over time, less

need for the public moneys.

So that you have to look at a generation, granted. And then you

look at two and three generations. And you end up having a system

based on projections—that, again, SSA has provided us; and you

could use other actuaries—that would indeed not require the Social

Security benefits that your grandchild would be paying for your retirement, or my great-grandchildren for my retirement, or grandchildren. So that is why that comparison just troubles me a little.

And maybe you are talking about different systems than the one

that I am referring to. But if you compare apples to apples in terms

of the rate of return and in terms of the impact on the beneficiary,

I think there will be a difference. Do you have a comment on that?

Ms. ENTMACHER. Yes. And I am very pleased you brought that

up. I want to give a lot of credit to Chairman Shaw for trying to

develop a proposal that protected individual benefits while creating

individual accounts; rather than simply cutting back on guaranteed

benefits. And I think that is an important feature of what the

Chairman was trying to do with his proposal.

But I think the point I made holds up. Because in order to create

the private accounts that would be called for by the Chairman’s

proposal, it would require a substantial amount of funding that

would come out of the Federal budget elsewhere; not Social Security taxes, but revenue that could be used either for increasing

spending on programs that are important to women, including education and Medicare, or through tax cuts that the Chairman might

be interested in.

But the point is that the money that is needed to fund the individual accounts that are part of the Archer-Shaw proposal needs to

come from somewhere, needs to be funded somehow.

Mr. PORTMAN. As do all benefits after the year 2014.

Ms. ENTMACHER. Right.

Mr. PORTMAN. And my only point is you are looking at the shortterm, rather than the mid-term or long-term, depending on your

perspective.

Ms. ENTMACHER. My point is that if the money that would be

spent to fund the private accounts—which would exceed the

amount of the projected surplus within a couple of decades—if that

money were put into Social Security, and if Social Security were allowed to invest that money, instead of the private accounts, we

could save on the costs of administering all those private accounts.

If Social Security could invest that money in something other than

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T-bills, they might get a higher rate of return. And in the end, the

total returns would be quite similar.

That is the point, that whether you look at it from the point of

view of proposals for private accounts that would increase the

money in retirement savings and thought, ‘‘Well, what if we put

that pre-funding into Social Security—’’ I entirely agree. We have

to compare apples and apples.

Mr. PORTMAN. We have made great progress on it. But what you

said was that there is a similar rate of return to the existing system, which you termed as privatization. And if you are talking

about a third system, which was not the system you talked about,

which would be taking general revenues and investing them in the

trust fund into some sort of a market higher rate of return, that

is a whole other debate we can have. And we have had that debate

on the Committee, as you know, numerous times. And Alan Greenspan and others have spoken on that.

But I think that is a different analysis. And I would just not

want to leave the impression that this is not a different type of proposal for the mid- and long-term. All the proposals require a transition cost. I know you all have addressed the transition cost, and

it is different depending on the proposal.

But I do think there is a creative third way here. And I think

there is agreement among the panelists here that more information

needs to be provided to people, so that at least people have the information to be able to make an informed decision.

I do not want to hold people, again, but let me just suggest that

Mr. John’s idea of having an objective analysis that goes beyond

even what Mr. Shaw just said about the solvency issue, I think

would be very helpful.

The nature of the trust fund, I know, again, OMB has done some

of that. And I think that would be very helpful, putting it in as

plain English as possible. And having worked a lot with the IRS,

I know that is sometimes a challenge, but we have made some

progress even with the IRS in that regard.

And finally is the rate of return, on which I take Henry Aaron’s

comments to heart, and I appreciate what he said about the need

to act quickly, and what you said in response to the President’s

proposals recently. But I do think that there has got to be a way

to provide some unbiased information to people.

I mean, you know, Social Security is not risk-free, either. There

are risks built into the Social Security system. And the obvious risk

is, in a period of great insolvency, which after the 2034 period spirals to the point that it is impossible for me to imagine us being

able to fund that because the taxes would have to, after 2050, 2060,

be so high that I think people would——

Mr. AARON. Actually not, Mr. Congressman. But that is a different issue.

Mr. PORTMAN. But that is a risk, in terms of analysis of the risk.

Mr. AARON. The force of my testimony—and we could go into it

later on, if you would like—is that your hope and desire—which I

think is a legitimate one, and one that I share; I would like to be

able to do straight-up comparisons of rates of return—is not possible.

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And the reason it is not possible in a way that would command

a reasonable consensus, and avoid destructive controversy is the

nature of the protections. We do not know how to value them in

an unambiguous fashion. I wish we did. I would like to have those

comparisons. We just do not know how to do it.

And I want to distinguish what I am saying from the view that

it is too complicated for people to understand. That is emphatically

not the point I am making. Written clearly, people can understand

any of these complicated concepts that we are talking about.

It is not that bureaucrats cannot write plain English that ordinary folk can understand. They can; and they do. The problem is,

we analysts could not come to a consensus agreement on how to

do the numbers in a way that would avoid what I have called destructive controversy.

And if I could say just a word about that: I live with numbers;

academics love to argue about them. If that becomes the focus of

the public debate—and I believe it would, if you mandate the estimation of concepts about which there is not a good consensus, that

provoke a lot of controversy—people will get confused, because they

will be hearing different information from different people. They

will get frustrated and annoyed, because they are hearing different

information. And they will focus on the wrong issues. They will

focus on these number issues.

The right issues, I think, are the ones that you and Mr. Shaw

have been trying to draw attention to. I may not agree with your

position on policy about them, but the question of how best to

structure a retirement system for Americans in the 21st century,

whether it should be through a defined benefit system with risks

diffused, or a defined contribution system with individual control

and risks borne by the workers——

Mr. PORTMAN. Or a third way.

Mr. AARON [continuing]. Or by some combination of the two——

Mr. PORTMAN. I mean, I would hardly call Archer-Shaw a defined

contribution system where the risk is borne by the individual, and

no risk.

Mr. AARON. No, I would not. I would, frankly, call it a very elaborate way of putting general revenues into the current Social Security system.

Mr. PORTMAN. As is the President’s proposal.

Mr. AARON. That is correct.

Mr. PORTMAN. And you have commented on that, and I appreciated your commentary.

But that is the sort of information that if people are provided the

right information, I think they can make an informed decision, and

people are smarter than we give them credit for.

I also understand your point about a final number. But I cannot

believe that in the statement, which I agree is much improved—

And I enjoy reading mine now and again, wondering what my kids’

statements are going to look like in terms of their amount that

they will contribute, and what they will expect back. But I think

there can be more information as to the solvency issue, as to the

nature of the trust fund, and then finally, something on the rate

of return in general terms, not in terms of a specific number, as

you say.

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And I was not here for your testimony, but I know, Mr. Thau,

you have some thoughts on that as well.

Mr. THAU. One thought, which is that the statement implicitly

gives you a rate of return. It tells me what I have paid in taxes

for this program over the course of my life. It estimates what I am

going to pay in taxes over the course of the rest of my working life,

and tells me what I am likely to get in benefits at certain retirement ages.

You can calculate out a rate of return based upon what is already in the statement. It seems to me, it would be possible to

make that clearer to the ordinary taxpayer, what the total amount

is that they are going to pay over a lifetime, and what they are

likely to get back.

And what the statement is missing, and what I mentioned in my

testimony, is that it does not say what you are going to pay from

now until the time you retire. It tells you what you have paid so

far, but does not add in the time between now and retirement age.

But I think that gives you some sort of calculation of what you are

going to get.

It seems to me you have an algebraic equation where you have

‘‘A’’ plus ‘‘Blank’’ equals ‘‘C.’’

Mr. PORTMAN. Right.

Mr. THAU. And the taxpayer does not know what ‘‘B’’ is. And

based upon that, you should be able to calculate out, you know,

what the value of this program is to you.

Mr. PORTMAN. Since he does not have the mike, I will speak for

Dr. Aaron, and say that rate of return would be something that

somebody might compare to a rate of return they would get on a

401(k) or even a private investment or an IRA investment; and

that there are, according to Dr. Aaron, different kinds of risks involved in that. And I agree, there are different kinds of risks. But

I will not agree that it is risk free.

Mr. AARON. Oh, I did not suggest that it was.

Mr. PORTMAN. Yes.

Ms. ENTMACHER. If I could respond to that—And it kind of picks

up on the points that Dr. Aaron was making, but it puts them in

the context of the women that I meet with when I go out and talk

about Social Security. They are afraid of growing old and having

nothing to live on.

It is very sad to see people who are afraid that they will live too

long. And this is one of their fears. And this is something—I mean,

many of these women, particularly the older women I meet with,

they did not work much in the paid labor force during their lives,

so they are getting spousal benefits. They are relying on the benefits that their husbands earned. Many of them are widows; their

husbands are deceased. It would never show up on their Social Security benefits statement, if they got one at all, because they did

not have 10 years in.

And you know, this is something that is adjusted for inflation;

it comes every month; they can count on it. It is not enough to live

on. And that is one of the issues that I think needs to be addressed:

How do we improve these social insurance goals?

But talking about improving the rate of return does not get to

the concerns. And I know a lot of those women live in your district,

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Mr. Chairman. And I am sure you know and you have heard how

much these other kinds of protections—women who have been

homemakers; women who took that chance, that risk of not looking

out just for themselves, but looking out for their families—what all

those insurance protections that Dr. Aaron enumerated mean for

people. And I do not think it is that easy to measure it. I do not

think it is possible.

Chairman SHAW. I think one of the things that we have to remember is, the purpose of the hearing was to simply get comment

on the statement and the information that is going out. I think we

will leave reform to a different day.

But to comment on some of the points that you made, I think Mr.

John has exercised a great deal of restraint, that he did not jump

out of his chair when you started talking about direct investment

by the Social Security Administration.

But I mean, you have the Heritage Foundation on 1 day that

wants to go to a privatized system. On the other side, you have

your situation, where you would like to see the Social Security Administration do direct investment.

Ms. ENTMACHER. That is not exactly it.

Chairman SHAW. I think the Archer-Shaw bill is somewhat in

the middle. We preserve the Social Security system exactly the way

it is, and we do not change it. And the Heritage Foundation does

not like our plan, because we do not change it.

We leave it totally alone. And the reason we leave it totally alone

and do not change the system one iota is because of a lot of the

things that you are talking about: The uncertainty and the fear,

and the ability to be able to plan. That is what Dr. Aaron is talking

about. He talks about the certain amount of guarantees because of

the investment structure and the commitment set forth in the language.

Unfortunately—and I think Rob has made this point pretty

clear—there are no guarantees, if Congress does not act. And we

need to act, to do something. And I think the middle-of-the-road approach, somewhere where Chairman Archer and I are, is about

where we are going to end up.

The problem that you have, and the reason this legislation is not

moving today, is that there are so many people that do not want

to get in any type of investment in private accounts, are against

it; and the Heritage Foundation on the other side, that does not go

to a privatized system, they do not like it. So the problem that you

have, when those two gang up on you it is tough to pass something.

Whatever we pass is not going to be the final say. Future Congresses will look at it. If there is any fine-tuning that is necessary,

they will make that fine-tuning.

But I guess I should get back to the purpose of this hearing, myself. But I do hope that we can move together. And it is going to

be very, very important that this be done in a bipartisan way. Neither party is going to do a good job if they go it alone. And the

American people will not have faith in it.

And we do know that our seniors are very easily frightened when

they see that this Social Security is a lifeline that they have and

they have lost their ability to work. And it is very important that

we do not frighten them at all.

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So that is the job that we have mapped out for us. I am still

hopeful that we can work with the President in getting something

done before the end of this Congress. It is becoming a long shot.

We will have to just settle for the little bit of reform we had in

doing away with the earnings penalty, and look to the next Administration to try to get something done.

If we control the Congress and I am back, I am confident that

my name will remain on this legislation. If we do not come back,

it may be the Rangel-Matsui bill——[Laughter.]

Chairman SHAW. With our thought in it. Who knows?

But in any event, this has been a very, very good hearing, and

I appreciate all of you being here. Thank you. We are adjourned.

[Whereupon, at 5:42 p.m., the hearing was adjourned.]

[A submission for the record follows.]

Statement of Hon. Judd Gregg, a United States Senator from the State of

New Hampshire

Thank you, Mr. Chairman, for the opportunity to submit testimony for your Committee’s hearing regarding Social Security right-to-know legislation.

I would like to begin by commending you for your initiative in holding this hearing. I believe the subject of the hearing to be critical to our efforts to safeguard Social Security for America’s seniors in a responsible and bipartisan way.

I have joined many others—including several whose policy preferences diverge

from my own—in lamenting the lack of constructive, substantive action this year

to reform the Social Security program. While too often we yield to the temptation

to blame others for that lack of action, I believe that a step back reveals that much

of our inability to achieve consensus derives from incomplete public and Congressional understanding of the information flow about Social Security. I believe that

these information gaps induce us to talk past one another, to focus only on selective

information, and to overlook important facts when they are inconvenient to one’s

own predispositions.

I would like to begin first by detailing what I believe to be the most damaging

gaps in the methods used to present information about the financial operations of

the Social Security system.

Secondly, I would like to discuss the manner in which we distribute information

to wage-earners and to beneficiaries about the taxes that they pay, and the benefits

that they can expect to receive. Here, too, I believe there is evidence that selective

presentation of information leads inadvertently to a confusing picture.

Thirdly, I would like to present what may be the most important part of my testimony, focusing on the way that the gaps in the first two types of information bias

and distort our legislative deliberations.

And fourth, I would like to close by giving my subjective view of where we are

in efforts to address these concerns, including my legislative efforts, and the responses to them.

Before I begin to describe my concerns, I think it is appropriate to begin by commending the professional, nonpartisan work of the Social Security Administration

(SSA) to provide accurate information about the future of the Social Security system. There is much that is right and good about the work that they do, and indeed

much of the information that I believe that we should emphasize to the public is

gleaned either directly or indirectly from the comprehensive report of the Social Security Trustees, from numbers generated by the Office of the Chief Actuary of SSA.

In my dealings with SSA, especially the office of the Chief Actuary, I have found

them to be exemplary public servants who never fail to respond to our requests in

a timely and helpful way. If Congress as a whole routinely received a report on Social Security’s financial operations that was as clear, understandable, and transparent as the information that individual staff are able to receive through separate

requests to SSA, then the understanding by Congress and the public of the realities

of the Social Security program would be immeasurably improved.

It is unfortunate indeed that when one notes the need for improved and more explicit reporting on certain aspects of the Social Security program, that this is sometimes construed as undermining the objective, independent work that SSA currently

does. I have been concerned by some reactions to what I consider to be straightforward, inarguable reporting requirements as signaling that any attempt by Congress to insist upon additional information will be regarded as an infringement upon

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the independence of the Social Security Administration. But there is a significant

difference between telling SSA how they must do their technical work, and requiring that certain information be put clearly before Congress when it is done. To characterize the latter as the former undermines confidence that all share the goals of

maximizing public information about the Social Security program.

It bears mentioning that the Social Security Administration was granted independent status in recent years, as much to safeguard their independence from administration policies as from the Congress. Accordingly, Congress has as great a

right as does the administration to require SSA to provide the information that it

believes to be appropriate to its needs to budget for the program. You can be certain

that if the President said to SSA that he wanted placed on his desk, every year on

March 31, a table of the program’s projected annual cash deficits, in dollars, that

it would be there in exactly the form requested. We might look askance at a directive by the President that SSA change their technical assumptions, but not at the

demand for the information itself. Congress’s rights in such matters are equally

great, and deserve exactly the same response.

Reporting on the Financial Operations of the Social Security Program

Mr. Chairman, in order to better illuminate the inadequacies of current Social Security reporting, I would ask you to consider the following anecdotal illustration.

Imagine that in some future year your position as Chair of this Committee is held

by a less responsible individual, who in an election year such as this one, pushes

through this committee a proposal to double all current-law Social Security benefits.

Imagine, too, that though this Committee took no action to fund these new benefits,

it arbitrarily reallocated $1 trillion in credits from on-budget revenues to the Social

Security Trust Fund annually for each of the next few decades.

What would be the result of this precipitous and irresponsible action? One result,

obviously, would be a vastly worsened problem of funding these now doubly large

benefits. But another perverse result would be that the following year’s Trustees report would contain a finding that Social Security system had been made solvent

throughout the 75-year valuation window—in other words, that’s financial problems

had been fixed. According to the Trustees’ report, the system would never be insolvent.

Now, no rational person could believe that this Chairman had resolved Social Security’s problems by simply doubling current benefit promises and rearranging the

debts between government accounts. But this is exactly what the current measure

of actuarial solvency would oblige us to report.

The remarkable thing about the current Social Security debate is that the argument that the system is somehow ‘‘sound’’ through 2037 under current law is exactly

the same argument that would be employed to claim that this new Chairman had

fixed the Social Security system. There is absolutely no difference between the two,

and the obvious shortcomings of this analysis have much to do with our current legislative impasse. Anyone who accepts the argument that we face no difficulties before 2037 must also accept the argument that we can promise additional benefits

cost-free, simply by issuing additional credits to the Social Security Trust Fund.

They are indeed premised on the same measurement.

Each year, Congress’s information on the health of the Social Security system

comes chiefly from the annual report of the Social Security Trustees. And each year,

news articles hasten to highlight the latest projected date through which the program is ‘‘solvent’’ according to that report. This year, that date is 2037. One is hardpressed to find an article about the report that doesn’t emphasize this date.

The Trustees’ work is excellent and professional, but it emphasizes information

of lesser relevance to the task of financing Social Security benefits. By highlighting

the distant insolvency date of 2037, the annual Trustees’ report gives the impression

to the public that as this date moves further out or closer in, the long-term picture

has either improved or worsened to that extent.

What Congress needs to know about the Social Security program is not its projected insolvency date, as my introductory anecdote shows. What it needs to know

above all is what the program will bring in, and what it will cost. What are the

projected gaps between those two, and thus what are the sizes of general revenue

commitments that must be made in addition to collected payroll taxes, in order to

pay benefits?

And because this is a long-term program that will require considerable advance

planning to reform properly, Congress needs this information to be projected over

the long haul, not merely within the 5 or 10 year windows used by CBO and OMB

during budget consideration, for refusal to look at the bigger picture until after this

time has gone by will destroy our ability to construct a solution to Social Security’s

financial problems that is fair to all generations.

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A simple summary report to Congress should simply state:

—The projected revenues that Social Security taxes will bring in annually

—The projected annual cost of paying benefits

—And any projected gaps between those two figures that will oblige Congress to

allocate additional revenues from the federal budget

These could be expressed either as an effective tax rate upon national wages, as

a percentage of overall federal spending, or in dollar terms, whichever is deemed

to be more useful. In my opinion, more than one of these methods of presentation

should be used.

There is information about cash-flow balances in the Trustees’ report and on the

SSA website, but the most important such information is buried in the appendices.

The appearance given by the report is that the annual cost growth in the Social Security system is a rather incidental bit of trivia, in comparison with the somehow

more meaningful measure of program solvency. That is not an appropriate distribution of emphasis. From the point of view of the federal budget, of taxpayers, and

the economy as a whole, the only thing that matters are the program’s annual revenues and its outlays, whereas intragovernmental transfers and debt do not alter the

overall picture.

One very great problem with the focus on the insolvency date is that the date of

projected insolvency tells one next to nothing with respect to the question of whether and how the government will be able to pay Social Security benefits. It doesn’t

tell you whether at some date in the future, the Social Security system will have

enough in payroll taxes to pay benefits, or whether a huge allocation from general

revenues must also be raised, nor how large that would be. It doesn’t tell you

whether the government has generated any savings whatsoever, or whether it sits

on top of massive debt. In fact, when the Social Security program enters into cash

deficits in the year 2015, from the standpoint of the economy and the taxpayer, the

exact same thing happens when there is a large and positive Trust Fund as would

happen if there were no Trust Fund at all—the government must turn to the private economy for additional money. All that the Trust Fund balance reveals is how

much of a legal claim that one part of the government has upon resources to be provided by another part. Assuming that we intend to keep paying Social Security benefits regardless of the existence of such a legal claim, the insolvency date therefore

provides little meaningful information.

Moreover, as the Congressional Budget Office points out in their latest analysis

of the President’s budget, the Trust Fund balance can simply be changed by fiat,

without doing anything that would actually create new means to finance benefits.

We could pass a law changing the interest rate paid on debt issued to the Social

Security system, making it larger or smaller, and thereby moving the projected ‘‘insolvency date’’ further away or closer in. Or we could simply declare that additional

credits from the general treasury will be transferred to the Social Security Trust

Fund—as some in the current administration and out on the campaign trail have

suggested—above and beyond whatever surplus revenues that Social Security has

actually brought in. To sum it up, we can simply decide what the Trust Fund balance is going to be, and thus we can simply decide what the projected ‘‘insolvency

date’’ is, without fixing anything.

For many years, the Social Security Trust Fund grew, even though none of that

money was being saved in any sense whatsoever. The government was running onbudget deficits, unified budget deficits, indeed deficits by any measure. Yet we continued to account as though this were all adding to our ability to pay Social Security

benefits. Today we are starting to make good on pledges to run a surplus both in

Social Security accounts in on-budget accounts. Yet long before the government has

generated any real net saving to back up the huge credits made to the Social Security Trust Fund, we hear proposals to make still more such credits, and to inflate

the Trust Fund balance still further. This does a disservice to the principle of honest

accounting, and to the taxpayers of this country. It is a consequence of our focusing

narrowly on Trust Fund balances.

This is highly misleading. It is imperative that current law as well as all alternative reform proposals be evaluated for their impact on the overall federal budget,

not simply the Social Security Trust Fund. Currently, CBO and OMB reports require Congress to look over the next 5 or 10 years at the operations of the federal

government at a whole, and we plan for this accordingly. With Social Security, however, we look only at the Trust Fund balance over 75 years. We see the consequences of this in proposals to inflate the Trust Fund balance—the part of the

equation we do see—at the expense of the part of the equation that we neglect—

the on-budget accounts. This is not responsible budgeting. And we will not budget

responsibly so long as the information that Congress receives is focused principally

on one side of the ledger only.

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Selective information and inadequate emphasis is never a good basis upon which

to make policy. In the third part of my testimony, I will show specifically how the

selective emphasis of information has distorted the Social Security reform discussion, and has in many ways paralyzed us out of meeting our responsibilities to the

Social Security program.

Reporting to Program Participants On Contributions and Benefits

One of the more damaging misrepresentations about reform proposals is that they

compare unfavorably to ‘‘current law.’’ ‘‘Current law’’ promises benefits but does not

provide the revenues to fund them long-term. Accordingly, any proposal to place the

system on a stable course must, to a first approximation, relative to this unrealistic

baseline, either cut benefits or raise revenues. Because every reform proposal is

thus misdescribed as either raising taxes or cutting benefits, nothing, therefore, gets

done, and the system inches closer to its day of reckoning.

One great frustration I have is that this is not even a factually accurate representation of ‘‘current law.’’ The Social Security Administration does not have the authority to send out checks without financing. Thus, regardless of what current law

promises in terms of benefits, the literal application of current law is that, once the

date of insolvency is reached, the Social Security administration would delay sending out benefit checks, effectively reducing benefits on average to about 72% of current promises. Literally, ‘‘current law’’ means that we would begin to collect vastly

increased general revenues from 2015 through 2037, and then that a sudden and

precipitous series of effective benefit cuts would occur in 2037.

However, we continue to publicly describe ‘‘current law’’ as though, first, that the

additional general revenue tax collections between 2015 and 2037 will not be required, and then that after 2037 the benefit checks would continue to be sent out

without financing. Although none of us believe that Congress would actually permit

a scenario of rapid tax hikes followed by drastic benefit cuts to take place, it is the

literal application of what current law would require. Proposals to shore up the system should be evaluated on whether they promise a better future than these massive general revenue tax collections from 2015 through 2037, and better than the

benefit cuts that would be required after 2037, rather than in comparison to a fantasy scenario that cannot occur in any event—the magic materialization of benefits

without the collection of tax revenues to pay for them.

This is why the 1999 Technical Panel of the Social Security Advisory Board recommended that all representations of current law represent one of two possibilities—one that presumes either that we pay the benefits that current law can actually fund—which right now is only 72% of all promises after 2037—or that we raise

taxes as is necessary to pay for all promised benefits. Somewhere in between those

two endpoints is where reality might take us, but nowhere in that stream of possibilities is there any scenario that corresponds to what we currently tell the public

will happen. Instead, they are sent misleading statements that tell them the benefits that they are promised, minus the information that the legal authority to pay

them does not exist beyond 2037, and the funding does not exist beyond 2015. SSA’s

website makes the same mistake.

At all times and in all places, Mr. Chairman, statements of benefit and tax projections should be provided in a self-consistent manner. If, on Personal Earnings and

Benefit Statements, we tell individuals that certain benefits will be paid, then we

should also identify the changes in current revenue streams that will be required

to pay those benefits, starting in 2015. If, on the other hand, we wish to assert that

tax collections will not be increased, then we should inform people of the changes

in their benefits that would occur consequent to that decisions. But at all times, in

fairness to all approaches, every possible scenario should be credited for the retirement income that it can actually fund and provide—whether these are benefits provided from defined-contribution personal accounts or through a defined-benefit system —and only to the extent that it offers the financing to pay for it.

So, too, as with the first part of my statement, I believe that information sent out

to Social Security beneficiaries should frankly acknowledge the literal application of

current law, and explain to recipients what the Trust Fund does and does not mean,

and its role as a debt owed by the US taxpayer, not an asset of the federal government. If we continue to wrongly imply to individual beneficiaries that benefits can

rain out of the sky without additional revenues being committed in 2015, then we

are committing an egregious public deception that will hamstring our ability to find

fair solutions.

Implications of the Information Gaps Upon Legislative Proposals

As I indicated previously, this may be the most important section of my testimony

because I intend here to show that these matters are not mere esoterica of concern

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only to policy experts, but have larger consequences for the political dynamic that

in turn are damaging to the interests of wage-earners and beneficiaries alike.

It is my view that the shortcomings of our current information flow are proved

by the way that the current Social Security debate has been distorted.

A first example: We know from current projections that projected payroll tax revenues will be insufficient to pay for Social Security benefits. But no one wants to

raise the payroll tax. On the other hand, no one wishes to be seen as cutting Social

Security benefits. In order to meet full current-law benefits, if we do not provide

a portion of those benefits through personal accounts, then taxes would have to be

raised. But since no one wants to admit to raising taxes, proposals to increase revenues to the system are made through the back door—through transfers from onbudget revenues. By transferring credits from general revenues, one requires that

taxes must be increased in the future—in many such proposals, by tens of trillions

of dollars—but one doesn’t straightforwardly admit that this is what is being done.

It is easy to see how our current scoring creates this temptation. If we looked

squarely at the entire effects of Social Security on the federal budget as a whole,

it could clearly be seen that transfers from on-budget revenues have no positive economic effect. The analyses of GAO, CBO and others show this clearly. Future revenues, outlays, debt, and everything else looks exactly the same even after one assumes the implementation of such transfers.

But because we report annually on Social Security’s finances by looking only at

the Trust Fund balance, this creates the illusion that transfers would actually do

some good. The Trust Fund balance is higher, the insolvency date is more distant,

and the added costs on the general revenue side—burdens on future taxpayers—go

unmeasured.

I am certain that these comments will be taken as implicitly critical of the President’s proposal, and I admit that they are. However, it should in fairness be noted

that his is not the only proposal that exploits this gap in our information flow; many

others do. Every time that a proposal funds Social Security benefits from general

revenues without taking an action to increase those general revenues by that

amount (such as, for example, reforming the Consumer Price Index), it is playing

this shell game. This is true whether general revenues are committed directly to

fund a new benefit or whether they are simply used to reimburse the Trust Fund.

And I think it is just as vital to say that every time an alleged expert says to the

public that ‘‘there is no problem in Social Security before 2037,’’ they too are exploiting this gap in the information flow.

Mr. Chairman, I believe it is absolutely critical that Congress begin to insist that

all reporting concerning Social Security focus on all of the revenues that the program brings to the government, as well as all of the costs that it imposes on it. To

look only at one side of the ledger, the Social Security Trust Fund balance, has

clearly induced gamesmanship and will continue to do so. This does not serve the

public well. It advantages only those who wish to gradually turn Social Security into

a welfare program funded largely through income taxes, and works against the interest of those who wish to ensure, as Franklin Roosevelt wished, that there remains a defined relationship between every generation’s tax contributions to the

program, and the benefits that they receive from it.

This leads to my second example of how selective information has biased our evaluation process. From its inception, Social Security was designed to be a contributory

system, distinct from welfare programs in that it was to be funded by dedicated

taxes. If we bias our discussions in favor of proposals that funnel income taxes into

the Social Security system, we would have no record of each person’s presumed contributions to their Social Security benefits. Accordingly, in the future, Social Security would depart increasingly from any notion that benefits were related to contributions, and it would be nearly impossible to tell whether various generations

and cohort groups were being treated fairly.

Currently, when we measure the fairness of the Social Security system, we track

the rate of return that each birth cohort receives on their payroll taxes. But this

becomes a meaningless exercise once the program begins to be funded significantly

from income taxes, as on its current course it would. If we purported to solve this

problem simply by transferring general revenues as was necessary to fund all future

benefits, it would look as though everyone was getting a great deal from the system,

even though they might be paying a tremendous amount in income taxes to support

it. The reason for this is that we would continue to keep track of the benefits they

receive, but only a portion—the payroll tax portion—of the tax burden that they

were carrying.

So, Mr. Chairman, I believe it is vitally important, especially as we look outward

at 2015, that we begin to tell the American public very frankly what is their individual share of the tax burden required to support the program, from income taxes as

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well as from payroll taxes. Under current projections, the average worker in the

year 2030 would need to pay not only their 12.4% payroll tax, but also on average

an additional 4.26% of their pay in income taxes, in order to pay full benefits to

seniors in that year. That is a real burden on taxpayers at that time, and it is absolutely misleading to pretend that it does not exist.

Last year when this Committee held hearings on Social Security reform, an analysis was provided to the Committee on the eve of the hearing, that purported to show

that reform proposals that contained personal accounts would produce an inferior

‘‘payback’’ on payroll taxes, relative to current law.

In reality, each of the proposals analyzed would have eliminated the majority of

the mounting income tax burden that is now projected to occur in the year 2015–

2037. However, by ignoring that $11.3 trillion in cost obligations, it can be made

to appear as though current law has provided something for free that the other

plans haven’t, and thus its ‘‘payback’’ ratio is superior.

Everyone should remember, Mr. Chairman, that in order to understand this problem correctly, we have to recognize that different generations experience the Trust

Fund in different ways. A worker paying a 12.4% payroll tax in 1990 didn’t have

to support a number of seniors whose benefits absorbed all of that 12.4%, so the

balance of that money could be used to provide other government services to that

taxpayer, or to reduce other federal borrowing and/or his income tax burden. But

a worker paying a 12.4% payroll tax in 2025 will be responsible for supporting more

seniors than that 12.4% can provide for, so he or she will have to make additional

income tax payments to pay interest and principal to the Trust Fund from the general budget. Consequently, that wage-earner will either get less in government services, or face higher tax or debt service burdens. Unless one counts the costs to that

taxpayer of paying off the Trust Fund, one receives a very misleading picture of how

the system is working.

If we continue down the current road of pretending that the Trust Fund can magically finance benefits without anyone having to pay for those benefits, then the only

result that we will reach, analytically, is that the only responsible course is simply

to inflate the Trust Fund and to pretend that it produces those benefits for free.

Economically and mathematically, of course, this is nonsense, but it is an inevitable

result of the practice of looking only at Trust Fund transactions when analyzing the

Social Security system.

We will never be able to make this system work fairly for all generations so long

as we succumb to a view of things that looks only at part of the picture. It is therefore absolutely essential that all government materials frankly note the recent CBO

and OMB findings that the Trust Fund in and of itself cannot finance benefits, and

properly account for the payroll and income tax burdens borne by different generations as they move through different stages of the Social Security system.

Again, we see the results of this in the proposals that have begun to circulate this

year. We see proposals to maintain or even expand upon existing benefit promises,

and to ‘‘pay for them’’ simply by trying to make the projected cost increases appear

as invisibly as possible. This is not a responsible way to make public policy, and

future generations will rightly scorn these activities if we do not improve upon our

information flow and thereby make our decisions with our eyes open.

Another, third example of how misunderstandings of Social Security’s finances

distort the public debate lies in the persistent notion that if the economy grows a

little bit faster, if the Trustees’ abandon ‘‘conservative’’ economic growth estimates,

then our perceived problems will all vanish. Mr. Chairman, there is no basis for this

view unless one simply chooses to look, again, selectively and narrowly at the Trust

Fund balance.

In the first place, the Trustees are projecting a slow-down in workforce growth,

not in per-capita productivity, reflecting a demographic reality, so it’s open to question whether their estimates are ‘‘conservative’’ at all. But the real point is that no

person who understands the inter-relationship between Social Security and the rest

of the budget can take refuge in the idea that faster economic growth will solve Social Security’s cost-problems. While it is possible in theory that economic growth

could grow fast enough to eliminate the actuarial deficit over 75 years, the realworld problem of budgeting for increased Social Security costs is only affected at the

margins by economic growth. For example, under the latest estimates, the cost of

the program as a tax rate is projected to grow by 68% over the next thirty years,

from 10.3% of the nation’s taxable pay to 17.4%. Under the ‘‘good economy’’ estimate, this cost growth would be less by less than 1% of the nation’s taxable pay,

meaning that projected costs would still be well more than 50% greater than what

they are now. Looking at the whole picture is essential if we are not to be seduced

and deceived by false hopes that inaction can meet our responsibilities.

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In sum, most ‘‘do nothing’’ proposals rely significantly on the presentation of only

selective information. Only if there is full and accurate disclosure of all costs, revenues and benefits can the shortcomings of these prescriptions be seen.

Current Efforts to Improve Public Education

During consideration of the earnings limit legislation, I sought to offer a simple

amendment to implement the recommendations of the 1999 Technical Panel on Assumptions and Methods with respect to the presentation of information about Social

Security. It was not my intent, Mr. Chairman, to interfere with your desire, or the

President’s desire, to have a clean earnings limit bill. However, given that this was

likely the only substantive action to be taken by the Congress this year in the Social

Security area, I thought it important to highlight at least the existence of the problems that remained unsolved, by directing additional ‘‘sunshine’’ upon Social Security’s financial operations.

We received a wide range of our responses to our amendment. Among watchdog

groups whose main concern is long-range fiscal responsibility, we received tremendous support. The Concord Coalition, for example, supported our efforts helpfully.

We also enjoyed the support of many who are committed to a fiscally responsible

long-term solution for Social Security, including some who have not yet cosponsored

reform plans.

To the extent that there were criticisms, as is often the case, these ranged from

the constructive and valid to many based on mischaracterizations and misunderstandings. I will presume that you are already familiar with the language of our

amendment, Mr. Chairman, and know that it would have obliged the Social Security

Trustees to implement only the Technical Panel’s recommendations regarding the

presentation of clear and relevant information, and only to the extent that the

Trustees found advisable to do so. Since the amendment was withdrawn, and the

Trustees’ report has been released, many have noted that the Trustees’ report does

implicitly evaluate the Tech Panel’s recommendations regarding economic and demographic estimates, and incorporates small pieces of them. However, the technical

assumptions were not the focus of our amendment, and although I have my own

views about the technical issues, the extent of their incorporation into the Trustees’

report does not speak to our concerns. My chief aim is to see that the relevant information is provided to Congress within the framework of the Trustees’ assumptions—not with the assumptions themselves.

Many who supported our objectives sought to pass a clean earnings limit bill, including you, Mr. Chairman, and we withdrew our amendment in deference to that

desire, upon receiving a commitment that our concerns would continue to be pursued in this Congress. I still believe that Congress would do well to pass legislation

this year to improve reporting to both the public and to Congress regarding the true

finances of the Social Security program. Doing so would be immeasurably helpful

to the prospects for bipartisan cooperation in future years.

Mr. Chairman, despite the fact that you and I and many others have put forward

Social Security reform proposals in this year of surpluses, it looks as though the

likelihood of meaningful action is small prior to this November’s election. But I believe that we can still provide a useful service if we at least assure that Congress

and the public receive the whole story, not just part of the story, of Social Security’s

finances.

That means a frank accounting of the system’s entire costs and revenues—not just

as seen through the narrow window of the Trust Fund. That means leveling with

the public about what current law can actually fund. It means reconfiguring our

public materials to honestly express what the Trust Fund is and what it isn’t. It

means evaluating all proposals on a level playing field, one that recognizes all benefits and costs delivered under each scenario. If we continue to present only selective

information to the public and to Congress, then we cannot expect that we will make

the best decisions. We will benefit only those who seek to obscure the realities of

the choices before us, and future taxpayers will be left with the costs that would

arise as a consequence of our inattention.

I applaud your leadership in holding this hearing, Mr. Chairman, and I thank you

again for the opportunity to submit this testimony.

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