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77–406 PDF 2002

S. HRG. 107–347

STRAIGHT SHOOTING ON SOCIAL SECURITY:

THE TRADE-OFFS OF REFORM

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

WASHINGTON, DC

DECEMBER 10, 2001

Serial No. 107–16

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING

JOHN B. BREAUX, Louisiana, Chairman

HARRY REID, Nevada

HERB KOHL, Wisconsin

JAMES M. JEFFORDS, Vermont

RUSSELL D. FEINGOLD, Wisconsin

RON WYDEN, Oregon

BLANCHE L. LINCOLN, Arkansas

EVAN BAYH, Indiana

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JEAN CARNAHAN, Missouri

LARRY CRAIG, Idaho, Ranking Member

CONRAD BURNS, Montana

RICHARD SHELBY, Alabama

RICK SANTORUM, Pennsylvania

SUSAN COLLINS, Maine

MIKE ENZI, Wyoming

TIM HUTCHINSON, Arkansas

PETER G. FITZGERALD, Illinois

JOHN ENSIGN, Nevada

CHUCK HAGEL, Nebraska

MICHELLE EASTON, Staff Director

LUPE WISSEL, Ranking Member Staff Director

(II)

C O N T E N T S

Page

Opening Statement of Senator John Breaux ......................................................... 1

Prepared statement of Senator Larry E. Craig ..................................................... 162

Prepared statement of Senator Tom Carper ......................................................... 162

PANEL I

Dan Crippen, Director, Congressional Budget Office, Washington, DC ............. 3

Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security

Issues, U.S. General Accounting Office .............................................................. 119

Geoffrey Kollman, Specialist on Social Legislation, Congressional Research

Service, Washington, DC ..................................................................................... 153

(III)

(1)

STRAIGHT SHOOTING ON SOCIAL SECURITY:

THE TRADE-OFFS OF REFORM

MONDAY, DECEMBER 10, 2001

U.S. SENATE,

SPECIAL COMMITTEE ON AGING,

Washington, DC.

The committee met, pursuant to notice, at 2:04 p.m., in room

385, Russell Senate Office Building, Hon. John Breaux (chairman

of the committee) presiding.

Present: Senator Breaux.

OPENING STATEMENT OF SENATOR JOHN BREAUX,

CHAIRMAN

The CHAIRMAN. Good afternoon to everyone. Thanks for being

with us. Thanks to our panel members for being with us, as well.

We appreciate this opportunity to discuss a very important subject matter. The hearing today is for the purpose of giving our colleagues and the American public a concept of a framework in which

we will be considering the very important subject of Social Security

reform.

First off, with the Presidential Social Security Commission’s final

meeting which will be held tomorrow, our hearing will weigh a

number of proposals that are contained within the commission’s

recommendation, recommendations that we have already looked at

in the press and had comments editorially even before the commission’s final meeting.

Second, I would like to use this hearing to draw attention to the

need to get the Social Security debate back on track. I have been

disturbed by the discussion over the past year and have grown increasingly concerned that we have taken a giant step backwards in

the actual debate.

Furthermore, I am also worried that we have confused the American people by muddling the real Social Security debate beyond recognition. We need a realistic and a nonpartisan reminder of the

very serious problems that are facing Social Security and a substantive examination of the costs and the tradeoffs that are associated with real reform.

Last, I think it is important to highlight how we as a nation will

handle our domestic priorities following the tragedies of September

11. I think we all wonder what can we possibly do now? With

major domestic issues like Social Security and Medicare, we may

be tempted to merely say we cannot handle this now or that not

enough money exists to confront such big issues. I think we may

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hear from our experts that pushing these big issues aside and ignoring them is simply not an option.

I have asked three congressional arms who provide us with objective analysis to come in this afternoon to remind us what led us

to our current Social Security predicament, and the problems that

are facing us.

My first hearing as ranking member of this committee back in

March 1997 dealt with preparing our nation’s entitlement programs for the aging of 77 million baby boomers. We heard about

Social Security in the context of the even bigger issue of overall entitlement reform and this included looking at Medicare and Medicaid and other mandatory spending programs that serve this country. That hearing was one of many long and eye-opening presentations that we have heard over the years, warning that the demographic changes in this country will soon cause an extraordinary

collision of financial pressures.

Social Security and Medicare are facing long-term insolvency.

Medicaid is filling in for the lack of a long-term care system in this

country and will put enormous pressure on both State and Federal

budgets. We heard time and time again that unless we acted, entitlement spending would inevitably bear down on the Federal budget and crowd out dollars for other discretionary investments, including education and critical funding of our national security. We

were also warned of spiraling deficits if we did not take action to

control this unsustainable entitlement spending.

Well, just as policymakers seem to be ready to tackle some of

these issues, the budget surpluses began to disappear, presumably

making reforms more difficult. So over the past 4 or 5 years we

have had an active debate on Social Security and Medicare and

both issues have been prominently featured on Presidential and

congressional agendas. Yet I firmly believe that in these rhetorical

battles we seem to have lost sight of the big picture. The debate

was more informed and realistic during our first Aging hearing

back in 1997. Recent debates over lockboxes and surpluses and

general revenue transfers have blurred the real issues.

So here we are again today simply unable to agree on how to

shore up Social Security. While our surpluses are now drying up

and disappearing, national security has simultaneously become our

top priority. So do we just throw up our hands and say that nothing can be done?

We cannot do that. Everything seems to have changed about the

Social Security debate except the problem; it is still there. Entitlement reform has now become more important than ever before. We

must realize the seriousness of why we continue to debate Social

Security and Medicare. After September 11 we now know that we

will always need to be prepared for emergencies that strain our nation’s financial resources. We simply cannot let Social Security and

other entitlement programs go unaddressed.

It is my understanding that the White House wants to use the

commission’s report to begin a Social Security dialog in this country over the next year. I hope that both parties will be honest with

the American people. We all need to be honest that we have promised more in benefits than we can afford to pay under the current

system.

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I also hope that the public takes the time to learn about Social

Security. Everyone should know the critical role that Social Security plays in this country—that it helps keep retirees out of poverty

and provides both survivor and disability benefits. I would also

hope that Americans look at their pay stubs, look at what their

projected benefits will be and ask themselves if they are willing to

take less or are they willing to pay more.

Today’s hearing will hopefully give the American public a chance

to hear an objective and honest assessment of the tough choices

facing Social Security. The testimony we will hear allows us to take

a step back from the political battles and remember that Social Security is heading for insolvency. The longer we want to address the

issue the more difficult it becomes.

With that, I am pleased to welcome our first presenter this afternoon, Mr. Dan Crippen, who is Director of the Congressional Budget Office here in Washington. Dan, thanks for being with us once

again. Thanks for the excellent publication that I had an opportunity to review over the weekend. I think it really is a very worthwhile document that really helps everybody understand where we

are and where we are headed and offers options as to how we need

to approach solving this problem.

So with that, Dan, we welcome you to the committee.

STATEMENT OF DAN CRIPPEN, DIRECTOR, CONGRESSIONAL

BUDGET OFFICE, WASHINGTON, DC

Mr. CRIPPEN. Thank you, Mr. Chairman. As you suggested in

your opening remarks, it may be only the folks in this room who

are thinking about Social Security these days but then, like growing older, it is better than the alternative. At least someone is still

on the job.

I am especially grateful for this opportunity, Mr. Chairman. As

you mentioned, we are taking this opportunity to release a piece

of work we have had under way for some time and indeed had

planned to release back in September but, like many other things,

got postponed. That is something we are calling a Social Security

primer, which we hope, as you say, will be helpful to you, the committee, press, other policymakers, as a reference document and as

a way to, we hope, set up some of the questions.

The CHAIRMAN. Was this developed, Mr. Crippen, in connection

with the commission?

Mr. CRIPPEN. No, it was not. We have been getting questions, of

course, for the last several years along the lines of the kinds of

things we put in here, so we decided it might be useful for everyone

to compile some answers to those questions in a basic way.

We think—I think, actually, the document is terse without being

too dense. In 12 or 13 pages we review with pretty good detail how

the program works, in another 10 or 12 pages what the demographics look like. So it does pretty quickly, I think, pull together

a number of things.

In my remarks today, Mr. Chairman, I want to just take a very

few minutes and do a couple of things: review the demographics,

as you suggested, and talk about how one might analyze Social Security and its reforms.

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There are at least three ways we believe that one could look at

the program and any reform proposals. The first, of course, is actuarial analysis, which is the most common and widely used so far,

that tells us what the trust fund looks like and what the expected

income and outflows are. Second would be from the statement of

the Federal budget, another approach you mentioned in your opening remarks—what role does Social Security play, what portion of

the budget and how does that grow in the future? Third would be

from the point of economics and the program’s effect on the macroeconomy and, in turn, the economy’s effect on the program.

Because not surprisingly we at CBO are budget analysts and

economists and not actuaries, we would encourage you to at least

consider the second two approaches, but I will get back to those

momentarily.

The basic dilemma that we are facing, and I think that is a good

word that you used—it is not necessarily a problem but it is certainly a dilemma and something that needs to be addressed—is

driven by the demographics. We have a baby boom generation, our

generation, that is about to retire and between 2010 and 2020 will

almost double the number of people in Social Security and other retirement programs. At the same time the workforce will barely

grow, something less than 10 percent, resulting in the current

three workers per retiree to drop to two.

What that means, of course, is that it is our children who will

be paying for our retirement, just as we are paying for our parents

now, except there will be fewer of them paying for each of us. So

while we may be somewhat uncertain of the economics of the future, we are fairly certain of these demographics. Everyone who

will retire in this time period is certainly born today and most of

the people who will be working in this time period have been born.

We may change immigration policy and some other things that

would increase the workforce, which could be salutary as far as the

program is concerned, but we do know the basic demographics that

underlie this dilemma.

We also know what the program in its current form looks like

relative to the rest of the budget. The second slide I brought along

is just a basic point that Social Security is almost half of the current noninterest budget, along with Medicare and Medicaid, the

other primary programs for retirees.

I would, Mr. Chairman, urge, of course, as you have, and you

know more about Medicare than almost anyone in this room, we

need to, of course, consider these programs while not necessarily

together in reform, we need to understand how they interrelate and

clearly the more one pays for health care delivery, perhaps the less

you can pay in Social Security and vice versa, but they are clearly

related programs and we need to consider them in context. That is

particularly true from the macroeconomic point of view.

This picture, however, worsens dramatically over the time period

2010 to 2030 where Social Security, Medicare and Medicaid will

make up at least two-thirds of the budget as we know it now. What

that means then in an economic sense and the third way one would

analyze these programs and the one I want to dwell on a bit today

is that these three programs will go from consuming about 7 percent of GDP, our current economy, to 15 percent by these relatively

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conservative projections. They are conservative for a number of reasons which I can get into but the point is quite simple. We will

more than double the take out of the economy for our retirees while

producing it with fewer workers.

Relative to our current budget we are spending around 18 or 19

percent, perhaps as much as 20 percent of GDP on Federal programs. If these three programs are taking 15 or 16 percent, it obviously suggests there are going to be some very dramatic changes

in our fiscal policy. That means we will have to raise taxes by 8,

9 percent of GDP, borrow the equivalent of 10 percent of GDP

every year or cut other Federal spending.

The CHAIRMAN. Let me interrupt you. Is there a percentage that

would be an acceptable percentage? What is it running right now?

Eight percent, 7 percent?

Mr. CRIPPEN. Seven, about 7 for all three programs.

The CHAIRMAN. Seven percent now and you are pointing out that

by the year 2030 if we keep the same program we will be running

at about 15 percent?

Mr. CRIPPEN. Correct.

The CHAIRMAN. Can we compare it to what other countries spend

on health and retirement programs? Is there a magical number

that is a good number and anything more than that is a bad number? What is the problem with 15 percent versus 7 percent?

Mr. CRIPPEN. Well, it is not necessarily a problem. As I said, you

pointed it out as a dilemma. We could choose to pursue this path

but it is important that we recognize in doing it that we are going

to have to make up the difference somewhere, the difference being

what we are currently spending on the rest of the Federal budget

and Social Security, relative to the economy. That means we need

an increase in taxes or borrowing or cut other spending, as I said,

as much as 10 percent of GDP.

In today’s terms, since we have over a $10 trillion economy, what

that means is you would have to raise a trillion in taxes every year,

you would have to borrow a trillion dollars every year or cut other

spending by a trillion dollars or half of the current budget, or some

combination obviously of those.

So there is no magic number. We have been running a pretty

steady number on Social Security, a little over 4 percent of GDP,

for the last couple of decades. At the same time we have had a

workforce increase. So Social Security in and of itself has not been

growing relative to the economy that much. Medicare has been

more, as you know. But economists do not have any magic number.

All we can do is suggest this means a lot of what our kids are

producing in the future will be paying for our benefits, and that is

really the point I want to make here today, Mr. Chairman, is that

from the point of view of macroeconomics, it does not matter a

great deal what the trust fund looks like, what the actuarial analysis shows you. What matters the most to economists and, in turn,

to budget analysts is what impact a program has relative to the

size of the economy. That is what this chart attempts to depict. Because no matter what we do, no matter what the balance is in the

trust fund, we are going to be taking from our children some of

their earnings and, in turn, buying with those earnings clothes,

cars, food in competition with them. So we will be commanding a

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high percent in these years of economic output that our kids are

making and it really does not matter what is in the trust fund.

Let me give you an example of one way that that might make

more sense, a more concrete example. Around the year 2016, as

you know, payroll taxes will no longer be enough to pay current

year benefits to retirees. Under the current law with the trust

fund, interest payments on the outstanding bonds in the trust fund

will be paid, which will be enough, that plus payroll taxes, to cover

the benefit payments but you have to think about what happens.

What we need to do at that point is generate cash. This is not a

paper transfer. Those checks that we send to beneficiaries are

going to be cashed and there will not be enough payroll taxes taken

in.

So how do we generate the cash? Well, the Social Security Administration goes to the Treasury and says, pay me interest. Treasury can only pay cash interest by raising taxes, borrowing or cutting spending. That is the only way it can come up with those dollars. So it does not matter what is in the fund; those dollars have

to be raised in those three ways.

Think for a minute if there were not a trust fund, if there were

no balances in it or it did not exist at all. Then in order to make

good on the payments when payroll taxes would not cover expenditures, the Federal Government, the Treasury would have the same

three options—raising taxes, increasing debt or cutting spending.

So from a budgetary and macroeconomic point of view, at that

point the trust fund, its balances, even its existence, matters much

less than how much the retirees and the elderly are removing, taking, consuming out of the economy.

So our basic message today, Mr. Chairman, is that there are

many ways one can analyze Social Security but we would suggest

strongly that when you are looking at reform proposals one should

not simply ask the question, what is the effect on the trust fund?

You need to go beyond that and ask not only what is the effect on

the Federal budget but how does it relate to this kind of portrayal

of the dilemma?

With that, with this fraction, if you will, there are only two moving parts. One is the Social Security expenditures, of course, the

numerator, and the other is the denominator, which is the size of

the economy. Those are the two things you really, at the end of the

day, have to work on to make this future look better for us and our

kids. There are really only those two moving parts.

Let me close by referring to some remarks made by not only a

predecessor of mine but the founder of CBO, Dr. Alice Rivlin, a

couple of years ago while she was at the Federal Reserve Board.

She reiterated some of these points, which I think deserve to be entered in the record.

Dr. Rivlin said, ‘‘I believe, however, that focussing too narrowly

on the Social Security funding question in isolation from the more

fundamental economic challenge of an aging population risks muddling the problem and perhaps picking a wrong answer. In any

given future year a larger proportion of older people will be competing with the workforce and the rest of the population for shares of

GDP in that year. Whatever is produced in the future will have to

suffice for all the claimants. Societies cannot consume more than

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they produce for long; nor can consumer goods feasibly be stockpiled. The first question,’’ Dr. Rivlin says, ‘‘how to move to a higher

economic growth path, is obviously the most important as well as

the most urgent. If we can find ways to make the future workforce

more productive, both they and future retirees will benefit. Its

main urgency to pursue economic growth is that some solutions

contribute to higher growth and some do not. It is important to

choose a pro-growth solution and choose it soon.’’ One of the folks still obviously involved very much in this debate

and who is thinking about it today is former Senator Moynihan. I

have over the years written down a number of what I call Moynihan’s laws and the first law, roughly translated, is if you do not

ask the right question, you will not get the right answer. What I

am suggesting, Mr. Chairman, is we need to ask a whole lot more

than just what does the trust fund look like in order to get an answer that is sustainable for us and our kids.

With that, I will close. Thank you.

[The prepared statement of Mr. Crippen follows:]

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The CHAIRMAN. Well, Mr. Crippen, thank you for your observations. Thank you for the publication which I thought was a very

helpful document, the primer on Social Security. I think it would

be good if all members would have a chance to review this as we

begin this discussion.

Let me talk a little bit about the commission. You mentioned

Patrick Moynihan’s memorable and very classic statements that he

would make as a member of the Finance Committee and one of

them, like you said, is if you do not ask the right question you are

not going to get the right answer.

It would seem to me that what the president was trying to do

with the commission was to ask them a question and hopefully get

the answer and it seems to me that in a certain way what they are

going to give out tomorrow is not really an answer. In theory, commissions serve a purpose of making difficult political recommendations that Congress does not have the political courage to do. Having served on a couple of commissions, I know that was what we

were supposed to do—come up with a recommendation.

It seems like the Social Security Commission has come up with

three recommendations. They are sort of sounding like Congress.

You know, on one hand you can do this, on the other hand you can

do that, but if you have a third hand, you have a third option. So

they have given us three options. I was actually hoping that they

would bite the bullet and come up with something that was nonpolitical and leave the politics of what we do to the Congress,

where we are supposed to make the political decisions but have

them make the recommendation as to what is the best policy, disregarding the politics, and we would handle that later on, which

has always been, I thought, the role of a commission.

I remember our CSIS Commission on Social Security with Senator Judd Gregg and myself and Jim Kolbe and Charlie Stenholm

in the House and others made a recommendation on Social Security and our Medicare Commission attempted to make a single recommendation. A document was produced. Yet with the Social Security Presidential Commission it seems like we have three separate

recommendations. Do you have any comment on that? One of them

actually is the one that, as you pointed out, I think has no tax increases and no benefit cuts. I mean I hear what you are saying and

that does not seem to be very realistic in solving the problem.

Can you solve the problem in Social Security without doing any

benefit cuts and without doing any tax cuts? I mean it would seem

to me if we could solve the problem of solvency that way we would

have done it a long time ago. That is easy. Is that realistic, though?

Mr. CRIPPEN. I suspect not, Mr. Chairman. We are, as you know,

not in a position to make policy recommendations. On the other

hand, we are around to try to help measure the effects of legislation and reforms.

In an economic sense what needs to happen in order to change

the outlook that I have presented here today, particularly with this

last chart, what needs to happen is the current generation, the

baby boomers, the current workers, will probably have to reduce

consumption some, increase savings therefore in order to grow the

economy more.

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If you want to think of it this way, maybe we should, as boomers,

if we want to fix this problem, pay twice—once for our parents and

once for ourselves. We are paying for our parents and a little more

than they require and we have the surpluses in the Social Security

system, at least. But if we are going to pay a second time for ourselves then we may want to save more now and we may want to

take reduced benefits when we retire. That would allow us to pay

twice but over the term of our entire lives, not just our working

lives.

So there are options that would help considerably but it does

mean that this generation is probably going to consume less, consume less now and consume less in retirement, in order to change

the outlook of this picture a great deal. Clearly, as I said, we need

to worry about the effects of not only Social Security reform but everything else we do, be it Medicare or immigration policy and other

things, on how the economy grows. Without that, this problem can

become untenable. But clearly to grow the economy we need to reduce consumption. It is the classic stuff your parents told you—

save now. Unless we do that as a country, we will not be growing

the economy nearly as much as we could and make this a much

easier situation for our kids.

The CHAIRMAN. The general proposition that I have heard many

members repeat and I was wondering if you think it is correct is

that in order to fix Social Security you do not have a lot of options.

I mean you can either reduce the benefits or increase the taxes or

revenues to pay for those benefits. Is that pretty much a correct

statement or is that an incorrect statement?

Mr. CRIPPEN. Well, if you define the problem as being the trust

fund and the solvency of the trust fund, that is certainly the limit

of your options. You need to increase revenue to the trust fund or

cut outflow, period. I mean there are not a lot of other options.

One, however, in addition, that we probably need to mention is

that increasing the rate of return on the trust fund is used as a

way to improve that outlook.

I would suggest, however, none of those are necessary or sufficient. That is to say it is not the trust fund solvency or balances

that worry us; it is, however, the impact of those expenditures and

the economy. Therefore the operation of the trust fund may be important. If it generates surpluses that are saved and not spent in

other areas, then indeed it might be helping that national savings

and growing the economy.

But just like the argument about rate of return, unless national

savings are actually increased somehow and the capital stock is increased and the economy grows better, raising the rate of return

does not do any good. It does not change this picture one iota. It

makes the trust fund look better so instead of 2038 it may look like

2055 or pick a year when it grows insolvent but it does not change

this picture.

We could legislate a higher rate of return. We now pay a rate we

make up based on Treasury rates. We could pay twice that. All we

have to do is change the law. The trust fund will look a whole lot

better but it would not have any impact on this view of the world.

So many of these reforms that look only at solvency or look only

115

at the trust fund itself, as I said, may not help this picture and

could hurt it, as Dr. Rivlin said.

So we need to be careful. Clearly to fix the trust fund problem

there are not many options but we should not just fix that problem.

We need to do that in the context, I would suggest, of the Federal

budget and the effects on the economy.

The CHAIRMAN. The first option that the commission is going to

recommend, I take it, includes transferring general revenues into

the program. Can you comment on that as a vehicle to help solve

this problem? Is it workable, not workable? What do you think?

Mr. CRIPPEN. It depends on where those general funds come

from. President Clinton actually proposed doing some pretty large

transfers of general revenues into the Social Security program. In

the case of his proposal, the funds essentially pass through the

trust fund, leaving behind, of course, the government bonds, some

called IOUs, but the cash came out the other side and was used

for other government expenditures, in the main.

So if general revenues are transferred through the trust fund, it

gets borrowed back to the government and those funds get expended for other programs. All you have done in this first instance

is raise the trust fund balances without doing anything to address

this problem, if this is the way you want to address it. You have

not changed economic growth. You have not changed the obligations to the elderly. And given those tests, it does not do much.

Now if those general funds that are transferred into the trust

fund are coming from surpluses that would otherwise be spent either by individuals or by the government, then you may have a net

positive effect on savings, but it really depends on what you assume the source of those funds is as to whether it can help or hurt.

It will make the trust fund look better but again the trust fund is

less interesting, I would suggest, than looking at these kinds of effects.

Does it affect how much Social Security is as a percent of the

budget? No. Does it affect economic growth? It does not. Does it

change the obligations to retirees? It does not do that, either. So

unless it actually adds to national savings and helps us grow the

capital stock, it is another one of those, like rate of return, that

makes the trust fund look better but does not help the problem.

The CHAIRMAN. Could you maybe give me a comment on the

three recommendations or the examples that the commission is

putting out tomorrow? The first one is a voluntary option to invest

2 percent of the payroll in a personal account, the second one is a

voluntary option to invest 4 percent of the payroll in a personal account and the third example they give is a voluntary option to invest an additional 1 percent of payroll in a personal account with

a 2.5 percent match from payroll taxes.

Can you comment on those ideas? I take it they all are versions

of trying to create individual retirement accounts but it is a question of whether the money to do that comes from the general revenues or whether it comes as a carve-out from the existing payroll

taxes. Can you give me some discussions on the pluses and

minuses of that?

Mr. CRIPPEN. Well, again the test that I would suggest that you

want to look at is what effect do these reforms have on the obligaVerDate 11-MAY-2000 12:08 Mar 21, 2002 Jkt 000000 PO 00000 Frm 00119 Fmt 6633 Sfmt 6633 77406.TXT SAGING1 PsN: SAGING1
116

tions for the elderly in the future? What does our benefit structure

look like? Second, what does it do to the economy? It depends critically upon where the funds come to finance those individual accounts.

If, for example, we are taking a surplus, if there were a surplus

today, and we were, instead of having the Federal Government pay

down debt held by the public, that surplus was used to fund individual accounts, that would have a net in the first instance—it

would be a net zero impact because we are taking savings of the

Federal Government and making it savings of individuals. So net

national savings would be the same.

The CHAIRMAN. But isn’t the argument that the individual savings would bring about a higher rate of return because it may be

in the markets or a combination of the markets, as opposed to government investing it?

Mr. CRIPPEN. That is part of the argument. As I said, there are

two real fallacies with that. The first is if you adjust for the risk,

what economists or market analysts call the risk-adjusted rate of

return, the bond market, which is what we are essentially paying

the funds now, and the equity market are roughly the same. So you

are getting paid more but it is because you are taking more risk,

so over time, the risk-adjusted rates of return.

But more importantly, the rate of return to the trust funds,

again whether they are individually held or whether the government holds them, are much less important. It makes the trust fund

look better but unless the economy is actually growing to reflect

those higher returns, it does not help. We can, as I said, legislate

higher rates of return. There is no reason would could not say that

these bonds now held by the Social Security trust funds could be

paid at the S&P 500 rate. There is absolutely no reason legislatively, morally, economically. Whatever you want to do, you can

raise the rate of return on these funds but that will not help the

problem, just as putting them in individual accounts and raising

the rate of return will not necessarily help the problem. It depends

on whether or not those monies are new and contributing to national savings. If you are just taking them from one pot, splitting

them up and putting them in a million other pots, it does not matter. You have had no effect.

Now the proponents certainly would argue that there may be ancillary effects, and we cannot deny that. If people have their individual accounts they may save more than they would otherwise. It

may make a lot more people aware of their retirement, the lack of

retirement funding. Those are all possible. But just in the first instance, from a macroeconomic point of view, that alone will not

solve this dilemma. It may make the trust fund look better. We can

do that by fiat.

The CHAIRMAN. The argument has been that if you put more

money into the trust fund, I guess because of investing it in a combination of markets, stocks and bonds or a combination, you are

putting more money in there. You seem to be telling me that that

does not really matter.

Mr. CRIPPEN. It matters only if it is new savings. Let us say, for

example, that we have these individual accounts financed by raising Treasury debt. We issue bonds in order to raise the money to

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give to individuals and their accounts. We have the capital markets

here giving you cash in return for bonds and we are giving individuals cash over here to buy bonds, or equities. So all we have done

is move the money around but we have not increased the amount

of money in the capital markets or in investment in capital stock.

It washes because if you borrowed it and then gave it to individuals you would have a zero impact roughly on the capital markets

and certainly no impact on economic growth.

The CHAIRMAN. Well, what do you think? Can you comment from

an economic standpoint on what we are going to be getting as a

Congress tomorrow? Do you think it offers some realistic options or

is it, as one editorial seemed to refer to it, really a punt on a recommendation to the Congress? I, for one, was kind of hoping we

would get a recommendation and we could say this is great or this

is not so great or it is terrible but we just got some things—I do

not want to be critical. A lot of these people were good friends of

mine and believe me, I know the difficult task of coming up with

a single recommendation on anything but I was kind of hoping that

the reason we had a commission was to come up with a single recommendation and yet now we seem to be coming back with a list

of options. We knew the options. We know the choices. I was trying

to get some kind of recommendation.

Can you give me a comment on what we are going to get?

Mr. CRIPPEN. You know this history better than I. You were a

participant and I have been an observer. But even when you have

a recommendation and not a list of them, such as you did with

CSIS or even with the Medicare Commission—you had a majority

for a recommendation—trying to get that adopted is an uphill battle. When you have a range of options and a Chinese menu, that

has to be harder. It just has to be.

So I am afraid the task before you is perhaps improved some by

the work of the commission but not made a lot easier.

The CHAIRMAN. I guess the answer is obvious but since September 11 and the fact that surpluses have pretty much disappeared

because of requirements that we are addressing which are important, does that affect the urgency of addressing Social Security reform?

Mr. CRIPPEN. First let me say that we do not know yet what the

surplus picture looks like. We are in the midst of doing that, as we

normally do, to produce for late January. Clearly with the economy

the way it is and with more spending for homeland security, the

surpluses are going to be diminished, even in the long run. In the

short run they may be nonexistent.

Nonetheless, the economy will, we believe, in the long run still

perform relatively well over the next 10 years and produce a fair

amount of Federal revenue, maybe even to the tune of having surpluses. But I think in either event it does not reduce the urgency

of fixing or addressing Social Security. The sooner we do it, the

more likely we are to change behavior of both our generation and

that of our kids in a way that will grow the economy and maybe

let us adjust. If our benefits are to be reduced, we can adjust ahead

of time before we retire for that reduction; we might actually increase our own savings if our future benefits look worse. So we

may have a double positive, if you will.

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But the sooner we do that, not looking to affect anybody who is

currently on the rolls or close, the dilemma that we describe here

has nothing to do current retirees. Therefore surpluses or not surpluses in the next year or two are not the important thing; it is

making some changes now that can make this future look different

and allow us all—— The CHAIRMAN. That is the important point. I think it is very important that Congress continue to assure existing retirees that

what we are doing today is not going to affect them. It is going to

affect people like yourself and myself and a lot of people in the audience who are maybe part of the baby boom generation or generation X. That is what we are talking about legislating, a system for

that group of people, not for the group that is there now. They are

fine. They are going to have enough to take care of their needs. My

father is a little over 80 years of age. That program is not going

to be adversely affecting him one way or the other. But for my generation and my children’s generation, unless we do something it is

simply going to have some very big problems.

Well, I appreciate it very much. Again thanks for staying on the

subject. Again the primer is a very good document and it is very,

very helpful. I look forward to continuing to work with CBO on

these problems and thank you for being with us.

Mr. CRIPPEN. I want to report, Mr. Chairman, that this morning

when I talked to my father he was more worried about whether the

ice was thick enough to walk on to fish than he was about Social

Security.

The CHAIRMAN. That is probably very correct. That is a more imminent problem.

Let me welcome up our second panel. Again you see that what

we are doing here is trying to get some nonpartisan presentations

on these issues. I am sure there will be plenty of time for every

interest group in Washington to come up and say what they think

about the commission’s recommendation and pick it apart or agree

with it or what have you but in trying to get the three presenters

we have today, we are trying to keep it as nonpartisan as we can.

I would like to welcome Barbara Bovbjerg, who is Director of

Education, Workforce and Income Security Issues at GAO, our

General Accounting Office, for making this presentation. Mr. Geoffrey Kollman over at CRS will be available, I take it, to answer

maybe some questions we might have. He is a specialist on social

legislation, including Social Security.

So Ms. Bovbjerg, we welcome you back to the committee and look

forward to your comments.

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STATEMENT OF BARBARA D. BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE, AND INCOME SECURITY ISSUES, U.S.

GENERAL ACCOUNTING OFFICE, WASHINGTON, DC

Ms. BOVBJERG. Thank you, Chairman Breaux. It is really a

pleasure to be here and I thank you for inviting me to discuss the

challenges of addressing Social Security reform.

I hope you do not feel that I am raising my voice at you but I

have been told I need to speak really loudly because people in the

back cannot hear.

Before I begin summarizing the substance of my statement I

wanted to take this opportunity to convey to you Dave Walker, our

Controller General’s, personal commitment to assisting you in this

endeavor. He very much wanted to be here today and was quite

disappointed he could not be. As we speak he is at ground zero in

New York.

He asked me to express his strong interest in these issues we are

addressing today and to let you know that he and GAO stand ready

to support Congress and this committee in the coming months in

considering how best to restore financial stability to Social Security.

But let me return to the business at hand. Over the past few

years a wide array of proposals have been put forth to restore Social Security’s long-term solvency and now a commission appointed

by the president is deliberating possible reform recommendations.

As the debate over possible action begins anew, you asked me here

to help clarify some of the key issues Congress and the public will

face in considering options for Social Security reform. Accordingly,

my testimony today discusses the nature and timing of the problem, GAO’s framework for evaluating reform proposals, and findings from our recent report on Social Security’s role in securing income adequacy.

First let me address the nature and the urgency of the problem.

I will do this only quite briefly, as Dr. Crippen has already discussed the fiscal and economic challenges Social Security presents.

As he observed, the anticipated growth in Social Security, in combination with rapid growth in Medicare and Medicaid, will dominate the Federal Government’s fiscal future and weaken the economy. Absent reform, the Nation will ultimately have to choose between persistent, escalating deficits and debt, significant tax increases, or dramatic budget cuts.

I brought a picture with me that we have used many times before to illustrate this budgetary challenge. We call this the haircut

graph because it illustrates the budgetary scalping the government

could experience if we do not take action soon to rein in entitlement spending.

The graph shows the actual composition of Federal spending in

the year 2000 and what it could look like in 2030 and 2050. In our

illustration we assume that the 10-year surpluses CBO projected in

August are eliminated. Of course, we do not know what the next

projections will be but we can guess they will be considerably less

optimistic than they were prior to September 11.

But if we assume that they are eliminated and we make no

changes to Social Security, Medicare or Medicaid, by 2030 under

today’s levels of taxation there will be virtually no room for any

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other Federal spending priorities. Those, of course, include national

defense, education, law enforcement, among others. By 2050 we

would be paying interest out of current tax receipts but little else.

Failure to take remedial action will place unsustainable pressure

on——

The CHAIRMAN. Let me interrupt you. This is a very important

statement. If we do not do anything—we are talking if we do not

do anything, we keep it just like it is on the current path, by about

2030 there is not going to be any money left for anything other

than—— Ms. BOVBJERG. At current levels of taxation, yes.

The CHAIRMAN. If we have no tax increases for these programs

or no reductions in the benefits of these programs, just these three

programs will be accounting for how much of our total Federal expenditures? 100 percent?

Ms. BOVBJERG. These programs would represent about 60 percent of total Federal spending at that point but more than 100 percent of revenue collections if we kept them at the same rate.

Now let me hasten to say that this is a picture that I can say

with confidence absolutely will not happen. The President and the

Congress will not let this happen. This would be a calamity and Dr.

Crippen spoke in some detail about economic effects—this is just

the fiscal side of it—but this is an illustration of what could happen under the current path, as you put it.

The CHAIRMAN. You make the point that Congress will not let

this happen. I am just wondering when are we going to do something to not let it happen? That is the question. It is going to take

a while to get it done and you cannot wait till 2030, obviously, to

get it done.

Ms. BOVBJERG. That is right. That is right. The time for action

is still now and it is still urgent, September 11 notwithstanding.

The events of September 11 have indeed necessitated shifting our

policy focus to national security and counterterrorism but they

have not changed the need to focus on Social Security and Medicare. Instead, they have made it potentially harder by reducing the

fiscal flexibility we were anticipating as recently as last summer.

But the Social Security problem is about more than finance. Let

me turn now to GAO’s framework for evaluation. To assist Congress in its deliberations, we have developed criteria for evaluating

Social Security reform proposals. The criteria are groups of questions to consider. The first measures the extent to which a proposal

restores financial solvency and whether that approach presents the

potential for being sustained. That is, would the proposal also restore structural stability to this program over the long term? Reforms that lead to sustainable solvency would avoid the need to revisit Social Security finances again and again.

Our second criterion considers benefits, the balance between retirement income adequacy and individual equity. Let me explain.

From the beginning, Social Security benefits addressed retirement income adequacy, in part through the program’s progressive

benefit structure, providing proportionately larger benefits to lower

earners. Individual equity refers to the relationship between contributions made and benefits received and the program’s focus on

replacement of preretirement earnings seeks to address this eleVerDate 11-MAY-2000 12:08 Mar 21, 2002 Jkt 000000 PO 00000 Frm 00124 Fmt 6633 Sfmt 6633 77406.TXT SAGING1 PsN: SAGING1
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ment, which can also be thought of as rate of return on individual

contributions. Balancing these seemingly conflicting objectives

through the political process has resulted in the design of the current program and should be taken into account in any proposed reforms.

Our third criterion focuses on administrability. Program complexity can make implementation and administration more difficult

and make it harder to explain to the public. Some degree of complexity arises in virtually all proposed reforms to Social Security,

even those representing only incremental changes.

The greatest potential implementing and administrative challenges are not surprisingly associated with proposals that would

create individual accounts. This is not to say that such proposals

should not be considered but rather that the administrative challenges associated with them should be understood and included in

any assessment of these approaches.

Our criteria aim to balance financial and economic considerations

with benefit adequacy and equity issues and administrative challenges and to facilitate evaluating proposals as packages. Focussing

on the pros and cons of different individual pieces will not take

interactive effects into consideration and will just make reaching

consensus all the more difficult. But in the end, the overall assessment of a proposal will depend upon what weights individual decisionmakers assign to the different criteria. GAO can help explain

and analyze potential impacts, but Congress will ultimately decide

what value to place on different aspects of Social Security reform.

Finally, let me turn to a discussion of our recent report on one

aspect of these criteria—income adequacy. This report, which we

prepared at the request of Congressman Shaw, chairman of the

House Social Security Subcommittee, considers how adequacy may

be measured and how varying approaches to solvency could affect

it. We observe in this report that no single measure of adequacy

presents a complete picture. Consequently, we used a number of

measures, including dependency rates, poverty rates, and earnings

replacement rates, to make comparisons in relative adequacy over

time. We compared simulated, fully funded benefits for different cohorts and different earnings histories to these different adequacy

measures.

In short, we found the progressive benefit reductions, which reduced benefits by smaller proportions for lower earners, would result in a smaller percentage of beneficiaries receiving benefits

below poverty thresholds than proportionate benefit reductions,

which reduce benefits across the board.

Raising the retirement age is an example of a proportionate reduction because unless people change their retirement behavior, it

represents a reduction in monthly benefits that is applied regardless of earnings level. Indexing the initial benefit formula to prices

rather than wages is another proportionate reduction. Of course,

when such measures are accompanied by progressive changes to

the program, these effects can be offset. Further, as I said earlier,

the extent to which adequacy is preserved must be balanced

against effects on individual equity and rates of return.

In conclusion, changes to the Social Security program should be

made sooner rather than later. Earlier action yields the highest fisVerDate 11-MAY-2000 12:08 Mar 21, 2002 Jkt 000000 PO 00000 Frm 00125 Fmt 6633 Sfmt 6633 77406.TXT SAGING1 PsN: SAGING1
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cal dividends for the Federal budget and provides a longer period

for affected future beneficiaries to adjust their retirement planning.

The events of September 11 and the need to respond to them do

not change this and waiting only makes it harder.

Today I described GAO’s criteria against which reform proposals

may be measured. These may not be the same criteria every analyst would suggest and certainly the weights different policymakers

assign to them will vary, but we believe these criteria provide at

least a foundation for devising agreeable and feasible solutions. In

seeking such solutions, policymakers will be deciding, whether explicitly or implicitly, what purpose Social Security should serve and

what benefit levels are adequate. Is Social Security’s role to minimize the need for means-tested public assistance? Is it to minimize

poverty? Or should the program seek simply to replace preretirement earnings? Should it seek to maintain a certain standard of

living for beneficiaries or does it seek to preserve purchasing

power? These are not easy questions but are the heart of assessing

proposed solutions to this financial, economic and social challenge.

Time is running out. The boomers are nearing retirement age

and once they retire our flexibility to alter the program will begin

to decline just as the financial pressures begin to intensify. And,

as my boss is fond of saying, compared to health reform, Social Security is easy lifting. It is time to take action.

Mr. Chairman, that concludes my statement. I have prepared a

written statement to be submitted for the record if I may.

[The prepared statement of Ms. Bovbjerg follows:]

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The CHAIRMAN. Without objection we will make that part of our

record. Thank you very much.

Compared to Medicare, Social Security is easy to fix. I am not

sure that means that Social Security is easy to fix, just that Medicare is very, very, very difficult to fix because of the policy changes

and reinventing a medical delivery system for this whole country

is indeed a real challenge and very, very difficult.

Mr. Kollman, I take it you do not have a statement. Do you have

any comment you want to make on what she said or a follow-up?

STATEMENT OF GEOFFREY KOLLMAN, SPECIALIST ON SOCIAL

LEGISLATION, CONGRESSIONAL RESEARCH SERVICE, WASHINGTON, DC

Mr. KOLLMAN. As the third support agency I think I would just

like to reiterate some of the points that were made.

The central issue and it is the one that Barbara just ended on

is this question of urgency. Why should we do something now rather than later? I think there are several important reasons.

One, the problem is not just going to be due to the retirement

of the baby boom. It has often been said that Social Security’s problem is you have this pig going through a python, likening the baby

boom to the pig. But that implies that once the pig is digested the

problem goes away. That is not true. What you have is a permanent aging of society, due not only to the size of the baby boom but

the fact that people are living a lot longer and the number of workers supporting them is going to decline and it is a downward trend

that continues. So it is a demographic phenomenon, as the director

of CBO said.

Second, and Barbara’s chart to the right explicitly shows this,

this is not just a Social Security issue. It is a much larger issue.

It is a burden on government that goes way beyond Social Security.

Third, the fact that the last four trustee’s reports have tended to

show some improvement, this does not alter the long-range picture.

In fact, until very recently there was a whole slew for 25 years of

trustee’s reports that showed a steadily deteriorating situation and

that continues to this day. And if you look at the last four trustee’s

reports, even though they showed temporary improvements in the

short range, postponing the date of insolvency by a few years, if

you look at the last year of the projection period that has remained

about the same magnitude of problem.

Fourth, there is the looming political problem—the complication

of having an aging society. If we wait till the baby boom is near

retirement or retired, especially if all 77 million of them are about

to be on the rolls or on the rolls, then you have the problem that

they have a tremendous vested interest in the status quo and it

would be very difficult to make change at that point.

Finally, as each year passes the timeframe in which the constraints can be imposed gradually get smaller and the longer we

wait to enact them the more precipitous they have to be.

Moreover, we need predictability in our retirement system so

people working today can plan for their future accordingly. It is

their future that is at stake.

So I just wanted to reiterate what I know the chairman has alluded to several times as to what the urgency is here.

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The CHAIRMAN. Thank you very much. You referred to the aging

of society and I have referred to it as good news/bad news. The

good news is that people are living a lot longer. The bad news is

that people are living a lot longer. Of course we, as a society, are

very pleased that medical technology has allowed people to live

longer than we did in 1935 when this program was instituted but

at the same time, recognizing that that fact also creates a huge

problem of trying to have fewer people pay for more and more people who live longer and longer every year.

So that is the real challenge. So the good news/bad news is sort

of the same thing and our challenge is to figure out how to achieve

the change and keep the commitment that we have to the American people.

I take it, Ms. Bovbjerg, you have seen or at least read some of

the information about the recommendations that I take it the commission in their last meeting hopefully will be able to present. It

seems to me, as I said to Mr. Crippen, I was sort of hoping that

we would get a recommendation and it looks like we get a range

of options with maybe three different recommendations.

That is sort of what Congress has been doing. I mean we know

what the options are. I was hoping that someone outside the

boundary of political decisions would make a recommendation that

would be rational and substantive and get the job done and let us

worry about the politics of it.

Can you describe, Ms. Bovbjerg, what you, or Mr. Kollman, what

you consider to be the different approaches of the three recommendations that we hear we are getting ready to get?

Ms. BOVBJERG. I wish I could.

The CHAIRMAN. I find it to be very complicated, particularly No.

3. I do not quite understand it yet.

Ms. BOVBJERG. I think what we have seen publicly has been very

short on details so I would be really reluctant to try to guess exactly what the commission is thinking in each of the approaches

that they have. I think we will be eagerly awaiting what they come

out with and will be very interested in seeing the details in the actuarial scoring. We would also look forward to applying our criteria

to the different options.

But as we have said before, I think it is really important to look

at these things as complete packages and while we see some outlines perhaps, it is difficult to know what is really in the options

from what the Commission has released so far.

The CHAIRMAN. Can you comment on one of the recommendations? One of their proposals to index the initial benefit determination, I take it, to growth in prices rather than to growth in wages.

Can you comment on what is the difference in that? How would

that affect what they are talking about doing if they started indexing the benefit determination to growth in prices rather than the

growth in wages?

Ms. BOVBJERG. Well, this is something that has been discussed

before, I believe most notably in Congressman Kasich’s proposal of

the past, but it is important to understand first how Social Security

benefits are calculated to really understand what they are talking

about.

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When Social Security determines a recipient’s initial benefit they

first have to determine the average monthly earnings over a 35-

year period and in order to do that they have to bring all the earnings from 35 years in the past, as well as just the last couple of

years, onto the same basis. They do this by inflating for the growth

in average wages.

So then once they determine the initial benefit, that benefit is

then, over the course of the person’s retirement life, inflated for

cost of living, which goes up with prices.

So there are two different kinds of indexing that occur in Social

Security—one for the initial benefit calculation and then the other

to maintain purchasing power over the time that the person is retired.

The CHAIRMAN. The CPI adjustment?

Ms. BOVBJERG. Yes.

Mr. KOLLMAN. But the key factor is that wages are projected to,

as they have in the past, rise more rapidly than prices. So by indexing not just the wages but the benefit formula to the increase

in wages you have a more rapid growth in the level than you otherwise would if you indexed them to prices.

The CHAIRMAN. So if their recommendation was put into effect

making the initial determination based on prices, that initial determination, I take it, would be lower than under the current system?

Mr. KOLLMAN. Under the projections, that is correct.

The CHAIRMAN. Can you give me an elaboration on the dates that

we hear all the time between what happens, I guess, in year 2016

versus what happens to the current system in the year 2038?

Ms. BOVBJERG. I would be happy to do that. The year 2038, the

one that I think a lot of people focus on, is when the trust fund

will no longer have enough assets to pay current benefits. That

means that when they collect payroll tax receipts there are not

enough to pay out current levels of benefits and they do not have

any more special Treasuries to cash in. That means that they have

to reduce benefits until they have enough cash in hand to pay them

out.

But 2016 is the point when that first begins. SSA does not have

enough current revenue to pay current benefits and they come back

to the Treasury with their special Treasuries, their trust fund assets, and begin to cash them in. This means that the rest of government has to find the cash.

So as we have been saying for a while now, the really important

date to the Federal Government is 2016. That is when the cash

from the general fund is going to have to come forward to

support——

The CHAIRMAN. The reason I asked that question is because I

have heard some members say look, do not worry; you are talking

about 2038; it is a long time from now. But actually in 2016 when

the benefits that we are paying out exceed the revenues that we

are taking in—I mean the only way we are going to continue to pay

those benefits is by taking money from some other function of government.

Ms. BOVBJERG. Either that, raise taxes or borrow.

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The CHAIRMAN. Or back to cutting the benefits at that time. So

really the real critical date we are looking at is really not 2038 but

really is 2016.

Ms. BOVBJERG. And something else to think about is that to the

extent that we begin to use the Social Security cash surplus every

year, the extent we begin to rely on it, by about 2008 when the

first of the boomers start to retire, that amount is going to start

to shrink until it just runs out in 2016.

So if we are reliant on the Social Security surplus, as with were

for so many years in the past, we are going to begin to have to

react to its diminishing after about 2008.

Mr. KOLLMAN. Just to reiterate that, when you say the problem

is in 2016 there is a shortfall in that year of about $17 billion.

There is the point——

The CHAIRMAN. Excuse me. The shortfall in 2016 would be $17

billion?

Mr. KOLLMAN. Right, between the actual revenue generated to

the system versus its outgo. That in itself is not the issue. That has

happened before in Social Security. It happened a lot in the late

1970’s and early 1980’s. The problem is it grows so rapidly from

that point that just 4 years later you are up to $99 billion in shortfall in just 4 years.

Again I want to reemphasize it is a long-term problem that just

keeps accelerating downward.

The CHAIRMAN. I would like some discussion from both of you

perhaps, if you can, on the concept of individual retirement accounts. If we go about designing a program that would encourage

workers to invest in individual retirement accounts I am concerned

about if we do that, how do we do it? What do we have to look out

for? What do we have to be cautious of? What do we have to make

sure we are protecting?

It seemed that Mr. Crippen’s statement, and I am trying to

evaluate everything he said, was that it does not really matter how

much is in the trust fund. I am not sure I have understood what

he was really talking about. And I think that for a rather simplistic

approach for some of us, we are trying to maximize the amount of

money that we have and some of us feel that investing the funds

in general government bonds is giving us such a low rate of return

that we ought to do something to increase that rate of return.

One of the things that we’ve been suggesting is exactly what I

have as a Federal employee and what everyone sitting up at this

dias has as a Federal employee and that is the ability to invest a

portion of our retirement benefits into a combination under the

Federal retirement plan and a savings plan. We can invest it in

government bonds or we can invest it in a combination of bonds

and stocks or we can invest it in what we call a high-risk account,

which is basically stocks. I think people feel that that gives us the

ability to have a higher rate of return; therefore more money is

being made available to us when we reach retirement age.

Is there an economical or mathematical reason why that concept

cannot work for the Social Security program, as well?

Ms. BOVBJERG. As I understood Dr. Crippen’s response, I thought

what he was suggesting was that the important thing is to increase

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saving and that it is not always clear that simply shifting from one

source of saving to another is going to achieve a net gain.

The CHAIRMAN. But if one sort of savings—i.e., an investment in

the market or a combination—gives you a better rate of return,

does that not make more money available for the retiree than if he

just invested in something that gives a 3 percent rate of return?

Ms. BOVBJERG. It could but the rate of return on Treasuries does

not have an effect on what Social Security retirees are receiving as

a rate of return. It has an effect on what the trust fund is receiving

as a rate of return. It has an effect on trust fund finance but not

specifically on individuals’ rates of return.

One of the things I was thinking about as I listened to you and

Dr. Crippen speaking was that in my statement—I did not emphasize it in the oral statement—we talk a little bit about labor force

growth and how really the big factor here is the slowdown and near

leveling off of the size of the labor force. And we do talk about

strategies to help people work longer, help increase the labor force,

and that is such an important aspect of all this.

Certainly if you have individual accounts it is something you

would want to think about at the same time, because the longer

people work, the longer their account contributions buildup—— The CHAIRMAN. That is an argument for increasing the eligibility

age for retirement is it not? I mean if people know they can retire

at 65, why work till you are 75?

Ms. BOVBJERG. It is also an argument for considering how we

have structured all of our retirement programs, not just Social Security but our pension policies. What are the incentives for people?

Do we encourage them to work longer or are the incentives for

them to quit earlier?

The CHAIRMAN. Let me see if I understand what I think you just

said. I, as a Federal employee, do I not earn more in my retirement

benefits than I get if I invest my contributions into the high-risk

account and it turns out to be a very good investment than if I just

put it all in government bonds? Is my retirement benefit the same

no matter what I invest it in?

Ms. BOVBJERG. No, that is not what I meant to say. I am sorry.

What I was suggesting—— The CHAIRMAN. In other words, do I not do better if I invest in

something that gives me a better rate of return than if I invest in

something that gives me the lowest rate of return?

Ms. BOVBJERG. Yes, but you would have to consider the risk associated with both investments.

The CHAIRMAN. I understand.

Mr. KOLLMAN. And I think that is what Dr. Crippen was suggesting is that when you talk about a large transfer of investments into

the equity funds, that would not factor in the risk there is in investing in equities. I know he made the statement that he postulated, I believe, if I remember correctly, that you would end up

with a rate of return, once it is risk-adjusted, so that what you

would get from the equities really would not be that much different

than you would get from the government long bond rate.

I am not an economist. I am just trying to remember what he

said. I believe that is the argument he made.

The CHAIRMAN. I am just trying to understand what he said.

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Some of the proposals say look, we will let you invest in the market 2 percent or whatever and if you get a better rate of return out

there, that is what you are going to get, but if the market goes to

heck, we are always going to guarantee that you get at least what

you would get under the existing Social Security program. What

does that proposal do for the good of the system? If you say we are

going to let you invest and if you do well, great, you get it, but if

you do badly, you do not get any less than you would get under

your regular Social Security retirement program, does that help the

program? It sounds like it is a no-lose deal. That is like going to

Las Vegas and giving me $100 and saying look, go bet it any way

you want and if you win you get to keep it all but if you lose, we

are still going to give you the $100 that you left with. I do not

know that that accomplishes very much if we do that.

Can you comment on that type of a concept that some have proposed?

Ms. BOVBJERG. It assures people that they are going to get a certain level of benefit but, at the same time, as I recall, the plans

of that nature require general fund transfers, as well. Actually, I

think most of the proposals that we have looked at rely on general

funds to some extent but this type of plan would require a fairly

significant infusion.

The CHAIRMAN. Do you all agree with the—I asked this of Dr.

Crippen—with the general statement that I have heard? Look, Senator or Congressman, you do not have a lot of choices here. You are

either going to decrease the benefits that we give or you are going

to increase the revenues or taxes that are necessary to pay for

those benefits because of what is about to happen out there with

the larger number of people living a lot longer, fewer people paying

the revenues to pay for the same amount of benefits for more and

more people who live longer and longer. Is that pretty much our

options or would you classify it in a different fashion than those

being the two choices?

Ms. BOVBJERG. When Dr. Crippen was talking about that, that

is when I started thinking about helping people work longer, considering other ways to increase the labor force. I mean we have

taken some measures to help people who have been on welfare join

the labor force. We are trying to help people with disabilities join

the labor force. We have had different debates about immigration

policy.

My guess is that Dr. Crippen would say that that was a benefit

reduction because you are asking people to work longer and then

spend less time in retirement, but that struck me as being of a little bit different nature than just strictly the changes within the

system.

The CHAIRMAN. Mr. Kollman, do you have a comment on that?

Mr. KOLLMAN. I think that is another way of saying there is no

free lunch. Part of the dilemma, and I do not know if it would be

eased or not but this gets to the issues of benefit adequacy is referring to, Social Security right now is designed as a wage replacement system so that over time, no matter what wages do, a retiree

can count that he will get a certain proportion of his preretirement

earnings replaced by Social Security.

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For example, right now if someone always earned an average

wage, he gets about 42 percent of his preretirement earnings.

Then, under the indexing system we have in place, the notion is

that someone retiring 50 years in the future under the current system who always earned an average wage would also get 42 percent

of his wages replaced.

The CHAIRMAN. How much?

Mr. KOLLMAN. Forty-two percent, the same percentage as today.

Because wages rise faster than prices, this means that in the future what we are projecting is that people will have a higher standard of living. They can purchase a higher market basket of goods

than today’s retirees. On the other hand, their relative position to

the rest of society is going to be about the same.

One option that is sometimes mentioned as it relates to the price

indexing option is if you portray the role of Social Security not as

a wage replacement system but as a system that provides a certain

market basket of goods to meet a person’s needs, which would be

very similar to saying you are going to look at it in its relationship

to preventing people from being out of poverty, that is one of the

reasons that supporters of some form of price indexing say look,

you can portray this as we are not going to cut your benefits from

what today’s retirees are able to purchase, we are going to give you

that same amount, but it will not be as much as promised under

current law.

Now the big criticism of such an approach is this means the role

of Social Security in providing retirement income would go down a

lot. Instead of replacing 42 percent it might be only replacing 27

percent of a person’s earnings. And if people want to maintain their

standard of living into retirement they would have to come up with

other resources to make up that difference.

But it is sometimes put that way and you cannot have a free

lunch in terms of yes, we can pay you today’s benefits without raising taxes or cutting benefits, but perhaps we can present this in

such a way that it can be more palatable if you understand that

we are doing something that may not be as bad in terms of your

purchasing power as one would intuitively think.

The CHAIRMAN. That suggestion to index the initial determination based on prices, as opposed to growth in wages, does that address some of what you are talking about?

Mr. KOLLMAN. Yes. The example No. 2 that the commission is

considering is basically that approach.

The CHAIRMAN. But that is just an initial determination. I guess

the regular cost of livings after that are, in fact, earmarked to

prices, as opposed to——

Mr. KOLLMAN. Yes, their market basket purchasing power would

remain the same in retirement.

The CHAIRMAN. So that would be a helpful suggestion in terms

of what you are trying to reach.

Mr. KOLLMAN. It is judgmental to say whether it is helpful or

not. I am just trying to point out that aside from you have to cut

benefits and you have to raise taxes, all that may be true but in

terms of are you going to do something that can be portrayed as

throwing people into poverty, then that is not true because the povVerDate 11-MAY-2000 12:08 Mar 21, 2002 Jkt 000000 PO 00000 Frm 00163 Fmt 6633 Sfmt 6633 77406.TXT SAGING1 PsN: SAGING1
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erty levels rise with prices and you are keeping them in the same

relative position to that.

The CHAIRMAN. Give me a comment. Where are we headed on

the age adjustment now under current law for eligibility, when it

is all factored in? Do you know when it would be factored in?

Mr. KOLLMAN. It is being factored in now. Anyone born after

1937 through 1943 has had their age raised, their full retirement

age raised to 66, and we are going to have then a hiatus until it

starts going up to 67 and that occurs for people—— The CHAIRMAN. I am in the hiatus group.

Mr. KOLLMAN. Right. Those born between 1955 and 1960. So

anyone born after 1959 will be at the full retirement age of 67.

The CHAIRMAN. So the highest under current law that we have

is an eligibility number of 67?

Mr. KOLLMAN. Not eligibility. That is the so-called full retirement age.

The CHAIRMAN. For full retirement.

Mr. KOLLMAN. The age for eligibility remains at 62. It is just that

someone retiring in the future will have more of a so-called actuarial reduction to their benefit compared to current law.

The CHAIRMAN. An incentive to perhaps work longer, as we

talked about.

I guess from an actuarial standpoint or from your standpoint do

you all feel that eligibility should be tied to life expectancy? What

happens? Are we ever going to go higher than 67? Is this an option? Is it appropriate to try to tie the full eligibility age to life expectancy so you guarantee an individual a certain amount of time

in which they will be guaranteed retirement benefits?

I mean what are we saying to people now? Life expectancy is

about 80, I guess, almost?

Mr. KOLLMAN. Depending on your sex.

The CHAIRMAN. I understand. I am trying to combine the two

here.

Ms. BOVBJERG. It is about 85 for women, 82 for men.

The CHAIRMAN. I think about 80 is a ballpark figure just for

thinking. So if you become eligible at 65 you have 15 years of retirement. I was just wondering, do you have any thoughts about

maintaining that 15 years of retirement that we have today? Certainly when we passed this program the average life expectancy

was 65 so most people did not even become eligible under the initial determination of this program. Now it is about 15 years of retirement if you look at the life expectancy.

Some would say that is a good number and we should continue

that range as life expectancy moves up to 81, 82, 90 years, you

know, should the eligibility age progress at the same rate? Do you

have any thoughts on that concept?

Ms. BOVBJERG. We did some work for you a couple of years ago

on this issue and certainly it makes a great difference to the trust

fund and it is not unreasonable to think about trying to hold retirement, the length of retirement roughly constant, but there will be

people who cannot work longer.

The CHAIRMAN. I understand.

Ms. BOVBJERG. So one of the policy tasks is to think about how

you structure other sources of support for them.

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The CHAIRMAN. That is something that we on the Aging Committee have looked at because obviously there is some manual work

that cannot be done by an older person, even though life expectancy has increased. So the question is do you take a disability definition and expand it to cover people who are not really disabled but

cannot perform the tasks that they were doing before? And I recognize that and want to be helpful in making sure that happens.

Do you all think that this is an urgent issue that we should address, the reform issue of Social Security, or is it not urgent at all,

since we can wait till 2038?

Ms. BOVBJERG. We at GAO absolutely think it is urgent and I

hope we have not left anyone in this room thinking that we believe

we can wait.

Mr. KOLLMAN. That is why I tried to be somewhat forceful when

I opened my mouth the first time, saying that as the third support

agency, we definitely think that there should be a sense of urgency

here, or at least that it is probably better to do something sooner

rather than later.

The CHAIRMAN. I appreciate both of you. Your offices have been

very, very helpful and I thank you. What we tried to do today was

to get some comments on this overall issue in light of the fact that

the commission will have their final meeting tomorrow and I understand that they will make three different recommendations.

I think that it is clear that all three what I would call objective

arms of our government have said this afternoon that it is really

urgently needed for Congress to address the problem of Social Security and do it in an urgent fashion because the need is very urgent to move toward solving this problem.

And I think that all three have also said to this committee that

there are obviously no easy answers, that there are no pain-free

answers. What we have described is going to take political courage

and it is not going to be easy to solve this very difficult problem

with just easy answers. If it had been easy answers we would have

done it a long time ago.

It seems to me when I look at the three propositions that the

commission is likely to put forward tomorrow, in my opinion, I

think the first option really is not a real option. I think it is dead

as far as this Senator is concerned because I don’t think it really

solves the problem. I think that is consistent with what I heard

today from three branches of government, that that option really

does not solve the problem. It may solve some political problems

but it does not solve a problem that we were called upon to find

a solution to. It does not fix it.

So I think we should, when we get those recommendations,

quickly look to options No. 2 and 3 to see if we cannot build on

those options toward reaching a solution to this very important

problem.

I thank both of you and also Mr. Crippen for being with us. Senator Craig has asked that I include his statement in the record.

[The prepared statement of Senator Craig and Senator Carper

follows:]

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PREPARED STATEMENT OF SENATOR CRAIG

Social Security turned 65 this year. This program has provided years of retirement security to Americans. However, Social Security has aged, and the world has

changed. It is now time to modernize the program to adapt it to our growing Nation.

We want to ensure that current retirees and those nearing retirement age continue

to receive their promised benefits, the benefits they have earned. For future generations, I want to ensure that our children and grandchildren have a retirement program that reflects the magnificent prosperity of this country—a program that provides financial security, flexibility, opportunities for growth, and most of all, a program that future generations can depend upon.

On May 3, of this year, President Bush established a Social Security Commission

to study the future of our national retirement program. The President tasked this

Commission with the responsibility of developing strategies to strengthen the program’s foundation and ensure its financial viability. This Commission is truly an impressive bipartisan group of experts. I have had the great fortune to work with

three commission members who were outstanding colleagues while serving in Congress. I commend the Commission for its hard work and look forward to its final

report.

Currently, Social Security, Medicare, and Medicaid taken together, consume 43

percent of the federal budget and 7.3 percent of our total Gross Domestic Product

(GDP). To put this in perspective, consider that all personal income taxes collected

by the federal government add up to 9 percent of the GDP. Looking ahead, the picture becomes truly alarming: If we assume for a moment that if the federal government’s spending were to remain at its current share of GDP, by 2030, Social Security, Medicare, and Medicaid would consume 90 percent of the federal budget,

crowding out virtually all other government spending.

In 1940, when benefits were first paid, there were 42 workers per retiree. In 1960,

there were five workers for every retiree. Now there are slightly more than three.

This downward trend in the ratio of workers to retirees is alarming and requires

us to consider new options for stabilizing this important retirement program.

Just 15 years from now, Social Security payments to beneficiaries will begin to

exceed incoming Social Security payroll taxes—and by 2038, if nothing is done, the

Social Security trust fund will be depleted.

If we do not take serious action soon, we may ultimately face a grim long-term

future that could come down to choosing among the following: 1) massive tax increases, 2) widespread cuts in other federal programs, or 3) deep federal borrowing

and budget deficits. To give you a basic idea of how dire these choices will be, consider that if, in the year 2025, the federal government chose to cover Social Security’s shortfalls through cuts in other government spending, it would have to cut the

equivalent of the entire combined budgets of the Department of Energy, the Department of Commerce, the EPA, NASA, veteran’s programs, Head Start, and WIC.

However, if we act soon, we have a much better chance of keeping Social Security

solvent and a sound investment for our children and our grandchildren. We can

choose to strengthen the program, provide citizens with the freedom to choose to invest, save, and provide Americans with ownership of their retirement funds. Indeed,

a useful and essential beginning point toward long term modernization of Social Security is, I believe, the creation of a personal retirement account option.

Back in 1999, I held a series of hearings across the great state of Idaho. These

Senior-to-Senior forums enabled us to explore options for the Social Security program. At those hearings we discussed ideas that Idahoans had, the very ideas that

the commission and the Nation are now talking about. Also, as the ranking member

of the Senate Special Committee on Aging, I continue to be dedicated to making the

modernization of Social Security a priority. Serious Social Security reform cannot

occur overnight, but Congress must find the courage to act—and act soon. A BandAid will no longer be enough.

We have the opportunity to make a difference in the lives of our children and our

grandchildren. We have that ability so long as we are willing to make some important decisions soon. We can sit back and do nothing and leave our children with

a grim future, or we can stand up, face the task at hand, and modernize Social Security so future generations can truly count on retirement security. A legacy worth

leaving.

PREPARED STATEMENT OF SENATOR TOM CARPER

I want to thank you, Chairman Breaux, for calling this hearing. It is such a truism that it is almost cliche ́ to say, but with the possible exception of the war against

terrorism there is truly no more important challenge that we face as a country today

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than strengthening Social Security. I, like everyone else in this room and across our

country, want to ensure that Social Security will be there, not just for my mother’s generation, not just for my generation, but for my children’s generation and for future generations to come.

Passage of the Social Security Act of 1935 was a landmark event in our nation’s history. Social Security has become not only the largest, but one of the most significant and successful programs enacted by the United States Congress. Before the advent of Social Security, the vast majority of men who lived past the age of 65 continued to work until they died or until they became disabled. Large segments of the

nation’s elderly population lived in poverty. Even today, slightly less than half of

our nation’s seniors would be poor absent Social Security.

As a result in part of the success of Social Security, we are confronted with what

I would describe as a pleasant problem. We have to find a way to modernize Social

Security to cope with a world in which most people not only don’t expect to work

until they die, but in which an increasing number can now expect to live for a quarter century or more in retirement. As the miracles of modern medicine continue to

make it possible for more Americans to live well into their eighties and nineties,

and in some cases beyond, and as the post-war baby boom generation approaches

retirement, the financial pressures on the Social Security system will inevitably

grow. The question is how we will manage to meet the demands of an aging population and do so in a way that is consistent with a balanced budget.

I also want to take this opportunity to commend the President for calling attention to this issue by appointing his commission—a commission, I might add, with

a very distinguished panel of public and private leaders. I want to note in particular

two members of that commission—a favorite son of Delaware, Sam Beard, and a

good friend of mine from my days in the House, Tim Penny. If the President wanted

to ensure that I would take the recommendations of his commission under careful

consideration, he did the right thing by bringing on board Sam Beard and Tim

Penny.

There are just two points that I would make here at the outset about the work

of the President’s commission. First, what the President’s commission is proposing

is a fundamental change, not just in the design of the Social Security program but

also in its purpose. Since its inception, Social Security has been a social insurance

program designed with the purpose of ensuring that all Americans enjoy basic income security in retirement. The President’s commission is proposing to change Social Security to make it an individual investment program with the purpose of promoting individual risk-taking, wealth-accumulation, and estate-building.

Now there is a lot to be said, in general terms, for promoting individual risk taking, wealth-accumulation, and estate-building. They are the very engines that drive

our entrepreneurial economy and feed our collective prosperity. The question posed

by the recommendations of the President’s commission, however, is whether this is

the appropriate purpose for which we ought to use our Social Security system, even

if it means sacrificing to some extent the effectiveness of the program if promoting

its original, intended purpose. That is one of the central questions we need to ask

ourselves in the course of this debate.

The second point I would make is that finding a way to meet the demands of an

aging population in a way that is consistent with a balanced budget invariably will

involve tough choices. I think we need to be very clear with ourselves and with the

public that plans to replace today’s Social Security with individual private investment accounts do not magically relieve us of this burden. If anything, for the foreseeable future these plans will make the choices we face a great deal more difficult.

Under all three of the plans that the President’s commission has outlined, the large

Social Security surpluses we currently enjoy will be transformed in rather short

order into substantial Social Security deficits—as early as 2005 or 2006.

Whether we like it or not, the context in which we now approach the question

of Social Security reform has changed dramatically in just a few short months.

When then-Governor Bush unveiled his plan during the presidential campaign to replace in part today’s Social Security with private investments it was against a backdrop of budget surpluses that extended for as far as the eye could see. Under these

circumstances, the idea of financing two separate pension systems at one and the

same time—the traditional one for older workers and a new and, one might say,

more sexy one for younger workers was a luxury we could afford to consider.

Today, things are different. We face some exceedingly difficult choices if we have

any intention of getting back to a balanced budget, let alone if we intend to get back

in any serious way to paying down the national debt. The President’s budget director announced last week that even with substantial Social Security surpluses under

the current system he now expects the federal government as a whole to run deficits

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form plan that now, in the name of restoring solvency to the system, would turn

Social Security surpluses into Social Security deficits as early as 2005 or 2006 will

dig ourselves into a ditch that we will not easily crawl out of. It might just ensure

that the new string of budget deficits announced last week will ultimately run just

as long as the old string of budget deficits—not for three years but for thirty years.

I’m glad we are focusing today on the work of the commission and the fiscal challenge we face in seeking a way to finance Social Security in the years to come that

will be consistent with a balanced budget. I hope this hearing will be just what the

Chairman intends it to be; a chance for some ‘‘straight shooting on Social Security

and the trade-offs of reform.’’

The CHAIRMAN. The committee will stand adjourned.

[Whereupon, at 3:35 p.m., the committee was adjourned.]

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