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S. HRG. 108–202

SOCIAL SECURITY:

WHOSE TRUST WILL BE BROKEN?

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

WASHINGTON, DC

JULY 29, 2003

Serial No. 108–18

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING 

LARRY CRAIG, Idaho, Chairman 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

MIKE ENZI, Wyoming 

GORDON SMITH, Oregon 

JAMES M. TALENT, Missouri 

PETER G. FITZGERALD, Illinois 

ORRIN G. HATCH, Utah 

ELIZABETH DOLE, North Carolina 

TED STEVENS, Alaska 

RICK SANTORUM, Pennsylvania 

JOHN B. BREAUX, Louisiana, Ranking 

Member 

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 

LUPE WISSEL, Staff Director 

MICHELLE EASTON, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

Opening Statement of Senator Larry E. Craig ..................................................... 1

PANEL I 

Hon. David M. Walker, Comptroller General, United States General Accounting Office, Washington, DC ................................................................................. 3

James B. Lockhart, III, Deputy Commissioner, Social Security Administration ........................................................................................................................ 31

PANEL II 

Thomas R. Saving, Public Trustee, Social Security and Medicare Trust Funds, 

College Station, TX .............................................................................................. 67

Brad Smith, President/Co-Founder, Social Good Through Politics (Harvard 

University), Knoxville, TN .................................................................................. 79

APPENDIX 

GAO Report on Social Security Reform; Analysis of a Trust Fund ..................... 91

(III) 

(1)

SOCIAL SECURITY: WHOSE TRUST WILL BE 

BROKEN? 

TUESDAY, JULY 29, 2003 

U.S. SENATE, 

SPECIAL COMMITTEE ON AGING, 

Washington, DC. 

The committee met, pursuant to notice, at 10 a.m., in room SD–

628, Dirksen Senate Office Building, Hon. Larry E. Craig (chairman of the committee) presiding. 

Present: Senators Craig and Stabenow. 

OPENING STATEMENT OF SENATOR LARRY E. CRAIG, 

CHAIRMAN 

The CHAIRMAN. Good morning, everyone. The U.S. Senate Special 

Committee on Aging will convene. 

I was just chatting with BNA’s correspondent, Mr. Wyand, and 

he tells me that his uncle turned 100 yesterday. He mentioned he 

was coming down here on a Social Security hearing, and he instructed his nephew to make sure that Social Security is going to 

be OK and left alone. I can tell your uncle personally that the system will be stable and long-lived for him. [Laughter.] 

Well, thank you all very much for being with us this morning. 

Today we do something that is really the primary responsibility of 

this committee, and that is, oversight, review, and record building, 

information gathering, for the purposes of senatorial use, especially 

as the appropriate committees begin to look at Social Security in 

the coming years and deal with the realities of the trust funds. 

Last year, Senator Chuck Grassley, Chairman of the Finance 

Committee, and I asked the GAO to use its analytical framework 

to evaluate a Social Security Trust Fund exhaustion scenario or 

what might be called the status quo option. This option reflects the 

idea that we do not need to act soon to strengthen Social Security. 

Critics of the models developed by the President’s Commission to 

Strengthen Social Security suggest that we wait until the trust 

fund is exhausted before we act to improve the system. 

Today’s GAO trust fund exhaustion study builds on a report requested by Aging Committee Ranking Member Senator Breaux and 

presented in January to this committee by the Comptroller General. The January report used GAO’s analytical framework to 

evaluate the models developed by the President’s Commission to 

Strengthen Social Security. Today’s GAO study will help us compare the Commission’s models with the status quo or the trust fund 

exhaustion scenario. 

2

Many of us in Congress have a strong concern for the future of 

Social Security and the impact on future beneficiaries of the status 

quo option. It is important to emphasize that the trust fund exhaustion scenario does not affect seniors currently receiving Social 

Security benefits or those about to retire. This scenario is really 

about America’s youth, in other words, looking forward into the future. 

Representing them here today will be a panelist by the name of 

Brad Smith, who will be on our second panel, a 20-year-old college 

student who will testify before us. We are here today to receive 

first the GAO’s report and listen to additional testimony on the 

trust fund exhaustion scenario, but before we begin, I am compelled to mention recent action taken by several lawmakers in Congress. 

Last Wednesday, I signed a bipartisan letter with several lawmakers, including my good friend, the ranking member of this committee, John Breaux. The letter was addressed to leaders of the 

Democrat and the Republican Campaign Committees. The letter 

called for a political cease-fire on Social Security. 

In signing the letter, we pledged to defend candidates running 

for public office, Republican or Democrat, who support, and I quote, 

‘‘Social Security modernization and are willing to make the tough 

choices to address the fiscal challenges facing Social Security.’’ This hearing is convened in the spirit of a cease-fire on Social Security and to point this Congress in the direction of facing up to 

the tough choices ahead on Social Security. 

With that, I am pleased to welcome the distinguished witnesses 

to the Aging Committee. Our first witnesses on panel one are 

David Walker, who is the Comptroller General of the General 

Accounting Office. James Lockhart, Deputy Commissioner for the 

Social Security Administration, will also testify before us today on 

panel one. 

Panel two I mentioned. We will hear from Dr. Thomas Saving, 

Public Trustee for the Social Security/Medicare Trust Funds, and 

Brad Smith of Knoxville, TN, President and co-founder of an organization called Social Good Through Politics at Harvard University, 

where he will be a junior this fall. 

So I look forward to all of your testimony. Now let us turn to our 

first panel, Mr. Walker and Mr. Lockhart. David, if you would 

start.

3

STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL, UNITED STATES GENERAL ACCOUNTING OFFICE, 

WASHINGTON, DC 

Mr. WALKER. Thank you, Chairman Craig. It is a pleasure to be 

here to speak about the important issue of our Nation’s Social Security program. As you know, today we are issuing the report that 

Senator Grassley and you requested dealing with the trust fund exhaustion scenario, or the so-called ‘‘do nothing’’ scenario. But before 

I end up getting into summarizing the key parts of that report, I 

would like to talk about a few framework issues that I think are 

important to put this subject in context. 

I think it is important to keep in mind that in looking at Social 

Security reform, focusing on trust fund solvency alone is not sufficient. We need to put the program on a path toward sustainable 

solvency. Trust fund solvency is an important concept, but focusing 

on trust fund solvency alone can lead to a false sense of security 

about the overall condition of the Social Security program. 

Second, as this next graphic will show, Social Security reform is 

part of a broader fiscal challenge, and the combined Social Security 

and OASDI program will end up taking an increasingly large part 

of the overall Federal budget. If you look into the future, you can 

see that we are in for some very tough decisions because of the 

large and growing gap between projected revenues and projected 

expenditures based upon these assumptions. Absent reform, the 

Nation will ultimately have to choose between persistent and escalating Federal deficits, significant tax increases, and/or dramatic 

budget cuts. 

Solving Social Security’s long-term financing problem is more important and complex, as you know, Mr. Chairman, than simply 

making the numbers add up. Acting sooner rather than later would 

clearly help to ease the difficulty of change. Social Security will 

begin to constrain the budget long before the trust funds are exhausted in 2042. In fact, as you can see from this graphic, the program’s annual cash-flow is projected to become negative in 2018. 

Social Security’s annual cash deficit will place increasing pressure on the rest of the Federal budget to raise resources necessary 

to meet program costs. Waiting until Social Security faces an immediate solvency crisis will limit the scope of feasible solutions and 

could reduce the option only to those choices that are the most difficult and dramatic options. 

Acting soon reduces the likelihood that Congress will have to 

choose between imposing severe budget cuts and benefit cuts or unfairly burdening future generations, as the next chart will show. 

This chart shows the sooner you act, the less dramatic changes you 

have to make, whether it be on the revenue side or the expenditure 

side because we get the power of compounding working for us rather than as it is right now, namely working against us. 

The trust fund exhaustion scenario or the ‘‘do nothing’’ scenario 

analyzed in our report dramatically illustrates the need for action 

sooner rather than later. Under this scenario, once the combined 

trust funds have been fully depleted, benefit payments would be 

adjusted each year to match the annual tax revenue that will be 

coming into the trust funds. 

4

Under the trust fund exhaustion, scenario those receiving benefits would experience a large and sudden benefit reduction of about 

27 percent, or, in other words, they would receive about 73 percent 

of currently scheduled benefits in 2039. By the end of the 75-year 

period, smaller reductions that would occur in successive years 

after 2039 would mean that individuals would only be receiving 

about two-thirds of what otherwise they would have been receiving 

under the current benefit formulas, or about 67 percent of their 

currently scheduled benefits. As you can see, a dramatic decline 

would occur between 2037 and 2039 and then a gradual decline beyond that. 

As the next graphic shows, the trust fund exhaustion scenario 

raises significant intergenerational equity issues. The timing of the 

benefit adjustments means that the trust fund exhaustion scenario 

would place much greater burdens on younger generations. For example, those born in 1955 would receive currently scheduled benefits until they reach age 83, while those born in 1985 would always 

receive benefits in retirement lower than currently scheduled benefits. This means that the lifetime benefits would be reduced for 

younger generations. So, therefore, their return on investment 

would also be reduced. 

In addition, under the trust fund exhaustion scenario, benefits 

would be adjusted proportionally for all recipients, increasing the 

likelihood of hardship for lower-income retirees and the disabled, 

those who rely on Social Security as their primary or sole source 

of retirement income. 

In summary, Mr. Chairman, the Social Security challenge is a 

significant one. We do not have an immediate solvency problem. 

We do not have an immediate crisis with regard to this program. 

We do, however, have a large and growing imbalance. Acting sooner rather than later is the responsible approach. Candidly, solving 

the Social Security problem is easy lifting compared to Medicare 

and some of the other challenges we face. We have an opportunity 

to exceed the expectations of all generations of Americans if we 

take timely and prudent actions. Thank you, Mr. Chairman, for 

holding this hearing. It is incredibly important. 

[The prepared statement of Mr. Walker follows:]

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The CHAIRMAN. Well, David, thank you very much. You are not 

the first to compare the difficulties between Medicare prescription 

drugs and Social Security and those kinds of adjustments. We had 

Chairman Greenspan before the committee some months ago, and 

he made the same reflection. It was really the first time I had actually begun to focus on the reality of the differences between a dynamic activity like health care versus being able to effectively calculate, shall I say, relatively static figures or predictable outcomes. 

So thank you very much. 

Now let us turn to Jim Lockhart, Deputy Commissioner, Social 

Security Administration. Thanks for being with us. 

STATEMENT OF JAMES B. LOCKHART, III, DEPUTY 

COMMISSIONER, SOCIAL SECURITY ADMINISTRATION 

Mr. LOCKHART. Thank you, Mr. Chairman, for holding this hearing on the very important topic, the future of Social Security. Commissioner Jo Anne Barnhart has made achieving sustainable solvency a major goal of the agency. 

Both the Trustees’ Annual Report and GAO’s report confirm that 

the Social Security program as currently financed is unsustainable. 

However, I want to make it clear, as you did, that the benefits of 

current retirees and those nearing retirement are safe. 

Social Security is one of the most successful Government programs, last year paying out over $450 billion to 46 million people. 

Only 70 percent were retirees, with the rest being survivors and 

disabled. The 154 million American workers paying Social Security 

taxes last year and the millions joining the system every year are 

relying on Social Security for a major portion of their financial future. 

Turning to the first chart—America is aging rapidly. In the next 

30 years, the number of Americans aged 65 and older will double. 

Lower birth rates and increased life expectancies have reduced the 

ratio of workers to beneficiaries from over 8:1 in 1955 to 3.3:1 

today. By 2031, we will reach an unsustainable level—in fact, well 

before 2031 we will reach an unsustainable level. 

As the Trustees point out, the pressure on the trust funds will 

begin in 5 years, when the first baby boomers reach retirement 

age. In 2018, the cash-flow will turn negative. By 2042, the trust 

fund will be exhausted. 

As David Walker pointed out, and as shown in this next chart, 

when the trust fund is exhausted there would be a 27-percent reduction in scheduled benefits. Benefits would continue to decrease 

every year thereafter, and by 2077, the reduction would be 35 percent. 

Today’s younger workers such as my 26-year-old son, who is here 

today, would be particularly hurt. After paying into Social Security 

for well over 40 years, his scheduled benefits would be drastically 

cut at retirement and every year thereafter. In contrast, based on 

my life expectancy, leading-edge baby boomers like myself would 

never see a benefit cut. 

An alternative, as the next chart shows, is to raise taxes to maintain solvency. The payroll tax rate would have to start increasing 

in 2042, reaching 18.9 percent by 2077. That is more than a 50-

percent payroll tax increase from today’s 12.4 percent rate. The 

32

GAO report reinforces the Trustees’ position in their annual report, 

and I quote, ‘‘The sooner adjustments are made the smaller and 

less abrupt they will have to be.’’

Another way to look at this shortfall over just the 75-year period 

is its present value of $3.5 trillion. What present values means is 

the trust funds would need the equivalent of that amount today 

plus earning interest on that amount today to pay for the shortfall 

over the 75-year period. To achieve sustainable solvency, which is 

our goal, the present value is actually $10.5 trillion. That is triple 

the public national debt of today. Absent any action, the shortfall 

will continue to compound every year thereafter. 

Clearly, achieving sustainable solvency will be no easy task, but 

delay only makes the task more difficult. As David Walker just 

said, ‘‘if we wait we will have to make benefit reductions even 

deeper or tax increases even steeper.’’

The unattractiveness of relying exclusively on tax increases and 

benefit reductions has led a number of Republicans and Democrats 

to propose Social Security personal accounts among other changes. 

Some of those proposals have significantly less costs than the current system. 

In March, Social Security’s Trustees presented their annual report to President Bush personally. At the meeting, the President 

said, ‘‘. . . the Trustees confirmed that benefits for today’s seniors are safe and secure . . . also once again have delivered a sobering message—Social Security . . . is unsustainable for the 

long term. . . . We need to explore new ways to ensure that Social Security remains strong and financially secure for America’s 

children and grandchildren.’’

He continued: ‘‘I am encouraged by the unprecedented level of bipartisan interest in . . . proposals . . . to strengthen Social Security. . . . Although these proposals differ in details, they are 

consistent in showing that if we give workers the opportunity to invest a portion of their wages in personal accounts, Social Security 

will be able to offer high benefits than would otherwise be the 

case.’’

He continued: ‘‘I hope that Members of Congress will join with 

the Social Security Administration and other interested parties in 

a national dialog about how best to strengthen and protect Social 

Security. I look forward to working with Congress to see that Social 

Security remains sound and strong for today’s and tomorrow’s retirees.’’

This hearing is part of that process of working together to fulfill 

our obligations to the hundreds of millions of Americans we serve. 

There is really no other program that impacts the lives of so many 

Americans. 

Mr. Chairman, thank you, and I look forward to working with 

you and other Members of Congress to reach a bipartisan consensus on how best to protect and strengthen Social Security for future generations. 

[The prepared statement of Mr. Lockhart follows:]

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The CHAIRMAN. Well, Commissioner Lockhart, thank you very 

much. Let me thank both of you for your testimony this morning 

and the consistency and I think the responsibility you have brought 

in discussing this issue. I think all of us recognize the value of the 

program and the phenomenal impact it has on seniors. 

I am always made aware of that. I hold a good number of town 

meetings in my State on an annual basis, and I have a fair number 

who attend who will tell me that it is their single largest source 

of income in their senior years or that it is a substantial or only 

source of income, depending on their particular condition and situation of disability. 

That is a fairly sobering statement, at least to me, when I realize 

the level of dependency that these individuals place on the program 

itself. So there is no question that not only is it important for the 

healthy, the most vulnerable in our society are dramatically impacted and would be, I suggest, by this proposal. 

A 30-percent reduction, or near that, in payment by the late 2030 

to 2040 timeframe, both of you agree with that scenario. I see your 

charts are very similar. 

Mr. LOCKHART. Yes, they are. 

Mr. WALKER. That is correct. 

The CHAIRMAN. Of course, that is making the assumption that 

those who are the recipients at that time are the ones who have 

paid in at consistently higher levels throughout their productive 

years. Is that not correct? 

Mr. WALKER. That is correct. 

The CHAIRMAN. You know, outside of economists and actuaries, 

most folks—and, Mr. Lockhart, you dealt with explaining this. 

Most folks do not really understand what present value means. 

Can you briefly clarify for us the difference between present value 

and common ways of thinking about spending? For example, in 

normal dollar terms, about how big would the 75-year deficit be? 

Both of you can respond to that if you wish. 

Mr. LOCKHART. Well, let me start with that. It is a concept we 

introduced this year in the Trustees’ Report for the first time. It 

is not only actuaries and economists who use it, but financial folk 

like myself use it all the time. 

Really, to look at it in its simplest way, it means that we would 

need that amount of money today, earning interest today, to cover 

the shortfall over the 75-year period. So if you look at the numbers, 

the interest on that amount of money is well over $200 billion a 

year. That is just to cover the shortfall over the 75-year period. As 

David Walker pointed out, what our goal has to be is sustainable 

solvency. The other point of that number is it does include our 

present trust fund. 

But if you look at the longer term, that $10.5 trillion that I had 

in that chart—if you would put that back up—if you look at that, 

it is triple that amount. Every year there is interest of about $650 

billion. So the numbers are very, very large. The point is you need 

that money today earning interest. Or if you get it later, you have 

to even put in more money. 

Yes, there are other ways to look at it, and one of the ways is 

to say how much in today’s dollars we need for the 75-year period. 

50

Again, including the trust fund, that is about $21 trillion in constant 2003 dollars. 

If you look at nominal dollars and assume, say, a 3-percent inflation rate—— The CHAIRMAN. I was going to say, how do we adjust for inflation 

here? If we choose to do that, obviously. 

Mr. LOCKHART. The Trustees’ Report assumes a 3-percent inflation rate. If you use that number and look at nominal dollars, future dollars, if you will, that is about $120 trillion. I mean, all 

these numbers are so large it is hard to come to grips with. But 

one way to look at the $10.5 trillion number is it is $100,000 for 

every American family. The net worth of the average American 

family is just about that. 

Mr. WALKER. The bottom line, Senator Craig, is how much 

money you would have to have today invested at Treasury rates in 

order to fund the gap between projected revenues and projected expenses. As Mr. Lockhart said, for the 75-year period, which is historically what the Trustees have done for a number of years, you 

would need $13.5 trillion today invested at Treasury rates. 

But if you look in perpetuity, recognizing that things are getting 

worse every year after the trust fund goes insolvent, including at 

the end of the 75-year period, you would have to have $10.5 trillion 

today invested at Treasury rates. Guess what? We don’t have $10.5 

trillion today. That is almost the size of the U.S. economy for a 

year. 

The CHAIRMAN. Very close. 

Mr. Walker, in your testimony you state that slowing labor force 

growth is not always recognized as part of the Social Security debate. One of the possibile items you mentioned for addressing the 

financial gap includes raising payroll taxes. What would be the effect on wages and employment of increasing the payroll tax to close 

the Social Security financing gap? 

Mr. WALKER. Well, it is a complex factor, but I will say this: to 

the extent that you end up raising the payroll tax, that obviously 

has a negative effect on employment opportunities. It also happens 

to be the most regressive tax that we have. As you know, the payroll tax gets imposed on all individuals up to the taxable wage 

base, and so raising it is obviously going to have a negative effect 

on what employment opportunities and represents an increase in 

a regressive tax. 

I think one of the things we need to think about, Senator, is 

what can we do to encourage people to work longer. We have a 

problem whereby we face slow workforce growth and we need to try 

to encourage seasoned Americans, especially in a knowledge-based 

economy with longer life spans, to work longer. This can help us 

not only on the revenue side, it can help us on the expenditure 

side. Other than that, we can look at immigration policy and what, 

if anything, might need to be considered in order to deal with these 

dependency ratios. 

The CHAIRMAN. OK. Today, the worker-to-retiree ratio is about 

3.3:1. By the time of the trust fund exhaustion in 2042, there will 

be only two workers to support each retiree. At least that is the 

current projection. This happens because our labor force growth 

drops to what your testimony terms ‘‘negligible growth.’’ In what 

51

ways can lawmakers address labor shortages in the next couple of 

decades? You probably have already addressed that in the tail end 

of your last question about working longer. Are there other factors? 

Mr. WALKER. Well, immigration policy—which is obviously complicated now because, while our country is comprised to a great extent of immigrants, with new security threats there is obviously a 

new dimension associated with immigration policy. Other than 

that, it is trying to find ways, as I mentioned, to encourage people 

to work longer. 

Now, the interesting thing is that if you look at average life 

spans, if you consider the fact that we have moved from the industrial age to the knowledge age, where it is brain power rather than 

brawn; if we recognize the fact, as medical science has shown, that 

to the extent that people stay mentally and physically active for a 

longer period of time, they are likely to live longer and have a more 

productive life, all things being relatively equal; I would argue that 

we need to look at what can be done not only with regard to Federal entitlement program policies but also private pension and 

other employee benefit policies and practices to encourage people to 

work longer, even if it is just on a part-time basis. 

The CHAIRMAN. It appears to be starting to happen almost voluntarily because of certain needs and certain desires and lifestyles 

and health and niches with the workforce that need that kind of 

experience. But as a part of policy, it isn’t there yet. 

Mr. Lockhart, from the Social Security Administration standpoint, can you tell us why sustainability is so important? 

Mr. LOCKHART. We have set sustainability as one of our four 

major strategic goals, and the reason really simply is that we think 

it is important to strengthen Social Security not just for a shortterm period or some arbitrary period, but for the long term, for our 

children and our grandchildren. 

There are obviously a lot of ways to define ‘‘sustainability,’’ but 

it really means that we eventually start creating a positive cashflow; that if you look at the $3.5 trillion and the $10.5 trillion numbers, that they are equal, if you will, that it doesn’t grow after the 

75-year period. 

If you don’t have sustainable solvency, you are going to fall off 

the cliff, just like they are falling off the cliff in 2042. Reform 

should really be addressed to achieve sustainable solvency, not just 

a 75-year period. 

The CHAIRMAN. OK. Can you explain what you mean by saying 

in your testimony that some of the reform proposals, despite significant transition costs, are less costly than the present system? 

Mr. LOCKHART. Yes, Mr. Chairman. It is our belief that reforms 

should be judged against the cost and benefits of the present system, and that cost over the very long-term future is $10.5 trillion. 

In contrast, some of the personal account proposals, with other 

changes besides personal accounts as well, have a cost to general 

revenues in the $1 to $3 trillion range, and they have been graded 

by GAO, some of them, and by our actuaries as sustainable. 

So by that transition investment, one could actually reduce or eliminate that $10.5 trillion number. So from our standpoint, it is 

not a transition cost. It is a transition investment. The return on 

investment is excellent. 

52

Mr. WALKER. Mr. Chairman, if I might? 

The CHAIRMAN. Please. 

Mr. WALKER. One of the problems that we have is that if you 

look at how we keep score in the Federal Government, it can lead 

to some very perverse decisions. For example, from a budgeting 

standpoint, we look at 10-year cash-flows. We don’t look at discounted present value concepts. 

It is very important that we start considering discounted present 

value, not only for Social Security and Medicare and related obligations, but also any major spending and tax decisions. Because if we 

don’t do that, then we may end up taking actions that arguably 

make sense in the short term, but are unsustainable in the long 

term. This is part of our fiduciary and stewardship obligation to future generations, to our children and grandchildren. 

The CHAIRMAN. Mr. Lockhart, what is the Social Security Administration doing or what efforts are you making at this moment to 

educate the public about the consequence of inaction in strengthening Social Security? Is there any outreach of communicative effort now based on the information that is being accumulated? 

Mr. LOCKHART. Certainly. As, again, one of our four strategic objectives, a big part of that objective is solvency education. We have 

started that. We have a lot farther to go in that. We have our communications group, our policy group, our actuaries all working on 

it. 

One of the things we do is that we send out every year a statement to American workers, anybody who is over 25. I think my son 

just got his first this year. It is trying to lay out the future of Social 

Security as well as project future benefits. Unfortunately, too many 

people just look at the numbers, and they don’t look at the message. The message in there is the same that we have been talking 

about today, that there is a serious long-term issue. So we put that 

out. 

Certainly our website is one of the most looked at websites in 

Government. We have frequently asked questions on there about 

Social Security’s future. We have communications people throughout the country. We, as you know, have 1,300 field offices. We are 

involved in a lot of local events. We are working with interested interest groups and hope to do a lot more of that. Our policy and actuarial groups do papers, have forums. 

But we can do more, and we will do more. 

The CHAIRMAN. Mr. Walker? 

Mr. WALKER. Mr. Chairman, I was part of a concerted national 

dialog effort in the 1997 to 1998 timeframe prior to becoming 

Comptroller General of the United States. As you know, I used to 

be a Trustee of Social Security and Medicare, and Assistant Secretary for Pensions and Health at the Labor Department in an earlier part of my life. That effort showed, quite frankly, that the 

American people get it; that if they are provided with the information, that they can be moved to recognize that there is a need for 

reform. 

At the same point in time, I would respectfully suggest that if 

we are going to engage in such a dialog, we need to recognize that 

we have a broader challenge. As on one of the charts that I showed, 

we have a large and growing fiscal imbalance. We have a strucVerDate 0ct 09 2002 13:11 Nov 25, 2003 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 C:\DOCS\90050.TXT SAGING1 PsN: JOYCE
53

tural deficit. This is a subset of that broader challenge, and so people need to understand that we need to make some tough choices 

in a range of areas. This is just one. Health care is one that is 

much greater than this. 

So I would respectfully suggest that while we need a national dialog, we need to dialog on the overall imbalance, we need to talk 

about Social Security, but we also need to talk about health care, 

because, frankly, that is a lot bigger problem and a lot tougher 

challenge than Social Security. 

The CHAIRMAN. Well, I agree with both of you. The American 

people get it today. I sense that in my experience over the last 20 

years, that when it comes to a dialog on Social Security—there was 

an old line that I remember as a freshman in Congress: ‘‘Don’t you 

touch Social Security. You leave that alone, Congressman.’’ To a 

much more thoughtful line today, and that is, ‘‘How do we fix it?’’ Or ‘‘How do we make sure that it is there for our children and our 

grandchildren?’’ Most importantly—and I think I am increasingly 

surprised, and I spend a lot of time in high schools. The No. 1 question asked of me by high school seniors is: What are you going to 

do about Social Security? All of a sudden they got their first paycheck. They saw what was taken out of it. They know the importance of it to their grandparents. But all of a sudden it has dawned 

on them that they are going to be large payers into it. There is an 

informational base that they are looking at out there. 

So it is interesting to see that dialog beginning at a very early 

age in the workforce, and I think that is tremendously valuable. 

Mr. WALKER. If I might, Mr. Chairman, follow up, you mentioned 

before something that is very important—Mr. Lockhart did as 

well—that from a practical standpoint, today’s seniors and those 

that are nearing retirement aren’t going to be affected. 

The CHAIRMAN. Exactly. 

Mr. WALKER. So, therefore, it means that the sooner we act so 

that we can end up structuring reforms to where they affect younger people more than the current seasoned Americans, if you will, 

and retirees, then they have time to be able to make the necessary 

adjustments. They will have an opportunity to make the adjustments. So we can structure reforms, if we get on with it, that will 

exceed the expectation of every generation of Americans. 

One of the things that many younger workers and young people 

don’t understand is that even when the trust fund goes insolvent, 

they still will get 73 cents of their benefits but declining thereafter 

many think it means that there is no money at all. That is not 

true. So we really have an opportunity to exceed the expectations 

of all generations. We just need to get on with it. 

The CHAIRMAN. Well, thank you. We have been joined by my colleague from Michigan. Senator, welcome, and you are certainly welcome to make an opening statement and ask questions of either of 

these gentlemen. Thank you. 

Senator Stabenow. Thank you, Mr. Chairman, and—— The CHAIRMAN. Turn your mike on, please? 

Senator Stabenow. Rather than making an opening statement, 

welcome. We appreciate both of you and your leadership roles and 

information that you provide. I think rather than an opening statement, I would like to ask some questions. 

54

I noticed that the hearing really talked about—and the chairman, our distinguished chairman of the committee, has asked you 

to look at the ‘‘do nothing’’ strategy related to Social Security. I 

guess I would challenge the ‘‘do nothing’’ title of this because I believe we have done something. What we have done is pass a series 

of tax cuts on two different occasions now that have placed us in 

a much more serious situation in order to meet our obligations long 

term, it would certainly appear by the numbers. 

Mr. Chairman, there is a Center on Budget and Policy Priorities 

study that I would ask be placed in the record that is called ‘‘Social 

Security and the Tax Cut.’’ The 75-year cost of the tax cut is more 

than twice as large as the long-term deficit in Social Security. I 

would ask that that be placed as part of the record. 

The CHAIRMAN. Certainly. It will be a part of the record. 

Senator Stabenow. Thank you. 

[The study follows:]

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It seems to me, if we are looking at all options—and it is always 

a question of values and priorities—that we certainly cannot look 

at tax policy separately or in isolation from this debate, that this 

is all part of the same debate in terms of the revenues that are 

available, the way the trust funds are used, what the deficit is, as 

well as our obligations and so on. 

So I am wondering—Mr. Walker, I would ask you first—if you 

would agree that the decisions we have made on tax policy will 

make it tougher to meet our Social Security obligations in the long 

run. 

Mr. WALKER. I think you have to look from a macro and micro 

perspective. Macro is the overall fiscal situation, and then micro 

would be individual programs such as Social Security. 

As my testimony points out on one of the figures, we face a large 

and growing fiscal imbalance due to decisions that have been made 

both on the spending side and the tax side. Frankly, we have been 

increasing spending at a much more dramatic rate than historically 

has been the case and was expected. There have also been actions 

taken on the tax side. The combined effect is that the bottom line 

is much worse as a result. 

As we show on Figure 5 that is in the testimony, based upon the 

assumptions laid out, we face a large and growing fiscal imbalance, 

a structural deficit. Tough decisions are going to have to be made 

dealing with entitlement programs, discretionary spending, and tax 

policy. Ultimately that is a policy decision for the Congress to 

make, but it is not just one issue. It is looking at all three dimensions in order to solve the problem. 

Senator Stabenow. I appreciate that. The reality is, as you have 

just indicated, that we make decisions every day. It is really not 

‘‘do nothing.’’ We make decisions every day that impact what will 

happen in terms of Social Security. 

Mr. Lockhart, I don’t know if you would like to respond to that 

question. 

Mr. LOCKHART. Certainly if you just look from the Social Security 

standpoint, for all payroll taxes that are not used, to pay benefits 

or administrative expenses, we get a Treasury bond. We also receive bonds to pay for the interest on trust fund assets every year. 

So from the trust standpoint, there is no impact. 

I think what I would like to do is really look at the $3.5 trillion, 

and picking up a comment that Mr. Walker made about looking at 

the net present value of the cost of these programs, one of the 

things one can do with reform is to reduce those numbers pretty 

dramatically. You can stop some of the growth on those charts that 

he has there. Social Security is slated to grow from about 4.4 percent of GDP to about 7 percent by 2077. By reforms, you can actually level that off in a way that is fair to present and future generations. That is, I think, what we should be looking for, and that 

is why I think we should be doing reform sooner rather than later 

because it is a lot easier if we do it sooner. 

Senator Stabenow. Well, I guess to go back to my original 

premise, when I look at as a member of the Budget Committee at 

decisions like—I was fortunate to come on that committee 2 years 

ago. We were debating what to do with the $5.7 trillion surplus, 

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eral Government has been fortunate to have. Then 2 years later, 

now we have seen, I believe, the largest swing ever in our history 

to over a $2 trillion deficit. So over a $7 trillion swing as we just 

look 10 years out, the largest single year deficit possibly ever in our 

country that we are facing right now. 

The reality is that we are making decisions that impact that. 

Some of that is the slowed economy. The largest single piece of that 

is tax policy, the tax cuts that were given. Then we have spending, 

and I believe it is somewhere in the range of 96 percent of the increases we have seen in 2 years are defense, homeland security, 

and restoration of the 9/11 targets, particularly in New York. So 96 

percent is something that the people of our country certainly believe needs to happen for our basic safety and security. All of those 

things, again, combine back to having an impact. When we were debating the $5.7 trillion surplus, a number of us, 

including at that time the chairman of the Budget Committee, suggested because of your presentations, the numbers you have, that 

we actually put dollars aside to go into—to essentially put money 

in the bank in terms of the trust fund for future generations to address these issues of solvency so we would not be in a situation of 

looking at raising payroll taxes or cutting benefits or so on. 

That choice was not made. So it is not that we are doing nothing. 

We are making choices that impact where we are today, which I 

think is just very important for the American people to understand—not that that takes the place of the baby boomers retiring, 

not that it negates any of what you are talking about, but we are 

making choices. 

Now we have the economy, and the unemployment rate for June 

jumped from 6.1 percent to 6.4 percent, the highest level in 9 years, 

the highest number of people on unemployment benefits since 

1983. In a macro sense, I guess I would ask you: Shouldn’t we be 

focusing very much on job creation, not only for individual families, 

where it is absolutely critical, but doesn’t the weakened economy 

undermine our ability to provide benefits for future generations? 

Our economic policies now, how we stimulate the economy to create 

jobs, doesn’t that have an impact on your numbers as well when 

we look at the strength of the economy? 

Mr. WALKER. Well, first, let me clarify that the ‘‘do nothing’’ phrase only deals with Social Security. Clearly, you are correct that 

Congress has been doing a lot of things in many different areas, 

and many of which were good things. I mean, some are good and 

some are not so good, depending upon where you sit. 

I do think, however, whether it be on the tax side or the spending side, that when Congress is debating significant legislation that 

could have significant costs not just over the next 10 years, but 

also beyond the 10 years, many times Congress debates both tax 

and spending proposals that the costs balloon after 10 years, and 

we act like the world is going to end in 10 years. Well, it isn’t. 

As a result, we need to consider discounted present value concepts as part of the discussion and debate on both the tax side and 

the spending side, and one of the things that we need to start 

doing, quite frankly, is to quit digging because we are already in 

a huge hole. For Part A of Medicare alone, we have a $6 trillion 

unfunded discounted present value obligation. For Social Security, 

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we have got $3.5 trillion. That is only for 75 years. If you look for 

perpetuity, Social Security is $10.5 trillion, according to the latest 

calculations, and Medicare may be more like $30 trillion. So we 

need to recognize reality. 

By the way, I have been testifying on this issue for several years, 

and we have had a long-range structural imbalance even when we 

had surpluses. We had a long-range problem then. Even if the tax 

cuts didn’t happen, we still would not solve our problem. But you 

are right to say you have got to look at both sides. You have got 

to look at both sides of the equation. 

Mr. LOCKHART. Senator. 

Senator Stabenow. Yes, go ahead. 

Mr. LOCKHART. Excuse me, Senator. The only point I would like 

to make is, in the case of Social Security, I think there is still time 

to make some choices here. If we do it relatively soon, we have the 

opportunity to stop those numbers growing. That is critical. Every 

year that $10.5 trillion will grow by about $650 billion. That is 

more than the present deficit. 

So to the extent we can start looking at solutions, start evaluating them, and, as the President asked, do it on a bipartisan 

basis, I think we can really make a great choice for America’s children and grandchildren. 

Senator Stabenow. Well, I certainly agree with that and believe 

that we need to make choices. I would also suggest that, Mr. Walker, when you talk about stopping digging, that around here we just 

continue to dig, and without looking at the situation. The vast majority of—I mean, if we asked the American people do we have the 

option of not focusing on homeland security or rebuilding the Pentagon and New York or defense, or, on the other side, reducing revenue through a supply side strategy on tax cuts, people understand 

that we had to come forward with those dollars in terms of protecting safety and security. The option, in my judgment, was on the 

other side, and we have chosen as a Congress to keep diggings. My 

guess is we are going to see more digging and more and more undermining revenue that just adds to the problem that you are talking about right now. 

Thank you, Mr. Chairman. I would just add one thing as a positive note on Social Security. Social Security is not just about income for people, which we know the vast majority of people receive 

income from, and many of them, many of our constituents or possibly family members rely on Social Security. But it is also a life 

insurance and disability policy for people of this country. I remind 

young people of that when I speak to them in schools that if they 

were to become disabled or if there would be a loss of life of their 

parents or themselves with minor children, it also is a part of a 

safety net that I believe has been a great American success story. 

It is our job to be responsible about making sure it is there for the 

future. 

Thank you. 

The CHAIRMAN. Senator, thank you very much. 

One of the reasons Chairman Grassley and I asked the GAO to 

do the audit and look at the ‘‘do nothing’’ is because we—you know, 

while you are concerned, and responsibly so, about actions taken 

this year and next year, what is critical to Social Security is actions 

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we take now to impact us out 40 and 50 years. If you will notice, 

even with what we did this year, the line of revenue on Social Security is still flatlined, relatively speaking, as growth patterns 

occur. 

Of course, out there in late 2030 or early 2040, a precipitous drop 

begins in Social Security’s ability unless we do one of a couple of 

things at that time, and that is why we thought it was important, 

if you will, to look at the cliff, because we don’t function well, you 

or I, at that cliff level. We really have to think in actuarial terms 

long term on Social Security and its impact. The idea of raising 

payroll taxes by 50 percent would be as precipitously negative on 

your workforce and mine as it would be to cut benefits by anywhere from 30 to 35 percent. Those are the ‘‘do nothing’’ scenarios 

that both GAO and Social Security agree on. 

So what we are trying to do is build a record so that you and 

I can look outward and in the coming years make those kinds of 

decisions. I personally think that is critically important. 

Senator Stabenow. Mr. Chairman, if I might, I absolutely agree 

with the need to do that. I would just urge that we do that within 

the context of all of the decisions we make, not just in the context 

of raising benefits—lowering benefits or raising the payroll tax, but 

that we do this in the context of the broader issue. If we, in fact, 

had now a $5 trillion surplus and were able to take a large part 

of that and pre-fund the liability outward on Social Security, I 

would dare say that would help a great deal. It wouldn’t solve the 

problem, but it would allow us to make different decisions. 

So that is all that I guess I wanted to say, is that we have—as 

we make decisions responsibly about where we go, I don’t think 

going back into huge deficits, the largest deficit possibly in the history of the country, helps any of these numbers. That should be of 

a big concern to all of us. 

The CHAIRMAN. Thank you. 

Gentlemen, thank you very much for your work and your testimony before us. As you know, this is ongoing as we work to build 

a record from which decisions will be made by Members of this 

Congress, so I thank you both very, very much. 

Mr. LOCKHART. Thank you, Senator. 

Mr. WALKER. Thank you, Senator. 

The CHAIRMAN. Now I would ask our second panel to come forward, if you would please: Dr. Thomas Saving, Public Trustee of 

the Social Security and Medicare Trust Funds; and Brad Smith, 

the President and co-founder of Social Good Through Politics at 

Harvard University. 

Gentlemen, welcome to the committee. Mr. Saving, if you would 

proceed, please. Pull that mike as close as is comfortable, and we 

thank you for being here.

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STATEMENT OF THOMAS R. SAVING, PUBLIC TRUSTEE, SOCIAL SECURITY AND MEDICARE TRUST FUNDS, COLLEGE 

STATION, TX 

Mr. SAVING. Thank you, Mr. Chairman, and I would like to 

present some things about Social Security. A few of those—this is 

a chart that comes right from the Trustees’ Report, and mainly 

what I would like to do is—if I can figure out how to do it. That 

is where I want to be, right here at Figure 1. 

As Congress considers legislation to reform Social Security, it is 

important to understand the program’s financial condition, and I 

think there are a lot of ways to speak about this, and I am going 

to say some things that may be somewhat different than we have 

just heard but are related to it in a way that I will make very clear 

as we go along. 

In less than a decade, the combined Social Security and Medicare 

programs—and I am going to briefly comment on both of them because I think they are both important. In fact, they are part of the 

same kind of a program, and that is, transfers from the young to 

the old. One of those programs, as we have already heard from 

both witnesses, is in much more dire straits, but is much more difficult to solve. So that means that the reason we are concentrating 

on Social Security is it is something that we can do something 

about. We can solve at least perhaps a fourth of the problem that 

these two programs represent in an easy way, and then we can try 

to solve the other three-fourths of that problem. 

But in less than a decade, the combined Social Security and 

Medicare programs will go from a position of providing net revenue 

to the Treasury, which is what they have been doing up until— forecasts for this year will be the first year in which Medicare 

Parts A and B and Social Security together have ever actually 

required a transfer from the Treasury as a group. That is going 

to happen this year, and it is going to get much worse in the near 

future. 

The other thing I think that is important—and in that sense, I 

am going to say something a little bit different than the last two 

witnesses. The fact that the Trustees’ 2003 estimate of trust fund 

exhaustion date is 2042 has no bearing—I want to repeat that, no 

bearing—on the demands that Social Security and Medicare are 

going to place on the budget in the next few years. The trust fund 

is not going to help us fund the deficits that we are talking about, 

and I think that is very important, and it relates to what we might 

have done with a surplus or something that we might have had 

that we might have put somewhere that we think might have 

helped us. The question is: What would we have to had done with 

that to have helped us? 

So there are a few years of good news remaining from these programs. Social Security and Medicare Part A payroll tax revenue 

currently exceed expenditures, and these surpluses are sufficient to 

cover almost all the Medicare Part B expenditure. So we can say 

that is really what we are doing with the money. We are subsidizing Medicare Part B. 

This year and next, these combined programs will require only 

a small transfer. But in fewer than 5 years, beginning in 2008, and 

every subsequent year, these programs are going to become a drag 

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on the Federal budget. By 2010, less than 7 years, these programs 

are going to consume 1.5 percent of total Federal income tax revenues. 

I would like to say something about income tax revenues, that 

if you look at a graph—and I do not have it with me—of the percent that Federal income tax revenues are of the gross domestic 

product, for the last 50 years—and we have had dramatic changes 

in the Tax Code over those 50 years—you will see that the percentage that is of gross domestic product is remarkably stable. It 

changes very, very little, and part of that is that incentives matter, 

and lower marginal tax rates are the difference between what we 

are like and what Europe is like, outside of Ireland and England, 

where they have become more like us in Tax Code, and as a result, 

have had much faster growth than the rest of Europe. The key to 

this is increasing gross domestic product. 

Now I will go on. We project as Trustees that Social Security expenditures, the year they will first exceed revenues is 2018. But at 

2020, just 2 years after that, these programs together are going to 

be using 17.5 percent of all Federal income tax revenues. That is 

what you can see on the chart, on Figure 1. By 2040, which is 2 

years before we say the trust fund is going to be exhausted, something on the order of 47 percent of all Federal income tax revenues 

are going to have to be transferred to Social Security and Medicare. 

That is, half of almost every dollar that we are taking in as Federal 

income tax is going to have to go to these programs. That is clearly 

not sustainable. 

So, in spite of Medicare reform that is getting most of the press 

right now, Social Security’s financing future is ominous, and I 

think that is what this hearing is about. This year, Social Security 

is going to contribute the equivalent of 6.5 percent of Federal income tax revenues to the Treasury, and, of course, we have got 

good uses for that money. By 2020, just at the beginning of the 

baby boomer wave—we will be 10 years into it—Social Security is 

going to require a transfer of 3.4 percent of Federal income tax revenues. So it is going to go from providing you a 6.5-percent addition 

to Federal income tax revenues to taking almost 3.5 percent of 

those revenues. By 2021 or so, it is going to be at 4.5 percent of 

Federal income tax revenues. I might add, historically that is the 

largest that the Social Security transfer has ever been. In 1978 and 

1983, it was that large, and those are the 2 years, as you know, 

that we changed Social Security. We reduced benefits in 1978, and 

we raised taxes and reduced benefits in 1983. So both of those 

things happened, and that is the largest that this transfer has ever 

been. 

Then I want to say something about 2042, right here to the 

shortfalls, because these are dollar shortfalls in 2003 dollars. So 

these are the amounts in 2003 dollars we are going to be transferring to Social Security. I think if we look at 2042, the year we say 

the trust fund is going to be exhausted, we are going to transfer 

$427 billion in today’s dollars out of Federal income tax revenues 

of $2.76 trillion, because that is 15.5 percent of Federal income tax 

revenues that will be transferred to Social Security. The next year, 

we would only have to transfer $438 billion. The message there is 

that if we have figured out how to transfer $427 billion to Social 

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Security, trust fund exhaustion is irrelevant. If we found that much 

money, the next year there is no way that you are going to tell constituents we are going to now spend this money on something else 

and not pay you your benefits. So if we figure out how to do that, 

we have solved the problem. I think that is important. 

On tax requirements, I want to discuss now the size of the debt 

that we have. We have done some new things this year in the 

Trustees’ Report. I want to come back to that. Usually, the Trustees’ Report is concentrated on the 75-year deficit. That is what these numbers show, and the $3.5 trillion deficit that both the two 

witnesses discussed before is—the real amount of money you are going to have to come up with in a present value context is not $3.5 

trillion. It is $4.9 trillion, because the trust fund is not going to 

help you pay the debt. In fact, you have to find the revenue somewhere, because the trust fund is simply debts you have decided to 

pay for yourself. They are not invested. 

That is what I meant by if you had taken this so-called surplus 

that we had estimated we were going to have, you would have to 

have invested it in something real. I don’t know what that would 

have been and how we would have done it. I know that, in general, 

the Senate in 1998 somewhat of unanimously said we are not going 

to have the Government invest in equities or in real capital. But 

that is what we would had to have done with that money. 

We now report, in addition to this number—and I think something that is even more important in the Trustees’ Report, and that 

is what we refer to as splitting up the future of Social Security into 

two things. One of them is the current members of Social Security, 

those 15 years old and older. Now, we give that a name. We call 

it the 100-year closed group. But it says: What do we owe the current members of the Social Security system? As it turns out, we 

owe them $11.9 trillion. That is the 10.5, as previously discussed, 

but now the question is: What are the new people going to contribute? The person who starts working tomorrow and everyone following them, if the system was in equilibrium, those people would 

do what? They would contribute $11.9 trillion. What are they going 

to actually contribute? Nothing. So the new people are going to contribute nothing to solving the $11.9 trillion that we owe everyone 

who is currently in the system. Therein is the problem, and how 

we are going to solve that problem is the issue. 

That is why I think we have taken a very big step in the Trustees’ Report this year by emphasizing what we do owe everyone who 

is in the system, and what are the upcoming people going to pay 

for it. If you think very simply about the Social Security system 

and what it is going to be in 2040 with two workers per retiree, 

on the average we replace 42 percent of earnings. That is what Social Security is like. If you have two workers for every retiree, what 

is the tax rate going to have to be to support that? It is going to 

have to be 21 percent. Each person gives up 21 percent of their 

earnings. Added together, that is the 42 percent that it is going to 

take for every retiree. It is a very simple idea. 

What is the problem? The tax rate is way too low. Why is it too 

low? Well, two things. We have got baby boomers going through, 

a big generation supporting a small generation of retirees. We are 

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tires, the smaller generation coming up is going to have to consume 

less. I was on the President’s Commission, to strength Social Security and as I constantly reminded my fellow Commissioners all the 

time, the elderly are going to eat real food, drive real cars, live in 

real houses, use real hospital beds and doctors and nurses when 

they are consuming health care. Somebody has to produce that 

stuff. The only people who are going to produce it are the young. 

The question we really have before us is: How are the young going 

to produce more because, otherwise, they are going to have to drive 

smaller cars, live in smaller houses, and consume less perhaps— eat out less often, so that we can live it up the way we are scheduled to do so. So we are going to have—if we can’t capture the baby 

boomers before they leave working—we are going to have a great 

deal of difficulty solving the problem. 

I think I will stop there. 

[The prepared statement of Mr. Saving follows:]

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The CHAIRMAN. Well, Mr. Saving, thank you very much. Obviously, Doctor, you have challenged us well beyond what the two 

first panelists did, so we are going to ask Brad to solve the problem. [Laughter.] 

We are always looking for solutions, Brad, and we thank you 

very much. Brad Smith is President and co-founder of Social Good 

Through Politics. Please proceed. 

STATEMENT OF BRAD SMITH, PRESIDENT/CO-FOUNDER, SOCIAL GOOD THROUGH POLITICS (HARVARD UNIVERSITY), 

KNOXVILLE, TN 

Mr. SMITH. Thank you, Chairman Craig. It truly is an honor and 

a privilege to be here today to speak with you, so I thank you. 

My name is Brad Smith. I am a junior at Harvard University 

majoring in economics and government. For the past 2 years, I 

have led a group of 20 Harvard students that has studied Social 

Security and developed a five-point plan that remedies the fiscal 

insolvency and increases the equality of the current Social Security 

system. We have discussed our plan with notable individuals including Harvard President and former Secretary of the Treasury 

Lawrence Summers, former CEA Director Martin Feldstein, current CEA Director Gregory Mankiw, former Senators David Pryor 

and Warren Rudman, and current Senators Kennedy and Hagel. 

However, the reason I am here today is not to tell you about 

what my group has done, but rather to implore you to lead Congress and to take immediate action to guarantee that my generation has financial security in our retirement. 

Since the Social Security system was instituted by Franklin Roosevelt in 1935, the system has lifted millions of our Nation’s retirees out of poverty. But I am frightened for my peers today. As you 

have heard this morning, the system will not be able to do this for 

my generation of Americans. 

If no changes are made to the current system, my generation will 

receive somewhere between 75 percent and two-thirds of the benefits we have been promised. This means that my generation of 

Americans will not have the social insurance we have been promised. This means that millions of retirees in my generation will fall 

below the poverty line. This means that my generation will receive 

less in benefits than we paid in taxes, never mind seeing a return 

on our investment. 

To me it is clear: The insolvency of the current Social Security 

system is a threat to the social welfare of our Nation’s future retirees. 

However, there is good news. We do have the power to protect 

these future retirees. That is why I am here today: to plead with 

you to take action and to take it immediately. 

Every day we delay, the cost of fixing the problem increases. Yes, 

it is better to undertake reform in an economic boom than during 

an economic recession. Yes, it is better to undertake reform when 

there is a budget surplus rather than when there is a budget deficit. But as any investor will tell you, it is better to start investing 

today than it is to start investing tomorrow. 

I know that Social Security is not an easy problem to fix. If it 

was, it would have already been done. But I believe that is exactly 

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why Chairman Craig asked me here today: to be a voice for the 

millions of Americans who the current system will certainly fail. 

I am not here to promote a specific solution, but I do believe that 

the plan my group has developed can serve as a starting point for 

a discussion on reform. Using a Social Security Administration caliber model, my group has developed a five-point plan that is progressive and that addresses the fiscal insolvencies of the current 

system. Our plan includes investing a portion of the FICA tax, redistributing wealth to lower-income and minority Americans, and 

ensuring that all retirees receive at least 100 percent of their promised benefits. 

However, no matter how good our plan is and no matter how 

hard we work to inform Americans of the importance of reforming 

the system, the power to change the system lies only in your 

hands. 

My generation needs you to be bold and commit yourselves to developing, publicizing, and passing a bipartisan reform plan. It will 

be difficult, perhaps even controversial. But, in the end, I can guarantee you that it will be worthwhile. My generation will thank you 

and your generation will leave a great legacy behind. 

Thank you for your time. 

[The prepared statement of Mr. Smith follows:]

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The CHAIRMAN. Well, Brad, thank you for that testimony and 

your thoughts. 

Several years ago, I held a series of meetings across my State on 

Social Security with all the appropriate charts and graphs to tell 

the story of current versus future situations. I invited senior citizens and seniors in high school to attend. It was interesting to 

watch the interaction, because in the first instance, the senior citizen came somewhat defensive, and in the end, that defense was 

gone and they were thinking in a much broader sense about the 

totality of the system and the impact that it will have on your generation in relation to money in versus money out. 

It was a fascinating experience, and it is some of what we are 

going to have to hear from the younger generation to cause this 

Congress to deal with this issue sooner, I think, rather than later. 

Dr. Saving, you have made a somewhat broader perspective analysis, I think, of Social Security and the impacts ahead. In fact, your 

testimony suggests that Social Security and Medicare financing 

will have Federal budgetary implications as early as 2008. Will this 

create an immediate visible effect at the time? Or will it be kind 

of a gradual shadow effect, if you will, on the budget? 

Mr. SAVING. Well, I think it is certainly going to be gradual, and, 

actually, before it goes into deficit, it would start to have an effect 

as soon as the revenues from this system have peaked and start 

to decline. So that is going to be almost immediate. 

But, you know, those are very small effects, and until we reach— and perhaps we can go back to right here and get a feel for it. But 

by 2020, you are looking at 17.5 percent of Federal income tax revenues being transferred, and in the sense of your 10 years, that is 

well beyond 2013. But by 2013 we already will be transferring— we won’t be transferring anything to Social Security, of course. Social Security is going to go on not requiring a transfer. But the sum 

of the two will indeed be requiring a transfer by then on the order 

of 7 or 8 percent of Federal income tax revenues. 

But we have to recall that Medicare itself right now, Parts A and 

B together, have a deficit of about 7 percent. 

The CHAIRMAN. Right. 

Mr. SAVING. Because of Federal income tax revenues. So we are 

already transferring to the elderly, and the complicated part is to 

find a way to accomplish this within, I think, the fairly near future 

because these numbers are going to be huge, and as you are well 

aware, there is no way that even at 2020 that 17.5 percent of Federal income tax revenues is going to be obtainable as a transfer. 

It just can’t happen. That means that we have to do something, 

and the problem that we can do something about more quickly is 

Social Security. 

But the other issue is that we still have the debt to the existing 

people that we somehow have to do something about, and that is 

the $11.9 trillion. The question is: What do we do about it? I might 

say simply that, as you know, in the Commission we took care of 

a lot of that debt by price indexing benefits as of 2008. Actually, 

that wipes out about $5.5 trillion of that debt. 

Now, if you try to do a reform, then you have to give something 

back to people, and what the Commission tried to do is give something back in terms of private accounts. I am not here to promote 

84

the Commission’s proposals or any other reform. I am here as a 

Trustee and just to discuss. But no matter what you do, that number has to be dealt with, and I think that is what the important 

point is. Each reform that we suggest has to say how are we going 

to deal with this $11.9 trillion, and we can deal with it by making 

the baby boomers pay more taxes because they, clearly, in a sense 

were undertaxed. Now, they might not agree with that if you would 

come to them and say—— The CHAIRMAN. I don’t agree with it. 

Mr. SAVING. Exactly. I assumed you didn’t feel like you were 

undertaxed. But in the sense of supporting what you are expecting—and I think another important point is that a generation 

transfer system such as Medicare and Social Security have a bad 

effect on the economy in the sense they reduce the capital stock, 

because to the extent that people believe that their retirement is 

taken care of, they invest less in the economy and they then leave 

a smaller capital stock to the generations that follow them. 

The CHAIRMAN. Well, on the first panel, following up on your 

comment there, we discussed the need to assess the potential economic effects of tax increases necessary to pay current promises. I 

am interested in your judgment as an economist on the economic 

impact of raising taxes to fill the financial gap in Social Security 

and Medicare. What is your general view on that? 

Mr. SAVING. Well, I think if we take a look at this chart right 

here, it can give you an idea of where those taxes would have to 

be if we were going to pay Medicare costs. As a percent of taxable 

payroll, we are looking at tax rates that are double the current 

payroll tax rates by almost 2030 if we were going to really pay the 

Medicare that way. Those kind of tax incentives matter, and we 

were discussing one way to solve this problem is to have people 

work longer. The question is: How do we make people work longer? 

We have to make it profitable for them to work longer. If you are 

taking away 30 percent up front of what they earn, the labor force 

participation is going to fall. Jobs are going to fall, because jobs are 

a function of how many people want to work. If we make it less 

profitable to work, fewer people are going to want to work. I think 

we have to solve this—these are onerous tax levels that approach 

European levels, and that is the reason why they have grown so 

much more slowly than we have. I think there is no doubt that the 

capital stock will get smaller, and income and employment will fall, 

and that will actually exacerbate this problem, although it looks 

like it might solve it. 

The CHAIRMAN. OK. Brad, you are probably the first person ever 

to testify before Congress who can expect to receive his entire Social Security retirement benefit off the edge of the cliff, that chart 

that both GAO and Social Security were showing us a few minutes 

ago. You are certainly one of the youngest, if not the youngest, witness ever to testify before the Aging Committee. [Laughter.] 

There ought to be a message in that beyond what I am proposing, and that is that you, too, someday will grow older. 

But, anyway, it is especially refreshing, I think, for young people 

like yourself now becoming very much involved in the system and 

the thought processes of this country to associate yourself with the 

older generation, and that cross-generational relationship, I think, 

85

on the solution that we are all talking about is extremely important here for both sides to understand this issue and effectively 

deal with it. 

Can you tell the committee what has compelled your interest and 

your group’s interest in Social Security? 

Mr. SMITH. My interest in Social Security and my group’s interest sprung from a discussion we were having at Harvard’s Institute 

of Politics. We were sitting around talking about what were going 

to be the issues that affected our generation and what were going 

to be the issues that affected our lifestyles in the future. One of the 

issues that kept coming to the forefront was Social Security. Social 

Security brings 40 percent of the people that receive its benefits 

above the poverty line. My Grandmom, Alma Smith, in Knoxville, 

TN, she relies on Social Security. It is how she feeds herself. What 

I am afraid of is that in the future the Social Security benefits my 

grandmother receives are not going to be there for my generation. 

Instead the people in my generation are going to have significant 

financial problems in their retirement because Social Security is 

not going to be there for them. 

My group came together not only because we saw there was a 

problem with Social Security but because we saw there was a problem that could be fixed. Social Security is both a problem and an 

opportunity, for our generation to work with the older generation 

to develop a solution, that not only fixes the current problem but 

that improves individuals lifestyles well into the future. 

The CHAIRMAN. Well, I am pleased to have you thinking about 

fixing it. A good number of young people I speak to just simply say 

to me, ‘‘Well, Senator, it is not going to be there. We understand 

we probably still have a social obligation to our parents and our 

grandparents, but we are not expecting to get anything. We are 

going to invest in other forms of retirement and annuity programs 

because it is not going to be there.’’ That kind of pessimism, if you 

will, or I guess I could say pessimistic objectivity, at least at the 

current time, frustrates me because there are going to be a good 

many of our citizens out there of your generation who are going to 

probably need this kind of help. 

The Comptroller General, Mr. Walker, pointed out in his testimony that the trust fund exhaustion scenario raises, and I quote, 

‘‘significant intergenerational equity issues.’’ I have told my grandchildren that they may someday look at me and say, ‘‘Gramps, we 

can’t afford you any longer.’’ We should not let that happen. 

Do you see inaction on Social Security as increasing tension of 

the generations? 

Mr. SMITH. What I see is that my generation is paying 12.4 percent of what we earn to FICA. I see that money going to help my 

Grandmom and lots of other elderly senior citizens. In the future, 

if Social Security is not there for my generation I think there is a 

great possibility that it will cause intergenerational tension. Right 

now we sit on the brink of opportunity, the opportunity to fix the 

Social Security system. If we pass over this brink without your generation considering the effects in action will have on my generation 

I think that intergenerational tension will increase. On the other 

hand, if our generations work together, we have the chance to increase generational cooperation. 

86

The CHAIRMAN. It is important for us to find the best ways to 

educate our young people on important public issues. Obviously, 

the old phrase that you are the next generation of leaders may be 

old, but it is true. What, in your opinion, is the extent of awareness 

of your generation regarding Social Security insolvency issues? 

What lawmakers do to increase that awareness, Brad? 

Mr. SMITH. I think there is a limited awareness and in a lot of 

cases, the awareness that people think they have is actually wrong, 

as you alluded to earlier. A lot of people think either there will be 

no Social Security for us in the future or people don’t even think 

about Social Security at this point in their lives. I think that there 

is a two-pronged approach that we all can take to improve that into 

the future. 

The first prong of this approach involves groups like mine going 

onto college campuses, reaching out to people in their 20’s and 30’s, 

and showing them the graphs, talking to them about the numbers, 

and explaining to them the tradeoffs that are inherently involved 

in the Social Security debate and saying be informed, be wise, so 

that when you go vote you know what you are voting for. Think 

about this when you choose who to vote for. Think about this when 

you are electing your Senators and Congressmen. In this way I 

think there is a lot that can be done by my generation to inform 

others in my generation. 

But the second prong of this approach to increase fix awareness 

must involve Congress and the Senate. It involves concerned Senators like yourself standing besides the graphs we have seen this 

morning saying, Look, this is what is going to happen in the future; 

if we don’t do anything, this is what our grandchildren are going 

to face. We need to do something. I have ideas, and you have ideas 

about how to fix the problem. We need to work together because 

the most important thing is finding a solution. No matter what 

that solution is, fixing the problem needs to come first, and then 

we can talk about different ways and different means of doing that. 

The CHAIRMAN. Thank you very much. It is a thoughtful approach and the right one, I think, in the end to get there. 

I was here in 1983. I made the tough choice of voting for that 

new reform at that time that we are currently living under today. 

You have spoken to it already, Dr. Saving, as it relates to the impact on revenue and the programs that were made available at 

that time. 

You are suggesting that the tax necessary to fund the deficit or 

the reality of what you are looking at is not a move from 12 to 18 

but a move ultimately from 12 to over 20 percent. Is that correct? 

Mr. SAVING. That is correct. It is going to take that to do it, and 

I think that is what happened in 1983—and I think Pat Moynihan, 

who I worked with on the Commission and had a great deal of respect. He was a wonderful guy, and, of course, you knew Pat. 

The CHAIRMAN. Absolutely. 

Mr. SAVING. Wonderful person. But he recognized by 1990 that 

the approach taken in 1983 wasn’t right because what was going 

to happen was there was no way for Congress or the Government 

to protect the excess revenue, because there was no real way to invest it. That was the real problem with it. 

87

It led us down the path where even where, we are now, we look 

at the trust fund as if it is something real, because it was generated by this tax revenue that was there to help the system, presumably, but never really invested. I think it is a problem, and 

that is why, when one of the things that we produce as Trustees— and I was not going to mention this here, but it is something we 

call the actuarial deficit; that is, what is the immediate change in 

taxes which would solve the problem of the system? We do that in 

two ways now. One of them is the perpetuity one, if you say; if we 

immediately raise taxes 4 percentage points over what they are 

now, we would permanently solve the problem. But that would only 

be true if we really took the surpluses and invested them in factories. Because if we do not invest them in factories, all we have 

done is to raise taxes and spending somewhere. 

The CHAIRMAN. You ultimately have fed the general fund of the 

U.S. Treasury. 

Mr. SAVING. Exactly, which funds the current people in the 

world, but not the future. To fund the future requires that we build 

factories. If we do not do that, we have not funded the future. 

There is no real way to fund the future other than that. It may be 

possible for Government to do that, but we recognize that it is very 

difficult. I think the Senate in 1998, when they voted unanimously 

that they would not support something like that, recognized the 

difficulties—not that it cannot be done, but that it is difficult in the 

political system to do it. That is what private accounts were like. 

Or another way to do it independent of that, and I don’t know the 

answer to that. But it does require—and when I speak to young 

people—and I do that a lot, obviously, on a university faculty, and 

they are the age of Brad. When you speak to them, of course, at 

that age most of them assume they are immortal so they are never 

going to be old. By the time I am done, I am pointing to this 

chart——

The CHAIRMAN. Well, let the record show they will get old. All 

right? 

Mr. SAVING. They will get old, yes. 

The CHAIRMAN. Let’s establish that fact here. 

Mr. SAVING. I say, Look, this isn’t about—‘‘You think this is 

about old people,’’ I say. ‘‘It is not. I am going to get mine. This 

is about you because these are the taxes that you are going to have 

to pay. So the reform in Social Security is about you, not about old 

people.’’ It is about young people. 

The CHAIRMAN. Well, let’s talk about——

Mr. SAVING. It is nice to see that Brad and his group recognize 

that. 

The CHAIRMAN. Let’s talk about that for just a little bit, because 

I have been through one of the most significant reforms in Social 

Security, and you have just spoken to it. In all instances, reforms 

have been a combination of two things: usually a reduction in overall benefits and increases in revenues through taxation. Of course, 

you have run into the biggest frustration of a major tax increase 

flowing into the treasury, therefore, being used up until it is needed for other purposes and that kind of negative obligation, if you 

will, resulting. That is what Congress, I think—that is what people 

like myself and others, and that is what I hope Brad and his group 

88

are wrestling with at this moment. Are there other ways to reform 

it? Of course, I am one of those who believes you can begin to cause 

people to look at a portion of their revenue, their taxes into individualized accounts that change the character of the system. 

Visit with us a little bit about those thoughts in your mind, because I am one of those that will no longer accept the standard 

form of adjusting the system. I don’t think it is viable anymore. 

Mr. SAVING. Well, I think step one of that is the point that I 

made earlier. The only way to transfer resources from the present 

to the future is with factories. That, in effect, is what individuals 

saving for their retirement do. In effect, they build factories so that 

when they retire, they are going to be able to sell to the younger 

generation, in effect. The younger generation is going to be willing 

to pay for them and to consume less. Because ultimately all we 

have to work with is the gross domestic product of the country. 

When retirees consume more of it, there is less of it for the younger 

generation. So, part one of the whole thing is to get rid of this $11.9 trillion 

debt. Again, it comes back to that issue. If we are going to have 

young people save more, they have to consume less. The only way 

to increase the capital stock of the country in any year, since we 

only have a fixed amount of gross domestic product, if investment 

is going to be bigger, consumption has to be smaller. We have to 

let people know that, yes, consumption is going to be smaller, but 

the benefits of the smaller consumption are going to more than 

compensate you for the fact you get smaller consumption. That is 

what investment means. Whenever you put money in your savings 

accounts or you invest, you consume less. 

The CHAIRMAN. Brad, do you agree with that? 

Mr. SMITH. Yes. 

The CHAIRMAN. Please go forward on that, because you and your 

group have thought of a variety of ideas. Obviously, you have mentioned five approaches or a five-point approach. 

Mr. SMITH. Right. 

The CHAIRMAN. Does it incorporate some of what Dr. Saving has 

just mentioned? 

Mr. SMITH. It does incorporate some of what Dr. Savings mentioned. The only way we can really fix the Social Security system 

is by consuming less now and looking at how we can use the money 

we have now to ensure ourselves a secure financial future. I believe 

that the answer to the Social Security crisis does have to be some 

form of investment, and that does mean reducing our consumption 

now or adjusting how we distribute benefits to the elderly generation now or just looking at different possibilities for the way to do 

that. But I do think that it does require some form of investment 

in capital and in the future. 

The CHAIRMAN. Historically, we have reached out into the future 

and adjusted in time slots that actuarially fit the trust funds. One 

of the things that I have heard constantly in my life as a public 

person—and I hear it from my parents, but I also hear it from a 

chorus of other seniors, and my parents are now in their mid–80’s. 

They were notched babies or notch babies. Somehow, somebody else 

before them got more than they are getting, and that is inequitable, when, in fact, it was a Congress making a decision as the 

89

Board of Directors of Social Security in making those adjustments 

to fit the cash-flow in part. 

I reference that as a point of interest because if I have heard it 

once, the chorus has been loud, and there have been numerous efforts on the part of Congress to make adjustments in the notch. 

Mr. SAVING. Yes. One of the interesting things about it—one of 

my brothers is a notch baby. I heard about this all the time. I 

spoke to him yesterday—— The CHAIRMAN. Were you ever able to effectively—— Mr. SAVING. I said I am going to Washington to testify before the 

Senate Committee on Aging. He had two comments. He said first, 

‘‘Tell them don’t age.’’ But the second thing is—and he is always 

wanting to get me to impose upon you, ‘‘Fix this notch thing.’’ But 

the other issue is—— The CHAIRMAN. Well, let me ask this question of you first, 

though. Have you ever been able to convince him of how the notch 

came about and that it was equitable at the time? 

Mr. SAVING. Well, you know the answer to that. [Laughter.] 

You aren’t going to convince him of that. 

The CHAIRMAN. But you are an economist. I am just a lowly politician. I have never been able to pull it off. 

Mr. SAVING. You would be better at that than I would, though. 

But what is interesting is I gave him a piece of research that came 

out of the National Bureau of Economic Research recently that suggested that the notch babies have benefited from the fact that they 

got smaller Social Security benefits because they worked longer 

and have lived longer. When I tell my brother that he is lucky he 

was a notch baby, he does not buy that either. 

But the thing that you had the GAO do here points very clearly 

at the impact of that approach, which creates several notches. As 

we know, politically, as you know, notches are not good. From that 

perspective it is clear that we can’t just let the system go on the 

way it is, because it is going to re-create these notches. But also, 

I think that the points that were made here that the transfer is 

really not any different after the trust fund expires than it was before, the real problem is to deal with the deficits and forget the 

trust fund. But, again, anytime you compare any proposal to reform Social Security, you have to say: What is it if we don’t do it? 

I am very pleased that you had GAO do this, because it is important for us to say these are the things that will happen if we don’t 

do anything. 

But I want to emphasize that here are the transfers that we—

in order to even make that happen, this is the money we are going 

to have to raise and transfer to Social Security, even to make the 

so-called ‘‘do nothing’’ thing happen. It is going to be very expensive to, so to speak do nothing. It is important for us to say—and 

one of the things on the Commission we were always faced with, 

people would say this is expensive and let’s do something else, and 

we would say, well, show us where you are going to find the money 

to do what you are talking about. That is the issue. 

The other side always would simply have a better idea, but never 

tell you how they are going to fund it. That is important. I think 

that is why I like very much what you have done here. 

The CHAIRMAN. Well, thank you very much for that statement. 

90

Brad, I am going to give you the chance to have the last word. 

Mr. SMITH. Well, I think the last word has to be reform and reform now. There are tons of ways—great people have looked at lots 

of different ways to reform the system. I think Pride of Retirement 

Council have a great way to reform the system. But I think there 

are other good ways on the table. We need to reform the system 

now in order to ensure that my generation has financial security 

in our retirements. My generation will make the necessary investment to secure our futures and I hope that your generation will assist us in this process. 

The CHAIRMAN. Words well spoken. Thank you. 

The committee will stand adjourned. 

[Whereupon, at 11:32 a.m., the committee was adjourned.] 

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