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SOCIAL SECURITY: THE LONG–TERM

BUDGET IMPLICATIONS

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, JUNE 19, 2002

Serial No. 107–32

Printed for the use of the Committee on the Budget

(

Available on the Internet: http://www.access.gpo.gov/congress/house/house04.html 

(II)

COMMITTEE ON THE BUDGET 

JIM NUSSLE, Iowa, Chairman 

JOHN E. SUNUNU, New Hampshire 

Vice Chairman 

PETER HOEKSTRA, Michigan 

Vice Chairman 

CHARLES F. BASS, New Hampshire 

GIL GUTKNECHT, Minnesota 

VAN HILLEARY, Tennessee 

MAC THORNBERRY, Texas 

JIM RYUN, Kansas 

MAC COLLINS, Georgia 

GARY G. MILLER, California 

PAT TOOMEY, Pennsylvania 

WES WATKINS, Oklahoma 

DOC HASTINGS, Washington 

JOHN T. DOOLITTLE, California 

ROB PORTMAN, Ohio 

RAY LAHOOD, Illinois 

KAY GRANGER, Texas 

EDWARD SCHROCK, Virginia 

JOHN CULBERSON, Texas 

HENRY E. BROWN, Jr., South Carolina 

ANDER CRENSHAW, Florida 

ADAM PUTNAM, Florida 

MARK KIRK, Illinois 

[Vacant] 

JOHN M. SPRATT, Jr., South Carolina, 

Ranking Minority Member 

JIM MCDERMOTT, Washington 

BENNIE G. THOMPSON, Mississippi 

KEN BENTSEN, Texas 

JIM DAVIS, Florida 

EVA M. CLAYTON, North Carolina 

DAVID E. PRICE, North Carolina 

GERALD D. KLECZKA, Wisconsin 

BOB CLEMENT, Tennessee 

JAMES P. MORAN, Virginia 

DARLENE HOOLEY, Oregon 

TAMMY BALDWIN, Wisconsin 

CAROLYN MCCARTHY, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

MICHAEL M. HONDA, California 

JOSEPH M. HOEFFEL III, Pennsylvania 

RUSH D. HOLT, New Jersey 

JIM MATHESON, Utah 

PROFESSIONAL STAFF

RICH MEADE, Chief of Staff 

THOMAS S. KAHN, Minority Staff Director and Chief Counsel 

(III)

C O N T E N T S

Page 

Hearing held in Washington, DC, June 19, 2002 ................................................. 1

Statement of: 

Hon. David M. Walker, Comptroller General, U.S. General Accounting 

Office .............................................................................................................. 3

C. Eugene Steuerle, Senior Fellow, the Urban Institute; former Chair, 

Social Security Technical Panel on Methods and Assumptions; President, National Tax Association .................................................................... 40

Maya C. MacGuineas, Senior Fellow, New America Foundation ................. 51

Hon. Barbara B. Kennelly, President and CEO, National Committee to 

Preserve Social Security and Medicare; former Member of Congress ...... 56

Dan L. Crippen, Director, Congressional Budget Office ............................... 74

Prepared statement, additional submissions of: 

Mr. Walker: 

Prepared statement ................................................................................... 6

GAO’s calculated rate of return on trust fund assets ............................ 20

Present excess value of the OASDI program .......................................... 21

Mr. Steuerle ...................................................................................................... 43

Ms. MacGuineas ............................................................................................... 54

Ms. Kennelly ..................................................................................................... 58

Mr. Crippen ....................................................................................................... 75

(1)

SOCIAL SECURITY: THE LONG–TERM BUDGET 

IMPLICATIONS 

WEDNESDAY, JUNE 19, 2002

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to call, at 10:25 a.m. in room 210, 

Cannon House Office Building, Hon. Jim Nussle (chairman of the 

committee) presiding. 

Members present: Representatives Nussle, Gutknecht, Toomey, 

Hastings, Brown, Crenshaw, Spratt, Bentsen, Price, Moran, and 

Hooley. 

Chairman NUSSLE. Good morning, and welcome. We have a number of guests joining us as well. We are pleased to have you with 

us today for our committee’s hearing on Social Security and the 

budget implications of long-term sustainability. 

First of all, I would like to compliment Mr. Spratt for his suggestion, last year now, that we hold this hearing. We have obviously 

had many things to touch on and focus on since he made that suggestion after the budget went through last year. Certainly, September changed everyone’s focus and there were many immediate 

necessary issues that we had to deal with. 

That may be a good segue or threshold for this hearing today. 

The necessary and the immediate and the emergency and the 

things that focus our attention on a minute-to-minute, day-to-day, 

election year to election year basis, oftentimes are the only things 

that occupy Congress’ attention. 

Today, I am pleased to focus the committee’s attention on Social 

Security. Social Security is our Nation’s most successful antipoverty program. It benefits more than 44 million Americans and 

its preservation is a responsibility that neither I nor any of my colleagues take lightly. 

Members may recall that this hearing was originally scheduled 

for last September 13; then, of course, 2 days before the hearing 

our world changed. As a result of terrorist attacks, we significantly 

altered our perceptions about our own personal security. Still I 

know that today our colleagues—and myself for that matter—are 

determined not to let the events of that very important and fateful 

day derail our obligation to ensure that retirement security is 

available not only for this generation, but future generations. 

Although the Budget Committee has no specific legislative jurisdiction over Social Security itself and the program—or, for that 

matter, any changes to the program—we must deal with the consequences of any reform plan or any plan to change or alter or deal 

2

with Social Security as well as—maybe more importantly—the consequences of failing to act. It is absolutely critical that Budget 

Committee members and the general public understand the budget 

implications of Social Security’s long-term sustainability before proceeding to a debate on potential solutions. 

We have today a host of high caliber witnesses who have given 

us a number of good ideas in the past; and certainly, first and foremost in that regard is David Walker. I don’t know if there is anyone who has more consistently sounded the alarm about the impending concern over a number of long-term obligations to our Federal Government, Social Security being one of them—many obligations that he has highlighted for coming in a siren sort of way. We 

appreciate his continued vigilance to bring that to our attention. I 

told him before the hearing today—he really gets to showcase that. 

Oftentimes in the past, he has had to deal with that along with 

10 or 20 other issues that he has brought to our attention. Today 

we get to focus the way we wanted to last September 13. 

Dealing with the problem and focusing on the consequences does 

not have to be political. You know, I have heard all sorts of tactics 

used on many people’s parts: privatization, scaring people, doing all 

sorts of things. It is scary, but it is not a matter of the reform being 

scary; it is a matter of the consequences of inaction being quite 

frightening, particularly taken in context with what Mr. Walker 

and others will be presenting today. 

So I look forward to the opportunity to somberly take a look at 

that issue. Fortunately, we don’t have the collegialities that people 

can use that as a way to forward anybody’s particular political 

agenda; we can just look at this in the careful context that I think 

it deserves, particularly given all of the priorities that Congress 

has to deal with. 

Again, I would like to compliment Mr. Spratt for his specific suggestion and all members who have chimed in on needing to focus 

on this issue. And I would recognize him for any comments he 

would like to make at this time. 

Mr. SPRATT. Thank you, Mr. Chairman. It is hard to believe that 

18 months ago we had within our reach the first phase at least of 

a plan that would have helped us save, salvage Social Security. 

That plan had bipartisan support. 

The first phase of it was that we would dedicate the surpluses 

building up in the Social Security trust fund solely to the repurchase of outstanding Treasury bonds and notes, and thereby add 

about $3.5 trillion to the national savings, and at the same time, 

retire most of the debt held by the public. 

We also had a projected surplus of $5.6 billion, which was 

enough, if we husbanded our resources and budgeted right, to allocate some share, some portion, to shore up the long-term liabilities 

of Social Security. 

Congress took another tack, preferring tax cuts. We then found 

that we were in the midst of a recession, and we then found ourselves challenged by terrorists. So the fiscal facts have changed 

dramatically. We hardly have the money to buy up any of the public debt now, much less allocate some share of the general fund to 

subsidizing and shoring up Social Security. 

3

But that doesn’t mean that the problem has gone away. Far from 

it. As we meet, 77 million baby boomers are marching to their retirement. There is no way that we can change that fact; we have 

got to face it. This hearing highlights that critical fact and reminds 

us that neither we in Congress, nor the Bush administration, has 

yet to address the biggest fiscal challenge that faces us all. So I 

think it is timely and pertinent. 

Regardless of our jurisdiction I think we should be leading the 

way here, Mr. Chairman. I appreciate your calling this hearing. 

Chairman NUSSLE. I thank the gentleman. 

As I said to start with, there is no one who has in an objective, 

sober, somber, responsible way provided any better information to 

the United States Congress on this issue than David Walker, who 

is the Comptroller General for the United States and, of course, 

oversees GAO. 

We appreciate your coming today with your presentation. We 

look forward to it, and you may proceed as you see fit. Welcome. 

STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL 

OF THE UNITED STATES 

Mr. WALKER. Thank you, Mr. Chairman, Mr. Spratt, other members of this committee. It is a pleasure to be back before you today 

to talk about our Nation’s Social Security program and the longrange challenges relating thereto. 

I should note at the outset that while I may have been talking 

about this problem for a while—not only Social Security and how 

it fits into our long-range fiscal challenge—CBO Director Dan 

Crippen shares my concerns, and I know that he is going to be testifying later today. 

We are two lone voices in the wilderness, and I am very appreciative of your willingness, Mr. Chairman and Mr. Spratt, to conduct this hearing, because this has to be part of a broader public 

education effort in order to help the public understand the nature, 

extent and the timing of our problems such that Congress will then 

be in a position to act. 

Because Congress will eventually be required to act, as I will 

point out, the sooner the better for a variety of reasons. 

I have a few graphics that I would like to use today to be able 

to convey a number of important messages, if we can start with the 

first one. 

My first point would be that Social Security reform is part of a 

larger and very significant fiscal and economic challenge; and to 

make that point, I am going show two graphics. The first one is 

how the composition of the Federal budget has changed over the 

last 40 years. You can see that in 1962, when John F. Kennedy was 

President, 68 percent of the Federal budget was discretionary. The 

Congress was able to decide how that was going to be spent every 

year. 

By 1982, that had declined to 44 percent. And in the fiscal 2002 

budget, it was down to 37 percent. So the ratio has flipped during 

the prior 40 years. 

Specifically, Congress used to be able to decide annually how $2 

out of every $3 were spent. Now it is only a little more than $1 

out of $3. This is going to get worse as we go forward, because 

4

much of the budget is on autopilot unless Congress and the President take certain actions. 

In the second graphic is our famous ‘‘haircut, scalp and decapitation chart.’’ I realize these labels aren’t pleasant, but one can see 

how you get them from here. This shows results of our latest longrange budget simulation for which, importantly, we take the Social 

Security and Medicare trustees’ best estimate, or intermediate assumptions, and we take CBO’s assumptions; we don’t want to compete with our sister agency—they come up with the economic assumptions—or with the trustees. 

If you start with these and the percentage of our economy represented by Federal taxes, and if you assume the tax cuts enacted 

last year do not sunset, that spending will end up increasing based 

upon the Social Security and Medicare trustees’ intermediate estimates; and that discretionary spending grows by the rate of the 

economy—this is what the future will look like. 

If you look at the spending side by 2015, we will start having to 

haircut all other spending. By 2030, it will have to be cut significantly. By 2050, the entire Federal budget would have to be cut in 

half. 

Now, obviously, there are alternatives. You can raise taxes, cut 

spending, go further into debt, or some combination thereof. But if 

you look at the relative order of magnitude, there is a huge longrange fiscal imbalance driven primarily by two things. No. 1, 

known demographic trends—as you mentioned, Mr. Chairman, the 

retirement of the baby boom generation—and No. 2, rising health 

care costs. 

We are not going to change known demographic trends and not 

much has been done lately to help control rising health care costs. 

In fact, some steps will end up fueling these health care costs. 

Second key point: Focusing on trust fund solvency alone is not 

sufficient. We need to put the program on a path toward sustainable solvency. Next graphic, please. 

This graphic shows the cash flows for the OASDI combined program, Social Security, Old Age, Survivors Income and Disability Insurance program. This is the combined cash flow. Yes, we have 

positive cash flows now, but we are going to start going into negative cash flow position starting in 2017. And starting in about 

2006, these positive cash flows start going down. 

Now, what does that mean? That means that to the extent that 

you have had this positive cash flow that has provided some additional budget flexibility in the integrated budget, that is going to 

start going down in about 2006. That is not far from now. By 2017, 

you are going to turn a negative cash flow, which is going to be 

even more of a problem, because you are going to have to figure 

out how you are going to pay those benefits: raise taxes, cut spending or increase debt held by the public. And it gets progressively 

worse as time goes on. 

So cash flow is key. Solvency is only one factor. 

The next key point is that solving Social Security’s long-range financing problem is more important and complex than simply making the numbers add up. This program, meaning OASDI, is critically important to the economic security of millions of Americans, 

not only in retirement but also for the disabled and others. 

5

Given the current financial shortfall in the program, it is important to compare proposals both to current promised and to funded 

benefits. If you can go back, please, to the last one. There are a lot 

of people that want to compare Social Security reform proposals 

just to promised benefits. That is fundamentally flawed and unfair, 

because all the promised benefits are not funded. 

There is a huge shortfall between what has been promised and 

what has been funded; and you have to figure out how you are 

going to close that shortfall. So any analysis, including the ones 

that were released yesterday that compare the benefit cuts based 

solely upon promised benefits, rather than to both funded and 

promised, is unfair, unbalanced—in my opinion, inappropriate. 

Therefore, when GAO does work, which you will see in a few 

minutes, we compare it to both funded and promised benefits. Both 

are relevant. Using only one or the other is not appropriate; you 

need to look at both. And you need to determine how to close that 

gap. 

Reform proposals should be evaluated as packages. We are going 

to have to engage in some heavy lifting. We are going to have to 

make some trade-offs. There is no free lunch. And, as a result, if 

you look at things piecemeal—retirement age, indexing, bend 

points, even individual accounts, if you look at elements one at a 

time, you are going to polarize the situation. Therefore, there is a 

need to look at packages and to compare them against some criteria. 

And, Mr. Chairman, as you know, GAO has come up with some 

recommended criteria, and these are the three at the highest level. 

But there are a bunch of sub-criteria that we would recommend 

Congress use to evaluate Social Security reform proposals as a 

package. 

Next, please. Acting sooner rather than later helps ease the difficulty of change. This graphic shows the degree of the imbalance 

for these periods of time. You can see that the sooner you act, then 

the less dramatic either the benefit adjustment is going to have to 

be, or the tax adjustment, or some combination is going to have to 

be in order to make the numbers work, because of the miracle of 

compounding. 

Therefore, we need to be able to recognize that the longer we 

wait, not only the more dramatic the changes will have to be, but 

the more difficult they will be to make because you will have more 

people who are already receiving benefits; they will represent a 

larger percentage of the population, and therefore, it will be more 

difficult to be able to make needed changes in some regards. 

Last point before I summarize: We believe, Mr. Chairman, that 

it is possible to structure Social Security reform such that you can 

exceed the expectations of all generations of Americans. 

Let me restate that: You have the ability to exceed the expectations of every generation of Americans. 

And why do I say that? Because from a practical standpoint, current retirees and people who are near retirement are afraid that 

Congress is going to cut their benefits. And they don’t have the 

time or ability to make up for any such cut because they are already retired or they are near retirement. From a practical standVerDate Feb 1 2002 14:17 Aug 27, 2002 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 H:\DOCS\HEARINGS\107-32\HBU170.000 HBUDGET1 PsN: DICK
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point, that is not going to be politically possible nor would it be fair 

to do that. 

Secondly, baby boomers like myself are already discounting Social Security. They are discounting it more than they should, as to 

what they think that they are going to get. And generation Xers 

and Ys, like my kids, are discounting it even more. 

Therefore, if you structure a Social Security reform proposal that 

leaves retirees and people who are nearing retirement alone, keeps 

them whole, deliver on the promise, if you restructure Social Security reform such that you make gradual changes that have gradually greater effects to younger people, but gives them time to be 

able to adjust, you can exceed the expectations of all generations 

of Americans. I call that a win. 

What it takes is political leadership and personal courage—political leadership and personal courage. 

The last word that I will give you is, this is easy lifting compared 

to Medicare and health care. This is nothing compared to the challenges that we face in Medicare and health care. There is going to 

be a lot of pain, and the magnitude of change in the health care 

area is going to have to be much greater. So all of the more reason, 

why don’t we get on with something that can be a win-win scenario? 

Thank you. 

[The prepared statement of Mr. Walker follows:]

PREPARED STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL, U.S. 

GENERAL ACCOUNTING OFFICE

Mr. Chairman and members of the committee, thank you for inviting me here to 

discuss ensuring the long-term viability of our Nation’s Social Security program. Social Security not only represents the foundation of our retirement income system; 

it also provides millions of Americans with disability insurance and survivor’s benefits. As a result, Social Security provides benefits that are critical to the current and 

future well-being of tens of millions of Americans. However, as I have said in congressional testimonies over the past several years,1 the system faces both solvency 

and sustainability challenges in the longer term. Although the Social Security 

Trustees now project that under the intermediate or ‘‘best estimate’’ assumptions 

the combined Social Security trust funds2 will be exhausted 3 years later than in 

last year’s estimates, the magnitude of the long-term funding shortfall is virtually 

unchanged. In their 2002 report, the Trustees emphasized that while the program’s 

near-term financial condition has improved slightly, Social Security faces a substantial financial challenge in the not-too-distant future that needs to be addressed soon. 

In essence, the program’s long-term outlook remains unchanged. Without reform, 

Social Security, Medicare, and Medicaid are unsustainable, and the long-term impact of these entitlement programs on the Federal budget and the economy will be 

dramatic. 

Over the past few years, a wide array of proposals has been put forth to restore 

Social Security’s long-term solvency, and last December a commission appointed by 

the President presented three models for modifying the current program. The Commission’s final report3 called for a period of discussion lasting at least a year before 

legislative action is taken to strengthen and restore sustainability to Social Security. 

It is not my intention to discuss the specifics of or take a position for or against 

any individual reform proposal, element, or approach. Rather, I hope my testimony 

today, which is based on a body of work we have published over the past several 

years, will help clarify some of the key issues in the debate. To do that, I’m going 

to talk about the nature and timing of the Social Security problem and a framework 

you might use in addressing it. 

First, let me highlight a number of important points in connection with our Social 

Security challenge: 

• Social Security reform is part of a larger and significant fiscal and economic 

challenge. If you look ahead in the Federal budget, the combined Social Security or 

Old-Age and Survivors Insurance and Disability Insurance (OASDI) program toVerDate Feb 1 2002 14:17 Aug 27, 2002 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-32\HBU170.000 HBUDGET1 PsN: DICK
7

gether with the rapidly growing health programs (Medicare and Medicaid) will 

dominate the Federal Government’s future fiscal outlook. Under GAO’s long-term 

simulations it continues to be the case that these programs increasingly constrain 

Federal budgetary flexibility over the next few decades. Absent reform, the Nation 

will ultimately have to choose between persistent, escalating Federal deficits, significant tax increases and/or dramatic budget cuts. • 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 it is not the only perspective we need to have on Social Security’s longterm financing. In fact, focusing on trust fund solvency alone is inappropriate and 

can lead to a false sense of security about the overall condition of the Social Security 

program. The size of the trust fund does not tell us whether the program is sustainable-that is, whether the government will have the capacity to pay future claims or 

what else will have to be squeezed to pay those claims. Aiming for sustainable solvency would increase the chance that future policymakers would not have to face 

these difficult questions on a recurring basis. Estimates of what it would take to 

achieve 75-year trust fund solvency understate the extent of the problem because 

the program’s financial imbalance gets worse in the 76th and subsequent years. • Solving Social Security’s long-term financing problem is more important and 

complex than simply making the numbers add up. Social Security is an important 

and successful social program that affects virtually every American family. It currently pays benefits to more than 45 million people, including retired workers, disabled workers, the spouses and children of retired and disabled workers, and the 

survivors of deceased workers. The number of individuals receiving benefits is expected to grow to almost 69 million by 2020. The program has been highly effective 

at reducing the incidence of poverty among the elderly, and the disability and survivor benefits have been critical to the financial well-being of millions of others. • Given the current financial shortfall of the program, it is important to compare 

proposals to both current promised and funded benefits. Comparing the beneficiary 

impact of reform proposals solely to current Social Security promised benefits is inappropriate since all current promised benefits are not funded over the longer term. 

As a result, comparisons to current promised benefits after the point of trust fund 

insolvency assume a payroll tax increase or general revenue infusion that have not 

been enacted and may not occur. Likewise, comparisons of reform proposals solely 

to funded benefits after the point of trust fund insolvency are also inappropriate 

since that assumes a reduction in benefits that has not been enacted and may not 

occur. The key point is that there is a significant gap between promised and funded 

benefits that must be closed. In fact, a primary purpose of most Social Security reform proposals is to close or eliminate this gap. • Reform proposals should be evaluated as packages. The elements of any package interact; every package will have pluses and minuses, and no plan will satisfy 

everyone on all dimensions. If we focus on the pros and cons of each element of reform, it may prove impossible to build the bridges necessary to achieve consensus. 

• Acting sooner rather than later helps to ease the difficulty of change. As I 

noted previously, the challenge of facing the imminent and daunting budget pressure from Medicare, Medicaid, and OASDI increases over time. Social Security will 

begin to constrain the budget long before the trust funds are exhausted. The program’s annual cash surplus will enter a steady decline beginning in 2006,4 and from 

2017 on, Social Security’s annual cash deficit will place increasing pressure on the 

rest of the budget to raise the resources necessary to meet the program’s costs. 

Waiting until Social Security faces an immediate solvency crisis will limit the scope 

of feasible solutions and could reduce the options field to only those choices that are 

the most difficult and could also delay the really tough decisions on Medicare and 

Medicaid. Acting sooner rather than later would allow changes to be phased in so 

that future and near retirees have time to adjust their retirement planning. 

• We believe it is possible to structure a Social Security reform proposal that will 

exceed the expectations of all generations of Americans. Today many retirees and 

near-retirees fear cuts will affect them while young people believe they will get little 

or no Social Security benefits. We believe the time has come to craft a solution that 

will protect Social Security benefits for the Nation’s current and near-term retirees, 

while ensuring that the system will be there for future generations. 

Our Social Security challenge is more urgent than it may appear. Although the 

combined trust funds will not run dry until 2041, the Social Security program’s 

pressure and cash demands on the rest of the Federal Government will begin much 

sooner. Failure to take remedial action will, in combination with other entitlement 

spending, place unsustainable pressure on the government and, ultimately, the 

economy. This problem is about more than finances. It is also about maintaining an 

adequate safety net for American workers against loss of income from retirement, 

8

disability, or death; Social Security provides a foundation of retirement income for 

millions of Americans, and has prevented many former workers from living their retirement years in poverty. As the Congress considers proposals to restore the longterm financial stability and viability of the Social Security system, it also needs to 

consider the impact of the potential changes on different types of beneficiaries. 

Moreover, while addressing Social Security reform is important and will not be easy, 

Medicare presents a much greater, more complex, and more urgent fiscal challenge. 

To assist the Congress in its deliberations, GAO has developed criteria for evaluating Social Security reform proposals. These criteria aim to balance financial and 

economic considerations with benefit adequacy and equity issues and the administrative challenges associated with various proposals. The use of these criteria can 

help facilitate fair consideration and informed debate of Social Security reform proposals. Although making policy decisions of this importance requires appropriate deliberation, the time to act is now. Waiting only makes the problem larger, the magnitude of the required changes greater, and the time available to phase in changes 

shorter. Waiting also may serve to further delay the really hard decisions on Medicare and Medicaid. 

SOCIAL SECURITY’S LONG-TERM FINANCING PROBLEM IS MORE URGENT THAN MAY

APPEAR

Today, the Social Security program does not face an immediate crisis but rather 

a long-range and more fundamental financing problem driven largely by known demographic trends. The lack of an immediate solvency crisis affects the nature of the 

challenge, but it does not eliminate the need for action. Acting soon reduces the likelihood that the Congress will have to choose between imposing severe benefit cuts 

and unfairly burdening future generations with the program’s rising costs. Acting 

soon would allow changes to be phased in so the individuals who are most likely 

to be affected, namely younger and future workers, will have time to adjust their 

retirement planning while helping to avoid related ‘‘expectation gaps.’’ Mr. Chairman, as you heard earlier this month while hosting the Second Annual OECD International Conference of Chairpersons of Parliamentary Budget Committees, we are 

not alone in facing long-term budget challenges due to an aging population. Our 

counterparts in many European countries are debating these same issues, and a 

number of developed and developing countries have already engaged in fundamental 

reform of their systems to deal with their long-range challenges. 

Acting soon will also help put the overall Federal budget on a more sustainable 

footing over the long term, thereby promoting both higher economic growth and 

more fiscal flexibility. The importance of such flexibility was brought dramatically 

home last September. The budgetary surpluses of recent years put us in a stronger 

position to respond both to the events of September 11 and to the economic slowdown than would otherwise have been the case. Going forward, the Nation’s commitment to surpluses will truly be tested. None of the changes since September 11 have 

lessened the pressures placed by Social Security, Medicare, and Medicaid on the 

long-term fiscal outlook. Indeed, the events of September 11 have served to increase 

our long-range fiscal challenges. 

Since there is a great deal of confusion about Social Security’s current financing 

arrangements and the nature of its long-term financing problem, I would like to 

spend some time describing the nature, timing, and extent of the financing problem. 

DEMOGRAPHIC TRENDS DRIVE SOCIAL SECURITY’S LONG-TERM FINANCING PROBLEM

As you all know, Social Security has always been largely a pay-as-you-go system. 

This means that current workers’ taxes pay current retirees’ benefits. As a result, 

the relative numbers of workers and beneficiaries has a major impact on the program’s financial condition. This ratio, however, is changing. In the 1960s, the ratio 

averaged 4.2:1. Today it is 3.4:1 and it is expected to drop to around 2:1 by 2030. 

The retirement of the baby boom generation is not the only demographic challenge 

facing the system. People are retiring early and living longer. A falling fertility rate 

is the other principal factor underlying the growth in the elderly’s share of the population. In the 1960s, the fertility rate was an average of three children per woman. 

Today it is a little over two, and by 2030 it is expected to fall to 1.95, a rate that 

is below replacement. Taken together, these trends threaten the financial solvency 

and sustainability of this important program (See fig. 1). 

The combination of these trends means that labor force growth will begin to slow 

after 2010 and become negligible by 2050 (See fig. 2). Relatively fewer workers will 

be available to produce the goods and services that all will consume. Without a 

major increase in productivity, low labor force growth will lead to slower growth in 

9

the economy and to slower growth of Federal revenues. This in turn will only accentuate the overall pressure on the Federal budget. 

This slowing labor force growth is not always considered as part of the Social Security debate. Social Security’s retirement eligibility dates are often the subject of 

discussion and debate and can have a direct effect on both labor force growth and 

the condition of the Social Security retirement program. However, it is also appropriate to consider whether and how changes in pension and/or other government 

policies could encourage longer workforce participation. To the extent that people 

choose to work longer as they live longer, the increase in the share of life spent in 

retirement would be slowed. This could improve the finances of Social Security and 

mitigate the expected slowdown in labor force growth.


w1.eps
10

In addition to encouraging people to work longer, a second approach to addressing 

labor force growth would be to bring more people into the labor force. In domestic 

social policy, we have seen an increasing focus on encouraging those previously outside the labor force (i.e., welfare recipients, the disabled) into the workforce. Concern about the slowdown in the growth of the labor force may also lead to discussions about immigration and its role. Increased immigration, however, poses complex issues and is unlikely to be the sole solution. For example, according to a recent 

United Nations study,5 it would take more than a sustained tenfold increase in projected immigration to maintain the ratio of workers to retirees at recent levels. 

These are issues that the Congress may wish to explore further in the next few 

years. 

Because of the demographic trends discussed above, current estimates show that 

within 15 years benefit payments will begin to exceed program revenue, which is 

composed largely of payroll taxes on current workers6 (See fig. 3).


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SOCIAL SECURITY TRUST FUNDS, CASH FLOW, AND THE FEDERAL BUDGET

Within the Federal budget, Social Security—more properly, the Old-Age and Survivors Insurance and Disability Insurance programs (OASDI)—has two trust funds 

that authorize Treasury to pay benefits as long as the applicable trust fund has a 

positive balance. Currently, annual tax revenues to Social Security exceed annual 

benefit payments. The trust funds, by law, invest the resulting cash surplus in U.S. 

Government obligations or securities that are backed by the full faith and credit of 

the U.S. Government. At present, the trust funds’ assets are in the form of special, 

nonmarketable Treasury securities that are backed by the full faith and credit of 

the U.S. Government and so carry no risk of default.7 Although the trust funds cannot sell their holdings in the open market, the trust funds face no liquidity risk 

since they can redeem their special Treasury securities before maturity without penalty. These securities earn interest credits at a statutory rate linked to market 

yields, and this interest from the Treasury is credited to the trust funds in the form 

of additional Treasury securities. 

I think it is useful to pause for a moment here and reflect on what the term ‘‘trust 

fund’’ means in the Federal budget.8 Trust funds in the Federal budget are not like 

private trust funds. An individual can create a private trust fund using his or her 

own assets to benefit a stated individual(s). The creator, or settler of the trust, 

names a trustee who has a fiduciary responsibility to manage the designated assets 

in accordance with the stipulations of the trust. In contrast, Federal trust funds are 

budget accounts used to record receipts and expenditures earmarked for specific 

purposes. The Congress creates a Federal trust fund in law and designates a funding source to benefit stated groups or individuals. Unlike most private trustees, the 

Federal Government can raise or lower future trust fund collections and payments 

or change the purposes for which the collections are used by changing existing laws. 

Moreover, the Federal Government has custody and control of the funds. 

Under current law, when the Social Security trust funds’ tax receipts exceed 

costs—that is, when the trust funds have an annual cash surplus—this surplus is 

invested in Treasury securities and can be used to meet current cash needs of the 

government or to reduce debt held by the public. In either case, the solvency of the 

trust funds is unchanged. However, while the Treasury securities are an asset to 

the trust funds, they are a liability to the Treasury. Any increase in assets to the 

trust funds creates an increase of equal size in future claims on the Treasury. One 

government fund is lending to another. As a result, these transactions net out on 

the government’s consolidated books.9

The accumulated balances in a trust fund do not in and of themselves increase 

the government’s ability to meet the related program commitments. That is, simply 


w3.eps
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increasing trust fund balances does not improve program sustainability. Increases 

in trust fund balances can strengthen the ability to pay future benefits if a trust 

fund’s cash surpluses are used to improve the government’s overall fiscal position. 

For example, when a trust fund’s cash surpluses are used to reduce debt held by 

the public, this increases national saving, contributes to higher economic growth 

over the long term, and enhances the government’s ability to raise cash in the future to pay benefits. It also reduces Federal interest costs below what they otherwise would have been, thereby promoting greater fiscal flexibility in the future. 

According to the Trustees’ intermediate estimates, the combined Social Security 

trust funds will be solvent until 2041.10 However, our long-term model shows that 

well before that time program spending will constitute a rapidly growing share of 

the budget and the economy. Ultimately, the critical question is not how much a 

trust fund has in assets, but whether the government as a whole can afford the 

promised benefits in the future and at what cost to other claims on scarce resources. 

As I have said before, the future sustainability of programs is the key issue policymakers should address—i.e., the capacity of the economy and budget to afford the 

commitment. Fund solvency can help, but only if promoting solvency improves the 

future sustainability of the program. 

SOCIAL SECURITY’S CASH FLOW IS EXPECTED TO TURN NEGATIVE IN 2017

Today, the Social Security trust funds take in more in taxes than they spend. 

Largely because of the known demographic trends I have described, this situation 

will change. Under the Trustees’ intermediate assumptions, annual cash surpluses 

begin to shrink in 2006, and combined program outlays begin to exceed dedicated 

tax receipts in 2017, a year after Medicare’s Hospital Insurance trust fund (HI) outlays are first expected to exceed program tax revenues. At that time, both programs 

will become net claimants on the rest of the Federal budget (See fig. 4). 

As I noted above, the special Treasury securities represent assets for the trust 

funds but are future claims against the Treasury. Beginning in 2017, the trust 

funds will begin drawing on the Treasury to cover the cash shortfall, first relying 

on interest income and eventually drawing down accumulated trust fund assets. Regardless of whether the trust funds are drawing on interest income or principal to 

make benefit payments, the Treasury will need to obtain cash for those redeemed 

securities either through increased taxes, spending cuts, increased borrowing from 

the public, or correspondingly less debt reduction than would have been the case 

had Social Security’s cash flow remained positive.11 Neither the decline in the cash 

surpluses nor the cash deficit will affect the payment of benefits. However, the shift 

affects the rest of the budget. The negative cash flow will place increased pressure 

on the Federal budget to raise the resources necessary to meet the program’s ongoing costs.

13

DECLINE IN BUDGETARY FLEXIBILITY WILL BE SEVERELY EXACERBATED ABSENT

ENTITLEMENT REFORM

From the perspective of the Federal budget and the economy, the challenge posed 

by the growth in Social Security spending becomes even more significant in combination with the more rapid expected growth in Medicare and Medicaid spending. 

This growth in spending on Federal entitlements for retirees will become increasingly unsustainable over the longer term, compounding an ongoing decline in budgetary flexibility. Over the past few decades, spending on mandatory programs has 

consumed an ever-increasing share of the Federal budget. Prior to the creation of 

the Medicare and Medicaid programs, in 1962 mandatory spending plus net interest 

accounted for about 32 percent of total Federal spending. By 2002, this share had 

almost doubled to approximately 63 percent of the budget (See fig. 5). 

In much of the last decade, reductions in defense spending helped accommodate 

the growth in these entitlement programs. This, however, is no longer a viable option. Even before September 11, reductions in defense spending were no longer 

available to help fund other claims on the budget. Indeed, spending on defense and 

homeland security will grow as we seek to combat new threats to our Nation’s security. 

Our long-term budget simulations continue to show that to move into the future 

with no changes in Federal retirement and health programs is to envision a very 

different role for the Federal Government. Assuming, for example, that the tax reductions enacted last year do not sunset and discretionary spending keeps pace with 

the economy, by midcentury Federal revenues may only be adequate to pay Social 

Security and interest on the Federal debt. Spending for the current Medicare program—without the addition of a drug benefit—is projected to account for more than 

one-quarter of all Federal revenues.12 To obtain balance, massive spending cuts, tax 

increases, or some combination of the two would be necessary (See fig. 6). Neither 

slowing the growth of discretionary spending nor allowing the tax reductions to sunset eliminates the imbalance.


w4.eps
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It is important as well to look beyond the Federal budget to the economy as a 

whole. Figure 7 shows the total future draw on the economy represented by Social 

Security, Medicare, and Medicaid. Under the 2002 Trustees’ intermediate estimates 

and the Congressional Budget Office’s (CBO) most recent long-term Medicaid estimates, spending for these entitlement programs combined will grow to 14.1 percent 

of GDP in 2030 from today’s 8.3 percent. Taken together, Social Security, Medicare, 

and Medicaid represent an unsustainable burden on future generations.


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This testimony is not about the complexities of Medicare, but it is important to 

note that Medicare presents a much greater, more complex, and more urgent fiscal 

challenge than does Social Security. Unlike Social Security, Medicare growth rates 

reflect not only a burgeoning beneficiary population, but also the escalation of 

health care costs at rates well exceeding general rates of inflation. Increases in the 

number and quality of health care services have been fueled by the explosive growth 

of medical technology. Moreover, the actual costs of health care consumption are not 

transparent. Third-party payers generally insulate consumers from the cost of 

health care decisions. These factors and others contribute to making Medicare a 

much greater and more complex fiscal challenge than even Social Security. 

When Social Security redeems assets to pay benefits, the program will constitute 

a claim on real resources in the future. As a result, taking action now to increase 

the future pool of resources is important. To echo Federal Reserve Chairman Greenspan, the crucial issue of saving in our economy relates to our ability to build an 

adequate capital stock to produce enough goods and services in the future to accommodate both retirees and workers in the future.13 The most direct way the Federal 

Government can raise national saving is by increasing government saving. Ultimately, as this committee recommended last fall, we should attempt to return to 

a position of surplus as the economy returns to a higher growth path. This would 

allow the Federal Government to reduce the debt overhang from past deficit spending, provide a strong foundation for future economic growth, and enhance future 

budgetary flexibility. 

Similarly, taking action now on Social Security would not only promote increased 

budgetary flexibility in the future and stronger economic growth but would also 

make less dramatic action necessary than if we wait. Perhaps the best way to illustrate this is to compare what it would take to achieve actuarial balance at different 

points in time by either raising payroll taxes or reducing benefits.14 Figure 8 shows 

this. If we did nothing until 2041—the year the trust funds are estimated to be exhausted—achieving actuarial balance would require changes in benefits of 31 percent or changes in taxes of 45 percent. As figure 8 shows, earlier action shrinks the 

size of the necessary adjustment.


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Thus both sustainability concerns and solvency considerations drive us to act 

sooner rather than later. Trust fund exhaustion may be nearly 40 years away, but 

the squeeze on the Federal budget will begin as the baby boom generation starts 

to retire. Actions taken today can ease both these pressures and the pain of future 

actions. Acting sooner rather than later also provides a more reasonable planning 

horizon for future retirees. 

EVALUATING SOCIAL SECURITY REFORM PROPOSALS

As important as financial stability may be for Social Security, it cannot be the 

only consideration. As a former public trustee of Social Security and Medicare, I am 

well aware of the central role these programs play in the lives of millions of Americans. Social Security remains the foundation of the Nation’s retirement system. It 

is also much more than just a retirement program; it also pays benefits to disabled 

workers and their dependents, spouses and children of retired workers, and survivors of deceased workers. Last year, Social Security paid almost $408 billion in 

benefits to more than 45 million people. Since its inception, the program has successfully reduced poverty among the elderly. In 1959, 35 percent of the elderly were 

poor. In 2000, about 8 percent of beneficiaries aged 65 or older were poor, and 48 

percent would have been poor without Social Security. It is precisely because the 

program is so deeply woven into the fabric of our Nation that any proposed reform 

must consider the program in its entirety, rather than one aspect alone. Thus, GAO 

has developed a broad framework for evaluating reform proposals that considers not 

only solvency but other aspects of the program as well. 

The analytic framework GAO has developed to assess proposals comprises three 

basic criteria: 

• The extent to which a proposal achieves sustainable solvency and how it would 

affect the economy and the Federal budget; 

• the relative balance struck between the goals of individual equity and income 

adequacy; and 

• how readily a proposal could be implemented, administered, and explained to 

the public. 

The weight that different policymakers may place on different criteria will vary, 

depending on how they value different attributes. For example, if offering individual 

choice and control is less important than maintaining replacement rates for low-income workers, then a reform proposal emphasizing adequacy considerations might 

be preferred. As they fashion a comprehensive proposal, however, policymakers will 

ultimately have to balance the relative importance they place on each of these criteria. 


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FINANCING SUSTAINABLE SOLVENCY

Historically, Social Security’s solvency has generally been measured over a 75-

year projection period. If projected revenues equal projected outlays over this time 

horizon, then the system is declared in actuarial balance. Unfortunately, this measure is itself unstable. Each year, the 75-year actuarial period changes, and a year 

with a surplus is replaced by a new 75th year that has a significant deficit. This 

means that, changes that restore solvency only for the 75-year period will not hold. 

For example, if we were to raise payroll taxes immediately by 1.87 percentage 

points of taxable payroll today—which, according to the 2002 Trustees’ Report, is 

the amount necessary to achieve 75-year balance—the system would be out of balance next year. This is the case because actions taken to close the 75-year imbalance would not fully address the projected deficit in year 76 of 6.49 percent of taxable payroll. Reforms that lead to sustainable solvency are those that avoid the 

automatic need to periodically revisit this issue. 

As I have already discussed, reducing the relative future burdens of Social Security and health programs is essential to a sustainable budget policy for the longer 

term. It is also critical if we are to avoid putting unsupportable financial pressures 

on future workers. Reforming Social Security and Federal health programs is essential to reclaiming our future fiscal flexibility to address other national priorities. 

BALANCING ADEQUACY AND EQUITY

The current Social Security system’s benefit structure strikes a balance between 

the goals of retirement income adequacy and individual equity. From the beginning, 

benefits were set in a way that focused especially on replacing some portion of workers’ pre-retirement earnings. Over time other changes were made that were intended to enhance the program’s role in helping ensure adequate incomes. Retirement income adequacy, therefore, is addressed in part through the program’s progressive benefit structure, providing proportionately larger benefits to lower earners 

and certain household types, such as those with dependents. Individual equity refers 

to the relationship between contributions made and benefits received. This can be 

thought of as the rate of return on individual contributions. Balancing these seemingly conflicting objectives through the political process has resulted in the design 

of the current Social Security program and should still be taken into account in any 

proposed reforms. 

Policymakers could assess income adequacy, for example, by considering the extent to which proposals ensure benefit levels that are adequate to protect beneficiaries from poverty and ensure higher replacement rates for low-income workers. 

In addition, policymakers could consider the impact of proposed changes on various 

subpopulations, such as low-income workers, women, minorities, and people with 

disabilities. Policymakers could assess equity by considering the extent to which 

there are reasonable returns on contributions at a reasonable level of risk to the 

individual, improved intergenerational equity, and increased individual choice and 

control. Differences in how various proposals balance each of these goals will help 

determine which proposals will be acceptable to policymakers and the public. 

IMPLEMENTING AND ADMINISTERING PROPOSED REFORMS

Program complexity makes implementation and administration both more difficult 

and harder to explain to the public. Some degree of implementation and administrative complexity arises in virtually all proposed changes to Social Security, even 

those that make incremental changes in the already existing structure. However, 

the greatest potential implementation and administrative challenges are associated 

with proposals that would create individual accounts. These include, for example, 

issues concerning the management of the information and money flow needed to 

maintain such a system, the degree of choice and flexibility individuals would have 

over investment options and access to their accounts, investment education and 

transitional efforts, and the mechanisms that would be used to pay out benefits 

upon retirement. Harmonizing a system that includes individual accounts with the 

regulatory framework that governs our Nation’s private pension system would also 

be a complicated endeavor. However, the complexity of meshing these systems 

should be weighed against the potential benefits of extending participation in individual accounts to millions of workers who currently lack private pension coverage. 

Continued public acceptance and confidence in the Social Security program require that any reforms and their implications for benefits be well understood. This 

means that the American people must understand why change is necessary, what 

the reforms are, why they are needed, how they are to be implemented and administered, and how they will affect their own retirement income. All reform proposals 

18

will require some additional outreach to the public so that future beneficiaries can 

adjust their retirement planning accordingly. Yet the more transparent the implementation and administration of reform, and the more carefully such reform is 

phased in, the more likely it will be understood and accepted by the American people. 

With regard to proposals that involve individual accounts, an essential challenge 

would be to help the American people understand the relationship between their individual accounts and traditional Social Security benefits, thereby ensuring that any 

gaps in expectations about current or future benefits are avoided. In addition, increasing the public’s level of sophistication and understanding of how to invest in 

the market, the relationship between risk and return, and the potential benefits of 

diversification presents an education challenge that must be surmounted so that the 

American people have the necessary tools to secure their future. The Enron collapse 

helps to illustrate the importance of this, as well as the need to provide clear and 

understandable information so that the public can make informed retirement decisions. 

CONCLUSION

Early action to address the financing problems of Social Security yields the highest fiscal dividends for the Federal budget and provides a longer period for future 

beneficiaries to make adjustments in their own planning. The events of September 

11 and the challenges of combating terrorism do not change this. In fact, the additional spending that will be required to fight the war on terrorism and protect our 

homeland will serve to increase our long-range fiscal challenges. It remains true 

that the longer we wait to take action on the programs driving long-term deficits, 

the more painful and difficult the choices will become. 

Although the program does not face an immediate solvency crisis as it did in 

1983, the fundamental nature of the program’s long-term financing challenge means 

that timely action is needed. The demographic trends recognized in 1983 are now 

almost upon us. It is these demographic trends—and their implications for both Social Security and Medicare—that lead to the conclusion that the program faces both 

a solvency and a sustainability problem. For the American people to understand 

why change is necessary, a public education campaign will be needed that focuses 

not just on Social Security but also on our long-range fiscal challenges. 

We will face many difficult choices in making Social Security sustainable. Focusing on comprehensive packages of reforms that protect the benefits of current retirees while achieving the right balance of equity and adequacy for future beneficiaries 

will help to foster credibility and acceptance. This will help us avoid getting mired 

in the details and losing sight of important interactive effects. It will help build the 

bridges necessary to achieve consensus. 

Today I have described the three basic criteria against which GAO thinks Social 

Security reform proposals may be measured. These may not be the same criteria 

every analyst would suggest, and certainly how policymakers weight the various elements may vary. However, if comprehensive proposals are evaluated as to (1) their 

financing and economic effects, (2) their effects on individuals, and (3) their feasibility, we will have a good foundation for devising agreeable solutions, perhaps not 

in every detail, but as an overall reform package that will meet the most important 

of our objectives. 

Today many retirees and near-retirees fear cuts that will affect them while young 

people believe they will get little or no Social Security benefits. As I said at the start 

of my testimony, we believe it is possible to structure a Social Security reform proposal that will exceed the expectations of all generations of Americans. Yes, we believe there is a window of opportunity to craft a solution that will protect Social Security benefits for the Nation’s current and near-term retirees, while ensuring that 

the system will be there for future generations. However, this window of opportunity will close as the baby boom generation begins to retire. As a result, we must 

move forward to address Social Security because we have other major challenges 

confronting us. The fact is, compared to addressing our long-range health care financing problem, reforming Social Security will be easy lifting. 

It is my hope that we will think about the unprecedented challenge facing future 

generations in our aging society. Relieving them of some of the burden of today’s 

financing commitments would help fulfill this generation’s stewardship responsibility to future generations. It would also preserve some capacity for them to make 

their own choices by strengthening both the budget and the economy they inherit. 

We need to act now to address the structural imbalances in Social Security, Medicare, and other entitlement programs before the approaching demographic tidal 

wave makes the imbalances more difficult, dramatic, and disruptive. 

19

We at GAO look forward to continuing to work with this committee and the Congress in addressing this and other important issues facing our Nation. 

Mr. Chairman, Mr. Spratt, members of the committee, that concludes my statement. I’d be happy to answer any questions you may have. 

END NOTES

1. U. S. General Accounting Office, Social Security: Criteria for Evaluating Social 

Security Reform Proposals, GAO/T–HEHS–99–94 (Washington, D.C.: Mar. 25, 1999); 

Social Security: The President’s Proposal , GAO/T–HEHS/AIMD–00–43 (Washington, D. C.: Nov. 9, 1999); Budget Issues: Long-Term Fiscal Challenges, GAO–02–

467T (Washington, D.C.: Feb. 27, 2002). 

2. In this testimony, the term ‘‘trust funds’’ refers to the Old-Age and Survivors 

Insurance and Disability Insurance Trust Funds. 

3. Strengthening Social Security and Creating Personal Wealth for All Americans 

(Dec. 21, 2001; rev. March 19, 2002). 

4. This calendar year estimate is based on projected tax receipts and outlays in 

constant 2002 dollars under the intermediate assumptions of the 2002 Trustees’ Report. 

5. United Nations Population Division, Replacement Migration: Is it a Solution to 

Declining and Aging Populations? (March 2000). 

6. Income tax revenue resulting from taxation of up to 50 percent of Social Security benefits for certain higher income beneficiaries is credited to the OASI and DI 

trust funds and provided a little more than 2 percent of total income in 2001. 

7. Under current law, the Secretary of the Treasury as trustee may purchase marketable Treasury and agency securities if the Secretary determines that such purchase is ‘‘in the public interest.’’ Such purchases have been rare. As of the end of 

calendar year 2001, about 0.003 percent of OASDI trust fund holdings were in marketable Treasury securities. 

8. For a discussion of trust funds and other earmarked funds in the budget, see 

U.S. General Accounting Office, Federal Trust and Other Earmarked Funds: Answers to Frequently Asked Questions, GAO–01–199SP (Washington D.C.: Jan. 

2001). 

9. Under current accounting standards, the long-term funding gap—the difference 

between promised benefits and expected contributions—for Social Security and 

Medicare is reported as required supplementary stewardship information but not 

treated as a liability in the government’s financial statements. The recognized liability is the amount of benefits due and payable to or on behalf of beneficiaries at the 

end of the reporting period. 

10. Separately, the DI fund is projected to be exhausted in 2028 and the OASI 

fund in 2043. 

11. If the unified budget is in surplus at this point, then financing the excess benefits will require less debt redemption rather than increased borrowing. 

12. This simulation assumes that all promised benefits would be paid in full 

throughout the 75-year projection period. 

13. Testimony before the Committee on Banking, Housing, and Urban Affairs, 

U.S. Senate, July 24, 2001. 

14. Solvency could also be achieved through a combination of tax and benefit actions. This would reduce the magnitude of the required change in taxes or benefits 

compared to making changes exclusively to taxes or benefits as shown in figure 8.

Chairman NUSSLE. Thank you. 

As I said, this is one of the first things that Mr. Spratt suggested 

to me when I took over as chairman of the committee; that he 

wanted to focus on this and highlight this and have a hearing on 

this, and so, I would like to invite him to go first in the questioning. 

Mr. SPRATT. General Walker, obviously one way to restore some 

solvency to Social Security for the long run is to increase the rate 

of the return on the assets in the trust fund. 

Have you given any thought or analysis to how we might do that, 

using the traditional structure that we have now, a trust fund invested in government bonds? Have you considered the possibility 

that it might be invested in equities or corporate bonds in order to 

increase the yield or return of the trust fund? 

20

Mr. WALKER. Obviously, to the extent that the Congress decided 

to more actively invest these funds, then based upon modern portfolio theory, having a diversified portfolio of assets, one should be 

able to achieve a greater rate of return over time. 

At the same point in time, Mr. Spratt, as you know, that also has 

implications on the budget. Because my understanding is, under 

the current budget rules—and Director Crippen can verify this or 

correct me—that if you end up using that cash, and then make an 

investment, that is counted as an expenditure at the present point 

in time. 

So, from an economic standpoint, your point is well taken. In 

fact, one of the things I think that this committee needs to think 

about is, how do we keep score? We currently keep score based 

upon, largely, cash flow concepts and 10-year horizons, which ignore the economic reality and which also ignores the fact that most 

of our budget challenges are, after 10 years, big budget challenges. 

Mr. SPRATT. Well, we can easily change that rule and simply 

stipulate by another rule that if economic assets are purchased, 

they should not be treated the same as if a consumable service or 

commodity was purchased. 

Have you calculated what we would need to realize as a rate of 

return on the trust fund, the return that we can expect under existing circumstances in order to keep it solvent for the next 70 

years? 

Mr. WALKER. Well, what we can do is, we can make some assumptions, where we would end up taking, for example, the number in the financial statements of the U.S. Government, which is 

the discounted present value of the unfunded liability that exists 

right now, over the next 75 years. And we could compare what a 

more likely return would be on a more diversified portfolio of assets 

versus that and come up with what the difference in the number 

would be. 

That might be helpful to you. I think it would illustrate your 

point. 

[The information referred to follows:]

GAO’S CALCULATED RATE OF RETURN ON TRUST FUND ASSETS

In response to your request, we calculated the rate of return on trust fund assets 

that would be necessary to achieve trust fund solvency for 75 years. Our calculations are based on the data and intermediate assumptions presented in the 2002 

Trustees’ Report. In order to simplify the calculation, we assumed immediate investment of all current and projected future assets of the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) trust funds. We found that the 

rate of return over the 75-year projection period would have to be increased 2.5 percent from the 3 percent real rate of return assumed by the Trustees to a real rate 

of 5.5 percent to achieve combined trust fund solvency through 2076. We discussed 

this estimate with the staff at the Office of the Chief Actuary, Social Security Administration, who agreed that our estimate was reasonable. 

As noted, this calculation assumes that the entire combined trust fund balance 

of more than $1 trillion is immediately invested and earns that rate of return over 

the entire 75-year period. Hypothetically, the trust fund could redeem its existing 

balance of more than $1 trillion in Treasury securities, but its investment could potentially be disruptive to financial markets. In addition, investment of trust fund 

assets in private markets would have immediate consequences for the Federal budget. Social Security cash surpluses would not be available to finance other government activities. In addition, reinvesting existing trust fund balances would mean 

that the Treasury would have to repay money previously borrowed from the trust 

fund. In 1998, GAO issued a report that examined issues raised by government inVerDate Feb 1 2002 14:17 Aug 27, 2002 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-32\HBU170.000 HBUDGET1 PsN: DICK
21

*NOTE.—Social Security Financing: Implications of Government Stock Investing for the Trust 

Fund, the Federal Budget and the Economy. April 22, 1998, GAO/AIMD/HEHS–98–74.

vestment of Social Security funds in the stock market with the intention of earning 

higher returns.* Our 1998 report stated that allowing the Social Security trust fund 

to invest in the stock market is a complex proposal that would have potential consequences for the trust fund, the U.S. economy and Federal budget policy. Additional information and analyses on related issues can be found in our 1998 report. 

Mr. SPRATT. Well, if you can do that for the record, if you can 

demonstrate what we would need to realize as a rate of return on 

the trust fund in order for the trust fund to meet its obligations 

through the stipulated time period, I think—what is it, 75 years? 

Mr. WALKER. Yes. We will have to make some assumptions; we 

will disclose those. 

And I think the other thing, as you know, Mr. Spratt, which is 

very important is that part of the problem with Social Security is 

that even if you come into actuarial balance for the 75-year period 

today, you know you are going to be out of balance next year because of the way the numbers work. I mean, the deficit is escalating each year. 

Mr. SPRATT. Well, obviously the problem with going out that far 

is a lot of things we don’t know about 2075. 

Mr. WALKER. That is true, although I think we have to also learn 

some lessons that it is even tough to project 10 years, much less 

75. On the other hand, I think that we can’t be overly optimistic, 

because we know that some of these trends, like demographics, 

aren’t going away. 

Mr. SPRATT. You mentioned the net present value of the shortfall 

in Social Security today. I have seen the number $3.3 trillion. Is 

that your calculation of what the shortage is on a net present value 

basis? 

Mr. WALKER. It is around $3 trillion. I will provide it for the 

record. And again that doesn’t count Medicare, which is a big one. 

[The information referred to follows:]

PRESENT EXCESS VALUE OF THE OASDI PROGRAM

According to the 2002 Financial Report of the United States Government, for the 

OASDI program, the present value of the excess of income (excluding interest) over 

expenditures for the 75-year period 2001–2075, taking into account the beginning 

trust fund balances and the cost of attaining a target trust fund balance at the end 

of the period, is $3.394 trillion.

Mr. SPRATT. I understand that. 

I don’t have any further questions at this time. Thank you very 

much. 

Chairman NUSSLE. Let me start with what may be—what may 

sound like good news, the trustees’ report. I guess part of why I 

am asking this is to highlight why it may not be good news and 

why sometimes this gets confusing. 

But this year’s trustees’ report shows that the dates of cash flow 

deficits and insolvency for Social Security are gradually receding, 

and that is often reported as good news and assumed to be good 

news. Every time a year is added onto that, or a period of time is 

added onto the solvency date, that is championed or that is reported as being good news. 

Can we really afford to feel secure about the fact that that solvency date appears to be receding slightly? 

22

Mr. WALKER. In my opinion, Mr. Chairman, solvency is one 

measure that you should look at. However, it is only one. And, in 

fact, if you just look at the solvency measure, it can give you a false 

sense of security and potentially a misleading picture as to what 

the condition of Social Security is. 

I think you also have to look at, when does Social Security turn 

a negative cash flow? Because once it starts, you know, turning a 

negative cash flow, that has a very real impact on the budget. 

In addition to that, you have to look at what percent Social Security is to the overall budget and the overall economy. Furthermore, 

you have to look at, how does Social Security fit into the overall 

budget picture and the ability to be able to deliver on not just Social Security promises, but other promises that have been made. 

So my personal view is that solvency is something to track, but 

by no means is it the primary measure that Congress should focus 

on. 

Chairman NUSSLE. Why is it the primary measure that Congresses focus on, or for that matter, the media? I mean, that is the 

date that is reported. Banner headlines, that is what is talked 

about. You will see it in every publication and rag and everything 

else. Why is that the date that—should we be tracking other dates 

or times or measures as primary factors, as opposed to, seemingly, 

highlighting just that one date or factor? 

Mr. WALKER. I would argue that there are at least two dates that 

are important. One date is when you turn negative cash flow; another date is the insolvency date. I think those are two key dates 

as a point in time. If you look at negative cash flow, that is 2017, 

based on the most recent trustees’ report. 

If you look at when the cash flows start declining—right now we 

are building positive cash flows—when they start declining, that is 

2006, based on the latest trustees’ report. 

I think this is part of the public education plan. First, what does 

solvency mean? What does that date mean? What that means is 

that if we don’t do anything to Social Security by that date, which 

is, I believe 2041, which is the insolvency date——

Chairman NUSSLE. We have got a chart on this. I am not trying 

to use—I am not trying to make you accept this chart, but this is 

a chart that may—here is the chart. 

This is, I think, what you are referring to. Just so we can put 

it in some kind of a graphic, charted way, is this what you are talking about? 

Mr. WALKER. I think what you are talking about here is the blue 

line represents the trust fund. And the green line represents cash 

flow income. The outgo is obviously expenditures. And the date, as 

I recall, is—2041 I believe is the date that the combined OASDI 

trust fund is supposed to be insolvent. 

What that means is, if Congress does nothing between now and 

then, if all trustees’ intermediate assumptions prove to be valid as 

of that date you would end up having to decide what you are going 

to do about the approximate 25-percent shortfall between the revenues that are coming in in that program every year and the promises that have to be paid in that year. 

That is obviously not a desirable state, to wait until you spend 

every last dime. Then, all of a sudden, you have this significant 

23

shortfall that has to be addressed, which shortfall increases year 

by year because of some of the demographic trends and other factors that we talked about. 

Mr. SPRATT. Thank you, Mr. Chairman. 

When you speak of a cash deficit in 2017, are you including in 

the income to the trust funds interest payments and income tax 

transfers? 

Mr. WALKER. The interest on the bonds I believe is not included 

in that, because that is not a cash item. I believe if you take total 

income, it would be about 2027. 

So it is truly just what I said; it is cash flow. As you know, the 

interest on the bonds is an accounting entry but it is significant because it is a government commitment to pay in the future. 

Mr. SPRATT. But we book the interest on the bonds as income 

and use it to purchase other bonds, don’t we? 

Mr. WALKER. That is correct. 

Mr. SPRATT. So it is treated as an asset by the trust fund? 

Mr. WALKER. It is an asset, it is income, but it is not cash. In 

other words, what we do count is, we count payroll taxes, we count 

the taxation that is attributable to taxation of certain Social Security benefits where they are cash amounts, but we don’t count the 

notational interest on the bonds because it is a non-cash item. 

Chairman NUSSLE. Two more things quickly. One is the Nation’s 

gross domestic product is obviously going to be growing. Some 

would possibly predict that it would grow much more substantially 

than is being used as the basis for the arguments that you are 

making, or that others make, about the concern. 

I have heard those who would suggest that we could grow out of 

this, that somehow that there may be a bump for the baby 

boomers; but by and large, this could be taken care of by growth 

in the economy. 

Would you address that either in favor or against? 

Mr. WALKER. Well, first, this does assume growth in the economy 

generally consistent with CBO’s assumptions. So you can ascertain 

whether you believe they are reasonable or not. There is growth in 

the economy that is assumed as part of this analysis. 

My personal opinion is that reasonable people can differ as to 

whether or not you can grow out of part of, or all of, the Social Security problem. What you are not going to grow out of, in my opinion, is the larger fiscal problem. In other words, if you look at the 

degree of imbalance that I showed up there on the ‘‘haircut, the decapitation and the disembodiment’’ chart, there is something you 

are not going to grow out of in my opinion. 

Chairman NUSSLE. The last thing I would like you to just address is your second-to-last page of your presentation. If you want 

to put it up, that would be great. It is basically your criterion for 

evaluating Social Security reform proposals. You went over that 

very quickly. 

Would you just expand on your three points for the members, 

what you mean by those three points as we begin to possibly take 

a look at some solutions in the near future? 

Mr. WALKER. Well, these are very high levels. We have a number 

of sub-elements for each one. It is available on our Web site. But 

at the highest levels, financing sustainable solvency, the idea that 

24

we have been talking about, solvency has some significance, but it 

is not everything. It can be misleading. You need to look at what 

has to be done not only to be able to make the program solvent, 

but to be able to make the program sustainable as a percentage of 

the budget, as a percentage of the economy over time. 

Secondly, balancing adequacy and equity in the benefit structure. 

Whatever changes you make, consideration has to be given to different income levels and different resource levels of the individuals 

involved and what likely effect that is going to have on them, and 

then equity between generations, equity between different classes 

of individuals in whatever changes you are considering making. 

And then thirdly, implementing and administering reforms. To 

what extent are there going to be transition challenges? To what 

extent are there going to be administrative challenges associated 

with whatever reform proposals you may consider? 

To the extent that you are talking about reforming the existing 

defined benefit structure, that is one thing. To the extent that you 

are considering individual accounts, either as an optional or as a 

mandatory element of reform, then that raises a whole new range 

of implementation issues that you need to think about from the 

standpoint of how are you going to end up handling the recordkeeping, what are you going to do about the investments, what are 

you going to do about investment education? 

Those are solvable problems, but they are significant challenges 

that have to be adequately focused on both as to the structure and 

the timing of implementation of any such proposal. 

Chairman NUSSLE. Thank you. 

I would just observe before I recognize, I guess Mr. Bentsen, Mr. 

Spratt and I just had a 15-minute conversation with the Comptroller General, and I don’t think politics was invoked once. I don’t 

know if that can be sustained, but I will tell you, if we can’t have 

a conversation about this in this country, about this challenge, and 

do it in a non-political way, we are not going to address it. I think 

we have proven that we can. Maybe that is, in part, why we don’t 

have jurisdiction. I don’t know. 

But I am very serious about that. I think there are ways that we 

can have conversations about this, even though people can have 

their differences of opinion. 

Mr. WALKER. Can I touch on that, Mr. Chairman? 

Chairman NUSSLE. Please. 

Mr. WALKER. In a prior life, I was a trustee of Social Security 

and Medicare. I was Assistant Secretary of Labor for pensions and 

health and head of the Pension Benefit Guaranty Corporation. And 

because I have a lot of background in pensions and health, as well 

as other areas, I was afforded the opportunity to participate in 

some of these town hall meetings that former President Clinton, 

former Vice President Gore and other bi-partisan leaders held 

around the country as part of an education effort to try to educate 

the American people on the nature, extent, and timing of the problem, and to try to put it in context. That has to happen. 

What I found is, the American people are a lot brighter than 

sometimes we give them credit for. And, if you give them the facts, 

they can understand the need for some type of change. 

25

Reasonable people can differ on what those changes should be. 

But one of the things that has to happen is, there needs to be a 

public education effort which is part of that political leadership and 

personal courage that has to happen to get a little bit out front, because realistically, Congress is not going to act until the American 

people have a better understanding of the nature and extent and 

magnitude of the problem, because you obviously have to stand for 

reelection. 

By the way, Mr. Spratt, the interest is included in the trust fund 

balance; it is included in that. But, it is not included in the cash 

flow analysis. 

Mr. SPRATT. That is kind of a quirk of our accounting. I mean, 

if we booked interest as a real cost, even though we were paying 

it to ourselves, usually as trustee, our bottom line would look a lot 

different today. 

I think it is one of the anomalies in Federal bookkeeping that we 

really ought to give more serious attention to. 

Mr. WALKER. I think you are right. One of the things that we 

need to do is, we need to take another look at the accounting and 

disclosure for Social Security and Medicare obligations. Right now, 

under generally accepted accounting principles for the Federal Government, the bonds that are held in the trust fund are not shown 

as a liability in the consolidated financial statement of the U.S. 

Government. 

The reason it is not shown as a liability is because the right 

hand owes the left hand. Just as in the private sector, you eliminate those types of transactions on consolidation. 

At the same point in time, the unfunded obligation between promised benefits and funded benefits, that approximate $3.4 trillion number that we talked about before, just for Social Security, 

is not shown as a liability. It is disclosed. It is contained in a separate statement, which is a positive step. 

But I think one of the things that we need to do—and I have 

shared with this with my colleagues on the Joint Financial Management Improvement program, including the Secretary of the 

Treasury and the Director of OMB—is that we need to have a discussion and debate about whether or not the current accounting 

treatment should go further. 

I expect that that will end up happening within the next year or 

so. 

Mr. SPRATT. Thank you, sir. 

Chairman NUSSLE. Mr. Bentsen. 

Mr. BENTSEN. Thank you, Mr. Chairman. 

Mr. Walker, I don’t want to debate what are on the margins, but 

I do think on the interest that Mr. Spratt brings up, there is a 

legal obligation for that interest. 

You are right, we don’t account for it in the same way that we 

don’t account for some other trust funds we have out there: the BIF 

fund, the Safe fund and other things like that. But there is a legal 

obligation that presumably Congress is going to honor; otherwise, 

it would probably have somewhat catastrophic effects on the Treasury market and others. So I think we have to count it. But you are right. In a $3.4 trillion present value deficit, we are 

debating on the margins here. When you talk about this gap, this 

26

deficit, the cash flow deficit and the long-term cash flow deficit, and 

you say we are going to have to have either benefit reductions or 

increased revenues, or some combination thereof; and you—but you 

do that based upon demographic projections, which I think—I think 

your assumptions—I don’t know whether your assumptions are accurate, but I think your ingredients are accurate that you have to 

look at that. 

Is it true that regardless of whether there was a—and I am not 

trying to make it political or anything—when we had the Social Security task force a couple of years ago, and we had Alan Greenspan 

come and talk to us about this in an off-the-record luncheon, he 

made this point. This is more of a societal problem, where you have 

a universal pension safety net program; and whether it was—

whether it is operated through a Federal Government trust fund 

program, as it is right now, or whether or not it was operated 

through a private sector or privatization concept of some sort, 

where there was a guaranteed benefit level, which is the case right 

now, that deficit would exist. Is that correct? 

I mean, one way or the other, the economy has to pick it up? It 

scores against GDP, whether it is governmental or non-governmental? 

Mr. WALKER. Yes. 

But the way to really look at it is, we call this a ‘‘trust fund.’’ 

This is not a traditional trust fund in the sense that you and I or, 

frankly, the American people would normally refer to as a ‘‘trust 

fund.’’ 

What ‘‘trust fund’’ means in this context is an accounting device. 

It is a sub-account within the overall financial statements of the 

U.S. Government. 

Now, don’t get me wrong. The fact that this trust fund holds government securities backed by the full faith and credit of the U.S. 

Government, guaranteed as to principal and interest, has not only 

legal significance; it has, economic and moral significance as well. 

But, you know, this is not a fund that is backed by hard assets 

that are actively invested. 

So you really have several options. When you turn a negative 

cash flow to deal with the long-range problem, you need more income, less benefits, more debt held by the public; or to try to figure 

out a way that you can increase rate of return. Through actively 

funding, you might end up helping to reduce the problem on a discounted present value basis over time. 

Mr. BENTSEN. I guess I agree with that. 

But I guess my question is this: Isn’t there generally an unfunded liability of pension obligations, both within the government 

and outside of the government, that we are having to make 

through either—through either income-generating assets, or whatever, we are having to make up? 

So this is more of a societal program that other nations around 

the world, as they age, are starting to face as well. And whatever 

you end up with—with whatever proposal, the cost—there is a cost 

associated with it whether you privatize, or don’t privatize, whatever. That cost is either in the form of a reduction in benefits or 

an increase in up-front contribution. 

27

Mr. WALKER. I think your point is that it has a macroeconomic 

impact, it has a broader impact, which is true. 

There is one bit of good news here, but let’s not get too enthusiastic. The one little bit of good news is that we are a lot more open 

and transparent about our challenges in this regard, and in fact, 

our challenges in this regard are not nearly as great as some other 

industrialized nations. That is the good news. 

The bad news is that some developing countries are ahead of us. 

Some developed countries are also ahead of us in trying to deal 

with this long-range problem. 

Mr. BENTSEN. Thank you. 

Chairman NUSSLE. Mr. Gutknecht. 

Mr. GUTKNECHT. Thank you, Mr. Chairman. 

Mr. Walker, thank you for coming up. I am reminded, listening 

to your testimony, of something that Winston Churchill said almost 

70 years ago. He said, Americans always do the right thing, once 

we have exhausted every other possibility. 

I am afraid what I see happening is, we are sort of going down 

that path again. I have asked to put this pie chart up that you 

started your remarks with. This is a troubling pie chart, at least 

it is to me, when you see how much of our total Federal budget has 

gone basically to entitlement programs. What troubles me is, with 

all due respect to friends on the Ways and Means Committee last 

night, they passed a bill claiming to spend roughly $350 billion 

over the next 10 years on a new entitlement called prescription 

drugs. 

Your colleague—or your partner in crime, sitting beside you 

there—Mr. Crippen and his people, recently did a study. They estimate that seniors alone will spend over $1.8 trillion on prescription 

drugs over the next 10 years. My concern is, we are doing almost 

nothing on what I think is the big issue. That is, affordability. 

We are allowing the pharmaceutical industries to literally take 

all of their profit, all of their research dollars, all of their marketing dollars from the pockets of American consumers. We are 

doing very little in terms of opening up free markets to allow 

Americans access to drugs at world prices which are dramatically 

lower than here in the United States. But that is for another day. 

But my issue is, when you look at these charts—first question: 

do you estimate that the net interest—and there is some good 

news/bad news in these charts—the net interest went from 6 percent to 11 percent. We are now down to 9 percent, roughly. 

As you go forward, what is your estimate? Will that percentage 

go up, stay the same, or will it come down? 

Mr. WALKER. If you go to the next chart, you will see it. 

Mr. GUTKNECHT. OK. 

Mr. WALKER. The next one, interest is the dark blue. And so you 

can see as a percentage of the economy rather than as a percentage 

of the budget—it goes down and then starts to escalate after about 

2015. It rapidly escalates after that. 

Part of that has to do with the fact that you turn negative cash 

flow in both Social Security and Medicare. And if you don’t end up 

doing something on the revenue side and/or the benefit side, then 

it assumes you are going to increase debt held by the public, which 

means that your interest expense is going to start going back up. 

28

So that is how it looks over those periods of time. 

Mr. GUTKNECHT. That is my concern, that as we go forward if we 

open up more and more entitlements under Medicare, which we are 

not adequately funding today—when I talk to my rural health care 

providers, they are not happy; in fact, more than a hundred providers in Colorado have now said that they won’t take any new 

Medicare recipients. 

So we have got a whole lot of things that are converging. I do 

want to close though and come back. 

You mentioned in your testimony just recently, in response to the 

last question, there are other countries that are moving forward. 

Germany is one of them, under the leadership of what we would 

describe as a liberal government in Germany. They did begin the 

process of creating a personalized retirement system; and I just 

want to share with you and my colleagues what they have done. 

Originally, Germans were allowed to put up to 1 percent of their 

pay into these retirement accounts. That will rise to 4 percent by 

2008. And the amazing news—this is according to the German 

press—is that their original estimates—they are going to dramatically surpass their original estimates in terms of how much these 

accounts are going to be worth. 

Deutsch Bank is now estimating, by 2009, the new capital that 

will be included in these new accounts could reach 160 billion 

Euros, which is roughly US$138 billion by 2009. So the point is 

that there are other governments, clearly left-of-center governments that are moving forward with reform of their Social Security 

systems. And it may well be that there is hope that we in the 

United States will ultimately do the right thing. 

Mr. WALKER. One of the things that we have done at GAO is 

issued reports on what some other countries have done in this 

area. I believe it is important for us to do that, not just in the area 

of Social Security, but health care, the environment and a number 

of other areas, because we live largely in a borderless world where 

we face many shared challenges. 

So, therefore, it is important to try to learn from others. What 

did they do? What worked? What didn’t work? But we obviously 

have to apply that to our system and our culture and our values 

and, hopefully, we will do that in time. 

Chairman NUSSLE. And just to remind members that we had an 

excellent hearing and summit of budget chairmen just this last 

week, the OECD, that discussed this very topic. And another example of—maybe not the exact model Mr. Gutknecht approved, but as 

a political way to handle it, Sweden may be a good example. They 

held hands together in a total partisan way, in a total political 

way, and decided to make the decision. 

So there are some models out there that are worth taking a look 

at. We tried to highlight that at the committee. 

Ms. Hooley. 

Ms. HOOLEY. Thank you. Would you do just a little explaining to 

me about—and I apologize if this question has been asked. But as 

you look at privatization for Social Security, what kind of cuts are 

we going to have to make to benefits to make that happen? And 

when do we ever get a return on that? And do individuals have 

29

their own accounts, or is that—or are those accounts pooled where 

they have some choices within that pooling? 

Mr. WALKER. Well, first, one would have to have a specific proposal, because obviously there are a number of different proposals 

out there for different individual accounts. In my personal opinion, 

having an individual account is not equivalent to privatizing Social 

Security. 

But the fact of matter is, to the extent that Congress would decide, as a part of more comprehensive Social Security reform, that 

it wanted to have individual accounts as an element, first it would 

have to decide, is it going to be voluntary? Is it going to be mandatory? 

Is it going to be an add-on to the defined benefit? Is it going to 

be a substitute for a portion of the defined benefit? If so, are you 

going to make other changes? 

Are you going to do something with the retirement age? Are you 

going to do something with the indexing, something with the bend 

points in calculation of the replacement ratios? 

And so there are a lot of questions that would have to be answered in order to be able to—for me to give any specific numbers 

or percentages in that regard. 

We have analyzed several past Social Security reform proposals, 

and we are in the process of analyzing the three Social Security reform proposals that the Commission came out with for another 

committee, which we expect will be available late in the year. 

Ms. HOOLEY. Do you have these? 

Mr. WALKER. No. We are running them through an economic 

model. 

We have an economic model we use for Social Security reform. 

We will have the results later this year, but we don’t have the 

numbers yet. But that would be helpful to you. 

Ms. HOOLEY. Since we spent all this surplus, what would be your 

opinion about the best things to do with Social Security to make 

sure that it is there in the future, and that we do not lower the 

benefits? 

Mr. WALKER. Well, I think there are several reasons we don’t 

have the surplus now. 

Ms. HOOLEY. I know, but let’s just talk about, we don’t have it. 

So what would be your solution to making sure that Social Security 

is there in the future, and that we do not lower the benefits? 

Mr. WALKER. I think part of it is to create additional fiscal discipline over the budget and the spending process going forward. 

Being able to look at what the longer-term implications of current 

or proposed actions as to whether or not they are making our situation better or worse in the long term; and then obviously trying to 

do what can be done to fuel economic growth. 

And to the extent that there are surpluses generated, to use that 

in a way that starts reducing debt—in order to provide additional 

fiscal flexibility going forward. 

I have testified on behalf of GAO before as to the range of options that Congress has to try to help deal with the long-range fiscal challenge and the different levels of risk; and I would be happy 

to provide that to you, which I think would be helpful. 

Ms. HOOLEY. Do you think it should be privatized? 

30

Mr. WALKER. I don’t know of anybody who is talking about, 

quote, unquote, ‘‘privatizing the Social Security system’’—I mean, 

a situation where it would not be a government program and where 

there wouldn’t be any government guarantees, where there 

wouldn’t be any government involvement. 

I do know a lot of people who are talking about the possibility 

of using individual accounts as an element of more comprehensive 

Social Security reform. I think that is something that is worth serious consideration. But I think it has got to be a piece of an overall 

package. 

I wouldn’t want to make a hypothetical recommendation. I don’t 

think it is appropriate for me to do. 

Ms. HOOLEY. Thank you. 

Chairman NUSSLE. Thank you. 

Mr. Toomey. 

Mr. TOOMEY. Thank you, Mr. Chairman. I would like to follow 

up on this line of questioning that my colleague just began, because 

specifically, I think it is important that we address head on this 

question of whether personal accounts somehow necessitate benefit 

cuts. 

If you stop and think about where we are today, the current system in its current form, it seems to me if we don’t do anything to 

reform this system, if we leave it exactly as it is, then we are assured of benefit cuts, either in the form of absolute cuts, because 

the cash flow isn’t there to pay the promised benefits or, at a minimum, dramatic cuts in the rate of return on the money that people 

put into the system, because it would require a dramatic tax increase in order to fund the benefits as currently promised. 

Is that a fair way to characterize the current system? 

Mr. WALKER. I think—to be balanced, I would have to say that 

if you don’t do anything, it assumes you are going to have to significantly increase taxes or cut benefits. 

Mr. TOOMEY. Which drives down returns. 

Mr. WALKER. Or significantly cut benefits, or some combination. 

Mr. TOOMEY. So as I see it, the current season, unreformed, if 

we pretend that we don’t have a problem here and we leave it 

unaddressed, that leads to dramatic cuts, at a minimum, in the return to workers or in the absolute benefits. 

I would also like to touch on this issue of whether there is something somehow inevitable about a major societal problem in any 

kind of retirement plan, and I would appreciate your comment on 

this. It seems to me that it, rather, depends very much on the 

structure of the plan. 

And we have a plan in which we have an unfunded defined benefit system, and we are relying on an ever-growing work force to 

fund it, which we know we are not going to have in relation to the 

number of retirees; and that an alternative system in which you 

have a prefunded, essentially—at least if a component of this were 

to be prefunded—invested in the economy, able to generate market 

rates of return, and then that that would provide some component. 

If you move in that direction, you can indeed solve the solvency 

problem permanently. Is that your view, that this can done? 

Mr. WALKER. Not by itself. 

31

I think what you have to do is, if you go to an individual account 

structure, then you have to decide how you are going to handle the 

transition obligation. You are going to have to solve a number of 

administrative issues. Then you are going to have to decide whether or not you are going to allocate additional general revenues, or 

whether or not you are going to change the benefit structure as a 

way to close the gap. 

You can help close the gap, you can help deal with the rate-ofreturn issue with a funded system. That doesn’t necessarily solve 

your problem. 

Mr. TOOMEY. I didn’t mean to suggest that there wasn’t a significant transitional cost. There is. 

My point is that it can be done in a fashion that is for a finite 

period of time with a finite amount of money. It is large, but it is 

finite and then it leads you to a system in which you have a fundamentally different structure, where you have a prefunded system, where you can assure generous benefit system. You have just 

got to get to that structure. 

Mr. WALKER. It is possible to reform Social Security with individual accounts coupled with other reform changes and achieve 

sustainable solvency and other objectives over time. 

Mr. TOOMEY. Thanks. I would like to go back to a chart briefly, 

then—I am going to run out of time soon—which is the chart that 

you have on page 15. If it is possible for us to bring that back up, 

I would appreciate that. That is the bar chart, I am thinking of. 

Mr. WALKER. The one that deals with the percentage of the economy? 

Mr. TOOMEY. That is correct. That is the one. 

Let me ask a question. First of all, my assumption is that you 

are referring—those numbers refer to Federal Government spending. 

Mr. WALKER. That is correct. 

Mr. TOOMEY. There is no representation here, no attempt to represent State and local government spending. 

Mr. WALKER. Neither spending nor taxation. 

Mr. TOOMEY. Right. Now, I might be off on this, but in very 

rough terms, the number that comes to my mind for the total 

amount of State and local spending in our country as a percentage 

of GDP is something around 20 percent; is that around the right 

ball park? 

Mr. WALKER. My director of budget says closer to 10. 

Mr. TOOMEY. For the combined, all State and local? 

Mr. WALKER. Ten to 15 percent. 

Mr. TOOMEY. Education systems, 10 to 15. If we took 10 to 15, 

if we assume that we maintain that level and we look at the number for 2050, what are we up to? About 35, maybe more? 

Mr. WALKER. About 35 percent at the Federal level alone. 

Mr. TOOMEY. We added the State and local component, we would 

probably be—in excess of 50 percent of our GDP would be in the 

hands of government and outside of the private sector. 

Do you think that that is a formula—under that scenario, we 

could probably have robust economic growth? 

Mr. WALKER. No. 

Mr. TOOMEY. Thank you. 

32

*NOTE.—This report will not be available until 2003. 

Mr. HASTINGS [presiding]. Mr. Price. 

Mr. PRICE. Thank you, Mr. Chairman. Mr. Walker, welcome. I 

apologize for my late arrival and hope that I won’t be redundant 

in the questions that I pose, but I would like to pick up on the 

question of privatization. 

Assuming for the purposes of discussion the three alternative privatization schemes put forward by the President’s Commission, can 

you give some fix on the problems that privatization might pose for 

the cash-flow of Social Security revenues, the dates at which the 

cash-flow reverses, and the dates at which we really do have a solvency problem? 

The dates that we often hear discussed for the cash-flow reversal 

are 2017, when the receipts coming in no longer exceed the benefits 

going out, and then around 2040 or 2041, when the trust fund is 

depleted. What effect would the privatization schemes that the 

Commission put forward have on those dates, those dates when 

real trouble develops? 

Mr. WALKER. We are in the process of conducting a comprehensive analysis of those proposals based upon the criteria that we recommended for Congress to consider, including coming up with 

those dates that you are talking about, those key dates, as well as 

whether or not they would achieve sustainable solvency over time. 

That is not going to be released for several more months, and so 

I would be happy to make that available to you when we have it, 

but we don’t have it yet.* 

Mr. PRICE. Well, there may be some differences among the three 

plans. The date that has been widely discussed is 2008. That is 

when the cash-flow problems would develop almost 10 years earlier 

under a privatization scheme that would basically skim off 2 percentage points from the payroll tax. Does that seem like a plausible 

assumption? 

Mr. WALKER. It clearly would accelerate—and only two of the 

three plans would restore solvency over time. I mean, we know 

that based upon what we have seen right now, the dates will 

change. We know only two of the three plans would restore solvency over time, and we also know that two of the three plans also 

proposed changes in the benefit structure whereas the other plan 

is nothing more than really an add-on feature to the existing program. 

Mr. PRICE. I think the goal of giving people incentives to save for 

their retirement is a widely shared goal. I don’t think there is any 

question our country needs to do that and the Congress needs to 

do that. The question is should that come out of Social Security or 

should we leave the basic structure of Social Security intact and 

then provide additional incentives for that kind of saving? 

Nobody should assume that Social Security in and of itself is an 

adequate retirement plan. It was never designed that way, although many people today are solely dependent on Social Security 

for retirement income. We clearly need to shore up those other two 

legs of the proverbial three-legged stool, that is private pension 

plans and also private savings. 

33

Do you have any observations on the financial implications of 

those two tracks above and beyond Social Security as opposed to 

skimming off 2 percentage points from the payroll tax, which would 

be a major change in Social Security? 

Mr. WALKER. Let me give you some general remarks on that. 

First, you are correct in noting that Social Security is only one leg 

of the so-called three-legged stool. You are also correct in noting 

that we need to increase personal savings because our personal 

savings rate is abysmally low, especially as compared to other developed countries. I would respectfully suggest that we are headed 

to a future where there is going to be a four-legged stool for retirement income security. And, that fourth leg is earnings from parttime employment. If people don’t end up doing more from the 

standpoint of trying to increase their personal savings and given 

the fact that we have been stuck at about a 50 percent coverage 

rate under the private pension system and I think unrealistic—I 

mean I think it is unrealistic to expect you are going to get much 

higher than that under a voluntary system, and I am not saying 

it shouldn’t be voluntary. Why? Because of health care costs. The 

No. 1 benefit of choice on behalf of employees is health care. No. 

2 is health care, No. 3 is health care. To the extent that employers 

have to end up spending more money on health care, they have less 

money for pensions and individuals have less money for savings. 

So one of the things we have to do here is to recognize that this 

Social Security problem is a subset of a much bigger problem, and 

the biggest problem is probably Medicare, Medicaid and other 

health care issues. 

Mr. PRICE. My time has expired. Thank you. 

Mr. HASTINGS. Mr. Walker, thank you for being here and, Mr. 

Spratt, thank you for encouraging this hearing to happen. I just 

want to ask or make an observation and ask you to elaborate on 

a statement that you made earlier. But before I do that I have to 

say that I am a bit optimistic that something can be done because 

there was a time not too ago that I can recall where people were 

to even mention Social Security, that you could almost be assured 

that if you are in a political season there could be ads, leaflets or 

something saying that if an individual talked about reforming Social Security that that individual was throwing old people out on 

the streets. We have come a long, long way from that. 

In fact, the 2000 election, this was part of the debate and there 

were potential solutions out there. So I tend to be optimistic. I am 

not foolish enough to think that this won’t be a political issue in 

the future. But your observation with your experience in the past 

having town hall meetings where the American people understand 

I think is very encouraging. I, too, have had the experience that 

you have suggested when I have had my town hall meetings, and 

I will say in every one of my town hall meetings the issue of Social 

Security comes up. And my response has been, well, if we keep 

three principles in mind as we start this process of reforming, number one, those that are in the system or very near the system you 

don’t change the benefits. My parents, for example, are in their late 

80s. You simply can’t change the rules. But for the boomers coming 

in you have to figure out a time period when you say you are not 

a boomer, but you give them flexibility. 

34

That is the term I use with Social Security, and then we can 

have some resolution to this. But the maximum of flexibility has 

to be the younger generation. My children are in their early 30s 

and 20s and they know this is not a good deal over a period of 

time. They instinctively know that. I think you alluded to that observation because where we are heading unless we try to reform 

this system is we are going to have a political debate of pitting 

grandparent against grandchild, and the country simply ought not 

to get into that debate. 

What I would like you to do is elaborate more because you said 

this is really an easy solution compared to the others when you responded to Mr. Price of the Medicare challenges that we have. 

Would you elaborate more on how you say this is easy and what 

we should take from that from your perspective in order to try to 

resolve this? 

Mr. WALKER. Part of it is building on what you just said, and 

that is in my opinion, first, that Social Security is a defined benefit 

promise. It is not like health care where it is a defined level of coverage and where you really don’t know what your costs are going 

to be. So you have a lot more of an ability to estimate what the 

current cost of this program is likely to be than you do for Medicare and some other health care programs. So that is a good start. 

Secondly, if you assume that for people who are currently retired 

and nearing retirement, you are not going to change the promise. 

You are going to deliver on the promise. You are going to give them 

what they expect. Then you take away the fear factor that a lot of 

people have about Social Security reform. If you then say baby 

boomers like myself who are discounting Social Security—because 

they know there is a difference between promised benefits and 

funded benefits—if you look at my kids, you know Xers and Y generation who know it; who are discounting the program even more, 

that means you have an opportunity to reform the program with 

or without individual accounts, although younger people are more 

accustomed to individual accounts and that is something they can 

identify with, and you could potentially use the power of 

compounding over time to help deal with the problem. If you end 

up reforming the program so you make relatively more dramatic 

reforms and provide additional choices potentially for younger people, then you have a way to reform the program which provides for 

sustainable solvency over time and allows people to do what they 

need to do to adjust for any changes in the program that otherwise 

are going to occur. That, to me, is exceeding the expectations of all 

generations of Americans. On the other hand, Medicare is the opposite, but that is the subject for a different hearing. 

Mr. HASTINGS. Would you say as evidence of your observation of 

how the boomers and the Gen X and Yers would respond to this 

is the evidence of more people that have investments, whether it 

is 401(k)s or IRAs or you name it, than what we have seen in the 

past, would that be evidence to support your position? 

Mr. WALKER. Well, I think I try to base mine on facts, and if you 

just look at the facts from the standpoint of what percent are private employers have pension plans for their employees and what 

is the nature of those plans, on a relative basis there is a larger 

portion of defined contribution plans today than there used to be 

35

20 and 30 years ago. In addition, there has been an increase in the 

percentage of those plans that have 401(k) type salary reduction 

features where the individuals have an opportunity to be able to 

select among several different investment choices for the future. 

One example of that is the Federal Thrift Savings Plan. The Federal Thrift Savings Plan is the Federal Government’s 401(k) plan. 

I wouldn’t call that as being privatized per se. It does have individual accounts. It does have active investment, but the government obviously is running it and it has a government oversight 

board, although the assets are largely managed by private sector 

investment managers. 

So those would be a few of my thoughts on the subject. 

Mr. HASTINGS. Thank you. Mr. Moran. 

Mr. MORAN. Thank you, Mr. Chairman. We have gotten so high 

tech and these new chairs now—has it been asked of the witnesses—I am sorry, we were in an appropriations markup earlier 

this morning—the relative cost of these proposals, because I would 

like to measure the effect of the tax cuts versus having used part 

of that tax cut for financing the general revenue requirements for 

a reasonable privatization proposal. 

Mr. WALKER. Mr. Moran, we are in the process of analyzing the 

three proposals that came out of the President’s Commission on a 

variety of bases, including some of the factors that you talk about, 

but that has not been completed and won’t be completed for several 

months. But when it is I will be happy to make it available to you. 

Mr. MORAN. I appreciate that, Mr. Walker. I appreciate everything you do and Dan and all of the witnesses we are going to be 

hearing from. The problem is that—and at least it is my concern 

about these proposals, all of which I think have some merit, some 

more than others—is that the option of doing this was precluded 

by the premature actions that we have taken by reducing Federal 

revenue flow by $2 trillion for the next 10 years and by 4 to $7 trillion for the subsequent 10 years. It seems to me we are going to 

need something in the range of a trillion dollars to pay for the creation of individual savings accounts to complement Social Security 

and eventually transition to those accounts, those complementary 

accounts. But to do so you can’t reduce benefits, so you have to 

have an infusion of general revenue money. And by the rate cuts 

which take effect—start to take effect in a few years and hit us 

most strikingly just as the baby boom generation joins the Social 

Security rolls, that was the money that we had the option of putting into a privatization proposal that could have worked. 

Politically, I don’t think you can do any of these proposals without that infusion of general revenue money, and that is my problem with these proposals. By the actions that the Congress took 

over the last 2 years, I think we have precluded that option, particularly the actions that we have just taken the last couple of 

weeks to make permanent all of these rate cuts in the estate tax 

cuts. 

So I would like to hear your response to that. 

Mr. WALKER. Well, as you know, Mr. Moran, I am not going to 

get into the business of whether or not tax cuts are a good or bad 

idea. 

36

Mr. MORAN. Well, in the context of the money we need to make 

this work. 

Mr. WALKER. I can provide some information. If you look at 

where we are today versus where we were a year ago there are at 

least three contributing factors. One, the economy is weaker than 

it was projected to be. No. 2, revenues are lower in part due to the 

economy and in part due to tax changes and stock market declining. Finally, expenditures are greater partly in response to the 

tragic events of September 11. So if you look at the combined effect 

of all of those, what was projected which was going to be a significant excess of funds that would be available to fund a transition 

obligation, to pay down debt held by the public or some combination thereof, is largely gone. 

But that still doesn’t mean that we shouldn’t be engaging in a 

fundamental debate about how this system should be reformed and 

whether or not from an economic standpoint, not from a budget 

scoring standpoint, but from an economic standpoint, using discounted present value analyses and all, what makes the most sense 

for how you end up reforming this program over time. 

One of the real concerns that I have, Mr. Moran, is the way that 

our budget rules work is they are largely cash-flow based and they 

are based on a 10-year horizon. And so I think some of the things 

we need to be thinking about are, how can we bring additional 

metrics to bear. How can we bring longer range horizons to bear 

and how can we consider other options that could cause you to 

reach different solutions as to what the right thing to do is? You 

need another set of metrics to be able to consider the long range 

implications of different alternative actions rather than just the implications over the next 10 years. 

Mr. MORAN. I don’t want to be argumentative with you and I 

don’t have any problems with you or your judgment nor with Mr. 

Crippen’s, and I know we are going to hear from Mr. Steuerle and 

I am anxious to hear from him, representing the Urban Institute, 

and he was a member of the Commission. But I am going to ask 

the same question of everyone. But when you say even longer term, 

I don’t know how far out you are going unless it is 2030 or something like that. But even at that with these lower revenue flows, 

given the reduction of the work force, not just in quantity, but in 

quality, a much higher proportion of our work force is non-native 

born, and nothing wrong with being nonnative born, but less likely 

to have the benefits of a quality education and as a result probably 

less capable of the value-added productivity that gives us the 

growth. 

So I am afraid we have set in motion a situation where we are 

always going to be too strapped to achieve the kind of transition 

that I agree in the long run makes sense. I appreciate your response and I know that you don’t want to get into the tax cut itself, 

but I do think that has the most relevance to the option the Congress has before it. 

But I won’t belabor the point and I thank you, Mr. Chairman. 

Mr. HASTINGS. Thank you. 

Mr. MORAN. Did Mr. Walker want to respond? 

Mr. WALKER. I would commend to you, Mr. Moran, a couple of 

the charts that are in the testimony and that we showed, one of 

37

which is how the composition of spending has changed as well as 

what our simulation shows for the long range budget outlook, 

which underscores some of the concerns you have. But I would also 

come back and say that shows that we need to start dealing with 

some of these problems sooner than later because the longer we 

wait the tougher it is going to be and the more dramatic the 

changes are going to have to be. 

And your comment about the workforce is very relevant. We have 

now moved into a knowledge-based economy. With a knowledgebased economy it is people and brain power that make the difference in connection with ours competitive advantage. So things 

like education and things like other skills and knowledge are going 

to be key to help fuel economic growth, enhance productivity and 

help us deal with these longer range problems. 

Mr. MORAN. There was a scientific study that came out confirms 

that it was directed primarily at third world countries, but they 

said it applies equally to the United States, that investments in 

education and health care create economic growth in themselves to 

a greater extent than the reverse economic growth creating greater 

investments in education and health care. They find that the 

former is an even stronger impetus than the latter. And I am concerned that we are not going to have much money to invest in nondefense discretionary domestic programs. 

But with that, thank you Mr. Walker, and thank you Mr. Chairman. 

Mr. HASTINGS. Mr. Bentsen wanted to have a follow-up question. 

But I wanted to ask one very direct question in line of the question 

with the gentleman from Virginia, and that is this: Did the tax relief plan that we passed have a direct relationship—negative or 

positive—on the Social Security trust fund? 

Mr. WALKER. On the Social Security trust fund itself, no, because 

the Social Security trust fund obviously just deals primarily with 

payroll tax revenue. 

Mr. HASTINGS. Has the tax relief plan that we passed had a positive or negative effect on any benefits that anybody is receiving? 

Mr. WALKER. Not at the present time, no. 

Mr. HASTINGS. Thank you. Mr. Bentsen. 

Mr. BENTSEN. Thank you, Mr. Chairman. Mr. Toomey in his line 

of questioning and your response talked about, if we go to privatization, individual account, prefunded program, although I don’t 

know that prefunded is the right term, but we would—he alluded 

that in effect future retirees would be held harmless or perhaps 

even better off. You responded ‘‘well, of course you have transition 

costs that have to be accounted for and you have other issues that 

have to be accounted for.’’ And Mr. Toomey—and I don’t want to 

characterize his comments, particularly with him not being here, 

he said ‘‘fine, well, let us lay off the transition costs.’’ Assume those 

are absorbed over a period of time. And if you make that assumption, I think you still said, and what I would like you to do is clarify for us, that there are other costs associated with this. One are 

the administrative costs that you talked about, but are you also 

stating that—and this is a perception that is out there that needs 

to be clarified, the more—that whatever Congress does with Social 

Security needs to be addressed because there is an argument being 

38

made that well, if you stick with the current defined benefit system 

through the trust fund, you are either going to have to raise payroll 

taxes, cut benefits, increase debt substantially or a combination 

thereof. But if you go to a privatized account you can make a onefor-one transfer and in fact you may well be better off. 

Isn’t it true you are just as likely to be worse off than better off? 

And we get into discussions about return on investment. And if you 

look at Treasury return versus an S&P index return, the S&P 

index is always better, which of course is not true, because for the 

last 2 years the S&P has been below the Treasury return. So my 

question is, what are the other—are you stating that you would 

have to go through a wholesale benefit plan change, which very 

likely could result in no longer a guaranteed minimum benefit or 

a benefit reduction of some sort? 

Mr. WALKER. It obviously depends on the assumptions. Let me 

give you a specific example. As you know, the President’s Commission’s proposals that we are analyzing involve the creation of an individual account element under the current system. But in order 

to achieve sustainable solvency over time, they propose certain 

other changes to the benefit structure of the current defined benefit 

system. One of the proposals proposes to index benefits based upon 

cost of living rather than wages, which is a change. The other proposal talks about indexing benefits based upon longevity and 

makes certain other adjustments. This comes back to the point that 

I made before. When you are comparing Social Security reform proposals, I think to be fair you have to look at how does that reform 

proposal compare against not just promised benefits, but also funded benefits, because a lot of the promised benefits have not been 

funded. So what is going to happen when you have run out of 

money? 

Mr. BENTSEN. With the chairman’s indulgence, one, the change 

in the indexing would apply not to just Social Security benefits but 

benefits under the new privatized program? 

Mr. WALKER. Defined benefit portion. 

Mr. BENTSEN. Of the non-cut, 10 percent. 

Mr. WALKER. Right. 

Mr. BENTSEN. But there would be a reduction in using a new indexing method? 

Mr. WALKER. In other words, they would receive less money 

under the defined benefit program than otherwise they would have 

as is currently promised. But not all of those promises are funded, 

but in addition to that, they would receive an individual account 

that would earn a rate of return. 

Mr. BENTSEN. I think it is very important and I am glad you are 

making this—the other point is whether we should look at this in 

comparison to funded benefits, not in relation to promised benefits 

because funded benefits are far below—it is an unfunded liability, 

because a lot of times in the debate over this issue advocates of individual accounts and privatization make the assumption or the argument that we are replacing promised benefits with a new promise that will be fulfilled, and that is not necessarily accurate. I 

mean the magic of compounding interest is there, but it is not always there. 

39

Mr. WALKER. I think to be fair and balanced about it, you have 

to look at the proposal against the criteria that we established and 

you have to consider both funded benefits as well as promised benefits. If you don’t do that, you are effectively assuming either a tax 

increase or a general revenue infusion or a benefit cut that may or 

may not happen. Now under the current system under current law, 

you can only pay Social Security benefits to the extent that you 

have got assets in the trust fund. So therefore, if you waited until 

2041 when all the bonds were gone, unless there was a change in 

the law that would allow for additional revenue infusion, general 

revenues or whatever else, you couldn’t pay all the benefits. 

Mr. BENTSEN. What you are saying is whether you keep the current system the way it is or you change it or you privatize it or 

whatever you do, these changes are coming. So anyone who is making the assumption that there is a magic fix out there that can give 

you what you have today and even more in the future does not 

exist except for a huge cost on the economy? 

Mr. WALKER. I don’t think many Americans are assuming that 

there aren’t going to be changes that won’t affect their future benefits. I am talking about baby boomers and generation Xers. I don’t 

know very many boomers or generation Xers that don’t think there 

is going to be a significant change to this program that will affect 

them. What is important is that people that are currently retired 

and are nearing retirement, I would argue it wouldn’t be fair to 

change the deal for them because they don’t have time to make adjustments. Obviously you get elected and I don’t, so you have to 

make these decisions, but there are obviously political problems 

with changing promises for people who don’t have time to make adjustments. 

Mr. BENTSEN. Thank you. Thank you, Mr. Chairman. 

Mr. HASTINGS. Mr. Walker, thank you very much for your testimony. If it wasn’t already done, without objection, your full report 

will appear in the record. And I appreciate very much your candor 

and your work on this and we will dismiss you. 

Mr. WALKER. Thank you very much. 

Mr. HASTINGS. Next we will hear from three experts who have 

a great deal of knowledge of the annual report of the Social Security trustees. First will be Mr. Gene Steuerle, who is a Senior Fellow at the Urban Institute; Maya MacGuineas, Senior Fellow at 

the New America Foundation; and third and certainly not least, a 

former colleague of ours, Barbara Kennelly, who is currently the 

President of the National Committee to Preserve Social Security 

and Medicare. 

I want to thank all of you for appearing here today, and why 

don’t we just go—without objection, your full statements will appear in the record. Let me recognize first Mr. Steuerle. 

40

STATEMENTS OF C. EUGENE STEUERLE, SENIOR FELLOW, THE 

URBAN INSTITUTE; MAYA C. MACGUINEAS, SENIOR FELLOW, 

NEW AMERICA FOUNDATION; AND THE HON. BARBARA B. 

KENNELLY, PRESIDENT, NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY AND MEDICARE 

STATEMENT OF C. EUGENE STEUERLE 

Mr. STEUERLE. Thank you, Mr. Chairman and members of the 

committee. It is indeed a privilege to testify before you today on the 

trustees’ report on Social Security. And let me mention also that 

I am an admirer of both of my colleagues, one of whom I used to 

testify before, so it is nice to testify with her. My testimony will 

assess several points which I will only summarize here. 

The integrity of the process leading to the trustees’ report is indeed a national asset. There is a question that arises as to why we 

make projections for 75 years, and the simple answer is we make 

projections for that long because past Congresses and Presidents 

have essentially built internal growth into these programs, and one 

simply has to account for what one is promising. 

Now when it comes to Social Security, another question that 

arises is what are the key dates we want to emphasize. I would 

argue that the key dates are today and 2008, when the baby 

boomers start retiring. The main economic issue, as opposed to an 

accounting issue, is that programs for the elderly and near elderly 

are absorbing ever increasing portions of the national income and 

of the Federal budget, and when they absorb more of these resources, that burden has to be paid for. 

The fundamental new long-term problem facing Social Security is 

a rapidly declining number of workers relative to beneficiaries, and 

it is a mistake to believe that this labor market problem is going 

to be easily solved by any capital market solution, whether we are 

talking about trust funds or individual accounts. Scheduled declines in the Nation’s employment rate affect the affordability of 

Social Security not simply through Social Security taxes and benefits, which is what the trust funds measure, but also because the 

declining number of workers reduces income taxes, it reduces national output, and it reduces the private assets and income of the 

elderly as well. 

Now there are several other items that are in my report that I 

am only going to very briefly summarize and I believe need to be 

highlighted. One is that Social Security continues to provide smaller and smaller shares of total benefits to those people who are most 

needy; that is, those people who are most elderly. The tables showing annual benefit levels need to take into account lifetime, not just 

annual benefits, which for Social Security and Medicare are now 

approaching for younger couples about $1 million in current dollars 

in terms of their value. The disability insurance program is often 

forgotten, and yet it is showing increasing prevalence of disability 

insurance receipts even while we have improved health care. And 

this program also has widely disparate payments according to geographic location. Social Security and Medicare already depend a 

good deal on general revenue financing. 

My final additional point is the uncertainty of projections, which 

we often debate but pay little attention to, is something that is 

41

amenable to reform, for instance, by having years of benefit receipts simply indexed for how long people are living. 

Having given that summary, let me go quickly through the main 

points. The public policy process behind the issuance of the trustees’ report is one of the most balanced and non-partisan in this Nation. This achievement is made possible by the involvement of a variety of institutions and individuals. I was fortunate enough to participate in two technical panels and to Chair one of them. 

Let me also mention the national asset that is involved in the integrity of the Office of the Actuary of the Social Security Administration. Now there are some who question why this process leads 

to projections for 75 years, given that many factors are hard to estimate for so long a period of time. The most obvious answer is that 

we project for so long because past Congresses and Presidents have 

made promises for so long, indeed for centuries into the future. As 

members of this Budget Committee, you are well aware that this 

can be contrasted with what we do on the discretionary side of the 

budget, where promises are generally made for 1 year only. Making 

promises that can only be met uncertainly in the far distant future 

requires projections that have a great deal of uncertainty. 

Now from an economic perspective the key Social Security issue 

facing the Nation is what share of the Nation’s economic resources 

are demanded by programs for the elderly. If that share goes up, 

then mathematically some other share must go down. Someone 

must pay. In terms of the elderly share it has been going up for 

some time and it is projected to continue for a considerable period 

of time. That is shown in figure 1 in my testimony. Of course the 

rate of increase for the elderly share begins to accelerate once the 

baby boomers begin to retire in 2008. Many of the dates in the 

trustees’ report are mainly key points, markers, or signposts along 

that path. 

Now built-in growth in particular programs act as a serious impediment to shifting resources to meet other new needs and priorities, whether that is education or reinvigoration of our foreign policy in defense of freedom. But I also want to note that it also deters 

us from fixing up the programs themselves, such as to additional 

aid those who have significant impairments in old age, to provide 

a drug benefit—which you have already discussed—or to remove 

some of the very strong discrimination in Social Security against 

single working heads of households. I discuss this discrimination in 

my testimony, but I will not go into the details here. 

Even the budget debates in Congress this year prove how the 

pressure of these growing entitlement programs affect discretionary 

choices. These issues are not postponed until some year like 2017. 

Now several times I have mentioned the labor market problem. 

Social Security faces a significant labor market problem that is hidden in trust fund accounting. Indeed, too much emphasis on the 

trust funds implies that there is some sort of capital market solution to this issue. Simply put, it is the scheduled decline in the 

number of workers to retirees that forms the core of the new dilemma facing Social Security. The typical worker now fully retires 

in late middle age, at least if we define old age and middle age by 

life expectancy. When he does so, our current Federal programs encourage him to become dependent upon other taxpayers because we 

42

have a pay-as-you-go system. His drop in output reduces the 

amount of transfers that is making to support government programs, but it is not just Social Security that he no longer finances, 

it is also other programs that he used to finance through Federal 

income and other State and local taxes. Meanwhile his own aftertax income falls, the rate of growth of GDP falls, and it is this multiple hit that affects the Social Security and Medicare affordability. 

The United States was lucky in the post-World War II period. 

Despite substantial decreases in the male labor force participation 

as males acquired more and more years of retirement, females entered the labor force in increasing numbers. So if you look at the 

numbers on the employment rate that is a later graph in my testimony, you will see that the adult employment rate actually increased over this post-World War II period and is scheduled to decline quite rapidly. In fact, the rate of decline, assuming there is 

no adjustment in this labor market behavior, is so strong and so 

long that it is equivalent to an increase in the unemployment rate 

of just short of one-half of 1 percent of the labor force every year 

for almost 20 years running. And we have not had that type of 

labor market hit since the time of the Great Depression. 

Now, as I mentioned, I have several other issues in my report 

but there is no time to discuss them here in depth. So I would just 

give one or two sentences on each one. 

First, the program is now designed to provide continually higher 

and higher levels of benefits to those further and further from likely death. I don’t believe that is necessarily a good way to have a 

program adjust over time. 

Second, the expected value of lifetime benefits reveals much more 

about the program and much more about what needs to be reformed than annual benefits. As I mentioned, these lifetime benefits have climbed from about $290,000 for an average income couple in 1970 to close to $540,000 today and to nearly a million dollars for a couple retiring in 2030. 

Third, prevalence rates of disability insurance coverage are actually expected to grow in a population that is growing more healthy 

over time. Meanwhile, there are vast geographical differences in 

the incidence and prevalence of DI receipts, and these issues need 

attention as well. 

Fourth, Social Security and Medicare depend already to a significant extent on general revenues, and these need to be highlighted, 

I believe, better in the trustees’ reports. 

And finally, the trustees’ reports do not make clear that the uncertainty of projections is itself an item that can be reformed 

through the process itself. The most obvious example is that these 

predictions are uncertain in part because we don’t know how long 

people will live in the future. If we simply index the program for 

life expectancy, we can remove this source of uncertainty in the 

program. There are countries like Sweden that have also reduced 

the uncertainty in projections by adjusting their systems not simply for life expectancy but even for fertility rates and the amount 

of taxes that will be available in the future. 

In summary, the process leading to the development of the trustees’ reports is one of the finest in government. Here I have emphasized that the key economic dates coming out of the report are 

43

today and 2008, when the baby boomers begin to retire, basically 

any date when the programs for the elderly are growing and taking 

an increased share of national income out of the budget. I have also 

suggested that Social Security funding problems relate primarily to 

a remarkable drop in labor force participation, and the trust fund 

accounting tends to hide that problem. 

Various aspects of the Social Security program could also be better clarified in the trustees’ reports: How increasing shares of total 

benefits are being spent on those who are younger and with less 

relative needs; how growth in cost is better reflected in lifetime 

than annual benefits; how prevalence rates in disability insurance 

are growing but are masked by the way they are reported today; 

how much these programs are scheduled to be supported by general revenues over time; and finally, how the uncertainty of actuarial estimates can actually be reduced through policy design. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Steuerle follows:]

PREPARED STATEMENT OF C. EUGENE STEUERLE, SENIOR FELLOW, THE URBAN INSTITUTE, FORMER CHAIR, SOCIAL SECURITY TECHNICAL PANEL ON METHODS AND ASSUMPTIONS, PRESIDENT OF THE NATIONAL TAX ASSOCIATION

Mr. Chairman and members of the committee, it is privilege to testify before you 

today on the Trustees’ Report on Social Security. Through the various Social Security and Medicare Trustees’ Reports we gain a fuller understanding of the long-run 

costs and benefits reflected in the current design of these programs. My testimony 

will emphasize several basic points: 

• The integrity of the process leading to the Trustees’ Report—including the input 

of the highly respected Office of the Chief Actuary—is a national asset. The report 

must contain projections for 75 years or longer because past Congresses and Presidents have built eternal growth into these programs, and one should try to account 

for what one is promising. 

• When it comes to Social Security, the key dates that one should emphasize are 

today and 2008, when the baby boomers start retiring. The main economic issue is 

that programs for the elderly and near-elderly continue to absorb increasing portions of the Nation’s output and of the Federal budget, which necessarily means 

that other portions are already being reduced, soon at ever faster rates. 

• The fundamental new long-term problem facing Social Security is a rapidly declining number of workers relative to beneficiaries, and it is a mistake to believe 

that this labor market problem can easily be solved by a capital market solution. 

Scheduled declines in the Nation’s employment rate affect the affordability of Social 

Security not simply through increases in Social Security benefits and declines in Social Security taxes (a ‘‘trust fund’’ concept), but through declines in national output, 

income tax collections, and the private assets and income of the elderly, as well. 

There are several additional items that I believe are worthy of highlighting within 

the Trustees’ Reports: 

• That Social Security continues to schedule smaller and smaller shares of benefits to those with greater needs, such as people near poverty and the truly old (say, 

those with less than 10 years of life expectancy); 

• That tables showing annual benefit levels tend to disguise the promised growth 

in lifetime benefits under Social Security and Medicare, which are approaching $1 

million for younger couples today; 

• That the Disability Insurance program projections imply increasing prevalence 

of disability insurance receipt in most age groups in a program with widely disparate payments according to geographic location; 

• That Social Security and Medicare already depend a good deal upon general 

revenue financing, largely through transfers of income taxes collected on Social Security benefits, through the financing of Part B, Medicare, and through future interest payments; 

• That the uncertainty of projections is a consequence of program design, such as 

the failure simply to adjust years of benefit receipt by changes in life expectancy. 

44

THE PROCESS

The public policy process behind the issuance of the Trustees’ Report is one of the 

most balanced and nonpartisan in this Nation. The achievement is made possible 

by the involvement of a variety of individuals and institutions: trustees from the 

Cabinet, outside ‘‘public’’ trustees, and departmental staffs, such as the Office of 

Economic Policy within the Treasury Department. Special note should be made of 

the long-standing reputation for integrity of the Office of the Chief Actuary of the 

Social Security Administration (SSA). I have also been privileged to participate in 

two technical panels, one of which I Chaired. These panels are invited by SSA to 

provide an external review of its methods and assumptions—a process now called 

by the Social Security Advisory Board and in which SSA cooperates fully. 

There are some who question why projections are made for 75 years when certain 

factors are very hard to predict for such a long period of time. The first answer is 

the most obvious one: we project for that long because past Congresses and Presidents have made promises for so long—indeed for centuries—into the future. This 

can be contrasted with the discretionary side of the budget, where promises are generally made for 1 year only. Making promises that can only meet uncertainly in the 

far distant future requires projections filled with uncertainty, not the other way 

around. Second, we do know a fair amount about the future since birth rates today 

affect such matters as the maximum number of non-foreign born 50-year-olds who 

will be alive in 50 years or 75-year olds alive in 75 years. Some of these demographic factors can be projected with a modest degree of certainty for well into the 

future. 

KEY DATES

From an economic perspective, the key ‘‘Social Security’’ issue facing the Nation 

is what share of the Nation’s economic resources are demanded by programs for the 

elderly. If that share goes up, then mathematically some other share or sets of 

shares must decline. It turns out that the elderly share has been going up for several decades and is projected to continue along that path even today (figure 1). 

When the elderly share of the budget was much smaller, it put less pressure on 

other parts of the budget. Now that the share is more than half of all non-interest 

domestic spending and growing, the pressure on other programs is rising. Of course, 

the rate of increase in the elderly share begins to accelerate once the baby boomers 

start retiring in 2008.

Many of the dates in the Trustees’ Reports are mainly signposts along this path 

and have no great meaning relative to the path itself. Some have meaning for individuals—such as 2043 when current law requires a reduction of more than onequarter in annual Social Security benefit payments to all retirees then alive. 


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Built-in growth in particular programs acts as a serious impediment to shifting 

resources to new needs or priorities, whether it be education or reinvigoration of our 

foreign policy in defense of freedom. But it also largely deters a shifting of resources 

within elderly programs themselves, such as to help those with significant impairments because of old age, to provide a drug benefit, or to remove some of the clear 

discrimination in Social Security against single working heads of household—who 

may work, pay taxes, and raise children, and yet get lower benefits than other beneficiaries who do none of these activities. These are issues for today, not just decades 

into the future. Even the budget debates in Congress this year prove how the pressure of these automatically growing entitlement programs affects discretionary 

choices. The issues aren’t postponed until some year like 2017. 

THE LABOR MARKET PROBLEM

Social Security faces a significant labor market problem that is somewhat hidden 

in trust fund accounting. Indeed, too much emphasis on ‘‘trust funds’’ implies that 

that there is some sort of capital market solution. Simply put, it is the scheduled 

decline in the number of workers to retirees that forms the core of the new dilemma 

facing Social Security. 

Now it is true that our mandated retirement system—unfortunately in my view—

has always had only very modest funding or saving levels relative to potential liabilities. This has led to a worthy debate both about saving the temporary and relatively small surpluses now being generated on a cash flow (but not liability) basis 

or trying to put more money aside in individual accounts or in the trust funds. But, 

quite bluntly, the adoption of dozens of saving incentives over the past few decades 

has shown that the government of a free society has trouble mandating net increases in national saving rates, since private individuals may with one hand offset 

what the government does or requires them to do with their other hand. 

The typical worker now fully retires in late middle age—at least if old age and 

middle age are defined by life expectancy. When he does so, our current Federal programs encourage him to become dependent upon other taxpayers. His drop in output 

reduces the amount of transfers he is making to support government through Social 

Security taxes, Federal income taxes, and other taxes, including those paid to State 

and local governments. In addition, his own after-tax income falls, thus reducing the 

amount of earnings he has to spend that year or to put aside to support himself 

more in later years (see example in figure 2). It is this multiple hit that so dramatically affects the affordability of Social Security and Medicare. 

The United States was lucky in the post-World War II era. Despite substantial 

decreases in male labor force participation due to more and more years in retirement, females entered the labor force in such numbers that the employment rate 

among adults still increased. If no adjustments in retirement behavior are made, 

however, this Nation faces the reverse situation—a decline in the percentage of 

adults employed along with an increase in the percentage of those more dependent 

upon government. The potential scheduled decline in the employment rate is so 

strong and so long that it is equivalent to an increase in the unemployment rate 

of about 0.4 percentage points per year every year for over two decades running (see 

figure 3). 

OTHER ISSUES

Serving the Less Needy. The Social Security Trustees report is mainly focused on 

whether assets and liabilities of the system come into balance. However, it does contain some data on projected benefit levels for workers and couples at different income levels. These data tend to show some aspects of the distribution of benefits 

but mask a number of potential problems and inequities in the program. In particular, the program as now designed continually provides higher and higher percentages of benefits to those further and further from likely death (see figure 4). 

The antipoverty effectiveness of each additional dollar spent is declining.

46


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The system also strongly discriminates against divorced and unmarried individuals, many of whom work, pay taxes, and raise children by themselves, yet in the 

end get fewer benefits than individuals who do none of these. The discrimination 

is caused by the design of spousal and survivor benefits, which are available for no 

additional tax contributions but only to certain individuals (those who remain married to a worker for more than 10 years). Another problem caused by this same 

structural design of spousal and survivor benefits is that smaller levels of benefits 

are provided for two-earner couples than for one-earner couples with the same 

amounts of earnings and taxes paid into Social Security. 

Lifetime benefits. The Trustees’ Reports have traditionally shown the value of annual Social Security benefits over time. However, a large share of the growing costs 

of Social Security (as well as Medicare) has come from an expansion in the number 

of years of benefit support. The expected value of lifetime benefits conveys much 

more about the nature of Social Security promises being made than do annual benefits, and I—along with the technical panel I chaired—have recommended inclusion 

of these amounts in the Trustees’ Reports. These lifetime benefits have climbed from 

about $290,000 for an average-income couple retiring in 1960 to about $650,000 

today and are scheduled to grow to over $1 million for an average-income couple 

retiring in 2030 (figure 5). 

An additional reason for showing these lifetime figures is that policy makers considering reform should focus considerable attention on what type of package of benefits they want to provide for the future, not just on individual pieces of a package. 

A benefit of $25,000 a year for 20 years, for instance, might provide more protection 

against poverty than a benefit package of $20,000 a year for 25 years, even if the 

lifetime cost is the same.


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Directions for Disability Insurance (DI). Almost all the recent public attention to 

OASDI is on the old age or OASI part of the program. However, the Trustees’ Report on OASDI does cover DI, and it demonstrates, among other things, the incidence levels of disability insurance. Incidence levels reflect mainly the number of 

new recipients added per year to the system, and these projections tend to show a 

leveling out in the program for numbers of new beneficiaries. However, this can be 

misleading, as can be understood theoretically by thinking about moving from 99 

percent to 100 percent of the population being covered. Upon hitting 100 percent, 

the incidence rate would show a decline to zero, but the program clearly would not 

be declining in cost or in percentage of the population covered. In other words, the 

incidence of new recipients must be added to the stock of people who remain in the 

program to figure out the prevalence of DI within the population. A steady incidence 

rate can mean a growing stock or prevalence rate. 

The Social Security Administration calculates prevalence—the percentage of the 

population of different ages who receive DI (figure 6)—but it doesn’t show these figures in the Trustees’ Reports. These prevalence rates are projected to grow in most 

age groups even while health care improves. That age-adjusted prevalence rates of 

disability insurance go up over time even while there is no projected increase in ageadjusted prevalence of actual disability implies either that people today are being 

under-served or people tomorrow are being over-served. These difficulties within DI, 

as well as the wide geographical differences in incidence and prevalence of DI recently brought to light by the Social Security Advisory Board, imply that serious 

thinking needs to be applied to this program as well.


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Dependence Upon All Revenue Sources. One issue often debated with Social Security and other elderly programs is whether they are adding to net saving or not. 

Although the answer is unclear, any potential savings of these programs are reduced substantially by the general revenue sources that they already tap. Other 

than interest payments, the largest among these are those that derive from the income taxation of Social Security benefits and the general revenue financing of the 

Supplementary Medical Insurance (SMI) program (figure 7). 

Interest payments to Social Security also essentially come out of general revenues. 

The trust fund concept tends to hide the nature of all these general revenue obligations, although the reports do show the figures in separate tables on income and 

cost. The total effect should be shown together in a separate table, perhaps following 

along the lines of presentation of general revenue effects already in the HI and SMI 

report. After all, the more that comes out of general revenues, the less that such 

revenues are available for other societal needs and obligations. 

One can graphically display the dependence of Social Security and Medicare on 

all tax sources. Figure 1 shows the demands of Social Security and Medicare over 

time. Of course, if all obligations in elderly programs were to be counted, we would 

also add in Medicaid (long-term care) and civil service and military retirement systems. These elderly programs as a whole are essentially scheduled to absorb almost 

all taxes, which remain relatively constant as a percentage of national income. 

The Uncertainty of Projections. Commendably, SSA calculates projections not only 

for some average or intermediate set of circumstances but for various alternatives 

as well. Following upon the advice of several groups, including the Technical Panel 

which I chaired, SSA is investigating ways to improve upon its measures of the risk 

that the system will do worse or better than projected. 

As currently presented, however, policy makers who focus almost entirely on intermediate projections ignore most of this analysis. What the Trustees’ Reports do 

not make clear is that these risks and uncertainties about future imbalances are 

a consequence of program design. Therefore, they can largely be built out of the program. For instance, there is significant risk that people will live longer (or shorter) 

lives than projected and the system will be further out of (or in) balance than projected. But there is no reason this financial risk has to be in the program. If the 

program were ‘‘indexed’’ so that as people lived longer, they did not receive more 

years of benefits, then that additional ‘‘risk’’ of imbalance would be eliminated (figure 8).


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Similarly, it is possible to adjust the system over time so that it pays out benefits 

according to the number of workers and taxpayers in the economy, which itself is 

affected by demographic and economic factors such as the fertility rate. Sweden recently enacted a sweeping reform that makes that type of adjustment so that the 

risk of long-term imbalance is significantly reduced, if not eliminated, for a whole 

variety of demographic and economic factors. 

By the way, the current Social Security system already is essentially adjusted for 

changes in economic growth levels. For instance, when the rate of wage growth declines, then so does the rate of future benefits—which is why the sensitivity of the 

system to changes in economic assumptions is not great (see p. 151 of the 2002 

OASDI Trustees’ Report). On the flip side, when wages increase unexpectedly, so 

do future benefits. It turns out that if unexpected growth in wages in the last part 

of the 1990s hadn’t been allowed to raise substantially the level of future benefits 

promised to such people as those of us sitting in this room today, then the longrun actuarial deficit of Social Security would have been cut almost in half. Thus, 

Social Security could have shared in the same budgetary gains that in the late 

1990s created substantial slack in the non-entitlement part of the budget. 


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SUMMARY

The process leading to the development of the Trustees’ Reports is one of the finest in government. That individuals like myself are able to make recommendations 

on improvements speaks well of the process itself. Here I have emphasized that the 

key economic dates coming out of the reports are today and 2008, when the baby 

boomers begin to retire—basically any dates when the programs for the elderly as 

a whole force reduced shares of national income to be spent on other items. I have 

also suggested that Social Security funding problems relate primarily to a remarkable scheduled drop in labor force participation, and trust fund accounting tends to 

hint a bit misleadingly that this problem can be met by a capital market solution. 

Various aspects of Social Security programs could also be better clarified within 

the Trustees’ Reports: how increasing shares of total benefits are being spent on 

those who are younger and have less relative needs, how growth in costs is better 

reflected in lifetime than annual benefits, how prevalence rates of Disability Insurance are growing but are masked by more constant ‘‘incidence’’ rates, how much 

these programs are scheduled to be supported by general revenues over time, and 

how the uncertainty of actuarial estimates can be reduced through policy design.

Mr. HASTINGS. Thank you, Mr. Steuerle. 

Ms. MacGuineas. 

STATEMENT OF MAYA C. MACGUINEAS 

Ms. MACGUINEAS. Good morning. My name is Maya MacGuineas, 

and I am a Senior Fellow at the New America Foundation, a nonpartisan think tank in Washington, where I work on fiscal policy. 

Thank you for inviting me to testify. It is a privilege to appear before the committee today. 

I have been asked to talk about the trustees’ report in particular. 

The trustees’ report is the single most important and influential 

source of information about the financial health of the Social Security programs. And given the attention the report receives, it is certainly worthwhile to discuss not only the implications of the findings, but whether there are ways to improve either the content or 

the presentation. 

Furthermore, given the unbiased analysis, the trustees’ report 

can and should provide a framework for comparing various reform 

proposals as we move forward with the necessary discussion about 

how best to reform Social Security. 

In my comments today, I am going to discuss ways to provide 

more information about Social Security’s effect on the unified budget, an analysis that extends beyond the actuarial window, a more 

detailed breakout of the sensitivity analysis of various economic 

and demographic assumptions and additional information with regard to benefits. 

The main purpose of the annual report is to shed light on the 

overall financial health of Social Security, and the report is unquestionably the most comprehensive source of such unbiased information. In addition to evaluating short range trust fund adequacy, the 

analysis relies primarily on five measures, those being: trust fund 

exhaustion dates, income and cost rates, trust fund ratios, actuarial 

balance and Social Security as a percentage of GDP. 

In my opinion, some of these are more useful than others. Income 

and cost rate, for instance, are reasonably straightforward. They 

show that benefits will exceed taxes as a percentage of payroll by 

6.42 percent at the end of the 75-year period. Likewise, viewing Social Security as a percentage of GDP is extremely useful because 

it shows the level of resources the program will transfer across the 

52

entire economy, and this transfer will grow from 4.5 percent today 

to 7 percent at the end of the time period. 

On the other hand, trust fund ratios, actuarial solvency and exhaustion dates seem to cause as much confusion as they do clarity. 

And while I do not take issue with the assumptions, these numbers 

are based on, or the methodological approaches used to derive 

them, I am concerned they may divert attention away from some 

of the more relevant issues. The trust fund ratio is expected to 

peak at 471 percent in 2015 and decline thereafter. The trust fund 

exhaustion date is 2041. The actuarial balance, which measures Social Security’s financial status over a 75-year time period and expressed as difference between expected income and cost rates as a 

percentage of taxable payroll in present value, is in a deficit of 1.87 

percent. 

These numbers, however, do not convey the full burden to the 

budget or the economy of meeting future obligations, and their inclusion of the trust funds, while appropriate in an accounting 

sense, masks the extent of the larger problems. To illustrate this 

point, you merely need to look at the idea that has been floated occasionally to increase interest rates. Such a change would improve 

trust fund ratios, extend exhaustion dates and decreases the actuarial deficit. Increase the interest rate by a fraction and the problem would improve. Increase the interest rate by enough and it 

would appear on paper to disappear completely. 

Would we have really made any meaningful improvements in the 

situation we are facing? Of course not. The overflowing trust funds 

would not do a thing to make the task of paying benefits any easier. The money to pay the higher interest cost would have to come 

from somewhere, but neither trust fund ratios, actuarial solvency 

or exhaustion dates reflect this. 

So on to this table. One of the recommendations I do have would 

be to include a year-by-year cash-flow analysis in the report. This 

table shows it in 10 years, but I would suggest that it be done for 

every year. Also this table is in 2002 dollars. One would want to 

include both current and constant dollars. Such a cash-flow table 

would show the tax revenues that will flow to the Social Security 

as well as their sources and the annual costs. The surplus or deficit 

numbers I believe are particularly helpful because they illustrate 

how much Social Security contributes to the rest of the budget in 

the short run and how much it will drain from the rest of the budget in the future. It is also useful to view how these deficits translate into payroll tax increases or benefit reductions necessary to 

keep the program balanced. 

In addition to showing the cash-flow numbers in dollars, I suggest showing them as a share of total government revenues. And 

by incorporating CBO assumptions one can see that spending on 

Social Security will rise from 23 percent of the budget today to 33 

percent by 2025 and continues to rise thereafter. The cash-flow deficit will grow to 6 percent of total revenues over the time period 

and then double over the next 50 years. 

While in my mind viewing these numbers as a share of the budget is the most helpful, you could also calculate it as a share of GDP 

or covered payroll or any other denominator deemed appropriate. 

53

I also in my written testimony include how this would be helpful 

in improving the details that we receive on the sensitivity analysis. 

The actuaries include this in Appendix D, but they do so for only 

certain time periods. I think it would be helpful to look at this on 

an annual basis, particularly because reporting these results in a 

cash-flow framework would be very useful in conveying both the 

timing and magnitude of the effects and also, I think, clarifying 

some common misconceptions such as the notion that we can actually grow our way out of this problem without changes to the program or that the financing challenges result solely from a demographic bubble that we can weather with a few minor changes. 

Furthermore, these cash-flow tables would be extremely helpful 

in comparing and contrasting specific policy recommendations. In 

evaluating the effect of increasing the payroll tax cap, for instance, 

one could see how much the top line, income from payroll tax, 

would increase. Similarly, this analysis would convey the extent to 

which shifting from wage indexing to price indexing would affect 

benefits over time. 

And finally, proposals to create private accounts could also be 

evaluated in the same manner. If a private account plan specified 

revenue or benefit changes they would be reflected above the line. 

To the extent the plan depended on general revenue transfers, that 

would be reflected below the line and shown as a share of the 

budget. Over time the money available from the accounts would 

provide another source of income to be added to revenue on top of 

the line. 

In addition to cash-flow tables, I think there are a few other 

changes that could be helpful, and I will speak to these briefly. 

One, the concept of actuarial solvency is somewhat confusing, both 

because it includes the trust funds as assets without showing 

where the money to pay for them will come from and, two, because 

it is calculated over a 75-year time period, which can produce a 

‘‘cliff effect,’’ where if you extend this evaluation period for a single 

year, new policy changes are necessary and the whole program 

again falls out of balance. Arguably, I believe it would be better to 

show actuarial solvency in perpetuity. Calculations reported in recent work by Kent Smetters and Kevin Brennan of the University 

of Pennsylvania have found that this would alter the calculation of 

the present value of the unfunded liabilities from $3.3 trillion to $6 

trillion. 

Additionally, the trustees could consider including tables that 

show both lifetime benefits and net transfers on a generational 

basis. Gene spoke about lifetime benefits and gave some examples 

of how dramatic it would be to see how these benefits grow with 

life expectancies. Net transfers, the present value of a generation’s 

benefit less the taxes they pay, would be useful at looking at the 

program from the perspective of generational equity. We could, for 

instance, make Social Security appear to be healthy by all evaluation techniques, including cash-flow by simply passing a law that 

the payroll tax would be increased as necessary to cover promised 

benefits. The program would be actuarially solvent, cash-flow deficits would be zero, and the trust fund would never be depleted. But 

younger workers and future generations would suffer huge losses 

54

which would be captured in a net transfer evaluation while missed 

in other assessments. 

To conclude, the integrity with which the trustees’ report is constructed and its unbiased content play a crucial role in providing 

the information needed to evaluate the financial health of Social 

Security. My suggestions here should in no way be taken as a criticism of the work that is currently done but rather a suggestion of 

other information that might be useful for purposes of comparison 

and analysis. 

[The prepared statement of Ms. MacGuineas follows:]

PREPARED STATEMENT OF MAYA C. MACGUINEAS, SENIOR FELLOW, NEW AMERICA

FOUNDATION

Good morning, Mr. Chairman and members of the committee. My name is Maya 

MacGuineas and I am a Senior Fellow at the New America Foundation, a nonpartisan think tank here in Washington, where I work on fiscal policy. Thank you 

for inviting me to testify today. It is a privilege to appear before the committee. 

The Social Security Trustees’ Report is the single most important and influential 

source of information about the financial health of the Old-Age and Survivors Insurance and Disability Insurance programs. Given the attention the report receives, it 

is certainly worthwhile to discuss not only the implications of the findings but also 

whether there are ways to improve either the content or presentation. Furthermore, 

given its unbiased analysis, the Trustees’ Report can and should provide a framework for comparing various proposals as we move forward with the discussion about 

how best to reform Social Security. 

In my comments today, I am going to discuss ways to provide more information 

about Social Security’s effects on the unified budget, an analysis that extends beyond the actuarial window, a more detailed breakout of the sensitivity analysis of 

various economic and demographic assumptions, and some additional information 

with regard to benefits. 

The main purpose of the annual report is to shed light on the overall financial 

health of the Old-Age and Survivors Insurance and Disability Insurance programs. 

The Trustees’ Report is unquestionably the most comprehensive source of such information. In addition to evaluating short-range trust fund adequacy, the analysis 

relies primarily on five tools including: 1. Trust fund exhaustion dates; 2. Income 

and cost rates; 3. Trust fund ratios; 4. Actuarial balance; and 5. Social Security costs 

as a percentage of GDP. 

In my opinion, some of these are more useful than others. Income and cost rates 

for instance, are reasonably straightforward and quite useful. They show that while 

taxes as a percentage of payroll currently exceed benefits by 1.88 percent of covered 

payroll, this relationship will deteriorate over time and that by 2025, benefits will 

exceed non-interest income by 2.90 percent. By 2080, the number will have grown 

to 6.68 percent. Likewise, viewing the Social Security program as a percentage of 

GDP is an extremely useful tool because it shows the level of resources the program 

will transfer across the entire economy. The Trustees report that Social Security 

will transfer 7 percent of the economy at the end of their 75-year valuation period 

as opposed to 4.5 percent today. Both of these sets of numbers are relatively easy 

to understand. 

On the other hand, trust fund ratios, actuarial solvency, and exhaustion dates 

seem to cause at least as much confusion as clarity. While I do not take issue with 

the assumptions these numbers are based on, or the methodological approaches 

used to derive them, I am concerned they may divert attention away from more relevant issues. 

The trust fund ratio is expected to peak at 471 percent in 2015, and decline thereafter. The trust fund exhaustion date, 2041, is the year when the trust funds’ assets 

will be depleted. Actuarial balance measures Social Security’s financial status over 

a 75-year time period, expressed as the difference between the expected income and 

costs as a percentage of taxable payroll in present value terms. Currently, the actuarial deficit is 1.87 percent. 

But these numbers do not convey the full burden to the budget or the economy 

of meeting future obligations. Their inclusion of the trust funds, while appropriate 

in an accounting sense, masks the extent of the larger problem. One must also consider the burden the trust funds represent in order to view the funding problem in 

its entirety. To illustrate this point, you merely need to look at the idea that has 

been floated occasionally to increase the rate of interest paid on the bonds in the 

55

trust funds. Such a change would improve trust fund ratios, extend the exhaustion 

date, and decrease the actuarial deficit. Increase the interest rate by a fraction, and 

things would look a bit better. Increase the rate by enough, and all problems would 

appear on paper to evaporate. Would this change make any meaningful improvements to the situation we are facing? Of course not. The overflowing trust funds 

would not do a thing to make the task of paying benefits any easier. The money 

to pay the higher interest costs would have to come from somewhere, but neither 

trust fund ratios, actuarial solvency, or exhaustion dates reflect this. 

One recommendation I would make, then, is to include a year-by-year cash flow 

analysis. Almost all of the information necessary for such an analysis is contained 

in the Trustees’ Report but could be combined in a way that illuminates some important issues (See Table 1). 

A cash flow presentation would lay out the tax revenues that will flow to the program as well as their sources, and the annual costs. I show the numbers here in 

2002 dollars; if this format were adopted, they would presumably be shown in both 

current and constant dollars. The surplus or deficit numbers are particularly helpful 

because they illustrate how much Social Security contributes to the rest of the budget in the short run and how much it will drain from it in the future. It is also useful 

to view how these deficits translate into payroll tax increases or benefit reductions 

necessary to keep the program balanced on an annual basis. 

In additional to showing the cash flow numbers in dollars, I would suggest showing them as a share of total government revenue. Since the government’s actual tax 

base is only a little more than half the value of GDP, showing cash flow numbers 

as a share of total government revenue gives a more realistic picture of the tax rates 

required to achieve balance. By incorporating Congressional Budget Office assumptions, one can see that spending on Social Security will rise from 23 percent of the 

budget today to 33 percent by 2025 and continues to rise thereafter. The cash flow 

deficit will grow to 6 percent as a share of total revenues over that time period and 

then double over the next fifty years. While in my mind viewing these numbers as 

a share of the budget is most helpful, they could also be calculated as a share of 

GDP, covered payroll, or any other denominator deemed appropriate. 

This format would not only be helpful in viewing trends in a way that is relevant 

to Social Security and the unified budget, it could also serve as a useful benchmark 

for comparing the effects that changes in assumptions or policies would have on the 

program. For instance, the Trustees include in their report high, low and intermediary cost assumptions for their underlying economic and demographic assumptions. In Appendix D of the report they perform a sensitivity analysis by altering 

one variable at a time. The findings are reported in terms of summarized income 

and cost rates and actuarial balance over 25, 50, and 75-year periods. Reporting 

these results using the annual cash flow framework would be more useful in conveying the timing and magnitude of these effects. This analysis would be helpful in 

clarifying some misconceptions, such as the notion that we can grow our way out 

of the problem without other changes to the program, or that the financing challenges result solely from a demographic bubble that we can weather with a few 

minor changes. 

Furthermore, cash flow tables would be extremely helpful when comparing and 

contrasting specific policy recommendations. In evaluating the effect of increasing 

the payroll tax cap, for instance, one could see by how much the top line—income 

from payroll tax—would increase. Similarly, this analysis would convey the extent 

to which shifting from wage indexing to price indexing would affect benefits over 

time. Proposals to create private accounts could be evaluated in the same manner. 

If a private account plan specified revenue or benefit changes, they would be reflected above the line and to the extent a plan depended on general revenue transfers, that would be reflected below the line and shown as a share of the budget. 

Over time, the money available from the accounts would provide another source of 

income to be added to tax revenue. 

In addition to adding cash flow tables, there are a few other changes that would 

be helpful. First, actuarial solvency is somewhat confusing not only because it takes 

into account the Social Security trust funds while ignoring where those funds will 

come from, but also because it is evaluated over a 75-year period. This focuses attention on policy changes necessary to keep the program balanced over that period 

and that period only. This approach to reform suffers from the problem of the ‘‘cliff 

effect’’ where when the evaluation period is lengthened by a single year, the program promptly falls out of balance, thus making further changes necessary. It would 

arguably be better to evaluate the program’s well being in perpetuity, shifting attention away from actuarial solvency over a limited time period to sustainability—a far 

more important objective. Calculations reported in recent work by Kent Smetters 

and Kevin Brennan show that the actuarial shortfall is twice as large when evaluVerDate Feb 1 2002 14:17 Aug 27, 2002 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-32\HBU170.000 HBUDGET1 PsN: DICK
56

*NOTE.—See, Smetters, Kent and Kevin Brennan. ‘‘Analyzing Social Security Reform on a Cohort Basis: Toward Objective Accounting.’’ University of Pennsylvania, Manuscript, Forthcoming. 

ated in perpetuity. In particular, the shortfall increases from around $3.3 trillion 

over the next 75 years to over $6 trillion when evaluated in perpetuity. 

Finally, the Trustees should consider including tables that show both lifetime benefits and net transfers on a generational basis. Lifetime benefits rather than average annual benefits would be helpful in reflecting how costs rise along with increases in life expectancies. 

Net transfers—the present value of a generation’s benefits less the taxes they 

pay—would be useful in evaluating generational equity. Smetters and Brennan 

show that this measure gives a more objective view of liabilities than standard trust 

fund accounting.* We could, for instance, make Social Security appear to be healthy 

by all evaluation techniques including cash flow by simply passing a law that the 

payroll tax would be increased as necessary to cover promised benefits. The program 

would be actuarially solvent, cash flow deficits would be zero, and the trust fund 

would never dip below zero. But younger workers and future generations would suffer huge losses, which would be captured in a net transfer evaluation while missed 

in other assessments. 

To conclude, the integrity with which the Trustees’ Report is constructed and its 

unbiased content play a crucial role in providing the information needed to evaluate 

the financial health of Social Security. My suggestions here should in no way be 

taken as a criticism of the work that is currently done, but rather as suggestions 

about other information that might be useful for the purposes of analysis and comparison. I look forward to your questions, and once again, thank you for holding this 

hearing and inviting me to testify.

Mr. HASTINGS. Thank you very much for your testimony. And 

now it is my pleasure to recognize our former colleague Barbara 

Kennelly. 

STATEMENT OF THE HON. BARBARA B. KENNELLY 

Ms. KENNELLY. Thank you, and as a former member of this committee, I want to say to you that I know you are here, you are the 

unsung heroes of Capitol Hill. 

For nearly 70 years, Social Security has guaranteed working 

families that they would have income in the event of old age, death 

of a family wage earner, or a disability. Social Security provides 

benefits in a manner that is both progressive and fair. No other 

wage replacement program, public or private, offers the protections 

of the Social Security old age, survivor and disability insurance 

program. In addition to retirement income, I want to emphasize 

this: that 38 percent of all Social Security benefits are paid to the 

disabled individuals, spouses of the disabled individuals or dependent children or survivors. I emphasize that because of the earlier 

conversation that this committee had with the previous witness. I 

don’t know how many of these people, this 38 percent, had low expectations of having Social Security there for them, but I do know 

they probably had no expectation that they would have an early 

death or be disabled. 

Today Social Security, as you know, continues to meet the challenge that it faces and it still has a surplus. And even, in fact, with 

the recent economic sluggishness, it continues to keep that surplus. 

We know from the Social Security trustees’ report that we can 

probably expect full solvency until 2041. By 2017, Social Security 

will have accumulated over $5 trillion in Treasury bonds backed by 

the full faith and credit of the United States of America. And I 

think I can speak with certainty that the millions of members of 

the national committee certainly expect that these bonds can be 

57

collected upon because they understand that is the law. In 2017, 

the program will begin to call in its interest on these bonds. 

Beginning in 2027, as we said often this morning, interest and 

tax revenues combined will be insufficient to meet demands and 

the program will need to redeem the bonds that we have been talking about. In the year 2041, if no changes are made, the trust fund 

will be exhausted and incoming revenues will meet only about 72 

percent of current benefit obligations. Even at this point, Social Security isn’t broken. 

What is happening to Social Security is because of longevity and 

because of low birth rates. It has a cash shortfall, as has been mentioned. Benefit adjustments and/or new revenues equivalent to 1.86 

percent of payroll or 0.72 percent of the gross national domestic 

product would be sufficient to cover the costs of currently promised 

benefits for the next 75 years. 

Long range Social Security solvency is directly linked to the 

strength of the economy. But continued economic growth alone will 

not solve all Social Security’s long-term problems. We must begin 

a real debate, beyond the debate of privatization, to make the adjustments that can be made today to ensure that the program will 

be intact for future generations, and the sooner we begin to do it 

the better. 

And as I look at the Members of Congress here, I know that John 

Spratt and I are probably the only two here that were in the Congress in 1983. I know Mr. Spratt remembers, like I do, how we 

waited too long to address the problems of solvency in Social Security. You have to remember how hard it was to vote for what we 

had to vote for because in that 1983 vote that we had to vote for 

was for the first time to tax Social Security and citizens are still 

outraged by that. For the first time, we said if you go to college full 

time you can have Social Security, which had been up to that point 

the fact. And for the first time, we raised the age from 65 to 67. 

So if we don’t start acting sooner rather than later, some very difficult decisions will have to be made as were made in 1983. And 

in the meantime we must move back toward efforts to pay down 

our mounting Federal debt not attributed to the trust funds. 

During the last year of the previous administration, the Clinton 

administration, and during the first year of the Bush administration, our Nation was on track to completely repay public debt by 

2012. 

This would have taken a tremendous burden off future generations expected to repay obligations to Social Security trust funds, 

and also cover their needs as well. 

Last year’s 10-year $1.7 trillion tax cut, combined with the sagging economy and the subsequent need to respond to the horrific 

events of 9/11 completely erased a projected 10-year $5.7 trillion 

surplus. 

Now, instead of paying down debt, we are increasing debt, and 

the related interest cost to our younger generations. Therefore, the 

National Committee, the committee that I am president of, opposes 

efforts to extend last year’s tax cuts beyond 2010. 

This extended tax cut is estimated by the Center on Budget and 

Policy Priorities to cost an additional $4 trillion to the general fund 

in the decade beginning in 2012. Ironically, that decade is at the 

58

same time that those baby boomers that we constantly refer to are 

coming down the pike. We must put our priorities in order. 

All of the demands of future revenue should be laid aside until 

this task is accomplished. Diverting Social Security payroll taxes to 

private individual investment accounts also worsens Social Security’s long-term projected shortfall and requires even more revenue 

to maintain current promises. 

Funneling even 2 percentage points of payroll tax out of Social 

Security and into private accounts more than doubles the long-term 

shortfall, today’s promised benefits. 

Of the three plans put forward by the President’s Commission to 

Strengthen Social Security, the Social Security actuary has found 

that if implemented today, during the period from 2003 to 2012, 

the plan boosts the unified deficit by $1.2 trillion, plan 2 by $1.5 

trillion, and plan 3 by $1.3 trillion. 

All three plans called for large reductions in the guaranteed benefit as great as 43 percent for those retiring in 2075. Even for those 

who do not opt for the voluntary account, this happens. Thus, the 

solution proposed by private accounts only digs the hole deeper, requiring even greater cuts in defined benefits and lawyer demands 

on future revenue sources. 

While the goal of expanding national savings is laudable, private 

accounts in lieu of guaranteed benefits merely substitutes one form 

of retirement savings for another. We must improve incentives for 

younger workers to invest and save on top of, not in place of, currently promised Social Security benefits in order to expand both individual and national savings. 

In closing, I say to the members of the Budget Committee, I 

agree with Chairman Nussle that this has been a marvelous, educational conversation. I hope you will keep having this conversation 

about future solvency, because there is no doubt in my mind that 

a developed country like the United States of America is going to 

have some sort of retirement-guaranteed government program for 

the old and the disabled. 

But, I do hope that you can keep the debate separate, the conversation separate between these—you know, some of us disagree 

about how you go about ways, we often have honest disagreements. 

But the fact of the matter is, there are those who want to have a 

different system, who want to have a different structure. And there 

probably will be many other suggestions along the way. But I urge 

you to continue to think about solvency. Continue to think about 

the fact that there always will be elderly people. There always be 

poor and disabled people. 

I thank you very much for allowing me to speak today. 

[Prepared statement of Ms. Kennelly follows:]

PREPARED STATEMENT OF HON. BARBARA B. KENNELLY, PRESIDENT AND CEO, 

NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY AND MEDICARE

Chairman Nussle, Ranking Member Spratt, members of the committee, I appreciate the opportunity to testify before the House Budget Committee on this issue 

of critical importance, the long-term budget outlook for Social Security. On behalf 

of the millions members and supporters of the National Committee to Preserve Social Security and Medicare, I am delighted to be back in the halls of Congress with 

my former colleagues. Thank you for holding this timely and important hearing. 

Most Americans who have any recollection of the Great Depression will understand that Social Security was created to guard against what President Franklin 

59

Roosevelt described as the ‘‘hazards and vicissitudes of life.’’ For nearly 70 years Social Security has guaranteed working families would have some income in the event 

of old age, death of a family wage earner or disability. 

Social Security provides benefits in a manner that is both progressive and fair. 

No other wage replacement program, public or private, offers the protections of the 

Social Security Old Age, Survivors and Disability Insurance program. In addition 

to retirement income, 38 percent of all Social Security benefits are paid to disabled 

individuals, spouses of retired and disabled workers, dependent children and survivors. 

Today Social Security continues to meet this challenge, and despite recent economic sluggishness, the 2002 Social Security Trustees’ Report shows an improved 

forecast for the system with full solvency extended another 3 years to 2041. By 

2017, Social Security will have accumulated over $5 trillion in treasury bonds, 

backed by the full faith and credit of the United States Government. 

In 2017, the program will begin to tap its interest on these bonds. Beginning in 

the year 2027, interest and tax revenues combined will be insufficient to meet benefit demands and the program will need to redeem bonds held by the trust funds. 

In the year 2041, if no changes are made, the trust funds will be exhausted and 

incoming revenues will meet only about 72 percent of current benefit obligations. 

Even at this point, Social Security will not be ‘‘broken.’’ This shortfall, if addressed 

today is quite manageable. Benefit adjustments and/or new revenues equivalent to 

1.86 percent of payroll or 0.72 percent of GDP would be sufficient to cover the cost 

of currently promised benefits for the next 75 years. 

Long-range Social Security solvency is directly linked to the strength of the economy. The prosperity of the late 1990s dramatically improved the financial outlook 

of Social Security, with the date of insolvency improving 14 years (2027 to 2041) 

in the past 6 years, on the strength of the economy alone. 

But continued economic growth alone will not solve all of Social Security’s longterm problems. We must begin a real debate, beyond privatization, to make the adjustments that can be made today, to ensure that the program will be intact for future generations. The sooner we begin, the less difficult the decisions will be. 

First, we must move back toward efforts to pay down our mounting Federal debt 

not attributed to the trust funds. During the last year of the previous administration, and the first year of this one, our nation was on track to completely repay public debt by 2012. This would have taken a tremendous burden off of future generations expected repay obligations to Social Security trust funds and cover their other 

needs as well. 

Last year’s 10-year, $1.7 trillion tax cut combined with a sagging economy, and 

the subsequent need to respond to the horrific events of 9/11 completely erased a 

projected 10-year $5.6 trillion surplus. Now instead of paying down debt, we are increasing debt and the related interest costs on our younger generations. As the 

power of compound interest also works in reverse, this huge change in our budget 

outlook will mean $1 trillion in new interest on the debt in just the next 10 years. 

Therefore, as the National Committee opposed the tax cuts enacted last year, we 

must also oppose efforts to extend of those tax cuts beyond 2010. This tax package 

is estimated by the Center on Budget and Policy Priorities (CBPP) to cost of an additional $4 trillion to the general fund in the decade beginning in 2012, ironically 

the same decade in which we are concerned about the general fund’s ability to cover 

the cost of interest owed to the Social Security trust funds. In fact, the CBPP analysis has found that the cost of the tax cuts, if extended 75 years, is more than twice 

as large as the long-term deficit in Social Security. 

It is not that we oppose tax cuts in principle, but more a recognition that we must 

place our priorities in order. If meeting our future obligations to Social Security and 

Medicare without having to resort to painful benefit cuts is our number one priority, 

we strongly believe that all other demands on future revenues should be laid aside 

until that task is accomplished. 

Today Social Security remains fully self-financed and is not responsible for even 

one penny of the Federal debt. While Social Security surpluses accumulated since 

1983 were intended to pay down debt held by the public to reduce future burdens 

related to the retirement of the baby boom, with the brief exception of the past few 

years this has not happened. Our recent return to spending Social Security trust 

funds on general needs marks a return to using the regressive payroll tax to finance 

general revenue programs. 

Although we have many fundamental problems with the concept of privatization, 

perhaps the biggest argument against transforming part of Social Security into a 

system of individual retirement accounts is the tremendous cost of the transition. 

Although individual accounts are often presented as a way to ‘‘save’’ Social Security, 

diverting money to individual accounts actually worsens Social Security’s long-term 

60

projected shortfall and requires even more revenue to maintain current promises. 

Indeed, funneling 2 percentage points of payroll out of Social Security and into private accounts more than doubles the long-term shortfall for today’s promised benefits. 

Of the three plans put forward by the President’s Commission to Strengthen Social Security, the Social Security Actuary has found that, if implemented today, during the period from 2003–2012 plan 1 boosts the unified deficit by $1.2 trillion, plan 

2 by $1.5 trillion, and plan 3 by $1.3 trillion. All three plans call for large reductions 

in the guaranteed benefit as great as 43 percent for those retiring in 2075, even for 

those who do not opt for the voluntary account. Plans 2 and 3 have been deemed 

‘‘solvent’’ only because they call upon the general fund for trillions of dollars in general revenue transfers with no specified source. Under plan 1, program expenses exceed tax revenues as early as 2009, plan 2 by 2006, and plan 3 in 2011. Thus the 

‘‘solution’’ proposed by private accounts only digs the hole deeper, requiring even 

greater cuts in defined benefits and larger demands on future revenue sources. 

Further, the level of individual risk privatization would introduce to Social Security is unacceptable. Although proponents of privatization like to talk about market 

averages, there is no such thing as an investor who earns the market average every 

year. Even if individual accounts could work well for upper-income earners and 

earners without dependents, they would not work as well for low-income workers, 

people of color, disabled workers or families. 

While the goal of expanding national savings is laudable, private accounts in lieu 

of guaranteed benefits merely substitutes one form of retirement savings for another. We must improve incentives for younger workers to invest and save, on top 

of, not in place of currently promised Social Security benefits in order to expand 

both individual and national savings. 

SOLVENCY ALTERNATIVES

I urge you to keep the security in Social Security and focus on changes that do 

not dismantle its principles of shared risk. A few of the solvency alternatives (in addition to debt retirement) we have suggested Congress consider include: 

1. Supplementing payroll taxes with general revenue. An influx of dollars from 

general revenues would help meet the increased demands of an aging population. 

If the same level of general revenue commitment contained in various private account proposals now on the table were directly applied to solvency of the current 

program, solvency could be extended without exposing beneficiaries to benefit cuts 

or the vagaries of the market. 

2. Increasing the maximum wage base. Currently, the first $80,400 of earned income is subject to payroll tax. The base could be increased so that 90 percent of covered earnings are taxable and indexed thereafter. 

3. Expanding coverage. Newly hired state and local workers could be brought into 

the Social Security program. This would provide these workers with increased retirement security, greater freedom in changing jobs and added protection from the 

eroding effects of inflation on income. 

4. Government investment of a portion of the trust fund reserves. Private investment of a portion of the reserves should be seriously considered and debated. We 

could invest some of the reserves in an indexed selection of stocks and allow Social 

Security to realize a higher return on its investments, without appreciably increasing individual risk. 

Chairman Nussle, Congressman Spratt, thank you for holding this important 

hearing today. We look forward to working with you toward a truly bipartisan effort 

to reinforce Social Security as the bedrock safety net for all of America’s working 

families. I would be pleased to answer any questions you may have.

Mr. HASTINGS [presiding]. Thank you. I want to thank all three 

of you for your testimony. Mr. Spratt, in line with the precedent 

that the chairman started, I will recognize you first. 

Mr. SPRATT. Well, I first want to first say to Gene Steuerle and 

Maya MacGuineas, I didn’t put the question to you about the trust 

fund report, and about the actuaries. But I think you have added 

something to the understanding of our process by devoting your attention to it, both in terms of process and particularly as to the integrity of it. When Tim Penny spoke to me about the possibility of 

being on the President’s Commission, and asked me if I had any 

ideas about it, my only recommendation to him was that they 

61

should use the Social Security actuaries to do whatever analysis 

they did. We need to have one scorekeeper so that we can keep 

some commonality and comparability about the wealth of different 

proposals that have been put out there. 

Gene Steuerle, you have actually proposed a Social Security solution that has a number of different elements. I want to give you 

an opportunity to explain your concept of it as you formulated it 

several years ago. I know it appears in different versions today. I 

think you were probably the grandfather, if not the father of the 

Stenholm proposal as it is called in the House. Would you explain 

how it would work? 

Mr. STEUERLE. Mr. Spratt, I should say that I was on the National Commission on Retirement Policy which Mr. Stenholm was 

the co-Chair. I agreed to sign onto that proposal. But we had disagreements on the Commission as well. So I have never come out 

with an exact proposal. 

But I can tell you the elements of a proposal that I would tend 

to believe are fair and ‘‘do-able.’’ Quite honestly, I believe there is 

a lot of room for compromise. I believe that this huge debate, for 

instance, that we have over individual accounts is exaggerated on 

both sides, and that there are really compromises that are available. 

The fundamental way that I start off looking at this program—

that I use to address the system—is, to ask myself, ‘‘what are the 

principles under which a system can work?’’ There is a core set of 

public finance principles. We want equal treatment of equals—

which is sort of an equal justice principle—and some progressivity. 

We want to take care of the poor, we want the system to be efficient, and we want it to be as simple as possible. 

Mr. SPRATT. You also took the opportunity, as long as you were 

at it, of changing the benefit structure as I recall, to deal with 

some inequities in it today. 

Mr. STEUERLE. My fear, again, on both sides of the aisle, is the 

fight over preserving the system or only adding individual accounts 

ignores that the core of the system, which would remain, which 

would still be very large, whether you have individual accounts or 

not. That core basically needs some substantial reform. Particularly 

the system has substantial discrimination, as I stated in my testimony, against single heads of household who can work, pay taxes, 

raise children—do all of these things we think we might be worth 

subsidizing—and get lower benefits than people who don’t do any 

of those things. 

That is among the types of reforms. Another concern is the system at the margin does a very poor job in attacking poverty. It has 

become more and more of a middle-aged retirement system, and it 

gives higher and higher levels of benefits to everyone overtime. 

There is substantial money in the system already with which we 

could solve poverty, whether we lower benefits over time or not. We 

already pay out enough that we can eliminate poverty among the 

elderly altogether, and we don’t. 

So there are a lot of issues in the core Social Security program—

which is going to be this pay-as-you-go system—that I think we 

should deal with, have been put to the side in this constant debate 

over individual accounts or no individual accounts. 

62

Having said that, I think the case can be made for individual accounts as put forward in the Stenholm-type proposal. I tend to 

favor them, partly because as this committee would understand, it 

gives honest budget accounting. When the money goes into the account, it is recognized as an outlay of government, and therefore 

deters the type of action where people make promises in the future 

but don’t have to fund them. So you make a promise, it has to be 

funded. 

Now, the related problem the individual account advocates have 

is that if we are going to put money in these accounts, we have got 

to fund them. Now they are asking us how we are going to do that. 

That is an honest scorekeeping aspect that I don’t think you have 

in the current system. 

I also tend to favor individual accounts a little bit because it is 

a back-door way of dealing with some of the fundamental problems 

in our private pension system, which is the issue just off the table. 

Well over half of the population gets almost nothing or gets very 

little in the way of private pension benefits. We need to figure out 

a way to increase saving among them. So I am willing to and actually quite supportive of efforts to try to put these type of accounts 

in the system. But it is for these particular reasons. 

In sum, I want to have a core system that does a better job in 

removing poverty among the elderly. I want it to remove some of 

this discrimination against single heads of households, and along 

the way, as a budget accounting rule, I tend to be someone who 

supports a lower growth rate of benefits, primarily because I think 

these entitlement programs are deterring us from spending more 

on education and other more vital needs of our society. 

I really do not believe that giving people like myself a 17th, 18th, 

19th year in retirement is a priority of our society, and it should 

not be. The current system has that as a priority over what I believe to be more fundamental needs. 

So for that reason, I am quite willing to support a lower rate of 

growth of benefits, primarily, in my view, through increasing the 

retirement age and aiming for some fixed number of years of retirement support—15, 16, something like that. 

Mr. SPRATT. Let me ask each of you: The actuaries have indicated that if 14 percent of the trust funds were invested in equities, 

46 percent of the estimated shortfall would be resolved. Is that a 

viable solution? Let me turn first to Barbara Kennelly. Does the 

National Committee regard this as, at least, something worthy of 

consideration? 

Ms. KENNELLY. Yes. And what Gene has said is what I agree 

with. That the debate has just got off of hand, we are not addressing the real problems. And you can disagree. But the National 

Committee is not saying don’t do anything. The National Committee is saying, and I agree with Mr. Walker, when you do something, it has to be a package of some things that you do, because 

we all know come 2041, we are short 27 percent of funds we need 

to pay for full Social Security. 

Mr. SPRATT. That was the wisdom of 1983 which you referred to. 

Everybody had a stake in this solution. 

Ms. KENNELLY. But I really felt very badly, because when the 

previous Commission on Social Security came out, one of the strong 

63

recommendations, they also had three suggestions, but one of the 

strong recommendations was investment by Social Security, or by 

the government, into the market. And unfortunately practically the 

next day, Mr. Greenspan came out and said, ‘‘oh, no, no, we can’t 

do that. I mean, how could this happen? And how could we have 

a board that could control this?’’ I felt like saying, ‘‘do you think 

you are the only honest man in Washington? You are the Federal 

Reserve.’’

But, it just sunk like that. But in my list of things, there are 

many ways of filling in the gap. I definitely say that we should look 

at the market. 

Mr. SPRATT. Gene. 

Mr. STEUERLE. I am not arguing that one can’t put stocks and 

bonds in the trust funds. My concern is if the goal is to have more 

ownership of stocks and bonds, I think that that probably is better 

served on the private or the individual side. And my reason is that 

simply transferring money to buying stocks doesn’t increase saving 

in society. All that happens there is, in an accounting sense, the 

government now lays a greater claim upon national resources than 

it does, say, if it is investing in bonds. So it doesn’t necessarily improve the economy. 

Mr. SPRATT. But it improves the rate of return in the trust fund’s 

assets. 

Mr. STEUERLE. Because now the trust fund owning stocks mean 

people in the private sector own less stock, so the private sector 

gets a little lower income than goes to the trust fund. Again the 

question is whether we increase saving in the process. If we don’t 

increase saving, there is no net gain for the economy or for citizens, 

we just get a little more money on the trust fund side. 

My concern—and I have to say it is an issue of political economy 

and not economics, I have to be quite honest about it—is that I 

think every nation that has tried to do this has run into problems 

of how you control what the government is going to buy or not buy. 

Admittedly, we do it when people put money in the Thrift Saving 

Plan. State and local governments do it. But you do get this problem: if you invest in the Standard and Poors 500 Index; what happens if you are company number 501 and the government is not 

investing in you? Or you are a small start-up company, you are not 

listed on the stock market, you don’t get this government investment. Or the whole question of social investment in tobacco companies. 

These issues will not remain off the table. So I think politically 

it is probably easier if we can figure out ways to resolve them with 

individual accounts. 

I don’t necessarily mean they have to be individual accounts 

along the lines of any one proposal or another. You could have individual accounts along the lines of President Clinton’s proposal if 

you want. But I just think if you are going to control where the 

stock is going to be invested, it is better to leave that choice to the 

individuals. 

Mr. SPRATT. Ms. MacGuineas. 

Ms. MACGUINEAS. I will be brief because Gene made the same 

points I would make. But I think the suggestion suffers from the 

popular misconception that we can get out of this problem by mereVerDate Feb 1 2002 14:17 Aug 27, 2002 Jkt 000000 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-32\HBU170.000 HBUDGET1 PsN: DICK
64

ly increasing rates of return. That is not what it is about. It is not 

about switching investments in one place for a different kind in another place. That is purely an asset shuffle. You are going to have 

the government owning more stock and, therefore the public owning more of the government bonds that were there before, and the 

returns on the assets are going to converge as necessary. 

So you can’t sort of switch with one hand your investments to 

your other hand and resolve the problem. If the discussion is about 

how best to prefund the system through private accounts or centralized trust funds, that is a good discussion to have. But we have 

to be talking about what consumption we are going to reduce in 

order to improve saving. And that comes from policy changes, either in taxes or benefits, it doesn’t come from shifting. 

Then finally, I do tend to agree with the Greenspan concerns of 

the political economy issues at hand. This is trillions of dollars that 

would be invested centrally by the government. And I am quite 

concerned that it would, over time, compromise the ability of the 

capital markets to allocate capital as efficiently as possible. 

Mr. SPRATT. Both of you have indirectly undercut an argument 

that Martin Feldstein makes for one of his proposals. Namely, he 

assumes that the transfer of Social Security assets into the equity 

markets would have an effect on the economy, and that the Treasury and the next stage would be able to reap higher returns from 

corporate returns as a result of this, cost of capital would go down, 

companies would become more productive and efficient, they would 

become more profitable, and consequently, the Treasury would reap 

some of the return for this in income taxes. 

I take it from what you said you don’t think there will be an economic effect like that by simply investing in the market, using 

these assets to invest in the market? 

Mr. STEUERLE. In Dr. Feldstein’s case, he is actually making an 

assumption that there is also some shift out of consumption. Under 

some analyses he has performed, he assumes that government 

spends less on other consumption items. That is really the source 

of the additional savings that lead to this investment. Again, if it 

can be done the right way, this attempt to lower consumption is 

in both the attempt to put Social Security off-budget on the one 

side and the attempt to put money in individual accounts on the 

other. 

The common goal is to successfully change the target, the deficit 

target of Congress, which both sides of the aisle attempted to do 

last year by defining a non-Social Security budget surplus as one 

way of getting there. Or individual accounts might do that by having the money counted, as I said, immediately as an outflow of government. 

If you can change the accounting so Congress has a tighter target, than the savings come from the fact that Congress basically, 

somewhere in this system—it might be in the non-Social Security 

part of the system—is spending less or taxing more. But it is getting the government in more balance. And that is really the source 

of saving that Dr. Feldstein relies upon. 

If that occurs, it probably would improve the economy. However, 

my concern is not that we don’t work on these savings issues. I 

think they are vital. But I have been in this town now 30 years, 

65

essentially working on saving proposals from one administration to 

the next; one Congress to next. Quite honestly, we cannot totally 

control net national savings. We can control government saving. 

We can mandate individuals do certain things with one hand, but 

we can’t control what they do on the other because we are in a 

democratic society. 

We can only do things to try to improve net savings. 

Mr. SPRATT. Let me ask each of you, do you then support, as a 

first step, the idea of using the surplus to buy up outstanding government bonds, pay down debt held by the public and add to national savings? 

Ms. KENNELLY. We did that for 2 years. What resulted is we 

were going to be able to pay off the debt by 2012. We saw that in 

action when we did have the surplus, because by law, when you 

have certain amounts of money, you can only use it to pay down 

the debt. But I would like to go back to your previous question for 

a minute and say one thing—we always talk about the picture in 

Washington, because we are dealing with the big picture. But if 

you look at the individual out in the country, nothing was mentioned when you asked that question about investing in the market 

about risk. And why one of the reasons that we are for looking at 

the investing in—the government investing in the market is the 

risk would be shared. 

In the individual accounts, the risk is there for each individual, 

and if they retire at a time when the market is down, they have 

to pay for that by themselves and they lose their dollars. And there 

really is no insurance for them in the individual accounts. 

Ms. MACGUINEAS. From an economic perspective, I think the approach of paying down the debt was a very solid, well thought-out 

approach. I did, at the time we were talking about it, spend a little 

time worrying about what was going to happen when all of the 

debt was bought up, but I am not so worried in the short term any 

more. 

Mr. SPRATT. As Larry Summers said, that was like his worrying 

about going on a diet and losing too much weight. 

Ms. MACGUINEAS. So yes, paying down is debt is the way to increase public saving. That has the same kind of effects as creating 

private accounts that create new saving in the private sector. But, 

I think the question is, what mechanism can create the budgetary 

discipline necessary to accomplish this in a sustainable way. My 

concern is we have had those trust funds for decades. We have seen 

that the presence of the Social Security surplus not only leads to 

the use of that surplus, it may, some academic research has shown, 

lead to more than—spending more than just in the Social Security 

surplus, because of the psychological effects of feeling like there is 

more money at hand. 

I believe one of the fundamental advantages of private accounts 

is that it would take that money out of the budget and wall it off, 

if you will, in a way that I think makes sustained savings far more 

likely. 

Mr. SPRATT. Thank you; all three. I appreciate your participation. 

Let me give others a chance to ask questions. 

Mr. HASTINGS. I want to thank you all for being here. Let me ask 

a question of all three of you, if any of you have hopefully the anVerDate Feb 1 2002 14:17 Aug 27, 2002 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-32\HBU170.000 HBUDGET1 PsN: DICK
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swer to this. All of you alluded to the 75-year projections that were 

in this trustees’ report. Social Security is nearly 70 years old now. 

Has there been a study that you are aware of going back to the—

when Social Security started of what these projections would be, 

recognizing, of course, that there were changes in the benefits over 

a period of time, and obviously a new study? I mean we remind 

ourselves we were in the Second World War when Social Security 

was founded. 

So are you aware of any in-depth study as to what the projections were at the time of Social Security, on what it would be, say, 

75 years, I don’t know if they looked at 75 years in the 1930s or 

not. Are you aware of any of those studies? 

Ms. KENNELLY. I would go back to the previous actuary reports. 

Because that is exactly why we have them, so that we can do those 

projections. But, as you say, so much has changed. When Social Security began the lifespan was 67, say, so you were only going to be 

paying 2 years. The whole demographic picture continues to evolve. 

But I think your actuarial reports are about as good as they get. 

Mr. HASTINGS. Mr. Steuerle. 

Mr. STEUERLE. Early on, the system was not indexed as it is 

today. The early system had a tax rate of 2 or 3 percentage points 

of payroll. There were projections that that would be insufficient if 

there wasn’t some funding because the costs were going to rise at 

that time to 6 percent of payroll. 

But after that point in time, there were substantial benefit increases that were enacted by a number of Congresses. 

Mr. HASTINGS. Starting when, roughly? 

Mr. STEUERLE. Probably the biggest increase came early in the 

Eisenhower administration. Now mind you, by the way, that Social 

Security’s long-run costs were quite moderate when it was established. Then we had these increases in the Eisenhower administration, partly to make up for the fact that inflation through World 

War II had substantially reduced benefits. We didn’t have automatic growth. Congress was able to act a bit more in a discretionary manner as in other parts of the budget. 

Then we started enacting a number of increases in Social Security. In particular, as the defense budget kept shrinking, we had 

more and more money that we shifted off to domestic policy and 

that we could afford in the broader budget context. 

In the late 1970s and early 1980s, we decided to try to move 

more to a system of indexing because we weren’t quite happy with 

the way that we were having these constant enactments by Congress. So there was an attempt to create an automatic mechanism 

that would be cleaner, in some sense, and create a more equitable 

benefit. 

In some sense it did. But the consequence was, we built all of 

this growth into the system. 

Mr. HASTINGS. How accurate were the projections at these times, 

because we are looking at a 75-year projection? We will be making 

decisions on this as this debate goes forward based on those 75-

year projections. What I am asking is how accurate were those projections when they were made at these given times? 

Mr. STEUERLE. I would have to check with the Social Security 

Administration. My guess is they were probably fairly accurate, 

67

that most of the changes came about because of enactments by 

Congress. 

Mr. HASTINGS. OK. 

Ms. MACGUINEAS. I would have thought if there were a study, 

Gene would have done it. 

Mr. HASTINGS. Let me ask another question to all three of you. 

Mr. Walker, when he was up here, made, I thought, a rather profound observation, when he said the expectations of the boomers to 

some extent and the expectations of the Gen-Y and the Gen-Xs to 

a larger extent are of the idea that their expectations of receiving 

full benefits from Social Security will not be there, and therefore, 

the potential fix that we have may be easier than what would be 

otherwise thought. 

I hope I characterized that correctly. I would like your observations on that. 

Ms. MACGUINEAS. Two points on that. I believe that that is probably the case. Actually, though, the literature I have seen is slightly different. People’s expectations tend to be wrong about what they 

are going to receive, but they are wrong on both sides. Many people 

think it is more. Many people are surprised to learn how low the 

benefits are. 

Many people think they are going to do much worse because they 

think that Social Security is not going to be there for them. So I 

have seen huge discrepancies in our expectations as compared to 

reality, but on both sides and also along the income spectrum. 

Mr. HASTINGS. In that train of thought, then, are those that as 

you described that are higher expectations, lower expectations, 

what percentage of the people feel that way? 

Ms. MACGUINEAS. I would have to check the specific numbers. I 

was just struck with how few people actually knew what they 

should expect from Social Security. 

Mr. HASTINGS. I interrupted you. 

Ms. MACGUINEAS. But to your bigger point, I am not sure if the 

fairest way to figure out how to spread the costs of reforming the 

system is to say let’s do it based on what people’s expectations are, 

because you may have an expectation for something that is going 

to be very negative because of information they have received. I am 

not sure that giving somebody something that is just a tiny bit better than very negative still means that we have done the best in 

for making the system as fair as possible. 

I think one of the crucial things in keeping support for Social Security is making people feel like they are treated fairly. And in this 

difficult situation which we are currently in, I think that is going 

to involve spreading the whole cost of reform between individuals 

and in particular, generations. 

Mr. HASTINGS. OK. 

Ms. KENNELLY. Congressman, I agree, probably that many, many 

young people don’t think Social Security is going to be there when 

they get older. And one of the reasons for that is that millions of 

dollars have been spent on this message to say Social Security 

won’t be there. And I have to take that a step further, these advocates of the individual account are very much active, such as CATO 

in saying that very thing. But I would disagree with Mr. Walker 

that the baby boomers don’t expect Social Security to be there. I 

68

think that they do. I think the lower the income of the individual, 

the more they expect that it will be there for them. 

We are a country that has always had a Social Security system 

as every other developed country has had a Social Security system. 

I can’t imagine this great Nation not having it. I know that when 

I was younger, I certainly never thought about retirement. 

But we have so much talk, every magazine, all of the magazines 

on the stand about retirement policy, about investing. This morning the talk about the 401(k) plans. But there are so many people 

out there. The average median income—the average income for 

families in this country is $30,000. People with a couple of kids 

can’t afford some of these things that some of us take for granted, 

like 401(k) plans. 

So I think there is certain—a great deal of expectation, middle 

age and lower and middle income people, that it will be there. 

Mr. STEUERLE. Three very quick anecdotes on expectations. The 

first is that the retirement age is increasing right now. You can 

hardly even pick up a comment, at least on increases in what is 

called the normal retirement age, in the paper. Few notice this is 

happening. That is because it has been taken out of a political context. People’s expectations haven’t been dashed, at least as far as 

I can tell there. 

Second is that the system between 1995 and 2000 basically increased its future benefits for people by about 10 percent above 

what they were expecting in 1995. Nobody is even aware of this, 

as best I can tell, essentially because the system is wage indexed. 

When the economy grew about 10-percent more over those 5 or 6 

years than we expected, it did all sorts of wonders for the non-Social Security part of the budget. 

In Social Security, it basically raised everybody’s benefit, your 

benefits, my benefit, by 10-percent beyond what we would have 

projected, even in our Social Security statement in 1995. Almost no 

one noticed that 10 percent bonus, which was probably the largest 

single decision made by Congress between 1995 and 2000 in terms 

of spending, and it came about automatically. 

So in terms of expectations, I think that people do not have great 

expectations. 

And the final example is that few people are aware that the system is automatically increasing benefits. In the debate over reform, 

few people note that we are basically talking about cutting the rate 

of growth of benefits. We are not cutting real benefits. 

Mr. HASTINGS. Maybe that leads into what you talked about, Mr. 

Steuerle, about the annual benefits and lifetime benefits and the 

differentiation between that and the focal point of our debate. 

Would you elaborate on that difference between the annual benefits 

and lifetime benefits? 

Mr. STEUERLE. Well, there were two aspects to my note. The first 

was that I was arguing simply that we should count lifetime benefits because that is the basic insurance policy that people are getting. And people should understand what their lifetime benefits are 

and not just look at an annual benefit, just as if we were putting 

money in our 401(k) plan. We want to know what is in the account. 

The advantage of that is that I think it gives a more honest accounting of how Social Security is adjusting over time. It is not just 

69

adjusting annual benefits, it is adjusting for the fact that we generally don’t increase—the law actually has a temporary increase—

but the normal retirement age for longevity. And the biggest 

growth in the system has come from providing people with more 

and more years in retirement. 

The second reason for calculating lifetime benefits is geared toward helping those people engaged in reform actions. I would much 

prefer these reform commissions aim for a target of what they 

think lifetime benefits should offer first, and then back up to what 

they think the system should be in the way of annual benefits rather than first looking at annual benefits. 

That way, they can decide whether we want to get more money 

in late old age, when people have more severe problems of longterm care. They may have lower incomes then, so do we want to 

boost that benefit up relative to giving more money early in their 

retirement. 

If you start with a lifetime package of benefits, you naturally 

think, just as you and I would, in drawing down our 401(k) plan. 

When you think only in terms of annual benefits, you didn’t think 

along those lines. You design a package, as I said earlier, where 

and more and more of the resources go to the younger among the 

elderly—really people in late middle age who really need the resources much less. 

Mr. HASTINGS. Thank you very much. 

Mr. Moran. 

Mr. MORAN. Thank you, Mr. Chairman. In that regard, Mr. 

Steuerle, you have a chart here showing that in the year 2000 a 

two-earner couple would get total lifetime benefits of approximately 

two-thirds of $1 million, apparently $650,000. 

Do you have a comparable figure for how much they would have 

paid into the system at that point? 

Mr. STEUERLE. In present value, for an average income couple in 

Social Security, this depends on your discount rate. But if you take 

a 2 percent discount rate—assume a 2 percent rate on return—I 

think they would almost have paid in most of the Social Security 

money. 

In terms of Medicare, they would fall far short because the Medicare tax is very low in its rate of growth, while the projected rate 

of growth of health costs is very high. That is what is driving the 

Social Security number—excuse me, I mean driving the Medicare 

number. 

Mr. MORAN. So they would have paid in about $300,000 in terms 

of the Social Security, FICA taxes, but any estimate of how much 

less than the $350,000 they would have paid in versus benefits that 

they received? 

Mr. STEUERLE. They probably wouldn’t even have paid in a third 

of it. But it can get a little complex there. Some of it is coming from 

what they may have paid in income tax to support the Medicare 

Part B system that was very low cost in the past. I can send you 

the numbers. 

Mr. MORAN. That might be useful for us to understand. Now, 

part of the reason that we have—at least equal to benefits, at least 

equal to what is being paid in, and let me ask one other question 

here. As we get to much later out, 2030 is the figure that you show, 

70

are we paying in a higher percentage or a lower percentage of what 

we are getting out of the system? I know people are living longer, 

and so you would assume that you are going to get a lot more back 

in terms of your annuity benefit that you paid in later years. Is 

that the case? 

Mr. STEUERLE. As you move to the future, people pay at a much 

higher percentage. They pay in more than they get back, even at 

these moderate discount rates. That is because the tax rate has 

continually gone up over time. Social Security created very, very 

large windfalls to the early generations—in particular to the rich 

of earlier generations, interestingly enough. 

But future generations don’t get that windfall, because they come 

to the point where they have to pay more for the system now. This 

analysis is made very complex by the fact the system is still out 

of balance. So you have to ask, what is the actual tax rate that 

would apply in the future if you maintain this benefit? It is higher 

than what is in the current law. 

Mr. MORAN. What I am getting at is, if you did do it on an annuity basis, what in terms of FICA taxes will it take to treat it as 

though it were an annuity, a tax-free annuity? 

You are saying that you are actually—it is less of an annuity, 

less of a good investment, from the perspective of it being a private 

annuity, the longer you go out, because wages are going up, you 

are paying a higher percentage despite the income cap, and so your 

return is less you are telling us, except for Medicare. 

Mr. STEUERLE. It is also very complex. Because ultimately Social 

Security is designed so that the rate of return you get in the future 

is determined by the birth rate. If birth rates fall, your rate of return falls. So as birth rates have fallen, our rate of return is lower 

than previous generations and on into the future. So that is one of 

the consequences of Social Security’s pay-as-you-go design. Because 

it is not funded, it is dependent on this money coming into the system. 

Mr. MORAN. Someone was saying, I remember people were talking about it for a while, that you recover after the first 21⁄2 years 

of being on retirement virtually of what you have paid into the system. Now, the numbers you are telling us—that is not consistent 

with that assumption at all. 

Mr. STEUERLE. I don’t think people are counting the fact that you 

as an employee really pay the employer tax. The employer doesn’t 

pay it, the employee pays it as a reduced wage. Also, I don’t think 

they are using interest rates. If you paid money 30 years ago, it 

would be compounded at some rate. 

Mr. MORAN. So they are just looking at what the employee has 

paid and not the comparable employer? 

Mr. STEUERLE. I am guessing. I am almost certain that they 

don’t compound the taxes, they don’t use interest. The question 

whether they use employer and employee taxes, I am not certain. 

Mr. MORAN. So that is a bogus statement that you are getting 

back from the system, in just a few years of retirement, what you 

paid in, the rest is coming out of subsequent generations’ incomes. 

That is just not the case. 

Mr. STEUERLE. I think for new retirees, I think the case is weak. 

For older retirees, it is more true——

71

Mr. MORAN. So it would been true for earlier retirees. That is 

helpful to know. I am very sympathetic with your concern about 

the efficiency and equity aspect of Social Security that a lot of it 

is going to people who don’t need it. And vis-a-vis our other national priorities, it is a real question whether we should and can 

be continuing such a system from that perspective. But, just as the 

one of the principal reasons we, or at least I consistently vote 

against vouchers or anything else that is going to undermine the 

public participation in our public—widespread participation in public school system, is if you didn’t have widespread benefit, then the 

people who need a quality school system the most are going to be 

less likely to be able to get that revenue flow that they need from 

general taxes, similar case applies to Social Security. 

If you don’t have widespread benefits you are going to have less 

political support for maintaining a system that, in fact, in the long 

run, really does benefit lower income people to a greater extent 

than it does upper. There is some income transfer taking place 

within the system. You probably wouldn’t be able to sustain that 

politically if you don’t have widespread benefits at the level that we 

are paying out. Is that not an accurate statement? 

Mr. STEUERLE. I think the concept of social insurance—and I 

agree with it—is that you need to have a mandated system. But 

there is a case with individual accounts where it is also part of a 

mandated system. So the question is, what balance would you 

achieve? I agree with you, you can’t allow people to opt out, because the people who opt out would be the people who are paying 

for some of this redistribution. So people can’t opt out entirely from 

the system. 

However, you could set up or design individual account Social Security that also deals with some of the issues you talk about, both 

with respect to progressivity and mandated participation. 

Mr. MORAN. But my concern is any kind of testing system is 

going to undermine the kind of political support that you have 

today for the benefit distribution that you have. Let me ask one 

other question. I don’t want to go to far beyond my time here. 

But, on disability insurance—well, let’s go to a broader question. 

If we went—if we increased the retirement age at the pace at 

which the health of our senior citizens is—the longevity our senior 

citizens is increasing, which we don’t do, but if we geared it to the 

greater longevity that is being achieved through improved health 

care, a lot of it paid out of Medicare, et cetera; if we geared it to 

that, and you today you would probably be in the 70s because the—

I think when it was established, the average length of age was only 

about 48 or something. 

So if you geared it to improved longevity figures, the problem we 

would run into, and which I think is an untenable situation, is that 

even though it is a declining proportion, those people who work 

with their backs to do manual labor, men and women, and oftentimes we think of men, but it is women who are performing domestic work and so on. 

The human body gives out, if you are performing that kind of 

work in your late 50s, your early 60s, and it is not fair really for 

these people to expect them to stay in the work force at a level consistent with the general health of the workforce, even through a 

72

greater proportion of people are not performing manual labor in the 

United States today. 

I would like for you to address that, and Barbara as well, if I 

could have the indulgence of the chairman—thank you, Chairman 

Hastings—if we could have a more liberalized definition, for example, of disability so that people who are in that kind of situation 

could, in fact, retire early, albeit with a slightly reduced benefit 

level. I think we could then kick in a more rational extension of 

age eligibility. I am not sure, but I would like you to address that. 

Ms. KENNELLY. I hear what you are saying, Congressman. If, in 

fact, we continue to increase the retirement age, disability claims 

will increase. That argument has been made. But, getting back to 

those individual accounts, I have read an awful lot of material on 

individual accounts. We understand the market, because most of us 

are in the market. What you put in, you get more if your stock performs well, and if your stock doesn’t perform well, you get less. 

I haven’t figured out how you, in a practical way, can bring people on disability to make any money in the individual accounts. So 

I think that is a whole another avenue. 

Mr. MORAN. I happen to agree with you. That is one of the major 

problems. But it is part of a larger problem with people who are 

best able to manipulate within the field of investment judgment 

are those that are——

Ms. KENNELLY. Even if they don’t have any income. But to get 

back to the raising of the age, on my long list of things that you 

can do to address solvency, one of them is that in this increase that 

began to raise the age to 67, there is a gap between 66 and 67. 

And possibly to bring some money in, we might be able to close 

that gap. But, I wouldn’t like to suggest yet that we raise the age 

any higher than 67, because we have no studies to show exactly 

what you are saying. Did this make people go more to disability? 

Would this change help people? Take for instance the 62 retirement 

in regard to the 65 retirement, which will be the 67 retirement. So 

I think that is a very difficult question to address. But the disability question will have to be addressed. 

Mr. MORAN. Well, we do know that people are living longer. But 

as you say, it is this issue that really has to be addressed if you 

are going to increase in a correlative way to longevity. Thank you. 

Mr. Steuerle. 

Mr. STEUERLE. If you look at the statistics when Social Security 

was first established—that is, when benefits were first paid in 

1940—about 70 to 80 percent of men age 65 were working. That 

has dropped to about 30 percent. Work then was tougher. It was 

far more physically demanding. 

Mr. MORAN. You said 70 to 80? 

Mr. STEUERLE. It is something like 70 to 80 percent of men at 

age 65 were working when benefits were first paid. The average 

age of retirement in 1940 was 68. The average age of retirement 

today—when people have longer life expectancy and greater 

health—is 62 to 63 depending on how you count disability insurance. So people are retiring earlier, several years earlier, and they 

are living several years longer, even while the physical demands of 

the jobs have been declining quite substantially. 

73

I can send you all of these data. Because I realize I am being 

very quick here. The difficulty is, do we really need for most people 

in the population, as I say, this 15th, 16th, 17th or 18th year in 

retirement? I understand your sympathy for this group in the population, whether it is 10 percent or 20 percent of the population—

that may have some physical impairments. But it is very expensive 

to subsidize 100 percent of people who are not in need for the 10 

or 20 percent who are in need. 

It is an issue. It is just that the system has become so expensive 

that a number of years of support just seems to me not a tenable 

result. I will say, however, that increasing the retirement age does 

have an impact because we waited so long to reform, and people 

retire now so much earlier. We have allowed them earlier retirement even while they are living some much longer. We are so close 

to the point in time when the baby boomers retire that the adjustments have to be much faster and much more swift than just simply indexing. The adjustment is somewhat substantial. 

Let me finally say that I think the main change that needs to 

be made is in the early retirement age, not so-called ‘‘normal’’ retirement age. The age of 62 is the age that needs to be bumped up 

more than worrying about what the so-called normal retirement 

age is. 

Mr. MORAN. That is very helpful. Incidentally, let me say, Mr. 

Chairman, I appreciate your inviting Mr. Steuerle, and obviously, 

our colleague, Mrs. Kennelly. I don’t know Ms. MacGuineas, but I 

know that she was a player on the Commission. Mr. Steuerle with 

the Urban Study has given us so much creative information that 

it is a pleasure to have him testify before us, I appreciate that. You 

have told me a number of things that I actually wasn’t aware of, 

and some of them are counterintuitive. 

Did you have anything further to add, Ms. MacGuineas? 

Ms. MACGUINEAS. The only thing I would add would be that one 

way to think about this may be to rather than just increasing the 

retirement age, indexing benefits to life expectancy, but allowing 

for a more flexible retirement age, because obviously, I share your 

concerns, everyone would. 

At the same time, as Gene said, it is unfortunate to not understand this as a labor market problem and not create the incentives 

to stay in the workforce longer when we know that that would resolve part of the problem to protect one group. 

I also think ensuring that we strengthen disability so it can kick 

in for the people who need it is probably an important part of the 

equation. 

Mr. MORAN. I do think that at least unless you deal with that 

situation, even though it may be 10 percent it is a sine qua non 

of reform. You have got to address that element of the workforce. 

Thank you. Thank you, Mr. Chairman. 

Mr. HASTINGS. Mr. Steuerle, in responding to Mr. Moran’s request on statistics as to retirement age, going back to, I think you 

said the 1940s, my assumptions is that you probably have those 

statistics for probably every year, that can be found some place. 

Am I correct in that assumption? 

74

Mr. STEUERLE. I will try to find what I can. As you might know, 

in many cases, I just rely on data that are kept by the Social Security Administration. But I will be glad to. 

Mr. HASTINGS. Whatever you can. I, as one Member would certainly like to have these statistics, because, inevitably as we proceed in this debate, that is going to come up. There is no question 

about that. As we have to make some of those decisions. I want to 

thank the panel for joining us. Barbara, it was good seeing you 

once again. 

Chairman NUSSLE [presiding]. That is a good suggestion. Thank 

you. We do have two votes. I don’t want to be disrespectful. So why 

don’t we—first of all, we are pleased to have you. You also, as I 

said in the opening, there have been a few people that have just 

been in the forefront of sounding the alarm and letting folks know 

in a constructive way about some of the challenges. And you certainly have added to that greatly. I want to welcome you and thank 

you for your testimony today. We will accept it. And then if we 

have questions we will come back after the vote. 

Director Crippen, welcome back to the committee. 

STATEMENT OF DAN L. CRIPPEN, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. CRIPPEN. Thank you, and Mr. Moran as well. I will, as I 

said, put aside much of which I intended to say and try and make 

probably just one point. 

There is an advertisement running, I was reminded this morning 

as many of your witnesses talked on disability insurance, that uses 

Yogi Berra as the central figure in the ad. Among the other Yogi 

Berrisms, he said, when you get sick or if you can’t go to work, this 

plan will give you cash, which is almost like money—or just as 

good as money. 

What we heard from most of the witnesses today—I can only reiterate—is, you have to think about the cash. How we account for 

current taxes and future obligations is important. But when it 

comes down to it, it is very simple, I think. When I retire, my children will pay for my benefits. 

There is no way around that. Whether it is payroll taxes up until 

2017, whether it is payroll taxes and general revenues after that, 

income taxes to pay interest, whether we end up borrowing from 

my kids in order to pay my benefit, it is my kids who will be funding my benefit. 

We can argue about and think about all of the accounting we 

want. But at the end of the day, my two kids are unfortunately 

going to pay for me. Those of you who don’t have two kids should 

probably take a benefit cut. 

But one way we can think about that—the way that I have been 

talking about it for the past 31⁄2 years, with this poor bedraggled 

chart that has gone with me to virtually every hearing—is as a 

percentage of the economy, how much is the Federal Government 

transferring to retirees? 

All of that has to come from workers, my children. There is no 

magic way, there is no dollar stuffed in a mattress, there are no 

offshore accounts here. It will be the current economy at the time 

that is important both in my children’s ability to finance my benefit 

75

and, if you want to think about it another way, in producing the 

goods that I will be consuming, because what I consume, they can’t. 

So in that light, Mr. Chairman, I just want to say a couple of 

things about what CBO is doing that I think will help that debate 

when you all get around to having it in a more concrete way. 

One, we have been publishing a number of documents that I 

hope will be helpful. We put out one last year called ‘‘Social Security: A Primer.’’ It is aimed at policymakers, policy analysts, and 

press. It has a lot of charts, graphs, colors, and an attempt to explain Social Security from an economic point of view. 

We have done reports—like the one that is on the screen now—

looking at the uncertainty in Social Security. I think it is important 

to note that while introducing individual accounts, for example, 

might introduce new uncertainties into the system, the system is 

already very uncertain in many ways, and we don’t know what the 

net effect would be. 

We have just begun a series of 3- and 4-page reports—there 

should be about 15 of these—looking at particular aspects of the 

long-term implications of Social Security. We are putting out about 

one a week. 

Last and most important, we have spent the past 3 years building a new long-term model that will be able to answer most of the 

questions that you heard raised here today. We will be able to look 

at the effects of reform on the economy. We will be able to look at 

the effects of reform on individuals, any given cohort of the population. We will be able to look at the effects of reform across populations, across generations. We will be able to do much of what 

Gene Steurele called for and more perhaps. 

We are in the throes of finalizing that model. It should be ready 

for you when you are ready to do Social Security. With that I will 

quit. 

[The prepared statement of Mr. Crippen follows:]

PREPARED STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET

OFFICE

Mr. Chairman, Ranking Member Spratt, and members of the committee, I appreciate the opportunity to appear before you to discuss the Social Security program. 

The Social Security Act of 1935, enacted in the midst of the Depression, is widely 

seen as one of the most important legislative accomplishments in U.S. history. Since 

its inception, Social Security has grown to become by far the largest Federal program. Over the next 30 years, the aging of the baby boom generation will pose new 

challenges for Social Security, the Federal Government, and the U.S. economy. 

The Congressional Budget Office (CBO) has examined those challenges in a number of recent reports. Late last year, we published ‘‘Social Security: A Primer’’ and 

‘‘Uncertainty in Social Security’s Long-Term Finances: A Stochastic Analysis.’’ Last 

week, we released a policy brief on the long-range picture of the Federal Government’s share of the economy. My testimony today summarizes some of the findings 

of those reports; it will make the following major points. 

Once the baby boom generation retires, the portion of the Nation’s output that 

the Federal Government will spend on Social Security is expected to rise by 50 percent from about 4 percent of gross domestic product (GDP) today to an estimated 

6 percent in 2030. 

Addressing the growing cost of Social Security would not by itself eliminate the 

economic and budgetary pressure caused by the aging of the U.S. population. The 

rapidly escalating costs of the government’s health care programs are a major 

source of that pressure. CBO projects that Federal spending for Social Security, 

Medicare, and Medicaid combined will account for about 14 percent of GDP by 2030 

nearly double the current share. 

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Looking farther ahead, CBO projects that government spending (excluding interest on the Federal debt) will rise from about 18 percent of GDP today to 28 percent 

in 2075 under current policies. If revenues remain within their historical range relative to GDP, the total cost of government (including interest) could double as a 

share of the economy: from about 19 percent of GDP today to about 40 percent in 

2075. However, modest reductions in the growth of spending for Federal programs 

could significantly slow the growth of interest costs and total outlays. 

Projections of Social Security’s finances are highly uncertain, but the range of uncertainty is not adequately reflected in the low-, medium-, and high-cost scenarios 

used by the Social Security trustees.

Uncertainty about long-term budgetary outcomes derives from many factors, including rates of mortality, fertility, inflation, and real wage growth. Social Security’s 

finances are most influenced by variables, such as mortality rates, that move independently of economic growth, because outlays are affected more than receipts when 


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people live longer. That aspect of the system’s finances is important to keep in mind 

when designing proposals to reform Social Security. For instance, a change in the 

retirement age that was linked to life expectancy could automatically resolve the 

budgetary consequences of any future changes in mortality rates. 

The expected increase in Medicare spending highlights the divergence between 

economic growth and budgetary pressures even more clearly, because most of that 

increase results from health care costs per beneficiary growing faster than GDP per 

capita. No mechanism in law exists that will slow down that growth. 

Although policymakers have many goals, if they want to limit the growth of Federal spending as a share of GDP, they have only two options: slow the growth of 

that spending or increase the growth of the economy. The Nation’s ability to sustain 

an aging population will ultimately depend on how many goods and services the 

economy produces and how they will be distributed, not on how much money is credited to Social Security’s trust funds. 

THE PRESSURES OF AN AGING POPULATION

Over the next three decades, the aging of the baby boomers (the large group born 

between 1946 and 1964) will put new pressure on Social Security, the Federal Government, and the U.S. economy. The Social Security Administration projects that 

the number of people age 65 or older will rise by more than 90 percent during that 

period (from about 36 million now to 69 million in 2030), according to its intermediate assumptions (see figure 1). At the same time, the number of adults under 

age 65 who will largely be the ones paying the payroll taxes to support their elders 

will grow by only about 14 percent (from 172 million to 196 million). Moreover, even 

after all of the baby boomers have retired, the number of elderly people is expected 

to keep rising at a faster rate than the number of non-elderly people as life spans 

continue to lengthen. 

Perhaps even more important, as the population ages, spending on Medicare and 

Medicaid is likely to rise rapidly because of increases in Federal costs per beneficiary as well as in the percentage of the population eligible for benefits (unless 

major changes are made to those programs). Medicare provides health insurance to 

most U.S. residents age 65 or older and to eligible disabled people, most of whom 

also receive Social Security benefits. Medicaid is a joint Federal/State program that 

provides medical assistance to low-income people; in recent years, a large share of 

its payments have gone to provide long-term care, mainly for elderly or disabled 

people. 

A LONG-RANGE PICTURE OF THE FISCAL SITUATION

How will those pressures of demographics and health care costs affect the U.S. 

budget and economy? To help address that question, CBO has developed a new longrange model. Using the model, we recently prepared a 125 year picture of the budget that extends from 1950 to 2075. Those projections illustrate a potential path for 

the budget that highlights the implications of maintaining current policies. Of 

course, the future path of the budget is highly uncertain and subject to wide variation. Thus, the path shown in those projections is simply a representation based 

on an illustrative set of key assumptions. 

Although my testimony focuses on long-range projections of spending under current policies, CBO is about to unveil an expanded version of the model that will be 

capable of simulating the budgetary and economic effects of policy changes including 

detailed proposals for Social Security, such as the introduction of private accounts. 

One of the more innovative features of the expanded model is its ability to perform 

stochastic simulation analysis, which shows the probabilities of alternative outcomes 

based on a statistical distribution of alternative assumptions about such factors as 

returns on stocks and bonds, mortality, fertility, and wage growth. The model will 

also include equations that reflect how people alter their work and saving in response to increases in taxes and cuts in benefits. We expect to begin releasing analyses from that model sometime this fall. 

In CBO’s current long-range model, Social Security spending reflects growth in 

the number of recipients and in wages, which determine benefits. Medicare and 

Medicaid spending reflects the increasing number of recipients and the age profile 

of enrollees as well as the rising costs of medical care. For the long-range projections 

described below, the growth in health care costs for each recipient of a given age 

is assumed to slow to a rate 1 percentage point faster than the growth rate of per 

capita GDP. Although seemingly high, that rate is lower than it has been in recent 

decades. The budget figures in these projections are expressed as a share of GDP 

so that the magnitude of Federal revenues and spending can be observed in relation 

to the country’s total economic activity in any given year and over time. 

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The projections show that it is spending for the major entitlement programs and 

for interest because of the commitments involved and their sheer magnitude that 

has the largest potential to constrain future Congresses. Moreover, much of the government’s remaining spending consists of discretionary outlays, the levels for which 

are determined annually. Given the wide array of discretionary programs, that category of spending (unlike the major entitlement programs) does not easily lend itself 

to projections that merge economic and demographic assumptions with legislative 

rules for the payment of benefits. Thus, CBO’s long-range projections assume that 

defense, nondefense discretionary, and all other spending (that is, other than for Social Security, Medicare, Medicaid, and interest) will remain fixed as a share of GDP 

beginning in 2012, the last year of the 10-year baseline projections that CBO published in March 2002. The projections do not incorporate the recently enacted farm 

bill and economic stimulus package. 

HISTORICAL TRENDS IN SPENDING

Spending by the Federal Government grew from approximately 3 percent of GDP 

in 1925 to about 16 percent in 1950. (Following the Depression, World War II 

abruptly boosted Federal spending to about 42 percent of GDP, but afterward, that 

spending dropped and resumed a less volatile growth trend). Since then, Social Security, Medicare, and Medicaid have together become the largest component of the 

Federal budget (see figure 2). In 1962, when Social Security outlays represented 

only 2.5 percent of GDP, and Medicare and Medicaid had not yet been created, 

spending for all other government activities made up about 85 percent of Federal 

non-interest outlays. The largest share was for national defense, which accounted 

for half of non-interest outlays and represented 9.2 percent of GDP. By 2001, total 

spending for Social Security, Medicare, and Medicaid equaled 7.8 percent of GDP, 

about triple the 1962 share for Social Security alone. Although still constituting less 

than half of all Federal spending, the three programs combined accounted for the 

largest share of total outlays. Defense spending had fallen to 3 percent of GDP, and 

all other non-interest spending stood at 6.3 percent. Interest costs, whose share of 

GDP had risen steadily from 1.2 percent in 1962 to a high of 3.3 percent in 1991, 

stood at 2.0 percent in 2001.

PROJECTIONS TO 2075

Looking ahead, CBO projects that outlays for Social Security, Medicare, and Medicaid (based on the current rules for benefits) could nearly double as a share of GDP 

by 2030, rising to about 14 percent. If spending for all other government activities 

in 2030 remained at roughly the same share of GDP as projected for 2012 (about 


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7 percent), Social Security, Medicare, and Medicaid would account for almost 70 percent of the government’s non-interest spending. By 2050, outlays for the three programs would constitute nearly 17 percent of GDP, and by 2075, about 21 percent 

exceeding the share of GDP now absorbed by all Federal revenues (see figure 3). 

Under the assumptions that CBO made for its long-range picture of government 

finances, the projected rise in spending for Social Security, Medicare, and Medicaid 

would drive total Federal outlays well above the level seen throughout much of the 

post-World War II period. The government’s core costs (that is, ignoring net interest 

on the debt) could rise from about 18 percent of GDP today to about 24 percent in 

2050 and 28 percent in 2075. Left unattended, that steady escalation in spending 

could cause major deficits to emerge, pushing the government’s debt, and its interest 

spending on that debt, to unprecedented levels. If revenues remain within their historical range relative to GDP, the total cost of government (including interest) could 

double as a share of the economy from about 19 percent of GDP today to about 40 

percent in 2075 (see figure 4).


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ISSUES TO CONSIDER IN REFORMING SOCIAL SECURITY

Several aspects of Social Security and the outlook for it as the population ages 

are especially important in considering changes to the program. First, throughout 

its long history, Social Security has had multiple goals some related to redistributing income, others related to offsetting lost earnings. In 2000, only about twothirds of Social Security’s beneficiaries were retired workers; the rest were disabled 

workers, survivors of deceased workers, and workers’ spouses and minor children 

(see figure 5). Policymakers will need to decide whether the program’s goals are still 

appropriate and, if so, how changes to Social Security would aid or hinder the 

achievement of those goals and affect various types of beneficiaries and taxpayers. 

Those decisions will also need to take into account the dramatic increase in the elderly population that is expected in the coming decades. 

Second, issues about how to prepare for an aging population ultimately concern 

the amount of goods and services that the economy will produce and how they will 

be distributed, not how much money is credited to the Social Security trust funds. 

In that sense, the projected depletion of those funds which is the focus of much of 

the popular debate about Social Security’s future is irrelevant. The challenges of adjusting to an aging population would need to be faced even if the trust funds never 

existed. 

Third, deciding how to prepare for an aging population is likely to require weighing the interests of today’s workers and Social Security beneficiaries against the interests of future workers and beneficiaries. No matter how it is packaged, any plan 

to increase national saving today means that the U.S. population will consume 

fewer goods and services now so that consumption can be greater in the future, 

when a larger share of the population is retired. Gone are the days when expansion 

of the labor force could pay for the growth of Social Security benefits. (In past decades, Social Security’s payroll tax revenues grew substantially as the baby boom 

generation and women of various ages entered the labor force in large numbers). 

As the Congress looks at policy changes, one consideration is that future workers 

and Social Security beneficiaries are likely to have higher standards of living, on 

average, than current workers and beneficiaries do, because of future increases in 

productivity.


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STRATEGIES FOR DEALING WITH AN AGING POPULATION

Spending more on elderly people may be appropriate in light of their increasing 

numbers, but questions can be raised about the extent to which that spending 

should rise. Policymakers have many goals, but if they want to limit the growth of 

spending on the elderly as a share of the economy, they can do so in only two ways: 

either by slowing the growth of that spending or by increasing the growth rate of 

the economy. Different options for reform would have different effects on economic 

growth. To the extent that those options boosted the future size of the economy and 

increased the Nation’s accumulation of assets, they could lessen the burden on future workers from government programs that serve the elderly. 

My testimony focuses on three ways to prepare for an aging population that have 

generated a lot of public attention: paying down Federal debt, creating private retirement accounts, and making changes to the benefits or revenues of the current 

Social Security program. Those approaches are not mutually exclusive; they could 

be combined in any number of ways. (In addition, many people have put forward 

proposals to curb the rising costs of Federal health care programs. Such proposals 

could also help the Nation deal with its impending demographic changes, but they 

are beyond the scope of this testimony). 

Regardless of which approach policymakers decide to take, a number of key questions should be raised about any proposed policy option: 

• How would it affect economic growth over the long run? 

• Would the proposed policy improve the long-term fiscal outlook faced by succeeding generations? How would it alter the taxes they pay and the benefits they 

receive? 

• Would the policy improve the ability of Social Security and Medicare to respond 

to unanticipated changes in demographics (such as life expectancy) and in the economy (such as productivity growth)? Some proposals could help make those programs 

more adaptable to change; other proposals could reduce their flexibility. 

PAY DOWN DEBT

One strategy for preparing for the needs of an aging population is to pay down 

Federal debt. If the government spends less than it receives in revenues (and private saving does not fall too much in response), national saving will rise, boosting 


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the stock of private capital and expanding the productive capacity of the economy 

in the long run. Indeed, Federal debt held by the public has fallen sharply in recent 

years from about 50 percent of GDP in 1995 to about 33 percent today. That decline 

has freed up funds for investment in private capital. 

CBO will soon update its 10-year projections for the budget, but it does not expect 

any significant surpluses to be available for paying down debt for at least a few 

years. However, if current tax and spending policies are maintained, significant 

budget surpluses could reemerge at some point in the next 10 years. But even paying off all of the Federal debt available for redemption would not provide enough 

interest savings or additional economic growth to finance Social Security, Medicare, 

and Medicaid spending over the long run. 

CREATE PRIVATE ACCOUNTS

A second strategy is to encourage private saving. A prominent set of proposals envisions creating private retirement accounts. Those proposals differ in many ways, 

but they share a common feature: the income from an account would depend on the 

payments made into it and the rate of return on the account’s assets. Many types 

of accounts are possible, and their effects would vary widely. 

One of the central issues is how private retirement accounts would be financed. 

Many proposals include a contribution from the government to help people pay for 

accounts. According to supporters of private accounts, diverting payroll tax revenues 

from the government could prevent policymakers from spending those revenues on 

other programs and could thus provide many of the same economic benefits as paying down debt. In addition, they argue, private accounts could allow the government 

to encourage asset accumulation while avoiding the problems of having the government own shares in private companies. However, because national saving consists 

of both private and government saving, a proposal that simply moved dollars from 

government saving to private saving (by financing private accounts through an increase in Federal debt) would have no direct effect on national saving or capital accumulation. To raise national saving, a proposal would have to cut either government consumption, private consumption, or both. 

Some people argue that private accounts would offer higher rates of return than 

the traditional Social Security system does, but that argument can be misleading. 

Social Security has a low rate of return largely because initial generations received 

benefits far greater than the payroll taxes they paid. That difference would have to 

be made up even if the Social Security system was entirely replaced by private accounts. Moreover, investing in the stock market either through private accounts or 

through government purchases of stock for the Social Security trust funds would be 

no panacea. Simply raising the average rate of return on assets by taking on more 

risk would not change the economic fundamentals. Only if the investment proposal 

increased national saving and enlarged the economy would it reduce future burdens. 

In setting up a system of private accounts, policymakers would have to address 

many practical issues. How much would the system cost to administer? Would it 

provide insurance against downturns in the stock market? Would the system require 

that accounts be converted into annuities and, if so, under what conditions? How 

would it handle benefits for workers’ families, for survivors of deceased workers, and 

for disabled workers? Would the system give subsidies to people with low income 

and intermittent work histories? How would the system be regulated and investors 

informed? 

The answers to those questions could have implications for the economy. For example, government guarantees that people would receive a minimum level of retirement income in the event of a market downturn would probably reduce national 

saving below what it would be without those guarantees. And subsidies to low-income workers that were phased out as wages rose could impose implicit taxes on 

work and could discourage some people from working more. 

MAKE PROGRAMMATIC CHANGES

A third approach is to modify the current Social Security program. Changes that 

have been proposed include reducing benefits (for example, by raising the retirement age, calculating initial benefits using a price index rather than a wage index, 

or reducing annual cost-of-living adjustments) or increasing payroll taxes. The effect 

on the economy would depend on the particular kind of change. 

Many types of benefit reductions could increase the size of the economy in the 

long run because they could encourage some people to save more. However, those 

long-term gains could take a couple of decades to materialize fully, and the effect 

in the near term would be uncertain. Slowing the growth of Social Security benefits 

could reduce the lifetime resources of some transitional generations, but it could 

83

also lead to higher wages and lower tax burdens for later generations. If benefits 

were to be cut, changing the law now rather than later would give workers time 

to adjust their plans for saving and retirement. 

Raising taxes to pay for future Social Security benefits would have an uncertain 

effect on the size of the economy in the long run. Moreover, the effect would depend 

on the type of tax increase and other factors. If the revenues from a tax increase 

did not change the government’s decisions about other spending or taxes, national 

saving could rise. But the extra revenues could encourage more government spending, which would limit any rise in national saving. In addition, increases in marginal tax rates on payroll or income could reduce people’s incentives to work or save, 

also dampening any increase in national saving. 

Although long-term projections of the Federal budget and the economy carry huge 

uncertainties, one fact seems certain: the U.S. population will age significantly over 

the next 30 years, and unless policies are changed, spending on the elderly will rise 

sharply, posing new challenges for the Federal Government and the Nation’s economy.

Chairman NUSSLE. Mr. Moran, do you have any questions that 

you would like to ask at this time? 

Mr. MORAN. Mr. Chairman, the answer is yes. But, given the fact 

that Mr. Crippen has been here all morning, we have got a vote, 

it seems to me that I can—I will have another opportunity to ask 

them. But I do appreciate him being here, and I appreciate all of 

the work that he has done in elucidating the Social Security issue 

for us as well as everything else with regard to the budget. Thank 

you, Mr. Chairman. 

Chairman NUSSLE. Thank you. I appreciate your coming and 

your interest obviously. 

Let me ask then, I just have one question so I will ask it now 

and then we can—we probably have more questions. This conversation will continue, I have no doubt. 

In your testimony, I believe it was last December to the Special 

Committee on Aging in the Senate, you said the following—and I 

am interested in your elaboration on it. ‘‘Issues about how to prepare for an aging population ultimately concern the amount of 

goods and services that the economy will produce and how they will 

be distributed, not how much money is credited to the Social Security trust funds. In that sense, the projected depletion of those 

trust funds, which is the focus of much of the popular debate about 

Social Security’s future, is irrelevant. The challenge of adjusting to 

an aging population would need to be faced, even if the trust funds 

never existed.’’

So would you elaborate on that just for the purposes of this hearing, and then that is basically what I was interested in hearing 

from you about. 

Mr. CRIPPEN. Obviously, just cut me off whenever you need to 

leave. As many of the other witnesses said, the way to think about 

this clearly, I think, is to follow the cash. 

There is no cash in the trust funds. There are assets; there are 

obligations. Those certainly will be made good. Think of 2017, when 

it looks like we won’t have enough payroll taxes to fund benefits. 

The Social Security Administration will, figuratively speaking, go 

to the Treasury and say, ‘‘Give me some interest payments for 

cashing in bonds actually or debt instruments that pay interest.’’ 

To do so, the Treasury will have to raise taxes, cut other spending 

or borrow from my kids in order to pay the interest. 

If there were no trust funds, no interest, no bonds, and the Social 

Security Administration didn’t have enough cash, they would esVerDate Feb 1 2002 14:17 Aug 27, 2002 Jkt 000000 PO 00000 Frm 00087 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-32\HBU170.000 HBUDGET1 PsN: DICK
84

sentially—assuming the benefit is paid—come to the Treasury and 

say, ‘‘we need cash.’’ The Treasury would have to raise taxes, cut 

other spending or borrow from my kids. 

So the effect on the economy and the budget is identical, whether 

or not you have these trust funds. The point is that, as that poor 

bedraggled chart shows, there are only two moving parts, if you 

think of the world the way most economists do: the level of obligations to the elderly and the size of the economy. 

Anything else is noise below that; some of it is interesting; some 

of it is informative, some of it is useful. But it is not necessarily 

the right question. 

I would argue that if you have reform in front of you or you are 

questioning policy effects, whether they are current or future, on 

Social Security, you have to look at the chart and say, does it 

change either of those two things? Does it change the obligations 

to the elderly, the retirees or does it change the size of the economy? Other questions are less important. 

Chairman NUSSLE. One final thing that I just thought of that I 

am interested in your—I think I know the answer, but, I expressed, 

and you were here, which I appreciate, when David Walker was 

here, about the fact that there is a lot of focus on solvency, and 

that seems to be the primary focus on the part of many Members, 

but more especially the media which is getting this message then 

therefore out to the public. 

Is that a proper focus? And if there are other focuses that we 

should have as far as just general guideposts, what should they be? 

Let’s start with that. 

Mr. CRIPPEN. I would suggest that it is not the proper focus. In 

fact, in some venues, I have argued that it is distracting. Indeed, 

I and others have perpetuated that as a policy objective for a long 

time. I was involved in the 1983 Commission, as I think you know. 

Howard Baker, who I worked for in the other body, as you say, actually proposed the Commission. He sold it to President Reagan, 

and we made the first call to Alan Greenspan to see if he would 

Chair it. So we were very much a part of that. 

And the only question we asked of the Commission for any proposals was, does this ensure 75-year actuarial or long-run solvency? 

We didn’t ask other questions about its effect on the economy, we 

didn’t think about that. We didn’t ask what the trust fund buildups were going to be invested in. 

We thought only of solvency as the primary objective, because 

the fund was almost insolvent. I think we convinced ourselves and 

our constituents of the same thing—that solvency was a very important issue. But since then, at least I have come to understand 

better that the implications for my children are not so much what 

is in the trust funds, but clearly what they are able to pay for at 

that time. 

And the difference really is one of consumption. You and I can 

save in individual accounts of our own or of somebody else’s construction, but to do so we have to give up spending, we have to give 

up consumption, and hope that that helps capital investment and 

the economy grow. It is not necessarily true, however, that in generating trust fund surpluses the government has collectively given 

up consumption. And so unless we actually do something to help 

85

the economy, my share of Microsoft, which I will have to sell to my 

kids, will be worth more or less depending on how the economy 

performs largely. 

And their ability to buy it from me will depend on how much 

they can make out of the economy. So whether the assets are socalled real in equities or whether the assets are in government 

bonds matters much, much less than how gib is the economy at the 

time. 

Chairman NUSSLE. Again, thank you for your testimony. I would 

like to thank, again, Mr. Spratt for the atmosphere in which this 

hearing was held. We all, I think, came to this with an interest in 

trying to solve the problem, understood the problem, and start 

looking at some solutions. If we would start learning from that experience, Congress may be able to function in dealing with this in 

a much better way. 

I would also like to thank Tori Gorman. This has been a good 

hearing. It takes a lot of staff work on both sides to get this all 

put together. Our witnesses have done a great job and the members participated in a very constructive way, and I appreciate that. 

So with that we are adjourned. 

[Whereupon, at 1:19 p.m., the committee was adjourned.]

Æ