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93–172 PDF 2004

S. HRG. 108–425

RETIREMENT PLANNING: DO WE HAVE A CRISIS

IN AMERICA?

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

WASHINGTON, DC

JANUARY 27, 2004

Serial No. 108–27

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING 

LARRY CRAIG, Idaho, Chairman 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

MIKE ENZI, Wyoming 

GORDON SMITH, Oregon 

JAMES M. TALENT, Missouri 

PETER G. FITZGERALD, Illinois 

ORRIN G. HATCH, Utah 

ELIZABETH DOLE, North Carolina 

TED STEVENS, Alaska 

RICK SANTORUM, Pennsylvania 

JOHN B. BREAUX, Louisiana, Ranking 

Member 

HARRY REID, Nevada 

HERB KOHL, Wisconsin 

JAMES M. JEFFORDS, Vermont 

RUSSELL D. FEINGOLD, Wisconsin 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

LUPE WISSEL, Staff Director 

MICHELLE EASTON, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

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

PANEL OF WITNESSES

Prepared Statement of Dr. Goodman, President, National Center for Policy 

Analysis ................................................................................................................. 3

Jack L. VanDerhei, Ph.D., CEBS, Professor, The Fox School of Business 

and Management, Temple University, Philadelphia, PA ................................. 23

Jagadeesh Gokhale, Ph.D., Senior Fellow, Cato Institute, Washington, DC ...... 41

APPENDIX 

Prepared Statement of Senator John Breaux ....................................................... 75

Prepared Statement of Senator Gordon Smith ..................................................... 75

(III) 

(1)

RETIREMENT PLANNING: DO WE HAVE A 

CRISIS IN AMERICA? 

TUESDAY, JANUARY 27, 2004

U.S. SENATE, SPECIAL COMMITTEE ON AGING, Washington, DC. 

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

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

Present: Senators Craig and Carper. 

OPENING STATEMENT OF SENATOR LARRY CRAIG, CHAIRMAN 

The CHAIRMAN. Well, good morning, everyone. The U.S. Senate 

Special Committee on Aging will be convened. I appreciate all of 

you for braving the weather of today. Our hearing is on retirement 

planning, do we have a crisis in America as it relates to that? 

I am pleased to reconvene the Special Committee on Aging for 

the Second Session of the 108th Congress. Today’s hearing is on a 

topic of strong interest to me and my colleague, John Breaux. Senator Breaux had planned to be here this morning. I think, you 

know, Southerners just do not cope well with this kind of weather. 

We Westerners oftentimes find this a slight inconvenience but 

somehow are able to kind of push through. I will never live that 

down. John will be all over me on that one.[Laughter.] 

But having said that, both of us have shown a keen interest in 

the issue of retirement security for our senior Americans. Just 2 

years ago, Senator Breaux and I served as delegates to the Savers 

Summit. At that time, I remarked that the summit was the beginning, not the end, of our commitment to help Americans plan for 

their retirement. This hearing is a continuation of that effort. 

America has come a long way in building a stronger retirement 

system compared to the early part of the 20th Century. We should 

not lose sight of those accomplishments; however, we have seen a 

dramatic increase in longevity and a trend toward healthy aging. 

Americans are living longer and healthier than ever before. This 

means they must plan to save more to keep them from outliving 

their retirement nest eggs. I know in talking with our elderly 

today, oftentimes, that is a growing concern that they express. 

A recent report from the Department of Commerce shows that 

the personal savings rate has actually declined from 7.7 percent in 

1992 to 2.3 percent in 2002. At a time when savings should be 

going up, we see a dramatic decline. Today’s hearing should help 

us understand the impact of this dramatic decline in personal savings and the leading ideas for addressing the decline. 

2

With that, let me say how pleased I am to welcome two of our 

three experts today. One of those is snowbound in Texas, or at 

least, his planes were not flying, and he apologizes for not being 

here. But we are very proud that the two gentlemen who are here 

before us this morning were able to weather the elements: Dr. Jack 

VanDerhei of Temple University and the Employment Benefit Research Institute; we appreciate you for being here. 

The gentleman who is not with us, but we trust we will be able 

to get his testimony to put in the record, John Goodman, president 

of the National Center for Policy Analysis in Dallas. 

[The prepared statement of Dr. Goodman follows:]

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The CHAIRMAN. We also have Dr. Gokhale—I am struggling with 

your first name—who is a senior fellow at the Cato Institute, who 

will offer his observations and analysis today before the committee. 

So we look forward to your testimony on what we believe is an 

ever-important issue for our country and for the seniors of our 

country and those who are obviously beginning to think and plan 

toward their retirement. 

With that, Doctor, we will turn to you first to start the testimony. 

STATEMENT OF JACK L. VANDERHEI, PH.D., CEBS, PROFESSOR, THE FOX SCHOOL OF BUSINESS AND MANAGEMENT, TEMPLE UNIVERSITY, PHILADELPHIA, PA 

Dr. VANDERHEI. Thank you. Senator Craig, I am Jack VanDerhei 

from Temple University and research director of the EBRI Fellows 

Program. It is my pleasure to appear before you today to discuss 

the extremely important topic of whether we do have a retirement 

crisis in America. 

As you will note from my written testimony, I believe the answer 

is yes for some groups and no for others. However, another question of equal public policy concern is how severe is this crisis, and 

is it feasible to expect the vulnerable groups to be able to deal with 

those projected problems through increased savings? 

As you know, the ability of future retirees to have broadly defined levels of retirement security has been the focus of several 

Congressional hearings as well as countless public policy analyses 

in the past. However, in recent years, there have been several reasons to revisit earlier studies and conclusions. Most significant 

among these is the evolution from defined benefit plans to defined 

contribution plans in the private sector in the last two decades. 

In addition, there have been advances in research and analysis 

in recent years. While several studies have attempted to project retirement income and wealth, there have been few attempts to reconcile their results with the uncertain amount and duration of retiree expenditures. A new computer model I have developed with 

my co-author Craig Copeland of the Employee Benefit Research Institute allows a quantification of the gap between basic future retirement needs and assets under various comfort levels, if you will. 

The Employee Benefit Research Institute and the MilBank Memorial Fund, working with the Governor of Oregon, set out to see 

if the necessary retirement security analysis could be undertaken 

on a State-specific basis and undertook an initial study on the future retirees of Oregon. The results, released in 2001, made it clear 

that there is a significant shortfall and that major decisions lie 

ahead if the State’s population is to have adequate resources in retirement. 

Subsequent to the release of the Oregon study, it was decided 

that the approach could be carried to other States as well. Kansas 

and Massachusetts were chosen as the second and third States for 

analysis, and we completed their results in 2002. The model was 

recently expanded so it could be national in scope, and initial estimates were published in the November 2003 EBRI Issue Brief and 

were discussed at a day-long EBRI policy forum held December 4, 

2003. 

24

While I would be happy to answer any questions regarding the 

components of this model, I think it is important to note that the 

primary objective of this analysis is to combine simulated retirement income and wealth with simulated retiree expenditures to determine how much each family would need to save today as a percentage of their current wages to maintain some prespecified comfort level that they will be able to afford simulated expenses for the 

remainder of their lifetime once they retire. 

We report these savings rates by age cohort, by family status, 

and by gender in figures A and B of the written testimony that I 

have submitted. It is important to note that these percentages represent savings that need to be generated in addition to what retirement income and or wealth is simulated by the model. Therefore, 

if the family unit is already generating savings for retirement that 

is not included in defined benefit plans or defined contribution 

plans or IRAs or Social Security or net housing equity, that value 

needs to be deducted from the estimated percentages. 

Figure A, which is on page 13 of my written testimony, shows 

the median percentage of compensation that must be saved each 

year until retirement for individuals to have adequate retirement 

income in three out of four of their simulated outcomes. This represents our baseline assumptions that current statutory Social Security benefits are paid and that housing equity is never liquidated, although we do run alternative scenarios in the model. 

The results show that for the median individual in birth cohorts 

on the verge of retirement, there is little possibility of them saving 

enough to supplement the simulated retirement wealth to provide 

adequate retirement income to meet basic needs. However, younger 

birth cohorts would benefit from the increased years of contributions and would have savings targets that are feasible for most 

groups. 

However, there are some notable exceptions: single females in 

the lowest income quartile are predicted to need in excess of 25 

percent of compensation per year to have sufficient retirement 

wealth regardless of the birth cohort. Figure B, which is on page 

14 of the written testimony shows the median additional savings 

required to provide retirement adequacy if one wanted a 90 percent 

confidence level, in essence, to have nine out of 10 of their simulated life paths sufficient. 

We have purposely structured many of our assumptions to provide conservative estimates of the amounts that would be needed 

to be saved while employees are working to alleviate any deficits. 

For example, we have assumed in this version of the model that 

all employees continue to work until Social Security normal retirement age, even though there has been a long-term trend toward 

early retirement, albeit one that seems to be reversing in recent 

years. 

But even with these conservative biases built in, the numbers appear troubling for some age cohorts and almost fatalistic for others. 

The good news is that if many of the younger cohorts begin saving 

a reasonable amount to supplement their Social Security and qualified retirement plans now, they have a good chance of providing 

themselves with reasonable assurance that they will at least be 

able to cover basic retirement expenditures. 

25

However, changes in public policy and additional resources from 

families and charities would be required to provide adequate retirement income for retirees with greater longevity who suffer serious 

and persistent chronic disease. 

To wrap up, both for individuals and public policymakers, being 

able to quantify the extent of the impending shortfall in basic retirement income adequacy has obvious implications. For those 

lucky enough to be young and disciplined at saving, getting started 

now is likely to assure them a comfortable retirement. Since there 

are many who are older, nearing retirement age, and in the lower 

income brackets, public resources are likely to be called upon either 

directly or indirectly to deal with their inability to finance their old 

age. 

Knowing the extent of the future problem will at least allow policymakers at both the State and Federal levels to try to prepare 

to deal with these issues when they arrive. 

Thank you very much and I look forward to your questions. 

[The prepared statement of Dr. VanDerhei follows:]

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The CHAIRMAN. Doctor, thank you very much. 

Now, let me turn to our second panelist this morning, Dr. 

Gokhale, senior fellow at our Cato Institute. Welcome. 

STATEMENT OF JAGADEESH GOKHALE, PH.D., SENIOR 

FELLOW, CATO INSTITUTE, WASHINGTON, DC 

Dr. GOKHALE. Thank you very much. I am quite honored to have 

this opportunity to testify about retirement planning in the United 

States. 

The answer to that question about whether there is a retirement 

crisis is simply yes. There is a significant crisis that we face. The 

crisis should be attributed more to the public policies that we have 

adopted over the last several decades rather than to private saving 

behavior that generates inadequate saving in a benign policy environment. As I go along, I think it will become clearer as to why 

I say that. 

With regard to whether we have a crisis, well, we know that the 

baby boom generations are going to exit the work force over the 

next couple of decades, and that means two things: Their exit from 

the labor force means that labor force growth rates will fall, dragging down with it output growth rates. Second, the share of the 

population that is retired will increase considerably, and therefore, 

retiree consumption as a share of total consumption must also increase significantly. Those two things are quite clear in the projections that we see today. 

Therefore, we need to transfer more resources toward retirees. 

Even if we were to maintain overall retiree living standards at the 

same real level as today’s retiree standards, it implies that the 

share of retiree consumption in total consumption would have to 

increase from 20 percent today to about 35 percent. If we have to 

provide a higher living standard to future retirees consistent with 

the growth in the trend of retiree living standards from the past, 

that share would have to increase to about 43 percent, as I have 

documented in my testimony. 

So, we need to transfer more resources toward retirees, but this 

transfer essentially means a transfer of resources from younger 

generations to older generations. That transfer will downward pressure on national saving. The reason for that is younger generations, because they have a longer life span ahead of them, generally 

spend less per dollar of resources than retirees. 

So, if resources are transferred from low spenders to high spenders, total consumption in the economy will rise and savings rates 

will decline. That is one observation. In the past, we have accomplished the same kind of transfer from younger to older generations 

through expansions of Social Security and Medicare benefits. But 

that expansion was feasible because national output growth remained high. 

In turn, high output growth occurred because we had this big, 

productive cohort of baby boomers in their working years. National 

output was high and continued to grow, despite a decline in productivity in the mid-1970s. That, labor force growth however, is 

going to be slower from now on. We have the following vexing dilemma facing us as a result: we know that the exit of the baby 

boomers from the work force is going to reduce labor force growth. 

42

That has a dampening effect on output growth. We need the high 

output growth in order to be able to transfer these resources to retirees for consumption. But the very act of transferring these resources by way of entitlement programs itself puts a dampening effect on saving because we are transferring resources from low 

spenders to high spenders. 

As a result, we are caught in this dilemma: we need output 

growth to be fast in order to be able to transfer these resources, 

but in implementing this transfer, we are going to dampen output 

growth itself. That is kind of a vicious logic that we are faced with, 

and the only thing we can do about it is really to encourage more 

saving on the part of the population. 

We cannot do anything about the demographic trends except by 

additional immigration of young, skilled workers, but that only 

postpones the problem, because when more immigrants come into 

the country, they will work and contribute payroll taxes, which will 

help us transfer more resources to the elderly, but then, they, in 

turn will qualify for benefits in the future, and the problem does 

not necessarily go away; it just gets postponed. 

We could try and affect saving behavior in the U.S., but admittedly, doing so is quite difficult. We have in place several types of 

tax incentives for encouraging additional saving on the part of 

workers, but the evidence shows that those incentives result at 

most in 25 to 30 percent of new saving in the economy. The reason 

is that the rules of our tax incentive saving programs are quite 

complicated, and therefore, may discourage employers from offering 

those plans—I am talking about traditional 401(k) and traditional 

IRA plans. 

An additional complication arises because the rules of those 

plans, interact in significant ways with the rest of the tax code to 

dilute the tax incentives such plans provide for additional saving. 

We need to properly design these saving incentives to maximize the 

tax incentive. The rules should be less uncomplicated, as uncomplicated as possible, and the structure of the programs should be 

frontloaded so that the plans follow the Roth type design. That 

means plan contributions are made on an after-tax basis, but withdrawals are not subject to income taxes. 

Now, doing it in this manner implies very few interactions with 

the rest of the tax code and therefore a higher tax saving incentive. 

However, in providing such saving incentives, we know that the 

Government would lose revenue. It is also important to consider 

what other tax or spending policy adjustments should be put in 

place to deal with that lost revenue. If we raise other taxes to 

make up the lost revenue from the initial incentive, then, we may 

end up with very little net incentive to save. If we finance for a 

short-term basis the lost revenue through higher deficits, well, 

higher deficits will soak up some of the saving, and therefore, 

again, we do not have an overall increase in saving. 

It appears that to maximize the tax incentive, we should deal 

with the lost revenue through lower spending. That would be the 

better way to provide a tax saving incentive. But again, what is ultimately done to make up the lost revenue is a very difficult question to answer, because lots of changes occur simultaneously in 

taxes and spending. 

43

So with that, let me close my spoken remarks. I would like my 

written remarks to be submitted into the record, and I welcome 

any questions. 

Thank you. 

[The prepared statement of Mr. Gokhale follows:]

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The CHAIRMAN. Thank you very much, Dr. Gokhale. 

All of your testimony and your charts and everything will become 

a part of our record. 

In part, both of you may have answered this, but let me ask the 

question, because I think it is at the core of what we are not doing 

versus what we are doing that is affecting the savings rate. There 

have been several national educational efforts designed to increase 

savings over the past decade. Yet, the savings rate continues to decline. How are we to view these educational efforts in light of a declining personal savings rate, and I ask that of both of you as a 

general question? 

Dr. VANDERHEI. Well, not to change the question, but I really 

think what one wants to focus on as an output metric is not necessarily personal savings rates. There are many components that 

have long been debated as perhaps not being totally effective in determining what you are trying to accomplish in those educational 

campaigns. 

I think what one might want to look at in more specificity is 

what is happening to certain targeted groups of those educational 

campaigns; for example, with 401(k) participants, there was a lot 

of conventional wisdom recently that with the recent 3-year bear 

market, 401(k) participants would have given up and started to reduce their contributions or get out of the 401(k) plans altogether. 

A recent study I have done on approximately 10 million individual 401(k) participants with Sarah Holden from the Investment 

Company Institute shows there has only been a very, very minor 

decrease. One of the reasons for that is the educational campaigns 

that the employers and the service providers have been able to 

transmit to the 401(k) participants. I think if you look at particular 

groups of individuals that are likely recipients of those educational 

campaigns, you can get a better feel than if you look at some aggregate overall statistic. 

So overall, I would say that the employer-provided educational 

campaigns have been quite effective, not only in increasing the employee contributions going into 401(k) plans but also keeping them 

at a substantial rate, even over one of the worst bear markets we 

have seen in the last recent history. 

The CHAIRMAN. Dr. Gokhale. 

Dr. GOKHALE. Well, as far as education campaigns, my answer 

is going to be somewhat general, but I will speak to the issue of 

whether encouraging more participation in 401(k)s, especially on 

the part of lower-income individuals, is really desirable and how effective that is really as a savings incentive. 

Well, increased education can improve a person’s perception of 

the alternatives available. But if those alternatives are all bad, 

then, it is not going to result in a higher saving rate necessarily. 

So, my view is these programs are probably misguided, and you 

should not spend as much time and effort into these educational 

programs, because the policy environment within which people operate today has built into it disincentives to save. 

I have studied the decline that we have had over the last several 

decades in the national saving rate. I came up with three reasons 

for why that decline has occurred. First, we have transferred resources from low spenders to high spenders, essentially through 

59

the expansion of Social Security and Medicare. Well, that means 

the elderly who consume a higher fraction of every dollar of their 

resources are getting resources to consume, and that is reducing 

national output, whereas, younger individuals who consume less 

per dollar of their resources are losing resources. 

Second, the provision of greater Social Security and Medicare 

benefits in annuitized form, meaning that they are paid as annual 

income rather than as a lump sum at retirement, provides longevity insurance, meaning they insure individuals from the uncertainty about how long they are going to live. 

But as a result of providing that insurance, people who receive 

these annuitized benefits are able to consume at a faster rate out 

of their Social Security wealth, and therefore, again, consumption 

goes up, and national saving goes down. 

Finally, because of higher health care costs, the retirees over the 

last several decades have increased their rate of consumption out 

of every dollar of resources. We have transferred resources towards 

retirees, and their rate of consumption out of resources has been 

rising over time. That is the third reason for the decline in national 

saving. 

One may try to encourage younger generations to save more, but 

imagine the situation these generations face. They have high necessary expenditures in bringing up their children, providing for 

childrens’ expenses paying mortgages on their homes, and on top 

of that, paying 15.3 percent as payroll taxes. If they did not have 

to pay those taxes they would, presumably, have more to save. 

They might expect, incorrectly, that the Government is doing the 

saving for them, taking this 15.3 percent of earning and promising 

them these Social Security and Medicare benefits when they retire. 

But we know there is a funding shortfall in these programs; that 

it is not clear how fully people appreciate that funding shortfall. So 

the public policy stance here is to provide retirees with the ability 

and incentive to consume at a faster rate, because we are giving 

them additional resources. We provide younger individuals with diluted tax incentives to save. As I mentioned the 401(k) plans, even 

though they save taxes on the accrual of interest and capital gains 

on the account balances, once these balances are withdrawn, they 

are subject to tax. 

Depending on how well the plan does in the accumulation phase 

the individual might end up in a higher income tax bracket upon 

retiring because of high withdrawals from the plans and, therefore 

may pay more in taxes on a lifetime basis. In addition, you might 

have more of your Social Security benefits subject to tax because 

of these high withdrawals. In the withdrawal phase, you would 

have, if you downshift your tax bracket, you would lose on your exemptions, the value of your exemptions and deductions. 

So younger individuals, even though they receive tax-saving incentives, those incentives are really very dilute. The 401(k)-type 

tax incentive is not as efficient as one might believe, especially for 

low earners, some of whom might lose on a lifetime basis. They 

would be able to afford less consumption over their lifetime and 

pay more taxes as a result of participating in these plans. 

Within this public policy environment, where the elderly are receiving resources and are encouraged to consume more, and the 

60

young are in a situation where they have huge necessary expenses 

and inefficient tax incentives to save, educational efforts to get 

them to save more are not going to work. 

Thank you. 

The CHAIRMAN. Thank you. 

Dr. VanDerhei, your testimony presented 5 percent as an additional increase in savings needed to reduce the income expenses 

gap for future retirees. Have you calculated what total percentage 

of savings would be necessary to meet retirement expenses and, if 

so, what would that be? 

Dr. VANDERHEI. Actually, I believe you are referring to figure C 

in the written testimony. 

The CHAIRMAN. Yes. 

Dr. VANDERHEI. One of the things that we did, which I did not 

have time to mention in the oral testimony, is an addition to compute what savings rates individuals would need to make to have 

a particular comfort level that they will be able to meet their retirement expenditures. We wanted to try to find out if there was 

some relatively feasible goal, savings goal, target savings that individuals could all do and see how that was going to impact the overall probability of having sufficient retirement income. 

The 5 percent was more or less an ad hoc number that seemed 

relatively reasonable. Most groups could probably afford that. And 

if you take a look at—actually, Craig, could you—we have a chart 

over here, chart C. 

I apologize, Senator. Can you see that from there? 

The CHAIRMAN. I can, and I have it in your testimony. I will refer 

to that. Go ahead. 

Dr. VANDERHEI. OK; basically, as you look out, as a function of 

age, the younger birth cohorts, obviously, since they would have 

the longer period of time to be able to put in that 5 percent have 

a much higher probability regardless of income quartile and regardless of family status and gender to be able to have sufficient 

income. But the 5 percent only gets you over a 90 percent probability if you are in the very youngest birth cohort and one of the 

highest two income quartiles. That is what the red circle represents. 

After we put together the written testimony, actually Money 

magazine is running a special article in their March issue based on 

similar types of things, and they asked much the same question: 

that is fine for the youngest cohort, but what about people that are 

currently in their fifties—or born in the 1950’s, excuse me, which 

would be the next two younger cohorts? 

I went back and ran the same type of analysis, and it would indeed take a 10 percent additional savings rate to be able to get the 

upper two income quartiles for people born in the fifties up to the 

90 percent level. But even at that 10 percent level, the lower two 

income quartiles do not even come close to that. So again, I think 

you need some caution when you come up with, quote, the savings 

rate; it is going to largely depend on, unfortunately, their family 

status, their gender and their income quartile as far as how much 

they have generated already within the defined benefit, the defined 

contribution, and the IRA environment. 

61

But I would say for the third and fourth quartile, people born in 

the 1950’s or later, 10 percent would seem to be adequate. 

The CHAIRMAN. OK; your testimony included a reference to scenarios where you assume retirees use their home equity to finance 

their expenses in retirement. Could you elaborate on the findings 

and the message seniors should take away from those results? 

Dr. VANDERHEI. I would be glad to. Again, something I did not 

have a chance to talk about in the oral testimony is that we knew 

that there was anything but a general consensus in what retirees 

should do, much less what they actually do do, with their net housing equity when it comes to financing retirement. 

Some individuals suggest that you should just keep it and never 

liquidate it; not use it for retirement. Other say that as soon as you 

retire you should sell the house, take the net equity, perhaps 

annuitize it in something known as a reverse annuity mortgage. 

Others would say just hold on to it as long as you can, but when 

you need it, whether it is for a catastrophic medical cost or something else, that is the time to sell it, and instead of annuitizing it, 

to basically keep it as a lump sum. 

So we ran all three scenarios. What I presented earlier today was 

a baseline, where you assume there was never any liquidation, but 

we find that in the third scenario, where you hang onto the house 

after you retire, as long as you can until you need it for some financial reason, perhaps catastrophic health care costs, that basically, 

the aggregate deficits for all people in a particular year decrease 

by as much as 23 percent. 

So certainly, from all of the scenarios we ran, it seems to make 

sense when possible to hold on to that as long as you can as another part of your nest egg that you are going to easily be able to 

liquidate to use for other purposes later. 

The CHAIRMAN. Can you explain why percentages for some 

groups differ so widely? You have done that in part, but figures A 

and figures B, you have got a wide spread there. 

Dr. VANDERHEI. Sure; just to quickly flip to figure A—and this 

is all in the written testimony if you are interested—one of the 

problems we have with the types of retirement planning devices 

which are widely available is they do a very good job of simplifying 

the assumptions so that they are easily used, but oftentimes, they 

use averages: what is your average life expectancy? What is the average rate of return you expect? The problem is that if you do not 

deal with uncertainty, you are basically going to end up planning 

for how much money do I need to be able to survive through retirement 50 percent of the time? 

I think if you ask most individuals ‘‘is having enough money just 

50 percent of the possible times in retirement sufficient?’’ they are 

going to say no. So what we did in figure A was to run the scenario 

so that you are going to have enough money three out of four 

times; hence, the 75 percent confidence level. Just to focus on a 

particular group to give you an example, the circled number there 

is for the single females in the next to lowest income quartile, born 

between 1951 and 1955. The median individual in that cohort, we 

assume, if you want enough money to have enough retirement income three out of four times, would have to save an additional 11 

percent. 

62

But if you flip that to figure B, the exact same cohort, if they 

want enough money to have sufficient retirement income nine out 

of 10 times in retirement, obviously is going to have to save more. 

For this particular group, you see that 11 percent on the previous 

chart now escalates all the way up to 18 percent. So you are going 

to need to have a bigger buffer against some of these consequences 

if indeed you want to have more certainty that you are going to be 

able to meet, for example, the longevity risks that were just mentioned previously. 

The CHAIRMAN. Let me ask you this last question before I turn 

to Dr. Gokhale: what is the best way to interpret your results in 

figure C, given the current public policy debates that are underway? 

Dr. VANDERHEI. The good news about figure C is that overall, 

the numbers seem to get better as you go further and further to 

the right. What that is saying is that those individuals that start 

saving and start saving early are obviously going to have a much, 

much higher probability of having sufficient income overall. So that 

would be the overall message, I think, from a public policy standpoint is to start saving and to start saving early. 

When you go back, and you compare not just the retirement 

wealth, but whether retirement wealth will be sufficient to meet retirement expenditures, you find a much higher probability overall. 

The CHAIRMAN. Thank you very much. 

Dr. Gokhale, you said in your statement something that really 

caught my attention, because not long ago we had Chairman 

Greenspan before the committee to talk about the demographics of 

aging and cultures and economies and the impact that those aging 

demographics have on given public policy and economies. He used 

Japan as an example. But he also said something that I want to 

clarify in what you said. He said because we have a dynamic immigration policy in this country, we will not hit the same indices, if 

you will, that Japan did, where as we grow older, and the baby 

boomers leave the work force, we will not have anyone to replace 

them in the work force. 

Now you mentioned, and I believe these were your words, labor 

force growth rates will fall as the baby boomers exit. In reality, if 

we have a dynamic immigration policy, will that be the case? I understand, and I think most who look at this clearly understand, 

that if we have a declining labor force committed to pay for the 

public commitment that we have toward our baby boomers, we are 

in real trouble. We are in real trouble anyway. 

But having said that, if we have—and the reason I find that important is because we are right in the midst of a fairly aggressive 

debate on immigration policy in this country and how we deal with 

immigrants and undocumented workers and all of that. Expand on 

that, if you will. 

Dr. GOKHALE. Well, I think a friendlier immigration policy that 

encourages immigrants to enter the United States and work and 

contribute and pay taxes will definitely alleviate the problem we 

are facing with a growing commitment toward financing consumption for retirees. Having said that, current immigration levels do 

not, I think, even approach the level of immigration that would be 

needed to completely overcome the problem we are facing. 

63

I think today—I may be off a little in the numbers I am citing, 

but I think roughly about a million immigrants, a little under a 

million immigrants enter the United States every year. 

The CHAIRMAN. That is about right. 

Dr. GOKHALE. I have documented that by 2030, the retiree population will essentially double. Now, if you are going to keep everything in the same proportions, then, the working proportion should 

also double in order to have sufficient resources through tax revenues coming in to pay the retirees the consumption resources they 

will need. 

Doubling the worker population is going to require a huge increase in immigration, which I do not believe is going to be possible 

or even contemplated. I think that the immigrants who are in this 

country and who wish to come into the United States and work 

would be welcome, but I think immigration as a solution to the retirement crisis we are taking is probably not on the cards. 

The CHAIRMAN. Well, that puts your statement in context, then, 

of the kind that helps me understand what you are saying and why 

you are saying it. 

In your testimony, you have suggested that short-term budget 

concepts like deficits are inappropriate. How would the longer-term 

measures that you recommend help us solve entitlement finances? 

Dr. GOKHALE. Well, we know that Social Security and Medicare 

involve very long-term commitments. The budget concepts that are 

regularly published by the official budget reporting agencies such 

as the Congressional Budget Office and the Office of Management 

and Budget, essentially look five or 10 years ahead into the future. 

That implies that these short-term budget measures do not capture 

the longer term implications of current policies, because most of the 

budget crunch, the shortfall or revenues to cover the promised benefits, will occur beyond that projection horizon. 

The budget measures that I am recommending would be much 

longer-term in their focus. They would essentially help us in two 

ways. We know that there is a budget shortfall. We need to quantify how big that shortfall is. Those budget measures essentially 

tell us how much additional resources the Government has to raise 

or have on hand in order to make those policies sustainable. That 

is one message that my recommended budget measures would help 

us to understand. 

The other way in which those budget measures would help us is 

choosing between alternatives policies that we could use to fix the 

problem. We have a choice between many different ways of implementing those policies in order to close the funding gaps for these 

programs. 

Of course, depending on what type of policies are implemented, 

different groups in the population, including future populations, 

are going to be affected differently. We need to understand how 

those different effects will occur under different policies in order to 

be able to make informed choices about the most desirable ways to 

address the funding shortfalls of Social Security and Medicare. 

The CHAIRMAN. You mentioned that economists believe that only 

25 or 30 percent of the total savings benefiting from tax-favored 

savings accounts would be new savings. In light of this, can you 

64

elaborate on the benefits of expanding Roth IRA-like savings accounts? 

Dr. GOKHALE. Well, if you save more, then, obviously, you acquire a claim on real, productive assets. Greater saving has significant beneficial effects—completely the opposite of when there is inadequate saving in the economy. That sounds tautological, but let 

me elaborate a little bit. 

If people save more, they acquire a claim on real, productive assets. The counterpart to there claims in the real economy would be 

more capital per work, making workers more productive. 

When the high savers retire, we need to transfer consumption resources towards them. But they would then have the claims that 

are needed to effect that transfer. So, the financial mechanism that 

we need to transfer these additional resources from younger to 

older generations, for the retirees to be able to draw on resources—

they would already have the financial claims on resources. So, the 

transfer would be easily effected. 

Both the real and the financial economies would work in a complementary fashion to effect the required transfer toward the retiree populations. 

The CHAIRMAN. You seem to favor the after-tax type Roth account, after-tax dollars going in but tax-free dollars coming out. 

Dr. GOKHALE. Right. 

The CHAIRMAN. We obviously found early on that tax-free dollars 

going in up to a certain amount was a phenomenal incentive. Aftertax dollars are less incentivized, and not until you are much older 

do you recognize the value of tax dollars coming out being untaxed. 

You still hold that it is preferable that it be after-tax dollars 

going into a Roth-style IRA? 

Dr. GOKHALE. That is correct. There are several reasons why the 

saving incentives, such that before-tax dollars go in, but the withdrawals are taxed, provide a very diluted savings incentive on a 

lifetime basis to those who participate. I mentioned three reasons 

earlier. Essentially the reasons are the withdrawals can put you in 

a higher tax bracket. The higher withdrawals, if they are sufficiently high, can subject more of the retiree’s Social Security benefits to taxation and therefore increase total tax liability over the 

lifetime. 

In the contributions phase, if a person downshifts across tax 

brackets, then, the value of exemptions and deductions and mortgage interest and all of those things that you take deductions for, 

the value of those deductions would reduce. 

An additional reason is that if plan withdrawals are taxed, capital gains accruals in the accounts, which would ordinarily be taxed 

at a lower rate, would now be subject to an income tax, and that 

tax would perhaps be at a 30 percent rate. If you could keep these 

resources outside the tax incentivized saving vehicle, those would 

be subject to a capital gains tax rate, which would be much lower. 

So these tax interactions dilute the saving incentives of the traditional IRA type savings plans. 

The CHAIRMAN. Thank you. Is Tom coming back? Do you know? 

Oh, he is on the phone. 

65

Well, then, I will ask one more question, and then, we have been 

joined by our colleague, Tom Carper, Senator Carper. See if he has 

any opening comments or questions. 

Dr. Gokhale, you elaborated on your view of the two approaches 

to solving the Social Security’s financial problems, i.e., maintaining 

the existing systems with benefit cuts and tax increases or moving 

to personal retirement accounts. 

Elaborate on that, if you could, for the record. That is a debate 

that we are moving toward; no question about it, and we have to. 

I think collectively, in a bipartisan way, most of us recognize that 

Social Security, especially for younger ones coming into it, needs to 

produce a greater return as it relates to dollars in, dollars out. At 

the same time, being able to sustain a secure system for those who 

are moving quickly toward it. If you would expand on those approaches. 

Dr. GOKHALE. I recently did a study about the funding shortfalls 

for Social Security and Medicare in the entire Federal Government. 

It has been published in a book by the American Enterprise Institute. In that, I show that Social Security’s shortfall over the entire 

future is about $7 trillion, and that of Medicare is even larger, at 

about $36 trillion. These numbers are as of the fiscal year 2002. 

These are huge shortfalls. 

It essentially means that going forward under current policy, not 

enough tax dollars will come in to pay the scheduled benefits of 

these programs. Now, at some point in the future, either the scheduled benefits will have to be cut in order to bring them in line with 

the amount of resources, the revenues that we have under current 

tax laws, or the tax rates, the payroll tax rates, would have to be 

increased. We could do that, just a simple fix to Social Security and 

Medicare’s financing problem; either cut the benefits in the future 

or raise taxes but keep the financing mechanism the same. That 

is one alternative. I call it the status quo alternative. 

Now, the problem with this alternative is that when we either 

cut benefits—future benefits of workers and future generations—or 

raise their taxes in order to close the funding shortfall, we would 

delink benefits from taxes, which means, on net, we would increase 

the taxes of these individuals. On net, whether we cut benefits, or 

whether we raise taxes, the net effect is to increase the take from 

them in terms of net tax dollars. 

Higher net tax rates distort individual behavior and essentially 

impose an economic loss in addition to the amount of tax revenue 

raised by that measure. So, if we raise taxes, let us say, to cover 

the $7 trillion shortfall in Social Security, it is not only the $7 trillion that will be a cost to future workers, but in addition, their behavior will change. They will work less, perhaps, because their tax 

rates are high. 

That distortion will create an additional economic loss. My simple calculation suggests that that loss will be about a 30 percent 

additional cost on top of the amount of funding gap that exists in 

Social Security today. So, the alternative to that is to not make the 

additional transfers required for future retirees now that the baby 

boomers are going to retire. We will need to expand these transfers; at the margin, not do that expansion through the existing Social Security system but do it through reforming the system such 

66

that we get people to save in these type of tax-incentivized saving 

vehicles through a personal or individual account reform of the Social Security system. 

The benefit of an individual account reform would be to reduce 

the additional distortions from tax or spending measures that are 

taken to close the funding gap. The distortion would be minimized, 

because now, the individual account is owned and controlled by the 

individual. That has some benefit, some value, to individuals. 

Hence, the distortionary impact of these tax law changes would be 

lowered. They can own the account; they can invest it in their preferred investment directions, subject to some regulations, of course, 

but the investments would be matched to their personal risk preferences. 

In addition, once they pass away, they can bequeath those account balances to their loved ones, which means those additional 

features, because they add value to the benefits, will minimize the 

distortions arising from the necessary tax and benefit changes that 

have to occur in the future. 

The CHAIRMAN. In those studies, did you go on to discuss the 

type of personal account and how it got managed as relates to the 

individual? Or did you compare it to a Federal—the current system 

that we have for Federal employees to invest in an IRA-like account, if you will? 

Dr. GOKHALE. The Cato Institute has just released an outline of 

an individual accounts reform plan for Social Security. In that, we 

have a fairly elaborate mechanism whereby these account balances 

would be set up. There would be a three-tier regulation of the investments allowed. Initially, when workers contribute into these 

accounts, until their accounts reach a certain size such that they 

could purchase, let us say, an annuity that would allow them a living standard about 120 percent of the poverty level, they would 

have to restrict their investments in reasonably safe and conservative investments. 

But once they have accumulated sufficient amounts in these accounts, they could broaden their investment choice. We are working 

on estimating how, exactly, the finances would work, but the Cato 

Institute just released an outline of such a plan, and we are working on designing its details. 

The CHAIRMAN. Do you also propose in that a phase-in period for 

those who are currently participating in this system, if they choose, 

or new work force coming in— Dr. GOKHALE. Right. 

The CHAIRMAN [continuing.] Percentages of a total amount going 

in, move toward a personal account? 

I have looked at a variety of models, and of course, the frustration for those of us who believe that we ought to move toward personalized accounts, is how do you continue to fund, over a period 

of time, the existing commitment, i.e., liability, to Social Security 

from the current work force while allowing them to move toward 

personalized accounts? 

Dr. GOKHALE. Right, the existing liability is there. The only problem is that it is not reported in official budget reports. 

The CHAIRMAN. Right. 

Dr. GOKHALE. That does not make it—

67

The CHAIRMAN. No. 

Dr. GOKHALE. It does not make it disappear. It is there. It is just 

not as visible as it would otherwise be. 

So, sure, when you take a part of today’s payroll tax payments 

and invest them in individually owned and controlled accounts, 

then, we have a problem in financing current benefits to current 

retirees. 

For a period of time, that may have to be done through borrowing more from the markets. That implies higher debt levels, but 

that simple transaction is just replacing an implicit debt that exists—off the books, but it still exists—an implicit debt for an explicit debt. 

The CHAIRMAN. I see. 

Dr. GOKHALE. That is a transition mechanism that we are working on designing. 

The CHAIRMAN. That is a clear way of stating it. I had not 

thought of it in that total context. 

Do you want to check and see if Senator Carper has any comments he wants to make? I do not have any further questions of 

these gentlemen. 

Well, I want to thank both of you for being here this morning. 

This is obviously a dialog for the record of an oversight committee 

like this one that I think is increasingly valuable as we look at a 

variety of instruments. Our President has proposed a variety within the Medicare prescription drug package. We established something that I have worked on for a good number of years, as have 

others; the health savings account concept, which I think hopefully 

will begin to showcase the value of these kinds of tools out there 

that citizens can go toward to advance their own needs, whether 

it be health care or retirement. I think that is extremely valuable. 

Senator Carper, we are pleased you have joined us this morning. 

I have concluded my questioning, and if you have any comments 

to make of these gentlemen or questions, please proceed. 

Senator CARPER. Mr. Chairman, I was just talking with a retiree, 

a fellow who is 86 years old, and he lives in the Riverdale section 

of Brooklyn. His last name is Biaggi, Biaggi. Does that name ring 

a bell with you? 

The CHAIRMAN. Biaggi. 

Senator CARPER. Used to be a captain in the New York Police 

Department. 

The CHAIRMAN. I will be darned. 

Senator CARPER. Later a Congressman. 

The CHAIRMAN. Oh, of course, Mario. 

Senator CARPER. Mario. 

The CHAIRMAN. I will be darned. 

Senator CARPER. Eighty-six years old. I just try to keep tabs on 

him. 

The CHAIRMAN. Very colorful gentleman. 

Senator CARPER. He is a great guy. 

The CHAIRMAN. Yes, he is. 

Senator CARPER. He is a great guy; 86, he is a widower now, and 

he just returned my call, and I felt my cell phone vibrating, and 

I slipped in back to take it. So I have missed what was said here, 

68

but he asked to be remembered, and I know you and I served with 

him—

The CHAIRMAN. Absolutely. 

Senator CARPER [continuing.] In the House. 

Gentlemen, thank you for joining us this morning. I am glad you 

did not get stuck in Dallas with the storm or bad weather. 

I was looking at a chart that came with the materials for today’s 

hearing, and I do not know that—I think you might be able to tell 

it. It starts over here on the left hand side in 1981, and we are 

measuring the personal savings rates from 1981 over here to 2003. 

You do not need very good eyesight, I think, to see that the trend 

is going in the wrong direction. When I look at this number, it says 

in 2003, our savings rate was down to almost 2 percent. Let me 

just start off, if we could, by just asking you to tell me what do we 

count when we talk about the personal savings rate? 

Dr. GOKHALE. Well I generally tend to—

Senator CARPER. Maybe what do we not include that we ought 

to think about? 

Dr. GOKHALE. Well I have—I mean, the personal savings rate is 

calculated as personal disposable income minus household outlays. 

The remaining part is the amount not consumed, essentially, and 

that is how I prefer to calculate the saving rate—as the rate of the 

amount not consumed divided by the income base over which the 

saving rate is defined. 

I prefer doing it that way rather than adding up different saving 

components; that gets to be pretty difficult. 

Senator CARPER. Go ahead, Mr. VanDerhei. Would you want to 

add to that or take away? 

Dr. VANDERHEI. Well, I would agree with that. I think there 

have been some long-acknowledged deficiencies with it. I remember 

back in the days when retirement plans were primarily defined 

benefit plans, that the primary difference that we had was if you 

are looking at employer contributions going into the plans as the 

component of savings rates as opposed to what the actual benefit 

accruals of the employees were that when you had artificial restrictions, as were imposed in 1987 with the so-called full funding limit, 

that you had these time series out of whack for awhile. 

Obviously, as defined benefit plans have diminished in overall 

importance, that becomes less and less of a problem. But actually, 

Senator Craig had asked a very similar question earlier, and I 

guess my response to him was I think if you are really wanting to 

concentrate on what this problem with the savings rate is for future retirement income, that perhaps the aggregate number is not 

what you want to focus on; that you want to focus on what pockets 

of the population are vulnerable and, basically, what types of savings rates they would have to have prospectively. 

We realize there is a problem historically, but prospectively, 

what would they need to have to get to some adequate retirement 

income by the time they hit, say, Social Security normal retirement 

age? Unfortunately, those types of vulnerabilities get masked in 

those aggregate numbers. 

So I guess breaking them out into individual components, I 

think, is the important point. 

69

Senator CARPER. Well, when I was Governor of Delaware, our administration spent a fair amount of time encouraging homeownership. We ended up with a homeownership rate that approaches 75 

percent in my little State, which is pretty good. I continue to focus 

on that as a United States Senator, with a real focus on my home 

State. 

I am wondering if—we have seen a lot of refinancing of home 

mortgages; in some cases, people taking the equity out of their 

homes in order to pay for other debt and to pay off other debt, 

maybe more expensive debt, and to end up with a lower mortgage 

payment. Does that explain some of the reduction in the savings 

rate? Do we count here the equity in people’s homes? Is that reflected here in this personal savings rate? 

Dr. GOKHALE. I think the personal savings rate does not reflect 

the capital gains accruing on homes. Essentially, it is an income—

it is a measure of how much income is not spent on consumption. 

But the income measure does not include capital gains accruing on 

homes. So even though capital gains affect the amount we consume, the gains themselves are not part of the income definition. 

So even though it affects the saving rate, the measure does not directly address the fact that you are also receiving value through 

appreciation in your home. 

Senator CARPER. Some other countries that have a historically 

high rate of savings—Japan comes to mind—I used to kid the guy 

who was the Prime Minister of Japan; I remember meeting with 

him a number of years ago, and I said, ‘‘you know, your country 

is so different from ours.’’ I was giving him a little bit of encourage 

to stimulate his economy, and I said, ‘‘in our economy, if you cut taxes by, a dollar, people will go out and spend $2.’’ In Japan, if you cut taxes by, like 1 yen, people will go out and 

save 2 yen. But Japan and other countries where they do not invest 

as much of their money in housing, they have a pretty high savings 

rate. I wondered if maybe our capital accumulation, is a little bit 

better than is reflected in these numbers, because we do inordinately invest in our homes. 

I like to think that probably for the majority of people in our 

country, probably, that the biggest source of capital accumulation 

for a lot of folks is the equity in their home. We use that equity 

to, in some cases, reverse mortgages to help pay for our lives at the 

end of our lives, and to sustain it, some people use the equity in 

their homes to start a small business, you know, to send their kids 

to school, that kind of thing. 

But could one of the reasons why—let me make up an example. 

Let us say a person makes $50,000 a year, and they put $500, let 

us say $1,000 a year in savings of some kind, stocks, whatever, a 

401(k). But they also pay a mortgage every month, and part of the 

principal for that mortgage might, we will say, adds up to over the 

course of a year to, say, $5,000 just for principal, and they have 

seen accumulation of equity and the capital gains in their home. 

Do I understand it that this personal savings rate reflects the 

$1,000 that they might put in their 401(k), but it does not reflect 

the $5,000 in principal payments that they have made in their 

home or the increase in capital accumulation on their home, increase of value in their home? If that is true, does that make 

70

sense? Either one of you, feel free. I do not want to pick on you, 

Doctor. 

The CHAIRMAN. Let me add this, because this is an excellent 

question. Is not the indices or the numbers that we calculate personal savings rate in this country include IRAs, 401(k)s, defined 

benefit pensions and personal retirement accounts, all other forms 

of accumulation are not a factor in these figures? Is that an accurate thought? Is that accurate? 

Dr. GOKHALE. My understanding is that all saving is included in 

the personal saving rate. The way I calculate it, if you do not consume something, you are saving it out of the income definition we 

use. 

The CHAIRMAN. So your definition would include—

Dr. GOKHALE. My definition would include the budget—

The CHAIRMAN. The buildup of—

Dr. GOKHALE. The buildup of—no, would include the buildup of 

equity through paying the mortgage, because essentially, by paying 

a mortgage, you are buying part of a durable good, the home. If you 

appropriately adjust the personal savings rate to take into account 

the fact that you are purchasing a durable good, it would be included. 

Usually, however, in the definition of outlays includes purchases 

of durable goods. So there are some subtleties—alternative ways of 

calculating the personal savings rate to adjust for purchases of durable goods. 

What is not included is the appreciation of that $5,000, because 

home values go up. So you might be paying off $5,000 in principal, 

but at the end of the year, that $5,000 appreciates and becomes 

$6,000, because the home’s value has increased. That additional 

$1,000 of home appreciation will not be included. 

The CHAIRMAN. Intriguing. 

Senator CARPER. OK; let me just ask each of you: just give me 

some really basic responses in terms—and you have already, I am 

sure, gone over this in your testimony and with the Chairman. But 

if our interest is in encouraging greater savings in this country for 

capital formation, for investments to make us more productive, it 

is kind of interesting: we continue to be more and more productive 

as a nation, our work force is, while our savings rate is going to 

pot. 

I do not know if there is an easy explanation for that or not. But 

just a couple of basic things that we ought to be doing, particularly 

with us in the Congress, to encourage greater savings. 

Dr. GOKHALE. Well, my recommendation is to essentially design 

saving incentives in the style of Roth IRAs rather than traditional 

IRAs and 401(k)s, simply because Roth IRA rules minimize the 

interactions of contributions and withdrawals with the rest of the 

income tax code and that dilutes the saving incentives. 

The Roth design does not involve such interactions with the rest 

of the income tax code, and therefore, the tax incentive remains 

strong. But an important additional qualification is that when we 

provide either a Roth or a traditional type of saving incentive, the 

government loses revenues. Which type of other tax and spending 

policies are used to recoup lost revenues is also important. 

71

If we raise other taxes to make up for lost revenues, we may not, 

on net, be providing significant saving incentives. If we finance the 

lost revenues through incurring larger deficits, then, we would 

have to raise future taxes by even more, not only to recoup lost revenues but to pay interest on the debt accumulated along the way. 

That would dilute the savings incentive even more. But if we cut 

spending in response to lost revenues, then, we would preserve the 

saving incentive. So we need to couple such saving incentives with 

control over federal spending. 

Senator CARPER. OK. 

Dr. VANDERHEI. I would say fundamentally, you want to look at 

what is doing the best job of producing retirement savings at this 

point in time. I think if you look at the private retirement system, 

you would want to look at both what you can do for employers that 

currently do not sponsor plans to give them the incentives to start 

doing it, because that will, by definition, increase the participation 

in retirement plans for their employees and then also look at the 

employees. 

One of the problems on the employee side is not necessarily that 

employees are not responding to employer incentives, because when 

a 401(k) plan is offered with a match, a large, large percentage 

even of the lower income employees will respond to that. The problem is, however, that currently, it is, in many people’s opinion too 

easy for that money to slip out of the retirement system at job 

change. 

Currently, there are tax incentives to keep it in the system, but 

those incentives, obviously, are not sufficient, especially when the 

employees are young. Instead of rolling over those account balances 

from the old employer to the new employer or into an IRA, many 

times, even with the 20 percent withholding and even with the 10 

percent premature tax, young employees will think, well, I will 

work with the next employer long enough to have sufficient retirement income. 

Iteration by iteration, they cash out those early accumulations. 

The problem is, oftentimes, they end up with just the last employer 

or the last two employers’ account balances for their overall retirement savings. Finding ways of encouraging them to retain those, 

I think, would go a long way to increasing overall retirement account balances, especially as we become more and more dependent 

on defined contributions going forward. 

Senator CARPER. OK; let us just talk for a moment about middleincome and lower middle-income workers. You know, when you 

offer somebody who makes over $100,000 an IRA the ability to 

defer—whether it is a Roth IRA or a traditional IRA—but the ability to delay, in some cases, for a long time, your tax obligation, I 

can see where there is a real incentive for upper-income families 

to participate. They have more disposable income anyway. 

When I was State treasurer of Delaware, we started a deferred 

compensation program for our State employees, and the participation was pretty good among higher paid State employees. It was 

not very good among lower-paid State employees. When I was Governor, we changed the program up a little bit so that the State 

would match, literally for everybody, a relatively small match for 

what people deferred and put into the plan. 

72

For people whose income was low, it was really rather significant. For people whose income was high, it was a little incentive, 

but comparatively speaking, not much. Just talk to me a little bit 

about how we get more lower-income folks to save for their retirement, because my sense—and I think I heard the Chairman saying 

this, and I believe I heard Mr. Gokhale—did I get that right, Dr. 

Gokhale? 

Dr. GOKHALE. Gokhale, that is fine. 

Senator CARPER. OK; Gokhale; all right. Has anyone ever mispronounced your name? [Laughter.] 

Dr. GOKHALE. Nobody but you right now. [Laughter.] 

Senator CARPER. I am the first; I do not believe that. [Laughter.] 

I guess my question is, what would we be doing more to encourage not just people whose income is $100,000 and above to save; 

I think they will anyway, but the people whose income is, say, 

under $40,000 or under $30,000, who are not saving much at all, 

but they are just trying to get through the day? There are a lot of 

them, as you know. 

Dr. GOKHALE. Well, low-income individuals have huge amounts 

of necessary expenditures. I mean, they have to pay for bringing 

up their kids, pay for kid’s college expenses. Even sending them to 

a community college at that income level, is a significant expense. 

On top of that, they have to pay, payroll taxes, which is a huge 

burden. Ultimately, in some sense, it is saving for them. Government is doing that saving for them. It takes the 15 percent in payroll taxes and promises some retirement benefits. 

Unfortunately, those benefits cannot be paid as promised. So that 

saving essentially provides a very low rate of return. If, instead, we 

could somehow redirect that 15 percent payroll tax into an individual account, that would earn a higher rate of return. Of course, 

I recognize that somehow we have to finance the benefits of existing retirees. 

Senator CARPER. That is the $64,000 question, is it not? 

Dr. GOKHALE. That is right, but that debt is on the books. The 

question is should we make it explicit, and allow low-income individuals to access higher returns in the market or whether we 

should continue under the current system and make future 

changes as they become necessary, which has not just costs in 

terms of higher taxes but also costs in terms of distorting labor 

market behavior on the part of low income individuals. So I think 

we observe low saving rates because low earners have tremendous 

responsibilities and necessary expenditures that they need to 

make. 

Senator CARPER. Dr. VanDerhei. 

Dr. VANDERHEI. Senator, I think you touched on what is absolutely the most important way of accomplishing this, and that is 

by the employers offering a match. Craig Copeland and I have an 

article in the North American Actuarial Journal that shows, because we actually went back and took from millions of different 

participants and looked at their match rates, that when you control 

for age, and you control for wage, and you control for gender, that 

the larger the match and not only that, the larger you go out with 

the match—

73

Senator CARPER. When you say the larger you go out, what do 

you mean? 

Dr. VANDERHEI. Three percent of compensation versus 6 percent 

of compensation; the higher the participation and the higher the 

contribution percentage from those employees. 

So, without a doubt, we found that statistically, that is the single 

most significant thing. With respect to what else could happen, I 

truly think that although it is difficult, there is a role that the Government could play as far as educating individuals, again not solely 

with respect to the message that you need to save now to have bigger accumulations, because accumulations really do not mean that 

much, certainly to young individuals. 

But if you are able to show them how the likelihood of them having sufficient money for their retirement expenses to match up retirement income versus retirement expenses and show what you 

are doing as far as likelihood of being able to have a significant retirement income is going to be able to help most individuals. This 

is something I have been teaching, now, for my undergraduates for 

25 years, and while it is tough to get a 20-year-old to think about 

retirement, we oftentimes use their parents as guinea pigs as far 

as what types of educational devices would indeed get them to start 

contributing more to their retirement plans, to their IRAs, whatever. 

If you move away from the exclusive focus on retirement wealth 

to one that looks at the expenses they are going to have to cope 

with also, you find much better response upon those people in their 

forties and fifties. 

Senator CARPER. Thank you both, Dr. VanDerhei, Dr. Gokhale. 

Dr. GOKHALE. Gokhale. 

The CHAIRMAN. Gokhale. 

Senator CARPER. Gokhale; all right, we will get it. 

Thank you both for being here and for your testimony. 

I would just say in closing—I will go back to sort of the issue 

that I raised initially, Mr. Chairman, and that is the notion that 

for a lot of families in this country, the biggest form of savings for 

them is the equity in their homes and just to close by saying again 

how important it is that we make the idea of homeownership a reality for a lot of families, and not just those income is fairly high 

but particularly for those whose income is low but for whom owning their own home would just be a very good thing for their current life but also for their later years. 

Thank you, and thanks for being so generous with that time. 

The CHAIRMAN. Both you and I totally agree on that. It is extremely valuable, and it is one of the tools that we promoted in this 

country, and obviously, we have incentivized it through the tax 

code and found it very valuable and not only for savings but I think 

for community stability and all of the other kinds of social benefits 

that are gained from it. 

Gentlemen, thank you very much for your testimony, your involvement in these issues. They grow increasingly important for 

those of us who are going to have to make some tough decisions 

in the future. A few of us spend time looking at those projections 

in those out years and $7 trillion liabilities and $36 trillion liabilities and recognize that those are very ominous figures against any 

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economy, let alone ours, being the largest in the world. But one 

that we want to try to keep there and all of the factors that play 

into that, recognizing that that economy pays for the social commitment this Government has made long-term to its citizens. 

So those are important issues. Thank you very much for weathering the weather to be with us today. 

Dr. VANDERHEI. Thank you. 

Dr. GOKHALE. Thank you. 

The CHAIRMAN. The committee will stand adjourned. 

[Whereupon, at 11:19 a.m., the Committee adjourned.] 

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A P P E N D I X 

PREPARED STATEMENT OF SENATOR JOHN BREAUX

I would first like to thank Chairman Craig for holding this vital hearing on retirement savings. I would also like to take this opportunity to thank all of the witnesses 

who have come before us to testify today. Your testimony will be of great value as 

the Committee works to address some of the critical challenges that exist in ensuring financial security for both today’s and tomorrow’s retirees. 

The need for retirement income security for our nation’s retirees is great. This 

need will only grow, as 77 million baby boomers stand on the doorstep of retirement. 

We, as a nation, can no longer wait to address issues of retirement security nor turn 

a blind eye to them. In recent years, several competing theories have come to the 

fore. Before we as legislators can attempt to implement any of these theories, we 

must first understand the implications of each. That is why this hearing is so important. I look forward to hearing what our witnesses have to say and to working with 

my them along with my colleagues here in the Senate on this crucial issue. 

PREPARED STATEMENT OF SENATOR GORDON H. SMITH

Today’s hearing on retirement planning is of vital interest to all Americans. With 

America’s changing demographics and the increased mobility of our citizens, it is essential that every American be able to adequately prepare for their own retirement. 

Our retirement system must face the realities of our time. Unlike in the past, employees do not have the same jobs for life; increasingly, they switch both employers 

and professions. Families have become increasing separated by distance, and retirees must be able to financially provide for their own care as they get older. In addition, Americans longevity rate in increasing—we as a nation are living longer, 

healthier lives. 

With these trends taken together, it is imperative that the federal government 

promote a retirement system that encourages all American’s to prepare for their financial future. At a time when Americans should be saving more, they are not. 

American’s personal savings rate has been on the decline. We must have a strong 

retirement system that encourages private savings. The federal government and future generations cannot be made to bore the cost of an every increasing size of retirees who are living longer than there predecessors. 

Since the early 20th Century, America has made important headway in building 

a stronger retirement system by encouraging innovate ways of saving for retirement. We have made significant improvements, however, much needs to be done to 

ensure the income security for Americans during their retirement. 

Therefore, I join the Chairman, and look forward to learning more about creating 

innovative policies to encourage American’s to increase their personal savings in an 

effort to provide for their future.

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