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80–261 2013

2012 ANNUAL REPORT OF THE SOCIAL SECURITY 

BOARD OF TRUSTEES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON SOCIAL SECURITY 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JUNE 21, 2012

Serial No. 112–SS17 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan, Chairman 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

RICK BERG, North Dakota 

DIANE BLACK, Tennessee 

TOM REED, New York 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

JENNIFER SAFAVIAN, Staff Director and General Counsel 

JANICE MAYS, Minority Chief Counsel 

SUBCOMMITTEE ON SOCIAL SECURITY 

SAM JOHNSON, Texas, Chairman 

KEVIN BRADY, Texas 

PATRICK J. TIBERI, Ohio 

AARON SCHOCK, Illinois 

RICK BERG, North Dakota 

ADRIAN SMITH, Nebraska 

KENNY MARCHANT, Texas 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

SHELLEY BERKLEY, Nevada 

FORTNEY PETE STARK, California 


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C O N T E N T S 

Page 

Advisory of June 21, 2012 announcing the hearing .............................................. 2 

WITNESSES 

Charles P. Blahous III, Ph.D. Trustee, Social Security and Medicare Boards 

of Trustees, Testimony ........................................................................................ 6 

Robert D. Reischauer, Ph.D. Trustee, Social Security and Medicare Boards 

of Trustees, Testimony ........................................................................................ 15 

SUBMISSIONS FOR THE RECORD 

The Honorable Pete Stark ...................................................................................... 43 

NCPA ........................................................................................................................ 45

MATERIAL SUBMITTED FOR THE RECORD 

Questions For The Record: 

Charles P. Blahous III, Ph.D. ................................................................................. 50 


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2012 ANNUAL REPORT OF THE SOCIAL 

SECURITY BOARD OF TRUSTEES 

THURSDAY, JUNE 21, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON SOCIAL SECURITY, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 9:06 a.m. in Room 

B–318, Longworth House Office Building, the Honorable Sam Johnson [Chairman of the Subcommittee] presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

Chairman Johnson Announces Hearing on the 

2012 Annual Report of the Social Security Board 

of Trustees 

Thursday, June 21, 2012 

U.S. Congressman Sam Johnson (R–TX), Chairman of the House Committee on 

Ways and Means Subcommittee on Social Security announced today that the Subcommittee will hold an oversight hearing on the findings in the 2012 Annual Report 

of the Social Security Board of Trustees. The hearing will take place on Thursday, June 21, 2012 in B–318 Rayburn House Office Building, beginning at 

9:00 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A 

list of invited witnesses will follow. 

BACKGROUND: 

The Board of Trustees of the Federal Old-Age and Survivors Insurance (OASI) 

and the Federal Disability Insurance (DI) Trust Funds was established under the 

Social Security Act to oversee the financial operations of the OASDI Trust Funds. 

The Board is comprised of six members, four of whom serve by virtue of their positions in the Federal Government (the Secretary of the Treasury (who also serves as 

Managing Trustee), the Secretary of Labor, the Secretary of Health and Human 

Services, and the Commissioner of Social Security) and two members of the public 

who are appointed by the President and confirmed by the Senate. The Deputy Commissioner of Social Security Administration serves as Secretary of the Board. 

The Social Security Act requires that the Board, among other duties, report annually to the Congress on the financial status of the OASI and DI Trust Funds. The 

overview section of the 2012 report concluded, ‘‘Under the long-range intermediate 

assumptions, annual cost for the OASDI program is projected to exceed non-interest 

income in 2012 and remain higher through the remainder of the long-range period. 

The combined OASI and DI Trust Funds are expected to increase through 2020, and 

then to decline and become exhausted and unable to pay scheduled benefits in full 

on a timely basis in 2033. However, the DI Trust Fund becomes exhausted in 2016, 

so legislative action is needed as soon as possible.’’ 

In the absence of intervening Congressional action or changes in projections, the 

Trustees project that incoming Social Security revenues would be sufficient to pay 

about three-quarters of scheduled benefits starting in 2033 and over the rest of the 

75-year period. 

In their ‘‘Message from the Public Trustees,’’ the Public Trustees concluded that 

Social Security’s finances had deteriorated primarily because of a weak economy and 

higher-than-expected inflation. They said, ‘‘[t]he Social Security outlook has worsened significantly relative to last year’s report. The actuarial deficit in its combined 

trust funds is now 2.67 percent of taxable payroll, the highest recorded since the 

last major Social Security financing reforms roughly three decades ago.’’ They also 

said, ‘‘While there is no way to know what mixture of additional revenue and restraints on benefit growth will prove to be the most palatable means of strengthening Social Security’s financial position, lawmakers should be aware that it will become increasingly difficult to avoid adverse effects on current beneficiaries, those 

close to retirement, and low-income beneficiaries in all birth cohorts if legislative actions are delayed much further.’’ 

In announcing the hearing, Chairman Sam Johnson (R–TX) stated,‘‘Americans 

have long known that without change, Social Security will be unable to 


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keep its promises to the hard-working taxpayers who pay into the system. 

According to this year’s report, not only is Social Security’s outlook worse, 

it is clear that the longer we wait the harder it will be to protect benefits 

for those who rely on them most. I hope this hearing will help lead us to 

find commonsense solutions to secure Social Security’s future.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on the findings in the recently released 2012 Annual Report of the Board of Trustees of the OASDI Trust Funds, the effect of the trust 

funds’ current cash flow deficit status and future exhaustion, and the cost of delaying actions to address Social Security’s fiscal challenges for workers and beneficiaries. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearing for which you 

would like to submit, and click on the link entitled, ‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word or WordPerfect document, in compliance with the formatting requirements listed below, by the close 

of business on Thursday, July 5, 2012. Finally, please note that due to the 

change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical 

problems, please call (202) 225–1721 or (202) 225–3625. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

be maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

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

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

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

by the Committee. 

3. All submissions must include a list of all clients, persons and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

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

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

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

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

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://www.waysandmeans.house.gov

f 

/. 


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Chairman JOHNSON. This hearing will come to order. Good 

morning to both of you. Thank you for being here. 

According to this year’s report from the Social Security Board of 

Trustees, Social Security will be unable to keep its promises to the 

hard working Americans who pay into the system. 

We will hear today that not only is Social Security’s financing 

looking worse, but it will also be increasingly difficult to protect 

benefits for those who rely on them most if we delay action much 

longer. 

As Commissioner Astrue said ‘‘This year’s Trustee Report contains troubling but not unexpected projections about Social Security’s finances, and once again emphasizes that Congress needs to 

act to ensure long term solvency of this important program.’’ 

According to the Trustees, the Old Age and Survivors Program 

will be unable to pay full benefits beginning in 2035, three years 

earlier than projected in last year’s report. 

That means workers who are 44 years old today will reach their 

full retirement age in 2035, at which point everyone else will face 

benefit cuts of 25 percent unless Congress acts. 

In less than 4 years, Social Security’s Disability Insurance Program will be unable to pay full benefits. 

The average monthly benefit for a disabled worker today is only $1,111. In 2016, revenues will cover 79 percent of benefits. That is 

a potential cut of about $233. That is real money for those who are 

getting by on fixed income. 

Social Security’s last major reform was in 1983, then Social Security faced an imminent disaster. In their 1982 annual report, the 

Social Security Trustees said, ‘‘Without corrective legislation in the 

very near future, the Old Age and Survivors Insurance Trust Fund 

will be unable to make benefit payments on time beginning no 

later than July 1983.’’ 

Members of Congress and the President were able to develop and 

ultimately pass on a bipartisan basis the Social Security Amendments of 1983. 

Despite the near failure of the Greenspan Commission and despite the opposition of senior advocacy groups including AARP, as 

this year’s report makes clear, Social Security is in trouble, but just 

as in 1983, I believe our nation has the will to again save Social 

Security. 

We should not follow the path Europe has taken by waiting for 

a financial disaster to force changes that ultimately could end up 

hurting the most vulnerable. 

Today we will hear from Social Security’s Public Trustees, but we 

in Congress are trustees, too, and the public knows the longer we 

wait, the more difficult the choices will become, and the less time 

Americans will have to prepare. 

With all the financial anxiety that Americans face, we should not 

increase the burden on them by failing to fulfill our duty in protecting our nation’s most important safety net program. We need 

to act now before it is too late. 

Do you have an opening statement? 

Mr. BECERRA. I do. 

Chairman JOHNSON. What do they say, up from the grave he 

arose. 


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Thank you again for listening. I will recognize Mr. Becerra now 

for any opening statement you have. 

Mr. BECERRA. Thank you, Mr. Chairman. I also want to thank 

Mr. Stark for being here in the event I was not able to make it. 

I got my daughter to her program on time and I am able to be 

here. Thank you very much for being here to the two gentlemen, 

our Trustees who are here. 

I would just like to say what I have been saying for quite some 

time. Social Security, even through the worst recession since the 

Great Depression, is a program that people have grown to rely 

upon and can trust. 

Between 2007 and 2010, a typical middle class family lost some- where between $26,000 to $87,000 in their net worth. That is about 

four out of every ten dollars of their assets and savings. Between 2007 and 2010, Social Security added $439 billion to its 

trust fund surplus, while paying Americans their earned benefits 

on time and in full. 

Here we saw Americans with their private savings and retirement pensions watching it go down at the same time during this 

great recession. We saw Social Security continue to increase the 

monies it had to pay out benefits to its recipients. 

Over 77 years now, through 13 recessions, Social Security has 

added not one penny to our deficit or to our debt. 

In 2011, Social Security provided earned benefits to more than 

55 million seniors, widows, disabled workers, and children, while 

saving all the reserves in its trust fund to pay future benefits. 

Six out of ten seniors who get Social Security rely on Social Security for a majority of their income. There are 1,300,000 children 

who are lifted out of poverty because they receive Social Security. 

In the long term, Social Security faces a manageable challenge. 

It is not now and never will be broke. 

This April, the Social Security Trustees warned that without action, Social Security will be insolvent by 2033. Let’s be clear about 

what that means. 

In 2033, worker contributions are projected to cover about 76 

percent of Social Security’s costs. The remaining balance in Social 

Security’s trust fund will pay another five percent of costs. The 

shortfall is stable. After 2033, Social Security’s income will be 

enough to pay about three-fourths of earned benefits until at least 

2087, and likely longer after that. 

Social Security’s long term shortfall is a problem that we need 

to address, but even when the reserves building up now run out, 

Social Security will not be out of money. It will have a shortfall of 

about .9 percent of GDP, just slightly more than the cost of extending the Bush tax cuts for people who earn more than a quarter of 

million dollars a year. 

Social Security does face a crisis in the short term, one manufactured by a series of budget cuts forced by House Republicans. 

If they continue, the cuts could delay benefits and damage Social 

Security’s well earned public image. 

In 2011, the Republican-led a four year continuing resolution cut 

the Social Security Administration’s budget by $600 million, despite rising numbers of Americans applying for Social Security. 

In 2012, SSA’s budget was frozen below the 2010 level. 


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I strongly oppose these budget cuts which are kind of like the 

cable company starting to bill you for a service while you are at 

home waiting for them to show up and connect it. 

Social Security’s trust fund funds the entire cost of paying Social Security benefits. In 2011, workers contributed over $600 billion to 

Social Security’s trust fund. Because of Social Security’s budget 

cuts in 2011, all Social Security field offices started closing half an 

hour early each day. 

Social Security permanently closed over 300 contact stations and 

small field offices and waiting times for initial disability decisions 

rose and are likely to be over 130 days by the end of 2012. 

SSA faces an even bigger cut through the sequestration process, 

automatic cuts scheduled by the Budget Control Act. Although Social Security benefits are protected, if Congress does not act soon, 

on January 2, Social Security’s operating budget will be cut by over 

$1 billion. 

$1 billion in cuts translates into 40 days in which Social Security 

is shut down. Offices are closed and locked. No one answers the 

phone. No applications processed. No one makes sure benefit 

checks are sent to the right place. 

Mr. Chairman, Social Security has been there for Americans for 

77 years. I hope we can continue to work to make it strong for another 77 years. We can start by addressing the preventable crisis 

of short-sighted budget cuts. 

With that, I yield back the balance of my time. 

Chairman JOHNSON. Thank you. We have one witness panel 

today. Seated at the table are our two Public Trustees, Charles 

Blahous, Ph.D., and Robert Reischauer, Ph.D. 

Robert Reischauer, I would like to congratulate you on your 

award last night at the National Academy of Social Insurance. We 

are lucky to have someone with your breadth of experience working 

as a Public Trustee. Thank you and congratulations. 

Mr. Blahous, you are recognized. 

STATEMENT OF CHARLES P. BLAHOUS, III, PH.D., TRUSTEE, 

SOCIAL SECURITY AND MEDICARE BOARD OF TRUSTEES 

Mr. BLAHOUS. Thank you, Mr. Chairman, Mr. Ranking Member, all the Members of the Subcommittee. It is a great honor to 

appear before you today to discuss the findings of the latest Trustees’ reports. 

In view of the time constraints we are all under, what I would 

like to do is gloss over most of the background information in my 

written remarks and just proceed to some primary points about Social Security financing. 

The first simple point is that Social Security costs are rising, 

most of that cost increase is going to play out from a period that 

started in 2008 through 2035. The primary driver of those cost increases is demographic. 

If you think about Social Security costs, there are really two 

main pieces. One is growth in the per capita benefit level, and that 

is driven by the benefit formulas in law, but also just the growth 

in the number of beneficiaries. 

On the revenue side, the primary driver is growth in the number 

of workers and the wages that are subject to tax. That ratio of 


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workers to beneficiaries is very important for Social Security financing. That ratio is in the process of dropping. 

We had 3.3 workers to support each beneficiary in 2007. Now we 

are down to 2.8, and under our current projections, we will be down 

to 2.0 by 2035. 

Part of that is longevity increases, but the bigger and more immediate factor is simply fertility patterns. We have this big baby 

boom generation going onto the retirement rolls prior to 2035. 

Under our current projections, the combined Social Security trust 

funds will be depleted in 2033. That is three years earlier than we 

projected in last year’s report. Each year what the Trustees do is 

they estimate the program’s actuarial deficit, usually expressed as 

a percentage of the tax base, the program’s tax base, and this year, 

our projection is 2.67 percent of worker wages over the next 75 

years. 

That sounds arcane, but basically what that means is you have 

a 12.4 percent payroll tax rate now, if you immediately added 2.67 

points to that, you would have the program in balance for 75 years, 

or if you immediately had an equal subtraction in benefit obligations. 

That is an average figure. The shortfalls are smaller in the near 

term, bigger in the long term. It is also a substantial increase from 

last year’s projection. 

Last year, we were at 2.22 percent. It may not sound like a big 

difference, but by Social Security norms, it is a pretty substantial 

deterioration. We have only had one other report over the previous 

30 years that showed as much deterioration in a single year as this 

year’s report does. My colleague, Mr. Reischauer, will review some 

of the reasons the outlook has grown worse. 

Also important, the figures I just cited pertain to the combined 

trust funds. Social Security has two trust funds, and under law, 

they each have to be kept solvent to maintain their benefit payments. 

The Social Security disability insurance trust fund is in the more 

severe condition of the two. It is projected to be depleted in 2016. 

What is happening over time is the program is going to pose 

under current law a greater financial strain on the larger budget, 

and some of the strain is a result of discretionary policy choices, 

of course, that are made along the way. 

One of them, for example, this year, the payroll tax rate has been 

cut from 12.4 points to 10.4 points. Social Security has been held 

harmless for that change. There is a provision of that law which 

transfers general revenues over to Social Security so that its ability 

to finance benefits is not affected. 

Basically, what is happening is that part of the financing responsibility has been moved from Social Security’s payroll tax to the 

general revenue side of the ledger. 

A final point, there are significant costs to delay in addressing 

the financing shortfalls. It is often cited that in 2033, we will have 

only enough funds to pay 75 percent of scheduled benefits. It is important to bear in mind that does not mean 75 percent of scheduled 

benefits for those retiring in 2033, that includes everybody. It includes people already on the rolls in 2033, including many people 

who are drawing benefits today. 


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If you were to say well, we do not want to cut benefits for people 

already on the rolls in 2033, what if the benefit reductions were 

confined to new claimants. 

We would not be able to balance the system in that year without 

a substantial unprecedentedly large tax increase even if we cut off 

the entirety of benefits to new claimants. 

By 2033, it is really too late, far too late to protect previous beneficiaries from substantial dislocations. 

If you start working through the problem backwards and you say 

how soon do we have to act if we want to prevent reductions for 

people in retirement, near retirement, low income beneficiaries, 

and prevent a tax increase of a size we haven’t countenanced before, we would have to do that pretty soon. 

Finally in closing, Mr. Chairman, I would just say that the legislative achievement in creating the Social Security program remains 

historically a remarkable one. 

It has provided critical social insurance protections for hundreds 

of millions of Americans. It has done this at exceptionally low administrative cost. It has done it with financing methods that are 

not without their critics but nevertheless have been generally accepted by most of the American public as relatively equitable. 

That is a hard thing to do in legislation, and with responsible bipartisan action, Social Security can continue to fulfill its vital role, 

but such action must be prompt and sufficiently decisive if the program is going to serve future generations as well as it has served 

previous ones. 

Thank you. 

[The prepared statement of Charles P. Blahous, III, follows:] 


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Statement of Charles P. Blahous 

Public Trustee for Social Security 1 

Before the Subcommittee on Social Security 

of the U.S. House of Representatives Committee on Ways and Means 

June 21, 2012 

Thank you, Mr. Chairman, Mr. Ranking Nlember and all of the members of the subcommittee. It 

is an honor to appear before YOll today to discuss the findings of the latest Social Security 

Trustees'report. "!'viy written testimony begins with some basics of Social Security finances 

before describing the causes and magnitude of the program's projected financing shortfall. 

Social Securi(v Taxes, Trust Fund~' and Benefits 

Taxes: Under current Ia"v the vast majority of fInancing for Social Security benetit payments is 

provided by a payroll tax upon covered wages. In most recent y~ars the payroll tax rate has been 

12.4%, though it was temporarily reduced to 10.4% [or the years 2011 and 2012. The tax is 

cun-enlly scheduled to retum to 12.4% in2013 and beyond. The usual 12.4% tax is nominally 

divided into two 6.2 point halves assessed respectively upon employer and employee~ but most 

economists agree that the entirety of the 12.4% tax is taken from the \vorker's wage 

compensatl011. Wage earnings subject to this tax, as \\-'ell as any benefit credits based on those 

earnings, are both capped. This cap retlects Social Security's historical design as a tloor of 

protection in the event of income loss due to old age, disability, or death of a primary household 

wage earner. The current cap is S110,100 annually, and is indexed to grow generally with the 

national Average \Vage Index (AWl). In addition to payroll taxation, a mllch smaller amount of 

program revenue (about 3%) is generated via income ta-...;:ation of Social Security benefits. 

The Trust Funds: Beyond revenue generated from current t.axation, further aut.hority and 

resources to finance bendit payments are provided by the Social Security Trust Funds.' The 

economic significance of the trust funds is a source of persistent. controversy. But though there 

is controversy over the trust funds' economic meaning, there is much less so over v .. ·hat the trust 

funds literally contain; specifically, special-issue Treasury bonds. These bonds are on the one 

hand real asseb to the Social Security program, backed by the full faith and credit of the federal 

1 T am also a research fellow with the Hoover Institution ~Uld a senior research fellow ", .. jtb the Mercatus Center. 

~ There are separate trust funds for the OASI (Old-Age and Survivors) and Dr (Disability) programs. though public 

discussions often refer to the combined operations of the Funds. 
10 


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government, while on the other they are equally a real obligation of the general budget accounts. 

If we look at the bonds from the perspective of the tmst funds, they are assets. [fwe look at 

them from the perspective ofthe unified federal budget, they are a net wash, as is the interest that 

they earn. The total amount of the trust funds, no\v roughly 52.7 trillion, represents the interestcompounded value of past annual program balances, including years of surpluses from 1984 to 

2009 inclusive. 

Benefits: Americans tend to think of retirement benefits first ",,then thinking of Social Security. 

This is understandable given that the majority of benefit paY111ents (about 64%) are made to 

retired workers. But Social Security also provides for a number of other forms of benefits as 

well, including disability benefits, spousal benefits, and benefits for widows, widowers and 

survivor children. Although there are differences in the methods of computing benefits for these 

respective populations, they all hinge in some fashion on the basic retiremlo:nt benefit I(Jrmula. 

Importantly, onc's total Social Security beneflt is not limited to the amount of one's own 

contributions plus interest. One's beneHt is instead a function of a fonnula written into the ia","-. 

An overriding problem we face is that the total amount of projected benefit obligations that 

\vould result under cutTent formulas is signi ficantly greater than the amount of revenues that the 

program ,,,ou1d receive under current law. One way or the other, this imbalance behveen 

revenues and scheduled benefits must be corrected. 

Sources a/Financing Strains 

Under current financing methods the vast majority of program revenues at any given point in 

time derives from payroll taxes contributed by current workers. Program benefits, cost rates and 

demographics can be related by the following fonnula: 

(Individual benefits as % ofCLLlTcnt \vorkcr wages) 

__________________ = (Cost rate as (YO of current workl'l" vvages) 

(Ratio of workers to beneficiaries) 

For example, if hypothetically a typical benefit were equal to 40% of the average worker's 

,vages, and if there ,vere four taxpaying workers for each beneficiary, then the average program 

cost rate would equal 10% of the average worker's \\"ages. 
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Under current law, individuals' initial Social Security benefits are indexed to grow with national 

average wages while the program's 12.4% tax rate is scheduled to remain constant. But as the 

preceding formula shows, the ongoing decline in the worker-beneticiary ratio must either result 

in higher tax burdens upon workers or in benefits that grow less rapidly than worker wages. It is 

this collision bet\veen current benefit and tax schedules, program financing methods and 

demographics that is at the heart of Social Security's projected financing shOlifall. 

Ratio of Workers to Beneficiaries 

~Pa5t:>t1d Projected) 

Various demographic factors contribute to the ongoing decline in the ratio of contributing 

workers to beneficiaries. Increasing longevity is an important factor, though prior to 2035 a 

more significant one will be the continued movement of the Baby Boom generation from the 

ranks of workers to the ranks of beneficiaries. 

Current Financing Projections 
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Social Security expenditures exceeded the program' s non-interest income in 2010 for the first 

time since 1983 and ar~ projected 10 do so for the indefinite future. 3 III the near term, 

redemption of trust fund assets Jrom the General Fund of the Treasury will provide the 

resources needed to otfset annual cash-tlo" deticits ofthe combined trust funds. Since these 

redemptions \\'i1l be less than trust fund interest eamings through 2020, nominal halanees of 

the combined trust funds ,vi!! cominue to grmv. After 2020, Treasury wi!! redeem trust fund 

assets in amounts that exceed interest earnings until depletion of trust fund reserves in 2033, 

three years earlier than projected last year. Thereafter, tax income would be suflicientto pay 

only about three-quarters of scheduled bcncfits through 2086. 

Though the nomInal balance of the combined trust funds is still rising as a result ofanlll.m! 

interest credits, there are important caveats to bear in mind about this. One is that the combined 

trust funds' abitity to finance benefits is already in decline, as evidenced by the combined T nlst 

Fund Ratio having peaked at 358 in 2008.4 This is because the cost of paying benefits is rising 

proportionally faster than th~ trust funds' nominal value, resulting in a progr~ssively shortening 

duration of'the benefits the rund~ can finance. Al~o, while interest payments and general 

rC\enue transters increase the balance ofthc funds, they do not reduce the unilied budget delicil. 

Accordingly. Social Security operations are currently adding to the unitied federal deticit and 

will add substantially more in the years to come. 

Also, and very importantly, the results just described pertain to the combined Old-Age and 

Survivors Insurance and Disability Insurance (OASDI) trust funds. Under law each of Social 

Security's separate trust funds must have a positive balance in order to maintain scheduled 

benefit payments. Considered separately, Social Security's Disability Insurance (DI) trust tcmd 

faces a much more immediate crisis. 01 costs have exceeded non-interest income since 2005 and 

trust lund depletion is now projected lor 2016. Changcs to improve thc linancial status olthc DI 

program arc thus needed very soon. 

Under c.urrent projec.tions, the anllual cast of Social Security benetits expressed as a share 0.1' 

workers' taxable earnings wlll grow rapidly from 11.3 percent in 2007, the last pre-recession 

year, to roughly 17.4 percent in 2035. and will then decline slightly before slowly increasing 

after 2050. The projected 75-ycar actuarial delicit [or the combined OASDI Trust Funds is 2.67 

percent oftaxablc payroll. up trom 2.22 percent projected in last year's report. This is the largest 

actuarial deficit reported since prior to the 1983 Social Security amendments, and the largest 

'Technically, Social Security would not be permitted to nm annual dcfieil.;; after tru~t fund depiction due to its lack 

of legal authority to make payments from timmcing. .sources other than the trust nmds. The deficits are permanent in 

lhe sense thaI anTlual l)l.:ndi.t ohligaliom. are projected to exceed annual revenues. 

"\ The Trust Fund Ratio (TFR) indicates the duration of benefit payments Ihat call be financed by the trust funds. A 

TFR of 100 would mean that there arc sufficient assets in the trust fund to finance onc year's worth ofhcneflts. 
13 


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single-year deterioration in the actuarial deficit since the 1994 Trustees Rep01t. My colleague 

Robert -Rei schauer \vill provide additional detail about the reasons for this deterioration. 

A useful interpretation ofthe actuarial deficit is that it represents the percentage points that 

\\iould have to he either added to the current-Iav,,' income rate or subtracted from the cost rate for 

each of the next 75 years to bring the funds into actuarial balance. The actuarial balance equals 

zero if trust fund assets at the end of the period arc equal to the follmving year's cost. The 

relatively large delleits at the end of the 75-year projection period---equal to 4.50 percent of 

taxable payroll in 2086-indicate that sustained solvency would require payroll tax rate increases 

or benefit reductions (or a combination thereof) by the end oIthe period thaI are substantially 

larger than the average actuarial deficit of2.67 percent. 

The Gro-wing Urgency (iLegis/ative Corrections 

By almost any objective measure, the financial health of the Socia-] Secllrit,y system has 

enter~d a conceming decline. Whi Ie there is no way to know what mixture of additional tax 

revenues and restraints on benefit grO\vth \\/ill prove to be the most palatable means of 

str~ngthening Social S~curity's financial position, la\vmakcrs should b~ aware that it will 

become increasingly diHkult to avoid adverse effects on ClllTent benetkiaries, those close to 

retirement, and lov.t-income bcne1kiarics in all birth cohorts iflegislativc changes arc ddaycd 

much further. 
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For many years the Trustees Repolts have contained illustrations of the magnitudes of changes to 

benefits or taxes required to place Social Security on a financially sustainable path. Useful 

though these illustrations arc) they understate the likely effects oficgislativc actions upon those 

affected. First, such illustrations often assume that the full effect oflegislation takes place 

immcdiatc1y, \\'lth no phase-in or lead time. Perhaps even more importantly, the benefit 

examples assume that legislators \vould be equally \'v'illing to reduce support for current 

benetieiaries as to restrict the growth of benetits to thtllre participants. Tn the past, policy makers 

have been reluctant to significantly reduce the benefits of those who have already begun to 

collect them. In a practical sense, therefore. changes adv~rscly atli..':cting younger generations are 

likely to be much more severe than indicated in these simple illustrations. The costs that \vill be 

borne by younger generations will grow significantly each year that a new cohort of baby 

boomers joins the benefit rolls \vith current formulas in place. 

For example, imagine that no legi.slative action is taken w1til the Trust Funds' depletion date of 

2033 is approached. In 2033, incoming tax revenues vwuId be sufficient only to fund 75% of 

promised benefits. This constraint hO\vever, would apply to pre-existing as well as ne\-\' benefit 

payments. Even the complete elimination of benefit payments to ne\v claimants v/ould not then 

by itself balance system finances, if previous retirees arc protected. Accordingly, unless there 

\vas then an unpreccdented increase in payroll tax assessments, the opportunity to confine bcneJit 

changes only to prospective ones ",'"ould have been long lost. The trustees are currently exploring 

hmv the illustrations in the trustees' report might be retined to better capture these practical costs 

of further delay in legislative corrections. 

Budget implications of Social Secur;(v Operatjons 

Concern about the long-range financial outlook for Social Security often focuses on the 

depletion dates for the trust funds~the time \vhen projected trust fund balances under cunent 

lav,' would be insufficient to pay the full amounts of scheduled benefits. A more immediate 

issue is the growing burden that the program wiil place on the Federal budget well before 

depletion of its trust funds. Social Security operations \\'iI1 exert rapidly rising pressure on the 

Federal budget for the next t\\'o decades, as genera! revenues must cover grm,\,ing OASDI 

deficits through 2033. 

The 2011 deticit of Sa cia I Security tax income relative to cost was $148 billion and the 

projected 2012 deficit is $165 billion. The large sizes of these detieits are primarily due to a 

temporary reduction in the Social Security payroll tax for 2011 and 2012. The legislation 

establishing the payroll tax reduction also provided for transfers of revenues from the General 

Fund of the Treasury to the trust funds to "replicate to the extent possible" revenues that \,vGuld 

have occulTcd in the absence of the payroll tax reduction. If the payroll tax ClIt is pCn11il1ed to 

expire on schedule at the end of the year, pressure exerted by Social Security on the federal 

budget will be immediately reduced. but will grow substantially thereafter as the number of 

beneficiaries and the total cost of benefit payments both rise. 
15 

f 

Chairman JOHNSON. Thank you. You said ‘‘pretty soon.’’ What 

do you mean? Do you have a definitive date? 

Mr. BLAHOUS. Well, you will get different answers if you ask 

different experts. My own view is the window of opportunity is closing relatively rapidly. 

We already face a shortfall that is significantly larger than the 

one that was repaired in 1983, which is probably the high water 

mark politically of what can be accomplished in terms of a short 

term resolution. 

Obviously, each year we wait, the problem grows larger and more 

difficult to solve. 

Chairman JOHNSON. I understand that. When are we going to 

fall off the cliff? That is what I am asking you. You can answer 

later. 

Mr. Reischauer, you are recognized. 

STATEMENT OF ROBERT D. REISCHAUER, PH.D., TRUSTEE, 

SOCIAL SECURITY AND MEDICARE BOARD OF TRUSTEES 

Mr. REISCHAUER. Thank you, Chairman Johnson, Ranking 

Member Becerra, Members of the Subcommittee. I appreciate the 

opportunity to appear before you to discuss how the Social Security 

program’s financial outlook has changed since the last Trustees’ report. 

To judge whether the financial health of Social Security is improving or deteriorating, the media and the public tend to focus on 

whether the years in which the two trust funds are projected to be 

exhausted has receded or advanced. 

By this measure, there has been a significant deterioration in the 

financial health of the Social Security programs since the 2011 report. The exhaustion date, as the Chairman has mentioned, for the 


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16 

OASI program is now projected to be 2035, three years sooner than 

was projected last year. 

The DI trust fund exhaustion date has advanced two years, from 

2018 to 2016, and the exhaustion date for the two trust funds combined has now moved to 2033, three years sooner than projected 

last year. 

A more comprehensive measure of the trust fund’s financial condition is the actuarial balance over a 75 year evaluation period. 

This measure is essentially the difference between the annual income and costs of the program summarized over the 75 year period 

and expressed as a percentage of taxable payroll over that period. 

A negative actuarial balance, meaning an actuarial deficit, can 

be interpreted as the percentage points that would have to be either added to the current law income rate or subtracted from the 

cost rate in each of the next 75 years to bring the fund into actuarial balance. 

The actuarial deficits of both Social Security trust funds have deteriorated since last year’s report. The DI trust fund’s actuarial deficit has worsened by seven one-hundredths of a percent of taxable 

payroll. That for the OASI fund has deteriorated by 38 one-hundredths of a percent of taxable payroll, and the combined trust 

funds have weakened by 44 one hundredths of a percentage point. 

This deterioration in the combined trust funds is the largest decline since the measure was first calculated in 1982, save for the 

change that occurred in 1994. 

There are lots of reasons why the actuarial balance can go up or 

down from one year to the next. One of them, of course, is that the 

valuation period changes. We add 2086 to the valuation period and 

subtract 2011, and that accounts for about nine percent of the deterioration in the actuarial balance. 

Clearly, there was no legislation that affected this in a significant way over the past year, so that is not a factor. 

Demographic assumptions in this year’s report are identical to 

those that were assumed in the previous report, but we have updated starting values and the transition from those starting values 

to the ultimate values do affect the actuarial balance. 

Specifically, more recent data has shown that birth rates for 

2009 and 2010 were lower than assumed in the last report. Immigration in 2010 was a bit lower than was assumed in the previous 

report. There was a slightly smaller initial population than we assumed before. 

A little less than half of the increase in the actuarial deficit between 2011 and 2012 is accounted for by changed economic assumptions and more recent information about the economy’s performance. 

Two-thirds of this is related to updated starting values and less 

optimistic assumptions about near term growth of the economy. 

Price inflation, as you all know, was higher than anticipated between the third quarters of 2010 and 2011, and rather than a 

seven-tenths of a percentage point COLA in December of 2011, Social Security gave out a 3.6 percentage point COLA. That makes 

a huge difference, as you can imagine. 

Real interest rates in 2011 and those projected in the 2012 report 

are lower than assumed before. The new investments that the trust 


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17 

funds make get less interest earnings than we thought they would 

get when the 2011 report was put together. 

Together, these economic factors make the gap between non-interest income and costs over the next few years significantly larger 

than projected in last year’s report, but when the economy has recovered, about the end of this decade, 2020 or so, the gap between 

what was expected last year and what was expected this year will 

be close to disappearing. 

However, it is important to recognize that we made a new assumption in the 2012 report that causes the gap between income 

and costs to grow over the long run, and this had to do with what 

we expect the changes in the average number of hours worked per 

week to do. 

In last year’s report, we said hours were not going to change in 

the future. In this year’s report, we assumed they will decline five 

one-hundredths of a percentage point a year. We did this to reflect 

the aging of the workforce and the belief that as productivity goes 

up, incomes go up, people will want to take more leisure, and that 

will translate into working a few less hours as it has in the past. 

This assumption obviously acts to reduce taxable earnings and payroll tax revenues from what was assumed in 2011. 

We also made a change in our assumptions about the incidence 

of disability. Compared to last year’s report, the ultimate age adjusted disability incidence rates were increased by two percent for 

males and five percent for women. These are more consistent with 

what the historical values and trends have been over the last decade. 

The deterioration in the actuarial deficits that I have just summarized here today underscore the need for legislative action to put 

Social Security on a more sustainable path. 

The sooner we address this challenge, as Chuck as said, the less 

disruptive the changes will be. If the reforms are adopted soon, 

those most adversely affected can be given time to prepare. The 

burden can be spread more equally across different generations, 

and political animosity and public anxiety associated with these 

unavoidable changes can be moderated. 

The changes in the trust funds’ financial well being that I have 

discussed also call attention to the importance of maintaining a 

strong economy and vibrant long term growth. 

Let me conclude with a comment about the staffs of the Social 

Security Administration and the Departments of Treasury, HHS 

and Labor, with whom we worked to produce the Trustees’ reports. 

They are an incredibly hard working, talented group of analysts 

who are dedicated to providing the public and the Congress with 

as objective and sophisticated set of estimates as is possible, and 

I think we are all in their debt for the service they provide to us. 

Thank you. 

[The prepared statement of Robert D. Reischauer follows:] 


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Statement of Robert D. Reischauer1 

Subcommittee on Social Security, Committee on Ways and Means 

U.S. House of Representatives 

June 21, 2012 

Chairman Johnson, Ranking Member Becerra, and members of the subcommittee, I appreciate 

this opportunity to discuss the 2012 Social Security Trustees Report with you. My tellow Public 

Trustee Dr. Charles P. Blahous covered the basic operations and projected financing shortfall of 

the program in his presentation. My statement focuses on the changes that have occurred in the 

program's financial outlook since last year's report and the impact that a weak economy can 

have on this outlook. To illustrate my points, I have included in my statement a number of 

charts that were prepared by the Office of the Chief Actuary of the Social Security 

Administration. 

The projections of the financial health ofthe Social Security program that are contained in the 

annual Trustees Reports change each year, sometimes by small amounts, sometimes by moderate 

amounts, and sometimes by large amounts. To judge whether the financial health of Social 

Security is improving or deteriorating, the media and the public focus on whether the years in 

which the two trust funds are projected to be exhausted have receded or advanced since the last 

report. If the movement has been by more than a year or two, the year-to-year changes are 

regarded as significant. 

By this measure, the changes between the 2011 and 2012 Trustees Reports indicate a significant 

deterioration in the financial health of the Social Security program. (See Chart) The exhaustion 

date of the OASI Trust Fund is now projected to be 2035, three years sooner than was projected 

in last year's report. The projected exhal1... tion date of the DI Trust Fund has advanced two years 

from 2018 to 2016 and the exhaustion date for the two trust funds combined (OASDI) is 

projectcd to come in 2033, three years year sooner than was projected in last year's report. 

1 President Emeritus ofllie Urban Institute and Public Trustee of the Social Security Trust Funds. The views 

expressed in this statement should not be attributed to the Urban Institute, its SpOllSors, staff, or trustees. 
19 


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A more comprehensive measure ofa trust fund's financial condition is its actuarial balance ovcr 

the 75-ycar valuation period. This balance is essentially the difIercnce betv·/een annual income 

and costs, summarized over the 75-year projection period and expressed as a percentage of 

taxable payroll. 

A negative actuarial balance-an actuarial deficit-----can be interpreted as the percentage points 

that viould have to be either added to the current-law income rate or subtracted -from the cost rate 

in each of the next 75 years to bring the fund into actuarial balance, By definition, for a trust 

fund to be in actuarial balance its income must equal its costs over the valuation period and at the 

end of the 75fh year the trust fund mList hold assets equal to the 76th year's cost. 2 

The actuarial deficits of both Social Security tmst funds have deteriorated since last year's 

report. The DI Trust Fund's actuarial deficit has worsened by -0.07 percent of taxable payroll, 

the OASI fund's deficit has deteriorated by -0.38 percent oftaxablc payroll and the deficit of the 

combined trust funds has weakened by -0.44 percent of taxable payroll (See Table). The 

deterioration in the combined trust funds' deficit is the largest single year decline ::.incc this 

measure was [irst calculated in 1982. 

2011 Trustees Report 

2012 Trustees Report 

Diflcrcnce ~J)jfthcn~~ adjusts for row](kd ,'ompoJlcn1s 

Long-Range Actuarial Deticit of the 

OAS!, Dl, and OASDI Trust Funds 

(percent of taxable payro!l) 

OAS! DI OASDI 

-1.92 -0.30 -2.22 

-2.30 -0.37 -2.67 

-0.38 -0.07 -0.44* 

Year-tn-year changes in Social Security's projected financial situation always occur because the 

valuation period is moved one year fonvard. Changes can also occur because new legislation is 

enacted, underlying economic 311d demographic assumptions are modified, administrative 

practices arc revised, projection methodologies arc refined. and new- data become available. 

The 75-year valuation period used in the 2012 Trustees Report adds the year 2086, a year with a 

large negative balance. and drops 20 II, a year with a more modest negati\.'e balance, to the 

valuation period used in the 2011 RepOli. This change tt-om the previous report accounts for a 

bit less than 9 percent of the increa~e in the actuarial deficit. (See Chart) 

Because Social Security's annual deficits, expressed as the difference between the cost rate and income 

rate, are projectt:d to increase gradually from 2017 to 2037, to decline slighlly during the 2038 [0 2052 

period and then to increase through 2086, the single tax rate increase for all years starting in 20 12 

sufficient to achieve actuarial balance would result in large annual surpluses carly in the period followed 

by increasing annual deficits in later years. The relatively large deficits at the end ofthe 75-year 

projection period----equul to 4,50 percenl of taxable payroll in 2086-indica1e that sustained solvency 

would require payroll tax rate increases or benefit redw.;lions (or both) by the end of lhe period that are 

substlll1tially larger than those needed on average for the vahlation period (20 12 R 86), 
20 


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Factors Accounting for Increase in the Projected 

Actuarial Deficit in the 2012 TR 

Net Increase of 0.44 percent of payroll 

No legislation enacted during the past year signiticantly affccted Social Security's long-range 

financial position. 

Vv1,ile the ultimate demographic assumptions in this year's Report arc the same as those in the 

2011 Report, updated starting demographic values and the transition from these values to the 

ultimate assumptions increased the aClUarial deficit modestly. Specifically, the availability of 

more recent data showed lower 2009 and 20 I 0 birth rates, lower 20 10 immigralion rates, mld a 

slightly smaller initial population than was assumed in the 20 II Report. 

Almosl halfofthe increase in the acluarial deficit belween the 2011 and 2012 Reporls is 

accounted for by changed economic assumptions and more recent information about the 

economy's performance. About two-thirds oethis is related to updated starling values and less 

optimistic assumptions about the ncar term growth of the economy. They illustrate hov-.' 

relatively small errors in our ability to forecast short-term economic conditions can have 

significant impacts on Social Security's financial \vell-being. 
21 


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Price inflation bdween the third quarters 0(,2010 and 2011 was laster than was assumed in the 

2011 Report. Rather than a 0.7 percent increase in benefits, as was assumed in the 2011 Rep011, 

beneticiaries received a 3.6 percent December 201 1 COLA. increasing the program's costs. 

A weaker than expected economy resulted in average taxable earnings f()f 2011 that were below 

the level assumed in the 20 II Report. (See Chm1) The assumed levels of average taxable 

earnings have been adjusted downward from the levels assumed in the 2011 Report by 2.0 

percent for 2012 and by lesser amounts in future years in this year's report. (See Chari) These 

adjustments reduce expected future payroll tax revenue. 

Real interest rates in 2011 and those projected in the 2012 Report for the next few years are 

lower than was asslUned in the 2011 Report. Lower real interest rates reduce the amount of real 

interest income that the trust funds will receive on their ncw investments. 

The 2012 Rep011's estimate of the gap between non-interest income and costs over the next few 

years is signiticantiy larger than that shown in the 2011 Report largely because orthese 

economic factors, in particular a larger than expected COLA and the shOitfal1 in average taxable 

wages. (See Chart bclow) The expectation that full recovery from the Great Recession will take 

one year longer than was assumed last year. with full employment not being attained until 2019, 

also contributes to the larger gap. 
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OASDIArmual CaslN'i:!owBalances 2011·20l}a 

Another change introduced in the 2012 Report has a more significant impact over tht! longer 

term. Tn past reports the Trustees asslimed that the average number of hours worked per \\"eek 

\vQuld not change in the future. The 2012 Report assumes that after 2021 the average number of 

hours worked per \veek ,vill decline 0.05 percent a year. reflecting the aging of the workforce 

and the bclicfthat future 'workers ",HI want to take some ufihelf productivity gains in the form 

of more leisure. This assumption translates into a reduction in the real \vage differential-the 

percentage point difference between the growth of a\ cragc covered wages and the growth of 

consumer prices. Aller 2021, this assumption will act to reduces taxable earnings and payroU taA 

revenueR from the levels assumed in the 20 II report by ever increasing amounts. It accOLlnts for 

about onc-third of the 0.21 percentage point increase in the actuarial deficit associated with 

economic factors and is the prinuuy reason for the reduction after 2021 in the cash flow balances 

shown in the previous chart. 

The 2012 Report also revised the assumption made about the incidence of disability. Compared 

to last year's report. the ultimate age-adjuskd disability incidence rates were increased by 2 

percent for males and 5 percent for ""omen. These rates are more consistent than were the 

previous report's assumptions with the disability levels and trends experienced over the past 

decade. The new assumptions increased the actuarial deficit by -0.04 percent of taxable payroll. 

Several improvements in methods and new program data -wcre introduced in the 2012 Report. 

fWD methodological refinements are expected to improve the accuracy of the estimates of the 

benet·its paid to the average ,vorker \vho retires in the future. Taken together the new data and 

methodological refinements increase the projected long-run actuarial delleit by 0.08 percent of 

taxable payroll. 
23 

f 

Chairman JOHNSON. Thank you. You went three minutes over. 

[Laughter.] 

Mr. REISCHAUER. That is a better performance than last year. 

I want to be graded on the curve. 

Chairman JOHNSON. Thank you. I am going to as customary 

limit my time to five minutes and ask all my colleagues to do the 

same. 

Social Security was designed so that workers pay into the system 

and earn their benefits. Franklin Roosevelt understood the importance of making Social Security different from a welfare program. 

He once said ‘‘We put those payroll contributions there so as to 

give contributors a legal, moral and political right to collect their 

pensions and their employment benefits. 

With those taxes in there, no damn politician can ever scrap my 

Social Security program.’’ 


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Mr. Blahous and Mr. Reischauer, in your messages from this 

year’s annual report, you point out payroll taxes represent only 70 

percent of the total Social Security income in 2011 due in large 

part to general revenue transfers replacing lost income from a payroll tax holiday. 

If we continue to replace payroll tax revenues with income tax 

revenues, how long before Social Security is no longer perceived as 

an earned benefit, and what is that going to do for public support? 

Go ahead, Mr. Blahous. 

Mr. BLAHOUS. I would say my answer to the second part of 

your question is no one can know when that point might be 

reached obviously, but that statement is in the report obviously because we wanted to call law makers’ attention to the fact that Social Security historically has had a certain rationale for its financing, and as you pointed out, it does go back to Franklin Roosevelt. 

If you go back and read his early statements, he placed a very 

high level of importance on the notion that this was an earned benefit. He did not want it to be merged in with the general budget. 

That is why we have a separate trust fund. That is why we have 

a separate payroll tax. That is why we have trustees. 

He was very concerned. In multiple statements he says if you 

want to have a universal participation program, it costs a lot of 

money to do that, so if you have it as part of the general budget, 

it is going to be competing for funding with other programs and 

would be subject to great political risk, that the benefits of this program could be cut back. 

He was very attentive to the idea of how do you structure this 

program so it has enduring political support, and not only FDR, 

but subsequent Social Security advisory councils over the years 

have repeatedly said that one of the bases of the program enduring 

political support is the idea that workers have earned these benefits and they came out against—all these advisory councils came 

out against funding the program from the general fund. 

Just speaking for myself as a Trustee, I think one of the things 

we wanted to do was just draw law makers’ attention to the fact 

that if the program does continue to get transfers from the general 

fund, it does potentially create a situation where we would have a 

departure from FDR’s intentions on that point. 

Chairman JOHNSON. It is not your personal money any more. 

About $0.45 out of every $1.00 of public debt is held by foreign governments, mostly China. 

Mr. Blahous, if we continue the payroll tax holiday and the general revenue transfers to replace lost payroll tax revenue, do we 

risk turning Social Security from a program paid by Americans to 

one dependent on the whims of foreigners who invest in our bonds? 

Mr. BLAHOUS. I think it is certainly the case that the general 

revenues that were transferred to Social Security along with the 

payroll tax cut were financed with debt. They were financed by increasing the deficit. We cut payroll taxes and added that amount 

to the deficit. 

Certainly, while there is an ongoing argument over who really finances the redemption of bonds held in the trust fund, clearly, in 

this instance, this would be case of the financing for Social Security 

being provided by the people who invest in U.S. Treasury bonds. 


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Chairman JOHNSON. Can you tell me why you think tax increases are no answer for fixing Social Security? It seems to me to 

fix Social Security for good, we need to make sure our reform efforts align tax revenues with benefit outlays on a sustained basis. 

That did not happen during the last major reform. 

Seventy-five year solvency was achieved by building annual surpluses in the near term followed by growing annual deficits in the 

long term, even though that was not intended at the time. Is that 

correct? 

Mr. BLAHOUS. That is correct, although I have to say that if 

you were to bring ten experts up here, you would have a few that 

would disagree with me on the point. 

If you go back and study the 1983 reforms, one of the things that 

is striking about them is that they did not measure financial success the way we do it now. 

When they analyzed Social Security’s future balance, they did 

not count the carry over balance of the trust fund. They did not 

count interest earnings of the trust fund. 

They used a different actuarial method that basically presumed 

that all benefits in the future would be paid by taxing the wages 

of future earners. 

If you read the comments of people who developed the reforms, 

whether they are Jake Pickle or Senator Pat Moynahan or Robert 

Myers, who was the Executive Director of the Commission, they 

said in multiple places that it was their intention to keep the program financed on a pay-as-you-go basis. 

The fact that they wound up with a solution that had big surpluses in some years and big deficits in other years, was not as intentional as many people now believe. 

What they were trying to deal with was a short term emergency, 

trying to make sure the benefit checks did not stop in 1983, and 

they were trying to arrive at an average actuarial balance over the 

long term. 

As you point out, that resulted in an unsustainable solution because as time went on, the surplus years faded into the past and 

more deficit years appeared on the horizon. 

Again, they were trying to do a lot of things under emergency 

conditions in 1983. The intention is not to critique what they did, 

but simply to point out that as they defined the long term balance, 

they did not give the same level of attention to what was happening on an annual basis that we do in the Trustees’ reports now. 

Chairman JOHNSON. Okay. I presume you agree with him? 

Mr. REISCHAUER. Actually, I probably would disagree with all 

three of the answers that Chuck gave. 

[Laughter.] 

Mr. REISCHAUER. That is why you have two Trustees. Do you 

want me to disagree or shall I keep my lips sealed? 

[Laughter.] 

Chairman JOHNSON. I will let Mr. Becerra ask. My time has 

expired. Thank you. 

Mr. BECERRA. We will just leave it at there is disagreement on 

that. 

Let me ask the two of you—by the way, thank you for your testimony and the work that you do as Trustees, we appreciate that. 


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Both of you mentioned in part of your testimony the deterioration in the outlook for the program, which is why I think all of us 

should be trying, as Mr. Blahous said, dealing with this sooner 

than later. 

I think your pie charts in your testimonies, the information you 

provided, show a great portion of that deterioration occurred as a 

result of the recession, which hit pretty hard. 

It became pretty clear that when you lose jobs in America, you 

lose workers who are paying their FICA contributions, their Social 

Security contributions, fewer workers contributing to Social Security, less money going into the pot to pay out benefits. 

Job one for Congress should be creating jobs, helping the private 

sector create those jobs. You get more folks to work. It does not just 

help them and their families, it helps Social Security because there 

is more money going into the system, the Social Security system 

and the trust fund. 

Mr. Reischauer, you mentioned immigration passingly. Does the 

fact that we have had, unlike other countries, a consistent flow of 

immigrants over the last several decades help the Social Security 

system and its trust fund when it comes to being able to pay out 

benefits? 

Mr. REISCHAUER. That is a very complicated question. In fact, 

the influx of immigrants has increased the labor force, it has increased the number of individuals paying payroll taxes, which over 

the short run, clearly helps the ability of the program to pay benefits to retired and disabled workers and survivors. 

Mr. BECERRA. I think the other part of that that you do not 

mention is in the long run, if they become recipients of Social Security benefits, then they will draw as well. 

It is one of those things where it is not plus an automatic plus 

because they at some point will qualify to receive those benefits as 

well. 

Mr. REISCHAUER. Yes, but it is very complicated and will depend on what their earning patterns are over time and different 

groups of immigrants have different pluses and minuses in sort of 

a narrow fiscal sense. 

Mr. BECERRA. Or if they stay in the country. Some of these 

folks will move back. 

Mr. REISCHAUER. Many leave and do not end up collecting 

benefits. 

Mr. BECERRA. Right. I have some numbers here that show that 

between 2007 when the recession was starting and then got really 

deep through 2010, nearly 6,000 companies in this country terminated their pension plans. 

In 2009 alone, those terminated pension plans were short $9 billion of what they needed to pay out in benefits to the workers who 

had those pensions under those companies. 

During that time, 2007 to 2010, Social Security did not lose any 

money, did it? 

Mr. BLAHOUS. No, Social Security continued to make payments 

in full and the nominal balance of its trust funds continued to rise. 

Mr. BECERRA. Right. We all know the examples of Circuit City 

that shut down its pension plan. We remember Enron when it went 


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bankrupt, and how those companies left their employees and their 

pensions. 

The reason why I think it is so important, you mentioned how 

we should be acting now to try to resolve any longer term issues 

for Social Security, is that we do not want to get to the point where 

you compare Social Security to Enron or Circuit City. 

Fortunately, we still have some funds, even if Congress cannot 

get its act together, to keep the Social Security system going 

smoothly for the next 20 some odd years, and even after that it 

would be paying out 75/76 percent in benefits. 

I do not think anyone today is paying into Social Security to get 

75 percent of what today’s beneficiaries are getting. 

I hope what you all will continue to do is give us the recommendations that you feel will help us move toward something 

sooner than later. 

I think most people are getting to the point of agreeing it is pretty simple math, as I think you mentioned, Mr. Blahous. You can 

go to the benefit side. You can go to the revenue side. You can figure out a way to get yourself in an actuarial balance for the next 

75 years. 

Hopefully, what we will do is we will sit down at some point soon 

in Congress and try to come up with that tough political response. 

Appreciate your testimony here today and your service with the 

Trustees, and I hope you will continue to come and testify before 

this Committee. Thank you. I yield back. 

Chairman JOHNSON. Thank you. Mr. Brady, you are recognized. 

Mr. BRADY. Thank you, Mr. Chairman. We hear these days that 

everything is doing fine with Social Security on Capitol Hill. No 

need to act. Things are not fine with Social Security. 

As Chairman Johnson pointed out, in the last year, America borrowed roughly $140 billion, much of it from China and other foreign investors, just to pay our Social Security benefits. 

This year we will borrow $150 billion roughly from China and 

other foreign investors just to pay our benefits to seniors. That is 

not fine. 

If you do not like that, get used to it, because your report said 

we face permanent deficits forever in Social Security programs. 

We are told maybe this is due to the recession but truth is we 

are told the economy is doing better but this had the largest single 

deterioration since 1994, Social Security, so it is getting worse, not 

better. 

I have three questions. I would hope we could have a no spin 

zone here and just ask the Trustees, those responsible for the financial stability of Social Security, just to give us your best advice 

to Congress and the White House. One, should Congress and the 

White House continue to delay reforms on this important program, 

or should we act now? 

Mr. Blahous. 

Mr. BLAHOUS. I am an advocate of acting as soon as possible. 

Mr. BRADY. Mr. Reischauer. 

Mr. REISCHAUER. I think speedy action is called for. 

Mr. BRADY. How much time? 


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Mr. REISCHAUER. Whether the actual changes in policy you 

make need to be implemented next year or after is a totally separate issue. This is an area where we generally phase policy in over 

a long time. 

Mr. BRADY. You both made the point that if we do not act soon, 

it will be impossible to protect current and near retirees. Again, 

your advice to us. What is the time table? How soon do we need 

to act? This year? Next year? Your advice to us. 

Mr. REISCHAUER. I think you should act when the climate is 

right, when changes are being made—— 

Mr. BRADY. I am asking you as a Trustee looking at the numbers, how much time would you say we have to act in your belief? 

Mr. REISCHAUER. I would hope that you would act within the 

next five years. 

Mr. BRADY. Mr. Blahous. 

Mr. BLAHOUS. Yes, with the disclaimer, if you were to line up 

ten experts here, I am probably on the pessimistic end of those ten 

with respect to how bad it is going to be for the future of the program if we delay too long, but I certainly agree definitely within 

five years. I would hope to do it even faster. 

Mr. BRADY. The payroll tax holiday was important to many 

families, but it did blow a hole in Social Security’s revenue stream. 

It was backfilled by general revenue. We know that cannot continue. 

Again, no politics in this, your advice as Trustees, should we continue the payroll tax holiday or should we restore the full stream 

of revenue to Social Security? 

Mr. Blahous. 

Mr. BLAHOUS. Here I am speaking very much for myself. I 

would urge that Social Security go back to its 12.4 percent rate. 

Mr. BRADY. Restore to the full stream. We have to deal with 

how we do that. Your advice would be restore the full amount of 

money? 

Mr. BLAHOUS. That is a personal view. Obviously, not the 

Board of Trustees. 

Mr. BRADY. I understand. Mr. Reischauer? 

Mr. REISCHAUER. Mine is obviously a personal view, too, but 

I would phase it out with all deliberate speed. 

Mr. BRADY. Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you. Mr. Schock, you are recognized. 

Mr. SCHOCK. Thank you, Mr. Chairman. It does not seem like 

the news is getting much better. I want to get a little parochial 

here. You said we need to act soon. I am just curious what the 

younger generation of Americans have in store for themselves if we 

don’t act soon. 

Mr. BLAHOUS. Two part answer. The mathematical part of the 

answer is a net income loss. There is a table in the Trustees’ Report that says if you just held all current participants in the system harmless, current benefit formulas, current tax formulas, then 

people coming into the system would lose a net of about four percent of their taxable wage income to Social Security. That is a net, 

that is after they receive all benefits. 


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Those income losses would be higher on the higher income side 

but they would also be present on the lower income side. You 

would have whole generations that were losing money net through 

the program. 

That is the mathematical answer. Getting back to the questions 

that were asked earlier, I think they would also face the risk that 

we might not be able to generate the political will to keep the program operating on a self financing basis. 

Then if we could not keep the program going on a self financing 

basis and had to merge into the general fund or subsidize it from 

the general fund, I think they would lose something else, which is 

sort of the legacy of Social Security as a separate stand-alone self 

financing system that has a certain degree of political protections 

that other Federal programs do not have. 

Mr. SCHOCK. Mr. Reischauer. 

Mr. REISCHAUER. You asked young generations, what should 

they expect, and the answer is less income in retirement years. Future generations will run more risk with respect to disability as 

well, payments they would get in disability and as survivors. 

They need to divert more of their income into private pension 

plans or 401(k)s or other retirement vehicles. 

Mr. SCHOCK. Why are you saying they would need to do that? 

Mr. REISCHAUER. If they wanted to maintain adequate incomes in retirement. 

Mr. SCHOCK. Because of Social Security? 

Mr. REISCHAUER. Social Security payments would be less for 

them. 

Mr. SCHOCK. How much less? 

Mr. REISCHAUER. Well, as Chuck explained and the Chairman 

and others have mentioned, Social Security would be able to pay 

about three-quarters of the benefits now promised. 

Mr. SCHOCK. That is based on what age category? 

Mr. REISCHAUER. This would be across the board for all existing beneficiaries and future beneficiaries starting after 2033. 

Mr. SCHOCK. For the next 100 years? 

Mr. REISCHAUER. Well, we do not go out that far. We go out 

through 2086. It stays roughly in that area. 

Mr. SCHOCK. Assuming the same number of people live the 

same number of years and have the same number of children? 

Mr. REISCHAUER. No, I mean we do vary this over time in our 

projections according to the best information that we have available. 

Mr. SCHOCK. What happens to people that are not as young, 

perhaps they are 50, and they are 15 years from retirement? What 

is going to happen to their Social Security if we do not do anything? 

Mr. BLAHOUS. The literal no action scenario is that—literal no 

legislative action would be a 25 percent benefit reduction in 2033. 

Those people presumably would collect full benefits for some years 

and then experience a sudden benefit reduction in 2033. 

Obviously, it is unlikely that is the way it would play out in practice. Congress would probably not permit a sudden 25 percent benefit reduction. 


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There would probably be some alternative mix of pain allocated 

between beneficiaries and taxpayers, but the literal no action scenario is 25 percent benefit reductions. 

Mr. SCHOCK. Are you assuming we would be responsible? 

Mr. BLAHOUS. Let’s just say there is no historical precedent for 

Congress allowing a sudden benefit cut of that magnitude. 

Mr. SCHOCK. Is there historical precedent for Congress allowing 

Social Security to become this broke? 

Mr. BLAHOUS. No. That is actually a very important question. 

Mr. SCHOCK. Has it ever been this broke? 

Mr. BLAHOUS. We have never had an actuarial deficit as large 

as it is now. We have come closer to the insolvency point. In 1983, 

we were a few months away from not being able to send out the 

benefit checks, but the size of the current actuarial imbalance is 

larger than it has ever been, at least since before the 1983 reforms. 

There was an indexing mistake that was made in the 1970s, and 

there was temporarily a huge long term deficit that was created by 

that indexing mistake that was fixed in the 1977 amendments. 

Since that correction, this is the largest actuarial deficit we have 

seen since prior to the 1983 reforms. 

Mr. SCHOCK. Mr. Reischauer, do you agree? 

Mr. REISCHAUER. Yes. 

Mr. SCHOCK. If you have a Republican and Democrat to agree, 

maybe we should leave Capitol Hill now. 

[Laughter.] 

Mr. SCHOCK. Thank you, Mr. Chairman. 

Chairman JOHNSON. Every now and then we do. Mr. Stark, you 

are recognized. 

Mr. STARK. Thank you, Mr. Chairman. Thank you for holding 

this hearing and thank our witnesses for their service. 

I have to mention, Mr. Blahous, before you choose to criticize my 

testimony, we both have the same background. I notice you have 

a doctorate in physical chemistry. 

I also have a great deal of experience in physical chemistry. I 

think I took ten semesters of it at MIT. However, it was all second 

semester chemistry that I had to repeat over and over again before 

I could pass it, but it is a great background. 

The Republicans want to kill Social Security. I think that is quite 

obvious, and turn it into a voucher plan. 

Mr. BRADY. Mr. Chairman, if the gentleman would yield on 

that. 

Mr. STARK. I will be happy to. 

Mr. BRADY. Mr. Stark, as you know, Republicans are very 

strongly supportive of Social Security. Our mom’s and our 

dad’s—— 

Mr. STARK. Rich people. Let the poor people pay for it. I do not 

buy that. The Republicans want to kill Social Security and Medicare and turn them into voucher systems. 

Mr. Reischauer, actually, they are stealing your thunder. You are 

one of the original founders and your thunder, of course, is to have 

Medicare have premium support. 

Fortunately, it also gave you an umbrella for that thunderstorm, 

which was a guaranteed benefit. 


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Would you support the idea of premium support without a guaranteed benefit? 

Mr. REISCHAUER. As you know, Mr. Stark, the term ‘‘premium 

support’’ came out of an article that Henry Arron and I wrote in 

1995 suggesting that there be private or non-profit options for 

Medicare beneficiaries along with fee for service, that the benefit 

be a defined guaranteed benefit, and that the payment be one that 

was indexed to the growth of health care costs over time. 

Our belief was that this might generate more efficient delivery 

systems and better care for America’s seniors along with some cost 

savings. 

The emphasis was on the quality of care and offering a more diverse set of delivery systems. 

Mr. STARK. Thank you. The Affordable Care Act, which the Republicans would like to defeat, according to actuaries, it would extend solvency eight years longer than if the Republicans had their 

plan to kill health reform. 

Would you suggest that is correct? 

Mr. REISCHAUER. Yes. There is a projection that HI costs 

would be reduced and the trust fund would be solvent—— 

Mr. STARK. I ask unanimous consent to submit for the record 

a CMS press release with the Trustees’ report which states that 

‘‘Without the Affordable Care Act, the health insurance trust fund 

would expire eight years earlier, in 2016.’’ 

Mr. Reischauer, can you put a dollar number—I keep hearing 

that Social Security is going to go broke in 20 years, something like 

that. What will the total negative amount be? How many billions 

would you guess if you project that, it is going to be short over the 

total period? 

Mr. REISCHAUER. Over the next 75 years? 

Mr. STARK. Is it going to take 75 years to go broke? 

Mr. REISCHAUER. No. It will exhaust the trust funds in 2033 

if you combine the trust funds. I do not have a number at the tip 

of my tongue. 

Mr. STARK. Any idea, Mr. Blahous? 

Mr. BLAHOUS. The projections have the trust funds solvent 

through 2033. The shortfall would be 2033 through the end of the 

75 year period. We have a present value estimate of that, about 

$8.6 trillion. 

Mr. STARK. $8.6 trillion. Do you have any idea what the two 

wars we are fighting and not paying for costs over the same period 

of time? 

Mr. BLAHOUS. I do not. 

Mr. STARK. Would you be surprised to know it probably cost a 

lot more than that, and I am not hearing anybody on the other side 

ask that we pay taxes, particularly those of us who maybe have 

high incomes, like Members of Congress, we are not being asked 

to contribute anything to pay for that war. Lower income people 

maybe are. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you. Without objection, the CMS 

memo that you referred to will be entered into the record. 

[The information referred to follows: The Honorable Pete Stark] 


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ccoleman on DSK8P6SHH1PROD with HEARINGInsert offset folio 14 here 80261.014

DEPARTMENT OF HEALTH & HUMAN SERVICES 

Centers for Medicare & Medicaid Services 

Room 352-G 

200 Independence Avenue, SW 

Washington, DC 20201 

Office of Communications 

CMSNEWS 

FOR IMMEDIATE RELEASE 

Monday, April, 23, 2012 

Contact: CMS Office of Media Relations 

(202) 690-6145 

Medicare Stable, But Requires Strengthening 

The Medicare Trustees Report released today shows that the Hospital Insurance (HI) Trust Fund 

is expected to remain solvent until 2024, the same as last year's estimate, but action is needed to 

secure its long-term future. In 2011, the HI Trust Fund expenditures were lower than expected. 

Without the Affordable Care Act, the HI Trust Fund would expire 8 years earlier, in 2016. The 

law provides important tools to control costs over the long nm such as changing the way 

Medicare pays providers to reward eftldent, quality care. These efforts to reform the healthcare 

delivery system are not factored into the Trustees projections as many of the initiatives are just 

launching. 

"The Trustees Report tells us that while Medicare is stable for now, we have a lot of work ahead 

of us to guarantee its future," said Acting CMS Administrator Marilyn Tavenner. "The 

Affordable Care Act is giving CMS the ability to do this work, with tools to lower costs, tight 

fraud, and change incentives so that Medicare pays for coordinated, quality care and not the 

number of services." 

The report projects that the Supplementary Medical Insurance (SM I) Trust Fund is financially 

balanced because beneficiary premiums and general revenue financing are set to cover expected 

program costs. Spending from the Part B account of the SMI trust fund grew at an average rate 

of5.9 percent over the last 5 years. 

SM I Part D, the Medicare prescription drug program, had an average growth rate of 7.2 percent 

over the last 5 years. Cost projections for Part D are lower than in the 2011 Trustees report, due 

to lower spending in 2011 and greater expected use of generic drugs. 
33 

f 

Chairman JOHNSON. Mr. Marchant, you are recognized for five 

minutes. 

Mr. MARCHANT. Thank you, Mr. Chairman. My question is 

about the actual mechanics of how when you approach let’s say 

2016 and the disability shortfall begins to appear in the disability 

program. What is the number that Congress would need to appropriate out of general funds in those threshold years just to maintain the benefit? 

Mr. BLAHOUS. Just as a very crude estimate, it is about $30 

billion a year, the shortfalls that appear from 2016 through the 

rest of the decade. 

Mr. MARCHANT. We look at things over ten years usually. 

Mr. BLAHOUS. They would start in 2016. It would be about $30 

billion a year, I guess, over the last six years of that valuation period. 

Mr. MARCHANT. Is there a trigger put into the law where the 

Congress immediately is confronted with having to make that legislative decision, or will it be a legislative decision through the entire 

Congress and then be signed by the President? 

Mr. BLAHOUS. The way the law reads is that the disability insurance program can only make payments from monies that are in 

its trust funds. If you assume Congress does nothing, then basically 

you would have—when the trust fund balance got down to zero, 

you would have delays in outgoing benefit payments until incoming 

tax revenues came in to finance more benefit payments. 

The effect of that through just delaying payments would be to reduce total payments on an annual basis by about 21 percent per 

year. 

If you wanted to maintain full scheduled benefit payments 100 

percent, you would have to find other revenues and put them in the 

trust funds to allow the full scheduled benefits to be paid. 


ccoleman on DSK8P6SHH1PROD with HEARINGInsert offset folio 15 here 80261.015
34 

Mr. MARCHANT. You would basically have an appropriation 

that would be made into the trust fund and the trust fund would 

basically then make its payments adequately? 

Mr. BLAHOUS. Right. 

Mr. MARCHANT. If we reach that threshold in the main Social 

Security trust fund, what would be the amount of money needed 

that Congress would have to appropriate in that first year, based 

on the projections that you are making now, to keep the benefit at 

100 percent, when we reach the 75 percent threshold? All of us get 

that warning when we open our yearly statement and look at it. 

Mr. BLAHOUS. Right now, I do not have the precise dollar figure off the top of my head, but just to put it in today’s terms, it 

is about 25 percent of scheduled benefits. 

Today, the cost of paying benefits is a little bit shy of $800 billion. It is about $790 billion per year. 

If you wanted to think of it in today’s terms, the amount by 

which you would be short, in today’s equivalent, a little bit shy of 

about $200 billion a year. 

Mr. MARCHANT. $200 billion. That would be the choice Congress would have at that point, to keep benefits basically at the 

projected level. Congress would have the decision of just simply appropriating the money to go in? 

Mr. BLAHOUS. Yes. This cuts to a point I made earlier about 

the difficulty of the choices Congress would face. Obviously, the 

path of least resistance at that point is just to turn to the general 

fund and say here is another $200 billion. It will be much higher 

in nominal terms in 2033. The equivalent of $200 billion and put 

it into Social Security. 

Obviously, that would end the principle that Social Security was 

supposed to be financing itself. 

If you wanted Social Security to finance itself, you would either 

have to raise payroll taxes or cut benefit payments by enough to 

fill in that gap. 

Mr. MARCHANT. By doing that, you would completely end the 

philosophy of a self-paying system, and you would transfer it like 

many of the states have done. They have gone in and raided their 

pension plans over the years to where the pension obligations in 

many of the states now is just a current appropriation. 

They have depleted their trust funds, borrowed against them or 

cashed them in to where instead of it being a payment out of the 

trust fund based on earnings, they just simply have a fixed liability 

to them. 

Mr. BLAHOUS. That is right. 

Mr. MARCHANT. Would that law just become law by the fact 

that we had not fixed the system? 

Mr. BLAHOUS. You would have to take an affirmative legislation action to support the program with general revenues. Under 

current law, there is no provision for doing that. The program cannot borrow from the general fund, cannot receive, without additional legislation, an appropriation from the general fund. 

You would have to change the law in order to have that result. 

Mr. MARCHANT. I think it is reasonable to expect that most of 

us will still be here in 2016. I certainly hope to be. 


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That threshold that you are talking about in the Social Security 

retirement fund, we are approaching with the disability fund. 

Whether we are acting or not acting, we are making some very 

conscious decisions on how we are going to handle this disability 

trust fund. 

I suspect the mentality of Congress at this point is well, we will 

just appropriate the money so that no one loses their benefit. 

When you make that conscious decision, are you not making a 

much bigger decision at that point? 

Mr. REISCHAUER. In the past, when faced with this same challenge, the Congress has reallocated tax revenues from the OASI 

system, the old age survivor system, to the disability system; tweak 

the division of the total payroll tax between the two trust funds, 

thereby avoid making a difficult decision. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

Chairman JOHNSON. The gentleman’s time has expired. Mr. 

Smith, you are recognized. 

Mr. SMITH. Thank you, Mr. Chairman, and thank you to our 

witnesses. 

Mr. Blahous, we frequently hear actually that Social Security is 

a separate account and does not attribute to the deficit. I think my 

colleague, Mr. Marchant, was touching on some of this. 

In your testimony, you indicate that Social Security operations 

are currently adding to the unified Federal deficit and will add substantially more in the years to come. 

Could you expand on that? 

Mr. BLAHOUS. I think perhaps the best way for me to answer 

this is to say the parts of my answer that I think all analysts 

would agree with, and then I will get into the part that there is 

some disagreement on among analysts. 

I think all analysts agree that to the extent Social Security is 

supported by its own payroll tax revenue or by the taxation of benefits, to that extent, it is not adding to the Federal budget deficit. 

I think most analysts would also agree that to the extent Social 

Security is receiving a subsidy from the general fund, like the general fund transfers that accompanied the payroll tax cut, that portion does add to the deficit. 

Where you get into the murky area where analysts argue with 

each other has to do with the interest payments that are made to 

the Social Security trust fund. 

Right now, to a very large extent, from now to through 2033 and 

certainly into the 2020s, Social Security is going to subsist to a 

large extent based on the interest payments from the general fund. 

If you ask two different analysts to interpret what is going on 

there, you are going to get two different answers. 

From a mechanical standpoint, the payments of interest go from 

the general fund to Social Security. You could say from a mechanical and unified budget standpoint, those interest payments do not 

represent money coming into the U.S. Treasury and therefore, represent money going to Social Security without reducing the unified 

budget deficit, and then representing an extent to which Social Security is adding to the overall deficit. 

You will also have a school of thought, and I do not agree with 

this, but there is also a school of thought that says those interest 


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payments represent the extent to which Social Security has reduced the amount of borrowing in the past that the Federal Government has had to do, and therefore, represents a reduction in 

unified budget interest payments. 

Therefore, to the extent Social Security receives interest payments, it is not adding to the unified budget deficit. 

You are going to have competing views on that. I am on one side 

of that discussion and other people are on the other. 

I think with respect to other parts of Social Security, there is less 

ambiguity. I think to the extent that the program is receiving 

transfers of general revenues, it is clearly adding to the deficit, and 

to the extent it is relying on its payroll tax income, it clearly is not. 

Mr. SMITH. Thank you. I will yield back. 

Chairman JOHNSON. Thank you. Mr. Berg, you are recognized. 

Mr. BERG. Thank you, Mr. Chairman. Thank you to the witnesses. 

Mr. Reischauer, I appreciate your article in 1995 about premium 

support and where that would go. 

My question to you is what happens when—I am sure at the 

time people called that ‘‘vouchers’’—people said that is going to 

wreck Medicare, what was your response back then? 

Mr. REISCHAUER. Our response was that changes were unavoidable, that this was a promising approach towards providing 

beneficiaries with more choice, possibly higher quality coordinated 

care, and possibly a reduction in Government spending from competition among plans. 

Mr. BERG. Thank you. Jumping back, I kind of wanted to follow 

up on a question that Representative Marchant had on the Disability Insurance Trust Fund. 

We talk about how we have one to five years to make some decisions. I am sitting here looking at 2016 and I am saying that is 

not five years. That is four years. If you are going to not fall off 

the cliff, you are probably talking one to three years to do something. 

As you explained the reality of how things may happen and 

where money would come out of the other fund to kind of subsidize 

this fund, if you pooled those two funds, what is the year that we 

are not going to cover the benefits? 

Right now, we are saying the one is 2035 and this one is 2016. 

If the old age started subsidizing this other one, at what point is 

it going to bring that down? 

Mr. Blahous. 

Mr. BLAHOUS. Basically, right now the old age and survivors 

fund, the so-called ‘‘retirement fund,’’ that is scheduled for depletion in 2035. Disability is 2016. 

If you put them together, the combined funds would be under in 

2033. 

Mr. BERG. It would be the same? 

Mr. BLAHOUS. 2033 is the figure that we often throw around 

in the vernacular, because it refers to Social Security as a whole. 

That is the figure you hear the most. 

If you split it into the two funds, one of them is 2035 and other 

one is 2016. 


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Mr. REISCHAUER. The 2033 assumes that you re-jigger the allocation of the payroll taxes between the two trust funds? 

Mr. BERG. For the old age and survivors, you are seeing today 

with this report it is still 2035. 

Mr. REISCHAUER. It is not ‘‘still.’’ It was 2038 last year, right? 

Mr. BERG. It has come down from 2038 to 2035. The other point, 

I just want to be clear, when you present value this unfunded liability, we are talking about $8.6 trillion, which is over two years 

of all Federal spending, but that includes 2.7 using that money 

within the trust fund. 

Mr. BLAHOUS. You are right. That is basically the size of the 

actuarial deficit on top of redeeming the trust fund, and redeeming 

the trust fund, basically you are saying redeeming the trust fund 

counting it as an asset and then the shortfall from 2033 out to the 

end of the valuation period is where that $8.6 trillion comes from. 

Mr. BERG. If you did not value that Trust Fund amount, you are 

$10 to $11 trillion in that unfunded liability to make it solvent? 

Mr. BLAHOUS. That is right. 

Mr. BERG. I think there are a lot of different terms that are 

being used, and sometimes it makes it confusing. It cash flows for 

a while here, but it is not solvent. 

From my perspective, I just really think we have to look at these 

facts and the facts are the facts, and if it is not solvent long term, 

and quite frankly, if we care about Social Security, we need to do 

some things to ensure it is solvent. 

I obviously personally am very open to any ideas from anywhere. 

I think the solution needs to be bipartisan. I think that is the only 

way you can present it to the American people. I am just hopeful 

we will get some of those bipartisan solutions coming forward. 

Thank you, Mr. Chairman. I will yield back. 

Chairman JOHNSON. Thank you. You can always raise the age 

to 100, you know. That might take care of it. 

I am going to ask one more question. Mr. Blahous, in order to 

fix Social Security for good, we need to make sure our reform efforts ultimately align tax revenues with benefit outlays on a sustained basis, and that did not happen during the last major reform 

in 1983. 

Then 75-year solvency was achieved by building annual surpluses in the near term followed by growing annual deficits in the 

long term, even though that was not intended by the reformers at 

that time. Is that correct? Could you talk about that? 

Mr. BLAHOUS. Again, and my colleague, Mr. Reischauer, may 

want to leap in and disagree, but my read of the 1983 amendments 

is that what they intended to do and what they actually did were 

somewhat different. 

I think they aimed at avoiding an immediate insolvency problem. 

The benefit checks were not going to go out in a few months and 

they wanted to prevent that from happening. 

They also aimed at a long term actuarial balance. If you actually 

go back and read the documents of the deliberations and the 

memo’s of the Greenspan Commission exchanged, and how they 

measured fiscal success, it is very clear they did not look at it the 

way we do it now. 


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When we make a measure of the condition of the trust funds, we 

count the carry over balance of the trust fund. We count the interest payments of the trust fund. We basically treat the trust fund 

as an asset in Social Security, and therefore, within that mindset, 

you could certainly do something that builds up the trust fund and 

then draws it down over a period of time. 

That is not actually how they went about it. What they did is 

they used a different method for calculating the program’s financial 

condition. It was called the ‘‘average cost method,’’ basically. 

It assumed that in any given year, you were going to fund the 

program by incoming wages from workers. They did not count the 

carry over balance of the trust fund. They did not count the interest payments of the trust fund. 

If you read the commentary of the Greenspan Commission members and the staff director, they say it is our intent to keep the program going on a pay-as-you-go basis, not to have big imbalances 

from one year to the next. 

Jake Pickle wrote a letter, my memory is slipping, but either to 

the New York Times or the Wall Street Journal, saying the public 

would never stand for a big trust fund build up because they would 

not trust the Government to control trillions of dollars of investments and save the money, so we want to keep this program going 

on a pay-as-you-go basis. 

What happened instead was they got big surpluses in some years 

and big deficits in other years, but that result was not fully apparent until so late in the legislative process, that they could not really go back and revisit it. 

Obviously, what they were dealing with was a big emergency. 

They did not want to disrupt the political deal that had been 

reached, so they got a result where the program’s actuarial balance 

on paper was a little bit more apparent than real, which is why it 

has slipped since then. 

Chairman JOHNSON. If we get a solution this time, there are 

going to be political consequences as well. 

Do you care to comment, Mr. Reischauer? 

Mr. REISCHAUER. Yes, I do care to comment. There is a real 

dilemma here. If you operate a program like this on a strictly payas-you-go basis, then you are saying as demography changes and 

changes may be in unexpected ways or trend economic growth 

changes, you are going to have to raise taxes or lower taxes or raise 

benefits or lower benefits. 

For a program that is designed to provide the American population with some kind of assurance that it is going to be able to 

plan its retirement or how much insurance it needs for its potential 

disability, that is not really a satisfactory way to go. 

The other option is you can build up reserves and deplete reserves over time. 

I agree with Mr. Blahous that the intent was not to build up 

these big reserves. The future course of demography was not fully 

appreciated by those responsible or anybody at that time. 

Was the baby bust a permanent phenomenon. We have had huge 

social changes that have gone on in the last 30 to 40 years. Smaller 

family size, more immigration, more women in the workforce, et 


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cetera, that make these things very hard to put in place and then 

stick with your decision for the next 75 years. 

I do not think there is a right answer to this question. 

Chairman JOHNSON. Thank you, sir. Mr. Becerra, you have one 

more question? 

Mr. BECERRA. Yes. To sort of feed off this, I think often times 

we have this conversation because we are accustomed to having 

this conversation. 

I think we do not explain it in terms that most Americans will 

look at it from. 

Essentially, back in 1983, when Social Security was nearing a 

point where it would not be able to pay all benefits, Congress, 

working with President Reagan, worked to deal with that. 

The result was a system where Americans paid a little bit more, 

those who retired got a little less in benefits. The result was this 

reserve that was being built up. Americans have since 1983 been 

contributing more into the system that has been needed to pay recipients, the beneficiaries. 

I think most Americans would say if I gave you hard cash, 

whether you are a bank or any other place where I can store my 

money, and you tell me you are going to pay me interest on that 

cash, that you are expecting at some point to get to collect on that 

cash, essentially by law, that is what we did. 

We told Americans that when they deposited their Social Security contributions from their paycheck to the Government for Social 

Security, what was not used—actually, all of it when it comes in 

goes into Treasury bonds. 

From there, the Social Security system uses what it needs from 

those Treasury bonds to pay for benefits. It cashes in those Treasury bonds. 

Because it has not needed to cash in all of those Treasury bonds 

to pay for current retirees, it has been building up this surplus, 

and that surplus has been earning interest, small, because Treasury bonds earn less interest than some more risky investment on 

Wall Street, but it has been earning interest. That is the $1.6 trillion in interest that has been earned. 

Mr. Blahous, you are saying some people would question whether 

that is real money because it is interest and it was essentially a 

transaction between one arm of the Government, Social Security, 

to the other arm of Government, which is the general operating 

budget of the Federal Government. 

Those Treasury bonds are real. As the Chairman pointed out earlier, 45 percent of our debt held by the public is owned by foreigners. They own that debt and they get to collect on it because 

they own Treasury bonds. 

Those who say it is not real money that Social Security holds, 

guess what, we are in pretty good shape because 45 percent of our 

debt that is held by foreigners is not real money either, so we do 

not owe the foreigners. 

If you do not owe Social Security to Americans that paid into it, 

then we do not owe the foreigners either. 

That is why I do not understand the logic of those who say it is 

not real money. Americans paid real money into the system. It was 


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secured by the most secure form of currency there is, which is a 

Treasury bond. 

To say it is not real money simply because it was done by Social 

Security giving the money to the Government and getting a Treasury bond to hold onto that money, I think is a real either mistake 

to say or a real injustice to the American people who continue to 

pay into the system today. 

That reserve is going to continue to grow for several more years 

before we have to start using it to pay for benefits. 

I think the public will want to understand—I did the quick math 

on this. In the 77 years Social Security has been around, you and 

I and everybody who works and has worked, we have contributed 

about $14 trillion into Social Security with our paychecks, our 

FICA contributions. 

In that 77 years, the calculation was that we have used up about 

$13 trillion in paying out benefits. Hard cash left over, simple 

math, 14 minus 13, there is $1 trillion that Americans have contributed in cold hard cash to Social Security that has never been 

used. 

That has helped produce part of that reserve. Because for decades that reserve has been gaining interest because it is held in 

Treasury bonds, it has added another $1.6 trillion. 

I think most Americans would tell you if you only wanted to give 

them back their $1 trillion and not the 1.6 they earned in interest, 

if this were a bank, we would have a big run on that bank. In fact, 

we would probably burn that bank down. 

I think we want to be very careful when we talk about funny 

money for Social Security. Either we tell China and the rest of the 

world that we are not going to pay them because they have the 

same funny money, or we should keep our obligations to Americans 

who contributed money. 

The final point I want to make is this, and my colleague friend 

from Texas, Mr. Brady, mentioned that Social Security faces a permanent deficit forever, I want to make it clear, and I think Mr. 

Blahous and Mr. Reischauer would concur, under the law, Social 

Security cannot run deficits. 

Is that correct? 

Mr. BLAHOUS. That is correct. 

Mr. BECERRA. Social Security will never face a deficit. What we 

do face, and I think, Mr. Blahous, you have used the right word, 

an ‘‘actuarial deficit.’’ The actuaries see the difference between 

what we are collecting and what we hope to pay out, and there is 

a deficit there, and that is what we have to tackle sooner than 

later. 

Can the Social Security system ever run deficits? By law, it can 

never run deficits. The cold hard fact is we would have to say—I 

think Mr. Blahous said, we would have to tell Americans in 2033 

guess what, all of a sudden your benefit went from 100 percent of 

what you have been getting to 75 percent, which would be cruel, 

and that is what we have to deal with. 

Never has Social Security run a deficit and never can it until we 

in Congress change the law. 

With that, I would yield back. 


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Chairman JOHNSON. Do you want to make a final comment on 

that? 

Mr. BLAHOUS. I certainly do not want to be construed as implying that the bonds in the trust fund are not real assets to Social 

Security. As my testimony indicates, I think the Trustees’ report 

makes clear those bonds are backed by the full faith and credit of 

the U.S. Government, true assets to the program. 

Where you get into these controversies about the trust fund, it 

is not really so much about whether they are real assets to Social 

Security, but it usually has to do with these arguments between 

analysts as to who is paying for the trust fund bonds. For example, the interest payments, we did $200 billion plus in 

general revenue transfers this year to Social Security from the general fund, without collecting any taxes based on that $200 billion. Those bonds are going to earn $400 billion or so of interest up 

through 2033. You have this analytical question, who is really paying for that interest, the taxpayer who finances the general fund 

of the U.S. Government or the person investing in the Treasury 

bonds. 

It is not necessarily the case they were paid for by workers on 

Social Security and there is just a fierce analytical argument as to 

whether that portion of Social Security’s financing comes from contributions made by workers or some other source. 

I certainly do not want to be construed as saying that it is not 

real money for Social Security. 

Mr. BECERRA. Mr. Chairman, this is what I love about hearings. When we actually can have this kind of a discussion, this is 

what I think the public would love to here, rather than just our 

doing our five minutes of asking questions and you only getting 

five minutes to respond or give your testimony, I think actually 

Chairman Camp has done a great job on this on taxes where he 

has allowed us to have these informal off the record kind of conversations with experts on tax reform, and I think we could do 

more of those, maybe even on Social Security. 

For example, Mr. Blahous, you pointed out something very important. When we did the payroll tax cut to try to help working 

families with this recession, you are right, we told them you have 

to contribute less to your FICA taxes to Social Security. 

Congress intentionally said we are not going to damage Social 

Security. We are going to take money from the general fund and 

replace the money that otherwise would have gone in. 

I would respond to your point, which I think is a valid point, is 

that real money that should earn interest through these Treasury 

bonds because it really came from the general fund, and I would 

say absolutely it should earn interest. 

We consciously in Congress said we do not want to undermine 

Social Security, we want to help the economy and give working 

families who pay FICA taxes a bit of a break, but we do not want 

to do that at the expense of Social Security when these folks retire. 

I would say the decision was consciously made by Congress that 

we knew that money would be used to buy Treasury bonds that 

would then earn interest and therefore, we knew that would become money that the Federal operating budget would owe to Social 

Security when the time came to collect on those Treasury bonds. 


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Your point is absolutely well taken. That is the kind of parsing 

that I think we have to discuss. Otherwise, everyone gets confused 

about is it real money, is it not real money. I appreciate the point 

you made. 

Chairman JOHNSON. I want to thank both of you for being here 

today. I think we have had a positive discussion. We do need to fix 

Social Security and we intend to do it. 

I want to thank all the members for being here today as well. 

Mr. Stark, thank you for coming. 

With that, the meeting stands adjourned. 

[Whereupon, at 10:28 a.m., the subcommittee was adjourned.] 


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[Submissions for the Record follow:] 

The Honorable Pete Stark 


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NCPA 


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Statement of 

Pamela Villarreal 

Senior Fellow 

National Center for Policy Analysis 

on the 

2012 Social Security Annual Report 

Ways and Means Committee 

Social Security Subcommittee 

United States House of Representatives 

June 21, 2012 
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Mr. Chairman and members of the Subcommittee, 1 am Pamela Villarreal, a senior fellow at the 

National Center for Policy Analysis. ~re are a nonprofit, nonpartisan public policy research 

organization dedicated to developing and promoting private alternatives to government 

regulation and control, solviug problems by relying on the strength of the competitive. 

entrepreneurial private sector. I welcome the opportunity to share my vic\vs about the 2012 

Social Security Trustees Report. 

Regrettably, the Social Security and Medicare Tmstees repOlis have become reruns of years past, 

with the combined unfunded liabilities exceeding the capacity of the average American to 

understand - more than $63 trillion. Little is offered in the way of viable solutions to solve the 

looming financial catastrophe. In the 2012 report, actuaries estimated that the unfunded 

liabilities of Social Security are $20.5 trillion. At a minimum, the federal government should 

have that much in the bank today, earning interest, in order to fund the Social Security programs 

into the future. Alas, the tmstces inform us that there is only $2.6 trillion in the Social Security 

T rusl Fund, nO\\lhere ncar enough to cover the promises Congress has made to future seniors. 

By the way, the Social Security Trust Fund is nothing more than IOUs written to the Treasury 

while the money has been horrowed and spent on other programs. Technically, this money 

belongs in the net unfunded liability column, bringing the total unfunded liability into the intinite 

horizon to more than $23 trillioo. 
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It almost goes without saying (yet nobody seems to be listening) that the current Social Security 

system is unsustainable because Congress has made promises without paying for them. So what 

are tbe options? The NCPA has examined tive scenarios (tbe details can be accessed at 

http://vv'vv'\v.ncpa.org/pdfs/st337.pdt) that should be of interest to the Subcommittee: 

(1) Retain current law benefits. [I' Congress decides to continue with the current Social 

Security system, they should lind a way to pay for it. According to NCPA research, an 

additional 3.2 percent would need to be added to the cun'ent 12.4 percent payroll tax to 

eliminate the unfunded obligation while retaining current law benefits. But a tax hike 

would have devastating eHeels on the Ii'agile economy. Increasing taxes on labor (which 

is whalthe payroll tax is) during a tepid economic recovery and high unemployment is 

not advisable. 

(2) Progressive price indexing. Moving to a price index instead of a \vage index for those 

at the top ofthe taxable earnings distrihntion would reduce the unfimded obligation to 

$3.2 trillion and shrink the Social Security program to ahout 82 percent of its current size. 

This option would still require a 0.6 percent increase in the payroll tax, but would result 

in a more progressive program. Workers at the 100;ver end (belo\v the 30th percentile) 

would stay with the current wage-indexed formula. 

(3) Change the benefits formula. Without raising taxes at all, Social Security benents 

could he reduced, with the benefits of higher earning workers declining the most. To 

eliminate the unfunded obligations, overall Socia! Security benefits \vould need to shrink 

to ahout 77 percent of their current size. 
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(4) Raise the retirement age. If Congress increased the retirement age by one month every 

two years, the unfunded obligation would shrink to $6.3 trillion. This option would still 

require al.3 percent increase in the payroll tax to achieve solvency. This would result in 

a Social Security program about 87 percent of its current size. However. an across-theboard increase in retirement age would disproportionately harm low-income workers 

since the increase in average life-expectancy is largely due to gains made among highincome \\iorkers. 

(5) Eliminate the taxable maximum. By eliminating the current $106.800 cap, the 

unfunded obligation would shrink to S8.3 tri11io11. Immediate revenues would be 

available for Congress to borrow and spend on other priorities, but this option would 

result in a larger Social Security program over time because of higher future benetits that 

would accrue in the absence of a cap. 

In addition to the five scenarios above, the National Center for Policy Analysis has done 

substantial \-vark in the area of private retirement accounts. This is a viable solution \vorthy 

ofthe Subcommittee's consideration. In brief: 

(I) Put a portion of payroll taxes in personal retirement accounts. While temporary 

payroll tax reductionsjust increase future debts, diverting those taxes to fund retirement 

accounts would reduce future government liabilities. 

(2) Transition toward a funded system. Allow workers and employers to set aside part of 

their payroll taxes and \varkers' wages in personal retirement accounts. As balallces 

grow over time, they will replace the government's unfunded promises. 
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MATERIAL SUBMITTED FOR THE RECORD 

Questions for the Record: 

Charles P. Blahous III, Ph.D. 


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Attn: Kim Hildred 

Staff Director 

Subcommittee on Social Security 

Committee on Ways and Means 

U.S. House of Representatives 

B-317 Rayburn House Office Building 

Questions for the Record of June 21, 2012 Hearing 

Subcommittee on Social Security 

Committee on Ways and Means 

U.S. House of Representatives 

Answers of Charles Blahous 

I am pleased to offer these answers to Chairman Johnson's questions for the record. If you have 

further questions or would like additional information, please do not hesitate to ask. 

Charles Blahous 

Q1: Disability Insurance (01) provides an essential income safety net for those who are unable to work 

due to disability, yet this program won't be able to pay full benefits beginning in 2016. The 

Subcommittee is conducting a hearing series on securing the future of the 01 program. Please explain 

why the Disability Insurance program financing is in worse shape compared to the retirement and 

survivors program and give us your recommendations for how to secure the DI program. 

Ai: There are a number of reasons why the DI trust fund is in more immediate financial difficulty than 

the OASI trust fund. The first one is simply timing: the large baby boom generation became eligible for 

disability benefits before they became eligible for retirement benefits. Over the very long term, the 

trustees' projections for annual cash imbalances in the disability program are no worse than they are for 

the retirement portion of Social Security. But the financial strains that arise from demographics have 

hit DI first, with the result that DI insolvency is projected for 2016 while OASI is projected to remain 

solvent until 2035. In future years more disabled baby boomers will convert to retirement benefits, 

shifting some current DI costs to the OASI trust fund. 

Another contributor to the financial difficulties of the DI program has been the rising percentage of 

women with working careers of sufficient length to render them eligible for disability benefits. Fewer 

than 55% of women were disability-insured at the time of the 1983 Social Security reforms, whereas 

today the number is approaching 70%. Disability incidence rates among women have also risen to be 

closer to those for men. 
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By the early 1990s it was already clear that the disability program's share of total Social Security taxes 

was insufficient to finance its share of total program costs. Policy changes (including liberalization of 

eligibility criteria in 1984) and economic conditions up through the early 1990s drove up disability 

incidence rates relative to assumptions operative at the time of the 1983 reforms and for several years 

afterwards. Estimators also failed to anticipate a decline in disability termination rates that was, in the 

words of the 1992 Trustees' Report, "In part because of the lower average age of new beneficiaries." 

The higher share of disability recipients who are women, and/or who receive disability benefits on the 

basis of mental or musculoskeletal disorders, combined to drive down mortality rates among disabled 

beneficiaries. A reallocation of program tax rates effective in 1994 staved off immediate 01 insolvency 

but was insufficient to restore the long-term health of the 01 program. 01 was thus in weaker financial 

condition than OASI even before the most recent recession precipitated additional disability benefit 

claims. 

Options for restoring the 01 system to financial health are in some senses more limited than with the 

OASI program, but in other senses more diverse. Eligibility age increases that can be used to reduce 

projected OASI costs will not save money in 01 (and could actually increase 01 costs). 01 options thus 

essentially consist of changes to its benefit formula, eligibility criteria and tax revenue collections. In 

view of Ol's weaker financial condition relative to OASI, I believe a reallocation of the current tax rate to 

be appropriate, though this would merely strengthen 01 at the expense of the OASI program. I would 

recommend that any changes to the benefit formula be made concurrently to OASI and 01, to avoid 

"gaming" issues that could arise if the two formulas were decoupled. I believe it is appropriate to 

explore changes to the bend points or bend point factors so that scheduled benefits grow more slowly in 

each program than under current law, with the effects of such cost constraints concentrated on higherincome beneficiaries. As I describe more fully in my answer to your third question here, I also believe 

that reforms should be considered with attention to work incentives, for example by restructuring the 

benefit formula so that benefits rise proportionally with every additional year of work. 

Q2: When Social Security began, the full retirement age was established at age 65. Social Security's early 

retirement age was first established at age 62 for women in 1956, and for men in 1961. Today, the early 

retirement age remains unchanged, however the full retirement age will reach 67 for those born after 

1959. Had the full retirement age kept up with increases in life expectancy, what would it be today? 

Was the system designed for people to live as long as they do today? 

A2: The precise answer depends on whether we are referring to life expectancy at birth, upon first 

receiving benefits or at some other age, because historical life expectancy increases have been unequal 

at different ages. By any measure, however, Social Security's eligibility ages have not risen to keep pace 

with U.S. population aging. Since Social Security's inception cohort life expectancy at birth has risen by 

nearly eleven years. Cohort life expectancy at age 65 has risen by about six years. Thus, even if using a 

more conservative measure of longevity improvements the full retirement age would need to be at least 
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71 today rather than the current 66, if indeed the policy goal were to have the normal retirement age 

keep pace fully with increasing longevity. 

With respect to the second question as to whether Social Security was originally designed for people to 

live as long as they do today, my subjective answer is a qualified no. Though Social Security's designers 

could make reasonable estimates of future longevity gains, they were not in a position to anticipate 

other factors that affect population aging, including among them the subsequent pattern of changes in 

fertility rates that is now producing such dramatic increases in the number of people receiving old-age 

benefits. We must also remember that the benefits the program now pays at a given age are a function 

of a number of program design elements, including not only the full retirement age but also earlyretirement eligibility, automatic annual cost-of-living adjustments, wage-indexing of the initial benefit 

formula, and various ad hoc benefit increases legislated over the decades. One could thus look at this 

complex picture in either of two ways; on the one hand one could argue that if Social Security was still 

limited to its original benefit design, current eligibility ages would be sustainable. If however we instead 

think of Social Security as the program we know it today -- with its COLAs, wage-indexed benefits, and 

early retirement options -- its original eligibility ages were clearly not designed for a program with these 

features. 

Q3: Before the 1977 Amendments, the only way initial benefits increased was through an Act of 

Congress, which has happened 11 times. Under the 1977 Amendments, Congress fixed an unintended 

error resulting from earlier legislation by changing the benefit formula so that initial benefits would 

automatically increase with wage growth. As a result, today's retirees are receiving larger benefits in 

real terms than their parents did. Please discuss some of the options whereby benefits could increase at 

a sustainable rate, better reward work, and still protect lower earners. 

A3: I am currently in process of completing a paper that addresses many of these issues. As you note, 

the 1977 amendments established a benefit formula that is indexed to growth each year in the national 

Average Wage Index (AWl). Because over time worker wages tend to grow faster than price inflation, 

this produces substantial growth in the real (inflation-adjusted) value of individual Social Security 

benefits. This is a significant driver of program cost growth, and if continued without alteration would 

result in growing tax burdens for younger generations. 

Two features of this benefit formula are often overlooked. One is that in an aging society it causes 

lifetime worker cost burdens to rise over time, which causes benefits to grow faster than pre-retirement 

after-Social-Security-tax earnings. Assuming for example that current benefit schedules are left in place 

and that taxes are raised to maintain solvency, a worker with steady earnings retiring in 2055 who 

receives a benefit equal to roughly 41% of his gross pre-retirement wages would have faced a lifetime 

Social Security cost rate of over 16% to receive that benefit, whereas the worker retiring in 1985 would 

have faced a lifetime cost rate of less than 6% for that same 41% replacement rate. Thus, even if the 

policy goal is to maintain benefits that remain a constant percentage of pre-retirement living standards 

(a goal that would still require substantial tax increases to meet), the current benefit formula overshoots 
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the mark and a downward adjustment to future benefit growth of roughly 0.25 percentage points per 

year would be necessary. 

A second often-overlooked result of the current indexing method is that it produces benefit 

replacement rates that rise over time for a given real level of earnings. For example, the worker retiring 

in 2055 and earning the CPI-indexed equivalent of roughly $43,800 today is being promised a benefit 

replacement rate of 48.7%, in contrast with a $43,800 worker retiring today who receives a benefit 

replacement rate of 42.9%. This implicitly reflects a value judgment embedded in the current formula, 

which is that as society grows richer the safety net should expand so that Social Security benefits for a 

worker with a given level of real income automatically grow more generous relative to his cost of living. 

This is clearly not the only value judgment that could be made. If the method of indexation were 

changed to pay the same real level of benefits based on the same level of real earnings across time, a 

substantial portion of the program's projected financing shortfall could be closed. 

Your question also asks whether reforms to bring the growth of benefits to sustainable levels could 

better reward work. I believe that the answer is yes. The benefit reduction applied to early benefit 

claims, and the reward applied to delayed retirement claims, could both be increased to reflect the 

value of payroll taxes contributed by seniors who extend their working lives. Moreover as I mentioned 

in my answer to the first question the existing benefit formula, currently applied to an average of an 

individual's top 35 earnings years after indexing for national wage growth, could instead be applied to 

each individual earnings year. As an example, the existing benefit formula could be divided by 38 or 40 

and then applied to each year of earnings. As a result, in contrast with the current formula where 

benefit returns drop precipitously when an individual reaches 35 years of earnings, younger seniors 

would continue to accrue proportional benefits if they extend their working careers. Finally, the growth 

of the non-working spouse benefit for higher-income earners could be constrained. Under current law it 

is possible for the spouse of a higher-income individual, who makes no direct tax contributions to Social 

Security, to receive a higher spousal benefit than the primary benefit another lower-wage individual 

might receive after a full career of contributing taxes to the program. This situation both undermines 

work incentives and creates regressive income transfers. This could be addressed by restricting the 

growth of non-working spouse benefits, so that the most generous such benefits do not exceed the 

inflation-adjusted value of benefits received by full-career low-income workers in 2012. All of these 

reforms would improve system finances while improving the returns to work under Social Security. 

Q4: As young people often don't think Social Security will be there for them, what advice do you have for 

what we should tell them? Can they expect to get back what they paid into the system? 

A4: Answering the second question first, unfortunately younger workers cannot expect to receive back 

the present-value of their contributions to Social Security. A table in the Social Security Trustees' report 

shows that workers just now entering the system should expect on balance to contribute roughly 4.2% 

of their wages more than they receive in benefits, if current benefit schedules for older cohorts are left 
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