President’s Commission 

to Strengthen Social Security 

Thursday, 

October 18, 2001

Held at the 

Park Hyatt Washington 

Washington, DC 

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9537 Elvis Lane 

Seabrook, Maryland 20706 

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President's Commission To Strengthen Social Security 

Commission Members

Richard D. Parsons, Co-Chair

Leanne Abdnor 

Samuel Beard 

John Cogan, Ph.D.

William E. Frenzel 

Estelle James, Ph.D.

Robert L. Johnson 

Gwendolyn S. King

Olivia S. Mitchell, Ph.D.

Gerald Parsky

Timothy J. Penny

Robert C. Pozen 

Mario Rodriguez

Thomas R. Saving, Ph.D. 

Commission Staff Members

Charles (Chuck) P. Blahous

Jeff Brown 

Steve Goss 

DFO, Social Security Administration

Mike Anzick 

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I N D E X

Welcome and Opening Remarks

by Richard Parsons 

Panel I: Social Security and Young Americans

by Amy Holmes

by Maya MacGuineas

by Meredith Bagby

by Hans Riemer

Questions and Answers 

Panel II: Expert Testimony on Technical Issues

in Social Security Reform

by Sylvester Schieber

by Eugene Steuerle

by Alicia Munnell

Questions and Answers 

Part III: Other Perspectives on Social Security

by Michael Tanner

by Vincent Sombrotto

by John Goodman

by Michael Sherraden

Questions and Answers 

Keynote: --- indicates inaudible in transcript. 

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P R O C E E D I N G S 

(10:12 a.m.) 

WELCOME AND OPENING REMARKS 

by Richard Parsons, Co-Chair 

CHAIRPERSON PARSONS: Good morning, ladies and 

gentlemen. Welcome to the, I think, fourth in a series of 

meetings and hearings by the President's Commission to 

Strengthen Social Security. My name is Dick Parsons, and I 

am one of the co-chairs of the commission. 

Those of you who are particularly alert this 

morning will note that I am sitting here by myself without 

my trustee wing man and co-chairman, The Honorable Daniel 

Patrick Moynihan. Unfortunately, Senator Moynihan is down 

with the flu bug or a cold. We spoke last night. He was 

going to try and make it, but I am informed this morning --

he did not know whether he was going to do it or not. He 

said he would try, but this morning he felt under the 

weather. 

So, what we had done last evening was sort of 

jointly worked on a little statement. I normally do not 

read things, but I am going to read this statement that we 

worked on together, so that even though he could not be here 

in person, Senator Moynihan will be here virtually, which 

seems appropriate in the digital age, through his words. 

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But, let me first say, good morning and welcome to 

all of my fellow commissioners. I know that moving around 

the country and coming to Washington is a bit more difficult 

now than it has been in the past, reasons we are all 

familiar with. So, we particularly appreciate your 

attendance this morning and your participation in what is 

still a very important effort for our country. 

So, let me start with this statement that the 

senator and I thought would frame these hearings today. 

Welcome to the October meeting of the President's Commission 

to Strengthen Social Security. I want to thank our 

witnesses for their testimony; and to thank the members of 

the press for their attention to our work; and, of course, 

to thank the audience for being here with us, the members of 

the public who are interested in our work. We look forward 

to a productive meeting of the commission. 

I would like to specifically request -- this we 

put in as a detour, we put in, since the last time we had a 

public hearing, several people felt compelled to be in touch 

with the outer world and had their cell phones on. And at 

key times during the meeting these things go off, and 

everybody had their own distinct ring, and some are musical, 

and some are chimes, and some are bells, so we would ask 

everybody to extend to our witnesses the courtesy of turning 

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off you cell phones. 

The Senator and I thought it would be appropriate 

to, first, say a few words about the environment in which 

the commission is now meeting and operating. In many ways, 

the world has changed dramatically since September 11th. 

The events of the last month which have included deeds, both 

of great evil and of selfless heroism, deserve our 

acknowledgement. 

In a substantive sense, the task before this 

commission remains largely as before. We have always been 

obligated by the charter, by the charter that set up this 

commission, that the president gave us, to take a long-term 

view and not base our recommendations on day-to-day events. 

We would have been right to suspect, even as we 

begun our work, that over the long-term the nation would 

face wars and recessions and other unforeseen challenges. 

But the events of the past month bring those realities home 

in ways that are more vivid than any of us expected. 

We, on the commission, wish to be appropriately 

respectful of the environment in which we now must work. We 

recognize that many individuals who hold starkly different 

views about how best to strengthen and safeguard social 

security for the 21st Century are coming together to provide 

for the common defense of our nation, its citizens, and our 

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way of life. 

We cannot know when Congress and the President 

will deem it right, or the right time to bring the work of 

the commission to fruition. What we can do, however, is to 

continue our work with collegiality and mutual respect, and 

to express different viewpoints and appropriate differences 

from each other in a respectful way. 

This is not a time to charge one another with base 

motivations or to treat the important subject as a political 

opportunity. Americans have responded to the current 

challenges with the very best that is in them, and we on the 

commission are determined to emulate that spirit in our 

work. 

Historians may recall that Ida May Fuller claimed 

and received the first check from the social security system 

in January of 1940. This was in between Adolph Hitler's 

conquest of Poland and the fall of France. These were dark 

times for democracy and for the world. And, yet, our 

national still devoted some of its resources and talents to 

providing secure retirement incomes for its senior citizens. 

Moreover, the first major increase in benefits to 

recipients took place in September of 1950, after the 

beginning of the Korean War. So, we are not the first to 

wield the responsibility of safeguarding retirement security 

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at a time when national security concerns are also 

paramount. 

That said, our current circumstances should not 

prompt introspection regarding social security. The 

commission is pondering a number of approaches to safeguard 

the social security program for the future, some of which 

may find agreement, others opposition. 

We want to hear from all sides. Now is not the 

time for ranker and division. It is the time for 

participation in a debate that offers solutions from 

different perspectives and from different voices. And we 

have to consider these suggestions in an atmosphere of 

dignity of respect for each other, and I believe that we 

can. 

As much as we are divided, several important 

points seem clear. Nearly everyone agrees that we should 

move social security from its traditional "pay as you go" 

financing to "partial prefunding of future benefits," not 

with rhetorical lockboxes, but with real savings that can be 

drawn down in the future to pay benefits. 

Doing so would help us prepare for the aging of 

society and earn better returns for the system. To 

accomplish this new saving, some favor allowing the 

government to invest directly in the stock market while 

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others favor individual accounts. That is a legitimate 

debate. 

So, let us have the debate and hear from both 

sides of that argument in a way that will show Americans and 

the world that we can disagree without being disagreeable. 

Likewise, there is a growing consensus that personal 

retirement accounts either integrated into social security 

or added on top of it are feasible and desirable. 

The Clinton Administration, for example, proposed 

investment accounts on top of the traditional system, while 

others want workers to be able to invest part of their 

social security taxes in these accounts. Again, it is a 

legitimate debate, so let's discuss the issue. 

What we cannot and should not do is pretend that 

the status quo is a viable option; it is not. We cannot by 

inaction allow social security to swallow up the rest of the 

budget, particularly, when other needs may be so pressing. 

In this sense, our work is perhaps more important today than 

it was just a few weeks ago, not only for the sake of social 

security, but for the sake of future generations ability to 

respond to the challenges that confront them. 

Social security must be placed on a selfsustaining path. I can promise that if all sides air their 

concerns and their goals, we will do our best to answer them 

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and to meet them. There are different ways to address 

social security's problems, but idleness is not one of them. 

So, let us discuss and debate them in a manner 

demonstrating the strength, vitality, and civility, of our 

mature democracy. Now, with that, I again want to say, 

welcome, to everybody and to introduce our first panel. 

What we are doing today is we are continuing 

something we started in San Diego at the end of the summer 

of hearing from those different voices, and different 

perspectives, and different points of view about how to 

strengthen social security, how to move forward into the 

21st Century with a system that instills confidence and 

answers to questions that all of you who are members of the 

social security system have. 

Our first panel is going to speak to us from the 

perspective of the viewpoint of young people. And so, I am 

particularly interested, and I know my fellow commissioners 

are particularly interested to hear from them, because at 

the end of the day they have got the biggest stake. 

The panel consists of four individuals: 

• Amy Holmes, who is a journalist who has written 

and commented on this issue; previously was associated with 

the Independent Women's Forum, and has testified on the Hill 

in that prior incarnation on this issue; 

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• Meredith Bagby, who represents the Third 

Millennium, a youth advocacy organization, who also has 

substantial background and knowledge on social security 

issues; 

• Maya MacGuineas, Maya is with New America 

Foundation, which is a think tank, and has done a lot of 

work in thinking with her colleagues on the subject of 

social security reform, and, in fact, was an advisor to 

Senator McCain in terms of his views and positions when he 

was running; and 

• Hans Riemer, who was formerly with the 2030 

Center, and is now with the Institute for America's Future, 

which is an impressive sounding name, if ever there was one, 

and will give us some views that he has formulated over the 

course of time in thinking on this. 

What we have done is we have asked each of our 

panelists to limit their formal statements. They have all 

had an opportunity to submit written statements which could 

be longer, but to limit their formal statements before the 

commission to five minutes each, so that we can then engage 

them in a letter Q&A. 

So, without further ado, Amy, why don't you start 

us off? 

PANEL I: SOCIAL SECURITY AND YOUNG AMERICANS 

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by Amy Holmes 

MS. HOLMES: Thank you, Mr. Chairman. Mr. 

Chairman, and distinguished members of the commission, good 

morning. My name Amy Holmes, and it is an honor and a 

privilege to be invited to speak to you today. 

I come before you today as a private citizen and 

patriot and would like, first of all, to express my deep 

sympathy for the families who lost loved ones in the attacks 

on the World Trade Center and the Pentagon. We will never 

forget them. We will never give up, and America will 

prevail. 

But we are here today to talk about a different 

type of battle, the battle on old age poverty launched 

nearly 70 years ago under the leadership of President 

Franklin Delinor Roosevelt. 

As the chairman mentioned, the first person ever 

to receive a social security check was a woman named Ida 

Fuller. She ultimately received $20,000 in benefits from 

the federal government, not a bad return for a three year 

investment of $22 in social security taxes, but what a 

difference this 60 years makes. 

According to conservative estimates from Economic 

Security 2000, baby boomers social security entitlements 

threaten to push my lifetime tax rate up to an astonishing 

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70 percent. And then, having paid out these taxes over my 

working lifetime, when I retire there will be fewer than two 

workers to support my social security benefits, as compared 

to 8.6 workers for every beneficiary in 1955. 

And, as an African-American woman, I am 

statistically among those who are most dependent on social 

security for future retirement income. Before my generation 

is forced to invest in lottery tickets, we must take bold 

steps to reform the system now. Conservative, diversified, 

private retirement accounts are the surest path to 

retirement security. 

As you, as a commission, review the many options 

for reform, you will hear from groups that claim to speak 

for people like me, like the National Organization for 

Women, for instance, which downplays social security 

concern. 

NOW calls the social security crisis nothing more 

than a "Chicken Little" atmosphere and opposes reforms that 

would truly liberate American citizens from government 

dependents and offer us real choice and ownership over our 

financial futures. 

According to a statement by its former president, 

"The threat our families face is not the imminent collapse 

of social security funding, but a possibly shortfall in 

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2032." Well, even if she is right, and the commission knows 

that the trust fund is filled with paper promises, I cannot 

wait until I am 57-years-old to shore up my retirement money 

with money I do not have because 70 percent of it was paid 

in taxes. 

The Feminist Majority, another group claiming to 

represent the interest of women, warns that, "Having a 

private account means that we bear all of the risks of 

investing." As it stands, we bear all of the risks of 

social security meltdown and know we have no way to hedge 

against it. 

According to the 1998 Social Security Trustee 

Report, if we stay with the status quo, we will either have 

to cut benefits by 25 percent, raise taxes by 50 percent, 

drastically cut government spending on other programs, or 

increase the federal debt, or we can choose to take the 

necessary steps now to reform the system. Which will our 

leaders choose? 

I guess I am most baffled by the support for 

government investment in the stock market. Such ill-advised 

investment would give an enormous advantage to large traded 

companies with all of their allegedly problems of wage 

inequities, glass ceilings, and old boys clubs. 

According to the National Foundation of Women 

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Business Owners, as of two years ago, women owned 9.1 

million businesses in the United States representing 

38 percent of all business, and employing 27.5 million, and 

generating over $3.6 trillion in sales annually. 

Female owned businesses are growing more rapidly 

than the overall economy, and are more likely to have 

remained in business over the past three years than the 

average U.S. firm. It just does not make sense, from a 

women's point of view, to tip the scales against female 

entrepreneurs in favor of Fortune 500 companies. 

There is much more to be said on this topic, I am 

sure we will, including the inadvisability of putting the 

nation's stock market in the hands of government 

bureaucratic, but let me close with this. 

One-hundred and fifty years ago, Elizabeth Katie 

Stanton argued before the New York legislature that we are 

"persons, native, free-born citizens, property holders, 

taxpayers, and that a woman has 'a right to the property she 

inherits and the money she earns.'" 

How far we have strayed from the cause of true 

liberation that in 2001, the possibility of private 

ownership and control of our retirement assets is 

controversial, that women are painted as timid and easily 

duped, and that the freedom to choose and plan for ones 

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retirement is better left to the wisdom of government 

officials. 

Reforming social security to take into account the 

differences in women's work history, longevity, and poverty 

rates, will take imagination and resolve. Earnings 

sharings, for example, where spouses split retirement 

savings in separate accounts is one such reform. 

Ensuring a safety net for elderly women who are 

most likely to suffer from poverty must also top any reform 

agenda. But do not be fooled by those who would use these 

differences to thwart honest effort. Social security reform 

is a women's issue now more than ever. Thank you. 

CHAIRPERSON PARSONS: Thank you, Amy. Maya, do 

you want to go next? 

by Maya MacGuineas, New America Foundation 

MS. MACGUINEAS: Good morning, Mr. Chairman, 

members of the commission. Thank you for the opportunity to 

testify before you today. And I realize that most of the 

country's attention is focused on more immediate threats, as 

is only appropriate. But it is important that at the same 

time we take action to address the longer term threats that 

we know exist to our nation's retirement program. 

So, I thank you for going forward with the 

important work of the commission. I will focus my remarks 

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today not only on why a reformed social security system is 

necessary to provide a secure retirement for younger 

generations, but also on an area I think is key to creating 

a workable solution, and that is how to make the accounts 

more progressive. 

First, as the commission has rightly pointed out, 

the single most important step in strengthening social 

security is to boost national saving. Higher savings rates 

channel more money into productive investment creating 

higher economic output and wages. A large economic pie, in 

turn, will reduce the burden of paying mounting retirement 

costs. 

Theoretically, a plan to increase saving need not 

incorporate personal accounts. The government could 

increase its contribution to national saving by running 

large surpluses, paying down the debt, and over time 

acquiring private assets. 

Practically, however, this approach presents 

serious problems. And, first, there is the important 

distinction between prefunding the social security program 

on paper, and actually putting aside the resources to cover 

future benefits. 

As we have seen over the past few decades, the 

government has proven to be an ineffective mechanism for 

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actually saving the social security surpluses. If the 

country were to proceed with the plan for government to 

invest in the stock market, I believe we would encounter a 

host of problems from the pressures to make socially 

responsible investments with there being as many definitions 

of socially responsible as there are politicians, to how 

proxies would be voted to the liquidity restraints involved 

in investing a single mass of fund. 

The better option then is to do the saving 

privately by allowing individuals rather than the government 

to own their savings shifting part of the program from a 

defined benefit to a defined contribution plan. 

And I might point out that a universal defined 

benefit plan, as we currently have, actually makes little 

sense since the risks cannot be shifted beyond the 

participants. 

Private investment accounts, if structured 

properly, can have many advantages from helping to protect 

against demographic risks, to over time increasing returns, 

to enhancing flexibility, to creating a way to bring low 

income workers who currently have little or no savings into 

asset owning class, and they can make the system sustainable 

on an ongoing basis. 

There are three concerns regarding private 

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accounts that I believe are valid. The first two, higher 

administrative costs and investment risks, can and should be 

addressed through prudent regulation. The third has to do 

with the progressivity of the system, and some critics of 

private accounts are concerned that implementing investment 

accounts would reduce an important redistributional element 

that currently exists in social security, and I share this 

concern. 

I am submitting today with my testimony the 

details of a reform package I call "Progressive 

Privatization." And the proposal includes a structure 

whereby the system would be made more progressive through 

government matches for the contributions of low income 

workers. 

Matches would be provided not only for voluntary 

contributions on top of the payroll tax to create an 

incentive for additional saving, but recognizing that many 

workers at the lower end of the income spectrum are already 

stretched to the limit and cannot afford to save, it will 

provide government matches for the mandatory saving coming 

from existing payroll taxes starting at the first dollar. 

The plan includes investment accounts of 21⁄2 to 

5 percent of covered payroll, and progressive matches 

ranging from 2 to 1 to _ to 1, depending on income level. 

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The specifics of the matches and income cutoffs can 

obviously be altered depending on the desired level of 

progressivity. 

Progressive personal accounts are desirable for 

the following reasons: 

• First, there is wealth building. By allowing 

lower income workers to invest a greater portion of their 

wages, progressive accounts build wealth more quickly for 

those who need it most; 

• Second, there is the administrative cost issue. 

And progressive accounts will ensure that each account is 

of sufficient size to be administered efficiently, resolving 

the problem of high administrative costs eating away at 

small account balances. 

• Thirdly, in terms of annuities, larger accounts 

will reduce the adverse selection problems which are 

exacerbated by the fact that the longest living individuals 

have larger savings and purchase larger annuities. If each 

individual's account were closer in size, adverse selection 

will be reduced and the annuity costs would go down. 

• Fourth, in terms of public confidence, 

questions are now being raised about whether social security 

effectively aids the least advantaged in society. By making 

the personal accounts progressive, the public will clearly 

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understand that social security and personal investment 

accounts can aid lower income Americans. 

• And, finally, most importantly, national 

saving. If the accounts are funded on a straight percentage 

of wages, then high wage workers will have proportionately 

large account balances, larger than low income workers. But 

because these individuals already have private savings, they 

may choose to reduce their personal saving, reducing the 

benefit to the economy. 

Low income workers, on the other hand, did not 

have social security savings to offset, so their 

contributions will be a net increase to national saving. 

Person accounts weighted towards low income workers may be 

the most economically efficient, as well as the most 

progressive reform option. 

Obviously, other changes will be needed during the 

transition, and the "Progressive Privatization" plan I am 

submitted is structured to: 

(1) Spread the costs fairly between individuals 

and generations; 

(2) Protect the benefits of recipients who rely 

on them; 

(3) Compliment the new system of private 

accounts; and 

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(4) Benefit the economy. 

The mix I propose includes a combination of 

spending reductions and revenue increases, and you will find 

the details in the report. 

Let me just point out one thing that I think is 

particularly important, and that is that progressive 

privatization does not rely on government borrowing during 

the transition. 

Given that one of the most important advantages of 

prefunding the program is the positive effect it can have on 

national saving, borrowing creates an investment -- to 

create the investment account would undermine the economic 

benefits. 

Therefore, I think it is important that we are 

willing to make the changes necessary to keep the social 

security system balanced now rather than shifting the costs 

to the future, and that is what this task is really about, 

shoring up the system for the future. 

Private accounts, if structured to meet their full 

potential, can provide more revenues by increasing saving, 

and more appropriately balancing investments. Through a 

form of progressive privatization the social security system 

can be made progressive enough that all workers can afford 

to retire with dignity, and at the same time fair enough 

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that all who participate will receive adequate returns on 

what they contribute. 

This is the legacy we should leave to the next 

generation of retirees. So, I appreciate the chance to 

appear before you today, and thank you for all of the hard 

work you are doing to save social security. 

CHAIRPERSON PARSONS: Thank you, Maya, appreciate 

it. Meredith. 

by Meredith Bagby, Third Millennium 

MS. BAGBY: Thank you, Mr. Chairman, and to the 

commission, first, I would like you to know how honored I am 

to be here on behalf of Third Millennium, not only because 

the decisions you make will effect my generation, but also 

because it is a proof of the strength of this democracy to 

keep on working and to do the business of government despite 

our challenges and our great tragedies in this country. 

It is encouraging to me as a young adult that you 

are working now to reform social security for my generation 

and our children. I think that this commission has a unique 

opportunity. After years of not facing the music on social 

security, Americans finally seem to be hearing the message 

from our economists, actuaries, and gentrologists. 

We have come to accept the monumental shortfalls 

that social security will face in 2016 and beyond. Today we 

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see the white elephant in the room. We are looking at him 

squarely in the eye and we will take him on. And your 

excellent interim report only strengthens our resolve. 

Now, the immediate challenge facing this 

commission is to craft a plan that meets the president's 

objectives set forth in his May 2nd executive order. Put 

simply, you need to simultaneously design a system of 

personal accounts, return social security to sound actuarial 

footing, and do so without raising payroll taxes or 

effecting the benefits of current or near retirees. 

Now, that may seem like a monumental task; it does 

to me, but it can be done. The key element is to call upon 

my generation to sacrifice. If you treat us like the adults 

that we now are, we will rise to the occasion. You must ask 

us to accept a plan that could raise our eligibility age, 

index it to average life spans, lower our future benefits by 

altering the ways they are calculated, and tax our future 

benefits at a higher rate. 

If you do this I believe that my generation will 

not oppose you. It will not oppose you because we realize 

the need for sacrifice; and it will not oppose you if you 

take the time to explain and communicate to my generation 

exactly why the sacrifice is needed. 

And the logic here is simple. Due to demographic 

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changes, the expansion of life spans, the baby boomers, will 

be creating an unprecedented financial burden that we 

generation X'ers and millennials will have to meet. 

What our peers need to hear from you, from this 

commission, over and over and over again is why we need to 

act now to solve a problem that won't erupt for decades to 

come. And once you have conveyed the urgency of that task 

and the cost of doing nothing now, you need to explain how 

your plan resolves the problems head on. 

Mr. Chairman, if this commission is willing to 

make the case, our generation is willing to listen and 

willing to sacrifice. We ask for one thing, however, give 

us the capacity to build meaningful retirement resources 

through a system of personal accounts. In other words, let 

us grow some wealth as well as redistribute it. 

Why is this so important? Well, according to the 

Employee benefits Research Institute 2001, the report 

entitled, "Retirement Confidence Survey," people between the 

ages of 26 and 36 are doing a lousy job of saving for 

retirement, this despite the proliferation of 401(k)s and 

other savings plans. 

Twenty-one percent of this age group say 

explicitly that they have invested nothing for retirement; 

another 21 percent say they do not know how much they have 

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earmarked for retirement or refuse to answer the question at 

all; and another 22 percent say they have invested under 

$10,000, a very modest amount, given their ages. 

Taken together, nearly two-thirds of my peers are 

failing to build retirement security, a sad phenomena that 

mirrors the situation faced by older generations. However, 

given our young ages, we have the ability to reverse that by 

creating a system of personal accounts now. 

To me, as a young person, the most important step 

you can make in formulating policy is to help secure a 

viable savings reserve for our future. America is known 

worldwide, and unfortunately to have a pathetically low 

savings rate, both collectively and individually, compared 

to other industrialized nations, and any reform you 

implement has to address this issue. 

The importance of national savings cannot be 

overestimated. We all rely on our capital stock to build 

roads, schools, to pay medical bills, to fight the wars that 

are now waging. If we are going to have long-term success, 

America needs to reverse the role of selling off our assets 

in order to pay for our own rabid consumption. If we can 

alert people to, in their own lives with this needs of 

savings, then we can take a valuable step towards bringing 

about a more financially secure future. 

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Furthermore, the relative youthfulness of 

generation X'ers gives us time to weather the fluctuations 

of the market. Data from Wharton professor, Jeremy Segal, 

the guru of long-term investment, that since 1801 owning 

stocks for a 35 year period gave an average after inflation 

annual rate return of 6.8 percent. 

Even the worse 35 year spell returned an average 

of 3.4 percent per year. By the Office of the Actuaries own 

calculation, this is two to four times what many generations 

can expect to see from social security. Of course, the 

notion of private accounts invested in the market may have 

lost favor in recent months -- I know I lot a lot of money 

in the market -- given the volatility and recent drops in 

the market. 

However, if we keep our wits about us, we will 

know historically and for the long term the market works, 

and American corporations work, and American equity works. 

As a cushion, we can also create a system that guarantees 

that if a retiree's personal account in conjunction with his 

or her social security defined benefit does not meet a 

predetermined minimum threshold the government can step in 

and make the difference. 

The generation X firefighters, and policemen, and 

now military personnel, who are losing their lives and lost 

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their lives on September 11th, made the ultimate sacrifice 

for democracy. A request to their contemporaries sitting 

here and those who will see the reform of social security to 

forego a small amount of social security money decades from 

now would be a well-timed, yet small sacrifice by 

comparison, and I believe would not be rebuffed by my 

generation. Thank you for this opportunity to speak. 

CHAIRPERSON PARSONS: Thank you, Meredith. Hans. 

by Hans Riemer, 2030 Center 

MR. RIEMER: Thank you, Chairman Parsons, members 

of the President's Commission for the opportunity to speak 

today about the impact of social security privatization on 

young adults. 

My name is Hans Riemer, and I am the founder and 

chairman of the 2030 Center, a public policy organization 

for young adults based in Washington. I am also a senior 

policy analyst at the Institute for America's Future, where 

I help to organize a broad coalition of groups in opposition 

to privatization. 

Since our founding in 1997, the 2030 Center has 

been a strong advocate for young people who want to see 

social security strengthened, not dismantled, for future 

generations. I appreciate that the commission has chosen to 

focus so directly today on the impact that social security 

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reform will have on younger generations. No group of 

Americans has more at stake in this debate than today's 

young workers. 

I would like to use my time today to raise a flag 

of caution about what may emerge from this commission's 

deliberations. In saying this, I am not referring generally 

to the fact that the commission is going to propose a plan 

to privatize social security. 

While I do not share the opinion that 

privatization would improve social security for younger 

generations, I respect the fact that the present has 

committed himself to a course of action on the issue, and 

that the commission will pursue that objective. 

I oppose privatizing social security on general 

principle. I believe that the level of guaranteed 

protection that social security provides today is about 

right. Americans need a guaranteed safety net that protects 

individuals and families from ill-fortune; and the country 

needs a guaranteed safety net that protects everyone from 

the shocks of severe economic dislocation. 

My purpose today is to discuss why the mandate 

this commission has been given by the president is uniquely 

problematic from the perspective of how it will effect 

younger generations. There are many ways to privatize 

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social security, and I am concerned that the course this 

commission has been mandated to follow will necessarily be 

among the worse possible for today's younger generations. 

According to the executive order establishing this 

commission, it is final recommendations must adhere to a set 

of guidelines. For the purposes of my discussion, the first 

and the fifth principle are the keys to understanding the 

unique impact on young people. 

The first principle states that modernization must 

not change social security benefits for retirees or near 

retirees. For the purposes of my testimony, I will 

approximately age 55 as near retirees. 

The fifth principle states that modernization must 

preserve social security, disability, and survivor's 

components. Under privatization, contributions that would 

normally go to pay social security benefits are instead 

directed towards private investments. 

As a result, the system is no longer able to meet 

its promised obligations, and its guaranteed benefits must 

be scaled back. The private investment accounts are 

intended to make up for the difference in lost social 

security benefits. 

The reduction in social security benefits that is 

caused by privatization is significant. Private accounts 

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totalling just two percentage points of FICA in an amount 

that is significantly less than both the president and many 

members of this commission have discussed as a possibility 

would drain approximately $1 trillion out of social security 

over only the next ten years, and many trillions more after 

that. 

Under such a scenario, an immediate and permanent 

benefit cut of about 25 percent will be necessary in order 

to maintain solvency over 75 years. However, the 

commission's principles specify that not everyone would 

share in this burden. Instead, according to the fifth 

principle, social security survivors and disability 

components must be preserved. 

Disability and survivor's benefits constitute 

about one-third of social security outlays, a substantial 

portion of the program that has been walled off from the 

downside costs of privatization. Therefore, all necessary 

benefit cuts must be borne by the retirement portion of the 

program. 

More significantly, the first principle states 

that all individuals who are either near retirement or in 

retirement must also be held harmless from necessary 

reductions; that is, all necessary benefit cuts must be 

borne by the retirement benefits of workers who are 

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currently under the age of 55. This mandate means that the 

burden of pain will not be spread equally among the 

generations, but instead backloaded onto today's young 

adults. 

A recent study by the Century Foundation presents 

some basic calculations about the impact on young people of 

an approach to privatization constrained in an identical 

manner as this commission. The results are striking. For a 

worker who is age 29 today, as I am, the cuts to social 

security's benefits, guaranteed benefits, would total 

54 percent. 

Of course, the individual investment account 

totalling two percent of wages is designed to offset the 

cuts, but the account simply cannot bear the load. Even 

assuming an optimistic scenario for investment returns and 

administrative costs, today's 29-year-old worker with 

average earnings will still wind up with 20 percent less 

income than social security would have provided; and for low 

earners they would have wind up with 29 percent less income 

than they would have normally been provided. 

The loss of 29 and 20 percent of retirement income 

for low and average earners, respectively, would be a 

disastrous outcome no doubt, but the situation is in fact 

considerably worse. Because the result is an average, 

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nearly half will do poorer. 

The issue of average outcomes is particularly 

important because the promise of guaranteed protection 

against poverty cannot be averaged out if someone feasts on 

the rewards of a rich stock account while others cannot 

afford to eat. 

Social security is supposed to be there for 

everyone regardless of whether they have good luck or know 

how to manage investments. With the clear framework 

established for this commission, I fear that we are headed 

down a road that forces young Americans into a no win 

situation. 

I do not see how under the commission's principles 

young people will be better off at all. Yet, for years the 

campaign to privatize social security has focused its 

message on the supposed benefits for today's younger 

generations. 

Today this message is echoing in the halls of 

Congress and the White House, throughout the media, and in 

the think tanks. It would indeed be tragic if, at the end 

of the day, a policy was adopted that exploited young 

people's lack of political power to exact an unshared 

economic sacrifice of great proportion. 

While I do not expect this commission to abandon 

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its directive to pursue a privatization plan, I hope that 

the commission will directly confront the constraints that 

had been established and seek an outcome that treats young 

people more fairly. 

And, for the record, I will also point out that 

there are better options to strengthen social security for 

future generations, options that involve both shared 

sacrifice and reward. Redirecting general revenues that are 

projected to go to the recently enacted tax cut to social 

security would go a long way towards closing its projected 

shortfall. 

Raising the payroll tax caps so that high earners 

pay social security taxes on more or all of their income 

like the rest of us would also help, as would using private 

fund managers to diversify the social security trust fund's 

investment strategy. 

In the end, strengthening social security for 

future generations is not a matter of affordability but 

rather a matter of priorities. This country needs a strong 

safety net and there is only one entity that can provide a 

real guarantee of social security, the U.S. government. 

We should sustain this valuable program rather 

than start toward the path of dismantling it. On behalf of 

the 2030 Center, I thank the President's Commission for 

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inviting me to present my views today. 

CHAIRPERSON PARSONS: Thank you, Hans. I think I 

speak on behalf of all my fellow members of the commission 

saying this has been as thoughtful a set of presentations as 

we have heard so far. But I know it is also provocative, 

and there will undoubtedly be some questions members of the 

commission will have. Olivia. 

QUESTIONS AND ANSWERS 

DR. MITCHELL: Thank you very much. It is a great 

pleasure to have you here speaking as eloquently and 

articulately as you have, and I very much appreciate your 

presentations. I am pleased to hear that there is a concern 

about the role of women in the potential set of reforms that 

we are talking about. 

I know there has been a great deal of discussion 

publicly about the fact that the American people may be 

somewhat financially illiterate. There is a lot of concern 

about people not knowing how to invest, not knowing how to 

make financial calculations. 

I had one comment which is that the current, the 

most recent evidence, suggest actually that women are 

somewhat more sophisticated in their investment behavior 

than many men. For example, there is evidence that shows 

that women are less likely to churn and turn over their 

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accounts when they are investing. 

So, as a consequence, they can get their 

retirement with actually a bigger account rather than the 

account eroded over the years. There is other research that 

shows that women's earnings patterns are actually fairly 

uncorrelated with the stock market, so that of all groups 

women might in fact benefit the most from diversification 

vis-a-vis the stock market. 

So, I am just curious what kind of reaction, what 

kind of background information input you have gotten in 

terms of women being able to invest effectively or not in 

the market? Thanks. 

MS. HOLMES: Well, I have read some reports that 

women are more conservative investors and what you have said 

about not turning over their accounts as much. I do not 

know if this boils down to any sort of hardwired gender 

differences. I certainly would not want to go that far. 

But I also am aware and have read much about the 

problem of women who choose not to go into the work force 

being concerned that they will not be able to have the same 

types of benefits as men under private retirement account 

systems. 

I mentioned the reform of earning splitting which 

would actually also be in effect if there were to be divorce 

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between two married people, that a woman would have 

50 percent of the household income, and that would be 

invested in her name until she retires. So, you know, I 

think some of the ways that women are characterized to try 

to oppose reform on social security are unfair and do us a 

disservice. 

CHAIRPERSON PARSONS: Tom. 

DR. SAVING: Hans, I have just loved your 

statement and I am very pleased that you guys came, and you 

have done a superb job of presenting your material. As the 

chairman said, I think you have set a standard for the way I 

think all the presentations that we have heard should try to 

match up to. 

I am going to just read something that you said at 

the very end of your comments, Hans. "This country needs a 

strong safety net." Certainly, I agree with that. "And 

there is only one entity that can provide a real guarantee 

of social security to the U.S. government." 

And let me ask you how you look at the 1983 

changes in social security as being the strong guarantee 

since it significantly raised taxes and significantly 

reduced benefits? 

MR. RIEMER: Well, I thought the 1983 --

DR. SAVING: That is your government at work in 

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preserving your social security benefits. 

MR. RIEMER: I thought the 1983 effort was a 

laudable initiative. It was a commission that brought both 

sides together, a shared agreement of principles, and I 

think it reached an outcome that was very solid. It put the 

program onto a financial path of security for several 

decades and sustained the guaranteed benefit, and I hope the 

commission will -- this commission will emulate that model. 

DR. SAVING: Oh, you mean reduce benefits and 

raise taxes which is what that -- which as '83 did? I would 

assume that what you meant by guarantee is maintain benefits 

without raising taxes. I do not know what anyone means by 

those words, but that is the way I would describe those 

words. But that's, okay, that is my question. 

MR. RIEMER: I am certainly willing to consider 

anything. I would not put any policy off the table, as 

along as the conversation is focused around preserving the 

guaranteed benefit. But if the conversation is focused 

around how to cut back on the benefit for privatization, 

then I do not believe that those options are good ones to 

consider. 

DR. SAVING: I am sorry. My question was not 

about that. My question was simply how does a proposal that 

in 1983 that significantly raised taxes and significantly 

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reduced benefits suggest to you that the U.S. government is 

the best person to maintain your social security? 

That is not what they did in '83, and that was 

what my question was about. It had nothing to do what we 

are proposing, or what any other proposal would be like. It 

simply said that past history suggests that there is very 

significant political certainty about what will happen to 

social security if we do not do something. 

MR. RIEMER: Right, and my impression is that the 

'83 reforms had been broadly and widely accepted by the 

public, and, therefore, they have some measure of political 

certainty. 

DR. SAVING: Well, I did not suggest acceptance. 

I simply said, you said the government is the best person to 

guarantee social security. In 1983, they reduced benefits 

and raised taxes. 

CHAIRPERSON PARSONS: I think in the law, Tom, we 

say asked and answered. 

DR. SAVING: Yes, glad you did. Thank you. Lee. 

MS. ABDNOR: Thank you, Mr. Chairman. Can you 

hear me? Is this on? 

CHAIRPERSON PARSONS: It is now. 

MS. ABDNOR: Okay. Thank you. Thank you all for 

coming. We greatly appreciate especially hearing from your 

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generation who have the most at stake. I would like to 

address my question to the women on the panel. Ms. Holmes 

made a reference in her testimony to a few of the women's 

groups that have made statements against private accounts 

over the past few years, and that jogged my memory of 

something I would like to ask your opinion about. 

A few years ago when I was here, there was a press 

conference held by a number of women's organizations 

including National Organization of Women with Patricia 

Ireland there, and a three or four other women panel at the 

National Press Club, and they were roundly opposing personal 

accounts as being terrible for women for a host of reasons. 

But I stood and I asked the question then, well, 

how would you feel if -- about giving women the choice, to 

let women decide for themselves what they would like to do 

if these accounts were voluntary? And they said absolutely 

not. They wholly and unanimously disagreed. 

And I was shocked and very disappointed to hear 

these groups who supposedly support women's rights say no, 

women should not have the choice and the right to do that. 

And it just sounded to me very much like they trusted women 

to be smart enough to make decisions about other things in 

their lives than to be able to make choices about other 

things but not about their bank accounts and their financial 

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future. 

So, my question is how do you understand that? It 

makes no sense to me, and if you could give us some 

insights. Maybe there is something about it that I do not 

understand that I wish I did, but I was not able to get a 

clear answer from them on why. 

MS. HOLMES: Yes, and when I gave testimony on the 

Hill in the subcommittee that is representative, I believe, 

of NOW, and she said that she would support the government 

investing on our behalf. And, as I mentioned in my remarks, 

this seems to me to greatly disadvantage female small 

business owners. Their companies are not publicly traded; 

their companies are not being invested in. 

Maya has also made reference to the political 

problems of putting this large a chunk of our economy in the 

hands of people with political agendas and motivations, and 

how they would deal with investing our money. 

As far as these organizations opposing even a 

choice, I know having worked with Sam Beard that that is 

also an option of reform; that certain citizens like the 

Chilean example would have the opportunity to choose to 

stick with the status quo or set up a private retirement 

account. These groups oppose it. Frankly, it is baffling 

and puzzling. There does not seem to be any real 

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explanation. 

MS. ABDNOR: Do either of you other two women have 

any other insights on that? 

CHAIRPERSON PARSONS: I will bet they do. 

MS. BAGBY: I mean to me I think it has to do with 

traditional political alliances and where different groups 

fall. And I think that often people -- often I think one of 

the problems of our democracy and the way it works is that 

people claim to represent constituencies sometimes without 

ever listening to the constituencies that they represent. 

And so, I think that there is a necessity, 

especially among our generation. Our general, for the most 

part, does not trust organizations and does not trust the 

institutional, you know, the lobby groups of Washington. 

And so, I think in order to regain that trust, those lobby 

groups and those constituencies, the leadership really needs 

to listen to what their people want, and I think that the 

avenues of communication need to open. 

And I think, particularly with women, it is a 

perfect example that women are and have become more willing 

to invest for themselves to plan their own futures. And I 

think given the opportunity they would choose a plan that 

incorporated private accounts. 

MS. ABDNOR: Okay. Thank you. That is helpful. 

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Can I ask one more quick question? 

CHAIRPERSON PARSONS: Certainly, you may. 

MS. ABDNOR: Hans, thank you for your testimony, 

and for being so direct and clear about what your position 

is, and what the position of your organization is including 

some of the options you would prefer to see considered on 

the table such as government investment in the stock market, 

and that sort of thing. 

You mentioned at the end that you have been 

working on this for four years now, is that right, since 

'97? 

MR. RIEMER: Well, the 2030 Center was founded in 

1997. I actually started at a group called the National 

Academy of Social Insurance in 1995. 

MS. ABDNOR: Before that. 

MR. RIEMER: And I worked for Arthur Fleming at 

the Save Our Security Coalition after that. 

MS. ABDNOR: Okay, and your organization though 

for four years, the 2030 organization. Have you all come up 

with a plan for how you would sustain the system that has 

been scored by the actuaries as we are all having to do the 

75 year plan? 

MR. RIEMER: Yes, if you will look through our 

publications going back to the beginning, we have always 

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proposed options to strengthen social security. And we 

usually draw from actuarial tables to make our numbers add 

up. 

MS. ABDNOR: So when you raise payroll taxes, how 

high do you raise payroll taxes in your plan? 

MR. RIEMER: We have actually never put out a plan 

that specifically called for raising payroll taxes, although 

we have always thought that it was a reasonable option 

considering that our generation will live longer than any 

other generation before us, it could not come for free. 

MS. ABDNOR: What was in your plan then for --

what is in your plan? And that's been scored? 

MR. RIEMER: We have actually never sent our plan 

to the actuaries to score it, but we would not be opposed. 

We were drawing from actuarial tables, so the numbers were 

fairly consistent with what you would expect. 

MS. ABDNOR: Would you be willing to do that so 

that we could be able then to compare what you all are 

suggesting with what others are suggesting? It would help 

us, because we have to look at the apples and apples. And 

if we had a plan there that your organization was willing to 

put forward on the table that would be helpful. 

MR. RIEMER: If this commission were to put 

forward a plan that was scored by the actuaries to balance 

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over 75 years, I might be willing to consider doing the same 

thing. 

MS. ABDNOR: Okay, that's a no. Thank you. 

CHAIRPERSON PARSONS: That's an asked and answered 

also. All right. Bob. 

MS. ABDNOR: Thank you. 

MR. POZEN: Well, I think we will be putting 

forward a plan that will be scored by the actuaries, so you 

can count on it I think. Steve Goss will definitely do it. 

So, I think if that is your precondition, we will be 

putting forward a plan that will be scored by the actuaries, 

and we have to live within the constraints. 

And I guess I think that what Leanne is trying to 

suggest is that we have found that when these things are 

scored that it is a lot tougher. The various ideas turn out 

when you really run all the numbers not to be as easy or as 

attractive. And so, I think we will be doing it. We have 

to do it, so I would suggest that. 

But I was also going to ask you another question 

which was provoked by something you said. I think we would 

all agree that there has to be burden sharing. This is a 

difficult problem, and one in which there is no easy 

solution. If there was people would have been there many 

years ago, and so that different groups have to share. 

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But I guess I was concerned one thing that you 

said you thought the mandate that we had not to touch 

people's benefits in retirement was concerning to you and/or 

near retirement. And I guess I think a lot of us on the 

panel have children, and some of us may even have 

grandchildren, but I think we all are sympathetic with the 

generational issue. 

But I guess I was surprised to hear that I think 

we are also sympathetic with the notion that people who are 

in retirement or very close to retirement, it is very 

difficult to change the rules on them at that point. 

And I was wondering whether you were really 

suggesting that that is what we ought to do, and you were 

criticizing the fact that -- seemed to be criticizing the 

fact that the president's mandate sort of really said to us 

we should not be changing the rules of the people who are 

already in retirement.Your testimony suggested that you 

thought that that was an inappropriate constraint. 

MR. RIEMER: Thank you for that question. It is 

important. The purpose of my testimony was not to 

necessarily advocate that you should reduce disability 

benefits or survivor's benefits, or that you should reduce 

benefits for people who are currently retired. 

It is to illustrate the constraints that are put 

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on younger people's benefits when you do wall those portions 

of the program off, and to urge the commission to consider 

what paths there might be to offset that constraint. And I 

do not necessarily know what those paths would be, but I 

think it is incredibly important that the commission 

consider how those constraints will effect today's younger 

people's today's benefits; and then what could be done to 

offset the fact that the cuts are necessarily loaded onto to 

today's younger people. 

MR. POZEN: Well, I think in any actuarial 

analysis, the fact that we are constrained, and most of us 

think properly so, not to cut benefits of people in 

retirement, that is an actuarial reality that we have to all 

deal with. So, we are forced to take that into account. 

There is no other way that we can avoid that, so 

it is there in the numbers. So, I think you should be 

assured that we are taking that into account because the 

impact of that is built into all of the calculations. 

MR. RIEMER: Right, I was only trying to express 

that if you were to wall off those portions of the program 

that you would necessarily cause younger people today to 

have much larger reductions in their guaranteed benefits, 

and that the accounts could not make up for the difference. 

And so, there needed to be some mitigating policy to get 

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young people at least back to even if not to some level of 

greater wealth. 

MR. POZEN: Thank you. 

CHAIRPERSON PARSONS: John. 

DR. COGAN: Thank you all for coming to testify. 

Like Olivia said, your testimony, as far as I am concerned, 

is among the best we have heard so far. You really have 

honed in on a couple of very important issues that are 

confronting anyone who deals with social security reform. 

There is this sort of emerging consensus that if 

you are going to fix social security for the future, the 

funds have to be invested. We can no longer go along 

without an investment program. We have got to make it an 

investment program. 

And you really have two choices: 

• One is to have the government invest it; 

• And the other is to have individuals invest it. 

And I know many of us have expressed concerns, as 

many of you have, about the dangers associated with 

government investment and the benefits associated within the 

individual investment. 

We heard testimony in San Diego from a person from 

the World Bank who had conducted a study of countries that 

have chosen the government investment route, and countries 

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that have chosen the personal investment route, and her 

conclusions were very, very striking. 

The countries that had chosen personal investments 

had enormous success, high rates of return. The countries 

that had chosen the government investment model, they 

actually had negative returns on balance. It actually lost 

money. 

And so, philosophical considerations aside, the 

practical reality is that individual investment seems to 

work and government investment does not seem to work. There 

is a very important difference between the two that I would 

like you to comment on. 

It does seem to me that if you have a government 

investment model, you really do not give individuals 

ownership; and if you have an individual investment approach 

you do. And I would like to ask you all if you think that 

is a correct characterization of the difference between the 

two. And does it help explain why government investment 

models, or government investment approaches do not tend to 

work and individual investment approaches seem to work? 

MS. MACGUINEAS: Well, that is absolutely right 

that it is not just the difference of is it individuals or 

the government who is going to own the money. Part of the 

question is is this going to be a defined benefit or a 

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defined contribution plan? 

And one of the myths out there is that these 

defined benefit plans do not have risks associated with 

them. They have tremendous risks associated with them, and 

you can ask my generation that is paying increasingly large 

payroll taxes as we absorb the risks of what happens in a 

"pay as you go" defined benefit plan. 

As it matures, as the returns are reduced, we know 

that there is a ceiling on what returns are going to be able 

to achieve. There are going to be no greater than 

productivity growth in terms of labor and a growing 

population, and when the population has a baby bust instead 

of a baby boom that risk is very pronounced. 

So, I have a problem with people saying we need to 

have the government invest it, because that is going to make 

the system risk-free. One, the markets are always going to 

have swings. The markets are going to go up and down. It 

does not matter who is investing, individuals or the 

government, but over the long-term it is very hard to pick. 

You cannot find a period where you would have been unwise 

to be in the stock market. 

So, the government cannot insulate people from 

some risks, and it can insulate individuals from some 

personal investment risks by regulating their accounts which 

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I think is a wise thing to do. 

I also just want to point out one concern I have, 

and I am not an expert on this. But most of us are talking 

about investments being in passive investments, indexes, 

rather than letting people pick their own stocks and bonds, 

and I think that is a very smart idea. If the government 

were doing this, one massive centrally invested fund, there 

would be huge compromising of our financial markets which 

are currently the most efficient and the most liquid. 

For the same reason though, I am even concerned if 

individuals can never get out of passive investment funds. 

And one of the specifics I have in my report, which I think 

is just something to think about, is is there a point once 

people have invested and saved enough -- say, they are 

required to invest only in index funds initially. 

But is there a point when they have enough savings 

and the administrative costs would not be overly burdensome 

that they should have some more freedom in what they are 

investment? And I believe that is going to help the 

efficiency of the financial markets which really is 

important to maintain. 

MS. BAGBY: I would agree with all of that, and I 

would probably just add one other thing. And that is that 

one of the big concerns for me, and I think a lot of people 

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in my generation, is the fact that our savings rates are so 

low, and that by handing over responsibility to an 

individual and saying, look, you are responsible for 

building your own nest egg, there is the possibility that we 

can increase our savings rate in the U.S. 

And that, I think, is huge just because our 

savings rate in the U.S. is under four percent. It is less 

than half of the mean for industrialized countries, and that 

is a real concern because what it means is that we are 

selling off a lot of our assets in order to pay for a kind 

of rabid consumption to buy VCRs, and televisions, and 

makeup, and I mean these ridiculous things that we buy as 

Americans. 

Not to abuse us too much, but we do have to 

reconsider and really save for things that are important 

like our kids education, and our health care, and to buy 

homes, and to build businesses. 

So, I think that anything you can do to put 

responsibility into the hands of someone and say, this is 

what you can do for your future, and encourage them to save 

and pop up that savings rate is a good thing. And I think 

that is why private accounts are really beneficial to us. 

CHAIRPERSON PARSONS: I think we have time for one 

more question. Sam. 

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DR. COGAN: Can I get just a quick response from 

Hans? 

CHAIRPERSON PARSONS: Okay. Hans, quick response. 

MR. RIEMER: One thing I have always been 

concerned about was that when you set up a system of 

individual accounts -- I would not concerned about, sorry. 

But one thing I would like to point out is that when you set 

up a system of individual accounts, you have to be aware 

that the financial structures will be quite similar to a 

government invested approach because you have large funds, 

and then therefore someone has to pick which stocks go into 

which fund that individuals are allowed to choose from. 

So, whatever approach it is that is devised to 

solve that problem from the individual accounts perspective, 

I would just advocate that we replicate a similar approach 

for the collective investment model. 

DR. COGAN: Would you agree that the difference is 

in ownership, that in a personal account approach 

individuals own their accounts, but if you have government 

investment individuals do not own the accounts? 

MR. RIEMER: I think I would agree to that to an 

extent. I would also point out that checks are written in 

the name of each individual beneficiary, and that is an 

equivalent factor in my mind. 

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CHAIRPERSON PARSONS: All right. We are going to 

divide that one last question into two very quick questions. 

Sam and Bob. 

MR. BEARD: John actually stole my question, so I 

want to go back to Leanne. Hans, we are wrestling with all 

of the balances and the costs, and we will come up with a 

system that is scored; and then we are not the United States 

Congress. 

We are just making a suggestion and trying to 

increase the public debate, because we think that social 

security has to be saved. It would be very valuable and I 

heard you -- I think I heard you say that if we created a 

scored plan that you would, and I think it would be valuable 

if you would do that. 

And I am sure that we could make Mr. Goss 

available because he loves scoring things and does not have 

enough to do. And I think it would be very valuable because 

fundamentally we will go to the United States Congress and 

we will say, here are some options, and so we will score 

ours. Will you score yours and produce it? 

MR. RIEMER: I think the 2030 Center will be quite 

willing to do that, yes. 

MR. BEARD: Great. 

CHAIRPERSON PARSONS: Bob. 

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MR. JOHNSON: Real quick. Ms. MacGuineas, you 

pointed out that progressive privatization of accounts is 

the best way to go, and that the result would mean 

obviously, and I think it is right, that lower income 

workers would have a chance to build a larger nest egg for 

retirement as well as for inheritance potential. 

But, you know, I think you also stated that with 

progressive privatization the transition costs would be 

covered or would not be a problem. How do you arrive -- oh, 

you did not say that. I thought that is what I read in your 

testimony that this would sort of eliminate that issue. 

Because if you could then I was going to say we can all go 

home. 

MS. MACGUINEAS: Oh, yes. I wish I could do that 

for you. I think we have to be very clear about the fact 

that there is transition cost. If we want to grow the 

economy, we have to save more. The only way you save more 

is you consume less, and that is a cost. 

Now, it is not a cost that goes nowhere. We are 

saving it. We own that money. We defer that consumption 

for later, that is what saving is; and there is a public 

good that comes from that saving and we grow that economy 

over time. But the transition to progressive privatization 

is even going to cost slightly more than normal accounts, 

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because I am suggesting that we subsidize the accounts of 

low income workers. 

Perhaps, Mr. Goss would like to score that 

sometime. I do not know how much it costs exactly, but a 

rough estimate is that it would be roughly $30 billion a 

year. And I would just point out that that is significantly 

lower than the $100 billion a year we spend in tax 

expenditures creating incentives for savings for middle- and 

high-income workers through things like favored tax 

treatment of pensions and IRAs. 

So, I think the costs are manageable. But nobody 

should say that reforming social security is going to be 

cheap, going to be easy. You cannot reform a system that is 

facing trillions of dollars of deficit in a pain-free 

manner. 

The point about creating private accounts, I 

believe is while it costs more initially to save more, those 

benefits are huge over the long run and it will be the only 

thing that ends the need for ongoing tax increases and 

benefit cuts. 

CHAIRPERSON PARSONS: Now, Congressman Penny would 

like to just place some questions before you on the record, 

not get a response right now. 

MS. KING: Yes, but if you could respond in 

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writing, I would appreciate it, just in the interest of time 

because we have another panel that is waiting. My first 

question for Meredith Bagby. 

You very courageously put some suggestions on the 

table to trim benefits for future retirees as a way of 

keeping the system solvent, raising retirement age, taxing 

benefits, reducing benefit calculations. I would like you 

to speak to the issue of payroll tax hikes and general fund 

transfers, and why you did not suggest those, why you might 

prefer the other options to those approaches. 

Then, for any of you, many critics of using social 

security to crate private accounts say that we really ought 

to do that elsewhere. Why should we do that within the 

social security system rather than simply relying on other 

tax breaks and tax incentives to encourage savings? 

And then for Mr. Riemer, I did not hear a lot of 

shared sacrifice in your testimony as to how we shore up the 

system for the long-term. It sounded to me like a lot of 

general fund money, and government invests, and raise the 

wage cap so the wealthy put more into the system. That does 

not sound to me like shared sacrifice at all. 

Actually, most of your reforms turn this into more 

and more of a general fund program. Why shouldn't we just 

make it a general fund program given all of the general fund 

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money you want to put into it? 

MS. KING: Mr. Chairman, may I just ask one other 

question? 

CHAIRPERSON PARSONS: Oh, on the record? 

MS. KING: On the record. They do not have to 

answer now. But I would like very much to hear from you, 

from those of you who have advocated personal retirement 

accounts. Under what circumstances, if any, would you urge 

early distribution from those accounts? 

Social security you do not get early distribution. 

You wait until you retire. Are there circumstances you 

would hope we would consider to change that tradition? 

CHAIRPERSON PARSONS: Thank you, Gwen. It is 

obvious from the questions that your panel has --

4: Mr. Chairman, can I just do one more? First 

of all, I want to thank everyone here. But I think it is 

important to bear in mind as we look at the current system, 

what the current system promises and what it can afford to 

pay. And I noticed in Hans' testimony that you cited a 

study I think that said that if you invested two percent of 

your wages in a personal account, your benefits would be 

20 percent lower than the current system. 

My understanding is it is 20 percent lower than 

what the current system promises, not 20 percent lower than 

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what the current system can afford to pay. So, I would like 

just a written commentary to identify that issue because it 

is an important part of what we are going to be considering 

as we go forward. 

It is one thing for the system to promise 

something, it is another thing that we can afford to pay, 

and if we want to achieve the promises what impact it will 

have to have in terms of increasing taxes. 

CHAIRPERSON PARSONS: Thank you, Jerry. I think 

that is a fair point. Senator Moynihan has admonished us on 

every occasion we have met not to be sort of trapped into 

using words that convey meanings that are not really there. 

And we talk about a guaranteed benefit, there is no 

guaranteed benefit. 

There is a promise of a benefit, and that was the 

implication of Tom's question, you know, that benefit in the 

past has been reduced and it could be reduced again on the 

whim of the Congress. And so, our challenge is to figure 

out how to make the promise real. 

And, as you can tell from all of the questions and 

the spirited back and forth, this is not a challenge without 

some complexity, but you guys were terrific. And we wish we 

could sort of stay here and engage with you all afternoon, 

but we have another panel coming. 

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Actually, I am feeling like maybe I should be out 

there and you should be up here. You have got more wisdom 

on this than I do for sure. But thank you very much for 

your participation. We look forward to your further input 

and you have been very helpful. We appreciate it. 

(All thank you) 

CHAIRPERSON PARSONS: If we could have our next 

panel join us. 

(Off the record) 

(On the record) 

PANEL II: EXPERT TESTIMONY ON TECHNICAL ISSUES IN 

SOCIAL SECURITY REFORM 

CHAIRPERSON PARSONS: We are going to get right 

into it, since we ran over a little bit with our last panel. 

The second panel of the morning is a panel of experts in 

what I will call the technical aspects of social security 

reform, folks who have spent a better part of their 

professional lives understanding the system, and can help us 

think through some of the nitty gritty in terms of if you 

move this piece what happens to this piece over here. 

But having sort of preannounced them as experts, I 

will tell you you have got a challenge to rise to the level 

of the last panel that we heard from who were really quite 

thoughtful and informative, but I know you will make it. 

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So, let me introduce each of our panelists and we 

will get going. First, is Syl Schieber, who is formerly a 

member of the 1994/96 Social Security Advisory Council, and 

is currently on the Social Security Advisory Board, who is 

with Watson Wyatt Worldwide Consulting Firm. 

He is joined by Gene Steuerle, who is with the 

Urban Institute, and who chaired a technical panel on Social 

Security Advisory Board in 1999, I guess it was, Gene. 

And the third panelist is Alicia Munnell, who is a 

distinguished professor at Boston College, and who has spent 

a good deal of time sort of studying the system and is here 

to share some of her insights with us. 

So, ground rules, lady and gentlemen, are we would 

ask you to restrain yourselves to five minutes in terms of 

your delivered remarks; we have your written statements; and 

then make yourself available to a barrage of questions. 

MR. SCHIEBER: Thank you, Mr. Chairman. 

CHAIRPERSON PARSONS: Syl, why don't you kick it 

off? 

by Sylvester Schieber, Watson Wyatt Worldwide 

MR. SCHIEBER: Thank you very much, Mr. Chairman, 

members of the commission for inviting me here this morning 

to testify. Given other things that are going on, it might 

be easy to lose sight of the importance of social security. 

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But as we look to the future, it is still extremely 

important and deserves the attention that you are giving it. 

According to the social security actuaries under 

current law in present value terms, social security is 

currently underfunded over the 75 year projection period by 

$3.2 trillion. That takes into account the current trust 

fund plus all anticipated revenues relative to anticipated 

benefits over this period. 

Per the discussion with the prior panel, the 

traditional fixes when the system is out of balance is 

either to raise taxes or to cut benefits. Anyone who says 

that these benefits are guaranteed is either trying to 

mislead or has not been paying attention. 

Even to assume that there are promised benefits 

suggests that someone is not paying attention. The law is 

very specific. Congress has reserved the right to change 

the benefits in this program any time it pleases, and that 

has been tested before the Supreme Court. 

Because of the funding problem we are now facing, 

there are quite a number of people that have suggested that 

maybe we ought to turn to funding. To truly fund the 

program in the way that Franklin Roosevelt originally 

envisioned that the program would be operated. 

And why do you want to fund a retirement program? 

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Well, one of the reasons you do is that the assets you 

contribute, the contributions you make over time generate a 

rate of return that help finance the benefits when people 

get to retirement age. 

You take a young worker who starts to contribute 

to a retirement program early in their career, by the time 

they get to retirement easily two-thirds to three-fourths of 

the money that is paid out during their retirement actually 

can come from return on the assets rather than money that 

they have had to take out of their paycheck. So, there is 

very important reasons for why we might want to do this. 

Some people have looked at this and they have 

said, well, we are already beginning to accumulate a fund 

under current law, and we simply should invest some of that 

in equities, and that would help -- that would solve our 

problem. 

Well, part of the problem is we are not funding at 

a high enough rate, even if we invest in equities that were 

going to solve our $3.2 trillion deficit. And if all we do 

is take the current fund and invest it differently than we 

are investing now, we really have not changed anything in 

our overall economic perspective. We have simply arbitraged 

within existing markets. We are taking high returns from 

one group of savings and giving them to another. 

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Really, what we need, as we try to address this 

problem, is we need new savings. Now it is very difficult 

just to raise taxes under this program. We have gotten 

taxes to a rate that there is considerable resistance, and 

there is a concern about the drag they might have on the 

economy. 

So we need to think about adjusting the program, 

and there has been a lot of discussion. There has been 

discussion this morning about transition costs, and how we 

adjust the program. We are facing a $3.2 trillion 

transition costs no matter what we do. Even if we stay with 

the current structure, we are facing a $3.2 trillion cost. 

Now, if we adjust the program in some fashion such 

that we raise benefits over time, or reduce the revenues 

that are now coming into the program, then the $3.2 trillion 

would be more than $3.2. But unless we raise benefits or 

cut the sources of revenue already coming into the program, 

it should not change that amount. 

Who pays depends upon the structure of the reform. 

We heard in the last panel, Mr. Riemer, say that -- he 

referred to an analysis that Dr. Munnell and some associates 

of hers have done that looked at a 29-year-old, and said 

that if you establish the two percentage account that they 

attribute to your panel, that a 29-year-old would receive a 

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benefit reduction relative to current law of 54 percent. 

Now, they do acknowledge, finally, that the 

individual account itself would generate some benefits. And 

so, the ultimate benefit reduction would only be 20 percent. 

But 20 percent relative to what? Twenty percent relative 

to a benefit that is in current law, that is neither 

guaranteed nor promised. 

Now, if you look at the benefits that are actually 

being funded for a 29-year-old today, over their retirement 

period their benefits, if we are going to fund at the 

current rate we are willing to pay, would have to be reduced 

by 30 percent. So, the two percent reform option would 

actually raise their benefits relative to what we are 

currently financing. 

So, let's be very careful when we are talking 

about transition costs, and keep track of where the pea is 

under the walnut shell as the walnut shell moves around. 

Because if you do not, you will end up playing a game that 

we have all seen played on television that really does not 

seem quite fair. 

As we look around at other nations around the 

world that have addressed this issue, they have dealt with 

the transition costs in a variety of ways: 

• Chile has tapped general revenue surpluses to 

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pay the transition costs as they move from an underfunded 

system to one that is funded on the basis of general 

accounts. 

• The United Kingdom is largely using the 

reduction in benefits over time to finance the transition 

costs. 

• Canada has adopted a change in their system 

where they are raising the payroll tax over time. 

• Sweden has done a little bit of both, 

increasing contribution rates and reducing benefits. Again, 

Sweden is moving toward an individual account type program. 

Now just because you move to an individual account 

type program does not mean that you have to abandon the 

fundamental principles that are embedded in the social 

security system that you have in tact. I would say many of 

these other countries have maintained the fundamental 

principles that they had in their old system as they have 

moved from one structure to another structure. 

Now, there certainly are issues about how you 

restructure the benefit in both elements of the program if 

you keep a defined benefit base and a defined contribution 

element to the program, but you can design structures that 

take into account financial market risks for lower income 

people and offer them protections can be completely 

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redistributive in the nature of our current program. 

Now, in closing, I would say that one of the 

things I think that you ought to consider if you are 

considering options, because we do need to get additional 

money into the system. 

There is a tremendous reluctance on the part of 

policy makers in this country, and the taxpayers in this 

country to pay higher taxes. I think somehow you need to 

figure out how to get some additional money into the system 

on a voluntary basis in keeping with the president's 

principles. 

And, in that regard, I would suggest that you pay 

attention to what has been the most successful and the most 

popular voluntary retirement savings program in the history 

of mankind, the 401(k) system that has been established in 

this country, and has now operated for more than 20 years, 

so there is a lot of experience with it. 

Today, as many as half of the workers in the 

United States have these types of plans. On average, 

70 percent or more of the eligible participants participate 

in them. On average, contributions going into them exceed 

seven percent of pay. 

David Wise and some colleagues -- David is at 

Harvard, and some colleagues of his, have estimated that 

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this totally voluntary system by 2030 is going to be 

throwing off benefits that exceed the social security 

program in 2030, a totally voluntary system throwing off 

benefits that are costing about seven percent of pay, larger 

benefits than this mandatory system that is costing around 

121⁄2 percent of pay, on its way to 16 or 17 percent. 

I would very seriously advise that you look at 

this structure. I have submitted a proposal to the 

commission with some elements of such a proposal. Thank you 

very much. 

CHAIRPERSON PARSONS: Thank you, Syl. Gene. 

by Eugene Steuerle, Urban Institute 

MR. STEUERLE: Chairman Parsons, and members of 

the committee, it is a privilege for me to be here with you 

today. I know many of you personally, and I would like to 

thank you for your own support during my own difficult 

period. I applaud also the efforts that you make to engage 

in the very task of bringing the nation's priorities into 

balance. 

And make no mistake about it, it is this broader 

task of redefining national priorities to which you have 

been called in the context of dealing with social security. 

Under most projections, spending on the elderly would soon 

comprise up to 80 percent or more of noninterest domestic 

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spending. 

As has continued to demand a growing share of 

federal taxes, social security has steadily been pushing 

aside other domestic spending whether measured as shares of 

the budget or of gross domestic product. Today, a new 

demand has been place on both and private budgets, the need 

to combat terrorism, and public expenses are only the tip of 

the iceberg. 

In economic slow down, hundreds of thousands of 

workers have been idled, and hundreds of billions of dollars 

of dollars in output have already been lost. Meanwhile, the 

private sector will be transformed by new requirements for 

architecture, for revamping transportation systems, handling 

chemicals, and many other items. 

Other unmet shifts in demands are also not going 

to reverse themselves. For far too long the nation has 

failed to ensure an adult presence for each child throughout 

most of the day, a task not easily met when the federal 

budget spends six times more on each elderly person than on 

each child. 

And in the elderly budget itself, the needs of 

single heads of household and of the oldest of the old are 

increasingly being ignored so as to provide retirement 

support to healthy middle aged Americans. While the 

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terrorism threat is being newly engaged, the requirement for 

flexible budgets that respond to current needs is not new. 

Every fiscal crisis in the nation's history 

reflects nothing more than the simple need to find resources 

to meet new priorities. In this context, the principal 

problem of social security is that at the margin it grows 

independently, both in the needs of the nation, and of the 

elderly themselves. 

The new sense of national urgency cannot be 

ignored. We all know that in politics a frequent goal is to 

claim to do something for someone without ever admitting the 

costs. Within the social security debate, some claim that 

larger shares of the national pie for the elderly programs 

should never be admitted to channel resources away from 

other priorities. 

Meanwhile, others argue, just as naively, that if 

we shift around a bit of money to individual accounts that 

no one loses. In a period when there is a call for new 

national sacrifice and lives have been lost and more will be 

lost, when the needs of the unemployed are large, and when 

many businesses face failure, this type of rhetoric gets us 

nowhere. 

The fundamental issue, I repeat, is how can the 

nation shift priorities to meet its most important needs? 

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The commission's practical task then is to leave some level 

of resources free to apply in the future to new emergencies 

and needs. 

This can be done, in part, by indexing benefit 

growth so that it fits within available resources and 

revenues from workers, as has been done by other countries 

such as Sweden. One method I understand the commission is 

considering is to index growth in social security benefits 

of future retirees by prices rather than wages. 

While, in my view, better than nothing, in the 

short run, a preferable method would be determine an 

affordable rate of growth in lifetime rather than annual 

benefits while encouraging later retirement so that workers 

are more likely to have increased annual benefits when they 

truly become old. 

I would like next to mention two important issues 

that I believe have been given short shrift in the recent 

debate, retirement age, and poverty issues. In my view, the 

employment incentives within social security seriously 

threaten economic growth in the future, and economic 

recovery from modern recessions. 

The primary problem is that social security now 

encourages most individuals to retire in late middle age 

when the nation needs their talents. About one-quarter of a 

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century of support is now provided to the longer living 

spouse of a typical couple who retire. 

Anyone who looks closely at the cost of social 

security knows that it is not the size of the annual benefit 

that costs so much, it is the number of years of support 

that is involved. Your mandate as a commission could be 

interpreted narrowly to look mainly at each individual's 

social security benefit structure. 

But, in fact, the affordability of social security 

to society is affected as much, if not more, by whether 

people work, by whether they work and produce national 

output in income, and whether they work and then contribute 

social security taxes as well as income taxes that then 

place less demand on the federal budget as a whole. 

Over the post-war period, the trend toward more 

and more years in retirement was fortuitously offset by the 

increase in female labor force participation, allowing for 

continual growth in the percentage of adults who are 

employed, but that era is over. 

The danger now is that once the early baby boomers 

hit their sixties, the adult employment rate could fall 

precipitously causing a recessionary hit from the labor 

force every year for more than two decades running. Indeed, 

I also suggest in my testimony that social security 

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employment incentives already could dampen the ability of 

the economy to recover from a current downturn. 

If this commission wishes to increase future 

economic resources, its surest methods are: 

• First, to adjust the early retirement age; and 

• Second, to reconfigure lifetime benefits so 

that more are received later in retirement. 

These measures would increase the supply of labor. 

Although I also favor attempts to increase saving for 

retirement, relying upon them to solve what is essentially a 

labor market problem is risky. 

I recognize that the retirement age issue is 

highly sensitive. However, in good faith can we build 

social security reform on the presumption that a 16th, or a 

20th, or 25th year in retirement is a higher national 

priority than many other needs such as restructuring our 

buildings, providing new opportunities to the newly 

unemployed, paying for the transformation that our society 

is now undertaking, or even to meet the needs of our 

children, I think not. 

I would like to suggest a way perhaps to cut the 

guardian knot over retirement age. I believe the commission 

should redefine retirement age policy by setting the 

earliest retirement age, and then increasing it gradually so 

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that the system stays within budgetary balance, taking into 

account such factors as life expectancy, and indeed 

demographic factors such as fertility rates. 

Sweden recently did this in their own reform. 

There should be no normal retirement age. Instead, there 

should be a systematic actuarial adjustment in benefits, one 

more generous than current law which does not take into 

account the taxes that people contribute. 

The systematic actual adjustment should be made 

for anyone who works beyond the earliest retirement age. 

Again, I provide more details in my testimony. My suggested 

version of retirement age reforms symbolically does not 

sound as harsh as increases in the normal retirement age. 

Over the next few decades, it merely moves up the 

earliest retirement age toward what is now already slated to 

be the normal retirement age. It also allows any reform 

package to provide significantly higher annual benefits, 

both because it will generate higher social security taxes, 

and because affordable lifetime benefits will then be spread 

over fewer years. 

For many reasons, the current social security 

system does an increasingly inadequate job also directing 

new resources to meet the needs of the elderly poor. Among 

its primary defects is that social security discriminates 

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very strongly against single heads of households who work, 

pay taxes, raise children, and get lower benefits than many 

individuals who do none of these contributions to society. 

This is an issue related to the design of spousal 

and survivor benefits which are a pure transfer component of 

the system, in the sense that no additional contributions go 

for these benefits. 

Today, the projected reduction in elderly poverty 

under social security is very modest relative to the 

scheduled increase in benefit payments of hundreds of 

billions of dollars. This commission is also considering 

reform in the form of individual accounts. 

While I am quite comfortable with that type of 

reform as a matter of good budget policy, and as a matter of 

private pension policy, this tact by itself does impose 

risks that cannot be undertaken well by those with low 

income. 

Hence, I strongly urge this commission to pay 

particular attention to the needs of the poor among the 

elderly, set up a decent minimum benefit that ensures that 

the bottom one-third or so of the income distribution is 

better off no matter what happens within any individual 

account or private pension. A minimum benefit is also one 

of the surest ways to ensure that lower income women and 

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minorities fair well in any reform. 

I simply do not believe you can solve many related 

problems, the removal of a net addition to risk flow income 

individuals, a fair allocation of what is now spent on 

spousal and widower benefits, and an ensured improvement in 

the status of lower income women and minorities through a 

means tested approach. Means testing additionally involves 

all sorts of enforcement problems in saving disincentives. 

In sum, social security's current dilemma is that 

it is inflexible in meeting the national priorities of the 

nation whether they be combatting terrorism, addressing the 

needs of children, or addressing the needs of the oldest and 

the poorest among the elderly themselves. 

Whatever reform you undertake, I urge you not to 

dodge the problems associated with the retirement age policy 

that suggests that a 15th, 20th, or 25th year in supported 

retirement, middle aged retirement, is the nation's higher 

priority that threatens economic growth by scheduling large 

declines in adult employment rates, and introduces many to 

retire when their income becomes inadequate decades after 

they retire. 

At the same time, I also urge you to increase 

resources for the poorest of the elderly. Our system does 

have the means and the resources to provide a basic benefit 

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for everyone at above a poverty level, and that should be 

the first goal of any reform. Thank you. 

CHAIRPERSON PARSONS: Thank you, Gene. Alicia. 

by Alicia Munnell, Boston College 

MS. MUNNELL: Chairman Parsons, members of the 

commission, thank you so much for the opportunity to appear 

before you today. 

I would like to use my time to argue strongly 

against cutting back on social security's defined benefit 

promises, and replacing them with individual accounts. 

Individual accounts will not solve social security's long 

run financial problem, and they are unduly risky for 

people's basic retirement benefit. 

Consistent with your introductory remarks, Mr. 

Chairman, I want to clarify what I am not arguing about. I 

am not here to debate the merits of prefunding social 

security's commitments. I think using social security 

system to increase national saving is a good idea. 

Similarly, I am not here to dispute the merits of 

broadening the investment portfolio to include equities. I 

would like to see social security participants, particularly 

those with no other assets, have access to higher returns. 

I am not here even to argue against individual 

accounts. Once you have restored balance to social security 

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to preserve most of today's pension promises, supplemental 

accounts through social security would be an easy and 

efficient way to increase saving. 

I am here today to urge you to adopt three 

guidelines as you put together your recommendations: 

• First, restore 75 year balance to social 

security so that people can regain confidence in the 

program; 

• Second, retain the programs defined benefit 

structure so that retirees will have predictable retirement 

income; and 

• Third, consider any individual account 

provisions as add-ons to the programs not carve-outs. 

Let me just take a minute and expand on each of 

these points. First, the most important thing you can do is 

to restore balance to the social security program over the 

next 75 years. This program is crucial to the economic 

being of all older Americans, and constant debate about its 

viability hurts the very people you want to help. 

Restoring balance to a system where expenditures 

are projected to exceed income requires changes in cash 

flows. The only way to improve cash flows is to increase 

revenues, lower outlays, or improve returns on trust fund 

assets. 

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Notice that this list does not include individual 

accounts. They are not on the list because by themselves 

individual accounts do nothing to improve cash flows and the 

financial position of the program. Since individuals 

accounts are no magic bullet, restoring balance will require 

painful choices. Outlays will have to be cut and revenues 

raised. 

There is no rule for how much to do of each, but 

historically both increases in revenues and cuts in outlays 

have been part of legislation to make social security 

financially sound. For example, in 1983, a commission 

headed by Alan Greenspan recommended a balance package of 

revenue increases and benefit cuts to restore 75 year 

solvency. 

The same approach should be taken this time, and a 

list of both outlay and revenue options is extensive. Some 

steps that are both inherently fair and would also improve 

the long run financial outlook include extending coverage to 

uncovered state and local workers, taxing social security 

benefits like private pension benefits, eliminating the CPIs 

so-called upper level substitution bias in the cost of 

living adjustments, extending the period for calculating 

social security benefits, maybe accelerating the rate at 

which the so-called normal retirement age reaches 67. 

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Many would also argue for an increase in the 

social security maximum earnings base to bring the 

proportion of earning subject attacks more in line with the 

90 percent figure established in 1983. It is not difficult 

to identify a whole host of changes that will close the 75 

year financing gap. It is just difficult to come up with a 

package and make a proposal. 

I am also one of those that would argue that 

investing a portion of the trust fund inequities should be 

part of any program to restore balance. By reducing the 

size of other required changes, equity investments would 

improve the returns through the system. 

This proposal has met with opposition from those 

who fear that it would lead to government interference in 

private sector activities. My view is that such pressures 

are easy to guard against. I have some specifics in my 

testimony, and it is also an area that I have looked into a 

lot, and I would happy to discuss some later. 

But Canadians are already investing some of their 

social security trust funds and equities and have not 

encountered any serious problems. We certainly could do the 

same. 

The second guidelines that I would like to urge 

you to adopt is that in the process of restoring 75 year 

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balance, you retain social security's define benefit 

structure. It is possible to have equivalent amounts of 

funding in the social security program and in assistance of 

individual accounts, and equity investment is possible in 

either scenario. 

So, the question comes down to whether a defined 

benefit or a defined contribution arrangement is better for 

people's basic retirement income. Here it seems to me the 

economics are clear. Social security's defined benefit plan 

is better than individual accounts for providing the basic 

retirement pension. 

Because social security is a defined benefit plan, 

it can spread risks across the population and across 

generations. This means that people's basic benefits do not 

depend on what stocks they pick, or when they buy and sell. 

They are assured a predictable basic retirement income, an 

amount that they can add on to. 

Retirement income that depends on one's skills as 

an investor is not consistent with the basic goals of a 

mandatory social security program. Remember that social 

security is the major source of income for two-thirds of the 

population, and virtually the only source for 30 percent. 

The dollar amounts here are not very large. An 

retired individual with a history of average earnings who 

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retired in January of 2000, received a benefit of about 

$900. In my view, that does not make sense to put that 

dollar amount at risk. 

Finally, advocating a defined benefit program for 

the basic retirement benefit does not rule out a role for 

individual accounts. Once balance is restored to the 

existing program, it is possible to consider changes that 

would improve the likelihood that future retirees will have 

adequate incomes. 

One option is to introduce voluntary supplemental 

accounts within social security for those who would like to 

set aside more money. Thus, the debate is not about whether 

individual accounts are good or bad. Once people are 

assured basic retirement protection, individual accounts may 

be a perfectly reasonable addition. 

What opponents to individual accounts object to, 

and what I object to, is cutting back on existing social 

security benefits and replacing those benefits with a risky 

and costly alternative. Introducing individual accounts as 

an add-on to social security is a good idea; substituting 

individual accounts for existing social security benefits is 

not. 

In short, accumulating reserves is a good idea. 

Investing in equities is a good idea. Even individual 

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accounts are a good idea, but not if they involve major 

reductions in the protections offered through today's social 

security program. We should be talking about adding on 

savings options not cutting back on existing benefits. 

Thank you very much. 

CHAIRPERSON PARSONS: Thank you. Well, at least 

so far you have rise to the task, quite thoughtful 

presentations. But, again, I know there will be questions. 

So, shall we have at them? Who is going to start us off? 

Estelle. 

QUESTIONS AND ANSWERS 

DR. JAMES: Yes, I have a question that comes both 

out of -- is this working? 

CHAIRPERSON PARSONS: Yes. 

DR. JAMES: Both out of Syl's and Alicia's 

comments. Syl referred to the fact that additional revenues 

are needed to maintain existing benefit levels. And, of 

course, those revenues can come from a variety of sources, 

but increasing individual savings through individual 

accounts is one way. And Alicia referred to individual 

accounts as possible voluntary add-ons. 

Now, if we were to have individual accounts, if we 

want to encourage them on a voluntary basis, I am wondering 

what mechanisms you would recommend for doing that 

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particularly at the low end of the income scale. 

Syl, you referred to the 401(k) experience and it 

has been very successful at all income levels, but it has 

been more successful at the upper income levels than the 

lower income levels. 

So I would be interested in, from the entire 

panel, what mechanisms could be used to induce voluntary 

individual accounts as add-ons particularly at the low end 

of the income scale? 

MR. SCHIEBER: First of all, let me say that I 

agree with Gene, that if you are going to have individual 

accounts and the restructuring of the residual defined 

benefit program, you need to provide a more robust relative 

defined benefit for the lower income people than the higher 

income people, and that partially takes away the need for 

the low income people to save at the same rates that the 

higher income people do. 

In my prepared proposal that I submitted to the 

commission, I suggested that we could give refundable tax 

credits at the bottom end of the earnings distribution if we 

really were very concerned about getting relatively high 

rates of participation at the low income level, so that 

would be a mechanism. 

Now, that costs money and it would be a new 

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entitlement, but it has been proposed. It was proposed, in 

essence, by the Clinton Administration, and there have been 

a number of people that have endorsed it. I think you do 

want to be careful about getting too much exposure at the 

low income end of the spectrum to financial market risks. 

I think the low income end of the spectrum would 

benefit significantly from having a vehicle where they could 

have some real capital accumulation. But I am not nearly as 

concerned about high rates of savings there, as I am by 

encouraging people further up the earnings distribution to 

save and to take some of the income transfer that is really 

eating away at the other things that government can do 

because of the high transfers that are going to middle- and 

upper-income people today. 

MR. STEUERLE: As I mentioned very briefly in my 

testimony, I view individual account reform primarily as a 

private pension reform. Today, we only have perhaps onethird of the population, at best, that really saves at any 

rate adequately for retirement. I am using rough numbers 

here. 

We have another one-third at the bottom that no 

matter how much they save they would not have that much of a 

retirement, and no matter how you mandate of them they would 

not have much built up in an individual account. 

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But we do have this difficulty that we have this 

middle -- I do not it is a third -- but we have this middle 

group of mainly middle class people including lower middle 

class people who I believe must have to share more of the 

burden of saving for their own retirement, and that seems to 

me the group that you are mainly trying to induce to save 

more through a voluntary approach. 

The people at the bottom, for the most part, I 

believe you have to take care of through some sort of 

minimum social security benefit, simply because they have 

scattered work histories, often rough marriage histories. 

They often need money for even more important needs than 

retirement. It is just going to be hard to solve their 

problem at the bottom. 

So, I think the very bottom you solve with a 

minimum benefit; the middle you pull along through subsidies 

for possibly matching 401(k) plans. I had a suggestion one 

time, at least in one of my reports, where I suggested you 

might think about a match to employers and employees. 

I do not care which one does it -- I would not 

make it an employer mandate -- who would contribute some 

minimum amount into private pension plans, say, 6 or 

8 percent of wages. The government would match, perhaps, 2 

percent of wages. 

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This is complicated because you are going to have 

to get into things like discrimination rules, and you may 

not want to get into private pensions. But, quite bluntly, 

when you are in individual accounts, you are in the private 

pension world already. That is the type of direction I 

would look. As I say, it is complicated, but there is just 

not time today in fairness to go through all of it. 

MS. MUNNELL: I think the best thing you can do 

for low income individuals is to maintain social security's 

defined benefit promise and progressive benefit formula. I 

agree with Gene. If you want to think about individual 

accounts, it should be to help the private pension system. 

Many employers do not offer any supplementary 

pension plans. Allowing people to contribute individually 

additional amounts through their social security payroll tax 

deductions would be a good way to enhance the private 

pension system that we have now. 

CHAIRPERSON PARSONS: Bob. 

MR. POZEN: Gene and Syl, you spoke about a 

minimum benefit. Right now, as you know, there is no 

minimum benefit in social security. I was wondering whether 

you could give us a little more detail as your thinking 

about what level you ought to think this minimum benefit 

ought to be. Some people could argue poverty line; other 

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people could argue other things. And I think it is a 

subject that we would really like to have your thinking on. 

MR. STEUERLE: We did a study -- I would be glad 

to give you the draft chapters -- on social security and the 

family where we tried to examine at least a few options. I 

want to indicate they are not perfect options. You really 

need to have Steve and his people really -- Steve is -- when 

is he going to get time to do this -- but run some of these 

options for you. 

But the type of minimum I would have, I would push 

very strongly on it. I mean I would so something like a 

poverty level minimum. I think because of resources, you 

are probably going to have to define it as poverty level at 

some point in the future. I am not sure you can quite get 

there today, but, say, 2008 or whenever you think your 

reform is going to be more fully implement. And, after 

that, quite honestly, I would wage index it. 

So I would push pretty strongly. And I would have 

that at about a poverty level, and I would use that as a 

base of support. If you do that I think you can gradually 

erode -- you can gradually make the exchange at the top of 

the social security defined benefit for whatever you may 

want to do in the form of individual accounts, and you leave 

open options for the future by providing this strong base of 

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support. 

So, I would push very strongly on this getting rid 

of poverty. I also think that, just as a practical 

political matter, if you could say to the public that you 

have essentially reduced poverty among the elderly -- and we 

already pay out more per person than the poverty level of 

each individual and the system is wage indexed, so it is 

growing over time substantially. 

We already pay out more than enough to get rid of 

poverty among the elderly. If you could make a claim that 

you are going to make a substantial headway in that 

direction, I think it would significantly increase the 

salability of whatever else will be in your proposal. 

MR. SCHIEBER: The proposals that I have worked on 

have used a flat benefit as the internal floor. And the 

benefit that we have derived would give a long career 

worker, someone who worked some period of time, year-in and 

year-out, for a relatively full career, and their guaranteed 

benefit, or their inside benefit something about two-thirds 

to three-fourths of the poverty line with the assumption 

that the savings on top of that through these other 

mechanisms would get them to the poverty line. 

I have actually said that, you know, if you are 

really committed to the poverty line, you could have your 

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internal benefit give a poverty level guarantee of the sort 

that Gene has advocated in some of the work that he has 

done. 

If you have that internal benefit being larger, I 

think it diminishes the size of the individual account 

benefit that you can have, and there are certain tradeoffs, 

and some of them relate to some of the other things that 

Gene favors. 

If you have a larger individual account benefit, 

it significantly changes the retirement incentives that a 

worker faces when they get to be 60, 62, 65, or you know 

some other advanced age. And part of my goal has been, in 

this structure that I have suggested, that for the middle 

class and the upper middle class you try to get those 

incentives in the system to encourage them to keep working, 

and provide a big enough floor benefit for the low income 

people that if they get out they are not going to live a 

retirement period in poverty. 

The thinking behind my approach is these low 

income people have had a miserable life in the labor market 

to begin with. And the reason they have had low wages over 

their whole career is that their marginal product is very 

low. Their contribution in terms of our total output is 

very low. If we lose them to retirement because they simply 

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do not have the stamina to keep going back and fighting the 

system we have not lost much. 

The people where we are really losing value are 

the middle class workers and the upper middle class, and the 

higher class workers, who today are bailing out of the labor 

market in their late fifties or their early sixties. We 

really need to change the incentives for them very 

significantly, because I agree wholeheartedly with the 

things that Gene was commenting on in his prepared remarks. 

MS. MUNNELL: Bob, can I just add a different 

perspective on the minimum benefit? Because it sounds harsh 

to be against the minimum benefit. But I would argue 

against making social security more progressive than it 

already is. We have other programs such as SSI to deal with 

the property issue. 

I think that the most important thing is to 

maintain support for the program as a whole. I think you 

run into a danger if you make it too progressive. And I 

think the program as it is, for this current degree of 

progressivity, has been phenomenal in reducing poverty 

because of its existence. 

So, I know it sounds nice to sort of say, you 

know, let's have minimum benefit help low income people. 

That is not clear to me that making it more progressive is 

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going to help low income people over the long run. 

MR. SCHIEBER: While most people would not believe 

it, social security has been my hobby through most of my 

career. I have spent most of my career working in the 

private sector with employers. And if you look at the 

overwhelming majority of employers, middle and larger size 

employers in the United States today, they are running 

either purely at a defined contribution plan, but it 

certainly among the larger ones. 

They are running both a defined benefit and a 

defined contribution plan. And when they communicate those 

benefit packages to their workers, they are talking about 

the retirement package. And they fully understand, and the 

workers fully understand that one element of the package 

provides certain kinds of securities and opportunities, and 

the other provides a different set of opportunities but they 

work together. 

And the people who participate in these plans do 

not curse the one and love the other because it just does 

not work that way. I think if you have got a coordinated 

package, and you go to the American people and you explain 

to them what you are doing here and why you are doing it, I 

think the American people will buy it. 

One of the things we have tried to do with social 

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security over the years is we have had a whole variety of 

different policy goals, equity and adequacy, that have 

gotten all jumbled up because we have tried to hide them. 

And all I believe that it has done is create resentment, 

because many people believe it is nothing but a welfare 

program. 

Well, it is not just a welfare program, but it has 

got welfare elements, but we cannot explain it because we 

have put all of this together. We have mashed all of the 

potatoes up, and when we go back and we try to describe the 

people, the individual potatoes, and they cannot sort them 

out. Well, let's help them sort them out because we can 

define these things somewhat more discreetly. 

CHAIRPERSON PARSONS: Okay. I have got Olivia, 

Mario, and Bob Johnson, and then we will see where we are. 

DR. MITCHELL: Thank you very much. I, again, 

wanted to add my appreciation to all three of you for coming 

today, and also for your career long commitment and 

creativity and effort on this extremely important topic. 

And so, we are greatly appreciative of all of your work, and 

we hope to continue to draw on you again in the future. 

I guess I wanted to address my question to Alicia. 

It seems like the major point of your testimony it seems to 

me that social security benefits should be provided on a 

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defined benefit basis rather than a defined contribution 

basis, namely, that the benefit should be specified rather 

than having people receive the returns on their investment 

account whatever they may be. 

As has been noted in this session, also the 

previous session, the current system has not provided 

specified benefits nor specified taxes, that is, there is a 

lot of political risks. The future holds tremendous 

political risks because of the insolvency that the system 

faces. 

And, of course, also, as was previously noted, the 

system has no minimum benefit, so that people can readily 

fall through the safety net if they do not happen to have 

enough years of coverage to be eligible for DI or for full 

insurance. 

So there is a tremendous amount of political risk 

in the current system, and I think we should just recognize 

that. But the main point I wanted ask had to do with your 

perception of individual accounts. I guess, you know, the 

president's charge to us was to design a system which had 

voluntary individual accounts. 

So, my point is that your concern about individual 

accounts may be superseded by the fact that they are 

voluntary, namely, the people that wanted to remain in the 

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first pillar defined benefit system could do that. The 

people that wanted to have a partial defined contribution 

system would have that and still have the first pillar 

defined benefit program. 

So, I guess my question is if we can establish 

accounts that are voluntary, that if we can establish a 

system that even potentially enhances progressivity for 

people at the bottom, what is wrong with giving workers the 

option to move into a voluntary account? 

MS. MUNNELL: Just a couple of points, Olivia. A 

national pension system cannot be set in stone. It does not 

matter whether it is defined contribution, defined benefit, 

you are going to have economic and demographic changes over 

decades, and all systems have to be adjusted to meet those 

changes. 

And so, there have been some changes in social 

security over time. But if you compare the stability of the 

replacement rate onto the social security system with what 

you would have gotten with a defined contribution account 

invested in 60 percent equity at 40 percent bonds, you would 

find that one has been remarkably more predictable than the 

other. 

And so, we are really arguing over a degree here 

in terms of what portion of people's retirement income do 

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you want to make predictable. And I guess when we are 

talking about an average benefit of $900, I want to make 

that predictable; and then $900 a month is not enough for 

the average person to live on. I am happy to have them have 

the opportunity to save above that and would encourage it. 

So, what I want to do is keep the social security 

program in tact because I think it is valuable. I do not 

want it to turn into a system of individual accounts, and 

then a means tested program, because I do not trust means 

tested programs. I think to thing strong about social 

security is everybody has an interest in it. Everybody is 

committed to it. It is relatively stable, as government 

programs go, over time. 

And, in terms of allowing some people to opt out, 

I mean, there is the obvious problems that if you are a high 

income person, you are much more likely to opt out because 

you do not get as good a deal in social security; and then 

you are leaving in more and more low income people, and it 

makes it more difficult to have a progressive benefit 

formula. 

But, basically, I just want some portion of 

people's retirement income to be predictable, and my 

judgment is that the level we provide now through social 

security is relatively the right level. 

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MR. STEUERLE: Olivia, can I speak just briefly? 

I mean I do think you have got some technical issues here. 

I do not disagree with the nature of your question, but I 

mean among them are it is going to be extremely hard. 

If this option is too widespread and too open, it 

is going to be extremely hard to predict any degree of 

certainty with what is going to happen, to say what happens 

in the remaining defined benefit system, or the defined 

contribution system. 

If this option is badly designed, you know, you 

could create massive revenue and expenditure estimating 

problems that I do not think you would be able to resolve. 

And you do have to also deal with the issue, I think in 

fairness, to say although I favor the idea in principle, you 

also have to deal with the issue that I think Olivia and Syl 

raised too which is some people in this system, most people 

in the system do contribute to tax. 

They are being taxed to support a progressive 

redistribution. You cannot sort of have some people opt out 

of that progressive redistribution, and other people opt 

into it because that also does not work. I mean if we are 

going to tax people to support a progressive redistribution 

that burden has to be fairly distributed. 

So, these are among I think the technical issues 

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you have to deal with if you are thinking about optional 

accounts. If it is really something you can -- a subsidy 

system you can opt in to over and above something else that 

may be a different matter. 

MR. SCHIEBER: There is actually good empirical 

evidence on people's choices when they are given the choice 

to opt in or out of the system. You can look at public 

sector employees where they are not covered today and their 

attitudes about coming into the system. There is extremely 

strong reluctance to come into the system. 

A number of years ago, I was on a commission that 

looked into whether or not federal workers should enter the 

system. And the federal unions, especially the mail 

carriers, the postal workers, were adamantly opposed to 

being covered by social security because they had their own 

pension system. So, you know, we have some empirical 

evidence on what people do if they are given the choice to 

opt out or to be out and stay out. 

DR. MITCHELL: Just as a footnote, I would only 

note that the military has just been given the opportunity 

move into the federal thrift savings plan, and that has 

become a very popular additional defined contribution bit. 

So, there is again a piece of evidence. 

MR. STEUERLE: They are opting into a subsidy 

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rather than out of a tax. 

CHAIRPERSON PARSONS: Okay. Mario, Bob. 

MR. RODRIGUEZ: This is for Sylvester. Some say 

that we now can reform social security through personal 

accounts because of this year's budget balance. You 

remember the 1994/96 Advisory Council on Social Security, 

and you advocated reform of the system at a time that 

government faced substantial budget deficits. 

Why didn't you give up on the reform at the time 

when the government faced these deficits? 

MR. SCHIEBER: Well, in the proposal that we put 

together, I was part of the group that put together the 

large personal security accounts. It would have been a five 

percent account. And I have continued to argue that we 

should have larger rather than smaller accounts. 

We acknowledge that there would be transition 

costs. And, in that regard, we were unique in terms of 

designing proposals. Some people that have designed 

proposals have tried to find ways to hide the transition 

costs. Many of the people who advocate that we should stay 

with the current system have tried to hide the transition 

costs of staying with the current system. 

I think our proposal was somewhat unique in that 

we explicitly acknowledged this transition cost, and we 

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actually advocated that there should be an explicit charge. 

And we estimated with Steve Goss's abled help -- and be 

careful about how much you put on him. I know how hard he 

works, and you can kill the guy if you are not careful. 

Steve estimated that the cost of the transition in 

our plan would be 11⁄2 percent of payroll roughly over a 75 

year period. And so, we were going to quite explicitly levy 

that on people which took that out of kind of the general 

revenue financing issues. 

And I think it is consistent with my philosophy 

that somehow we have to get more money into this system. At 

that juncture, because of the players I was willing to say 

we ought to mandate it. Under the current principles, I 

believe that we ought to devise a voluntary mechanism that 

encourages people to put more in. And so, that is why I 

have advocated that we have a voluntary contribution with 

matching type option. 

MR. RODRIGUEZ: So, basically, what you are saying 

is over the long term, social security reform will reduced 

costs rather than introduce new costs? 

MR. SCHIEBER: A funded system over time will 

require a much lower payroll contribution rate than a "pay 

as you go" system given our demographic structure, and what 

appear to be the inherent rates of return and wage growth 

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rates that we have. It looks like both the economics and 

the demographics of our economy favor more funding, and that 

should reduce the payroll costs rates of financing a given 

level of retirement. 

CHAIRPERSON PARSONS: Bob. 

MR. JOHNSON: I want to give Professor Munnell one 

more chance to sort of answer Olivia's question, because I 

did not quite understand if you were saying you are 

absolutely, adamantly against private accounts, or you are 

saying you are against private accounts if the tradeoff is a 

significant reduction in what you call as defined benefits. 

Because I am having trouble understanding why, if 

take an African-American worker, who has a higher mortality 

rate, would have an option of diverting part of his social 

security payroll tax into private accounts that they are 

going to yield a higher return over the period of his 

working life, and then have the ability to pass that on to 

his family as an asset, would not benefit from an option of 

having private accounts and become a part of the middle 

class, which we talked about here, that has a significant 

investment, far greater than most African-Americans in the 

equity market. 

And I think what we are trying to do is trying to 

bridge that tradeoff between a certain level of continuation 

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of defined benefits and the flexibility of seeking a higher 

return over the life of the worker in the market, and 

thereby creating solvency for the entire system. And I am 

just wondering if you are opposed to that concept, as long 

as we can reach some level of guaranteed benefits? 

MS. MUNNELL: People have called me a lot of 

things, but never unclear. I do not want to see you --

MR. JOHNSON: I went to Princeton, so that is 

probably the reason. 

MS. MUNNELL: Debate, cut back on social 

security's defined benefit promise as they are now, and 

replace that with individual accounts. I think that will 

harm people, and I think that will harm the program. 

Am I against individual accounts in general? No, 

how can you hate individual accounts? There is nothing 

wrong. I do not hate 401(k) plans. I just do not want to 

see you cut social security benefits. That is what I do not 

want to see done. And I do not believe that AfricanAmericans are going to better with individual accounts than 

with a defined benefit program. 

Yes, you have lower life expectancy. But also, as 

a group, African-Americans have lower incomes and they 

benefit from the progressive benefit formula. So, and if 

you look at where most of the civil rights groups are, they 

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are against privatization. 

So, I do not think it is an answer for women. I 

do not think it is the answer for African-Americans. I do 

not think it is an answer for anybody. If you want to have 

individual accounts, I think that would be a good thing that 

there is not universal pension coverage in this country. 

I think it would be great if everybody had a way 

to save in addition to social security. So, add individual 

accounts on to social security, but do not cut back on the 

defined benefits that we have in place now. 

MR. JOHNSON: You are opposed to cutting benefits. 

Are you in favor of raising taxes? 

MS. MUNNELL: I would sit down with you today to 

eliminate the 75 deficit for social security, and it is 

going to take some changes in flows going in, and some 

changes in flows going out. And there are tons of things 

that we could do that would not upset me at all. 

I do not think bringing in state and local workers 

would upset me. I think that would be fair. I think making 

some small adjustment, technical adjustment on the CPI, 

which would be fair. I think extending the average period 

in which calculate benefits would be fair. 

I think that there are tons of things that we 

could do that change these flows that are not that 

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important. And it does not require that big a change, as we 

could solve that problem. 

CHAIRPERSON PARSONS: We have Estelle, and then 

Gwen, and then we are going to struggle, but wrap it up. 

DR. JAMES: Okay. I would like to a point that 

both Gene and Syl have referred to, which is the importance 

of increasing the labor force keeping people in the labor 

market for longer, especially as longevity increases. 

Now, we have been warned by all sides of the 

political spectrum to avoid that issue, and, in particular, 

to avoid tampering with the retirement age. This question 

is going to apply to everyone. 

And so, but we do face the problem that, both from 

the point of view of the economy, the output of the economy, 

and from the point of the finances of the social security 

system, both of these would be better off if people stayed 

in the labor market longer instead of shorter which is what 

they are doing now. 

So, my question is what kinds of incentives can be 

build into the system to get them to do this? If we do not 

change the retirement age, what other mechanisms are there 

to create incentives for people to continue working longer, 

which I think many of us agree would be good for the broader 

economy, and would also be good for the system? That's for 

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all three of you. 

MR. SCHIEBER: Well, I think the greater 

dependence as you approach retirement age on defined 

contribution accounts really significant changes the 

incentives. In a defined benefit plan, if you do not retire 

and you are not getting full actuarial adjustments, if you 

do not take a benefit once you are eligible, you lose a year 

of eligibility. 

Now, the problem you have is that not everybody is 

average when they are assessing their own expected remaining 

life. And so, people were relatively, who believe they are 

going to die sooner than their life expectancy, are going to 

be better off taking benefits earlier rather than later 

because there is a hedge that is built in here that they can 

take advantage of. 

In the defined contribution type arrangement, by 

deferring retirement a year has two effects. One is it 

gives you an additional year of work and contribution into 

the system, so your account grows. It grows because your 

contribution grows because of the interest, and it shortens 

the life expectancy period over which benefits are going to 

be paid, so you are going to get a higher year-in, year-out 

annuity in retirement. 

So you are going to get a higher year-in, year-out 

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annuity in retirement. So, there is really some pretty 

strong incentives in these types of plans to encourage 

people to keep working. Whereas, there are incentives in 

defined benefit plans that encourage people to require at a 

given point. 

If you look at a country like Sweden, Sweden has 

stayed with a fairly large social security program, but they 

converted it from a defined benefit plan to a notional 

account and defined contribution plan much like the cash 

balance plans that employers are putting in in the United 

States here now except it is now funded, whereas, these are 

funded. 

They allow people to retire at age 60, but they 

give an actuarial adjustment if they stay in the plan 

longer. So, people are now putting in an additional year of 

contribution. They are getting an additional year of 

interest accrual if it is on a notional account, but the 

account is growing just the same as though it were funded, 

and they have got a shorter period over which -- so it has 

drastically changed the incentives for people to retire. 

And it has done another even more favorable thing, 

I believe, for policy makers. It has completely taken off 

of the table for the policy makers telling people when they 

should retire. People now make up their own mind when they 

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retire. And if the system does not have enough to fund 

benefits because life expectancy is expanding, life 

expectancy is automatically going to adjust the annuities. 

So, I think some of these things are so difficult, 

and we have seen here the discussion, the debate about 

retirement age is so ugly we ought to get it out of the --

we ought to get it off the table, so we can solve our 

problems instead of creating an environment where we use 

these things as schedules to beat each other in the head. I 

almost said something bad. 

MR. STEUERLE: Estelle, I am glad you asked a 

question on something besides individual accounts. In fact, 

my great fear for this commission is that it is focused on 

individual accounts. 

And, by the way, both sides of the debate have 

such a focus on this that this is sort of like focusing on 

the hind of the dog. I am reminded of a dog pound owner in 

Kentucky who allegedly wanted to get people to buy more dogs 

and heard about the world wide web. And he kept taking 

pictures of these dogs, thought that would be cute, but he 

kept taking them from the behind. 

And, first, people said, oh, that is not selling 

many dogs. So, then he and his wife decided to adjust the 

thing. They said, well, let's exercise these dogs and they 

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will have sleeker behinds; and then, they said, well, let's 

put pants on these behinds and that will sell the dog. And 

it just did not do much. 

And it was not until they finally turned the dog 

around that you saw the face, and the body, and the whole 

dog that you saw what it didn't -- and my bottom line is 

individual accounts are the hind of the dog. They ain't the 

tail, but they ain't the dog either. 

And if that is the focus of this commission, I do 

not think -- I just do not think it sells. Even though I 

favor them, it is not the main issue of social security. 

Social security faces a labor market issue. If we are going 

to be honest with the public, it is a labor market issue 

that is causing the shortfall. It is the shortfall of 

workers to retirees that is forcing the issue. 

Yes, saving has been an issue throughout the 

history of social security, but the shortfall we face is a 

labor market issue. And to go to the public and say we can 

solve a labor market issue with a saving solution is 

extremely risky. We have never been able as a government to 

mandate saving because individuals can offset anything we 

do. 

Now, to the question of what we can do on the 

labor market. As I said, I think we should increase the 

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earliest retirement age. If you are not willing to go as 

far as I am, you should at least index it for increases in 

longevity, and perhaps some past increases in longevity. 

The other thing to do is to move benefits a little 

more on the tail end rather than the front end, because a 

lot of people are misled as to the level of benefits they 

have. They look at the benefit they get when they are 62. 

In the retirement, if you take out the disabled, most people 

are now retiring at age 62 on social security. 

They look at that benefit and they do not realize 

that they, especially if they are married, they and their 

spouse on an average are going to live 25 years, some 30 

years, and that benefit level at 62 is not going to mean the 

same in an economy 30 years down the road that has growth, 

and the cost of nurses have grown by a few percent per year 

for 30 years compounded. 

Their private pension is probably not indexed if 

they have a defined benefit plan, and they end up much, much 

worse off. And so, I think the signal, honest signal up 

front, is less benefits early and more benefits late. You 

could do that by giving, figuring out the lifetime benefit 

you want to give people which is I think the right way to do 

it. 

You do not start with the annual benefit. You 

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start with a lifetime benefit you want to give them, and 

then figure out how you want to give that. You could give 

less up front, more later. You could wage index it, if you 

are willing to cut back on the up front benefit enough, or 

you do not want to wage index it, wait a few years, and bump 

the benefit up a little bit. 

But do something to provide more of an incentive 

to work at those younger ages when people are capable, and 

then you do not have to worry so much about the fact that 

you are providing a higher benefit down the road for the 

same lifetime benefit later when they are less capable of 

work in the first place. Those are the tricks I think you 

have to play with on changing labor incentives. 

DR. JAMES: But if you use that mechanism you run 

into distributional issues again because you are giving less 

money in the earlier years, and low earners are more likely 

to die before they reach the later years. 

MR. STEUERLE: But, you know, changing somebody 

from getting, say, 20 years -- say one group is likely to 

die, has 10 years of support, and another group 20. They 

are cutting it back to 19 and 9, or 18 and 8. That does not 

make a lot of difference in how well off they are. 

And this answer is to you, Mr. Johnson, as well. 

Most minorities are really losing social security because 

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they die before they even get to retirement age. So, 

adjusting retirement age is not one of the issues that 

mainly effects them at all. 

The way you are going to solve their problems if 

they are going to live to retirement age is bumping up 

something like a minimum benefit. The change you make in 

the retirement age does not make that difference on that 

calculation. You have got to go to other parameters to deal 

with that issue. 

MR. JOHNSON: Wouldn't private accounts add to 

their likelihood of getting a higher return during their 

working life if they are going to retire anyway? 

MR. STEUERLE: It is about balance. The study I 

did with Lee Cohen at Social Security, and some others, show 

that in terms of rates of return, minorities had, at least 

low income minorities had some of the -- about the same rate 

of return under some analyses as other people. 

What happened is the distributional part of the 

social security formula and the benefit formula roughly 

offset the mortality differences, so it depends. I mean 

that does say that the system that purportedly redistributes 

to low income people does not do as much as we said it does. 

On the other hand, you do not want to --- that 

distributional formula either. You have got a balancing act 

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I think to pull here. 

DR. JAMES: Besides changing the retirement age, 

what other incentives? 

MS. MUNNELL: Well, we are doing something good 

already which is phasing in fully the delayed retirement 

credit. So, we are getting out at least the negative 

incentives. 

And I would support Gene's notion that as you move 

the "normal" retirement age up to 67, that it might be 

appropriate to consider moving the 62 age as well, or else 

you are going to have people with very, very low benefits 

who opt for early retirement. 

CHAIRPERSON PARSONS: Gwen. 

MS. KING: Maybe I am just getting cranky because 

it is lunch time. Gene, I am just a little bit grateful to 

you for all that you have done, and a little bit curious 

about the distinction you made about retirement age and 

African-American males, who do not live to retirement age, 

but you persist in saying we should move that age out. 

So, and I draw the distinction very clearly that 

African-Americans does not necessarily mean low income. But 

I think that is probably something, a subject I would rather 

not shoot a question at you and have you rush through an 

answer; something, if you may, if you will, I would like to 

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talk to you about at some point in the future, and we can do 

that. 

But, clearly, I do not necessarily agree with that 

perspective. But there is something on the record, and, 

again, maybe I am just grumpy, but it seems to me that we 

had an earlier discussion about lower wage workers and the 

importance of moving them out of the work force and keeping 

the "more valuable higher wage workers." 

Syl, here we go. I have got to tell you --

MR. SCHIEBER: I knew somebody was going to get to 

it. 

MS. KING: And maybe I misunderstood what you had 

to say, but I think about all of the people who are in 

charge of security machines at airports who are not 

necessarily the highest paid workers. And I think about 

people who care for our children and drive our school buses, 

and all of those others who are lower wage workers, and I 

see them as very valuable people. 

And I know a lot of mid-managers, my dear, that I 

would have asked to leave early on when I was in the work 

force, and we would not have lost a step at all. So, maybe 

that too is the subject of a longer discussion, and I hope I 

did not hear you correctly. 

And for all of you who think that it is important 

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to continue to give contracts for our security and for 

transporting our children to the person who gives you the 

lowest bid, I think perhaps we all need to rethink that way 

of moving. But tell me I misunderstood you. 

MR. SCHIEBER: Well, anytime you are designing a 

retirement plan, there is a whole variety of dynamic 

variables that are moving around. By the very fact that you 

are giving people a wealth accumulation vehicle that 

converts into a stream of income at some point when they 

quit working, it is going to have incentives that encourage 

people -- that give people encouragement to quit working, 

and to spend the rest of their life in what economist call 

"leisure." 

Now, it may not be all leisure. We know that. I 

was not saying we should encourage lower income people to 

quit early. What I was saying is, as you deal with these 

tradeoffs, I am not as worried about structuring a system 

that might give lower income people the opportunity, or not 

have strong as incentives to keep them in the labor market, 

as I think that it is important to give higher income people 

the incentives to stay in the labor market. 

Yes, these people are valuable, but we have told 

them through our market mechanisms throughout their whole 

life that they are not nearly as valuable as other people. 

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In purely economic terms, and I am not putting a dollar 

value on anybody's life. I am talking about the rate of 

return they get for an hour of labor. 

So, I think as you deal with these tradeoffs 

people with the ability to make a major contribution to the 

economy to this society ought not be encouraged to withdraw 

from making that contribution prematurely. 

MS. KING: Whether they are high income or low 

income? 

MR. SCHIEBER: Well, I think you are going to have 

some incentives in a retirement plan, no matter what, that 

give some encouragement to people to retire, to withdraw. 

All I am saying is I am not as bothered if there might be a 

little more incentive at the lower income levels than at the 

higher income levels. I think it may be the tradeoff you 

have in a plan design. 

I think we also have to be careful, if you look at 

people who earn lower income levels throughout their working 

careers, they have often had a much harsher experience in 

the labor market than people who earn a lot of money. And 

to design plans that almost require that they stay in the 

labor market for an extended period of time may border on 

being inhumane. 

MS. KING: Like lengthening the retirement age? 

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MR. SCHIEBER: There are certainly some people who 

work at physical jobs, who work out in elements over most of 

their career, who work in back breaking kinds of activities 

even inside over their whole career. By the time they get 

to be in their early sixties, their ability to continue to 

do those kinds of things become somewhat limited. 

And I think we have to be a little bit careful 

about forcing them to stay in the labor market for some 

significantly extended period of time, because they may not 

be able to continue to perform. 

And, again, it comes down to these very difficult 

tradeoffs that you have when you are designing a retirement 

plan, and every word deals with them day in and day out. I 

mean, if you think about it, even social security with which 

you have some experience as a manager, social security last 

year, and I believe the year before, ran early retirement 

incentives for parts of their work force. 

Now, here is kind of an irony. You had social 

security which was raising the retirement age, the normal 

retirement age for all of the citizens, or the overwhelming 

majority of citizens in the United States at that juncture, 

encouraging their own workers to retire early, because 

there were some very practical things that they were trying 

to deal with. 

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So, you have got to look at these tradeoffs, and 

we are kind of forced at times to try and come up with one 

size fits all. And we know that one size does not exactly 

fit all, so you are forced to make the tradeoffs. 

CHAIRPERSON PARSONS: All right. Syl, we are 

going to have to bring this to a close. Have you got one 

last sort of silver bullet, Gene? 

MR. STEUERLE: Just very quick. The issue on 

minorities and dying early is not really an issue so much as 

social security versus individual accounts. It is an issue 

of annuitization. Once people either voluntarily or 

mandatorily are forced into annuities, the people with 

shorter lives lose out in that type of system. 

You will face the same issue even with individual 

accounts. Because if you want to guarantee that people have 

adequate income in retirement and they are low income, you 

have individual accounts and you want to depend on that 

money to get some minimum benefit, you may be led either 

towards forced annuitization, or you may want them 

voluntarily to take an annuity, in which case they get a low 

return too. 

So, the issue actually does not go away in either 

case. You have got to deal with the question of whether you 

are going to annuitize or not, whether you are in the social 

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security world, defined benefit or a defined contribution 

world. 

MS. KING: I appreciate that. Thank you. 

CHAIRPERSON PARSONS: I was going to say. You get 

the last word, because you are the lady. 

MS. KING: Well, I would only offer to Eugene --

and, again, I would love to continue this discussion -- that 

the attraction of having an account which you can leave to 

your beneficiaries, as most of us do with our savings plans, 

is something that it may just be a dream, but it is 

something that people are thinking about. 

And when I hear the younger people talking about 

how important it would be for them because they can see the 

value over a longer period of time, I am still convinced 

that perhaps it might be a worthwhile way to go. 

CHAIRPERSON PARSONS: Okay. 

MS. KING: Anyway, since I have the last word, ha, 

ha. 

CHAIRPERSON PARSONS: Thank you. This is another 

outstanding panel. I am not entirely sure I got the part 

about the dogs with the pants. But other than that I 

thought it was quite illuminating, obviously provocative, 

and helpful to the commission. We appreciate it very much. 

We are now going to take a short lunch recess, and 

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we will be back here about quarter after, twenty after one, 

for the next panel. Thank you very much. 

(Whereupon, the meeting was adjourned for a 

luncheon recess at DR. COGAN:42 p.m.) 

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A F T E R N O O N S E S S I O N 

(1:35 p.m.) 

CHAIRPERSON PARSONS: We have got to apologize to 

our distinguished panelists for being a little late in 

getting going again. But it certainly does not indicate any 

diminution in our enthusiasm for hearing what you have to 

share with us this afternoon. So, let me introduce the 

panel. 

PANEL III: OTHER PERSPECTIVES ON SOCIAL SECURITY 

CHAIRPERSON PARSONS: This is the third panel we 

have for today, and one we are calling, "Other 

Perspectives." We have heard from some representatives of 

generation X, as they like to call themselves, and some socalled experts on the system, and now we are interested in 

getting a broader view from other perspectives around the 

points on the compass. 

We have with us Mr. Michael Tanner, who was with 

the Cato Institute. I think he is the director of Health 

and Welfare Studies for the institute, who has done quite a 

bit of thinking about social security reform. 

We have got Vincent Sombrotto, who is the 

president of the National Association of Letter Carriers, 

and will give us some perspectives from the labor point of 

view. Mr. Sombrotto is also a member of the Federal Thrift 

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Retirement Investment Board. So, he has lots of perspective 

on this subject. 

Mr. John Goodman, who is the president and founder 

of the National Center for Policy Analysis, who also has 

spent a lot of time kind of thinking about this subject, 

personal accounts, in particular. 

And, lastly, it was Mr. Michael Sherraden, who is 

a professor from Washington University, and has an 

interesting perspective on low income people and how they 

respond to the opportunity to accumulate wealth, which is 

something we have talked about here, and it would be good to 

get some academic analysis and thoughtfulness under our 

theories and presupposition. So, we look forward to hearing 

from you. 

The ground rules are that we have asked all of you 

to submit a written submission. And we would ask you to 

make a brief, five or so minute presentation to the 

commission; and then we will go into what I know will be a 

lively question and answer session. 

And just so we are all on the same time frame, we 

are going to conclude this within an hour after having 

started. We will end a little late, but we will end about 

3:30 or so -- excuse me, 2:30 or so. So, with that, Mr. 

Tanner. 

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by Michael Tanner, Cato Institute 

MR. TANNER: Thank you, Mr. Chairman, 

distinguished members of the commission. I want to thank 

you for this opportunity to testify today. And I want to 

thank you for your willingness to undertake the difficult 

work of tackling an issue as controversial as social 

security reform. 

I think it is an unfortunate statement about 

current political life that you have had to suffer so much 

unfair criticism and such vitriolic criticism for simply 

daring to tell the truth about the need to reform social 

security. 

The Cato Institute's position on the need for 

social security reform is pretty well known. For more than 

20 years, we have attempted to educate the public on the 

need to transform social security from a "pay as you go" 

program to one based on real savings and investment. 

And, in that regard, we have conducted a wide 

variety of research over the years. I know you have all 

been provided with volumes of that research, probably more 

than you care to read in any one sitting. So I will spare 

you all of that today, and just try to set out for you if I 

can what I think should be some guidelines for reform, five 

principles, if you were, for what I hope will guide your 

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efforts for reform. 

The first is that solvency is not enough. I 

understand that none of us would be here today is social 

security were not facing a serious financial crisis. And I 

think the commission is to be commended for having point out 

the depths of that problem and the fact that it begins in 

the year 2016 when social security begins to run a deficit, 

an issue for which you have been much criticized, but for 

which the commission is correct. 

But solvency is not the only issue when it comes 

to social security reform. If all we cared about was 

solvency, it is possible to raise taxes enough, or to reduce 

benefits enough to keep the program actuarially solvent for 

whatever period of time you want. 

But the social security is facing many additional 

problems beyond solvency. Social security is providing a 

poor rate of return to young workers, and that rate of 

return is getting steadily worse. Workers get a far worse 

rate of return from social security than they can hope to 

get from private markets. 

And, in fact, from many young people, they can 

actually expect close to a negative rate of return, or a 

zero rate of return from social security. A social security 

form that is adequate must address this issue and provide 

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higher retirement benefits and a better rate of return for 

young people. 

The current social security system contains a wide 

variety of inequities. It penalizes women who work outside 

of the home through the dual entitlement rule. It penalizes 

low income workers. It penalizes African-Americans and 

other minorities with shorter life expectancies. 

And, most of all, under the current social 

security system workers have no ownership of their social 

security benefit. They have no right, contractual, legal, 

or otherwise to social security benefits, meaning that they 

are entirely at the mercy, as it will, of the government to 

decide what it is that they will have to retire on. They 

have no ownership that they can pass on to their heirs. 

They have no way to accumulate real wealth. 

Social security reform must address all of these 

issues. It cannot simply focus on how can we prop up the 

current system a little bit longer? How can we eke it out 

for another few years? We must come up with the best system 

for Americans retire on. 

The second principle I would suggest is that 

individuals not government should invest; that if we decide 

that allowing investment in real assets is the way to go to 

reform social security, it should be done by individual 

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workers not the government as a whole. 

To allow the government to invest is to allow 

political entry into our economy in a way that I think none 

of us would enjoy. One simply has to look at the history of 

other foreign countries as documented by the World Bank to 

see the problems there, or within our own country to look at 

the experience of state, local, municipal governments and 

their pension funds. 

Forty-four percent of state and local pension 

funds contain some sort of mandated investment requirement. 

You must invest in in-state industries, or renewable 

energy, or so forth. 

Approximately, 25 percent of state and local 

pension funds have some sort of investment restriction. You 

cannot invest into tobacco stocks, or companies that make 

nuclear weapons, or companies that do not have union 

contracts, and so on. 

To allow the government to make these investment 

decisions is to invite every social policy decision to 

become a question of retirement security. After all, the 

day that the federal government invests in, say, Walt Disney 

stock, I would imagine Jesse Helms and Barney Frank going to 

the floor of Congress for a debate that may never end. 

The third principle is that we should maximize 

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consumer choice. I would urge the commission not to limit 

individuals to simply one fund investment options, or two, 

or even three. 

Now, while it is likely that initially they are 

going to have to have a single fund, at least until 

reconciliation can take place, and that after that you may 

wish to have a limited variety of investment options. 

At some point, I would urge that once 

accumulations in an account have reached a particular level 

that you deem adequate, that individuals be able to open 

their investment decisions to a wider range of options. 

I think this is important for the efficient 

functioning of capital markets, and I think that it also 

avoids any prospect of government decision making in the 

investment process. 

The fourth principle I would urge is simply 

called, "Don't touch grandma's check." I think all of us 

can agree, and it is part of the president's charge to you 

that we should not be touching the benefits of retirees or 

near retirees. 

Now, in order to do this and make the transition 

to a system of individual accounts, it will require input of 

general revenue. And I think most advocates of individual 

accounts recognize that some measure of general measure is 

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going to have to be transferred into the program in order to 

make this work. 

The Cato Institute would be happy to provide ways 

that we think that this can be done without raising taxes. 

However, I would point out that whatever of my own money 

that you put into general revenue to transition to a system 

of individual accounts, over the long run it will be less 

money than is necessary to prop up the existing system, a 

system which fails to meet the earlier criteria I was 

talking about. 

Finally, a last principle I would suggest is that 

more privatization is better than less. If the goals of the 

commission are to go beyond solvency and to look at things 

like how can we allow low income workers to accumulate 

wealth, and that wealth be allowed to be passed on to their 

heirs, two percentage points accounts simply do not make it. 

For a minimum wage worker, or someone earning 

$15,000 or $20,000 a year, two percent of their income is 

not going to allow them to accumulate a substantial nest 

egg. And if we are attempting to create national savings, 

then more national savings increase is better than less 

national savings increase. 

And if we know that you get a higher rate of 

return from individual investment, then more individual 

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investment is better than less. One thing I would like you 

to consider if you are unwilling to go, as I would like sort 

of the "Full Monty," and allow individuals to invest all of 

their funds which is unlikely; or even a substantial portion 

is to allow at least low income workers to invest a 

substantial portion of their money. 

This can be done either in a graduate method, say, 

allowing 6 percent of the first $20,000, and 4 percent of 

the next $20,000, and so on; or it could be done up to a 

flat dollar amount which I think would probably be the most 

administratively simple, say, up to $2,000 a year that you 

could put into an individual investment account. 

This would have the effect of coming close to full 

privatization for the lowest income individuals while upper 

income individuals would have a much smaller portion going 

into individual accounts. And, after all, they are not 

depending on social security, so for them it is not as big a 

deal to be able to accumulate this wealth. 

That said, I want to just close with this. In the 

wake of September 11th, it perhaps seems trivial to be 

talking about social security with all of the things that 

have happened. But all of the problems that effected social 

security before September 11th were still true on September 

12th. 

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And something else was true as well, the attack 

that we suffered on September 11th really was an attack on 

our way of life and our belief in individual dignity of 

every person. And, in a sense, when we look at social 

security, the current system requires people to remain 

dependent on the government. 

A system of individual accounts is a system 

consistent with our belief in individual dignity. It is a 

system that allows people to own wealth and accumulate it. 

And I can think of no finer tribute to our way of life and 

reputation of the attacks upon it than to move to a system 

that guarantees that kind of dignity for every individual. 

And I would urge the commission to move forward with its 

work. Thank you very much. 

CHAIRPERSON PARSONS: Thank you, Mr. Tanner. Mr. 

Sombrotto. 

by Vincent Sombrotto, National Association of Letter Carriers 

MR. SOMBROTTO: Thank you, Mr. Chairman, and 

distinguished guests of the commission. I am glad you were 

wearing your clothes when you talked about the "Full Monty." 

My name is Vincent Sombrotto. I am president of 

the National Association of Letter Carriers, AFL-CIO, and a 

senior member of the Executive Council of the AFL-CIO as 

well. The union I am proud and privileged to be the 

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president of represents 312,000 active and retired letter 

carriers that worked for the United States Postal Service. 

I appreciate the opportunity to appear before the 

commission today, especially during this difficult time for 

all of us, and it is a difficult time. And God bless 

America that we have a government that protects all of its 

citizens. 

In addition to being NALC president, I serve as 

chairman of the Employee Thrift Advisory Council. The 

council advises the Federal Retirement Thrift Investment 

Board, an independent agency of the federal government that 

manages the thrift savings plan, the TSP, as often described 

as a 401(k) for government workers, and has some 21⁄2 million 

participants. 

In actuality, it is part of a three-tiered 

retirement plan that also includes a defined benefit pension 

-- which also includes defined pension benefit and social 

security. As those who know, we can tell you, I have worked 

hard to convince every letter carrier in America to invest 

prudently through the federal thrift savings plan, and most 

of them do. 

Nevertheless, the NALC would oppose any proposal 

to divert existing FICA or federal insurance contribution 

taxes into individual accounts because the risks are too 

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great and the costs are too high. The TSP is designed, that 

is, the thrift savings plan, is designed to supplement the 

guaranteed benefits provided by social security in a basic 

annuity program. 

All worker investors, whether they are in the 

private or public sector, have been reminded of the risks of 

stock market investment in recent months. The 1990's bull 

market has come to a definite end, and the value of Standard 

and Poor's 500 stocks has declined significantly since the 

spring of 2000. 

Federal employees have seen their TSPC fund, which 

is their equities fund, investment fall by nearly 27 percent 

alone this year. Had portions of their social security 

funds had also been invested in stocks, their losses would 

have even been greater. 

Finally, as many other observers have noted, there 

is the problem of paying for an individual investment plan 

that would require one of three choices: raising taxes, 

using funds from any long-term budget surplus, or cutting 

benefits. 

With tax increases seemingly off the table, and 

given recent events to the uncertainty of budget surpluses, 

we need to know how to pay for the transition to individual 

accounts, and what benefits would have to be cut. NALC 

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could support a so-called social security plus program 

structured along the lines of the thrift savings plan with 

Social Security Administration handling administration of 

individual accounts invested in a limited number of index 

funds. 

The additional funds would belong to individual 

contributors and could be invested by private sector 

managers under contract with the SSA. A social security 

plus program would actually boost national savings and would 

not endanger the social sophisticated communication system 

-- oh, excuse me. 

Did you take a page away from me here? Oh, on 

page 6. That full monty has got me now. 

The low cost of administrating the TSP accounts, 

which is less than six basis points, stems from the federal 

government's unique capabilities which include computerized 

payroll, sophisticated communication systems, and 

professional human resource managers. 

However, while these approaches may address the 

savings crisis in the United States, they do not address the 

issue of solvency of the social security trust fund. 

According to the latest report of the social security trust 

fund, relatively modest changes could restore actuarial 

balance to the system. Revenue increases or benefit cuts or 

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some combination of both would be required. 

The commission could reject the notion that taxes 

can never be raised to overcome the projected shortfall of 

social security. Nobody, including the members of the NALC, 

including myself, want to pay more taxes. However, if we 

had to, I believe we can afford to modestly raise payroll 

taxes. 

Other changes such as removing the cap on wages 

subject to payroll taxes, or subjecting investment, and 

using general revenues or a portion of the federal budget 

surplus to bolster social security should also be 

considered. 

Finally, rather than establish individual 

accounts, the trust fund could make collective investment in 

private sector assets on behalf of all social security 

recipients and participants. Trust fund diversification is 

fundamentally different from replacing social security 

benefits with individual accounts. 

It is much more cost-efficient than individual 

accounts, and retains the unique risk and cost-sharing 

features of social security, features that are not provided 

by an employer-based pension system. 

Although I understand some are concerned about the 

federal government only, the private sector assets, and 

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injecting politics into the capital markets, the 14 year 

record of the thrift savings plan shows that it is possible 

to avoid this pitfall. 

I would like to make one last point. Letter 

carriers and other public sector retirees are the victims of 

particularly onerous flaws in the social security system. 

Under the windfall elimination provision, the government 

pension officer, public sector annuitants can lose some, if 

not all, of their social security benefits whether they be 

spousal benefits or through their own work in the private 

sector. 

We believe that Congress should act immediately to 

address these issues. And, quite frankly, many retirees 

cannot afford to wait to see action on any proposal by this 

commission with regard to these issues. 

However, should no action be taken prior to the 

issuance of a report by this commission, we strongly urge 

that you address these anomalies in the current system. 

Such a move would not only provide public servants with the 

benefits they have earned, but also would provide much 

needed stimulus to our economy. These are people who could 

use and will spend these benefits if they were made 

available to them. Thank you. 

CHAIRPERSON PARSONS: Thank you, Mr. Sombrotto. 

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Mr. Goodman. 

by John Goodman, National Center for Policy Analysis 

DR. GOODMAN: Thank you, Mr. Chairman, and members 

of the commission. Over the last several years, there have 

been a number of reform plans put forth by various 

individuals. There was a Graham-Dominici plan; there was an 

Archer-Shaw plan; there was a bipartisan plan in the House, 

and another one in the Senate; and then there was a separate 

Moynihan-Cary plan. 

At the NCPA, we asked this question. What if we 

went through all of these plans and picked out what we 

thought were the most attractive features of every one of 

them and discarded all of the rest, and put it all together 

in a hybrid plan. If we did that, we thought we would have 

the most persuasive case that one could make for setting up 

a system of private accounts, and that is what we proceeded 

to do. 

We came to the conclusion that if people could put 

2 percent of their payroll tax, or 2 percentage points in 

the private account every year over their work life, that by 

the time today's teenagers reached retirement age, about 

mid-century, that they would be able to pay more than half 

of today's promise of benefits under current law, promise 

under current law. 

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More than half of those benefits would be paid 

from the private account. And, furthermore, the government 

could guarantee the total benefit, could guarantee that 

people receive exactly what they are promised under current 

law with a payroll tax no higher than the one we have today. 

All this assumes that the funds are invested 

properly. And I hope that we will be able to spend a little 

bit of time talking about what it means to invest these 

funds properly. 

But it seems to me that if government is going to 

guarantee the result, the risk preference that should count 

is not the risk preference of the individual worker or 

retiree, but rather the risk preference of taxpayers, or if 

you like of society as a whole. 

If the taxpayers are guaranteeing the result, then 

the portfolio that should be selected is not the one 

preferred by the individual worker or the retiree, but the 

portfolio preferred by society as a whole. And what is the 

portfolio preferred by society as a whole, the one they are 

now holding, or if you like the market as a whole? 

So, if the funds are invested in portfolios that 

reflect broadly the market as a whole and kept there, even 

during the retirement years, then we can achieve these 

objectives. I hope I have an opportunity to talk about why 

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that is a desirable way to do this. 

We found that we could adopt some other attractive 

features in this plan. We could have earnings sharing, 

dividing the contributions between husbands and wives, and 

therefore eliminating a lot of the inequities that exist, 

especially for women under the current system. 

We found that we could make as part of our plan 

the provision that dependents would inherit, or heirs would 

inherit the PRA of someone who died before reaching the 

retirement age provided that the PRA account is not needed 

to pay dependents benefits. 

We found that -- and this won't happen soon -- but 

on down the line for, perhaps, some of today's 20-yearsolds, and certainly for some of today's newborns that if 

their funds accumulate to the point where they can annuitize 

their promised benefits that we can allow them to take any 

excess funds in their accounts and use them for whatever 

personal reason they wanted to put them to, or to invest 

them at will. 

We relied upon a model developed under the 

supervision of Professor Tom Saving, a member of the 

commission to do some simulations. And one of the projects 

that we made was that today's 20-year-olds should be able to 

fund 52 percent of their promised benefits with these 

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accounts. Today's newborns should be able to fund twothirds of their promised benefits with the private accounts. 

These simulations assume some injection of 

infusion of funds from general revenues similar to the way 

that the Graham-Dominici plan worked. We assume that there 

is a larger capital stock due to the expanded PRA accounts, 

and that we would therefore have higher corporate income 

taxes because of this higher capital stock; and therefore we 

recapture some of this for social security; and therefore 

fund the deposits. 

We also assume very low administrative costs. And 

to get administrative costs low, we assume that social 

security does the record keeping, and even the depositing of 

the money in the accounts for small businesses. 

But we are perfectly happy to see larger companies 

that now have 401(k) plans make deposits directly if they 

are willing to bear the excess administrative costs. But we 

think administrative costs for the funds themselves ought to 

be kept to 20 basis points or .2 percent. 

Finally, we think this should be voluntary. But 

for those who stay within the current system, we think that 

the set of benefit reforms outlined in the Moynihan-Cary 

proposal, and several of the bipartisan proposals is 

appropriate. 

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And what that means is that we should go ahead and 

raise the retirement age in future years, adjust COLA 

payments, and make such other changes as were recommended 

for those who stay within the current system. But if you 

opt for the private account, if you are willing to have your 

funds invested, and pay as much as possible your own way, 

you are guaranteed all of the benefits under current law. 

Thank you. 

CHAIRPERSON PARSONS: Thank you, Mr. Goodman. Mr. 

Sherraden. 

by Michael Sherraden, Washington University of St. Louis 

DR. SHERRADEN: Thank you, Mr. Chairman, members 

of the commission, for inviting me to give this testimony. 

As you have requested, I will speak about assets and the 

poor with implications for individual accounts. I have 

spent a good part of the past 15 years thinking, studying, 

and writing about assets and people of low income. 

From the outset, I suspected that sooner or later 

this work would connect with a discussion about individual 

accounts and social security. Today is apparently that day. 

I am glad to have this opportunity to tell you what I have 

learned. 

Income support has been the signal idea of the 

welfare state of the 20th century. It is an industrial era 

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idea. The goal has been to support people when they did not 

have income from industrial labor markets. The primary form 

of income support for the non-poor has been social 

insurance, and for the poor it has been means tested 

transfers or welfare. 

As the members of this commission know very well, 

income-based policies comprised most of social policy, and 

social policy comprises most of federal spending. On 

reflection, it is remarkable that one idea has defined so 

much public policy. 

The world has changed considerably since incomebased policies were initiated to be sure people still 

require income security when they are not employed, but 

income alone is no longer enough. The labor market of the 

information age requires that people have resources to 

invest in themselves throughout their lifetimes. 

In effect, people will require greater control and 

flexibility of their own social policy decisions, far beyond 

retirement security. Also, policy should promote 

accumulation across generations so that more children begin 

life with at least some financial resources. Asset accounts 

are better suited for this. 

Although assets will be increasingly important for 

well-being, many Americans are asset poor. In 1998, two out 

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of five U.S. households had a total net worth minus their 

home equity of less than $5,000. Two out of five did not 

have enough liquid assets to live at the poverty level for 

three months. 

Racial differences in asset holding and net worth 

are great. The median net worth of whites versus AfricanAmericans is 11 to 1. As a comparison, the figures for 

median income are 1.6 to 1. The pattern is much the same 

between whites and hispanics. 

There is reason to believe that a shift to assetbased policy is underway. Around the world, it is uncommon 

to encounter a new or expanding system of social insurance, 

but very common to find a new or expanding policy based on 

asset accounts. 

In the United States, this can be seen in the 

introduction and growth of 401(k)'s, 403(b)'s, IRAs, Roth 

IRAs, the federal thrift savings plan, educational savings 

accounts, individual training accounts, college savings 

plans in the states, and proposed individual accounts and 

social security. 

Some of these are public, and some are called 

private. But it is important to bear in mind that the 

private sector plans are typically defined by public 

policies regulated by government and receive substantial 

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subsidies through the tax system. 

All of these asset based policies have been 

introduced in the United States since 1970. Overall, asset 

accounts for various purposes are the most rapidly growing 

form of domestic policy, and it seems likely that the shift 

to asset based policy will continue. 

Unfortunately, the shift to asset accounts is 

considerably more regressive than income based policies. 

The reasons are two-fold: 

• First, the poor do not participate in the asset 

based policies that currently exist; and 

• Second, asset based policies operate primarily 

through tax benefits or tax expenditures that benefit the 

poor little or not at all. 

In other words, asset based policies have the 

potential to exacerbate inequality, and indeed are doing so, 

because the poor are being left behind. To illustrate, in 

1999, two-thirds of tax benefits for pension accrue to the 

top 20 percent of households while only 2.1 percent went to 

the bottom 40 percent. 

As asset based policies are created, a major 

challenge will be to aim for inclusion. This is especially 

true for policies that purport to be universal. The goal 

should be to bring everyone into the system with adequate 

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resources in their accounts for social protections and 

household development. 

Recent innovations that match savings for low 

income and low wealth households such as individual 

development accounts are a step in this direction. IBAs 

demonstrate that the poor can save and benefit from 

progressive asset accumulation. 

The data show that poverty level IBA participants 

have saved on net $25 per month. These savings are matched 

at 2 to 1 on average, so the accumulation is about $75 per 

month, or about $900 per year. It is interesting to note 

that the saving amount in IDA programs is not statistically 

related to income. 

This is, perhaps, similar to how people save in 

401(k)'s. They save a certain amount each month because 

those are the rules and expectations. Many of the poor can 

do this if they have opportunity and incentive. 

Why not give the poor at least as much subsidy for 

saving as everyone else? 

The challenge is to incorporate this principal 

into the large-scale asset based policies that exist and the 

new ones that are being proposed. Social policy for the 

poor has been focused almost exclusively on income. The 

assumption is that income transfers will support a certain 

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level of consumption. This is a nobel and necessary goal, 

but it is not enough. 

Even for the vast majority of households, the 

pathway out of poverty is not through income and 

consumption, but through savings and accumulation. Simply 

stated, not many people manage to spend their way out of 

poverty. 

When people begin to accumulate assets, their 

thinking and behavior changes as well. Accumulating assets 

leads to important psychological and social effects that are 

not achieved in the same way or degree by receiving and 

spending an equivalent amount of regular income. 

These behavioral effects of asset accumulation are 

important for household well-being. They are likely to 

include more long-range planning, better care of property, 

increased learning about financial affairs, and increased 

social and political participation at the local level. 

To mention only a few examples from research: 

• There is convincing evidence that controlling 

for other factors, home ownership is associated with 

residential stability, maintenance and upkeep of the home, 

and social and political involvement in the community; 

• There is convincing evidence that controlling 

for other factors, home ownership and financial assets are 

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associated with marital stability and reduced domestic 

violence; 

• There is convincing evidence that controlling 

for other factors, home ownership and financial assets are 

associated with higher educational attainment in children. 

The appendix to my testimony provides a review of 

research on effects of assets. 

Based on the above information and perspectives, I 

recommend the following: 

The first policy priority should be to bring the 

poor into 401(k)'s, IRAs, state college savings plans, and 

all of the other tax advantaged asset based strategies that 

now benefit the non-poor but not the poor. Because they do 

not receive tax benefits, the poor should receive direct 

deposits into these assets accounts. 

The principle should be that public expenditures 

for asset accounts should benefit the poor at least equally 

in dollar terms. If a new policy system of individual 

accounts is to be created, it should be above and beyond the 

current contribution and benefit structure of social 

security. The reasons are three-fold: 

• First, social insurance provides important 

protections that cannot be replaced by individual accounts. 

The goal should be not to reduce social insurance but to 

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increase asset building. 

• Second, a good case can be made for saving an 

asset accumulation above and beyond the current social 

insurance structure. Household savings are low, and people 

save best in contractual savings systems. One can imagine 

American workers saving an additional two or more 

percentages of pay with progressive government subsidies. 

• Third, removing a portion of the current social 

security revenues will exacerbate the challenge of long-term 

financing. It is better to leave that system in place and 

build on top of it. If there are to be individual accounts 

carved out of the current social security, these accounts 

should be progressively funded. So far, no proposal has 

been adequate in this regard. 

The proposal for matched savings in H.R. 1793, 

that is Kobe and Stenholm, is very good. It is very good to 

see, because it highlights the importance of asset subsidies 

for the poor, but it is not nearly sufficient. The policy 

should include an initial deposit into the accounts of low 

paid workers and government matching funds beginning with 

the first dollar deposited. 

In conclusion, the United States and most other 

nations are likely to have expanding policies of individual 

accounts. The biggest issue before this commission is not 

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individual accounts outside of social security or within it. 

The biggest issue is whether the poor are included 

in these policies, and whether they have sufficient asset 

accumulations in their account for their social protection 

and household development. 

Taking the long view, I am reminded of Hugh 

Hecklo's observation of the welfare state of the 20th 

century. If there has been a direction of our century 

struggle, it seems to have been mainly a question of 

expanding presumptions of inclusive, of assuming that more 

people matter and they matter as equals. 

Trends at the beginning of the 21st century raise 

serious questions about inclusiveness. The pronounced shift 

toward asset based domestic policy in the United States has 

excluded the poor. If new asset based policy is being 

considered in relation to social security, the challenge 

will be to see that the poor matter as equals. 

This is not only about fairness, but about 

enabling all Americans to become stronger and more 

productive citizens. Thomas Jefferson was essentially 

correct about the positive effects of property holding. It 

is time to extend this vision to include the entire 

population. Thank you for considering my testimony. 

CHAIRPERSON PARSONS: Thank you, Mr. Sherraden. 

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All right. Tom, you wanted to kick it off. 

QUESTIONS AND ANSWERS 

DR. SAVING: I feel I ought to say something. 

Because although I appreciate very much the testimony here, 

and I found it very interesting, I often say that because 

Dr. Goodman used a model that I developed, I should 

disassociate myself. Because I had nothing to do with 

either preparing or doing any of the calculations in his 

testimony. 

I was afraid that there may be a misconception. 

He did not mean that to be a misconception, because he 

clearly specified that he had used a model that I had a part 

in writing some two years ago in doing these calculations. 

But I am not involved in any way in his testimony. 

CHAIRPERSON PARSONS: You have no questions about 

any of it either? John. 

DR. COGAN: Thank you, gentlemen, for coming. 

Question for Mr. Goodman. John, you and I both know that 

social security does not provide any guarantee right now, no 

legal guarantee, there is no economic guarantee, and you 

have proposed a new system. And you say that under the new 

system you would provide a guarantee. Can you tell me how 

you go about achieving that guarantee? 

DR. GOODMAN: I was not talking about a guarantee 

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different from the one that is in the current law. 

DR. COGAN: That's enough. Michael, can I ask you 

a question? 

You had intimated that under a proposal that you 

would favor, the government would continue to collect 

contributions for personal accounts, and that after a 

reconciliation then the government would somehow invest them 

for people, and if their accounts got big enough, then 

eventually individuals would be able to direct their own 

accounts to, or direct their own contributions to private 

fund managers. I think I have got it right. 

The question I have is why don't we just allow 

individuals to take their payroll tax contributions that 

they want to contribute to personal accounts, and if they 

have a fund manager that meets some specified criteria, and 

they have a fund that meets a specified criteria, why not 

let them invest those funds directly and not send them to 

the Internal Revenue Service? 

MR. TANNER: Actually, I would think that that 

would be the best alternative. And to the degree that you 

can build on existing structures for companies that have, 

for example, 401(k) programs, and so on, I think you should 

build on that. The problem exist primarily with small 

businesses that do not have such programs today who file 

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their social security statements primarily on paper. 

And you have this problem within the current 

system, whereby, the money is essentially deposited on a 

lump sum basis and not reconciled with the W-2's for some 

18 months after the money is collected. And if you are 

investing in a system in which you might have significant 

fluctuations if individual's accounts are not credited the 

day before the market goes up 200 points, people are going 

to be very unhappy. So, you have got to find some way to 

deal with that. 

I think for companies that have operations in 

place that can do that, you should let them do it. For 

those that do not there should be some sort of default 

system, perhaps, a money market fund, something that will 

hold that money until reconciliation takes place. 

Thereafter, I think people should be able to 

invest in as wide a range as possible if you decide that 

initially that is going to be only a few funds. I think 

certainly after people accumulate a significant amount of 

assets, they should be able to move beyond those few funds. 

I am concerned that as far as the efficiency of 

capital markets go, that directing all money into an index 

fund, or a small number of index funds does ont allow 

capital to go to where the market decides it is most 

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efficient, and that that over the long term could lead to 

distortions. 

You also do not want to end up in a situation such 

as the Canadian savings program just ended up in where they 

had a mandate that you had to invest in an index 

approximating the Toronto stock exchange. While as Nortel 

went up in value, it began to dominate the Toronto stock 

exchange. They ended up with about a third of their assets, 

or somewhere like that, in Nortel. 

As Nortel stock fell, they could not sell it. 

They were forbidden by law from unloading this stock, and 

they just had to watch it fall, and they lost some 

$800 million. So, I do not think you want to lock people 

into that sort of situation. 

DR. COGAN: Got it, got it. So, you would be in 

favor of allowing individuals immediately if they have a 

private pension fund that meets some governmental specified 

criteria to put their payroll --

MR. TANNER: Yes, it seems no reason to reinvent 

the wheel. If you have a system that works and you can 

piggyback on to it, I think that that is a very good move. 

DR. COGAN: Great, thank you. 

CHAIRPERSON PARSONS: Gwen. 

MS. KING: Yes, Dr. Sherraden, you radical, you. 

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I am fascinated by your recommendation to us, and I sort of 

want to make sure I understand it. You say the first policy 

priority should be to bring the poor into the asset system. 

Who are the poor, working poor? You did not say the 

working poor. Who are we talking about? 

DR. SHERRADEN: Well, I think it applies to 

everyone of low income. The current structure of asset 

accumulation policies is that the government assists with 

the accumulation through tax benefits. But for people with 

very low or no tax liabilities, then they are not eligible 

for these benefits. So, my suggestion would be that in 

those cases, the government make a direct deposit into 

similar accounts. 

MS. KING: Well, that was going to be my next 

question. But I am tracking with 401(k)'s, and you are in a 

401(k) if you work for someone. 

DR. SHERRADEN: Right. 

MS. KING: And so, that is how you gain access to 

the 401(k). 

DR. SHERRADEN: I am sorry to interrupt. You gain 

access to 401(k), but not to the tax benefit if you do not 

have a tax liability. 

MS. KING: So, where would the money come from to 

make the deposit into the accounts of the poor that you are 

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recommending be covered? 

DR. SHERRADEN: I think it should come from 

general revenues. 

MS. KING: General revenues. And would you also 

continue to keep the SSI program in tact? 

DR. SHERRADEN: Yes, I would not recommend cutting 

any of the income support programs. 

MS. KING: So this would be new revenues, yes? 

DR. SHERRADEN: Yes, and the reasoning is because 

in my interpretation, the tax benefits are large 

expenditures that are enormously regressive. It is not a 

matter of providing the poor with something that other 

people do not have. What I am suggesting is bringing the 

poor into a system of government subsidy that already 

exists. 

MS. KING: I see. Thank you very much. 

CHAIRPERSON PARSONS: Lee. 

MS. ABDNOR: Thank you. Thank you all for coming. 

Dr. Sherraden, if I could also direct my question to you. 

You made reference in your testimony about other positive 

effects of investment beyond financial security, positive 

effects of accumulating assets. 

Could you reference some of those for us, some of 

the secondary benefits? 

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DR. SHERRADEN: I have included an appendix to the 

testimony that reviews a fairly substantial amount of 

research. 

MS. ABDNOR: Can you mention what a few of those 

might be? 

DR. SHERRADEN: What the effects are? 

MS. ABDNOR: Yes. 

DR. SHERRADEN: Well, I did mention some on my 

testimony. The greatest knowledge that we have about this 

is in relation to home ownership. And it is very clear that 

home ownership has positive effects on people's stability, 

both their residential stability, and their marital 

stability. 

It has positive effects on how their children do 

in school, and with interactions with the law, and with 

pregnancies, as in teenage years. And this is statistically 

controlling for other factors such as income, and race, and 

age. These effects exist for home ownership. 

MS. ABDNOR: Thank you. 

CHAIRPERSON PARSONS: Olivia. 

DR. MITCHELL: I had a question for Mr. Sombrotto. 

In your capacity on the Thrift Savings Plan Advisory Board, 

I know that recently you have moved to adopt two additional 

investment options from the original three that have been 

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around for awhile. 

One of the investment options I do not see, and I 

am curious why not, is that of inflation protected bonds. 

It would seem to me that as people move into retirement that 

focus on inflation is a very legitimate concern. 

Is that something that you think could be 

incorporated as one of the investment options in the future? 

And how would you help us think about that in terms of 

modeling an individual account investment portfolio? 

MR. SOMBROTTO: Well, you hit the nail on the 

head. We are looking at a wide variety of investment 

instruments that members of the thrift savings plan can 

invest in. They can make those selections. And, as we go 

along -- when we started off we really only had three. We 

had the G Fund, which was the government fund, which was 

guaranteed by the full credit of the government; and then we 

had the C Fund which was for equities, and so on. 

So, yes, we continue to try to find a broader 

array of opportunities for folks to invest and have these 

opportunities to look at various investment instruments. 

DR. MITCHELL: But if I could just follow up on 

that. It would seem that, to me, at least, if you are 

talking about retirement security that inflation protected 

bonds could arguably come before small cap, or 

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international, or any other sorts of fairly narrow portfolio 

options; that is, inflation protected bonds will help 

protect consumption over the 20-30 plus years of retirement. 

I am just wondering why that is not on your plate right 

now. 

MR. SOMBROTTO: Well, because we already have the 

G Fund which is guaranteed. 

DR. MITCHELL: But they are not inflation 

protected. 

MR. SOMBROTTO: Well, no. In fact, I am a 

participant in a plan, and my money is not in equities, it 

is in the G Fund. I believe in government. I think there 

is a reason for it. I am a product of The Depression. I 

grew up in The Depression. 

I understood and still understand the effects of 

The Depression on society in our country, and we do not want 

to return to that kind of an era. Social security was a 

safety net back when Roosevelt thought of it. And we do not 

want, those of us that understand how important it is, do 

not want to see it tampered with and gambled with. 

DR. MITCHELL: No, but, with all due respect, the 

inflation protected bonds are government bonds. 

MR. SOMBROTTO: No, that is okay. 

DR. MITCHELL: Right, so I think we are on the 

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same page. 

MR. SOMBROTTO: I am not dismissing that. I am 

just saying that that will be a subject. See, there is 

-- we are the advisory board, and there is a commission that 

makes those decisions. It is headed by a CEO. In fact, I 

know that somebody here, Frank Cavanaugh, was the original 

CEO, and I had the opportunity to work with him. 

But what we do is then make recommendations after 

they give us a wide variety of options, and we look at them, 

and then we try to decide what is prudent and which is safe 

for the people, the folks that we represent. 

CHAIRPERSON PARSONS: Other questions. Tim. 

MR. PENNY: Just one quick question for Mr. 

Tanner, regarding the general fund transfer to take care of 

those who are currently in the system. Have you put a fence 

around that to define how many people for how long we 

provide that kind of a transfer? 

MR. TANNER: I do not think it is possible without 

knowing the size of the accounts, essentially, that you are 

going to create, the size of the carve-out, and how fast 

that is going to be phased in; and in addition to other 

projections in terms of the sizes, for example, future 

social security surpluses, so I cannot put a dollar amount 

on it. 

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What I can suggest is that in the long term it 

will be less general fund transfer than is necessary if you 

are going finance the current shortfall entirely for --- of 

the general fund. 

In any sense, what you have for the portion that 

you move to an individual account is that you are taking out 

revenue, but you are also reducing obligations. And, at 

the same time, you have people who have obligations and not 

the revenue. 

But, eventually, this cohort with obligations and 

no revenue will go away. People will eventually die and 

leave that cohort. This cohort goes on forever. At the 

same time, with the current system what you have is a system 

in which you have an unfunded liability and that cohort 

never goes away. 

The unfunded liability continues into infinity, so 

if you move -- whatever cost you have of making that 

transition it eventually goes away. There is no painless 

way of doing it, at least not painless for the politicians. 

But it is going to be less painful than doing nothing, 

absolutely. 

CHAIRPERSON PARSONS: Okay. Well, we are coming 

in just on time. We thank you, gentlemen. We appreciate 

your input. And we thank you, ladies and gentlemen, who 

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have joined us today to hear this. To sort of conclude 

where we started, every member of this commission is keenly 

aware that the events that have sort of overtaken our 

deliberations in our country over the last month. 

But we are, I think, to the woman and man, 

convinced that those events and our national response to 

them only highlight the importance of what we are trying to 

do here which is to figure out how to create a national 

social security system that current members can look at for 

the next hundred years and have confidence that the promises 

that that system offers for them in their retirement are 

promises that can be kept and will be kept. 

And, additionally, to echo something Mr. Sherraden 

said, a system that enables not just the maintenance of a 

certain level of income in their retirement years, but 

enables them to develop a certain level of wealth that they 

can, not only assure their own position within the economy, 

but perhaps even pass on to future generations. 

It is a big challenge, and it is a big challenge 

particularly at a time where other challenges are placing 

new and unanticipated demands on government revenues. But 

we appreciate the input of all of those who came today, and 

this panel in particular, in terms of helping us think it 

through. And we are going to do our best to try and come up 

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with as responsible a recommendation to the president as we 

can within the mandate we were given. 

Having said that, I will let you all know that the 

next meeting of the commission which will be under the 

appropriate federal sunshine laws, a public meeting, is on 

November 9th, probably here in Washington. We will put that 

on the website. We look forward to seeing those of you who 

maintain a current and ongoing interest in our deliberations 

at that time. We stand adjourned. 

(Whereupon, the meeting was adjourned at 2:29 

p.m.) 

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