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85–623 PDF 2003

S. HRG. 108–4

ANALYZING SOCIAL SECURITY:

GAO WEIGHS THE PRESIDENT’S COMMISSION’S

PROPOSALS

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

WASHINGTON, DC

JANUARY 15, 2003

Serial No. 108–1

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING

LARRY CRAIG, Idaho, Chairman

RICHARD SHELBY, Alabama

RICK SANTORUM, Pennsylvania

SUSAN COLLINS, Maine

MIKE ENZI, Wyoming

GORDON SMITH, Oregon

JAMES M. TALENT, Missouri

PETER G. FITZGERALD, Illinois

ORRIN G. HATCH, Utah

ELIZABETH DOLE, North Carolina

TED STEVENS, ALASKA

JOHN BREAUX, Louisiana, Ranking Member

HARRY REID, Nevada

HERB KOHL, Wisconsin

JAMES M. JEFFORDS, Vermont

RUSSELL D. FEINGOLD, Wisconsin

RON WYDEN, Oregon

BLANCHE L. LINCOLN, Arkansas

EVAN BAYH, Indiana

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

LUPE WISSEL, Staff Director

MICHELLE EASTON, Ranking Member Staff Director

(II)

C O N T E N T S

Page

Opening Statement of Senator John Breaux ......................................................... 1

Statement of Senator Larry Craig ......................................................................... 3

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

Washington, DC; accompanied by Barbara D. Bovbjerg, Director, Education,

Workforce, and Income Security Issues, U.S. GAO, Washington, DC ............. 5

APPENDIX

Prepared Statement of Senator Russ Feingold ..................................................... 55

(III)

(1)

ANALYZING SOCIAL SECURITY: GAO WEIGHS

THE PRESIDENT’S COMMISSION’S PROPOSALS

WEDNESDAY, JANUARY 15, 2003

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

The committee met, pursuant to notice, at 9:33 a.m., in room

SD–562, Dirksen Senate Office Building, Hon. John Breaux (chairman of the committee) presiding.

Present: Senators Breaux, Stabenow, Craig, and Talent.

The CHAIRMAN. The Senate Aging Committee will please come to

order.

Good morning, everyone. Welcome to the 108th Congress. I am

sure we will be joined by other members. I am delighted to have

my ranking member, Senator Larry Craig. I call him the crown

prince of chairs.

Senator CRAIG. Be careful with terms.

The CHAIRMAN. He is the chairman-in-waiting here, soon to be,

and we are very, very delighted to begin this year, I think, in the

same timeframe and in the same manner which we did last year,

in a cooperative fashion, which I think is so important particularly

on the questions of aging. There is really not a lot of difference in

how we approach these issues.

I also want to welcome our new member, Senator Talent. Welcome to the Aging Committee. We are delighted to have you on

board. A number of other members have requested to be members

of our Aging Committee and we are delighted to have them and we

will welcome them when they get to the meeting, and we look forward to working with them.

The purpose of our hearing this morning is really quite simple.

It is to hear the findings of the GAO study that we requested on

plans proposed by the President’s Commission on Social Security.

I had asked the GAO and our good colleague, David Walker, to

conduct this analysis really for one reason, to sort of call a timeout in some of the political rhetoric of the debate regarding Social

Security. We can have a number of groups come before the Aging

Committee and we will pretty much tell you what they are going

to say before they get here with regard to Social Security and what

should be done.

We wanted to try and get as much of a neutral recommendation

and review of the commission proposal as possible, and we could

think of no one better to conduct that review than the GAO. Of

course, that is the purpose of the hearing, is for them to present

this report.

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I believe we have actually taken a giant step backwards in the

Social Security reform debate in the past few years. Rather than

a discussion about the real reform that we need with the American

public, Social Security is once again becoming every politician’s favorite 30-second negative ad.

I was at a speech in Washington yesterday and mentioned that

I did not think that Social Security reform was going to happen

this year. I got folks saying, ‘‘Well, then why should we even have

a hearing this morning? ’’ The answer is that reform, while it may

be a long way off, rhetoric on Social Security is still here; it is now

and it is red hot.

It is not that Social Security isn’t getting enough attention; it is

that it gets too much of the wrong kind of attention. The truth is

simply that politicians and interest groups can’t talk enough about

Social Security, about protecting it and about saving it for future

generations, or too often about the other side, trying to destroy it

for our Nation’s seniors.

So if we are going to do all this talking, I thought we should at

least have a sort of non-partisan, objective voice in the mix. I might

add that finding a non-partisan voice on Social Security is almost

impossible. We are rapidly running out of interested parties who

are not firmly in one camp or the other.

I am still a firm believer that Congress must address entitlement

reform overall. The demographic changes in this country will soon

cause an extraordinary collision of financial pressures. I referred to

it yesterday as truly the perfect political storm.

Social Security and Medicare both are facing long-term insolvency. Medicaid, which is having to fill in for the lack of a longterm care system in this country, is already putting enormous pressure on State and Federal budgets. We have all heard time and

time again that unless we do something, entitlement spending will

crowd out dollars for other discretionary investments such as our

national security and education, just to mention two. If I know

Dave Walker, he will speak to these issues as well.

We truly are at a crossroads of either ducking and waiting for

that perfect storm to hit or actually preparing to face it. Today’s

hearing will hopefully give the American public a realistic reminder about the tough choices facing our Social Security system

for millions of Americans. It is such a critical program and it deserves better than what we have seen in recent times.

I want to thank once again Dave Walker and the terrific staff

that he has at GAO for the enormous amount of work that has

gone into the report that he has prepared for us this morning. We

look forward to hearing that report and asking questions.

I would like to recognize now my friend and chairman soon, soon

to be, Senator Craig.

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STATEMENT OF SENATOR LARRY CRAIG

Senator CRAIG. Well, Mr. Chairman, thank you very much. I am

here today because this was a hearing that the chairman had

begun to work on some time ago, prior to the election. If it had not

been, I would not be here.

I think it is important for the record to show that the transition

of power in a democratic society is being flawed at this moment;

that I should be the chairman, as should others, in a majority

party.

When the transition occurred some months ago, with the change

of a single member, that transition in this committee and others

came almost immediately, and that is the way it ought to be. But

because of the cooperative nature that the chairman and I have

worked under and will continue to work under for the benefit of

this committee, I am here today.

But it is very important that the record demonstrate that what

is going on in this Senate at this moment is historic and precedentsetting and it will be denied. I think that is fundamentally important.

But this committee will work in a cooperative vein because, as

I think the chairman laid out, the issues before it and the challenges in Aging America are critical and it is our opportunity, both

John Breaux’ and mine and Jim Talent’s and others’, to highlight

those in this committee, to challenge authorizing committees within the Congress to meet those kinds of demands.

Today before us is a GAO review about Social Security, and I too

welcome David Walker. Social Security, I think, has provided protection from financial uncertainty for generations of older Americans. However, America has changed dramatically over the past

decades and continues to change.

The U.S. economy, for example, has evolved from an industrialage workforce to an economy characterized more and more by information-age opportunities. America also faces unprecedented demographic changes, and it is in those changes that this committee has

an opportunity to highlight and bring to the forefront.

As a Nation, Americans are living longer than ever before. Birth

rates have stabilized to roughly replacement levels. The ratio of

workers paying into Social Security to those collecting Social Security benefits has declined from 5-to–1 in 1960 to 3.4-to–1 today.

The worker-to-beneficiary ratio is projected to decline to 2-to–1 by

2040.

Let us be clear. Current retirees and those nearly retirement age

will continue to receive their promised benefits. Let me repeat that.

There is not a Member of Congress, nor does the current system

deny current retirees and those nearing retirement age being allowed to continue to receive their promised benefits.

Those receiving benefits now and in the near future need not

fear losing their benefits. I think it is in that context that the

chairman challenged us this morning to be able to openly, honestly

and effectively review these programs that benefit our elderly, our

Aging in America, without the political demagoguery that has historically mounted around it.

The challenge calling out to this generation of leaders is how to

sustain Social Security beyond this generation of retirees without

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over-burdening our children and grandchildren with excessive

taxes on their labor or huge cuts in their retirement income.

We are here today to learn how best to provide a Social Security

program that is adequate and sustainable for the future. Our

charge is to develop a Social Security program that future generations can depend on.

On May 3, 2001, President Bush courageously established a Social Security Commission to study the future of our national retirement program. The President tasked this commission with the responsibility of developing models designed to strengthen Social Security.

The commission featured an impressive bipartisan group of experts. This group produced three models using different design features to show how each approach might address the twin issues of

benefit adequacy and sustainability.

So, Mr. Chairman, I too look forward to listening to the GAO’s

view of how the President’s commission meets these twin goals because they are the twin goals that remain the challenge.

Thank you very much.

The CHAIRMAN. Thank you, Senator Craig, and you point out the

great challenge facing us. We are challenged to fix Social Security

and we still haven’t even figured out how our committees are going

to meet. So that puts everything in perspective here.

Senator Talent, comments? Welcome to the committee. We are

glad to have you on board.

Senator TALENT. Thank you, Mr. Chairman. It is a pleasure to

be here. In the House, generally you don’t get to make opening

statements unless you are the chairman or the ranking member. So

while normally I probably wouldn’t, I think I will take advantage

of the opportunity at least on this one occasion.

The CHAIRMAN. One minute. [Laughter.]

Senator TALENT. Oh, the 1-minute rule. Thank you, Mr. Chairman. It is the first time I have ever served on a committee where

you say ‘‘Mr. Chairman’’ and two people turn around.

The CHAIRMAN. You should see what happens when you say ‘‘Mr.

President.’’ [Laughter.]

Senator TALENT. I would like to associate myself with the comments both of the chairman and the future chairman. I am also

frustrated with the slow pace of change in terms of reflecting the

last elections, and I hope that will be dealt with in the next day

or two.

I asked on this committee and am pleased to be here because I

think really what this committee is going to be dealing with today

and in the future are the most important issues that we are confronting.

If you just look at this issue on a very concrete basis today, if

you are a couple approximately my age and you are thinking about

your retirement and thinking about what kind of assets you are

going to have available and how much money you are going to need

to be able to sustain your quality of life, that $900 a month that

you ought to have a right to expect to get from Social Security is

very important.

Whether that is going to be there depends in large part on what

we do in the next few years. So I think this isn’t an issue where

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we can just afford to do nothing because politically it is hard to

bring it up. I think we do have to confront it. I think we need to

strengthen this system for current recipients and future recipients.

I congratulate the chairman on scheduling this hearing and I am

looking forward very much to what Mr. Walker has to say.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Talent, and we are glad to

have you on the committee.

David, you have heard our comments and now we are very

pleased to have you report on Social Security Reform: Analysis of

Reform Models Developed by the President’s Commission to

Strengthen Social Security. We are glad to see you back at the

committee. Welcome.

STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL, U.S. GENERAL ACCOUNTING OFFICE, WASHINGTON,

DC.; ACCOMPANIED BY BARBARA BOVBJERG, DIRECTOR,

EDUCATION, WORKFORCE, AND INCOME SECURITY ISSUES,

U.S. GENERAL ACCOUNTING OFFICE, WASHINGTON, DC

Mr. WALKER. Thank you, Senator Breaux, Senator Craig, Senator Talent. It is a pleasure to be here.

Senator Talent, congratulations on your victory and on joining

the world’s most prestigious deliberative body.

It is a pleasure to be here to talk about Social Security reform.

This is not the first time and I am sure it won’t be the last time

that I will talk about this, but I hope I don’t have to do it every

year during the balance of my tenure. I have only 11 years left and

I am hoping that the Senate and the House might act on comprehensive reform well in advance of the expiration of my term.

Since there are only three of you here, and I understand I am

the only witness, what I would like to do, Senator, is to go through

some background information and then talk about the results of

our study.

You have held up the report. This is the report that we are

issuing today. But as all of you know, we have done a lot of work

in this area over the past several years, and expect to do more in

analyzing various reform proposals as they come forth.

The CHAIRMAN. We have a pending request right now on voluntary versus mandatory private accounts that we are working

with you on.

Mr. WALKER. I believe you are correct, and we have other ones

that we are discussing with Senator Craig and others to do as well.

So our cup runneth over and we are looking forward to trying to

help to the extent that we can.

If I can, let’s go to the first slide. There are a few important

points that I think we have to lay out in an overall framework

before we get into this particular proposal. This represents projected cash-flows for the Social Security Trust Fund starting in

2002 moving forward.

Now, we hear a lot about the Social Security Trust Fund and we

hear a lot about the issue of trust fund solvency. But as we all

know, cash is key, and Social Security’s combined trust fund,

OASIS, which is old age and survivor’s insurance and DI, disability

insurance, turns a negative cash-flow in 2017. That is really the

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key date, not just 2041 when the trust fund becomes insolvent because we have liquidated all of the bonds that are in the trust

fund. So we really need to recognize that the sense of urgency is

a lot more immediate than many people realize.

Now, if you were to add on top of this Medicare’s cash-flow problems which are greater than Social Security, you will find they

begin at about the same timeframe and we see red as far as the

eye can see with a never-ending escalation, unless something is

done.

Looking back and over time until the present time it is important

to understand that in 1962 when John F. Kennedy was President,

continuing to 1982 when Ronald Reagan was President, and until

2002, with President George W. Bush, the composition of the budget has changed fundamentally.

In 1962, had you been in the Senate, you would have been able

to decide how 68 percent of the Federal budget was going to be

spent for that year. Last year, the Congress was able to decide how

37 percent of the Federal budget was going to be spent, and the

squeeze is getting tighter every year.

Now, if we can look forward, one of the things GAO has done for

about 10 years now is we have performed various long-range budget simulations. Now, this is important. This is not a projection. It

is a simulation and I will tell you what the key assumptions are.

As you know, the CBO is responsible for being the official budget

scorekeeper for the Congress. They do projections for 10 years. The

problem is that those are all based on cash-flows and the world

doesn’t end in 10 years. In fact, our biggest problems actually don’t

start until after 10 years. So, therefore, we believe it is important

to take a longer-term intergenerational view, in part not just because of Social Security, but Medicare and various other issues.

The blue line that goes horizontally across, this graphic represents Federal revenues as a percentage of the overall economy.

The left-axis is the percentage of GDP. So we assume that that

stays what it is under current law. We are not getting into the details about tax rates and tax preferences and all those issues, just

the relative share of the economy represented by Federal tax revenues.

Then if you look at the bars, the bars represent the composition

of Federal spending. In the year 2000, you see there was a gap.

The gap was what we used to call a surplus. In 2015, 2030, 2050,

you see what the future may hold if certain things happen: No. 1,

if the Social Security and Medicare trustees are correct that their

best estimate assumptions of what the spending on those programs

will be will come true. Historically, they have been a little bit optimistic. So in other words, it could be somewhat worse. I was a

trustee for Social Security and Medicare from 1990 to 1995, so I

have got firsthand experience dealing with these issues.

Second, if the economy grows at the rate that the CBO is expecting, which at the end of 10 years is 3.1-percent real GDP growth,

although this model assumes that it is affected by deficits and so

it goes down if you just leave it on auto pilot. It starts at 3.1 percent read GDP growth. If you don’t do anything, it is going to go

down. It could go up with other policies.

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Finally, if discretionary spending as a percentage of the economy

does not change; in other words, discretionary spending grows by

the rate of the economy, not by the rate of inflation, but the rate

of the economy. As you know, discretionary spending includes such

things as defense, homeland security, education programs, transportation, infrastructure, the judicial system of the Nation, some

things that arguably shouldn’t be discretionary because they are in

the Constitution, but nonetheless under our current system they

are.

So let’s just say that is not a scenario anybody wants. All the

more important why we need to be talking about this. This means

several things. One, we must have Social Security and Medicare reform, and we need it sooner rather than later.

Second, we also need to take a look at the base of Federal spending and other policies and programs to consider what should the

Government do, how should the Government do business, and who

should do the Government’s business in the 21st century. We need

to set new priorities because the numbers don’t add up. The status

quo is unacceptable. We have got to get on with the heavy lifting.

The next figure shows what happens just to Social Security,

Medicare and Medicaid spending as a percentage of GDP, given the

escalation that is expected. That is unsustainable, Senators. There

is no way we can sustain these escalating deficits and maintain

economic growth.

This shows why it is important to act sooner rather than later.

Basically, it says that if you look at early action, let’s say 2002 versus 2017 versus 2041, if you act in 2002 and all you did was adjust

benefits, you can see there would be a 13-percent across-the-board

adjustment necessary. I am not proposing that is what you do. Nobody is for that, but it gives you a sense of the relative order of

magnitude.

If you waited until 2017, you would have to adjust them by 16

percent. If you wait until the trust fund runs out, you would have

to adjust them by 31 percent across the board, at this time.

On the other hand, if you looked on the revenue side, you could

increase payroll taxes by 15 percent now, 22 percent in 2017, or 45

percent in 2076, as compared to current payroll tax levels, and you

would get the same job done. The problem is that these actions

would balance the system for only for 75 years and at the end of

75 years, we are still facing escalating deficits. So that is why we

talk about sustainable solvency.

The point here is not that you are going only to adjust benefits,

not that you are just going to look on the revenue side, but that

early action causes the miracle of compounding to work for you.

The miracle of compounding means that if you act earlier, the

amount of change you are going to have to make is much less dramatic and people have a lot more time to be able to adjust to that

change.

The last figure shows the three basic criteria that we used to

evaluate the proposal that I will talk about today and that we

evaluate all proposals on. First, financing sustainable solvency. It

is not just trust fund solvency; it is what percentage is this program as a percentage of the economy. Is it solvent and sustainable

in the year 2075 and beyond? The world won’t end in 10 years and

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it won’t end in 75, and therefore, we need to look for a longer horizon.

Second, balancing adequacy and equity in the benefit structure.

Are the benefits adequate and are they equitable from a variety of

different perspectives? Third, what about the issues of implementing and administering reforms? This is particularly important if

you are talking about individual accounts because that would be a

new ball game. It is more like a defined contribution plan.

By the way, I used to be Assistant Secretary of Labor for Pensions and Health, and so I have a lot of experience dealing with

pension and health issues in the private sector, and there are a lot

of analogies here, I think, that could be drawn with regard to potential reform proposals along the lines of the commission’s and

others.

So these are the real keys and the bottom line is that there are

tradeoffs. Every reform proposal is going to have pros and cons.

Every one is going to be able to be attacked on individual elements.

You need to look at reform proposals as a package and you need

to look at them as compared to at least two benchmarks.

First, you increase revenues. Second, you only cut benefits. Those

are the two extremes. I don’t think you are going to do either one.

I don’t think you are going to do either extreme and I wouldn’t recommend that you do either extreme, but those represent the extremes. The solution is someplace in between and may possibly involve individual accounts, which would add a new element.

But you need to be able to look at it both ways. Why do I say

that? Because, for example, all promised benefits aren’t funded, as

a result it is not fair just to look at a benchmark that is based just

on promised benefits because they are not all funded.

But, Congress could decide to fund promised benefits. That is

why you all are elected. I don’t have a vote, but hopefully I can

help you get to some of this information.

Now, if I can, Senators, I will now go to the commission’s proposals. We have applied our criteria to the commission models and

what I would respectfully suggest is that I focus on Model 2 because when you get right down to it, I think there is a fairly broadbased consensus that Model 2 is the one that is being discussed the

most. It is kind of like the three bears theory. One is too hard, one

is too soft, and the other one may or may not be just right. But

Model 2 is the one that I think people are focusing on as having

the most potential with regard to the commission’s proposals.

As you see, if you apply our criteria to the commission models,

especially Model 2, you are going to see there are tradeoffs. There

are tradeoffs between achieving sustainable solvency and maintaining adequate retirement income for current and future retirees.

They illustrate these tradeoffs that have to be part of this national

debate.

Now, as far as financing sustainable solvency, a few key points.

Overall, Model 2 would provide for sustainable solvency not just

during the 75 years, but also beyond the 75 years, and it would reduce the share of the Federal budget and the economy that are projected to be devoted to Social Security as compared to currently

scheduled benefits, regardless of how many individuals selected the

accounts.

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The CHAIRMAN. Could you give us sort of a synopsis of what

Model 2 does? I know you are talking about the effects. Could you

just structurally say what that recommendation is?

Mr. WALKER. I sure can, Mr. Chairman. I think that is important.

Senator TALENT. Mr. Chairman, if I could, I wonder since I am

new, if I just don’t understand a term he is using, would it be all

right if I just asked him to explain that so I can follow?

The CHAIRMAN. Sure.

Senator TALENT. Again, explain sustainable solvency. Do you

mean something that corrects the cash-flow problem? Is that what

you mean?

Mr. WALKER. We mean something that not only causes the trust

fund to be in actuarial balance for 75 years. It is in balance in year

75 and beyond, and it is sustainable as a percentage of the economy. That is basically it.

Senator TALENT. OK, so by ‘‘imbalance’’ you mean the money

coming in will be enough to pay the money going out that we promised?

Mr. WALKER. Through the end of 75, at the end of 75, and our

analysis also considers beyond 75.

Senator TALENT. The total volume of it is economically sustainable, in your judgment?

Mr. WALKER. Correct.

Senator TALENT. Those are the two things you mean by that?

Mr. WALKER. Right, and we have a more technical and detailed

definition in the material. I would be happy to speak with you separately, Senator, on these issues if you would like.

Senator TALENT. I follow what you are saying.

Mr. WALKER. In Model 2, there are several key elements. It provides for a defined benefit base, which is the form of the current

system. It does not propose to change benefits for anybody who is

55 or older today. That is something that Senator Craig talked

about. In other words, for people who are 55 and older today, it

does not propose to change their benefits.

For individuals who are younger than that, it proposes that

starting in the year 2009 they would have an opportunity to elect,

choose, if they so desire, to have a voluntary individual account of

up to 4 percent of taxable payroll, or $1,000 annually. If they

choose that, they are agreeing to certain benefit adjustments, as

compared to what they would otherwise get under the current defined benefit system. Namely, a benefit offset amount.

So they can choose the individual account in exchange for agreeing to certain benefit offset adjustments. In addition, the primary

general benefit adjustment would be that right now under Social

Security, in calculating your initial benefit when you retire, in

order to calculate that benefit, in indexing the amounts that you

earned during your working life, right now those amounts are indexed to real wage growth; in other words, not just inflation to

make the dollars comparable, but also increases in productivity, increases in standard of living.

So what this would propose is that rather than indexing the initial benefit that you get to real wage growth, which would include

again productivity increases and improvements in the standard of

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living, you would index to inflation. So you would calculate benefits

to maintain purchasing power, not for overall changes in the standard of living.

Now, as you know, right now the way that it works is once you

retire, benefits are indexed to inflation to maintain purchasing

power. There would be an enhanced benefit for low wage workers.

In addition, there would be a requirement for general fund transfers for about three decades to fund the transition obligation, which

is to fund the benefits already payable under the old system, along

with the individual accounts.

The CHAIRMAN. How much?

Mr. WALKER. About $2.2 trillion, but the unfunded obligation for

Social Security today for 75 years alone is about $3.4 trillion. So

one of the things we always have to keep in mind is you have to

start with where we are and how do things compare to where we

will be if we do nothing.

I know, Senator Craig, one of the things we are looking at is the

possibility of, what would happen if we waited until the trust fund

ran out of money. That is something that we can look at from an

analytical standpoint, but that raises major intergenerational and

timing issues. But you may want to consider that and debate it.

Senator CRAIG. David, in analyzing these models, though, did

you not in your evaluation make a couple of assumptions on baseline activity?

Mr. WALKER. On the baseline?

Senator CRAIG. Yes, as it relates to these are not analyses from

the status quo, the current status quo.

Mr. WALKER. Well, let me clarify. Basically, what they are is if

you look—let’s go back to the figure right before this one. We use

two benchmarks.

Senator CRAIG. Right.

Mr. WALKER. We believe you ought to have at least two. You

could add others, but for simplicity we just start with two. The left

one is a tax adjustment benchmark which says you increase payroll

taxes, and we are not recommending that, but increase payroll

taxes, or otherwise generate revenues of an equivalent amount,

starting in 2000 necessary to try to be able to deal with the funding over the next 75 years.

The tax adjustment is the blue and the benefit adjustment is the

yellow. Under the benefit adjustment, you would change benefits

across the board effective immediately. You are not going to do

that. So those are our two baseline assumptions.

Senator CRAIG. But I mean in going forward in analyzing these

models, those assumptions are built in there that action would

have taken place, are they not?

Mr. WALKER. That is correct.

Senator CRAIG. That Congress would raise taxes and cut benefits?

Mr. WALKER. These are two extremes. The solution is likely to

be somewhere in between. These are the two extreme benchmark.

Senator CRAIG. Politically, don’t assume we are going to do either

of those.

Mr. WALKER. No, I don’t, but on the other hand I think it is important to recognize that is what many people debate. Many people

11

say, ‘‘Well, gee, we need to deliver on our promised benefits.’’ Well,

if you are going to deliver on your promised benefits, that means

you have got to come up with the revenues. There are some other

people who say, ‘‘Well, you know, we need to live within our means

and we need to make sure we only pay what we have revenues for.’’ Well, OK, that is what this would do.

The scenario you are talking about, Senator Craig, I believe, the

so-called status quo scenario, would be theoretically as follows.

Once you starting turning negative cash-flow in 2017, you start

drawing on these Government bonds which are basically an unsecured promise to pay. They represent a first claim on future general revenues. They are not readily marketable.

You have got to either raise taxes, cut benefits, or do additional

public debt financing to pay them off, to turn them into cash. So

you do that until 2041, and in 2041 you are faced with either cutting benefits 31 percent or raising payroll tax revenues 45 percent.

Now, theoretically, you could say, ‘‘Well, we could slow down payments and pay everybody a hundred percent.’’ But, realistically,

that is a kiting scheme. I mean, you are not going to do that, and

so that is theoretically what the status quo is. I don’t think anybody would want that.

The CHAIRMAN. Well, give us your summary of Model 2, then, as

to what that recommendation consists of.

Mr. WALKER. As I mentioned Model 2 would provide for sustainable solvency not only for the 75 years, but beyond the 75. It would

require significant general fund transfers, but quite frankly virtually every proposal requires significant general fund transfers.

In addition, viewed from the perspective of the economy, the total

payments—Social Security is defined benefits, plus income from individual accounts as a percentage of GDP—would fall under Model

2 with universal account participation relative to both the baseline

extended and the tax increase benchmark. In 2075, the share of the

economy absorbed by payments to retirees from the Social Security

of the system as a whole would be roughly 20 percent lower than

the baseline extended or tax increase benchmark and roughly the

same as the benefit reduction benchmark.

As far as balancing adequacy and equity, the commission’s proposal illustrates that there are tradeoffs here in order to try to

achieve a plausible solution. Both models 2 and 3 protect benefits

for current and near-term retirees, and the shift to advanced funding could improve intergenerational equity.

However, under each of the models, some future retirees could

face potentially significant benefit reductions over the long term because of how you change the benefit formula. In Model 2, the initial

benefit is based upon earnings indexed to the cost of living rather

than by real wage growth.

Median benefits for those choosing individual accounts are always higher than those who do not choose the account, and that

gap grows over time. In other words, what this says for younger

people, in other words for people that are under 55, is take the deal

if it is offered. I mean, that is basically what it says based on our

probability analysis. As you know, you don’t know for certain because you don’t know exactly what investment returns are going to

do, but the probability analysis says you take the deal.

12

However, median monthly benefits received by those without accounts would fall below the benefit reduction benchmark. In other

words, those who don’t choose the accounts could end up being

worse off over the long term.

For the 20 percent of beneficiaries with the lowest income, the

median monthly benefits with universal participation in the accounts tend to be higher than benefits under the benefit reduction

benchmark. This is likely due to the enhanced benefit for low wage

workers. In other words, there is a minimum benefit provided in

here that is enhanced over current law, and so that is the primary

reason why that lowest 20 percent is in the aggregate better off.

Senator CRAIG. Both in Models 2 and 3, low-income and low-income disabled actually benefit.

Mr. WALKER. From this enhanced benefit. From my understanding, that is correct. Both Models 2 and 3 have that.

Senator CRAIG. More than under the current situation, is that

not correct, making these assumptions and this kind of reform?

Mr. WALKER. For median benefits, the answer is yes. For everybody, the answer is no. But most, yes.

Senator CRAIG. Correct.

Mr. WALKER. Regardless of whether an account is chosen under

Model 2, many people could receive monthly benefits that are higher than the benefit reduction benchmark. However, some could fare

worse. Some people could also receive a greater benefit than if you

just essentially raise payroll taxes or otherwise generate other revenues, general revenues, to meet today’s promise. Some could actually be better off than that.

Now, as far as implementing and administering reforms, there

would be a governing board that would be established in order to

administer the individual accounts that would decide which investment options would be available to individuals and that would provide various financial information to individuals.

The commission didn’t spend a whole lot of time trying to work

out the details. This would be a significant undertaking because

there is nothing of this size and magnitude anywhere in the world,

but intellectually and technologically it is possible to accomplish

with time and resources to get this done.

We do, however, believe that making the accounts voluntary ends

up increasing the complexity, and that furthermore even if you end

up having individual account options and can do it in an administratively feasible manner, which you can, it is going to be incredibly important to have a significant education campaign for individuals who would be involved in having to, one, make a choice, and

two, after having made a choice, if they decide to go with individual

accounts, how they should invest and what they should do once

they do that. The fact of the matter is that the dynamics of who

is bearing the risk are changed fundamentally, and therefore this

has to be recognized.

So in summary, Senators, I think it is important to know that

Social Security reform is part of a broader fiscal and economic challenge, that focusing on trust fund solvency alone is not sufficient.

In fact, it can be misleading to focus on trust fund solvency alone.

We need to put the program on a path of sustainable solvency.

13

Solving Social Security’s long-term financing problem is more important and complex than simply making the numbers add up. It

is a balancing of all these interests. Given the current projected financial shortfall in the program, it is important to compare proposals to at least two benchmarks, the two that we have used and possibly others, and we are obviously looking for continuous improvement on this.

The reform proposals should be evaluated as packages because if

you try to look at them on each individual element, you will get

ripped apart. Every individual element will get ripped apart. You

have to look at a proposal as a package and you need to look at

it as compared to these two benchmarks in order to put it in perspective. Acting sooner rather than later will clearly help you be

able to be successful here.

Last, let me just say—and I have said this for years, probably

10 years or more, since I was a trustee of Social Security and Medicare—it is possible to exceed the expectations of all generations of

Americans in connection with Social Security reform if you decide

to act.

Why? Because from a practical standpoint, current retirees and

near-term retirees aren’t going to be affected. They are going to get

what they have been promised. They fear they won’t. It wouldn’t

be fair not to deliver on the promise, and I would argue it wouldn’t

be politically feasible not to deliver on the promise.

But on the other hand, individuals such as myself, baby-boomers,

and my kids, generations X and Y, are already discounting what

they think they are going to get from Social Security because they

know that all the promises aren’t funded. Every survey and poll

will tell you that, and I have gone around the country as part of

public education campaigns over the last 10 years and you see that.

So, therefore, if you structure a reform proposal that leaves current and near-term retirees alone and that restructures the program with or without individual accounts—we can debate that, but

with or without them, that provides for more adjustments to

younger people, you can end up giving them more than they think

they are going to get and yet achieve all these objectives. I call that

win-win.

The bad news is the longer you wait, the tougher it is going to

be, and this is easy lifting compared to Medicare. This is real easy

lifting compared to Medicare. So it is important that we deal with

the easy lifting so we can get on with the tough work.

Thank you, Senators.

The CHAIRMAN. David, thank you very, very much for a very

clear and I think a very concise presentation.

I would say to our colleague, Senator Stabenow, we had asked

GAO to conduct this assessment of the various proposals of the

President’s commission. We have had a lot of the political groups

make their presentations on both sides of the issue. Guess what?

There were no surprises in what they said. So we were trying to

get someone from GAO who would be more neutral on this issue.

I think one thing is clear from the presentation and the graphics

that you have, David, that to me the twin problems of Social Security and Medicare are a greater threat to the economy of the

United States than the twin threats of Iraq and North Korea beVerDate 11-MAY-2000 11:34 Mar 31, 2003 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 C:\DOCS\85623.TXT SAGING1 PsN: SAGING1
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cause these threats affect not just this generation, but these affect

the next generation and the next generation and all Americans into

the future.

I mean, this is a huge threat to the economic security of the

United States, the twin problems of Medicare and Social Security.

The urgency of us beginning to address this, I think, is so graphically presented by your testimony that I would hope very much

that when the President presents the State of Union Address that

he addresses both of these, that he says what needs to be done on

Medicare and prescription drugs, and also Social Security reform

that is desperately needed.

Without leadership from all of us, this will not happen. I mean,

it is going to take the President, it is going to take Republicans,

it is going to take Democrats trying for just a moment to set aside

the harsh political rhetoric of these issues and the 30-second sound

bites which we have seen time and time again and try and work

for resolution. I really do hope that the White House addresses this

in the State of the Union. We are trying to buildup the record,

pointing out the urgency of this, and I think it is going to take that

leadership.

Let me ask, if I could, how close is Model 2 that you have discussed today to the type of program that I as a member of the Senate and the Thrift Savings Plan, and all of us here, all of these people behind me and 9 million other Federal workers have with regard to our retirement in terms of the voluntary nature of the private accounts that we have a chance to invest in, with regard to

how those accounts are managed? Can you give some discussion?

It seems that Model 2 is not so novel that it has never been tried

before. It seems very similar to what I have as a member of the

U.S. Senate.

Mr. WALKER. There are some similarities and some differences.

No. 1, Federal workers that were hired after 1983 had to come in

under the new Federal Employee Retirement System, which includes the Thrift Savings Plan.

There are some similarities to individuals who were hired before

that as well. They were given an option. They could elect whether

or not to stay under the old CSRS system or whether to go to the

new system. So there is a direct comparison, I think, that could be

made in that regard. It was a one-time election to make at that

point in time.

I will be able to provide more information for the record if you

would like. What we are talking about here is something very similar. Under Model 2, Individuals would be able to make a one-time

election whether or not they are going to do this or not, although

the relative amount of defined benefit under Model 2 is greater

than the relative amount of defined benefit under FERS. In addition, there is a minimum benefit guaranteed under Model 2.

The CHAIRMAN. We also can, I think, put up to 12 percent in.

Mr. WALKER. Yes, you can put a lot more money in TSP as a percent of pay.

The CHAIRMAN. Three times more.

Senator CRAIG. There is a difference, also. The base amount that

comes out for the retirement plan is fixed and the percentage that

15

we put into our 401(k) is voluntary above that as a percentage of

our retirement amount that goes into the retirement fund.

Mr. WALKER. That is correct. You can put a lot more money in.

That is correct.

Senator CRAIG. I assume in Model 2, when you say ‘‘4 percent

of,’’ you are talking about 4 percent of the payroll tax.

Mr. WALKER. Four percent of taxable payroll, correct, up to $1,000, as I recall. So it is less money on a relative basis than you

can do in the Federal TSP.

Senator CRAIG. Taxable payroll or percentage of the tax that is

paid in?

Mr. WALKER. It is 4 percent of that person’s taxable payroll. If

I was making $40,000 a year, it is 4 percent of that, up to $1,000.

Senator CRAIG. I was wrong in that assumption, then. I thought

it was a percentage of the total already coming in.

Mr. WALKER. That is not my understanding; 4 percentage points

of the 12.4, with a maximum of $1,000.

Senator CRAIG. Then I was right, OK, thank you.

Mr. WALKER. So, therefore, we are saying the same thing. The

fact is it is very similar, but the amounts involved are different.

For Social Security, under Model 2, you would continue to have

much more of a defined benefit element than defined contribution.

The Federal Thrift Savings Plan provides much more of a defined

contribution.

Another similarity, and then I will respond to any more questions, is under the Federal Thrift Savings Plan you have a board

that oversees it. They provide several mutual fund options that are

managed by the private sector, which shares are voted not by Government employees but by private sector investment managers.

They maintain individual accounts, and so there are a lot of analogies.

The CHAIRMAN. Those accounts would be inheritable?

Mr. WALKER. Yes.

The CHAIRMAN. The children and grandchildren of the employee?

Mr. WALKER. Yes, so you could have a sizeable pre-retirement

benefit which you don’t have now under Social Security.

The CHAIRMAN. Let me wind up my questions with this. I have

seen the rhetoric on both sides on this issue and I have seen some

that have argued, look, if we compare the idea of an individual account to the Enron debacle and scandal, how would that type of calamity be protected against in Model 2?

I mean, I think the obvious way is you don’t put your money in

one single account and one single company. It is diversified. But

can you elaborate on how that type of calamity could be prevented

under the structure that they are recommending?

Also, I remember the numbers say that we have never had a negative 20-year period of market returns in the history of this country. Most people not just one year for their retirement, but probably an average of 20 years, plus. Give me a little bit of discussion

on that.

Mr. WALKER. Well, first, it is envisioned that there would be several investment choices and that each of those investment choices

would be collective investment pools. In other words, you would

have an investment in a mutual fund where you own a piece of a

16

broadly diversified fund. That is what the Federal Thrift Savings

Plan——

The CHAIRMAN. We have five accounts we can choose from.

Mr. WALKER. Right. It is not anticipated that you would be able

to buy the stock of any particular company, nor would you be able

to buy the bonds of any particular company. So therefore you manage risk through diversification between asset classes, and diversification within asset classes.

Then, second, obviously you have an investment horizon that covers a number of different years. Depending upon what your age is,

you may want to change what your investment strategy is in order

to reduce the potential volatility or variation in return the closer

you get to retirement or once you are in retirement.

So you have broad-based diversification between classes, within

classes, and that should help to moderate risk. It doesn’t eliminate

it, but it helps to moderate it.

The CHAIRMAN. Senator Craig, then Senator Stabenow.

Senator CRAIG. Well, David, I have already asked several of the

questions that I had planned to ask. But in your testimony, you do

make a couple of assumptions and I want to make sure those are

clear for the record.

You talk about general fund contributions or participation in all

of this. You make that statement under what assumptions? No. 1,

that there would not be a tax increase to fund current promises

and benefits, a Social Security tax, or is it an offset to the 4 percent

that would be coming out to the individual accounts?

Explain general fund contribution because right now I am under

the assumption that the payroll tax is taking care of Social Security and there is no general fund contribution.

Mr. WALKER. There is a very small amount of general fund contribution right now. As you know, there are certain Social Security

benefits that are subject to individual income tax. The income tax

associated with that goes into the Social Security Trust Fund. That

is a general revenue fund.

Senator CRAIG. I see.

Mr. WALKER. But it is not significant.

Senator CRAIG. But that is not what you were meaning here?

Mr. WALKER. No, it is not. Let me clarify what I was meaning.

What I was meaning is in order to make this program sustainable

and solvent over the long term, and yet try to have a program that

has reasonable adequacy and equity, you are going to have to come

up with money somehow.

Now, how you come up with the money—you could increase the

payroll tax, you could use general revenue, or whatever. Every proposal that I am aware of but one provides for general revenue

funding. The question is how much and when you get general revenue funding.

Model 2 assumes about $2.2 trillion in general revenue funding

over about three decades.

The CHAIRMAN. How much over ten?

Mr. WALKER. I will have to find out and provide it for the record,

Senator.

The CHAIRMAN. It was about $1 trillion. Is it still about that?

17

Mr. WALKER. I think that is correct, but I would be happy to provide it for the record. I wouldn’t want to shoot from the hip on that.

But again I think it is important to look beyond ten. I think one

of the problems we have is that we look at ten, but our real problems don’t start until after ten because the baby-boomers don’t

really start retiring in big numbers until after ten. So we are deluding ourselves, I think, if we just look at ten.

It is kind of like the flat earth theory. In our budget, we have

a flat earth theory. It is like everything is going to end in ten. Well,

Columbus showed us the earth isn’t flat, it is round, and so we

have got this huge tidal wave right beyond the 10 years that we

have got to deal with.

Senator CRAIG. Columbus did it on deficit, too, remember.

[Laughter.]

Mr. WALKER. Right. I know you are big on trying to keep the deficit under control and eventually eliminating the deficit.

The CHAIRMAN. A new Republican theory, keeping it under control.

Senator CRAIG. Well, we are just following our leader.

Mr. WALKER. We are talking about how do you end up financing

whatever gap, and most people are not proposing a payroll tax increase because that is the most regressive tax that we have. So

most people don’t believe that that makes a lot of sense. If you are

not going to do a payroll tax, well, then what else are you going

to do?

Now, some people are proposing to eliminate the payroll tax cap

for Social Security. In other words, right now you only pay 12.4

percent, the combined employer and individual total up to a certain

level. Some people are proposing that everybody should have to pay

Social Security payroll taxes that on every dime of earned income.

That obviously would be somewhat controversial. That is the only

proposal that I know of that does not require general revenue

transfers. Every other one does.

Senator CRAIG. Again, in examining the models, I still don’t quite

understand. I know you have not put the figures to it in the sense

of just a broad analysis, but you are not assuming status quo?

Mr. WALKER. No.

Senator CRAIG. You are assuming some adjustments in benefits

and revenue?

Mr. WALKER. Yes. Our two benchmarks are, simply stated, in

2002 you either adjust income to meet benefit payments as projected or you adjust benefits to meet income availability. But you

do it up front; you don’t wait until the trust fund is out of money.

We are going to do an analysis of that for you.

Senator CRAIG. In 2002, by this analysis, it is an either/or or

both, 15 and 13?

Mr. WALKER. No. It is either/or. So if all you did was just adjust

benefits in 2002, that is what it would be, and that would be for

everybody. You could decide, for example, let’s leave persons 55

and over alone. So it would be zero for them, but you would have

to adjust a lot more than 13 percent, obviously, for people under

55. Then you get another notch, maybe, situation for some people.

18

Senator CRAIG. That begins to resolve that original chart where,

at 2017, you went from surplus to deficit, is that not correct? That

is what you are saying?

Mr. WALKER. That is correct. That was the negative cash-flow

date.

Senator CRAIG. That shoves that back, then?

Mr. WALKER. It does, it does. As I said, ‘‘We have got one that

adds Medicare.’’ That will get your attention.

Senator CRAIG. Do you have it with you?

Mr. WALKER. We have one that adds Medicare to that and, believe me, it is a sobering chart.

Do we have it with us? We will provide it to you this afternoon,

Senator.

Senator CRAIG. We would like to see that.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Stabenow, and then Senator Talent.

Senator STABENOW. Thank you, Mr. Chairman, and thank you

for holding this hearing on this very important topic.

Mr. Walker, thank you for joining us. I have deep concerns about

this proposal, and your comments it just reemphasize the concerns

that I have.

First of all, when we look at these charts, it is one of the reasons

that many of us on the Budget Committee last year at a time when

we were projecting $5.6 trillion in surpluses, suggested that one of

the most responsible things that we could do for ourselves and for

our children, grandchildren and on to the future would be to prefund Social Security, put dollars into that rather than doing the tax

cut that was proposed, the supply side tax cut over a 10-year period reducing revenue.

So I share your concern about these numbers, and understand

what happens with Social Security and Medicare as we go, and

think we have a very important challenge in being responsible.

Given that, though, when I look at these numbers, I am concerned that the commission at this point has not identified exactly

how to come up with the dollars that you are talking about. We are

talking about the need for more dollars to go in the system, and

this is the transitional cost if we are going to a system that involves private accounts.

You were saying, ‘‘Over a 30-year period, $2.2 trillion, or over a

75-year period, $3.4 trillion.’’ Then your comments just a moment

ago, it sounds like you are assuming that in 2002 all of this would

be predicated on a payroll tax increase or benefit cuts. It seems to

me that is what you are suggesting at this point in time, or some

other general fund transfer. Would that be correct?

Mr. WALKER. Well, we are not suggesting a payroll tax increase

or benefit cut. We are doing that for illustrative purposes just to

give you a sense of the magnitude of the charges that are needed.

Senator STABENOW. I understand.

Mr. WALKER. But every proposal that I am aware of, Senator

Stabenow, other than the one that comes from the House that proposed eliminating the cap on payroll taxes—in other words, what

wages are subject to payroll taxes—every one assumes general revenue transfers.

19

I would argue that if you want to deliver on the promises that

have been made right now, and if you don’t want to raise the payroll tax, then ultimately you are going to have to do general revenue transfers under the status quo.

Senator STABENOW. So just to put it in perspective—and this is

where we are now when we look at the numbers on deficits, and

so on, based on decisions that we have made to this point—now we

have in front of us another proposal for somewhere between $600

billion and $1 trillion, depending on how you figure the interest

costs, of additional tax cuts.

Again, we could argue fairness on who receives those, but looking

at the overall numbers, we are looking at deficits as far as the eye

can see. We are looking at another round of tax cuts, and yet at

the same time you are warning us, and I believe correctly, that the

biggest challenge that we have to the economy and to the Federal

budget is Social Security and Medicare, and that it, in fact, will require, as you have said, ‘‘Significant general fund transfers whether we go with the current system or with a new system.’’ Certainly,

with a new system, as I understand it, it is even greater transfers

because of the costs of going to a new system.

Mr. WALKER. I am not recommending any proposal. I am trying

to be an honest broker here and there are a lot of proposals out

there.

Under current law, if you were just to let the trust fund run out

of money and then fill up the gap between 2041 and 2075, the discounted present value of that today is $3.4 trillion. You wouldn’t

have to start paying it until the trust fund runs out, but you would

have to have $3.4 trillion today invested at Treasury rates to close

the gap.

Senator STABENOW. I understand.

Mr. WALKER. Under Model 2, it is $2.2 trillion. So both of them

cost money. It is a matter of how much and when, and then to the

extent there is a difference, then how did you make up that difference. Did you adjust benefits? Did you get additional rate of return on investments? That is really what it comes down to.

Senator STABENOW. So Model 2, if I understand correctly, then,

would involve some changing of revenue coming in—i.e. payroll tax

increase—or benefit cuts to offset some of that cost?

Mr. WALKER. Model 2 would leave everybody who is 55 today, as

I understand it, alone. For people who are under 55 today who

chose to go with the individual account—they don’t have to go with

the individual account. If they chose to go with the individual account, their defined benefit would be reduced by an offset amount

because they are getting part of their payroll taxes for this individual account, and so that is part of what they are paying. In other

words, that is part of making up the difference between the 3.4 and

the 2.2.

Now, one of the differences is if you went with Model 2, it means

that the money that you are going to have to raise is going to have

to come quicker because right now under the status quo, let the

trust fund run out, you don’t have to raise it until further on out.

On the other hand, if you go with Model 2 or anything like Model

2 that has individual accounts, you are going to have to raise the

money quicker because you have to pay the promised benefits to

20

current retirees and near-term retirees and start funding these individual accounts.

Senator STABENOW. So the pressure, in other words, under Model

2 with individual accounts is dollars sooner in some way, decisions

having to be made, general fund transfer, payroll tax increase, benefit cuts, or some kind of combination of those, then?

Mr. WALKER. That is correct. It is the timing and the magnitude.

Let me say for the record to clarify one thing that I may have

misspoke on, everybody’s defined benefit formula changes under

Model 2. There is just an additional offset for the ones that choose

the individual accounts. Model 2 also proposes an across-the-board

benefit formula change, to set the record straight.

Senator STABENOW. Mr. Chairman, just one more point, if I

might.

The other concern that I have—and I am very concerned about

what we are talking about in terms of the dollars and how we

would pay for this in the context of the current budget and the

economy, and so on. The second issue, though, that I think is important for all of us to understand—and you have said this; you

said the dynamics of who is bearing the risk are fundamentally

changed.

So in the current system, Social Security is a base, a foundation.

We then add to our accounts on top of that, 401(k)s or other kinds

of investments that we all do, and that is on top of that. I know

that the folks, for instance, at Enron that had come in said thank

goodness for Social Security because it at least was there as a foundation for them when everything else went bad.

One of my major concerns relates to that, that we are changing

the fundamental risk, fundamentally changing a policy that has

been in place in this country now for many, many years.

I had one example brought to my attention from a grandmother

of a young woman who is a junior at Michigan State University,

my alma mater, who had invested in what is called the Michigan

Educational Trust, which is an investment program that accepts

tax-deductible contributions, and so on.

In Michigan, she was lucky because the Michigan trust fund invests primarily in bonds and so it was not affected by the latest

stock market situation. But she indicated that in looking at other

States that had up to 60 percent of their fund revenue in the stock

market, they lost a great deal of money and their ability to send

their children to college.

So it has a direct relationship when we are investing and what

happens in terms of the ability to send our children to college if it

is a college fund, or the ability to prepare for retirement, and so

on. Fundamentally, under the proposal that includes private accounts, that risk is shifted to the individual as opposed to a fundamentally defined benefit program that serves as a floor or a

foundation for retirement for individuals.

Mr. WALKER. That is correct, Senator. Can I respond real quickly?

First, the risk is shifted, you are correct, between a defined benefit plan and a defined contribution plan. By definition, individual

accounts are defined contribution arrangements. I think it is imVerDate 11-MAY-2000 11:34 Mar 31, 2003 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 C:\DOCS\85623.TXT SAGING1 PsN: SAGING1
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portant to note that right now the investment risk is borne to some

extent by the taxpayers of the United States broadly.

The nature of the investment risk would be that it would shift

from the taxpayers broadly to individuals involved. Not all the benefit because let’s keep in mind that under every proposal that I

have seen here there would be a base defined benefit, just as you

have in many cases in the private sector.

A portion of the risk would be shifted to the individual, but the

individual would make a choice as to whether or not they want to

assume that risk. It would not be thrust upon them. They could

say, ‘‘Yes, I want to assume that risk or, no, I don’t want to assume

that risk, and that would be their choice.’’ Furthermore, as I understand Model 2—and again I am not a

proponent for any plan—as I understand Model 2, there is also a

minimum benefit guarantee which is not there under current law;

that for the bottom 20 percent, the lowest income 20 percent, it is

obviously helpful because it is not there right now.

Senator STABENOW. Thank you very much.

The CHAIRMAN. Thank you.

I was just noticing, having the discussion with you on the various

rates of return, over the period 1992 to 2001, looking at what we

have as Senators, the G Fund, which is the bond fund only, as I

understand it—the rate of return has been about plus 6.5 percent.

The C Fund, which is basically the market, even with the bad

years of 2000 and 2001—over that 10-year period, our rate of return for those who chose voluntarily to go into the market, has

been almost a 13-percent return, 12.9 percent. So that is an average-out, so that is really significant.

Senator TALENT.

Senator TALENT. Thank you, Mr. Chairman.

Mr. Walker, I want to make certain what I understood to be a

predicate, what you said at the beginning. Did I understand you to

be saying that the current system, at the current tax and benefit

levels, is actuarily mathematically impossible? Is that correct?

Mr. WALKER. It is not in actuarial balance. It is not solvent in

the long term, it is not sustainable in the long term. The difference

between the projected revenues and the projected expenditures

over 75 years alone, not beyond that—the discounted present value of that difference is $3.4 trillion as of the end of fiscal 2001. That

gives credit to the bonds that are in the trust fund which don’t

have economic significance.

Senator TALENT. It is actuarily impossible, it is mathematical impossible?

Mr. WALKER. Well, the numbers don’t add up.

Senator TALENT. It is not sustainable. It is like a Ponzi game is

not sustainable, right?

Mr. WALKER. Ponzi schemes aren’t sustainable. I am not equating this to a Ponzi scheme.

Senator TALENT. Well, I understand, but I mean in the sense

that it is not sustainable, right, long term?

Mr. WALKER. It is not sustainable, correct.

Senator TALENT. Are you certain about that? Couldn’t you make

different assumptions about the productivity of the American economy? Let’s say there was another information revolution, maybe,

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that came along and all of a sudden workers became ten times

more—I mean, is that the kind of thing it would take to make the

current system safe for our people?

Mr. WALKER. Well, in fact, having been a trustee myself for 5

years, the trustees every year do 75-year projections and they assume three sets of assumptions: high-cost, low-cost, best estimate

or the so-called intermediate assumption. Ours are based upon the

best estimate, or intermediate set of assumptions.

Under the low-cost assumptions, which assumes very positive assumptions across the board not just with regard to economic

growth, but also with regard to immigration, also with regard to

birth rates, also with regard to a whole variety of things—under

that, it says we don’t really have a problem. Now, I don’t know

anybody who believes that.

Senator TALENT. OK.

Mr. WALKER. I think the other thing is that even if we were to

have a new paradigm shift with regard to economic growth and be

able to grow which would really help the situation, to grow faster

than this has assumed—that would clearly help. I would, however,

respectfully suggest that when you look at our aggregate fiscal

challenge, you are not going to grow your way out of that challenge.

The imbalance, when you look at Social Security, Medicare, Medicaid—you are not going to grow your way out of that problem. Additional growth that can help, but you are going to have to make

some tough choices.

Senator TALENT. I am pushing you on this because this is an important predicate for even taking this issue on for me. I have no

ideological axe to grind in this. I have no desire to change the system unless we need to, but what I hear you telling me is we are

like in the position of somebody who is standing in the middle of

a highway and a big truck is coming down the highway and if we

don’t move, the truck is going to hit us.

I would just say, Senator Stabenow, that is how I view this. I

know there are risks to moving. I mean, maybe you will sprain

your ankle in the ditch if you move. But if you are correct, there

is no chance about what is going to happen if you stay there; you

are going to get run over.

Is that your perception essentially of where we are at with this

thing?

Mr. WALKER. You have got to act. You don’t have a choice. The

question is when are you going to act and how are you going to act.

This is a truck, but Medicare is a much bigger truck. Medicare is

a freight train coming.

Senator TALENT. It is a train.

The CHAIRMAN. You could jump in a ditch full of alligators,

which may not be a good idea.

Senator STABENOW. Would my colleague yield for just a moment?

Senator TALENT. Yes, sure, I would be happy.

Senator STABENOW. There is no question that we have a big hole.

I think the first thing is to stop digging, which is a major issue

around here because we just keep digging the hole bigger by the

tax proposals that come forward, and so on. So we are just making

it bigger.

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But there is a significant difference between shoring up Social

Security, the current system, and transferring to another system

that involves keeping the current system and transferring to private accounts. My concern is, for instance, when we look at what

Mr. Walker has indicated, the $2.2 trillion in transfer costs, that,

as I understand it, includes a benefit cut. So I think we just need

to be clear on that, that there are major tradeoffs here.

Senator TALENT. If I could just reclaim my time, I understand

that. There is an area here where it just seems to me, regardless

of what we think of tax cuts versus tax increases or this or that

or the other thing, there is a quite appealing, perhaps narrow area

where we may all be able to agree.

For example, you were mentioning before that we are going to

have to have general fund transfers under Model 2. But if indeed

it is true that no matter what we do, we are going to have to have

general fund transfers and if we don’t do Model 2 the general fund

transfers are going to have to be even greater, then while we can

all concede we don’t like the idea of general fund transfers, let’s at

least do the model that lets us have the lowest general fund transfers.

Do you see what I am getting at?

Senator STABENOW. I might just say that Model 2, though, includes a benefit cut. So I think that is important.

Senator TALENT. Reclaiming my time again, if we don’t do Model

2, I mean what I hear Mr. Walker saying is we are going to have

to have either much bigger benefit cuts or very substantial tax increases on everybody. I don’t think anybody here really wants either one of those two things.

I really would like to get with the chairman to talk about some

kind of common ground so we can agree. You know, we are going

to disagree about things like how we create prosperity, but regardless of what we feel about that, there may be some proposals that

we can all agree on, and that is kind of what I would like to get

at and I hear you maybe trying to move us a little bit in that direction.

Let me ask one other thing, though, about Model 2. As I understand it, because of the floors that we establish, low-income workers and disabled workers, the neediest, are better off under your

assumptions about Model 2. Is that correct?

Mr. WALKER. Low-income, the bottom 20 percent, most are better

off, not all, than the——

The CHAIRMAN. Why don’t you just pull her up to the table and

she can help you explain?

Mr. WALKER. We are drilling down deep now.

The CHAIRMAN. Go ahead, and just mention your name.

Ms. BOVBJERG. I am sorry to interrupt. I am Barbara Bovbjerg.

I am Director of Education, Workforce——

The CHAIRMAN. You are not interrupting. Mr. Walker is happy

to have you.

Ms. BOVBJERG. I am Barbara Bovbjerg. I am Director of Education, Workforce, and Income Security.

We did look at these two polar benchmark and when we compared those, most of the lower earners and the lower-earner disabled come out better than under the benefit reduction benchmark.

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Some, not a lot, not the majority—some will come out better than

the tax increase benchmark which is essentially equivalent to currently scheduled benefits.

Senator TALENT. Thank you, Mr. Chairman.

The CHAIRMAN. Let me go ahead. I have a couple of questions

and then I will recognize everybody again for a second round.

On page 26, David, you are talking about your analysis of Model

2 shows that median monthly benefits for those choosing individual

accounts are always higher than for those who do not choose the

accounts, and the gap grows over time.

Then in the next paragraph you say for the lowest quintile of

beneficiaries, median monthly benefits with universal participation

in accounts tend to be higher than the benefits received under the

benefit reduction benchmark.

Tell me what that means so that I can perhaps understand it a

little bit better. Are you saying that the median monthly benefits

for people choosing individual accounts are always going to be

higher? I mean, that is what I read it as saying. It is on page 26

in my earlier copy. I don’t know if it is the same in the book.

Ms. BOVBJERG. That is true because the people who do not select

the accounts only have the benefits that are being reduced by the

change from wage to price indexing. The people who select the accounts, while the account income is offset with the defined benefit

portion, still will generally do better. That increases over time with

the different cohorts.

We looked at three different cohorts, those born in 1955, 1970

and 1985, and because the 1985 cohort would have the longer time

with both the defined benefit reduction and the individual account,

you can see that that disparity widens.

Mr. WALKER. It is because of compounding, basically.

The CHAIRMAN. The point of the projection on whether individual

accounts work is a projection on what the markets are going to be

doing, which is sort of anybody’s guess, but we have a track record.

I mean, we have a track record ever since we have had a market,

and we had a track record which I just read over the last 10 years

for the Thrift Savings Plan that we have showing what the combination of investment in stocks have done over the last 10 years.

So tell us a little bit about how GAO went about creating a

model that gave us some idea of what these individual accounts

would generate because people always use the argument, well, if

the market collapses, you are not going to have any retirement left.

So how did you project this? Give me a little bit more about the

protections involved.

Mr. WALKER. What we tried to do in order to assure consistency,

and also in order to be able to assure that we weren’t in the business of coming up with new assumptions that are, GAO assumptions, is we used the same assumptions that the Social Security actuaries use for the different analysis that they do.

If you look at page 66 of the report, 6.3 percent for Treasuries,

6.8 percent for corporate bonds, and 10 percent for equities over

time. Those are the assumptions, and that is consistent with the

Social Security actuaries.

The CHAIRMAN. Senator Craig, do you have any follow-up, or

Senator Stabenow after Senator Craig?

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Senator CRAIG. Well, I don’t have any additional questions. A

couple of observations.

First of all, David, thank you very much, and your troupe, for

being here and the work you are doing. As we thrust these things

upon you to analyze, we are all going to work to build a record

here.

But I am sitting here looking at that chart and I refer, Senator

Stabenow, to it because that is what David went through before we

began to look at different models. The reality is right there. We

should cut benefits 13 percent this year or raise taxes 15 percent

to sustain outward, or by 2017 we should a 16-percent benefit cut

or a 22-percent increase in payroll tax, or by 2041 we should do a

31-percent benefit cut or a 45-percent payroll increase.

That is the reality upon us based on current assumptions, current projections. That is what we have all been looking at for a

time. I am not one that is going to saddle my grandchildren in a

huge payroll tax increase. At the same time, I am going to want

them, because they are very dynamic people, to go to their computer and pull up their account and make some assumptions and

know what they are dealing with, as other countries have taught

or educated their people into doing.

I think there is a phenomenal assumption that I have always

found totally faulty. When you give the American public adequate

information, they respond in a phenomenal way.

You had said very early, David, in your comments that there is

one thing that is obvious in all of this, that if we make these

changes, there needs to be driving it a major educational program

that allows people to make certain assumptions and understand

where they are and what their opportunities might be, and certainly for younger people a great deal more opportunity in the long

term, compounding, if you will, than those of an older age and of

no benefit to me at my age, but certainly I think the opportunity

for my children and grandchildren to have something that is worth

their money, or they are going to aggressively depart from it or find

alternative ways because the law will demand they can’t depart.

I have always said in this debate I am not going to be part of

creating a generational rift in this country of the magnitude that

will occur by 2075 if we don’t make the adjustments now. I still

want kids to be willing to help their grandparents out just a bit.

At the same time, obviously the grandparents of that day are going

to be a much more sophisticated American from the standpoint of

understanding and making decisions and having information available to them than probably the grandparents of today.

That is our challenge, to be able to be forward-looking in this instead of reactionary as it relates to current circumstances. It is

critical that we view long-term projections and we look at historic

averages because we are talking about actuarily thinking down the

road and that is a phenomenal challenge for all of us.

Thank you.

Mr. WALKER. Senator, if I can quickly respond, you actually are

going to need to do more than this.

Senator CRAIG. You didn’t need to say that. [Laughter.]

Mr. WALKER. But I am just trying to keep the record straight

here, and the reason I say that is this would achieve solvency and

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actuarial balance for 75 years. But at the end of 75 years, you still

have a big imbalance, and every year we take off a good year and

we add a bad year. Now, in our analysis we think you need to

achieve sustainable solvency, which means not just for 75, but beyond. So you really need to do more than that.

The last thing is, coming back to what Senator Breaux said——

Senator CRAIG. Excuse me for interrupting. This does also assume there are some unpaid promised benefits in there now, are

there not?

Mr. WALKER. Yes.

Senator CRAIG. This assumes that?

Mr. WALKER. This assumes that for 75 years, but it doesn’t deal

with perpetuity. We think you need to do something that not only

works for 75 years, but isn’t pre-programmed to not work beyond

75 years. That is our current system. I mean, even if you can make

it work for 75, it is pre-programmed that it doesn’t work beyond

that.

The last thing on this and then I think Senator Stabenow has

a point. Senator Breaux said at the outset—and I think it is important to say this—this will require Presidential leadership.

Senator CRAIG. No question.

Mr. WALKER. I know that President Bush is dedicated to do

something in this area, and I also know that President Clinton

was, too.

Senator Breaux, you and I and others were involved in at least

one commission in the past, and we were also involved in a massive national education campaign that included going around the

country, including the President and the Vice President, to try to

educate Americans as to the nature, extent, timing and magnitude

of our problem. They get it.

The CHAIRMAN. Oh, yes.

Mr. WALKER. They understand it. Realistically, that has got to

happen because you get elected and you can’t get too far ahead of

the people. So something has to happen that will cause the American people to understand the nature, extent timimg and the magnitude of the problem. Believe me, they get it, and that will enable

you to act in a way that is not only prudent, but in a way that can

exceed the expectations of all generations of Americans.

The CHAIRMAN. Senator Stabenow, any comments?

Senator STABENOW. Yes, thank you. I do have a comment.

I do, Senator Craig, understand these numbers very, very well

and what we have right here. In the last Budget Committee last

year as we were debating what to do, as we at that time thought

we had substantial surpluses, there were many of us arguing exactly these points and why we should be looking to the future.

If I remember the budget numbers from the hearings, the second

10 years of just the current tax cut is a $4 trillion loss, which is

more than the liability totally of Social Security during that time

period. It was something like $3.8 trillion.

We have made decisions—‘‘we’’ meaning the Congress—that have

substantially dug the hole deeper by decisions made last year. I

fear, in all seriousness, that the hole will get even deeper based on

what is being proposed right now. So I have grave concerns about

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that, understanding that, in fact, we have to make decisions either

way regarding Social Security. It is a question of what.

The point I would just make in conclusion is I want to make a

pitch for Social Security and just tell you as somebody who has

watched over the years—I wasn’t here when it was passed, but we

have substantially brought people out of poverty, seniors out of

poverty. This is a system that has about a 1-percent administrative

cost, much cheaper than anybody, if we are out managing our own

accounts, will be paying.

This is a system also that is not only retirement; it is a disability

policy and a life insurance policy. We haven’t talked about that

today and I am wondering, as we look at all of this, we are looking

only at the retirement piece of this. Yet if you are a worker that

becomes fully disabled, your dependent children know that they

have a safety net. If you die on the job, your family knows that

there is a safety net there. So this is broader; Social Security is

broader than just retirement.

I guess I would just ask, in conclusion, for your comments and

analysis as to how the system is affected, the broader system of Social Security, with the disability provisions and life insurance provisions of changes that are made as it relates to individual accounts, and so on.

Mr. WALKER. Well, you are correct that Social Security is much

more than retirement income. That is the primary part of Social

Security, but disability income and certain survivor benefits, et

cetera, are part of it.

My understanding is that this proposal really is focused primarily on the retirement income portion. In other words, it envisions that there will still be a disability program. I know there is

a proposed change in here that in the case of certain low-income

individuals, there are actually some potential enhancements to disability income for low-income people, the bottom 20 percent.

So I think it is very important that we recognize exactly what

you said. This isn’t just the monthly payments. It is also disability,

which could be in monthly form. It is also these other factors. But

at the same time, I think we also have to recognize that right now

you don’t get a pre-retirement death benefit out of Social Security,

and that under this option if you chose to have an individual account, you would get a pre-retirement death benefit. So there are

tradeoffs. There is no free lunch, there is no perfect solution.

The CHAIRMAN. Well, thank you very, very much. While there is

not a perfect solution, we may be in the middle of a perfect storm

when you have all of these things colliding at the same time, with

Medicare and Social Security all coming due in approximately the

same timeframe because of the baby-boom generation and other

factors.

It was difficult when we had a $200 billion surplus. It is going

to be a lot more difficult with a $200 billion deficit. But the problem doesn’t go away and political rhetoric is not enough to solve it.

We have to find ways to work together to get something done.

David, thank you very much. We look forward to future reports

in this area for the Aging Committee and for our new chairman

when he takes over next time.

[The prepared statement of Mr. Walker follows:]

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The CHAIRMAN. With that, the committee will stand adjourned.

[Whereupon, at 11 a.m., the committee was adjourned.]

(55)

A P P E N D I X

PREPARED STATEMENT OF SENATOR RUSS FEINGOLD

Mr. Chairman, thank you for calling this hearing. This may be your last hearing

as Chair of the Committee, at least for two years, and let me take this opportunity

to congratulate you on your tenure. You have continued the tradition of previous

Chairs in using this Committee to help educate both policymakers and the public

about issues of concern to our seniors. In particular, I want to congratulate you on

the series of hearings you held in the last Congress on long-term care, an issue on

which I have worked for the past twenty years, first in the Wisconsin State Senate,

and now as a member of the United State Senate.

It is fitting, in what for a while may be your last hearing as Chair, that we will

be focusing on what may be the single most important issue to seniors—especially

tomorrow’s seniors-namely, the future of Social Security. And I am especially

pleased that the Comptroller General will discuss the GAO’s review of the President’s Social Security Commission. Since the President’s Commission made its report more than two years ago, there has been little discussion of it, even though

the recommendations from that Commission would affect every single American currently receiving, or expecting to receive, Social Security benefits.

Mr. Chairman, we should have the debate over whether or not to privatize Social

Security. I strongly oppose privatization, but I recognize that there are some, including President Bush, who want to privatize the program. The public is entitled to

a robust and informed debate on the topic, and today’s hearing would be an excellent beginning.

Mr. Chairman, contrary to what some advocates of privitization argue, Social Security is in good shape for the near term. We can extend the program’s solvency

for 75 years if we make changes now equal to less than 2 percent of our payroll

taxes or 13 percent of benefits. If we wait until 2038, we will need payroll tax increases of more than 5 percent or benefit cuts of more than 27 percent, so there

is a strong case for acting on this matter soon.

By contrast, the President’s commission seems bent on taking 2 percent of the

payroll taxes away from the present Social Security system and devoting those

funds to private accounts. As the Institute for America’s Future notes, this 2-percent

plan would require Social Security to come up with another $1.5 trillion in the next

10 years alone. And as former Presidential economic advisor Gene Sperling has

pointed out, it will move forward the date when payroll taxes no longer cover benefits from 2016 to 2007.

The plan of the President’s Commission to divert Social Security money into private investments would thus just add to Social Security’s problem. It would take resources away from Social Security that we would have to make up with either more

taxes or more benefit cuts. As the Wall Street Journal reported, it would require

making huge offsetting benefit cuts, averaging 40 percent.

In the 107th Congress, Congressman Kolbe and Stenholm did a great service to

this debate by introducing a bill that largely tracked the President’s approach. Their

bill demonstrated just how unacceptable that approach would be. The proposal reduced Social Security’s guaranteed benefit, reduced cost-of-living adjustments, and

raised the retirement age, all made necessary in order to help fund the diversion

of Social Security revenues into private accounts.

Mr. Chairman, reducing cost-of-living adjustments would disproportionately hurt

older beneficiaries, particularly women, who have longer life expectancies. And raising the retirement age would disproportionately hurt blue collar workers and African-American beneficiaries, when African-American men have a life expectancy of

68 years.

It was not surprising, then, that Speaker Hastert and Leader Gephardt both said

that they could not support the bill. I couldn’t either.

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Prior to the last Congress, I initiated a series of discussions with the people of

Wisconsin about Social Security—at town-hall listening sessions, through letters to

my office, and through a special page on my web site. Of course, this wasn’t a scientific sample, but hundreds of my constituents expressed some clear opinions.

Part of that discussion was a section on my web site that allowed people to choose

among various options to extend the solvency of Social Security. Respondents rejected most options. I note that because I want to make it clear that there are no

easy options. Extending the solvency of Social Security will require tough decisions.

In this regard, the people I heard from do not want us to cut Social Security benefits

or raise taxes significantly.

But, Mr. Chairman, a majority of respondents did support five options, which,

taken together, would keep Social Security solvent for 75 years. They supported

former President Clinton’s plan, including transferring to Social Security general

revenues equal to the interest savings Social Security generates, and having an

independent board invest 15 percent of trust fund assets in the stock market.

They also supported two other structural changes to the Social Security program:

requiring all new State and local government employees to participate in Social Security, and raising the cap for earnings subject to Social Security taxes to the level

of salary that a member of Congress makes.

Respondents also rejected a number of options, many by resounding majorities.

They overwhelmingly opposed across-the-board benefit cuts, COLA cuts, across-theboard payroll tax increases, and raising the retirement age.

Let me note that President Clinton’s proposal to transfer to Social Security general revenues equal to the interest savings Social Security generates was made at

a time when we had projected budget surpluses. As we know, those surpluses were

dissipated quickly in large part by President Bush’s massive tax bill, and compounded by increased spending and the economic slow down, and what might have

been the basis for a rational plan to ensure that Social Security would be available

for future generations was squandered.

But as difficult as our task is now to extend the solvency of Social Security, it

will be made far worse by the President’s plans to privatize the program. As the

Institute for America’s Future points out, each of the three Bush Commission plans

diverts at least $1.5 trillion from Social Security over the next 10 years, and thus

would create an immediate problem for the program that does not currently exist.

This is a fundamental flaw of privatization. Not only does privatization undermine the Social Security program’s well-proven principle of shared commitment to

a decent life for our seniors, privatization also creates a financial hole that, as economist Paul Krugman has noted, ‘‘must be filled by slashing benefits, providing large

financial transfers from the rest of government, or both.’’

Mr. Chairman, we do not have $1.5 trillion to transfer from the rest of government. Indeed, just the opposite is occurring. Thanks to the massive Bush tax cut,

a slowed economy, and increased spending, the rest of government is relying on Social Security surpluses. There is no money in the budget to protect current Social

Security beneficiaries from the benefits cuts that would almost surely result if the

Bush privatization plan were to be enacted.

Mr. Chairman, thank you again for calling this hearing. I very much hope it will

mark the beginning of a real debate on the future of Social Security.

Æ