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72–873 2012

SOCIAL SECURITY’S FINANCES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON SOCIAL SECURITY 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JUNE 23, 2011

Serial No. 112–SS6 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON SOCIAL SECURITY 

SAM JOHNSON, Texas, Chairman 

KEVIN BRADY, Texas 

PAT TIBERI, Ohio 

AARON SCHOCK, Illinois 

RICK BERG, North Dakota 

ADRIAN SMITH, Nebraska 

KENNY MARCHANT, New York 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

SHELLEY BERKLEY, Nevada 

FORTNEY PETE STARK, California 

JON TRAUB, Staff Director 

JANICE MAYS, Minority Staff Director 


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C O N T E N T S 

Page 

Advisory of June 23, 2011, announcing the hearing ............................................. 2 

WITNESSES 

Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation ..................... 7 

Stephen C. Goss, Chief Actuary, Office of the Chief Actuary, Social Security 

Administration ..................................................................................................... 47 

Tim Lee, Texas Retired Teachers Association, on behalf of Coalition to Preserve Retirement Security ................................................................................... 60 

Alex Brill, Research Fellow, American Enterprise Institute ............................... 69 

Mark J. Warshawsky, Ph.D., Former Assistant Secretary for Economic Policy, 

U.S. Department of the Treasury ....................................................................... 77 

Andrew G. Biggs, Ph.D., Resident Scholar, American Enterprise Institute ....... 82 

SUBMISSIONS FOR THE RECORD 

Questions for the Record ......................................................................................... 104 

The Honorable Mr. Becerra .................................................................................... 114 

The Honorable Mr. Batchelder ............................................................................... 116 

Center for Fiscal Equity .......................................................................................... 118 

International Association of Fire Fighters ............................................................ 126 

Jim Miller ................................................................................................................. 129

National Committee to Preserve Social Security and Medicare .......................... 130 


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SOCIAL SECURITY’S FINANCES 

THURSDAY, JUNE 23, 2011 

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON OVERSIGHT,

JOINT WITH

SUBCOMMITTEE ON SOCIAL SECURITY, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 2:04 p.m., in Room 

B–318, Rayburn House Office Building, the Honorable Sam Johnson (Chairman of the Subcommittee) presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

Chairman Johnson Announces 

Hearing on Social Security’s Finances 

June 23, 2011 

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

Ways and Means Subcommittee on Social Security announced today that the Subcommittee will hold a hearing on Social Security’s current revenue streams, proposed changes to those structures and the impact they would have on the program, 

beneficiaries, workers and the economy. The hearing will take place on Thursday, June 23, 2011 in B–318 Rayburn House Office Building, beginning at 

1:30 p.m. 

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

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

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

list of invited witnesses will follow. 

BACKGROUND: 

The 2011 Annual Report of the Social Security Board of Trustees again highlighted the financing challenges facing the Old Age and Survivors Insurance (OASI) 

and the Disability Insurance (DI) programs. The trustees project permanent and 

growing cash flow deficits, and by 2036 the combined OASI and DI Trust Funds are 

projected to become exhausted and unable to pay scheduled benefits. The DI Trust 

Fund is projected to become exhausted in 2018. The Public Trustees expressed the 

need for action soon in order to be able to protect vulnerable populations and those 

at or near retirement age. 

Social Security benefits are financed primarily by payroll taxes on covered wages. 

The Federal Insurance Contributions Act (‘‘FICA’’) imposes a tax on covered wages 

up to the taxable wage base of $106,800 in 2011, divided between employers (6.2%) 

and employees (6.2%). Self-employed taxpayers are subject to payroll tax under the 

Self-Employed Contributions Act (‘‘SECA’’) on the same wage base with a rate equal 

to 12.4 percent (the total combined employer-employee rate). The wage base is adjusted annually based on average wage growth, if a Social Security cost-of-living adjustment is payable. 

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act 

of 2010 reduced the OASDI payroll tax paid by the worker by 2 percentage points 

in calendar year 2011. The law also required the Secretary of the Treasury to make 

general revenue transfers to replace revenues temporarily diverted from the trust 

funds. 

According to the Social Security Administration, about 94 percent of workers in 

paid employment and self-employment are covered under the OASDI program. The 

majority of non-covered workers are in State, local, or the Federal Government. 

In addition to Social Security payroll taxes, certain Social Security beneficiaries 

must include a portion of Social Security benefits in taxable income for the Federal 

income tax, and the Social Security program receives part of those taxes. 

According to the 2011 Annual Report of the Social Security Trustees, in calendar 

year 2010, Social Security non-interest income was $637.3 billion from payroll taxes 

and $22.7 billion from the taxation of benefits. Social Security tax income as a percent of taxable payroll will grow from 12.52 in 2011 to 13.31 in 2086, due to growth 

in income from the taxation of benefits. 


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The Social Security actuaries have estimated a number of revenue generating proposals, including those proposed by the President’s Fiscal Commission which would 

require all newly hired state and local workers to participate in Social Security and 

increase the amount of earnings subject to Social Security payroll taxes by increasing the taxable wage base. 

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

Security first began, the payroll tax was only 2 percent—evenly split between employers and employees—on the first $3,000 in wages. Today the payroll tax is 12.4% 

on the first $106,800 in wages. Yet despite the tax increases, Social Security is in 

trouble. Clearly tax hikes have not been a panacea. This hearing will provide an 

opportunity to learn more about Social Security revenues, options for change and 

their impacts.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on the sources of Social Security’s revenues, how those 

sources have changed over time, options for change and their impacts. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

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

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

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

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

business on Thursday, July 14, 2011. Finally, please note that due to the change 

in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries 

to all House Office Buildings. For questions, or if you encounter technical problems, 

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

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

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

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

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

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

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

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

1. All submissions and supplementary materials must be provided in Word format and MUST 

NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised 

that the Committee relies on electronic submissions for printing the official hearing record. 

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

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

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

by the Committee. 

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

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

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

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

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

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

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


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

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

f 

/. 

Chairman JOHNSON. Thank you all for being here. I want to 

apologize to our witnesses and audience for the delay due to the 

vote, and I thank you for your patience. This meeting will come to 

order. 

I want to thank you all for your testimony ahead of time. As we 

heard from the public trustees at our June the 3rd hearing, Social 

Security revenues will cover only 77 percent of the benefits by 

2036. Congress needs to act, and the sooner we do so, the sooner 

we can protect those who are most vulnerable, along with current 

retirees and those nearing retirement. And for younger workers 

and families we have a responsibility to provide certainty about the 

future of their Social Security. 

To that end, I was heartened to learn of the deliberations of 

AARP’s volunteer board, and welcome their acknowledgment that 

Social Security will be unable to pay benefits promised in the future, and how the program needs to be strengthened for generations to come. 

Today we will learn more about Social Security’s current revenue 

sources, proposed changes to those sources, and their impact on Social Security workers, beneficiaries, and economic growth. 

Since its beginning, Social Security has been a program primarily financed by workers for workers. Workers’ hard-earned payroll taxes fund the majority of the benefits Social Security pays out 

each year. It is important to point out, as well, that the number 

of workers paying into Social Security has been steadily declining 

over the years. In 1950, for instance, there were 161⁄2 workers for 

each beneficiary. Today, just 2.9 workers, and in 14 years, 2.3 

workers per beneficiary. 

You are shaking your head; you agree. 

[Laughter.] 

Chairman JOHNSON. In 1935, the tax rate for employers and 

employees each was just 1 percent on earnings, up to $3,000 a 

year. How far we have come. Congress has raised the payroll tax 

14 times since then. Today the tax rate is 6.2 percent for employees 

and employers, for a combined 12.4 percent. 

The amount of earnings subject to payroll tax, however, known 

as the taxable wage base, has also grown over time. In 1935 the 

taxable wage base was $3,000. Over the life time of the program, 

the taxable wage base has been statutorily increased by Congress 

10 times. In 1972, Congress passed legislation that increased the 

base automatically to reflect the growth in average wages. However, soon afterwards, Congress increased the wage base even further over a number of years. 

Annual tax increases have generally been in autopilot since 1982. 

Since then, the wage base has increased 26 times from $32,400 to 

its current level of $106,800. Probably go up again this year, too, 

you all think? 

But despite these tax increases, Social Security is still in trouble. 

Not enough young workers are paying this tax to sustain the Baby 

Boomer wave of retirees leaving the workforce and drawing beneVerDate Nov 24 2008 03:47 Feb 18, 2012 Jkt 072873 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\72873.XXX GPO1 PsN: 72873

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fits at the rate of 10,000 a day for the next 19 years. Clearly, we 

can’t tax our way to sustainable solvency. 

And, as we consider the program’s financial state, we can’t lose 

sight of the fact that throughout the history of the program, Congress has also increased benefits beyond the ability of the program 

to pay for them in the long run. 

The challenge Congress now faces goes beyond just rebalancing 

Social Security’s finances. With chronic unemployment, falling incomes, and so many young workers unable to start their careers, 

nothing we do should make it harder for Americans to find goodpaying jobs. 

I am sure, if you ask any ordinary citizen, what is vitally important to them, you will likely hear, ‘‘good paying jobs.’’ They worry 

America is falling behind, and that their children’s futures will be 

dictated by foreign predators. Americans want and expect a balance between creating a new and better economy for their children 

and caring for their elders. 

That is why, as we look ahead, Social Security must be what its 

founders intended: a program that lives within its means. Americans want, need, and deserve nothing less. We must do this for the 

American people. And I am confident that, by working together, we 

will. 

Mr. Becerra, would you care to make a statement? 

Mr. BECERRA. Yes, Mr. Chairman, I would. Mr. Chairman, 

thank you very much. Thank you for holding this hearing today. 

I would like to begin, first, by acknowledging something the 

chairman said, that we are looking at somewhere around 2036 before Social Security will face a situation where it doesn’t go broke, 

it won’t go bankrupt, but it will have a challenge in providing the 

benefits that Americans today expect to receive when they retire in 

that year of 2036. 

I think that is an important acknowledgment, Mr. Chairman, because too often the conversation—or should I say the debate—on 

Social Security is one where some would discount the money that 

Americans, on a daily basis, are contributing to Social Security 

through a tax, the FICA tax, that they contribute to the Social Security system and the trust fund. 

The more we acknowledge that today Social Security is paying 

benefits on time and in full, and has always done that for more 

than 75 years, and that it will continue to do so for another good 

20-some-odd years, it becomes very important. Because, unlike the 

rest of the Federal Government, which is in fiscal crisis, Social Security today goes forward. 

Remember, as well, that, at the same time that Social Security 

has never missed a payment, most Americans a couple of years ago 

were afraid to look at their 401(k) or IRA statements, because they 

saw what was happening to their private savings and their pension 

funds. It becomes very important for us to have a conversation 

about Social Security that talks about the facts on the ground. 

And, Mr. Chairman, I think many people will have to acknowledge that the facts are very stubborn things. They don’t lie. And 

the reality is that today we have a system that has never failed the 

American public. And I don’t believe anyone in this chamber would 

like to see Social Security fail. And that is why I do believe, Mr. 


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Chairman, like you, that there is a chance for some bipartisan cooperation in dealing with the future challenges that Social Security 

will face, much because of the Baby Boom generation, but many of 

them simply because of the fact that America, like every other 

country, continues to change. 

The challenge has nothing to do with any sneaky numbers or 

broken magic on the part of Social Security to pay benefits. It is 

a very straightforward system. You put something in, and we’ve 

been able to guarantee that we put something out to pay you. 

I actually disagree with you on one point, Mr. Chairman. Social 

Security is not overly generous. Social Security hasn’t gotten too 

big when it comes to what it provides to Americans. The benefits 

today are very modest. And most seniors have very limited incomes. The average benefit for a senior today is somewhere around 

$14,000 a year. Among senior households, the median income is 

only about $24,000. So when you are talking about a household 

that may have more than one senior, you are still only looking at 

about $24,000. 

One out of every three beneficiaries under Social Security depends on that Social Security paycheck to provide virtually all of 

their income. And less than half of seniors in America have a pension or a savings plan from their work. Only the wealthiest onefifth of seniors in this country have any significant income from assets. 

Keep in mind, as I said before, that were it not for Social Security, in 2008 all those folks who are ready to retire in this country 

probably were looking at a collapse of their IRA and their 401(k). 

At least a third of the value of those privately held assets had disappeared. 

And that is why, Mr. Chairman, it does disturb me that some of 

the proposals we see from my Republican colleagues call for nothing but cuts to the benefits in Social Security, whether it is the privatization plan presented by Mr. Sessions, a member of the leadership in the House Republican Conference, or whether it is the plan 

of the chairman of the Budget Committee, Mr. Ryan, who has had 

plans in the past to privatize the system, and whose budget calls 

for a fast-tracking on future cuts of Social Security, or whether it 

was the recent proposal by Senator Hutchinson to reduce the 

COLA by one percent at a time when seniors haven’t received a 

COLA increase in two years, these are all cuts. 

And at a time when all Americans are suffering through difficult 

economic times, I don’t believe we want to see our seniors go back 

to the 1930s when, what was it, some 3 out of every 4 that would 

retire retired into poverty. 

And so this is a fabulous program that has worked well. But demographics will make it more challenging in about a quarter of a 

century. And rather than wait a quarter of a century, we should 

tackle it now. And that is why, Mr. Chairman, I look forward to 

working with you and all of our colleagues on this committee to try 

to present to our colleagues and the rest of the House a proposal 

in the future that can really take us a long ways in making sure 

that Social Security will once again be there for all Americans, as 

it has for more than 75 years. 

I yield back. 


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Chairman JOHNSON. Thank you. Just know that you and I disagree on how the money is being counted, and there are a lot—— 

Mr. BECERRA. I think you have made that very clear, Mr. 

Chairman. 

Chairman JOHNSON. There are a lot of IOUs out there in the 

Social Security trust fund that have to be paid from the general 

revenue. 

Mr. BECERRA. China, Japan, and every major corporation in 

America knows the same thing, and they are waiting to be paid, 

as well. 

Chairman JOHNSON. I know. Before we move on to our testimony today, I want to remind our witnesses to limit your oral 

statements to five minutes, if you can. 

Without objection, all the written testimony will be made part of 

the permanent record. 

We have one panel today, and our witnesses who are seated at 

the table are Tom Barthold, Chief of Staff, Joint Committee on 

Taxation; Stephen Goss, Chief Actuary, Office of the Chief Actuary, 

Social Security Administration; Tim Lee, Texas Retired Teachers 

Association, on behalf of the Coalition to Preserve Retirement Security—we have had some arguments over that one, too—Alex Brill, 

research fellow, American Enterprise Institute; Mark Warshawsky, 

Ph.D., former Assistant Secretary for Economic Policy, U.S. Department of the Treasury; and Andrew G. Biggs, Ph.D., resident scholar, American Enterprise Institute. 

I thank all of you for being here today. 

And, Mr. Barthold, you are recognized for five minutes. 

STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, 

JOINT COMMITTEE ON TAXATION 

Mr. BARTHOLD. Well, thank you, Chairman Johnson and Mr. 

Becerra. Your subcommittee staff had asked if my staff and I could 

prepare background discussion of the Social Security tax base, and 

that is what was provided to you and your staff in our publication 

JCX–36–11. I will take my couple of minutes here to summarize 

the high points, many of which you actually introduced in your 

opening remark. 

The Social Security and Medicare trust funds are primarily financed by payroll taxes on covered wages. The payroll taxes include the FICA tax, Federal Insurance Contribution Act, and the 

SECA tax, the Self-Employed Contributions Act. There is also, for 

the Medicare trust fund, an additional hospital insurance tax. And, 

in addition, funds are contributed to both the Medicare and Social 

Security trust funds from an income tax on certain included Social 

Security benefits. 

I will discuss first, in brief, the payroll taxes. FICA imposes taxes 

on both employers and employees, based on an amount of wages 

paid to the employee during the year. It is composed of two parts. 

The OASDI tax equals 6.2 percent of covered wages, up to the maximum wage base, $106,800 for this year, as noted by the chairman. 

And there is an HI tax equal to 1.45 percent of covered wages. The 

employee’s tax is generally equal to the amount of tax imposed on 

the employer. 


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Likewise, the SECA tax has two components, and the rate of the 

SECA tax is set to equal the combined rates of the employee and 

the employer under the FICA tax. So, under the OASDI component, the current rate of tax is 12.4 percent on self-employment income, up to the Social Security wage base of $106,800. And under 

the HI component, the tax rate is 2.9 percent on all self-employed 

employment income. 

Now, I should note that, for the current year, there is a two percentage point reduction in the OASDI rate to 4.2 percent, both for 

the employee portion of FICA, as well as for SECA. This was enacted as a provision in late 2010. 

The present law—as noted by the chairman, the present law 

wage base is indexed each year, based on growth in average wages 

in the national economy. Now, under these taxes the law provides 

certain exceptions from the wage base for certain types of employment and certain types of remuneration. 

One type of employment exempted from Social Security tax is 

based on categories of workers who are covered under alternative 

retirement systems. These include certain state and local government employees, employees of the Federal Government, and workers whose compensation is subject to the Railroad Retirement tax 

system. 

A second type of exempted employee involves workers with religious beliefs whose beliefs preclude participation in the Social Security system. 

A third type of exempted employment is wages to students. 

There has been a recent—I will note that there is a recent dispute 

resolved by the Supreme Court in the so-called Mayo case. The Supreme Court in that case upheld an IRS regulation providing that 

medical residents are not students, and, therefore, are subject to 

Social Security taxes, where wages paid to other students are exempt. 

Now, even when a worker’s type of employment is covered by the 

Social Security, certain types of remuneration paid to the worker 

are not subject to that tax. This generally follows income tax exclusions. Examples of such exempted compensation include employerprovided retirement benefits and employer-provided health benefits. There are similar elective contributions for health benefits 

through health FSAs, which are also excluded from both the income and Social Security taxes. 

In general, the FICA taxes apply to workers who are employees. 

The SECA taxes apply to workers who are self-employed or independent contractors. One ongoing issue regarding payroll tax liability is the determination of whether a worker is properly treated as 

an employee or as an independent contractor. If a person is an employee, the responsibility for reporting and withholding FICA rests 

with the employer. If you are an independent contractor, then reporting and withholding rests with the worker. This determination 

shifts the burden of compliance, not the underlying liability. 

I also noted another component of funding for the trust funds is 

the income tax. Individuals with incomes above certain thresholds 

must pay income tax on a portion of their Social Security benefits, 

and the revenue raised from the Social Security benefits finance— 


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from the taxation of Social Security benefits, excuse me—finances 

both the Social Security and the Medicare trust funds. 

And, with that, I will conclude my brief summary, and be happy 

to answer any questions that the Members might have. 

[The prepared statement of Mr. Barthold follows:] 


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f 

Chairman JOHNSON. Thank you, I appreciate that. I want to 

welcome our newest member, Mr. Kenny Marchant, from the great 

state of Texas, as a member of this committee. Glad to have you 

aboard. 

Mr. MARCHANT. Glad to be here. 


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Chairman JOHNSON. Stephen Goss, chief actuary, Office of the 

Chief Actuary, Social Security Administration. You are recognized 

for five minutes, sir. 

STATEMENT OF STEPHEN C. GOSS, CHIEF ACTUARY, OFFICE 

OF THE CHIEF ACTUARY, SOCIAL SECURITY ADMINISTRATION 

Mr. GOSS. Thank you very much, Chairman Johnson, Ranking 

Member Becerra, Members of the Subcommittee. It is really a 

pleasure to be here, and thank you for the invitation. 

I would like to take these couple of minutes to sum up the written testimony that I submitted, but also to put in perspective the 

history and the expectations for the future of what the costs of Social Security are going to be, and what they mean for us, to make 

sure that the system is set up properly for the future. 

Chairman Johnson, you quite rightly pointed out some of the 

very interesting facts of Social Security, about the incredibly fundamental ratio of numbers of workers for every beneficiary that we 

have to support the system. 

And we should keep in mind about Social Security, that when 

the first monthly benefits were paid in 1940, we had somewhat 

over 40 workers for every beneficiary. And the reason for that was 

clear; we were taxing virtually all the workers, starting right off 

the bat, but the only people in 1940 who could get monthly benefits 

were people who had worked for at least 2 years in the years 1937, 

1938, or 1939. Not many very, very old people had worked for two 

years in that period. 

So, it was a long time, not until about 1975, until the system actually matured, and we reached the point where we reached a rather stable level of 3.3 workers per beneficiary. We stayed at that 

level from 1975 until about 2008. 

As you mentioned, Chairman Johnson, after 2008, starting 

around 2010, the recession has gotten a head start on moving in 

the direction of having a drop in the number of workers per beneficiary. 

It is important to understand why that is happening. It is happening in part because of the Baby Boomers moving over from the 

ages which have been working ages over the next 25 years, into the 

ages in which they will be retirees. But, actually we wouldn’t even 

call them the Baby Boom bulge if, in fact, they had all had 3.3 kids 

themselves as people in 1946 through 1965 did. 

Historically, birth rates have been at about 3 children per 

woman, especially if you look at the number of children surviving 

to age 10. Between the end of the Baby Boom period and the mid1970s, we actually had a drop in the birth rate in this country from 

an average of 3 kids down to an average of 2 children. If we are 

going to support elders in our country, and they all had three kids 

in the past, and now in the future they are all going to have two 

kids, that really is a fundamental shift. 

The point is that this isn’t just a matter of people living longer. 

There is some of that. The fundamental change over the next 25 

years, in the cost of the system relative to GDP, relative to payroll, 

and in the number of workers per beneficiary, is really due to the 

drop in the birth rate. It is not that we are going to do anything 


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about this change, but it is important for understanding how we 

got there. 

The implication of this drop in the birth rate is really quite striking. As both the chairman and the ranking member mentioned, we 

are in a situation where we are going to have a drop in the number 

of workers per beneficiary, and this is going to cause the cost of Social Security, of the benefits that are scheduled now, to change 

from about 4.3 percent of GDP—which it has been for decades—to 

rise up to about 6 percent of GDP. 

The fundamental question before you all, as our elected representatives is, ‘‘Where do we want to go? What do the American 

people want to do? Do they want to have the kind of benefits that 

are scheduled in current law, and raise the revenue up from the 

4.5 percent of GDP that is scheduled in current law now up to 6 

percent? Or, do they want to keep revenue at 4.5 percent of GDP 

and lower benefits?’’ There is really a fundamental choice between 

raising revenue by a third, reducing the scheduled benefits by a 

fourth, or some combination of those two. 

In my position—I am sure also for Tom Barthold and probably 

most of us—we are not in a position to tell you what really makes 

the most sense. But these are the choices that are before you on 

behalf of your and all of our constituents. 

Let me speak a little bit about the very near term situation for 

Social Security. There has been a lot of talk about the year 2010, 

in which we had the first year—for quite a while, since 1972—in 

which we had more cost for the system than we had taxes coming 

in. Now, the trust fund is still growing, because interest more than 

exceeded the amount of shortfall we had in taxes, and that will 

continue until 2023. But we did have of taxes in the year 2010, and 

this is what a recession looks like; we have more people coming 

and getting benefits, fewer people working. 

We are projecting now for the years 2012, 2013, and 2014, that 

we will have cash flow deficits—that is, cost exceeding the taxes in 

the system, by a little less than 20 billion a year, where in the 

prior trustee’s report, in 2010, we were projecting a little bit less 

than a $10 billion-per-year surplus. 

That kind of a swing is significant. But for a $700 billion per 

year cost program and a federal budget where we are running deficits on the order of $1 trillion per year, that kind of swing was 

probably not all that traumatic. 

So, we are facing a situation over the next 25 years in which we 

are going to have this dramatic shift. We are going to be having 

increasing cost, we are going to have to find a way to get there. 

The trust funds do stand as the cushion to give us the authority 

to be able to augment the taxes that we have coming in to be able 

to pay scheduled benefits, as you both mentioned, until 2036. 

But the fundamental question that is before us is, ‘‘What do we 

do thereafter?’’ Are we going to raise taxes? Are we going to lower 

benefits? One thought that I would really want to leave you with 

is that we should not analyze a change in taxes or a change in benefits from just one perspective. 

For example, if we decided that, in order to continue paying the 

full benefits, even through 2036, we want to raise taxes during that 

period to have more money coming into the trust funds, what that 


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will mean is that we will dip into the trust funds less. If we raise 

taxes and have more revenue coming to pay benefits during that 

period, that means that we will have less spending down of the 

trust funds and—— 

Chairman JOHNSON. Can you close it down? Your time has expired. 

Mr. GOSS. Okay, sorry. If we have more taxes, we will have less 

borrowing from the public. Both of those have economic implications. We should not look at an increase in taxes, just as the implication of taxes, but also what that means in terms of borrowing 

less from the public. 

I have submitted a number of individual provisions that have 

been considered. I am hoping in the questions we might be able to 

get into some of those. 

[The prepared statement of Mr. Goss follows:] 


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Chairman JOHNSON. Thank you, sir. 

Mr. GOSS. Thank you very much. 

Chairman JOHNSON. Tim Lee, Texas Retired Teachers Association, on behalf of the Coalition to Preserve Retirement Security. 

You are recognized for five minutes. 

Mr. LEE. Thank you very much. 


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Chairman JOHNSON. Are you from Texas? 

Mr. LEE. Yes, sir. 

Chairman JOHNSON. Where do you live? 

Mr. LEE. I live in Austin. 

Chairman JOHNSON. Okay. 

Mr. LEE. Yes, sir. 

STATEMENT OF TIM LEE, TEXAS RETIRED TEACHERS ASSOCIATION, ON BEHALF OF COALITION TO PRESERVE RETIREMENT SECURITY 

Mr. LEE. Chairman Johnson, Ranking Member Becerra, and distinguished Members of the Subcommittee, my name is Tim Lee, 

and I am the executive director of the Texas Retired Teachers Association. I am testifying today in my capacity as a board member 

of the Coalition to Preserve Retirement Security, specifically here 

to talk about the issue of mandating Social Security coverage with 

public workers. 

Over the years some have recommended bringing all public workers into the Social Security program. However, mandating that all 

newly hired public workers must participate in the Social Security 

system would create significant new cost pressures for the affected 

state and local government jurisdictions, while providing only minimal benefit to the program. 

These jurisdictions, with their own long-standing defined benefit 

retirement plans, would have to make difficult choices. Adding an 

additional 6.2 percent payroll tax per worker to the benefit cost of 

public employers would almost certainly result in cut-backs to their 

existing defined benefit plans, cuts in government services and/or 

increases in taxes or fees to absorb the added costs. The disruption 

that would likely occur for these public jurisdictions and their 

workers seems a high price to pay for adding an estimated two 

years of solvency to the Social Security program. 

It is estimated that mandatory Social Security coverage would cost the affected states and localities $44 billion over 5 years. The 

additional financial burden, which will impact all 50 states to one 

degree or another, could be an insurmountable budgetary hurdle, 

particularly during these very difficult days of huge revenue shortfalls hitting virtually every state. 

In Texas, for example, our state legislature has finished its regular session and is now in special session. The regular session was 

particularly difficult, as we all struggled with a budget reduction 

for the biennium that exceeded $15 billion. The state budget reduction has hit public sector—particularly our public schools—very 

hard. Tens of thousands of public school employees, including classroom educators and support personnel, have been sent reduction in 

force notices, and are not anticipating being rehired in the coming 

school year. 

To the issue of added cost, due to the mandating Social Security, 

the impact would be devastating to 95 percent of Texas school districts. These school employers and employees already make a contribution equal to 6.4 percent of their salary to the Texas teacher 

retirement system. The state legislature is bound by the Texas constitution to make a contribution, a minimum of six percent of the 

aggregate active teacher payroll. 


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I think it is speculative, at best, to assume that any of these contributions to the teacher retirement system in Texas will remain in 

the event that Congress mandates Social Security coverage for all 

public employees. 

School districts and employees would be hard-pressed to make an 

additional contribution to the Social Security trust fund, as well as 

maintaining contributions to the TRS pension fund. Our Texas TRS 

fund is presently valued at around $110 billion. It is about 82.3 

percent funded. Redirecting contributions away from this fund to 

cover a new federal mandate for Social Security coverage would 

quickly destabilize the fund, and jeopardize the long-term financial 

security of 1.3 million Texans. To break that number down even 

further, 1 out of every 20 Texans depends on the TRS Texas as 

their primary source of their retirement or future retirement security. 

Texas has taken bold steps to maintain the health of the public 

retirement system, and projections suggest that TRS Texas is able 

to meet current and future obligations through the year 2114. Mandating Social Security coverage would have a profound negative impact on that funding status, and leads us in the wrong direction, 

and jeopardizes the long-term funding of the retirement system. 

Some suggest that current retirees may be held harmless by 

mandating Social Security coverage for only newly hired active employees, contending this would make it less onerous for public employers. But nothing could be further from the truth. Public sectordefined benefit plans rely on constant reliable revenue stream in 

order to meet actual real goals and provide a retirement benefit for 

plan participants at affordable contribution levels. Proponents of 

this solution fail to understand that the normal cost of the existing 

retirement plan will increase as percentage of payroll as younger 

members are eliminated from the plan. 

Thus, employers and new workers will not only have to add additional 6.2 percent of the new payroll tax, but employers may also 

have to increase contributions to the existing plan, or cut benefits. 

When states and localities are under extreme fiscal stress, as they 

are currently, this added expense will create enormous burdens 

with negligible, if any, positive outcomes. 

Those positive outcomes are significantly less positive than one 

may realize. A study by the General Accountability Office concluded that a new hire would only add two years, at most, to the 

Social Security solvency. The same report stated that moving to 

mandatory coverage would be very costly to the states involved. As 

a result, mandatory coverage provides no long-term solution to the 

Social Security issue, but it creates a huge, unfunded mandate on 

state and local governments. Destabilizing state designed, statefunded public pension plans would have grave repercussions across 

a public and private spectrum alike. 

Considering this, the—consider this. The teacher retirement system pension fund pays about 6.6 billion annually in benefits to over 

300,000 current TRS Texas retirees. These benefit payments have 

a substantial impact on the Texas economy, including $640 million 

in state taxes paid, 260 million in local government revenues, and 

helps create more than 91,500 permanent jobs in Texas. 


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And I will skip to the end, Mr. Chairman. Mandating Social Security coverage for all public sector workers would only create an 

enormous unfunded federal mandate on state and local taxpayers, 

and major costs and burdens for public employers, without contributing significantly to the solvency of the Social Security program. 

Millions of public employees have placed their faith and their future in the pension plans, and have planned for their retirement 

accordingly. It is absolutely critical to maintain the stability and 

confidence, the security of those public pension plans for their employees. And we will work to continue to do so. 

Thank you for the opportunity to testify, and thank you for your 

staff’s work in helping me be here today. 

I appreciate it. 

[The prepared statement of Mr. Lee follows:] 


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Chairman JOHNSON. Thank you, sir. 

Mr. LEE. Thank you. 

Chairman JOHNSON. Thank you for being here. And you know, 

I don’t think there are very many of us that want to impose a tax 

on any state. And, as you know, the state of Texas, along with a 


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lot of others, some of their associations, fireman and police, opted 

out of Social Security for a private retirement fund. And that is 

what America is all about, in my view. 

Alex Brill, a research fellow, American Enterprise Institute, you 

are recognized for five minutes. 

STATEMENT OF ALEX BRILL, RESEARCH FELLOW, AMERICAN 

ENTERPRISE INSTITUTE 

Mr. BRILL. Thank you very much, Chairman Johnson, Ranking 

Member Becerra, other Members of the Subcommittee, for the opportunity to appear before you this afternoon to testify on this important topic. 

To establish Social Security as a sustainable, solvent program, 

changes are certainly necessary. Absent structural reforms, scheduled benefits will exceed income by roughly 30 percent in 25 years. 

From a mechanical accounting perspective, a sustainable Social Security program could be achieved by either a reduction in the rate 

of growth of future benefits, or through tax increases. But these 

two options have different economic effects, particularly the effect 

on labor supply. Advocates of reform proposals that offer a combination of both revenue increases and benefit reductions sometimes argue that a solution involving both sides of the ledger is a 

‘‘balanced approach.’’ However, once one considers the economic impact of different changes, that balance may shift considerably. 

This hearing is about the revenue matters with regard to Social 

Security. And so, in my testimony I will focus briefly on the economic consequences of tax changes. 

First and foremost, I would like to stress that in evaluating any 

tax increase geared at addressing the solvency of the Social Security system, the burden of the tax is greater than just the tax itself. 

Taxpayers alter their behavior in response to tax changes. And this 

behavioral response is not without consequence. It gives rise to 

what economists call an excess burden. The greater the taxpayers’ 

response to avoid the tax, the greater the excess burden. This behavioral response, that may result from an increase in the payroll 

tax rate, includes fewer hours worked and a shift from taxable 

wage income to non-taxed fringe benefits. 

Described earlier, the payroll tax is a tax on wages, not total 

worker compensation. And, therefore, it generally creates a distortion between wage compensation and non-wage compensation, such 

as health benefits and many other non-taxed fringe benefits. When 

an employer pays a worker wages, the employer deducts that cost 

from his own taxes, while the worker reports the wages as taxable 

income. However, when an employer compensates a worker with a 

non-taxable fringe benefit, it too, is deducted from the employer’s 

income, but excluded from the worker’s income. 

As a result of this distortion, there has been a decrease of wages 

as a share of total employee compensation. Today, approximately 

one out of every five dollars of compensation is non-wage, almost 

all of which is excluded from taxable income—income tax and payroll taxes. The shift from wage to non-taxed fringe benefits has 

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roll tax, few have focused on more broadly taxing compensation income. 

For some workers, higher payroll taxes affect decisions about 

whether or how much to work. With regard to the impact of higher 

payroll taxes on labor supply, it is important to also note that the 

behavioral responses vary considerably across workers of different 

types. For example, a number of economists have documented that 

married female workers are more likely to reduce their labor supply as a result of a marginal tax increase. It has also been documented that high marginal tax rates also discourage entrepreneurship, and reduce the business activity of sole proprietorships. 

Tax rate increases will generate more income for the Social Security trust funds, but that additional revenue comes at a cost. Higher marginal rates will discourage labor supply and, through other 

means of shifting, reduce taxable income. In addition to less economic output, such a change will lead to a significant decline in 

both federal and state income taxes. 

The least bad of the various tax options would be a broadening 

of the tax base by taxing fringe benefits. This would at least eliminate some of the existing distortions between wage and non-wage 

compensation. Such a change, if combined with a reduction in the 

statutory payroll tax rate, could reduce the excess burden of the 

payroll tax. 

However, there are many other reforms worth adopting before 

considering tax increases. While those issues are beyond the scope 

of this hearing, I would encourage the committee to explore 

changes to the retirement age, the benefit formula, and the consumer price index methodology for calculating cost of living adjustments before considering tax increases. 

I will conclude by reiterating that raising tax rates to prevent insolvency is likely to discourage work, and thus, long-term economic 

growth. 

I would also like to express to the committee my view that Congress need not wait until a full reform that actuaries estimate will 

return the trust funds to long-run solvency can be agreed to. Many 

incremental reforms can and should be considered now. The sooner 

Congress adopts pro-solvency measures, the less consequential they 

need to be. Thank you, and I look forward to answering your questions. 

[The prepared statement of Mr. Brill follows:] 


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Chairman JOHNSON. Thank you, sir. I appreciate your remarks. 

Dr. Warshawsky, a former assistant secretary for economic policy, U.S. Department of the Treasury, you are recognized, sir. 


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STATEMENT OF MARK J. WARSHAWSKY, PH.D., FORMER ASSISTANT SECRETARY FOR ECONOMIC POLICY, U.S. DEPARTMENT OF THE TREASURY 

Mr. WARSHAWSKY. Thank you very much, Chairman Johnson, 

Ranking Member Becerra, and Members of the Subcommittee on 

Social Security. I appreciate the opportunity to be here. I would 

like to congratulate you for holding this hearing discussing the revenue options for Social Security reform. 

As the recent Social Security trustees report shows, the program’s financial status has worsened both in the short and long 

term. Social Security is now running large and soon to be rapidly 

growing cash flow deficits, adding to the federal debt outstanding 

held by the public and the budget deficits of the Federal Government. The day is steadily growing closer when benefits by law will 

have to be cut. Indeed, for disabled beneficiaries and their families, 

this is projected to occur in seven years. 

It is good that we are now discussing more actively options to 

strengthen Social Security, and it is promising that many groups 

and individuals and legislators have put forward specific proposals. 

At the same time, not all provisions and all reform plans are good 

policy. 

For example, there are proposals coming from the deficit reduction commissions and elsewhere to increase Social Security payroll 

taxes substantially by increasing the contribution and benefit base. 

In particular, the commissions propose to increase the Social Security contribution and benefit base—also called the taxable maximum—by an additional two percent each year, starting in 2012, 

until 90 percent of total earnings of the labor force are taxed. 

If the increase were to happen in one step in 2012, the taxable 

maximum would be about $215,000, up from $106,800 today. This 

is a very large tax increase on about 10 million of our most productive workers. Almost 99 percent of workers would then be subject 

to Social Security taxation on all of their earnings, up from about 

94.5 percent today. 

This proposed provision is a bad idea for at least four reasons, 

in addition to the general ill effects of tax increases. 

It unfairly targets a specific segment of the population that has 

not seen particularly large gains in earnings. It is an extra burden, 

in addition to the new taxes imposed on this and other groups to 

finance Medicare and in the recent health care legislation. It will 

cut pre-retirement savings. And it represents an unnecessary expansion of Social Security. Let me explain briefly each. 

Those who advocate an increase in the taxable maximum have 

indicated that their goal is to have 90 percent of total earnings in 

the labor force subject to Social Security taxation. This taxable coverage ratio has fluctuated over the history of the program, from as 

little as 71 percent in 1965 to a high of 90 percent in 1983. And 

most recently, in 2009, it was 85.7 percent. The use of this ratio 

for policy design seems very arbitrary. But I think what the advocates are getting at is a deeper concern about the distribution of 

income and earnings, more broadly. And they claim, based on some 

research, that there has been an increase in inequality. 

But then consider another study that focuses on the wages of private sector workers, ages 25 to 60, over a long period of time. It 


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finds that the increase in equality has slowed since the late 1980s, 

and that the vast majority of the increase for the top 20 percent 

of workers, the first group since 1980 is due to those above the 1 

percent, the top percentile, the second group that is, those earning 

more than $215,000. And this is confirmed also looking at estimates from Social Security wage data. 

So, the first group, which is the larger group, has had wage increases much more modest than the upper group. Punishing the 

first group with a much bigger tax increase than the second group 

would be very unfair. 

The second reason why an increase in the taxable maximum is 

a bad policy is that workers in this segment—and also those with 

higher earnings, in the upper earnings distribution—are already 

bearing significant increases in payroll taxes, and are scheduled for 

further increases soon. 

In 1991 the earnings cap for Medicare health insurance was increased, and in 1994 it was lifted entirely. So these workers already have seen a significant payroll tax increase of 2.9 percent of 

earnings. Under the new health care law, an additional payroll tax, 

HI payroll tax of .9 percent will be levied from workers earning 

above $200,000 for singles, $250,000 for joint filers. Because these 

thresholds are not indexed, many of the same workers would be hit 

by this tax increase as the increase that was proposed by lifting the 

Social Security taxable maximum. 

The third reason for opposition to this increase is that it will reduce private retirement savings. We have done work using a comprehensive retirement planning model for some illustrative household situations, and a colleague and I have found that those individuals earning above $106,000 that would be hit by this tax increase would reduce their retirement savings by about 4 percent. 

When you translate that across 10 million workers, that is a significantly lower amount of domestic sources of investment capital. 

Finally, an increase in the wage contribution of benefit base is 

an unnecessary expansion of the program. An increase is unnecessary, because there are fairer and better ways to bring Social Security to permanent solvency with no payroll tax increase, which 

would involve changes in several aspects of the program affecting 

different groups that, together, add up to sustainability. Thank 

you. 

[The prepared statement of Mr. Warshawsky follows:] 


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Chairman JOHNSON. Thank you, sir. I agree with your last 

statement, wholeheartedly. 

Andrew Biggs, doctor—is it Andy? 

Mr. BIGGS. It is. 

Chairman JOHNSON. Yes, that’s what I thought. Resident scholar, American Enterprise Institute, you are recognized for five minutes. 

STATEMENT OF ANDREW G. BIGGS, RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. BIGGS. Thank you very much. Mr. Chairman, Ranking 

Member Becerra, Members of the Subcommittee. Thank you for offering me the opportunity to testify today with regard to Social Security’s finances. 

The American population is aging, which means that smaller 

numbers of workers must support larger populations of retirees. To 

help them do so, public policy should encourage individuals to do 

three things: work more, meaning more hours of the week and 

more weeks of the year; save more, meaning greater contributions 

to retirement plans and other savings vehicles; and retire later, 

meaning delaying retirement past 62, the most common age of 

claiming Social Security benefits. 

If we improve the incentives for Americans with regard to work, 

saving, and retirement ages, we can boost the economy and increase our capacity to finance rising entitlement costs. How would 

fixing Social Security through tax increases affect these efforts? 

Put broadly, increased taxes generally mean that individuals will 

work less, because the reward for working has been reduced; save 

less, because they have less after-tax income with which to save, 

and less reason to save, as entitlement programs would be more 

generous; and retire earlier, because Social Security benefits would 

appear more generous, relative to their after-tax pre-retirement 

earnings. In other words, higher taxes work opposite to economiclevel goals that most analysts would accept. 

We may disagree regarding how large the effects of raising taxes 

would be. We might also conclude that some policy goals are so important that the negative economic effects of tax increases are a 

price worth paying. But we should not dispute that raising taxes 

imposes a cost on the economy’s ability to support growing populations of retirees. 

The most common proposal for raising Social Security taxes is 

lifting or eliminating the maximum taxable wage. With regard to 

raising the so-called tax max, I would make four points. 

First, the current payroll tax ceiling is not unusually low, by historical standards. As of 2009, 85 percent of total wages were subVerDate Nov 24 2008 03:47 Feb 18, 2012 Jkt 072873 PO 00000 Frm 00086 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\72873.XXX GPO1 PsN: 72873

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ject to the payroll tax. From 1937 through 2009, the average was 

84 percent. And from 1950 through 1970, only 78 percent of total 

earnings were subject to taxes. 

Second, Social Security’s payroll tax ceiling also is not unusually 

low, relative to other developed countries. Across 22 OECD countries, pension taxes were, on average, applied up to 2.1 times the 

average wage. In the U.S., the Social Security payroll tax is applied 

up to around 2.9 times the average wage, a significantly higher tax 

cap than in the UK, Germany, Canada, or other competing countries. 

Third, eliminating the payroll tax ceiling could lead to very high 

marginal tax rates. Based on the tax rates proposed by the administration, eliminating the tax max would raise the top all-in marginal tax rate to an average of 63 percent, and higher than that 

in some states. And these taxes would be before we had done much 

of anything to fix Medicare and Medicaid. 

Fourth, roughly one-quarter of the revenue gains from eliminating the tax max would be offset by lower tax receipts in other 

areas. This result does not depend on assuming that individuals 

change their work behavior. Rather, employers would reduce workers’ wages to compensate for their own higher payroll tax liabilities. These reduced worker wages would lower receipts from federal income taxes, Medicare payroll taxes, and state income taxes. 

If individuals made even modest behavioral responses to higher 

taxes, then about half the gross revenues from eliminating the payroll tax ceiling would be lost, according to a study by Professors 

Jeffrey Liebman of Harvard University, and Emmanuel Saez of the 

University of California, Berkeley. 

Lawmakers face a choice: policies that encourage work and saving, or retaining the safety net for the poor, versus policies that 

discourage work and saving. Our ability to care for those in need 

springs from the goods and services produced in the economy. If we 

penalize workers who produce those goods and services, the goals 

of Social Security and other federal programs will be more difficult 

to achieve. Thank you very much. 

[The prepared statement of Mr. Biggs follows:] 


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f 

Chairman JOHNSON. Thank you, sir. I appreciate all of your 

testimony. I don’t think any of us up here—on this side, anyway— 

want to raise taxes. But we will have to see what falls out. 

Mr. Goss, in 2010 the maximum amount of earnings subject to 

the 12.4 percent payroll tax was 106,800, same as this year. And 

84.2 percent of covered earnings were subject to the tax. What 

would the maximum amount be this year if 90 percent of covered 

earnings were subject to the payroll tax? 


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Mr. GOSS. Dr. Warshawsky addressed that point already, and it 

would be somewhat in excess of 200,000. We estimate that by the 

time we get to 2020, if we were to go to a 90 percent taxable instead of the roughly 82.5 percent taxable that we expect to have 

at that time, it would be a little bit over double the taxable maximum amount that we would have, otherwise. 

Chairman JOHNSON. Yes. Are you in favor of that? 

Mr. GOSS. We are in favor of solvency and strengthening Social 

Security—— 

Chairman JOHNSON. Okay. 

Mr. GOSS [continuing]. Absolutely, by whatever means you all 

determine. 

Chairman JOHNSON. Okay, 202,500 is what it would be today. 

Dr. Biggs and Mr. Brill, the Congressional Budget Office produced a policy option publication for Congress last July. In it they 

stated, ‘‘Like all taxes on earnings, Social Security taxes reduce the 

award from work, which tends to decrease how much people work.’’ 

The Joint Committee on Taxation recently completed a revenue 

analysis for me, and the analysis says that 2.8 trillion in self-employment income, and 13.4 trillion in wage income, would be subject to payroll taxes over the next decade if the wage base were 

eliminated. If the taxable wage base were lifted to cover 90 percent 

of earnings, those numbers would be 500 billion and 4.4 trillion, respectively. 

Given these facts from CBO and Joint Tax, do you think that 

raising the wage base would keep this country from creating new 

jobs in this country that we desperately need? Either one of you. 

Mr. BIGGS. Well, as I noted in my testimony, I believe that we 

need to concentrate on economy-level goals of work, saving, investment, the things that will strengthen the economy and allow us to 

support larger populations of retirees. 

With regard to the effects of taxation, I think I would raise three 

points. One is that the negative economic effects of a tax increase 

depend, first, on the size of the tax increase. A 12.4 percent increase in the marginal tax rate is large, by itself. 

Second, it depends on the tax it’s already stacked on top of. If 

people are already paying high marginal tax rates, and then you 

add more to it, the economic effects are more significant than if you 

were stacking that tax increase on a low tax rate. 

Third, higher-income individuals tend to be the most sensitive to 

marginal tax rates. So, essentially, you are applying this tax increase in the place where you are going to have the most negative 

economic effects from it. So I think it is just not, in my mind, a 

particularly productive way of going about this problem. 

Chairman JOHNSON. Do you agree with that? 

Mr. BRILL. I do agree. I agree with Mr. Biggs’s points. And I 

would just add that the response that we could anticipate—your 

question focused on labor and job creation—a number of the small 

business and medium businesses are pass-through entities, taxed 

through the ordinary individual income tax, not the corporate tax 

system. Roughly half of small business income is taxed by individuals at relatively high income rates. Raising the cap, whether it be 

to 90 percent—in other words, to $200,000—or taking the cap off 


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all together, would raise the marginal rates significantly on those 

small businesses. 

Chairman JOHNSON. Yes, and small businesses—our studies indicate that is where most of the jobs are created. Is that true? 

[No response.] 

Chairman JOHNSON. Dr. Biggs and Mr. Brill, from an economic 

viewpoint, how do you think small business owners would react if 

Congress raised their marginal payroll tax 12.4 percent? What 

would be the business response, particularly during these times? 

Mr. BRILL. Research by Doug Holtz-Eakin and Bob Carroll and 

others have noted that the response from sole proprietorships to increases in tax rates can be significant. So a reduced amount of 

business activity from these small employers. It could be on the 

order of magnitude to a five to seven percent reduction in activity. 

In addition, there is a shift in the amount of taxable income that 

is reported, different than a shift in the economic activity. But both 

of these are important consequences. So there is both an effect to 

federal revenues on the income tax side, as well as a real effect on 

the economy. 

Chairman JOHNSON. Thank you. 

Mr. BIGGS. I believe the effects would be larger on the small 

business end than they would be for individuals working for other 

employers. Small businesses have more capacity to shift the way 

compensation is paid out, where individual employees have less. So 

I think the negative effects we are talking about would be larger 

on the small business end than they would be in the rest of the 

workforce. 

Chairman JOHNSON. Yes, it is negative overall, in my view, too. 

Mr. Becerra, you are recognized for five minutes. 

Mr. BECERRA. Thank you, Mr. Chairman, and thank you all for 

your testimony and for having taken the time to shed some light 

on the issues of Social Security. 

Interesting, Mr. Brill, I take a couple of things from your testimony that I think are very important that we have to really consider. Non-wage compensation does not get taxed, for payroll purposes, to provide the funds for Social Security. 

So we find ourselves in a situation where, if you are a worker 

in America who relies principally on your paycheck, and your income is anywhere between, you know, 0 to $106,800, you are subject to the full level of the Social Security payroll tax contribution 

to the system. But if you rely on a paycheck for part of your income, but the lion’s share of your income comes from other nonpayroll sources—and obviously, an extreme example would be a 

Bill Gates or perhaps a Wall Street executive, there is a good 

chance that the vast majority of their income doesn’t get taxed for 

payroll purposes. 

So there are a whole bunch of Americans who are making vast 

sums of income who, because they don’t get it through a paycheck, 

don’t have to contribute to the Social Security system beyond whatever they get as a paycheck for a directly-compensated wage. That 

is an excellent area of examination. Because I think you talked 

about how you have to figure out how you broaden the base in a 

fair way. And I think we should try to explore that a bit more. 


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Mr. Biggs, you pointed out something that I think most Americans don’t often think about, and may have to swallow kind of hard 

to recognize or accept, and that is—you said you have to work 

more, save more, and retire later. I think in America, the goal of 

most Americans is to be able to retire earlier—save more, and retire earlier, rather than have to work more, have to save more, and 

retire later. 

And I think the way you tried to explain it, though, it makes it 

clear you are not telling folks, ‘‘Hey, this is a new day in America, 

where we are going to work longer and get less,’’ what we are simply saying is, ‘‘Be smart about the way you save, understand what 

it means to have to work hard, and be prepared to know what it 

will take for you to live out the rest of your years, if you are going 

to retire, whether you retire early or not.’’ 

And I think, too often, Americans don’t really plan for what it 

will take to live out their retirement in dignity. And then that is 

where I think Social Security has become a tremendous asset in 

this recent heavy recession, and I think makes it very clear why 

so many seniors have become so protective of Social Security benefits. 

I want to ask a quick question. Are any of you familiar with Mr. 

Sessions’s—Pete Sessions—legislation that he recently introduced, 

H.R. 2109? 

[No response.] 

Mr. BECERRA. I referenced it in my opening remarks. It is legislation which essentially privatizes Social Security, because it allows 

workers today to not contribute into the system, and instead, create their own private accounts. 

And unlike previous privatization proposals, in this case, in the 

Sessions legislation, there would be no backfilling of the lost revenues by having today’s workers no longer put money into the system, and instead, only put money into a private account. Most of 

the previous privatization proposals at least recognized that Americans who are retired today because they were working and contributing to the system yesterday should not be expected to take the 

massive loss of benefits, as a result of having today’s workers no 

longer contributing to the system. 

Mr. Goss, I have tried to explain an aspect of the Sessions legislation. Obviously, it goes well beyond that into other areas, as well. 

But what would happen if you had a system where you created a 

system—I would no longer call it Social Security, because it would 

become a privatized system, where no longer would American 

workers contribute, starting today, into the Social Security system 

and the trust fund? What would happen to today’s retirees? 

Mr. GOSS. Very good question. We have not been asked to do a 

formal estimate of the plan, but we are familiar with it. My understanding of the plan is that workers today who are not yet retired 

and not receiving benefits would have the option to start paying 

one half of the taxes, and after 15 years not to pay any of the taxes 

themselves, and by their employers. 

People who are over 40—especially over 50—probably wouldn’t 

want to do this, because they have a substantial investment in Social Security already. For people who are under 40, they may well 

decide that the amount of money that they could put into an acVerDate Nov 24 2008 03:47 Feb 18, 2012 Jkt 072873 PO 00000 Frm 00099 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\72873.XXX GPO1 PsN: 72873

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count would be sufficient that they would be willing to walk away 

from the Social Security benefits that have been scheduled for 

them. 

What this would mean, though, to the extent that people did 

this, is that the amount of revenue coming into Social Security 

would be dramatically reduced. Already, as many on the panel 

have pointed out, we do not have enough taxes coming in over the 

future to be able to pay for scheduled benefits, as it is. Taxes would 

be reduced—essentially, immediately—by a substantial degree, and 

we would not have any offsetting reduction in benefits until people 

who are under 40 now got to the point of receiving benefits. 

So, for Social Security—the ability to pay benefits to people who 

are currently receiving or are now approaching the time of receipt 

of benefits would be severely compromised. Trust fund exhaustion 

would certainly come much sooner than 2036. And the extent to 

which we have cash flow shortfalls, and the speed with which we 

would be spending down our trust fund assets, would be much, 

much faster. 

Mr. BECERRA. Thank you. Thank you, Mr. Chairman. 

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

Mr. SMITH. Thank you, Mr. Chairman. And thank you to our 

witnesses, for sharing your expertise and your time. 

We have heard various characterizations of Social Security, that 

everything is just fine and so forth. And I am trying to grapple 

with various points of information and perspectives. 

But Mr. Goss, would you describe Social Security as actuarially 

sound? 

Mr. GOSS. Thank you very much for the question. Clearly, we 

do not project that Social Security is solvent over the next 75 years. 

We will reach the point in 2036, if nothing is done—and we trust 

something will be done—that the trust funds will become exhausted and won’t be able to pay full benefits. As Chairman Johnson indicated, at that point in time, 77 percent of scheduled benefits would be payable. 

So, changes clearly need to be made. We need to either increase 

revenue or, to reduce the scheduled benefits to match the revenue 

already being put on the table under current law. 

Mr. SMITH. But is there even a mechanism to reduce those benefits, should nothing be done? 

Mr. GOSS. Well, actually, there is. Social Security OASI, DI, and 

the Medicare Hospital Insurance funds are special in the Federal 

Government. Most programs in the Federal Government, as we 

know too well, can run deficits for a long time, and actually build 

up a lot of debt. We have over $14 trillion of total federal debt now. 

Social Security does not have any debt. In fact, it cannot have debt, 

by statute. It is not allowed to have debt. 

From the point of its inception, it has to always have taken in 

more money than it has paid out. So there is a natural breaking 

force spending, there is a scrutiny that is applied to the trust fund 

programs. If we reach the point where the trust funds run out, and 

there is no action by Congress, we will have no choice but to pay 

out only then what the trust funds have available, which will be 

$.77 on a dollar. 


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That would be—I don’t know if catastrophic is too strong a word, 

but that would be a terrible situation. You cannot—anybody would 

not want to have our beneficiaries, from one day to the next, drop 

by 23 percent in the amount that they receive. So we have absolute 

confidence that the Congress will act between now and that time, 

and hopefully sooner. 

Mr. SMITH. Okay, thank you. Dr. Biggs, in your testimony you 

note that while only six percent of workers reach the taxable maximum in a given year, almost a quarter of workers would be affected by such an increase over their lifetimes. Could you expand 

on this? 

Mr. BIGGS. Sure. In an given year, around six percent of employees have earnings above the taxable maximum of around 

$107,000. We had periods in the past—I think from 1950 to 1970 

that actually were around 20 or 22 percent of workers were above 

that tax cap in any given year. 

Today it is only six percent, but it is not the same six percent 

year after year. Some people have good years, some people have 

bad years. If you look at the course of individuals’ full working lifetimes, somewhere—my number is around 24 percent—would have 

had some earnings above that cap at some point in their career. 

And so, if you lift or eliminate the cap, would have been subject 

to that higher tax rate. 

Mr. SMITH. Mr. Brill, certainly the six percent sounds like a 

small number. But if these are entrepreneurs and job creators, how 

does that impact our economy and our effort to reverse this recession? 

Mr. BRILL. I think, actually, the more important number is the 

larger number that you referenced, the 24 or 25 percent, because 

what is important to keep in mind is it is not only those taxpayers 

who are facing the higher tax rate currently, but those that would 

risk facing it if they were successful. 

So, research on the economic consequences of entrepreneurship 

have confirmed this, that if an individual who is making $100,000 

is considering a new venture, a risky venture that, if things work 

out well, his income or her income would jump to $200,000, knowing that their tax rate would increase substantially at the same 

time may discourage some of that activity. 

So, it is important to focus not just on those who are actually affected at the moment, but those who are at risk of facing the higher tax, as well. 

Mr. SMITH. Okay. Dr. Warshawsky, would you care to comment? 

Mr. WARSHAWSKY. I agree with the statistics that have been 

put forward. But I think it is also very helpful to give some characterization of who these workers are. The typical earnings profile of 

many workers is that they reach their peak in their early fifties, 

when they have their highest earnings potential. This is after years 

of education, hard work, supporting growing children. And these 

people have been hit pretty hard by high education costs, high 

health care costs. 

So, I think it is important to sort of get a sense of the character 

of these workers. 


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Mr. SMITH. Okay. Thank you. Thank you, Mr. Chairman. I yield 

back. 

Chairman JOHNSON. Thank you, Mr. Smith. Mr. Berg, you are 

recognized. 

Mr. BERG. Well, thank you, Mr. Chairman. I wanted to explore 

a little bit the question that comes up always that there is income 

that people receive that they are not paying, you know, FICA or 

SECA on. What is an example of what people use for that? There 

is some specific revenue that you hear a lot? Please. 

Mr. GOSS. We have on page nine of the written testimony identified a couple proposals that could generate revenue that have been 

put forth by the bipartisan policy center workgroup, and one of 

them actually by Paul Ryan, in his roadmap plan, that would not 

increase the taxable maximum amount. These are plans, instead, 

that would look at employee compensation that is now not taxed, 

but would become taxed. 

One of these items that would cover about 42 percent of our 75- 

year shortfall would be to tax the employer-sponsored group health 

insurance premiums, whether those are paid for by employees or 

by employers. Currently, they are generally not subject to the FICA 

tax. If those were subject to the FICA tax over a gradual period of 

time, phased in as this particular proposal would suggest, we could 

cover almost half of the 75-year shortfall. 

Another smaller approach toward covering a portion of this 

would be to cover certain Section 125 cafeteria plans by which employees can pay for a portion of some fringe benefits that they receive. These are also tax exempt currently. Most of this, as we have 

learned from our friends at Joint Committee on Taxation, is the 

employee share of employer-sponsored group health insurance. If 

we were to make that no longer FICA tax-exempt, that would cover 

about 10 percent of the long-term shortfall for Social Security. 

So, there are options, other than just raising taxes. 

Mr. BERG. And I was just curious, because I hear people talking 

about that, and now I know that what they are talking about is 

simply taxing health care benefits, or employer-provided health 

care benefits. 

The other question I had—and again, we had a reduction in 2010 

where we went from 6.2 to 4.2, and I guess I was just wondering 

if any of the panelists here have—do we have any results from 

that, that we can say, ‘‘Hey, that was a good decision,’’ or a poor 

decision, or—what was the impact of that? Anyone wish to address 

that? Or is it too early to tell? 

Mr. GOSS. Well, I would just—— 

Mr. BERG. Do you get paid extra? Are you getting paid by the— 

no. 

Mr. GOSS. Okay. 

Mr. BERG. No, no. 

Mr. GOSS. A portion of that legislation suggests that the trust 

funds, per se, would not be affected. The revenue coming into the 

trust funds has been maintained exactly as though the tax rate 

were not reduced. 

So, effectively, one might suggest that it was a mechanism by 

which the amount that employees and self-employed had to pay to 

the Federal Government was reduced by 2 percent of their pay, up 


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to the $106,800. Trust funds are not affected, and the long-term 

solvency is not affected. 

Mr. BERG. I can’t understand that. Why is the trust fund not 

affected, or the long-term? Are we taking dollars and putting it in 

there to offset that two percent? 

Mr. GOSS. We—— 

Mr. BERG. Okay. 

Mr. GOSS. The trust fund continued to be credited, not by money 

that was coming in in payroll taxes, but money from the general 

fund to the treasury. 

Mr. BERG. Right, right, okay. 

Mr. GOSS. And this is a special—— 

Mr. BERG. I follow you, I follow you. 

Mr. GOSS [continuing]. A special one-year thing in 2011. 

Mr. BERG. So now, what is the benefit, then? 

Mr. GOSS. Well, the benefit—I think some of our economists 

could probably speak better—— 

Mr. BERG. I see some smiles, though. 

Mr. GOSS [continuing]. To this than I. 

Mr. BERG. Whoever has the biggest smile starts. 

Mr. WARSHAWSKY. I am anxious to hear what Steve will say. 

[Laughter.] 

Mr. GOSS. But we have heard much discussion about the impact 

on economic growth and desire to work by having taxes increase. 

This effectively was a one-year decrease in taxes for employees and 

for self-employed. The intent, presumably, was to encourage more 

work and more employment during that period. I am not sure that 

anybody can really measure what the impact is. 

Mr. BRILL. I would just comment that if we are thinking about 

changing the tax rates as a tool to create jobs, we need to distinguish between temporary tax policies and permanent policies. This 

policy, which was a temporary one, while technically it may be too 

early to do the analysis, and it is always hard to know the but-for 

case, but certainly the labor market is not improving while this policy is in place. 

Mr. WARSHAWSKY. I would just comment again. I have not 

seen any studies in it. I would imagine it is premature. But I think 

the American public sees that Social Security has financial troubles, and that the Federal Government has financial troubles, and 

with this sort of temporary tax cut, people, you know, are uncertain. They don’t know. Does that mean taxes will increase in the 

future? 

Mr. BERG. I just—let me—it is clear to me. I, of course, just 

come from little old North Dakota. And it seems that out here everything is pretty temporary, and a cloud of uncertainty over business and over everything. A cloud of uncertainty is over Social Security. People need to know what is going to happen. 

And again, just to add to that, I think we need long-term solutions for solvency, whether it is our country’s cash flow, whether 

it is our country’s regulatory environment, whether it is our country’s tax environment, simply having a path that people can look 

down the road and have confidence that it is going to be there is 

really what is critical. 


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So, just one final question. What is the cost? Does anyone know 

what the cost of the two percent is, then, to the general fund? Do 

we have a number on what that is? 

Mr. GOSS. So for 2010 and some of the cost for 2011 slipping into 2012, it is about $110 billion in total. 

Mr. BERG. And that is set to expire in December of 2011, or—— 

Mr. GOSS. Or the beginning of 2012. Work in 2012 will no longer 

be subject to the 2 percent reduction. 

Mr. BERG. Okay. 

Mr. GOSS. In payroll tax. 

Mr. BERG. Thank you. I yield back. 

Chairman JOHNSON. Thank you, Mr. Berg. Mr. Marchant, you 

are recognized. 

Mr. MARCHANT. Thank you, Mr. Johnson. Mr. Brill, the President is proposing that we cut the employer’s payroll taxes to create 

jobs. Other Members of Congress—the Democratic Members of 

Congress—are proposing that we raise payroll taxes in order to 

make the Social Security fund solvent. 

Which of those two policies would create more jobs, or make the 

fund become more solvent? Which one of those policies should we 

select? 

Mr. BRILL. Are there any other choices? 

[Laughter.] 

Mr. MARCHANT. I won’t select either one of those, but those are 

the proposals—— 

Mr. BRILL. I would just note again, as I remarked to Congressman Berg, the important distinction between those two, in addition 

to the fact that one is going up and the other one is going down, 

is that one is temporary and the other one is permanent. The evidence of temporary tax policies on permanent job creation is shaky, 

at best. 

And as we were just noting, a recent experience may be too soon 

to analyze, but it seems unlikely that we would get a large benefit 

from a temporary payroll tax, whether it be on the employee side 

or the employer side. Of course, there have been a number of attempts at temporary policies in the last few years, none of which 

seem to have been particularly effective. 

On the other side, raising the cap is a permanent policy, and employers and employees experiencing long-term, higher marginal 

rates are less likely to engage in work. 

Mr. MARCHANT. As someone that is a small employer, as well 

as a Member of Congress, and my brother as well, we have had 

this discussion in the last week about what happens in January, 

when all of a sudden the two percent goes away, and all of a sudden the same exact check to one of our—the foreman in this case, 

$68, will—the foreman will be paid exactly the same amount, but 

there will be $68 less in his paycheck. 

Is there any of you on the panel that have any opinion about 

how—what effect that is going to have on employment, if Congress 

or the administration is not able to extend that deduction? Dr. 

Biggs, how about you? 

Mr. BIGGS. I think I would agree with some of the others, that 

I suspect the effects on employment of temporary payroll tax cuts 

will be small. And so, if we didn’t see a lot of job gains through 


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the payroll tax cut—and I suspect we didn’t—then probably we 

won’t see a lot of job losses when the payroll tax goes back to its 

original level. That is my gut on this. 

It may be possible to do some research in further years and figure it out, but if you are looking to hire somebody, particularly if 

you are looking to hire somebody for a quality job, you know, what 

we call a ‘‘good job,’’ it is somebody you want to have them stick 

around for a while, you know, a permanent employee, a two percent cut in your labor cost in one year is not really enough to say, 

you know, ‘‘I am going to go out and add a whole load of new people.’’ It is just—the temporary nature of it just—I don’t think will 

have that big an effect. 

So, I tend to think the positive effects were small, and the negative effects, when it goes away, also will be small. 

Mr. MARCHANT. And, Mr. Chairman, if I could ask a question 

that I promised a gentleman last week—when he found out that I 

was going to be on the Social Security Subcommittee, he asked me 

to ask this as a question. 

What is—and I will ask this to Mr. Goss—what is the definition 

of a gap baby? Notch baby, I am sorry. 

Mr. GOSS. Notch. 

Mr. MARCHANT. Because this gentleman obviously is a notch 

baby. 

Mr. GOSS. Okay. 

Mr. MARCHANT. And he calls often. 

[Laughter.] 

Mr. GOSS. We apologize for that. There was a certain period of 

time during which births reached retirement age in a period when, 

as a result of the 1977 Social Security amendments, because the 

benefit levels were rising at, really, an unsustainable rate, these 

so-called replacement ratios, benefits relative to wage levels, were 

growing out of control. And the 1977 Social Security amendments 

came along and corrected that. 

But the Congress at that time decided that the benefits had risen 

to a level that was about six percent higher than they thought 

made sense. So they actually, over a period of five or six years 

worth of retirees, pulled the benefit levels down. As a result of having the benefit levels pulled down over that period, we ended up 

with a situation which really defines what a notch is: people retiring this year, say at 62, actually getting less when they retire at 

62 than a person who is now 63, had the same job, and retired a 

year ago. 

And so, if a person retiring now is getting less than a person who 

retired a year ago from the same job, then that is defined as a 

notch that is something which, when we design proposals—everybody who is sitting behind you knows well—this is something we 

strive to avoid, having notches in the future so you won’t have any 

more cards and letters. 

Mr. MARCHANT. Okay. Thank you, Mr. Chairman. 

Chairman JOHNSON. Try not to ask that question any more. 

[Laughter.] 

Chairman JOHNSON. Let’s see, Mr. Tiberi. 

Mr. TIBERI. Thank you, Mr. Chairman. Thanks for having this 

hearing. 


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Mr. Goss, remind us up here. When Social Security was created, 

my understanding is that President Roosevelt stressed that this 

would not be a welfare system, that this would be a system that 

the benefits, the taxes that you paid, would equal the benefits that 

you incurred. And, therefore, if you were making $100,000, and 

paying tax on the $100,000, your benefit will be higher over a period of time if your average wage over time was $50,000, and thus 

you paid $50,000 into—or taxes based on the $50,000. Is that correct? Is that how it works? 

Mr. GOSS. That is absolutely correct. People who earn more, and 

therefore pay higher taxes, do get higher benefits. But it is not in 

direct proportion. 

Mr. TIBERI. Right. 

Mr. GOSS. If you have somebody who makes $50,000 versus $100,000, the $100,000 will pay twice as much in the way of taxes. 

But because of the way the benefit formula has been put together, 

they will not get twice as much in the way of benefits. 

Mr. TIBERI. But they will get a percentage higher, because they 

put a percentage more in. 

Mr. GOSS. They definitely will get more benefits. 

Mr. TIBERI. If we lift the cap—the proposals to lift the cap 

haven’t corresponded to the theory that President Roosevelt has 

proposed, is that correct? My understanding is those who want to 

lift the cap want to also cap the benefit and then use the remainder to fund the system. Is that correct, or am I wrong? 

Mr. GOSS. Well, we have a variety of proposals. One that has 

been discussed much here is to gradually raise the taxable maximum up, so that we will again be taxing 90 percent. 

Actually, the fiscal commission and the bipartisan policy center 

commission came up with slightly different flavors of that. Generally speaking, if we do raise the taxable maximum, extra earnings that people have above the current taxable maximum might 

be confronted in our benefit formula with getting only a 15 percent 

return, as compared to about the average 48 percent return that 

earnings tend to get. 

The fiscal commission actually suggested that the extra earnings 

should get not a 15, but a 5 percent return. So they were trying 

to achieve actually more solvency kick out of raising the taxable 

maximum than the bipartisan policy center is. 

Other proposals have been put forth that would say that for the 

extra taxes paid in for higher earnings, there will be no extra benefit gains. So there is a great variety of possibilities that you might 

consider. 

Chairman JOHNSON. Dr. Biggs, would we lose public support, 

in your opinion, if we raise the tax? And we have heard from you 

and Mr. Brill about the negatives of raising the tax. But put that 

aside for now. Would we lose public support of the system, in your 

opinion, if we took the cap off and retirement benefits would be less 

than they are today for those earners, based upon the tax paid and 

the benefits received, whether it is 48 percent versus 15 or 48 percent versus 5 for the added amount? 

Mr. BIGGS. Well, I think that that is an important issue, sort 

of a political economy issue, of how people view the program, and 

how that affects their support for it. 


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Historically, that issue is very, very important for President Roosevelt. He appointed a commission to develop sort of the skeleton 

of the Social Security program. 

The interesting thing of what the committee on economic security 

came up with is they originally set this wage cap of $3,000, and 

they argue that anybody above that wage cap shouldn’t even participate in the program, that they should just go save on their own. 

So, under their structure, you wouldn’t have had any redistribution 

from these high earners to low earners. It was really seen as a universal insurance program, where everybody paid in, everybody got 

out. 

The compromise they came to was a cap where you pay in taxes 

based up to $100,000 in earnings, and your benefits are based on 

those same taxes. So there was always this interchange between 

the two. If you made it too progressive, the argument was, it would 

be come to be seen was what Roosevelt called relief—the phrase we 

use today is ‘‘welfare.’’ 

Now, the question is how far can you push that. You can say we 

are going to eliminate the cap, and you are going to get an extra 

penny of earnings, or an extra penny of benefits. People say, ‘‘Okay, 

clearly, that is sort of a—that makes kind of a joke of the situation.’’ So the question is, how far can you push it before you get 

the lack of political support, which, really, people have counted on 

for the program? If people don’t feel a program is fair, then the political support does tend to fall apart. 

Chairman JOHNSON. Thank you. Mr. Brill, you commented 

about the concern that, in raising Social Security revenue, there 

would be a detrimental impact on overall federal revenue. Can you 

expand upon that, why you believe that? 

Mr. BRILL. Sure. I think this is an important consequence to appreciate when looking at raising the cap or raising the payroll tax 

rate. It depends, in part, on exactly the sensitivity of the workers, 

to what degree they respond to this higher tax rate. And there is 

a debate among academics to that response. 

But there is absolutely shifting that will occur, and it would be 

reflected in any analysis that Tom and his team would undertake, 

or any work done by the CBO on this issue. 

One paper that many have noted on this area is a working paper 

by Jeffrey Liebman and Emmanuel Saez. In that paper, they estimate the impact on a per-worker basis of raising the payroll cap. 

In one example, a more conservative example, raising the cap to 90 

percent from where it is now would result in $155 more in payroll 

taxes, but $67 less in other taxes being paid, as the workers shift 

their behavior and either work less or report less taxable wages. 

And so, in that sense, there is a decreasing amount of general fund 

revenues in exchange for increasing amounts of Social Security revenues. 

Chairman JOHNSON. Thank you. You know, you guys didn’t 

talk about raising the age limit at all. I am surprised. 

And, Mr. Lee, you didn’t push your teachers out there, I am sorry 

to hear. Tell them hi when you get back, will you? 

Mr. LEE. I will, thank you. 


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Chairman JOHNSON. I thank you all for being here today. This 

subcommittee will continue to monitor progress to make sure that 

Social Security is done right, within its means. 

With that, the committee stands adjourned. Thank you all for 

being here. 

[Whereupon, at 3:28 p.m., the subcommittee was adjourned.] 

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