Statement of the Hon. Nick Smith, a Representative in Congress from the State of Michigan

Before the Subcommittee on Social Security,
 House Committee on Ways and Means

Hearing on Social Security Improvements for Women, Seniors and Working Americans

March 6, 2002

• The atmosphere on the topic of Social Security reform has changed quite a bit since I started working on this in 1993 and introduced my first bill in 1994. The President's commitment to reform could push this effort over the top.

The Social Security Solvency Act

• I hope that Congress will consider offering my bill or something similar to strengthen Social Security. My bill is a carve-out approach, allowing workers to invest 2.5% of their paycheck into an account they own and control. It has generally transparent financing, with an infusion of cash from the general fund in the beginning, to be repaid later. It includes, however, a number of features that should be considered.

• The Transition Problem. As you all know well by now, nearly any Social Security reform plan based on savings would be more stabile and generate greater returns over the long-term than what we can expect from the current pay-as-you-go system. The difficulty, however, is getting from here to there. So let me discuss a few of things I did to smooth the transition.

• New bend point for benefit calculations. My legislation would create a new, 5% bend point affecting higher earners. The introduction of the bend point is phased in to prevent the creation of notch. This will significantly restrain the growth of benefits for higher earners. This is necessary to maintain the progressivity of the Social Security benefit structure, in my view, because a worker-owned account based on a percentage of income will allow higher-income individuals to save more in their accounts than lower-income individuals.

• Multiple tiers of account management. Worker-owned accounts pose some challenges related to controlling administrative costs. My proposal does this by limiting fairly sharply the range of investment options available before an account reaches $2,500 in assets.

Benefit protections for women

• Account sharing for married couples. A private account plan needs a way to provide for nonworking spouses. My solution to this problem to split the contributions made by a married couple equally between each spouse's account. This also simplifies the division of account money in the case of divorce or separation.

• Imputed earnings for nonworking spouses who care for children. My bill would reduce the length of the earnings history that AIME is calculated on for a spouse who takes time off to care for a child between birth and three years of age. This could reduce the 35 year work history period by as much as five years.

• Increase in widow and widower benefits. My bill would increase the deceased spouse benefit from 100% of the deceased spouse's benefit to 110%. This is designed to help some surviving spouses who are squeezed by the need to maintain their household.

Doing the whole job

• We need to settle on one proposal that restores the solvency of the Social Security system. This is where the President's Commission fell down on the job by offering three proposals. The controversy this causes makes people nervous. People are justifiably worried that the benefits that they've paid for are in jeopardy. I think that reform has to answer the question, "Where are my benefits going to come from?" If it doesn't, the public will be skeptical, and rightly so.

• Resolving the Social Security shortfall is critical to our long-term financial health. We now face a series of financial challenges related to the aging of our population. Social Security is one, but we also have to resolve the even more serious shortfalls in Medicare and Medicaid that are looming.

• There's a huge benefit to tackling the Social Security problem sooner rather than later. Today, compound interest is working against the solvency of our pay-as-you-go financing system. If we begin to save some money to help pay benefits, compound interest will start to work in our favor.

• We should be bold in our recommendations. Compromises will be made on any proposal set forth. So don't compromise before the negotiations begin.