HEARING ON SOCIAL SECURITY’S FINANCES
SUBCOMMITTEE ON SOCIAL SECURITY
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
July 8, 2011
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
KEVIN BRADY, Texas
XAVIER BECERRA, California
LLOYD DOGGETT, Texas
SHELLEY BERKLEY, Nevada
FORTNEY PETE STARK, California
JANICE MAYS, Minority Staff Director
C O N T E N T S
Sylvester Schieber, Ph.D., Independent Consultant, New Market
Thomas S. Terry, President, T. Terry Consulting, on behalf of the American Academy of Actuaries
C. Eugene Steuerle, Ph.D., Senior Fellow, Urban Institute
Barbara Bovbjerg, Ph.D., Director for Education, Workforce, and Income Security, U.S. Government Accountability Office
HEARING ON SOCIAL SECURITY’S FINANCES
House of Representatives,
Subcommittee on Social Security,
Committee on Ways and Means,
The subcommittee met, pursuant to notice, at 9:02 a.m., in Room B‑318, Rayburn House Office Building, Hon. Sam Johnson [chairman of the subcommittee] presiding.
[The advisory of the hearing follows:]
*Chairman Johnson. Good morning to all of you. We are going to try to crank this hearing up on time, so I am going to bring the hearing to order.
We heard a few weeks ago from the public trustees that unless Congress acts, in 2036 Social Security revenues will only cover 77 percent of promised benefits. Congress needs to act, and the sooner we do the sooner we can protect those who are vulnerable.
Republicans and Democrats agree on this much: current benefits should not change for those in or near retirement. All their lives, they have worked hard and played by the rules. They deserve the peace of mind, knowing that Social Security will be there for them.
But young people deserve peace of mind, too. At our last hearing, the subcommittee looked at options to raise payroll taxes to address these challenges, and heard that these options don’t promote savings, reward, work, or permanently fix Social Security’s shortfall.
With chronic unemployment, falling incomes, and so many young people unable to find work, nothing we do should make it harder for Americans to find good‑paying jobs. Today we will learn more about Social Security’s benefits, proposed changes to benefits, and their impact on future beneficiaries, workers, Social Security’s finances, and economic growth.
Since the beginning of the program, benefits have been based on workers’ lifetime earnings. The formula that determines benefits is designed to replace a higher percentage of career earnings for lower earners. Benefits are increased almost every year to keep pace with inflation through cost of living adjustments.
Social Security first paid monthly benefits in 1940 to a lady named Ida Mae Fuller, who worked for just 3 years under Social Security. Her first monthly check was $22.54. But her check was not indexed for inflation, and her lifetime benefits for her and her age group were soon supported by a surge of young workers. During her lifetime, she collected nearly $23,000 in Social Security benefits.
Today 55 million Americans receive benefits, averaging over $1,000 per month. By 2035, over 90 million will receive benefits. Benefits are more generous, but the number of beneficiaries will rise much more rapidly than the number of workers, now struggling in today’s economy, who will need to support them.
The reality is there is simply not enough young workers to support the Baby Boomers who are retiring at the rate of 10,000 a day for the next 19 years. Social Security also provides essential income to workers’ families. Spouses, children, and survivors are all eligible for benefits. In fact, 1 out of every 13 beneficiaries receives family benefits.
Many of our witnesses will review how America and Social Security have changed over the past 76 years. Today, people are just living longer. That’s nice, isn’t it?
*Chairman Johnson. When Social Security was created, Americans lived, on average, to 64. And Social Security’s retirement age was 65. According to the actuaries, had Congress tied Social Security’s full retirement age to increases in life expectancy from the beginning, instead of being 66, it would be close to 71. However, I know that the life insurance guys tell you you’re going to live to be 100 nowadays. No wonder members on both sides of the aisle have expressed support for raising the retirement age.
In 1935, Social Security was born amidst a great economic crisis, The Great Depression. Then none other than FDR said that Social Security can furnish only a base upon which each one of our citizens may build his individual security through his own individual efforts. In other words, Social Security benefits were intended to provide a modest safety net. In these challenging economic times, FDR’s statement still rings true. While everyone who pays into Social Security should receive a benefit, not everyone relies on Social Security. Whatever solutions Congress may ultimately consider, we must protect those who depend on Social Security the most.
In the meantime, until Congress acts, workers and their families are challenged to plan for their retirement. An important tool in their planning is the Social Security statement, which includes a worker’s earnings history, and estimated future Social Security benefit. It’s the main document that Social Security uses to communicate with over 150 million workers about their future benefits. Today, we will hear from GAO regarding the results of their review which was done earlier this year. New Americans want, need, and deserve this certainty that Social Security will be there for them. I am confident, by working together, we can provide that certainty.
I thank all our witnesses for joining us today, and look forward to hearing their expert advice on ways to move forward.
And we are expecting votes around 10:00 or 10:15 this morning, so we are going to try to work you all in, and I would implore all our members to commit to 5 minutes.
You are recognized for five minutes, Mr. Becerra.
*Mr. Becerra. Mr. Chairman, thank you very much. Today’s hearing illustrates a basic question of right and wrong. Social Security has never contributed a dime to the nation’s $14.3 trillion debt, not a penny to our federal deficit this year, or any year of our nation’s history. Yet, some in this town insist that we should cut Social Security benefits for seniors to pay for these deficits, deficits run up over the last 10 years, principally as a consequence of fighting two unpaid‑for wars, and giving unpaid‑for tax cuts to millionaires.
Most Americans would say it is immoral and un‑American for this congress to tax Peter to pay for Paul’s sins, to make retirees, widows, disabled workers, and children who rely on Social Security pay for the Bush debt. How can that be right?
Here is a simple truth. Today, Social Security has over $2.6 trillion in its trust fund, entirely generated by worker contributions. Over its lifetime, Social Security has earned $14.6 trillion, and only spent $12 trillion. Do the math.
As a result, Social Security has enough income in reserves to pay full benefits to our seniors for the next quarter century, and about 3/4 of benefits after that. Social Security is not broke, and it will not go bankrupt. That is because, unlike the federal operating budget, Social Security cannot deficit spend. Nor will it ever face its own debt ceiling crisis.
Our challenge is to address a manageable shortfall in Social Security after 2036. The size of that shortfall is about the same size as the cost of keeping in place the Bush tax cuts for just the wealthiest two percent of American taxpayers.
Preserving Social Security for the future is simply a matter of priorities, a matter of right and wrong. What is wrong is cutting Social Security benefits for people who worked hard all their lives to earn benefits for themselves and their families. It’s especially wrong if you are cutting their Social Security in order to pay for tax cuts for millionaires.
Social Security benefits are very modest, and most seniors have limited incomes. The average benefit for a retiree is $14,000 a year. Six out of ten seniors rely on Social Security for more than half of their income, and nearly a third have virtually nothing else to count on. As people get older and begin to outlive their other retirement savings, they begin to rely increasingly on their Social Security paycheck.
The benefit cuts Republicans have put on the table this year would have devastating consequences for today’s seniors, and for the 155 million future beneficiaries who are paying into Social Security today.
In our last hearing, we learned from Social Security’s chief actuary that, under the Social Security privatization bill, H.R. 2109, introduced by Congressman Pete Sessions and other members of the House Republican leadership, Social Security’s ability to pay benefits to current beneficiaries would be “severely compromised.”
If we enacted the Republican bill, current seniors might not get the monthly checks they earned through a lifetime of work. In addition, the chairman of the House Budget Committee, Republican Paul Ryan, has a plan to privatize Social Security, to raise the retirement age, and to cut benefits for the middle class. And House Republicans recently voted to create a special fast‑track process for Social Security cuts.
It doesn’t end there. The Republican Study Committee, which represents about three‑fourths of my colleagues on the Republican side, including majority leader Eric Cantor, has proposed raising the retirement age to age 70, with benefit cuts starting in just 3 years, 2014, at a time when Social Security will have $3 trillion in its trust fund. Their plan would cut benefits for middle income workers, and it could easily cost them about $3,400 a year when they retire.
Mr. Chairman, I am grateful that we are holding a hearing on Social Security benefits. We need to have a comprehensive discussion on all of the options available to us to strengthen Social Security. Where you stand on Social Security and where you fall on the ways to strengthen it will speak volumes about your priorities for our country and for the generation that built the America we so love.
And with that, Mr. Chairman, we look forward to the testimony of our witnesses.
*Chairman Johnson. Thank you, Mr. Becerra. You know, $3 trillion is a lot of money. You can’t pay benefits in bonds. Social Security needs cash. And I don’t know where Treasury gets the cash to redeem the bonds.
In times of this deficit, Treasury has to borrow it. Today, the U.S. borrows $.40 for every dollar it spends, much of it from the Chinese, and sends the bill to our children and grandchildren. And ‑‑
*Mr. Becerra. Mr. Chairman, if I ‑‑ may I comment on that?
*Chairman Johnson. ‑‑ part of that is to cover Social Security ‑‑
*Mr. Becerra. So this is a piece of paper, like the Treasury certificate that Social Security has. It’s simply a piece of paper. It says $20 on it. It’s worth $20 only if the full faith and credit of the United States backs it up.
This is a savings bond, a Treasury certificate my daughter got when she was born 16 years ago. It is worth ‑‑ supposed to be worth ‑‑ $50 if she cashes it in when she turns, I think it is, 18. It is a certificate. It is based on the full faith and credit of the United States. It is worth money, versus this envelope or this piece of paper, simply because we say we are going to have the full faith and credit of the United States back it up.
But whether it is this or this, or the Social Security’s Treasury certificates, or the ones that China has, or Japan has, we either are going to follow and live up to our obligations and our debts, or we are not. But to say that the trust fund’s $3 trillion are mere paper, but this paper is worth money and China’s paper is worth money, I think is an egregious way to tell seniors that they have paid into a system, and to make them believe that it is not there for them, and for our kids, as well.
My daughter relies on this $50 savings bond just the way that she is going to rely on Social Security.
*Chairman Johnson. Okay. Before we move on to our testimony today, I want to remind our witnesses to limit their oral statements to five minutes, please, and be advised that, without objection from this gentleman here, your statements in writing will be entered in the record.
*Mr. Becerra. No objection.
*Chairman Johnson. No objection. We have one panel today. Our witnesses are seated at the table, and they are Sylvester Schieber, an independent consultant from New Market, Maryland. Yes, thanks for coming to Washington.
Thomas Terry, president, T. Terry Consulting, on behalf of the American Academy of Actuaries.
Eugene Steuerle, Ph.D., senior fellow, Urban Institute.
Joan Entmacher, vice president for family economic security, National Women’s Law Center.
Charles Blahous, Ph.D. research fellow, Hoover Institute.
And Barbara Bovbjerg, Ph.D., director for education, workforce, and income security, U.S. Government Accountability Office.
Thank you all for being here.
Dr. Schieber, you may proceed.
STATEMENT OF SYLVESTER J. SCHIEBER, PH.D., INDEPENDENT CONSULTANT, NEW MARKET, MARYLAND
*Mr. Schieber. Good morning, Mr. Chairman, Mr. Becerra. Thank you very much for inviting me here today, members of the subcommittee.
My remarks today will focus on the need to modernize Social Security’s benefit portfolio to improve the effectiveness with which the program meets one of its long‑term specified goals, one of the ones you mentioned in your opening remarks, Mr. Chairman, the redistributive character of the program.
In the opening analysis in my submitted remarks, I show how the retirement system has gotten more costly over time. The results in table one of this submission show that an individual retiring today will have borne payroll taxes relative to lifetime earnings more than six times those of a worker retiring in 1955.
In your opening remarks you mentioned Ida Mae Fuller getting the first Social Security benefit. When she retired she had paid $25 in lifetime taxes into Social Security. She did fairly well under the program. Today the participants are not doing quite as well.
If you add in the supplemental cost of saving for an adequate retirement income, the cost of retirement today has tripled over what it was in 1955. These costs will automatically continue to climb under current law for at least another decade. Add in health costs, and today’s workers are facing claims exceeding one‑third of their lifetime pay, just to cover retirement and health costs. And that is before we address the under‑funding of Social Security and Medicare that I know you are all aware of.
While retirement security is important, we should not lose sight of the need to preserve the prospects of some prosperity gain for workers in the future. We cannot simply address our financing issues by throwing more costs at workers. Some of our financing shortfalls can be addressed by making Social Security more consistent with the stated goals, and modernizing it to correspond with 21st century realities.
The benefit formula established in 1935 was intended to provide relatively higher benefits compared to earnings for low earners when you compare it to those with higher earnings. At least a dozen different times since 1935 Congress has reaffirmed that commitment.
Table two in my formal submitted remarks shows estimates prepared by the Social Security actuaries on what they call the system’s money’s worth. The calculations are for persons born in 1949 and compare the value of their expected lifetime Social Security benefits at age 65 to the accumulated value of payroll tax collections on lifetime earnings.
Numbers in the table that are greater than one suggest some segment of the 1949 birth cohort will receive more in expected lifetime benefits than the value of their contributions. Those numbers less than one suggest the opposite. If you look at the values for one‑earner couples, you will see that they can expect to do much better at every earnings level, on average, than their single counterparts or married individuals in two‑earner couples.
Where the one-earner couple is a higher earner, the system provides relatively higher benefits than for low earner single workers or two‑earner couples. In a program that is intended to pay relatively higher benefits for lower earners, this is an inconsistent result with the stated goal.
In the third table in my presentation I factor in supplemental savings, the tax benefits for employer‑sponsored savings, and this result carries through the whole system.
In my formal statement I cite two significant empirical studies that have documented that the spousal benefit feature is essentially defeating the redistributive feature embedded in Social Security’s benefit formula. The reason that these results have arisen in recent decades is because the spousal benefit tends to be concentrated among higher earners. Families with low earning levels often have little choice but to send both members of a couple to work in order to make ends meet.
Partly, this is so today to a greater extent than in the past, because many modern workers have to surrender so much more of their earnings to cover Social Security and their own retirement savings and health insurance costs that economic circumstances leave them no choices, but that both spouses have to work to cover family needs.
For most workers today, the spousal benefit has little or no economic value, but renders their treatment unfair, relative to those who benefit from it and pay nothing extra for it. Either we should quit the pretense that Social Security is redistributive, as Congress has repeatedly specified in the benefit formula, or we should make the actual structure fit the stated intent.
Another change to the benefit structure that is important then is ‑‑ and should be considered in modernizing Social Security ‑‑ is the introduction of a true joint and survivor benefit for married couples. The operation of the spousal benefit partially covers this void now. But by perpetuating its inequitable existence, and mitigating the need for a joint survivor benefit, existing policy propagates another inequity.
Today the longest‑living spouse in a two‑earner couple receives little or no benefit in consideration of the deceased spouse’s income and participation in Social Security. This makes the benefit in single‑earner couples an even more glaring problem.
The Retirement Equity Act of 1983 required that private employer‑sponsored pensions offer a joint and survivor benefit, and the only way that it can be waived is by both persons actually waiving the benefit. It can be financed within the structure of the benefit itself; it does not have to add expense to Social Security’s cost. It would modernize the system, it would make it more equitable, and it would also be more efficient.
Thank you, Mr. Chairman.
*Chairman Johnson. Thank you, sir. I appreciate it.
Mr. Terry, you may proceed.
STATEMENT OF THOMAS S. TERRY, PRESIDENT, T. TERRY CONSULTING, ON BEHALF OF THE AMERICAN ACADEMY OF ACTUARIES
*Mr. Terry. Thank you, Mr. Chairman and members of the subcommittee. I am glad to be here this morning. I am here representing the American Academy of Actuaries. We are an organization of roughly 17,000 members whose mission is to serve the public on behalf of the U.S. actuarial profession.
I want to talk ‑‑ in my five minutes I would like to talk about two things. I would like to talk about actuaries and the role of actuaries in assessing the solvency and sustainability of financial systems, and I would like to talk about a position that the American Academy of Actuaries has advocated, and that is that the Social Security retirement age be increased.
First, about actuaries. Actuaries go about the business of evaluating complex financial systems. And we do that by constructing models. And these models are designed to gauge the long‑term solvency and the long‑term sustainability of these financial systems. We go about that by looking at the system from the standpoint of the principles that seem to be functioning in that system, and the assumptions that support that.
Now, the reason we do that is because we then turn around and we project those principles into the future, based on a certain set of assumptions.
Now, as you know, there is talk about actuarial imbalances in the Social Security system. Well, those calculations are not here‑and‑now assessments, because, as we know, there is a $2.6 trillion trust fund. This is really a long‑term imbalance that we talk about. It is actuarial principles and assumptions that give transparency into that sort of imbalance. And so, therefore, what we do as actuaries is we examine and explore those principles, and we test those assumptions.
Now, one of the key principles, for example, that the Social Security system operates on is that the current cohort of workers will support the current cohort of retirees. That is one of the foundational principles upon which the system has been built.
Now, one of the assumptions that has gone into that system is that ‑‑ right from the very start ‑‑ is that longevity was a relative fixed notion. Back in ‑‑ as the chairman indicated, back in 1937, longevity was what it was. And for people at birth at that age, longevity was ‑‑ or life expectancy was 64. For those that reached age 65, their life expectancy at that point was 12 years.
Fast forward to today. Life expectancy for a 65‑year‑old is roughly 18 years. That is a 50 percent increase over that which was in place in 1937, which brings us now to my second point, which is the American Academy of Actuaries and our position around retirement age.
You know, we at the academy have examined and explored all sorts of suggestions, options, alternatives for closing that imbalance, closing that long‑term 75‑year imbalance. One of the topics that has risen to the top of the list that we look at is increasing retirement age. And the reason is because we believe it was an assumption that was a fixed assumption back in 1937 that deserves re‑evaluation today.
Every actuarial forecast or projection that has been done since then has, in fact, updated and anticipated improved longevity, including the forecasts that have been done in the most ‑‑ you know, in the current time frame that takes into account this 50 percent improvement in longevity.
To restore balance to the system and to maintain that balance between the working years and the retirement years, the academy believes that it is paramount that, at the top of any list of reform items, increasing the retirement age has to appear on that list.
We are mindful of the fact that any increase or any change to the system has to be done with respect to what objectives we are trying to achieve, the impact on both near‑term as well as long‑term retirees. We are mindful of the fact that there are always going to be consequences to any change. And to the extent that there are consequences, those consequences may need to be mitigated. We are well aware of that, and we stand ready to sort of help evaluate any sorts of proposals that may come forward that appear in any sort of a reform package.
So, those are my remarks, Mr. Chairman.
*Chairman Johnson. Thank you very much.
Dr. Steuerle, you may proceed.
STATEMENT OF C. EUGENE STEUERLE, PH.D., SENIOR FELLOW, URBAN INSTITUTE
*Mr. Steuerle. Thank you, Mr. Chairman, members of the subcommittee. It is an honor to be before you again today.
As has been commented already by several people, including you, Mr. Chairman, since Social Security was first enacted, vast changes have occurred in the economy and life expectancy, and the health care and the labor force participation of women. We simply cannot design a system for 2080 by what we think were the needs of a society in 1930.
That doesn’t mean Social Security hasn’t been a great success. It has. But at the margin it is not serving us as well as it could. So, consider the following.
If you count lifetime benefits in Social Security, taking into account the retirement age issues that Mr. Terry just talked about, Social Security now provides about $555,000 worth of lifetime benefits to the average couple retiring today. For someone of Mr. Becerra’s generation, the average benefits rise to over $700,000. If for your generation, if we count in Medicare, it’s over a million, it is about $1.2 million or $1.3 million.
So, what we are really talking about here is the growth in the benefits that we are trying to try to figure out how to constrain so we can stay within a reasonable system, not cutting back on existing levels.
In addition, the current system has morphed into a middle‑aged retirement system. Basically, younger and younger people are ‑‑ essentially, relative to their life expectancy ‑‑ are getting benefits. It has recently made only modest progress in dealing with poverty.
It discourages work among older individuals, and we need them to be in the labor force. It encourages the near‑elderly to spend down their retirement income too soon, so it is a threat to the very old, and it denies equal justice in all sorts of ways. It discriminates against the single working heads of household; against the long‑term worker; and many others.
None of these features ‑‑ I just want to be clear ‑‑ derives from any conservative or liberal principle. They are just badly designed features that don’t meet the needs of today, and are not well targeted, if you are worried about ‑‑ as I am ‑‑ about the progressivity of the system.
So, in my testimony I talk about four different types of reforms that I think are really important and worth considering.
One is simply to try to figure out ways to restrict the growth in benefits and the growth in number of years of benefits, which is largely the retirement age issue. It is not necessarily and issue of cutting back on the number of years, but cutting back or limiting growth while the system is out of balance. I think we need to really think about ways of increasing labor supply. We really need workers in the economy who bring revenues to the Social Security system, who bring revenues to the income tax.
I talk about increasing the equity and efficiency of the system, particularly this discrimination, largely against single heads of households, who are often working women, abandoned mothers, who basically don’t have access to about a quarter of the system for which they pay.
And I would also like to encourage you to think about latching on some private pension reform–to extend pension coverage to lower‑income people–as a part of a broader fix of the programs for the elderly.
Very briefly, I first suggest restricting growth when the system is out of balance. If Congress would simply put on a rule that says, “While Social Security and Medicare are out of balance, we are going to cap the total amount of benefits at $1 million per couple”, the systems would be in long‑term balance. It is the growth in the benefits well beyond this million‑dollar package of benefits per couple that is causing the imbalances.
Another issue I would address here, as I said, is to gradually adjust the retirement age to take into account that people are living longer and longer, because it is having an effect on who is getting the benefits. More and more benefits, as I show, are going to people further and further from death. Benefits are not well concentrated to periods when people’s needs are the greatest.
I would also index the benefits more slowly for higher‑income people, although I would favor a strong minimum benefit that is wage‑indexed for low and moderate‑income people. So we could really provide an even sounder base of protection for the bottom third, or the bottom half of the income distribution.
I mentioned in the testimony that I would try to encourage greater labor force participation, and that’s where increasing the retirement age, I think, is really important. And that includes the early retirement age. Increasing the early retirement age has very little effect on Social Security balances, but does a lot, by the way, for income tax revenues. It helps us deal with this demographic issue of going to a world where we are encouraging about one‑third of adults to be on Social Security.
I also suggest all sorts of ways of improving the equity and efficiency of this system. These include, as I mentioned, designing strong minimum benefits to really help lower‑income people. I would move toward actuarial neutrality in designing survival and spousal benefits, because that is a major cause of the problem of this discrimination against single heads of households.
And finally, as I mentioned, I would try to add on some private pension reform on to Social Security, so that we get some saving for this broad mass of middle class people who don’t have much saving in retirement.
Finally, Mr. Chairman, Mr. Becerra, members of the committee, I would like to note that the definition of a pessimist is someone, when he smells the scent of flowers, looks around for a casket. I actually think that what you are going through politically these days on Social Security, on taxes, on the debt, is very difficult. You are having to identify who is going to pay for government, either through lower benefits or higher taxes because the promises we made in the past just cannot be met.
But if we take this straightjacket off ourselves, I think we are actually freeing up ourselves–and you as a congress—to put resources towards those needs that we consider to be the most important in society. Thank you.
*Chairman Johnson. Thank you, sir.
Ms. Entmacher, you may proceed.
STATEMENT OF JOAN ENTMACHER, VICE PRESIDENT FOR FAMILY ECONOMIC SECURITY, NATIONAL WOMEN’S LAW CENTER
*Ms. Entmacher. Thank you, Chairman Johnson, Mr. Becerra, members of the subcommittee. Thank you for giving me the opportunity to testify on behalf of the National Women’s Law Center.
I am going to shift focus from the balance sheet of the Social Security program to what Social Security means to the budgets of the Americans who rely on Social Security. Two out of three beneficiaries 65 and older get most of their income from Social Security. And for one out of three, it is virtually their only source of income. That is particularly striking when you realize that the average Social Security benefit is just $14,000 a year for older Americans, and it is just $12,000 a year for older women.
As a result, even with Social Security at its current levels, economic insecurity among the elderly persists, especially among women. And their incomes are modest. The median older beneficiary has a total income of less than $21,000 a year. That is total.
That is about what Jeanette O’Linger in Medford, Oregon, is living on right now. She is a widow, 84 years old, living alone. She worked until age 73, but her only income now, apart from a little help from her adult children, is her Social Security check. Her benefit is about $20,000 a year, so it is actually higher than average. But it is still a struggle for her to make ends meet, and she told us about it.
Forget cable TV or new clothes. What about food? She explained. “I can’t afford meat any more. But every once in a while, if I see a great bargain, I will splurge on a small piece of meat. There is a special discount cheese that I like. I make very thin slices.”
Slicing the cheese very thin can maybe stretch your food budget to the end of the month. But it won’t cover health care. She also told us, “A couple of months ago my dentist told me that I need a root canal. I have had to put it off, because it is $800, and that would be too tough to take on now. I am taking a chance with my health, but I don’t know what else I can do.”
Not a lot of room to cut there. And Social Security benefits are already scheduled to decline. The retirement age is going up right now. It has already increased from 65 to 66, and rising to 67. Every year’s increase in the retirement age is an across‑the‑board benefit cut of about seven percent at whatever age people take their benefits.
In addition, rising Medicare premiums will consume a greater portion of retirees’ Social Security income.
On top of that, other sources of secure retirement income are declining. And, of course, the recession has made things worse. This adds up to a compelling case for protecting and strengthening Social Security benefits. Yet there are a number of proposals out there that would cut Social Security benefits, even for current retirees and those near retirement. So I was very pleased to hear your statement, Mr. Chairman, about the bipartisan support for protecting those people.
For example, switching to the chain CPI for calculating the cost‑of‑living adjustment in Social Security would cut benefits for current beneficiaries, like Ms. O’Linger. And they would produce deeper cuts with every year of benefit receipt. This change would particularly hit women, because they live longer than men, are more reliant on Social Security, and already at much greater risk of poverty as they age.
Those who say that that cut won’t hurt aren’t trying to live on Social Security. A cut of $56 a month represents the loss of a week of food every month for the median Social Security female beneficiary.
The Bowles‑Simpson plan relies on benefit cuts for two‑thirds of its savings over the next 75 years, and four‑fifths of the savings in the 75th year. Restoring solvency to the Social Security program by slashing the benefits people need to live is like fixing a stubbed toe by cutting off a foot.
And there are some proposals that would cut benefits more quickly and more deeply than Bowles‑Simpson. For example, the Republican Study Committee proposal to speed up the increase in the retirement age and bills that are pending on the Senate side to accelerate that increase would cut benefits for people currently between the ages of 55 and 60.
In addition, the SAFE Act introduced by Representative Sessions, which would allow the diversion of payroll taxes into private accounts would simultaneously worsen trust fund solvency and jeopardize benefits for current retirees, as chief actuary Steve Goss testified at the last hearing, and jeopardize not only the retirement benefits for workers who choose accounts, but disability and life insurance protections for their families.
I hope this ‑‑ I recognize that it is important to make adjustments sooner than later, but this committee has the time to make those adjustments right, so that people don’t get hurt. Thank you.
*Chairman Johnson. Thank you, ma’am.
Dr. Blahous, you are recognized.
STATEMENT OF CHARLES P. BLAHOUS, PH.D., RESEARCH FELLOW, HOOVER INSTITUTION
*Mr. Blahous. Thank you, Mr. Chairman, Mr. Ranking Member, and the subcommittee for the honor of testifying today. Owing to the time constraints, I am going to bypass most of the background information in my written testimony, and just offer the subcommittee nine suggested rules of thumb for you to consider as you contemplate changes in Social Security benefits.
The first is very simple. Act soon. Obviously, the balance of any benefit or tax changes is a very important value judgement. But whatever the balance chosen, we are going to be better off if that solution is enacted sooner. The longer that you delay action, the more any changes are going to be concentrated on a smaller number of birth cohorts, and that is going to increase adverse effects on vulnerable populations within those cohorts.
Second rule of thumb. On the threshold question of whether we should change the growth of benefits at all, my recommendation would be yes, simply because to do otherwise means that younger generations are going to face far higher Social Security tax burdens than any previous generation has tolerated. Program costs were about 11.5 percent of worker wages in 2008, before the Baby Boomers began to retire. And under the current benefit formula, that would rise to over 17 percent by the mid‑2030s. And what would happen is we would be trying to pay benefits that are rising very dramatically, in per capita terms, relative to inflation.
Today, a typical medium‑wage retiree gets a benefit of about $18,000 a year at the normal retirement age. The current formula is trying to pay the beneficiary of 2050 a benefit of about $29,000 a year, and that is after adjusting for inflation.
So, if we adjust the rate of growth now, benefits can still rise in real terms. They don’t have to be cut from today’s levels. But if we leave the current formula in place, I fear we run the risk of actual real future benefit declines, as voters rebel against the high tax rates required to sustain current payment schedules.
Third rule of thumb is simply that we need to recognize demographic realities. Our population is aging rapidly. Meanwhile, what has happened is that we have enacted various benefit increases over the years, and we have established early retirement. So now what is happening is people are retiring earlier, and claiming earlier than when FDR established the system. They are getting higher annual benefits, and they are living longer.
Something there has to give. We would actually have to raise both the early and normal retirement ages by at least three years, just to get back to the starting point, where the typical beneficiary was claiming at 65, let alone to adjust for longevity gains since the program’s inception.
Fourth rule of thumb: phase in any changes that you want to make as rapidly as you can, to be fully effective before 2035. The vast majority of cost growth in the system will play out by 2035. That is when we hit the 17 percent cost rate. And then, after that, costs are relatively flat until they rise higher, only after the 2070s. So, any benefit changes that you postpone to occur only after 2035 are not going to do that much to address the looming tax burdens facing younger workers.
Fifth rule of thumb: repair the system’s flawed work incentives. The current system is basically designed to drive seniors out of the workforce, which may have been an attractive policy in 1935. But in the 21st century, we have the opposite problem. We have future economic growth jeopardized by the withdrawal of millions of skilled Baby Boomers from the workforce. In my judgment, we should stiffen the penalty for early claims. We should increase the reward for delayed claims. We should perhaps offer a lump sum option to make the delayed retirement credit more attractive.
We should redesign the benefit formula. Right now, the way it currently works is that the longer you work, and the more your average earnings rise, the lower your incremental returns on your Social Security contributions. And I believe we should redesign that formula so that it delivers proportional additional benefits for every year of further work by seniors.
The sixth rule of thumb: protect the vulnerable by constraining benefit growth on the high‑income end. Obviously, the faster the benefits grow on the high‑income end, the less there is left over for vulnerable populations within a given level of tax revenue. I think it is financially and politically inefficient to have higher tax burdens driven, in large part, by benefit growth above and beyond inflation for upper income workers.
Seventh rule of thumb: maintain the contribution benefit link. Don’t means test. I think there is an important conceptual distinction to be drawn between a more progressive benefit formula, which I favor, and a true means test, which I don’t. The former requires no new administrative capabilities from SSA. It doesn’t penalize individuals for the saving they do outside of Social Security, and it doesn’t sever the vital link between contributions and benefits that distinguishes Social Security from welfare.
Eighth rule of thumb, maintain the link between retirement and disability benefits. The fact that the disability benefit formula is based on the retirement formula is, in my judgment, important. It limits gaming of the system, and it provides for a smooth transition once a disabled individual reaches retirement age.
And the ninth and final rule of thumb I offer for your consideration is just to avoid unnecessary complexity, if you can. It is important to remember not every part of the Social Security benefit formula can do everything, and you are going to have distributional goals. You are going to have goals for targeting benefits. But you cannot ask the retirement age to handle that for you. You cannot ask the CPI to handle that for you.
My recommendation would be just set the retirement age for the general case that reflects population aging, set CPI for your best measure of overall inflation, and do your benefit targeting through the basic benefit formula.
And, with that, I would be happy to answer any questions the subcommittee may have.
*Chairman Johnson. Thank you. We can’t tell people to stop getting older.
*Chairman Johnson. Thank you.
Ms. Bovbjerg, you may proceed.
STATEMENT OF BARBARA BOVBJERG, PH.D., DIRECTOR FOR EDUCATION, WORKFORCE, AND INCOME SECURITY, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
*Ms. Bovbjerg. Thank you, Mr. Chairman, Mr. Becerra, members of the committee. Thank you for inviting me today.
You have heard others speak about ways to stabilize Social Security’s financial future, but you have asked me to address one of the most important vehicles for explaining Social Security programs, and that is the individualized Social Security statement.
The statement is the Federal Government’s main document for communicating with more than 150 million workers about their Social Security benefits. As such, it also serves as a key financial literacy tool to educate the public about Social Security, and its provision is mandated in law.
Should changes to the Social Security programs take place, the statement would take on added importance as a means to explain them. My testimony today will address both the current status of the statement and SSA’s plans to improve its usefulness. My remarks are based on interviews we have conducted in the last month with SSA officials, documents they have provided, and our prior work on the statement’s understandability.
With regard to status, the statement is not currently being distributed. SSA used to mail the statement to virtually all American workers annually, until a few months ago when, for budgetary reasons, the Agency chose to suspend the mailings. SSA is, instead, preparing to make the statement available online, and has begun developing a new web portal for this purpose.
But both the portal and the online version of the statement are currently in the initial phases of development, and once developed, will need to be fully tested. As a result, SSA officials are uncertain when the statement will once again be available to the public, although they are hoping for early next calendar year.
And, in the meantime, copies of the statement are not available. And SSA staff and the website instead direct requesters to SSA’s retirement estimator ‑‑ we have a little picture of that web page on the front of our testimony ‑‑ which, although useful, does not fill the same function as the statement.
SSA’s focus on getting the statement online and securing the personal information it contains is really important. But these elements of the statement should not be the only concerns of the Agency.
For example, SSA will need plans in place for publicizing the availability of the statement online. An internal SSA working group is currently considering options for the public roll‑out of the online statement, but they have not yet developed a plan for carrying it out.
They will also need to consider how best to provide this information to people without Internet access. Even the relatively few computers available in selected field offices will not necessarily permit access to the online statement itself if individuals without computers will even know to go there to look for it. And while Agency officials have said they would also like to make the online statement available in Spanish, the initial version will be English only.
Let me turn now to improving the usefulness of the statement. SSA officials have told us that they believe the electronic format has advantages for individuals, including immediate access when it is needed, and not simply when it arrives in the mail. The officials also note that, with an electronic statement, they can provide links to related documents, and thereby provide complete information, but minimize the lengthy description in the statement itself.
SSA has also told us they plan to draw an industry best practices for screen design and layout, to make the system more user‑friendly.
And although they are planning such changes, the first publicly‑released version of the online statement some time next year will be nearly identical to the current print version. This means sticking with the limited graphics and layout that we at GAO and the Social Security Advisory Board felt should have been modernized years ago.
Officials told us they also did not plan to change the statement’s content, because so much of it is statutorily required. However, we noted in our 2005 report that the statement contained descriptions and concepts that focus group participants found confusing. This is the same content that SSA plans to roll out online.
SSA’s own financial literacy initiative offers detailed ideas for improving the statement’s usefulness, but it is unclear what role staff from this office have played in the design or content of the online statement, thus far.
In conclusion, SSA’s decision to suspend statement mailings this year may negatively affect millions of Americans now, but could ultimately have the positive result of modernizing delivery of this important information. Yet, because this decision to suspend was made so abruptly, SSA faces pressure to take quick action to restore the statement’s availability, which means there is little or no time to redesign the statement to take advantage of the new electronic platform.
But that is not even our greatest concern. The lack of preparation for providing all American workers, including those without computer resources and those without English proficiency, with an understandable version of the statement risks leaving a significant portion of our population without information about Social Security at a time when changes to the programs could make such information more crucial than ever.
We are, therefore, recommending that the SSA commissioner take steps immediately to address these access issues, and thus assure that the statement remains an important tool for communicating with all workers.
And that concludes my statement.
*Chairman Johnson. Thank you very much.
*Ms. Bovbjerg. Thank you.
*Chairman Johnson. I appreciate that. We are struggling to meet a vote deadline here this morning, so I would like everyone to have a chance to ask questions. And I will limit my time to five minutes, and ask the ranking member to do the same.
Mr. Terry, your testimony makes very clear and compelling case for raising the retirement age. When the actuaries endorse working longer, that is not risk‑taking, according to you. It is not to me, either. Everyone ought to be listening carefully to what you and the experts have to say on this issue.
So, we cannot force people to work longer, but we can encourage them. And it makes no sense to me to tax someone who wants to work, and, who we, as a nation, need to have to work. In other words, we may not want to tax them as they get past a certain age. And why not encourage older workers by freeing them of their Social Security payroll tax that taxes the very first dollar of income? Makes sense to me. Must make sense to you, because you mentioned it in your remarks.
How much would this boost older workers’ willingness to work? And do you think it would encourage, or we should encourage employers to create jobs for them? And finally, how would this benefit our country? Mr. Terry?
*Mr. Terry. Well, it is an excellent ‑‑ I like the way you posed the question, because I think you are suggesting that it is not simply a matter of forcing people to do something they don’t want to do, that we, in fact, may have impediments inadvertently set up to ‑‑ sort of preventing people from working longer.
If work is thought of as drudgery from which people must escape, and that Social Security is the savior for that escape, then I think that is a flawed ‑‑ that is probably a flawed premise. And I think the premise of your question is that, in fact, there may well be removal of disincentives to work. They could very well encourage the sort of increasing productivity out of the workforce that we all could benefit from.
The Academy doesn’t have a, per se, position around the elimination of payroll taxes, or the ‑‑ you know, the cutting back of payroll taxes for older workers. That can and should be something that is on the table, obviously, and we would be happy to take a look at that and sort of examine it, from an actuarial perspective. We haven’t done that yet, but we would be pleased to do so.
*Chairman Johnson. Why don’t you do it for us?
*Mr. Terry. Yes, will do.
*Chairman Johnson. Thank you. The Social Security statement is one of the few government publications that reaches nearly every working‑aged American. The statement reminds workers how much of their hard‑earned wages they have paid in taxes for the promise of future Social Security benefits, and gives an estimate of what those benefits might be.
Dr. Bovbjerg, can Social Security choose not to provide a statement to workers, or is it required by law?
*Ms. Bovbjerg. The law says that the Social Security Administration must provide a Social Security statement to individuals aged 25 and over. How that statement is provided, and whether it is mailed, or whether it is online, is something that Social Security is considering right now.
*Chairman Johnson. So you don’t think they violated the law when they didn’t send one in the mail.
*Ms. Bovbjerg. We do not have an opinion on whether they violated the law. We prefer to let courts make those decisions.
*Chairman Johnson. Come on.
*Ms. Bovbjerg. We do think that it is very important that people get this statement. And when the decision was made back in the spring not to mail the statement any more, to cancel that contract, it was made for budgetary reasons. But it did not, I believe, consider the fact that there could be a full calendar year in which statements are not going out.
*Chairman Johnson. Yes. Well, what does the law require ‑‑
*Ms. Bovbjerg. One hundred and fifty million people.
*Chairman Johnson. ‑‑ Social Security to include in that statement?
*Ms. Bovbjerg. Oh, there are many things. It is ‑‑
*Chairman Johnson. And did they do it online?
*Ms. Bovbjerg. Well, we haven’t seen ‑‑
*Chairman Johnson. Did they put everything in it?
*Ms. Bovbjerg. We haven’t seen what they are putting online yet. But what they have in the current statement, which we have reproduced in the back of my written testimony, is they show what your earnings record is, they estimate your future benefits, they talk about the offsets that apply to public employees and some in the railroad industry.
There are many things that Social Security must include there. And we don’t dispute that. I think we are concerned about how those things are explained.
*Chairman Johnson. Thank you very much. Mr. Becerra, you are recognized for five minutes.
*Mr. Becerra. Thank you, Mr. Chairman. And thank you all for your testimony. I suspect we will be calling on all of you for your ideas, whether it is nine points or one point into the future, because I do believe that there is an appetite to discuss how we get to a solution on Social Security. So thank you very much.
Ms. Entmacher, let me ask you something, because the story you recounted of the woman in Oregon sounds eerily familiar to the story I hear from too many seniors in my congressional district in Los Angeles, where the costs are probably even higher than the costs of the woman you mentioned in Oregon.
If you take a look over the lifetime, and if someone lives into their eighties or nineties, that is quite a few years of collecting about $14,000, on average, a year ‑‑
*Ms. Entmacher. $12,000 for women.
*Mr. Becerra. $12,000 for women ‑‑ and you are right, we do have to address that imbalance for women ‑‑ and then, when you put Medicare in there, it is a good chunk of money.
But, at the same time, we are finding that health care costs are eclipsing any cost of living that seniors are getting in their COLA in Social Security. And $14,000, as you mentioned, is not much to start with.
How do you see this going? If we get to the point of trying to deal with making Social Security stronger into the future so that my kids and their kids know that it will be there the way it is for today’s seniors ‑‑ and I hope for me, as well, and I expect for me ‑‑ what should we be doing to try to make sure that we can tell the woman in Oregon or my constituent in Los Angeles that Social Security will be as strong today ‑‑ tomorrow as it is today?
*Ms. Entmacher. Well, I think there are two separate problems that need to be looked at separately, although they are often talked about together as Social Security and Medicare and Medicaid.
Health care costs are on a trajectory of increase that is unsustainable. And it is not just the federal health programs. Actually, health care costs in the federal programs are rising somewhat more slowly than health care costs in the private sector. So there is a real need to control the growth of health care costs to see where we can find real efficiencies without impeding benefits and the quality of care. And I think my expertise is not in health ‑‑ is not in health care reform. But clearly, that is an area where we do see costs continuing to escalate.
If you look at the growth curve for Social Security benefits, as the chairman pointed out in his announcement of this hearing, they will increase to about 6.2 percent of GDP in 2035. But after that, they actually decline slightly and stay stable for the next 75 years.
So, when it comes to Social Security, we are really dealing with the fact of an aging population. Although, as the chief actuary pointed out, it is really more that there aren’t as many young people as there used to be. So how do we deal with that?
I think there are solutions, fair solutions, on the revenue side. I think the wage base for Social Security is very low. We tax a much smaller percentage of wages than we have taxed in the last several decades. A lot of compensation now is outside of Social Security taxes all together. And, of course, we are taxing only a small portion of GDP.
So, I think that there are revenue solutions. And, you know, Mr. Goss testified about some of them at his testimony a couple of weeks ago. The National Academy of Social Insurance, in a paper that I cite in my written testimony, lists other ways of raising revenue for Social Security.
And it is striking ‑‑ and I mention some of the public polling ‑‑ that across the political spectrum ‑‑ and this includes people who support the Tea Party ‑‑ they support raising revenue to finance Social Security and close the deficit. You wouldn’t be surprised to find that people across the political spectrum oppose cuts to Social Security benefits. But they actually also support revenue increases to strengthen the program. So I would suggest that as a place to look.
*Mr. Becerra. Thank you. Mr. Terry, you are a numbers guy. You testified how we’ve got to look at these numbers.
You mentioned the $2.6 trillion trust fund, and how we address the long‑term life of Social Security. I pulled out the $20 bill, I pulled out the savings bond, and I guess I could have pulled out the Treasury certificate that the Social Security system has. What is your sense of how we deal with this existing debt ceiling crisis? And what is the impact on the $20 bill, the savings bond my daughter has, or the Treasury certificate for Social Security?
*Chairman Johnson. Limit your response, please.
*Mr. Becerra. Oh, and yes, you have to do it in three seconds or less.
*Mr. Terry. Two things to say. Great question. Number one is that we actuaries ‑‑ and particularly the American Academy of Actuaries ‑‑ are focused on the Social Security system itself, okay? So our realm of focus is the system, itself.
Secondly, we are in the midst of preparing a detailed discussion brief, if you will, of the very question you ask about the trust funds, the ‑‑ is the money real, is it not real, what are the aspects of it, and what are the attributes of it that can inform some of our thinking about the importance of that $2.6 trillion.
So, we are close to putting the finishing touches on that, and we will get that to you.
*Mr. Becerra. Appreciate that. Thank you, Mr. Chairman.
*Chairman Johnson. Thank you. Mr. Berg, you are recognized for five minutes.
*Mr. Berg. Well, Mr. Chairman, thank you. I really don’t know where to start.
I mean, I am extremely frustrated with the rhetoric on this issue. We heard today three accusations of Republican plans that are going to ruin Social Security. None of those proposals have come before this subcommittee. None of them.
We have a lot of attention today because I think the President has recognized this is an issue that should be talked about, should be debated. Everyone I talk to back in North Dakota is concerned about Social Security. And I think it has been used as a political football by different people, different interests all along.
I sit here today and I hear people say, “Well, we have 2.6 trillion, nothing to worry about.” The reality is, to redeem those dollars, it comes from the general fund. I mean why are we in this debt crisis right now today? We are in it because we have got 14.3 trillion in debt, and we don’t have any more money. So, the money has to come from the general fund.
I also think that it is crazy to say we should ignore this problem. I am not here to say we want to use Social Security to fund our deficit. I mean I am new here; I didn’t create this problem. But, quite frankly, it has got to be fixed. I mean we are spending more in general fund than we are taking in.
And I came here to honor this promise to our seniors. I am here to honor that. And I am very frustrated when I sit here and hear, “You know what? Don’t worry. We are good for 25 years. And at the end of 25 years, it is only going to go 75 percent.”
We talked about the O’Linger in Oregon: 25 percent goes from 20,000 to 15,000. If we are concerned about these things, why are we ignoring them?
And so, again, I appreciate everyone’s perspective. I mean the point is they quit doing the statements. Why did they quit doing the statements? They are saying for budget reasons. Well, everyone I talk to that has looked at this says there is a problem.
And so, really, my question is pretty high‑level and pretty simple. And that is, I would like each of you to say what are the facts. Why should we look at this? Give me a fact that is non‑disputable on why we should be spending our time on fixing Social Security or making it solvent, long‑term?
*Mr. Schieber. Me?
*Mr. Berg. Absolutely.
*Mr. Schieber. The time perspective in which the system will run out of money if we don’t do anything is within the life expectancy, roughly, of people who are retiring today. So it is an issue that is going to affect almost everyone who is stepping into retirement today.
It also is ‑‑
*Mr. Berg. Solvency?
*Mr. Schieber. Solvency. And it is also well within the life expectancy of everybody who is working, or the overwhelming majority of people who are working.
The trust fund will be depleted under the projections. There will still be tax revenues coming in. The trust funds will run out of money. So it’s within the life expectancy of people today who are going ‑‑ who are here, participating in the program. We ought to fix it before we get to the cliff. You don’t put the brakes on at the cliff, you put the brakes on as you are coming to the cliff.
*Mr. Terry. I would echo that, and what I think other panelists have said this morning, too, about the need to address it now, rather than later. And to suggest that there is not an issue is to suggest there is nothing to address right now. And the Academy believes that, in fact, action should be taken now to address the long‑range deficit.
*Mr. Steuerle. Just two quick comments. The first is that there are a lot of features of Social Security that are just badly targeted. So a lot of low‑income women ‑‑ as I say, particularly single heads of households ‑‑ really suffer discrimination in the system. And there are fixes that we need to make, regardless of whether there are imbalances or not.
The fact that so much money is now concentrated so much earlier in life ‑‑ a typical couple is getting benefits now for close to 27 years, going on 3 decades. That is not a good system. There needs to be more concentration of benefits later in life, even if the system was totally imbalanced.
If you are asking specifically about the imbalances that are driving the current debate, what happened in the trust funds is while the Baby Boomers were temporarily in the workforce, they were paying in about $1 for every $.90 that was being paid out. It was still mainly a pay‑as‑you‑go system. Today, basically for every $1 coming in, $1 is going out. And as you move towards the future, the ratio moves towards roughly $1.25 going out for every dollar coming in.
So that is sort of the simple math that we are dealing with, in terms of this largely pay‑as‑you‑go system. And, yes, the trust fund had a little build‑up when only paid out $.90 for every dollar that came in the trust fund is going in the opposite direction. So that is what is driving the system, largely because of the decline in the birth rate, and the decline in the number of workers per beneficiary.
The only ways to address a decline in workers per beneficiary are to tax workers more or take something away from the beneficiaries. That is the simple math. It is not conservative, liberal, Democratic, or Republican.
*Chairman Johnson. Thank you. Time has run out. I will let each one of you make a short statement, if you desire.
*Ms. Entmacher. One of the most popular options for strengthening Social Security ‑‑ and I agree that action should be taken. In 1983 Congress waited until Social Security was within a few months of exhausting the trust fund, and that is an experience that I don’t think anyone wants to repeat.
But right now, people pay Social Security taxes only on their first $106,800 of income. And when you explain that to people ‑‑ you know, the vast majority of whom pay taxes on every single dollar they earn ‑‑ they are shocked. And again, across the political spectrum people say, “Well, gee, people, you know, should pay Social Security taxes on more of their income,” and that would go a long way to strengthen the trust fund, and make sure we can continue to pay benefits that are so important in North Dakota.
*Mr. Blahous. Just a couple of very quick points. This is important because Social Security has an imbalance. Quite apart from anything happening in the larger deficit, Social Security’s own books are out of balance over the long term. There is an imbalance of benefit promises relative to incoming revenues. That has to be closed, if you want to have a self‑financing Social Security system. It is best if that imbalance is closed sooner, rather than later. That gives you the fairest possible outcomes. You get the least fair outcomes if you wait until later.
I would make one final point on this. If we do wait until we are close to trust fund depletion, there is no historical precedent for closing a shortfall of that magnitude. In 1983, when they had emergency surgery to repair program finances, income and outflow were still pretty close together. We are rapidly getting to a point where they are going to be much, much further apart. There simply is no historical precedent for closing a shortfall of the size that it will be by the time the trust fund is run down.
*Chairman Johnson. Thank you. Ms. Bovbjerg?
*Ms. Bovbjerg. Social Security touches the lives of nearly every American. It is a crucially important program. Yet, for 15 years, GAO has been talking about the structural imbalance in the system, and that it will be important to act as early as possible to avoid really horrible choices later on that will hurt people dramatically.
And so, we have been arguing that having this discussion ‑‑ and I congratulate the subcommittee for having this hearing and raising some of these issues ‑‑ is really important, but that we do need to make decisions, and that everything should be on the table.
*Chairman Johnson. Good testimony. Mr. Smith, you are recognized.
*Mr. Smith. Thank you, Mr. Chairman. Mr. Steuerle, you had started to touch on private pension reform toward the end of your remarks. Could you elaborate on that?
*Mr. Steuerle. Yes. In Great Britain a few years ago, they undertook a Social Security reform. And when they did it they actually – in a typically British way ‑‑ had a white paper–had an outside study on what they should do. And they concluded that it would be very useful to try to increase private saving at the same time as they did Social Security reform.
Now their Social Security reform actually increased benefits in the public system. But even there, they decided that that was not enough. That flexibility was probably because they formerly indexed at a much slower rate. They decided that, to really help a broad swath of people, they really needed to build up private pension saving.
And so, if you look at our private pension system, it covers fairly poorly a majority of the population. An estimate I did a few years ago ‑‑ I haven’t quite updated it ‑‑ basically said that for 75 percent of people who retire, Social Security and Medicare ‑‑ the lifetime value of Social Security and Medicare is in excess of all of their private assets, their home.
So, we have a larger and larger percent of the population dependent upon Social Security and Medicare, which is one of the issues that Joan raises. And the question is, how do we deal with it?
Well, one way we deal with it is to try to perhaps, as my testimony would argue, increase some of those cash benefits for low and moderate‑income people. But for the middle‑income people, I don’t think we can just get there by just adding to a system that is already out of balance. We need to work on things like private saving. And we need to recognize that this private retirement system we have set up is really not doing a good job of covering the vast majority of people.
And, you know, we can ask who is to blame. Is it the fact that employers aren’t doing it correctly, or employees who aren’t saving enough? It’s almost beside the point. Regardless, we need to figure out ways of enhancing the saving of middle‑income people as they move towards retirement.
*Mr. Smith. Thank you. Ms. Entmacher, you mentioned that there is public support for revenue increases to fix Social Security.
*Ms. Entmacher. Mm‑hmm.
*Mr. Smith. Could you elaborate on that?
*Ms. Entmacher. Sure. The ‑‑ raising the cap on taxable wages is certainly one option that is very popular. But there are also some polls that ‑‑ you know, in which people say that “I would pay more in Social Security taxes to strengthen the benefits that people rely on,” that this is one area of tax where people say, “I don’t mind paying Social Security taxes, because I know what I am getting for it, and I would pay more to protect Social Security.”
In the past, Congress, you know, in terms of automatically legislating for needs in the future, there have been scheduled small increases in the payroll tax way in the future, to make sure that Social Security stayed in balance. And this is something the public says they support, and particularly if some of the proposals for improving and strengthening Social Security that Gene has talked about were part of the discussion.
And again, I am not saying wait until the last minute. I agree with Chuck. It would be very bad to wait. But I think if there was a process of public education about how we are strengthening the program, making it better, making it more adequate ‑‑ and, yes, everyone is going to be chipping in a little more. People who are very wealthy are going to be chipping in a little more. I don’t know whether it can be done without, you know, increases far in the future, and the payroll tax rate, but this is what the American people say they want. They want a stronger Social Security system, and they are willing to pay for it.
*Mr. Smith. And when you mention “very wealthy,” what would determine that?
*Ms. Entmacher. Well, I mean, I ‑‑ certainly, at this point, the ‑‑ everyone above, you know, about $107,000 isn’t contributing to Social Security. You could raise the ‑‑
*Mr. Smith. They are not contributing to Social Security, or that ‑‑
*Ms. Entmacher. Oh, well, not ‑‑ on the ‑‑ you are quite right. It is the income above that amount, plus other forms of compensation, such as health care benefits that are not, you know, part of the Social Security base.
*Mr. Smith. Okay, thank you. I yield back.
*Chairman Johnson. Thank you. Mr. Marchant, you are recognized.
*Mr. Marchant. Thank you, Mr. Chairman. In the last 24 hours we have began to hear a lot about the concept of chained CPI, instead of the traditional COLA method. Could each of the panelists talk a little bit about that concept? Maybe describe to the public that is watching this hearing ‑‑ describe to them this concept, and why it might be an important part of the solution to this problem.
*Mr. Schieber. There has been debate about the CPI, which ‑‑ what is the appropriate CPI, almost from the time we linked benefits to it. There are concerns about what is in the market basket that is used to value what is happening to the price of the goods that we consume.
And the argument, basically, between the chained CPI and the current CPI is that in the current CPI many people do not believe that we considered that when the price of a good ‑‑ let’s pick a car. If your ‑‑ if the price of a Mercedes goes up, then maybe you don’t buy the Mercedes, you switch and you buy an Audi or something, that the current CPI does not take that kind of substitution into account. And so it is over‑stating what the true cost of living is, and it extends to things beyond expensive cars. It extends on down.
So, there is ‑‑ the argument is that this new CPI more adequately reflects, or more closely reflects, the cost of living over time.
The problem with any market basket is you pick any specific individual, and they probably don’t exactly consume that particular market basket. And so, it is an estimation to try and get as close as we can to a reasonable rate of increase in the cost of living for people.
And the argument is being made, on technical grounds, we should move from the current system to an alternative system.
*Mr. Terry. The actuarial profession will leave to the economists the question about what is the proper mix that goes into a basket of consumer goods to accurately measure inflation and its impact on indices.
But I will say that we have — we’re aware that a chained CPI would likely produce a lower measure of inflation, and lower to the point where, if it were to be implemented and used to inform the cost of living adjustments, that it could close as much as a quarter of the long‑term deficit ‑‑ long‑term imbalance in the system.
*Mr. Steuerle. I am ‑‑ as an economist, I tend to favor coming up with a good measure of CPI. But if you do it by itself, I think it causes a problem in Social Security. That is because, for people who haven’t retired yet, the CPI adjustment doesn’t affect their growth in benefits. So the younger of you on the panel, your benefits keep growing by $10,000, $20,000, $30,000, $50,000, and that doesn’t go down. The CPI hits people once they retire.
And so in the first year of retirement, you have a small adjustment–it might be one‑third of one percent. That compounds. For someone retired for 25 or 30 years– the person who is 85 or 90 has a 10 percent cut. So you end up with a much bigger cut on the older elderly.
I have testified, or put in my testimony, I want to make the system go in the opposite direction. I want to increase benefits at older ages, when it does not have such a negative work disincentive, and cut back on the benefits at an early age.
Talking about the poor, or the very low income, I would try to maintain their benefits, no matter what. But my problem with doing a CPI only, without worrying about that issue, is that I prefer to backload the benefits to protect the really old, for whom there is not really that much incentive to work, because they cannot. This reduces this disincentive up front. On top of which, the older people are just more needy. So, that is one more of my concerns with the CPI adjustment.
*Ms. Entmacher. The problem with switching to the chained CPI for Social Security is that this is a program that overwhelmingly serves people who are elderly and people with disabilities. It also serves some children, but the vast majority of beneficiaries are elderly or people with disabilities.
And what is different about them from other consumers is that they spend twice as much of their budget on health care. That is for all people 65 and older. For people 75 and older, they spend 2.5 times as much as consumers generally on health care. And the reason that matters when you are trying to figure out what is a fair cost of living adjustment is that health care costs rise so much faster than everything else.
So, if you are already spending, you know, a much bigger share of your budget on something that is rising much more quickly, a cost of living adjustment that might be fair for other purposes, or for other people, is really systematically unfair to the elderly. In fact, the Bureau of Labor Statistics, for ‑‑
*Chairman Johnson. Close it down, please. The time has expired.
*Ms. Entmacher. Sorry.
*Mr. Becerra. Just go ahead and finish off.
*Chairman Johnson. Finish your statement.
*Ms. Entmacher. Oh. The Bureau of Labor Statistics has a special CPI for the elderly. And by that measure, our current cost of living index underestimates the cost of living increases that elderly people experience.
*Chairman Johnson. Mr. Schock, you are recognized.
*Mr. Schock. Thank you, Mr. Chairman, and thank you once again for hosting this very, very important hearing on a very important topic.
Once again, it appears that there are some in this room that just believe in the policy of the ostrich. If we stick our head in the sand long enough, it will go away. The reality is we’ve got a problem.
And, Dr. Schieber, I think you might be best to answer this. We hear about the fund eventually running out. Remind me again ‑‑ and for our listeners ‑‑ how many years is that estimated to be?
*Mr. Schieber. The latest estimate, I believe, is 2036. So about 25 years.
*Mr. Schock. Twenty‑five years.
*Mr. Schieber. From now.
*Mr. Schock. And you said earlier that that is likely to be assuming somebody is healthy and in relatively good shape, if they retire today at 65?
*Mr. Schieber. You will be around 50 then.
*Mr. Schock. Lord willing.
*Mr. Schock. So, in 2036, we deplete the assets. And so, in 2037, if you are a recipient of benefits, and you are to get $1,000 a month, what happens?
*Mr. Schieber. You will ‑‑ the next month you will get $750.
*Mr. Schock. Okay, $750. And that goes for a year?
*Mr. Schieber. Well, you would get a monthly check.
*Mr. Schock. Correct. But the first year after the year in which we deplete the assets, we go down to 77 percent of being able to meet liabilities.
So, the second year, what happens? We have accrued basically 23 percent of last year’s liabilities that we haven’t been able to pay. So now, the second year, what happens?
*Mr. Schieber. Under current law, Social Security cannot borrow money. So Social Security would be making payments at that juncture, most people assume, at the rate at which money would be coming in. So ‑‑ and the rates are projected to be relatively constant out there. So it would go along somewhere around 75 percent, 78 percent, whatever the ‑‑ you know, in that window.
Of course, if we have one of the happy experiences which we may have some time in the future, like the one we have been through the last couple of years, and revenues drop very significantly, then it might not be 75 percent. It may be 60 percent. So no guarantees.
*Mr. Schock. And so, I guess what I am having a hard time understanding is why do we continue to send statements to people who might be around 50 years from now to tell them to expect a certain benefit when we know today the truth to be that, under the current system, there ‑‑ they cannot ‑‑ they should not base their retirement on the current expectation.
*Mr. Schieber. The statement does ‑‑ has included, generally, a comment to the effect that the system is under‑funded, and that Congress is either going to have to do something, or benefits could be reduced in the future.
But the reason that they cannot send out a statement to people who are 50 years old today or 40 years old today and say, “Oh, hey, by the way, here is one kind of calculation. But, really, your benefit is only going to be 70 percent, 80 percent of that,” is because of the letters that those of you sitting at this table would get in response.
*Mr. Schock. But isn’t that the truth? I mean isn’t that current ‑‑ isn’t current law say that, based on the current assets in 2036, they are only going to get 77 percent?
*Mr. Schieber. There are two aspects to current law. One is the revenue aspect, defining how much is going to be collected, and then there is a benefit formula aspect to it. And the law says something right now that is inconsistent in these two segments of its corpus. And the general public, I don’t think, has a complete appreciation of what is going on. But I think, generally, they know that something is wrong.
But, you know, we go off and we propose to them that there is some magical simple solution. We hear all the time about these surveys. You know, “The public would like to pay more for Social Security, rather than having benefits cut.”
*Mr. Schock. Right.
*Mr. Schieber. Oh, and how would you like that done? “Well, tax people who are earning more than $106,000.” That is not the American people. That is not the American workers paying for this. And if you look at table two in my presentation, the people they want to raise taxes on are already getting back less than $.50 on the dollar for what they are contributing.
FDR thought this was wrong. The early architects thought it was wrong. And Robert Ball repeatedly said that these low rates of return in this system are wrong. And what they are talking about doing is exacerbating it, because the American people, we hear, are willing to pay more taxes to support this program.
*Mr. Schock. Well, I see my time has expired. But it seems to me that to send out a statement which we know to be false under current law ‑‑ my last statement I had with me ‑‑ I think at the last hearing, for those of you that were hear ‑‑ and it said that when I retire 40 years from now, I should plan, based on my current income, to receive $3,000 a month. And then it said, “Is your ‑‑ is Social Security in trouble? No.” And it went on to say that, under current law, it is required to meet the obligations, and on and on and on.
All I am suggesting is, for someone who is not in Congress, for someone who doesn’t serve on the Social Security Subcommittee of Ways and Means, who isn’t privy to this information, but only privy to the statement by which they are sent from the Social Security Administration, I think it is disingenuous, I think it is wrong, I think it is misinformation, and I think, in many respects, it is similar to a Ponzi scheme that we send people to jail for out in the real world.
So, I appreciate the chairman’s continuation on this subject, and I look forward to working with him and our ranking member, here, when he realizes we’ve got a problem, and tries to help us fix it. Thank you.
*Mr. Becerra. Mr. Schock, I have realized the problem, but it is not Social Security.
*Chairman Johnson. It seems like all our witnesses think Social Security has a problem.
Listen, I want to thank each and every one of you for your comments. I think this has been beneficial to all of us. Thank you for being here today.
We know in 2036, according to you, 75 percent ‑‑ I am told 77 percent. Congress and the President need to find commonsense solutions to make Social Security secure, sustainable. And the sooner we do so, the sooner we can protect those who are most vulnerable. With that, I thank you all for being here, and all our members.
And the committee stands adjourned.
[Whereupon, at 10:25 a.m., the subcommittee was adjourned.]
MEMBERS SUBMISSION FOR THE RECORD
Mr. Xavier Becerra
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