Hearing on the President’s and Other Bipartisan Entitlement Reform Proposals
SUBCOMMITTEE ON SOCIAL SECURITY
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
April 18, 2013
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
SAM JOHNSON, Texas
|SANDER M. LEVIN, Michigan
CHARLES B. RANGEL, New York
JIM MCDERMOTT, Washington
JOHN LEWIS, Georgia
RICHARD E. NEAL, Massachusetts
XAVIER BECERRA, California
LLOYD DOGGETT, Texas
MIKE THOMPSON, California
JOHN B. LARSON, Connecticut
EARL BLUMENAUER, Oregon
RON KIND, Wisconsin
BILL PASCRELL, JR., New Jersey
JOSEPH CROWLEY, New York
ALLYSON SCHWARTZ, Pennsylvania
DANNY DAVIS, Illinois
LINDA SÁNCHEZ, California
JENNIFER M. SAFAVIAN, Staff Director and General Counsel
SUBCOMMITTEE ON HUMAN RESOURCES
PATRICK J. TIBERI, Ohio
|XAVIER BECERRA, California
LLOYD DOGGETT, Texas
MIKE THOMPSON, California
ALLYSON SCHWARTZ, Pennsylvania
The Honorable Erica L. Groshen,
Commissioner, accompanied by Michael W. Horrigan, Ph.D., Associate Commissioner, Office of Prices and Living Conditions, Bureau of Labor Statistics, Department of Labor
Jeffrey Kling, Ph.D.
Associate Director for Economic Analysis, Congressional Budget Office
Executive Director, The Moment of Truth Project, Committee for a Responsible Federal Budget
Co-Chair, Strengthen Social Security Coalition
Charles P. Blahous III, Ph.D.
Trustee, Social Security and Medicare Boards of Trustees
Hearing on the President’s and Other Bipartisan Entitlement Reform Proposals
Thursday, April 18, 2013
U.S. House of Representatives,
Committee on Ways and Means,
The Subcommittee met, pursuant to notice, at 9:31 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. Thank you all for being here. This is the first in the Committee’s hearing series on the President’s and other bipartisan entitlement reform proposals.
We need to protect and preserve Social Security. That is what this Committee is all about.
According to the Social Security Board of Trustees, beginning in 2033, Social Security will be unable to pay full benefits. In other words, when today’s 47 year old workers reach full retirement age in 2033 and everyone else is already receiving benefits, they will face a 25 percent benefit cut unless Congress reforms Social Security, which we can do.
The inclusion of using a more accurate measure of inflation in President Obama’s budget is a welcome acknowledgement that we must take action to make sure that Social Security is there for our future generations.
The purpose of this hearing is to have a full discussion of a policy with wide bipartisan support, more accurately measuring inflation in order to fix the Social Security system.
Congress passed the first benefit increase in 1950, later increased benefits ten other times before passing a law in 1972 that created a formula to determine the cost of living adjustments or COLAs.
The Social Security COLA increases benefits each year that there is inflation. If there is no inflation, there are not any COLAs, as was the case in 2009 and 2010. If prices fall, benefits cannot be reduced.
At the time automatic COLAs were enacted, the Bureau of Labor Statistics or BLS only produced one measure of inflation, which remains the inflation measure used to determine Social Security COLAs today.
However, BLS has since developed other measures including the Chained Consumer Price Index or Chained CPI, which we will discuss today.
The President’s own budget says most economists agree that the Chained CPI provides a more accurate measure of the average change to the cost of living than the standard CPI.
In testifying before the full Ways and Means Committee last week, Treasury Secretary Jacob Lew stated “The Chained CPI is a more accurate measure of inflation in that it does a better job of reflecting the substitution of goods in response to relative price changes.”
Today we will hear from the Commissioner of BLS why that is. Some say using the Chained CPI to measure inflation would result in a benefit cut, but that is plainly false.
The truth is that benefits will continue to grow, only more slowly than under the current less accurate measure. Only in Washington would that be called a “benefit cut.”
That said, I fully recognize and am sensitive to the impact this change could have on some beneficiaries’ pocketbooks, especially those who receive benefits for a long time.
The fact of the matter is the current measure overstates inflation and ignores that it is simply unfair to your children and grandchildren who rightly expect us to make sure Social Security will be there for them.
Let me be clear. Determining the adequacy of Social Security benefits especially for those who are most vulnerable is an important discussion to have, and we will as part of this hearing series on bipartisan entitlement reforms.
The President likes to say that if we agree on a policy, then we ought to act and not let our differences hold us up.
We owe it to every American to carry out our responsibility and carefully examine each bipartisan policy option, and we will through this hearing series.
Mr. Becerra is not here yet. Without objection, all written testimony will be made part of the record.
We have one witness panel today. Seated at the table are Erica Groshen, Commissioner, accompanied by Michael Horrigan, Associate Commissioner, Office of Prices and Living Conditions, Bureau of Labor Statistics, Department of Labor. That is a mouthful.
Jeffrey Kling, Associate Director for Economic Analysis, Congressional Budget Office.
Ed Lorenzen, Executive Director, The Moment of Truth Project, Committee for a Responsible Federal Budget.
Nancy Altman, Co‑Chair, Strengthen Social Security Coalition, and Charles Blahous, III, Public Trustee, Social Security and Medicare Board of Trustees, and thank you for being here again.
Welcome. Thanks to all of you for being here.
Commissioner Groshen, will you go ahead with your testimony?
STATEMENT OF ERICA L. GROSHEN, COMMISSIONER, ACCOMPANIED BY MICHAEL W. HORRIGAN, ASSOCIATE COMMISSIONER, OFFICE OF PRICES AND LIVING CONDITIONS, BUREAU OF LABOR STATISTICS, DEPARTMENT OF LABOR
*Ms. Groshen. Good morning. I thank the Subcommittee for this opportunity to talk about the family of Consumer Price Indexes published by the BLS.
As you know, we produce some of the nation’s most current and important economic statistics, including the inflation measures under discussion today.
In doing so, we help policy makers, businesses and households to make the best decisions for themselves and others.
I will start by describing the CPI‑U. The measurement objective of all of our CPIs is to estimate changes over time and the cost to consumers of maintaining the same standard of living.
How do we construct the CPI‑U? We estimate the change in prices that consumers pay for a market basket of goods and services in urban areas. This market basket is divided into item categories, such as uncooked beef steaks.
We collect prices for goods across 211 item categories in 87 urban areas, resulting in over 8,000 unique item area cells. We collect expenditure weights for each of these cells, such as steak in Chicago.
The weights represent shares of total consumer expenditures across all items and areas. The data source for the weights is our consumer expenditure survey.
With prices and weights in hand, we produce the CPI in two stages, and understanding these stages is the key to understanding how our indexes differ.
In stage one, we calculate a CPI‑U for each cell. That is the average change in prices, and for most cells we use a formula that assumes that consumers actually do substitute among products within the cell.
In stage two, we combine our indexes across all the cells to produce a national number. CPI‑U uses a formula that assumes consumers do not substitute across items or areas. That is we assume they do not adjust their purchases between steak and chicken in Chicago as prices change.
What is the CPI‑W? It aims to estimate price changes for households that receive more than half of their income from wage and clerical jobs. The formulas and the prices that we use in the CPI‑W are the same as for the CPI‑U. The only difference is the CPI‑W uses consumer expenditure weights that are based on the wage and clerical group.
What about the experimental CPI‑E? Again, we use the same formulas and the same prices as the CPI‑U, but we use expenditure weights for households with a respondent or spouse age 62 or older.
Over the past 20 years, while the CPI‑U and the CPI‑W increased at an average annual rate of 2.4 percent, the CPI‑E rate was 2.6 percent. This reflects only differences in expenditure patterns of these populations. For example, older Americans relatively heavy spending on health care.
We call the CPI‑E experimental partly because the expenditure weights are based on smaller sample sizes, but also our CPI‑U sample may not represent well where the elderly shop, where they live, what they buy, and the prices they pay. Moving to an official CPI‑E would require a thorough research effort.
Finally, what about the Chained CPI‑U? This differs from the indexes I just talked about in weights and formulas. Furthermore, we revise it twice before it is final.
Stage one is the same. Stage two uses a superlative index formula that captures how consumers actually adjust what they buy as relative prices change.
Because consumers make such adjustments, the growth in the Chained CPI‑U is typically smaller than that for the regular CPI‑U. For the past 12 years ending in December 2011, while the CPI‑U grew at an average annual rate of 2.5 percent, the Chained CPI‑U rate was 2.2 percent.
The other difference is there are lags in reporting the Chained CPI‑U. It takes a long time to collect consumer expenditure shares and to estimate their weights. The final Chained CPI‑U for March 2013 will be published in February 2015.
To sum up, as part of our continuing efforts to improve measurements in our dynamic economy, the BLS has created a Chained CPI‑U to gauge the cost of living in a way that accounts for how consumers substitute among goods when price changes are not uniform.
I thank you for the opportunity to testify before this Committee. Dr. Horrigan and I will be happy to answer your questions.
[The statement of Ms. Groshen follows:]
*Chairman Johnson. Thank you for your testimony. That is insightful.
Mr. Becerra, do you still want to make your opening remarks?
*Mr. Becerra. I can wait until everyone testifies or I can do it right now.
*Chairman Johnson. We will delay the rest of you for a moment and let Mr. Becerra make his opening remarks. Go ahead. You are recognized.
*Mr. Becerra. I appreciate that, Mr. Chairman. I apologize to the witnesses that I had to run a little late. Thank you for being here. We look forward to the rest of your testimony.
I want to just begin by making a quick observation. At a time when folks are talking about their economic security, this is perhaps the most important time to make sure we maintain Social Security because it is for many Americans, not just seniors – many disabled Americans, working Americans who have become disabled, to children, widows and widowers, it is their economic security.
Any time someone says to you Social Security is broke or bankrupt or causing our deficit, I will say emphatically here that is contrary to the evidence. In fact, I think I would be on very safe ground to say anyone who says Social Security is broke or bankrupt is lying because the facts show just the opposite.
Let’s look at the numbers. I would say to anyone who wants to contest what I am about to tell you, show me your numbers. I will show you some numbers and you can see them on this chart.
Social Security currently has about a $2.7 trillion surplus, and that is because over more than 77 years of taking in taxes from Americans who have been working and paying into Social Security, it has brought in in tax contributions over $14.5 trillion.
It has also earned interest on those trillions that have been invested into the Trust Fund by tax, paying Americans about $1.5 trillion.
At the same time, it has only had to spend in benefits, and a very tiny sliver you see above that red bar, in administrative costs, because administrative costs are less than one percent, a total spending of $13.5 trillion.
The math is very simple. More than $2.5 trillion that Americans have contributed to Social Security through their taxes that have never been used through 13 recessions, and in more than 77 years, Social Security has never failed once to pay benefits on time and in full.
When we discuss Social Security, we should discuss it in that context of the reality and the truth of what Social Security is.
When you hear conversations about what should happen to Social Security and to those earned benefits that Americans have paid into the system so they could get them when they retire or should they become disabled or should they happen to die so their spouse, who is now a widow or widower, or their children, who are now the children of a deceased parent, have a chance to survive, those are the folks we should concern ourselves most with.
Switching to the Chained CPI, the so‑called adjustment, change to the way we calculate the cost of living, the COLA increase seniors, disabled folks, survivors of an American who has perished get, is nothing more than a cut to the benefits that people receive.
The paycheck or the earned check that people receive from Social Security will decrease. It is a cut. It is a substantial cut because we know the power of compound interest. With time, that cut grows in size.
If we are talking about economic security at this time when our economy is beginning to recover from those devastations of the 2008 Wall Street crisis, you would think we would want to provide people with the greatest economic security and that would be through their Social Security earned benefits.
The Chained CPI affects not just seniors, disabled, children or widows, it affects veterans who will see benefits they have earned cut. It affects any number of folks including middle income and low income tax paying families who will see their taxes rise.
The Chained CPI is coming at the worse time for all those folks who worked very hard and thought they had paid into a system on a bargain, that it would be there for them because they paid into it.
Let us remember that a typical American middle income worker at the age of 65 under the Chained CPI would lose about $140 of his or her annual benefit if Chained CPI were to become the law.
By age 75, the annual benefit would be cut by $560. By the time he or she reaches age 85, the age at which most seniors tend to depend most on Social Security, the annual benefit would be cut almost $1,000 a year.
The problem here is that we have to know our facts and we have to recognize that economic security is perhaps the most important thing for our parents, our grandparents, our children, disabled families, and certainly for American working families.
Mr. Chairman, I am looking forward to hearing the testimony because there is nothing more important than the security of Social Security. With that, I will yield back.
*Chairman Johnson. Yes. You guys need to take what he said with a grain of salt. Some of that is shading the truth.
*Mr Becerra. Show me the numbers.
*Chairman Johnson. Easily. We are not going to quit paying Social Security. Let’s face it.
Mr. Kling, welcome aboard. Please proceed.
STATEMENT OF JEFFREY KLING, ASSOCIATE DIRECTOR FOR ECONOMIC ANALYSIS, CONGRESSIONAL BUDGET OFFICE
*Mr. Kling. Thanks for inviting me to testify. As you know, the Social Security Administration increases recipients’ monthly benefits in most years, for example, the 1.7 percent COLA that applied to benefits paid in January 2013 was based on the increase in the Consumer Price Index between 2011 and 2012.
One option for lawmakers would be to link to another measure of inflation, the Chained CPI. That Index generally grows more slowly than the traditional CPI does, an average of about one quarter of a percentage point more slowly per year over the past decade.
Using the Chained CPI in a variety of Federal programs and the Tax Code would reduce the deficit by a total of $340 billion over the next ten years if implemented starting in calendar year 2014, according to estimates by the Congressional Budget Office and the staff of the Joint Committee on Taxation.
The President’s budget for fiscal year 2014 includes a related but less comprehensive option that would use the Chained CPI for Social Security and some other spending programs, as well as for the tax system.
CBO is currently reviewing that and other proposals in the President’s budget. I will not be discussing those specific proposals today.
In my remarks this morning, I will focus on the analysis examining a generic proposal to use the Chained CPI for indexing COLAs and Social Security starting next year. Such a policy would not alter the size of people’s benefits when they are first eligible, either now or in the future, but it would reduce their benefits in subsequent years because of the reduction in the average COLA relative to current law.
The impact would be greater the longer people received benefits, that is the more reduced COLAs they experienced.
For example, after a year, the Social Security benefits paid to a 63 year old who had claimed initial retirement benefits at age 62 would be about one quarter percent lower on average if the Chained CPI was used for indexing.
After ten years of COLAs, the effect for a 73 year old would be 2.5 percent on average. After 30 years of COLAs, the effect for a 93 year old would be 7.2 percent on average.
According to CBO’s analysis, using the Chained CPI for annual COLAs would reduce outlays for Social Security relative to CBO’s current law baseline by $1.6 billion in 2014. Those savings would grow each year reaching $24.8 billion in 2023, and would total $127 billion over the 2014 to 2023 period.
CBO projects that Social Security recipients would face an average benefit reduction of about $3 per person per month in 2014 and roughly $30 per person per month in 2023.
By 2033, outlays for Social Security would be three percent lower than they would be under current law or six percent of gross domestic product rather than 6.2 percent. As a result, the gap between Social Security’s outlays and tax revenues in that year would shrink by about one‑sixth to one percent of GDP.
According to many analysts, the traditional CPI overstates increases in the cost of living because it does not fully account for the fact that consumers generally adjust their spending patterns as some prices change relative to other prices, and because of a statistical bias related to the limited amount of price data that the BLS can collect.
However, using the Chained CPI instead for indexing Social Security could have disadvantages. The values of that Index revised over a period of years so the programs would have to be indexed to a preliminary estimate of the Chained CPI that is subject to estimation error.
Also, the Chained CPI may understate the growth and the cost of living for some groups. For instance, some evidence indicates that the cost of living grows at a faster rate for the elderly than for younger people in part because of changes in health care prices which play a disproportionate role in older people’s cost of living.
However, determining the impact of rising health care prices on the cost of someone’s standard living is problematic because it is difficult to measure the prices that individuals actually pay and to accurately account for changes in the quality of health care.
Changing the measure of inflation used for indexing is only one of many possible modifications to Social Security, if the Congress wishes to slow the growth of Federal spending by constraining outlays for Social Security benefits or to improve the long term solvency of the program by making changes to its spending or revenues.
Many other approaches are possible, a number of which CBO has analyzed previously.
[The statement of Mr. Kling follows:]
*Chairman Johnson. Thank you, sir.
Mr. Lorenzen, you are recognized for five minutes.
STATEMENT OF ED LORENZEN, EXECUTIVE DIRECTOR, THE MOMENT OF TRUTH PROJECT, COMMITTEE FOR A RESPONSIBLE FEDERAL BUDGET
*Mr. Lorenzen. Mr. Chairman, Ranking Member Becerra, members of the Subcommittee, it is an honor to be before you and an unusual experience to be on this side of the table.
I am Executive Director of The Moment of Truth Project, which was established to continue the work of the National Commission on Fiscal Responsibility and Reform, also known as the Bowles‑Simpson Commission. I worked on the staff of the Fiscal Commission.
On a personal note, I would like to briefly note that I have had significant personal experience with the value of the Social Security program having received survivor’s benefits as a child after the death of my father, and more recently, having had to manage my family’s finances for a period based on Social Security benefits.
Neither of those experiences have convinced me that providing COLAs that are greater than the rate of inflation is the desirable policy, rather, that we should try to find a way to make the Social Security system fiscally strong by making progressive changes in the benefits in a way that strengthens poverty protections for the programs.
The CPI offers a rare opportunity to achieve both significant savings spread across the entire budgets and by making a technical improvement to existing policies.
Brief background. The issue of overstatement of inflation in the CPI gained prominence in 1995 when then Federal Reserve Chairman Alan Greenspan mentioned the issue and his belief in testimony before Congress.
Even before Chairman Greenspan’s comments, the Congressional Budget Office had done a report noting there was a growing discussion and debate among economists identifying a bias in CPI.
In response to Chairman Greenspan’s comments, the Senate Finance Committee, chaired by then Senator Pat Moynihan, appointed the Baskin Commission, which did a review of CPI and estimated the bias of between 0.7 and 2.0 percent.
While there was controversy over many of the specific elements and disagreements of the specific findings, the general consensus was the findings were broadly accepted and confirmed by subsequent analysis by the Federal Reserve Board and others.
In response to that discussion, the Bureau of Labor Statistics did a thorough review of the methodology and made changes where it felt there were improvements that could be made, including introduction of the geometric mean to deal with lower substitution bias and other changes.
Those changes reduced the bias by 0.35 percent, and were implemented with very little notice or controversy, very similar to what switching to the Chained CPI would do.
The changes that BLS were able to do administratively did not address the issue of upper level substitution bias, which is what Chained CPI is intended to do, as described before.
On the Fiscal Commission, when we started meeting with various groups for suggestions about ideas for deficit reduction, switching to the Chained CPI for all parts of the budget was one of the common themes of suggestions from groups across the ideological perspective, and in the Commission meetings, it was an area of early discussion for potential consensus among members.
There was definite agreement that it should only be done as a technical correction and therefore should be applied to all parts of the budget equally. Interestingly, it was a Democratic member of the Commission who first raised the idea of Chained CPI for Social Security, and a Republican member who raised it on the issue of revenues, both did so on the basis that it should be done for accuracy.
The final Commission report did include a switch to Chained CPI, and had some low income protections. It was one of the few elements that every member of the Commission who voted for the plan did support.
Since the Commission report has come out, there have been additional recommendations for improvements for low income protections, which should be considered.
Switching to the Chained CPI has broad support from the Congress, across the spectrum, which I have detailed in my testimony, and has been included in every major bipartisan proposal.
The budgetary effects have just been described. I would just note that while most of the focus has been on the impact it would have on Social Security, Social Security represents slightly more than a third of the savings while the remaining two‑thirds of savings would come from revenues and changes in other Government programs.
Switching to Chained CPI would also close approximately one‑fifth of the Social Security funding gap and help avoid the Trust Fund exhaustion, and therefore, avoid the automatic reduction in benefits that would occur with Trust Fund exhaustion.
It is important to remember that under Chained CPI, nominal benefits would continue to increase. We estimate they would increase by approximately 60 percent over 20 years under Chained CPI, instead of a 68 percent increase under the current measure.
Also, interestingly, real benefits for an 85 year old will be higher in the future than a similar retiree today.
If you were compare a worker who retired at age 65 and is 85 today and took a worker who retired today at age 65 and received benefits subject to Chained CPI, that future retiree would still have a higher benefit in real inflation or adjusted terms by about eight percent higher.
On the distributional effects, both the Tax Policy Center and the Social Security Administration have found that switching to Chained CPI is roughly distribution neutral. However, that does not mean we should not have concerns about the distributional effects.
However, those should be addressed in the context ideally of a comprehensive plan where it makes comprehensive reforms of the Social Security program and tax system to make the Tax Code and Social Security system more progressive, but absent that, there are many proposals where you could make much more targeted, much more effective improvements to provide benefits for lower income beneficiaries who have been assisted by the higher Chained CPI which provides a very blunt and fully targeted way to provide assistance to those populations.
*Chairman Johnson. The gentleman’s time has expired.
*Mr. Lorenzen. Very briefly, moving to the CPI‑E would be a very controversial step. There are many questions and concerns about the methodology of CPI‑E.
I would just conclude by saying that any changes in deficit reduction are going to require tough choices, but moving to Chained CPI is not a change in policy, but rather a more accurate way to implement the current policy and any adverse effects of implementing current policy more accurately should be addressed by more targeted and effective policies.
[The statement of Mr. Lorenzen follows:]
*Chairman Johnson. Thank you, sir.
Ms. Altman, you are recognized.
STATEMENT OF NANCY ALTMAN, CO‑CHAIR, STRENGTHEN SOCIAL SECURITY COALITION
*Ms. Altman. Thank you. As you know, every January, Social Security benefits are automatically adjusted for inflation. Some refer to these adjustments as increases, but they are not.
They are intended to allow those on fixed incomes to remain in place, to simply tread water, without accurate and timely inflation adjustments, retirees, people with serious and permanent disabilities, and others will see their Social Security erode as they age.
That is no small matter. Half of retirees have total incomes, that is incomes from all sources, of less than $17,000. Most of that comes from Social Security. One out of three seniors relies on Social Security for virtually all of their income. Nearly one out of two seniors age 80 or over does. For women and people of color, the reliance is even greater.
The intent of the adjustment is to allow beneficiaries to tread water, but they are not, they are sinking. The current inflation index under measures the inflation they experience.
The Index is designed for workers and the general public, but seniors and people with disabilities spend more on health care where prices rise faster and less on clothing, recreation and other items where prices tend to rise slower.
Chained weighting an Index that already under measures their inflation simply will sink beneficiaries faster.
By shielding some from the harshest impacts of the Chained CPI, the Simpson‑Bowles, Rivlin‑Domenici, and Administration proposals all implicitly concede that it is less accurate for this population.
People do not need to be shielded from a more accurate adjustment.
These protections cannot solve what is a poorly targeted benefit cut. The Chained CPI cuts the benefits of every single one of today’s 57 million beneficiaries, but people already on fixed incomes have little or no ability to make up the loss.
In addition, the cost grows with each succeeding year, like a snowball rolling down a hill, hitting hardest the oldest of the old, the poor and the near poor.
Members must confront many divisive issues, but Social Security is not one of them. Poll after poll reveals that Democrats, Independents, Republicans, Union households, tea parties, the young, the old, and virtually every other demographic overwhelmingly agree about Social Security.
They agree that Social Security should not be addressed as part of a deficit deal to reduce the deficit, and they are right. Cutting Social Security does not reduce by even a penny the Federal Government’s total debt burden. Cutting it does not buy the Government a single extra day of borrowing authority.
Let me repeat because many people find this surprising. Cutting Social Security does not reduce at all the Federal Government’s debt subject to the debt limit.
Including Social Security in a deficit package gives the appearance that policy makers are raiding Social Security’s contributions and diverting them to unauthorized purposes.
You can easily avoid this improper appearance by addressing Social Security as it should be addressed, on its own, and in the sunshine.
That is how it was done in 1977 and 1983, when Social Security’s projected shortfall was much more immediate in 1983, it was six months versus 20 years today, and much larger, over eight percent of taxable payroll in 1977 versus less than three percent today.
Social Security is too complicated and too important to address any other way, but to do that, policy makers have to be prepared to follow the will of the people.
This body must open the door to more than just a narrow group of budget experts, an open process focused solely on Social Security will not lead to the Chained CPI. Instead, it will lead, I am confident, to a stronger foundation of economic security for America’s workers and their families.
Thank you, Mr. Chairman.
[The statement of Ms. Altman follows:]
*Chairman Johnson. Thank you.
Mr. Blahous, welcome again. Good to see you. Please proceed.
STATEMENT OF CHARLES P. BLAHOUS, III, TRUSTEE, SOCIAL SECURITY AND MEDICARE BOARD OF TRUSTEES
*Mr. Blahous. Thank you, Mr. Chairman, Mr. Ranking Member, all the members of the Subcommittee. It is an honor as always to appear before you.
As has been mentioned, I am here to discuss proposals to apply the Chained CPI to calculation of Social Security COLAs.
In my written testimony, I have provided some background information about how the COLAs are currently calculated, along with some basic information about the current state of program finances.
Because my speaking time is limited, what I would like to do is gloss over most of that background information and really just focus on three major points.
The first point, admittedly, at the risk of stating the obvious, is that whether Chained CPI should be used for Social Security COLAs is primarily a function of whether you as lawmakers are persuaded that it is technically meritorious as a measure of general price inflation.
Obviously, if you were not so persuaded, it would not make sense to apply it to Social Security.
If you were persuaded, I would argue that it should be applied to Social Security along with everything else, including the Federal Income Tax Code, including other Federal programs. I would not recommend specifically singling out Social Security for the change nor would I recommend specifically exempting it.
The second point has to do with the state of program finances and the impact that the Chained CPI would have upon them.
Basically, the current Social Security system faces a substantial financial shortfall that consists of significant excess of scheduled benefits over projected taxes.
One way or the other, we are going to need legislation to correct that.
Our best estimates are that if Chained CPI were adopted, it would reduce that shortfall by between 16 and 20 percent, depending on the measure that is employed to measure it. That would be a significant financial step in the right direction, although one could argue it is modest in the context of the overall financing shortfall.
A very important factor to bear in mind is that with each passing year, the shortfall has been growing larger, and because of that, changes to Chained CPI that improve the financing situation would actually get us back a little bit less than to where we were two years ago. It would make up not fully for the last two years of deterioration in program finances.
We would still have a very long way to go. I would regard CPI reform as sort of a broader Government‑wide technical reform on how inflation is measured. I would not regard it as Social Security reform or entitlement reform or tax reform. The basic work of comprehensive solvency reform would still be ahead of us.
The final recommendation I have, and this is a subjective one, but I believe in it very strongly, which is regardless of what the Subcommittee concludes with respect to the technical merits of Chained CPI, I would recommend that we continue to base Social Security COLAs on measures of general price inflation affecting America as a whole and population as a whole.
Occasionally, you read commentary from people suggesting that we should have sort of a senior specific inflation index and use that for Social Security COLAs. I would strongly recommend against doing that. That approach, I think, would suffer from a number of disqualifying problems.
One is you have to remember a lot of Social Security recipients are not elderly. A lot are dependent children. You have the disabled, 19 percent are disabled, and their dependents.
Clearly, it would be inappropriate to use an inflation index for the elderly to index benefits for children or young disabled.
If you went down the road of trying to have specific inflation indices for specific sub‑populations in Social Security, we could create real problems and real chaos in a hurry.
We would have a situation where different components of the Social Security population would be getting different COLAs, that can be very divisive. You have to also remember that people move from one group to the other, when the disabled reach retirement age, they convert from disability to retirement benefits.
It would not take very long for people to notice that there are other disparities in inflation experienced by other sub‑populations, geographic differences, things like that.
I would strongly caution against going down the road of trying to divvy up the Social Security recipient population into sub‑populations.
I would recommend sticking with the long‑standing use of CPI which is measure for general price inflation affecting the population as a whole.
In conclusion, Mr. Chairman, I would just say again I think the main point is whether it should be applied for Social Security COLAs is really a function of the technical merits of the Chained CPI as a measure of general price inflation.
It would have a positive, modest effect on program finances, and we would still have in front of us the major work of Social Security financing reforms.
[The statement of Mr. Blahous, III follows:]
*Chairman Johnson. Thank you, sir.
As is customary, for each round of questions, I am going to limit my time to five minutes and ask my colleagues to also limit their questioning time to five minutes as well.
Commissioner Groshen, it seems like we have an acronym for everything here in Washington. Maybe we could think of a new one today.
For those not so well versed in the inside the Beltway jargon, what exactly is the “CPI,” and is it best called an “inflation estimator,” and how does your staff go about determining it?
*Ms. Groshen. As I said, we think of it as a way to estimate the changes over time in the cost to consumer of maintaining their standard of living.
It really focuses on what it is that consumers buy and weights it by the experience of consumers. It is an attempt to measure a cost of living index, and in that way, the Chained CPI is different from the CPI that we had before, because it allows for substitutions.
When people can substitute for goods, they experience less of a decline in their standard of living than when they cannot substitute among goods, and therefore, the cost to restore them to their previous standard of living is lower.
It also corrects another technical problem called “the small sample bias” that I can tell you more about if you are interested.
*Chairman Johnson. How is Chained CPI different? What does it mean to call a CPI “chained?”
*Ms. Groshen. One of the benefits of having it be chained is that you can compare the current level of the Index to an original level very simply. That is where the term “chained” comes from. Again, a somewhat technical explanation.
It is really on the difference between the current one that you have to do a more complicated set of algebra to be able to get the total difference over time.
*Chairman Johnson. Do we have to go back to college?
*Ms. Groshen. No, you might need to use your calculator. That is all.
*Chairman Johnson. Why is Chained CPI considered the most accurate measure of inflation?
*Ms. Groshen. It is considered more accurate because it allows for this substitution, where consumers substitute. It does not act as if consumers are more constrained than they actually are.
*Chairman Johnson. Dr. Blahous, you are well versed in Social Security history, and have been here many times. Was not the original reason for the COLA to ensure benefits keep pace with inflation? If the current measure is not accurate, do we not need to switch to a more accurate one?
*Mr. Blahous. I would argue yes, and that was the original intent. The COLAs were basically created in the 1972 Social Security Amendments, which have kind of a history. There were some mistakes that were made in the 1972 Amendments, and also the way it is done today really reflects the state of knowledge at the time.
Basically they made an effort to adjust benefits for inflation both for people already receiving them and for initial retirees. They made some technical errors in the application of new retirees, and that is what the whole 1977 Amendment set of changes was about, the notch babies, and that whole story.
They made some mistakes. The reason we are using CPI‑W today for Social Security is not so much because people regard it as the most accurate measure of inflation, it was just the only one that was around at the time. Even CPI‑U was not around at the time of the 1972 Amendments.
Over time, the interpretation has been that CPI‑W is the one that has to be applied to Social Security COLAs based on the old wording of the law.
*Ms. Altman. Mr. Chairman, if I can add to that.
*Chairman Johnson. No, ma’am. I am not asking you the question. Thank you. My time has practically expired. I am going to stop now. Mr. Becerra, you are recognized.
*Mr. Becerra. Thank you, Mr. Chairman. I think it is appropriate to talk about this Chained CPI. I think it is a very appropriate name for this change in the way you calculate seniors’ benefits.
It really does drag down the ability of those who rely on Social Security to know their Social Security will be there for them the way they expect it, they will be chained down.
On the issue, Commissioner Groshen, of the accuracy of the Chained CPI or the CPI, you also do a calculation called “CPI‑E,” which is a calculation of the cost of living for the elderly. You take a sample of elderly Americans throughout the country. It is a smaller sample. You do not apply it but you keep a study that samples elderly Americans when it comes to what their cost of living is.
In that CPI‑E, which calculates cost of living for elderly, do you notice a difference between the CPI‑E and the currently used CPI?
*Ms. Groshen. Yes, we do. The difference between the two measures, the CPI‑E and the CPI‑U, are the weights, the consumption weights, differences between the elderly and the non‑elderly.
*Mr. Becerra. What are the actual results? I know I am going to run out of time. Which ends up providing a higher benefit amount to an elderly person, the currently used CPI‑U or the CPI‑E which takes into account the survey of elderly folks?
*Ms. Groshen. During the period from December 1982 to December 2012, the average annualized change for the CPI‑W was 2.8 percent, and for the CPI‑E, it was 3.1 percent. It was three‑tenths of a percent higher for the CPI‑E.
*Mr. Becerra. The CPI‑E, which is a calculation of the cost of living for elderly that you do showed that the elderly have a cost of living that is higher than the average consumer that you use to calculate the regular Consumer Price Index.
Now we have the Chained CPI, which would be below the currently used CPI down here. When people ask is this a more accurate measure of what the costs of a senior are, there is a good chance that senior is going to lose way more than what he or she is currently receiving, which may already be inaccurate given that seniors probably tend to use health care more than the average consumer you use to measure your CPI.
I suspect ‑‑ I am guessing Mr. Kling and Mr. Lorenzen are probably the youngest folks here. I suspect they have not had to worry about colonoscopies yet. They probably, being male, do not worry about mammograms as much.
Once you are a senior, that colonoscopy is something you have to regularly do. If you are a female, you probably have to worry about mammograms quite a bit.
If you are young and healthy, you do not have to worry about that. You might decide if you are running out of money, you will not buy the steak, you will buy the chicken because it is less expensive.
I doubt you are going to have a choice when it comes to a colonoscopy of getting a colonoscopy or a cheaper colonoscopy somewhere else, or taking your heart medication or buying a cheaper heart medication.
It is a less flexible calculation for seniors when it comes to their ability to substitute one product or one service for another because for them ‑‑ we would love to have as many choices in health care, for example, as possible, but they are not always there.
Ms. Altman, does the change to a Chained CPI, as modest as it may sound when we speak of it in terms of accountants and .0 this and .0 that, does it have an actual impact on the resources that most seniors or disabled or survivors of our deceased American workers have?
*Ms. Altman. Absolutely. As I say, it has a snowballing effect. It compounds over time. The older you get, the larger the cut. We have calculated that for an average work, retires at age 65, fortunate enough to live 30 years, even these bump up’s in these various proposals, would still lose a cumulative amount of about $15,000. That is someone who during their working years was only earning $40,000.
*Mr. Becerra. It is a hit. Let me just conclude by saying I thank you all for your testimony. We have to continue to examine these things.
I think Mr. Blahous said it correctly, we have to here in Congress decide what we do, and I would simply finally add that knowing that Social Security has never added a single penny to our deficits,
I would hope that we confine our discussions about working on strengthening Social Security to Social Security, not within the context of budget deficits that Social Security never caused.
Thank you, Mr. Chairman.
*Chairman Johnson. Thank you. Mr. Renacci, you are recognized for five minutes.
*Mr. Renacci. Thank you, Mr. Chairman. I want to thank all the witnesses today for being here. When I saw this chart in the beginning, it is interesting, because you try to learn some things.
Mr. Kling, I want to ask if this statement is true. Since 2010, Social Security has been paying more in benefits than it receives in revenue and that the cash flow deficit for the ten year period ending 2023 is projected to reach $1.3 trillion according to the CBO?
*Mr. Kling. Yes, it is correct. The Congressional Budget Office generally focuses on the budget of the Government as a whole. On that basis, the dedicated revenue from Social Security taxes was less than outlays for Social Security benefits last year, and will be throughout the next decade under current law, contributing to the unified Federal budget deficit and increasing Federal debt held by the public.
Looking at just the Social Security program, the total inflow including payroll tax revenue and interest payments on the Trust Fund balances from the Treasury will exceed the outflow from the combined Old Age Survivors and Disability Insurance Trust Funds for the next several years.
That situation will reverse and the outflow will exceed the inflow starting in 2017, CBO projects. That combination of Trust Funds includes the Disability Insurance Trust Fund that will be exhausted in 2016.
*Mr. Renacci. Between now and 2023, we will reach $1.3 trillion? That is a true statement?
*Mr. Kling. Yes.
*Mr. Renacci. Thank you. Mr. Lorenzen, I think this comes down to accurate measure. You were ending your testimony about this is all about coming up with an accurate measure of inflation.
You did not get a chance to finish. I would like to hear the rest of what you were going to say.
*Mr. Lorenzen. What I was saying is the policy within the Social Security program, within the Tax Code and many other programs is to ensure that the value of those benefits or those provisions in the Tax Code keep pace with inflation.
As long as that is the policy, we should try to implement that policy in the most accurate way and make sure those programs are indexed to the most accurate measure of inflation as possible.
In some cases, providing a higher than justified increase in inflation masks other shortcoming’s in the programs or provides benefits across the board that benefit certain populations more so and provide a more accurate measure that may have other undesirable consequences, but those should be addressed by policies that are intended to do that.
We should not be having a policy to index programs to greater than inflation that provides a higher adjustment for everyone in order to help some.
For example, it makes no sense to have an indexing of the Tax Code that provides a $450 windfall to someone at the top quintile of the Tax Code in order to protect a $25 tax benefit for someone at the bottom quintile.
You would be far better to accurately index inflation for everyone, and then if we are concerned, as I am about the person at the bottom quintile, find another change to the Tax Code to address that.
I think we can do that in Social Security and other programs, index the programs to achieve the policy goal of keeping pace with inflation for all of them and then finding ways to help and assist those for whom that change in inflation exposes other shortcoming’s.
*Mr. Renacci. What do you believe is the most accurate measurement?
*Mr. Lorenzen. I do believe the Chained CPI that has been developed over years is the most accurate measure based on what I have read from experts.
*Mr. Renacci. Thank you. Commissioner Groshen, why is CPI‑E referred to as experimental? Is it ready for prime time?
*Ms. Groshen. The short answer is no, it is not ready for prime time, which is why we all it experimental. The problems with it are it is based on a small sample size, but even more than that, it is based on using the same stores and the same prices and the same set of goods as for the general population.
For the BLS to stand behind it as an official statistic, we would need to do the research involved to really design the program to measure the cost of living for the elderly in a statistically sound way.
*Mr. Renacci. Mr. Lorenzen, do you have any comments about the flaws in the CPI‑E?
*Mr. Lorenzen. I would add a couple of flaws. I think health care is one area of different expenditures, but there are other differences in spending patterns among seniors that are not reflected in CPI‑E, including mail order and senior discounts.
There are also questions about how it accounts for housing is accurate, that seniors are much more likely to own their own home and have paid off mortgages, whereas CPI and CPI‑E both assume inflation based on imputed rent.
On the issue of health care, I would say two things. First, as was noted, it is not clear how much the measures are accurate in measuring health inflation, that it is very difficult to do so accurately, and some suggestions that measures overstated health care inflation.
I would add the bulk ‑‑ the increase in health care costs for seniors is in a small population. Instead of again having a higher inflation adjustment based off the higher health expenditures for the smallest population, we can address that through something like an out‑of‑pocket limit and other reforms of the Medicare program instead of providing a higher adjustment for everyone.
*Mr. Renacci. Thank you. I yield back.
*Chairman Johnson. Thank you. The gentleman’s time has expired.
Ms. Schwartz, you are recognized for five minutes.
*Ms. Schwartz. Thank you, I appreciate the testimony. I do also have to start with where I think our premise has to begin.
I will echo some of the comments made by the Ranking Member, that we should begin by understanding that Social Security is different and is funded differently, has its own Trust Fund, in fact, in the wisdom of Congress, they actually anticipated the baby boomers, unlike in Medicare, for example, and that was important. Those are dollars in Social Security going forward.
We have made a commitment, Social Security to seniors and to their families, and we ought to start with the premise of absolutely sustaining it and making sure it’s there for our current seniors and our future seniors.
The discussion about how to modify the CPI, Consumer Price Index, for Social Security, it feels really different. How it affects seniors, as I think was pointed out in the panel, the idea of changing it and already we know it is not going to work for all seniors.
Therefore, how many seniors are we then going to modify it for because we are worried about older seniors, the biggest group that is growing, over 85. The poorest seniors, which is a lot of them also, and our sickest seniors.
If you are starting to say okay, it does not work for percent or that percent, we begin to say is this a wise thing to do. That is really the question before us, should we even be applying a change in the Chained CPI or even considering it for seniors and for Social Security?
That is a big deal. In Pennsylvania, it is a big deal. We have almost two million seniors. As you know, seniors are aging.
As already pointed out, they have very different uses of the economy than you might compare to a 25 or 35 or 45 year old. They are living on fixed incomes, more and more of them are relying on Social Security as the one piece they know is going to come to them.
Small changes in an inflationary factor, I think it becomes increasingly important as we are seeing changed in retirement benefits for many Americans, to sort of move from defined benefits to defined contributions, it may be even more important as we go forward for future seniors.
Again, you point out that most seniors ‑‑ I thought the number was $14,000, average income, you said $17,000. It is still not very much.
I wanted to really ask the question about how this would apply to the poorest and sickest seniors. The question was raised about seniors had a different position in terms of health care than younger Americans.
I know when I talk to a group of seniors, and I bet if I say it to everybody in this room, how many of you take a medication. Forget the ones that are really serious, how many of you who are over 65 take a medication. They laughed.
I said, “does anyone take one?” They all laughed at me. One. How about two, how about three, how about for. Which one are you not going to take if you do not get a little more of an increase.
It is a little different than am I going to buy steak or chicken. It is really a question of am I going to buy chicken at all. Am I going to buy vegetables. Am I going to take one medication versus another.
That is serious business. It has implications for higher costs for families, who often have to help out their seniors/relatives, or higher costs to taxpayers because they show up in emergency rooms.
The implication in relationship to health care costs, which seems to be very, very important and different for seniors, as well as some of the issues some others would like to raise about housing.
These are seniors who live on a fixed income. It is not easy for them to shift costs to somewhere else, as some do. I will get a job. I will get a second job. I will find a higher paying job. I will not buy a new car this year.
This is really not what most 85 year old’s or 80 year old’s or even 75 year old’s are really thinking about.
We really have to understand that may be very different than a change we might make or might not make in how we index increases.
What we hear as Members of Congress all the time is the increases, and they are small, that they get in Social Security, often go to the increases in Medicare, cost sharing. They get pretty upset about it.
It is not even an increase question, about whether they can afford increases in their heating bill because they have already used it all up for health care.
I really wanted to ask Ms. Altman if you could just speak more specifically to how many seniors would have to ‑‑ I think Mr. Lorenzen talked about this ‑‑ be ameliorated. The harm to seniors would have to be ameliorated in terms of our sickest seniors, our poorest seniors, our oldest seniors.
*Ms. Altman. We have actually looked at that very carefully. It is really more than half. If you are talking about the poorest of the poor, you are talking about 9.4 million seniors who are not getting SSI but just Social Security, but are poor or near poor.
As you say, the population is aging. More and more are getting older.
If it is an accurate Index, you do not have to ameliorate. People talk about shielding veterans, two out of five Social Security beneficiaries are veterans.
There are lots of groups that I think the American people would see as deserving and not worthy of having a cut.
*Chairman Johnson. The gentlelady’s time has expired.
*Ms. Schwartz. Thank you very much.
*Chairman Johnson. Mr. Kelly, you are recognized.
*Mr. Kelly. Thank you, Chairman. Thank you all for being here.
There is an old adage where I come from, if you do not know where you are going, any road will get you there. In this case, we do know where we are going. We know if we do not take a look into the future, if we do not get this fixed ‑‑ I understand charts and I understand income has nothing to do with solvency. A lot of people make a lot of money and still go broke every year.
It is not a matter of how much you make, it is how much you save. It is about keeping your spending under control.
Listen, I am/ 64. You think I am not concerned about what is happening? I am absolutely concerned with what is happening. By the same token, there is something about early detection. If you get it early enough, you can usually get it fixed and get it done at much less cost.
I am trying to figure out why even have the hearing today if there is no problem. We have all kind of revenue. We do not have any problem looking into the future, why are we worrying about this? Why are we even having this conversation about the solvency and the long range stability of Social Security?
If I look at the figures, what are we talking about? We have all kind of money. All kind of money coming in. It is growing at a tremendous rate, 1.6%, 1.8%.
Here is the deal. If your heart is willing but your wallet is weak, I do not care how much you care about these folks, I care about them.
We made promises to people years ago that we cannot keep today and then we try to soft soap it and really, I wish policy were the driving force in this town and not politics.
I wish we could talk about the reality of how we are going to save this program as opposed to how we are going to spend it some way that makes us look good in the next election.
If we really care about Americans, I do not care about Republican, Democrat, Independent, Libertarian, whatever you are in this country, there is always that ability to speak about it openly and do it the right way, but do it honestly, please.
I want to save the program, too. Mr. Blahous, you have some interesting approaches. Running a business all my life, there are a lot of things that I made a mistake on early. My dad was a World War II pilot, and much like the Chairman, he was a bomber pilot. We had a Cessna franchise for a while.
The most important thing he told me is when we were flying somewhere. He would say, son, make sure that you chart that the right way and make sure you stay on course.
It is no big deal being off one degree. I grew up in a little town called Butler, about 25 miles from Pittsburgh. You can be off one degree flying from Butler to Pittsburgh and end up pretty close to Pittsburgh. If we were flying from Butler to Los Angeles, we would end up in Oregon.
There is a long range effect to this stuff. The equities that you talked about, if it is not a problem, we have all this income, if it is coming in and we cannot spend it fast enough and do not worry about it, why be concerned? Why all the interest?
If we do not do this, what is the ultimate effect? I like the approach you have to it. We are talking now about numbers that support what our hearts want to do.
*Mr. Blahous. I think even relative to many other experts, I am extremely concerned about the financial future of Social Security.
You made a reference to early detection. I fear the early detection light has been going off for a while and there has been a failure to act.
I fear we are actually getting to the point where it is going to be difficult to get this problem resolved.
In 1983, the program faced a very substantial financing crisis. It took a tremendous amount of bipartisan cooperation to resolve it. You actually had Republicans and Democrats joining together to overcome the very spirited opposition of the AARP and other seniors groups. It was a very difficult thing to do.
We had to delay COLAs by six months. They had to raise the retirement age. They exposed benefits to taxation for the first time. They had to bring all Federal employees into the system. They had to accelerate a previously enacted increase in the payroll taxes.
This was really politically painful stuff. The current long range shortfall in Social Security relative to that then, it is about twice as large now. The amount of political pain that all of you would have to endure in a long range solvency fix is about twice as much as it was in 1983.
If you did a 50/50 on benefits and taxes, conservatives would have to agree to twice as much in terms of tax increases and progressives twice as much in terms of benefit restraints as was done in 1983.
That is a very tall order. With each passing year, this becomes a bigger problem to solve. I am very worried about it. I am worried about the consequences if we do not enact repairs relatively soon.
*Mr. Kelly. Mr. Renacci and I are both automobile dealers. In the old day, we had gauges that told us what the temperature was, what the oil pressure was, and they switched the lights. They would go red. It was called “idiot lights” because when the light was on, it was already too late. The engine was fired.
You say we have a blinking light right now. It may be blinking yellow but we better wake up and smell the coffee. We are at a dangerous, dangerous point.
I thank you for your testimony. Mr. Chairman, my time has expired.
*Chairman Johnson. Thank you. Mr. Thompson, you are recognized for five.
*Mr. Thompson. Thank you, Mr. Chairman. Thanks to all the witnesses for being here today.
I am glad you preceded me in the questioning because you raised an issue that I came into this Committee thinking about today. It is a little bit confusing as we deal with this.
I think we need to talk about Chained CPI and what it means and how it works. The idea that we are talking about it from the vantage that you brought up as part of the shortfall for Social Security, I find a little bit baffling.
I do not think it is a reform to Social Security. As I understand it, it is about 20 percent of the shortfall. That is a long way from what we need to be doing. It is even worse in this case because to get that 20 percent of the shortfall, you are cutting benefits to seniors and you are cutting benefits to veterans, and many times those veterans are the seniors that we are trying to help provide a secure retirement for.
When we talk about Chained CPI as part of the deficit issue, I think it really muddies the water. Social Security does not have anything to do with the debt, as I understand it. I do not believe Social Security has added a dime to our debt. I do not believe it can by law.
When you start co‑mingling these topics, I do not know if it gets us to where we need to be. That is we certainly need to deal with our deficit. We need a long term plan to do it. When we start doing that, I think we need to look at what caused it.
You cannot have major tax cuts without paying for them. You cannot go to war without paying for it. You cannot provide prescription drug benefits without paying for it. Yet, we are not talking about anything like that.
We also need to make sure that Social Security is available for providing a secure retirement for many years to come.
As I mentioned, this does not do it. It is 20 percent. I do not know you factor that in. If you look at the 20 percent and you are getting that from the seniors themselves, that kind of raises havoc with the security of those seniors that you are trying to help.
I have a couple of specific questions. Ms. Altman, can you explain how Chained CPI cuts veterans’ benefits?
*Ms. Altman. Sure. The veterans’ benefits actually can get hit three or four times because as you know, there are a number of programs Government‑wide that are indexed, the largest savings comes from Social Security.
As I said earlier, two out of five veterans receive Social Security. People who are disabled or die in Service in Iraq or Afghanistan qualify for Social Security benefits. Those benefits would be cut by the Chained CPI.
In addition, there are a number of veteran specific programs, veteran retirement programs and programs for disabled veterans. Those also are indexed and those also would be cut by the Chained CPI.
*Mr. Thompson. If you are a veteran who was wounded in a previous war and you get a certain disability payment as a result of that, you can expect to see your veterans’ disability check reduced?
*Ms. Altman. That is right.
*Mr. Thompson. If you are a veteran who was killed and your children are receiving benefits, the children of that veteran can expect to see a reduction in their benefits they receive from their dead mother or father?
*Ms. Altman. They will be cut twice. They also receive survivor benefits under Social Security.
*Mr. Thompson. Mr. Blahous, do you still believe we ought to privatize Social Security?
*Mr. Blahous. As you know, I worked for President Bush and worked on his proposal to include personal accounts of Social Security. I actually think although at one time, it would have been prudent to try to save as much Social Security contributions as we could going forward in personal accounts, I think that time has passed.
I think it is too late to advance fund a significant portion of Social Security obligations.
I believe our solutions at this point are best confined to the traditional ones, trying to align benefits and taxes within the current structure.
*Mr. Thompson. You do not believe we should privatize Social Security?
*Mr. Blahous. No.
*Mr. Thompson. How do you think we should do the reform?
*Mr. Blahous. I will give you a two part answer. There is what I personally would design if I were dictator of the world, and there is what I would support.
The second ranges much wider than the first one. I would tend to focus primarily on reductions in the rate of the growth on the high income end basically by changing the benefit formula. There are some other changes I would make.
*Mr. Thompson. Means test it?
*Mr. Blahous. No, I would not do a true means test. A means test basically means measuring income outside the Social Security system and withholding benefits based on that.
There is a benefit formula in the current law that is progressive. It is like a system of income tax brackets except you have benefit brackets. I would basically make those more progressive and hold down benefit growth on the higher income end.
Having said that, there have been proposals put forward that would do more of a mix of revenue changes and benefit changes like the Simpson‑Bowles proposal.
*Mr. Thompson. Raising the age, is that one?
*Mr. Blahous. Raising the age would be something I would consider as was in Simpson‑Bowles. Simpson‑Bowles included some increases in the tax base as well.
I frankly think a solution is important enough that I would go along with a variety of ways to do it.
*Chairman Johnson. The gentleman’s time has expired. There are a lot of ways to fix it and we need to and we will.
Mr. Griffin, you are recognized.
*Mr. Griffin. Thank you, Mr. Chairman. I want to start out by saying that I saw a representative from the White House here in the room. I want to say something I do not say much, which is I congratulate the President on acknowledging that we have a problem.
There are some people here I have heard from today that do not acknowledge that we have a problem, and the President has acknowledged that we have a problem.
We may disagree on what to do about it, but it was welcomed to see him at least putting something forward that starts the conversation on this.
I will say one of the big problems is the longer we wait, the closer we get to the edge of the cliff, the fewer options we have.
We have heard a reference to that here a minute ago. My mother is on Social Security. I pay into Social Security, despite what the Internet says. I hope to get Social Security benefits at some point, especially since I turned down my congressional pension.
I am counting on Social Security. I want to save it. I feel like I am in a land of glitter and unicorns here because you have people who are saying Social Security has a problem, it does not have enough money, but it does not add to the deficit or the debt. Complete and utter nonsense.
I am not going to be one of these guys that cites Factcheck.org, although they have commented on this. Sometimes they are right and sometimes they are wrong.
The bottom line is we have a yearly deficit. If Social Security only used the money it has coming in, we would have a problem. You can say it does not add to the deficit. You can say it does not add to the debt. You may be thinking of Social Security as a separate fund and it technically is, but it is one Government.
*Mr. Becerra. Will the gentleman yield?
*Mr. Griffin. The gentleman will not yield. If you take $100 in your personal account and separate it in ten separate accounts, you still have $100.
The bottom line is because of where we go to get the money to plus up Social Security, at the end of the day, we are borrowing money. Where is the money coming from if we are not borrowing it from somewhere?
This is just ridiculous. I agree with this gentleman, why are we here if there is not a problem. There is a problem and that is why we are here. It is that simple.
You can talk Washington speak, about moving money around, and it is not here, that is a bunch of nonsense to normal people. You are insulting people when you say we have enough money.
If you say we do not have enough money, then you have to admit it is adding to some deficit somewhere even if it is on another balance sheet.
These ideas of trust funds is Washington speak, we know they are routinely treated as one big pool of money. Either you are wasting my time, which I rushed over here from somewhere else, or we have a problem.
I think the President just acknowledged we have a problem. I am a veteran. I am still serving. I had to get up early this morning and run Army Reserves all the way down the Mall. Do not talk to me about veterans. My grandfather served in World War I. I served in Iraq.
I want to help veterans. Will they be better off if we have a debt crisis, folks? How are seniors going to be better if we have a debt crisis? Ask the Europeans. It is a bunch of nonsense.
I had a question, but I am out of time. If I hear somebody else say that we have plenty of money and this is not adding to the deficit or debt, I just cannot listen to it.
I thank President Obama for starting the conversation so we can fix this for the next generation of people, which includes me. Thank you, Mr. Chairman.
*Chairman Johnson. Thank you. The President is aware. Mr. Doggett, you are recognized.
*Mr. Doggett. Let me just affirm that Social Security is not adding to the debt to begin with. That does not mean that I am not concerned about the long term solvency of Social Security and that it will be there as strong for my grandchildren as it was for my parents.
Mr. Lorenzen, your group has worked with the recommendations of the Simpson‑Bowles Commission. This is not the only recommendation that the Simpson‑Bowles Commission made to ensure the long term solvency of Social Security, is it?
*Mr. Lorenzen. No, it is not.
*Mr. Doggett. In fact, one of the other recommendations of the Simpson‑Bowles Commission was that the wage base, the taxable wage base would be slowly expanded, and did not that proposal ‑‑ if the concern is for the solvency, the long term solvency of Social Security, did not that proposal do more to protect the long term solvency than adjusting the cost of living increase?
*Mr. Lorenzen. It did somewhat more. It was a comprehensive plan that looked at all parts.
*Mr. Doggett. I want to be open to all points of view. My main objection here, when the President’s name is invoked, that once again, as has happened a number of other times in this Administration, he begins by saying he agrees with what the Republicans want, which is clearly a limitation on the growth of Social Security benefits, and then begs for something in return.
Of course, they have rejected any other revenues, including additional revenues to protect the solvency of Social Security, or closing corporate loopholes, or making the other changes that would allow us to address our budget shortfall, which is very real.
Commissioner, let me ask you, with reference to the Chained CPI, my understanding from your testimony is that even if the Republicans exerted total control on this and they could impose it this morning, we are not quite ready yet to do so. It is not, as you said, ready for prime time yet.
*Ms. Groshen. What is not ready for prime time is the Chained CIP‑E. The Chained CIP‑U is ready.
*Mr. Doggett. Could be ready.
*Ms. Groshen. That is right. You would have to deal with the fact that it is revised twice, but there is a plan out there that would allow that to happen.
*Mr Doggett. You have indicated that implementing that takes longer than the way we do the CPI now, that the data takes longer to collect and is not as available as quickly as the way we do it now.
*Ms. Groshen. No. We publish an initial number and that could be used to adjust the cost of living, were that the choice of the policy makers.
The BLS makes no recommendation on how our official numbers should be used.
*Mr. Doggett. I guess like so many other members, I receive so many expressions of concern for seniors during the two years that they received no cost of living increase of any kind and the notion that increases in the cost of food at the grocery store did not decline or stay steady during that time, they soared.
If we had in effect the cost of living increase that is being discussed today, the chained approach, how much less over the last decade or two would seniors have received? Would there have been other years in which they had no cost of living increase?
*Ms. Groshen. We can do that calculation for you. I do not have that off the top of my head.
*Mr. Doggett. It would not surprise you taking it say over the last two decades if they had two recent years in which they got no cost of living increase, if this new system had been in place, there would have been other years over that 20 years in which they also would have received no cost of living increase.
*Ms. Groshen. Possibly.
*Mr. Doggett. Ms. Altman, let me ask you also, looking forward with reference to veterans, and I appreciate the gentleman’s service, I have a lot of veterans in the San Antonio/San Marcos/Austin area concerned about what impact this will have on them, just like seniors and individuals with disabilities.
What difference will it make over time to them in terms of dollars and cents? What is the estimate?
*Ms. Altman. Let me make clear that the American Legion and the Veterans of Foreign Wars are against the Chained CPI, both for Social Security and the veterans’ programs.
They would have the figures on the overall calculation.
*Mr. Doggett. You are saying both the VFW and the American Legion oppose this change?
*Ms. Altman. We can give you a list of veterans, Paralyzed Veterans of America, those are the most prominent groups. There are about fifteen veterans’ groups that have come out against it. We can provide your staff with the letters they have sent.
*Mr. Doggett. Thank you.
*Ms. Groshen. Actually, I have an answer. The two years where there was no increase were 2009 and 2010. The Chained CPI‑U would have given three‑tenths of a percent increase rather than zero.
*Mr. Doggett. Why is that?
*Ms. Groshen. It is because ‑‑ basically the substitution effect.
*Mr. Horrigan. One of the issues is we had such a large increase in energy prices in 2008 and then the decline, the way the adjustment in Social Security works using the CPI‑W is it is compared to the previous peak.
We had two years where the Index was not above the previous peak. However, with the Chained CPI, because of substitution, it started at a lower level and came back a little bit faster.
Just in terms of the comparison of the previous year, it hit that previous peak one year earlier with the way it is adjusted, in the official way it is adjusted.
*Mr. Doggett. Thank you. Thank you, Mr. Chairman.
*Chairman Johnson. Thank you. Mr. Tiberi?
*Mr. Tiberi. Mr. Chairman, thank you. Mr. Doggett, can we sign you up for that proposal now?
*Mr. Tiberi. Mr. Chairman, Mr. Ranking Member, if I were watching on C‑SPAN 25, on the Internet right now, I would be pretty darn confused. I have to tell you, I am so blessed. I have an 80 year old father, he is going to be 80 this year, who came to America in 1950. In 1950, there were 16.5 workers for every retiree on Social Security. There were not 10,000 people retiring a day.
Now there are less than three workers for every retiree. My dad had figured it out and my mom has figured it out, my mom and dad still live in the same house I grew up in in Columbus, Ohio ‑‑ just got rid last year of their 18 year old car, not because they wanted to but because it broke down, and Social Security is still really, really important to them.
They look at their grandkids and they have again figured it out, partly because of organizations like yours, who are doing a great job of saying we have a problem, even though some honorable folks even up here believe there is not a problem.
Here is what helped them.
*Mr. Becerra. Will the gentleman yield?
*Mr. Tiberi. After my five minutes, I will.
*Mr. Becerra. I never said there is not an issue or challenge for Social Security. I just said today using Social Security funds to pay for deficits that it did not cause is the problem.
Certainly, we all want to take care of Social Security long term.
*Mr. Tiberi. The long term for me is very quickly approaching. When I get my Social Security statement now, it says if we do nothing, if I go online, I will get approximately 72 percent of the benefits that I am supposed to get.
When I came in 2000, Mr. Becerra, it did not say that. I used to talk about saving Social Security for my kids. Now it is for people of my generation. My mom and dad get that, not because they are concerned about me, but they are really concerned about their grandkids.
If it is going to impact me in my generation, God help my kids and their kids.
Sir, in your written testimony, which I thought was awesome, you talk about the difference between the President’s proposal and the current law, and the difference it has in terms of impact on benefits over a year, over a period of 20 years.
Can you expand on that for us?
*Mr. Lorenzen. I was speaking about the proposals on the Chained CPI.
*Mr. Tiberi. Yes, generally.
*Mr. Lorenzen. With Chained CPI in place, benefits will still be increasing in nominal terms, obviously.
*Mr. Tiberi. Can you say that again? I could not quite hear you.
*Mr. Lorenzen. I am sorry. Benefits will still be increasing in actual terms. They will be increasing slightly less than they are under scheduled law, but doing it more accurately.
However, the Trust Fund is projected to be exhausted in 2033, at which point there will be a 25 percent reduction for all beneficiaries. The Chained CPI would delay that exhaustion briefly and make the shortfall thereafter smaller, so benefits would be higher with Chained CPI because the Trust Fund has money to pay benefits, but also because the initial benefits are indexed to wages, that a future retiree is going to start with a greater benefit in real inflation adjusted terms than a previous retiree.
If you were to compare someone who retired in 1993 at age 55 with what their benefit is today and took a comparable worker who retired today at age 65, 20 years from now when they are 85, even if Chained CPI had been applied and there was not any bump up in benefits or any other adjustments to compensate for it, someone retiring today would still have a higher benefit in real inflation adjusted terms at age 85.
*Mr. Tiberi. Thank you. Commissioner, one last quick question. To follow up on Mr. Doggett’s point, if this is enacted, long term, this is not even enough, correct? We need to do more?
*Ms. Groshen. I am sorry?
*Mr. Tiberi. Because of demographics, in terms of Social Security.
*Ms. Groshen. The BLS does not do calculations of that.
*Mr. Tiberi. Mr. Blahous?
*Mr. Blahous. You have to do a lot more.
*Mr. Tiberi. We have to do a lot more. Any suggestions on your part in terms of saving for my kids, saving Social Security for them, at the same time not hurting current seniors like my mom and dad?
*Mr. Blahous. I think we are in “all of the above” mode. We have to make changes to the eligibility age. I think we have to make changes to the benefit formula. I think we should slow the rate of benefit growth on the high income end just by making brute force changes in the benefit formula itself.
I think there are other changes we should make to improve the work incentives in the system that would basically have the effect of rewarding seniors for staying in the workforce longer.
*Mr. Tiberi. The longer we wait, the more difficult a challenge it is?
*Mr. Blahous. Absolutely.
*Mr. Tiberi. Thank you.
*Chairman Johnson. We have to get it through the House and the Senate.
*Chairman Johnson. May or may not happen. Mr. Becerra for half a minute.
*Mr. Becerra. Thank you, Mr. Chairman. I just want to make clear we are clear on something. We all say we want to preserve Social Security. This is about making sure for our kids and our grandkids, it is working as well as it has worked for our parents and grandparents.
To try to make it sound like Social Security is having the sky fall on it today when what the sky is falling on is the Federal budget which has exhausted its resources and over spent, not Social Security, to say that the Social Security Trust Fund that Americans have created through their tax contributions does not exist and the interest it earned, it is like telling any American how much money do you have in your pocket today, can you pay off your house and your car loan today with the money you have in your pocket without going into your savings account?
That is crazy. We have money in the savings account for Social Security. It is there because Americans contributed taxpayer money into that Fund.
To cut benefits, to discuss a budget deficit caused by unpaid for wars or tax cuts that went to very wealthy folks, that is just putting it on the backs of seniors.
I think a number of us are ready to engage in a conversation about what we do long term to make sure Social Security is viable for everyone.
To just cut seniors and veterans’ benefits to deal with today’s budget deficits caused by other things, that is what concerns many of us.
Thank you, Mr. Chairman, for the time.
*Chairman Johnson. The President likes the idea. Thank you to our witnesses for their testimony. I also thank our members for being here.
We know we have to do something to protect Social Security long term, and we will do that. Come 2033, Social Security will not be able to pay full benefits. Americans deserve a Social Security program they and their children and grandchildren can count on.
As our hearing series moves forward, I look to our continued examination of bipartisan Social Security reforms. We need to do right by today’s beneficiaries and workers. When there is bipartisan agreement, we can and should act, and we will.
I want to thank you all for being here today. The meeting stands adjourned.
[Whereupon, at 11:05 a.m., the Subcommittee was adjourned.]
Public Submissions For The Record
Center on Budget and Policy Priorities
Consortium for Citizens with Disabilities
National Active and Retired Federal Employees Association
National Education Association
National Senior Citizens Law Center
The Social Security Institute