Hearing on What Workers Need to Know About Social Security as They Plan for Their Retirement
SUBCOMMITTEE ON SOCIAL SECURITY
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
July 29, 2014
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
Charles P. Blahous III, Ph.D.
Public Trustee, Social Security and Medicare Boards of Trustees
Sylvester J. Schieber, Ph.D.
C. Eugene Steuerle, Ph.D.
Institute Fellow and Richard B. Fischer Chair, Urban Institute
Vice President for Family Economic Security, National Women’s Law Center
Andrew G. Biggs, Ph.D.
Resident Scholar, American Enterprise Institute
Laurence J. Kotlikoff, Ph.D.
William Fairfield Warren Professor, Boston University, Boston, Massachusetts
Hearing on What Workers Need to Know About Social Security
as They Plan for Their Retirement
Tuesday, July 29, 2014
U.S. House of Representatives,
Committee on Ways and Means,
The Subcommittee met, pursuant to notice, at 11:00 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. Well, good morning and welcome. Yesterday the Social Security Board of Trustees, folks who provide us with results of Social Security’s annual financial check‑up, again sounded the alarm over the Social Security financial health.
Unless Congress does its job, full benefits can’t be paid on time beginning in just two years for those receiving disability benefits. Further, when today’s 48 year‑old workers reach their full retirement age in 2033, they and everyone else receiving retirement and survivor benefits will see a 23% cut. Today, 9 out of 10 seniors, age 65 and older receive Social Security benefits, which is a major source of income for most seniors.
Since I’ve been Chairman, I’ve been committed to making sure that Social Security will be there, not just for today’s seniors, but for their children and grandchildren. The price of delay gets higher every year, so the sooner we act the better.
As public trustees informed us yesterday, the changes needed today are bigger than what Congress passed in 1983. It is no wonder that young people don’t believe they will ever receive benefits.
A recent survey by Transamerica Center for Retirement Studies survey found that 81% of those between the ages of 18 and 34 today don’t believe Social Security will exist when it comes time for them to retire.
As a result, these young people expect most of their retirement to be self‑funded, resulting in 70% of them already saving for retirement. With the retirement of the baby boomers, the decline in traditional pensions, stagnant wages that make it even harder for Americans to save and Social Security impending inability to pay full benefits, Americans face a challenging retirement security landscape.
Bottom line, Americans want, need, and deserve a Social Security program they can count on. But just as important, a program they can understand.
For instance, older workers getting ready to retire are trying to determine when they should retire, and what benefits they should apply for, yet deciding when to take Social Security benefits isn’t just a question of how old you are. Workers have to answer questions like “How long am I going to live? Do I want to keep working? How much will my spouse receive from Social Security?”
As we will hear today, taking benefits at the wrong time can cost thousands of dollars. While Social Security has some tools to help, sometimes these tools aren’t all that helpful. So what happens when well-meaning programs become so complex that Americans need paid help to figure out what their benefits are? Americans pay.
In the disability program many pay lawyers to help them receive disability benefits, while others pay financial planners to help them figure out retirement benefits. Worse, those who can’t afford the help pay with fewer or lower benefits than they deserve. And that is just wrong. There has to be a better way.
Today’s hearing isn’t just about ensuring that Social Security will be there for current and future generations, but starting a much needed conversation about what workers need to know about Social Security as they plan for their retirement.
I want to thank all of our witnesses for being here today and I look forward to hearing your testimony. And I now recognize ranking member, Mr. Becerra for his opening statement.
*Mr. Becerra. Mr. Chairman, before I begin my opening statement, I want to again, register my concern that we will be discussing the Social Security Trustees report which was released yesterday without hearing from the author of and the foremost expert on that report. That’s the Social Security Chief Actuary, Stephen Goss. I would like to insert into the record the letter that I sent to you registering the Democrats’ concern that Chief Actuary Goss was not invited to testify at our hearing to provide a neutral, nonpartisan explanation of the facts before we are presented with partisan policy recommendations. I’d like to submit that into the record Mr. Chairman.
*Chairman Johnson. You could have invited him. You know.
*Mr. Becerra. Mr. Chairman, we had one witness out of five or six ‑‑
*Chairman Johnson. You could have invited him ‑‑
*Mr. Becerra. And we chose to invite someone as well an official witness is usually invited.
*Chairman Johnson. Does anybody object to having it put in the record? Okay.
*Mr. Becerra. Thank you, Mr. Chairman. For most Americans Mr. Chairman, Social Security is the heart of retirement security. Six out of ten seniors rely on Social Security for more than half of their income. For almost half of Americans over 80, nearly all of their income comes from Social Security. Without Social Security nearly half of women over the age of 65 would be poor. Americans have earned that vital retirement security. Over 160,000,000 Americans today pay into Social Security with their paycheck tax contributions every week in exchange for economic security for themselves and their families.
Over its lifetime, Social Security has raised through those tax contributions 17.2 trillion dollars and paid out 14.4 trillion dollars; thereby, accumulating a surplus of 2.8 trillion dollars for future benefit payments.
Now, only the highest income earners, 25% of retirees, receive any significant income from something other than Social Security, like an IRA or work‑based retirement plan. And that’s even despite the substantial subsidies that are provided for retirement savings through the tax code.
So, Mr. Chairman, the best way for Congress to improve retirement security for all Americans is by protecting Social Security from benefit cuts and making sure it is as strong for future generations as it was for their parents and grandparents.
I am deeply concerned about the proposal several of our witnesses have put forth to cut Social Security’s annual cost of living adjustments for current seniors. The so called chained CPI would result in deep benefit cuts for those who need them the most.
I also disagree with the proposals four of our witnesses have made in the past to privatize Social Security, cutting its guaranteed benefits.
Mr. Chairman, I know I’ve said this before, in fact I said it at our hearing on the Social Security Trustees report back on June of 2011. The biggest challenge facing Social Security right now is Republican budget cuts in the House of Representatives.
At our hearing in 2011, I and other Democrats on the subcommittee asked you to hold hearings to find out how Americans were affected by a $622,000,000 cut to the Social Security Administration’s budget.
We never had that hearing, even though prior to 2011, our committee had a bipartisan tradition of holding oversight hearings on SSA’s budget and its ability to serve the American public. The cuts continued.
Since the beginning of 2011 the number of Americans receiving Social Security has actually grown by almost 4 million people, but the Social Security Administration budget is still lower today than it was four years ago in 2010.
We now know some of the ways the cuts are affecting Americans who rely on Social Security. Social Security has lost 11,000 employees as a result of these cuts, almost 15% of its workforce. Some local Social Security offices are operating with staff shortages of more than 25%.
Budget cuts forced Social Security to reduce the number of hours their offices are open to the public by one fifth, including closing offices completely on Wednesday afternoons.
Disabled workers today are waiting longer and longer to receive their earned benefits. 14% of Americans who try to call Social Security’s 800 number get a busy signal and those who get through are usually put on hold. Seniors who need help are waiting in long lines that stretch out the door of the Social Security office sometimes in the heat or icy cold.
Mr. Chairman, I again urge you to schedule a hearing on the Social Security Administration’s budget so that we can examine these budget cuts and make sure Social Security can continue its long tradition of providing Americans with the services they paid for.
Let me enter into the record Mr. Chairman, a letter that the Democrats on the subcommittee sent to you today, reiterating our concerns, and requesting that we act now before the situation gets worse.
The best thing that we can do if we do really care about Social Security and we care about those Americans who have contributed every month through their paychecks a tax contribution to the Social Security system, is to make sure we don’t undermine the ability of the Social Security Administration to dispense the services these Americans have paid for.
The money is there. We have challenges policy‑wise to Social Security that are long term. Today we face operating budget deficits in the billions, but Social Security has a surplus in the trillions.
And so, we have an opportunity to work together bipartisanly to try to resolve these issues. But, Mr. Chairman, I urge you and I submit this letter to the record that again urges this subcommittee to do its oversight responsibility under the Constitution. To hold the hearing on the SSA’s budget so we don’t find ourselves falling into situations where Social Security fails to provides the benefits that it always has, on time and in full.
With that Mr. Chairman, I request Mr. Chairman to submit this letter into the record. And I yield back the balance of my time.
*Chairman Johnson. Are there any objections? There’s none.
*Chairman Johnson. You know on the issue of Social Security Administration needing more money, I’d like to make two points. One, in the last decade, Social Security received a 34% increase in budget since GOP control. And all but one budget has been bipartisan and all were signed by President Obama, your president. Just last ‑‑
*Mr. Becerra. Our President. Our President.
*Chairman Johnson. Just last week we learned Social Security spent $300,000,000 on failed implementation of a new computer system for the State Disability Determination Services. That’s $300,000,000 that was wasted. We need to watch out for ‑‑
*Mr. Becerra. Mr. Chairman ‑‑
*Chairman Johnson. ‑‑ that, too
*Mr. Becerra. I’m intrigued, query. I understand the Chairman has a prerogative to make additional remarks. We are working outside the regular order. I just want to make sure that if the Chairman is going to make some remarks, we have an opportunity to have an opportunity do the same as well. Chairman has always been gracious in allowing that, I just want to point that out.
*Chairman Johnson. Well, as is customary any member is welcome to submit a statement for the hearing record and as we move to testimony today, I want to remind our witnesses to please limit your oral statements to five minutes. However, without objections all the written testimony will be made a part of the hearing record.
We have one witness panel today, and seated at the table are: Charles P. Blahous, III, Ph.D., he is a public trustee, Social Security and Medicare Boards of Trustees. Welcome aboard.
Sylvester Schieber, independent consultant.
C. Eugene Steuerle, Ph.D., Institute Fellow and Richard B. Fischer Chair, Urban Institute.
Joan Entmacher, is that correct? Vice President, Family Economic Security, National Women’s Law Center.
Andrew G. Biggs, Ph.D., Resident Scholar, American Enterprise Institute.
And Laurence J. Kotlikoff, is that correct? Ph.D., William Fairfield Warren Professor, Boston University, Boston Massachusetts.
Welcome and thank you all for being here.
Dr. Blahous, please go ahead with your testimony.
*Mr. Blahous. Thank you Mr. Chairman, Mr. Ranking Member, and all the members of the subcommittee. It’s a great honor to appear before you today again to discuss the recently released projections of the Trustees and the implications for workers’ retirement planning. ‑‑
*Chairman Johnson. Turn on your microphone.
*Mr. Blahous. The light says it’s on,
*The Clerk. It was on, just bring it closer.
*Mr. Blahous. Okay.
*Chairman Johnson. Thank you.
STATEMENT OF CHARLES P. BLAHOUS, III, Ph.D., PUBLIC TRUSTEE, SOCIAL SECURITY AND MEDICARE BOARDS OF TRUSTEES
*Mr. Blahous. With your permission, my written testimony has a longer analysis, but I’d like to use my oral remarks to simply make four quick points.
The first point is simply that Social Security faces a substantial financing shortfall and as of yesterday we reconfirmed that part of that shortfall has become an immediate problem.
In our latest projections released yesterday we projected that the Disability Insurance Trust Fund will be depleted in the 4th quarter of 2016. What is important to remember about that is that this is not an indication that we only have a problem on the Disability side. In fact what we found was that the long term shortfall in the Old Age and Survivors Insurance Trust Fund is actually larger than it is on the Disability side.
The reason it is showing up first on the Disability side is primarily, not solely, but primarily, because the baby boomers move through their ages of peak disability incidence before they hit retirement age.
So rather than interpreting this as a problem that is solely confined to DI I would urge the interpretation that it is basically the first manifestation, the first element of financial crisis associated with problems that are afflicting the program as a whole.
The second point I would make is that uncertainty as to how the shortfall is going to be resolved is a threat to workers’ retirement security for a number of reasons. One is that as long as workers don’t know how we are going to resolve it, the means of resolution is unknown, workers can’t make their plans, they don’t know what is going to be required in terms of additional tax contributions, they don’t know what their benefits are going to be. And also, the longer we delay, the larger the relative sacrifice that we require from each birth cohort, because we have fewer birth cohorts that can contribute to the solution.
Another very important factor in my judgment is that the closer we come to say, 2033, the greater the uncertainty becomes that we are going to be able to repair the shortfall at all within the historical financing structure of Social Security.
Just for purposes of illustration, consider that if we wanted do a solution today, and we wanted to not raise taxes and we wanted not to cut benefits for people now in retirement, we’d have to, reduce the benefits of people newly coming onto the rolls by 21%. But if we wanted to employ that same strategy in 2033, even cutting off the entirety of their benefits would not solve the problem then.
So clearly, by 2033, our opportunity has long passed. And there’s a point between now and then that our opportunity to close the shortfall within the historical financing structure disappears. And that’s a problem, because if we can’t maintain Social Security finances under the historical financing structure, then we’d have to find a different means of doing it and programs financed for example from the General Fund tend to be more changeable than Social Security, they tend to be more subject to sudden eligibility changes, benefit changes, means tests, that sort of things, things that Social Security has generally escaped in the past.
The third point I’d make is that the costs of Social Security are rising faster than our economic output. That wouldn’t be a problem if it reflected a greater national capacity to finance these benefits. But because Social Security is not a savings program but rather an income transfer program, basically, any benefit gains that come to one group have to come at the cost of a different group, at least from a financial perspective. So what is happening is we’re increasing our commitments to paying higher benefits without increasing our national capacity to finance them. And that’s an issue.
The final point I would make, Mr. Chairman, is that this may seem paradoxical, but there certain ways in which we could actually enhance retirement security by slowing the growth of costs. You have to remember that retirement security is not only a function of annual income and assets, but is also a function of the number of years over which you have to stretch your retirement resources.
And there is a lot of evidence that the current design of Social Security is causing people to withdraw prematurely from the workforce and run greater risk of outliving their savings.
If we could possibly repair some of the inducements and incentives in the course of slowing the growth of costs, we could simultaneously put the program on a sounder financial footing and increase retirement security at the same time.
We also have a problem in the sense that the rising cost of financing the current benefit formula is depressing the relationship between workers’ pre‑retirement earnings and their post‑retirement benefits, and that is an issue as well.
That is particularly an issue for low income people because you have many people who are in the situation now where they actually expect better standards of living in retirement than they have as workers. And this has terrible implications for their ability to put aside savings, their labor force attachment and other problems. We see the results of that in the paucity of savings that a lot of groups have outside of Social Security.
In conclusion, Mr. Chairman, the financing shortfall facing Social Security, creates substantial income risks for Americans who are planning for retirement. We can minimize this risk by enacting financing reforms that preserve historical financing structure or reducing cost growth to rates that can be financed within a stable tax rate. Retirement income security would also be enhanced by reforms that increase labor force attachment and remove disincentives to saving.
*Chairman Johnson. Thank you.
Dr. Schieber, welcome. Please proceed.
STATEMENT OF SYLVESTER J. SCHIEBER, INDEPENDENT CONSULTANT
*Mr. Schieber. Mr. Chairman. Mr. Becerra. Members of the Subcommittee, thank you for inviting me here today. In the opening section of my submitted testimony, I discussed the major approaches to assessing how workers are doing in the retirement preparations. Life cycle and similar models are good tools to facilitate policy makers’ and analysts’ understanding of how the retirement system is working, but beyond the grasp or the interest of most workers.
Plan sponsors and administrators who are at the nexus of workers’ retirement savings will generally depend on earnings replacement rate models for plan design and communications for broad participant population, because broad rule of thumb direction is often the best that can be offered to the large group of workers participating in these plans.
Indeed, the Social Security Administration introduces its own retirement planner on its official website, discussing retirement planning in terms of target earning replacement rates. In the early 20th Century, plan sponsors focused on retirees having income that would allow them to maintain their career standard of living. Over the last 40 years or so, replacement rates have been used explicitly in plan design and communication by plan sponsors.
Conventional replacement rate targets have been estimated to allow workers to have spendable income in retirement that is equivalent to that achieved toward the end of the career. For most plan designers and retirement counselors, the pre‑retirement earnings measure used in defining replacement rate targets is a salary‑level retirement or average earnings over the last five years of the career.
For researchers, price index career average earnings or price index earnings a few years prior to retirement are often used because earning patterns toward the end of the career tend to decline. So using the final years gives you a misimpression of what is going on.
Social security earnings replacement rates presented by the trustees are not equivalent to the conventional replacement rate measures. I understand they have been taken out of this year’s prestige report, but they have been in prior reports. And there was a doctoral note released yesterday regarding these.
They are based on career average wage indexed earnings for which most workers, especially lower earners, are significantly higher than the career average real earnings. The Social Security actuaries did publish a note on this yesterday. But let us consider the hypothetical median workers retiring at age 65. Using their assumptions from last year’s trustees report, this worker earned $22,295 in 1990, the equivalent of $39,811 in today’s dollars, because of CPI indexing.
But they counted the earnings at $47,740 in calculating this worker’s replacement rate. Now, when workers go to the grocery store, the auto repair shop, or wherever, they do not spend wage index dollars. They spend the real dollars they have in their pocket. And so it is not clear why we want to treat these standards of living they never achieved during their working career as the standard of living against which we are judging benefits.
In table one of my submitted remarks, you can see the conventional measures of Social Security replacement earnings result in replacement rates that are higher than those presented by the trustees for full‑career workers retiring at normal retirement age. I understand that benefits are developed using career average wage indexed earnings, but have found that even economists that have studied Social Security for years often do not understand that the trustees’ replacement rates are calculated using a different base year than the index used to determine their benefits.
Some analysts even apply wage indexing to all pre‑retirement income and retirement income targets, suggesting that workers should be saving beyond what is needed to maintain their pre‑retirement standard of living. Our retirement system should not expect workers to become slaves to financing retirement living standards they never achieved while working. My analysis of the 31 and 38 birth cohorts of Social Security beneficiaries summarized in table two suggests this problem may become accentuated over time as average age indexed earnings rise more rapidly than real wages for workers. Replacement of real earnings is increasing under this system.
One reason for the widely perceived inadequacy of workers’ savings for retirement outside of Social Security today is a series of reports published by the Social Security Administration summarizing survey data gathered by the Census Bureau in its current population survey. We heard a summary of this in the opening remarks this morning.
Comparison of the reported income provided by pension annuity plans and IRAs to Social Security from IRS tax filings shown in table three of my submitted remarks proves that as much of the pension and IRA income paid to Social Security beneficiaries is not being captured by the current population survey. This is a problem the Census Bureau and Social Security has known about for twenty years.
If the full income being paid to Social Security beneficiaries by supplemental retirement plans was being reported, it would be roughly equivalent to Social Security benefits instead of less than half of that amount, and it would be above Social Security benefits for the top half of the income distribution of retirees. These benefits distribute much more broadly down the income distribution than Social Security reporting indicates. It is impossible to clearly understand who is doing well and who is doing poorly under the current arrangements if the official government reports on the income status of retirees ignores hundreds of billions of dollars of their income.
I have a formal analysis of this issue that was published in the Journal of Retirement earlier this year that I would be happy to submit to the committee if you are so interested.
*Chairman Johnson. Please do. Thank you.
*Chairman Johnson. Dr. Steuerle, please go ahead.
STATEMENT OF C. EUGENE STEUERLE, INSTITUTE FELLOW AND RICHARD B. FISCHER CHAIR, URBAN INSTITUTE
*Mr. Steuerle. Thank you, Mr. Chairman, Mr. Becerra. It is an honor to be here with you again. And also the members of the Subcommittee. Contrary to the popular argument that we live in an age of austerity, I would like to suggest that we live in an age of extraordinary opportunity. Yet, as I argue in a book, Dead Men Ruling, that I sent to each member of this Subcommittee, we block Congress by constantly re‑fighting yesterday’s battles.
As only one reflection, in 2009, every dollar of revenue had been committed before that new Congress walked through the Capitol doors. Looking to Social Security after three quarters of a century of continual growth, it has largely succeeded in providing basic protections to most, though not all, older people. Now, as psychologist Laura Carstensen suggests, we should be redesigning our institutions around the new possibilities that improved health care and long lives provide.
But the eternal automatic growth of Social Security is not conditioned on any assessment of society’s opportunities or needs. Not making the best use of the talents of people of all ages, not child or elderly poverty, not educational failures or the incidence of Alzheimer’s or Autism. Let me focus on three problems caused by this past, rather than future focus.
And I should point out that these are problems that apply regardless of whether one is a progressive or a conservative, because neither conservative principles would allow these types of problems to persist. The first is the ways that Social Security provides unequal justice to many. The second is the consequence of providing ever larger shares of Social Security resources to the middle aged. And the last is how each year that reform is delayed adds to the burden passed on to younger generations.
First to unequal justice. Social Security redistributes in many ways, both progressive and regressive. And many fail to provide equal justice. Among the most outrageous, working single parents, often abandoned mothers, are forced to pay for spousal and survivor benefits they cannot receive, often receiving at least $100,000 fewer lifetime benefits than some who do not work, do not pay Social Security tax, and raise no children.
Similarly, the system discriminates against younger couples, against spouses who divorce before ten years of marriage, against long term workers, and those who beget or bear children before age 40.
To the second point, middle aged retirement. People today retire about a decade longer than they did when Social Security first started paying benefits. Let me be clear. The biggest winners of this multi‑decade policy have been people like the witnesses at this table and the members of Congress who, if married, now get about $300,000 in additional lifetime benefits. This is not a way to redistribute to people in need or people with shorter life expectancies.
But there are other consequences. A decline in employment rate, as reflected in Congressional Budget Office reports, a decline in the rate of growth of GDP and of personal income, as well as lower Social Security benefits for the truly old, when they start receiving benefits so much earlier in their lives. Meanwhile, within a couple decades, close to one third of the adult population will be on Social Security for one third or more of their adult lives.
There is no financial system, public or private, that can provide so many years or retirement for such a large share of the population without severe repercussions, both for the individuals’ well‑being in retirement and for the workers upon whose backs the system relies.
Finally, the impact on the young. Today’s lifetime Social Security and Medicare benefits approximate about $1 million for a couple with average incomes throughout their working lives. That large number comes about largely because of the number of years of support. Rising by about $18,000 a year, benefits for a couple in 2030 are scheduled to grow to about one and a third million dollars. Meanwhile, the rate of return on contributions falls continually for each generation.
Each year of delayed reform shifts more burdens to younger generations from older ones, with the largest impact on groups like blacks and Hispanics, in part because they comprise a larger share of those future generations who are scheduled to get lower returns than current generations retiring.
In summary, each of year of delay in reforming Social Security continues a pattern of unequal justice under the law, threatens the well‑being of the truly old, increases the share of benefits going to the middle aged, leads government to spend ever less on education and other investments, contributes to higher non‑employment, lower personal income and revenues, not just in Social Security but throughout the system, and increases the burden that is shifted to the young and to people of color. Thank you.
*Chairman Johnson. Thank you, sir.
Ms. Entmacher, welcome. Please proceed.
STATEMENT OF JOAN ENTMACHER, VICE PRESIDENT FOR FAMILY ECONOMIC SECURITY, NATIONAL WOMEN’S LAW CENTER
*Ms. Entmacher. Thank you Chairman Johnson, ranking member Becerra, and members of the Subcommittee. Thank you for giving me this opportunity to testify today on behalf of the National Women’s Law Center. For a large majority of Americans, Social Security is not only their major source of retirement income but the most secure and predictable. Benefits are modest but incredibly important. The average Social Security benefit for women 65 and older is about $13,000 a year. It is about $17,000 for older men. As Mr. Becerra said, without Social Security, half of women 65 and older would be poor.
And for two thirds of seniors, Social Security provides at least half of their retirement income. It is virtually the only source of income for over one third of seniors. These data are from the Current Population Survey. While Mr. Schieber has criticized this survey for not fully reflecting income distributions from retirement accounts, other surveys confirm that most seniors cannot expect much support from their retirement savings. The Federal Reserve Board Survey of Consumer Finance shows that half of households between ages 65 and 74 had no assets in retirement accounts.
Two thirds of those over 75 had no retirement assets. Younger generations are not doing much better. 45 percent of all working age families and 40 percent of families near retirement have nothing in retirement accounts. These data show that today’s workers will also be heavily reliant on Social Security. They cannot afford benefit cuts, whether it is part of privatization plans that would replace secure benefits with risky private accounts, a lower and less accurate cost of living adjustment, or further increases in the retirement age.
We do need to increase retirement savings for average Americans, and the surest and most effective way to do it is to protect and enhance Social Security. Social Security is already virtually universal and provides lifelong benefits that are adjusted for inflation. In addition, it provides life and disability insurance for workers and their families, imposes few responsibilities on employers, and is highly efficient.
There are several reforms that would improve the adequacy and equity of Social Security, as Mr. Steuerle has testified, and which I mentioned in my written testimony. What I want to emphasize is that they are affordable. The report of the Social Security trustees shows that there is a long term shortfall. But Social Security is fundamentally sound. On a combined basis, it can pay promised benefits in full until 2033, and 77 percent of benefits after that. It would be irresponsible for Congress to wait until the trust funds are within six months of exhaustion, as it did in 1983 before taking action to strengthen Social Security. But two decades provides time for Congress to enact reforms that raise revenue and improve benefits.
Polls show that a large majority of Americans favor this approach. However, there are two issues that require immediate attention. Congress should prevent cuts to disability benefits in 2016 and reassure all workers that if they are seriously injured and can no longer work, that Social Security will be there for them. It can do this through the simple and routine step of reallocating payroll taxes to rebalance Social Security’s two trust funds. Congress has done this 11 times in the past and in both directions.
Second, Congress needs to restore adequate funding to the Social Security Administration. Cuts in services are already jeopardizing timely access to the benefits Americans have earned, and fall especially hard on the most vulnerable people. Moreover, at least in part for budgetary reasons, Social Security plans to rely even more on conducting its work through online interactions. But this strategy has its limits, even for those who are internet savvy. The Social Security website touts how quick and easy it is to sign up for benefits online.
But deciding when to take benefits is a major financial decision and applicants should be able to consult with well‑trained staff to get help understanding their options and their consequences. In addition, access to and ability to use online services is more limited among the population of elderly people and people with disabilities that Social Security serves. And even people that have no problem applying for benefits online at 66 may not be able at age 90 to go online to correct an erroneous deduction for Medicare premiums.
In announcing this hearing, Chairman Johnson, you said Americans want, need, and deserve a Social Security program they can count on and understand. I could not agree more and I thank you again for inviting me.
*Chairman Johnson. Thank you, ma’am.
Dr. Biggs, welcome.
STATEMENT OF ANDREW G. BIGGS, PH.D., RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE
*Mr. Biggs. Mr. Chairman, Congressman Becerra, and members of the Subcommittee, thank you very much for inviting me to speak to you this morning. Much of what Americans need to know about Social Security and retirement is difficult to understand. Worse, much of what we think we know turns out not to be true. I would start by saying we should not panic and we should not pass far‑reaching policy changes in haste. For instance, some have proposed substantial expansions to the Social Security program, with others arguing that these expansions should be financed by reducing tax advantages for private retirement savings plans such as IRAs and 401Ks.
This would be a mistake. The state of retirement security in the US is substantially better than you probably think. While some studies claim that Americans face a so‑called retirement crisis, these articles make a number of methodological choices that, in my view, are unsupportable. They overestimate what Americans need for retirement, understate what Americans have saved, and misunderstand how family structures and health costs affect the amount that one must save for retirement.
Other high quality research, including projections from the Social Security Administration itself, show a much more positive view of Americans’ retirement saving. For instance, the Social Security Administration’s office of retirement disability policy maintains what is surely the most comprehensive model of retirement income in the country. This model simulates on a person by person, year by year basis, employment, pension offerings and participation, individual investment decisions, and of course the accrual of Social Security benefits.
The SSA model estimates that Americans who were born in the depression had a total retirement income at age 67 equal to 109 percent of their career average earnings indexed for inflation. We cannot judge for ourselves whether that amount is enough. What is significant in this context, though, is SSA does not forecast a large decline in retirement going forward.
For instance, fast forward to the Generation X’ers, who are widely assumed to be dramatically under saving for retirement. The SSA model projects that the median Gen X’er will, at age 67, have a retirement income equal to 110 percent of his career average earnings adjusted for inflation. Retirement income will come from different sources, from defined contribution plans rather than defined benefit plans, but the SSA model, which I believe is the best in the business, does not produce numbers that scream out, retirement crisis.
But there is much more than we can do to provide individuals with better information about the retirement savings decisions they make. As my testimony details, the benefit estimates provided in the annual Social Security statement are expressed in a form, so called wage index dollars which are essentially meaningless from a retirement planning point of view and which almost no users of the statement could possibly understand.
The figures published by the SSA, which include both the benefit estimates published in the statement and replacement rate calculations, which Dr. Schieber discussed in his testimony, are potentially very useful in retirement planning, but are current calculated in a way that is simply incorrect. For instance, for a 30 year old worker today, the benefit estimate he will receive on his Social Security statement understates the true inflation index value of that future benefit by around 35 percent.
The agency needs to get these figures right. But the biggest problem with retirement security today is not America’s savers. It is America’s legislators, who literally for decades have ignored the need to fix Social Security’s finances. According to Social Security’s trustees, the programs 75 year deficit has risen by 66 percent since 2008. The Congressional Budget Office’s figures are even worse. According to the CBO, Social Security’s long term deficit has nearly quadrupled in the past 6 years. While the CBO once projected that Social Security would be solvent until mid‑century, today both CBO and SSA project insolvency in the early 2030’s.
In other words, the insolvency date for Social Security, according to CBO, at least, has moved forward by nearly two decades just in the past six years. How much worse does this problem have to get before both political parties step up to the plate and fix Social Security? Saving for retirement is our job as individuals. Fixing retirement programs is your job as members of Congress, and I respectfully suggest that we all get down to business. Thank you.
*Chairman Johnson. Thank you, sir. We appreciate your comments.
Dr. Kotlikoff, you are now recognized.
STATEMENT OF LAURENCE J. KOTLIKOFF, PH.D., WILLIAM FAIRFIELD WARREN PROFESSOR, BOSTON UNIVERSITY, BOSTON, MASSACHUSETTS
*Mr. Kotlikoff. It is a great honor, Chairman Johnson and Mr. Becerra, and other distinguished Members of the Committee, to be with you. I guess I am on the left side of this table, because I am facing a Republican. I might be viewed as a Republican because I was probably invited by the Republican members.
*Chairman Johnson. You are on our right.
*Mr. Kotlikoff. Okay. Well, let me just tell you, I have been voting on the left for my entire adult career. I voted for every Democratic president, including our current president. So I just want the Democratic members to realize, and also the Republican members, that I am speaking here today not as a political person. I am an academic. I am an economist and I am here to tell you that I am here to tell you things that you have not heard so far and you may not hear from anybody else about Social Security solvency and about its complexity and inequities. Although some of these I have heard mentioned.
I think the first thing I want you to realize is that we have issues of generational inequity, unfairness, and we also have issues of intragenerational inequity and unfairness. And I think these things keep getting kind of confused. The Democrats, I sense, are very concerned about fairness within a generation, with the rich who are the same age being treated unfairly relative to the poor, and that is an important issue.
But I want you to set aside that and assume that everybody within a cohort is exactly the same. So Mr. Becerra, suppose everybody your age was exactly the same and looked just like you. And everybody who was a year younger was the same and looked just like that person. And so we have old people and young people, and there are no differences within the cohort. So, would we want to leave enormous bills for our children and future generations? Wouldn’t we want to engage in social insurance policies, other kinds of policies, that may do enormous good and may be very important because insurance markets are not operated very well? There are good economic arguments.
But then the question is, getting the government involved to fix some of these problems is one thing. Another thing is leaving future generations to pay for those fixes. To pay the bills for future generations. And we have, really, a generational crisis here of enormous proportions. And the way economists look at this is we look at the fiscal gap. We look at, over the entire future of the economy, how much are the projected expenditures compared to the projected taxes measured in present value? What is the gap? What is the fiscal gap?
This is what economists measure. The fiscal gap in the US is current $210 trillion. That is according to the CBO’s alternative fiscal scenario data released last week. That is 58 percent of the present value of revenue. So this country is 58 percent underfinanced. Detroit is about 20 percent underfinanced. Social Security by itself is 33 percent underfinanced. If you look at table F61 in the trustees’ report released yesterday, you will see that there is a $24.9 trillion unfunded liability over the infinite horizon. It is not over 75 years. Nothing in economics tells us to look at 75 years and ignore the future.
I have children. I am sure many of you do as well. I started a little bit late, so I have young children who will be alive in 75 years. We cannot ignore the commitments to them and there is nothing in economics that allows us to do that, in economic theory. So we have to measure things correctly. And economic theory is very clear that we should be measuring infinite horizon fiscal gap. The trustees’ report is burying that number. They have been calculating it since 2002. The trustees don’t even mention it in their summary statement.
We just heard a statement that says Social Security is fundamentally sound. A system that is in worse shape than Detroit’s pension systems is not fundamentally sound. A system that is 58 percent underfinanced, according to the trustees’ report, that’s the entire country. The Social Security system is 33 percent underfinanced. This stuff is not fundamentally sound.
We have to start thinking about things from a generational perspective, and that does not mean that you should not also focus on intragenerational equity. I am all for that. Okay? I have been a lifelong Democrat in terms of voting. I am with you. And we have to look at that, too. We have to look at fairness within and across generations. But we cannot keep confusing these things. We cannot in the name of intragenerational equity ignore what we are doing to all the children, poor and rich alike.
So what I am going to do is show you Social Security’s formula for the benefits of a spouse. Ten mathematical functions. This is the first time anybody has actually expressed this in math. Ten functions. One is in four dimensions. One is a maximum function. There is also side conditions that are very complicated. Many, many functions to determine the side conditions and the variables that go in here. One of those side conditions is a maximum of a min function.
It could not be complex. People are making all kinds of crazy mistakes, and Social Security people in the offices are providing all kinds of bad advice because the thing is just crazily complex. We need a new system that is not going to go broke.
*Chairman Johnson. Thank you, sir.
As is customary for each round of questions, I will limit my time to five minutes and ask my colleagues to also limit their questioning time to five minutes, as well. Dr. Blahous, according to this year’s report, if Congress doesn’t act, come 2033, everybody receiving benefits will face a 23 percent cut. Worse, in just two years, everybody receiving disability insurance will face a 19 percent cut in benefits. Some of my friends on the other side like to say that 2033 is way off in the future, and that Congress has plenty of time. Social Security is well and good right now.
First, based on the trustees’ report, would it be right to say that Social Security is in crisis right now?
*Mr. Blahous. Well, we certain face a crisis on the disability side. And I would certainly say that we face a shortfall that is bigger than we have ever successfully corrected before. And so yes, I think it is a very pressing and urgent policy concern.
*Chairman Johnson. Well, is it fair to say, then, that we are already facing the largest shortfall Social Security has ever faced, and can you explain that in simple terms? How big is this Social Security shortfall right now?
*Mr. Blahous. I have discovered in my public life that I am terrible at this, making complex issues as simple as that. But I would say, I think Dr. Kotlikoff did it pretty well. You can think of it in terms of the fraction of current benefit obligations that are unfinanced. When you go out to 2033, you are talking a quarter of the benefits that we are promising are not financed. Or you could look at it another way. You could say that people’s tax revenues that they are paying are short by a third of what they need to be to fund promised benefits.
So if you look at your tax return, the amount of payroll taxes you are paying, and imagine yourself paying an additional third on top of that, you get a sense of how big the problem is.
*Chairman Johnson. Yeah, I hear you. And something my Democrat friends like to say. There is plenty of money in Social Security, so we have nothing to worry about. Do you want to address that?
*Mr. Blahous. I would say that the date of trust fund depletion and the amount of money in the current trust fund does not provide very useful information about how much time we have. Because if you wait to the point where it is drawn down and run out, it is too late to fix it.
*Chairman Johnson. Right.
*Mr. Blahous. Because the gap is too big. So I would urge that you think in terms of, how much longer is the problem still at a soluble level. And when you think about it that way, you realize that time is much shorter than the large trust fund balance might suggest.
*Chairman Johnson. Well, what price will beneficiaries and today’s workers pay if it is not fixed before this president leaves office?
*Mr. Blahous. Well, let me give you a two part answer, if I could. There is a part that I think most experts would give and then I think there is a part that I would give that most experts wouldn’t. But I think most experts would say they are going to pay a very high financial price for delay. That young Americans entering the system are going to lose about 4 percent of their lifetime wage income through the program as a net income loss, even net of all the benefits they got.
But I would say there is another risk that they face. And I think a lot of the policy community has been slow to recognize this. Which is that they run the risk of having a Social Security system that is not structured the way it has been in the past. Historically, for better or for worse, there has been pretty good bipartisan acceptance of the way we finance Social Security. And so benefits have been relatively safe from sudden changes because of the way we pay for Social Security out of the payroll tax.
But if we go to a system that we cannot balance that way and we have to subsidize it permanently from the general fund, then all those bets are off. Then suddenly, people are subject to much greater income insecurity because of the fact that programs financed from the general fund tend to be much more subject to sudden benefit changes and means tests and things of that nature than Social Security has been.
*Chairman Johnson. Well, I am not sure we can increase taxes enough to cover it. Dr. Schieber and Dr. Biggs, is there anything that you want to add to that statement?
*Mr. Schieber. Well, if you think about it, 4 percent of a worker’s earnings is kind of an abstract concept, unless you are a worker facing 4 percent additional taxes on your earned income each year. If you think about it, over a 40 or 45 year career, someone starts working in their early 20s, they work until 65, 66, 67, 45 years, we are talking about taking 2 more years of their earnings to pay for a benefit that is essentially the equivalent of the benefit we are paying to people of my generation right now.
And that seems to be a very substantial levy against them, knowing how hard it is for young people today to get a start in life. There is no reason to expect that the kids matriculating through high school and even the ones in grade school are necessarily going to have that much easier time to start. So there is a limit. I think there is an equity issue here that we need to think about if we are going to talk about delay.
*Chairman Johnson. Thank you. My time has expired. Mr. Becerra, you are recognized.
*Mr. Becerra. Thank you, Mr. Chairman. And thank you all for your testimony today. Where should we go? It is interesting. Mr. Chairman, let me clarify something for you. Democrats do not think that we should be hunky dory, going around town just thinking that we should do nothing on Social Security. I think Democrats have said for a long time, we should keep the most successful program that has ever been devised in America to help Americans have economic security stay strong moving into the future.
And so we are prepared to meet the challenge that faces Social Security. And there is a challenge. We have heard it discussed here. In about 20 years, we are going to be hitting the challenge. I would not call it a crisis. I would call it a crisis what happened to all of Enron’s employees who put money into their pensions and found out when they woke up one day that Enron no longer had any of their money that they were counting on for retirement. That is a crisis.
I call it a crisis that we go to war in Iraq, never pay a dime of it with real money, using the government credit card. Spend over $1 trillion. Still have not paid for it. And if you want to talk about infinite horizons, the so called projection into the future of however, I don’t know how you do that. But apparently some folks think you can project infinitely into the horizon. What is the cost of never having paid for a trillion dollar war and what will that cost be in infinity?
The issue is this. It is, how do you make sure you give Americans that security? Ms. Entmacher made a really good point. The average benefit is about $1200 a month under Social Security. No one is going to get rich off of that. And I know we use euphemisms. Mr. Blahous, you used the euphemism of slowing the growth of cost. That is another way of saying cutting benefits. So yeah, you can slow the growth of cost in Social Security, which means cutting a Social Security recipient’s $1200 benefit. You want to talk about a crisis, talk about someone who depends almost exclusively on Social Security, about cutting their benefits. And that is a crisis.
Especially for women in America, who as Ms. Entmacher pointed out, earn less than men do when they retire. Because they have done their business of helping raise the next generation. And they get penalized for not being able to stay in the workforce as long as men do. Those are the crises that we have to address. But Social Security? With $2.8 trillion in reserves? Is that a crisis today? No, I would call a federal budget operating deficit in the hundreds of billions as something that we have to tackle today. I think we have time to deal with Social Security on a bipartisan basis. But we should not try to panic Americans, especially young Americans, who today do not know where they are going to have their retirement savings. Because now these defined contribution plans could be like Enron. Where poof, it is gone if that company does not make good investment decisions.
And so I think we should be careful about how we discuss Social Security. Because I do not think anyone can name me a private sector program that works as a retirement benefit, disability insurance, and a life insurance policy all at the same time and over 78 years, never having once failed to pay on time and in full. So I can name a lot of Enrons in the private sector. We can talk about the crisis in the Veteran’s Administration. Social Security is not one of those. But the important thing is, we should not let Social Security become one of those failures by underfunding it with its budget.
It is growing in the number of people that it has to serve. Yet its budget is smaller today than it was 4 years ago. And Mr. Chairman, whether our Republican majority in the House of Representatives wishes to hold a hearing, as it should because of our oversight responsibilities under the Constitution, to determine how the Social Security Administration is doing, this will come back to haunt anyone who wishes to hide under the rocks about this budget for Social Security.
Ms. Entmacher, women have a tougher time in retirement because they live longer than men and they earn less in retirement, whether it is through a private pension plan or through Social Security. What would happen to that population of women, who are going to continue to outlive men, if we were to cut benefits by, say, doing the chained CPI and also continue to see the budget for the Social Security Administration be well under what it needs to be able to provide sufficient services to those Americans?
*Chairman Johnson. The gentleman’s time has expired, so please be brief.
*Ms. Entmacher. I will. The chained CPI is a way of computing the annual cost of living adjustment that is lower, and I would say less accurate, than the current rate is computed. That adds up every single year you live. It is kind of like compound interest in reverse. And we calculated that for a single elderly woman receiving the median benefit, by age 80, her benefit would be cut by $54 a month. Which may not sound like a lot, but it is the equivalent of one week’s worth of food every single month that she can no longer afford.
So that is a severe cut in benefits. Of course, the service cuts mean that it may be more difficult to access the Social Security benefits that you have earned if there is a problem, that you are receiving accurate benefits, if you need to change your bank account, it is just that much harder to get hold of someone to get it straightened out and make sure that you continue to get your benefits that you count on on time and in full.
*Chairman Johnson. Thank you, ma’am. Mr. Tiberi, you are recognized.
*Mr. Tiberi. Thank you, Mr. Chairman. Thank you all for being here today. I had a former governor in Ohio, a friend of mine, also a US Senator, George Warner, when he became governor, said, “We need to do more with less.” That does not mean we need to do less with less. We need to do more with less. And he succeeded in doing that. Let me share with you, because the budget has been talked about, these are numbers from the Social Security Administration. This makes a lot of sense. A higher number than ever, customers, Social Security recipients, use the Social Security online tools more than ever.
Which, there is obviously a cost savings. 50.9% in fiscal year 2013. Another great statistic. This is a survey. This is an annual survey, fiscal year 2013, from again, Social Security customers. 80.2 percent said that the Social Security office that they worked with provided services of excellent, very good, or good in 2013. 80.2 percent.
And I know that is true in the office near my hometown of Worthington, Ohio, just outside Columbus. So I think those are good things to remember as we talk about the Social Security budget. Mr. Chairman, I would like to submit for the record, two articles from the Columbus Dispatch. The first title, Democrats’ Plan Won’t Save Social Security, Congress’s Budgeters Say, written on Thursday, July 17th by Jack Torre.
In that article, it says that a Senate plan that is designed to both preserve Social Security and expand its benefits for some by raising payroll taxes on the wealthy. The report by the Congressional Budget Office concludes that to make the Social Security solvent for the next 75 years, payroll taxes would need to be raised on all working Americans who pay Social Security taxes.
And in response to that, Mr. Chairman, a Tuesday, July 22nd editorial in the same newspaper, Stop Ignoring Good Advice: CBO Report Renews Calls For Leaders To Fix Financial Fundamentals. And in the text of the editorial, it says, “Promising people more benefits at no cost isn’t new, especially in an election year. The Democrat‑backed plan that purports to expand Social Security payments at no additional cost to most Americans simply isn’t realistic, a fact backed by the Congressional Budget Office report last week that also provided a sobering reminder for the need to get serious about entitlement reform overall.
“Senate Democrats recently backed a plan that they said would preserve Social Security and expand benefits for many. They said that the increase would be paid for by payroll taxes on those making more than $117,000 per year, the current threshold above that Social Security taxes aren’t levied. Unfortunately for the CBO, the math doesn’t add up. The non‑partisan research arm of Congress said to simply keep Social Security solvent for the next 75 years, payroll taxes would need to be raised on all working Americans.”
And it goes on. I’d like to submit both of those for the record, without objection.
Mr. Tiberi. Which brings me to a point I am going to make, and maybe Dr. Biggs, you can help me. Because in your testimony, you kind of touched on this. Some say, well, the crisis is not here. I have a 47 year old sister. She is a woman. She is my sister. She retires, her full retirement is in 20 years. Coincidentally, that is the same year that the report that you all provided, the CBO provided, said that the jig is up if we don’t do anything.
Now, my sister does not have a whole lot of confidence, my 47 year old sister, as she is planning for her retirement today with two kids, that she is going to be taken care of. My even younger sister, who is 40, has less enthusiasm, to your point, about fixing the current system for what she is thinking about in terms of retirement. Let alone my four daughters, 5 through 11, in what this report means to them.
And so the Senate Democrat plan, I don’t know if you have seen it, which the article and the editorial take issue with. If we are to expand benefits, raising payroll taxes on wealthier Americans to do it, wouldn’t we be right back where we are today? Kicking the can down the road and impacting my four daughters? Since we are concerned about the wages of women?
*Mr. Biggs. Thank you for your question. In a sense, you wouldn’t be right back where you were. You would be worse off. And the reason is this. I am not in favor of fixing Social Security by raising or eliminating the so called tax max on payroll taxes. I think that cap was put in place by Franklin Roosevelt for a reason so the system does not look like a welfare plan, so it is something that everybody pays and everybody receives out in reasonable measure. That it is not just a take from the rich, give to the poor kind of thing. And I think Roosevelt said this is for political reasons, to make it supportable.
On the sort of economics side, I do not think it is a particularly good idea, because eliminating the tax max effectively raises the top marginal tax rate by 12 percentage point, so you are going from, say, 43 percent today to somewhere in the mid 50’s. I just think that is too high. But raising the tax max or eliminating the payroll tax ceiling in order to increase benefits actually makes things worse off. Because you are taking off the table one of the options that could have been used to make the system solvent. In other words, you cannot raise or eliminate the tax max twice.
So if you do that in order to raise benefits, then we have to come back and address solvency. And one of those options that was on the table is no longer on the table. And so then the folks who are sponsoring these plans have to say, okay, now that we have taken that off the table, what are we going to do to fix the system so that your sister or, by the way, me can have that when we retire. So I think that you really have to think, first, how do we pay for what we have promised? To promise additional benefits before you have paid for what you have already promised, it just confirms all the stereotypes people have about politicians. No offense.
*Chairman Johnson. The time of the gentleman has expired.
Mr. Doggett, you are recognized.
*Mr. Doggett. Thank you very much, Mr. Chairman, and thanks to each of our witnesses for your testimony.
My feeling is that Social Security is one of the most effective programs that we have ever approved in this Congress. I think one would be hard‑pressed to find a family across America that has not had a family member who has obtained dignity in retirement as a result of Social Security; and, if they look back in the past, who suffered greatly when Social Security was not there.
Many of these families have a neighbor who is able to survive after a serious injury or a disability, because of Social Security disability; or, a child who would never have completed high school without the survivor benefits of Social Security.
Vital programs, and yes there are improvements that need to be made. I believe you have outlined what some of them may be. I’m willing to work as I believe my democratic colleagues, for the most part, are willing to work to make constructive changes to improve Social Security and be sure that it is there ‑‑ not just for grandparents, but for our grandchildren.
There are some obstacles to doing that, and one of those obstacles is the fact that while we are told today that there is a broken piggy bank in the trust fund, there are always those who are out there who see that trust fund and the assets in it as an incredible profit center for privatizing Social Security. And right through the last round of elections we’re advocating that the only solution to this impending crisis as it has been described is to privatize the Social Security system and break the bond that some were opposing in 1935 ‑‑ and have ever since ‑‑ about an effective social insurance program.
And then there are those who suggest that Social Security has an impending crisis; and, therefore, the only solution is to cut everyone’s benefits. If the only issues at stake are how much can we cut and how much should we turn these public assets, these benefits paid into the social insurance system to Wall Street, we will never get the changes that are necessary. I think some of them are modest. Some are more controversial and politically difficult to undertake, but we will never get the changes needed to ensure that we have longer term solvency for Social Security.
The suggestion has been made that the Social Security system is just so complex that it can’t be fully understood and utilized. There are some changes that are necessary that relate to some of those complexities. I think the complexity mainly affects people at the other end of the income scale for whom Social Security is probably not the principal source of retirement security.
I think that for most Americans, like the women that Ms. Entmacher was talking about earlier, it’s all pretty simple. You work hard. You pay in to the Social Security system. When you retire, when you become disabled or you lose a spouse or parent, you get Social Security benefits; and, relative to the complexities, we have Social Security offices around the country staffed with people ‑‑ as my Republican colleague was just saying ‑‑ who seem to be doing a pretty good job at 1200 local offices in explaining, based on their expertise, how the Social Security system works. And we have an 800 number that people can call if they’re close by a Social Security system.
That means though that over the past four years that cuts have occurred in the Social Security budget that we have lost about one in 10 of the people who answer the phones or who are available to answer the questions. One in 10 of the people who answer the phones or who are available to answer the questions, and that’s why the request that Mr. Becerra has made about the need for us to exercise our oversight responsibilities and look at the budget of the Social Security system is so very important.
As far as the complexities of this, Ms. Entmacher, you are an expert on how our Social Security policy affects older women, nearly half of whom would live in poverty without Social Security. Is the main problem that these women are having with Social Security’s complexity, is that the real barrier that they face, that it’s just too confusing and complex to make the right choices?
*Ms. Entmacher. No. It is not. I mean the main problem that women have with retirement security is lower wages throughout their working life, caregiving responsibilities, the high cost of child care which often means that they can’t really afford to work, because the wages that they get barely pays for child care.
And, yet, that means time out of the work force and less opportunity to build up Social Security benefits or retirement savings. It’s just many women struggle to make ends meet throughout the working life, and Social Security is what they have to count on. And that’s the main problem. And, unfortunately, many women work in very demanding jobs.
You know, people don’t think of retail work as physically tough, but people are on their feet for many hours. People who are nurses’ aides, that’s an incredibly hard job, and they simply can’t ‑‑ even if they know that they can get more by waiting until their full retirement age to claim benefits, they just can’t make it. And, of course, for both older women and men who have lost jobs in the recession, it takes much longer to find another job. And so many people, if they can’t get reemployed, they have to claim at 62, because they have no other income. I think those are the major challenges that many people face.
*Chairman Johnson. Thank you. Mr. Renacci, you are recognized.
*Mr. Renacci. First, I want to thank the chairman for holding this hearing. I want to thank the witnesses for their testimony. I am glad that we are here to discuss the role Social Security plays in Americans’ retirement security. I think this is a very important topic, considering the solvency of the program and the rate at which older workers are retiring. According to the trustees’ report, Social Security’s present value of unfunded liabilities over the next 75 years equals 10.6 trillion, which is one trillion more than last year.
I have to be honest. I am shocked to hear our friends across the aisle when they say there is no cause for immediate action. Instead of addressing the issue we continue to kick the can down the road for future generations. This unfortunate reality is that government officials and American people do not have a good grasp of really our dire financial situation. Our country is more than 17 trillion in debt and digging our way out is not as simple as cashing in on Treasury securities.
If the Social Security obligations were added to our debt, our true liabilities could be well over 50 trillion. As a CPA and former businessman, I came to Washington to really bring business perspective to an institution that sorely lacks it. We cannot continue to jump from budget crisis to budget crisis, and as many of the witnesses have talked about ‑‑ Mr. Kotlikoff and Mr. Biggs ‑‑ we really have to start addressing some of these problems.
To help us really get on the right track, I introduced the Federal Financial Statement Transparency Act, which is a bipartisan bill that will lead to a more honest depiction of our nation’s finances. The Federal Government ‑‑ think about this ‑‑ requires public companies to have an honest depiction of their finances to sell securities, and the Federal Government should be able to meet those same standards and really show what our true liabilities are.
Mr. Blahous, what would the impact be on the Social Security trust fund if all unfunded liabilities needed to be paid out; and, is there cause for concern?
*Mr. Blahous. Well there absolutely is cause for concern and I think a point that was made here earlier today, although we do report the 75‑year, what we call, the open group obligation, which is the $10.6 trillion obligation, I think the actual amount of unfunded obligations within the Social Security system is actually substantially higher than that.
The reason for that is that the excess or the shortfall is not something that actually sort of plays out gradually over time. It is actually something that is on the books now. There is an excess of benefit obligations over contributions for people who are already in the system, and that is actually about $24 trillion, and that is about 4.4 percent of future wages going forward. And that is a number we report in the Social Security trustees’ report. So if you were to take this ‑‑ what some people call the closed‑group obligation and add that to the books now, you would add about $24 trillion to our current liabilities.
*Mr. Renacci. So will Social Security taxes this year be adequate to fund benefit obligations, current benefit obligations?
*Mr. Blahous. They will not.
*Mr. Renacci. Okay. How far short will they come this year?
*Mr. Blahous. About $80 billion.
*Mr. Renacci. Okay. So where will that money come from to make up the difference?
*Mr. Blahous. Well when the payroll taxes fall short of benefit obligations, the difference has to be made with payments from the general fund. Right now, they would be in the form of interest payments from the general fund to the trust fund; and, a large share of those interest payments would go out the door immediately to pay beneficiaries.
*Mr. Renacci. So you are saying that the money flows from the Government’s general fund to the trust fund?
*Mr. Blahous. Yes.
*Mr. Renacci. Does that portion of Social Security spending add to the federal deficit?
*Mr. Blahous. Yes, it does.
*Mr. Renacci. So 80 billion is added to the federal deficit this year?
*Mr. Blahous. That’s right.
*Mr. Renacci. Why doesn’t that get highlighted more in the trustees’ report?
*Mr. Blahous. Um, well, there are a lot of different perspectives that the trustees’ report takes, and a lot of the trustees’ report is just devoted to diagnosing the actuarial status of the trust funds irrespective of the effect on the overall federal budget. Now there are certainly those of us who believe that we as trustees have a duty to put before lawmakers the implications of honoring Social Security obligations for the Government’s general fund; but that is obviously something that if there was a feeling that we need to do more of that, that is something I can take back to the other trustees.
*Mr. Renacci. So we have 17 trillion in debt. We have potentially 10 to 20 trillion in unfunded liabilities. We could have over 50 trillion total liabilities just in those two areas; and we have 80 billion each year, at least this year, that is going to exceed what comes in. I would somewhat believe we have a current problem that we need to fix and it is something we can’t kick down the road, as I continue to hear. This is an issue that we need to start looking into. And, Mr. Kotlikoff, I know you have mentioned some of those issues too.
*Mr. Kotlikoff. Yeah. Well you are an accountant, so we have a kindred interest here. More than 1,000 economists, including 17 Nobel Prize winners, have endorsed something called the Inform Act. If you go to the InformAct.org, you will see that they have an endorsed bill, which is a bipartisan bill called H.R. 2967, and that bill requires Infinite Horizon Fiscal GAAP Accounting by the CBO, the GAO and the OMB on an ongoing basis. And what we are seeing here is the entire economics profession, with the exception of people like Paul Krugman on one extreme and Art Laffer on another extreme.
If you look at the names of these people, they are on the right and the left. You have got people like Glenn Hubbard and Jeff Sachs agreeing to do Infinite Horizon Fiscal GAAP. So the economics profession is not confused about how to do the right accounting. The trustees of the Social Security Administration are hiding the right accounting.
In their Appendix, they have actually moved it back this year to Table F‑61 in the Appendix used to be not in the Appendix. Now it is buried in the Appendix. And that says what is really going on is that the end funded liability of Social Security is actually 60 percent larger than the 75‑year number you are focused on. So this system is actually in far worse shape, and it is part of the country’s fiscal policy that is in far worse shape.
And, yes, Mr. Becerra, it is absolutely true that when you run a trillion‑dollar war, okay, over 10 years, and you get nothing out of it for real in terms of any real success, that adds a trillion. And if you don’t pay for it, that adds a trillion dollars burden to your kids and my kids and everybody else’s kids. So we have to understand that we are engaged in take as you go policy. It is not pay as you go, but take as you go policies on a wide‑scale basis.
We have been changing the tax structure to lower taxes on asset income that shifts, and more on wage income that shifts taxes away from older people towards younger people. We are doing a lot of things that are burdening everybody’s children. So there is the issue of generational equity. There is the issue of intra‑generational equity. We have to look at both of these.
And if you go to the PurplePlans.org, one of the websites they send you to, you will see a set of plans that have been endorsed by a lot of economists that I developed. Each one is post‑card length. It does involve the reform for Social Security, for taxes, for healthcare, comprehensive for the financial system. This is what economists would do to get rid of our overall fiscal gap, and you guys could agree on it, because it is including blue and red considerations here.
That’s why it is called purple. And many, many economists, including Nobel Prize winners, have endorsed these plans. So I encourage you, A, to vote to pass the Inform Act. So we started doing proper fiscal accounting, comprehensive fiscal accounting, Infinite Horizon Fiscal Accounting, which is the only proper thing that economic theory says to do, and then also to adopt the Purple Plans, which will get rid of the fiscal gap.
*Chairman Johnson. Yeah. The gentleman’s time has expired.
*Mr. Kotlikoff. Thank you, Mr. Chairman.
*Chairman Johnson. Thank you.
Ms. Schwartz, you are recognized.
*Ms. Schwartz. Thank you, Mr. Chairman.
As Mr. Becerra here, like where do you start in the conversation we are having. Let me first say that I don’t think this is a surprise to anyone. We have this recent report, but we know that Social Security has issues going forward that really is not a divide between Republicans and Democrats. It really isn’t. How we solve it is, which is why we keep having hearings about what the problem is, rather than how we are going to solve it.
That is really what we are dealing with, yet again today. I can tell you the number of hearings I have been to that describe the fact that whether it has actually gone with a longer time. We have until 2033. That’s a good thing to have time to work it out. But no one disagrees that we should tackle this issue. The issue is how do we tackle it. And we, as Democrats, believe that Social Security has been a strength for this country to be able to say to people as they age that you will not die in poverty, and it has worked.
We start there, and we start with an understanding, particularly having just gone through the recent recession, that in fact converting it to a 401‑K does not provide that kind of security. And that’s been suggested, to privatize it, give people a right to invest it any way they might. You go through another 2008, how many of you have lost money in your 401‑Ks? I assume every one of you have one, and you all lost money in it. Now, maybe you are young enough to be able to make up for that, but if you were 70, maybe not so much.
So what we need to be focusing on, really, I am interested that none of you are also offering solutions. I know you have talked about two very important aspects that we have to take into account here. One is the demographics of what is happening for seniors. We have a lot more of them, 10,000 more a day, 40 million more seniors. You call Social Security, they tell you that. They say there are 40 million seniors out there who are calling us right now. So you might have to wait. And I don’t think they are all calling every minute, but sometimes many of them are. And we don’t have enough people to answer the lines, but they do get back to you.
And that is a huge problem for the next 20‑25 years, maybe 30 if medical science is really, really good, and we diet and exercise. But we’re not going to live forever. This is not a problem for 75 years. It’s a really important blip, which is why we have a surplus in the Social Security trust fund. We occasionally have to put it back in, because we borrow against it, but the fact is that money is there. We raised it in 1983.
Congress realized that they needed to put some extra money in for all those millions of extra seniors. So the fact is we reasonably don’t want to talk about the crisis because of what some of you have been saying, is that we want young people, and those approaching retirement, to understand that Social Security will be there for them, because we are committed to making sure it is.
Those benefits have been important to America. It keeps seniors out of poverty, particularly women who get lower wages and have less Social Security benefits. So we have work to do. So one of the other things you have not mentioned in addition to the issue about the demographics is income inequality and wage inequality in this country. So you can talk about four percent. Who said we have to add four percent wages?
The fact is that in the last two, three decades wage disparity may be unpredicted by the great economists of this nation, but certainly it was a deliberate result of particularly tax cuts to the very wealthy and the way we treat unearned income in this nation. So it is we have to understand that there are few people earning money; but, we are now taking out of Social Security, my staff tells me, 82.5 percent of payroll is what we tax ‑‑ America taxing a lot of payroll. You all nod, say yes. Is that correct? You talked about that.
*Ms. Entmacher. Yes.
*Ms. Schwartz. We have. That’s right. So one of the ways to look at this is are we being fair to the workers you have talked about? Not just our children and grandchildren, but right now are we being fair to workers if we are actually the cap has not been growing as quickly as it might, given the wage disparity and income disparity in this nation. So while you keep talking about cutting benefits and making Social Security a private system and other ways to do it, you have really not talked about the fact that there is a lot of wealth and a lot of income that we are not touching out there that could help solve this problem.
And I would say to the Chairman I would love to see this committee actually have a hearing about how we would solve this problem. Because what we do by just talking about it as a crisis is to scare people, and we scare people, we don’t make very good decisions. So while some of you said let’s not rush into it ‑‑ I think you said that ‑‑ let’s not do it because you are scaring people that Social Security won’t be there for them. It will be there for them if we actually make a commitment as a Congress to protect Social Security benefits and the legacy going to the future.
So it is hard to ask a question, because I am not sure that you will answer it the way I wanted to given the balance ‑‑
*Chairman Johnson. Well your time is expired.
*Ms. Schwartz. ‑‑ but my time is expired. So the question to each and every one of you is to really work on solutions to this, not just the crisis, and to ask the Chairman to actually focus on what will work to protect and secure Social Security into the future. That’s what we want to be discussing today. And I yield back.
*Chairman Johnson. Thank you.
Mr. Kelly you are recognized.
*Mr. Kelly. Thank you, Mr. Chairman, and thanks for having the hearing. And thanks to all our panel for being there.
I sometimes get confused. I came out of the private sector. And so when you start talking about who provides the revenue for all these programs, I think sometimes it is the government. And we all know that that is not true. These are based on wage taxes or transfer from the general fund, which are based on taxes that are levied onto every single hardworking American taxpayer.
So as we put this back and forth, and while we don’t want to politicize, we absolutely do. Is there anybody that would disagree with me that the only way, the only way to get this fixed is to look at where the revenue streams come from and understand that that flow has been interrupted with an economy that just hasn’t recovered in a nation that has unbelievable assets. So we can go back and forth with this about Republican/Democrat problem. This is not a Republican and Democrat. This is an American problem.
Am I mistaken? I have signed pay checks for a long time. 6.2 percent of every person I signed a pay check for, I also matched what I paid them. They put 6.2 percent in. The dealership puts 6.2 percent in. It was 12.4 percent. So am I misunderstanding where the revenues come from? Mr. Schieber, go ahead.
*Mr. Schieber. Well most of the revenue does come out of payroll taxes.
*Mr. Kelly. Right.
*Mr. Schieber. Now, of course, there is interest being accrued on the trust fund balance. Certainly, a portion of the kind of immediate growth in the unfunded liabilities, the immediate ‑‑ the reduction in the period of benefits that are going to be paid ‑‑ is related to what’s happened to the economy over the last several years. But since 1994 ‑‑ we are actually celebrating the 20th anniversary this week, I guess, with the release the trustees’ report ‑‑ the trustees have been telling us that there is a big demographic problem, that the system has to be rebalanced. There is a demographic problem. So a major portion of it is the demographics.
*Mr. Kelly. No. I get it. It’s like the navigator on the Titanic saying, listen. There’s an iceberg out there. Maybe you ought to change where you are going and actually maybe scale it back a little bit. And the captain saying, oh, the heck with that. You don’t understand. Not even God could sink this boat. Now, having said that, because I’m worried about this ‑‑ workforce participation is at the lowest rate it has been in 36 years. Now, I’m looking at these taxpayers the same way.
There’s an old adage about don’t worry about the mule, just load the wagon. The mule’s about ready to unhitch himself and say I can’t pull this load. It’s too heavy. Or that, add another mule to help me pull it. When you have that many people, when you have almost 92 million Americans opting out of the labor force, do you think over the course of time that could have effect on the revenues we need to run this country? Is there anybody that disagrees with that? Because I am trying to figure out, you know, we have all these willing hearts but we have weak wallets. Where does the money come from? Is there anybody out there? Forget about the government paying for this stuff. The government doesn’t pay for one red cent. American taxpayers do.
We have gone so far away from what this ‑‑ how it works. It just drives me nuts. We sit around here almost arguing how many angels we can fit into the head of a pin, and the meanwhile we have got a program that is a great program, but it is not funded the right way. And we also, by the way, not everybody deriving a benefit has put any money in. So let’s not get to out of whack on that.
*Mr. Kotlikoff. Yes, sir.
*Mr. Kelly. Yeah, Mr. Kotlikoff?
*Mr. Kotlikoff. Well, yeah. I think there is a resource everybody here could use, which is economists. And I know we don’t have the greatest reputation in the world, but ‑‑
*Mr. Kotlikoff. But, you know, if you do look at the PurplePlans.org, you will see a fix for Social Security for the tax system. We can do things on the tax system. We can do things on the tax system that the Democrats would like, the Republicans would like. You know, for example, that would actually, I think, improve the progressivity of the system, but in the process shift the corporate tax from the corporations onto the households, the shareholders, in a way that would bring more business back into the country, keep businesses from leaving, get more jobs here. We have a very difficult international competitive situation. We have a very difficult problem with smart machines taking people’s jobs.
But on the Social Security issue, Ms. Schwartz, the solution ‑‑ there is a solution that is different from just maintaining the current system, which, if I actually sat down with you for a day and went through the inequities and mistreatment of low income people, high income people, middle income people, this is like a random lottery, what you get out of the system, because it is so complicated.
If you don’t know ‑‑ and you can’t call the Social Security system ‑‑ whether they are well paid or not, whether they have more people or not, they are giving the wrong answers routinely. I know this because I have a little company that does Social Security software. I also write a column every week for PBS News Hour about Social Security. I get people e‑mailing me and writing me every day about the mistakes Social Security is making. These are the people that are getting to the people on the phone. It is too complicated.
So one idea on the Purple Social Security Plan ‑‑ and this is not privatization as you know it, but it is individualization ‑‑ but it is progressive ‑‑ think about taking, freezing the old system in place, paying off everything that is accrued, and by putting zeroes in the earnings record, and then going to a new system for Social Security where everybody contributes eight percent of their pay to a single account, where they have their own name on each account, but the contributions are divided 50‑50 between spouses and legal partners.
The government makes matching contributions on behalf of the poor. It is all invested in one way ‑‑ not by Wall Street, but by a computer, a laptop, in a global market weighted index fund with a floor. So the government would guarantee a zero rate of return, so if we have a crash, but everybody gets the same rate of return. And at the end of the accumulation phase, the government would annuitize the account balances on a cohort basis.
*Chairman Johnson. The gentleman’s time has expired.
*Mr. Kotlikoff. That’s okay.
*Ms. Schwartz. And I do want to apologize. I believe this was Mr. Kelly’s time. So you may want to be answering his question. I apologize, Mr. Chairman. This was not my intention.
*Mr. Kotlikoff. No. I am trying to give you a solution.
*Ms. Schwartz. I am curious to know whether his plan actually taxes people above the 170,000 cap that is now in your system.
*Mr. Kotlikoff. One of these plans just eliminates the ceiling on the payroll tax, if you look at the Purple Tax Plan. So it is a set of plans.
*Ms. Schwartz. Well you may want to speak to Mr. Kelly about this. He was saying everyone was treated exactly the same, and people are not, because there is a cap on the income.
*Mr. Kotlikoff. I guess what I am trying to say, really quickly, is that we have a lot of ‑‑
*Chairman Johnson. Okay.
*Mr. Thompson. Thank you, Mr. Chairman.
*Chairman Johnson. Thank you.
Mr. Thompson, you are recognized.
*Mr. Thompson. I would hate to deprive you of the opportunity to mention the Purple Plan a couple more times.
*Mr. Thompson. I want to just comment on a couple of things that have been said today. We are at the time of the hearing where just about everything has been said. My friend from Pennsylvania, I don’t want you to think you are the only person who has come out of the private sector. A lot of us have, and some of us are still writing checks on our private sector businesses. And we know well how things operate. Some things, while the private sector is great, I wouldn’t trade my business for anything.
There are some things that need to be left to the government, and I think everybody would agree with that to some degree. And I don’t know how far out that iceberg was when whatever exchange happened between the captain and the observer. We don’t have black boxes back then. So probably we will never know, but I doubt strongly if it was 19 years out. And that is a point that I ‑‑
*Mr. Kelly. Well we can get a different rate of speed than the Titanic, though.
*Mr. Thompson. I think that is a point that has to be reiterated, because any failure to do that does put us in a position where a number of people have mentioned it becomes an issue of frightening people. And we should be ashamed of ourselves if we are frightening senior citizens. And I don’t think my district is made up of people any different than anybody else on this dais, but when the rhetoric gets ramped up, I have people come to me all the time worried about whether or not Social Security is broken, broke, bankrupt. The wheels aren’t falling off of this call for a while.
Now, granted, we do have problems that need to be worked on as Ms. Schwartz said. That’s what we should be doing is trying to figure out how to solve these problems, not trying to figure out how to whip up everybody into some fear position where it benefits somebody politically. In regard to the Social Security, every one of us in this room factors Social Security into our retirement. Every constituent we represent factors Social Security into the retirement. This is not something that we only talk about in this hearing or in political ads, but I can tell you that my constituents want a Social Security office that is open. So if they need something, they can go down there. They can sit and talk to the people.
Ms. Entmacher mentioned the computer stuff. You know. I have young Social Security recipients who feel better about going in the office and sitting down with a human being rather than trying to do a calculation online. And I think we do a terrible disservice when we deprive folks of that opportunity.
I want to ask Mr. Blahous. You are talking about this shortcome. Do you factor in the interest on the trust fund in your calculations? Because your numbers are a nine‑day difference between the numbers that I got from our staff, and we show a $19.3 billion surplus.
*Mr. Blahous. Well it depends on what you are asking.
*Mr. Thompson. I know it always depends on how you figure. Figures never lie, but ‑‑
*Mr. Blahous. Well I was asked the question as to what was the relationship between payroll tax revenue and expenditures. So that answer, of course, excluded the interest.
*Mr. Thompson. So is it accurate that we have a $19.3 billion surplus factoring in the tax revenues of 883.4 billion, interest of 99 billion, operating expenses of 5.7 billion?
*Mr. Blahous. It is accurate that the trust fund had an increase in its balance. The amount of trust fund assets increased. From a trust fund perspective, we had a surplus. If you are asking me from an overall budget perspective did we have surplus, the answer is no, because the interest payments are from one government account to the other.
*Mr. Thompson. Well, Mr. Chairman, I would like unanimous consent to put these accurate numbers into the record, because I think it was very misleading to go down that road. And I’m assuming staff can put a proper draft together for you, but again it just feeds into the idea that we are going to frighten people, and I don’t think that is right. I think right would be all of us sitting down and figuring out what sort of tweaks we needed to make to make the system work. And could you just by a show of hands, how many of you on the witness table believe we should privatize Social Security?
*Mr. Kotlikoff. You need to define what you mean.
*Mr. Thompson. No. No. I didn’t ask for any commentary. So nobody thinks we should privatize Social Security?
*Mr. Kotlikoff. Well I think we should individualize it. I am not sure we should ‑‑ I wouldn’t privatize it the way President Bush proposed.
*Mr. Thompson. My time has expired. Thank you.
*Chairman Johnson. Yes, it has. Thank you. And we will put this in the record.
*Chairman Johnson. How about Mr. Griffin? Are you?
*Mr. Griffin. Thank you, Mr. Chairman. Appreciate it. It was great to hear my colleagues say that they would never use Medicare or Social Security to scare people. Make sure your party leadership knows that. That will probably be a news flash.
Mr. Blahous, I want to ask you from a practical standpoint, let’s say we get to the point where the trust fund does not have the money to pay out. I think a lot of people, a lot of Americans sort of feel like, yeah. Well, on paper that will happen at some point, but maybe my benefits will never be affected because we will just borrow it. Right? So I want you to walk me through what the practical impact would be in terms of where the money would come from if there are benefit cuts. So I assume we would have to find in general revenue the money to shore up the fund, the way sort of we have done with the Highway Trust Fund.
That would come out of discretionary fund and we wouldn’t have that money, most likely. So that would be borrowed. Could you sort of walk through what the practical implications of that would be? Could we even borrow that much? How much money are we talking about borrowing when we get to the point where we don’t have enough money to pay out? And all the bad things that we have heard ‑‑ you know, benefits being cut and all that? What would we have to do if reforms do not occur? What would we have to do to continue on the path that we are on?
*Mr. Blahous. Right. At the point where the combined trust funds, assuming we reallocate taxes between the trust funds and then they are depleted in 2033, one of the common methods that the trustees use to describe quantities within the Social Security system as a percentage of the program’s tax base. So, for example, in 1983 when we had a shortfall to close, the long term shortfall was described as 1.8 percent of the program’s tax base.
In order to fill that, they delayed the COLAs by six months. They exposed benefits to taxation for the first time. They brought in newly hired federal employees. They raised the eligibility age, et cetera. They did all these things, and that added up to about 1.8 percent of the tax base. And they did about half of it on each side, half of it on the revenue side, half of it on the benefit side.
If we wait until 2033, our shortfall, our annual shortfall will be about 4.2 percent of taxable payroll. So we would have to make changes. Again, heeding the admonition about not wanting to scare people, but you may have to make changes over twice as severe, about two and a half times as severe. And the question is would our political system, would the people on the right be over twice as willing to raise taxes as they have ever been willing to do before. Would people on the left be over twice as willing to cut benefits ‑‑ both of them twice as willing?
*Mr. Griffin. What about people who would say ‑‑ and I am not advocating this, but we would just borrow that money. How much are we talking about here?
*Mr. Blahous. Right. Well, yeah, exactly. Again, it is in dollar figures. It’s going to be much, much bigger, because we are looking way into the future. And so that is why we tend to do it as a percentage of GDP or as a percent of taxable payroll. But you would have to borrow ‑‑ if you wanted to do it through borrowing ‑‑ you would have to borrow an amount that equaled over four percent of what workers are earning, and that is a tremendous amount of money.
*Mr. Griffin. Right. That is not an option is the point. Is that what you are saying? In terms of getting that money, borrowing that sort of money, adding that to the debt?
*Mr. Blahous. My personal view ‑‑ and this is not necessarily a consensus view among experts, my personal view is that at that point it is a bridge too far to balance system finances. And we wouldn’t be able, politically ‑‑
*Mr. Griffin. Right.
*Mr. Blahous. ‑‑ to sustain the system without turning it into a program that is financed from the general fund. And then we would lose a lot of the things that have made Social Security a stable, reliable benefit over the years.
*Mr. Griffin. Well that is scary to me, and I am not a senior yet. I hope I make that, but that is scary to me in and of itself. Let me ask you real quickly. Could you talk a little bit about our culture and the role that Social Security played in the early days versus now in terms of whether people had in the early days other sources of income for retirement versus today? Has there been a movement? And I think I know the answer to this. Has there been a movement over the years to rely solely on Social Security for a bigger percentage of the population, or is it the same, general ‑‑ I’d like to know that. I see you shaking your head.
*Mr. Blahous. I think the first point I would make is that if we still had the system that was left to us by FDR we wouldn’t have a financial shortfall right now. It is the subsequent expansions that have put us in financial trouble. You know. We added the disability component, later on. Perhaps it was an appropriate thing to do. Then we added early eligibility. People are now collecting at 62 more often than any other age.
Originally, they could only collect at 65. So we are collecting three years earlier and we are living a lot longer. And then in the 1970s we expanded. We added a 20 percent benefit increase and we started wage‑indexing the benefits. And so now we have cost issues that we didn’t have under the original design of Social Security. So when people talk about sort of the historic legacy, I guess, of Social Security, it is not the FDR legacy that is really in jeopardy. The program he left to us is stable. It is the subsequent expansions that are causing us the trouble.
*Mr. Griffin. I am out of time, Mr. Schieber, but the Chairman in his mercy might allow you to respond.
*Mr. Schieber. In 2008 there were $532.87 billion paid in Social Security benefits, that combined, IRA and pension annuity benefits paid to Social Security beneficiaries was $568 billion. So the benefits paid out of pensions and IRAs was actually larger than Social Security benefits. Last year we got tax data on both of them, and none of these tax qualified benefits existed or very minuscule amounts of them existed in the 1930s.
So there is a much greater dependence, now, on these tax qualified benefits, people’s personal savings or personal pensions than we have had in the past. Of course, we haven’t been reporting it. We have only been reporting 40 percent of it. So in terms of what you are generally being told, you have no idea what this other part of the retirement system is really about. It would seem to me that might be important when you think about retirement income security.
*Chairman Johnson. Thank you. Ms. Entmacher, you look fidgety. Did you want to say something?
*Ms. Entmacher. I would. Thank you very much.
First of all, yes. It is not Franklin Roosevelt’s retirement program and that is a very good thing. I know that many people have pointed to what a great job Social Security has done in reducing elderly poverty since Franklin Roosevelt’s days. And what may be less understood is that most of that decrease has come through the improvements that were made to Social Security that were just discussed, particularly for women, the automatic COLA, increased benefits for widows, those have been incredibly important and valuable.
Second, what is causing the shortfall in Social Security is not rising benefits. As has been indicated, benefits are actually going down from what they would have been because of the 1983 cuts. And in 1983 people tried to, and did for a couple of years, establish solvency for 75 years. What has created much of the shortfall is the growth in inequality, the shrinking of wages for ordinary Americans and the growth and wages at the top, which was not foreseen by people in 1983.
And, lastly, because trillions of dollars are really frightening, I would like to point out that the growth in Social Security’s cost is about 1.2 percent of GDP over the next several decades and then levels off. 1.2 percent of GDP is less than what we had to come up with when the baby boomers were kids and public education was more expensive.
We spend about ‑‑ I have the CBO estimates of tax expenditures, the tax expenditure for giving preferential rates on capital gains is one percent of GDP per year. We can afford to cover the shortfall and make improvements in Social Security. We shouldn’t wait to do it, and we don’t have to do it all at one blow, but we can reassure people that Social Security will be there.
*Chairman Johnson. Thank you for your comments, ma’am.
And without objection I will insert into the record my response to Mr. Becerra’s letter which was inserted into the record earlier.
*Chairman Johnson. In closing, I want to thank all of you for your testimony and thank our members who are still here for being here.
Social Security is facing the biggest challenge since 1983, and the longer we wait the harder it is going to be to fix. In the meantime, workers can’t be sure how to plan for their retirement, because they don’t know what to expect from Social Security. We have got real work to do. Americans deserve a Social Security program they can count on with benefit amounts they can understand.
With that, the Committee stands adjourned.
*Mr. Kelly. Mr. Chairman, I know we have just adjourned. I would like to hear you.
I know somebody who still wanted to respond I would like to stay and hear. I heard what you said, ma’am. I do not agree with you. And I think there are a number that would not. So I will stay and listen. I want to hear what you have to say. If this isn’t a crisis, we had better look up in the dictionary what a crisis is.
*Mr. Kotlikoff. This is a huge crisis. The country is broke and Social Security is broke too. It is not broke in 30 years.
*Mr. Becerra. Mr. Chairman, are we still in hearing?
*Chairman Johnson. I will withdraw my adjournment. Go ahead.
*Mr. Kotlikoff. Social Security is not broke in 30 years or in 20 years or in 10 years. It’s broke today. We need according to the trustees’ report Table F61, just go look at it. It’s buried, but you can find it. We need a 4.1 percent hike in the payroll tax rate. That is a 33 percent hike in the payroll tax rate for Social Security, starting today, immediately and permanently, 33 percent tax hike.
That is in the trustees’ report. This is what a thousand economists at every top school ‑‑ Stanford, Harvard, MIT, Chicago, you name it, Princeton ‑‑ 17 Nobel Prize winners, and they are not Republicans. They are not Democrats. They are both. Okay? That is what they are saying to look at, guys. You guys keep talking about the 75‑year numbers. Economics doesn’t support that. It says you have to look at the Infinite Horizon. Now, this does not mean the system is broke.
*Mr. Becerra. Mr. Chairman, if we want to have more discussion, I think that is fine. I think it is always important as I think members have pointed out we want to get to the solutions rather than just talking about the issues. And so I think we can do that, but I think we have to do it in a way that is organized and constructive.
If we are going to have every witness comment, we can do that, but that is going to take more time. Mr. Chairman, so long as we can just establish how you want to do this, do you want to give them a chance?
*Chairman Johnson. Well, what I would prefer to do is let you all submit something for the record. If you would care to, we will put it in.
And with that the Committee stands adjourned.
[Whereupon, at 12:50 p.m., the Subcommittee was adjourned.]
Questions For The Record
Public Submissions For The Record
Financial Planning Association