[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
RETIREMENT SECURITY: WHAT SENIORS
NEED TO KNOW ABOUT PROTECTING
THEIR FUTURES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
MAY 15, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-29
89-632 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice JULIA CARSON, Indiana
Chairman BRAD SHERMAN, California
RON PAUL, Texas GREGORY W. MEEKS, New York
PAUL E. GILLMOR, Ohio BARBARA LEE, California
JIM RYUN, Kansas JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois CHARLES A. GONZALEZ, Texas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey
TIM MURPHY, Pennsylvania BERNARD SANDERS, Vermont
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises
RICHARD H. BAKER, Louisiana, Chairman
DOUG OSE, California, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma DENNIS MOORE, Kansas
EDWARD R. ROYCE, California CHARLES A. GONZALEZ, Texas
DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts
SUE W. KELLY, New York HAROLD E. FORD, Jr., Tennessee
ROBERT W. NEY, Ohio RUBEN HINOJOSA, Texas
JOHN B. SHADEGG, Arizona KEN LUCAS, Kentucky
JIM RYUN, Kansas JOSEPH CROWLEY, New York
VITO FOSSELLA, New York STEVE ISRAEL, New York
JUDY BIGGERT, Illinois MIKE ROSS, Arkansas
MARK GREEN, Wisconsin WM. LACY CLAY, Missouri
GARY G. MILLER, California CAROLYN McCARTHY, New York
PATRICK J. TOOMEY, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
MELISSA A. HART, Pennsylvania STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota BRAD MILLER, North Carolina
PATRICK J. TIBERI, Ohio RAHM EMANUEL, Illinois
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
C O N T E N T S
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Page
Hearing held on:
May 15, 2003................................................. 1
Appendix:
May 15, 2003................................................. 31
WITNESSES
Thursday, May 15, 2003
DeSalles, Lavada, Member, Board of Directors, AARP............... 10
Gallagher, Hon. Tom, Chief Financial Officer, Florida Department
of Financial Services on behalf of the National Association of
Insurance Commissioners........................................ 14
Hounsell, M. Cindy, Executive Director, Women's Institute For a
Secure Retirement.............................................. 11
Keating, Hon. Frank, President & CEO, American Council of Life
Insurers....................................................... 7
Woods, David F., CEO, National Association of Insurance &
Financial Advisors, President, Life and Health Insurance
Foundation for Education....................................... 9
APPENDIX
Prepared Statements:
Oxley, Hon. Michael G........................................ 32
Clay, Hon. Wm. Lacy.......................................... 34
Emanuel, Hon. Rahm........................................... 35
Fossella, Hon. Vito.......................................... 37
Gillmor, Hon. Paul E......................................... 38
Kanjorski, Hon. Paul E....................................... 39
Kelly, Hon. Sue W............................................ 41
DeSalles, Lavada............................................. 42
Gallagher, Hon. Tom.......................................... 77
Hounsell, M. Cindy........................................... 90
Keating, Hon. Frank.......................................... 99
Woods, David F............................................... 104
Additional Material Submitted for the Record
DeSalles, Lavada:
Written response to questions from Hon. Ruben Hinojosa....... 125
American Health Care Association (AHCA) and National Center for
Assisted Living (NCAL), prepared statement..................... 129
RETIREMENT SECURITY: WHAT SENIORS
NEED TO KNOW ABOUT PROTECTING
THEIR FUTURES
----------
Thursday, May 15, 2003
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
And Government Sponsored Enterprises
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:08 a.m., in
Room 2128, Rayburn House Office Building, Hon. Richard Baker
[chairman of the subcommittee] presiding.
Present: Representatives Baker, Lucas of Oklahoma, Kelly,
Ryun, Tiberi, Brown-Waite, Harris, Kanjorski, Inslee, Lucas of
Kentucky, Clay, Baca, Emanuel and Scott.
Chairman Baker. [Presiding.] I would like to call this
meeting of the Subcommittee on Capital Markets to order. This
morning our purpose is to examine the subject of retirement
security and what seniors do or do not know about the
availability of retirement products in making their planning.
As those of us who are baby boomers are realizing when we
begin to retire, we present a unique problem to the country.
There are more of us than any other model ever manufactured. We
are going to live a longer time. We are going to demand higher
levels of care and we are going to sue more. So we probably
need to examine what the landscape will look like when this
significant group of retirees begins to avail themselves of
that opportunity.
Retirement security is very essential for everyone, but
especially important for those who face it in the near term. It
has taken particular urgency for 77 million baby boomers who
will turn 60 by 2006. Traditionally, securing retirement income
depended on three sources, from Social Security, income from an
employer pension plan, and individual savings. Over the last
decade, experts have begun to alter this strategy by adding
medical insurance and even a fifth alternative, earnings from
retirees' continued employment. As a result, a number of
innovative products have been introduced in an attempt to fill
seniors' changing needs.
But few consumers know that private long-term care
insurance has the potential to protect the policyholder and,
equally important, the policyholder's family from the
extraordinary costs of long-term care of nursing home care that
is often not covered by government security programs. Few
seniors are aware of how annuitization, the trading of assets
for a guaranteed stream of payouts, can help guard against
outliving the planned asset program. And it is necessary to
increase consumer awareness of how long-term care, annuities
and other financial products can fit with a sound retirement
strategy. That is the reason why we are here this morning, is
to first gain understanding, but secondly look at the
regulatory oversight of the current State structures and to
examine whether or not any actions are required by Congress to
assure seniors of long-term income stability with adequate
planning.
To that end, I welcome all our witnesses here this morning,
and recognize Mr. Kanjorski for any opening statement he may
choose.
Mr. Kanjorski. Mr. Chairman, today we will explore the
issues that individuals should consider as they plan for
retirement. Because investor protection and financial literacy
are top priorities for my work on this panel, I am therefore
very pleased that we are meeting to examine matters like
annuities, life insurance and long-term care insurance, among
others.
The aging of the American population has made retirement
planning an issue of increasing concern for our nation's
policymakers and we should review a number of trends before
hearing from the witnesses. Today, 12.4 percent of the
population is 65 years of age or older. By 2025, according to
Census Bureau projections, this statistic will rise to 18.5
percent. Moreover, over the next 30 years as baby boomers reach
retirement age, America's elderly population will likely
double, rising from 35 million to nearly 75 million. Life
expectancy rates also continue to increase. Someone who lives
to age 65 can now expect to live an additional 18 years, up
from an extra 13 years in 1940. Although Americans are living
longer than ever before, many are retiring earlier. For many of
these individuals, retirement will last 20 or 30 years or even
longer.
In light of these trends, individuals must plan prudently
and early in order to ensure a secure retirement with a steady
stream of income to cover expenses. While retirement planning
is important for everyone, it is especially important for
women. Women, after all, generally live longer and with less
income when compared to men. For many years, we have described
retirement planning as a three-legged stool based on Social
Security, employer-provided pensions and personal savings and
investments. In reality, it consists of more than these three
supports. Genuine retirement planning should also incorporate
insurance products, including medical, long-term care and
annuities. Experts also advise that really effective retirement
preparations should include either a will or, if appropriate,
an estate plan to protect one's loved ones.
With more Americans living longer and retiring earlier,
pensions and Social Security benefits will have to be paid over
even longer periods of time. Personal savings and investments
must also be stretched out. The troubles of the stock market
over the last three years, however, has resulted unfortunately
in significant declines in pension plans and retirement
investments. Today, the sagging economy has produced an under-
funding of pension plans of more than $300 billion. It also
disturbs me that the retirement plan participation rates have
recently dropped for full-time employees, standing at just 55.8
percent in 2001. Savings for retirement is just one step toward
achieving financial security.
I am therefore pleased that we are examining the issue of
annuities. Annuities can help seniors to manage their savings
so that they will not out-live their assets. In today's complex
financial marketplace, we also need to ensure that individuals
preparing for retirement understand the benefits of receiving a
guaranteed stream of payouts via an annuity, instead of taking
a lump-sum payment. As the American population continues to
age, experts predict that the number of individuals requiring
long-term care will greatly rise. At some point, one in five
seniors will require nursing home care for at least a year. The
costs of such care now average $55,000 annually, but by 2030,
according to at least one estimate, these services could cost
or $200,000. To reduce the burden on Medicare and Medicaid, we
have worked in recent years to adopt policies aimed at
encouraging individuals to purchase long-term care insurance.
Today's hearing will help us to understand what else we can do
through the private sector to meet this growing need.
Finally, Mr. Chairman, because we are talking about
retirement planning, I feel it is important to raise the issue
of Social Security. This program presently covers about 160
million workers, providing them with a safe, secure and steady
stream of income in retirement. As a result of Social Security,
the poverty rate among America's elderly has dropped
dramatically, and without this vital retirement program the
poverty rate among older women would increase from 12 percent
to more than 50 percent. Social Security is a success. We
should not tinker with this program with proposals to privatize
the system. I will be particularly interested to hear what our
witnesses have to say about this issue.
Mr. Chairman, I want to thank you for bringing these
matters to our attention. Retirement planning is an issue of
utmost importance. I look forward to working with you on these
endeavors.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 39 in the appendix.]
Chairman Baker. Thank you, Mr. Kanjorski.
Ms. Kelly?
Mrs. Kelly. Thank you, Mr. Chairman. Good morning, and I
thank you very much for holding this important hearing on
retirement security. It is an issue that is of great concern to
today's seniors and tomorrow's retirees.
With tens of millions of baby boomers approaching
retirement, the need to focus on proper planning and financial
literacy continues to grow. The cornerstone of retirement
security is the consumers' ability to anticipate their future
financial needs and adjust their assets, using several diverse
financial products, from investments and pension funds to life
insurance policies and long-term care insurance, annuities and
Social Security. As more sophisticated financial products are
introduced to fill the evolving retirement needs of seniors, we
need to ensure that consumers have a clear and objective base
of information. The arrival of new and improved products for
seniors is welcome, but it also comes with an additional
responsibility that financial regulators keep pace with the
changes in the marketplace to protect consumers.
Last year, my Subcommittee on Oversight and Investigations
held a hearing on one product known as a viatical settlement,
the practice of buying life insurance policies from the elderly
or terminally ill at a discount, and then marketing them as
investments. A properly conducted viatical transaction can be a
benefit to all parties involved. Sick individuals can access
much-needed cash to pay for medical expenses. Companies that
sold the original policies receive premiums that are important
to market stability, and investors and settlement companies who
buy policies are able to make a return on their investment.
Unfortunately, as we learned at that hearing, bad actors have
taken advantage of these arrangements to create or buy phony
policies and fraudulently bilk unsuspecting investors. While it
is extremely unacceptable, it is no surprise, given the complex
nature and inconsistent State of regulation of viaticals. The
State regulation is inconsistent. I strongly believe that we
have to address the lack of uniformity and regulatory gaps
among the States in regulating life and viatical settlements
that leave some citizens, particularly elderly Americans, at
the risk of being defrauded.
I thank the witnesses for appearing here today before the
subcommittee and I look forward to hearing their testimony on
these issues.
Thank you, Mr. Chairman. I yield back.
[The prepared statement of Hon. Sue W. Kelly can be found
on page 41 in the appendix.]
Chairman Baker. Thank you, Ms. Kelly.
Mr. Scott, do you have an opening statement?
Mr. Scott. Thank you very much, Chairman Baker.
Chairman Baker and Ranking Member Kanjorski, I want to
thank you for holding this important hearing, and thank the
witnesses for coming today regarding the retirement security
for seniors. Of course, I want to also thank this distinguished
panel of witnesses today for their testimony on this important
subject.
This hearing is held at an opportune time, given that this
past Sunday was Mother's Day. Of course, when you consider the
average age of those of us on this committee, you can
accurately say that many of our mothers are either retired or
certainly close to retirement. We should honor them by taking a
serious, serious look at retirement and security for seniors.
My own mother just retired this past year.
Of the many issues related to a secure retirement, two
stand out in my mind. One is the exploding Federal deficits
which threaten Social Security and Medicare. The other is the
lack of basic savings among African Americans. These two
concerns relate to traditional retirement planning, which
includes Social Security benefits, employer pension plans, and
individual savings and investments. Since future retirees
cannot depend on Social Security or basic savings for
retirement income, they must begin to consider additional
financial planning tools. For example, promotion of financial
literacy is of utmost importance. In that regard, I have
introduced legislation which is entitled The Prevention of
Predatory Lending Through Education Act, that uses financial
literacy and a 1-800 number as tools to fight predatory
lending, so that families can keep more of their money and
invest it for their retirement use.
In today's paper of the Washington Afro, there is a
headline story that shows the timeliness of this hearing. If I
may share the first paragraph, there is a picture of four
elderly African American retired women. The headline is, ``The
Victims Fight Back, Predatory Lender Pays Elderly Women $4.3
million.'' It starts out by simply saying, if I may add this
into my record, ``It all started with a telephone call. Eugene
Duncan says her husband Vincent was recovering from a stroke,
confined to a wheelchair, when a representative from a company
called First Government Mortgage made an unsolicited offer for
a secondary mortgage loan. The representative then came to the
elderly retired couple's home and smooth-talked them into
signing a loan application. Then without their knowledge or
consent, according to court documents, he prepared fictitious
documents that helped them to get the loan. The couple got the
loan, but between the high interest rates and payments they
could not afford, they almost lost their home,'' this pattern
of predatory lending targeting the elderly and the retired.
That is why I am so excited to work on this committee in
such a bipartisan way with my colleagues in addressing the
needs for our retirees. I will work with the committee to
discuss ways to increase basic savings and investment rates
through financial education and predatory lending.
I just want to take this opportunity, Mr. Chairman, to
thank you personally for your encouragement for us in support
of this effort; certainly, Chairman Ney, Chairman Oxley and our
Ranking Member, Representative Frank, for addressing this very,
very important issue as we approach ways to help our seniors to
save their money and live more productive lives.
Thank you.
Chairman Baker. Thank you, Mr. Scott.
Mr. Lucas? Ms. Harris?
Ms. Harris. Thank you, Mr. Chairman. Thanks for holding
this very important hearing, and I wanted to thank all the
members of the distinguished panel for their testimony today.
As Congress debates how we can most effectively revitalize
our nation's economy, we must address the concerns of the
people who built our prosperity in the first place, our
seniors. We cannot truly restore economic security without
bolstering Social Security as well. We must all have the same
goal, both the Federal and the State level, to protect and help
our seniors. In recent years, our seniors have borne the
consequences of the greed of corporate executives who rocked
markets and robbed shareholders, suffering through undeserved
sleepless nights after a lifetime of hard work, saving and
thrift.
Moreover, they have endured the continued uncertainties
surrounding whether we will keep our nation's moral obligation
to protect Social Security, strengthen Medicare and provide a
prescription drug benefit. While we address issues that impact
today's seniors, we must also plan for the retirement of
tomorrow's seniors. During the next decade, 77 million baby
boomers will reach the age of retirement, thus we must marshal
the resources, creativity and courage to address an array of
challenges. While a large part of this effort involves the
development and the refinement of policies and programs, we
still must focus a significant portion of our energies upon
helping our seniors understand their rights and choices in
today's financial services marketplace. I look forward to our
continued consideration of this critical matter.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Ms. Harris.
Mr. Baca?
Mr. Baca. Thank you very much, Mr. Chairman. I am glad to
be here and to hear the panelists discuss what is very
important to us in terms of retirement Social Security for our
seniors and for our future, not only as we look at the seniors,
but the baby boomers looking at the long effects, too, as well,
because many of our seniors are on fixed income, and we have to
look in terms of long-range. What is actually going to happen?
What kind of retirement plan are they going to have? What are
they relying on in reference to Social Security? Where is their
income coming from? And especially as we look at Hispanics,
Social Security is made up 75 percent of their annual income,
especially for retirement for Hispanics, so they rely on Social
Security, compared to 63 percent of other retirees.
I am very much concerned about the effect Social Security
will have and what the president's Social Security
privatization plan will have on the Hispanic community and
impact, so we are very much concerned there. And also as we
look at Social Security, we have to look at health insurance,
what are the affects it is going to have on future plans for
the ability to pay for health insurance, prescription drugs,
and then the ability to save plans, too, as well.
So hopefully the panelists will begin to look at the
overall generic. As we look at the diversity within our
communities right now, we are seeing many individuals that will
be retiring and would like to retire. We want to make sure that
they are protected and their pension plans will be there. And
then if there is privatization, what affects will it have on
our seniors in the long run, too, as well; what affects will it
have on Medicare and the ability to have health coverage. Many
of our seniors right now, when we look at Social Security as
their only form of income, if in fact they have any kind of
medical problems they end up losing their homes because they do
not have the income to provide, they do not have the insurance
to provide, they do not have the planning to survive, and they
do not have the pension plans that is in place too, as well.
So I am very much concerned with hopefully coming up with
some kind of a Social Security pension plan that will safeguard
them now and in the future, and also protecting out baby
boomers that will be following into this category. That is all
of us here right now and those future ones to come too, as
well. Hopefully, the deficit will not be on them or anybody
else, based on what we are proposing even right now through the
president's tax initiative that he has just passed.
Thank you very much, Mr. Chairman.
Chairman Baker. Thank you, sir.
Mr. Ken Lucas?
Mr. Lucas of Kentucky. Thank you, Mr. Chairman. I will be
brief.
In my prior life before coming to Congress, I spent 32
years as a financial planner and a CLU and a ChFC. I was
surprised that there are not that many of us up here with that
background. Again, we spent a lot of time preserving people's
net worth and protecting their retirement assets. I look
forward to hearing your testimony today.
Thank you.
Chairman Baker. Thank you very much, Mr. Lucas.
I would certainly like to welcome our witnesses to this
hearing this morning. I look forward to your insights and
perspectives. I certainly want to welcome our first witness. I
think for the purposes of introductions, I would yield to Mr.
Lucas for appropriate comment.
Mr. Lucas of Oklahoma. Thank you, Mr. Chairman. I
appreciate that yield.
Nine years ago this week, I was elected in a special
election to serve in this fine body. At that time, as I worked
my way up and down one-third of the State in the old Sixth
Congressional District, then-citizen Keating was working all
over the entire State in preparation for a run for governor
that fall. And much, I suppose, to the chagrin of a lot of
people back home, not only did I get reelected that fall, but
so did Governor Keating, a fellow who in his eight years as
governor not only accomplished something that is rarely done in
Oklahoma, and that is to be reelected governor, but he
stewarded us through some very, very difficult times, both man-
made, in essence, and by mother nature. His leadership helped
propel, I think, Oklahoma rather dramatically along in a
progressive way towards both economic and political reform. His
career there could best be summarized as enabling, I think, my
fellow Oklahomans, his fellow Oklahomans, the opportunity to
better live up to their potential.
So I am particularly pleased, Mr. Chairman, that in his
role now as president and CEO of the American Council of Life
Insurers, he is here today to testify before us again, I
suspect with a focus on how to enhance the quality of life for
all of our fellow Americans.
Thank you, Mr. Chairman, and thank you, Governor Keating,
for being here today.
Chairman Baker. Thank you, Mr. Lucas.
Welcome, Governor Keating. We are pleased to have you here
this morning.
STATEMENT OF GOVERNOR FRANK KEATING, PRESIDENT AND CEO,
AMERICAN COUNCIL OF LIFE INSURERS
Mr. Keating. Mr. Chairman and members of the subcommittee,
after Congressman Lucas' very kind and undeserved introduction,
I think I will not say another word.
[Laughter.]
I have a formal statement that I have submitted for the
record. I would appreciate the committee at their leisure to
examine that statement, because some of the things in there I
think are very important. First off, as a citizen, I want to
thank Chairman Baker and the members of the subcommittee, for
examining these issues. As the ranking member said and as the
other members of this subcommittee have pointed out, this is a
very serious business.
As an older baby boomer, those of us between the ages of 55
and 64, unfortunately most of us do not have enough money to
retire on. That is a demographic time bomb which is ready to go
off. The average cash assets of the older baby boomer is
$47,000. If you add in a house and if you add in retirement
assets, maybe, maybe $100,000, which at $40,000 a year is a
couple of years of income. If you consider a point and a half
in interest, that is not a significant income as a companion
income to Social Security.
So as Congressman Scott mentioned, the importance of
retirement planning; the importance of the state-regulated
industry which I represent, the life insurance industry, and
members of Congress, and the private sector working together to
sensitize people to the important of retirement security and
retirement planning is extremely significant. As Congressman
Kanjorski noted, the cost of nursing home today alone is
$55,000 a year. The cost of having someone come to your home if
you do not have a meals-on-wheels program, but to come to your
home and attend to your needs just on an ad hoc basis is some
$16,000 per year. The fact of the matter is, for the first time
ever, financial magazines and newspapers are beginning to speak
in terms of people outliving their assets. This is remarkable,
the fact that today people are thinking about stopping the
accumulation part of their life, and looking at fixed income
when they reach about 75. And yet just two or three generations
ago, 60 was considered old.
So we do have this very serious demographic challenge. We
have a very serious education challenge. For those of us who
represent, as ACLI does, some 400 life insurance companies,
there is sensitization toward long-term care and the need to
examine at an early age long-term care policies and what they
will do for your own financial security and the financial
security of your family. The need for us to examine our own
life insurance needs, so that if we have dependents and
something were to happen to us even at a later age, if we are
taking care of grandchildren; if we are taking care of step-
children, or even children who have returned home, to have life
insurance is important across all age groups. And of course,
the issue of annuities. After the challenge of the stock market
over the course of the last three years, don't we all like
defined benefits? An annuity is in effect a defined benefit to
provide a companion investment for Social Security.
So Mr. Chairman, we see this industry and this organization
as advocacy and research, obviously of assistance to the
Congress on tax matters, but most importantly assistance to our
citizens, our fellow citizens on the sensitization of the need
for income for life; the sensitization of need for retirement
security and life security for our children and in many cases
our children's children. We do not do enough of it. We do not
have enough money saved for retirement, and we welcome this
debate and discussion because it is long overdue.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Frank Keating can be found
on page 99 in the appendix.]
Chairman Baker. I want to thank the governor. We appreciate
your participation this morning.
Our next witness is Mr. David F. Woods, CEO of the National
Association of Insurance and Financial Advisors. Welcome, Mr.
Woods.
STATEMENT OF DAVID F. WOODS, CEO, NATIONAL ASSOCIATION OF
INSURANCE AND FINANCIAL ADVISORS, PRESIDENT, LIFE AND HEALTH
INSURANCE
Mr. Woods. Thank you, Chairman Baker. I am probably the
only card-carrying person in the room today, that is, Medicare
card-carrying person in the room. I am a senior. I understand
very well the concerns of seniors and the needs of seniors.
I represent the National Association of Insurance and
Financial Advisors. I am the brand-new CEO. We have 800 local
associations across the country representing 325,000 insurance
agents, financial advisers and their staffs. Our mission is to
provide professional education and support to our members, to
establish and to maintain ethical standards for them, and to
provide help to committees like yours, members of the various
legislative bodies as you and we together try to wrestle with
the response that we collectively can make not only of seniors,
but to all citizens in various aspects of their financial
lives.
I also represent the Life and Health Insurance Foundation
for Education. We are a nonprofit organization founded about 10
years ago to address the need of the population at large for
more education about the role that insurance and insurance
products play in their financial lives, and to help them
understand that a financial plan without these insurance
products at its base is really nothing more than a savings and
investment program that really dies or becomes disabled or
grows old and disappears when they do.
So I am privileged to be here today. My primary purpose is
to really introduce myself to the members of the committee. My
hope is to be with you on a number of future occasions, not
only on the issue of seniors, but other issues that may come
before this committee where we can be, either or both of my
organizations, can be helpful. I am also privileged to be here
with Governor Keating. We both started our new jobs together in
January and really have renewed a longstanding partnership
between the National Association of Insurance and Financial
Advisors and the ACLI, to bring the help, support, dues,
resources of the life insurance industry to this and other
committees which may be interested.
Let me if I can just give you a very brief overview of the
role that an agent-adviser plays. I know Mr. Lucas has long
experience in doing that, so you may correct me if I miss
anything. My written testimony covers it in full detail, but
let me just give you a thumbnail. I was an insurance agent for
30-plus years; still carry a license; still do a tiny bit of
business when I have some time. The role of the agent-adviser,
financial adviser, has several aspects to it, first and
foremost, to understand the needs of our clients and our
prospects. Not just in terms of how much money do you have, how
much money do you need, but understand them as human beings;
understand what their personal needs are; what their cares,
what their concerns are, so that not only can we make the
numbers add up, but we can make them add up in terms of what is
important to them in their lives. And then to do the research,
to find the appropriate products that may address those needs,
and to bring those needs to their attention; to help them
evaluate them; to provide competitive analysis for them, so
that they can make an informed and intelligent decision about
the products that are important in their lives.
As it applies to seniors particularly, I think the members
here have mentioned all of them, annuities, long-term care,
life insurance being the most prominent and important among
them, for seniors, and then to provide ongoing service to our
clients over a long period of time. Seniors particularly find
their needs changing. The early years of retirement are much
more active than the later years. Money begins to run out as
time passes, typically, the longer people live. Long-term care
needs become critically important, nursing home care, home
care: frightening prospects, frightening prospects for seniors.
Some of you may have had your own parents in that situation, as
I have. It is a terrible prospect. So the role of the agent-
adviser is to constantly work with our clients to help them
understand their changing needs, to evaluate their options for
them, and to help them work through those options and take
advantage of whatever may be there for them.
I appreciate the opportunity to spend some time with you
today. I am more than happy to answer any questions you have. I
particularly applaud the committee for addressing this issue.
All of you have pointed out the needs of this burgeoning crop
of baby boomers, but I would submit that there are millions and
millions of people who are already retired who have the same
concerns and the same issues. So I am looking forward to
working with you as together we address these problems.
Thank you, Mr. Chairman.
[The prepared statement of David F. Woods can be found on
page 104 in the appendix.]
Chairman Baker. Thank you very much, sir. We appreciate
your testimony.
Is it Mrs. Lavada DeSalles, is that correct, Ms. DeSalles,
who is a member of the board of directors of AARP? Welcome.
STATEMENT OF LAVADA DESALLES, MEMBER, BOARD OF DIRECTORS, AARP
Ms. DeSalles. Thank you. It is Lavada DeSalles. You were
close.
[Laughter.]
Good morning, Chairman Baker, Ranking Member Kanjorski, and
other distinguished members of the Subcommittee on Capital
Markets, Insurance and Government Sponsored Enterprises. I am a
member of AARP's board of directors, and I appreciate this
opportunity to offer our views regarding what seniors need to
know about protecting their economic security.
Today, my testimony will focus primarily on the role that
private insurance can play in financially securing retirement
for older Americans. Private insurance products can and
frequently do play an important and valuable role in
accumulating, managing and protecting the financial assets
necessary for having a secure retirement. We believe that
privately financed insurance products have the potential for
playing a more integral, but supplemental role to Social
Security, if the marketplace includes, first, strengthened
enforcement of consumer protection statutes and regulations;
second, ready access by consumers to well-qualified,
independent and affordable financial planning resources; third,
reliable and accurate measures for comparing insurance
products. Lastly, additional progress should be made in the
standardization and licensing of insurers, their agents, and in
the way products are approved.
Also important is that these products be integrated as
supplementary options for what we at AARP describe as the four
basic pillars of retirement income security for the 21st
century. That is, Social Security, pensions and savings,
investments, health care insurance coverage, and increasingly
earnings from working during one's retirement years.
Unsurprisingly, commercially offered personal insurance
products pose the very same cost, availability and
sustainability challenges for individuals that are so familiar
to policymakers in addressing national issues.
However, the responsibility for the selection among a
complex array of insurance companies, policy options, shifts to
the individuals and their families when they are at the same
time attempting to manage their daily financial affairs. We do
not view this challenge as an unbreachable barrier, but rather
one that will require a concerted effort by policymakers, the
insurance industry, consumer advocates, and consumers to
address.
Chairman Baker, today's hearing represents an important
first step in launching this effort. AARP has long been active
in efforts to assist mid-life and older Americans to improve
their prospects for achieving personal financial security. In
this regard, we have conducted research; designed, tested and
provided financial education and counseling services to our
members, as well as mid-life and older adults in general. But
because of the rapidly growing population of retirement-age
Americans, the demand for high quality, non-conflicted
financial literacy programs will continue to grow.
In conclusion, we believe that efforts should continue to
be made to increase consumer awareness of insurance options;
options for assembling and managing the necessary financial
assets for a secure retirement. At the same time, we believe
that changes in a number of public policies and insurer
practices would be useful for improving the insurance
marketplace and the products and services it provides. We
commend you, Chairman Baker, for beginning this important
discussion. We look forward to working with the subcommittee to
further improve prospects for a secure retirement for all
Americans.
I will be happy to answer any questions you may have.
[The prepared statement of Lavada DeSalles can be found on
page 42 in the appendix.]
Chairman Baker. Thank you very much.
Our next participants is Mrs. Cindy Hounsell, Executive
Director, Women's Institute for a Secure Retirement. Did I get
that close?
Ms. Hounsell. Yes.
Chairman Baker. Thank you.
STATEMENT OF M. CINDY HOUNSELL, EXECUTIVE DIRECTOR, WOMEN'S
INSTITUTE FOR A SECURE RETIREMENT
Ms. Hounsell. Good morning. We very much appreciate the
opportunity to be here and to focus on women's issues.
I thought I would start by saying why we call ourselves
WISER. I have been working on this issue for 15 years, and I
realized that I had made every financial mistake that you could
make throughout your working life. So I thought, well, we do
not want to call ourselves STUPIDER, so we will have to find a
better acronym and sort of work through the name WISER. People
often say to me, well, why don't you include men? I say, well,
then we would have to have been MISER, so that would not have
worked well either.
But as mentioned, I have been working on this issue for 15
years, and I would just like to emphasize that one of the
things that I think is so important for the committee to hear
is that people just do not have the financial basics. One of
the things I find is that if you throw out the word ``annuity''
at somebody, they are already knocked over on the table falling
asleep, because they do not even understand why they need to
understand what an annuity is. People just do not have the very
basic foundation of financial planning. I find this to be true,
and it does not matter what the education level is. I can talk
to people that do not even have jobs and they could understand
the need for it just as well as people who are professionals,
or like people in this room. I probably did not know what an
annuity was myself until about six or seven years ago, when I
became very interested in insurance products. Of course, that
was prompted by the fact that my house burned down. So all of a
sudden, I was loving insurance, and I thought, boy, this is
really key, and where are the other areas in my life, like
long-term care insurance that will really help women when they
get older.
As the statistics show, and I have all this in my
statement, but I would like to just briefly breeze through some
of it. Women live longer. They earn less. They have different
needs because of those factors. The major point I would like to
make is that women need information to make the best financial
decisions because they can least afford to make mistakes with
their money. They need this information early in their working
lives.
Women face a host of obstacles that jeopardize their
economic security. One of them is pay. Two-thirds of today's
full-time working women earn less than $30,000. Care-giving
responsibilities cause women to spend about nine years out of
the job market or working part-time or making other
accommodations for their families' lives. Fewer years at work
mean they are less likely to be eligible for employer benefits,
and combined with lower pay, smaller Social Security benefits
and less money in savings. These factors are coupled with the
general lack of knowledge about money management, as well as
the financial products that could help them in the future.
Older women are much more likely to live alone than older
men. Living alone means you are much more likely to be poor. As
Mr. Scott mentioned in his statement, the poverty rate among
older minority women is just astounding. For single black women
over age 65, it is 43 percent; and for Hispanic women, it is 49
percent, which is nearly twice the rate of white women. We hear
all the time from women who are convinced they will never be
able to stop working and they will never be able to retire.
As women tend to outlive their husbands, they face a
greater risk of requiring long-term care, either in their own
homes or in nursing homes. We know that there is a great need
to educate younger and middle-aged people because we have found
that the major fact is that people do not understand that age
is the significant reason to buy long-term care insurance
earlier; that it is more expensive as you age. People think
that it is just something to do when you get older or as you
reach retirement age. So we have got to change that, also
because then it is more expensive, and they do not understand
that. We happen to have access through one of the foundations
that funds us to long-term care insurance. There is a women
that works with me who is in her late 30s. She signed up for
the long-term care insurance.
Another fact is that many employers offer adult children
the opportunity to sign up their parents for long-term care
insurance. If families were better educated about the
availability of the provisions such as in-home care, services
at assisted living facilities, they would be capable of taking
the needed steps to talk about these issues, resulting in much
better financial planning decisions for both the adult children
and for their elderly parents.
And then there is the other consequence of living longer,
which is that women have greater concerns about outliving their
income. Many older people are living longer than ever, and yet
most financial education focuses on getting people to save and
invest, while there is very little information available on
what to do when you reach retirement age to make sure the money
lasts for as long as you need it. Few of those who are retiring
realize that the money may have to last for perhaps 20 or 30
years after we stop working. We did a booklet which has become
very popular with the Society of Actuaries. It is available on
Web sites, and we would hope that people would look at the
booklet, or maybe include it on your Web site. We have a couple
of good stories in there. One of them I love to use, and I
won't take time to do it here because my time is running out,
but Ron Gebhardtsbauer, who is an actuary, actually we included
in our prepared statement the story, talked his mother into
buying an annuity because every year she was taking out little
bits of money and knew she was going to run out of money by the
time she probably reached 90. He convinced her to buy an
annuity and now she will get the same amount of money whether
she lives to be 90 or 100.
I will end here because I think my time is just about up. I
thank the committee for what you are doing, and we would love
to continue working with you.
[The prepared statement of M. Cindy Hounsell can be found
on page 90 in the appendix.]
Chairman Baker. Thank you very much.
For the introduction of our final participant, I would like
to turn to Ms. Harris for her particular words. Ms. Harris?
Ms. Harris. Thank you, Mr. Chairman.
Our final panelist today has served the great State of
Florida in an amazing variety of capacities. Today, as
Florida's first Chief Financial Officer, Tom Gallagher
continues to display the creative, skilled and determined
leadership that has distinguished his three decades of public
service. As Chief Financial Officer, Tom Gallagher leads the
new Department of Financial Services, which was created in
January of this year as the result of a 1998 constitutional
amendment that has merged the Office of the State Treasurer,
Insurance Commissioner, Fire Marshal, and Office of the
Controller.
Prior to his election to this post last November, Tom
Gallagher had served as State Treasurer, Insurance Commissioner
and Fire Marshal for a total of 12 years, beginning with his
election to that position in 1988. He has also served two years
as education commissioner, two years as secretary of the
Department of Professional Regulation, and 13 years as a member
of the Florida House of Representatives. Tom Gallagher
established his reputation as tough, courageous and an
effective leader following Hurricane Andrew, when as Insurance
Commissioner, he guided Florida through the trauma of its most
costly natural disaster.
Moreover, he has demonstrated his extraordinary talent for
shaping innovative solutions to seemingly intractable problems
on many occasions, such as when he spurred the creation of a
program that offers health insurance to more than 300,000
uninsured children in Florida. Just last year, he played a
vital role in the Florida legislature's passage of a windstorm
bill that is saving Floridians nearly $100 million annually.
Tom Gallagher has dedicated his career to helping the
people of Florida untangle the knots that often accompany their
use of financial service products. I particularly look forward
to hearing the comments of this fierce protector of consumer
rights regarding the State of Florida's efforts to protect our
seniors from fraud and abuse.
It is with great pleasure I introduce my friend and former
colleague in Florida's executive cabinet, the Chief Financial
Officer, Tom Gallagher.
Chairman Baker. Thank you, Ms. Harris.
Welcome, Mr. Gallagher.
STATEMENT OF HON. TOM GALLAGHER, CFO, FLORIDA DEPARTMENT OF
FINANCIAL SERVICES ON BEHALF OF THE NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS
Mr. Gallagher. Thank you very much, Mr. Chairman and
members of the committee. I have also submitted written
testimony.
I am very proud that Florida is considered the head of the
curve in protecting consumers from fraud. We have actively been
involved with the NAIC's Viatical Settlements Working Group.
The viatical business emerged in 1989, and by 1992 the NAIC had
determined that a model law was needed. It was basically set up
to help people that had AIDS. The initial model required
companies and brokers to obtain a license before entering into
the viatical settlement agreements, giving regulators authority
to refuse or revoke a license and approve provider contracts.
The first model also required disclosure, payment of proceeds
into an escrow account, and confidentiality of the medical
information. The model was recently updated to broaden the
definition of a viatical settlement and new protections against
fraud have been added. The new model also enabled States to
consider the security aspect of the viatical transaction, that
is the sales to investors. We in Florida provided a substantial
input. Florida, along with several other States, have adopted
the new model and we are of course encouraging other States to
follow suit.
In Florida, we have a tough law on the books and
aggressively enforce the provisions of that law. Our Viatical
Settlement Act of 1996 focused on protecting insured
individuals or the viator. The Act has been amended to consider
the investor and to curtail investor abuses. The enforcement
results in Florida, 35 viatical providers have applied for
licensure; 17 of them withdrew; 4 were denied. There are eight
currently licensed; three have surrendered their license; and
three licenses have been revoked. Since 1996, 14,017 life
insurance policies have been purchased from viators, having a
face value of $2.9 billion, for which viators were paid $953-
plus million. The average amount an investor has made has been
$43,744, and the average age of investors into these viatical
settlements is about 70.5 years old.
The regulatory actions we have taken by the department
since 1996 have been 21. We have done eight against providers;
two against brokers; three against agents; five against
officer-employees; and three against unlicensed entities. As
far as viatical criminal cases affecting Florida, these cases
have encompassed 38 indictments against individuals. The
companies are Future First, who was a provider; Kelco was a
provider; Justus Viatical, an unlicensed provider; Financial
Federated Title and Trust, Asset Security Corporation, an
unlicensed entity; Life Benefit Services, a broker; and a
doctor providing fraudulent life expectations was also
indicted; and 11 viators themselves for fraudulent acts.
The Department of Financial Services continues to work with
the Federal Viatical Task Force, with the FBI, the U.S. Postal
Service, the SEC and other law enforcement agencies. Our Fraud
Division has executed nine search warrants on viatical-related
companies and seized more than 1,000 files representing in
excess of $76 million in fraudulent policies. Potential
criminal violations commonly reviewed are theft,
misrepresentation, investor fraud, and securities and
investment issues. The estimated losses to investors in
Florida, $2 million from Justus Viatical Group; criminal
charges have been filed, American Benefit Services, Financial
Federated Title and Trust, $117 million, principals of both
companies are serving lengthy prison sentences; Future First
Financial Corporation, $203 million, licenses revoked, criminal
charges were filed, the companies placed into a court-appointed
conservatorship, the former president was just arrested and now
resides in a county jail with a $10 million bond; Accelerated
Benefits Corporation, $114.5 million, license revoked; and
William Page and Associates has paid fines and are on a two-
year probation.
The anti-fraud network that was talked about on March 6,
2001 by Terri Vaughan, who testified in support of establishing
a national anti-fraud network among the State and Federal
regulatory agencies. We have the technical infrastructure at
the NAIC to place and share information among State regulators
that can easily be expanded to Federal agencies. We are capable
of receiving and handling both public and confidential
information. We believe that the anti-fraud network should have
information-sharing agreements; standards should be in place
for how information is shared; and the important link to
current databases, not start new ones. We believe that the
participants should be given legal immunity for good-faith
reporting.
We also believe that insurance regulators would benefit
from access to the FBI's fingerprint database. State insurance
regulators are the only functional regulators who do not have
access. The best way to weed out wrongdoers is before they get
a chance to commit fraud. State regulators would benefit from
the access to the NASD's enforcement database. In return, the
NAIC could share information on insurance agents and companies.
Financial products are becoming intertwined. Sharing of
information is more important than ever, and preserving
regulatory confidence is also very important.
In conclusion, State regulators fully support congressional
efforts to fight the viatical settlement fraud and to create a
nationwide anti-fraud network on information-sharing among
regulators. We at the NAIC and in the State of Florida stand
ready to offer you our assistance and expertise and technical
infrastructure to do this.
I thank you very much for the opportunity to be here, Mr.
Chairman.
[The prepared statement of Hon. Tom Gallagher can be found
on page 77 in the appendix.]
Chairman Baker. Thank you, Mr. Gallagher.
Mr. Woods, my question needs to be set up appropriately.
Education is obviously the first answer; making conscious,
informed decisions is always an appropriate remedy almost for
any problem. But secondly, even if someone engages in an
activity, there is a likelihood as individuals become older and
abilities become impaired in some cases, that there be a
mechanism for appropriate oversight and enforcement. Listening
to Mr. Gallagher's recitation of Florida's action, it would
appear that adopting the NAIC viatical model law is not only
appropriate, but necessary. Do you think we need to do
something nationally, or are we in a position to rely on each
State to take their own course of action?
Mr. Woods. Well, it is always a challenge, the tension
between State regulation and Federal regulation. It seems to me
that Mr. Gallagher has appropriately pointed out the kind of
oversight that States can provide in the viatical settlement
area. Information, as you have indicated; understanding;
education; full disclosure, all of those things are critically
important. It is my belief that the States can do that
appropriately and through the NAIC model, we believe they
should.
Chairman Baker. Governor Keating, do you feel that leaving
this issue to state resolution is appropriate? Given the
concern with the numbers of baby boomers about to retire, and
the asset base which they represent, that seems to be an
awfully ripe target for a lot of folks who do not have pure
motives.
Mr. Keating. Mr. Chairman, as you know, the argument rages
in the State regulatory environment on the question of
suitability for a number of these financial services products.
I must confess, though, as a Federalist, to have 50 hot-houses
of experimentation, some expressing more serious problems than
others, sharing ideas, having ideas compete with each other, is
always the best place to begin. It may well be the best place
to end. But to have a very aggressive leader in a State as Mr.
Gallagher is in Florida is a symbol to States like mine and
other States. Well, go in there and find out what the problem
is with viaticals, and see if we need a regulatory or a
statutory change to make our citizens, our seniors safe. I
really think at this juncture it is far wiser, and perhaps the
Congress can help by having public hearings on the subject, or
even hearings in districts or States, but I think it is a lot
better to let the States try to work through it together,
sharing and competing with ideas, as opposed to having a
Federal fix at this time.
Chairman Baker. What about the concept of either act by a
date certain or this becomes the rule. For example, States
which are consumed by budgetary difficulties, other matters of
importance, whether it be in Oklahoma or Texas. Simply holding
out a standard, you can do whatever you like, but if absent any
action on your part, this becomes the standard for those States
who choose not to act. I am concerned about the inevitability
of the numbers and the economic assets at risk if there is a
State which simply chooses not to act, and the consequences of
a large group of defrauded seniors coming to the Congress
asking us then to respond to an identifiable crisis. This is
just my perspective only, but generally the Congress' finest
hours do not occur when we are pressed to act quickly.
Mr. Keating. I think those of us who served at the State
level would certainly agree that the commerce clause would
cover the Congress' jurisdiction. The Congress could do that if
it wished. Secondly, I think as it has been done in many
instances in the past, for the Congress to set a bar and to say
this is a serious interstate problem and here is the bar that
we really want to be reached; we are going to attempt to reach
it with you in a spirit of comity and brotherhood and
sisterhood. It is probably better than a stick. I think it is
better to have a carrot. But I agree with you, I think the
purpose of this hearing is not only to anticipate running out
of money; to anticipate the need for more financial security
and more financial assets, but also to anticipate as a result
of the longer-lived population those abuses, those criminal
abuses that could and do occur within and to the senior
population. So I think that bar-setting, consistent with the
jurisdiction of the Congress, is not inappropriate.
Mr. Woods. Mr. Chairman, could I add something to that?
Chairman Baker. Sure.
Mr. Woods. I think we certainly agree with the governor.
This is a major problem, as you have pointed out. There are
millions of people in this situation; millions more to come
there. If the States do not act by some point, it seems to us
that we would support a default position that they would
naturally fall back to, because it is a critical issue. Mr.
Gallagher has pointed out some of the issues that can occur if
there isn't appropriate oversight and regulation. So I think we
would support that.
Chairman Baker. Well, it is good to hear a financial
adviser telling us to plan ahead. I like that.
[Laughter.]
My time has expired. Mr. Kanjorski?
Mr. Kanjorski. Thank you, Mr. Chairman.
I was struck by your testimony, Ms. Hounsell, in terms of
the gap of income that women experience. I guess if we look out
over the future, the next 40 years, that gap of income probably
should materially close, if not completely close. Wouldn't you
agree? So we are just dealing there with a 40-year problem.
Ms. Hounsell. I think the issues that I talked about, the
care-giving, all of those things, they have not changed and
they will not change. I know Newsweek just did a big article
saying that there are women that earn more than their spouses,
but it is a very small percentage of the whole work force. So I
do not think it will change. I think that is why it is really
important for women to understand early on in their careers.
Mr. Kanjorski. I tend to agree. That is what I was going to
get to. Listening to testimony and everything, from Mr.
Gallagher to Governor Keating, and Mr. Woods about the
potential fraud. How much fraud is out there? Are we talking
about 3 percent, 10 percent, 20 percent? Because it seems to me
that it be sometimes more expensive, both at the State level
and the Federal level, to try and prevent fraud, and maybe
those assets could be utilized in financial education. I am one
that is quite convinced that Americans across the board are
financially illiterate to a large extent. I think that probably
the best evidence of that is how they bought some of the stocks
they did when they did and where they went to. Maybe I would
even go beyond that and say, what I am worried about is we have
substantial people that are engaged in financial planning, the
sale of insurance products, these are very complicated. I know
when I talk to people in the insurance business, sometimes I
walk away spinning, not quite understanding what is the best
proposition, and yet here I have the benefit of 70 of my
colleagues who are the most educated on all these propositions
in the world.
The reality is that we do not have an educated electorate.
Should we just standardize situations, and then discourage or
prevent someone who fails a financial literacy test from
getting into those markets, the selling of those products that
you talked about Mr. Gallagher, and take the money that we are
spending to prevent fraud and spend it on education, or include
a large segment of education and put it into our school
systems, and literally encourage people to get smart.
I just want to add one caveat to that. When the market goes
wrong or people lose money on investments, they always want to
find fraud, misrepresentation and abuse, but I am struck with
the fact that right now in Washington, those of us who are
elected officials, and our two parties are in a tremendous
struggle to determine what is the best tax policy for the
United States, or recovery stimulation policy for the economy.
I would venture to say probably some of us could be indicted
for fraud because we cannot all be right, and we area almost
diametrically opposed. I listen to my good friend Alan
Greenspan and to Warren Buffett, and he tells us to do one
thing and what the effect will be, or the Committee on Taxation
that tells us what is going to happen if we pursue a certain
policy. On the other hand, I listen to some of the highest
officials in the nation who enjoy tremendous credibility with
the American people, and they will recommend completely
something diametrically opposite; and then I look at the
electorate, and they are dead split probably on the issue,
indicating that they are not making the best analysis of
understanding either.
If we cannot do that in national economic policy, national
financial policy, how can we expect the average constituent to
have the literacy necessary in financial understanding to
really protect themselves? And then the role is, how much
should government get involved? Wouldn't it be better to say if
you do not qualify in a certain way, you cannot get into that
product, and it is on the basis of the seller to qualify the
person and prove that they are literate enough to participate?
Mr. Gallagher. I will touch on that. That is one issue that
you did hear Mr. Woods mention, that the NAIC is looking at
ways to set up a qualification as to what product is right for
the person that is buying it. It is not an easy thing to do,
because certain products fit some people. I think the national
argument is that some people see one way of stimulating the
economy as totally different than the other sees it. Both will
probably stimulate it; the question is, which one is going to
do it in a way that the person sees it to benefit them better,
I guess.
That happens in investments all the time. There are a
myriad of investments because they fit different people's
needs. Mr. Scott mentioned the problem of people in predatory
lending. We have a major education going on in Florida on
predatory lending. Certain lending processes that go on are fit
for certain people. A person that has really excellent credit
should not get mortgages that cost a lot of money and have a
bunch of points. But yet, there are some people who because of
their credit problems might have to get a mortgage like that,
so it might be the only thing they can do and it might fit
them.
So different things fit different people. I certainly do
not think we ought to have a police force going out and saying,
and government should be involved in making the decision on
what is good for who. But I do believe that there are two
sides. One, enforcement of people that do abuse the laws that
we have to prevent fraud, that has to be a strong side. And the
other side is education. You also have to have the ability to
have people educated in what is right for them. I think you
have to have both.
Mr. Kanjorski. You know, I am struck, one of our fine
senators, I cannot recall his name right now, but he talked
about compound interest and what a small portion of the
American population understands the ramification of compound
interest. Maybe we ought to develop a Florida-type test that
you have to take, and if you cannot pass the test of
understanding compound interest, you are just disqualified from
the field. Would you recommend that we take that up with your
governor and include that as part of that final test down
there?
Mr. Gallagher. I would recommend you take it up with
somebody else other than me. I am not dealing with it.
[Laughter.]
Chairman Baker. Especially as long as it does not apply to
members of Congress.
Mr. Kanjorski. Alright. Thank you very much.
Mr. Woods. Mr. Chairman, could I add something to that
statement? You cannot legislate morality. That is a truism.
Education is the best defense against fraud and things like
that. That is the reason why the life insurance industry about
10 years ago created the Life and Health Insurance Foundation
for Education to provide that kind of financial literacy, which
is our word and your word. It is a good term. One of our major
programs is a high school education program, so that as these
consumers come into the marketplace, they have an understanding
of financial issues and how to address them and how to think
about them, and the kind of questions to answer. So I do not
think it is an either-or issue. I think it really is a
combination of both regulation and education.
Chairman Baker. Thank you.
Ms. Kelly?
Mrs. Kelly. Thank you, Mr. Chairman.
Mr. Woods, as I mentioned in my opening, my Subcommittee on
Oversight and Investigations held a hearing on viaticals last
year. I was really troubled by the complete lack of adequate
consumer protections for viaticals that there are in many
States, something that I thought was very surprising because of
the good work that has been done by the NAIC in developing a
consensus model of viatical law. At that time, it became clear
that Florida had an A-plus level of viatical protection. I
understand now that 12 States have implemented the new NAIC
model. Don't you think we need to make sure that more States
update their law so that everybody can be an A-plus in terms of
protecting the consumers? How would you recommend we try to
push that?
Mr. Woods. Well, the answer to the first question is easier
than the answer to the second. We do agree with that. We do
think that proper protection for consumers, disclosure, all of
those issues, are tremendously important. As the chairman said
earlier, they are at a vulnerable time in their lives. As far
as how to do it is concerned, that is a bigger challenge.
Perhaps a default mechanism that the chairman mentioned is one
way to do that; education of the legislators themselves and of
the commissioners themselves about the critical importance of
this process. I would not call it a product, but this process,
and how it can be abused and yet how it can also be very
helpful to people at an important time in their lives. It is a
challenge, but I think you are right to address it. The role of
this committee, it seems to me, is to continue to raise the
issue in the minds of the public and also regulators across the
country. I cannot give you a better answer. I wish I could.
Mrs. Kelly. Mr. Gallagher, I want to switch gears a little
and talk about your testimony, which I found very interesting.
It notes that allowing States to run a national fingerprint
background check on insurance producers and the company
personnel is probably the best way to weed out what we know are
wrongdoers before they get a chance to commit fraud. I was
interested in the kind of coalitions you were talking about
building here. Specifically, you talked about this
fingerprinting. It seems to me that you talk about how critical
it is if States expect us to establish a national agent's
licensing system like we did in NARAB. I helped to write that
NARAB legislation. I am interesting in how you perceive that as
working in light of, if it is the same way that we built the
NARAB legislation, or how you see that working.
Mr. Gallagher. I can tell you in a way how it does not
work, but also tell how it does. Let me just mention that we do
have in Florida fingerprinting for licenses. If you look at,
when I talked about viaticals, 35 basically applied; 17
withdrew. There is a reason they withdrew. They withdrew
because we do fingerprint background checks and they realized
they were not going to get a license in Florida because of who
they were. So many other States are unable to do this. That is
why I am pushing very hard for you all to allow us as State
regulators, especially on the insurance side, to have access to
the FBI database. Certain of us can because of our specific
laws and the way we operate; most of the States cannot. So
there are about four or five States, I think four that require
fingerprints before they allow an agent to be licensed in that
State; other States do not.
We believe that it is a very important consumer protection,
and the ability to stop things before they start by having that
fingerprint background check; and also share databases with
Federal and other States to know who has done what before we
give them a license, and wait until after they spend who knows
how many years before they get caught abusing someone again
with fraud, when they have already maybe been busted in another
State.
Mrs. Kelly. So if I understanding your testimony clearly,
what you are asking for is a Federal statute that would give
all States some kind of a uniform access to compare notes with
the FBI's fingerprint database. Is that correct?
Mr. Gallagher. That is correct. We believe that it would be
worthy. Insurance regulators are the only ones that don't.
Banking regulators and banks themselves have access to the
database, whereas insurance regulators do not. We believe the
fastest way for all insurance regulators to get that access and
to be able to compare with each other the information from NASD
as well as NAIC and other States would be to have the database
work out as well as have the access to the FBI fingerprint
files. It is a very simple access now. It used to take us six
weeks to get returns. We now do it all electronic. There are
electronically taken; they are sent in; we get 24-hour
turnaround. So this is not a time-consuming thing. The FBI has
updated their fingerprint process. We have done it in most of
the States. So it is electronically done, so it really is a
very smooth, easy thing to do, as opposed to what it used to be
with the cards.
Mrs. Kelly. But you need a Federal statute to do it?
Mr. Gallagher. We believe that is the fastest and best way
to get it done, and have us up and running. You in the Congress
in 2001 did the bill that would allow that. The Senate has not
quite gotten to it yet, but we encourage you to keep it moving,
and maybe even let that go by itself. Sometimes it gets so many
other things attached that it does not move. But just allowing
that access we believe for insurance regulators would make a
major difference.
Mrs. Kelly. Thank you, Mr. Chairman.
Chairman Baker. Thank you very much.
Mr. Gallagher, just to clarify, I should not interpret your
remarks representing NAIC today for a national standard to in
any way be inferred or any implications with regard to national
charter. Is that correct?
Mr. Gallagher. We have been pretty strong in our stand on
the problems that could come by that, but we are willing to
work with you on any ideas you may have.
Chairman Baker. I am sorry. I just could not pass up the
opportunity.
Mr. Gallagher. I understand.
[Laughter.]
Chairman Baker. Mr. Scott?
Mr. Scott. Thank you, Mr. Chairman.
This has been a very invigorating discussion and such a
distinguished panel. I would like to ask a series of questions,
first to you, Governor Keating. It seems to me that as a former
governor and now the head of the American Council of Life
Insurers, you represent over 380 individual companies. You
mentioned two areas that I would like to examine a little
further and get your thoughts on, that I find challenging. One
is the strains that we are faced with in our economic
infrastructure, with the baby boomers. You mentioned that their
average age is between 55 and 64, and their average savings is
only $47,000. We have got the strains on Social Security and
Medicaid.
My first question is, given this, what do you recommend
that we in Congress do in reference to the stability of
Medicaid and Social Security? That is the first part of my
question, what we can do here, and what further impact is this
going to have if we do not do something. And what do you
recommend that we do in these two specific areas, given your
position not only now as the head of the life insurers, but as
a former governor?
Mr. Keating. Congressman Scott, that requires a Solomaic
answer, and I am not sure that I am in a position to provide
it. Obviously, if I were able to tell you how to solve Social
Security once and for all and Medicare once and for all, I
would probably be on the talk show circuit and in every living
room in America, because all of us are groping for that answer.
The reality is, as you know, that the country made a
commitment, our nation made a bipartisan commitment to have a
Medicare system to care for the elderly, long-lived now, more
than ever before, for their health care needs. The burden
obviously on the States and on taxpayers is very large to do
that.
The same is true of Social Security. My children, and I am
a grandfather for the first time last July, on the fourth of
July, by the way, and expect to have another grandchild by
another daughter this July, though probably not the fourth,
they do not think they are going to have Social Security. They
just simply do not anticipate that they will. Well, that
commitment that they will have Social Security and what is
assured them will be paid I think is very important. How do you
get there, with the lengthening life spans? Obviously, here in
the Congress you debate older retirement ages, older ages for
access to Medicare, as well as to Social Security, and that
debate should continue.
I think at the same time, as Mr. Woods said and as I know
the chairman mentioned in the discussion of education, people
have to understand that that is not the only thing. Whatever
robust Social Security or Medicare system there is out there,
or whatever diminished Medicare or Social Security system is
out there, people have to have personal responsibility; they
have to have personal knowledge of their finances; they have to
have a personal commitment to take care of themselves. That is
very difficult. I cannot over-emphasize the significance of
congressional investigative subcommittees or committees going
into the States. They are covered by all the newspapers, all
the television, all the radio. You can in one hearing sensitize
the entire population of a State about an issue. To take these
issues and go into the States and debate Social Security and
Medicare at the same time, and get ideas from citizens and from
elected officials to solve a problem that is a serious problem
20 years from now, if not perhaps even 10 years from now, I
think is very, very meritorious.
To have joint discussions with State leaders and with State
policymakers, especially those of us on the State level that
are charged to pay out of State resources a large bit of the
Medicaid bill, that is very important. And that is very
bipartisan and very essential. But there is simply no way, as
you know, to say in one sentence how to fix Social Security or
Medicare. It is just that in one sentence, I think the average
American would say to us, those of us who have been elected and
those of you who are now elected, that we expect for that
contract to be honored.
Mr. Scott. Let me just ask another question. That was one
area. The other is, as I mentioned in my opening statement, we
are working in this committee on financial literacy. I have
introduced a bill, working with other members of this
committee, to find a way to target information. One of the
tools that we plan to use is the establishment of a nationwide
toll-free number, because it is a two-way street. You can have
it available, but if we can find some kind of way to have a
lifeline out for these individuals to get information back and
to target it.
Ms. Hounsell, I think you hit my point a little bit. There
are targeted groups. I think there is probably no group, quite
honestly, in more need of this than African American women. I
would like to hear what you recommend, and if there are others
here, I would like to know what specifically each of you all
are doing in the areas of getting financial education,
financial literacy to some of these most impacted communities.
Again, Governor Keating, I think you hit it on the head when
you said that financial literacy is more than just knowing the
difference between stocks and bonds; it is more than knowing
enough about saving money. It is the responsibility of managing
those assets over a lifetime. I think if we do nothing else in
this committee, to deal with financial literacy and arm our
people with the information they need, if no more than just
simply say before you sign on the bottom line, call this
number.
That is the approach that we are hearing. I would like to
hear from you what each of you are doing, if you would care to
comment, and have anything that you are moving in the area of
providing financial literacy, especially for the most impacted
and vulnerable groups like African American women.
Ms. Hounsell. We have a grant from the administration on
aging, and one of the things we have tried to do is really get
into the communities, so we work with a lot of different
groups. In fact, two weeks ago, I was at the National
Conference of Black Mayors where we do a workshop every year
with the women mayors. A number of them are taking our program
and then doing it in their community, whether they do it in the
churches or wherever they can, a library. That is where people
are willing to do. They need to hear it in their home base. One
of the reasons I think we have had so much success is because
we then have somebody in the community bring us in, and we
train them. One woman that we trained about six years ago in
Atlanta has done over 90 trainings, and she has hit more than
5,000 people. A lot of these people then take the information
to other people. I think that you need more than just giving
people a Web site. I am always saying that to people. You know,
you go home, I mean to do a lot of things when I go home, and
the last thing, you know, there are things I could learn on the
Web site myself, but the last thing I am doing when I go home
is turning on the computer and trying to do that. When you have
working people with so many other demands on their time, they
just do not get to doing it. But if there is a program at the
library or at the church on a Tuesday night, and somebody says
you have to come hear this, they will come.
Ms. DeSalles. And we at AARP have long been active in the
area of providing financial education through sophisticated
means such as research that we do and our very excellent Web
site, all the way down to individual workshops out in the
community and in the churches. One of our very successful local
efforts was a financial education series called ``Women, it is
time.'' We concentrated on the fact that women typically,
particularly lower-income women, do not bring with them the
financial expertise that other groups do.
There is absolutely a need for as much financial education
and increased financial literacy as we can provide, but we need
a level playing field. People have to be responsible and make
their own decisions, but they should do so in an area that
protects them. That is why we are also pushing for changes in
the regulatory environment so that when people get the
wherewithal to make those decisions, then they are making the
decisions in an area that is protected somewhat, if you want.
It is necessary to have them both. I believe Mr. Woods talked
about the needs for the equal thrust, and we agree with that.
Chairman Baker. Mr. Scott, a couple of our witnesses have
to leave in the next few minutes, and I would like to afford
the opportunity.
Mr. Scott. Sure.
Chairman Baker. Thank you, Mr. Scott.
Ms. Harris?
Ms. Harris. Thank you, Mr. Chairman.
This question is for Mr. Woods. In your testimony, you
mentioned the role that the insurance agents are the first line
of contact for many of our seniors, in terms of their adviser
or their educator on various insurance products. Bearing in
mind that the agents have to rely on their commissions, what
other types of information does your organization provide in
education to help protect the consumer?
Mr. Woods. The Life and Health Insurance Foundation for
Education provides, this really gets to Mr. Scott's question as
well, several levels of education. We have a broad-based
education program for high school students, primarily juniors
and seniors. Last year in 2002, 25 percent of the high school
juniors and seniors in the country were exposed to this
program. In the State of Utah, it is a mandated program. We
have a very large Web site. We are adding a big section on
long-term care, which will be up in July, as well as life
insurance, disability insurance, health insurance, all of the
other kinds of insurance coverages.
We also are part of a couple of coalitions, Jump Start
coalition, which some of you may be familiar with, is a
coalition of many organizations dedicated to providing
financial literacy, particularly at the early stages of life.
We are also a part of an effort on the part of the National
Endowment for Financial Education to provide financial literacy
across the country in various venues. It is a massive job. We
have not done this very well or at all forever, I suspect, and
really the effort has begun in the last five or ten years. We
are very proud that the insurance industry has made this
investment in this effort.
The other thing is, and Congressman Lucas can attest to
this, he pointed out his credentials in the insurance industry,
the best teacher of all, the best educator of all is a
knowledgeable and qualified life insurance agent. Consumer
study after consumer study indicates that that is where people
get their information, and they want to get their information
from them.
Ms. Harris. Certainly. And I think the programs for young
people that you mentioned are laudable. We are just concerned
about seniors as well. Again, it is just the perception that as
these well-qualified planners are dependent on commissions,
just that there are other opportunities for seniors to evaluate
versus that specific information, that they are the only
source.
Following up on that with regard to AARP, we have heard a
lot of discussion about the need for a financially literate
senior population. Based on your research, where do most
seniors turn for that information?
Ms. DeSalles. I am sorry, the last part of the question?
Ms. Harris. Where do most of your seniors turn for
financial information?
Ms. DeSalles. They turn to a variety of sources,
newspapers, magazines, friends and families. Our research, and
I do not have those percentages right in front of me; it is in
the written statement, but they get that information from a
variety of sources. The problem is, they do not get enough
information at an age when they need to start planning. The
information is out there if you are savvy enough to look for it
and seek it out, whether on the Web or magazines and newspapers
or financial planners, but people just are not getting it.
Ms. Harris. As the largest advocacy group, do you launch
that type of information when they first join? Do you have
other opportunities for them to educate themselves concerning
fraud and abuse?
Ms. DeSalles. We take advantage of every opportunity we
can. Primarily, our biggest method of communicating with our
members, of course, is our AARP magazine, as well as the
Bulletin, which goes to over 20 million households, reaching
our 35 million members. But we use not only those articles, but
we use an extensive volunteer network to provide in many cases
one-on-one information to people. We have pamphlets, booklets
that we make available not only to individuals, but to groups,
to other people that want to avail themselves of our research.
We are noted for the quality of the research that we provide,
and we are very proud of it. We make it available to other
researchers and institutions, private individuals. We cover the
waterfront.
Ms. Harris. You certainly are one of the first lines of
defense with regard to information to so many of our seniors.
Mr. Chairman, one final question to Mr. Gallagher. You
testified that the average age for the viatical investor is
over 70, and the majority of viatical provider applications in
Florida have failed to gain approval. Notwithstanding the
national charter that you mentioned earlier and discussed with
the chairman, since viatical fraud is a growing problem, and
you have discussed the fingerprinting, the use of FBI databases
and also cross-checking with other States, what else can
Congress do to make it easier to protect our seniors?
Mr. Gallagher. I think if we did that, we would go a long
way. I don't like to repeat myself, but I think if you try to
do too many things, nothing gets done.
Ms. Harris. This database information is the first line of
defense, you say that is the single most important thing we
could do?
Mr. Gallagher. The most important thing is having that
database. The fraud database is certainly number one. And
access by State insurance regulators to the FBI fingerprints
can help the States do what Florida does, and we also can do it
better when other States have the ability to get in there and
do theirs.
Ms. Harris. So there is no wish list, that is the main
thing?
Mr. Gallagher. I would like to just keep it in and keep it
real simple, and we believe that that would have a lot of good
things to help the elderly and protect them before the fraud
happens, than go arrest somebody afterwards.
Ms. Harris. Thank you.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Ms. Harris.
Mr. Lucas?
Mr. Lucas of Kentucky. Thank you, Mr. Chairman.
Mr. Woods, I want you to know that you are not alone being
on Medicare. I probably preceded you there by a few years.
Mr. Woods. I could not tell by looking at you.
[Laughter.]
Mr. Lucas of Kentucky. You ought to be in politics.
Mr. Kanjorski was talking about education against consumer
fraud, but from my limited experience, I think we have got to
protect the people. There are a lot of naive folks out there,
and there are a lot of intelligent people in their certain
fields, but I like the idea, Mr. Baker, that we have a Federal
default position, give the States some time to do something
about this, but if they do not, then I think we need to step
in. I would like to hear from the panel about that, but I will
make a couple of other comments, and then I would like for you
to answer that.
I think unfortunately by the time people get to be members
of the AARP, it is a little late for savings. You have got to
protect what you have, because I think the key to saving is as
we all know the magic of compounding. If we could get people to
save a little bit earlier with the compounding and dollar-cost
averaging, I think that would be it. Also, I think the old
adage of put all your eggs in one basket and watch that basket,
is a very dangerous example to set, talking about the people of
Enron and others who put all their eggs in one basket and where
that basket went. I was a great believer in functional
allocation and trying to get people to do something early.
I would commend Mr. Gallagher for what the State of Florida
has done in this viatical transactions problem, and I would
hope, Mr. Baker, that we might come up with some legislation
that would protect people in those States where the States have
failed to take action. I think that would be very meaningful
and very helpful to our people. But I would be interested in
any of you folks on the panel making your comments about that
particular issue. Should we come up with a default position as
the Federal government for States who fail to act?
Ms. DeSalles. I am not a technical expert on that, but
certainly AARP would be willing to, our staff that are experts
on this, work closely with the subcommittee in exploring that
issue. That offer just stands for us.
Mr. Lucas of Kentucky. Anybody else? Does it make sense?
Mr. Woods. Yes, certainly from the National Association of
Insurance and Financial Advisors' standpoint, Congressman
Lucas, we are already working actively with the States to get
them to adopt the model, but we would support the default
position for the very reasons the chairman and others have
indicated. It is a critical issue for seniors at a very
vulnerable time in their lives. I think they would be
supportive of that.
Mr. Lucas of Kentucky. Thank you.
Chairman Baker. Thank you, Mr. Lucas.
Mr. Tiberi?
Mr. Tiberi. Thank you, Mr. Chairman. I apologize for coming
in late. I had another markup, and I apologize I missed the
testimony from the panel.
Governor Keating, the issue of annuities has kind of
bubbled up and made some news lately. Can you talk to us, and I
apologize if it was in your testimony, about the differences
between variable and fixed annuities, and how one is preferable
to another for seniors to choose from?
Mr. Keating. It is difficult for me to give any specific
financial advice because you do not know, as David Woods said,
the circumstances of each individual, their age, their
financial knowledge, their dependents, their financial
challenges, and obviously their assets. But a fixed annuity
provides a set steady stream of income. A variable obviously
varies with the market, and most particularly the stock market.
I know recently, after seeing three years of calamity in the
stock market, and living in public housing in a State residence
for eight years, I bought from my brother, who is a financial
planner, a variable annuity. To be honest with you, I feel
pretty good about it. We bought my mother-in-law a long-term
care policy, and she feels 20 years younger.
So as Congressman Lucas pointed out, to put many different
eggs in many different baskets; to have something that is
fixed; to have something that rides with the market tide; to
have real estate and the like, whatever you can do to make
yourself more diverse and make yourself more knowledgeable
about your assets and do not keep everything frozen forever,
that is wise financial planning. But an annuity is a wing-man
relationship to the Social Security system. I think you can get
them for very little money or a lot of money, but to have a
defined benefit check from Social Security and a defined
benefit check from your annuity that you cannot out-live is
very sound planning. Hopefully in my own case, I have done
something wise for once.
Mr. Tiberi. Following up on that, Governor, is there
something that we can do in Congress to help people purchase
annuities, tax advantages? Is there something we can do to help
seniors?
Mr. Keating. Remember that the annuity has a tax-free
buildup. The reason for that is you cannot get anything out
until you're 59 1/2, and you have by law and by practice, a lot
of serious penalties if you do so. It is the only product out
there that encourages people to save long term to provide for
their retirement, in effect, that wing-man or companion
investment to Social Security. Obviously, we feel that whatever
comes through the Congress to provide for the goose equally to
the gander is very important. If I have 100 shares of General
Electric, for example, in my annuity, if the Congress sees fit
to provide that 100 shares outside of the annuity with tax-free
treatment, it is only wise to provide the 100 shares within the
annuity for tax-free treatment as well.
This is not just, Congressman, an issue of fairness, but of
good social policy, because if all of us become consumers only;
if all of us become spenders only, we do not think about 20
years from now. We don't care about it. If I have to pay taxes
right now on whatever I invest in an annuity, for example, or a
savings retirement vehicle, I will not do it. I will not do it.
I will buy a boat or I will take a vacation. But to the extent
that those products can continue to have fair, equal tax
treatment and not tax the build-up, and when we take out, of
course, we would love to see capital gains treatment, that is
the way to have more people buy annuities. There are about 57
million annuity contracts out there in existence.
Mr. Tiberi. You mentioned long-term care insurance. One of
the things, I was in the State legislature in Ohio, and one of
the things that we tussled with was how to encourage
particularly baby boomers at this point in time to purchase
long-term care insurance. Is there something Congress can do to
encourage more people to purchase long-term care insurance?
Mr. Keating. There are a number of bipartisan measures to
provide an above-the-line deduction for long-term care. Realize
that for you writing the checks, from us and yourselves as
taxpayers, to provide an opportunity for Medicare to be secure
in the future should also include an opportunity for an
alternative to Medicare if you wish, a supplement, a companion
to Medicare, which is long-term care. So that an individual can
stay in their home, something Medicare does not permit, and
have an insurance policy help them be secure and be in a
dignified environment in their home. To use tax policy to
encourage that kind of very wise social policy is unfortunately
the only way you are probably going to have a lot more people
participate. For example, there are only eight million long-
term care policies in existence today. With a population of 280
million people or whatever the figure is, it rises every month,
that is an insignificant number of people buying what is in my
judgment an extraordinarily important product.
Mr. Tiberi. Thank you, Governor.
Mr. Keating. Yes, sir.
Chairman Baker. Thank you, Mr. Tiberi.
Ms. Brown-Waite?
Ms. Ginny Brown-Waite of Florida. Thank you, Mr. Chairman.
I apologize, too. We had a markup in the Veterans Committee, or
I would have been here sooner.
The question is for Mr. Gallagher. Mr. Gallagher, you
testified that the current 2001 NAIC model law on viaticals
should be adopted by all States, and that State laws must
change to recognize the changing marketplace. I have been
actually working with the chairman of the committee to draft
legislation that will address this issue. Both Chairman Oxley
and Chairman Baker, along with the staff, have helped us work
on a bill that will very closely follow the NAIC model law, and
will set that as a default for States with little or no
regulation on viaticals. Obviously, under this plan States with
little or no regulation of the viatical industry will have a
certain amount of time to adopt the model law. However, if a
State would like to strengthen the law on an ongoing basis, the
legislation would also include a specific provision to allow
just that. Certainly, in the State of Florida, we have had the
viatical law since I was there in 1996 when we passed it, and
we had several amendments to that law to actually strengthen it
and improve it. I know the great job that you have done, and
the recovery that the State has been able to obtain as a result
of abuses of our viatical law have been very pro-consumer and
certainly have set an example for many other States.
I just had a question, and that is, do you think that
seniors and other consumers would be better protected if all
States had used some updated version of a viatical law similar
to what Florida has? I know that there are only about 11 now
that actually have similar laws.
Mr. Gallagher. I can say partially yes. But I say
``partially'' because many States, even if they had the laws,
do not have the ability to go into the FBI, get the
fingerprints, and keep people from being able to get into the
business and create the fraud. So you are much better off
closing the door before they come in, as opposed to allowing
them in to perpetrate a fraud, and then have the laws that
allow you to go arrest them because they have carried out that
fraud.
Ms. Ginny Brown-Waite of Florida. Mr. Chairman, a follow-up
question? I know that in Florida, one of the things that we did
was we, for example nursing home employees and directors have
to be fingerprinted and subject their names to the FBI. Would
that be a good, I mean, that is at the beginning of the
process? Would that be a good addition to this bill?
Mr. Gallagher. Yes. I think any access that you can give to
enable State regulators that have the responsibility to carry
out viatical fraud regulation, because it is considered an
insurance product. In my belief it is also a securities product
because they are taking and making a security out of some of
the products that they are selling, to see to it that there are
the background checks of those individuals that are involved in
it, as you have in nursing homes, yes, that should be done. And
any help that you in Congress would do to allow the access to
those files of fingerprints would certainly help the States.
Ms. Ginny Brown-Waite of Florida. And you cannot do that on
your own?
Mr. Gallagher. Florida can, so that is why we are probably
on the forefront of what we have been able to do in regards to
keeping people out of the business. We have a lot of elderly
and a lot of people like to come to Florida and commit fraud.
We are strong on those that do it, but we have kept a lot of
people from doing it because we did not let them in.
Ms. Ginny Brown-Waite of Florida. Great.
Mr. Gallagher. I think other States having that ability
would be a real plus.
Ms. Ginny Brown-Waite of Florida. Thank you, Mr. Chairman.
Thank you very much, Mr. Gallagher.
Chairman Baker. Thank you, Ms. Brown-Waite.
I want to express my appreciation to each of you, and make
a request. To the extent not contained in your submitted
official testimony, which of course is made part of our
official record, any brochures, informational material, the
examples that you gave us during your presentations here this
morning, if you have information that is for retail
distribution to folks that are of an educational nature, the
committee would like to get that for purposes of incorporating
it into our own informational base. The subcommittee has 47
members, each of whom represent in excess of 600,000 people. If
just the members of this committee engage in some informational
distribution, it would be extremely helpful, if it is nothing
more than just a list of 1-800 numbers. So if nothing else were
to come of the hearing this morning, that would be of
significant help to the committee in understanding the scope of
what is being done, and assimilating it into our own offices.
Secondly, I think the issues raised and the perspectives
given are very helpful to us. This is a beginning step. It is
certainly not a conclusion. To the extent any member wishes to
add additional comments or questions for the record, it will
remain open for a period of time. We certainly appreciate your
willingness to participate, and we look forward to working with
you in the future.
If there are no further comments, our meeting stands
adjourned. Thank you.
[Whereupon, at 11:49 a.m., the subcommittee was adjourned.]
A P P E N D I X
May 15, 2003
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