[Senate Hearing 111-188]
[From the U.S. Government Publishing Office]
S. Hrg. 111-188
SOCIAL SECURITY: KEEPING THE PROMISE IN THE 21ST CENTURY
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HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC
__________
JUNE 17, 2009
__________
Serial No. 111-8
Printed for the use of the Special Committee on Aging
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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SPECIAL COMMITTEE ON AGING
HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon MEL MARTINEZ, Florida
BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama
EVAN BAYH, Indiana SUSAN COLLINS, Maine
BILL NELSON, Florida BOB CORKER, Tennessee
ROBERT P. CASEY, Jr., Pennsylvania ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado
ARLEN SPECTER, Pennsylvania
Debra Whitman, Majority Staff Director
Michael Bassett, Ranking Member Staff Director
(ii)
C O N T E N T S
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Page
Opening Statement of Senator Herb Kohl........................... 1
Statement of Senator Mel Martinez................................ 3
Panel of Witnesses
Statement of Leon Burzynski, President, Wisconsin Alliance for
Retired Americans, Pewaukee, WI................................ 4
Statement of Kenneth Apfel, Professor of the Practice, School of
Public Policy, University of Maryland, College Park, MD........ 9
Statement of Joan Entmacher, Vice President for Family Economic
Security, National Women's Law Center, Washington, DC.......... 18
Statement of Melissa Favreault, Senior Research Associate, Income
and Benefits Policy Center, Urban Institute, Washington, DC.... 30
Statement of John Irons, Research and Policy Director, Economic
Policy Institute, Washington, DC............................... 51
Statement of Andrew Biggs, Resident Scholar, American Enterprise
Institute, Washington, DC...................................... 61
(iii)
SOCIAL SECURITY: KEEPING THE PROMISE IN THE 21ST CENTURY
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WEDNESDAY, JUNE 17, 2009
U.S. Senate,
Special Committee on Aging,
Washington, DC.
The Committee met, pursuant to notice, at 2:04 p.m. in room
SH-216, Hart Senate Office Building, Hon. Herb Kohl (chairman
of the committee) presiding.
Present. Senators Kohl [presiding] and Martinez.
OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN
The Chairman. Good afternoon to everybody, and at this time
we'd like to commence our hearing.
We all appreciate your attending this hearing on Social
Security. The last time the Senate took a close look at the
program, we were responding to the former administration's plan
to privatize the program, as you remember, with investment
accounts.
Four years later, I think we're all thankful that effort
was not successful and Social Security was not exposed to a
stock market that has devastated the retirement savings of so
many people over the past year. The impact of the financial
downturn provides a stark contrast to the dependability of
Social Security, and it's also a reason that the program's
guaranteed inflation-protected benefits are more vital to
Americans, now more than ever.
More than just a retirement program, Social Security is a
collective insurance policy, protecting us all from the
possibility that we die young and leave a family behind, become
disabled and not able to work, or even live into a ripe old age
and beyond our savings. Because we all pay into the program,
the cost of this insurance is relatively low, given the
significant monetary benefits individuals receive in exchange.
For example, the survivor benefit is equivalent to a 433,000
life-insurance policy, and disability benefit is equivalent to
a $413,000 disability insurance policy for a young family.
Consider this as if a couple wanted to buy the same income
protection they would receive from Social Security retirement
benefits, they would have to pay over a half a million dollars
to buy an inflation-indexed annuity in the private market.
However, as crucial as the program is today, the fact that
it was designed in another era--the fact is that it was
designed in another era. In 1935, when Franklin Roosevelt
signed the Social Security Act into law, women mostly worked in
the home and did not generate their own earnings, and so the
program was designed to provide benefits for spouses and
widows. Today, women make up nearly half the work force,
earning their own benefits and contributing to the strength of
our economy. Also, people did not live as long back then, the
life expectancy back then was 62. Today, someone who retires at
age 65 can expect to live to the age of 83. As Social Security
nears its 75th anniversary, it's time to take a fresh look at
the retirement program to ensure that it will be just as strong
in another 75 years.
The changes in benefits that have taken place in our
society should be mirrored in the types of benefits Social
Security provides and in the way we raise revenues. Today,
we'll place a particular focus on making sure that the most
vulnerable in our society are not left behind as we examine
ways to strengthen benefits.
When Social Security began in 1935, 50 percent of seniors
lived in poverty. Today that number is below 10 percent. While
the program has been incredibly successful at reducing poverty
among the elderly as a whole, poverty still remains high for
some groups, including those aged 85 and over, older single and
widowed women, as well as minorities. Nearly one-quarter of
elderly African Americans and more than one-sixth of elderly
Hispanics today live in poverty.
As we begin the discussion about making changes to the
program, we need to keep in mind that Social Security benefits
are not overly generous. While Social Security makes a critical
difference in the lives of tens of millions of the American
elderly, disabled, and survivors, the average retirement
benefit is only $1153 a month. Yet, despite these modest
payments, Social Security is still a vital lifetime, because,
over 40 percent of all older Americans, Social Security is what
provides nearly all of their income.
We all know that healthcare reform is the No. 1 priority of
the administration and of my colleagues here in the Senate and
across the Capitol. But with an urgent need to contain the
Federal deficit, there's no doubt that, sometime soon, all eyes
will turn to Social Security. When that time comes, this
committee wants to be prepared to act as a repository of ideas
for reform proposals. As our witnesses will confirm today,
Social Security can be strengthened, benefits for those who
need them most can be increased, and long-term solvency can be
ensured, with just a few relatively small, relatively
commonsense changes.
So, we'd like to thank our witnesses today for their
willingness to participate. We look forward to their testimony.
Before we get to them, we turn to the ranking member on this
committee, Senator Mel Martinez.
OPENING STATEMENT OF SENATOR MEL MARTINEZ, RANKING MEMBER
Senator Martinez. Thank you very much, Chairman Kohl.
I appreciate you calling this hearing today on this very
important issue to so many Americans, those who are, today,
receiving their Social Security benefit, and those of us who
anticipate that in the future. Preparing to live on a fixed
income can often be worrisome, which is why Americans deserve
to know that they will receive their fair share of Social
Security upon their retirement. Social Security has been a
primary source of income for retirees and disabled Americans
for many decades.
For one-third of Americans 65 years and older, Social
Security benefits constitute 90 percent of their total income.
Social Security is safe today for seniors, but unfortunately
it's in serious danger for our children and grandchildren.
That's why Social Security reform remains a top priority for
our nation.
For states like Florida, the home to 3.4 million
beneficiaries, it is essential. At risk is the Social Security
trust fund, which has helped to ensure generations of Americans
receive what they have been promised.
As the number of baby boomers retiring increases, and more
Americans begin to receive their share, it's clear the
financial foundation of Social Security is weak. There won't be
enough money to meet its future obligations, and fixing the
system is long overdue. In 1950, there were about 16 workers to
pay every beneficiary, but today there are about 3 workers to
support each person collecting Social Security. Without some
sort of change, by 2016, the government will begin to pay out
more in Social Security benefits than it collects in payroll
taxes. By 2034, the Social Security Administration expects
we'll have almost twice as many people 65 and over than there
are today, and that will be 74 million seniors. If we don't act
now, by 2037, when today's workers who are in their mid-20's
begin to retire, the program will only have enough revenues to
pay about 75 percent of benefits.
Under current law, Social Security has a total unfunded
obligation of more than $10 trillion. A 2001 White House report
on Social Security stated, and I quote, ``As time goes by, the
size of the Social Security problem grows, and the choices
available to fix it become more limited.''
Eight years later, the problem remains unsolved. There are
a variety of plans and ideas that have been proposed to fix
Social Security, but unfortunately we've not reached a
consensus on how best to do this.
We need to work together, here in Congress and with the
President, to determine the best elements of the proposals that
have been put forward. I look forward to hearing from our
witnesses today, and I'm certain they will underscore what we
already know, that the longer we wait to take action, the more
difficult and expensive the changes will be.
Thank you, Mr. Chairman.
The Chairman. Thanks very much, Senator Martinez.
Our first witness today will be Leon Burzynski, the
President of the Wisconsin Alliance for Retired Americans.
Mr. Burzynski is also a member of the IBEW and Executive
Board Member of the Wisconsin AFL-CIO.
Our next witness will be Kenneth Apfel, Professor at the
University of Maryland School of Public Policy. Mr. Apfel
served as commissioner of the Social Security Administration
under the Clinton administration from 1997 until 2001. He also
served at the Office of Management and Budget at the U.S.
Department of Health and Human Services, and also as the
Legislative Director for Senator Bill Bradley. Today, he's
known for his research in public management and leadership,
with a particular focus on aging, healthcare, and retirement
issues.
Next, we'll be hearing from Joan Entmacher. She's the Vice
President for family economic security at the National Women's
Law Center. Prior to this time, Ms. Entmacher worked for the
National Partnership for Women and Families, the Massachusetts
Attorney General's office, and also the U.S. Department of
Labor. She's also taught political science at Wellesley
College.
Next, we'll be hearing from Dr. Melissa Favreault. Dr.
Favreault is a Senior Research Associate at the Urban
Institute's Income and Benefits Policy Center. Her primary
research interests include aging, social policy, and the life
course, and is one of the most--one of the foremost experts at
modeling how Social Security reform will affect different
populations.
Next, we'll be hearing from Dr. John Irons, from the
Economic Policy Institute. He's previously served as the
Director of tax and budget policy at the Center for American
Progress, and also as an Assistant Professor of economics at
Amherst College. Additionally, Dr. Irons has worked for the
Brookings Institution, as well as the Federal Reserve Board of
Governors.
Senator Martinez, would you like to introduce the final
witness?
Senator Martinez. Thank you, Mr. Chairman.
I would like to introduce Mr. Andrew Biggs. Mr. Biggs is
currently a Resident Scholar at the American Enterprise
Institute. Previously, he was the Principal Deputy Commissioner
of the Social Security Administration, where he oversaw SSA's
policy research efforts, and led the agency's participation in
the Social Security Trustees Working Group.
Thank you.
The Chairman. Thank you so much.
As you can see, we have a very distinguished group of
panelists, and we're looking forward to hearing your 5-minute
comments before we engage in conversation.
We'll start with you, Leon.
STATEMENT OF LEON BURZYNSKI, PRESIDENT, WISCONSIN ALLIANCE FOR
RETIRED AMERICANS, PEWAUKEE, WI
Mr. Burzynski. Thank you, Chairman Kohl.
Mr. Chairman and members of the Special Committee on Aging,
my name is Leon Burzynski. I'm the president of the Wisconsin
Alliance for Retired Americans, representing more than 89,000
Wisconsin retirees, and part of the National Alliance for
Retired Americans, representing more than 4 million retirees
across the nation. We are dedicated to the economic and health
security for current and future retirees. I greatly appreciate
this opportunity to testify on the importance of strengthening
Social Security.
Senator Kohl, I especially want to thank you for all your
efforts on behalf of Wisconsin retirees and seniors.
The theme today, ``Social Security: Keeping the Promise in
the 21st Century,'' is as relevant now as any time in the
history of the program. The recent economic downturn clearly
demonstrates that the guaranteed benefits of Social Security
are the foundation of retirement security. We in the Alliance
for Retired Americans believe Social Security is vitally
important for current retirees, our children, and our
grandchildren.
Please consider. Social Security is America's family
insurance policy. Retirees, workers, surviving spouses, and
children all benefit from the program. Two, two-thirds of
retirees receive more than one-half of their income from Social
Security. If Social Security did not exist today, about 40
percent of retirees over 65 would have incomes below the
poverty level. Finally, it provides a steady stream of income,
with built-in protections against excessive inflation, that you
cannot outlive.
I'd like to share four personal stories from members of the
Alliance for Retired Americans of how Social Security has
helped them and their families.
Let's start with Michael Ott, from Hilbert, WI, who ran the
family farm until it became impossible to compete with large
corporate farms. Michael ended up with a part-time job, at just
over the minimum wage. At age 62, he began collecting Social
Security, and was getting by. Michael had been sick, but was
hoping to make it to 65 and have Medicare. Unfortunately, he
ended up in the emergency room, where he was diagnosed with
congestive heart failure. As a result, he had to stop working.
I ask you, what would Michael have done without the guaranteed
$600 a month he received from Social Security?
Without Social Security, Jed Jennings, a cancer patient
from Bow, NH, would be unable to pay for her chemotherapy and
medications. The Social Security she receives also helps pay
for her food and regular household expenses. These benefits
play an important role in her life, and she can state
confidently that if Social Security did not exist, her income
would be inadequate to cover her expenses.
Finally, Art Palian, from Cedarburg, WI, is a retired
teacher. When he was 17 years old, his father died, and during
this difficult and challenging time, Art's mom received
survivor benefits that helped in raising her six children. Art
has stated, on a number of occasions, that Social Security
benefits kept his family intact after the passing of his dad.
Bob Kirkner of King, NC, is 70 years old, a proud father
and grandfather. He retired with a good pension after 34 years
as a mechanic for U.S. Airways. When U.S. Air first declared
bankruptcy, Bob's health insurance payment went from $40 to
$600 a month, until he received his Medicare and VA benefits.
After the second bankruptcy filing, Bob's pension was cut
drastically, and his Social Security check, that was a
supplement, is now half his income. Even with Medicare and VA
benefits, his healthcare costs are almost $400 a month.
With all due respect to those claiming the program's in
financial crisis, we strongly disagree. According to Social
Security trustees, the program will have enough funds to pay
full benefits through 2037, and about 78 percent thereafter. In
consideration of our children and our grandchildren, we're not
suggesting Congress do nothing. However, the time is
approaching when Congress will need to take action to extend
the solvency of Social Security. One simple solution is to
restore the earning caps to the historical level of 90 percent
of all wages earned. The erosion to the current level of 82
percent has derived the Social Security Trust Fund of income to
insure payments for future beneficiaries.
In conclusion, Mr. Chairman, Social Security has been the
underpinning of our country's safety net. We believe President
Obama and Congress should be able to restore its solvency
without making radical changes to this fiscally responsible
Federal program that's essential for our security.
Thank you for listening to me and giving me this
opportunity to speak.
[The prepared statement of Mr. Burzynski follows:]
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The Chairman. Well, that's a remarkable statement, for many
reasons, one of which is it's exactly 5 minutes. [Laughter.]
Exactly. Thank you, Leon.
Mr. Apfel.
STATEMENT OF KENNETH APFEL, PROFESSOR OF THE PRACTICE, SCHOOL
OF PUBLIC POLICY, UNIVERSITY OF MARYLAND, COLLEGE PARK, MD
Mr. Apfel. You established quite a standard that I'll try
to live by.
Senators, it's an honor to be back in the Hart Senate
Office Building to testify on Social Security in the 21st
century.
Our Social Security system has been the bedrock of support
for millions of Americans for 75 years now. Social Security's
core framework has essentially remained the same as instituted
in the 1930's. The program, however, has evolved considerably
over the years to meet changing demographic, human, and
economic needs.
Social Security provides a foundation of support for about
one in six Americans. While benefits are modest, for most
Americans the value of Social Security is the biggest
accumulation of dollars they will take into retirement.
According to a recent National Academy of Social Insurance
study--NASI study--a 65-year-old with average benefits would
need to pay an insurance company almost a quarter-million
dollars for that level of protection.
Social Security is without a doubt the crown jewel of
American antipoverty policy. Social Security lifts 13 million
elders out of poverty. Without those monthly benefit payments,
about half of all seniors would be living in poverty.
Social Security is also America's family protection plan.
About one-third of beneficiaries are severely disabled workers,
their spouses and children, or they're surviving family members
of workers who have died. Social Security is the equivalent of
about a $400,000 disability insurance policy, and the Social
Security survivor benefit is the equivalent of almost a
$450,000 life-insurance policy for a young family. About 6 and
a half million children under 18, nearly 9 percent of all U.S.
children, received part of their family income from Social
Security in 2005. About 1.3 million of these children were
lifted out of poverty by Social Security benefits.
Social Security is particularly important to retirees in
communities of color. According to the NASI study, among all
beneficiaries 65 and older, 42 percent of singles and 22
percent of married couples rely on Social Security for almost
all of their income. Among African Americans, the figures were
54 percent for single persons, 33 percent for married couples.
Among Latinos, the figures were 62 percent for singles, 37
percent for married couples.
Social Security is the majority source of income for more
than three-quarters of nonmarried aged-women beneficiaries, and
almost all income for more than two out of every five
nonmarried aged women.
The chart in my testimony that's before the committee here
today, highlights the importance of Social Security as a source
of income for older Americans. I don't need to go through all
these numbers. But, we're all painfully aware of the strains
that we're now experiencing in the other legs of the elderly
income stool. Retirement savings accounts have shrunk by 40
percent over the past year. Private defined benefits are
shrinking and are under unremitting stress. The unemployment
rate for older Americans is increasing significantly. These
changes, coupled with the erosion of employer-provided retiree
health plans, the increases in Medicare premiums, and the cost
of healthcare, all place growing importance on Social Security
as a source of income that can be counted on.
Now, while it's true that Social Security provides
essential protections for Americans, it's also true that
millions of beneficiaries still live on the edge. According to
NASI studies, those 65 and older who are poor or near poor--
family incomes below 125 percent of the poverty level--25
percent of unmarried women, 26 percent of black men, 36 percent
of black women, 27 percent of Hispanic women, 31 percent--of
Hispanic men--31 percent of Hispanic women, 18 percent of Asian
men and women. Among persons age 80 and older, those with
income below 125 percent of the poverty line include 28 percent
of unmarried women, 46 percent of black women, 37 percent of
Hispanic women.
Our Social Security system needs to continue to evolve, as
it has for the past 75 years, to meet the nation's needs. We
need to be clear that we face two challenges, twin challenges,
and that both need to be addressed: the solvency challenge and
the benefit-adequacy challenge.
The National Academy of Social Insurance has been examining
in depth these benefit-adequacy issues. Indeed, three of the
panel members appearing before this committee today have been
researching these activities for the National Academy of Social
Insurance. Today, as chairman of the board of the National
Academy of Social Insurance, I'm providing to the committee the
first of several NASI reports to be published in the months
ahead on the topic of benefit adequacy for vulnerable
populations. This report focuses on the benefits of targeted
groups, such as widowed spouses, low-paid workers, people who
have spent part of their time out of the workforce because of
childcare or eldercare responsibilities, beneficiaries who have
lived to advanced ages, older workers with occupational
disabilities. Any discussion on modifying Social Security
should consider, not just solvency, but benefit adequacy,
particularly for vulnerable groups.
Thank you, Mr. Chairman. I completed my testimony.
[The prepared statement of Mr. Apfel follows:]
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The Chairman. I owe ya. Great statement, thank you so much.
Now we hear from Joan Entmacher from the National Women's
Law Center.
Thank you for being here.
STATEMENT OF JOAN ENTMACHER, VICE PRESIDENT FOR FAMILY ECONOMIC
SECURITY, NATIONAL WOMEN'S LAW CENTER, WASHINGTON, DC
Ms. Entmacher. Chairman Kohl, Senator Martinez, thank you
for holding this hearing and for giving me the opportunity to
testify on behalf of the National Women's Law Center.
Too often, discussions of Social Security portray it as a
problem that needs to be brought under control. But, as you
both and other witnesses on this panel have emphasized, it's
the largest and most secure piece of Americans' retirement
income, and strengthening and improving it has never been a
more important topic.
My written testimony explains the challenges that women, in
particular, face in achieving a secure retirement, and why
those challenges persist despite the growth in women's work and
earnings in recent decades. So, with my limited time, I'll
discuss reforms, focusing on a proposal to improve the benefit
for surviving spouses.
That's one important element of a reform package, because
over half of all poor, elderly women, 55 percent, are widows.
Even with the changes in marriage and divorce patterns in
recent decades, widows will remain the largest group of poor,
elderly women for decades to come. However, I emphasize, along
with Ken and Melissa, that reforms need to be developed as a
package, including consideration of the important nonretirement
benefits that are also part of Social Security.
Additional reforms beyond the widows' benefit are needed,
because more women, especially black women, will enter
retirement never having been married, or having been married
for less than 10 years in a--in one marriage, and not qualify
for benefits as a divorced spouse. They would not be helped by
improvements in the widows' benefits. So, the proposals that
Melissa will talk about, to improve benefits for lifetime low
earners and caregivers, are also essential. But, a change in
benefits for surviving spouses could improve both the adequacy
of benefits for poor widows and the equity of benefits for
surviving spouses in low-earner, dual-earner couples.
Before I describe the reform proposal, I'll give a brief
explanation of how current benefits for surviving spouses work.
A surviving spouse is entitled to receive up to 100 percent
of the deceased spouse's benefit, to the extent it exceeds his
or her own worker benefit, assuming no reductions for early
retirement. This helps provide basic income security for a
surviving spouse, but there are some issues with the current
benefit structure.
It means that household Social Security benefits drop at
widowhood by 33 to 50 percent. The cost of maintaining a
household for one person is less than for two, but it doesn't
drop that much.
Second, households in which spouses' earnings were more
equal experience a greater decline at widowhood; and with more
women contributing more to household income, the number of
households in this situation is increasing.
Third, the survivor of a dual-earner couple can end up with
a lower benefit than the survivor of a single-earner couple
that contributed less over their working lives to Social
Security.
So, as Ken has said, as part of a project by NASI that was
funded by the Rockefeller Foundation, several of us analyzed
options for improving benefits, including one that I looked at
for reforming the widow(er)'s benefit. Under this proposal,
which is a variant on earlier reform ideas, a surviving spouse
would receive the higher of his or her current benefit or an
alternative benefit, which would be equal to 75 percent of the
couple's combined benefits that they had earned as retired
workers. This feature would help reduce the disparity in
benefits that currently exists between single- and dual-earner
couples.
Second, the value of the deceased spouse's benefit used in
the calculation would not be reduced because the deceased
spouse had claimed benefits before full retirement age. This
would increase the adequacy of benefits for lower-income
survivors.
Finally, the size of the increase would be capped to target
the improvement to those most in need and to control the cost.
The Social Security actuaries recently provided a rough
estimate of the cost of this proposal, using two different
caps. With a cap based on the average benefit for all retired
workers, the cost would increase the long-term deficit by just
4 percent. Setting the cap at a higher rate, the benefit of a
maximum earner, would add 20 percent to the current deficit. Of
course, there are possibilities in between.
My written testimony, and that of Melissa and Ken, describe
other possible reforms.
So, in my remaining seconds----
The Chairman. Go ahead.
Ms. Entmacher [continuing]. I will simply remind the
committee that it's important to look not only at Social
Security but also at Supplemental Security Income, which
provides a means-tested support for the lowest-income
beneficiaries.
There are ways to modernize that program to ensure that all
beneficiaries can truly benefit from the improvements in Social
Security that we're talking about.
Thank you.
[The prepared statement of Ms. Entmacher follows:]
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The Chairman. Thank you very much, very fine statement.
Dr. Melissa Favreault.
STATEMENT OF MELISSA FAVREAULT, SENIOR RESEARCH ASSOCIATE,
INCOME AND BENEFITS POLICY CENTER, URBAN INSTITUTE, WASHINGTON,
DC
Dr. Favreault. Thank you, Senators, for this opportunity to
testify. I'm going to focus on four key points.
First, Social Security benefits for long-term, low-wage
workers are modest, and need to be increased. Second, there are
many ways to bolster benefits for low-income retirees. The
technical details of each proposal will determine its
effectiveness. Third, any Social Security reform package will
include multiple provisions that interact with each other. So,
certain provisions to help low earners may be more or less
desirable, depending on other components of the package.
Finally, some low-income older and disabled Americans are
beyond the reach of Social Security. To help them, Congress
should consider expanding SSI, the Supplemental Security Income
program, as Joan Entmacher just described.
On to my first point, about the need to reduce poverty risk
by shoring up Social Security for long-term low-wage workers.
About 10 percent of Americans age 65 and older live in poverty,
and many have incomes that leave them just barely above the
poverty line. Low-wage workers' Social Security benefits are
modest, both compared to benefits in other developed countries
and compared to basic needs. For example, someone who spent 35
years working full time at the minimum wage, who retired at age
62, would receive a Social Security benefit equal to only about
83 percent of the poverty level. Many low-lifetime earners
don't even get that much; many drop out of the labor force for
a time or only work part time, often to care for children,
disabled family members, and frail parents. Also, recessions
hit them especially hard, and they are more likely than others
to become disabled.
This leads to my second point. We can bolster benefits for
these vulnerable earners in different ways, with various
strengths and weaknesses. Let me start with minimum benefits,
because of their prominence in reform packages. They are highly
cost effective, and directly address the problem of wage
stagnation that has hurt less- educated workers in recent
decades. Our models show that within 5 to 10 years of enactment
certain minimums could lift tens of thousands of Social
Security beneficiaries out of poverty. By mid-century, they
could help almost a million people every year.
Minimum benefits with stricter work-years definitions would
have smaller effects, but would cost less and maintain Social
Security benefits' strong ties to time in the labor force.
That is the challenge in designing a minimum benefit. The
better it is at alleviating poverty, the worse it sometimes is
at rewarding work. Really large minimum benefits could weaken
the relationship between taxes paid and benefits received.
Given the fiscal challenges ahead, Social Security must
continue to reward long-term workers.
Another interesting Social Security adequacy proposal would
increase benefits at older ages, say when folks are in their
80's and older, through a longevity insurance bonus or index.
This addresses the risk that people might outlive their assets.
Such benefits would be targeted toward a time of life when work
ability is most limited, and would ensure that older seniors'
incomes kept up with standards of living for workers in the
economy. But some of these benefits may go to well-off seniors
who don't need extra help. Without caps, then, longevity
benefits may be less effective at reducing poverty than other
equally costly approaches.
Proposed spouse and survivor benefits, as Joan Entmacher
has described, often try to increase a program's fairness, for
example, making benefits more equal for single- and dual-earner
married couples. A challenge for these proposals is that trying
to make benefits fair for some couples often makes benefits
less fair for unmarried workers who paid the same payroll tax.
Some of these proposals are also fairly costly, and caps can
help, as Joan pointed out already.
Caregiver credit options try to deal with most of the
limitations of spouse and survivor benefits. They could
effectively serve many single parents, who now often fall
through the cracks. Like minimum benefits, they also tend to be
quite cost effective, and very progressive. But they're not
always fair for caregivers who earn more than the credit level,
and they're hard to administer.
So, details matter. Without careful design, large
vulnerable groups could be left out, diversity within groups
may be overlooked, and benefit improvements could become less
effective over time.
My third point is that, in any Social Security reform
package, provisions are going to interact. Sometimes people say
that solving Social Security's financing needs is just an
arithmetic problem. We just need to raise some taxes and cut
some benefits.
But, different tax increases and benefit cuts affect
workers and beneficiaries very differently. For example,
reductions to cost-of-living adjustments would affect the
oldest old more than other beneficiaries. I've simulated many
Social Security packages in which the impact of an adequacy
adjustment that appeared to be highly effective in isolation
has been largely wiped out by other elements in the package.
That's why it's critical to look at packages in totality, as--
again, as Joan pointed out, the whole is often quite different
from the sum of its parts.
My final point, echoing Joan again, is that Social Security
can't do it all. SSI was designed to aid those with limited
work histories. It has languished over the last 35 years, and
needs to be updated if it's to play more of a role in reducing
need among rapidly aging baby boomers. For example, increasing
SSI's asset test would be an especially cost effective way to
alleviate poverty among older women. Given the increasing share
of defined contribution employer-provided pensions, Congress
could reconsider the way SSI treats these types of pensions.
So, that's the end of my statement. Thank you, and welcome
the opportunity to have a discussion of these issues and to
answer any questions you may have for me.
[The prepared statement of Dr. Favreault follows:]
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The Chairman. Thank you very much, Dr. Favreault.
Dr. Irons.
STATEMENT OF JOHN IRONS, RESEARCH AND POLICY DIRECTOR, ECONOMIC
POLICY INSTITUTE, WASHINGTON, DC
Dr. Irons. Well, thank you, Chairman Kohl and Ranking
Member Martinez, for inviting me here today.
As has been already said, the Social Security system has
been the bedrock of retirement security.
Sorry, I hope you can hear me better now.
The Social Security system has been the bedrock, as was
mentioned earlier, of retirement security for over half a
century. Over the years, the system has evolved in response to
changing conditions, and, as is well known, program outlays are
expected to exceed revenue. So, the system faces a shortfall
over the next 75 years.
Responsible stewardship of the program would again
necessitate making feasible adjustments to move us toward
sustainability. Long-run balance within the system can be
achieved in one or a combination of three ways: by reducing
total benefits, by increasing payroll tax revenue, or by
transferring general revenues to Social Security. My testimony
today will focus on the second of these options, that is
increasing the payroll tax revenue.
Specifically I want to suggest that any policy to increase
overall revenue through the payroll tax should include an
increase in the cap on earnings subject to the tax. As you
know, Social Security taxes are levied on earnings up to a
maximum level that is adjusted each year to keep pace with
average wages. In 2009, the payroll tax cap is set at $106,800,
and roughly 6 percent of the population has earnings above that
cap.
Due to growing income inequality, the share of earnings
above that cap has risen from 10 percent in 1982, when the
system was last in balance, to over 16 percent in 2006. This is
because incomes have grown strongly at the top, while incomes
in the middle have stagnated. This trend is expected to
continue, meaning that the growing share of earnings remain
outside of the payroll tax base.
The cap also means that higher-income individuals pay a
smaller share of their income in Social Security taxes than
middle-class employees. Including the employee and employer
share of Social Security, together with the Medicare tax,
earners in the middle fifth of the income distribution pay an
average effective payroll tax of about 11 percent. In contrast,
the top 1 percent of earners pay just 1.5 percent of their
earnings, on average.
Let me turn now to two different options for making
adjustments to that cap. According to the Social Security
Administration, fully eliminating the cap on taxable earnings
would be sufficient to fully close the projected shortfall in
Social Security. If newly taxed earnings above the taxable
maximum were credited toward the benefits, eliminating the cap
would close most, but not all, of the gap. Short of that,
raising and indexing the cap to capture 90 percent of earnings,
as it did when the system was last in balance, would reduce the
shortfall by slightly less than half, assuming benefit
adjustments as well.
A third option, which I want to focus on a little bit more
today, would be to split the difference, to eliminate the cap
on earnings for employer contributions, and raise the cap to
cover 90 percent of earnings on the employee side. With
earnings up to the employee cap credited for benefit purposes,
this change would reduce the long-term shortfall by about
three-fourths.
There are several advantages to this last approach. It
would eliminate most of the long-term shortfall while
maintaining a link between contributions and benefits, which I
think is very important. It would not lead to extremely large
benefits for millionaires, which could be a concern if all
earnings were credited for benefit purposes. Finally, self-
employment--self-employed taxpayers, who are responsible for
both the employee and the employer share, would not face as
large an increase in payroll taxes as if you had a full
elimination of the gap.
Further, this option would have, at most, a modest impact
on the standard of living of upper-income taxpayers. On the
employee side this would mean an increase in tax payments of,
at most, 2.6 percent of income. If income growth for the top 5
percent of the households continues as it has for the past 20
years, and assuming that the full 6.2 percent of the employer
tax were passed on to their employees in the form of lower
wages, the additional tax obligation would be recouped by these
individuals in less than 4 years. Affected taxpayers would also
recoup some of the higher taxes in the form of higher benefits.
Some would argue that an increase in the cap would create
inefficiencies and cost jobs. Indeed, all else equal, I too
would prefer to live in a world without taxes. But, all else is
not equal. If revenue is not generated by lifting the cap, it
must be raised from other sources or benefits must be cut.
Those choices have costs, as well.
While no one likes to raise taxes, raising the cap on
taxable earnings would, in my opinion, be a better option than
raising tax rates across the board. Thus, any policy to
increase overall revenue through the payroll tax should have a
higher cap as part of the equation. In particular, raising the
cap to cover the 90 percent of all earnings, and eliminating
the cap on employer side, would close about three-fourths of
the projected 75-year shortfall, and the higher cap would
affect just 6 percent of employees. By contrast, an across-the-
board rate hike would affect everyone, with a disproportional
impact on low- and moderate-income workers.
For most of those who would face a higher tax obligation,
the impact would be minimal relative to their incomes, and
would likely be more than offset by wage growth in just a few
years.
So, thank you for the opportunity to speak with you today,
and I look forward to answering questions.
[The prepared statement of Dr. Irons follows:]
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The Chairman. Thank you very much Dr. Irons.
Dr. Biggs.
STATEMENT OF ANDREW BIGGS, RESIDENT SCHOLAR, AMERICAN
ENTERPRISE INSTITUTE, WASHINGTON, DC
Dr. Biggs. Chairman Kohl, Ranking Member Martinez.
Social Security is the largest Federal spending program,
the largest tax paid by most workers, and the largest source of
income for most retirees. It also faces a significant long-term
funding challenge. For these reasons, I am glad you chose to
hold this hearing today, and I'm thankful for the opportunity
to testify.
In my testimony, I wish to highlight three main points.
First, Social Security's long-term shortfalls increased
significantly in the latest trustees report, and will worsen
further if reform is delayed. Second, population aging, not
rising per-capita healthcare costs, is the principal driver of
rising entitlement spending. Even if current health reforms are
successful, we may still face a budget crisis if aging-
associated costs are ignored. Third, Social Security reform
should encourage longer work lives and simplify the benefit
formula.
The 2009 Social Security Trustees Report showed worsening
program finances due to lower payroll tax revenues, increased
life-expectancies, and the simple passage of time. While many
people focus on the date of trust-fund exhaustion, which moved
from 2041 to 2037, the more important finding is that the
projected long-term deficit rose by almost one-fifth. Moreover,
each year we delay reform, this deficit increases around 5
percent. Time is money, as they say.
More broadly, I wish to place Social Security in a context
of overall increases in entitlement spending. Rising
entitlement costs spring from population aging, which increases
the number of beneficiaries, and per-capita healthcare price
increases, which raise costs even if the beneficiary population
does not change. The administration has argued that per-capita
healthcare inflation is, in OMB Director Peter Orszag's terms,
the real deficit threat, and that Social Security and
population aging in general are small issues. Yet, both CBO and
OMB projections clearly show that population aging, not rising
per-capita health costs, will be the largest entitlement-cost
driver through around 2050. A chart in my testimony illustrates
these trends.
Policies to address aging include specific Social Security
reforms, such as those we'll talk about here today, plus
macrolevel policies such as increasing labor- force
participation, boosting saving rates, and raising skilled
immigration levels.
My final comments propose two improvements to Social
Security's benefit structure aimed, in particular, at low
earners. First, we need to improve Social Security's incentives
to delay retirement. Second, we must simplify the benefit
formula to better target benefits, and to make benefits more
understandable. While longer work lives enhance retirement
security, due to quirks in the Social Security benefit formula,
a person who delays retirement and continues to pay into Social
Security typically receives almost no benefits in return. On
average, a person who works an additional year receives only
around 9 cents in extra retirement benefits for each extra
dollar of taxes they pay. Policymakers should consider lowering
the Social Security payroll tax for older workers, which would
encourage delayed retirement.
Second, the Social Security benefit formula is remarkably
complex--basing benefits on average wages, the number of years
worked, length of marriage, relative earnings between husbands
and wives, and other factors. As a result, many workers have no
idea what their Social Security benefit will be until the first
check arrives. By this time, of course, it is too late to plan
their other savings or to consider working longer. Almost one
in four individuals near retirement cannot even guess what
their future Social Security benefit will be. Of those making
predictions, one-quarter of near-retirees over estimated their
benefits by more than 28 percent. This predictability risk is
every bit as damaging as having your 401(k) account decline on
the verge of retirement.
Moreover, the benefit formula's complexity means that
retirees with the same lifetime earnings often end up with very
different benefits. Figure 3 in my testimony illustrates how
large these disparities can be. The poor targeting of Social
Security's progressivity means that for many low earners Social
Security is a social insurance policy that fails to pay off
when they need it the most.
Fixing this problem, though, does not require higher
average benefits or greater progressivity. Instead, benefits
must merely be targeted more effectively. One solution, which
resembles the pension program in New Zealand, combines a flat
dollar benefit paid to each retiree, with automatic enrollment
in individual retirement accounts. As a chart in my testimony
shows, this alternative, while much simpler than current-law
Social Security, actually targets low earners much more
effectively.
To conclude, rising entitlement costs, especially those
caused by population aging, pose significant challenges.
Reforming Social Security in the near future can reduce the
long-term fiscal gap while enhancing the welfare of retirees.
Thank you again for your consideration. I'd be happy to
take any questions.
[The prepared statement of Dr. Biggs follows:]
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The Chairman. Thank you very much, Dr. Biggs.
Senator Martinez.
Senator Martinez. Well, thank you Mr. Chairman.
It is apparent that we all acknowledge there's a problem,
and that there are no easy, simple, or painless solutions to
the problem. I guess the beginning question I would have for
Mr. Irons is--you indicated and some would say that your
proposal would cost jobs if you increase the payroll taxes of
employers, and you answer that by saying that the world would
be a nicer place if none of us paid taxes, or something like
that. I realize that that's not an option. The question really
is, Would it, in fact--at a time when we have unemployment
reaching double digits, would it in fact be something that
would threaten job loss?
Dr. Irons. I think if you were to do it all today, then
that would probably not have a good impact on the broader
macroeconomy, or it very well might cost jobs. I think the
magnitude of the job loss would be relatively minor, for
various reasons, but I think if you were to actually try to
implement this, I would suggest phasing it over time to allow
people in businesses to plan for it, to push off some of the
tax increases until, hopefully, after we've recovered. So, it'd
be a phase-in over time, it'd be more predictable, it would
happen after we've, largely, recovered.
But, having said that, I think even with--if this were in
place, you'd have a relatively mild job loss, if any. Because I
think----
Senator Martinez. Why would that be, can you kind of----
Dr. Irons. I can't necessarily quantify it, it's a--I'm an
economist, so it's an on-the-one-hand/on-the-other-hand kind of
thing, here, so I can't give you an exact number.
Senator Martinez. No, I realize that, but----
Dr. Irons. Yeah, but I think the right comparison here,
again, is not to compare this with doing nothing, it's to
compare this with the alternatives. So, I think this would have
a smaller impact on the broader macroeconomy, and on jobs, than
if you raised rates across the board, or if you made some other
changes by impacting benefits. I think a benefit cut would have
a larger impact on jobs. I think cutting benefits would have a
larger impact on individuals, especially in a recession. So,
again, when you look at all these options, in order to bring
the system into balance, I don't want to say there's no cost,
but I say this is probably the least cost of the options that
are before you.
Senator Martinez. Now, I think there's a pretty good
consensus that impacting benefits is not a desirable option.
But, I wonder if means-testing of benefits is something that
has any merit or should be considered?
I'd throw that open to anyone who might----
Ms. Entmacher. I think the concern is that--as several
witnesses, and as the chart indicates--benefits are so
important for people, really quite high up the income scale,
that means-testing would mean, potentially, cutbacks for
average Americans who rely on Social Security for the majority
of their income. It also would undercut a lot of the strength
and support for the program, which is precisely that this is
something that everyone contributes to, and it's there when
they need it, and benefits are related to the contributions
that people make during their working lives, even though Social
Security also has progressive features that help those in need.
So, I think it would fundamentally change the character of the
program if we were to go to something like means-testing
benefits.
That's not to say--and several of us had suggested--have
suggested--that if you're going to make improvements, you want
to target those improvements to those most in need. I think
that's, you know, a different way of thinking about the
problem, that if we're going to make it better, if we're going
to put additional improvements and benefits, make sure they go
to people who need them most.
Senator Martinez. Well, shouldn't we first right--get
ourselves somewhere out of the hole before we talk about
improving benefits? I mean I----
Go ahead, Mr. Apfel.
Mr. Apfel. I believe----
The Chairman. Microphone.
Mr. Apfel. I believe these two issues must be enjoined. The
last time we really dealt with Social Security in a major way
was 1983. Since that time we did make changes to the
retirements earnings test, which I thought was a very important
change. But, we don't deal with these issues very frequently.
It's an excellent--most of the----
Senator Martinez. Know why?
Mr. Apfel. Well, for all the different political reasons,
it's very----
Senator Martinez. Right.
Mr. Apfel [continuing]. Very hard--it seems to me that
marrying together the issue of long-term solvency of the
system, which will take changes, and it will----
Senator Martinez. Not without pain, probably, in some
direction or another.
Mr. Apfel. It's--there's going to be pain involved in that
package. But, coupling that with a hard look at so many of the
people on that chart, particularly in that bottom half--it's
critically important that we think about marrying the issue of
adequacy of benefits for our vulnerable populations, for low-
and moderate-income people, with any efforts at restoring
solvency.
Now, I have been one who's argued, for years, that there
will have to be some benefit restraints, and I would think that
some of those benefit restraints slow the growth rate of
benefits for future generations will primarily have to be near
the higher end of the income scale. We're going to clearly need
tax increases for the system, but we also then have to take a
look at what we've done to the system and how the changes that
are being talked about today, the adequacy piece, fits into
that overall package.
If we do the former, the solvency piece, without the
latter, the adequacy piece, we're digging a deeper hole for
many of the lower income people on that chart.
If we do the latter, the benefit adequacy changes, without
the former, we are digging a deeper hole in terms of solvency.
So, I think it's a good chance to build the two together----
Senator Martinez. Improve benefits while at the same time
fixing solvency, all in the same package----
Mr. Apfel. I think it's critically----
Senator Martinez [continuing]. Something that we don't do
that frequently.
Mr. Apfel [continuing]. Critically important.
Senator Martinez. What about the--and again I'll throw this
open to the whole panel. I mean, all of you are so
knowledgeable on this, and I would appreciate hearing from any
of you on this--the idea of deferring or delaying retirement,
given the fact that we live longer, given the fact that we're
healthier, given the fact that many of us, particularly after
the recent debacle of the market, probably want to work a
little longer, things of that nature--how does that----
Go ahead, Mr. Burzynski.
Mr. Burzynski. If I could address that. I think that there
are some occupations and careers where that would not be
necessarily a problem. Personally, I come out of construction,
and construction workers, by the time they're 60, 65, have
pretty much beat themselves to death. People that have worked
in a factory their whole life, stood on concrete, people that
work in stores, clerks, those sorts of jobs, again, by the time
they reach what we now consider the retirement age, the idea of
working longer years is not necessarily something they're
looking forward to.
Senator Martinez. Not really an option, physically
speaking, for----
Mr. Burzynski. It's not, physically. In my own case, I
begin to--it would take me 5 minutes to tell you all the
physical things that I have worked through in the 40-some years
I was an electrician in construction, so----
Senator Martinez. The Senate can be a tough place, too, I
can----
Mr. Burzynski. Right. [Laughter.]
Senator Martinez. No, I hear you. Any other thoughts on
this?
Dr. Irons. I would just----
Senator Martinez. OK.
Dr. Irons [continuing]. Concur with that notion, that it is
a--Social Security gives people the option. You know, I think
preserving that option by maintaining, you know, the current
retirement age, I think is critically important. The other
piece of this is, because you have the option of early
retirement, and your benefits adjust, delaying the normal
retirement age is equivalent to just a raw benefit cut.
So, and I think, you know, the way I kind of think about
this is twofold. One, you have to maintain the option, and two,
if you want to cut benefits, cut benefits; don't do it through
changing the retirement age.
Dr. Biggs. If I might just briefly touch on this, Senator.
Senator Martinez. OK.
Dr. Biggs. Without minimizing the problems faced by people
who work in physically demanding jobs, if we go back to the
1950's, the typical person first claimed Social Security
benefits at age 68. Today, life expectancies are longer, work
is much less demanding than it was back in the 1950's, when
people would work in mines and steel mills and the like; yet
people tend to claim benefits at 62 or 63. So we have better
work conditions, probably an extra 5 years of longevity, but
we're claiming benefits 5 years earlier.
That's great if you can afford to do it, if you have the
savings set aside to do it. I don't know if we want to be heavy
handed about this, but of the points I made in my testimony is,
we want to give people the incentives to work longer. So, I
think something like lowering the payroll tax, or doing various
other things could that tell people, ``We want you to work
longer. It's to your benefit, we're going to try to make it a
little bit easier for you.''
Senator Martinez. I think, too, it may allow for those who
really are unable to continue to work, for whatever physical
conditions not to, while maybe the others, who could, have an
incentive to remain longer in the workforce----
Mr. Biggs. Exactly.
Senator Martinez [continuing]. Might be a good thing.
Mr. Apfel? The demographics are not working in our favor
when we look at the numbers, in terms of what they look like in
the future. So, maybe allowing people to work longer, and
giving them a bit of an incentive to do it, might be a good
thing for the whole system.
Yes, sir?
Mr. Apfel. I, for one, have not ruled out supporting any of
the things that are being talked about here. Again, it's an
issue of marrying together the need for long-term solvency and
benefit adequacy.
In this case, if there were efforts made to create
encouragements to keep people in the workforce longer, or to
change the retirement age, and a whole package of things that
have been talked about, if those are coupled with looking at
how to provide a stronger set of benefits for low- and
moderate-income workers, for blue-collar workers, a way to
liberalize the disability program, so that people who are beat
up by the time they're 60, who are clearly not going to be
eligible for Social Security disability today--these are the
kind of issues, again, whether we could couple together a
package of changes for solvency, that would have some things
that none of us would particularly like, with the notion that
we are providing more assurances on adequacy. So, again, this
is another example where marrying the two issues of solvency
and adequacy could lead to good steps for the future.
Senator Martinez. Well, I guess what you're saying is, that
we put everything on the table, and then work at it and come up
with something that seems fair and adequate for the future, and
for the long term, of the system.
Yes, ma'am?
Ms. Entmacher. Senator, if I might, the other piece of
encouraging people to work longer is making sure that jobs are
available, that employers want to hire them. That, of course,
is a problem that many people, particularly lower-skilled
workers, but, actually older workers at all education levels
are encountering in this current recession. The jobs are not
there, and older workers who lose jobs are having an even
harder time getting back to work when they're trying to do it.
Discrimination persists, particularly against older women,
so staying in the workforce is not always an option, even if
you----
Senator Martinez. Sure.
Ms. Entmacher [continuing]. Want to do it. A proposal, that
actually would not increase costs at all, and might encourage
people to work longer, is something that Virginia Reno, at
NASI, has suggested, which is, let's rename--re-label Social
Security benefits and encourage people to retire at the ``best
benefit age,'' and describe that as age 70. It's with maximum
delayed retirement credits. Keep the benefit structure below
that as it is, but maybe let people know that if they can stay
into the workforce, they'll get an even better benefit. Instead
of focusing on the ``full retirement age,'' think about the
possibilities of increased benefits if they work longer--which
our current system does provide--without penalizing people.
Senator Martinez. Thank you, Mr. Chairman.
The Chairman. Thanks, Senator Martinez.
Dr. Irons, your thought that we might raise the cap--
however we do that, at whatever level, and whatever assessment
we make--in a sense, that is means-testing, isn't it? Because
you're trying to raise money to balance the deficit in Social
Security by asking the more affluent to pay in more. So, it
is--and I'm not criticizing it--but, it is really a means test
in a different kind of a cloak, isn't it?
Dr. Irons. You can call it whatever you want. It's asking,
you're right, the people at the top end of the income
distribution to pay more. That's the bottom line of it. I mean,
I think the means test--often times talked about in terms of
the benefit structure, not so much on the revenue. I concur
with the other panelists, to think about this as a package,
probably makes sense.
But, it does ask more of upper-income individuals to pay
more their tax obligation than the current system currently
does. But, it would also change the benefit structure, as well,
to allow them to recoup some of that in terms of higher
benefits.
The Chairman. Yes, you could work it into----
Dr. Irons. But the overall system, as you know, is
progressive. People at the low end tend to get a greater share
of their tax payments back, at the end of the day. So, this
would make the system you know more of what it was designed to
do. I think it would return us back to having 90 percent of all
earnings covered, and that's--you're right, it's going to
impact people with higher incomes more.
The Chairman. Yes. Although we're not feeling it acutely
now, because of the downturn in the economy, all the
demographics indicate that in the future we are going to need
those people who are aging and healthy to stay in the
workforce. There will be a shortage of skilled workers in the
decades to come, so that it does behoove us, not only to
improve Social Security in terms of its financial structure,
but also for our economy. It behooves us to do everything we
can to encourage people to stay in the workforce.
I have a bill that would provide benefits to companies who
are wanting to keep their people in the workforce, but looking
for some benefit. But, in every way, I think we all agree that
keeping people in the workforce is a very, very good thing to
do, not least of which is that they also stay alive and healthy
and active and challenging themselves just as long as they can,
you know, be productive in our society. That's a good thing for
everybody, and it also helps Social Security, isn't that true?
I think we all agree with that.
Now, Mr. Apfel, you were working in the Senate, weren't
you, back in the 1983 period, when we reformed Social Security?
You probably have some recollection as to how we were able to
get it done, even under political duress. Could you give us
some recollections of what it was back then?
Mr. Apfel. Well, I do have recollections, Senator. I worked
them for Senator Bill Bradley, who was a member of the Senate
Finance Committee. A commission was established during that
time--with President Reagan and administration officials,
senior Democratic leadership, senior Republican leadership, to
try to come up with a package that would move the system
forward for the long term.
What's interesting about that 1983 package is that, 2 and 3
years before that, some of the things that ended up in that
package were considered to be impossible, unacceptable. Still,
people came together for what I believe was the greater good.
The greater good is the long-term economic security of future
generations. A number of things were done that no one thought
were possible before that, and everyone came together to
support those efforts. That--some of the things that I,
personally, would have liked to have seen included didn't get
included in that package. Indeed, the increase in the
retirement age didn't include liberalizations to the disability
program to help people who had trouble working. So even to this
moment today, I'm still testifying on behalf of taking another
look at that, because I think it's important to do so.
No one supported everything that was in that package; but,
for the greater good, and for the greater sense of economic
security for future generations, it was a critically important
step that everybody came together and supported.
It is one of the--one of my favorite moments of working in
the U.S. Senate, seeing people come together for the greater
good. I think that is very possible. I would hope that, next
year, that this body, working with President Obama, would be in
the position to do that again, to--and again, not just make
changes for solvency, but for adequacy, as well. To come
together, marrying these two issues, and moving the system
forward for the greater good.
Because this is the program that is the most important
Senator Bill Bradley, at the time, said that it was the best
expression of community that he knew, the Social Security
system; that was back in 1983. I believe that is true today.
It's going to take working together to make that happen. Not
just about solvency, but about assuring that the people
particularly in the bottom half of those charts, have some
assurances that they have an adequate system for retirement.
The Chairman. So, you are very supportive of the idea of
resurrecting that sort of a group and seeing what we can come
up with to move forward on Social Security for the next 75
years. You think it would work.
Mr. Apfel. I think it would work. Whether that is a
commission, whether that is the leadership from the respective
committees, I don't know what the right model would be. Right
now, Congress is very heavily involved with healthcare, so
trying to deal with the Social Security issue for the next 75
years in----
The Chairman. It's not going to happen this month or next
month----
Mr. Apfel. No, no.
The Chairman. Next year, I think----
Mr. Apfel. But, I would love to see there be an effort next
year to come together for the sake of the American people and
for the sake of future generations.
The Chairman. Have you talked to Senator Bradley recently?
Mr. Apfel. I did recently, within about the last couple of
weeks.
The Chairman. Did you?
Mr. Apfel. Yes, I did.
The Chairman. How's he doing?
Mr. Apfel. He's doing just fine, and--well, I'll share a
couple of private stories with you after the hearing, if you'd
like, but I won't for the record.
The Chairman. Just by coincidence, I'm going to be talking
to him next week, but I'll remind him about you.
Mr. Apfel. Ask how Betty Sue is.
The Chairman. OK. Betty Sue. OK.
Who else wants to make comment? I think this is really a
good panel.
Yes, sir, Leon, go--say what's on your----
Mr. Burzynski. If I could add one more concern, and that's
a rather recent phenomenon about the garnish from bank
accounts. What we're hearing is that--normally, under the
Federal law, Social Security and veteran benefits and some
other sorts of military disability benefits, are not allowed to
be garnisheed or put a hold on or taken from beneficiaries.
But, what's happened recently is, because, under the new
programs, all of our benefits go into a bank account
electronically, and then the creditor will put a hold on the
bank account, and the bank freezes it. So, now all the money
that the person has for the month--and in many cases that's
their Social Security benefits, and maybe a few bucks--gets
frozen. On top of it, the banks add fees and--late fees and
overdraft fees and all sorts of things, and, in some cases, the
fees amount to more than the amount that's in the account.
I think that's drastically wrong that that can happen, and
I would hope that there's--that's something that needs to be
addressed right away, and especially--you know, one of the big
banks--we just gave Bank of America a ton of bailout money--us
taxpayers--and Bank of America is one of the banks that's
freezing accounts and freezing Social Security funds for
beneficiaries.
So, I would hope that that--that's not necessarily going to
fix Social Security, but it certainly would fix the income for
some of the folks that are dealing with that today.
The Chairman. That's a very good comment, very appropriate,
and we will look into that very carefully.
Yes, sir, Kenneth?
Mr. Apfel. The report that we provided to you today, one of
the proposals that's in there is to examine whether specific
changes could be made in this area. The Social Security Act
does protect benefits from garnishment or attachment by
creditors, but this is a real problem. So, we have--this report
does include some suggestions to look at for fixing this
problem.
The Chairman. Very good.
Who else would like to make comment?
Mr. Biggs. If I might----
The Chairman. Yes Dr. Biggs.
Mr. Biggs [continuing]. Touch briefly on the tax issue. I
think, as the representative on my end of the spectrum, I would
feel remiss if I didn't talk a little bit about taxes.
Understanding that Social Security reform will necessarily
be a compromise between the different positions, different
parties, certainly I wouldn't say that people on my end of
things should simply oppose any plan that includes a tax
increase. We need to come to fix this program, and, at the end
of the day, compromises are going to have to be made.
At the same time, I think--when we think about raising the
wage cap, the $107,000 that we currently levy taxes on, I think
we want to be a little bit wary of what's going to happen with
that. If we--I guess, to touch, first, there's the argument
that the payroll tax currently covers 85 percent of total
wages, which is a decline from 90 percent in the early 80's. If
you look throughout Social Security's history, the average
coverage has been right around 84 percent. So, the current
level is not out of line with where Social Security has been,
historically.
If we raise it back up to 90 percent, that raises the tax
max from $107,000 to around $180,000. A person making $180,000
is in the 28-percent income tax bracket. They probably pay 6 or
7 percent for State income taxes. If they are going to pay the
Social Security tax of 12.4 percent on top of that they're
looking at a 47-percent marginal tax rate. If they're married
it could be higher than that.
I am wary of--$180,000 is good money, no doubt. If you're
living in a place like New York City, it's--you know, you're--
not private jets, or even private schools, with that kind of
salary--I'm wary of having a nearly 50-percent tax rate on
somebody at that income level, given that we haven't even
started to address Medicare or Medicaid, both issues which also
might require tax increases.
So, I think we want to be careful. Social Security is one
area where personal savings can fairly easily substitute for
Social Security benefits. If I save more in my IRA or 401(k),
that can reduce the burden on Social Security. With something
like Medicare or health insurance, it's harder to do that
through personal substitution. So, I just think it's something
we should be wary of.
The Chairman. I think it's a good point, and, you know, one
thought on that is that we could have a moratorium on any
increase beyond its current level, until a person's income
stretches to $200,000 or $250,000 and then come back and take a
look at assessing some kind of a--of a fee, beyond that.
Mr. Biggs. I think, in terms of when we want to say, why
has this coverage fallen from 90 percent to 85 percent, the
solution is to levy a higher tax on people making $180,000. The
real cause of the decline in the coverage has been people at
the very, very top end of the earning spectrum making $1
million, $5 million, a year. So, raising taxes on the person
making $180,000, I don't--there's a fairness issue there, as
well. He didn't cause the problem, so I'm not sure whether he
should have to pay for it.
So, I think a wide range of solutions should be looked----
The Chairman. Sure.
Dr. Biggs [continuing]. In this regard.
Ms. Entmacher. Senator?
The Chairman. Who also wants to make comment?
Ms. Entmacher. I'd actually like to follow up on the point
that Andrew made, which I think is a very good one, because I
was going to suggest that, in addition to looking at ways of
increasing the base of payroll taxes for Social Security, we
should be looking at taxes on those very high-income people. I
don't think that's, maybe, entirely where Andrew was going to
take his argument. But, I don't think it's necessary that
financing for Social Security come entirely from the payroll
tax. That was the focus of Mr. Irons' testimony. But, I think
there are other options and reasons to look at them.
Part of the reason there is a long-term shortfall in Social
Security is that, soon after the program was created, we
allowed people to claim benefits so that they could get out of
poverty, so that those people in--you know, coming out of the
Depression, could benefit from Social Security even though they
hadn't paid into it long, and we could quickly start addressing
the problem of elderly poverty.
That's known as the legacy problem that--Social Security
inherited this long-term debt. Recognizing that, I think it
would be appropriate to look at some highly progressive taxes,
some other forms of revenues that might help shore up Social
Security.
The Chairman. I agree.
Dr. Irons. If I could just piggyback on--
The Chairman. Dr. Irons.
Dr. Irons [continuing]. The prior two comments. I do
think--I agree, to some extent, with both comments. I do think
that looking at other taxes is very much merited. I didn't
focus on that in my testimony, but it's worth exploring,
certainly.
With regard to the cap, I think I come down as an
economist, thinking about the design of the tax code. Right
now, as I said in my testimony, if you are in the middle of the
income distribution, you pay around 11 percent of your income,
in terms of the payroll tax. If you're in the top 5 percent,
you pay one and a half percent. So, from--on a basis of
fairness and just basic economics, there's an imbalance there
that needs to be rectified. Whether you do it in the way you
suggest, about raising taxes on people above 250,000 or
something, that's certainly one way to go. Raising the cap, or
some combination of the two, might be warranted.
But, I think there is something, which is a focus on making
the overall payroll tax more fair, and to do so in a way that
raises revenue, in a way that does not allow people at the very
top end to avoid their obligation, which is largely the way the
system is now.
The Chairman. Very good.
Mr. Apfel.
Mr. Apfel. I don't know whether we're almost done, Mr.
Chairman, but I wanted to thank you, personally, for a focus of
a hearing on benefit adequacy. We've spent hearing after
hearing after hearing looking at the issue of solvency. What
you have asked us to look at is critically important, which is,
``How adequate is that benefit structure, particularly for
vulnerable populations?'' This is a big contribution, and I
would hope that your committee will continue to look at these
issues and dig in, in depth, so that, whenever we do resolve
this issue for the long term, that the issues that you've asked
us to address on adequacy become part of that package. So I
want to thank you----
The Chairman. Thank you.
Mr. Apfel [continuing]. Personally for what you've done.
The Chairman. Thank you so much.
Who else? [No response.]
The Chairman. Well I have just one request. If we put
together a commission, are you all willing to work on it? I
think you'd be great. [Laughter.]
You do a wonderful job, and you did a great job here today.
We thank you all for coming, and we'll see you soon.
[Whereupon, at 3:14 p.m., the hearing was adjourned.]