[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

THE 2011 ANNUAL REPORT OF THE SOCIAL SECURITY BOARD OF TRUSTEES

=======================================================================

before the

SUBCOMMITTEE ON SOCIAL SECURITY

of the

COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

__________

JUNE 3, 2011

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Serial No. 112-SS4

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Printed for the use of the Committee on Ways and Means

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SUBCOMMITTEE ON SOCIAL SECURITY

SAM JOHNSON, Texas, Chairman

KEVIN BRADY, Texas XAVIER BECERRA, California
PAT TIBERI, Ohio LLOYD DOGGETT, Texas
AARON SCHOCK, Illinois SHELLEY BERKLEY, Nevada
ERIK PAULSEN, Minnesota FORTNEY PETE STARK, California
RICK BERG, North Dakota
ADRIAN SMITH, Nebraska

C O N T E N T S

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Page

Advisory of June 3, 2011 announcing the hearing.................. 2

WITNESSES

Charles P. Blahous III, Ph.D.,Trustee, Social Security and
Medicare Boards of Trustees, Testimony......................... 9
Robert D. Reischauer, Ph.D.,Trustee, Social Security and Medicare
Boards of Trustees, Testimony.................................. 16

THE 2011 ANNUAL REPORT OF THE SOCIAL SECURITY BOARD OF TRUSTEES

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FRIDAY, JUNE 3, 2011

U. S. House of Representatives,
Subcommittee on Social Security,
Committee on Ways and Means,
Washington, D.C.
The subcommittee met, pursuant to call, at 9:07 a.m., in
Room B-318, Rayburn House Office Building, the Honorable Sam
Johnson [chairman of the subcommittee] presiding.
[The advisory of the hearing follows:]

HEARING ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

Chairman Johnson Announces

Hearing on the 2011 Annual Report of the Social Security Board of
Trustees

Friday, May 27, 2011

U.S. Congressman Sam Johnson (R-TX), Chairman of the House
Committee on Ways and Means Subcommittee on Social Security announced
today that the Subcommittee will hold an oversight hearing on the
findings in the 2011 Annual Report of the Social Security Board of
Trustees. The hearing will take place on Friday, June 3, 2011 in B-318
Rayburn House Office Building, beginning at 9:00 a.m.

In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing. A list of invited
witnesses will follow.

BACKGROUND:

The Board of Trustees of the Federal Old-Age and Survivors
Insurance (OASI) and the Federal Disability Insurance (DI) Trust Funds
was established under the Social Security Act to oversee the financial
operations of the OASDI Trust Funds.

The Board is comprised of six members, four of whom serve by virtue
of their positions in the Federal Government (the Secretary of the
Treasury (who also serves as Managing Trustee), the Secretary of Labor,
the Secretary of Health and Human Services, and the Commissioner of
Social Security) and two members of the public who are appointed by the
President and confirmed by the Senate.

The Social Security Act requires that the Board, among other
duties, report annually to the Congress on the financial status of the
OASI and DI Trust Funds. The overview section of the 2011 report
concluded, ``Under the long-range intermediate assumptions, annual cost
for the OASDI program is projected to exceed non-interest income in
2011 and remain higher through the remainder of the long-range period.
The combined OASI and DI Trust Funds are expected to increase through
2022, and then to decline and become exhausted and unable to pay
scheduled benefits in full on a timely basis in 2036. However, the DI
Trust Fund is projected to become exhausted in 2018, so legislative
action will be needed as soon as possible.''

The report also projected that the reserves held in the trust funds
would reach nearly $2.7 trillion by the end of 2011. The U.S. Treasury
bonds held by the trust funds, which are backed by the full faith and
credit of the U.S. government, will be used to supplement current
income through 2036. However, since no funds have been set aside to
redeem these bonds, doing so will require the Federal Government to
raise taxes, cut spending, or borrow more. Thereafter, in the absence
of intervening Congressional action or changes in projections, the
Trustees project that incoming revenues would be sufficient to pay only
three-quarters of scheduled benefits.

The Trustees concluded, ``Social Security will play a critical role
in the lives of 56 million beneficiaries and 158 million covered
workers and their families in 2011. With informed discussion, creative
thinking, and timely legislative action, Social Security can continue
to protect future generations.''

In announcing the hearing, Chairman Sam Johnson (R-TX) stated,
``This year's annual report again sounds the alarm that Social Security
will be unable to keep its promises to the hard-working Americans who
pay into the system. Americans want, need and deserve a Social Security
program they can count on and a fact-based conservation about how to
get there. This hearing will begin that conversation.

FOCUS OF THE HEARING:

The hearing will focus on the findings in the recently released
2011 Annual Report of the Board of Trustees of the OASDI Trust Funds,
the effect of the trust fund's current cash flow deficit status and
future exhaustion, and the cost of delaying actions to address Social
Security's fiscal challenges for workers and beneficiaries.

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Chairman JOHNSON. The committee will come to order.
I want to thank our witnesses for being here today. And
just know that we appreciate what you all do.
You know, for over 75 years, Social Security has relied on
the strong work ethic of American workers paying part of their
hard-earned wages for promise of future benefits should they
retire, become disabled, or die. You are going to get money
when you die.
Seniors, those with disabilities, widows, and their
families count on these benefits to be there for them. Yet,
according to the recently released annual report of the Social
Security Board of Trustees--and, Doctor, I think you have
spoken on this already--unless we act, Social Security won't be
able to keep its promises.
For example, Social Security's disability insurance program
will be unable to pay full benefits in 2018. Let's face it, the
program is almost broke right now. In addition, by 2036, tax
income will cover only 77 percent of benefits. The average
monthly benefit for a retired worker today is only about
$1,175, a potential cut of about $270. And that is real money,
especially for those that are on a fixed income.
According to the trustees, Social Security is already
running permanent cash flow deficits. As a result, Social
Security must rely on general revenue to pay back, with
interest, Social Security surpluses--with interest--do you hear
that? We have been lying to ourselves for a long time.
Over the next 10 years, Social Security's cash shortfall
will reach $416 billion. And to pay its debt to Social Security
in these times of record deficits and debt, the Treasury is
going to need to borrow more. And we are at our debt limit,
aren't we? We do so at our own economic peril.
Today, the U.S. borrows 40 cents for every dollar it
spends, a good amount of which comes from the Chinese, and
sends the bill to our children and grandchildren. The bottom
line is that China and other foreign governments are also
financing our Social Security program.
Families are right to be worried about the country's
economic future. We face great challenges. But I believe in the
greatness of this country we call America. We need to make sure
this program is safe, secure, and sustainable. And let's be
clear: Current and near retirees deserve the peace of mind of
knowing they will get their promised retirement benefits. We
are paying into it; we need to give them back what they have
done.
At the same time, though, we have a responsibility to
ensure that Social Security will be there for younger workers.
At the end of the day, Americans want, need, and deserve a
Social Security program they can count on and a fact-based
conversation about how to get there.
I look forward to beginning that conversation today, and
thank our two witnesses for the testimony we are about to hear.
With that, I will recognize my famous ``companero,'' Mr.
Becerra, the ranking Democrat.
Mr. BECERRA. Mr. Chairman, thank you very much for holding
this hearing.
Let me begin first, Mr. Chairman, by disagreeing with you.
Social Security is not broke. The trustees report for 2011
shows that Social Security is once again the reliable workhorse
in our economy. Social Security has weathered 13 recessions in
the last 75 years, and never once--let me repeat--never once
failed to pay, on time and in full, every retiree, widow,
child, or disabled worker the benefits they have earned.
Even through the Bush recession, the worst economic
upheaval since the Great Depression where 8 million Americans
lost their jobs and 6.7 million Americans lost their homes, the
Social Security surplus continued to grow.
The Bush recession has hit American families hard. From
June 2007 to the beginning of 2009, it stripped Americans of a
total of $19.4 trillion in household wealth. To put that in
perspective, the Bush recession, by itself, took from Americans
enough wealth to wash away the Nation's entire debt and still
leave America with a $5 trillion-plus surplus. The average
family saw its wealth--the value of its home, retirement, and
other savings and investments--drop by $40,000, more than 25
percent of their total net worth. In contrast--oh, by the way,
families who own stock, they saw their portfolio of stock drop
by more than a third.
In contrast, Social Security remains strong, and the
surplus is real. Social Security and seniors didn't cause the
current deficit. Indeed, Social Security has never--I repeat,
never--added a single cent to the Nation's debt.
The trust fund's income from tax revenues and interest on
the U.S. Treasury bonds that it owns is more than what is being
paid today in benefits. So Social Security will run a surplus
of $69 billion in 2011. At the end of 2011, the Social Security
Trust Fund will hold $2.7 trillion in U.S. Treasury bonds. And
the trustees project that the balance will continue to grow
until 2022, when it reaches $3.7 trillion.
In addition to payroll contributions, the trust fund earns
interest on the Treasury bonds--the interest is real--on
Treasury bonds purchased with workers' contributions. Over its
lifetime, Social Security has so far collected $15.5 trillion
and paid out a total of $12.8 trillion in benefits and
administrative costs. Do the math. Americans have built up a
$2.5 trillion surplus in their trust fund.
The Treasury bonds held by the trust fund are real, and,
just like all other bonds held by Treasury that have been
issued over the last several years, they have real value.
American workers know that their Social Security contributions
are real. They see the amount deducted from their paychecks
every week.
In the long term, in about a quarter century, Social
Security does face a shortfall. But this is a manageable
challenge. The trustees report looks at Social Security
solvency 75 years into the future. This gives Congress the
ability to carefully consider how best to improve and
strengthen Social Security for future generations.
The cost of Social Security's shortfall, which begins
around 2036, would be reduced, for example, by allowing the
Bush tax cuts for the wealthiest 2 percent of Americans to
expire. And we know how important Social Security has been to
so many of our seniors who, today, do not live in poverty.
Mr. Chairman, I appreciate that we are holding this hearing
on Social Security's long-term outlook. However, as you know,
the Social Security Administration has a more immediate need,
which is to ensure that it can get beneficiaries their Social
Security benefits today.
I know that you and I both believe that it is essential
that the Social Security Administration provide today's seniors
with the benefits they have earned. Therefore, I would request
that we also hold a hearing on the Social Security
Administration's operating budget so that we can ensure that it
can continue to provide essential services to today's
beneficiaries, such as processing benefit claims on time and
accurately, processing disability applications and appeals
without lengthy waiting times, and answering calls and
addressing problems for current and future beneficiaries.
We have worked in a bipartisan way in the past to make
Social Security and the Social Security Administration do its
job and do it right. Most recently, we did that when we
provided $500 million in the American Recovery and Reinvestment
Act to reduce the disability backlog. Let's not undo that type
of success. Let's continue to work together in a bipartisan
fashion to strengthen Social Security in the long run.
I yield back.
Chairman JOHNSON. When we get the premise straight, we can
work together. The system is broke, and you know it. They are
borrowing money. Sure, we got pieces of paper over there, but
that is not real money.
Mr. BECERRA. Mr. Chairman, you tell that to any American
who deposits money in a bank, and if the bank tells them,
``That is not real money''----
Chairman JOHNSON. I think our witnesses will confirm that.
Mr. BECERRA [continuing]. They will tell you what they
think about the banking system.
Chairman JOHNSON. We have two witnesses today, both of them
well-versed in the Social Security program.
And I welcome you both here.
Mr. Blahous, would you like to begin your testimony at this
time, please?

STATEMENT OF CHARLES P. BLAHOUS III, PH.D., TRUSTEE, SOCIAL
SECURITY AND MEDICARE BOARD OF TRUSTEES

Mr. BLAHOUS. Thank you, Mr. Chairman, Mr. Ranking Member,
all of the members of this subcommittee. It is a great honor to
appear before you today to discuss the findings of the latest
Social Security trustees report.
My written testimony contains some basic background
information about program benefits, taxes, trust fund
operations. Because our speaking time is limited, what I would
like to do is skip over most of that and just make three main
points in my oral remarks.
The first point is simply this, that Social Security
expenditures are rising and that this carries important
implications both for the program's own financing outlook as
well as for the general Federal budget.
Last year, in 2010, we reached the point, for the first
time since the 1983 reforms, that program expenditures exceeded
incoming program tax revenue. That deficit last year was $49
billion. This year, we are expecting a similar cash deficit of
about $46 billion in 2011.
Now, what is significant about this, or what is new about
this, is that this is actually the first trustees report, since
there have been public trustees, to have concluded that an era
of permanent annual cash deficits has been reached.
Now, as noted in the opening remarks, the trust fund
balance is going to continue to grow in the near term because
of interest payments from the general fund to the trust fund.
So we are in something of an unusual period right now where we
are running a deficit of tax income relative to outgoing
benefit obligations but the trust fund balance is still rising.
A couple of important caveats to bear in mind about the
rising nominal balance of the trust funds: One is that, in
terms of their ability to finance benefits, the purchasing
power of the trust funds has actually already begun to decline
relative to benefit payments. The so-called ``trust fund
ratio'' peaked in 2008. That basically measures the duration of
time that the trust funds could finance benefits in the absence
of payroll tax revenue. And the reason it has begun to decline
is that the cost of paying benefits is rising faster than the
nominal balance of the trust funds.
Second, while the interest payments to the trust funds
increase the balance of the funds, they don't have a unified
budget impact. So what is determinative from a unified budget
standpoint is the balance between the program's tax income and
its outgoing benefit obligation.
And, third, as you alluded to, Mr. Chairman, the data that
I have just described pertains to the combined trust funds, but
the disability insurance trust fund, individually, is in worse
shape. We project trust fund exhaustion in 2018.
The second major point I would like to make is simply that
costs are growing for a very specific reason, and that is
population aging. Before the baby boomers started entering the
retirement rolls and before the recession hit in 2007, the cost
of paying Social Security benefits amounted to about 11\1/2\
percent of the program's payroll tax base, basically 11\1/2\
percent of the taxable wages earned by workers.
Now, it has risen since then, and it is going to continue
to rise in the future. We are projecting that that will hit 17
cents on the dollar by the mid-2030s. And this predominantly
reflects a decline in the ratio of workers to collectors, as
the baby boomers move out of the workforce and into the retiree
population.
The third and final point that I would make, Mr. Chairman,
is simply that these financial challenges, as the trustees
report states in multiple places, should be addressed soon if
we want to minimize adverse impacts on vulnerable populations,
including people already getting benefits, low-income workers,
et cetera.
One of the things the trustee reports do is they provide
for these illustrative examples of how much benefits or taxes
would have to be raised in order to keep the program sound from
a financial standpoint. And these illustrations are useful
insofar as they go, but obviously you, as legislators, have to
consider a number of policy considerations and constraints as
you make policy for the program.
So we can show you, for example, that in 2036 benefits
would have to be reduced by 23 percent to fit within projected
tax revenues. But you might look at that and say, ``Well, I
don't want to reduce benefits for people already receiving
them.'' Historically, Congress has wanted any benefit changes
to be prospective, to affect new retirees, rather than people
already on the rolls.
And so, if you asked the question again and said, how much
would benefits have to be reduced in 2036 if we confine the
changes to new retiree claimants, the answer is, the system
wouldn't be in balance even if 100 percent of those benefits
were cut off.
So you start working through the problem backwards and ask
yourself, well, if I want to take into account bipartisan
policy reality that we don't want to change benefits for people
now in retirement or on the verge of retirement, our window for
acceptable action closes much sooner.
So I would simply summarize by saying that the essential
message conveyed by the reports is that Social Security faces
real and substantial challenges, and we will best serve the
interests of the public if financial corrections are enacted at
the earliest practicable time.
Thank you.
[The prepared statement of Mr. Blahous follows:]

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Chairman JOHNSON. Thank you, sir. Thank you for your
testimony.
Dr. Reischauer, you are recognized.

STATEMENT OF ROBERT D. REISCHAUER, PH.D., TRUSTEE, SOCIAL
SECURITY AND MEDICARE BOARDS OF TRUSTEES

Mr. REISCHAUER. Chairman Johnson and Ranking Member Becerra
and Members of the Subcommittee, I appreciate the opportunity
to discuss the 2011 trustees report with you and with my fellow
public trustee, Dr. Blahous.
We divided up the topic, so you wouldn't hear a repetition.
What I thought I would do would be to cover the financial
outlook changes from last year's report to this year's report.
Every year, of course, the financial situation changes,
sometimes by a little bit, sometimes by a moderate amount,
sometimes by large and very significant amounts. As an
indicator of how significant the changes are from year to year,
the public and the press tend to focus on the dates at which
the various trust funds are projected to be exhausted.
By that metric, the changes between the 2010 and 2011
report are pretty small. The exhaustion date for the OASI trust
fund is now projected to be 2038, which is 2 years earlier than
last year's report suggested.
The projected exhaustion date for the DI trust fund remains
unchanged, at 2018. The fact that it is unchanged shouldn't
allow us to sleep any easier because, of course, 2018 isn't too
far away. That suggests that you will be faced with making some
adjustments sometime in the next 3 or 4 years to ensure that
that trust fund pays on a timely basis full amounts.
A more comprehensive measure of the trust fund's financial
condition is its actuarial balance over the 75-year valuation
period. This balance is essentially the difference between
annual income and costs summarized over 75 years and then
expressed as a percentage of taxable payroll. An actuarial
deficit can be interpreted as the percentage points that would
have to be either added to the current law income rate or
subtracted from the cost rate for each of the next 75 years to
bring the system into actuarial balance.
While the actuarial balance of the DI trust fund has not
changed from last year, it is still minus 0.3 percent; the
actuarial balance for the combined OASDI trust fund has
deteriorated by 0.3 percentage points. So how does this look in
historical perspective? Is that big, or is it small? With the
exception of the change that took place between the 2008 and
2009 trustees reports, you have to go all the way back to the
1994 trustees report to find a bigger change from one year to
the next.
Now, the year-to-year changes in Social Security's
financial situation can occur for a whole lot of reasons. They
occur almost inevitably because the valuation period changes
when we move the whole estimation process forward 1 year. They
also might occur because legislation is enacted, because the
underlying economic and demographic assumptions are modified,
because there are new administrative practices, or because
projection methodologies and data are improved.
If we look at what happened over the course of the 1-year
period that I am contrasting, you find that the 75-year
valuation period, which involved dropping from the year 2010
and adding the year 2085, accounted for a sixth of the
increase, 0.05 percent of the 0.30 percent that I was talking
about.
Clearly, there was no legislation enacted during the past
year that had a significant impact on Social Security's long-
run financial position. However, there were important changes
in the demographic and economic assumptions that were used in
this year's report, and they did have a significant impact, as
I said.
Lower recent and projected mortality for those age 65 and
older account for a third of the increase. Now, in one sense,
that is good news: People are living longer, especially good
news for people like me who are old. And this is the projection
from new data for people 65 and over. That accounts for one-
third of the deterioration in the long-run actuarial balance.
There have also been changes in net immigration that have
to do with falloff in net immigration that occurred as a result
of the weakness in the economy.
The 2011 report also assumes that the economic recovery is
a bit lower, that real earnings in the base year off of which
these projections are made are lower, and it takes longer for
earnings to get back to what would be regarded as a normal
level, and that we have slightly lower real interest rates on
trust fund assets.
Those things, all together, combine to account for about a
sixth of the year-to-year deterioration.
Chairman JOHNSON. Doctor, can you wind it down? Your 5
minutes are up.
Mr. REISCHAUER. Okay. Well, let me just close with one
additional comment----
Chairman JOHNSON. Sure.
Mr. REISCHAUER [continuing]. Because that was all I was
really going to say about the changes.
And that additional comment is, over the last 8 months, Dr.
Blahous and I have had the opportunity to work closely with the
chief actuaries and their staffs, as well as the professional
staffs of the ex-officio members of the Board of Trustees--that
is, Treasury, HHS, DOL, and SSA. One cannot but be impressed by
the depth of their expertise, their objectivity, their
willingness to engage in a free and open debate at all hours of
the day and night, and their dedication and hard work.
And this experience has convinced me, and I believe Chuck
as well, that both the Congress and the public are being very
well-served by the current support for these reports in
providing good information to the Congress for its
deliberations.
Thank you.
[The prepared statement of Mr. Reischauer follows:]

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Chairman JOHNSON. Thank you, sir.
You know, you mentioned that there are actually two funds,
the old age and the disability. And it appears to me that the
disability fund is in worse shape than anything else. Part of
that is our problem, because we haven't had enough judges
working and we haven't handled the situation properly. Mr.
Becerra and I have talked about that, and I think that we need
to try to fix that.
Under current law, the trustees are required to warn
Congress in writing when the program is in real trouble,
meaning when the trust fund IOU assets can only cover 20
percent of benefits for a given year. The chief actuary
provided the unsigned copy of that letter at a recent staff
briefing, and I will insert that into the record, without
objection.
Chairman JOHNSON. Hearing none, okay.
Dr. Blahous, what does this year's report say about the
status of the disability trust fund?
Mr. BLAHOUS. Well, as you know, Mr. Chairman, from a trust
fund financing standpoint, the disability insurance program
faces a more severe challenge than the old-age and survivors
portion of the program, what people think of as the retirement
program.
The disability insurance program began to show an excess of
expenditures over tax income in 2005. It began to have a net
draw on its trust fund assets by 2009. Its trust fund balance
is already in decline; its trust fund ratio is in decline. The
20 percent trust fund ratio warning that you referred to is
something we would hit, I believe, in 2017. And we are
projecting trust fund exhaustion in 2018.
So it is in much more serious condition than the program as
a whole.
Chairman JOHNSON. Well, how many times has the disability
trust fund faced exhaustion in the past, and what have we done
about it?
Mr. BLAHOUS. I don't know the exact number of times, but,
certainly, there have been instances where, in the past, the
disability insurance fund has come close to that 20 percent
ratio. It neared there in the late 1970s. It neared there in
the early 1980s. It neared there in the early 1990s. In the
early 1990s, there was a reallocation of the tax rates between
the retirement portion of the program and the disability
portion of the program.
Chairman JOHNSON. Yeah, but we are stealing from the Social
Security retirement and survivors fund to do that, which will
be broke.
Do you support reallocating the payroll tax to improve the
financing of the disability program at the expense of the
retirement program? That is what we have done in the past.
Mr. BLAHOUS. Well, I want to be very careful, obviously,
sitting here as a trustee, not speaking for Dr. Reischauer, not
speaking for the trustees as a group. But I would----
Chairman JOHNSON. Your personal opinion.
Mr. BLAHOUS. My personal opinion is that the tax rates
certainly warrant review. I mean, we have a 2038 insolvency
date projection for the retirement portion of the program, 2018
for disability, which, in my view, powerfully suggests that we
don't have the tax allocation right. I mean, if you had an
appropriately proportional allocation between the funds, the
two funds should be in a comparable state of financial health.
So I do think it makes sense to review that allocation,
though, as you say, it doesn't increase or improve the net
financing position of the program as a whole. It would just
move resources from one side of the program to the other.
Chairman JOHNSON. You mean that is delaying disaster, is
what you are saying?
Mr. BLAHOUS. Well, you could say that it is putting the two
programs on a comparable course of concern, rather than one
being far worse than the other.
Chairman JOHNSON. Okay.
Dr. Reischauer, would you like to comment on those issues?
Mr. REISCHAUER. I would agree with what Chuck said. Both
programs need to be strengthened. It would be best, in my
opinion, to address these problems together. And if they were
on a comparable time pattern, that would probably facilitate--
--
Chairman JOHNSON. I think that is one thing that Mr.
Becerra and I do agree on, that we do need to have some reform.
And do either of you have specific suggestions as to what
actions we ought to be considering to solve these issues? And
would you submit your recommendations for the record?
Mr. BLAHOUS. I am happy to follow up with specific
suggestions for the record.
I would just say that the way I tend to conceptually think
about the disability program, sort of in five pieces. One is,
do we have the tax allocation right? And I think we probably
don't.
Second, remember, on the retirement side of the program,
there are more levers you can pull. You can pull the
retirement-age lever, you can pull the benefit-formula lever,
you can pull the tax lever. You don't have quite as many levers
on the disability side because the retirement-age lever doesn't
do anything for you. And so, that suggests you almost have to
look at things associated with the tax allocation and with the
benefit formula. And I tend to believe that we do need to
consider the rate of benefit growth above inflation, especially
on the high-income end, in both programs.
I also have a longstanding concern that the way that the
benefit formula works, where it sort of mixes together its aims
of keeping track of each individual's wage history and also
being a progressive redistribution, both of which are worthy
goals, but, combined in one formula, have the effect of really
dampening work incentives on both sides. And that is a
particular problem on the disability side, and I am happy to
follow up with more details.
Chairman JOHNSON. Thank you, sir.
Mr. Becerra, you are recognized.
Mr. BECERRA. Thank you, Mr. Chairman. Let me see if I can
dissuade you that the Social Security program is broke. At
least, I probably can find you a couple hundred million
Americans who would challenge that statement, because sometime
this week, when they receive their paycheck and their paycheck
stub and they look at that paycheck stub, they are going to see
a deduction from their pay for a tax contribution, a FICA tax
contribution, that goes to Social Security and to Medicare.
And, gentlemen, see if you can help me with something. The
number I have from the inception of Social Security is that
American workers, through their tax contributions, through
their paychecks, have contributed $13.9 trillion straight out
of their pocket into the system, into Social Security. And
please correct me, shout out or raise your hand, if it is a
wrong number--$13.9 trillion.
Looking at SSA's records, I see that, since the trust fund
was established in the 1930s to collect the tax contributions
that Americans pay in and because we were collecting more than
what was needed to pay the benefits for those who retired, we
had excess contributions by American workers. Those were put
into this fund, this trust fund. And the money was replaced
with Treasury bonds, the most secure investment in the world,
as far as I know. At least, that is why China continues to lend
us money.
And, to date, since the inception of the trust fund, those
Treasury bonds that are exchanged for the contributions that
taxpayers have paid into the system, those bonds have earned
$1.6 trillion in interest in the trust fund. That quick math,
if I can still remember how to do that, is $15.5 trillion.
SSA says to us that, since the beginning of Social Security
in the 1930s, we have had to pay out to Americans who have
retired, who are disabled workers, or who are the survivors of
an American worker who has perished and therefore can collect
Social Security, that those Americans have been given, have
been paid--Social Security has paid out to them a total of
$12.7 trillion. And in terms of the cost of administering the
program--and, by the way, the Social Security Administration
runs a very tight ship here--the total cost for those 70-plus
years is $0.1 trillion, or $100 billion, for a total cost to
the system, to Americans, of $12.8 trillion.
Again, with my quick math, if I subtract the $12.8 trillion
that we have had to put out in benefits or to pay for costs and
subtract that from all that has been collected from American
taxpayers' contributions, I net $2.7 trillion as a balance that
has not been used.
Now, Mr. Chairman, you said that the system is broke. I
defy you to find me another, whether government program or
private enterprise, that can say it has $2.7 trillion in
reserve, ready to use for the purpose it was contributed.
Chairman JOHNSON. The money isn't there.
Mr. BECERRA. Well, then, if that is a statement, that the
money isn't there, it is not that American workers didn't
contribute it with their taxes; it means that politicians have
been stealing the money and lying----
Chairman JOHNSON. You are exactly right.
Mr. BECERRA. Okay.
Chairman JOHNSON. That is what has happened.
Mr. BECERRA. Well, then we make the distinction and there I
think we can clearly define the lines here.
There are some politicians who say, ``Continue, American
worker, to pay those contributions in your taxes, have that
deduction made, but while we tell you it is going to be put
into a trust fund, we are lying to you, because we are going to
use it to pay for other things we are not willing to pay for.''
And so, Mr. Chairman, the only reason Social Security and
American workers would not have $2.7 trillion that they can
count on in the future to deal with the long-term challenges is
because politicians are willing to steal the money that
American workers have contributed for Social Security.
Dr. Blahous, you mentioned some things that I want to get
into.
Are you fortunate enough to own your home?
Mr. BLAHOUS. I am.
Mr. BECERRA. Outright?
Mr. BLAHOUS. I have a mortgage outstanding.
Mr. BECERRA. Okay. Own your car?
Mr. BLAHOUS. Yes.
Mr. BECERRA. Outright?
Mr. BLAHOUS. That one I own outright, yes.
Mr. BECERRA. Do me a favor, can you tell me if, in your
pocket, you have enough money to pay for your house right now,
the mortgage?
Mr. BLAHOUS. I am a little bit short.
Mr. BECERRA. A little bit short? You are broke. According
to those who say Social Security can't pay out benefits, you
are broke.
Because, see, you, yourself, used the word ``cash
deficits'' to explain what Social Security is incurring, a
``cash deficit.'' What you are saying there is that, today,
Social Security isn't collecting from American workers
contributions sufficient to pay for the benefits that are
paying out. You are disregarding the more than $2\1/2\ trillion
that was built up in the surplus. Because, as the chairman has
said, politicians have been using the money.
But just for the same reason, I could today say that you
are broke. And I guarantee you, if I look at your balance
sheet, I know you are not broke. Social Security is not broke.
Social Security, if people want to be cute and talk about cash
deficits, well, you could say we are broke. But just because
for the same reason you don't carry hundreds of thousands of
dollars in your pocket to pay off your mortgage or your car
loan and you keep it in a bank where you think it will be safe,
Americans trusted politicians who said that if you put the
money in the trust fund, it will be there, the tax dollars you
are contributing will be there, to pay benefits.
And so, therefore, I think, Mr. Chairman, we can resolve
this challenge that Social Security will face a quarter century
from now, but you don't have to steal the money out of the
Social Security Trust Fund that Americans have contributed to
take care of Social Security.
Chairman JOHNSON. Well, you need to work with us to not
steal any more money.
Mr. BECERRA. Mr. Chairman----
Chairman JOHNSON. I would just about guarantee you that Dr.
Blahous, if he decided to cash in all his reserves, could pay
for his house.
Mr. BECERRA. Absolutely. And if the Social Security
Administration were to cash in all of its reserves out of the
trust fund, it could pay benefits for quite some time.
Chairman JOHNSON. Where are they going to get the money
from? We are borrowing money from other countries.
Mr. BECERRA. Oh, so you are essentially saying that those
Treasury bonds that the American public owns through the trust
fund are not real?
Chairman JOHNSON. That is right.
Mr. BECERRA. Okay. And so, do you tell that to China?
Chairman JOHNSON. Well, is China going to fund it?
Mr. BECERRA. No, Mr. Chairman, you have said that the
American people have fake Treasury bonds. So are the Treasury
bonds----
Chairman JOHNSON. The Treasury bonds are there, and the
full faith of the United States Government is behind them.
Mr. BECERRA. Okay. So they are real.
Chairman JOHNSON. But the United States Government doesn't
have any money. We are borrowing it. You ought to go down there
and look at Treasury borrowing money like it is going out of
style.
Mr. BECERRA. I understand what you are saying, Mr.
Chairman. But what you are saying is that Social Security
should pay the price for the terrible spending policies of
others. We did a war in Iraq and Afghanistan, never paid for
it. So Social Security recipients should pay for that?
Chairman JOHNSON. Well, the baby boomers have had an effect
on it.
Mr. BECERRA. The Bush tax cuts, trillions of dollars of
Bush tax cuts, never paid for. So Social Security recipients
should pay for that?
Chairman JOHNSON. Yeah, your time has expired.
Mr. BECERRA. But fortunately not the Social Security Trust
Fund.
Chairman JOHNSON. Mr. Tiberi, you are recognized.
Mr. TIBERI. I have a headache, Mr. Chairman.
Wow. You know, my mom--and Mr. Becerra has heard this--my
mom and dad are pretty simple people. And they say to me, you
know, ``I watch a story on Fox News and then I watch MSNBC. I
see the same story, and there is a different outcome to the
story.'' Now I know what they mean, watching this. I am
thoroughly confused.
And let me kind of recap, and maybe you two can help me,
without my editorial comment. But I will give some anyway.
So you say permanent cash deficit. You say $46 million cash
deficit. You guys say lower mortality rates, falloff on net
immigration, population aging--all things that are part of the
trustees report. I have had actuaries say to me that we have
fewer workers for more retirees that plays into this. I have
had actuaries say to me that we not only live longer, the
system has--and I think, Dr. Reischauer, you alluded to this--
you have a system that wasn't designed for people living as
long as they are living today. So they worked longer, were in
retirement for a shorter period of time; so now you have people
in retirement for a longer period of time.
So Mr. Becerra says, and we heard a little bit more about
it a little bit ago, Social Security remains strong and the
surplus is real. Which is different than what the trustees
report says, which is different than what you say.
Mr. Becerra says, Mr. Chairman agreed, that the problem is
because politicians have taken from the trust fund. But then
you all have said, we paid back the trust fund with interest.
I get a statement from the Social Security Administration
that says, a few years after my full retirement, I can expect
to get 75 percent of what I paid into it. Yet Mr. Becerra says
the system is strong. And that is less than 25 years from now.
Now, maybe----
Mr. BECERRA. Will the gentleman yield?
Mr. TIBERI. Oh, you had a lot of time. If I had more time--
--
Mr. BECERRA. But you have mischaracterized what I said, Mr.
Tiberi. I didn't say that----
Chairman JOHNSON. Regular order.
Mr. BECERRA. I just was asking----
Mr. TIBERI. Go ahead.
Mr. BECERRA. I said that the system is strong----
Mr. TIBERI. For 25 years.
Mr. BECERRA [continuing]. And, for the next 25 years, it
will pay out full benefits.
Mr. TIBERI. Right. Well, in my statement from the Social
Security Administration--I will bring it in and show you--is,
in less than 25 years, I, if I retire at 67, will get less than
100 percent of the benefits that I paid. That is not from me;
that is from them.
Mr. BECERRA. Well, I would love to see that, if it is less
than 25 years.
Mr. TIBERI. Yeah, I will show you. I will show you. And Mr.
Schock probably has a statement that is much scarier than that.
So we can blame the Bush-Pelosi-Reid recession for this,
but the reality is, I think, what you are telling us, the
reality is actuaries, numbers, right? I mean, this isn't about
politics. This isn't about blaming Bush, Pelosi, politicians,
quite frankly. Based upon reading the trustees report, it
appears to me--and we can't even agree on this--that this is
actuarial, this is numbers, this is math. This is more people
retiring, living longer, which Dr. Reischauer said is a good
thing, and I agree. This is a country that has fewer workers
for retirees and net immigration loss.
Can you both expand upon that and help us clear this up? Is
the trust fund being reimbursed by the general revenue fund
with interest over the next 20 years, so that stealing of the
money actually has been paid back? Can you comment on that?
Mr. BLAHOUS. Sure. And, obviously, this discussion that is
playing out today is one that you hear everywhere. It is a
classic example of people looking at different parts of the
animal.
Mr. TIBERI. But you are the experts, so tell us.
Mr. BLAHOUS. Right. Well, basically, there is truth in what
everybody is saying. From the trust fund standpoint, they are
real assets--the bonds in the trust fund are real assets of the
Social Security system. They do earn interest, and it is paid
from the general fund.
A lot of the controversy about the trust funds has to do
less with mechanically what is in there and are they assets for
Social Security, but whether or not there is actually real
saving there, whether there are real savings resources behind
the trust fund, so that when the bonds need to be redeemed, we
are in a position where we can pay those bonds back.
I think all the things that have been said about the trust
funds today are basically correct. I mean, the Social Security
system has a trust fund balance of about $2.6 trillion. It is
earning interest. The trust fund balance continues to rise.
But there is also a lot of things that the trust fund
balance doesn't tell you. It tells you what assets does the
Social Security system command that establish its authority to
pay out benefits. But it doesn't tell you such things as when
you should take action to fix Social Security. If you were to
wait until the point of trust fund depletion, you would have
the harshest, least equitable outcome, relative to acting now
and creating a more equitable schedule of benefits and taxes
going forward.
And it also doesn't tell you whether or not the problem is
still soluble. I mean, we have a very unusual situation right
now. In the 1980s, early 1980s, when they had a Social Security
crisis, they were able to fix it, but one of the reasons they
were able to fix it was that the trust fund balance had been
pretty small, historically, up to that point. So, at the point
when the trust fund was running out, incoming taxes and
outgoing benefit obligations were still pretty close together.
That is not the situation we are in now. If we were to try to
ride the trust fund for the next quarter century and redeem all
those bonds, we would be at a point, ultimately, where taxes
and benefits were so far apart that there would be no
historical political precedent for taking short-term action to
close that shortfall.
So we are in a much more difficult situation. Yes, the
trust fund is real, from the system's perspective. It is an
obligation from the general government's perspective. But it
also doesn't tell you how soon you have to act to fix the
system----
Chairman JOHNSON. The time of the gentleman has expired.
Mr. Schock, you are recognized.
Mr. SCHOCK. Well, thank you both for your testimony.
I, too, am a bit taken back by some of our friends on the
other side of the aisle who seem to believe that everything is
rosy and fine.
You have mentioned that we can pay out benefits for the
next 25 years. But, at the same time, after 25 years, what
happens?
Either one of you.
Mr. REISCHAUER. What happens is that the Social Security
system is not allowed to pay benefits in excess of the
resources that are flowing in through tax revenues, plus
whatever its accumulated asset position is. And so that is why
your statement says that after 2036 there would be a ratable
reduction in your benefit of roughly 25 percent.
The discussion that we have been having from the trustees
report assumes that these assets are real, that the Social
Security Administration will be able to go to the Treasury and
say, ``Here are these pieces of paper; we need cash,'' and that
the Treasury will go and either borrow more money from the
public or other taxes will be raised or other spending will be
cut. And that is the----
Mr. SCHOCK. To make good on those Treasuries.
Mr. REISCHAUER [continuing]. Assumption. And if those
aren't real, you would have a statement that would look very
different. It would be flashing when you opened up your
envelope.
Mr. SCHOCK. So let me make sure I understand this. If I
take Mr. Becerra's rosy view that these are real bonds that the
government will make good on----
Mr. BECERRA. That is a rosy view?
Mr. SCHOCK. Well, I am just saying as opposed to our
chairman's less rosy view. Okay? All right?
So let's take the minority's view, all right, that we are
going to get all the money on this, even in the best-case
scenario, in 25 years you are going to be able to pay me or pay
recipients 76 cents on the dollar?
Mr. REISCHAUER. Correct.
Mr. SCHOCK. Okay. So what this sounds like to me is what
has happened in my State, which has now one of the largest
unfunded liabilities in the Nation for States, whereby when I
read my statement, it says I will still be entitled to my
benefit and the benefit will accrue each year, but I will only
be paid what the Social Security Administration has cash in
hand to cover, correct?
So, basically, the money now will no longer be borrowed
from the Treasury, but Social Security, in essence, will be
borrowing this money from people who are expecting to receive
the benefit in present form?
Do you understand my question?
Mr. REISCHAUER. Yes, I understand your question. The point
here is that the Social Security system sets up promises to
individuals: If you pay in this amount, we will pay you when
you retire that amount, subject to----
Mr. SCHOCK. Only if we have the money.
Mr. REISCHAUER [continuing]. The resources available at
that time.
Mr. SCHOCK. Thank you. And when I am looking at my
statement, it says, based on what I have paid in, I am going to
get about $3,000 a month if I keep working and wait until I am
70. What do you think I am going to make--of the $3,000 a month
I am supposed to get, 40 years from now, not 25 years, what
percent of that $3,000 a month should I expect if we don't make
any changes?
Mr. BLAHOUS. I mean, if you didn't make any changes, then,
by definition, it would be 77 percent declining to 74 percent.
If we made changes, it would be somewhere between 77 percent
and----
Mr. SCHOCK. That is if I retired in 25 years.
Mr. BLAHOUS. Right. But----
Mr. SCHOCK. And the accrued liability only increases each
year, because if you can only pay 76 percent of your
obligations in year 1, even if you can pay 76 percent in year
2, you are not going to pay 76 percent because you owe 25
percent last year. Right? It becomes a snowball effect.
Mr. BLAHOUS. Right. The percentage starts at about 77 cents
on the dollar, and it goes down to about 74 by the end of the
75-year valuation period. And what legally is expected to
happen is that this would not be manifested by the Social
Security Administration's arbitrarily doing a 23 percent cut
across the board. Basically, they would have to delay the
issuance of the benefit checks until the financing came in. So,
in effect, your benefits would be cut 23 percent, gradually
increasing to an annual benefit cut of about 26 percent. But it
would happen simply through your getting fewer benefit checks.
But roughly a quarter of your benefit.
Mr. SCHOCK. Well, I would like to see at some point what
happens each year, because I think that what is going to happen
is something similar to what has happened in many States across
this country, where the States have basically balanced their
books on the back of providers who provide services to the
State, and basically the State has become more and more in debt
to the people to whom they owe money. And I would hate to see
that happen to people who are expecting their Social Security
check to live on.
Chairman JOHNSON. Thank you. The gentleman's time has
expired.
Ms. Berkley, you are recognized.
Ms. BERKLEY. Thank you, Mr. Chairman.
I have a terrible head cold, and I dragged myself to this
hearing. I feel like being here like I feel like having a
toothache. But it is very important, what we are talking about.
And I have about 408,000 Social Security recipients in the
State of Nevada. My congressional district, which encompasses
Las Vegas, has the fastest-growing senior population in the
United States. So issues that affect seniors are very important
to me. And this is about as rosy as I am going to be this
morning.
I am here to find out what it is we can do, given the fact
that a third of the seniors that I represent have no other
income but that Social Security check. They depend on it. They
count on it. They don't have supplemental income. They don't
come from rich families that can take care of them. They don't
have other assets.
What do we do to keep the program solvent beyond the 75-
year window so that other seniors--I actually heard an elected
official in Nevada chide a group of seniors for being in the
position that they are in because they didn't make good choices
when they were young. Now, when I looked out at that audience,
I saw a bunch of World War II vets that enlisted in the Army,
served their country, came home, married their high school
sweetheart, got a job, had children, their children went on to
lead good lives, and now they are retired on their Social
Security. They didn't make bad choices. They depended on the
promises of their government to have an income that they had
been paying into for many, many years since they started
working.
I don't think privatizing the system is a good way to go.
If you are somebody in my income bracket and you have an
extensive portfolio, you can invest in stocks and not have to
worry about the bottom falling out from under you. But for most
people that depend on this Social Security check, they have no
alternative. And I think it is a little too risky to play, dare
I say, roulette with people's only means of survival.
So what suggestions do you have? You deal with this on a
daily basis. What do we do as a Congress, where we obviously
come from different positions, different belief systems, but
know that this system is important enough to keep solvent and
keep our seniors receiving their Social Security?
I would like to hear it, because, as you can hear from
here, we are nowhere near a conclusion that is going to be
beneficial. And the longer we wait, the worse it is going to
get.
So what do you suggest we do in a political environment?
This isn't actuarial, obviously. If it was, it would be an easy
decision. What do you do? How do I protect my people?
Mr. BLAHOUS. Let me answer in two parts.
First, I would just stress the importance of acting soon.
It is very important, especially if you are talking from the
vantage point of people now receiving benefits. And the reason
for that, if you did a solution today, you could honor full
benefits to people now getting them, you could honor benefits
to people on the verge of retirement, and you basically would
face a set of choices that would be I think at least
comparatively benign.
If you wanted to, you could fix the system without raising
taxes, and you could pay a rate of benefit growth for initial
retirees going forward that is somewhere between the rate of
inflation and wage indexation. If you want to pay something
closer to the current benefit formula going forward, you would
have to raise taxes somewhat.
But at least you have comparatively benign----
Ms. BERKLEY. Are you talking payroll taxes?
Mr. BLAHOUS. Well, I am just sort of outlining the choices
today, that basically, within a stable tax rate right now, we
can afford not only to pay today's benefits but, actually, a
level of benefits in the future that is somewhat higher, even
relative to the inflation. Now, if you want to pay for the
current benefit formula, you have to raise either the payroll
tax base or the payroll tax rate somewhat to do it.
But at least your choices today are comparatively benign.
If you wait a while, because of all the baby boomers heading
into the system, then you start facing much more difficult
choices. Then you start facing choices of affecting people
close to retirement or already in retirement or actually having
real declines in benefit levels.
And, of course, the nightmare scenario is you wait until
2036, and then you have the choice between a 23 percent benefit
reduction and a 16.4 percent payroll tax rate. So there is a
huge advantage to today's seniors if we act earlier.
Now, stepping back from that--and this is just my personal
set of policy views. I am not speaking for the trustees. But I
tend to think that the basic levers in Social Security, the
three that I look at are: the eligibility age--right now we are
living about 6 years longer at age 65 than when Social Security
was first established, but we are actually--a typical
beneficiary is collecting benefits 3 years earlier, because we
moved the first age of claims from 65 to 62.
Chairman JOHNSON. Could you summarize?
Mr. BLAHOUS. Well, I would look at the eligibility age; the
benefit formula, especially for high-income beneficiaries; and
the work incentives provided in the system.
Chairman JOHNSON. I think that Mr. Becerra and I are both
energized to try to fix the system. And it can be fixed. And we
agree with you that people who put their money in there expect
to get a return from it.
Ms. BERKLEY. And it is the safety net that millions of
older Americans depend on for their very survival.
Chairman JOHNSON. You are right. You are right. Thank you.
Your time has expired.
Mr. Paulsen, you are recognized.
Mr. PAULSEN. Thank you, Mr. Chairman.
First of all, thank you for being here and for sharing your
expertise, because you are the experts, you deal with this. And
I find much of what is in your report actually fascinating.
Let me just follow up on some of the comments or questions
that were offered a little earlier.
Last night, I was signing high school graduation letters,
and I had 800. I was signing for one of the high schools. I
know a lot of the kids where my daughter is graduating. And,
you know, these high school students are essentially set to
retire in about year 2055. A long time away, right? And many of
them will be going to college or entering the workforce. They
are going to start paying Social Security payroll taxes.
Can you comment, I mean, what rate of return can these
young people expect on the taxes that they are paying? And how
would that be different from the return of their grandparents
and parents?
Please, Mr. Blahous, first.
Mr. BLAHOUS. A typical high school graduate today, they
would probably expect a personal rate of return of about 1\1/2\
to 2 percent over inflation on their Social Security
contributions. That would be a bit less than their parents.
Their parents are probably 2, 2\1/2\. And their grandparents
are probably 3 percent or so.
It has been gradually drifting down, and that reflects a
couple of things. One, it reflects population aging. So, as you
have a declining ratio of workers to beneficiaries, if you want
to have comparable benefit payments between generations, each
succeeding generation has to face a higher tax rate to get it.
And so that causes internal rates of return to be depressed
over time.
The internal returns were highest for the first recipients,
the people who collected benefits without themselves putting in
appreciable amounts into the system. So they were much higher
in the very early years of the program.
Mr. PAULSEN. Mr. Reischauer?
Mr. REISCHAUER. I just want to ask Chuck a question.
That assumes that the people retiring in 2055 don't have a
ratable reduction in their benefit.
Mr. BLAHOUS. Actually, I am assuming the ratable reduction.
Mr. REISCHAUER. Oh, you are.
Mr. BLAHOUS. Yeah. There is basically----
Mr. REISCHAUER. So it would be higher if the system were
fixed in some way without changing the benefit structure that
exists now?
Mr. BLAHOUS. Right.
Mr. PAULSEN. Well, that goes to the question, then, of how
does further delay impact these young people and future
generations? I mean, a future delay in acting on fixing the
program, right? Because this is the trustees report. It is
offering us the challenge of 2036 and, you know, 75 years out.
Mr. BLAHOUS. I mean, I would say that delay--obviously,
delay is costly from the perspective of your choices as
legislators. But it is especially costly from the standpoint of
younger generations, because you wind up in a situation where
the effects of balancing the system are concentrated much more
on younger participants.
So the longer that you leave the current imbalance between
scheduled benefits and projected revenues on the table, and you
have cohort after cohort after cohort of baby boomers entering
the rolls who, themselves, aren't contributing to removing that
imbalance, you are loading up on the younger generation the
adverse consequences of that imbalance.
So delay is particularly costly from the standpoint of
younger workers.
Mr. PAULSEN. You know, it seems to me--and I don't know the
exact wording of the statute, but the reason we have the
trustees report and the reason that you are out there to
provide us the expertise and the benefit of your knowledge and
share information with us, the Members of Congress, is not to
give us sort of the snapshot of where we are right now, but it
is to share the picture of where this program is going, right?
Isn't that what the trustees are responsible for?
Mr. REISCHAUER. ``Under no change in the law'' is what we--
We are not, with our public trustees hats on, opining on
various methods to strengthen the system or alter it.
Mr. PAULSEN. Right. Right.
Well, I just think this is an important point, Mr.
Chairman. I mean, I haven't been in Congress very long, just
for 2 years. But I just notice that Congress always tends to
deal with short-term thinking. We are always thinking 6 months,
2 years. We are never thinking for the long term. And some of
the issues that are portrayed here are no different than what
faced us with AMT, estate taxes, or other issues. If you don't
tackle them earlier, they become much more difficult--the doc
fix--to address down the road. And I think your warnings, early
warnings, are really important.
I mean, there are a couple of things that just really stick
out to me. Right now, cash flow deficits that started earlier,
they are projected to be permanent. That is right around the
corner. And that is going to continue permanently right on down
the road. And the gap is real. And, again, by 2036, it is
either a 32 percent increase in taxes or it is going to be a 23
percent reduction in benefits down the road. I mean, that is
significant.
So I just want to thank you for being here. I know we have,
bipartisanly, have a lot of opportunity and challenge in
addressing this, Mr. Chairman.
Chairman JOHNSON. Thank you, sir. I appreciate your
testimony.
Mr. Smith, you are recognized.
Mr. SMITH. Thank you.
I appreciate the opportunity to have a dialogue here today.
I think we owe the American people a sincere discussion here.
And I am kind of intrigued by the preview of some future
campaign advertisements. But I hope that, as we do look at the
balance, we realize the fact that there is an imbalance.
Would you say that characterizing our situation with Social
Security as an imbalance is accurate?
Mr. REISCHAUER. As looked at over the long run, yes.
Mr. SMITH. Right. And I appreciate that. Because I think,
if anything, though, we can add emphasis to the fact that we
have a commitment to seniors that we will fulfill. And as we
look at trying to address things--I mean, it is fairly cut and
dry as to what needs to be done or what could be done to
address this imbalance long term.
But I share the concern of my colleagues when I see young
people paying out, paying into the system, and, yet, without
the assurance that that balance can be achieved, because there
are political games played here in Washington that I think come
at a huge price tag for the future of young Americans who want
to pursue economic freedom.
And I am one who thinks that economic freedom is one of the
fundamental, core principles of our country, that we can make
sure that there is the safety net well into the future for
those who have been dealt a different hand, certainly no fault
of their own oftentimes.
But if we wanted to balance things out long term--
obviously, we have to look at it that way--what would be the
age--if the retirement age were increased, how much would we
have to raise the retirement age for things to be in balance,
doing nothing else?
Mr. BECERRA. I want to hear this one.
Mr. BLAHOUS. Yeah, it is a lot. I mean, at this point, it
is a lot.
With retirement-age changes, much depends on the rate at
which you phase it in. So, you know, a lot of proposals have it
going very, very gradually. If you look at the Simpson-Bowles
proposal, they start phasing in a retirement-age increase by 1
month every 2 years. You basically run out of the valuation
period; the 75-year period runs out before the retirement age
gets up fast enough to actually close the imbalance. So you
would have to raise it much more dramatically.
But I think, in theory, you would have to get it well up
into the mid 70s, the normal retirement age, if you wanted to
close the imbalance through retirement-age changes alone. The
proposals that are often talked about to raise it to 67, 68,
and 69 over time only solve a small fraction of the actuarial
deficit.
Mr. SMITH. Thank you.
Mr. REISCHAUER. Just to clarify things, the normal
retirement age is the age at which you get full benefits, and
that is 66 now. And it will gradually rise, starting in a few
years, to become 67. Then there is the early retirement age, at
which you are eligible for reduced benefits.
And so the answer to your question could also depend on
whether you are moving the early end and the normal retirement
age up together or you are just moving the normal retirement
age up. And when you move the normal retirement age up alone,
the benefits you receive at the early retirement age go down
very significantly.
Mr. SMITH. Okay.
Thank you, Mr. Chairman. I yield back.
Chairman JOHNSON. Thank you.
Mr. Berg, you are recognized.
Mr. BERG. Thank you, Mr. Chairman.
Well, first of all, I just really appreciate you being here
and presenting. And I can't imagine all the work that has gone
into the last 12 months and what your trustees have brought
forward.
I don't know where to even start on this thing, but, you
know, I got elected to take on some of these problems and fix
the problems. And I think we have political agendas, we have
financial agendas, we have people on a lot of different agendas
here. But I just want to make it really, really simple. And I
am not asking you to represent anyone except yourself.
But if I said to you, we have to fix this problem so it is
stable, so cash flows for the long term, what specifically
would you do if we said, the next 30 days we have to fix this,
what would you do? What are the key things you would do, for
both the old age and disability?
Mr. BLAHOUS. Just very visibly and publicly taking off my
trustees hat, I tend to think in terms of three main levers on
Social Security.
One is the eligibility age. As Dr. Reischauer said, there
are moving parts even to the eligibility age. There is normal
retirement age, there is early eligibility age. And so, to
understand what you get at a given age of claim, you have to
know a lot of things, you know, what those are and, also, what
the basic benefit is at normal retirement age.
Longevity has increased about 6 years at age 65 since
Social Security was first established. But due to the
establishment of early eligibility age, people are more
typically claiming benefits at 62 now. So a typical beneficiary
is getting benefits for about 9 additional years. Even if the
early eligibility age went gradually up to 65 and the normal
retirement age went gradually up to 70, you would still be in a
position----
Mr. BERG. So what would your age number be?
Mr. BLAHOUS. Well, I wouldn't do it all through--I mean,
again, this is personal speculation. But I think any
eligibility-age changes have to be very gradual. And I happen
to be of the view that it is important to raise the early
eligibility age at least back to 65 so that people aren't
claiming earlier than they were when the system was first
established.
Even if the early eligibility age went back to 65 and the
normal retirement age went to 70, people would still be
claiming benefits no later than they were then and getting a
much higher benefit because of the numerous benefit increases
since then. So that is one lever.
Another one is just constraining the growth of benefits on
the higher-income end. There are sort of two families of plans
to do that. There are the so-called progressive indexing plans,
where, basically, benefits on the lower-income end rise at the
rate of wage growth in the economy, and on the higher-income
end they rise at the rate of inflation, and everybody else is
somewhere in between. That is one family of plans. Another one
sort of surgically gets into the benefit formula and changes
the numbers in the benefit formula to target benefit growth on
the high-income end. That is basically the Simpson-Bowles
approach. They are both valid approaches, and they both have
the same intended effect.
And the last category of things I personally would look at
is, there are a lot of very skewed work incentives in the
current system. The current system, the actuarial penalty for
early retirement claims may not be adequate. The actuarial
reward for delayed retirement claims may not be adequate. This
may incentivize people to leave the workforce earlier.
There are quirks in the way the benefit formula works. The
way the benefit formula works now, it is trying to do two
things: It keeps track of your wage history so it knows whether
you are a high-income person or a low-income person, but it is
also trying to be progressive. It is trying to pay a higher
return to people on the lower-income end. So what happens is,
the longer you work, your lifetime average earnings rises. And
because of the progressivity of the benefit formula, your
internal returns drop.
And once you hit 35 earnings years, then your personal
returns really plummet. So when you are a senior, you are
contemplating whether to a transition job, a part-time job in
transition to retirement, the system is basically telling you
that if you keep working and paying payroll taxes, there is
going to be almost no change if your benefit.
So there are a lot of changes I would make to that just to
better incentivize work. But, again, not speaking as a trustee.
Mr. BERG. Thank you.
Take a crack at it?
Mr. REISCHAUER. Yes, I was hoping you were going to run out
of time. But I will take off my trustees hat, as well, and say
that, were I the czar and asked to go off in a room and try to
do this without considering political consequences, I would
first of all----
Chairman JOHNSON. We are going to build a wall right here.
Mr. REISCHAUER [continuing]. Would raise the eligibility
age and index it to longevity. Do it very gradually and not by
huge amounts.
I would increase the computation period over which benefits
are calculated. Now we take your top 35 years of earnings and
average them, and that leads to a situation where we don't make
as much of a distinction as I believe we should between
individuals who have very high earnings in a few years versus
somebody who works a long career at a relatively low wage. And
so I would make an adjustment on that front.
I would adjust the benefits in ways that would probably
raise them at the bottom and dampen their growth at the top,
and institute some kind of minimum benefit that was more
adequate than what we have now.
I would phase in coverage for all State and local workers,
about a quarter of whom are now outside the system. And it
leads not only to huge administrative complexities but certain
inequitable situations.
And I would raise the taxable maximum, which is now indexed
to the growth of average wages but has led to a situation where
the fraction of total earnings that are covered, which has
bounced around at about 91 percent in certain years, is down in
the mid to low 80 percent now.
And also make an adjustment for the fact that a larger
fraction of total compensation that people are getting now
comes in the form of nontaxable fringe benefits, namely health
insurance.
And so, making some adjustments that way. And I think, you
know, a balance between taxes----
Chairman JOHNSON. The gentleman's time has expired. Can you
put that----
Mr. REISCHAUER. As soon as I said ``taxes''?
Chairman JOHNSON. Can you put some of that in writing, 1,
2, 3, 4, 5, for us, please?
Mr. REISCHAUER. Yes. Both of us will.
Chairman JOHNSON. I would appreciate it. We probably have
it on the record anyway, but thank you.
Mr. Brady, you are recognized.
Mr. BRADY. Thank you, Mr. Chairman.
Today's job numbers are heartbreaking for job seekers,
especially coming on a string of bad economic news: first-
quarter GDP just anemic; manufacturing index going down.
Consumer confidence is almost as low as it was more than 2
years ago. And, in fact, the unemployment rate at 9.1 percent
is artificially low. That is because people have given up
looking for work. In fact, we have the fewest percentage of
Americans in the workforce in a quarter of a century. And a lot
of them have given up hope, and, frankly, many of them will
struggle to get back into the workforce.
Who would have thought the highlight of the Obama recovery
was two Christmases ago? We are in real trouble. And the
failure to get this economy going has a direct impact on Social
Security.
Today, we have heard two major red flags raised. Dr.
Blahous has said this is the first report since 1983 projecting
permanent cash-flow deficits. And Dr. Reischauer said that, in
looking at the 75-year outlook, this is the largest single-year
deterioration since 1994. That ought to be real red flags and
certainly, I think, counters the argument that things are just
rosy in Social Security. You would have to be in denial to
believe we don't have a real problem in this program.
These cash deficits that are now permanent, as I look at
the estimations, it looks like Social Security's cash shortfall
in the next 10 years will be $416 billion. My question is, the
current deficits we are running, is it fair to say that Social
Security's permanent and growing cash-flow deficits are adding
to the unified Federal deficit? And, if so, does that increase
the burden of debt we are leaving to our kids and grandkids?
Dr. Blahous, is that adding to our debt?
Mr. BLAHOUS. I would say yes. From a trust fund standpoint,
the trust fund balances are continuing to rise. So if you
looked narrowly at the world of the Social Security Trust Fund,
its balances are rising. But if you look at the unified Federal
budget, the shortfall of tax income relative to outgoing
benefit expenditures adds to the unified Federal deficit.
Mr. BRADY. And, right now, we are borrowing to make up the
difference.
Mr. BLAHOUS. That is right.
Mr. BRADY. Dr. Reischauer, is this adding to the unified
debt?
Mr. REISCHAUER. Yes, by definition, it is.
Just one comment on your preamble, and that is, I said that
the deterioration in the actuarial balance was as large or
larger than any since the early 1990s, but a very small portion
of that is due to economics, changed economic assumptions. Most
of it was due to changes in demographic assumptions and
improved data and----
Mr. BRADY. Are you concerned about----
Mr. REISCHAUER [continuing]. Some improved methodologies.
Mr. BRADY. If Congress doesn't act, are you concerned about
the future of Social Security?
Mr. REISCHAUER. Yes. No, I mean, I think this is a----
Mr. BRADY. Yes or no?
Mr. REISCHAUER. Yes. No, yes. I said yes----
Mr. BRADY. No, comma, yes. Okay. I get it.
Mr. REISCHAUER. Yes, yes.
Mr. BRADY. I knew that.
Mr. REISCHAUER. You know, this is a challenge going
forward. It is not like the debt ceiling, something that has to
be addressed in the next few months or even the next few years.
As Dr. Blahous has said, the sooner you address it, the better
off we will be. The options will be greater, the ability of
affected parties to respond will be more.
Mr. BRADY. I know the answer to this, but there is probably
a need to clear things up. And I stepped out for a minute. But
in the trust fund today, we don't have cash in the trust fund
today, correct? We don't have a Social Security Trust Fund
comprised of cash?
Mr. REISCHAUER. No, you don't. But your bank account
doesn't have cash in it either, and yet, when you put your ATM
card in, cash comes out.
Mr. BRADY. Yeah. But that is because you have actually
deposited cash before and the bank is holding it. Today--
Mr. REISCHAUER. Well, the bank has actually lent it to
somebody. So the bank doesn't always even have it.
Mr. BRADY [continuing]. The U.S. Government is holding
those IOUs, correct? And these are nonmarketable securities. So
there is a difference between the security sold to a firm or to
China versus the nonmarketable securities within the trust
fund. Right now, because we are running a deficit, in effect,
we have borrowing authority to make up any difference each year
in Social Security.
Correct, Dr. Blahous?
Mr. BLAHOUS. Yes, the bonds in the trust fund are special-
issue Treasury bonds. And, basically, they earn a rate of
interest that is pegged to a market rate of interest. But they
are unusual bonds in the sense they are basically called as
needed by the Social Security system.
Mr. BRADY. And the call is on taxpayers and the Federal
Government.
Mr. BLAHOUS. Right.
Mr. BRADY. So when we are running short, as we are--and you
said permanently running short in this program--that means we
permanently borrow to make up the difference each year.
Thank you, Mr. Chairman.
Chairman JOHNSON. Thank you.
Mr. REISCHAUER. But right now the Treasury is giving an
interest payment that is larger than the amount that you have
to borrow. So----
Mr. BRADY. And that has to be paid back, is another call on
taxpayers and the government.
Chairman JOHNSON. Yeah, they sell Treasuries every day.
Have you been down there and watched them? We borrow money like
it is going out of style.
Mr. Becerra, you are recognized for one quick question. And
then, we have a vote, so we will have to adjourn.
Mr. BECERRA. Thanks. Thanks, Mr. Chairman.
I just want to clarify, these nonmarketable special-issue
bonds, they are not just held by Social Security, they are also
held by foreign governments and other folks, as well.
Mr. BRADY. No, that is not true.
Mr. BECERRA. That is true, absolutely true. It absolutely
is true.
Mr. BRADY. You can answer.
Mr. BECERRA. So----
Chairman JOHNSON. Wait a minute. Let him respond.
Mr. BLAHOUS. Well, I mean, I am not an expert in the
broader set of securities sold by the Federal Government, but
the bonds that are issued to Social Security are sort of a
special-issue creation of the Social Security Act that is sort
of uniquely created for the Social Security system.
Mr. BECERRA. Right, backed up by the money that taxpayers
contribute into the system. It is not as if they are fictitious
bonds. They are bonds backed by the money that taxpayers put
into it.
Mr. BRADY. But they are different from the securities, the
Treasuries that are held by the public.
Mr. BECERRA. If, by that, you mean that the money that
foreign countries give us is better than money that American
taxpayers give to the Federal Government, then perhaps they are
different. But a dollar is a dollar.
One quick question I just wanted to ask because we have--I
think everyone agrees that, long term, we want to do something
to make sure that we don't have a shortfall in Social Security
but that, right now, the Social Security system continues to
contribute.
The question I have is this. Has the Social Security system
ever contributed a cent to the deficit that the country faces
today?
Mr. BLAHOUS. I mean, I would state that it is contributing
to the deficit now in 2011 and did in 2010, as well.
Mr. BECERRA. And how is that?
Mr. BLAHOUS. Well, basically, the amount of revenue the
program is generating----
Mr. BECERRA. On an annual basis.
Mr. BLAHOUS [continuing]. Is less, on an annual basis, is
less than the amount that the program is sending out the door.
Mr. BECERRA. And so, Dr. Blahous, then you are taking the
fact that the money that was contributed in the last 10 years--
I won't even talk about the last 30 years, but the last 10
years--when taxpayers were contributing more than was being
used by Social Security, that no longer exists?
Mr. BLAHOUS. Well, no question, I understand the
fundamental point, which is that if you take the total value of
Social Security's positive contributions to the budget balance
since the 1980s, that far outweighs the negative contribution
it is making in 2010 and 2011. So I certainly recognize that
point.
Mr. BECERRA. Right, but, I mean, I think it is important
for American taxpayers to understand what folks are saying.
When they contribute out of their paycheck for Social Security
and the government takes that money and says, ``We don't need
it all today, so we are going to put some of it into Treasury
bonds so that now we can use that money today as the Federal
Government for other operating expenses, but you are going to
hold Treasury bonds so that when you do retire you can collect
it''--if you say that we are running deficits today, then you
have essentially said that those Treasury bonds that were
backed up by the money that same worker contributed last year
has evaporated.
Chairman JOHNSON. Yeah, let's call it quits to the
interrogation.
And I would like to make one comment. FactCheck.org says it
this way: Quote, ``Some senior Democrats are claiming that
Social Security does not contribute one penny to the Federal
deficit. That is not true. The fact is, the Federal Government
had to borrow $37 billion last year to finance Social Security
and will need to borrow more this year. The red ink is
projected to total well over a half a trillion dollars in the
coming decade.''
Mr. BECERRA. FactCheck's pants are on fire, I think.
Chairman JOHNSON. And, with that, we are going to close the
hearing. We have a vote going on.
I appreciate the two of you being here. That was very good
testimony. Thank you.
The committee is adjourned.
[Whereupon, at 10:27 a.m., the subcommittee was adjourned.]

QUESTIONS FOR THE RECORD

Charles P. Blahous III, Ph.D.

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Robert D. Reischauer, Ph.D.

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SUBMISSIONS FOR THE RECORD

The Center for Fiscal Equity

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