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

SOCIAL SECURITY'S FINANCES

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

HEARING

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 23, 2011

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Serial No. 112-SS6

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Printed for the use of the Committee on Ways and Means

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
RICK BERG, North Dakota FORTNEY PETE STARK, California
ADRIAN SMITH, Nebraska
KENNY MARCHANT, New York

Jon Traub, Staff Director

Janice Mays, Minority Staff Director

C O N T E N T S

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Page

Advisory of June 23, 2011, announcing the hearing................ 2

WITNESSES

Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation.. 7
Stephen C. Goss, Chief Actuary, Office of the Chief Actuary,
Social Security Administration................................. 47
Tim Lee, Texas Retired Teachers Association, on behalf of
Coalition to Preserve Retirement Security...................... 60
Alex Brill, Research Fellow, American Enterprise Institute....... 69
Mark J. Warshawsky, Ph.D., Former Assistant Secretary for
Economic Policy, U.S. Department of the Treasury............... 77
Andrew G. Biggs, Ph.D., Resident Scholar, American Enterprise
Institute...................................................... 82

SUBMISSIONS FOR THE RECORD

Questions for the Record......................................... 104
The Honorable Mr. Becerra........................................ 114
The Honorable Mr. Batchelder..................................... 116
Center for Fiscal Equity......................................... 118
International Association of Fire Fighters....................... 126
Jim Miller....................................................... 129
National Committee to Preserve Social Security and Medicare...... 130

SOCIAL SECURITY'S FINANCES

----------

THURSDAY, JUNE 23, 2011

U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
joint with
Subcommittee on Social Security,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:04 p.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 Social Security's Finances

June 23, 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 a hearing on Social Security's
current revenue streams, proposed changes to those structures and the
impact they would have on the program, beneficiaries, workers and the
economy. The hearing will take place on Thursday, June 23, 2011 in B-
318 Rayburn House Office Building, beginning at 1:30 p.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 2011 Annual Report of the Social Security Board of Trustees
again highlighted the financing challenges facing the Old Age and
Survivors Insurance (OASI) and the Disability Insurance (DI) programs.
The trustees project permanent and growing cash flow deficits, and by
2036 the combined OASI and DI Trust Funds are projected to become
exhausted and unable to pay scheduled benefits. The DI Trust Fund is
projected to become exhausted in 2018. The Public Trustees expressed
the need for action soon in order to be able to protect vulnerable
populations and those at or near retirement age.

Social Security benefits are financed primarily by payroll taxes on
covered wages. The Federal Insurance Contributions Act (``FICA'')
imposes a tax on covered wages up to the taxable wage base of $106,800
in 2011, divided between employers (6.2%) and employees (6.2%). Self-
employed taxpayers are subject to payroll tax under the Self-Employed
Contributions Act (``SECA'') on the same wage base with a rate equal to
12.4 percent (the total combined employer-employee rate). The wage base
is adjusted annually based on average wage growth, if a Social Security
cost-of-living adjustment is payable.

The Tax Relief, Unemployment Insurance Reauthorization, and Job
Creation Act of 2010 reduced the OASDI payroll tax paid by the worker
by 2 percentage points in calendar year 2011. The law also required the
Secretary of the Treasury to make general revenue transfers to replace
revenues temporarily diverted from the trust funds.

According to the Social Security Administration, about 94 percent
of workers in paid employment and self-employment are covered under the
OASDI program. The majority of non-covered workers are in State, local,
or the Federal Government.

In addition to Social Security payroll taxes, certain Social
Security beneficiaries must include a portion of Social Security
benefits in taxable income for the Federal income tax, and the Social
Security program receives part of those taxes.

According to the 2011 Annual Report of the Social Security
Trustees, in calendar year 2010, Social Security non-interest income
was $637.3 billion from payroll taxes and $22.7 billion from the
taxation of benefits. Social Security tax income as a percent of
taxable payroll will grow from 12.52 in 2011 to 13.31 in 2086, due to
growth in income from the taxation of benefits.

The Social Security actuaries have estimated a number of revenue
generating proposals, including those proposed by the President's
Fiscal Commission which would require all newly hired state and local
workers to participate in Social Security and increase the amount of
earnings subject to Social Security payroll taxes by increasing the
taxable wage base.

In announcing the hearing, Chairman Sam Johnson (R-TX) stated,
``When Social Security first began, the payroll tax was only 2
percent--evenly split between employers and employees--on the first
$3,000 in wages. Today the payroll tax is 12.4% on the first $106,800
in wages. Yet despite the tax increases, Social Security is in trouble.
Clearly tax hikes have not been a panacea. This hearing will provide an
opportunity to learn more about Social Security revenues, options for
change and their impacts.''

FOCUS OF THE HEARING:

The hearing will focus on the sources of Social Security's
revenues, how those sources have changed over time, options for change
and their impacts.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Please Note: Any person(s) and/or organization(s) wishing to submit
for the hearing record must follow the appropriate link on the hearing
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From the Committee homepage, http://waysandmeans.house.gov, select
``Hearings.'' Select the hearing for which you would like to submit,
and click on the link entitled, ``Click here to provide a submission
for the record.'' Once you have followed the online instructions,
submit all requested information. ATTACH your submission as a Word or
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listed below, by the close of business on Thursday, July 14, 2011.
Finally, please note that due to the change in House mail policy, the
U.S. Capitol Police will refuse sealed-package deliveries to all House
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problems, please call (202) 225-1721 or (202) 225-3625.

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The Committee relies on electronic submissions for printing the
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3. All submissions must include a list of all clients, persons and/
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The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
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Note: All Committee advisories and news releases are available on
the World Wide Web at http://www.waysandmeans.house.gov/.

Chairman JOHNSON. Thank you all for being here. I want to
apologize to our witnesses and audience for the delay due to
the vote, and I thank you for your patience. This meeting will
come to order.
I want to thank you all for your testimony ahead of time.
As we heard from the public trustees at our June the 3rd
hearing, Social Security revenues will cover only 77 percent of
the benefits by 2036. Congress needs to act, and the sooner we
do so, the sooner we can protect those who are most vulnerable,
along with current retirees and those nearing retirement. And
for younger workers and families we have a responsibility to
provide certainty about the future of their Social Security.
To that end, I was heartened to learn of the deliberations
of AARP's volunteer board, and welcome their acknowledgment
that Social Security will be unable to pay benefits promised in
the future, and how the program needs to be strengthened for
generations to come.
Today we will learn more about Social Security's current
revenue sources, proposed changes to those sources, and their
impact on Social Security workers, beneficiaries, and economic
growth.
Since its beginning, Social Security has been a program
primarily financed by workers for workers. Workers' hard-earned
payroll taxes fund the majority of the benefits Social Security
pays out each year. It is important to point out, as well, that
the number of workers paying into Social Security has been
steadily declining over the years. In 1950, for instance, there
were 16\1/2\ workers for each beneficiary. Today, just 2.9
workers, and in 14 years, 2.3 workers per beneficiary.
You are shaking your head; you agree.
[Laughter.]
Chairman JOHNSON. In 1935, the tax rate for employers and
employees each was just 1 percent on earnings, up to $3,000 a
year. How far we have come. Congress has raised the payroll tax
14 times since then. Today the tax rate is 6.2 percent for
employees and employers, for a combined 12.4 percent.
The amount of earnings subject to payroll tax, however,
known as the taxable wage base, has also grown over time. In
1935 the taxable wage base was $3,000. Over the life time of
the program, the taxable wage base has been statutorily
increased by Congress 10 times. In 1972, Congress passed
legislation that increased the base automatically to reflect
the growth in average wages. However, soon afterwards, Congress
increased the wage base even further over a number of years.
Annual tax increases have generally been in autopilot since
1982. Since then, the wage base has increased 26 times from
$32,400 to its current level of $106,800. Probably go up again
this year, too, you all think?
But despite these tax increases, Social Security is still
in trouble. Not enough young workers are paying this tax to
sustain the Baby Boomer wave of retirees leaving the workforce
and drawing benefits at the rate of 10,000 a day for the next
19 years. Clearly, we can't tax our way to sustainable
solvency.
And, as we consider the program's financial state, we can't
lose sight of the fact that throughout the history of the
program, Congress has also increased benefits beyond the
ability of the program to pay for them in the long run.
The challenge Congress now faces goes beyond just
rebalancing Social Security's finances. With chronic
unemployment, falling incomes, and so many young workers unable
to start their careers, nothing we do should make it harder for
Americans to find good-paying jobs.
I am sure, if you ask any ordinary citizen, what is vitally
important to them, you will likely hear, ``good paying jobs.''
They worry America is falling behind, and that their children's
futures will be dictated by foreign predators. Americans want
and expect a balance between creating a new and better economy
for their children and caring for their elders.
That is why, as we look ahead, Social Security must be what
its founders intended: a program that lives within its means.
Americans want, need, and deserve nothing less. We must do this
for the American people. And I am confident that, by working
together, we will.
Mr. Becerra, would you care to make a statement?
Mr. BECERRA. Yes, Mr. Chairman, I would. Mr. Chairman,
thank you very much. Thank you for holding this hearing today.
I would like to begin, first, by acknowledging something
the chairman said, that we are looking at somewhere around 2036
before Social Security will face a situation where it doesn't
go broke, it won't go bankrupt, but it will have a challenge in
providing the benefits that Americans today expect to receive
when they retire in that year of 2036.
I think that is an important acknowledgment, Mr. Chairman,
because too often the conversation--or should I say the
debate--on Social Security is one where some would discount the
money that Americans, on a daily basis, are contributing to
Social Security through a tax, the FICA tax, that they
contribute to the Social Security system and the trust fund.
The more we acknowledge that today Social Security is
paying benefits on time and in full, and has always done that
for more than 75 years, and that it will continue to do so for
another good 20-some-odd years, it becomes very important.
Because, unlike the rest of the Federal Government, which is in
fiscal crisis, Social Security today goes forward.
Remember, as well, that, at the same time that Social
Security has never missed a payment, most Americans a couple of
years ago were afraid to look at their 401(k) or IRA
statements, because they saw what was happening to their
private savings and their pension funds. It becomes very
important for us to have a conversation about Social Security
that talks about the facts on the ground.
And, Mr. Chairman, I think many people will have to
acknowledge that the facts are very stubborn things. They don't
lie. And the reality is that today we have a system that has
never failed the American public. And I don't believe anyone in
this chamber would like to see Social Security fail. And that
is why I do believe, Mr. Chairman, like you, that there is a
chance for some bipartisan cooperation in dealing with the
future challenges that Social Security will face, much because
of the Baby Boom generation, but many of them simply because of
the fact that America, like every other country, continues to
change.
The challenge has nothing to do with any sneaky numbers or
broken magic on the part of Social Security to pay benefits. It
is a very straightforward system. You put something in, and
we've been able to guarantee that we put something out to pay
you.
I actually disagree with you on one point, Mr. Chairman.
Social Security is not overly generous. Social Security hasn't
gotten too big when it comes to what it provides to Americans.
The benefits today are very modest. And most seniors have very
limited incomes. The average benefit for a senior today is
somewhere around $14,000 a year. Among senior households, the
median income is only about $24,000. So when you are talking
about a household that may have more than one senior, you are
still only looking at about $24,000.
One out of every three beneficiaries under Social Security
depends on that Social Security paycheck to provide virtually
all of their income. And less than half of seniors in America
have a pension or a savings plan from their work. Only the
wealthiest one-fifth of seniors in this country have any
significant income from assets.
Keep in mind, as I said before, that were it not for Social
Security, in 2008 all those folks who are ready to retire in
this country probably were looking at a collapse of their IRA
and their 401(k). At least a third of the value of those
privately held assets had disappeared.
And that is why, Mr. Chairman, it does disturb me that some
of the proposals we see from my Republican colleagues call for
nothing but cuts to the benefits in Social Security, whether it
is the privatization plan presented by Mr. Sessions, a member
of the leadership in the House Republican Conference, or
whether it is the plan of the chairman of the Budget Committee,
Mr. Ryan, who has had plans in the past to privatize the
system, and whose budget calls for a fast-tracking on future
cuts of Social Security, or whether it was the recent proposal
by Senator Hutchinson to reduce the COLA by one percent at a
time when seniors haven't received a COLA increase in two
years, these are all cuts.
And at a time when all Americans are suffering through
difficult economic times, I don't believe we want to see our
seniors go back to the 1930s when, what was it, some 3 out of
every 4 that would retire retired into poverty.
And so this is a fabulous program that has worked well. But
demographics will make it more challenging in about a quarter
of a century. And rather than wait a quarter of a century, we
should tackle it now. And that is why, Mr. Chairman, I look
forward to working with you and all of our colleagues on this
committee to try to present to our colleagues and the rest of
the House a proposal in the future that can really take us a
long ways in making sure that Social Security will once again
be there for all Americans, as it has for more than 75 years.
I yield back.
Chairman JOHNSON. Thank you. Just know that you and I
disagree on how the money is being counted, and there are a
lot----
Mr. BECERRA. I think you have made that very clear, Mr.
Chairman.
Chairman JOHNSON. There are a lot of IOUs out there in the
Social Security trust fund that have to be paid from the
general revenue.
Mr. BECERRA. China, Japan, and every major corporation in
America knows the same thing, and they are waiting to be paid,
as well.
Chairman JOHNSON. I know. Before we move on to our
testimony today, I want to remind our witnesses to limit your
oral statements to five minutes, if you can.
Without objection, all the written testimony will be made
part of the permanent record.
We have one panel today, and our witnesses who are seated
at the table are Tom Barthold, Chief of Staff, Joint Committee
on Taxation; Stephen Goss, Chief Actuary, Office of the Chief
Actuary, Social Security Administration; Tim Lee, Texas Retired
Teachers Association, on behalf of the Coalition to Preserve
Retirement Security--we have had some arguments over that one,
too--Alex Brill, research fellow, American Enterprise
Institute; Mark Warshawsky, Ph.D., former Assistant Secretary
for Economic Policy, U.S. Department of the Treasury; and
Andrew G. Biggs, Ph.D., resident scholar, American Enterprise
Institute.
I thank all of you for being here today.
And, Mr. Barthold, you are recognized for five minutes.

STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT
COMMITTEE ON TAXATION

Mr. BARTHOLD. Well, thank you, Chairman Johnson and Mr.
Becerra. Your subcommittee staff had asked if my staff and I
could prepare background discussion of the Social Security tax
base, and that is what was provided to you and your staff in
our publication JCX-36-11. I will take my couple of minutes
here to summarize the high points, many of which you actually
introduced in your opening remark.
The Social Security and Medicare trust funds are primarily
financed by payroll taxes on covered wages. The payroll taxes
include the FICA tax, Federal Insurance Contribution Act, and
the SECA tax, the Self-Employed Contributions Act. There is
also, for the Medicare trust fund, an additional hospital
insurance tax. And, in addition, funds are contributed to both
the Medicare and Social Security trust funds from an income tax
on certain included Social Security benefits.
I will discuss first, in brief, the payroll taxes. FICA
imposes taxes on both employers and employees, based on an
amount of wages paid to the employee during the year. It is
composed of two parts. The OASDI tax equals 6.2 percent of
covered wages, up to the maximum wage base, $106,800 for this
year, as noted by the chairman. And there is an HI tax equal to
1.45 percent of covered wages. The employee's tax is generally
equal to the amount of tax imposed on the employer.
Likewise, the SECA tax has two components, and the rate of
the SECA tax is set to equal the combined rates of the employee
and the employer under the FICA tax. So, under the OASDI
component, the current rate of tax is 12.4 percent on self-
employment income, up to the Social Security wage base of
$106,800. And under the HI component, the tax rate is 2.9
percent on all self-employed employment income.
Now, I should note that, for the current year, there is a
two percentage point reduction in the OASDI rate to 4.2
percent, both for the employee portion of FICA, as well as for
SECA. This was enacted as a provision in late 2010.
The present law--as noted by the chairman, the present law
wage base is indexed each year, based on growth in average
wages in the national economy. Now, under these taxes the law
provides certain exceptions from the wage base for certain
types of employment and certain types of remuneration.
One type of employment exempted from Social Security tax is
based on categories of workers who are covered under
alternative retirement systems. These include certain state and
local government employees, employees of the Federal
Government, and workers whose compensation is subject to the
Railroad Retirement tax system.
A second type of exempted employee involves workers with
religious beliefs whose beliefs preclude participation in the
Social Security system.
A third type of exempted employment is wages to students.
There has been a recent--I will note that there is a recent
dispute resolved by the Supreme Court in the so-called Mayo
case. The Supreme Court in that case upheld an IRS regulation
providing that medical residents are not students, and,
therefore, are subject to Social Security taxes, where wages
paid to other students are exempt.
Now, even when a worker's type of employment is covered by
the Social Security, certain types of remuneration paid to the
worker are not subject to that tax. This generally follows
income tax exclusions. Examples of such exempted compensation
include employer-provided retirement benefits and employer-
provided health benefits. There are similar elective
contributions for health benefits through health FSAs, which
are also excluded from both the income and Social Security
taxes.
In general, the FICA taxes apply to workers who are
employees. The SECA taxes apply to workers who are self-
employed or independent contractors. One ongoing issue
regarding payroll tax liability is the determination of whether
a worker is properly treated as an employee or as an
independent contractor. If a person is an employee, the
responsibility for reporting and withholding FICA rests with
the employer. If you are an independent contractor, then
reporting and withholding rests with the worker. This
determination shifts the burden of compliance, not the
underlying liability.
I also noted another component of funding for the trust
funds is the income tax. Individuals with incomes above certain
thresholds must pay income tax on a portion of their Social
Security benefits, and the revenue raised from the Social
Security benefits finance--from the taxation of Social Security
benefits, excuse me--finances both the Social Security and the
Medicare trust funds.
And, with that, I will conclude my brief summary, and be
happy to answer any questions that the Members might have.
[The prepared statement of Mr. Barthold follows:]

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Chairman JOHNSON. Thank you, I appreciate that. I want to
welcome our newest member, Mr. Kenny Marchant, from the great
state of Texas, as a member of this committee. Glad to have you
aboard.
Mr. MARCHANT. Glad to be here.
Chairman JOHNSON. Stephen Goss, chief actuary, Office of
the Chief Actuary, Social Security Administration. You are
recognized for five minutes, sir.

STATEMENT OF STEPHEN C. GOSS, CHIEF ACTUARY, OFFICE OF THE
CHIEF ACTUARY, SOCIAL SECURITY ADMINISTRATION

Mr. GOSS. Thank you very much, Chairman Johnson, Ranking
Member Becerra, Members of the Subcommittee. It is really a
pleasure to be here, and thank you for the invitation.
I would like to take these couple of minutes to sum up the
written testimony that I submitted, but also to put in
perspective the history and the expectations for the future of
what the costs of Social Security are going to be, and what
they mean for us, to make sure that the system is set up
properly for the future.
Chairman Johnson, you quite rightly pointed out some of the
very interesting facts of Social Security, about the incredibly
fundamental ratio of numbers of workers for every beneficiary
that we have to support the system.
And we should keep in mind about Social Security, that when
the first monthly benefits were paid in 1940, we had somewhat
over 40 workers for every beneficiary. And the reason for that
was clear; we were taxing virtually all the workers, starting
right off the bat, but the only people in 1940 who could get
monthly benefits were people who had worked for at least 2
years in the years 1937, 1938, or 1939. Not many very, very old
people had worked for two years in that period.
So, it was a long time, not until about 1975, until the
system actually matured, and we reached the point where we
reached a rather stable level of 3.3 workers per beneficiary.
We stayed at that level from 1975 until about 2008.
As you mentioned, Chairman Johnson, after 2008, starting
around 2010, the recession has gotten a head start on moving in
the direction of having a drop in the number of workers per
beneficiary.
It is important to understand why that is happening. It is
happening in part because of the Baby Boomers moving over from
the ages which have been working ages over the next 25 years,
into the ages in which they will be retirees. But, actually we
wouldn't even call them the Baby Boom bulge if, in fact, they
had all had 3.3 kids themselves as people in 1946 through 1965
did.
Historically, birth rates have been at about 3 children per
woman, especially if you look at the number of children
surviving to age 10. Between the end of the Baby Boom period
and the mid-1970s, we actually had a drop in the birth rate in
this country from an average of 3 kids down to an average of 2
children. If we are going to support elders in our country, and
they all had three kids in the past, and now in the future they
are all going to have two kids, that really is a fundamental
shift.
The point is that this isn't just a matter of people living
longer. There is some of that. The fundamental change over the
next 25 years, in the cost of the system relative to GDP,
relative to payroll, and in the number of workers per
beneficiary, is really due to the drop in the birth rate. It is
not that we are going to do anything about this change, but it
is important for understanding how we got there.
The implication of this drop in the birth rate is really
quite striking. As both the chairman and the ranking member
mentioned, we are in a situation where we are going to have a
drop in the number of workers per beneficiary, and this is
going to cause the cost of Social Security, of the benefits
that are scheduled now, to change from about 4.3 percent of
GDP--which it has been for decades--to rise up to about 6
percent of GDP.
The fundamental question before you all, as our elected
representatives is, ``Where do we want to go? What do the
American people want to do? Do they want to have the kind of
benefits that are scheduled in current law, and raise the
revenue up from the 4.5 percent of GDP that is scheduled in
current law now up to 6 percent? Or, do they want to keep
revenue at 4.5 percent of GDP and lower benefits?'' There is
really a fundamental choice between raising revenue by a third,
reducing the scheduled benefits by a fourth, or some
combination of those two.
In my position--I am sure also for Tom Barthold and
probably most of us--we are not in a position to tell you what
really makes the most sense. But these are the choices that are
before you on behalf of your and all of our constituents.
Let me speak a little bit about the very near term
situation for Social Security. There has been a lot of talk
about the year 2010, in which we had the first year--for quite
a while, since 1972--in which we had more cost for the system
than we had taxes coming in. Now, the trust fund is still
growing, because interest more than exceeded the amount of
shortfall we had in taxes, and that will continue until 2023.
But we did have of taxes in the year 2010, and this is what a
recession looks like; we have more people coming and getting
benefits, fewer people working.
We are projecting now for the years 2012, 2013, and 2014,
that we will have cash flow deficits--that is, cost exceeding
the taxes in the system, by a little less than 20 billion a
year, where in the prior trustee's report, in 2010, we were
projecting a little bit less than a $10 billion-per-year
surplus.
That kind of a swing is significant. But for a $700 billion
per year cost program and a federal budget where we are running
deficits on the order of $1 trillion per year, that kind of
swing was probably not all that traumatic.
So, we are facing a situation over the next 25 years in
which we are going to have this dramatic shift. We are going to
be having increasing cost, we are going to have to find a way
to get there. The trust funds do stand as the cushion to give
us the authority to be able to augment the taxes that we have
coming in to be able to pay scheduled benefits, as you both
mentioned, until 2036.
But the fundamental question that is before us is, ``What
do we do thereafter?'' Are we going to raise taxes? Are we
going to lower benefits? One thought that I would really want
to leave you with is that we should not analyze a change in
taxes or a change in benefits from just one perspective.
For example, if we decided that, in order to continue
paying the full benefits, even through 2036, we want to raise
taxes during that period to have more money coming into the
trust funds, what that will mean is that we will dip into the
trust funds less. If we raise taxes and have more revenue
coming to pay benefits during that period, that means that we
will have less spending down of the trust funds and----
Chairman JOHNSON. Can you close it down? Your time has
expired.
Mr. GOSS. Okay, sorry. If we have more taxes, we will have
less borrowing from the public. Both of those have economic
implications. We should not look at an increase in taxes, just
as the implication of taxes, but also what that means in terms
of borrowing less from the public.
I have submitted a number of individual provisions that
have been considered. I am hoping in the questions we might be
able to get into some of those.
[The prepared statement of Mr. Goss follows:]

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Chairman JOHNSON. Thank you, sir.
Mr. GOSS. Thank you very much.
Chairman JOHNSON. Tim Lee, Texas Retired Teachers
Association, on behalf of the Coalition to Preserve Retirement
Security. You are recognized for five minutes.
Mr. LEE. Thank you very much.
Chairman JOHNSON. Are you from Texas?
Mr. LEE. Yes, sir.
Chairman JOHNSON. Where do you live?
Mr. LEE. I live in Austin.
Chairman JOHNSON. Okay.
Mr. LEE. Yes, sir.

STATEMENT OF TIM LEE, TEXAS RETIRED TEACHERS ASSOCIATION, ON
BEHALF OF COALITION TO PRESERVE RETIREMENT SECURITY

Mr. LEE. Chairman Johnson, Ranking Member Becerra, and
distinguished Members of the Subcommittee, my name is Tim Lee,
and I am the executive director of the Texas Retired Teachers
Association. I am testifying today in my capacity as a board
member of the Coalition to Preserve Retirement Security,
specifically here to talk about the issue of mandating Social
Security coverage with public workers.
Over the years some have recommended bringing all public
workers into the Social Security program. However, mandating
that all newly hired public workers must participate in the
Social Security system would create significant new cost
pressures for the affected state and local government
jurisdictions, while providing only minimal benefit to the
program.
These jurisdictions, with their own long-standing defined
benefit retirement plans, would have to make difficult choices.
Adding an additional 6.2 percent payroll tax per worker to the
benefit cost of public employers would almost certainly result
in cut-backs to their existing defined benefit plans, cuts in
government services and/or increases in taxes or fees to absorb
the added costs. The disruption that would likely occur for
these public jurisdictions and their workers seems a high price
to pay for adding an estimated two years of solvency to the
Social Security program.
It is estimated that mandatory Social Security coverage
would cost the affected states and localities $44 billion over
5 years. The additional financial burden, which will impact all
50 states to one degree or another, could be an insurmountable
budgetary hurdle, particularly during these very difficult days
of huge revenue shortfalls hitting virtually every state.
In Texas, for example, our state legislature has finished
its regular session and is now in special session. The regular
session was particularly difficult, as we all struggled with a
budget reduction for the biennium that exceeded $15 billion.
The state budget reduction has hit public sector--particularly
our public schools--very hard. Tens of thousands of public
school employees, including classroom educators and support
personnel, have been sent reduction in force notices, and are
not anticipating being rehired in the coming school year.
To the issue of added cost, due to the mandating Social
Security, the impact would be devastating to 95 percent of
Texas school districts. These school employers and employees
already make a contribution equal to 6.4 percent of their
salary to the Texas teacher retirement system. The state
legislature is bound by the Texas constitution to make a
contribution, a minimum of six percent of the aggregate active
teacher payroll.
I think it is speculative, at best, to assume that any of
these contributions to the teacher retirement system in Texas
will remain in the event that Congress mandates Social Security
coverage for all public employees.
School districts and employees would be hard-pressed to
make an additional contribution to the Social Security trust
fund, as well as maintaining contributions to the TRS pension
fund. Our Texas TRS fund is presently valued at around $110
billion. It is about 82.3 percent funded. Redirecting
contributions away from this fund to cover a new federal
mandate for Social Security coverage would quickly destabilize
the fund, and jeopardize the long-term financial security of
1.3 million Texans. To break that number down even further, 1
out of every 20 Texans depends on the TRS Texas as their
primary source of their retirement or future retirement
security.
Texas has taken bold steps to maintain the health of the
public retirement system, and projections suggest that TRS
Texas is able to meet current and future obligations through
the year 2114. Mandating Social Security coverage would have a
profound negative impact on that funding status, and leads us
in the wrong direction, and jeopardizes the long-term funding
of the retirement system.
Some suggest that current retirees may be held harmless by
mandating Social Security coverage for only newly hired active
employees, contending this would make it less onerous for
public employers. But nothing could be further from the truth.
Public sector-defined benefit plans rely on constant reliable
revenue stream in order to meet actual real goals and provide a
retirement benefit for plan participants at affordable
contribution levels. Proponents of this solution fail to
understand that the normal cost of the existing retirement plan
will increase as percentage of payroll as younger members are
eliminated from the plan.
Thus, employers and new workers will not only have to add
additional 6.2 percent of the new payroll tax, but employers
may also have to increase contributions to the existing plan,
or cut benefits. When states and localities are under extreme
fiscal stress, as they are currently, this added expense will
create enormous burdens with negligible, if any, positive
outcomes.
Those positive outcomes are significantly less positive
than one may realize. A study by the General Accountability
Office concluded that a new hire would only add two years, at
most, to the Social Security solvency. The same report stated
that moving to mandatory coverage would be very costly to the
states involved. As a result, mandatory coverage provides no
long-term solution to the Social Security issue, but it creates
a huge, unfunded mandate on state and local governments.
Destabilizing state designed, state-funded public pension plans
would have grave repercussions across a public and private
spectrum alike.
Considering this, the--consider this. The teacher
retirement system pension fund pays about 6.6 billion annually
in benefits to over 300,000 current TRS Texas retirees. These
benefit payments have a substantial impact on the Texas
economy, including $640 million in state taxes paid, 260
million in local government revenues, and helps create more
than 91,500 permanent jobs in Texas.
And I will skip to the end, Mr. Chairman. Mandating Social
Security coverage for all public sector workers would only
create an enormous unfunded federal mandate on state and local
taxpayers, and major costs and burdens for public employers,
without contributing significantly to the solvency of the
Social Security program. Millions of public employees have
placed their faith and their future in the pension plans, and
have planned for their retirement accordingly. It is absolutely
critical to maintain the stability and confidence, the security
of those public pension plans for their employees. And we will
work to continue to do so.
Thank you for the opportunity to testify, and thank you for
your staff's work in helping me be here today.
I appreciate it.
[The prepared statement of Mr. Lee follows:]

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Chairman JOHNSON. Thank you, sir.
Mr. LEE. Thank you.
Chairman JOHNSON. Thank you for being here. And you know, I
don't think there are very many of us that want to impose a tax
on any state. And, as you know, the state of Texas, along with
a lot of others, some of their associations, fireman and
police, opted out of Social Security for a private retirement
fund. And that is what America is all about, in my view.
Alex Brill, a research fellow, American Enterprise
Institute, you are recognized for five minutes.

STATEMENT OF ALEX BRILL, RESEARCH FELLOW, AMERICAN ENTERPRISE
INSTITUTE

Mr. BRILL. Thank you very much, Chairman Johnson, Ranking
Member Becerra, other Members of the Subcommittee, for the
opportunity to appear before you this afternoon to testify on
this important topic.
To establish Social Security as a sustainable, solvent
program, changes are certainly necessary. Absent structural
reforms, scheduled benefits will exceed income by roughly 30
percent in 25 years. From a mechanical accounting perspective,
a sustainable Social Security program could be achieved by
either a reduction in the rate of growth of future benefits, or
through tax increases. But these two options have different
economic effects, particularly the effect on labor supply.
Advocates of reform proposals that offer a combination of both
revenue increases and benefit reductions sometimes argue that a
solution involving both sides of the ledger is a ``balanced
approach.'' However, once one considers the economic impact of
different changes, that balance may shift considerably.
This hearing is about the revenue matters with regard to
Social Security. And so, in my testimony I will focus briefly
on the economic consequences of tax changes.
First and foremost, I would like to stress that in
evaluating any tax increase geared at addressing the solvency
of the Social Security system, the burden of the tax is greater
than just the tax itself. Taxpayers alter their behavior in
response to tax changes. And this behavioral response is not
without consequence. It gives rise to what economists call an
excess burden. The greater the taxpayers' response to avoid the
tax, the greater the excess burden. This behavioral response,
that may result from an increase in the payroll tax rate,
includes fewer hours worked and a shift from taxable wage
income to non-taxed fringe benefits.
Described earlier, the payroll tax is a tax on wages, not
total worker compensation. And, therefore, it generally creates
a distortion between wage compensation and non-wage
compensation, such as health benefits and many other non-taxed
fringe benefits. When an employer pays a worker wages, the
employer deducts that cost from his own taxes, while the worker
reports the wages as taxable income. However, when an employer
compensates a worker with a non-taxable fringe benefit, it too,
is deducted from the employer's income, but excluded from the
worker's income.
As a result of this distortion, there has been a decrease
of wages as a share of total employee compensation. Today,
approximately one out of every five dollars of compensation is
non-wage, almost all of which is excluded from taxable income--
income tax and payroll taxes. The shift from wage to non-taxed
fringe benefits has eroded the payroll tax base over time. And
while many Social Security reform proposals subject a greater
share of payroll to the payroll tax, few have focused on more
broadly taxing compensation income.
For some workers, higher payroll taxes affect decisions
about whether or how much to work. With regard to the impact of
higher payroll taxes on labor supply, it is important to also
note that the behavioral responses vary considerably across
workers of different types. For example, a number of economists
have documented that married female workers are more likely to
reduce their labor supply as a result of a marginal tax
increase. It has also been documented that high marginal tax
rates also discourage entrepreneurship, and reduce the business
activity of sole proprietorships.
Tax rate increases will generate more income for the Social
Security trust funds, but that additional revenue comes at a
cost. Higher marginal rates will discourage labor supply and,
through other means of shifting, reduce taxable income. In
addition to less economic output, such a change will lead to a
significant decline in both federal and state income taxes.
The least bad of the various tax options would be a
broadening of the tax base by taxing fringe benefits. This
would at least eliminate some of the existing distortions
between wage and non-wage compensation. Such a change, if
combined with a reduction in the statutory payroll tax rate,
could reduce the excess burden of the payroll tax.
However, there are many other reforms worth adopting before
considering tax increases. While those issues are beyond the
scope of this hearing, I would encourage the committee to
explore changes to the retirement age, the benefit formula, and
the consumer price index methodology for calculating cost of
living adjustments before considering tax increases.
I will conclude by reiterating that raising tax rates to
prevent insolvency is likely to discourage work, and thus,
long-term economic growth.
I would also like to express to the committee my view that
Congress need not wait until a full reform that actuaries
estimate will return the trust funds to long-run solvency can
be agreed to. Many incremental reforms can and should be
considered now. The sooner Congress adopts pro-solvency
measures, the less consequential they need to be. Thank you,
and I look forward to answering your questions.
[The prepared statement of Mr. Brill follows:]

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Chairman JOHNSON. Thank you, sir. I appreciate your
remarks.
Dr. Warshawsky, a former assistant secretary for economic
policy, U.S. Department of the Treasury, you are recognized,
sir.

STATEMENT OF MARK J. WARSHAWSKY, PH.D., FORMER ASSISTANT
SECRETARY FOR ECONOMIC POLICY, U.S. DEPARTMENT OF THE TREASURY

Mr. WARSHAWSKY. Thank you very much, Chairman Johnson,
Ranking Member Becerra, and Members of the Subcommittee on
Social Security. I appreciate the opportunity to be here. I
would like to congratulate you for holding this hearing
discussing the revenue options for Social Security reform.
As the recent Social Security trustees report shows, the
program's financial status has worsened both in the short and
long term. Social Security is now running large and soon to be
rapidly growing cash flow deficits, adding to the federal debt
outstanding held by the public and the budget deficits of the
Federal Government. The day is steadily growing closer when
benefits by law will have to be cut. Indeed, for disabled
beneficiaries and their families, this is projected to occur in
seven years.
It is good that we are now discussing more actively options
to strengthen Social Security, and it is promising that many
groups and individuals and legislators have put forward
specific proposals. At the same time, not all provisions and
all reform plans are good policy.
For example, there are proposals coming from the deficit
reduction commissions and elsewhere to increase Social Security
payroll taxes substantially by increasing the contribution and
benefit base. In particular, the commissions propose to
increase the Social Security contribution and benefit base--
also called the taxable maximum--by an additional two percent
each year, starting in 2012, until 90 percent of total earnings
of the labor force are taxed.
If the increase were to happen in one step in 2012, the
taxable maximum would be about $215,000, up from $106,800
today. This is a very large tax increase on about 10 million of
our most productive workers. Almost 99 percent of workers would
then be subject to Social Security taxation on all of their
earnings, up from about 94.5 percent today.
This proposed provision is a bad idea for at least four
reasons, in addition to the general ill effects of tax
increases.
It unfairly targets a specific segment of the population
that has not seen particularly large gains in earnings. It is
an extra burden, in addition to the new taxes imposed on this
and other groups to finance Medicare and in the recent health
care legislation. It will cut pre-retirement savings. And it
represents an unnecessary expansion of Social Security. Let me
explain briefly each.
Those who advocate an increase in the taxable maximum have
indicated that their goal is to have 90 percent of total
earnings in the labor force subject to Social Security
taxation. This taxable coverage ratio has fluctuated over the
history of the program, from as little as 71 percent in 1965 to
a high of 90 percent in 1983. And most recently, in 2009, it
was 85.7 percent. The use of this ratio for policy design seems
very arbitrary. But I think what the advocates are getting at
is a deeper concern about the distribution of income and
earnings, more broadly. And they claim, based on some research,
that there has been an increase in inequality.
But then consider another study that focuses on the wages
of private sector workers, ages 25 to 60, over a long period of
time. It finds that the increase in equality has slowed since
the late 1980s, and that the vast majority of the increase for
the top 20 percent of workers, the first group since 1980 is
due to those above the 1 percent, the top percentile, the
second group that is, those earning more than $215,000. And
this is confirmed also looking at estimates from Social
Security wage data.
So, the first group, which is the larger group, has had
wage increases much more modest than the upper group. Punishing
the first group with a much bigger tax increase than the second
group would be very unfair.
The second reason why an increase in the taxable maximum is
a bad policy is that workers in this segment--and also those
with higher earnings, in the upper earnings distribution--are
already bearing significant increases in payroll taxes, and are
scheduled for further increases soon.
In 1991 the earnings cap for Medicare health insurance was
increased, and in 1994 it was lifted entirely. So these workers
already have seen a significant payroll tax increase of 2.9
percent of earnings. Under the new health care law, an
additional payroll tax, HI payroll tax of .9 percent will be
levied from workers earning above $200,000 for singles,
$250,000 for joint filers. Because these thresholds are not
indexed, many of the same workers would be hit by this tax
increase as the increase that was proposed by lifting the
Social Security taxable maximum.
The third reason for opposition to this increase is that it
will reduce private retirement savings. We have done work using
a comprehensive retirement planning model for some illustrative
household situations, and a colleague and I have found that
those individuals earning above $106,000 that would be hit by
this tax increase would reduce their retirement savings by
about 4 percent.
When you translate that across 10 million workers, that is
a significantly lower amount of domestic sources of investment
capital.
Finally, an increase in the wage contribution of benefit
base is an unnecessary expansion of the program. An increase is
unnecessary, because there are fairer and better ways to bring
Social Security to permanent solvency with no payroll tax
increase, which would involve changes in several aspects of the
program affecting different groups that, together, add up to
sustainability. Thank you.
[The prepared statement of Mr. Warshawsky follows:]

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Chairman JOHNSON. Thank you, sir. I agree with your last
statement, wholeheartedly.
Andrew Biggs, doctor--is it Andy?
Mr. BIGGS. It is.
Chairman JOHNSON. Yes, that's what I thought. Resident
scholar, American Enterprise Institute, you are recognized for
five minutes.

STATEMENT OF ANDREW G. BIGGS, RESIDENT SCHOLAR, AMERICAN
ENTERPRISE INSTITUTE

Mr. BIGGS. Thank you very much. Mr. Chairman, Ranking
Member Becerra, Members of the Subcommittee. Thank you for
offering me the opportunity to testify today with regard to
Social Security's finances.
The American population is aging, which means that smaller
numbers of workers must support larger populations of retirees.
To help them do so, public policy should encourage individuals
to do three things: work more, meaning more hours of the week
and more weeks of the year; save more, meaning greater
contributions to retirement plans and other savings vehicles;
and retire later, meaning delaying retirement past 62, the most
common age of claiming Social Security benefits.
If we improve the incentives for Americans with regard to
work, saving, and retirement ages, we can boost the economy and
increase our capacity to finance rising entitlement costs. How
would fixing Social Security through tax increases affect these
efforts?
Put broadly, increased taxes generally mean that
individuals will work less, because the reward for working has
been reduced; save less, because they have less after-tax
income with which to save, and less reason to save, as
entitlement programs would be more generous; and retire
earlier, because Social Security benefits would appear more
generous, relative to their after-tax pre-retirement earnings.
In other words, higher taxes work opposite to economic-level
goals that most analysts would accept.
We may disagree regarding how large the effects of raising
taxes would be. We might also conclude that some policy goals
are so important that the negative economic effects of tax
increases are a price worth paying. But we should not dispute
that raising taxes imposes a cost on the economy's ability to
support growing populations of retirees.
The most common proposal for raising Social Security taxes
is lifting or eliminating the maximum taxable wage. With regard
to raising the so-called tax max, I would make four points.
First, the current payroll tax ceiling is not unusually
low, by historical standards. As of 2009, 85 percent of total
wages were subject to the payroll tax. From 1937 through 2009,
the average was 84 percent. And from 1950 through 1970, only 78
percent of total earnings were subject to taxes.
Second, Social Security's payroll tax ceiling also is not
unusually low, relative to other developed countries. Across 22
OECD countries, pension taxes were, on average, applied up to
2.1 times the average wage. In the U.S., the Social Security
payroll tax is applied up to around 2.9 times the average wage,
a significantly higher tax cap than in the UK, Germany, Canada,
or other competing countries.
Third, eliminating the payroll tax ceiling could lead to
very high marginal tax rates. Based on the tax rates proposed
by the administration, eliminating the tax max would raise the
top all-in marginal tax rate to an average of 63 percent, and
higher than that in some states. And these taxes would be
before we had done much of anything to fix Medicare and
Medicaid.
Fourth, roughly one-quarter of the revenue gains from
eliminating the tax max would be offset by lower tax receipts
in other areas. This result does not depend on assuming that
individuals change their work behavior. Rather, employers would
reduce workers' wages to compensate for their own higher
payroll tax liabilities. These reduced worker wages would lower
receipts from federal income taxes, Medicare payroll taxes, and
state income taxes.
If individuals made even modest behavioral responses to
higher taxes, then about half the gross revenues from
eliminating the payroll tax ceiling would be lost, according to
a study by Professors Jeffrey Liebman of Harvard University,
and Emmanuel Saez of the University of California, Berkeley.
Lawmakers face a choice: policies that encourage work and
saving, or retaining the safety net for the poor, versus
policies that discourage work and saving. Our ability to care
for those in need springs from the goods and services produced
in the economy. If we penalize workers who produce those goods
and services, the goals of Social Security and other federal
programs will be more difficult to achieve. Thank you very
much.
[The prepared statement of Mr. Biggs follows:]

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Chairman JOHNSON. Thank you, sir. I appreciate all of your
testimony. I don't think any of us up here--on this side,
anyway--want to raise taxes. But we will have to see what falls
out.
Mr. Goss, in 2010 the maximum amount of earnings subject to
the 12.4 percent payroll tax was 106,800, same as this year.
And 84.2 percent of covered earnings were subject to the tax.
What would the maximum amount be this year if 90 percent of
covered earnings were subject to the payroll tax?
Mr. GOSS. Dr. Warshawsky addressed that point already, and
it would be somewhat in excess of 200,000. We estimate that by
the time we get to 2020, if we were to go to a 90 percent
taxable instead of the roughly 82.5 percent taxable that we
expect to have at that time, it would be a little bit over
double the taxable maximum amount that we would have,
otherwise.
Chairman JOHNSON. Yes. Are you in favor of that?
Mr. GOSS. We are in favor of solvency and strengthening
Social Security----
Chairman JOHNSON. Okay.
Mr. GOSS [continuing]. Absolutely, by whatever means you
all determine.
Chairman JOHNSON. Okay, 202,500 is what it would be today.
Dr. Biggs and Mr. Brill, the Congressional Budget Office
produced a policy option publication for Congress last July. In
it they stated, ``Like all taxes on earnings, Social Security
taxes reduce the award from work, which tends to decrease how
much people work.''
The Joint Committee on Taxation recently completed a
revenue analysis for me, and the analysis says that 2.8
trillion in self-employment income, and 13.4 trillion in wage
income, would be subject to payroll taxes over the next decade
if the wage base were eliminated. If the taxable wage base were
lifted to cover 90 percent of earnings, those numbers would be
500 billion and 4.4 trillion, respectively.
Given these facts from CBO and Joint Tax, do you think that
raising the wage base would keep this country from creating new
jobs in this country that we desperately need? Either one of
you.
Mr. BIGGS. Well, as I noted in my testimony, I believe that
we need to concentrate on economy-level goals of work, saving,
investment, the things that will strengthen the economy and
allow us to support larger populations of retirees.
With regard to the effects of taxation, I think I would
raise three points. One is that the negative economic effects
of a tax increase depend, first, on the size of the tax
increase. A 12.4 percent increase in the marginal tax rate is
large, by itself.
Second, it depends on the tax it's already stacked on top
of. If people are already paying high marginal tax rates, and
then you add more to it, the economic effects are more
significant than if you were stacking that tax increase on a
low tax rate.
Third, higher-income individuals tend to be the most
sensitive to marginal tax rates. So, essentially, you are
applying this tax increase in the place where you are going to
have the most negative economic effects from it. So I think it
is just not, in my mind, a particularly productive way of going
about this problem.
Chairman JOHNSON. Do you agree with that?
Mr. BRILL. I do agree. I agree with Mr. Biggs's points. And
I would just add that the response that we could anticipate--
your question focused on labor and job creation--a number of
the small business and medium businesses are pass-through
entities, taxed through the ordinary individual income tax, not
the corporate tax system. Roughly half of small business income
is taxed by individuals at relatively high income rates.
Raising the cap, whether it be to 90 percent--in other words,
to $200,000--or taking the cap off all together, would raise
the marginal rates significantly on those small businesses.
Chairman JOHNSON. Yes, and small businesses--our studies
indicate that is where most of the jobs are created. Is that
true?
[No response.]
Chairman JOHNSON. Dr. Biggs and Mr. Brill, from an economic
viewpoint, how do you think small business owners would react
if Congress raised their marginal payroll tax 12.4 percent?
What would be the business response, particularly during these
times?
Mr. BRILL. Research by Doug Holtz-Eakin and Bob Carroll and
others have noted that the response from sole proprietorships
to increases in tax rates can be significant. So a reduced
amount of business activity from these small employers. It
could be on the order of magnitude to a five to seven percent
reduction in activity.
In addition, there is a shift in the amount of taxable
income that is reported, different than a shift in the economic
activity. But both of these are important consequences. So
there is both an effect to federal revenues on the income tax
side, as well as a real effect on the economy.
Chairman JOHNSON. Thank you.
Mr. BIGGS. I believe the effects would be larger on the
small business end than they would be for individuals working
for other employers. Small businesses have more capacity to
shift the way compensation is paid out, where individual
employees have less. So I think the negative effects we are
talking about would be larger on the small business end than
they would be in the rest of the workforce.
Chairman JOHNSON. Yes, it is negative overall, in my view,
too.
Mr. Becerra, you are recognized for five minutes.
Mr. BECERRA. Thank you, Mr. Chairman, and thank you all for
your testimony and for having taken the time to shed some light
on the issues of Social Security.
Interesting, Mr. Brill, I take a couple of things from your
testimony that I think are very important that we have to
really consider. Non-wage compensation does not get taxed, for
payroll purposes, to provide the funds for Social Security.
So we find ourselves in a situation where, if you are a
worker in America who relies principally on your paycheck, and
your income is anywhere between, you know, 0 to $106,800, you
are subject to the full level of the Social Security payroll
tax contribution to the system. But if you rely on a paycheck
for part of your income, but the lion's share of your income
comes from other non-payroll sources--and obviously, an extreme
example would be a Bill Gates or perhaps a Wall Street
executive, there is a good chance that the vast majority of
their income doesn't get taxed for payroll purposes.
So there are a whole bunch of Americans who are making vast
sums of income who, because they don't get it through a
paycheck, don't have to contribute to the Social Security
system beyond whatever they get as a paycheck for a directly-
compensated wage. That is an excellent area of examination.
Because I think you talked about how you have to figure out how
you broaden the base in a fair way. And I think we should try
to explore that a bit more.
Mr. Biggs, you pointed out something that I think most
Americans don't often think about, and may have to swallow kind
of hard to recognize or accept, and that is--you said you have
to work more, save more, and retire later. I think in America,
the goal of most Americans is to be able to retire earlier--
save more, and retire earlier, rather than have to work more,
have to save more, and retire later.
And I think the way you tried to explain it, though, it
makes it clear you are not telling folks, ``Hey, this is a new
day in America, where we are going to work longer and get
less,'' what we are simply saying is, ``Be smart about the way
you save, understand what it means to have to work hard, and be
prepared to know what it will take for you to live out the rest
of your years, if you are going to retire, whether you retire
early or not.''
And I think, too often, Americans don't really plan for
what it will take to live out their retirement in dignity. And
then that is where I think Social Security has become a
tremendous asset in this recent heavy recession, and I think
makes it very clear why so many seniors have become so
protective of Social Security benefits.
I want to ask a quick question. Are any of you familiar
with Mr. Sessions's--Pete Sessions--legislation that he
recently introduced, H.R. 2109?
[No response.]
Mr. BECERRA. I referenced it in my opening remarks. It is
legislation which essentially privatizes Social Security,
because it allows workers today to not contribute into the
system, and instead, create their own private accounts.
And unlike previous privatization proposals, in this case,
in the Sessions legislation, there would be no backfilling of
the lost revenues by having today's workers no longer put money
into the system, and instead, only put money into a private
account. Most of the previous privatization proposals at least
recognized that Americans who are retired today because they
were working and contributing to the system yesterday should
not be expected to take the massive loss of benefits, as a
result of having today's workers no longer contributing to the
system.
Mr. Goss, I have tried to explain an aspect of the Sessions
legislation. Obviously, it goes well beyond that into other
areas, as well. But what would happen if you had a system where
you created a system--I would no longer call it Social
Security, because it would become a privatized system, where no
longer would American workers contribute, starting today, into
the Social Security system and the trust fund? What would
happen to today's retirees?
Mr. GOSS. Very good question. We have not been asked to do
a formal estimate of the plan, but we are familiar with it. My
understanding of the plan is that workers today who are not yet
retired and not receiving benefits would have the option to
start paying one half of the taxes, and after 15 years not to
pay any of the taxes themselves, and by their employers.
People who are over 40--especially over 50--probably
wouldn't want to do this, because they have a substantial
investment in Social Security already. For people who are under
40, they may well decide that the amount of money that they
could put into an account would be sufficient that they would
be willing to walk away from the Social Security benefits that
have been scheduled for them.
What this would mean, though, to the extent that people did
this, is that the amount of revenue coming into Social Security
would be dramatically reduced. Already, as many on the panel
have pointed out, we do not have enough taxes coming in over
the future to be able to pay for scheduled benefits, as it is.
Taxes would be reduced--essentially, immediately--by a
substantial degree, and we would not have any offsetting
reduction in benefits until people who are under 40 now got to
the point of receiving benefits.
So, for Social Security--the ability to pay benefits to
people who are currently receiving or are now approaching the
time of receipt of benefits would be severely compromised.
Trust fund exhaustion would certainly come much sooner than
2036. And the extent to which we have cash flow shortfalls, and
the speed with which we would be spending down our trust fund
assets, would be much, much faster.
Mr. BECERRA. Thank you. Thank you, Mr. Chairman.
Chairman JOHNSON. Thank you. Mr. Smith, you are recognized.
Mr. SMITH. Thank you, Mr. Chairman. And thank you to our
witnesses, for sharing your expertise and your time.
We have heard various characterizations of Social Security,
that everything is just fine and so forth. And I am trying to
grapple with various points of information and perspectives.
But Mr. Goss, would you describe Social Security as
actuarially sound?
Mr. GOSS. Thank you very much for the question. Clearly, we
do not project that Social Security is solvent over the next 75
years. We will reach the point in 2036, if nothing is done--and
we trust something will be done--that the trust funds will
become exhausted and won't be able to pay full benefits. As
Chairman Johnson indicated, at that point in time, 77 percent
of scheduled benefits would be payable.
So, changes clearly need to be made. We need to either
increase revenue or, to reduce the scheduled benefits to match
the revenue already being put on the table under current law.
Mr. SMITH. But is there even a mechanism to reduce those
benefits, should nothing be done?
Mr. GOSS. Well, actually, there is. Social Security OASI,
DI, and the Medicare Hospital Insurance funds are special in
the Federal Government. Most programs in the Federal
Government, as we know too well, can run deficits for a long
time, and actually build up a lot of debt. We have over $14
trillion of total federal debt now. Social Security does not
have any debt. In fact, it cannot have debt, by statute. It is
not allowed to have debt.
From the point of its inception, it has to always have
taken in more money than it has paid out. So there is a natural
breaking force spending, there is a scrutiny that is applied to
the trust fund programs. If we reach the point where the trust
funds run out, and there is no action by Congress, we will have
no choice but to pay out only then what the trust funds have
available, which will be $.77 on a dollar.
That would be--I don't know if catastrophic is too strong a
word, but that would be a terrible situation. You cannot--
anybody would not want to have our beneficiaries, from one day
to the next, drop by 23 percent in the amount that they
receive. So we have absolute confidence that the Congress will
act between now and that time, and hopefully sooner.
Mr. SMITH. Okay, thank you. Dr. Biggs, in your testimony
you note that while only six percent of workers reach the
taxable maximum in a given year, almost a quarter of workers
would be affected by such an increase over their lifetimes.
Could you expand on this?
Mr. BIGGS. Sure. In an given year, around six percent of
employees have earnings above the taxable maximum of around
$107,000. We had periods in the past--I think from 1950 to 1970
that actually were around 20 or 22 percent of workers were
above that tax cap in any given year.
Today it is only six percent, but it is not the same six
percent year after year. Some people have good years, some
people have bad years. If you look at the course of
individuals' full working lifetimes, somewhere--my number is
around 24 percent--would have had some earnings above that cap
at some point in their career. And so, if you lift or eliminate
the cap, would have been subject to that higher tax rate.
Mr. SMITH. Mr. Brill, certainly the six percent sounds like
a small number. But if these are entrepreneurs and job
creators, how does that impact our economy and our effort to
reverse this recession?
Mr. BRILL. I think, actually, the more important number is
the larger number that you referenced, the 24 or 25 percent,
because what is important to keep in mind is it is not only
those taxpayers who are facing the higher tax rate currently,
but those that would risk facing it if they were successful.
So, research on the economic consequences of
entrepreneurship have confirmed this, that if an individual who
is making $100,000 is considering a new venture, a risky
venture that, if things work out well, his income or her income
would jump to $200,000, knowing that their tax rate would
increase substantially at the same time may discourage some of
that activity.
So, it is important to focus not just on those who are
actually affected at the moment, but those who are at risk of
facing the higher tax, as well.
Mr. SMITH. Okay. Dr. Warshawsky, would you care to comment?
Mr. WARSHAWSKY. I agree with the statistics that have been
put forward. But I think it is also very helpful to give some
characterization of who these workers are. The typical earnings
profile of many workers is that they reach their peak in their
early fifties, when they have their highest earnings potential.
This is after years of education, hard work, supporting growing
children. And these people have been hit pretty hard by high
education costs, high health care costs.
So, I think it is important to sort of get a sense of the
character of these workers.
Mr. SMITH. Okay. Thank you. Thank you, Mr. Chairman. I
yield back.
Chairman JOHNSON. Thank you, Mr. Smith. Mr. Berg, you are
recognized.
Mr. BERG. Well, thank you, Mr. Chairman. I wanted to
explore a little bit the question that comes up always that
there is income that people receive that they are not paying,
you know, FICA or SECA on. What is an example of what people
use for that? There is some specific revenue that you hear a
lot? Please.
Mr. GOSS. We have on page nine of the written testimony
identified a couple proposals that could generate revenue that
have been put forth by the bipartisan policy center workgroup,
and one of them actually by Paul Ryan, in his roadmap plan,
that would not increase the taxable maximum amount. These are
plans, instead, that would look at employee compensation that
is now not taxed, but would become taxed.
One of these items that would cover about 42 percent of our
75-year shortfall would be to tax the employer-sponsored group
health insurance premiums, whether those are paid for by
employees or by employers. Currently, they are generally not
subject to the FICA tax. If those were subject to the FICA tax
over a gradual period of time, phased in as this particular
proposal would suggest, we could cover almost half of the 75-
year shortfall.
Another smaller approach toward covering a portion of this
would be to cover certain Section 125 cafeteria plans by which
employees can pay for a portion of some fringe benefits that
they receive. These are also tax exempt currently. Most of
this, as we have learned from our friends at Joint Committee on
Taxation, is the employee share of employer-sponsored group
health insurance. If we were to make that no longer FICA tax-
exempt, that would cover about 10 percent of the long-term
shortfall for Social Security.
So, there are options, other than just raising taxes.
Mr. BERG. And I was just curious, because I hear people
talking about that, and now I know that what they are talking
about is simply taxing health care benefits, or employer-
provided health care benefits.
The other question I had--and again, we had a reduction in
2010 where we went from 6.2 to 4.2, and I guess I was just
wondering if any of the panelists here have--do we have any
results from that, that we can say, ``Hey, that was a good
decision,'' or a poor decision, or--what was the impact of
that? Anyone wish to address that? Or is it too early to tell?
Mr. GOSS. Well, I would just----
Mr. BERG. Do you get paid extra? Are you getting paid by
the--no.
Mr. GOSS. Okay.
Mr. BERG. No, no.
Mr. GOSS. A portion of that legislation suggests that the
trust funds, per se, would not be affected. The revenue coming
into the trust funds has been maintained exactly as though the
tax rate were not reduced.
So, effectively, one might suggest that it was a mechanism
by which the amount that employees and self-employed had to pay
to the Federal Government was reduced by 2 percent of their
pay, up to the $106,800. Trust funds are not affected, and the
long-term solvency is not affected.
Mr. BERG. I can't understand that. Why is the trust fund
not affected, or the long-term? Are we taking dollars and
putting it in there to offset that two percent?
Mr. GOSS. We----
Mr. BERG. Okay.
Mr. GOSS. The trust fund continued to be credited, not by
money that was coming in in payroll taxes, but money from the
general fund to the treasury.
Mr. BERG. Right, right, okay.
Mr. GOSS. And this is a special----
Mr. BERG. I follow you, I follow you.
Mr. GOSS [continuing]. A special one-year thing in 2011.
Mr. BERG. So now, what is the benefit, then?
Mr. GOSS. Well, the benefit--I think some of our economists
could probably speak better----
Mr. BERG. I see some smiles, though.
Mr. GOSS [continuing]. To this than I.
Mr. BERG. Whoever has the biggest smile starts.
Mr. WARSHAWSKY. I am anxious to hear what Steve will say.
[Laughter.]
Mr. GOSS. But we have heard much discussion about the
impact on economic growth and desire to work by having taxes
increase. This effectively was a one-year decrease in taxes for
employees and for self-employed. The intent, presumably, was to
encourage more work and more employment during that period. I
am not sure that anybody can really measure what the impact is.
Mr. BRILL. I would just comment that if we are thinking
about changing the tax rates as a tool to create jobs, we need
to distinguish between temporary tax policies and permanent
policies. This policy, which was a temporary one, while
technically it may be too early to do the analysis, and it is
always hard to know the but-for case, but certainly the labor
market is not improving while this policy is in place.
Mr. WARSHAWSKY. I would just comment again. I have not seen
any studies in it. I would imagine it is premature. But I think
the American public sees that Social Security has financial
troubles, and that the Federal Government has financial
troubles, and with this sort of temporary tax cut, people, you
know, are uncertain. They don't know. Does that mean taxes will
increase in the future?
Mr. BERG. I just--let me--it is clear to me. I, of course,
just come from little old North Dakota. And it seems that out
here everything is pretty temporary, and a cloud of uncertainty
over business and over everything. A cloud of uncertainty is
over Social Security. People need to know what is going to
happen.
And again, just to add to that, I think we need long-term
solutions for solvency, whether it is our country's cash flow,
whether it is our country's regulatory environment, whether it
is our country's tax environment, simply having a path that
people can look down the road and have confidence that it is
going to be there is really what is critical.
So, just one final question. What is the cost? Does anyone
know what the cost of the two percent is, then, to the general
fund? Do we have a number on what that is?
Mr. GOSS. So for 2010 and some of the cost for 2011
slipping into 2012, it is about $110 billion in total.
Mr. BERG. And that is set to expire in December of 2011,
or----
Mr. GOSS. Or the beginning of 2012. Work in 2012 will no
longer be subject to the 2 percent reduction.
Mr. BERG. Okay.
Mr. GOSS. In payroll tax.
Mr. BERG. Thank you. I yield back.
Chairman JOHNSON. Thank you, Mr. Berg. Mr. Marchant, you
are recognized.
Mr. MARCHANT. Thank you, Mr. Johnson. Mr. Brill, the
President is proposing that we cut the employer's payroll taxes
to create jobs. Other Members of Congress--the Democratic
Members of Congress--are proposing that we raise payroll taxes
in order to make the Social Security fund solvent.
Which of those two policies would create more jobs, or make
the fund become more solvent? Which one of those policies
should we select?
Mr. BRILL. Are there any other choices?
[Laughter.]
Mr. MARCHANT. I won't select either one of those, but those
are the proposals----
Mr. BRILL. I would just note again, as I remarked to
Congressman Berg, the important distinction between those two,
in addition to the fact that one is going up and the other one
is going down, is that one is temporary and the other one is
permanent. The evidence of temporary tax policies on permanent
job creation is shaky, at best.
And as we were just noting, a recent experience may be too
soon to analyze, but it seems unlikely that we would get a
large benefit from a temporary payroll tax, whether it be on
the employee side or the employer side. Of course, there have
been a number of attempts at temporary policies in the last few
years, none of which seem to have been particularly effective.
On the other side, raising the cap is a permanent policy,
and employers and employees experiencing long-term, higher
marginal rates are less likely to engage in work.
Mr. MARCHANT. As someone that is a small employer, as well
as a Member of Congress, and my brother as well, we have had
this discussion in the last week about what happens in January,
when all of a sudden the two percent goes away, and all of a
sudden the same exact check to one of our--the foreman in this
case, $68, will--the foreman will be paid exactly the same
amount, but there will be $68 less in his paycheck.
Is there any of you on the panel that have any opinion
about how--what effect that is going to have on employment, if
Congress or the administration is not able to extend that
deduction? Dr. Biggs, how about you?
Mr. BIGGS. I think I would agree with some of the others,
that I suspect the effects on employment of temporary payroll
tax cuts will be small. And so, if we didn't see a lot of job
gains through the payroll tax cut--and I suspect we didn't--
then probably we won't see a lot of job losses when the payroll
tax goes back to its original level. That is my gut on this.
It may be possible to do some research in further years and
figure it out, but if you are looking to hire somebody,
particularly if you are looking to hire somebody for a quality
job, you know, what we call a ``good job,'' it is somebody you
want to have them stick around for a while, you know, a
permanent employee, a two percent cut in your labor cost in one
year is not really enough to say, you know, ``I am going to go
out and add a whole load of new people.'' It is just--the
temporary nature of it just--I don't think will have that big
an effect.
So, I tend to think the positive effects were small, and
the negative effects, when it goes away, also will be small.
Mr. MARCHANT. And, Mr. Chairman, if I could ask a question
that I promised a gentleman last week--when he found out that I
was going to be on the Social Security Subcommittee, he asked
me to ask this as a question.
What is--and I will ask this to Mr. Goss--what is the
definition of a gap baby? Notch baby, I am sorry.
Mr. GOSS. Notch.
Mr. MARCHANT. Because this gentleman obviously is a notch
baby.
Mr. GOSS. Okay.
Mr. MARCHANT. And he calls often.
[Laughter.]
Mr. GOSS. We apologize for that. There was a certain period
of time during which births reached retirement age in a period
when, as a result of the 1977 Social Security amendments,
because the benefit levels were rising at, really, an
unsustainable rate, these so-called replacement ratios,
benefits relative to wage levels, were growing out of control.
And the 1977 Social Security amendments came along and
corrected that.
But the Congress at that time decided that the benefits had
risen to a level that was about six percent higher than they
thought made sense. So they actually, over a period of five or
six years worth of retirees, pulled the benefit levels down. As
a result of having the benefit levels pulled down over that
period, we ended up with a situation which really defines what
a notch is: people retiring this year, say at 62, actually
getting less when they retire at 62 than a person who is now
63, had the same job, and retired a year ago.
And so, if a person retiring now is getting less than a
person who retired a year ago from the same job, then that is
defined as a notch that is something which, when we design
proposals--everybody who is sitting behind you knows well--this
is something we strive to avoid, having notches in the future
so you won't have any more cards and letters.
Mr. MARCHANT. Okay. Thank you, Mr. Chairman.
Chairman JOHNSON. Try not to ask that question any more.
[Laughter.]
Chairman JOHNSON. Let's see, Mr. Tiberi.
Mr. TIBERI. Thank you, Mr. Chairman. Thanks for having this
hearing.
Mr. Goss, remind us up here. When Social Security was
created, my understanding is that President Roosevelt stressed
that this would not be a welfare system, that this would be a
system that the benefits, the taxes that you paid, would equal
the benefits that you incurred. And, therefore, if you were
making $100,000, and paying tax on the $100,000, your benefit
will be higher over a period of time if your average wage over
time was $50,000, and thus you paid $50,000 into--or taxes
based on the $50,000. Is that correct? Is that how it works?
Mr. GOSS. That is absolutely correct. People who earn more,
and therefore pay higher taxes, do get higher benefits. But it
is not in direct proportion.
Mr. TIBERI. Right.
Mr. GOSS. If you have somebody who makes $50,000 versus
$100,000, the $100,000 will pay twice as much in the way of
taxes. But because of the way the benefit formula has been put
together, they will not get twice as much in the way of
benefits.
Mr. TIBERI. But they will get a percentage higher, because
they put a percentage more in.
Mr. GOSS. They definitely will get more benefits.
Mr. TIBERI. If we lift the cap--the proposals to lift the
cap haven't corresponded to the theory that President Roosevelt
has proposed, is that correct? My understanding is those who
want to lift the cap want to also cap the benefit and then use
the remainder to fund the system. Is that correct, or am I
wrong?
Mr. GOSS. Well, we have a variety of proposals. One that
has been discussed much here is to gradually raise the taxable
maximum up, so that we will again be taxing 90 percent.
Actually, the fiscal commission and the bipartisan policy
center commission came up with slightly different flavors of
that. Generally speaking, if we do raise the taxable maximum,
extra earnings that people have above the current taxable
maximum might be confronted in our benefit formula with getting
only a 15 percent return, as compared to about the average 48
percent return that earnings tend to get.
The fiscal commission actually suggested that the extra
earnings should get not a 15, but a 5 percent return. So they
were trying to achieve actually more solvency kick out of
raising the taxable maximum than the bipartisan policy center
is.
Other proposals have been put forth that would say that for
the extra taxes paid in for higher earnings, there will be no
extra benefit gains. So there is a great variety of
possibilities that you might consider.
Chairman JOHNSON. Dr. Biggs, would we lose public support,
in your opinion, if we raise the tax? And we have heard from
you and Mr. Brill about the negatives of raising the tax. But
put that aside for now. Would we lose public support of the
system, in your opinion, if we took the cap off and retirement
benefits would be less than they are today for those earners,
based upon the tax paid and the benefits received, whether it
is 48 percent versus 15 or 48 percent versus 5 for the added
amount?
Mr. BIGGS. Well, I think that that is an important issue,
sort of a political economy issue, of how people view the
program, and how that affects their support for it.
Historically, that issue is very, very important for
President Roosevelt. He appointed a commission to develop sort
of the skeleton of the Social Security program.
The interesting thing of what the committee on economic
security came up with is they originally set this wage cap of
$3,000, and they argue that anybody above that wage cap
shouldn't even participate in the program, that they should
just go save on their own. So, under their structure, you
wouldn't have had any redistribution from these high earners to
low earners. It was really seen as a universal insurance
program, where everybody paid in, everybody got out.
The compromise they came to was a cap where you pay in
taxes based up to $100,000 in earnings, and your benefits are
based on those same taxes. So there was always this interchange
between the two. If you made it too progressive, the argument
was, it would be come to be seen was what Roosevelt called
relief--the phrase we use today is ``welfare.''
Now, the question is how far can you push that. You can say
we are going to eliminate the cap, and you are going to get an
extra penny of earnings, or an extra penny of benefits. People
say, ``Okay, clearly, that is sort of a--that makes kind of a
joke of the situation.'' So the question is, how far can you
push it before you get the lack of political support, which,
really, people have counted on for the program? If people don't
feel a program is fair, then the political support does tend to
fall apart.
Chairman JOHNSON. Thank you. Mr. Brill, you commented about
the concern that, in raising Social Security revenue, there
would be a detrimental impact on overall federal revenue. Can
you expand upon that, why you believe that?
Mr. BRILL. Sure. I think this is an important consequence
to appreciate when looking at raising the cap or raising the
payroll tax rate. It depends, in part, on exactly the
sensitivity of the workers, to what degree they respond to this
higher tax rate. And there is a debate among academics to that
response.
But there is absolutely shifting that will occur, and it
would be reflected in any analysis that Tom and his team would
undertake, or any work done by the CBO on this issue.
One paper that many have noted on this area is a working
paper by Jeffrey Liebman and Emmanuel Saez. In that paper, they
estimate the impact on a per-worker basis of raising the
payroll cap. In one example, a more conservative example,
raising the cap to 90 percent from where it is now would result
in $155 more in payroll taxes, but $67 less in other taxes
being paid, as the workers shift their behavior and either work
less or report less taxable wages. And so, in that sense, there
is a decreasing amount of general fund revenues in exchange for
increasing amounts of Social Security revenues.
Chairman JOHNSON. Thank you. You know, you guys didn't talk
about raising the age limit at all. I am surprised.
And, Mr. Lee, you didn't push your teachers out there, I am
sorry to hear. Tell them hi when you get back, will you?
Mr. LEE. I will, thank you.
Chairman JOHNSON. I thank you all for being here today.
This subcommittee will continue to monitor progress to make
sure that Social Security is done right, within its means.
With that, the committee stands adjourned. Thank you all
for being here.
[Whereupon, at 3:28 p.m., the subcommittee was adjourned.]
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