Hearing of Senate Special Committee on Aging - Social Security: Do We Have to Act Now?

Hearing of Senate Special Committee on Aging - Social Security: Do We Have to Act Now?

Senator Nelson. Speaking of that, I wish that our distinguished panel, who I have had the pleasure of hearing both of you in these past couple of days, might clarify for us on what was changed in what the President said and what the White House put out with regard to what had been put out by the White House previously in the press. We don't know the details
of the President's plan, but some additional information was released yesterday and I would like that to be filtered through
the eyes of both of you and give us your interpretation and how that would affect the ultimate final product.

It is no secret, Mr. Chairman. I have made a couple of fairly definitive statements this week, both in Florida and here on the Senate floor, that I am not going to support anything that is going to be a huge transfer of new debt out of the Social Security Trust Fund, nor am I going to support something that will have a diminution of the benefits. Now, I agree that everything ought to be on the table and if everything is on the table, then we can start realistically picking and choosing.

I will just close by saying that I, too, was a Member of Congress when one of the finest examples of bipartisanship has
ever been rendered in American history, and that was when Ronald Reagan and Tip O'Neill decided that they were going to
save Social Security in the early 1980's. They appointed this Commission, and it was bipartisan, and as a result of that, they came to an agreement and then they came to another very significant agreement, that nobody was going to play ``gotcha''
politics and that there was not going to be used the final result, which was a give and take in the process of compromise,
otherwise known as consensus building, that they were not going to use that to someone's disadvantage in the coming election. They honored that agreement and that is why we had the saving of Social Security back in the 1980's.

Thank you, Mr. Chairman.

BREAK IN TRANSCRIPT

Senator Nelson. Could you all address the question that I had raised in my opening comments? What was changed last night?

Mr. Walker. Do you want to go first?

Mr. Holtz-Eakin. With the stipulation that we are far, far, far from a lot of detail on what we know was proposed, we have
looked at the transcript of the speech, at the policy book that has been released, and at the transcript of a briefing which
provided some background, and I think three things stand out in contrast to Commission Plan 2, which was widely discussed prior to the State of the Union.

First is in the contributions to the plan itself, as we understand it, there is a $1,000 cap which is now indexed to general wage growth and which then also goes up by $100 each year in addition to whatever wage growth there might be. So
there is a rising cap on the contributions.

Second, there is a series of phase-ins in both when the program starts and then who is eligible to contribute to individual accounts.

Then third, in terms of the computations at the end of the working career, there are accumulations in the individual accounts that come from contributions. In Commission Plan 2, each contribution was, for purposes of calculating total benefits, that contribution was assumed to have a 2-percent real return. At the end of the working career, all these fictitious 2 percent earnings were used to calculate offsets to the traditional benefit. That 2 percent return has now been changed to 3 percent.

So there have been some, essentially, details on money going in, timing of eligibility, and calculation of total benefits at the end that look a little different from Commission Plan 2, but an enormous amount remains to be specified in terms of annuitization and many details.

Mr. Walker. Senator, I would say there are still a lot of issues that have to be addressed to figure out how you are going to pay for the individual accounts. Commission Plan 2 provides some insights, potentially, as to what the administration has in mind, but it is not clear that they intend to necessarily go with Commission Plan 2.

There are several things that I took out of last night's State of the Union, and I was there as you were and others. First, I heard the President say that if you are 55 years old or older, you will not be affected in any way, shape, or form. Presumably, that means that whatever the benefits people 55 and older have been promised and in whatever form they will get it.

Second, the language that I heard appeared to say that individual accounts would be optional. He didn't actually use
the word optional, but that is what I inferred, at least, that it would be optional for people under 55.

Senator Nelson. He said voluntary.

Mr. Walker. Voluntary. Well, then that is optional. That tells me it is optional. The question is----

Senator Nelson. What does that mean to you?

Mr. Walker. Well, what it means to me is that you wouldn't automatically have to take part of your payroll tax and use it
to fund an individual account. You might be able to stick with the current system, and part of the question would be is if you
did take part of the payroll tax and use it for an individual account, what would the tradeoff be? How would your defined
benefit promise otherwise be affected? That hasn't been defined yet, and that is something that obviously would have to be
defined.

There are a number of important details that would have to be defined before, A, you can really understand it, and second,
before you can cost it and think about what the potential implications would be for individuals.

Senator Nelson. So we are really reacting to something that we don't know what the specifics are. We are having an academic discussion about various things that we might put on the table, but at this point, we don't know what is on the table by the President.

Mr. Walker. Senator, I would suggest there is one thing that is important in addition to getting the details filled out. As was mentioned by one of the members earlier, you can't solve a problem until you admit that you have a problem and I think there is work still to be done in trying to help convince people, not only here within Washington but outside the beltway, what is the nature, extent, magnitude, and timing of the problem and what are the relative pros and cons of acting sooner rather than later? But you are right, a lot more details have to come out as to what the potential solution might be and what the pros and cons of that potential solution might be.

I might mention one more thing, Senator. It is very important in analyzing reform proposals that, as we have said at GAO, you have to look at a package. There are pros and cons of every reform element.

The other thing is to benchmark the reform package against both promised benefits and funded benefits, because not all
promised benefits are funded. Therefore, if somebody is to say, ``Well, this represents a cut of X percent from promised
benefits.'' Well, if you are under 40, all your promised benefits aren't funded and if you're under 30 none of your benefits are fully funded. As a result, you are really comparing apples and oranges unless you consider both the funded benefits as well as the promised benefits.

Senator Nelson. You know, you talk about you don't have a problem unless you recognize there is a problem, and we had a
problem back in the Great Depression and it was addressed. I know that just on a basic set of values that we have a problem
if we don't, and are not admonished and follow the necessities put out in the Good Book about honor your father and your
mother and take care of the widows and orphans. I know that elderly poverty is now 10 percent, and it is down from 35
percent in 1959, and I sure don't want it to go back the other way where it is increasing. So I am going to look at this with
a very, very careful eye, Mr. Chairman.

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_senate_hearings&docid=20045.wais