Copyright ©2009 by Federal News Service, Inc., Ste. 500, 1000 Vermont Ave, Washington, DC 20005 USA. Federal News Service is a private firm not affiliated with the federal government. No portion of this transcript may be copied, sold or retransmitted without the written authority of Federal News Service, Inc. Copyright is not claimed as to any part of the original work prepared by a United States government officer or employee as a part of that person's official duties. For information on subscribing to the FNS Internet Service at www.fednews.com, please email Carina Nyberg at email@example.com or call 1-202-216-2706.
SEN. KOHL: Good afternoon to everybody and at this time we'd like to commence our hearing. We all appreciate your attending this hearing on Social Security. The last time the Senate took a close look at the program we were responding to the former administration's plan to privatize the program, as you remember, with investment accounts. Four years later, I think we're all thankful that effort was not successful and Social Security was not exposed to a stock market that has devastated the retirement savings of so many people over the past year.
The impact of the financial downturn provides a stark contrast to the dependability of Social Security, and it's also a reason that the program's guaranteed, inflation-protected benefits are more vital to Americans now more than ever. More than just a retirement program, Social Security is a collective insurance policy protecting us all from the possibility that we die young and leave a family behind, become disabled and not able to work, or even live into a ripe old age and beyond our savings.
Because we all pay into the program, the cost of this insurance is relatively low given the significant monetary benefits individuals receive in exchange. For example, the survivor benefit is equivalent to a 433,000 (dollars) life insurance policy and the disability benefit is equivalent to a $414,000 disability insurance policy for a young family.
And consider this -- if a couple wanted to buy the same income protection they would receive from Social Security retirement benefits they would have to pay over half a million dollars to buy an inflation-indexed annuity in the private market. However, as crucial as the program is today, the fact that it was designed in another era -- the fact is that it was designed in another era.
In 1935, when Franklin Roosevelt signed the Social Security Act into law, women mostly worked in the home and did not generate their own earnings and so the program was designed to provide benefits for spouses and widows. Today, women make up nearly half the workforce, earning their own benefits and contributing to the strength of our economy. Also, people did not live as long back then. The life expectancy back then was 62. Today, someone who retires at age 65 can expect to live to the age of 83.
As Social Security nears its 75th anniversary it's time to take a fresh look at the retirement program to ensure that it will be just as strong in another 75 years. The changes in benefits that have taken place in our society should be mirrored in the types of benefits Social Security provides and in the way we raise revenues. Today, we will place a particular focus on making sure that the most vulnerable in our society are not left behind as we examine ways to strengthen benefits.
When Social Security began in 1935, 50 percent of seniors lived in poverty. Today, that number is below 10 percent. While the program has been incredibly successful at reducing poverty among the elderly as a whole, poverty still remains high for some groups including those aged 85 and over, older single and widowed women, as well as minorities. Nearly one-quarter of elderly African Americans and more than one-sixth of elderly Hispanics today live in poverty.
As we begin the discussion about making changes to the program, we need to keep in mind that Social Security benefits are not overly generous. While Social Security makes a critical difference in the lives of tens of millions of the American elderly, disabled, and survivors, the average retirement benefit is only $1,153 a month. Yet despite these modest payments, Social Security is still a vital lifetime (sic) because over 40 percent of all older Americans Social Security is what provides nearly all of their income.
We all know that health care reform is the number one priority of the administration and of my colleagues here in the Senate and across the Capitol. But with an urgent need to contain the federal deficit, there is no doubt that sometime soon all eyes will turn to Social Security. When that time comes, this committee wants to be prepared to act as a repository of ideas for reform proposals. As our witnesses will confirm today, Social Security can be strengthened, benefits for those who need them most can be increased, and long-term solvency can be ensured with just a few relatively small, relatively common-sense changes.
So we'd like to thank our witnesses today for their willingness to participate. We look forward to their testimony, and before we get to them we turn to the ranking member on this committee, Senator Mel Martinez.
SEN. MEL MARTINEZ (R-FL): Thank you very much, Chairman Kohl. I appreciate you calling this hearing today on this very important issue to so many Americans -- those who are today receiving their Social Security benefit and those of us who anticipate that in the future.
Preparing to live on a fixed income can often be worrisome, which is why Americans deserve to know that they will receive their fair share of Social Security upon their retirement. Social Security has been a primary source of income for retirees and disabled Americans for many decades. For one-third of Americans 65 years and older, Social Security benefits constitute 90 percent of their total income. Social Security is safe today for seniors, but unfortunately, it is in serious danger for our children and grandchildren.
That's why Social Security reform remains a top priority for our nation. For a state like Florida, the home to 3.4 million beneficiaries, it is essential. At risk is the Social Security Trust Fund, which has helped to ensure generations of Americans that -- and to ensure they receive what they have been promised. As the number of Baby Boomers retiring increases and more Americans begin to receive their share, it's clear the financial foundation of Social Security is weak. There won't be enough money to meet future obligations and fixing the system is long overdue.
In the 1950s, there were about 16 workers to pay every beneficiary but today there are about three workers to support each person collecting Social Security. Without some change, by 2016 the government will begin to pay out more in Social Security benefits than it collects in payroll taxes. By 2034, the Social Security Administration expects that we'll have almost twice as many people 65 and over than there are today, and that would be 74 million seniors.
And if we don't act now, by 2037, when today's workers who are in their mid-20s begin to retire, the program will only have enough revenues to pay about 75 percent of benefits. Under current law, Social Security has a total unfunded obligation of more than $10 trillion. A 2001 White House report on Social Security stated, and I quote, "As time goes by, the size of the Social Security problem grows and the choices available to fix -- to fix it become more limited."
Eight years later, the problem remains unsolved. There are a variety of plans and ideas that have been proposed to fix Social Security, but unfortunately, we have not reached a consensus on how best to do this. We need to work together here in Congress and with the president to determine the best elements of the proposals that have been put forward.
I look forward to hearing from our witnesses today and I'm certain it will underscore what we already know -- that the longer we wait to take action the more difficult and expensive the changes will become. Thank you, Mr. Chairman.
SEN. KOHL: Thanks very much, Senator Martinez. Our first witness today will be Leon Burzynski, the president of the Wisconsin Alliance for Retired Americans. Mr. Burzynski is also a member of the IBEW, an executive board member of the Wisconsin AFL-CIO. Our next witness will be Kenneth Apfel, professor at the University of Maryland School of Public Policy. Mr. Apfel served as commissioner of the Social Security Administration under the Clinton administration from 1997 until 2001.
He also served at the Office of Management and Budget at the U.S. Department of Health and Human Services and also as the legislative director for Senator Bill Bradley. Today, he's known for his research in public management and leadership with a particular focus on aging, health care, and retirement issues.
Next, we'll be hearing from Joan Entmacher. She's the vice president for Family Economic Security at the National Women's Law Center. Prior to this time, Ms. Entmacher worked for the National Partnership for Women and Families, the Massachusetts attorney general's office, and also the U.S. Department of Labor. She's also taught political science at Wellesley College.
Next, we'll be hearing from Dr. Melissa Favreault. Dr. Favreault is a senior research associate at the Urban Institute's Income and Benefits Policy Center. Her primary research interests include aging, social policy, and (a life course ?) and is one of the most -- one of the foremost experts at modeling how Social Security reform will affect different populations.
And next we'll be hearing from Dr. John Irons from the Economic Policy Institute. He has previously served as the director of tax and budget policy at the Center for American Progress and also as an assistant professor of economics at Amherst College. Additionally, Dr. Irons has worked for the Brookings Institution as well as the Federal Reserve Board of Governors. And Senator Martinez, would you like to introduce the final witness?
SEN. MARTINEZ: Thank you, Mr. Chairman. I would like to introduce Mr. Andrew Biggs. Mr. Biggs is currently a resident scholar at the American Enterprise Institute. Previously, he was the principal deputy commissioner of the Social Security Administration where he oversaw SSA's policy research efforts and led the agency's participation in the Social Security Trustees Working Group. Thank you.
SEN. KOHL: Thank you so much, and as you can see we have a very distinguished group of panelists and we're looking forward to hearing your five-minute comments before we engage in conversation. We'll start with you, Leon.
MR. BURZYNSKI: Thank you, Chairman Kohl. Mr. Chairman and members of the Special Committee on Aging, my name is Leon Burzynski. I am the president of the Wisconsin Alliance for Retired Americans, representing more than 89,000 Wisconsin retirees, and part of the National Alliance for Retired Americans, representing more than 4 million retirees across the nation. We are dedicated to the economic and health security for current and future retirees.
I greatly appreciate this opportunity to testify on the importance of strengthening Social Security. Senator Kohl, I especially want to thank you for all your efforts on behalf of Wisconsin retirees and seniors. The theme today, "Social Security: Keeping the Promise in the 21st Century," is as relevant now as any time in the history of the program. The recent economic downturn clearly demonstrates that the guaranteed benefits of Social Security are the foundation of retirement security.
We in the Alliance for Retired Americans believe Social Security is vitally important for current retirees, our children, and our grandchildren. Please consider -- Social Security is America's family insurance policy. Retirees, workers, surviving spouses, and children all benefit from the program. Two-thirds of retirees receive more than one-half of their income from Social Security, and if Social Security did not exist today, about 40 percent of retirees over 65 would have incomes below the poverty level. And finally, it provides a steady stream of income with built-in protections against excessive inflation that you cannot outlive.
I'd like to share four personal stories from members of the Alliance for Retired Americans of how Social Security has helped them and their families. Let's start with Michael Ott from Hilbert, Wisconsin, who ran the family farm until it became impossible to compete with large corporate farms. Michael ended up with a part-time job at just over the minimum wage. At age 62, he began collecting Social Security and was getting by.
Michael had been sick but was hoping to make it to 65 and have Medicare. Unfortunately, he ended up in the emergency room where he was diagnosed with congestive heart failure. As a result, he had to stop working. I ask you, what would Michael have done without the guaranteed $600 a month he received from Social Security? Without Social Security, Jet Jennings, a cancer patient from Bow, New Hampshire, would be unable to pay for her chemotherapy and medications.
The Social Security she receives also helps pay for her food and regular household expenses. These benefits play an important role in her life, and she can state confidently that if Social Security did not exist her income would be inadequate to cover her expenses. Finally, Art Palleon from Cedarburg, Wisconsin, is a retired teacher. When he was 17 years old, his father died, and during this difficult and challenging time, Art's mom received survivor benefits that helped in raising her six children.
Art has stated on a number of occasions that Social Security benefits kept his family intact after the passing of his dad. Bob Kirkner of King, North Carolina, is 70 years old, a proud father and grandfather. He retired with a good pension after 34 years as a mechanic for US Airways. When US Air (sic) first declared bankruptcy, Bob's health insurance payment went from 40 (dollars) to $600 a month, until he received his Medicare and VA benefits.
After the second bankruptcy filing, Bob's pension was cut drastically and his Social Security check that was a supplement is now half his income. Even with Medicare and VA benefits, his health care costs are almost $400 a month. With all due respect to those claiming the program is in financial crisis, we strongly disagree. According to Social Trust Security (sic) trustees, the program will have enough funds to pay full benefits through 2037 and about 78 percent thereafter.
In consideration of our children and our grandchildren, we're not suggesting Congress do nothing. However, the time is approaching when Congress will need to take action to extend the solvency of Social Security. One simple solution is to restore the earning caps to the historical level of 90 percent of all wages earned. The erosion to the current level of 82 percent has derived (sic) the Social Security Trust Fund of income to ensure payments for future beneficiaries.
In conclusion, Mr. Chairman, Social Security has been the underpinning of our country's safety net. We believe President Obama and Congress should be able to ensure its solvency without making radical changes to this fiscally responsible federal program that's essential for our security. Thank you for listening to me and giving me this opportunity to speak.
SEN. KOHL: Well, that's a remarkable statement for many reasons, one of which is it's exactly five minutes. (Laughter.) Exactly. Thank you, Leon. Mr. Apfel?
MR. APFEL: You established quite a standard that we'll try to live by. Senator, it's an honor to be back in the Hart Senate Office Building to testify on Social Security in the 21st century. Our system has been the bedrock of support for millions of Americans for 75 years now. Social Security's core framework has essentially remained the same as instituted in the 1930s.
The program, however, has evolved considerably over the years to meet changing demographic, human, and economic needs. Social Security provides the foundation of support for about one in six Americans. While the benefits are modest, for most Americans the value of Social Security is the biggest accumulation of dollars they will take into retirement.
According to a recent National Academy of Social Insurance study -- NASI study -- a 65-year-old with average benefits would need to pay an insurance company almost a quarter million dollars for that level of protection. Social Security is without a doubt the crown jewel of American anti-poverty policy. Social Security lifts 13 million elders out of poverty, and without those monthly benefit payments about half of all seniors would be living in poverty. Social Security is also America's family protection plan. About one-third of beneficiaries are severely disabled workers, their spouses and children, or the surviving family members of workers who have died.
Social Security is the equivalent of a -- about a $400,000 disability insurance policy, and the Social Security survivor benefit is the equivalent of almost a $450,000 life insurance policy for a young family. About 6.5 million children under 18 -- nearly 9 percent of all U.S. children -- received part of their family income from Social Security in 2005. About 1.3 million of these children were lifted out of poverty by Social Security benefits. Social Security is particularly important to retirees in communities of color.
According to the NASI study, among all beneficiaries 65 and older 42 percent of singles and 22 percent of married couples rely on Social Security for almost all their income. Among African Americans, the figures were 54 percent for single persons, 33 percent for married couples. Among Latinos, the figures were 62 percent for singles, 37 percent for married couples.
Social Security is the majority source of income for more than three-quarters of non-married aged women beneficiaries, and almost all income for more than two out of every five non-married aged women. The table -- the chart that's before the committee here today -- highlights the importance of Social Security as a source of income for older Americans. I don't need to go through all these numbers but we're all painfully aware of the strains that we're now experiencing in the other legs of the retirement stool -- the elderly income stool. Retirement savings accounts have shrunk by 40 percent over the past year. Private defined benefits are shrinking and are under unremitting stress. The unemployment rate for older Americans is increasing significantly.
These changes, coupled with the erosion of employer-provided retiree health plans, the increases in Medicare premiums, and the cost of health care all place growing importance on Social Security as a source of income that can be counted on. Now, while it's true that Social Security provides essential protections for Americans, it's also true that millions of beneficiaries still live on the edge. According to NASI studies, those 65 and older who are poor or near poor -- family incomes below 125 percent of the poverty level -- 25 percent of unmarried women, 26 percent of black men, 36 percent of black women, 27 percent of Hispanic women, 31 percent of Hispanic men, 31 percent of Hispanic women, 18 percent of Asian men and women.
Among persons age 80 and older, those with income below 125 percent of the poverty line include 28 percent of unmarried women, 46 percent of black women, 37 percent of Hispanic women. Our Social Security system needs to continue to evolve, as it has for the past 75 years, to meet the nation's needs. We need to be clear that we face two challenges -- twin challenges -- and that both need to be addressed -- the solvency challenge and the benefit adequacy challenge. The National Academy of Social Insurance has been examining in depth these benefit adequacy issues.
Indeed, three of the panel members appearing before this committee today have been researching these activities for the National Academy of Social Insurance, and today, as chairman of the board of the National Academy of Social Insurance, I'm providing to the committee the first of several NASI reports to be published in the months ahead on the topic of benefit adequacy for vulnerable populations. This report focuses on the benefits of targeted groups such as widowed spouses, low-paid workers, people who have spent part of the workforce -- time out of the workforce because of childcare or eldercare responsibilities, beneficiaries who live to advanced ages, older workers with occupational disabilities.
Any discussion on modifying Social Security should consider not just solvency but benefit adequacy, particularly for vulnerable groups. Thank you, Mr. Chairman, and I'm one second early.
SEN. KOHL: (I owe you ?). Great statement. Thank you so much. Here -- and now we hear from Joan Entmacher from the National Women's Law Center. Thank you for being here.
MS. ENTMACHER: Chairman Kohl, Senator Martinez, thank you for holding this hearing and for giving me the opportunity to testify on behalf of the National Women's Law Center. Too often discussions of Social Security portray it as a problem that needs to be brought under control, but as you both and other witnesses on this panel have emphasized, it's the largest and most secure piece of Americans' retirement income, and strengthening and improving it has never been a more important topic.
My written testimony explains the challenges that women, in particular, face in achieving a secure retirement and why those challenges persist despite the growth in women's work and earnings in recent decades. So with my limited time I'll discuss reforms, focusing on a proposal to improve the benefit for surviving spouses. That's one important element of a reform package because over half of all poor elderly women -- 55 percent -- are widows, and even with the changes in marriage and divorce patterns in recent decades widows will remain the largest group of poor elderly women for decades to come.
However, I emphasize, along with Ken and Melissa, that reforms need to be developed as a package, including consideration of the important nonretirement benefits that are also part of Social Security. Additional reforms beyond the widow's benefit are needed because more women, especially black women, will enter retirement never having been married or having been married for less than 10 years in one marriage and not qualify for benefits as a divorced spouse.
They would not be helped by improvements in the widow's benefits so the proposals that Melissa will talk about to improve benefits for lifetime low earners and caregivers are also essential. But a change in benefits for surviving spouses could improve both the adequacy of benefits for poor widows and the equity of benefits for surviving spouses and low-earner dual-earner couples. Before I describe the reform proposal, I'll give a brief explanation of how current benefits for surviving spouses work.
A surviving spouse is entitled to receive up to 100 percent of the deceased spouse's benefit to the extent it exceeds his or her own worker benefit, assuming no reductions for early retirement. This helps provide basic income security for a surviving spouse but there are some issues with the current benefit structure. It means that household Social Security benefits drop at widowhood by 33 to 50 percent. The cost of maintaining a household for one person is less than for two but it doesn't drop that much.
Second, households in which spouses' earnings were more equal experience a greater decline at widowhood, and with more women contributing more to household income the number of households in this situation is increasing.
Third, the survivor of a dual-earner couple can end up with a lower benefit than the survivor of a single-earner couple that contributed less over their working lives to Social Security. So, as Ken has said, as part of a project by NASI that was funded by the Rockefeller Foundation, several of us analyzed options for improving benefits including one that I looked at for reforming the widower's benefit.
Under this proposal, which is a variant on earlier reform ideas, a surviving spouse would receive the higher of his or her current benefit or an alternative benefit which would be equal to 75 percent of the couple's combined benefits that they had earned as retired workers. This feature would help reduce the disparity in benefits that currently exist between single- and dual-earner couples.
Second, the value of the deceased spouse's benefit used in the calculation would not be reduced because the deceased spouse had claimed benefits before full retirement age. This would increase the adequacy of benefits for lower-income survivors. And finally, the size of the increase would be capped to target the improvement to those most in need and to control the cost.
The Social Security actuaries recently provided a rough estimate of the cost of this proposal using two different caps. With a cap based on the average benefit for all retired workers the cost would increase the long-term deficit by just 4 percent. Setting the cap at a higher rate, the benefit of a maximum earner would add 20 percent to the current deficit and, of course, there are possibilities in between.
My written testimony and that of Melissa and Ken describe other possible reforms. So in my remaining seconds I will simply remind the committee that it's important to look not only at Social Security but also at Supplemental Security Income, which provides a means-tested support for the lowest-income beneficiaries. There are ways to modernize that program to ensure that all beneficiaries can truly benefit from the improvements in Social Security that we're talking about. Thank you.
SEN. KOHL: Thank you very much. Very fine statement. Dr. Melissa Favreault?
MS. FAVREAULT: Thank you, Senators, for this opportunity to testify. I'm going to focus on four key points. First, Social Security benefits for long-term low-wage workers are modest and need to be increased. Second, there are many ways to bolster benefits for low-income retirees. The technical details of each proposal will determine its effectiveness.
Third, any Social Security reform package will include multiple provisions that interact with each other so certain provisions to help low earners may be more or less desirable depending on other components of the package. Finally, some low-income older and disabled Americans are beyond the reach of Social Security. To help them, Congress should consider expanding SSI -- the Supplemental Security Income program -- as Joan Entmacher just described.
On to my first point about the need to reduce poverty risk by shoring up Social Security for long-term low-wage workers -- about 10 percent of Americans aged 65 and older live in poverty and many have incomes that leave them just barely above the poverty line. Low-wage workers' Social Security benefits are modest both compared to benefits in other developed countries and compared to basic needs.
For example, someone who spent 35 years working full time at the minimum wage retired at age 62 would receive a Social Security benefit equal to only about 83 percent of the poverty level. Many low lifetime earners don't even get that much. Many drop out of the labor force for a time or only work part time, often to care for children, disabled family members, and frail parents. Also, recessions hit them especially hard and they're more likely than others to become disabled.
This leads to my second point. We can bolster benefits for these vulnerable earners in different ways with various strengths and weaknesses. Let me start with minimum benefits because of their prominence in reform packages. They're highly cost effective and directly address the problem of wage stagnation that has hurt less educated workers in recent decades.
Our models show that within five to 10 years of enactment certain minimums could lift tens of thousands of Social Security beneficiaries out of poverty. By mid-century, they could help almost a million people every year. Minimum benefits with stricter work years definitions would have smaller effects but would cost less and maintain Social Security benefits' strong ties to time in the labor force.
That is the challenge in designing a minimum benefit. The better it is at alleviating poverty the worse it sometimes is at rewarding work. Really large minimum benefits could weaken the relationship between taxes paid and benefits received. Given the fiscal challenges ahead, Social Security must continue to reward long-term workers.
Another interesting Social Security adequacy proposal would increase benefits at older ages, say, when folks are in their 80s and older, through a longevity insurance bonus or index. This addresses the risk that people might outlive their assets. Such benefits would be targeted toward a time of life when work ability is most limited and would ensure that older seniors' incomes kept up with state standards of living for workers in the economy.
But some of these benefits may go to well-off seniors who don't need extra help. Without caps, then, longevity benefits may be less effective at reducing poverty than other equally costly approaches. Proposed spouse and survivor benefits, as Joan Entmacher has described, often try to increase the program's fairness -- for example, making benefits more equal for single- and dual-earner married couples.
A challenge for these proposals is that trying to make benefits fairer for some couples often makes benefits less fair for unmarried workers who pay the same payroll tax. Some of these proposals are also fairly costly and caps can help, as Joan pointed out already. Caregiver credit options try to deal with most of the limitations of spouse and survivor benefits. They could effectively serve many single parents who now often fall through the cracks.
Like minimum benefits, they also tend to be quite cost effective and very progressive but they're not always fair for caregivers who earn more than the credit level and they're hard to administer. So details matter. Without careful design, large vulnerable groups could be left out, diversity within groups may be overlooked, and benefit improvements could become less effective over time.
My third point is that many Social Security reform package provisions are going to interact. Sometimes people say that solving Social Security's financing needs is just an arithmetic problem -- we just need to raise some taxes and cut some benefits. But different tax increases and benefit cuts affect workers and beneficiaries very differently.
For example, reductions to cost-of-living adjustments would affect the (oldest old ?) more than other beneficiaries. I've simulated many Social Security packages in which the impact of an adequacy adjustment that appeared to be highly effective in isolation has been largely wiped out by other elements in the package. That's why it's critical to look at packages in totality. Again, as Joan pointed out, the whole is often quite different from the sum of its parts.
My final point, echoing Joan again, is that Social Security can't do it all. SSI was designed to aid those with limited work histories. It has languished over the last 35 years and needs to be updated if it's to play more of a role in reducing need among rapidly-aging Baby Boomers. For example, increasing SSI's asset test would be an especially cost effective way to alleviate poverty among older women.
(Given ?) the increase in share of defined contribution employer- provided pensions, Congress could reconsider the way SSI treats these types of pensions. So that's the end of my statement. Thank you, and I'm open -- welcome the opportunity to have discussion.
SEN. KOHL: Thank you very much, Dr. Favreault. Dr. Irons?
MR. IRONS: Well, thank you, Chairman Kohl and Ranking Member Martinez, for inviting me here today. As has been already said, the Social Security system has been the bedrock of retirement security. Sorry. Hope you can hear me better now. Social Security system has been the bedrock, as mentioned earlier, of retirement security for over half a century.
Over the years, the system has evolved in response to changing conditions, and as is well known, program outlays are expected to exceed revenue. So the system faces a shortfall over the next 75 years. Responsible stewardship of the program would again necessitate making feasible adjustments to move us toward sustainability. Long- run balance within the system can be achieved in one or a combination of three ways -- by reducing total benefits, by increasing payroll tax revenue, or by transferring general revenues to Social Security.
My testimony today will focus on the second of these options -- that is, increasing the payroll tax revenue. Specifically, I want to suggest that any policy to increase overall revenue through the payroll tax should include an increase in the cap on earnings subject to the tax. As you know, Social Security taxes are levied on earnings up to a maximum level that is adjusted each year to keep pace with average wages.
In 2009, the payroll tax cap is set at $106,800, and roughly 6 percent of the population has earnings above that cap. Due to growing income inequality, the (share ?) earnings above that cap has risen from 10 percent in 1982, when the system was last in balance, to over 16 percent in 2006. This is because incomes have grown strongly at the top while incomes in the middle have stagnated.
This trend is expected to continue, meaning that the growing share of earnings remain outside of the payroll tax base. The cap also means that higher-income individuals pay a smaller share of their income in Social Security taxes than middle class employees. Including the employee and employer share of Social Security together with the Medicare tax, earners in the middle fifth of the income distribution pay an average effective payroll tax of about 11 percent.
In contrast, about 1 percent of earners pay just 1.5 percent of their earnings on average. Let me turn now to two different options for making adjustments to that cap. According to the Social Security Administration, fully eliminating the cap on taxable earnings would be sufficient to fully close the projected shortfall in Social Security. If newly-taxed earnings above the taxable maximum were credited towards benefits, eliminating the cap would close most but not all of the gap.
Short of that, raising and indexing the cap to capture 90 percent of earnings, as it did when the system was last in balance, would reduce the shortfall by slightly less than half, assuming benefit adjustments as well. A third option, which I want to focus on a little bit more today, would be to split the difference -- to eliminate the cap on earnings for employer contributions and raise the cap to cover 90 percent of earnings on the employee side.
With earnings up to the employee cap credited for benefit purposes, this change would reduce the long-term shortfall by about three-fourths. There are several advantages to this last approach. It would eliminate most of the long-term shortfall while maintaining a link between contributions and benefits, which I think is very important.
It would not lead to extremely large benefits for millionaires, which could be a concern if all earnings were credited for benefit purposes. Finally, self-employment tax -- self-employed taxpayers, who are responsible for both the employee and the employer share, would not face as large an increase in payroll taxes as if you had a full elimination of the cap. Further, this option would have a (most ?) modest impact on the standard of living of upper income taxpayers.
On the employee side, this would mean an increase in tax payments of, at most, 2.6 percent of income. If income growth for the top 5 percent of the households continues as it has for the past 20 years and assuming that the full 6.2 percent of the employer tax were passed on to their employees in the form of lower wages, the additional tax obligation would be recouped by these individuals in less than four years.
Affected taxpayers would also recoup some of the higher taxes in the form of higher benefits. Some would argue that an increase in the cap would create inefficiencies and cost jobs. Indeed, all else equal, I too would prefer to live in a world without taxes. But all else is not equal. If revenue is not generated by lifting the cap it must be raised from other sources or benefits must be cut, and those choices have cost as well.
While no one likes to raise taxes, raising the cap on taxable earnings would, in my opinion, be a better option than raising tax rates across the board. Thus, any policy to increase overall revenue through the payroll tax should have a higher cap as part of the equation. In particular, raising the cap to cover the 90 percent of all earnings and eliminating the cap on the employer side would close about three-fourths of the projected 75-year shortfall and the higher cap would affect just 6 percent of employees.
By contrast, an across-the-board rate hike would affect everyone with a disproportional impact on low- and moderate-income workers. For most of those who would face a higher tax obligation the impact would be minimal relative to their incomes and would likely be more than offset by wage growth in just a few years. So thank you for the opportunity to speak with you today. I look forward to answering questions.
SEN. KOHL: Thank you very much, Dr. Irons. Dr. Biggs?
MR. BIGGS: Chairman Kohl, Ranking Member Martinez, Social Security is the largest federal spending program, the largest tax paid by most workers, and the largest source of income for most retirees. It also faces a significant long-term funding challenge. For these reasons, I am glad you chose to hold this hearing today and I am thankful for the opportunity to testify.
In my testimony, I wish to highlight three main points. First, Social Security's long-term shortfalls increase significantly in the latest Trustees Report and will worsen further if reform is delayed. Second, population aging, not rising per capita health care costs, is the principal driver of rising entitlement spending. Even if current health reforms are successful, we may still face a budget crisis if aging-associated costs are ignored. And third, Social Security reform should encourage longer work lives and simplify the benefit formula.
The 2009 Social Security Trustees Report showed worsening program finances due to lower payroll tax revenues, increased life expectancies, and the simple passage of time. While many people focus on the date of trust fund exhaustion, which moved from 2041 to 2037, the more important finding is that the projected long-term deficit rose by almost one-fifth. Moreover, each year we delay reform this deficit increases around 5 percent. Time is money, as they say.
More broadly, I wish to place Social Security in a context of overall increases in entitlement spending. Rising entitlement costs spring from population aging, which increases the number of beneficiaries, and per capita health care price increases, which raise costs even if the beneficiary population does not change. The administration has argued that per capita health care inflation is, in OMB director Peter Orszag's terms, the real deficit threat, and that Social Security and population aging in general are small issues. Yet both CBO and OMB projections clearly show that population aging, not rising per capita health costs, will be the largest entitlement cost driver through around 2050.
A chart in my testimony illustrates these trends. Policies to address aging include specific Social Security reforms such as those we'll talk about here today plus macro-level policies such as increasing labor force participation, boosting saving rates, and raising skilled-immigration levels. My final comments propose two improvements to Social Security's benefit structure aimed in particular at low earners. First, we need to improve Social Security's incentives to delay retirement, and second, we must simplify the benefit formula to better target benefits and to make benefits more understandable.
While longer work lives enhance retirement security, due to quirks in the Social Security benefit formula a person who delays retirement and continues to pay into Social Security typically receives almost no benefits in return. On average, a person who works an additional year receives only around nine cents in extra retirement benefits for each extra dollar of taxes they pay. Policy makers should consider lowering the Social Security payroll tax for older workers, which would encourage delayed retirement.
Second, the Social Security benefit formula is remarkably complex, basing benefits on average wages, the number of years worked, the length of marriage, relative earnings between husbands and wives, and other factors. As a result, many workers have no idea what their Social Security benefit will be until the first check arrives. By this time, of course, it is too late to (plan ?) their other savings or to consider working longer.
Almost one in four individuals near retirement cannot even guess what their future Social Security benefit will be. Of those making predictions, one-quarter of near retirees overestimated their benefits by more than 28 percent. This predictability risk is every bit as damaging as having your 401k account decline on the verge of retirement. Moreover, the benefit formula's complexity means that retirees with the same lifetime earnings often end up with very different benefits. Figure 3 in my testimony illustrates how large these disparities can be.
The poor targeting of Social Security's progressivity means that for many low earners, Social Security is a social insurance policy that fails to pay off when they need it the most. Fixing this problem, though, does not require higher average benefits or greater progressivity. Instead, benefits much merely be targeted more effectively. One solution, which resembles the pension program in New Zealand, combines a flat dollar benefit paid to each retiree with automatic enrollment in individual retirement accounts.
As a chart in my testimony shows, this alternative, though much simpler than current law Social Security, actually targets low earners much more effectively. To conclude, rising entitlement costs, especially those caused by the population aging, poses significant challenges. Reforming Social Security in the near future can reduce the long term fiscal gap, while enhancing the welfare of retirees.
Thank you again for your consideration. I'd be happy to take any questions.
SEN. KOHL: Thank you very much, Dr. Biggs. Senator Martinez.
SEN. MEL MARTINEZ (R-FL): Thank you, Mr. Chairman.
It is apparent that we all acknowledge there's a problem and that there are no easy, simple or painless solutions to the problem, and I guess the beginning question I would have for Mr. Irons is, you indicated and some would say that your proposal would cost jobs, if you increase the payroll taxes of employers, and you answer that by saying that the world would be a nicer place if none of us paid taxes, or something like that.
I realize that that's not an option. The question really is, would it, in fact, at a time when we have unemployment reaching double digits, would it, in fact, be something that would threaten job loss?
MR. IRONS: I think, if you were to do it all today, that that would probably not have a good impact on the broader macro economy, or in any event, well might cost jobs. I think the amount of the job loss would be relatively minor, for various reasons. But I think if you were to actually try to implement this, I would suggest phasing it over time to allow people in businesses to plan for it, to push off some of the tax increases until, hopefully, after we have recovered.
So it would be a phasing over time, it would be more predictable, it would happen after we've largely recovered. But having said that, I think, even if this were in place, you'd have a relatively mild job loss, if any, because I think --
SEN. MARTINEZ: Why would that be? Can you kind of --
MR. IRONS: I can't necessarily quantify it. It's just a, under the comments, it's an on the one hand, on the other hand kind of thing here. So I can't give you an exact number.
SEN. MARTINEZ: No, I realize that. But I'm saying --
MR. IRONS: Yeah, but I think the right comparison here, again, is not to compare this with doing nothing. It's to compare this with the alternatives. So I think this would have a smaller impact on the broader macro economy and on jobs than if you raised rates across the board, or if you made some other changes by impacting benefits.
I think a benefit cut would have a larger impact on jobs. I mean, cutting benefits would have a large impact on individuals, especially in a recession. So again, when you look at all these options, in order to bring the system into balance, I don't want to say there's no cost, but I say this is probably the least cost of the options that are before you.
SEN. MARTINEZ: I think there's a pretty good consensus that impacting benefits is not a desirable option. But I wonder if means testing of benefits is something that has any merit or should be considered, and I'd throw it open to anyone who might ---
MS. ENTMACHER: I think the concern is that, it's several witnesses, and the as the chart indicates, benefits are so important for people, really quite high up the income scale, that means testing would mean potentially cutbacks for average Americans who rely on Social Security for the majority of their income. It also would undercut a lot of the strength and support for the program, which is precisely that this is something that everyone contributes to and it's there when they need it an benefits are related to the contributions that people make during their working lives, even though Social Security also has progressive features that help those in need.
So, I think it would fundamentally change the character of the program, if we were to go to something like means testing benefits. That's not to say, and several of us have suggested, that if you're going to make improvements, you want to target those improvements to those most in need. I think that's a different way of thinking about the problem, that if we're going to make it better, if we're going to put additional improvements in benefits, make sure they go to people who need them most.
SEN. MARTINEZ: But shouldn't we first right, get ourselves somewhere out of the hole before we talk about improving benefits? I mean I -- Go ahead, Mr. Apfel.
MR. APFEL: I think these two issues --
SEN. MARTINEZ: Microphone.
MR. APFEL: I believe these two issues much be enjoined. The last time we really dealt with Social Security in a major way was 1983. Since that time, we did make changes to the retirement's earnings test, which I thought was a very important change. But we don't deal with these issues very frequently. It's an excellent, most --
SEN. MARTINEZ: Do you know why?
MR. APFEL: Well, it's for all of the different political reasons,
SEN. MARTINEZ: Right.
MR. APFEL: It's very, very hard. It seems to me that marrying together the issue of long term solvency of the system, which will take changes, and it will, I've --
SEN. MARTINEZ: Not without pain, probably, in some direction or another.
MR. APFEL: It's going to be pain, involved in that package. But coupling that with a particular look at so many of the people on that chart, particularly in that bottom half, it's critically important that we think about marrying the issue of adequacy of benefits for our vulnerable populations, for low and moderate income people with any efforts at solvency.
Now I have been one who's argued for years that we need to, there will have to be some benefit restraints, and I would think that some of those benefit retrains for the slowing the rate of growth of benefits for future generations will primarily have to be near the higher end of the income scale, that we're going to clearly need tax increases for the system, but we also then have to take a look at what we've done to the system and how the changes that are being talked about today, the adequacy pieces, fit into that overall package.
If we do the former, the solvency piece, without the latter, the adequacy piece, we're digging a deeper hole for many of the people on that chart. If we do the latter, the benefit adequacy stuff, without the former, we are digging a deeper hole in terms of solvency.
So I think it's a good chance to build the two together
SEN. MARTINEZ: Improve benefits while at the same time fixing solvency, all in the same package.
MR. APFEL: I think it's critically important.
SEN. MARTINEZ: Because that's something that we don't do that frequently.
MR. APFEL: Critically important.
SEN. MARTINEZ: What about the, and again, I'll throw this open to the whole panel. I mean, all of you are so knowledgeable on this and I would appreciate hearing from any of you on this, that the idea of deferring or delaying retirement, given the fact that we live longer, given the fact that we're healthier, given the fact that many of us, particularly after the recent debacle of the market probably want to work a little longer, things of that nature. How does that, go ahead Mr. Burzynksi.
LEON BURZYNSKI: If I could address that. I think that there are some occupations and careers where that would not be necessarily a problem. Personally, I come out of construction, and construction workers, by the time they're 60, 65, they've pretty much beat themselves to death. People that have worked in a factory their whole life, stood on concrete, people that work in stores, clerks, those sorts of jobs. Again, by the time they reach what we now consider the retirement age, the idea of working longer years is not necessarily something they're looking forward to.
SEN. MARTINEZ: Not really an option, physically speaking.
MR. BURZYNSKI: It's not physically. In my own case, I could begin, it would take me five minutes to tell you all the physical things that I've worked through in the 40 some years I was an electrician in construction.
SEN. MARTINEZ: The Senate can be a tough place, too. (Laughter) I can --
MR. BURZYNSKI: Right.
SEN. MARTINEZ: No, I hear you. Any other thoughts on this?
MR. IRONS: I would just concur with that notion, and that it is that Social Security gives people the option, and I think preserving that option, by maintaining the current retirement age, I think is critically important. Another piece of this is because you have an option of early retirement, and your benefits adjust, delaying the normal retirement age is equivalent to some raw benefit cut. So I think, the way I kind of think about this is two-fold. One, you have to maintain the option, and two, if you want to cut benefits, cut benefits. Don't do it through changing the retirement age.
MR. BIGGS: If I might just briefly tough on this, Senator.
Without minimizing the problems faced by people who work in physically demanding jobs, if we go back to the 1950s, the typical person first claimed Social Security benefits at age 68. Today, when life expectancies are longer, work is much less demanding today than it was back in the '50s when people would work in mines and steel mills and the like. People tend to claim benefits at 62 or 63.
So we have better work conditions, probably an extra five years of longevity, who are claiming benefits five years earlier. That's great if you can afford to do it, if you have the savings set aside to do it. I don't know if we want to be heavy handed about this, but one of the points I made in my testimony is we want to give people the incentives to work longer, so I think something like lowering the payroll tax, doing various other things to tell people we want you to work longer. It's to your benefit. We're going to try to make it a little bit easier for you to -- (inaudible) --.
SEN. MARTINEZ: And I think, too, it may allow for those who really are unable to continue to work, for whatever physical conditions, not too well, maybe others who could, have an incentive to remain longer in the work force, might be a good thing. Mr. Apfel?
I mean, you know demographics are not working in our favor when we look at the numbers in terms of what they look like in the future, so maybe allowing people to work longer and giving them a bit of an incentive to do it, might be a good thing for the whole system. Yes, sir?
MR. APFEL: I, for one, have not ruled out supporting any of the things that are being talked about here. Again, it's an issue of marrying together the need for long term solvency and benefit adequacy. In this case, if there were efforts made to create encouragements to keep people in the work force longer, or to change the retirement, the whole package of things that had been talked about.
If those are coupled with looking at how to provide a stronger set of benefits for low and moderate income workers, for blue collar workers, a way to liberalize more of the disability program, so that people who are plumb beat up by the time they're 65, who are clearly not going to be eligible for Social Security today, these are the kind of issues again that the question is whether we could again couple together a package of solvency that would have some things that none of us would particularly like with the notion that we are providing assurances on adequacy. So again, this is another example where marrying the two issues of solvency and adequacy could lead to good steps for the future.
SEN. MARTINEZ: I guess what you're saying is that we put everything on the table and then work at it and come up with something that seems fair and adequate for the future and for the long term of the system. Yes, ma'am?
MS. ENTMACHER: If I might, the other piece of encouraging people to work longer is making sure that jobs are available, that employers what to hire them. That, of course, is a problem that many people, particularly lower skilled workers, but actually older workers at all education levels, are encountering in this current recession.
The jobs are not there, and older workers who lose jobs are having an even harder time getting back to work when they're trying to do it. Discrimination persists, particularly against older women, so staying in the work force is not always an option, even --
SEN. MARTINEZ: Sure.
MS. ENTMACHER: If you want to do it. A proposal that actually would not increase costs at all, and might encourage people to work longer, is something that Virginia Reno at NASE has suggested, which is let's rename, re-label Social Security benefits and encourage people to retire at the best benefit age and describe that as age 70.
It's with maximum delayed retirement credits and keep the benefits structure below that as it is, but maybe let people know that if they can stay into the work force, they'll get an even better benefit. Instead of focusing on the full retirement age, think about the possibilities of increased benefits if they work longer, which our current system does provide, without penalizing people.
SEN. MARTINEZ: Thank you, Mr. Chairman.
SEN. KOHL: Thank you, Senator Martinez.
Dr. Irons, your thought that we might raise the cap, however we do that, at whatever level and whatever assessment we make. In a sense that is means testing, isn't it? Because you're trying to raise money to balance the deficit in Social Security by asking the more affluent to pay in more. So it is, and I'm not criticizing it, but it is really a means test in a different kind of a cloak, isn't it?
MR. IRONS: You can call it whatever you want. It's asking, you're right, people at the top end of the income distribution to pay more. That's the bottom line of it. I think the means test often times is talked about in terms of the benefits structure and not so much on the revenue, and I concur with the other panelists.
I think about this as a package, it probably makes sense. But it does ask more of upper income individuals to pay more of their tax obligation than then current system currently does. But it would also change the benefit structure as well to allow them to recoup some of that in terms of higher benefits.
SEN. KOHL: Yes, since it works it into the --
MR. IRONS: But the overall system, as you know, is progressive. People at the low end tend to get a greater share of their tax payments back at the end of the day. So this would make the system more of what it was designed to do, I think. It would return us back to having 90 percent of all our earnings covered and that's, you're right, it's going to impact people with higher incomes more.
SEN. KOHL: Yes. Although we're not feeling it acutely now, because of the downturn in the economy, all the demographics indicate that, in the future, we are going to need those people who are aging and healthy to stay in the work force. There will be a shortage of skilled workers in the decades to come, so that it does behoove us, not only to improve Social Security in terms of its financial structure, but also for our economy.
It behooves us to do everything we can to encourage people to stay in the workforce. I have a bill that would provide benefits to companies who are wanting to keep their people in the workforce, but looking for some benefit. But in every way, I think we all agree that keeping people in the workforce is a very, very good thing to do, not the least of which is that they also stay alive and healthy and active and challenging themselves just as long as they can be productive in our society. It's a good thing for everybody and it also helps Social Security. Isn't that true? I think we all agree with that.
Now, Mr. Apfel, you were working in the Senate, weren't you, back in the 1983 period, when we reformed Social Security and you probably have some recollection as to how we were able to get it done even under political duress. Could you give us some recollections of what it was back then?
MR. APFEL: Well, I do have recollections, Senator. I worked for Senator Bill Bradley, who was a member of the Senate Finance Committee, and a commission was established during that time where, with President Reagan and administration officials, senior Democratic leadership, senior Republican leadership, to try to come up with a package that would move the system forward for the long term. And what's interesting about that package is that two and three years before that, some of the things that were in that package were considered to be impossible, unacceptable, but still, people came together for what I believe was the greater good.
The greater good is the long term economic security of future generations, and a number of things were done that no one thought were possible before that, and everyone came together to support those efforts. Some of the things that I personally would have liked to have seen didn't get included in that package. Indeed, the increase in the retirement age didn't include liberalizations to the disability program to help people who had trouble working.
That's why today, even to this moment, today, I'm still testifying on behalf of taking another look at that. I think it's important to do. So, no one supported everything that was in that package, but for the greater good and for the greater sense of economic security for future generations, it was a critically important step that everybody came together and supported. It is one of my favorite moments of being in the United State Senate, seeing people come together for the greater good.
I think that is very possible. I would hope that next year that this body, working with President Obama, would be in the position to do that again, to again, not just for solvency, but for adequacy as well, to come together marrying these two issues, and moving the system forward for the greater good. Because this is the program that really, I think it's the most important.
Senator Bill Bradley at the time said that it was the best expression of community that he knew, the Social Security system. That was back in 1983. I believe that is true today. It's going to take working together to make that happen. Not just about solvency, but about assuring that the people, particularly in the bottom half of those charts have some assurances that they have an adequate system for retirement.
SEN. KOHL: So you are very supportive of the idea of resurrecting that sort of a group and seeing what we can come up with to move forward on Social Security for the next 75 years? And you think it would work?
MR. APFEL: I think it would work. Whether that is a commission, whether that is the leadership from the respective committees, I don't know what the right model would be, but right now the Congress is very heavily involved with health care. So trying to deal with the Social Security issue for the next 75 years in --
SEN. KOHL: It's not going to happen this month or next month.
MR. APFEL: No. No.
SEN. KOHL: Next year, I think.
MR. APFEL: But I would love to see there be an effort next year to come together for the sake of the American people and for the sake of future generations.
SEN. KOHL: Have you talked to Senator Bradley recently?
MR. APFEL: I did recently. It was in about the last couple of weeks.
SEN. KOHL: Did you?
MR. APFEL: Yes, I did.
SEN. KOHL: How's he doing?
MR. APFEL: He's doing just fine, and well, I'll share a couple of private stories with you after the hearing, if you'd like, but I won't for the record.
SEN. KOHL: Just by coincidence, I'm going to be talking to him next week, but I'll remind him about you.
MR. APFEL: Ask how Betty Sue is.
SEN. KOHL: Okay. Betty Sue. Okay. Who also wants to make comment? I think this is a really good panel.
Yes, sir. Leon. Do you want to say what's on your --
MR. BURZYNSKI: If I could add one more concern, and that's a rather recent phenomenon about the garnishment of bank accounts. What we're hearing is that normally, under the federal law, Social Security and veteran benefits and some other sort so military disability benefits are not allowed to be garnisheed, or put a hold on or taken from beneficiaries.
But what's happened recently is, because under the new programs, all of our benefits go into a bank account electronically, and then the creditor will put a hold on the bank account, and the bank freezes it. And so now, all of the money that the person has for the month, and in many cases, that's their Social Security benefits and maybe a few bucks, gets frozen.
And on top of it, the banks add fees, and late fees and overdraft fees and all sorts of things, in some cases, so the fees amount to more than the amount that's in the account. And I think that's drastically wrong that that can happen, and I would hope that there's, that's something that needs to be addressed right away, especially, one of the big things, we just gave Bank of America a ton of bailout money, us taxpayers, and Bank of America is one of the banks that's freezing accounts and freezing Social Security funds for beneficiaries.
So I would hope that, that doesn't necessarily fix Social Security, but it certainly would fix the income for some of those folks that are faced with that today.
SEN. KOHL: That's a very good comment, very appropriate, and we will look into that very carefully.
Yes, sir, Kenneth.
MR. APFEL: In the report that we provided with you today, one of the proposals that's in there is to examine whether specific changes could be made in this area. The Social Security act does protect benefits from garnishment or attachment by creditors, but this is a real problem. So we have, this report does include some suggestions to look at for fixing this problem.
SEN. KOHL: Very good. Who else would like to make comment?
MR. BIGGS: If I might --
SEN. KOHL: Yes, Dr. Biggs.
MR. BIGGS: Touch briefly on the tax issue. I think as the representative of my end of the spectrum, I would feel remiss if I didn't talk a little bit about taxes. Understanding the Social Security formula will necessarily be a compromise between the different positions, different parties. Certainly I wouldn't say that people on my end of things should simply oppose any plan that includes a tax increase. We need to come to fix this program and at the end of the day, compromises are going to have to be made.
At the same time, I think when we think about raising the wage cap, the $107,000 we currently levy taxes on, I think we want to be a little bit wary of what's going to happen with that. If we, I guess to touch first, there's the argument that payroll tax currently covers 85 percent of total wages, which is a decline from 90 percent in the early '80s. If you look throughout Social Security's history, the average coverage has been right around 84 percent, so the current level is not out of line with where Social Security has been historically.
If we raise it back up to 90 percent, that raises the tax max from $107,000 to around $180,000. A person making $180,000 is in the 28 percent income tax bracket. They probably pay six or seven percent for state income taxes. If they're going to pay the Social Security tax on top of that, 12.4 percent, they're looking at a 47 percent marginal tax rate. If they're married, it could be higher than that.
I am wary of, $180,000 is good money, no doubt. But if you're living in a place like New York City, it's, you know, you're not in private jets or even private schools with that kind of salary. I am wary of having a nearly 50 percent tax rate on somebody at that income level, given that we haven't even started to address Medicare, Medicaid, other issues which also might require tax increases.
So I think we want to be careful. Social Security is one area where personal savings can fairly easily substitute for Social Security benefits. If I save more in my IRA or 401k, that can reduce the burden on Social Security. With something like Medicare, health insurance, it's harder to do that personal substitution. So I just think it's something we should be wary of.
SEN. KOHL: I think it's a good point, and one thought on that is that we could have a moratorium on any increase beyond its current level until a person's income stretches to $200,000 or $250,000, and then come back and take a look at assessing some kind of a fee beyond that.
MR. APFEL: I think in terms of what we want to say, why has this coverage fallen from 90 percent to 85 percent? The solution is to levy higher tax on people making $180,000. The real cause of the decline in the coverage has been people at the very, very top end of the earning spectrum, making a million dollars, $5 million a year. So raising taxes on the person making #$180,000, I don't, there's just a fairness issue there as well. He didn't cause the problem, so I'm not sure whether he should have to pay for it. So I think a wide range of solutions should be looked at --
SEN. KOHL: Right.
MR. APFEL: IN this regard.
MS. ENTMACHER: Senator?
SEN. KOHL: Who else wants to make comment?
MS. ENTMACHER: I'd actually like to follow up on the point that Andrew made, which I think is a very good one, because I was going to suggest that in addition to looking at ways of increasing the base of payroll taxes for Social Security, we should be looking at taxes on those very high income people. I don't think that's maybe entirely where Andrew was going to take his argument, but I don't think it's necessary that financing for Social Security come entirely from the payroll tax. That was the focus of Mr. Irons' testimony.
But I think there are other options and reasons to look at them. Part of the reason there is a long term shortfall in Social Security is that soon after the program was created, we allowed people to claim benefits so that they could get out of poverty, so that those people coming out of the Depression could benefit from Social Security, even though they hadn't paid into it long, and we could quickly start addressing the problem of elderly poverty.
That's known as the sort of legacy problem that Social Security inherited this long term debt. And recognizing that, I think it would be appropriate to look at some highly progressive taxes, some other forms of revenues that might help shore up Social Security.
SEN. KOHL: I agree.
MR. IRONS: Yeah, if I could just take you back --
SEN. KOHL: Dr. Irons?
MR. IRONS: To the prior two comments. I do think, I agree to some extent with both comments, and I do think that looking at other taxes is very much merited. I didn't focus on it in my testimony, but it's worth exploring, certainly.
With regard to the cap, I think I come down as an economist, thinking about the design of the tax code, and right now, as I said in my testimony, if you are in the middle of income distribution, you pay around 11 percent of your income in terms of payroll tax. If you're in the top five percent, you pay one and a half percent. And so, on the basis of fairness and just basic economics, there's an imbalance there that needs to be rectified.
Would it be good in the way you suggest about raising taxes on people above $250,000 or something, that's certainly one way to go. Raising the cap or some combination of the two, might be warranted. But I think there is something which is a focus on making the overall payroll tax more fair, and to do so in a way that raises revenue in a way that does not allow people at the very top end to avoid their obligation, which is largely the way the system is now.
SEN. KOHL: Very good. Mr. Apfel.
MR. APFEL: I don't know whether we're almost done, Mr. Chairman, but I wanted to thank you personally for a focus of the hearing on benefit adequacy. It's been hearing after hearing after hearing, looking at the issue of solvency, and what you have asked us to look at is critically important, which is, how adequate is that benefit structure, particularly for vulnerable populations. It's a big contribution and I would hope that your committee will continue to look at these issues and dig in, in depth, so that whenever we do resolve this issue for the long term, that the issues that you have asked us to address on adequacy, become part of that package. I want to thank you personally --
SEN. KOHL: Thank you.
MR. APFEL: For what you've done.
SEN. KOHL: Thank you so much. Who else?
Well, I have just one more question. If we put together a commission, you all willing to work on it? I think you'd be great. (Laughter) I think you'd do a wonderful job. And you did a great job here today. We thank you all for coming and we'll see you soon.