SEN. GRASSLEY: Senator Santorum.
SEN. SANTORUM: Thank you.
Good to see you again, Mr. Goss. And just a comment on that chart, and I think you brought the point up, which is the president's plan only did a 75 year projection and within that time the president expected us to reach a balance. Beyond that, I don't think that the president -- I mean, correct me if I'm wrong -- would want to build up Social Security surpluses and continue to reduce benefits. And at some point we would turn off the benefit reductions once we achieve actuarial balance over the long term, and those benefit reductions would not continue. And I think to suggest that somehow or another we're going to continue to reduce benefits when we're building up surpluses and long -- and that we have a long-term surplus in the system doesn't give much credit to future Congresses' political sense, much less a concern for seniors and their benefits upon their retirement. So I think you made the point, and maybe it's something now that you've come out with long-term projections, the president needs to go back and look at those long-term projections and see how he would adjust his plan accordingly to make sure that what Senator Baucus has suggested doesn't become a reality.
One other follow up on one of the things that was asked on the issue of, you know, why the change. You've said immigration was a big part. Are you talking principally about H1Bs, folks who are coming here working, contributing and then not staying here to collect benefits? Is that the windfall we're getting from this? Or is it something else?
MR. GOSS: On the immigration what we're really talking about are what we sometimes refer to as the other than legal immigration. The reason for the really larger number presumed for the 1990s is because, quite frankly, every 10 years when a new Census is developed by the Bureau of Census from their big survey, they then warn the reality of large the population really is around the year 2000. Between '90 and 2000 they've added up the total number of births and the total number of deaths and the total number of legal immigrants coming into the country, and they can do that fairly directly, and they therefore are able to predict the level of the population in the year 2000. The 2000 Census population turned out to be several million people more than had been expected, and we're left only to infer that that is the result largely of people who are other than legal entering the country.
SEN. SANTORUM: And they're paying Social Security?
MR. GOSS: Some of them are and some of them aren't. We assume that half to three-fourths of the individuals who are residing in the country in an other than legal status will, one way or the other, probably be contributing to Social Security and that many of them will ultimately potentially be able to receive a benefit under the system. And as a result, though, of the contributions by a portion of these individuals, the system does indeed enjoy a positive effect on its actuarial balance.
The other thing to keep in mind very strongly, though, about even other than legal immigration coming in is that the biggest effect is really that when people enter the country, whether they're here legally or not, if they have children while they're in the country those children will be legal and they will be citizens of the United States. And in the course of the 75 year projection, that's a very significant factor.
SEN. SANTORUM: That's a plus.
MR. GOSS: Absolutely.
SEN. SANTORUM: Obviously I'm doing my part. We're expecting our eighth child so I'm doing my part to help the Social Security long term. I just want everybody here to know that I'm not just doing it on a policy front, I'm doing it on a personal front. A couple of questions on what Senator Grassley talked about, which has to do with the longer we wait to solve this problem. Now, you talk about the shortfall is 1.92 percent over the 75 year period. But that's an average, isn't it? And so the fact that we're in all these surplus years and, you know, we have these very big surpluses right now, every year we wait and every year of surplus we put behind us, that number grows and grows and grows. Is that not correct? I mean, the problem grows?
MR. GOSS: Well, it depends. There's sort of a couple of different perspectives here. This particular chart was done on the basis -- if we're considering the 75 year period, it was done on the basis of considering a fixed 75 year period.
So that the total amount of money that we need to generate within that period is the same, regardless of when we start. It's true that if we start later, the size of the increase from a later point in time would have to be larger. But there is another consideration that I think you might be referring to, Senator Santorum, which is that with respect to the 75 year deficit in this year's trustees report of 1.92, if we do nothing and next year we come back to this same discussion and the new trustees report is coming out, we will expect that the new 75 year period that we would be looking for at that point would have a deficit of almost 2.0 percent of payroll. It would increase by about .07 percent of payroll. And that's largely because of the addition of the one additional year onto the end of the period, and the fact that all the years of deficit would be one year closer at that point.
SEN. SANTORUM: That's right.
MR. GOSS: So delay is important.
SEN. SANTORUM: I mean, if we're looking at the total cost of the program today versus what the total cost of the program is as a percentage of tax from payroll, we're looking at about 11 percent is what the cost of the program is today as far as taxable payroll and year -- one of the years I have here is 2033, which is 17.3 percent; 2063, 19 percent. And so the point that I guess I'm trying to make is that as the Boomers retire and other factors go in, this delay is really going to cost us some serious -- and is requiring us to dramatically -- more dramatically increase taxes or cut benefits to solve the problem. And those have been the options that we've used in the past, which is either reduction of benefit or increase in taxes.
And one other question very quickly. When we reach 2018 -- everyone talks about the problem date is 2042, but when we reach 2018 we're going to have to -- we're not going to have enough money to pay benefits at that point, or 2019. We're going to have to do what? How is Social Security going to pay these benefits? What are they going to do?
MR. GOSS: Well, in 2018 that is the point at which we would reach the point where the tax income coming into the system would first fall -- in the future period, would first fall a little bit short of the total cost of benefits. And what that would mean is that in net we will have to use all the taxes coming in towards the benefits, and in addition we would have to redeem some of the trust fund assets that are held in the fund. At that point in time, of course, trust fund assets -- the special issue bonds that the trust funds hold would be rather large.
SEN. SANTORUM: And they would be redeemed from?
MR. GOSS: They would be redeemed by the general fund of the Treasury, which of course would have budget implications which are significant. But I would -- not to make this point too strongly, but the impact of having to redeem bonds at that point is significant. It is also true that -- recall we have an $85 billion surplus right now, in the year 2002 that is, an $85 billion excess of taxes coming in over the cost of the program currently, and those moneys are being invested in the general fund of the Treasury. Those numbers will be declining after about the year 2009. So even before the point that we reach 2018 and which we actually cross over to have a net redemption of bonds, the amount by which we will be having excess taxes going into the general fund will be declining after the year 2009.
SEN. SANTORUM: Mr. Chairman.
SEN. GRASSLEY: Thank you. (Off mike) -- and obviously you might get some questions for answer in writing from those of us who were here, as well as people that aren't here, and we'd appreciate maybe in two or three weeks to have those answers back, answers in writing. So the meeting is adjourned.
SEN. BAUCUS: Wait, wait, wait --
SEN. GRASSLEY: Well, if Senator Baucus has a question, we'll stay in session.
SEN. BAUCUS: The question gets to replacing wage indexing with price indexing. And it's my understanding -- and I'm just getting up to speed on this -- that we're making projections -- the president's commission's option two really is based on replacing wage indexing with price indexing, which has the effect of lowering benefits. Am I correct? Because wage index -- wages generally rise faster than prices.
MR. GOSS: Absolutely. The trustees are assuming that wages will rise at about 1.1 percent faster than prices in the future, on average. And under those circumstances, most definitely. Benefits would rise at a slower rate if they're rising with prices.
SEN. BAUCUS: Okay. And it means that somewhere out beyond the 75 year window, the traditional benefit will be -- I was going to say almost entirely gone. I guess the point I'm just trying to figure out is the degree to which that's a factor, particularly over a longer period of time. Is there any way of projecting?
MR. GOSS: Well, some have argued that the -- sort of the purchasing power of the benefit would be maintained by price indexing. Of course, the standard of living that we all enjoy with new things coming onto the marketplace would not be captured by simply maintaining purchasing power. I think you have very accurately portrayed through at least the 75 year period, and we're a little bit in question as to what exactly the commission would intend beyond it, the sort of shift between the defined benefit and the defined contribution component of the Social Security plan. And there's no question but that the commission proposals would move us away from being a purely defined benefit plan for Social Security, towards being partially and increasingly through 75 years moving towards having a defined contribution component of the plan. And many of the proposals that we've seen have had that nature.
SEN. BAUCUS: What's the argument for wage indexing as opposed to price indexing?
MR. GOSS: I think traditionally when people have looked at a wage index system, they have looked at the system from the point of view of devising a benefit formula that would provide benefits that would maintain a somewhat constant relationship to the wage levels that individual had over their career. So that what we sometimes refer to as the replacement rate would be similar in the future for the Social Security program across generations. I would hesitate to try to characterize precisely the thinking of the members of the commission, but I do know that I believe that they have largely that aim in the mind for the totality of the benefit structure that would be provided under their plans. And they were, in effect, devising a plan that would have the defined benefit portion, the traditional Social Security benefit, sort of shrinking as a percentage of one's career wages, with the idea that the expected defined contribution or the individual account benefit would be rising relative to that, exactly as your chart showed.
SEN. BAUCUS: Do you have a view on the COLA issue? I mean, how accurate it is, how inaccurate it might be? And the Bureau of Labor Statistics calculates this top figure.
MR. GOSS: Very good question. In fact, I'm glad you mentioned that, if we have just another moment, because this is one of the small changes that we had in this year trustees report. We all recall back to the Boskin Commission, et cetera, et cetera. At this point we believe, from what we understand from the people at the Bureau of Labor Statistics, that the remaining principal shortcoming of the Consumer Price Index is that there is something that we refer to as upper level substitution bias in the Consumer Price Index. This upper level substitution bias derives from the fact that across broad categories of goods and services they are not automatically re- weighted in the way that the index has done when people shift from one type of good to another, and people do shift over time. So that this is not captured with the current Consumer Price Index.
This kind of shifting is captured in the Gross Domestic Products Price Index, sometimes called the deflator. And as a result we project in the future that we will have about a three-tenths of 1 percent difference between the rate of growth in the Consumer Price Index at a faster rate than the Gross Domestic Product Price Index. This has actually increased from last year's projections from two- tenths up to three-tenths.
And we did this on the basis of consultation with the people at the Bureau of Labor Statistics, who have done more careful analysis, in conjunction with their development of a new -- what they refer to as the Chained CPIU. They've actually developed one of their price indices now that actually takes into account this inaccuracy and is adjusted for it. As we stand in the current law, though, our Consumer Price Index is based on the CPIW and it does not have correction for upper level substitution bias. It is something that could be considered for the future, though.
SEN. BAUCUS: So do you recommend making those changes? That is, that more accurately reflect, I guess, seniors' standards and buying power or whatnot?
MR. GOSS: Well, we fortunately at the Office of the Actuary never recommend any proposal one way or the other, but we're always --
SEN. BAUCUS: You're the numbers --
MR. GOSS: -- extremely happy --
SEN. BAUCUS: You're the numbers guys. (Laughs.)
MR. GOSS: We're extremely happy to talk in terms of sort of what the implications of doing something one way or the other would affect. The Consumer Price Index as it stands now arguably does result in price increases that are somewhat faster than sort of the overall market basket of prices that people actually tend to purchase. And to the degree that that is a fact, then the Consumer Price Index would tend to give a slightly faster rate of growth in benefits than the pure purchased market basket, but to a fairly small degree.
SEN. GRASSLEY: Senator Santorum?
SEN. SANTORUM: Yeah, I'd just like to pursue that because I think it's an important question. It's one of the things I think we are going to have to deal with here is how we make this -- how we -- what assumptions we're going to make going forward as to the growth in the program. I mean, I've seen a past Social Security Advisory Council report talking about this back in 1979, and I know the late Senator Moynihan was a strong advocate of making this change. And let me understand it, what basically we want to do is to maintain the purchasing power of the beneficiary today for all future beneficiaries and the problem that we have today is that actually the purchasing power of Social Security benefits is increasing as a result of the formula we use today, which is leading in part to some of the solvency problems that we have. Is that an accurate depiction?
MR. GOSS: I think that would be accurate. I believe our estimate is that if we were to modify the cost of living adjustment within the current system and adjust it downwards to have more of a Chained CPI kind of approach that we would have -- I believe the number is somewhere around .25 to .3 percent of payroll reduction in the 75 year actuarial deficit.
SEN. SANTORUM: You say adjusted down, but I -- you know, that's where others would say, well, what we're doing here is reducing benefits. But if what you do -- and, you know, you worry less about hard dollars than you do about sort of percentages of how things grow and how things look as far as the percentage of things, because these dollars are very hard to estimate. You made that comment with respect to Senator Grassley's question. If what we're trying to do here is to accurately maintain the same purchasing power of the senior today, and when we're looking at these huge problems confronting us, huge unfunded liabilities that have grown every year.
I mean, we talk about the last time we made the major fix to Social Security we were going to solve the problem for the next 75 years, and that lasted I think two years until we started to go out of balance. And from 1985, where we were at $268 billion, and now we're at $3.5 trillion, every single year after that the deficit or the debt has grown and we have these huge problems. We want to be responsible in trying to deal with this. We don't want to have future generations of seniors be worse off than the current generation of seniors. But when you're faced with this difficult problem, you don't want them necessarily to be better off either.
I mean, you don't want to exacerbate the problem by making future generations pay even more -- and that's what we're talking about here, we're talking about increases in payroll taxes. To pay even more to have a richer benefit than should be the case. So I understand what -- you're making a factual statement saying, well, we would reduce the rate of growth. But in a sense all we're doing is trying to better accurately project what the purchasing power is of the dollars that are being given to Social Security today -- Social Security recipients today, and project that out into the future. Is that a fair assessment?
MR. GOSS: I think it is.
SEN. SANTORUM: I appreciate that. I don't have any more questions.