Federal News Service
HEADLINE: HEARING OF THE SENATE SPECIAL COMMITTEE ON AGING SUBJECT: STRENGTHENING SOCIAL SECURITY: WHAT CAN WE LEARN FROM OTHER NATIONS?
CHAIRED BY: SENATOR LARRY CRAIG (R-ID)
WITNESSES PANEL I:
JAMES B. LOCKHART III, DEPUTY COMMISSIONER, THE SOCIAL SECURITY ADMINISTRATION;
YOSHINORI OHNO, MEMBER OF JAPANESE HOUSE, CHAIRMAN, RESEARCH COMMISSION ON THE ANNUITIES SYSTEM, LIBERAL DEMOCRATIC PART OF JAPAN;
PANEL II:
VINCENT TRUGLIA, MOODY'S INVESTOR SERVICES; AXEL BOERSCH-SUPAN, DIRECTOR, THE INSTITUTE FOR ECONOMIC RESEARCH, UNIVERSITY OF MANNHEIM, MANNHEIM GERMANY;
DAVID HARRIS, DIRECTOR, WATSON-WYATT WORLDWIDE, LONDON, ENGLAND;
JACOBO RODRIQUEZ, SENIOR FELLOW, CATO INSTITUTE
LOCATION: 628 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.
TIME: 10:00 A.M.
BODY:
SEN. EVAN BAYH (D-IN): Thank you, Mr. Chairman. I apologize for being a little bit late, as you understand and our witnesses may or may not, traffic delays are an occupational risk here in Washington, so I am sorry to have missed the testimony. But I want to thank you for your appearance and, Mr. Chairman, I want to thank you for holding this hearing. It's not often that Congress tries to get out in front of the curve and anticipate the solution to problems before they've reached the critical point. I think the more we can focus the nation's attention upon this looming problem, the better off we'll be.
I was looking at some briefing materials, in one of your 2018 -- 14 years from now, I think, is that right, Mr. Lockhart? The system tips over and we begin to pay out more in benefits than we do that we take in, in revenues. My guess is it's at that moment when the crowding out effect will begin and other programs will begin to receive less funding because of the needs to meet our entitlement obligations, that this will come into stark relief. But if we wait that long and obviously the potential solutions are much more difficult to implement, these actuarial problems can take on a momentum all of their own. So, in any event, thank you gentlemen, Mr. Chairman, thank you for calling the hearing.
Are we into question time now?
SEN. CRAIG: Please go right ahead.
SEN. BAYH: Just a couple of things, and Mr. Ohno, please don't think I'm ignoring you, but I'd like to at least direct my first couple of questions to Mr. Lockhart. Is my understanding correct that the magnitude of the challenge in Social Security is significant, but Medicare is in all likelihood going to be a more sizeable problem? Is that-if we did nothing, and just sort of let the situation run, we'd still have in the out-years about 73 percent of the money coming into fund Social Security? We're looking at a 27 percent problem or thereabouts, is that correct?
MR. LOCKHART: Both are very, very serious problems for the American people, both long term. The numbers on Medicare are larger, but the numbers on Social Security are still very, very large. If you look, for instance, at the short fall over the next 75 years and say we needed that money today, to invest it today to cover the benefits that are scheduled for today and without increasing taxes. That's $3.7 trillion, that's equal to the U.S. debt to the public today.
SEN. BAYH: So it's a $3.7 trillion problem?
MR. LOCKHART: Over the 75 year period, and as Chairman Greenspan says, after the 75 year period which is an arbitrary number, you just fall off the cliff and you keep falling and the number grows to the 10 --
SEN. BAYH: Three.seven-and that's in today's dollars?
MR. LOCKHART: Today's dollars, earning interest you need it.
SEN. BAYH: And that's about 27, 25 percent?
MR. LOCKHART: Well, another way to look at it is --
SEN. BAYH: I mean, in other words, Mr. Lockhart, if we did nothing we'd still have enough money coming in to cover about three quarters of our obligations?
MR. LOCKHART: At the-that is correct. If for instance we did nothing and no tax increases, no change in benefits, no change in investment policy, in 2042 when the trust fund's exhausted the benefits would be cut 27 percent and then every year thereafter the-from scheduled, every year thereafter they continue to fall and fall.
SEN. BAYH: Just to make it clear on the record, I'm in the camp of hoping that we don't do nothing, but I'm just trying to identify the size of the problem. I'm also interested, Mr. Chairman, in our use, and we all do it, we refer to the trust fund, but am I right in saying, Mr. Lockhart, just for the record I mean there really is no pot of money. These are just obligations against the ongoing revenues of the government, correct? And so it's money we're taking out of either education or healthcare or other things that we'd like to do as a society. There's no bank account with assets sitting in it.
MR. LOCKHART: What the trust fund is, is special issue Treasury bonds that have been issued to the Social Security over the years. Any year there's been an excess of taxes over benefits paid. And in addition every year we get new Treasury bonds for the interest owed on the trust fund. So for instance last year the increase was about $150 billion, but over half of that was actually interest, it wasn't even excess taxes.
SEN. BAYH: I guess my point is, in 2018 when we tip over and we start paying out more in benefits than we take in, in tax revenues, these are not actually, you know-the money's going to have to come from somewhere, correct? And there's not some magical trust fund sitting there, we can just take the money out of and say well we'll plug the gap by doing that. We're either going to have to raise taxes or cut other parts of the budget --
MR. LOCKHART: That's very correct. These are not actually, you know-the money's going to have to come from somewhere, correct? And there's not some magical trust fund sitting there we can just take the money out of and say well, we'll plug the gap by doing that. We're either going to have to raise taxes or cut other parts of the budget --
MR. LOCKHART: That's very correct, Senator. At that point, trust fund-Social Security come knocking on the door of the Treasury and Treasury will have to start paying the interest in cash and/or redeeming the bonds. And obviously where that money comes from is increasing taxes, cutting government spending somewhere else, or borrowing it somewhere else. But it even happens before 2018. A pressure release starts about 2008, 2009 when us baby boomers start to retire and --
SEN. BAYH: Believe me, it's going to come as a revelation, I think, Mr. Chairman, to folks up here on Capitol Hill, whenever the date arrives when they say, well, what do you mean we have to appropriate money for Social Security? We think-this has never happened, we thought there was a trust fund? It's going to come as a-you mean, we have to have less for the other things we want? It's going to, I think, be a real eye opener for people who haven't followed this problem, probably a shock to the system.
Just a couple of other questions. Our country has experienced a renaissance in productivity growth over the last few years and it seemed to hang in there pretty well, even during the most recent economic downturn. I'd like to ask you, is there any-if we are fortunate enough to see, I imagine it will taper off, but hopefully will taper off at a higher plateau than was the case over the last couple of decades. If we're fortunate enough to experience higher productivity growth, can that play some role in helping to close this gap or not?
MR. LOCKHART: Certainly a higher productivity will help. We are projecting reasonably high productivity in our 75 year numbers, but if it goes beyond that it will certainly help but it can't solve the problem.
SEN. BAYH: Forgive my ignorance, what are you forecasting over the --
MR. LOCKHART: About 1.5 percent.
SEN. BAYH: You're a brave man to try to forecast anything over 75 years.
MR. LOCKHART: Well, it's not me, it's our independent actuaries at Social Security. But the trustees get very involved in those discussions, in fact, there's been some very significant discussions over the years about productivity numbers. But if you do sensitivity analysis over productivity, it still won't grow your way out of the problem. And the real issue, it goes back to what Chairman Ohno was saying, is that there's just not enough population growth. And if you have very few workers, even if you have relatively high productivity, you're not going to be able to pay for all today's retirees or tomorrow's retirees.
SEN. BAYH: So you factored in-forgive me, I was thinking you said-what is your average estimate of productivity growth?
MR. LOCKHART: About 1.5 percent over-but, I mean, it has been higher and it has historically been lower. And we can send you some numbers around what that will do to the numbers but it would-if you increased it, you'd almost have to get to about a 3 percent productivity level continually for the 75 year period to actually solve this issue. And that would be pretty unheard of.
SEN. BAYH: Can I just in knocking this around just in my own mind, I didn't anticipate that this would solve the problem, but if you get a little-if you're a little on the upside on productivity, that can make a contribution to helping hopefully close the gap.
MR. LOCKHART: Yes, I think that's right. And, you know, that's one of the-and economic growth will help us too. You know, the more we can do to stimulate economic growth will be helpful as well. And yes, that will close the gap some. I think-but the key issue, as you were saying earlier, is if we can make these changes earlier, we have a lot of time and we can make them smaller and we have a lot of time to have an impact. And, you know, frankly some of these changes might actually increase productivity, and they might increase growth of the government, so you'll have a dual benefit.
SEN. BAYH: Well, the good news if there is-anything over a 75 year period, these things go up and down, Mr. Chairman, I never cease to be amazed. We try and estimate, as you know, Mr. Lockhart, Mr. Ohno, you may be aware too, our budget's on a 10-year basis. When I was governor of my state we had biannual budgets. The estimates were never right for two-year periods, let alone 10- or 75-year periods. Again, I tip my hat to you and the actuaries for attempting this.
The good news, if there is any, may be, Mr. Chairman, it seems to be the pace of innovation, if anything, is accelerating. And if you look at our economies, and it ebbs and flows over long periods of time, if you try and anticipate what our economy's long term comparative advantage is going to be, it's probably going to be structuring our activities more around high innovation, value added parts of the economy. And so perhaps if that's true and we can make the most of those opportunities, maybe we can bump up the productivity number a little bit, not solve the problem but at least make a modest contribution.
Which leads me to my next question, and I don't want to hog the microphone here, Mr. Chairman, I had a couple other questions.
SEN. CRAIG: Please proceed.
SEN. BAYH: The GDP price deflator, did you discuss that in your testimony?
MR. LOCKHART: No, no I didn't. I think we're assuming a 3 percent inflation rate over the 75 year period.
SEN. BAYH: Well, the annual cost of living adjustment, that's what I wanted to get to.
MR. LOCKHART: Okay.
SEN. BAYH: I gather that on a technical basis, some experts feel that overstates the true rate of inflation. If that were to be adjusted to the-what the technical analysts feel is a more accurate number, what kind of contribution would that make to solving the problem?
MR. LOCKHART: Well, I'm not an expert on various CPIs at all with the letters after them, but my understanding that it would have, again, a marginally beneficial impact to the system. Obviously, you know, there are issues and as I said to the chairman, President Bush has made it clear that he wants to protect the benefits of today's retirees and near-retirees.
SEN. BAYH: That's just one item that some people-I remember former Senator Moynihan and others had put out there to say --
MR. LOCKHART: Right, and Chairman Greenspan recently --
SEN. BAYH: Absolutely nobody wants to tinker around or nobody wants to-just a technical matter. I mean, is this the current way it's being calculated, is that an accurate expression or not?
MR. LOCKHART: Well, I think there's experts on both sides and I'm really not an expert to I will not comment on it.
SEN. BAYH: That never stops people in our positions from commenting, but I thank you for your reticence. Two more quick questions.
It seems to me that one of the-the real challenge we're trying to arrive at here is, how do we-and I want to get to the rate of return issue, is there a way we can harvest greater rates of return while still maintaining the safety net mechanism?
And there are different ways to go about that, have you looked at all at the experience of some state pension funds where, you know, they invest in stocks and other higher rate of return instruments, but they do it by rather than the individual accounts. And I'm not expressing an opinion one way or another but they pool the resources, invest them and generate a higher rate of return over longer periods of time and yet maintain the safety net by, you know, guaranteeing a certain pension. Have you looked at that option and do you have an opinion about that?
MR. LOCKHART: Well, certainly I know that world very well. I spent probably a 30 year career in the world of pensions, mainly in the corporate side and international side for that matter, but-so I'm very familiar with all forms of pensions. And certainly, you know, the state systems have some plusses and minuses to them. I think, actually, you can-and some of the proposals out there are creating a safety net within Social Security, but also allowing personal accounts to individuals. And that way the individual has a little more choice control over their assets and it does give them a nest egg.
SEN. BAYH: Let me follow up on that. How would you go about guaranteeing a minimum rate of return, in other words, the safety net within the individual account approach?
MR. LOCKHART: Well, I mean, there's a whole series of different kinds of personal account approaches and, you know, there's all sorts of bills that have been introduced. There was the president's commission, and I think the, you know, the key issue is to keep a defined benefit portion. And any type of reform is to have a-that safety net under there that is a defined guaranteed benefit plan. And then layer on top of that, potentially, at least some of the reforms are looking at layering on top of that the personal account. So you have-like many corporations do today, a defined benefit plan within a personal account, in that case a 401(k) on top of it.
SEN. BAYH: And the advantage of that over the state pension model in your mind would be?
MR. LOCKHART: Well, what we're talking about here is a much more money than any state pension plan has. We're talking trillions of dollars. And I think that could lead to some real political issues if a government agency owned a major portion of many American companies. The CBO, I think probably last June or thereabouts, wrote a paper on this and really started to, you know, sort of talk about some of these issues. You know, what happens if a factory is being shut down in someone's district? Wouldn't there be pressure on the Social Security trustees, you know, to put pressure on that company not to do it?
SEN. BAYH: Has that been the experience with state pension funds?
MR. LOCKHART: State pension funds have-that's a good question and I really don't want to, you know, make many comments about state pension plans, but there have been some things about social investing and other issues in state pension plans. There have been, you know, certainly some pressure from time to time. Most of them don't succumb to it, but there has certainly been pressure.
SEN. BAYH: My final question has to do with the transition costs to a private account system. Have we been able to estimate what the transition costs would be?
MR. LOCKHART: Well, I like it called a transition investment because that's what it really is. It's actually reducing the long- term costs by putting some money a little sooner rather than later. Various plans have transition investments in the range of-again in today's dollars, present value, you need it today-one to two trillion versus that $3.7 trillion I talked about earlier, or really because some of these plans actually produce sustainable solvency which means it's fixed for ever, if you will. You compare it to that $10 trillion number. So at a cost --
SEN. BAYH: Sorry. What was that $10 trillion number?
MR. LOCKHART: The $10 trillion-SEN. BAYH: That's to fix it for ever?
MR. LOCKHART: Yeah, basically --
SEN. BAYH: The 3.7 was for what? Seventy-five years.
MR. LOCKHART: Seventy-five year period. But then at 76 years, it just falls off the cliff again. So it's a new number we introduced from the trustees' report last year. And it's really trying to look at the very long-term issue. Obviously, those numbers, there's variability around them. But it's an indication of the potential we might need to fill. And if you look at the transition investment of, say, $1.5 trillion, that can be very small compared to the long-term cost if we don't fix the system.
SEN. BAYH: And in a private account approach, as I understand it, the Social Security recipients of most modest means are actually subsidized somewhat. Is that correct? If you receive more in benefits than they paid in, could you still maintain that?
MR. LOCKHART: Most of the private account proposals that I have seen have actually increased the safety net for the lower income people, the workers and, in fact, they consciously have done that.
SEN. BAYH: So there'll still be a subsidy --
MR. LOCKHART: Well, I wouldn't call it subsidy because everybody contributes to this program. I mean, that's one of the great things about Social Security.
SEN. BAYH: But the people at the higher end would be in fact having some of the money they pay in, as is currently the case, go to help people at the lower end.
MR. LOCKHART: Yes. People at the lower end get a higher replacement rate, get a higher return on their investment. Yes.
SEN. BAYH: That's currently the case. Yes.
MR. LOCKHART: Some of the proposals are even raising the safety net higher than that. Just again, to protect the longer working, lower age, lower wage workers.
SEN. BAYH: Good. Well, I'm interested in exploring all these options and I'm really in favor of what works.
Mr. Chairman, again I want to thank you. It's refreshing for us to take a look at a problem that, gee, 75 years. It's not too often we look that far over the horizon. Our children and grandchildren will thank us if we do that. So-and I thank you for holding the hearing today. And thank you, gentlemen, for your time.