President, Economic Security 2000

Testimony Before U.S. Senate Finance Committee

Tuesday, March 16, 1999

Thank you so much for inviting me to testify today. I would like to begin by praising Senator Roth. Your leadership, Mr. Chairman, has created a nationwide focus on savings. Roth IRAs has opened savings and wealth to millions of Americans - an accomplishment which provides the framework for discussing Social Security. The Federal Thrift Savings Plan, IRAs, 401(k)s, mutual funds and private pensions have allowed millions of small investors to become stakeholders and owners in America's economic prosperity. Social Security can offer the same opportunity to all Americans.

Most of us will agree that it is time to fix Social Security. I come to the fix-Social-Security-table from a different perspective: America's economic prosperity in the 21^st century will be defined by our ability to shrink the gap between rich and poor in America and retain economic opportunity for middle class working men and women.

I put this in the context of why Social Security itself was created: Early in this century, poverty among seniors was a defining social problem. To address it, we created Social Security. Today's parallel defining social problem is the growing disparity between the rich, the middle class and the poor. More than half of American workers live paycheck to paycheck. After paying their bills, most have no disposable income left for savings.

By contrast, twenty five percent of Americans are defined by their ownership of capital and savings. Money is an economic tool which should be open to all Americans. There are two sources of income: Income from wages (I get a job and I get paid) and income from savings. One third of all income comes from savings. Money makes money.

Social Security provides the only major resource in letting money make money for everyone. Fifty-seven percent of American workers earn $18,000 a year or less. The $18,000 worker pays $2,232 to Social Security, and most have no extra money for savings. But, through these existing payroll taxes, all Americans are huge "savers."

The debate over adding Personal Retirement Accounts to Social Security focuses on whether these accounts will weaken or strengthen the future Social Security system as well as our essential guarantee of a decent retirement income for all. Personal Retirement Accounts actually strengthen our ability to pay future benefits and preserve the safety net. It is important to note that for every dollar individuals accumulate in their Personal Retirement Account, the future liability that Social Security faces is lessened.

There are two different approaches for building Personal Retirement Accounts:

Option One: Use current surpluses. Preserve the basic Social Security structure and maintain the current payroll tax at 12.4 percent. Add Personal Retirement Accounts on top of the guarantee. This approach would invest $30 to $60 billion a year, or 1-2 percent of payroll in Personal Retirement Accounts. Such incremental-ism has great merits. The wiser path is often the slower one. By testing and making adjustments, expand the accounts only if the model works and gains acceptance by the American public. Since many serious leaders oppose Personal Retirement Accounts as a part of the existing payroll tax, let experience and the American public decide future policy.

Option Two: Start bigger. Address the entire Social Security problem head-on while we can still afford it. Implement policies today that surmount the entitlement hurdle - save Social Security and maintain future economic growth. Invest between $90 and $120 billion a year or 3-4 percent of payroll in Personal Retirement Accounts. This policy option requires what FDR called "bold, persistent experimentation."

This is an economic growth agenda, restoring the savings leg to retirement security and creating an opportunity to double Social Security benefits for two-thirds of future retirees.

The prospect of finding 3-4 percent of payroll brings me to one of the major focal points in the Social Security debate: Where will Congress find the money to fund Personal Retirement Accounts, while preserving benefits to current seniors and a strong safety net for all Social Security recipients today and in the future?

First, there are no easy choices. However, the toughest choice results from doing nothing. The future economic prosperity of the United States and of all our citizens will be worse under this option. If we wait, entitlement deficits will threaten our future economic growth.

The January 1999 Congressional Budget Office report, "The Economic and Budget Outlook: Fiscal Years 2000-2009" reports with clarity that entitlement spending left unchecked seriously threatens our future economy. The CBO report shows that if tax cuts or spending increases eliminate the surpluses projected for the next ten years, federal debt will rise to $33 trillion or 100% of GDP by 2033; $86.4 trillion or 200% of GDP by 2040; and $225.9 trillion or 260% of GDP by 2043. This won't happen, but this is the major entitlement hurdle which we need to overcome beginning today.

I had the benefit of entering the Social Security debate in 1994 with no expertise in Social Security. As a result, I sought creative financing instruments so my numbers would work. I refused to stop until Steve Goss would sign off on my "system." The debate has moved quite a bit forward since then, with many plans that pave the way for reform.

These plans demonstrate how to work within the boundaries of the existing Social Security system and find the first 2 percent of payroll. They adjust bend points, index the Normal Retirement Age, adjust CPI inflation rates and slow calculations for 'real wage' growth. Do not be fooled by any plan that purports to make no tough choices. It is important not to jeopardize a dime of benefits to the disabled, to survivors or to low-income recipients. It is both feasible and imperative to keep progressive safety net promises.

To find the next 1-2 percent of wage requires creativity.

The projected Social Security surpluses can be helpful. Be careful. The actual cash surplus is only $55 billion per year and disappears in 2012. It does not exceed a total of $600 billion. The other half of the Social Security surpluses are attributed interest payments on the Trust Fund - money that has already been spent. This is a debt - an I.O.U. from the government viewpoint and not a spendable surplus.

I submit two ideas related to voluntary savings matches:

The first is worth $70 billion per year. The second is worth $30 to $40 billion per year.

Savings Match #1: The first is simple, but powerful. Offer a choice to all Americans: Choose to stay within a reduced pay-as-you-go system which will deliver the benefits it can afford at the existing 12.4% of payroll. Or, choose a remodeled system with Personal Retirement Accounts. Use Social Security surpluses and selected benefit cuts to allow 2% of wage to be invested in the accounts. To participate, individuals must voluntarily match, dollar-for-dollar on a progressive scale, the government savings match. Experience with employer-based 401(k) plans indicates that 75-80% of employees, including low, middle and high income workers, select the savings match. For lower income workers, surpluses can enhance the match. This choice increases the accounts to 4% of payroll and adds $70 billion per year to remodel Social Security.

Savings Match #2: The second voluntary savings match idea is also simple. It adds an estimated $35 to $40 billion in voluntary savings to Social Security. Offer workers a flat set-aside into their individual savings accounts. Assume $100 for lower income workers earning $10,000 to $15,000; $300 for moderate income workers earning $30,000, and $400 for higher income workers earning $40,000 and over. If lower income workers voluntarily agree to create a personal savings match of $2 per week, they will receive an additional $200 in their account. If moderate income workers voluntarily add a personal savings match of $6 per week, they will receive an additional $300 into their account. For higher income workers, if they voluntarily add $20 per week, they receive an additional $600 into their account.

With these savings matches, lower income workers set aside $400 per year, moderate income workers $900 per year, and higher income workers are setting aside $2,000 per year. Upon retirement, promised Social Security benefits are reduced, offset by the income from the principal. This cuts the tax dependence on future workers, helps make Social Security solvent, and creates substantial nest eggs on a progressive basis for all Americans.

Government-issued bonds have historically been proven an effective tool in financing economic growth.

Liberty Bonds. On a voluntary basis, use the tax code to attract higher income seniors to defer their Social Security benefits. This can save $15 to $30 billion per year to finance up-front the funded accounts. Why will higher income seniors agree to defer their Social Security benefits? Be creative and use the tax code. Most higher income seniors are financially prepared for their retirement through savings and existing pensions. Allow them to transfer the $15,000-$16,000 per year they would receive from Social Security to go tax-free - beyond federal estate taxes - to their heirs. Create a Liberty Bond - a 30-year bond, with accumulated interest to benefit their heirs.

Special Issue Equity Right (ER) Bonds. Use the example of World War II, where the government issued E-Bonds to pay for War expenses, with the understanding that they would be paid back after the War. Do the same with Social Security. Authorize Social Security to issue special purpose zero-coupon bonds to strengthen the Trust Fund and to assist in underwriting the transition. Social Security will realize substantial future surplus revenues in a funded system. In future years, a large portion of Social Security benefits will be paid through Personal Retirement Accounts. At this point, we will be able to pay back these bonds.

Use the example of state budgets for use of extra unexpected annual revenues.

"Lockbox" a portion of expected future federal revenues. Another creative option would be to "lockbox" a portion of expected future federal revenues. The assumption is that increased savings in the Personal Retirement Accounts will generate economic growth. As a result, the federal government will receive revenues beyond existing constant dollar expenditures. Up front, commit half of these revenues to strengthening Social Security. This law exists in 30 states - State Tax and Expenditure Limits (TELS). States agree in advance not to spend a portion of unexpected extra revenue. These monies are set aside for special purposes.

Under a funded system, Social Security benefits will be paid through these Personal Retirement Accounts, and ultimately, lower the dependence on excessive payroll taxes on future generations under the outdated pay-as-you-go system.

Once the Personal Retirement Accounts begin to gain interest and grow substantial savings, Social Security benefits increasingly will be paid by the income from the Personal Retirement Accounts. As each dollar of benefits is paid from the Personal Retirement Accounts, reduce the pay-as-you-go current law benefit by 75 cents.

If we think creatively - we can find the means to build meaningful Personal Retirement Accounts for all Americans and at the same time meet our obligations to existing seniors, without entitlement spending crippling our economy of future standard of living.

The issue here is opportunity, not obstacles. We can surmount any obstacle, especially in today's economic climate. We have a tremendous opportunity, through Social Security, to extend the Roth IRA model to every working American. Once we agree on principles and a direction, it is possible to achieve anything.