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THE RETIREMENT POLICY CHALLENGES AND OPPORTUNITIES OF OUR AGING SOCIETY HEARING BEFORE THE COMMITTEE ON WAYS AND MEANS HOUSE OF REPRESENTATIVES U.S. ONE HUNDRED NINTH CONGRESS FIRST SESSION MAY 19, 2005 Serial No. 109-18 Printed for the use of the Committee on Ways and Means U.S. GOVERNMENT PRINTING OFFICE 26-385 WASHINGTON 2006 : ForsalebytheSuperintendentofDocuments,U.S.GovernmentPrintingOffice Internet:bookstore.gpo.gov Phone:tollfree(866)512-1800;DCarea(202)512-1800 Fax:(202)512-2250 Mail:StopSSOP,Washington,DC20402-0001 COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman E. CLAY SHAW, JR., Florida CHARLES B. RANGEL, New York NANCY L. JOHNSON, Connecticut FORTNEYPETE STARK, California WALLY HERGER, California SANDER M. LEVIN, Michigan JIM MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland DAVE CAMP, Michigan JIM MCDERMOTT, Washington JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York PHIL ENGLISH, Pennsylvania WILLIAM J. JEFFERSON, Louisiana J.D. HAYWORTH, Arizona JOHN S. TANNER, Tennessee JERRY WELLER., Illinois XAVIER BECERRA, California KENNY C. HULSHOF, Missouri LLOYD DOGGETT, Texas RON LEWIS, Kentucky EARL POMEROY, North Dakota MARKFOLEY, Florida STEPHANIE TUBBS JONES, Ohio KEVIN BRADY, Texas MIKE THOMPSON, California THOMAS M. REYNOLDS, New York JOHN B. LARSON, Connecticut PAUL RYAN, Wisconsin RAHM EMANUEL, Illinois ERIC CANTOR, Virginia JOHN LINDER, Georgia BOB BEAUPREZ, Colorado MELISSAA. HART, Pennsylvania CHRIS CHOCOLA, Indiana DEVEN NUNES, California Allison H. Giles, ChiefofStaff Janice Mays, Minority ChiefCounsel Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions ofthe hearing record, the process of converting betweenvariouselectronicformatsmayintroduceunintentionalerrorsoromissions. Suchoccur- rences are inherent in the current publication process and should diminish as the process isfurtherrefined. ii CMS Library C2-07-13 7500 Security Blvd. Baltimore, Maryland 21244 CONTENTS Advisory ofMay 12, 2005 announcingthehearing 2 WITNESSES Congressional Budget Office, Douglas Holtz-Eakin, Director 7 Social SecurityAdvisoryBoard, The Honorable Hal Daub 19 Centerfor Strategic and International Studies, RichardJackson 24 Employee Benefits Research Institute, Dallas L. Salisbury 27 The Brookings Institution, PeterR. Orszag 35 National CenterforPolicyAnalysis, John C. Goodman 51 SUBMISSIONS FOR THE RECORD Americans for Secure Retirement, WalterWelsh, statement 107 California Retired Teachers Association, GeorgeAvak, Sacramento, CA, statement 108 Merrill Lynch and Co., Inc., Bruce E. Thomspon, Jr., statement 110 University of Massachusetts Boston, Boston, MA, Yung-Ping Chen, statement 120 iii THE RETIREMENT POLICY CHALLENGES AND OPPORTUNITIES OF OUR AGING SOCIETY THURSDAY, MAY 19, 2005 U.S. House of Representatives, Committee on Ways and Means, Washington, DC. The Committee met, pursuant to notice, at 10:15 a.m., in room 1100, Longworth House Office Building, Hon. Bill Thomas (Chair- man ofthe Committee), presiding. [The advisory announcing the hearing follows:] (l) 2 ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS FORIMMEDIATE RELEASE CONTACT: (202) 225-1721 May 12, 2005 No. FC-9 Thomas Announces Hearing on the Retirement Policy Challenges and Opportunities of our Aging Society Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways and Means, today announced that the Committee will hold a hearing on the retirement policy challenges and opportunities of our aging society. The hearing will take place on Thursday, May 19, 2005, in the main Committee hearing room, 1100LongworthHouse OfficeBuilding,beginningat 10:00 a.m. In view of the limited time available to hear witnesses, oral testimony at this hearingwillbe frominvitedwitnesses only. However, anyindividual ororganization not scheduled for an oral appearance may submit a written statement for consider- ationbythe Committee andforinclusioninthe printedrecordofthe hearing. BACKGROUND: Seventy-eightmillionBabyBoomers are headingtowardretirement and eligibility for a number ofFederal and State benefits, including Social Security, Medicare, and Medicaid. Those Baby Boomers and the generations that follow will live longer in retirement as the average life expectancy at age 65 has increased from about 14 years in 1940 to 18 years today, and is expected to increase to 22 years in the future. In addition, American families are havingfewer children. As a result, over the next 30 years, the number ofpeople age 65 and older will double, while the number ofadults under age 65 willincreasebyless than 15 percent. In preparation for the retirement ofthe Baby Boomers and the aging ofAmerica, Congress has a responsibility to review current retirement policies and programs to ensure that they are as strong as possible. Americans over age 65 receive, on average, 42 percent oftheir income from Social Security, 21 percent from pension and retirementplans, 14 percentfromincome on assets, and22 percentfromwages. Pensions, personal savings, and wages were all intended to supplement Social Se- curity income. However, only 40 percent ofAmericans own a defined contribution pension or an Individual Retirement Account. More than half of those with such plans have saved less than $15,000 in the account. Furthermore, the personal savings rate for Americans has declined to less than 2 percent ofafter-tax income. For these reasons, encouraging personal savings and strengthening other savings vehi- cles mustbe partofany debate onretirement security. In announcingthe hearing, ChairmanThomas stated, "The Baby Boom generation will redefine aginginAmerica,just as ithas everyother segmentoflife. Itis critical for Congress to review the programs that will serve an aging population and make the necessary adjustments now to provide Americans with a secure retirement." FOCUS OFTHE HEARING: The hearing will focus on strengthening retirement security policy in order to meetthe needs ofan agingpopulation. DETAILS FORSUBMISSION OFWRITTENCOMMENTS: Please Note:Any person(s) and/or organization(s) wishingto submit for the hear- 3 ing record must follow the appropriate link on the hearing page ofthe Committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov, select "109th Congress" from the menu entitled, "Hearing Archives" (http://waysandmeans.house.gov/Hearings.asp?congress=17). Se- lect the hearing for which you would like to submit, and click on the link entitled, "Click here to provide a submission for the record." Once you have followed the on- line instructions, completing all informational forms and clicking "submit" on the final page, an email will be sent to the address which you supply confirming your interest in providing a submission for the record. You MUST REPLY to the email and ATTACH your submission as a Word or WordPerfect document, in compliance with the formatting requirements listed below, by close ofbusiness Thursday, June 2, 2005. Finally, please note thatdue to the change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. Forquestions, orifyouencountertechnical problems, please call (202) 225-1721. FORMATTINGREQUIREMENTS: The Committee relies onelectronic submissions for printingthe official hearingrecord. As al- ways, submissions will be included in the record according to the discretion ofthe Committee. The Committeewill notalterthecontentofyoursubmission,butwereservetherighttoformat itaccordingtoourguidelines. AnysubmissionprovidedtotheCommitteebyawitness, anysup- plementary materials submitted for the printed record, and any written comments in response to a requestforwritten comments mustconform tothe guidelines listedbelow. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will be maintainedintheCommitteefilesforreviewandusebytheCommittee. for1.maAtllansdubMmiUsSsiTonNsOaTndexscuepepdleamteonttaalroyfm1a0tepraigaelss, minucsltudbiengpartotvaicdhemdenitns.WoWridtnoerssWeosrdaPnedrfseucb-t mitters are advisedthat the Committee relies on electronic submissions forprintingthe official hearingrecord. 2. Copies ofwhole documents submitted as exhibit material will notbe acceptedfor printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use bytheCommittee. 3. All submissions must include a list ofall clients, persons, and/or organizations on whose behalfthe witness appears. A supplemental sheet must accompany each submission listingthe name,company, address,telephoneandfaxnumbersofeachwitness. The Committee seeks to make its facilities accessible to persons with disabilities. Ifyou are in need ofspecial accommodations, please call 202-225-1721 or 202-226- 3411 TTD/TTY in advance of the event (four business days notice is requested). Questions with regard to special accommodation needs in general (including avail- ability ofCommittee materials in alternative formats) may be directed to the Com- mittee as noted above. Chairman THOMAS. Good morning. As we all know, in 2008, the first ofthe Baby Boomers will be eligible for early retirement. With each passing year, the portion of the Federal budget consumed by those who are retiring will continue to grow. Currently, it equals about 42 percent. That is up from 28 percent in 1980. It is expected to increase to about 55 percent in the near future. I want to com- mend the witnesses because, Members and others who have read the testimony, there is a surprising recurrence of a theme through each of the presentations; notwithstanding there is a relatively broad political spectrum represented, either in terms of the individual who has written the materials or the assumed group that they may represent. We focused on Social Security in the initial hearing, and I know that is what generates all the heat and light and discussions. I am very, very concerned about the question of retirement and savings, in part for this reason. I believe over the last two decades every 4 — measure that was put into law to "assist" Americans t—o save because we are all concerned about the net savings rate was done with, as I said, honest and good intentions. The difficulty is Ameri- cans, in living their lives, don't live their lives along the neat cub- byholes in which the jurisdictions of congressional Committees is established; and that oftentimes, what was a good intention has created either a counter-force or a cancellation or a total failure in terms of limited government resources to achieve the desired result. — If politics and I—don't mean partisan politics or other kinds of politics, but politics can be defined as the pro—cess of determining who gets what, when—, and how, this hearing and if necessary, subsequent hearings about examining what the Federal Govern- ment had done to assist people in determining who gets what, when, and how, needs to be, I think, fundamentally examined. Be- cause essentially, that percentage that I discussed of the Federal Government that is going to retirees goes to retirees, in a very great extent, using only one criterion, and that is age. We are al- ready engaged in the greatest inter-generational transfer ofwealth in the history of the world. I think it is entirely appropriate to examine the question ofwho gets what, when, and how. It is very tempting politically to talk about groups and the fact that perhaps benefits are going to be adjusted, or that certain groups get this or get that. The Chair's goal is to challenge the Members of this Committee, from an institutional point of view. Because all those other Committees with their limited jurisdiction have performed an honest and earnest duty; but it is this Com- mittee uniquely in the House ofRepresentatives that has a broader jurisdiction, the entire Tax Code, under our jurisdiction in which, to the extent that we can create a meaningful and useful Federal assistance in savings, that should be our goal. Obviously, there is going to be discussion on the changing role of defined benefits versus defined contributions; the multiplicity of saving instruments, what works, what doesn't work; government attempts to incentivize those who tend not to have appropriate wherewithal to save. I think to a certain extent there is a discussion about the Tax Code and the value of a marginal tax rate, and the behavior associated with the last dollar taxed, and to what extent do you change behavior on where and how that last dollar is taxed. I think when you talk about savings and focusing on savings, it is almost an inverse relationship in which, ifwe spend our time talking about people who are going to save anyway and at- tempt to create incentive systems that change the way in which they save, rather than allowing them to save, we are perhaps not maximizing the use ofthat Federal dollar. I think it becomes important, as you move down the income scale where people do make a decision as to whether they are going to save or not, how we do it. I think it is absolutely essential at the bottom of the income level that we be as creative as we can and as inclusive as we can in setting up structures to assist people to save; that we do so in a way that those least able to save are most comfortable and have an opportunity to save. That was the theme that I thought I detected through each ofyour testimonies. That is 5 why I decided not to deliver a general theme; but rather focus on that particular area. The Chair will now recognize the gentleman from New York for any comments he may wish to make. Mr. RANGEL. I wish this Chair had had a written statement, so that I could follow more clearly where you would like to take this Committee. We have been challenged by the President on the problems that we face in Social Security. Now you are challenging us in terms of coming up with some type of solution to the problem. Now this panel is going to challenge us to provide incentives for savings and to improve our pension benefits. It looks like the Social Security problem still remains a "third rail." I do hope that since I couldn't find it in the Chairman's opening remarks, that the panel kind of helps me. Because I don't know what question was raised to you to respond, but I do hope that you know that many of us are here to try to avoid getting savings con- nected with Social Security, because we think that we should deal with that, and that it is very important, but we should deal with it separately. So, you may be taking this to health care, to housing for senior citizens, to retirement funds, and a variety of other things. I would believe, Mr. Chairman, that solvency of the Social Security system is a big enough problem for us to start to tackle. However, I will wait and see where this takes us, and maybe with the benefit of some of your Republican colleagues who understand where you are going better than I do, will have a better idea as to when we are going to deal with the problem of solvency. I would like to yield a minute to Richard Neal, before I yield to Sandy Levin during my 5 minutes. Mr. NEAL. I thank you, Mr. Rangel. Mr. Chairman, I applaud you for holding this hearing to examine how we can make retirement more secure. I know that all of us as Democrats are inter- ested in working with you on legislation that would help achieve that end. What concerns me, though, Mr. Chairman, is that some have suggested that your strategy is to pass a retirement bill that does not contain private accounts, and then to add them during a conference Committee. We are eager to work with you to address Social Security's financing challenges, but we cannot be party to anything that would substitute private, personal, or individual accounts for Social Security's guaranteed benefits. Before we com- mence this hearing on retirement security, Mr. Chairman, might you be willing to clarify for Members of this Committee and to those who are watching this Committee that you will not add private accounts to a conference report, if they are not included in a House-passed bill? Chairman THOMAS. Tell the gentleman I will take a minute to respond to him, but I don't want to take the time of the Ranking Member, which I believe he is going to yield to the Ranking Mem- ber on the Social Security Subcommittee. Well, no, it is on your time, and your time is going. So, you use the rest of the time, and I will respond. Mr. LEVIN. Welcome to all ofyou. Your testimony today is going to widen the circle of issues relating to retirement security discussed in the testimony before this Committee. Let me just say what we on this side very much believe; that efforts to widen the lens cannot blur an appropriate focus on Social Security privatiza- — 6 tion. That was the centerpiece ofthe President's State ofthe Union address, his 60-day tour, and his recent press conference. It has also been very much stated by Members of this Committee. We re- sponded going to the public, and the more the public has heard, the less they like the proposals. So, now you are going to discuss with us the issues that are fac- ing our country in the coming years. Indeed, I think this will come out; the changing picture as to pension programs in the private sec- tor really fortifies the understanding the public has had about the strength of Social Security, a guaranteed benefit, think this will come out in the testimony; that since 1983, the number of defined benefit plans has been going down. Also, the recent pension fail- ures I think have provided a stark reminder to the country about the importance—of the Social Security guarantee, will just finish my time is up that we need to consider broader issues of retirement. What is standing in the way ofhaving a truly bipartisan discussion of this is the President's demand for private accounts. We want to strengthen Social Security, not to replace it. Thank you, Mr. Chairman. Chairman THOMAS. I thank the gentleman, will respond to my colleague from Massachusetts on his inquiry. I believe that the President has proposed some changes to Social Security; I don't believe he has demanded them, think it is incumbent upon us to at least examine, consider, and move forward. The Chair has no interest in playing "Gotcha." This is, I think, a fundamentally important issue in front ofus. I think the President should be commended by placing the la—rger question of aging Americans and their retirement security of which—, obviously, one of the fundamental core issues is Social Security in front ofus. I thought it was incumbent upon us, given our knowledge, jurisdiction, that if Social Security is presented to us, it would be a derogation of duty not to look at pensions and savings, and argue that only dealing with Social Security would be an adequate ad- dressing of aging Americans' needs. It just seemed to me logical and obvious to take the opportunity, especially on the area ofinte- gration and coordination, of looking at the question of retirement. We began with the hearing looking at Social Security. We certainly are going to return to Social Security in great detail. Because as the Subcommittee examines Social Security, there are clearly some internal adjustments for particular groups currently receiving So- cial Security, who need to be addressed on basically a fairness theme. I think it is entirely appropriate, believe —the people who are in front of us wro—te their papers with, I think in my opinion, what I got out of it a degree of gratefulness that we are talking about the larger picture beyond Social Security, which could afford us a chance to begin to build some links and institutionally address the issues that I think need to be addressed if we are looking at aging Americans and their retirement. So, I would just tell the gentleman from Massachusetts I have an interest in producing a product, and I believe that my colleagues on my side of the aisle have an interest, in producing a product which is a responsible one and should elicit bipartisan support at the end of this legislative process. If it does not, that is of course