The House Committee on Ways and Means (Archer) on the President's plan for Social Security
Kenneth Apfel, Commissioner, testified, February 23, 1999.

Good morning, Mr. Chairman and Members of the Committee. I appreciate the opportunity to appear before you today to discuss the President's plan to strengthen Social Security. I believe that assuring the future financing of Social Security and Medicare is the most important domestic issue that we face as a Nation and I am delighted to be a part of these ongoing discussions.

In my testimony today I will briefly review for you the importance of Social Security as well as its long-range solvency situation, the Nation's changing demographics, and then discuss why I believe the President's framework for protecting Social Security is the right approach.

Importance of Social Security

In the course of the past year, thousands of Americans, in forums and town hall meetings across this country, have made it clear that they believe that Social Security is important and it is worth protecting. I personally have spoken to women, minorities, people with disabilities, older Americans, baby boomers, college students, to business and labor leaders, to academicians and policy makers. And what I have learned from my year-long dialogue with the American people, is that they understand just how important Social Security is for retirees and their families, for people with disabilities, for children who have lost a parent, for young widows and widowers struggling to raise children alone. They know what Social Security means to those millions of Americans for whom those monthly benefit checks make the difference between dignity and devastation.

Today, Social Security provides benefits to 44 million men, women and children. In 1998, an estimated 150 million people worked in jobs covered by the Social Security program and paid contributions on their earnings, giving them peace of mind that comes from knowing that they and their families will be protected when they retire or if they should become disabled or die. Nearly 1 in 6 Americans receives Social Security benefits and 95 percent of Americans have the benefit protection provided by our programs.

Social Security is the most effective anti-poverty program in history. It is the major source of income for two-third of beneficiaries age 65 and older, and contributes 90 percent or more of income for about one-third percent. Today, only about 11 percent of older Americans are poor. Without Social Security, about half of all older Americans would be living in poverty. This is a program that has worked. It has worked extraordinarily well for the American people - young and old - for over a half of a century. We should be very careful to protect the guaranteed benefit that Americans - both those who are now recipients and those who have been promised benefits - will need.

The program also provides a financial floor of protection for millions of working-age Americans. About a third of our beneficiaries are not retirees, but are severely disabled workers, their children, or the surviving family members of workers who have died untimely deaths. This protection is extremely important, especially for young families struggling to afford adequate private insurance policies. For a young married average worker with two children, Social Security is the equivalent of a $300,000 disability insurance policy and a $300,000 life insurance policy. About one in six of today's twenty year olds will die before retirement, and nearly thirty percent will become disabled.

For all of these reasons, the program is irreplaceable, and I am delighted to have an opportunity to talk to you today about the President's framework for making Social Security strong for the 21st century.

Trustees' Estimates

As you know, under the 1998 Trustees Report intermediate assumptions, the annual combined tax income of the OASDI program is projected to exceed annual expenditures from the funds until 2013. After that, because of interest income, total income is projected to continue to exceed expenditures until 2021. The funds would begin to decline in 2021 and would be exhausted in 2032. In 2032, when the trust funds are projected to become exhausted, the Social Security system will have enough income to cover only about three-fourths of benefit obligations.


We are all familiar with our Nation's demographics - and it can be summed up this way: we are living longer lives, but it is not just the number of years we are living, it is also the number of people who are living longer. This is good news. More of us are living to retirement age, and life expectancy at age 65 is increasing:

  • In the U.S. in 1995, the elderly population (aged 65 and over) was about 34 million, making up about 12 percent of the population. In contrast, there were about 9 million aged people in the U.S. in 1940, and then they accounted for less than 7 percent of the population.
  • The elderly population growth rate is expected to be modest from now through 2010, but it will increase dramatically between 2010 and 2030 as the baby-boom generation ages into the 65-or-older age group. By 2030 our elderly population will have doubled from 34 million, about 12 percent of the population, in 1995 to 68 million, about 20 percent of the population.
  • When benefits were first paid in 1940, a 65-year old on average lived about 12 ½ more years. Today, a 65-year old can expect to live about 17 ½ more years. By 2070, life expectancy at age 65 is projected to be 20 ½ years.

Acting Now is Important

These millions of people, retired and working, rely on Social Security for their retirement security, and protection for their families against loss of earnings due to severe disability and death. Clearly, we must preserve and protect Social Security; millions are counting on us for strong and decisive action. The time to act is now. Not because Social Security is in crisis, but because delay will greatly increase the cost of achieving solvency. At the present time, our financing is sound. We can have modest changes now, or much more drastic changes later. The size of the financing gap will double if we delay for a generation, and young Americans could lose faith in our system. We face serious but manageable challenges with early action. We can prevent a crisis from ever occurring with responsible action in the near term.

Window of Opportunity

I strongly support the Administration's decision to try to use the window of opportunity presented by the budget surpluses to advance fund more of the nation's Social Security system. This is the first time in a generation our fiscal position enables us to take such action. Through advance funding, we can prepare for the inevitable challenges of the retirement of the baby boomers and succeeding generations.

President's Framework

I'd like to talk about how the President's framework would impact the Social Security program. The President proposed the following three distinct actions to solve the Social Security program financing problem:

  • The framework provides for transferring amounts equal to 62 percent of projected federal budget surpluses over the next 15 years-about $2.8 trillion--to the Social Security system. Except for a small investment in corporate equities, the framework uses this transfer to pay down the publicly held debt, strengthening our economy for the future.
  • The framework calls for investing a small portion of the transferred amounts in the private sector to achieve higher returns for Social Security. The amount of the Trust Funds invested in the private sector would be about 15 percent, representing, on average, no more than about 4 percent of the stock market. Funds would be invested in broad market indexes by private managers, not the government.
  • The President's framework calls for a bipartisan effort to take further action to ensure the system's solvency until at least 2075. There are hard choices that we must face. To assure confidence in Social Security it is important to bring the program into 75-year actuarial balance.

The first two steps will keep Social Security solvent until 2055, and bipartisan agreement on the hard choices could extend that solvency at least through 2075.

Benefits of the President's Plan

By paying down publicly held debt, the President's plan will ensure that the country will have the resources necessary to pay Social Security until the middle of the next century. Merrill Lynch recently released a report that concluded:

Allocating a portion of budget surpluses to debt reduction, as the President proposes, is a conservative strategy that makes sense. Reducing the debt will result in increased national savings, lower interest rates, and stronger long-term economic growth than would otherwise be the case.

The lower interest costs and higher growth will make it possible for the Social Security Trust Fund to redeem its bonds without creating pressure on other government programs. Indeed, OMB calculations indicate that the decline in government interest payments will provide sufficient resources so that the combined government expenditures on interest and Social Security benefits will be below current levels as a share of the economy until 2050 and beyond.

Investment in the Private Sector

The President's plan would require that transfers be made from the U.S. Treasury to the Social Security trust fund each year for 15 years. The amount transferred each year would be specified in law, so that by 2015, about $2.8 trillion would have been transferred. A portion of these funds would be invested in the private sector each year, from 2000 through 2014, until such time as 14.6 percent of the Trust Funds are in private investments. The remainder, 85.4 percent, would continue to be held in government securities. This allows the trust funds to achieve a higher rate of return without assuming undue risk.

Stocks over time have returned about 7 percent annually after inflation, while Treasury bonds have yielded about half as much. Diversifying the trust fund investment to include stocks would produce more investment income and reduce the projected shortfall that needs to be made up through potential revenue and benefit changes.

Under the proposal, total investment in the private sector would account, on average, for around 4 percent or less of the U.S. stock market over the next 30 to 40 years. This, by the way, is about the size of Fidelity's share of the stock market today. State and local pension funds now represent more than twice as much-about 10 percent-of total stock market investments. If State and local pensions had not, years ago, gone in the direction of a diversified portfolio, then States and localities would have had to increase taxes or curtail pensions significantly. State and local government pension plans now hold roughly 60 percent of their total investment portfolios in the private sector.

We must provide safeguards to avoid politicizing the investment process. Under the President's proposal, the Administration and Congress together would craft a plan that ensures independent management without political interference. I believe that this can be done, and that the Federal Reserve Board and the Federal Retirement Thrift Investment Board could serve as models. The Federal Reserve Board makes extremely important and sensitive economic decisions and no one doubts its independence. The Federal Retirement Thrift Investment Board oversees the investment of billions of dollars in the private sector and there has been no allegation of political interference in those investment decisions.

USA Accounts

Social Security is one part of a "three legged" retirement system, which includes employer sponsored retirement plans and personal savings. I strongly support the President's program to create Universal Savings Accounts (USAs) by using part of the budget surpluses to help Americans build up wealth to finance their longer lifespans. Under the proposal, we will reserve 12 percent of the projected surpluses over the next 15 years - averaging about $36 billion per year.

These accounts would be separate from Social Security, not a substitute for the guaranteed benefit. No resources for these accounts would be drained from the Social Security system.

The President would extend this savings opportunity on a progressive basis to assure that those most in need of increased resources in retirement would benefit. The USA accounts will provide individuals with additional resources and individual choices in saving for retirement. Today the overwhelming preponderance of funds from pensions and savings go to the top half of the population by income, leaving only a tiny percentage for the bottom half by income. USA accounts, separate from Social Security, will mean hundreds of dollars in targeted tax cuts for working Americans who choose to save more for retirement, with more help for lower-income workers.

Program Improvements

The President said a comprehensive reform package must include provisions to reduce poverty among elderly women. While the poverty rate for the elderly population is approximately 11 percent, for elderly widows it's 18 percent. Elderly women often are more dependent on Social Security because they are less likely to have pensions, and sometimes outlive their assets. Almost three-quarters of Social Security beneficiaries over age 85 are women-our mothers, grandmothers and great grandmothers. It is essential that we work together in a bipartisan effort to ensure that they have the best protection that society can provide.

In addition, as part of the broader reform package, the President's proposal would eliminate the retirement earnings test. This provision of the law is a confusing and anachronistic hold-over from the earliest years of the program. Eliminating this work disincentive will allow people the freedom to choose to continue to work in their retirement.


Today we have a remarkable window of opportunity-a window created by the responsible fiscal policy of the last six years and the economy it helped to produce. The President's framework does much more than protect Social Security and Medicare. President Clinton's approach would pay down the publicly held debt, thereby increasing national savings and promoting economic growth which will reduce burdens on future generations.

This is a moment we could not have foreseen just a few years ago. It is a moment in which we can begin to deal with the future. It is the moment to address long-term generational challenges. The President's framework for Social Security solvency gives a solid foundation on which to preserve our social insurance program for the 21st century. The Administration and the Congress worked together successfully to achieve a robust economy. We now must focus on strengthening and protecting the Social Security system for future generations of Americans.