Testimony of James Roosevelt, Jr. Associate Commissioner for Retirement Policy Social Security Administration
Hearing before the Committee on Ways and Means U.S. House of Representatives, February 11, 1999

Good morning, Mr. Chairman and Members of the Committee. My name is James Roosevelt, Jr., and I am the Associate Commissioner for Retirement Policy at the Social Security Administration. I appreciate the opportunity to appear before you today to discuss Social Security reform lessons learned in other countries. I am glad to be a part of the ongoing discussions to save Social Security for the 21st century. There is valuable information that can be gleaned from examining the efforts to reform social insurance programs around the world.

In my testimony today I will briefly review for you Social Security's long-range solvency situation in terms of the status of the trust funds as well as changing demographics. I will also discuss the demographics facing other nations, and a broad range of reforms that have been implemented in other countries to address those changes. This topic is quite relevant; as I will discuss later, the Administration considered foreign experience carefully in the process of developing our framework to protect Social Security.

It is important to keep in mind that every country has its own unique circumstances and that what is best in one country may not be the best solution for our country. Each country faces a different set of demographics and has a different set of programs to support retirees, survivors and the disabled. For example, merely comparing cash benefits without considering health and housing supplements may provide a distorted picture. Also, the social insurance tradition and the status of the social insurance programs in different countries vary greatly. We are fortunate in this country to be facing a problem, but not a crisis. Some countries have made radical changes because their situations were more dramatic and immediate.

Status of the Social Security Trust Funds

I'd like to take a moment to share with you the current status of the Social Security Old Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds. The OASDI Trustees monitor the financial health of Social Security -- our Nation's most successful family protection program.

According to the 1998 Trustees Report, the assets of the combined funds increased by $88.6 billion, from $567.0 billion at the end of December 1996 to $655.5 billion at the end of December 1997. At the end of fiscal year 1998, the combined funds had a combined balance of $730 billion. In 1997, the Social Security trust funds took in $457.7 billion and paid out $369.1 billion. Thus, over 80 percent of income was returned in benefit payments. Administrative expenses in 1997 were $3.4 billion, or about 0.9 percent of benefits paid during the year.

Under the 1998 Trustees Report's intermediate assumptions, the annual combined tax income of the OASDI program will continue to exceed annual expenditures from the funds until 2013. However, 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, continuing payroll taxes and income from taxes on benefits are expected to generate more than $650 billion in revenues (in constant 1998 dollars) for the Trust Funds in 2032. This is enough income to cover about three-fourths of benefit obligations. And I want to stress that the President is committed to seeing to it that this scenario never develops.

Changing Demographics

I have mentioned "demographics" in a general way, but I have some specific facts to share with you that may be helpful to our discussion today:

  • In the U.S. in 1995, the elderly population (aged 65 and over) was about 34 million, making up about 12% 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.
  • And Americans are living longer. When benefits were first paid in 1940, a 65-year old on average lived about 12 ½ more years. Today, a 65-year old could expect to live about 17 ½ more years and by 2070, life expectancy at age 65 is projected to be an additional 20 ½ years.
  • 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. For every 100 working age people, there will be more than 35 people aged 65 and over by 2030.
  • In 1994, 60% of the elderly were women and 40% were men. Among the oldest of these (85 or older), over 70% were women and fewer than 30% were men.

Clearly, many millions of people are depending on us for strong and decisive action to preserve and protect the multi-tiered structure of retirement income security. President Clinton stated that we must act now to tackle this tough, long-term challenge.

Foreign Demographics

Certainly it is no secret that other countries are facing similar demographic issues, some far more serious than ours. In the U.S., we will have 21 people aged 65 and over for every 100 American workers next year. But in Japan, for every 100 workers, there will be more than 24 people aged 65 and over. Belgium, France, Greece, Sweden and Italy all foresee greater aged-people-to-worker ratios than ours next year.

Life expectancy is also increasing around the world and is expected to continue to do so. In the United States and the United Kingdom, life expectancy at birth has increased by about 6 years from the early 1950's to the late 1980's. Over the same period, life expectancy at birth has increased by about 10 years in France, Italy and Greece, 13 years in Spain, 8 years in Switzerland and 7 years in Germany.

Further, the fertility rate in developed countries needs to be about 2.1 to maintain a stable population, and only Ireland is at that level or projected to be there. The impact of increasing longevity and decreasing fertility is indicated by the percent of population over 65. When compared with some other developed nations, the percent of U.S. population over 65 is relatively low. For example, as a nation, we are younger than the people of Italy or Japan, and this relationship is not projected to change in the future. In Italy, elderly residents represented 14.1 percent of the total population in 1990, with projected growth to 20.9 percent in 2020. 11.7 percent of the population was over 65 in Japan in 1990, and is projected to grow to 24.2 percent in 2020. In contrast, here in the U.S., 12.6 percent of us were over 65 in 1990; we are projected to reach just 16.3 percent in 2020.

Differences in Social Policy

Just as our demographic picture is not identical to that of other developed countries, we differ in other important ways as well. For example, our Social Security program is a relatively small piece of this country's Gross Domestic Product (GDP) -- in 1998, Social Security expenditures were 4.6 percent of GDP. In many countries, social insurance represents a far larger proportion of GDP.

We also differ from other countries in our approach to changing demographics because we were foresighted enough to begin to prepare our Nation for the retirement of our baby boomers with the 1983 Social Security Amendments. The 1983 amendments paved the way to move from a pay-as-you-go approach to partial advance funding.

For all of these reasons, we in the U.S. are in a somewhat better relative position to begin to deal with the challenges presented by our changing population than are many other nations. In addition, other countries have different income support and social service programs. Therefore it is sometimes difficult to make direct comparisons with what other countries are doing or have already done. Nonetheless, examination of the experience of foreign countries provides interesting and valuable insights, and there is much we can learn.

International Approaches to Reform

Let me turn now to a discussion of how other countries are dealing with these demographic changes. Sweden and the United Kingdom have made recent changes in their old-age pension programs. Canada is also making changes. Of course, Chile is another, oft-cited model for retirement income reform and Australia has added a new element to their very different and interesting social insurance structure. I would like to talk about each of these countries, beginning with what is going on in Canada.

Our neighbors to the north have recently enacted legislation to deal with their changing population. When the Canada Pension Plan was introduced in 1966, the face of Canada's population was entirely different than it is today. A quickly growing senior population, a generation soon to retire, and a rapidly shifting economy resulted in the Canadian government's adoption of a number of reforms to strengthen Canada's retirement income system.

Of special interest to us in the United States is the Canadian decision to invest new funds in a diversified portfolio of securities - that is, a combination of stocks and bonds. This recent legislation allows the fund to build an eventual reserve of 4-5 years of benefits and moves the Canadian Pension Plan system away from a pay-as-you-go plan toward a more fully funded system.

The new investment board for the Canadian Pension Plan is to operate at arm's length from government influence, with the stock investments reflecting a diversified portfolio, which will be selected passively, mirroring broad market indexes. We will be watching Canada carefully as it deals with questions concerning corporate governance. For example, regulations have not yet been issued on whether or how shares owned by the Canadian Pension Plan will be voted.

Another country that invests part of its government pension fund in stocks is Sweden, which has been making such investments since 1974. About 13 percent of the surplus funds were invested in stocks in 1996, the latest data available. These investments represent about 4 percent of total Stockholm Exchange market capitalization. The funds are directed by large boards that represent government, business, and labor; which has protected against politically motivated investment.

Let me talk a little more about Sweden's program. Under the new Swedish system (now being implemented), basic and supplementary pensions will be phased out and replaced by a single, earnings-related pension. In addition, 2 ½ percent of earnings will be invested in individual "premium accounts". These premium accounts will be privately managed, under public supervision, and permit a wide range of investments. Payroll contributions will be held in a conservatively invested account until the administrative process is completed and they are credited (with interim returns) to each worker's chosen account. Since this program is brand new, we will be watching its implementation with great interest.

The United Kingdom has about 10 years' of experience with individual retirement accounts. Starting in 1988, the British system allowed workers to "contract out" the earnings related portion of their two-tier pension program in order to set up tax-deferred "personal pensions". Thus, under this system, privatization is voluntary. However, there are weaknesses to their system which the British government has recognized. For example, workers with low wages or sporadic work histories do not seem to be well protected. Tthe British government has recently proposed substantially revising their system to address this issue. We will be watching with interest to see what steps the United Kingdom takes to improve their retirement income protection program.

In addition, the British government has had difficulty regulating the sale of private pensions; misleading and sometimes fraudulent sales tactics may have adversely affected as many as 20 percent of those who opted for personal pensions. Also yet to be resolved is how best to set up an effective regulatory mechanism whereby investors can seek redress and compensation.

It would appear that social insurance reform plans that involve direct selling of investment instruments raise many difficult issues. Arthur Levitt, Chairman of the Securities and Exchange Commission, recently cautioned that under a mandatory individual accounts program, uninformed investors won't be able to capture the potential for greater returns because "they risk making poor decisions, perhaps through ignorance or because they fall prey to misleading sales practices".

And let me say a couple of things about the fundamental reform of the Chilean social insurance system. It is worth pointing out that the situation in Chile prior to reform looked nothing like the situation we are facing today. Chile's demography was vastly different in that it had, and still has, a relatively young population, a fertility rate substantially above ours, and a 9-to-1 ratio of workers to retirees when the change was made. Further, as you know, the old Chilean program was close to bankruptcy when it was overhauled in 1981.

The plan is based on private retirement pension funds administered by private pension fund management companies. There are no employer contributions under the new plan, but workers are required to make monthly contributions equal to 10 percent of their wages into individual savings accounts. There is an additional 3 percent contribution for administrative fees and disability and survivors insurance. Transition costs were funded in part by selling off a vast array of nationalized companies.

This is not to say, however, that the experience of Chile does not hold some lessons for the United States. While the Chilean reforms did respond to some of the problems inherent in the old system, some serious concerns remain. Some of the difficulties are:

  • about 40 percent of workers are not contributing regularly;
  • 80 percent of the self employed are not participating;
  • administrative fees are high but choice in investments is limited due to regulation;
  • and rates of return in recent years are too small to cover administrative fees.

The overall real rate of return under the privatized Chilean system from its inception in 1981 through the end of 1998 is 11 percent. However, the overall real rate of return is not what every worker is getting. After considering administrative costs, including withdrawal fees and costs of annuitization, the real rate of return through 1995 was 7.4 percent and is still declining.

In the last 4 years, annual rates of return in Chile have been low or negative. In fact, the situation has deteriorated to such a degree that in October the Deputy Secretary of Social Security in Chile, Patricio Tombolini, encouraged workers who are eligible to retire to postpone their decision until such time as the market losses could be reversed. I think it is safe to say that no one here today ever wants to have to make such a pronouncement to the American public.

Another country that has made recent changes to its pension system is Australia. Australia's system is quite different from the United States'. Australia has approached the problem of improving retirement income not by expanding public programs, but by imposing a mandate on all employers to offer at least one contributory retirement plan to all employees. Employers are required to make contributions to these funds at the rate of seven percent of employee earnings in 1999, rising to 9 percent in 2002-2003. Many employers make contributions that are above and beyond what is required. The plans are fully portable and managed by the private sector. They are paid out at age 55, some as pensions but the majority as lump sums which can be annuitized. This supplements a very generous, wealth-tested retirement benefit funded through general revenues payable at age 65. The Australian approach to individual accounts was implemented in 1992 and is scheduled to be complete in 2002.

This brief review has illustrated the great diversity of the retirement income protection plans around the world. While I do not want to over-generalize about what we can learn from international experience, one observation I can make is that when countries have individual accounts as part of their national retirement system, lower earners, intermittent workers, and women tend to have less favorable outcomes than others. However, in many nations, this problem is offset by the provision of a great variety of income support and social service programs offered to the elderly. Where such programs do not exist, or are very limited such as in Chile, the affected workers may be severely disadvantaged.

President's Response Reflects Foreign Experience

Three weeks ago, in his State of the Union address, President Clinton proposed historic steps to ensure the solvency of Social Security. When putting together his framework for a solution to the long-range Social Security solvency problem facing our country, President Clinton wanted to increase national savings to reduce burdens on future generations, and reduce publicly held debt. His plan, therefore, draws on the approach taken by Canada and Sweden and State and local pension systems in this country to diversify the fund portfolio. Through the provision of Universal Savings Accounts (USA accounts), the President's framework draws on the experience of countries that have added individual retirement accounts as a voluntary supplement to social insurance protection.

Specifically, the President proposed the following three actions to solve the Social Security program financing problem:

  • Transfer 62 percent of projected federal budget surpluses over the next 15 years-about $2.8 trillion--to the Social Security system and use the money to pay down the publicly held debt, which would strengthen our economy for the future. Thus the President's plan provides for debt reduction while giving Social Security the benefit of the gains from reducing publicly held debt.
  • Invest a portion of the trust funds, which would never exceed about 15 percent, in the private sector to achieve higher returns for Social Security. Funds would be invested in broad market indexes by private managers, not the government.
  • 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 President's 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.

President Clinton also said that reducing poverty among elderly women must be a priority as part of this comprehensive solution. While the poverty rate for the elderly population is approximately 11 percent, for elderly widows it's 18 percent. In addition, he proposed eliminating the retirement earnings test, and strengthening Medicare. These proposed actions constitute a solid framework for ensuring retirement security for current and future generations of Americans, and I would like to review them now in some detail.

First, 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 annual funds transferred would be specified in law, so that by 2015, about $ 2.8 trillion would be allocated to save Social Security. 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. Thus, for example, in 2032, 94 percent of benefit payments will come from tax revenue and interest on government securities with only six percent from private investments.

Stocks over time have returned about 7 percent annually after inflation, while 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. It would provide a higher rate of return with no risk to the individual and minimum risk to the trust funds.

Under the President's proposal, total investment in the private sector would account 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 that figure-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.

The Administration understands the importance of providing appropriate 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. We believe that this can be done, especially if the Federal Reserve Board and the Thrift Savings Plan Board serve as models.

The President's framework does not merely protect Social Security - it reduces publicly held debt and increases the savings rate. Paying down publicly held debt will cause new capital formation to occur; it will reduce debt servicing costs as well. As Alan Greenspan recently asserted, "reducing the national debt - the publicly held debt.is a very important element in sustaining economic growth." He added, "as the debt goes down, so do long-term interest rates, so do mortgage rates, and indeed economic growth would be materially enhanced as a consequence." Finally, paying down publicly held debt provides Government with flexibility to respond to future conditions. That is, if the government later decides to finance some obligations by issuing new publicly held debt-for example, redeeming Social Security assets-it would be possible to do so without threatening future economic performance.

Second, in addition to strengthening Social Security and Medicare, the President has proposed Universal Savings Accounts, separate from Social Security, to help every American build the wealth they will need to finance longer lifespans. Under the President's framework, we will reserve 11 percent of the projected surpluses over the next 15 years - averaging about $33 billion per year, so that every worker can have a nest egg for retirement. These accounts, proposed by the President, would be matched on a progressive basis. Today 93 percent of the funds from pensions and savings go to the top one half of the population by income. This leaves only 7 percent for the lower 50 percent by income. USA accounts, separate from Social Security, will mean hundreds of dollars in targeted tax cuts for working Americans, with more help for lower-income workers.


In conclusion, let me say we have much in common with many countries around the world as we face the demographic challenges we are discussing today. It is important to learn as much as we can from their experiences. It seems clear that many foreign nations are looking to strengthen their savings rates and provide for advance funding. The President's proposals for protecting Social Security are consistent with these goals. The President's proposals represent a solid framework for ensuring retirement security.

The President's plan is a sound approach for protecting Social Security. It uses the budget surpluses-the first the nation has enjoyed in more than a generation-to help preserve a program that is of overriding importance to the American public. The Social Security program in the United States has been a resounding success. It has lifted the elderly out of poverty. Today without Social Security about half of the elderly would be living in poverty. With Social Security that number has been reduced to 11 percent. This is a program worth protecting and must be protected.

The Administration and the Congress worked together successfully to achieve a robust economy. The Administration and the Congress must now work together to achieve a bipartisan package to ensure the solvency of Social Security for at least the next 75 years. We must use the window of opportunity provided by the budget surpluses to move us closer to a financially secure system. We look forward to working with this Committee to strengthen the Social Security system for the future.