Statement by Dr. Shirley Charter,
Commissioner of Social Security,
before the House Committee on Ways and Means,
Subcommittee on Social Security

March 11, 1996

Mr. Chairman and Members of the Subcommittee:

I appreciate your invitation to discuss the question of whether future beneficiaries will get a fair return on their contributions in terms of the benefits they will receive from Social Security. You also asked me to address the question of whether young workers should expect to receive their full benefits and what changes will be required to ensure that future retirees are treated fairly.

As we begin to discuss and analyze the changes that may be necessary to ensure that Social Security continues to serve the needs of America, it is absolutely essential to understand the role that Social Security has played in the past and recognize the positive impact it has had on the economic well-being of the country. Social Security allows almost 42 percent of the elderly­-10 million people--to live out of poverty.

Unfortunately, many critics of the program judge its value from much too narrow a perspective. They view it from the perspective that Social Security is only a savings plan for retirement and that the return on investment is the sole criterion against which it should be assessed. Some people believe that if they were allowed to invest their Social Security taxes in private investments, such as stocks and bonds, they would receive a higher rate of return--in their view, a fairer return--on their Social Security taxes than Social Security currently provides. Thus, I would like to begin today with a brief look at the purpose of the program before I discuss some specific comparisons of contributions and benefits.

Social Security Offers Families Protection

The success and popularity of Social Security is based on the fact that it strikes a balance between the complementary goals of individual equity--providing benefit protection which is related to an individual's contributions--and social adequacy--providing advantages to society as a whole by alleviating poverty and allowing as many citizens as possible to enjoy a reasonable standard of living. In other words, the social adequacy aspects of the program look beyond the individual to how Social Security can benefit society as a whole. These features, which I will describe later in my testimony, are designed to provide a measure of financial independence to all workers, including lower paid workers and their families. One of the key elements of Social Security is that because it is not means-tested, it maintains the collective nature inherent in this social insurance program.

As a social insurance program, Social Security spreads the cost of protection against the risk of lost income due to retirement, death, or disability over the entire working population, with more protection, per dollar earnings, for lower paid workers and for workers with dependents. Consequently, the value of benefits for any given worker depends on his or her individual circumstances--whether the individual has high or low earnings, is married, may have children, becomes disabled or dies at. a young age, or receives benefits beyond average life expectancy.

For example, in an extended family, retired beneficiaries·may be receiving benefits while their adult children, still in the workforce, and grandchildren have the assurance that Social Security benefits will be there if one of the working parents becomes disabled or dies. The security provided by Social Security is inter-generational.

Those who limit their analysis of the value of Social Security to the retirement program ignore the vitally important disability and survivor programs. Over 30 percent of our Nation's Social Security beneficiaries are receiving disability and survivors benefits, and those programs make up over 30 percent of the benefits Social Security pays. This protection can be extremely valuable, especially for young families that have not been able to sufficiently protect themselves against the risk of the worker's death or disability. In 1994, Social Security paid $15.2 billion in benefits to children. Without Social Security's protection, an increased burden would be placed on families, other government programs, and private charities to support those who would be left in financial need due to the unexpected death or disability of the worker.

One way to gauge the value of Social Security disability benefits is to express their value as insurance. The Social Security disability program provides the same value as a $203,000 disability insurance policy for a worker aged 27 with a spouse and two children and with average earnings. Last year, Social Security paid about $41 billion in benefits to about 6 million disabled workers and family members.

Similar value applies to the Social Security survivor program. Survivor benefits for a worker aged 27 with a family and with average earnings are equal to a $295,000 life insurance policy. Social Security also paid about $67 billion in benefits to more than 7 million survivors of deceased workers last year. Again, we tend not to focus on the fact that one in five of today's 20-year-old men and one in eight 20-year-old women will die before retirement.

Social Security has had another important beneficial impact that critics of the program often fail to acknowledge. By dramatically increasing the extent to which retired and disabled workers, their dependents, and survivors of deceased workers are financially independent, Social Security has relieved younger generations of the burden of providing for the financial needs of older relatives at the same time they are trying to raise their own families.

Finally, because the cost of administering the program is less than one percent of contributions paid, the public is receiving maximum value for their investment. More than 99 percent of the Social Security contributions paid by workers is returned in benefits paid to them or their survivors. That's better than anything you can get in the private market.

Individual Equity and Social Adequacy

Because Social Security is designed to meet certain social adequacy goals, we should not measure its worth simply by comparing contributions paid and benefits received. Certain features of the program are geared toward meeting broad-based social needs in addition to providing retirees with a specific rate of return.

The basic benefit formula is designed to replace a higher proportion of earnings for low earners than for high earners. This is in part because higher income workers are more likely to have accumulated greater savings or investment income than lower income workers. Also, it assumes that lower earners need to have more of their earnings replaced because they spend a higher proportion of their earnings for basic needs. Such workers generally are not able to accumulate savings or generate investment income to the extent that higher earners can. Additionally, many low earners have worked in jobs that have not provided pension coverage. Thus, the benefit formula provides lower income workers with a measure of financial independence without the requirement to establish need.

Social Security is the major source of income (providing 50 percent or more of total income) for 63 percent of beneficiaries aged 65 and older, and contributes 90 percent or more of income for about 25 percent. As the program has matured, it has more effectively met its objectives. Only 1 in 8 elderly people are living below the poverty line today, compared to 1 in 3 in 1959. And about 42 percent of beneficiaries age 65 and over--more than 10 million people--are kept out of poverty by their monthly Social Security benefits.

Social Security was never intended to serve as the sole source of income to retirees. When combined with pensions, private savings, and investments, however, Social Security benefits were intended to give workers some measure of economic security. Benefits are based on the amount of earnings subject to Social Security contributions, rather than individual financial circumstances. Generally, the higher the lifetime earnings, the higher the monthly benefit.

Benefit and Contribution Comparisons

Let me now discuss some specific comparisons of contributions and benefits. As stated earlier, the value of the Social Security program should not be measured solely on the basis of individual equity. Any analysis of the Social Security program shows· that past generations have benefited greatly from the program. This is because, until the program matured, benefits tended to be generous relative to contributions so that the program could begin to offer adequate protection to as many workers as possible, including those who did not have an opportunity to contribute to it during their entire careers.

As the program has matured, the return on contributions has decreased but remains generous. For example, to illustrate the return for persons now becoming beneficiaries, we may consider a person with average wages who retires at age 65 in 1996, who paid $21,518 in the employee's share of Social Security OASI contributions. When interest on those contributions is factored in, the resulting value is $73,703. This worker will receive a monthly benefit of $890, and will recover all contributions, with interest, in 8 and one-third years. This worker can be expected to live nearly 10 more years beyond the break-even point.

In the future, the rate of return, while declining, will continue to be fair, especially when viewed within the context of the broad social objectives of Social Security. For example, a "baby boom" worker with average wages who retires at 66 in 2015 will pay $59,562 in the employee's share of Social Security contributions ($258,824 with interest). This worker will receive $2,074 in monthly benefits or $1,006 in real terms, and recover those contributions in about 12 years, and can be expected to live 6 years beyond the break even point based on life expectancy projections for 2015.

For a worker born in 1968 with average earnings who retires in 2035 at age 67 it will take 10 years to recover the contributions he or she paid. This worker will receive a monthly benefit of $1,215 in today's dollars and can be expected to live an estimated 8 years after the break-even point.

Having given you these calculations for those individuals born in 1968, however, I must qualify their significance. As we all know, we cannot project what lifetime benefits for those retiring 20 to 40 years from now will be. We all recognize that changes to the program will be required to sustain Social Security in the long term.

As you know, the Congressionally mandated Advisory Council on Social Security is very close to completing its assessment of long-range solvency options. Once the Council's options and recommendations are made public, the Social Security Administration, Congress and the public will carefully evaluate them and assess their impact on current and future beneficiaries. Until the public discussion has progressed further, it would be 5 premature for me to take a position on specific options or ideas.


Mr. Chairman, for 60 years Social Security has been one of the most important and successful government programs. It was conceived not only to protect individuals, but also to protect America as a whole from the kind of economic uncertainty and need that existed during the Great Depression. The value of Social Security must be judged in terms of the protection it provides-­ not only for the individual but for society as a whole. Thus, those who seek to measure its value must consider the design of the program and the elements that support its design, rather than restrict their analysis to a simple measure of a rate of return on contributions.

According to the 1995 Trustees Report, beginning in 2013 Social Security expenditures will exceed revenues. The Trustees Report estimates that the Social Security Fund will be exhausted in 2030. Clearly, considering the crucial role that Social Security plays in our society, its future solvency is of critical importance to the nation.

As past successful efforts to reform Social Security have shown, changes to the program should occur only after bipartisan debate and public discussion. The Advisory Council is an important element in the development of this bipartisan consensus. I look forward to sharing the Council's work with Congress and the public, and to working with you and the American people to ensure that there is sufficient funding of the Social Security program for all future generations.