Committee on Ways and Means Hearing on
"Alternatives to Strengthen Social Security"
Statement of Barbara Kennelly, President and CEO
National Committee to Preserve Social Security and Medicare
May 12, 2005

Chairman Thomas, Ranking Member Rangel, and Members of the Committee:

The National Committee to Preserve Social Security and Medicare represents over 4 million members and supporters who are united in their opposition to the privatization of Social Security. The members of the National Committee understand better than anyone the importance of Social Security. Every day, over 47 million Americans – one out of every four households – experience the success of Social Security firsthand. This great program is the single largest source of retirement income in the United States , and each year it keeps 12 million seniors out of poverty. Social Security, unlike virtually any other retirement vehicle, provides a sound, basic income that is adjusted for inflation and that lasts as long as you live.

The members of the National Committee are seniors who have long experience with the unpredictability of life. They understand the true value of Social Security not just for themselves, but for younger Americans as well. In fact, older Americans see Social Security as part of their legacy to their children and grandchildren.

National Committee members fervently believe in Social Security. They have experienced firsthand the “hazards and vicissitudes” of life and believe in a collective societal sharing of risk to guard against them. They also truly believe carving private accounts out of Social Security will ultimately result in the dismantling of Social Security as we know it.

At a press conference on April 28, President Bush re-affirmed his determination to carve private accounts out of Social Security, placing American's retirement security at risk while passing along trillions of dollars of additional debt to our children and grandchildren.

At the same time, President Bush announced his support for a plan to cut Social Security benefits for middle and higher-income Americans. The plan would make substantial cuts in benefits for over 70 percent of future retirees. All workers earning more than a modest $20,000 a year today would see significant reductions in their Social Security checks. A worker who earns about $37,000 today – hardly a royal sum – would suffer a 28 percent benefit cut. A person who earned $60,000 would experience a reduction of over 40 percent. Ultimately, Social Security would be converted from a broad-based retirement income security plan into a retirement plan solely for the poor. Hard-working, middle-class Americans would be the big losers.

In addition to targeting middle-class Americans, the President is insisting on his plan for private accounts. Such accounts not only do nothing to improve Social Security's solvency, but, by diverting payroll taxes out of Social Security, private accounts actually accelerate insolvency. Diverting 4 percentage points of payroll taxes into private accounts, as the President has recommended, would drain the Trust Fund so quickly that the program would face a cash-flow problem in 2011 rather than 2017 as under current law. Moreover, the Trust Fund would become unable to pay full benefits by 2030, a decade earlier than if no payroll taxes had been diverted into private accounts.

The creation of private accounts requires a massive infusion of funding spanning multiple generations. These costs are often obscured but are unavoidable in such a vast systemic change. Today, Social Security is a pay-as-you-go program, which means the payroll taxes paid by today's workers go to pay the benefits of today's retirees. Under privatization, however, today's workers must also fund their own accounts.

The result of privatization is that generations of workers end up paying twice – once to pay the benefits that have already been earned by current retirees, and then again to fund their own benefits, whether through borrowing, tax increases, cuts in future benefits, or some combination. A study conducted for the National Committee in 1997 concluded that every single generation living at the time of privatization would end up worse off financially than if nothing at all had been done to strengthen Social Security. More recent projections by other organizations, including the Congressional Budget Office, have reached similar conclusions.

The non-partisan Center on Budget and Policy Priorities has estimated that President Bush's private account proposal would cost an additional $5 trillion in new borrowing in the first 20 years alone. Our current public debt – which is the accumulation of all our nation's borrowing until this point in history – stands at $4.5 trillion. This single proposal, therefore, would double the debt we have accumulated throughout this nation's history in only two decades and require trillions of dollars of additional borrowing in future years. This ten trillion dollars in federal borrowing comes to $34,000 of debt for every man, woman and child in America . A child born today would still be repaying the debt well into middle age.

The impact of trillions of dollars in additional borrowing on financial markets is unclear, with miscalculation potentially resulting in catastrophic consequences. Acceptance of the additional borrowing requires lenders to rely on assurances by current legislators that their successors 50 years in the future will follow through on the dramatic benefit cuts privatization plans will require.

The magnitude of the cost of private accounts is so great that the dramatically larger borrowing must be accompanied by cuts in benefits. These cuts reduce benefits above and beyond any changes needed to restore Social Security's solvency. Thus, the President's private account plan not only imposes substantial middle-class benefit cuts and massive new borrowing, it subjects those people who opt for private accounts to a “retirement tax” in the form of additional reductions in their benefits. For e very dollar a person transfers into his private account, he must pay back that dollar upon retirement out of his Social Security benefit – plus 3 percent interest above inflation , regardless of the actual balance in his account. Even a low-inflation environment like today's still generates about 3 percent inflation, so in order to come out ahead, accounts today would have to earn over 6 percent. Economists project that over time, this so-called “clawback” or “offset” of benefits will reduce the Social Security benefit by almost half. When the two types of benefit cuts required by the President's plan are combined, they effectively phase-out Social Security benefits for all but the lowest-income workers over time.

To paraphrase Arthur Levitt, former Chairman of the SEC, from a recent editorial:

“Borrowing against one's Social Security to invest in the markets is a risky strategy that would only make sense for certain high net-worth investors who can afford to lose their entire investment. F or the majority of workers who make less than $50,000 a year, private accounts are not a good investment not just because the odds of coming out behind are high, but also because these investors very likely may have nothing to fall back on if they lose that money .”

Privatization places the risks of achieving an adequate retirement income entirely on the individual. However, markets go up and markets go down, and woe to the person who must retire in a declining market. Any system based on private accounts will necessarily place a tremendous burden of “market timing” on future retirees. Looking at markets that are averaged out over the long-term masks the dramatic fluctuations accounts experience on a daily basis. Moreover, requiring a person to annuitize his or her private account balances adds another unpredictable variable – interest rates at the time of annuitization – to an already complex calculation. As a result, workers with exactly the same salary histories would inevitably be subject to dramatically different incomes from their private accounts based entirely on their date of retirement.

The last issue I would bring to the Committee's attention is the impact of private accounts on current retirees. Many proponents of private accounts seem to believe that seniors are mostly motivated by self-interest, and, if they can simply be convinced that their own checks are not at risk, they would sit this battle out.

In my conversations with seniors, I find two schools of thought. First, there are a number of seniors who do not believe the Administration's assurances that they would not be impacted by private accounts. These seniors look at the long-term impact of the required borrowing and reach the conclusion that even if they are “held harmless” initially, carrying that amount of debt simply is not sustainable over time. They believe that, once budgetary pressures build high enough, budget cutters will necessarily look for deeper cuts in programs such as Social Security, Medicare and Medicaid. The current budget debate in Congress only serves to confirm their suspicions. Few seniors have other sources of income, so any reductions in these programs would have a dramatic impact on them.

But even those who believe they will be protected are not heading for the sidelines. That is because they truly believe in Social Security – in its guaranteed benefits, in its progressivity, in its insurance elements. And they believe in Social Security so passionately, they want to preserve it for their children and grandchildren. I have seen this passion to protect Social Security at every town hall meeting in which I have participated. Senior's opposition to privatization is not dissipating – if anything, it is growing stronger.

Private accounts that replace Social Security's guaranteed benefits do not supplement Social Security, they undermine it. The more people realize the trade-offs required to restructure Social Security – the additional risk, the substantial middle-class benefits cuts, and the massive new federal borrowing – the more their support for privatization drops. Through their opposition, the American people are stating loudly and clearly that they prefer to strengthen the current system rather than entrusting their retirement security to the uncertainties of the investment markets. Because of this, Congress should renounce replacing guaranteed Social Security benefits with risky investment accounts, burdening middle-class Americans with major cuts in Social Security benefits, and saddling all Americans with massive new federal debt.

The National Committee is a nonprofit, nonpartisan organization that acts in the interests of its membership through advocacy, education, services, grassroots efforts and the leadership of the board of directors and professional staff. The work of the National Committee is directed toward developing a secure retirement for all Americans.