New Directions in Retirement Income: Social Security, Pensions and Personal
Testimony by Commissioner of Social Security, Kenneth S. Apfel before
the Senate Committee on Finance
July 22, 1998
Thank you for the invitation to testify on retirement security policy, including
Social Security, pensions and private savings. All three are critical to the
economic well being of our nation's future retirees. This hearing is particularly
well timed, since, as you know, leaders from across the country gathered in
the first week of June here in Washington for the first National Summit on Retirement
Savings. Established by the bipartisan Savings Are Vital to Everyone's Retirement
Act (SAVER) of 1997, the meeting was the first of three, with additional summits
scheduled for 2001 and 2005.
The SAVER summit presented all of us with an opportunity to reflect fully
on the fact that, if we want to maintain a reasonable standard of living for
our elderly, we need to take a broader national look at the entire area of retirement
income security. While Social Security is a vital element, it is not the only
element. I believe that any serious consideration of Social Security reform
must take place within the context of all of the elements of retirement income
Today I will discuss with you the importance of the multi-tiered structure
of retirement income and the demographic pressures that are driving the need
for Social Security reform. I will also discuss the process by which the President
plans to restore Social Security's long-term solvency. Finally, I will discuss
with you the principles for reform to which the President is committed.
Social Security has evolved almost continuously since its inception in response
to the changing needs of the American people. Today, Social Security faces serious
long-term challenges, chiefly due to demographic trends like the aging of the
baby-boomers and longer life expectancies. Such developments mark the beginning
of yet another stage in Social Security's development as a social insurance
Status of the Trust Funds
I'd like to take a moment to report the current status of the Social Security
Old Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds.
As you know, the 1998 Trustees Report was released on April 28. The OASDI Trustees
monitor the financial health of Social Security -- our Nation's most successful
family protection program.
The 1998 Trustees Report tells us that 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. In 1997, the Social Security trust funds
took in $457.7 billion and paid out $369.1 billion.
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. Each of these three
dates is slightly further away than estimated in the 1997 Report, reflecting
the positive impact of low unemployment, low inflation, and robust economic
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.
Even with projected further increases in the cost of the OASDI program throughout
the long-range period, the tax income under present law would still be enough
to cover about two-thirds of benefit obligations in 2072. And I want to stress
that the President is committed to seeing to it that these scenarios never develop.
The Trustees put it this way:
It is important to address the financing of both the OASI and DI programs
soon to allow time for phasing in any necessary changes and for workers to adjust
their retirement plans to take account of those changes. The importance of this
is emphasized by the high priority that the President and the Congress are giving
to the resolution of the program's financing problems. ... The impact of the
changes in the current program will be minimized if they are enacted soon.
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 1/2 more years. Today, a 65-year old
could expect to live about 17 1/2 more years and by 2070, life expectancy
at age 65 is projected to be an additional 20 1/2 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. The elderly population is
expected to reach 75 million by 2050, and will represent 20% of the population.
- 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.
The Structure of Retirement Security
Social Security has worked well over the past 60 years, arguably better than
any other social insurance program in the world. In 1996, 11 percent of the
nation's population over age 65 was poor; without their Social Security benefits
an additional 40 percent would have been poor, bringing the total percent of
elderly in poverty to 50 percent without Social Security. Still, Social Security
was never intended to be the only source of retirement income. Social Security
was conceived as only one, albeit important, element of retirement income, along
with employer pensions and private savings.
Developing an overall plan for retirement has always been desirable. In the
process of the national debate on Social Security reform, we need to be sure
that we look carefully at what needs to be done to strengthen employer provided
pensions and private savings as well as our defined benefits program. Now, with
Social Security reform at the forefront of domestic policy discussions, paying
more attention to the other two legs of the retirement-income stool has become
critical as we look at retirement security for the future.
Role of Social Security
As you know, Mr. Chairman, Social Security is America's most successful domestic
program. It is hard to overstate the importance of Social Security in improving
the lives of Americans. Today, Social Security provides benefits to 44 million
men, women and children. In 1997, an estimated 145 million people worked in
jobs covered by the OASDI program and paid OASDI 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 antipoverty program in history. It is
the major source of income for 66 percent of beneficiaries age 65 and older,
and it contributes 90 percent or more of income for about 33 percent. As previously
noted, about 40 percent of beneficiaries aged 65 or older are kept out of poverty
by their monthly Social Security benefits.
And Social Security is much more than a retirement program. It provides valuable
insurance protection in the event of death or disability. This protection is
extremely important, especially for young families struggling to afford adequate
private insurance policies. Almost one in six of today's twenty year olds will
die before retirement, and nearly thirty-percent will become disabled. Social
Security benefits for a widow and two young children average about $1,500 a
month. For a disabled worker and family, the average is about $1,200 a month.
While some of these families may also have employer-provided insurance or privately
purchased insurance protection-many more rely heavily on the safety net that
Social Security provides. Mr. Chairman, I want to take this opportunity to clear
up a misconception that I have come across time and again as I speak to people
about the future of Social Security-Many Americans do not seem to understand
that Social Security is an intergenerational trust. Many believe that their
Social Security contributions are held in interest-bearing accounts earmarked
for their own future retirement needs-but, as you know, this is not the case.
Today's Social Security contributions mostly fund benefits for today's retired
workers. This intergenerational trust is a fundamental element of the Social
Role of Pensions and Savings
In 1996, 40 percent of the income of the aged came from Social Security. As
for the rest, 19 percent came from employer pensions, 18 percent came from asset
income (including savings), and 20 percent from earnings.
The story is even more enlightening when one looks at the proportion of income
received among different income groups. Among the aged with the lowest incomes
(those whose income falls within the lowest quintile), Social Security makes
up about 81 percent of their income. In contrast, Social Security provides only
21 percent of the income of the aged with the highest incomes (those in the
highest quintile), with 21 percent of their income coming from pensions, 25
percent from personal assets, and nearly 32 percent from earnings.
When we look at the pension element of retirement income, we see that it is
stronger than it used to be--over the past 30 years, receipt of employer pensions
has almost doubled. But all evidence suggests that the pension leg needs to
be made even stronger. Less than half of all individuals aged 65 and older received
pensions in 1994.
Also, the pension leg needs to be made stronger because pension coverage has
been stagnant in recent years. As we learned at the SAVER summit, 56 percent
of full-time civilian wage and salary workers participate in some kind of pension
plan at work, but 44 percent do not. Pension coverage is particularly low among
people who work for small employers. Eighteen percent of full-time employees
who work for private organizations employing fewer than 25 workers participate
in pension or retirement savings at work, compared to 62 percent of those in
private organizations that employ 100 or more people.
Savings is the third element of retirement income. The savings leg appears
to have become weaker over time. Despite the obvious importance of personal
savings, the savings rate has declined since World War II. According to the
Commerce Department1, it has fallen from 9.2 percent
of disposable personal income in 1946 to 3.8 percent in 1997. Strengthening
the savings leg is an important goal for all Americans, but we are particularly
concerned about savings in the bottom half of income levels.
In 1996, only 7 1/2 percent of aggregate pension income went to aged individuals
in the bottom half of the income distribution. Only 6 1/2 percent of aggregate
savings was held by aged individuals in the bottom half of the income distribution.
When I look at these facts, it seems clear that many of these same aged individuals,
the ones in the bottom half of the income distribution, are sitting on stools
with only one leg-their Social Security.
Do I believe we need to find ways to improve our personal savings rates? Absolutely!
To improve personal savings rates, Americans would have to alter their spending
behavior, which may be particularly difficult for lower-income people. We need
to look carefully at the ideas that flow from this past SAVER summit, as well
as the two scheduled for the future, to find ways to help people in the lower
half of the income distribution save for their retirement.
President Clinton is committed to ensuring that Americans can look forward
to secure retirements. He proposed and signed the Retirement Protection Act,
which ensured the soundness of the defined benefit system and the Pension Benefit
Guaranty Corporation, in 1994. He supported and signed the Small Business Jobs
Protection act, which allowed simplified pension plans for small businesses
in 1996. In 1997, he signed the Taxpayer Relief Act that raised income limits
on deductible IRAs and created the Roth IRA. And in signing the SAVER Act, he
has made it clear that more needs to be done.
President's Process for Social Security Reform
This Committee's close scrutiny of the stability of each of the components
of retirement income security serves to underscore the importance of Social
Security and of Social Security reform. President Clinton is strongly committed
to strengthening the Social Security system. He is using this year to raise
the visibility of Social Security reform. He has challenged every American to
attend a conference or forum on the issue--or to organize and host one if none
are planned in the community. And Americans are responding. This national call
to action is spreading to every corner of the country. Americans have participated
in Americans Discuss Social Security (ADSS) forums in Boston, Minneapolis, Tallahassee,
Winston-Salem, Albuquerque, Austin, Buffalo, Seattle, Denver, Phoenix and Des
The President is actively involved in these nonpartisan discussions. On April
7, he participated in a Social Security forum in Kansas City, organized by AARP
and the Concord Coalition. He participated in a 10-city videoconference to kick
off the ADSS events organized by the Pew Charitable Trust. The Vice President
was in Providence, Rhode Island, on July 1, and President Clinton will be in
Albuquerque, New Mexico on July 27, for conferences on Social Security reform
convened jointly by the Concord Coalition and the AARP. Many Administration
officials, including myself, have participated in these events, as have many
Members of Congress of both parties.
In December of this year, the President will host a bipartisan White House
conference on Social Security as a culmination of the various conferences, forums
and discussions held throughout the year. The purpose of the White House conference
is to bring together the lessons learned from the national dialogue.
Following the White House conference in December, the President and his team
will begin bipartisan negotiations with congressional leaders in early 1999.
Preserving the Successes of the Program
Clearly, this national dialogue has got to be about how to address the challenges
facing Social Security in the future, but it must also be about how we preserve
and protect the accomplishments of the program that has served this nation so
well for over sixty years. During this national discussion, we would do well
to question whether changes to the program preserve and protect these important
accomplishments: whether Social Security continues to be a benefit people can
count on; whether the elderly, disabled, and survivors of workers are protected
from financial hardship; whether the program has low administrative costs; whether
the program is universal and fair; and whether the program is maintained as
a basic public trust. The dialogue about how we ensure the solvency of Social
Security in the 21st century will need to include these critically important
SSA will play a vital role in this dialogue by helping to make understandable
the elements that will lead to long-range solvency. We have made strengthening
the public's understanding of the Social Security programs one of our five strategic
goals in our recently published Agency Strategic Plan. Through a comprehensive
education campaign, Americans will better understand the value of Social Security,
while recognizing that its benefits are intended to supplement savings, investments,
and private pensions in planning for a comfortable retirement.
Public Participation Critical
As President Clinton has said, we must inform Americans about Social Security
and the issues confronting it. The President's proposal to conduct regional
forums to raise public awareness of the problems facing Social Security acknowledges
an important truth: the broad-based participation of the American public is
critical to achieving a resolution of the long-term solvency issue. An accurate
understanding of the facts is needed as the foundation for public discussion.
We have been focusing our efforts on educating the public about the Social Security
programs to put them in the best possible position to be able to enter into
public debate about options for the future of Social Security.
I am personally committed to getting the message to as many Americans as possible.
I have criss-crossed this nation to participate in numerous forums and discussions
with the public and with members of Congress. I have also made sure that members
of my top staff were actively engaged in many of the forums around the country.
I want to be sure that all Americans understand that there is a debate going
on and that each and every one of us needs to be involved.
What do I believe Americans should understand about our Social Security program?
I want all Americans to understand the economic facts about Social Security.
Presently, the Social Security Trust Fund takes in more money than it spends,
creating reserves in the Trust Fund. These reserves were designed to help pay
for the future growth in the benefit rolls in the early part of the next century.
I want all Americans to understand what Social Security has meant to older
Americans. The plight of older Americans used to be a national disgrace. Now,
Social Security provides them with a solid measure of economic security even
if they outlive the actuarial tables . . . and their savings. It also provides
many of them, and their children, the advantages that only living independently
I want all Americans to know that Social Security is more than a retirement
program. I want younger people to know that not only will Social Security be
there for them in the future, but it is there for them NOW in the form of disability
and survivor's protection.
I want all Americans to know that Social Security was never intended to provide
for all of a worker's retirement income needs. Pensions and personal savings
have always been and should always be part of a sound financial retirement plan.
I want all Americans to understand that the changing demographics of the country
are the primary driver of the need for change. There is an unalterable dynamic
at work: by 2030, there will be nearly twice as many older Americans as there
are today, putting great strains on our retirement system.
Finally, I want all Americans to understand one important fact: There are
tradeoffs that must be accepted for each approach to achieving solvency. These
are complex issues. The advantages and disadvantages of each proposal will have
to be examined and discussed. Let me remind you again that the purpose of public
education is to enable members of our society to participate in an earnest and
informed dialogue about this most important issue. We need to hear from Americans
on this issue. Their views are clearly important because Social Security is
Principles to be Considered in Reform
President Clinton has indicated that he will judge any reform proposal by
its ability to meet the following five principles:
- Reform should strengthen and protect Social Security for the 21st Century.
Proposals should not abandon the basic program that has been one of our nation's
- Reform should maintain the universality and fairness of Social Security.
For half a century, Social Security has been a progressive guarantee for citizens.
It should be kept this way.
- Social Security must provide a benefit people can depend on. Regardless
of economic ups and downs, Social Security must provide a solid and dependable
foundation of retirement security.
- Social Security must continue to provide financial security for disabled
and low-income beneficiaries. We must never forget the one out of three Social
Security recipients who are not retirees.
- Social Security must maintain America's fiscal discipline. Any budget surpluses
should be reserved pending Social Security reform.
Throughout the program's history, one feature of Social Security has never
been altered: the fundamental commitment to offer a basic foundation of protection
that ensures economic security for American families. Social Security has fulfilled
this commitment well over the past six decades. The principles of universality,
progressivity, dependability, financial security and fiscal discipline form
an important framework for evaluating potential changes to the program.
I strongly support the President's initiatives to restore the Social Security
program to long-term fiscal health. I appreciate having the opportunity to be
a part of this full and open public debate. I would like to emphasize, however,
that as we begin to seriously address these issues, we must continue to preserve
fiscal discipline. For the sake of our children and future generations, we must
not jeopardize the progress we have made in balancing the budget.
This Administration and Congress have demonstrated that they are capable of
coming together in a bipartisan way to fashion solutions important to this nation.
Today we have an historic opportunity to SAVE SOCIAL SECURITY. Now is the time--when
the economy is strong, the budget is balanced--to begin to address the economic
security for future generations of retirees. Now is the time--when the program
is not in crisis--to face the long-range solvency problem and to begin to deal
As the country considers changes in our national retirement income policies,
there is clearly more at stake than "just" Social Security. Social Security
is the most universal and dependable portion of the retirement income that workers
can rely on, but we need to remember that pensions and savings are also important
sources of retirement income. Changes made to Social Security can affect these
other sources of retirement income as well. It's important to consider what
the effects of Social Security reform on these other sources might be.
This Administration and Congress have demonstrated that they are capable of
coming together in a bipartisan way to fashion solutions important to this nation.
In addition to Social Security reform, finding ways to increase overall pension
coverage among workers and finding ways to encourage workers to save more for
retirement can make us all better off in our "golden years." I look forward
to working closely with the members of this Committee on this important endeavor.
1 This most common measure of saving is part of
the Commerce Department's National Income and Product Accounts data. It is calculated
by subtracting personal consumption expenditures, taxes, including payroll taxes,
consumer interest payments and personal transfer payments to foreigners from