FROM THE OFFICE OF PUBLIC AFFAIRS
Text as Prepared for Delivery
LAWRENCE H. SUMMERS, DEPUTY SECRETARY OF THE TREASURY
July 22, 1998
SENATE FINANCE COMMITTEE
Mr. Chairman, my colleagues and I appreciate the opportunity to
meet with you today to discuss new directions in retirement security policy
-- an issue of critical importance to every American and to the future of our
economy. One of the greatest challenges that we as a nation face as we enter
the 21st century is ensuring the financial security of our population as it
ages. Let me applaud this Committee for addressing and focusing attention on
this question at this time.
Let me focus today on the key challenge of helping working Americans prepare
themselves so they can retire in good financial health. Given the salience of
this issue, I will devote the bulk of my time to discussing the President's
approach to the reform of Social Security. But I will end with some remarks
on the other core elements of retirement savings pensions, and private savings.
I. The President's Approach
Let me start by articulating the case for the President's policy of reserving
the surplus until Social Security is fixed. Its basic premise is this: the economy
is remarkably strong. Our budget is the healthiest it has been for a generation.
But we may not always be in such a strong position. And we will certainly never
be in a stronger position to face the major challenge we have ahead of us --
the challenge of an aging society.
When the Social Security Act was passed in 1935, American life expectancy was
62 years. Today, I am told that a married couple of 65 year-olds has an even
chance of seeing a survivor pass the age of 90. These improvements in life expectancy,
and a fall in birth rates, have put us on a path of decline in the number of
American workers for every Social Security beneficiary. In 1960, the ratio was
5.1 to 1. Today it is 3.3 to 1. In a little more than 30 years' time, when there
will be twice as many elderly as there are today, the ratio will be just 2 to
1, and falling. There is a time to reap and a time to sow, and now is a time
to sow. Now, at a time when our economy is strong and we face a critical challenge
ahead -- that is a time to prepare for the challenge we face.
The case for reserving the surplus until Social Security is fixed rests on
First, it is a fiscal imperative. By acting to save Social Security first,
we can ensure the long-run health of the budget. We can avoid a situation where
we find ourselves facing the challenge of an aging society and its burden on
the budget -- at the same time as shouldering the burden of servicing large
amounts of debt. It is a fiscal imperative to assure the long-run solvency of
the Social Security system now, when our economy is strong.
The second pillar is the broad economic case that applies to America as a nation.
In the end, what you earn depends on what you invest. We as a nation have been
plagued for a long time by a national savings rate that is too low. In 1992,
our net national savings rate was just 3.1 percent. With the progress that we
have made in reducing the federal deficit in the past five and a half years,
the savings rate last year was 6.5 percent, nearly twice what it was in 1992.
But that savings rate is still only a little more than half what we achieved
in the 1950s and 1960s, when the economy grew most rapidly, and it still ranks
America 19th of 26 industrialized countries.
A low national savings rate is a substantial problem because the only way that
we can have investment in America, financed by Americans, is by increasing our
national savings rate. As Secretary Rubin has already noted, as long as the
national savings rate is too low, we face an unfortunate choice between reducing
investments, on the one hand, and, on the other, relying on foreign capital
to finance that investment, with the trade deficits that are associated with
that borrowing. That is why it is imperative for us as a country to increase
our national savings rate.
By preserving the surpluses until the Social Security system's solvency has
been established on a long-term basis, we act to increase national savings.
This step maximizes the growth potential of our economy which is important to
help the economy be as strong as it can be to face the challenge of an aging
Third, it is a national imperative to maintain Social Security as a basic public
trust. Sixteen percent of our seniors -- one in six -- receive all of their
income from Social Security. The bottom two-thirds of the aged population receive
half of their total income from Social Security. Without Social Security, nearly
50 percent of aged Americans would be in poverty. That makes it imperative that
we preserve as a basic public trust America's most effective public program
-- for the next generation and the next generation and the generation after
Social Security is effective, in large part because it is efficient. More than
99 cents are paid in benefits by Social Security for every dollar that is paid
in by workers and employers. Few, if any, private systems -- anywhere in the
world -- come close to matching this efficiency. One recent study1
estimates that during the pay-out phase of privately-provided annuities the
loss to overhead alone averages more than 8 cents in the dollar. Another study,
of life insurance firms, by the American Council on Life Insurance found that
on a per-dollar basis, expenses totaled 11 percent of annual income, or 16 percent
of contributions, of which nearly half went in selling costs, or agents' commissions.2
Social Security, quite simply, is the most efficient insurance program in existence.
Assuring the maintenance of this system for the next generation has to be a
II. Reform Issues for Debate
Mr Chairman, a vigorous national debate is now well under way on how best to
rise to the challenge of strengthening Social Security -- a debate that will
culminate in December with the President's White House Conference. There is
a great deal still to decide -- and there are a great many issues still to be
discussed. I will not prejudge any of those discussions today, but I would like
to discuss some of the economic questions that can and must be asked of any
serious proposal for reform.
The first of these is whether the reformed system continues to assure an adequate
stream of benefits for future retirees. Americans need a benefit they can count
on, a fail-safe source of income, regardless of economic fluctuations and regardless
of their generation.
For example, various proposals call for investing Social Security funds in
the stock market. This would potentially bring higher returns to workers but
it would also bring higher risks. A careful balancing of risk and return would
be required to assure that Americans' benefits are secure. We owe all our sons,
our daughters and our grandchildren a good return. But we also owe them the
guaranteed floor of protection that the program has been providing for all American
workers and their families since 1940.
A second question will be whether the reformed system continues to provide
financial security for survivors and the disabled. Unfavorable comparisons are
often made between the returns on contributions offered by Social Security and
the returns offered by the market. But we must always remember that the Social
Security system is more than just a retirement system; it also offers important
disability and survivors insurance. In fact, one in three Social Security recipients
is not a retiree. Any reform must ensure that Social Security is in a position
to continue playing these other roles in the future.
A third question would be whether the proposed reform adequately accounts for
the need to continue payments to today's retirees. It is important to remember
that Social Security is not advance funded. If, as some have suggested, we were
to move toward such a system, in which contributions of current workers are
fully saved in order to be available the workers reach retirement age, then
we would have to figure out some new way to pay for the Social Security benefits
paid to current retirees. This "transition problem" must be taken fully into
account when evaluating any proposals for comprehensive reform.
Fourth, we will need to ask whether the reformed system maintains America's
hard-won fiscal discipline. By building up reserves for the years ahead, the
Social Security Trust Fund is making an enormous contribution to our future
by increasing the pool of national saving. In choosing the way forward we will
need to be consistent with that strong record.
As we proceed with this vital debate there will be many other issues to be
discussed -- and many other questions to be considered. But I hope we will all
be able to agree on the importance of maintaining Social Security as a basic
public trust for future generations of Americans. And I hope we will all be
able to agree that until we have met that obligation to our children, we should
not risk the fiscal progress that we as a country have made. Today virtually
every working man and woman in America is covered by Social Security. Mr. Chairman,
let us all agree that however we reform Social Security our children will be
able to count on Social Security as their parents and grandparents did.
Although much of the attention on retirement savings will focus on Social Security,
we must not forget the importance of the other two legs of the retirement stool:
pensions and private savings. Let me talk briefly about the state of pension
coverage for American workers and the steps that this Administration has taken
to encourage more retirement plan coverage for workers.
At the present time there are shortfalls on both the supply and the demand
side in the private pension market. Half of all American workers are not covered
by a retirement plan. And one reason that so many employers fail to offer such
plans is lack of employee demand. Even among workers whose employers offer plans,
a surprising number fail to take advantage of the retirement savings benefits
available to them. Nearly 40 percent of employees earning less than $50,000
a year who are eligible to save through a 401(k) plan choose not to participate
in the program.
One key to remedying this situation could be increased education about the
importance of retirement saving. For example, a recent study found that education
provided in the workplace tended to increase worker participation in 401(k)
plans. The job here will not be easy. The same study concluded that newsletters,
other written material, and even occasional seminars were not particularly effective
in boosting employee participation in 401(k)s. But frequent, face-to-face contact
with employees was found to boost participation rates. Clearly, the issue of
retirement saving is one of the more difficult and complex areas of personal
finance. It could be that only a sustained effort at employee education is likely
to be successful.
In the past several years Congress and the Administration have taken a number
of steps to encourage employer-provided pension coverage. These efforts have
focussed largely on three areas: expanding the number of people eligible for
employer-provided pensions, simplifying pension laws for businesses, and making
pensions more secure and portable for workers.
The SIMPLE, a new retirement savings plan introduced last year as a low-cost
option for small business, is proving popular with small business owners and
their employees. We have also changed the law to allow tax-exempt organizations
to sponsor 401(k) plans.
To simplify existing pension rules we have repealed measures that had restricted
the ability of family members of small business owners to save for their own
retirement and have enacted the upcoming elimination of the overall contribution
limits for employees who participate in both defined benefit and defined contribution
plans. Beginning in 1999, employers will also be exempted from nondiscrimination
testing for 401(k) plans if they provide specified contributions to employees
under a special safe harbor arrangement.
Finally, we have enacted reforms to make pensions more secure and portable
for workers, including the 1994 Retirement Protection Act, which has provided
protection for the benefits of more than 40 million American workers and retirees.
The President's FY 1999 budget proposes further expansions of programs to encourage
retirement savings, particularly for small businesses and for moderate- and
lower-income workers not currently covered by employer-sponsored plans. These
- encouraging payroll deduction -- or "direct deposit" -- IRAs by allowing
employers to offer workers the opportunity to make IRA contributions on a
pre-tax basis through payroll deductions. The convenience of this arrangement,
as well as peer-group reinforcement, should encourage further participation
- providing a new three-year tax credit for the administrative and retirement-education
expenses of any small business that sets up a new retirement plan or payroll
deduction IRA arrangement;
- offering a new option for a simpler-to-administer pension plan for small
IV. Private Savings
With the economy performing so well and the elder members of the Baby Boom
generation coming within reach of retirement and hence into their peak asset-accumulation
years one might expect a high personal saving rate for the nation. But this
is anything but the case. In fact, despite the rise in national saving, the
personal saving rate hit a 50-year low last year, and there is clearly a risk
that many Americans may not be doing enough to prepare.
This Administration is committed to providing our aging population, and future
generations as well, with the tools for a financially secure retirement. Already,
Congress and the Administration have taken a number of steps to increase the
level of personal saving:
- with the cooperation and leadership of members of this committee, we have
expanded eligibility for IRAs and created a new vehicle to encourage additional
saving: the Roth IRA;
- we have added inflation indexed bonds to the roster of government-issued
securities. These instruments provide savers with guaranteed protection against
the corrosive effect of inflation on savings. Everyone who saw their nest
egg severely diminished during the inflation of the 1970s can attest to the
importance of this new savings vehicle. We are extremely pleased with the
reception they have been accorded;
- by changing the EE bond to allow holders to receive a higher rate of return
and providing monthly accrual of interest, we have taken steps to make Savings
Bonds more attractive. And earlier this month, we introduced inflation-indexed
- finally, we have looked to harness new technology in making information
about the savings bond program more readily available to all Americans. The
Bureau of Public Debt, the agency at Treasury that issues Savings Bonds, will
begin selling Savings Bonds on its home page on the World Wide Web later this
V. Concluding Remarks
Mr. Chairman, as Secretary Rubin mentioned earlier, any effort to increase
our national savings rate must rest on three core principles: maintaining fiscal
discipline; protecting the progressive structure of the tax system and strengthening
Social Security. By ensuring that the surplus is reserved until Social Security
is safe, we can help ensure that the Social Security system of the 21st century
continues to protect generations of Americans and promote both our economy and
our values. And we can help ensure that it continues to promote our hard-earned
Mr. Chairman, while we may debate the policies by which we will strengthen
the pieces of the three-legged stool of retirement savings, there is no questioning
the importance of strengthening all three of those legs. I look forward to working
with the members of this committee and with others in Congress as we take on
this critical challenge. Thank you. I would now welcome any questions.
1Mitchell, Poterba and Warshansky et al, NBER 1997
2Cited in Mitchell, NBER, 1996