New Directions in Retirement Income: Social Security, Pensions and Personal Savings

New Directions in Retirement Income: Social Security, Pensions and Personal Savings

Testimony by Commissioner of Social Security, Kenneth S. Apfel before the Senate Committee on Finance

July 22, 1998

Opening Remarks

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 security.

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 program.

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 growth.

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.

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:

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 Security program.

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 Moines.

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 questions.

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 can offer.

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 their program.

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:

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 with it.

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 personal income.

Other Administration Statements

Save Social Security First (article by Gene Sperling)

Secretary Robert E. Rubin testimony on Social Security before the Senate Finance Committee

White House Conference on Social Security: Press Briefing by Gene Sperling

Deputy Secretary Lawrence H. Summers testimony on Social Security before the Senate Finance Committee

Clinton Has Done His Part (article by Gene Sperling)

Remarks by Treasury Deputy Secretary Lawrence H. Summers before the Senate Budget Committee Task Force on Social Security

Assistant Secretary David W. Wilcox testimony on Social Security before the Ways and Means Committee

New Directions in Retirement Income: Social Security, Pensions and Personal Savings

Testimony of Kenneth S. Apfel, Commissioner of Social Security Concerning the Challenges Facing the Social Security Administration

Testimony Before House Ways and Means Subcommittee on Social Security — 2/26/98

Testimony Before Senate Budget Committee Task Force on Social Security - 2/24/98

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