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 three pillars.

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 society.

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 that.

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 crucial imperative.

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.

III. Pensions

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 include:

• 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 in IRAs;
• 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 business.

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 Savings Bonds;
• 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 year.

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 fiscal discipline.

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.