Testimony for the President's Commission to Strengthen Social Security

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Testimony for the President's Commission to Strengthen Social Security

TREA Senior Citizens League
Testimony on Strengthening Social Security
for the

President's Commission to Strengthen Social Security

August 15, 2001

Introduction:
The TREA Senior Citizens League (TSCL) appreciates this opportunity to express our views to this Commission. TSCL is a 501(c)(4) nonprofit, social welfare organization and civic league, charged with the mission to defend and protect its members' earned retirement benefits. Currently, TSCL has approximately 1.2 million members and supporters, nearly all of whom are over the age of 60. Approximately 800,000 of our members are "Notch babies", born between 1917 and 1926, who were impacted by Congress' attempts to reform Social Security in 1977.

TSCL has the unique vantage point of being one of the last organizations still speaking out on behalf of those who believe they were unfairly disadvantaged by the 1977 legislation, and we believe we can provide some cautionary advice on how to prevent a new "Notch" from occurring.

The Notch Controversy:
TSCL is well aware that there are major disagreements among Congressional representatives and others over whether there really is a "Notch" problem. TSCL is also aware of the 1994 report by the Commission on the Social Security "Notch" Issue that concluded, "...the "Notch" is a necessary and appropriate result of the 1977 legislation which was designed to substantially reduce the growth of future benefit costs and to restore fiscal balance to Social Security and no legislative remedy is in order."

While TSCL, and its 800,000 members and supporters who consider themselves "Notch Victims" vigorously dispute that conclusion, and do believe there Congress should consider a legislative remedy, that is not the purpose of this testimony. What TSCL does want to address, is an appendix to the 1994 Commission's report, written by a former staff Director of the Social Security Sub-Committee of the House Ways & Means Committee and a former Staff Member of the Senate Finance Committee. Both the Commission's report and this appendix can be found on the Internet at the following site: http://www.ssa.gov/history/notchbase.html. This document provides a complete summation of the legislative history of the 1972 and 1977 Social Security reforms that inadvertently created the Notch. We would like to highlight a few of their pertinent conclusions:

A disparity in Social Security payments definitely exists for those born after 1916 (those who began to be affected by the 1977 change in law), and that this disparity extends through 1926 (clearly documented in a chart titled Old vs. New Law - Benefit Differentials for Workers with Average Earnings Retiring at Age 65);
Part of this disparity was a result of unanticipated conditions of double digit inflation; and
Most importantly - the notch was not an inevitable result of the policy choice made in 1977, but could have been prevented or lessened, had original language in the Ford Administration bill submitted in 1976 been retained.

The report concludes "...Apart from the apparently overlooked addendum to the Myers testimony, we have found no indication of any effort at that time to bring up the notch issue for close Congressional scrutiny." The report further concludes "It is certainly possible that differentials of this magnitude, [referring to the Benefit Differential chart] if they had been known in 1977, would have raised questions about the appropriateness of making a sharp break between the old law rules for workers born before 1917 and the new law rules for workers born in and after 1917."

Inexplicably this document was never even mentioned in the final Commission report, and neither was any weight given to the very salient arguments that the "Notch" does exist, but could have been prevented had Congress exercised a bit more foresight.

Esteemed Members of this Commission - we seek to bring this to your attention in the hopes of preventing a potential new "Notch" situation, particularly since any potential changes in current Social Security benefits may further disadvantage our Notch members. We strongly urge caution as your Commission sifts through recommendations to strengthen and reform Social Security. It is our fervent desire that your Commission strive for solutions that will impact minimally on current recipients, and that will not inadvertently target any one age group.

TSCL's Recommendations for Strengthening Social Security:
We are not experts in all of the fine details that need to be considered in crafting Social Security reforms. (And we dare say that after the 1977 reforms, it is apparent that even the "experts" cannot predict all of the unanticipated outcomes of reform.) However, after carefully reviewing the legislative history of both the 1972 and the 1977 reform attempts, TSCL has embraced a number of guiding principles for future reform.

Reform measures must be phased in gradually.

One of the problems with the 1977 reform was an abrupt transition to a new benefit formula that cut benefits too sharply in comparison with benefits calculated for those born a year earlier. The 1975 report of the Social Security Trustees Report had predicted that the Social Security Trust Funds would be depleted by as early as 1980, but Congress grid-locked for two years. By the time Congress finally enacted legislation in 1977, it was running out of time. Although Congress believed it was "protecting the benefit rights of people approaching retirement and whose retirement plans have taken Social Security benefits into account,"1 the transition to the new benefit formula took place too rapidly. The new benefit formula rules applied to 82% of retirees by the third year (1981).2 Affected retirees had little or no time to save the additional funds needed to make up for the shortfall to their benefits.

Clearly we cannot afford to wait until deficit conditions again occur in the Trust Fund. In order not to disadvantage one particular group, everyone affected needs to have adequate time to learn about and prepare for changes. Investment accounts require decades to build up adequate cash to enable future longer-lived retirees to live comfortably. We must begin to strengthen the system now.

Reform measures must not be predicated on economic forecasts.

Social Security is more than retirement income alone. It also provides disability, family, and survivor's benefits as well. Therefore, in emphasizing an increase in "rates of return" it is important to consider the return of the full program, including disability, spouse and family benefits, and survivors benefits.

TSCL considers it highly risky for any reform plan to assume that private retirement accounts might return a given amount based on historical stock market performance. No professionally managed mutual fund is allowed to make such claim. Neither should policy makers. In fact, some market analysts predict that large influxes of Social Security money held in private investment accounts could cause market to plunge into a long-term depression as large numbers of Baby Boomers sell their stocks and bonds. A true test of any reform measure would be one that provides economic security under any market condition.

Reform measures should not disadvantage any one group disproportionately.

The cost of reform should be spread as fairly and uniformly as possible. According to the American Academy of Actuaries, no one "fix" alone will solve all of Social Security's financing problems. TSCL has evaluated a number of proposals that have been put forth to improve the solvency of Social Security. Earlier this year and in previous years we surveyed our membership determine what they would favor. Outlined below are the major findings of our most recent survey. Because Social Security is likely to require more than one "fix", respondents were allowed to favor more than one solution.

41% - favor increasing wages subject to Social Security by eliminating the maximum wage cap - 14% oppose.
36% - favor reducing benefits for retirees whose total retirement income exceeds $45,000 per year - 26%oppose.
29% - oppose gradually increasing the retirement age to 70 for full benefits - 24% favor.
53% - oppose personal retirement accounts - only 17% favor.
61% - oppose allowing the government to invest 40% of the Social Security Trust Fund into stocks and other private equities - just 8% favor.

A survey conducted in 1997 found that 55% favor higher payroll taxes.

About 40% felt that the non-trust fund portion of federal budget surplus should be used for debt reduction in order to make it easier to re-borrow, or redeem the special obligation bonds in the Social Security Trust Funds.

TSCL membership is adamantly opposed to proposals that would cut Cost-of-Living Adjustments (COLAs). A majority of members feel that the current COLA does not accurately reflect their current cost of living now. About 88% support using the Consumer Price Index for Elderly Consumers (CPI-E) to determine COLAs rather than using the current CPI which surveys younger Urban Wage Earners and Clerical Workers, CPI-W). In previous surveys 48% say that lower COLAs would necessitate cutting back on essential items like medicine or food. Another 35% say they would have to cut back on non-essential items.

Although the majority of TSCL members are opposed to government investment in the stock market, an approach TSCL has under study is one recently suggested by Allan Sloan, Newsweek's Wall Street editor.

Current law requires that the Social Security Trust Fund may own only securities guaranteed by the federal government. These securities are an asset to the Trust Fund, but they are a claim on the Treasury. If the Trust Fund has to cash in these securities to cover its checks, the government must raise the money by borrowing, raising taxes or cutting other spending.

However, there are perhaps other securities the Trust Fund might be able to purchase and still stay within the letter of the law. Sloan proposed that the Social Security Trust Fund could invest in mortgage securities guaranteed by the Government National Mortgage Association (Ginnie Mae), confirmed by the office of the Treasury Secretary to be a legal investment for the Fund.3 These securities would be backed up by real money actually being paid for mortgages, thus eliminating the Government's need to issue an IOU to itself and then having to cover it by use of taxes. The mortgage payments from American homeowners would put cash into the Social Security system. This would have the additional economic stimulus of promoting home ownership and at the same time guaranteeing that there will be the money to pay future benefits to retirees, survivors and the disabled. Although this proposal would not completely solve Social Security's long-term financial problems, it could buy time and help ease the transition to other more long-term solutions.

Another solution that has been proposed and supported by TSCL in the past as been to direct the investment of surplus Social Security taxes into bank Certificates of Deposit. By keeping the certificates of deposit in amounts that remain within the limits of federal deposit insurance, the government would guarantee the safety of the investment.

The government must be willing to ensure that reforms work as anticipated, and correct those that do not.

Failure to ensure that reforms work as anticipated undermines public confidence in the government and the Social Security system. History shows that government reforms can have unanticipated results. As we discussed at the start of this testimony, the 1977 reforms inadvertently created a disparity in Social Security payments for those born after 1916 - those who began to be affected by the 1977 change in law.

Over the past 19 years there have been many bills to correct the benefit disparities affecting Notch babies. However to date, there has been no resolution, Congressional, or otherwise, to the "Notch" problem. Our members believe Congress should consider a legislative remedy. We respectfully ask that any reform of Social Security re-examine the Notch issue and include a correction of the 1977 reform disparities.

Conclusion:
The TREA Senior Citizens League is fully aware that long term solutions must be crafted within the next few years to address the coming insolvency of Social Security. TSCL is also aware that these reforms should be addressed sooner rather than later as each year that action is delayed, means that less time for transitioning to a new system. Therefore, TSCL applauds President Bush for creating a Commission tasked with the mission of reforming and strengthening Social Security. However, TSCL remains concerned that the Commission may limit itself in examining all possible solutions in favor of focusing only on private accounts. TSCL is further concerned that the Commission might not take the time required to examine all possible ramifications of any solutions it does propose. Our fervent wish is that we avoid any new "Notch" problems as this country moves to a new Social Security system.

The TREA Senior Citizens League would like the opportunity to testify in person before this Commission, as we believe we can provide a special perspective into the consequences of Social Security Reform benefit changes. Our tale is a cautionary one that must be heard by this Commission.

1 "Congressional Intent Concerning The "Notch" Issue: Legislative Background of the 1977 Social Security Amendments," James W. Kelly, Former Staff Director, Subcommittee on Social Security, House Ways and Means Committee, and Joseph R. Humphreys, Former Professional Staff Member, Senate Finance Committee, a paper prepared for The Commission on the Social Security "Notch" Issue, December 31, 1994.
2 Congressional Research Service Issue Brief, "Social Security Notch Debate," David Koitz and Geoffrey Kollmann, Updated February 24, 1995, page 3.
3 "A Simple Social Security Solution" by Allan Sloan, August 13, 2001 Newsweek, p. 27.

August 2001