On April 20, the House Financial Services Committee examined proposals to reform Social Security and encouraged the promotion of financial literacy programs.
Chair Michael Oxley (R-OH) explained that Social Security “was created in a different America. In 1950, there were 16 workers for every retiree. Today, there are just over three workers for every retiree, and when the Baby Boom generation retires, there will be only two workers for every retiree…Without reform, Social Security will become Social Insecurity in the future. Waiting is not an option, and band-aid reforms will not solve the structural problems. The longer we put off structural reform of Social Security the more expensive it will be to fix. That is why we must act now.” Emphasizing the importance of financial literacy, Rep. Oxley said that in order to “make the most of their money, our citizens must be prepared to manage their finances and attend to their savings and investment decisions. People need information on savings and investing. They need to know about the benefits of compound interest, dollar-cost averaging, and diversifying their investments.”
In a statement submitted by his office, Rep. Ruben Hinojosa (D-TX) said that financial literacy “means empowerment power to manage money, credit, and debt and become responsible workers, heads of households, investors, entrepreneurs, and leaders.” He explained that he and Rep. Judy Biggert (R-IL) co-founded the Congressional Financial and Economic Literacy Caucus to increase “public awareness of poor financial literacy rates” and “provide a forum for my colleagues to promote policies that advance financial literacy and economic education.”
The committee heard testimony from former Sen. Alan Simpson (R-WY) who served on the Bipartisan Commission on Entitlements and Tax Policy under the Clinton administration. He addressed the high Social Security payroll tax, noting that the highest wage earners “are being promised benefits under the current system, in 2050, that are 40% higher than the highest wage earners receive today. And that’s after adjusting for inflation…At some point, common sense will surely prevail, and the rate of benefit growth will be brought down to a sustainable level. And the right time to do that is now. The sooner we put that change in place, the more gradual it can be, and the more fair to the retirees of the future. Bringing benefit promises back to a sensible rate of growth will still allow benefits to rise at a pretty good clip, but it will be considerably less than the current system is promising. That’s where the personal accounts come in. By giving workers the chance to invest in a personal account, we enable them to use the proceeds from long-term investment and to get some of the money back.” Sen. Simpson added, “If you take the personal accounts out of the equation, then you do two things: you lower the benefits that the system will be able to pay, and you also continue the wasteful situation in which all surplus Social Security money continues to be spent. If you want to make sure that any of this money is saved, the only way to do it is to put it in personal accounts, because the federal government will otherwise spend every penny of it. That is a ‘given.’”
Former Rep. Barbara Kennelly (D-CT), president and CEO of the National Committee to Preserve Social Security and Medicare, said that “privatizing Social Security would not only increase retirement risk, it would cut Social Security benefits, increase federal borrowing and further weaken Social Security’s financial status. No matter what you believe about the financial status of the current system, you need to keep in mind that private accounts make the situation worse. The President himself said that private accounts don’t improve solvency one thin dime. What many people don’t realize is that, by diverting payroll taxes out of Social Security, the accounts actually accelerate insolvency. This means that everything has to be bigger benefit cuts have to be deeper and borrowing has to be larger.” She added, “The costs will fall on every American taxpayer for generations to come. Some call this borrowing the ‘transition’ costs. However, using the term ‘transition’ costs implies that these costs will last for a short time and be gone. In fact, my twin 3-year-old granddaughters will still be paying off this debt when they reach middle age.” Rep. Kennelly expressed her support for financial literacy programs, but noted, “Financial knowledge rarely protects an individual from all the ‘hazards and vicissitudes’ of life. Despite our best planning, life gives us ‘lemons’ and they are often financial. Just ask the people who counted on a pension from Enron. Ask the people whose retirement came just as the stock market was dropping in the late 1990s…These individuals understand better than most people that no amount of planning can protect one from the financial risks and unforeseen circumstances they may encounter.”
President and CEO of the Employee Benefit Research Institute (EBRI) Dallas Salisbury explained that “with changing demographics, projected financing shortfalls in public programs such as Social Security and Medicare, and a transfer in responsibility for retirement savings and distribution decisions from employers to individuals, there is a greater need than ever before for all individuals to actively plan and save for their long-term personal financial security. Without action on the part of individuals, we could at least experience greater income difficulties for Americans as they age, and at worse a dramatic decline in the standard of living of retirees and an increase in elderly poverty. Therefore, financial education and the financial literacy to which it leads are of great national importance.” With regard to Social Security reform, Mr. Salisbury stated, “If the nation settles on including some sort of individual accounts in Social Security, EBRI research shows the only way to achieve greater returns, other than taking a reduction of benefits, is to ensure the accounts are invested in diversified portfolios and not simply more ‘save’ bond funds, assuming past returns are an indication of future returns.”
Testifying on behalf of Rock the Vote, Hans Riemer said that his organization “believes that all Americans can learn how to invest for their own future. At the same time, we also believe that everyone should have a basic safeguard to protect them if they are unsuccessful with their personal investments. That safeguard, which is Social Security, should be sufficient to protect a middle class standard of living while at the same time lifting low income workers out of poverty.” Disputing claims that Social Security is heading towards “bankruptcy,” Mr. Riemer stated, “Social Security is not going anywhere. Since current workers pay the benefits for current recipients, the only way that the program would disappear is if there were no workers paying into it. Clearly that is never going to happen. While there is indeed a decline in the number of workers paying into the fund relative to beneficiaries, there are still more than enough workers to make ends meet.” He added, “If the goal of promoting financial literacy is to empower people to understand their personal financial situation and take action to improve it, a good starting point would be clearing up this unfortunate misunderstanding about whether Social Security is going to disappear or not.”
