[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
IMPROVING SOCIAL SECURITY WORK INCENTIVES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SOCIAL SECURITY
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
FEBRUARY 15, 2000
__________
Serial 106-46
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
66-309 CC WASHINGTON : 2000
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Social Security
E. CLAY SHAW, Jr., Florida, Chairman
SAM JOHNSON, Texas ROBERT T. MATSUI, California
MAC COLLINS, Georgia SANDER M. LEVIN, Michigan
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois BENJAMIN L. CARDIN, Maryland
KENNY HULSHOF, Missouri
JIM McCRERY, Louisiana
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
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C O N T E N T S
__________
Page
Advisories announcing the hearing................................ 2
WITNESSES
Social Security Administration, Hon. Kenneth S. Apfel,
Commissioner of Social Security................................ 12
______
American Association of Retired Persons, Jane Baumgarten......... 48
Center on Budget and Policy Priorities, Robert Greenstein........ 83
Institute for Policy Innovation, and Fiscal Associates, Aldona
Robbins........................................................ 87
Johnson, Hon. Sam, a Representative in Congress from the State of
Texas.......................................................... 7
National Association of the Home Builders, Tom Woods............. 53
National Bureau of Economic Research, Leora Friedberg............ 70
National Center for Policy Analysis, Bruce Bartlett.............. 78
National Committee to Preserve Social Security and Medicare,
Martha A. McSteen.............................................. 60
Peterson, Hon. Collin C., a Representative in Congress from the
State of Minnesota............................................. 9
60 Plus Association:
James L. Martin.............................................. 56
Henry A. Hough............................................... 58
Zed's Ethiopian Cuisine, and National Restaurant Association, Zed
Wondemu........................................................ 64
______
SUBMISSIONS FOR THE RECORD
American Bar Association, Senior Lawyers Division, Chicago, IL,
Edward E. Kallgren, letter..................................... 96
American Farm Bureau Federation, statement....................... 96
Capitol Watch, Andrew F. Quinlan, statement...................... 97
Salmon, Richard J., Jacksonville, FL, letter..................... 98
IMPROVING SOCIAL SECURITY WORK INCENTIVES
----------
TUESDAY, FEBRUARY 15, 2000
House of Representatives,
Committee on Ways and Means,
Subcommittee on Social Security,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 9:07 a.m., in
room 1100 Longworth House Office Building, Hon. E. Clay Shaw,
Jr. (Chairman of the Subcommittee) presiding.
[Advisories announcing the hearing follow:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON SOCIAL SECURITY
CONTACT: (202) 225-9263
FOR IMMEDIATE RELEASE
February 8, 2000
No. SS-10
Shaw Announces Hearing on
Improving Social Security Work Incentives
Congressman E. Clay Shaw, Jr., (R-FL), Chairman, Subcommittee on
Social Security of the Committee on Ways and Means, announced today
that the Subcommittee will hold a hearing on improving Social Security
work incentives. The hearing will take place on Tuesday, February 15,
2000, in room B-318 of the Rayburn House Office Building, beginning at
10:00 a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include academics and policy experts who have studied
Social Security work disincentives, including the current Social
Security earnings test; other witnesses will include seniors affected
by this earnings test. However, any individual or organization not
scheduled for an oral appearance may submit a written statement for
consideration by the Committee and for inclusion in the printed record
of the hearing.
BACKGROUND:
Social Security has included a retirement earnings test since the
1930s. Under this provision, working seniors with earnings above a
certain threshold lose part or all of their Social Security benefits in
the year of the earnings.
In calendar year 2000, recipients aged 65 (currently the normal
retirement age) through 69 can earn up to $17,000 without penalty;
seniors earning more than that amount lose $1 of benefits for every $3
of earnings above the limit. Some people believe that this provision
discourages work, especially among seniors who reach the normal
retirement age. A separate earnings test applies to beneficiaries under
the age of 65; which reduces benefits by $1 for every $2 of earnings
above $10,080 in 2000.
The aging of the population has implications for productivity and
economic growth. Providing seniors with the appropriate incentives and
opportunities to work will be important to the future prosperity of the
country.
In announcing the hearing, Chairman Shaw stated: ``Welfare Reform
and the new Ticket to Work law cleared the path to work for millions of
poor parents and disabled individuals. This hearing will investigate
remaining Social Security barriers to work, including the earnings
penalty affecting some 400,000 hardworking seniors each year.
Especially in a strong economy, Social Security rules should encourage
seniors' contributions, not force them to the sidelines.''
FOCUS OF THE HEARING:
The hearing will focus on work disincentives in Social Security
programs, including the current Social Security earnings penalty.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect or MS Word format, with their name, address,
and hearing date noted on a label, by the close of business, Tuesday,
February 29, 2000, to A.L. Singleton, Chief of Staff, Committee on Ways
and Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Social Security office, room B-316
Rayburn House Office Building, by close of business the day before the
hearing.
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The above restrictions and limitations apply only to material being
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Note: All Committee advisories and news releases are available on
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***NOTICE-CHANGE IN TIME AND LOCATION ***
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON SOCIAL SECURITY
CONTACT: (202) 225-9263
FOR IMMEDIATE RELEASE
February 11, 2000
No. SS-10-Revised
Change in Time and Location for Subcommittee Hearing on Improving
Social Security Work Incentives
Tuesday, February 15, 2000
Congressman Clay Shaw, Jr., (R-FL), Chairman of the Ways and Means
Subcommittee on Social Security, today announced that the Subcommittee
hearing on improving Social Security work incentives, previously
scheduled for Tuesday, February 15, 2000, at 10:00 a.m., in room B-318
of the Rayburn House Office Building, will now begin at 9:00 a.m. in
the main Committee hearing room, 1100 Longworth House Office Building.
All other details for the hearing remain the same. (See
Subcommittee press release No. SS-10, dated February 8, 2000.)
Chairman Shaw. If everybody could take their seats, we will
proceed with what I think is going to be a most fruitful and
successful hearing for everybody, and particularly for American
seniors.
Good morning. In recent years, this Committee has focused a
great deal of energy on reforming government programs to
encourage work. That was the focus of the historic welfare
reforms we passed in 1996. It was also the point of Ticket to
Work bill that passed last year to help disabled Americans
enter the work force in greater numbers. Today we will explore
how Social Security rules actually discourage work for some
seniors.
Currently, Social Security takes away benefits from hard-
working seniors who make more than the annual limits allow.
Those are limits arbitrarily set by government. This earnings
penalty has been in place since Social Security started in the
thirties, but that does not make it right.
Many of you will recall that in 1996 we eased this penalty
for seniors who reached the full retirement age. As a result,
seniors 65 through 69 now can earn up to $17,000 a year without
experiencing a cut in their benefits. While that certainly was
a positive step, many of us have long felt that it is wrong to
punish hard-working seniors, period.
What message does this send? That senior contributions are
no longer needed? That seniors should head for the sidelines of
the economy due to age alone? That seniors don't deserve the
benefits that they paid for simply because they continued
working?
I don't think any of us feels that way on any of those
questions. So today we will hear from a broad spectrum of
witnesses, including Social Security's Commissioner and AARP,
who support repealing the earnings penalty for seniors who have
reached the full retirement age. Tomorrow we will mark up H.R.
5, which is a bipartisan bill that eliminates this penalty.
We are pleased today to welcome Sam Johnson, the bill's
author, and Collin Peterson, the lead Democrat cosponsor, who
are here, and they will testify at our hearing.
We were encouraged to hear the President say yesterday that
he would sign a bill similar to H.R. 5 if it reaches his desk.
I have a feeling that it is going to reach his desk. We intend
to hold him to that pledge.
Eliminating the earnings penalty is the right thing to do
for seniors. They have spent a lifetime working for their
Social Security benefits, and they should not be deprived of
one penny. They should get all the benefits they earn and all
the benefits that they paid for, regardless of whether they
keep working or not. Hopefully, before too much longer, Social
Security rules will reflect as much.
I was asked yesterday at a news conference in which we
unveiled the hearing process by a reporter that said: Isn't
this taking away one of the sweeteners that will lead
eventually to Social Security reform? Well, I am disappointed
that we are not getting fully to Social Security reform.
However, it is wrong to hold back something as important as
this where we take a dollar out of each $3 that a senior earns
simply because they decided to work. That is simply wrong. And
whereas I would like this to be part of a larger bill, I have
no intention of holding it hostage and holding those seniors
hostage until we finish the political wrangling and political
bickering across the aisle and down Pennsylvania Avenue with
the President.
Again, I would say that the President knows my phone
number. He can find me readily if he would like to broaden this
to a wider reform. However, I think that it is time that we
expedite this bill, that we move it forward, get it to the
President's desk, get it signed, and say that the seniors now
beginning the first of this year are no longer penalized
because they choose to or, in many instances, they have to work
to support their families and take care of their loved ones.
With that, I will yield to my friend, Mr. Matsui. It is
going to be a great pleasure to work in a very positive way
with you on this bill, as I would certainly anticipate that you
are going to be joining with us on the Republican side in order
to get this done.
Mr. Matsui. Thank you, Mr. Chairman. I appreciate your
comments, and I appreciate the fact you are holding the hearing
on this bill today and a quick markup tomorrow. I believe it is
at 4 o'clock in the afternoon, if I am not mistaken. And I
would imagine it would go to the Full Committee soon, and I
doubt if a vote could be taken this week, but perhaps as soon
as we get back from the recess, we will be able to get this to
the floor.
As all of us know, the earning limitation issue has been a
thorn in the side of senior citizens for quite a number of
years. My father, when he was past 65, was actually told by his
employer, whom he had worked with for almost 50 years, that he
is going to be penalized significantly if, in fact, he was
making the same income. And so they actually cut his hours way
back and dropped his salary at that time down to $14,000, what
the earning limit was. And he put in probably the same number
of hours that he always did, but he was obviously paid at a
much, much significantly lower rate.
And so this earnings limitation has really affected senior
citizens in a number of perverse ways. Many retire--in fact, we
have had a report by Leora Friedberg from the University of
California at San Diego, that says that by eliminating the
earnings test, you will probably see an increase of seniors in
the work force by 5.3 percent. And, in addition, I think some
employers would not suggest to employees that they take a wage
cut and have the employees continue to work for the same number
of hours that they had.
This legislation is much needed. The President has endorsed
it. Leader Gephardt has endorsed. The entire Republican
leadership has endorsed it. And so it has very, very strong and
wonderful bipartisan support.
It is my hope that in the days ahead--and I still speak in
the spirit of bipartisanship--perhaps the Senate could do this,
the other body, or perhaps the House could do it before it hits
the floor, perhaps it could be taken under separate
legislation. But we do have the problem of senior citizen women
who are single. Married women, their poverty rate when they
receive Social Security is 5 percent. Married women on Social
Security is 5 percent. Overall, seniors over 65 have a 10
percent poverty rate. But single women on Social Security have
between 18 and 20 percent as their poverty rate. And,
undoubtedly, we need to do something about this. Maybe that
will be a comprehensive bill. Perhaps it could be looked at
some time later this year.
Another issue is, a few years ago in the midnineties we
decoupled the threshold on the earnings test, which was at
$14,000. We raised it to $17,000 for seniors, but we did not do
it for the blind, who at that time were coupled with seniors.
And with the minimum wage going up--we hope it will go up again
this year--undoubtedly that has an impact on the ability of
seniors to earn a livable wage by continuing the earnings limit
to $14,000.
I understand that the costs over a 5-year period by raising
the earnings limit on the blind from $14,000 to $17,000 would
be in the range of $1 billion to $2 billion over 5 years. And
it would be my hope that we can find some way to deal with this
problem. It is not a significant revenue item, but deal with
this problem and really give the incentive not only for seniors
but also the blind as well.
Mr. Apfel will testify that this earnings test for the
blind and for senior citizens adds a great deal of complexity
to the Code and certainly to the Social Security
Administration, I think he will testify in the range of $750,
$760 million a year additional administrative costs. And so
obviously this is an issue that all of us from a fiscal point
of view have to be aware of.
One other comment I would like to make is that this bill
must remain clean. The President has indicated he wanted a
clean bill. My understanding was that last week when we moved
the marriage penalty relief bill, there were some other items
on it that we are finding out about now--I could be wrong about
that; these are only rumors--pension benefit changes, and we
are checking into that right now. Thank goodness the bill
hasn't been moved in the Senate and sent to the President. We
want to keep these bills as clean as possible so that there is
no misunderstanding about what members are voting for. It is
very important that we keep this legislation clean as well.
So, Mr. Chairman, I want to thank you in the spirit of
bipartisanship. Certainly we want to work with all of you, and
we look forward to getting this to the President so that the
President and all members can be part of a signing ceremony.
Thank you.
Chairman Shaw. Thank you. It took us a year to get here,
but we are here and we are here together.
I would like to welcome our first panel: Sam Johnson,
esteemed Member of this Committee, and Collin Peterson, who has
also been a leader with regard to getting rid of the earnings
penalty on Social Security. We have both of your full
statements. You may proceed as you see fit, and you are welcome
before this Committee. Mr. Johnson?
STATEMENT OF HON. SAM JOHNSON, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF TEXAS
Mr. Johnson. Thank you, Mr. Chairman, and if Mr. Matsui
will listen, I will tell him, we have a clean bill filed. We
have a clean bill filed, and that is the way we want it, too.
Last year Collin Peterson and I introduced H.R. 5, the
``Senior Citizens' Freedom to Work Act of 1999,'' to eliminate
the Social Security earnings penalty. Under current law, senior
citizens age 65 through 69 can earn only $17,000 before they
lose $1 in Social Security benefits for every $3 of earnings.
This limit is unfair, outdated, and bad for our economy. The
Social Security earnings penalty must be eliminated.
As we all know, our seniors have earned Social Security
benefits through a lifetime of contributions to the program,
and seniors are entitled, in my view, to their full benefits.
It is their money. It doesn't belong to Washington, D.C. It
should not be taken away from them just because they choose to
work after their normal retirement age.
This Social Security earnings penalty is simply unfair, un-
American, and plain wrong. CBO estimates that nearly 500,000
seniors who reach the normal retirement age will lose benefits
because of the earnings penalty just this year. It
discriminates against our senior citizens who must work in
order to supplement their benefits, and that is just not right.
The earnings penalty is also outdated and bad for the
economy. It is a Depression-era law whose time has long since
come and gone. In the thirties, the earnings penalty was used
to force seniors out of the work force. Today, with
unemployment at record lows, seniors are needed in the work
force.
The disincentive effect is magnified when viewed in light
of other taxes. Senior citizens who work not only lose a large
percentage of their Social Security benefits due to the Social
Security earnings penalty, but they must continue to pay Social
Security, Medicare, Federal tax, and State tax as well.
Combined, the earnings penalty and these taxes force our
seniors to face a total marginal tax rate as high as 80 percent
in some cases.
In addition to being complicated and difficult for the
individual senior citizen to understand, the Social Security
earnings penalty is complex and costly for the Federal
Government to administer. For example, the earnings penalty is
responsible for more than one-half of the retirement and
survivor program overpayments. Social Security estimates that
administering it costs $150 million a year. Therefore, an
earnings penalty repeal would help minimize the administrative
expenses and help our seniors better understand their benefits.
I firmly believe that repealing the Social Security
earnings penalty will aid our country's economy. Our senior
citizens would be more likely to continue to work, and the
American economy would benefit from their experience and
skills. The combined increase in the amounts that they would
pay in Social Security and other taxes, as well as the
additional contribution to our gross national product, will
quickly offset any temporary cost. In fact, according to the
Social Security Administration actuaries, the repeal of the
Social Security penalty will not affect Social Security's
financial status over the long run.
Yesterday, the President agreed to sign this bill, and I am
pleased that he has decided to help us remedy this blight on
our Social Security system.
You know, I fought for freedom in two wars, and I believe
that freedom entitles our seniors to the freedom to work
without a penalty. America's seniors want, need, and deserve
the repeal of this outmoded Social Security earnings penalty.
Thank you, Mr. Chairman.
[The prepared statement follows:]
Statement of Hon. Sam Johnson, a Representatives in Congress from the
State of Texas
Mr. Chairman, last year, Collin Peterson and I introduced
H.R. 5, the ``Senior Citizens'; Freedom to Work Act of 1999.''
This legislation will eliminate the Social Security earnings
penalty. Under current law, our senior citizens aged 65-69 can
earn only $17,000 before they lose $1 in Social Security
benefits for each additional $3 of earnings. This limit is
unfair, outdated, and bad for our economy. The Social Security
earnings penalty must be eliminated.
As we all know, our seniors have earned Social Security
benefits through a lifetime of contributions to the program.
Seniors are entitled to their full benefits. It's their money.
It should not be taken away from them just because they choose
to work after their normal retirement age.
This Social Security earnings penalty is simply unfair. CBO
estimates that nearly 500,000 seniors who reach the normal
retirement age will lose benefits because of the earnings
penalty in 2000. It discriminates against our senior citizens
who must work in order to supplement their benefits. That's
just not right.
The earnings penalty is also outdated and bad for the
economy. It is a Depression-era law whose time has long since
come and gone. In the 1930's, the earnings limit was used to
force seniors out of the workforce. Today, with unemployment at
record lows, seniors are needed in the workforce.
The disincentive effect is magnified when viewed in light
of other taxes. Senior citizens, who work, not only lose a
large percentage of their Social Security benefits due to the
Social Security earnings penalty, but they must also continue
to pay Social Security, Medicare, federal taxes and probably
state income taxes as well. Combined, the earnings penalty and
these taxes force our seniors to face total marginal tax rates
as high as 80%.
In addition to being complicated and difficult for the
individual senior citizen to understand, the Social Security
earnings penalty is complex and costly for the federal
government to administer. For example, the earnings penalty is
responsible for more than one-half of retirement and survivor
program overpayments. SSA estimates that administering it costs
$150 million a year. Therefore, an earnings penalty repeal
would help minimize administrative expenses and help our
seniors better understand their benefits.
I firmly believe that repealing the Social Security
earnings penalty will aid our country's economy. Our senior
citizens would be likely to work more and the American economy
would benefit from their experience and skills. The combined
increase in the amounts that they would pay in Social Security
and other taxes, as well as the additional contribution to our
Gross National Product, will quickly offset any temporary cost.
In fact, according to the Social Security Administration's
actuaries, the repeal of the earnings penalty will not affect
Social Security's financial status over the long run.
Yesterday, the President agreed to sign this bill. I am
pleased that he has decided to help us remedy this blight on
our Social Security system.
I fought for freedom in two wars and, I believe that
freedom entitles our seniors the ability to work without a
penalty.America's seniors want, need and deserve the repeal of
the Social Security earnings penalty.
Chairman Shaw. Thank you, Sam.
Collin.
STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MINNESOTA
Mr. Peterson. Thank you, Mr. Chairman, and I want to thank
you and the Subcommittee for inviting me to be with you today
to go over this important issue.
The Social Security earnings limit is a law that America's
seniors love to hate, and for good reason. About 1.4 million
retirees lose part or all of their current Social Security
payments each year because they earn more than this law allows.
And you have all done a good job of pointing out how it works.
The earnings test, as you know, has been a part of the
Social Security program since its inception. You know, with the
backdrop of the Great Depression and unemployment, the
rationale for this test probably made some sense. Social
Security was viewed to protect worker from certain risks,
specifically loss of income due to retirement. Therefore, their
benefits were withheld from workers who made a significant
income and reserved for those who actually retired.
Additionally, earnings limits were included to encourage
retirees to leave the work force, making more jobs available to
young people and to the unemployed.
However, today's economy bears no resemblance to the
American economy of the mid20th century, and Social Security
earning limits have outlived their time.
Mr. Chairman, I am here today to say in unequivocal terms
that the earnings limits are a bad policy and should be
repealed. H.R. 5, which eliminates the earnings limits for
retired workers between 65 and 69 just makes good economic
sense.
As I stated, today's economy is drastically different than
when Social Security became law. For instance, currently
American cities and rural areas alike are experiencing historic
labor shortages, and that includes my district where, in spite
of the fact that we have got a tremendous farm economic
disaster, we have got shortages in all of our little cities.
Seniors are living longer and are more skilled than in the past
and could help this labor shortage significantly. However, as
you know, this limit prevents or discourages a lot of seniors
from playing a critical role in that economy.
In 1930, 54 percent of males continued working after 65,
and in 1997, only 18 percent of senior males continued that
work. And I think that is in large part because of this law.
When I asked the folks back home if repealing the Social
Security earnings limit would help the economy in St. Cloud,
Minnesota, in my district, Teresa Bowman, the president of the
St. Cloud Chamber, responded with a resounding ``yes.'' She
added that the St. Cloud Chamber of Commerce views the work
force shortage as the number one problem in their area, and
they think H.R. 5 would be of significant help in providing
them relief of that problem.
David Martin, who represents the Chamber of Commerce of
Fargo-Moorhead, a community that is a bit more rural than St.
Cloud up on the Minnesota-North Dakota, David also stressed the
problems they are experiencing due to the labor shortage. Last
year, according to a Newsweek article, the Fargo-Moorhead area
had the highest labor shortage rate in the country. David said
that the chamber of commerce is concerned that the tight labor
pool will make it very difficult for their economy to grow, and
he believes H.R. 5 would give their area and areas like it a
big boost so their economy could continue to grow into the 21st
century.
In addition to being sound economic policy, eliminating the
Social Security earnings limit I think is a matter of fairness.
Social Security benefits have been earned by a lifetime of work
and contributions to this program, and I think seniors should
expect that they should get those benefits when they retire.
Also, as Mr. Johnson pointed out, these seniors are paying
some of the highest, maybe the highest marginal tax rates of
any of our taxpayers, and that is something that clearly we
should solve.
Last, I would like to talk about two other things that are
not really in this bill, but I think I want considered by this
Committee. One of them is kind of related to this. The IRS--and
they have been kind of doing this ever since I was back
practicing accounting and doing tax returns--have got an
interpretation that if a farmer rents his land to somebody, to
his son or neighbor, that they are considering that rent to be
earned income, self-employment income. And when they audit some
of these farmers, they are going in and making them pay self-
employment tax on the farm rent, saying that they are
significantly contributing to the decisionmaking and,
therefore, you know, they are having earned income.
You can write it up any way you want, and they will come in
and interpret that if you sit at the kitchen table and give
your son advice, that triggers this all being self-employment
income. So not only do they have to pay the 15.3 percent, they
get tied up in this earnings limit problem because that then
becomes earned income.
So I would like this Committee to look at that. I have co-
sponsored a bill, introduced by Mr. Nussle, to address this
issue. This is an interpretation that has been made by the IRS,
and I think it is something that we ought to look at and
correct because it is driving a lot of farmers crazy. And right
now they do not need this kind of a hassle with all the other
problems that they are having and they don't need to have to
pay that extra tax. So I wish you would look at that.
Then, last--and this is not related to this bill either,
but the National Federation for the Blind has talked to me, and
I think to others, about that they have got some concerns with
the earnings limit as it affects those folks. As I understand
it, there is some revenue implication from that, but I think
that is something else that we ought to look at because these
folks, a lot of them are trying to work and be productive
members of society, and we ought not penalize them the way we
do either.
So thank you very much, Mr. Chairman. I hope that we can
work together on this and have a successful outcome and all be
at the White House someday at a signing ceremony.
Thank you.
Chairman Shaw. Thank you. Thank you both.
Do any of the members seek recognition for questioning? Mr.
Collins?
Mr. Collins. Mr. Peterson, I would like for you to go back
to the issue of the blind. What would you recommend in that
area?
Mr. Peterson. On the what?
Mr. Collins. What would you recommend the Congress do in
the area of the blind and the earnings limit?
Mr. Peterson. Well, if I had my way, I think I would take
the earnings limit off.
Mr. Collins. Totally off? No ceiling, just totally off?
Mr. Peterson. Let them work.
Mr. Collins. I am sorry?
Mr. Peterson. I said let them work.
Mr. Collins. Yes, I understand.
Mr. Peterson. But it would be costly. But I think, as Mr.
Johnson said, these earnings limits create a lot of
bureaucracy, a lot of complications in the system. That is one
reason why it would be easier if you just took it off rather
than try to adjust it up. You know, that would be my
suggestion. But, you know, anything that we could do to improve
it, of course, would be helpful.
Mr. Collins. Well, I have had some suggestions both ways,
some to totally take it off and some to maybe still leave some
type of ceiling in place where there would not be a cliff added
that would stop.
Thank you.
Chairman Shaw. Mr. Matsui?
Mr. Matsui. I just want to thank the panel for their
testimony. Thank you.
Chairman Shaw. Did anyone seek recognition on the
Republican side or the Democrat side?
[No response.]
Chairman Shaw. Well, I would like to thank you and, Collin,
to comment on part of the issue that you raised with regard to
parents handing down the business, the farming business to
their youngsters.
Perhaps since we have the Commissioner here, we should
question him with regard to that--you could take the same
argument with regard to voting proxies. That doesn't make any
sense at all.
Mr. Peterson. Right.
Chairman Shaw. And, of course, as far as the earnings
limit, that will become history at a very early date, I am
hopeful. But I can tell you that if we can't get some
satisfaction with regard to that problem, we will certainly
look into it, because that is flat wrong.
As a father, I hope my kids do listen to me, and I have a
lot of advice, as all fathers do. And I think that the ability
to tap into our matured population to get advice as to how to
run businesses and what to do from an economic standpoint is
tremendously important and should never be discouraged. Because
I have seen so many instances where kids have taken over
businesses and run them right into the ground, and I think it
is very important that their parents keep tabs on what is going
on with the businesses that they helped to create. So our
Committee will look into that.
Mr. Peterson. Well, that would be great because I can tell
you that this is driving the farmers crazy, and my old partners
in my CPA firm, every time I talk to them, this is the number
one thing they bring up. They do a lot of farm work, and, you
know, if the IRS gets more auditors, this is going to be a
bigger problem. The only thing that is saving them now is that
they don't have enough people out there to audit enough people
to catch them. But it is a big issue, and as I said, it is not
a law that was passed by Congress. This is just an
interpretation. They have been after this for a long time, but
since 1996, they have really stepped up the effort to try to
turn all of this rental income into self-employment.
Chairman Shaw. Well, you can tell your farmers that you got
the attention of the Ways and Means Committee.
Mr. Peterson. Great.
Chairman Shaw. Thank you both for testifying.
Chairman Shaw. Now we are pleased to invite our second
witness, who is Hon. Kenneth Apfel, who is the Commissioner of
the Social Security Administration, and, Commissioner, I would
ask that as part of your remarks if you would comment on the
point that Mr. Peterson made if you are prepared to do so. If
not, you could come back to us in writing and make a note of
his concern.
STATEMENT OF HON. KENNETH S. APFEL, COMMISSIONER OF SOCIAL
SECURITY, SOCIAL SECURITY ADMINISTRATION
Mr. Apfel. Good morning, Mr. Chairman, Congressman Matsui,
and Members of the Committee.
You indicated the importance of individuals listening to
their parents. Well, I must tell you that my father told me,
``Get rid of that earnings test.'' So I do listen to my father,
and it is one of the reasons why I feel so strongly about
eliminating the earnings test.
On the issue of the farm situation, I must say I was
unaware of the entire issue, so we will have to respond to that
in the record. I will be talking to the IRS about that because
it is brand-new information to me.
To begin with, Mr. Chairman, the President's budget
provides a framework for locking away the entire Social
Security surplus each and every year. An estimated $1.7
trillion over the next 10 years, under Social Security
Trustees' assumptions, would be devoted solely to improving the
balance sheet of the Federal Government and strengthening
Social Security.
The President's framework provides for transfers in years
2011 through 2050 of the interest savings that would result
from setting aside the Social Security surpluses. Under Social
Security actuary projections, these transfers would total $99
billion in 2011 and grow to $205 billion by 2016. The transfers
would extend the solvency of the trust funds to about 2050.
Also, beginning in 2011, the framework calls for investing
a sensible and measured proportion of the transfers in broad
equity market indexes by private managers and not the
government. This would further extend trust fund solvency to
2054, compared to the current projected date of 2034.
Solvency of Social Security is vitally important to the
economic security of everybody, particularly older women.
In this regard, we need to be aware that Social Security
reform proposals can have very different effects on the
benefits received by women compared to men. Women tend to have
lower lifetime earnings, work fewer years, and live longer in
retirement than men. Elderly women often are more dependent on
Social Security because they are less likely to have pensions
and more likely to outlive assets. The specific issues faced by
elderly women need to be addressed within the framework of
Social Security reform.
Which brings me to the retirement earnings test. Under
current law, for beneficiaries age 65 to 69 in 2000, benefits
are reduced $1 for every $3 of earnings above $17,000 a year.
For those between 62 and 65, benefits are reduced $1 for every
$2 of earnings above $10,080 annually. Workers are exempt when
they reach age 70, and delayed retirement credits are provided
to compensate workers age 65 to 69 whose benefits are withheld
under the RET.
The President has said that we should eliminate the
retirement earnings test. The retirement earnings test is both
confusing to beneficiaries and difficult to administer.
Eliminating the retirement earnings test could affect the
choice of older workers regarding whether and how much to work.
Although the benefit withholdings under the RET are roughly
offset by higher benefits later on, many people perceive the
retirement earnings test as a tax on their labor income.
Eliminating this perceived disincentive would have two
effects: One, some people would choose to remain in the labor
force or continue to work full-time because they would not face
the same reduction in their current Social Security benefits;
and, two, some people would choose to work less, making up for
lower earnings with higher current Social Security benefits.
With a limited amount of evidence on the overall effect of
the RET on labor supply, it is impossible to form a definitive
conclusion. However, it seems very plausible that eliminating
the retirement earnings test would lead to a modest increase in
work activity.
And, additionally, widows of workers who retire before full
benefit retirement age also get permanently reduced benefits.
Thus, elimination of the retirement earnings test at 62 could
negatively impact the number of elderly women living in
poverty. And my written statement, which I would ask to be
included in the record, goes into more detail on this point.
The Administration, therefore, believes that we can make a
substantial downpayment on Social Security reform with two
simple, clear bipartisan steps.
The first step is to pass a straightforward bill to repeal
the retirement earnings test at the normal retirement age. If
Congress sends the President a clean bill to repeal the
retirement earnings test at the normal retirement age, with no
extraneous, non-Social Security matters whatsoever, he will
sign it.
The second simple step is for Congress to pass and send a
bill to the President that would extend the solvency of Social
Security to at least 2050 and include significant measures to
reduce poverty among elderly women. The President has given
Congress straightforward legislation that would simply assure
that we devote the interest savings earned by paying down the
publicly held debt to making Social Security stronger. By
agreeing to this simple step, we can extend the life of Social
Security to the middle of the next century.
Just as the administration and the Congress worked together
to successfully tackle the economic challenges facing this
Nation and put our fiscal house in order, we can also work
together to eliminate the retirement earnings test in the right
way. And I believe that we can work together to resolve the
long-term Social Security solvency issues as well.
I will be happy to answer any questions the members may
have at this time.
[The prepared statement and attachment follow:]
Statement of Hon. Kenneth S. Apfel, Commissioner of Social Security,
Social Security Administration
Good morning, Mr. Chairman and Members of the Subcommittee.
Thank you for inviting me to appear this morning to discuss
issues related to the Social Security retirement earnings test
(RET). First, I would like to discuss the President's framework
for Social Security reform. Then, I will discuss another major
concern of the Administration; the importance of Social
Security to the economic well-being of elderly women and the
need to improve their protection under the program. Finally, I
will explain how the Social Security retirement earnings test
has changed over the years and discuss the implications of
eliminating the test.
The President believes that it is important to modernize
the system by eliminating the outdated retirement earnings test
at normal retirement age (NRA). The President would also like
to work together to use the benefits of debt reduction to
extend the solvency of Social Security to about 2050 and
improve the effectiveness of Social Security in combating
poverty among elderly women. He remains committed to working
together with Congress on a bipartisan basis to enact reforms
that make Social Security solvent for at least 75 years.
President's Budget Framework
Let me begin today by discussing the President's budget
proposal as it pertains to Social Security reform. I strongly
support the President's proposal. Maintaining fiscal discipline
and paying down the debt gives us an historic opportunity to
meet the challenges of the future. The President proposes to
devote the Social Security surpluses to improving the balance
sheet of the Federal government, and to transfer the resulting
interest savings to the Social Security trust fund. In
addition, his plan calls for investing a limited amount of the
trust fund in equities as a prudent and workable solution for
extending the life of the trust fund yet further into the
future. This budget proposal is an important first step towards
crafting a bipartisan agreement between the President and
Congress that will keep faith with future generations of
Americans.
As you know, the Social Security program faces a long-range
deficit of 2.07 percent of taxable payroll under the
intermediate assumptions of the 1999 Trustees Report. Because
Social Security is fundamental to the economic well being of
our aged population, ensuring the long-range solvency of the
Social Security program must be one of our highest priorities.
That is why the President's budget framework to preserve and
strengthen Social Security is so very important. The President
has proposed the following specific actions:
First, the President's framework provides for locking away the
entire Social Security surplus each and every year. All Social
Security surpluses, an estimated $1.7 trillion over the next 10
years under Social Security Trustees assumptions, would be
devoted solely to improving the balance sheet of the Federal
government and strengthening Social Security (under
Administration assumptions, the Office of Management and Budget
projects a $2.2 trillion Social Security surplus over 10
years). This framework will ensure that we achieve substantial
public debt reduction, helping to prepare the government and
the Nation for the retirement of the baby boomers.
The framework provides for the transfer of interest savings
based on the cumulative amount of Social Security surpluses we
actually experience over the next 15 years. The President's
framework provides for transfers in years 2011 through 2050 to
Social Security. The Social Security actuaries project that the
interest savings that would result from setting aside the
Social Security surpluses (assuming all the new resources are
invested in government securities) would total $99 billion in
2011 and grow to $205 billion by 2016. Total transfers between
2011 and 2015 would be $690 billion. The transfers would extend
the solvency of the trust funds until 2050.
Also, beginning in 2011, the framework calls for investing a
sensible and measured proportion of the transfers in the equity
market to achieve higher returns for Social Security. The
equity investment would be limited to 50 percent of the
cumulative transfer amounts, to the degree that these did not
exceed 15 percent of the trust funds. The Social Security
actuaries project that the Trust Fund's equity holdings would
represent, on average, about 3 percent of the stock market over
the 30-year period 2011-2040. Funds would be invested in broad
market indexes by private managers, not the government. This
would further extend the solvency of the trust funds to 2054,
compared to the current projected exhaustion date of 2034.
Now is the time for action. If we act now, before there is
a Social Security financing crisis, and while we enjoy the
first budget surpluses in a generation, we can prevent a
financing crisis from ever occurring. If we delay action for a
generation, the size of the financing problem will grow. We
have an historic window of opportunity to meet the challenge
facing Social Security. . . and we must not let this
opportunity slip away.
Importance of Social Security for Women
I now want to talk about the importance of Social Security
in the economic security of women and why any comprehensive
reform of Social Security must address the high incidence of
poverty among elderly women.
For 60 years, Social Security has provided a solid floor of
financial protection in the event of a worker's retirement,
death, or disability. It has allowed the great majority of
Americans to retire with the dignity that comes from financial
independence, without fear of poverty or reliance on others.
No government program has had a more positive impact on the
lives of older women than Social Security. There can be no
doubt--Social Security is a vitally important element in the
retirement income security of our sisters, our mothers, our
grandmothers, and our great grandmothers.
The President is committed to helping elderly women, who
typically have higher poverty rates than other elderly. On
numerous occasions, the President has made it clear that he
wants to address their situation as part of the effort to close
the long-range deficit in Social Security. He has stated that
``We should reduce poverty among elderly women who are nearly
twice as likely to be poor as our other seniors.''
Even though Social Security does a good job of keeping most
elderly families above the poverty threshold, poverty rates
vary greatly between different groups. For example, poverty
rates are higher among nonmarried women than married women
beneficiaries.
Only 5 percent of aged married women are poor; in contrast, 22
percent of divorced, 20 percent of never-married, and 18
percent of widowed women age 65 and older are poor.
Widows account for the largest proportion (66 percent) of poor
aged beneficiary women. There are 1.2 million aged widows who
receive Social Security benefits and have incomes below the
poverty line ($7,818 for an aged individual in 1998).
Social Security Reform and Women
We need to be aware that Social Security reform proposals
can have very different effects on the benefits received by
women compared to those received by men. These differences stem
from the fact that, although Social Security program rules are
gender neutral, individuals are affected differently because of
their lifetime earnings patterns and life expectancies differ.
Women tend to have lower lifetime earnings and work fewer
years in covered employment than men and, because of their
longer life expectancies, will spend more time than men in
retirement. Therefore, the possible differential effects of any
proposed program changes on women need to be closely reviewed
as we discuss the options and trade-offs of ways to ensure the
solvency of Social Security.
Income security remains an elusive goal for many elderly
women. This is why a comprehensive Social Security reform
package must not only achieve solvency but include provisions
to protect elderly women. Elderly women often are more
dependent on Social Security because they are less likely to
have pensions and sometimes outlive their assets. Almost three-
quarters of Social Security beneficiaries over age 85 are
women. It is essential that we work together in a bipartisan
effort to ensure that they have the best protection that
society can provide.
The Retirement Earnings Test
Now, I will discuss the issue of the retirement earnings
test (RET). Let me begin by briefly reviewing the philosophy
behind the earnings test and how that philosophy, and the test
itself, have changed over the years.
Social Security was designed as a social insurance program
under which workers and their dependents were to be insured
against the loss of earnings as a result of retirement,
disability, or death of the worker. Benefits are intended to
partially replace the earnings that are actually lost due to
these events. In that context, the retirement earnings test was
designed as an objective measure of the extent to which
earnings are lost due to retirement.
The Social Security program has always had an earnings
test. However, the ``all-or-nothing'' test in the original 1935
Social Security Act has been modified numerous times to allow
retirees to supplement benefits with earnings up to a specified
level. Even before the first benefits were paid in 1940, the
test of retirement was modified so that a beneficiary could
earn up to $14.99 in covered earnings before losing benefits
for that month.
Since 1940, many other changes to the retirement earnings
test have been made. The Social Security Amendments of 1950,
for example, exempted people age 75 and over from the earnings
test. In 1954, the retirement test was broadened to include
non-covered wages, and the age at which the test no longer
applied was lowered from 75 to 72. The concept of reducing
benefits by $1 for each $2 of earnings above the exempt amount
was introduced in the Social Security Amendments of 1960, and
the 1972 Amendments provided for the earnings test exempt
amount to be increased automatically with increases in average
wage levels. In 1983, the age at which the test no longer
applies was lowered to 70. In 1990, the withholding rate of $1
of benefits for each $2 of earnings was changed to $1 for $3
for beneficiaries aged 65 to 69.
The most recent change to the retirement earnings test
occurred in 1996. With the strong support and leadership from
the President, the annual exempt amounts for beneficiaries aged
65 to 69 was legislated to rise annually. This year the annual
exempt amount is $17,000; in 2001, it will be $25,000, and by
2002, it will reach $30,000. This increase gives many older
Americans the opportunity to supplement their Social Security
benefits while remaining productive members of the workforce.
The Current Retirement Test
Under current law, for beneficiaries age 65-69 in 2000,
benefits are reduced $1 for every $3 of earnings above $17,000
per year. For beneficiaries between the ages of 62 and 65,
benefits are reduced $1 for every $2 of earnings above $10,080
per year. Unearned income, such as interest income, dividend
payments, private pensions and the like, is not counted for
purposes of the retirement earnings test.
In addition, workers are exempt from the test when they
reach age 70. For a worker below age 70, his or her earnings
above the exempt amount affect not only his or her own
benefits, but also the benefits of family members receiving
benefits on the worker's earnings record. However, if a
dependent or survivor beneficiary has earnings above the exempt
amount, those earnings can affect only that individual's
payments.
Delayed retirement credits (DRCs) are provided to
compensate workers age 65-69 whose benefits are withheld under
the retirement earnings test. The DRC increases the worker's
retirement benefit for each month that benefits are fully
withheld after the full benefit retirement age, now age 65 but
scheduled to rise to 67 by 2022. The DRC is currently 6-percent
per year for workers age 65 in 2000. The DRC percentage will
increase 0.5 percentage point every two years until it reaches
8 percent per year for workers reaching age 65 in 2008 and
later. When the DRC is 8 percent per year, benefits lost due to
the retirement earnings test and/or delayed retirement
generally will be offset in an actuarially fair manner by the
increase in benefits resulting from DRCs.
The present-law actuarial reduction provisions, in
conjunction with the earnings test for workers aged 62-to 65,
are designed to provide the early benefit claimant who works,
on average, with the same total lifetime benefits as would be
received if benefits had started at age 65. A person who files
a Social Security claim before reaching the full benefit
retirement age receives a reduced benefit. However, once the
person reaches age 65, the benefit payment is adjusted upward
to account for any benefit amounts withheld due to earnings
prior to age 65. The effect of this procedure is that whenever
a monthly check, otherwise payable to someone between 62 and
65, is partially or totally withheld under the earnings test,
the amount ``lost'' is repaid, on average, over the course of
the beneficiary's remaining lifetime beginning at 65.
In 1999, an estimated 1.2 million beneficiaries had some or
all of their benefits withheld for some portion of the year
under the earnings test due to work at age 62 or above. About
800,000 beneficiaries lost some or all of their benefits under
the test as a result of their work at ages 65-69. The benefits
of 150,000 auxiliary beneficiaries are also limited or withheld
due to the earnings of the primary beneficiary. With respect to
beneficiaries aged 62-64, about 230,000 working beneficiaries
had all or part of their benefits withheld, and 25,000
auxiliary beneficiaries are affected.
Issues Associated with Eliminating the Retirement Earnings Test
As I indicated earlier, the President has said that we
should eliminate the retirement earnings test. However, an
important issue is whether the RET should be eliminated at age
62 or at the normal retirement age, currently age 65, scheduled
to gradually rise to 67. (For example, workers born in 1938 and
eligible for early retirement at age 62 this year, have a
normal retirement age of 65 and two months.) This issue
involves important trade-offs. On one hand, the RET is
confusing to beneficiaries, and probably reduces their work
effort to some degree. It is also difficult to administer.
Eliminating the test would end these problems. On the other
hand, eliminating the RET at age 62, by itself with no other
changes, would likely increase poverty for many older
beneficiaries--particularly elderly women--and would increase
the long-range program deficit by a small, but measurable
amount. Eliminating the test at the normal retirement age would
have a negligible impact on poverty for older beneficiaries and
would not result in a long-range program cost. Let me elaborate
on these points.
Eliminating the RET could have an effect on the choice of
older Americans of whether and how much to work. Although the
benefit witholdings under the RET are roughly offset by higher
benefits later on, many people perceive the RET as a tax on
their labor income. Eliminating this perceived disincentive
would have two effects: (1) some people would choose to remain
in the workforce or to continue to work full-time because they
would not face the same reduction in their current Social
Security benefits; and (2) some people would choose to work
less, making up for lower earnings with higher current Social
Security benefits.
There is only a limited amount of evidence on the overall
effect of the RET on labor supply and it is impossible to form
a definitive conclusion. It does, however, seem plausible that
eliminating the RET would lead to a modest increase in work
activity, an assumption that is reflected in the Social
Security actuaries' estimates of the impact of eliminating the
RET on Social Security solvency.
Eliminating the RET below the normal retirement age might
also change the risks that older Americans face down the road.
Eliminating the earnings test would result in more workers
electing to receive benefits as soon as they become eligible
(about 60 percent of workers already claim benefits at age 62).
The decision to claim benefits earlier reduces these
individuals' monthly Social Security benefits. The lower
benefit is intended to be actuarially fair so that, over their
lifetimes, beneficiaries receive, on average, the same total
benefits. However, many people do not perceive that these
benefits are paid back to them over their lifetime. Once
beneficiaries who claimed reduced benefits stop working, they
may not have sufficient outside resources to offset this
reduction in Social Security benefits.
And I want to emphasize this point: the widow(er)s of
workers who retire before full benefit retirement age also get
permanently reduced benefits due to the worker decision to
retire early. Thus, elimination of the RET at 62 could also
have a negative impact on the number of elderly women living in
poverty in the future. The poverty impact of eliminating the
RET between age 62 and the NRA is dependent on changes in
filing behavior and changes in work/retirement decisions, and
cannot be predicted exactly.
At present, most women who have ever been married
ultimately receive benefits based on their deceased husband's
earnings record. Age reductions in the deceased worker's
benefit are generally passed on to the widow(er)'s benefit.
Thus the worker's decision to take benefits at 62 would result
in lower, perhaps inadequate, benefits for his survivor many
years later. A very likely consequence of eliminating the
earnings test for those below NRA, if no other changes were
made, would be an increase in the number of elderly widows who
are poor.
The Administration believes that the best policy is to
eliminate the earnings test at NRA. Eliminating the RET at age
62 raises serious concerns about increasing poverty among
elderly women, and we would not want to consider it without at
least making sizeable changes to the program to mitigate these
deleterious effects.
Next Steps
The Administration believes that we can make a substantial
down payment on Social Security reform with two simple, clear
bipartisan steps:
The first step is to pass a straightforward bill to repeal
the RET. If Congress sends the President a clean bill to repeal
the RET at NRA, with no extraneous, non-Social Security matters
whatsoever, he will sign it.
The second simple step is for Congress to pass and send a
bill to the President that would extend the solvency of Social
Security to about 2050 and include significant measures to
reduce poverty among elderly women. The President has given
Congress straightforward legislation that would simply ensure
that we devote the interest savings earned by paying down the
publicly-held debt to making Social Security stronger. By
agreeing to this simple step, we can extend the life of Social
Security to the middle of the next century.
Conclusion
The President has shown strong leadership in providing a
framework for preserving the financial well-being of the Social
Security program. If adopted, this framework would take us a
long way towards closing the long-range actuarial gap of 2.07
percent of taxable payroll. It gives us a solid foundation on
which to preserve our social insurance program throughout this
century. And it does much more: President Clinton's approach
would pay down the publicly held debt, thereby increasing
national savings and promoting economic growth, which will
reduce burdens on future generations.
Just as the Administration and the Congress worked together
successfully to tackle the economic challenges facing this
nation and put our fiscal house in order, we can also work
together to eliminate the RET in the right way. And I believe
that we can work together to resolve the long-term Social
Security solvency issues as well. We have an opportunity that
we could not have imagined just a few years ago. We can begin
to deal with the future, and address long-term generational
challenges. We must seize this moment and focus on
strengthening and protecting the Social Security system for
future generations of Americans.
I will be happy to answer any questions the Members may
have.
Treatment of Self-Employment Income for Farmer Landlords
Present Law:
The Internal Revenue Code and the Social Security Act
provide that rental income from real estate shall be excluded
from net earnings from self employment (NESE) unless it is
income (1) derived under an ``arrangement'' (between the owner
and another individual) that provides that such other
individual shall produce agricultural or horticultural products
on the land AND (2) that there be material participation by the
owner in the production of these products, and that such
participation actually occurs.
Background:
In 1954, the Social Security Act first covered
self-employed farmers but rental income from crop shares was
excluded. In 1956, Congress included the ``material
participation'' exception to the exclusion of real estate
rental income, so that such rental income would become NESE if
the owner participated in a substantial way in the farm
activities.
The elements for material participation were set
forth in the 1956 Senate report and are still used in making
determinations as to the landowner's participation. Material
participation is met only if the owner performs at least 3 of
the following:
Periodically advises and consults with his/her tenants;
Periodically inspects the production activities;
Furnishes a substantial portion of the machinery, equipment and
livestock; or
Assumes responsibility for a substantial portion of the
production expenses.
Issue:
Representative Peterson's earlier remarks
reference a bill, which he supports, that was introduced by
Representative Nussle (H.R. 1044). This bill would exclude
certain farm rental income from NESE if the taxpayer enters
into a ``lease agreement'' relating to such income that is
silent on the question of material participation.
In the statement Representative Nussle made when he introduced
H.R. 1044, he expressed concern that ``IRS is using a 1995 Tax
Court Ruling and one of its own nonbinding memorandums to make
a farmer liable for SE tax on income derived from an
arrangement between the tenant farmer and his landlord. That
means that IRS is levying the SE tax not only on the cash
rental income from the land, but also on any partnership or
corporation a farmer has established to manage the farm with
their spouse, children or other relatives.''
The treatment of rental income in these cases is
consistent with its treatment in other cases--that is, income
is subject to SECA tax only if it is derived in the course of a
person's trade or business. That is why rental income is
generally not subject to Social Security tax. However, if the
person does more than merely rent the land--if the person
materially participates in the farming activity--then the
income is subject to SECA tax.
Representative Nussle's bill would reduce the
amount of NESE that certain farmers would report--provided they
have a lease agreement that is silent regarding material
participation of the farmer. From a Social Security coverage
standpoint, the effect would be lower taxable earnings, which
in turn would decrease the amount of Social Security benefits
payable to the farmer and his/her dependents.
Chairman Shaw. Mr. Johnson, do you have any questions?
Mr. Johnson. Maybe one. Thank you, Mr. Chairman.
Good morning. Thanks for being here.
Mr. Apfel. Good morning.
Mr. Johnson. We are glad you support this. I know you have
a relative that was affected by this from what we read from
last year.
Mr. Apfel. That is correct.
Mr. Johnson. And I think that this is an important step in
making the Social Security Administration easier for you to
operate, maybe. Would you care to comment on that?
Mr. Apfel. Yes. I think that repeal of the retirement
earnings test would simplify the program administratively for
the Social Security Administration and also simplify the
program for individuals who are already receiving benefits.
There is a lot of misunderstanding about the Social
Security retirement earnings test and its implications over the
long term for individuals. So eliminating the retirement
earnings test would make it simpler for beneficiaries to be
able to continue to work.
Mr. Johnson. Yes, but you have had some overpayments as a
result of that, haven't you?
Mr. Apfel. Yes.
Mr. Johnson. What is the cost of that?
Mr. Apfel. I was going to continue to point that out.
Administratively, it costs us somewhere in the vicinity of
1,500 workyears each year to administer the retirement earnings
test for working beneficiaries age 62-69. We also have
overpayments of about $780 million a year. These overpayments
occur because we learn about the accurate amounts of earnings
after the fact, so there is always a lot of administrative work
that needs to be done. Eliminating the retirement earnings test
at the normal retirement age would eliminate the vast amount of
that work for us. So it would simplify the administration of
the program and I think simplify it for the American public as
well.
Mr. Johnson. Does that mean you can downsize your agency?
Mr. Apfel. Well, Mr. Chairman, I----
[Laughter.]
Mr. Apfel. Mr. Johnson, I would say the answer to that is
no. The Social Security Administration faces enormous
pressures, particularly as we look to the long-term future and
the retirement of the baby-boom generation. There are areas
that we could improve service delivery if we had more
resources. If we could free up 1,000 work years from
administering the RET for those age 65-69, we could provide
better service to the American public with that activity, which
I think would be very important to do.
Mr. Johnson. Eliminate the backlog, right?
Mr. Apfel. Pardon me, sir?
Mr. Johnson. Eliminate the backlog?
Mr. Apfel. That is what we are aiming toward doing, and we
would be able to do more activities both in disability but also
in our field offices.
Mr. Johnson. Good for you.
Thank you, Mr. Chairman.
Chairman Shaw. Mr. Matsui?
Mr. Matsui. Thank you, Mr. Chairman.
Thank you very much, Mr. Apfel, for your testimony. If we
eliminate the earnings test for seniors--and I am venturing out
here, and maybe I am getting into an area I shouldn't. But I
would imagine you are going to have to coordinate more with the
Internal Revenue Service--obviously there is a privacy issue--
because there will be perhaps--people who now might be avoiding
their earnings test by receiving cash and other forms of
income. And it is my hope that you coordinate with Mr. Rossotti
and others in the Service and Treasury Department because there
may be some way then to recapture some of that lost income in
terms of within the stream of total GDP in the economy, and
obviously the implications in terms of tax collection and
making sure that average citizens who pay their taxes don't get
penalized because others avoid the system.
I think that is an issue we really have to get into, and I
know the Service right now is going through some--they don't
know whether they are a customer service agency or collection
agency, and they think they can do both, which hopefully they
will be able to do. But I would hope that there is some level
of coordination there. I have to believe there is a lot of
avoidance going on because of that earnings test.
Second, I understand that there is a revenue implication
for the first 5 or 10 years of $23 billion--10 years, I
believe; is that correct? Or 5 years?
Mr. Apfel. Eliminating the retirement earnings test at the
normal retirement age would cost $17 billion over the first 5
years and $26 billion over the 10 years. But I should point----
Mr. Matsui. Well, let me ask you, this delayed retirement
credit which they receive when they retire to make up for the
amount that they have been paying in under the earnings test, a
lot of folks don't even know about that. My father didn't know
about that.
Mr. Apfel. Neither did mine.
Mr. Matsui. Yes. Had he known about it, he might have just
said, no, keep the same income level, I will continue the same
hours, and then obviously when he reached 70, he would have
been able to collect significantly more benefits.
But it is my understanding that after a period of time,
this proposal essentially, because you will eliminate the
delayed retirement credit, will be revenue neutral. Is that
correct?
Mr. Apfel. It is roughly revenue neutral over the long
term. If we go back to the last time that we raised the
retirement earnings test age, we were dealing at that point in
time within the context of needing short-term offsets for those
added costs. In other words, there were changes made to Social
Security to make it budget neutral in the short term, and we
don't need to do that now given the change in the fiscal
picture. But it is also very important, Mr. Matsui, that the
cost in the long term is negligible. It is virtually zero.
Because of the changes to the delayed retirement credit, an
individual will receive basically the same total lifetime
benefits and the system will receive the same amount of
resources over the long term, and it does not have a negative
impact on Social Security's solvency.
Mr. Matsui. And I appreciate that comment. Just so that
everyone really understands that, this is not an issue of
taking from the general account or even from the Social
Security money that will be walled off, because essentially
this is a revenue-neutral proposal over the life that we are
talking about in terms of dealing with the solvency issue of
Social Security. Is that correct?
Mr. Apfel. That is absolutely correct, Mr. Matsui.
Mr. Matsui. Thank you.
Let me ask one more question, Mr. Chairman. I don't want to
take too much time. There is a long schedule today. But in
terms of the issue of the blind and other disabled receiving
SSI disability benefits, they were decoupled--or at least the
blind were decoupled in the mid-nineties. They are still
receiving at $14,000 and not at $17,000.
Is there a way--and I ask this question sincerely because I
think it is a legitimate issue that those that have concerns
about the issue of moving the blind up from $14,000 to $17,000,
it is a legitimate issue, but what about the other disabled
that are in the work force? How would one distinguish that and
treat the blind separately than the other disabled? Do you have
a response to that?
Mr. Apfel. Well, yes, under current law we have two
different income thresholds--one for the disabled and one for
the blind. The blind receive a higher income threshold before
their benefits are reduced than other disabled individuals on
the disability rolls. And one of the issues is whether the
income that a person on disability can receive from outside
sources, from work, could be higher before losing their Social
Security benefits. A separate issue is whether the blind should
be able to work more without losing their Social Security
benefits.
Both of those issues do have long-term and short-term costs
associated with them. I know that eliminating the level of
substantial gainful employment for the blind would cost $2.5
billion over 5 years, and it would reduce the long-term
solvency of Social Security.
So I think within the context of looking at an overall
long-term solvency package, I think these are options that need
to be considered, but they do have long-term costs to the
system.
Mr. Matsui. Thank you.
Thank you, Mr. Chairman.
Chairman Shaw. Mr. Collins?
Mr. Collins. Thank you, Mr. Chairman.
Commissioner, I found with interest that you said you have
about 1,200 staff that deal with the earnings limit?
Mr. Apfel. About 1,000 have to administer the RET provision
for those age 65-69, that is correct.
Mr. Collins. Then you followed that up saying if we could
free up 800 of them. What would you do with the other 400?
Mr. Apfel. The other roughly 500, these are estimates--are
involved in administering the retirement earnings test for
those age 62 through 64. Remember there are two retirement
earnings tests, and the proposal before us, which I strongly
support, is to eliminate the retirement earnings test at the
normal retirement age. We would still have administrative
implications for those age 62 through 64 where we have a
separate retirement earnings test and one that eliminating
would have a significant poverty impact, I might point out. So
those other 500 people, somewhere in that vicinity, would be
working on the retirement earnings test for those age 62
through 64.
Mr. Collins. Well, I appreciate your explaining that. We
had a hearing last week and had a report on the future needs of
the Social Security Administration and how you are going to
handle the influx of those of us who were born during or right
after World War II, because there are a lot of us. And it was
brought up, too, in that same hearing that--maybe it was in the
103d Congress--we passed the independent act dealing with the
Social Security agency and that there was to be a report in 2
years on the work force analysis by the administration.
I think you need to follow up on that because, if I
remember correctly, we have not received that report, and that
would help explain a lot of the needs and also the question
that I just asked you about the difference in the 1,200 and the
800 or the 400 or the 300, or whatever it is. You know, we seem
to be kind of scrambling for the number there.
So I think it would be helpful if you would follow up on
that work force analysis report that was supposed to have been
submitted about 3 or 4 years ago, and we need to take a look at
that based on the fact of the needs of Social Security and how
you are going to handle the baby boomers.
Mr. Apfel. Well, Mr. Collins, I am unaware of a requirement
for a time-certain specific report, but I will say we need to
do just what you just said. We are in the process of developing
a long-term framework as well as what the implications are for
our work force over the medium term.
I will be testifying, I would assume, within the next week
or two on that, and I will provide more details at that time.
But overall we clearly have sizable long-term challenges that
we face as an agency as the baby boomers retire and as the baby
boomers enter the disability-prone years of their fifties. So,
clearly, dealing with this issue now is the right thing to do,
and we will provide more detail.
Mr. Collins. Well, as they went through some of the
problems that exist today, current problems, and how those
current problems are going to escalate over the next few years,
I mean, it was just as plain as the nose on your face it is a
people problem. You know, a lot of people recognize that, and
the management at Social Security needs to also recognize that
and work with the Congress and give us some reports on it.
We thank you. Thank you for your work.
Mr. Apfel. Thank you, Mr. Collins. And I would point out
that it is not only a people problem, it is also an automation
problem. It seems to me that the two areas that are going to
take a tremendous amount of work in the course of the next 3 to
4 years is the retirement of our own work force as well as the
importance of moving aggressively in the automation area so
that we are able to deal with these added workload challenges
in the long term. I think those are the two critical issues
that I will be coming before the Committee on in the future.
Mr. Collins. Good. Thank you.
Chairman Shaw. Mr. Tanner?
Mr. Tanner. Thank you, Mr. Chairman.
Commissioner, I just have one question, and I will be
brief. I think Mr. Matsui touched on it, but since this
proposal is one that moves the timing of the effect the law has
on the Social Security benefits across the board, this proposal
does not have an adverse effect on the solvency of the Social
Security system. Am I correct in that?
Mr. Apfel. That is correct, Mr. Tanner.
Mr. Tanner. Thank you, Mr. Chairman. I told you I would be
brief. Thank you.
Chairman Shaw. Thank you.
Mr. Hayworth.
Mr. Hayworth. Thank you, Mr. Chairman. And I would like to
thank my friend from Texas for introducing this legislation. It
is something we have been talking about for a long time, and I
am pleased to be a cosponsor of this bill. And I, too, have
heard from the homefront, from my folks and others in the
community concerned about what is patently unfair to people who
remain productive members of society, much valued, much honored
members of the work force, and I believe it is imperative that
we eliminate this earnings limit for all working seniors.
But I would like to highlight the importance of this
legislation for small businesses and self-employed seniors. The
Social Security earnings limit hits small business really on
both ends:
First, when labor is in such short supply, the earnings
limit restricts the abilities of a small business to acquire
and retain qualified workers. It discourages qualified seniors
from either seeking employment or from working additional hours
once they reach the statutory caps. Finding qualified help
ranks with rising health insurance costs as the most difficult
challenges facing small business owners today. It seems to me
that Federal laws should encourage work and productivity, not
discourage it.
Second, many seniors are self-employed and are subject to
both the dollar caps under the earnings limit and a more
subjective and invasive self-employment test. This substantial
services test audits self-employed workers to determine how
many hours they work each month, the type of work they do, the
depth of their business involvement, and other subjective
factors designed to determine the value of their work.
If they run up against either the wage caps or the self-
employment restrictions, well, then, their Social Security
benefits are reduced or eliminated.
In other words, small business owners face an earnings
limit squeeze. The situation is made worse when you consider
that self-employed workers pay a higher rate into Social
Security than do other workers. They pay more into the system,
they face a more stringent limit, and they endure a worker
squeeze.
I want to make sure that this legislation addresses self-
employed seniors. Sir, does the current language in this
legislation apply to self-employed seniors of full retirement
age so their benefits will no longer be reduced due to their
earnings?
Mr. Apfel. Yes.
Mr. Hayworth. That is good to know, and I am glad we have
it in the record, and it comes as good news for so many seniors
in the 6th District of Arizona and across America who are
working hard. And I thank you for that brief answer, and, Mr.
Chairman, I thank you for the time.
Chairman Shaw. Mr. Hulshof?
Mr. Hulshof. Thank you, Mr. Chairman.
Mr. Apfel, welcome. I think, as you can sense from the
questions, there is a lot of unanimity regarding the repeal of
the earnings limit, and I, too, am proud to be a cosponsor of
Mr. Johnson's bill.
Essentially, I think it is useful, especially as Mr.
Hayworth mentioned those town meetings back home, it is useful
to remind folks that Social Security was not intended to be a
welfare program; that you pay into the system, you play by the
rules, you know, that you are entitled to get out of that
system what you put in. And yet because of the earnings limit,
what the system is telling seniors is that it is OK if you are
semi-retired, if you have a low-paying job, or if you work
part-time, but if you use those skills that you have used a
lifetime to develop, look out because your benefits are going
to be reduced. And so I think, you know, this is clearly the
right step forward, very much like this Subcommittee took in
the Ticket to Work and work incentives program, again, looking
for ways to remove those barriers, those disincentives that
hinder people from returning to work because we want them all
to be productive.
Along that vein, Mr. Commissioner, I want to follow up on
what Mr. Matsui inquired of and maybe where there is a little
more difficulty in the issue, and that is regarding the blind
and the non-blind disabled. I guess first I want to ask you
regarding the disability benefits, what is substantial gain
activity?
Mr. Apfel. Well, under regulations that existed before I
became Commissioner, an individual could earn up to $500 a
month before losing their benefits, and we changed that through
regulation to $700 a month, a very significant increase, to
enable individuals to continue to work more before they started
losing their benefits, as a greater incentive to work. I think
it was a very important change, and it is one that we should
maybe even do more on in the future.
Mr. Hulshof. But specifically regarding the population of
disabled, is that right?
Mr. Apfel. Yes, that is the overall disabled population.
There is a separate--and I don't have the specific number;
I will provide that for the record. For the blind, there is an
SGA limit as well that is higher than it is for the other
disabled population.
Mr. Hulshof. And, if you would, Mr. Apfel----
Mr. Apfel. For the blind, it is $1,170 a month.
Mr. Hulshof. Thank you.
Mr. Apfel. It is $700 a month for the non-blind disabled.
Mr. Hulshof. OK. And, if you would, could you contrast that
definition you have just given on substantial gain activity and
how that differs from the earnings limit that we are discussing
here today?
Mr. Apfel. Well, the earnings limit, again, applies to the
retired population, not the disabled population, and under
current law the level of $17,000 in 2000 is somewhat higher
than it is for the blind which is applied on a monthly basis.
The RET is on an annual basis, $17,000 for those age 65-69 in
2000. And the proposal before this Committee that we strongly
support would eliminate the earnings test entirely for those
individuals above the normal retirement age.
Mr. Hulshof. Mr. Apfel, you have already indicated that the
way the system is presently, the blind beneficiaries qualify, I
guess, for higher income thresholds that non-blind disability
beneficiaries do not receive. Are there any other benefits that
blind beneficiaries receive that the non-blind do not other
than that income?
Mr. Apfel. I am unaware--in the title II Social Security
program, I believe that is the only special work incentive all
blind beneficiaries receive. It is a higher level of earnings
that is available to the blind than for the non-blind disabled.
There are other work incentives that apply to blind SSI
beneficiaries
Mr. Hulshof. A question that I have had, and I have asked
constituents of mine, blind constituents, the Americans with
Disabilities Act--I was not here then, either, Mr. Apfel, when
the ADA was passed. But didn't the ADA essentially say that we
want to treat all those with disabilities the same? And is this
something that squares with or doesn't square with what we have
been talking about as far as the higher income thresholds?
Mr. Apfel. I think the ADA was aimed at ensuring those with
disabilities' entry into the labor force, and I support there
being a higher threshold of income for the blind disabled than
for all disabled. I think it would be a mistake to roll back
the differential so that the blind would receive the same
threshold as all disabled. I think that it is appropriate to
have a separate and a higher threshold for the blind. And I
don't think that is inconsistent with the ADA.
Mr. Hulshof. Well, let me ask a final question if the
chairman will indulge me, probably the toughest question. What
are your views on re-linking blind substantial gainful activity
with the age 65 and older earnings limit?
Mr. Apfel. If we link it back up to the age 65--to the
normal retirement age, it would eliminate the threshold
entirely. Such an impact would cost about $7 billion over 10
years, and it would lead to lower long-term solvency in Social
Security.
The difference between the proposal that is before this
Committee for those at normal retirement age and the blind is
that the normal retirement age elimination has a negligible
impact on the long-term solvency of Social Security. If we link
the blind or the disabled groups to this, it would have a long-
term cost. So I think we would have to view that within the
context of a broader reform endeavor to be able to look at
those issues.
Mr. Hulshof. So I guess the answer--I understand the
implications of re-linking as far as the budgetary impact, but
do I take it from your answer that you don't have a position as
to re-linking? I understand the consequences, but----
Mr. Apfel. Well, I think that within the context of this
piece of legislation, which is a straightforward piece of
legislation that has a negligible cost to the Social Security
system over the long term, that is the right way to go at this
time.
If we are going to address the long-term solvency issue, I
think these are very legitimate issues to be viewed within that
context. But because they do have costs--also, if we look at,
say, widow poverty, there is a tremendously compelling need to
be able to do something, but it has cost to the system. We are
not here today to add a widow poverty proposal into this
legislation because it would have that long-term cost.
Mr. Hulshof. Right.
Mr. Apfel. So what we ought to do is view that issue of the
blind and the disabled within the context of the broader reform
endeavors.
Mr. Hulshof. Thank you, Mr. Apfel.
Mr. Chairman, thanks for the additional minute or so.
Chairman Shaw. Just very briefly, you and I have worked
together, and I think we have had a very good relationship
since you have become Commissioner and I have become chairman.
And looking at the complexity of the Code and the regulations--
and it is interesting to watch these questions evolve as to the
complexity of the regulations. And then you compound that by
seeing that seniors are confronted with this and trying to
figure out what they are doing. I noticed your answer with
regard to what is going to happen to the 1,200 employees, in
reply to Mr. Johnson's question. I would preface this by saying
that the Congress has carved out your agency as an independent
agency to try to depoliticize as much as we possibly could. And
I think it is paying off. Obviously we have disagreements on
some things, and you certainly have a certain allegiance to the
President who made your appointment. But I think our working
relationship has been very good.
But talking about the complexity of the Code the way it is,
how many pages are there in the regulations that you work with?
Mr. Apfel. Our Social Security regulations?
Chairman Shaw. Does anybody have that answer? I understand
it is about that thick.
Mr. Apfel. There are a lot--about 1,000 pages. There are
lots--one of the issues here is that the Social Security law is
quite a complex law, and benefits are very tightly prescribed
by law. And, clearly, there is a lot of need for very detailed
regulations to carry out those laws, particularly in the area
of disability. So it is a very large document. And our
interpretations of those are even larger.
Chairman Shaw. I think that the Members certainly up here
realize this, but the Commissioner's term may transcend to
whoever the next President is. It is not a question of your
dropping off the edge of the Earth with the end of the
administration.
Mr. Apfel. Well, actually, my particular term as
Commissioner ends in 1 year. The next Commissioner, whether
that be me or someone else, has a 6-year term that does go
beyond individual Presidencies. The next Commissioner, whoever
that may be, if serving their full term, will serve two--could
serve potentially two different Presidents from two different
parties.
Chairman Shaw. The independence of your agency and the
definition of the Commissioner's term--in your opinion, what
effect does that have as far as your getting involved in the
political struggle that certainly is going to take a lot of our
time between now and November?
Mr. Apfel. Well, one of the important aspects of the Social
Security independence legislation was the creation of a 6-year
term within Social Security, so Commissioners serve across
Presidential terms. Because of that, I think it is
inappropriate for the Commissioner to engage in direct
political activities or to endorse individual political
candidates. I think it is important to keep that degree of
separateness from the political process.
At the same time, that does not mean that the Commissioner
of Social Security should not be voicing his views on the
appropriateness of certain policy actions that relate to Social
Security.
Chairman Shaw. I understand that.
Mr. Apfel. So if there was a proposal to fully privatize
the Social Security system, I would say that I think that would
be wrong for the country, a wrong step for the country. But I
do think it is important for the commissionership and the
agency that the Commissioner not engage in direct political
activities or endorse candidates.
Chairman Shaw. I would like to work with you and your staff
to try to simplify that code. In looking at this and seeing the
complexity of what we were dealing with, it is very difficult
to understand exactly all the complexities, and I am sure that
the fact that you have to have such long regulations would
certainly say that the present code is up to some
interpretation which is not the best way to go.
So perhaps, with your good office and our staff here on
Ways and Means, we can work to try to take a step which is
going to take us a long time in order to simplify the entire
code.
Mr. Apfel. We will be looking forward to working with you,
Mr. Chairman, in those endeavors to try to simplify the
program.
Chairman Shaw. OK. Thank you.
Mr. Doggett.
Mr. Doggett. Commissioner, I support this legislation, but
like you, I am disappointed that it is not part of a broader
reform package, and I have a few questions about that.
On December 15 of this past year, just a couple months ago,
Speaker Hastert and Majority Leader Dick Armey wrote the
President and asked him to ``lock away 100 percent of the
Social Security surplus in your 2001 budget proposal and commit
those surplus funds to reducing the national debt.''
Now, this bill conflicts and is contradictory with that
letter of 2 months ago, isn't it?
Mr. Johnson. Will the gentleman yield?
Mr. Doggett. I will as soon as I get the Commissioner's
response as to whether this bill conflicts with the request
that we ``lock away 100 percent of the Social Security surplus
in your 2001 budget and commit those funds to reducing the
national debt.''
Mr. Apfel. Mr. Doggett, the costs of this are costs to the
Social Security trust fund, so part of the Social Security
surpluses would be, in the short term, used to pay for the
short term costs of this legislation.
I would point out that all of those costs come back to the
Social Security system over the life of the program.
Mr. Doggett. Sure, and I understand your testimony to be
that over 75 years it is neutral. But whether it is neutral or
plus or minus----
Mr. Apfel. It is a minus for about twenty-eight years.
Mr. Doggett [continuing]. It is inconsistent with and
contradictory of the request made by the Republican leadership
within the last 2 months, that instead of using it to put more
money in the pockets of Social Security recipients, we should,
as they say, commit 100 percent--``lock away 100 percent'' is
their words--of the Social Security surplus and use it all to
pay down the debt. This doesn't do that, does it?
Chairman Shaw. Would the gentleman yield?
Mr. Doggett. As soon as I get the answers, I will be glad
to yield and within the limits of my time.
Mr. Apfel. Mr. Doggett, it is true that this would reduce
in the short term the amount of Social Security surpluses, and
if we did not get back that money in the long term to the
system, it would fully violate the notion of reserving all that
money. But because it does come back to Social Security over
the long term so that it is a negligible cost over the long
term, I think it lives within----
Mr. Doggett. And I understand that goal as far as to save
Social Security first is an appropriate conclusion, and as I
said, I support the bill. But it does not use 100 percent of
the money to pay down the national debt, does it? It is
inconsistent with that statement.
Mr. Apfel. It does not use 100 percent to pay down the debt
in the short term. That is correct.
Mr. Doggett. And----
Mr. Apfel. But in the long term, it does.
Mr. Doggett. OK. And with reference to the overall issue of
how we address reform and what our priorities are, we have
among our retiree population a wide range of individuals in
terms of their health and in terms of their wealth, do we not?
Mr. Apfel. Yes, we do, sir.
Mr. Doggett. Some are single women who are not in very good
health and millions who rely on essentially nothing but their
Social Security check to get by.
Mr. Apfel. That is absolutely the case.
Mr. Doggett. And some are--fortunately, an increasing
number--relatively healthy, especially in their early ages, and
they are able to be much more productive and be involved in the
work force.
Mr. Apfel. Very much so.
Mr. Doggett. And as far as which group this particular part
of the reform helps, while it is a desirable reform, basically
this is an approach of beginning the reform to help from the
top and work down whether than to begin at the bottom and work
up, isn't it?
Mr. Apfel. Well, I think it is a very important question,
and I would like to spend a minute answering that because I
think it is a very, very important question.
Does the elimination of the retirement earnings test affect
different income groups differently? And the answer is yes. In
the short term, those in the top quintile of income would
receive added resources in the short term from such a repeal.
Over the long term, it has no differential impact because
individuals that receive their Social Security benefits because
of RET elimination will receive lower Social Security benefits
later in life and the same total benefits over their lifetime.
So while it is true in the short term that it affects upper-
income elderly positively, in the long term it has zero impact
on the elderly at the upper-income.
I would also point out, because I think it is an important
part of this, that if we look beyond the repeal at the normal
retirement age and look to repeal earlier, say at 62, which is
one of the other proposals, that would have a very significant
differential and a major poverty impact.
If we repeal the retirement earnings test at age 62, we
don't know how many people would change their behavior, would
file for benefits earlier. If all persons over age 62 had
started filing at age 62 for benefits, upward of 700,000
additional people would have been put in poverty for 1993
because their benefits would have been lower for subsequent
years. So if no one changed their behavior, the effect would be
zero. But we believe that somewhere in between those two
extremes of zero to 700,000 would be the poverty effect of
changing the retirement earnings test at age 62. For cost
purposes, the actuaries assume that about half of the people
would change their behavior, which corresponds to about 350,000
additional people moving into poverty.
I think this is a very critical point. Eliminating the
retirement earnings test at age 62, which this legislation does
not do, would have a sizable poverty impact. It is not clear
exactly how much it would be, but the only way to deal with
this issue would be in the context of women.
You asked about women. About three-quarters of the people
who would be affected negatively by being put into poverty due
to RET elimination at 62 would be women, and about half are
widows. So, clearly, there would be a sizable poverty impact
from eliminating the RET at 62. It is a negligible poverty
implication at age 65 and at the normal retirement age.
But, again, the last point, to go back to the first one,
there is a short-term benefit for those at the highest quintile
over the course of the first few years, but because of the
delayed retirement credit and the loss of the delayed
retirement credit when benefits are paid, it has a zero impact
on benefit income over a lifetime for those at the top.
Mr. Doggett. Mr. Chairman, may I ask just one more
question?
Chairman Shaw. One more, and then we will move on.
Mr. Doggett. Many commentators looking at the long-term
Social Security solvency issue have emphasized how painful it
may be to resolve that hard choices will have to be made, and
they have raised a variety of alternatives about how to
minimize the hurt.
Doesn't beginning at this place in terms of Social Security
reform where you actually put more money in the pockets of some
Social Security recipients, as desirable as that may be,
represent kind of an eat-dessert-first approach to reform?
Mr. Apfel. Mr. Doggett, I would certainly prefer and I
think many would prefer that we were dealing with the entire
universe of reforms to ensure Social Security's long-term
solvency. That hasn't been easy, and I have little scars that
have come through that process, and we continue to work for it.
I would have serious reservations if the long-term costs of
this proposal were not negligible. But because they are
negligible, I find it very acceptable to see this as a
downpayment on the long-term efforts that we need to do. I
would prefer, in other words, to see us deal with the entire
panoply of issues before us. But I don't think it is
inconsistent to deal with this issue separately because it does
not have an effect on the long-term solvency of the system. And
I would certainly have a different opinion if the earnings test
was being eliminated at age 62 because of that poverty impact,
which is very major. And we can provide more for the record on
that, if you would like. But because it is at the normal
retirement age and because the costs are virtually zero, I
think this is a legitimate separate step.
[The following was subsequently received:]
The Impact of Repealing the Retirement Earnings Test on Rates of
Poverty
This paper summarizes an analysis of the implications of
potential changes in filing behavior that might result from
changes in the retirement earnings test (RET). In general, the
earlier one files for Social Security benefits the lower his or
her monthly benefit. Elimination of the RET might lead to some
individuals filing for Social Security benefits at an earlier
age than they otherwise might, and thus could lead to
reductions in individual incomes and increases in the number of
people in poverty. Using matched 1994 Current Population Survey
and Social Security Administration administrative data, this
analysis examines the potential changes in individual income
and the number of people in poverty that could have resulted
for beneficiaries in 1993 from earlier elimination of the RET
at either the normal retirement age (NRA), which is currently
age 65, or at age 62.
In general, we find that even if individuals accelerate
their filing for Social Security benefits as a result of
elimination of the RET at age 65, there would be little or no
change in the number of people below the poverty line. However,
if the RET were eliminated at age 62 and individuals accelerate
their filing for Social Security benefits, the number of people
below the poverty line would increase. This analysis provides a
range of estimates for the impact of eliminating the RET on
rates of poverty, which illustrates the implications of
potential changes in the RET.
Specifically, this paper:
Explains how the RET works, focusing on the
differences between the test for beneficiaries at the NRA and
above and for beneficiaries aged 62 through NRA;
Describes the approach used to estimate the
poverty effects of repealing the RET;
Provides poverty estimates for repealing the RET
at NRA and the RET at 62; and
Provides detailed demographic profiles on the
population likely to get moved into poverty if the RET at 62
were eliminated.
How the Retirement Earnings Test (RET) Works
The Social Security Act of 1935 specified that beneficiaries would
lose all their benefits if they had any earnings. Over the years,
however, Congress has eased the RET's restrictions (allowing
beneficiaries to supplement their benefits with earnings) by increasing
the amount of exempted earnings, reducing the age of exempted
beneficiaries, and liberalizing the formulas for reducing benefits.
The RET affects the timing of a person's benefits but has little
effect on total benefits received over a lifetime. The details differ
depending on whether a beneficiary is above or below the NRA (It does
not apply to beneficiaries aged 70 and above). In both cases, however,
the earlier a person begins to draw benefits, the smaller his or her
monthly benefit will be.
Retirement Earnings Test at the Normal Retirement Age
Under current law, beneficiaries aged 65 through 69 in 2000 have $1
in benefits withheld for every $3 earned above $17,000. This threshold
will increase in stages to $30,000 in 2002 and increase automatically
thereafter with the average wage in the U.S. economy.
Delayed retirement credits (DRCs) are provided to compensate
workers at the NRA through age 69 whose benefits are withheld under the
RET. The DRC increases the worker's retirement benefit for each month
that benefits are fully withheld after the NRA. The DRC is 6 percent
per year for workers age 65 in 2000, and it will increase 0.5
percentage points every two years until it reaches 8 percent per year
for workers reaching age 65 in 2008 and later. At that time, benefits
lost due to the RET and/or delayed retirement generally will be offset
in an actuarially fair manner by the increase in benefits resulting
from DRCs. (See example 1.)
Example 1
How the Retirement Earnings Test Affects Beneficiaries at the Normal
Retirement Age and Above
In 2000, a worker files for benefits at age 65 (the normal
retirement age) and receives his/her full benefit of $1,000 per
month. If this worker had delayed filing for benefits for one
additional year, his/her benefit would have been increased by 6
percent to $1,060 per month. This increase reflects the fact
that he/she had not received benefits for one full year for
which he/she was entitled. This ``delayed retirement credit''
amounts to 6 percent of the full annual benefit amount each
year in 2001 and later.
If this beneficiary files for benefits at age 65 and
continues to work, he/she may be affected by the RET as
follows:
Scenario 1: His/her earnings never exceed the RET earnings
threshold, so the RET has no effect on his/her benefit and he/
she continues to receive his/her full benefit amount of $1,000
per month for the rest of his/her life.
Scenario 2: His/her earnings exceed the RET earnings
threshold to the extent that all his/her benefits at age 65 are
withheld. As a result, he/she receives a delayed retirement
credit of 6 percent, which increases his/her benefit to $1,060
per month, accounting for the fact that he/she received no
benefits at age 65 due to the RET.
These scenarios represent the extreme cases. If the worker
receives partial benefits, then the delayed retirement credit
adjusts his/her benefit accordingly. Also, a worker could have
earnings after age 65, which could increase his/her full
benefit. Annual cost-of-living adjustments would also raise
his/her benefit.
Retirement Earnings Test at Age 62
In 2000, beneficiaries between age 62 and the NRA have $1
in benefits withheld for every $2 earned above $10,080. (This
amount is adjusted annually to reflect the growth in the
average wage in the U.S. economy.) Beneficiaries also have
their benefits actuarially reduced for each month that they
receive benefits before the NRA. For example, a person born in
1938, who starts to collect benefits at age 62, receives 79.2
percent of what he or she would have received at age 65 and 2
months (his or her NRA). If benefits are withheld before the
NRA because of the RET, the actuarial reduction is adjusted at
the NRA to exclude those months, so there would be no permanent
reduction for those months. (See example 2.)
Example 2
How the Retirement Earnings Test Affects Beneficiaries Age 62 through
the Normal Retirement Age
In 2000, a worker files for Social Security retirement
benefits at age 62 rather than waiting until age 65 and 2
months (his/her normal retirement age). Had he/she waited to
file until age 65 and 2 months, his/her full benefit amount
would have been $1,000 per month. Because he/she chose early
retirement benefits at age 62, his/her benefits are reduced by
20.8 percent to $792 per month.
This reduction accounts for the fact that this beneficiary
will receive benefits for 38 additional months. However, over
his/her lifetime, he/she is expected to receive the same total
amount of benefits (based on actuarial projections of life
expectancy and adjustments for interest).
If this beneficiary continues to work after filing for
benefits at age 62, he/she may be affected by the RET as
follows:
Scenario 1: His/her earnings never exceed the RET earnings
threshold, so the RET has no effect on his/her benefits, and
he/she continues to receive 79.2 percent of his/her full
monthly benefit amount for the rest of his/her life--$792.
Scenario 2: His/her earnings exceed the RET earnings
threshold to the extent that his/her benefits are partially or
fully withheld in every month before reaching his/her NRA. As a
result, his/her benefits are recomputed at age 65 and 2 months
as 100 percent of his/her full benefit amount of $1,000 per
month, accounting for the fact that he/she never received full
benefits earlier due to the RET.
These scenarios represent the extreme cases. If the worker
receives partial benefits before he/she reaches age 65, then
the adjustment to his/her benefit at age 65 will reflect that
benefit payment in an actuarially fair manner. Also, a worker
could have earnings after age 62, which could increase his/her
full benefit. Annual cost-of-living adjustments would also
raise his/her benefit.
Approach Used to Estimate Poverty Effects of Eliminating the RET
To analyze the poverty effects of eliminating the RET, data
from the March 1994 Current Population Survey--a nationally
representative survey--are matched with Social Security
Administration administrative records. These data indicate how
much each person received in Social Security and other income
in 1993.
These data are used to determine the Social Security
benefit amount the person would have received in 1993 had there
never been an RET at 62 and over or an RET at NRA and over.
Essentially, this approach calculates the effects of changes in
filing behavior on poverty. It is assumed that many people
would have claimed benefits earlier had the RET never existed
and that, for many, this would mean lower Social Security
income (because, for example, benefits claimed before the NRA
are permanently reduced). Once the difference in Social
Security income is estimated, it is possible to determine
whether this would change the person's poverty status and to
report how many more people would be in poverty if the RET had
never been in effect.
Historical Approach
This is an historical approach, which examines the Social
Security population at a point in time in the recent past and
asks how Social Security income and poverty status would be
different assuming that the RET had never existed. It does not
take a cohort of people approaching their retirement years and
forecast the poverty effects from repealing the RET at 62 or
the RET at NRA.
There are limitations and advantages to using an historical
approach. Limitations include not fully reflecting the recent
increases in women's labor force participation, real increases
in Social Security benefits, or increases in the number of
beneficiaries retiring earlier--suggesting that estimates for
1993 may be somewhat larger than for future years. Advantages
include being able to know definitively at what age people in
the sample claimed benefits and to determine how their Social
Security income would have been different if benefits had been
claimed earlier. Another advantage of using an historical
approach is that it measures effects on people of all ages
within the Social Security population. This is important
because, as beneficiaries age, they exhaust other income
sources, and the importance of Social Security to total income
rises (See chart 1 for cross-sectional data on the importance
of Social Security by age).
[GRAPHIC] [TIFF OMITTED] T6309.001
Only Accounts for Changes in Social Security Income
This approach does not measure changes in income (other
than Social Security) that could have occurred if the RET at 62
or the RET at NRA had never existed. For example, it is
plausible that people would choose to work and earn more in the
absence of an earnings test. However, economic research has
found that the RET has only modest effects on aggregate labor
supply. This could be because workers take account of a number
of factors when making work and retirement decisions (the
availability and size of private pensions, health status, job
characteristics, personal preferences, etc.).
Assumes Benefits Received Early Will Not be Saved
The elimination of RET at 62 is likely to cause people to
file for permanently reduced benefits. However, it is not known
what such people would do with these reduced benefits. They may
save or invest a portion of them and have higher asset income
later in life. While this analysis does not take such effects
into account, economic research suggests that individuals at or
near the poverty level are not likely to save this additional
income.
Poverty Estimates for Eliminating the Retirement Earnings Test
Eliminating the RET is likely to encourage some beneficiaries to
apply earlier for benefits and, as a result, receive a lower monthly
benefit in the long run. Depending on the amount of a beneficiary's
income from other sources, this reduction in monthly benefits may
reduce his or her total income below the poverty threshold ($7,990 a
year for an aged individual and $10,070 for an aged couple in 1999).
If the RET were eliminated at the NRA (currently age 65), the
increase in the incidence of poverty would be small for several
reasons: Few people currently delay receipt of Social Security benefits
beyond age 65; those who do typically have incomes well above the
poverty level; and accelerating the receipt of a worker's benefit to
age 65 would generally not lower benefits enough to cause the
beneficiary (or the beneficiary's survivor) to become poor. Eliminating
the RET at age 62, however, would cause the income of some
beneficiaries to fall below the poverty level.
Retirement Earnings Test at the Normal Retirement Age
Elimination of the RET at NRA may encourage some who now plan to
retire later than the NRA to file for benefits at the NRA, but the
poverty effects stemming from elimination of the RET at NRA are
estimated to be minimal. The most important reason for this is that
benefits to a surviving spouse (widow or widower) would not generally
be reduced below the deceased worker's full benefit as a result of
eliminating the RET at the NRA.
In 1998, 9 percent of insured workers started receiving retired
worker benefits at age 65 and 1 month or later. It is unclear to what
extent insured workers would change their filing behavior, so poverty
estimates are provided based on four separate filing scenarios (See
table 1).
Table 1
Filing Scenarios for Repeal of the Retirement Earnings Test at the
Normal Retirement Age through Age 69
------------------------------------------------------------------------
Assumed Percentage of People Currently
Filing Scenarios Filing for Benefits after Age 65 Opting
to File by Age 65 and 0 Months
------------------------------------------------------------------------
Scenario A 0%
Scenario B 20%
Scenario C 50%
Scenario D 100%
------------------------------------------------------------------------
There would be a negligible effect on poverty under
Scenario A, and only about 2,000 people aged 62 and older would
be moved into poverty under Scenario D in 1993 (See table 2).
Table 2
Poverty Estimates Based on Different Filing Scenarios for Eliminating
the Retirement Earnings Test at Normal Retirement Age
------------------------------------------------------------------------
Aged 62+ Poverty Rate Before
Number of People Age 62+ Moved into and After Change
Poverty ------------------------------
Before 12.0%
------------------------------------------------------------------------
Alternative Scenario Alternative Scenarios
A Negligible effect A 12.0%
B 500 B 12.0%
C 1,000 C 12.0%
D 2,000 D 12.0%
------------------------------------------------------------------------
Source: Social Security Administration, Office of Policy, February 2000.
Eliminating the Retirement Earnings Test at 62
Eliminating the RET at ages 62 through 69 could raise the
number of beneficiaries in poverty. Much of this effect would
be due to more workers filing for benefits earlier and
receiving benefits permanently reduced below the full-benefit
level. Evidence suggests that the effects of increased work
efforts would be unlikely to offset these reductions.
Filing for benefits before the NRA is advantageous in the
short run for workers, but it can be disadvantageous later on--
particularly for their surviving spouses. The lower benefit for
a worker filing at age 62 in 2000 rather than waiting until his
or her NRA (reduced 20.8 percent in 2000 and 30 percent when
the NRA increases to 67 in 2022) is intended to be actuarially
fair so that beneficiaries, on average, will receive the same
total lifetime benefits as they would have received if they
filed for benefits at the NRA. In the future, however, much of
this reduction below the full-benefit level would pass through
to surviving spouses and could make their benefits inadequate.
In 1998, 48 percent of insured workers opted for benefits
at either 62 and 0 months or 62 and 1 month, and 79 percent of
insured workers opted for benefits before age 65. It is unclear
how the 52 percent of individuals who currently file for
benefits after age 62 and 1 month would change their filing
behavior, so estimates are provided under four scenarios. (See
table 1 for scenarios. These scenarios are based on the
percentage of people who currently file for benefits after age
""62 and 1 month who are assumed to file by age 62 and 1
month).
Based on these assumptions about how filing behavior would
be affected, eliminating the RET at age 62 could have moved up
to about 700,000 people aged 62 and older into poverty and
increased their poverty rate from 12.0 percent up to 13.9
percent in 1993 (See table 3).
Table 3
Poverty Estimates Based on Different Filing Scenarios for Eliminating
the Retirement Earnings Test at Age 62
------------------------------------------------------------------------
Aged 62+ Poverty Rate Before
Number of People Age 62+ Moved into and After Change
Poverty ------------------------------
Before 12.0%
------------------------------------------------------------------------
Alternative Scenario Alternative Scenarios
A Negligible effect A 12.0%
B 140,400 B 12.4%
C 351,100 C 12.9%
D 702,200 D 13.9%
------------------------------------------------------------------------
Source: Social Security Administration, Office of Policy, February 2000.
Demographic Profiles of Poverty Effects of Eliminating RET at 62
Detailed demographic breakouts of who could have been affected in
1993 by eliminating the RET at 62 are summarized below.
Gender--Up to 500,000 women could be moved into poverty, accounting
for 71 percent of the total moved into poverty. Their poverty rate
could increase from 14.8 percent up to 17.1 percent (See table 4).
Marital Status--Widow(er)s could account for 55 percent of the
total moved into poverty (up to 387,000). The poverty rate for
widow(er)s is 19.6 percent; it could increase to 23.2 percent. Married
couples could account for 34 percent of the total moved into poverty
(235,000), and their poverty rate could increase from 5.8 percent up to
6.9 percent (See table 4).
Benefit Type--Beneficiaries receiving worker-only benefits could
account for 55 percent of the total moved into poverty. Up to 238,000
surviving-spouse beneficiaries could be moved into poverty (34 percent
of the total), and their poverty rate could rise from 19.2 percent up
to 22.9 percent (See table 4).
Age--Fifty percent of the total moved into poverty could be aged
70-79. The poverty rate for this group could rise from 11.4 percent up
to 13.8 percent. Beneficiaries aged 80-89 could account for 36 percent
of the total moved into poverty. Their poverty rate could increase from
17.5 percent up to 21.9 percent (See table 4).
Table 4
Estimated Poverty Effects of Eliminating the Retirement Earnings Test at Age 62 and Above, by Selected
Demographic Characteristics
----------------------------------------------------------------------------------------------------------------
Number Moved into Poverty Poverty Rate After
----------------------------------------- ---------------------------------------
Percentage of People Currently Filing Percentage of People Currently Filing
Demographic for Benefits after Age 62 Opting to Poverty for Benefits after Age 62 Opting to
Characteristics File at Age 62 (Alternative Scenarios) Rate File at Age 62 (Alternative
----------------------------------------- Before Scenarios)
A ---------------------------------------
0% B 20% C 50% D 100% A 0% B 20% C 50% D 100%
----------------------------------------------------------------------------------------------------------------
Total 1 140,400 351,100 702,200 12.0% 12.0% 12.4% 12.9% 13.9%
Gender
Men 1 40,400 100,900 201,800 8.2% 8.2% 8.5% 8.8% 9.5%
Women 1 100,100 250,200 500,400 14.8% 14.8% 15.2% 16.0% 17.1%
Marital Status2
Married 1 47,000 117,600 235,200 5.8% 5.8% 6.1% 6.4% 6.9%
Widowed 1 77,300 193,300 386,700 19.6% 19.6% 20.3% 21.4% 23.2%
Divorced/Separated 1 10,200 25,500 51,000 23.7% 23.7% 24.1% 24.7% 25.6%
Never Married 1 5,900 14,600 29,300 22.5% 22.5% 22.8% 23.4% 24.3%
Benefit Type3
Worker-Only 1 76,600 191,400 382,900 9.1% 9.1% 9.4% 10.0% 11.0%
Spouse 1 13,100 32,800 65,500 8.1% 8.1% 8.3% 8.7% 9.4%
Surviving Spouse 1 47,600 119,000 237,900 19.2% 19.2% 20.0% 21.1% 22.9%
Age
62-69 1 12,300 30,900 61,700 10.0% 10.0% 10.1% 10.2% 10.4%
70-79 1 69,700 174,200 348,400 11.4% 11.4% 11.9% 12.6% 13.8%
80-89 1 50,900 127,300 254,600 17.5% 17.5% 18.3% 19.7% 21.9%
90+ 1 7,500 18,700 37,500 19.1% 19.1% 19.9% 21.0% 22.8%
----------------------------------------------------------------------------------------------------------------
Source: Social Security Administration, Office of Policy, February 2000.
Notes:
1 The effect would be negligible.
2 Respondents to the Current Population Survey indicated their marital status at the time of the survey. These
individuals may or may not be receiving a benefit based on their marital status.
3 Some people affected by this proposal are not beneficiaries (they share a household with a beneficiary), so
rows do not add up to the total number of people affected. The ``Spouse'' category includes divorced spouse
beneficiaries and dually-entitled spouse beneficiaries, and the ``Surviving Spouse'' category includes
surviving divorced spouse beneficiaries and dually-entitled surviving spouse beneficiaries.
Mr. Doggett. Thank you.
Thank you, Mr. Chairman.
Chairman Shaw. There are a couple of points I think that
should be made at this point: One, that the leadership on the
Republican side clearly set aside the surplus and locked it
away and said that it can be used, however, for Social Security
reform. This is a small part of Social Security reform. But it
is reform. It is bringing fairness to the system, and this was
a very unfair situation that we had.
In fact, when Social Security originally was put into law,
that earnings test grabbed hold, I believe, after $15 of
earnings.
Mr. Apfel. It was actually at zero in the beginning.
Chairman Shaw. We have been chipping away on that, and now
it is the time to absolutely eliminate it.
There are a couple of other things that I think need to be
brought to light here. One, I think the Commissioner made it
very clear that it is revenue-neutral because you start getting
those benefits that you lost back after 70 and beyond. But I
think more than that, look at the effects it is going to have
on certain parts of the population. Life expectancies, to take
an example, for African-Americans are less. So if you are
whacked with the earnings penalty and then don't live long
enough, you never get back what you were penalized. And that is
something that I think we have to also think about.
Absolutely this present system is terribly unfair, and we
are going to get rid of it once and for all, and I am pleased
to hear that everybody--even you, Mr. Doggett, though you have
some criticism--is going to vote for it because I think this is
a most important bill.
Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman. And my friend from
Texas, Mr. Doggett, I sure am glad you are for this bill;
otherwise, the questioning would have been real tough.
Mr. Commissioner, you said a few minutes ago that you
support the disparity between the earnings limit, if you will,
for non-blind disabled and blind disabled. What is the
rationale for that differential?
Mr. Apfel. The rationale--which goes back to the 1977
Social Security Amendments--is that the problems facing the
blind are very severe in terms of employment and a higher
incentive was viewed back then and always has been to provide
employment opportunities for the blind. And I think that is
right and it should continue.
Mr. McCrery. We shouldn't try to provide employment
opportunities for non-blind disabled?
Mr. Apfel. Oh, I think we should as well, but I believe the
history here of a more liberalized system for the blind makes
sense because of their intense employment needs.
Now, again, my recent regulation for the non-blind disabled
was to greatly expand the amount of income that that group
could continue to earn without losing benefits. I think that we
need to--as I testified before this Committee earlier this
year--we need a whole lot of thinking about what steps are
going to be necessary to assure more of the disabled enter into
the work force. The Ticket-to-Work legislation I think, was a
very important first step. I am not here to make a series of
new proposals yet. The ink is still drying on the new one.
Mr. McCrery. So you are considering the possibility of
bringing the non-blind disabled up to the level of the blind
disabled?
Mr. Apfel. I am considering whether we should find some way
to raise somewhat higher the levels for the disabled, and there
is no definitive decision on that yet, but it is one of the
areas that I am considering to provide greater incentives yet
again.
Mr. McCrery. How much would it cost to bring the non-blind
disabled up to the same income level as the blind disabled?
Mr. Apfel. If we brought the non-blind disabled up to the
blind disabled--I am going to have to provide that for the
record, sir. I don't have that information, but we will provide
that.
[The information follows:]
Proposal:
Raise the SGA level for non-blind disabled to the SGA level
for the blind disabled.
Cost over First 5 Years: $2 billion
Long-Range Cost: 0.09 percent of taxable payroll
Mr. McCrery. OK. I think it is worth looking at. We do want
to try to encourage work in this country, and we have gone to
great lengths with welfare reform and Ticket to Work and now
this legislation to encourage work. So I think that we ought to
look at----
Mr. Apfel. Mr. McCrery, I would love to work with you on
that. The reality is that we need to create greater incentives
for work, and that is true in the disability community, it is
true in the welfare population, and I think the steps that were
taken last year by this Committee were very important. But we
need to do more, and we would love to work with you on that in
the years ahead.
Mr. McCrery. Thank you.
Yesterday the President endorsed this legislation,
basically, but he also mentioned a couple of other things. One
would be overall Social Security reform and the other, he
talked a bit about bringing women out of poverty. But would you
clarify that he did not make his approval or his decision to
sign this legislation that is before the Committee today
contingent upon our acting upon the other two items, did he?
Mr. Apfel. No. What the President said--and I support this
endeavor--is a two-step process. Step one would be the
elimination of the retirement earnings test at the normal
retirement age, a simple, straightforward bill without a lot of
extraneous activities around it; and, two, moving to the next
step on the long-term solvency of Social Security. The
President has proposed transferring on-budget surpluses, based
on the interest savings to Social Security, as well as benefits
for women.
I would very much like to see those done this year as well.
Certainly that is what the President said yesterday.
Mr. McCrery. But he is not going to hold up signing this
bill until----
Mr. Apfel. He absolutely did not say that that would be
held up from this legislation. He has supported the retirement
earnings test repeal for some time, as Mr. Johnson knows. And
we can do this separately, but we ought to also do the other
steps that are necessary to move us closer to long-term reform.
Mr. McCrery. Do you know what the President's proposal is
on women on Social Security?
Mr. Apfel. Well, the specific proposal has not been
articulated in terms of one particular piece of legislation.
There are a series of options that have been discussed before
this Committee and other places about whether to expand
benefits for women, whether to find ways to provide stronger
spousal benefits. We could provide for the record a listing of
four or five potential inclusions--not only in Social Security
but also in the SSI Program. SSI is another program provides a
very important poverty benefit, and there could be
liberalizations in that as well.
There is not one specific proposal, Mr. McCrery, but I will
provide for the record a listing of a half-dozen proposals that
all should be considered.
[The information follows:]
While the Administration has not endorsed any specific
proposal designed to improve the economic condition of elderly
women at this time, we are examining a variety of proposals
that have been developed by numerous groups, including:
1. Increasing Social Security Benefits for Widow(er)s
Under current law, survivors receive the higher of their
own worker benefit or a surviving spouse benefit based on their
deceased spouse's primary benefit. This benefit generally
ranges from 50 percent to 67 percent of the amount the couple
would be receiving if both were still alive. Recent research
shows that a single person needs about three-quarters of a
couple's income to maintain the same standard of living. While
Social Security is generally only one part of retirement
income, it accounts for a much larger proportion of the
retirement income (in some cases all) of the poorest
individuals.
The widow(er)'s benefit could be increased in many ways.
One way is by making it a larger percentage of the couple's
benefit. This increase could be limited to a specific threshold
to control costs and to target it more effectively. For
example, it could be limited to the benefit paid to steady
maximum earners or to the average retired worker benefit. In
addition, it could be effective immediately for all current
beneficiaries or phased in gradually for newly-eligible
beneficiaries. Examples of these types of options include:
Increasing widow(er)'s benefits to 67 percent of
the couple's benefit, effective for all widow(er) beneficiaries
immediately, and limited to the benefit paid to steady maximum
earners or limited to the average retired worker benefit (see
attached memorandum).
Increasing widow(er)'s benefits to 67 percent of
the couple's benefit, gradually phased in for new eligibles,
and limited to the benefit paid to steady maximum earners or
limited to the average retired worker benefit (see attached
memorandum).
Increasing widow(er)'s benefits to 75 percent of
the couple's benefit, effective for all widow(er) beneficiaries
immediately, and limited to the benefit paid to steady maximum
earners or limited to the average retired worker benefit (see
attached memorandum).
Increasing widow(er)'s benefits to 75 percent of
the couple's benefit, gradually phased in for new eligibles,
and limited to the benefit paid to steady maximum earners or
limited to the average retired worker benefit (see attached
memorandum).
Widows are at risk of poverty in later life, especially
when their spouse files for benefits before the normal
retirement age (NRA) and receives an actuarially reduced
benefit. A provision of current law--the widow(er)'s limit--
operates as a ceiling on widow(er)'s benefits. Under the
widow(er)'s limit, the widow(er)'s benefit can not exceed the
greater of the reduced benefit the deceased worker was
receiving or 82 of the deceased worker's primary insurance
amount (PIA). For example, a married man who filed for benefits
at age 63 in 1999 would have received 86.7 percent of his PIA.
If he dies after she reaches the NRA, her widow(er)'s benefit
will be 86.7 percent of his PIA. Without the limit, she would
have received 100 percent of his PIA, because she began to
receive widow(er)'s benefits after the NRA.
For example, one option would be to abolish the widow(er)'s
limit ceiling and permit widow(er)s, whose spouse retired
before the NRA, to receive up to 100 percent of their spouse's
PIA, depending on when the widow(er) filed for benefits.
2. Increasing Social Security Benefits for Low Earners--Most of
whom are Women
Under current law, a special minimum benefit exists that
provides a guaranteed minimum benefit for persons who worked at
least 11 years in covered employment. Workers must meet a
minimum earnings amount to qualify for a year of covered
earnings ($8,505 in 2000). The current minimum benefit would
pay a worker with 30 years of covered earnings a monthly
benefit of $580.60 (in December 1999), while the all-ages
poverty threshold was $722.20 in that same year.
Only 143,390 retired workers (0.50 percent of all retired
worker beneficiaries) received special minimum benefits in
December 1999; 76 percent were women.
There are various ways to increase the special minimum
benefit, including 1) revising the indexing mechanism so the
real amount of the benefit grows in the future or 2)
structurally changing the benefit. Examples of these types of
options include:
Indexing the special minimum benefit to wage
growth rather than inflation. (Benefits under the regular
benefit formula are wage-indexed before eligibility and thus
reflect wage growth.)
Increase the benefit payment to workers with many
years of low earnings by changing the existing special minimum
benefit so that 30 years of covered earnings results in a
benefit at 100% of poverty threshold; 40+ years results in a
benefit at 130% of poverty threshold, scaled between 30 and 40,
and scaled down to 10 years.
3. Making Changes to the Supplemental Security Income (SSI)
Program
Under current law, the dollar amount of monthly Social
Security benefits excluded in the computation of SSI benefits
(the general income exclusion) has remained constant at $20
since 1974. If the $20 had been raised to its inflation-
adjusted equivalent in January 2000, the dollar amount would be
$80.
Women are especially affected by this exclusion because
they are far more likely to have low enough retirement benefits
to qualify for SSI. In December 1998, 34 percent of women
retirees received less than $500 per month in Social Security
benefits compared to 12 percent of men.
The general income exclusion could be raised in any
increment above the current $20. For example, one option would
be to increase the SSI general income exclusion from $20 up to
$80 and possibly adjusting it annually thereafter to keep pace
with inflation.
Social Security
May 28, 1999
Memorandum
Harry C. Ballantyne, Chief Actuary
Subject: Estimated Long-Range OASDI Financial Effects of
Provisions to Increase Benefits Paid to a Widow(er)--
INFORMATION
Background
Under current law, a surviving aged spouse (age 62 or
older) may be eligible to receive either (1) an aged surviving
spouse benefit based on the earnings of the deceased spouse,
(2) a retired worker benefit based on his/her own earnings, or
(3) his/her own retired worker benefit plus a dual entitlement
excess benefit equal to the excess (if any) of the aged
surviving spouse benefit over his/her own retired worker
benefit. Effectively, a surviving aged spouse is eligible for a
Social Security monthly benefit equal to the higher of his/her
own retired worker benefit and the aged spouse benefit payable
based on the earnings of the deceased spouse.
The 1994-6 Advisory Council on Social Security considered
provisions to modify the nature of the benefit payable to an
aged surviving spouse of a married couple. The Individual
Account (IA) Plan and the Personal Security Account (PSA) Plan
both included a provision to pay an aged surviving spouse 75
percent of the benefit that would be payable to the couple if
they were both still alive, if higher than the benefit
otherwise available. The 75-percent benefit amount was limited
in both cases based on the retired worker benefit that would be
payable to the survivor had she/he been a steady worker with
earnings consistently at or above the OASDI contribution and
benefit base. The IA plan, in addition, included a provision to
reduce the benefit payable to an aged spouse based on their
spouses earnings from 50 percent to 33 percent of the spouses
primary insurance amount (PIA).
The PSA provision would increase the benefit payable to
survivors of both one-earner and two-earner couples, with a
larger increase for two-earner couples. The benefit for the
survivor of a one-earner couple would be about 112.5 percent of
the worker's retirement benefit (0.75 x 1.50 = 1.125), compared
with 100 percent of the worker's retirement benefit under
current law. For a two-earner couple where both spouses had the
same PIA, the benefit would be 150 percent of the survivor's
retired worker benefit, compared with 100 percent of the
retired worker benefit under current law.
The IA plan combined this provision with a reduced spouse
benefit (both spouses alive) so that the survivor of a one-
earner couple would not be helped (0.75 x 1.33 = 1.0).
Description of Provision
Provisions currently being considered focus on the proposal
to provide an aged surviving spouse benefit equal to 67
percent, 75 percent, or more of the benefit payable to the
couple if they were still both alive without any reduction in
the benefit payable to the spouse of a living worker.
The table below provides estimates of the effect on the
long-range OASDI actuarial balance of provisions to increase
the benefit of an aged surviving spouse to 67 or 75 percent of
the amount that would be payable to the couple if they were
both still alive. This benefit option would be available as of
the date upon which both the surviving spouse has attained age
62 and the deceased spouse would have attained age 62 (i.e.,
the date at which both could have been eligible for retired
worker or aged spouse benefits). The couple benefit for this
purpose would reflect any actuarial reductions (or DRC) earned
by either spouse up to the date of death of the deceased
spouse. If the deceased spouse had not yet become entitled to a
retired worker or aged spouse benefit, then the deceased would
be deemed to have become entitled at the date of death, or at
the date age 62 would have been attained, whichever would occur
later. Reduction (or DRC) for the survivor would be based on
the age of first entitlement to a retired worker, aged spouse,
or aged surviving spouse benefit (but not less than 62).
Estimated change in OASDI
Provision actuarial balance (percent of
taxable payroll)
67 Percent of Couple Benefit--Effective
for all in 2000+........................
Limit to Steady Maximum Earner......... -0.12
Limit to Average Retired Worker Benefit -0.03
67 Percent of Couple Benefit--Phased in
for New Elig 2000-09
Limit to Steady Maximum Earner......... -0.09
Limit to Average Retired Worker Benefit -0.02
75 Percent of Couple Benefit--Effective
for all in 2000+
Limit to Steady Maximum Earner......... -0.46
Limit to Average Retired Worker Benefit -0.10
75 Percent of Couple Benefit--Phased in
for New Elig 2000-09
Limit to Steady Maximum Earner......... -0.33
Limit to Average Retired Worker Benefit -0.07
Based on intermediate assumptions of the 1999 Trustees
Report.
The table provides estimates for two possible limits on the
amount that the provision may increase the benefit of a
surviving spouse. First, the retired worker benefit that would
be payable to the surviving spouse if he/she had earnings
consistently at or above the OASDI contribution and benefit
base (from age 22 through age 61). Second, the retired worker
benefit that would be payable to the survivor if she/he had a
PIA equal to the average PIA for all retired worker
beneficiaries in current payment status for December of the
year prior to the year in which the survivor first exercises
this benefit option. In both cases, the limit reflects any
actuarial reduction (but not DRC) that would apply to the
survivor's retired worker benefit with initial entitlement at
the age of first entitlement to a retired worker, aged spouse,
or aged surviving spouse benefit (but not less than 62).
The table also provides estimates for two possible
effective dates. First, all persons eligible for this benefit
option as of January 2000 are affected. This means that all
persons eligible for an aged surviving spouse benefit who
otherwise qualify, would receive the benefit of this option for
all benefits payable for January 2000 and later. Second, the
benefit option would be phased in over 10 years for persons
newly eligible for the option. Persons first eligible for the
option in 2000 would receive 10 percent of the potential
increase under the full provision, 20 percent for those first
eligible in 2001, and 100 percent for those first eligible in
2009 and later. First eligibility occurs when the survivor
could qualify for the benefit option, regardless of whether the
individual has filed for any OASDI benefit at that time or not.
This gradual phase in for newly eligible beneficiaries is
intended to minimize the extent to which individuals newly
eligible in any year will benefit less from this provision than
do individuals newly eligible in the following year.
Stephen C. Goss,
Deputy Chief Actuary
Mr. McCrery. Thank you.
Chairman Shaw. Mr. Weller?
Mr. Weller. Thank you, Mr. Chairman.
Commissioner, good to see you. Good morning.
Mr. Apfel. Good to see you.
Mr. Weller. First, let me just begin by commending my
colleague, Sam Johnson, as well as the Speaker of the House,
Dennis Hastert, for their leadership--and Clay Shaw, our
chairman, for their leadership repealing the earnings limit,
the earnings penalty on seniors who want to continue working
after they turn 65. It is a fairness issue, and I am very, very
pleased that the President has made a decision to support the
legislation as well.
Now, it is interesting that 800,000 Americans over the age
of 65 lose $1 of their Social Security for every $3 in outside
income that they earn above $17,000. I think of seniors that I
know back home, some who may not have been able to save a lot
for their retirement or their pension income isn't quite what
they thought it would be, and so they are forced to work. And,
of course, this legislation will help them in their later
years. So I really am very, very pleased that this is a
bipartisan effort today.
I also note the President's comments that he says he will
sign a bill to repeal the earnings penalty as long as it is not
littered with a lot of unrelated other things. And I hope that
the President's friends in the Senate will keep that in mind as
we move our legislation to address another issue of fairness,
the marriage tax penalty. There are threats by some in the
Senate, of course, to put extraneous provisions on our effort
to wipe out the marriage tax penalty for 25 million married
working couples.
We have had the leadership here in the House send a stand-
alone bill, a clean bill that only does one things, to the
Senate and we hope we can keep it that way and put it on the
President's desk and that he will sign that legislation into
law.
Commissioner, a lot of times during debate and a lot of the
rhetoric, there is always the rich versus poor, what is the
definition of middle class. Last week I was told by some of my
friends that a married couple making $62,000 who happen to own
a home are rich. And that was their definition of wealthy.
The L.A. Times today has on the front page a couple
examples of a couple seniors who are forced to work or want to
work after they are 65, and I just want to kind of get a feel
what your thoughts are about where they stand on the economic
ladder.
You have Ida, 66. She works as a cashier. Her monthly
benefit from Social Security is $417. She has annual earnings
of $18,500, and, of course, this year the earnings limit is
$17,000 So her earnings in excess of the limit are $1,500, and
according to this example of the L.A. Times, under the current
system, under the current earnings penalty, she will lose $500
as a result of the earnings penalty.
Is Ida wealthy making $18,500?
Mr. Apfel. Well, I don't know what her other income is, but
if that is her only income, she is certainly not wealthy, and
the reason we need to repeal the earnings test is to provide a
greater work incentive for that individual because she would be
able to keep her Social Security benefits.
Mr. Weller. Then the second example that they give is a
gentleman by the name of Fred. He is 67 years old. He is an
auto mechanic, and he currently has a monthly benefit of
$1,000. He has annual earnings of $32,000, and after the
$17,000 earnings penalty for this year, his earnings in excess
are $15,000. And the current earnings penalty costs Fred, who
is 67 years old, working as an auto mechanic, $5,000 a year.
Now, under the administration's definition of rich, is
Fred, who makes $30,000 and suffers a $5,000 earnings penalty,
is he defined as rich by your administration?
Mr. Apfel. I am not sure where we are going, Mr. Weller.
The administration proposes to eliminate the retirement
earnings test so that that individual could continue to work
without losing Social Security benefits.
From what you have described, this does not appear to be an
affluent individual. The repeal of the retirement earnings
test, once it phases fully up to $30,000, will, among others,
affect the top quintile of earners in this country, in other
words, the top fifth of earners, as I was pointing out to Mr.
Doggett.
However, those individuals will receive, therefore, lower
Social Security benefits later on over their lifetime. So the
elimination of the retirement earnings test would affect those
in the top quintiles.
Mr. Weller. So this auto mechanic making $32,000, suffering
a $5,000 penalty, is not rich. You believe that he is not a
wealth individual.
Mr. Apfel. It doesn't sound like a rich----
Mr. Weller. Because I remember back in 1993 the
administration pushed through a tax increase on seniors making
about $33,000. You may recall that tax increase on their Social
Security benefits, and they were defined as rich at that time.
So that definition has changed. So I hope this is----
Mr. Apfel. Well, Mr. Weller, I am not certain that I
would--if you remember the history on that legislation, that
was made to help strengthen the Medicare Program, and those
were resources that were provided to the Medicare Program--just
as back in 1983 with the bipartisan support of this Committee
changes were made to provide for taxation of benefits to help
strengthen the Social Security system. So I don't know whether
that person is rich or not, but those were changes that were
made to help strengthen both the Social Security system back in
1983 and the Medicare system in 1993.
Mr. Weller. Just quickly in response, reclaiming my time,
Commissioner, back in the South Side of Chicago and the south
suburbs in Illinois, an auto mechanic making $32,000 or $35,000
struggles to get by, even with their Social Security benefits.
And that is why this legislation is so important, to help
seniors in their later years live a quality lifestyle. They
have health care concerns at that age. Of course, we want to
address that this year. And, of course, Bill Thomas is doing a
terrific job as he works to put together a prescription drugs
component for Medicare. And I look forward to working with you.
But thank you, Commissioner, and thank you, Chairman.
Mr. Apfel. Well, I think it is a very important piece of
legislation, and we strongly want to see it enacted.
Chairman Shaw. Mr. Levin?
Mr. Levin. I was just trying to refresh my recollection of
whether the House and the Senate have passed bills since 1994
to reverse the 1993 provision on taxation of Social Security
benefits. I forget. Has that been acted on by both the House
and the Senate, sent to the President?
Mr. Apfel. I do not believe it has, sir.
Mr. Levin. I don't think so.
Mr. Apfel. If legislation was enacted to do it, it would
reduce Medicare solvency and would reduce Social Security
solvency.
Mr. Levin. So I am a bit mystified why Mr. Weller would
raise that, since there was control of this Congress and no
effort on both sides to repeal it. But, anyway, I guess we
fight old battles around here. But let's concentrate on the new
one.
We support the provision proposed here. In your testimony,
though--and I had a chance to read it, though I am sorry I
missed some of the earlier back and forth. In your testimony,
you talk about the need to be aware that Social Security reform
proposals can have very different effects on the benefits
received by women compared to men.
Just elaborate a bit about this issue, if you would.
Mr. Apfel. Any one of the reform proposals will have a
differential effect on men and women, as it will individuals in
different income groups. With respect to the effect of
eliminating the retirement earnings test at the normal
retirement age, about 40 percent of those individuals are women
and about 60 percent are men. And the impact on poverty is
negligible from such a change at the normal retirement age.
That is not the case, as I indicated to Mr. Doggett, for
eliminating the test at age 62. If the proposal were to
eliminate the retirement earnings test at an earlier age, at
62, the poverty impact would be substantial, and primarily for
women. If we look at the statistics on this, the effect of
eliminating the retirement earnings test at age 62, is that if
everyone retired at age 62, the long-term poverty effect could
be as high as 700,000 people.
Now, clearly, not everyone would retire at age 62, although
about 60 percent now do. If no one changed their behavior, the
effect would be zero. Some will change their behavior, and
there will be some poverty impact. The actuaries have assumed
somewhere about one-half will change their behavior, which
corresponds to about 350,000 additional people moving into
poverty.
If we look at the individuals who might potentially be
affected by poverty, about three-quarters of those are women
and about half are widows, a few widowers. So there would be a
significant impact for women to eliminate the retirement
earnings test at age 62.
If the RET is eliminated at the normal retirement age,
again, which this legislation does, there is really a
negligible impact. And it also creates some modest incentives
to work, which I think are good.
So I think we need to look at all of the proposals before
us in the future for Social Security, both in terms of
differential for women and men, as well as different income
groups. And Mr. Doggett talked about the implications for
upper-income for this particular piece of legislation, and in
the short term it would provide a benefit for primarily men,
primarily upper-income or those in the top quintiles. But over
the long term, because their benefits would not be as high, it
has a zero income effect.
So there is a very big difference between the elimination
of the retirement earnings test at the normal retirement age
and if it were eliminated at the early retirement age. And so I
am pleased that the bill before the Congress deals with it at
the normal retirement age and not the early retirement age.
Mr. Levin. Thank you, and we are proud of all your talented
efforts, Mr. Commissioner. Thank you.
Chairman Shaw. Mr. Matsui, you indicated that you had
another question.
Mr. Matsui. Thank you very much, Mr. Chairman, for allowing
me to ask this one question.
I don't think there is, but is there a notch problem here
at all? Would there be? Not at all?
Mr. Apfel. No, sir.
Mr. Matsui. OK.
Mr. Apfel. If an individual, say, turns 65 halfway through
the year, the benefit income would be affected by the earnings
test for the first half of the year by the lower earnings test,
and by the last half of the year not at all. So there is not a
notch effect that is created by this legislation.
Mr. Matsui. OK. Thank you.
Mr. Levin. It is the magic word.
Mr. Apfel. I know. It is a magic word. I don't need another
notch.
Chairman Shaw. Thank you, Commissioner. You are always
welcome before this Committee, and it is nice to have you
again.
Mr. Collins. May I ask a question?
Chairman Shaw. Oh, Commissioner, we have one more question
for you. I am sorry.
Go ahead, Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman, and we won't hold you
long, Commissioner.
There has been a lot of reference to the Social Security
surplus. I have some concern about using the word ``surplus.''
Having been in small business for about 35 years, knowing that
I had a lot of obligations facing me as far as amortizations
and such, I considered the very similar situation that we have
with the payroll tax today to be more of a positive cash flow
at this point in time than I do a surplus, because is it not
true that within the next 14, 15 years that positive cash flow
will reverse and we will have a negative cash flow, and we will
need all of the positive aspects of the payroll tax today to
meet that obligation?
Mr. Apfel. I think that is a fair way to look at it, Mr.
Collins. I think the Social Security surplus is a very
important asset for the long term for Social Security. We have
a positive cash flow in the Social Security system for about
the next 13 to 14 years; then we do go negative. And it is
very, very important how we handle this issue over the short
term to ensure that we can pay benefits in the long term.
I think it is very appropriate to lock away those Social
Security surpluses and pay down the debt with them, because
that is real savings. That is real savings for the economy. I
would also think an important step would be when the Congress
decides what to do about that non-Social Security surplus, I
would certainly hate to see us have all of that resource be
gone before we have figured out the share for Social Security.
I think the Social Security system and the President's proposal
to provide on-budget transfers to Social Security is very
important to meet those long-term obligations that we have.
So the Social Security surplus is important, but also the
on-budget surplus is very important. And I am going to be
watching how that money gets used because I would hope that we
are in a position where some of that on-budget surplus is used
as well to strengthen Social Security for the long term.
Mr. Collins. Well, there have been a lot of ideas expressed
as to how any type of positive cash flow should be used. In
fact, we heard quite a bit of that the other night.
But, now, this earnings test that we are addressing here
with Mr. Johnson's bill, it doesn't affect payroll tax, does
it, in a negative way?
Mr. Apfel. No. Actually, it affects the payroll tax income
in a slightly positive way.
Mr. Collins. That is right. So this positive cash flow/
surplus won't be affected by this.
Mr. Apfel. The outlays from the Social Security trust fund
increase in the short term from this proposal. But those
revenues come back in over the long term into the system
because of lower benefits that individuals receive by not
receiving delayed retirement credits.
Mr. Collins. But those are not FICA taxes. This is actually
a penalty. The earnings test is a penalty. It is a tax in the
form of a penalty, not a tax in the form of payroll taxes.
Mr. Apfel. That is a fair assessment. It is very much a
perceived penalty because individuals do not realize that if
they do take this penalty in the short term, then under the
current law their benefits are higher in the future. So it is
perceived in the short term very much as a penalty, and
elimination of that will mean that individuals have higher
benefits in the short term but somewhat lower benefits in the
long term. But that is how it stays cost-neutral.
But I would also point out, Mr. Collins, that there is some
payroll tax increase to this. I had given the figures of $17
billion over 5 years and $26 billion over 10 years as the cost
of this proposal. That is really the gross cost. Some offsets
will occur. Somewhere on the order of 25 percent will come back
in, and that will come back in through added payroll tax
income.
Mr. Collins. It has a positive effect on the payroll tax.
Mr. Apfel. A positive effect on the payroll tax. There are
three----
Mr. Collins. I have one quick hypothetical question for
you. That is a big word for me. Supposing--and that is a good
Southern word for ``suppose.'' Supposing there was no need to
borrow the Social Security FICA tax cash flow by the general
fund--in other words, all of the public debt was retired and
there is no need to continue to build debt, because when we do
build debt, we have a tendency to spend it. What interest-
bearing account would you suggest those funds be deposited in?
Mr. Apfel. You are now projecting out 10 and 15 years?
Mr. Collins. Yes.
Mr. Apfel. Well, ultimately----
Mr. Collins. Now, I didn't say stock market or mutual
funds. What interest-bearing account----
Mr. Apfel. But, Mr. Collins, I would. It seems to me that
in the long term we need to be investing part of these
surpluses in not only government securities but also in the
equity market.
If we look at State and local pensions systems--and Social
Security is not a perfect analogy to State and local pensions,
but it does have many of the same similarities. State and local
pensions now invest about 60 to 70 percent of their assets in
equities to ensure a higher rate of return. But higher rate of
return means that taxes don't have to be raised or benefits cut
to provide for those obligations.
I think this is an area that we should look at. I think
there is quite a bit of resistance to such a proposal right now
in the Congress that I have heard, a very significant----
Mr. Collins. Yes, I understand that, and we don't want to
get into that debate because--and I think it should be looked
at, too. But what interest-bearing account? Very similar to
what Galveston does in Texas. They put theirs in interest-
bearing accounts. What interest-bearing account would you----
Mr. Apfel. Interest-bearing bonds and government
securities, as well as in the market itself. I think all of
them are legitimate options and we should be doing all of them
in the long term.
If I could just finish up on the question that you asked a
minute ago, Mr. Collins, about the gross cost and the fact that
there are offsets to the overall cost, about 25 percent, that
is due to three things, really: Higher payroll taxes because
people will be working more; somewhat higher taxation of
benefits; and, three, lower Medicare costs. This is something
that many people are unaware of, but if people are working
more, they have third-party insurance that will be paying some
of those health care costs that are now being paid for by
Medicare. So there is potentially--there will be a positive
impact on Medicare as well as some positive income to the
system from payroll taxes.
Mr. Collins. Thank you, Mr. Chairman.
Chairman Shaw. If I could just follow up on just a couple
of things here that you unearthed, which really is going beyond
the scope of this hearing, but I think it is necessary to be
sure that the record is clear.
As we pay off the publicly owned debt, the debt that is out
there that people are holding, a lot of it is foreign owned,
but we are paying that down. But that is counterbalanced within
the Social Security trust fund is that for every dollar that
goes out of the surplus, it is replaced with a Treasury bill,
which is debt. It is debt by the government to the Social
Security Administration or debt by the government to itself,
but it certainly represents a liability in that it stands for
the resolve that the Congress and the administration have to
future generations. But when that starts going down, we
obviously have to go to the taxpayer or the general fund in
order to get the money to pay that off. There is no arguing in
that arena.
When we start talking about privatization of the Social
Security system, and you made remarks that you weren't for
privatization, but you are for investment in the private
sector. Now we can say, as far as the investment is concerned,
that it is privatized, but as far as who controls it, it is
government controlled. But I think that that's a dangerous road
to go down. I would hope that, whereas equities are important,
they should be invested outside of the Social Security system.
The Social Security system should be left totally alone. It
is presently invested in the government securities, and it
should continue to go that way. Any investment in the private
sector should be outside of the Social Security system, but
used at a later date to come and help out. I think this is of
concern to us.
I think that every poll that I have seen says that they do
not want, that the American people do not want the Social
Security Administration playing the stock market. I agree with
the American people on that. And I would be very much opposed
to any privatization of the Social Security system, whether it
be through the privatization of investment or whether it would
be the taxes, FICA taxes, going outside for investment in the
private sector. It is not necessary, and it should not happen,
and we should not privatize the Social Security system at all.
If you would like to comment on that.
Mr. Apfel. Well, Mr. Shaw, this whole issue is one that we
have yet to get to consensus on. I think that is fair to say.
From my perspective, I believe that as the Social Security
system develops larger surpluses in the future, that a very
legitimate option is to diversify the portfolio. I don't think
that the consensus has emerged on that yet. But if we look at
State and local pensions, which used to be invested very low in
equities, they are now quite high in equities, to help increase
rates of return and also to increase--to obviate tax increases
and to obviate benefit cuts for State and local pensioners.
I think that this is an issue that needs a whole lot more
debate and will continue to be debated. But I must tell you,
where I sit on this issue, I think that it is the right thing
to do in the long term. I think that the potential of a
consensus on this this year is unlikely on the issue of equity
investments, either individually or collectively. But I do
believe it is the right thing in the long term for the system,
and that debate will continue, sir.
Chairman Shaw. We understand each other.
Thank you. Thank you, Commissioner.
Mr. Apfel. Thank you.
Chairman Shaw. We now have our next panel, and we are
actually going a lot slower than I had anticipated. We have
Jane Baumgarten, who is a member of the board of directors of
the American Association of Retired Persons, North Bend,
Oregon; we have Tom Woods, who is the president of T.E. Woods
Construction in Kansas City, Missouri. He is chairman of the
board of trustees of the National Association of Home Builders;
Jim Martin, president of The 60 Plus Association, down in
Arlington, Virginia; we have Colonel Henry A. Hough, who is a
member of The 60 Plus Association, in Arlington, Virginia;
Martha McSteen, who is the president of the National Committee
to Preserve Social Security and Medicare; and Zed Wondemu of
Zed's Ethiopian Cuisine in Georgetown and the National
Restaurant Association.
Welcome. We have all of your full testimony, which will
become a part of the permanent record, and we would welcome you
to proceed as you see fit, and please feel free to summarize.
Ms. Baumgarten.
STATEMENT OF JANE BAUMGARTEN, MEMBER, BOARD OF DIRECTORS,
AMERICAN ASSOCIATION OF RETIRED PERSONS
Ms. Baumgarten. Thank you, Mr. Chairman. I am Jane
Baumgarten, a member of AARP's board of directors. The
Association appreciates the opportunity to present our views
regarding the Social Security earnings limit.
AARP supports increasing, as well as eliminating, the
earnings limit for beneficiaries ages 65 through 69. This would
enable many beneficiaries to work and supplement their Social
Security, just as other recipients do with pensions and
unearned income. With a change, beneficiaries will be able to
earn more without penalty. AARP is pleased to have worked on a
bipartisan basis with this Committee and other Members of
Congress to increase the earnings limit for beneficiaries ages
65 through 69.
We support the legislation enacted in 1996 that phases in
an increase. It provided needed relief, while maintaining the
integrity of the Social Security trust funds. Given the
increased longevity and improved health of many older people,
as well as the changing definition of retirement, it is time
once again to look at the earnings limit for those who work
past age 65.
The economy today is different than it was when Social
Security began. With labor shortages looming on the horizon, we
ought not to discourage older works from remaining in the labor
force. At a time when the law prohibits age discrimination in
the work force, we should not be sending mixed signals to older
workers.
Raising or eliminating the earnings limit would mean less
frustration and inconvenience for beneficiaries and the Social
Security Administration. SSA spends between $100- and $150
million annually monitoring excess earnings and updating
workers' wage records. Over 60 percent of the agency's
overpayment errors result from the earnings limit. As we hear
from our members, working beneficiaries ages 65 through 69 are
perplexed by the earnings limit and feel punished for their
work initiative.
Misunderstandings result not only in overpayments that have
to be recouped, but also in underpayments because beneficiaries
overestimate their earnings in the report. They file annually
with SSA. Even a temporary loss in income can have immediate
economic consequences for those who work out of necessity.
Despite the fact that many older persons need extra income
and are willing to work, some oppose increasing or repealing
the earnings test for those who work past age 65. They argue
that the change would be costly to the Social Security trust
funds. While there are short-term costs, the Social Security
actuaries estimate that the long-term cost to the trust funds
is negligible.
Others suggest that any change would be benefit higher
income individuals. Many middle-income beneficiaries also work
to supplement their Social Security in order to meet current
expenses or to set something aside for the future. If they are
willing to work, they ought to be able to earn more than the
current law allows, particularly if they do not have much in
addition to Social Security.
Of course, higher income working beneficiaries will also
benefit from the change, but they will pay higher income taxes,
more payroll taxes, as well as additional income taxes on up to
85 percent of their Social Security.
AARP firmly believes that now is the time to change the
earnings limit. It is good labor, it is good social, and it is
good economic policy. We need to find ways to better tap the
valuable and still underutilized skills of our older workers.
One of the best ways to do this is by removing the penalty that
discourages workers, ages 65 through 69, from working and
contributing to the economy.
The Association is pleased that Congress and the
administration are revisiting the Social Security earnings
limit. AARP looks forward to working with this Committee and
other interested policy makers on a bipartisan basis to let
older workers know their contributions to our economy are
needed and are appreciated.
And I thank you very much for this opportunity, gentlemen.
[The prepared statement follows:]
Statement of Jane Baumgarten, Member, Board of Directors, American
Association of Retired Persons
AARP appreciates this opportunity to present its views on
the Social Security earnings limit or ``retirement test.'' The
Association has long supported increasing the earnings limit
and has been pleased to have worked with this committee and
other Members of Congress to allow beneficiaries ages 65
through 69 to earn more without losing any earned Social
Security benefits. AARP supported the legislation enacted in
1996 that phases in an increase in the earnings limit. That
change will enable beneficiaries ages 65 to 69 to earn up to
$30,000 in 2002 before their Social Security is reduced. The
legislation not only helps older Americans who work in order to
supplement their Social Security, but it also maintains the
financial integrity of the Social Security trust funds.
The earnings limit discourages older people from remaining
in the work force and contributing to the country's economic
growth. Given the increased longevity and generally improved
health of many retirees, the prospect of an aging society, and
a slower-growing work force, it is critical that we find ways
to better tap the valuable and still underutilized skills of
older workers. It is equally important that we enable more
beneficiaries to supplement their income without a penalty,
just as many do with employer provided pensions and other non-
wage income.
I. The Earnings Limit in Practice
The earnings limit reduces the Social Security benefits of
working beneficiaries up to age 70 whose earnings exceed an
annually adjusted threshold. The retirement test is different
for beneficiaries under age 65 than for those ages 65 through
69, and no longer applies when a beneficiary reaches age 70. In
2000, beneficiaries ages 62 through 64 lose $1 in benefits for
every $2 in earnings above $10,080. Those ages 65 through 69
lose $1 in benefits for every $3 in earnings above the $17,000
limit in 2000. The earnings limit not only restricts the amount
a beneficiary can earn from employment without losing any
Social Security retirement benefits, but it also can affect
spousal and dependent benefits.
Although Social Security has always had a retirement test,
it has been modified over time by narrowing its applicability.
For example, the age at which the test no longer applies was
reduced to 75 in 1950, then to 72 in 1954, and in 1977 was
lowered to age 70. The test was changed from measuring only
monthly wages to one that measures monthly and yearly earnings.
In 1960, the penalty for earnings above the threshold was
altered from a total loss of monthly benefits to a reduction in
benefits. Since 1972, the law has provided for an automatic,
annual updating of the threshold in accordance with changes in
average annual wages. The 1983 Social Security Amendments
further eased the penalty for those ages 65 through 69 to a $1
benefit reduction for every $3 of excess earnings. In 1996, an
increase was enacted that gradually raises the earnings
threshold for beneficiaries ages 65 through 69 to $30,000 in
2002.
AARP believes we should continue to modify the retirement
test to accommodate the aging of our population, evolving
retirement patterns, and the needs of our labor market and our
economy.
II. Reasons for Change
Members of Congress and the Administration have proposed
additional improvements in the earnings limit. Changes
currently being considered include increasing or repealing the
threshold for working beneficiaries ages 65 through 69 as well
as adjusting the limit for those ages 62 through 64. Interest
in additional improvements reflects a legitimate concern about
the effect of current law on working beneficiaries, the
administrative burdens imposed on the Social Security
Administration (SSA), and the overall economic and societal
benefits of encouraging older Americans to continue working.
AARP supports further liberalization, including repeal, of
the earnings limit for those beneficiaries who continue working
beyond the Normal Retirement Age. We recognize that there is a
short-term cost to the trust funds and urge that the impact be
minimized. However, the long-term financial impact on the
program is negligible.
A. Effect on Beneficiaries
Most Social Security beneficiaries are not in the paid
labor force and will not be affected by changing the earnings
limit. Last year, Social Security Commissioner Apfel testified
that during 1999, nearly 1.1 million beneficiaries had some or
all of their benefits withheld because of work at or after age
62. (Statement before the Senate Democratic Task Force on
Social Security, September 13, 1999) About 690,000
beneficiaries ages 65 through 69 lost some or all of their
benefits because of excess earnings. In addition, 103,000
dependent and spousal beneficiaries were affected. Among
beneficiaries ages 62-64, about 221,000 lost some or all of
their Social Security because they worked, and 38,000 dependent
and spousal beneficiaries were also affected.
In addition to those who lose benefits, many others who
deliberately hold their earnings below the threshold in order
to preserve their full benefit and maximize their retirement
income are adversely affected by the earnings limit. Many in
this group rely heavily on Social Security and are likely to
have less in savings and/or pension income. For those who are
capable and have the desire to earn more than the current
earnings limit, the additional income from raising the limit
can make a difference. Continued or increased employment may be
the only option many working beneficiaries have to meet current
expenses, repay debts, or set aside some income for a time when
they will no longer be able to work.
Many affected older workers are perplexed by a penalty on
earnings because non-working beneficiaries with the same or
even larger incomes generated from other sources, such as
pensions or capital gains, do not have to forego any benefits.
They feel punished for their work initiative. The argument that
Social Security was designed as a partial replacement for
income lost due to retirement, and that the earnings limit is
designed to measure whether a worker is retired, often does not
resonate with beneficiaries who need income today and must work
to augment their Social Security.
B. Administrative Problems
The retirement test creates administrative problems for the
Social Security Administration. It spends $100 -$150 million
annually to monitor excess earnings and update workers' wage
records. The agency estimates that sixty-eight percent of its
overpayments are due to the earnings limit. Changing the limit
would ease Social Security's administrative burdens.
A substantially higher or repealed earnings limit also
would mean less frustration and inconvenience for working
beneficiaries. Misunderstanding about the earnings limit
creates financial and emotional hardships when overpayments are
recouped, especially from beneficiaries who depend on their
earnings to supplement their Social Security. Beneficiaries who
overestimate earnings will have more benefits withheld than
necessary. These lost benefits may be restored, but a temporary
reduction in income could have immediate economic consequences.
In addition, some beneficiaries forfeit a month of benefits for
failing to file a report of estimated earnings in a timely
manner. They may be unaware of this annual filing requirement,
especially if they return to the labor force some time after
having filed for benefits. (Generally, beneficiaries receive
information about filing an annual earnings estimate when they
apply for Social Security.)
C. Effect on the Economy
While Social Security is intended as a partial replacement
for income lost due to retirement, disability, or death of the
worker, the definition of retirement has evolved to accommodate
changing work patterns, labor shortages, and increased
longevity. Some older individuals choose to gradually ease out
of the work force rather than drop out entirely, and many
continue working full-time or part-time because they need
additional income. As our society continues to age and the pool
of knowledgeable and willing workers lags behind demand, older
workers will be needed in the work force more than ever.
If older Americans can earn more without penalty, there
could be a greater incentive for them to work. Working
beneficiaries will have additional money to contribute to the
economy and will pay additional tax dollars into the federal
treasury. Moreover, employed older people tend to remain
healthy longer, suggesting the prospects for lower costs for
the Medicare program.
D. Additional Costs
Working beneficiaries ages 65-69 who exceed the limit
resent having to return 33 \1/3\ cents of their benefits to the
government for each dollar earned. When the returned benefits
are combined with payroll taxes, federal income taxes, state
taxes, and income taxes on up to 85 percent of benefits, the
cost of working can be quite high and acts as a strong
disincentive to work. Those ages 65 through 69 who lose some of
their benefits will receive a delayed retirement credit (DRC)
that partially compensates for lost benefits. They are not made
whole, however, because the current 6 percent DRC is not
actuarially equivalent to the lost income. (The credit is being
increased to the actuarially fair level of 8 percent by the
year 2008, on a phased-in basis.)
III. Concerns About Changing the Earnings Limit
While many policymakers and analysts recognize the value in
changing the earnings limit for those who work past the Normal
Retirement Age, some concerns remain. The most widely mentioned
are the impact on the trust funds and the economic status of
those who would benefit from the change.
A. The Cost Concern
Some oppose changing current law because it creates a
modest cost to the trust funds over the short term. While this
is true, SSA actuaries estimate that the long-term cost to the
trust funds is negligible since the value of the total benefits
paid to the individual over a lifetime does not change
significantly. This results from the fact that those whose
post-65 earnings cause a benefit loss will receive a delayed
retirement credit, which currently does not fully compensate
for the lost Social Security. With further liberalization (or
elimination), the individual can earn more and receive a
benefit now instead of getting a larger benefit later that
includes a DRC. Once the DRC reaches 8 percent, the trust funds
pay the individual roughly the same amount of lifetime total
benefits; it is simply that the payout schedule differs.
The Congressional Budget Office (CBO) suggests that the
overall costs associated with raising the limit may be
overstated because the revenue generated by additional work is
often disregarded. (SSA estimates the additional revenue would
offset between 10 and 15 percent of the cost of repeal.) While
the revenue gained from increased work force participation may
be difficult to project because of uncertainties about the
number of retirees who will increase their work effort and
their earnings level, it is clear that some additional federal
revenues will be collected. The primary revenue sources are the
income tax, the payroll tax, and increased taxation of Social
Security benefits.
B. Benefit Distribution Concern
Raising the earnings limit will have little impact on low
and moderate income older Americans since many of them do not
work or have earnings below current law thresholds. Middle
income working beneficiaries, however, may be trying to cope
with a smaller income, modest assets, and the prospect of
increased longevity. Should we penalize beneficiaries who work
to supplement their Social Security while other beneficiaries
with the same or even higher incomes from pensions and non-wage
income do not have a benefit reduction? What other options do
these working beneficiaries have to increase their income and
prepare for a time when ill health and/or advanced age may
force them out of the work force?
Some oppose further improvements because they believe that
only those with higher incomes would benefit. If the earnings
limit is changed, many older Americans will benefit, including
those with higher incomes. Higher income beneficiaries,
however, will pay additional income and payroll taxes, as well
as higher income taxes on their Social Security benefits. In
any event, all beneficiaries age 70 and over regardless of
earnings receive their full Social Security benefit without
penalty.
IV. Changing the Earnings Limit for Beneficiaries Age 62 Through 64
There is widespread agreement on raising, if not
eliminating, the earnings test for those ages 65 through 69,
but there is no consensus about what changes should be made for
the age 62-64 group.
Supporters of liberalization (or elimination) note that
beneficiaries ages 62 through 64 may continue working or
increase their work effort and thus continue to contribute to
our economy. Some policy analysts observe that the earnings
test for the younger group is a greater deterrent than many
realize. They believe that if older workers withdraw from the
labor force at age 62 because of the earnings test, they would
be less inclined to enter the workforce at age 65 even if, at
that age, there are no earnings restrictions.
Those who oppose eliminating the test for beneficiaries
ages 62 through 64 cite the added short-term costs to the trust
funds and the potential impact on the long-term economic well-
being of those who would start collecting Social Security at 62
instead of waiting. The adverse impact will be greatest for the
survivors of poor and modest income older beneficiaries who
have less income from other sources to augment their Social
Security. Workers who currently file for benefits at age 62
experience a twenty percent actuarial reduction because they
begin receiving benefits before the Normal Retirement Age. As
the age for collecting full benefits moves to age 67, future
beneficiaries who collect benefits at 62 will face a thirty
percent reduction. The effect of these substantially reduced
benefits will not be apparent immediately while earnings
supplement the Social Security benefit. The impact of a
permanently reduced benefit, however, could be more pronounced
later in life as older beneficiaries, particularly their
survivors, become more reliant on Social Security income. Older
beneficiaries have a greater chance of being poor, of having
consumed their other assets, and of not being able to
supplement their Social Security.
Opponents of repeal argue that if the earnings test remains
in place, more people will continue to work and not collect
benefits. As a result, upon retirement they and their survivors
will receive a larger benefit.
AARP believes that because of the added trade-offs, further
evaluation of the impact of any change for the age 62-64 group
is necessary. While we should remove disincentives to continued
work where possible, we must also ensure the long-term adequacy
of Social Security benefits.
V. Conclusion
AARP is pleased that Congress and the Administration are
revisiting the earnings limit. We strongly support removing
penalties that discourage workers ages 65 through 69 from
remaining in the workforce and contributing to the economy.
This is good public policy. We look forward to working with
this committee on a bipartisan basis to achieve this goal.
Chairman Shaw. Thank you.
Mr. Woods.
STATEMENT OF TOM WOODS, CHAIRMAN OF THE BOARD, HOME BUILDERS
INSTITUTE, NATIONAL ASSOCIATION OF HOME BUILDERS
Mr. Woods. Good morning, Mr. Chairman, and Members of the
Committee. I am Tom Woods, and I am a small business owner and
a homebuilder from Kansas City, Missouri. And I come to you
today not only representing my 25 years of experience as a
small business owner, but also representing the perspective of
the 200,000 business members of the National Association of
Home Builders and their 8 million employees. I also serve as
the chairman of the board of the Home Builders Institute, which
is the educational arm of the National Association of Home
Builders.
Mr. Chairman, before I get into my testimony and all of the
facts and the figures that are so important to this complicated
issue, I would like to share a very brief anecdote with you. It
put a very human face on the Social Security earnings test
issue for me. This is not part of my formal written testimony
that I submit to the record, but I feel it is important.
Just before I flew here, I took the time to stop at a
coffee shop that is frequented by a lot of the men that I have
known over the years who have worked for and with me building
homes, and I asked them, as a group, flat out: If you could
come back to work, even part time, or come back to work to help
me teach the young people that are now on our job sites, the
young men and women, would you? Every single one of them said
they wished they could, but they couldn't afford to.
Mr. Chairman, they may be older, but they are fit, and they
are strong, and they know things, with 30 or 40 years' of
experience, that the young people have yet to even imagine or
learn. They have the experience to know, but they cannot afford
to come back to work because of the Social Security earnings
test. Mr. Chairman, these people are hardly millionaires, and
they want to know since when in America does it cost you to
want to work hard?
Today, Mr. Chairman, my colleagues in the home building
industry are experiencing a severe shortage of skilled workers.
It is not a short-term phenomenon. For the last 3 years, it has
been the number one issue among NAHB members in our quarterly
surveys. It has become even more important than things like
dealing with permit process or material costs and the like. And
with most young people looking for their future in the high-
tech industry, we do not expect the trend to go away any time
soon.
To put the problem in perspective, last year, there were
1.7 million permits issued for the construction of new homes. I
employ about 300 workers on each house, either through my own
crews or contractors or subcontractors. The math is staggering.
The need for skilled workers is great. And this is especially
so in an industry accounting for 4.7 percent of the gross
domestic product.
The Labor Department tells us that we need 240,000 new
workers each year, that they must be recruited and trained
every year to meet America's building needs. And, Mr. Chairman,
it is just not happening. We are experiencing shortages across
the Nation in every occupation in the home building industry.
The National Association of Home Builders, through the Home
Builders Institute, is training thousands of young adults every
year in the construction trades, but we don't come close to
making up for those lost through retirement. And the people we
are losing are the men and women with the best knowledge base,
the ones who would make the very best teachers because of their
years of experience.
Mr. Chairman, the Social Security earnings test robs our
Nation of the contributions that our vibrant, healthy seniors
want to contribute and continue making. It robs them of the
ability to be part of our strong, growing economy. And perhaps
worst of all, the Social Security earnings limit robs them of
what researchers tell us American seniors need most: physical
activity, a purpose in life, and the socialization that goes
along with working and teaching and sharing knowledge on a day-
to-day basis.
Let me just conclude with this: The Social Security
earnings limit was created when our economy wasn't stable
enough to support both young workers and older workers, and we
weren't living as long, and we weren't as healthy in our later
years as we are now. It made sense then, but times have
changed. Instead of helping solve a problem, it is creating
one. That is the shortages that I talked about, the work force
that we are not able to sustain. It is robbing our younger
workers of the incredible knowledge base older workers have and
want to share.
Please let me go back to Kansas City, go back to the coffee
shop, go back and tell these men who want to come back to work
that I won't break their budget.
Thank you very much for your time, and I look forward to
working with you.
[The prepared statement follows:]
Statement of Tom Woods, Chairman of the Board, Home Builders Institute,
National Association of Home Builders
Good morning, Mr. Chairman and members of the Ways and
Means Subcommittee on Social Security. My name is Tom Woods,
and I am a small business owner and home builder from Kansas
City, Missouri. I am here today to talk to you about how the
Social Security earnings test deprives the home building
industry of many of its best and most experienced workers. And
also to tell you that the Social Security earnings test robs
our vibrant and healthy senior citizens of the opportunity to
contribute to the economic vitality of this country and share
their expertise and positive work ethic with younger workers.
I am not only representing my personal experiences of more
than 25 years in the home building business, but also the
perspective of the 200,000 business members of the National
Association of Home Builders (NAHB) and their more than 8
million employees.
I have a strong commitment to the issue of worker
development and retention. I currently chair the Association's
Task Force on Labor Shortages and concurrently serve as Chair
of the Board of Trustees of the Home Builders Institute (HBI),
an organization solely dedicated to educating and training
workers for the home building industry. And I am pleased to say
that I am accompanied today by Frank Riggs, the recently
appointed President of the Home Builders Institute and your
former colleague from Northern California.
Today the home building industry is experiencing a severe
shortage of skilled workers. This shortage of workers is so
severe that for the past three years labor availability has
ranked as the number one industry issue across the country in
NAHB quarterly surveys of twenty critical issues. For the home
building industry, labor availability is proving to be more
important than all of the more traditional issues that one
might associate with construction, such as cost and supply of
materials, development costs, and the entire development and
permitting process.
And far from being a temporary situation, a strong economy
and changing demographics, coupled with occupational trends,
suggest that this shortage of skilled workers in the home
building industry will continue well into the future. To give
you a perspective on this, please consider the following:
Last year there were 1.71 million permits issued
to build new homes. To give you an example of what this means
in terms of numbers of workers, I estimate that for each of the
homes I build I employ about 300 workers, either directly or
through sub-contracts. If you multiply that by even 1 million
new homes, it is easy to see how significant a skilled
workforce is to this important industry that represents more
than 4.7% of the Gross Domestic Product.
In terms of demographics, aging Baby Boomers in
the construction industry are already beginning to retire, and
in part because of the Baby Bust of the 1970s, there is a much
smaller pool from which to draw new workers. Currently, the
United States Department of Labor estimates that some 240,000
new workers must be recruited and trained each year to meet the
nation's building needs, and it is just not happening. Today we
are experiencing a shortage of skilled workers in virtually
every occupation in the home building industry.
And we find that we are also challenged in our
recruitment efforts by the draw of competing occupations,
particularly new technology jobs that are such an attraction
for younger workers.
While NAHB, through HBI and its state and local affiliates,
trains thousands of young adults each year in the construction
trades, these efforts do not compensate for the loss that the
industry suffers each year in retirements.
From our industry's standpoint, the current Social Security
earnings limit deprives the industry of an important segment of
its knowledge base--craft skills workers with years of
experience who face a very real financial disincentive if they
want to continue working beyond retirement age. And with those
retirements, we also lose the best teachers that we have to
transfer craft skills to younger generations, the high quality
workmanship that goes along with many years of experience, and
a work ethic that sets standards for high productivity.
The Social Security earnings test allows recipients under
age 65 to earn up to $10,080 a year in wages or self-employment
income without having their benefits affected. After this
``earnings limit,'' retired workers lose $1 in benefits for
every $2 in earnings. If retired workers are between ages 65
and 69, they can only earn up to $17,000 a year before losing
$1 in benefits for every $3 in earnings. For most workers,
including those whom I use to build my homes in Kansas City,
this substantial reduction in benefits is entirely too much to
justify working beyond the earnings limit.
As you know, the earnings test has been part of the Social
Security program since its inception. And early on, when the
American economy was not stable enough to sustain great numbers
of both older and younger workers, and when we were not living
longer, healthier lives as we are now, it made sense. But now
that America has the opposite problem of insufficient numbers
of workers, and many, many vital senior citizens who very much
want to work, its sole function is to force, and keep, our
older citizens out of the workforce.
From our perspective, this is unfair, as Social Security is
a retirement benefit that is earned through a lifetime of
contributions, and as such should not be taken away because an
individual continues to work beyond the traditional retirement
age. And what about retired individuals who must continue to
work in order to survive?
Social Security benefits are oftentimes meager and, alone,
do not provide for the quality of life that hard-working
Americans deserve in their golden years. And for some older
individuals, continuing to work is an absolute necessity, as
they have no other source of income to cover basic necessities
and pay their bills. Continuing to maintain the Social Security
earnings limit unduly hurts poorer retired workers. The limit
should be eliminated to encourage their participation in the
workforce.
A recent study published by the Institute for Policy
Innovation (IPI) estimates that someone between 65 and 69,
paying no income tax but earning over the limit, could face a
marginal tax rate of forty-one percent. ``For people who also
pay federal income tax, the marginal tax rate on wages can be
well over 80 percent. . .such high, punitive tax rates on
working individuals may help explain why only 16.5 percent of
men age 65 and over are in the workforce today, compared to 47
percent fifty years ago.''
For our nation's home builders, retention of skilled
workers plays an important role in meeting our workforce needs.
Because the skills of decades ago are no longer taught in
current education and training programs, home builders
especially recognize the need to keep and utilize the unique
talents of retirees. And study after study confirms the
importance of physical activity, having a purpose in life, and
the opportunity for socialization, to the continued health and
mental vitality of senior citizens.
Mr. Chairman, NAHB believes that it is time to retire the
Social Security earnings test. We thank you for giving us the
opportunity to share our views with you, and we commend you for
your efforts to encourage older Americans to stay in the
workforce longer and remain productive members of society. We
look forward to working with you, and members on both sides of
the aisle, to lift the Social Security earnings limit and help
diminish the labor shortage problem confronting the home home
building industry today.
Chairman Shaw. Thank you, Mr. Woods. And you can bring that
message back to the coffee shop.
Mr. Martin.
STATEMENT OF JAMES L. MARTIN, PRESIDENT, 60 PLUS ASSOCIATION,
ARLINGTON, VIRGINIA
Mr. Martin. Thank you, Mr. Chairman. The 60 Plus
Association is a nonpartisan seniors group that honors Members
of Congress in both parties who are senior friendly, and we
look forward to honoring everybody on this panel that is going
to vote for repeal of this particular bill.
Having worked on Capitol Hill 35 years ago as chief of
staff to the late Senator Ed Gurney of Florida, I have seen a
lot of taxes come, but I haven't seen very many go. But if
today's headline is accurate in this paper, with the President
of the United States, no less, endorsing today's efforts, then
here is a tax whose time to go has come.
The earnings limitation was imposed, as was said before,
during Depression times, 25-percent unemployment, to free up
jobs for younger workers. But the Chairman himself was widely
quoted today as saying, ``While it may have made sense then, it
sure doesn't make much sense today.''
And Congressman Sam Johnson, who is chief sponsor of this
bill, this former Marine looks at him in awe, he was quoted
this morning, after having fought in two World Wars, he also
fought for the freedom to work.
We shouldn't penalize those who not only want to work, but
need to work to supplement their Social Security, and that
includes my favorite senior citizen, my mom, my sainted mom,
who still works part time down in Florida. The 60 Plus
Association strongly endorses repeal of this tax. It is a major
step toward fulfilling our slogan, ``Tax Fairness for
Seniors.''
On behalf of the 60 Plus chairman, former Congressman Roger
Zion, who served on this body well in the sixties and
seventies, it is my pleasure to introduce our coworker at 60
Plus, Colonel Hank Huff, who has a personal story to tell about
this particular tax.
Thank you.
[The prepared statement follows:]
Statement of James L. Martin, President, 60 Plus Association,
Arlington, Virgnia
Mr. Chairman, Members of the Subcommittee,
I'm Jim Martin, President of the 60 Plus Association, an
eight-year national nonpartisan seniors' advocacy organization
of over half a million members.
Having worked on Capitol Hill more than 35 years ago as
press secretary and administrative assistant to the late
Senator Edward J. Gurney of Florida, I'm well aware of the long
hours and hard work that go into these hearings.
Our slogan at the 60 Plus Association is ``tax fairness for
seniors.''
There are many unfair taxes on seniors, notably the federal
estate or death tax. We are dealing with another unfair tax
today, the earnings limitation imposed on senior citizens
between the ages of 65 and 69.
This earnings limitation was imposed at a different time in
a different era to meet very different conditions.
It was imposed in the early days of the Social Security
Act. At that time, seniors were fortunate to live to 65 years
of age. There was concern that those who lived 65 and beyond
and wanted to work or had to work would take jobs away from
others. Therefore, a penalty was imposed.
Today is a much different situation. More seniors are
living not only to 65, but many into their 70s, 80s, 90s and
beyond.
We also are living in prosperous times where there is a
shortage of workers, rather than of jobs.
We should be encouraging seniors to continue work. It helps
them. It helps the economy.
We should reward those who want to work, not penalize them.
This should be the case whether they choose to work or to spend
full-time in leisure and other pursuits.
The 60 Plus Association commends this Subcommittee, its
Chairman and its Members, for holding hearings on repeal of
this tax. Removing it will be a major step toward tax fairness
for seniors.
I'd now like to turn to my co-worker at the 60 Plus
Association, Hank Hough, who has his own story to tell
regarding this tax and its personal effect.
---------------------------------------------------------------------------
60 Plus is a seven-year-old non-profit, nonpartisan group with a
less government, less taxes approach to seniors' issues. 60 Plus is
supported by voluntary donations from its 500,000 citizen lobbyists to
print and mail millions of letters, petitions and voting indexes. 60
Plus publishes a newsletter, SENIOR VOICE, and a SCORECARD, bestowing a
GUARDIAN OF SENIORS' RIGHTS award on lawmakers in both parties who vote
``pro-senior.'' 60 Plus has been called ``an increasingly influential
lobbying group for the elderly.''
---------------------------------------------------------------------------
Chairman Shaw. Thank you.
Colonel.
STATEMENT OF RETIRED LIEUTENANT COLONEL HENRY A. HOUGH,
EXECUTIVE VICE PRESIDENT, 60 PLUS ASSOCIATION, ARLINGTON,
VIRGINIA
Lt. Colonel Hough. Mr. Chairman, Committee members. My name
is Henry A. Hough. I am 72 years old and am executive vice
president of The 60 Plus Association and work for Jim Martin. I
retired from the Army as a Lieutenant Colonel in July 1974 and
have worked full time as a civilian since then in a variety of
careers.
From 1974 to 1977, I worked for Amtrak here in Washington.
And for the next 17 years, I was involved in Air Defense
Command Control and Communications projects in Saudi Arabia,
working for full time for Litton, Boeing and Westinghouse.
I certainly don't claim to be a tax expert. However, I am
something of an expert on the negative personal impact of this
egregious legislation. As a result, I paid back $11,452 over
the 3 years that I worked when I was 67, 68 and 69; $3,245 in
1995; $4,621 in 1996; and $3,586 in 1997. Understandably, this
is an emotional issue with me. Even though my loss is
unrecoverable, I am highly pleased by the Committee's efforts,
headed by Chairman Shaw, to eliminate this tax to correct a
gross injustice to older Americans, 65 through 69, who want to
work or, in some cases, may have to work.
Furthermore, I submit to the Committee not only is the law
wrong, but the administration of it by the Social Security
Administration is all fouled up. While I certainly don't fault
the Social Security employees who are doing their best under
the circumstances, repaying the Social Security earnings limit
has been a bureaucratic nightmare. The details are in my
prepared statement. But it suffices to say that the notices
were delayed for as long as a year and a quarter. It is
difficult to develop a viable personal budget when you don't
know when the other shoe will drop.
The economic and employment picture has changed drastically
since the earnings limit was established, as has been pointed
out here today. Today, there is a tight labor market with firms
having to go abroad to get qualified workers, particularly in
professions and highly technical areas. That says something
about our educational system, but that is another matter. Older
workers have the experience, qualifications, work ethic and
good judgment to fulfill these labor shortages, provided there
are economic incentives for them to do so.
I am not advocating, by any means, that all of us older
workers should rush into the labor market. It should be an
individual choice. Many seniors have hobbies, family and other
interests which favor full retirement, precluding working.
Others may want to work part time. But those of us seniors who
want to or have to work full time, should have an unfettered
choice to do so. As Senator Dole asks, why retire? And look at
Chairman Greenspan and, I might add, certain Members of
Congress who pursue active careers as bona fide seniors.
There are favorable psychological factors to having an
opportunity to work. For one thing, work contributes to
seniors' self-esteem. Instead of older people being regarded as
a burden on society, they can make a positive contribution to
the economy and society and feel good about themselves. Another
factor is the changing demographics, with seniors representing
an increasing percentage of the U.S. population, based on
greater numbers entering the retirement age pool, or baby
boomers, and increased life expectancy.
The real issue is are seniors going to be a burden or an
asset to society? If you work, you pay taxes and contribute to
economic growth. If you don't work, you don't pay taxes. Also,
the more older workers contribute to the economy, the less
strain on the rapidly emerging problems of the Social Security
system.
And, finally, I believe there is widespread support amongst
all seniors to remove this egregious inequity.
Thank you very much.
[The prepared statement follows:]
Statement of Retired Lieutenant Colonel Henry A. Hough, Executive Vice
President, 60 Plus Association, Arlington, Virginia
My name is Henry A. Hough and I am 72 years old. I am
Executive Vice President of the 60 Plus Association located in
Arlington, Virginia. This matter of the earnings limit on older
Americans in the 65-69 age group has been a major issue of the
60 Plus Association.
I retired from the US Army as a lieutenant colonel, July 1,
1974, and have worked full time as a civilian since then in a
variety of careers. From 1974 to 1977 I worked for Amtrak here
in Washington with extensive traveling around the USA. For the
next 17 years, 1977 to 1994, I was involved in various Air
Defense Command, Control and Communications projects in Saudi
Arabia working for Litton, Boeing and Westinghouse, working
full time, both in Saudi Arabia and in the United States.
When I returned from Saudi Arabia in 1994, I decided to
start yet another career as a political activist; rather than
just talking about what's wrong with the country, try to do
something about it. At the age of 67, I started working for 60
Plus in April 1995.
I certainly don't claim to be a tax expert which I most
emphatically am not. However, I am something of an expert on
the negative personal impact of this egregious legislation, the
Social Security Earnings Limit, which has resulted in a loss of
$11,452 to me for working when I was 67, 68 and 69, broken down
as follows:
1995............................. $3,245.00 (Support Data
Enclosed)
1996............................. 4,621.00 (Support Data
Enclosed)
1997............................. 3,586.00 (Support Data
Enclosed)
Grand Total..................... $11,352.00
Understandably, this is an emotional issue with me. Even
though my loss is unrecoverable, I am highly pleased by the
committee's efforts, headed by Chairman Shaw, to eliminate this
tax to correct a gross injustice to older Americans, 65 through
69, who want to, or in some cases, may have to work.
Furthermore, I submit to the committee not only is the law
wrong, but the administration of it by the Social Security
Administration is all fouled up. While I certainly don't fault
the Social Security employees who are doing their job as best
they can under the circumstances, repaying the Social Security
Earnings Limit has been a bureaucratic nightmare. I knew about
the law and starting before April 15, 1996, for tax year 1995,
I started inquiring about the procedures for repayment and got
no response after repeated inquiries. I explained I was trying
to do the right thing,. Finally, I got the notice for tax year
1995 dated October 31,1996, followed by a penalty assessment of
$1150.00 dated February 18, 1997. I received the payment notice
for tax year 1996 dated July 31, 1997 in a fairly timely
manner. However, I did not receive the notice for tax year 1997
until March 21, 1999. It's difficult to develop a viable
personal budget when you don't know when the other shoe will
drop.
The economic and employment picture has changed drastically
since the EarningsLimit was established in 1935. Today, there
is a tight labor market with firms having to go abroad to get
qualified workers, particularly in professions and highly
technical areas, that says something about our educational
system, which is another matter. Older workers have the
experience, qualifications, work ethic and good judgment to
fulfill these labor shortages providing there are economic
incentives for them to do so. The progressive increases of the
earnings limit starting in 1996 up to the current $17,000 were
a step in the right direction, but, as my experience indicates
it certainly is a disincentive. You may ask, why am I working?
Well, for one thing I started working at 60 Plus closer to the
threshold age of 70 after which there are, of course, no limits
on earnings. For a person continuing to work after 65, that
five year gap to 70 can really be a whopper, much larger than
the loss I experienced. Another reason I'm still working is a
sense of fulfillment, but even here there are limits to
economic obstacles like the Earnings Limit.
I am not advocating, by any means, that all of us older
workers should rush into the labor market. It should be an
individual choice. Many seniors may have hobbies, family and
other interests which favor full retirement, precluding
working. Others may want to work part time. But those of us
seniors who want to, or have to, work full time should have an
unfettered choice to do so. As Senator Dole asks, why retire?
And look at Chairman Greenspan and, I might add, certain
members of Congress who pursue active careers as bonafide
seniors. There are favorable psychological factors to having an
opportunity to work. For one thing, work contributes to
seniors' self esteem. Instead of older people being regarded as
a burden on society, they can make a positive contribution to
the economy and society and feel good about themselves.
Another factor showing the impracticability of the Earnings
Limit is the changing demographics with seniors representing an
increasing percentage of the U.S. population, based on greater
numbers entering the retirement age pool (baby boomers) and
increased life expectancy. The real issue is: ``Are seniors
going to be a burden or an asset to society?'' If you work, you
pay taxes and contribute to economic growth. If you don't work
you don't pay taxes. As I said, I'm not a tax expert, but I'm
willing to bet that a study would show that the projected
revenue gains from more seniors working would more than offset
revenues from paying back under current legislation. Also, the
more older workers contribute to the economy, the less strain
on the rapidly emerging problems of the Social Security system.
And finally, I believe there is widespread support amongst
all seniors to remove this egregious inequity. Whether or not
they are working, they recognize the inequity of this terrible
legislation which I believe, they overwhelmingly want repealed.
Even if they are not working, they know somebody who has been
adversely affected by it.
Thank you very much.
Chairman Shaw. Thank you, Colonel.
Ms. McSteen.
STATEMENT OF MARTHA A. McSTEEN, PRESIDENT, NATIONAL COMMITTEE
TO PRESERVE SOCIAL SECURITY AND MEDICARE
Ms. McSteen. Thank you, Mr. Chairman. I am Martha McSteen,
president of the National Committee to Preserve Social Security
and Medicare, a grassroots education and advocacy organization
representing millions of senior Americans. The members and
supporters of the National Committee strongly support enactment
of H.R. 5.
Many National Committee members need to remain in the work
force because of such factors as increased cost of living and
expensive prescription drug bills. Others work because they
receive satisfaction from continuing to be productive and
creative. And increasingly, ``retirees'' must help support an
80- or 90-year-old parent.
As we all know, the intent of the original legislation was
to preclude workers from returning to a crowded work force.
Today, unemployment is at a 30-year low, and our Nation faces
an acute labor shortage. It is, indeed, time to retire the
Social Security earnings limitation.
I commend you for your actions in 1996 and urge you to now
take the final step and eliminate the earnings test. About one
in three people between the ages of 65 and 69 and eligible for
retired worker benefits is employed at some point during the
year. In 1999, about 800,000 beneficiaries in this age group
lost some or all of their benefits because of the earnings
limitation. The Social Security Administration withheld about
$3.9 billion in benefits from these beneficiaries in 1999.
These statistics do not factor in the number of individuals
dissuaded from applying for benefits because they realized the
earnings limit would consume most or all of their earned
benefits. The impact of the earnings limitation may explain
why, despite improved health among seniors, only 16.5 percent
of men 65 and over are in the work force today. That is
compared to about 47 percent 50 years ago.
Maintaining independence in retirement is important to
today's seniors. Not all seniors work because they need the
money. Many receive satisfaction from continuing to be
productive and creative. Instead of a national policy to
encourage the continuing use of the talent, energy and wisdom
America's seniors bring to the workplace, the earnings
limitation serves as an active disincentive to work. Others who
do work find ways of avoiding paying Social Security taxes so
their benefits will be protected. At the same time, the trust
funds lose those rightful contributions.
Opponents of eliminating the earnings limit, argue that
such policy would primarily benefit the wealthy who, ``Don't
need Social Security.'' However, Social Security is not a
needs-based program. Upper-income workers have earned their
benefits. They are also more likely than low- or middle-income
workers to have substantial unearned income from savings and
investments. Since unearned income is not subject to the
earnings limitation, the question of equity exists. Whether or
not the senior works out of necessity or for enjoyment, the
combination of FICA payroll taxes, income tax and loss of
Social Security benefit if the earnings exceed the limitation
exact a high price.
Over the years, the main obstacle to eliminating the
earnings limitation has been the cost. True, there would be a
short-run budgetary cost. Removing the earning test for those
at the full benefit age and above would raise Social Security
expenditures by about $21 billion over the first 9 years.
However, since elimination of the earnings test reduces the
subsequent benefit increases that would have occurred through
the actuarial adjustments, the cost of repeal declines as the
years pass. Over the long run, we are told there is very
little, if any, actuarial impact.
In addition to being one of the least-popular features of
Social Security, the earnings limitation is also one of the
most widely misunderstood and confusing. Reductions in current
benefits are offset by an increase in future benefits, the so-
called delayed retirement credit. Although the actuarial
adjustments are fair, on average, for the population as a
whole, they are not always accurate for specific population
groups. Even if delayed retirement credit balances out over the
long run, it does not help those seniors who are working
because they need all of their benefits and earned income for
immediate needs.
Finally, I would note that administering the test is a
resource-intensive administrative operation. Repeal of the test
would mean that claims representatives would no longer have to
calculate benefit withholding based on the earning estimates
under our overpayments. The many appeals that result from the
misunderstanding of the retirement test and the waivers of
repayment from those who can't pay back the overpayments would
also be eliminated.
Let us acknowledge that the earnings test is an outdated
relic from the Depression era. Given today's booming economy
and record low unemployment, it makes sense to encourage
seniors to continue to use their wisdom, skills and work ethic
to benefit American business rather than penalize them for
working.
Mr. Chairman and Members of the Subcommittee, I commend you
for holding these hearings on this important issue and urge you
to continue to work to eliminate the Social Security earnings
limitation.
Thank you very much.
[The prepared statement follows:]
Statement of Martha A. McSteen, President, National Committee to
Preserve Social Security and Medicare
Thank you Mr. Chairman for giving me the opportunity to
come before the Subcommittee and talk about the need to repeal
the Social Security earnings limitation for those individuals
who have reached the normal retirement age. Thank you, too, for
your ongoing interest in issues affecting our nation's seniors.
I am Martha McSteen, President of the National Committee to
Preserve Social Security and Medicare, a grassroots, education
and advocacy organization representing millions of seniors
Americans. The about five million members and supporters of the
National Committee strongly support enactment of H.R. 5.
Many National Committee members need to remain in the work
force, because of such factors as increased costs of living and
expensive prescription drug bills. Others work because they
receive satisfaction from continuing to be productive and
creative. Whatever the reason they chose to continue paid
employment, America's seniors also deserve to receive their
full retirement benefits earned through a lifetime of
contributions. Seniors cannot see why they should lose part or
all of their benefits for continuing to work or the rationale
behind penalizing retirees at 68 or 69 but not at 70.
The Social Security earnings limitation dates back to the
establishment of Social Security. In 1935, the Committee on
Economic Security appointed by President Franklin D. Roosevelt
recommended that no benefits be paid before a person had
``retired from gainful employment.'' Initially, the Social
Security Act provided that benefits would not be paid for any
month in which the individual had received ``wages with respect
to regular employment.''
The intent of this limitation was to preclude workers from
returning to the workforce. This was deemed necessary because
of the high unemployment rate our nation was experiencing at
the time. Today, though, our situation is very different.
Unemployment is at a 30 year low and our nation faces an acute
labor shortage. It is indeed time to retire the Social Security
earnings limitation.
In 1996 Congress enacted legislation (P.L. 104-121) to
allow a faster increase in the earnings limit for retired
workers between ages 65 to 69. In 2000, senior citizens aged 65
to 69 lose $1 in benefits for every $3 they earn over $17,000
annually. By 2002 those seniors will be able to earn up to
$30,000 annually without penalty. I commend you all for your
actions in 1996, and urge you to now take the final step and
eliminate the earnings test.
About one in three people between the ages of 65 and 69,
and eligible for retired worker benefits, is employed at some
point during the year. In 1999, about 800,000 beneficiaries in
this age group lost some or all of their benefits because of
the earnings limitation and the Social Security Administration
withheld about $3.9 billion in benefits from these recipients.
Of course, these statistics do not factor in the number of
individuals dissuaded from applying for benefits because they
realized the earnings limit would consume most or all of their
earned benefits.
The impact of the earnings limitation may explain why,
despite improved health among seniors, only 16.5 percent of men
age 65 and over are in the workforce today compared to 47
percent 50 years ago.
Social Security benefits are often described as being one
leg of a three-legged stool. The other legs are made up of
private savings and pensions. It is important to note that
fewer than half of all seniors have their Social Security
benefits supplemented by a pension. For those who do have
pension income, lack of cost-of-living adjustments after
retirement results in a continuing decline in their purchasing
power.
Savings can be equally elusive. Even those seniors who have
accumulated respectable nest eggs, can see them quickly eroded
by the high costs of nursing home care, exorbitant prescription
drug costs, or other major medical expenses not covered by
Medicare. And, as life spans increase, more and more retirees
find themselves responsible for the care of an aged parent.
Maintaining independence in retirement is important to
today's seniors. Not all seniors work because they need the
money. Many receive satisfaction from continuing to be
productive and creative. Instead of a national policy to
encourage the continuing use of the talent and energy and
wisdom America's seniors bring to the workplace, the earnings
limitation serves as an active disincentive to work.
Opponents of eliminating the earnings limit argue that such
policy would primarily benefit the wealthy who ``don't need
Social Security.'' However, Social Security is not a needs
based program. Upper income workers have earned their benefits.
They are also more likely than low or middle-income workers to
have substantial unearned income from savings and investments.
Since unearned income is not subject to the earnings
limitation, a question of equity exists.
Whether the senior works out of the need for extra income
or the pleasure of working, the combination of FICA payroll
taxes, income tax and the loss of Social Security if earnings
exceed the limitation exact a high price.
Over the years, the main obstacle to eliminating the
earnings limitation has been the cost. It is true that there
would be short-run budgetary costs. Removing the earnings test
for those at the full benefit age and above would raise Social
Security expenditures by about $21 billion over the first nine
years. However, since elimination of the earnings test reduces
the subsequent benefit increases that would have occurred
through the actuarial adjustments, the costs of repeal required
declines as the years pass. Over the long run, there is very
little actuarial impact.
In addition to being one of the least popular features of
Social Security, the earnings limitation is also one of the
most widely misunderstood and confusing. Reductions in current
benefits are offset by an increase in future benefits (the
delayed retirement credit).
However, although the actuarial adjustments are fair on
average for the population as a whole, they are not always
accurate for specific population groups. For example, cohorts
with shorter-than-average life expectancies generally do not
recover all of their lost benefits. Because of differences in
life expectancies, the earnings test works to the disadvantage
of lower-income beneficiaries in particular. Also, even if the
delayed retirement credit balances out over the long run, it
does not help those seniors who are working because they need
ALL of their benefits and earned income for immediate needs.
Finally, I would note that administering the test is a
resource intensive administrative operation. Repeal of the test
would mean that claims representatives would no longer have to
calculate benefit withholding based on earnings estimates,
under or overpayments at the end of the year based on actual
earnings or the new benefit amount taking into account both new
earnings and months of benefits withheld. The many appeals that
result from the misunderstanding of the retirement test and the
waivers of repayment from those who can't pay back the
overpayments would also be eliminated.
Mr. Chairman and Members of the Subcommittee, I commend you
for holding hearings on this important issue, and I urge you to
continue your work to eliminate the Social Security earnings
limitation for those seniors who have achieved the normal
retirement age.
The earnings test is an outdated relic from the depression
era. Given today's booming economy and record low unemployment,
it makes sense to encourage seniors to continue to use their
wisdom, skills and work ethic to benefit American business
rather than penalize them for working.
Chairman Shaw. Thank you. Ms. Wondemu?
STATEMENT OF ZED WONDEMU, OWNER, ZED'S ETHIOPIAN CUISINE,
GEORGETOWN, WASHINGTON, D.C., ON BEHALF OF NATIONAL RESTAURANT
ASSOCIATION
Ms. Wondemu. Mr. Chairman and Members of the Subcommittee,
thank you for the chance to testify on the impact of the Social
Security earnings test. My name is Zed Wondemu and I own and
run Zed's Ethiopian Cuisine in Georgetown.
This issue has long been a frustration of mine and it is my
sincere hope that you, as lawmakers, will eliminate the
earnings test and allow more older Americans to work without
fear of losing their benefits.
I know that when people think of restaurant employees they
think of younger adults. But as the nation's largest private
sector employer, the food service industry also employs tens of
thousands of individuals between the ages of 65 and 70.
Although I am testifying today on behalf of the National
Restaurant Association, I am here to tell my own story. As a
small business person, I see firsthand how the Social Security
earnings test changes the choices people make. My restaurant,
which offers excellent cuisine with quality service, employs
only ten individuals. Clearly, I rely on the quality of
employees, not the quantity, to uphold my restaurant's
reputation.
I take great pride in the fact that, for several years
running, my restaurant has been recognized by Washingtonian
Magazine as one of Washington's 100 very best restaurants.
In addition to my restaurant, I also own a small apartment
building, with just seven units. Given the size of the building
I do not need, and cannot afford, a management company. To help
out with the upkeep of the building, I wanted to hire an older
gentleman who lives in one of the apartments. Prior to his
retiring, the tenant was a maintenance worker for a company in
this area. At the age of 69, he is in excellent health. In
fact, I would say he is still very strong and vibrant for any
age. However, because of his concern over losing his Social
Security benefits if he works too many hours, I am unable to
hire him to be an on-site manager.
I do not understand the need to continue this limitation.
There may have been a reason in the past, but times are
different. We are in a changing society. I do not need to tell
you how the population is changing. I know the point has been
overemphasized here today, but I hope the baby-boom generation
will change the way this culture thinks about its senior
citizens.
This is not the time to prevent people from working. You
can figure out there is a big labor shortage today by just
taking a quick drive around this town. Everyone is looking for
help. In my business, we place a premium on the type of help
that older employees offer, dependability, experience, a
certain knowledge of the world, a work ethic, and a cultural
history.
In a small restaurant, the ability to employ quality
workers is critical. To me, the highest quality employees are
the more ``seasoned'' individuals, the ones who do not need all
the training, the ones who provide a chance for us to learn
from them.
Coming to this country at the age of 15 to go to school, it
is obvious that I have lost some of the real tradition and
habits of cooking from the ancient nation of Ethiopia. Now, my
adopted country's free enterprise system allows me to transport
this fine cuisine to this beautiful country of ours. In doing
so, I constantly depend on the older generation's advice and
consultation to preserve the true cooking and tradition. I
believe there is much to be learned from the older generation.
But policies such as the earnings test send a strange message
to our senior citizens about how much they ``should'' work.
As the number of older Americans grows, this country will
need to tap into this resource. For this reason, I hope this
Congress is successful in eliminating the Social Security
earnings test so we can truly take advantage of the experience
and the skills that older Americans contribute to this
country's economic future.
Again, thank you for the chance to address this
distinguished Subcommittee and, most of all, for listening to
those of us on the frontlines of this issue.
Thank you.
[The prepared statement follows:]
Statement of Zed Wondemu, Owner, Zed's Ethiopian Cuisine, Georgetown,
Washington, D.C., on behalf of National Restaurant Association
Mr. Chairman and members of this subcommittee, thank you
for the opportunity to testify on the impact of the Social
Security earnings test. My name is Zed Wondemu and I own and
operate Zed's Ethiopian Cuisine in Georgetown. This issue has
long been a frustration of mine and it is my sincere hope that
you, as lawmakers, will eliminate the earnings test and allow
more older Americans to work without fear of losing their
benefits.
I know that when people think of restaurant employees they
think of younger adults. But as the nation's largest private-
sector employer, the foodservice industry also employs tens of
thousands of individuals between the ages of 65 and 70.
Although I am testifying today on behalf of the National
Restaurant Association, I am here to tell my own story. Because
as a small businessperson, I see firsthand how the Social
Security earnings test changes the choices people make.
My restaurant, which offers excellent cuisine with quality
service, employs only ten individuals. Clearly, I rely on the
quality of employees, not the quantity, to uphold my
restaurant's reputation. I take great pride in the fact that,
for several years running, my restaurant has been recognized by
Washingtonian Magazine as ``one of Washington's 100 very best
restaurants.''
In addition to my restaurant, I also own a small apartment
building, with just seven units. To help out with the upkeep of
the building, I wanted to hire an older gentleman who lives in
one of the apartments. It only has seven units, so I do not
need, and can not afford, a management company. I just need
someone to help out. Prior to his retiring, this tenant was a
maintenance worker for a company in the area. At the age of 69,
he is in excellent health, in fact, I would say he is still
very strong and vibrant for any age. However, because of his
concern over the losing his Social Security benefits if he
works too many hours, I am unable to hire him to be an on-site
manager.
I do not understand the need to continue this limitation.
There may have been a reason in the past, but times are
different. I don't need to tell you how the population is
changing. I know the point has been overemphasized here today,
but I hope the baby-boom generation will change the way this
culture thinks about its senior citizens.
This is not the time to prevent people from working. You
can figure out there's a big labor shortage today just by
taking a quick drive around this town. Everyone is looking for
help. In my business, we place a premium on the type of help
that older employees offer -dependability, experience, a
certain knowledge of the world, a work ethic, and a cultural
history. In a small restaurant, the ability to employ quality
workers is critical. To me, the highest-quality employees are
the more ``seasoned'' individuals -the ones who don't need all
the training, the ones who provide an opportunity for us to
learn from them.
Coming to this country at the age of 15 to go to school, it
is obvious that I have lost some of the real tradition and
habits of cooking from this ancient nation of Ethiopia. Now, my
adopted country's free enterprise system allows me to transport
this fine cuisine to this beautiful country of ours. In doing
so, I constantly depend on the older generation's advice and
consultation to preserve the true cooking and tradition. I
believe there is much to be learned from the older generation,
but policies such as the earnings test send a strange message
to our senior citizens about how much they ``should'' work.
As the number of older Americans grows, this country will
need to tap into this resource. For this reason, I hope this
Congress is successful in eliminating the Social Security
earnings test so we can truly take advantage of the experience
and skills that older Americans contribute to this country's
economic future.
Again, thank for the opportunity to address this
distinguished subcommittee, and most of all, for listening to
those of us on the frontlines of this issue.
Chairman Shaw. Thank you, and thank all of the witnesses.
Mr. Johnson?
Mr. Johnson. Thank you, Mr. Chairman.
Tom, I was in the construction business and I know, like
the restaurateurs, that they lean on some of the more
experienced elderly to teach them the profession. I think you
do that in the building business, too. Is it not true that some
of your, especially plumbers, electricians, and even
carpenters, learn the trade from the older guys and you need
them around to help you out? Is that true or false?
Mr. Woods. That is very true. You know, across the country,
in HBI, the group that I work with, the education arm, and I am
a homebuilder, the very best programs that we have are the
programs where we have people with years and years of
experience and understanding, and we have them involved.
Numerous people on this panel have said, our older citizens
today are in better health. Some of the reasons they are in
better health is they have stayed active, they have worked
hard. To take that away, you know I gave an example and
unfortunately today this man would have probably been here with
me, but he is having both knees replaced this morning in Kansas
City. And he is doing that, quite frankly, because of his
activity level. He is in excellent health. He retired, I would
guess a year ago, maybe a little more.
He still comes by the job site to check on the kids, as he
says. He was one of those at that coffee shop and he was one of
those that I asked would you come back? And his comment to me
was in a minute. So I think there is a real need for that.
Mr. Johnson. Thank you so much for your answer. I do not
have any further questions, Mr. Chairman.
Chairman Shaw. Just to add to that, I think it's improvment
to consider not only the questions of the skills, but the work
ethics. I used to work as a forester with a lumber company down
in the woods. And I will tell you, when you go down to Alabama,
down in the swamp, in August and you see an old man, you say I
have got to keep up with this guy.
There is really a lot to learn, not only from the technical
skills, but also the work ethic.
Mr. Woods. It is an amazing thing, if I might say, we talk
about the fact that sometimes the generations do not have all
that much in common. But if you really look at that, there is
an interesting thought. I have heard it said the reason that
grandparents and grandchildren get along so well is they have a
common enemy.
And I think that sometimes works in the industry, too,
because I think sometimes I see it with the youngest, most
spirited sometimes, they really build a kinship to some of the
older, well experienced, and when you look back, they might
just see a reflection there, I think.
Chairman Shaw. Thank you. Do any other members have further
questions? Mr. Hulshof?
Mr. Hulshof. Mr. Chairman, just briefly, to follow up with
you, Mr. Woods, it is always great to have another resident
from the Show-me State. Welcome to Washington.
As I understand your testimony, in following up on what Mr.
Johnson said, it is not just that older workers would be
retained to help train younger workers, but they are there
swinging hammers and climbing ladders and doing the manual
labor, just like the younger guys. Is that a fair statement?
Mr. Woods. I think it is a fair statement. I am not trying
to indicate to you that that is everybody, but I will tell you
there are individuals there who I will put up against the best
of them. They may not be as physically quick as maybe they once
were, or whatever, but wisdom will make up an awful lot for
that. They are certainly not to be sold short.
And I certainly do not want to be in the position, nor do I
think you want to be in that position, to tell someone who has
the ability and has the desire to be involved at that level,
that they cannot do it. And I think a couple of these people
said it best.
In some cases, they simply have to do it, whatever those
circumstances may be. It may be taking care of a parent. It may
be because of other medical experiences or circumstances we do
not know. And I just think it should not be our decision to put
any more obstacles in their way than some of them may have
experienced already.
Mr. Hulshof. What is the real impact? I do not know what
the number would be, but let us say that an older worker
recognizes the earnings limit and then maybe works up to that
and says I am going to leave the job site? I am not sure what
the number of people would be who fall in that category, but
how does that affect maybe a construction site that you are the
supervisor on and somebody is no longer there? What is the
real-life impact of some decision like that, Mr. Woods?
Mr. Woods. Well, any time you build a team, and that is
what home building, that is what construction is, it is a team
effort. As Mr. Johnson said, it takes the plumbers, the
electricians, and carpenters. And as you get to where you work
within that team and you build together, you become very
dependent on each other. And any time you take one person out
of that mix, no matter what their job, and no matter what
level, you have to rebuild that team.
While I would not call any of these people rich, by any
stretch of the imagination, the gentleman that was here earlier
from Chicago, a lot of these guys will make $35,000 or $40,000
a year, or easily could. But I certainly do not think they are
rich. But if you take them out when they have reached that
$17,000 limit, it means that we have lost them for half the
year, and they are just very, very hard to replace.
I see the young people in many of our programs, and when I
speak to this I am speaking of HBI, who works with a lot of
disadvantaged youth. In some cases, these older people are the
only real role models they have ever been introduced to. And
when you take that out of the situation, you have got another
problem to overcome.
So I do not know that you can put a number on to it. But in
some cases, it is devastating.
The other thing it does, it creates the situation where the
employer, whether it is myself or the plumber or whatever, in
many cases simply cannot hire that young person because we do
not have the personnel to put him with to be able to supervise
or to teach him. And so from that line, in many cases, it
simply means that it is a house that does not get built, a
dream that does not get fulfilled.
Mr. Hulshof. Thanks, Mr. Woods.
A final comment, Ms. McSteen, or really not a question but
a comment. I really do appreciate your statement and position,
very succinctly and powerfully put, that eliminating the
earnings penalty for seniors who have reached full retirement
age would not primarily benefit the wealthy. We often hear,
when we try to take limits off and remove disincentives, that
we cannot do it, and you can follow along with the mantra,
because it would only benefit the wealthy.
It appears that, at least on this issue, and I know Mr.
Weller was inquiring of the Commissioner about the 1993 tax
increase from 50 percent to 85 percent, maybe there is hope for
the future that we can even roll that back.
But I do appreciate your statement that this is not a
needs-based program. This is a retirement system people have
worked for and played by the rules, and they are entitled to
these benefits. I appreciate your statement.
Thank you, Mr. Chairman.
Chairman Shaw. Thank you. Mr. Matsui?
Mr. Matsui. Thank you. Mr. Chairman, I just want to thank
the panel. The lack of asking a question does not indicate at
all disinterest. We just agree with you so much. So we want to
thank you all for your testimony with you today. Thank you.
Chairman Shaw. Mr. Portman?
Mr. Portman. Thank you, Mr. Chairman.
I would like to start by saying, as a father of young kids,
I am the common enemy. They get along well with their
grandparents. They also get along well with their great-
grandmother. And increasingly we have family situations where,
because of longevity, you are going to have great-grandparents
out there who are part of this conspiracy against us parents.
I am just delighted that we are here today. Sam Johnson
deserves a lot of credit, and others here, for getting us to
this point. This is really exciting for me.
I have a dear friend who is a nurse care giver. She took
care of my grandfather before his death at 97 a couple of years
ago, and she is in her late sixties. She wants to work and she
is able to work, and she is someone who can give a lot to our
society, and particularly to our elderly right now. Yet her
effective tax rate, as I have helped her figure out, is about
80 percent.
Because when you add up all these taxes, including what is
about a 33 percent marginal tax rate on work because of the
earnings limit, it is just not worth it for her to work.
Everybody is advising her just do not work. She wants to work
and she has a lot to give.
So I have just been delighted over the last 24 hours even
to see people come together on this issue from both sides of
the aisle, and to finally begin to talk about putting this into
place. Over the long-term, as I understand, it is not going to
have an impact on the solvency of Social Security because of
the delayed credits in any case.
The one issue I get some feedback on back home, that I want
to have somebody address if they would, and Ms. McSteen I know
you talked about this, and AARP, Ms. Baumgarten, you have
addressed this as well. Some people have said gee, the earnings
limit really is not unfair because there is a delayed increase
in benefits over time to those people like my friend, the care
giver.
Can you address why it is indeed unfair to my friend the
care giver, and other older Americans out there who want to
work, even though over the younger term theoretically, using
the actuarial data, they would get an increased benefit or get
the same benefit?
Ms. McSteen. In the case you mentioned, I would think that
the urgency is for the moment, that she needs to be able to
work now, and she does not need to be worried about the future.
So she will gain in the long run by continuing to work and to
contribute and be able to draw her Social Security. It is the
right thing.
Mr. Portman. Ms. Baumgarten?
Ms. Baumgarten. The fact that the money is taken out now,
up front, when they are working because they need it hurts.
Looking at something down the road just does not register. A
lot of them are working because they need the extra money. And
if you need the extra money, you need it now, not in an
actuarial equivalency down the road.
Mr. Portman. I appreciate the response and I agree with
that. I think this is about behavior and it is about what
people will do when faced with again, what I have calculated
from my friend, about an 80 percent marginal tax rate.
It also is a risk. In other words, the actuaries can come
in and say gee, over time, on average you are going to end up
getting a delayed credit for this. But, unfortunately, not
everybody is going to live that long. So for individuals, it is
a risk to delay the benefit, rather than getting the benefit of
the Social Security you have worked all your life for while you
need it. And at the same time, again contributing to our work
force, contributing to society.
We have got about a 3 percent unemployment rate in my area.
I think nationally it is about 4 percent. These are wonderful
workers to have out in the work force, the mentoring you talked
about, just adding that maturity to the work force and letting
people do what they want to do, and to give so much back. Ms.
McSteen?
Ms. McSteen. There is one additional thing that we really
have not talked that much about this morning. That is we must
recognize that there are many individuals who may, in fact, die
early. That is something that, particularly minorities, are
faced with because of their early death rate overall. And the
delayed retirement credit may make up for lost benefits over
time for some people, but not for all.
Mr. Portman. Thank you, that is an excellent point.
Mr. Chairman, again I commend you for having this hearing,
and I yield back the time.
Chairman Shaw. Thank you, and I want to thank this panel
for putting a very human face on the task that is before us. I
think that, from the last line of questions by Mr. Portman, the
question that comes to my mind is who in the world said that it
is up to the Congress to decide when someone gets the benefits
that they have earned? That is just flat wrong.
We are going to put the record straight. We are going to
put the law straight. We are going to deal with everybody
fairly on this. I am delighted to see the wonderful
bipartisanship that we have here. In dealing with this
wonderful part of our population, it is wonderful to know that
we can leave our partisan hats at home and work together.
Thank you very much.
We now have our final panel, Leora Friedberg, Ph.D.,
Assistant Professor of Economics at the University of
California, San Diego, and the National Bureau of Economic
Research in Cambridge, Massachusetts; Bruce Bartlett, who is a
Senior Fellow at the National Center for Political Analysis;
Robert Greenstein, who is the Executive Director of the Center
on Budget and Policy Priorities; and Aldona Robbins, Ph.D.,
Senior Research Fellow, Institute for Policy Innovation,
Lewisville, Texas.
Dr. Friedberg? As the previous panels, we have the full
text of your statements that will be made a part of the
permanent record. You may proceed.
STATEMENT OF LEORA FRIEDBERG, PH.D. ASSISTANT PROFESSOR OF
ECONOMICS, UNIVERSITY OF CALIFORNIA, SAN DIEGO, AND FACULTY
RESEARCH FELLOW, NATIONAL BUREAU OF ECONOMIC RESEARCH,
CAMBRIDGE, MASSACHUSETTS
Ms. Friedberg. My name is Leora Friedberg. I am an
economist and, as you said, a professor at the University of
California, San Diego. This summer I am moving to the
University of Virginia.
I have been invited here to summarize my research findings.
In my research I have analyzed how beneficiaries have changed
their hours of work in response to past changes in the earnings
test. And then I used this past evidence to develop predictions
if the earnings test were changed or removed today.
These predictions directly pertain to a particular subset
of beneficiaries, men aged 65 to 69, already working a fair
amount. For technical reasons, this is the group for which I
can make the most precise predictions. This is also the group
losing the most benefits to the earnings test. But I will be
happy to discuss later what might happen with other groups.
In my research I use large data files collected by the
Bureau of Labor Statistics in which people reported their
earnings and hours of work during the previous year. Many
workers in those surveys responded noticeably to past changes
in the earnings test.
For example, in 1983 the earnings test was eliminated for
people age 70 and 71. In the data, we can see the cluster of
workers with earnings just below the earnings limit, and we can
see them smooth out their earnings after the earnings test was
eliminated for this age group. So we can conclude that they had
been changing their work hours because of the earnings test
beforehand.
In 1978, the earnings limit was raised from $3,000 to
$4,000 for people aged 65 to 71. You see this cluster of
workers move their earnings just up to the new earnings limit
after that change.
Based on these past responses, I have developed predictions
if the earnings test is changed today. These predictions focus
on the hours of work among people who are already working, and
there are three important subgroups to consider. The first
group is low earners, people who keep their earnings just at or
below the earnings limit. We have heard many examples of that
today.
This group is reacting most visibly to the earnings test
and will be the most responsive to a change. Compared to their
actual hours of work in 1995, they would be predicted to work
50 percent more, on average as a group, if the earnings test is
eliminated.
The second group to consider are medium earners, people who
are working a little more initially, losing some but not all of
their benefits to the earnings test. In theory, we do not know
if this group would work more or less when the earnings test is
eliminated. They might work more because this effective
marginal tax rate from the earnings test declines or they might
work less because they have extra income. The evidence from
past changes is that this group would work 18 percent more on
average.
The third group are high earners, people working so much
that they lose all of their benefits now. This group would not
work more because now they would be getting extra income and
they would face no actual change in their effective tax rate.
Responses in the past suggest that they would work 4 percent
less on average because of this extra income.
There is an important caveat for this group in particular.
It consists mostly of full-time workers who may have less
flexibility to change their work hours, compared to the part-
time workers who are already showing a flexible response to the
earnings test. So these high earners may not be able to change
their work hours just a little. They may not change their hours
at all. So the prediction for this group is somewhat less
certain.
The same consideration is important with regards to
retirement. I have not addressed the question of whether the
earnings test causes some people to retire completely and thus
whether eliminating the earnings test will lead them to
postpone retirement. If jobs are not perfectly flexible and
people cannot find part-time work that lets them keep their
earnings just below the limit and avoid the earnings test, then
it might cause some people to retire.
It is difficult to analyze this because it depends on these
constraints on work hours. Indirect evidence supports the
notion that jobs are not perfectly flexible, that people cannot
control their hours precisely, and therefore we might expect
that eliminating the earnings test would cause some people to
delay retirement. But I do not have direct evidence about this.
So to sum up, my past research suggests that among men age
65 to 69 who are earning at least up to the earnings limit,
they would be predicted overall to work 5 percent more. The low
earners would work 50 percent more. Medium earners would work
18 percent more, and the high earners would work 4 percent
less.
So that is what the evidence suggests from past changes in
the earnings test. I will be happy to answer questions about
other groups and how they might respond to the earnings test or
how they might respond to raising the earnings limit in the
next couple of years. Thank you.
[The prepared statement follows:]
Statement of Leora Friedberg, Ph.D., Assistant Professor of Economics,
University of California, San Diego, and Faculty Research Fellow,
National Bureau of Economic Research
Summary
The Social Security earnings test produces some of the
highest tax rates in the economy. A beneficiary aged 62-64
loses $1 in benefits for every $2 earnings above an earnings
limit of $10,800 this year, in effect a 50% marginal tax rate.
A beneficiary aged 65-69 faces a 33% marginal tax rate for
earnings above $17,000. The tighter rules for younger
beneficiaries will apply for longer as the normal retirement
age is gradually raised from 65 to 67, beginning this year.
Many beneficiaries appear unresponsive to the additional
provision that lost current benefits are returned as a small
percentage increase in benefits forever after they retire. If
beneficiaries are unaware of this provision, even as many
economists and journalists reporting on Social Security have
been then we have a perverse policy that distorts people's
choices as if they were taxed yet raises virtually no revenue.
I have been invited here to summarize my research findings.
In my research I have analyzed how beneficiaries changed their
hours of work in response to past changes in the earnings test.
I use this past evidence to develop predictions if the earnings
test were removed today. These predictions directly pertain to
a particular subset of beneficiaries--men aged 65-69 who are
already working a fair amount. For technical reasons, this is
the group for which I can make the most precise predictions.
This is also the group losing the most benefits to the earnings
test.
In my research I use large data files collected by the
Bureau of Labor Statistics in which people report their
earnings and hours of work during the previous year. Many
workers in these surveys responded noticeably to past changes
in the earnings test.
For example, in 1983 the earnings test was
eliminated for people aged 70-71. Before that, many of them
kept their earnings just at the earnings limit. Afterwards,
their earnings smoothed out, so we can concluded that they had
been changing their work hours because of the earnings test.
In 1978, the earnings limit was raised from $3000
to $4000 for people aged 65-71. In the data, we can see the
cluster of workers with earnings just below the earnings limit
move their earnings up to the new higher limit.
Based on these past responses, I have developed predictions
if the earnings test is changed today. These predictions focus
on the hours of work among people who are already working.
There are three important subgroups to consider.
Low earners, people who keep their earnings just
at or below the earnings limit. This group is reacting most
visibly to the earnings test and will be the most responsive to
a change; compared to their actual hours of work in 1995, they
would be predicted to work 50% more on average, if the earnings
test is eliminated.
Medium earners, people working a little more
initially, losing some but not all of their benefits to the
earnings test. In theory we do not know if this group would
work more or less when the earnings test is eliminated--they
might work more because the marginal tax rate declines, or they
might work less because they have extra income. The evidence
from past changes is that this group would work 18% more on
average.
High earners, people working so much that they
lose all of their benefits. This group will not work more,
because they get extra income but face no actual change in
their marginal tax rate. Responses in the past suggest that
they would work 4% less on average. An important caveat for
this group: it consists mostly of full-time workers who may
have less flexibility to change their work hours, compared to
the part-time workers who are already showing a flexible
response to the earnings test. The high earners may not be able
to reduce their work hours a little, so their work hours may
not change at all, and the prediction for this group is less
certain.
This is also an important consideration for retirement. I
have not addressed the question of whether the earnings test
causes some people to retire completely, and thus whether
eliminating the earnings test will lead them to postpone
retirement. If jobs are not perfectly flexible, and people
cannot find part-time work that lets them keep their earnings
below the limit and avoid the earnings test, then it depends on
the structure of jobs, not just on their observable work hours.
Indirect evidence supports the notion that jobs are not
perfectly flexible, so we might expect that eliminating the
earnings test would cause some people to delay retirement. But,
I have not found direct evidence of this.
To sum up, all of the men aged 65-69 who were earning at
least up to the earnings limit in 1995 would be predicted to
work 5% more, in total. The lower earners would work 50% more,
the medium earners would work 18% more, and the high earners
would work 4% less.
The same type of analysis yields predictions about the how
people would respond to the gradual increase to a $30,000
earnings limit for people aged 65-69, legislated in 1996. In
comparison, people will not increase their work hours as much
or will reduce their work hours more. The low earners would
work 34% more, not 50% more. The middle earners would work 7%
more, not 18% more. The high earners would work 10% less, not
5% less. The differences arise because the tax rate is not
eliminated, but gets pushed up into higher earners.
While the short-run costs of relaxing or eliminating the
earnings test will be substantial, the long-run costs approach
zero, since future benefits will not be raised as they are
today to make up for current benefits lost to the earnings
test.
Now I will briefly discuss what we might expect with other
groups if the earnings test is changed.
Working women respond to the earnings test
similarly to men, suggesting a similar change in work hours if
the earnings test is eliminated. A significantly smaller
proportion of women work at these ages, however.
People aged 62-64, and eventually aged 65-66 as
well, face much more restrictive earnings test rules, almost
unchanged since the early 1970s. How do younger workers respond
to the earnings test? Some also hold their earnings down, just
below the limit, but more continue to work full-time.
Therefore, more workers in this age range may reduce their
hours, relative to the number who increase their hours.
However, of this age group in particular, the ``retirement
effect'' of the earnings test, which I discussed earlier, could
be substantial. In other words, people in this age range may
choose to postpone retirement if the earnings test is
eliminated.
I will be happy to answer questions about my research on
the expected response of workers aged 65-69 to changing the
earnings test, and about the potential response of other
groups, for example younger workers who continue to face more
restrictive earnings test rules.
Background
Introduction. When Social Security was established during
the Great Depression, one motive was to encourage older workers
to leave the labor force and make way for younger workers.
Thus, the system was designed not simply to give benefits to
older workers, but also to condition benefits on retirement.
In the decades since, the typical retirement age of older
workers has plummeted. The proportion of men aged 65 and over
working or looking for work fell from 46% in 1950 to 17% last
year. With life expectancy continuing to rise, the work force
shrinking, and savings rates at an all-time low, the increasing
length of retirement has come to be viewed as unsustainable.
To ease the penalty against working, the earning test was
gradually liberalized beginning in the 1950s, principally for
people aged 65 and over. In 2000, a beneficiary aged 65-69
earning more than a limit of $17,000 loses $1 in benefits for
every $3 in additional earnings--which functions as a 33% tax
on wages. March 1996 legislation will raise this exempt amount
to $30,000 by 2002, the tighter earnings test rules for people
aged 62-64 will be extended to ages 65 and 66 as the normal
retirement age gradually rises.
Moreover, beneficiaries do not appear to respond to the
provision that they will be compensated later, in the form of a
small percentage increase in benefits forever after they
retire. If beneficiaries are indeed unaware of this provision,
as suggested by some evidence, then the earnings test has the
perverse effect of distorting people's choices as if they were
taxed, yet raising virtually no revenue.
Some researchers have concluded that gradual liberalization
of the earnings test rules means that the earnings test no
longer leads people to retire and has little effect on their
hours of work. Two major problems arise with past studies. No
one has analyzed data from after the 1970s, so previous results
may be outdated. Also, not major changes in the earnings test
rules occurred during the period studied in earlier research.
My strategy is to investigate several recent changes in the
earnings test rules. It is easy to understand how people are
influenced by the earnings test by observing how they respond
when it is altered; otherwise it can be more difficult, since
work decisions are shaped by many factors which we cannot
observe and which change over time. The data I use show a
strong response among workers to past changes in the earnings
test, suggesting similar reactions if the earnings test were
eliminated today. While the short-run costs of relaxing the
earnings test would be substantial, the long-run costs are
close to zero, since future benefits will not be raised as they
are today to make up for current benefits lost to the earnings
test.
The impact of the earnings test on hours of work. In my
research, I studied the response of workers to the earnings
test by analyzing data on how much people work, and earn, and
how their behavior changed when the earnings test rules
changed.\1\,\2\ Three important changes have
occurred in the last twenty-five years. In 1978, the earnings
limit was raised from $3,000 to $4,000 for workers aged 65-71,
while it did not change for workers aged 62-64. In 1983, the
earnings test was eliminated for workers aged 70-71, while it
remained in place for workers aged 62-69. Lastly, in 1990 the
earnings test tax rate was lowered from 50% to 33% for workers
aged 65-69, but not for workers aged 62-64. The structure of
each of these rule changes, affecting people of some ages and
not other similar ages, is extremely useful. It allows us to
control for other potential shifts in work hours by comparing
earnings and hours of the affected and the unaffected age
groups over the period when the rules changed.
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\1\ In 1989 the Social Security Administration estimated that
almost one million retired-worker beneficiaries lost some or all of
their benefits to the earnings test, accounting for over one-third of
people aged 65-69. In addition, about a couple hundred thousand
beneficiaries kept their earnings just at or below the earnings limit.
See Leonesio (1990) and Bondar (1993).
\2\ The analysis is based on large data files collected by the
Bureau of Labor Statistics in its Current Population Survey (CPS).
People surveyed in the March CPS report their earnings and hours of
work during the previous year. The data and methods are described in
detail in Friedberg (2000).
---------------------------------------------------------------------------
The earnings data show that a significant proportion of
workers respond to the earnings test and that they shifted
their earnings when the rules changed. Figure 1 begins by
showing earnings distributions relative to the earnings limit
before and after the limit was raised for 65-71 year olds in
1978. The graphs compare the earnings of affected 67-69 year
old men and of unaffected 63-64 year old men. Figure 1-A shows,
before 1978, the number of older and younger workers with
earnings in each $1000 interval above and below the earnings
limit, as a proportion of the total number of people in the age
group.
Figure 1-A demonstrates a strong response to earnings test
before any change in the rules. Many people in both age groups
were clustered just at or below the limit--over 20% of 67-69
year old workers have earnings within $1000 below the limit,
along the almost 10% of 63-64 year old workers. Roughly the
same number of people appeared in each increment for several
intervals, followed by a big drop from the interval just below
to just above the limit.
After 1978, the clustered 67-69 year olds moved up to the
new earnings limit. First, Figure 1-B shows earnings of both
age group in relation to the unchanged earnings limit of the
younger group. The 63-64 year olds keep their earnings at the
same point, but the 67-69 year olds clearly shifted their
earnings higher. Figure 1-C shows them clustered at their new
higher limit. These changes were large and statistically
significant.
[GRAPHIC] [TIFF OMITTED] T6309.002
Figure 2 makes the same comparisons around the earnings
limit before and after 1983, when the earnings test was
eliminated for 70-71 year olds. Figures 2-A illustrates
earnings patterns before 1983 of the affected age group.\3\
They are juxtaposed with 73-75 year olds who do not face the
earnings test and whose earnings decline smoothly over the same
range. Figure 2-B shows the same comparisons after 1983. Now,
the earnings of the affected 71-72 year olds decline smoothly
over the range of the earnings limit, resembling the older
group.
---------------------------------------------------------------------------
\3\ Figures 2-A and 2-B actually show 71-72 year olds, since they
were 70-71 when the reported earnings were earned.
---------------------------------------------------------------------------
There was no noticeable reaction to the 1990 reduction in
the earnings test tax rate. This is not inconsistent with the
other strong reactions, however, because the 1990 change was
smaller. The tax rate declined 17 percentage points from 50% to
33%, rather than falling to zero as it effectively did earlier.
Predictions based on those earlier response suggest a small,
ambiguous change in earnings when the tax rate declines.
[GRAPHIC] [TIFF OMITTED] T6309.003
The data above show one particular reaction to the earnings
test, among people keeping their earnings just at the earnings
limit. Others working more and losing some or all their
benefits to the earnings test will also react, but that
reaction is more ambiguous and is thus difficult to observe
above. The reasons are as follows.
The earnings test alters the incentive to work in two
different ways. It changes the net wage and also the total
income of beneficiaries, depending on how much a beneficiary
works. Although intuition suggests the earnings test causes
beneficiaries to work less, this is not unambiguously true.
Facing a higher marginal tax rate will cause people to work
less, but reducing income may cause people to work more.
Similarly, eliminating the earnings test will not lead all
beneficiaries to work more. There are three different subgroups
we have to consider, depending on how much someone is working
when the earnings test is in place.
The first group is the one discussed above,
consisting of people who hold their earnings just at or below
the earnings limit. They will unambiguously work more when the
earnings limit is raised, the earnings test tax rate lowered,
or the earnings test eliminated.
The second group consists of people earning
somewhat more than the limit and losing some but not all their
benefits. In theory, we cannot unambiguously predict whether
they will work more or less if the earnings test is relaxed or
eliminated. They may work more because their marginal tax rate
falls or less because they have extra income. My research shows
that on average people in this group will work more.
The third group consists of people earning
considerable more than the limit and losing all their benefits.
Their marginal tax rate will not change when the earnings test
is eliminated, but their income will rise. This will induce
them to work less, if they can adjust their hours of work.
What about the increase in benefits later on? Just as
people are rewarded with higher benefits in the future if they
delay claiming benefits today, beneficiaries also receive an
increase in all future benefits for current benefits lost to
the earnings test. Someone under age 65 gets a 6\2/3\% increase
in future benefits for each year's worth of benefits foregone.
Someone aged 65-69 gets an adjustment that is gradually
approaching 8%. These credits establish a tradeoff, actuarially
fair for a person with average life expectancy, between a
year's worth of benefits at present and a percentage increase
in all future benefits.
However, there is no evidence that the credits are taken
into account with regards to the earnings test. In all
likelihood, many fewer people would respond to the earnings
test and restrict their earnings, as we observe them doing in
Figures 1 and 2.\4\ Furthermore, descriptions of the earnings
test in the popular press generally fail to mention the
adjustment. When both Money (Simon 1996) and the Los Angeles
Times (Kristof 1997) have described how the earnings test
works, neither mentioned that higher future benefits compensate
for lost benefits today. The perverse result is that people
respond to the earnings test as if it were a tax, yet it raises
virtually no revenue over the long-run.
---------------------------------------------------------------------------
\4\ We would still expect a reaction among people with less than
average life expectancy and people who are more impatient than average.
Other evidence shows that more people claim benefits at age 62 then
either of these factors predict, however, suggesting that people either
do not know or do not care about the future adjustments.
---------------------------------------------------------------------------
The predicted impact of eliminating the earnings test. I
used the information implicit in the response of workers to
past changes in the earnings test to develop predictions about
changes today, such as eliminating the earnings test or raising
the earnings limit to $30,000.
Low earners, who keep their earnings just at or below the
earnings limit are reacting most visibly to the earnings test
and will be the most responsive to a change. Compared to their
actual hours of work in 1995, they would be predicted to work
50% more on average, if the earnings test is eliminated. In
comparison, medium earners would be predicted to work 18% more
on average. As discussed earlier, they may work either more or
less in theory because their marginal tax rate falls but their
income rises. Thus, the evidence from past changes suggests
that the tax rate effect dominates. Lastly, high earners would
be predicted to work 4% less on average, because they have more
income and their marginal tax rate does not change. In total,
men aged 65-69 who were earning at least up to the earnings
limit in 1995 would be predicted to work 5% more.
At this point, it is important to mention a caveat
affecting high earners the most. These predictions have assumed
that everyone can adjust their work hours flexible. However,
while those at the earnings limit do appear to have a lot of
control over their hours, other who work full-time and earn
more may have less flexibility. Thus, it is somewhat less
likely that the group of high earners will actually change
their hours, even though they are predicted to, compared to the
low earners. This issue will also determine whether the
earnings test affects retirement, as I discuss later.
It is interesting to compare the predications of work hours
if the earnings test is eliminated to the predictions when the
earnings limit is raised to $30,000. Because this change is not
as dramatic, people will not increase their work hours as much
or will reduce their work hours more. The low earners would be
predicted to work 34% more and the middle earners 7% more,
while the high earners would be predicted to work 10% less. The
differences arise because the tax rate gets pushed up onto
higher earners. Raising the earnings limit removes the burden
of the earnings test for many low earners but makes it bind
more strongly for higher earners.
One argument made against changing the earnings test is the
fiscal cost. However, while the initial costs is relatively
high, the long-run cost is declining towards zero, because
benefits will not be lost today to the earnings test and thus
future benefits will not be raised.\5\ As these adjustments are
approximately actuarially fair on average, the fiscal cost of
eliminating the earnings test today will be virtually canceled
out within a number of years.
---------------------------------------------------------------------------
\5\ Leonesio (1993) reported Social Security Administration
forecasts that eliminating the earnings test for ages 65-69 would raise
payouts by $4.3 billion in the first year. Income, payroll and benefits
taxes due to higher earnings would offset 14.8% of the cost. That
forecast was based on a very small predicted change in work hours. My
research results suggest a larger offset through taxes paid as people
work more.
---------------------------------------------------------------------------
Another possible argument against relaxing the earnings
test is that it would primarily benefit high income
beneficiaries. It is true that total income would rise more for
higher earners, but the data show that most of the distortions
to behavior are observed among low and medium earners. Their
work hours would rise the most if the earnings test were
lifted.
Other potential effects. My research pertains directly to
men aged 65-69 who are already working. Several other groups
may be affected as well. I cannot offer as precise conclusions
in their regard, but I will discuss some important
considerations.
It is essential to consider whether the earnings
test induces people to retire. If jobs are perfectly flexible,
then someone who wants to work but not lose benefits can limit
their hours to keep their earnings below the limit. In the
case, the earnings test will not cause anyone to retire
completely. However, if jobs are not perfectly flexible, or if
a part-time job involves a substantial cut in the hourly wage,
then it may not be feasible to earn less than the limit, and
retirement may be preferred to facing the earnings test. It is
difficult to analyze the potential magnitude of such effects
which depend on unobserved conditions of jobs, rather than on
their observable work hours. Indirect evidence supports the
notion that jobs are not perfectly flexible, so we might expect
that eliminating the earnings test would cause some people to
delay retirement.
While my research focused on men, older women
react similarly to the earnings test. Thus, we can expect a
similar change in work hours if the earnings test is
eliminated. A significantly smaller proportion of women work at
these ages, though, so a small number will be affected.
People aged 62-64, and eventually 65-66 as well,
face much more restrictive earnings test rules, almost
unchanged since the early 1970s. How do these younger workers
respond? The data show that some hold their earnings just below
the limit, as do older workers, while a greater proportion
continue to work full-time. Therefore, more workers at these
ages might reduce their hours, relative to older workers, if
the earnings test is eliminated. However, it is among this
group that the ``retirement effect'' of the earnings test is
crucial. If the earnings test causes some 62-64 year olds to
retire, eliminating it would have an extra punch because they
are likely to continue working longer than 65-69 year olds.
Conclusions. The earnings test has been the subject of a
great deal of popular attention, but less academic interest in
recent years. I have used a new empirical strategy, analyzing
the reactions to past changes in the earnings test rules, to
arrive at several conclusions.
The data reveal a significant number of workers clustered
just at the earnings limit. The clustering demonstrates that
the earnings test leads some beneficiaries to hold down their
hours of work. The clustering moved when the earnings limit
moved and disappeared when the earnings test was eliminated for
some ages. Thus, beneficiaries react promptly and flexibly to
changes in the earnings test.
The past reactions indicate how people might respond if the
earnings test is changed today. According to my estimates, men
aged 65-69 who were earning at least up to the earnings limit
in 1995 would be predicted to work 5% more, in total. Low
earners, just at or below the earnings limit, would work 50%
more, medium earners would work 18% more, and high earners
would work 4% less. In comparison, people would be predicted to
increase their work hours less or reduce them more when the
earnings limit is raised to $30,000. These differences arise
because the tax rate is not eliminated, but gets pushed up onto
higher earners. Lastly, it is important to recognize that the
long-run cost of eliminating the eliminating the earnings test
is virtually zero.
References
Bondar, Joseph. 1993. ``Beneficiaries Affected by the
Annual Earnings Test, 1989.'' Social Security Bulletin 56: 20-
8.
Friedberg, Leora. 2000. ``The Labor Supply Effects of the
Social Security Earnings Test.'' The Review of Economics and
Statistics 82(1): 1-16.
Kristof, Kathy, 1997. ``Personal Finance.'' Los Angeles
Times. September 5, 1997; D5.
Leonesio, Michael V. 1990. ``Effects of the Social Security
Earnings Test on the Labor Market Activity of Older Americans:
A Review of the Evidence.'' Social Security Bulletin 53: 2-21.
Simon, Ruth. 1996. ``How To Be Sure You Never Go Broke.''
Money25, October: 100-114.
Chairman Shaw. Thank you.
Mr. Bartlett.
STATEMENT OF BRUCE BARTLETT, SENIOR FELLOW, NATIONAL CENTER FOR
POLICY ANALYSIS
Mr. Bartlett. Thank you, Mr. Chairman.
The Social Security earnings test is among the most unfair
and counterproductive policies ever imposed by the Federal
Government. On the one hand, we are continually told that
workers have a right to Social Security whenever there is a
proposal to modify cost of living adjustments. But on the other
hand, we take away benefits from many seniors simply because
they have chosen to work past the normal retirement age. And
historically, it has been those most vocal about Social
Security rights who have resisted most strenuously any
elimination of the earnings test.
This is a massive injustice, in my opinion. If people have,
in fact, earned their Social Security benefits, then they are
entitled to them. No one takes away anyone's private pension or
annuity if that person continues to work after they have become
entitled to benefits. This disparate treatment makes a mockery
of the notion that Social Security is an earned benefit that
people are entitled to by virtue of long years of work. It
makes Social Security equivalent to a welfare program where
benefits are rightly withdrawn from people who no longer need
them.
A further element of unfairness results from the fact that
the earnings test applies only to wage income. One can receive
millions of dollars a year in interest, dividends and capital
gains without losing a penny of Social Security benefits.
The earnings test was originally imposed for a reason that
now makes no economic sense. Its purpose was to get workers out
of the labor force during the Great Depression in order to open
up jobs for younger workers. Today however, one of the biggest
problems facing the country is not a lack of jobs, but a lack
of workers. The earnings test is not only depriving American
businesses of labor they desperately need, but is keeping out
of the labor force some of our best educated and most
experienced workers.
The withholding of benefits acts like an additional tax on
earnings. In the case of retirees between the ages of 65 and 69
it is a 33 percent tax rate, and for those between the ages of
62 and 64 it is an even worse 50 percent tax rate. And these
implicit tax rates come on top of explicit taxes such as
Federal, State, and local taxes, including taxes on Social
Security benefits for some people.
These high effective tax rates have a major impact on the
employment status of older workers. They are a major reason why
in 1999 only 16.9 percent of men over age 65 were in the labor
force, either by working or seeking work. 50 years ago, 47
percent of such men were still in the labor force. At the turn
of the century the figure was better than 60 percent.
It is my view that the earnings test should be scrapped in
its entirety. Either people have earned their benefits or they
have not, and singling out those who continue to work after
retirement age is a violation of that principle. The only
possible justification for keeping the earnings test is
budgetary. Obviously, elimination of the test would lead to
payment of benefits that are now not paid, increasing Federal
outlays for Social Security.
However, I believe this cost is often grossly overestimated
because it does not take into account the impact of the delayed
retirement credit. The delayed retirement credit raises
benefits for retirees when they put off drawing Social Security
benefits, even though they are eligible for them. For workers
turning 65 this year, they will receive a 6-percent increase in
their Social Security benefits for each year they delay drawing
benefits. Thus, if their work history entitled them to $1,000
per month in benefits at age 65, but they did not begin drawing
benefits until age 66, they would get $1,060 per month.
In future years, the gain will increase. That is because
the delayed retirement credit will rise to 8 percent in the
year 2008. This means that someone waiting until age 70 before
drawing benefits would get 40 percent more than if they started
at age 65. After age 70 there is no further increase in
benefits and also no earnings test. At that point, the Social
Security actuaries estimate that the lifetime benefits people
receive from Social Security will be about the same in the
aggregate regardless of whether they retire at age 65 or age
70.
The delayed retirement credit is extremely important in
calculating the long term budgetary impact of eliminating the
earnings test. That is because those people who now lose
benefits because of the earnings test are receiving higher
future benefits. Because the DRC is supposed to cause lifetime
benefits to be the same regardless of when people begin to draw
benefits, the long term cost of eliminating the earnings test
should in theory be zero. Higher benefits paid out in the short
run to people who would otherwise lose benefits because of the
earnings test will be offset by lower future benefits because
they will no longer claim the delayed retirement credit.
In conclusion, I believe that all arguments against
abolishing the earnings test are spurious. In fact, my
suspicion is that the true barrier to doing so is simply class
envy. Those who would benefit most in the short run from
abolition of the earnings test are relatively high income
earners. But in the longer run, especially given the rise in
life expectancy, I would expect to see many more moderate
income workers stay in the labor force if the earnings test
were repealed.
Mr. Chairman, this is not a partisan issue President
Clinton proposed eliminating the earnings test in his State of
the Union address in 1999 and has reiterated his desire to do
so as recently as yesterday. I urge the Committee to support
him.
[The prepared statement follows:]
Statement of Bruce Bartlett, Senior Fellow, National Center for Policy
Analysis
Mr. Chairman, the Social Security earnings test is among
the most unfair and counterproductive policies ever imposed by
the Federal Government. On the one hand, we are continually
told that workers have a ``right'' to Social Security whenever
there is a proposal to modify cost of living adjustments. But
on the other hand, we take away benefits from many seniors
simply because they have chosen to work past the normal
retirement age. And historically it has been those most vocal
about Social Security rights who have resisted most strenuously
any elimination of the earnings test.\1\
---------------------------------------------------------------------------
\1\ For example, the Washington Post routinely decries any
modification of the earnings test while strenuously defending a
worker's right to benefits. See its editorials on March 15, 1996;
December 3, 1995; January 17, 1995; January 17, 1991; December 2, 1989;
and April 19, 1989.
---------------------------------------------------------------------------
This is a massive injustice. If people have in fact earned
their Social Security benefits, then they are entitled to them.
No one takes away someone's private pension or annuity if that
person continues to work after they have become entitled to
benefits. This disparate treatment makes a mockery of the
notion that Social Security is an earned benefit that people
are entitled to by virtue of long years of work. It makes
Social Security equivalent to a welfare program where benefits
are rightly withdrawn from people who no longer need them.
A further element of unfairness results from the fact that
the earnings test applies only to wage income. One can receive
millions of dollars per year in interest, dividends and capital
gains without losing a penny of Social Security benefits. But
someone who has invested in human capital rather than financial
capital is punished when he or she seeks a return on that
investment by continuing to work.
The earnings test was originally imposed for a reason that
now makes no economic sense. Its purpose was to get workers out
of the labor force during the Great Depression in order to open
up jobs for younger workers.\2\ Today, however, one of the
biggest problems facing the country is not a lack of jobs, but
a lack of workers. The earnings test is not only depriving
American businesses of labor they desperately need, but is
keeping out of the labor force some of our best educated and
most experienced workers.\3\ As a nation we cannot afford to
keep doing this.
---------------------------------------------------------------------------
\2\ Marshall R. Colberg, The Social Security Retirement Test: Right
or Wrong? (Washington: American Enterprise Institute, 1978), p. 2; C.
Eugene Steuerle and Jon M. Bakija, Retooling Social Security for the
21st Century (Washington: Urban Institute Press, 1994), p. 226.
\3\ See ``Brain Drain,'' Business Week (September 20, 1999), pp.
112-126.
---------------------------------------------------------------------------
Keeping older workers out of the labor force is also
harmful to them. When they are forced into idleness by
retirement, it often impacts negatively on their health and
self-esteem.\4\ And the notion that older workers are not
healthy enough to continue working is simply no longer valid.
Rising life expectancy and improved medicine mean that today's
average 65 year old is probably in better physical shape than a
40 year old worker was before World War II.\5\ Of course, no
retiree should be forced to work if they prefer leisure, but
actively penalizing those who want to work and are able to work
is harmful both to them and the economy.
---------------------------------------------------------------------------
\4\ See Committee for Economic Development, New Opportunities for
Older Workers (1999), available at www.ced.org/pdf/OLDER.PDF.
\5\ Eugene Steuerle, Christopher Spiro, and Richard W. Johnson,
``Can Americans Work Longer?'' Straight Talk on Social Security and
Retirement Policy No. 5 (Washington: Urban Institute, 15 August 1999),
available at www.urban.org/retirement/st/Straight5.pdf. A recent
government report also suggests that estimates of rising life
expectancy in the future may be understated. See Social Security
Advisory Board, The 1999 Technical Panel on Assumptions and Methods,
available at www.ssab.gov/reports.html.
---------------------------------------------------------------------------
According to the Social Security Administration, 3.5
million people between the ages of 62 and 69 have some earned
income, about 37 percent of all retirees under the age of
70.\6\ In 1995, 743,000 workers aged 65 to 70 had their Social
Security benefits reduced because their earnings exceeded the
allowed amount, 8.5 percent of all retired worker
beneficiaries. Twenty-nine percent of those losing benefits
received no Social Security benefits at all that year. The
total amount of benefits lost was $4.3 billion and the median
benefits lost per recipient was $3,596.\7\
---------------------------------------------------------------------------
\6\ House Ways & Means Committee, 1998 Green Book (Washington: U.S.
Government Printing Office, 1998), p. 33.
\7\ Bertram Kestenbaum, Michael Shakleford, and Chris Champlain,
``Effect on Benefits of Earnings at Ages 65 or Older, 1995,'' Social
Security Bulletin, vol. 62, no. 1 (1999), pp. 4-9. For data on earlier
years, see Joseph Bondar, ``Beneficiaries Affected by the Annual
Earnings Test, 1989,'' Social Security Bulletin, vol. 56, no. 1 (Spring
1993), pp. 20-28.
---------------------------------------------------------------------------
It should be noted that the earnings test also creates a
kind of marriage penalty, because earnings by the primary
Social Security recipient above the threshold can also reduce
the benefits of auxiliary recipients. In 1995, secondary
recipients losing benefits were primarily female. Only 2,000
males receiving secondary benefits lost benefits, while 62,000
females did.
Inclusion of secondary beneficiaries raises the number of
those losing benefits in 1995 to 806,000. And because 154,000
other family members--nonworking spouses and children--are also
affected by the reduction in benefits, the total number of
people harmed by the earnings test rises to 960,000. But even
this number understates the impact of the earnings test,
because about 152,000 additional workers did not apply for
benefits because their earnings were above the threshold.\8\
---------------------------------------------------------------------------
\8\ Kestenbaum, Shakleford and Chaplain, op. cit.
---------------------------------------------------------------------------
The withholding of benefits acts like an additional tax on
earnings. In the case of retirees between the ages of 65 and 69
it is a 33 percent tax rate, and for those between the ages of
62 and 64 it is a 50 percent tax rate.\9\ And these implicit
tax rates come on top of explicit taxes such as federal and
state income taxes, including taxes on Social Security benefits
for those whose incomes are high enough. Of course, older
workers also continue to pay Social Security taxes as well.\10\
---------------------------------------------------------------------------
\9\ Policymakers often overlook the more punitive earnings test for
those taking early retirement. See Eugene Steuerle and Christopher
Spiro, ``Are Policymakers Overlooking a Second Earnings Test?''
Straight Talk on Social Security and Retirement Policy No. 9
(Washington: Urban Institute, 15 October 1999), available at
www.urban.org/retirement/st/Straight9.pdf. The authors note that under
current law, this more punitive earnings test will apply to more people
as the normal retirement age is raised to 67. This will make workers
between the ages of 65 and 66 subject to the high de facto tax rates
that now apply only to those aged 62 to 64.
\10\ One study found that the marginal tax bite, both explicit and
implicit, can reach more than 100 percent in some cases. See John
Goodman, ``Raising the Earnings Limit,'' National Center for Policy
Analysis Brief Analysis No. 149 (January 31, 1995), available at
www.ncpa.org/ba/ba149.html. Another study put the top rate at 96
percent just at the federal level. See Nathan Oestreich, Howard Toole,
and Oliver Galbraith, ``Restoring the Incentive for the Elderly to
Work,'' Tax Notes, vol. 49, no. 4 (October 22, 1990), pp. 469-471. And
the incidence of high de facto marginal tax rates is not limited to
just a few of the elderly. One study found that 30 percent of the
single elderly and 12 percent of married elderly faced marginal tax
rates exceeding 60 percent. John R. Gist and Janemarie Mulvey,
``Marginal Tax Rates and Older Workers,'' Tax Notes, vol. 49, no. 6
(November 5, 1990), pp. 679-694.
---------------------------------------------------------------------------
These high effective tax rates have a major impact on the
employment status of older workers. They are a major reason why
in 1999 only 16.9 percent of men over age 65 were in the labor
force, either by working or seeking work.\11\ Fifty years ago,
47 percent of such men were still in the labor force. At the
turn of the century the figure was better than 60 percent.\12\
This sharp decline is all the more remarkable given the
significant rise in life expectancy over this period.\13\
---------------------------------------------------------------------------
\11\ Bureau of Labor Statistics data available at http://
stats.bls.gov.
\12\ Bureau of the Census, Historical Statistics of the United
States: Colonial Times to 1970 (Washington: U.S. Government Printing
Office, 1975), part 1, p. 132. See also Roger L. Ransom and Richard
Sutch, ``The Labor of Older Americans: Retirement of Men On and Off the
Job, 1870-1937,'' Journal of Economic History, vol. 46, no. 1 (March
1986), pp. 1-30.
\13\ It is worth noting that when Social Security was first
established, age 65 was greater than the male life expectancy at birth.
See Historical Statistics, pt. 1, p. 56.
---------------------------------------------------------------------------
It is my view that the earnings test should be scrapped in
its entirety. Either people have earned their benefits or they
haven't, and singling out those who continue to work after
retirement age is a violation of that principle. The only
possible justification for keeping the earnings test is
budgetary.\14\ Obviously, elimination of the test would lead to
the payment of benefits that are now not paid, increasing
federal outlays for Social Security. However, I believe this
cost is often grossly overestimated because estimates do not
take into account the impact of the delayed retirement credit
(DRC).
---------------------------------------------------------------------------
\14\ Historically, this has been the greatest political barrier to
elimination of the earnings test despite broad bipartisan support for
doing so. See Helen Dewar, ``Senate Blocks Rise in Social Security
Earning Limit,'' Washington Post (November 3, 1995); Kitty Dumas,
``Budget-Buster Hot Potato: The Earnings Test,'' Congressional
Quarterly (January 11, 1992), pp. 52-55; Julie Kosterlitz, ``Working
for a Price,'' National Journal (February 6, 1988), pp. 318-321.
---------------------------------------------------------------------------
The DRC raises benefits for retirees when they put off
drawing Social Security benefits, even though they are eligible
for them. Workers turning 65 this year will receive a 6 percent
increase in their Social Security benefits for each year they
delay drawing benefits. Thus, if their work history entitled
them to $1,000 per month in benefits at age 65, but they did
not begin drawing benefits until age 66, they would get $1,060
per month.\15\
---------------------------------------------------------------------------
\15\ Actually, the DRC is calculated on a monthly basis, meaning
that those who lose benefits because of the earnings test get some of
it back.
---------------------------------------------------------------------------
The idea of the credit is to encourage workers to stay in
the labor force and not retire the minute they become eligible
for benefits. But many workers are under the mistaken belief
that any benefits they fail to draw simply are lost. Hence,
many workers are retiring too soon for their own good. A recent
study from the National Bureau of Economic Research says that
most workers would be better off by delaying their first Social
Security benefit check by up to 3 years.\16\
---------------------------------------------------------------------------
\16\ Courtney Coile et. al., ``Delays in Claiming Social Security
Benefits,'' National Bureau of Economic Research Working Paper No. 7318
(August 1999), available at www.nber.org/papers/ w7318.
---------------------------------------------------------------------------
In future years, the gain will increase. That is because
the delayed retirement credit will rise to 8 percent in the
year 2008 (for workers born in 1943).\17\ This means that
someone waiting until age 70 before drawing benefits would get
40 percent more than if they started at age 65. (After age 70
there is no further increase in benefits and also no earnings
test.\18\) At that point, the Social Security actuaries
estimate that the lifetime benefits people receive from Social
Security will be about the same in the aggregate regardless of
whether they retire at age 65 or age 70.
---------------------------------------------------------------------------
\17\ The DRC was only 3 percent until 1989. Thus any studies based
on this lower figure will grossly overestimate the budgetary cost of
eliminating the earnings test, compared with a 6 percent or 8 percent
rate.
\18\ Note that in 2008, when the DRC is fully phased-in, the age at
which one may receive full benefits will be 66, and will continue
rising to age 67 thereafter. This suggests a need to change the age at
which the DRC is capped from 70 to age 72, or else future workers will
not get as much value from the DRC as current workers do.
---------------------------------------------------------------------------
The DRC is extremely important in calculating the long term
budgetary impact of eliminating the earnings test. That is
because those people who now lose benefits because of the
earnings test are receiving higher future benefits. They also
receive higher benefits because earnings past age 65 can cause
their benefits to be recomputed. That is because Social
Security uses a 35-year earnings history to calculate benefits.
If post-65 annual earnings are greater than the lowest of these
years, they can lead to higher benefits.
Because the DRC is supposed to cause lifetime benefits to
be the same regardless of when people begin to draw benefits,
the long term cost of eliminating the earnings test should in
theory be zero. Higher benefits paid out in the short-run to
people who would otherwise lose benefits because of the
earnings test will be offset by lower future benefits because
they will no longer claim the DRC. This fact is admitted even
by those who oppose elimination of the earnings test.\19\
---------------------------------------------------------------------------
\19\ Jonathan Gruber and Peter Orszag, ``What To Do About the
Social Security Earnings Test?'' Issue in Brief No. 1 (Boston: Center
for Retirement Research, Boston College, July 1999), available at
www.bc.edu/bc--org/aup/csom/executive/crr/issuebriefs/ issuebrief1.pdf.
---------------------------------------------------------------------------
Another problem is that estimates of the net cost of
eliminating the earnings test sometimes look only at increased
payroll taxes that will result from expanded labor supply, as
those now forced out of the labor market by the test remain in
it or reenter.\20\ These estimates tend to overlook higher
income tax revenues and reduced outlays for Medicare due to
older workers having employer-provided health benefits. One
study that did take all of the relevant factors into account
found that after about 8 years, the net increase in federal
outlays is just $1 billion per year.\21\
---------------------------------------------------------------------------
\20\ Recent estimates of how much the labor supply would rise from
elimination of the earnings test suggest that the magnitude could be
fairly large. See Leora Friedberg, ``The Labor Supply Effects of the
Social Security Earnings Test,'' National Bureau of Economic Research
Working Paper No. 7200 (June 1999); idem, ``The Social Security
Earnings Test and Labor Supply of Older Men,'' in James M. Poterba,
ed., Tax Policy and the Economy, vol. 12 (Cambridge: MIT Press, 1998),
pp. 121-150. Earlier studies generally found much lower labor
responses. See Marjorie Honig and Cordelia Reimers, ``Is It Worth
Eliminating the Retirement Test?'' American Economic Review, vol. 79,
no. 2 (May 1989), pp. 103-107; Michael V. Leonesio, ``The Effects of
the Social Security Earnings Test on the Labor-Market Activity of Older
Americans: A Review of the Evidence,'' Social Security Bulletin, vol.
53, no. 5 (May 1990), pp. 2-21; Michael D. Packard, ``The Earnings Test
and the Short-Run Work Response to Its Elimination,'' Social Security
Bulletin, vol. 53, no. 9 (September 1990), pp. 3-16. Two early studies
that did find a high labor response to reduction of the earnings
penalty are Michael J. Boskin, ``Social Security and Retirement
Decisions,'' Economic Inquiry, vol. 15, no. 1 (January 1977), pp. 1-25;
and Anthony J. Pellechio, ``The Social Security Earnings Test, Labor
Supply Distortions, and Foregone Payroll Tax Revenue,'' National Bureau
of Economic Research Working Paper No. 272 (August 1978).
\21\ Gary Robbins and Aldona Robbins, ``Retiring the Social
Security Earnings Test,'' Institute for Policy Innovation Issue Brief
(May 6, 1999), available at www.ipi.org. Another study found that the
main long-run cost from eliminating the earnings test came from the
recomputation of benefits. See Alan L. Gustman and Thomas L.
Steinmeier, ``Changing the Social Security Rules for Work After 65,''
Industrial & Labor Relations Review, vol. 44, no. 4 (July 1991), pp.
733-745. My guess is that most seniors would happily give up any
recomputation of benefits for work after age 65 in return for abolition
of the earnings test.
---------------------------------------------------------------------------
In conclusion, I believe that all arguments against
abolishing the earnings limit are spurious. In fact, my
suspicion is that the true barrier to doing so is simply class
envy. Those who would benefit most in the short run from
abolition of the earnings test are relatively high income
earners. But in the longer run, especially given the rise in
life expectancy, I would expect to see many more moderate
income workers stay in the labor force if the earnings test
were repealed.\22\
---------------------------------------------------------------------------
\22\ Press reports indicate that many Baby Boomers don't wish to
ever retire. See ``So Who Wants to Retire?'' Business Week (November 8,
1999), p. 8; Gene Epstein, ``A Big New Wrinkle,'' Barron's (September
6, 1999), pp. 27-29; John Authers, ``Boomers Want to Work For Ever,''
Financial Times (October 30, 1998).
---------------------------------------------------------------------------
Mr. Chairman, this is not a partisan issue. President
Clinton proposed eliminating the earnings test in his State of
the Union Address in 1999, and has reiterated his desire to do
so again this year.\23\ I urge the Committee to support him.
---------------------------------------------------------------------------
\23\ The President said, ``we should eliminate the limits on what
seniors on Social Security can earn.'' Congressional Record (January
19, 1999), p. H259. His latest comment came in an interview with
reporters on February 1, 2000. He said, ``I think that something that
costs money in the short run, but makes you money in the long run is
lifting the earnings limits. And we plainly ought to do that.''
Accessed at www.nytimes.com/yr/mo/ day/news/financial/clinton-text.html
on February 2, 2000.
---------------------------------------------------------------------------
Chairman Shaw. Thank you, Mr. Bartlett.
Mr. Greenstein.
STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE DIRECTOR, CENTER ON
BUDGET AND POLICY PRIORITIES
Mr. Greenstein. Thank you, Mr. Chairman.
As you have heard today, there is a case for eliminating
the earnings test applied to people who have reached the normal
retirement age, as H.R. 5 does.
My one reservation is, as you know, long term solvency
legislation is controversial, eliminating the earnings test is
popular. My preference would be to do it as part of long term
solvency legislation to make it easier pass. My concern is that
without this, getting that agreement on long term solvency
legislation is even a little harder.
Having said that, I recognize that a decision seems to have
been made to move forward this year with it, so I will proceed
to discuss the earnings test questions themselves.
There are various ways to change the earnings test, some
wise and some unsound. Fortunately, you have before you, I
think, a very sound way to change the earnings test in H.R. 5
so that if you do more forward this year, I think passing H.R.
5 is the way to do it.
Before going a little further into why, I would like to
make two observations. One is I tend to think we really should
not talk about the earnings test as imposing a tax on the
earnings because, as Congressman Portman just mentioned, if you
lose benefits due to the earnings test, you get them back after
you cease having the earnings test apply through higher monthly
benefit for the rest of your life and, on average, you fully
get back what you lost in the earnings test.
This means the earnings test is not really a tax on
lifetime benefits, which is the very reason why you can
eliminate it without worsening Social Security solvency. If it
really were a big tax on lifetime benefits, then eliminating it
would increase benefits and worsen solvency. But eliminating it
does not worsen solvency, it means more benefits now instead of
benefits later.
The second observation I want to make is that we should
think very differently about the separate test that applies to
those who begin receiving Social Security benefits early. For
them eliminating that test, which H.R. 5 wisely does not do,
would significantly increase poverty among the very old. People
who begin to draw benefits at 62, as you know, receive a 20
percent lower monthly benefit for the rest of their lives, and
that affects their widows, as well.
If we eliminated the test as it applies to the early
benefit receivers, many more people would likely begin to claim
benefits at 62, with the result that more beneficiaries and
ultimately more widows would be receiving the lower benefits
when they were very old. As Commissioner Apfel stated here this
morning, that could increase the number of elderly poor by up
to 700,000 people.
So what are the policy conclusions that I would draw?
First, the research suggests that among those who have reached
the normal retirement age, eliminating the earnings test may
cause a modest increase in work effort. The Social Security
actuaries report that eliminating that earnings test would have
no effect on solvency. Eliminating the earnings test for people
who have reached the normal retirement age therefore seems a
sensible step and that is what H.R. 5 does.
The separate test that applies to early retirees is a
different story. There is no evidence in the research
literature that eliminating it would cause a significant
increase in work effort. But eliminating it would cause a
significant increase in poverty among the very old, especially
among widows in their eighties and nineties.
In addition, the Social Security actuaries report that
eliminating the earnings test for early retirees would move the
date of insolvency forward from 2034 to 2033 and modestly
reduce the trust fund's assets.
Eliminating the test for early retirees would have one
other adverse effect. It would encourage increased claiming of
benefits at age 62. Mr. Chairman, as we move forward into the
difficult demographic decades ahead, when the population will
age and Americans will live longer, encouraging more people to
start claiming at 62 is one of the last things we should be
doing.
In conclusion, if Congress does decide to move forward this
year with earnings test legislation outside of larger solvency
legislation, then H.R. 5 would be the way to go.
Thank you.
[The prepared statement follows:]
Statement of Robert Greenstein, Executive Director, Center on Budget
and Policy Priorities
I appreciate the opportunity to testify before the
Subcommittee today. I am Robert Greenstein, executive director
of the Center on Budget and Policy Priorities here in
Washington, D.C. The Center is a nonprofit policy institute
that works on an array of public policy issues, with a
particular interest in matters of fiscal policy and policy
impacts on low-and moderate-income families. The Center
receives no federal grants or contracts.
The Earnings Test and Social Security Reform
I approach the topic of today's hearing with some ambivalence. On
the one hand, as explained below, there is a case for eliminating the
Social Security earnings test as it is applied to individuals who have
reached the age at which full Social Security benefits are paid
(sometimes known as the ``normal retirement age''). On the other hand,
the best course would be to deal with the earnings test as part of
broader Social Security reform legislation, rather than to move
legislation eliminating this test separate from--and ahead of--a
broader reform package that restores long-term solvency.
Restoring long-term solvency to Social Security will necessarily
entail some reductions in benefits or increases in payroll taxes unless
policymakers pour in so much money from the rest of the budget for a
number of decades as to make any hard choices unnecessary, a course of
action that would likely cause serious fiscal problems a few decades
from now. This point holds true for both privatization and non-
privatization approaches to restoring long-term Social Security
solvency.
Eventually, we will have to make some tough choices. Doing so will
not be easy politically. Having elimination of the earnings test as
part of such a long-term solvency package would make the package more
politically palatable. By contrast, separate action now to eliminate
the earnings test, outside of a long-term solvency package, would
likely make such a package somewhat less attractive and still harder to
pass. It also is difficult to argue that changes in the earnings test
should be made on their own but that other changes for which the
evidence may be more compelling--such as changes in the Social Security
widows' benefit to reduce the high rates of poverty that old widows
face--must wait for long-term solvency legislation.
I recognize, however, that Congress may wish to proceed nonetheless
to address the earnings test this year. Accordingly, the main body of
this testimony addresses various issues related to the earnings test
and to potential legislation to eliminate it.
Should the Earnings Test Be Eliminated?
I believe the answer to this question depends on how the
earnings test is eliminated. Done in a sound way, elimination
of the earnings test is likely to represent a positive, if
modest, improvement. Done in an unsound manner, eliminating the
earnings test would likely turn out to be a net negative,
causing a significant increase in poverty among elderly widows.
Fortunately, the Ways and Means Committee has before it a
piece of legislation that eliminates the earnings test in an
appropriate manner. This is H.R. 5, introduced by Rep. Sam
Johnson. If the Subcommittee resolves to move forward this year
with earnings test legislation, H.R. 5 would be the bill to
pass.
Misunderstandings About the Earnings Test
The earnings test is one of the most misunderstood aspects
of Social Security. There are three common sources of
misunderstanding about the earnings test:
1. Although many refer to the Social Security earnings
test, there are, in fact, two earnings tests, not one. Separate
tests apply for individuals who have reached the normal
retirement age and for individuals who begin to draw benefits
early (i.e., before the normal retirement age, most commonly at
62). As discussed below, the two earnings tests raise very
different issues. Decisions need to be made separately about
what to do regarding each of the earnings tests.
2. The earnings tests do not impose a tax on earnings. To
be sure, a beneficiary's earnings do cause his or her Social
Security benefits to be reduced. But on average, the Social
Security benefits that are reduced while a beneficiary is
working are restored after the beneficiary stops working or
reaches age 70, whichever occurs first. Once the earnings test
ceases to apply to a beneficiary, the monthly Social Security
benefit the beneficiary receives for the rest of his or her
life is increased above the level the beneficiary would have
received if he or she had not been subject to the earnings
test. For a beneficiary with average life expectancy, the extra
benefits received after the earnings test ceases to apply will
about exactly equal the benefits lost due to the earnings
test.\1\ The Social Security benefit structure is purposely
designed to produce this result. (Technically, this result will
be achieved for the earnings test above the normal retirement
age starting in 2005, when legislation Congress passed to
achieve this result is phased in fully. Today, the subsequent
benefit increases compensate for most, but not all, of the
benefits that a beneficiary with average life expectancy loses
as a result of the earnings test.)
---------------------------------------------------------------------------
\1\ Those with above average life expectancies are somewhat over-
compensated; the application of the earnings test actually increases
their lifetime benefits. Those with below-average life expectancies are
somewhat under-compensated.
---------------------------------------------------------------------------
The fact that the earnings test is not a tax on lifetime
benefits--and does not reduce benefits on average--is the
reason why eliminating it has no effect on long-term Social
Security solvency. If the earnings test truly were a tax on
benefits, eliminating it would increase total Social Security
benefits paid and hence worsen Social Security's long-term
financial picture.
3. Elimination of the separate test that applies to those
who begin receiving Social Security benefits early (i.e.,
before the normal retirement age) would significantly increase
poverty among the very old. People who begin to draw Social
Security benefits at age 62 now receive about a 20 percent
lower monthly benefit for the rest of their lives than the
benefit they would receive if they began drawing benefits at
the normal retirement age. This actuarial reduction affects the
benefits their widows later receive, as well. If the earnings
test for early benefit receipt is eliminated, more people will
begin claiming benefits at age 62, with the result that more
beneficiaries--and ultimately more widows--will be receiving
reduced monthly benefits while they are very old. Those who are
very old often no longer have other income sources and may have
largely exhausted their assets; many such individuals must live
largely or entirely on their monthly Social Security check.
There is little question that early claiming of Social
Security benefits at age 62 increases poverty. Economists
Jonathan Gruber of M.I.T. and Peter Orszag of the University of
California at Berkeley recently looked at the average Social
Security benefits of very old widows. They found the average
benefits of widows whose spouses had begun claiming Social
Security benefits before 65 were below the poverty line, while
the average benefits of widows whose spouses waited until the
normal retirement age to collect benefits were nearly $2,000
above the poverty line. They also found that a significant
portion of this difference in average benefits was due to the
decision regarding whether to begin receiving benefits early or
to wait until the normal retirement age.\2\ Some preliminary
work indicates that eliminating the earnings test for people
who draw benefits early would increase the number of elderly
poor people by some hundreds of thousands.
---------------------------------------------------------------------------
\2\Jonathan Gruber and Peter Orszag, ``What to do about the Social
Security Earnings Test?,'' Center for Retirement Research, July 1999.
---------------------------------------------------------------------------
Research on the Effect of the Earnings Test on Work Effort
Economists Gruber and Orszag also recently completed a review of
the research literature on the effect of the earnings test on decisions
about whether to work. They reported that most of the academic
literature ``suggests that, contrary to popular impression, the test
has little effect'' on the degree to which seniors work. They noted,
however, that one recent study suggests the earnings test does have a
more significant effect on the work decisions of individuals who have
passed the normal retirement age, although they cautioned that this
study has methodological limitations. Their overall conclusion is that,
based on the available research, ``The earnings test has some, but a
relatively modest, effect on overall work activity'' for those above
the normal retirement age.\3\ Their review found no evidence in the
research literature of any significant effect on work activity of the
earnings test that applies to early retirees.
---------------------------------------------------------------------------
\3\ Gruber and Orszag, op. cit. Gruber and Orszag observe that one
study (by Robbins and Robbins) concludes that the earnings test for
beneficiaries who have reached the normal retirement age has very large
effects on work effort. Gruber and Orszag note, however, that this
study has been sharply criticized by Social Security experts, most
notably in a critique published by the Office of Research and
Statistics of the Social Security Administration, for a series of
errors that make its results unreliable.
---------------------------------------------------------------------------
Policy Implications
The research suggests that among those who have reached the
normal retirement age, eliminating the earnings test may cause
a modest increase in work effort. The Social Security actuaries
report that eliminating this earnings test would have no effect
on long-term Social Security solvency. Eliminating this
earnings test therefore seems a sensible policy step. That is
what H.R. 5 does.
The separate test that applies to early retirees is a
different story. There is no evidence that eliminating it would
cause an increase in work effort. But eliminating this test
would cause a significant increase in poverty among the very
old, especially among widows in their 80s and 90s. In addition,
the Social Security actuaries have reported that eliminating
the earnings test for early retirees would move the date of
Social Security insolvency forward from 2034 to 2033 and
modestly reduce the trust fund's projected assets.
Eliminating the test for early retirees also would have one
other adverse effect--it would encourage increased claiming of
Social Security benefits at age 62. As we move toward the
difficult demographic decades that lie ahead, when the U.S.
population will be aging and Americans will be living longer,
encouraging more people to start claiming Social Security at
age 62 is one of the last things we should be doing.
Conclusion
Elimination of the earnings test is not so pressing a
national need that it must be accomplished immediately. The
more pressing need is fashioning Social Security solvency
legislation. Solvency legislation inevitably will entail tough
choices. Fashioning and enacting such legislation will be
easier if earnings test elimination can be packaged with it.
For this reason, the most prudent course is to wait.
If, however, Congress is intent on moving forward this
year, it should adopt H.R. 5, which eliminates the earnings
test for those reaching the normal retirement age. It would be
most unwise also to scrap the earnings test that applies to
early retirees, a step that H.R. 5 wisely does not take.
Chairman Shaw. Thank you.
Dr. Robbins.
STATEMENT OF ALDONA ROBBINS, PH.D., VICE PRESIDENT, FISCAL
ASSOCIATES, AND SENIOR RESEARCH FELLOW, INSTITUTE FOR POLICY
INNOVATION, ARLINGTON, VIRGINIA
Ms. Robbins. Thank you, Mr. Chairman and Members of the
Committee.
As we have heard today, the Social Security retirement
earnings test can lead to very high tax rates on wage income.
Its elimination would be one of the best ways to improve work
incentives.
The earnings test itself is a 33 percent marginal tax on
the next dollar of wages over the limit. Payroll taxes tack on
another 7.65 percent which makes the marginal tax rate at least
41 percent. And then depending on the retirees Federal income
tax bracket and whether he or she must include Social Security
benefits in adjusted gross income, the marginal tax rate on
wages can reach over 80 percent. In the face of such high
punitive tax rates, retirees may well decide to work fewer
hours or not bother working at all.
There are at least two reasons that the earnings test
should be eliminated all together. The first has to do with
fairness and the second with economic common sense. The matter
of fairness has to do with the delayed retirement credit. As we
have heard today, retired workers who lose benefits for a month
or more because of the earnings test will have them boosted
later, thanks to the delayed retirement credit. Because men at
age 70 have a life expectancy of roughly 12 years, for women it
is about 16, the present value of benefits withheld between the
normal retirement age and 69 due to the earnings test will be
about the same as the higher benefits paid out after age 70 due
to the delayed retirement credit.
So that is why the Social Security actuaries estimate that
the long run cost of eliminating the earnings test is next to
nothing. But while the government breaks even, individual
retired workers may not. Because benefits withheld today are
given back after age 70, the earnings test is essentially a
forced loan from retired workers to the Federal Government at
the government borrowing rate. But on average retirees fare
worse because the market interest rate they face to replace
benefits withheld is higher.
And of course, the actuarial calculations are based on life
expectancies which mean that only half of the people will
survive long enough to even break even. In other words, roughly
half of those who lose benefits to the earnings test will never
receive sufficient benefits from the delayed retirement credit.
Doing away with the earnings test also makes good economic
sense. Stock and bond markets hold their collective breaths the
first Friday of every month as they wait for the Bureau of
Labor statistics report on job creation and unemployment. Last
January the economy added an unexpectedly large 387,000 new
jobs and the unemployment rate dipped to 4 percent, which is
just a tick off a 30 year low.
With a population that is growing by less than 1 percent a
year, there are continuing worries about tight labor markets.
Congress is presently addressing this issue by looking at
raising immigration limits for skilled workers in technology.
But there is a skilled labor pool at home just waiting to be
tapped.
Only one in three people between the ages of 65 and 69 who
are eligible for retired worker benefits work sometime during
the year. And about two-thirds of those who do work keep their
earnings under the limit. Doing away with the earnings test
would make more labor resources available.
The change that Congress enacted in 1996 in raising the
earnings limit has already had a positive effect. Labor force
participation rates of men ages 65 to 69 have increased by 8
percent and the rates of women have increased by 6 percent.
Completely removing the penalty against work should encourage
even more seniors to reenter the labor market.
Many jobs go begging in this tight labor market. Increasing
numbers of older workers will find it much easier to get jobs,
jobs that will otherwise go unfilled. But the revenue losses
computed under normal budget scoring rules assume that these
new workers would not lead to more jobs or output overall. In
fact, on average each additional dollar of labor compensation
earned by these workers would lead to about $1.50 more in gross
domestic product.
In other words, while the combination of the earnings test
and the delayed retirement credit may net the government a few
pennies at best, it probably costs society $1.50 and this seems
like a poor trade.
Thank you.
[The prepared statement follows:]
Statement of Aldona Robbins, Ph.D., Vice President of Fiscal
Associates, and Senior Research Fellow, Institute for Policy
Innovation, Arlington, Virginia
Mr. Chairman and members of the Committee, I am Aldona
Robbins, Vice President of Fiscal Associates and Senior
Research Fellow at the Institute for Policy Innovation (IPI).
Thank you for the invitation to appear at this hearing on
``Improving Social Security Work Incentives.'' \1\
---------------------------------------------------------------------------
\1\ Much of the material in this statement is adapted from Aldona
and Gary Robbins, Retiring the Social Security Earnings Test, The
Institute for Policy Innovation, Issue Brief, May 6, 1999. Copies are
available on IPI's website--www.ipi.org.
---------------------------------------------------------------------------
Social Security's retirement earnings test can lead to very
high marginal tax rates on wage income. Its elimination would
be one of the best ways to improve work incentives.
Between the normal retirement age through age 69, workers
who earn too much lose $1 in benefits for every $3 in wages and
salaries over the earnings limit.\2\ In other words, the
earnings test itself is a 33.3 percent marginal tax on the next
dollar of wages over the limit. Payroll taxes tack on another
7.65 percent raising the marginal rate on wages to at least 41
percent. Depending on the retiree's federal income tax bracket
and whether he or she must include some Social Security
benefits in adjusted gross income, the marginal tax rate on
wages can reach over 80 percent.
---------------------------------------------------------------------------
\2\ Currently normal retirement age is 65. However, starting with
people born in 1938 (and who turn 62 this year), the retirement age
will gradually be raised to 67 for people born in 1960 and after.
---------------------------------------------------------------------------
In the face of such high, punitive tax rates retirees may
well decide to work fewer hours or not bother working at all.
The earnings test may help explain why only 16.5 percent of men
age 65 and over are in the labor force today compared to 47
percent fifty years ago.
Recently, older workers have gotten some relief from these
punitive marginal rates. The ``Senior Citizens'' Right To Work
Act of 1996 temporarily allowed a faster increase in the
earnings limit for retired workers between 65 and 69. This year
the earnings limit is $17,000 versus $13,200 under old law. By
2002, retirees will be able earn up to $30,000 without penalty.
After that, the earnings limit will go up more slowly, rising
with average wages.
While this temporary relief is laudable, there are at least
two reasons that the earnings test should be eliminated
altogether. The first has to do with fairness and the second
with economic common sense.
Why do I say that doing away with the retirement earnings
test is a matter of fairness? Retired workers who lose benefits
for a month or more because of the earnings test have them
boosted later thanks to the delayed retirement credit. The
credit increases the benefit amount to which a retired worker
is entitled by a fixed percentage for every year he or she
postpones retirement past the normal retirement age. Starting
in 1986, the delayed retirement credit has been increased by
half a percent every other year from its original 3 percent
until it reaches its final value of 8 percent for everyone born
in 1943 and after. For example, a retired worker born in 1945
who will lose a year's worth of benefits because of the
earnings test will receive an 8 percent increase in his or her
Social Security benefit at age 70. (A retired worker who will
have two year's worth of benefits withheld will receive a 16
percent increase and so forth.)
Because men at age 70 have a life expectancy of a little
over 12 years (women about 16 years), the present value of
benefits withheld between normal retirement age and 69 due to
the earnings test will be about the same as the higher benefits
paid out after age 70 due to the delayed retirement credit.
That is why the Social Security actuaries estimate the long-run
costs of eliminating the earnings test as next to nothing. In
other words, the combination of the earnings test and the
delayed retirement credit means the government breaks even.
But retired workers may not. Because benefits withheld
today are given back after age 70, the earnings test is a
forced loan from retired workers to the federal government at
the government borrowing rate. On average, retirees make out
worse because the interest rate they face to replace benefits
withheld today is higher. Of course, the actuarial calculations
are based on life expectancies, which mean that only half the
people will survive long enough to break even. In other words,
roughly half those who lose benefits due to the earnings test
will never receive sufficient benefits from the delayed
retirement credit.
The other reason to do away with the earnings test is that
it makes good economic sense. Stock and bond markets hold their
collective breaths the first Friday of every month waiting for
the Bureau of Labor Statistics report on job creation and the
unemployment rate. Last January the economy added an
unexpectedly large 387,000 new jobs and the unemployment rate
dipped to 4 percent, just a tick off a 30-year low. With a
population that is growing by less than one percent a year,
there are continuing worries about tight labor markets.
Congress is presently addressing this issue by looking at
raising immigration limits for skilled workers in technology.
But there is a skilled labor pool at home just waiting to
be tapped. Only one in three people between the ages of 65 and
69 who are eligible for retired worker benefits work sometime
during the year. About two-thirds of those who do work keep
their earnings under the limit. Doing away with the earnings
test would make more labor resources available. The change
Congress enacted in 1996 has already had a positive effect.
Labor force participation rates of men ages 65 to 69 have
increased by 8 percent and those of women by 6 percent.\3\
Completely removing Social Security's penalty against work
should encourage even more seniors to reenter the labor market.
---------------------------------------------------------------------------
\3\ BLS data show that the labor force participation rate of men
averaged 26.3 percent between 1990 and 1996 versus 28.3 percent from
1997 through 1999. The averages for women are 17.1 percent versus 18.1
percent, respectively.
---------------------------------------------------------------------------
Many jobs go begging in this tight labor market. Increasing
numbers of older workers will find it much easier to get jobs
``B jobs that will otherwise go unfilled. But, the revenue
losses computed under normal budget scoring rules assume that
these new workers would not lead to more jobs or output
overall. In fact, on average, each additional dollar of labor
compensation earned by these new workers would lead to $1.50
more gross domestic product. In other words, while the
combination of the earnings test and the delayed retirement
credit nets the government a few pennies at best, it probably
costs society a dollar and a half. This seems a poor trade.
With a low price tag, burgeoning federal budget surpluses
and the economy's need for talented workers, now is the time to
finish the job and repeal the earnings test.
Chairman Shaw. Thank you.
Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman. I appreciate the
testimony and all the thought that has gone into it.
My first question is for Dr. Friedberg. I just wanted to
ask you why you think your research is indicating more
behavioral shifts than other research? I know there is some
other research that indicated the labor supply would not be
affected much by the earnings limit being appealed, and yet you
indicate that it would. I wonder if you can talk about maybe
some of the assumptions you use, as compared to some other
research in this area.
Ms. Friedberg. That is a good question. The reason that I
did some new research on the earnings test was that most of the
previous research was based on data from the seventies. So it
is not a question that I brought new assumptions to my
research. I was using more recent data, so that the old
conclusion might be somewhat outdated.
And also, during the seventies there were no changes in the
earnings test, so we had no easy way to see exactly how people
were responding. I used data following people through later
changes that showed a strong response.
Mr. Portman. So you have been able to actually look at
behavior changes as a result of actual changes in law, raising
the earnings limit in particular, and extrapolated from that as
to what the impact might be if there were a repeal of the
limit, particularly for those ages 65 and older.
Ms. Friedberg. That is correct.
Mr. Portman. Your research has shown that there would
indeed be more folks who would be working, as compared to now,
in that age group?
Ms. Friedberg. That is precisely right. For example, in
1983 the earnings test was eliminated for 70 and 71 year olds,
much as the proposal today focuses on a slightly younger group.
And you see an increase in work hours, so those are the
conclusions I got.
Mr. Portman. Thank you for your research work.
Bob Greenstein, we have a lot to talk about on Social
Security generally. I agree with you, it would be great if we
had comprehensive Social Security reform, and this would be a
nice way to compliment some other Social Security reform
measures that would be necessary to increase the solvency. As
you know, there are proposals out there. Archer-Shaw is one I
think is very innovative, to look at that.
But the reality is, unless you feel otherwise, I think we
would agree it is not going to happen this year. Major Social
Security reform will probably have to wait until the new
Congress and the next president, and I guess that is why I feel
so strongly that we need to go ahead and clean up what is
currently in the system which is counterproductive, and this
would be one of them.
I would only encourage you to think broadly, too, about
retirement security. I know we have differed sometimes on the
pension reforms, but I really think we are missing a huge
opportunity, not just to focus on Social Security, a government
program, but to focus on the need for all Americans to have
retirement security through private savings. Particularly in
the pension area, where only half of America's workers have any
kind of pension at all now. So you have 70 to 75 million
workers with no defined benefit plan, 401(k) or any other
pension.
I would look forward to working with you on that in the
future and perhaps we need to have a discussion at another time
about some of the behavior changes that Dr. Friedberg talked
about as it relates to retirement security generally, that if
you let people save more for their own retirement and give
people incentives who own small businesses to offer plans, you
are going to see a lot of those lower and middle income workers
get real security through their private savings.
My question to you is, with regard to early retirement and
your concern that if you allow the earnings limit to be
eliminated for people who are 62 to 65 you are going to have
poverty rates which will increase for older people,
particularly women. One could take that to the next step which
would be that early retirement, in general, is a bad idea.
If you believe that this will be counterproductive because
it will encourage more people to retire at 62, not having an
earnings limit at 62, as compared to the current situation,
then would you also not believe that we should do other things
to discourage people from retiring at age 62? Or even change
that option all together so that retirement becomes, with life
expectancy increasing, 65 and not 62?
Mr. Greenstein. I think the particular concern with regard
to the earnings test as it goes down to age 62 is encouraging
not so much retirement as drawing benefits, encouraging people
to start drawing benefits at age 62, to a larger degree, which
then automatically triggers the actuarial reduction that lasts
the rest of their life.
And of course, as the normal retirement age moves up over
the next 20 years from 65 to 67, the actuarial reduction at age
62 becomes deeper. I really do have concerns even about the
current numbers of people who draw at 62, and I certainly would
not want there to be more of them.
Now you are absolutely right, a question that leads to is
should the early eligibility age, now age 62, be raised a bit?
I actually think, when you look across the research, the
effects on more work effort of eliminating the earnings test
above the normal retirement age, the research seems to indicate
there are effects, but they are pretty modest.
If you wanted to get the biggest effect on increased work
effort, increasing that early eligibility age above 62 probably
would be the thing that would get you that biggest effect. But
it would be enormously controversial and it would raise issues
of people who really cannot keep working beyond age 62 but are
not sufficiently disabled to quality for disability benefits.
For that reason, as you know, the standard view among most
liberals in Washington is to say that age cannot move beyond
62, that early eligibility age. I actually think it is worth
looking at as part of comprehensive Social Security reform. If
we moved it up a little bit beyond 62 people would not get a 30
percent actuarial reduction at age 62, as they will when the
full age goes to 67.
But if we did that we would need some mechanisms to take
care of those people who really cannot keep working beyond 62,
who are not quite disabled enough to meet the disability
definition. Maybe there is something we could do to modestly
revise the disability definition, just starting at 62. But I do
think it is an area to look at and something that is worth
considering as part of larger Social Security solvency
legislation.
Mr. Portman. I appreciate your candid response and I just
would make the point, as you did, that the legislation before
us today, Sam Johnson's bill, does not deal with the 62 to 65
earnings limit, and therefore I know that you are supportive of
the legislation. But I know that on the other side of the
Capitol there is interest in total elimination of the penalty,
which would include early retirement. And I know that this will
be an issue that we will be addressing over the next few weeks
as we work through the process.
Mr. Greenstein. Could I add one more point? I know this is
not something members of either party talk about publicly, but
privately there is some view that some year, some way, some
how, we may have to look at some of the issues on retirement
ages in Social Security. I would just urge you to think about
the fact that if you eliminate the early earnings test, then we
go to who knows, 70 or 80 percent, some huge percentage of
Social Security beneficiaries starting to claim at 62.
Mr. Portman. Let us be clear, so people who are watching
this would know, do not about 60 percent of retirees now retire
at age 62?
Mr. Greenstein. That is correct. So we are talking about,
if you can start at 62, there is no reduction whatsoever for
the earnings you have, maybe some people will understand, what
I think most do not, all of the actuarial consequences.
If the 60 percent goes significantly higher, politically
that will make it even more difficult in the future to ever
move that age 62, should it be deemed wise to do so.
See the point I am getting at? I think, in some ways, if
you do that you actually foreclose politically some options you
might want to think about when you get to long term solvency.
Mr. Portman. Thank you for your testimony.
Mr. Bartlett. Mr. Portman, would it be all right if I made
a comment here?
Mr. Portman. With the indulgence of the Chair, he has the
time.
Chairman Shaw. Mr. Bartlett, go ahead.
Mr. Bartlett. Thank you. With regard to this question of
early retirement, I think it is extremely important that the
Committee take into account the fact that with the increase in
the retirement age to 66 and then to 67, more and more retirees
are going to be affected by the more punitive earnings test
that applies to early retirees. It will then, in the future,
affect those who are 65, 66, and 67 who now have the lower
test.
And so I think it would be a good idea to make it
symmetrical so that you move up the age at early retirement,
although I recognize the political problems there.
The other problem is that the delayed retirement credit now
is capped at age 70. You do not get any further increase, and
so you are also squeezing that period of time in which the
delayed retirement credit would apply. So you might need to
raise that 70 age up to 72, so that people would be able to get
the same benefit in the future when the retirement age rises as
they get today from the delayed retirement credit.
Mr. Portman. Good point.
Chairman Shaw. Mr. Matsui?
Mr. Matsui. I want to thank the panel, but let me follow up
very briefly, Mr. Chairman. I know that we need to move quickly
on this.
What percentage of the 60 percent that retire at 62, Bob,
are women and men?
Mr. Greenstein. I do not have those figures with me. I
would have to go back to my office.
Mr. Matsui. Does anyone have that figure?
Ms. Robbins. My recollection is that it is about even.
Women might be a slightly bigger percentage.
Mr. Matsui. I would imagine the reason that the poverty
rate for single women on Social Security is 18 percent is that
they have low earnings throughout their lifetime. And that is a
principal cause. Is that right, Bob?
Mr. Greenstein. That is a large part of it. It is actually
aggravated by early claiming of benefits. There was a very
interesting piece of research done last year by economists John
Gruber and Peter Orszag. They looked at very old widows and
they looked at their Social Security benefits. What was
interesting was they found that for very old widows whose
spouses had begun to claim benefits early, when those widows
were in very old age, their average Social Security benefit was
below the poverty line.
When they looked at very old widows, same age group, whose
spouses had not begun to draw Social Security benefits before
the normal retirement age, their average Social Security
benefit was about $2,000 above the poverty line.
Now part of the difference was because one group had a
higher earnings profile than the other. But they found that a
significant factor in this difference was simply the actuarial
reduction for claiming benefits early.
I feel like I am repeating myself here but the point I am
trying to make is we should not be encouraging more people to
claim benefits early. We should be concerned, as the full
benefit age goes from 65 to 67 and the early age stays at 62,
the 30-percent reduction people are going to get at age 62 is a
real whopper and we are going to see effects on widow poverty
and old age there. It is one of the things, when we do Social
Security reform, I think both parties have indicated that there
is a concern on the widow poverty issue. It is something we
really need to pay attention to.
Mr. Matsui. Did the study point out whether they were
mainly low income women who were retiring at 62 or was there
any distinction between income groups?
Mr. Greenstein. If I remember correctly, the group where
the spouse drew benefits early on average had a lower earnings
profile than the group where the spouse did not begin to draw
benefits until the normal retirement age. Or that even despite
that the difference in when they drew benefits itself
aggravated the poverty of the poor group.
Chairman Shaw. Just to follow up, those that least could
afford it were taking the early retirement.
Mr. Greenstein. Yes, they might also have been those who
had the least job opportunities at that period, as well.
Chairman Shaw. That is true.
Mr. Matsui. Dr. Robbins?
Ms. Robbins. I was just going to make an observation that
it is inevitable that the longer one lives, if you are
depending on Social Security, that relative to the rest of
society you are going to end up losing ground because once you
receive a benefit level, that is going to be increased only
with the cost of living. And what is happening around you is
the benefits of economic growth.
So part of it is simply because the widows are living
longer lives and if it is their husbands who made the decision
to retire early, women are outliving men by three to 5 years,
as well.
Mr. Matsui. I appreciate your testimony. In 1983 when we
revised Social Security and increased that age from 65 to 67, I
do not believe that we discussed any of this at all. I regret
it. I supported it, but I regret it now.
Thank you very much for your testimony.
Chairman Shaw. Mr. Johnson?
Mr. Johnson. Thank you, Mr. Chairman.
Dr. Robbins, you described the earnings penalty as a forced
loan from retired workers. Do you want to explain that a little
bit?
Ms. Robbins. Simply that what is happening is the
government faces a government borrowing rate but you are
telling retirees we are going to take this money from you today
and we are going to give it back to you later. In the
calculations, if you use the government borrowing rate, in
terms of present value, the benefits withheld today versus the
delayed retirement credit, it works out to be about the same.
The problem is individuals generally, if they go to borrow,
cannot get the government borrowing rate. They have to borrow
at something higher.
Mr. Johnson. They do not pay interest do they? When they
pay you back, they do not pay interest do they?
Thank you very much.
Chairman Shaw. I would like to thank this entire panel. It
has been very helpful and very enlightening.
Mr. Greenstein, I too would have liked this to be a part of
a larger package with general reform of the Social Security
system to be sure that it is going to be out there and be
strong for our kids and our grandkids. However, when it became
increasingly clear that we were not going to have general
Social Security reform this year because of some of the late
announcements from the White House, it did not seem at all
reasonable to hold back the seniors that are being
unnecessarily punished with this unjust penalty.
So at that point the determination was made to go ahead and
move this part of the bill. I am very pleased to see that the
President has stepped out in front at a very early time, just
yesterday at a news conference, that he indicated that he would
sign this bill as long as it was in the general form of H.R. 5.
I can assure him, unless some disaster happens over in the
Senate, that it will be. We are going to pass this tomorrow--
about four o'clock we are going to start our markup. I would
anticipate the markup is going to go very, very quickly.
Mr. Matsui and I have been discussing this and we are in
general agreement that we need a clean bill, we do not want it
cluttered. And I would hope that all the members would support
a closed rule going to the House, and we can bring it up as
early as March 2nd, and that is our intention. From some of the
early comments we are getting from the Senate, I think they
will work on it rather quickly and we can get it to the
President's desk.
In any event, the effective date of the bill that is before
us is January 1, 2000 which means that it will retroactively,
in a very positive way, affect those that are presently working
and having to endure this penalty.
Thank you very much, and this hearing is concluded.
[Whereupon, at 4 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
American Bar Association
Chicago, IL 60611
February 28, 2000
The Honorable E. Clay Shaw, Jr.
Chairman
Subcommittee on Social Security
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
I am writing to you regarding the hearings your Subcommittee held
February 15, 2000 relating to the Social Security Earnings test.
The ABA supports the elimination or the substantial liberalization
of the retirement earnings test in Social Security. The retirement
earnings test coupled with other taxes imposes a very large marginal
tax rate on certain elderly Americans. We believe that such a high tax
rate discourages work effort by these elderly workers, many of whom
have the very skills America needs to continue to be competitive in the
coming years.
Different individuals and groups have conflicting views as to how
many elderly individuals aged 65 and over would either return to work
or continue to work depending on whether the test were repealed or
liberalized. We cannot say with certainty what the results would be.
However, we believe that if even a modest number of individuals in this
group is encouraged to continue working, the effect on the economy can
only be positive. The addition of skilled and experienced employees
will enhance the competitiveness of the American economy and supplement
the tax revenues derived from employment.
Moreover, any projected revenue loss from changing the test will be
offset, in whole or in part, by income taxes on the earnings of workers
who are motivated to remain in the workforce, including income taxes on
earnings past age 70 of workers who are not encouraged by this earnings
penalty to retire at 65.
From the standpoint of tax policy, we believe that the current
restrictions result in a most regressive tax. The changing patterns of
compensation and employment have outdated and thwarted the original
effects and objectives of the law.
The ABA understands the importance to the individual of being given
the option to continue to work in one's field of interest. A marginal
tax rate as high as this one creates a substantial barrier to continued
employment.
We would appreciate it if you would include this letter in the
record of the your Subcommittee's hearing on the Social Security
Earnings Test.
Sincerely,
Edward E. Kallgren
Chair, Senior Lawyers Division
cc: Robert D. Evans, Director, Governmental Affairs Office
Joseph E. Ross, Chair, Committee on Legislation and Administrative
Regulations, ABA
Senior Lawyers Division
STATEMENT OF AMERICAN FARM BUREAU FEDERATION
The American Farm Bureau Federation supports the
abolishment of the Social Security retirement earnings test.
The retirement earnings test is an original feature of
Social Security. Under the provision this year, working seniors
ages 65-69 with earnings above $17,000 lose $1 of benefits for
every $3 they earn over the limit. For those under age 65,
benefits are reduced by $1 for every $2 dollars above a $10,080
threshold. In addition, Social Security benefits become subject
to taxation once the limitation has been exceeded.
The retirement earning test was created during the 1930s to
keep older workers out of the labor force so that jobs would be
available for younger workers. Today's situation is much
different than it was during the depression. Unemployment is
low and there are fewer younger workers. People are living
longer and should be encouraged to work longer, not discouraged
by an obsolete retirement earnings test.
The threshold creates special problems for farmers and
ranchers who do not normally pick a retirement date and stop
farming. Farms and ranches are businesses that must undergo an
orderly transition to the next generation of agricultural
producers. The retirement earning test wrongly imposes a
penalty on senior partners as they phase-out of agricultural
operations.
Farm Bureau urges Congress to eliminate the Social Security
retirement earnings test.
Statement of Andrew F. Quinlan, Executive Director, Capitol Watch
``Earnings Test Reform: A Small Step in the Right Direction''
Capitol Hill and the White House have been arguing over the
best way to ``save'' Social Security. Unfortunately, the result
has been gridlock; largely because there is no way of
reconciling the differences between those who want to modernize
the program with personal retirement accounts and those who
think the problem can be solved by adding more IOUs to the
Trust Fund.
This does not mean, however, that nothing good can happen.
The President, for instance, recently endorsed a Republican-led
effort to get rid of the Social Security ``earnings test,'' a
Depression-era law that penalizes working seniors by deducting
money from their Social Security checks for every dollar they
earn over a certain amount. This modest and long-overdue reform
would, in effect, dramatically reduce marginal tax rates on
working seniors and eliminate a barrier to continued employment
for America's seniors.
For instance, workers between the ages of 62 and 64 can
earn up to $10,080, with no reduction in their Social Security
benefits. However, for every $2 they earn over the $10,080
threshold, they lose $1 in Social Security benefits. The
threshold is increased to $17,000 for those between 65 and 69.
They lose ``only'' $1 for every $3 earned over the limit.
In effect, the earnings test imposes the equivalent of a
very steep marginal tax rate. Recall the essential insight of
supply-side economics: high tax rates reduce productive
behavior by lowering incentives to work, save, invest, and take
risks. More specifically, people work to increase their
disposable income, and policies that result in less disposable
income will discourage employment. This in a nutshell is what
the earnings test does. As mentioned before, seniors between
age 62 and age 64 lose 50 cents in Social Security benefits for
every dollar that they earn over the limit while seniors
between age 65 and age 69 lose more than 33 cents of benefits
for every dollar of ``excess'' earnings. This means that the
benefit of working--more disposable income--is sliced by a huge
percentage. And to add insult to injury, the worker must also
pay a host of taxes on their income.
Let's take a 64 year-old Social Security recipient who
works to balance the family budget and has annual earnings of
$15,080. Since his earnings are $5,000 over the limit he must
forgo $2,500 in Social Security benefits. A 65 year-old worker
will not be penalized quite as heavily, but will still lose
$1,667 in benefits if he or she has $5,000 of earnings above
the limit. Moreover, once federal and state income taxes,
payroll taxes, and other levies are added to the equation,
elderly workers are facing an effective marginal tax rate that
is far in excess of the confiscatory rates facing professional
sports stars and Wall Street hotshots. It is not hard to
understand why this person would decide to stop working before
he passes the earnings limit.
At first glance, this type of law seems preposterous. What
would motivate politicians to enact super-high tax rates on
senior citizens who are trying to earn extra income to make
ends meet? It turns out that the earnings limit on Social
Security benefits was part of the original Social Security
program. During the debate of the 1930's, Congress wanted to
entice seniors out of the workforce and free up scarce jobs for
younger workers.
With the benefit of hindsight, we now know that the Great
Depression was not caused by too many seniors in the workforce,
but rather by misguided monetary policy, high tax rates, trade
protectionism, and other government policy mistakes.
Nonetheless, one can understand how panicky politicians at the
time adopted a zero-sum mentality. Today, there is no excuse
for this kind of thinking. Jobs are plentiful and individuals
are living and working longer than ever before. Older workers
have valuable years of experience and can be productive well
into their retirement years.
The earning test creates a whole range of individual
tragedies by effectively forcing seniors out of the workforce.
But the earnings test is also bad news for the overall U.S.
economy. In a 1997 report entitled Earnings Limit Penalizes
Working Seniors, the National Center for Policy Analysis argued
that abolishing the earnings limit would increase federal tax
revenues because of additional economic output. NCPA also
estimated that the elderly work force would increase by 38
percent, that wage income for the elderly would increase, and
that the additional taxes paid by the elderly would more than
offset the Social Security benefits paid to these workers.
Some progress has been made. This Committee as well as
Congressional Leaders and the President have agreed to repeal
the earnings test on seniors who have reached the normal
retirement age. The only shortcoming is that the legislation
leaves in place the penalty on Social Security recipients who
have not reached retirement age. The earnings test should not
exist at all. Congress and the American people should seize
this rare opportunity and extend a good idea to its logical
conclusion.
---------------------------------------------------------------------------
Andrew F. Quinlan is the Executive Director of CapitolWatch a
national, nonprofit, nonpartisan taxpayer advocacy organization with
250,000 supporters. Visit CapitolWatch's Web site at
www.CapitolWatch.org for more information.
---------------------------------------------------------------------------
Richard J. Salmon, P.E.
Jacksonville, FL 32258
February 26, 2000
Honorable E. Clay Shaw, Jr.,
Congressman (R-FL), Chairman
Subcommittee on Social Security
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515
RE: Hearing on Improving Social Security Work Incentives
I commend and urge the Subcommittee on Social Security to stay the
course charted for support of and enaction of H.R. 5 by the 106th
Congress.
My reason for this statement is personal. I am 66 years and five
months of age and have worked full time since completing my formal
education in 1956. My employer has asked me to continue working as a
structural engineer and manager of a small office in North Florida. My
employer feels that my experience in industry and in consulting
engineering and my influence on young entry level and junior
engineering staff is of significant continuing benefit to our firm and
its objectives.
Last year, calendar 1999, my gross wages were $73,400.00. This
amount is our gross household income. My Federal Income Tax withheld
was $10,066.00. My Social Security Tax Withheld was $4,501.00. The
figures cited are from my 1999 W-2 Wage and Tax Statement. I am
married. My wife stopped working in May of 1997.
I accepted a re-assignment with my company from New England to
North Florida, which gave me an opportunity to continue working. We
purchased a modest home with a 30 year mortgage. Our combined
retirement savings are less than our mortgage principal balance. Our
one automobile is five years old.
I consider the current retirement earnings test to be highly
punitive. My eligibility for Social Security Benefits between the ages
of 65 through 70 were recently estimated to be approximately $85,200.00
total over the five year period. By virtue of the fact that I am
working and paying taxes, under the current regulations (the retirement
earnings test) I am forfeiting that entire amount of income by
continuing to work and continuing to make a contribution to our nations
economic well-being.
The after tax residue of those earned benefits would allow me to
better provide for our retirement years, perhaps pay down our mortgage
somewhat to a manageable retirement years expense.
Respectfully Submitted,
Richard J. Salmon, P.E.
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