people invest in themselves so they can make it in america. but they've got to start by making sure they have access to the best education that we can give them. in his state of the union address, president obama told us that americans had the opportunity to win the future. if we're willing to rise to the challenge and do the things necessary to make sure that we are successful. countries like china and india, for example, have started educating their children earlier than we do, they keep them in class longer than we do, and they make sure if they don't learn anything else, that they all are steeped in math and science. they're investing in research, new technologies to make sure they have an opportunity not just to catch up with where we are in america, but they want to

win the future as well. so if we as americans are going to compete for and win the jobs and industries of the future, we have to do three things that the president said. we have to outsmart, outeducate and outbuild the rest of the world. our international challenge is especially, i think, compelling for us as african-americans. because as senator cardin referenced, all of us know in education we've got to be honest, our children aren't keeping up with their peers here in america. you should all be concerned that in this a recent global poll eighth grade students in the united states -- of all colors -- trailed ten other countries in the world in math and sciences. when it comes to black students, we not only trail most other developed nations, but we also badly fall behind the white classmates here at home.

this is an achievement gap that, unfortunately, is going the wrong way, and it is one that we cannot and should not accept. the problem we have today will only get worse unless we commit ourselves to doing a coup of things -- couple of things and is taking immediate action. i want you to consider this. over the next ten years according to the census bureau, over half of all new jobs created in this country are going to require an education beyond a high school diploma. and yet, unfortunately, according to the most recent census data in 2005 one out of every -- only one out of every ten african-american boys who graduates from high school goes to college. we can't accept this. this is unacceptable for our communities, and i think it's unacceptable for america. we know what follows from this unacceptable dropout rate.

everything from high unemployment and if you know the country is struggling with a 9% unemployment rate, we know what that unemployment rate looks like in our communities. and we have everything from be high unemployment to runaway teen pregnancies and so many other challenges. so the question for us today, frankly, is what are we going to do about it? what are we going to do about it as americans, what are we going to do about it as citizens, but especially what are we going to do about it as african-american leaders? and the challenge is whether or not we're willing to commit to do whatever's necessary to give our children a chance to succeed in this 21st century that so many of us have parents do anything they needed to give us a chance to succeed and be where we are today. president obama has said, and i quote: responsibility begins not in our classrooms, but in our homes and communities. it's families that first instill

the love of learning in a child. only parents can take -- can make sure that the tv is turned off and that the homework gets done. and we need to teach our kids that it's not just the winner of the super bowl that deserves our praise and celebration, but we ought to be celebrating the kids who win the science fair as well. [applause] now -- i think that's a fairly simple proposition. we understand it. but if we're honest with ourselves, we're not doing it. i can tell you from my experiences as united states trade rep, and i cannot put into words what an honor it is to be the face of this country for this president and go around the world negotiating with other countries. but i can, i can tell you what i've seen firsthand from africa to asia to india, and that is

families that are willing to sacrifice everything for their children's education. so that they can invest in their future and give them a better life. now, i talked about how they're studying in matt and sciences. -- math and sciences. what really humbles me whether i'm in nairobi or mumbai, i don't meet a child in the world that doesn't speak english. they all start -- they didn't just start speaking english, they speak four or five other languages. and they're beginning to understand they know they're going to be compete anything a global world. in fact, i'll tell you, there was a horrible little thing that they have in africa that if someone speaks two languages, you're considered polylingual. i mean, multilingual. if you speak several, you're considered polylingual. if you only speak one language, you're considered an american. [laughter] now, that was funny 15 years ago.

i'm telling you, in a world in which every one of our children is going to be competing in a global environment, that's just not acceptable anymore. these kids are studying languages, they're studying math and science, and because of technology they've got access to the best information anywhere they can get it. let me make my point, and i'll move on. i want you to consider one thing. we all know what our dropout rates are for our kids. if india, china and africa thought any different about educating their young people as we are, that means in the next ten years they're only going to produce a billion and a half of the most highly-educated, motivated workers in the world who are willing to work, in most cases, for ten cents on the dollar what they would make here in america. so i think and i hope you understand and embrace the challenge and the reality that we have. now, let me turn to some of the good news because i think there is an opportunity, and there is a way forward.

and i'm confident that we can rise and meet the challenges and win the future as president obama has challenged us to do. i told you about what i learned in terms of families. but the other thing that sustains me, that encourages me from my travels around the world whether it's to africa, to asia or latin america to europe is i can tell you one thing, and you're seeing it played out on cnn every day in egypt and tunisia and the rest of the world. the united states is still regarded as an absolute beacon for the universal aspirations of people all around the world. we are still one of the most powerful symbols of freedom and liberty everywhere around the world. and i know that something stamped made in america is still the most powerful brand everywhere in the world because people know if it is grown, raised, created, made in america as steny said, there's an implied value that it's going to

be good for you. you can feed your family, it's going to work the way people believe it ought to work, and the united states is still considered not only the best place in the world to do business, it's considered one of the best places in the world to educate your children. and so that's why i think congressman hoyer's efforts to get us to think about making it in america is so important. because if we make it in america, we keep the jobs here. we have the investment here. and then we have the ability because of the work of what we're going to share -- doing to share what we make in america with the rest of the world. our unlimited potential, the capacity of our university also gives us another extraordinary advantage. i don't know, do we have -- no, i think that's another piece. i'll keep going until they bring another mic. >> [inaudible] >> there we go.

[inaudible conversations] [laughter] >> are we good? all right. well, i'll use this one until we get -- is this back on? is this on? >> no. >> with all right, that's not on. one of the great advantages that we have in the united states is we have the capacity to educate any child that wants to go to college, but think about it, we're the only country in the world that can open our doors to hundreds of thousands of young people from around the world as well. and that's whether you go to any one of of our hbcus, the university of maryland, the university of texas, you're bound to see someone from be asia, africa who has come here to invest in their future through our colleges and universities. this leads to a continuous cycle of discovery and development that allows us to have the most innovative country, the most productive workers in a world which increasingly knowledge

created our institutions of higher learning creates the products and the services that are going to drive our economy in the future. so while we do have this reality of an increasingly competitive global marketplace, we do have all the fundamental elements to meet the challenge here at home. president obama believes we can do it, and that's why he continues to harp on the need for us to invest, to innovate, to build, to make it in many america so we can sell it elsewhere. but the challenge, again, for us within our community is, are we going to accept that challenge? are we going to internalize this, are we going to make it personal? i don't know how many of you heard about this new book written by a asian-american professor at yale by the name of amy chua, but i imagine more than a few of you have watched.

she was on oprah,-one of oprah's favorite books. it's called "the battle hymn of the tiger mother." and the book talks about how she was raised in this incredibly strict chinese environment, and she made the decision to raise her two daughters the same way. here's what she says, quote: i see my upbringing as a great success story. by disciplining me, my parents inculcated self-discipline. by restricting my choices as a child, they gave me so many more choices in my life as an adult. because of what they did, i now get to do what i want to do, and i get to do the work that i love. now, to many of us in this room listening to that we think, that ain't no traditional asian upbringing. that's how my mamma and daddy

raised us. [laughter] that's how our grandparents raised us. and i have kids now, and i love watching my friends when they go ask their kids where do you want to go, i just wish -- [laughter] i would have liked to have seen one of my brothers and sisters go to my mama and daddy and say, we don't want to do that today. we ain't going to eat this. [laughter] i know you're laughing because y'all understand. we understand about discipline. every time i say something, we're going to call cps. i was like, you call cps. you better tell them to bring -- [inaudible] [laughter] but the point is -- [applause] this isn't an ethnic story, y'all, this is our story. and if it works in the chinese community, we know it can work many our community because it's the way so many of us were raised. we know that. we know what it was like to be not just in participants, but in -- parents but in a church

where everywhere we went we got end couragement, but we also had people pull us aside and say, boy, what are you doing? i mean, we had unwavering, unyielding spirit in the african-american community after reconstruction, after civil rights. but these are all our children. and everybody understood we're going to sacrifice now so we can have a better tomorrow. and it wasn't that hard a lesson; go to school, keep your mouth shut, work hard, respect adults, go to church, have some faith, make good grades, be good citizens, vote, help somebody else and go out in this world and do your best to succeed and compete. most of us, if we're honest, are frustrated by what we see in our communities now. and excuses that we hear. i mean, my mother was a teacher. and you didn't talk back to

teachers. no parent ever changed a school to con -- came to school to confront the teacher. in fact, you know, every child in our class has one experience that your mama and daddy brought you to school the first day, and they went up to the teacher and they told you in front of all your classmates, boy, don't make me lose a day's pay. [laughter] do not make me have to come up here to this schoolhouse. [applause] and now, you know, god bless our teachers. you've got parents the first thing they want to do -- but anyway. [laughter] but don't we, i mean, let's be real. we know what the symptoms, the reality of these ridiculous dropout rates are. we're not educating our young people. that's why we have some of the highest teen pregnancy rates, that's why we've got so many unwed mothers walking around, that's why the black family doesn't look like what it used to. i want to make -- i'd say this

one thing, this is no comment on any child having to raise a child by herself. our women are the strongest women in the world, but it's time for black men to stand up -- [applause] we cannot compete and win the future, and this just isn't an african-american imperative, this is an american imperative. we're not going to make it in america, we're not going to compete in a global world, where not just african-americans but half our boys and girls who enter the ninth grade and drop out of school. but we know what to do about it. and so that's why from my humble perspective it's important at least for us as an african-american community to accept this challenge and do what our parents did and commit to saving our kids, to invest in their education. i can't tell you how proud i am of my two daughters. both of them are in college, one goes ion go to graduate from -- going to graduate from columbia in may, the other one's at nyu. we have to commit ourselves to

make sure that all of our children succeed. but it does give me hope. [applause] and we want to make sure that none of us rests on our ability to stand up. it's not important to talk about what you did first. this isn't about us. this is about our future. what are young people going to have an opportunity to do? and one of the ways we can do that is education and everything we have to do as faith, but we have to take this on. i talked to you about growing up in austin. and while steny was up dancing with the, with the choir over here, i was sitting clapping because, let me tell you, i grew up in a little church like that. my mother was the youngest girl of 14 kids, all right? she turned 90 years old last -- [inaudible] she turned, she just celebrated her 90th birthday last week. but anyway -- [applause] but i grew up in a little family

church, and if any of you are from the south, they're all the same. i love 'em, you know? it didn't matter if we had choir, but when i learned was i can tellstepny is the most retail of politicians, you go into any of these churches, and i wonder, who made all those wooden blocks that somebody put up on the wall in every little black church in the south? and they all had bible verses on 'em. you know, some of them. and the common thing wherever you went, every little church you went into had john 3:16 on the wall somewhere. and i grew up, again, in be one of those families, we don't wait for sunday to say do you want to go to church. [laughter] we were in church sunday, sunday night, bible study, choir practice, and i grew up in a -- i grew up in a family church. and i mean, a family church. when you've got 14 brothers and sisters, ten of whom still lived

within five square miles of one another and one of 'em becomes a preacher, you've got an instant congregation. [laughter] and it was -- we loved it. people wandered into that church would walk around and go, oh, my god, these people all look alike. [laughter] but anyway, we grew up in a little church. real simple. no, we weren't denominational, just the church of the new testament. and every sunday, every wednesday we started off john 3:16, god so loved the world, you all know. so we do this every week. and the kids would go and after 15, 16 years of this we just kind of rolled an eye. and one day we stand up, we're getting ready to recite john 3:16, one of my cousins nudged me and said you know what this means? i said, of course i know john, 3 16. he said what god is really saying is god so loved the world

world -- [inaudible] [laughter] you know, i laughed about that but thought about it more and more because if you watch what's happening in egypt, you reflect on what's happened in south africa, you look at the history of civil rights, there was gandhi, it was nelson mandela. wasn't no committee on that bus with rosa parks. it was martin luther king. and my buoyant is that while we're -- point is that while we're all waiting for somebody else to come up with a plan -- [applause] the challenge for us is, are we going to do with these other people do and embrace that power of one? we've done it before. i mean, look at what brilliant black educators like booker t. washington and george washington carver did around the tush -- turn of the century. look how far we came from emancipation to civil rights

with no resources, and look at all the resources that we have today, the proud, rich legacy of african-american scientists and educators and leaders. and there's no reason we can't commit to attack this problem of dropout rates in our community and commit to make sure ourselves -- and i want to make sure, this is ron kirk speaking, this is not the obama administration, this is not arne duncan. as a community i think it's time for us to say to ourselves in the next 20 years, in the next 30 years, nine out of ten african-american boys and girls are going to graduate high school, and they're going to have experience, they're going to have the right to go to college, or they're going to have the skills to get a job. [applause] now, i'm not giving anybody else a pass, but we have to accept this challenge as a community to do that. and that means you're going to have to get up and go ahead and talk to some of these kids

instead of shaking your head, go over to them and say, pull up your pants. turn off the tv. put a book in your hand. [applause] support our teachers and make sure that they have a safe environment to educate our children. and we as a community have to make a decision that whether they've got their ball caps on, no matter what they may look like at 10 or 11 years old, one thing i know from my lifetime in public service, there's not a -year-old child in america that goes to bed every night and says, i want to grow up and be a monster. i want to be the kind of person that people see me and cross the street and lock their doors. every 4-year-old child dreams of doing something great. they may not have a ron kirk or a steny hoyer or some of you in their lives, but it doesn't matter. we as a community have to make those children our own, embrace them, and give them the tools that they need to succeed in life. mahatma gandhi wasn't said you

must be the change that you wish to see in the world. that simple lesson inspired leaders like rosa parks and martin luther king to lead the greatest civil rights movement and transformation in the history of the world. it inspired people like john lewis to persevere in the struggle for civil rights. it motivated marion wright edelman to say, i'll take on the responsibility to make sure that we can improve the lives of poor children and empower them through equal opportunity and education. it inspired a skinny, young boy in chicago with a name none of us could pronounce six years ago if we're honest named barack obama to launch the most improbable campaign to be president of the united states. and it has to be the model that we all embrace to take on the responsibility to educate our

children, to compete and win in an age that they can succeed in the future. your efforts here in waldorf throughout this fifth congressional district give me hope that we can make a difference, that we can begin this challenge right here in maryland to accept this responsibility, to reclaim our children, to give them the tools that they need to succeed. but we can't stop here. we have to carry this throughout maryland, we have to carry this throughout maryland, we have to take it to our churches, our fraternities, our sororities and accept this challenge to give our children a brighter future. i want to leave you one more story and a few more words before i come to a close. one of my daily meditations comes from some words i read the first time i had a chance to

lead the country when i was mayor of dallas. steny talked about the outreach i did globally, and that's is a city very much rooted in international competition because we're in the middle of nowhere. we didn't have a choice. so we do a lot of international international -- i made a decision that i would be the first may color of -- mayor of dallas to lead a trade delegation to africa. so i went there in 1996, and i read everything i could about nelson mandela. i wasn't going to meet him, but he was such a powerful of inspiration to me. and i read his inaugural address, and i pulled out these words in it that he used to inspire the people of south africa to not only embrace their future, but his biggest concern, he knew they couldn't carry all that anger and hate with them. and so i was reading these words, and i got up and made a speech to the people of my

delegation, and one of my friends came to me and said, that's great, but nelson mandela didn't write that. he said, that was written by an american author. he quoted her, written by a white woman from america. i thought, well, cool. so i went and got the book. it's called "return to love" written by an american woman named mary ann williamson. so these are the words that i want to leave you with today. what she says in my meditation is this: our deepest fear is not that we are inadequate. our deepest fear is that we are powerful beyond measure. it is our light and not our darkness that most frightens us. we ask ourselves, who am i to be brilliant, talented, gorgeous, fabulous? actually, who are you not to be? you are a child of god, and your

playing small does not serve the world. there is nothing enlightened about shrinking so that other folk won't feel insecure around you. we are all meant to shine as children do. we have born to -- we are born to make manifest the glory of god that is within us. and it's not just in some of us, but it is in every one of us. and as we let our light shine, we unconsciously give others permission to do the same. and as we are liberated from our fear, our presence automatically liberates others. thank you so much for the opportunity to meet with you today. go forward and be that power of one, and let's reclaim our community, let's save our children. god bless you, thank you. [applause]

>> the united nations security council is meeting today to discuss the situation in libya. white house spokesman jay carney called on the libyan government this morning to allow peaceful protests. libya leader moammar ca calfty appear -- qadhafi appeared on television saying he will fight. at least 250 people have been killed during public demonstrations. we're watching for a televised announcement and will bring it to you on the c-span networks. coming up here on c-span2, we'll be live at 3 eastern with a discussion on retirement and the future of social security hosted by the woodrow wilson international center. and ireland's general election is this coming friday. the prime minister is stepping down because of the country's economic problems, and the candidates to replace him -- the leaders of the three major irish political parties -- will meet in their final tv debate this afternoon in dublin. you can see coverage at 4:30 eastern on c-span.

>> the c-span networks, we provide coverage of politics, public affairs, nonfiction books and american history. it's all available to you on television, radio, online and on social media networking sites. and find our content anytime through c-span's video library. and we take c-span on the road with our digital bus and local content vehicles bringing our resources to your community. it's washington your way, the c-span networks. now available in more than 100 million homes. created by cable, provided as a public service. >> federal reserve board chair ben bernanke tells lawmakers the financial system is better off today than it was two years ago. he gave an update to the senate banking committee during this hearing last week. he's joined by the heads of the securities and exchange commission, the federal deposit insurance corporation and the acting comptroller of currency. it's about two hours, 20 minutes.

[inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations] >> i'd like to call to order the first banking committee meeting of the 112th congress. the last several years have been an historic time for this committee. i have big shoes to fill follow anything the footsteps of my recent predecessors, chairman shell by and chairman dodd. i'm thankful and humbled by this opportunity, and i look forwardw to working with all of my colleagues on the committee to make this a successful session of congress. haggen, muran, and i look forward to working with all of you. there is an important work ahead

of us. i'm committed to an agenda that will bolster our economic recovery, make our financial regulations world class, and ensure that consumers and investors have the protections they deserve. to final parts of this agenda with with the implementation of dodd-frank and beginning the process of housing financial reform. we compiled a further list of issues the committee may consider which will be posted on the committee's website today. this morning, we hold the first in ray series of -- implemention.f the dodd-frank >> there are certainly no shortage of topics for us toto discuss with the regulators today.ing

and in the coming weeks and clor months at many issues important to myself and the members of this committee. the committee's oversight will think to ensure that the letter in this spirit of the new law are being implemented by the regulatory agencies, public comment and proposed rules are being appropriately solicited and concerted and the new law is enforced. legitimate concerns are recognized and addressed and that they have the resources they need. the regulators have been hard at work, and i look forward to learning more about the progress implementing the dodd-frank act. i want to be clear that dodd-frank act has part significant and much needed reform to our financial system. it improves consumer-investor

protection, fills regulatory gaps by bringing oversight to the derivatives market, and helps provide -- avoid another financial crisis. this em policemennation -- implementation will create certainty for the business community, consumers, and investors. in turn, that certainty will bring market participants back to the table and restore consumer and investor confidence. a task of this complexity was such a global impact must be done with great care to avoid unintended consequences that could impair economic growth or send good paying jobs overseas. our oversight agenda will make

sure we're on the right track. i commend the hard work of all of the regulators. i look forward to working closely with all of you to be sure we get this right, and i thank you for being here today in an incredibly busy week with the release of the budget. because of the busy schedules of our regulators, we will limit opening statements today to myself and ranking members shelby and i ask the other members of the committee to submit their opening statements for the record. with that, i turn to senator shelby. >> thank you, mr. chairman. last year, congress passed the dodd-frank financial reform act as the chairman has mentioned. the president and majority proclaimed the act a his tore click accomplishment. at the signing ceremony, the

president declared the act would provide certainty to our markets and lifted our economy -- lift our economy to a more prosperous future. eight months later, the effects are now setting in. unemployment rate still stands at record levels. while the political forces that drove the passing of this, the huge cost of the act are now becoming clier. the dodd-frank party, i believe, is over. unfortunately, our economy is now preparing to pay the tab. our financial regulators have begun to implement dodd-frank and the decisions they make over the next few months will impact every american. regulators will determine if americans can buy a home or a car, if they can get loans to start businesses. they will also determine what financial products are available and to whom they may be sold. in dodd-frank, the majority party delegate the an

unprecedented amount of authority and discretion to the bureaucracy. our regulators now have more than 200 rule makingings to complete by july. the work to implement the rules are staggering. for lobbyists, lawyers, dodd-frank is a gold mine. for the rest of us, however, it means more red tape, more government, fewer choices, and high fees. today, i hope to learn more about how our regulators plan to mansion this un-- manage this workload. concerns are raised about the fairness of the rule making process. in the rush to comply with the unrealistic deadline set in dodd-frank, the regulators had to focus on speed rather than deliberation. while our regulators will do their best to comply with the deadlines, congress, i believe, should seriously examine whether the speed of the process is

underminding its integrity. there are early indications that it is. one of the hallmarks of our regulatory process is openness. yet, with so many rule makings considered simultaneously, public participation could be stifled. it may be practically impossible for parties to provide thorough comments on so many rules and for regulators to fully consider every comment in such a short time frame. they will receive an enormous quality of comments, what matters is the quality of the interaction of the commentators and regulators. i believe we should consider whether the final rules would be better if our regulators had more time to hear from the public. another consequence of the hasty rule making process is that our regulators may not be proposerly conduct -- proposerly conducting proposed

rule. everything should include an understanding of its cost. unfortunately, there are serious questions regarding the willingness and the ability of our regulators to conduct such analysis. at the fcc, the position of chief economist has been vacant for 10 months. at the cftc, the commission of the chief economist was vacant for 11 months before finally being filled this past december. i believe the failure to promptly fill these key positions suggest that economic analysis is not a high priority for our regulators. in the light of the fact that the cost imposed by these rules may cause some americans to lose their jobs, our regulatory agency should make themselves aware of the economic impact of proposed rules before adopting them. while improvements in the rule making process can smooth implementation of dodd-frank,

i'm under no illusions it can offer long term consequences. dodd-frank is going to be very, very expensive. dodd-frank may not raise taxes directly, but consumers will soon feel its cost when they pay high regulatory fees, higher compliance costs, and higher prices for financial services. just this past week, the president's budget calls for the cftc to impose $117 million in new taxes in the form of user fees to pay for the cost of dodd-frank. over the coming months, the hidden costs will grow as our regulators impose new rules and regulations. i hope the committee will focus at least as much attention on the cost as it does the rules over the next few months. thank you, mr. chairman. >> the committee will now turn to executive session.

the committee has been in executive session to consider the committee's work budget, procedure, and subcommittee structure and jurisdiction. every member should have received an should have in front of them a copy of the rules of procedure, the resolution of the budget, and the document on the subcommittee membership and structure which were thought of discussions between ourselves over the past three weeks and have now been agreed upon by me and ranking member shelby. budget and committee rules with pretty straightforward, and it will not take a lot of time here on the subcommittees except to commend my colleagues for their interest and willingness to take on subcommittee assignments. i intend in this congress to encourage robust subcommittee participation. i think it enhances the work of

the committee if our subcommittees actually conduct hearings and proceed along those lines. i have always believed in the practice of providing the subcommittee chairs with the necessary resources to be able to do so. it is not just a rhetorical comment like one accompanied by getting work down. i'm very grateful to the subcommittee chairs and the last congress which did a very good job on a range of issues, and to those who have agreed to chair the subcommittees in this congress. holding hearings and providing counsel to the full committee how we should proceed. there's one clutch in the document before you which is that senators were mistakenly

place on four subcommittees and the committee rules only allow membership on three subcommittees. senator has gracefully agreed that this morning to withdraw from the economic subcommittee and senator brom on subcommittees will replace him. i ask consent to make these modifications to the membership list before you. without objection, it is so modified. with that, senator shelby, do you have anything to add under organizational manners? >> no, sir. >> is there any further discussion? senator merkley, i understand

you wanted to discuss a proposal. >> thank you, mr. chairman. i'm going to be very brief because i did agree to withdraw the amendments at the request of our chairman, but i wanted to mention that the thought behind them, i think, is one we should continue to wrestle with which is essentially how do we make the u.s. senate less segregated? most state legislatures provide seating by democrat, republican, democrat, republican or have other mechanisms to decrease the isolation of the parties. the u.s. senators enormously is split, and split in ways that are aggravated of the developments of the last two decades, specifically, senators used to live here with their families, they were here for sweekds, had dinner together, those connections are largely gone, and the fact, the ability to have connections in settings like this is caused by the size

of the room. there's ideas that various senators mentioned for addressing this. one is to have every other seating, and a second is to have our three central figures, our chairman and ranking of both parties occupy permanent seats, but have others grab their name tag on the way in. this is not the time to have a long institution, and i agreed to withdraw the amendments, but i did want to mention it. we have to keep wrestling on making our senate and nation less polarized and increase connection and dialogue between the parties. with that, i wra the two amendments, and thank you very much, mr. chairman. >> thank you. this committee has more often than not operated in a bipartisan manner, and the hope thats is not necessary to sit side by side in order to work side by side. that said, i appreciate your thoughtfulness on this matter, and i'm confident that both sides of the aisle will continue to work together.

since there are no other amendments to be offered, i move the adoption and block of the committee budget resolution, the subcommittee structure, and membership document, and the committee rules of procedure by a proposed vote. all those in favor? all those opposed? the aye's have it, and the measures are adopted and blocked, and the budget resolution is reported. i have unanimous consent that the staff be allowed to make any changes that the rule will be waived. hearing no objections, it is so ordered. i thank my colleagues for their cooperation, and now we can return to the hearing phase of our meeting to hear from regulators on their

implementation thus far on the dodd-frank wall street reform legislation. before i begin the introductions of our witnesses today i want to remind the colleagues that the record will be open for the next seven days for any materials you'd like to submit. the hon national ben s. beer -- bernanke, federal reserve system is serving second term as chairman which began on february 1 of last year before becoming chairman, he was chairman of the president's counsel of economic for advisers from 2005 to 2006.

also, he served the federal reserve system in a variety of roles in addition to serving as professor of economics at princeton university. sheila bair chair of the deposit insurance corporation, before that, she was in the policy of the management at the university of massachusetts. she was also the substantiate secretary for financial institutions at the u.s. department of the treasury from 2001 to 2002. the hon national mary schapiro is chair of securities and

exchange committee. she was appointed by president obama in january of 2009. previously, she was ceo of the financial industry regulatory authority. chairman schapiro served as commissioner of the fcc from 1988 to 1994 and chairman of the teacher's credit commission from 94 to 96. the honorable gary gensler is chair commodity futures and trading commission which oversees the options markets in the u.s.. chairman gensler previously served in the treasury department under secretary of domestic, finance, and assistance secretary of financial markets. in addition, he served as tenure adviser to the senate ranking

committee. mr. john walsh is act comptroller of the currency. mr. chairman walsh assumed the position last august and previously served as chief of staff in public affairs. he has been with the occ since 2005 and prior to that was the executive director of the group 30. mr. walsh also serves with the senate banking committee from 86-92. i thank you for being here today. i regret that i had my surgery on my voicebox recently, but i hope it will clear up.

chairman bernanke, you may begin your testimony. >> thank you. members of the committee, thank you for the opportunity to testify about the federal reserves implementation of the dodd-frank act. it addresses critical gaps in the framework, many revealed by the recent financial crisis. the federal reserve is committed 20 working with the other regulatory agencies to implement the act effectively. we are cooperating with the international counterparts to further strengthen regulation to ensure a level playing field across country, and to enhance supervisory cooperation, and we have enhanced the supervisory function at the federal reserve to better meet the objectives of the meet. the act gives the federal reserve important responsibilities to make rules to implement the law and apply the new rules. in particular, the act requires

the federal reserve to complete more than 50 rule makes and set formal guidelines as well as a number of studies and reports. we've been assigned formal responsibilities to collaborate with other committees on a span number of rules and studies. so that we meet the obligations on time, we draw on expertise and resources across the system in banking supervision, economic research, financial markets, consumer protection, and analysis. in all more than 300 members of the federal reserve staff are working on dodd-frank implementation projects. we created a senior staff commission to coordinate the efforts and created a tracking tool to facilitate management and oversight of the implementations. we made considerable process in our responsibilities. we have provided oversight to the counsel and assisting the counsel in designing its risk monitoring and evaluation

process and in developing its proceed childrens for identifying systemically important nonbank firms and financial market utilities. we also are helping the new aves of financial research develop data reporting standards to support the counsel's systemic risk monitoring and evaluation duties. we contributed significantly to the counsel's recent studies, one on the rules for trading and private fund activities, and the second one on the exponential limit. we are now developing for public comment the necessary rules to implement the important restrictions and limits. last week, we adopted a final rule to ensure activities prohillary clintoned by the rule are invested or term that the in the time period required by the act. we have been moving forward rapidly in other areas. we issued a study on the potential effect of the act's credit risk retention requirements on securitization

market as well as an advanced notice on credit ratings in the regulations of federal banking agency. in addition, in december,ed board and other agencies requested comment on a proposed rule to implement the rules required by the cullens amendment. in december, we requested comment on proposed rules for debit card interchange fees and inhibit the act on exclusivity arrangements and routeing restrictions. the board together with the fcc, ots provided the congress a comprehensive report on the agency's progress and plans relating to the transfer of the supervisory authority of the ots for thrifts and thrift holding companies. the issue and we and the banks established offices to build on our existing opportunity programs to promote diversity in management employment and business activities.

we continue to work closely with other agencies to develop joint rules to implement the credit risk retention requirements for securitizations, resolution plans or living wills for large bank holding companies and counsel designated nonbank firms, and capital requirements for swap dealers and swap participants. we are consulting with the fcc on a variety of rules to enhance the efficiency of the markets. including rules that would require most standardized derivatives to be traded and cleared require the registration and prudential regulation of swap participants and improve the transparency of derivatives. we are coordinating with the ftc on the agency's respective rule makings on standard for utilities and working with market regulators in central banks and other countries to update the international standards for these utilities. the transfer of the federal

reserve consumer protection responsibilities specified in the act to the new bureau consumer protection is well underway. a team at the board headed by governor duke is working closely with the staff and at the treasury to facilitate the transition. we provided technical assistance as well as staff members to assist it in setting up its functions. we have finalize the funding agreements and provided funding. moreover, we made substantial progress towards a framework for transferring staff members to the cfpb and integrating employees into the benefit programs. one of the federal reserves most important dodd-frank implementation projects is to develop more strict standards for all large banking organizations and for nonbank firms designated by the counsel. beside capital liquidity, these standards include stress tests,

new counterparty credit limits and risk management requirements. we are working to produce a well-integrated set of rules to significantly strengthen the framework for large complex financial firms and the financial system. complementing these issues, the federal reserve has been working for some time with other regulatory agencies and central banks around the world to design and implement a stronger set of prudential requirements for acting banking firms. these efforts resulted in the adoption in the summer of 2009 of more strict capital standards for trading activities and securitization exposures. of course, it also includes the agreements reached in the past couple months on the new framework for globally active banks. this should make the financial system stable and reduce the likelihood of financial crisis by requiring these banks to hold more and better quality capital and more robust liquidity

buffers. . . expertise to oversee a broader range of financial firms and business models. the act also requiresitlso req orpervisors to take a suprvis macroprudential approach. that is, the federal reserve ani other financial regulatoryory

agencies are expected to t supervise financial institutions and critical infrastructures with an eye toward not only the inastruc safety and soundness of each sad individual firm, but also takina into account risk to overall financial stability. financial stability we believe a successful macroprovincial approach to the provision requires both the multidisciplinary perspective. our experience in 2009 with the supervisor decapolis as the program properly known as the bank stress test demonstrated the feasibility and benefits of employing such a perspective. building on the experience and other lessons learned from the recent financial crisis we have reoriented our supervision of the largest most complex banking firms to include greater use of horizontal or cost firm evaluations on the practices and portfolios of the firms. improved quality that surveillance mechanisms and better use of the broad range of skills of the federal reserve staff. we have created a new office of financial stability within the federal research which will

monitor financial developments across a range of markets and firms and coordinate with the council on the other agencies to strengthen oversight. the federal reserve is committed to its longstanding practice of insuring all of its rulemakings are conducted in a fair, open and transparent manner. accordingly we are disclosing our public website of all communications with members of the public including banks, trade associations, consumer groups and academics regarding matters subject to a proposed future rulemakings under the act. we also implemented measures within the act to enhance the federal reserve transparency. in december we released detailed information regarding individual transactions conducted between december 1st, 2007 and july 20, 2010 across a wide range of the federal reserve liquidity programs and we are developing the necessary processing is to disclose the information concerning the transactions conducted after july 20, 2010 on the delayed basis as provided in

the act hope to conclude the dodd-frank act is a step forward for the financial regulation in the united states. the federal reserve will work with overfill regulators, the congress and the administration to ensure the law is implemented expeditiously and in a manner that best protect the stability of our financial system and our economy. thank you. >> thank you, chairman bernanke. ms. bear, members of the committee, think for the opportunity to testify today on the fdic's progress in implementing the dodd-frank act. first a quick to congratulate senator johnson on becoming chairman and it's an honor to be called to testify for the hearing. we appreciate your efforts in the past on issues like deposit insurance reform and we look forward to your leadership as we address future challenges in the financial industry. the recent financial crisis has great shortcomings in the private sector risk-management and framework for the financial regulation. in the crisis hit, the policy

makers were faced with a choice of propping up large failing institutions or risking bankruptcy as we saw in the lehman brothers failure. landmark dodd-frank act enacted last year created a regulatory and resolution regime to protect the american people from the severe economic consequences of financial instability to get it gives the regulators the tools to curb excessive risk-taking, enhanced supervision and facilitate the liquidation of large banks and non-bank financial companies in the event of a failure. the act requires or authorizes the fdic to implement some of 44 regulations including 18 independent and 26 joint rulemakings which we are doing as expeditiously and has transparently as possible. many of the fdic rulemakings stem from the mandate to end to big to fa l we are making clear there will be no more bailouts of large financial institutions. our bowl is that market expectations and financial institution credit ratings

should over time fully reflect this reality. consistent with the dodd-frank mandate our recent interim rule require creditors and shareholders not taxpayers, bear losses of a financial company failure and makes clear that the fdic resolution powers will not be used to bail out another institution. to make most effective use of these new resolution authorities it is essential we have access to the information we need to monitor the health of entities and conducted a vans planning to wind them down without disruption to the broader system. to this end the fdic and the federal reserve are working would establish requirements for these firms to maintain credible, actionable resolution plans that would facilitate their orderly resolution. if these entities are unable to demonstrate, quote, resolveable, end quote we should be prepared to require structural changes so they can be wound down and they can't make needed structural changes we should require divestiture. the fdic is working with the its counterparts to develop

criteria for systematically important institutions subject to enhanced supervision and the need to maintain resolution plans. the fdic board also implemented its authority under dodd-frank to strengthen and reform the deposit and insurance fund the act will able us to make positive fund balance during crisis periods. we have expanded the assessment base used for deposit insurance assessments and removed reliance on credit ratings while also making large bank assessments to more sensitive to risk. under the collins amendment capital requirements for bank holding companies and nonbanks will be made as strong as those applied to community banks. the federal banking agencies are in the early stages of rule making to implement this provision and are also taking steps to implement basal three proposals and liquidity actions. addresses misaligned incentive and securititation require fsoc agencies for risk standards for loan

securitizations and define standards for qualifying residential mortgage not subject to risk retention. as this inneragency process moves forward we believe the standards must include incentives to appropriately service securitized loans. research and recent experience show the importance of sstszing to mortgage performance and risk. but most securitizations currently do not provide the proper resources or incentives for services to effectively engage in loss mitigation. as implementation moves forward the industry should understand the dodd-frank reforms are no way intended to impede the ability of small and mid-sized institutions to compete in the marketplace. instead they should do much to restore competitive balance by subjecting systematically important institutions to greater market discipline and regulatory oversight. history reminds us that financial markets can not function in an efficient and stable manner without strong, clear, regulatory guidelines. millions of americans have lost their jobs, their homes or both. even as so many of our largest financial institutions received

government assistance that enabled them to survive and recover. we have a clear obligation to members of the public who have suffered the greatest losses as a result of crisis, to prevent such a severe episode from ever recurring. thank you very much. >> thank you, chairman bair. miss shapiro. >> chairman johnson, ranking member shelby and members of the committee. thank you for the opportunity to testify today on behalf of the securities & exchange commission regarding implementation of the dodd-frank wall street reform and consumer protection act. the act is intended to fill a number of significant regulatory gaps, bring greater public transparency and market accountability to the financial system and give the sec important tools which to better protect investors. it also assigns the sec for new authority over over-the-counter derivatives, hedge funds and credit rating agencies among others. to respond we brought together experts from across the agency creating cross

disciplinary teams to draft rules and conduct the required studies. we put in place to insure maximum input from the public and highly transparent process. we continue to consult frequently with our fellow regulators, domestic little an internationally. we have made significant progress to date. the commission has issued 25 proposed rule releases, seven final rule releases and two interim final rules. we have reviewed thousands of public comments, completed five studies, and hosted a number of public roundtables jointly with the cftc. while my written testimony contains detailed discussion of our work i'd like to highlight just a few areas of particular interest. a key portion of the act seeks to reduce a source of financial instability by proving transparency in the derivatives markets and facilitating the centralized clearing of swaps. the sec has proposed rules regarding swaps which together provide a clear blueprint for more stable and transparent derivatives market. these include proposals that the, to mention just a few,

would lay out the reporting requirements for market participants and obligations of swap data repast tories. seek to mitigate the potential conning ins of interest to clearing agencies, establish duties and core principles of swap execution fait is. we are also working with the federal reserve, cftc and financial stability oversight council to develop a framework for supervising market utilities that are designated as systematically important. in addition to derivatives the dodd-frank act provides the agency with authority over hedge fund and private equity funds with assets under management in the u.s. over $150 million. here we have proposed rules that would facilitate the registration of private fund advisors, and together with the cftc we proposed rules to require advisors to hedge fund and other private fund to report information for use by the fsoc in monitoring systemic risk. the sec is also acting to give more investors more

information about asset backed securities, another focus of legislation. in this area we have adopted rulesing requiring abs issuers to disclose history of asset purchase he requests received and repurchases made and we also adopted rules requiring issuers to review the assets underlying the abs, to disclose the nature of the reviews and provide reasonable assurance that is the prospectus disclosures are accurate. the dodd-frank act also includes provisions related to executive compensation. and in furtherance of these provisions last month the commission adopted rules requiring companies to allow shareholders to cast an advisory say on pay vote at least once every three years. and requiring a separate advisory vote on the frequency of say on pay votes at least every six years. additionally the legislation substantially expand the agency's authority to compensate which is shill blowers. in november we proposed a rule mapping out a procedure for would-be whistle-blowers to provide use "elf"

information to the agency. the rule makes it clear that whistle-blowers play a critical role protecting investors. at the same time it is designed to compliment, not circumvent existing compliance regimes companies operate. in recent weeks the sec also released two studies which examine ways of improving the investment advisor and broker-dealer regulatory framework. first the commission publish ad staff study describing potential approaches for congress to consider to increase examination of investment advisors and second we issued a staff buddy looking at different standards of conduct required of investment advisors and broker-dealers. most importantly that study recommended the commission implement a uniform fish rived standard of conduct for broker-dealers and investment providers when they are providing personalized investment advice about securities to retail investors. in short the commission moved steadily and responsibly to implement the dodd-frank act. as we continue to make

progress we look forward to working closely with congress, fellow regulators, the financial community and investors to craft rules that will strengthen the financial markets. thank you for inviting me here today and i look forward to answering your questions. >> thank you, chairman schapiro. chairman gensler. >> good morning. thank you chairman johnson, ranking member shelby, members of this committee and congratulations on assuming the chair. congratulations to the five new members of the committee as well. i guess i'm a little partial having once staff ad chair for this committee. i thank you for inviting me here today to testify on behalf of the commodity futures trading commission. i want to thank my fellow commissioners and the staff for such hard work at the cftc in fulfilling their statutory mission. i'm also pleased to testify alongside the fellow regulators here today in

2008, the financial system failed the american public. but the regulatory system as well failed the american public. the effects of that crisis have reverberated throughout america and the global economies. in the u.s. hundreds of billions of dollars of taxpayer money were used to bail out the financial system. that was on the brink of failure and millions of jobs have been lost and have yet to fully come back. the cftc is working very closely with the sec, the federal reserve, the fdic the office of comptroller of currency, treasury and other regulators to implement the dodd-frank act and we're coordinating and consulting closely with international regulators harmonize oversight of the swaps market and insure that there is a level field. we have received thousands of comments from the public and had hundreds of meetings with which we all post on our website. for the vast majority of the proposed rule macking we

have solicited public comments for a period of 60 days. one area where the cftc is seeking input from the public relates to timing and implementation of various requirements under the rules. public comments will help inform the commission as to what requirements can be met sooner and which can be phased and be implemented later. we're also under the act, proposed rules along with the other regulators here with regard to margin requirements and the congress recognized that there are different levels of risk posed by transactions between financial entities and those involving nonfinancial entities. this is the so-called end user exception in clearing. proposed rules on margin requirements for the cftc we believe should focus only on transactions between financial entities rather than those transactions that involve nonfinancial end-users, consistent with how congress did the clearing requirement.

aside from proposing rule makings to implement dodd-frank, the cftc is supporting the work of the financial stability oversight council providing both data and expertise relating to a variety of systemic risks. we also had the opportunity to coordinate with treasury, council and the office of financial research on the proposed rules by the fsoc. to the cftc does require additional reus so. futures market we oversee $40 trillion in size. the swaps market jointly oversee with the sec is 300 trillion dollars in size. roughly seven times the size of our agency. we do not need seven times the peel but we need more people and we need more technology. on monday the president submitted a fiscal year budget of 308 million for the commission. this is essential for fulfilling our mission. in 1992 we had 634 staff at the cftc. we're currently between 670

and 680. we actually shrank about 23% in the prior decade. with this committee and congress's help we grew back to where we were in the '90s. only last year did we get back to where we were in the '90s. furthermore the cftc's funding if it were returned to fiscal year 2008 levels, the agency would to the be able to fulfill our statutory mission. every program would be affected. we would be unable to pursue fraud and ponzi schemes, market manipulations though it did take senator shelby time to fill office of chief economist. we wouldn't be able to fill any jobs. we would have to go the other way and unfortunately let people go. i don't think that's what the american people need us to do at this time after the crisis of 2008. the cftc fundamentally is a good investment the mission is to promote transparent, open, and competitive markets so end-users hedgers and investors can get benefit of the markets and

transparency in those markets and competition in those markets. the cftc is also a cop on the beat to insure against fraud and manipulation and other abuses. i thank you and i would be happy to answer any questions. >> thank you, chairman gensler. mr. walsh. >> thank you, chairman johnson, senator shelby and members of the committee. i appreciate the opportunity today to describe the activities the occ has undertaken to implement the dodd-frank act. let me begin as others have done by saying what a pleasure it is to appear before chairman johnson for the first time and by expressing our hope for continuing productive working relationship with my old committee including with its five new members. i'm pleased to report much has been accomplished during the past six months on implementation of the dodd-frank act. progress in all iner of areas is discussed in my written statement. our single largest task is integration of the employees and functions of ots into

our sup advisory mission and we're on track to complete all transfers by the target date of july 21st. we firmly believe that the talent and experience of ots staff will be essential for effective supervision of federal savings associations going forward. we're fostering a environment that will maximize career opportunities while insuring to enjoy the full protections afforded employees by the dodd-frank act. we're also engaged in extensive outreach to the thrift industry, addressing concerns and clarifying expectation the. we anticipate an orderly transfer of authority that will insure the combined agency can continue to provide effective supervision of both national banks and federal savings associations. in the area of rule writing we are making progress on the many projects assigned to us but a few present particular challenges. an issue i raised in testimony last september is the prohibition on use of credit ratings. we recognize that the misuse of credit ratings,

especially in structured finance, contributed importantly to the financial crisis but this was not true of corporate and municipal ratings. and after significant study and comment, we have found no practical alternative for such ratings that could be used across the banking sector. we have heard concerns from regional and community banks that attempting to replace ratings with internal assessments of credit worth thinkness would be prohibitively costly and complex for them. although we certainly do not advocate the return to total reliance an credit ratings their use within defined limits is essential for implementation of capital rules including the basel iii capital framework and we urge congress to modify this prohibition. general concern is coordinate implementation of dodd-frank requirements for capital and liquidity with basel iii. while the two share many common objectives it is essential to implement these reforms in coordinated, mutually reinforce manner and enhances safety and

soundness without damaging u.s. competitiveness or restricting access to credit. my testimony describes our efforts to enhance the capital and liquidity standards of u.s. financial companies with this coordination challenge in mind. finally i'd like to update the committee on steps the occ has taken in response to the four closure crisis since i last testified on this issue. the federal banking agencies have concluded examinations of foreclosure processing at the 14 largest federally-regulated mortgage servicers. the examinations which we undertook in late 2010 with the federal reserve, the fdic and the ots, found critical deficiencies and shortcomings that resulted in violations of state and local foreclosure laws, regulations or rules. despite these clear deficiencies we found loans subject to foreclosure were in fact seriously delinquent and servicers had documentation and legal standing to foreclose. in addition case reviews showed that servicers were in contact with troubled borrowers and had considered

loss mitigation alternatives including loan modifications. that said, our work identified a small number of foreclosure sales that should not have proceeded because of an intervening event or condition. we're now finalizing reimmediate sanctions and appropriate remedy to comprehensively the problems identified. our actions will address identified deefficiencies and hold servicers to standards that require effective and proactive risk management and appropriate remedies for customers who have on about financially harmed. we are also discussing our supervisory actions with other federal agencies and state attorneys general with a view towards resolving comprehensively and finally the full range of legal claims arising from the mortgage crisis. equally important we are drawing on lessons from these examinations to develop mortgage servicing standards for the entire industry. the occ developed a framework of standards that we shared with other agencies and we are now participating in an

inneragency process to establish nationwide requirements that are comprehensive, apply to all servicers, provide the same safe guards for all consumers and are directly enforceable by the agencies. while we are still in a relatively early stage, we share the common objective to achieve significant reform in mortgage servicing practices. thank you for the opportunity to testify. i would be happy to answer your questions. >> thank you, mr. walsh. thank you for your testimony. i will remind my colleagues that we will keep the record open for statements, questions, and any other material you would like to submit. as we begin questioning other witnesses i will put five minutes on the clock for each member's questions. chairman shapiro, and and chairman gensler with the

arrival of the president's budget this week and failure yet to appropriate the funds authorized by dodd-frank act, please describe how you are addressing funding constraints in your respective agencies as you continue to implement the dodd-frank act. >> i'm happy to go first with that, mr. chairman. for the purposes of really conducting the studies and writing the rules that are required%'urces that are laid on the president's budget request because we don't have the capacity now to take on the examination of hedge funds for

example which is under the legislation and the new entities that are part of to our current core functions, we are feeling the pressure of operating under a continuing resolution. we are making some difficult choices. we're restricting hiring across the agency and selectively hiring only very special positions. we've cut travel and to me most importantly we have delayed very significant technology programs that would help bring the sec's technology up into at least this century, if not, this year. and, that is having an impact on our ability, i believe to achieve our core mission as effectively as we could. quite frankly the level which the american people have the right to expect. >> mr. gensler, please elaborate. >> our agency just this past year with the help of congress got back to our

staffing levels of the 1990s having been shrunk unfortunately i think in the prior decade. but that staff is not enough to take on the implementation. we can write the rules and have the meetings. about a quarter of our staff right now is working in one way or another on the rule writing. this year, under the continuing resolution have had to make hard choices. our technology budget only 31 million last year. this year, under the continuing resolution we'll probably have to cut it about 45%. we're cutting travel and all the other things to be efficient but technology is the key to move forward. we're also working hand and glove with the self-regulatory organization, the nfa, to see what they can pick up. can they pick up registration and examination functions and so forth? we think to take on this task of a market seven times the size of our current agency it is a new task to take on something that large.

this small agency needs to be larger. the president's asked for $308 million for next year. i know this nation of ours has a great budget deficit that we all have to come together and understand better and grapple with w so i feel a little bit daunting to ask for more money for this agency at this time but i really do think this is the good investment for the american public to avoid crises like in 2008. >> chairman bernanke, chairman bair and comptroller walsh, community banks and credit unions are the backbone of our economy. which is why we worked hard to protect their viability and in drafting the dodd-frank act. as a regulators depository institutions holding under $10 billion in assets, could you please speak to the impact of the dodd-frank implementation on these small institutions,

including the impact of the debt interchange rule and the qualified resident mortgage qrm rule making. so, to insure that there are no unintended consequences moving forward. >> chairman johnson, we fully agree with you that community banks, small regional banks play a very important role in our banking system. it is very important to minimize the excess regulatory burden on these institutions. we have tried to institutionalize that effort within the federal reserve. we have, for example, created a special committee that looks only at smaller banks and tries to insure that rules that are written for the banking system broadly are not excessively burdensome on the smallest institutions. we also created a community

bank council that meets three times a year with the board of governors to give us their views. so we are trying to reach out and understand particular problems. our rule-making activities are focused primarily, given the nature of the crisis and fact that most of the problems with the large institutions are focused on the largest institutions. we are, for example, currently developing as dodd-frank requires, a new set of regulatory capital liquidity, risk management and other rules that would apply, primarily to those banks of 50 billion or larger. and even those banks the rules are tighter, the larger the bank. so we are indeed very sensitive to this issue and are trying to do our best to minimize the impact on small banks. with respect, i will speak to the interchange rule. perhaps chairman bayer would like to say something about

something about qrms. the interchange provision as an exemption for smaller banks which of course we will put in the rule. we are not certain, and i think this is something we are trying to better understand due to the comments and to our outreach, we're not certain how effective that exemption will be. it is possible that because merchants will reject more expensive cards from smaller institutions or because networks will not be willing to differentiate the interchange fee for issuers of different sizes it is possible that exemption will not be effective in the marketplace. it is after all, allowable, not a requirement. and so there is some risk that, that exemption will not be effective and that the, interchange fees available through smaller institutions will be reduced to the same extent that we would see for larger banks.

>> thank you. i welcome that question. i guess i would like to note first of all that one of the things dodd-frank did was change the assessment base for deposit insurance premiums from one based on domestic to one focused on assets. we finalized rules on that in the third quarter. that will reduce community banks deposit insurance preemts premiums by 30%. it tend to shift more of the burden on entities that rely less on deposit insurance and hits those that rely on security liabilities which tend to be the larger institutions. i think that will have a significant benefit for community banks. on the qrm rule i don't want to front run the rule making process but that rule is close to being done. i think i can assure the committee the direction on the qrm rule will be focused on issuers of securitizations, not small mortgage originators. so i think the impact will not be burdensome for community banks. i think we have all strived to realize community banks weren't the problem that the

qrm rules are trying to correct. so i think you will, if you're concerned about that you will be pleased when you see the rule that goes out for public comment. i'd also, back to my opening statement about the orderly liquidation authority. i think robust of implementation of title two for orderly liquidation authority will help level the playing field of both large and small. funding for large institutioning will go up as the authority is implemented that will also help the community banking sector. i share chairman bern keys concerns about effective of interchange rules and to truly protect community banks particularly if the networks are not required to have a two-tier pricing structure so community banks can continue to charge higher fees. so we're in consultations with the fed on this and reviewing what the legal authorities might be there from a regulatory standpoint. but i do think this is helpful to community banks.

>> mr. walsh, my time has expired but please sum up quickly. >> just to echo some others on qrm and interchanges we're working with the other agencies there i would just note our community banking population will go up by half when we integrate ots from 1400 to 2100 institutions. we have a division devoted to community banking. we have examiners around the country who are attentive to their concerns. we have been doing quite a bit of outreach to community banks to try to understand their concerns as was noted most of the changes in dodd-frank are aimed at the significant changes, are aimed at larger institutions but the smaller institutions do worry about the increasing weight of regulation that the changes imply. and as i noted, the one concern with credit ratings, that, if it were simplified, could be a benefit to community banks. >> thank you, mr. walsh. senator shelby.

>> thank you, mr. chairman. i'll direct this question first to chairman bernanke and then some others. in a recent financial times article, secretary geithner talked about the difficulty of designating non-bank financial institutions as systemic. he said, and i'll quote, it depends too much on the state of the world at the time. you won't be able to make a judgment about what is systemic and what's not until you know the nature of the shock, end quote. i find the secretary's comments interesting given his strong support of title one of dodd-frank when we went through this. if it's impossible to know what firms are systemic until a crisis occurs, the financial stability oversight council will have a very difficult time objectively selecting systemic banks and nonbanks

for heightened regulation. mr. chairman, as a member of the council, what's your view on whether firms can be designated as systemic without creating some type of a arbitrary process here? >> senator, it is a difficult problem. >> i know. >> you have different types of firms respond to different types of shocks. it is also true that an individual industry with small firms might be subject to a broad shock as we saw with the money market mutual funds for example. that being said i think one of the problems with, one of the sources of the crisis in 2008 was there were very substantial gaps in the oversight of many large firms like the aig for example. didn't have strong consolidated oversight. i think our task is to do the best we can to try to

identify those firms which, you know, most likely pose a risk. >> what is do the best we can mean to us? what does that mean? >> well we don't want to be arbitrary as you point out. >> okay. >> so we have already put out the fsoc with the cooperation of all the folks at this table, has already put out a request essentially for input. but what we would like to do is provide relatively clear guidelines about the criteria that we will use to try to identify firms that are potentially systemic. admittedly those will not be exact numerical guidelines for example. but, i do think it is important that the fact that each institution, each agency at this table has a certain specific set of institutions for which it is responsible. that we don't allow that fact to create faps where there are important firms that have no serious consolidated oversight. so i do it e think it is useful to do this but you

acknowledge your concerns it will never be a perfect process. >> chairwoman bar. do you have a comment. >> perhaps easier to say what is not systemic for bank holding companies -- >> talk about banks, please. and you're defending the funds. >> we are defending the fund. and so i think our concern about this is to make sure if we have to use our resolution authority that we have, we are prepared and we have resolution plans and have had information that we need for an orderly wind down. so, i think, for me, senator, the biggest, there are a number of factors npr identifies. for me it is, interconnectedness more than anything. if you fail, what else happens? who else gets hurt? and, it may be that we need to do the type of two-step process so we're basing on some simple metrics based on size and counterparty exposures. take it to a second level

and ask those entities to do what is called a credit exposure report in title two. basically do analysis. do a scenario if you fail what happens. in terms of systemic that is the most important factor to me. there are some that will be obvious and that's why we need to know who they are in advance to have standards and have them start reducing any concentrations they might that would have broader collateral impact. there will be some gray areas but at least in terms of resolution planning i would err on the side of inclusiveness. >> mr. chairman, chairman bernanke, all of you are chairman to a point. let's see. do you believe that you're better positioned now than you were two years ago to deal with the failure of a large bank? for example, financial institution? or is, are, would that come as a shock to you still? in other words, would you be in a position to wind these

institutions down? >> well, of course -- >> what about a manufacturing facility? >> no. as chairman bair discussed of course the resolution regime and the other prudential requirements are aimed at financial firms which have the risk of bringing down the system. i think there is quite a bit more work to do to fully implement all the dodd-frank has put on the table in terms of living wills, resolution, prudential requirements and so on. i think we are better off today than we were two years ago but i would say it will still be some time before we have completely implemented not only all you have the rules in the context of dodd-frank but i think very importantly, and chairman bair has taken leadership on this, we have to negotiate and coordinate with international regulators because so many large institutions are cross borders. so we'll need to work together with other institutions. so we have not got to the

point where this set of tools is fully implemented but we're working very hard and it certainly is a focus of the fed and the fdic to get the resolution process up and running as effectively as possible. >> do you believe the fed is a regulator today is a lot more on top of things on, as to the, the capability of a bank to stand a lot of shocks as opposed to two years ago? in other words, are you more diligent than you were two years ago the fed as a regulator. >> mr. cheryl, we all learned lessons from the crisis. >> what have you learned? >> the importance of being very aggressive and, not being willing to allow banks to, you know, too much leeway when they're, particularly when they're inadequate in areas like risk management where turned

out to be such an important problem during the crisis. so we've done a lot to try to strengthen and improve our supervision from a day-to-day basis but we've also, i don't want to take more time than you'd like, senator, but we've also done a good deal to structure the internal process so we have, to, a lot more interaction between the supervisors and economists and financial market specialists who have different skills they bring to the table to give us broader perspective or what a bank and other institution is doing. >> how many banks today, just off the top of your head, still owe a lot of money because of tarp? i know a lot of them. >> with just a couple of larger banks. still might be a couple hundred small banks but, the great majority of the money has been paid back of course and, in the end, -- >> are we getting to the point, the once that hadn't paid back, is that a

dangerous signal for you because the economy's picked up a little bit? are you not worried? >> i don't think so, senator. the relatively small banks have, a number of relatively small number of smaller banks have not paid their dividends and but,ing a you know, as you know we've had a lot of failures of small institutions and a few of them had tarp money but the great majority are either, have either paid back or are on a track to pay back. >> are we going to continue to lose a lot of banks, small banks, medium-sized banks, in this country? i see the decline. you can see the trend line down. >> maybe, chairman bair could take it? >> so, senator, i think we peaked last year at 157 failures. there will be an elevated number of failures that will be lower, significantly lower. >> how many are on the watch list now, roughly? >> i think we've got oh about 700, 800 --

>> 700 banks on the watch list. >> well, troubled bank list is, most of those do not fail. only about 23 percent ultimately fail. and that is cyclical. the economy is improving. and, i think, our losses actually went down last year. about 22 billion last year. around 34 billion in 2009. losses were down significantly last year. the banks that are failing are much smaller banks which is why the losses are lower. so things are getting better. the banking sector is healing. that is very true of the community banks as well. >> my last question, if i could, directed to chairwoman schapiro. importance of economic analysis. you recently stated economic analysis is important for the sec in its work. sec has 4,000 employees but

has only 25 ph.d financial economists. considering the importance of economic analysis that you placed on what you're doing, how did you determine that 25 ph.d economists is the appropriate number? or have you done that? are you trying to grow it or what? >> we're absolutely trying to grow it, senator. if i could also speak to your earlier comments. i think you know we are actively and aggressively recruiting for a chief economist at the sec i want to note that we would like that person also to lead our division of risk strategy and financial innovation. the person who is acting head of that now is a ph.d economist. ph.d from the university of chicago. where he also has an mba. we are not without significant economic expertise within the agency. we have about 30 staff economists and they are fully engaged, as you can imagine. on the dodd-frank and other rules. >> you don't feel like it's adequate yet, do you?

>> no, i sure don't. i think it is important for us to have more capacity in economic analysis. part of really my view how we have to shift the entire focus of the agency. we will always have lawyers. we have a law enforcement agency. that's important. but we also need and have been very successful recruiting current market experience, new skillsets, new kinds of talent to the agency, economic analysis and financial analysis, to be also very key components. there are also very important to the support of our enforcement program, frankly as well as our rul rule-writing and many studies we have to do. my goal would be to try to significantly, if we have the resources grow that area of our operations. >> thank you, mr. chairman. >> senator bennett please abide by the rule. >> thank you, mr. chairman. i will. >> as they say it. >> i will. congratulations, on your first hearing as chairman.

i also want to thank senator merkley for the amendment that he raised say if it is any sign of things to come we're delighted to have senator isakson on this side. it is working out perfectly. chairman bernanke there were a lot of representstation made, when this bill was passed institutions 10 billion below were exempt. i hear you're starting to hear feedback there may be some practical problems with implementing that? >> well, senator, i should first state our rule is out for comments. so we're still gathering information. by the statute, the smaller institutions will be exempt from these restrictions but there is the possibility as i mentioned, that either because merchants wouldn't

accept the more expensive cards or because networks would not be willing to have a two-tier pricing system. it is possible in practice they would not be exempt from the lower intercharge fee. >> what would the result of that be if in practice they didn't have the benefit of it? >> well the, the, the statute limits the, the interchange fee to the incremental cost associated with an individual transaction. which does not cover the full cost, if you include some fixed costs associated with setting up a debit card program, for example. so, it's certainly possible that some of those costs would get passed on to consumers in some way. for example, a charge for a debit card or something like that. that would just mean that, if the small banks do not

have effective exemption, it would mean whatever economic forces are impinging on larger banks would affect them as well. >> i want to follow up on some of the questioning the ranking member was asking about the fsoc. i wonder, asking it in a different way because it is both about the institutions themselves which are the ones that are systematically risky but also about the instruments i would think. and i wonder, if any of you would like to talk a little bit about what the priorities setting looks like? how do you decide what the agenda is going to be for the council and over what period of time? is it something the treasury secretary coordinates? how do you detect where you ought to be looking versus where you're not? >> senator if i may -- >> and to the extent that you have agenda items already, what those might be? >> senator, first our agenda has, i think, two parts in a sense. as you know, we have, fsoc

has to write a financial stability report once a year. and for that purpose, it makes sense that there be a annual review of all the major financial sectors, to try to identify any emerging problems or developments in those sectors. so that's part of our process. in addition we want to remain flexible so that any ongoing problems, to take an example, the developments in europe, for example, and the i willlycations for u.s. banks or money markets, any developing event for situation can be brought quickly to the, to the council. the, the council has set up, and in fact there was a public discussion of this. the council has set up committees of staff and deputies who are covering different areas and who are presenting to the council short summaries of areas

where they have identified potential developments of interest. and then the council members are giving feedback about what they would like to hear the most discussions. >> is that because i'm under strict instructions from our chairman? i'm going to ask you because you mentioned europe. is our own domestic fiscal condition something that the council is going to be taking up? are you aware of any other systemic greater than our own debt and deficit? >> that is a, that is a difficult question because obviously that falls somewhere between fiscal stability and financial stability. so the question is, whether that is more congressal responsibility or fsoc responsibility. we have not at this point discussed, i don't believe, perhaps someone can correct me, i don't think we've discussed anything related to that so far. >> i would just encourage it because i think our financial stability is so closely linked to our fiscal stability. thank you, mr. chairman. i have three seconds evident are. i yield back the balance of

my time. >> senator corker, we have a vote coming up at 10 to 12 and, i encourage you to abide by the five-minute rule. >> i got it, thank you. appreciate it. welcome all of you and i thank you for your service. and we miss you. after dodd-frank we haven't heard from you and, the phones quit ringing. we're glad to have you here today and appreciate the work each of you are doing. that is a sincere statement. another lot of talk about the budget issue and no question that's going to probably get even tighter. so it will be more after limitation in funding. we did receive some calls during the cr period about what you were going to be able to do. i have this question, i hear some of you are not being able to invest in

technology. there are some positions that are open in other areas. examination and that kind of thing. would it make any sense, i know y'all have been really pushing out rules and regulations. and i know people have been concerned at the rapidity of that. would it make any sense for us to slow you guys down a little bit so that you have time to, both invest in technology and hire people and actually be slightly more thoughtful on the rule making? i'll ask that to chairman schapiro. >> i think as i said earlier, the real impacts of the continuing resolution on the sec are on frankly core mission. our ability to hire examiners. to travel for enforcement cases and most particularly, to build a technology we need to really do the job that's right in front of us at this moment, putting dodd-frank aside. if you think about back to may 6th and the flash crash and how long it took us after that to be able to generate the reports that

gave the public an understanding of what happened on that day, those largely because we lack the technology capability to take in the kind of data we needed to take in and analyze it in a reasonable period of time. so, for me, the budget impacts are really as much or more right now to core mission than they are to dodd-frank implementation. once the rules are in effect and we will be very careful with how we sequence and implement the actual rules. we will, as chairman gensler said we'll seek comment from the industry what is the right order? what do they need six months to be able to do because they have to build a system? what do we need time to do because we might build a system. that will require additional funding in order to both build the systems and bring in people needed to do hedge fund examinations for example, or examine swap dealers or major swarp participants or whatever other, but i think the getting the rules written it

is a stress for sure and it's a challenge and it is affecting all of our capacities to do other things. but i think the real crunch comes after the rules are in place and we actually have to operationalize them and we lack the resources to do that. >> thank you very much. chairman bernanke, i know that there are a lot of things that each of you sought and got and then there were some things you didn't ask for and got. i know one of the things you received was the interchange issue and i know you're being diplomatic but it seems to me it is an impossibility if a rate is set for larger institutions it is not going to impact the smaller institutions a it relates to interchange rules. i mean it is not, doesn't seem to me to be a possibility. i know again you doesn't didn't ask for this. it was an amendment that passed on the floor. i was over the other day with senator kirk and we were watching a fed auction take place at bureau of debt. you know, if you just looked at the cost of that transaction, the electronic

auction, itself, it is obviously very minimal. but there was a whole passel of folks paying attention and making sure that ethical guidelines were in place. i'm sure, i know these institutions banking institutions have those same things. so would you please -- the fairness of us price-setting at some rate that only is a transmission cost seems to me to be incredibly in error. we also are going to be forcing people into credit cards over time, i mean, people that don't have credit, are going to be forced into credit cards which is a debt instrument, not something that is coming out of their account. seems like to me the whole issue is very perverse and something that was very shortsighted on our part. sort of a populist move. i wonder if you would editorialize about that? >> i don't know if i can editorialize about it. i mean, as i said before it is true that the statute

requires us to look only at the incremental costs and not necessarily the full cost. and it will have various implications. one would be, as i mentioned before, probably that some costs on the banking side will be passed on to consumers or will affect product offerings and so on. on the other side, merchants will be paying less and, depending on the state of competition in the, that part of the market they may be passing those savings on to consumers. so there will be some transfers on both sides, and the issue really is what congress intended. what objects you had. again this process will certainly lead to lower interchange fees which will benefit some and impose costs on others. >> mr. chairman i know my time is up. and i thank you. put there is no question our smaller institutions will be impacted in a big way. i think we all know that. i hope we will endeavor somehow to fix that here in

congress. thank you and condition gratlations on chairing. -- congratulations. >> senator menendez. >> thank you, mr. chairman. congratulations for your ascension to the chairmanship and i look forward to working with you. since i have five minutes let me give succinct questions and answers. i marvel people who three years after our financial crisis still don't have the full regulation of the wall street and derivatives and other key issues i'm always asked by new jerseyians, why no one has gone to jail? i marvel now that i hear that your response to the question of the funding of your, your ability to pursue what congress passed and that the american people wanted to see is going to be sufficient to promote regulations but not

sufficient to enforce them. is that a fair statement of what you responded to the chairman? >> i think that we have a lot of responsibilities once the rules are written for examination and enforcement, registration, taking in massive amounts of data. particularly in the swaps area where we will not be able to rely on a self-regulatory organization. and it will be very difficult for to us do any of that without additional resources. so it is broader -- >> a cop on the beat without any bullets? >> well -- >> it is a concern that i have because, if we're going to promote regulations pursuant to the law, but not to be able to enforce them, then it is a hollow promise to the american people of what we said we were going to do so that they would never face the risk again of collectively assuming risk for the decisions of others. and so i appreciate your honest answer to that because i think that will dictate part of the debate as to how we go forward in

the budget process to at least, largely derive from the industry, have the resources so you can do the enforcement that the american people want to see. otherwise i wouldn't be surprised to send everybody home. >> i agree with that, senator. i was trying to say it is broader than just enforcement. it is market analysis and market surveillance. >> technology side, absolutely. i'm in agreement with you. secondly, i recently wrote to you, madam chair, about the cybersecurity and attacks that have taken place against hacking at nasdaq and what not. i hope you can give us some sense because obviously market integrity is important. variety of way, one of the ways we are sure that we are not having markets being affected by those who are hacking it. and i hope you could give us some sense of where you're headed in that regard. and let me get my, my third question out and you can answer to both of them. and that's, to both you,

chair lady schapiro and chairman gensler, with reference the title 7 of dodd-frank requires all swaps, whether cleared or uncleared are reported to a swap data repository. i like to know what agencies you're doing to assure that the information being reported to multiple repast tories is not so fragmented and ultimately allows you an accurate, complete view of the market activity? one of the provisions provisions of dodd-frank allows the cftc to designate one repository to allow electronic access to the commission for all swap data repository information and i wonder if you considered that? tell me what you're doing on cybersecurity. tell me what you're doing on that. >> certainly. i don't want to comment specific on the nasdaq matter which is obviously intensely under scrutiny by regulators broadly, but let me just say given the highly electronic nature of our

markets and they're highly fragmented in nature, financial institutions broadly and exchanges are, i think increasingly having to face cybersecurity threats. we worked very closely with the exchanges. we have something called the automated review program which our examiners evaluate with the exchanges the quality of their information security that's in place and what vulnerabilities they might have. we recently asked all of the exchanges to provide us with an audit of their information security policies, practices and systems so that we can have a baseline understanding of where all the many different markets are with respect to that. we're taking this extremely seriously. we're working closely with the fbi, secret service, department of justice, to make sure that we are pursuing any of these threats as aggressively as we can. i can tell you that exchanges are taking it extremely seriously as well. this is their franchise. with respect to the securities data, swap data

repast tories, we have asked questions and are proposing a release on swap data repast tories and obligations and core principles whether we should create some consolidated audit trail. to the extent multiple repast tories are developed we can repositoris. ultimately that should be part of the consolidated audit trail system we proposed last year and hope to make final later this year that would have all of the markets provide to a central repository all the transactional information in the life of an order from inception through execution. that would give us the ability to reconstruct trading in markets and look for violations of federal securities laws. >> with regard to data which is so critical to regulators to get an aggregate picture, congress did say we could have a direct electronic feed from the data repositories which we

appreciate. we put that in the proposed rules. we're looking for public comment. one of the challenges is aggregating if there is more than one data repository in an asset class, more than one for interest rate swaps, for instance. that is part of reason why the cftc we believe does need to be efficient and use technology, in the president's 2012 budget it actually recommends doubling technology so we can be a more efficient agency. then aggregate that data with those direct electronic feeds. >> thank you, mr. chairman. . . electronics. >> senator johanns. >> mr. chairman, thank you. chairman bernanke, let me start with you and i went to visit with you a little bit about the interchange rules that she put out. when you start out with an observation. i think you folks send

everybody. i think he stunned the retailers, the bangs. i don't think anyone ever expect to something this dramatic, district attorney and. do you agree with me that 80% of the transactions interchanged transactions are actually done >> is that an accurate statistic? i know it's very concentrated. >> obviously large national firms that account for a lot of the transactions, but i don't know the exact number. >> i think that's the best available information i can find, not only national firms or multinational players are some of the biggest economic players in the world. this suspect joe's hard -- this isn't joe's hardware somewhere in nebraska. doesn't it occur to you that really what we've done there is

we've taken money from this sector of the economy through congressional price fixing and directed you to transfer that money to this sector of the economy impacting the biggest players, really, in the world on this side of the equation. >> the first comment about draconian, we tried hard to follow the language of the statute which is pretty clear. don't get me wrong, i'm not beating up the messager. >> you're trying to do what we told you to do. not me, i voted against it, but -- and i wish more of my colleagues would have, but the end result of this is you're moving money from here to here, and it's the big players who will see the benefit of that,

would you agree with that? >> according to the fraction of the total debit transactions that they have. the question is to what extent, and i'm sure there will be to some extent savings passed on to customers which is part of the objective,. >> but there's the problem with price fixing. we can't guarantee that, can we? we can't guarantee that a single consumer will get any benefit from that legislation. >> i mean, we hope we do. you might be able to make an economic argument that they will, but the reality is we don't know, do we? >> no, senator, there's no guarantee. >> let me just go a step further because this just sounds to terrible to me. we're seeing commodity prices go up.

there's complex reasons for that, but, you know, good economists are now saying you're going to pay more at the grocery store for various products because the input costs are going up so dramatically. it's hard to argue against that at the moment. you wouldn't suggest that it would be good economic policy that we pass a law that the price of a porter house steak or the price of a gallon of milk can only go so high, would you? >> no. >> yeah. mr. gensler, let me go to you. we have an issue with the end user deal, and we all do. one of the challenges i have, and i'm guessing you have it too. how do we define end user? we have small community banks

out there. they want to protect themselves so they're in the derivatives market to protect themselves against the risks they are incurring. are they end users or are they financial institutions that should be regulated here? >> the statute says that they are, financial companies and most of them are not swap dealers. in fact, i'm not aware of any small community bank. i don't think any are swap dealers. they wouldn't be regulated that way. the question is whether they are brought into the clearinghouse, and congress did give us authority to exempt them from that. we have asked the public a series of questions to help us with that. we're working with fellow regulators here to help us with

that, not just from the community bank, but farm credit institutions and national credit unions as well. >> uh-huh. mr. chairman, thank you. >> senator reid. >> thank you very much, mr. chairman and ladies and gentlemen. there's been a great deal of work over the last several months of trying to sort out the foreclosure issues. the state attorney generals, everyone's been engaged. it seems in reports that with respect to robo signings, liabilities have been established, but penalties have not. is that the crux of the bay at the moment? >> i would defer you to the comptroller on this. they've been leading most of this. we are not the primary regulator of the large servicers. i think the way i envision this

unfolding and most have been working for a global settlement that would include a robust enforcement actions as well as other appropriate media measures as well as streamline modifications to help borrowers get a fair shot at a mortgage and help clear the market because there's such an increasing backlog here. i hope those are key elements of any final package. >> is this an issue of, you know, what's holding up this settlement? the attorney general miller was here months ago talking about how they are working on the costs, and so can you elaborate briefly? >> well, we have been at work actually since the last time we appeared here in the committee on a series of examinations, we, the fed, the ots, and with fdic participating to some extent in the examines to identify the problems and develop both the

facts on the ground, and then also to develop what the appropriate remedies were to that, and those remedies include both remedial actions that the servicers will have to fix what's broken. there's clearly things broke as i mentioned in my testimony. there's also the penalty phase of the process. we have finished the work. we are kind of getting to the point where we will be delivering documents to the banks and talking about civil money penalties, but the comprehensive settlement that we're talking about is one that would also involve violations that are under the purview of other agencies. the department of justice, fdc, the state attorney's general, and our effort has been to achieve a kind of comprehensive settlement that will kind of put the problem to bed and let us get on with remediation, but the

specific supervisory piece is one piece of a broader effort. >> the "wall street "wall street journal" reported that you are mentioning rather modest fines in the penalty phase, and, again, some from borrowing this revolution in the newspaper, it seems like there was some intentional activity and also just, in fact, i think there's a penalty phase, some ignition to something more of just negligence. are you measuring these fines in terms of the overall impact on people who have lost their homes through this process in terms of the benefits the banks are deriving from at least prior to detection this type of operation, and is that factored

into your consideration? >> although one is amazed what the "wall street journal" finds out, in this case, we have not made decisions about the level of penalties. that is the next phase to come. we will be discussing that with the federal reserve, and there will be penalties for companies at the servicer levels. that is a process that is still underway, but in terms of the penalties involved, that includes other things than just those we are looking at. >> i think you have to move with some expedition because, again, the last time we were here visiting, we talked without the pro-- we talked about the progress we made. you have to come to a conclusion very quickly in terms of trying to settle the market and move forward. just a quick question because i've only got a few seconds left, mr. chairman. dodd-frank creates position of a vice chairman of supervision or

chairwoman of supervision of the fed. how close are we to putting that into place, and who is taking the lead on what you now have as a complicated vast supervisory responsibilities? >> well, the administration has not yet nominated anyone. we are still nowhere in that respect, but headed the bank supervision area and testified before the committee a number of times is taking the lead on the supervisory and rule writing issues. >> thank you. thank you, mr. chairman. >> welcome to the committee senator kirk. >> thank you, thank you, mr. chairman, and i look forward to working with you on the subcommittee. i'm an admirer of yours. i just finished "lord of

finance" which is a real story of what human bankers go through. questions on titles i and vii that credits the systemic risk, regulatory gap, and a key phrase regardless of legal chart. it's a broad authority to examine risk. you established this office of financial security to look at any potential dangers out there. would you be able to look at u.s. states as a sort of systemic risk? >> our office of financial stability is just trying to look at different risks that mite emerge. they don't have examination authority, for example. the risks rising from the states or federal market is something to pay attention to, but i think the appropriate venue for that would be the fsoc, the counsel where we discuss mutually any

complications or ramifications of developments there. >> just note that illinois has the worst state funded pension in the country at 54%, but a new analysis could mean it's as low as 38%. the "chicago tribune" reported the deficit, and we have concerns about california. i would just note that a young state representative from new salem, wisconsin wrestled with this in 1860. they advised secretary webster not to guarantee state debt to preserve the full credit of the united states, so it would appear this could be a source of systemic risk and something that's fully within nor capability to examine. one other question, the "wall street journal" reported two days ago our larger foreign creditor, china, sold $11.2 billion in treasuries in

november and another $4 billion in december, $15.2 billion unwinding with a 1.7% reduction in total holdings. do you see this movement by america's largest creditor abroad as a source of systemic risk? >> the international imbalances, the current account imbalances could, in principle, be a systemic risk, and i think they contributed to the crisis. that being said, i wouldn't make much of those data. first of all, they are actually incomplete data, and secondly, in the short run, the main determinant of chinese dollars is they need to keep it pegged at the level they choose. they take whatever they need to take in order to keep their currency at the desired level. >> thank you, mr. chairman. i reached out to chairman warner on the subcommittee looking at

continued dangers in spain and portugal and the accuracy and size of the irs which is something to work on. i yield back. >> nart akaka. >> thank you very much, mr. chairman, and congratulations on being chairman. good morning to the witnesses. you worked tirelessly on implementing this law. your efforts have, in large part, been prompt, thorough, and transparent. we do appreciate that. before i begin, i'd like to thank each of you for your leadership and recognize your staffs for the extraordinary efforts. chairman schapiro, i was pleased with the commission's staff

study on broker dealers and investment advisers. i'm also encouraged by its recommendation in favor of the uniform few dish yarr -- fiduciary standard. i know this is an area you're interested in, so i have two questions for you. first is how can confusion over varying obligations of financial professionals harm investors taking investment advice. second is how can a uniform few dish yarr standard reduce investor's cost and improve portfolio performances? >> thank you, senator, and i know you share my great interest in financial literacy and financial protection. i appreciate that support.

what we learned is we commissioned a study several years ago looking at the issue of whether investors under the relationship that they had with a broker versus a relationship with an investment adviser and found there was significant confusion and much of the work that was done by rand corporation. the issue goes to whether the interest of the customer must be put ahead of the interest of the professional. the customer must come first or whether the duty is current under the broker dealer regime duty to only provide suitable recommendations understanding the net worth, the investment goals, risk, power, and so forth. it's a suitability standard of care under broker dealers, a fiduciary duty to put investors first under the regime. we felt it's not fair to leave customers to guess which standard of care they were

receiving when they were dealing with a professional. it's just not something transparent to investors, so the staff study recommends as the dodd-frank act authorized the commission to study, that a uniform few dish yarr standard of care be applied across professionals when giving advise to retail investors about securities. i think the standard will alleviate confusion because it's becoming uniform. while it's hard to quantify, the staff made attempts to do that in that context. i think the benefits to investors of having their interests put first are also hard to quantify, but will be very real over time, and so our next stage is for the commission to consider the report carefully and make a determination about whether to move forward with specific rules that would create this fiduciary standard of

care. >> chairman schapiro, should the dodd-frank act, we provided a commission with authority to require meaningful disclosures prior to the purchase of an investment product of services, more effective and timely disclosures can greatly improve and invest the financial decision making. what is the commission's plan to implement this specific provision and promote more responsible investor behavior in general? >> well, this is an area of long time interest to me that investors get decision use. accessible information at the right moment in making a decision on whether or not to invest. what we often see is they get information after they make the decision to invest.

it's my hope that we could when our challenger is more open post getting through many of the dodd-frank rule writing precisions turn our attention back to a point of sale disclosure enfir ri and see if the commission can do something to help investors get useful information and not pages and pages of boiler play and get it at the time to help them make the right decision. it's my hope that some point later this year, we can turn our attention back to those issues. >> thank you very much for your responses. mr. chairman. >> welcome to the committee, senator muran. >> thank you. i want to be a good member of the committee, and this is my first hearing. i assume that's done by speaking under five minutes. [laughter] i read the audience.

i want to talk just about a broad issue and then a very specific one. we had lots of communications with small community banks, credit unions, small financial institutions. they dominate the economy in kansas and communities across our state, and in all the response to questions given in your testimony and you indicate an effort to treat differently, recognize the difference between the community banks. i would assume that you would agree they are not a cause of systemic risk to our economy, and yet, the constant conversation with community bankers, with credit unions is very much about the regulations that are coming our way. this conversation predates dodd-frank, but it is exacerbated by dodd-frank. when the regulators say we understand the problem, we treat them differently, there's not a recognition on the part of

bankers that that's the case. my question or general sense is bankers are just complaining types who have it wrong, or are regulators wrong in taking care of this issue. we are not overly regular lating community banks? mr. shelby in his question about the loss of small banks, the immediate response by you was about the number of closures. that's a component, i suppose, of losing small banks, but what i noticed in our economy is it's happening by consolidation. there are, perhaps, economic reasons that consolidation should occur, but my impression is it's occurring because of the regulatory costs. in fact, i had a conversation with one of our large regional bankers who tells me for the first time in their bank's history, they are receiving calls from small community bankers saying are you interested in buying our bank? we can no longer afford the regulations.

it's no longer fun to be a banker, and the cost of being a small community bank exceeds our ability to generate returns on investment. while we talk about treating them differently, the evidence doesn't seem to be there. what is missing? what needs to take place? i think there's great value in community banks making decision, and i would say i'm not here on behalf of bankers, but advocating on behalf of their customers, their clients who in the state like kansas or south dakota, it is a place in which our farmers, ranchers, small businessmen and women have the opportunity to expand, and there's a tremendous consequence to our economy, including job creation in the failure of our banks being comfortable in making loans, and finally, in that regard, particularly real estate loans, there's been a half dozen bankers saying we no

longer make mortgage loans. you can't borrow money for a house because of all the regulations and the fear of the next examination that we missed something that will get us written up. making a real estate loan is no longer worth it. that's a terrible circumstance in small town kansas and america in which the local bank is fearful of making a real estate loan or a mortgage on a house. your response? >> well, i would say a couple of things. i think you're right. there's been consolidation. there's still over 7,000 community banks out there, but there is consolidation. that is a by product of a financial crisis. the shock absorbs the leak, and that's what's happening here. we are very concerned about making sure we have a vibrant community banking sector. it's our job to serve community banks, serve the public, but i think the public interest is served by having diversity in

their banking institutions, and i said this repeateddedly, throughout the crisis, the community banks were doing a better job of lending than the bigger institutions. that's a fact. we have proactively tried to protect community banks in the brunt of the dodd-frank requirements that are targeted at larger institutions. our change in the assessment base is reduced by 30% in aggregates and deposit insurance. they are exempt from the compensation rules that we just put out. we have tried to insulate them from the securitizations as you'll see when those come out. i think we have acted on a number of fronts to try to insulate and strengthen their competitive position. as i said, ending too big to fail will increase funding costs for many large institutions and provide better competitiveness.

the issue is a very real one. we are very concerned. we'll be writing a comment letter. the likelihood of this hurting community banks and for them to increase the fees they have on accounts is greater than any tiny benefit that retail customers get that savings to be passed along. i think that's just obvious to me. we are very much hopeful. i don't know if this could be dealt with by congress, but what we're planning to do is work in the regulatory framework to see if there's greater discretion to provide community banks. i do think this is a real issue and could have an adverse impact in a way was unintended by congressmen in dodd-frank. >> the would like to follow up with you ms. schapiro about advisers in making advice to

government. there's a rule from january 6 that's of great concern, and i'll be in your hometown. >> thank you, mr. chairman. i'll make time to see you as soon as possible. >> i too want to congratlate you on your chairmanship. i appreciate your efforts in this difficult time. before i get to my questions on debit interchange rules, i do want to say the issues of regulation that senator moran brought up is a big one. i brought it up with members of this panel at least on four different occasions, and the inconsistencies with regulation and the time on my watch of community banks is a big concern to me. i don't know that consolidation in our financial system is a positive thing overall especially for rural america. that aside, i want to talk about the debit interchange rules, and

chairman, it's an issue i'm very concerned about, and i was wondering is there any way to actually ensure community banks and credit unions are exempted in practice from this provision? >> i'm not -- i hesitate to get a final answer on that. >> in your opinion. >> i think it may not be the case that there'll be practice exempt, but i don't know for sure. of course, one way to address it is if congress wants to is require the networks to differentiate. >> let's talk about that for a second. with the routeing provisions in this bill, first of all, it's illegal to turn down a credit card; correct? >> i don't think so. >> that's not illegal? okay.

if you go into a retilerrer and you have a -- retailer and you have a card and they say we don't want that, we want a different one. that's okay? >> you certainly have the right to accept different types of visa, american express, and so on. >> yeah, yeah, but in this particular case is one that has a bigger fee tied to it. >> the restrictions there i think are more a function of requirements imposed by the visa company for example opposed to legal restrictions. >> yeah, but if we have a two tiered system, the fees on credit unions are higher than those of the big banks; react? >> correct. >> what stops a retailer from saying i want to use one the bigger ones.

what stops them from doing that? anything? >> not now. unless the, again, unless the company, the visa, requires acceptance on those cards, which in many cases they do. >> okay, okay, so in practice i can't imagine visa is out there checking out -- if it's a visa card, it's a visa card. they'll do their thing anyway. it seems there will be undue harm done to smaller banks when the retailer looks at this saying i'm going with the smaller interchange possible because it helps the bottom line. do you see that being that way? >> as i mentioned earlier, one is exemptions might turn down small bank cards and the other is networks might not find it economical to have a two-tiered system. >> from your point of view, how

do you think it's going to impact the institutions that you supervise? >> well, i think it remains to be seen whether they can be protected with this. i'm skeptical of all the reasons chairman beer nan ky -- bernanke indicated. if they are going to reduce the income for debit cards, they'll have to make that up somewhere by raising the fees somewhere on transaction accounts. it could have the unintended consequence of pushing them into prepaid cards opposed to debit cards, and prepads cards don't have the protection of debit cards. it's more difficult to deposit insurance. you have to be careful on structuring thosing thes. that would not be helpful for consumers and that might be an unintended consequence. this needs to be fixed and

hopefully through the regulatory authority. >> do you think it would be beneficial to delay this precision, to take a look at unintended consequences? >> yeah, you know, look, there's legitimate policies on both sides of this. the policy ramifications is on who will pay more or less. it wasn't dealt with. >> thank you for your opinion. i wish we had another two or three hours just for my questions. thank you, mr. chairman. >> senator -- [inaudible] welcome to the committee. >> thank you. i'm dlighted to be on the -- delighted to be on the committee that i watched on television from my office. i'm glad to be back in the room, and thank you all for your patience and working with us today. let me ask chairman sha

schapiro, dodd-frank is a familiar term, less familiar is frank and wicker, but it was an amendment that al franken and i authored which passed actually in the senate by a vote of 60-35 with regard to the rating agencies. now, as you know, there's many people including many who feel that the rating agencies were one of the principle reasons that we encountered the melt down we did in 2008. our amendment would have required the securetized product to be signed by prorating by the fcc rather than having the companies themselves shop around for their favorite rating

agency. when we got to conference, this frng and wicker language was dropped, but in the final version, the law does require the fcc to implement a study on credit rating agencies and gives the fcc the authority to implement frank and wicker when it is deemed to be beneficial to the public's interest, so how is that study coming, and what are your thoughts on this? >> that's right, senator. we have many studies on rating agencies, but this certainly an important one. we should be going out shortly with a request for comments from the public on ways to alternative ways to both structure a system for an assignment of ratings swell the specifics of having the fcc do it or the regulatory organization do it or having

another entity do it. it has a two year time deadline, i believe, which is why i hasn't gotten it out the door yet in terms of public comment, but the staff has worked on the notice, and hopefully it will go very soon. that will kick off the study, and then we'll be able with the comments be able to put together the different ideas. >> do you share my conclusion that defective and improper ratings were a large part of the problem in 2007 and 2008? >> i very much share your perspective and i've spoken a lot over the last two years of rating agencies relating to the financial crisis. the fcc gets larger responsibility under dodd-frank with respect to rules and examinations of credit agencies incoming a report to congress on the annual examination findings and other issues, and we are

well underway with all of those exemptions. >> under the law now, a company wishing to be rated still has completely free reign to shop around and pick the rating agency of their choice? >> we are trying to discourage rating shopping which would require disclosure that you did shop around for ratings and you were ultimately selective of the agency that gave you the highest rating in the preliminary rating. we've done disclose rules in that regard and others in the predominant model in the rating agencies right now. >> i hope you will be atentative to this issue. i have a question about qualified residential mortgages, and what the up intended

consequences of the qrm's might be in actually forcing or directing housing finance towards the government instead of towards the private sector. you know they dominate housing finance in the country, and i think it's the stated position of the administration and my position we want private sector capital to return to the market to replace taxpayer guaranteed morning -- mortgages. federal mortgages are exempt from the risk retention requirements, the 5% risk retention requirement, because they are considered by definition qualified residential

mortgages. might this cause mortgages to grow and drive out the private sector and first time home buyer mortgages and do -- but what steps might we take to ensure that the qrm rules do not artificially push even more borrowers into taxpayer guarantee mortgages rather than the private market? >> part of the proposal made with the fha would be a smaller part of the housing market restricted to the appropriate group of people who are qualifying for that type of morning. those mortgages are, of course, explicitly government guaranteed and the securitization requirement is not necessarily relevant. the main purpose is just to provide some standardized underwriting criteria that are

sufficiently strong that the securitytizer can be exempt from the retention requirement, but to my mind, they are entirely consistent with a private market in securitization and a housing market where the government's role is quite limited and if it's other than through fha and other special programs, it becomes relevant during periods of crisis. >> well, i know we're out of time, but have you received comments or has the fed received comments from americans expressing the view that this rule and the exemption of federal housing administration mortgages might drive more and more mortgages to the public rather than the private market?

>> we haven't issued a request yet for comments; right? yeah, and we will, of course, do that, and then we'll get the comments, but we haven't got to that stage yet. >> thank you. >> last but not least, senator isakson. >> thank you for including me and for all that testified. thank you for your time. i will be brief. this questions really applies to all of you because you have input on the mortgage rule that's being written, and senator wickers' comments could not be more appropriate. you say we will continue to work to move the rules forward without delay. we are determined to get them right the first time. it is to that subject i want to speak. the qrm amendment which senator hagueen, myself, and senator

landrieu wrote. on down payment, it did not specify an amount, but any amount of loan above 80% would have to be privately insured. i have seen a letter written to y'all by a large institution recommending a down payment requirement for 30%. that would put a handful of people in control of the entire mortgage market privately and force more people into fha than are already there. the markets from the loans of post world war ii until the beginning of the collapse which was lending practices in 2000 carried mortgage insurance on 90-% 95% loans that performed equally as well as larger down payment loans, 95% of whom don't have 30% to put down.

my request is, careful when you address this subject because you could protract what's already a protracted section. with that said, i just hope that you will follow the guidelines and the parameters that were issued in qrm amendment on the down payment subject and the private mortgage insurance as well. i hope you will be willing to do that. >> well, senator, i do think it's important to emphasize the qrm standards are not the standards for all mortgages. they don't apply to those who will have the risk retention. i think the intention of the agencies is that there will be multiple funding mechanisms for mortgages and for portfolio lenders, those who retain all the risk as well as those who have the 5% risk retention because there is skin in the game.

there's natural economic up sentives and you can provide more flexibility. the highers are trying to compensate for the skin in the game by the issuer. i think -- i'll be honest with you, i talked with my staff about this a lot. we are open, want comment on this question, but we are unable to document that pmi lower defated risk. we just can't find it. if you have additional information, we want to see it. this is a framework we'll trying to come up with. i think we're consistent with dodd-frank. we will remain open minded i commit to you. we do not anticipate the standards to be the standards for all mortgages and that, again, this is just to compensate for the lack of economic incentive because

there's skin in the game. for those who want to retain the 5%, they will have much more flexibility. >> first of all, i'll give you the historical data. i'm old enough to have sold real estate in 62 and then in 72 when 5% loans came into effect. there are those with larger down payments if they are well underwrin, the whole intent of qrm. the other is qrm's requirement is so restrictive that it takes out much of the marketplace, then there's a small number of people controlling conventional lending to everybody else because there's risk retention lenders and they can price it and control it which will raise the potential cost of the loans to the borrowers somewhat like a, b, c, and d credits did is

push the rates up to secure a rate and then underwrote poorly on the loans. that's an important decision you'll make. i i'll get the data to you this afternoon in fact. i've been working on. thank you, mr. chairman, and thank you for your time. >> thank you, senator isakson. we have a tough road ahead of us, the committee, but at least we have a stronger financial system because of dodd-frank. over the next weeks and months, we'll continue to see the implementation of dodd-frank. i look forward to hearing more from our colleagues and the regulators. i'm sure that we will continue to hear about numerous successes and challenges, and it is important for us to conduct oversight. thanks again to the colleagues and our panelists for being here

today. this hearing is adjourned. [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations]

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[inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] >> we are learning this afternoon that senator john thune is saying he will not run for president next year. the south dakota republican says he'll remain in the u.s. senate serving a second term. he says it's the best place to fight for america's future. congresswoman emerson announced she's not seeking the republican nomination for the u.s. senate in 2012 says she can best serve missouri and her district by

maintaining her senior position in the house. she is serving her 8th term. coming up here on c-span, live at 3 eastern with a discussion on retirement and the future of social security hosted by the woodrow wilson international center. the prime minister is stepping down because the country's economic problems. the leaders will meet in the final debate this afternoon in dublin. you can see coverage at 4:30 eastern on c-span.

>> top republican on the senate budget committee give his assessment of the financial condition. it's an event hosted by "atlantic" magazine. this is about 15 minutes. >> back here in the studio and seated next to me is the senior smart from the state of utah. he is senator orrin hatch, a senator who spent, is it 37 years? >> 34 years. >> 34 years, it's nice to have you here. >> i heard they wanted someone with charm, wits, and charisma, so i'm happy to fill in until then. [laughter] >> we're here to talk about jobs the future. what do you see right now? you represent the state of utah, but you've been in washington

for over three decades. as you look out ahead, what do you think the outlook is for young people watching? >> well, if they go to school, graduate school, and this splent opportunities to get good jobs. those who don't finish high school will drag behind and have difficult times in life. it pays to have an education, go to high school and pay attention to those things, but we're going to have to do a lot of things to recess tait our country -- resuscitate our country because we're in danger of losing it. >> we're in danger of losing? >> that losing that position. we're now spending up to 69% of gdp. some say the gross national debt to gdp is up to 90%. if it is, we're in real trouble, but i think it's closer to 62%-69%. we have got to get more on

creating businesses and opportunities in this country including from what the president suggested, cutting corporate tax rates in a way that doesn't harm the growth of the companies, the small business companies who are 70% of the jobs are created to basically helping our young people to find jobs and get educated so they can get jobs. >> what's the government's role in doing that? >> i think the government's best role to keep their hands off and keep taxes low, try to get spending under control. we're spending 25% of gdp right now. we haven't spent that much since world war ii. right now, right now, our revenues are something like, you know, about 14.8%. we're practically on revenue shares today around 18% or a

little higher from time to time. when you spend 25% above your total expenditures and we have 14.8% coming in, you can see that's putting the country in great jeopardy. we also have huge national debts that we've got to bring down, and the only way to do that is to be competitive, and being competitive means giving business an opportunity to grow, businesses, and keeping our high-tech world going. i'm chairman of the republican senator isakson tore yal high-tech task force, and our high-tech world is second to none in the world, but we're in danger of losing that when you consider how competitive india's become, china's become, and that's just two countries, not all of them. >> we now know, senator, when people analyze what happened to job growth or the lack of it over the last decade and not just the last year or two, and we now understand that job growth was starting to slow in

the decade of 2000-2010 that we weren't seeing in this country the kind of automatic growth that we had seen before, that those ingredients were already there, and so, i guess my question is what are the fundamentals in our economy that need to shift beyond just tax changes? >> well, this country is the greatest country in the world still, and it would be catastrophically stupid for us to throw it down the drain, and we can do it by too much government, too many restrictions and controls and not giving incentives to businesses. deferral means that we are going to tax the overseas profits of our large corporations. if we do, they're uncompetitive because other countries don't do

that, so we were able to -- our current laws still are not good in that particular area. are we literally going to -- >> that would be a tax break, wouldn't it? >> well, it's a tax break if they don't tax overseas profits. now, if they bring them back to this country, they detax them. even though there's a lot of businesses overseas by necessity, that still means a lot of jobs here as long as the company is moving ahead, that company will employee a lot of people. >> growing jobs overseas, but not as many here. >> that's true and not true. a lot of the companies -- for instance, in the 1980s of the 50 largest multinational corporation the in the world, we had 37 based in the united states. today because of poor tax policies and because some of our other government approaches to everything, we now have 16. you know, that's pathetic when you think about it. this is the most innovative

country in the world. just take the high-tech world. who can compare with what we've done considering microsoft and intel. i just chatted with the founder of facebook yesterday. he's a young man now worth $9 billion because he had the incentives to do the things he did with facebook. we want to edge courage that. -- encourage that. we can overtax and overregulate to the point where businesses don't feel comfortable here and then go overseas. we're not balancing our budget. we're spending 25% of gdp. >> you know, so the administration, the president's thinking we just heard from secretary geithner that yes, there's a deficit, and yes, it needs to be addressed, you we have to worry about the jobs of the future. to do that, we need to invest in

education, in medical research, in infrastructure, some of the things that are going to make it possible for jobs to be created down the line. you say that's not as important as getting the debt? >> i'm not saying that at all. that is important. we do invest a lot of money. do we do it efficiently? do we do it well? >> do we do it in ways that encourage small businesses where 70% of jobs are created? the president said he's going to reduce corporate tax rates. not many pay the full 35% because we have tax expenditures where they get certain breaks in certain areas, and they want to do away with the tax expenditures. well, i think we can reduce the rates. the g-7, largest countries in the world, most productive, they are about 28% tax rate. we're at 35%. the g20 is 18.

we're at 25. we need to do things, everything from expanding h1b visas, visas -- >> cutting the corporate tax rate to what? >>25% with reasonable tax expenditures. along with senator baucus, we're the authors of the research and development tax credit keeping our people competitive. a lot of other countries have those credits. we let our blanch for a year. we should make a permanent so companies can plan and count on it. >> we have a question from the audience. before that, do you know what the effect on the deficit would be to institute those tax cuts? >> well, the only way to get out of the deficit is to strengthen business and strengthen opportunities and strengthen success in this country. if we do that, we'll have enough

revenues to take care of the country, and we have to quit spending. you spend 25% of gdp, that is really off the charts, and that's really costing us every step of the way, and we got to bring spending down. the federal government is not the answer to everything, and unfortunately, over the last 30 years, it's the last answer to everything. >> yes, sir. >> we'll leave the remarks at this point to see the rest of this and you can see the rest of this event on the website. we're going live to washington on the future of social security and how it impacts retirement plans. you'll hear from the social security administration and one the program's current public trustees. this is live coverage on c-span2. it's just starting. >> the trust fund will run out of money in blank, fill in what you think is the appropriate year.

are those projections accurate? can they support retirees for generations to come? should they expect to rely on social security? what reforms, if any, are needed? as a historian, i can't help thinking the impact of social security on the american society. before the social security was passed in 1935 and really began to take hold of the decades that followed, for millions of americans it meant poverty. ..

from the one that prevailed before the 1930s. to be sure congress escape to amend the social security act, multiple times the additional passage, but its existence has never been called into question. however we some in congress and beyond a calling for social security to be put on the table along with other entitlements. and they shipped along with the decline is resulting from the economic downturn is having a dramatic impact on the way that americans are currently thinking about retirement. social security really in danger? if so, what if anything can be done to fix that? i'm going to identify with our panel race country briefly gives you a blogger bios in front of you. and then we're going to proceed in alphabetical order.

it is by happenstance that mitchell orenstein will collapse after other speakers at a chance to give their perspective on the fashion of social security and. so started for my left, we have andrew biggs from the american enterprise institute, charles blaha's and member of the social security -- >> on the public trustee. >> we have ross clahous with the economic policy institute, heidi hartmann. barbara eisenbrey and finally michel orenstein, professor at the school for advanced international studies at johns hopkins university. they said, all of these panelists are experts in one way or another on different aspects of social security, so we are very fortunate to have them with us. address each of them to limit

your remarks to about 12 minutes so we'll have plenty of time for q&a and discussion afterwards. so mr. biggs, the floor is yours. >> thank you very much and thanks to all of you for coming. i really appreciate the opportunity to speak today. it's an important and timely issue. i'm necessarily going to abstract the technicalities of social security. usually it over with with numbers and formulas. it will also depend on those things, but i want to talk to the big pitcher qualitative sense of what we think about social security and where the program may go in the future. i think i'll start with the basic experiment. what was social security look like if we were designing it today from scratch? this goes back to the question of the management expert peter drucker asked. would we do what we're doing if we were currently doing it. i think sometimes when i talk of

social security funds, the technical staff get to the look way back and see what you want the program to do? the responses we can't design a program from scratch. we are to have the system. but most reformed people talk about wouldn't it be implemented for decades to come. that means for people who are you today, who have entered the workforce, essentially we can define whatever system for them we want. and the question is, how do we transition to that to some? the first question i'd ask is why do we have the social security program? what we want the system to do? you answer those questions can social security reform becomes easier to manage. the first half of the social security program both your and the u.s. and around the world is to force people to save. if you require people to save, a good number of people would fail to do it. they wouldn't be looking ahead. they would end up in poverty in retirement and depend on other people for assistance. requiring everyone to save each

month helps not just the people themselves, but also helps the taxpayer that might otherwise have to bail them out. the second task is to redistribute money to low earners, the disabled and the survivors. these are people who even if they stayed responsibly every month wouldn't have enough money to provide for themselves at a decent standard of living in retirement. the third path of the social security program is to help people protect against outliving assets. even if he survived a 65 come your life expectancy is around each 83, but a lot of people will live significantly longer than that and it's hard to define and protect yourself against that risk. social security pays benefits out of sununu would be the last as long as you live. it provides insurance protection against ending up in poverty when you're 90 or 95 years old and don't have the option of returning to the workforce. having answered that question, i ask a second set and never said

we think about the social security program in light of what we know about our aging population? queen of the population is getting older. more retirees, fewer workers. what do we want to do in that circumstance? what i would outline an engaging population you essentially want to encourage people to do three things. work more, which means incur greater laborforce competition, save more machines were saving for individuals to prepare for more savings to both capital and the economy to make them more productive. third, you want people to retire later. that delay is that reduces the effect of the population. so if we've heard all these things, helps smaller populations of workers become more live to support larger populations and retirees in the future. and i think you'll hear some folks think we should fix social security's problem. raising taxes rather than

reducing benefits. the maniac here, how increasing taxes affect these three goals for addressing population aging? welcome the raise social security taxes and people will work less. a higher tax on the were reports to work in the lower report to work means less work. likewise, people tend to think less taxes. let's take him to put in the retirement account some individuals would almost surely reduce the amount they save him through the do intend retire earlier. if you raise social security taxes, the after-tax replacement rate, meaning the ratio of the social security benefits to your after-tax earnings will increase. that will encourage people to claim retirement benefits earlier rather than later. so i think that approach tends not to work with these goals that i think are pretty reasonable when we look at how to address an aging population. given that, what would i propose? the first thing is if you want to require people to save, i say just require people to save.

back in the 1930s, we didn't have mutual funds or the internet or anything like that, so people can be effectively on own. today we can simply sign everybody up for a 401(k) or an ira account. if you have to contribute 2.5% earnings to a 401(k), matched by their employer, that would be 5% more set aside for retirement. second, i'd have a flat benefit -- basic nsa to protect everybody against poverty. he would approach everyone regardless of earnings and this would be designed to be a flat protection against poverty in old age. today we have a 15% to seniors in poverty. we could erase poverty in old age for half was social security currently spends. we take the poverty level benefit to my feet hundred $50 a month and give that to everybody at retirement. the idea here is a combination of the poverty level benefit in

mandatory individual savings account would roughly equal the generosity of the progress country progressive yet the program. third time that we would like to hope protect against running out of assets at retirement by requiring to annuitize part of their savings account. when you get your account to convert at least part of it to annuity company don't run out of money in old age. the idea there is your replicating roughly the basic action that social security gives you, but you're doing it in a way that has a much stronger safety net for low-income people because it's saving space will have better incentives, be able to participate in the workforce, the better for the economy will provide many of the same protections that are consistent with what we think about retirement in the 2050s rather than the 1950s. so i guess to sum up, i would say that social security is not the biggest problem for the budget. it's not the biggest challenge, but it's the challenge we know how to fix today.

we know the pros and cons of the different approaches and we just have to come to some sort of agreement on what to do about them. something like medicare by contrast we don't even know how to fix the program. if you look at the recent health care debate, there is disagreement even today on whether the health care reform bill will greatly increase such a deficit in the future or greatly reduced them. we just don't understand the health care issue nearly as well as we understand social security, but solving social security today gives both the americans and financial markets confident that the government is capable of getting on top of the long-term. we are in a recession like we are today, increase content is a good way to get you out of it. thank you very much. >> thank you very much. [applause] >> i need somebody felt that this. >> okay, richard. >> is richard here? i probably could figure this out, but i miss teen wasting everyone's time.

[inaudible] >> all right. great. okay, i'm going to do something -- first of all, me start by thanking the wilson center. i haven't been back here since i was in college. it's great to be back here and it's a wonderful place to work, absolutely marvelous people, 19 look environment. i wasn't actively working on social security when i was here. i was working on patients and it's hard to write about employer-provided prevention in which you have a good place to concentrate heavily and not be distracted by anything more interesting than pension, which is pretty much everything in the world. so i really appreciated the environment is provided here and in a big fan of the wilson

center. i'm going to do something that's pretty out of character for me here. those of you who know me -- some of some of you in the panel know me, some of you in the audience know that i have a pension for arriving at presentations like this with long powerpoint presentations with graphs, charts, sides and information that is more than anyone could possibly absorb. so i figured i needed to change course and do something a little bit different. so risking going too far. i just decide what are the main points i want people to take away from a presentation? am going to write those points down. if you want to chat during the question. about my substantiation, i am happy to elaborate. i'll elaborate turn their prepared remarks, but i really wanted my limited time to focus you want certain bottom-line message is about where we are in social security policy. the first point i would make is that performing social security is not an option.

it is something we have to do. it's not something we can decide, well, we should change social security or maybe we shouldn't. it's not something we have the liberty of deciding if we'll do what they appear the program faces a substantial imbalance between what you are promising beneficiaries to pay and the resources that will have on hand to pay those benefit promises. one way or the other, that very substantial imbalance has to be resolved. that's not a myth. it has to be resolved. the government cannot send out the checks without collect and resources for deposits on people's e-mail boxes or whatever. so we're not talking about whether to do with social security, we're talking about how scared we can either plan for it and do it in a way that we decide well in advance and most equitable, fair, gradual way of dealing with it or we can just let things happen as they would have been under the no action scenario, which would be the most chaotic, unfair

possible outcome. it's not a question of whether something will change. something has to change simply because we've been in a very substantial imbalance and it has to be dealt with and will be resolved one way or the other, would we plan for it or not. the second point i make this blog we put off dealing with it, the more disruptive changes will eventually be. this has become something of a cliché. they always make this point of making -- it starts to balance off people's goals and they stop internalizing what that really means. but this is not just do not start talking. this is a real consequence and it's going to have a very real impact upon real individuals who need to wrap our minds around the fact that the longer we put off action, the poor many classes of people are going to be in will be responsible for that if we don't act. let me just give you sort of the extreme scenario. we do absolutely nothing until 2037.

if we do nothing until 2037 commute and if it's cut across the board. i would caution you to notice that's not just affecting people retiring in 2037. that's everyone who's on the role, including a few people who are collecting benefits today. if anonymous benefits to collect benefits in 2037, they would get a very sharp, harsh reduction of 22% of their benefits. now by a bipartisan consensus there is a general agreement that we shouldn't cut benefits of the 95-year-old widowed at 22% when she's depending on it, which raises the question, what if we try to shield people already in retirement from the 22% reduction? suppose we implemented this bipartisan consensus that shield people from a change. how much would the benefit reduction has to be done? it turns out you can cut the entirety of benefits to the new retiree class of 2037 and not seven and not appeal to close

the and you realize these very extreme outcomes that would take place in 2037 are all unacceptable and intolerable to start work into the problem backwards. well, how bad is that if we act in 2036? pretty darn bad. 2035, 2034. you realize that her window for having a reasonably fair, equitable solution of problems is closing fast if we don't act within the next two years commercial because of demographic, largely because the dollar took a benefit for people in retirement, we lose our opportunity to have a tolerably fair outcome in resolving the short haul and reducing the chances to get bipartisan agreement and just how to do it. a very important point to something i think a lot of people have exactly backwards, you often hear people saying well, i'm worried about legislation to do was social security finances. i don't want reform because i don't want there to be benefit

cuts. that's exactly backwards. if we reform the system today. in theory, i'm not saying we should do it this way, but in theory you could reform the system so you didn't raise taxes, didn't have benefit in future classes that retirees would give benefit that are higher in per capita terms. i think a real false sense where you have benefit cuts relevant to today's levels. you've cuts relevant to what they are promising they can't pay, but not relative to what people are getting out. we don't have to worry about benefits being cut or slashed or any of those things. there's a reform plan that reduces if enacted today low today's levels. now the longer we allow it to play out, the closer we come to the data in which we have real benefit cuts or you get to a point where the incoming taxes are insufficient on the benefit of problems we are making without somebody except in its decline in levels. this is exactly the opposite

impression of what you usually get peer politicians and going to suspended by blocking form should be seen precisely the opposite. you have to benefit cuts would not be something good if we act today we can avoid them. here's another one that is a pet peeve of mine. actually the few that are pet peeves of mine, but often we get into a rather silly debate when we talk about people going after social security and other people defending social security is that somehow this is a debate between people who are trying to tear the system down and people are trying to preserve it. that's very wrong in a very damaging way to think about it. the reality is we have an imbalance. we are not doing anyone any favors by having a system of promised benefits that can't fund. that doesn't help anyone. one way or the other the balance will close. we don't act, what we are doing is concealing from people the changes that we know are ultimately going to be necessary. we don't know how they'll fall out, but were concealing something that's what happened to them. either benefits will be lower or

taxes will be higher than the currently same. in any case, the people affected don't know what's going to happen, which is not testing that it's going have been. that is not a defense to social security workers they can steal from them the effect of corrections we now have to occur. all of it in action means is that participants are going to have adverse effects of there not being warned them they cannot plan for. another important point is the social security trust fund is a very solid until 2037. i find when i'm in discussions about social security that there's a lot of confusion. you sometimes hear people saying if the system is fine until 2037, why should we make changes now? and wouldn't be in some ways breaking faith with people on social security to make changes to the benefit level well before 2037 if the system is solvent for another 26 years? this confuses and confounds and

complaints distinct issues and it's important to keep them separate. first of all, trust fund does not tell us how long we pre-funded benefit in any meaningful way. at any given point, even if you accept the trust fund is a meaningful method of pre-funding, which i'm not sure it's accurate, but even if we accept back on the trust fund will never hold assets that are equal to more than three and half years for the benefits roughly going forward. so it's not like the trust of his pre-funded years of benefits. at any given point in time the vast majority of benefits will be paid by taxing workers to the payroll taxes. so we have a pre-funded 27 years with the benefits. were basically depending on younger workers to pay taxes to keep the benefit lower. secondly, the trust fund doesn't tell you anything about whether particular benefits are appropriate. your benefits are determined by what is right in the law. that is nothing to do with the trust fund and nothing to do --

very little to do with the about you personally put into social security. it's basically a function of your personal wage history. now in fact, not only is there not a direct relationship between trust fund assets of the benefit formula, but actually a great inconsistency between the two. according to benefits for now, we keep having benefit added an item will be in 2037, the benefits would suddenly be cut in 2037. the trust and does not measure the appropriateness of the current benefits. with the trust fund measures is the access of past taxes collected over past expenditures plus interest. that tells you nothing about what the appropriate from a going forward in the future. nor does it tell you what action should be taken. if you wait until 2037 you get the worst possible outcomes. you get the best possible outcomes if you act today. it is installed until 2037 does

not in any measure argue for delaying action. i thought it was going through my biggest pet peeves. now i'm going to go through my biggest pet peeves. whenever you talk about social security reform, there's a lot of people worried about social security reform and the race argument about why it shouldn't have been. over the past several years i think the biggest red herring has been the myth that somehow the social security projections are overly conservative. if you know -- for me personally, this is always the first litmus test for the person who knew they were talking about. you cannot read the social security financial projections and reach the solution. it is even been picked up in the mainstream press reporting. there is absolutely no grounds for it. the basic idea was the trustees have been conservative in economic growth protection. if economic growth was just a

system, everything would be fine and the trustees in the past i've always been too conservative anyway. offerings were flatly false or trustees are not projecting the per capita productivity growth that will slow down or per capita wage growth would slow down. it would accelerate a little bit. even if he did go to a higher economic growth, most of the problem is still there because of strict invite fertility, lunch of the other factors. it's not too conservative. they're actually too optimistic. so there is no grounds for this with whoever, but it kept getting repeated over and over again as an argument against doing something, but somehow the problem isn't really there. now, we've had the recession in the program's finances are. obviously so much worse than projected in any previous trustees report, the people of stuff saved this. no one can really take it seriously anymore. now there is a new red herring, which we couldn't do a social security because it has nothing to do with the problems in the

rest of the deficit and it's not a contributor to the deficit and social security is being targeted gratuitously and not necessarily for cut that are not necessary to balance the federal budget and reasons that have nothing to do social security. this in my view is also ridiculous. first of all, social security has an imbalance. first of all, social security is intervened in the deficit to be clear about that. it's running a deficit. more money is going out, so it's not correct to say the program is not contributing to the deficit. and it's a bigger contributor to the deficit over the long-term that everything is not called medicare and medicaid. yes it is smaller problem to medicare or medicaid, the thicker than everything else. when you start throwing out everything that is not called medicare and medicaid in terms of your practices come you start running out of corrective actions quickly. putting that aside, what whether you think social security is part of the budget or not justice and honor.

social security side of the balance from its own finances. there's no one out there proposing to cut a penny from social security beyond what is necessary to balance programs on books. the idea that anyone is targeting social security is beyond absurd. the idea policymakers go to the politically most sensitive area of the budget and gratuitously cut it rather than deal with other -- other sources the budget is ridiculous and also flies in the face of the actual proposals that have been proposed forward, none of which actually require social security to subsidize anything to the rest of the federal budget. a couple of points i want to make on solutions before turning it over. one is that we need to be very clear what constitutes this correction. in 1983, he did some good things, but also made some mistakes. one of the mistakes they made is they did not look to see whether or not the solution is actually going to be balanced on an annual basis over the next 75

years. we wound up with a set of reforms that produced large surplus in the early years in huge deficits in the later years. that obviously can only work if you can do something to actually think the surpluses in some way reduce other federal debt payment or improve the fiscal position so you can finance the deficit in the deficit years. most people on both sides of the recognized that is does not affect this, but that would be intent in 83. they actually did know that was going to happen. i have a whole chapter in my book on history and it's very interesting. the number of advisory panels and technical panels have come forth and potomac to the same mistake again. next time you social security, don't look at the get actuaries at the balance over 75 years. you have to make sure you resolve the annual shortfalls going forward, otherwise you've left a substantial fiscal problem for future generations to deal with. now, this doesn't mean he won't honor bonds of trust funds interest the trust funds have an

obligation. if we want to be serious about fiscal collection, we have to close the very large annual shortfall over the long-term and we also have to do with the real source of the financing shortfall, which is the disclosure of the next quarter century because of majority falls and the cost group now through 2035. if we don't get a handle, were not loving the problem. finally, let me end with one opinion. all the credit kathy as i say this because i know cathy disagrees with it. but i can't go forward with a description without offering something of a solution night. and i would say that my personal opinion, president of on this commission did an incredible job of these proposals. they are not my preferred policy and preferred policy and i think there are flaws and imperfections. i personally, for reasons that i think andrew would agree with what do more to contain cost growth in the muslim attack site and the commission did, but the

proposals are reasonable middle ground between getting visions of how to do the social security shortfall. i have a more positive view of these proposals than some others do and they've written favorably about antipasto probably write favorably of the future, but i think there's a reasonable starting point and a worthy proposal going forward. and that's that. thank you. [applause] >> thanks, charles. [inaudible conversations] >> let's let i.t. go or barbara. [inaudible conversations]

>> hi, good afternoon. i'm heidi hartmann could have stood department's policy research. shown on the screen is a report released last month, social security, vital to women and people of color, meant increasingly reliant. i would say a little bit about our findings for this reporter. i am going to take a special look at the program from a woman's point of view, but first i want to just go over a few basics because i did notice they were kind of missing from the excellent presentations that we just heard. just to give you an idea of how big the system is today, this is what we are paying now, about $676 billion is going to 53 million people. so with a large share of our population and a very large number of people in households that get from social security, even more people than those

53 million. most of the people are retired workers and their family members. some are disabled workers and their families, 10 million some are survivors of deceased workers. another study in andrew's preferred program -- he didn't actually say how he would deal with those who die early or those who become disabled at younger ages. he talked about the retirement retirement -- his ideal retirement program. the individual accounts obviously wouldn't help those people very much because they wouldn't have been able to pay them for very long. its 4 million children, about 3 million minor children under 18, but another million who are disabled adult children or students still in high school, 18 and 19 years old. 21 million men and 27 million women. so women are the majority of the recipient and that is why we like to say social security is a women's issue.

this is funny the way this little clicker works, but i guess i'm doing it the right way. this is the size of the trust fund now. i think those of us on the panel admit that the trust fund is real. it holds u.s. treasury securities $2.7 trillion. so although chuck said that social security was in deficit this year, actually its trust fund this year. if i do trust fund is growing, i would think i was in deficit actually. so what happened this year was that taxers needs did comment by then payouts, partly because of the recession. fewer people working from the fear people putting in taxes, but the humongous trust fund was earning interest and taxes on social security benefits. so it is continuing to grow and it will grow until 2025. at that point since it was built up to pay for the baby boom retirement, will start paying

for the baby boom retirement and it will gradually decline and it's expected that it will reach 02036. at that point, as chuck said, benefits would fall for everyone 22 to 25%. one of the interesting things is chuck thinks it should be a prepaid system. we should have all this money in a trust fund. goodness knows the government will really pay it back. now, if we had prepaid the entire retirement of the entire population, especially for help in something, it would be amazingly deflationary for the economy as a whole. i can't imagine what the economy would look like. so we never intended it to be a prepaid system. it's a pay-as-you-go system. that means current workers pay for current retirees. the reason we can still pay 75% to 78% and 2037 is that this was going to be coming in from the payroll tax revenue.

we did build up a trust fund because of the baby down, unlike senator simpson and the actuaries for the social security system to predict the aging of the illuminated try to take into account. ideally that changed back in 1983 would've lasted 75 years. 2037 is a quite 75 years. what happened during that time to make us not get to the whole full 75 years without having to address solvency again. one of the things happen with income grew a lot more unequally. the income is an oddity that was distributed as it was at the time. i think just a few years ago we were more unable at any time since world war ii. now although it back back to 1929. our income distribution is unable today as it was apparently in 1829. so are we are becoming more unequally that means less and less of our income is paid into payroll tax, so revenues are

down over what they were projected to be. so these are just some of the basic facts of where we are. the trust fund is still growing. a lot of people say the government is that money, so that money -- at a social security causing the deficit and causing the government to owe money. if you think about who holds government funds we hear a lot about how much china holds of our government funds, do we think china is causing our deficit because it holds government bonds? the fact is we will have to pay back the chinese or anybody else who holds her government bond, but we don't usually think of those people is causing the death that we have. the data we have, the current deficit is a lot because taxes were reduced, unequal income, taxes are reduced. we fought two wars without paying for them and now we have a major recession. at the moment, even our very, very high difficult to control health care costs are not really, you know, you wouldn't

attribute the whole deficit to them. going forward they are important because they are expect it to crow about inflation, but really we should be looking at where the debt and the deficit come from and it is not social security. so i wanted to take a special look at the system from a woman's point of view. one of the good things about it is to be fully covered and to get out the benefits, disability, survivor benefits for your survivor requires only that you were 10 years at $4360 a year. they made an administrative change. if you even work only one quarter and 4360 come you get the credit for the full year. that was important to them because they don't always work for quarters every year, so that was a good change for women. they connect today's woman. if you look at the people who are retired today, only about 70% are fully covered.

only 40% aroma getting social security benefits because they married a man who is eligible for benefits. so going forward, 95% will be fully covered because of their own work. today, looking at the 65 and older, 95% to get social security benefits. as i said, some of that is because of their husbands benefit. another good thing about the system is that as a wife you can get money, either through your own work or three-year marriage, but it had to be 10 years than it has to be 10 consecutive years to the same guy. so if he got divorced and you're going to marry him, you have to stay married 10 years to get the second time around to get those benefits. just keep that in my case i was a strategy point of view than you are going to pursue. these benefits are fully adjusted. that's particularly important are women because they live longer than men and returns are higher than they are for higher earning workers, another advantage to women in these benefits are not subject to market risk or investment

decisions. this is a craft that just shows you how things have changed for women. the pink area is those women who got the benefit -- all women who retired today, 65 and over. 62 win over, some are still working, but those who receive benefits at 62 and older. those soli workers has gone from 39% to 45%. the shirt that is duly entitled both because of marriage and their workers have increased substantially from 7% in 1960 to 28% today and the share is only benefits because they are married or remarried a man for 10 years is 27% today versus more than half in the 1960s. the women are definitely working more and they are getting more earnings over their own -- because of their work effort. while we look at how much people defend social security, women depend much on demand for 67% of income. these are all people over age 65 -- 65 or older.

and sadly, the circle is bigger for men because men do it more income, even in retirement than women do. our new study and i'm just going to go through this pretty quickly is that reliance on social security has increased for those 65 and older in the last 10 years from 199,922,009. this is just looking at those who rely on social security for 80% or more of their income. if we look out for men with 80% or more in the middle, you see it go up from 29% to 35% over the ten-year period. that's a pretty big change on the share of men recline on social security for 80% or more. for women as a whole, relying didn't increase that much, so women are shifting towards the higher end of reliability or reliance on social security. for minutes, but overall and has come up also at the upper incomes of either 80% or 100% reliant on racial security.

and that means that almost 2 million more men are now relying social security than did 10 years ago in about 2 million more women as well. and the proportion of women relying on it is higher. so the big change is really among men, not women. the first set of bars here is wiped from the second black come in the third set as hispanic. which you can see his each group is more dependent than whites. people older, 75 and older are more dependent than those 65% or 74%. in the greek, reliant than men, the gray bars. so social security is very important to people of color and especially to women of color. there are some disadvantages to women in the system and for many, many years women's groups all talked about these. then when social security became under the threat of privatization and is guaranteed benefits, everybody forgot about

these problems. if a defendant about a rut because people are attacking it, so we stopped talking about it. now we decided a good strategy b. would be to strengthen social security so it be even better for people. no groups are starting to talk again. it is based on 35 highest years of earnings and since you have many zero turning years of the women, that could be a disadvantage for you. you might as no spousal benefits. annette tipper typical modern wife gets no additional benefits compared to her next-door neighbor who was a full-time homemaker and did not pay anything to the system. the working life is duly entitled some of the shoe doesn't necessarily see the benefits increase. so some people consider that to be a disincentive for women's work effort. so what we would need to do to improve social security when in his account for the fact that women have increased efforts

across these decades. would like to see them get awards for that. would like to address family structures, take care of caregiving outside of marriage, especially among several members. the guy to increase benefits vulnerable women who live alone, those most reliant on social security are the primary women, especially older unmarried women. and would like to strengthen social security and vulnerable retirees, not cut back as well as increasing. in closing, i would just say that what people have said that we might to my nieces and differently if we were starting out that would be good to do something now. i certainly don't disagree with those points that would be great to solve the long-term funding gap. it is useful to keep a perspective on the idea that it will fall to 75% if we do nothing. if you look at the simpson planned and some of the other proposals, they do take you down

to benefits at about that same level, maybe he%. they just take you down more slowly. so they're not really solving -- they are not solving the funding gap by bringing in any new revenues. they're mostly solving the funding gap by cutting benefits. in a capitalist system, we are used to security risk. we had a good example of what happened in the last recession. all of these people, 65 and older. their income from assets have fallen by half in the ten-year period. so if you take away government guaranteed benefits, you are forcing people to put more benefits into the private market, save on the road and see how they do. so any type of cutting social security benefits is a form of privatization. you could call a privatization through the backdoor because the fungus or your government provide a guaranteed benefits are going down, you have to do something else and that money is

going to go to wall street and you're going to be subject to risks. so it's really a question. brock would have to take care of our retirement. do we want to do it to the government or do we want to do it to the private market? my argument is let's do it the government only so we have now, which is middle-class welfare by the way because it does insulate you from risk. in a capitalist society is important to be insulated from some degree of risk. thank you. [applause] >> thanks, heidi. >> thank you, sonya, thank you i.d. for letting me go out of turn here. so the answer here to social security at what we do about it depends very much on what questions were asking to begin with.

andrew asked some interesting questions and pose and answer to what is the purpose of social security that i think is too narrow and might've been adequate career 40 years ago, but given where we are now is no longer -- i don't think is the right approach, the right framework. the questions that we need to ask and answer about social security are, what is the state of retirement insecurity today in what will be in the future? will people have enough to survive decently in their old age and will social security benefits be enough when combined with the other resources available to provide workers of dignified financially secure old age. and the answer to these questions i think does that lead to the kinds of solutions provides that the deficit solution which is two thirds coming benefit than one third

finding increase revenues. here is what i consider the key fact about where we stand with social security. older americans are going to need more help from social security in the future, not less. and there are a number of reasons for this. if you look at where things stand now, it's a different picture from 30 years ago, the last time in the greenspan commission of social security. the average household for someone in the peak earning years of 32 to 64 has retirement saving that are about $90,000 too low on average to assure an adequate retirement come. the number goes up the closer you get to her retirement, the worst of it unfortunately. this calculation was made by the center for retirement research and it takes into account all major sources of retirement income and asset social

security, traditional pension plans and other forms of saving and housing as well. it assumes a house on retirement will take reverse mortgage and spend their entire equity in the home. it assumes they will work longer than they do now, that's already tidier at 65 instead of it exceed three and a half. so even using these conservative assumptions, they calculate that the total retirement at today's exploit $6 trillion that's a trillion. that is worse than the federal budget deficit for this year. the reducing social security benefits at all, whether by raising the retirement age or changing formulas to reduce the replacement rate will leave retired income and make the retirement income to 30 hours.

so why is -- what hasn't changed since 1983 and why -- why is it bad, widely expected we expect it to get worse. pension coverage has been falling. it's about half in the private sector of what it was in the greenspan commission met in the teen 83. less than 20% of private or employees now are covered by the defined benefit pension plan. if you look at people who are already on the cusp of retirement, and people in hospital at age 6262, only half -- a little less than half expect with any pension pension income and all. those who do, the median of about $10,000, so it isn't very much either. going forward, a smaller percentage will have income because employers are continuing to do away with defined benefit

plans and unions are finding it nearly impossible to win plan through collective bargaining. so this is a road that is leading basically to the disappearance of pension plans -- traditional plans. the andrew solution is the 401(k) that will have people save more through 401(k) plans and iras. but we have a lot of experience over the last 25 years with 401(k) plans and frankly they've been a very. they have less families with less and less retirement income. "the wall street journal" just this weekend published a great story called retiring boomers find 401(k) plans fall short. how short? well, the average -- the median household your retirement had about $150,000 in its 401(k) plan. how much did they need combined

with social security to maintain living standard in retirement? they needed $630,000. so they are way behind. this is worse than the retirement -- center for retirement research, numbers i gave you before partly because this is post-financial collapse. people lost one third to half of their assets. the boomers are in bad shape. the question is well, we'll get better? is there any reason to people think it will do better if we force them to save more and more after the government and social security plan, but through their 401(k)s? there is no reason to hope that it will be better. employers put too little and

generally and the players at anything less. that could change. employers can cancel their contribution as they did during this downturn. many employers did not make the match they had been making. employees must manage their funds. they are not skilled investors. skilled investors sometimes don't do that very well, but the average person managing the 401(k) does pretty badly. brokers, fund administrators. those fees over a lifetime can reduce the assets in a plan by as much as 25% to 30%. and then of course when you have two stock market crashes one decade, the assets get clobbered. and finally, we allow people to borrow from there for a one k. plans than they do. they lose a job in and they borrow with a hardship exemption. they borrow to send kids to school and they end up without

money when they need to retire. and of course, unlike social security and pension, as heidi pointed out, 401(k) plans are guaranteed by the government. so what do we expect? the center for retirement research looking at how rich he -- with the risk is for the various generation and cohort to actually have a secure retirement, maintained standard of living found that more than half of the early rumors, 64% of late homers and 71% of gen x iraq are at risk. so we ought to be improving benefit in the social security system, not looking to cut them in any way. you know, if our goal is to help

people have a dignified retirement. so what should we do about social security? as i said, the first you should not do is cut benefit in raising the retirement age, which andrew proposed. he didn't say exactly how he would do it, but raising the retirement age, making people work longer if the benefit cut. when we raise the retirement age from the navy three from 65 to 67, they cut it if it's from the average worker who retires at 55 by 13%, meaning that over the course of their retirement, they would lose $20,000. if we raise the retirement age to 70 now, that would be another 19% cut in another $35,000 lost for retirement income for people covered by social security. people say well, this is the fair thing to do. people are living longer. and everyone is living so much

longer. we should raise everyone's retirement age. everyone is not unfortunately living longer and people are especially low income people have hardly changed. in fact, their increased longevity at age six to five, since 1983, his last in the increased retirement age do we party enacted. then -- low income men have increased their longevity at age 65 way about a year. the print command by five years for that. so the effect of this -- it doesn't have the same effect on everybody. raising the retirement age obviously is a problem for people who are in physical jobs. and there are still coming in now, something like 45% of americans who work in physically demanding jobs.

if you run your feet all day long at the cashier or lifting patients in a nursing home or driving the truck work in the steel melt is very different from the kind of work we do if we work forever. but you know, not that we all want to, but raising the retirement age is much harder on low income people and people in physically demanding jobs. and you have to remember, social security benefits are not very generous. already the average retiree gets $14,052, which is less than the minimum wage for a full-time worker. we're in a situation where the social security replacement rate is already declining. it's going from 41% in 2002 tonight 36% and 2030. on top of the less attention

coverage, we have already declining replacement rates and social security. so what is the solution? if you are worried that professionals are going to do it for 30 years and we can't afford to pay their benefits, and the answer to cut benefit on hotel maids and janitors or is it raise taxes on the people who can afford it? i would say the answer is clearly that you should raise taxes on the people who can afford it. a construction worker who makes $50,000 a year pays 6.2% social security tax on every $1 of his wages. but a banker who makes a banker your face is 6.2% am only the first 6800, meaning his effective social security tax rate is less than 1%. when you add in the employers tax, the construction workers

has 12.4% and the bankers million dollars plus tax that less than 1.5%. you know, there is a real problem here, due to a party problem. the tax cap was originally this $106,800 in 1983 to cover 90% of wages. since then, we've had tremendous tremendous -- a tremendous inequality in the united states. and to the degree that the numbers are almost -- well, they will stun you probably. 55% above the income growth in 1983 has gone to the top 1% of americans. so as a result, only about 83% now instead of 90% of total earnings are covered at the social security tax. wage stagnation for most workers, coupled with this

growing inequality is the main reason social security's outlook has worsened in recent decades. the actuary said that that is not an unexpected order either the expected growth in longevity longevity -- increase in longevity. if the richest 10% of americans have the same share of national income throughout the 25 years from 198,322,008 that they had in 1983, their income would've been $11 trillion less. in the end, the top 1% would've been asked by $5 for. so i think taxing salary scarily good -- well, social security actuaries would remove the tax and tax people and their entire income. it would completely solve the long-term solvency issues that

social security has come to rebuild the trust fund and guarantee full benefit for 75 years and beyond. i think that is the fairest solution we could have. [applause] >> thank you very much, ross. it's >> thank you. being the one, two, three, four, the speaker, very much what it planned to stay assertive and said very well. i am the president of the preserve social security and medicare and mine comes from all walks of life, democrats, republicans, unaffiliated. what they share is the passion

for social security and medicare. i am one of those people at alex rivlin, we just don't quit. we are here. but social security was never intended to be the sole source of income. they were going to be savings and pension in our rate of savings in this country were way down in the coming up a little bit, thank heavens. pensions -- defined pension plans are things that will be a memory, but some people have them and they are lucky, the future people will not hunt them. and now, where we are right now is that one in three seniors absolutely rely on social security for 90% of their income. excite a 10 have their income. it can be said enough. benefits are not overly generous. we're talking out an average of $14,000 a year.

for women, $1237 a year. you try living on that. guess what, there's a lot of people living on it and a lot of people i want to be able to continue to live on it. and we have to keep remembering. we have the last commission. charles, by the way, i want to congratulate you. ..

>> and why do i take time to go over these figures? because i think we have to. because right now the time is ripe. i am shocked at the huge amount of our deficit, shocked. absolutely. i can remember when i was in congress, $200 billion deficit? oh, my god, what are we going to do? pay as you go, etc., etc. when you look at the deficit now, it is truly shocking. and everything is being thrown in to figure out what we're going to do. and don't get me wrong, social security has to be strengthened, no doubt about it. you know, i have ten grandchildren, about to have my 11th, and i know it has to be there for the future. but we've got to be careful how we tackle this and how we cut the deficits. and we certainly don't want to add any more to the deficits. and, you know, it's -- what social security has which people

don't remember all the time is social security has a dedicated source of income, very different from the regular situation for the rest of government. it's dedicated because it comes out of your payroll and mine. i've been paying it for years. every time i get a paycheck, social security comes out of it. and, you know, the thing about social security, by the lay -- and i'll talk about that a little bit in the future -- by the law, social security cannot add to the deficit, and it can't do anything to borrow from government. the money that comes in is the money that goes out, and then we have the money that's in the trust fund. and let's look at social security funding. look at the trustees' report of 2010. we are taxing 156 million americans for your social security. they're paying in 6.2% of their income. when, if you've got a small business or something, you're

paying 12.4%. and you know what? guess what we're taking in 2011? $707 billion we're taking in. of -- and, you know, that's the money that's coming in. now, there are other sources of income. we have a tax, and let me tell ya, this was one of the most unpopular things we ever did in congress. we tax higher income people on their benefits, and that tax is 27.3 billion in 2011. it's not a lot of money, but i can remember when billions used to mean something. but there were -- the remaining source of income is the interest payments. and currently because of what happened in 1983 and, by the way, i was there in 1983, i was on the ways and means committee. i remember it like it was yesterday. and currently in the trust fund

we have $2.6 trillion. and if you put the interest there, it's 120 -- just this year, 2011, it's $120 billion. and when you look at this, you have to match up the obligations where we have to pay out. and that's exactly what we have to do. and we have to address the shortfall. and, you know, i can tell you about how strong the program is and how, you know, it's going to be okay until 2037. and then 2037 we're going to have paid down all that extra money, and, you know, 2037 we have to look at what we're going to do. should we wait until 2037? of course we shouldn't. and, you know, can i tell you there are people in washington right now, and i'm sure charles will probably be on the commission, but there are people in washington right now, we're scared to death about social

security being looked at as part of the whole deficit situation. there are some very, very wise people in this washington situation that could be on a commission and would understand that we'd have to get real about the future of social security. and, you know, let's talk about the trust fund. it was established in 1939. it's been with us since 1939. it wasn't important. very small. it was only used if there were extra funds as a contingency. there were a few problems, but it was no big deal. but it had just a minor role. but in 1983 it really got to be very important because in 198-- i just enjoy, you know, watching what's going on. senator simpson would say, well, we didn't know those baby boomers were coming. well, where in the heck was he?

they were in their 20s, early 30s, we knew they were coming. one of the things we knew we had to do when we were looking at this and, look, i'm the last one to be talking about the good old days, but it was a bipartisan agreement. our president, ronald reagan, it was some wonderful people who knew that social security was in a terrible, terrible situation. and they knew they had to come together and do something about it. and so they did. but, you know, now '83 was a long time ago, and now there's questions, constant questions. economists that we have right here argue the trust fund is not economically meaningful. how do you redeem those bonds? well, guess what? we've got to redeem those bonds. a lot of people don't want to redeem those bonds but, you know, those bonds are are there. and, you know, what do we do? i think, and you're going to have the next speaker who's going to talk about the

international situation. i think any country worth its salt has a social security program. and ours is not that generous, to be very frank. but now if we're going to have a mix into the time, very difficult times with this deficit. at least some of us think we should protect our social security system. and let me just read you about the trust fund. americans who expect the trust fund to be honored have the law on their side. it's quite clear and right in the social security act, section 201d. basically, it says each obligation purchased by the trust fund shall stay in the space that it is incontest my in the hands of the trust fund to which it is issues. the obligation is supported by the full faith and credit of the united states. and that the united states has pledged to the payment of those obligations. i mean, so many people just want to put that whole situation aside and just go on.

i don't think that is a good idea. i really don't. and when you look what people are going through in this country, i travel all the time. i talk to my members all the time around the country. and my members are not well off, let me tell you. they pay $12 to join my organization because they can't go to washington and lobby. i'm a lobbyist. believe it or not, i'm a lobbyist and very proud of it. but, you know, i lobby for social security and for medicare. and i think this country has to protect those problems -- programs. but, you know, i know we're in crisis situation right now, and i know we're going to have to make some very tough decisions. but let's not make those tough decisions on those people who are just trying to get along. [applause] >> thank you, barbara.

>> hi. i'm mitchell ornstein from johns hopkins university school of advanced international studies, and i'm bringing to this panel a rather different, unique perspective which is an international perspective on the problem of social security today. my research has focused on pension privatization worldwide, on the trend which i'll talk about in a moment of privatizing pension systems. and emphasizing issues of learning from one country to another. countries don't deal with these problems completely with their own resources, but also rely to great extent on the experiences of other countries to consider

solutions. i've also been looking since the financial crisis on working on a new article on the future of pension privatization trend after the crisis which is quite interesting. and so the questions i'm going to ask are rather more comparative questions; where did the united states' experience fit in an international perspective, how is united states effected by global trends, and what lessons can the united states draw from other countries. so first let me address this question of what the context the is, the sort of historical context in which we're considering social security reform to date. since 1981 there's been a major trend worldwide which has partly touched the united states, but has been experienced by many countries, most countries, i would say, which was a large, a very concerted campaign for privatization of pension

systems. it was led in large part by the world bank and other organizations actually based in washington, d.c. with the support of many u.s.-based academics. and economists primarily. that advocated for replacing social security-type systems around the world, and it is true that as was said previously, most countries worth their salt have a social security-type system, some of which are considerably more generous than the united states. some less, i suppose. and these organizations began to promote a replacement of social security systems with ones based on private individual pension savings accounts. and about 30 countries worldwide starting with chile in 1981 and continuing through most of latin america, a lot of central and eastern europe including russia, including poland, including

hungary, including bolivia in latin america as well as some countries in africa and asia have privatized their pension systems, often with u.s. government help. usaid supported that campaign quite significantly. at the same time, and partly causing, you could say, this trend was a global crisis of social security-type systems. in large part because of the history of these systems, they were founded typically or greatly expanded after the second world war when demography was very favorable, a lot of people moving into the labor force and incomes rising rather rapidly. these systems ran into trouble because of a worldwide, again, trend towards demographic aging. i think many people are aware that in the united states there are an increasing proportion of elderly people. that's good news. the longevity is increasing, but it also means that pension systems are put under considerable pressure because

people are spending a longer period of their life or longer proportion of their life in retirement. but also because of the trends that were mentioned before towards income inequality and stagnation of average wages also have this tendency to put pressure on social security-type systems. so that's the broad context in which the united states considered privatizing its pension system in 2005. as you know, those proposals were made, and they were rejected by congress. it has to be said, though, that the united states to some extent has privatized in part its social security system as was said through the back door can which, essentially, means as there have been gradual cuts in the replacement rate of social security and as there have been increasing, increasing tax benefits for individual retirement accounts, the government is spending more and

more on the private retirement system and less and less on social security. although it's been more moderate than in some other countries. the financial crisis, i believe, radically changed the global pension picture. radically changed this debate. it should be said from the outset that the financial crisis hit both social security-type pension systems and funded private pension systems. both of them are in trouble. or, in fact, one takeaway from this is that today everybody's worse off than they were before 2008. [laughter] regardless of what your situation is. >> comforting. [laughter] >> but, but given that, it's been very interesting that privatized pension systems and funded pension systems were much worse effected than social security-type systems in countries around the world. and because of that the trend

towards privatizing pension systems has basically stopped. and when i say stopped, my database, essentially, is all countries around the world. what are they doing in their pension reforms? and what you see is that since 2007 no new countries, to my knowledge, have privatized their pension system which is a big change because there were a couple countries a year in the years before that. and, of course, that's one metric for looking at how it's badly affected. but i another metric was also mentioned here that assets decreased in these private accounts. so anybody, anybody who had a private retirement account or really any asset knows that asset prices decline very presip toutly. precipitously. and the figures were mentioned it was about halved to a third. people were losing their value in their accounts and, therefore, their retirement income be they were relying on those accounts for retirement income.

interestingly, from that perspective social security did really well during the crisis. social security benefits were not cut dramatically in 2008. in fact, they were maintained pretty much at the same levels they were before. and that was, obviously, a huge boon for people who were relying on those benefits as their other assets were decreasing, that this was a matter of stability for them personally. but it was also a huge matter of stability for the economy at large. because i don't know if word automatic stabilizers means anything to you, but it was often used in europe to indicate that when we in the united states thought to stabilize the economy and to stimulate the economy, social security actually played a pretty important part in that because it maintained that level of outpayments and maintained people's incomes at a time where a lot of other incomes were declining. and being cut or people were

losing tear jobs. losing their jobs. so i think that opinion within the community of people that thinks about pensions and social security really shifted radically in 2008 towards realizing some of the important anti-crisis benefits of social security and the ways that it, that the private pension systems could be extremely vulnerable to a crisis. you could think of this as pro-cyclical, countercyclical terms, that private pensions tended to be per cyclical meaning they come into crisis at the same time the economy's in crisis which isn't helpful whereas social security tends to be countercyclical because at a time of crisis it actually does better than at other times. what have countries been doing to react to this new reality? well, a lot of -- a couple of countries have actually gotten rid of their private pension systems. only a couple. out of the 30 or so that have

privatized their systems. but it's an important trend and needs to be watched. argentina, which was one of the first countries to privatize its pension system in 1994, the government there seized all assets in private pension accounts which totaled around $30 billion and took that money into their social security trust fund and used it to set its deficit right and begin to pay benefits, promising that those, the money people had contributed into those accounts would be credited towards their social security pension in the future. a similar but not exactly the same process has unfolded in hungary which was up with of the first form -- one of the first former communist countries to privatize their system. they actually reversed that privatization system just a few weeks ago, actually under a right-wing government. this isn't a left/right thing. in argentina it was a left

government that did that, but in hungary it was actually a right-wing government that did that, and the reason was simply they needed the money live anything people's private accounts to cover their debt. and the imf actually approved of that on the basis that that was going to help them get out of their debt problems. some countries cut their contributions to individual accounts. this was a more frequent solution, estonia, poland. others made participation voluntary. but i think it's fair to say that the privatized pension system's been very badly hit and destabilized by the financial crisis. u.s. private pensions, as was also mentioned before, are also in crisis. those people who have private pensions accounts of various types know there have been dramatically reduced balances. there was this joke going around about 401(k)s becoming 201ks, and i've scene that

in -- seen that in my own family. there's, also the problem was discussed before that there's just, in general, inadequate retirement income as a result of that. that's going to effect the baby boom generation perhaps more than others. at the same time, because of the broader fiscal crisis of the government not only in the united states, but really around the world governments are having serious problems meeting their obligations. and i'll speak about europe in a second. there have been a number of discussions about what to do and how to bring these pay-as-you- go social security systems into balance which is obviously an important challenge. and by far in europe, which are the more comparable countries to the united states, the most popular thing to do has been to raise the retirement age. and i want to just focus on that for a second. you may know, i'll show you a

couple slides, actually, in a second. there were big protests in france against raising the retirement age from 60 to 62. in spain, interestingly, also recently there were big protests against raising the retirement age from 65 to 67. actually, they agreed to do that n. the spanish case, the unions agreed to it. in the french case, they didn't agree to it, but i think it happened anyway. but i think it's instructive to look at these retirement age increases and note that in the united states the retirement age for, i believe, for my generation is going to be 67. in france they increased the retirement age from 60 to 62. in great britain women who were getting, i guess, a good deal at age 60 retirement got, their retirement age raised up to 65, parity with men. and there is talk of they're

planning to increase the age to 67 starting in 2024, so that's kind of postponed for a while, but they're going to do that. germany is increasing gradually its retirement age from 65 to 67. netherlands from 65 to 66. i mentioned spain already. usually these are phased in over a number of years, it doesn't happen immediately. and just for a benchmark here, life expectancy in europe is currently at around 76 years for men and 82 for women, and they're expecting that's going to go up by about eight years or seven years by 2060. and the european commission right now is trying to suggest that countries should legislate further increases in the retirement age that will keep them in line with increases in the, in life expectancy in the future. but i think what's interesting to look at is that very few countries are thinking about retirement age increases beyond 67 which is actually where we

are presently. the united states in '83 put that, that was part of the '83 legislation that was mentioned, they put in place that increase already. and were sort of forerunners in that. but you don't see anyone else talking about -- you see britain talking about 68, you don't see anybody talking about 70. although that's, obviously, where things would need to go if you were to solve the problem just by retirement age increases. so what are the lessons that the u.s. can broadly derive from looking at some of the international experiences? i think, i think one of the big lessons of the financial crisis was that pension privatization can't really solve the problem. in the u.s. if we were to do a panel on u.s. pensions or workplace pensions or sometimes called occupational pensions or 401(k) pensions, you'd find that in the u.s. private pensions are much more broke than social security is.

they provide insufficient -- our system, which costs a lot of money in tax breaks that are given primarily through wealthy individuals -- provides insufficient and very volatile pensions. and that volatility tends to happen exactly when people need the income most, unfortunately. our system, as was mentioned, the 401(k) system, i understand that people on the panel agree with this, if it were to be redesigned as something that was effective, it'd have to be totally redesigned from what it is today. if we haven't been able to do it well until now, how exactly are we going to be able to do that in the future? i also agree that the problem in the united states in this international comparison is not that we have too much social security, but rather too little. the real issue here is that further cuts are, will

impoverish elderly people. the scope for retirement age increases while i agree that they can be considered and should be considered, are rather more limited than for a country like france which has a 62 retirement age. taxes need to be raised. it was talked about the payroll tax threshold in particular. if you're going to deal with this shortfall in income. however, i do agree perhaps with one of the, one of the previous speakers that, that this could be a good time, also, really to consider not only strengthening social security system, but also undertaking that redesign of the occupational workplace or 401(k) system at the same time. that, really, is in more crisis, in fact, than social security, and we could look to britain in its current nest pension system which is going to be introduced in the next year as one possible model. i was talking with a panelist

earlier, maybe new zealand is another possible model, australia have some interesting ideas for encouraging saving on top of social security. but i think that's an important point. the issue now after what we've with seen in the last couple years is, is protecting income. it's not about cutting social security, it's about needing even more than is presently in social security for people to retire on and taking on that challenge means addressing the bigger problem in the private system as well. thanks very much. [applause] >> well, as you can see, there are a number of differences among the panelists, but i think rather than giving them time to address them now, i'll give them time at the very end because you've all been sitting here very patiently for quite a while. so let's hear from you, now, your questions and comments. please wait for a microphone and identify yourself and try to keep your, your questions and comments relatively short.

don? yeah. >> yeah, hi, i'm don with the congress project here at the wilson center. we've heard references made to the president's commission but very little efforts made to the president himself and the congress and the seeming vacuum there on taking leadership and doing something about this. i'm just wondering whether any of you are going to speculate where this is going politically both with the administration and the congress in terms of coming to some type of i don't know whether it's going to be a summit or what, but where you see things going. >> [inaudible] >> um, i'm pessimistic that this is going anywhere. my view is that a pretty substantial opportunity is in danger of being lost. we have split control of congress right now. it's very hard to do a social security fix when you have one party in control of everything

and the minority party in such circumstances is usually in no mood to help the majority party solve the big problems. when president reagan did the social security fix in 1983, he had split control of congress, you had both parties with some skin in the game. we are also after the point where the president's bipartisan commission has reported. and that was a framework that got people as far ranging as senator coburn on the right and senator durbin on the left to put their names behind i. -- behind it. and we also have the congressional budget office saying now that the deficits that emerged last year in social security are now permanent features of program finances. so you have an increased sub instant i imperative to act, and you have unusual circumstances that would allow for action. i don't think the president's budget presentation moved us in the direction of action. basically, the rhetoric in the budget that be, basically, a series of thou shalt nots, thou

shalt not cut benefits for the most vulnerable, thou shalt not privatize, thou shalt not slash deficits for future generations. that puts them in the company of every author of every reform plan, but it doesn't really tell where we need to go. at some point you have to pivot between, from saying this is what i won't allow happen to explaining why inaction is unacceptable. if you look at what the president did on health care reform the last two years, they weren't very specific in their budget either, but they had a place holder, and they shade these are the broad physical contours we want to achievement and in health care reform, and the accompanying rhetoric was this is why we need to change, here are the positive benefits. we have yet to see that pivot to any sort of rhetoric. so right now there doesn't seem to be aggressive leadership anywhere to make something happen. maybe something can happen, but i fear the opportunity is being lost. >> yeah, ross. >> i would just add to that a different, you know, reason why

nothing's going to happen which is that to have this work even under the deficit commission scenario which i didn't like, i thought it was, you know, a terrible solution to have two-thirds benefit cuts and a third revenue increases, but the republicans are led by people who are saying there will be no tax increases. they will not vote for tax increases. if that's the leadership position and they enforce it and they do enforce it in the house of representatives, the president would be crazy to step forward and say i'm for, you know, a balanced package of cuts and tax increases. he'll immediately be attacked for the cuts, and he'll never get the tax increases. so it would be, you know, a politically suicidal thing for him to do, and i was, unlike my colleague, i was happy to see

that he didn't in his state of the union take that step. >> i'd just like to add, i mean, so much of what we do here in washington is politics, but i think the president knew very well that the freshman were just going to do their thing, and they were going to do discretionary cuts. you know, only 12% of the budget, but discretionary cuts. so why would he come forward doing something else? he did his discretionary cuts. but i am convinced if we would separate what's happened with social security from the whole budget and the whole situation that we're in, i know there are people that are in this -- and, you know, chuck, you know them too. we all know them. they could sit down and solve the social security future problem very well. the problem is that we want to just throw it in to the deficit reduction rather than add anything to the deficit.

so that's the up and the down of the whole thing. >> i'm sorry, i don't want to -- i have to respond to some of these things. [laughter] first of all -- >> i'm going to be one that hits -- [laughter] >> i disagree with the portrayal the fiscal commission was two-thirds benefit cuts. there have been estimates of that basically arrived at by saying let's take the different provisions and throw them into different categories, and we'll add them up, here are the benefit provisions, we'll add them up, and two-thirds of them are on the benefit side. but that's not how you do it. each provision hasen impact on -- has an impact on revenues and benefits. in order to get a sense of the net impact of the proposal, you have to add up each side, and the actuary's done that for us. it's about 46% on the revenue side, 54% on the benefit side. so i don't agree with the characterization. secondly, i don't agree this is about the republicans. we saw the fiscal commission, and there were taxes in the

social security package. republicans were not the ones that went after it. this is very much between the white house and their left. this is the left that attacked the fiscal commission in very stern terms the whole way, told the president not to support what they were doing. it was not republicans. yes, republicans don't like tax increases and that's their opening bargaining position just like with the democrats, but the dominant pushback was not from the republican side. and i think to be realistic, we ought to recognize that. this is the dialogue between the white house and their left on social security. >> if i could just sort of follow on from chuck's point which i think does -- this is really, you know, it's the president is dealing with his own party. i remember when the president came into office, there was talk then that he was going to appoint a commission to look at social security and the deficit. and they were supposeddedly on the verge of doing it, and he got pushed back from the last, and he didn't go with it. eventually he said, okay, i'm going to appoint the commission, and he comes up with a set of

proposals which got, i think, decent support from people on the commission and some support from some very conservative republicans. he gets pushback from the left, and he says, okay, i'm not going to do anything. he's not going to say anything in the state of the uni. about two -- union. about two days later an unname presidential aide said, well, he was thinking of lifting the tax cap, but he didn't want to go that far. i think by definition leadership means you go first. so if the president wants to get it done, he's going to have to be willing to stand up and take some heat on it. and whether you like what president bush did or not, he stood up and took the heat -- >> and he lost. >> and he lost, but if you want to get this done, you have to take some risks. and if president obama doesn't do it, he's not going to get anything from it. i think that's the long and short of it. >> heidi. >> >> can i chime in from the president's left? [laughter]

>> oh, don't sell yourself short. >> don't sell him short, sorry. [laughter] >> but, you know, first of all, that assumes that the commission was a balanced commission. it was not, much to our disappointment, the president appointed two well known haters of social security, senator alan simpson, you know, coined the term greedy geezers 20 or 30 years ago. so he is not a guy who we would look to to come up with a balanced plan, and the plan was not very balanced. and similarly, erskine bowles, people were saying, well, there's got to be a blue dog on the commission. i said, we've already got him, it's erskine bowles. the left did not control the membership of the commission or especially the co-chairs. and there would have been a lot -- [inaudible] if it had not been such a surprise as to who they were. secondly, what we're talking about here is the consensus in washington. the only people who really think that the social security problem

is solved by cutting benefits seem to be on the editorial boards of washington post or "the new york times". and the rest of them are, you know, many of the people of the type who would be running around washington or in congress. it's really an elite position. and when you ask the american people what do they want, they say don't raise the retirement age, don't cut benefits by wide margins. even among tea party people. even among independents. even among republicans. even among democrats. and the vast majority are actually willing to pay more taxes if that's what it takes. so you have a problem that is totally playing out for the security of social security. we'll even pay more for it, and medicare by the way, and you have a leadership which is totally out of touch with what the american people want. so i think, you know, the good interpretation i can put on president obama's actions is he got the message from the american people. he has, he's been shown those

polling results, those polling results are being carried to members of congress in both parties, in the house and the senate, and people are understanding that the american people don't want this. they want the program to be more secure. if they have to pay more for it, they will, and that's what they want. so i don't think president obama is out of touch at all. >> this yes e man right here. gentleman right here. >> my name is gordon smith, just a citizen living in the washington area for a long period of time. this is for the whole panel. and i, honestly, didn't find a lot of difference in your opinions. i thought they were or somewhat close because no one said let's get rid of social security, and i think that's the yin and yang of it. anyway, i went to work when i was 21 years old, and i'm now 78. and i still go to work, and i still, i collect social security, but i still have to pay -- they still take it away from me. i don't understand that. but if i, i calculated once if all my social security payments

had gone into the stock market -- not me making selections, but just the average of the market -- i would have made 6.9% in real returns over that period of time. i would have -- now i get about 20,000 a year in social security. if i'd gone to the other program, i would have had $3 .8 million, and if you amortize it over the rest of my life span, i could take down $305,000 a year. as opposed to 20,000. and if market fell in half, i would still have 1.9 million, and i'd have 152,000 a year. the question i'd like to pose to you, social security now invests in short-term government bonds. that's not risky.

i would argue that's very risky. only one issuer, the u.s. government which some people say are going to go broke and have to default on the debt, that's a very risky -- no investment adviser would ever tell you go all with one company and put it all in short-term notes. i mean, you're not making enough to e recover inflation. so the question is, why doesn't social security invest it in the broad stock market by computer, just average it all across the board by computer so the cost is low, and it would help the country? >> let me -- >> yeah, well, okay. you want to go, all right. >> i was going to say short answer, you're presuming there's something to invest. you're assuming there's a storehouse of savings there that we have sitting around that we can choose to make an investment. going forward, again, in the future we're looking at deficit, so we may not have anything to -- >> in a surplus between what

goes in and what has to go out every year. >> right, right. now, let me try to strip down sort of the rate of return question because i i think it's something that a lot of people get very confused about. your individual rate of return is not a function of all of what the social security program is invested in. it's purely a function of two things, what tax rate have you been assessed, and then what does the benefit formula say it's going to give to you, and those perform your rate of urn urn -- return. you have to look if you want to get a fair reading on how the system treats everybody, you can't just look at the tax side, the bonds and benefits, you have to look at sort of the whole package. and there are certain broad trends. one is the system redistributes money from higher income people to lower income people, generally, and the system redistributes money from later birth years to earlier birth years. so the people who retired on social security first got a lot more back than they ever put in. and then the next generation came along, and they're funding

their benefits. the reason your personal return from social security might be low is because -- not because of what's happening with the bonds and trust fund, but simply because your dollars were used to pay for the previous generation. now, as it happens the worst treatment by far is going to be for younger generations, and this is one reason why it's so important to reform the system early. because if you exempt people now in the system from the solution, you're locking in enormous negative returns going forward. because the personal returns are driven by these demographic forces and the relationship between the tax burden people carry and the benefits people can afford to pay them. if you just leave current benefit formulas where they are, younger generations, people just entering the system, lose a net 4% of their lifetime wages through this program. and that's not a total tax -- that's a the loss. that's the difference between after they collect all their benefits and what they're going to put in. so the system is going to

subtract net worth from the younger generation. now, getting back, this isn't really a function of what the system's invested in, this is just because of who's paying for what and which generation is supporting whom. unfortunately, a certain amount is embedded in in the count system already because we've got a lot of people in retirement, too late to fund their benefits, there's only one place we can get the money, and that's by taxing younger generations, and we're just stuck with that problem. >> anybody else want to -- heidi? is. >> i would say it's not absolutely clear that younger workers would have to lose 4%. we could start taxing nonwage incomes, financial transactions, we could use general revenues. it doesn't all have to be payroll tax. in fact, you know, some of the work that was done by -- [inaudible] showed that gift to that first generation, we could view that gift as something that, you know, all generations should be fairly shared, and it should be

paid by people who don't pay hardly any tax at all, people like bill gates. so if you took care of that and put enough general revenues into the system to take care of that, you know, you'd have a pretty decent rate of return. >> the general revenues don't effect the total return, it just changes the distribution that pays -- the net 4% loss is still there, it's just divvied up lately. >> you're just assuming a lot of things are going to stay the same. i'm just saying you could reform the system to make the system a lot more generous to the younger generation. it doesn't have to go the way you say. >> right, but doing general revenue transfers doesn't -- that would still come out of the pockets of the younger generations. that doesn't change the calculation -- >> i don't know, how old is bill gates, you know? he's not exactly young. >> well, whether you assess it on the payroll tax side or general revenue side is irrelevant to the calculation. it's a generational income transfer. it's not -- you can do it through income tax, you could do payroll taxes. the net will --

>> you could tax older people today who are wealthy, and that might help the younger generations in the future. i don't, i think there's a lot of ways to do it which would not have the impact you're talking about. >> could you just talk about, let me just sort of leave these formula questions aside and address what i took to be the question which is, why -- assuming there is money to invest, i understand that there may not be any, but assuming there is some money to invest, why is it that it's invested the way it is? why is the rate of return set the way it is? and if, in fact, the money were invested in the stock market as the gentleman suggests, what would be the rate of return over a certain period of years, wouldn't that increase the amount of money in the fund? >> i would say, first of all, why is it the way that it is, the bonds that are issued in the social security trust fund are, basically, under law designed to be reflective of the government's borrowing rate in the private market. so in the statute what it says

is whenever the system runs a surplus, we'll issue a special issue treasury bond to the fund, and the rate of interest will be determined by the market rate on all securities for the duration of more than, like, four years. so that's how it's calculated. and it's basically meant to represent the idea -- it hasn't worked out this way -- but it's meant to represent the idea that because the government gets to borrow from social security when it runs a surplus, it has to do less borrowing in the public markets, so the rate of interest is equal to what it would have had to pay in private markets. so that's the idea behind it. now, as to whether stock investments reduce the size of the problem going forward, i would argue, no, because basically you have, you have a certain benefit you're trying to pay, and you're trying to preserve to inflate beneficiaries from risk. you could offer a higher return if beneficiaries were willing to accept investment risk. and under president bush's proposal, for example, we could

say people can expect a higher rate of return from the personal account, but there's a risk involved. they might get higher, they might get lower. of once you try to insulate people from that risk then all you can offer is generally a lower rate of return. so from the government's perspective the least cost way of financing that benefit is simply through issuing treasury bonds. if it invests in stocks, you know, because it's trying to offer risk-free benefit, then basically due to variations in the return of those stocks, its net expectation value of the money you have to have available is not -- i probably didn't word that very well. andrew's done a great paper on this, so maybe i should let andrew -- >> i mean, the short story, you know, i favor personal accounts in the past, so the question you ask if i took my money out of social security and i instead had invested it in stocks, i would have done so much better. okay.

there's a couple of reasons why that doesn't really work. and i'll say this sort of argument was big behind the idea of personal accounts, and it made it very attractive. at the end of the day, i don't think it's correct. and the reason is, first, social security's an intergenerational transfer system, a pay as you go system. so it would be great for me if i could take my money out and put it in other investments. i could earn a higher rate of return without taking any risk by doing it. that's just putting it in government bonds, something like that. the problem is that money's currently paying for my dad's social security. so, you know, unless i want to cut his social security which i might be willing to do just on a family basis -- [laughter] but unless i'm willing to cut his social security, then we have to come up with extra money to pay it. well, if i have to pay extra while taking my social security money and putting it in the stock market, the rate of return sort of balances out because of that. you have what's called a transition cost. once you factor in the transition cost, the market rate of return is necessarily higher. now, you can get some return

through, by investing in riskier assets, by investing in stocks. you get a risk premium on that, and that's just how the market rewards you. you would have invested in the stocks and gotten the risk premium, and you would have been a winner in that. other people would have been a loser. the higher return is a compensation for risk, and it doesn't give it away unless there's a risk of actually losing money. i've done studies and papers showing by and large investing in stocks has been a great deal. the problem is what happened in the past may not happen in the future. so when you take issue with transition costs from a pay as you go system to a funded system and this issue of market risk, the rate of return is what it is, and there really isn't anything we can do to improve it. >> you're absolutely right in that. i can remember, people know better than i do, probably, in the clinton administration they had the commission i think it was 20% to go into the trust fund? i thought that was a terrific idea because it wouldn't be individuals taking the risk.

it would be shared risk of the government. but, you know, the way things have gone, i don't think it's on the table anymore. but that was a good idea. >> here's a kind of rhetorical question. how do municipal and state pension funds which are, in fact, invested in the stock market, what kind of models are they for doing -- >> [inaudible] [laughter] >> not today. [laughter] >> i would say this is actually really important because -- >> learned about this temptation to try to think we can escape the hard choices by turning more and more to social security to fill these gaps in other parts of our retirement scheme. but the reality is we've got the same problem everywhere we go. people say, well, 401(k) account took a big hit, so we need to have more defined benefit pension saving. but then you look at all the defined benefit systems, they all have the same problems. you look at employer-provided, state and local systems, you look at social security, you see amazingly similar problems.

each is about one-fifth to one-quarter underfunded, they're each underfunded for very similar reasons which is that it's easier to kind of promise more than you actually are willing to fund. it's easy to kind of of rely on accounting methods, sort of hide the scope of the actual problem. in the state and local pension systems, they hid behind aggressive rates, in social security we use accounting to make the problems look smaller. the bottom analysis is no matter where you go, you're not doing anybody any favors by promising more in benefits than the system has resources to pay. and that's equally true in social security as it is in these other systems. and we have to be really, really careful before we start talking about benefit increases that we only do this in the context of actual action to balance the system's books. if we do it outside of that, we're simply making empty promises, and that's not doing anybody any favors. >> well, i would just like to jump in and say that the groups that are proposing benefit increases are, indeed, proposing ways to pay for them.

but i did want to go back to the issue of wealth and income. we talked about how income is very unequally distributed. wealth is even more unequally distributed. and by and large, it is the older people who have the larger accumulations of wealth. now, on average older people are not particularly rich. relying on social security. but where those pots of wealth are,tyically, are a general generation from the struggling young parent who at the same time they're paying payroll taxes is supporting young children. so i do think that if we taxed financial transactions of investments, if we taxed wealth in some way, it would help this transfer problem that you spoke about because we did have a transfer to that early generation, and we haven't really made up for it in the system. and according to orszag's analysis that is responsible for part of the shortfall that we have now. so that was my proposal. i think my proposal does make

some rational sense, i would just like to suggest that. [laughter] >> yes, right here. >> phyllis from the wilson center. thank you all so much. this has been really, really interesting. understanding that there's a difference between what you might like to have happen and what is politically possible, can we just look at what we might like? my other assumption is that unless we think about the impossible, it'll never happen. so just to speculate a little bit, the question of if we raise the level, the income level which you had to go on paying taxes, we could take care of the problem. how high would we have to raise that level? would we tax all payroll income, or would it go to a certain amount of our 106,000? or what would it have to be? and the second question, and this is taking two hot button issues together admittedly. does anyone think about the

consequences, the possible consequences on social security income of immigration reform? are there economists thinking about that and what the impact would be of legalization on the social security system assuming that there are a lot of undocumented immigrants who are not now paying social security taxes? >> well, let me just talk about the first piece, about raising, you know, scrap the cap is what, you know, some of my friends want to do. and i've been in social security so long. social security, one of the basic things of social security was adequacy and equity. adequacy that lower income people got no return than higher income people. but equity was that, you know, higher income people give some return. and if you just raise the cap all the way up, where's the support for the program? the decision makers, i think, would walk away from the program. i mean, what would happen if you

raise the cap and just took away the cap? i mean, it'd be ridiculous, you know? you would be taxed, and you'd get really no return. and as far as immigration goes many people are much more knowledgeable about that than i am, but i do know many immigrants are here paying social security, and the money goes into social security, and they never collect it. they never collect it because they can't. they can't. so it's not all negative. >> well, the, you know, obviously, i disagree with barbara about kind of lifting the cap. there is no cap on medicare. and -- >> but it's a much smaller percentage. >> well, the taxes are smaller percent tax, it's true, but if we -- i think there's general agreement, and i hope we can find out from the other

panelists that, that when congress set the rate, set the cap in 1983, it was covering about 90% of all salary and wage income. and now it covers, the cap hasn't kept pace with the inequality which has so much of income, salary and wage income far above the cap now. that we would have to raise it to about, i think, $180,000 to get back to the level that we're at. that would not, of course, make up for the 28 years, you know, or so that we haven't, haven't been capturing 90%. but that would go a long way to solving -- >> and i'd be for that. i would be for that. >> and you would be for that, and i think -- >> i have a different perspective. [laughter] not so much policy, but i just want to talk about the analysis. first of all, there is before i

get into the analysis, there's actually a very good paper on this that just came out that i recommend to people, but it basically makes -- you often hear people say, well, back in are '83, 90% of all wages were subject to tax. wouldn't it be good from an equity perspective to get back to 90%, and, of course, as he said, the reason it's slipped is because we have a lot more earnings growth above the cap than below it. but what the paper shows is that the reason we have this skewed earnings distribution is that most of this growth has been way, way, way up here. i mean, the super rich is with where a lot of that -- is where a lot of that growth income has occurred. and when the skewed growth occurs, it causes the cap to rise more rapidly. now, it drops as a percentage of the whole, but the people who get hit the hardest are the people just right above the cap. and so if we go back and say, well, now because of the skewed earnings, we're going to raise it again to cover 90% of

previous earnings, we're going to disproportionately hit the people who have already been hit as a consequence of the cap rising faster, so it sounds afeeling at first glance but actually a double hit on the people who got the biggest hit. people below the hit aren't hit differently if they're indifferent to it, it's the people just above the cap get hit, and they've been hit the hardest over the last 25, 30 years as it is. you have to be really careful, 180,000 is about the level it'd have to go to, but remember in the social security system benefits are rated. so you collect more in revenue, you obligate more in benefits. so you have a form that makes additional benefit payments to people who need them least. if you go to the studies that look at what happens if you just take off the cap completely, obviously, you know, you're paying all these extra benefits to people who are incredibly rich, and you still tonight solve more than a fraction of --

still don't solve more than fraction of the problem. you could blow away the cap and not pay benefits on that and any of the excess. two points about that. one is that fundamentally changes the nature of social security. basically, you're dissolving that link between contributions and benefits. maybe we want to do that, and we'd have to have a very knowing decision we'd basically want to break that barrier and destroy that contribution benefit link before we do it. secondly, although it seems to get you out from a revenue perspective, it doesn't get you that much. it postpones by only a few years, and the deficits go on starting from the mid 2020s and go on forever. if you actually look at the year by year frau of that -- flow of that proposal, it doesn't accomplish what as much as you might think. it only closes about 15% of the outyear cash shortfalls even though it seems to do a lot better if you look at the trust fund balance. >> i think that talking about

raising this tax cap is, we've all spent a lot of time on it. i think it makes sense because it's one of the policies that really is out there. i mean, i agree with the point chuck makes. if you eliminate the cap, essentially you have a big trust fund buildup which will be spent on something else, and then you have bigger benefits down the road. you have to think, well, somebody's going to have to pay for them. so i don't think we're solving the problem in a bookkeeping sense, we're not solving it for future generations. the second point i would make is the effect of eliminating the cap on top tax rates. i think it's worth just running through a little bit of quick math on this. under the obama administration's proposed budget, the top income tax rate will eventually rise a little over 41%, you know, get rid of the bush tax cuts and eliminate a couple of exemptions. the medicare payroll tax rate has risen now to a little bit under 6%. the top state tax rate is usually around 6%.

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