isn't happening in the medicaid program the medicaid products one of those theories that is supported with scant evidence been proven fact. many other organizations have done work and we have done polling work ourselves to document the vast majority of americans have no idea who pays for long-term care and support and leave medicare will cover them in the time comes. for them or no one looks forward to being on medicaid because care in the public perception as being a welfare program. ..

wrist is this is a difficult problem whose scale will grow rapidly in the years and decades to come. there are two separate aspect to it. the first is going to be the nuts and bolts costs of long-term services driven by a greater number of individuals who require those services and increasing costs per person and really two things the committee can think about on dealing with that fundamental problem which is the cost. one his those kinds of preventive actions that could be taken to either defer or eliminate long terms needs and those that stand out are increasing prevalence of all flyers and dementia which lead to extremely costly cases and

research and other efforts can make progress on that. that is something that should be within the scope of the discussion. the second is the models of delivery which are more efficient, even the state, condition of beneficiary would lower the cost and deliver those services and the wall is picking very flexible strategies because we know that the current models begin informal care provided by family members, the need to work and increasing number of people leading services and we have flexibility in the delivery of the services as we try to learn what works. so avoiding building in to some sort of program or rigid structure is the first order of business given the costs problems that we are going to face. the second aspect is the final fanged legal cost of those services and i think we are going to have to do things very

differently. i at least believe an enormous effort should be placed on enhancing the private sector financing of the services as a top priority and doing everything possible. i understand this is not easy to have private long-term care insurance take a role in financing this. i say that for two major regions. the first is we know the current projected strains on the federal budget are quite frankly daunting and in my years at the cbo and my career spent studying congressional budget problems i never saw anything like the condition we find ourselves in. is not a time at which we can commit the taxpayer to additional mandatory spending commitments without thinking hard about it. right now the cash flow gap between premiums of payroll taxes coming to medicare and spending going out approaching $3 billion a year. unsustainable trajectory.

if we can enhance private-sector pickup of these costs before we put them on the federal budget everyone comes out ahead. the second reason is we have never pre funded costs of the services and if we have private insurance reserving premiums and pre funding payment for the cost of that care we would address the national saving issues and have a benefit of delivering better overall growth in economic performance at a time we are going to need every national dollars to meet a variety of demands on the private sector for resources to meet the standard of living for the elderly and population. the strategies have to be flexibility, prevention on the costs and private sector first on financing and i would be happy to have a discussion. thank you. >> thank you very much. we will go to questions and

comments. there appear to be three areas where there is strong evidence that we can indeed save money while at the same time not damage the effectiveness of long-term care. you are referred to these three. number one by keeping people out of the hospital in the first place, by not sending people to a nursing home until they need to be there and balancing or shifting nursing home residents who need to be there for a community setting, costs are lower. moving from here forward addressing these three things how can we do better? particular thoughts and ideas how we can improve on our costs of long-term care while not

damaging the products? >> 0 p.m. is interesting in continuing to improve the product we are offering. to clarify where we are, the experience of folks who are getting the services is relatively small. one of the things we are monitoring closely with the contractor as we go forward is advantages are made in the delivery of the service we work for the contract and to make sure those are applied to the program and we're interested in hearing what goes around the cutting edge of these programs are and what the best way forward is. >> initially what is the consumer have as choice? the number one thing we hear from older people in minnesota is remain in their homes.

if we can provide low-cost interventions we can delay the need for more expensive services for some period of time. that is what we're focusing on. delaying the need for more extensive services. we have a tracking in minnesota. 92% of long-term care in minnesota is provided by families and they want to continue to do so. the more we can support families to help their older family members, it will conserve dollars with higher need. >> is that 92% lead the nation? >> i don't know what other states are tracking. you have been in this field--the highest in terms of percentage?

>> probably on the higher end of the spectrum that i think family members throughout the country want to support their family members. they need the tools and the information and some additional support in order to do so but i believe there are people across the country who are committed to helping family members. >> you and others have said that a key is keeping people with long-term care needs in their homes as long as possible. hospitals out of nursing homes and in their homes. is that right? >> that is correct. >> what about you? >> chairman and. -- one of the goal, my testimony was directed on improving coordination of care and enhancing primary-care targeted to this population and coordinating the long-term care needs as well as basic medical

needs but i would add to that preventing unnecessary hospitalization that we have tremendous evidence of inappropriate, unnecessary and preventable hospital used by long-term nursing home residents to are not getting enough nursing care in the nursing home. i would urge tensions to holding nursing facilities. you can do this through medicare. holding them accountable for providing that care and thereby preventing unnecessary admissions whether for a bad sore or dehydration or things we can handle in the nursing home. the third area for medicare initiatives would be greater accountability for good quality care including preventing unnecessary hospitalization in special needs plans. the medicare advantage plans

that are directed -- we don't know very much about what goes on in those plans and we can do a better job of holding them accountable for delivering appropriate care. when you ask about promoting home and community-based care, i would answer what not to do, making major cuts in medicaid financing and federal financing for medicaid or turning over more responsibility to the state would put home and community-based care in particular in danger. nursing facilities have a great deal of political power. and i think that is -- when resources have been strained particularly as needs are rising to cut what is coming from the federal government would particularly put home and community-based services at risk. i would pick up on a question that i heard in dr. chernof's testimony about initiatives that

are moving to managed-care or long-term care that are primarily budget not quality driven. we have to be mindful whether we are getting appropriate home and community-based and other services for those beneficiaries. finally, i would endorse another comment for suggestion to dr. reena nadler -- chernof. as the population ages i am reading for those improvements and preventing all climbers. not only in my personal interests but clearly in the nation's interests. we are likely to see increased demand on need for public finance for long-term care. unlike dr. holtz-eakin i'm not a believer, we do not see that as the financing solution for the

problem with the we have now or we have it in the future. and enhance federal support as dr. chernof asked with the federalization of the program. point will be critical to get appropriate access to care at home and in the community as well as the population ages. >> dr. chernof, how can we do better without spending more? >> a couple of observations. i suggest you are asking a specific question about what can we do better now and i observed that there's also this other question which is how we plan better for the long term. i want to address my comments specifically to your question which is what can we do with current systems to improve them given what we know. i would observe if you were to look at our long-term service and support scorecard looking or cross the country and the

roadmap we completed with the center for healthcare strategies, looking at steps to improving systems whether it begins rebalancing or moving to manage long-term services and supports or creative models, we should be heartened by the fact that there are really good models out there and some of them are represented by a vote on this committee and we should be building on what we know. the notion that we are starting from scratch is not accurate. there are really good models and we should build on those experiences. to dr. holtz-eakin's point that flexibility is really important. how we are going to meet the needs of families and delivery systems is very locally based on assets on the ground and a resources. so the solution to your three points reside in organized, accountable systems of care that have flexibility to meet the

needs of families and are responsive to the assets that are available. i would offer that those flexible accountable systems have four the characteristics. the first is they begin by focusing on the quality and coordination of care. the notion of targeting the right services is incredibly important and how you get the efficiency to look forward. the second point would be that they have rebalancing at their core which means we will focus on helping folks stay in the communities of their choice. we will work against the tyranny of the bricks and mortar. i grew up in hospitals and cared for people in nursing homes. bricks and mortar drive so much financing of health care. what we're talking about is a system that begins and reside in the community. the third key point would be a notion of self direction and choice. it is hard for clinical providers to do that. i told myself among them. we really start by talking with patients and families about what

they want and try to achieve that because that will be the most cost-effective choice and one that keeps the family, the individual even -- they are in the driver's seat. the fourth characteristic is any of these changes do need to be efficient system is. they need to generate cost savings that can be used to support the system. they generate outcomes and improve quality. the notion that you measure what you are doing, not just building systems that are more expensive because they are better but better systems that are actually more efficient and better storage through public resources we use. >> dr. holtz-eakin. >> i think the important thing to echo is there are models and examples that appear promising at the moment for particularly the work nation. in many cases across what are traditionally separated

long-term care and health services. our experience at -- when i was cbo is successful models don't scale successfully. what i would urge you to do is think about scaling things up. in particular if you're going to go past something that looks like demo pilots example and focusing on the state as the vehicle for scaling makes a lot of sense because they have the capability of running large-scale programs like medicaid. they have flexibility how they influence things and you can learn from different experiences. a focus on the same level makes sense from that point of view. we know many states have been successful in the health area using managed medicaid approaches with controls throughout them and the extent that we wanted to try more coordination through that vehicle. that would be a sensible first step in this area and see what results we get on larger

populations. >> senator corker. >> thank you for your testimony. as you look at the issue and the overall financing for health care in general. obviously a major train wreck. this weekend, visiting neighbors in a long-term care facility and it is incredibly expensive. we all have loved ones or friends or neighbors that have had alzheimer's. we see more of that coming. the financing component of it is incredibly difficult and a national issue in moving to the national crisis. how are private institutions you dealt with that are actually insuring long-term care on the private side, how are they actuarially doing? it seems to me it is difficult at this juncture knowing so many

changes demographically but also larger occurrences of alzheimer's. obviously much larger -- how in the world are private institutions fairing that are in the long term care business and are there concerns about insolvency down the road? i know some of you don't like privacy. but go ahead. >> i think we have seen some private failures where they have not adequately manage those risks and some people leave long-term insurance as a result but we have also seen some of the institutions both understand the interactions with medicaid better and took advantage of the partnership opportunities and offer policies that protect against 5% inflation risk to the beneficiary and still manage their finances well enough to stay in business.

there are still people in the business and being successful. if we get more examples where there are more employers providing the gateway to large pools of individuals, they would have a much brighter future. when you look at the sort of things that matter for for making private insurance more successful and a bigger part of this, i want to emphasize i don't think private insurance will pay every dollar moving forward. most have two families. that is the bulk of it. we have to get every dollar we can in private insurance because demand of the public-sector are going to be enormous. i think awareness, start with awareness campaigns. there's a lot of awareness about the need for this and who is going to pick up the tab. get wherever you can as part of the package so people can see

it. >> you been in a cafeteria. >> deal with medicaid coordination. there is literature suggesting medicaid crowd out insurance. it deserves serious consideration. not the only reason there is trouble. you could consider some things through the tax code. none are magic bullets but since we have a saving need and long-term care financing the, products the additional long-term care insurance, innovative products favored by the tax code. part of the solution, go back to the literature on how to get people to save, you have opt out. star with a long-term insurance as part of a package and opt out if you don't want it. none of those are in and of themselves fabulous or going to solve it but all of them have merits of consideration. >> not that i don't like private long-term care -- >> i was going to ask you about public.

>> and that as well. not that i don't like it but, doug has couched his advocacy suggestions. suggestions. it is a neutral term. in terms of recognizing it is part of the solution. it is not the solution. my concern as we look -- as long as i have been working on this issue and it is going to be getting close to long enough to need long-term care, that is called a fledgling industry. it is very challenging for this industry to grow. it is doing -- serving the same number of beneficiaries today as it was 20 years ago. it is not falling. several of the companies or certainly some prominent ones have stopped offering the product. i don't know that it is because they are going out of business but having difficulty making money on it and making it grow

because the ways in which they keep from going out of business is they set up limits on lifetime benefits and are careful in selecting their beneficiaries and when necessary increase the premiums even after people have been paying for many years. it is a product that particular the -- quite interested in promoting strong quality standards for insurance. if it is a good product is good that people with means can afford it but the number who can is modest. the industry itself recognizes that. my concern with the strategy to make it better, making it better is great. my concern with any strategy that would put tax incentives into it, that is spending public dollars for going revenues as dug well knows, if i am choosing, i would rather see

them afford not for those who are most able to move forward because we know historically those subsidies do in fact go to people who probably would have bought it anyway. >> we are in sort of an environment here that is moving more towards tax reform that doesn't incident and does away with many of the $1.2 trillion in tax breaks we give each year. i understand that is a suggestion to cause there to be greater uptick and at the same time the momentum right now is in a different direction and everybody acknowledges that. >> just to add one observation in a critical place and the folks on each side of me. the challenge i see in front of us is we have failed as a country to achieve a social policy goal of getting people to plant effectively for their

long-term services as they age. given that 70% of folks need them. when you look at things like the partnership program which is a nice incremental step the reality is it is an open question whether the partnership program covers new people or people who were predisposed to buy long-term care coverage which is a good thing. so those sorts of challenges suggest that what we have is a boutique or a niche product and many of the solutions we look at sort of build in an incremental way. the challenge or opportunity in front of us may be to look at larger scale solutions and broader forms of coverage whether in public or private space but we need to get to a place that has people more engaged and there are cost-effective choice is in front of them. >> professor feder, you're a

major champion not necessarily of the class act but something like that weather was public financing in place and if you look at where we are in today in today's dollars the average american family are making average wages puts about $119,000 into the medicare program over their lifetime in today's dollars. that same family takes out of medicare over their lifetime in today's dollars 357,000. you really as we know cannot make that up with volume. and a lot of volume is on its way over the next ten years in particular. knowing that we are not particularly good at making those things work in the public sector, we always want to give people what they wish without asking them to pay for it. that is the way politics have been in western democracy. is there a way for us to

effectively designed in your opinion a public plan that addresses the concern you are talking about? that we are all talking about? >> i think there is. there's a lot of resistance to that at the current time. >> i think a lot of it is because of the way we handle these other programs. >> let me address that. it is useful when we heard a couple times accurately that 70% of people turning age 65 are likely to need long-term care. the reason we are talking about insurance whether public or private is because there's a lot of and predictability for individuals about where they are going to fall. the 70%, 30% not needed at all and we may all route for that building to a ripe old age and then said goodbye. that would be the best. there also even within the 70% about 17% use less than a year

of intensive long-term care services. at the other end of the spectrum, 20% use more than five years so there is variation. that is why we talk about insurance. savings alone, you can't do it. it is not billable. that is the first thing. on your medicare point, the problem is rising health-care costs. we contribute during our working years at a rate of growth we have seen on health care costs. we only contribute during our working years to cover mostly hospital costs which is only half of the costs and the rest we can pay through premiums and general revenue. that pre funding, such an imbalance is because we are not controlling health-care costs. medicare is doing worse than the private sector. the whole system is not controlling health-care costs.

if anything medicare is doing slightly better. historically in most of history slightly better in controlling costs. now going forward, because we are moving toward more integrated care we are looking to have medicare leave the system in making that more efficient. i wouldn't sherri negative view toward medicare. we need to do better in all our health care spending. what you are raising -- >> i wasn't giving the negative view. i was stating fact. [talking over each other] >> three times as much as we are taking in. i am just saying as politicians we have difficulty aligning those things. i agree with you that in the public and private side health care costs have not been in control. i am not making a differentiation between public and private. we just haven't handled this program or any other entitlement program very well. >> i am not sure we agree on that but that is okay.

we can move on. what i would say is what i thought you were talking about was looking for a way to free fund. i would be happy to provide for the record a proposal that was developed by lynn berman who used to run the urban institute brookings joint task center and a colleague of his at the urban institute. that put forward a design for the refunding of services. that is -- can be done. challenging. refunding which medicare is never designed to be is what i was saying earlier, is challenging because we do when we take in at the federal government we tend to lend ourselves that money and we want to put it away. that is for a challenger. i would be happy to share that. >> i would love to see it.

>> i know senator udall has a couple questions. go ahead. go ahead, senator mansion -- manchin. >> we all know medicaid was never intended to be the primary problem -- long-term coverage but medicaid's longest payer of long-term care services with long-term care accounting for almost half of national long-term care spending. as a former governor i know giving our state flexibility and resources they need to innovate is a first and critical step toward controlling spending. in the medicaid program and improving long-term care outcomes. we will never achieve quality and savings with a 1-size-fits-all approach that ignores the differences in medicaid population from state to state. as you noted in your testimony minnesota is flying waivers

under medicaid to improve wages and pay for services and make sure services go to the most in need which i agree with. that being said what steps could congress take to improve and increase flexibility to states like west virginia and minnesota to maximize the value of long-term care in the medicaid programs? >> thank you for the question. i do believe states can manage the programs effectively and minnesota is an example if you have the vision and if you have a bowl or plan appropriately you can achieve that. but it takes some prerequisites. you can't have a community based system unless you plan to have a home community based system. if you have the structure for communities to retain people of all ages in their community. i think we have to not only move

away from a 1-size-fits-all philosophy that all states will look alike but also that the waivers have to look identical. we have had this partnership with the federal government that begins with the assumption that the institution because of the way the programs were initiated, the institution is the entitlement and you have to seek permission to do things differently which is always contrary to my thinking. why we have to ask permission to do things differently that the consumer wants. i will repeat. people want to stay in their homes. we are redesigning a system whereby the most expensive care, most expensive services, waiver will be available to those with the highest needs where it cannot be provided elsewhere.

but beyond that, we want strategies to maintain independence, again, low-cost strategies to maintain independence, low-cost strategies to encourage transition back to the community. we had some success with that. transition to communities from people who have been in nursing homes longer than 90 days are proving successful but it takes a person by person strategy to achieve that outcome. we can't just declare that that is what we're going to do. it takes resources which is what minnesota is doing. if we dispense with the waiver and everyone has that full menu as opposed to targeting based on individual needs, where in the system they best can use -- >> you believe in waivers? >> yes. >> mr. chernof, on the waivers,

how did state have a little more flexibility and you believe that is important? >> thank you. building on what was already said, there needs to be a valid, reliable delivery system in place. to get from where you are to where you want to be depends on the resources that are currently available and if you don't have everything you need then you need to get the time to grow those resources. that to my mind is what these flexibilities are important. if you are going to be -- encourage folks to remain in their home in their community, there have to be valid, reliable, observable, accountable resources to help those families when they need that little bit of help. where the flexibilities come in i do agree moving away from the

entitlement being threatened nursing home or getting to a place where folks get home and community-based services as a right. not as a waiting list but as a right. that is a huge step in the right direction. it is an important piece of flexibility but what states need to demonstrate is there is really a valid system that is there to meet the needs of folks as we meet the transition. what states need to demonstrate to ask about flexibility is that there really is the demonstrable system where quality is being measured. a way for folks who were having a problem, beneficiaries -- we need to move away from brick and mortar. >> a like to ask mr. holtz-eakin, in your testimony is a common misconception that medicare covers long-term care and many more simply never save or plan for it and for long-term care service and support. what do you think could be done or should be done for us to

educate the public? so many people are falling through have nowhere to turn to. >> i don't know that there's a magic public education program. enormous problems in federal programs and their costs. difficult to win decayed the american public. there have been some future initiatives. those are the things you look and see what success we get. relatively small scale. if they turn out to be a good investment, do a project evaluation and they improve awareness. that would be great. the more you do through the employer community, often very effective at reaching their employees about various financial management issues. those are the two things to do. >> thank you. >> senator udall. >> thanks to you and ranking

member senator corker for this important hearing. this discussion is helpful on macro cosmic level. i have a few questions that are more focused but i want to acknowledge dr. chernof, you are sitting between those two advocates. chairman kohl, very soon. thank you for your spirited conversation. mr kohl. mr. colman, and the follow-up on what senator manchin pursued and what particular focus and the will turn to dr. feder as well in rural parts of the county. in colorado with every eastern region of the state is very rural. we create a lot of fruit and fiber and fuel for the country. we have western regions in colorado that are very rural. what have you found a unique challenges in long-term services in those parts of your state? dr. feder, how medicare itself could work with that dynamic?

>> minnesota has greater minnesota also. population density is a challenge in providing services to older adults and people with disabilities. what we found is we need flexibility. relying upon the communities and the community infrastructure with which to based long-term care service and support. we need to acknowledge the drive time, differences that we need to accommodate in our policies to allow poor people to have some choice but maybe not as much choice. it is a challenge to divide policies that accommodate those distinctions and differences but it can be done. we are also learning the value

of technology. and the fact that every day there is more to be learned about how to support people in their own homes with the use of technology and the internet and other lifeline systems and monitoring systems for people who are some miles away from services. >> dr. feder? >> i would reiterate and reinforce the emphasis on technology to connect people who are dispersed to resources that can serve as support and check people who can check in on people who are impaired and be able -- skype is a wonderful thing. i am sure we have better than that but we have mechanisms that can make people feel connected and support and keep them connected to care givers who are more likely to be caregiver's by

which i mean medical technicians in urban areas. you asked about medicare. medicare in terms of developing integrated delivery system is, medicare is in the process of doing this. better care would not look only at state that medicare can do a great deal and is in this regard. by trying to support physician practices in rural areas and using personnel who can serve several practices as care coordinators' who are able to connect visits and technology to people who are in their own homes and enable them to connect to resources for support. medicare can do a lot in that regard. >> you could be making house calls using technology without actually being on site? >> i am confident it is not

exactly the same but you could greatly enhanced support for people both in terms of monitoring their conditions and in terms of helping them keep track of people so you know when the crisis is occurring. that is what we are looking at with social workers and nurses and other professionals who helped identify when people need intervention and try to connect them to the resources and infrastructure we are talking about building so that they can stay at home so it doesn't have a crisis and we don't have an unnecessary -- >> my parents were very stubborn. i'm sure i won't be stubborn. my children think i am very flexible. they want to live in their own homes in their later years. imagine that. they both took fall. both of them were in the bathroom and kitchen respective for half a day or longer and the result of those fall ended up in

their desks. i wonder if there could be that sort of monitoring and privacy concerns. >> we can do better. no question about that. think about things like hospitalization. having somebody checking in on you that you're eating properly and taking medications and all those things can very much improved quality of life and quality of care for people and prevent expensive services. >> dehydration contributed. let me go back to long-term care insurance. dr. holtz-eakin spoke to this and i have my little pamphlet sitting in my home office suggesting long-term care insurance. i haven't responded yet. i keep thinking i will find a moment where i want to do that.

long-term care, john hancock, what are you doing to think about attracting more carriers and a little bit of time left. i might ask dr. holtz-eakin how we use market forces and market psychology to get us aging baby boomers to participate. >> you have identified one of the challenges we see for the federal long-term care program going forward. in recent years the number of insurers who are actively participating in this market have gone down. i am not so concerned that we have one provider of long-term care program right now. i think the way we have done it is the way we do life insurance and it is not like health insurance where people are changing yearly. what i am more concerned about is we only had one active bidder to provide that service. so we are looking very

carefully. at the moment we have a provider to is doing a good job but a concern long term for this program is there are enough active participants trying to actually provide that service. the point was made earlier today that the market stayed relatively static over a number of years and is not growing rapidly. we are very happy with the fact that with our most recent when the contract opened up again that we are increasing by 20%. which we thought was very positive. it is one of those challenges on the horizon for us. >> i could help those numbers if i signed up. >> you can sign up any time. you can do it in the hearing. >> it is important to harness market forces literally from the ground up. you have heard the technologies and the need for flexibility and the markets are very good at

that but there are rules for government in this and they are on both sides. you care about privacy. you care about having quality personnel when it is someone's home. when you live your -- regulate what a person can or cannot do you cannot get to the benefits of services. a thorough review at the ground level, ability to provide services more cheaply is going to make the care cheaper and that helps make insurance cheaper. you can't get around that. a very expensive underlying care makes insurance harder to sell. you have to make money or you won't stay in the insurance business. we had too little awareness and too little education for people to sign of. insurance is sold and not bought. we need to sell more. that is a big part of it.

to the extent the experience of the boomers in caring for their parents drives us. that is one thing that might be different in the future than the past. >> i think president clinton once remarked this is a high class problem we have because of the extension of our life span but it is a real challenge. thank you. >> thank you very much. senator udall. >> parter holtz-eakin, you expressed concern about a long-term insurance market. individual market has not thrive in recent years with the increases as high as 90%. on the other hand, but i am very proud of, mutual never had a premium increase. in your opinion how can we succeed with a long-term care insurance market in keeping

premiums reasonable and getting people to participate in long-term care? >> step number one is work on those to the extent possible and step number 2 is full this as effectively as you can and make sure you can get broader pools. that is the problem with individual markets and this is the individual market at the moment. ways to enhance the pulling particularly by -- through their employer, making them more successful. >> i think i am good. i look for the same professor, i thank all of you for testifying. this is a very massive problem. people are not thinking in advance of those kind of things

down the road. they have difficulty seeing daily and yearly activities. i think the comment that you made about insurance being sold and not bought, here we have -- i haven't signed a peter. and i may not. it is a big problem. the costs associated with this -- i hate to go back to that -- i appreciate doctor chernof's comment about customizing and making this very customer/patient centered. we were aggressive in tennessee in seeking waivers and moving to community based solutions and that was done by people on both sides of the aisle through the

years. real need to be involved in dealing with and there's a public sector role. i am on the private side, trying to -- sounds like northwestern mutual. has done a good job of it but the actuarial issues of being able to take in premiums now and know that will deal with situations down the road is really tough. i thank you all for educating us today and coming from other places and look forward to seeing you again. >> any other comments? thank you so much for being here. it is clearly a complicated thing that very important and you shall lot of light and thank you for coming.

[inaudible conversations] [inaudible conversations] >> the house ways and means committee is looking into the pros and cons of retirement savings plans available now. at this hearing the committee discusses possible changes as part of a comprehensive tax reform. representative david camp chairs the two our meeting.

>> good morning. we need to continue our dialogue about a bipartisan fast-forward to reform federal income tax system. in recent weeks much of the discussion about tax reform and on the corporate side. and on april 1st leaving america with the dubious distinction of having highest corporate tax rate. it is unacceptable that american employers face an undue burden when we need them to get the economy growing and get thirteen million unemployed people back to work. as tax filing they reminds us only comprehensive tax reform insures we address the need of american families regardless how they -- the individual side of the tax code of we transform today's broken code from one that impedes the one that improves prospects for job creation.

and 1 forty two million tax returns. they receive 10.5 million extension forms in part due to the complex, costly and time-consuming nature of the tax code. with 4500 changes in the last decade, 579 of them in 2010 alone, the code is too complex. this complexity lead to ever increasing costs of complying with the federal tax code. according to the national taxpayer advocate in 2008 taxpayers spend $163 billion complying with individual and corporate income tax rules. american family the spending more money complying with the tax code and also spending more time navigating through the tangled web of tax could result in taxpayers' spending six billion hours annually to comply with the code. weather is the compliance and administrative burdens or impact of temporary and expiring tax provisions or the effect of convoluted rules and financial planning decisions today's tax

code is not just can't bring employers but the ability of individuals, families to plan finances with reasonable certainty. turning to the topic of today's hearing, tax incentives for retirement savings, becomes clear why we're taking time to lay the foundation for tax reform by gathering input from experts. many americans work to meet the needs of the tax filing deadline today's testimony reinforces the wide popularity of savings vehicles. the overwhelming majority of american workers with actress workplace retirement and two workplace retirement plan participating in that plan. according to the bureau of labor statistics, 78% of full-time workers with access workplace retirement plan and 84% of those workers participate in the plan meaning 66% of all full-time workers participate. the plan benefit taxpayers of all income levels and all walks of life. in 2010 over 70% of workers

earning $30,000 to $50,000 participated in an employer sponsored retirement plan if such a plan available to them according to data from the research institute. similarly irs data indicate 30% of those participating in contribution plans make less than $50,000 a year and three quarters make less than $100,000 annually. proliferation of tax favored retirement accounts has led congress to create new types of plans with different rules. some have questioned whether the large number of plants and different rules and eligibility criteria reduce the effectiveness of incentives and increasing retirement savings. in addition many commentators offered ideas for increasing participation in retirement plans and better targeting the incentives. these ideas range from consolidation of existing plants and accounts to changing the default rules governing whether an employee participates to additional incentives like sabers credit. as the committee continues to

work toward a comprehensive tax reform is important to keep in mind these savings vehicles affect average people who depend on these resources. we must insure we do not inadvertant we take steps that result in an intended consequences that could threaten their retirement security of ordinary families. if this committee considers tax reform by believe there are three important principles to keep in mind when evaluating tax retirement vehicles. simplification, increased participation, particularly by low and middle-income taxpayers and where there are tax benefits effectively and properly targeted. regarding the first of these principles in august 2010 the presidency advisory board also known as the volcker commission presented options for simplifying savings in a report on tax reform options. these options are worth the of consideration and discussion. we have an expert panel of witnesses who will evaluate how existing tax rules measure up to these criteria. i would like to emphasize

today's hearing is about drawing conclusions but is about making sure as congress approaches tax reform we do so well armed with information. washington's than too much time acting first and asking later. that has proven to be the wrong approach. american families and job creators deserve better than a trial and error approach to crafting policy. this is our opportunity to gather input to get facts and arming forward to the discussion and i now yield to ranking member, mr. levin. >> this committee's initial examination of what tax reform might mean for a very specific set of tax provisions. those designed to promote retirement savings. tax preferred retirement savings benefited tens of millions of american families. the estimates of exactly how

many very. most fined 40% to 50% of all workers are covered by an employer sponsored retirement plan some 60 to seventy million people. employer sponsored plans including defined contribution and benefit plans, private and public sector, hold assets of $9.3 trillion, held that amount as of the end of last year and in addition, forty-nine million told four$.7 trillion, the tax referred retirement system is voluntary. employers are not required to offer retirement plans. but i think we will hear that employers basically understand the current system in that it works for them in terms of allowing them to offer

retirement benefits to their workers. i know to most of this committee agrees with that. mr. neil introduced a resolution in support of our current system, co-sponsored by 150 members including 26 members of this committee. reflecting bipartisan agreement that these provisions are vital to encouraging retirement savings. that is not to say the current system cannot be improved. of course it can be. today i believe we will hear about several ways to do that including proposals to expand enrollment in 401(k)s and iras and expand the savings credit. what should be clear is the basic structure of our current system should be preserved. at this juncture should not be repealed to pay for tax reform.

tax reform should approach retirement saving incentives with an eye towards strengthening our current system and expanding participation not as an opportunity to find revenue. i think one of our witnesses summed this up nicely in his and your written testimony and i quote, the retirement savings tax expenditures should not be reduced or tinkered with to pay for other initiatives whether inside or outside tax reform process. those funds are the primary retirement nest egg of millions of american families. they should not be taxed in order to finance more government spending, deficit reduction or to offset other tax initiatives including lower marginal tax rates. finally, i want to note that while today's hearing is focused

on defined contribution plans, our retirement security policy in this country has traditionally been a three legged stool with personal savings constituting just one of those legs. the other two legs, defined pension benefit pensions and social security, are indeed also vital components of insuring americans' retirement security. ..

the employee benefit research institute since 1988 and is published more than 100 papers on employee benefits. second we will hear from mrs. judy miller, chief actuary of issues and director brad retirement policy at the american society of pension professional and actuaries and a specialized in employer-sponsored retirement programs for nearly 40 years. and third we will welcome mr. bill sweetnam a principle at the lug group in washington d.c.. mr. sweetnam specializes in retirement security and service benefits tax counsel from george w. bush treasury department and forth we will hear from mr. david john, the senior research fellow and retirement security financial institution at the heritage foundation. mr. john is published and testified extensively on the improvement of of retirement security plans. and they we welcome mr. randy hardock a partner at davis and heart numb llp in washington d.c.. mr. hardock is every electric compliance specialist, maintains

a practice focused on employers and institutions in retirement and saving issues. mr. hardock is testifying on behalf of the american council. thank you colligan for your time today. the committee has received each of your written statements and they will be made part of a formal hearing record. each of you will be recognized for five minutes for your oral remarks. mr. vanderhei we will begin with you and you are recognized for five minutes. >> thank you. chairman kim, ranking member levin and members of the many thank you for the opportunity to speak with you today on the issues involved in tax reform and tax requirements accounts. it's a nonpartisan to do that as been conducting original research on retirement health in a bid for the past 34 years. it does not take policy decisions and does not lobby. my testimony today draws on extensive research conducted by us over the last projection model, as well as well as annual

analysis of behavior of tens of millions of individual participants from tens of thousands of 401(k) plans dating back in some cases as far as 1996. measure in retirement income adequacy is an extremely important conflicts topic and provides this type of measurement in the late 1990s. figure 1 of my written testimony shows the model of the baby boomers and gen x'ers earlier this year 43 to 44% of the households were projected to be at risk of not having adequate retirement income per basic retirement expenses plus uninsured health care cost. even though this number is quite large the good news is that this is by three percentage points lower than what we found in 2003. it would be my pleasure to explain in more detail later by a american households are better off today than they were nine years ago even after the financial and real estate market crises in 2008 in 2009 but the short answer is extremely positive impact from automatic

enrollment in 401(k) plans. it's difficult to imagine any volunteer strategy more effective in dealing with retirement adequacy of an than increasing the likely would have eligibility in the qualified retirement plan. figure 5 of amar'e decimation of the importance of defining benefit plans for retirement income adequacy and that figure 6 shows a similar analysis of 401(k) plans. the number future years that workers are eligible for participation in defined contribution plans makes a tremendous difference in their ratings. gen x'ers for example with no future years of eligibility are simulated to run short of money 61% of the time whereas those with 20 or more years of future eligibility who experienced the situation only 18% of the time. knowing the percentage of households that will be at risk for inadequate retirement income is important for public policy analysis however equally important is knowing just how large accumulated deficits are likely to be. the aggregate deficit number is expected to be $4.3 trillion for

all baby boomers and gen x'ers while trillion dollar deficits are useful in focusing attention on this problem, they do little to help policymakers understand exact rate where these deficits are coming from. for example figure 3 of my written testimony provides information on retirement savings shortfalls for gen x'ers. the average deficit decreased substantially with additional years of future eligibility in defined contribution plan and gen x'ers fortunate not to have at least 20 years of future eligibility finder average deficits reduce more than 70% of the average deficits for those with no future years of eligibility. ebrird research has shown repeatedly additional research of a 401(k) plan under current tax incentives has the potential to generate a psalm that when combined with social security benefits would replace a sizable portion of the employees pre-retirement income for those with continuous coverage. our research has also shown that

the automatic enrollment type of 401(k) plan when combined with automatic escalation provisions appears to have the potential to produce even larger retirement accumulations for most of those covered by such plans. recently however there've been proposals to modify the existing tax incentives for defined contribution plans by either tapping annual contributions or changing them before tax of employee and employer contributions in exchange for government matching contribution. last september the senate finance committee held a hearing that focused to a large extent on the second type of proposal. hardock presented -- ebrird presented evidence of the possible impact of such a proposal and future 401(k) accumulations. in recent months results of two new surveys have allowed ebrird to model these effects more accurately and last month we published our new results showing projected changes in 401(k) balance the retirement age due to expected modifications of plan sponsors and participants in reaction to that proposal.

figure 11 in my written testimony shows a 22% reduction in 401(k) balances in retirement for young workers and in the lowest income quartile, those most at risk for insufficient retirement income. the results are even more dramatic for small plans. figure 12 shows the average reduction for low income employees in these plans are 36 and 40%. in conclusion given the financial state of the future generations of retirees, appears to be so strongly tied to whether they are eligible to participate in employer-sponsored retirement plans, the logic of modifying either completely or marginally the center structure of employees or employers for plants at this time needs to be thoroughly examined. the potential decrease of retirement income resulting from either employer modifications to existing retirement plans or employees reducing future contributions to these plans needs to be analyzed carefully

when considering the overall impact of such proposals. thank you and i look forward to your questions. >> thank you very much. ms. miller you are recognized for five minutes. >> thank you chairman kim, ranking member levin and members of the committee. i am judy miller chief of actuarial issues and director of retirement policy for the american society of -- more than 8000 members work with retirement plans were for employers about is their primary focus is plans for small business. t. key features distinguish retirement tax incentives in the code, the deferral nature of the incentive and the nondiscrimination rules that make employer-sponsored plans very efficient at delivering benefits across the income spectrum. unlike other tax incentives come incentives for retirement savings of our deferrals. they're not permanent exclusions. and employer paid health and if it are excluded from income where mortgage interest is deducted this amount will never be taxed. the traditional retirement savings account no income taxes are paid on contributions when added to the account of the same

contributions are included in attackable income when the amounts are paid from the plan. in other words, every single dollar that is exempt from tax now will be subject to income tax in the future. since most of those retirement years are outside the governments i've are 10 year budget window looking at the so-called tax expenditure for assigned countries and plans on a sort short-term cash basis overstates the cost of this incentive. in fact few estimates by former jcp staff show a better measure of expenditure for defined contribution plans is more than 50% less than the jctv cash basis estimate over a five-year period. as you consider these issues let's not forget this is a deferral. the amount of revenue you might think you are raising and cut retirement savings incentives is not rep and again. its bookkeeping fiction. the second distinguishing feature is the nondiscrimination rules to make sure incentives for retirement plans don't discriminate in favor of highly paid. the result is this tax incentive is more progressive than the

current tax code. households making less than $100,000 pay 26% of all income taxes but they get over 60% of the tax benefit incentive for defined contribution plans. this is analysis under state the benefits because it doesn't recognize a good part of small business owners, so-called tax savings is transferred to workers in the form of contributions. let me explain. a small small-business owner usually considers a plan when the business is finally become profitable. the owners show how setting up a retirement plan can save enough money on their personal income taxes to pay most of the cost of contributions like matching contributions that will be required for employees and nondiscrimination rules. it's a beautiful thing really. deferred income tax for the owner becomes current contributions for workers. data clearly shows the key to promoting retirement security is workplace savings. over 70% of workers earning from 30 to 50,000 to participate in a planet work but less than 5% save on either a of their own.

the bureau of labor statistics data shows 70% of full-time workers have access to replace retirement plans with 84% participating. almost 80% coverage is the best story. morning to be dumb but the committee should discuss the system. we support the auto either a supposed al as a way to extend workplace savings by building on the current structure. recent tax reform proposals include dramatic cuts to maximum contribution limits, cap on the value of the current year's exclusion for households making over certain dollar amount or conversion of the current year's income exclusion to a credit. all of these proposals would reduce the incentive for small business owners to sponsor workplace retirement plan and will be a big step in the wrong direction. i have over 20's experience selling plans to small business owners. with rare exception the current year's tax savings was a cretul factor supporting the decision to put in a plan. it's not just small business

owners that are selfish. quite the contrary but in real-life they real-life they are sitting on lots of cash. savings generated from the retirement plan tax incentives provide cash to help make contributions required by the nondiscrimination rules. reducing incentive literally reduces the cash for small biz has worked with. there's not doubt a doubt in my mind reducing incentives would mean fewer plans unless contributions toward workers retirement. one of the questions posed in this hearing, the simple answer is no. a proposal to combine all the fine car division plans into a single type of plan might look like simplification on paper but in fact the combined 401(k) and 457 feet would disrupt savings for employees of state and local governments and other nonprofits. believe me when you're talking to an employer about setting up a plan flexibility is not the enemy and one size definitely does not fit all. that is not to say simplification is needed. for example risen reports from

small business, and i would be pleased to work with the many on these further simplifications. in summary the room improved retirement security for working americans is expanded workplace savings reducing incentives for small-business owners to sponsor retirement plans is the opposite of what needs to be done. i would be pleased to discuss these issues further with the committee or answer any questions they may have or could thank you very much. sneh thank you very much. mr. sweetnam you are recognized for five minutes. >> chairman camp and making member levin thank you for the opportunity to test by this and. on a principle of the law firm that focuses exclusively on employee benefits law. prior to joining groom i was a benefits tax counsel at the office of tax policy at the department of treasury from 2001 to 2005. i will testify today about the simplification proposals for retirement savings accounts that we developed at the office of

tax policy and that were included in the bush of administrations budget proposals for fiscal years 2004 in two and 2005. please note that i'm speaking today on my own behalf and not speaking on behalf of the firm or any firm client in my testimony. one of the reasons to simplify. the code provides various incentives for individual retirement savings for employer-based retirement savings and further savings such as the payment of medical expenses or educational expenses. all the savings vehicles have different eligibility requirements and the amount of the tax could change based on the individual's income status or his or her participation in other savings programs. employer-provided retirement savings vehicles present their own level of complexity. under the internal revenue code fair number of retiring -- retirement savings vehicles including 401(k) plans, 401(k) d. programs in 457 be plans. some rules vary depending on the

type of plants and their limitations on the type of entity that can adopt certain types of plans. multiple nondiscrimination rules at complexity to the administration of these plans. will nondiscrimination rules are a means of making sure that the lower paid employees share in the benefits provided by the savings plans, some commentators argue that the level of complexity is excessive in relation to the benefits that lower paid employees receive. the administration's 2004 budget proposal outlines a simplified system of retirement savings with only three types of favored vehicles. lifetime savings accounts, lsa's retirement savings accounts, an and employer retirement savings accounts, he rsa's. lifetime savings account some individuals would contribute $5000 on an after-tax basis to an lsa. amounts contributed would grow on a tax-free basis. there would be no income limitations on contributors to

the lsa. distributions from these accounts could be made any time regardless of the individuals age and can be used for any reason by the owner. those individuals might be more willing to conjure between lsa because they could access the money saved in the lsa in the event of an emergency, which is different than making conch rations to a retirement-based system. next was retirement savings accounts, rsa's. individuals can contribute $5000 on an after-tax basis to an rsa with account earnings growing on a -- basis. no income limits would apply to contributions to an rsa. qualified distributions, i.e. those made after an individual paid age 58 or an event of death or disability would be tax-free. all other distributions would be considered non-qualified distributions and would be included in income to the extent

that this distribution exceeds age. finally employer retirement savings accounts. urso's would be available to all employees regardless of the type of employee. they generally would follow the existing rules for 401(k) plans including the 401(k) contribution limit, the catch-up limit for employees age 50 and above and the availability of contributions. the nondiscrimination taxing rules will be simplified and would be eliminated with lower paid employees and high savings rates under the plans. although the simplification efforts did not advance in congress, our efforts to review and recommend comprehensive changes to the current retirement savings system was i believe worthwhile. any effort to advance tax reform will likely include a review of retirement savings initiatives. with one goal of tax reform is to simplify the current system,

i would recommend the committee examine the work of the office of tax policy during the bush administration. thank you for this opportunity to address the committee and i will be happy to answer any of your questions. >> thank you mr. sweetnam and mr. john you are recognized for five minutes. >> chairman camp and ranking member levin i appreciate the chance to testify before this morning on ways to ensure that all americans have the opportunity to save for retirement. i'm david john a senior research fellow at the heritage foundation and deputy director of the retirement security project. this is an issue that transcends ideological and partisan differences. for those who have access to a payroll deduction retirement savings account, the current system works fairly well. however millions of americans still lack that ability. in theory, they can save it at a higher rate but as jack and judy have shown only a maximum of 5% actually do so on a regular basis.

many of these workers who lack the ability to save through payroll deductions for part-time employers or smaller businesses, women, members of minority groups, younger workers are all for. social security even if it was fully funded, only provides about half the retirement income needs of an average income worker. either we can ensure that everyone has the ability to save to provide for themselves in retirement or congress in the year future will face demands for additional taxpayer paid benefits. those demands will be very hard to resist. ensuring that all americans have the opportunity to szabo require some hard decisions. a proposal developed by mark e3 who attended workings for automatic iras would provide a relatively simple cost-effective way to increase retirement securities for millions of americans. the automatic i.r.a. would enable them to save for retirement by allowing them to regularly contribute amongst their own paychecks to an

i.r.a.. the plan is simple for both employers and employees. employees would be automatically enrolled into their employers automatic i.r.a.. automatic enrollment is a process that has proven to build participation which employees like and under which employees have complete control of smedley affair own retirement savings decisions. to avoid confusion and to keep costs low, all automatic i.r.a.'s would offer three and only three investment choices. for employers the plan is also very simple. they would be asked to do the same thing they now do to withhold income and other taxes from an employee's paycheck except the money would go into an i.r.a. instead of to the treasury. employer contributions would neither be required nor permitted. employers would not be required to comply with the risser rules or other types of regulations that apply to 401(k)'s or a variety of other things.

the simplifications eliminate almost all the costs associated with an automatic i.r.a.. but the plan also includes a tax credit designed to cover any remaining startup administrative cost. while the automatic i.r.a. is especially valuable for newspapers, it would be equally valuable for older savers who changed jobs from a company that offers a 401(k) plan to a smaller company that currently has no type of retirement savings plan. right now these workers tend to have gaps which cripple their ability to build retirement security. hovered with the automatic i.r.a. they could roll roll over 401(k) type accounts into the automatic i.r.a. and continue savings. that would also work if they went to a larger company. this is not a partisan or ideological proposal. it has been endorsed by number varied publications such as national review in "the new york times." it's been endorsed by civic and conservative liberal officials and other types. other officials. earlier this year representative

richard nael introduced h.r. 4049, the automatic i.r.a. act of 2012. while the heritage foundation is a 501(c)(3) nonprofit does not and cannot endorse any legislation, let me say that the policies contained in his bill would significantly improve our retirement savings system. my written statement also discusses the value of simplifying current confusing series of retirement savings amounts so ordinary americans and employers can better understand them. indicia my statement discusses two modest proposals. first to use tax information to encourage taxpayers to consolidate their retirement accounts if they desire to do so in second to include social security administration on an annual 401(k) or higher contributors though they have a complete picture of their expected total retirement income in time to make a change so that they can actually increase savings and improve their potential outcome.

it also discusses the desirability a long multiple employers to share retirement savings and a thought or two about the tax treatment of retirement savings. i'd be happy to discuss them at any point. thank you for giving me this opportunity to testify and i look forward to your questions. >> thank you very much. mr. hardock you are recognized for five minutes. >> thank you for the opportunity to speak to them bath of the american that the council become an attorney with over 30 years experience specializing in retirement. i served as benefits tax counsel of the treasury department and the senate finance committee tax counsel responsible for retirement issues during consideration of 1986 tax reform act. this committee has been responsible for every major improvement in their retirement savings. that includes a bipartisan retirement security act passed in 2001. the legislation that established a successful framework for

defining cognition plans and i.r.a.'s still in place today. the 2001 bill was cosponsored by you chairman camp, by you ranking member levin and we thank you both that. was cosponsored by every senior republican still serving on this committee and 10 of the 15 democrats now serving on this committee. it was cosponsored by speaker boehner, minority leader pelosi, majority leader cantor and minority leader hoyer. promoting retirement savings is an area where republicans, democrats have long been able to agree and ask for your continued support of the context of tax reform. the current retirement system is working. it is working for the almost 80% of full-time employees with tax -- access to retirement plans to work. it works for almost 100 million americans who have saved through workplace retirement plans or irs. the first thing in and the most important principle when you discuss tax reform in the

retirement system is do no harm. in 2012, 80% of households with a fine cogitation plans said their tax savings were big incentive to contribute. almost half the savings said they would not contribute at all to any retirement savings if it weren't for the defined contribution plan. today, coverage, nondiscrimination requirements favors credit and various other rules to ensure the benefits in the defined contribution plans are delivered fairly across all income levels. current rules provide balance incentives that encourage business owners to voluntarily maintain retirement plans and encourage employee participation. any major restructuring of the system reduces or tries to reallocate the system retirement is a gamble we cannot afford to take when dealing with the retirement security of working and retired americans. reducing retirement savings incentives to pay for other

initiatives would be counterproductive. proposals that appear to increase short-term federal tax revenue for changes in and retirement savings benefits generally get those additional revenues because individuals are saving less for retirement. making matters worse, and ms. miller indicated, short-term revenue gains are changes in the eighth time in status under the current budget rules is an illusion because when a worker saves less money today it will mean smaller distributions and less tax revenue when the person retires. just like the short-term budget scoring, the tax expenditure scorekeeping does not paint an accurate picture. the bulk of today's estimated retirement cap expenditure comes from savings that are already in retirement in an i.r.a., not from new contribution so that they tax expenditure number cannot be turned into big new tax revenues without retroactively taxing the

existing retirement -- of america. that action could be seen as a breach of trust by those workers who contributed and those employers who contributed on the assumption that this money would grow tax-free only at distribution. still, the retirement system can and should be improved for all americans, especially those with lower incomes who find it most difficult to say. tax reform offers the opportunity to do just that, by building on the existing system, not by tearing it apart. today employer-sponsored plans baked effective use of payroll deductions, provide fiduciary oversight and typically include employer contribution. more americans need access to those workplace retirement savings plans and all americans should be encouraged to say that higher levels. one area that deserves particular attention is the automatic enrollment and automatic increased strategies. those are plan designs were

workers often for a plan participation where the default contribution levels are increased each year. these plan designed to increase participation and savings rates significantly, especially for low income, younger and minority workers. more employers are adopting these design teacher but greater incentive should be considered to accelerate that trend. we also believe much could be done to reduce the cost of plan administration. for example regulations on delivery of required notices should be brought into the 21st century to better accommodate electronic delivery. we stand ready to work with the members of this committee to assist the members of this committee into in its long history of retirement savings. thank you. >> thank you all for that excellent testimony. today's tax filing day, deadline which americans have to spend millions of hours preparing their taxes because their system is a complex one. not only is compliance

complicated, but the long-term financial planning as complicated as well because of our code. i would like to just explore in each -- ask each of you how the tax code is performing in the area of tax security. the retirement savings issue, they have a choice as many of you said of many different proposals out there with different rules. and, certainly individuals trying to save for retirement have one set of rules and individuals trying to save for health has another system with another set of rules and families trying to save for education also have many options available. each with its own set of rules, but my question is, should the system, and why don't i start with mr. hardock and go down the line, should the system of existing tax at vintage retirement savings, should those be consolidated to make it

easier for individuals to save? do you have an opinion on that? >> most americans have retirement plans are quite happy with the plans they have. the fact is plan participants in most employers do not choose between a 401(k) plan or a 457 plan. they simply have one. those choices are not particularly difficult and when they do come into play they are made by employers. what you get if you try to consolidate is to make everyone reconsider and everyone am and their plan. ..

>> it would be much simpler if you exempt it from income, without having to have one level for 401k and one for college saving plans and other savings. savings that are not consumption -- they are actually exceedingly valuable, and should be encouraged. to the point that you look at simplification. it's not just a matter of accounts, it is a matter of saving himself. >> mr. sweetnam. >> thank you. first of all, let me focus on the individual retirement savings. first off, i think one of the things that we try to do in the proposal is to eliminate the

income limits. when you have those limits, you really aren't sure whether you are eligible to make a contribution to an ira. if any of you remember prior to the income limits being put on, banks use to stay open on tax day until midnight in order to accept people's ira contributions. once we put in the income limits, those lines went away. i think that was one of the things that we tried to do in our proposal. the second thing that we tried to do, and i think david alluded to this, was with our rsa and lsa proposals. our rsa proposal was a means to save for any reasons and pull

money out of those accounts to use for any reason. one of the things that people have to realize, is that people saving, it changes over time. the younger people might not be thinking about savings, but they might be thinking about other savings. i have a 30-year-old son. he is saving. what is he saving? he is saving to my house, which is a really good thing. but when he gets a little bit older, he will be saving for retirement. what we tried to do with our lsa proposal was to give lower income people or people who are at the margins of savings a way to have a tax vehicle to have savings. on these retirement sites, i think one of the things that you have seen -- i've probably been practicing as long as randy.

what we have seen over the years is congress legislating to make the differences between the various types of retirement plans, less and less and less. what we were trying to do in our proposal was to take that final step. we had all of the plans -- all of the plans had the same contribution amounts. we just said, let's take the final step in eliminate the various code differences between the two. the congress has been going that way over the last two years. >> thank you. ms. miller? >> thank you, i would like to focus on the employer side of this. i think it actually ties into the individual, too, and that when you talk to a small employer, it really isn't that confusing. if you pull someone that is not thinking about retirement

planning, but if you are actually talking to an employer and ask them to put in a retirement plan, you are saying if you want to have an ira-based plan or one that has a trust. a trust that your employees will leave their money in. if you put your money in the 401k for them, they can pull it out right away. if you put it in a simple plan, they might run off with it. you are drawing their suspensions. many were talking about how much you can afford and what would you like to do. this is where i get concerned about the proposals in individual savings. right now, we have a 5000-dollar ira limit then you can go up to $10,000 for a simple plan. then you can go up to 17,004 in individual referral and qualified retirements. there are rewards for stepping up and providing better benefits. and i think that is why the system really has been working so well. if you have -- and there is a proposal for, i'm sorry, safe

harbor of $10,000 -- what happens is if you have someone who can put $5000 -- a small business owner can put 5000 in an ira and 5000 and lsa, there is no reason in the world in terms of what they can save on a tax favored basis to put in a simple plan. right now they have the ira. if they want to put in the 10,000, they want to go to the simple. you have to be careful what you do on the individual savings side, making sure it does not disrupt the individual employer side. when you look at it from an employer's perspective, there are options and things you can do as opposed to the ira -- where it's basically telling you where you can do something. the employer side, here is what you can do. here are your options. it is very positive on the employer's site. >> does the vendor hype?

>> i find a lot to breathe in what randy and judy just said. i think from a rather abstract viewpoint, if you look at what is happening with respect to employers. you would introduce a whole new set of nondiscrimination testing if you did something like this. the other thing that you have to keep in mind, is that many employees are targeted in what they are saving for. i think we need to keep in high is a metamorphosis for an overall savings target, it will be much more difficult for an individual to find out if they are on track for a specific retirement income. >> thank you very, very much for your testimony. mr. chairman. i think this is a hearing that has significance for tax reform

for this issue and beyond. while there are some differences among you, and i think everyone believes that we can improve the system, i think your testimony issues a warning to those who propose to eliminate all tax expenditures. they are those who equate tax expenditures loosely with tax loopholes. this tax expenditure, i think, is not a loophole. it is a policy. some have essentially said let's start by ruminating them all and go on from there.

some propose getting down to a certain point, assuming the elimination of all tax expenditures. do any of you favor eliminating this tax expenditure? >> no. >> that is a big no from this end of the table. >> no. >> no. >> i am not sure this is quite the way to put it, that mr. hardock, you said here that after talking about the importance of this return in savings, use it for that reason that the first and most important principle we urge this committee to consider in the context of tax reform, is do no

harm. i am not quite sure i would put it that way. maybe, surely, to this area, i think that is true, and the same is true in other areas related to policies being embraced in tax expenditures. so maybe i will leave it at that. except to say, mr. sweetnam, i think there is a distinction between what you save for, and i am all in favor of supporting education purposes and for buying a house. i think the proposal is to eliminate the present provision on purchasing a house on home ownership. eliminating that without

reference to any income level or anything else, it is a mistake. but, i do think you all feel that the retirement structure is more or less working where we need to improve it. and i think we need to be careful not to lump everything together, and lose the emphasis on having a strong social security system, which is added to by savings for retirement. i think we need a combination, and i think we want to drive home -- you mentioned that the percentage now to save for retirement has improved a bit. but we need to try to build that up, not by eliminating social security, but adding on to it. so i really think your testimony

has importance today for this issue, and all other issues relating to tax reform. we need to look at it, but look at it with care and not with such broad strokes that we would sweep the weight a system like retirement savings that is basically working. >> think you. >> i do want to say that i think we are having a very good discussion today. i do think it is important to point out that i don't think there's anyone who is proposing eliminating this area. this thing that came to it with simpson-bowles, it capped this, it did not eliminate this. there is no proposal to do such a with such a big. >> chairman, let me just say. on the chart that is on page 29 of simpson-bowles, it has the numbers of alternatives,

including eliminating all tax expenditures. >> that is one reason why i voted against the simpson-bowles commission. >> mr. john, i want to thank you for your work. you put in the automatic ira proposal. as someone who comes from small business background, under the first question that many small business owners will have about any kind of mandated automatic ira is what is this going to cost me? would automatic ira create any new costs or burdens on employers who offer either a. >> no, it would not. most employers that are covered with this, roughly 97%, according to studies by a variety of firms, actually

already use some form of payroll processing software or an outside payroll processor. for those having had many discussions -- for both of those industries, this would simply be a new module that would be added. plus, the fact that there is a tax credit. the tax credit has two components to it. one part, which applies for two years, which would cover any capital costs of setting up an automatic ira. the other would last for six years, and could be extended if congress chose to do so during a period of time. it would provide a certain amount to cover the cost of actually putting employees in an office system. it is a very simple, easy to understand system, and we have found a major insurance company did market research with employers for us. and they found that the more that they discussed it with the employers, the stronger the employers supported the

proposal, and it went up. >> to the rest of you agree with this or have any additional thoughts? >> i definitely would agree with that. even for those that don't use a current payroll provider, we have members who are very interested in providing this so the employer could do it over the phone. the credit should more than cover any costs incurred by the employer. >> thank you. mr. john. i understand your proposal would utilize private financial institutions to administer the automatic iras. in the past, there has been proposals to create personal retirement accounts that would be administered by the social security administration. some might argue that it would be simpler for small businesses if this could be tied into the existing payroll tax withholding process. could you comment on the pros and cons of the different approaches?

>> sure. this is a very different -- this is completely separate from the proposal in 2005 and before to set up personal account and social security. there is a private-sector management industry which works exceedingly well treated we do not see any reason to supplanted by government entity. we do have the ability if the private-sector provider so chooses to have what is called an -- [inaudible name] von. that would allow small savers to generate roughly $5000, but at that point, that would be rolled into the private sector. we feel that the private sector is going to be more innovative, it will be creating more jobs, and frankly, it will do a better job of keeping costs lower.

to thank you, mr. chairman. >> thank you for holding this hearing today. thank you for your leadership on these issues as well as over all. as someone who has been interested in pension and retirement issues since i've been here, i look forward to working with you. i also look forward to working with others on this issue. i think strongly that we need to make sure that americans have the tools and the education necessary to feel that they can make their right choices with respect to retirement. one of our panelists did a study with the employee benefits research institute. only 14% of americans, mr. vanderhei, would be able to afford a comfortable retirement. more than half of all workers reported that they had not calculated how much they would need to live during retirement.

you are not in your head in agreement. those are pretty unbelievable numbers. i find out, anecdotally, i have a friend who is a lawyer who took a 401k plan and put it into an ira, he ultimately put his ira into a real estate investment with a third party. pretty sophisticated, and doing very well according to him, versus others who have not quite an understanding of how much it has been talked about before. how much they can put in because the contribution limits are what they can put it in. my question to all of you, and i will start here on my right, is whether it is simplification or reform or whether it is -- whatever it is. how do we get more americans to change that 14% number so that they have a better understanding and can make better choices and

can have that 14% number be something substantial, like 75% of americans feel they can comfortably live in retirement and understand what they need in retirement. how do we get there as policymakers enact starting here? >> i think there are the folks that really are going to save no matter what you do. if you force them to say, they will borrow money somewhere else. there are the folks that i call the squirrels, they will save no matter what. that's my mother. there is almost everyone else, including me, that wants to do the right thing, and knows they need to save, doesn't know quite how to do it, doesn't want the government telling us how to do it. but wants to do the right thing. strategies like auto enrollment and auto escalation, they send a

single to that group of people that these are the levels you should be achieved in to get to a retirement security. so we talk about bill, whose son is saving for a first home. when my son asked that i want to buy a home as well, and i have this for one plan at work. put the money in the 401k plan first. that goes back to the issue of people saving for retirement. we need to set up structures and incentives that let people know how much to save. and we see mr. vanderhei's numbers, and the german -- generation x is numbers. ultimately changing the numbers. >> i actually have forethought to four documents. i imagine you will see much of the same thing here. first, obviously, everyone has to have access.

if you don't have access, we can talk all we want about doing your own. 95% of people don't. second, start young. that is absolutely crucial with that. another thing is the auto structures. auto enrollment and auto escalation. one of the things that this committee can do as part of his discussion of taxes and litigation tax reform, is to look at a 3% default rate for auto enrollment. there are a number of studies out there that show that people have precisely the same participation rate if it is 5%, 6%, like, to start. people think that they are doing the right thing, and that 3%, since that's when it starts, that must be the right amount for them to say. they find themselves trapped later on. >> thank you. >> one of the things that we were looking at when we did it our retirement simplification proposals is that we thought -- we were trying to harness the

industry to do a lot more advertising with regard to savings. one of the things that we have looked at was by eliminating the income restrictions for iras, there would be advertisements to get people to come in and do this. we actually saw this happen when congress enacted the roth ira. i was working for senator roth at that time. when the roth ira was enacted, we sought for all different types of ira savings. additionally, because everyone was promoting it. >> all right. thank you. you are recognized, sir. >> thank you, mr. chairman. i think this is a very important hearing to have.

mr. t. g. barry and i have the same concern over people's security. but i fly back and forth from seattle. where united airlines has its largest base, its oldest base, most of the flight attendants are about 55 to 60 years six years old. one of them told me a story, and i would like you all to respond to this. her husband worked for a big bank in seattle. washington mutual. one day they closed the bank. and he lost his entire 401k. boom, gone. it was all gone because it was invested in the bank. it was required -- he was required to invest in the bank. now, she flies for united airlines. they have gone into bankruptcy twice, and each time they go into bankruptcy, the first thing the bankruptcy judge to on in response to the companies pleadings is to scrape off the

retirement. so this woman, who has flown for united airlines for 29 years, now house a guarantee of $231 a month from the pd gc. on top of her social security. now, here are middle-class americans who did everything right. and they got clobbered by the system. i want to hear that this automatic system that we are going to enroll everyone in is going to protect those people. this woman said to me, me and my husband will work until we die because we have nothing but social security. >> i would like to take a first stab at that. the situation you have described is horrible. congress has acted to prevent a company forcing an employee to put all their money into employer stock. that is no longer permissible, and that was -- the ability was phased out. you guys did a great job on

that. hopefully that one won't happen again. i think the key on automatic enrollment is on all the defaults. one of those default is investment. >> you heard mr. teaberry talk about how to invest and how to understand 14%. so how can anyone believe that we can design a system that says we are going to give all of you a choice -- only 14% understand what they are in. >> most people don't take advantage of that choice. if you automatically enroll them, they will stay in the default investment. the key is having a secure and appropriate default investment. again, there were changes made, and i think there were changes made --

>> the small businesses or whatever -- does that mean that they have certain places they can put the money and they will be restricted as well, or can they do if they want? >> they choose the provider, but the type of investment that is a default investment, it is defined. it is a target fund. or, you know, frankly, that is something you could be considering -- what should that be. there is ample evidence that whatever you say, the default investment can be, is where most people are going to end up putting their money. >> so the automatic investment or the automatic enrollment would put it into something that is judged to be by whom? who would say that this is a safe investment? i would like to know who those people are? to you define the parameters. [laughter] [laughter] >> in terms of the individual companies. >> the treasury will ultimately put the blessing -- they will bless the company that is going to make these investments,

right? >> right now it would be that the plan sponsor or if you are in a -- they would be the one that is choosing the investment advisor. if they hire an investment advisor. they will have judiciary responsibility for choosing a company that provides. >> and he was on the hook if they made a bad choice? >> the judiciary that is responsible for that decision. >> sony investment counselor would be responsible for making -- the patient -- sorry, i'm a doctor -- permitting the client whole? >> in theory, fortunately, there are many situations now that employer stock is off the table. there are not any situations where you have the company

investment has gone down to zero. where you have several responsible people choosing investment providers, it is not -- there are horror stories, and they are more rare. >> in the and the flight attendant, i should just tell her tough luck? >> defined benefit system is a whole other -- >> it seems that they ought to be connected or we should take away the ability of the companies to take up the pension at bankruptcy. >> thank you. time has expired. doctor, you are recognized. >> thank you chairman, for holding this hearing. as we look at tax reform and a very deeply important area of retirement security, let's take away a few things from this discussion. number one, we obviously need to look at how you can promote responsibility and savings. secondly, whatever we do, i certainly apprec t