>> you are working to help those who are being penalized by the fact that it's not a democracy doing human rights work as well, that's why this is so important. to make sure, i often used to say nobody is to care who i was. we have this title and we have the united states government, if we can use it skillfully to

bring to bear. and for all of our problems, in whatever decade, that means a lot to a lot of people around the world. >> thank you. did you want to say something? >> i thought that was great. >> i'm told actually, i we supposed to -- deputy burns is really close, isn't he? he is on his way. he's close, right? he's very, very close. [laughter] i could go on and on. do whatever you want. i'm going to keep on talking. i'm going to go back and give mike trouble again. it's a lot of fun. this is what you get for asking me to do this, by the way. and actually i want to go back to to more because i don't, what's unclear to me is, is with regard to the arab spring which is so the forefront of today's news, is how, i don't know that you address the cultural issues as much.

what your role, it seems to me that because you're not at the state department you might have a more vigorous approach to cultural issues, these the some of these arab countries. couldn't you? >> look, i think it's important to distinguish, there are a lot of things over the years have been called cultural issues, that are human rights issues. and global norms have shifted. we've been talking about that. so i think that expectations in these countries have shifted. i think we also have a lot more data about the relationship between human rights and the government outcomes. we have a lot more data about the relationship between democracy and political participation and development outcome. and so those making the argument that on the basis of cultural specificity or on the basis of religious tradition that certain rights are less important or

don't apply, i think have very, very shaky ground to stand on increasingly shaky ground. going back to the comment made earlier about arab exceptionalism, that was what the latest in a long string of exceptionalism's. we used to have debates in the academy and in the policy world about whether the catholic countries of latin america are culturally resistant to democracy. we've that the same arguments about asia as herald noted. so i think that we really need to set aside the notion that this is about culture, and embrace the fact that the human rights norms are universal norms. and i think one of the things that we worked hard to do in the administration while i was here, and that i would give mike and secretary clinton a lot of credit for is standing on the

universality of these principl principles. and not making it about us or american tradition, but it's about the fact that these are norms. >> i'm going to have to introduce them, deputy burns has now arrived. thank heavens. [applause] >> well, it is, first of all of want to thank all the panelists for the whole day. it's been fantastic. and to bring us some we have deputy secretary bill burns who is a fantastic leader. he's really a consummate diplomat, and one who is both principled and practical and has been a huge supporter of the work that we are doing. so i'm delighted to introduce bill burns. [applause] >> thank you very much, mike. it really is a pleasure for me to join all of you. i want to thank mike for

organizing is very important look back at these three transformational periods that give us foreign policy. in a moment when our values and interests are so deeply entwined from the nile, i want to thank mike posner and all of his terrific colleagues at dr l. for your irreplaceable contribution to u.s. national security and human dignity throughout the world. under mike's leadership, drl has defined our agenda. i want to thank our panelists for their unique perspectives on the evolution of human rights policy. over the past 30 years, i've had the privilege of working with virtually every panelist over the course of today, tom pickering, elliott, tex harris, tammy, and many other remarkable friends and colleagues. i know it is much easier to reflect from the safe vantage point of hindsight upon issues

that cause gray hairs and sleepless nights. all of us are grateful for your service, your sacrifice and your superb contributions to the cause of universal human rights. all of us also believe that america is best off in a world of successful and stable nations where individual rights are respected. we know that ideals and interests don't always mesh, as seamlessly as we might like. and for the tough cases it takes judgment and persistence, and an ability to see both the forest and trees in order to move our policy forward. each of you face decisions like these, and each left the state department and our world a richer place. at the time i joined the foreign service in 1982, drl was already well-established and its office on the seventh floor publishing human rights reports under the leadership of elliott abrams. the cold war dominate u.s. security interests, including

authoring touring regimes of latin america that were critical u.s. partners. elliott argued if united states was to be credible in denouncing human rights violations by communist dictators we had to call out violations by anti-communist dictators as well. it meant speaking out about a gust of us was daniel ortega. does not a popular policy, but it was an important attempt to put us on the right side of history. only a couple of decades later, most people in the americas live under leaders they elected with increase respect for the rights and freedom, greater inclusion for populations to long overlooked, and the middle-class that now numbers 275 million. today trl reports on the status of human rights in 199 countries and territories, but the goal is not to chastise. it is to change behavior. during the clinton administration we established a human rights dialogue with china. today we hold these dialogues with many countries with which

we have important relationships, but the differences on issues of rights and freedoms such as russia and vietnam. as was with countries whose views on these issues are closer to our own like colombia and mexico. we frank conversations, grounded in her principles and would help elements within government put in place better practices, solve problems within their own societies, and become more accountable and more open to their citizens. thanks to trl, a surprising number of these difficult but essential conversations delivered results. in 1990 adrl begin funding programs to help human rights activists including charles, women and other vulnerable groups improve their own advocacy and reach. after 9/11 when our government recognize that conflict and stability and terrorism were in many ways the byproducts of the failures of authoritarian states to modernize and advance human dignity these efforts also gave

rise to the middle east partnership initiative, founded in 2002 to strengthen civil society and the rule of law, empower women and youth, improve and expand education, encourage economic reform and increased political participation. globe trl has translate our human rights aspirations into action. in pakistan, he launched the first women's radio program focusing on gender issues and got the country's first nongovernmental radio stations on the air. one of my favorite drl were stores is how lorne and pat who now runs the global programming office at drl help to get kurdistan its first printing press in 2003.

at the time, the country's only printing press was owned by then the president family. they manage to set up an international board of directors for an independent newspaper, bought a printing press and launch it with enough fanfare that it was actually able to report the news. seven years later they witnessed the first ever democratic transfer of power in central asia. i'm not suggesting that one printing press turn the tide of history. as is often the case, we can never precisely measure the impact of u.s. engagement. but here's what we do know. when we work to put ourselves in the right side of history, when we support citizens working to resolve conflict peacefully to bring change to their societies, to create economic opportunities and to cling universal rights, we enhance our country's interest, we enhance our country security. we enhance our country's leadership, and we reflect the values and a generous spirit of the american people.

i've had a great honor and privilege of serving in government during the fall of the berlin wall, the uprisings in tunis and tahrir square, and the new opening in burma. the changes that swept the wor world, not just in the past two years but over the past 20 years, maybe about ideals we hold dear, and made that our support. but in the end they are not about us. they are by thousands of individual decisions made by the citizens and governments of sovereign nations. they are about the thirst for dignity, a proud people in every corner of the world. they are about fundable truths and universal human aspirations for which no society and no region is immune. we rightly approach our engagement with a large dose of humility. and yet looking back on the decades of drl, a time when through wave after wave, democracy has moved forward beyond american eastern europe and africa and the middle east, it is clear that the world is a

better place today because you took the long arc of american foreign policy and didn't get towards justice. dro has led by the motto don't make a point, make a difference. and when we look back at the story of american diplomacy, as we've done today. it's clear just what he difference you have made. you help us to be the nation we aspire to be. and you help us exercise leadership in a more peaceful and more secure world. but our work is far from done, and with a growing voice of civil society around the world, we need drl now more than ever. all of us understand the tough work ahead. from stopping the horrific shelling of civilians in syria to rebuking incitement against lgbt persons around the world, from standing up and on are going to ending forced labor. from nurturing new democracies to making sure that while the government may throw pressures of conscious in jail, no government can make the world

forget about them. fortunately, we have one of the most passionate advocates i know as our secretary of state. through her words and deeds, secretary clinton has used her unique stature, her frankness, her courage and her conscious to fight for and win a place on the world stage for so many who had been relegated to the shadows. for women to lgbt persons to religious minorities, to use, to the disabled. and by helping so many people live up, she would say, to their god-given potential, she has helped this department and this country live up to our potential. we look forward very much to continuing down the road of history with all of you. thank you very much, and keep up the great work. [applause] >> thank you. and thank you all again for being here. have a great weekend.

[applause] [inaudible conversations] >> display, former microsoft ceo bill gates will talk about the future of federal funding of public higher education. live coverage begins at 10:15 a.m. eastern on c-span. a look at the fiscal health of the social security program. the subcommittee on social security whether testament on the social security board of trustees annual report. this hearing is an hour and 20 minutes.

>> this hearing will come to order. good morning to both of you. thank you for being here. according to this year's report from the social security board of trustees, social security will be unable to keep its promises to the hard-working americans who pay into the system. we will hear today that not only is social security's financing outlook worse, but it will also be increasingly difficult to protect benefits for those who rely on them most if we delay action much longer. as commissioner astrue said, this year's trustees report contains troubling, but not unexpected, projections about social security's finances. it once again emphasizes that congress needs to act to ensure the long-term solvency of this important program. according to the trustees, the old age and survivor program will be unable to pay full benefits beginning in 2035,

three years earlier than projected in last year's annual report. that means that workers who are 44 years old today will reach their full retirement age in 2035 at which point they and everyone else will face benefit cuts of 25% unless congress acts. and in less than four years, social security's disability insurance program will be unable to pay full benefits. the average monthly benefit for a disabled worker today is only $1,111. in 2016, revenues will cover 79% of benefits, so that's a potential cut of about $233. that's real money, especially for those who are getting by on a fixed income. social security's last major reform was in 1983. then, social security faced imminent disaster. in their 1982 annual report, the

social security trustees said, without corrective legislation in the very near future, the old-age and survivors insurance trust fund will be unable to make benefit payments on time beginning no later than july 1983. members of congress and the president were able to develop and ultimately pass, on a bipartisan basis, the social security amendments of 1983, come on in, we just started. despite the near-failure of the greenspan commission and despite the opposition of senior advocacy groups, including aarp. as this year's report makes clear, social security is in trouble. but just as in 1983, i believe our nation has the will to again save social security. we should not follow the path europe has taken by waiting for a financial disaster to force changes that ultimately could end up hurting the most vulnerable.

today we will hear from social security's public trustees. but we in congress are trustees too and the public knows the longer we wait, the more difficult the choices will become and the less time americans will have to prepare. with all the financial anxiety that americans face, we should not increase the burden on them by failing to fulfill our duty in protecting our nation's most important safety net program. we need to act now before it's too late. i'll now -- do you have an opening statement? well, you do. you are right. did they stay up? okay, thank you again for listening, and i had a statement here, i understand you are on your way, but i've recognize

mr. becerra now for any opening statement you have. >> thank you, mr. chairman, and also want to thank mr. stark for being here in the event i was not able to make it. i got my daughter to a program on time, and i'm able to begin. thank you very much to the two gentlemen, our trusty sword you. i would just like this it would have been saying for quite some time. social security, even through the worst recession since the great depression is a program that people have grown to rely upon and can't trust. between 2007 and 2010, a typical middle-class american family lost somewhere between 26-$87,000 in their net worth. that's about four out of every $10 other assets and savings. between 2007 and 2010, social security added $439 billion to its trust fund surplus, while

paying americans to earn benefits on time and in full. so he we saw americans with their private savings and retirement pension watching it go down, at the same time during this great recession. we saw social security continue to increase the monies it had to pay out benefits to its recipients. over 77 years now through 13 recessions, social security has added not 1 penny to our deficit or to our debt. in 2011, social security provided earned benefits to more the 55 million seniors, widows, disabled workers and children, while saving all the reserves in its trust fund to pay future benefits. six out of 10 seniors who get social security rely on social security for a majority of their income. there are 1,300,000 children who were lifted out of poverty because they received social security. and the long-term, social security's is a manageable challenge. it is not now and never will be

broke. this april social security's trustees warned that without action social security will be insolvent by 2030. let's be clear about what that means. in 2030, worker contributions are projected to cover about 76% of social security's cost to the remaining balance and social security's trust fund will pay another 5% of costs. the shortfall is stable. after 2033, social security's income will be enough to pay about three force of earned incomes until at least 2087, and likely longer after that. social security's long-term shortfall is a problem, when we need to address. but even when the reserves we are building up now by now, social security will not be out of money. it will have a shortfall of about .9% of gdp come just like a more than the cost of extending the bush tax cuts for people who earn more than a quarter of a million dollars a year. social security does face a

crisis in the short term, one manufactured by series of budget cuts forced by house republicans. if they continue, the cuts could delay benefits and damaged social security's well-earned public image. and 2011, the republican-led for your continuing resolution copy social security administration's budget by $600 million, despite rising numbers of americans applying for social security. and 2012, ssa's budget was frozen below the 2010 level. i strongly oppose his budget cuts, which are kind of like the cable company starting to build you for a service while you're at home when for them to show up and connected. social security's trust fund funds the entire cost of paying social security benefits. and 2011, workers contributed over $600 billion to social security's trust fund. because of social security budget cuts, and 2011, all social security field office start closing half an hour early each day.

social security permanently closed over 300 contact stations and small field offices, and waiting times for decisions rose and are likely to be over 103 days by the end of 2012. through sequestration process, these automatic cuts scheduled by the budget control act. although social security benefits are protected, if congress doesn't accident, on january 2, social security's operating budget will become by over a billion dollars. a billion dollars in cuts translates into 40 days in which social security is shut down. offices were closed and locked, no one answers the phone, no one is processing, and no one make sure benefit checks are sent to the right place. mr. chairman, social security has been there for americans for 77 years. i hope we can continue to work to make a strong for another 77

years. we can start by addressing the preventable crisis of shortsighted budget cuts. and with that ideal back the balance of my time. >> thank you. we have one witness panel today. i see at the table are two public trustees. charles blahous, ph.d, and robert reischauer who is a ph.d. robert reischauer, i think, i'd like to congratulate you on your award last night at the national i can't of social insurance. we are lucky to have someone with her breath of experience working as a public trustee. thank you, and congratulations. dr. blahous, you are recognized. >> thank you, mr.chairman. mr. ranking member, all the members of the subcommittee it's a great honor to appear before you today to discuss the fines of the latest trustees report. in view of the time constraints

we are on but what i would like it is also most of the background information in my written remarks and procedures and primary point about social security financing. the first simple point is that social security costs are rising but most of the cost increase is going to play from a period of 2008 through 2035. and the primary driver of those cost increases is demographic. if you think about social security costs, they are two main pieces. one is growth per capita benefit level, and that is driven by performing with the law but also the growth of the number of beneficiaries. on the revenue side, primary driver is growth in the number of workers, and wages that are subject to tax. so that racial is very important for social security financing. that ratio is in the process of dropping. we had 3.3 workers to support each beneficiaries in 2007. now we're down to 2.8, and under current projections we will be down to 2.0 by 2035. part of that is longevity

increases, but the bigger more immediate factor simply fertility patterns but we have this big baby boom generation going on prior to 25. under our current projections, combine such as rudy trust fund depleted in 2033, that's three years earlier than we projected in last years record. each year with the trustees do is to estimate the programs actually a deficit. usually expressed as a percentage of the tax base, programs tax base. and if you are projection is to .67% of worker wages over the next 75 years. that sounds arcane but basically what that means is that you have a 12.4% tax rate never give you, you about a to .67 points did you have a program and balanced for 75 years, or if you nearly had an equal subtraction and benefit obligation. that's an average figure. it's also substantial increase

from last year's projection. last year we were at 2.22% a minute somebody big difference but by social security norms is pretty substantial deterioration. we have only had one other reward over the previous 30 years that showed as much deterioration in the single you as this year's report does. and my colleague, dr. reischauer, will review some of the reasons why. also important, the figures i decided pertaining to the combined trust fund, social security has two trust funds and under lock the each have to be kept sal to maintain the benefit payment. social security disability trust insurance fund has been dashed is projected to be depleted in 2016. what's happening over time is the programs going to impose under current law a greater financial strength of a larger budget. some of the strain, however, is the result of discretionary policy choices, choices made along the way. one of them, for example, this year the payroll tax rate has been cut from 12-point for point

to 10-point for point. soso suggested held harmless for the change. is a provision of that law which transfers general revenues over to social security so that it's about to finance benefits is not affected but basically what is happening is that part of financing responsibility has been the from social security payroll tax to the general revenue side of the ledger. final point, there are significant costs in addressing the financing shortfalls. it's often cited that in 2033 we will have only enough funds to pay 75% of scheduled benefits. it's important to bear in mind that doesn't mean 75% of scheduled benefits for those retiring in 2033. that includes everyone. people already on roles in 2033 including a people who were drunk benefits today. if you were to say well, we don't want cut benefits, to cut benefits for people already on the roles in 2033, what is the benefit reductions were confined to new claimants? we wouldn't be able to balance the system in that you would have a substantial unprecedented

large tax increase in if we cut off the entirety of benefits to new claims. so by 2033, it's really, really too late, far too late, to protect previous beneficiaries from substantial dislocation to you start working to the problem backwards and you say, house and we have to actively want to prevent reductions for people in retirement, near retirement, low income beneficiaries, and prevent a tax increase of the size we have not encountered before. we would have to do that pretty soon. in closing i would just say the legislative achievement creating the social security program remains historically remarkable one. it's provided critical social insurance protections for hundreds of millions of americans to it has done so at exceptionally administered low-cost but it's done it with financing methods out their critics but nevertheless have been generally accepted by most american public has echoed a. that's our thing to do.

and was responsible bipartisan action from social security continue to fulfill this vital role that such action must be decisive if the program is going to serve future generations as well. thank you. >> thank you. usually pretty soon. what you mean? you have a definitive date? >> you will get different answers if you ask different experts. but my own view is that the window of opportunity is closing bell to the rapidly. we've already face a shortfall that is significantly larger than the one that was prepared in 1983. which is probably the high water mark politically of what can be accomplished in terms of a short-term resolution. so each year we wait, the problem grows larger. >> i understand the when are we going to fall off the cliff? that's what i'm asking you. you can ask it later. dr. reischauer, you are recognized. >> thank you, chairman johnson, ranking member becerra, members of the committee. i appreciate the opportunity to appear before you to discuss how

the social security programs financial outlook has changed since the last trustees report. to judge whether the financial health of social security is improving or deteriorating, media and the public tend to focus on whether the years in which the two trust funds are projected to be exhausted. by this measure there's been a significant deterioration in the financial health of the social security programs since the 2011 report. the exhaustion date, as the chairman has mentioned, for the oesi program is now projected to be 2035, three years sooner than was projected last year. the di trust fund exhaustion date has advanced two years of 2018 to 2016, and exhaustion date for the two trust funds combined has now been moved to 2033, three years sooner than was projected last year.

a more comprehensive measure of trust fund financial condition is its actuarial balance over 75 year valuation period. the measure is essentially the difference between the annual income and costs of the program summarized over 75 year period, and expressed as a percentage of taxable payroll over that period. a negative actuarial balance, meaning an actuarial deficit, can be interpreted as the percentage points that would have to either be added to the current law income rate or subtracted from the cost rate in each of the next 75 years to bring the fun into actuarial balance. the actuarial deficits of both security trust funds have deterred since last you for the dead trust fund actuarial deficit has worsened by seven wonders of the% of taxable payroll. that for the osi fund has deteriorated by .38, or 381

hundredths of a% actual payroll, and combined trust funds weakened by 441 hundredths of a percentage point. this deterioration and the combined trust funds is the largest decline since the measure was first can't live in 1982, save for the change that occurred in 1994. there are lots of reasons why the actuarial balance can go up or down from one year to the next. one of them of course is the valuation to changes. we had 2086 to the valuation period and subtract 2011, and that accounts for about 9% of the deterioration in the actuarial balance. clearly there was no legislation that affected this in a significantly over the past year, so that's not a factor. demographic assumptions in this year's report are identical to

those that were sent in the previous report, but we have updated starting values and the transition from those starting values to the ultimate values do affect the actuarial balance. specifically, more recent data has shown that birth rates for 20 -- 2009 and 2010 were lower than was assumed in the last report. immigration in 2010 was a bit lower than was assumed in the previous report. and was a slightly smaller initial population than we assumed before. about half, although less than half of the increase between 2011 and 2012 is accounted for by changed economic assumptions and more recent information about the economy's performance. two-thirds of this is related to updated starting values and less optimistic assumptions about the newt term growth of the economy.

price inflation as you all know was higher than was anticipated between the third quarters of 2010 and 2011. and rather than a seven-tenths of a percentage point, cold in december of 2011, security gave out 3.6 percentage point, cola. so that makes a huge difference, as you can imagine. real interest rates in 2011 and those projected in 2012 report are lower than was assumed, and so the new investments that the trust funds make get less interest earnings than we thought they would get when the 2011 report was put together. together, these economic factors make the gap between non-interest income and costs over the next few your

significantly larger than was projected in last year's report, but when the economy has recovered, about the end of this year, 2020 or so, the capital in what was expected last year and was expected this year will be close to disappearing. however, it's important to recognize that we made a new assumption in 2012 report that causes the gap between income and costs to grow over the long run. and this had to do with what we expect to changes in the average number of hours worked per week to do. in last year's report we said it's not going to change in the future. in his shoes report we assume that it will decline at 51 hundredths of a percentage point a year, and we did this to reflect the aging of the workforce and the belief as

productivity goes up, incomes go up. people will want to take more leisure and that will translate into working few less hours as it has in the past. and this assumption obviously asked to reduce taxable earnings and payroll tax revenues from what was assumed in 2011. we also made a change in our assumptions about the incidence of disability, and compared to last years report the ultimate age-adjusted disability incidence were increased by 2% for males and 5% for women. these are more consistent with what the historical values and trends have been over the last decade. the deterioration in the actual deficit i've summarize here today, underscore the need for legislative action to put social stood on a more sustainable path to the sooner we address this challenge, as chuckas said, the

less disrupted the changes will be. if the reforms are adopted soon, those most adversely affected can be given time to prepare, the burden can be spread more easily across different generations, and the political animosity and public anxiety associate with these unavoidable changes can be moderated. the changes in the trust fund financial well being also call attention to the importance of maintaining a strong economy and vibrant long-term growth. let me conclude with a comment about the staffs of the social security administration and the departments of treasury, hhs and labor, with whom we work to produce the trustees report. they are incredibly hard-working, talented group of analysts who are dedicated to providing public and the congress with as objectivity and sophisticated group of estimates as is possible.

and i think we are all in their debt for the service that they provide to us. thank you. >> thank you. you went three minutes over. >> that's a better performance than last year. i want to be graded on a curve. [laughter] thank you. so, i'm going, as customary, each round of questions i will let my time to five minutes, and ask all my colleagues to do the same. so, social security was designed so that workers pay into system and earned their benefits. and franklin roosevelt understood the importance of making social security different from a welfare program. he once said quote we put those payroll contributions there so as to give contributors a legal, moral and political right to collect their pensions and their employment benefits. with those taxes, and there are

no damn politician can ever compromise social security program. dr. blahous and dr. reischauer, in your messages from this year's annual report you point out payroll taxes represent only 70% of the total social security income in 2011 t-2 in large part to the general revenue transfers replacing lost income from payroll tax holiday. if we continue to replace payroll tax revenues with income tax revenues, how long before social security is no longer perceived as an earned benefit? was going to do to public support? go ahead, dr. blahous. >> i was semi-and to the second part of your question is no one can know when that point might be reached, obviously. but that statement is in the report, obviously because we want to call lawmakers attention to the fact that social security historically has had a certain rationale for financing it and as you pointed out it does go

back to president roosevelt. you go back and read his early statements. he placed a very high level of importance on the notion this was an earned benefit but he didn't want it to be merged in with the general budget. that's what have a separate trust fund. that's why we have a separate payroll tax, that's why we have trustees. he was very concerned, in multiple statements he says this, that if you want to the universal participation program that cost a lot of money to do that, so if you have it as part of the general budget it will be competing for funding with other programs, and it would be subject to great political risks, that the benefits of this program could be cut back. so he was very attentive to the idea how to structure this program so that it has enduring political support. and not only fdr, but subsequent social security advisory councils over the have repeatedly said that one of the bases of the programs enduring political support is the idea that workers have earned these benefits, and they came out

against all these advisory councils came out against funding the program for the general fund. such as the can for myself as a trustee i think what things want to do is draw lawmakers attention to the fact that if the program does continue to get transfers from the general fund, it does potentially create a situation where we have a departure from fdr's intentions on that point. >> it's not your personal money anymore. about 45 cents out of every dollar of public debt is held by foreign governments, mostly china. dr. blahous, if we continue the payroll tax holiday, and the general revenue transfers to replace lost payroll tax revenue, do we risk turning social security from a program paid by americans to one dependent on the whims of foreigners who invest in our bonds speaks well, i think it is certainly the case that the general revenues that were transferred to social security

belongs to the payroll tax that were financed, financed by increasing the deficit if we cut payroll taxes, and add that amount to the deficit certainly, there's an ongoing argument over who really finances the bonds held in the trust fund. clearly in this instance, this would be a case of financing for social security being provided by the people who invest in u.s. treasury bonds. >> can you tell me why you think tax increases are no answer for fixing social security? because it seems to me, to fix social security for good we need to make sure our efforts are aligned tax revenues with benefit outlays on a sustained basis, and that didn't happen during the last major reform. then 75 year solvency was

building surplus in the near-term by growing annual deficits in the long term, even though that wasn't intended. is that correct? >> that is correct. though i have to say that if he were to bring in experts of the he would have a few that would disagree with me on the point. if you go back and say the 1983 reforms, one of the things that is striking about them is that they did not major financial success the way we do it now. when they analyze social security's future balance, they didn't count the carryover balance in the trust fund. they didn't count interest earnings of the trust fund. they use a different actually a method that basically presumed that all benefits in the future would be paid by taxing the wages of future earnest and if you read the comments of people who develop these reforms, jake pickle or senator pat moynihan or robert myers was the executor of the commission, basic in multiple places that it was their intention to keep the

program finance on a pay-as-you-go basis. and the fact that they wound up with a solution that have big surpluses some years and big deficits in other years wasn't as intentional as many people now believe. what they're trying to do with any short-term emergency, time to make sure the benefit checks, and they're trying to ride out a actual average bounce over the long trumpet as you point out that resulted in a system solution because as time went on, surplus your state into the past and more deficit years appeared on the horizon. i can come they were trying to do a lot of things under emergency conditions in 1983, so to critique what they did, but simply to point out that as a defined long-term balance they didn't give the same level attention to what was happening on an annual basis that we do in the trustees reports now. >> i presume you agree with him speak was actually probably

disagree with all three of the answers that chuck gave. [laughter] >> come on back. >> that's what you have to trustees. >> do you want me to disagree, or shall i keep my lips sealed? >> i will let -- my time has expired. thank you. >> we will just leave it at the fact that there is disagreement there on that. let me ask the to do. by the way, thank you for your testimony, and where did you as trustees. we appreciate that. both of you mentioned in part of your testimony the deterioration in the outlook for the program, which is why i think all of us should be tried, and i think dr. blahous said, dealing with sooner than later. and i think your pie charts in your testimony, the information you provided, show a great portion of deterioration

occurred as result of the recession. it hit pretty hard. it has become pretty clear that you lose jobs in america, u.s. workers are paying their fica contributions, their social security contributions. fewer workers can to bring social security, less money going into the pocket to pay out benefits. so job one for congress should be creating jobs, helping the private sector create those jobs. you hope to get more folks to work. you don't just help them and their fans, it helps social security because there's more money going into the system, the social security system and the trust fund. dr. reischauer, you mentioned immigration. does the fact that we that, unlike other countries, a consistent flow of immigrants over the last several decades healthy social security system and its trust fund when it comes to being able to pay out benefits? >> that's a very complicated question. in fact, certainly the influx of

immigrants has increased the labor force, has increased the number of individuals paying payroll taxes, which over the short run clearly helps the ability of the program to pay benefits to retired and disabled workers and survivors. >> and i think the other part of that, you don't mention, in the long run if they become recipients of social security benefits and they will draw as well so it's one of those things it's not just the automatic plus. because they have somewhat will qualify to receive those benefits as well. >> yet, but it's very complicated. it will depend on what the earning power is our overtime. different groups of immigrants who have different pluses and minuses, in sort of a narrow fiscal sense. >> or if they stay in the country. some move back. >> many leave and don't end up collecting benefits. >> right. i have some numbers here that show between 2007, when the

recession was starting and got really deep, through 2010, nearly 6000 copies in this country terminated their pension plan. in 2009 of those, those terminated pension plans were short $9 billion what they needed to pay out benefits to the workers who have those pensions under those companies. during that time, 2007-2010, social security didn't lose any money, did it? [inaudible] dr. blahous, sorry, go ahead. >> social security continue to make payment in full on the nominal bouts of its trust fund continued to rise. >> i mean, we all know the examples of circuit city that went bankrupt. we remember enron when it went bankrupt, and how those companies left their employees and their pensions, and the

reason why i think it's important, you mentioned that we should be acting out to try to resolve any longer-term issues for social security is that we don't want to get to the point where you can their social security to enron over to circuit city. and fortunately we still have the funds that keep us, even if congress can't get its act together to keep the social security going smoothly for the next 20 some odd years, but come and even after that they would be paying out 75, 76% benefits. but i don't think anyone today is paying into social security to get 75% of what today's beneficiaries are getting. so i hope that you all can do is give us the recommendation that you feel helpless move toward something sooner than later. i think most people are getting to the point that it is pretty simple math, as i think dr. blahous you mentioned it didn't go to the benefit side, you can

go to the revenue side, and you can figure out a way to get yourself in an actuarial balance for the next 75 years. and so hopefully what we'll do is we'll sit down at some point soon in congress and try to come up with that. appreciate your testimony here today. your service on what the trustees, and i hope you'll continue to come before this committee. thank you. yield back. >> thank you. mr. brady. >> thank you, mr.chairman. you know, we hear these days of everything is doing fine. on capitol hill. don't need to act. but things are not fine with social security. as chairman johnson pointed out, in the last year america borrowed roughly $140 billion, much of it from china and other foreign investor, just to pay our social security benefits. this year we will borrowed $150 billion, roughly, from china and other foreign investors, just to pay our benefits to seniors. that's not fine.

and we come if you don't like that, did you stood because your report said we face permanent deficits forever in social security program. we are told, maybe this is due to the recession, but truth is we are told the economy is doing better, but this has the largest single deterioration since 1994. social security. so it is getting worse, not better. answer my question, i have three questions do you all, and i would hope we'd have a no spin zone here, and just ask trustee, those responsible for the financial stability of social security, just to give us your best advice to congress and the white house. one, should congress and the white house continue to delay reforms on this important pro graham, or should we act now? dr. blahous. >> i'm an advocate of acting as

soon as possible. >> dr. reischauer? >> i think speed action is called for spent how much time, where the actual changes in policy you make need to be sorted implement it next year is a totally separate issue. it is an area where we generally face policy in over long time to get people -- >> you both made a point if you don't act soon it will be impossible. so again, your advice to us, what's the timetable? how soon do we need to act? this year? next year? i mean, your advice to us. >> you know, i think you should act when the time is right. when changes are being made, i mean, -- >> not from a political standpoint. i'm asking you from a trustee looking at the numbers, how much time would you say we have to

act, in your belief? >> i would hope that you would act within the next five years. >> dr. blahous? >> yes. with the disclaimer, i'm probably on the pure line of expert you. i'm probably on the estimates with respect to how bad is going to be for the future of the program if we delay too long, but i certainly agree definitely within five years. i would hope it would be even faster. >> and i ask, the payroll tax holiday was important to many families, but it did blow a hole in social security's revenue stream. it was backfill but we know that can't continue. again, no politics in this. your advice as trustee, should we continue the payroll tax holiday, or should we restore the full stream of revenue to social security? dr. blahous? >> speaking very much for myself, but i would urge that social security go back to its

12.4% rate. >> we have to do with how we do that, but your advice would be restore the full amount of money? >> that's a personal view. not board of trustees. >> dr. reischauer? >> mine obviously is a personal view, to pick but i would phase it out with speed. >> right. thank you, mr.chairman. >> thank you. mr. schock, you're recognized. >> thank you, mr.chairman. well, it doesn't seem like the news is getting much better. i want to get a little parochial here. you said we need to act soon. i'm just curious, what the younger generation of americans have in store for themselves if we don't act soon. >> i would say, two-part answer.

the mathematical part of the answer is a net income loss. there's a table in a trustees report that says that if you just held all current -- current tax limits, people come into the system would lose a net of about 4% of the taxable wage income to social security, and that is in the. that is after they receive all benefits. those income losses would be higher on the high side but it also be present on the lower income site. he would have whole generations that were losing net to the program. so that's the mathematical answer. getting back to the questions that were asked earlier, i think it would also face the risk that we might not be able to generate the political bill to keep the program operate on a self-financing basis. then if we couldn't get the program going on a self-financing basis and have to merge into the general fund our subsidize it form the general fund i think it is something else which is sort of the legacy

of social security as a separate standalone self-financing system that has certain degree of political protections that other federal programs don't have. >> dr. reischauer? >> you asked what young generations, what should they expect. and the answer is less income in their retirement years, future generations will run more risk with respect to disability as well, payments they would get in disability and in survivors. they need to divert more of their income into private pension plans, which are 401(k)s or other retirement vehicles -- >> and you are saying they would need to do that, why? >> if they want to maintain adequate incomes in retirement.

social security's payments would be less for them spent how much less? >> well, as chuck explained, and the chairmen and others have mentioned, social security would pay about three course of the benefits now promised. spent is that they somewhat age category? >> well, i mean this would be an across the board for all existing beneficiaries and future beneficiaries starting after 2033. >> for the next 100 years? >> well, we don't go out that far. we go out through 2086, and it stays roughly in that area spent assuming the same number of people for the same number of years and have the same number of children? >> no. we do very this overtime in our projections, according to the best information we have available. >> so what happens to people

that aren't as young, perhaps they are 50? and their 15 the ways -- 15 years away from retirement, what's going to happen to their social security we don't do anything? >> i mean, the little no action scenario is that literal no legislative action will be 25% reduction in 2033. and so, those people presumably would collect full benefits for some years and then experience a sudden reduction in 23. it's unlikely that the way it would play out in practice. congress would probably not permit a sudden 25% benefit reduction. so they would probably be some alternative mixes, but the literal no action scenario is that 25% reduction. >> you are assuming we would be responsible. spent i'm not sure if being responsible, let's just say there's no historical precedent for congress allowing sudden

benefit cut of that magnitude. >> is there historical precedents for congress on social security to become this broke? >> no. that's actually very, very important question because -- >> has ever been this broke? >> we've never had an actual budget as large as now. we came close -- we were a few months away, but the size of the current actuarial balance that is larger than it is ever been. at least since before the 83 for reforms. after, there was an indexing mistake is made in the 1970s and was temporarily a huge long-term deficit that was created by that mistake '06 and a 77th amendment. but since that direction, this is large stature to deficit we've seen prior to the 83 reforms. >> dr. reischauer? you a free? >> yes.

>> so i got a republican and democrat to agree. >> maybe we should leave capitol hill now. [laughter] >> thank you, mr.chairman. >> every now and then we do. mr. starr, you're recognized. >> thank you, mr.chairman. .. >> it was all second semester chemistry that i had to repeat over and over again before i could pass it. [laughter] but it's a great background.

the republicans want to kill social security, i think that's quite obvious, and turn it into a voucher plan -- >> mr. chairman? >> and the -- >> if the gentleman would yield on that? >> be happy to. >> mr. stark, as you know, republicans are very strongly supportive of social security. our moms and our dads -- >> for rich people. i don't buy that. >> we ought to be much more bipartisan. >> social security and medicare and turn them into voucher systems. now, dr. reischauer, actually, you're one of the -- stealing your thunder, you're one of the original founders, and your thunder, of course, is to have medicare have premium support. fortunately, you also gave me an umbrella for that thunderstorm

which was a guaranteed benefit. but would you support, um, the idea of premium support without a guaranteed benefit? >> um, as you know, mr. stark, the term premium support came out of an article that henry aaron and i wrote in 1995 suggesting that there be private or nonprofit options for medicare beneficiaries along with fee for service, that the benefit be a defined guaranteed benefit and that the payment be one that was indexed to the growth of health care costs. over time. and our belief was that this might generate more efficient delivery systems and better care

for america's seniors along with some cost savings. but the emphasis was on the quality of care and offering a more diverse set of delivery systems. >> thank you. the affordable care act which the republicans would lake to defeat -- would like to defeat according to actuaries it would shorten the, it would extend solvency eaght years longer -- eight years longer than if the republicans had their plan to kill health reform. would you suggest that's correct? >> there's a projection that hi

costs would be reduced, and the trust fund -- >> i'd ask unanimous concept to submit for the report -- consent to submit the release of the trustees' report which states that without the affordable care act, the health insurance trust fund would expire eight years later in 2016. dr. reischauer, can you put a dollar number, i mean, i keep hearing that social security's going to go broke in, i don't know, 20 years, something like that. what'll the total negative amount be, how many billions would you guess if you project that, it's going to be short -- >> over the next 75 years? >> is it going to take 75 years to go broke? >> no. it will exhaust the trust fund in 2033 if you combine the trust funds.

>> how much? >> i don't have a number at the tip of my -- >> any idea? >> basically, it's solvent through 033, so the -- 2033, and we have a present value estimate of about $8.6 trillion. >> 8.6 trillion. okay. and do you have any idea what the two wars that we're fighting and not paying for cost over the same period of time? >> i do not. >> would you be surprised to know they probably cost a lot more than that? and i'm not hearing anybody on the other side ask that we pay taxes, particularly those of us who maybe have high incomes like members of congress. we're not being asked to contribute anything to pay for that war. lower income people maybe are. thank you, mr. chairman. >> thank you. and without objection, the cms memo that you referred to will be entered into the record. mr. marchant, you're recognized for five minutes. >> thank you, mr. chairman.

my question is about the actual mechanics of how when you approach, let's say 2016 and the disability shortfall begins to appear in the disability program , what's the number that congress would need to appropriate out of general funds in those threshold years just to maintain, to maintain the benefit? >> just as a very crude estimate, it's about $30 million a year of the shortfalls that appear from 2016 for the rest of the decade. >> so about $300 billion over a -- we look at things over ten years usually. >> right. now, they would start in 2016, so it'd be about $30 million a year over the last six years of

that valuation period. >> and is there already, is there a trigger put into the law where the congress immediately is confronted with having to make that legislative decision, or is it -- will it be a legislative decision that has to be, go through the complete congress and then be signed by the president. well, the way the law reads is that the disability insurance program can only make payments from monies that are in its trust funds. so if you assume the congress does nothing, then basically you would have -- when the trust fund balance got down to zero, you would have delays in outgoing benefit payments until incoming tax revenues came in to finance more payments, and the effect of that would be to reduce total payments on an annual basis by about 21% per year. if you wanted to maintain full scheduled benefit payments, 100%, you would have to find other revenues and put them in

the trust funds to allow the scheduled benefits to be paid. >> so you'd basically have an appropriation that would be made into the trust fund that then the trust fund would basically then make, make its payments adequately? >> right. >> based on the current. finish and if we reach that threshold in the main social security trust fund and the amount of money, what would be the amount of money needed that congress would have to appropriate in that current year the first year based on the projections that you're making now to keep the benefit at 100% when we reach the 75% threshold that all of us get, all of us get that warning when we open our yearly statement and look at it. >> right now i don't have the precise dollar figure off the top of my head, but just to put it in today's terms, it's about

25% of scheduled benefits. now, today the cost of paying benefits is a little bit shy of $800 billion. it's about $390 billion -- $790 billion per year. today's equivalent you'd be a little bit shy of about $200 billion a year. >> 200 billion. so that would be the choice congress would have at that point; to keep benefits basically at the level the trust fund, the projected level, congress would have the decision of just simply appropriating the money to go in. >> yes. now, um, this cuts to a point i'd made earlier about the difficulty of the choices congress would face to keep -- i mean, obviously, the path of least resistance at that point is just to turn to the general fund and say here's another 200 billion. but the equivalent of 200 billion and put it into social

security. obviously, that would, um, end the principle that social security was supposed to be financing itself. now, if you wanted social security to finance itself, you'd either have to raise payroll taxes or cut benefit payments by enough to fill in that gap. >> but by doing that you would completely end the philosophy of a self-paying system, and you would transfer it like many of the states have done. they've gone in and raided their pension plans over the years to where the pension obligations in many of the states now is just a current appropriation. i mean, they've depleted the trust funds, borrowed against them or cashed them in to where instead of it being a payment out of the trust fund based on earnings, they just simply have a -- it's just a fixed liability to them. >> that's right. >> and that would become, would that law just become law by the

fact that we have not fixed the system? >> well, you would actually, you would have to take an affirmative legislative action to support the program with general revenues. under current law there's no provision for doing that. the program can't borrow from the general fund, can't receive without additional legislation, can't receive an appropriation from the general fund. so you'd have to change the law in order to have that result. >> so i think it's reasonable to expect that most of us will still be here in 2016. i certainly hope to be. [laughter] and so that threshold that you're talking about in the main social security fund we're approaching with the disability fund. so our -- whether we are acting or not acting, we are making some very conscious decisions on how we're going to handle this disability trust fund. and i suspect that the mentality of congress at this point, well,

will just appropriate the money so that no one loses their benefit. but when you make that conscious decision and you're making -- aren't you making a much bigger decision at that point? >> in the past when faced with this same challenge, the congress has reallocated tax revenues from the oasi system, the old age survivor system, to the disability system. >> so -- >> and tweaked the division of the total payroll tax between the two trust funds and thereby avoided making, you know, a difficult decision. >> thank you. mr. chairman? >> gentleman's time's expired. mr. smith, you're recognized. >> thank you, mr. chairman, and thank you to your witnesses. dr. blahous, we frequently hear

that social security does not contribute to the deficit. my colleague, mr. marchant, was touching on some of this. in your testimony you indicate that social security operations are currently adding to the unified federal deficit and will add stably more in the years to come -- add substantially more in the years to come. >> the parts of my answer that i think all analysts would agree with, and then i'll get into the parts where i think there's disagreement among analysts. i think that all analysts agree that to the extent that social security is supported by its own payroll tax revenue or by the taxation of benefits, to that extent it's not adding to the federal budget deficit. i think most analysts would also agree that to the extent that social security is receiving a subsidy from the general fund like the general fund transfers that accompany the payroll tax cut, that portion does add to the deficit. where you get into the murky area where analysts argue with each other has to do with the interest payments that are made

to the social security trust i fund. right now to a very large extent, from now up through 2033 and certainly into the 2020s, social security's going to exist based on the interest payments from the general fund. if you ask two different analysts to interpret what's going on there, you're going to get two different answers. from a mechanical standpoint, the payments of interest go from the general and fund to social security. so you could say from the mechanical and unified budget standpoint that those interest payments don't represent money coming into the u.s. treasury and, therefore, represent money going to social security without reducing the unified budget deficit and then represent an extent to which social security's adding to the overall deficit. you'll also have a school of thought, and i don't agree with this, but there's a school of thought that says those interest payments represent the extent to which social security has reduced the amount of borrowing in the past that the federal government has had to do and,

therefore, represents a reduction in unified budget interest payments and, therefore, to the extent social security receives interest payments, it's not adding to the budget deficits. you're going to have competing views on that. i'm on one side of the discussion, and other people are are on the other. but there's less ambiguity. to the extent that the program is receiving transfers of general rev news, it's clearly adding to the deficit, and to the extent that it's relying on payroll tax income it's clearly not. >> thank you. and i'll yield back. thank you. >> thank you. mr. burr, you're recognized. >> thank you, mr. chairman, and thank you for the witnesses. dr. reischauer, i appreciated your article in '95 about premium support and where that would go. my question to you is what happens when i'm sure at the time people called that vouchers and said that's going to wreck medicare. what was your response back a --

back then? >> you know, our response was that, you know, changes or were unavoidable, that this was a promising approach towards, um, providing beneficiaries with more choice, possibly higher quality coordinated care and possibly a reduction in government spending from competition among plans. >> thank you. jumping back here, i kind of wanted to follow up on the question that representative marchant had on the disability insurance trust fund. if it's, you know, we talked about we've got one to five years to make some decisions, and i'm sitting here looking at 2016, and i'm saying that's not five years, that's four years. and if you're not going to fall off a cliff, you're probably

talking one to three years to do something. now, as you explain, you know, the reality of how things may happen and where money would come out of the other fund to kind of subsidize this fund, if you pool those two funds, have you looked at what's the year that we're not going to cover the benefits? right now we're saying the one is 2033, we're saying this one is 2016. if the old age started subsidizing this one, at what point is it going to bring that down? dr. play house. >> the so-called retirement fund is 2035, disability's 2016, the combined funds if put together will be done in 2033. >> so it's the same? >> it refers to social security as a whole, so that's the figure you hear the most. if you split it into the two funds, one is 2035, the other is 2016. >> the 2013 -- 33 assumes that

you rejigger the allocation of the payroll tax between the two trust funds -- >> okay. >> to maximize -- >> so the old age is survivors you're saying with this report is still 2035? >> that one's 2035. >> but it's not "still," it was 2038 last year. >> oh, so it's come down. okay. the other point i just want to be clear is when you present value this unfunded liability, we're talking about 8.6 trillion which is over two years of all federal spending. but that includes the 2.7, using that money within the trust fund, is that -- >> basically -- right. you're right. that's, basically, the size of the actuarial deficit on top of redeeming the trust fund. and redeeming the trust fund, basically, you're saying redeeming the trust fund, counting it as an asset and then the shortfall from 2033 out to the end of the valuation period is where that 8.6 trillion comes from. >> so if you didn't value that trust fund amount, you're up to 10-13 trillion in that unfunded

liability to make it solvent? >> that's right. >> and i think there's a lot of different terms that are being used, and sometimes it makes it confusing. it cash flows for a while's -- for a while, here, but it's not solvent. from my perspective, i think we have to look at these facts, and the facts are the facts. quite frankly, if we care ant social -- about social security, we need to do some things to insure that it is solvent. i'm, obviously, personally very open to any ideas from anywhere, and i think the solution needs to be bipartisan. i think that's the only way you can present it to the american people, and i'm just, you know, hopeful that we'll get some of those bipartisan solutions coming forward. thank you, mr. chairman. i'll yield back. >> thank you. you can always raise the age to 100, you know. that'd take care of it. i'm going to ask one more question. dr. play house, in order to -- blahous, we need to align tax

revenues with benefit outlay on a sustained basis, and that didn't happen during the last major reform in '83. then the 7 5-year solvency was achieved in the near term followed by growing annual deficits in the long term even though that wasn't intended by the reformers at that time s. that correct? and could you talk about that? >> well, again, and my colleague, dr. reischauer, may want to leap in and disagree, but my read of the '83 amendments is that what they intended to do and what they actually did are somewhat different. i think they, um, they aimed at avoiding an immediate insolvency problem. the benefit checks were not going to go out in a few months, and they wanted to prevent that from happening. they also aimed at a long-term actuarial balance. you actually go back and read the documents of the deliberations and the memos of

the greenspan commission and how they measured fiscal success. it's very clear that they didn't look at it the way that we do it now. when we make a measure of the condition of trust funds, we count the carryover balance in the trust fund, we count the interest payments to the trust fund. we basically treat the trust fund as an asset in social security and, therefore, within that mindset you could certainly do something that builds up the trust fund and draws it down over a period of time. that's not actually how they went about it. they used a different med for calculating the program's financial condition. it was called the average cost method, basically, and it assumes in my given year you're going to fund the program by incoming wages from workers. they didn't count the interest payments of the trust fund. and if you read the commentary of the o greenspan commission members and the staff director, they say it's our intent to keep the program going on a pay as

you go basis. jake pickle wrote a letter, my memory is slipping, but it was east "the new york times" or "the wall street journal" saying the public would never stand for a big trust fund buildup because they wouldn't trust the government to control trillions of dollars of investments and save them money. so we want to keep this program going on a pay as you go basis. what happened instead was they got big surpluses in some years and big deficits in other years, but that result wasn't fully apart until solely in the legislative process. they couldn't really go back and revisit it. and, obviously, what they were dealing with was a big emergency. they didn't want to disrupt the political deal, so they got a result where the program's actuarial balance on paper was a little bit more apart than real which is why it has slipped since then. i should probably allow myself to be -- >> if we get a solution this time, there's going to be political consequences as well. do you care to comment, doctor? >> yes, i do care to comment. you know, there's a real dilemma

here. if you operate a program like this on a strictly pay as you go basis, then you're saying as demography changes -- and changes maybe in unexpected ways or trend economic growth changes -- you're going to have to raise taxes or lower taxes or raise benefits or lower benefits. and for a program that's designed to provide the american population with some kind of assurance that it's going to be able to plan its retirement or how much insurance it needs for its potential disability, you know, that's not a really satisfactory way to go. the other option is you can build up reserves and demeet reserves -- deplete reserves over time. and i agree with dr. blahous

that, you know, the intent was not to build up these big reserves. the future course of demography was not fully appreciated by those responsible or anybody at that time. you know, was the baby bust, you know, a permanent phenomenon? wasn't it -- you know, we've got huge social changes that have gone on in the last 30, 40 years. smaller family size, more immigration, more women in the work force, etc., etc. that make these things very hard to put in place and then stick with your decision for the next 75 years. so, you know, i don't think there's a right answer to this question. >> thank you, sir. mr. becerra, you have one more question? >> yeah, let me -- and to sort of feed off of this because i think often times we have conversation because we're

accustomed to having this conversation. i think we don't explain it in terms of most americans' look at it from. so, essentially, what we're saying is back in 983 when social security was nearing a point where it wouldn't be able to pay all benefits, congress working with -- excuse me -- working with president reagan worked to deal with that, and the result was a system where americans paid a little bit more, those who were retired got a little less in benefits, and the result was this reserve that was being built up because americans have since 1982 been contributing more into the system that's been needed to pay recipients, the beneficiaries. now, i think most americans would say if i gave you hard cash whether you're a bank or any other place where i could store my money and you tell me you're going to pay me an interest on that cash but you're expecting at some point to get to check on that cash, so, essentially, that's what we did. we told americans that when they

deposited their contributions, social security contributions from their paycheck to the government for social security that what was not used -- actually, all of it when it comes in goes into treasury bonds. then from there the social security system uses what it needs from those treasury bonds to pay for benefits. it cashes in those treasury bonds. because it hasn't needed to cash in all of those treasury bonds to pay for current retirees. it's been building up this surplus. and that surplus has been earning interest. sml because treasury bonds earn less interest than some more risky investment on wall street, but that's the 1.6 trillion in interest that's been earned. dr. blahous, you're saying some people would question whether that's real money because it's interest, and it was essentially a transaction between one arm of the government, social security, to the other arm of government which is the general operating budget of the federal government. but those treasury bonds are

real, and as the chairman pointed out earlier, 45% of our public debt is owned by formers. foreigners. they own that debt, and they get to collect on it because they own treasury bonds. so there are those who say it's not real money that social security holds. guess what, we're in pretty good shape because 45% of our debt held by foreigners isn't real money either. because we don't owe foreigners. if you don't owe social security, then we don't owe the social security either. americans paid real money into the system. it was secured by the most secure form of currency there is which is the treasury bond, and to say it's not real money simply because it was done by social security giving the money to the government and in turn getting a treasury bond to hold on to that money, i think, is a real either mistake to say or a real injustice the to the

american people who continue to pay into the system today. and it's the fact that that reserve is going to continue to grow for several more years before we have to start using it to pay for benefits. and so i think the public will want to you understand. i did the quick math on this. in the 77 years that social security's been around, you and i and everybody who works and has worked, we've contributed about $14 trillion into social security with our paychecks, our fica contributions. in that 77 years, the calculation was that we've used up about $13 trillion in paying out benefits. hard cash left over, there's a trillion dollars that americans have contributed cold, hard cash to social security that's never been used. that's helped produce part of that reserve. because for decades that reserve has been gaining interest because it's held in treasury bonds, it's added another 1.6

trillion. if you only wanted to give americans back their one trillion and not the 1.6 they earned in interest, if this were a bank, we'd have a big run on that bank, and we'd probably burn that bank down. so i think we want to be very careful when we talk about funny money for social security because then either we tell china and the rest of the world that we're not going to pay them because they've got the same funny money, or we should keep our obligations to americans who contributed money. final point i want to make is this. my colleague and friend from texas, mr. brady, mentioned that social security faces a permanent deficit forever. i want to make it clear, and i think dr. blahous and dr. reischauer would concur that under the law social security cannot run deficits, is that correct? >> that's correct. >> that's right. so social security will never face a deficit. what we do face and i think, dr. blahous, you used the right word, an actuarial deficit. because the actuaries see the

difference between what we're collecting and what we hope to pay out, and there is a deficit there. and that's what we have to tackle sooner than later. but can the social security system ever run deficits? by law it can never run deficits. the cold, hard fact is, i think dr. blahous said we'd have to tell americans in 20 33, guess what? your benefits went from 100% to 75% which would be cruel, and that's why we have to deal with it. but never has social security run a deficit and never can it until congress changed the law. with that, i yield back. >> do you want to make a final comment on that? >> well, i, just i certainly don't want to be construed as implying that the bonds and the trust fund are not real assets to social security. i think the, and as my testimony indicates, i think the trustees' report makes clear those bonds are backed by the full faith and credit of the u.s. government, a true asset to the program. where you get into these controversies about the trust

fund, it's not really so much about whether they're real assets to social security, but they usually have to do with these arguments between analysts as to who's paying for the trust fund bonds. so, for example, the interest paymentses, we did 200 plus billion in general revenue transfers this year to social security from the general fund without collecting any taxes. now, based on that 200 billion. now, those bonds are going to earn $400 billion or so interest up through 2033, so you have this, you know, analytical question, well, who's really paying for that interest, the taxpayer who finances the general fund of the u.s. government or the person invest anything the treasury bonds is, obviously, you know, the interest payments -- it's not necessarily the case that they were paid for by workers on social security, and there's just a fierce analytical argument as to whether that portion of's financing come -- of social security's financing comes from another source. but i certainly don't want to be construed as saying they're not

real money. >> this is what i love, when we actually can have this kind of discussion. this is, i think, what the public would love to hear. rather than just our doing our five minutes of asking questions, and you only getting five minutes to respond or giving testimony, this -- and i think, actually, chairman camp has done a great job of this where he's allowed us to have these informal, off the record kinds of conversations with tax reform, and i think we could do even more of those on social security. for example, dr. blahous, you point out something important. when we did the payroll tax cut to try to help working families with this recession, you're right, we told them you had to contribute less thugh fica to social security. but congress intentionally said we're not going to damage social security. we're going to take money from the general fund and replace the money that otherwise would have gone in. so i would respond to your point, which i think is a valid point, is that real money that should earn interest through these treasury bonds because it really came from the general

fund? i would say, absolutely. because we consciously in congress said we don't want to undermine social security, we want to help the economy and give working families who pay fica taxes a bit of a break, but we don't want to do that at the expense of social security when these folks retire. so i would say the decision was consciously made by congress that we knew that money would be used to why treasury bonds that would then earn interest and, therefore, we knew that that would, that would become money that the federal operating budget would owe to social security when the time came to collect on those treasury bonds. but your point is absolutely well taken, and that's the kind of parsing i think we have to discuss because otherwise everyone gets confused about is it money, is it real money. so i appreciate the point you make. >> i want to thank both of you for being here today, and i think we've had a positive discussion. we do need to fix social security, and we intend to do it. and i want to thank all the members for being here today as

well. mr. stark, thank you for showing up. with that, the meeting stands adjourned. [inaudible conversations] >> coming up next, securities and exchange commission chairman mary schapiro testifies about changing money market fund regulations. and the senate will continue work on the food and drug administration's user fee bill. the chamber will also work on a judicial nomination for u.s. district judge for southern florida. live senate coverage here on c-span2 at 10 eastern. this morning former microsoft ceo bill gates will talk about the future of federal funding of public higher education. live coverage begins at 10:15

eastern on c-span. and over on c-span3, the senate judiciary committee holds a hearing on deceptive practices and voter intimidation if federal elections. maryland senator ben cardin and election law attorneys will testify. live coverage at 10 a.m. eastern on c-span3. next, the head of the securities and exchange commission testifies about money market regulations and risk. mary schapiro took questions from members of the senate banking committee which is chaired by senator tim johnson of south dakota. this is an hour and 20 minutes. [background sounds]

>> i call this hearing to order. today we will examine the health and stability of money market mutual funds, the impact of the 2010 reforms and the potential positive and negative consequences of additional proposed reforms from the perspective of the industry's regulator, the industry itself, users of industry's product and economic experts. i look forward to hearing the testimony and welcome -- [inaudible] as the committee continues its oversight of the financial markets. because we're anticipating a series of votes starting in many an hour, we're going to forgo

opening statements from the committee's members in order to begin questioning of our witnesses. i will remind my colleagues that the record will be open for the next seven days for opening statements and any other materials you'd like to submit. i will also ask everyone to stick to five minutes for your questions. and today's first panel we have chairman of the securities and exchange commission, chairman mary schapiro. chairman schapiro, please, begin your testimony. >> chairman johnson, ranking member shelby, members of the committee, i appreciate the opportunity to testify about money market mutual funds and the continuing risks they pose to our financial system. as we all know, during the financial crisis a single money market fund known as the reserve primary fund triggered a run on that fund and funds across the market. within a matter of days, investors had withdrawn about $300 billion from prime money market funds or 14% of those

funds' assets. it was one of several destabilizing events during the crisis. to meet their customers' redemption demands, money market funds began selling portfolio securities, further depressing the value of securities and creating a vicious cycle. soon other funds were struggling to meet the demands of their customers and found themselves at risk of breaking the buck. the shock waves were widespread. money market funds ban hording cash and stopped -- began hording cash and other debt issued by companies, financial institutions and municipalities. this dramatically reduced the cash and liquidity available for those bities. in the final two weeks of september 2008, money market funds reduced their holdings of commercial paper alone by more than $200 billion. the rise on money market funds ended only after the treasury department took the unprecedented step of using the exchange stabilization fund to guarantee more than $3 trillion

in money market fund shares. while this step dramatically improved the market, it also put u.s. taxpayers directly at risk for money market fund losses. in the wake of the financial crisis, many have rightfully asked where were the regulators and why didn't they do more to address systemic risk. having reviewed this issue closely and methodically since my arrival in 2009, i've come to understand that money market funds pose such a risk, and and others agree. current and former regulators of both political parties have raised flags about the risks posed by money market funds and the need for reform, as has the financial stability oversight council. two years ago we at the sec passed measures to increase the stability of money market funds by institutingly quid fit standards and improving credit quality. all important reforms and one of the first significant responses to the financial crisis by any government regulator. by while these steps have been

widely hailed, i said then and still believe more needs to be done. that's because the incentive to run clearly remains. and since congress specifically prohibited the use of the exchange stabilization fund to again guarantee money market funds, this core part of our financial system is operating without a net. there are several features that can contribute to destabilizing runs. first, the stable $1 share price together with a history of sponsor support has fostered an expectation of safety. based on a staff analysis since money market funds were first introduced, fund sponsors have stepped in with their own capital at least 300 times. when a sponsor does not or cannot support a fund, investors lose confidence and rush to reseem deem. second, because an early redeeming shareholder can receive their full $1, investors have an incentive to redeem at the first sign of a problem in a

fund. because large, sophisticated institutional investors are likely to be more closely watching is and can move large sums of money quickly, the small businesses will bear the full loss. and, third, if too many investors redeem at the same time, the fund can be forced to sell securities at fire sale prices causing the fund to break a dollar and depressing the broader, short-term credit market. this spreads the contagion to other funds. it is for these reasons that i asked the staff to explore a number of structural reforms including two in particular that may be promising. the first option would require money market funds, like all other mutual funds, to simply set their share prices based on the market value of the fund's underlying assets. but understanding that the dollar is important to investors who use this product, a second option would be to allow money market funds to maintain a stable value they do today but require the funds to maintain a

capital value to support the fund's stable values and impose restrictions on redemptions. on many occasions members of this committee have appropriately noted the importance of capital buffers. here a capital buffer would increase money market funds' ability to suffer losses without breaking the buck and would permit, for example, money market funds to sell some securities at a loss to meet redemptions during a crisis. if a large credit event occurred, the buffer could help manage the loss, and additional exemptions or fees could slow the run, possibly supplement the capital and dramatically reduce the contagion to other funds and the system. these ideas and others are the subject of continuing analysis and discussion at the commission. of course, if the commission were to propose reforms, there would be an opportunity for public consideration and comment. that would trigger a meaningful and informed public debate on this critical issue for the nation's investors, taxpayers and the financial system at large. it is essential we address this

risk now rather than waiting until the middle of the next crisis. thank you, and i'm, of course, pleased to answer your questions. >> thank you, chairman schapiro. we will now begin the questions. will the clerk, please, put five minutes on the clock for each member's questions. chairman schapiro, as a result of the 2010 reforms, funds are published, the assets they hold their portfolios. what did the sec know about money market funds that you didn't know before the crisis? how is this new information informing the sec's views on the risk of money market funds? >> senator, i would say that the, um, transparency initiatives that the sec undertook in this connection have been extremely useful to us in monitoring the risk that money market funds are taking. i will also say anecdotally that every morning when i pick up the

newspaper and read about an earthquake in japan or problems in european financial institutions, the first question i ask our staff is what is money market fund exposure to these incidents and to these institutions. what the data has done is it's given us a window into those exposures in a much more granular way, but it also helps us understand the risks that are, exist within fund portfolios, and we have, in fact, hired a former money market fund portfolio manager to help us work through this data. we've noticed some interesting things, i will say, that some fund managers are taking on significantly greater risks than others, although all their share prices are still priced at a dollar. we have learned that while most funds significantly reduce their exposures to european banks in light of all the problems in the eurozone, some funds did not and were actually able to capture higher yields which is very enticing to investors. and, but, again, shows you that

the $1 share price can be a little bit misleading. the risk that funds are taking are not prohibited by our rules, um, but it's very important, obviously, for us to have a good handle on what those are. so we look at the data very carefully, and i will say we worry about some of it. >> which one or two provisions in the 2010 reforms do you believe have been most beneficial? what analysis has the sec conducted on the full impact and effectiveness of the 2010 reforms, and as such analysis -- has such analysis informed your very view on what worked well? >> sure. well, of course, we've studied the 2010 reforms very carefully. i would say from my perspective i think the most value have been the liquidity requirements. the requirement for 10% daily liquidity and 30% weekly which are, in fact, exceeded on average by funds. but i think those have been the

most helpful in meeting redemptions, particularly high numbers of redemptions that we saw, for example, this past summer. um, we have, um, analyzed the 2010 reforms carefully. um, we believe they have served their purpose quite well. today don't solve for the problem we are most concerned with right now which is the potential for, um, a money market fund to suffer a severe loss as a result of the credit event and not be able to absorb that loss and the propensity for there to be runs on money market funds. but that said, we think the 2010 reforms were extremely positive and, um, if we put out a release recommending further reforms, we will, um, include in that a careful analysis of the 2010 reforms and why we believe, um, we need to go further. >> there are pros and cons with

any policy proposal. what would be the impact of additional reforms such as asset value, capital buffer or redemption restriction on those who used and rely on money market funds including municipalities, companies and retail investors if implemented? and do you agree with some who have suggested that additional reforms may cause investors to move assets out of the money market funds? >> well, senator, that's a question that i could answer over a long period of time, but i think clearly, um, additional reforms in this area will have a cost, will have costs associated with them. and, um, we would intend in our release to fully analyze not just operational administrative costs which could come from systems programming or other

kinds of changes, but also competitive issues and opportunity costs and the full range of costs and benefits. but i think the costs, um, i believe would be far, far, um, outweighed by the benefits of another potentially devastating run as we saw in 2008 when reserve broke the buck. the costs there we will also try to measure, but they are the costs of damaged investor confidence, they are the costs of funds frozen in order to liquidate, and investors don't have the access to their, to their accounts during that period. but they are the costs of a short-term credit market freezing up and public companies and others not being able to issue commercial paper or have their commercial paper rolled over. they are the costs of small businesses and individuals not being able to, um, access their cash management accounts and

make payrolls or tuition payments. the implications of another run, i think, for our economy are very broad and very deep. and so those are costs we need to take into account as well as the costs, of course, of any proposed changes whether it's floating -- [inaudible] or capital. >> senator shelby. >> thank you. chairman schapiro, in your written testimony you mentioned, and i'll quote you, runs with potential systemic impacts on the financial system. as a justification for additional money market fund regulation. has the financial stability oversight council designated any money market funds or activities as systemically important? >> senator, um, as you know in the annual report of the financial stability oversight council, um, money market funds were discussed at length as a

weakness, and the potential systemic risk for the u.s. financial system. the fsoc has not designated any institutions at this point as systemically important financial institutions. >> okay. um, yesterday "the wall street journal" reported that a new sec study has found that money market mutual funds receive financial support from their sponsors more than 300 times since the '70s and about 100 more times than -- that's about 100 more times than previously reported. did the commission, madam chairman, review or approve this study, and could you -- if so, could you provide a copy of this study to this committee? and how many times, if i could add, have money market funds required sponsor support since the 2010 reforms? is that too much? [laughter] that's a lot. >> it tests my ability to

remember, but i hope that you'll remind me of any piece of this that i have forgot cannen. >> oh, sure. >> senator, the staff did a tabulation, essentially, not really a study, a tabulation of occasions where sponsor support has been given to money market funds. um, it doesn't even include all kinds of sponsor support, so i actually believe that the number may be conservative. but, essentially, it's a tabulation in many instances where people came to us in order to get authority to do sponsor support because what they wanted to do was an affiliated transaction which would be a violation of sec rules. i'd be more than happy to provide the information to the committee. um, as i said, it's likely a conservative number, um, because it's -- those instances that came to the commission's staff's attention because relief was sought or we were notified about the, um, support that was given. i know that moody's reported, um, a number somewhere in the vicinity of 200, i believe.

and i don't know exactly what they looked at over what period of time. i know our staff reviewed everything back to the inception of money market funds in the 1970s. i will say just as an example that they may have had a different baseline at moody's is that they looked, they reported that during the financial crisis 62 money market funds required support from their sponsors, but they looked only at the 100 largest funds as an example. >> okay. >> our staff looked at everything back to the inception of money market funds in the '70s. >> madam chairman, did the sec work with the federal reserve in developing the 2010 money market fund reforms? and if so, would you explain to us the fed's involvement, if any? >> you know, senator, i'm not sure to what extent. i'd be happy to supplement the record with this. i'm not sure to what extent the staff consulted with or talked with the federal reserve board staff with respect to the 2010

reforms. they may well have. i just don't know the extent of it. >> is the sec currently working with the federal reserve in developing further reforms? >> with yes. we've had our staffs have had lots of conversations about the potential reforms. >> okay. um, chairman schapiro, multiple fed officials have included discussions of the risks posed by money market funds in recent speeches on shadow banking. are money market funds so-called shadow banks? >> i'm not a big fan of the expression "shadow bank." i would say money market -- >> how you define it too, right? >> exactly. i would say that money market funds are hugely important and popular investment products in our economy, and they are important for millions of investors. and, honestly, they have generally been well and responsibly managed. so this is not in any way about

shadow banks or negative connotations. this is about my belief that their structure presents systemic risk. that as chairman of the sec i think it's important we talk about and debate openly and publicly. >> should the fed be the primary regulator of money market funds? >> i think the sec is a fine regulator of money market funds. um, i think they are at the end of the day, and this is part of what is lost in this discussion, investment products. and the sec is truly the federal government's expert on investment products. the confusion or the complication is that their value doesn't fluctuate like investment products can, should and do because we have the fiction of the stable asset value. >> thank you, mr. chairman. >> senator reid. >> thank you, mr. chairman. i want to commend you and ranking member shelby for holding this hearing because

looking back over the last several years there are many be, many issues that had potential dire consequences to the financial system which were not examined even though they were small, small risks appeared, but the consequences were, as we discovered in 2008 and '9, extraordinary. i think that this is a very, very important topic. and let me follow up a question that senator shelby posed. that is, the financial stability council has not designated a mutual fund as systemically important and subject to regulation, but they can do that, is that correct? >> i believe that, um, we could designate individual, um, funds as systemically important or, um, the activity of maturity transfer, credit mediation or whatever as systemically important activities. >> and that raises the possibility if the sec did not

promulgate a rule that would apply to all mutual funds, then the fsoc could pick out, presumably, the largest funds and impose restrictions or impose operating procedures on them under their authority. is that a fair estimate? >> i think that's right. we're working to refine what criteria would be used for, um, asset managers in designated and systemically important, but i believe that's right. >> so you could have, essentially, a system in which some are regulated and some are not. yours -- i would presume anything the sec did under the investment act would apply to every mutual fund equally. >> it would apply to all 2a7 money market funds. and the risk of, i think, having some designated and some not designated is that, of course, a run can start on a particular fund, but the contagion spreads it very quickly across many money market funds because, frankly, there's no incentive not to run if you can get your dollar out as an early redeemer.

why would you take the chance and stay in a fund and potentially have to bear the losses? >> and as you point out, most of the institutional investors have the most connectivity to the fund, they monitor it on an individual basis unlike retail investors. they, typically, under the present rules could withdraw their funds at the full nav, the dollar nav. and then at the end of the line others might get less, is that correct? >> that's right. the tendency is for, um, the losses to be concentrated in the remaining or the slower-moving shareholders which are always retail, small businesses not the largest institutions that are, in fact, monitoring their funds. >> one of the issues that was also raised by senator shelby is the, your testimony about 300, essentially, situations where

the sponsor of the fund stepped in and provided capital which raises the issue if that is the norm if they have both the intent and the capability of doing that, then essentially the funds can police themselves. but that raises another issue about both the capacity of these funds and their willingness. and perhaps in terms of -- is there any consideration to i know stress testing of the financial companies are popular now, but looking at the capacity of funds to be able to support or sponsors to be able to support their funds as something that you would consider? >> we do have stress testing now as part of the 2010 reforms, but it's really stress testing the portfolio of the funds as opposed to testing their capacity and willingness to step in and support a fund that's in danger of breaking the dollar. i mean, the real concern about

that is not that it's necessarily a bad thing to have sponsor support and prevent a fund from breaking the dollar, it's that there will come a time when a fund will not have, as you say, either the capacity or the willingness to step in and support its fund. and investors believe that there will be support because of history has shown us that, um, in many hundreds of instances funds have stepped in to do that. and, of course, history has shown us when things got very bad, the federal government stepped in to do that. so experience is trumping their theoretical understanding that these are at risk. >> final question. i'm concerned about the impact on municipal participants, many municipalities, state, local government use money market funds on a very efficient way to manage their cash. and are you looking seriously at any impact that that could have on municipaliti