that information has to be organized and presented for investors. i would be watching. is there budget. and fourth would be leadership. are we going to see shadow leaders of these efforts? president obama brought in mike and this is the guy who is going to fix this. so we should start to see shadow leaders for the environmental effort. probably if there's maybe a leadership. so i think those are the four bell weathers for me. brazil did it it right the first time. then their second reform has taken it back. so i would say the opening to the upstream, norway, brazil have followed that model. i think the u.s. and norway have done it, but algeria did it. iraq did it. the system of open criteria, you open the envelope and see who wins. the independents of the laters,

it it remains to be seen whether they are going to be safety case or performance standards or what kind of regulators they are going to be. norway is another great example. colombia has a terrific regulator. those are other countries that have done this well. and on the fund, i think it's pretty much only norway that has done this with the kind of political independence, fiscal independence that mexico has done. >> i think it's worth spending a moment's talk about the regulator. that's the key element right now i think in this. the question a the lot of us have is we have a very small, underfunded commission at this point in time. and in a relatively short period of time, we're expectings them to either find the human capital or resources in mexico or bring them in from outside. and that's the real danger, i think, here. and david said it very well. is commission going to be allowed to recruit internationally?

will it have the resources to do it? is it going to be an attractive enough proposition? if it's not a strong regulator, then this will be a real problem for both companies wanting to invest in mexico and for the benefits that will be distributed to the mexican people. >> what role jorge, can institutions like yours play in cooperating with some of the technical assistance? >> it's not only that, but there's a lot of universities in the united states that have a long relationship with pemex. we're working now with a group in mexico on shale gas development. we were talking about water resources along the border and what impact shale development could have to water resources. so certainly our universities in partnerships which we have with toly technical and the national

science foundation, the resources are there for us on our side of the business, the academic and research side of the business to add value to this whole process. and remember, there's a heavy involvement in research and partnerships in the american universities with the private sector. so, yes, there's no question that a u.s. institution and in corporation with mexican institutions can play a key role in this whole process. >> may i just comment? this is a very important issue that independents in the world of the regulators. and the constitutional reform has taken notice of this. one of the strong elements of the reform is that in article 28 of the constitution, both regulators have achieved some sort of constitutional status.

and they have granted technical atonmy. and they have granted something called object -- so what does this mean? this means that for the services that they provide, they collect a fee. up to now, that fee would go to the ministry of finance and into the budget. so they wouldn't be allowed to keep that fee. now they will be allowed to have it in a trust account. in a trust account up to three years of the yearly budget. so that means that they will have a trust account for almost three years of what their budget is like. so they will have enough resources that will be provided by their own services to be able to do all these type of things. we're evolving from a system

that is mostly outregulated by pemex into a system that will be regulated by others. so we are migrating into that. we are fully aware that we have to be very careful into that implementation. in addition to that, there are going to be two new members for each of these regulators that right now five member regulator board. now there are going to be a seven-member board. this is due to increasing the workload. they are going to have the personnel, the budget and the aton my to be a fundamental part of new model that we have achieved. >> all of you have mentioned the word transparency in your remarks, in your comments. and clearly the reform aims to turn a page. how does the mexican government now guarantee that transparency? particularly in light of pemex

eventually becoming more independent, but how does pemex improve its independence from the very beginning? what are the steps of transparency, concrete steps that people ought to be looking for? let me begin with duncan. it's a question for all of you. >> the first step is to really learn what best practices are out there in the world. the second thing is to take full advantage of the technologies that we have available to us. enrique gave a nice rundown of how it will work its way through in the payments, et cetera. that information needs to be publicly available online and easily accessible. it it shouldn't be hidden behind various different hurdles that you have to get over. and the third thing i would say is that industry needs to play a role in making sure that things remain open and let's face it, the industry historically has not been the most transparent industry. it's begun to realize that

transparency works in their favor. and fourthly, civil society needs to play a very big very bg role in mexico and the government should work with civil soes sirkts working with think tanks, et cetera, to make sure this data is available to the public. >> i think the role of the industry has changed considerably in the last 20 to 50 years. i think we do welcome transparency and we do welcome, also, good governance we have many countries in the world in which we have huge challenges. there's lots of things we would like to implement that's part of the corporate core, not only the corporation but our shareholders and in some countries is extremely difficult to implement. i think transparency not only from the industry is welcome, but i think transparency in the whole process is welcome. there's a lot of data, both seismic data. a lot of different data we have to share now. we have consortiums -- talking

about universities, consortiums in which five or six different private companies participate in that consortium and they share knowledge and they share new licenses and new procedures. so transparency is extremely important, but good governance within within the country in which we operate is extremely important. i think that's going to be the case in mexico, by the way. i don't have any question having lived there and traveled there for the last five or six years regularly that there's a culture change, that there is a new re-engineering not only of people mechanics but a new re-engineering of mexican society. by the way, i did not mean that the reform process was easy. i did say that but i didn't mean that. people have to understand -- the first thing, when i was sent to

mexico, believe it or not, my corporation sent me for a three-week course, even though i have a degree in latin american studies of mexican history. you have to go back to mexican american war of 1917. people were in veracruz in 1914. there's history behind the whole culture that comes and ties to march of 1938 that we have to understa understand, the political, historical courage it took for the president to move this reform forward. even though from a historical, political context the process was difficult and not easy, what i meant to say is from a business point of view, this is the easy part, now comes the implementation so we can get to the targets of 2020.

>> it's remarkable at the constitutional level people have to appreciate these transitory articles have constitutional status, revenue transparency, constitutional transparency, cost reporting transparency and reporting to the national fund are demanded at the constitutional level. i don't think there's another country in the world that has a constitutional level directive for transparency. that's pretty impressive. i think smaller attempts that will be important will be looking at what the auction system looks like. presumably that will be transparent and joining something like the disstrackive industries transparency initiative will give a platform for civil society to participate. that's been a popular international movement that's shown good results. >> enrique, let me give you the last word before i open up to questions. >> there's a full committee of transparency in the company know nat toes administration. what you have said is true.

we went to different countries to see how different oil models work. we learned from those who have transparency elements that work well we have put them in the constitutional so we can have a mandate, a clear mandate to make them enforcementable in the law and the regulatory next steps. we're fully committed. i think most importantly, the mexican people does not satisfy the way transparency has been dealt with, extractive sector in the past and we need to do it better. that's strong and we hope civil society will be highly involved with that the idea of the itis is very important. we're analyzing to do it. >> i would like to bring our other guests here. sir, why don't i begin with you because you're closest. >> stephen donohue from mcclarity and associates.

thank you very much. perhaps it's on purpose, but there's some ambiguity about the issue of booking reserves. david in the paper says it's clear it's the attention to allow companies to benefit from the future value of what they're doing. i haven't quite heard you say that. would you tell us how the government of mexico and sened use this going forward? that really is the fundamental issue. >> for us it's -- what congress has achieved in the constitution we believe is standard practice of course. it has to be established that the property of oil and gas is of the mexican nation, but those contracts will also be available to be able to report future benefits, future economic benefits of those contractors for feeling all the legal requests that the companies have in different markets. so we are, according to standard

international practices, that's how we see that transitory article. >> i would just add, stephen, that the sec ultimately will want to look at the contracts and see if there's an element of risk and is there a security of entitlement. if they see those two in the forms of the contract, then they will make a determination that those reserves are able to be booked by companies. i would say in terms of the political culture from talking to our colleagues here and talking to the oppositional parties and appreciating the threshold for legislation is lower than the threshold for constitutional reform, the entire initiative makes no sense absent the ability of companies to book reserves. i think there's deep knowledge and recognition on the part of the government that if companies cannot book reserves, they will not invest and they wouldn't have gone to all this effort to try to enforce this constitutional change knowing it would take constitutional change without it. you've got to see the contracts. i think in the legislation, that's the two big bellwethers are going to be how much the definition of the schemes is

defined in the legislation and how much visibility there is on the terms. all these companies have their models and they crunch it in. how much is the return on investment. that's why they'll pick mexico and not kurdistan or some other place. the earlier we see the stability, the more security there will be. my question is around national content. that's been a big issue in the hemisphere and the extent to which mexico deals with the national content issue. we'll put it more competitive verses other options or less competitive. >> in secondary law, we will

establish percentages and the areas and the time frame for national content. what we have learned in other countries is that it is important to one of the outcome ts of our reform of this type is to have a strong national industry that produces services and participates actively in that transformation of the oil and gas sector and we're aiming to that. it will be in the secondary legislation that we will establish that. we're also aware that some of the examples in other countries, if you put such strict rules into national content, that has slowed down implementation of the reform or that has made them more e pen sive in the process of implementation. another strong element is that we're very interested in establishing foreign direct investment, we were looking for companies that are right now based in the u.s. that will be able to be based in mexico and have important offices and

produce products there in mexico in order to bring them, instead of buying the products from the u.s., to be able to buy the products from mexico. and brazil has been very successful in achieving that and norway has been very successful in achieving it. its own private sector has become a worldwide provider of services in the oil industry. we're aware of that. we're also aware we have commitments in different free trade agreements that we have to have equal treatment of investment. in order to craft a secondary legislation, we have these three elements to put into place in a correct way. >> i just wanted to mention that, as we're sitting here today, there are a number of mexican companies today in houston already talking to u.s. companies, particular service contract, petroleum services companies. it's not only foreign investment o from the point of view of american dollars coming, mechanics xan companies will

come over here, do joint ventures with u.s. corporations, have the knowledge transfer, the skill transfer that you'll see in the next five years, a very considerable number of very quality mexican companies that will be the focus of this industry. from a local content point of view, i think the mexico case is going to be different certainly than the brazilian case. in fact, somebody asked the question about nafta. i think this is an area in which now the nafta infrastructure is going to help this new relationship between mexican, small companies, medium size companies, small companies that provide services and equipment and products to the oil and gas industry in mexico doing joint ventures with the u.s. that to me is a huge area of growth, by the way. >> i think it's important to remember that we sit here in washington or houston and look and say we don't want the national content requirements to be too high because that will be a barrier to investment, but we also don't want them to be too low. part of this goal, it's not just

about oil and gas or electricity. it's about developing the mexican economy, increasing competitiveness and adding jobs ultimate limit if we want this reform to be politically sustainable in the long term, the mexican people need to feel a benefit from it. that's why it's incumbent upon business and government to work out what would be a fair level for national and local content and then for the government and people mechanics in particular to work with providers throughout the couple to develop natural indigenous capacity to do this. that's where the long-term benefits of this reform will really be felt. >> absolutely. >> the back of the room? the gentleman who is standing. >> diana negroponte from the bookings institution. first to the undersecretary, 2450u for coming to washington and thank you for your powerpoint presentation which i hope the atlantic council will place on their website.

my question concerns the valuation of the blocks. prior to an auction on international market prices, who will determine the valuation of existing fields and what are the criteria which will be used to determine their value. >> thank you very much, ms. negroponte. we'll leave that presentation to the atlantic council. thank you for having me. the ministry of energy will make that balance. the ministry of finance will make the fiscal calibration of the contract. then the bidding process will be taken by the national hydrocarbons commission who will sign the contract on behalf of the mexican state: the secondary relation will establish the framework through which we'll do those economic analyses, and the

industry would require case by case analysis because the fields from shell water to shell gas, the economic conditions are very different. we will allow secondary relations to establish a framework, but it will be up to the ministry of energy on its responsibilities and the ministry of finance on its responsibilities to tune in each contract, depending on the quality of the field. thank you. >> i would just say, this is an area of risk, i think, to take an area, say shale fields or deep water and say this framework or frameworks that we're going to apply, these are roughly the terms, creates a way to scale a lot of acreage at one time for auction where the market will determine the price. but if it's field by field, that creates i think a significant drag on the bureaucratic process and the ability to really slow down why is one field verses another one under aern terms,

then you run into problems of, is that being done because it's a way of getting pemex to be able to get some preferential rights. i know that's not the design. i think that's something to watch in that process, is what's the most efficient way to get those blocks sized and get them up for auction and how much flexibility will there be for companies which may see higher risk in shale gas than in other areas because the cost to mean towards a concession versus profit sharing. >> best practice example, who has done the acreage valuation correctly? >> actually, we've done it pretty well. i would say at least in the deep water gulf of mexico. jorge would agree. we run the seismic, do a geologic assessment. we make that data available and it goes up for auction. the market determines the price. at times when we have seen high risk like in shale gas but the deep water in 1998 when prices were $10, we provided tax

incentives to encourage people to go into the shale business and into deep water. both of those incentives expired once we did that. we saw an area of high risk and we wanted to maximize the reward. but we did it by area, by type of geology rather than by field. i think the norwegians do something similar. even the uk has one scheme for marginal fields and another one for deep water. it's for marginal fields generally. it's not field-by-field assessment. it makes it easier bureaucrat cli on the licensing agency. >> and allows for variation which is important? >> yes, among different types of technology. >> deep water verses shale. >> we're following that path. first variation allowed by the secondary legislation. >> the gentleman in the back i know has been waiting. >> thank you. thank you sub secretary ochoa for being here.

mr. duncan wood mentioned about the prices of electricity in mexico being a little too high especially on the northern part. i'm a witness of this. even though production will open up and production costs will lower down because of the openness, distribution in electricity and gasoline will still -- electricity is still controlled by a national company. what opportunities will be there? is this even considered about opening up the national company, and what opportunities could be there for business? >> thank you. that's a very good question. the other part of energy reform is strong transformation in the electricity sector. this is not by field. but let me just give you some of the important lines of this reform. transportation and distribution are natural monopolies. the ways this reform allows private participation is through

contracts with cfe, the national power company. and this is in the way the brazilians did their own transformation that allowed the public company to establish contracts that would allow to it build new transmission industry lights. have in mind that 80% of the price of electricity comes from the cost of the fuel that you use to produce electricity. there's a big opportunity there for natural gas to have an impact in the whole area. now, the other important part in mexico is an inefficient distribution system where we're losing around 20% of the electricity that we conduct. this is due to technical failures in some areas is more like social problems that have been introduced in people not paying or people stealing the electricity. so through these contracts we'll find the mechanism to make these

lines more efficient. if you see the percentage of the impact, having a market of electricity, having substantial natural gas and renewables that can put a mix of the production of electricity in a way that will tend the costs to go down significantly. if that's 80% of the cost of electricity, then we can translate to the consumer better prices to make it more competitive in a region. it's a huge transformation as well. i would suggest undersecretary for electricity in january. the reform is very, very important in the press because it was an issue with reform, it got to a secondary position. but hydrocarbons have taken much more of the attention. but electricity reform is very important. >> please transmit to the undersecretary the floor is open. david, i know there's a section

of the report on electricity. do you want to summarize that? >> undersecretary mel gar is well known here in washington. we'd be delighted to have here here. this is an area where there's great opportunity, but the framework makes all the difference. it may be that in mexico that distributed generation is going to be the first area of commercial opportunity rather than grid extension, places where people can have relatively small sources of generation access their own gas and provide electricity to something other than the major load centers. and so there needs to be visibility and flexibility in the legislation to allow those relatively smaller generators to be able to sell directly to customers. relying on cfe for collections when collections are not good and relying on cfe for transmission security when transmission is already weak will be a source of insecurity for investors. some flexibility there will be helpful.

subsidy is the other question there, because as long as residential consumers are subsidized, the target will be the industrial consumers, the ones producing their own electricity and to create a system where you can extend transmission and where you can bring in all this capital. at some point they're going to have to give up the residential base. nobody is going to be able to provide electricity cheaper than an existing subsidizing situation stem. i think in the initial drafts of the reform, there has been a transitory amendment by called for moving from general subsidies to targeted subsidies which would be classic economic theory. right now everybody in mexico city gets their first 250 kilowatts of electricity free whether you're carlos slim or need subsidy from the government. that's a very expensive system. maybe in the legislation there will be an opportunity to take a look at that. we say the value proposition is a question. those kinds of questions, both the data and the framework still

have to be worked out. >> i saw duncan nod when the word subsidy was mentioned. >> as many of you in the room know, it's a bizarre pricing system in mexico. it really, really s. some people e end up paying very little. when you jump over the barrier in terms of your residential consumption, all of a sudden, the cost of every unit of electricity that you've consumed goes up enormously. so working out how to remove subsidies but at the same time lowering energy costs i think is part of the conundrum we're looking at right now and it vears, very important in political terms. this is where the average mexican i think will feel the benefits of the energy reform. yes, we can talk about jobs and competitiveness and all the other great things, but the average mexican on the street wants to see that the promise of lower energy costs and lower fuel costs as well really come through within a reasonable period of time. i'm a believer, an optimist on

this, that once you have a greater participation by private generators in the system and once you bring in these lower costs of natural gas for combined cycle generation which doesn't necessarily need to happen because the reform, it can happen by just building the pipelines across the border to get the gas into the market, then i think we'll begin to feel those benefits anyway. >> thank you. we're willing to take questions from the web as well. sir? >> hi, jeff eping. i've had the good fortune. i worked for pemex for a couple of years. i've looked at hundreds of wells and seismic. geological potential is very good. my question is turning the issue of security for operations, how do you think that will play out for drilling wells especially onshore. >> thank you very much. one of the elements of

constitutional reform is that an institution is going to be created to overlook industrial safety and environmental issues which is going to be dependent of the ministry of environment. that was created thinking about important issues that they were saying, up to today, pemex is a self regulatory institution regarding those topics. if an xaps, they have to make a report to the ministry of energy. that includes a new institution and it will will have the participation of the ministry of energy. but that institution will take care of that. >> i'll add the u.s.-mexico transboundary agreement finally cleared the u.s. congress as part of the budget deal. when we were launching that, we thought it would be a first baby step to cooperate with mexico in

the gulf of mexico. it turns out we've leapfrogged that completely. this would be an area for u.s.-mexico cooperation. we've learned a lot about safety, at least in the deep water oil spill prevention, oil spill mechanisms, commercially available systems. so i think that's one of the areas over the next months where we could have some bilateral and hemisphere cooperations. >> that's something we talked about. i just want to underscore that that process is already in place and this process already has been in place before this energy reform. in other words, there is great cooperation between the u.s. and mexican coast guard. there's cooperation and work between sened and the u.s. state department, u.s. and private industry. in november there was a meeting in tampa in which mexican officials and u.s. coast guard officials were there. the process is in place. all i wanted to underscore and highlight again through maybe saying everything in this world is easily as far as the

agreements and paperwork is concerned, implementation is a very, very difficult challenge. and the deepwater horizon taught us that. i think in this new concept by the industry being able to work hand in hand with pemex, that's going to bring and transfer a lot of knowledge on how we manage the business. i think that's an area that we're going to see quite a bit of improvement. by the way, not only in offshore drilling, but also pipeline transportation. we have seen a number of accidents and incidents in mexico and also in onshore field work. >> i don't know if this was implicit in your question. but public security onshore in particular, because i don't think we're going to see the zetas going out into the deep waters of the gulf of mexico. it's a question i get asked a lot. my standard response is look where the international oil industry operates globally? they don't always operate in the safest places.

they know how to deal with security threats. the one potential exception i would say is the smaller operators that might benefit from a boom in the shale business in northern mexico. that's where we really have to keep focused on the questions of rule of law in mexico, where we have to keep focused on trying to lower levels of violence in the -- across the country. and in particular, you know, lowering the cost of doing business because, although it hasn't been a significant disincentive for investment in mexico in recent years, it does raise the cost of doing business when you have to face threats of kidnapping, extortion, et cetera. for the bigger companies, that's not a big deal. for the smaller companies, i think that's something they need to factor in. >> good morning. ram i don't know genz from wbi. let me come back to the

electricity sector. do you see a role for the world bank or the public branch of the world bank or the idb in opening up the sector to private participation? >> not that i am aware of. the transformation in the reporm is that it will allow something that happened, since mexico amended its secondary legislation in 1995 -- sorry -- 1991-'92 which was to allow participation of private sectors in generation for consumption of its own and to sell it to nearby big businesses. that model has been put into question because it was not a constitutional amendment. there has been several intents to amend the constitution in order to put this model into place. but until now it has been

successful. so what we are doing now is establishing something that is already there. a third of mexico's power production is done by the private sector, but now what we're achieving with this reform is not only that they have a constitutional base to do so, but we're also promoting a market so that we can have the lowest cost producers to be distributed first, and that will be one of the substantial reasons where we can decrease prices in the future because we have a strong supply of natural gas in the country. that will decrease the costs of production of electricity in mexico, and if we have an independent body that will submit the electricity to the distribution lines according to lower costs, that we'd be able to transfer these benefits to the overall population. of course, there is a task ahead to get the subsidy system right in order to decrease

externalities that you have, that duncan has described. this is part of a whole plan of implementation that will allow the lower costs of production of electricity to reach the bill of the mexicans. >> there's one area -- how about product branding in retail? in other words, all the service stations in mexico are not owned by pemex. they're privately owned by dealers and jobbers and operators but only carry and buy product from pemex. in the legislation or in secondary legislation, are we looking at the availability of private branding? that's number one. is the operator of that private brand going to be able to import its own gasoline so the deficit in refining can be met by a new operator? is that model for downstream marketing of retail fuels is

somewhere in the revision of the reform? >> yes, yes, of course. we already import 50% of our gasoline. but there is no benefit of competition for the consumer. so what we are looking at is precisely secondary legislation to open up branding and to open up the service. if that means that the private sector will do this business needs to import gasoline, that's what we're currently doing. we're currently importing 50% of the gasoline. that will be obviously in the process that we can increase the production capacity inside the country. you were mentioning that you could see pemex having joint ventures in refineries in the u.s. the irony is we have them already. pemex has a refinery in texas. it's a joint venture with shell. this is from the early '90s. if pemex would want to bring its

partner, shell, to mexico and do what it's doing in texas, until reform, they were forbidden to do so. that's ironic. you can ask your oil company to do a joint venture in the u.s., but you forbid your oil company to do it in your country. so with the energy reform that president pena forwarded to congress, pemex will be allowed to do those joint ventures in mexico. we are looking for an important change in downstream. lit take time as you've described. we have now the legal structure that will allow those things to happen. >> david, you want to add something? >> just the previous questioner, there's always an opportunity for the international financial institutions to provide private financing, ifc. i think it would be welcome in the power sector. people mechanics is xm's largest provider. for the ifc and others, having

that participation would give comfort to private investors. it's probably something for the share hold earls and the bank to encourage. >> i have a question from those watches us on the web. i'm going to direct it to duncan. the question is what does this mean for broader u.s.-mexico relations? i'm going to add immigration, commerce, judicial cooperation, security cooperation. >> it's a question i get quite a lot, i have to say. what i think has been fascinating and incredibly well handled by the u.s. government over the last 10, 15, even 20 years is how the u.s. government has respected mexico's sovereign right to determine its own energy future, and the role that has been played by the u.s. government, i was actually given a class yesterday at the foreign service institute. and the officer said was there really as a result of great pressure from the united states.

he came up with a conspiracy theory. i said hang on, this sounds like from one of my classes in mexico. this didn't happen. the united states government has always been incredibly respectful in terms of allowing mexico to determine its own future. this is a result of a national debate in mexico and a long process. but the implications of it for the bilateral relationship i think are very, very positive, partly because of increased business integration, but mostly the point i mentioned earlier on which is increased integration of energy markets which means you're seeing an increased integration of the production system in north america. what we're looking at for the future is that all of the three countries in north america depend upon each other to really enhance their competitiveness. that's what this really opens up a possibility for, is lowering energy costs in mexico, guaranteeing stability of supply, making sure u.s. producers in mexico can stay

there because energy costs are lower. and in other areas -- you mentioned immigration security for example. these are areas where i see there will be a very positive net benefit for the mexican people and the mexican economy. already we're seeing zero net migration from mexico to the united states. probably that's as a result of demographics, probably as a result of a tougher climate here in the united states, but probably as a result of greater economic opportunities in mexico and this can only help. some of the estimates prove to be about 100,000 new jobs in the energy sector. that's something we should celebrate. that means more 15-year-old mexicans see their future is in country as opposed to leaving. on the point of security, if you are a young man who lives in a marge liesed area and you have no economic opportunities, there's very little choices for you. are you going to my great or go

into potentially organized crime? this offers you another way out. it needs to be added to all the changes happening in education, of course and other changes in the economy. i see this as being a very positive thing. it will relieve the pressures in the long run as well. >> particularly in the border states. >> yes. >> did you want to add something? >> i agree completely. >> david, let me ask you -- another question from those watching us on the web. first, the bilateral relationship. but now cast this reform within the tpp that's being negotiated and some of the free trade discussions. >> well, i think for the more mexico grows as an exporter probably in oil -- gas may have a more de domestic market, the more value there is in tpp. united states is in a slightly different position. for us the ability to export gas, given the enormous amount of gas we have, the potential to

export lng and the relatively low prices, that gives us basically a bargaining chip to use for both of those trade negotiations which we didn't have before. so it's indispensable for us. i think mexico would be a collateral beneficiary of that. i'm not so certain that mexico is going to become an lng exporter in the next 10 to 15 years given the incredible amount of domestic demand and relatively low price of gas right now. i'm not so sure it's as big a deal for mexico in those trade agreements as it is for us. >> do you want to add a mexican view of the bilateral relation? >> i agree that the first objective with a reform of this sort is to have enough oil, natural gas, petrochemicals produced in mexico for our own market. i think that you're right. mexico will not be an exporter of lng in the near future.

the first task is to reduce the 30% of imports that we have on natural gas, and that will boost a new industrialization of our country and to lower the prices of electricity. u but in the long run, and these reforms are made for 50 years. these reforms obviously have impact in the short term and the midterm, but mostly in the long term. i think we'll see a different scenario ten years ahead of us regarding that. in order for those benefits to come into place, you have to start now. one of the very important things we've done, the first big step, and we will follow the time line that constitutional reform has established, but we have our eyes looking into the future in those fields. >> the main thing is we have to look at what's going on in mexico also from the perspective of north america and the united states. this is a strategic regional revolution that's going to take place. if you look at the keystone

pipeline when it gets approved, between the keystone pipeline, the seaway pipeline and all the west, east and down to the east coast, pipelines that are going to be opened up here in the next few years, the u.s. gulf coast refining system is going to have the flexibility and xapsity of at least another 3 million barrels a day of capacity, mainly canadian crude coming down. as that canadian crude comes down, what is it going to displace? what foreign crude coming into the gulf coast is going to be displaced? if i'm a refiner in the gulf coast, i can tell a importer of crude the price differential verses wti is going to be different because now i have canadian crude in the pipeline that all i have to do is open the valve. the same thing with lng. i think what we're talking about is that this mexican energy reform is really going to open a whole new strategic view of a

regional energy matrix that we haven't seen before, that we as a region can certainly take advantage. i go back to 1/2 tachlt we're talking mexico, canada and the united states. collectively if you guys can get your heads together, certainly from the energy point of view, we can be a power-to-be. there was a headline from one of the news services about the energy revolution and how we're going to drown in oil because of all the oil that's going to be available. i think regional integration in north america, mexico, the united states and canada is very important for all three xhooe companies and also for this reform to move forward. >> if you play this out into the future after mexico meets its domestic demand, what can be interesting first is the product trade. most of u.s. products are now going to the hemisphere. but central america needs gas. if you, depending on how widespread the shale formations are in mexico, when you meet your demand you can see 15, 20 years out that mexico can be a supplier to central america and

a lot of the problems we've had so far on fuel oil dependency in the caribbean and high carbon consumption in central america can be resolved by mexico and central america or mexico and the caribbean. there hasn't been a source close enough to that territory to be able to get bass. i think 15 years out we're probably talking about not only north america, but talking about hemispheric energy immigration at an unprecedented scale. >> or electrical conductivity we're also talking about in which mexico can certainly play a very important role. >> we i'm sure can go on for a number of more hours. i'm going to have to draw it to a close. i appreciate everybody's participation. an an nounment for those members of the press who would like to interview the undersecretary, if we can meet in the back of the room, that would be great. an expression of thanks to all of you for participating.

it's been an amazing, amazing thing to watch in mexico, not only from the point of view of the technical ability to have passed this reform, but the prowess with which you did it e, not only this reform, in this past 12 months in mexico there has been an education reform, a telecommunications reform, reform of the financial and tax system, a political reform and now culminating a year and a couple of days into the first year of present pin netto with the energy reform. i think you could provide washington with a harvard case study about how to get some things done. happy holidays to everybody. thank you for joining us. happy holidays to all of us. thank you. [ applause ] .

subcommittee comes to order. and ie to ranking members think others will join us. this is likely the first of a series of hearings that senator to me and i would like to do on

the issues of retirement security and social security and all that it relates to and i appreciate his cooperation as i do senator hatch's. i will begin with an opening and other members that come are surly welcome to do the same. retirement security in america as we know from history's and fdr another stories from the new deal on, traditionally thought it was a three legged stool. social security, employer- provided pensions and personal savings and investment. the first leg social security guarantees a modest but stable income during retirement years, but not just for retirement security. social security provides basic financial security in the face of unexpected tragedy and provides a vital safety net to the disabled, the orphaned and the widows and widowers, something traditional retirement plans often are unable to provide. the other two legs of this three legged stool for personal

savings and pension plans, build upon the bedrock of social security and allow families maintain the standard of living that they approach the standard of living they enjoyed while working and protects seniors but also allows families to use their resources to buy homes, star families, and pay for education. without retirement savings, aging parents become dependent on working aged children, preventing us children from saving for their own retirement from perpetuating the cycle of economic distress for far too many families in those retirement years. for far too many workers, we assume social security is the the leg left standing on three legged stool. the percentage of workers covered by traditional defined benefit plans, those were you pay in and get a defined benefit likely for the rest of your life , has been declining steadily over the past 35 years. there are now only some 30,000 private-sector defined pension benefit plans down from over years0 just less than 30

ago. from 1979 to 2011, the proportion of private workers with retirement plans covered by defined if it pension plans fell from 62% to 7%. the same time the percentage participated in defined contribution plans much more, now, which inherently upholds more challenges for the beneficiary and perhaps others, increased from 16% to 66%. only half of america's divine parkervision plans of auto enrollment. aretime we are told we charge of our retirement futures, only one quarter of american workers have automatic access to a defined contribution plan. about half the us workforce today is covered i an employee- sponsored retirement plan. many are not participating in any employer-sponsored plan. working families are increasingly squeezed from every angle. wages are stagnant. home values have declined.

tuition cost for children are increasing at a time we begin to care for our aging parents. middle-class and low-income seniors rely on social security for majority -- close to two thirds of families overall. the middle-class and knowing cap families rely on sosa security for the majority of retirement income. -- the middle-class and low- income families rely on social security for the majority of retirement income. the economic aim middle-class workers haven't shared an economic gains, by large missing an increase associated with increased productivity and higher corporate profits, meaning costs go up, the ability to save has declined. the picture gets bleaker when considering racial disparities and well. -- and wealth.

these factors are why most americans have saved only a fraction of what they need for retirement. irk is approaching retirement age of an average savings of less than $27,000. one third of americans leading retirementl security age, one third of americans 45 to 64, have nothing to zero, saved for retirement at all. the numbers are only slightly better for those with a retirement plan. in 2010, 75% of americans nearing retirement age had less orn $3000 in their ira retirement accounts or 401(k). these facts illustrate how great the deed is, in my mind, maintaining and expanding social security. the only source of guaranteed lifetime benefits on which most retirees can rely. , as hisnsurance unemployment insurance and medicare, social insurance you pay in and get benefits out. social security or social insurance doesn't does provide

much needed financial support literature's hard-working middle-class people can retire with dignity. for the majority of recipients, these modest benefits provide over half their income lifting over 20 chilean americans out of poverty. -- over 22 million americans out of poverty. on social security, close to one third, for socially their entire income. the program is not only retirement insurance, but family income. one third goes to widows and children. rather than asking how we should scale back the program, we should be asking ourselves how we can strengthen it. that seems too often to be the howte on the talk shows is we can scale back the program and save money for budget reasons, not the debate, which i think it should be, of how we make -- how do we do with the fore issue of security financial security, retirement security for people. that means not reducing benefits

or raising retirement age. maintaining sosa security is the single most effective thing we can do to prevent economic ruin and poverty for millions of senior citizens. the budget debate creates a vacuum. it doesn't take into account the economic impact. have written on that, primarily mr. biggs and aarp. it would decrease our 10 year deficit with budget cuts. i don't think it's under the impact on seniors, their families would support them, and current and middle income workers. fors a macro economic issue shifting the cost from the federal budget does not resolve our retirement and savings programs. social security reform should be considered as part of the examination of the burgeoning retirement crisis. i want to yield to my ranking

member toomey. i think we will learn a lot from today's hearing and i look forward to your contribution. >> thank you very much, chairman brown. i appreciate your having this hearing. no question, it is extremely important topic and we all agree on the importance of addressing retirement security. as you pointed out, mr. chairman, americans rely generally on three main vehicles for financial stability. private savings that often comes in the form of tax preferred accounts. there is employer pensions, which as you pointed out, are increasingly defined contribution plans. there is the social security program. government the policy should focus on protecting all three of these pillars of retirement security. a couple of ways we can approach this, one, recognize the strengths of the current retirement system and preserve what works. the other thing we need to do is acknowledge the hard truths

going toorms that are be necessary to protect programs that seniors depend on. i think it is generally good to adopt the approach of first do no harm. one of the advantages of our current system is the diversity of saving options whether it is 401(k) or ira or pretax accounts from a roth sell accounts. giveange of options taxpayers greater flexibility, more choices, and more opportunities to accumulate savings will help them in their retirements will stop i think we ought to defend and encourage these provisions that help people to say. some suggested we should reduce the amount that americans can save in tax-deferred accounts. i think that is a bad idea and would diminish savings. while that would have adverse consequences for individuals attempting to save and provide further on retirement, i think it would also be counterproductive from an economic point of view. the most important long-term driver of economic growth is the

investment of accumulated capital. be accumulated before it can be invested. encouraging a savings over time it maximizes economic growth. the second point i would make is that we've got to make sure social security is going to be there for future generations. it is extremely important program. we all know this. seniors with a guaranteed source of income and kept millions of americans out of poverty. the fact is, the program in its current form is insolvent. it has gone into a cash flow deficit position in 2010. --efits now routinely benefits paid routinely exceed payroll taxes paid into the system by very large sums, which are only projected to grow. i know people often like to invoke the assets and trust fund, but we will probably get into this discussion. there are no assets backing up anything in the trust fund. this is a filing cabinet with

certificates that have no real assets to back them up. therefore, the trust funds to which we routinely prefer -- refer do nothing to enhance or enable the federal government to honor the commitment it has made , so we should not be under the illusion that somehow make things ok. the challenges facing social security are not a partisan observation. i want to quote mr. chairman briefly from the social security's trustee reports of this year 2013. in which they state "both the social security and medicare programs face substantial financing shortfalls that require legislative corrections. it is important to grasp the amount of time remaining to enact a financing solution is far less than the amount of time projected before final depletion of social security's combined trust funds. if lawmakers take action sooner rather than later, more options and more time will be available to phase in changes so the public has adequate time to prepare.

also helption will elected officials minimize adverse impacts on vulnerable appellations including lower income workers and people already dependent on program benefits." the final point i would make his tax increases don't solve this problem and would be a mistake to go down that road. actuaries and analyze the proposal some have suggested we completely lift the cap an income that is subject to the payroll tax. idea-- that is a radical to change the program that fundamentally and in the process taxeser the link between paid in and that is its -- benefits received, but even if that step were taken, it would only provide to bury relief. the cash flow deficits would return in just 11 years. mr. chairman, thank you for agreeing to do this hearing. i look forward to hearing from our witnesses and having a discussion. >> thank you for your comments, senator casey. >> mr. chairman, i will move to

the witnesses. thank thewant to chairman for calling this hearing. this probably -- there's probably no more important subject for us to be talking about. everybody talks about the housing bubble and all the bubbles we have had, the big bubble coming is the pension and retirement security bubble for america. my hometown of atlanta, georgia, and finally faced the music reformed their pension fund to try to make it sound for its beneficiaries in the future. by reforming benefits and contributions that go into the plan, but they finally faced the music. i want to associate myself with senator toomey said. we have to face the music, too. we have to preserve those entitlements for which people have paid. most people in america who have paid taxes that paid more for the retirement security than income taxes. and paid into payroll taxes deserve the protection and deserve a congress looking into the future, not just for them, but their children and

grandchildren. as policymakers, we have to be aching difficult decisions but make them in a context of our obligation to people we represent. called is most appropriate. the solutions are not easy, but senator toomey plus, it's about preserving the tax benefits and incentive of government policy to direct people towards more private savings are absolutely essential. people have to become more dependent on themselves and less on government, but we need to incentivize that process a disease ear for them to accumulate benefits over time and accurately capital over time. i look for to participating in the hearing and appreciate your calling. >> thank you, senator isakson. the major dues the witnesses. the first is robert romasco, president of aarp. he had a distinguished career in the private sector and written expensively -- and has written extensively. andrew biggs, thank you for joining us.

research -- he is devoted his career to researching retirement savings and pension issues and served as a principal deputy commissioner of social security ministration. welcome. , published extensively on these issues and on the tax treatment of retirement benefits and one of the foremost experts in the field. his research is readily cited in major outlets. welcome. finally, john sweeney, executive vice president of fidelity. he is responsible for portfolio, advisory services for fidelity's develop some of the best research available in america's retirement security. thank you, mr. sweeney for joining us. your written statements will be entered into the record. mystery moscow, please begin. romasco, please begin. >> we thank you for holding this

hearing on social security's role as one of the nations most important family protection programs. i name is robert romasco. all a member of the volunteer board of directors of aarp. when we think about social security, we tend to pitch a retired people and they are indeed the majority of those receiving benefits. that alone is a critical and important function, but social security is far more. it protects working men and women throughout their lives from the risks that can lead to loss of livelihood such as from death or disability. we may not think of social security as a family income protection program, but that is exactly what it is. picture this. more than 4 million social security recipients are children. in fact, social security -- >> could you move your microphone a little closer? >> house that? security pays more

benefit to children than any other government program. social security coverage also protects more than nine in 10 younger workers against the risk of death and disability. something that one in three workers will face before they retire. is an insurance policy with benefits worth hundreds of thousands of dollars. social security is critically important for millions of children to live with her grandparents. without these benefits, many grand families would sink into poverty. it is disaster relief that is there for families when catastrophe strikes. less than three weeks after the september 11 terrorist attacks, social security ministration sent the first checks to survivors of workers killed in new york from a virginia, and pennsylvania. today, eligible children and surviving spouses or people killed and disabled in the attacks are still receiving monthly benefits. picture for a moment you're 33- year-old mother of one with the

baby on the way who learns her husband was just killed in an accident at work. imagine you have no idea how you're going to feed your family. now imagine the relief of discovering a program that will help you support your children until they become adults. that is a blessing social security and that family was mine. my dad died before i was born. my mom worked incredibly hard as a seamstress for the social security benefits, survivor benefits, was a big help in putting food on the table, clothing on our backs, and a roof over our heads. yes, social security is a genuine lifeline for families for every generation. it is a lifeline for the young and elders. as i travel across the country, people of all ages, especially those over 50, express their passion and commitment to leaving the world a better place for their children and grandchildren. as i visit college campuses, students talk about making sure their parents and grandparents are secure and independent.

social security, young and old can understand is a vital part of the intergenerational context. we're sometimes the young and army for finite resources. i don't see that. i see those who depend on each other. i see americans at different stages on life's journey. older people helping younger people. later, the caregivers become the caret four. one day the young will need the retirement protection of social security every bit as much as seniors do today and perhaps even more. social security is one of the pillars of retirement security of the three legged stool senator brown talked about. we could once depend upon along with the employer-provided pensions a personal savings. unfortunately, social security is the sole remaining dependable leg. traditional defined employee- based pensions have gone the way of the floppy disk. retirement savings have shrunk. real wages for most americans are stagnant or going down.

health-care costs have soared. no wonder more than one in three working households from 21 to 64 years of age have no retirement savings. half the workforce has no employer-provided retirement plan. for most -- those who do, the amount and our 401(k)s would pay them a retirement benefit of less than $80 a month for life. financial security for many americans is in jeopardy. unless we reserve the current trends of stagnant wages, no pension, social security will be even more important. and in many cases, the only source of retirement income for and loved ones. we have to make sure sosa security is strengthened as a critical source of income they can rely upon. we also must help the american public understand that social security is not just a critical piece of the retirement security, but also a powerful engine in our economy. state and local economies, businesses and workers benefit from every sosa security dollar

paid out. ,t aarp, we just did a report which i respectfully request to be included in the record, that count each dollar paid to beneficiaries generates daily two dollars in spending by individuals, businesses, adding about $1.4 chilean and a total economic output in the year when he 12. this applet generates tax revenues for state, local, federal government exceeding $220 billion. the discussion the nation needs to have about social security and retirement is more than about deficit numbers. it is about family protection and community support. it is about real families trying to make ends meet and afford the necessities of life. it is about children making sure their parents and grandparents can live with dignity and independently. nots about our parents wanting to be a burden on our children. it is about my sister and me having enough to survive as children so we could change the

trajectory of our lives and make a meaningful contribution. theal security belongs to people who worked hard all their lives and future but it from every paycheck. the people who are promised it would be there for them and their families. it is a critical part of protecting our families throughout our working lives. it belongs to the children and grandchildren whose lives have been touched by the misfortune. it protects all our families today and in future generations. we are all in this together. thank you very much. >> thank you. mr. biggs? >> thank you very much, chairman brown, members of the committee, ranking member toomey. for the opportunity to testify today. i wish to make three main points. first, social security benefits are more adequate but it is financing less healthy than many suspect. financial advisers generally recommend the retirees have an income equal to 70% to 80% of their preretirement earnings. the typical new retiree today

receives a social security benefit equal to around 69% of their current earnings and mckinley preceding retirement. does this mean the retirees are living high on the hog from social security? of course not. there are many low-income retirees who clearly receive inadequate benefits from the program. but it is not clear that social security benefits are altogether too stingy. yes, some european countries pay our pension benefits than we do come a but if you look at countries with similar political and economic cultures to our own, say the u.k., canada, australia, or new zealand, their pension plans offer replacement rates that are pretty close to what social security pays. security's finances are weaker than commonly understood. to make the program sustainably solvent without reducing benefits would demand immediate and permanent 29% tax increase. if these tax increases are delayed, they only grow larger. some have been willing to propose such tax increases come in particular by illuminating the 113,000 dollars ceiling which payroll taxes are levied.

this seems like a tinting and easy solution. but let me point out several downsides. first, eliminating the so-called tax max would raise the top tax rate earned income for around 43% today to about 55%. and state income taxes in the top tax rate generally rises above 60% and in some states, closer to 70%. eliminating the so-called tax max would effectively cap out higher earners before we fix the larger financial problem facing medicare and medicaid. current proposals to illuminate the tex-mex would also increase benefits. as a result, they would fix only around half the 75-year shortfall and extend solvency they run 16 years. third, an international context, our tax max is unusually low. in the u.s., payroll taxes are around three times the average wage. the average oecd country, cap to run twice the average rage.

-- wage. i believe talk of raising sosa to 30 benefits before solvency securityed -- social benefits before solvency is restored as a responsible. some look at how defined contribution plans over the past several decades. participation in a traditional pension doesn't mean you will receive benefits from one. while long-term employees did very well from dp pensions, only around one in 10 participating in the system actually ends up collecting benefits from them. for instance, the average employee today hinges jobs every 4.6 years. such an play would not even invest in a traditional defined benefit plan. even employees who do invest often don't receive much. despite our nostalgia for the these plans, i would wager dp pensions were the only ones available today, retirement security in the u.s. would be considerably worse. havely, while dp pensions

important benefits, which i outlined my written testimony, many of these of images can be transferred to d.c. programs. consider a defined contribution plan which had automatic enrollment at a healthy contribution rate invested in a lifecycle portfolio which automatically shifted from stocks to bonds over time, with investments composed of low-cost index funds, and at least harshly annuitize benefits retirement. such a plan would address most of the concerns with limited downsides for individuals and no risks of it the taxpayer. moreover, nearly all of this would be allowable under current law. retirement policy massive ramifications for individual retirement security, the federal budget, and their broader american economy. we need policies that encourage americans to work and save and delay retirement. such policies will enhance individual retirement security as well is boosting the economy which is the ultimate source of

retirement income for all of us. thank you for your consideration. >> thank you very much. mr. baker? >> thank you very much, chairman brown, senator toomey for inviting me to speak here. i want to make three main points of my testimony. first off, emphasizing the comments mr. or chairman brown made at the beginning that social security is the main source of income for most retirees. secondly, it is projected to become an even more important ,ource in the decades ahead primarily as a result of the disappearance of defined benefit pension plans, inadequate replacement a 401(k), and stagnant wages. third, briefly i want to comment on proposals to change the index asian formula for social security. i would argue switching to the elderly price index is for much keeping in context with congress

and argue the opposite with the chain price index as a way to cut the program. first, i want to make a couple of comments quickly that ranking member toomey said social security was cash flow negative. that is not the case. the portion of cash flow interest on bonds followed by the trust fund is under the law. a business that had trysting income and a beacon sitter cash flow negative if that put it into positive territory. another point i want to make quickly in terms of the size of the tax increases, i think it is important to realize two points. the the extent to which shortfall facing social security tointervertebral redistribution. 90% of wage income was covered by the cap after the greenspan commission set it in 1983 because of a large awkward redistribution, we now cover less than 82% of wage income. if we had covered 90% of wage income over this whole period, that would've cut the shortfall -- by more than

40%. we talk about the same with tax increases, keep in reference. we have seen stagnant wages over the last three decades for most workers. if workers wages were the same rate as projected average wage growth, in other words, all workers shared equally in wage growth, the tax increase needed to make the fund a fully solvent would be about fighting percent of projected wage growth over the next three decades. 5% rejected wage growth over the next three decades. chairman brown did very well and laying out the basic argument about how well important sosa securities for most retirees. it covers 32% or 36% of income over age 65. 50 2.2% of non-wage income. 90% or more of the income for 35% of seniors. 45% of nonmarried seniors. one of the facts about seniors i think is very striking, the

poverty rate, the supplemental poverty rate which most people use to measure better for seniors, is now 14.8% compared to 15.5% for the adult population as a whole. the story there is social security has been effective in lifting huge numbers of seniors above poverty. so their poverty rate is basically the same as the adult population. very different from the story we saw before we had sosa security. the second part of what to make middle income people for that is projected to rise hugely over the next two decades. if we look at the people 68 -- the current generation of retirees, sosa security accounts for 34.2% of the total income projected to rise to 37% for workers who hit 67 between years 2033 and 2042. it is more dramatic at nonwage income. if you look at nonwage him and on rental income, we have treated housing income and that,

the rise is from 46.4% to 54.8%. this just illustrates the fact because of the collapse of defined benefit pensions, social security is projected to be a much more important source of income in the decades ahead. something i think we all have to be very aware of. the last one i wanted to make was in reference to the elderly consumer price index. if you go back to the decision to index social security for the cost of living, presumably congress did that in 1975 with the intention of preserving their living standards. the prices paid by the elderly is consistently risen more rapidly than the overall cpi, primarily because the more rapid growth in health-care costs. by contrast, if we look at the proposal to switch the indexation to the chained consumer price index, there's literally no evidence to my no one claims that is a more

accurate measure of the cost of living as seen by the elderly. there are features of that that are desirable. but looking at substitution for the population as a whole, not for the elderly. if the intention of congress is to have an index that accurately tracks the consumption patterns of the elderly is construct the statistics to set one up, and frankly, i don't know that would show a higher measured rate of inflation but i can't say which are more accurate one. thank you. say it would be more accurate one. thank you. >> thank you for having a speak to you today on this very important topic. my name is john sweeney, executive vice president, responsible for the investors we serve. of the privilege of helping more than 20 trillion american safer return to the workplace and personal savings retirement accounts.

401(k) and ira's for my for example. we want to help americans for more confident and make their financial decisions and achieve better results for the families when it comes to retirement. thisdelity we are passing on with customers. every day working americans ask is how to divide their families paycheck in order to meet multiple financial obligations including mortgage, saving for college, possibly caring for an aging parent. one goal which is common to all of our customers is being ready for retirement. this includes the young investors in rolling the workplace savings plan were to older couple nearing 65 and asking if they have saved enough to contemplate retirement. these investors need help navigating the multiple accounts and investment choices available to the middle stages of life. we believe the private retirement system is working well for those who utilize it as designed. people are not saving enough to ensure they will have a comfortable retirement. young investors face especially difficult road ahead. at the highest level, americans need to save more and we need to

incentivizing to do that. as you know, workplace savings plans have become one of the primary ways most working americans save for retirement. and for those who enroll early in their careers, save as much as possible to increase their savings as they earn more, stay the course and markets cap volatile than the results are generally good. in fact, our latest data shows for those who could use the saved for 10 years, the average allen's in a 401(k) has reached war than hundred $23,000. 33,000 yearmately go. we surveyed several thousand american households to understand how prepared people were to cover basic expenses like housing, food, and health care and retirement. or results in aggregate sobering. 55% of americans were in fair or poor conditions and not on track to cover their essential

expenses. we colored in red and yellow and our measure which you will see on page seven of our written testimony as well as on the chart to my right. on the other hand, one third of the households we surveyed are on track to cover 95% of essential expenses. we have given these people a green score and for these people, the system is working well. are generallymers doing well, generation y workers significant challenges. with longer life expectancies and if you're pensions available to them, gen-y will need to anticipate working longer and save more. that is why we believe we need to encourage higher levels of savings now. we know especially with younger investors, the most powerful way to improve readiness is to save more, if even a small amount. a 25 euros earning 25,000 does hereby increasing savings just one percent year can mean up to

-- a 25-year-old earning $25,000 with just increase of one percent more can make a difference. these firms are leaders in helping their employees it on the path of retirement security. instead are should doubling the default savings rate from 3% to 16%. our research shows people need to save two to 15% annually in order to retire securely. by starting a 6% with an auto escalation feature, you can get in favor on track to successful retirement in a few short years. taking the step now would mean a world of difference for younger generations in particular. finally, we need to continue to find ways to provide investors with more guidance and education, not less. at fidelity, people come to us to help navigate some of the most complex decisions of their lives. the demand for education and guidance has risen dramatically in the financial crisis. we take fiercely our obligation to simplify the complexity to do everything in our power to help them. our data shows workers who in

retirement planning session either online or on the phone increase the amount they saved by number to five percent to six percent. we take great pride in offering these resources to anyone. we would encourage this committee to work with the administration to ensure that people can continue to have access to the kinds of resources they need to make good for responsible decisions for themselves and their families. we recognize there are major challenges solving these issues. with your partnership, we can work to increase the savings rate in the workplace and help moore reckons be better prepared for retirement and meet the challenges that lie ahead. thank you for the opportunity. i am pleased to take your questions. >> thank you, mr. sweeney. efforts toed enhance or increase also security and a variety of ways as a war between the generations. why are they wrong? is it is athe issue false premise.

basically, it says we have a finite amount of resources that are limited to these and we have to fight over it. the issue is we all age. when you're 20 and you enter the workforce, you have hopefully a long life for retirement and so forth. if you look at the intergenerational activity, your concern about your life and her family and her parents and her grandparents. and vice versa. of notion is not one intergenerational conflict. it should be solidarity. if we look at the data, the data doesn't say the transfer of wealth to old to young, it is kind of like different. it is bottom to top. we assume the most massive wealth distribution in this country over the last 30 years. is a false premise. we care for our children. our children don't want our parents to be burdened and we as grandparents and parents don't want our children to be burdened. you look at the dynamics

for families intergenerational, protecting workers, we have an idea based on social insurance. we're all in this together. we all contribute. we take the benefits as appropriately. as they're designed to protect us all for the journey of life. >> thank you. mr. biggs, i want to ask you a series of questions. them sort ofanswer together in each of you take a shot at them if you would like. generally, thoughts on our current social security levels adequate or should we enhance social security and if so, how should we do it? and if you believe that we should modernize social security, what is your definition of modernizing the system, mr. biggs? give us general thoughts about those three questions and then each of you respond also, please. testimony, i to my believe the benefits are on average more adequate than any people think. here,lking point you

which comes from social security itself, financial advisors recommend you need to replace 70% to 80% of your retirement income, social security offers the average retiree 40%. the problem is those measurements are measured in different ways. financial advisors measure benefits for replacement rates will it into final learnings and social security to the wage indexed average. apples and oranges. if you measures also security benefits the way financial advisors would relative earnings were before retirement, social security benefits on average are not clearly inadequate. at the same time, the big problem is for folks at the low end. it is not social security benefits are not adequate on average or progressive enough, the problem is there is an enormous variation in the replacement rates people received even if they have the same lifetime income, the same contributions to the program. for example, if you take the husband and wife, a couple, the

benefit they get 10 buried based on whether they split the earnings evenly -- very based on whether they split the earnings evenly. likewise, if you have an individual or to individuals with the same total lifetime earnings, if one puts them under 35 years and the other is a longer career over 45 years, there will have the same lifetime earnings, but get a very different benefit will stop for low income people, social security is a risky benefit. it is an uncertain benefit. highly uncertain. you have enormous variation in the benefits received. it recently reduce that variation and give a better target a more uniform benefit which is something i've written about fairly extensively, you could reduce poverty in old age and provide a much more reliable social insurance program. you could do it at the same price we are currently paying. the problem was social security is as a social insurance program, it is like housing

insurance policy that may or may not pay off if your house burns down. you cannot be assured of having a high replacement rate if you're a low-income person. i think the simpler, better argeted program, one that is better social insurance policy for people on the bottom it but to be frank, high-income people will be helped him a they have to save more. the social security is an important component of income even for middle income and high income people in the u.s. some people say, that show so importance also security is. what that tells me is we have a lot of people who could, should come and would be saving more but they are not because they're getting social security benefits instead. low-income people need a better social security program but higher income folks really do need to save more on their own. cooks mr. baker, your thoughts on this questions? >> a couple of points. i would say are low income, moderate income people, i think social security is inadequate.

it is easy to make a big difference with reforms that don't add a lot to the cost. some women's groups put together program some years back that call for making the survival benefits 75% of the combined benefit. a lot of the poorest elderly are surviving spouses, most often women. it is a letter -- you could cap that so it doesn't add a big expense. also raising the bottom tier from 90% to 100% me you could take that back so higher income beneficiaries don't benefit from that. that would limit the cost and increase the pay back benefits of new order of 11% for lower income people. i think there are some things we could do very low-cost. i think i'm agreeing with andrew little bit. i think it is important to make it easier for people to save. that is unfortunate that so many workers as it would because we plans andthe benefit

many don't have contribution plans or they don't stay there long enough, there been a number proposals i think mueller -- some are joined by bipartisan support them to set up a savings plan opens everyone from a portable system, low-cost system. the minister at a cost make a very big difference. mr. sweeney's outfit does have very low cost but many do not. it makes a big difference in someone's ability to accumulate for retirement. if everyone had the option of a certain amount deducted and you could have that as a default contribution, could opt out of and put into a thrift savings type plan, though administered of cost, take that wherever they that,again, option out of that would be the default, i think that can make a big difference for middle-income retirees and how much they're able to save. >> mr. sweeney, your thoughts? solvesal security longevity and printable income for people for during retirement. -- protectable income for people during retirement.

we asked people to figure out their expenses and cover those essential expenses -- food, shelter, medical care with predictable stream of income as possible. do counselhing we them is if you continue to work longer the benefit you will receive on an annual basis increases possibly a percent here. that is one of the trade-offs. we asked people who have a cumulative sum well to think about spending down their current personal wealth to for they cap and is also security in order to receive a higher annual heyman from social security if they can do for the time they again taking it. >> inc. you. -- thank you. >> thank you, mr. chairman. i want to delve into the solvency issue facing social jaeger -- mr.r. baker objected to my categorizing as saying it was cash flow negative. technically, he is correct.

we have what i consider a series of accounting devices that obfuscate the reality of this program. one of them is the interest income. treasuryertificate the hands over to the social security administration which is probably filed in a filing cabinet and has no more real asset behind it then any other certificates in a filing. so when we look at this, we can look merely at what we deem to be -- narrowly at what we deem to be the social security trust fund and i think we would miss the essential point which is this. what is the ability of the federal government to honor the commitments that it is made to current retirees and future retirees in the social security program? mr. biggs, i am wondering if you would agree with my characterization that for the purpose of evaluating that question, the ability of the federal government as a whole to actually honor its commitments, the cash flows

coming in through the payroll taxes and the benefits that are being paid out an intergovernmental transfers of certificates don't have any internal impact at all on the fundamental ability. do you agree with that? >> here's one wouldn't think about it. imagine if we had no social security trust fund. if that were the case, a couple of years when social security started running negative cash flow, we would face the choice of raising taxes and issuing more debt, or cutting benefits. those would be the three choices. when you do have a trust fund, you have the same three choices essentially. and it will bias you in one direction. as long as you're a positive trust fund balance, the default position the federal government is, well, we will raise taxes or borrow to pay full benefits. once the trust fund runs out, the default position of the federal government is, we will cut benefits back to whatever level we can pay with payroll taxes. the trust fund has a legal

significance and pushes your policy in one direction or the other i'm a at the choices you phase them at the resources you have available, where you have to get them from, those are the same whether you have a trust fund or don't have a trust fund. >> is it fair to say no realally there are assets backing up the certificates in the trust funds and the existence of the trust fund does not have any impact whatsoever on the overall ability of the federal government to honor its commitments? >> exactly. the trust fund is a commitment to pay, not money that enables you to pay. it doesn't make it any easier for taxpayers to finance social security. income,his interest which i view either as an accounting device, isn't that like taking $1000 out of my savings account and moving it to my checking account insane, i have another $1000 of income? is important we focus on is because i think we are kidding

ourselves if we say everything is fine for several decades novel trustave this fund we treat as though it were real asset and it is fundamentally not. i want to ask another question because you made a really interesting series of points about how defined contribution plans could have the advantages that we often associate with defined benefit plans. i think people sometimes mistakenly think of or even characterize defined contribution plans has been very risky and they think of the person who takes their accumulated life savings and invest it in enron the day before it all goes to nothing. what you characterized, especially lifecycle investing in at least partial annuitization, really eliminates that risk. could you explain in particular what the lifecycle investment profile is all about and how that works? , some get the lifecycle

call it a lifestyle fund, available in the savings plans today, available in a number of 401(k) plans. they try to tackle the problems that a lot of people don't pay much attention to their investments. they don't reallocate their investments as they get older. myy don't think about how different investments fared. these are plants that automatically shift you from stocks when you're young to bonds as you get older. the idea is when you are younger, you can afford to bear more risk. an older, you want something that is or predictable. it does this automatically over time. if you have this application working using low-cost index funds, it is a simple and low- cost solution to a problem. i think more broadly, when people think aboutdb versus dc, you think about who bears the market risk. i think that is a less important thing to focus on. are youerences of automatically enrolled, the differences in the contribution

rates or the savings rate, the differences in terms of annuitization, those are by far the more important differences to make. those are things we can do today through d.c. plans enter certain degree, we are ready are. clearly have problems. but they are problems that can be fixed. the state andk at local, are problems i think in a lot of ways are much, much more difficult to fix. >> thank you very much. i see my time is expired. >> senator isakson? >> in 1983 when reagan and o'neill changed the soso security rules, i was 39 years old and they passed a new rule that said if you're born after adding 40 three, your eligibility went from ages 65 day 67. i was born in 44. i was the first generation of america to have -- to lose a year of my salsa security eligibility. it is going to age 67 in a few years. there are a lot of people

it out in and pushing for children and grandchildren. what would be your position on that, mr. romasco? >> what we advocated and have been strenuously vocal for over a year, let's take this conversation out of the depth of discussion and have a retirement discussion. among them, the possibility is raising the age along with a series of others. but we have to look at the financial issue of the circumstantial issue, as well as a value issue. i think there are challenges with raising the age. i think one of the challenges is, clearly, it will become very difficult to ask a coal miner to go down in that mind when he is 68 or 69 or 70 or waitress who has been on her feet for 30 years. i think there are issues with it and i think that should be part of the larger conversation about social security's role in a broader retirement system. we have heard a lot of suggestions worthy of consideration today. but let's think -- let's have

social security as part of our retirement conversation. >> what do you think about raising the age, mr. biggs? >> he cited the coal miner. go back to 1950 one we had a highly industrialized economy. you had coal miners and farmers and factory workers. the average age of initials also security coming in was 68. today when their biggest on-the- job risk is carpal tunnel from your mouse or something like that, it is 63. in a proposal i did a few months ago, i did not propose raising the retirement age. i think the idea we can't have a higher retirement age, i think it just lies in the faith that people did in fact retire later in the past and today's jobs are less physically demanding than they were in the past. it is not something that has to happen, but i think it is something that people should at least be open to. >> mr. baker? >> a couple of points. there's been a growing gap in

life expectancy. people often point to the fact we are living longer and that is true, but is not quite the same for everyone. as proportionally, the gains in life expectancy have gone to the top quintile, not in the bottom half of the income distribution. longera they will enjoy retirement is not necessarily true. the other point, we did analysis looking at labor department classification. we found post to half of workers and close to 60% of workers in the bottom quintile were jobs that were classified with the labor department is physically demanding. the blue working as custodians, which is is, on their feet pretty much eight hours a day. the idea we are worried about carpal syndrome with our mouse, that is not true. i would be hesitant to raise the age. >> >> we try to quantify how impactful retirement would. they got a 12 point improvement it will he characterize the measure.

with folks working part-time past 865, we saw a seven point improvement in their scores. it is a choice that people can make. we will have several different jobs during the course of our working 10 your and those jobs may not be the same kind of jobs. people want to work longer. today's 65-year-old are more healthy than our parents' generation. >> probably the single biggest investors the lack of and knowledge of the average ingrican in terms of sav for their retirement in the first place. you probably deal with that every day at fidelity. it would've been easier if they

done that 25 years earlier. promote resolution to the tax benefits of retirement savings in government programs that incentivize people to save. easing of thehe pressure will be one individuals are taking better care of themselves. get anyounger we can employee engaged at saving at a higher level and they should continue to save, the more likely we will be successful in the future. some of the comments that mr. begs made, we saw that to very successful. we need to have more employees make that a mandatory option. auto escalation.

today people default in at about 3%. we think that number should be double to 6%. a real target is somewhere between 10% and 15%. we want the auto escalation so that people get to that target savings rate of 10% to 15%. >> thank you very much. i want to thank senator brown for calling the hearing and for the work that he and senator toomey did to bring this hearing about. i wanted to start with mr. romasco. i had a couple of questions repaired. the wayning statement, , sometimeslized it the kind of testimony we do not hear too often in this room.

yourw this is somewhat, answer is dependent on so me bit of extrapolation. if you could project to the present the scenario you described that your mom was facing. how do you compare what your mom was facing in terms of the dependency on social security and the effectiveness of it with what a 33-year-old mother would face today who lives with her husband and has one child and one on the way. >> it is hard to do that. i can tell you that if we look at the circumstances, if that were happening today, i would suspect she would have twice as much difficulty finding and keeping a job and paying the rent. it was a working house suburb of boston.

the economic forces in the late 1940's and the late 1950's were not lavish but they are more severe now. all the costs have increased tremendously. i would suspect they would be even more challenging, particularly with what has happened with wages over time. i am just rejecting that. having some level of security that we can pay the rent makes an enormous difference in the way the family unit stays together. i did not realize it until i started to look into it. i always assumed my life was fine. i had a sense of security and that a check was coming in and that she wasn't pulling her hair out every night. i suspect that would be significantly different.

20% of us in this country are doing ok. 1% are doing really ok. most members say, rob, i am just trying to get to friday. >> you do not need to have a or a lot ofonomics advanced learning to look at the data on what has happened to the middle class over the last four years, the last 10 years or the last 45. the hammer blows the middle class has endured. and folks who are just a little the middle class. you talked in your testimony about the idea that social security has become the primary source of retirement income.

you point out that 70 million americans do not have access to a workplace retirement plan. that is a stunning number. we can debate how that happened. what would you hope that congress would do in the next two years or so if we had an opportunity to make changes? i think all of us in either party, as much as we debate, i think we'll have a pretty serious obligation to get this right. i just want to get your thoughts on what you would hope we would do. >> let's make sure we do not conflate this conversation with the deficit conversation. social security plays a huge role in that. we hear a lot of suggestions about how to look at work and

savings as part of the three legged stool. how do we restore those two legs? social security is about advocacy as well as solvency. and number of suggestions are part of that conversation. at the same time, let's not look at social security as a piggy bank to solve the deficit. what kind of country do we want? what can we afford and what are we willing to pay for? >> the red light is on. i am asking your indulgence. may be just to a lightning round with the remaining witnesses on what you would help we would do in the next two years. we will not allow you to have much time. >> i agree we want to think about social security reform in

a far-reaching way. it is not simply about solvency. republicans think social security is doing fine except we do not want to raise taxes. democrats think social security is doing fine except we do not want to cut benefits. if you make it do those things better, you get a more effective system. i think you want to look comprehensively at social security. if you look at in isolation, you are going to miss something. would you fix social security differently if there were not deficits in medicare and medicaid? you have to think about all of this stuff together. how do we make these things said? --how do we make these things

fit? you cannot tell somebody to pay for their health care benefits. we have to think about this in and integrated way. >> in terms of something that could be done quickly is raising benefits for those at the bottom. that would make a difference for retirees. in terms of how we think about the longer-range story, it is the economy. much of the shortfall for social security is because of the upwardly redistribution of wage income. social security faces a more difficult situation. that is money for people who need it. we have to hope for better economic outcomes. and getting back to medicare and medicaid, we have had a sharp

slowdown in health care costs. that has made more differences than deficit projections than anything congress is likely to do over the next two years. that affects the environment about how we think about social security in the long-term. >> i would suggest increasing financial education guidance. making the ability for people to make complex decisions simple. autoecond thing, the features are very beneficial. improving upon those. and thenllment, default enrollment. they have shown to yield very strong results. >> thanks very much. >> senator white.

>> thank you, senator brown. i commend you for it. i am struck by how many folks come up and described accounts that invariably get into the question of their pension melting away. they are talking about hopes and dreams they had had for years essentially it operating because their pension is not going to be there. there are a lot of pieces to this puzzle. the recession is a factor. the aging workforce is a factor. it is hard to follow how some of the changes at the state level affects private pensions. there are a host of issues that go into this mix. --e in the private sector

businesses --seem to be doing some wheeling and dealing with pension funds. we came across the work of a wall street reporter who had done a fair amount of writing on this. she is not talking about all of the businesses in the industry. she is saying there are some who have taken billions of dollars from pension funds to finance down siding and a sold the assets in merger deals. loopholes and discrimination rules that permit pension plans to be tapped to pay for executives, executive parachutes. they talk about the exportation --exploitation of new accounting rules and cutting benefits when there