$600 billion to social security's trust fund. because of budget cuts in 2011, all field offices started closing half an hour early each day. social security permanently closed over 300 contact stations and small field offices and waiting times for initial disability decisions rose and are likely to be over 130 days by the end of 2012. now ssa faces an even bigger cut through the sequestration process. these automatic cuts scheduled by the budget control act. although social security benefits are protected if congress doesn't act soon, on january 2nd social security's operating budget will be cut by over a billion dollars. a billion dollars in cuts translates into 40 days in which social security is shut down. offices are closed and locked. no one answers the phone. no one is processed. and no one makes sure benefit checks are sent to the right

place. mr. chairman, social security has been there for americans for 77 years. i hope we can continue to work to make it strong for another 77 years. we can start by addressing the preventable crisis of short sided budget cuts. with that, i yield back the balance of my time. >> thank you. we have one witness panel today. seated at the table are two public trustees. charles blai house, who is a vhd, and robert rushhour, who is a ph.d.. and robert, i think, i'd like to congratulate you on your award last night at the national academy of social insurance. we're lucky to have someone with your experience working as a public trustee. thank you and congratulations. dr. blai house, you're recognized. >> thank you, mr. chairman, mr.

ranking member, all the members of the subcommittee. it's a great honor to appear before you today 20 discuss the latest reports. what i'd like to do is gloss over the background information in my written remarks and proceed to primary points about social security financing. the first simple point is that social security costs are rising. most of that cost increase is going to play out from a period that started in 2008 through 2035. the primary driver of those cost increases is demographic. if you think about social security costs, there are two main pieces of them. one is growth in the per capita benefit level and that's driven by law. but also the growth in the number of beneficiaries. on the revenue side, the primary driver is the growth in the number of workers and the wages that are subject to tax. so that ratio of workers to beneficiaries is important for social security financing. and that ratio is in the process of dropping. we had had a 3.3 workers to

support each beneficiary in 2007. now we're down to 2.8. and we'll be down to 2.0 by 2035. part of that is longevity increases, but the immediate factor is fertility patterns. we have a baby boom generation prior to 2035. under our current progss, the combined trust funds would be depleted in 2033. that's three years earlier than in last year's report. each year the trustees estimate the deficit. usually expressed as a percentage of the tax base and this year our projection is 2.67% of worker wages over the next 75 years. now that sounds arkansas cane, but that means you have a 12.4% payroll tax rate now. if you added 2.67 points to that, you would have the program in balance for 75 years or if

you had an equal subtraction in benefits. that's an average figure. it's a substantial increase from last year's projection. last year we were at 2.22%. it may not sound like a big difference, but by social security norms, it's pretty substantial deterioration. we have only had one other report over the previous 30 years that showed as much deterioration in a single year as this year's report does. and my colleague will review some of the reasons that the outlook has grown worse. also important, the figures i just sited pertain to the combined trust funds. social security has two trust funds. they each have to be solvent. is in the more severe condition of the two. it's projected to be depleted in 2016. what's happening over time, the program is going to pose under current law a greater financial strain on the larger budget. some of the strain is a result

of discretionary policy choices that are made along the way. one of them, for example, this year the payroll tax rate has been cut from 12.4% to 10.4%. social security has been held harmless for that change. there's a provision that transfers re knews over to social security to its ability to finance benefits is not affected. but what's happening is that that part of financing correspondent has been moved to the general revenue side of the ledger. final point, there are significant costs to delay in addressing the financing shortfalls. it's often sited that in 2033 we'll have only enough funds to pay 75% of scheduled benefits. it's important to bear in mind, that doesn't mean 75% of scheduled benefits for those retiring in 2033. that includes everybody. that includes people already on the rolls. now if you were to say, well, we don't want to cut benefits for

people already on the roles in 2033. what if the reductions were confined. we wouldn't be able to balance the system in that year without a substantial large tax inkre increase. so by 2033 it's really, really too late, far too late to protect current -- excuse me previous beneficiaries from substantial dislocations. so you start working through the problem backwards and you say how soon do we have to act if we want to prevent reductions for people in retirement, near retirement, and prevent a tax increase. we'd have to do that pretty soon. finally in closing, mr. chairman, i would just say that the legislative achievement in creating the program remains historically a remarkable one. it's provided critical protections for hundreds of millions of americans. it's done this at low administrative costs. it's done it with financing

methods that not without their critics, but nevertheless have been accepted by most of the american public as equitable. that's a large thing to do. with responsible action, social security can continue to fulfill this vital role, but such action must be prompt and decisive if the program is going to serve future generations as well as it has served previous ones. >> thank you. you said pretty soon. what do you mean? do you have a definitive date? >> you'll get different answers if you ask different experts. my own view is the window of opportunity is closing rapidly. we already face a shortfall that's significantly larger than the one repaired in 1983. which is the water mark of what can be accomplished in terms of a short-term resolution. so obviously each year we wait, the problem grows larger and more difficult to solve. >> i understand that. when are we going to fall off the cliff? you can answer later. dr. ooiz hour, you're

recognized. >> thank you, chairman johnson, members of the committee, i appreciate the opportunity to appear before you to discuss how the social security program's financial outlook has changed since the last trustees report. to judge whether social security is improving or deteriorating, the media and public tend to focus on whether the years in which the two trust funds are projected to be exhausted has receded or advanced. by this measure, there's been a significant deterioration in the health of the social security program since the 2011 report. the exhaustion date, as the chairman has mentioned for the oasi program is now projected to be three years sooner than was projected last year. the di trust fund exhaustion date has advanced two years from 2018 to 2016. the exhaustion date for the two

trust funds combined has now been moved to 2033, three years sooner than was projected last year. a more comprehensive measure of trust fund's financial condition is its balance over an evaluation period. this measure is essentially the difference between the annual income and costs of the program summarized over the 75-year period and expressed as a percentage of taxable payroll over that period. a negative balance, meaning a negative deficit, can be interpreted as percentage points either added to the income rate or subtracted from the cost rated in each of the next 75 years to bring the fund into actual l deficits. they have deteriorated since last year's report.

the deficit has worsened by .07 of a percentage. that has deteriorated by .38. and the combined trust funds have weakened by .44. this deterioration is the largest. there are lots of reasons why the actual warl balance can go up or down from one year to the next. one of them, of course, is that the valuation period changes. we add 2086 to the valuation period and subtract 2011. and that accounts for about 9% of the deterioration in the actual warl balance. clearly there was no legislation that affected this in a

significant way over the past year. so that's not a factor. demographic assumptions in this year's report are identical to those that were assumed in the previous report, but we have updated starting values and the transition from those starting values to the ultimate values do affect the actuarial balance. more recent data has shown that birth rates for 2009 and 2010 were lower than was assumed in the last report. immigration in 2010 was a bit lower than was assumed in the previous report. and there was a slightly smaller initial population than we assumed before. about half, a little less than half of the increase in the actuarial deficit between 2011 and 2012 is accounted for by changed economic assumptions and

more recent information about the economy's performance. two-thirds of this is related to updated starting values and less optimistic assumptions about near-term growth of the economy. price inflation, as you all know, was higher than was anticipated between the third quarters of 2010 and 2011. and rather than a .7% in december of 2011, social security gave out 3.6% cola. so that makes a huge difference, as you can imagine. real interest rates in 2011 and those projected in 2012 report are lower than was assumed before. and so the new investments that the trust funds make get less interest earnings than we thought they would get when the

2011 report was put together. together these economic factors make the gap between noninterest income and cost over the next few years significantly larger than was projected in last year's preport. but when the economy has recovered about the end of this decade, 2020 or so, the gap between what was expected last year and what was expected this year will be close to disappearing. however, it's important to recognize that we made a new assumption in the 2012 report that causes the gap between income and cost to grow over the long run. and this had to do with what we expect the changes in the average number of hours worked per week to do. in last year's report, we said it's not going to change in the future. in this year's report, we assume it will decline at .05% a year.

we did this to reflect the ageing of the workforce and the belief that as productivity goes up, incomes go up, people will want to take more leisure and that will translate into working a few less hours, as it has in the past. in this si aumgs, obviously, acts to reduce taxable earnings and revenues from what was assumed in 2011. we also made a change in our assumptions about the instances of disability. the incidents were increased by 2% for males and 5% for women. these are more consistent with what the historical values and trends have been over the last decade. the deterioration in the actuarial deficits that i have

just summarized here today underscore the need to put social security on a more sustain path. the sooner we address this challenge, as chuck has said, the less disruptive the changes will be. if the reforms are adopted soon, those can be given time to prepare, the burden can be spread more equally across different generations and the political animosity and public anxiety associated with these n unavoidable changes can be moderated. the changes in the trust fund's financial well being call attention to the importance of maintaining a strong economy and vibrant long-term growth. let me conclude with a comment about the staffs of the social security administration and the departments of treasury, hhs and labor with whom we worked on these reports. they are a hard working group of analysts who are dedicated to providing the public and the

congress with as objective and sophisticated group of estimates as is possible. and i think we are all in their debt for the service that they provide to us. thank you. >> thank you. you went three minutes over. >> that's a better performance than last year. i want to be graded on the curve. >> thank you. you know, it's customary i will limit my time to five minutes and ask my colleagues to do the same. social security was designed so that workers pay into the system and earn their benefits and franklin roosevelt understood the importance of making social security different from a welfare program. he once said, quote, we put those payroll contributions

there to give contributors a political right to collect pensions and benefits. no politician can ever scrap my social security program. dr. bla housen and dr. rush hour, you point out payroll taxes represent only 70% of the total social security income in 2011. due in large part to general revenue transfers replacing lost income from payroll tax holiday. if we continue to replace payroll tax revenues, how long before social security is no long longer perceived as an earned benefit and what's that going to do for public support? go ahead, dr. blai house. >> i would say my answer to the second part of your question is no one can know when that point might be reached, obviously. but that statement is in the

report, obviously, because we wanted to call lawmakers' attention to the fact that social security historically has had a certain rational for its financing. and it does go back to franklin roosevelt. if you read his early statements, he placed a very high level of importance on the notion that this was an earned benefit. he didn't want it to be merged in with the general budget. that's why we have a separate trust fund and payroll tax and trustees. he was very concerned in multiple statements he says that if you want to have a universal participation program, it costs a lot of money to do that. so if you have it as part of the general budget, it's going to be competing for funding with other programs and it would be subject to great political risk that the benefits of this program could be cut back. he was very attentive to the idea of how you structure this program so it has support. not only fdr, but subsequent

advisory councils over the years have repeatedly said that one of the bay cease basis of the programs is the idea that workers have earned these benefits and they came out against all these advisory councils came out against funding the program from the general fund. so just speaking for myself as a trustee, one of the thing its we wanted to do was address attention to the fact that if the program does continue to get transfers from the general fund, it does potentially create a situation where we'd have a departure from fdr's intentions. >> it's not your personal money anymore. about 45 cents of every dollar of public debt is held by foreign governments, mostly china. dr. blai house, if we continue the payroll tax holiday and the general revenue transfers to replace lost payroll tax revenue, do we risk turning

social security from a program paid by americans to one depending on foreigners who invest in our bonds? >> well, i think it's certainly the case that the general r revenues that were transferred to social security along with the ray pais roll tax cut were financed with debt. they were financed by increasing the deficit. we added that amount to the deficit. certainly, while there's an ongoing argument over who really finances the redemption of bonds held in the trust fund, clearly in this instance, this would be a case of the financing for social security being provided by the people who invest in u.s. treasury bonds. >> can you tell me why you think tax increases are no answer for fixing social security? because it seems to me to fix social security for good, we need to make sure our reform efforts are aligned with benefit

allies on a sustained basis and that didn't happen during the last major reform. then 75-year solvency built in the near term followed by growing annual deficits in the long-term, even though that wasn't intended at the time. is that correct? >> that is correct, though, i have to say if you were to bring ten experts up here, you'd have a few that would disagree with me on the point. if you go back and study the 1983 reforms, one of the things that's striking about them is they did not measure financial success the way that we do now. when they analyzed social security's future balance, they didn't count the carry over balance of the trust fund. they didn't count interest earnings. they used a different method that presumed that all benefits in the future would be paid by taxing the wages of future earners. if you read the comments who

developed the reforms, whether jake pickle or pat monahan, they said in multiple places that it was their intention to keep the program financed on a pay as you go basis. and the fact that they wound up with a solution that had big surpluses in some years and big deficits in other years wasn't as intentional as many people now believe. what they were trying to deal with was a short-term emergency. trying to make sure the checks didn't stop in 1983 and trying to arrive at an average balance over the long-term. as you point out, that resulted in an unsustainable solution. because as time went on, the surplus years faded into the past. again, they were trying to do a lot of things under emergency conditions in 1983. the intention is not to critique what they did, but simply to point out that as they defined long-term balance, they didn't give the same level attention to

what was happening on an annual basis. >> i presume you agree with him? >> actually, i probably would disagree with all three of the answers that chuck gave. >> come on. >> that's why you have two trustees. do you want me to disagree or shall i keep my lips sealed? maybe they'll ask the same questions. >> my time is expired. thank you. >> we'll leave it at the fact that there's disagreement there. let me ask the two of you. thank you for your testimony and the work you do as trus tees. we appreciate that. both of you mentioned in part of your testimony the deterioration in the outlook for the program, which is why i think all of us should be trying, as i think dr. bla house said, dealing with this sooner than later.

and i think your pie charts and your testimonies and the information you provided show that a great portion of that it deterioration occurred as a result of the recession, which was hit pretty hard. and it's become pretty clear that you lose jobs in america. you lose workers paying their fica contributions. fewer workers contributing to social security, less money going into the pot to pay out benefits. job one for congress should be creating jobs. helping the private sector to create those jobs. it doesn't just help them and their families, it helps social security because there's more money going into the system and the trust fund. . d does the fact that we have had, unlike other countries, a consistent flow of immigrants over the last several decades

helped the social security system and its trust fund when it comes to being able to pay out benefits? >> that's a very complicated question. in fact, certainly, the influx of immigrants has increased the labor force, has increased the number of individuals paying payroll taxes, which over the short run, clearly helps the ability of the program to pay benefits to retired and disabled workers and survivors. >> and i think the other part of that it that you don't mention is in the long run, if they become recipients of benefits, they will draw as well. it's one of those things it's not just an automatic plus because they at some point will require to receive those benefits. >> it will depend on their earning patterns over time and different groups of immigrants have different pluses and minuses in sort of a narrow fiscal sense. >> or if they stay in the country.

>> many leave and don't end up collecting benefits. >> i have some numbers here that show that between 2007 when the recession was starting and then got really deep through 2010, nearly 6,000 companies in this country terminated their pension plans. in 2009 alone, those terminated pension plans were short $9 billion of what they needed to pay out benefits to workers who had those pensions under those companies. during that time 2007 to 2010, social security didn't lose any money did it? dr. blai house, go ahead. >> social security continued to make payments in full in the nominal balance continued to rise. >> i mean, we all know the examples of circuit city that

went bankrupt. we remember enron when it went bankrupt and how those companies left their employees and their pensions. and the virtue of social security, the reason why i think it's so important, you mention how we should be acting now to resolve any longer-term issues for social security is we don't want to get to the point where you compare social security to enron or circuit city. and fortunately, we still have some funds that keep us, even if congress can't get its act together, keep social security system going smoothly for the next 20-some odd years. even after that, it would be paying out 75% of benefits. but i don't think anyone today is paying into social security to get 75% of what today's beneficiaries are getting. i hope what you all continue to do is give us the recommendations that you feel

help us move towards something sooner than later. i think most people are getting to the point of agreeing that it's pretty simple math. as you mentioned, you can go to the benefits side. you can go to the revenue side and you can figure out a way to get yourself an actuarial balance for the next 75 years. hopefully we'll sit down at some point soon in congress and try to come up with that tough political response. appreciate your testimony here today and your service on the -- with the trustees and i hope you will continue to come testify before this committee. thank you. yield back. >> thank you. >> thank you, mr. chairman. you know, we hear these it days that everything is doing fine in social security on capitol hill. no need to act. but things are not fine with social security. as chairman johnson pointed out, in the last year, america borrowed roughly $140 billion, much of it from china, just to

pay our social security benefits. this year we will borrow $150 billion, roughly, from china and other investors just to pay our benefits to seniors. that's not fine. and if you don't like that, get used to it because your report said we face permanent deficits forever in social security programs. we're told maybe this is due to the recession, but truth is, we're told the economy is doing better, but this had the largest-single deterioration since 1994. so it's getting worse, not better. so my question -- i have three questions to y'all. i would hope we could have a no-spin zone and just ask trustees, those responsible for the financial stability of social security, just to give us your best advice to congress and the white house. one, should congress and the