white house continue to delay reforms on this important program? or should we act now? dr. blai house? >> i'm an advocate of acting as soon as possible. >> i think speedy action is called for. whether the actual changes in policy you make need to be implemented next year or after is a totally separate issue. this is an area where we generally phase policy in over a long time to get people accompanied. >> it will be impossible to protect current retirees. so your advice to us, what's the timetable? how soon do we need to act? this year? next year? your advice to us. >> you know, i think you should act when the climate is right. when changes are being made --

>> not from the plolitical standpoint. i'm asking as a trustee looking at the numbers, how much time would you say we have to act in your belief? >> i would hope that you would act within the next five years. >> dr. blai house? >> yes. with a disclaimer, if you were to line up ten experts, i'm probably on the pessimistic end as to how bad it's going to be if we delay. definitely within five years. i would hope to do it even faster. >> the payroll tax holiday was important to many families but it did blow a hole in social security. it was back fielded by general revenue, but that will continue. no politics in this, your advice as trustees. should we continue the payroll tax holiday or should we restore the full stream of revenue to

social security? >> i would urge that social security go back to its 12.4% rate. >> we have to deal with how we do that, but your advice would be restore the full amount of money? >> that's a personal view. obviously, the board of trustees -- >> dr. rush hour? great. thank you, mr. chairman. >> thank you. mr. shock, you're recognized. >> thank you, mr. chairman. it doesn't seem like the news is getting much better. i want to get a little

parochial. you said we need to act soon. i'm just curious what the younger generations of americans have in store for themselves if we don't act soon? >> i would say two-part answer. the mathematical part of the answer is a net income loss. there's a table in the trustees report that says if you just held all current participants in the system harmless, then people coming into the system would lose a net of about 4% of their taxable wage income to social security. that's after they receive all benefits. now those income losses would be higher, but lower on one side. so generations would lose money through the program. so that's the mathematical answer. getting back to the questions that were asked earlier, i think they would also face the risk that we might not be able to generate the political will to keep the program operating on a self-financing basis.

and then if we couldn't keep the program going on a self-financing basis and had to merge into the general fund, i think they would lose something else, which is the legacy of social security as a separate stand alone, self-financing system that has a certain degree of protections that other federal programs don't have. >> dr. rooi shower? >> you asked what would young generations should expect and the answer is less income in retirement years. future generations will run more risk with respect to disability, as well, payments they would get in disability and survivors. the need to divert more of their income into private pension plans, or 401(k)s or other

retirement vehicles -- >> and you're saying they would need to do that why? >> if they wanted to maintain adequate incomes in retirement because social security payments would be less for them. >> how much less? >> as chuck explained and the chairman and others have mentioned, social security would be able to pay about three quarters of the benefits now promised. >> is that based on what age category? >> this would be an across the board for all existing beneficiaries and future beneficiaries starting after 2033. >> for the next hundred years? >> well, we don't go out that far. we go out through 2086. it stays roughly in that area. >> assuming the same number of people live the same number of years and have the same number of children?

>> no. we do vary this over time in our projections. according to to the best information that we have available. >> so what happens to people that aren't as young? perhaps they are 50 and they are 15 years away from retirement. what's going to happen to their social security if we don't do anything? >> i mean the literal no action scenario is that it would be a 25% benefit reduction in 2033. so those people presumably would collect full benefits for some years and experience a sudden benefit reduction in 2033. obviously, it's unlikely that that's the way it would play out in practice. congress would not allow that. there would probably be some alternative mix of pain allocated between beneficiaries and taxpayers, but it's that 25% benefit reduction. >> so you're assuming we'd be

responsible. >> i'm not sure if being responsible -- let's just say there's no historical precedent for congress allowing a sudden benefit cut of that magnitude. >> is there historical press denlt for congress for allowing social security to become this broke? >> no. that's a very important question. >> it's never been this broke. >> we have never had an actual deficit as large as it is now. we have come closer in 1983, we were a few months away from not sending out the benefit checks. but the actual size, or at least since before the '83 reforms, after there was an indexing made in the 1970s. there was temporarily a huge long-term deficit that was created by that index mistake created in the '77 amendments. but since that correction, this is the largest deficit we have seen since prior to the '83

reforms. >> dr. rooi shower? you agree? so i have a republican and democrat to agree? >> maybe we should leave capitol hill now. >> thank you, mr. chairman. >> every now and then we do. mr. stark, you're recognized. >> thank you, mr. chairman. thank you for holding this hearing and thank our witnesses for their service. i'd have to mention, dr. blai house, that before you choose to criticize my testimony, we both have the same background. i notice you have a doctorate in physical chemistry. i also have a great deal of experience. i think i took ten semesters of it at m.i.t., however, it was

all second semester chemistry that i had to repeat over and over because i couldn't pass it. but it's a great background. the republicans want to kill social security. i think that's quite obvious and turn it into a voucher plan. >> mr. chairman, if the gentleman would yield on that. >> i'd be happy to. >> republicans are strongly supportive of social security. >> for rich people. >> i think for us to -- >> i don't buy that. >> we ought to be much more bipartisan. >> medicare and turn them into vulture systems. now, dr. rooi shower, actually they are stealing your thunder. you're one of the original founders. and your thunder of course, is

to have medicare have premium support. now fortunately, you also gave an umbrella from that thunderstorm, which was a guaranteed benefit. but would you support the idea of premium support without a guaranteed benefit? >> as you know, mr. stark, the term premium support came out of an article that henry aaron and i wrote in 1995 suggesting that there be private or nonprofit options for medicare beneficiaries along with fee for service that the benefit be a defined guarantee benefit and that the payment be one that was

indexed to the growth of health care costs over time. our belief was that this might generate more efficient delivery systems and better care for america's seniors along with some cost savings. but the emphasis was on the quality of care and offering a more diverse set of delivery systems. >> thank you. the affordable care act, which the republicans would like to defeat, according to actuaries, it would shorten -- it would extend solvency eight years longer than if the republicans

had their plan to kill health reform. would you suggest that that's correct? >> it's a projection that h.i. co costs would be reduced and the trust fund -- >> submit to the record a press release with the release of the trustees report that states that without affordable care act the health insurance trust fund would expire eight years earlier in 2016. dr. rooi shower, can you put a dollar number, i mean, i keep hearing that social security is going to go broke in, i don't know, 20 years, something like that. what would the total negative amount be? how many billions would you guess is it going to be short over the total period were. >> over the next 75 years? >> is it going to take 75 years

to go broke? >> no. it will exhaust the trust funds in 2033 if you combine the trust funds. i don't have a number at the tip of my tongue. >> any idea? >> it's basically -- the projections have it solvent through 2033. so the shortfall would be 2033 through the end of the 75-year period. we have an estimate of $8.6 trillion. >> and do you have any idea what the two wars that we're fighting and not paying for cost over the same period of time? >> i do not. >> would you be surprised to know they would probably cost a lot more than that and i'm not hearing anybody on the other side ask that we pay taxes particularly those of us who maybe have high incomes, like members of congress, we're not being asked to contribute anything to pay for that war. lower-income people maybe are. thank you, mr. chairman. >> thank you. without objection, the report

you referred to will be entered into the record. mr. marchen, you're recognized for five minutes. >> thank you, mr. chairman. my question is about the actual mechanics of how when you approach, let's say 2016, and the disability shortfall begins to appear in the disability program. what's the number that congress would need to appropriate out of general funds in those threshold years just to maintain the benefit? >> just as a very crude crude estimate, it's about $30 billion. >> so about $300 billion over --

we look at things over ten years usually. >> they would start in 2016. it would be $30 billion every year over the last six years of that valuation period. >> is there a trigger put into the law where the congress immediately is confronted with having to make that legislative decision, or will it be a legislative decision that has to go through the complete congress and then be signed by the president? >> well, the way the law reads is that the disability insurance program can only make payments from moneys that are in its trust funds. so if you assume the congress does nothing, basically, when the trust fund balance got down to zero, you would have a delay in payments until incoming tax revenues came in. the the eflkt of that through delaying payments would be to

reduce total basements on an annual basis by 20% per year. if you wanted to maintain full scheduled benefit payments 100%, you'd have to find other revenues and put them in the trust fund to allow the full benefits to be paid. >> you'd basically have an appropriation made into the trust fund that then the trust fund would basically then make its payments adequately. based on the current. and if we reach that threshold in the main social security trust fund and the amount of money, what would be the amount of money needed that congress would have to appropriate in that current year, the first year based on the progss that you're making now to keep the benefit at 100% when we reach the 75% threshold that all of us get that warning when we open

our yearly statement and look at it. >> right now, i don't have the precise dollar figure off the top of my head. to put it in today's terms, it's about 25% of scheduled benefits. now today the cost of paying benefits is a little bit shy of $800 billion. it's about $790 billion per year. if you think of it in today's te terms, the amount by which you'd be short in today's equivalent, shy of $200 billion a year. >> $200 billion. so that would be the choice congress would have at that point, to keep benefits basically at the level the projected level congress would have the decision of just simply appropriating the money to go in. >> yes. now this cuts to a point i made earlier about the difficulty of the choices congress had had

faced. obviously the path of the resistance is to turn to the general fund and say here's another $200 billion and put it into social security. obviously, that would, you know, end the principle that social security was supposed to be financing itself. you'd either have to raise payroll taxes by enough to fill in that gap. >> but by doing that, you would completely end the philosophy of a self-paying system and you would transfer it like many of the states have done. they have gone in and raided their pension plans over the years to where the pension obligations, in many of the states, just occur in appropriation. they depleted their trust funds, borrowed against them or cashed them in to where instead of it being a payment out of the trust fund based on earnings, they

just simply have -- it's just a fixed liability to them. >> that's right. >> and that would become -- would that law just become law by the fact that we have not fixed the system? >> well, you would have to take an affirmative legislative action to support the program with general revenues. under current law, there's no provision for doing that. the program can't borrow or receive without additional legislation. can't receive an appropriation from the general fund. you'd have to change the law in order to have that result. >> so i think it's reasonable to expect that most of us will still be here in 2016. i certainly hope to be. so that threshold that you're talking about in the main social security fund, we're approaching with the disability fund. so whether we are acting or not

acting, we are making some very conscious decisions on how we're going to handle this disability trust fund. and i suspect that the mentality of mentality of the congress at this point will just appropriate the money so that no one loses their benefit, but when you make that conscious decision -- aren't you making a much bigger decision at that point? >> in the past, when faced with the same challenge the congress has reallocated tax revenues from the osi system, the old age survivors system to the disability system. >> okay. >> so to tweak the vision of the total payroll tax between the two trust funds and thereby avoided making a difficult decision. >> thank you. mr. chairman? >> the gentleman's time has

expired. mr. smith, you're recognized. >> thank you, mr. chairman and thank you to our witnesses. doctor, we frequently hear, actually, that social security is a separate account and does not contribute to the deficit of my colleague mr. lindh quist , s but in your testimony you testified that social security is adding to the federal deficit and could add more in the years to come. could you expand on that? >> i think perhaps the best way for me to answer this is the parts of my answer that all analysts would agree with and then i'll get to the part where there's disagreement among analysts. i think all analysts agree that to the extent that social security is supported by its own payroll tax revenue or by the taxation of benefits. to that extent, it's not adding to the federal budget deficit. i think most analysts would also agree that to the extent that social security is receiving a subsidy from the general fund

like the general fund transfers that accompany the payroll tax cut, that portion does add to the deficit, where you get into the murky area where analysts argue with each other has to do with the interest payments that are made to the social security trust fund. right now to a very large extent from now up through 2033 and certainly into the 2020s, social security will subsist to a large extent based on the interest payments to the general fund. if you asked two different analysts, you will get two different answers. from a mechanical standpoint, the payment of interests go from the general fund to social security. so you could say from a mechanical and mutified interest payments and they don't come into the u.s. treasury and therefore represent money going to social security without reducing the unified budget deficit and represent the extent to add to the deficit.

you also have a school of thought and i don't agree with it and there's also a school of thought that the interest payments represent the extent to which social security has reduced the amount of borrowing in the past that the federal government has had to do and therefore represent a reduction in unified budget interest pages and therefore to the extent social security receives interest payments it's not adding to the unified budget deficit and you'll have competing use on that. i'm on one side of that discussion and a lot of people are in the other and with respect to the other parts of social security there's less ambiguity. i think to the extent that the program is receiving transfers of general revenues and to the extent that it's relying on the payroll tax income, it's clearly not. >> thank you, and i'll yield back. >> thank you, mr. burg. >> thank you, mr. chairman and thank you to the witnesses. i appreciate your article in '95 about premium support and where

that would go. my question to you is what happens when i'm sure at the time people call that vouchers and that they would wreck medicare. what was your response back then? >> you know, our response was that it was not avoidable and the response towards providing beneficiaries with more choice, possibly higher quality, coordinated care and possibly a reduction in government spending from competition among plans. >> thank you. jumping back here, i kind of wanted to follow up on a question that some merchant had on the disability of insurance

trust fund -- we talked about, we have one to five years to make some decisions and i'm sitting here looking at 2016 and i'm saying that's not five years, that's four years and if you're not going fall off the cliff you're probably talking one to three years to do something. if you explain the reality of how things may happen and where money would come out of the other fund to subsidize this fund. if you pool those two funds have you looked at what's the year that we're not going to cover the benefits. right now we're saying that one is 2033. we're seeing that one is 2016. if the old age started subsidizing the other one, at one point it would bring the other down. >> basically, the old age and the survivors' fund and the so-called retired fund and the disability is 2016 and if you put them together the combined funds will be over in 2033. >> so it would be the same? >> 2033 is the figure that we often throw around in the

vernacular because it refers to social security as a whole. >> if you split it into the two funds and the one is 2025 and the other is 2016. >> and the 33 assumes that you rejigger the allocation of the payroll tax to maximize -- >> the old age survivors we're seeing today when this report is still 2035. >> that one is 2035. >> but it's not still. it was 2038 last year. >> so it's come from 2038 to 2035. the other point, and i just wanted to be clear is when you value this unfunded liability, we're talking about 8.6 trillion which is over two years of all federal spending, but that includes a 2. using that money in the trust fund, is that -- >> right. you're right. that's basically the size of the actual deficit on top of redeeming the trust fund and the redeeming the trust fund, and basically you're counting it as

an asset and then the shortfall from 2033 out to the end of the valuation period is where the 8.6 trillion comes from from. if you didn't value that trust fund amount and your 10 to 11 trillion in the unfounded liability to make it solvent and sometimes it makes it confusing, but it cash flows for a while here, but it's not solvent and, you know, from my perspective, i just really think that we have to look at these facts and the facts are the facts and it's not solvent long term and quite frankly if we care about social security we need to do some things to ensure that it is solvent and so i'm obviously personally very open to any ideas from anywhere, and i think it needs to be bipartisan and that's the only way you can present it to the american people and i'm just hopeful that we'll get some of those bipartisan solutions going forward. thank you, mr. chairman.

>> you know i'm going to live to 100. take care of it. in order to fix social security for good we need to make sure our reform efforts ultimately align tax revenues with benefit outlays on a sustained basis and that didn't happen during the last major reform in '83 and then a 75-year solvency was achieved by building annual surpluses in the near-term following by growing annual deficits in the long term even though that wasn't intended by the reformers at that time, is that correct and could you talk about that? >> well, again and my colleague may want to disagree, but my read of the '83 amend. mentes is what they intended to do and what they did was somewhat different. they aimed at avoiding an immediate insolvency problem and

they wanted to prevent that from happening and they also aimed at a long term actual balance. if you actually go back and read the documents of the deliberations and the memos of the greenspan commission exchanged and how they measured fiscal success, it's very clear that they didn't look at it the way that we do it now and when we make a measure of the condition of the trust funds, we count the carryover balance of the trust fund and we count the interest payments of the trust fund and we basically treat the trust fund as an asset in social security and therefore, within that mindset you could certainly do something that builds up the trust fund and draws it down over a period of time. that's not actually how they went about it. what they did is they used a different method for calculating the program's financial condition and it was the average cost method, basically and it assumed that in any given year you will fund the program by incoming wages from workers. they didn't count the