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Sen. Hagel Introduces Bill To Extend Social Security Retirement to 68

First Social Security Bill of this Congress also supports private investment accounts

March 7, 2005 – While President Bush prepares to begin a two-month grassroots campaign to win support for the private investment accounts in Social Security, a Republican Senator, Chuck Hagel of Nebraska, will introduce a bill today calling for increasing the Social Security retirement age from 67 to 68 in 2023. It is the first Social Security bill to be introduced in this Congress.

"We are living longer," Hagel told Bob Scheiffer yesterday on CBS' "Face the Nation." "So when you look at the total universe of this, I think that makes some sense to extend the age."

Hagel also supports adding the private investment accounts, which has cost his plan the support of key Democrats. Sen. Ted Kennedy said on ABC’s “This Week” yesterday this would be a “great threat to seniors.”

“The Social Security system is not in crisis today, but there is clearly a crisis on the horizon,” Hagel said in a speech this morning to explain his bill. “In 2018, more money will be paid out of Social Security than comes in. In 2042, the Social Security Trust Fund will be insolvent. Beyond the next 75 years, there is only a black hole of unfunded liability for future generations.”

“No American age 45 or older will see a change in Social Security or their benefits,” he said. “For Americans under 45, my bill would provide the option of voluntary personal accounts.”

Hagel said, “Providing personal accounts is good policy for both the long-term viability of Social Security and for individuals. Government should be about empowering individuals and enhancing personal freedoms and their futures. Personal accounts help do this.”

Sen. Hagle says his bill will make Social Security solvent for future years because:

"First, my bill would raise the current full benefit retirement age by one year – from 67 to 68.

"Second, my bill would maintain the current early retirement age at 62, but would adjust benefits for those who choose to retire early. Currently, workers who retire early receive 70% of their full retirement benefits. My bill would provide these early retirees with 63% of the traditional benefit.

"Third, currently, an individual’s base Social Security benefit is determined by two factors: their average income over 35 years and the wage index. My bill adds a third component: life expectancy. Over the life of the program, Social Security benefit calculations have never been adjusted to reflect increased life expectancy.

"By factoring increased life expectancy into the base benefit calculation, the rate of increase in benefit payments will be slowed. No other changes will be made to the annual Consumer Price Indexing of benefit increases.

He said these adjustments will not only make Social Security solvent, but "can help us confront the challenges of increasing Medicare costs and shortages in the workforce. It is important to protect the option of early retirement, but our laws need to encourage individuals to stay in the work force, not leave it. Medicare costs, Medicaid costs, and labor shortages can be significantly reduced by keeping people healthy and productive and in the workforce."

"My bill pays for these changes in Social Security by using the existing 3.7 trillion dollar unfunded liability to ensure the long-term health of the Social Security system. Doing nothing will mean that at the end of 75 years, Social Security will have chewed up 3.7 trillion tax payer dollars to keep Social Security solvent and we will still have an insolvent program with trillions of dollars more of unfunded liabilities staring us in the face. In recent testimony before the Senate, Alan Greenspan said Social Security’s total unfunded liability could be as high as 10 trillion dollars over the life of the program," he added.

Complete Text

Speech by Sen. Chuck Hagel Detailing His Social Security Reform Plan

March 7th, 2005 - University of Nebraska-Lincoln - When I began my first campaign for the United States Senate in 1995, I published a booklet entitled, "Where I Stand." I wrote it because the first obligation of a candidate is to tell voters what you believe. In that booklet, I wrote:

"The Social Security System must be preserved, protected, and improved. We have made this covenant with our senior citizens. However, the long-term future of the Social Security system is in peril. If we do not get this issue resolved soon, this nation faces an entitlement disaster, eroding the trust between grandchildren and grandparents. We must explore every option in order to fix and strengthen our Social Security system. This will require bold leadership."

A decade later, those words still define my position on Social Security.

Social Security has been one of the most important and successful government programs in the history of America. Almost every American family over the last seventy years has been touched by Social Security.

In signing The Social Security Act of 1935, Franklin Roosevelt said, "None of the sums of money paid out to individuals in assistance or insurance will spell anything approaching abundance. But they will furnish that minimum necessity to keep a foothold; and that is the kind of protection Americans want."

A fundamental point that President Roosevelt made was that Social Security was not intended to replace the personal responsibility of individuals saving for and preparing for their own retirements. Social Security was never intended to be a substitute for a retirement or savings plan. It is a safety net for people. Social Security is an insurance contract that protects the most vulnerable in our society from falling into poverty. But Social Security is actuarially unsustainable with its present commitments to future generations.

This afternoon, I will introduce a comprehensive Social Security reform bill in the United States Senate. But I wanted to start the day here in Nebraska with some of the people who would be most affected by my bill......America’s next generation. It is your generation that will be asked to sustain the future of Social Security.

Obligation to fix the problem

My generation, the "baby boom" generation, has been the largest and most productive workforce in the history of man. The impending retirement of the 77 million strong "baby boom" generation will impact every aspect of our economy, government, and society: Medicare and Medicaid; health care; our workforce; and our competitive position in a world filled with countries much younger than ours.

The next generation of Americans will respond to these challenges as every generation has responded to its challenges: with innovation and hard work. However, my generation has a moral obligation to ensure that future generations do not have to bear an increasingly heavy burden of providing the retirement resources for future generations. That is why we must reform Social Security. It is a 1935 model trying to operate in a 21st century world. It will soon be incapable of delivering the promises and resources that it was built to provide.

Last week, in testimony before the House Budget Committee, Federal Reserve Chairman Alan Greenspan urged Congress to act on modernizing entitlement programs "sooner rather than later." He warned that unless we act now, meeting the huge unfunded liabilities facing our entitlement programs, there will be "severe" economic consequences for our nation. Chairman Greenspan is right.

The Problem

America’s largest entitlement programs, Social Security, Medicare, and Medicaid, are on a trajectory that cannot be sustained. For Fiscal Year 2006, the Congressional Budget Office tells us that 64 percent of the 2.5 trillion dollar budget will be obligated to mandatory spending, of which 42 percent is for these three programs. Those are tax dollars that are committed; money that cannot be used for anything else. Each year the percentage of the budget obligated to funding entitlement programs grows larger and larger. The current unfunded liability for Social Security over the 75-year horizon the Social Security Administration uses to calculate benefits and expenditures is 3.7 trillion dollars. Medicare’s unfunded liability is nearly 28 trillion dollars. This is in addition to America’s current national debt of 7.5 trillion dollars.

Medicare costs are growing faster than any other government or entitlement program. As we see health care costs continue to rise, coupled with the growing number of retirees, it will only continue to put more and more pressure on our federal budget and squeeze out money for important discretionary government programs like education, roads, parks, and housing programs. Last Congress, we passed an enormous expansion of Medicare. I voted against it. I thought it was bad policy and would add hundreds of billions of dollars to an already unsustainable program. I am supportive of efforts to re-open the Medicare Reform Bill and fix it. But, for political reasons, I doubt that will happen soon, although we will be forced to deal with it in the future.

The Social Security system is not in crisis today, but there is clearly a crisis on the horizon. In 2018, more money will be paid out of Social Security than comes in. In 2042, the Social Security Trust Fund will be insolvent. Beyond the next 75 years, there is only a black hole of unfunded liability for future generations. The longer we do nothing, the more difficult it will be to protect Social Security and the promise our government made to future generations of Americans. This reality is daunting, but there is good news in all of this. The system can be fixed. It is within our power to preserve the social safety net of this nation. It has been done before. In 1983, President Reagan worked with Congressional Democrats and Republicans to make tough choices and extend the life of Social Security.

Dealing with this problem now means facing less dramatic and difficult choices down the road. The earlier we confront the reality of the coming crisis, the more options we will have to come up with a wise and sustainable course of action.

Principles of the Bill

Allow me to now lay out the main points of my Social Security Reform Bill.

• 
  My bill would ensure the vitality of Social Security for future generations.

• There are no easy choices to fix the demographic challenges facing Social Security. Understanding this, we must make choices that address the problem responsibly and fairly.

• My bill would make changes to Social Security only for those Americans under the age of 45.

• No American age 45 or older will see a change in Social Security or their benefits.

• For Americans under 45, my bill would provide the option of voluntary personal accounts.

• Providing personal accounts is good policy for both the long-term viability of Social Security and for individuals. Government should be about empowering individuals and enhancing personal freedoms and their futures. Personal accounts help do this.

• For those under 45, my bill would continue to provide a guaranteed Social Security benefit from the Social Security Trust Fund.

• Under any reform plan, Americans still need the security of knowing that the portion of their Social Security benefits that come from the traditional Social Security system will be guaranteed.

• My bill would continue to guarantee survivor and disability benefits as they currently are.

• Social Security provides benefits for more than six million spouses and children of breadwinners who died prematurely or became disabled. For these families, their benefits should not be touched. I know something about this. When I was 16 years-old, my father died. The Social Security benefits my mother received were critical in helping her raise four young boys.

• I well remember my mother’s relief when that Social Security check arrived each month. We must remember that the first obligation of Social Security is to the most needy Americans.

• My bill does not raise taxes.

• I believe we can fix Social Security without raising taxes. We need to begin reforming government programs so that they don’t become so large and expensive that future taxpayers will be unable to pay for them. Young wage earners and small businesses are the most vulnerable to tax increases, and they would be the ones most adversely affected by higher taxes to save Social Security. Additionally, whenever we increase the costs of labor we hurt our competitive position in the world and make job creation more difficult. This is not abstract economic theory. It is a reality that has an impact on every American.

Those are the principles that formed the foundation of my bill. Here is how it would work.

Personal Accounts

Upon passage of the bill, Americans 44 and younger will be given two voluntary options: They can invest four percent of their payroll tax into a personal investment account modeled on the same accounts now offered to federal government employees (the remainder of their payroll tax contribution would continue to go into the traditional Social Security system); or

they can continue to invest their entire payroll tax in the traditional Social Security system.

If they choose the personal account option, then individuals will be able to invest in the same five funds that collectively make up the current Federal Thrift Savings Plan. They are:

The Common Stock Index Fund. Over the last ten years, it has earned an average annual rate of return of 11.99%.

The Fixed Income Index Investment Fund. Over the last ten years, it has earned an average annual rate of return of 7.72%.

The Government Securities Investment Fund. Over the last ten years, it has earned an average annual rate of return of 5.75%.

The Small Capitalization Stock Index Fund. Over the last ten years, it has earned an average annual rate of return of 11.84%.

And the International Stock Index Fund. Over the last ten years, it has earned an average annual rate of return of 5.45%.

These five funds provide a range of excellent investment options.

My bill would also provide a "Default Account" for those Americans who, for whatever reason, do not want to deal with choosing a fund or funds for their accounts. This fund will invest differently in an individual’s early working years than in their later working years.

The Thrift Savings Program has been a success for government employees. Last year, returns on the different accounts ranged from just over 4 percent to 20 percent, and over the last ten years the returns have been between 5.5 and 12 percent. Compare this with the 3 percent return provided by Treasury Bonds that Social Security invests in now. These private accounts are in addition to the guaranteed Social Security benefits and personal savings, pensions and retirement account programs individuals build up during their working years.

Under my bill, personal accounts would be administered by a board within the Social Security Administration called the Social Security Investment Board. The Board would be composed of: the Secretary of Treasury, the Chairman of the Federal Reserve Board, the Chairman of the Securities and Exchange Commission, and two Senate-confirmed appointments, nominated by the President. One of the President’s appointments would serve as Chairman of the Board.

Upon retirement, those who choose to enroll in a personal account will have two accounts: their personal account and the traditional Social Security benefit. They will be required to convert a portion of their personal account to an annuity which, when added to their guaranteed Social Security, would be at least 135 percent of poverty. The remainder of their personal account will be theirs to spend as they wish. It could be used to help with health care costs and retirement living costs, or it could even help an account holder’s children or grandchildren put a down-payment on a home, or pay college tuition.

Why personal accounts are important

There are those who will say that allowing individuals to invest their money through personal accounts is too risky. Their concerns are serious and they deserve a serious response.

Under my plan, no person is required to have a personal account. An individual who does not want to invest can keep all of their money in the traditional Social Security system. I believe that the policies which enhance personal freedom and responsibility encourage the ethic of savings and limit the role of government. These are the policies which will be most flexible and successful for America’s future. It is true that there is no guarantee with market-based investments, however, the historic success of markets is not a theory. It is a fact. As columnist George Will pointed out in a recent Washington Post column, in no 15-year period in the past eight decades has the growth of stocks ever been negative; in no 20-year period has the average growth been less than 3 percent, which exceeds the rate of return on Social Security assets.

Making the Trust Fund Solvent

We are blessed in America. The vast majority of Americans live healthier, longer lives than they did a few decades ago. Continued advances in medicine, education, and personal health will continue to increase not only the length of our lives, but also the quality of our lives, providing opportunities for older Americans to remain healthy, vital, and productive members of the workforce.

When Social Security was created in 1935, there were too many workers and not enough jobs. According to the Social Security Administration, in 1950 there were 16.5 workers per retiree. Incentives were created to move people out of the workforce. This dynamic is changing. Today, there are 3.3 workers for every retiree. In 25 years, there will be 2.1 workers for each retiree.

My bill makes three adjustments to Social Security that will make it solvent for future generations:

First, my bill would raise the current full benefit retirement age by one year – from 67 to 68.

Second, my bill would maintain the current early retirement age at 62, but would adjust benefits for those who choose to retire early. Currently, workers who retire early receive 70% of their full retirement benefits. My bill would provide these early retirees with 63% of the traditional benefit.

Third, currently, an individual’s base Social Security benefit is determined by two factors: their average income over 35 years and the wage index. My bill adds a third component: life expectancy. Over the life of the program, Social Security benefit calculations have never been adjusted to reflect increased life expectancy.

By factoring increased life expectancy into the base benefit calculation, the rate of increase in benefit payments will be slowed. No other changes will be made to the annual Consumer Price Indexing of benefit increases.

In addition to making Social Security solvent, these adjustments can help us confront the challenges of increasing Medicare costs and shortages in the workforce. It is important to protect the option of early retirement, but our laws need to encourage individuals to stay in the work force, not leave it. Medicare costs, Medicaid costs, and labor shortages can be significantly reduced by keeping people healthy and productive and in the workforce.

My bill pays for these changes in Social Security by using the existing 3.7 trillion dollar unfunded liability to ensure the long-term health of the Social Security system. Doing nothing will mean that at the end of 75 years, Social Security will have chewed up 3.7 trillion tax payer dollars to keep Social Security solvent and we will still have an insolvent program with trillions of dollars more of unfunded liabilities staring us in the face. In recent testimony before the Senate, Alan Greenspan said Social Security’s total unfunded liability could be as high as 10 trillion dollars over the life of the program.

Close

I have introduced this bill because I believe that leaders have a responsibility to deal with the great challenges of their time – not defer them, but to try to fix them and come up with solutions. I do not hold my bill up as the only way to address the solvency of Social Security. It is one way....there may be better ways. No comprehensive bill will be immune from critical evaluation....nor should it be. However, I think my bill is a common sense, responsible, and fiscally accountable place to start.

All Americans need to ask tough questions about the future of Social Security. We need to begin the process of refining ideas to forge the best, most responsible policy for the future.

President Bush deserves credit for making the modernization of Social Security a central part of his second term agenda. There is no possibility for success in modernizing Social Security without strong Presidential leadership.

As I said at the beginning of my speech, Social Security is one of the most important and successful government programs in American history. Since 1935, it has provided a safety net for our society’s most vulnerable. We have a high moral obligation to ensure that future generations continue to benefit from this safety net and social contract we have with our citizens. But in order to do this, we must fix the system.

This is a personal issue for me. Forty years from now, a young mother in Columbus, Nebraska may be left to raise four children on her own. I want her family to have the same access to the same safety net that my family had, and the promise that no matter where you start in life, with just a little help, you can finish where you want.

I am 58 years old. I am at the front end of the "baby boom" generation. My daughter is 14 years-old and my son is 12 years-old. I don’t want to fail their generation. That means addressing these entitlement program issues now while we have time to do it in a responsible way.

This is a defining debate for today’s leaders. Doing nothing is irresponsible and cowardly. It is in every American’s interest to deal with this challenge now. We have it in us to do what needs to be done. We can preserve, protect, and improve Social Security for all future generations of Americans.

###

The Saving Social Security Act of 2005

U.S. Senator Chuck Hagel (R-NE)

SIX PRINCIPLES OF THE HAGEL SOCIAL SECURITY BILL:

Will make Social Security solvent for future generations.

Will not change Social Security for anyone over the age of 44.

Will give Americans under the age of 45 the option of opening a voluntary personal account through Social Security.

Will provide a guaranteed Social Security benefit for all working Americans.

Will not reduce or change Social Security survivor or disability benefits.

Will not raise taxes.

Details of the Hagel Bill

I. Eligibility:

For Americans 45 and older: The Hagel Bill maintains the current system.

For Americans 44 and younger: The Hagel Bill provides two voluntary options –

1) Invest 4 percent of their payroll tax into a personal investment account modeled on the same accounts offered to federal government employees (the remainder of their payroll tax contribution would continue to go into the traditional Social Security system); or

2) Continue to invest their entire payroll tax in the traditional Social Security system.

For Survivors and the Disabled: The Hagel Bill maintains the current system. Additionally, survivor beneficiaries would receive the funds in the deceased’s personal retirement account.

For Public Employees: The Hagel Bill continues the current exemption for those state and local government employees who do not currently participate in the Social Security system.

II. Making the Trust Fund Solvent:

Social Security faces a $3.7 trillion unfunded liability over the next 75 years.

Federal Reserve Chairman Alan Greenspan has said that Social Security will face a $10 trillion unfunded liability over the life of the program.

The Hagel Bill would make Social Security solvent for future generations within 75 years by making the following three adjustments to the Social Security system.

Retirement Age: The Hagel Bill would raise the current full benefit retirement age by one year – from 67 to 68.

Early Retirement Benefits: The Hagel Bill would maintain the current early retirement age at 62, but would adjust benefits for those who choose to retire early. Currently, workers who retire early receive 70% of the traditional benefit. The Hagel Bill would provide these workers with 63% of the traditional benefit. This provision originated from the President’s 2002 Social Security Commission.

Life Expectancy: Currently, an individual’s base Social Security benefit is determined by two factors: their average income over 35 years and the wage index. The Hagel Bill adds a third component: life expectancy. Over the life of the program, Social Security benefit calculations have never been adjusted to reflect increased life expectancy.

By factoring increased life expectancy into the base benefit calculation, the rate of increase in benefit payments will be slowed. It will also ensure Social Security’s solvency for generations to come. No other changes will be made to benefit calculations.

III. Structure of Personal Accounts:

• The bill creates a Social Security Investment Board, within the Social Security Administration, modeled on the Federal Thrift Savings Plan (TSP) Board. The Board would create and provide oversight of a new voluntary program allowing workers to set-up personal investment accounts.

• The Board will be composed of the following 5 members: the Secretary of the Treasury; the Chairman of the Federal Reserve Board; the Chairman of the Securities and Exchange Commission; and two Senate-confirmed appointments, nominated by the President, of whom one shall be designated by the President as Chairman.

• The two appointed members shall serve a term of 6 years. The Board will appoint an Executive Director to manage the duties of the Board.

IV. Types of Investments for Personal Accounts:

Several private investment management firms, under contract with the Board, will manage the personal accounts. The Board will centrally administer the accounts.

All fees associated with the management of the account will be negotiated by the Board. Under the Federal Thrift Savings Plan, participants last year paid about 57 cents in administrative fees for every $1000 invested. Based on economies of scale, these fees would be expected to be smaller in the Hagel Bill.

• The Board would offer individuals the same five index funds offered under the current Federal Thrift Savings Plan for federal employees. The five index funds are:

• The "C" fund is a common stock index fund invested in the stocks of all corporations represented in the Standard and Poor's 500 index. Between 1995-2004, the "C" fund earned an average annual rate of return of 11.99%.

• The "F" fund, or "Fixed Income Index Investment Fund," is invested in a bond index fund that tracks the performance of the Shearson Lehman Brothers Aggregate bond index. These securities consist of government bonds, corporate bonds, and mortgage-backed securities. Between 1995-2004, the "F" fund earned an average annual rate of return of 7.72%.

The "G" fund consists of U.S. government securities and pays interest equal to the average rate of return on long-term U.S. government bonds. Between 1995-2004, the "G" fund earned an average annual rate of return of 5.75%.

The "S" fund (Small Capitalization Stock Index Fund) invests in a portfolio of common stocks that matches the stocks in the Wilshire 4500 index. The average annual rate of return on the Wilshire 4500 from 1995 through 2004 was 11.84%.

The "I" fund (International Stock Index Fund) invests in the common stocks of foreign corporations represented in the Morgan Stanley Capital Investment EAFE (Europe, Australia-Asia, Far East) index. The average annual rate of return on the EAFE Index from 1995 through 2004 was 5.45%.

Default Account: In addition to the five index funds, the Board will offer individuals a defaulted "life-span account" that invests aggressively in a worker’s early years and less aggressively in the later years. The investment starts off as a blend of 80% stock/20% bonds and moves along a sliding scale over the life of the account to 35% stock/65% bonds.

* The Federal Thrift Savings plan is currently looking at adding this option.

V. Requirements for Personal Accounts:

• Amount of Investment: Individuals participating in the program will be allowed to invest four percentage points of their 12.4% payroll tax into a personal account. Individuals and their employers would still be required to contribute 8.4 percent of their payroll tax into the Social Security Trust Fund.

• Opt-Out: New workers will automatically be enrolled in a personal account, unless the worker chooses to opt-out. Individuals will have until their 25th birthday to cancel their personal account and return to the traditional Social Security system. Upon enactment of the bill, all workers over the age of 25 will have 12 months to opt-out following enactment.

Beneficiaries: Account holders will be required to designate a beneficiary. This beneficiary will be entitled to the balance of the personal account upon the death of the primary account holder. Eligible beneficiaries would continue to receive the survivor benefits to which they are entitled.

Note: Funds cannot be withdrawn from personal accounts until retirement or death.

VI. Retirement Benefits:

Upon retirement, an individual who chooses to invest in a personal account will have two accounts: their personal account and their traditional Social Security benefit.

Individuals with a personal account will be required to use enough of their personal account to purchase an annuity which when added to their traditional Social Security account will equal no less than 135% of the poverty level. The Federal Government will guarantee this monthly benefit until their death.

Once an annuity is purchased, an individual will have the freedom to choose what to do with the balance of their personal account. It can be used to increase their monthly annuity payment, re-invested, used for retirement costs, or passed on to children and grandchildren.

Those who opt to stay in the traditional Social Security system will receive the same Social Security benefits as the current system adjusted for increased life expectancy.

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