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Social Security: Do We Have to Act Now?

Testimony Before The Senate Special Committee On Aging

People are surprised when they learn that incremental steps like these can have such a significant impact on Social Security solvency. In discussions with our members around the country, and in a recent survey, we found that most people support making incremental changes in the program, and sooner rather than later. When these and other options are put before our members and the public, they are willing and able to make the choices to achieve balanced solvency packages. AARP will continue to get the views of our members and the public in general on these and other options and they should not be interpreted as endorsed by AARP.

AARP is opposed to private accounts that divert money from Social Security payroll taxes. Private accounts are expensive. Money would have to be borrowed to fulfill promises to current beneficiaries and those close to retire while simultaneously creating millions of new accounts. Additional borrowing to fund an extended transition period would equal as much as $2 trillion over 10 years. Increasing our national deficit is not prudent fiscal policy at a time when deficit figures are already at record numbers.

Most younger workers today would have to pay twice to finance this new plan. First, current benefits must continue to be paid, even though there would be less revenue due to the diversion of payroll taxes into private accounts. So, borrowing must take place to meet these obligations, requiring additional interest payments and potentially higher interest rates. Second, the added debt must be paid off.

We understand that proponents of private accounts carved out of Social Security contend they would not affect current beneficiaries. But they have yet to tell us where the money would come from to protect them. Even more importantly, our members care about all generations, including, of course, their children and grandchildren. They want their legacy to be a better America for future generations, and they believe they have an obligation to ensure that Social Security remains strong. AARP and its members have good reason to be concerned about radical changes in Social Security.

Another policy to which AARP is strongly opposed is "price indexing." Overall Social Security benefits would gradually become smaller over time by price indexing initial benefit levels. Social Security today calculates initial benefit levels by indexing wage histories to overall growth in wage levels; retirees benefit from rising productivity during their worklife. Price-indexing would freeze the real value of earnings. This would result in about a 1% decrease in initial benefit level per year compounded for every year the policy is in effect. For example, if price indexing had been in effect since 1955, today's benefits would be 42 percent lower. In other words, retirees, survivors and the disabled would have to live as if it were 50 years ago.

Changing the benefit formula to price-indexing would by itself eliminate the projected trust fund deficit, but at the price of drastically lower income replacement rates for future generations.

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