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Social Security and Income Security in the United States

President Fox, honored guests, ladies and gentlemen:

It is my privilege and pleasure to represent AARP and its nearly 36 million members before this Conference. I would like to express my appreciation to Mr. Pedro Borda Hartmann and the Mexican Institute for Older Persons for initiating this important dialogue, and for inviting AARP to participate. And to our gracious hosts here in Mexico City, I offer a heart-felt “thank you” for your warm hospitality.

Some 16 hundred years ago, the great philosopher, Augustine, known to the world’s Roman Catholics as Saint Augustine, wrote,

"Hope has two beautiful daughters. Their names are Anger and Courage. Anger that things are the way they are. Courage to make them the way they ought to be."

It is in that spirit that my organization, AARP, has been expanding our quest for social change worldwide.

And, second, AARP’s activities are not confined to the United States. They span the globe and will do so more rapidly in the coming years. We recognize the interconnectedness of our aging societies and our economies. And we realize that aging of our world population is affected by how countries respond collaboratively to their opportunities and challenges.

We have developed a Latino Member Outreach program. The program is focused on:

  • Adapting products, services and programs for older Latinos;
  • Recognizing Latino concerns on issues such as pension and retirement, daily expenses, health and wellness, and growing older at home;
  • Participating in more Latino cultural events;
  • Increasing bilingual customer service; as well as releasing more publications and other types of communications in Spanish.

For example, in 2002 AARP launched a new bilingual publication, Segunda Juventud, which focuses on the Latino community. And, in early 2003, AARP established a National Hispanic Council, to provide guidance to the Association about outreach to the Latino community.

One of the great success stories of the 20th century was the dramatic increase in human longevity. This was due, in large part, to the eradication of childhood diseases and to improvements in public health systems, diet and standard of living. By the end of the 20th century this had become a worldwide phenomenon.

By 2050, there will be 2 billion older persons in the world – the majority in developing countries. And, for the first time in history, older people will outnumber children. We now identify this seismic shift in worldwide demographics as “Global Aging.”

AARP has chosen to focus considerable effort on global aging issues because we believe these issues will affect virtually every sector of our public lives — our economies, our politics, our health care, our infrastructures such as transportation and housing, and our social involvement in every aspect of our societies.

One important lesson we have learned already is that there never can be a single “right” solution for each global aging challenge we, as nations, now face -- or will face in the future. There are many significant differences among us, for example, in our populations, our systems of government, our economies, our resources, our cultures, and so forth.

The “right” solution for a problem in one nation may turn out to be exactly the wrong solution for a similar problem in another nation. The “right” solution for a problem at an early stage in the development of a social program or institution may be the wrong solution at a later stage of development.

I can think of no better example of what I’m talking about than the debate we’ve had in the United States this year over proposals by President Bush and others to create accounts out of the contributions workers currently make into Social Security. Often called by various names ("personalization," "privatization," "private account," and "personal accounts") such proposals would divert a part of each worker's Social Security contributions into individual accounts.

AARP is firmly opposed to private accounts in Social Security. We favor the concept of private savings and investment accounts -- but only as an addition to – and not a replacement for – our current Social Security system.

We know that you here in Mexico have embraced a form of private accounts, in your new pension system growing out of the reforms of 1997-- and that a number of other Latin American nations have embraced private accounts, as well, beginning with Chile, and including Peru, Argentina, Colombia, Uruguay, Bolivia, and El Salvador. We have been monitoring these programs with great interest.

I can’t help but think there must be those -- here in Mexico and in the other nations -- who may wonder why there would be such a fierce debate over private accounts in Social Security in the United States, where we portray ourselves as a bastion of free enterprise and free trade -- and why the largest and most powerful group representing our older population – AARP – would be so adamantly opposed.

The answer is simple: Private accounts that drain money out of Social Security most definitely are the wrong solution for our Social Security program’s manageable long-term solvency problem. They, in fact, are a solution that would yield consequences that would be much worse than the problem we now face. The proposals for private accounts would cut guaranteed Social Security benefits significantly, create a mountain of debt, and pass a huge bill on to future generations.

In fact, the accounts would drain as much as $2 trillion from the Social Security trust funds. We believe leaving a legacy of debt of that magnitude to our children and grandchildren is totally unacceptable.

Seventy years ago, in the depths of the Great Depression, more than half of our nation’s elderly population were living in poverty. Most of them had no income whatsoever! Today, thanks to Social Security, the poverty rate for older Americans is now lower than it is for any other age group.

The Social Security Act was signed into law by President Franklin D. Roosevelt on August 14, 1935. It was America’s first major federal government program to deal directly with the economic security of our citizens. The Social Security program has played a unique role in the income security of the American people for 70 years and has proved itself to be the most successful government program in our history. But it was never intended to be a program to provide pension benefits based on need.

Social Security is a system of social insurance under which workers and their employers contribute a part of their earnings in order to provide protection for the workers and their families if they die or become disabled; and with a minimum, but guaranteed source of income in their retirement years. Earnings replacement rates are about 60 percent for minimum wage earners, 42 percent for average wage earners, and 26 percent for high earners.

A payroll tax on both workers and their employers—remains the primary method of financing the program. Since each worker pays Social Security taxes, each worker earns the right to receive Social Security benefits. This basic principle of the Social Security program has been largely responsible for its widespread public acceptance and support. Today, Social Security provides needed benefits to over 48 million people.

We know Mexico’s former pension program had significant challenges. It covered only about a third of your work force, due in large part to your large “informal” sector, whose employees neither contributed to the program’s fund, nor qualified for benefits.

In contrast, in the U.S., Social Security covers the vast majority of workers. But we too have a growing “informal sector” in our workforce, comprised of migrant workers, and so forth. But it is not yet large enough to have much effect on our system.

Most Americans would not have a viable retirement income without Social Security, and it will continue to be a critical source of retirement income for most Americans in the future. Social Security provides, and will continue to provide, an average of 40 percent of total retirement income and about 80 percent of retirement income for retirees in the bottom 40 percent of the income distribution.

Social Security plays a particularly significant role in providing retirement income security for women and minorities in the United States. More than three quarters of older women, older African Americans, and older Hispanics depend on Social Security for more than half their income.

I’ll return in a few moments to the issue of how important Social Security is to those who have emigrated to the United States from Latin America, and to other Hispanics. But, for now, I’ll say simply that the positive difference that Social Security makes in the majority of our people’s lives makes it absolutely essential to strengthen the current program – and not to destroy it.

The question then becomes, can the present system be saved? And, can we afford it? The answer to both questions is a resounding “yes!”

Our Social Security program does not need a radical overhaul. Again, unlike Mexico’s former pension program, Social Security is not in crisis. It’s not going broke. If we do nothing whatsoever to change the existing program, the trust fund will be large enough to pay 100 percent of promised benefits through 2041.

The main source of Social Security income is the taxes that employees, employers, and the self-employed pay. This method of financing Social Security—a payroll tax on workers and their employers—remains the primary method of financing the program. The “trust fund” I just mentioned is the the Old Age and Survivors Insurance (OASI) Trust Fund, which was created within the U.S. Treasury to account for all program income and disbursements.

The biggest challenge facing us is the pending retirement of our 76-million “baby boomers” – the post-World War II generation born between 1946 and 1964. Well, in 2041, the youngest of the baby boomers will be 77 years of age! And, after 2041, again, if no changes are made, about 74 percent of promised benefits could still be paid for decades.

So, what we need to do now is to take steps to strengthen Social Security’s long-term solvency to ensure that full benefits can be paid beyond 2041. We don’t need to destroy the system or radically change it. Those of you that have followed our Social Security debate closely may have heard talk about the system “going broke” in 2017. That just isn’t true. Amid concern about what would happen when our “baby boom,” generation reached retirement age, changes to Social Security were legislated by Congress back in 1983.

The intent of the 1983 legislation was to create a surplus in the Social Security Trust Fund designed to meet the nation’s obligations to boomers’ when they retire. So, for years, Social Security’s income has exceeded its pay out, and the Trust Fund has grown, as intended. This will begin to change, however, in 2017, when Social Security is projected to begin taking in less money than it pays out.

While you never like to take in less money than you pay out, if you have the resources to cover your imbalances for another 36 years, that’s hardly a “crisis.” Nevertheless, AARP’s goal is to guarantee full Social Security benefits beyond 2041 for all future generations.

I mentioned earlier how particularly important our Social Security program is for Hispanics living in the US. The fact of the matter is: Hispanics receive more in Social Security benefits for each dollar they pay into the system than either non-Hispanic whites or blacks.

Older Hispanics rely more on Social Security than does the older population as a whole. Without Social Security, over half of older Hispanics in the United States would live in poverty. Thanks to Social Security, less than a fifth do.

Young Hispanics tend to have fewer assets, and are less likely to participate in an employment-based retirement plan, than other young people. Thus, while today’s young Hispanics will likely be more prosperous than their parents, they too will depend on Social Security’s retirement benefits -- as well as its disability and survivors benefits.

Yes, Social Security is not just for retirees. It also provides valuable disability and survivor’s benefits for today’s workers and their families. The average married worker with two children has Social Security insurance benefits currently equaling a US$400,000 life insurance policy and a US$350,000 private disability policy.

These protections are especially important for young working families, most of whom do not have their own disability insurance or life insurance. Unfortunately, the private accounts proposals do not guarantee that these survivor and disability protections would remain the same as they are today.

The President’s private accounts plan would have reduced the program’s funding shortfall entirely through benefit cuts that slice deep into the benefits of middle-class retirees. So, obviously, Hispanics would be harmed if large cuts are made in a system from which they benefit disproportionately.

In addition, the President’s plan would have placed the burden of reducing the shortfall almost entirely on younger workers and future generations. This would have harmed Hispanics, too, because today’s Hispanic population is overwhelmingly young.

I’m happy to report that the American people have not been fooled by the empty promises of private accounts. Numerous independent surveys have shown that Americans of all descriptions have soundly rejected the idea of private accounts that drain money out of Social Security. The President’s plan stands little chance of ever being formally introduced in Congress.

All that remains, at this point, is a plan put forth by Republicans in the House of Representatives. They call their proposal “GROW Accounts. By the sponsors' own admission, the “GROW Accounts” plan is not intended to address Social Security’s long-term solvency. What they would do is carry significant administrative costs – some have said at least $25 billion in the first ten years of the program -- and add upwards of $900 billion to our already spiraling national debt in the same 10-years period.

There is no reason to believe the American people will be fooled by repackaged proposals like “GROW Accounts” that seek to accomplish the same ill-advised ends as the earlier proposals. The real purpose of the “GROW Accounts” proposal is to serve as a foot in the door for more extensive private accounts in the future.

AARP believes future generations of Americans deserve a Social Security program that ensures that benefits remain adequate and secure. This means:

  1. A predictable and stable foundation that provides a risk-free retirement benefit that can’t be outlived -- for all who contribute;
  2. Disability and survivor benefits to protect workers and their families;
  3. Full participation -- so the solution is fair to everyone;
  4. Adequate benefits for low-wage retirees -- to assure at least a minimum standard in retirement;
  5. Benefits based on contributions for all who pay into Social Security; and
  6. Annual adjustments that keep benefits up with the cost of living.

AARP has endorsed some simple steps we can take to begin making a down payment to ensure the future of Social Security:

AARP supports investing part of the Social Security surplus so that it earns higher returns than those offered by U.S. Treasury bonds. That way, we strengthen Social Security while sharing the risks of investing. We should not be creating a system where some people win and others lose when it comes to Social Security.

And AARP supports raising the ceiling on the amount of wages taxed to support Social Security to cover the same share of wages as in the past. That would gradually raise today’s ceiling of US$90,000 to approximately US$140,000.

These steps alone won’t fill the entire future gap, but they would represent substantial progress toward solving the problem. There are many routes we can take -- whether it involves changes to benefits, to revenues, or some combination of both.

Social Security will remain the single most important source of retirement security in the United States, and will continue to provide the protections that are not available or affordable in the private sector. But Social Security was never intended to be our only source of retirement income. As important as it is, we must consider Social Security in the wider picture of overall financial security in retirement.

Building a secure retirement income in the United States was traditionally thought of as a three-legged stool, with the three legs represented by Social Security, savings, and pensions. If people had these three sources of retirement income, they could handle the financial demands of their retirement years.

Today, that three-legged stool no longer defines what it takes to build a secure retirement in the United States. Our research has found that escalating health-care costs so profoundly affect the pocketbook that adequate health-care insurance must now be considered a fourth pillar of retirement security.

Out-of-pocket health costs now average 19 percent of income for persons 65 and over in the U.S. The percentages are even higher for those with low incomes: those not eligible for Medicaid spend almost half of their total income on health care. Medicaid is a means-tested program that provides medical and long-term care assistance for low-income individuals and families.

So, without significant protection from health-related expenses, few of tomorrow’s retirees will be economically secure. But reform of our health care system is a topic for another day.

Roughly half of all working Americans age 50 and older have current pension coverage, a percentage that has not changed in two decades.

But typical pensions are changing rapidly from defined-benefit plans, which provide an annuity, to defined-contribution plans, of which 401(k) plans are the most common. These plans are basically tax-privileged savings plans provided by the employer. An employee contributes a percentage of their pre-tax income, typically up to 10% towards an investment account. Employers may choose to match the contribution, on average up to 5%) The purpose of 401(k) accounts is to serve to shift the responsibility for retirement security from the employer to the worker.

Today, pensions have become virtually indistinguishable from other individual savings. In effect, pensions are the way Americans now do most of their saving. That’s right. On their own, Americans just don’t save their money – they spend it all – and then some. The savings rate in the United States has been running less than half of what it was twenty years ago!

According to OECD figures, the Gross National Saving rate, as a percent of nominal Gross Domestic Product, in the U.S. was 31.1 percent in 2003, compared with 19.2 percent in Mexico. Norway had the highest gross savings rate at 30.4 percent, while Portugal’s percentage was only 0.7 percent.

The baby boomers in the United States are not saving nearly enough to finance the lifestyle they envision in their retirement years. Only 40 percent of eligible workers in organizations that offer 401(k) plans actually enroll in them. We must come up with ways to get Americans to save money for their retirement.

Some employers have begun to experiment with automatically enrolling employees in 401 (k) savings plans. Encouraging or requiring other employers to follow this approach would be a significant step towards improving retirement security. Not surprisingly, employer-matching contributions also seem to encourage higher levels of participation.

Another approach has shown that workers are willing to increase their savings rates when they receive raises. This approach, labeled “save more tomorrow,” allows workers to voluntarily allocate part of any compensation increase to their 401(k) plan while receiving the remainder in regular pay. Research shows that such innovations have raised worker savings remarkably.

About half our population has no employment-based savings plan of any kind. For some of these individuals, one option is the “saver’s credit,” which provides tax credits to low-income individuals and couples who set aside up to US$2,000 in savings – but which is due to expire in 2006.

Long experience shows that people find it very difficult to save without the “carrot” of an employer plan, or a matching employer contribution, or the “stick” of a mandatory payroll deduction such as Social Security.

One ambitious possibility would be to create a government-subsidized “universal 401(k)” plan for all workers, which could require employers to make available to each worker the option of a 401(k)-type retirement account that could not be accessed until retirement.

Ladies and gentlemen, as we develop our policies to deal with the impact of global aging on the future economic security of our citizens, we must remain true to our national cultures and traditions.

We must know what our people want, what their attitudes are, what their expectations are. Each nation clearly has its own unique challenges and will require policies and programs tailored to its own particular needs.

We must ask ourselves, “What sort of social contract does our government hold with our citizens?” “Is our social contract in need of modification?” Yes, the rapidly increasing numbers of older citizens will present our nations and our governments with enormous new social and economic challenges.

At AARP, we believe we have much to contribute — and much to learn. We stand ready to assist you in any way we can, and we ask for your assistance as we seek to meet the challenges of global aging.

More than 60 years ago, on June 12, 1943, United States Social Security Board Chairman Arthur Altmeyer spoke before an international audience in New York. He said:

"Social Security in any country is to the interest of all other countries, since it contributes to political stability, economic well-being, and is the embodiment of belief in the innate dignity and worth of the common man. The development of social security programs is essential both to the internal security of nations, and to the international security and peace of the world."

Chairman Altmeyer’s words were true then. They are true today. And they will be true tomorrow.

Thank you.

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