Senator BAUCUs. If you could, please. Just in your own mind do you know just generally what it is?

Mr. DRIVER. It is something over 300,000 a year increase.
Senator BAUCUS. That is total.

Mr. DRIVER. Yes.

Mr. THOMPSON. There is underlying our projections an assumption of how many total beneficiaries there will be in each year broken down by program. We can give that to you even subdivided by category, like disabled workers, dependents of disabled workers. Senator BAUCUs. If you could, please.

Mr. THOMPSON. We could submit that for the record. We didn't bring it with us today.

[The information referred to follows:]

ESTIMATED NUMBER OF OASI AND DI BENEFICIARIES IN CURRENT PAY AT THE END OF CALENDAR YEARS 1979-85, CONSISTENT WITH THE BENEFIT PAYMENT ESTIMATES FOR OMB'S MARCH UPDATE

Note. Totals may not equal the sum of rounded components.

Senator BAUCUS. Thank you very much.

Senator NELSON. Thank you very much.

[The prepared statement of Mr. Driver follows:]

TESTIMONY OF WILLIAM J. DRIVER, COMMISSIONER OF SOCIAL SECURITY

Mr. Chairman and members of this distinguished subcommittee, I appreciate the opportunity to appear before you today to discuss the financial condition of the social security program.

This morning I will review with you the most recent projections of the status of the social security trust funds, and consider some of their implications for the future. I will also discuss the President's proposal for interfund borrowing, which will ease some of the short-term problems that will arise over the next few years. Social security is our Nation's foremost social program. It represents a major and impressive achievement in social justice. Thirty-five million people receive social security benefits every month to carry them through periods of income loss upon the retirement, death or disability of a family breadwinner. Reassurance that this program is financed soundly and that benefit commitments will be met is a goal that we all share. Those who receive social security benefits, as well as those who will one day be entitled to receive them, should have no question in their minds that their benefits will be paid.

The predicted downturn in the economy and the less-than-favorable projections for quick recovery in the period ahead have given rise to some unease about the stability of the social security trust funds. We must work together to demonstrate quickly to the public that action will always be taken when necessary to guarantee the payment of social security benefits.

CURRENT PROJECTIONS AND STATUS OF TRUST FUNDS

The attached table shows projected operations of the old-age and survivors insurance, disability insurance, and hospital insurance trust funds, based upon the economic forecast embodied in the fiscal year 1981 budget. This forecast includes a mild recession in 1980, some recovery in late 1980 and continuing through 1981, and a return over the following 4 years to full employment and moderate rates of inflation. Our trust fund projections, like those included in the Department's budget and in other data submitted to Congress, assume that the tax increases and wage base expansions provided in current law will go into effect as scheduled.

As the table shows, we project that the old-age and survivors insurance trust fund will have cash flow problems because of insufficient reserves by the end of next year. Permitting the OASI fund to borrow from the DI fund or reallocating payroll tax rates between the two funds would avoid cash flow problems in 1981, although the OASI and DI reserves would become insufficient in 1982. Yet if we look at all three trust funds taken together-OASI, DI and HI-we project that the social security programs have sufficient revenues in the aggregate to meet all benefit commitments.

CHANGES IN ECONOMY SINCE 1977 AMENDMENTS

While these projections are encouraging, they are less promising than those used in 1977, when the current social security tax schedules were established.

Projections made at the time of the 1977 amendments, when the current payroll tax schedule was enacted, indicated that, while trust fund reserves would be low until revenues from the major rate increases scheduled for 1981 and later were realized, there would nevertheless be adequate funds to cover benefit payments. However, these projections were based upon an economic forecast which did not foresee the high rate of inflation we have experienced over the past 3 years, caused in large part by the continuing escalation in the price of oil.

The very large increases in the price of imported oil affect both benefit outlays and payroll tax revenue. Increased oil prices have contributed to a substantial rise in the CPI, the index to which social security cost-of-living increases are tied. The July 1979 cost-of-living adjustment in OASDI benefits of 9.9 percent added nearly $10 billion to the system's annual obligations; and the upcoming June 1980 adjustment of 13 percent will add another $13 billion annually.

Wages however, have not kept pace with inflation. The accelerated outflow of our national income, caused by the oil price increases, is one reason for the slowdown in the growth of workers' earnings and therefore, in payroll tax revenues.

In addition, more complex and less well understood forces in the economy have held gains in productivity below the levels expected on the basis of historical experience. This decline in productivity also contributes to a slowdown in the growth of workers' earnings and, therefore, payroll tax revenues. In 1977, it was projected that real wages would increase by 2.7 percent in 1978, 2.5 percent in 1979, and 2.4 percent in 1980. Real wages actually increased by only 0.9 percent in 1978, decreased by 2.8 percent in 1979, and are projected to decrease by 2.4 percent in 1980.

Recitation of these facts makes clear that the courageous action of the Congress to raise social security taxes in enacting the 1977 amendments was absolutely critical. Had changes in the tax rates and the earnings base not been enacted in 1977, the disability insurance trust fund would have encountered cash flow problems in 1979, and the combined OASI and DI funds would have become unable to meet benefit payments late this year.

In light of this recent economic history and the current projections of continued inflation and a mild economic downturn, it is clear that all of the projected tax increases and wage base expansion that are scheduled in law will be required to maintain the trust funds.

It is also clear in retrospect that the 1977 legislation shifted more funds to the disability insurance and hospital insurance programs than were required to maintain those programs. Experience with respect to both the disability and hospital insurance programs turned out to be more favorable than had been expected. The disability incidence rate declined at a greater rate than had been forecast and inflation in hospital costs slowed considerably. This more favorable experience is predicted to continue in the future. As the table illustrates, DI and HI trust fund reserves are projected to increase in each year through 1985. The HI trust fund reserve ratio will more than double, growing from about 54 percent of 1 year's outgo at the beginning of this year to 113 percent at the beginning of 1985. The DI trust fund reserve will more than triple over the same period.

As I mentioned earlier, however, the three trust funds are expected to have sufficient income and reserves in the aggregate to meet the needs of the total program over the next 5 years. The current projections show that, although outgo for the three funds combined will exceed payroll tax income by $2.3 billion this year, by 1985 income will exceed outgo by some $25 billion. Combined trust fund reserves, as a percent of outgo, will fall from 29 percent to 21 percent in 1983 and 1984, and will rise to 23 percent by the beginning of 1985.

We are therefore recommending legislation to permit borrowing among the three trust funds to meet the projected temporary shortfall in the OASI trust fund. We believe that interfund borrowing is the best way to respond to this temporary situation and to assure the continued financial integrity of the program as a whole. If our projections hold true, interfund borrowing should resolve the near-term financing problems of the OASI fund without causing basic changes in social security financing. At the very least, interfund borrowing is necessary to guarantee benefit payments until economic trends become clearer.

Basically, our proposal would enable the Managing Trustee to shift funds among the trust funds under certain conditions, with specified terms for repayment. Specifically, whenever the assets of one fund at the end of a 12-month period are less than 25 percent of estimated outlays during that period, the Boards of Trustees could instruct the Managing Trustee to borrow from the other trust funds an amount sufficient to bring that fund's assets up to 25 percent.

Borrowed amounts plus interest would be repaid to the lending trust fund when the reserve of the borrowing fund reaches 30 percent of its annual outgo. The interest rate would be set at such a level that after the loan has been repaid the lending trust fund would be in the same financial position as it would have been in if the borrowing had not occurred. Of course, the proposal assumes that the revenues from the tax and wage base increases scheduled under current law will be realized.

We are proposing that the authority for interfund borrowing expire at the end of 1990. The primary purpose of the interfund borrowing authority is to meet a temporary shortfall in the OASI trust fund during the early and middle years of the 1980's. Current projections show that payroll tax increases scheduled in the law for 1985 and 1990 will begin to rebuild the OASI reserves so that after 1990 borrowing authority will no longer be necessary. Also, the 1990 expiration date will allow the Congress to review the efficacy of the interfund borrowing provision and to decide whether it should be extended or allowed to expire.

Another proposal which we have considered but are not recommending at this time is a reallocation of the payroll tax rate between the OASI, DI, and HI programs. We are, of course, willing to work with the Committee if it wishes to provide for a reallocation of tax rates in addition to interfund borrowing. But a reallocation is not sufficient by itself to provide social security beneficiaries the guarantee that they need and deserve. Any allocation of tax rates that appears appropriate today may become inappropriate a few years hence, just as the 1977 allocation has already proved inappropriate. Our interfund borrowing plan, on the other hand, will always prevent cash flow problems from developing in a single trust fund at a time when overall reserves are adequate.

It is possible, of course, that economic conditions may differ from those on which our projections are based. In the past few months, for example, important developments have occurred which have caused many analysts to revise their forecasts. The Federal Reserve Board took action in October and again in February to tighten the supply of money and thereby caused interest rates to rise significantly. At the December OPEC meetings, oil prices were increased by an average of about 25 percent. Nevertheless, despite these negative factors, the economy has been surprisingly strong, and the long predicted recession has not yet materialized.

With economic events changing so abruptly and in such an unpredictable fashion, social security financing must provide the flexibility for the system to withstand fluctuations in the economy. Based on current forecasts, we believe that interfund borrowing provides such flexibility. We also believe that it would be unwise to make more drastic changes in social security financing at a time when the economic outlook is not clear. We are, however, constantly monitoring the state of the economy and will advise the committee if further adjustments appear to be needed. The Administration's interfund borrowing proposal has the advantage of being neutral in its effect on benefits, payroll taxes, and the overall Federal budget. It can make a major contribution to public confidence in the social security system and help assure social security beneficiaries that their benefits will be paid regardless of temporary economic downturns. The proposal has been endorsed by the National Commission on Social Security, and we urge that you give it prompt consideration. I thank you for the opportunity to provide the Administration's views to your subcommittee.

30%

30%

30%

548

348

23

35

24

54

29

Senator NELSON. Our next witness is Mr. Henry Aaron, senior fellow, Brookings Institution, and Chairman, 1979, Advisory Council on Social Security.

Mr. Aaron, the committee is very pleased to have you take the time to come and appear this morning in your capacity as chairman of the Advisory Council on Social Security.

Your statement will be printed in full in the record and you may present it however you desire.

STATEMENT OF HENRY AARON, CHAIRMAN, ADVISORY
COUNCIL ON SOCIAL SECURITY

Mr. AARON. Thank you very much, Mr. Chairman and Senator Baucus.

I would like to excerpt certain portions of my testimony, beginning with my thanks for the opportunity to present the recommendations of the Advisory Council.

Before getting into the body of the testimony, I should point out that the change in economic assumptions that has occurred in recent months and the attendant changes in projections of the social security trust funds have caused me to change some of the numbers that we used in the Advisory Council report.

The Advisory Council throughout its deliberations was aware of and deeply concerned by the growing sense of concern about the financial security of social security benefits. The Council's view one expressed here this morning: that benefit obligations to all who are now retired or soon will be retired or disabled, will be and should be met in full.

Council members differed about how and when the benefit structure should be modified for those who will retire many years hence, but no member of the Council could see any value to allowing the disabled and those past or near retirement age to worry needlessly about the security of their benefits.

Congress is committed that those benefits will be paid, and this fact should be made obvious to those who now are or soon will be beneficiaries.

With that principle in mind, the Advisory Council structured its recommendations for reforming the financing of social security to accomplish the following objectives. If adopted, the Council's recommendations would provide financing for hospital insurance from general revenues, permit payroll taxes to be cut from 6.65 percent now scheduled in law for 1981 to approximately 6 percent, and held at that level for the next 25 years.

The recommendations, if adopted, would prevent problems of inadequate revenues during the course of a recession and the attendant and needless concern that such shortfalls cause to beneficiaries. They would put the social security system on a sound actuarial basis for the next 75 years by placing in law a schedule of taxes sufficient to support presently legislated retirement, survivors and disability benefits for that entire period.

Senator NELSON. Let me ask a question. The issue, it seems to me, of public confidence is important in terms of the social security system, and one of the assertions that one sees frequently in the paper is that with a shrinking work force and an expanding percentage of people in the country that are retired, the capacity of