U.S. Senator Ted Stevens

SENATOR TED STEVENS: Well, thank you very much, Mort, I'm pleased that my grandson would like to know that, but -- I'm going to start up by apologizing, I didn't know this was the start of the Iditarod today, so this is the time for saying I'm sorry.

But I do thank Commonwealth North for responding to my request to have a meeting to allow me to present to you my point of view on, I think, one of the most pressing problems that the nation faces. And I do hope that you have questions, I hope that you will look at these slides. They've given me a little bit of a pointer here so if I have to use that I'll do that.

But it is an interesting period that we live in and I told the Legislature, I think it's just really one of the great challenging times of not only this state, but of America, to see if we can make the decisions that will make a difference, a real difference for the future.

For years now Social Security has been what we call the third rail in politics. People who touched it weren't re- elected. We're now entering this period of challenge for Social Security and the challenge is enormous on Social Security. Elected officials must have the political will to touch the third rail and survive because Social Security itself must survive. As president pro tem of the senate and chairman of Commerce as Mort said, I now find I'm deeply involved in this issue.

Social Security must survive, it's not bankrupt, but great problems loom ahead. Those problems cannot be solved simply by raising taxes which has been the solution since 1936. I believe we have a duty not to leave the burden of an ailing Social Security system for another generation, we owe it to our children and grandchildren to try and fix these problems now.

Now here's -- we get to the first slide. Americans lived in a different world in 1935 when Social Security was designed. Most women did not work outside of the home, life expectancy of the average American was 61, but Social Security was paid at 65 so a working man or woman did not live long enough really to collect much in retirement benefits.

It's a different world now. We need a system that reflects today's America. Women now make up 47 percent of the work force, the average American lives to 77, the life expectancy for American women is greater than men, it's now 79.

Social Security was intended to be and is an insurance program. It was never intended to be funded by the taxpayers by income paid into the treasury by taxpayers. It was established so that Americans who have a job support retirees by paying Social Security taxes.

All taxable wages or up to $90,000 are subject to that tax. The Social Security tax combines taxes collected for old age insurance and survivors insurance and disability insurance. Those are the numbers on the two columns on the left. When you total those numbers you'll -- both an employee and employer pay 6.2 percent in Social Security tax or a combination of 12.4 percent. Self-employed people pay the total amount, 12.4 percent themselves.

One of my concerns about growing Social Security -- the Social Security crisis is its impact on federal taxes. This chart shows the breakdown of federal taxes collected in our state. In 2002, 43 percent of all federal taxes collected went to Social Security. Let me repeat that, it stunned me when I saw it. 43 percent of all federal taxes paid by Alaskans in 2002 were Social Security taxes.

This slide illustrates the Social Security burden in dollars. In 2002 approximately 369,000 Alaskan residents worked on jobs that were covered by the Social Security program. They earned $9.83 billion which were subject to Social Security tax. Of that 9.83 billion Alaska's employers (sic), employers and self-employed residents paid 1.22 billion in Social Security taxes. At a time when we are building the future of our state I'm concerned about the impact of growing Social Security tax on the Alaskan economy. I want to comment on that in greater detail in a moment when we talk about solutions.

But first Alaskans must decide does Social Security have real problems. All Americans must make that decision, do we really have real problems with Social Security. For me after the briefings I've been through this year, there's no doubt there are problems and a real crisis is brewing.

The number one problem for Social Security is the number of contributors. In 1950 there were 16 workers paying into Social Security for every one person receiving benefits. Today that ratio is just over three to one. By the time our children and grandchildren retire there will be only two workers for each beneficiary. The system is not broken, it just doesn't fit the demographic trends of our nation.

The second problem is the way Social Security benefits are calculated. They're indexed to the growth in wages rather than being adjusted for inflation. Let me put this into perspective. If I can buy one gallon of milk with my Social Security benefit today then by the time our daughter, Lily, who's now 23 retires, she will be able to buy three gallons of milk for the same benefit. That's because the price of milk is tied to inflation while the benefits under Social Security are tied to wages. Over time the benefit grows faster than inflation, this gives recipients more purchasing power, but it creates a real solvency problem for the system.

The growth in benefits means that going forward the system promises higher benefits than it can pay out. The first bar represents the average wage earner retiring today what he will collect in benefits, $14,200. The second bar represents what Social Security promises to pay the average worker who retires in 2050 and that's $20,600. But the third bar represents what the system actually will be able to pay in 2050, only $15,000.

The Social Security system will continue to generate more money than is paid out until 2018. The black line in the middle of that graph represents the amount of money the federal government takes in for Social Security taxes. The blue line represents the Social Security benefits being paid out. In the next 13 years Social Security revenue collected will exceed the amount of cash benefits paid to Social Security systems, that surplus is represented by the shading in green. But you'll see by 2018 it really is zero. By 2018 when the baby boom generation retirement hits its peak, rising benefits, lower numbers of workers and growing numbers of retirees will create what we call now a perfect storm in 2018, moving the system from surpluses to deficits on an annual basis.

Annual Social Security surpluses will decline and according to the Social Security trustees, the program will begin to run annual deficits. These annual Social Security deficits are represented by the area shown in red. The annual deficits will increase each year from 16 billion in 2018 to 300 billion in 2033 and they are cumulative, they start adding up in terms of total deficits for the system.

When that happens in 2018, additional money must be paid into the Social Security fund if it is to be able to keep promises for the future. There would be three options available to raise such funds, cut government spending, raise taxes or increase the national deficit through borrowing and transfer the money to the Social Security fund.

But let me emphasize before I go further now, the Social Security system is safe for today's seniors and for those born before 1950. If we fail to modify the system by 2018, just 13 years from now, Social Security will have to begin paying out more than it takes in and that is the real sign of a crisis as far as I'm concerned. It's a warning we should heed.

Young Americans understand this problem, polls show that 79 percent of Americans under retirement age do not think Social Security will provide benefits by the time they retire. The perception is compounded in this state where the average is 32. More than 540,000 Alaskans are now under the age of 55 and I believe they know they will inherit this crisis if we do not act now.

Young people on my staff tell me the first question a financial planner asks them is do you want to assume that Social Security will be there when you retire. Now that's a question they've answered no.

For me the system needs repair and President Bush has started the discussion about how to fix it, a series of solutions have been presented, in coming months Congress will seek to find the solutions.

Ultimately a graph like this looks like what would be good news, one where the spending lines representing Social Security revenue and spending come together and stay even out into the future. To do this we would need a permanent solution, not a short term fix.

Let me again emphasize two decisions have been made, they are decisions, they're not built in the system, they're decisions that all have agreed to in Congress. No one 55 or older will be affected, their Social Security will not change, whatever plan we choose, the changes will impact only Americans born after 1950. Again that is a decision, it's not a component of the system, it's a reality, a political reality.

Secondly, raising Social Security tax is not a viable long-term solution. As this chart shows Social Security taxes have been raised repeatedly now since 1936, 22 times. Raising those taxes again would have serious consequences, but above all they would have serious consequences for us because almost half of the taxes we pay the federal government are Social Security taxes. As I said Social Security takes 12.4 percent of a workers' wages on all income up to 90,000. And the Medicare rate is 2.9 percent split between employer and employee.

However you look at it, that's a great burden on lower income people. No matter how much income tax relief they receive, the cost of their own Social Security are great, really very great. And I believe and most of us believe, those taxes should not increase.

Now some have asked since earnings up to 90,000 are subject to tax, why not just raise the 90,000 cap. Well, it looks easy, but that's not a long-term solution because this is an insurance program. The more a person would pay into Social Security, that person's benefits would be greater and the more that would come out. According to the Social Security trustees, completely eliminating the cap altogether and taxing all revenues under the Social Security tax would extend the 2018 to 2024. A very short-term fix.

The long-term fix to Social Security will actually be a combination of smaller solutions. As the president said in the state of the union message, all options are on the table and the solution must be bipartisan.

Many options have been proposed. When he was president, President Clinton spoke of increasing the retirement age.

Senator Gramm is now talking about personal savings accounts and raising the 90,000 cap, at the same time lowering the Social Security tax.

Add on accounts have been proposed as an alternative to personal saving accounts. They would be structured as enhancements to today's 401(k)s and would be funded through additional payroll taxes paid by employees.

Senator John Breaux who has now left us, suggested discouraging early collection of Social Security benefits, in other words asking people not to take their benefits until they're older and no longer employed.

The late senator, Senator Daniel Patrick Mornahan who really was quite an expert in this area, recommended changing the way the benefits are calculated and totally revamping the Social Security system.

Former congressman Tim Panic of Minnesota raised the possibility of indexing benefits to prices rather than wages. Others have expanded on that idea.

Senator Bennett of Utah has a blended indexing system which would tie the bottom third of workers to a wage index, the top workers to a price index and use a blended system for all other workers shifting as it went up in terms of income. That plan would be phased in over time and completely funded by 2011 and he says that's not a total solution, but it's a very long-term solution.

The after taxing indexing is another option that's on the table. Currently we base benefits on pretax income, you pay according to your income and therefore we base the benefits on pretax income. But under this plan the benefits would be based on the amount a person earns after taxes.

A group of proposals chart the need for incentives and mechanisms that will generate additional retirement savings. Some have proposed giving generous tax breaks to lower income workers who participate in retirement accounts. Others think we should automatically enroll workers in job based retirement accounts, there would be an opportunity to opt out, but the system would encourage savings by assuming workers want to participate.

And now Senator Lieberman and Senator Sam Thorn have come up with a new concept and that is they would give every child born in the United States a amount, say it's around $500, at the time of birth that would be held in an account that must be held until retirement that would be invested in the private market.

Now I've asked to be with you to ask you to start thinking with me and really to help me and Lisa and Don as Alaskans look at these options and decide what we should do. I think we should be part of the solution and I think the dialogue would best serve the interests of Alaskans. Our question has to be what combination of options will save Social Security without creating more problems and I think we should be able to find that balance if we have the will to start making changes. I want to discuss this with you, I'll take some questions. I hope -- I think we've got some coming.

But let me point out the members of my staff that are here, George Glow is my chief of staff, Maureen Ash is director of my Alaska offices, Liz Kanel, my legislature assistant for Social Security, health and education issues and Lindsey Hayes is my speech writer and tries to make it possible for me to explain a complicated subject like this. I hope we've been successful.

I do think that -- again I thank you for being in the audience and as a matter of fact we're taping this, we're going to give a copy of it to the White House and let them see how Alaskans react. What do you got, chief?