FROM THE OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE
Remarks by Treasury Deputy Secretary Lawrence H. Summers
February 24, 1998
before the Senate Budget Committee Task Force on Social Security
Mr. Chairman, my colleagues and I appreciate the opportunity to
be with you here today to discuss the most successful government program in
We meet at an auspicious time. For more than a generation, American politics
has been weighed down by an inability to live within our means. Budgetary deficits
have been a nagging obstacle to good policies. They have been an excuse for
letting long-term challenges go unaddressed. But now, that weight has been lifted.
Five years of sound finance and a remarkably strong economy have shrunk the
deficit to the point, this year, of statistical insignificance. We may be on
the brink of a new era of surplus.
Many things will change in this new era. Many things we considered impossible
in the old era of deficits will now be achievable. Many tasks we knew we ought
to accomplish will become tasks that we can and must accomplish. And as you
know, at the top of the Administration's agenda is to Save Social Security First.
Let me spend my time today painting the main features of this new era we are
entering: The remarkable state of the economy, and the historic challenge and
responsibility to increase national savings and to protect Social Security as
our society ages. What the end result for Social Security should be will be
a matter of considerable controversy and debate. But it will be worthwhile noting
the critical issues that will need to be addressed and some of the considerations
that will frame that vigorous debate.
I. Preparing the Nation for the Demographic Challenge Ahead
To begin, let us consider the remarkable state of the nation's economy:
- unemployment, at 4.7 percent, and inflation, at 1.7 percent last year, are
among the lowest in a generation. And last year our economy posted its fastest
growth in a decade.
- we are investing more in American companies and their workers. Business
equipment investment is increasing 11 percent per year, and at 9 percent of
GDP accounts for a record share of our economy's output.
- real wages and household incomes have at last started to catch up the ground
that had been lost since the 1970s. Indeed, real median family income is up
more than $2,000 since 1993.
- and, as Director Raines has reminded us, the budget deficit is no more.
President Clinton has submitted the first balanced budget in 30 years. The
magnitude of this accomplishment would be difficult to overstate. Consider
that, as of five years ago, the Office of Management and Budget projected
that the deficit for 1998 would come to $388 billion. Today, it is expected
to be negligible. As a result of the deficit reductions we have seen this
decade, more than $1 trillion in capital that would otherwise have been invested
in the sterile asset of government paper has instead been invested in America's
future: in our productive businesses, in our workers, in our cities, and in
These good economic times could not have come at a better time for our nation.
Because a central fact confronting everyone who would think seriously about
the future of our economy is the coming aging of our society. In 1940, soon
after the first Social Security Act was passed, the average American aged 65
could expect to live another 12.5 years. Today, the comparable figure is 17.5
years. And as the President has said, a good many children born this year will
live to see the 22nd century.
These improvements in life expectancy, and a decline in birth rates, have
put us on a path of rapid declines in the number of American workers for every
beneficiary. In 1960 the ratio was 5.1 to 1. Today it is 3.3 to 1. In a little
more than 30 years' time it will be just 2 to 1, and falling.
These prospective demographic developments pose twin challenges. For individuals,
increasing life expectancy implies that greater attention must be paid to laying
the foundation for a financially secure retirement. For the economy as a whole,
the burden imposed by the increase in the number of beneficiaries per worker,
together with the increasing burden likely to be imposed by the health care
system, implies that even greater effort must be exerted toward improving the
productivity of the American workforce.
The key to answering both challenges at both the individual and national levels
will be to increase saving. Obviously, saving is the means by which individuals
make provision for later consumption. So for individuals, the message is simple:
If you are going to live longer, on average, you must save more in order to
enjoy the same standard of living during your retirement. For the economy as
a whole, increased saving facilitates greater investment. In turn, an increase
in investment results in a more productive workforce and an economy with greater
overall productive capacity. Increasing the productive capacity of the economy
is the key to easing the burden on future generations of providing for tomorrow's
One piece of good news is that national saving has increased in recent years
from 3.1 percent of gross domestic product in 1992 to 6.5 percent in 1997. This
is an important step in the right direction. However, it is worth noting that
this improvement is entirely accounted for by increased government saving through
the reduction in the federal deficit. In contrast, private saving has actually
declined relative to the size of the economy, even though important pieces of
legislation have been enacted during the Clinton Administration to expand and
strengthen private pensions and individual savings in the future, and this year's
budget includes several additional proposals.
We need to save more, and if history and the efforts of other countries provide
any guide, we can save more. For example, in the 1950s and 1960s our national
saving rate averaged 11 percent. And today, of the 26 largest industrialized
countries, the United States presently ranks 19th in terms of national saving
How do we increase national savings? There are two methods available: the
government can save more or dissave less and the private sector can save more.
The budgetary surpluses now visible on the horizon could play a critical role
in helping the country prepare for the challenge of aging, by providing a significant
down payment on the higher savings the nation needs to equip tomorrow's workers.
For example, the projected surpluses could add up to half a percentage point
per year to the national saving rate even over the next few years, when the
surpluses still have not reached their projected peak.
But the surpluses could also do more than simply increase national savings;
they could also be used in a variety of ways to strengthen Social Security's
solvency for the 21st century. For example, as a rough approximation and, clearly,
these are controversial issues, and I am not making any endorsements here but
by way of illustration:
- every $100 billion of those surpluses that is transferred in Treasury bonds
to the Trust Fund could delay the exhaustion of the Fund by around a year
and reduce the actuarial deficit by around 5 percent.
- alternatively, some will suggest we invest the money in equities, which
would provide an even higher return, but would be enormously controversial
and clearly bring greater risks and uncertainties.
Although there will no doubt be many disagreements as we move forward through
this process, I am sure that there will be unanimous sentiment in favor of ensuring
that Social Security works as well for future generations as it has for past
If the surpluses are dissipated before Social Security reform is addressed,
however, they will not achieve either critical objective increasing national
savings or strengthening Social Security and the country will be that much less
well prepared for the future. Future generations are depending on us to make
the right choice. And in the State of the Union Message President Clinton made
our choice clear: in deciding how the surpluses will be used we must save Social
II. Reforming Social Security
To use the budget surpluses to increase national savings and strengthen Social
Security, we will be considering a great many reform options in the months ahead.
To evaluate these options, there are a number of basic questions that will need
to be addressed:
- How to find the best way to ensure Social Security's financial health, so
that people's benefits are there for them, and there for their children. We
need to be sure they will be able to count on Social Security as a public
trust as their parents and grandparents did.
- How to find the best way to ensure public, cost-effective insurance for
all. More than 99 cents are paid in benefits by Social Security for every
dollar that is paid in by workers and their employers. One recent study estimates
that during the pay-out phase of privately-provided annuities, the loss to
overhead alone averages more than 8 cents on the dollar. In another study,
the American Council on Life Insurance found that on a per-dollar basis, private
life insurers' expenses came to 11 percent of annual income, or 16 percent
of contributions, of which nearly half went for selling costs or agents' commissions.
- How to find the best way to ensure that Social Security continues to provide
the greatest retirement benefits to those who need them the most. Currently,
higher real rate of returns are earned by lower-wage workers. Today, the elderly
poverty rate stands at 10.8 percent. Without Social Security benefits, it
would be about 50 percent.
- How to ensure that Social Security provides an adequate rate of return for
workers on their contributions. Social Security must provide benefits during
retirement that are commensurate with the payroll taxes they paid as workers.
- How to ensure that Social Security continues to provide security for every
working American in the form of survivors and disability insurance protection.
Fully one-third of all Social Security benefits paid each year go to nonretirees.
In answering these questions, it also will be important to keep in mind that
the Social Security system is not advance funded. To a significant extent, the
benefits of current retirees are paid for with payroll contributions of current
workers. If we were to move to an advance funded system, in which contributions
of current workers were fully saved in order to be available for them to use
when they reached retirement age, then we would have to figure out some new
way to pay for the Social Security benefits paid to current retirees. This "transition
problem" must be considered when evaluating any proposals for comprehensive
Social Security reform.
Viewed in the framework of these questions, there are many options that have
already been proposed by those outside the Administration for reforming Social
Security. These options lead to many issues that will be debated, including:
- 1. Should we transfer unified budget surpluses to the Social Security Trust
- 2. Should we invest some of the Social Security Trust Fund's assets in private-sector
- 3. Should we create a system of individual investment accounts, and fund
them either by redirecting some of the payroll tax, by using some of the budget
surpluses, or through some other funding mechanism?
Needless to say, each of these issues and the myriad others like them has
many complexities. Each of them must be viewed through the prism of the questions
I described a few moments ago. That will be the challenge of the national discussion
that the President has set in motion for this year.
III. Concluding Remarks
Mr. Chairman, the debate we will have about the reform of Social Security
will not be about whether to protect its historic achievements. It will be about
finding how best to protect them.
By ensuring that the surplus is reserved until Social Security is safe, we
can help ensure that the Social Security system of the 21st century continues
to protect generations of Americans and promote both our economy and our values.
And we can help ensure that it continues to promote our hard-earned fiscal discipline.
Once we have addressed Social Security reform, we can explore other possible
ideas for using the fruits of this new surplus era. What matters is that the
surpluses should not be wasted but used to prepare the country for the next
century. I look forward to working with you, Mr. Chairman, with other members
of this committee and with others in Congress as we work to take on this critical