There is something of a conflict of interest between the Secretary of Treasury's role as the primary trustee of the trust funds and his role as the chief financial officer of the government. In his role as Secretary of the Treasury he is obligated to reduce the burden to the general treasury of interest payments to the trust funds. As the managing trustee of the trust funds lie is charged with securing the highest possible rate of return for those funds. Most of this conflict has been resolved by statutory rules that are intended to be fair both to the trust funds and to the Treasury. Yet there is a problem in having one person attempt to exercise both of these functions. In recent years an outstanding example of a direct conflict of interest has occurred in connection with the debt ceiling. When the Treasury bumps up against the debt ceiling it, of course, is unable to borrow for any purpose, including the payment of interest on the outstanding debt of the United States or the payment of Social Security benefits. The managing trustee of the Social Security trust funds more than once has resolved the issue in favor of the Treasury rather than the trust funds. Specifically, he has cashed in Social Security debt to give room to the Treasury to borrow. In place of interest-bearing securities in the trust funds, the Treasury made a notation of what was owed to the trust funds, with the intention of later making good, but it took an act of Congress to make up for the loss of interest and to restore the integrity of the funds. In the meantime, the trust funds had been put at some risk of interest loss, and there was, at a minimum, a public relations problem of loss of faith in the integrity of the Social Security funds. There was no lasting financial damage from this activity on the part of the Secretary of the Treasury, but it demonstrated clearly the possibility of a conflict of interest between his or her role as chief financial officer for the whole government and as a managing trustee of the trust funds.

The Secretary of the Treasury is needed as the day-to-day administrator of the Social Security funds. Only he is equipped to carry out the routine functions of fund management, but I believe that the provisions of your bill, Mr. Chairman, are a big improvement in shifting policy decisions to a new Board of Trustees. S. 216 subjects the Secretary of the Treasury to policy direction by a Board that has the interests of the Social Security trust funds single-mindedly at the center of its responsibility. This is a good move. Policy should be set by a Board of Trustees that does not have the kind of conflict of interest that a Secretary of the Treasury has inherently.

Some people who oppose setting up Social Security as an independent agency have argued that Social Security will not be as well represented in the councils of government as it is today because there will be no one at the Cabinet table to explain and defend the interests of the Social Security program. Although there is some merit in this contention, I do not find it persuasive. Surely any President would invite the Chairman of the Social Security Board to attend Cabinet meetings when the discussion involved Social Security. Nevertheless, to emphasize this point you may find it desirable to have the Committee report on this bill make clear that it is the intention of the Congress that the Chairman of the Social Security Board be directly involved in White House and Cabinet discussions of all matters that affect the present and future of the Social Security program.

There is no single right way to organize the functions of the federal government. Some of the possibilities are to group things together by subject matter similarity. This is the principle that brought together the two medical care payment programs of Medicaid and Medicare. Another possibility, however, is to group by type of administration, that is whether a program is administered primarily at the Federal level or primarily at the state level, with the Federal role being one of financing and standard setting. Still another possibility is putting together those things that have a similar program approach, such as grouping together all social insurance programs where the right to benefits grows out of past work and contributions, as compared to welfare programs where the object is to bring people up to a minimum standard of living based on an examination of their income and resources.

All of these approaches and others have been used in the past. The principle of direct Federal operation and the similarity of approach in social insurance led originally to Medicare being administered by the Social Security Administration, and there is a case to be made for the return of Medicare to a newly established Social Security Board. In favor of it are not only the organizational considerations I mentioned, but the fact that Social Security has district offices all over the country that can help people with information about Medicare and with the filing of claims, a resource not now available to the Medicare beneficiary. But the practicalities are against such a move at this time. After Social Security is removed from the Department of Health and Human Services what remains in the Department are largely health related programs, and if the Medicare program were also to be removed, the rationale for the Department is considerably weakened. And undoubtedly the re

moval of Medicare would be strongly resisted by most people primarily interested in health programs. Thus we support the decision of the Chairman to establish an independent Social Security Board with responsibility solely for Old-Age, Survivors and Disability Insurance plus the closely related Supplemental Security Income program (SSI).

The organizational principle that justifies including SSI in this new entity is the avoidance of obvious and important duplication in the operation of direct benefit programs of the federal government. It would be ludicrous to establish a nationwide network of offices to administer SSI separately from Social Security when most beneficiaries of SSI are also Social Security beneficiaries. The two programs can be handled by the same administering agency at greatly reduced cost and greatly increased convenience for beneficiaries if they are kept together. So this should be done, even though one has to recognize that administering these two programs in the same agency has created some public confusion, and I must say also, at least in the beginning, some confusion on the part of the staff in the Social Security Administration. The SSI program is paid for entirely out of general revenues and is a direct welfare program. Everybody needs to understand that. The reason for having the two together are for the convenience of the public and for administrative savings to the government. They are philosophically and financially very distinct programs.

At the same time there is no reason for Social Security to be involved once more in the AFDC program. AFDC is a state-administered program and there is no significant beneficiary overlap with Social Security or SSI.

The bill leaves AFDC in the Department as I believe it should. When I was Commissioner of Social Security I was at first responsible for the AFDC program and the Old-Age Assistance program, the predecessor program to SSI, and several smaller programs, as well as Old-Age, Survivors and Disability Insurance, but except for broad research and legislative issues there were almost no situations in which there was any need to consider policy in OASDI at the same time one considered policy in the other programs. They were just completely separate operations and almost entirely separate policy entities. I had to turn my attention from one program to the other. You could not look at them together, and they got nothing out of being grouped together. The time spent in staff meetings by the heads of one agency listening to the problems of others could have been spent better in other ways.

I would, however, give the research arm of the new Social Security Board a mandate to pursue research in the whole area of economic security. It is not desirable, in my view, to restrict the research mandate as narrowly as the bill does. In social insurance, over the years, one of the most important research questions in the provision of economic security has been the relationship of social insurance to welfare, on the one hand, and private activities on the other hand. I would use language similar to that in the present Social Security Act in describing the research function of the new agency. If there is some degree of overlap with other agencies in the research area, it can be worked out informally without restricting the mandate by statute. In research there is always more to do than there is money to do it.

I believe the relationship of the new Social Security Board to the Executive Office of the President, particularly the Office of Management and Budget should be similar to any Cabinet department. I do not argue that the independence of a Social Security Board should remove it from the ordinary oversight of the President and his control agencies. Legislative proposals, for example, should be made by the President. However, in certain respects Social Security is large enough to conduct its own service activities and to do so more efficiently. For example, I would certainly grant the new Social Security Board very strong delegations in the personnel area to determine its own recruitment policies and classification work, and I note that the bill provides for this on a demonstration basis. I believe, on the whole, Social Security could do a better job in space management and space procurement than working through the General Services Administration. It should certainly have its own General Counsel, as the bill provides, but such Counsel should have the same relation to the Justice Department as any other Department of government would have when it came to dealing with the courts.

The object here is not to set up an entity with the same degree of independence, say, as the Federal Reserve Board which operates very largely outside the President's control in almost all respects. The object here is to secure a combination of administrative efficiency and to demonstrate an objectivity of administration and a trusteeship of established rights that is called for by long-range commitments. These goals by no means require the elimination of the oversight function of OMB and the other control agencies of the President.

There is really no logical basis for the present grouping of programs in the Department of Health and Human Services. The relationship of Social Security to other agencies within HHS is not very close. In fact, Social Security's relationship with other government departments is frequently much closer. For example, Social Security must closely coordinate its coverage decisions and its work with the Internal Revenue Service which has responsibility for collecting Social Security taxes. I can think of very little of any importance that Social Security has in common with the other agencies grouped within the Department of Health and Human Services. Mr. Chairman, there is just one point in the bill, in addition to the point on research, that gives me pause. Those who advocate an independent agency under the direction of a single individual rest their case to a considerable extent on the possibility of overlapping functions between the Board and an administrator. They argue that distinctions between policy and administration are not clear enough to keep the Chairman of the Board and the administrator out of each other's hair. They argue that getting agreement within a Board is inherently more difficult than the decision of one person, and that if you have both a Board and an administrator you compound the difficulty of responding quickly to administrative problems or in carrying out day-to-day operations. They make a good point. If all that was at issue was the efficiency of day-to-day operations, it is probably true that a single head would be a slightly better form of organization. But as I have tried to point out, there is much more at stake here than day-to-day operations. Still it is desirable to set up the Board organization so as to minimize any potential for conflict between the Board Chairman and executive director, the day-to-day operator.

The relationship that I envision is not too different from that of the Chairman of a board of a corporation or a non-profit organization and the chief executive officer. I would give the Board responsibility for selecting the tap administrator, as the bill does, but I would also give the Board the power to define the duties of the job and remove the top administrator in the unusual situation where they couldn't get along. I think there is the potential for a problem if the executive director with responsibility for operations has a set term and duties defined in statute that are separate from those of the Board. I think it ought to be made clear that the Board in all respects is the top authority that it is the Board that is responsible for the whole program in all its aspects and that they hire a chief executive officer to carry out their will. I would hope the legislation would put all responsibility in the Board and let them get the help they need to carry out the work.

This would not by any means result in frequent turn-over in the administrator any more than is the case in a corporation where the Board of Directors hires and fires the chief executive officer. A Board will not go to the trouble of selecting a top officer of the caliber needed for this job and then force him or her out without good reason. That just makes their life more difficult. I believe a Board will be very responsible in the selection of a person whose primary duties are administrative and will stick with him or her as long as that chief executive officer is doing a good job. But don't make it too difficult for them to replace that officer in the event that things don't go well.

Mr. Chairman, we in SOS fully support S. 216 and believe that its passage would make a major contribution over the long run to the smooth functioning of our Social Security system and to the restoration of complete confidence in the integrity of the program.

THE IMPORTANCE OF PROVIDING A STATEMENT OF ACCOUNT TO ALL PARTICIPANTS IN THE SOCIAL SECURITY SYSTEM

We in SOS also believe it would add significantly to public understanding of Social Security and to confidence in the program if each contributor regularly received a statement of his or her earnings and an estimate of the benefits payable. As you know, progress has been made toward this goal as computer capacity at Social Security has expanded, and such statements are now furnished on request. However, I do not believe this is enough. The government owes it to contributing workers to keep them up to date on the protection they have earned, in part, so that people can plan well ahead of time to provide supplementary retirement protection to the extent they feel they need it and to provide additional protection for their survivors and dependents in the event of death or disability. Equally important, I believe such statements would reassure people about the dependability of Social Security and also help them realize what important protection they are getting for the contributions they and their employers are making.

It is shocking that nearly 50 percent of the people in the country, according to the latest polls, do not have confidence that they will receive Social Security benefits as promised. I believe that the passage of S. 1079 would help immeasurably to improve

contributor confidence in the program. As it is now, people contribute to Social Security year after year after year and never hear anything back. They must wonder what happens to their money!

We believe also that there is a tendency to very substantially undervalue the amount of protection Social Security provides; estimates of protection earned by the individual worker is the best way to change this misperception. Probably most people realize that once Social Security benefits are awarded they are kept up to date with increases in the cost of living, but probably not many realize that prior to the time benefits are awarded social Security protection is kept up to date automatically with increases in the level of living. I am doubtful that the majority of contributors have absorbed the fact that benefits automatically rise with wages-not just with prices—and that workers retiring 25 and 50 years from now will be awarded benefits equal to the same proportion of wages current at that time as workers retiring today receive as a proportion of today's wages. Dollar benefits will, of course, be much higher, but benefits will also be higher in real terms to the extent wage increases outpace price increases. It is not possible to get this story across without relating it to the individual's own situation; he or she needs to see concretely how much protection they are earning.

We have a good old-age, survivors and disability insurance program today and it is very popular, but understanding of the program is only about an inch deep and that makes it vulnerable to demagogic attacks.

I hope very much that S. 1079 passes quickly. I am only sorry it will take so long after passage to get the operation into full gear, but I assume the year 2000 is the first year the Social Security Administration thinks it can do the full job. I can understand why they want to be cautious, but maybe later this timetable can be speed

ed up.

I have carefully considered one objection that is sometimes made to furnishing estimates of retirement benefits to people who are still many years from retirement. The objection is that the estimate is bound to be off because earnings levels, which determine benefit amounts, will differ from the assumptions used in making the estimates, and people will be upset if their actual benefits turn out to be less than the estimate. There is some merit to this objection, but I believe the problem can be largely avoided by giving great emphasis in the statements to the fact that what is being furnished is only an estimate and that the actual benefit will differ from the estimate. I believe it would also be desirable to offer to make an estimate based on the worker's own assumptions as is done today. I believe sufficient safeguards can be included in the statement to keep the perceived problem to a minimum. It seems to me unless an estimate of future retirement benefits is furnished, the statement loses a great deal of its effectiveness.

Finally, one might raise the question why a bill is necessary. Why shouldn't Social Security just take the steps required by the bill on its own initiative? There is one very good reason: "money." Social Security staff will have been reduced by about 17,000 man years by the time the next budget cycle is completed. The Social Security Administration is scrambling to get the absolutely essential tasks done. It is important to have in law a definition of this new task in order to increase the likelihood that adequate resources will be provided to carry out the job. Even if an Administration is very sympathetic to the administrative needs of Social Security, which has not been the case in the recent past, it is very helpful in arguing with OMB about needed resources to have a statutory base for a workload. So it is of great importance to get these earning statements out, and it is of great importance to require it by statute.

Mr. Chairman, let me congratulate you on both of these bills. We believe their passage would make enormous contributions to the continued success of our Social Security system.

PREPARED STatement of JOSEPH F. DELFICO

Mr. Chairman and Members of the Subcommittee:

I am pleased to present our views on S. 216, a bill to make the Social Security Administration (SSA) an independent agency and S. 1079, a bill to require SSA to provide personal earnings and benefit statements to workers covered by Social Security.

S.216 would, among other things, create an independent Social Security Administration headed by a 3-member bipartisan board, establish a Beneficiary Ombudsman within SSA, and authorize SSA certain exemptions from the budget, personnel, and

administrative requirements of the Office of Management and Budget, Office of Personnel Management, and General Services Administration.

Few goals are more important than those embodied in this legislation-to increase public confidence in Social Security-and we clearly support this goal. As we have stated previously in testimony before the douse Ways and Means Social Security Subcommittee, independence has merit to the extent it promotes the stability and quality of leadership at SSA. It should be noted, however, that if SSA becomes independent, it will lose cabinet-level sponsorship; this could affect its ability to effectively argue against budgetary cuts and assure its programs are effectively integrated with related programs. In addition, regardless whether SSA is an independent agency or not, it would still be subject to budgetary and policy reviews by both OMB and the President.

Since the National Commission on Social Security Reform advocated an independent SSA in 1981, many changes to the agency's operational environment have occurred which could affect the perceived need for independence. The financial crisis surrounding the title II trust funds has subsided; the threat of wholesale automated data processing (ADP) systems failures has been reduced; and our extensive work to identify SSA's management weaknesses, reported on in March 1987, has, we feel, provided a blueprint for management improvement. In response to our work and their own initiatives, SSA's current leadership embarked on an extensive set of management and public service improvements that are already paying dividends. Our work showed that most of SSA's longstanding problems were caused by the lack of strong, stable leadership; adequate management processes; and sharply focused and consistent priorities. Corrections of most of these problems, in our view, can occur whether SSA is independent or continues to be part of HHS.

STRONG AND STABLE LEADERSHIP FOR SSA

Under S. 216, the leadership of SSA is invested in a three-member board which would be assisted by an executive director to direct operations. The board structure as envisioned in this legislation would have the advantage of helping to improve policy development activities within SSA. However, our work has convinced us that the board structure has significant operational and management weaknesses.

It is our conviction that strong, stable and focused leadership is essential for sustained action in solving SSA's management and operational problems, particularly as the agency starts addressing the technological, social, and demographic challenges of the 21st century. Many of SSA's problems have been exacerbated by the fact that since 1973, SSA has had 10 commissioners or acting commissioners and has experienced at least five major reorganizations causing many redirections in operating policy, ADP modernization, and associated staff morale problems.

We testified in April of this year that we believe the most effective form of leadership would be a single administrator with a fixed term of office. Our work has shown that boards are not as effective as single administrators for managing an agency like SSA. Over the years, we compared the board structure with that of a single administrator for several Federal agencies, including the Nuclear Regulatory Commission, the Federal Communications Commission, and the Consumer Product Safety Commission. We concluded that those agencies would have been more effectively managed by a single administrator. Some of the basic assumptions about a board structure-stability, insulation from political and economic pressures, and diversity of viewpoints—have not been borne out in practice. Furthermore, we found that the performance of these organizations suffered because of (1) untimely decisions, (2) a tendency by board members to micromanage the daily operations of the agency, and (3) diffused accountability. We also found that administrative matters distracted board members from policy making and other substantive decision making the primary purpose of and principal justifications for the board structure of leadership.

There is other evidence which suggests that boards are not as effective as single administrators. Studies, such as those by the Hoover Commission, the Ash Council, and the Railroad Retirement Commission, have recommended changes to improve board run agencies or found little value in the board leadership of agencies and have advocated their abolition. Additional details on these studies are in appendix I to this statement.

Given the problems SSA has experienced in its operations and the frequent need for direct, swift, and clear management action, we do not believe that it should have a leadership structure that could result in diffused and sometimes confusing direction over its operations. The best leadership structure for an independent SSA would be a strong single Administrator as head of the agency, appointed for an 8year, fixed term and assisted by an advisory board for policy matters.