1 Income is defined, solely for purposes of presenting distributional information, as adjusted gross income (AGI) plus untaxed income from: (1) untaxed social security benefits; (2) tax-exempt interest; (3) employer contributions for health plans and life insurance; (4) inside build-up on life insurance; (5) workers compensation; (6) contributions to IRA and Keogh accounts; (7) minimum tax preferences; and (8) portion of passive losses in excess of minimum tax preferences to the extent the losses are allowed in the computations of AGI.

2 Computed at average tax liability per return in income class.

IV. DESCRIPTION OF POSSIBLE PREMIUM OPTIONS

In light of the revision of the budget estimate relating to the Medicare catastrophic program, various options for changes to that program have been proposed.

A. RETAIN PRESENT LAW

Many argue that it would be inappropriate to make significant modifications in the catastrophic Program because the Act only became effective in 1989. In fact, certain benefits are not yet in effect under the program. Therefore, these individuals argue that there has not been sufficient experience in order to evaluate accurately the costs related to the program. Given the uncertainty associated with estimating the cost of future medical benefits, these individuals argue that it is inappropriate to reduce any available funds that might be needed in the future. In addition, any reserves in the program accumulated in early years may be used to limit the increase in future premium rates.

In general

B. REDUCE THE MONTHLY OR SUPPLEMENTAL PREMIUM

Some individuals argue that the premium for catastrophic coverage should be reduced because more revenue is projected than is needed to fund the benefits provided under the program. If this approach were adopted, the monthly or supplemental premium, or both, could be reduced.

Several options are available to reduce the supplemental premium.7 The options for such a reduction include: (1) reducing the maximum amount of premium that an individual may be charged; (2) reducing the premium rate that is applied to each $150 of income tax liability, and (3) increasing the minimum amount of income tax liability before which any supplemental premium is due. In addition, a combination of one or more of the these options might be adopted. Any reduction could be made solely with respect to premiums paid for 1989 or for future years as well.

Reduce cap on maximum supplemental premium

The maximum amount of supplemental premium ($800 for 1989) for an individual could be reduced. Adoption of this approach would benefit only those individuals who otherwise would pay more than the revised maximum supplemental premium. In general, these individuals are those with higher incomes.

Reduce the premium rate

Under present law, the supplemental premium for 1989 is $22.50 for each $150 in income tax liability (i.e., a 15-percent tax on income tax liability). The premium rate is increased for future years. The percentage rate of the supplemental premium could be reduced. Adoption of this approach generally spreads the savings that is achieved through the premium reduction to persons in all income classes. Except for those at the maximum premium level, the effect of this option is to reduce the amount of premium proportionally to the amount that is paid under present law. Increase the tax liability threshold

Under present law, in order to be liable for the supplemental premium, individuals must have at least $150 in income tax liability. However, eligible individuals are covered without regard to whether or not they meet this $150 threshold. Under this option, the threshold could be raised so that more low-income individuals would not be liable for the supplemental premium. Further, the calculation of the premium could be changed so that only tax liability in excess of the threshold would be subject to the supplemental premium.

If there were no change in the method by which the premium is calculated (i.e., each $150 of tax liability for those with tax liability in excess of the threshold continues to be subject to the premium), then the savings from an increased threshold would be realized by those who would be below the new threshold. If the calculation were changed so that the premium applies only to the tax liability in excess of the

7 This discussion assumes that, in general, the present structure for calculating the supplemental premium is retained.

threshold (e.g., income tax liability above the new threshold is subject to the premium), then an increase in the threshold would reduce supplemental premium payments by-equal dollar amounts to all individuals paying the premium except for those below the threshold and those who are currently at the maximum premium level.

C. REPEAL THE SUPPLEMENTAL PREMIUM

One proposal would repeal the supplemental premium and replace it with some other financing mechanism, such as a broad-based tax. Proponents of this view argue that it is unfair for high-income beneficiaries to subsidize those beneficiaries with low incomes. They contend that if a subsidy for lower-income beneficiaries of the catastrophic program is to be provided, then it should be financed by all taxpayers, not just by those individuals with higher incomes who are eligible for catastrophic benefits.

Those who support the supplemental premium argue that the premium is an appropriate method for funding the catastrophic coverage because only the potential beneficiaries of the program are required to pay for catastrophic coverage. Overall, every individual enrolled in Medicare will continue to receive a subsidy from general revenues and payroll taxes. Individuals who support this view argue that the income-related supplemental premium provides for an equitable distribution of the cost of the program.

D. REPEAL THE MEDICARE CATASTROPHIC PROGRAM

One option that has been proposed is to repeal both the coverage provided under the Medicare catastrophic program and the funding mechanism that was contained in the Act. Some argue that the costs imposed by the monthly and supplemental premiums exceed, for certain individuals, any possible benefit they may receive from the Medicare catastrophic and drug coverage. They argue, therefore, that the program should be repealed.

Other individuals point out that many of those covered receive substantial benefits under the Act and that all individuals eligible for Medicare will, on average, receive a benefit package that is subsidized by general revenues and payroll taxes. They argue that all individuals receive Medicare benefits in excess of what they pay in premiums, and that good social policy requires that such individuals be protected from the financial hazards of large medical expenses.

APPENDIX: METHOD FOR DERIVING DISTRIBUTIONAL TABLES

The staff of the Joint Committee on Taxation prepared the distributional tables on the amount of supplemental premium paid by Medicare enrollees. The distributions are prepared with the use of the individual tax model that is used for calculating changes in tax liability associated with proposed changes in the Federal individual income tax. The individual tax model utilizes a very large sample of actual individual tax returns collected by the Internal Revenue Service (IRS). To supplement the IRS data, demographic and economic information is included from a variety of sources including the Bureau of the Census and the Social Security Administration. The model is weighted to reflect the total projected population of potential taxpayers and is modified to be consistent with the most recent Congressional Budget Office economic forecasts.

Tax liability, as well as the supplemental premium, is calculated for each tax filing unit in the model. For each year analyzed, the calculation of tax liability and supplemental premium is performed using the relevant rates, brackets, and definition of taxable income, consistent with prevailing law for that year.

Tables 5 and 6 present estimates of the average supplemental premium per enrollee, per month. The estimates are based on the average tax liability within an income category using the definition of income normally employed for distributional analyses.

The income concept used is broader than adjusted gross income and is designed to more accurately reflect the flow of economic income available to the taxpayer. It is defined as adjusted gross income (AGI) plus untaxed income from: (1) untaxed social security benefits; (2) tax-exempt interest; (3) employer contributions for health plans and life insurance; (4) inside build-up on life insurance; (5) workers' compensation; (6) contributions to IRA and Keogh accounts; (7) minimum tax preferences; and (8) the portion of passive losses in excess of minimum tax preferences to the extent the losses are allowed in the computation of AGI. Of course, the calculation of tax liability, and therefore the supplemental premium, is based on taxable income, and is in

no way dependent on the measure of income used as the classifier for distributional presentation.

PREPARED STATEMENT OF ROBERT J. MYERS

Mr. Chairman and Members of the Subcommittee; My name is Robert J. Myers. I served in various actuarial capacities with the Social Security Administration and its predecessor agencies from 1934 to 1970, being Chief Actuary the last 23 years. In 1979-81, I was a member of the National Commission on Social Security. In 1981-82, I was Deputy Commissioner of Social Security. Then in 1982-83, I was Executive Director of the National Commission on Social Security Reform. Currently, I am Chairman of the Commission on Railroad Retirement Reform.

The two bills introduced by the distinguished Chairman of this subcommittee are intended to improve public confidence in the viability of the Social Security program. I believe that they would most certainly do so. The first bill would remove the Social Security Administration from the Department of Health and Human Services and establish it as an independent agency that would be headed by a bipartisan board. The second bill would require that periodic statements be furnished to workers covered by the Social Security program to inform them about their earnings record and give estimates of potential retirement, disability, and survivor benefits. I shall discuss each bill in turn.

DISADVANTAGES OF PRESENT ADMINISTRATIVE STRUCTURE

The present location of the Social Security Administration as one component of the Department of Health and Human Services has a number of serious disadvantages and weaknesses. Similarly, the fact that the Medicare program has been separated from the Old-Age, Survivors, and Disability Insurance program from an administrative standpoint, and assigned to the Health Care Financing Administration, another component of HHS, also has serious disadvantages.

The current organizational structure produces an excessive number of layers of responsibility and authority for programs which represent such immense social and financial magnitude. The making of decisions is excessively slowed down by such layering of authority, including both that in HHS and that in the Office of Management and Budget. As a result, necessary and desirable action is often delayed so long as to be useless. An outstanding example of this is the infamous "notch" situation in the OASDI program, which could have been greatly alleviated by a feasible legislative change in 1981 (or even earlier), but never surfaced from the layers of review. This problem has been present for a number of years, in both Democratic and Republican administrations.

Another disadvantage of the present structure is that the district offices of the Social Security Administration have little responsibility in the area of Medicare, because it is primarily administered by HCFA. As a result, Medicare beneficiaries have no place where they can go to receive face-to-face information about the program.

Still another difficulty with the present subordinate position of SSA is that policy decisions of the OASDI program are often made for reasons other than program ones. In the past, some proposals have been put forth for general budgetary reasons, even though they were not good program changes.

PROPOSAL TO RESTRUCTURE THE SOCIAL SECURITY ADMINISTRATION

The bill that would restructure the Social Security Administration represents a significant step forward, and I support it strongly. An independent agency, the Social Security Board, with a bipartisan board heading it up would do much to restore confidence in the Social Security program.

It should be noted that confidence has been restored considerably since the low period in the early 1980s. An annual survey made by the American Council of Life Insurance shows that the proportion of respondents who were "not too confident" or "not at all confident" in the future of the Social Security system rose from 37% in 1975 to about 68% in 1982-84, but then decreased to 45% in 1988. This still leaves a long way to go until the level of confidence that the program deserves to have with the public is reached. This bill will certainly help to do so!

The bill does not bring the Medicare program under the jurisdiction of the new agency as I believe to be desirable because Social Security and Medicare are really parts of a single national social insurance program. Such action could well be taken

later, after experience has demonstrated that the general concept is valid and appropriate.

The concept of having the Social Security program administered by an independent agency is not new and untried in this country. Such basis was applicable for the first decade of operation of the system and was highly successful. In my opinion, change was made only for the reason that the organizational chart of the Federal Government would look neater. In 1981 the National Commission on Social Security recommended independent agency status for both the Social Security and Medicare programs. Again, in 1983, the National Commission on Social Security Reform recommended independent status for the Social Security Administration, and proposed that further study of the matter should be made. This was done by the Congressional Panel on Social Security Organization in 1984, which recommended independent agency status under bipartisan control.

I have one suggestion for a change in the bill. It is provided that the three members of the Board should be appointed to staggered 6-year terms, with no more than two members being of the same political party. This could, at times, result in the undesirable situation of the Board consisting of only one member of the same party as the President and two members of the other party. The result could be political controversy and contention over policy recommendations. I believe that the Chairperson should be appointed by the President, with a term of office that is the same as that of the President. The other two members of the Board would have staggered 6-year terms and would be of opposite political parties.

It is essential that the Board members should be chosen on a truly bipartisan basis. In some respects, this may be difficult to achieve for the one member who is not of the same political party as the President. I suggest that, in order to accomplish bipartisanship, the following procedure_should be adopted. The President should unilaterally appoint the Chairperson. The leaderships of the two political parties in the Congress should each submit a list of potential members to the President for selection of the other two members of the Board, followed by Senate confirmation.

A good precedent for this proposed organization of the Social Security Board is the Railroad Retirement Board, which has been successfully operating in this general manner for the last half century. The only difference is that the members of that board are not selected on a bipartisan basis, but rather the President appoints the Chairman, and then names one member from recommendations made by railroad employers and the remaining member from recommendations made by railroad-employee organizations.

PROPOSAL TO PROVIDE EARNINGS AND BENEFIT STATEMENTS AUTOMATICALLY

The bill that would provide statements of earnings and benefit estimates automatically, on a deferred, phasing-in basis, would also make a very desirable change, and I support it strongly. Such procedure will further develop confidence in the program by showing that it is well run and that significant benefits are available.

This procedure will build on the very successful beginning that the Social Security Administration has already made with its personal Earnings and Benefit Estimate Statements. That program began about a year ago and operates on the basis of requests from the insured persons. It may be noted that the National Commission on Social Security in 1981 recommended that this procedure should be adopted, initially on a "request" basis, and eventually automatically. Also, private pension plans are required to furnish complete benefit statements upon request, and many do so on an automatic basis.

I believe that an additional requirement for benefit projections should be introduced. The present statements have a serious weakness insofar as the projected retirement benefits are concerned. Such projections are properly expressed in terms of current (1989) dollars, but the assumption is made that real wages (i.e., the actual wages expressed in terms of current dollars) will increase by 1% per year (not compounded) until age 62 is attained. This results in showing benefit estimates that are unrealistically high for persons who are many years from retirement.

The remedy for this undesirable situation is to require that, if any assumption as to future increases in earnings is used, the statement must also show the underlying estimated earnings (in current dollars) in the year before assumed retirement. What is important to people is not the future benefits in terms of dollars, but rather the relationship between the benefit amount and the most recent earnings.

SUMMARY

Both of the bills would significantly improve the administration and public understanding of the Social Security program. This would increase confidence in the viability and role of the program.

PREPARED STATEMENT OF SENATOR DAVID PRYOR

Mr. Chairman, I commend you for holding this hearing on making Social Security an independent agency. This is a concept whose time has come and I appreciate this opportunity to testify before the subcommittee today.

Only recently, the Social Security Administration (SSA) was considered the flagship Federal agency for efficiency and quality of public service. Since then, SSA has lost its reputation for excellence, and problems continue to mount. A hearing I recently chaired of the special committee on aging revealed that SSA is attempting to shift much of its business to a badly overburdened and often inappropriate toll-free telephone system. Further, we uncovered that millions of Social Security numbers had been verified for private companies such as credit bureaus and banks-all in violation of the privacy act—and against previous SSA policy.

We must move rapidly to stop this trend toward a deteriorating quality of management. I therefore share your belief that one way to accomplish this is to make the SSA much more independent.

The bill you have introduced, S. 216, points the congress in the direction it should take: increasing the independence and improving the management of the Social Security Administration, which operates the most successful program in the history of our nation. As you know, I have sponsored similar legislation in the past and I would like to take this opportunity to ask that you add my me as a cosponsor of your bill.

Enactment of this long overdue legislation would greatly increase public confidence in Social Security because it will demonstrate to all Americans that this congress considers the program above the politics that change from administration to administration. Beyond the fact that SSA should be administered by high caliber public servants who have a strong commitment to their work and the people they serve, we must assure that the administrators of this important program are freed from unnecessary and inefficient political pressures.

Because the Social Security program is so large (representing 21 percent of Federal expenditures in fiscal year 1989) and so vital (39 million people receive benefits and 120 million pay Social Security taxes), it deserves to be administered by its own

agency.

Yet, while there is no question that we must insulate SSA from political concerns, we must also ensure that it remains accountable to the people-through its elected officials in the Congress and the Presidency. We must all remain mindful of this and the constitutional implications of our approaches to ensure independence.

Independence of the judicial appeals process within SSA must be a high priority. I believe, Mr. Chairman, that the finance committee should enhance procedural fairness in what has been an adjudicative nightmare over the last decade. In the early 1980s, we witnessed the wholesale benefit terminations of thousands of truly disabled Americans, and an assault by SSA on the independence of ALJ's who sought to correct such abuses.

No longer should ALJ's be subject to political pressure by bureaucrats at SSA who try to save program dollars at the expense of eligible beneficiaries. Administrative law judges must be free to make independent review of cases. The independence of the judicial process must be sacrosanct; I am prepared to reintroduce legislation I have proposed to accomplish that purpose and it is my hope that you will join with me in this effort.

Mr. Chairman, we must also ensure that beneficiaries remain at the forefront of agency concern. The proposal in S. 216 to establish a beneficiary ombudsman would go a long way toward accomplishing this end. I have proposed, in legislation introduced before the 98th and the 100th Congresses, that the beneficiary ombudsman have the benefit of advice from a citizens' advisory committee, composed of employers; employees and beneficiaries. I hope you will consider this concept as part of an independent agency approach.

Further, I consider it essential that the beneficiary ombudsman can testify directly before congress. They should be positioned to encourage the administration to give primary attention to beneficiary concerns.

Finally, Mr. Chairman, we must keep in mind that experts remain divided on how best to structure the leadership of an independent agency. This committee should