The CHAIRMAN. Senator Hansen missed his turn.

REDUCTION IN FEDERAL MATCHING FOR SKILLED NURSING CARE

Senator HANSEN. Thank you very much, Mr. Chairman. First of all, I would like to ask for inclusion in the record of a letter I have from the Governor of Wyoming, Stanley Hathaway, which addresses itself to the same question, the reduction in Federal matching funds for skilled nursing care that was brought out by Senator Curtis in placing in the record a telegram from the Governor of the State of Nebraska. This letter is quite identical to that telegram from the Governor of Nebraska.

(The letter referred to follows:)

Hon. CLIFFORD P. HANSEN,

Sena e Office Building, Washington, D.C.

STATE OF WYOMING, EXECUTIVE DEPARTMENT, Cheyenne, June 15, 1970.

DEAR CLIFF: H.R. 17550, which has been passed by the House of Representatives, reduces by thirty percent the matching for Skilled Nursing Care under Title XIX after the first three months utilization in a year. If this bill passes the Senate it will be devastating to Wyoming's Title XIX program and will force a financial burden upon us that we will not be able to handle.

I realize that the cost of Title XIX to the federal government is great. It has also been very burdensome to the states, and it seems manifestly unfair at this point to be shifting more of the financial burden from the federal government to the states. Anything that you may be able to do to prevent this from happening will be greatly appreciated.

Sincerely yours,

STAN HATHAWAY, Governor.

ACTUARIAL SOUNDNESS OF H.R. 17550

Senator HANSEN. If I understand correctly, Mr. Secretary, it is my impression that the figures we have used, the balances that you project, would result from the House bill which, as I understand from your testimony, would account for a $7 billion balance for the year 1971-I refer to page 24 of your testimony-about $8 billion in 1972 and around $12.5 billion in 1973. I think you propose that rather than follow the schedules in the House bill, you would like to change that so as to bring about balances of $1.6 billion for 1971, $2.1 billion in 1972, and $3.3 billion in 1973.

It is my further understanding

Secretary RICHARDSON. Before you go on, Senator, I would like to correct just one thing. The references to the balances, $7 billion in 1971, $8 billion in 1972, and $12.5 billion in 1973, are projections based not on the House bill but on the present law.

Senator HANSEN. On the present law, I should have said. I meant to say that. Thank you for your correction.

I understand further that in response to the questions raised by the distinguished Senator from Delaware, Mr. Williams, instead of approaching this problem as an insurance company might in trying to come up with a proposal that is actuarially sound, it is the determination of the Department that we approach it rather on a payas-you-go basis so that we are not thinking about the contribution that an individual taxpayer may make and what he may eventually

take out of the program so much as we are thinking in terms of what the input on the basis of current contributions is and what the costs are. Am I right about that?

Secretary RICHARDSON. I think, Senator, that a rather important matter of terminology is involved here. I think that a basic distinction must be made between the actuarial soundness of the social security system on the one hand and the size of the accumulated reserve on the other.

Now, it is true, of course, that the social security system does not maintain, or is not required to maintain, the relative size of reserves that would be required for a private insurance company. The reason for this, of course, is simply that the financing of the social security system is made possible through the tax contributions of employees, employers, and the self-employed, and since the Congress can require that these be raised, it is not necessary that very large reserves be accumulated. But let me add that the trust fund in effect serves to eliminate the necessity for fluctuations in tax rates, so that the rates can be stable or built up at projected intervals over a long period. At the same time, the system is actuarily sound in the sense that the scheduled tax rates and rate increases are sufficient over time to meet the costs of aggregate projected benefit payments for the number of retired individuals and other beneficiaries at given foreseeable times. And I think it is fair to say that the Congress itself, this committee and the Ways and Means Committee in particular, with the periodic advice of the advisory committees like the one now deliberating, have contributed to maintaining the actuarial soundness of the system. So I do not think we should blur the question of how big it is desirable to have the trust funds at a given time with the question of the actuarial soundness of the system insofar as the scheduled tax rates are sufficient to make the system fully self-financing.

Senator HANSEN. In that regard, Mr. Secretary, as I understand it, benefit increases would be adjusted upward as prices rise. Additional revenue generated by the automatic adjustment of the wage base, however, is tied to the changes in earnings. Now, with the presently deteriorating conditions in the economy, is it not likely that program outgo may begin to exceed income to finance benefits? I have in mind, of course, obviously that prices rise faster than general earnings. That means benefits increase faster than wage base during acute inflation?

Secretary RICHARDSON. That is possible, Senator, over the short run. On the other hand, the automatic provisions do rest at the same time on the experience of the past 20 years or so, in which, wages have tended to rise faster than prices. And if that trend were to be maintained over the next foreseeable period, then the projected automatic increase would be adequately financed by the increase in the wage base.

EFFECTS OF A DOWNTURN IN THE ECONOMY ON THE ACTUARIAL SOUNDNESS OF H.R. 17550

Senator HANSEN. Unemployment, I understand, is now around 5 percent, and despite the predictions that we have rounded the corner, and I hope those are right, so far, a lot of indexes would indicate that the economy is still deteriorating. If unemployment continues,

does this not have serious potential effects for the social security system? Prices continue to skyrocket, so benefits under your proposal would rise also. Yet with rising unemployment, tax revenue will drop. What do we do then? Do we raise taxes again, or what do you propose? Secretary RICHARDSON. I think it should be noted, Senator, that the last figure I saw on current unemployment, which were, as you say, around 5 percent, also showed that the average duration of unemployment was something like nine and a fraction weeks.

Senator HANSEN. Shorter than it has been, you mean?

Secretary RICHARDSON. Well, it is shorter than it was, for example, in the downturn of the economy in 1958, when we had a real problem of prolonged unemployment. So that what we have in this interval is an increase in the number of unemployed at a given time, but not a very significant number of people who are out of work for prolonged periods. I do not have any estimate on what the effect may be. Perhaps Mr. Ball knows to what extent projected employment levels have already been incorporated into the projected gross revenues of the system.

Mr. BALL. Mr. Secretary and Senator Hansen, I think what the Secretary said in relation to your first question is the most significant point. That is, it is quite true that if the relation of wages to prices of the immediate present and the last 2 or 3 years were to continue, then the device that we propose for financing the automatic provision could not be sustained over the long run. But I really do not believe that it is reasonable to think of the American economy not returning to a situation in which productivity of labor is again on the increase which, of course, would result in wages rising faster than prices.

As long as the system is set up so that it can sustain short periods of difficulty of this kind—and the reason for the trust fund setup is really that you not have to raise rates for a temporary period--with the estimates being made for a 75-year period, we feel that, on the basis of the past performance of the American economy and its expected performance, this would be a sound position.

Senator HANSEN. Well, I cherish the hope that your anticipation of balance will be justified. I must admit to some concern, though, as I reflect on the typical state of mind of taxpayers under the unified budget which we have. It is my understanding that the Federal budget, while badly in a state of imbalance, is not reflected in an imbalance in the unified budget. So the reaction that might be expected from most of the people is not experienced simply because we are euphorically led to believe that the economy is in balance when, in fact, it truly is not in balance. This, of course, is something which we have inherited from the previous administration, and the determination which would go into the unified budget. But is there not reason to believe that we may be generating those conditions which will continue the present imbalance, the stresses that you speak of and are certain that we now have, into the future?

Secretary RICHARDSON. Just let me add a supplement to Mr. Ball's answer and my own earlier answer with respect to the effect of employment levels. The long-term projections on which the calculations for the financing of the system are based assume a 4-percent level of unemployment. This would mean, therefore, that a 5-percent level of

47-530 - 70-9

unemployment would reduce expected contributions into the system during the period very slightly below the projections. And, of course, that would be offset if you had in the future, say, 3-percent unemployment in any year. In any case, the effect from year to year over time is quite small. And it is, of course, this very reason why we have the trust funds. Even the rates that are now in the bill would still bring about progressive increase in the trust funds. So, if you had a 5-percent unemployment rate over the years, instead of a 4-percent rate, you would then have marginally slower increase in the fund.

The second point you made was with respect to the reflection of the intake and outgo from the trust funds under the withholding taxes of the social security system in the Federal budget. A question of judgment was raised as to how to affect this in the budget. This has been a subject of argument over a great many years. I have really no independent view of the desirability of various alternative approaches for Federal fiscal purposes. The theory of the approach now used, I believe, is that if you are looking at Federal expenditures in light of their impact on the economy, whether inflationary, deflationary, stimulating growth, or otherwise, it is important to take into account the very significant economic impact of the social security contribution by workers and social security benefit payments.

I think it would be very unfortunate if the inclusion of the social security intake and outgo came to be manipulated to achieve short term budgetary impact. The Congress and the Administration should continue to look at the funding of the system, as they have since its inception, on a basis of assuring the integrity of the system and the responsibility of the Government to its beneficiaries.

Senator HANSEN. Mr. Chairman, my time has expired. Just let me conclude by saying that there are some wide divergences of opinion as we contemplate what may happen in the next 75 years. There are those who say we will have worlds of money and there are those who say we will be worse than broke.

I do want to compliment the Secretary for his very able presentation here this morning.

Thank you.

Secretary RICHARDSON. Thank you. Senator.

The CHAIRMAN. Let me compliment you, too, Mr. Secretary, on behalf of the committee for the very fine responses you have made to the many questions asked by the committee. In the short time that you have been in this job, we can see that you are very well aware of what your duties and responsibilities are and you have brought yourself up to date with what has happened since you were with the Department some years ago. So we are very pleased to see that you have applied yourself diligently to this vast program that you have the responsibility for administering and you seem to be right on top of your job.

We will look forward to seeing you tomorrow at 10 o'clock.

(Whereupon, at 12:35 p.m., the committee was adjourned until Wednesday, July 15, 1970, at 10 a m.)

SOCIAL SECURITY AMENDMENTS OF 1970

WEDNESDAY, JULY 15, 1970

U.S. SENATE, COMMITTEE ON FINANCE, Washington, D.C.

The committee met, pursuant to recess, at 10:05 a.m., in room 2221, New Senate Office Building, Senator Russell B. Long (chairman) presiding.

Present: Senators Long, Anderson, Talmadge, Fulbright, Byrd, Jr., of Virginia, Williams of Delaware, Bennett, Curtis, Jordan of Idaho, Hansen, and Fannin.

SENATOR RUSSELL B. LONG'S DRUG AMENDMENT

The CHAIRMAN. The hearing will come to order.

Mr. Veneman, I understand why the Secretary is not able to be here at this moment. I asked him to undertake to determine the Department's position with regard to a proposal that I have suggested for reducing the cost of drugs under the medicaid proposal. Is the Department's position fixed on that as of now?

STATEMENT OF HON. JOHN G. VENEMAN, UNDER SECRETARY OF THE DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE; ACCOMPANIED BY HOWARD N. NEWMAN, COMMISSIONER, MEDICAL SERVICES ADMINISTRATION; ROBERT M. BALL, COMMISSIONER OF SOCIAL SECURITY; THOMAS M. TIERNEY, DIRECTOR, BUREAU OF HEALTH INSURANCE; AND IRWIN WOLKSTEIN, ASSISTANT BUREAU DIRECTOR, DIVISION OF POLICY AND STANDARDS, BUREAU OF HEALTH INSURANCE, HEW

Mr. VENEMAN. Mr. Chairman, the Department's position per se is not fixed on that matter. However, we do concede in the figures that you submitted yesterday that when we compare apples to apples, the $7.7 million that you suggested as administrative costs would be accurate. The somewhat over $100 million figure was on the assumption that the testing would be done by the Federal Government. În talking with staff today, it is my understanding that your measure proposed that this kind of testing be done by the industry. So actually on the administrative cost of the program, as you suggested, we are not too far apart. We are waiting for the completion of the drug reviews, which should be completed next year.