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Thursday, May 15, 2003
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
And Government Sponsored Enterprises
Committee on Financial Services,
Washington, D.C.

    The subcommittee met, pursuant to call, at 10:08 a.m., in Room 2128, Rayburn House Office Building, Hon. Richard Baker [chairman of the subcommittee] presiding.

    Present: Representatives Baker, Lucas of Oklahoma, Kelly, Ryun, Tiberi, Brown-Waite, Harris, Kanjorski, Inslee, Lucas of Kentucky, Clay, Baca, Emanuel and Scott.
    Chairman BAKER. [Presiding.] I would like to call this meeting of the Subcommittee on Capital Markets to order. This morning our purpose is to examine the subject of retirement security and what seniors do or do not know about the availability of retirement products in making their planning.
    As those of us who are baby boomers are realizing when we begin to retire, we present a unique problem to the country. There are more of us than any other model ever manufactured. We are going to live a longer time. We are going to demand higher levels of care and we are going to sue more. So we probably need to examine what the landscape will look like when this significant group of retirees begins to avail themselves of that opportunity.
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    Retirement security is very essential for everyone, but especially important for those who face it in the near term. It has taken particular urgency for 77 million baby boomers who will turn 60 by 2006. Traditionally, securing retirement income depended on three sources, from Social Security, income from an employer pension plan, and individual savings. Over the last decade, experts have begun to alter this strategy by adding medical insurance and even a fifth alternative, earnings from retirees' continued employment. As a result, a number of innovative products have been introduced in an attempt to fill seniors' changing needs.
    But few consumers know that private long-term care insurance has the potential to protect the policyholder and, equally important, the policyholder's family from the extraordinary costs of long-term care of nursing home care that is often not covered by government security programs. Few seniors are aware of how annuitization, the trading of assets for a guaranteed stream of payouts, can help guard against outliving the planned asset program. And it is necessary to increase consumer awareness of how long-term care, annuities and other financial products can fit with a sound retirement strategy. That is the reason why we are here this morning, is to first gain understanding, but secondly look at the regulatory oversight of the current State structures and to examine whether or not any actions are required by Congress to assure seniors of long-term income stability with adequate planning.
    To that end, I welcome all our witnesses here this morning, and recognize Mr. Kanjorski for any opening statement he may choose.
    Mr. KANJORSKI. Mr. Chairman, today we will explore the issues that individuals should consider as they plan for retirement. Because investor protection and financial literacy are top priorities for my work on this panel, I am therefore very pleased that we are meeting to examine matters like annuities, life insurance and long-term care insurance, among others.
    The aging of the American population has made retirement planning an issue of increasing concern for our nation's policymakers and we should review a number of trends before hearing from the witnesses. Today, 12.4 percent of the population is 65 years of age or older. By 2025, according to Census Bureau projections, this statistic will rise to 18.5 percent. Moreover, over the next 30 years as baby boomers reach retirement age, America's elderly population will likely double, rising from 35 million to nearly 75 million. Life expectancy rates also continue to increase. Someone who lives to age 65 can now expect to live an additional 18 years, up from an extra 13 years in 1940. Although Americans are living longer than ever before, many are retiring earlier. For many of these individuals, retirement will last 20 or 30 years or even longer.
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    In light of these trends, individuals must plan prudently and early in order to ensure a secure retirement with a steady stream of income to cover expenses. While retirement planning is important for everyone, it is especially important for women. Women, after all, generally live longer and with less income when compared to men. For many years, we have described retirement planning as a three-legged stool based on Social Security, employer-provided pensions and personal savings and investments. In reality, it consists of more than these three supports. Genuine retirement planning should also incorporate insurance products, including medical, long-term care and annuities. Experts also advise that really effective retirement preparations should include either a will or, if appropriate, an estate plan to protect one's loved ones.
    With more Americans living longer and retiring earlier, pensions and Social Security benefits will have to be paid over even longer periods of time. Personal savings and investments must also be stretched out. The troubles of the stock market over the last three years, however, has resulted unfortunately in significant declines in pension plans and retirement investments. Today, the sagging economy has produced an under-funding of pension plans of more than $300 billion. It also disturbs me that the retirement plan participation rates have recently dropped for full-time employees, standing at just 55.8 percent in 2001. Savings for retirement is just one step toward achieving financial security.
    I am therefore pleased that we are examining the issue of annuities. Annuities can help seniors to manage their savings so that they will not out-live their assets. In today's complex financial marketplace, we also need to ensure that individuals preparing for retirement understand the benefits of receiving a guaranteed stream of payouts via an annuity, instead of taking a lump-sum payment. As the American population continues to age, experts predict that the number of individuals requiring long-term care will greatly rise. At some point, one in five seniors will require nursing home care for at least a year. The costs of such care now average $55,000 annually, but by 2030, according to at least one estimate, these services could cost or $200,000. To reduce the burden on Medicare and Medicaid, we have worked in recent years to adopt policies aimed at encouraging individuals to purchase long-term care insurance. Today's hearing will help us to understand what else we can do through the private sector to meet this growing need.
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    Finally, Mr. Chairman, because we are talking about retirement planning, I feel it is important to raise the issue of Social Security. This program presently covers about 160 million workers, providing them with a safe, secure and steady stream of income in retirement. As a result of Social Security, the poverty rate among America's elderly has dropped dramatically, and without this vital retirement program the poverty rate among older women would increase from 12 percent to more than 50 percent. Social Security is a success. We should not tinker with this program with proposals to privatize the system. I will be particularly interested to hear what our witnesses have to say about this issue.
    Mr. Chairman, I want to thank you for bringing these matters to our attention. Retirement planning is an issue of utmost importance. I look forward to working with you on these endeavors.

    [The prepared statement of Hon. Paul E. Kanjorski can be found on page 39 in the appendix.]

    Chairman BAKER. Thank you, Mr. Kanjorski.
    Ms. Kelly?
    Mrs. KELLY. Thank you, Mr. Chairman. Good morning, and I thank you very much for holding this important hearing on retirement security. It is an issue that is of great concern to today's seniors and tomorrow's retirees.
    With tens of millions of baby boomers approaching retirement, the need to focus on proper planning and financial literacy continues to grow. The cornerstone of retirement security is the consumers' ability to anticipate their future financial needs and adjust their assets, using several diverse financial products, from investments and pension funds to life insurance policies and long-term care insurance, annuities and Social Security. As more sophisticated financial products are introduced to fill the evolving retirement needs of seniors, we need to ensure that consumers have a clear and objective base of information. The arrival of new and improved products for seniors is welcome, but it also comes with an additional responsibility that financial regulators keep pace with the changes in the marketplace to protect consumers.
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    Last year, my Subcommittee on Oversight and Investigations held a hearing on one product known as a viatical settlement, the practice of buying life insurance policies from the elderly or terminally ill at a discount, and then marketing them as investments. A properly conducted viatical transaction can be a benefit to all parties involved. Sick individuals can access much-needed cash to pay for medical expenses. Companies that sold the original policies receive premiums that are important to market stability, and investors and settlement companies who buy policies are able to make a return on their investment. Unfortunately, as we learned at that hearing, bad actors have taken advantage of these arrangements to create or buy phony policies and fraudulently bilk unsuspecting investors. While it is extremely unacceptable, it is no surprise, given the complex nature and inconsistent State of regulation of viaticals. The State regulation is inconsistent. I strongly believe that we have to address the lack of uniformity and regulatory gaps among the States in regulating life and viatical settlements that leave some citizens, particularly elderly Americans, at the risk of being defrauded.
    I thank the witnesses for appearing here today before the subcommittee and I look forward to hearing their testimony on these issues.
    Thank you, Mr. Chairman. I yield back.

    [The prepared statement of Hon. Sue W. Kelly can be found on page 41 in the appendix.]

    Chairman BAKER. Thank you, Ms. Kelly.
    Mr. Scott, do you have an opening statement?
    Mr. SCOTT. Thank you very much, Chairman Baker.
    Chairman Baker and Ranking Member Kanjorski, I want to thank you for holding this important hearing, and thank the witnesses for coming today regarding the retirement security for seniors. Of course, I want to also thank this distinguished panel of witnesses today for their testimony on this important subject.
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    This hearing is held at an opportune time, given that this past Sunday was Mother's Day. Of course, when you consider the average age of those of us on this committee, you can accurately say that many of our mothers are either retired or certainly close to retirement. We should honor them by taking a serious, serious look at retirement and security for seniors. My own mother just retired this past year.
    Of the many issues related to a secure retirement, two stand out in my mind. One is the exploding Federal deficits which threaten Social Security and Medicare. The other is the lack of basic savings among African Americans. These two concerns relate to traditional retirement planning, which includes Social Security benefits, employer pension plans, and individual savings and investments. Since future retirees cannot depend on Social Security or basic savings for retirement income, they must begin to consider additional financial planning tools. For example, promotion of financial literacy is of utmost importance. In that regard, I have introduced legislation which is entitled The Prevention of Predatory Lending Through Education Act, that uses financial literacy and a 1-800 number as tools to fight predatory lending, so that families can keep more of their money and invest it for their retirement use.
    In today's paper of the Washington Afro, there is a headline story that shows the timeliness of this hearing. If I may share the first paragraph, there is a picture of four elderly African American retired women. The headline is, ''The Victims Fight Back, Predatory Lender Pays Elderly Women $4.3 million.'' It starts out by simply saying, if I may add this into my record, ''It all started with a telephone call. Eugene Duncan says her husband Vincent was recovering from a stroke, confined to a wheelchair, when a representative from a company called First Government Mortgage made an unsolicited offer for a secondary mortgage loan. The representative then came to the elderly retired couple's home and smooth-talked them into signing a loan application. Then without their knowledge or consent, according to court documents, he prepared fictitious documents that helped them to get the loan. The couple got the loan, but between the high interest rates and payments they could not afford, they almost lost their home,'' this pattern of predatory lending targeting the elderly and the retired.
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    That is why I am so excited to work on this committee in such a bipartisan way with my colleagues in addressing the needs for our retirees. I will work with the committee to discuss ways to increase basic savings and investment rates through financial education and predatory lending.
    I just want to take this opportunity, Mr. Chairman, to thank you personally for your encouragement for us in support of this effort; certainly, Chairman Ney, Chairman Oxley and our Ranking Member, Representative Frank, for addressing this very, very important issue as we approach ways to help our seniors to save their money and live more productive lives.
    Thank you.
    Chairman BAKER. Thank you, Mr. Scott.
    Mr. Lucas? Ms. Harris?
    Ms. HARRIS. Thank you, Mr. Chairman. Thanks for holding this very important hearing, and I wanted to thank all the members of the distinguished panel for their testimony today.
    As Congress debates how we can most effectively revitalize our nation's economy, we must address the concerns of the people who built our prosperity in the first place, our seniors. We cannot truly restore economic security without bolstering Social Security as well. We must all have the same goal, both the Federal and the State level, to protect and help our seniors. In recent years, our seniors have borne the consequences of the greed of corporate executives who rocked markets and robbed shareholders, suffering through undeserved sleepless nights after a lifetime of hard work, saving and thrift.
    Moreover, they have endured the continued uncertainties surrounding whether we will keep our nation's moral obligation to protect Social Security, strengthen Medicare and provide a prescription drug benefit. While we address issues that impact today's seniors, we must also plan for the retirement of tomorrow's seniors. During the next decade, 77 million baby boomers will reach the age of retirement, thus we must marshal the resources, creativity and courage to address an array of challenges. While a large part of this effort involves the development and the refinement of policies and programs, we still must focus a significant portion of our energies upon helping our seniors understand their rights and choices in today's financial services marketplace. I look forward to our continued consideration of this critical matter.
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    Thank you, Mr. Chairman.
    Chairman BAKER. Thank you, Ms. Harris.
    Mr. Baca?
    Mr. BACA. Thank you very much, Mr. Chairman. I am glad to be here and to hear the panelists discuss what is very important to us in terms of retirement Social Security for our seniors and for our future, not only as we look at the seniors, but the baby boomers looking at the long effects, too, as well, because many of our seniors are on fixed income, and we have to look in terms of long-range. What is actually going to happen? What kind of retirement plan are they going to have? What are they relying on in reference to Social Security? Where is their income coming from? And especially as we look at Hispanics, Social Security is made up 75 percent of their annual income, especially for retirement for Hispanics, so they rely on Social Security, compared to 63 percent of other retirees.
    I am very much concerned about the effect Social Security will have and what the president's Social Security privatization plan will have on the Hispanic community and impact, so we are very much concerned there. And also as we look at Social Security, we have to look at health insurance, what are the affects it is going to have on future plans for the ability to pay for health insurance, prescription drugs, and then the ability to save plans, too, as well.
    So hopefully the panelists will begin to look at the overall generic. As we look at the diversity within our communities right now, we are seeing many individuals that will be retiring and would like to retire. We want to make sure that they are protected and their pension plans will be there. And then if there is privatization, what affects will it have on our seniors in the long run, too, as well; what affects will it have on Medicare and the ability to have health coverage. Many of our seniors right now, when we look at Social Security as their only form of income, if in fact they have any kind of medical problems they end up losing their homes because they do not have the income to provide, they do not have the insurance to provide, they do not have the planning to survive, and they do not have the pension plans that is in place too, as well.
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    So I am very much concerned with hopefully coming up with some kind of a Social Security pension plan that will safeguard them now and in the future, and also protecting out baby boomers that will be following into this category. That is all of us here right now and those future ones to come too, as well. Hopefully, the deficit will not be on them or anybody else, based on what we are proposing even right now through the president's tax initiative that he has just passed.
    Thank you very much, Mr. Chairman.
    Chairman BAKER. Thank you, sir.
    Mr. Ken Lucas?
    Mr. LUCAS OF KENTUCKY. Thank you, Mr. Chairman. I will be brief.
    In my prior life before coming to Congress, I spent 32 years as a financial planner and a CLU and a ChFC. I was surprised that there are not that many of us up here with that background. Again, we spent a lot of time preserving people's net worth and protecting their retirement assets. I look forward to hearing your testimony today.
    Thank you.
    Chairman BAKER. Thank you very much, Mr. Lucas.
    I would certainly like to welcome our witnesses to this hearing this morning. I look forward to your insights and perspectives. I certainly want to welcome our first witness. I think for the purposes of introductions, I would yield to Mr. Lucas for appropriate comment.
    Mr. LUCAS OF OKLAHOMA. Thank you, Mr. Chairman. I appreciate that yield.
    Nine years ago this week, I was elected in a special election to serve in this fine body. At that time, as I worked my way up and down one-third of the State in the old Sixth Congressional District, then-citizen Keating was working all over the entire State in preparation for a run for governor that fall. And much, I suppose, to the chagrin of a lot of people back home, not only did I get reelected that fall, but so did Governor Keating, a fellow who in his eight years as governor not only accomplished something that is rarely done in Oklahoma, and that is to be reelected governor, but he stewarded us through some very, very difficult times, both man-made, in essence, and by mother nature. His leadership helped propel, I think, Oklahoma rather dramatically along in a progressive way towards both economic and political reform. His career there could best be summarized as enabling, I think, my fellow Oklahomans, his fellow Oklahomans, the opportunity to better live up to their potential.
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    So I am particularly pleased, Mr. Chairman, that in his role now as president and CEO of the American Council of Life Insurers, he is here today to testify before us again, I suspect with a focus on how to enhance the quality of life for all of our fellow Americans.
    Thank you, Mr. Chairman, and thank you, Governor Keating, for being here today.
    Chairman BAKER. Thank you, Mr. Lucas.
    Welcome, Governor Keating. We are pleased to have you here this morning.


    Mr. KEATING. Mr. Chairman and members of the subcommittee, after Congressman Lucas' very kind and undeserved introduction, I think I will not say another word.
    I have a formal statement that I have submitted for the record. I would appreciate the committee at their leisure to examine that statement, because some of the things in there I think are very important. First off, as a citizen, I want to thank Chairman Baker and the members of the subcommittee, for examining these issues. As the ranking member said and as the other members of this subcommittee have pointed out, this is a very serious business.
    As an older baby boomer, those of us between the ages of 55 and 64, unfortunately most of us do not have enough money to retire on. That is a demographic time bomb which is ready to go off. The average cash assets of the older baby boomer is $47,000. If you add in a house and if you add in retirement assets, maybe, maybe $100,000, which at $40,000 a year is a couple of years of income. If you consider a point and a half in interest, that is not a significant income as a companion income to Social Security.
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    So as Congressman Scott mentioned, the importance of retirement planning; the importance of the state-regulated industry which I represent, the life insurance industry, and members of Congress, and the private sector working together to sensitize people to the important of retirement security and retirement planning is extremely significant. As Congressman Kanjorski noted, the cost of nursing home today alone is $55,000 a year. The cost of having someone come to your home if you do not have a meals-on-wheels program, but to come to your home and attend to your needs just on an ad hoc basis is some $16,000 per year. The fact of the matter is, for the first time ever, financial magazines and newspapers are beginning to speak in terms of people outliving their assets. This is remarkable, the fact that today people are thinking about stopping the accumulation part of their life, and looking at fixed income when they reach about 75. And yet just two or three generations ago, 60 was considered old.
    So we do have this very serious demographic challenge. We have a very serious education challenge. For those of us who represent, as ACLI does, some 400 life insurance companies, there is sensitization toward long-term care and the need to examine at an early age long-term care policies and what they will do for your own financial security and the financial security of your family. The need for us to examine our own life insurance needs, so that if we have dependents and something were to happen to us even at a later age, if we are taking care of grandchildren; if we are taking care of step-children, or even children who have returned home, to have life insurance is important across all age groups. And of course, the issue of annuities. After the challenge of the stock market over the course of the last three years, don't we all like defined benefits? An annuity is in effect a defined benefit to provide a companion investment for Social Security.
    So Mr. Chairman, we see this industry and this organization as advocacy and research, obviously of assistance to the Congress on tax matters, but most importantly assistance to our citizens, our fellow citizens on the sensitization of the need for income for life; the sensitization of need for retirement security and life security for our children and in many cases our children's children. We do not do enough of it. We do not have enough money saved for retirement, and we welcome this debate and discussion because it is long overdue.
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    Thank you, Mr. Chairman.

    [The prepared statement of Hon. Frank Keating can be found on page 99 in the appendix.]

    Chairman BAKER. I want to thank the governor. We appreciate your participation this morning.
    Our next witness is Mr. David F. Woods, CEO of the National Association of Insurance and Financial Advisors. Welcome, Mr. Woods.


    Mr. WOODS. Thank you, Chairman Baker. I am probably the only card-carrying person in the room today, that is, Medicare card-carrying person in the room. I am a senior. I understand very well the concerns of seniors and the needs of seniors.
    I represent the National Association of Insurance and Financial Advisors. I am the brand-new CEO. We have 800 local associations across the country representing 325,000 insurance agents, financial advisers and their staffs. Our mission is to provide professional education and support to our members, to establish and to maintain ethical standards for them, and to provide help to committees like yours, members of the various legislative bodies as you and we together try to wrestle with the response that we collectively can make not only of seniors, but to all citizens in various aspects of their financial lives.
    I also represent the Life and Health Insurance Foundation for Education. We are a nonprofit organization founded about 10 years ago to address the need of the population at large for more education about the role that insurance and insurance products play in their financial lives, and to help them understand that a financial plan without these insurance products at its base is really nothing more than a savings and investment program that really dies or becomes disabled or grows old and disappears when they do.
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    So I am privileged to be here today. My primary purpose is to really introduce myself to the members of the committee. My hope is to be with you on a number of future occasions, not only on the issue of seniors, but other issues that may come before this committee where we can be, either or both of my organizations, can be helpful. I am also privileged to be here with Governor Keating. We both started our new jobs together in January and really have renewed a longstanding partnership between the National Association of Insurance and Financial Advisors and the ACLI, to bring the help, support, dues, resources of the life insurance industry to this and other committees which may be interested.
    Let me if I can just give you a very brief overview of the role that an agent-adviser plays. I know Mr. Lucas has long experience in doing that, so you may correct me if I miss anything. My written testimony covers it in full detail, but let me just give you a thumbnail. I was an insurance agent for 30-plus years; still carry a license; still do a tiny bit of business when I have some time. The role of the agent-adviser, financial adviser, has several aspects to it, first and foremost, to understand the needs of our clients and our prospects. Not just in terms of how much money do you have, how much money do you need, but understand them as human beings; understand what their personal needs are; what their cares, what their concerns are, so that not only can we make the numbers add up, but we can make them add up in terms of what is important to them in their lives. And then to do the research, to find the appropriate products that may address those needs, and to bring those needs to their attention; to help them evaluate them; to provide competitive analysis for them, so that they can make an informed and intelligent decision about the products that are important in their lives.
    As it applies to seniors particularly, I think the members here have mentioned all of them, annuities, long-term care, life insurance being the most prominent and important among them, for seniors, and then to provide ongoing service to our clients over a long period of time. Seniors particularly find their needs changing. The early years of retirement are much more active than the later years. Money begins to run out as time passes, typically, the longer people live. Long-term care needs become critically important, nursing home care, home care: frightening prospects, frightening prospects for seniors. Some of you may have had your own parents in that situation, as I have. It is a terrible prospect. So the role of the agent-adviser is to constantly work with our clients to help them understand their changing needs, to evaluate their options for them, and to help them work through those options and take advantage of whatever may be there for them.
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    I appreciate the opportunity to spend some time with you today. I am more than happy to answer any questions you have. I particularly applaud the committee for addressing this issue. All of you have pointed out the needs of this burgeoning crop of baby boomers, but I would submit that there are millions and millions of people who are already retired who have the same concerns and the same issues. So I am looking forward to working with you as together we address these problems.
    Thank you, Mr. Chairman.

    [The prepared statement of David F. Woods can be found on page 104 in the appendix.]

    Chairman BAKER. Thank you very much, sir. We appreciate your testimony.
    Is it Mrs. Lavada DeSalles, is that correct, Ms. DeSalles, who is a member of the board of directors of AARP? Welcome.


    Ms. DESALLES. Thank you. It is Lavada DeSalles. You were close.
    Good morning, Chairman Baker, Ranking Member Kanjorski, and other distinguished members of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. I am a member of AARP's board of directors, and I appreciate this opportunity to offer our views regarding what seniors need to know about protecting their economic security.
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    Today, my testimony will focus primarily on the role that private insurance can play in financially securing retirement for older Americans. Private insurance products can and frequently do play an important and valuable role in accumulating, managing and protecting the financial assets necessary for having a secure retirement. We believe that privately financed insurance products have the potential for playing a more integral, but supplemental role to Social Security, if the marketplace includes, first, strengthened enforcement of consumer protection statutes and regulations; second, ready access by consumers to well-qualified, independent and affordable financial planning resources; third, reliable and accurate measures for comparing insurance products. Lastly, additional progress should be made in the standardization and licensing of insurers, their agents, and in the way products are approved.
    Also important is that these products be integrated as supplementary options for what we at AARP describe as the four basic pillars of retirement income security for the 21st century. That is, Social Security, pensions and savings, investments, health care insurance coverage, and increasingly earnings from working during one's retirement years. Unsurprisingly, commercially offered personal insurance products pose the very same cost, availability and sustainability challenges for individuals that are so familiar to policymakers in addressing national issues.
    However, the responsibility for the selection among a complex array of insurance companies, policy options, shifts to the individuals and their families when they are at the same time attempting to manage their daily financial affairs. We do not view this challenge as an unbreachable barrier, but rather one that will require a concerted effort by policymakers, the insurance industry, consumer advocates, and consumers to address.
    Chairman Baker, today's hearing represents an important first step in launching this effort. AARP has long been active in efforts to assist mid-life and older Americans to improve their prospects for achieving personal financial security. In this regard, we have conducted research; designed, tested and provided financial education and counseling services to our members, as well as mid-life and older adults in general. But because of the rapidly growing population of retirement-age Americans, the demand for high quality, non-conflicted financial literacy programs will continue to grow.
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    In conclusion, we believe that efforts should continue to be made to increase consumer awareness of insurance options; options for assembling and managing the necessary financial assets for a secure retirement. At the same time, we believe that changes in a number of public policies and insurer practices would be useful for improving the insurance marketplace and the products and services it provides. We commend you, Chairman Baker, for beginning this important discussion. We look forward to working with the subcommittee to further improve prospects for a secure retirement for all Americans.
    I will be happy to answer any questions you may have.

    [The prepared statement of Lavada DeSalles can be found on page 42 in the appendix.]

    Chairman BAKER. Thank you very much.
    Our next participants is Mrs. Cindy Hounsell, Executive Director, Women's Institute for a Secure Retirement. Did I get that close?
    Ms. HOUNSELL. Yes.
    Chairman BAKER. Thank you.


    Ms. HOUNSELL. Good morning. We very much appreciate the opportunity to be here and to focus on women's issues.
    I thought I would start by saying why we call ourselves WISER. I have been working on this issue for 15 years, and I realized that I had made every financial mistake that you could make throughout your working life. So I thought, well, we do not want to call ourselves STUPIDER, so we will have to find a better acronym and sort of work through the name WISER. People often say to me, well, why don't you include men? I say, well, then we would have to have been MISER, so that would not have worked well either.
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    But as mentioned, I have been working on this issue for 15 years, and I would just like to emphasize that one of the things that I think is so important for the committee to hear is that people just do not have the financial basics. One of the things I find is that if you throw out the word ''annuity'' at somebody, they are already knocked over on the table falling asleep, because they do not even understand why they need to understand what an annuity is. People just do not have the very basic foundation of financial planning. I find this to be true, and it does not matter what the education level is. I can talk to people that do not even have jobs and they could understand the need for it just as well as people who are professionals, or like people in this room. I probably did not know what an annuity was myself until about six or seven years ago, when I became very interested in insurance products. Of course, that was prompted by the fact that my house burned down. So all of a sudden, I was loving insurance, and I thought, boy, this is really key, and where are the other areas in my life, like long-term care insurance that will really help women when they get older.
    As the statistics show, and I have all this in my statement, but I would like to just briefly breeze through some of it. Women live longer. They earn less. They have different needs because of those factors. The major point I would like to make is that women need information to make the best financial decisions because they can least afford to make mistakes with their money. They need this information early in their working lives.
    Women face a host of obstacles that jeopardize their economic security. One of them is pay. Two-thirds of today's full-time working women earn less than $30,000. Care-giving responsibilities cause women to spend about nine years out of the job market or working part-time or making other accommodations for their families' lives. Fewer years at work mean they are less likely to be eligible for employer benefits, and combined with lower pay, smaller Social Security benefits and less money in savings. These factors are coupled with the general lack of knowledge about money management, as well as the financial products that could help them in the future.
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    Older women are much more likely to live alone than older men. Living alone means you are much more likely to be poor. As Mr. Scott mentioned in his statement, the poverty rate among older minority women is just astounding. For single black women over age 65, it is 43 percent; and for Hispanic women, it is 49 percent, which is nearly twice the rate of white women. We hear all the time from women who are convinced they will never be able to stop working and they will never be able to retire.
    As women tend to outlive their husbands, they face a greater risk of requiring long-term care, either in their own homes or in nursing homes. We know that there is a great need to educate younger and middle-aged people because we have found that the major fact is that people do not understand that age is the significant reason to buy long-term care insurance earlier; that it is more expensive as you age. People think that it is just something to do when you get older or as you reach retirement age. So we have got to change that, also because then it is more expensive, and they do not understand that. We happen to have access through one of the foundations that funds us to long-term care insurance. There is a women that works with me who is in her late 30s. She signed up for the long-term care insurance.
    Another fact is that many employers offer adult children the opportunity to sign up their parents for long-term care insurance. If families were better educated about the availability of the provisions such as in-home care, services at assisted living facilities, they would be capable of taking the needed steps to talk about these issues, resulting in much better financial planning decisions for both the adult children and for their elderly parents.
    And then there is the other consequence of living longer, which is that women have greater concerns about outliving their income. Many older people are living longer than ever, and yet most financial education focuses on getting people to save and invest, while there is very little information available on what to do when you reach retirement age to make sure the money lasts for as long as you need it. Few of those who are retiring realize that the money may have to last for perhaps 20 or 30 years after we stop working. We did a booklet which has become very popular with the Society of Actuaries. It is available on Web sites, and we would hope that people would look at the booklet, or maybe include it on your Web site. We have a couple of good stories in there. One of them I love to use, and I won't take time to do it here because my time is running out, but Ron Gebhardtsbauer, who is an actuary, actually we included in our prepared statement the story, talked his mother into buying an annuity because every year she was taking out little bits of money and knew she was going to run out of money by the time she probably reached 90. He convinced her to buy an annuity and now she will get the same amount of money whether she lives to be 90 or 100.
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    I will end here because I think my time is just about up. I thank the committee for what you are doing, and we would love to continue working with you.

    [The prepared statement of M. Cindy Hounsell can be found on page 90 in the appendix.]

    Chairman BAKER. Thank you very much.
    For the introduction of our final participant, I would like to turn to Ms. Harris for her particular words. Ms. Harris?
    Ms. HARRIS. Thank you, Mr. Chairman.
    Our final panelist today has served the great State of Florida in an amazing variety of capacities. Today, as Florida's first Chief Financial Officer, Tom Gallagher continues to display the creative, skilled and determined leadership that has distinguished his three decades of public service. As Chief Financial Officer, Tom Gallagher leads the new Department of Financial Services, which was created in January of this year as the result of a 1998 constitutional amendment that has merged the Office of the State Treasurer, Insurance Commissioner, Fire Marshal, and Office of the Controller.
    Prior to his election to this post last November, Tom Gallagher had served as State Treasurer, Insurance Commissioner and Fire Marshal for a total of 12 years, beginning with his election to that position in 1988. He has also served two years as education commissioner, two years as secretary of the Department of Professional Regulation, and 13 years as a member of the Florida House of Representatives. Tom Gallagher established his reputation as tough, courageous and an effective leader following Hurricane Andrew, when as Insurance Commissioner, he guided Florida through the trauma of its most costly natural disaster.
    Moreover, he has demonstrated his extraordinary talent for shaping innovative solutions to seemingly intractable problems on many occasions, such as when he spurred the creation of a program that offers health insurance to more than 300,000 uninsured children in Florida. Just last year, he played a vital role in the Florida legislature's passage of a windstorm bill that is saving Floridians nearly $100 million annually.
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    Tom Gallagher has dedicated his career to helping the people of Florida untangle the knots that often accompany their use of financial service products. I particularly look forward to hearing the comments of this fierce protector of consumer rights regarding the State of Florida's efforts to protect our seniors from fraud and abuse.
    It is with great pleasure I introduce my friend and former colleague in Florida's executive cabinet, the Chief Financial Officer, Tom Gallagher.
    Chairman BAKER. Thank you, Ms. Harris.
    Welcome, Mr. Gallagher.


    Mr. GALLAGHER. Thank you very much, Mr. Chairman and members of the committee. I have also submitted written testimony.
    I am very proud that Florida is considered the head of the curve in protecting consumers from fraud. We have actively been involved with the NAIC's Viatical Settlements Working Group. The viatical business emerged in 1989, and by 1992 the NAIC had determined that a model law was needed. It was basically set up to help people that had AIDS. The initial model required companies and brokers to obtain a license before entering into the viatical settlement agreements, giving regulators authority to refuse or revoke a license and approve provider contracts. The first model also required disclosure, payment of proceeds into an escrow account, and confidentiality of the medical information. The model was recently updated to broaden the definition of a viatical settlement and new protections against fraud have been added. The new model also enabled States to consider the security aspect of the viatical transaction, that is the sales to investors. We in Florida provided a substantial input. Florida, along with several other States, have adopted the new model and we are of course encouraging other States to follow suit.
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    In Florida, we have a tough law on the books and aggressively enforce the provisions of that law. Our Viatical Settlement Act of 1996 focused on protecting insured individuals or the viator. The Act has been amended to consider the investor and to curtail investor abuses. The enforcement results in Florida, 35 viatical providers have applied for licensure; 17 of them withdrew; 4 were denied. There are eight currently licensed; three have surrendered their license; and three licenses have been revoked. Since 1996, 14,017 life insurance policies have been purchased from viators, having a face value of $2.9 billion, for which viators were paid $953-plus million. The average amount an investor has made has been $43,744, and the average age of investors into these viatical settlements is about 70.5 years old.
    The regulatory actions we have taken by the department since 1996 have been 21. We have done eight against providers; two against brokers; three against agents; five against officer-employees; and three against unlicensed entities. As far as viatical criminal cases affecting Florida, these cases have encompassed 38 indictments against individuals. The companies are Future First, who was a provider; Kelco was a provider; Justus Viatical, an unlicensed provider; Financial Federated Title and Trust, Asset Security Corporation, an unlicensed entity; Life Benefit Services, a broker; and a doctor providing fraudulent life expectations was also indicted; and 11 viators themselves for fraudulent acts.
    The Department of Financial Services continues to work with the Federal Viatical Task Force, with the FBI, the U.S. Postal Service, the SEC and other law enforcement agencies. Our Fraud Division has executed nine search warrants on viatical-related companies and seized more than 1,000 files representing in excess of $76 million in fraudulent policies. Potential criminal violations commonly reviewed are theft, misrepresentation, investor fraud, and securities and investment issues. The estimated losses to investors in Florida, $2 million from Justus Viatical Group; criminal charges have been filed, American Benefit Services, Financial Federated Title and Trust, $117 million, principals of both companies are serving lengthy prison sentences; Future First Financial Corporation, $203 million, licenses revoked, criminal charges were filed, the companies placed into a court-appointed conservatorship, the former president was just arrested and now resides in a county jail with a $10 million bond; Accelerated Benefits Corporation, $114.5 million, license revoked; and William Page and Associates has paid fines and are on a two-year probation.
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    The anti-fraud network that was talked about on March 6, 2001 by Terri Vaughan, who testified in support of establishing a national anti-fraud network among the State and Federal regulatory agencies. We have the technical infrastructure at the NAIC to place and share information among State regulators that can easily be expanded to Federal agencies. We are capable of receiving and handling both public and confidential information. We believe that the anti-fraud network should have information-sharing agreements; standards should be in place for how information is shared; and the important link to current databases, not start new ones. We believe that the participants should be given legal immunity for good-faith reporting.
    We also believe that insurance regulators would benefit from access to the FBI's fingerprint database. State insurance regulators are the only functional regulators who do not have access. The best way to weed out wrongdoers is before they get a chance to commit fraud. State regulators would benefit from the access to the NASD's enforcement database. In return, the NAIC could share information on insurance agents and companies. Financial products are becoming intertwined. Sharing of information is more important than ever, and preserving regulatory confidence is also very important.
    In conclusion, State regulators fully support congressional efforts to fight the viatical settlement fraud and to create a nationwide anti-fraud network on information-sharing among regulators. We at the NAIC and in the State of Florida stand ready to offer you our assistance and expertise and technical infrastructure to do this.
    I thank you very much for the opportunity to be here, Mr. Chairman.

    [The prepared statement of Hon. Tom Gallagher can be found on page 77 in the appendix.]

    Chairman BAKER. Thank you, Mr. Gallagher.
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    Mr. Woods, my question needs to be set up appropriately. Education is obviously the first answer; making conscious, informed decisions is always an appropriate remedy almost for any problem. But secondly, even if someone engages in an activity, there is a likelihood as individuals become older and abilities become impaired in some cases, that there be a mechanism for appropriate oversight and enforcement. Listening to Mr. Gallagher's recitation of Florida's action, it would appear that adopting the NAIC viatical model law is not only appropriate, but necessary. Do you think we need to do something nationally, or are we in a position to rely on each State to take their own course of action?
    Mr. WOODS. Well, it is always a challenge, the tension between State regulation and Federal regulation. It seems to me that Mr. Gallagher has appropriately pointed out the kind of oversight that States can provide in the viatical settlement area. Information, as you have indicated; understanding; education; full disclosure, all of those things are critically important. It is my belief that the States can do that appropriately and through the NAIC model, we believe they should.
    Chairman BAKER. Governor Keating, do you feel that leaving this issue to state resolution is appropriate? Given the concern with the numbers of baby boomers about to retire, and the asset base which they represent, that seems to be an awfully ripe target for a lot of folks who do not have pure motives.
    Mr. KEATING. Mr. Chairman, as you know, the argument rages in the State regulatory environment on the question of suitability for a number of these financial services products. I must confess, though, as a Federalist, to have 50 hot-houses of experimentation, some expressing more serious problems than others, sharing ideas, having ideas compete with each other, is always the best place to begin. It may well be the best place to end. But to have a very aggressive leader in a State as Mr. Gallagher is in Florida is a symbol to States like mine and other States. Well, go in there and find out what the problem is with viaticals, and see if we need a regulatory or a statutory change to make our citizens, our seniors safe. I really think at this juncture it is far wiser, and perhaps the Congress can help by having public hearings on the subject, or even hearings in districts or States, but I think it is a lot better to let the States try to work through it together, sharing and competing with ideas, as opposed to having a Federal fix at this time.
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    Chairman BAKER. What about the concept of either act by a date certain or this becomes the rule. For example, States which are consumed by budgetary difficulties, other matters of importance, whether it be in Oklahoma or Texas. Simply holding out a standard, you can do whatever you like, but if absent any action on your part, this becomes the standard for those States who choose not to act. I am concerned about the inevitability of the numbers and the economic assets at risk if there is a State which simply chooses not to act, and the consequences of a large group of defrauded seniors coming to the Congress asking us then to respond to an identifiable crisis. This is just my perspective only, but generally the Congress' finest hours do not occur when we are pressed to act quickly.
    Mr. KEATING. I think those of us who served at the State level would certainly agree that the commerce clause would cover the Congress' jurisdiction. The Congress could do that if it wished. Secondly, I think as it has been done in many instances in the past, for the Congress to set a bar and to say this is a serious interstate problem and here is the bar that we really want to be reached; we are going to attempt to reach it with you in a spirit of comity and brotherhood and sisterhood. It is probably better than a stick. I think it is better to have a carrot. But I agree with you, I think the purpose of this hearing is not only to anticipate running out of money; to anticipate the need for more financial security and more financial assets, but also to anticipate as a result of the longer-lived population those abuses, those criminal abuses that could and do occur within and to the senior population. So I think that bar-setting, consistent with the jurisdiction of the Congress, is not inappropriate.
    Mr. WOODS. Mr. Chairman, could I add something to that?
    Chairman BAKER. Sure.
    Mr. WOODS. I think we certainly agree with the governor. This is a major problem, as you have pointed out. There are millions of people in this situation; millions more to come there. If the States do not act by some point, it seems to us that we would support a default position that they would naturally fall back to, because it is a critical issue. Mr. Gallagher has pointed out some of the issues that can occur if there isn't appropriate oversight and regulation. So I think we would support that.
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    Chairman BAKER. Well, it is good to hear a financial adviser telling us to plan ahead. I like that.
    My time has expired. Mr. Kanjorski?
    Mr. KANJORSKI. Thank you, Mr. Chairman.
    I was struck by your testimony, Ms. Hounsell, in terms of the gap of income that women experience. I guess if we look out over the future, the next 40 years, that gap of income probably should materially close, if not completely close. Wouldn't you agree? So we are just dealing there with a 40-year problem.
    Ms. HOUNSELL. I think the issues that I talked about, the care-giving, all of those things, they have not changed and they will not change. I know Newsweek just did a big article saying that there are women that earn more than their spouses, but it is a very small percentage of the whole work force. So I do not think it will change. I think that is why it is really important for women to understand early on in their careers.
    Mr. KANJORSKI. I tend to agree. That is what I was going to get to. Listening to testimony and everything, from Mr. Gallagher to Governor Keating, and Mr. Woods about the potential fraud. How much fraud is out there? Are we talking about 3 percent, 10 percent, 20 percent? Because it seems to me that it be sometimes more expensive, both at the State level and the Federal level, to try and prevent fraud, and maybe those assets could be utilized in financial education. I am one that is quite convinced that Americans across the board are financially illiterate to a large extent. I think that probably the best evidence of that is how they bought some of the stocks they did when they did and where they went to. Maybe I would even go beyond that and say, what I am worried about is we have substantial people that are engaged in financial planning, the sale of insurance products, these are very complicated. I know when I talk to people in the insurance business, sometimes I walk away spinning, not quite understanding what is the best proposition, and yet here I have the benefit of 70 of my colleagues who are the most educated on all these propositions in the world.
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    The reality is that we do not have an educated electorate. Should we just standardize situations, and then discourage or prevent someone who fails a financial literacy test from getting into those markets, the selling of those products that you talked about Mr. Gallagher, and take the money that we are spending to prevent fraud and spend it on education, or include a large segment of education and put it into our school systems, and literally encourage people to get smart.
    I just want to add one caveat to that. When the market goes wrong or people lose money on investments, they always want to find fraud, misrepresentation and abuse, but I am struck with the fact that right now in Washington, those of us who are elected officials, and our two parties are in a tremendous struggle to determine what is the best tax policy for the United States, or recovery stimulation policy for the economy. I would venture to say probably some of us could be indicted for fraud because we cannot all be right, and we area almost diametrically opposed. I listen to my good friend Alan Greenspan and to Warren Buffett, and he tells us to do one thing and what the effect will be, or the Committee on Taxation that tells us what is going to happen if we pursue a certain policy. On the other hand, I listen to some of the highest officials in the nation who enjoy tremendous credibility with the American people, and they will recommend completely something diametrically opposite; and then I look at the electorate, and they are dead split probably on the issue, indicating that they are not making the best analysis of understanding either.
    If we cannot do that in national economic policy, national financial policy, how can we expect the average constituent to have the literacy necessary in financial understanding to really protect themselves? And then the role is, how much should government get involved? Wouldn't it be better to say if you do not qualify in a certain way, you cannot get into that product, and it is on the basis of the seller to qualify the person and prove that they are literate enough to participate?
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    Mr. GALLAGHER. I will touch on that. That is one issue that you did hear Mr. Woods mention, that the NAIC is looking at ways to set up a qualification as to what product is right for the person that is buying it. It is not an easy thing to do, because certain products fit some people. I think the national argument is that some people see one way of stimulating the economy as totally different than the other sees it. Both will probably stimulate it; the question is, which one is going to do it in a way that the person sees it to benefit them better, I guess.
    That happens in investments all the time. There are a myriad of investments because they fit different people's needs. Mr. Scott mentioned the problem of people in predatory lending. We have a major education going on in Florida on predatory lending. Certain lending processes that go on are fit for certain people. A person that has really excellent credit should not get mortgages that cost a lot of money and have a bunch of points. But yet, there are some people who because of their credit problems might have to get a mortgage like that, so it might be the only thing they can do and it might fit them.
    So different things fit different people. I certainly do not think we ought to have a police force going out and saying, and government should be involved in making the decision on what is good for who. But I do believe that there are two sides. One, enforcement of people that do abuse the laws that we have to prevent fraud, that has to be a strong side. And the other side is education. You also have to have the ability to have people educated in what is right for them. I think you have to have both.
    Mr. KANJORSKI. You know, I am struck, one of our fine senators, I cannot recall his name right now, but he talked about compound interest and what a small portion of the American population understands the ramification of compound interest. Maybe we ought to develop a Florida-type test that you have to take, and if you cannot pass the test of understanding compound interest, you are just disqualified from the field. Would you recommend that we take that up with your governor and include that as part of that final test down there?
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    Mr. GALLAGHER. I would recommend you take it up with somebody else other than me. I am not dealing with it.
    Chairman BAKER. Especially as long as it does not apply to members of Congress.
    Mr. KANJORSKI. Alright. Thank you very much.
    Mr. WOODS. Mr. Chairman, could I add something to that statement? You cannot legislate morality. That is a truism. Education is the best defense against fraud and things like that. That is the reason why the life insurance industry about 10 years ago created the Life and Health Insurance Foundation for Education to provide that kind of financial literacy, which is our word and your word. It is a good term. One of our major programs is a high school education program, so that as these consumers come into the marketplace, they have an understanding of financial issues and how to address them and how to think about them, and the kind of questions to answer. So I do not think it is an either-or issue. I think it really is a combination of both regulation and education.
    Chairman BAKER. Thank you.
    Ms. Kelly?
    Mrs. KELLY. Thank you, Mr. Chairman.
    Mr. Woods, as I mentioned in my opening, my Subcommittee on Oversight and Investigations held a hearing on viaticals last year. I was really troubled by the complete lack of adequate consumer protections for viaticals that there are in many States, something that I thought was very surprising because of the good work that has been done by the NAIC in developing a consensus model of viatical law. At that time, it became clear that Florida had an A-plus level of viatical protection. I understand now that 12 States have implemented the new NAIC model. Don't you think we need to make sure that more States update their law so that everybody can be an A-plus in terms of protecting the consumers? How would you recommend we try to push that?
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    Mr. WOODS. Well, the answer to the first question is easier than the answer to the second. We do agree with that. We do think that proper protection for consumers, disclosure, all of those issues, are tremendously important. As the chairman said earlier, they are at a vulnerable time in their lives. As far as how to do it is concerned, that is a bigger challenge. Perhaps a default mechanism that the chairman mentioned is one way to do that; education of the legislators themselves and of the commissioners themselves about the critical importance of this process. I would not call it a product, but this process, and how it can be abused and yet how it can also be very helpful to people at an important time in their lives. It is a challenge, but I think you are right to address it. The role of this committee, it seems to me, is to continue to raise the issue in the minds of the public and also regulators across the country. I cannot give you a better answer. I wish I could.
    Mrs. KELLY. Mr. Gallagher, I want to switch gears a little and talk about your testimony, which I found very interesting. It notes that allowing States to run a national fingerprint background check on insurance producers and the company personnel is probably the best way to weed out what we know are wrongdoers before they get a chance to commit fraud. I was interested in the kind of coalitions you were talking about building here. Specifically, you talked about this fingerprinting. It seems to me that you talk about how critical it is if States expect us to establish a national agent's licensing system like we did in NARAB. I helped to write that NARAB legislation. I am interesting in how you perceive that as working in light of, if it is the same way that we built the NARAB legislation, or how you see that working.
    Mr. GALLAGHER. I can tell you in a way how it does not work, but also tell how it does. Let me just mention that we do have in Florida fingerprinting for licenses. If you look at, when I talked about viaticals, 35 basically applied; 17 withdrew. There is a reason they withdrew. They withdrew because we do fingerprint background checks and they realized they were not going to get a license in Florida because of who they were. So many other States are unable to do this. That is why I am pushing very hard for you all to allow us as State regulators, especially on the insurance side, to have access to the FBI database. Certain of us can because of our specific laws and the way we operate; most of the States cannot. So there are about four or five States, I think four that require fingerprints before they allow an agent to be licensed in that State; other States do not.
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    We believe that it is a very important consumer protection, and the ability to stop things before they start by having that fingerprint background check; and also share databases with Federal and other States to know who has done what before we give them a license, and wait until after they spend who knows how many years before they get caught abusing someone again with fraud, when they have already maybe been busted in another State.
    Mrs. KELLY. So if I understanding your testimony clearly, what you are asking for is a Federal statute that would give all States some kind of a uniform access to compare notes with the FBI's fingerprint database. Is that correct?
    Mr. GALLAGHER. That is correct. We believe that it would be worthy. Insurance regulators are the only ones that don't. Banking regulators and banks themselves have access to the database, whereas insurance regulators do not. We believe the fastest way for all insurance regulators to get that access and to be able to compare with each other the information from NASD as well as NAIC and other States would be to have the database work out as well as have the access to the FBI fingerprint files. It is a very simple access now. It used to take us six weeks to get returns. We now do it all electronic. There are electronically taken; they are sent in; we get 24-hour turnaround. So this is not a time-consuming thing. The FBI has updated their fingerprint process. We have done it in most of the States. So it is electronically done, so it really is a very smooth, easy thing to do, as opposed to what it used to be with the cards.
    Mrs. KELLY. But you need a Federal statute to do it?
    Mr. GALLAGHER. We believe that is the fastest and best way to get it done, and have us up and running. You in the Congress in 2001 did the bill that would allow that. The Senate has not quite gotten to it yet, but we encourage you to keep it moving, and maybe even let that go by itself. Sometimes it gets so many other things attached that it does not move. But just allowing that access we believe for insurance regulators would make a major difference.
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    Mrs. KELLY. Thank you, Mr. Chairman.
    Chairman BAKER. Thank you very much.
    Mr. Gallagher, just to clarify, I should not interpret your remarks representing NAIC today for a national standard to in any way be inferred or any implications with regard to national charter. Is that correct?
    Mr. GALLAGHER. We have been pretty strong in our stand on the problems that could come by that, but we are willing to work with you on any ideas you may have.
    Chairman BAKER. I am sorry. I just could not pass up the opportunity.
    Mr. GALLAGHER. I understand.
    Chairman BAKER. Mr. Scott?
    Mr. SCOTT. Thank you, Mr. Chairman.
    This has been a very invigorating discussion and such a distinguished panel. I would like to ask a series of questions, first to you, Governor Keating. It seems to me that as a former governor and now the head of the American Council of Life Insurers, you represent over 380 individual companies. You mentioned two areas that I would like to examine a little further and get your thoughts on, that I find challenging. One is the strains that we are faced with in our economic infrastructure, with the baby boomers. You mentioned that their average age is between 55 and 64, and their average savings is only $47,000. We have got the strains on Social Security and Medicaid.
    My first question is, given this, what do you recommend that we in Congress do in reference to the stability of Medicaid and Social Security? That is the first part of my question, what we can do here, and what further impact is this going to have if we do not do something. And what do you recommend that we do in these two specific areas, given your position not only now as the head of the life insurers, but as a former governor?
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    Mr. KEATING. Congressman Scott, that requires a Solomaic answer, and I am not sure that I am in a position to provide it. Obviously, if I were able to tell you how to solve Social Security once and for all and Medicare once and for all, I would probably be on the talk show circuit and in every living room in America, because all of us are groping for that answer. The reality is, as you know, that the country made a commitment, our nation made a bipartisan commitment to have a Medicare system to care for the elderly, long-lived now, more than ever before, for their health care needs. The burden obviously on the States and on taxpayers is very large to do that.
    The same is true of Social Security. My children, and I am a grandfather for the first time last July, on the fourth of July, by the way, and expect to have another grandchild by another daughter this July, though probably not the fourth, they do not think they are going to have Social Security. They just simply do not anticipate that they will. Well, that commitment that they will have Social Security and what is assured them will be paid I think is very important. How do you get there, with the lengthening life spans? Obviously, here in the Congress you debate older retirement ages, older ages for access to Medicare, as well as to Social Security, and that debate should continue.
    I think at the same time, as Mr. Woods said and as I know the chairman mentioned in the discussion of education, people have to understand that that is not the only thing. Whatever robust Social Security or Medicare system there is out there, or whatever diminished Medicare or Social Security system is out there, people have to have personal responsibility; they have to have personal knowledge of their finances; they have to have a personal commitment to take care of themselves. That is very difficult. I cannot over-emphasize the significance of congressional investigative subcommittees or committees going into the States. They are covered by all the newspapers, all the television, all the radio. You can in one hearing sensitize the entire population of a State about an issue. To take these issues and go into the States and debate Social Security and Medicare at the same time, and get ideas from citizens and from elected officials to solve a problem that is a serious problem 20 years from now, if not perhaps even 10 years from now, I think is very, very meritorious.
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    To have joint discussions with State leaders and with State policymakers, especially those of us on the State level that are charged to pay out of State resources a large bit of the Medicaid bill, that is very important. And that is very bipartisan and very essential. But there is simply no way, as you know, to say in one sentence how to fix Social Security or Medicare. It is just that in one sentence, I think the average American would say to us, those of us who have been elected and those of you who are now elected, that we expect for that contract to be honored.
    Mr. SCOTT. Let me just ask another question. That was one area. The other is, as I mentioned in my opening statement, we are working in this committee on financial literacy. I have introduced a bill, working with other members of this committee, to find a way to target information. One of the tools that we plan to use is the establishment of a nationwide toll-free number, because it is a two-way street. You can have it available, but if we can find some kind of way to have a lifeline out for these individuals to get information back and to target it.
    Ms. Hounsell, I think you hit my point a little bit. There are targeted groups. I think there is probably no group, quite honestly, in more need of this than African American women. I would like to hear what you recommend, and if there are others here, I would like to know what specifically each of you all are doing in the areas of getting financial education, financial literacy to some of these most impacted communities. Again, Governor Keating, I think you hit it on the head when you said that financial literacy is more than just knowing the difference between stocks and bonds; it is more than knowing enough about saving money. It is the responsibility of managing those assets over a lifetime. I think if we do nothing else in this committee, to deal with financial literacy and arm our people with the information they need, if no more than just simply say before you sign on the bottom line, call this number.
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    That is the approach that we are hearing. I would like to hear from you what each of you are doing, if you would care to comment, and have anything that you are moving in the area of providing financial literacy, especially for the most impacted and vulnerable groups like African American women.
    Ms. HOUNSELL. We have a grant from the administration on aging, and one of the things we have tried to do is really get into the communities, so we work with a lot of different groups. In fact, two weeks ago, I was at the National Conference of Black Mayors where we do a workshop every year with the women mayors. A number of them are taking our program and then doing it in their community, whether they do it in the churches or wherever they can, a library. That is where people are willing to do. They need to hear it in their home base. One of the reasons I think we have had so much success is because we then have somebody in the community bring us in, and we train them. One woman that we trained about six years ago in Atlanta has done over 90 trainings, and she has hit more than 5,000 people. A lot of these people then take the information to other people. I think that you need more than just giving people a Web site. I am always saying that to people. You know, you go home, I mean to do a lot of things when I go home, and the last thing, you know, there are things I could learn on the Web site myself, but the last thing I am doing when I go home is turning on the computer and trying to do that. When you have working people with so many other demands on their time, they just do not get to doing it. But if there is a program at the library or at the church on a Tuesday night, and somebody says you have to come hear this, they will come.
    Ms. DESALLES. And we at AARP have long been active in the area of providing financial education through sophisticated means such as research that we do and our very excellent Web site, all the way down to individual workshops out in the community and in the churches. One of our very successful local efforts was a financial education series called ''Women, it is time.'' We concentrated on the fact that women typically, particularly lower-income women, do not bring with them the financial expertise that other groups do.
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    There is absolutely a need for as much financial education and increased financial literacy as we can provide, but we need a level playing field. People have to be responsible and make their own decisions, but they should do so in an area that protects them. That is why we are also pushing for changes in the regulatory environment so that when people get the wherewithal to make those decisions, then they are making the decisions in an area that is protected somewhat, if you want. It is necessary to have them both. I believe Mr. Woods talked about the needs for the equal thrust, and we agree with that.
    Chairman BAKER. Mr. Scott, a couple of our witnesses have to leave in the next few minutes, and I would like to afford the opportunity.
    Mr. SCOTT. Sure.
    Chairman BAKER. Thank you, Mr. Scott.
    Ms. Harris?
    Ms. HARRIS. Thank you, Mr. Chairman.
    This question is for Mr. Woods. In your testimony, you mentioned the role that the insurance agents are the first line of contact for many of our seniors, in terms of their adviser or their educator on various insurance products. Bearing in mind that the agents have to rely on their commissions, what other types of information does your organization provide in education to help protect the consumer?
    Mr. WOODS. The Life and Health Insurance Foundation for Education provides, this really gets to Mr. Scott's question as well, several levels of education. We have a broad-based education program for high school students, primarily juniors and seniors. Last year in 2002, 25 percent of the high school juniors and seniors in the country were exposed to this program. In the State of Utah, it is a mandated program. We have a very large Web site. We are adding a big section on long-term care, which will be up in July, as well as life insurance, disability insurance, health insurance, all of the other kinds of insurance coverages.
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    We also are part of a couple of coalitions, Jump Start coalition, which some of you may be familiar with, is a coalition of many organizations dedicated to providing financial literacy, particularly at the early stages of life. We are also a part of an effort on the part of the National Endowment for Financial Education to provide financial literacy across the country in various venues. It is a massive job. We have not done this very well or at all forever, I suspect, and really the effort has begun in the last five or ten years. We are very proud that the insurance industry has made this investment in this effort.
    The other thing is, and Congressman Lucas can attest to this, he pointed out his credentials in the insurance industry, the best teacher of all, the best educator of all is a knowledgeable and qualified life insurance agent. Consumer study after consumer study indicates that that is where people get their information, and they want to get their information from them.
    Ms. HARRIS. Certainly. And I think the programs for young people that you mentioned are laudable. We are just concerned about seniors as well. Again, it is just the perception that as these well-qualified planners are dependent on commissions, just that there are other opportunities for seniors to evaluate versus that specific information, that they are the only source.
    Following up on that with regard to AARP, we have heard a lot of discussion about the need for a financially literate senior population. Based on your research, where do most seniors turn for that information?
    Ms. DESALLES. I am sorry, the last part of the question?
    Ms. HARRIS. Where do most of your seniors turn for financial information?
    Ms. DESALLES. They turn to a variety of sources, newspapers, magazines, friends and families. Our research, and I do not have those percentages right in front of me; it is in the written statement, but they get that information from a variety of sources. The problem is, they do not get enough information at an age when they need to start planning. The information is out there if you are savvy enough to look for it and seek it out, whether on the Web or magazines and newspapers or financial planners, but people just are not getting it.
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    Ms. HARRIS. As the largest advocacy group, do you launch that type of information when they first join? Do you have other opportunities for them to educate themselves concerning fraud and abuse?
    Ms. DESALLES. We take advantage of every opportunity we can. Primarily, our biggest method of communicating with our members, of course, is our AARP magazine, as well as the Bulletin, which goes to over 20 million households, reaching our 35 million members. But we use not only those articles, but we use an extensive volunteer network to provide in many cases one-on-one information to people. We have pamphlets, booklets that we make available not only to individuals, but to groups, to other people that want to avail themselves of our research. We are noted for the quality of the research that we provide, and we are very proud of it. We make it available to other researchers and institutions, private individuals. We cover the waterfront.
    Ms. HARRIS. You certainly are one of the first lines of defense with regard to information to so many of our seniors.
    Mr. Chairman, one final question to Mr. Gallagher. You testified that the average age for the viatical investor is over 70, and the majority of viatical provider applications in Florida have failed to gain approval. Notwithstanding the national charter that you mentioned earlier and discussed with the chairman, since viatical fraud is a growing problem, and you have discussed the fingerprinting, the use of FBI databases and also cross-checking with other States, what else can Congress do to make it easier to protect our seniors?
    Mr. GALLAGHER. I think if we did that, we would go a long way. I don't like to repeat myself, but I think if you try to do too many things, nothing gets done.
    Ms. HARRIS. This database information is the first line of defense, you say that is the single most important thing we could do?
    Mr. GALLAGHER. The most important thing is having that database. The fraud database is certainly number one. And access by State insurance regulators to the FBI fingerprints can help the States do what Florida does, and we also can do it better when other States have the ability to get in there and do theirs.
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    Ms. HARRIS. So there is no wish list, that is the main thing?
    Mr. GALLAGHER. I would like to just keep it in and keep it real simple, and we believe that that would have a lot of good things to help the elderly and protect them before the fraud happens, than go arrest somebody afterwards.
    Ms. HARRIS. Thank you.
    Thank you, Mr. Chairman.
    Chairman BAKER. Thank you, Ms. Harris.
    Mr. Lucas?
    Mr. LUCAS OF KENTUCKY. Thank you, Mr. Chairman.
    Mr. Woods, I want you to know that you are not alone being on Medicare. I probably preceded you there by a few years.
    Mr. WOODS. I could not tell by looking at you.
    Mr. LUCAS OF KENTUCKY. You ought to be in politics.
    Mr. Kanjorski was talking about education against consumer fraud, but from my limited experience, I think we have got to protect the people. There are a lot of naive folks out there, and there are a lot of intelligent people in their certain fields, but I like the idea, Mr. Baker, that we have a Federal default position, give the States some time to do something about this, but if they do not, then I think we need to step in. I would like to hear from the panel about that, but I will make a couple of other comments, and then I would like for you to answer that.
    I think unfortunately by the time people get to be members of the AARP, it is a little late for savings. You have got to protect what you have, because I think the key to saving is as we all know the magic of compounding. If we could get people to save a little bit earlier with the compounding and dollar-cost averaging, I think that would be it. Also, I think the old adage of put all your eggs in one basket and watch that basket, is a very dangerous example to set, talking about the people of Enron and others who put all their eggs in one basket and where that basket went. I was a great believer in functional allocation and trying to get people to do something early.
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    I would commend Mr. Gallagher for what the State of Florida has done in this viatical transactions problem, and I would hope, Mr. Baker, that we might come up with some legislation that would protect people in those States where the States have failed to take action. I think that would be very meaningful and very helpful to our people. But I would be interested in any of you folks on the panel making your comments about that particular issue. Should we come up with a default position as the Federal government for States who fail to act?
    Ms. DESALLES. I am not a technical expert on that, but certainly AARP would be willing to, our staff that are experts on this, work closely with the subcommittee in exploring that issue. That offer just stands for us.
    Mr. LUCAS OF KENTUCKY. Anybody else? Does it make sense?
    Mr. WOODS. Yes, certainly from the National Association of Insurance and Financial Advisors' standpoint, Congressman Lucas, we are already working actively with the States to get them to adopt the model, but we would support the default position for the very reasons the chairman and others have indicated. It is a critical issue for seniors at a very vulnerable time in their lives. I think they would be supportive of that.
    Mr. LUCAS OF KENTUCKY. Thank you.
    Chairman BAKER. Thank you, Mr. Lucas.
    Mr. Tiberi?
    Mr. TIBERI. Thank you, Mr. Chairman. I apologize for coming in late. I had another markup, and I apologize I missed the testimony from the panel.
    Governor Keating, the issue of annuities has kind of bubbled up and made some news lately. Can you talk to us, and I apologize if it was in your testimony, about the differences between variable and fixed annuities, and how one is preferable to another for seniors to choose from?
    Mr. KEATING. It is difficult for me to give any specific financial advice because you do not know, as David Woods said, the circumstances of each individual, their age, their financial knowledge, their dependents, their financial challenges, and obviously their assets. But a fixed annuity provides a set steady stream of income. A variable obviously varies with the market, and most particularly the stock market. I know recently, after seeing three years of calamity in the stock market, and living in public housing in a State residence for eight years, I bought from my brother, who is a financial planner, a variable annuity. To be honest with you, I feel pretty good about it. We bought my mother-in-law a long-term care policy, and she feels 20 years younger.
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    So as Congressman Lucas pointed out, to put many different eggs in many different baskets; to have something that is fixed; to have something that rides with the market tide; to have real estate and the like, whatever you can do to make yourself more diverse and make yourself more knowledgeable about your assets and do not keep everything frozen forever, that is wise financial planning. But an annuity is a wing-man relationship to the Social Security system. I think you can get them for very little money or a lot of money, but to have a defined benefit check from Social Security and a defined benefit check from your annuity that you cannot out-live is very sound planning. Hopefully in my own case, I have done something wise for once.
    Mr. TIBERI. Following up on that, Governor, is there something that we can do in Congress to help people purchase annuities, tax advantages? Is there something we can do to help seniors?
    Mr. KEATING. Remember that the annuity has a tax-free buildup. The reason for that is you cannot get anything out until you're 59 1/2, and you have by law and by practice, a lot of serious penalties if you do so. It is the only product out there that encourages people to save long term to provide for their retirement, in effect, that wing-man or companion investment to Social Security. Obviously, we feel that whatever comes through the Congress to provide for the goose equally to the gander is very important. If I have 100 shares of General Electric, for example, in my annuity, if the Congress sees fit to provide that 100 shares outside of the annuity with tax-free treatment, it is only wise to provide the 100 shares within the annuity for tax-free treatment as well.
    This is not just, Congressman, an issue of fairness, but of good social policy, because if all of us become consumers only; if all of us become spenders only, we do not think about 20 years from now. We don't care about it. If I have to pay taxes right now on whatever I invest in an annuity, for example, or a savings retirement vehicle, I will not do it. I will not do it. I will buy a boat or I will take a vacation. But to the extent that those products can continue to have fair, equal tax treatment and not tax the build-up, and when we take out, of course, we would love to see capital gains treatment, that is the way to have more people buy annuities. There are about 57 million annuity contracts out there in existence.
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    Mr. TIBERI. You mentioned long-term care insurance. One of the things, I was in the State legislature in Ohio, and one of the things that we tussled with was how to encourage particularly baby boomers at this point in time to purchase long-term care insurance. Is there something Congress can do to encourage more people to purchase long-term care insurance?
    Mr. KEATING. There are a number of bipartisan measures to provide an above-the-line deduction for long-term care. Realize that for you writing the checks, from us and yourselves as taxpayers, to provide an opportunity for Medicare to be secure in the future should also include an opportunity for an alternative to Medicare if you wish, a supplement, a companion to Medicare, which is long-term care. So that an individual can stay in their home, something Medicare does not permit, and have an insurance policy help them be secure and be in a dignified environment in their home. To use tax policy to encourage that kind of very wise social policy is unfortunately the only way you are probably going to have a lot more people participate. For example, there are only eight million long-term care policies in existence today. With a population of 280 million people or whatever the figure is, it rises every month, that is an insignificant number of people buying what is in my judgment an extraordinarily important product.
    Mr. TIBERI. Thank you, Governor.
    Mr. KEATING. Yes, sir.
    Chairman BAKER. Thank you, Mr. Tiberi.
    Ms. Brown-Waite?
    Ms. GINNY BROWN-WAITE OF FLORIDA. Thank you, Mr. Chairman. I apologize, too. We had a markup in the Veterans Committee, or I would have been here sooner.
    The question is for Mr. Gallagher. Mr. Gallagher, you testified that the current 2001 NAIC model law on viaticals should be adopted by all States, and that State laws must change to recognize the changing marketplace. I have been actually working with the chairman of the committee to draft legislation that will address this issue. Both Chairman Oxley and Chairman Baker, along with the staff, have helped us work on a bill that will very closely follow the NAIC model law, and will set that as a default for States with little or no regulation on viaticals. Obviously, under this plan States with little or no regulation of the viatical industry will have a certain amount of time to adopt the model law. However, if a State would like to strengthen the law on an ongoing basis, the legislation would also include a specific provision to allow just that. Certainly, in the State of Florida, we have had the viatical law since I was there in 1996 when we passed it, and we had several amendments to that law to actually strengthen it and improve it. I know the great job that you have done, and the recovery that the State has been able to obtain as a result of abuses of our viatical law have been very pro-consumer and certainly have set an example for many other States.
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    I just had a question, and that is, do you think that seniors and other consumers would be better protected if all States had used some updated version of a viatical law similar to what Florida has? I know that there are only about 11 now that actually have similar laws.
    Mr. GALLAGHER. I can say partially yes. But I say ''partially'' because many States, even if they had the laws, do not have the ability to go into the FBI, get the fingerprints, and keep people from being able to get into the business and create the fraud. So you are much better off closing the door before they come in, as opposed to allowing them in to perpetrate a fraud, and then have the laws that allow you to go arrest them because they have carried out that fraud.
    Ms. GINNY BROWN-WAITE OF FLORIDA. Mr. Chairman, a follow-up question? I know that in Florida, one of the things that we did was we, for example nursing home employees and directors have to be fingerprinted and subject their names to the FBI. Would that be a good, I mean, that is at the beginning of the process? Would that be a good addition to this bill?
    Mr. GALLAGHER. Yes. I think any access that you can give to enable State regulators that have the responsibility to carry out viatical fraud regulation, because it is considered an insurance product. In my belief it is also a securities product because they are taking and making a security out of some of the products that they are selling, to see to it that there are the background checks of those individuals that are involved in it, as you have in nursing homes, yes, that should be done. And any help that you in Congress would do to allow the access to those files of fingerprints would certainly help the States.
    Ms. GINNY BROWN-WAITE OF FLORIDA. And you cannot do that on your own?
    Mr. GALLAGHER. Florida can, so that is why we are probably on the forefront of what we have been able to do in regards to keeping people out of the business. We have a lot of elderly and a lot of people like to come to Florida and commit fraud. We are strong on those that do it, but we have kept a lot of people from doing it because we did not let them in.
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    Mr. GALLAGHER. I think other States having that ability would be a real plus.
    Ms. GINNY BROWN-WAITE OF FLORIDA. Thank you, Mr. Chairman. Thank you very much, Mr. Gallagher.
    Chairman BAKER. Thank you, Ms. Brown-Waite.
    I want to express my appreciation to each of you, and make a request. To the extent not contained in your submitted official testimony, which of course is made part of our official record, any brochures, informational material, the examples that you gave us during your presentations here this morning, if you have information that is for retail distribution to folks that are of an educational nature, the committee would like to get that for purposes of incorporating it into our own informational base. The subcommittee has 47 members, each of whom represent in excess of 600,000 people. If just the members of this committee engage in some informational distribution, it would be extremely helpful, if it is nothing more than just a list of 1-800 numbers. So if nothing else were to come of the hearing this morning, that would be of significant help to the committee in understanding the scope of what is being done, and assimilating it into our own offices.
    Secondly, I think the issues raised and the perspectives given are very helpful to us. This is a beginning step. It is certainly not a conclusion. To the extent any member wishes to add additional comments or questions for the record, it will remain open for a period of time. We certainly appreciate your willingness to participate, and we look forward to working with you in the future.
    If there are no further comments, our meeting stands adjourned. Thank you.
    [Whereupon, at 11:49 a.m., the subcommittee was adjourned.]
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