GAO-07-345CG

The Honorable David M

Comptroller General of the 

Awakening Confere

Sea Island, GA

January 7, 2007
GAO-07-345CG 

The Case for Chang

The federal government is on a “burning p

the status quo way of doing business is ufor a variety of reasons, including:

• Past fiscal trends and significant long-range chall• Rising public expectations for demonstrable resu

responsiveness

• Selected trends and challenges having no bound• Additional resource demands due to Iraq, Afghan

homeland security needs, and recent natural disaStates

• Numerous government performance/accountabili

challenges

• Outdated federal organizational structures, policie
GAO-07-345CG 

Composition of Federal S

20%

10%

14%

29% 28%

1%

7% 15%

34% 43%

1966 1986 

Defense Social Security

Net interest

All other spending

*Preliminary.Source: Office of Management and Budget and the Department of the Treasury.Note: Numbers may not add to 100 percent due to rounding.
GAO-07-345CG 

Surplus or Deficit as a Shar

Fiscal Years 1962-2006

-7-6-5-4-3-2-1

0123

19621965 1970 1975 1980 1985 1990 19

Fiscal Years

On-budget Off-budget Un

Source: Office of Management and Budget, Department of the Treasury and the Congressional Budget Of

Percent of GDP
GAO-07-345CG 

Fiscal Year 2005 and 2

Deficits and Net Operatin

Fiscal Year 2005 Fi

($ Billion

On-Budget Deficit (494) Off-Budget Surplusa 175 

Unified Deficit (318) Net Operating Cost (760) 

Sources: The Office of Management and Budget and the Department of the Treasury.aIncludes $173 billion in Social Security surpluses for fiscal year 2005 and $185 billion for fiscal year 2006

fiscal year 2005 and $1 billion for fiscal year 2006.
GAO-07-345CG 

Major Fiscal Exposu

($ trillions)

2000 

• Explicit liabilities $6.9

• Publicly held debt• Military & civilian pensions & retiree health• Other

0.5

13.0

3.82.76.5

--

$20.4

• Commitments & contingencies

• E.g., PBGC, undelivered orders

• Implicit exposures

• Future Social Security benefits• Future Medicare Part A benefits• Future Medicare Part B benefits• Future Medicare Part D benefits

Total

Source: 2000 and 2006 Financial Report of the United States Government.Note: Totals and percent increases may not add due to rounding. Estimates for Social Security and Medof January 1 of each year and all other data are as of September 30.
GAO-07-345CG 

How Big is Our

Growing Fiscal Burde

This fiscal burden can be translated and compare

Total –major fiscal exposures 

Burden/Net worth ratio 

Income

Median household income3 

Burden2

Per household 

Total household net worth1 

Per person Per full-time worker Disposable personal income per capita4 

Source: GAO analysis.Notes: (1) Federal Reserve Board, Flow of Funds Accounts, Table B.100, 2006:Q2 (Sept. 19, 2006); (2) Burdens are 

population as of 9/30/06, from the U.S. Census Bureau; full-time workers reported by the Bureau of Economic Analyshouseholds reported by the U.S. Census Bureau, in Income, Poverty, and Health Insurance Coverage in the United S

Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2005 (Aug. 2006); and (4) Bureau of 

Outlays: October 2006, table 2, (Nov. 30, 2006).
GAO-07-345CG 

Composition of Spending as a S

Under Baseline Extended (January 

0

1020304050

2005 2015* 2030* 

Fiscal year

Net interest Social Security Medicare & Medicaid 

Revenue

Percent of GDP

Source: GAO’s January 2001 analysis.*All other spending is net of offsetting interest receipts. 
GAO-07-345CG 

Composition of Spending as a S

Under Baseline Extended (August 2

0

1020304050

2005 2015 2030 

Fiscal year

Net interest Social Security Medicare & Medicaid 

Revenue

Percent of GDP

Source: GAO’s August 2006 analysis.Notes: In addition to the expiration of tax cuts, revenue as a share of GDP increases through 2016 due to taxpayers becoming subject to the AMT, and (3) increased revenue from tax-deferred retirement accounts

GDP is held constant. 
GAO-07-345CG 

Composition of Spending as a S

Assuming Discretionary Spending Grows with G

and All Expiring Tax Provisions are Exte

0

1020304050

2005 2015 2030 

Fiscal year

Net interest Social Security Medicare & Medicaid 

Revenue

Percent of GDP

Source: GAO’s August 2006 analysis.
GAO-07-345CG 

Growth in Spending for Social 

Medicare, and Medicaid Expe

Outpace Economic Grow

69%

122%

211% 

0%

50%

100%150%200%250%

GDP Social Security

Spending

Medicare

Spending

Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration, Medicare and Medicaid Services, and the Congressional Budget Office.Notes: Social Security and Medicare projections based on the intermediate assumptions of the 2006 Truson CBO’s August 2006 short-term Medicaid estimates and CBO’s December 2005 long-term Medicaid pro

Growth in constant dollars 2006-2030
GAO-07-345CG 

Social Security, Medicare, and 

Spending as a Percent of 

05

1015202530

2000 2010 2020 2030 2040 2050 20

Percent of GDP

Social Secu

Medicaid

Medicare

Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration, Medicare and Medicaid Services, and the Congressional Budget Office.Notes: Social Security and Medicare projections based on the intermediate assumptions of the 2006 Truson CBO’s August 2006 short-term Medicaid estimates and CBO’s December 2005 long-term Medicaid pro
GAO-07-345CG 

Debt per Capita Could Ex

GDP Per Capita Before 2

Assuming Discretionary Spending Grows with G

and All Expiring Tax Provisions are Exte

0

25,00050,00075,000

100,000125,000150,000175,000200,000

2005 2030 

Debt per Capita GDP per 

Per capita 2005 dollars

Source: GAO’s August 2006 analysis.
GAO-07-345CG 

Federal Tax Expenditures Ex

Discretionary Spending for H

Last Decade

0

200400600800

100012001400

1982 1985 1990 1995 2

Fiscal Year

Mandatory spending

Sum of tax expenditure revenue loss estimatesDiscretionary Spending

Dollars in billions (in real 2005 dollars)

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal years 1976-2007.Note: Summing tax expenditure estimates does not take into account interactions between individual provrefundable tax credits are included in mandatory spending.
GAO-07-345CG 

Current Fiscal Policy Is Uns

• The “Status Quo” is Not an Option

• We face large and growing structural deficits la

demographic trends and rising health care cost

• GAO’s simulations show that balancing the bud

require actions as large as 

• Cutting total federal spending by 60 percent or• Raising federal taxes to 2 times today's level

• Faster Economic Growth Can Help, bu

Solve the Problem

• Closing the current long-term fiscal gap based o

assumptions would require real average annuain the double digit range every year for the next 

• During the 1990s, the economy grew at an ave

per year. 

• As a result, we cannot simply grow our way out 

Tough choices will be required.
GAO-07-345CG 

The Way Forward:

A Three-Pronged Appro

1. Improve Financial Reporting, Public Ed

Performance Metrics

2. Strengthen Budget and Legislative Proc

Controls

3. Fundamental Reexamination & Transfo

21st Century (i.e., entitlement programs

spending, and tax policy)

Solutions Require Active Involvem

both the Executive and Legislative 
GAO-07-345CG 

The Way Forward

Improve Financial Reporting, Public Ed

Performance Metrics

• Improve transparency & completeness of President’s bu

• Return to 10-year estimates in budget both for curren

programs and for policy proposals

• Include in the budget estimates of long-term cost of p

& impact on total fiscal exposures. 

• Improve transparency of tax expenditures

• Consider requiring President’s budget to specify & expla

path to that goal within 10-year window--or justify an alte

• Require annual OMB report on existing fiscal exposures 

explicit & implied commitments]

• Require enhanced financial statement presentation and 

summary annual report that is both useful and used

• Increase information on long-range fiscal sustainability is

Congressional Budget Resolution & Budget Process. 

• Develop key national (outcome-based) indicators (e.g. e

social, environmental) to chart the nation’s posture, progrelative to the other major industrial countries 
GAO-07-345CG 

The Way Forward: 

Strengthen Budget and Legisla

Processes and Controls

• Restore discretionary spending caps & PAYGO rules on 

tax sides of the ledger 

• Develop mandatory spending triggers [with specific defa

forcing provisions (e.g., sunsets) for both direct spending preferences

• Develop, impose & enforce modified rules for selected ite

(e.g., earmarks, emergency designations, and use of sup

• Require long-term cost estimates (e.g. present value) fo

debate on all major tax and spending bills, including entiCost estimates should usually assume no sunset

• Extend accrual budgeting to insurance & federal employ

techniques for extending to retiree health & environment

• Consider biennial budgeting• Consider expedited line item rescissions from the Presid

require a majority vote to override the proposed rescissio
GAO-07-345CG 

The Way Forward:

Fundamental Reexamination & Trans

• Restructure existing entitlement programs• Reexamine and restructure the base of all other spendin• Review & revise existing tax policy, including tax prefere

enforcement programs

• Expand scrutiny of all proposed new programs, policies• Reengineer internal agency structures and processes, i

emphasis on long-term planning, integrating federal actwith others both domestically and internationally

• Strengthen and systematize Congressional oversight pr• Increase transparency associated with government con

selected items

• Consider a capable, credible, bi-partisan entitlement an

commission along the lines proposed by Sen. Voinovich 
GAO-07-345CG 

Key National Indica

• WHAT: A portfolio of economic, social, and enviro

based measures that could be used to help assess other governmental jurisdictions’ position and prog

• WHO: Many countries and several states, regions

already undertaken related initiatives (e.g., AustraliCanada, United Kingdom, Oregon, Silicon Valley (CBoston).

• WHY: Development of such a portfolio of indicator

number of possible benefits, including

• Serving as a framework for related strategic planning effort• Enhancing performance and accountability reporting• Informing public policy decisions, including much needed b

government policies, programs, functions, and activities

• Facilitating public education and debate as well as an inform

• WAY FORWARD: Consortium of key players housed 

Academies domestically and related efforts by the OEinternationally.
GAO-07-345CG 

Key National Indicat

Where the United States R

The United States may be the only superpcompared to most other OECD countries key economic, social, and environmental average, the U.S. ranks

OECD Categories for Key Indicators

(2006 OECD Factbook)

• Population/Migration • Energy • Environmen

• Labor Market • Education• Science & Tech. • Public Finan

• Macroeconomic 

Trends

• Prices

16 OUT OF 2

16 OUT OF 2

Source: 2006 OECD Factbook
GAO-07-345CG 

21st Century Challenges 

• Provides background, 

framework, and questions to assist in reexamining the base

• Covers entitlements & other 

mandatory spending, discretionary spending, and tax policies and programs

• Based on GAO’s work for the 

Congress

Source: GAO.
GAO-07-345CG 

Twelve Reexamination A

MISSION AREAS

• Defense• Education & Employment• Financial Regulation & 

Housing

• Health Care• Homeland Security

• Internationa• Natural Reso

Environmen

• Retirement & • Science & T• Transportati

CROSSCUTTING AREAS

• Improving Governance • Reexamining 
GAO-07-345CG 

Illustrative 21st Century Qu

Retirement and Disability Po

• How should Social Security be reformed to provide for 

solvency and sustainability while also ensuring adequatexample, increase the retirement age, restructure benefand/or create individual accounts)?

• What changes should be made to enhance the retireme

workers while protecting the fiscal integrity of the PBGC (for example, increasing transparency in connection witmodifying PBGC’s premium structure and insurance guaplan funding rules, or restricting benefit increases and thsum benefits in connection with certain underfunded pla

• How can existing policies be reformed to encourage in

strategies so that retirement income lasts an individualexample, benefit annuitization)?

• How can existing policies and programs be reformed to 

workers to work longer and to facilitate phased retirememployment (for example, more flexible work schedules pensions while continuing to work)?
GAO-07-345CG 

Illustrative 21st Century Qu

Health Care

• How can we make our current Medicare and Me

sustainable? For example, should the eligibility reage, income requirements) for these programs be 

• How can we perform a systematic reexaminatio

health care system? For example, could public entities work jointly to establish formal reexaminathat would (1) define and update as needed a minessential health care services, (2) ensure that all access to the defined minimum core services, (3) responsibility for financing these services among government, employers, and individuals, and (4) opportunity for individuals to obtain additional serdiscretion and cost?
GAO-07-345CG 

Key Elements for Econ

Security in Retireme

• Adequate retirement income

• Savings• Social Security• Pensions• Earnings from continued 

employment (e.g., part-time)

• Affordable health care

• Medicare• Retiree health care

• Long-term care (a hybrid)• Major Players

• Employers• Government• Individuals• Family• Community
GAO-07-345CG 

Personal Saving Rate Has 

-2.0

0.02.04.06.08.0

10.012.0

1960 1965 1970 1975 1980 1985 1990 

Percent of disposable personal income

Source: Bureau of Economic Analysis, Department of Commerce. 
GAO-07-345CG 

Aged Population as a S

of Total U.S. Populat

05

10152025

1950 1975 2000 2025 

Percent of total population

Population aged 65 a

Source: Office of the Chief Actuary, Social Security Administration.Note: Projections based on the intermediate assumptions of the 2006 Trustees’ Reports.
GAO-07-345CG 

U.S. Labor Force Growt

Continue to Declin

0123

1970 1980 1990 2000 2010 2020 2030 2040 205

Percentage change (5-yr moving average)

Source: GAO analysis of data from the Office of the Chief Actuary, Social Security Administration.Note: Percentage change is calculated as a centered 5-yr moving average of projections based on the inTrustees Reports.
GAO-07-345CG 

Social Security Workers Per B

0123456

1960 1970 1980 1990 2000 2010 2020 2030 2040 20

Covered workers per OASDI beneficiary

Source: Office of the Chief Actuary, Social Security Administration.Note: Projections based on the intermediate assumptions of the 2006 Trustees’ Reports.
GAO-07-345CG 

Working Longer May Help 

the Challenges of an Aging P

• Impact on the Economy

• Larger labor force• Additional economic growth

• Impact on the Federal Budg

• Additional tax revenue• Reduced expenditures: Social S

Medicare

• Impact on Individuals

• Enhanced retirement security an

of life
GAO-07-345CG 

Why Older Americans 

Work Longer

• Cultural Expectation to Retire in Mid-60s

• Social Security early retirement age is 62• Many private pensions have similar or lower eli

• Older Americans Perceive Few Opportunities

• Few older workers felt they had opportunities for par• Most older workers and retirees saw low wage, low s

primary employment opportunities

• Most Employers Do Not Make a Special Effort t

Older Workers

• Many employers say they are willing to implement polic

retain older workers, but few have actually done so

• Employers cite barriers, such as federal pension regula

employment options for older workers
GAO-07-345CG 

Social Security and Medi

Hospital Insurance Trust 

Face Cash Deficits

-900-800-700-600-500-400-300-200-100

0

100200

2005 2010 2015 2020 2025 2030 

Medicare HI cash flow Social Securit

Medicare HI

cash deficit

2006

Social Security

cash deficit

2017

Billions of 2006 dollars

Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration Medicare and Medicaid Services.Note: Projections based on the intermediate assumptions of the 2006 Trustees’ Reports. The CPI is used 
GAO-07-345CG 

Key Dates Highlight Long 

Challenges of the Social Secu

Date Event

OASI DI OASDI

2009 2009

201720272040 

20182028

2042 

-- Cash surplus be

decline

2005 Annual benefit c

cash revenue fr

2013

Trust fund ceasbecause even tainterest fall shor

2025 Trust fund exha

Sources: Social Security Administration, The 2006 Annual Report of the Board of Trustees of the Federal Insurance and Disability Insurance Trust Funds (Washington, DC: May 2006). 
GAO-07-345CG 

GAO Criteria for Evalu

Social Security Reform Pr

Reform proposals should be evaluated athat strike a balance among individual reelements and important interactive effecComprehensive proposals can be evaluthree basic criteria: 

• Financing sustainable solvency• Balancing adequacy and equity in 

structure

• Implementing and administering re
GAO-07-345CG 

Possible Way Forwa

on Social Security Ref

Hold harmless those who are near retiremeretired and make a number of adjustments tyounger workers

• Phase-in an increase in the retirement age 

life expectancy

• Modify income replacement and/or indexin

middle and upper income earners

• Strengthen the minimum benefit• Increase the taxable wage base, if necess• Consider supplemental individual accounts 

individual savings on a payroll deduction bminimum 2 percent payroll contribution and designed much like the Federal Thrift Savireal trust fund and real investments)
GAO-07-345CG 

Key Dates Highlight Lon

Challenges of the Medicare 

Date Event2006 Medicare Part A outlays exc

income

2007 Estimated trigger date for “M

warning”

2012

Projected date that annual “funding” for Part B will excetotal Medicare outlays

2018 

Part A trust fund exhaustedsufficient to pay about 80% A benefits

Source: 2006 Annual Report of The Boards of Trustees of The Federal Hospital Insurance and Federal STrust Funds (Washington, DC, May 2006).
GAO-07-345CG 

SMI Premium as Shar

Average Social Security (OA

0123456789

10

1990 1992 1994 1996 1998 2000 2002 

Percent of average OASI benefit

Source: CMS, Office of the Actuary.Note: Data for 2006 are based on the announced SMI monthly premium of $88.50 and do not include the premium. In August, the Centers for Medicare & Medicaid Services estimated that the national average modrug coverage equivalent to the Medicare standard coverage would be $32.20.
GAO-07-345CG 

Health Care Is the Nation’s 

Expenditure in Fiscal Yea

62.2

50.6

118.4*

41.8**

0

20406080

100120140

Exclusion of employer contributions for insurance premiums and medical car

Deductibility of mortgage interest on owner-occupied dwellings

Exclusion of pension contributions and earnings: employer-sponsored define

Child tax credit

Exclusion of pension contributions and earnings: employer-sponsored 401(K

Estimated dollars in billions

Source: Office of Management and Budget (OMB), Analytical Perspectives, Budget of the United States GovernmentNote: “Tax expenditures” refers to the special tax provisions that are contained in the federal income taxes on individu

include forgone revenue from other federal taxes such as Social Security and Medicare payroll taxes.*If the payroll tax exclusion were also counted here, the total tax expenditure for employer contributions for health inspercent higher or $177.6 billion.**This is the revenue loss and does not include associated outlays of $14.6 billion.
GAO-07-345CG 

Issues to Consider in Exam

Access, Cost, Quality, and P

Responsibility Challeng

• In reforming our health care system, the p

be educated about the differences betweeneeds, affordability, and sustainability aindividual and aggregate level.

• Ideally, health care reform proposals will

• align incentives for providers and consumers to ma

about health insurance coverage and prudent decismedical services,

• foster transparency with respect to the value and c• ensure accountability from health plans and provid

for appropriate use and quality.
GAO-07-345CG 

Possible Objectives 

Health Care Reform

Access• Develop a core set of basic and essential services with univers

provided by employers, unions, and professional organizations 

supplemental coverage could be available as an option but at a Employees Health Benefits Program (FEHBP) as a possible m

Cost• Limit the percentage of the federal budget that can be dedicateQuality• Take steps to achieve above average outcomes on key indicat

infant mortality, life expectancy, and medical error rates)

Personal Responsibility• Encourage individuals to assume more personal responsibility 
GAO-07-345CG 

Selected Potential Healt

Reform Approache

• Reexamine the scope, timing, and structure of Med

Drug Benefit

• Consider re-imposing some limits on direct advertis

drugs 

• Consider some limited importation of prescription d

countries

• Leverage the government’s purchasing authority to 

based purchasing for health care products and serv

• Foster more transparency in connection with health 

outcomes, including leveraging of technology while 

• Encourage case management approaches for peop

acute and chronic conditions to improve the quality care delivered and avoid inappropriate care
GAO-07-345CG 

Selected Potential Healt

Reform Approache

• Foster more preventative care and wellness services an

including fighting obesity and encouraging better nutritio

• Develop a set of national practice standards to help avo

improve outcomes, and reduce litigation

• Revise certain federal tax preferences for health care to 

efficient use of appropriate care

• The federal government should seek to lead by example 

reforming the health care programs for which it is respon(e.g., VA, DOD, FEHBP) 

• Limit spending growth for government-sponsored health 

(e.g., percentage of the budget and/or the economy)

• Pursue multinational approaches to investing in health c• Promote broad-based access to basic and essential hea

efficient health care delivery models

• Provide additional cost sharing mechanisms for individu

pools for alternative levels of coverage, as necessary

• Weigh the reform options for accessing and financing lo

assess the potential role of social insurance and recognburdens, and costs of informal care-giving)
GAO-07-345CG 

Four National Defici

• Budget• Balance of Paym• Savings• Leadership
GAO-07-345CG 

Key Leadership Attributes N

These Challenging and Chan

• Courage• Integrity• Creativity• Stewardship
GAO-07-345CG

The Honorable David M

Comptroller General of the 

Awakening Confere

Sea Island, GA

January 7, 2007
GAO-07-345CG 

On the Web

Web site: www.gao.gov/cghome.htm

Contact

Paul Anderson, Managing Director, Public AffaiAndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office441 G Street NW, Room 7149Washington, D.C. 20548

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