United States Government Accountability Office 

GAO Report to Congressional Committees

SOCIAL SECURITY 

REFORM 

Greater Transparency 

Needed about 

Potential General 

Revenue Financing 

March 2007 

 

GAO-07-213 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

March 2007

SOCIAL SECURITY REFORM 

Greater Transparency Needed about 

Highlights of GAO-07-213, a report to Potential General Revenue Financing 

congressional committees 

Absent reform, Social Security’s 

financing gap will grow until 

currently scheduled benefits can no

longer be paid in full. Recent 

reform proposals often include 

general revenue (GR)—a major 

change that can have significant

implications for the budget as a

whole. This report addresses these 

issues: (1) What information is 

available about GR in recent 

proposal scorings by Social

Security’s Office of the Chief 

Actuary (OCACT)? (2) What 

common mechanisms, especially

GR mechanisms, are used to 

increase program revenue?

(3) What are the implications of GR

for the trust fund and the federal 

budget? We have prepared this

report under the Comptroller 

General’s statutory authority to 

conduct evaluations on his own 

initiative as part of a continued 

effort to assist Congress in 

addressing the challenges facing

Social Security. 

What GAO Recommends

GAO recommends that the

Commissioner of SSA direct 

OCACT to include a summary 

presentation of its analysis to

facilitate comparisons of reform 

proposals especially with respect 

to use of GR and federal budget 

implications. SSA suggested that a

table showing how each provision 

affects the actuarial deficit would 

be helpful. GAO agrees but remains 

of the view that a table that can 

clearly and quickly communicate

both trust fund effects and federal 

budget implications is needed. 

Although focused on the trust fund, OCACT scoring memos are also the 

primary source of information on how proposals would impact the federal 

budget. Memos provide information on GR use and its effects, but experts 

said comparing proposals on this element presents challenges, requiring 

extensive efforts to understand complex tables shown at the end of the 

memos. 

Fourteen of 17 proposals GAO reviewed provided GR (1) as needed to 

maintain trust fund solvency or (2) as specified by formula, amount, or 

source. Nine of the 17 achieved “sustainable solvency” under OCACT’s 

definition using the first approach. This type of unlimited transfer poses the 

greatest potential risk to the federal budget, especially when combined with 

benefit guarantees. In proposals reviewed, amounts of GR under both types 

of approaches ranged up to about twice program shortfall. 

In all proposals using GR, the GR was reallocated from the non–Social 

Security budget. While any additional revenue to the trust fund will help 

solvency, unified federal budget effects depend on the type of revenue—

whether it is new revenue (additional payroll tax revenue or GR that is new 

to the federal budget) versus reallocated GR. Absent other changes, new 

revenue would improve the long-term fiscal imbalance while reallocated GR 

would do nothing to address it. Although raising taxes (payroll or other) or 

cutting benefits would have tangible consequences for taxpayers and 

beneficiaries, e.g., less take-home pay or smaller benefit checks, the 

consequences of transfers from the non–Social Security budget in the form 

of reallocated GR are less likely to be clearly observable. Reallocated GR, 

however, is not free. Regardless of how GR is provided to Social Security, it 

must be paid for at some point. The question is when, and by whom. 

New Revenue versus Reallocated General Revenue 

www.gao.gov/cgi-bin/getrpt?GAO-07-213.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Susan J. Irving 

at (202) 512-9142 or irvings@gao.gov. 
Contents 

Letter 1

Results in Brief 4

Background 9

OCACT Scoring Memos Are Primary Source of Information on 

Reform Proposals, but Detailed Tables Are Difficult to Use for 

Understanding General Revenue and Federal Budget Effects 17 

Recent Proposals Differ by Revenue Mechanism and Reform 

Approach Used, but Most Reallocate General Revenue and Aim 

to Increase Investment Returns 20 

Additional Revenue Improves Trust Fund Solvency but Effects on 

the Federal Budget May Differ Greatly 27 

Conclusions 33

Recommendation for Executive Action 35 

Agency Comments and Our Evaluation 35 

Appendix I Scope and Methodology 37 

Appendix II Comments from the Social Security Administration 38 

Glossary of Terms 40 

Tables 

Table 1: Revenue Mechanisms in Reform Proposals by New and 

Reallocated Revenue 25 

Table 2: Revenue Mechanisms in Reform Proposals by Reform

Approach 26

Table 3: Size of Reallocated General Revenue in Proposals 

Reviewed by Mechanism Used 31 

Figures 

Figure 1: New Revenue versus Reallocated General Revenue in

Social Security Reform 8 

Figure 2: Composition of Spending as a Share of GDP Assuming 

Discretionary Spending Grows with the Economy After 

2007 and All Expiring Tax Cuts Are Extended 11 

Page i GAO-07-213 General Revenue in Social Security Reform
Figure 3: Social Security Flows Today 13 

Abbreviations 

CBO Congressional Budget Office 

CES Committee on Economic Security 

CPI Consumer Price Index 

GR general revenue 

HI Hospital Insurance 

IA individual account 

OASDI Old-Age, Survivors, and Disability Insurance 

OCACT Office of the Chief Actuary 

SSA Social Security Administration 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page ii GAO-07-213 General Revenue in Social Security Reform
United States Government Accountability Office

Washington, DC 20548 

March 22, 2007 

The Honorable Max Baucus 

Chairman 

Committee on Finance 

United States Senate 

The Honorable Herb Kohl 

Chairman 

The Honorable Gordon Smith 

Ranking Member 

Special Committee on Aging 

United States Senate 

The Honorable Charles B. Rangel 

Chairman 

The Honorable Jim McCrery 

Ranking Member 

Committee on Ways and Means 

House of Representatives 

The Honorable Michael R. McNulty 

Chairman 

The Honorable Sam Johnson 

Ranking Member 

Subcommittee on Social Security 

Committee on Ways and Means 

House of Representatives 

Absent substantive reform, the gap between expected Social Security cash 

revenues and benefits that is expected to begin in 2017 will grow until the 

Social Security combined Old-Age Survivors and Disability Insurance 

(OASDI) trust fund1

 is exhausted and benefits at currently scheduled levels 

can no longer be paid in full. Under the 2006 intermediate Trustees’ 

estimates, Social Security’s long-term financial shortfall is estimated at 

 1

In this report, the combined OASDI Trust Funds are referred to as the Social Security trust 

fund. For more information on federal trust funds and other funds dedicated to specific 

programs, see GAO’s report Federal Trust and Other Earmarked Funds: Answers to 

Frequently Asked Questions, GAO-01-199SP (Washington, D.C.: January 2001). 

Page 1 GAO-07-213 General Revenue in Social Security Reform
2.02 percent of total taxable payroll,2 and its trust fund is projected to 

reach exhaustion in 2040.

3

 Since its inception in 1935, Social Security has 

been financed primarily by the payroll tax contributions of employers and 

employees. However, recent reform proposals have often used—and in 

some cases relied primarily on—general revenue financing4 to help 

address the program’s financial shortfall. Many of the reform proposals 

estimated (scored) by the Office of the Chief Actuary (OCACT) at the 

Social Security Administration (SSA) as achieving “sustainable solvency”

5

for the trust fund would give Social Security significant amounts of general 

revenue as part of a package of modifications. 

Such use of general revenue for Social Security would represent a major 

shift for this important and popular program. Since enactment in 1935, 

Social Security payroll taxes have been increased and benefits expanded, 

but the program’s financing framework has remained largely the same. 

The use of general revenue was proposed both before the actual creation

of Social Security and during short-term financing crises in the 1970s and 

1980s as an alternative to payroll tax increases, but Congress for the most 

part has rejected general revenue financing for Social Security. Use of 

general revenue would change the “self-supporting” nature of the program 

and has thus been controversial. Some have feared that such a shift would 

facilitate benefit expansion by undermining the fiscal discipline that 

requires limiting benefit outlays to trust fund balances; others have feared 

that use of general revenue would lead ultimately to a change from a 

universal program to a reduced, means-tested benefit. Since 1983, small 

 2

For explanation of technical terms, see the glossary at the end of this report. 

3

Social Security’s financial condition has traditionally been measured separately from that 

of the rest of the budget by comparing the program’s expected revenues with expected 

costs over a 75-year timeframe. Estimates of the solvency of Social Security’s trust funds in 

this framework have been prepared by the Office of the Chief Actuary (OCACT) at the

Social Security Administration (SSA) each year since 1941. 

4

As used in this report, general revenue refers to any revenue not derived from payroll tax 

contributions. (See text box.) 

5

When OCACT describes a proposal as modifying the program so that there is a positive 

trust fund ratio throughout the 75-year projection period and these ratios are stable or

rising at the end of the period, this meets the definition of “sustainable solvency” in the

2006 Trustees’ Report. 

Page 2 GAO-07-213 General Revenue in Social Security Reform
amounts of general revenue from taxation of the Social Security benefits 

of upper-income retirees have been dedicated to the program.6

In the coming years, as the baby boom generation retires, the nation will 

face a daunting and unprecedented long-term fiscal challenge. GAO’s longterm budget simulations show that current fiscal policy is unsustainable 

and, absent changes, will lead to an escalating spiral of federal deficits and 

debt.7

 Social Security is not the major driver of the long-term fiscal 

challenge—the cost of government-financed health care is—but Social 

Security reform has the potential to affect not only the financial condition

of the program’s trust fund but also the financial condition of the Nation. 

As the reform debate resumes, it will be important to make transparent the 

implications of general revenue use not only for the trust fund but also for 

the federal budget as a whole. 

This report seeks to answer the following questions: (1) What information 

is available about general revenue use in recent Social Security proposal 

scoring memos by OCACT and how can available information about 

general revenue use best be presented in order to facilitate comparison of 

reform proposals? (2) In recent Social Security reform proposals, what 

common mechanisms, especially general revenue mechanisms, are used to

increase revenue to the program? (3) What are the implications of general 

revenue use for the trust fund and the federal budget? 

To answer these questions, we reviewed relevant literature on Social 

Security and performed an in-depth analysis of 17 OCACT proposal 

scoring memos done from 2001 through 2006. These included all proposals 

 6

The Social Security Amendments of 1983 require beneficiaries with income (defined as

adjusted gross income plus tax-exempt bond interest plus one-half of Social Security 

benefits) of more than $25,000 if single, and $32,000 if married filing jointly, to include up to

50 percent of their benefits in their taxable income, beginning in 1984. Revenues from this 

provision are credited to the OASDI Trust Funds. The Omnibus Budget Reconciliation Act 

of 1993 required beneficiaries with incomes of more than $34,000 if single, and $44,000 if 

married filing jointly, to include up to 85 percent of their benefits in their taxable income, 

beginning in 1994. Revenues attributable to taxation of over 50 percent of Social Security

benefits are credited to the Medicare Hospital Insurance (HI) trust fund. These levels are 

not adjusted for inflation or wage growth, so the percentage of beneficiaries paying tax on 

Social Security benefits is expected to rise in the future. 

7

GAO’s long-term simulations assume that scheduled benefits for Social Security and 

Medicare’s HI Trust Fund are paid through borrowing, that is, by using reallocated general 

revenue after program trust funds reach exhaustion. (See textbox, “New Versus 

Reallocated General Revenue in Social Security.”) For more information on GAO’s 

simulations, see http://www.gao.gov/special.pubs/longterm/. 

Page 3 GAO-07-213 General Revenue in Social Security Reform
scored as achieving long-range solvency. Where a proposal was scored in 

multiple years, we used the most recent scoring. We also interviewed 

selected federal budget experts representing a range of views on reform 

approaches and met with officials from OCACT and Congressional Budget 

Office (CBO) involved in proposal scorings. (See app. I for more details on

our scope and methodology.) 

We have prepared this report under the Comptroller General’s authority to

conduct evaluations on his own initiative, and it is intended to assist 

Congress in its deliberations on Social Security and retirement issues. The 

report is addressed to interested congressional committees. 

We performed our work between May 2005 and December 2006 in 

accordance with generally accepted government auditing standards. We 

requested comments on a draft of this report from the Commissioner of 

Social Security and incorporated those comments as appropriate. (See 

“Agency Comments and Our Evaluation” and app. II.) 

Scoring memos prepared by OCACT usually serve as the basis for 

discussion of the financing changes—including any use of general 

revenue—contained in reform proposals.8

 These memos focus on the 

impact of a proposal on the combined OASDI trust fund. Understanding 

the use of any general revenue in a given proposal, the proposal’s impact 

on the federal budget, and how different proposals compare on these 

dimensions presents challenges. Although OCACT scorings have evolved 

in recent years to include estimates of a proposal’s use of general revenue

and the proposal’s year-by-year impact on the federal budget, detailed 

information on these effects is available primarily in the complex technical 

tables at the end of the scoring memo. 

Results in Brief 

In OCACT’s recent scorings, five different mechanisms were used to 

provide general revenue to maintain the current Social Security program9

 8

While OCACT has primary responsibility for scoring reform proposals, CBO has more 

recently begun to publish long-term scorings of some proposals. OCACT and CBO scorings 

have both substantive and presentational differences including: different assumptions, 

baselines, and time periods covered. One particularly important difference is the use of 

different economic assumptions, which results in CBO having more optimistic estimates of 

current-law program finances.

9

That is, maintain a modified pay-as-you-go social insurance program of defined benefits

paid for primarily by payroll tax revenue. 

Page 4 GAO-07-213 General Revenue in Social Security Reform
or to a restructured Social Security system that included individual 

accounts (IA). These mechanisms can be characterized as providing for 

either unlimited or limited amounts of general revenue financing. The first 

mechanism provides for unlimited amounts of general revenue to be 

transferred to the trust fund as needed to maintain solvency (e.g., a 100 

percent trust fund ratio). The other four mechanisms provide limited or 

defined amounts of general revenue through (1) general revenue transfers 

to the trust fund specified by formula or amount; (2) refundable tax 

credits, used to fund IAs; (3) dedication of estate tax revenue to the trust 

fund; and (4) redirection of Social Security benefit taxation revenue from 

Medicare’s Hospital Insurance trust fund to the Social Security trust fund. 

Fourteen of the 17 proposals we reviewed used reallocated general 

revenue, most often to finance program restructuring, and 9 proposals 

used the mechanism of unlimited transfers as needed to achieve a 

specified trust fund ratio, which guaranteed “sustainable solvency” for the 

trust fund under OCACT’s definition. (See text box for definition of 

“reallocated general revenue.”) Three proposals did not use general 

revenue. Of the 17 proposals, 7 increased payroll tax revenues. 

Page 5 GAO-07-213 General Revenue in Social Security Reform
New versus Reallocated General Revenue in Social Security 

In this report, “general revenue” in Social Security is defined as any revenue that does 

not derive from payroll tax contributions. In this framework, interest on trust fund 

assets is considered as deriving from payroll tax contributions.a

 All other revenue to 

Social Security, including revenue from taxation of certain Social Security benefits, is 

classified as general revenue.

b

 This framework accords with the federal budget 

accounting perspective of our analysis. This conforms to the discussion of general 

revenue use in Social Security found on SSA’s history web site.c

 

Although any additional payroll tax revenue would be new to the federal budget, 

general revenue may be either new to the federal budget as a whole or reallocated 

from other federal priorities. 

• New general revenue is revenue that derives from a new source, that is, from a 

new tax or increase to an existing tax. For example, in 1983, the Social Security 

benefits of upper income retirees were made subject to income taxation, and the 

revenue from this new tax was dedicated to the Social Security trust funds. From a 

federal budget perspective, this change represented new general revenue at that 

time. This change has remained in place and constitutes a permanent form of 

general revenue in today’s Social Security program. 

• Reallocated general revenue does not come from a new source. Rather, it is 

reallocated from existing revenue to the Treasury. Following World War II, 

reallocated general revenue was used to fund Social Security benefits for military 

personnel and also a small flat benefit for individuals who were at least age 72 in 

1968 but not entitled to Social Security through their work history. 

a

GAO’s definition of general revenue assumes that the interest rate used to credit the trust funds 

reflects the rates for long-term federal marketable government securities, as is the case under 

current law. The Department of Treasury determines the interest rate earned on trust fund 

balances for Social Security using a statutory formula that sets the interest rate equal, at the time 

of issue, to the average market yield on outstanding marketable government securities not due or 

redeemable for at least 4 years. 

b

From a tax perspective, accounting treatments are more complex. For example, the earned 

income tax credit, a refundable tax credit available to certain lower income earners, was intended

to help offset Social Security payroll taxes for those eligible. See GAO, Tax Administration: 

Earned Income Credit—Data on Noncompliance and Illegal Alien Recipients, GAO/GGD-95-27 

(Washington, D.C.: Oct. 25, 1994). 

c

See http://www.ssa.gov/history/genrev.html. 

Page 6 GAO-07-213 General Revenue in Social Security Reform
All proposals we reviewed were scored by OCACT as able to pay benefits 

as scheduled in that proposal over the 75-year period, but the effects on 

the federal budget shown in OCACT’s technical tables varied widely. For 

example, the effect on debt held by the public ranged from an 

improvement of $45 trillion to a worsening of $41 trillion over the 75-year 

projection period.10 Unlimited transfers of reallocated general revenue as 

needed to achieve trust fund solvency—by definition—pose the greatest 

potential risk to the budget especially when combined with benefit 

guarantees. In the proposals we reviewed, amounts of general revenue

transferred under this mechanism ranged up to about twice total program 

financial shortfall. Limited transfers, however, were also quite large, in 

some cases somewhat more than twice program shortfall. 

From the trust fund perspective, any type of increased revenue the trust 

fund receives —new general revenue, reallocated general revenue, or 

increased payroll tax revenue—will improve the actuarial balance and 

increase the trust fund’s capacity to pay benefits. From the budget 

perspective, however, new revenue from any source would improve the 

long-term fiscal imbalance while reallocated general revenue would do 

nothing to address it, all other things equal. (See fig. 1.) New revenue

would have tangible consequences for taxpayers, e.g., less take-home pay, 

while reallocated general revenue is less likely to be clearly observable. 

Reallocated general revenue, however, is not free. Regardless of how 

general revenue is provided to Social Security, it must be paid for at some 

point. The question is when, and by whom. 

 10In constant 2005 dollars under OCACT’s expected yield assumption. Estimates are based

on OCACT scorings and represent change in debt levels compared to a baseline in which 

scheduled benefits are paid in full and no other changes are made. Estimates were not

available for one of the plans reviewed. 

Page 7 GAO-07-213 General Revenue in Social Security Reform
Figure 1: New Revenue versus Reallocated General Revenue in Social Security 

Reform 

Regardless of their views on reform, most budget experts we spoke with 

believed greater transparency was needed concerning the use of general 

revenue in reform proposals. In view of the long-term fiscal challenge 

facing the nation, some experts were especially concerned about 

proposals’ use of reallocated general revenue for Social Security. As one of

these experts emphasized, the public needs to understand that reallocated

general revenue for Social Security is not “free.” Reallocated general 

revenue would need to be paid for now or later through lower spending, 

higher taxes, and/or more debt.11 Other budget experts viewed the use of 

reallocated general revenue as making possible a transition to a 

restructured Social Security system that would include IAs. These experts

viewed the use of reallocated general revenue as a transition cost that 

would eventually be repaid to the budget as a whole.12 Most experts we 

spoke with were concerned about the mechanism of providing for 

unlimited transfers of reallocated general revenue as needed to assure 

trust fund solvency. They noted that since this mechanism in effect 

 11See GAO, Options for Social Security Reform, GAO-05-649R (Washington, D.C.: May 6,

2005). 

12Advocates for these types of changes state that over time, the savings to the government 

(compared to paying currently scheduled benefits in full) will come to exceed the cost of 

funding individual accounts. 

Page 8 GAO-07-213 General Revenue in Social Security Reform
removes the possibility of trust fund exhaustion, it disables the trust fund’s 

capacity to signal policymakers and the public of a need to take action.

In coming decades, our nation will face a serious long-term fiscal 

challenge that will put America’s fiscal future at risk. Substantive reform 

of Social Security will involve hard choices. OCACT’s valuable information 

and complex analyses could make an even greater contribution to the 

reform debate if they were more readily accessible to nonexpert users. To 

improve understanding of proposed changes to Social Security, GAO is 

recommending that the Commissioner of SSA direct the Office of the Chief 

Actuary to include a summary presentation of its analysis in future scoring 

memoranda that will enable policymakers and the general public to 

quickly and easily compare Social Security reform proposals especially

with respect to proposed use of general revenue and implications for the 

federal budget as a whole. This type of presentational change would not 

require any additional analysis but could greatly facilitate comparison of 

proposals to one another. 

SSA did not explicitly agree or disagree with our recommendation in its 

comments. In response to the recommendation, SSA noted that recent 

OCACT memos had added an additional table (“table d”) that, SSA 

believes, already provides key information on general revenue use in 

proposals. SSA also expressed the view that a summary table showing the 

effects on the actuarial deficit of each proposal provision would be 

helpful. As our report had noted, this table has been included in some 

memoranda at the request of the proposal’s sponsor. 

While we agree with SSA that both the technical and summary table it

describes add value, we remain of the view that OCACT needs to develop 

a new table that can clearly and quickly communicate both trust fund 

effects and federal budget implications of a proposal. Our report 

acknowledged the value and completeness of OCACT’s analyses including 

those presented in “table d.” The message of our report was not that 

OCACT needs to do additional analytic work. Our message was rather 

that OCACT’s existing analyses need to be summarized and highlighted so

that a proposal’s implications for both the trust fund and the federal 

budget as a whole are immediately clear. 

When Social Security was enacted in 1935, the nation was in the midst of 

the Great Depression. About half of the elderly depended on others for 

their livelihood, and roughly one-sixth received public charity. Many had 

lost their savings. Social Security was created to help ensure that in the 

future the elderly would have adequate incomes in retirement and would 

Background 

Page 9 GAO-07-213 General Revenue in Social Security Reform
not have to depend on welfare. Instead, the new program would provide 

benefits based on the payroll tax contributions of workers and their 

employers. Today Social Security is much more than a retirement 

program. In 1939 Social Security coverage was extended to the dependents 

of retired and deceased workers and in 1956 to the disabled. Over onethird of beneficiaries receive benefits for reasons other than old age.13

Social Security Is One Part 

of the Long-Term Fiscal 

Challenge 

Our work on Social Security reform has emphasized the need for change

not only because future program revenues are expected to fall short of 

what is needed to pay currently scheduled benefits in full but because 

Social Security, Medicare, and Medicaid taken together will consume an 

increasing share of the budget and the economy. To move into the future 

with no changes in federal health and retirement programs is to envision a 

very different role for the federal government. Little room would be left for 

other federal spending priorities such as national defense, education, and

law enforcement. Absent changes in the structure of Social Security and

Medicare, some time during the 2040s government would do nothing but 

pay interest on the debt and mail checks to retirees. Accordingly, 

substantive reform of Social Security and health programs remains critical 

to recapturing our future fiscal flexibility. 

Overall, the federal budget is facing unsustainable deficits and debt. Our 

most recent long-term budget simulations provide a compelling illustration 

of how unsustainable the long-term fiscal outlook is under current 

policies. 

As shown in figure 2, the long-term outlook under plausible assumptions is 

bleak. A demographic shift will begin to affect the federal budget in 2008 

as the first baby boomers become eligible for Social Security benefits. 

Over time, this shift will cause spending for federal health and retirement 

programs including Social Security to swell. Long-term commitments for 

these and other federal programs will drive a massive imbalance between 

spending and revenues that cannot be eliminated without difficult policy 

choices and ultimately significant policy changes.

 13For more information on the Social Security program, see GAO, Social Security Reform: 

Answers to Key Questions, GAO-05-193SP (May 2005). 

Page 10 GAO-07-213 General Revenue in Social Security Reform
Figure 2: Composition of Spending as a Share of GDP Assuming Discretionary 

Spending Grows with the Economy After 2007 and All Expiring Tax Cuts Are

Extended 

As figure 2 shows, contrary to popular perception, although Social 

Security grows in size, it is not the major driver of the long-term fiscal 

challenge. Spending for Medicare and Medicaid is expected to grow much 

faster. Many specific solutions have been proposed for Social Security, but 

approaches to reducing health care cost growth remain elusive. Moreover, 

addressing federal programs such as Medicare and the federal-state 

Medicaid program will need to involve changes in the health care system 

of which they are a part. This will be a societal challenge affecting all age 

groups. While Social Security reform alone cannot eliminate the long-term 

fiscal challenge, the likely effects of reform on the nation’s fiscal future 

should be clearly understood and taken into account. 

Page 11 GAO-07-213 General Revenue in Social Security Reform
Social Security’s benefit payments and program receipts are tracked in 

federal budget accounts that are known as trust funds. Trust funds are one 

type of mechanism created to account for receipts that are dedicated to a 

specific fund for a specific purpose.14 Social Security has two trust funds, 

the Old-Age Survivors Insurance (OASI) Trust Fund and the Disability 

Insurance (DI) Trust Fund. The combined OASDI trust fund comprises the 

financial resources of the Social Security system.15 Social Security has a 

permanent appropriation that permits the payment of benefits as long as 

the relevant trust fund account has a sufficient balance. 

Social Security’s Trust 

Fund and the Federal 

Budget 

Social Security’s outlays are limited to trust fund balances, but the 

program’s outlays and revenues are also part of the federal unified budget. 

Today, Social Security payroll tax revenues exceed benefits. In 2005, the 

Social Security trust fund paid $530 billion in benefit payments and 

administrative costs and took in $608 billion in cash revenues, leaving a 

cash surplus of about $78 billion.16 By law, the Social Security trust fund 

must invest any cash surpluses in interest-bearing federal government 

securities. Throughout its history, Social Security has invested mostly in a 

special type of nonmarketable securities that, like debt held by the public, 

are guaranteed by the full faith and credit of the U.S. government. 

Treasury borrows the cash from Social Security’s surplus to pay for other 

government expenses, and this use of Social Security’s excess cash 

revenues reduces the amount Treasury would otherwise need to borrow 

from the public to finance other federal programs.17 (See fig. 3). 

 14In contrast to private trust funds, the federal government does not have a fiduciary 

responsibility to the trust fund beneficiaries. Congress can raise or lower future trust fund 

collections and payments by changing existing laws. 

15In this report, the combined OASDI Trust Funds are referred as the Social Security trust 

fund. For more information on federal trust funds and other funds dedicated to specific 

programs, see GAO-01-199SP. 

16Total receipts to the combined trust funds, including $94 billion in interest income, were 

$702 billion in calendar year 2005. 

17If Treasury could not borrow from the Social Security trust fund, it would have to borrow

more in the private capital market and pay interest in cash to finance current budget policy. 

However, Treasury still has to pay the trust fund interest on these securities. For a more 

detailed discussion of the temporary trust fund buildup and how it interacts with the 

federal unified budget, see GAO, Social Security Financing: Implications of Government

Stock Investing for the Trust Fund, the Federal Budget, and the Economy, 

GAO/AIMD/HEHS-98-74 (Washington, D.C.: Apr. 22, 1998). 

Page 12 GAO-07-213 General Revenue in Social Security Reform
Figure 3: Social Security Flows Today 

Revenue from 

12.4% payroll 

tax contributions

and taxation of 

Social Security 

benefits

Income tax 

revenue, 

fees, etc.

Social Security cash surplus

Special Treasury securities equal to Social 

Security cash surplus plus interest on 

Trust Fund balances

Borrowing from 

the public

Outlays for 

Social Security 

benefits

Social 

Security 

Trust Fund

General 

Fund

Outlays for 

non–Social Security 

spending

Source: GAO.

UNIFIED BUDGET

These excess cash revenues, however, will begin to diminish in 2009, one 

year after the oldest members of the baby boom generation first become 

eligible for Social Security old age benefits. This downturn in the Social 

Security cash surplus—the difference between payroll taxes and benefits

paid—will begin a squeeze on the rest of the budget that will worsen in the 

coming years, making less cash revenue available for other federal 

priorities. By 2017 trust fund cash revenues will be inadequate to pay 

currently scheduled benefits in full, and the Social Security trust fund will 

need to redeem trust fund assets from the Treasury. To pay the trust fund, 

Treasury will need to provide cash from general revenues in exchange for 

those trust fund securities. This can come only through increased revenue, 

increased borrowing from the public, reduced spending in the rest of the 

government, or some combination of these. While the trust fund is 

redeeming its securities, it will continue to pay full benefits, but the 

redemptions will reduce overall federal budgetary flexibility. 

Page 13 GAO-07-213 General Revenue in Social Security Reform
As we have said previously, Social Security reform proposals will need to

be evaluated on a number of criteria. Our work on various aspects of this 

important program has emphasized that Social Security reform is about 

more than solvency. To evaluate reform proposals, we have suggested that 

policy makers should consider three basic criteria: 

Our Framework for

Evaluating Reform 

Proposals 

1. the extent to which the proposal achieves sustainable solvency and how 

the proposal would affect the economy and the federal budget; 

2. the balance struck between the twin goals of individual equity (rates of 

return on individual contributions) and income adequacy (level and 

certainty of benefits);18 and 

3. how readily such changes could be implemented, administered, and 

explained to the public. 

Our first criterion of sustainable solvency reflects the need to look at 

Social Security reform both in terms of its trust fund and in the larger 

context of the federal budget as a whole. It is different from OCACT’s 

definition, which is focused solely on the trust fund, for which they are 

responsible. 

From a micro perspective, projected trust fund balances can provide a 

vital though imperfect signaling function for policymakers about 

underlying fiscal imbalances in covered programs. Tracking the estimated 

future balances makes it possible in turn to estimate how much more 

funding is needed to pay for the benefits scheduled in current law. A 

shortfall between the long-term projected fund balance and projected 

costs can signal that the fund, either by design or because of changes, is 

collecting insufficient monies to finance currently scheduled future 

payments. This signaling device can eventually prompt policymakers to 

action. 

From a macro perspective, however, program solvency measures such as 

the trust fund exhaustion date and the actuarial balance calculation 

provide no information about the broader question of program 

sustainability—that is, the capacity of the future economy and the federal

 18See GAO, Social Security: Program’s Role in Helping Ensure Income Adequacy, 

GAO-02-62 (Washington, D.C.: Nov. 30, 2001. For a discussion of individual equity issues, 

see GAO, Social Security: Issues in Comparing Rates of Return with Market 

Investments, GAO/HEHS-99-110 (Washington, D.C.: Aug. 5, 1999). 

Page 14 GAO-07-213 General Revenue in Social Security Reform
unified budget to pay program benefits over the long run. When a program 

is not fully self-financed, as is the case with Social Security, projected 

accumulated trust fund balances do not necessarily reflect the full future 

cost of existing government commitments. Accordingly, trust fund 

balances are not an adequate measure of Social Security’s sustainability. 

The critical question is whether the Nation and the government as a whole 

can afford the benefits in the future and at what cost in terms of other 

claims on scarce resources. Extending a trust fund’s solvency without 

reforms to make the underlying program more sustainable over the long

term can obscure the warning signals that trust fund balances provide, 

thereby creating a false sense of security and delaying needed program 

reform. 

Evaluating proposals is a complex task involving trade-offs between 

competing goals. Reform proposals should be evaluated as packages that 

strike a balance among individual reform elements and important 

interactive effects between these elements. The overall evaluation of any 

particular reform proposal depends on the weight individual policy makers

place on each criterion. 

Social Security Financing 

Has Evolved, but Payroll 

Taxes Remain the

Principal Financing 

Mechanism 

Since its establishment in 1935 Social Security has been financed primarily 

by payroll taxes contributed equally by employers and employees. Both 

tax rates and benefits have changed over time, but Congress has generally

rejected proposals for including general revenue in financing Social 

Security benefits. Payroll tax rates have increased, from a total of 2 

percent of taxable payroll in 1937—when payroll taxes were first 

collected—to 12.4 percent today. Benefits have also been expanded to 

include workers’ families and the disabled. 

The question of whether some general revenue should be used to minimize 

the burden of payroll taxes has been debated since the program’s 

inception. The Committee on Economic Security (CES), tasked by 

President Roosevelt with designing the program, believed that expected 

benefit payments would exceed expected payroll tax revenues beginning

about 1965 and at that time general revenue should be used to fill the gap.

Under this financing arrangement, the general revenue share was 

ultimately expected to reach about one-third of total revenues. President 

Roosevelt rejected the idea of using general revenue in program financing.

He endorsed payroll tax financing on the grounds that it would ensure the 

new program would be “self-supporting.” A perceived link between 

benefits and payroll tax contributions would, he believed, serve to 

preserve the program in the future. Using general revenue would make the 

Page 15 GAO-07-213 General Revenue in Social Security Reform
program welfare—in President Roosevelt’s words, “the dole by another 

name.” 

President Roosevelt’s financing approach envisioned the buildup of a 

reserve fund that would serve to fund benefits in the long term, but 

objections were made to this approach. Some believed that the existence 

of a large reserve fund would lead to higher benefit levels or other 

increased government spending; others objected to the underlying concept 

of prefunding benefits which they believed would lock in specific levels of

support for aged beneficiaries in the future. Congressional changes to the 

program that expanded benefits and postponed scheduled payroll tax 

increases put the program on a pay-as-you-go basis, that is, revenues from 

current workers in a given year pay for the benefits of current 

beneficiaries in that year. 

Nevertheless, the issue of whether general revenue should be used to 

supplement payroll tax financing has recurred throughout Social 

Security’s history. During short-term financing crises in the late 1970s and

early 1980s, proposals were made for general revenue use. At that time 

some opposed this use of general revenue believing that it would obscure 

the true cost of the program and lead to benefit expansion. Reform 

legislation passed in 1983 did include permanent use of some general 

revenue by imposing a new income tax on the Social Security benefits of 

upper income retirees and dedicating that tax to the trust fund.19 Although 

the income thresholds were not indexed to inflation, amounts of revenue

to Social Security from this source have been and remain small relative to

total program tax revenue. 

Since the legislation passed in 1977 and 1983, a temporary build up of trust 

fund assets has caused Social Security to temporarily deviate somewhat 

from pay-as-you-go financing. This occurred in part because the large baby

boom generation makes the size of the workforce large relative to the 

beneficiary population. As the baby boom generation retires and is 

replaced by a workforce that will grow less rapidly than in the past, trust 

fund assets will be redeemed to pay benefits, but these assets plus payroll 

tax revenues will eventually be insufficient to pay currently scheduled

benefits in full. To deal with this structural imbalance, many proposals 

have included the use of general revenue to supplement payroll tax 

 19Since Social Security benefits had previously been untaxed, this was seen by some as a

benefit cut. 

Page 16 GAO-07-213 General Revenue in Social Security Reform
financing—often in large amounts relative to total financing and over 

extended time periods. For example, both proposals made by President 

Clinton in 1999 and reform models put forward in 2003 by the Commission 

to Strengthen Social Security established by President George W. Bush 

included the use of general revenue.

OCACT scoring memos are the primary source of information on recent 

Social Security reform proposals. Since the mid-1990’s, OCACT has scored 

a wide variety of comprehensive reform proposals. Each proposal 

modifies the OASDI program using one or several of the following 

provisions that: (1) reduce benefits, e.g. through changes to indexing 

formulas and/or other methods; (2) increase benefits for special 

populations; (3) raise revenue through payroll tax increases; (4) use 

general revenue financing through a range of mechanisms (not always 

specified as general revenue); (5) invest trust fund assets through 

government investment in marketable securities; or (6) change the current

structure of the program by creating IAs.20 The format of these scoring 

memos has evolved over time, partially in response to feedback from 

users. More recent scoring memos are available on OCACT’s web site.21 In 

addition, OCACT has begun to post estimates of many of the stand-alone 

provisions that have been suggested to modify the Social Security program 

and improve its financial status. Many of these are also included in the 

various comprehensive proposals. 

OCACT Scoring 

Memos Are Primary 

Source of Information 

on Reform Proposals, 

but Detailed Tables 

Are Difficult to Use 

for Understanding 

General Revenue and 

Federal Budget 

Effects

OCACT’s scoring memos typically emphasize two important summary 

measures: (1) the change to actuarial balance and (2) ability of the trust 

fund to meet obligations throughout the 75-year period and beyond, an 

indicator of “sustainable solvency” as defined by OCACT.22 In recent years, 

sustainable solvency as defined by OCACT has become the standard by 

which reform proposals are measured. When OCACT evaluates a reform

proposal as meeting the definition of sustainably solvent, the proposal 

 20For a more detailed discussion see GAO-05-649R and GAO, Social Security Reform: 

Implications of Different Indexing Choices, GAO-06-804 (Washington, D.C.: Sept. 14,

2006). 

21http://www.ssa.gov/OACT/solvency/index.html. 

22When OCACT describes a proposal as modifying the program so that there is a positive 

trust fund ratio throughout the 75-year projection period and these ratios are stable or

rising at the end of the period, this meets the definition of “sustainable solvency” in the

2006 Trustees’ Report. 

Page 17 GAO-07-213 General Revenue in Social Security Reform
sponsor often highlights this point in press statements and other 

statements. This measure, however, considers only trust fund effects and 

not the effect of the proposal on the federal budget.23

To discover crucial information on a proposal’s general revenue use and 

federal budget effects, a user of OCACT’s scoring memos must consult the 

detailed tables at the end of the memo. The type and amount of 

information included in the tables has increased over time. Current tables

are generally comprehensive in presenting a proposal’s financial effects. 

Columns display year-to-year changes in the financial operations of the 

trust fund and the unified budget as well as the cashflow between the trust 

fund and the general fund of the U.S. Treasury. For those plans that 

include either government or IA investment in equity markets, OCACT 

publishes two sets of tables, one reflecting “expected-yield” assumptions 

on investments and a second set reflecting “low-yield” assumptions. A few 

of the scoring memos we analyzed included other tables that provide 

insight into general revenue use. One of these tables shows the impact of

each individual provision on the long-range actuarial balance (as a 

percentage of payroll). This table shows to what extent a single provision, 

by itself, either improves or worsens the actuarial balance.24

Budget experts we spoke with agreed that the tables had evolved and now 

provide more information but they also said that the tables are difficult to 

use and take much effort to understand. In particular, they said that the 

“information is not reader-friendly” and “key estimates of general revenue

are not highlighted and it is not always clear if there is a specified source 

for the general revenue.” Our analysis of 17 recent scoring memos 

generally confirmed this assessment. Policymakers and the public may 

have a difficult time comparing how different plans get to sustainable 

solvency and the implications for the rest of the budget, future deficits, 

and debt held by the public. Similarly, the 1999 and 2003 Technical Panels 

on Assumptions and Methods, convened by the Social Security Advisory 

Board, expressed concerns about consistency in presentation of 

information in scoring memos. One recommendation made by budget

experts was for an up-front summary table with crucial information that a 

 23On the other hand, our criterion for sustainable solvency measures the effect on the trust 

fund and includes evaluating how a proposal would affect the U.S. economy and the federal 

budget. 

24OCACT officials told us that this table was included only when specifically requested by

the plan sponsor. 

Page 18 GAO-07-213 General Revenue in Social Security Reform
reader needs in order to compare plans. Although we found no agreement

on precise content for the table, information about benefit cuts, tax 

increases, and general revenue could somehow be included.

OCACT staff told us that the principal purpose of their scorings was to 

show the effect of a proposal on trust fund solvency and not on the budget

as a whole. They added that they were generally satisfied with the current

format for scoring memos, noting that they had not received any negative 

feedback from users. They did agree that information could be more userfriendly and are considering ways to achieve this goal, for example 

through the inclusion of visuals. OCACT staff further noted that scoring 

proposals is resource-intensive. Although some scorings can take up to a 

year, others must be done under tight timeframes, e.g., when sponsors are 

planning to introduce legislation. They also told us that they have 

discussed options for a summary table with selected users but had not 

found any consensus on what information should be highlighted. OCACT 

staff emphasized that their scorings are and need to continue to be 

perceived as objective. In any case, OCACT staff did not think that the use 

of general revenue should be highlighted above other proposal changes. 

More recently, CBO has developed the capacity to do long-term estimates 

of Social Security reform proposals and has completed five long-term 

scoring memos to date. OCACT and CBO scoring memos have key 

substantive and presentational differences. One particularly important 

difference is the use of different economic assumptions, which results in 

CBO currently having more optimistic estimates of current-law program 

finances. Although budget experts we spoke with generally thought that 

CBO scoring memos have been beneficial analytical tools, they also 

thought that OCACT scoring memos were likely to continue to be the 

primary source of information in any debate over reform proposals. 

Therefore, having OCACT scoring memos provide clear and easily 

accessible information on any use of general revenue and on the impact of 

any reform proposal on the broader budget remains important. 

Page 19 GAO-07-213 General Revenue in Social Security Reform
Almost all proposals we reviewed package multiple revenue options 

and/or benefit changes to achieve sustainable solvency, but they differ25 in 

both the broad approach they take for dealing with the long-range 

solvency problem and the revenue mechanisms they use. Reform 

approaches can be divided into two broad categories: approaches that 

maintain the current structure, that is, a pay-as-you-go social insurance 

program of defined benefits paid for primarily by payroll tax revenue, and 

approaches that create a new structure that includes IAs. 

Provisions that guarantee revenue to the Social Security trust fund can be

classified as: reallocated general revenue mechanisms, payroll tax 

mechanisms, or new general revenue mechanisms (see Text Box). A 

reallocated general revenue mechanism is any provision that increases 

revenue to the program by redirecting existing general revenue expected 

under existing law to the trust fund. Payroll tax mechanisms directly 

change the amount of payroll taxes contributed and therefore increase 

payroll taxes flowing into the trust fund. A new general revenue 

mechanism would establish a new source of income to the general fund 

and dedicate it to the Social Security trust fund. Examples would be the 

creation of a national sales tax or increases in income or excise taxes with 

the revenue from any of these dedicated to the Social Security trust fund. 

None of the proposals we examined introduced new general revenues. All 

of them—although described and characterized in various ways—used 

only mechanisms that would reallocate general revenue and/or increase 

payroll taxes. 

Recent Proposals 

Differ by Revenue 

Mechanism and 

Reform Approach 

Used, but Most 

Reallocate General 

Revenue and Aim to 

Increase Investment 

Returns 

All 17 of the Social Security reform proposals we analyzed include at least 

one mechanism to increase revenue to Social Security and some use more 

than one mechanism.26 Fourteen of the 17 proposals we examined would 

reallocate general revenue, that is, transfer existing revenue from the 

general fund; the other 3 proposals did not use general revenue. 

The 14 proposals that used reallocated general revenue did so by means of 

five different mechanisms. These mechanisms can be characterized as 

 25For analysis of benefit and revenue options described in terms of GAO’s framework for 

evaluating Social Security reform plans, see GAO, Options for Social Security Reform, 

GAO-05-649R (Washington, D.C.: May 6, 2005). 

26Because some proposals were scored in multiple years or were not designed to achieve 

75-year solvency, the universe of proposals discussed in this report is comprised of 17

proposals. Scorings can be found at http://www.ssa.gov/OACT/solvency/index.html. 

Page 20 GAO-07-213 General Revenue in Social Security Reform
providing for either unlimited or limited amounts of general revenue 

financing. The first mechanism provides for unlimited general revenue; the 

other four use varying means to provide limited or defined amounts of 

general revenue financing. Unlike plans with unlimited transfers to assure 

trust fund solvency, proposals with general revenue transfers limited by 

specified amounts, source, or formula, could be insolvent at some point in 

time if the actual financial condition of the program differs from the 

OCACT estimates. 

Unlimited mechanism: 

• Unlimited general revenue transfers to the trust fund of whatever 

amount is necessary to maintain trust fund solvency (e.g., a 100 

percent trust fund ratio).

27 This mechanism is the most frequently used 

general revenue option. It is found in 9 of the 17 plans we examined. This 

provision usually states that general revenue transfers are to be made if, at

any time, the combined OASDI trust fund ratio is projected to fall below 

100 percent under the provisions of the plan.28 Transfers of sufficient 

amount and timing will be made to prevent the trust fund from falling 

below 100 percent of the annual program cost. In simple terms, funds 

sufficient to pay projected benefits for the year, that is, to maintain 

solvency, would be transferred as needed from the general fund to the 

Social Security trust fund without regard to the amount. This provision 

alone guarantees program solvency under any circumstance because it 

provides the trust fund with an unlimited and open-ended draw on the 

general fund.

29

 27The trust fund ratio is a measure of the adequacy of the trust fund level. It is defined as

the assets at the beginning of the year expressed as a percentage of the cost during the 

year. The trust fund ratio represents the proportion of a year’s cost that could be paid with 

the funds available at the beginning of the year. Having a trust fund ratio of 100 percent or 

more—that is, assets at the beginning of each year at least equal to projected outgo during 

the year—is considered a good indication of a trust fund’s ability to cover most short-term 

contingencies. 

28Most plans specify unlimited transfers to meet a 100 percent trust fund ratio, but one plan 

specifies transfers to maintain a 90 percent trust fund ratio. This trust fund ratio level still 

maintains solvency because the program can pay scheduled benefits when due. 

29In some cases, proposal sponsors suggest sources of non-Social Security program savings

to help offset the costs to the general fund. However, the transfers to the trust fund would 

not be contingent on achieving the reductions in actual federal spending. 

Page 21 GAO-07-213 General Revenue in Social Security Reform
Limited mechanisms: 

• General revenue transfers specified by formula or amount. Six plan 

sponsors propose using this mechanism, which specifies—in actual 

dollars, as a percentage of taxable payroll or using a formula—how much

general revenue would be transferred to the trust fund in a given year. 

Transfers would be limited by these specifications. In other words, 

transfer amounts are made independent of the financial condition of the 

program as measured by the trust fund ratio).30

• “Refundable tax credits” for individual add-on accounts (or to

individuals to offset account contributions). Alone among the general 

revenue options discussed, under this mechanism revenue would not be 

transferred to the OASDI trust fund, but would be outlaid immediately— 

either to provide funding to individual add-on accounts or to offset the 

cost of those accounts. The four proposals using this option would either 

credit the general revenue directly to the workers’ add-on accounts (the 

amount would be determined by the plan’s provisions) or include the 

amount as a credit on the individuals’ income taxes to partially offset the 

payroll tax increase introduced to fund the account. Although in these 

proposals the add-on accounts would be financed outside of the current 

program—either entirely or partially funded using reallocated general

revenue31—they would be considered part of a new Social Security system. 

• Dedication of revenue generated from the estate tax to the trust 

fund. This revenue option would dedicate revenue from the estate tax to 

the Social Security trust fund to help finance the current structure. One 

proposal would permanently establish a tax of 45 percent on all estates of

deceased taxpayers with taxable assets in excess of $3.5 million (as in 

current law for 2009).32 The tax revenue would be dedicated to the OASDI 

trust fund instead of to the general fund. 

 30Although plan sponsors sometimes propose spending cuts and/or assume revenue 

increases in non-Social Security programs to offset these general fund transfers; the

transfers are not conditional on the savings/revenue increases being achieved and would be 

made regardless of the success of these changes. 

31Plans may require individuals to contribute to the add-on account in order to receive 

credits. 

32Under current law (as of January 2007), the estate tax would be repealed for 2010 but 

would be restored with a lower exemption and a higher rate than in effect for 2009. Thus, 

compared to current law the estate tax in this proposal would be new revenue to the

budget only in the year 2010 and reallocated revenue in all succeeding years. 

Page 22 GAO-07-213 General Revenue in Social Security Reform
• Redirection of those revenues from Social Security benefit 

taxation that now go to the Medicare Hospital Insurance (HI) trust 

fund to the OASDI trust fund. Currently, up to 85 percent of an 

individual’s or couple’s OASDI benefits may be subject to federal income 

taxation if their income exceeds certain thresholds. The income tax 

revenue attributable to the first 50 percent of OASDI benefits is already 

dedicated to the Social Security trust fund, but the revenue associated 

with the amount between 50 and 85 percent of benefits is dedicated to the 

Medicare HI trust fund. Two proposals would dedicate all of the income 

from the tax on OASDI benefits to OASDI. 

Reform plans with individual accounts may have indirect effects on 

income from benefit taxation. Proposal sponsors typically stipulate 

whether disbursements from individual accounts would be taxed like 

current Social Security benefits or not taxed at all. If account 

disbursements are considered OASDI benefits for income tax purposes, 

income to the trust fund could be greater (or smaller) in cases where the 

combined traditional benefit and account disbursement yields are greater

(or lesser) than under current law. There would be similar implications for 

the HI trust fund if benefit taxation income is distributed as under current 

law. Plans that reduce the taxable traditional OASDI benefits and do not 

tax individual account distributions would lower trust fund revenue from 

this source. 

Of the 17 proposals, 7 increase payroll tax revenue using one or more of 

the following four mechanisms: 

• Raise or eliminate the “taxable maximum limit” or “cap” on 

covered earnings33 (with or without retaining the cap for benefit 

calculation). Incorporated in five proposals, this is the most common 

mechanism for bringing in new payroll tax revenue. This mechanism 

would not change the 12.4 percent tax rate but would either increase the 

level of wages taxed or completely eliminate the cap so that all covered 

earnings are taxed. This latter option is similar to the Medicare HI payroll 

 33SSA defines covered earnings to mean wages and self-employment earnings that are 

covered by the OASDI and/or HI programs. Under current law, all covered earnings are

taxed at a rate of 2.9 percent for Medicare HI, but for OASDI only covered earnings up to a

“taxable maximum limit” or “cap” are taxed at the 12.4 percent rate. This limits taxes as 

well as the earnings reflected in the benefit formula. The level of “taxable earnings” reflects

only the portion of covered earnings that is at or below this cap. This taxable maximum 

limit is indexed annually for average wage growth and therefore it changes every year. In

2007, the cap is $97,500. 

Page 23 GAO-07-213 General Revenue in Social Security Reform
tax of 2.9 percent, which applies to all covered earnings. SSA recently 

estimated that in 2005 about 84 percent of covered earnings were subject 

to the OASDI tax (i.e., were taxable) and projected decreases in the ratio 

of taxable wages to covered wages through 2015. After 2015, SSA expects 

this percentage to be held approximately constant at 82 percent of covered

earnings. Four plans propose to increase the percentage of taxable 

earnings under the “cap” to a level between 87 and 90 percent of covered

earnings. A fifth plan would completely eliminate the earnings cap and 

would tax all earnings at the 12.4 percent rate. 

• Increase the 12.4 percent payroll tax on taxable earnings. Four 

plans propose raising payroll tax rates by between 1 and 3 percentage 

points. None of the plans we reviewed propose an immediate tax rate 

increase of 2.02 percentage points, the estimated increase needed to 

achieve 75-year solvency through year 2080.34

• Expand coverage to state and local government employees not 

currently covered. Three plans would require those public employers not 

currently providing Social Security coverage to cover newly hired 

employees.35

• Tax covered earnings above the “cap” but at a lower tax rate (with 

or without retaining the “cap” for benefit calculation). Two 

proposals apply a rate much lower than 12.4 percent, between 3 and 4 

percent, to covered earnings above the established taxable maximum. 

Some of the mechanisms to increase payroll tax revenue could also result 

in increased benefit costs. For example, proposals that raise or eliminate 

the “cap” on covered earnings or tax earnings above the “cap” may or may 

not include these wages when calculating benefits. If the wages are 

included in the benefit formula, benefit costs would increase in the future 

and the improvement in the actuarial deficit would be smaller than if the 

wages were not included in the benefit calculation. Expanding coverage to

all state and local government workers would bring in additional payroll 

 34However, significantly larger changes would be required to maintain solvency beyond 75 

years. 

35About one-fourth of public employees do not pay Social Security taxes on the earnings

from their government jobs. Extending coverage to include them could result in potentially 

significant transition costs for some of their state and local government employers. See 

GAO, Social Security: Implication of Extending Mandatory Coverage to State and Local 

Government Employees, GAO/HEHS-98-196 (Washington, D.C.: Aug. 18, 1998). 

Page 24 GAO-07-213 General Revenue in Social Security Reform
tax revenue but would also increase the long-term benefit costs as newly 

covered earnings would entitle affected workers to the associated 

benefits. 

None of the five general revenue mechanisms in the plans we examined 

would come from new revenue sources and hence would bring no new 

revenue to the federal budget; the four payroll tax mechanisms would 

bring new revenue to the budget as a whole. Table 1 categorizes the 

mechanisms in terms of this framework. The number in parentheses 

indicates the number of reform proposals that contain this mechanism. 

Table 1: Revenue Mechanisms in Reform Proposals by New and Reallocated Revenue

New Revenue Reallocated Revenue

Limited, specified 

funding source

• Increase the 12.4 percent payroll tax (4) 

• Raise or eliminate earnings cap for payroll tax (5) 

• Tax earnings above the cap at a lower rate (2) 

• Expand coverage to state/local employees not

covered (3)

• Redirect all revenue from taxation of OASDI 

benefits to OASDI trust fund (2) 

• Dedicated estate taxa (1) 

Limited, no specified 

funding source

• General revenue transfers specified by amount or 

formulab

 (6) 

• Refundable tax credits (4) 

Unlimited, no specified 

funding 

• General revenue transfers as needed to maintain 

trust fund solvency (e.g., a 100% trust fund ratio)b

(9) 

Source: GAO.

Notes: Payroll tax mechanisms are in italics. The number of reform proposals do not sum to 17 since 

some reform plans contain more than one revenue mechanism. 

a

Sunset provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 would result in 

the estate tax being treated in the budget as new revenue in 2010 (the only year that the tax is

repealed under current law) and reallocated revenue in all succeeding years. 

b

In some cases, proposal sponsors suggest or assume sources of non-Social Security program 

savings or increases in revenue to help offset the costs to the general fund. However, the transfers to 

the trust fund in these proposals would not be contingent on achieving the estimated reductions in 

federal spending or increases in tax income on which transfer amounts are based. 

Although there is no analytic link between the inclusion of IAs and the 

selection of a specific revenue mechanism, in our review we found that 

most of the time reallocated general revenue mechanisms are used to help

structure a new Social Security system with IAs. On the other hand, 

payroll tax mechanisms are used about half the time to help finance the 

current program and about half the time in proposals creating a new 

system including IAs. Table 2 summarizes the reform approach and 

Page 25 GAO-07-213 General Revenue in Social Security Reform
revenue mechanisms used in reform plans. The numbers in parentheses 

indicate the number of reform proposals that contain a particular 

mechanism. 

Table 2: Revenue Mechanisms in Reform Proposals by Reform Approach

Maintain Current Structure New Structure with IAs 

General revenue 

mechanisms 

• Unlimited general revenue transfers as needed 

to maintain solvency (e.g., a 100% trust fund 

ratio) (1) 

• Dedicated estate tax (1) 

• Unlimited general revenue transfers as needed to 

maintain solvency (e.g., a 100% trust fund ratio) (8) 

• General revenue transfers specified by amount or 

formula (6) 

• Refundable tax credit (4) 

• Redirect all revenue from taxation of OASDI 

benefits to OASDI trust fund (2) 

Payroll mechanisms • Raise or eliminate earnings cap for payroll tax 

(3) 

• Increase the 12.4 percent payroll tax (2) 

• Tax earnings above the cap at a lower rate (1) 

• Expand coverage to state/local employees not

covered (2) 

• Raise or eliminate earnings cap for payroll tax (2) 

• Increase the 12.4 percent payroll tax (2) 

• Tax earnings above the cap at a lower rate (1) 

• Expand coverage to state/local employees not

covered (1) 

Source: GAO.

Note: Payroll tax mechanisms are in italics. The number of reform proposals do not sum to 17 since 

some reform plans contain more than one revenue mechanism. 

Most proposals—15 of the 17 we reviewed—included provisions aimed at 

increasing revenue through investment in private markets. Two proposals 

used direct government investing in marketable securities through the 

current program structure and 13 created a new Social Security structure 

including individual accounts.36 Investing in marketable securities creates 

the potential for improved returns but increases investment risk for the 

investing party (the government or individuals). Therefore, unlike 

reallocated revenue and payroll tax mechanisms, neither investment 

approach assures additional income. 

Proposals for government investment of the trust fund anticipate returns 

that would increase revenue to the trust fund while in most IA proposals 

the benefit obtained from any increased returns would be credited to the

individuals’ accounts and generally included as part of the account 

distribution. Individual account proposals may redirect revenue from the 

 36For GAO’s discussion of the key issues to consider in comparing Social Security and 

private market rates of return, see GAO/HEHS-99-110. 

Page 26 GAO-07-213 General Revenue in Social Security Reform
program or the federal budget but typically compensate for lost revenue 

through either across-the-board benefit cuts or “benefit offsets”37 to 

currently-scheduled benefits. In these proposals, the “total benefit” from 

the new Social Security system consists of a combination of the traditional 

Social Security defined benefit (including any modifications/offsets) and 

the individual account distribution (including any modifications/offsets). 

Some plans establishing IAs propose to guarantee benefit levels 

irrespective of actual returns; they are able to do this by using general 

revenue transfers. Guarantees would benefit account holders by partially 

or fully protecting them from risk. However, the increased benefits to 

account holders would create a corresponding cost for the federal 

government. Whenever an account fell short of promised benefits, the 

government—and, implicitly, taxpayers—would make up the difference.38

The effect of a reform proposal on federal budget balances and debt 

cannot be determined from its effect on trust fund solvency. The proposals 

we reviewed illustrate this. All plans included in our review were scored 

by OCACT as able to pay the plan’s benefits in full over the 75-year period.

However, plans’ impact on the federal budget as a whole varied widely in 

the scorings. For example, the effect on debt held by the public ranged

from an improvement of $45 trillion to a worsening of $41 trillion over the 

75-year projection period.

39 The impact of a proposal package on the 

federal budget is shown in the year-by-year scoring of effects on unified 

deficits and debt that OCACT provides in its technical tables. 

Additional Revenue 

Improves Trust Fund 

Solvency but Effects 

on the Federal Budget 

May Differ Greatly 

 37The purpose of benefit offsets is to compensate the trust funds for foregone taxes and to

equitably distinguish between those who do, and those who do not, shift Social Security 

taxes to voluntary personal accounts. There are different methods for calculating the 

offset. For a more thorough discussion of offsets, see Virginia P. Reno, Michael J. Graetz, 

Kenneth S. Apfel, Joni Lavery, and Catherine Hill, eds., Uncharted Waters: Paying Benefits 

from Individual Accounts in Federal Retirement Policy, Study Panel Final Report, 

National Academy of Social Insurance (Washington, D.C.: January 2005), ch. 9. 

38For a discussion of issues raised by estimating guarantee costs, see CBO, Evaluating 

Benefit Guarantees in Social Security (Washington, D.C.: March 2006). 

39In constant 2005 dollars under OCACT’s expected yield assumption. Estimates are based

on OCACT scorings and represent change in debt levels compared to a baseline in which 

scheduled benefits are paid in full through borrowing and no other changes are made. 

Estimates were not available for one of the plans reviewed. 

Page 27 GAO-07-213 General Revenue in Social Security Reform
That the impact on the trust fund and the impact on the budget as a whole 

can differ is not surprising. By definition, any increase in revenue provided 

to the trust fund—whether new general revenue, reallocated general 

revenue, or increased payroll tax revenue—will increase the trust fund’s 

capacity to pay benefits. Effects on the federal budget, however, depend 

on the type and amount of revenue and also on assumptions about 

payment of currently scheduled benefits.40

We compare the impact of new and reallocated revenue on the budget and 

long-term fiscal outlook under two different assumptions about the 

payment of currently scheduled benefits beyond projected trust fund 

exhaustion in 2040.41 First, assume as OCACT does in its memos and GAO 

does in its long-range simulations, that currently scheduled benefits would 

be paid in full throughout the estimating period (i.e., borrowing would 

increase to fund the benefits). Under these assumptions—and assuming no 

other changes in spending and/or revenue—either new general revenue or 

additional payroll tax revenue would replace some of that borrowing and 

improve the long-term fiscal outlook. Reallocated general revenue equal to

(or less than) the Social Security financial shortfall would have no impact 

on federal budget deficits, debt, or the long-term fiscal outlook. In 

amounts greater than the shortfall, reallocated general revenue would 

make the long-term outlook worse, all other things equal. 

As an alternative, assume instead that benefit outlays will be limited to 

trust fund income once the trust fund has reached exhaustion in 2040.42

Under this alternative, federal budget balances would be the same through 

2040 as under the first assumption, then improved over the longer term 

due to lower annual outlays and less borrowing. 

 40In this section, as elsewhere in the report, our analysis follows that of OCACT in being

limited to first order effects. 

41For GAO analyses of reform proposals using multiple sets of assumptions, see Social 

Security: Evaluating Reform Proposals, GAO/AIMD/HEHS-00-29 (Washington, D.C.: Nov.

4, 1999); Social Security Reform: Analysis of Reform Models Developed by the President’s

Commission to Strengthen Social Security, GAO-03-310 (Washington, D.C.: Jan. 15, 2003);

and Social Security Reform: Analysis of a Trust Fund Exhaustion Scenario, GAO-03-907 

(Washington, D.C.: July 29, 2003). 

42The Trustees 2006 Report notes that even if a trust fund’s assets are exhausted, tax 

income will continue to flow into the fund. Present tax rates would be sufficient to pay 74

percent of scheduled benefits after trust fund exhaustion in 2040 and 70 percent of

scheduled benefits in 2080. For an analysis of an illustrative assumption along these lines,

see GAO-03-907. This scenario was developed as an analytic tool, not a legal determination. 

Page 28 GAO-07-213 General Revenue in Social Security Reform
Under this “trust fund exhaustion scenario,” new revenue dedicated to 

Social Security early in the projection period would improve annual 

budget balances and extend the time period during which currently 

scheduled benefits could be paid in full. The new revenue would also 

reduce debt for most of the 75-year period.43 Any amount of reallocated 

general revenue on the other hand would increase federal budget deficits, 

reduce budgetary flexibility, and increase debt held by the public relative

to this alternative assumption of trust fund exhaustion. All else equal, the 

reallocated general revenue would provide additional income to the trust 

fund and make possible additional benefit outlays, but borrowing from the 

public would be needed to pay for these outlays.

Use of different time frames can also lead to different conclusions about 

the federal budget effects of additional revenue including reallocated 

general revenue. For example, some proposals that restructure the Social 

Security system to rely more on individual accounts—funded in part 

through a “carve-out” of current payroll tax revenues—use large amounts 

of reallocated general revenue at the outset to help make up the gap as 

benefit reductions from currently scheduled levels are phased in. Those 

favoring this approach to system restructuring may view the reallocated

general revenue as a loan from the rest of the budget that will be paid 

back. Advocates for these types of changes point out that once the 

transition to the new system is complete, the cost of the Social Security 

program will have been reduced compared to paying currently scheduled

benefits in full. Some favoring program restructuring have advocated use 

of an infinite horizon rather than the 75-year time frame traditionally used 

for actuarial assessment of the trust fund.44 These analysts view 75 years as 

an arbitrary cut-off point. They note that the use of this horizon can be

misleading where a gap between projected revenues and benefit payments

continues to grow after the 75-year window, as is the case with the current

program. 

 43The effect on debt by the end of the period would depend on the amount of new revenue 

raised for Social Security. If this was equal to the 75-year Social Security shortfall in 

present value terms, debt by the end of the period would be the same as under the 

alternative assumption. This is because the additional new revenue would have been used

to pay for additional benefit outlays of equal size. All else equal, debt at the end of the

period would be lower relative to the trust fund exhaustion scenario if the new revenue

exceeded program shortfall. 

44CBO uses a 100-year time frame for analysis. 

Page 29 GAO-07-213 General Revenue in Social Security Reform
Those who oppose using reallocated general revenue to achieve system 

restructuring include an emphasis on a shorter time frame in their 

analyses. They point to higher levels of federal spending and debt held by

the public over at least the next several decades resulting from this 

approach to reform. These analysts emphasize that it is in this nearer time 

frame the baby boom generation will retire and the cost to the government 

will escalate dramatically, driven by demographics and compounded by 

federal spending on health. These analysts were concerned that revenue

used for Social Security will not be available for Medicare and Medicaid, 

and absent changes in fiscal policy, spending on the three major 

entitlements will lead to unsustainable levels of debt long before Social 

Security restructuring will have reduced federal commitments for that 

program. These analysts called for a focus on the long-term federal budget 

problem as a whole and a search for solutions to Social Security’s 

financing problems within that larger context. 

In concept, the mechanism of unlimited reallocated general revenue as 

needed to assure trust fund solvency, used in 9 of the 17 proposals we 

reviewed, represents the largest potential draw on the federal budget. The 

amount of reallocated general revenue actually provided to the trust fund 

in these proposals would vary depending on the financial requirements of 

the Social Security program, and these would depend on the other 

proposal provisions. The other four general revenue mechanisms would 

use specified amounts of reallocated general revenues. That is, the amount 

of general revenue used would not vary according to the financial 

requirements of the Social Security program but would be dictated by the 

parameters of the mechanism, e.g., specified in current dollars or as a 

share of taxable payroll in specific years. 

In terms of size, amounts of reallocated general revenue used by 

mechanisms in proposals we reviewed varied widely, ranging up to over 

200 percent of total program financial shortfall. Estimates for general 

revenue deriving both from the mechanism of unlimited reallocated 

general revenue as needed to assure trust fund solvency and from 

specified general revenue transfer amounts were large in some cases. 

Table 3 shows amounts of reallocated general revenue by type of 

mechanism. 

Page 30 GAO-07-213 General Revenue in Social Security Reform
Table 3: Size of Reallocated General Revenue in Proposals Reviewed by Mechanism Used 

Amount

Mechanisms for reallocating general 

revenue

As a share of 75-year 

program financial 

shortfall 

As a percent of

taxable payroll

Number of 

proposals using 

mechanism

Unlimited General revenue transfers as needed to 

maintain solvency (e.g., a 100% trust fund 

ratio) 

Up to 184%a

Up to 3.5% 9

Limited General revenue transfers to the trust fund 

specified by formula or amount

Up to 207% Up to 4.0 % 6

Refundable tax creditsbUp to 115% Up to 2.2% 4

Redirect all revenue from taxation of OASDI 

benefits to OASDI trust funds 

22%-23% 0.4% 2

Dedicated estate tax 27% 0.5% 1

Source: GAO analysis of OCACT scorings. 

Notes: 

The numbers shown in this table do not sum to 17 since some reform plans contain more than 1 

revenue option. 

As shown in this table, “program financial shortfall” is defined as the cost of achieving actuarial 

balance including the cost of an ending trust fund ratio of 100 percent. 

Estimates shown are based on available information in OCACT scoring memos. In some cases, 

scorings for individual mechanisms were not shown separately. 

Where account yields affected the amounts of general revenue a proposal would use, OCACT’s 

expected yield estimate was used. 

a

Based on proposals reviewed as scored by OCACT under their expected yield assumption. Under 

OCACT’s low yield assumption, estimated amounts for this mechanism would range up to 245 

percent of program shortfall. 

b

Not transferred to the trust fund; used to fund individual add-on accounts. 

Some of the budget experts with whom we spoke suggested an approach 

we did not find in any of the reform proposals we examined. These 

experts suggested that plans could establish a new source of general 

revenue and dedicate the new revenue to the Social Security trust fund. 

For example, they suggested that instead of payroll tax increases, income 

taxes could be raised or a value-added tax45 instituted with all or part of 

the revenue dedicated to Social Security. Some of the budget experts we 

spoke with observed that any policy decision to introduce new revenues 

 45A value-added tax is a tax levied at each stage of production or distribution on the value 

added to the product during that stage of production. Value-added taxes are now

commonly used in many Western European countries as a source of revenue. 

Page 31 GAO-07-213 General Revenue in Social Security Reform
dedicated to a particular program could have implications for the capacity 

of the rest of the budget to deal with other fiscal challenges. Enactment of 

any new taxes for Social Security could affect the public’s willingness to 

bear taxes to fund other important national priorities, such as Medicare. In

addition, taxes may have effects on individuals’ saving behavior and on 

labor supply, effects that are beyond the scope of this report. 

Despite their differing views on reform approaches, budget experts 

generally either believed or advocated that some use of general revenue

would be part of reform. Some of them were concerned about the use of 

reallocated general revenue for Social Security in view of the long-term 

fiscal challenge facing the nation. One emphasized that the public needs to 

understand that reallocated general revenue for Social Security is not 

“free.” Reallocated general revenue would need to be paid for now or later 

through lower spending, higher taxes, and/or more debt.46 Another expert 

expressed the view that general revenue would be needed to reduce the

political pain involved in reform but cautioned that using general revenue

for Social Security could mean an even larger share of federal resources 

committed to funding programs that serve the elderly in coming decades, 

further squeezing out other national priorities. Most experts expressed the 

view that greater transparency about the use of general revenue use in 

reform plans was needed. 

Most budget experts with whom we spoke expressed concern about any 

provision of reallocated general revenue as needed for Social Security to 

assure trust fund solvency. These analysts, including some who generally

do not find trust fund accounting meaningful, said that the signaling 

provided by the Trustees’ projected trust fund exhaustion date has served

a useful purpose by alerting policymakers and the public of the need for 

program reform. Providing for the use of reallocated unlimited general

revenue transfers to achieve sustainable solvency would mean that the 

trust fund would never be projected to reach exhaustion. As a result, these 

analysts observed, the true costs of the program would become less 

transparent while at the same time the public might think that the Social 

Security financing shortfall had been resolved. 

One expert was especially concerned that explicit guarantees that total 

payouts from accounts plus Social Security would be not less than 

currently scheduled benefit levels could prove expensive for the federal

 46See GAO-05-649R (Washington, D.C.: May 6, 2005). 

Page 32 GAO-07-213 General Revenue in Social Security Reform
budget. Such guarantees will likely add to the cost of the Social Security 

system, because individuals will have protection against downside risks 

but are allowed by a guarantee to benefit on the upside, this expert said. In 

earlier work we noted that any proposal that would guarantee benefits and 

rely on enhanced rates of return on individual accounts to finance longterm solvency may create an additional draw on general revenue that 

could serve to increase the deficit over the long term.47 Four of the 17 

proposals we reviewed for this report included this type of provision; 3 of 

the 4 also provided for unlimited transfers of reallocated general revenue

to maintain trust fund solvency. 

In coming decades, our nation will face a serious long-term fiscal 

challenge that will put America’s fiscal future at risk. As we have said in

our body of work on Social Security, substantive reform of this important 

program will involve hard choices that will need to modify the program’s 

underlying commitments for the future. To do this—to achieve the goal of

saving Social Security and making it sustainable for the future—reform 

will need to increase program revenues and/or decrease program 

expenses. These are the only options. 

Conclusions 

It may well be that some general revenue will be part of reform. If so, this 

would a major substantive change. Considering both the long-term fiscal 

situation and the potential implications for Social Security, the use of any 

general revenue in proposals—reallocated or new—will need to be clearly 

understood by both policymakers and the general public. 

Although OCACT’s determination of “sustainable solvency” for a reform 

plan will remain an important threshold that plans will need to meet, it is 

not a sufficient benchmark in the context of the long-term fiscal outlook 

facing the United States. It is also an incomplete metric for comparing and 

evaluating reform plan financing implications. Given that most recent 

proposals use reallocated general revenue, a determination of trust fund 

solvency alone can be especially misleading. By definition a determination 

of trust fund solvency is not designed to and does not provide any 

information on how, when, or to what extent a plan is likely to worsen or 

improve the already daunting future federal fiscal imbalances. Clarity 

about these broader implications of any proposal will be essential as 

reform changes are debated. 

 47GAO/AIMD/HEHS-00-29 (Washington, D.C.: Nov. 4, 1999). 

Page 33 GAO-07-213 General Revenue in Social Security Reform
Although raising taxes (payroll or other) or cutting benefits would have 

tangible consequences for taxpayers and beneficiaries, e.g., less take-home 

pay or smaller benefit checks, the consequences of transfers from the nonSocial Security budget in the form of reallocated general revenue are less 

likely to be clearly observable. Reallocated general revenue, however, is 

not without cost. Regardless of how general revenue is provided to Social 

Security, it must be paid for at some point. The question is when, and by

whom. 

OCACT scoring memos have played and will continue to play an 

indispensable role in the debate by analyzing how proposals would affect 

the trust fund’s finances and in more recent years how proposals would 

affect the federal budget. OCACT’s valuable information and complex 

analyses could make an even greater contribution if they were more 

readily accessible to nonexpert users. It would be helpful for OCACT to 

include near the beginning of each memo a summary of the relative 

contribution of each provision in a proposal package to trust fund 

solvency. In addition, OCACT could devise a way to enable policymakers 

and the public to quickly and accurately grasp how the elements of a 

proposal, including any general revenue, work together to affect the trust 

fund and the overall federal budget. This type of presentational change 

would not require any additional analysis but could greatly facilitate 

comparison of proposals to one another. 

We recognize that developing a summary that would be easily accessible 

to policymakers and the general public and perceived as fair by all 

participants in the reform debate will present challenges. The elements of 

reform proposals are likely to continue to evolve, and new formats and 

analyses may become necessary. We recognize that a balance will need to 

be struck between standardizing formats and allowing the information 

provided to continue to evolve with the debate. Nevertheless, a more 

standardized summary early on could make clear the relative

contributions of benefit cuts and increased revenue from payroll and 

nonpayroll taxes. In addition, it could illuminate any use of general 

revenue and how use of such revenue is likely to affect the long-term 

budget outlook. This summary would be a presentational, not analytical, 

modification with major potential benefits to greater public understanding 

of proposed changes to this popular program that is important to virtually 

all Americans. 

Page 34 GAO-07-213 General Revenue in Social Security Reform
To improve public understanding of proposed changes to Social Security, 

we recommend that the Commissioner of SSA direct the Office of the 

Chief Actuary at SSA to include a summary presentation of its analysis in 

future scoring memoranda that will enable policymakers and the general 

public to quickly and easily compare Social Security reform proposals 

especially with respect to proposed use of general revenue and federal 

budget implications. 

In written comments (reprinted in app. II) on a draft of this report, SSA 

suggested that we should direct our recommendation to the Chief Actuary, 

not to the Commissioner. This change, SSA said, would target the entity 

that develops the analysis and would also be sensitive to the independence 

of the Chief Actuary. 

Recommendation for 

Executive Action 

Agency Comments 

and Our Evaluation 

As SSA stated in its comments, by legal mandate the Chief Actuary does 

report directly to the Commissioner. Because our recommendation 

concerns only the presentation of actuarial estimates—not any change in 

which estimates are developed nor in the analytical work required to 

develop them—we believe the recommendation as it stands recognizes 

and is appropriately sensitive to the independence of the Chief Actuary 

while at the same time reflecting the organizational structure of the Office 

of the Chief Actuary within SSA. 

SSA did not explicitly agree or disagree with our recommendation in its 

comments. In response to the recommendation, SSA noted that recent 

OCACT memos had added an additional table (“table d”) that, SSA 

believes, already provides key information on general revenue use in 

proposals. SSA also expressed the view that a summary table showing the 

effects on the actuarial deficit of each proposal provision would be 

helpful. As our report had noted, this table has been included in some 

memoranda at the request of the proposal’s sponsor. 

While we agree with SSA that both the technical and summary table it

describes add value, we remain of the view that OCACT needs to develop 

a new table that can clearly and quickly communicate both trust fund 

effects and federal budget implications of a proposal. Our report 

acknowledged the value and completeness of OCACT’s analyses including 

those presented in “table d.” The message of our report was not that 

OCACT needs to do additional analytic work. Our message was rather 

that OCACT’s existing analyses need to be summarized and highlighted so

that a proposal’s implications for both the trust fund and the federal 

budget as a whole are immediately clear. 

Page 35 GAO-07-213 General Revenue in Social Security Reform
Neither of SSA’s two suggestions is fully responsive to this goal. SSA itself 

noted in its comments that “table d” is “somewhat complicated.” With 

regard to the summary table showing how each provision affects the 

actuarial deficit, we agree that this table adds considerable value and can 

help facilitate certain types of comparisons across plans. It does not, 

however, make clear how each provision or the proposal as a whole would 

affect the federal budget. It is this kind of information, now available only 

to experienced users of OCACT memos, that needs to be made more 

accessible. Given the long-term fiscal challenge facing the Nation, the 

reform debate needs to take place not simply in the context of trust fund 

solvency but also in the larger context of the federal budget as a whole. 

SSA also provided technical comments, which we incorporated as 

appropriate.

We are sending copies of this report to the Commissioner of Social 

Security as well as other interested parties. Copies will also be made 

available to others upon request. In addition, the report will be available at 

no charge on the GAO Web site at http://www.gao.gov. Please contact 

Susan Irving at (202) 512-9142 or Barbara Bovbjerg at (202) 512-7215 if you 

have any questions about this report. Key contributors to this assignment 

were Jay McTigue, Joseph Applebaum, Jennifer Ashford, Linda Baker, 

Michael Collins, and Melissa Wolf. 

Susan J. Irving 

Director, Federal Budget Analysis, 

Strategic Issues 

Barbara D. Bovbjerg 

Director, Education, Workforce, 

and Income Security Issues 

Page 36 GAO-07-213 General Revenue in Social Security Reform
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To answer the questions in this report, we reviewed relevant historical 

documents and other literature on Social Security, including GAO reports 

and testimonies.1

 We undertook a review of the 26 OCACT proposal 

scoring memos done from 2001 through 2006, ultimately performing an indepth analysis of 17 of those scoring memos.2

 We eliminated nine of the 

scoring memos either because they were proposals that were scored in 

multiple years or because they were not scored by OCACT as able to pay 

plan benefits in full throughout the 75-year period. Most of the 17 

proposals were characterized by OCACT as meeting its definition of 

“sustainably solvent.” We also reviewed proposal scorings done by 

Congressional Budget Office (CBO) and met with officials from OCACT 

and CBO who were responsible for proposal scorings. To enhance our 

understanding of the relationship between Social Security and the federal

budget, we interviewed selected federal budget experts from think tanks 

and other policy organizations who represented a range of views on 

reform approaches. Some of these experts were former officials of the 

Social Security Administration and/or Congressional Budget Office. 

Our analysis, like the scorings of the Office of the Chief Actuary and recent

scorings by CBO, is limited to first order effects of reform changes. 

Accordingly, second order effects of proposed reforms on the federal 

budget, such as effects on economic growth, are beyond the scope of this 

report. This report also does not address the effects of general revenue use

on program equity. As discussed in other GAO work, the use of significant 

amounts of general revenue transfers could change program equity in

ways that are difficult to quantify.3

 1

In particular this report builds on GAO’s analysis of revenue options for reform as

discussed in Options for Social Security Reform, GAO-05-649R (Washington, D.C.: May 6,

2005). 

2

Scorings can be found at http://www.ssa.gov/OACT/solvency/index.html. 

3

See GAO-05-649R and GAO, Social Security: Distribution of Benefits and Taxes Relative 

to Earnings Level, GAO-04-747 (Washington, D.C.: June 15, 2004). 

Page 37 GAO-07-213 General Revenue in Social Security Reform
Appendix II: Comments from the Social Appendix II: Comments from the Social Security Administration 

Security Administration 

Page 38 GAO-07-213 General Revenue in Social Security Reform
Appendix II: Comments from the Social 

Security Administration 

Page 39 GAO-07-213 General Revenue in Social Security Reform
Glossary of Terms 

Page 40 GAO-07-213 

Glossary of Terms 

The majority of the definitions provided here are from the Social Security 

Administration, The 2006 Annual Report of the Board of Trustees of the 

Federal Old-Age and Survivors Insurance and Disability Insurance 

Trust Funds (Washington, D.C.: May 1, 2006) and GAO, A Glossary of 

Terms Used in the Federal Budget Process, GAO-05-734SP (Washington, 

D.C.: September 2005).

The difference between the summarized income rate and the summarized 

cost rate over a given valuation period. 

Actuarial balance 

Actuarial de A negative actuarial balance. ficit 

Values relating to future trends in certain key factors which affect the 

balance in the trust funds. Three sets of demographic, economic, and 

program-specific assumptions are presented in the annual Trustees’ 

report. 

Assumptions 

• Demographic assumptions include fertility, mortality, net immigration, 

marriage, and divorce. 

• Economic assumptions include unemployment rates, average earnings, 

inflation, interest rates, and productivity. 

• Program-specific assumptions include retirement patterns, and disability 

incidence and termination rates. 

The three sets of assumptions are described as follows: 

• Alternative II is the intermediate set of assumptions, and represents the 

Trustees’ best estimates of likely future conditions. 

• Alternative I is characterized as a low cost set—it assumes relatively rapid 

economic growth, low inflation, and favorable (from the standpoint of 

program financing) demographic conditions. 

• Alternative III is characterized as a high cost set—it assumes relatively 

slow economic growth, high inflation, and unfavorable (from the 

standpoint of program financing) demographic conditions. 

In its estimates of reform proposals, OCACT uses the intermediate set of 

assumptions, which represents the Trustees’ best estimates of likely future

demographic, economic, and program-specific conditions. 

General Revenue in Social Security Reform
Glossary of Terms 

A Board established by the Social Security Act to oversee the financial 

operations of the Federal Old-Age and Survivors Insurance Trust Fund and 

the Federal Disability Insurance Trust Fund. The Board is composed of six 

members, four of whom serve automatically by virtue of their positions in 

the federal government: the Secretary of the Treasury, who is the 

Managing Trustee, the Secretary of Labor, the Secretary of Health and 

Human Services, and the Commissioner of Social Security. The other two 

members are appointed by the President to serve as public 

representatives. 

Amounts adjusted by the consumer price index (CPI) to the value of the 

dollar in a particular year. 

The cost rate for a year is the ratio of the cost of the program to the 

taxable payroll for the year. In this context, the cost is defined to include 

scheduled benefit payments, special monthly payments to certain 

uninsured persons who have 3 or more quarters of coverage (and whose 

payments are therefore not reimbursable from the General Fund of the 

Treasury), administrative expenses, net transfers from the trust funds to 

the Railroad Retirement program under the financial-interchange 

provisions, and payments for vocational rehabilitation services for 

disabled beneficiaries; it excludes special monthly payments to certain 

uninsured persons whose payments are reimbursable from the General 

Fund of the Treasury, and transfers under the interfund borrowing 

provisions. 

Earnings in employment covered by the Old-Age Survivors and Disability 

Insurance program. 

“In current dollars” means valued in the prices of the current year. 

Amounts are expressed in nominal dollars with no adjustment for 

inflationary changes in the value of the dollar over time. The current dollar 

value of a good or service is its value in terms of prices current at the time 

the good or service is acquired or sold. 

Federal debt owed by the federal government to itself. Most of this debt is

held by trust funds, such as Social Security and Medicare. The Office of 

Management and Budget (OMB) contrasts it to debt held by the public by

noting that it is not a current transaction of the government with the 

public; it is not financed by private saving and thus does not compete with 

the private sector for available funds in the credit market; and it does not 

represent an obligation to make payments to the public. 

Board of Trustees 

Constant dollars 

Cost rate 

Covered earnings 

Current dollar 

Debt held by government 

accounts 

Page 41 GAO-07-213 General Revenue in Social Security Reform
Glossary of Terms 

That portion of the gross federal debt held outside of the federal 

government. This includes any federal debt held by individuals, 

corporations, state or local governments, the Federal Reserve System, and 

foreign governments and central banks. Debt held by government 

accounts (intragovernmental debt) is excluded from debt held by the 

public. Debt held by the public is not the same as public debt or Treasury 

debt. 

As reported in the Trustees’ Report and for the purposes of this report, the 

year in which the OASDI trust fund would become unable to pay currentlyscheduled benefits when due because the assets of the fund were 

exhausted. 

Funds held by the Treasury of the United States, other than receipts 

collected for a specific purpose (such as Social Security) and maintained 

in a separate account for that purpose. 

For a discussion of how it is defined for the purposes of this report, see 

page 6. 

Ratio of income from tax revenues on a liability basis (payroll tax 

contributions and income from the taxation of scheduled benefits) to the 

OASDI taxable payroll for the year. 

An increase in the volume of money and credit relative to available goods, 

resulting in an increase in the general price level.

A payment in exchange for the use of money during a specified period. 

For the OASDI trust funds, interest rates on new public-debt obligations 

issuable to federal trust funds are determined monthly. Such rates are set

equal to the average market yield on all outstanding marketable U.S. 

securities not due or callable until after 4 years from the date the rate is 

determined. The effective interest rate for a trust fund is the ratio of the 

interest earned by the fund over a given period of time to the average level 

of assets held by the fund during the period. The effective rate of interest 

thus represents a measure of the overall average interest earnings on the 

fund’s portfolio of assets. 

The next 75 years. Long-range actuarial estimates are made for this period 

because it is approximately the maximum remaining lifetime of current 

Social Security participants. 

Debt held by the public 

Exhaustion Date 

General fund of the Treasury

General revenue 

Income rate 

Inflation 

Interest 

Interest rate 

Long range

Page 42 GAO-07-213 General Revenue in Social Security Reform
Glossary of Terms 

The limit or “cap” on covered earnings that are subject to the 12.4 percent

payroll tax and that can be used in the benefit formula, thereby limiting 

the size of taxes and benefits. This “cap” is indexed annually for average 

wage growth and therefore it changes every year. In 2007, the taxable 

maximum limit is $97,500. 

See under Current dollar. 

The issuance of checks, disbursement of cash, or electronic transfer of 

funds made to liquidate a federal obligation. Outlays during a fiscal year 

may be for payment of obligations incurred in prior years (prior-year 

obligations) or in the same year. Outlays, therefore, flow in part from 

unexpended balances of prior-year budgetary resources and in part from 

budgetary resources provided for the year in which the money is spent. 

Total government outlays include outlays of off-budget federal entities, 

such as the Social Security trust fund. 

A financing method where taxes are scheduled to produce just as much 

income as required to pay current benefits, with trust fund assets built up 

only to the extent needed to prevent exhaustion of the fund by random 

economic fluctuations. 

A tax levied on the gross wages of workers. 

The equivalent value, at the present time, of a future stream of payments 

(either income or cost). The present value of a future stream of payments 

may be thought of as the lump-sum amount that, if invested today, 

together with interest earnings would be just enough to meet each of the

payments as they fell due. Present values are widely used in calculations 

involving financial transactions over long periods of time to account for 

the time value of money (interest). For the purpose of present-value 

calculations for this report, values are discounted by the effective yield on

trust fund assets. 

A program is solvent at a point in time if it is able to pay scheduled 

benefits when due with scheduled financing. For example, the OASDI 

program is considered solvent over any period for which the trust funds 

maintain a positive balance throughout the period. 

The difference between the summarized cost rate and the summarized 

income rate, expressed as a percentage of taxable payroll. 

Maximum taxable limit

Nominal dollar 

Outlay

Pay-as-you-go financing 

Payroll taxes 

Present value 

Solvency

Summarized balance 

Page 43 GAO-07-213 General Revenue in Social Security Reform
Glossary of Terms 

The ratio of the present value of cost to the present value of the taxable 

payroll for the years in a given period, expressed as a percentage. This 

percentage can be used as a measure of the relative level of cost during the 

period in question. For purposes of evaluating the financial adequacy of 

the program, the summarized cost rate is adjusted to include the cost of 

reaching and maintaining a target trust fund level. Because a trust fund 

level of about 1 year’s cost is considered to be an adequate reserve for 

unforeseen contingencies, the targeted trust fund ratio used in 

determining summarized cost rates is 100 percent of annual cost. 

Accordingly, the adjusted summarized cost rate is equal to the ratio of 

(a) the sum of the present value of the cost during the period plus the 

present value of the targeted ending trust fund level, to (b) the present 

value of the taxable payroll during the projection period. 

The ratio of the present value of scheduled tax income to the present value 

of taxable payroll for the years in a given period, expressed as a 

percentage. This percentage can be used as a measure of the relative level 

of income during the period in question. For purposes of evaluating the 

financial adequacy of the program, the summarized income rate is 

adjusted to include assets on hand at the beginning of the period. 

Accordingly, the adjusted summarized income rate equals the ratio of 

(a) the sum of the trust fund balance at the beginning of the period plus 

the present value of the total income from taxes during the period, to 

(b) the present value of the taxable payroll for the years in the period. 

As defined by OCACT, sustainable solvency for the financing of the 

program is achieved when the program has positive trust fund ratios 

throughout the 75-year projection period and these ratios are stable or 

rising at the end of the period. 

Wages and/or self-employment income, in employment covered by the 

OASDI and/or Hospital Insurance (HI) programs, that is under the 

applicable annual maximum taxable limit. For 1994 and later, no 

maximum taxable limit applies to the HI program. 

A weighted average of taxable wages and taxable self-employment income. 

When multiplied by the combined employee-employer tax rate, it yields 

the total amount of taxes incurred by employees, employers, and the selfemployed for work during the period.

See under “Taxable earnings.” 

Summarized cost rate 

Summarized income rate 

Sustainable solvency

Taxable earnings 

Taxable payroll 

Taxable wages 

Page 44 GAO-07-213 General Revenue in Social Security Reform
Glossary of Terms 

As discussed in this report, the OASDI trust funds are separate accounts in 

the United States Treasury in which are deposited the taxes received 

under the Federal Insurance Contributions Act and the Self-Employment 

Contributions Act, as well as taxes resulting from coverage of state and 

local government employees; any sums received under the financial 

interchange with the railroad retirement account; voluntary hospital and 

medical insurance premiums; and transfers of Federal general revenues. 

Funds not withdrawn for current monthly or service benefits, the financial

interchange, and administrative expenses are invested in interest-bearing 

federal securities, as required by law; the interest earned is also deposited 

in the trust funds. 

Trust fund 

• Old-Age and Survivors Insurance (OASI). The trust fund used for paying 

monthly benefits to retired-worker (old-age) beneficiaries and their 

spouses and children and to survivors of deceased insured workers. 

• Disability Insurance (DI). The trust fund used for paying monthly benefits

to disabled-worker beneficiaries and their spouses and children and for 

providing rehabilitation services to the disabled. 

• Hospital Insurance (HI). The trust fund used for paying part of the costs of 

inpatient hospital services and related care for aged and disabled 

individuals who meet the eligibility requirements. Also known as Medicare 

Part A. 

A measure of the adequacy of the trust fund level. Defined as the assets at 

the beginning of the year expressed as a percentage of the cost during the 

year. The trust fund ratio represents the proportion of a year’s cost which 

could be paid with the funds available at the beginning of the year. 

Under budget concepts set forth in the Report of the President’s 

Commission on Budget Concepts, a comprehensive budget in which 

receipts and outlays from federal and trust funds are consolidated. When

these fund groups are consolidated to display budget totals, transactions 

that are outlays of one fund group for payment to the other fund group 

(that is, interfund transactions) are deducted to avoid double counting. 

The unified budget should, as conceived by the President’s Commission, 

take in the full range of federal activities. By law, budget authority, 

outlays, and receipts of off-budget programs (currently only the Postal 

Service and Social Security) are excluded from the current budget, but 

data relating to off-budget programs are displayed in the budget 

documents. However, the most prominent total in the budget is the unified

total, which is the sum of the on- and off-budget totals. 

Trust fund ratio 

Unified budget 

(450398) Page 45 GAO-07-213 General Revenue in Social Security Reform
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

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

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER