GAO-
21st Century Challenges: Reexamining the Base of the Federal 

Preface 

Section 1: Introduction 

Section 2: Twelve Reexamination Areas 

National Defense 

Education and Employment 

Financial Regulation and Housing 

Health Care 

Homeland Security 

International Affairs 

Natural Resources, Energy, and the 

Environment 

Retirement and Disability Policy 

Scientific and Technological Innovation 

Transportation 

Governance 

Tax System 

Section 3: Where Do We Go From Here? 

Table

Table 1: Illustrative Generic Reexaminat

Criteria 

On March 4, 2005, the figure “over $4 trillio

page 71 was corrected to read “over $400 b
ii 21st Century Challenges: Reexamining the Base of the Fede

Figures

Figure 1: Composition of Spending as a 

of GDP Under Baseline Exten

Figure 2: Composition of Spending as a 

of GDP Assuming Discretiona

Spending Grows with GDP aft

2005 and All Expiring Tax Prov

Are Extended 

Figure 3: Forces Shaping the United Sta

and Its Place in the World 

Figure 4: Twelve Reexamination Areas 

Figure 5: Selected Reforms and 

Reexamination Approaches 

Figure 6: Reexamination Maturity Mode

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21st Century Challenges: Reexamining the Base of the Federal 

The Government Accountability Office has long ha

responsibility for monitoring the condition of the n

Recently, in our role as the auditor of the U.S. gover

consolidated financial statements, we included an em

paragraph in our audit report for the fiscal year end

30, 2004 expressing our concerns that the fiscal pol

today will—absent unprecedented changes in tax an

policies—result in large, escalating, and persistent d

economically unsustainable over the long term. Thi

based on the results of GAO’s long-term budget m

agency has used since 1992. 

Over the long term, the nation’s growing fiscal imb

primarily from the aging of the population and risin

costs. These trends are compounded by the presenc

deficits arising from new discretionary and mandato

well as lower revenues as a share of the economy. A

changes on the spending and/or revenue sides of th

long term deficits will encumber a growing share o

resources and test the capacity of current and futur

afford both today’s and tomorrow’s commitments. 

this unsustainable path will gradually erode, if not su

our economy, our standard of living and ultimately 

security. 

Addressing the nation’s long-term fiscal imbalances 

major transformational challenge that may take a ge

resolve. Given the size of our projected deficit we 

to grow our way out of this problem—tough choic

required. In addition, traditional incremental appro

budgeting will need to give way to more fundament

reexaminations of the base of government, ultimate

discretionary and mandatory programs as well as th

the budget. The nature and magnitude of the fiscal

economic and other adjustments that need to be co

amenable to “quick fixes;” rather they will likely req

thoughtful process of disciplined changes and refor

years. Nonetheless, the magnitude of and potential 

related changes can be mitigated if the necessary po

made sooner rather than later.
2 21st Century Challenges: Reexamining the Base of the Fede

While prompted by fiscal necessity, such a fundame

major program and policy areas can also serve the v

updating the federal government’s programs and pr

current and future challenges. Many current federa

policies, in fact, were designed decades ago to respo

challenges that existed at the time of their creation. 

recent entry into a new century, we have been remin

much has changed in the past several decades—wh

shifts in the security threats facing the nation, the a

population, the globalization of economic transacti

health care costs, increased environmental concern

significant advances in technologies and transportat

Moreover, given the fiscal constraints we are likely t

years to come, such a reexamination may very well 

address newly emergent needs without unduly and 

burdening future generations of taxpayers.

Having identified the major fiscal challenge facing t

given our role in supporting the Congress, we believ

has an obligation to provide policymakers with sup

identifying issues and options that could help to add

pressures. In this report, we build on our past and p

90 percent of which is requested by the Congress o

law—to provide policy makers with a comprehensiv

of those areas throughout government that could be 

for reexamination and review. This report is consis

GAO products, such as our high-risk series and bud

reports, where we pull together our insights and pre

the Congress to help in its budget and programmat

and oversight activities.1

This report is intended to help the Congress in revi

reconsidering the base of federal spending and tax p

intended as one input among many that Congress w

decides what its agenda will be for oversight and pr

1

GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D

and Opportunities for Congressional Oversight and Improved Use of Taxp

GAO-04-649 (Washington, D.C., May 7, 2004).
21st Century Challenges: Reexamining the Base of the Federal 

We have framed the issues presented as illustrative 

policymakers to consider as a supplement to their o

questions are drawn from GAO’s issued work, our 

prepared in consultation with the Congress, input f

inspectors general and the institutional knowledge o

They cover discretionary spending, mandatory spen

entitlements, as well as tax policies and programs. W

these questions may draw on the work of GAO and 

elected officials can and should decide which questio

well as how and when to address them. 

The report is organized in three sections. The first 

stage by providing the rationale for reexamining the 

federal government and the scope of GAO’s effort

section is organized around 12 areas of federal activ

narratives discussing emerging changes in each area 

several illustrative reexamination questions for each 

section provides some perspective on various strate

and approaches that should be considered as a poss

address the issues and questions raised in this repor

GAO stands ready to assist the Congress in address

needed base-line review of existing federal program

functions, and activities. 

The report was prepared under the direction of Pau

Managing Director for Federal Budget and Intergov

Issues in our Strategic Issues team, with the assistan

GAO team. Ty Mitchell and John Forrester of our 

team were the key staff responsible for the develop
4 21st Century Challenges: Reexamining the Base of the Fede

publication of this document. Copies of this repor

upon request. In addition this document will be av

charge on the GAO Web site at http://www.gao.go

David M. Walker

Comptroller General 

of the United States
21st Century Challenges: Reexamining the Base of the Federal 

1Crehpat

The federal government’s financial condition and lo

outlook present enormous challenges to the nation

respond to emerging forces reshaping American so

States’ place in the world, and the future role of the 

government. The near-term deficits are daunting—

unified budget deficit in fiscal year 2004 (including 

on-budget deficit and a $155 billion off-budget surp

$368 billion deficit (not including any supplemental 

forecast for fiscal year 2005 by the Congressional B

(CBO). If these near-term deficits represented only 

phenomenon prompted by such factors as econom

national security crises—there would be less cause 

However, deficits have grown notwithstanding the 

rebound of the economy from the recession in 200

incremental costs of responding to the nation’s glob

terrorism and homeland security represent only a re

fraction of current and projected deficits. Morever

U.S. Government Accountability Office’s (GAO) lo

simulations, the current fiscal condition is but a pre

more daunting long-term fiscal outlook.

Over the next few decades, as the baby boom gener

federal spending on retirement and health program

Security, Medicare, Medicaid, and other federal pen

disability programs—will grow dramatically. Other 

commitments, ranging from explicit liabilities, such 

environmental cleanup requirements to more impli

presented by lifecycle costs of capital acquisitions, w

nation’s fiscal future. Absent policy changes on the 

and/or revenue sides of the budget, a growing imb

expected federal spending and tax revenues will mea

ultimately unsustainable federal deficits and debt th

threaten our future national security as well as the s

for the American people. Ultimately, the nation wil

what level of federal benefits and spending it wants 

pay for these benefits.

The nation’s long-term fiscal outlook is daunting un

different policy scenarios and assumptions. For ins
6 21st Century Challenges: Reexamining the Base of the Fede

fiscally restrained scenario, if discretionary spending 

inflation over the next 10 years and all existing tax c

scheduled under current law, spending for Social Se

care programs would grow to consume over three-q

federal revenue by 2040. (See fig. 1.) On the other h

discretionary spending grew at the same rate as the 

near term and if all tax cuts were extended, federal re

be adequate to pay interest on the growing federal d

(See fig. 2.) Numerous alternative scenarios can be 

incorporating different combinations of possible po

economic assumptions, but these two scenarios can 

“bookends” showing a range of possible outcomes

2

To view alternative scenarios between these “bookends,” see th

Nation’s Long-Term Fiscal Challenge on GAO’s Web site 

(www.gao.gov/special.pubs/longterm/).
21st Century Challenges: Reexamining the Base of the Federal 

Figure 1: Composition of Spending as a Share of GDP under Baseline Extended

Notes: In addition to the expiration of tax cuts, revenue a

increases through 2015 due to (1) real bracket creep, (2

becoming subject to the alternative minimum tax (AMT), 

revenue from tax-deferred retirement accounts. After 20

share of GDP is held constant. 

2004 2015 2030 2040

Fiscal year

Percent of GDP

Net interest

Social Security

Medicare & Medicaid

All other spending

Revenue

Source: GAO’s January 2005 analysis.

0

10

20

30

40

50
8 21st Century Challenges: Reexamining the Base of the Fede

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

with GDP after 2005 and All Expiring Tax Provisions Are Extended

Notes: Although expiring tax provisions are extended, re

of GDP increases through 2015 due to (1) real bracket c

taxpayers becoming subject to the AMT, and (3) increas

tax-deferred retirement accounts. After 2015, revenue a

is held constant. 

2004 2015 2030 2040

Fiscal year

Percent of GDP

Revenue

Net interest

Social Security

Medicare & Medicaid

All other spending

Source: GAO’s January 2005 analysis.

0

10

20

30

40

50
21st Century Challenges: Reexamining the Base of the Federal 

Addressing the projected fiscal gaps shown here wi

policymakers to examine the advisability, affordabil

sustainability of existing programs, policies, functio

throughout the entire federal budget—spanning dis

spending, mandatory spending, including entitleme

policies and programs. Neither slowing the growth 

spending nor allowing tax cuts to expire—nor both 

combined—would by themselves eliminate our lon

imbalance. Additional economic growth is critical a

ease the burden, but the projected fiscal gap is so g

unrealistic to expect that we will grow our way out 

Clearly, tough choices will be required. Changes in 

processes and financial, fiscal, and performance me

necessary to facilitate these choices. 

Early action to change existing programs and polici

the highest fiscal dividends and provide a longer pe

prospective beneficiaries to make adjustments in the

The longer we wait, the more painful and difficult t

become. By waiting, an important window is lost d

today’s relatively large workforce can increase savin

preparing for the necessary changes in fiscal policy, 

health care and other reforms that may very well be 

solution to this coming fiscal crunch. However, the 

challenge is fast becoming a short term one as the r

baby boomers’ generation will begin as early as 200

overall work force growth has already begun to slow

Emerging Forces Will Test Existing Policy Fra

These challenges would be difficult enough if all we 

fund existing commitments. But the nation and the 

will continue to change in fundamental ways. As a 

range of emerging needs and demands can be expe

for a share of the budget pie. Whether it be nation

homeland security, transportation, education, enviro

cleanup, or public health, a society with a growing p

generate new claims for federal actions on both the 

tax sides of the budget. For example, the nation’s po

projected to grow by about 50 percent over the nex
10 21st Century Challenges: Reexamining the Base of the Fede

generating new needs for public and private resourc

the burdens of existing commitments and providing 

economic resources are two important strategies to 

generations to regain the fiscal flexibility to address 

More broadly, major forces are at work that will req

government to rethink its entire approach to policy 

priorities, and management to remain relevant to ou

society. In short, government will need to change t

dynamic as the nation and the changing environme

must operate. 

GAO’s Strategic Plan for Serving the Congress and 

(2004-2009), which was prepared in close consultat

Congress, highlights some of the major forces (See 

addition to the large and growing fiscal imbalances 

to reshape our nation and the role of the federal go
21st Century Challenges: Reexamining the Base of the Federal 

Figure 3: Forces Shaping the United States and Its Place in the World

Source: GAO.

Large and Growing Long-term Fiscal Imbalance—The U.S. government’s long-term 

condition and fiscal outlook present enormous challenges to the nation’s ability to resp

that shape American society, the United States’ place in the world, and the role of the 

government. The short-term deficits are but a prelude to a projected worsening long-

outlook driven largely by known demographic trends and rising health care costs.

Evolving National and Homeland Security Policies—The dissolution of the Soviet 

and the emergence of the more diffuse threats posed by terrorism to the nation’s natio

homeland security have led to major shifts in strategic threats. While these new secur

already prompting changes in defense postures and international relationships, prepa

responses to these new threats also carry wide ranging and unprecedented implicatio

policies, programs, and infrastructures.

Increasing Global Interdependence—The rapid increase in the movement of econom

goods, people, and information has prompted more widespread realization that the na

self-contained, either in its problems or their solutions. The growing interdependence 

carrying clear economic and social benefits, also places new challenges on the nation

tasks policymakers to recognize the need to work in partnerships across boundaries t

national goals. 

The Changing Economy—The shift to a knowledge-based economy and the adoptio

technology has created the potential for higher productivity but posed new challenges 

sustaining the investment in human capital and research and development that is so v

growth. While the sustainability of U.S. economic growth has been aided by trade libe

increased market competition in key sectors, the sustainability of growth over the long

require a reversal of the declining national savings rate that is so vital to fueling capita

productivity growth.

Demographic Shifts—An aging and more diverse population will prompt higher spen

retirement and health programs. Unless there is strength in the underlying sources of 

education, technology and research and development—low labor force growth will lea

economic growth and federal revenue growth over the longer term. As labor becomes 

scarce, a greater share of the work force will be comprised of foreign-born workers, w

minorities with broad-scale implications for education, training, child care, and immigra

Science and Technology Advances—Rapid changes in science and technology pre

opportunities to improve the quality of life and the economy, whether it be finding new 

energy, curing diseases, or enhancing the nation’s information and communications ca

However, technologies raise their own unique vulnerabilities, risks, and privacy and eq

that must be addressed by policymakers.

Quality of Life Trends—Large segments of the population enjoy greater economic pr

ever before, and the well being of many Americans has improved dramatically thanks t

in health care and improvements in environmental protection. However, these improve

been evenly distributed across the nation, as more than 40 million Americans lacking h

demonstrate. Prosperity has prompted its own stresses, as population growth and sp

demand for new transportation and communication infrastructure.

Diverse Governance Structures and Tools—To deliver on the public’s needs and wa

system will be pressed to adapt its existing policy-making processes and managemen

governance structures and management processes that emerge will be shaped by the 

(e.g., increasing interdependency, scientific and technological changes, and security t

depend on having sufficient foresight, a continuous reexamination and updating of prio

oversight, and reliable and results-oriented national performance indicators. 
12 21st Century Challenges: Reexamining the Base of the Fede

As the pace of change accelerates in every aspect o

these forces work to present government with new 

complex challenges and demands. As the federal ro

addressing a wide range of needs, the public has co

higher levels of performance and greater responsive

officials and programs. 

If government is to effectively address these trends, 

all of its existing programs, policies, and activities as 

of our programs were designed decades ago to add

challenges, informed by labor markets, security con

economic theories, life expectancies, health conditio

organizational structures, technologies, transportati

management models, and compensation strategies o

Outmoded commitments and operations constitute 

encumbrance on the future that can erode the capac

to better align its government with the needs and d

changing world and society. 

Accordingly, rethinking the base of existing federal s

programs, policies, and activities by reviewing their 

testing their continued relevance and relative priorit

society is an important step in this process of fiscal 

and national renewal. A periodic reexamination off

of addressing emerging needs by weeding out progr

that are outdated or ineffective. Those programs an

remain relevant could be updated and modernized 

their targeting and efficiency through such actions a

allocation and cost-sharing provisions, consolidatin

programs, and streamlining and reengineering oper

processes. The tax policies and programs financing 

budget can also be reviewed with an eye toward bo

level of revenues that should be raised as well as the 

that are used. 

We recognize that this will not be a simple or easy p

process reverses the focus of traditional incrementa

disproportionate scrutiny is given to proposals for n

activities, not those that are already in the base. Tak

at existing programs and carefully reconsidering the
21st Century Challenges: Reexamining the Base of the Federal 

financing is a challenging task. Reforming program

leads to winners and losers, notwithstanding demon

shortfalls in performance and design. Given prior 

political tendencies, there is little real “low-hanging 

federal budget. Moreover, given the wide range of p

issues covered, the process of rethinking governme

activities may take a generation to unfold. 

We are convinced, however, that reexamining the b

compelling opportunities to both redress our curre

fiscal imbalance while better positioning governmen

new challenges changing expectations of this new c

regard, the management and performance reforms 

Congress in the past 15 years have provided new to

insight into the financial, program, and managemen

of federal agencies and activities. The information 

as a result can provide a strong basis to support the 

reprioritization being suggested in this report.

GAO’s 21st Century Questions

This report is intended to help the Congress addres

demands as well as future fiscal challenges by provi

illustrative questions that could help support a fund

broad-based reexamination initiative. Drawing on G

institutional knowledge and extensive program eval

performance assessment work for the Congress, we 

200 specific 21st century questions illustrating the ty

choices our nation needs to face as it reexamines w

government does and how it does it. 

In developing the 21st century questions, we reflect

inventory of future forces working to reshape Amer

place in the world, and the various roles and respon

federal government that were presented in GAO’s l

Plan for Serving the Congress and the Nation (200

plan outlines specific trends, as described above, th

geopolitical boundaries and are expected to challen

federal government does and how it does business 

These trends, along with GAO’s institutional knowl
14 21st Century Challenges: Reexamining the Base of the Fede

work, helped us identify those federal program area

policy frameworks whose relevance, rationale, and r

are likely to be tested in the future. This process w

12 broad areas, discussed in section 2. We also drew 

collective knowledge and experiences of many othe

the various program areas discussed in the next sect

concerted effort to solicit input from within the acc

community, including various inspectors general as 

with various congressional members, officials, and 

The specific questions raised for each area were info

generic evaluation criteria that are useful to evaluate 

government program, policy, function or activity. T

framed as questions in table 1 and are designed to a

legislative basis for the program, its purpose and co

relevance, its effectiveness in achieving goals and ou

efficiency and targeting, its affordability, its sustaina

management. We used these criteria to generate spe

questions about those programs and priorities alrea

The resultant 21st century questions illustrate the kin

a reexamination and review initiative needs to addre
21st Century Challenges: Reexamining the Base of the Federal 

Table 1: Illustrative Generic Reexamination Criteria

Relevance of 

purpose and 

the federal role

Does it relate to an issue of nationwide interest? If so, is a federal role 

based on the likely failure of private markets or state and local governm

the underlying problem or concern? Does it encourage or discourage 

sectors from investing their own resources to address the problem?

Have there been significant changes in the country or the world that re

reason for initiating it?

If the answer to the last question is ‘yes,’ should the activity be change

and if so, how? If the answer is unclear as to whether changes make 

necessary, then ask, when, if ever, will there no longer be a need for a 

addition, ask, “would we enact it the same way if we were starting ove

been subject to comprehensive review, reassessment, and re-prioritiz

qualified and independent entity? If so, when? Have there been sign

since then? If so, is another review called for?

Is the current mission fully consistent with the initial or updated statuto

no significant mission creep or morphing)? Is the program, policy, func

direct result of specific legislation?

Measuring 

success

How does it measure success? Are the measures reasonable and co

applicable statutory purpose? Are the measures outcome-based, and 

applicable costs and benefits being considered? If not, what is being d

If there are outcome-based measures, how successful is it based on t

Targeting 

benefits

Is it well targeted to those with the greatest needs and the least capac

needs?

Affordability 

and cost 

effectiveness

Is it affordable and financially sustainable over the longer term, given 

trends, risks, and future fiscal imbalances?

Is it using the most cost-effective or net beneficial approaches when co

tools and program designs?

What would be the likely consequences of eliminating the program, po

activity? What would be the likely implications if its total funding was c

percent?

Best practices If it fares well after considering all of these questions, is the responsib

employing prevailing best practices to discharge its responsibilities an

mission (e.g., strategic planning, organizational alignment, human cap

financial management, technology management, acquisitions/sourcing 

change management, knowledge management, client/customer servic

management)?

Source: GAO.

When taken together, these questions can usefully i

breadth of issues that can be addressed through a s

reexamination process. Importantly, the questions 

major areas—discretionary spending, mandatory sp

entitlements, and tax policies. 
16 21st Century Challenges: Reexamining the Base of the Fede
21st Century Challenges: Reexamining the Base of the Federal Go

2Crehpat

This section provides short narratives describing th

forces prompting the need to reexamine the goals, 

strategies underlying the portfolio of programs in e

reexamination areas. As shown in figure 4, the reex

correspond with major federal missions and govern

processes.

Figure 4: Twelve Reexamination Areas

Source: GAO.

For each area, a summary of challenges and illustrat

reexamination questions demonstrate the type of re

Questions are neither exhaustive nor representative 

priorities. Nor are they intended to prescribe solutio

GAO findings regarding the program areas they dis

however, provide examples of the types of question

current trends, future fiscal realities, and GAO’s wo

expertise—that a fundamental reexamination of the 

government policies, programs, functions, and activ

address for each of the 12 areas. The questions we

their fiscal significance, their balance between a stra

operational level, and their relationship to GAO’s s

serving the Congress.

Mission Areas

Defense

Education & Employment

Financial Regulation & Housing

Health Care

Homeland Security

International Affairs

Natural Resource

 Environment

Retirement & Dis

Science & Techn

Transportation

Crosscutting Areas

Governance Tax System
18 21st Century Challenges: Reexamining the Base of the Fede

National 

Defense 

Challenges for 

the 21st Century

In the past 15 years, the world has experienced dram

the overall security environment, with the focus shi

conventional threats posed during the Cold War era 

unconventional and asymmetric threats evidenced i

September 11, 2001. To respond to these events an

global war on terrorism, the Department of Defens

been given a significant infusion of funds, with an a

appropriation totaling over $400 billion for fiscal ye

supplemental funding for homeland defense and ov

operations approximating $190 billion over the pas

In addition to providing additional resources to enh

fighting capabilities, the Congress has also taken ste

enhanced compensation and benefit programs for a

reserve personnel. 

As DOD seeks to meet the demands of the new se

environment, it continues to bear the costs of the p

maintaining or continuing to pursue many program

from the Cold War era. In this context, the magnit

and potential for current investments and operation

long-term financial commitments are prompting re

about the affordability and sustainability of the rate 

defense spending. For example, in September 200

Congressional Budget Office reported that carrying 

defense plans would require annual funding to be su

longer term at higher real (inflation-adjusted) levels 

occurred since 1980, excluding supplemental appro

factors should be considered, including reassessing t

of growth in defense and related spending. Failure 

result in significant waste today and opportunity co

Moreover, the recent 9/11 Commission Report sug

changes are needed across the government to stren

security institutions and move beyond the legacy of 

including reforming the nation’s intelligence organi

capabilities. As such, meeting the nation’s defense n

century may prompt decision makers to reexamine 

aspects of the nation’s national security programs su

DOD plans and budgets, organizes its forces, mana

force, acquires new capabilities, positions our force

alternatives to past approaches. 
21st Century Challenges: Reexamining the Base of the Federal Go

In addition to maintaining readiness and sustaining 

force, DOD is faced with identifying capabilities, in

technologies, needed to meet the demands of the n

environment, as well as determining the best way to 

capabilities and retain the U.S. military's technologic

Striking an affordable balance between current and 

be an ongoing challenge, particularly with the feder

current and projected fiscal imbalance. The upcom

defense review will provide an opportunity for DO

beyond the legacy of the past, assess the capabilitie

meet current, emerging and future threats, establish 

long-term priorities, and adopt realistic funding pla

To adapt to the new security environment, DOD is 

embarked on an effort to transform its war-fighting 

how it does business to support the war fighter. DO

military leaders appear committed to reform; howe

department faces significant challenges in accompli

transformation goals. 

The following challenges and illustrative questions 

framework for thinking about these issues in the fu

To successfully transform itself, DOD must overco

resistance to change and the inertia of various organ

policies, and practices that became well rooted in th

Longstanding organizational and budgetary problem

addressed, such as the existence of stove-piped or s

organizations, the involvement of many layers and p

in decision-making, the allocation of budget allocat

proportional rather than strategic basis among the m

and the use of traditional approaches to basing forc

or enhancing capabilities (typically on a platform by 

than a joint basis). DOD’s current approach to pla

budgeting often results in a mismatch between prog

budgets. And it does not always fully consider long

implications and the opportunity cost of selecting o

over another. 
20 21st Century Challenges: Reexamining the Base of the Fede

How should the historical allocation of resources across 

programs be changed to reflect the results of a forward-lookin

threat/risk assessment as part of DOD’s capabilities-based 

determining defense needs?

Can DOD afford to invest in transformational systems 

Combat System and national missile defense at the same tim

pursue large investments in legacy systems such as the FA-22 

like the Joint Strike Fighter, especially if cost growth and sch

continue at historical rates?

Are sufficient investments being made in capabilities th

lines, such as joint communications and interoperable system

the Global Information Grid well enough defined and under

sound investments to be made in its key components such as 

Transformational Satellite? 

Given the global availability of rapidly advancing techn

need to reconsider its approach for identifying critical technolo

those technologies from being exploited in order to maintain i

superiority? 

The global war on terrorism has required the milita

operate differently from the ways it was organized, e

and deployed to operate under post-Cold War plann

based on regional threats. Current operations have 

significant numbers of ready forces, both active and 

mobilized for long periods and created demand for 

such as military police, that exceeds the available su

DOD has taken steps to meet short term operation

not yet determined how it will meet the longer term 

reorganizing its forces and identifying the capabiliti

protect the country from current, emerging, and fut

and unconventional security threats.

Do the role, size, and structure of forces and capabiliti

strategic triad need to be adjusted to meet the challenges of pr

deterrence in the new security and fiscal environment? 
21st Century Challenges: Reexamining the Base of the Federal Go

Are the active and reserve components appropriately siz

used to meet the current and future national security demand

business model sustainable for the reserve component?

What is the appropriate role for contractors, especially 

deployment and conflict areas, to maximize the capabilities o

contract personnel and to ensure effective integration of contra

operations and support cost-effectively?

Does DOD’s plan for realigning forces at overseas loca

redeploying some forces from overseas to stateside locations pr

improved capability to respond to global threats in the new s

considering diplomatic, operational, and cost considerations?

DOD’s military personnel outlays are large and gro

from about $76 billion to an estimated $109 billion 

years 2000 and 2005. In fact, personnel costs comp

largest component of DOD’s total fiscal year 2005 

growth in military personnel costs has been fueled 

increases in basic pay, housing allowances, recruitme

bonuses, incentive pays and allowances, and other s

Furthermore, DOD’s costs to provide benefits, suc

have continued to spiral upward. Expanded health c

and their families and retirees has been the primary 

growing benefits costs. Also, a large portion of DO

compensation-related costs is in the form of benefi

compensations. In some cases, such benefits exceed

by private sector organizations. As the total and pe

DOD for military pay and benefits grows, question

whether DOD has the right pay and compensation 

cost-effectively sustain the total force in the future. 

civilian workforce, DOD is preparing to implement 

congressionally authorized personnel system, which 

way civilian employees are hired, assigned, compens

disciplined, and, if necessary, fired. 

Given the growing encumbrance of pay and benefit cost

care, within DOD’s budget, how might DOD’s recruitment, 

compensation strategies (including benefit programs) be reexa
22 21st Century Challenges: Reexamining the Base of the Fede

to ensure that DOD maintains a total military and civilian 

mix of skills needed to execute the national security strategy w

in a more targeted, evidence-based, and cost-effective manner

Is DOD pursuing the design and implementation of it

security personnel system initiatives in a manner that maxim

success?

Given its size and mission, DOD is one of the large

complex organizations to manage in the world. Wh

unparalleled combat effectiveness of U.S. forces has 

evidenced in the Persian Gulf and elsewhere, DOD 

effective in managing its ongoing business operatio

Complicating DOD’s efforts are numerous systems 

range of other longstanding weaknesses in the key b

strategic planning and budgeting, human capital ma

infrastructure, supply chain management, financial 

information technology, weapons systems acquisitio

contracting. For example, 8 individual items on GA

risk government operations and several of the gove

high-risk areas apply to key DOD business operatio

problems that continue to result in substantial waste 

adversely affect mission performance and result in 

transparency and accountability.

Does DOD need to create a senior management positi

accountable for taking a strategic, integrated, and sustained a

managing the day-to-day business operations of the departme

ongoing efforts to transform DOD’s business operations and 

related and longstanding high-risk areas? Should specific qu

requirements and periods of tenure or terms be established fo

positions related to key business operations?

Are current organizations aligned and empowered to m

the new security environment as efficiently as possible? What 

of scale and improvements in delivery of support services wou

combining, realigning, or otherwise changing selected support 

combat support, training, logistics, procurement, infrastructu

delivery)?
21st Century Challenges: Reexamining the Base of the Federal Go

Education and 

Employment 

Challenges for 

the 21st Century

The shift to a global economy and changes in techn

of work, and workforce demographics are challengi

federal approaches to education and employment. 

economy and advances in technology enable work t

other countries or render some jobs obsolete. If we 

effectively in a growing, knowledge-based economy

system must equip children with appropriate skills t

standards and provide means for adults to continue 

skills and enhance their existing abilities. This will r

that diverse populations have access to postseconda

and adult education. As an increasingly volatile job 

and eliminates jobs, federal programs that train new 

support workers who lose their jobs must also be c

responding to sudden changes in the economy. Fed

protect workers must account for changes in the na

membership in organized labor has declined, traditi

arrangements are giving way to alternatives such as 

employment and teleworking, and lifelong service w

employer is becoming much less common.

Changes in workforce demographics pose addition

The U.S. labor force has more than doubled in the p

is now growing at a much slower rate. Women, who 

workforce growth, are expected to join the workfor

rate, and baby boomers are likely to begin retiring in 

in less than 5 years. As a result, those leaving jobs a

outnumber those seeking jobs in certain industries. 

market will challenge federal efforts to ensure that e

enough workers with the right skills to help promo

growth. This trend also underscores the importanc

current pension, disability, health, and immigration 

regard to the latter, it will be important to consider 

number of visas allowed for both employment and 

affect long-term competitiveness, and our ability to 

with other nations, their people, and their cultures w

our national and homeland security needs. 

The following challenges and illustrative questions 

framework for thinking about these issues in the fu
24 21st Century Challenges: Reexamining the Base of the Fede

With rapid advances in technology, increases in glob

availability of highly educated foreign workers, U.S. 

increasingly need advanced skills to remain compet

Determining what skills workers need and providin

opportunities for acquiring those skills will depend, 

building partnerships among the multiple federal ag

key nonfederal players that support employment tra

and employers. In developing these partnerships, a

redundancy and ensuring sufficient numbers of wo

right skills will be crucial. This challenge may becom

to address if labor markets tighten over the next 20 y

boom generation retires, labor force participation r

remain flat, and immigrants face potential difficulti

visas given heightened security concerns. These sho

implications for the broader economy and budget a

Department of Labor’s efforts to ensure that emplo

sufficient numbers of workers with the right skills.

Should federally funded training programs operated acr

agencies—9 federal agencies administer 44 such programs—

and restructured in order to increase their cost effectiveness?

How can existing policies and programs be reformed to 

employers have sufficient numbers of workers with the right s

modifying pension policies and regulations so that workers ca

and still receive a pension)?

Many of the federal government’s higher education 

especially its grant and loan programs—were design

to meet the needs of traditional students in traditio

settings. However, they may not be well suited to a

diverse population that includes working adults, sin

students with disabilities, and increasing numbers o

addition, these tools may not be structured to take a

potential for cost savings or widening access provid

education technologies. The adoption of tax policy 

decade has resulted in some of these policies worki

purposes to traditional grant and loan programs. F

under the Higher Education Act, students seeking f
21st Century Challenges: Reexamining the Base of the Federal Go

and loans are penalized for having saved funds to p

education, while the Internal Revenue Code has enc

by exempting individuals from federal income taxat

income used to pay for postsecondary education. 

Is there a need for better coordination—or integration—

education policy tools (such as grants, loans, and tax preferen

examination of those policy tools that are not routinely subje

reauthorization or appropriation, such as the Hope and Lif

credits, for which tax filers claimed nearly $5 billion in 200

Higher education is increasingly global in nature as 

outside their country of origin with greater frequen

universities have become multinational institutions. 

United States has long been the global leader in hig

and the most desired destination of foreign student

education—recent graduate enrollments have fallen

in other countries have captured an increasing share 

international student population. The adoption of 

requirements has widely been argued as contributin

decreased enrollments of foreign students in the Un

How can the United States balance immigration polici

and student visa programs—to address employers’ need for w

particular skills, particularly math and science, the nation’s 

global leadership in areas such as science and higher educatio

homeland security requirements? 

The large achievement gap between students of dif

backgrounds has persisted for four decades despite 

federal investment in educating disadvantaged stud

time. Many disadvantaged children start school wit

than their more advantaged peers. Research shows 

intervention helps children succeed in school and is 

effective for the most disadvantaged students. It is le

current levels of coordination among the myriad fe

programs efficiently produce desired results for par

subgroups of children. For example, systematic inf

available on the total number of preschool children 
26 21st Century Challenges: Reexamining the Base of the Fede

subsidies through various federal programs and/or 

state-funded preschool. This prevents a comprehen

of how fully the combination of federal and state p

addresses preschoolers' needs. Recent legislative in

the No Child Left Behind Act with its emphasis on 

may help change this trend and could be aided by r

federal investments. The Elementary and Secondar

was passed in 1965 to provide assistance to states in 

disadvantaged students through Title I, the largest f

for elementary and secondary education. However

90 percent of school districts receive these Title I fu

the education of disadvantaged students, including 

number with limited English proficiency, an opport

improve targeting of funds to school districts havin

number and percentage of disadvantaged children.

Is there a need to reexamine the federal investment for 

programs (e.g., funds provided under the Child Care and D

grant and certain expenditures under Title I) to better coordi

support state and local efforts to prepare disadvantaged child

school? 

In light of the increasing diversity of the nation’s school 

should the Department of Education reexamine whether the

to better target limited resources such as Title I funds so that 

disadvantaged students including those with limited English p

addressed? 

Federal agencies that help employers provide safe, h

productive workplaces, such as the Occupational Sa

Agency (OSHA), will have to adapt to both change

demographics—the rising proportion of older work

and immigrant workers in some occupations—and 

nontraditional workplace arrangements, such as inc

independent contractors not covered by most work

laws.
21st Century Challenges: Reexamining the Base of the Federal Go

Do recent changes in the labor force makeup and work 

such as the growing use of telework and the increasing numb

contractors—warrant a reconsideration of the Department of 

as through OSHA, on traditional workplaces as part of its 

worker safety? 
28 21st Century Challenges: Reexamining the Base of the Fede

Financial 

Regulation and 

Housing 

Challenges for 

the 21st Century

Increased global interdependency and rapid techno

advancement in the financial services industry pose 

challenges to U.S. regulatory institutions charged wi

functioning markets and to government agencies ch

managing loan guarantee or mortgage insurance pro

some extent, compete with the private sector. Glob

become increasingly prevalent as technology allows 

moved around the world literally at the push of a bu

regulators whose authority is defined by national bo

Households can invest in companies worldwide and 

defrauded or have their identities stolen from almos

financial services sector has been and continues to 

most technologically sophisticated, whether in adap

to new uses or providing incentives to develop state

products to solve a range of risk management prob

immigration patterns, demographic trends, and a ra

of-life issues are important factors pushing up hous

related rents in certain regions and local real estate 

quickly outpace wage growth and put increasing str

affordability in those areas.

The following challenges and illustrative questions 

framework for thinking about these issues in the fu

The present federal financial regulatory structure ev

a result of periodic ad hoc responses to crises such 

panics. In the last few decades, however, the financ

industry, especially as represented by the largest firm

becoming more global, more concentrated, comple

consolidated across sectors, and increasingly conver

product offerings. Multiple specialized regulators b

to bear in their areas of expertise but have difficulty 

risk exposure at large conglomerate firms or identif

preemptively responding to risks that cross industry 

Is it time to modernize our financial regulatory system 

various federal regulatory agencies to promote a more coheren

structure, specify goals more clearly, and provide sufficient res

the flexibility and incentives to prospectively target resources 
21st Century Challenges: Reexamining the Base of the Federal Go

extent can specialized or consolidated regulators effectively ad

and systemic risks that arise from the potential failure of larg

financial firms? 

The need to improve consumers’ financial literacy—

make informed judgments and effective decisions a

management of money and credit—has become inc

important. Consumers are faced with an increasing

array of options for managing their personal financ

investments and credit products. In addition, availa

that many consumers are not adequately saving for 

despite concerns about the adequacy of Social Secu

pensions, and retiree health benefits. At the same t

consumer debt (especially credit card debt) has grow

past two decades, bankruptcy filings have increased 

and predatory lending has become a growing conce

What role should the federal government take in impr

literacy among consumers, and what are the most effective stra

Where are there gaps or overlaps in federal financial literacy 

many agencies should be involved? Can disclosures be impro

the limitations of improved disclosures in protecting consume

Government-sponsored enterprises (GSE) were cre

the 20th century to address perceived market imperf

financing housing, agriculture, and higher education

federal benefits they have been provided, the GSEs 

lending markets and national capital markets. Two 

GSEs, Fannie Mae and Freddie Mac, have played a 

establishing a nationwide secondary mortgage mark

increasing efficiency through greater standardizatio

products. However, with rapid developments spurr

change, the private marketplace has evolved dramati

GSE, Sallie Mae, has undergone privatization, the o

used their special federally provided status and relat

expand into new activities. These entities are also ta

risk and using more sophisticated and less transpare

management strategies. The public benefits and po
30 21st Century Challenges: Reexamining the Base of the Fede

taxpayers from such expansion, as well as from the 

existence of the GSEs, are a subject of great debate

Is the current federal GSE regulatory framework app

structured, and do the regulators have the necessary authoriti

risks of the GSEs? For example, should the Office of Feder

Enterprise Oversight be combined with the other housing GS

one comprehensive housing GSE regulator? What is the GS

achieving homeownership goals, especially for low-income and 

Do the GSEs continue to serve an important public policy p

their mission focus be restrained to limit expansion into new 

adjusted in any way? Should they be privatized? 

New information-based technologies are transform

markets at a rapid pace. Private sector financial ins

been using credit scoring and other tools to make f

among potential risks, allowing them to measure and 

effectively. Government lenders, loan guarantors, a

been slower to adopt similar tools for their decision 

federal credit programs can adopt some of the new 

better measure risk, lags in such adoption increase t

adverse selection—if the private sector and GSEs ta

of lower risk customers, government programs will 

on the less well understood and potentially riskier r

Do federal lending programs need to be reexamined to 

increased risks and potential costs to the government? For ex

Federal Housing Administration (FHA) continue to fully g

or move to a partial guarantee? If the cost of credit is linked 

risk, what role might the federal government play in reducing 

borrowing for those borrowers with little or no credit history? 

should FHA focus more of its activities on those with little o

Homeownership continues to be one of the primar

many families to accumulate wealth in this country, 

thought to contribute to stable and vital communiti

overall homeownership rate is at a historic high, in 

subpopulations the rate lags behind. Numerous too

applied to increase home ownership in the United S
21st Century Challenges: Reexamining the Base of the Federal Go

these tools are broadly based, such as the tax deduc

mortgage interest and GSEs and their effect on mo

rates. Both of these attract capital away from other 

economy and toward the housing sector. Other too

narrowly focused on particular areas or populations

FHA mortgage insurance program and other loan p

administered by the U.S. Department of Housing an

Development (HUD) and USDA’s Rural Housing Se

addition, lenders and others have developed mortga

permit households to become homeowners sooner 

the case otherwise. 

To what extent do the tools and incentives increase spe

rather than promote affordable housing? Can the tools and 

to homeownership be better targeted toward increasing home 

selected groups with less capacity to access credit markets? Fo

the cap on the mortgage interest deduction be more precisely t

What are the potential risks of recent homeownership 

borrowers, financial institutions, and taxpayers? Are the re

home ownership rate sustainable; i.e., how will families and f

cope with increases in mortgage interest rates and slower grow

A number of programs provided by HUD, RHS, and 

as well as other tools and incentives, are designed to 

rental housing affordable to target populations. Ov

emphasis of these incentives has shifted from the su

(production subsidies) to the demand side (voucher

years, most construction of federally financed affor

housing has resulted from tax provisions. In additi

federally assisted units are eligible to leave some old

programs in the next two decades. Finally, the cost

housing choice voucher program continue to grow, 

the difference between the eligible population’s inco

the cost of privately owned rental housing; this gap 

rapidly in certain markets. HUD and its public hou

partners have struggled to balance the competing d

maintaining assistance for a specified number of ho

controlling the increasing costs of doing so.
32 21st Century Challenges: Reexamining the Base of the Fede

What are the advantages and disadvantages of deman

(vouchers) versus supply-based incentives (production or finan

providing affordable housing to target populations? To what 

advantages and disadvantages dependent on local housing ma

the extent that market forces drive the housing voucher’s progr

the Congress best reconcile the competing demands of continu

targeted number of households while addressing the long-term 

implications? 
21st Century Challenges: Reexamining the Base of the Federal Go

Health Care 

Challenges for 

the 21st Century

Between 1992 and 2002, overall health care spendin

$827 billion to about $1.6 trillion; it is projected to 

$3.1 trillion in the following decade. This price tag 

from advances in expensive medical technology, inc

therapies, and the increased use of high-cost service

procedures. Many policymakers, industry experts, a

practitioners contend that the U.S. health care syste

public and private sectors—is in crisis. In the publi

term simulations of the federal budget show a large 

structural deficit resulting, in large part, from know

trends and rising health care costs. Since Medicare 

driven by both these factors, its burden on the budg

economy will balloon—tripling by 2035 and quintu

One of the fastest-growing segments of health care 

public and private sectors is prescription drugs. In 

Medicare Trustees estimated that over a 75-year per

share of the new Medicare benefit would be $8.1 tr

dollar terms. In the private sector, employers and o

purchasers of health care services find that the soari

insurance premiums poses a threat to their competi

an increasingly global market, often contributing to 

decisions to outsource American jobs overseas, to h

rather than full-time workers, and to minimize cash 

and pension costs.

Despite the significant share of the economy consu

care, U.S. health outcomes continue to lag behind o

industrialized nations. The United States now spen

15 percent of its gross domestic product on health 

than other major industrialized nations. Yet relative 

nations, the United States performs below par in su

rates of infant mortality, life expectancy, and prema

preventable deaths. Moreover, evidence suggests th

people are not getting the best value for their health 

Studies show that quality is uneven across the natio

share of patients not receiving clinically proven, effe

At the same time, access to basic health care covera

elusive goal for nearly 45 million Americans withou

a growing percentage of workers losing their emplo
34 21st Century Challenges: Reexamining the Base of the Fede

coverage. Many more millions of Americans are un

have lost some of the benefits their health plans prev

The following challenges and illustrative questions 

framework for thinking about these issues in the fu

Defining differences between needs, wants, afforda

sustainability is fundamental to rethinking the desig

health care system. Americans with good health in

access to an array of advanced technology procedur

health facilities, but clinical studies suggest that not 

desirable or needed. Rising health costs are compel

and private payers to examine whether these proced

continue to be financed without better accounting f

effectiveness. Additional health care spending over 

resources away from other economic sectors and co

economic implications for all levels of governments

other private purchasers of health care.

How can we perform a systematic reexamination of our 

system? For example, could public and private entities work 

formal reexamination processes that would (1) define and up

minimum core of essential health care services, (2) ensure tha

have access to the defined minimum core services, (3) allocate 

financing these services among such entities as government, em

individuals, and (4) provide the opportunity for individuals t

services at their discretion and cost?

The impact that federal health care outlays have on 

budget cannot be overstated. Medicare and Medica

programs for which federal spending is mandatory—

increasing shares of the federal budget and shrinkin

government’s flexibility to pay for other federal obl

national and homeland security, environmental clean

assistance. Today, Medicare and Medicaid’s combin

federal budget—at 20 percent—has more than dou

2 decades. Moveover, long-term care for chronic il

growing challenge as the aged population continues 

addition, health care expenditures for the Departm
21st Century Challenges: Reexamining the Base of the Federal Go

(DOD) and Veterans Affairs (VA) are increasing. D

care spending has gone from about $12 billion in 1

$26 billion in 2003—in part, to meet additional dem

from program eligibility expansions for military reti

and the dependents of those 2 groups and for the i

of active duty personnel involved in conflicts in Ira

Afghanistan. VA’s expenditures have also grown—

$12 billion in 1990 to about $24 billion in 2003—as 

number of veterans look to the VA to supply their h

How can we make our current Medicare and Medicai

sustainable? For example, should the eligibility requirement

requirements) for these programs be modified? 

How can the federal government best leverage its purch

health care products and services?

What options are there for rethinking the federal, stat

insurance roles in financing long-term care?

How can the benefits, eligibility, and health delivery sy

DOD be optimally structured to ensure quality and efficiency

should changes in eligibility and the benefit structure of VA 

health system be considered?

With billions of federal dollars going to DOD and VA 

what options are available to reduce spending growth through 

collaboration in, and integration of, health care delivery betw

agencies?

In the past several decades, the responsibility for fin

care has shifted away from the individual patient. I

half—46 percent—of health care spending was fina

individuals. The rest was financed by a combination 

health insurance and public programs. By 2002, the 

health care spending financed by individuals’ out-of

spending at the point of service was estimated to ha

14 percent. Tax preferences for insured individuals 

employers have also shifted some of the financial bu
36 21st Century Challenges: Reexamining the Base of the Fede

health care to all taxpayers. Tax policies permit the 

employees’ health insurance premiums to be exclud

calculation of their taxable earnings and exclude the 

premium from the employers’ calculation of payrol

themselves and employees. Health savings accounts 

consumer-directed plans, which shift more of healt

the individual, also have tax preferences. These tax 

represent a significant source of forgone federal rev

at cross-purposes to the goal of moderating health 

How can health care tax incentives be designed to encou

employees to better control health care cost? For example, sho

for health care be designed to cap the health insurance premiu

be excluded from an individual’s taxable income?

What reforms will encourage the private health insura

sufficiently pool risk and offer alternative levels of affordable 

that all Americans have access to essential health care covera

are there alternatives to employer-based coverage through prof

organizations, trade associations, or other entities?

The variation by geographic region in Americans’ u

services suggests, in part, quality and efficiency pro

of Medicare patients in different geographic areas h

despite receiving a greater volume of care, patients 

areas did not have better health outcomes or experi

satisfaction with care than those living in lower use 

and private payers are experimenting with payment 

designed to foster the delivery of care that is clinica

effective. Ideally, identifying and rewarding efficien

encouraging inefficient providers to emulate best p

result in better value for the dollars spent on care. 

implementing performance-based payment reforms

strategies, on a systemwide basis, will depend on sy

components that are not currently in place nationw

compatible information systems to facilitate the pro

dissemination of medical outcome data, safeguards 

privacy of electronic medical records, improved tran

through increased measurement and reporting effo
21st Century Challenges: Reexamining the Base of the Federal Go

incentives to encourage adoption of evidence-based 

These same system components would be required 

medical practice standards, which could serve as th

for effective medical malpractice reform. Policyma

to consider the extent to which federal leadership co

system components.

How can technology be leveraged to reduce costs and en

protecting patient privacy?

How can industry standards for acceptable care be esta

payment reforms be designed to bring about reductions in un

practice variation? For example, what can or should the feder

promote uniform standards of practice for selected procedures 

How can a medical information infrastructure be foste

privacy safeguards, that will help reduce the occurrence of me

malpractice litigation and will furnish health outcomes data 

consumer choice?

What reforms will help control health care costs associ

liability without undercutting provider accountability?

The attacks of September 11, 2001, and subsequent 

incidents—as well as disease outbreaks, such as the 

and SARS—have elevated to priority status concern

quality and availability of the nation’s public health 

federal, state, and local levels. In recent years, it ha

that, despite improvements, the nation’s public heal

remains too fragmented and uncoordinated and lack

effectively manage a large epidemic or bioterrorist a

fiscal year 2002, substantial federal funding has gon

local governments to improve disease surveillance s

laboratory capacity, communication systems, and w

Federal funds directed at basic biomedical research 

treatment and vaccinations for infectious diseases c

biological agents have also been substantial. In an e

demand and shrinking resources, however, it may b

determine how best to target the nation’s public he
38 21st Century Challenges: Reexamining the Base of the Fede

What are the most effective strategies for tracking emer

diseases and targeting resources to prepare for treating these 

How can our international agreements encourage the e

financial responsibility for developing pharmaceuticals and ot

technologies and eradicating AIDS and other worldwide disea

example, what can be done to facilitate more international b

prescription drug research and development currently finance

expenditures and higher U.S. prices?

Global interdependence and efficient transportation 

heightened U.S. vulnerability to a broad range of inf

such as SARS and avian influenza. Moreover, HIV/

tuberculosis, and malaria are increasingly viewed as 

economic growth and political stability in many nat

number of people with HIV/AIDS will grow signif

driven by the spread of the disease in five populous 

significant countries—China, India, Nigeria, Russia

To combat the spread of these diseases, the United 

multiple approaches, including partnerships with in

organizations, such as taking the lead in support of 

Health Organization (WHO). At the same time, th

also supports numerous bilateral programs to stren

countries’ health care systems. The increasingly glo

infectious diseases presents a challenge to these app

prompts the need to reexamine the balance betwee

integration of these approaches. 

Should the United States reexamine its central role in 

in global efforts to control the spread of emerging diseases suc

encourage other nations to provide more support to WHO w

and resources? Do U.S. commitments to infectious disease in

such as those for HIV/AIDS, need to be reexamined to be

well-being, economic growth, and political stability in many n

example, can better coordination or integration of current mu

bilateral approaches to combating disease achieve greater effe

efficiency?
21st Century Challenges: Reexamining the Base of the Federal Go

Homeland 

Security 

Challenges for 

the 21st Century

The terrorist attacks of September 11, 2001, evoked 

clarity the face and intent of enemies very different 

nation has faced before—terrorists such as al Qaed

able to attack us in our territory using tactics design

advantage of our relatively open society and individu

the 3 years since the attacks, the nation has begun c

enemy abroad and domestically at the federal, state, 

private levels. For example, the Congress enacted l

creating the Department of Homeland Security (DH

strengthening other security measures in law enforc

border and transportation security. Military action 

terrorist sanctuaries and support networks. The ne

Command provided additional resources and autho

homeland defense. Law enforcement disrupted ter

worked with international authorities to identify an

terrorist threats and target terrorist financing. Nati

such as the National Strategy for Homeland Securit

in many homeland security areas. A series of home

presidential decision directives provided further gui

objectives in areas such as critical infrastructure pro

warning systems, and national preparedness goals a

However, the threat of terrorism will persist well in

century. Terrorists are dispersed in loosely organize

international networks of terrorists, some of which 

national. Domestic terrorist groups remain a securi

currently to a much lesser extent than the internatio

movement. We must fundamentally reexamine our 

terrorism and homeland security—the nature of the 

its long-term impact, and the impact of our strategi

believe we are safer than we were on the day of the 

attacks, we still are not safe. 

The following challenges and illustrative questions 

framework for thinking about these issues in the fu

Defining an acceptable, achievable (within constrain

level of risk is an imperative to address current and 

Many have pointed out, as did the Gilmore and 9/1
40 21st Century Challenges: Reexamining the Base of the Fede

that the nation will never be completely safe and to

unachievable goal. Risks have been exposed in man

normal life, with perhaps many of the greatest dang

areas that Americans have simply taken for granted

water supplies, food production chains, information 

airports and train stations, ports, borders, and shop

However, we cannot afford to protect everything ag

threats—choices must be made about protection pr

risk and how to best allocate available resources. W

allocation decision-making is still evolving, we mus

systematic, reasonable approach to allocating resou

of management system standards, such as the Natio

Protection Association 1600 standard for national p

also aid in assessing risk and defining key homeland 

activities. 

What is an acceptable level of risk to guide homeland 

and investments, particularly federal funding? For example, 

managed in making sound threat, risk, and criticality assess

countermeasure options, and implementing those options cons

effective and the most efficient? What criteria should be used 

funding for homeland security in order to maximize results a

within available resource levels?

Confronting asymmetric threats requires new intern

domestic strategies and related tactics on our part. 

and domestic terrorists will not be defeated by conv

projection and weapons systems, law enforcement, 

protection alone. Instead, our tactics will hinge mo

intelligence, diplomatic efforts, and domestic partn

many actors. Understanding the underlying causes 

the isolation and alienation that feeds violence—an

mitigating those causes is likely to be the only way t

the levels of terrorism globally and domestically. Fo

international terrorist movement draws on a hatred 

as the corrupting influences of western culture and 

Instigators of terrorism can find recruits for violent 

those who see themselves with little or nothing to l

efforts to confront ideological differences and offer 
21st Century Challenges: Reexamining the Base of the Federal Go

future are essential to the long-term effectiveness o

terrorism. Public diplomacy will be challenged to t

reach audiences in areas where new threats are eme

What new international and domestic strategies and re

effectively confront the asymmetric tactics we now face and, fo

address the root causes of terrorism? For example, how can 

and thus counter, asymmetric threats such as suicide attacks, 

chemical terrorism, and cyber attacks? What approaches w

causes of terrorism, whether from domestic or international g

example, should the current U.S. approach to overseas broad

to target and better reach audiences in areas where new threa

Establishing effective federal, state, and local gover

sector; nongovernmental; and nation-state partners

addressing risk across the nation. The Constitution 

federal government to “provide for the common de

“repel invasions.” Many would interpret those requ

justify homeland security and related counterterrori

an inherently governmental obligation. However, t

of the targets that require protection are those own

sector—critical infrastructure such as water and po

information systems. Many of the emergency respo

recovery capabilities are those with nonfederal or n

entities, such as public health facilities.

Are existing incentives sufficient to support private sec

critical infrastructure it owns, and what changes might be ne

intelligence and information on threats be shared with other l

and other critical entities, yet be held secure? 

Measuring progress in the current war on terrorism 

work in progress. Measures in use—such as the nu

terrorists detained or arrested worldwide or kept on 

be extremely limited or meaningless without knowin

seriously destroy, degrade, or disrupt terrorists’ plan

degrade or dissuade their recruitment efforts and co

support. The apparent lack of international terroris

our borders since the September 2001 attacks sugg
42 21st Century Challenges: Reexamining the Base of the Fede

results from our homeland security actions, but it m

reflect terrorist choice of the time and place of ano

Small-scale domestic terrorist attacks still occur. Fu

the range of threats posed by terrorism and its caus

sophisticated ways to gauge progress. 

What is the most viable way to approach homeland se

management and accountability? For example, how should p

current war on terrorism be measured and assessed? What 

goals for prevention, vulnerability reduction, and response an

accountable for the many components of homeland security wh

and functions and disciplines are involved? How can these a

accountable and by whom?

Traditionally, state and local governments have had 

responsibility for financing first responders’ prepar

response to disasters, whether natural or manmade, 

generally local in their cause and effect. Prior to Se

2001, the federal government’s role was limited prim

providing guidance, some grants for planning, mitig

equipment, and disaster response and recovery assi

major disasters as hurricanes, earthquakes, and floo

September 11, 2001, the federal government has pr

of dollars to state and local governments for planni

and training to enhance the capabilities of first resp

respond to both smaller scale natural disasters and t

However, the federal financial assistance provided i

years has not been guided by a clear risk-based strat

outlines the role of federal, state, and local governm

identifying, enhancing, maintaining, and financing c

responder capabilities for emergencies. Moreover, 

and assistance has largely been focused on single ju

their immediately adjacent neighbors, well-documen

with first responders from multiple organizations to 

at the site of an incident and the potential for large 

incidents have generated a debate on the extent to w

responders should be focusing their planning and p

regional and multi-governmental basis. In addition

have been established on which to determine the eq
21st Century Challenges: Reexamining the Base of the Federal Go

and capacities that first responders need given the r

locations may face. In the absence of risk-based pe

standards that could be used to establish baseline ca

critical capacities, state and local governments have 

criteria for determining how federal grant funds sho

The absence of standards has also made it difficult 

responders to define the gap between what is and w

and measure their progress in achieving defined per

What should be the role of federal, state, and local gov

identifying risks—from nature or man—in individual state

establishing standards for the equipment, skills, and capaciti

responders need?

What costs should be borne by federal, state, and local 

private sector in preparing for, responding to, and recovering f

and small—whether the acts of nature or man, accidental or 

To what extent and how should the federal government 

foster a role for regional or multistate entities in emergency p

response?
44 21st Century Challenges: Reexamining the Base of the Fede

International 

Challenges for 

the 21st Century

The United States faces rising challenges and threat

and economic security. These threats include terror

conflicts, and global instability sparked by growing g

“haves” and “have nots,” as well as by corruption, et

disease. At the same time, the world grows increasin

interconnected through more open markets, rapidly 

technology, and efficient transportation systems. 

In this environment, advancing and protecting U.S. 

interests requires the use of all available instrument

military, diplomatic, and economic. The United Stat

periodically employed its armed forces and civilian a

conjunction with U.S. allies and the international co

address various threats to regional and internationa

stability. The United States also maintains a vast net

embassies and consulates at about 260 locations aro

staffed by about 60,000 U.S. and foreign national em

carry out foreign policy and public diplomacy progr

the United States seeks to advance its interests by p

wide variety of multilateral organizations. While try

and address emerging threats, the U.S. government 

promote foreign policy goals, national and econom

objectives, sound trade policies, and other strategies 

interests of the United States and its trading partner

21st century will bring increased challenges in balan

concerns with the desire to maintain strong econom

ties essential to domestic well being.

The following challenges and illustrative questions 

framework for thinking about these issues in the fu

The continuing proliferation of biological, chemical

weapons and delivery systems poses serious threats 

of the United States and its allies. The increasing lik

rogue regime or terrorists will attempt to threaten o

United States or its allies with weapons of mass dest

will challenge the U.S. nonproliferation and counter

efforts and preparations for the consequences of W

example, the great majority of Russian chemical we

vulnerable to theft or diversion by terrorists or rogu
21st Century Challenges: Reexamining the Base of the Federal Go

Do U.S. efforts to reduce or prepare for such WMD t

reexamined? For example, does U.S. nonproliferation assis

provided almost exclusively to Russia, need to be extended to 

such as Libya, that have WMD assets that must be elimina

What U.S. and international responses are needed to better 

increased security threats posed by rogue states and terrorists 

and use WMD? How can the United States better work wi

others to prevent the spread of WMD?

Protecting U.S. strategic interests in the face of new 

presented challenges for alliances established decad

example, serious disagreement with North Atlantic 

Organization (NATO) allies France and Germany o

in Iraq exposed fundamental differences over how 

should respond to security threats. Conflict interven

keep peace, stabilize failed states, and end terrorist 

dominated U.S. foreign policy actions in recent year

interventions will likely continue to play a prominen

to stabilize regions where U.S. interests are underm

threatened. 

Do we need to reexamine the U.S. force structure used 

and peacekeeping activities by the United Nations, NATO, 

international institutions? Should the United States have a 

devoted to such functions? What role should the United Nat

other international institutions perform in connection with su

Increasing global interdependency and shifting trad

a range of challenges for policymakers. The high lev

deficits, rapid increases in imports from nations suc

the increase in services trade have led to questions 

way to ensure that trade is fair and contributes to th

the American people. To date, new trade concerns

offshoring of high-tech services and currency interv

generally not been dealt with directly by traditional 

tools, such as trade agreements, and will challenge p

develop new strategies for dealing with them. Mor

globalization of economic activity is bringing an inc

the U.S. economy under the domain of internationa
46 21st Century Challenges: Reexamining the Base of the Fede

Economic activity historically viewed as isolated fro

trade agreements, such as local government procur

may come under the scrutiny of other parties to the 

agreements, and increasingly be subject to their enf

machinery. 

Does the U.S. portfolio of international trade policy too

reliance on industry-specific trade agreements, need to be reex

effectiveness and relevance in addressing new trade concerns s

and currency interventions?

What types of policy commitments and programs, such 

subsidies and import restrictions on textiles, may need to be r

consistency with broader international trade goals?

Although the United States’ commitment to foreign 

more than half a century, questions persist about the 

bilateral U.S. aid to developing countries and multil

provided by international financial institutions. The 

recently established a new foreign assistance progra

Millennium Challenge Account (MCA), to function 

U.S. Agency for International Development. MCA’s 

global poverty through economic growth in countr

justly, invest in their people, and encourage econom

However, like other foreign assistance efforts, MCA 

challenges such as inconsistent political will, ineffec

coordination, and limited capacity of recipient natio

donor resources. Moreover, few, if any, countries th

bilateral aid have significantly reduced poverty, and 

in technology have caused poorer countries to fall f

Regarding multilateral aid, the World Bank and Inte

Monetary Fund (IMF) did not prevent or quickly re

financial crisis in Argentina, although Argentina had 

reform programs funded by those institutions since 

1990s. Similarly, despite 9 years of ongoing efforts b

Bank and IMF, the debt problems of the poorest na

continue for decades. 
21st Century Challenges: Reexamining the Base of the Federal Go

Should the United States reevaluate its approach to re

poverty? For example, what role should continued bilateral U

of loans and grants through multilateral agencies play? Sho

multilateral development loans be forgiven? Are internationa

institutions structured to achieve the long-term financial heal

the countries they seek to help?

U.S. embassies and consulates are on the front lines

diplomatic activities and operating programs that ar

achieving a wide range of foreign policy interests. I

interacting with foreign governments, embassies an

conduct public diplomacy, promote trade, screen vi

wishing to visit the United States, assist American c

and play a key role in fostering military alliances and 

military and economic aid. Security priorities after 

further complicated their mission. The demands pl

embassies and consulates by a rapidly changing worl

existing ways of organizing themselves and matchin

and skills to meet those demands. While there have 

to review how overseas resource allocations are ma

changing world prompts the need to continually ree

priorities to determine the “who, where, and when,

mix of U.S. government and nongovernmental pers

should be overseas. Concerns over security for staf

overseas and fiscal pressures will also prompt the co

alternative ways of doing business overseas, such as 

outsourcing functions and performing functions fro

States or other remote locations. 

How can the U.S. presence overseas be rationalized to 

well as “right size” embassies and consulates and ensure secu

overseas operations while continuing to meet key foreign policy 

priorities?
48 21st Century Challenges: Reexamining the Base of the Fede

Natural 

Resources, 

Energy, and the 

Environment 

Challenges for 

the 21st Century

Following passage of major environmental legislatio

the nation made a number of gains in its air and wa

expressed a commitment to improved management 

resources. As the nation moves into the 21st centur

increasingly apparent that the current approach to n

use (including energy) and environmental protectio

modification to successfully address the long-term s

so many of our nation’s and the world’s natural eco

Evidence of this stress can be found on many front

depleted fresh water supplies, deteriorating fisheries

crises, and accelerated loss of biodiversity. Similarly

globalization of agribusiness coupled with increasin

in the nation’s agriculture sector raises questions ab

historic agriculture subsidy and support structures r

appropriate. 

In this context, the broad, long-term challenge is de

the nation can reconcile the desire for consumption 

need to protect resources to sustain the future. Fro

evidence, there is reason to reexamine existing prog

determine the balance between supporting the need

economy with our stewardship obligations to the ge

come. Federal regulatory and economic programs, 

approaches devised and implemented decades ago m

reassessed, and new approaches, such as pricing str

be considered to ration scarce resources. Natural re

and environmental concerns are inextricably linked

The following challenges and illustrative questions 

framework for thinking about these issues in the fu

Land use planning practices that do not adequately 

water, and petroleum availability can contribute to s

development and a host of problems. Such practic

part in automobile usage reaching new highs each y

dwindling, air pollution becoming more difficult to 

reliance on imported oil continuing to climb. Likew

growth, particularly in arid regions of the country, m

limiting obstacle—the availability of fresh water. In 

managers in 36 states expect water shortages to occ
21st Century Challenges: Reexamining the Base of the Federal Go

next 10 years under even normal conditions. In ma

country, drought conditions are giving an early indi

may occur on a much more widespread basis in the 

transportation and other incentive structures have p

current land use planning results. In this context, it 

examine land use planning and associated federal in

structures to ensure that they are not having uninte

consequences. Relatedly, federal natural resource al

usage decisions are distorted when the federal gover

charge fair market value when offering these resour

Whether it be oil and gas, timber, grazing rights, or w

government has a history of selling its assets at muc

than others or perhaps even below the cost of deliv

When this occurs, the federal government shortcha

Treasury and distorts markets for these resources.

Can alternative federal approaches to transportation, l

and water policies be adjusted to better promote sustainable m

nation’s land and water resources? For example, given proje

shortages, is there a need to reassess the balance between urb

water-scarce regions and continuance of existing crop irrigati

Additionally, should steps be taken to ensure that user fees c

fair market value or the costs of providing services are collect

natural resources are sold? 

The nation’s energy consumption is significant and 

according to our analysis of U.S. Department of En

data, total U.S. energy consumption is equivalent to 

790 billion gallons of gasoline per year, which is nea

consumed by every man, woman, and child each ye

consumption is expected to increase about 30 perce

20 years. As a result of these ever-increasing deman

reliability, affordability, efficiency, and sustainability 

concern. Not only has our nation experienced mul

crises, but our systems remain perpetually on the cu

supply/demand imbalances. These imbalances can 

price volatility that burdens consumers and the indu

adversely affects our economy. While there are diff

opinion as to how long the nation can rely on finite 
50 21st Century Challenges: Reexamining the Base of the Fede

supplies to meet the majority of its energy needs, th

doubt that at some point the nation will need to tra

alternatives. Enhanced conservation could delay th

point, but many believe that without a vision for a s

energy future, our nation’s energy markets in the 21

likely continue to experience the turmoil of the pas

frequency. The recent collapse of the energy grid in 

and midwestern states and the cascading blackouts 

well as the increases in gasoline and heating oil pric

warning signs of more pressing problems to come. 

in addition to aggressively pursuing opportunities t

production, it may be time to consider placing a sim

and investment in demand reduction strategies and 

alternative or renewable energy supplies and techno

Preparing the nation for its long-term energy future 

dependent on an approach that adequately balances 

To what extent are federal energy policies and incentiv

adequately preparing the nation to satisfy its energy needs ov

What is the appropriate balance between efforts to promote e

of fossil fuels, alternative renewable energy sources, and energy 

While the nation has made great strides in improvin

our air and water, questions are increasingly being r

whether the current policies, strategies, regulatory a

organizational structures—that in some cases were 

the 1970s—will be up to the challenge of protectin

water quality in the decades to come. Our nation’s 

are continually battling to keep air pollution in chec

regional dimensions of air-quality problems are bein

exposed by concerns over the spread of pollution f

power plants and other industrial sources in the Mi

Northeast states. Likewise, it continues to be a cha

and protect national treasures such as the Chesapea

Great Lakes. Despite hundreds of millions of dolla

efforts to restore these waters to healthy conditions 

as much progress as hoped. In addition, the nation 

than $150 billion burden over the next two decades 

replace, and upgrade the nation’s over 55,000 comm
21st Century Challenges: Reexamining the Base of the Federal Go

water and wastewater systems to protect public hea

reexamination of current approaches to address the

be in order to better achieve overall environmental 

providing more flexibility in achieving them. The es

institutionalization of a science-based, widely accep

environmental indicators to improve the quality of 

quality data is an essential prerequisite to evaluate a

approaches.

Does the existing federal regulatory approach for contr

pollution need to be modernized to generate improved results? 

the current prescriptive “command and control” regulatory st

to more cost effectively reduce pollution and better protect the 

Is there a way for the federal government to implement 

regulations more efficiently and effectively by taking into acco

costs of multiple environmental regulations to state, local, and 

while at the same time ensuring benefits to human health an

It is also unclear whether current agricultural practi

federal policies that have promoted them remain ap

sustainable. When federal agricultural policies were 

implemented, the United States was a largely rural n

and its related federal support were the lifeblood of 

communities. Today, the U.S. agricultural sector is d

relatively small number of agribusiness giants and ve

operations that operate globally. For example, whil

over 2 million farms in the United States, less than 

them provide 70 percent of the nation’s food and fi

for the vast majority of the $60 billion worth of agr

that help sustain the sector. Federal support for agr

$25 billion annually. Critics question the need for t

subsidies, which mostly go to larger producers, part

considering the government’s current and projected 

imbalance. In addition, while the Congress recently 

legislation to phase out support to tobacco growers

remain for a number of crops that are often criticiz

international marketplace as being anticompetitive. 

farming and livestock operations have become high
52 21st Century Challenges: Reexamining the Base of the Fede

and the associated fertilizer, pesticide, and animal w

being increasingly recognized as major contributors 

pollution. Finally, rural communities have changed 

is no longer the dominant activity in many rural com

many of the large-scale electrification and related in

development programs are logical candidates for re

Accordingly, new approaches to agricultural progra

better oriented to modern challenges may be in ord

Do current federal agricultural policies and programs, w

subsidies, remain relevant to the modern agricultural sector? 

current policies contributing to unfair trade practices? 

Can these policies and programs be sustained? Could 

approaches produce desired results more economically, effectiv

For example, could the federal crop insurance program be exp

larger role in the federal safety net for farmers? 

Are government supports for or ownership of energy pr

electricity generation in rural areas and particular regions sti

fundamental changes in the past 50 years in energy market i

According to the combined estimates from DOE, D

U.S. Environmental Protection Agency (EPA), it co

excess of $500 billion in current dollars to clean up 

radioactive wastes accumulated during 50 years of n

production at DOE facilities, (2) unexploded ordna

munitions, and related contamination at current or 

military sites, and (3) hundreds of thousands of Supe

hazardous waste sites created by private sector activ

the contamination in these sites may take 50 to 70 y

at other sites, the contamination is so extensive that 

irreversible and the site may be irretrievable. Frequ

progress in cleaning up these sites does not meet ex

frames and the costs dramatically exceed available f

For example, DOE’s projects for treating and storin

and hazardous waste, a by-product of nuclear weap

at DOE facilities, are estimated to cost more than $

could take decades to complete. Furthermore, the c
21st Century Challenges: Reexamining the Base of the Federal Go

approaches to cleaning up DOE, DOD, and EPA s

consistent and, in some cases, not especially efficien

development of more innovative incentives and app

needed. The enormity of this task, combined with 

constraints facing the nation, raises questions about 

existing cleanup standards are realistic. 

Does the current pace and cost of nuclear and hazardou

activities at DOE, DOD, and EPA sites suggest the need f

approaches to address these issues? Can the nation afford to 

and hazardous waste sites to the standards currently being ap

example, are there opportunities for DOE to apply risk fact

assigns risk factors to Superfund sites, to determine the most 

approach to clean up a site, possibly resulting in disposal of m

current sites rather than moving it to the planned undergrou
54 21st Century Challenges: Reexamining the Base of the Fede

Retirement and 

Disability Policy 

Challenges for 

the 21st Century

One of the great American achievements of the 20th 

development of a comprehensive national social ins

A core element of the system was a sturdy retireme

with Social Security as a foundation, supplemented 

pension system and individual savings arrangements

to conquer the long-standing economic fear of pov

For the last half century, millions of American work

look forward to their retirement as a time of dignity

security. The Congress later extended these social i

protections to those workers who were unable to en

economic activity because of disability. Indeed, ins

and their families from the potentially devastating in

caused by unexpected injury, illness, or death remov

risk to their economic well-being.

The challenges facing retirement and disability prog

term, severe, and structural in nature. A successful 

to these challenges will require a fundamental and c

reassessment of each of the key components of our 

retirement and disability system. 

The following challenges and illustrative questions 

framework for thinking about these issues in the fu

Social Security faces severe, long-term, structural fi

challenges that if not addressed, could lead to the d

trust funds. The unfunded obligation for the Old A

and Disability Insurance (OASDI) trust funds for t

is $3.7 trillion in present value as of 2004. Projecte

the OASDI trust funds will begin to fall short of ou

and, by 2042, trust fund balances will be insufficien

benefits promised under the current program. Soci

this long-term financing shortfall largely because of 

concurrent demographic trends, namely that people 

longer, spending more time in retirement, and havin

children. For example, average time in retirement g

11.5 years in 1950 to 18 years for the average male w

2003. Women are also having fewer children. In th

fertility rate was an average of 3 children per woma

is expected to fall to 1.95—a rate that is below repl
21st Century Challenges: Reexamining the Base of the Federal Go

together, these trends threaten the financial solvenc

sustainability of Social Security as well as the federa

whole. Social Security could be brought into balanc

75 years in various ways, including an immediate in

taxes of 15 percent or an immediate reduction in cu

benefits of 13 percent (or some combination of the 

the sustainability of the system beyond 75 years wil

larger changes. Encouraging older workers to exten

force participation can also improve program solve

contributing to overall economic growth. Lastly, hi

need for early action, even greater adjustments in sc

and revenues will be required the longer Social Secu

challenges remain unaddressed.

How should Social Security be reformed to provide for 

solvency and sustainability while also ensuring adequate bene

increase the retirement age, restructure benefits, increase taxe

individual accounts)?

How can existing policies and programs be reformed to 

workers to work longer and to facilitate phased retirement ap

employment (for example, more flexible work schedules or re

pensions while continuing to work)?

Serious weaknesses have become manifest in our n

pension system. Despite sustained large federal tax 

pension coverage continues to hover at about half o

private sector labor force. The number of tradition

benefit plans in which employers rather than emplo

risk of investment has been contracting for decades

terminations by bankrupt sponsors of large defined 

have threatened the solvency of the Pension Benefi

Corporation (PBGC), the federal agency that insure

benefits under such plans. Recognizing the long-te

facing PBGC, GAO has placed PBGC’s single-emp

program on its high-risk list of programs needing fu

and congressional action. As of the end of fiscal ye

agency’s single-employer pension program registere

accumulated position of $23.3 billion. While growt
56 21st Century Challenges: Reexamining the Base of the Fede

and coverage of defined contribution plans—where 

an individual account that receives contributions—

mitigated the decline of more traditional defined ben

plans have also experienced problems. Many worke

defined contribution pension plans continue to cho

participate, potentially leaving them with an inadequ

income. The risk burden of defined contribution p

individual employees to be knowledgeable about in

other retirement decisions, yet information and edu

always available. Large holdings of company stock 

may add to employees’ risk that their retirement sav

inadequate to provide levels of income needed in re

Finally, workers receiving their retirement benefit in 

the ability to withdraw or borrow money from retir

plans prior to retirement to supplement current con

drain workers’ accounts of needed benefits well bef

Policymakers will need to consider how to best enc

pension coverage and adequate and secure pension 

preserved for retirement purposes for the current a

labor force, and how such pensions might best inter

to the Social Security program.

What changes should be made to enhance the retiremen

workers while protecting the fiscal integrity of the PBGC insu

example, increasing transparency in connection with underfu

modifying PBGC’s premium structure and insurance guaran

funding rules, or restricting benefit increases and the distribu

benefits in connection with certain underfunded plans)?

How can existing policies be reformed to encourage inc

strategies so that retirement income lasts an individual’s entir

benefit annuitization)?

Meanwhile, federal disability programs, such as tho

Security Administration (SSA) and the Department 

Affairs (VA), have experienced significant growth o

decade and are expected to grow even more as incr

of baby boomers reach their disability-prone years. 

composition of the disability rolls has changed sign
21st Century Challenges: Reexamining the Base of the Federal Go

larger proportion of beneficiaries with mental impa

receiving benefits today than in the past. At the sam

scientific advances as well as economic and social c

redefined the relationship between impairments an

Advances in medicine and technology have reduced 

some medical conditions and have allowed individu

greater independence and function in work settings

nature of work has changed in recent decades as th

economy has moved away from manufacturing-bas

service- and knowledge-based employment. Given 

slowdown in the growth of the nation's labor force

that those who can work are supported in their effo

federal disability programs remain mired in concep

and are poorly positioned to provide meaningful an

for workers with disabilities. Further, in light of a c

established commission to study the appropriatenes

benefits, VA may be faced with the need to reform 

criteria. Over the last decade, GAO has built a bod

examining these issues and, more recently, has calle

fundamental transformation and modernization of 

programs, including SSA’s Disability Insurance and 

Security Income programs and VA’s disability progr

2003, GAO added modernizing federal disability pr

high-risk list. 

How can federal disability programs, and their eligibil

brought into line with the current state of science, medicine, te

market conditions (for example, which jobs are based on kno

rather than on strength and endurance)? How can such prog

facilitate the participation of people with disabilities in the w

(for example, earlier intervention in providing vocational reh

assistive technology devices such as voice synthesizers or stand

What options could be considered for reforming VA's 

benefits structure for veterans (such as revisiting the definition 

benefits) that would ensure appropriate and adequate benefit
58 21st Century Challenges: Reexamining the Base of the Fede

Scientific and 

Technological 

Innovation 

Challenges for 

the 21st Century

For society and government, developments in scien

technology present great opportunities to improve 

life, the performance of the economy and the gove

relationship of government to its citizens. Advance

technology in the United States have historically be

combined public and private sector research and de

investments of about $284 billion annually. These i

along with the nation’s strong research and develop

infrastructure and intellectual property protections, 

ensured the United States a leadership position in th

and commercialization of scientific advances and h

nurture entrepreneurship and dissemination of info

technologies. The benefits of applying technologic

such as information technology, in the United State

resulted in many positive outcomes but have also p

new challenges, concerns, and vulnerabilities. 

The following challenges and illustrative questions 

framework for thinking about these issues in the fu

As the pace of innovation has quickened over the p

competition in the global economy has also acceler

nations are increasingly gaining in their ability to co

technological advances, educate highly skilled techn

and offer world-class research opportunities to the 

brightest minds. These strides in global scientific a

innovation are beginning to challenge the United St

position. 

How can the federal government develop a more coordi

approach to setting the U.S. research agenda that also ensure

investment? For example, can the current patchwork of fede

scientific research provided by multiple agencies and program

better coordinated to more effectively and efficiently identify an

emerging technologies? 

Are different kinds of federal incentives needed to encou

sector collaboration and nurture interdisciplinary research an

approaches that can enhance U.S. competitiveness and produ
21st Century Challenges: Reexamining the Base of the Federal Go

example, does the current research tax credit actually stimul

research spending that would not have occurred otherwise? A

research being done by businesses that claim most of the tax 

U.S. competitiveness and productivity?

Can existing program structures and funding processes 

nation’s position as a critical collaborator in jointly funded int

research and ensure that the United States can continue to a

investments in new technologies? For example, how can the U

research and development effort effectively collaborate with glo

research and development efforts without compromising the n

property or competitiveness?

Compounding these external challenges are domest

and educational changes that have reduced the size 

the U.S. scientific workforce, such as the lagging pe

U.S. students in science, math, and engineering; the l

U.S. scientists reaching retirement age; and reduced 

foreign-born scientists and researchers coming to th

because of heightened security concerns and oppor

nations.

How can the United States better develop a world-clas

scientific domestic workforce that is not as dependent on larg

international students and researchers? For example, are dif

tools or targeted funding strategies needed to enhance U.S. st

in math and the sciences? 

Do current workforce retraining programs provide ade

help the United States develop lifelong learning strategies and 

programs that will meet the needs of a rapidly changing techn

environment? For example, should the federal government c

training tax credits to employers or individuals so that U.S. 

the training they need to stay current in a knowledge-based e

Information technology advancements have contrib

substantial gains in U.S. productivity, opened the wo

people who were previously barred because of phys

or geographic distances, and have begun to alter the 
60 21st Century Challenges: Reexamining the Base of the Fede

interact with their government. However, interconn

raised the potential for unauthorized access to pers

confidential data and created new vulnerabilities to 

critical operations and the infrastructures they supp

How can the federal government effectively utilize adva

further enhance homeland security while also protecting the p

citizens? For example, should the federal government encour

biometric technologies that could help ensure that drivers licen

to authorized and authenticated individuals? 

What cybersecurity technologies can be applied to prote

infrastructures from attack given current threat assessments 

implementation challenges, such as effective information shar

public and private stakeholders, will have to be addressed?

Similarly, despite many successes in the exploration 

loss of life, unsuccessful missions, and unforeseen c

have recently increased the level of concern over th

such exploration, particularly with regard to human 

activities. Since its inception, the National Aeronau

Administration (NASA) has undertaken programs t

advanced scientific and technological knowledge. H

painful symbol of the difficult environment in whic

perform its mission, as well as the risks associated w

exploration, is the recent loss of Shuttle Columbia a

complexities NASA faces in returning the remainin

to flight so that construction can resume on the Int

Station and the debate over the potential cost and t

government’s role in implementing the administrati

space exploration are emblematic of the challenges 

need to resolve in the years ahead.

What objectives are both appropriate and affordable fo

program? For example, can all existing programs continue t

implemented at current resource levels and without substanti

the private sector?
21st Century Challenges: Reexamining the Base of the Federal Go

Transportation 

Challenges for 

the 21st Century

The nation’s economic vitality and the quality of life 

depend significantly on the soundness, security, and 

physical infrastructure. The nation’s transportation 

particularly complex policy challenges, because it en

many modes—air, water, highway, transit, and rail—

owned, funded, and operated by both the public and 

Increasing passenger and freight travel has led to gr

congestion, and policymakers face the challenge of 

safety and condition of the transportation system w

congestion from overwhelming it. Transportation d

inextricably linked with economic, environmental, a

concerns, and coordination across levels of governm

different sectors is daunting and complex. New sec

in a world after 9/11 present additional challenges f

transportation that must be addressed in a rapidly c

demographic and technological landscape. Success

transportation needs in the face of these complex, c

challenges requires strategic and intermodal approa

tools and programs, and coordinated solutions invo

government and the private sector. 

These requirements, in combination with the loomi

faced by all levels of government, challenge the nat

fundamentally reexamine existing government trans

programs and commitments, to ask whether existin

constructs and financing mechanisms are relevant t

of the 21st century, and to make tough choices in s

and linking resources to results. 

The following challenges and illustrative questions 

framework for thinking about these issues in the fu

The transportation grant programs funded by the H

Fund—including the nation’s highway and transit p

evolved slowly since the Trust Fund was created in 

program was created for the purpose of constructin

highway system, and the interstate is complete, the 

of the program, in terms of its financing and delive

has not changed. In addition, this and other federa

programs do not have the mechanisms to link fund
62 21st Century Challenges: Reexamining the Base of the Fede

the accomplishment of specific performance-relate

outcomes, such as improvements in mobility and se

highway grant funds are apportioned by formula, w

the needs or capacity of recipients. Because many s

governments select most projects receiving this fun

little assurance that the projects selected and funded 

nation’s mobility and security needs. 

How narrowly or broadly should the federal role and i

nation’s transportation system be defined? For example, shou

and spending be more closely aligned with specific national in

purposes, such as interstate freight mobility or national and 

Concurrently, should responsibilities and authority for projec

regional mobility and other needs be devolved to state and loc

along with the revenue sources that support them? 

Should the federal transportation formula grant progra

local governments be revised to better consider factors such as 

capacity, and level of effort by the states and localities?

Transportation programs and funding mechanisms 

stovepiped by modes of transportation. For examp

passenger and freight travel occurs on all modes, fe

and planning requirements focus largely on highway

aviation passenger travel. This framework makes it 

intermodal projects and other modal projects (e.g., 

passenger rail) to be integrated into the transportati

Can intermodal solutions to the needs of modes such as 

passenger rail service be effectively carried out within the fram

existing trust funds and other transportation programs or is 

needed? Do the existing tools and delivery mechanisms, such 

funds dedicated only to certain modes of transportation, have 

provide intermodal, efficient, cost-effective solutions to mobili

challenges? 

While the trust funds were originally based on the co

users pay for the transportation systems, this conce

to fray. Revenues to the Highway Trust Fund, whic
21st Century Challenges: Reexamining the Base of the Federal Go

majority of highway and surface transportation safe

a large portion of transit spending, are drawn from 

user fees. The purchasing power of these revenues 

future fuel tax revenues will be further eroded by th

efficiency of vehicles. Aviation Trust Fund revenue

declining, in part because of lower cost airline ticke

factors. The Federal Aviation Adminstration will fa

challenges in supporting its four major accounts, w

operations, facilities and equipment, airport improv

and research, engineering, and development. Many 

whether the current financing scheme for transport

ultimately sustainable. As a result, decisionmakers a

looking more to the general fund to finance transpo

programs, and state and local governments are incr

on property and sales taxes to fund transportation i

Should the federal government continue to provide publ

grant programs or develop alternative, targeted, market-drive

credit enhancements, to stimulate private financing, particula

freight, maritime, and aviation where a mix of private and p

exist?

The use of tolls, congestion pricing, and user fees h

helping to solve congestion and mobility problems a

revenues for infrastructure improvements. Howeve

of competing federal grant funds and federal restric

pricing, and fees can work at cross purposes by diss

local governments and transportation service provi

adopting these tools.

What other mechanisms are available—e.g., tolls, pric

management, or user fees—that could be used to a greater de

help finance the nation’s transportation infrastructure that a

and would promote efficiency in the use of infrastructure and 

revenue from beneficiaries?
64 21st Century Challenges: Reexamining the Base of the Fede

Governance 

Capacity to 

Meet 

Challenges in 

the 21st Century

The federal government must address and adapt to 

trends and challenges in the nation and the world—

structural fiscal imbalance; a transformation from a

based to a knowledge-based economy; revolutionar

technology that have altered how we communicate 

globally; greater reliance on market forces and com

changing national security threats. To respond to t

challenges, government must have the institutional 

more strategically, identify and react more expedien

achieving results.

There are signs of transformation as the Congress h

agencies that can meet evolving challenges. For exa

recognizing growing security threats, the Congress 

Department of Homeland Security to fundamentall

the government is structured to respond to these th

recently restructured the intelligence community to 

nation has the critical information it needs to defea

Likewise, agencies including the Federal Bureau of 

(FBI), GAO, National Aeronautics and Space Adm

(NASA), the Department of Defense (DOD), and 

Service are undertaking major efforts to transform t

Furthermore, the government is partnering with th

to devise a comprehensive set of key national indica

the nation with quality data that the public, media, p

both government and nongovernment institutions c

the nation’s progress in addressing key challenges. 

Yet, in many cases, the government is still trying to 

ways that are based on conditions, priorities, and ap

existed decades ago and are not well suited to addre

21st century challenges. For example, some agencies 

all the necessary abilities, more flexible legal author

leadership and management capabilities to transfor

and operations. Consequently, to successfully navig

transformations across the government, it must fun

reexamine not only its business processes, but also 

organizational structures, management approaches, 

cases, outdated missions. 
21st Century Challenges: Reexamining the Base of the Federal Go

The following challenges and illustrative questions 

framework for thinking about these issues in the fu

To be a leading democracy in the information age m

mean producing unique public sources of objective

scientifically grounded, and widely shared quality in

that we know where the United States stands now a

trends are on both an absolute and relative bases—

comparisons with other nations. By ensuring that t

made more accessible and usable by the many differ

our society, we increase the probability of well-fram

good decisions, and effective solutions. The stakes 

including considerations regarding allocating scarce 

resources, strengthening the economy, creating jobs

future industries, enhancing security, promoting saf

strengthening our competitive edge, and sustaining 

environment.

Is the federal government effectively informed by a key 

system about the position and progress of the nation as a wh

absolute and relative bases compared to other nations—as a 

agency and program goals and priorities?

Is the federal statistical system adapting effectively to th

information? Is it effective at all levels and sectors of society 

information requirements? Are the large amounts of data th

effectively disseminated to the widest possible audiences, with 

privacy and confidentiality issues?

Most major outcomes of federal activities are suppo

programs and tools that, in turn, are often sponsore

different federal agencies. Although these individu

address common or similar performance goals, they 

overly fragmented delivery network and at times wo

purposes. For example, federal food safety program

by 12 agencies with differing enforcement criteria a

practices. The fragmentation of federal programs r

policymaking process that is overly stovepiped by a

program, with insufficient focus on how individual 
66 21st Century Challenges: Reexamining the Base of the Fede

contribute to overarching, crosscutting goals and m

result, the capacity to periodically reexamine the alig

relevance of policy portfolios in a changing society 

Government Performance and Results Act (GPRA

governmentwide performance plan to address thes

plan has not yet been developed by the executive br

Furthermore, the federal government lacks a gover

strategic plan to provide a framework for addressin

goals.

How can the executive branch and the Congress have 

crosscutting focus on policy and budget decisions to address go

conventional agency and program boundaries? Can the gover

performance plan required by GPRA be implemented to pro

crosscutting focus? 

How can agencies partner or integrate their activities in 

especially with each other, on crosscutting issues, share accoun

crosscutting outcomes, and evaluate their individual and orga

contributions to these outcomes? How can agencies more stra

their portfolio of tools and adopt more innovative methods to 

achievement of national outcomes? For example, how can th

food safety programs managed across several federal agencies 

better promote safety and the integrity of the nation’s food sup

Increasingly, the government relies on new network

partnerships to achieve critical results and develop p

often including multiple federal agencies, domestic a

non- or quasi-government organizations, for-profit 

profit contractors, and state and local governments

government uses an array of different tools and pro

work in this environment, such as direct service del

loan guarantees, tax preferences, insurance program

regulations. Ranging from education to homeland 

complex network of governmental and nongovernm

shape the actual outcomes achieved, whether it be t

partnerships in grant programs or through indepen

each acting locally to address common problems. N

the increased linkages in our system, each level of go
21st Century Challenges: Reexamining the Base of the Federal Go

makes decisions on these interrelated programs ind

little interaction or intergovernmental dialogue. Wh

magnitude of the nation’s challenges calls for a con

across sectors, there are insufficient opportunities f

those sectors to come together to reach consensus 

of mutual commitments that are necessary.

How can greater coordination and dialogue be achieved 

government to ensure a concerted effort by the public sector as 

addressing key national challenges and problems? For exam

mechanisms might usefully bring together leaders across gover

joint problems, perhaps through establishing commissions or 

promoting dialogue?

More specifically, government has also begun to fun

change who does its business—recognizing that it c

partner with the private sector in new, more cost-ef

Agencies are assessing what functions and transacti

sector could perform and asking their employees to 

private entities for this business to improve quality a

But the government does not yet know how this tre

its workforce and its ability to refocus more on stra

the extent to which it has delivered real cost savings

evaluating data to ensure such transformations are i

effectively and deliver the desired results will be crit

Has the government’s approach to competitive sourcing—

sector to do more of the government’s business—proven succe

modified to improve results and reduce costs in a timely, fair, 

manner? For example, should federal agencies be more consis

what work is inherently governmental and, therefore should 

federal employees? For work that is not inherently governmen

be required to develop plans for competing this work in order 

measurable efficiencies and performance improvements?

Performance, mission, cost, schedule, and other risk

major federal programs and investments such as we

homeland security, federal buildings and other infra

transportation subsidies, environmental clean-up, an
68 21st Century Challenges: Reexamining the Base of the Fede

technology systems. Despite these risks, federal age

comprehensive risk management strategies that are 

with program, budget, and investment decisions. A

among many, homeland security investments are de

risks to the nation’s communities and assets, but the 

common set of analytical tools and procedures on h

management should use them can be improved to b

allocation of homeland security resources with risk-

measures, such as relative risk and risk reduction per 

Governmentwide guidance generally does not fully 

management into all aspects of decision-making suc

making, program planning, implementation, and m

broadly, the Congress and the executive branch face 

difficult and contentious trade-offs as they re-exam

and restructure the base of federal programs in resp

budget demands and long-term fiscal challenges an

risk profiles faced by programs and agencies chang

discussed in section 1, much of the base of the fede

was put in place in response to the wants, needs, an

of an earlier era. For example, some risks to farme

aging population as discussed elsewhere in this sect

changed over the decades, as have the tools for eva

communicating risk about costs and other outcome

thorough and disciplined approach to identifying an

across the federal government could help in structu

informing the daunting decisions that need to be m

How could the federal government consistently apply a 

management framework to help guide federal programs and 

efficiently and to best effect? For example, can the Office of 

Budget and the Department of Homeland Security develop g

Homeland Security to better align federal investments in prep

potential risk and threat facing the nation’s assets and comm

extent should federal agencies, such as DOD or NASA, con

the uncertainty of cost estimates for major procurements in bu

what extent can changing risks be monitored across federal p

can these changes be used to review the base of ongoing federa
21st Century Challenges: Reexamining the Base of the Federal Go

A range of individual agencies need to successfully 

specific transformation initiatives. For example, the 

Service is under increasing financial pressure as the 

electronic bill payment, and growing competition fr

delivery companies are changing the nation’s comm

delivery sectors and adversely affecting mail volume

Service’s ability to address these challenges is hinde

outmoded business model that relies on mail volum

cover rising costs. The service is working to cut co

productivity, reduce its workforce, and make other 

but it will need attention and support as it adapts a 

competitive business model.

How should agencies, including the U.S. Postal Servic

services, infrastructure, legal framework, operations, and wor

with rapid changes in technology as well as in the communica

other sectors of the economy?

What are the specific leadership models that can be use

management and address transformation challenges? For ex

create chief operating officer or chief management officer posit

appointments within selected agencies to elevate, integrate, an

responsibility and authority for business management and tr

efforts?

The government has not transformed, in many case

motivates and compensates its employees to achiev

results within available resources and existing autho

though people are critical to any agency’s successful 

define its culture, develop its knowledge, and are its 

asset, a number of agencies still try to manage this a

size-fits-all” approach. For example, employees are 

through an outmoded system that (1) rewards lengt

rather than individual performance and contributio

(2) automatically provides across-the-board annual 

even to poor performers, and (3) compensates emp

various localities without adequately considering th

market rates for these employees. To address these 

provide the services the public expects, the federal 
70 21st Century Challenges: Reexamining the Base of the Fede

system must be reformed governmentwide, and this 

guided by a set of consistent principles, criteria, and 

How should the federal government update its compens

more market-based and performance-oriented? For example

performers be guaranteed pay increases? How can these syst

comparability and provide reasonable annual pay adjustmen

competing for critical occupations or in higher cost locations? 

can the government make an increasing percentage of federal 

risk” or dependent on achieving individual and organization

example, providing more compensation as one-time bonuses r

permanent salary increases? 

More than 30 federal agencies control about $328 b

property assets worldwide, and maintain a “brick an

buildings and office presence in 11 regions across t

this organization and infrastructure reflects a busin

the technological and transportation environment o

Many of these assets are no longer needed; others ar

aligned with, or responsive to, agencies’ changing m

many others are in an alarming state of deterioratio

costing taxpayers tens of billions of dollars to resto

The Congress and several agencies have recognized 

address this issue, but this financial liability still loo

In a modern society with advanced telecommunications 

information capabilities, does the government still need 11 re

agencies still need a physical presence in all major cities?

What opportunities exist to more strategically manage 

government’s real property assets, such as disposing of excess f

better leveraging surplus in the private sector to make the fed

relevant to current missions and less costly?
21st Century Challenges: Reexamining the Base of the Federal Go

Tax System 

Challenges in 

the 21st Century

American taxpayers paid about $1.9 trillion in comb

taxes, including income, payroll, and excise taxes, in 

These taxes, along with over $400 billion in deficit b

funded the federal government. The tax revenue ra

about 16 percent of gross domestic product–-at the 

range of federal taxes as a share of GDP for the las

Beyond funding government, any tax system, includ

one, has profound effects on the economy as a who

individual taxpayers, both for today and tomorrow. 

decisionmaking throughout the economy, including 

concerning how much and where to work, save, and 

decisions, in turn, affect economic growth and futu

thus future tax revenues. 

Concerns about the tax system’s effect on future ec

performance are one driver of the current debate ab

of that system. The U.S. position in the worldwide 

fundamentally changed and the structure and comp

economy has shifted. U.S. workers and firms must n

world of fast-paced technological change and const

global competition. Also, as noted in section 1, the 

between federal revenues and expenditures, if allowe

term, will affect economic growth. Addressing the 

require greater scrutiny of both tax revenues and ex

The following challenges and illustrative questions 

framework for thinking about these issues in the fu

The success of our tax system hinges very much on 

perception of its fairness and understandability. Fa

ultimately a matter of personal judgment about issu

progressive tax rates should be and what constitute

Fairness also depends on the extent to which taxpay

friends, neighbors, and business competitors are com

tax laws and actually paying their taxes. Compliance 

the effectiveness of the Internal Revenue Service’s 

enforcement efforts but also by Americans’ attitude

system and government. Disturbing recent polls ind

1 in 5 respondents say it is acceptable to cheat on th
72 21st Century Challenges: Reexamining the Base of the Fede

Given our current tax system, what tax rate structure 

raise sufficient revenue to fund government and satisfy the pu

reasonableness and fairness?

How can we best strengthen enforcement of tax laws to 

confidence that their friends, neighbors, and business competit

fair share? For example, can we increase compliance with th

reduce the need for IRS enforcement activities through greater 

and information reporting? Would improved compliance da

better allocate its enforcement resources? Could increased pen

disclosure reduce the use of abusive tax shelters?

Over the years the federal tax system and especially 

income tax has become more complex, less transpa

to frequent revision. Some complexity is understan

economy as diverse and sophisticated as ours. How

complexity and frequent revisions make it more dif

for taxpayers who want to comply to do so and for 

and enforce the tax laws. Many argue that complex

opportunities for tax evasion, through vehicles such 

which in turn motivate further changes in tax laws a

and perhaps more complexity. A lack of transparen

creating disrespect for the tax system and the gover

What opportunities exist to streamline and simplify the 

and thereby make it more transparent to taxpayers, reduce op

evasion, and decrease the compliance burden on taxpayers? F

Alternative Minimum Tax be eliminated? Can the Earne

Credit eligibility rules be simplified? Could the measuremen

simplified?

The growing complexity of the tax system stems in 

extensive use of tax incentives to promote social an

objectives. The tax system includes hundreds of billi

such incentives—the same magnitude as total discr

spending. For instance, the Low Income Housing T

federal government’s largest program for creating n

housing units and the Earned Income Credit is its l

assistance program for low-income families. How
21st Century Challenges: Reexamining the Base of the Federal Go

incentives do not compete in the annual budget pro

effectively are “fully funded” before any discretiona

considered. Further, relatively little is known about 

of tax incentives in achieving the objectives intende

Congress. As far back as 1994, GAO concluded th

deserved more scrutiny.

Which tax incentives need to be reconsidered because t

the objectives intended by the Congress, their costs outweigh t

duplicate other programs, or other more cost-effective means e

their objectives? For example, could health-related tax incen

treatment of employer-provided health insurance, which has b

over $180 billion in both income and certain payroll taxes, 

promote broader health care access, more efficient health care 

effectively control costs?

Rather than reconsider specific types of tax incentives, i

another 1986-style tax reform (broadening and simplifying t

eliminating many tax preferences thus allowing tax rates to 

Incentives for savings are a particular concern. Priv

savings are near historical lows and government sav

federal budget deficits, are negative. Low rates of d

force the nation to rely on foreign lenders to financ

investment. The tax code includes many incentives 

increase savings to finance retirement, health care, h

and so on. These savings incentives, which exempt 

from tax, have moved the current tax system in the 

consumption base. These incentives, however, are c

although not completely settled, researchers have ra

about how much, if any, net new savings they stimu

How effective are existing tax incentives at increasing 

targeted purposes? How effective are they at increasing overal

Could the myriad savings incentives (IRAs, health savings a

education savings incentives, etc.) that complicate the current 

consolidated and simplified while promoting increased saving
74 21st Century Challenges: Reexamining the Base of the Fede

The debate about the future tax system is partly abo

goals for the nation’s tax system can be best achieve

current structure, which is heavily dependent on inc

fundamentally reformed structure, which might inc

dependence on consumption taxes, a flatter rate sch

tax incentives. Increasing globalization, which mak

move assets, income, and jobs across international b

another motivator for the debate. As policymakers 

such issues, they will have to balance multiple objec

economic growth, equity, simplicity, transparency, a

administrability while raising the needed revenue. T

balance among these objectives may also be affected 

all, to take into account that, including both the em

employee share, an estimated two-thirds of taxpaye

more in 2004 in payroll taxes—which are levied to 

security and Medicare benefits—than they pay in in

(2) whether and how to tax wealth.

Is the federal income-based tax system sustainable and 

global economy? How should we tax the income of U.S. mu

corporations that is earned outside of the U.S.?

Should the basis of the existing system or any new refor

an income to a consumption base (today we actually have a h

Would such a change help respond to challenges posed by dem

and technological changes? How would such a change affect 

incentives? 

Regardless of whether a consumption tax is created, the 

is revised, or other fundamental tax system changes are mad

burden be allocated among taxpayers? Who should pay mo

pay less? How can burden be distributed according to policy

while minimizing complexity and preserving the desired benef

fundamental tax policy changes?
21st Century Challenges: Reexamining the Base of the Federal Go

How would the interrelationships between the federal a

tax systems and with the payroll tax system be taken into acc

the federal tax system? How should wealth be taxed, if at a

income or consumption based tax system and in any conversio

tax? How should transfers of wealth be taxed, if at all?
76 21st Century Challenges: Reexamining the Base of the Fede
21st Century Challenges: Reexamining the Base of the Federal Go

2Crehpat

The reexamination questions posed in this report c

challenge and an opportunity. Given the size of the 

imbalances looming in the future, business as usual 

The real question is not whether we deal with the fi

but how and when. Our policy process will be chal

with more foresight to take early action on problem

constitute an urgent crisis but pose important longe

the nation’s fiscal, economic, security, and societal f

address these issues, policymaking institutions will a

challenged to shift from the traditional focus on inc

changes in spending or revenues to look more fund

underlying relevance, relative priority and results of 

programs, policies, functions, and activities in addre

and emerging national needs and problems across a

the federal budget—discretionary spending, entitlem

mandatory spending, and tax policies and programs

While not easy, the periodic reexamination of existi

federal programs offers the prospect of weeding ou

outdated programs while strengthening and updatin

programs that are retained. Thus, such a process ad

fiscal imbalances but also can improve the responsi

effectiveness of government in addressing 21st cent

challenges. As discussed in section 1 of this report

current fiscal policy path is unsustainable. The que

section 2 of this report can be considered as one inp

that Congress will receive as it decides how to addr

While answers can draw on the work of GAO and 

elected officials can and should decide whether, how

move forward. 

Fiscal 

Challenges 

Prompt the 

Need for a New 

Approach

The stakes associated with federal programs are larg

beneficiaries of those programs and the nation’s tax

programs serve important constituencies and provi

current benefits. Accordingly, challenging the unde

rationale, and results achieved by these programs is 

analytic exercise, but rather a political process involv

strongly felt views and differing interests. 
78 21st Century Challenges: Reexamining the Base of the Fede

The conflicts and uncertainties entailed in budgetin

policymaking are often mitigated by focusing decisi

incremental changes in resources each year. As a re

incremental process focuses disproportionate attent

changes to existing programs and proposals for new 

the base of programs being taken as “given.” This t

process helps ensure stability and certainty in feder

commitments and helps target the limited time and 

policymakers on new proposals or proposals to cha

activities. While this approach may be appropriate 

stability and fiscal strength, it may be insufficient du

change and fiscal challenge. 

Moreover, the process routinely examines only the 

federal spending subject to the annual appropriation

definition, entitlement programs and tax expenditu

not reviewed or reauthorized annually, and many of 

are not even subject to periodic reauthorization to e

are periodically reviewed. As the nation enters a pe

existing portfolio of programs is unaffordable and u

current levels of taxation, a more fundamental revie

existing spending and tax policies and programs is n

appropriate but essential. 

The size of the problem is so large that across-the-b

to distributing cuts broadly across many individual 

accounts cannot really work. In addition, such app

result in retaining fat while cutting muscle—specifi

board cuts risk cutting effective programs while lea

outdated, or lower priority programs in the base. A

board approach also constitutes a missed opportuni

fundamental level the drivers of long-term deficits. 

of the long-term fiscal imbalances, all major spendi

programs in the budget should be subject to period

reexamination. While it is important to focus on th

programs driving the long-term outlook—Medicare

Social Security—our recent fiscal history suggests t

major areas from reexamination and review can und

credibility and political support for the entire proce
21st Century Challenges: Reexamining the Base of the Federal Go

size of the long-term fiscal imbalances, it is highly u

problem can be “solved” by reforms in any one sec

Building 

Support for a 

Reexamination 

Process

We recognize that reexamining the base is a challen

both leaders and stakeholders alike. Just as the trad

limits choices and political conflict, putting entire p

review periodically can increase the stakes and conf

with budget decisions. Accordingly, a process to re

programs and priorities will need to be supported b

publicly compelling rationale. 

The challenge for leaders is to frame the fiscal chall

something with important consequences for the val

that affect American citizens, both now and in the f

participants at GAO’s recent budget forum noted, le

able to make a compelling case for fiscal sacrifice b

never easy.3

 While current deficits are troubling, th

prelude to the daunting long-term fiscal challenges 

section 1 that are significant, structural and unsustai

However, long-term issues can be difficult to addre

when the most significant impact is beyond the 10 y

horizon. 

Effective and sustained leadership will be necessary 

among the public and other key players for address

term fiscal issues. Taking a long-term perspective c

important dividends for leaders in making the case 

public for initiating a reexamination process sooner 

Early action can turn the power of compounding fr

an ally, as reduced deficits usher in reduced debt, in

economic growth. Moreover, early action can enab

phase in changes over many years to permit future 

beneficiaries to more easily adjust to policy changes 

own private choices for savings, retirement, or othe

reexamination can also be used as a way to free fun

3

GAO, Comptroller General’s Forum: The Long-Term Fiscal Challenge, 

(Washington, D.C.: February 2005).
80 21st Century Challenges: Reexamining the Base of the Fede

programs and investments, thereby providing more 

support for the exercise.

Perhaps the most compelling reason to begin the re

now is the dire consequences of waiting for a crisis. 

deficits to rise to levels that seriously alarm markets 

economic actors to the point of approaching or rea

point,” the nation will be forced to adopt major and 

policy actions that would have significant disruptive 

for the lives of retirees and workers alike. 

Given the severity of the nation’s fiscal challenges a

range of federal programs, the hard choices that ne

considered may take a generation to address. Begin

reexamination and review process now would enab

makers to be more strategic and selective in choosin

review over a period of years. Reexamining selected 

budget base, over time rather than all at once, will l

process, but it may also make the process more feas

burdensome for decision makers. And by phasing i

programs or policies that might otherwise have pro

costs of transition, the burden of change can be spr

longer time periods. 

Notwithstanding the challenges associated with ree

reviewing the base of programs and operations has 

precedent. The federal government, in fact, has ree

reformed selected programs and priorities in the pa

programmatic perspective, such reexaminations hav

example, the 1983 Social Security reform, the 1986 

the 1996 welfare reform. They have also included r

the creation of the Department of Homeland Secur

recently, the ongoing reorganization of the U.S. inte

community. From a broader fiscal standpoint, the 

significant deficit reduction measures adopted by th

supported by the President that made important ch

discretionary spending, entitlement program growth

that helped eliminate deficits and bring about budg
21st Century Challenges: Reexamining the Base of the Federal Go

Some may be skeptical as to whether our political s

address long-term problems or commitments. How

skepticism ignores past examples of attention to lon

The interstate highway program took a generation t

complete. The Social Security system was created w

time horizons in mind and has undergone major re

both 1977 and 1983, with an eye toward improving 

longer-term sustainability. As a nation, we also anti

result met, the educational capacity needs of the ba

way from primary school to college. 

States and other nations also have engaged in reexa

exercises. States have variously examined their base

cutback management, performance and strategic pl

reform, and privatization/contracting out. In recen

states have reexamined their various programs and 

through such mechanisms as efficiency commission

reprioritization exercises. For instance, the state of 

adopted what it calls a statewide results-based appr

budgeting called “Priorities of Government” to add

shortfall of $2.4 billion for the 2003-2005 biennium

system, programs and activities were reviewed and 

their relative contribution to eleven broader perform

leading to cuts for programs below the line of avail

Other nations, too, have undertaken comprehensive 

efforts. New Zealand, Australia, Canada, and the N

example, have undergone performance-based budg

performance management reforms aimed at reprior

of their respective governmental activity and budge

number of years. In Canada, an OECD study conc

program review exercise delivered $18.8 billion in s

previously-planned reductions (cumulative over 3 y

in the 1995 and 1996 budgets and to that extent cer

contributed to achieving—and in fact exceeding—t

deficit-to-GDP target of 3 percent by 1996-97. In 

reconsideration reviews are conducted on particula

selected for each budget cycle, with participation by 

of central budget and departmental staff as well as 

resulting in a public report with recommendations t
82 21st Century Challenges: Reexamining the Base of the Fede

in the budget process. According to OECD, the pro

place since 1981 and has lead to significant savings 

reforms of major policy areas.4

Multiple 

Approaches 

Can Facilitate 

Reexamination

In our system a successful reexamination process w

likelihood rely on multiple approaches over a period 

and process can play a role in facilitating decisions a

leaders in making tough choices. However, process

themselves force decisions. Leadership, a sense of 

the future, and an agreement that tough choices and 

actions are required and essential for success. 

Some congressional observers believe a deceptively 

may hold the most promise: reliance on the existin

reauthorization, oversight, appropriations, and budg

They have been deployed to review and change exi

on a selective or episodic basis, but each also is perc

certain constraints that have prompted calls for cha

• The reauthorization process. The reauthorization pro

Congress the opportunity to probe into the effe

program and to terminate or make any changes b

funding for the reauthorized program. Reautho

purview of authorizing committees in the Cong

authorizations generally precede appropriations

some programs have authorizations that are per

not expire while others are subject to periodic r

are funded by permanent appropriations, such a

Affairs Pensions Benefits program. Furthermo

have been expressed that the authorization proc

increasingly been made less effective by the con

funding in appropriations bills even when progr

authorizations have expired, such as the Federal 

Investigation (FBI) and the Federal Prison Syste

funded in fiscal year 2005 with expired authoriz

appropriations. 

4

Organisation for Economic Co-operation and Development, R

Budget Institutions (GOV/PUMA/SBO (2003)15), May 16, 2003.
21st Century Challenges: Reexamining the Base of the Federal Go

• The oversight process. Although oversight can and 

authorizations and appropriations, the Congres

separate oversight process available outside the 

reauthorization/appropriations discussions. Th

process provides the Congress the means to ho

accountable for the economy, efficiency, and eff

existing policies, programs, and agency operatio

committees primarily responsible for exercising 

are the Senate Committee on Homeland Securit

Governmental Affairs and the House Committe

Government Reform, although authorizing com

engage in oversight reviews and hearings in con

matters within their jurisdiction. GAO and age

general support congressional oversight with an

evaluations, investigations, and reviews of variou

operations. Concerns have been expressed by a 

observers regarding the need to increase attenti

in the Congress and the lack of legislative follow

findings of oversight investigations and hearing

• The appropriations process. For the approximately 

federal budget that is subject to the annual appr

process, this process gives the Congress the opp

annually review programs and operations. Alth

process does not touch the major drivers of the 

deficit (e.g., Medicare, Medicaid, Social Security) 

programs important to citizens and the nation (

homeland security, health research, transportati

parks, education, environment). The squeeze c

growth in mandatory spending increases the nee

this part of the budget is reexamined and adapt

century. 

• The budget process. The congressional budget proc

vehicle through which the Congress articulates 

fiscal stance—overall targets for spending and r

priorities across various broad categories. The p

the overall constraints for spending and revenue 

Congress for each year and the rules of procedu

used to constrain new entitlement and tax legisl
84 21st Century Challenges: Reexamining the Base of the Fede

assumed in the annual budget resolution. Direc

in the budget resolution for reconciliation legisl

review of existing programs by directing congre

committees to propose cuts to meet savings targ

the resolution. The budget rules that were grou

statute—including discretionary spending caps 

limits on mandatory spending and tax cuts—an

executive actions if violated, expired at the end 

2002; the only constraints are those contained a

through congressional budget resolutions, and r

points of order. 

Other specific approaches and processes have been 

supplement the existing congressional processes an

these are generally aimed at addressing perceived lim

existing processes and to prompt greater incentives 

review and reexamination, each have their own set 

benefits as well as limitations that have historically c

use or success:

• Special temporary commissions. Special temporary c

have been convened to formulate recommendat

policy or functional areas. Temporary commiss

appealing because they provide a safe haven for 

policy alternatives, often are bipartisan in nature

both executive and legislative branch representa

typically include experts both within and outside 

Most commissions are designed to address issu

manner and then are dissolved. Commissions c

promising, but their ultimate success depends o

which the Congress and the executive branch ag

need for action, on the need to use a nontraditio

reach agreement or to develop a specific propo

general willingness to address the recommendat

commissions. This can be seen in the differing 

examples: Social Security reform (e.g., Greensp

and Moynihan Commission), terrorism and inte

(e.g., 9-11 Commission), military base realignme

(e.g., BRAC Commission), and Medicare (e.g., B

Commission). 
21st Century Challenges: Reexamining the Base of the Federal Go

• Sunset provisions. Proposals have been made to in

the-board provisions terminating all existing pro

certain number of years to trigger their reexami

Although numerous specific programs contain 

authorizations that are like sunset provisions, su

highway funding and the Temporary Assistance 

Families (TANF) program, a broad federal suns

been adopted. Concerns about this approach in

burden of a crosscutting provision and the lack 

those programs most in need of reexamination. 

some have noted that fixed-period authorization

sunset provisions. The reauthorization process 

same opportunity for reexamination—and if ap

not forthcoming in the absence of a reauthoriza

term authorizations effectively constitute sunse

• Executive reorganization authority. In the past, the 

provided the president with authority to propos

track consideration of changes in structures and 

of federal agencies and programs. However, su

been progressively limited over the years. The f

issue raised by granting reorganization authority 

is whether and how the Congress wishes to chan

its normal deliberative process when addressing 

proposals to restructure the federal government

may want to consider different tracks for propos

significant policy changes versus those that focu

on government operations.

• Biennial Budgeting. Shifting appropriations to a b

been proposed as a way to promote more system

congressional oversight and review in the “off ” 

skeptics note that whether this reform in fact fr

congressional time depends on whether the bud

relatively unchanged during the off year. The Co

passing annual supplemental appropriations in r

this is expected to continue for several more ye

some argue that reducing appropriations review

other year would serve to reduce the opportuni

Congress to routinely examine and review prog
86 21st Century Challenges: Reexamining the Base of the Fede

executive operations. Although some states use 

budgeting (e.g., Texas, Connecticut, and Ohio), t

are mixed, with the governor having more budge

the President. 

Performance and analytic tools may be as importan

important than specific process reforms in facilitati

reexamination. In this regard, the performance me

ushered in by the Government Performance and R

1993 (GPRA) have led to a growing supply of incre

sophisticated measures and data on the results achie

federal programs. Agencies and OMB have been w

years to strengthen the links between this informati

budget. Under the Program Assessment Rating To

example, OMB plans to rate the effectiveness of ea

the budget over a 5-year period. 

While these initiatives provide a foundation for a ba

federal policies, programs, functions, and activities, 

are in order to support the type of reexamination w

First, the PART focus on individual programs will p

important new assessments, but it needs to be supp

more crosscutting assessment of the relative contrib

portfolios of programs and tools to broader outcom

performance goals of importance—ranging from lo

housing to food safety to counterterrorism—are ad

wide range of discretionary, entitlement, tax, and re

approaches that cut across a number of agencies. W

moving to include some crosscutting assessments in 

2006 PART, fully developing the governmentwide p

provided for under GPRA would provide a more sy

for addressing the performance of programs cutting 

to broader goals. Second, the Congress could cons

focus its oversight and review on these important o

and missions by considering adopting a performanc

own. One potential approach we have suggested is 

resolution that could be included as part of the ann

resolution to help target congressional activity on ke

or performance problems. Once program areas or 

selected, special collaborative initiatives among GA
21st Century Challenges: Reexamining the Base of the Federal Go

IGs, and even OMB could be undertaken to identif

various performance issues and alternatives for con

consideration, including identifying specific program

reorganization, consolidation, or other reforms. 

Conclusion As the foregoing discussion suggests, there are a ra

reexamination approaches and strategies. Assuming 

reexamination is pursued by the Congress adopted 

congressional objective, we suggest that the challen

Congress is at least threefold: (1) building support w

Congress itself, the Administration, and ultimately t

public to justify a base-line reexamination of existin

policies, programs, functions, and activities as discus

(2) identifying those areas that congressional and ex

agree need review along the lines of the illustrative q

in section 2, and (3) choosing reexamination approa

strategies that are appropriate for the particular area

examined as discussed in this section. 

The choice among reexamination approaches will b

many factors. Initially, the choice of reexamination 

approaches may be determined depending on such 

frequently an issue arises and the degree of political 

complexity. For example, a commission may be we

moving along ideas for problems that occur infrequ

require “cover” to reach political agreement, such a

reform. The reauthorization and oversight process

suited for problems that occur more frequently, but 

as is the case with TANF reauthorization and overs

the activities of federal agencies. The appropriation

be more conducive to policy matters requiring cong

every year, such as the funding of national defense. 

different approaches has often been used to reexam

specific policy areas in the recent past, as shown in 
88 21st Century Challenges: Reexamining the Base of the Fede

Figure 5: Selected Reforms and Reexamination Approaches 

Source: GAO.

Other important factors that will drive the specific 

include the public’s readiness and familiarity with th

reexamined, the need for some kind of budgetary c

incentive to prompt review, the desire for consensu

stakeholders, and the stage of development of the i

Figure 6 demonstrates how different approaches m

appropriate at differing stages of the development o

ranging from the need to simply raise awareness ab

perhaps not widely perceived, reexamination issues 

need to develop specific proposals for dealing with 

defined problems. Studies by GAO or other indep

qualified organizations could be used to raise public 

issues and problems (“agenda setting”). Congressio

other forums (e.g., regional sessions) could be used 

broader public about the need for change. When p

issue among other concerns, the Congress might use 

the annual budget resolution, the oversight agenda, 

Congress has enacted major reforms in recent years which were promoted and 

through the use of various reexamination processes and tools 

Intelligence reform—The Intelligence Reform and Terrorism Prevention Act of 2004 

coordinate, and make more effective the U.S. intelligence community. Congress drew 

reexamination agenda put forward by the National Commission on Terrorist Attacks U

States (9-11 Commission), in developing the actual legislation through its committee s

Department of Homeland Security—The Homeland Security Act of 2002 brought to

organizations and created the Department of Homeland Security. In its proposal for a 

Homeland Security, the President included several provisions similar to those propose

reexamination effort of the U.S. Commission on National Security/21st Century (Hart-

Commission). Congress tailored the actual legislation following hearings and conside

authorizing and oversight committees. 

Farm reform—The Federal Agriculture Improvement and Reform Act of 1996 change

government's approach to farm support from a policy based on managing crop produ

supporting farm income to a policy that allows producers flexibility in what they plant. 

new legislation was triggered by the provision in permanent law that would have reba

levels authorized in 1949-leading to higher subsidies and federal costs. 

Social Security reform—The 1983 Amendments to the Social Security Act made ch

Security coverage, financing, and benefit structure. The reform was made necessary 

showing insufficient fund assets to pay all benefits. A bipartisan executive-legislative 

developed the proposal that led to legislation receiving widespread bipartisan congres
21st Century Challenges: Reexamining the Base of the Federal Go

develop a new performance resolution to rank its re

review priorities. For developing policy proposals, t

rely on existing authorization processes, or can rely 

special commission to develop new policy proposal

recommendations for particularly complex or contr

As a reexamination unfolds, then, a combination of 

be needed.

Figure 6: Reexamination Maturity Model

Source: GAO.

Regardless of the specific combination of reexamina

adopted, the ultimate success of this process will de

important overarching conditions

• Sustained leadership to champion changes and r

the many stages of the policy process.

• Broad based input by a wide range of stakehold

• Reliable data and credible analysis from a broad 

that provides a compelling fact based rationale 

base of programs and policies for specific areas

Different developmental stages of 

reexamination 

May 

require...

Different reexamination 

such as:

• Agenda setting—raising awareness of 

issues by collecting information and defining 

the nature, timing and scope of new issues 

and problems with existing programs.

➝ • Studies by GAO or other 

and qualified organizatio

• Educating—informing the broader public 

about need for change. ➝ • Congressional hearings 

• Prioritizing and aggregating—validating the 

basis for problem definition, and prioritizing 

and grouping assessments of current 

programs.

➝ • Leadership prioritization 

• Annual congressional bu

resolution/oversight age

• Developing policy proposals—providing a 

menu of options, exploring differences, 

making recommendations.

➝ • Temporary special comm

• Reauthorization process

• Executive reorganization 
90 21st Century Challenges: Reexamining the Base of the Fede

• Clear and transparent processes for engaging th

in the debate over the recommended changes.

In conclusion, our nation faces large, growing and s

term fiscal imbalances that we cannot simply grow 

Rather, hard choices based on a fundamental reexam

government policies, programs, functions, and activ

necessary in order to address our long-term fiscal im

will include consideration of what the federal gover

do, how it should do business, and how it should be 

future. The resolution of these problems must inva

difficult political choices among competing program

benefits to many Americans but are collectively una

current revenue levels. However, given the fiscal ch

reexamination of government can be expected, whe

through a public decision making process or forced 

The questions provided in this volume are designed 

kinds of issues that such a review can address, not t

such a process will reach. Such a review will be dif

process may take a generation or more to unfold. T

reexamination process will in fact proceed through 

processes and venues. However, the nation will be 

such a process begins sooner rather than later. 

(450348)
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