Social Security Reform

David M. WalkerComptroller Generalof the United StatesNovember 16, 1999

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-2200

-1800

-1400

-1000

-600

-200

200

600

1000

1400

1800

2200

2600

1999 2029 2044 2059 2074

Social Security Trust FundFinancial Outlook

Trust Fund Balance

Cash Surplus

Cash Deficit

Dollars in Billions

2014 2034

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Medicare’s Hospital Insurance Trust FundFinancial Outlook

-200

-150

-100

-50

0

50

100

150

200

1990 1995 2000 2005 2010 2015 2020 2025

Cash Surplus/Deficit Fund Balance

Cash Deficit 1992

Dollars in Billions

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Social Security and Medicare Part Aas a Percent of Taxable Payroll

0

5

10

15

20

25

30

1999

2004

2009

2014

2019

2024

2029

2034

2039

2044

2049

2054

2059

2064

2069

2074

Per

cen

t o

f ta

xab

le p

ayro

ll

Current Level

Source:  1999 OASDI Trustees’ Report.

5

0

2

4

6

8

10

1955

1965

1975

1985

1995

2005

2015

2025

2035

2045

2055

2065

2075

Workers per Beneficiary

Demographic Trends Drive Financing ofSocial Security and Medicare

Source: 1999 OASDI Trustees Report

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Changes:  Demographics

The Aging of the U.S. Population

0

20

40

60

80

100

1970 1995 2050-intermediate

2050-high cost

Pop

ulat

ion 

in m

illio

ns

Age 65 and over Under age 20

7

10

12

14

16

18

20

22

24

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Men Women

Life Expectancy Beyond 65

Num

ber 

of y

ears

 bey

ond 

age 

65

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Budget Outlook Provides Context

• Shift from nearly 30 years of budget deficits to projections forunified budget surpluses out into the future

•  Welcome news--but we need to act prudently

• Uncertainty inherent in projections

• Large debt overhang from years of deficits

• Looming cost pressures over next decades

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Long-Term Simulations

• Since 1992 GAO has been simulating interaction of budget & economyover long term.  Assumptions of this model are based on CBO and theSocial Security and Medicare Trustees’ best estimates.

• We use these simulations to provide qualitative illustrations of fiscal &economic outcomes associated with alternative policy paths.

• Long-term outlook is especially important now.• Achievement of unified budget surplus could lull us into thinking job is

done.• BUT surpluses could also present opportunity to address the future.•  We know that a demographic tidal wave will overwhelm future

surpluses.

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How Should We Use the Surplus?

• Meet pent-up demand for spending in some domesticdiscretionary areas?

• Increase defense spending?

• Cut taxes?

• Secure existing unfunded entitlement promises?

• Reduce publicly held debt?

• A combination of all?

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Relative Risk

• Multiple benefits to devoting a good portion of the surplus to debtreduction, especially if comprehensive reform is postponed

• interest savings

• demographic tidal wave will overwhelm surplus AND reducebudgetary flexibility

• Policy choices vary in degree of risk

• permanent changes in tax or spending paths present greatest risk

• paying down publicly held debt presents least risk

• Paying down debt is very helpful, but not enough (See “No Action”simulation)

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Alternative Fiscal Policy Simulations

• This presentation shows two alternative fiscal policy paths:  “No Action” (“Save UnifiedSurpluses”) and “Eliminate Unified Surpluses.”

• No action (“Save Unified Surpluses”) assumes no changes in current policies and thusresults in saving the unified surpluses.  This assumption implies no emergency spendingand that actual spending falls within the existing discretionary caps.  Thus unified budgetsurpluses through 2029 are used to reduce debt held by the public.  Thereafter, deficitsare permitted to emerge.  Discretionary spending follows CBO’s 10-year projections whichassume compliance with the spending caps through 2002 and growth with inflationthrough 2008.  Thereafter we assume discretionary spending grows with the economy.

• Eliminate unified surpluses assumes that surpluses are not retained.  Policy actions thatpermanently increase spending and/or reduce revenue eliminate the surpluses but keepthe unified budget in balance until unified deficits emerge in 2008.

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Composition of Spending as a Share of GDPUnder No Action Simulation

0

10

20

30

40

50

60

1998 2030* 2050 2070

Per

cent

 of G

DP

Social Security Medicare & Medicaid Net Interest All other spending

Revenue

Note:  Revenue as a share of GDP falls from its actual 1998 level of 21.6 percent to CBO’s 2008 implied level and is held constant at this levelfor the remainder of the simulation period.*In 2030, all other spending includes offsetting interest receipts. Source:  GAO’s Summer 1999 analysis.

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Composition of Spending as a Share of GDPUnder Eliminate Unified Surpluses Simulation

0

10

20

30

40

50

60

1998 2030 2050 2070*

Per

cen

t o

f G

DP

Social Security Medicare & Medicaid Net Interest All other spending

Revenue

Note:  Revenue as a share of GDP during the simulation period is lower than the 1998 level due to unspecified permanent policy actions thatreduce revenue and increase spending to eliminate the unified surpluses.*The “Eliminate unified surpluses” simulation can only be run through 2050 due to the elimination of the capital stock.Source:  GAO’s Summer 1999 analysis.

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Unified Deficits as a Share of GDP UnderAlternative Fiscal Policy Simulations

-5

0

5

10

15

20

1999 2004 2009 2014 2019 2024 2029 2034 2039 2044 2049 2054 2059 2064 2069

Per

cent

 of G

DP

Eliminate unifiedsurpluses*

No action

*Data end when deficits reach 20 percent of GDP.Source:  GAO’s Summer 1999 analysis.

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Simulation Results and Observations

• Despite short-term improvements in the fiscal outlook, “No action” remainseconomically unsustainable over the long term due to the aging population andrising health care costs.

• “No action” incorporates several optimistic assumptions which may not berealized.  These include continued tight fiscal restraint on discretionary spending,no emergency spending, a three-decade long period of negative federal debt,and moderation in Medicare cost growth.

• Substantive Social Security and Medicare reforms would have significantpositive impact on the long-term economic and budget outlook.

• Entitlement reform is critical to restoring fiscal flexibility and improvingintergenerational equity.

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Evaluating Social Security Reform Proposals

• Comprehensive proposals can be evaluated against three basic criteria.

• Reform proposals should be evaluated as packages that strike a balanceamong individual reform elements and important interactive effects.

• Some proposals will fare better or worse than other proposals under eachcriterion.

• Every proposal has a number of pros and cons.  Meaningful programreform requires tough choices.

• Overall evaluation of each proposal depends on the weight individualpolicymakers place on each criterion.

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Criteria for AssessingSocial Security Reform Proposals

• Financing Sustainable Solvency

• Balancing Adequacy and Equity in the Benefits Structure

• Implementing and Administering Reforms

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Financing Sustainable Solvency

To what extent does the proposal:

• Reduce future budgetary pressures?

• Reduce debt held by the public?

• Reduce the cost of the Social Security system as apercentage of GDP?

• Reduce the percentage of federal revenues consumed bythe Social Security system?

• Increase national saving?

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Financing Sustainable Solvency

To what extent does the proposal:

• Restore 75-year actuarial balance and create a stablesystem thereafter?

• Raise payroll taxes, draw on general revenues, and/oruse Social Security trust fund surpluses to financechanges?

• Create contingent liabilities?

• Include “safety valves” to control future programgrowth?

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Balancing Adequacy and Equityin the Benefits Structure

To what extent does the proposal:

• Change current-law benefits for current and future retirees?

• Maintain benefits for low-income workers who are mostreliant on Social Security?

• Maintain benefits for the disabled, dependents, andsurvivors?

• Ensure that those who contribute receive benefits?

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To what extent does the proposal:

• Provide higher replacement rates for lower-income earners?

• Expand individual choice and control over programcontributions?

• Increase returns on investment?

• Improve intergenerational equity?

Balancing Adequacy and Equityin the Benefits Structure

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Implementing and Administering Reforms

To what extent does the proposal:

• Provide reasonable timing and funds for implementationand result in reasonable administrative costs?

• Allow the general public to readily understand its financingstructure and increase public confidence?

• Allow the general public to readily understand the benefitstructure and avoid expectations gaps?

• Limit the potential for politically motivated investing?

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Evaluating Social Security Reform Proposals:Conclusion

• A proposal’s ability to achieve and sustain solvency is sensitive to economic andbudgetary assumptions.

• All proposals present trade-offs between unified budget results and benefit levels.

• None of the proposals fully address implementation and administrative issues.

• Proposals that guarantee benefits place the risk of financing those benefits on thegovernment.  Proposals that provide more choice and control to individuals may placeindividual benefits at greater financial risk while giving them an opportunity for higherreturns.

• In any reform proposal, attention must be paid to the impact on poverty among theelderly.

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Opportunity and Obligation

• Unified budget surpluses present both an opportunity and an obligation.

• Today’s fiscal and economic good fortune give us an opportunity toaddress the challenges of Social Security and Medicare reform--beforethe tidal wave of the baby boom’s retirement.

• Our stewardship responsibility gives us an obligation to enact changesthat  improve prospects for future generations.

• Social Security reform that recognizes these factors can exceed theexpectations of all Americans.

• Social Security reform is “easy lifting” compared to Medicare reform.

Social Security Reform