GAO

United States General Accounting Office

Testimony

Before the Committee on the Budget, U.S. Senate

For Release on Delivery

Expected at

9:30 a.m.

Tuesday,

February 23, 1999

SOCIAL SECURITY 

AND SURPLUSES

GAO’s Perspective on 

the President’s 

Proposals

Statement of David M. Walker

Comptroller General of the United States

GAO/T-AIMD/HEHS-99-95

Page 1 GAO/T-AIMD/HEHS-99-95

Mr. Chairman and Members of the Committee: 

It is a pleasure to be here today to discuss the President’s recent proposal 

for addressing Social Security and use of the budget surplus. These 

proposals address some of the most important issues facing the nation, 

both now and over the longer term. As you know, both GAO as an 

institution and I as an individual have a long-standing interest in these 

issues.

The President’s proposal is complex, which makes it all the more important 

for us to focus our attention on what it does—and what it does not do—for 

our long-term future. In summary, the President’s proposal:

• Reduces debt held by the public from current levels, thereby also 

reducing net interest costs, raising national saving, and contributing to 

future economic growth.

• Fundamentally changes Social Security financing in two ways:

• It promises general funds in the future by, in effect, trading publicly 

held debt for debt held by the Social Security Trust Fund (SSTF).

• It invests some of the trust fund in equities with the goal of capturing 

higher returns over the long term.

• Does not have any effect on the projected cash flow imbalance in the 

Social Security program’s taxes and benefits, which begins in 2013.

• Does not represent a Social Security reform plan and does not come 

close to “saving Social Security.”

Context: Long-Term 

Outlook Is Important

It is important to look at the President’s proposal in the context of the fiscal 

situation in which we find ourselves. After nearly 30 years of unified 

budget deficits, we look ahead to projections for “surpluses as far as the 

eye can see.” At the same time, we know that we face a demographic 

tsunami in the future that poses significant challenges for the Social 

Security system, Medicare, and our economy as a whole. In this context, 

we should recognize that the President uses a longer-term framework for 

resource allocation than has been customary in federal budgeting. 

Although all projections are uncertain—and they get more uncertain the 

farther out they go—we have long held that a long-term perspective is 

important in formulating fiscal policy for the nation. Each generation is in 

part the custodian for the economy it hands the next and the nation’s longterm economic future depends in large part on today’s budget decisions. 

This perspective is particularly important because our model and that of 
Page 2 GAO/T-AIMD/HEHS-99-95

the Congressional Budget Office (CBO) continue to show that absent a 

change in policy, the changing demographics to which I referred above will 

lead to renewed deficits. This longer-term problem provides the critical 

backdrop for making decisions about today’s surpluses. 

Surpluses are the result of a good economy and difficult policy decisions. 

They also provide a unique opportunity to put our nation on a more 

sustainable path for the long term, both for fiscal policy and the Social 

Security program itself. Current decisions can help in several important 

respects: (1) current fiscal policy decisions can help expand the future 

capacity of our economy by increasing national savings and investment, 

(2) engaging in substantive reforms of retirement and health programs can 

reduce future claims, (3) by acting now, we have the opportunity of 

phasing in changes to Social Security and health programs over a sufficient 

period of time to enable our citizens to adjust, and (4) failure to achieve 

needed reforms in the Social Security and Medicare programs will drive 

future spending to unsustainable levels and eventually “squeeze out” most 

or all discretionary spending. If we let the achievement of a budget surplus 

lull us into complacency about the budget, then in the middle of the 

21st century, we could face daunting demographic challenges without 

having built the economic capacity or program/policy reforms to handle 

them.

The Proposal Before turning to the context for and analysis of the President’s proposal, 

let me briefly describe it. The President proposes to use approximately 

two-thirds of the total projected unified budget surpluses over the next 

15 years to reduce debt held by the public and to address Social Security’s 

financing problem. His approach to this, however, is extremely complex 

and confusing. The President proposes to “transfer” an amount equal to a 

portion of the projected surplus to the Social Security and Medicare trust 

funds.1

 This transfer is projected to extend the solvency of Social Security 

from 2032 to 2049. His proposal to permit the trust fund to invest in 

equities is expected to further extend trust fund solvency to 2055. He calls 

on the Congress to work with him on program changes to get to 2075.

1

In this testimony, I will address only the Social Security portion of this transfer. The issues are similar 

but not identical for the Medicare trust fund transfer.
Page 3 GAO/T-AIMD/HEHS-99-95

To understand and evaluate this proposal, it is important to understand the 

nature of the federal budget, how trust funds fit into that budget, and the 

challenges of “saving” within the federal budget.

Can We Save for the Future 

in the Federal Budget?

The federal budget is a vehicle for making choices about the allocation of 

scarce resources. It is different from state budgets in ways important to 

this discussion. Most states use “fund budgeting” in which pension funds 

that are separate and distinct legal entities, build up surpluses that are 

routinely invested in assets outside the government (e.g., readily 

marketable securities held in separate funds). In contrast, the federal 

government’s unified budget shows all governmental transactions and all 

funds are available for current activities, including current-year activities of 

all trust funds. We cannot park our surplus in a cookie jar. The only way to 

save in the federal budget is to run a surplus or purchase a financial asset. 

When there is a cash surplus it is used to reduce debt held by the public. 

Therefore, to the extent that there is an actual cash surplus, debt held by 

the public falls.

This presents a problem for any attempt to “advance fund” all or part of 

future Social Security benefits. Advance funding within the current 

program would mean increasing the flows to the SSTF. Although it is 

officially “off budget,” the fact remains that the SSTF is a governmental 

fund. In the federal budget, trust funds are not like private trust funds. 

They are simply budget accounts used to record receipts and expenditures 

earmarked for specific purposes. A private trust fund can set aside money 

for the future by increasing its assets. However, under current law, when 

the SSTF’s receipts exceed costs, they are invested in Treasury securities 

and used to meet current cash needs of the government. These securities 

are an asset to the trust fund, but they are a claim on the Treasury. Any 

increase in assets to the SSTF is an equal increase in claims on the 

Treasury. One government fund is lending to another. The transactions net 

out on the government’s books. Given this investment policy, any increase 

in the trust fund balances would only become an increase in saving if this 

increment were to add to the unified budget surplus (or decrease the 

unified budget deficit) and thereby reduce the debt held by the public. 

This is also the only way in which an increase in the SSTF balance could be 

a form of advance funding.

How do these transactions affect the government’s debt? Gross federal 

debt is the sum of debt held by the public and debt held by governmental 

accounts—largely trust funds. This means that increases in the trust fund 
Page 4 GAO/T-AIMD/HEHS-99-95

surplus will increase gross debt unless debt held by the public declines by 

at least the same amount. Any reform of Social Security that increases the 

annual SSTF surplus would increase debt held by government accounts 

since, under current law, any excess of revenues over benefit payments is 

loaned to Treasury for current needs. As a result, total government debt 

would go up unless these surpluses were used to reduce debt held by the 

public by an equivalent amount.

For most people, the different types of “debt” in the federal budget may be 

confusing—especially since what is “good news” for a trust fund may be 

“bad news” for total debt and vice versa. This is so because total debt (or 

gross debt) is the sum of two very different types of debt—debt owed to the 

public and debt owed by one part of the government (general fund) to 

another part of the government (trust funds). Therefore, if a trust fund 

surplus grows faster than debt held by the public falls, total debt grows—

even if the trust fund surplus is created as an attempt to “save” or to “prefund” some of the future benefit payments. These contradictory 

movements emphasize the need to differentiate between different types of 

debt and what they mean. Both debt held by the public and debt held by 

trust funds are important--but for different reasons. Analytically, therefore, 

what is most important is not whether total debt increases but rather the 

reasons behind the increase--does it represent an attempt to “advance 

fund” through substantive reform or merely the promise of future 

resources? 

Debt held by the public and debt held by trust funds represent very 

different concepts. Debt held by the public approximates the federal 

government’s competition with other sectors in the credit markets. This 

affects interest rates and private capital accumulation. Further, interest on 

debt held by the public is a current burden on taxpayers. Reducing this 

burden frees up capacity to meet future needs. 

In contrast, debt held by trust funds performs an accounting function and 

currently represents the cumulative annual surpluses of these funds (i.e., 

excess of receipts over disbursements plus accrued interest). Importantly, 

debt held by the SSTF does not represent the actuarial present value of 

expected future benefits for either current or future participants. Nor does 

this debt have any of the economic effects of borrowing from the public. It 

is not a current transaction of the government with the public; it does not 

compete with the private sector for available funds in the credit market. It 

reduces the need to borrow from the public and so may hold down interest 

rates. Unlike debt held by the public, debt held by trust funds does not 
Page 5 GAO/T-AIMD/HEHS-99-95

represent an immediate burden on current taxpayers. Rather, it is a claim 

on future resources. The surplus is held in Treasury securities that give the 

SSTF a claim on the Treasury equal to the value of those securities. When 

the securities have to be redeemed, the Treasury must come up with the 

cash. At that time, taxpayers will see some combination of a lower surplus, 

lower spending, higher taxes, and/or greater borrowing from the public. 

If borrowing from the public is increased to cover this cash need, there 

could be upward pressure on interest rates. In addition, because debt held 

by the trust fund is not equal to future benefit payments--it is not a measure 

of the unfunded liability of the current system--it cannot be seen as a 

measure of this future burden. Nevertheless, it provides an important 

signal of the existence of this burden. Whether the debt constitutes a new 

economic burden for the future or merely recognizes an existing one 

depends on whether these currently promised benefits would be paid even 

in the absence of the securities.

How Does the President’s 

Proposal Work?

This information is important to understand the President’s proposal 

because, in large part, he proposes a set of transactions that, in effect, trade 

debt held by the public for debt held by the SSTF.2

 By running a cash 

surplus over the next 15 years, debt held by the public falls. To “save” this 

surplus, the President proposes to “transfer” it to the trust fund in the form 

of increased Treasury securities. Under his proposal, debt held by the 

public falls, but debt held by the trust funds increases. Because he shows 

the transfer as a subtraction from the surplus—a new budgetary concept—

he shows no surplus. As a result, he attempts to save some of the projected 

surplus by hiding it.

The mechanics of the proposed transfer of surpluses to the SSTF are 

complex and difficult to follow. Few details have been made available, and 

there is conflicting information on exactly how it would work. Figures 1 

and 2 are flowcharts representing our best understanding of the Social 

Security portion of this transfer. Since it is impossible to understand the 

changes proposed by the President without understanding the present 

system, figure 1 shows the flows under the current system. Under current 

law, annual cash flow surpluses (largely attributable to excess payroll taxes 

over benefits payments and program expenses) are invested in Treasury 

2

Paying down publicly held debt and issuing new special securities to the SSTF are two different 

transactions. Nevertheless, the effect is as if the securities are exchanged.
Page 6 GAO/T-AIMD/HEHS-99-95

securities.3 This excess “cash” is commingled with other revenues and 

used to finance other governmental activities. In this way, SSTF surpluses 

have helped and continue to help finance the rest of the government. This 

year, the SSTF surplus is expected to exceed the general fund deficit so 

there is also a surplus in the unified budget. Over the entire 15-year period, 

more than half of the projected unified surplus is composed of Social 

Security surpluses. Absent any change in policy, these unified surpluses 

will be used to reduce the debt held by the public. 

Figure 1: Current Social Security Flows

*Unified surplus = FICA surplus + general fund surplus

Source: GAO Analysis.

Under the President’s proposal, this would continue. However, as shown in 

figure 2, at the point where total tax receipts are allocated to pay for 

3

This presentation is somewhat simplified. In reality, FICA taxes are collected with income and 

corporate taxes by the Treasury and then allocated by the Treasury to Social Security, Medicare, or the 

general fund. In addition, a portion of income taxes paid on Social Security benefits flow into the SSTF. 

The expenditure side of the SSTF transactions is also simplified since administrative expenses also 

flow from the trust fund. These elements are unchanged by the President’s proposal and do not change 

the flows critical to understanding it.

Unified Budget

FICA Surplus

Special Treasuries

FICA Taxes

*Unified surplus would

pay down the debt held

by the public

Social Security

Trust Fund General Fund

 Discretionary

Spending

Mandatory

Spending

Other Taxes

Benefits
Page 7 GAO/T-AIMD/HEHS-99-95

government activities, a new financing step would be added to “transfer” a 

portion of the unified budget surpluses to the Social Security and Medicare 

trust funds. The unified budget would do this by providing a new set of 

securities for these trust funds. However, the excess cash would still be 

used to reduce the debt held by the public.

Figure 2: Social Security Flows Under President’s Proposal

Source: GAO Analysis.

In essence, this exchanges debt held by the public for debt held by the trust 

funds. While there are many benefits to reducing publicly held debt, it is 

important to recognize that under the current law baseline—i.e., with no 

changes in tax or spending policy—this would happen without crediting 

additional securities to the trust funds. 

The administration has defended this approach as a way of assuring both a 

reduction in debt held by the public and giving Social Security first claim 

on what they call the “debt-reduction dividend” to pay future benefits.

However, issuing these additional securities to the SSTF is a discretionary 

act with major legal and economic consequences for the future. Some 

FICA Surplus

Special Treasuries

Transfer for

Trust Fund

Special treasuries and

authority to purchase

equities

Unified surplus would pay down

the debt held by the public

Social Security

Trust Fund General Fund

Discretionary

Spending

Mandatory

Spending

Purchase of

equities

Other Taxes

Benefits

Unified Budget

FICA Taxes
Page 8 GAO/T-AIMD/HEHS-99-95

could view this as double counting—or double-crediting. Importantly, to 

the extent it appears that way to the public, it could undermine confidence 

in a system that is already difficult to explain. However, the debate over 

double counting focuses on the form of the proposal rather than its 

substance. Although form is important when it interferes with our ability 

to understand the substance—and I think this proposal falls into that 

trap—the important debate must be on the substance of the proposal.

This proposal represents a fundamental shift in the way the Social Security 

program is financed. It moves it away from payroll financing toward a 

formal commitment of future general fund resources for the program. This 

is unprecedented. Later in my statement, I will discuss the implications of 

this proposal for overall fiscal policy and for the Social Security program. 

Government Financing 

and Debt

The President’s proposals would have the effect of reducing debt held by 

the public from the current level of 44 percent of Gross Domestic Product 

(GDP) to 7 percent over the 15-year period. The President notes that this 

would be the lowest level since 1917. Nearly two-thirds of the projected 

unified budget surplus would be used to reduce debt held by the public. 

Because the surplus is also to be used for other governmental activities, the 

amount of debt reduction achieved would be less than the baseline (i.e., a 

situation in which none of the surplus was used), but nonetheless the 

outcome would confer significant benefits to the budget and the economy. 

Our previous work on the long-term effects of federal fiscal policy has 

shown the substantial benefits of debt reduction.4 One is lowering the 

burden of interest payments in the budget. Today, net interest represents 

the third-largest “program” in the budget, after Social Security and Defense. 

Interest payments, of course, are a function of both the amount of debt on 

which interest is charged and the interest rate. Thus, at any given interest 

rate, reducing publicly held debt reduces net interest payments within the 

budget. For example, CBO estimates that the difference between spending 

the surplus and saving the surplus is $123 billion in annual interest 

payments by 2009--or almost $500 billion cumulatively between now and 

then. Compared to spending the entire surplus, the President’s proposal

would also substantially reduce projected interest payments. Lower 

interest payments lead to larger surpluses; these in turn lead to lower debt 

4

Budget Issues: Analysis of Long-Term Fiscal Outlook (GAO/AIMD/OCE-98-19, October 22, 1997).
Page 9 GAO/T-AIMD/HEHS-99-95

which leads to lower interest payments and so on: the miracle of 

compound interest produces a “virtuous circle.” The result would be to 

provide increased budgetary flexibility for future decisionmakers who will 

be faced with enormous and growing spending pressures from the aging 

population.

For the economy, lowering debt levels increases national saving and frees 

up resources for private investment. This in turn leads to increased 

productivity and stronger economic growth over the long term. Over the 

last several years, we and CBO have both simulated the long-term 

economic results from various fiscal policy paths. These projections 

consistently show that reducing debt held by the public increases national 

income over the next 50 years, thereby making it easier for the nation to 

meet future needs and commitments. Our latest simulations done for this 

committee, as shown in figure 3, illustrate that any path that saves all or a 

significant share of the surplus in the near term would produce 

demonstrable gains in per capita GDP over the long run.5 This higher GDP 

in turn would increase the nation’s economic capacity to handle all its 

commitments in the future.

5

The “on-budget balance” path assumes that any surplus in the non-Social Security part of the budget is 

“spent” on either a tax cut or spending increases or some combination but assumes the current law path 

for the Social Security trust fund. Thus, the surplus in the Social Security trust fund remains untouched 

until it disappears in 2013 after which the unified budget runs a deficit equal to the SSTF deficit. The 

“Save the Surplus” path assumes no changes in current policies and that budget surpluses through 2024 

are used to reduce debt held by the public. The “No Surplus” path assumes that permanent increases in 

discretionary spending and tax cuts deplete the surpluses but keep the budget in balance through 2009. 

Thereafter, deficits reemerge as spending pressures grow.
Page 10 GAO/T-AIMD/HEHS-99-95

Figure 3: GDP Per Capita Under Alternate Fiscal Policy Simulations 

Source: GAO Analysis.

Under the President’s proposal, debt held by trust funds goes up more 

rapidly than debt held by the public falls, largely due to these additional 

securities transferred to the trust funds. Gross debt, therefore, increases. 

It is gross debt—with minor exceptions—that is the measure that is subject 

to the debt limit. The current limit is $5.95 trillion. Under the President’s 

plan, the limit would need to be raised sometime during 2001. Under either 

the CBO or the Office of Management and Budget baseline (i.e., save the 

entire surplus), the limit would not need to be raised during at least the 

next 10 years. Since other proposals to use the surplus would also bring 

forward the time when the debt limit would have to be raised, the impact of 

the President’s proposal on debt is in part a “compared to what?” question. 

In figure 4, we show the debt subject to limit under the baseline, the 

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

1998 2002 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050

On-budget balance Save the surplus No surplus

1998 level

Per capita 1998 dollars
Page 11 GAO/T-AIMD/HEHS-99-95

President’s proposal, and a hypothetical path we have labeled “on-budget 

balance.”6

Figure 4: Debt Subject to Limit Under Baseline and President’s Proposal

Source: OMB, CBO, Senate Budget Committee, and GAO Analysis. 

Figures 5 and 6 below compare the composition of debt under the same 

three paths: the baseline (save the entire surplus), the President’s proposal 

(including both the Social Security proposal and the other spending), and 

“on-budget balance.” Figure 5 shows debt held by the public under all 

three scenarios, and figure 6 shows debt held by governmental accounts.

As figure 5 shows, debt held by the public falls under all three scenarios. 

Since the baseline assumes the entire surplus is devoted to reducing debt 

held by the public, it shows the greatest drop. Under the “on-budget 

6

The baseline is the CBO baseline. It assumes that none of the surplus is used for tax cuts or spending 

increases. “On-budget balance” assumes that any surplus in the non-Social Security part of the budget 

is “spent” on either a tax cut or spending increases or some combination but that the surplus in the 

Social Security trust fund remains untouched. There is no “on-budget” surplus until 2001.

$4,000

$4,500

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

President's Budget with Social Security Proposal On-Budget Balance CBO Baseline

Debt Limit $5,950

Dollars in billions
Page 12 GAO/T-AIMD/HEHS-99-95

balance” path there are no tax cuts or spending increases until there is an 

on-budget balance in 2001 while under the President’s proposal spending 

increases and tax cuts are front-loaded. As a result, the President’s 

proposal is projected to reduce debt held by the public less than the “onbudget balance” path during these 10 years.

Figure 6 shows the impact of the President’s proposal to transfer securities 

to the SSTF. The projections for debt held by government accounts are the 

same for the baseline and the “on-budget balance” paths since neither 

changes current law. Under the President’s proposal, however, debt held 

by the SSTF increases as securities are transferred to it. This leads to the 

increase shown in figure 6.

Figure 5: Composition of Federal Debt: Debt Held by the Public

Source: OMB, CBO, Senate Budget Committee, and GAO Analysis.

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

President's Budget with Social Secu rity Proposal On -Budget Balance CBO Baseline

Dollars in billions
Page 13 GAO/T-AIMD/HEHS-99-95

Figure 6: Composition of Debt: Debt Held by Government Accounts

Note: Debt held by government accounts is the same under CBO baseline and the on-budget balance 

path.

Source: OMB, CBO, Senate Budget, and GAO Analysis.

While reducing debt held by the public appears to be a centerpiece of the 

proposal—and has significant benefits—as I noted above, the transfer of 

unified surpluses to Social Security is a separate issue. The transfer is not 

technically necessary: whenever revenue exceeds outlays and the cash 

needs of the Treasury—whenever there is an actual surplus—debt held by 

the public falls. The President’s proposal appears to be premised on the 

belief that the only the way to sustain surpluses is to tie them to Social 

Security. He has merged two separate questions: (1) how much of the 

surplus should be devoted to reducing debt held by the public and (2) how 

should the nation finance the Social Security program in the future. 

Let me turn now to the question of Social Security financing.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

President's Budget with Social Security Proposal On-Budget Balance CBO Baseline

Dollars in billions
Page 14 GAO/T-AIMD/HEHS-99-95

Social Security 

Financing

The President proposes two changes in the financing of Social Security: a 

pledge of general funds in the future and a modest amount of investment in 

equities. Both of these represent major shifts in approach to financing the 

program.

General Fund Financing By, in effect, trading debt held by the public for debt held by the trust funds, 

the President is committing future general revenues to the Social Security 

program. This is true because the newly transferred securities would be in 

addition to any buildup of payroll tax surpluses. Securities held by the 

SSTF have always represented annual cash flows in excess of benefits and 

expenses, plus interest.7 Under the President’s proposal, this would no 

longer continue to be true. The value of the securities held by the SSTF 

would be greater than the amount by which annual revenues plus interest 

exceed annual benefits and expenditures.

This means that for the first time there is an explicit general fund subsidy. 

This is a major change in the underlying theoretical design of this program. 

Whether you believe it is a major change in reality depends on what you 

assume about the likely future use of general revenues under the current 

circumstances. For example, current projections are that in 2032 the fund 

will lack sufficient resources to pay the full promised benefits. If you 

believe that this shortfall would—when the time came—be made up with 

general fund moneys, then the shift embedded in the President’s proposal 

merely makes that explicit. If, however, you believe that there would be 

changes in the benefit or tax structure of the fund instead, then the 

President’s proposal represents a very big change. In either case, the 

question of bringing significant general revenues into the financing of 

Social Security is a question that deserves full and open debate. The debate 

should not be overshadowed by the accounting complexity and budgetary 

confusion of the proposal.

One disconcerting aspect of the President’s proposal is that it appears that 

the transfers to the trust fund would be made regardless of whether the 

expected budget surpluses are actually realized. The amounts to be 

7

Cash flow into the SSTF is composed of payroll taxes and a portion of the income taxes paid on Social 

Security benefits. Income taxes make up a relatively small component of the surplus. Interest paid to 

Social Security is analogous to interest paid on publicly held debt. Both come from the general fund. 

Interest on publicly held debt is paid in cash while interest to the trust fund is credited in the form of 

additional Treasury securities.
Page 15 GAO/T-AIMD/HEHS-99-95

transferred to Social Security apparently would be written into law as 

either a fixed dollar amount or as a percentage of taxable payroll rather 

than as a percentage of the actual unified surplus in any given year. These 

transfers would have a claim on the general fund even if the actual surplus 

fell below the amount specified for transfer to Social Security—and that 

does present a risk.8

 However, it is important to emphasize that any 

proposal to allocate surpluses is vulnerable to the risk that those projected 

surpluses may not materialize. Proposals making permanent changes to 

use the surplus over a long period of time are especially vulnerable to this 

risk. 

The history of budget forecasts should remind us not to be complacent 

about the certainty of these large projected surpluses. In its most recent 

outlook book, CBO compared the actual deficits or surpluses for 1988-1998 

with the first projection it produced 5 years before the start of each fiscal 

year. Excluding the estimated impact of legislation, CBO says its errors 

averaged about 13 percent of actual outlays. Such a shift in 2004 would 

mean a surplus $250 billion higher or lower; in 2009, the swing would be 

about $300 billion. Accordingly, we should consider carefully any 

permanent commitments that are dependent on the realization of a longterm forecast.

Investment in Equities Under current law, the SSTF is required to invest only in securities that are 

issued or backed by the Treasury. The President proposes changing 

current law to allow the SSTF to invest a portion of its assets in equities. 

His proposal calls for the fund to gradually invest 15 percent of its total 

assets in the equity market. According to the administration’s estimates, 

the SSTF’s equity holdings would represent only a small portion—about 4 

percent—of the total equity market. To insulate investment decisions from 

political considerations, the administration proposes investing passively in 

a broad-based stock index and creating an independent board to oversee 

the portfolio.

8

It is worth noting that something like this happens now. Treasury does not track how much of the 

revenues it collects are for Social Security and how much for income taxes. It credits the SSTF with 

funds equal to the appropriate tax rate applied to the taxable wage base—whether or not those FICA 

taxes were actually paid.
Page 16 GAO/T-AIMD/HEHS-99-95

Last year, we reported on the implications of allowing the SSTF to invest in 

equities.9 In that report, we concluded that stock investing offers the 

prospect of higher returns in exchange for greater risk. We found that, by 

itself, stock investing was unlikely to solve Social Security’s long-term 

financing imbalance but that it could reduce the size of other reforms 

needed to restore the program’s solvency. We also concluded that investing 

in a broad-based index would help reduce, but not eliminate, the possibility 

of political influence over stock selections. However, the issue of how to 

handle stock voting rights could prove more difficult to resolve. If the 

government voted its shares, it would raise concerns about potential 

federal involvement in corporate affairs. If the government chose not to 

vote, it would affect corporate decision-making by enhancing the voting 

power of other shareholders or investment managers. The model 

applicable to passive private sector investment managers under the 

Employee Retirement Income Security Act may be relevant to the 

resolution of this issue.

Stock investing would have approximately the same impact on national 

saving as using the same amount of money to reduce debt held by the 

public. Both approaches would add about the same amount of funds to 

private capital markets, meaning that national saving would essentially be 

unchanged. From a budget accounting standpoint, they are not the same. 

Under current scoring rules the purchase of equities would be counted as 

an outlay, even though it is a financial transaction, because it is a transfer of 

funds from a governmental entity to a nongovernmental entity. The 

proposal apparently would change that. The administration proposes to 

show the entire transfer to the SSTF as a reduction in the surplus and the 

equity purchases would be part of that. The purchase of equities has 

another financial impact: since part of the surplus would be used to 

purchase equities, debt held by the public would be reduced less in the near 

term than if that amount went to reduce publicly held debt. However, in 

the future, claims on the Treasury would be lower because the program 

would rely in part on stock sales to pay benefits.

9

Social Security Financing: Implications of Government Stock Investing for the Trust Fund, the Federal 

Budget, and the Economy (GAO/AIMD/HEHS-98-74, April 22, 1998).
Page 17 GAO/T-AIMD/HEHS-99-95

Have Other Countries 

Tackled These 

Problems?

Although the dilemma we are facing of whether and how to save for the 

future is a very difficult one, it is not unique. A look at other democracies 

shows that surpluses are difficult to sustain. However, several nations have 

succeeded in sustaining surpluses. In those nations, political leaders were 

able to articulate a compelling rationale to justify the need to set aside 

current resources for future needs. 

For example, those countries that have come to the conclusion that the 

debt burden matters make it an explicit part of their fiscal decision-making 

process. Australia, New Zealand, and the United Kingdom all attempt to 

define prudent debt levels as a national goal to strive for. These debt goals 

can prove important in times of surplus. New Zealand, for example, used 

its debt goals as justification for maintaining spending restraint and 

attempting to run sustained surpluses. They promised that once they met 

their initial debt target they would give a tax cut. Importantly, when they 

hit that specified debt target, they delivered on their promise of tax cuts. 

Other countries have saved for the future by separating their pension or 

Social Security-related assets from the rest of the government’s budget. 

For example, the Canadian Pension Plan is completely separate from both 

federal and provincial budgets. When the fund earns surplus cash, it is 

invested in provincial debt securities and, starting this year, in the stock 

market. Sweden also maintains a pension fund outside the government’s 

budget and invests assets in stocks and bonds.

Norway may be the most dramatic example of setting aside current 

surpluses to address long-term fiscal and economic concerns. Norway 

faces the two-edged problem of a rapidly aging population and declining oil 

revenues—a significant source of current government revenue. To address 

these long-term concerns, Norway started setting aside year-end budget 

surpluses in 1996 to be invested in foreign stocks and bonds. Their express 

intention is to draw down these assets to pay for the retirement costs for 

their baby boomers.

It should be noted that other nations that have attempted to directly 

address their debt and pension problems have usually done so during or 

shortly after a fiscal or economic crisis. Fortunately, we do not have that 

problem. Instead, we have a unique opportunity to use our current good 

fortune to meet the challenges of the future.
Page 18 GAO/T-AIMD/HEHS-99-95

Social Security Reform 

Is Still Needed 

Finally, it is important to note that the President's proposal does not alter 

the projected payroll tax and benefit imbalances in the Social Security 

program. In addition, it does not come close to “saving Social Security.” 

Benefit costs and revenues currently associated with the program will not 

be affected by even 1 cent. Figure 7, which shows Social Security's payroll 

tax receipts and benefit payments, illustrates this point. Without the 

President's proposal, payroll tax receipts will fall short of benefit payments 

in 201310; with the President's proposal, payroll tax receipts also fall short 

of benefit payments in 2013—the graph doesn't change at all. Under the 

President’s proposal, expected stock market returns would be used to fill 

part of this gap, but from 2013 on the trust funds will need cash from 

redeemed Treasury securities, whether or not the President's proposal is 

adopted. 

10Cash inflows actually consist of payroll taxes plus the income taxes paid on Social Security benefits. 

Cash outflows are almost entirely made up of benefit payments, but they also include the fund’s 

administrative expenses.
Page 19 GAO/T-AIMD/HEHS-99-95

Figure 7: SSTF Projected Cash Income and Outflow through 2019

Source: Social Security Trustees 1998 Report, Intermediate Assumptions.

Under the President’s proposal, the changes to the Social Security program 

will be more perceived than real: although the trust funds will appear to 

have more resources as a result of the proposal, in reality, nothing about 

the program has changed. The proposal does not represent Social Security 

program reform, but rather a different means to finance the current 

program. Although the President has called for bipartisan cooperation to 

make programmatic changes, one of the risks of his proposal is that the 

additional years of financing it provides could very well diminish the 

urgency to achieve meaningful changes in the program. This would not be 

in the overall best interests of the nation. 

To achieve long-term solvency and sustainability, the Social Security 

program itself must be reformed. The demographic trends that are driving 

the program's financial problems affect the program well into the future. 

The impending retirement of the baby boom generation is the best known 

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

$1.4

$1.6

1998

1999

20002001

2002

2003

2004

2005

2006

2007

2008

20092010

2011

2012

2013

20142015

2016

2017

2018

2019

Cash Income Cash Outgo

Dollars in trillions
Page 20 GAO/T-AIMD/HEHS-99-95

of these trends, but is not the only challenge the system faces. If this were 

so, perhaps a one-time financing strategy could be sufficient. But people 

are retiring earlier, birth rates have fallen, and life expectancies are 

increasing—all these factors suggest that Social Security's financial 

problems will outlive the baby boom generation and continue far into the 

future. These problems cannot be addressed without changes to the Social 

Security program itself.

Changes to the Social Security system should be made sooner rather than 

later. The longer meaningful action is delayed, the more severe such 

actions will have to be in the future. Changes made today would be 

relatively minor compared to what could be necessary years from now, 

with less time for the fiscal effects of those changes to build. Moreover, 

acting now would allow any benefit changes to be phased in gradually so 

that participants would have time to adjust their saving or retirement goals 

accordingly. It would be tragic indeed if this proposal, through its 

budgetary accounting complexity, masked the urgency of the Social 

Security solvency problem and served to delay much-needed action.

There is another reason to take action on Social Security now. Social 

Security is not the only entitlement program needing urgent attention. In 

fact, the issues surrounding the Medicare program are much more urgent 

and complex. Furthermore, the many variables associated with health care 

consumption and Medicare costs and the personal emotions associated 

with health decisions make reform in this program particularly difficult. 

To move into the future without changes in Social Security or health 

programs is to envision a very different role for the federal government. 

Assuming no financing or benefit changes, our long-term model (and that 

of CBO) shows a world in 2050 in which Social Security and health care 

absorb an increasing share of the federal budget. (See figure 8.) Budgetary 

flexibility declines drastically and there is increasingly less room for 

programs for national defense, the young, infrastructure, and law 

enforcement—i.e., essentially no discretionary programs at all. Eventually, 

again assuming no program or financing changes, Social Security, health, 

and interest take nearly all the revenue the federal government takes in by 

2050. This is true even if we assume that the entire surplus is saved and 

these continued surpluses reduce interest from current levels. As shown in 

figure 9, the picture below is even more dramatic if we assume the entire 
Page 21 GAO/T-AIMD/HEHS-99-95

surplus is used.11 In that scenario, lower GDP and higher interest 

payments lead to a world in which revenues cover only Social Security, 

health, and interest in 2030. And in 2050 revenues don’t even cover Social 

Security and health!

Figure 8: Composition of Spending as a Share of GDP Under “Save the Surplus” 

Simulation 

Source: GAO Analysis.

11Our "No Surplus" simulation is not a forecast but rather an illustration of the implications of enacting 

permanent tax cuts and/or spending increases that eliminate projected surpluses and the fiscal 

pressures posed by the aging of the baby boom generation. This simulation shows ever-increasing 

deficits that result in declining investment, a diminishing capital stock, and a collapsing economy. In 

reality, these economic consequences would inevitably force policy changes to avert such a 

catastrophic outcome.

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1998 2030 2050

Social Security Medicare & Medicaid Net Interest All other spending

Revenue
Page 22 GAO/T-AIMD/HEHS-99-95

Figure 9: Composition of Spending as a Share of GDP Under “No Surplus” 

Simulation

Source: GAO Analysis.

Although views about the role of government differ, it seems unlikely that 

many would advocate a government devoted solely to sending checks and 

health care reimbursements to the elderly. 

Let us address Social Security for the long term today so that the nation can 

turn its attention to these other more pressing and difficult issues early in 

the new millenium. Look again at figure 8: Social Security is not the fastest 

growing portion of those bars—health grows faster.

Much remains to be done in reforming entitlement programs, and engaging 

in meaningful Social Security reform would represent an important and 

significant first step. The Congress and the administration, working 

together, can find a comprehensive and sustainable solution to this 

important challenge.

I recognize, though, that restoring Social Security solvency is not easy. 

However, it is easy lifting compared to what faces us in connection with the 

0%

10%

20%

30%

40%

50%

60%

70%

80%

1998 2030 2050

Social Security Medicare & Medicaid Net Interest All other spending

Revenue
Page 23 GAO/T-AIMD/HEHS-99-95

Medicare program. Ultimately, any reforms to Social Security will address 

not only the relatively narrow question of how to restore solvency and 

assure sustainability but will also go to the larger question of what role 

Social Security and the federal government should play in providing 

retirement income. There are many proposals being made to address these 

questions; choosing among them will involve difficult and complex choices, 

choices that will be critically important to nearly every American’s 

retirement income.

In my view, progress is likely to be greatest if we see these choices not as 

“either/or” decisions but rather as an array of possibilities along a 

continuum. Combining elements of different approaches may offer the 

best chance to produce a package that addresses the problem 

comprehensively for the long term in a way that is meaningful and 

acceptable to the American people. For example, such a continuum may 

identify individual accounts that could serve as a voluntary or mandatory 

supplement to a financially sound and sustainable base defined benefit 

structure. In addition, master trust principles can be used to provide for 

collective investment of base defined benefit and individual account funds 

in ways that would serve to prevent political manipulation of investments.

In order to help structure these choices, I would suggest five criteria for 

evaluating possible Social Security proposals.

Sustainable solvency: A proposal should eliminate the gap between trust 

fund resources and expenditures over 75 years, and have the ability to 

sustain a stable system beyond that time period.

Equity: A proposal should create no "big winners" or "big losers." Those 

who are most reliant on Social Security for retirement and disability 

income should continue to receive adequate support; those who contribute 

the most would also benefit from participation in the system, and 

intergenerational equity would improve.

Adequacy: Consistent with Social Security’s social insurance feature, a 

proposal should provide for a certain and secure defined benefit promise 

that is geared to providing higher replacement rates for lower-income 

workers and reasonable minimum benefits to minimize poverty among the 

elderly.

Feasibility: A proposal should be structured so that it could be 

implemented within a reasonable time period, it could be readily 
Page 24 GAO/T-AIMD/HEHS-99-95

administered, and the administrative costs associated with it would be 

reasonable.

Transparency: A proposal should be readily understandable to the general 

public and, as a result, generate broad support.

Applying such criteria will require a detailed understanding of the possible 

outcomes and issues associated with the various elements of proposals. 

We are working to provide the data, information, and analysis needed to 

help policymakers evaluate the relative merits of various proposals and 

move toward agreement on a comprehensive Social Security reform 

proposal.

Conclusions Budget surpluses provide a valuable opportunity to capture significant 

long-term gains to both improve the nation’s capacity to address the 

looming fiscal challenges arising from demographic change and aid in the 

transition to a more sustainable Social Security program. The President’s 

proposal may prompt a discussion and decision on both how much of our 

current resources we want to save for the future and how we can best do 

so. The President’s proposal is both wide ranging and complex, and it 

behooves us to clarify the consequences for both our national economy and 

the Social Security program. 

A substantial share of the surpluses would be used to reduce publicly held 

debt, providing demonstrable gains for our economic capacity to afford our 

future commitments. In this way, the proposal would help us, in effect, 

prefund these commitments by using today’s wealth earned by current 

workers to enhance the resources for the next generations. 

Saving a good portion of today’s surpluses can help future generations of 

workers better afford the billowing costs of these commitments, but this is 

only one side of the equation. We must also reform the programs 

themselves to make these commitments more affordable. Even if we save 

the entire surplus over the next 50 years Social Security and health 

programs will double as a share of the economy and consume nearly all 

federal revenues--essentially crowding out all other spending programs. 

Thus, it is vital that any proposal to expand economic growth be 

accompanied by real entitlement reform.

The transfer of surplus resources to the trust fund, which the 

administration argues is necessary to lock in surpluses for the future, 
Page 25 GAO/T-AIMD/HEHS-99-95

would nonetheless constitute a major shift in financing for the Social 

Security program, but it would not constitute real Social Security reform 

because it does not modify the program’s underlying commitments for the 

future. Moreover, the proposed transfer may very well make it more 

difficult for the public to understand and support the savings goals 

articulated. Several other nations have shown how debt reduction itself 

can be made to be publicly compelling, but only you can decide whether 

such an approach will work here.

I am very concerned that enhancing the financial condition of the trust fund 

alone without any comprehensive and substantive program reforms may, in 

fact, undermine the case for fundamental program changes. In addition, 

explicitly pledging federal general revenues to Social Security will limit the 

options for dealing with other national issues.

The time has come for meaningful Social Security reform. Delay will only 

serve to make the necessary changes more painful down the road. We must 

be straight with the American people; achieving the goal of “saving Social 

Security” will require real options to increase program revenues and/or 

decrease program expenses. There is no “free lunch.” After all, we have 

much larger and more complex challenges to tackle like the Medicare 

program.

As you consider various proposals, you should consider the following 

questions.

• How much of the unified budget surplus should go to debt reduction 

versus other priorities?

• If we are to use some portion of the surplus to reduce publicly held debt, 

is the President’s proposed approach the way to do this?

• Should Social Security be financed in part by general revenues?

• Should the SSTF invest in the stock market?

• How can we best assure the solvency, sustainability, equity, and integrity 

of the Social Security program for current and future generations of 

Americans?

• How can we best increase real savings for the future?

• How can we best assure the public’s understanding of and support for 

any comprehensive Social Security reform proposal?

We at GAO stand ready to help you address both Social Security reform and 

other critical national challenges. Working together, we can make a 

positive and lasting difference for our country and the American people.

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