GAO-08-446CG

The Honorable David MComptroller General of National Press FoundaJanuary 17, 2008
GAO-08-446CG 

The Case for Chan

The federal government is on a “burning 

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

• Past fiscal trends and significant long-range chal• Selected trends and challenges having no bound• Additional resource demands due to Iraq, Afghan

homeland security needs, and recent natural disaStates

• Numerous government performance/accountabil

challenges

• Outdated federal organizational structures, polici• Rising public expectations for demonstrable resu

responsiveness
GAO-08-446CG 

Composition of Federal S

20%

10%

14%

29% 28%

1%

7% 15%

34% 43%

1966 1986 

Defense Social Security

Net interest

All other spending

Source: Office of Management and Budget.Note: Numbers may not add to 100 percent due to rounding.
GAO-08-446CG 

What Does “All Othe

Spending Include?

Some examples of “all other” spend

• The Departments of State, Homeland Secu

Justice, Transportation, and Education

• The Federal Bureau of Investigation• The Internal Revenue Service• The Park Service• The Environmental Protection Agency• Unemployment Compensation• Veterans' Benefits• Food and Nutrition Assistance
GAO-08-446CG 

Federal Spending for Man

and Discretionary Prog

14%

44%

42%

Discretionary

26%

67%

7%

1966 1986 

Net Interest 

Source: Office of Management and Budget.
GAO-08-446CG 

A Different View

Federal Spending for

Mandatory and Discretionary P

0%

20%40%60%80%

100%

1962 1970 1980 1990 2000 

Percent of total outlays

Discretionary

Mandatory

Net interest

Sources: Office of Management and Budget and the Congressional Budget Office.
GAO-08-446CG 

Composition of Fede

Receipts by Sourc

42%

15%

20%

23%

Individual income Corporate income Social insurance 

37%

8%

10%

45% 

1966 1986 

Note: Numbers do not add to 100 percent due to rounding.Source: GAO analysis of data from the Office of Management and Budget.
GAO-08-446CG 

Main Measures of the Budg

• “On-Budget Deficit”

• The deficit minus the Social Secu

Fund and Postal Service surplus

• Unified Budget Deficit:

• The most commonly reported measure• A comprehensive measure of cash flo

how much we have to borrow today to obligations

• The difference between revenues & ou

money actually leaves the Treasury
GAO-08-446CG 

If the Unified Budget is Com

Reported, Why is the On-Bud

So Important?

• Today, Social Security taxes exceed 

Security benefits—the Social Securitinvested in Treasuries and it offsets tthe rest of government

• BUT that surplus shrinks in 2009 and 

in 2017, so we need to know the defiof the budget
GAO-08-446CG 

Social Security and Medi

Hospital Insurance Trust 

Face Cash Deficits

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

0

100200

2005 2010 2015 2020 2025 2030 

Calendar year

Medicare HI cash flow Social Security 

Medicare HI

cash deficit

2007

Social Security cash deficit

2017

Billions of 2007 dollars

Source: GAO analysis of data from the Office of the Chief Actuary, Social Security Administration and Office 

and Medicaid Services.Note: Projections based on the intermediate assumptions of the 2007 Trustees’ Reports. The CPI is used to 
GAO-08-446CG 

Still a Third Deficit Mea

Net Operating Cost

Net operating cost (or the “accrual d

• Like the unified budget deficit, net operating 

all federal activities (i.e., both on- and off-bud

unlike the unified budget deficit, expensemeasure are recorded on an accrual basgoods are used or services are performewhen the resulting cash payments are m

• In some cases, expenses are estimates o

will be outlaid in the future and thus depeassumptions regarding interest rates, inflgrowth, among other things

• See GAO-07-117SP and GAO-07-341SP 

cash & accrual deficits
GAO-08-446CG 

Fiscal Year 2006 and 2

Deficits and Net Operatin

Fiscal Year 2006 F

($ Billio

On-Budget Deficit (434) Unified Deficita (248) 

Net Operating Cost (450) 

Sources: Office of Management and Budget and Department of the Treasury.aIncludes $185 billion in Social Security surpluses for fiscal year 2006 and $186 billion for fiscal ye

surpluses for fiscal year 2006 and a $5 billion deficit for fiscal year 2007.
GAO-08-446CG 

Surplus or Deficit as a Shar

(1797-2007)

-35-30-25-20-15-10

-5

05

10

1797 1820 1840 1860 1880 1900 1920 1940 

Note: Data until 1929 are shown as a percent of gross national product (GNP); data from 1930 to present 

Source: Department of Commerce, Office of Management and Budget, and Congressional Budget Office.

Percent of GNP/GDP
GAO-08-446CG 

Debt Held by the Public a

of GDP (1797-2007

0

20406080

100120

1797 1820 1840 1860 1880 1900 1920 1940 

Percent of GNP/GDP

Note: Data until 1929 are shown as a percent of gross national product (GNP); data from 1930 to presSource: GAO analysis of data from the Department of Commerce, Office of Management and Budget
GAO-08-446CG 

Covering the Budg

• Remember, the budget document is a polic

lays out the President’s priorities over a sho(e.g., what the government should do, how spend on which programs, how much it shotaxes, and how much it should borrow)

• Don’t focus on a single year or even the ne

Instead...

• Ask about transparency & completeness:

• does the budget include all of the costs associat

initiatives? 

• Ask about the future:

• what are the long-term costs of individual propos• will the proposals help or hurt the long-term fisca
GAO-08-446CG 

Short-Term Versus Long

Perspective

While in the short term, deficits have been cthe long-term implications of fiscal imprudenimportant:

• In 2003, former Federal Reserve Chairman Paul Volk

percent chance of a financial crisis within five years

• In 2005, Standard and Poor’s issued a publication sta

“Notwithstanding the reform flurry of late, without furthto the current fiscal stance or to social security and hegeneral government debt-to-GDP ratios of France, Gewill surpass the 200% of GDP mark by the middle of tresulting in deficits that will be more akin to those currwith speculative-grade sovereigns.”

• In 2008, Moody’s Investors Service issued its annual 

States, saying: “in the very long term, the [triple-A] ratunder pressure if reform of Medicare and Social Secuout, as these two programs are the largest threats to tfinancial health of the United States and to the govern
GAO-08-446CG 

Major Fiscal Exposur

($ trillions)

2000 

• Explicit liabilities $6.9

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

0.5

13.0

3.82.76.5

--

$20.4

• Commitments & contingencies

• E.g., PBGC, undelivered orders

• Implicit exposures

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

Total

Source: 2000 and 2007 Financial Report of the United States Government.Note: Totals and percent increases may not add due to rounding. Estimates for Social Se

value as of January 1 of each year and all other data are as of September 30.
GAO-08-446CG 

How Big is Our

Growing Fiscal Burde

This fiscal burden can be translated and compa

Total –major fiscal exposures 

Burden/Net worth ratio 

Income

Median household income3 

Burden2

Per household 

Total household net worth1 

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

Source: GAO analysis.Notes: (1) Federal Reserve Board, Flow of Funds Accounts, Table B.100, 2007:Q3 (December 6, 2007); (2) Burdens arpopulation as of 10/1/2007, from the U.S. Census Bureau; full-time workers reported by the Bureau of Economic Analyshouseholds reported by the U.S. Census Bureau, in Income, Poverty, and Health Insurance Coverage in the United Stat

Income, Poverty, and Health Insurance Coverage in the United States: 2006 (Aug. 2007); and (4) Bureau of Economic A

(Nov. 29, 2007).
GAO-08-446CG 

Potential Fiscal Outco

Under Baseline Extended (January 

Revenues and Composition of Spending as 

0

1020304050

2005 2015 2030 

Fiscal year

Net interest Social Security Medicare & Medicaid 

Revenue

Percent of GDP

a a 

Source: GAO’s January 2001 analysis.aAll other spending is net of offsetting interest receipts.
GAO-08-446CG 

Potential Fiscal Outco

Under Alternative Simulation

Revenues and Composition of Spending as 

0

1020304050

2006 2015 2030 

Fiscal year

Net interest Social Security Medicare & Medicaid 

Revenue

Source: GAO’s August 2007 analysis.Notes: AMT exemption amount is retained at the 2006 level through 2017 and expiring tax provisiorevenue as a share of GDP returns to its historical level of18.3 percent of GDP plus expected reveon withdrawals from retirement accounts. Medicare spending is based on the Trustees April 2007 

for Medicare and Medicaid Services alternative assumption that physician payments are not reduc

Percent of GDP
GAO-08-446CG 

Unified Surpluses an

Deficits as a Share of G

Under Alternative Fiscal Policy S

-20-15-10

-5

05

2000 2005 2010 2015 2020 2025 2030 2035 

Fiscal year

Percent of GDP

Ba

Alternative Simulation

Source: GAO’s August 2007 analysis.Note: Assume currently scheduled Social Security benefits are paid in full throughout t
GAO-08-446CG 

Growth in Spending for Socia

Medicare, and Medicaid Exp

Outpace Economic Gro

71%

127%

224% 

0%

50%

100%150%200%250%

GDP Social Security

Spending

Medicaid

Spending

Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security AdministrationMedicare and Medicaid Services; and the Congressional Budget Office.Notes: Social Security and Medicare projections based on the intermediate assumptions of the 2007 Trubased on CBO’s August 2007 short-term Medicaid estimates and CBO’s December 2005 long-term Mediassumptions.

Growth in constant dollars 2007-2032
GAO-08-446CG 

Social Security, Medicare, and 

Spending as a Percent of 

05

1015202530

2000 2010 2020 2030 2040 2050 20

Percent of GDP

Social Secu

Medicaid

Medicare

Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security AdmiCenters for Medicare and Medicaid Services, and the Congressional Budget Office.Note: Social Security and Medicare projections based on the intermediate assumptions of the 2projections based on CBO’s August 2007 short-term Medicaid estimates and CBO’s December 2projections under mid-range assumptions.
GAO-08-446CG 

Federal Tax Expenditures Ex

Discretionary Spending 

Half of the Last Decad

0

200400600800

1000120014001600

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 20

Fiscal Year

Mandatory spending excluding net interes

Sum of tax expenditure revenue loss estimDiscretionary spending

Dollars in billions (in 2006 dollars)

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal years 1976-2008.Note: Summing tax expenditure estimates does not take into account interactions between indassociated with refundable tax credits are included in mandatory spending.
GAO-08-446CG 

Revenue Loss Estimates f

Largest Tax Expenditures Re

Fiscal Year 2006

125

89.8

68.3

48.6 

62.5

0

50

100150200

Revenue loss estimates (dollars in billions)

Treasury estimated income tax revenue losses Approximate 

Exclusion of employercontributions for medical insurance premiums and medical care

Net exclusion ofemployersponsored pension contributions and earnings

Deductibility of mortgage interest on owneroccupied homes

Capital gains(exceptagriculture,timber, iron oreand coal)

187.5

a

Source: GAO analysis of OMB, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2008.aThe value of employer-provided health insurance is excluded from Medicare and Social Security payroll taxes. Some 

revenue losses amounted to more than half of the income tax revenue losses in 2004, and we use this estimate for 2with health care, therefore the 50 percent figure may not apply to other items that are excluded from otherwise applic
GAO-08-446CG 

State and Local Governme

Increasing Fiscal Challe

-6-4-2

02

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 

Percent of GDP

Operating Surplus/Deficit 

Sources: Historical data from National Income and Product Accounts. Historical data from 1980 – 2006using many CBO projections and assumptions, particularly for next 10 years.

Net-lending/Net-Borrowing
GAO-08-446CG 

Current Fiscal Policy Is Uns

• The “Status Quo” Is Not an Option

• We face large and growing structural deficits l

known demographic trends and rising health c

• GAO’s simulations show that balancing the bu

require actions as large as 

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

• Faster Economic Growth Can Help, but I

the Problem

• Closing the current long-term fiscal gap based 

assumptions would require real average annuin the double-digit range every year for the ne

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

per year

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

Tough choices will be required
GAO-08-446CG 

The Way Forward:

A Three-Pronged Appro

1. Improve Financial Reporting, Public Ed

Performance Metrics

2. Strengthen Budget and Legislative Pro

Controls

3. Fundamentally Reexamine & Transform 

Century (i.e., entitlement programs, otand tax policy)

Solutions Require Active Involveme

both the Executive and Legislative B
GAO-08-446CG

The Way Forward

Improve Financial Reporting, 

Education, and Performance M

• Improve transparency & completeness of President’s 

• Return to 10-year estimates in budget both for current policies and prog

proposals

• Include in the budget estimates of long-term cost of policy proposals & impact on total fiscal exposures. 

• Improve transparency of tax expenditures

• Consider requiring President’s budget to specify & explain 

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

• Require annual OMB report on existing fiscal exposures [l

explicit & implied commitments]

• Require enhanced financial statement presentation to add

sustainability and intergenerational equity issues

• Prepare and distribute a summary annual report that is bo• Increase information on long-range fiscal sustainability iss

Budget Resolution & Budget Process

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

social, environmental) to chart the nation’s posture, progrerelative to the other major industrial countries 
GAO-08-446CG 

The Way Forward

Strengthen Budget and Legis

Processes and Controls

• Restore discretionary spending caps & PAYGO rules on b

sides of the ledger 

• Develop mandatory spending triggers [with specific defau

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

• Develop, impose & enforce modified rules for selected ite

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

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

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

• Extend accrual budgeting to insurance & federal employe

techniques for extending to retiree health & environmenta

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

require a majority vote to override the proposed rescission
GAO-08-446CG 

The Way Forward

Fundamentally Reexamine & Tr

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

enforcement programs

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

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

• Strengthen and systematize Congressional oversight pro• Increase transparency associated with government contr

selected items

• Consider a capable, credible, bi-partisan budget, entitlem

commission
GAO-08-446CG 

Possible Way Forwa

on Social Security Ref

Make little or no changes to those who are nealready retired and make a number of adjustmaffect younger workers:

• Phase-in an increase in the normal retirement age and 

expectancy

• Consider phasing-in an increase in the early retiremen

life expectancy with a modified disability access provis

• Modify income replacement and/or indexing formulas f

income earners

• Strengthen the minimum benefit• Consider a modest adjustment to the COLA formula• Increase the taxable wage base, if necessary• Consider supplemental individual accounts and manda

savings on a payroll deduction basis (e.g., a minimum contribution and a program designed much like the FedPlan with a real trust fund and real investments)
GAO-08-446CG 

Issues to Consider in Exa

Our Health Care Syst

• The public needs to be educated about the differenc

wants, needs, affordability, and sustainability at individual and aggregate level

• Ideally, health care reform proposals will:

• Align Incentives for providers and consumers t

decisions about the use of medical services,

• Foster Transparency with respect to the value 

and

• Ensure Accountability from insurers and provid

standards for appropriate use and quality.

• Ultimately, we need to address four key dimensions

quality, and personal responsibility
GAO-08-446CG 

Moving the Debate For

• The Sooner We Get Started, the Bette

• The miracle of compounding is currently wor• Less change would be needed, and there wo

time to make adjustments 

• Our demographic changes will serve to make 

difficult over time

• Need Public Education, Discussion, a

• The role of government in the 21st Century

• Which programs and policies should be chan• How government should be financed
GAO-08-446CG 

Can There be Progress i

and Beyond?

• Do presidential candidates recogn

problem?

• What is the scope and substance o

candidates’ platforms on the issue

• What is the status of previously pro

initiatives (e.g., Congressional comtask forces sponsored by Cooper/WConrad/Gregg)?
GAO-08-446CG 

Three Key Illnesse

• Myopia• Tunnel Vision•Self-Centeredn
GAO-08-446CG 

Four National Defic

• Budget• Balance of Paym•Savings• Leadership
GAO-08-446CG 

Key Leadership Attributes N

These Challenging and Chang

• Courage•Integrity• Creativity•Partnership•Stewardship
GAO-08-446CG 

Three Key Groups That Need t

Their Influence and Involv

• The Business and 

Professional Commu

• Young Americans• The Media
GAO-08-446CG 

GAO References Available 

• http://www.gao.gov/financial/fy2007financia• http://www.gao.gov/special.pubs/longterm/w• http://www.gao.gov/special.pubs/longterm/
GAO-08-446CG

The Honorable David MComptroller General of National Press FoundaJanuary 17, 2008
GAO-08-446CG 

On the Web

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

Contact

Chuck Young, Managing Director, Public AffairsYoungC1@gao.gov (202) 512-4800 

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

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