Social Security: Long-Term Challenges Warrant Early Action
Published: 2005-02-03T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Social Security is the foundation of the nation's retirement income system, helping to protect the vast majority of American workers and their families from poverty in old age. However, it is much more than a retirement program and also provides millions of Americans with disability insurance and survivors' benefits. Over the long term, as the baby boom generation retires and as Americans continue to live longer and have fewer children, Social Security's financing shortfall presents a major program solvency and sustainability challenge that is growing as time passes. The Chairman and Ranking Member of the Senate Special Committee on Aging asked GAO to discuss the future of the Social Security program. This testimony will address the nature of Social Security's long-term financing problem and why it is preferable for Congress to take action sooner rather than later, as well as the broader context in which reform proposals should be considered.
section_title: What GAO Found
paragraphs: Although the Social Security system in not in crisis today, it faces serious and growing solvency and sustainability challenges. Furthermore, Social Security's problems are a subset of our nation's overall fiscal challenge. Absent reform, the nation will ultimately have to choose among escalating federal deficits and debt, huge tax increases and/or dramatic budget cuts. GAO's long-term budget simulations show that to move into the future with no changes in federal retirement and health programs is to envision a very different role for the federal government. With regard to Social Security, if we did nothing until 2042, achieving actuarial balance would require a reduction in benefits of 30 percent or an increase in payroll taxes of 43 percent. In contrast, taking action soon will serve to reduce the amount of change needed to ensure that Social Security is solvent, sustainable, and secure for current and future generations. Acting sooner will also serve to improve the federal government's credibility with the markets and the confidence of the American people in the government's ability to address long-range challenges before they reach crisis proportions. However, financial stability should not be the only consideration when evaluating reform proposals. Other important objectives, such as balancing the adequacy and equity of the benefits structure need to be considered. Furthermore, any changes to Social Security should be considered in the context of the broader challenges facing our nation, such as the changing nature of the private pension system, escalating health care costs, and the need to reform Medicare and Medicaid.

section_title: Letter
paragraphs: Thank you for inviting me here to talk about our nation’s Social Security  program and how to address the challenges presented in ensuring the  long-term viability of this important social insurance system. Social  Security not only represents the foundation of our retirement income  system, it also provides millions of Americans with disability insurance  and survivors’ benefits. As a result, Social Security provides benefits that  are critical to the current and future well-being of tens of millions of  Americans. As I have said in congressional testimonies over the past  several years, the system faces both solvency and sustainability challenges  in the longer term. While the Social Security program does not face an  immediate crisis, it does have a $3.7 trillion gap between promised and  funded benefits in current dollar terms.  This gap is growing rapidly and,  given this and other major fiscal challenges, it would be prudent to act  sooner rather than later to reform the Social Security program. Failure to  take steps to address our large and structural long-range fiscal imbalance,  which is driven in large part by projected increases in Medicare, Medicaid  and Social Security spending, will ultimately have significant adverse  consequences for our future economy and quality of life.
Let me begin by highlighting a number of important points concerning the  Social Security challenge.
Solving Social Security’s long-term financing problem is more  important and complex than simply making the numbers add up.  Social Security is an important and successful social insurance  program that affects virtually every American family. It currently pays  benefits to more than 47 million people, including retired workers,  disabled workers, the spouses and children of retired and disabled  workers, and the survivors of deceased workers. The number of  individuals receiving benefits is expected to grow to almost 69 million  by 2020. The program has been highly effective at reducing the  incidence of poverty among the elderly, and the disability and survivor  benefits have been critical to the financial well-being of millions of  others.
Focusing on trust fund solvency alone is not sufficient. We need  to put the program on a path toward sustainable solvency. Trust  fund solvency is an important concept, but focusing on trust fund  solvency alone can lead to a false sense of security about the overall  financial condition of the Social Security program. For example, the  size of the trust fund does not tell us whether the program is  sustainable—that is, whether the government will have the capacity to  pay future claims or what else will have to be squeezed to pay those  claims. Furthermore, estimates of what it would take to achieve 75-year  trust fund solvency understate the extent of the problem because the  program’s financial imbalance gets worse in the 76th and subsequent  years.
Social Security reform is part of a broader fiscal and economic  challenge. If you look ahead in the federal budget, the combined  Social Security or Old-Age and Survivors Insurance and Disability  Insurance (OASDI) program, together with the rapidly growing health  programs, will dominate the federal government’s future fiscal outlook.  While this hearing is not about the complexities of Medicare, it is  important to note that Medicare presents a much greater, more  complex, and more urgent fiscal challenge than does Social Security.  Medicare growth rates reflect not only a burgeoning beneficiary  population, but also the escalation of health care costs at rates well  exceeding general rates of inflation. Taken together, Social Security,  Medicare, and Medicaid represent an unsustainable burden on future  generations. Under the 2004 Trustees’ intermediate estimates and the  Congressional Budget Office’s (CBO) long-term Medicaid estimates,  spending for Social Security, Medicare, and Medicaid combined will  grow to 15.6 percent of GDP in 2030 from today’s 8.5 percent. Absent  meaningful changes to these programs, the nation will ultimately have  to choose among persistent, escalating federal deficits, huge tax  increases, and/or dramatic budget cuts. Furthermore, any changes to  Social Security should be considered in the context of the problems  currently facing our nation’s private pension system. These include the  chronically low level of coverage of the private workforce, the  continued decline in defined benefit plans coupled with the termination  of large underfunded plans by bankrupt firms, and the shift by  employers to defined contribution plans, where workers face the  potential for greater return but also assume greater financial risk.
Acting sooner rather than later helps to ease the difficulty of  change. As I noted previously, the challenge of facing the imminent  and daunting budget pressure from Medicare, Medicaid, and OASDI  increases over time. Social Security will begin to constrain the budget  long before the trust fund is exhausted in 2042. The trust fund cash  surpluses that are now helping to finance the rest of the government’s  budgetary needs will begin to decline after 2008, and by 2018, the cash  surpluses will turn into deficits. At that point, Social Security’s cash  shortfall will begin to place increasing pressure on the rest of the  budget to raise the resources necessary to meet the program’s costs.
Waiting until Social Security faces an immediate solvency crisis will  limit the scope of feasible solutions and could reduce the options to  only those choices that are the most difficult. It could also contribute  to a further delay of the really tough decisions on Medicare and  Medicaid. Acting sooner rather than later would allow changes to be  phased in so that future and near-term retirees have time to adjust their  retirement planning. Furthermore, acting sooner rather than later  would serve to increase our credibility with the markets and improve  the public’s confidence in the federal government’s ability to deal with  our significant long-range fiscal challenges before they reach crisis  proportions.
Reform proposals should be evaluated as packages. The elements  of any package interact; every package will have pluses and minuses,  and no plan will satisfy everyone on all dimensions. If we focus on the  pros and cons of each element of reform by itself, we may find it  impossible to build the bridges necessary to achieve consensus. It is  also important to establish the appropriate comparisons or  benchmarks against which reforms should be measured. Given the  current projected financial shortfall of the program, it is important to  compare proposals to at least two benchmarks—one that raises  revenue to fund currently scheduled benefits (promised benefits) and  one that adjusts to current tax financing by reducing benefits (funded  benefits). Comparing the benefit impact of reform proposals solely to  currently scheduled Social Security benefits is inappropriate since all  current scheduled benefits are not funded over the longer term.  Estimating future effects on Social Security benefits should reflect the  fact that the program faces a long-term actuarial deficit and that benefit  reduction and/or revenue increases will be necessary to restore  solvency. The key point is that there is a significant gap between  scheduled benefits and projected revenues. In fact, a primary purpose  of most Social Security reform proposals is to close or eliminate this  gap.
Failure to address the Social Security financing problem will, in  combination with other entitlement spending, constitute an unsustainable  burden on both the federal government and, ultimately, the economy.  However, this problem is about more than finances. It is also about  maintaining an adequate safety net for American workers against loss of  income from retirement, disability, or death. Social Security has prevented  many former workers and their families from living their retirement years  in poverty. As the Congress considers proposals to restore the long-term  financial stability and viability of the Social Security system, it will also  need to consider the impact of the potential changes on the millions of  Americans the system serves: specifically, the effects on different types of  beneficiaries and the resulting implications for the adequacy and equity of  the benefits structure. The fundamental nature of the program’s long-term  financing challenge means that timely action is needed. I believe it is  possible to craft a solution that will protect Social Security benefits for the  nation’s current and near-term retirees, while ensuring that the system will  be solvent, sustainable, and secure for future generations. Stated  differently, I believe that it is possible to reform Social Security in a way  that will ensure the program’s solvency, sustainability, and security while  exceeding the expectations of all generations of Americans. I also believe  that, given our other fiscal challenges, it is prudent to act sooner rather  than later to address this large and growing problem.
subsections: section_title: Social Security’s Long-term Financing Problem Is More Urgent than It May Appear
paragraphs: Today, the Social Security program does not face an immediate crisis, but  it does face a long-range financing problem driven primarily by known  demographic trends that is growing rapidly. While the crisis is not  immediate, the challenge is more urgent than it may appear. Acting soon to  address these problems reduces the likelihood that the Congress will have  to choose between imposing severe benefit cuts and unfairly burdening  future generations with the program’s rising costs. Acting soon would also  allow changes to be phased in so that the individuals who are most likely  to be affected, namely younger and future workers, will have time to  adjust their retirement planning while helping to avoid related  “expectation gaps.” On the other hand, failure to take remedial action will,  in combination with other entitlement spending, lead to a situation  unsustainable for both the federal government and, ultimately, the  economy.
The Social Security system has required changes in the past to ensure  future solvency. Indeed, the Congress has always taken the actions  necessary to do this when faced with an immediate solvency crisis. I  would like to spend some time describing the nature, timing, and extent of  Social Security’s financing problem.
subsections: section_title: The Causes of Social Security’s Long-Term Financing Problem
paragraphs: As you all know, Social Security has always been a largely pay-as-you-go  system. This means that the system’s financial condition is directly  affected by the relative size of the populations of covered workers and  beneficiaries. Historically, this relationship has been favorable. Now,  however, people are living longer, and spending more time in retirement.  As shown in figure 1, the U.S. elderly dependency ratio is expected to  continue to increase. The proportion of the elderly population relative to  the working-age population in the U.S. rose from 13 percent in 1950 to 19  percent in 2000. By 2050, there is projected to be almost 1 elderly  dependent for every 3 people of working age—a ratio of 32 percent.  Additionally, the average life expectancy of males at birth has increased  from 66.6 in 1960 to 74.3 in 2000, with females at birth experiencing a rise  of 6.6 years from 73.1 to 79.7 over the same period. As general life  expectancy has increased in the United States, there has also been an  increase in the number of years spent in retirement. Improvements in life  expectancy have extended the average amount of time spent by workers in  retirement from 11.5 years in 1950 to 18 years for the average male worker  as of 2003. A falling fertility rate is the other principal factor underlying the  growth in the elderly’s share of the population. In the 1960s, the fertility  rate was an average of 3 children per woman. Today it is a little over 2,  and by 2030 it is expected to fall to 1.95—a rate that is below what it takes  to maintain a stable population. Taken together, these trends threaten the  financial solvency and sustainability of this important program.
The result of these trends is that labor force growth will continue to  decline in 2006 and by 2025 is expected to be less than a fifth of what it is  today, as shown in figure 2. Relatively fewer U.S. workers will be available  to produce goods and services. Without a major increase in productivity or  increases in immigration, low labor force growth will lead to slower  growth in the economy and to slower growth of federal revenues. This in  turn will only accentuate the overall pressure on the federal budget.
This slowing labor force growth has important implications for the Social  Security system. Social Security’s retirement eligibility dates are often the  subject of discussion and debate and can have a direct effect on both labor  force growth and the condition of the Social Security retirement program.  It is also appropriate to consider whether and how changes in pension  and/or other government policies could encourage longer workforce  participation. To the extent that people choose to work longer as they live  longer, the increase in the amount of time spent in retirement could be  diminished. This could improve the finances of Social Security and  mitigate the expected slowdown in labor force growth.
The Social Security program’s situation is one symptom of this larger  demographic trend that will have broad and profound effects on our  nation’s future in other ways as well. The aging of the labor force and the  reduced growth in the number of workers will have important implications  for the size and composition of the labor force, as well as the  characteristics of many jobs in our increasingly knowledge-based  economy, throughout the 21st century. The U.S. workforce of the 21st  century will be facing very different opportunities and challenges than  those of previous generations.
section_title: Cash Flow Turns Negative in 2018
paragraphs: Today, the Social Security Trust Funds take in more in taxes than they  spend. Largely because of the demographic trends I have described, this  situation will change. Although the trustees’ 2004 intermediate estimates  project that the combined Social Security Trust Funds will be solvent until  2042, program spending will constitute a rapidly growing share of the  budget and the economy well before that date. Under the trustees’ 2004  intermediate estimates, Social Security’s cash surplus—the difference  between program tax income and the costs of paying scheduled benefits— will begin to decline in 2008. By 2018, the program’s cash flow is projected  to turn negative—its tax income will fall below benefit payments. At that  time, the program will begin to experience a negative cash flow, which will  accelerate over time. Social Security will join Medicare’s Hospital  Insurance Trust Fund, whose outlays exceeded cash income in 2004, as a  net claimant on the rest of the federal budget. (See figure 3.)
In 2018, the combined OASDI Trust Funds will begin drawing on its  Treasury securities to cover the cash shortfall. At this point, Treasury will  need to obtain cash for these redeemed securities either through increased  taxes, spending cuts, and/or more borrowing from the public than would  have been the case had Social Security’s cash flow remained positive.  Whatever the means of financing, the shift from positive to negative cash  flow will place increased pressure on the federal budget to raise the  resources necessary to meet the program’s ongoing costs.
section_title: Different Measures but Same Challenges and Same Conclusion
paragraphs: There are different ways to describe the magnitude of the problem. A case  can be made for a range of different measures, as well as different time  horizons. For instance, the actuarial deficit can be measured in present  value, as a percentage of GDP, or as a percentage of taxable payroll in the  future. The Social Security Administration (SSA) and CBO have both made  projections of Social Security’s future actuarial deficit using different  horizons. (See table 1.)
CBO uses a 100-year horizon to project Social Security’s future actuarial  deficit, while the Social Security Administration utilizes both 75-year and  infinite horizon projections to estimate the future deficit. In addition, both  the Social Security Administration and CBO have different economic  assumptions for variables such as real earnings, real interest rates,  inflation, and unemployment.
While their estimates vary due to different horizons and economic  assumptions, each identifies the same long-term challenge: The Social  Security system is unsustainable in its present form over the long run.  Taking action soon on Social Security would not only make the necessary  action less dramatic than if we wait but would also promote increased  budgetary flexibility in the future and stronger economic growth. Some of  the benefits of early action—and the costs of delay—can be seen in figure  4. This figure compares what it would take to keep Social Security solvent  through 2078, if action were taken at three different points in time, by  either raising payroll taxes or reducing benefits. If we did nothing until  2042—the year SSA estimates the Trust Funds will be exhausted— achieving actuarial balance would require changes in benefits of 30  percent or changes in taxes of 43 percent. As figure 4 shows, earlier action  shrinks the size of the necessary adjustment.
section_title: Social Security Reform Is Part of a Broader Fiscal and Economic Challenge
paragraphs: As I have already discussed, reducing the relative future burdens of Social  Security and health programs is essential to a sustainable budget policy for  the longer term. It is also critical if we are to avoid putting unsupportable  financial pressures on Americans in the future. Reforming Social Security  and health programs is essential to reclaiming our future fiscal flexibility  to address other national priorities.
Changes in the composition of federal spending over the past several  decades have reduced budgetary flexibility, and our current fiscal path will  reduce it even further. During this time, spending on mandatory programs  has consumed an ever-increasing share of the federal budget. In 1964,  prior to the creation of the Medicare and Medicaid programs, spending for  mandatory programs plus net interest accounted for about 33 percent of  total federal spending. By 2004, this share had almost doubled to  approximately 61 percent of the budget.
If you look ahead in the federal budget, the Social Security programs (Old- Age and Survivors Insurance and Disability Insurance), together with the  rapidly growing health programs (Medicare and Medicaid), will dominate  the federal government’s future fiscal outlook. Absent reform, the nation  will ultimately have to choose among persistent, escalating federal deficits  and debt, huge tax increases and/or dramatic budget cuts. GAO’s long-term  budget simulations show that to move into the future with no changes in  federal retirement and health programs is to envision a very different role  for the federal government. Assuming that discretionary spending grows  with inflation and all existing tax cuts are allowed to expire when  scheduled under current law, spending for Social Security and health care  programs would grow to consume over three-quarters of federal revenue  by 2040. Moreover, if all expiring tax provisions are extended and  discretionary spending keeps pace with the economy, by 2040 total federal  revenues may be adequate to pay little more than interest on the federal  debt. (See figure 5.)
Alternatively, taking action soon on Social Security would not only  promote increased budgetary flexibility in the future and stronger  economic growth but would also make the necessary action less dramatic  than if we wait. Indeed, long-term budget flexibility is about more than  Social Security and Medicare. While these programs dominate the long- term outlook, they are not the only federal programs or activities that bind  the future. The federal government undertakes a wide range of programs,  responsibilities, and activities that obligate it to future spending or create  an expectation for spending. GAO has described the range and  measurement of such fiscal exposures—from explicit liabilities such as  environmental cleanup requirements to the more implicit obligations  presented by life-cycle costs of capital acquisition or disaster assistance.  Making government fit the challenges of the future will require not only  dealing with the drivers— entitlements for the elderly—but also looking at  the range of federal activities. A fundamental review of what the federal  government does and how it does it will be needed.
Also, at the same time it is important to look beyond the federal budget to  the economy as a whole. Under the 2004 Trustees’ intermediate estimates  and CBO’s long-term Medicaid estimates, spending for Social Security,  Medicare, and Medicaid combined will grow to 15.6 percent of GDP in  2030 from today’s 8.5 percent (See figure 6.) Taken together, Social  Security, Medicare, and Medicaid represent an unsustainable burden on  future generations.
section_title: Considerations in Assessing Reform Options
paragraphs: As important as financial stability may be for Social Security, it cannot be  the only consideration. As a former public trustee of Social Security and  Medicare, I am well aware of the central role these programs play in the  lives of millions of Americans. Social Security remains the foundation of  the nation’s retirement system. It is also much more than just a retirement  program; it pays benefits to disabled workers and their dependents,  spouses and children of retired workers, and survivors of deceased  workers. In 2004, Social Security paid almost $493 billion in benefits to  more than 47 million people. Since its inception, the program has  successfully reduced poverty among the elderly. In 1959, 35 percent of the  elderly were poor. In 2000, about 8 percent of beneficiaries aged 65 or  older were poor, and 48 percent would have been poor without Social  Security. It is precisely because the program is so deeply woven into the  fabric of our nation that any proposed reform must consider the program  in its entirety, rather than one aspect alone. Thus, GAO has developed a  broad framework for evaluating reform proposals that considers not only  solvency but other aspects of the program as well.
subsections: section_title: The GAO Criteria for Reform
paragraphs: The analytic framework GAO has developed to assess proposals  comprises three basic criteria:    Financing Sustainable Solvency—the extent to which a proposal  achieves sustainable solvency and how it would affect the economy  and the federal budget. Our sustainable solvency standard  encompasses several different ways of looking at the Social Security  program’s financing needs. While a 75-year actuarial balance has  generally been used in evaluating the long-term financial outlook of the  Social Security program and reform proposals, it is not sufficient in  gauging the program’s solvency after the 75th year. For example, under  the trustees’ intermediate assumptions, each year the 75-year actuarial  period changes, and a year with a surplus is replaced by a new 75th  year that has a significant deficit. As a result, changes made to restore  trust fund solvency only for the 75-year period can result in future  actuarial imbalances almost immediately. Reform plans that lead to  sustainable solvency would be those that consider the broader issues  of fiscal sustainability and affordability over the long term. Specifically,  a standard of sustainable solvency also involves looking at (1) the  balance between program income and costs beyond the 75th year and  (2) the share of the budget and economy consumed by Social Security  spending.
Balancing Adequacy and Equity—the relative balance struck  between the goals of individual equity and income adequacy. The  current Social Security system’s benefit structure attempts to strike a  balance between the goals of retirement income adequacy and  individual equity. From the beginning, Social Security benefits were set  in a way that focused especially on replacing some portion of workers’  pre-retirement earnings. Over time other changes were made that were  intended to enhance the program’s role in helping ensure adequate  incomes. Retirement income adequacy, therefore, is addressed in part  through the program’s progressive benefit structure, providing  proportionately larger benefits to lower earners and certain household  types, such as those with dependents. Individual equity refers to the  relationship between contributions made and benefits received. This  can be thought of as the rate of return on individual contributions.  Balancing these seemingly conflicting objectives through the political  process has resulted in the design of the current Social Security  program and should still be taken into account in any proposed  reforms.
Implementing and Administering Proposed Reforms—how readily  a proposal could be implemented, administered, and explained to the  public. Program complexity makes implementation and administration  both more difficult and harder to explain to the public. Some degree of  implementation and administrative complexity arises in virtually all  proposed changes to Social Security, even those that make incremental  changes in the already existing structure. Although these issues may  appear technical or routine on the surface, they are important issues  because they have the potential to delay—if not derail—reform if they  are not considered early enough for planning purposes. Moreover,  issues such as feasibility and cost can, and should, influence policy  choices. Continued public acceptance of and confidence in the Social  Security program require that any reforms and their implications for  benefits be well understood. This means that the American people  must understand why change is necessary, what the reforms are, why  they are needed, how they are to be implemented and administered,  and how they will affect their own retirement income. All reform  proposals will require some additional outreach to the public so that  future beneficiaries can adjust their retirement planning accordingly.  The more transparent the implementation and administration of  reform, and the more carefully such reform is phased in, the more  likely it will be understood and accepted by the American people.
The weight that different policy makers may place on different criteria will  vary, depending on how they value different attributes. For example, if  offering individual choice and control is less important than maintaining  replacement rates for low-income workers, then a reform proposal  emphasizing adequacy considerations might be preferred. As they fashion  a comprehensive proposal, however, policy makers will ultimately have to  balance the relative importance they place on each of these criteria. As we  have noted in the past before this committee and elsewhere, a  comprehensive evaluation is needed that considers a range of effects  together. Focusing on comprehensive packages of reforms will enable us  to foster credibility and acceptance. This will help us avoid getting mired  in the details and losing sight of important interactive effects. It will help  build the bridges necessary to achieve consensus.
One issue that often arises within the Social Security debate concerns the  appropriate comparisons or benchmarks to be used when assessing a  particular proposal. While this issue may seem to be somewhat abstract, it  has critical implications, for depending on the comparisons chosen, a  proposal can be made more or less attractive. Some analyses compare  proposals to a single benchmark and as a result can lead to incomplete or  misleading conclusions. For that reason, GAO has used several  benchmarks in assessing reform proposals. Currently promised benefits  are not fully financed, and so any analysis that seeks to fairly evaluate  reform proposals should rely on benchmarks that reflect a policy of an  adequately financed system. Similarly, it is important to have benchmarks  that are consistent with each other. Using one that relies on action  relatively soon versus one that posits no action at all are not consistent  and could also lead to misleading conclusions. Estimating future effects on  Social Security benefits should reflect the fact that the program faces a  long-term actuarial deficit and that conscious policies of benefit reduction  and/or revenue increases will be necessary to restore solvency and sustain  it over time.
section_title: Reform Will Have Pervasive Impact on the Social Security Program
paragraphs: A variety of proposals have been offered to address Social Security’s  financial problems. Many proposals contain reforms that would alter  benefits or revenues within the structure of the current defined benefits  system. Some would reduce benefits by modifying the benefit formula  (such as increasing the number of years used to calculate benefits or using  price-indexing instead of wage-indexing), reduce cost-of-living  adjustments (COLA), raise the normal and/or early retirement ages, or  revise dependent benefits. Some of the proposals also include measures or  benefit changes that seek to strengthen progressivity (e.g., replacement  rates) in an effort to mitigate the effect on low-income workers. Others  have proposed revenue increases, including raising the payroll tax or  expanding the Social Security taxable wage base that finances the system;  increasing the taxation of benefits; or covering those few remaining  workers not currently required to participate in Social Security, such as  older state and local government employees.
A number of proposals also seek to restructure the program through the  creation of individual accounts. Under a system of individual accounts,  workers would manage a portion of their own Social Security  contributions to varying degrees. This would expose workers to a greater  degree of risk in return for both greater individual choice in retirement  investments and the possibility of a higher rate of return on contributions  than available under current law. There are many different ways that an  individual account system could be set up. For example, contributions to  individual accounts could be mandatory or they could be voluntary.  Proposals also differ in the manner in which accounts would be financed,  the extent of choice and flexibility concerning investment options, the way  in which benefits are paid out, and the way the accounts would interact  with the existing Social Security program—individual accounts could  serve either as an addition to or as a replacement for part of the current  benefit structure.
In addition, the timing and impact of individual accounts on the solvency,  sustainability, adequacy, equity, net savings, and rate of return associated  with the Social Security system varies depending on the structure of the  total reform package. Individual accounts by themselves will not lead the  system to sustainable solvency. Achieving sustainable solvency requires  more revenue, lower benefits, or both. Furthermore, incorporating a  system of individual accounts may involve significant transition costs.  These costs come about because the Social Security system would have to  continue paying out benefits to current and near-term retirees  concurrently with establishing new individual accounts.
Individual accounts can contribute to sustainability as they could provide  a mechanism to prefund retirement benefits that would be immune to  demographic booms and busts. However, if such accounts are funded  through borrowing, no such prefunding is achieved. An additional  important consideration in adopting a reform package that contains  individual accounts would be the level of benefit adequacy achieved by the  reform. To the extent that benefits are not adequate, it may result in the  government eventually providing additional revenues to make up the  difference.
Also, some degree of implementation and administrative complexity arises  in virtually all proposed changes to Social Security. The greatest potential  implementation and administrative challenges are associated with  proposals that would create individual accounts. These include, for  example, issues concerning the management of the information and  money flow needed to maintain such a system, the degree of choice and  flexibility individuals would have over investment options and access to  their accounts, investment education and transitional efforts, and the  mechanisms that would be used to pay out benefits upon retirement. The  Federal Thrift Savings Plan (TSP) could serve as a model for providing a  limited amount of options that reduce risk and administrative costs while  still providing some degree of choice. However, a system of accounts that  spans the entire national workforce and millions of employers would be  significantly larger and more complex than the TSP or any other system  we have in place today.
Harmonizing a system that includes individual accounts with the  regulatory framework that governs our nation’s private pension system  would also be a complicated endeavor. However, the complexity of  meshing these systems should be weighed against the potential benefits of  extending participation in individual accounts to millions of workers who  currently lack private pension coverage.
section_title: Social Security Reform Should Be Considered in the Context of Broader Challenges
paragraphs: Another important consideration for Social Security reform is assessing a  proposal’s effect on national saving. Individual account proposals that  fund accounts through redirection of payroll taxes or general revenue do  not increase national saving on a first order basis. The redirection of  payroll taxes or general revenue reduces government saving by the same  amount that the individual accounts increase private saving. Beyond these  first order effects, the actual net effect of a proposal on national saving is  difficult to estimate due to uncertainties in predicting changes in future  spending and revenue policies of the government as well as changes in the  saving behavior of private households and individuals. For example, the  lower surpluses and higher deficits that result from redirecting payroll  taxes to individual accounts could lead to changes in federal fiscal policy  that would increase national saving. On the other hand, households may  respond by reducing their other saving in response to the creation of  individual accounts. No expert consensus exists on how Social Security  reform proposals would affect the saving behavior of private households  and businesses.
Finally, the effort to reform Social Security is occurring as our nation’s  private pension system is also facing serious challenges. Only about half of  the private sector workforce is covered by a pension plan. A number of  large underfunded traditional defined benefit plans—plans where the  employer bears the risk of investment—have been terminated by bankrupt  firms, including household names like Bethlehem Steel, US Airways, and  Polaroid. These terminations have resulted in thousands of workers losing  promised benefits and have saddled the Pension Benefit Guaranty  Corporation, the government corporation that partially insures certain  defined benefit pension benefits, with billions of dollars in liabilities that  threaten its long-term solvency. Meanwhile, the number of traditional  defined benefit pension plans continues to decline as employers  increasingly offer workers defined contribution plans like 401(k) plans  where, like individual accounts, workers face the potential of both greater  return and greater risk. These challenges serve to reinforce the imperative  to place Social Security on a sound financial footing.
Regardless of what type of Social Security reform package is adopted,  continued confidence in the Social Security program is essential. This  means that the American people must understand why change is  necessary, what the reforms are, why they are needed, how they are to be  implemented and administered, and how they will affect their own  retirement income. All reform proposals will require some additional  outreach to the public so that future beneficiaries can adjust their  retirement planning accordingly. The more transparent the  implementation and administration of reform, and the more carefully such  reform is phased in, the more likely it will be understood and accepted by  the American people.
section_title: Conclusions
paragraphs: Social Security does not face an immediate crisis but it does face a large  and growing financial problem.  In addition, our Social Security challenge  is only part of a much broader challenge that includes, among other things,  the need to reform Medicare, Medicaid and our overall health care system.
Today many retirees and near retirees fear cuts that would affect them in  the immediate future while young people believe they will get little or no  Social Security benefits in the longer term. I believe that it is possible to  reform Social Security in a way that will ensure the program’s solvency,  sustainability, and security while exceeding the expectations of all  generations of Americans.
In my view, there is a window of opportunity to reform Social Security;  however, this window of opportunity will begin to close as the baby boom  generation begins to retire. Furthermore, it would be prudent to move  forward to address Social Security now because we have much larger  challenges confronting us that will take years to resolve. The fact is,  compared to addressing our long-range health care financing problem,  reforming Social Security should be easy lifting.
We at GAO look forward to continuing to work with this Committee and  the Congress in addressing this and other important issues facing our  nation. In doing so, we will be true to our core values of accountability,  integrity, and reliability.
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