Social Security and Surpluses: GAO's Perspective on the President's Proposals
Published: 1999-02-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO discussed the President's proposal for addressing social security and use of the budget surplus.
section_title: What GAO Found
paragraphs: GAO noted that: (1) the President's proposal: (a) reduces debt held by the public from current levels, thereby also reducing new interest costs, raising national saving, and contributing to future economic growth; (b) fundamentally changes social security financing by promising general funds in the future by, in effect, trading publicly held debt for debt held by the Social Security Trust Fund and by investing some of the trust fund in equities with the goal of capturing higher returns over the long term; (c) does not have any effect on the projected cash flow imbalance in the social security program's taxes and benefits which begins in 2013; and (d) does not represent a social security reform plan and does not come close to saving social security; (2) 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; (3) the President's proposal may prompt a discussion and decision on both how much of the current resources the nation wants to save for the future and how it can best do so; (4) a substantial share of the surpluses would be used to reduce publicly held debt, providing demonstrable gains for the nation's economic capacity to afford future commitments; (5) in this way, the proposal would help the nation, in effect, prefund these commitments by using today's wealth earned by current workers to enhance the resources for the next generations; (6) the transfer of surplus resources to the trust fund, which the administration argues is necessary to lock in surpluses for the future, 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; (7) moreover, the proposed transfer may very well make it more difficult for the public to understand and support the savings goals articulated; (8) several other nations have shown how debt reduction itself can be made to be publicly compelling, but only Congress can decide whether such an approach will work in the United States; (9) GAO is very concerned that enhancing the financial condition of the trust fund alone without any comprehensive and substantive program reforms may in fact undermine the fundamental changes; and (10) explicitly pledging federal general revenues to social security will limit the options for dealing with other national issues.

section_title: Letter
paragraphs: 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.”
subsections: section_title: Context: Long-Term Outlook Is Important
paragraphs: 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 long- term economic future depends in large part on today’s budget decisions.   This perspective is particularly important because our model and that of  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.
section_title: The Proposal
paragraphs: 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.   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.
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.
subsections: section_title: Can We Save for the Future in the Federal Budget?
paragraphs: 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  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  “pre- fund” 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  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.
section_title: How Does the President’s Proposal Work?
paragraphs: 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.  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  securities.  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.
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  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.
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  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.
section_title: Government Financing and Debt
paragraphs: 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.  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  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.  This higher GDP  in turn would increase the nation’s economic capacity to handle all its  commitments in the future.
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  President’s proposal, and a hypothetical path we have labeled “on-budget  balance.”
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  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 “on- budget 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.
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.
section_title: Social Security Financing
paragraphs: 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.
subsections: section_title: General Fund Financing
paragraphs: 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.  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  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. 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 long- term forecast.
section_title: Investment in Equities
paragraphs: 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.
Last year, we reported on the implications of allowing the SSTF to invest in  equities.  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.
section_title: Have Other Countries Tackled These Problems?
paragraphs: 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.
section_title: Social Security Reform Is Still Needed
paragraphs: 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 2013; 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.
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  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  surplus is used.   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!
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  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  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.
section_title: Conclusions
paragraphs: 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,  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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