Social Security: Long-Term Financing Shortfall Drives Need for Reform
Published: 2002-06-19T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: Social Security not only represents the foundation of our retirement income system; it also provides millions of Americans with disability insurance and survivor's benefits. Although the Social Security Trustees now project that under the intermediate or "best estimate" assumptions the combined Social Security Trust Funds will be exhausted 3 years later than in last year's estimates, the magnitude of the long-term funding shortfall is virtually unchanged. Without reform, Social Security, Medicare, and Medicaid are unsustainable, and the long-term impact of these entitlement programs on the federal budget and the economy will be dramatic. Social Security reform is part of a larger and significant fiscal and economic challenge. Absent reform, the nation will ultimately have to choose between persistent, escalating federal deficits, significant tax increases, or dramatic budget cuts. Focusing on trust fund solvency alone is not sufficient. Aiming for sustainable solvency would increase the chance that future policymakers would not have to face, on a recurring basis, the difficult questions of whether the government will have the capacity to pay future claims or what else will have to be squeezed to pay those claims. Comparing the beneficiary impact of reform proposals solely to current Social Security promised benefits is inappropriate since all current promised benefits are not funded over the longer term. Reform proposals should be evaluated as packages. If the focus is on the pros and cons of each element of reform, it may prove impossible to build the bridges necessary to achieve consensus. Acting sooner rather than later helps to ease the difficulty of change. Waiting until Social Security faces an immediate solvency crisis will limit the scope of feasible solutions and could reduce the options field to only those choices that are the most difficult and could also delay the really tough decisions on Medicare and Medicaid.

section_title: Letter
paragraphs: Thank you for inviting me here to discuss ensuring the long-term viability  of our nation’s Social Security program.  Social Security not only represents  the foundation of our retirement income system; it also provides millions of  Americans with disability insurance and survivor’s benefits.  As a result,  Social Security provides benefits that are critical to the current and future  well-being of tens of millions of Americans.  However, as I have said in  congressional testimonies over the past several years, the system faces  both solvency and sustainability challenges in the longer term.  Although  the Social Security Trustees now project that under the intermediate or  “best estimate” assumptions the combined Social Security Trust Funds  will be exhausted 3 years later than in last year’s estimates, the magnitude  of the long-term funding shortfall is virtually unchanged.   In their 2002  report, the Trustees emphasized that while the program’s near-term  financial condition has improved slightly, Social Security faces a  substantial financial challenge in the not-too-distant future that needs to be  addressed soon.  In essence, the program’s long-term outlook remains  unchanged.  Without reform, Social Security, Medicare, and Medicaid are  unsustainable, and the long-term impact of these entitlement programs on  the federal budget and the economy will be dramatic.
Over the past few years, a wide array of proposals has been put forth to  restore Social Security’s long-term solvency, and last December a  commission appointed by the President presented three models for  modifying the current program.  The Commission’s final report called for a  period of discussion lasting at least a year before legislative action is taken  to strengthen and restore sustainability to Social Security. It is not my  intention to discuss the specifics of or take a position for or against any  individual reform proposal, element, or approach.  Rather, I hope my  testimony today, which is based on a body of work we have published over  the past several years, will help clarify some of the key issues in the debate.   To do that, I’m going to talk about the nature and timing of the Social  Security problem and a framework you might use in addressing it.
First, let me highlight a number of important points in connection with our  Social Security challenge.
Social Security reform is part of a larger and significant 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 (Medicare and Medicaid) will dominate the federal  government’s future fiscal outlook.   Under GAO’s long-term simulations  it continues to be the case that these programs increasingly constrain  federal budgetary flexibility over the next few decades.  Absent reform,  the nation will ultimately have to choose between persistent, escalating  federal deficits, significant tax increases and/or dramatic budget cuts.
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 it is not the only perspective  we need to have on Social Security’s long-term financing.  In fact,  focusing on trust fund solvency alone is inappropriate and can lead to a  false sense of security about the overall condition of the Social Security  program.  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. Aiming for sustainable solvency would increase the chance that  future policymakers would not have to face these difficult questions on  a recurring basis.  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.
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 program that  affects virtually every American family. It currently pays benefits to  more than 45 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.
Given the current financial shortfall of the program, it is  important to compare proposals to both current promised and  funded benefits.  Comparing the beneficiary impact of reform  proposals solely to current Social Security promised benefits is  inappropriate since all current promised benefits are not funded over  the longer term.  As a result, comparisons to current promised benefits  after the point of trust fund insolvency assume a payroll tax increase or  general revenue infusion that have not been enacted and may not occur.   Likewise, comparisons of reform proposals solely to funded benefits  after the point of trust fund insolvency are also inappropriate since that  assumes a reduction in benefits that has not been enacted and may not  occur.   The key point is that there is a significant gap between promised  and funded benefits that must be closed.  In fact, a primary purpose of  most Social Security reform proposals is to close or eliminate this gap.
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, it may prove impossible to  build the bridges necessary to achieve consensus.
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 Funds are exhausted.  The program’s annual cash  surplus will enter a steady decline beginning in 2006, and from 2017 on,  Social Security’s annual cash deficit will 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 field to only those choices that are the most difficult  and could also delay 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 retirees have time to adjust their  retirement planning.
We believe it is possible to structure a Social Security reform  proposal that will exceed the expectations of all generations of  Americans.  Today many retirees and near-retirees fear cuts will affect  them while young people believe they will get little or no Social Security  benefits.  We believe the time has come 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 there for future  generations.
Our Social Security challenge is more urgent than it may appear.  Although  the combined Trust Funds will not run dry until 2041, the Social Security  program’s pressure and cash demands on the rest of the federal  government will begin much sooner.  Failure to take remedial action will, in  combination with other entitlement spending, place unsustainable pressure  on the government and, ultimately, the economy.  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 provides a foundation of retirement income for  millions of Americans, and has prevented many former workers 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 also needs to consider the impact of the potential changes on  different types of beneficiaries.  Moreover, while addressing Social Security  reform is important and will not be easy, Medicare presents a much greater,  more complex, and more urgent fiscal challenge.
To assist the Congress in its deliberations, GAO has developed criteria for  evaluating Social Security reform proposals.  These criteria aim to balance  financial and economic considerations with benefit adequacy and equity  issues and the administrative challenges associated with various proposals.   The use of these criteria can help facilitate fair consideration and informed  debate of Social Security reform proposals.  Although making policy  decisions of this importance requires appropriate deliberation, the time to  act is now.  Waiting only makes the problem larger, the magnitude of the  required changes greater, and the time available to phase in changes  shorter.  Waiting also may serve to further delay the really hard decisions  on Medicare and Medicaid.
subsections: section_title: Social Security’s Long- Term Financing Problem Is More Urgent Than May Appear
paragraphs: Today the Social Security program does not face an immediate crisis but  rather a long-range and more fundamental financing problem driven largely  by known demographic trends.  The lack of an immediate solvency crisis  affects the nature of the challenge, but it does not eliminate the need for  action. Acting soon 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 allow  changes to be phased in so 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.”    Mr. Chairman, as you heard earlier this month while hosting the second  Annual OECD International Conference of Chairpersons of Parliamentary  Budget Committees, we are not alone in facing long-term budget challenges  due to an aging population.  Our counterparts in many European countries  are debating these same issues, and a number of developed and developing  countries have already engaged in fundamental reform of their systems to  deal with their long-range challenges.
Acting soon will also help put the overall federal budget on a more  sustainable footing over the long term, thereby promoting both higher  economic growth and more fiscal flexibility.  The importance of such  flexibility was brought dramatically home last September.  The budgetary  surpluses of recent years put us in a stronger position to respond both to  the events of September 11 and to the economic slowdown than would  otherwise have been the case.   Going forward, the nation’s commitment to  surpluses will truly be tested.    None of the changes since September 11  have lessened the pressures placed by Social Security, Medicare, and  Medicaid on the long-term fiscal outlook. Indeed, the events of September 11 have served to increase our long-range fiscal challenges.
Since there is a great deal of confusion about Social Security’s current  financing arrangements and the nature of its long-term financing problem, I  would like to spend some time describing the nature, timing, and extent of  the financing problem.
section_title: Demographic Trends Drive Social Security’s Long-Term Financing Problem
paragraphs: As you all know, Social Security has always been largely a pay-as-you-go  system.  This means that current workers’ taxes pay current retirees’  benefits. As a result, the relative numbers of workers and beneficiaries has  a major impact on the program’s financial condition.  This ratio, however, is  changing.  In the 1960s, the ratio averaged 4.2:1.  Today it is 3.4:1 and it is  expected to drop to around 2:1 by 2030.  The retirement of the baby boom  generation is not the only demographic challenge facing the system.   People are retiring early and living longer.  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 replacement.  Taken together, these trends threaten the  financial solvency and sustainability of this important program. (See fig. 1.)
The combination of these trends means that labor force growth will begin  to slow after 2010 and become negligible by 2050.  (See fig. 2.)  Relatively  fewer workers will be available to produce the goods and services that all  will consume.  Without a major increase in productivity, 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 is not always considered as part of the  Social Security debate.  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.  However, 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 share of life spent in  retirement would be slowed.  This could improve the finances of Social  Security and mitigate the expected slowdown in labor force growth.
In addition to encouraging people to work longer, a second approach to  addressing labor force growth would be to bring more people into the labor  force.  In domestic social policy, we have seen an increasing focus on  encouraging those previously outside the labor force (i.e., welfare  recipients, the disabled) into the workforce.  Concern about the slowdown  in the growth of the labor force may also lead to discussions about  immigration and its role.  Increased immigration, however, poses complex  issues and is unlikely to be the sole solution.  For example, according to a  recent United Nations study, it would take more than a sustained tenfold  increase in projected immigration to maintain the ratio of workers to  retirees at recent levels.  These are issues that the Congress may wish to  explore further in the next few years.
Because of the demographic trends discussed above, current estimates  show that within 15 years benefit payments will begin to exceed program  revenue, which is composed largely of payroll taxes on current workers.   (See fig. 3.)
subsections: section_title: Social Security Trust Funds, Cash Flow, and the Federal Budget
paragraphs: Within the federal budget, Social Security—more properly, the Old-Age and  Survivors Insurance and Disability Insurance programs (OASDI)—has two  trust funds that authorize Treasury to pay benefits as long as the applicable  trust fund has a positive balance.  Currently, annual tax revenues to Social  Security exceed annual benefit payments. The Trust Funds, by law, invest  the resulting cash surplus in U.S. government obligations or securities that  are backed by the full faith and credit of the U.S. government.  At present,  the Trust Funds’ assets are in the form of special, nonmarketable Treasury  securities that are backed by the full faith and credit of the U.S. government  and so carry no risk of default.  Although the Trust Funds cannot sell their  holdings in the open market, the Trust Funds face no liquidity risk since  they can redeem their special Treasury securities before maturity without  penalty.  These securities earn interest credits at a statutory rate linked to  market yields, and this interest from the Treasury is credited to the Trust  Funds in the form of additional Treasury securities.
I think it is useful to pause for a moment here and reflect on what the term  “trust fund” means in the federal budget.  Trust funds in the federal budget  are not like private trust funds.  An individual can create a private trust  fund using his or her own assets to benefit a stated individual(s).  The  creator, or settlor, of the trust names a trustee who has a fiduciary  responsibility to manage the designated assets in accordance with the  stipulations of the trust.  In contrast, federal trust funds are budget  accounts used to record receipts and expenditures earmarked for specific  purposes.  The Congress creates a federal trust fund in law and designates  a funding source to benefit stated groups or individuals.  Unlike most  private trustees, the federal government can raise or lower future trust  fund collections and payments or change the purposes for which the  collections are used by changing existing laws.  Moreover, the federal  government has custody and control of the funds.
Under current law, when the Social Security Trust Funds’ tax receipts  exceed costs—that is, when the Trust Funds have an annual cash surplus— this surplus is invested in Treasury securities and can be used to meet  current cash needs of the government or to reduce debt held by the public.   In either case, the solvency of the Trust Funds is unchanged.  However,  while the Treasury securities are an asset to the Trust Funds, they are a  liability to the Treasury.  Any increase in assets to the Trust Funds creates  an increase of equal size in future claims on the Treasury.  One government  fund is lending to another.  As a result, these transactions net out on the  government’s consolidated books.
The accumulated balances in a trust fund do not in and of themselves  increase the government’s ability to meet the related program  commitments.  That is, simply increasing trust fund balances does not  improve program sustainability.  Increases in trust fund balances can  strengthen the ability to pay future benefits if a trust fund’s cash surpluses  are used to improve the government’s overall fiscal position.  For example,  when a trust fund’s cash surpluses are used to reduce debt held by the  public, this increases national saving, contributes to higher economic  growth over the long term, and enhances the government’s ability to raise  cash in the future to pay benefits.  It also reduces federal interest costs  below what they otherwise would have been, thereby promoting greater  fiscal flexibility in the future.
According to the Trustees’ intermediate estimates, the combined Social  Security Trust Funds will be solvent until 2041.  However, our long-term  model shows that well before that time program spending will constitute a  rapidly growing share of the budget and the economy.   Ultimately, the  critical question is not how much a trust fund has in assets, but whether the  government as a whole can afford the promised benefits in the future and  at what cost to other claims on scarce resources.  As I have said before, the  future sustainability of programs is the key issue policymakers should  address—i.e., the capacity of the economy and budget to afford the  commitment.  Fund solvency can help, but only if promoting solvency  improves the future sustainability of the program.
section_title: Social Security’s Cash Flow Is Expected to Turn Negative in 2017
paragraphs: Today, the Social Security Trust Funds take in more in taxes than they  spend.  Largely because of the known demographic trends I have  described, this situation will change. Under the Trustees’ intermediate  assumptions, annual cash surpluses begin to shrink in 2006, and combined  program outlays begin to exceed dedicated tax receipts in 2017, a year after  Medicare’s Hospital Insurance Trust Fund (HI) outlays are first expected to  exceed program tax revenues.  At that time, both programs will become net  claimants on the rest of the federal budget.  (See fig. 4.)
As I noted above, the special Treasury securities represent assets for the  Trust Funds but are future claims against the Treasury.  Beginning in 2017,  the Trust Funds will begin drawing on the Treasury to cover the cash  shortfall, first relying on interest income and eventually drawing down  accumulated trust fund assets.  Regardless of whether the Trust Funds are  drawing on interest income or principal to make benefit payments, the  Treasury will need to obtain cash for those redeemed securities either  through increased taxes, spending cuts, increased borrowing from the  public, or correspondingly less debt reduction than would have been the  case had Social Security’s cash flow remained positive. Neither the  decline in the cash surpluses nor the cash deficit will affect the payment of  benefits.  However, the shift affects the rest of the budget.  The 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: Decline in Budgetary Flexibility Will Be Severely Exacerbated Absent Entitlement Reform
paragraphs: From the perspective of the federal budget and the economy, the challenge  posed by the growth in Social Security spending becomes even more  significant in combination with the more rapid expected growth in  Medicare and Medicaid spending.  This growth in spending on federal  entitlements for retirees will become increasingly unsustainable over the  longer term, compounding an ongoing decline in budgetary flexibility.  Over  the past few decades, spending on mandatory programs has consumed an  ever-increasing share of the federal budget.  Prior to the creation of the  Medicare and Medicaid programs, in 1962 mandatory spending plus net  interest accounted for about 32 percent of total federal spending.  By 2002,  this share had almost doubled to approximately 63 percent of the budget.   (See fig. 5.) *Office of Management and Budget current services estimate.
In much of the last decade, reductions in defense spending helped  accommodate the growth in these entitlement programs.  This, however, is  no longer a viable option.  Even before September 11, reductions in defense  spending were no longer available to help fund other claims on the budget.   Indeed, spending on defense and homeland security will grow as we seek  to combat new threats to our nation’s security.
Our long-term budget simulations continue to 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, for  example, that the tax reductions enacted last year do not sunset and  discretionary spending keeps pace with the economy, by midcentury  federal revenues may only be adequate to pay Social Security and interest  on the federal debt.  Spending for the current Medicare program—without  the addition of a drug benefit—is projected to account for more than one- quarter of all federal revenues.  To obtain balance, massive spending cuts,  tax increases, or some combination of the two would be necessary. (See  fig. 6.)  Neither slowing the growth of discretionary spending nor allowing  the tax reductions to sunset eliminates the imbalance.
It is important as well to look beyond the federal budget to the economy as  a whole.  Figure 7 shows the total future draw on the economy represented  by Social Security, Medicare, and Medicaid.  Under the 2002 Trustees’  intermediate estimates and the Congressional Budget Office’s (CBO) most  recent long-term Medicaid estimates, spending for these entitlement  programs combined will grow to 14.1 percent of GDP in 2030 from today’s  8.3 percent.  Taken together, Social Security, Medicare, and Medicaid  represent an unsustainable burden on future generations.
This testimony is not about the complexities of Medicare, but it is  important to note that Medicare presents a much greater, more complex,  and more urgent fiscal challenge than does Social Security.  Unlike 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.  Increases in the number and quality of  health care services have been fueled by the explosive growth of medical  technology.  Moreover, the actual costs of health care consumption are not  transparent.  Third-party payers generally insulate consumers from the cost  of health care decisions.  These factors and others contribute to making  Medicare a much greater and more complex fiscal challenge than even  Social Security.
When Social Security redeems assets to pay benefits, the program will  constitute a claim on real resources in the future.  As a result, taking action  now to increase the future pool of resources is important.  To echo Federal  Reserve Chairman Greenspan, the crucial issue of saving in our economy  relates to our ability to build an adequate capital stock to produce enough  goods and services in the future to accommodate both retirees and workers  in the future.  The most direct way the federal government can raise  national saving is by increasing government saving.  Ultimately, as this  Committee recommended last fall, we should attempt to return to a  position of surplus as the economy returns to a higher growth path.  This  would allow the federal government to reduce the debt overhang from past  deficit spending, provide a strong foundation for future economic growth,  and enhance future budgetary flexibility.
Similarly, taking action now on Social Security would not only promote  increased budgetary flexibility in the future and stronger economic growth  but would also make less dramatic action necessary than if we wait.   Perhaps the best way to illustrate this is to compare what it would take to  achieve actuarial balance at different points in time by either raising payroll  taxes or reducing benefits.  Figure 8 shows this.  If we did nothing until  2041—the year the Trust Funds are estimated to be exhausted—achieving  actuarial balance would require changes in benefits of 31 percent or  changes in taxes of 45 percent.  As figure 8 shows, earlier action shrinks the  size of the necessary adjustment.
Thus both sustainability concerns and solvency considerations drive us to  act sooner rather than later.  Trust Fund exhaustion may be nearly 40 years  away, but the squeeze on the federal budget will begin as the baby boom  generation starts to retire.   Actions taken today can ease both these  pressures and the pain of future actions.  Acting sooner rather than later  also provides a more reasonable planning horizon for future retirees.
section_title: Evaluating Social Security Reform Proposals
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 also pays benefits to disabled workers and their dependents,  spouses and children of retired workers, and survivors of deceased  workers.  Last year, Social Security paid almost $408 billion in benefits to  more than 45 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.
The analytic framework GAO has developed to assess proposals comprises  three basic criteria:  the extent to which a proposal achieves sustainable solvency and how it  would affect the economy and the federal budget;  the relative balance struck between the goals of individual equity and   how readily a proposal could be implemented, administered, and  explained to the public.
The weight that different policymakers 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, policymakers will ultimately have to  balance the relative importance they place on each of these criteria.
subsections: section_title: Financing Sustainable Solvency
paragraphs: Historically, Social Security’s solvency has generally been measured over a  75-year projection period.  If projected revenues equal projected outlays  over this time horizon, then the system is declared in actuarial balance.   Unfortunately, this measure is itself unstable. 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.  This means that, changes that restore  solvency only for the 75-year period will not hold.  For example, if we were  to raise payroll taxes immediately by 1.87 percentage points of taxable  payroll today—which, according to the 2002 Trustees Report, is the amount  necessary to achieve 75-year balance—the system would be out of balance  next year.  This is the case because actions taken to close the 75-year  imbalance would not fully address the projected deficit in year 76 of 6.49  percent of taxable payroll.  Reforms that lead to sustainable solvency are  those that avoid the automatic need to periodically revisit this issue.
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 future workers.  Reforming Social Security and  federal health programs is essential to reclaiming our future fiscal  flexibility to address other national priorities.
section_title: Balancing Adequacy and Equity
paragraphs: The current Social Security system’s benefit structure strikes a balance  between the goals of retirement income adequacy and individual equity.   From the beginning, 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.
Policymakers could assess income adequacy, for example, by considering  the extent to which proposals ensure benefit levels that are adequate to  protect beneficiaries from poverty and ensure higher replacement rates for  low-income workers. In addition, policymakers could consider the impact  of proposed changes on various subpopulations, such as low-income  workers, women, minorities, and people with disabilities.  Policymakers  could assess equity by considering the extent to which there are reasonable  returns on contributions at a reasonable level of risk to the individual,  improved intergenerational equity, and increased individual choice and  control.  Differences in how various proposals balance each of these goals  will help determine which proposals will be acceptable to policymakers  and the public.
section_title: Implementing and Administering Proposed Reforms
paragraphs: 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. However, 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.   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.
Continued public acceptance 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.  Yet 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.
With regard to proposals that involve individual accounts, an essential  challenge would be to help the American people understand the  relationship between their individual accounts and traditional Social  Security benefits, thereby ensuring that any gaps in expectations about  current or future benefits are avoided. In addition, increasing the public’s  level of sophistication and understanding of how to invest in the market,  the relationship between risk and return, and the potential benefits of  diversification presents an education challenge that must be surmounted  so that the American people have the necessary tools to secure their future.   The Enron collapse helps to illustrate the importance of this, as well as the  need to provide clear and understandable information so that the public  can make informed retirement decisions.
section_title: Conclusion
paragraphs: Early action to address the financing problems of Social Security yields the  highest fiscal dividends for the federal budget and provides a longer period  for future beneficiaries to make adjustments in their own planning.  The  events of September 11 and the challenges of combating terrorism do not  change this.  In fact, the additional spending that will be required to fight  the war on terrorism and protect our homeland will serve to increase our  long-range fiscal challenges.  It remains true that the longer we wait to take  action on the programs driving long-term deficits, the more painful and  difficult the choices will become.
Although the program does not face an immediate solvency crisis as it did  in 1983, the fundamental nature of the program’s long-term financing  challenge means that timely action is needed.  The demographic trends  recognized in 1983 are now almost upon us.  It is these demographic  trends—and their implications for both Social Security and Medicare—that  lead to the conclusion that the program faces both a solvency and a  sustainability problem.  For the American people to understand why  change is necessary, a public education campaign will be needed that  focuses not just on Social Security but also on our long-range fiscal  challenges.
We will face many difficult choices in making Social Security sustainable.   Focusing on comprehensive packages of reforms that protect the benefits  of current retirees while achieving the right balance of equity and adequacy  for future beneficiaries will help 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.
Today I have described the three basic criteria against which GAO thinks  Social Security reform proposals may be measured.  These may not be the  same criteria every analyst would suggest, and certainly how policymakers  weight the various elements may vary.  However, if comprehensive  proposals are evaluated as to (1) their financing and economic effects,  (2) their effects on individuals, and (3) their feasibility, we will have a good  foundation for devising agreeable solutions, perhaps not in every detail, but  as an overall reform package that will meet the most important of our  objectives.