Social Security Reform: Greater Transparency Needed about Potential General Revenue Financing
Published: 2007-03-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Absent reform, Social Security's financing gap will grow until currently scheduled benefits can no longer be paid in full. Recent reform proposals often include general revenue (GR)--a major change that can have significant implications for the budget as a whole. This report addresses these issues: (1) What information is available about GR in recent proposal scorings by Social Security's Office of the Chief Actuary (OCACT)? (2) What common mechanisms, especially GR mechanisms, are used to increase program revenue? (3) What are the implications of GR for the trust fund and the federal budget? We have prepared this report under the Comptroller General's statutory authority to conduct evaluations on his own initiative as part of a continued effort to assist Congress in addressing the challenges facing Social Security.
section_title: What GAO Found
paragraphs: Although focused on the trust fund, OCACT scoring memos are also the primary source of information on how proposals would impact the federal budget. Memos provide information on GR use and its effects, but experts said comparing proposals on this element presents challenges, requiring extensive efforts to understand complex tables shown at the end of the memos. Fourteen of 17 proposals GAO reviewed provided GR (1) as needed to maintain trust fund solvency or (2) as specified by formula, amount, or source. Nine of the 17 achieved "sustainable solvency" under OCACT's definition using the first approach. This type of unlimited transfer poses the greatest potential risk to the federal budget, especially when combined with benefit guarantees. In proposals reviewed, amounts of GR under both types of approaches ranged up to about twice program shortfall. In all proposals using GR, the GR was reallocated from the non-Social Security budget. While any additional revenue to the trust fund will help solvency, unified federal budget effects depend on the type of revenue--whether it is new revenue (additional payroll tax revenue or GR that is new to the federal budget) versus reallocated GR. Absent other changes, new revenue would improve the long-term fiscal imbalance while reallocated GR would do nothing to address it. Although raising taxes (payroll or other) or cutting benefits would have tangible consequences for taxpayers and beneficiaries, e.g., less take-home pay or smaller benefit checks, the consequences of transfers from the non--Social Security budget in the form of reallocated GR are less likely to be clearly observable. Reallocated GR, however, is not free. Regardless of how GR is provided to Social Security, it must be paid for at some point. The question is when, and by whom.

section_title: Letter
paragraphs: Absent substantive reform, the gap between expected Social Security cash  revenues and benefits that is expected to begin in 2017 will grow until the  Social Security combined Old-Age Survivors and Disability Insurance  (OASDI) trust fund is exhausted and benefits at currently scheduled levels  can no longer be paid in full. Under the 2006 intermediate Trustees’  estimates, Social Security’s long-term financial shortfall is estimated at  2.02 percent of total taxable payroll, and its trust fund is projected to  reach exhaustion in 2040. Since its inception in 1935, Social Security has  been financed primarily by the payroll tax contributions of employers and  employees. However, recent reform proposals have often used—and in  some cases relied primarily on—general revenue financing to help  address the program’s financial shortfall. Many of the reform proposals  estimated (scored) by the Office of the Chief Actuary (OCACT) at the  Social Security Administration (SSA) as achieving “sustainable solvency”  for the trust fund would give Social Security significant amounts of general  revenue as part of a package of modifications.
Such use of general revenue for Social Security would represent a major  shift for this important and popular program. Since enactment in 1935,  Social Security payroll taxes have been increased and benefits expanded,  but the program’s financing framework has remained largely the same.  The use of general revenue was proposed both before the actual creation  of Social Security and during short-term financing crises in the 1970s and  1980s as an alternative to payroll tax increases, but Congress for the most  part has rejected general revenue financing for Social Security. Use of  general revenue would change the “self-supporting” nature of the program  and has thus been controversial. Some have feared that such a shift would  facilitate benefit expansion by undermining the fiscal discipline that  requires limiting benefit outlays to trust fund balances; others have feared  that use of general revenue would lead ultimately to a change from a  universal program to a reduced, means-tested benefit. Since 1983, small  amounts of general revenue from taxation of the Social Security benefits  of upper-income retirees have been dedicated to the program.
In the coming years, as the baby boom generation retires, the nation will  face a daunting and unprecedented long-term fiscal challenge. GAO’s long- term budget simulations show that current fiscal policy is unsustainable  and, absent changes, will lead to an escalating spiral of federal deficits and  debt. Social Security is not the major driver of the long-term fiscal  challenge—the cost of government-financed health care is—but Social  Security reform has the potential to affect not only the financial condition  of the program’s trust fund but also the financial condition of the Nation.  As the reform debate resumes, it will be important to make transparent the  implications of general revenue use not only for the trust fund but also for  the federal budget as a whole.
This report seeks to answer the following questions: (1) What information  is available about general revenue use in recent Social Security proposal  scoring memos by OCACT and how can available information about  general revenue use best be presented in order to facilitate comparison of  reform proposals? (2) In recent Social Security reform proposals, what  common mechanisms, especially general revenue mechanisms, are used to  increase revenue to the program? (3) What are the implications of general  revenue use for the trust fund and the federal budget?
To answer these questions, we reviewed relevant literature on Social  Security and performed an in-depth analysis of 17 OCACT proposal  scoring memos done from 2001 through 2006. These included all proposals  scored as achieving long-range solvency. Where a proposal was scored in  multiple years, we used the most recent scoring. We also interviewed  selected federal budget experts representing a range of views on reform  approaches and met with officials from OCACT and Congressional Budget  Office (CBO) involved in proposal scorings. (See app. I for more details on  our scope and methodology.)
We have prepared this report under the Comptroller General’s authority to  conduct evaluations on his own initiative, and it is intended to assist  Congress in its deliberations on Social Security and retirement issues. The  report is addressed to interested congressional committees.
We performed our work between May 2005 and December 2006 in  accordance with generally accepted government auditing standards. We  requested comments on a draft of this report from the Commissioner of  Social Security and incorporated those comments as appropriate.  (See  “Agency Comments and Our Evaluation” and app. II.)
subsections: section_title: Background
paragraphs: When Social Security was enacted in 1935, the nation was in the midst of  the Great Depression. About half of the elderly depended on others for  their livelihood, and roughly one-sixth received public charity. Many had  lost their savings. Social Security was created to help ensure that in the  future the elderly would have adequate incomes in retirement and would  not have to depend on welfare. Instead, the new program would provide  benefits based on the payroll tax contributions of workers and their  employers. Today Social Security is much more than a retirement  program. In 1939 Social Security coverage was extended to the dependents  of retired and deceased workers and in 1956 to the disabled. Over one- third of beneficiaries receive benefits for reasons other than old age.
subsections: section_title: Social Security Is One Part of the Long-Term Fiscal Challenge
paragraphs: Our work on Social Security reform has emphasized the need for change  not only because future program revenues are expected to fall short of  what is needed to pay currently scheduled benefits in full but because  Social Security, Medicare, and Medicaid taken together will consume an  increasing share of the budget and the economy. To move into the future  with no changes in federal health and retirement programs is to envision a  very different role for the federal government. Little room would be left for  other federal spending priorities such as national defense, education, and  law enforcement. Absent changes in the structure of Social Security and  Medicare, some time during the 2040s government would do nothing but  pay interest on the debt and mail checks to retirees. Accordingly,  substantive reform of Social Security and health programs remains critical  to recapturing our future fiscal flexibility.
Overall, the federal budget is facing unsustainable deficits and debt. Our  most recent long-term budget simulations provide a compelling illustration  of how unsustainable the long-term fiscal outlook is under current  policies.
As shown in figure 2, the long-term outlook under plausible assumptions is  bleak. A demographic shift will begin to affect the federal budget in 2008  as the first baby boomers become eligible for Social Security benefits.  Over time, this shift will cause spending for federal health and retirement  programs including Social Security to swell. Long-term commitments for  these and other federal programs will drive a massive imbalance between  spending and revenues that cannot be eliminated without difficult policy  choices and ultimately significant policy changes.
As figure 2 shows, contrary to popular perception, although Social  Security grows in size, it is not the major driver of the long-term fiscal  challenge. Spending for Medicare and Medicaid is expected to grow much  faster. Many specific solutions have been proposed for Social Security, but  approaches to reducing health care cost growth remain elusive. Moreover,  addressing federal programs such as Medicare and the federal-state  Medicaid program will need to involve changes in the health care system  of which they are a part. This will be a societal challenge affecting all age  groups. While Social Security reform alone cannot eliminate the long-term  fiscal challenge, the likely effects of reform on the nation’s fiscal future  should be clearly understood and taken into account.
section_title: Social Security’s Trust Fund and the Federal Budget
paragraphs: Social Security’s benefit payments and program receipts are tracked in  federal budget accounts that are known as trust funds. Trust funds are one  type of mechanism created to account for receipts that are dedicated to a  specific fund for a specific purpose. Social Security has two trust funds,  the Old-Age Survivors Insurance (OASI) Trust Fund and the Disability  Insurance (DI) Trust Fund. The combined OASDI trust fund comprises the  financial resources of the Social Security system. Social Security has a  permanent appropriation that permits the payment of benefits as long as  the relevant trust fund account has a sufficient balance.
Social Security’s outlays are limited to trust fund balances, but the  program’s outlays and revenues are also part of the federal unified budget.  Today, Social Security payroll tax revenues exceed benefits. In 2005, the  Social Security trust fund paid $530 billion in benefit payments and  administrative costs and took in $608 billion in cash revenues, leaving a  cash surplus of about $78 billion. By law, the Social Security trust fund  must invest any cash surpluses in interest-bearing federal government  securities. Throughout its history, Social Security has invested mostly in a  special type of nonmarketable securities that, like debt held by the public,  are guaranteed by the full faith and credit of the U.S. government.  Treasury borrows the cash from Social Security’s surplus to pay for other  government expenses, and this use of Social Security’s excess cash  revenues reduces the amount Treasury would otherwise need to borrow  from the public to finance other federal programs. (See fig. 3).
These excess cash revenues, however, will begin to diminish in 2009, one  year after the oldest members of the baby boom generation first become  eligible for Social Security old age benefits. This downturn in the Social  Security cash surplus—the difference between payroll taxes and benefits  paid—will begin a squeeze on the rest of the budget that will worsen in the  coming years, making less cash revenue available for other federal  priorities. By 2017 trust fund cash revenues will be inadequate to pay  currently scheduled benefits in full, and the Social Security trust fund will  need to redeem trust fund assets from the Treasury. To pay the trust fund,  Treasury will need to provide cash from general revenues in exchange for  those trust fund securities. This can come only through increased revenue,  increased borrowing from the public, reduced spending in the rest of the  government, or some combination of these. While the trust fund is  redeeming its securities, it will continue to pay full benefits, but the  redemptions will reduce overall federal budgetary flexibility.
section_title: Our Framework for Evaluating Reform Proposals
paragraphs: As we have said previously, Social Security reform proposals will need to  be evaluated on a number of criteria. Our work on various aspects of this  important program has emphasized that Social Security reform is about  more than solvency. To evaluate reform proposals, we have suggested that  policy makers should consider three basic criteria:  1. the extent to which the proposal achieves sustainable solvency and how  the proposal would affect the economy and the federal budget;  2. the balance struck between the twin goals of individual equity (rates of  return on individual contributions) and income adequacy (level and  certainty of benefits); and  3. how readily such changes could be implemented, administered, and  explained to the public.
Our first criterion of sustainable solvency reflects the need to look at  Social Security reform both in terms of its trust fund and in the larger  context of the federal budget as a whole. It is different from OCACT’s  definition, which is focused solely on the trust fund, for which they are  responsible.
From a micro perspective, projected trust fund balances can provide a  vital though imperfect signaling function for policymakers about  underlying fiscal imbalances in covered programs. Tracking the estimated  future balances makes it possible in turn to estimate how much more  funding is needed to pay for the benefits scheduled in current law. A  shortfall between the long-term projected fund balance and projected  costs can signal that the fund, either by design or because of changes, is  collecting insufficient monies to finance currently scheduled future  payments. This signaling device can eventually prompt policymakers to  action.
From a macro perspective, however, program solvency measures such as  the trust fund exhaustion date and the actuarial balance calculation  provide no information about the broader question of program  sustainability—that is, the capacity of the future economy and the federal  unified budget to pay program benefits over the long run. When a program  is not fully self-financed, as is the case with Social Security, projected  accumulated trust fund balances do not necessarily reflect the full future  cost of existing government commitments. Accordingly, trust fund  balances are not an adequate measure of Social Security’s sustainability.  The critical question is whether the Nation and the government as a whole  can afford the benefits in the future and at what cost in terms of other  claims on scarce resources. Extending a trust fund’s solvency without  reforms to make the underlying program more sustainable over the long  term can obscure the warning signals that trust fund balances provide,  thereby creating a false sense of security and delaying needed program  reform.
Evaluating proposals is a complex task involving trade-offs between  competing goals. Reform proposals should be evaluated as packages that  strike a balance among individual reform elements and important  interactive effects between these elements. The overall evaluation of any  particular reform proposal depends on the weight individual policy makers  place on each criterion.
section_title: Social Security Financing Has Evolved, but Payroll Taxes Remain the Principal Financing Mechanism
paragraphs: Since its establishment in 1935 Social Security has been financed primarily  by payroll taxes contributed equally by employers and employees. Both  tax rates and benefits have changed over time, but Congress has generally  rejected proposals for including general revenue in financing Social  Security benefits. Payroll tax rates have increased, from a total of 2  percent of taxable payroll in 1937—when payroll taxes were first  collected—to 12.4 percent today. Benefits have also been expanded to  include workers’ families and the disabled.
The question of whether some general revenue should be used to minimize  the burden of payroll taxes has been debated since the program’s  inception. The Committee on Economic Security (CES), tasked by  President Roosevelt with designing the program, believed that expected  benefit payments would exceed expected payroll tax revenues beginning  about 1965 and at that time general revenue should be used to fill the gap.  Under this financing arrangement, the general revenue share was  ultimately expected to reach about one-third of total revenues. President  Roosevelt rejected the idea of using general revenue in program financing.  He endorsed payroll tax financing on the grounds that it would ensure the  new program would be “self-supporting.” A perceived link between  benefits and payroll tax contributions would, he believed, serve to  preserve the program in the future. Using general revenue would make the  program welfare—in President Roosevelt’s words, “the dole by another  name.”
President Roosevelt’s financing approach envisioned the buildup of a  reserve fund that would serve to fund benefits in the long term, but  objections were made to this approach. Some believed that the existence  of a large reserve fund would lead to higher benefit levels or other  increased government spending; others objected to the underlying concept  of prefunding benefits which they believed would lock in specific levels of  support for aged beneficiaries in the future. Congressional changes to the  program that expanded benefits and postponed scheduled payroll tax  increases put the program on a pay-as-you-go basis, that is, revenues from  current workers in a given year pay for the benefits of current  beneficiaries in that year.
Nevertheless, the issue of whether general revenue should be used to  supplement payroll tax financing has recurred throughout Social  Security’s history. During short-term financing crises in the late 1970s and  early 1980s, proposals were made for general revenue use. At that time  some opposed this use of general revenue believing that it would obscure  the true cost of the program and lead to benefit expansion. Reform  legislation passed in 1983 did include permanent use of some general  revenue by imposing a new income tax on the Social Security benefits of  upper income retirees and dedicating that tax to the trust fund. Although  the income thresholds were not indexed to inflation, amounts of revenue  to Social Security from this source have been and remain small relative to  total program tax revenue.
Since the legislation passed in 1977 and 1983, a temporary build up of trust  fund assets has caused Social Security to temporarily deviate somewhat  from pay-as-you-go financing. This occurred in part because the large baby  boom generation makes the size of the workforce large relative to the  beneficiary population. As the baby boom generation retires and is  replaced by a workforce that will grow less rapidly than in the past, trust  fund assets will be redeemed to pay benefits, but these assets plus payroll  tax revenues will eventually be insufficient to pay currently scheduled  benefits in full. To deal with this structural imbalance, many proposals  have included the use of general revenue to supplement payroll tax  financing—often in large amounts relative to total financing and over  extended time periods. For example, both proposals made by President  Clinton in 1999 and reform models put forward in 2003 by the Commission  to Strengthen Social Security established by President George W. Bush  included the use of general revenue.
section_title: OCACT Scoring Memos Are Primary Source of Information on Reform Proposals, but Detailed Tables Are Difficult to Use for Understanding General Revenue and Federal Budget Effects
paragraphs: OCACT scoring memos are the primary source of information on recent  Social Security reform proposals. Since the mid-1990’s, OCACT has scored  a wide variety of comprehensive reform proposals. Each proposal  modifies the OASDI program using one or several of the following  provisions that: (1) reduce benefits, e.g. through changes to indexing  formulas and/or other methods; (2) increase benefits for special  populations; (3) raise revenue through payroll tax increases; (4) use  general revenue financing through a range of mechanisms (not always  specified as general revenue); (5) invest trust fund assets through  government investment in marketable securities; or (6) change the current  structure of the program by creating IAs. The format of these scoring  memos has evolved over time, partially in response to feedback from  users. More recent scoring memos are available on OCACT’s web site. In  addition, OCACT has begun to post estimates of many of the stand-alone  provisions that have been suggested to modify the Social Security program  and improve its financial status. Many of these are also included in the  various comprehensive proposals.
OCACT’s scoring memos typically emphasize two important summary  measures: (1) the change to actuarial balance and (2) ability of the trust  fund to meet obligations throughout the 75-year period and beyond, an  indicator of “sustainable solvency” as defined by OCACT. In recent years,  sustainable solvency as defined by OCACT has become the standard by  which reform proposals are measured. When OCACT evaluates a reform  proposal as meeting the definition of sustainably solvent, the proposal  sponsor often highlights this point in press statements and other  statements. This measure, however, considers only trust fund effects and  not the effect of the proposal on the federal budget.
To discover crucial information on a proposal’s general revenue use and  federal budget effects, a user of OCACT’s scoring memos must consult the  detailed tables at the end of the memo. The type and amount of  information included in the tables has increased over time. Current tables  are generally comprehensive in presenting a proposal’s financial effects.  Columns display year-to-year changes in the financial operations of the  trust fund and the unified budget as well as the cashflow between the trust  fund and the general fund of the U.S. Treasury. For those plans that  include either government or IA investment in equity markets, OCACT  publishes two sets of tables, one reflecting “expected-yield” assumptions  on investments and a second set reflecting “low-yield” assumptions. A few  of the scoring memos we analyzed included other tables that provide  insight into general revenue use. One of these tables shows the impact of  each individual provision on the long-range actuarial balance (as a  percentage of payroll). This table shows to what extent a single provision,  by itself, either improves or worsens the actuarial balance.
Budget experts we spoke with agreed that the tables had evolved and now  provide more information but they also said that the tables are difficult to  use and take much effort to understand. In particular, they said that the  “information is not reader-friendly” and “key estimates of general revenue  are not highlighted and it is not always clear if there is a specified source  for the general revenue.” Our analysis of 17 recent scoring memos  generally confirmed this assessment. Policymakers and the public may  have a difficult time comparing how different plans get to sustainable  solvency and the implications for the rest of the budget, future deficits,  and debt held by the public. Similarly, the 1999 and 2003 Technical Panels  on Assumptions and Methods, convened by the Social Security Advisory  Board, expressed concerns about consistency in presentation of  information in scoring memos. One recommendation made by budget  experts was for an up-front summary table with crucial information that a  reader needs in order to compare plans. Although we found no agreement  on precise content for the table, information about benefit cuts, tax  increases, and general revenue could somehow be included.
OCACT staff told us that the principal purpose of their scorings was to  show the effect of a proposal on trust fund solvency and not on the budget  as a whole. They added that they were generally satisfied with the current  format for scoring memos, noting that they had not received any negative  feedback from users. They did agree that information could be more user- friendly and are considering ways to achieve this goal, for example  through the inclusion of visuals. OCACT staff further noted that scoring  proposals is resource-intensive. Although some scorings can take up to a  year, others must be done under tight timeframes, e.g., when sponsors are  planning to introduce legislation. They also told us that they have  discussed options for a summary table with selected users but had not  found any consensus on what information should be highlighted. OCACT  staff emphasized that their scorings are and need to continue to be  perceived as objective. In any case, OCACT staff did not think that the use  of general revenue should be highlighted above other proposal changes.
More recently, CBO has developed the capacity to do long-term estimates  of Social Security reform proposals and has completed five long-term  scoring memos to date. OCACT and CBO scoring memos have key  substantive and presentational differences. One particularly important  difference is the use of different economic assumptions, which results in  CBO currently having more optimistic estimates of current-law program  finances. Although budget experts we spoke with generally thought that  CBO scoring memos have been beneficial analytical tools, they also  thought that OCACT scoring memos were likely to continue to be the  primary source of information in any debate over reform proposals.  Therefore, having OCACT scoring memos provide clear and easily  accessible information on any use of general revenue and on the impact of  any reform proposal on the broader budget remains important.
section_title: Recent Proposals Differ by Revenue Mechanism and Reform Approach Used, but Most Reallocate General Revenue and Aim to Increase Investment Returns
paragraphs: Almost all proposals we reviewed package multiple revenue options  and/or benefit changes to achieve sustainable solvency, but they differ in  both the broad approach they take for dealing with the long-range  solvency problem and the revenue mechanisms they use. Reform  approaches can be divided into two broad categories: approaches that  maintain the current structure, that is, a pay-as-you-go social insurance  program of defined benefits paid for primarily by payroll tax revenue, and  approaches that create a new structure that includes IAs.
Provisions that guarantee revenue to the Social Security trust fund can be  classified as: reallocated general revenue mechanisms, payroll tax  mechanisms, or new general revenue mechanisms (see Text Box). A  reallocated general revenue mechanism is any provision that increases  revenue to the program by redirecting existing general revenue expected  under existing law to the trust fund. Payroll tax mechanisms directly  change the amount of payroll taxes contributed and therefore increase  payroll taxes flowing into the trust fund. A new general revenue  mechanism would establish a new source of income to the general fund  and dedicate it to the Social Security trust fund. Examples would be the  creation of a national sales tax or increases in income or excise taxes with  the revenue from any of these dedicated to the Social Security trust fund.  None of the proposals we examined introduced new general revenues. All  of them—although described and characterized in various ways—used  only mechanisms that would reallocate general revenue and/or increase  payroll taxes.
All 17 of the Social Security reform proposals we analyzed include at least  one mechanism to increase revenue to Social Security and some use more  than one mechanism. Fourteen of the 17 proposals we examined would  reallocate general revenue, that is, transfer existing revenue from the  general fund; the other 3 proposals did not use general revenue.
The 14 proposals that used reallocated general revenue did so by means of  five different mechanisms. These mechanisms can be characterized as  providing for either unlimited or limited amounts of general revenue  financing. The first mechanism provides for unlimited general revenue; the  other four use varying means to provide limited or defined amounts of  general revenue financing. Unlike plans with unlimited transfers to assure  trust fund solvency, proposals with general revenue transfers limited by  specified amounts, source, or formula, could be insolvent at some point in  time if the actual financial condition of the program differs from the  OCACT estimates.
Unlimited general revenue transfers to the trust fund of whatever  amount is necessary to maintain trust fund solvency (e.g., a 100  percent trust fund ratio). This mechanism is the most frequently used  general revenue option. It is found in 9 of the 17 plans we examined. This  provision usually states that general revenue transfers are to be made if, at  any time, the combined OASDI trust fund ratio is projected to fall below  100 percent under the provisions of the plan. Transfers of sufficient  amount and timing will be made to prevent the trust fund from falling  below 100 percent of the annual program cost. In simple terms, funds  sufficient to pay projected benefits for the year, that is, to maintain  solvency, would be transferred as needed from the general fund to the  Social Security trust fund without regard to the amount. This provision  alone guarantees program solvency under any circumstance because it  provides the trust fund with an unlimited and open-ended draw on the  general fund.
General revenue transfers specified by formula or amount. Six plan  sponsors propose using this mechanism, which specifies—in actual  dollars, as a percentage of taxable payroll or using a formula—how much  general revenue would be transferred to the trust fund in a given year.  Transfers would be limited by these specifications. In other words,  transfer amounts are made independent of the financial condition of the  program as measured by the trust fund ratio).    “Refundable tax credits” for individual add-on accounts (or to  individuals to offset account contributions). Alone among the general  revenue options discussed, under this mechanism revenue would not be  transferred to the OASDI trust fund, but would be outlaid immediately—  either to provide funding to individual add-on accounts or to offset the  cost of those accounts. The four proposals using this option would either  credit the general revenue directly to the workers’ add-on accounts (the  amount would be determined by the plan’s provisions) or include the  amount as a credit on the individuals’ income taxes to partially offset the  payroll tax increase introduced to fund the account. Although in these  proposals the add-on accounts would be financed outside of the current  program—either entirely or partially funded using reallocated general  revenue—they would be considered part of a new Social Security system.
Dedication of revenue generated from the estate tax to the trust  fund. This revenue option would dedicate revenue from the estate tax to  the Social Security trust fund to help finance the current structure. One  proposal would permanently establish a tax of 45 percent on all estates of  deceased taxpayers with taxable assets in excess of $3.5 million (as in  current law for 2009). The tax revenue would be dedicated to the OASDI  trust fund instead of to the general fund.
Redirection of those revenues from Social Security benefit  taxation that now go to the Medicare Hospital Insurance (HI) trust  fund to the OASDI trust fund. Currently, up to 85 percent of an  individual’s or couple’s OASDI benefits may be subject to federal income  taxation if their income exceeds certain thresholds. The income tax  revenue attributable to the first 50 percent of OASDI benefits is already  dedicated to the Social Security trust fund, but the revenue associated  with the amount between 50 and 85 percent of benefits is dedicated to the  Medicare HI trust fund. Two proposals would dedicate all of the income  from the tax on OASDI benefits to OASDI.
Reform plans with individual accounts may have indirect effects on  income from benefit taxation. Proposal sponsors typically stipulate  whether disbursements from individual accounts would be taxed like  current Social Security benefits or not taxed at all. If account  disbursements are considered OASDI benefits for income tax purposes,  income to the trust fund could be greater (or smaller) in cases where the  combined traditional benefit and account disbursement yields are greater  (or lesser) than under current law. There would be similar implications for  the HI trust fund if benefit taxation income is distributed as under current  law. Plans that reduce the taxable traditional OASDI benefits and do not  tax individual account distributions would lower trust fund revenue from  this source.
Of the 17 proposals, 7 increase payroll tax revenue using one or more of  the following four mechanisms:    Raise or eliminate the “taxable maximum limit” or “cap” on  covered earnings (with or without retaining the cap for benefit  calculation). Incorporated in five proposals, this is the most common  mechanism for bringing in new payroll tax revenue. This mechanism  would not change the 12.4 percent tax rate but would either increase the  level of wages taxed or completely eliminate the cap so that all covered  earnings are taxed. This latter option is similar to the Medicare HI payroll  tax of 2.9 percent, which applies to all covered earnings. SSA recently  estimated that in 2005 about 84 percent of covered earnings were subject  to the OASDI tax (i.e., were taxable) and projected decreases in the ratio  of taxable wages to covered wages through 2015. After 2015, SSA expects  this percentage to be held approximately constant at 82 percent of covered  earnings. Four plans propose to increase the percentage of taxable  earnings under the “cap” to a level between 87 and 90 percent of covered  earnings. A fifth plan would completely eliminate the earnings cap and  would tax all earnings at the 12.4 percent rate.
Increase the 12.4 percent payroll tax on taxable earnings. Four  plans propose raising payroll tax rates by between 1 and 3 percentage  points. None of the plans we reviewed propose an immediate tax rate  increase of 2.02 percentage points, the estimated increase needed to  achieve 75-year solvency through year 2080.
Expand coverage to state and local government employees not  currently covered. Three plans would require those public employers not  currently providing Social Security coverage to cover newly hired  employees.
Tax covered earnings above the “cap” but at a lower tax rate (with  or without retaining the “cap” for benefit calculation). Two  proposals apply a rate much lower than 12.4 percent, between 3 and 4  percent, to covered earnings above the established taxable maximum.
Some of the mechanisms to increase payroll tax revenue could also result  in increased benefit costs. For example, proposals that raise or eliminate  the “cap” on covered earnings or tax earnings above the “cap” may or may  not include these wages when calculating benefits. If the wages are  included in the benefit formula, benefit costs would increase in the future  and the improvement in the actuarial deficit would be smaller than if the  wages were not included in the benefit calculation. Expanding coverage to  all state and local government workers would bring in additional payroll  tax revenue but would also increase the long-term benefit costs as newly  covered earnings would entitle affected workers to the associated  benefits.
None of the five general revenue mechanisms in the plans we examined  would come from new revenue sources and hence would bring no new  revenue to the federal budget; the four payroll tax mechanisms would  bring new revenue to the budget as a whole. Table 1 categorizes the  mechanisms in terms of this framework. The number in parentheses  indicates the number of reform proposals that contain this mechanism.
Although there is no analytic link between the inclusion of IAs and the  selection of a specific revenue mechanism, in our review we found that  most of the time reallocated general revenue mechanisms are used to help  structure a new Social Security system with IAs. On the other hand,  payroll tax mechanisms are used about half the time to help finance the  current program and about half the time in proposals creating a new  system including IAs. Table 2 summarizes the reform approach and  revenue mechanisms used in reform plans. The numbers in parentheses  indicate the number of reform proposals that contain a particular  mechanism.
Most proposals—15 of the 17 we reviewed—included provisions aimed at  increasing revenue through investment in private markets. Two proposals  used direct government investing in marketable securities through the  current program structure and 13 created a new Social Security structure  including individual accounts. Investing in marketable securities creates  the potential for improved returns but increases investment risk for the  investing party (the government or individuals). Therefore, unlike  reallocated revenue and payroll tax mechanisms, neither investment  approach assures additional income.
Proposals for government investment of the trust fund anticipate returns  that would increase revenue to the trust fund while in most IA proposals  the benefit obtained from any increased returns would be credited to the  individuals’ accounts and generally included as part of the account  distribution. Individual account proposals may redirect revenue from the  program or the federal budget but typically compensate for lost revenue  through either across-the-board benefit cuts or “benefit offsets” to  currently-scheduled benefits. In these proposals, the “total benefit” from  the new Social Security system consists of a combination of the traditional  Social Security defined benefit (including any modifications/offsets) and  the individual account distribution (including any modifications/offsets).
Some plans establishing IAs propose to guarantee benefit levels  irrespective of actual returns; they are able to do this by using general  revenue transfers. Guarantees would benefit account holders by partially  or fully protecting them from risk. However, the increased benefits to  account holders would create a corresponding cost for the federal  government. Whenever an account fell short of promised benefits, the  government—and, implicitly, taxpayers—would make up the difference.
section_title: Additional Revenue Improves Trust Fund Solvency but Effects on the Federal Budget May Differ Greatly
paragraphs: The effect of a reform proposal on federal budget balances and debt  cannot be determined from its effect on trust fund solvency. The proposals  we reviewed illustrate this. All plans included in our review were scored  by OCACT as able to pay the plan’s benefits in full over the 75-year period.  However, plans’ impact on the federal budget as a whole varied widely in  the scorings. For example, the effect on debt held by the public ranged  from an improvement of $45 trillion to a worsening of $41 trillion over the  75-year projection period. The impact of a proposal package on the  federal budget is shown in the year-by-year scoring of effects on unified  deficits and debt that OCACT provides in its technical tables.
That the impact on the trust fund and the impact on the budget as a whole  can differ is not surprising. By definition, any increase in revenue provided  to the trust fund—whether new general revenue, reallocated general  revenue, or increased payroll tax revenue—will increase the trust fund’s  capacity to pay benefits. Effects on the federal budget, however, depend  on the type and amount of revenue and also on assumptions about  payment of currently scheduled benefits.
We compare the impact of new and reallocated revenue on the budget and  long-term fiscal outlook under two different assumptions about the  payment of currently scheduled benefits beyond projected trust fund  exhaustion in 2040. First, assume as OCACT does in its memos and GAO  does in its long-range simulations, that currently scheduled benefits would  be paid in full throughout the estimating period (i.e., borrowing would  increase to fund the benefits). Under these assumptions—and assuming no  other changes in spending and/or revenue—either new general revenue or  additional payroll tax revenue would replace some of that borrowing and  improve the long-term fiscal outlook. Reallocated general revenue equal to  (or less than) the Social Security financial shortfall would have no impact  on federal budget deficits, debt, or the long-term fiscal outlook. In  amounts greater than the shortfall, reallocated general revenue would  make the long-term outlook worse, all other things equal.
As an alternative, assume instead that benefit outlays will be limited to  trust fund income once the trust fund has reached exhaustion in 2040.  Under this alternative, federal budget balances would be the same through  2040 as under the first assumption, then improved over the longer term  due to lower annual outlays and less borrowing.
Under this “trust fund exhaustion scenario,” new revenue dedicated to  Social Security early in the projection period would improve annual  budget balances and extend the time period during which currently  scheduled benefits could be paid in full. The new revenue would also  reduce debt for most of the 75-year period. Any amount of reallocated  general revenue on the other hand would increase federal budget deficits,  reduce budgetary flexibility, and increase debt held by the public relative  to this alternative assumption of trust fund exhaustion. All else equal, the  reallocated general revenue would provide additional income to the trust  fund and make possible additional benefit outlays, but borrowing from the  public would be needed to pay for these outlays.
Use of different time frames can also lead to different conclusions about  the federal budget effects of additional revenue including reallocated  general revenue. For example, some proposals that restructure the Social  Security system to rely more on individual accounts—funded in part  through a “carve-out” of current payroll tax revenues—use large amounts  of reallocated general revenue at the outset to help make up the gap as  benefit reductions from currently scheduled levels are phased in. Those  favoring this approach to system restructuring may view the reallocated  general revenue as a loan from the rest of the budget that will be paid  back. Advocates for these types of changes point out that once the  transition to the new system is complete, the cost of the Social Security  program will have been reduced compared to paying currently scheduled  benefits in full. Some favoring program restructuring have advocated use  of an infinite horizon rather than the 75-year time frame traditionally used  for actuarial assessment of the trust fund. These analysts view 75 years as  an arbitrary cut-off point. They note that the use of this horizon can be  misleading where a gap between projected revenues and benefit payments  continues to grow after the 75-year window, as is the case with the current  program.
Those who oppose using reallocated general revenue to achieve system  restructuring include an emphasis on a shorter time frame in their  analyses. They point to higher levels of federal spending and debt held by  the public over at least the next several decades resulting from this  approach to reform. These analysts emphasize that it is in this nearer time  frame the baby boom generation will retire and the cost to the government  will escalate dramatically, driven by demographics and compounded by  federal spending on health. These analysts were concerned that revenue  used for Social Security will not be available for Medicare and Medicaid,  and absent changes in fiscal policy, spending on the three major  entitlements will lead to unsustainable levels of debt long before Social  Security restructuring will have reduced federal commitments for that  program. These analysts called for a focus on the long-term federal budget  problem as a whole and a search for solutions to Social Security’s  financing problems within that larger context.
In concept, the mechanism of unlimited reallocated general revenue as  needed to assure trust fund solvency, used in 9 of the 17 proposals we  reviewed, represents the largest potential draw on the federal budget. The  amount of reallocated general revenue actually provided to the trust fund  in these proposals would vary depending on the financial requirements of  the Social Security program, and these would depend on the other  proposal provisions. The other four general revenue mechanisms would  use specified amounts of reallocated general revenues. That is, the amount  of general revenue used would not vary according to the financial  requirements of the Social Security program but would be dictated by the  parameters of the mechanism, e.g., specified in current dollars or as a  share of taxable payroll in specific years.
In terms of size, amounts of reallocated general revenue used by  mechanisms in proposals we reviewed varied widely, ranging up to over  200 percent of total program financial shortfall. Estimates for general  revenue deriving both from the mechanism of unlimited reallocated  general revenue as needed to assure trust fund solvency and from  specified general revenue transfer amounts were large in some cases.  Table 3 shows amounts of reallocated general revenue by type of  mechanism.
Some of the budget experts with whom we spoke suggested an approach  we did not find in any of the reform proposals we examined. These  experts suggested that plans could establish a new source of general  revenue and dedicate the new revenue to the Social Security trust fund.  For example, they suggested that instead of payroll tax increases, income  taxes could be raised or a value-added tax instituted with all or part of  the revenue dedicated to Social Security. Some of the budget experts we  spoke with observed that any policy decision to introduce new revenues  dedicated to a particular program could have implications for the capacity  of the rest of the budget to deal with other fiscal challenges. Enactment of  any new taxes for Social Security could affect the public’s willingness to  bear taxes to fund other important national priorities, such as Medicare. In  addition, taxes may have effects on individuals’ saving behavior and on  labor supply, effects that are beyond the scope of this report.
Despite their differing views on reform approaches, budget experts  generally either believed or advocated that some use of general revenue  would be part of reform. Some of them were concerned about the use of  reallocated general revenue for Social Security in view of the long-term  fiscal challenge facing the nation. One emphasized that the public needs to  understand that reallocated general revenue for Social Security is not  “free.” Reallocated general revenue would need to be paid for now or later  through lower spending, higher taxes, and/or more debt. Another expert  expressed the view that general revenue would be needed to reduce the  political pain involved in reform but cautioned that using general revenue  for Social Security could mean an even larger share of federal resources  committed to funding programs that serve the elderly in coming decades,  further squeezing out other national priorities. Most experts expressed the  view that greater transparency about the use of general revenue use in  reform plans was needed.
Most budget experts with whom we spoke expressed concern about any  provision of reallocated general revenue as needed for Social Security to  assure trust fund solvency. These analysts, including some who generally  do not find trust fund accounting meaningful, said that the signaling  provided by the Trustees’ projected trust fund exhaustion date has served  a useful purpose by alerting policymakers and the public of the need for  program reform. Providing for the use of reallocated unlimited general  revenue transfers to achieve sustainable solvency would mean that the  trust fund would never be projected to reach exhaustion. As a result, these  analysts observed, the true costs of the program would become less  transparent while at the same time the public might think that the Social  Security financing shortfall had been resolved.
One expert was especially concerned that explicit guarantees that total  payouts from accounts plus Social Security would be not less than  currently scheduled benefit levels could prove expensive for the federal  budget. Such guarantees will likely add to the cost of the Social Security  system, because individuals will have protection against downside risks  but are allowed by a guarantee to benefit on the upside, this expert said. In  earlier work we noted that any proposal that would guarantee benefits and  rely on enhanced rates of return on individual accounts to finance long- term solvency may create an additional draw on general revenue that  could serve to increase the deficit over the long term. Four of the 17  proposals we reviewed for this report included this type of provision; 3 of  the 4 also provided for unlimited transfers of reallocated general revenue  to maintain trust fund solvency.
section_title: Conclusions
paragraphs: In coming decades, our nation will face a serious long-term fiscal  challenge that will put America’s fiscal future at risk. As we have said in  our body of work on Social Security, substantive reform of this important  program will involve hard choices that will need to modify the program’s  underlying commitments for the future. To do this—to achieve the goal of  saving Social Security and making it sustainable for the future—reform  will need to increase program revenues and/or decrease program  expenses. These are the only options.
It may well be that some general revenue will be part of reform. If so, this  would a major substantive change. Considering both the long-term fiscal  situation and the potential implications for Social Security, the use of any  general revenue in proposals—reallocated or new—will need to be clearly  understood by both policymakers and the general public.
Although OCACT’s determination of “sustainable solvency” for a reform  plan will remain an important threshold that plans will need to meet, it is  not a sufficient benchmark in the context of the long-term fiscal outlook  facing the United States. It is also an incomplete metric for comparing and  evaluating reform plan financing implications. Given that most recent  proposals use reallocated general revenue, a determination of trust fund  solvency alone can be especially misleading. By definition a determination  of trust fund solvency is not designed to and does not provide any  information on how, when, or to what extent a plan is likely to worsen or  improve the already daunting future federal fiscal imbalances. Clarity  about these broader implications of any proposal will be essential as  reform changes are debated.
Although raising taxes (payroll or other) or cutting benefits would have  tangible consequences for taxpayers and beneficiaries, e.g., less take-home  pay or smaller benefit checks, the consequences of transfers from the non- Social Security budget in the form of reallocated general revenue are less  likely to be clearly observable. Reallocated general revenue, however, is  not without cost. Regardless of how general revenue is provided to Social  Security, it must be paid for at some point.  The question is when, and by  whom.
OCACT scoring memos have played and will continue to play an  indispensable role in the debate by analyzing how proposals would affect  the trust fund’s finances and in more recent years how proposals would  affect the federal budget. OCACT’s valuable information and complex  analyses could make an even greater contribution if they were more  readily accessible to nonexpert users. It would be helpful for OCACT to  include near the beginning of each memo a summary of the relative  contribution of each provision in a proposal package to trust fund  solvency. In addition, OCACT could devise a way to enable policymakers  and the public to quickly and accurately grasp how the elements of a  proposal, including any general revenue, work together to affect the trust  fund and the overall federal budget. This type of presentational change  would not require any additional analysis but could greatly facilitate  comparison of proposals to one another.
We recognize that developing a summary that would be easily accessible  to policymakers and the general public and perceived as fair by all  participants in the reform debate will present challenges. The elements of  reform proposals are likely to continue to evolve, and new formats and  analyses may become necessary. We recognize that a balance will need to  be struck between standardizing formats and allowing the information  provided to continue to evolve with the debate. Nevertheless, a more  standardized summary early on could make clear the relative  contributions of benefit cuts and increased revenue from payroll and  nonpayroll taxes. In addition, it could illuminate any use of general  revenue and how use of such revenue is likely to affect the long-term  budget outlook. This summary would be a presentational, not analytical,  modification with major potential benefits to greater public understanding  of proposed changes to this popular program that is important to virtually  all Americans.
section_title: Recommendation for Executive Action
paragraphs: To improve public understanding of proposed changes to Social Security,  we recommend that the Commissioner of SSA direct the Office of the  Chief Actuary at SSA to include a summary presentation of its analysis in  future scoring memoranda that will enable policymakers and the general  public to quickly and easily compare Social Security reform proposals  especially with respect to proposed use of general revenue and federal  budget implications.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments (reprinted in app. II) on a draft of this report, SSA  suggested that we should direct our recommendation to the Chief Actuary,  not to the Commissioner.  This change, SSA said, would target the entity  that develops the analysis and would also be sensitive to the independence  of the Chief Actuary.
As SSA stated in its comments, by legal mandate the Chief Actuary does  report directly to the Commissioner.  Because our recommendation  concerns only the presentation of actuarial estimates—not any change in  which estimates are developed nor in the analytical work required to  develop them—we believe the recommendation as it stands recognizes  and is appropriately sensitive to the independence of the Chief Actuary  while at the same time reflecting the organizational structure of the Office  of the Chief Actuary within SSA.
SSA did not explicitly agree or disagree with our recommendation in its  comments.  In response to the recommendation, SSA noted that recent  OCACT memos had added an additional table (“table d”) that, SSA  believes, already provides key information on general revenue use in  proposals.  SSA also expressed the view that a summary table showing the  effects on the actuarial deficit of each proposal provision would be  helpful.  As our report had noted, this table has been included in some  memoranda at the request of the proposal’s sponsor.
While we agree with SSA that both the technical and summary table it  describes add value, we remain of the view that OCACT needs to develop  a new table that can clearly and quickly communicate both trust fund  effects and federal budget implications of a proposal.  Our report  acknowledged the value and completeness of OCACT’s analyses including  those presented in “table d.”  The message of our report was not that  OCACT needs to do additional analytic work.  Our message was rather  that OCACT’s existing analyses need to be summarized and highlighted so  that a proposal’s implications for both the trust fund and the federal  budget as a whole are immediately clear.
Neither of SSA’s two suggestions is fully responsive to this goal.  SSA itself  noted in its comments that “table d” is “somewhat complicated.”  With  regard to the summary table showing how each provision affects the  actuarial deficit, we agree that this table adds considerable value and can  help facilitate certain types of comparisons across plans.  It does not,  however, make clear how each provision or the proposal as a whole would  affect the federal budget.  It is this kind of information, now available only  to experienced users of OCACT memos, that needs to be made more  accessible.  Given the long-term fiscal challenge facing the Nation, the  reform debate needs to take place not simply in the context of trust fund  solvency but also in the larger context of the federal budget as a whole.
SSA also provided technical comments, which we incorporated as  appropriate.
We are sending copies of this report to the Commissioner of Social  Security as well as other interested parties. Copies will also be made  available to others upon request. In addition, the report will be available at  no charge on the GAO Web site at http://www.gao.gov. Please contact  Susan Irving at (202) 512-9142 or Barbara Bovbjerg at (202) 512-7215 if you  have any questions about this report.  Key contributors to this assignment  were Jay McTigue, Joseph Applebaum, Jennifer Ashford, Linda Baker,  Michael Collins, and Melissa Wolf.
section_title: Appendix I: Scope and Methodology
paragraphs: To answer the questions in this report, we reviewed relevant historical  documents and other literature on Social Security, including GAO reports  and testimonies. We undertook a review of the 26 OCACT proposal  scoring memos done from 2001 through 2006, ultimately performing an in- depth analysis of 17 of those scoring memos. We eliminated nine of the  scoring memos either because they were proposals that were scored in  multiple years or because they were not scored by OCACT as able to pay  plan benefits in full throughout the 75-year period. Most of the 17  proposals were characterized by OCACT as meeting its definition of  “sustainably solvent.” We also reviewed proposal scorings done by  Congressional Budget Office (CBO) and met with officials from OCACT  and CBO who were responsible for proposal scorings. To enhance our  understanding of the relationship between Social Security and the federal  budget, we interviewed selected federal budget experts from think tanks  and other policy organizations who represented a range of views on  reform approaches. Some of these experts were former officials of the  Social Security Administration and/or Congressional Budget Office.
Our analysis, like the scorings of the Office of the Chief Actuary and recent  scorings by CBO, is limited to first order effects of reform changes.  Accordingly, second order effects of proposed reforms on the federal  budget, such as effects on economic growth, are beyond the scope of this  report. This report also does not address the effects of general revenue use  on program equity. As discussed in other GAO work, the use of significant  amounts of general revenue transfers could change program equity in  ways that are difficult to quantify.
section_title: Appendix II: Comments from the Social Security Administration
section_title: Glossary of Terms
paragraphs: The majority of the definitions provided here are from the Social Security  Administration, The 2006 Annual Report of the Board of Trustees of the  Federal Old-Age and Survivors Insurance and Disability Insurance  Trust Funds (Washington, D.C.: May 1, 2006) and GAO, A Glossary of  Terms Used in the Federal Budget Process, GAO-05-734SP (Washington,  D.C.: September 2005).
subsections: section_title: Actuarial balance
paragraphs: The difference between the summarized income rate and the summarized  cost rate over a given valuation period.
section_title: Actuarial deficit
paragraphs: A negative actuarial balance.
section_title: Assumptions
paragraphs: Values relating to future trends in certain key factors which affect the  balance in the trust funds. Three sets of demographic, economic, and  program-specific assumptions are presented in the annual Trustees’  report.
Demographic assumptions include fertility, mortality, net immigration,  marriage, and divorce.
Economic assumptions include unemployment rates, average earnings,  inflation, interest rates, and productivity.
Program-specific assumptions include retirement patterns, and disability  incidence and termination rates.
The three sets of assumptions are described as follows:   Alternative II is the intermediate set of assumptions, and represents the  Trustees’ best estimates of likely future conditions.
Alternative I is characterized as a low cost set—it assumes relatively rapid  economic growth, low inflation, and favorable (from the standpoint of  program financing) demographic conditions.
Alternative III is characterized as a high cost set—it assumes relatively  slow economic growth, high inflation, and unfavorable (from the  standpoint of program financing) demographic conditions.
In its estimates of reform proposals, OCACT uses the intermediate set of  assumptions, which represents the Trustees’ best estimates of likely future  demographic, economic, and program-specific conditions.
section_title: Board of Trustees
paragraphs: A Board established by the Social Security Act to oversee the financial  operations of the Federal Old-Age and Survivors Insurance Trust Fund and  the Federal Disability Insurance Trust Fund. The Board is composed of six  members, four of whom serve automatically by virtue of their positions in  the federal government: the Secretary of the Treasury, who is the  Managing Trustee, the Secretary of Labor, the Secretary of Health and  Human Services, and the Commissioner of Social Security. The other two  members are appointed by the President to serve as public  representatives.
section_title: Constant dollars
paragraphs: Amounts adjusted by the consumer price index (CPI) to the value of the  dollar in a particular year.
section_title: Cost rate
paragraphs: The cost rate for a year is the ratio of the cost of the program to the  taxable payroll for the year. In this context, the cost is defined to include  scheduled benefit payments, special monthly payments to certain  uninsured persons who have 3 or more quarters of coverage (and whose  payments are therefore not reimbursable from the General Fund of the  Treasury), administrative expenses, net transfers from the trust funds to  the Railroad Retirement program under the financial-interchange  provisions, and payments for vocational rehabilitation services for  disabled beneficiaries; it excludes special monthly payments to certain  uninsured persons whose payments are reimbursable from the General  Fund of the Treasury, and transfers under the interfund borrowing  provisions.
section_title: Covered earnings
paragraphs: Earnings in employment covered by the Old-Age Survivors and Disability  Insurance program.
section_title: Current dollar
paragraphs: “In current dollars” means valued in the prices of the current year.  Amounts are expressed in nominal dollars with no adjustment for  inflationary changes in the value of the dollar over time. The current dollar  value of a good or service is its value in terms of prices current at the time  the good or service is acquired or sold.
section_title: Debt held by government accounts
paragraphs: Federal debt owed by the federal government to itself. Most of this debt is  held by trust funds, such as Social Security and Medicare. The Office of  Management and Budget (OMB) contrasts it to debt held by the public by  noting that it is not a current transaction of the government with the  public; it is not financed by private saving and thus does not compete with  the private sector for available funds in the credit market; and it does not  represent an obligation to make payments to the public.
section_title: Debt held by the public
paragraphs: That portion of the gross federal debt held outside of the federal  government. This includes any federal debt held by individuals,  corporations, state or local governments, the Federal Reserve System, and  foreign governments and central banks. Debt held by government  accounts (intragovernmental debt) is excluded from debt held by the  public. Debt held by the public is not the same as public debt or Treasury  debt.
section_title: Exhaustion Date
paragraphs: As reported in the Trustees’ Report and for the purposes of this report, the  year in which the OASDI trust fund would become unable to pay currently- scheduled benefits when due because the assets of the fund were  exhausted.
section_title: General fund of the Treasury
paragraphs: Funds held by the Treasury of the United States, other than receipts  collected for a specific purpose (such as Social Security) and maintained  in a separate account for that purpose.
section_title: General revenue
paragraphs: For a discussion of how it is defined for the purposes of this report, see  page 6.
section_title: Income rate
paragraphs: Ratio of income from tax revenues on a liability basis (payroll tax  contributions and income from the taxation of scheduled benefits) to the  OASDI taxable payroll for the year.
section_title: Inflation
paragraphs: An increase in the volume of money and credit relative to available goods,  resulting in an increase in the general price level.
section_title: Interest
paragraphs: A payment in exchange for the use of money during a specified period.
section_title: Interest rate
paragraphs: For the OASDI trust funds, interest rates on new public-debt obligations  issuable to federal trust funds are determined monthly. Such rates are set  equal to the average market yield on all outstanding marketable U.S.  securities not due or callable until after 4 years from the date the rate is  determined. The effective interest rate for a trust fund is the ratio of the  interest earned by the fund over a given period of time to the average level  of assets held by the fund during the period. The effective rate of interest  thus represents a measure of the overall average interest earnings on the  fund’s portfolio of assets.
section_title: Long range
paragraphs: The next 75 years. Long-range actuarial estimates are made for this period  because it is approximately the maximum remaining lifetime of current  Social Security participants.
section_title: Maximum taxable limit
paragraphs: The limit or “cap” on covered earnings that are subject to the 12.4 percent  payroll tax and that can be used in the benefit formula, thereby limiting  the size of taxes and benefits. This “cap” is indexed annually for average  wage growth and therefore it changes every year. In 2007, the taxable  maximum limit is $97,500.
section_title: Nominal dollar
paragraphs: See under Current dollar.
section_title: Outlay
paragraphs: The issuance of checks, disbursement of cash, or electronic transfer of  funds made to liquidate a federal obligation. Outlays during a fiscal year  may be for payment of obligations incurred in prior years (prior-year  obligations) or in the same year. Outlays, therefore, flow in part from  unexpended balances of prior-year budgetary resources and in part from  budgetary resources provided for the year in which the money is spent.  Total government outlays include outlays of off-budget federal entities,  such as the Social Security trust fund.
A financing method where taxes are scheduled to produce just as much  income as required to pay current benefits, with trust fund assets built up  only to the extent needed to prevent exhaustion of the fund by random  economic fluctuations.
section_title: Payroll taxes
paragraphs: A tax levied on the gross wages of workers.
section_title: Present value
paragraphs: The equivalent value, at the present time, of a future stream of payments  (either income or cost). The present value of a future stream of payments  may be thought of as the lump-sum amount that, if invested today,  together with interest earnings would be just enough to meet each of the  payments as they fell due. Present values are widely used in calculations  involving financial transactions over long periods of time to account for  the time value of money (interest). For the purpose of present-value  calculations for this report, values are discounted by the effective yield on  trust fund assets.
section_title: Solvency
paragraphs: A program is solvent at a point in time if it is able to pay scheduled  benefits when due with scheduled financing. For example, the OASDI  program is considered solvent over any period for which the trust funds  maintain a positive balance throughout the period.
section_title: Summarized balance
paragraphs: The difference between the summarized cost rate and the summarized  income rate, expressed as a percentage of taxable payroll.
section_title: Summarized cost rate
paragraphs: The ratio of the present value of cost to the present value of the taxable  payroll for the years in a given period, expressed as a percentage. This  percentage can be used as a measure of the relative level of cost during the  period in question. For purposes of evaluating the financial adequacy of  the program, the summarized cost rate is adjusted to include the cost of  reaching and maintaining a target trust fund level. Because a trust fund  level of about 1 year’s cost is considered to be an adequate reserve for  unforeseen contingencies, the targeted trust fund ratio used in  determining summarized cost rates is 100 percent of annual cost.  Accordingly, the adjusted summarized cost rate is equal to the ratio of   (a) the sum of the present value of the cost during the period plus the  present value of the targeted ending trust fund level, to (b) the present  value of the taxable payroll during the projection period.
section_title: Summarized income rate
paragraphs: The ratio of the present value of scheduled tax income to the present value  of taxable payroll for the years in a given period, expressed as a  percentage. This percentage can be used as a measure of the relative level  of income during the period in question. For purposes of evaluating the  financial adequacy of the program, the summarized income rate is  adjusted to include assets on hand at the beginning of the period.  Accordingly, the adjusted summarized income rate equals the ratio of   (a) the sum of the trust fund balance at the beginning of the period plus  the present value of the total income from taxes during the period, to   (b) the present value of the taxable payroll for the years in the period.
section_title: Sustainable solvency
paragraphs: As defined by OCACT, sustainable solvency for the financing of the  program is achieved when the program has positive trust fund ratios  throughout the 75-year projection period and these ratios are stable or  rising at the end of the period.
section_title: Taxable earnings
paragraphs: Wages and/or self-employment income, in employment covered by the  OASDI and/or Hospital Insurance (HI) programs, that is under the  applicable annual maximum taxable limit. For 1994 and later, no  maximum taxable limit applies to the HI program.
section_title: Taxable payroll
paragraphs: A weighted average of taxable wages and taxable self-employment income.  When multiplied by the combined employee-employer tax rate, it yields  the total amount of taxes incurred by employees, employers, and the self- employed for work during the period.
section_title: Taxable wages
paragraphs: See under “Taxable earnings.”
section_title: Trust fund
paragraphs: As discussed in this report, the OASDI trust funds are separate accounts in  the United States Treasury in which are deposited the taxes received  under the Federal Insurance Contributions Act and the Self-Employment  Contributions Act, as well as taxes resulting from coverage of state and  local government employees; any sums received under the financial  interchange with the railroad retirement account; voluntary hospital and  medical insurance premiums; and transfers of Federal general revenues.  Funds not withdrawn for current monthly or service benefits, the financial  interchange, and administrative expenses are invested in interest-bearing  federal securities, as required by law; the interest earned is also deposited  in the trust funds.
Old-Age and Survivors Insurance (OASI). The trust fund used for paying  monthly benefits to retired-worker (old-age) beneficiaries and their  spouses and children and to survivors of deceased insured workers.
Disability Insurance (DI). The trust fund used for paying monthly benefits  to disabled-worker beneficiaries and their spouses and children and for  providing rehabilitation services to the disabled.
Hospital Insurance (HI). The trust fund used for paying part of the costs of  inpatient hospital services and related care for aged and disabled  individuals who meet the eligibility requirements. Also known as Medicare  Part A.
section_title: Trust fund ratio
paragraphs: A measure of the adequacy of the trust fund level. Defined as the assets at  the beginning of the year expressed as a percentage of the cost during the  year. The trust fund ratio represents the proportion of a year’s cost which  could be paid with the funds available at the beginning of the year.
section_title: Unified budget
paragraphs: Under budget concepts set forth in the Report of the President’s  Commission on Budget Concepts, a comprehensive budget in which  receipts and outlays from federal and trust funds are consolidated. When  these fund groups are consolidated to display budget totals, transactions  that are outlays of one fund group for payment to the other fund group  (that is, interfund transactions) are deducted to avoid double counting.  The unified budget should, as conceived by the President’s Commission,  take in the full range of federal activities. By law, budget authority,  outlays, and receipts of off-budget programs (currently only the Postal  Service and Social Security) are excluded from the current budget, but  data relating to off-budget programs are displayed in the budget  documents. However, the most prominent total in the budget is the unified  total, which is the sum of the on- and off-budget totals.