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Testimony: Before the Subcommittee on the Budget, House of 

For Release on Delivery Expected at 10 a.m. Wednesday, June 19, 2002:

Social Security: Long-Term Financing Shortfall Drives Need for Reform:

Statement of David M. Walker, Comptroller General of the United States:


Mr. Chairman and Members of the Committee:

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, [Footnote 1] 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 

[Footnote 2] 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 [Footnote 

3] 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 

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 

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 

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, [Footnote 4] 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.

Social Security’s Long- Term Financing Problem Is More Urgent Than May 


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 


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.

Demographic Trends Drive Social Security’s Long-Term Financing Problem:

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.):

Figure 1: Social Security Workers per Beneficiary:

[See PDF for image]

Note: Projections based on intermediate assumptions of the 2002 

Trustees’ Report.

Source: The 2002 Annual Report of the Board of Trustees of the Federal 

Old-Age and Survivors Insurance and Disability Insurance Trust Funds.

[End of Figure]

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.

Figure 2: Labor Force Growth Is Expected to be Negligible by 2050:

[See PDF for image]

Note: Projections based on intermediate assumptions of the 2002 

Trustees’ Report.

Source: GAO analysis of data from the Office of the Chief Actuary, 

Social Security Administration.

[End of Figure]

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, [Footnote 5] 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 


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. 

[Footnote 6] (See fig. 3.):

Figure 3: Social Security Cost and Income as a Percent of Taxable 

[See PDF for image]

Note: Projections based on intermediate assumptions of the 2002 

Trustees’ Report.

Source: The 2002 Annual Report of the Board of Trustees of the Federal 

Old-Age and Survivors Insurance and Disability Insurance Trust Funds.

[End of Figure]

Social Security Trust Funds, Cash Flow, and the Federal Budget:

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. [Footnote 7] 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 


I think it is useful to pause for a moment here and reflect on what the 

term “trust fund” means in the federal budget. [Footnote 8] 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. [Footnote 9]

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. [Footnote 10] 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.

Social Security’s Cash Flow Is Expected to Turn Negative in 2017:

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.):

Figure 4: Social Security’s (OASDI) Trust Funds Face Cash Deficits as 

Boomers Retire:

[See PDF for image]

Source: GAO analysis of data from the Office of the Chief Actuary, 

Social Security Administration, based on the intermediate assumptions 

of 2002 Annual Report of the Board of Trustees of the Federal Old-Age 

and Survivors Insurance and Disability Insurance Trust Funds.

[End of Figure]

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. [Footnote 11] 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.

Decline in Budgetary Flexibility Will Be Severely Exacerbated Absent 

Entitlement Reform:

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.):

Figure 5: Federal Spending for Mandatory and Discretionary Programs, 
Fiscal Years 

1962, 1982, and 2002:

[See PDF for image]

* Office of Management and Budget current services estimate.

Source: GAO analysis of data from the Office of Management and Budget.

[End of Figure]

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. [Footnote 

12] 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.

Figure 6: Composition of Spending as a Share of Gross Domestic Product 

Assuming Discretionary Spending Grows with GDP and the Tax Cuts Do Not 


[See PDF for image]

Source: GAO’s March 2002 analysis.

[End of Figure]

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.

Figure 7: Social Security, Medicare, and Medicaid Spending as a Percent 
of GDP:

[See PDF for image]

Note: Projections based on intermediate assumptions of the 2002 

Trustees’ Reports and CBO’s January 2002 long-term projections under 

midrange assumptions.

Source: Office of the Chief Actuary, Social Security Administration; 

Office of the Actuary, Centers for Medicare and Medicaid Services; and 


[End of Figure]

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. [Footnote 13] 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. [Footnote 14] 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.

Figure 8: Size of Action Needed to Achieve Social Security Solvency:

[See PDF for image]

Note: The benefit adjustments in this graph represent a one-time, 

permanent change to all existing and future benefits beginning in the 

first year indicated.

Source: GAO analysis of data from the Office of the Chief Actuary, 

Social Security Administration.

[End of Figure]

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.

Evaluating Social Security Reform Proposals:

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 

would affect the economy and the federal budget;

* the relative balance struck between the goals of individual equity 

income adequacy; 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.

Financing Sustainable Solvency:

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 


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 


Balancing Adequacy and Equity:

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.

Implementing and Administering Proposed Reforms:

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.


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.

Today many retirees and near-retirees fear cuts that will affect them 

while young people believe they will get little or no Social Security 

benefits. As I said at the start of my testimony, we believe it is 

possible to structure a Social Security reform proposal that will 

exceed the expectations of all generations of Americans. Yes, we 

believe there is a window of opportunity 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. However, this window of opportunity will close as the baby 

boom generation begins to retire. As a result, we must move forward to 

address Social Security because we have other major challenges 

confronting us. The fact is, compared to addressing our long-range 

health care financing problem, reforming Social Security will be easy 


It is my hope that we will think about the unprecedented challenge 

facing future generations in our aging society. Relieving them of some 

of the burden of today’s financing commitments would help fulfill this 

generation’s stewardship responsibility to future generations. It would 

also preserve some capacity for them to make their own choices by 

strengthening both the budget and the economy they inherit. We need to 

act now to address the structural imbalances in Social Security, 

Medicare, and other entitlement programs before the approaching 

demographic tidal wave makes the imbalances more difficult, dramatic, 

and disruptive.

We at GAO look forward to continuing to work with this Committee and 

the Congress in addressing this and other important issues facing our 


Mr. Chairman, Mr. Spratt, members of the Committee, that concludes my 

statement. I’d be happy to answer any questions you may have.



[1] U.S. General Accounting Office, Social Security: Criteria for 

Evaluating Social Security Reform Proposals, GAO/T-HEHS-99-94 

(Washington, D.C.: Mar. 25, 1999); Social Security: The President’s 

Proposal, GAO/T-HEHS/AIMD-00-43 (Washington, D.C.: Nov. 9, 1999); 

Budget Issues: Long-Term Fiscal Challenges, GAO-02-467T (Washington, 

D.C.: Feb. 27, 2002).

[2] In this testimony, the term “Trust Funds” refers to the Old-Age and 

Survivors Insurance and Disability Insurance Trust Funds.

[3] Strengthening Social Security and Creating Personal Wealth for All 

Americans (Dec. 21, 2001; rev. March 19, 2002).

[4] This calendar year estimate is based on projected tax receipts and 

outlays in constant 2002 dollars under the intermediate assumptions of 

the 2002 Trustees Report.

[5] United Nations Population Division, Replacement Migration: Is it a 

Solution to Declining and Ageing Populations? (March 2000).

[6] Income tax revenue resulting from taxation of up to 50 percent of 

Social Security benefits for certain higher income beneficiaries is 

credited to the OASI and DI Trust Funds and provided a little more than 

2 percent of total income in 2001.

[7] Under current law, the Secretary of the Treasury as trustee may 

purchase marketable Treasury and agency securities if the Secretary 

determines that such purchase is “in the public interest.” Such 

purchases have been rare. As of the end of calendar year 2001, about 

0.003 percent of OASDI trust fund holdings were in marketable Treasury 


[8] For a discussion of trust funds and other earmarked funds in the 

budget, see U.S. General Accounting Office, Federal Trust and Other 

Earmarked Funds: Answers to Frequently Asked Questions, GAO-01-199SP 

(Washington D.C.: Jan. 2001).

[9] Under current accounting standards, the long-term funding gap--the 

difference between promised benefits and expected contributions--for 

Social Security and Medicare is reported as required supplementary 

stewardship information but not treated as a liability in the 

government’s financial statements. The recognized liability is the 

amount of benefits due and payable to or on behalf of beneficiaries at 

the end of the reporting period.

[10] Separately, the DI fund is projected to be exhausted in 2028 and 

the OASI fund in 2043.

[11] If the unified budget is in surplus at this point, then financing 

the excess benefits will require less debt redemption rather than 

increased borrowing.

[12] This simulation assumes that all promised benefits would be paid 

in full throughout the 75-year projection period.

[13] Testimony before the Committee on Banking, Housing, and Urban 

Affairs, U. S. Senate, July 24, 2001.

[14] Solvency could also be 

achieved through a combination of tax and benefit actions. This would 

reduce the magnitude of the required change in taxes or benefits 

compared to making changes exclusively to taxes or benefits as shown in 

figure 8.