This is the accessible text file for GAO report number GAO-03-376T 
entitled 'Social Security: Analysis of Issues and Selected Reform 
Proposals' which was released on January 15, 2003.



This text file was formatted by the U.S. General Accounting Office 

(GAO) to be accessible to users with visual impairments, as part of a 

longer term project to improve GAO products’ accessibility. Every 

attempt has been made to maintain the structural and data integrity of 

the original printed product. Accessibility features, such as text 

descriptions of tables, consecutively numbered footnotes placed at the 

end of the file, and the text of agency comment letters, are provided 

but may not exactly duplicate the presentation or format of the printed 

version. The portable document format (PDF) file is an exact electronic 

replica of the printed version. We welcome your feedback. Please E-mail 

your comments regarding the contents or accessibility features of this 

document to Webmaster@gao.gov.



Testimony:



Before the Special Committee on Aging, U.S. Senate:



United States General Accounting Office:



GAO:



For Release on Delivery Expected at 9:30 a.m. EST:



Wednesday, January 15, 2003:



social Security:



Analysis of Issues and Selected Reform Proposals:



Statement of David M. Walker

Comptroller General of the United States:



GAO-03-376T:



Mr. Chairman and Members of the Committee:



Thank you for inviting me here to talk about our nation’s Social 

Security program and how to address the challenges presented in 

ensuring the long-term viability of this system. Social Security not 

only represents the foundation of our retirement income system; it also 

provides millions of Americans with disability insurance and survivors’ 

benefits. As a result, Social Security provides benefits that are 

critical to the current and future well-being of tens of millions of 

Americans. 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. 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 a commission 

established by the President has presented three models for modifying 

the current program. The Commission’s final report[Footnote 2] called 

for a period of discussion lasting at least a year before legislative 

action is taken to strengthen and restore sustainability to Social 

Security. Today we are issuing the GAO report you requested on the 

Commission’s options.[Footnote 3] At your request, we have also done a 

qualitative review of three other proposals introduced in the 107th 

Congress. In my testimony today I will discuss not only our report but 

also the broader issue of Social Security. I hope my testimony will 

help clarify some of the key issues in the debate about how to 

restructure this critically important program.



First, let me highlight a number of important points in connection with 

the Social Security challenge.



* Social Security reform is part of a broader fiscal and economic 

challenge. If you look ahead in the federal budget, the combined Social 

Security or Old-Age and Survivors Insurance and Disability Insurance 

(OASDI) program together with the rapidly growing health programs 

(Medicare and Medicaid) will dominate the federal government’s future 

fiscal outlook. Under our long-term simulations, it continues to be the 

case that these programs increasingly constrain federal budgetary 

flexibility over the next few decades. Absent reform, the nation will 

ultimately have to choose between persistent, escalating federal 

deficits, significant tax increases, and/or dramatic budget cuts.



* Focusing on trust fund solvency alone is not sufficient. We need to 

put the program on a path toward sustainable solvency. Trust fund 

solvency is an important concept, but focusing on trust fund solvency 

alone can lead to a false sense of security about the overall condition 

of the Social Security program. The size of the trust fund does not 

tell us whether the program is sustainable--that is, whether the 

government will have the capacity to pay future claims or what else 

will have to be squeezed to pay those claims. Aiming for sustainable 

solvency would increase the chance that future policymakers would not 

have to face these difficult questions on a recurring basis. Estimates 

of what it would take to achieve 75-year trust fund solvency understate 

the extent of the problem because the program’s financial imbalance 

gets worse in the 76th and subsequent years.



* Solving Social Security’s long-term financing problem is more 

important and complex than simply making the numbers add up. Social 

Security is an important and successful social program that affects 

virtually every American family. It currently pays benefits to more 

than 45 million people, including retired workers, disabled workers, 

the spouses and children of retired and disabled workers, and the 

survivors of deceased workers. The number of individuals receiving 

benefits is expected to grow to almost 69 million by 2020. The program 

has been highly effective at reducing the incidence of poverty among 

the elderly, and the disability and survivor benefits have been 

critical to the financial well-being of millions of others.



* Given the current projected financial shortfall of the program, it is 

important to compare proposals to at least two funded benchmarks--one 

that funds currently scheduled benefits and one that adjusts to current 

tax financing. Comparing the beneficiary impact of reform proposals 

solely to currently scheduled Social Security benefits is inappropriate 

since all current scheduled benefits are not funded over the longer 

term. As a result, comparisons to currently scheduled 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 inappropriate since that 

assumes a future sudden and sharp reduction in benefits that is not 

likely to occur. The key point is that there is a significant gap 

between scheduled benefits and projected revenues. In fact, a primary 

purpose of most Social Security reform proposals is to close or 

eliminate this gap.



* Reform proposals should be evaluated as packages. The elements of any 

package interact; every package will have pluses and minuses, and no 

plan will satisfy everyone on all dimensions. If we focus on the pros 

and cons of each element of reform, it may prove impossible to build 

the bridges necessary to achieve consensus.



* Acting sooner rather than later helps to ease the difficulty of 

change. As I noted previously, the challenge of facing the imminent and 

daunting budget pressure from Medicare, Medicaid, and OASDI increases 

over time. Social Security will begin to constrain the budget long 

before the trust funds[Footnote 4] are exhausted in 2041. The program’s 

annual cash flow is projected to be negative beginning in 2017. 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 to only those choices that are the most difficult. 

It could also contribute to further delay the really tough decisions on 

health programs (e.g., 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. It would also 

help to ensure that the “miracle of compounding” works for us rather 

than against us.



Our Social Security challenge is more urgent than it may appear. 

Failure to take remedial action will, in combination with other 

entitlement spending, lead to a situation unsustainable both for the 

federal 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 and their families from living their retirement years in 

poverty. As the Congress considers proposals to restore the long-term 

financial stability and viability of the Social Security system, it 

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 even more urgent fiscal challenge.



To assist the Congress in its deliberations, we have 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.



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

May Appear:



Today the Social Security program faces not 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.” 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 1950, before the Social Security 

system was mature, the ratio was 16.5. 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]



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

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



Note: Projections based on intermediate assumptions of the 2002 

Trustees’ Report.



[End of figure]



The combination of these trends means that labor force growth will 

begin to slow after 2010 and by 2025 is expected to be less than a 

third of what it is today. (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]



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

Social Security Administration.



Note: Projections based on intermediate assumptions of the 2002 

Trustees’ Report.



[End of figure]



This slowing labor force growth is not always recognized 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.



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, combined program outlays begin to exceed dedicated tax 

receipts in 2017 (see fig. 3), a year after Medicare’s Hospital 

Insurance (HI) Trust Fund 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.



Figure 3: Social Security’s Trust Funds Face Cash Deficits as Baby 

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 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]



Although the Trustees’ intermediate estimates show that the combined 

Social Security Trust Funds will be solvent until 2041,[Footnote 5] 

program spending will constitute a rapidly growing share of the budget 

and the economy well before that date. Ultimately, the critical 

question is not how much a trust fund has in assets, but whether the 

government as a whole can afford the 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.



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. 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 6] Neither the 

decline in the cash surpluses nor the cash deficit will affect the 

payment of benefits. The shift will, however, affect 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 Disappears 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. In 1962, 

prior to the creation of the Medicare and Medicaid programs, spending 

for mandatory programs 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. 4.):



Figure 4: Federal Spending for Mandatory and Discretionary Programs, 

Fiscal Years 1962, 1982, and 2002:



[See PDF for image]



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



[A] Office of Management and Budget current services estimate.



[End of figure]



In much of the last decade, reductions in defense spending helped 

accommodate the growth in these entitlement programs. Even before the 

events of September 11, 2001, however, this ceased to be a viable 

option. Indeed, spending on defense and homeland security will grow as 

we seek to combat new threats to our nation’s security.



We prepared long-term budget simulations that seek to illustrate the 

likely fiscal consequences of the coming demographic tidal wave and 

rising health care costs. These 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 in 

2001 do not sunset and discretionary spending keeps pace with the 

economy, by mid-century federal revenues may only be adequate to pay 

Social Security and interest on the federal debt. [Footnote 7] Spending 

for the current Medicare program--without the addition of a drug 

benefit--is projected to account for more than one-quarter of all 

federal revenues. To obtain balance, massive spending cuts, tax 

increases, or some combination of the two would be necessary. (See fig. 

5.) Neither slowing the growth of discretionary spending nor allowing 

the tax reductions to sunset eliminates the imbalance.



Figure 5: Composition of Spending as a Share of Gross Domestic Product 

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

Sunset, and Currently Scheduled Social Security Benefits:



[See PDF for image]



Source: GAO’s August 2002 analysis.



[End of figure]



Although this figure assumes payment of currently scheduled Social 

Security benefits, the long-term fiscal imbalance would not be 

eliminated even if Social Security benefits were to be limited to 

currently projected trust fund revenues. This is because Medicare (and 

Medicaid)--spending for which is driven by both demographics and rising 

health care costs--present an even greater problem. Absent a change in 

design, these two health programs together are projected to nearly 

triple as a share of gross domestic product (GDP) over the next half-

century.



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. We are 

developing a health care framework to help focus additional attention 

on this important area and to help educate key policymakers on the 

current system and related challenges.



Indeed, long-term budget flexibility is about more than Social Security 

and Medicare. While these programs dominate the long-term outlook, they 

are not the only federal programs or activities that bind the future. 

The federal government undertakes a wide range of programs, 

responsibilities, and activities that obligate it to future spending or 

create an expectation for spending. We have work underway regarding how 

to describe the range and measurement of such fiscal exposures--from 

explicit liabilities such as environmental cleanup requirements to the 

more implicit obligations presented by life-cycle costs of capital 

acquisition or disaster assistance. Making government fit the 

challenges of the future will require not only dealing with the 

drivers--entitlements for the elderly--but also looking at the range of 

federal activities. A fundamental review of what the federal government 

does and how it does it will be needed.



At the same time it is important to look beyond the federal budget to 

the economy as a whole. Figure 6 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 most recent long-term Medicaid estimates, spending for these 

entitlement programs combined will grow to 13.9 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 6: Social Security, Medicare, and Medicaid Spending as a Percent 

of GDP:



[See PDF for image]



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

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

CBO.



Note: Projections based on intermediate assumptions of the 2002 

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

range assumptions.



[End of figure]



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 Alan 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 8] The 

most direct way the federal government can raise national saving is by 

increasing government saving, that is, as the economy returns to a 

higher growth path, a balanced fiscal policy that recognizes our long-

term challenges can help provide a strong foundation for future 

economic growth and can enhance future budgetary flexibility.



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. Some of 

the benefits of early action--and the costs of delay--can be seen in 

figure 7. This compares what it would take to achieve actuarial balance 

at different points in time by either raising payroll taxes or reducing 

benefits.[Footnote 9] Figure 7 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 7 shows, earlier action 

shrinks the size of the necessary adjustment.



Figure 7: Size of Action Needed to Achieve Social Security Solvency:



[See PDF for image]



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

Social Security Administration.



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.



[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. Social 

Security 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, we have developed a broad 

framework for evaluating reform proposals that considers not only 

solvency but other aspects of the program as well.



The analytic framework we have developed to assess proposals comprises 

three basic criteria:



* the extent to which a proposal achieves sustainable solvency and how 

it would affect the economy and the federal budget;



* the relative balance struck between the goals of individual equity 

and 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:



Our sustainable solvency standard encompasses several different ways of 

looking at the Social Security program’s financing needs. While 75-year 

actuarial balance is generally used in evaluating the long-term 

financial outlook of the Social Security program and reform proposals, 

it is not sufficient in gauging the program’s solvency after the 75th 

year. For example, under the Trustees’ intermediate assumptions, each 

year the 75-year actuarial period changes, and a year with a surplus is 

replaced by a new 75th year that has a significant deficit. As a 

result, changes made to restore trust fund solvency only for the 75-

year period can result in future actuarial imbalances almost 

immediately. Reform plans that lead to sustainable solvency would be 

those that consider the broader issues of fiscal sustainability and 

affordability over the long term. Specifically, a standard of 

sustainable solvency also involves looking at (1) the balance between 

program income and cost beyond the 75th year and (2) the share of the 

budget and economy consumed by Social Security spending.



As I have already discussed, reducing the relative future burdens of 

Social Security and health programs is essential to a sustainable 

budget policy for the longer term. It is also critical if we are to 

avoid putting unsupportable financial pressures on future workers. 

Reforming Social Security and federal health programs is essential to 

reclaiming our future fiscal flexibility to address other national 

priorities.



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.



Range of Proposals Illustrates Options for Reform and Choices to

be Made:



Over the course of the last several years, various reform proposals 

have been crafted. Many proposals involve restructuring the Social 

Security program to include individual retirement accounts. These 

individual accounts are similar to defined contribution pension plans 

in that benefits are based on contributions to and investment returns 

(gains and losses) on the accounts. This approach offers the potential 

for increased investment returns, but, depending on the design of the 

reform, may expose retirees and/or the government to investment risk. 

Increasing rates of return through investment in private securities, 

whether through individual accounts or collective government 

investment, cannot achieve sustainable solvency without additional 

changes to the current system.



There has been considerable variation in the individual account 

proposals introduced in the past couple of years. For example, some 

earlier proposals required that individuals participate in the accounts 

while more recent proposals provide individuals with the choice of 

whether or not to participate. As you know, Mr. Chairman, we are 

currently working on a report to be released next month that examines 

the unique issues surrounding voluntary individual accounts. Individual 

account proposals also differ in other areas, such as the manner in 

which accounts are financed, how the accounts interact with the 

existing Social Security program, the extent of choice and flexibility 

concerning investment options, and the way in which benefits are paid 

from the account balances.



A number of Social Security reform proposals were introduced in the 

107th Congress. At your request, we have done a qualitative review of 

the proposals introduced last year by Representatives Shaw, De Mint, 

and DeFazio. These three proposals illustrate different approaches to 

reform. Representative Shaw introduced a new reform proposal last week-

-which we have not had a chance to look at--and we realize that other 

proposals may undergo some revisions as well. Like the Commission 

models, the proposals by Representatives DeMint and Shaw included 

voluntary individual accounts. All three proposals included significant 

revenue enhancements, and two of them (Rep. DeMint and Rep. Shaw) 

included a guarantee of future benefits at least as large as currently 

scheduled levels. Some of these plans include general revenue 

transfers, collective investment of some portion of trust fund assets 

in private securities, and eliminating the cap on the maximum amount of 

earnings subject to the payroll tax. In addition, some include 

provisions that would reduce future expenditures, such as an individual 

account offset against Social Security retirement and aged survivor 

benefits and an increase in the number of benefit computation years in 

the benefit formula.



As I noted previously, last year the President’s Commission to 

Strengthen Social Security issued a report containing three reform 

models. At your request, we looked at the Commission’s proposals and is 

today issuing a report on our findings. Each of the Commission’s three 

reform models represents a different approach to including a voluntary 

individual account option to Social Security. Model 1 adds individual 

accounts to the current system but does not restore solvency. Models 2 

and 3 restore solvency to the Old-Age and Survivors Insurance and 

Disability Insurance Trust Funds through a combination of changes in 

the initial benefit calculation, general revenue transfers, and/or 

benefit offsets for those who choose to participate in the individual 

account option. Model 3 also requires an additional contribution equal 

to 1 percent of taxable payroll under the voluntary individual account 

option. All models share a common framework for administering 

individual accounts.



Examining the Effects of Reform Using the Commission’s Proposals:



Applying our criteria to the Commission models highlights trade-offs 

between efforts to achieve sustainable solvency and maintain adequate 

retirement income for current and future beneficiaries. The models 

illustrate some of the options and trade-offs that will need to be 

considered as the nation debates how to reform Social Security.



We used our long-term economic model in assessing the Commission reform 

models against the first criterion, that of financing sustainable 

solvency.[Footnote 10] Over the past few years, we have been developing 

a capacity to estimate the quantitative effects of Social Security 

reform on individuals. Such estimates are useful in applying our 

adequacy/equity criterion to reform proposals. To examine how the 

Commission reform models balance adequacy and equity concerns, we used 

the GEMINI model, a dynamic microsimulation model for analyzing the 

lifetime implications of Social Security policies for a large sample of 

people born in the same year. Our analysis examined the effects of the 

reform models for the 1955, 1970, and 1985 birth cohorts. To show the 

range of possible outcomes given the voluntary nature of individual 

accounts in the Commission models,[Footnote 11] we simulated each model 

assuming (1) no participation in the individual account option and (2) 

universal participation in the account option.



Our analysis of the Commission reform models included comparison with 

three benchmarks:[Footnote 12]



* The “benefit reduction benchmark” assumes a gradual reduction in the 

currently scheduled Social Security defined benefit beginning with 

those newly eligible for retirement in 2005. Current tax rates are 

maintained.



* The “tax increase benchmark” assumes an increase in the OASDI payroll 

tax beginning in 2002 sufficient to achieve an actuarial balance over 

the 75-year period. Currently scheduled benefits are maintained. 

[Footnote 13]



* The “baseline extended” benchmark is a fiscal policy path developed 

in our earlier long-term model work that assumes payment in full of 

currently scheduled Social Security benefits and no other changes in 

current spending or tax policies.



Financing Sustainable Solvency:



The use of these criteria to evaluate approaches to Social Security 

reform highlights the trade-offs that exist between efforts to achieve 

solvency for the OASDI trust funds and efforts to maintain adequate 

retirement income for current and future beneficiaries.



Overall, Model 2 would provide for sustainable solvency and reduce the 

shares of the federal budget and the economy devoted to Social Security 

compared to currently scheduled benefits (tax increase benchmark) 

regardless of how many individuals selected accounts. With universal 

account participation, general revenue funding would be needed for 

about 3 decades. Specifically, our analysis of sustainable solvency 

under Model 2 showed that:



* As estimated by the actuaries, Model 2, with either universal or zero 

participation in voluntary individual accounts, is solvent over the 75-

year projection period, and the ratio of annual income to benefit 

payments at the end of the simulation period is increasing. However, in 

Model 2 with universal account participation, over 3 decades of general 

revenue transfers are needed to achieve trust fund solvency. Model 2 

with zero account participation achieves solvency with no general 

revenue transfers.

:



* Model 2 with universal account participation would ultimately reduce 

the budgetary pressures of Social Security on the unified budget 

relative to the baseline extended benchmark. However, this would not 

begin until the middle of this century. Relative to both our benefit 

reduction benchmark and tax increase benchmark, unified surpluses would 

be lower and unified deficits higher throughout the simulation period 

under Model 2 with universal account participation. Model 2 with zero 

account participation would reduce budgetary pressures due to Social 

Security beginning around 2015 relative to the baseline extended 

benchmark. This fiscal outlook under Model 2 with zero account 

participation is very similar to the fiscal outlook under our benefit 

reduction benchmark.

:



* Under Model 2 with universal account participation, the government’s 

cash requirement (as a share of GDP) to fund the individual accounts 

and the reduced defined benefit would be about 20 percent higher 

initially than under both the baseline extended and tax increase 

benchmarks. This differential gradually narrows until the 2030s, after 

which less cash would be required under Model 2 with universal account 

participation. By 2075, Model 2 with universal account participation 

would require about 40 percent less cash than the baseline extended and 

tax increase benchmarks.

:



* Viewed from the perspective of the economy, total payments (Social 

Security defined benefits plus income from individual accounts) as a 

share of GDP would gradually fall under Model 2 with universal account 

participation relative to the baseline extended and tax increase 

benchmarks. In 2075, the share of the economy absorbed by payments to 

retirees from the Social Security system as a whole under Model 2 with 

universal account participation would be roughly 20 percent lower than 

the baseline extended or tax increase benchmark and roughly the same as 

under the benefit reduction benchmark.

:



* With regard to national saving, Model 2 increases net national saving 

on a first order basis primarily due to the proposed benefit 

reductions. The individual account provision does not increase national 

saving on a first order basis; the redirection of the payroll taxes to 

finance the accounts reduces government saving by the same amount that 

the individual accounts increase private saving.

:



Beyond these first order effects, the actual net effect of a proposal 

on national saving is difficult to estimate due to uncertainties in 

predicting changes in future spending and revenue policies of the 

government as well as changes in the saving behavior of private 

households and individuals. For example, the lower surpluses and higher 

deficits that result from redirecting payroll taxes to individual 

accounts could lead to changes in federal fiscal policy that would 

increase national saving. However, households may respond by reducing 

their other saving in response to the creation of individual 

accounts.[Footnote 14]



Because the benefit reductions in Model 3 are smaller than in Model 2, 

long-term unified deficits are larger under Model 3. Model 3 requires 

an additional contribution equal to 1 percent of taxable payroll for 

those choosing individual accounts. Assuming universal account 

participation in both models, Model 3 would result in a larger share of 

the economy being absorbed by total benefit payments to retirees--about 

the same share as would be the case under the baseline extended and tax 

increase benchmarks.



Balancing Adequacy and Equity:



The Commission’s proposals also illustrate the trade-offs reform 

proposals face generally in balancing adequacy and equity 

considerations. Both of the models protect benefits for current and 

near retirees, and the shift to advance funding could improve 

intergenerational equity. However, under each of the models, some 

future retirees also could face potentially significant benefit 

reductions in comparison to either the tax increase or the benefit 

reduction benchmarks. This is because primary insurance amount formula 

factors are reduced by real wage growth, uncertainty in rates of return 

earned on accounts, changes in benefit status over time, and annuity 

pricing.



Our analysis of Model 2 shows that:



* Median monthly benefits (the individual account annuity plus the 

defined benefit reduced by an offset) for those choosing individual 

accounts are always higher than for those who do not choose the 

account, and this gap grows over time. In addition, median monthly 

benefits under universal participation in the accounts are also higher 

than the median benefits received under the benefit reduction 

benchmark. However, median monthly benefits received by those without 

accounts fall below those provided by the benefit reduction benchmark 

over time.

:



* For the lowest quintile of beneficiaries, median monthly benefits 

with universal participation in the accounts tend to be higher than the 

benefits received under the benefit reduction benchmark, likely due to 

the enhanced benefit for full-time “minimum wage” workers. This pattern 

becomes more pronounced over time.

:



* Regardless of whether an account is chosen, under Model 2 many people 

could receive monthly benefits that are higher than the benefit 

reduction benchmark. However, a minority could fare worse. Some people 

could also receive a benefit greater than under the tax increase 

benchmark although a majority could fare worse. Monthly benefits for 

those choosing individual accounts will be sensitive to the actual 

rates of return earned by those accounts.

:



The cohort results for Model 3 are generally similar to Model 2. 

However, median monthly benefits for those choosing individual accounts 

are higher than the benefit level under the tax increase benchmark for 

the 1970 and 1985 cohorts. This result is likely because of Model 3’s 

feature of a mandatory extra 1 percent contribution into the individual 

accounts for those who choose to participate.



Implementing and Administering Reforms:



Each of the models would establish a governing board to administer the 

individual accounts, including the choice of available funds and 

providing financial information to individuals. While the Commission 

had the benefit of prior thinking on these issues, many implementation 

issues remain, particularly in ensuring the transparency of the new 

system and educating the public to avoid any gaps in expectations. For 

example, an education program would be necessary to explain the changes 

in the benefit structure, model features like the benefit offset and 

how accounts would be split in the event of divorce. Education and 

investor information is also important as the system expands and 

increases the range of investment selection. Questions about the 

harmonization of such features with state laws regarding divorce and 

annuities also remain an issue.



Conclusion: Choices and Trade-Offs Will Be Part of Any Social Security 

Reform--Acting Soon Would Help:



It is likely that the structural changes required to restore Social 

Security’s long-term viability generally will require some combination 

of reductions from currently scheduled benefits, revenue increases, and 

may include the use of some general revenues. The proposals we have 

examined, both in 2002 and earlier, generally reflect this. Proposals 

employ possible benefit reductions within the current program 

structure, including modifying the benefit formula, raising the 

retirement age, and reducing cost-of-living adjustments. Revenue 

increases might take the form of increases in the payroll tax rate, 

expanding coverage to include the relatively few workers who are still 

not covered under Social Security, or allowing the trust funds to be 

invested in potentially higher-yielding securities such as 

stocks.[Footnote 15] Similarly, some proposals rely on general revenue 

transfers to increase the amount of money going towards the Social 

Security program. Reforms that include individual accounts would also 

involve Social Security benefit reductions and/or revenue increases, 

and the use of general revenues.



The Commission report highlights the trade-offs and challenges in 

reform. Model 2 uses a combination of benefit reductions and revenue 

increases to restore long-term solvency. For example, we found that the 

model reduces Social Security’s defined benefit from currently 

scheduled levels through formula changes, provides enhanced benefits 

for low-wage workers and spousal survivors, and adds a voluntary 

individual account option. Model 2 would both restore trust fund 

solvency and reduce the shares of the federal budget and the economy 

devoted to Social Security compared with currently scheduled benefits 

regardless of how many individuals selected accounts. With universal 

account participation, general revenues would be needed for about 3 

decades. The other three proposals we examined take somewhat different 

approaches, relying heavily on additional sources of revenue. For 

example, Representative DeFazio’s proposal would restore solvency 

primarily on the revenue side, allowing a portion of trust fund assets 

to be invested in marketable securities and eliminating the cap on 

taxable payroll earnings.



In evaluating Social Security reform proposals, the choice among 

various benefit reductions and revenue increases will affect the 

balance between income adequacy and individual equity. Benefit 

reductions could pose the risk of diminishing adequacy, especially for 

specific subpopulations. Both benefit reductions and tax increases that 

have been proposed could diminish individual equity by reducing the 

implicit rates of return the workers earn on their contributions to the 

system. In contrast, increasing revenues by investing retirement funds 

in the stock market could improve rates of return but potentially 

expose individuals to investment risk and losses.



Similarly, the choice among various benefit reductions and revenue 

increases--for example, raising the retirement age--will ultimately 

determine not just how much income retirees will have but also how long 

they will be expected to continue working and how long their 

retirements will be. Reforms will determine how much consumption 

workers will give up during their working years to provide for more 

consumption during retirement.



Early action to change these programs would yield the highest fiscal 

dividends for the federal budget and would provide a longer period for 

prospective beneficiaries to make adjustments in their own planning. 

Waiting to build economic resources and reform future claims entails 

risks. First, we lose an important window where today’s relatively 

large workforce can increase saving and enhance productivity, two 

elements critical to growing the future economy. We lose the 

opportunity to reduce the burden of interest payments, thereby creating 

a legacy of higher debt as well as elderly entitlement spending for the 

relatively smaller workforce of the future. Most critically, we risk 

losing the opportunity to phase in changes gradually so that all can 

make the adjustments needed in private and public plans to accommodate 

this historic shift. Unfortunately, the long-range challenge has become 

more difficult, and the window of opportunity to address the 

entitlement challenge is narrowing. As the baby boom generation retires 

and the numbers of those entitled to these retirement benefits grow, 

the difficulties of reform will be compounded. Accordingly, it remains 

more important than ever to deal with these issues over the next 

several years.



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 have said before, I believe it is possible to structure 

a Social Security reform proposal that will exceed the expectations of 

all generations of Americans. In my view, 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 lifting.



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 

nation.



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

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



FOOTNOTES



[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); Social Security: Long-Term Financing Shortfall 

Drives Need for Reform GAO-02-845T (Washington, D.C.: June 19, 2002). 



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

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



[3] Social Security: Analysis of the Commission to Strengthen Social 

Security (GAO-03-310, Jan. 15, 2003).



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

Survivors Insurance and Disability Insurance Trust Funds.



[5] Separately, the Disability Insurance Fund is projected to be 

exhausted in 2028 and the Old-Age and Survivors Insurance Fund in 2043. 





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

the excess benefits will require less debt redemption rather than 

increased borrowing. 



[7] This simulation assumes that all currently scheduled benefits would 

be paid in full throughout the 75-year projection period.



[8] Testimony before the Senate Committee on Banking, Housing, and 

Urban Affairs, July 24, 2001.



[9] 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 with making changes exclusively to taxes 

or benefits as shown in figure 7.



[10] For this analysis, consistent with SSA’s scoring of the Commission 

reform models, our long-term economic model incorporates the 2001 

Trustees’ intermediate assumptions.



[11] In this testimony, the term “individual account” is used for the 

voluntary accounts, consistent with published GAO work. The Commission 

used the term “personal account” in its final report.



[12] From the perspective of analyzing benefit adequacy, the tax 

increase and baseline extended benchmarks are identical because both 

assume payment in full of scheduled Social Security benefits over the 

75-year simulation period.



[13] Our benchmarks are solvent for the 75-year projection period 

commonly used by SSA’s Office of the Chief Actuary, but they do not 

achieve sustainable solvency. Both the benefit reduction and tax 

increase benchmarks are explicitly fully funded and we worked closely 

with Social Security’s Office of the Chief Actuary in their design. 



[14] No expert consensus exists on how Social Security reform proposals 

would affect the saving behavior of private households and businesses.



[15] About 4 percent of the workforce remains uncovered, which mostly 

includes some state and local government employees and federal 

employees hired before 1984.