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Testimony: 

Before the Committee on the Budget, House of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EST: 

Tuesday, January 23, 2007: 

Long-Term Budget Outlook: 

Deficits Matter--Saving Our Future Requires Tough Choices Today: 

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

GAO-07-389T: 

Chairman Spratt, Mr. Ryan, Members of the Committee: 

I appreciate this invitation to talk with you about why deficits 
matter--about our nation's long-term fiscal outlook and the challenge 
it presents. Your decision to focus on this issue is an important 
statement about the seriousness with which you view this challenge and 
your commitment to begin to address it. 

You all have entitled this hearing "Why Deficits Matter." Let me start 
with a very simple reason: they matter for the world we leave our 
children and grandchildren. As all of you know--and as I will discuss 
in this statement--it is not the short-term deficit that threatens us; 
it is the long-term fiscal outlook. We are on an imprudent and 
unsustainable path. Continuing on our current fiscal path would 
gradually erode, if not suddenly damage, our economy, our standard of 
living, and ultimately even our domestic tranquility and our national 
security. This is a great nation with much to be proud of and much to 
be thankful for. But today we are failing in one of our most important 
stewardship responsibilities--our duty to pass on a country better 
positioned to deal with the challenges of the future than the one we 
were given. 

The picture I will lay out for you today is not a pretty one and it's 
getting worse with the passage of time. But this nation has met 
difficult challenges--including challenges to its very existence--in 
the past and I'm confident that we can do so again. 

The essence of my message today is no surprise to Members of this 
Committee: 

* Our current financial condition is worse than is widely understood. 

* Our current fiscal path is both imprudent and unsustainable. 

* Improvements in information and processes are needed and can help. 

* Meeting our long-term fiscal challenge will require (1) significant 
entitlement reform to change the path of those programs; (2) 
reprioritizing, restructuring and constraining other spending programs; 
and (3) more revenues--hopefully through a reformed tax system. This 
will take bipartisan cooperation and compromise. 

* The time to act to save our future is now! 

When fiscal year 2006 ended a great deal of attention was paid to the 
fact that at $248 billion "the deficit" came in lower than originally 
predicted and lower than in 2005. And just this week press reports have 
noted that--as figure 1 shows--the (unified) deficit as a share of the 
economy is not terribly high. 

Figure 1: Unified Surplus or Deficit as a Share of Gross Domestic 
Product (GDP), Fiscal Years 1940-2006: 

[See PDF for image] 

Source: Department of Commerce, Office of Management and Budget, and 
Congressional Budget Office. 

[End of figure] 

This is all true--and it is also misleading. First, a single year's 
unified budget deficit is not the critical issue here. Certainly this 
improvement in the 1-year fiscal picture is better than a worsening in 
that picture, but it did not fundamentally change our long-term fiscal 
outlook. In fact, the U.S. government's total reported liabilities, net 
social insurance commitments, and other fiscal exposures continue to 
grow and now total approximately $50 trillion, representing 
approximately four times the nation's total output, or gross domestic 
product (GDP) in fiscal year 2006, up from about $20 trillion, or two 
times GDP in fiscal year 2000. 

Further, the long-term challenge is fast becoming a short-term one as 
the first of the baby boomers become eligible for early retirement 
under Social Security on January 1, 2008--less than one year--and for 
Medicare benefits in 2011--less than 4 years from now. The budget and 
economic implications of the baby boom generation's retirement have 
already become a factor in the Congressional Budget Office's (CBO) 10- 
year baseline projections and will only intensify as the baby boomers 
age. Simply put, our nation is on an imprudent and unsustainable fiscal 
path. Herbert Stein once said that something that is not sustainable 
will stop. That, however, should not give us comfort. It is more 
prudent to change the path than to wait until a crisis occurs. 

And that brings me to my next point. While restraint in the near term 
and efforts to balance the budget over the next 5 years can be 
positive, it is important that actions to achieve this also address the 
long-term fiscal outlook. The real problem is not the near-term 
deficit--it is the long-term fiscal outlook. It is important to look 
beyond year 5 or even year 10. Both the budget and the budget process 
need more transparency about and focus on the long-term implications of 
current and proposed spending and tax policies. In this testimony I 
will suggest a number of things that I believe will help in this area. 

Our Fiscal and Financial Condition Is Worse Than Widely Understood: 

A great deal of budget reporting focuses on a single number--the 
unified budget deficit, which was $248 billion in fiscal year 2006. 
This largely cash-based number represents the difference between 
revenues and outlays for the government as a whole. It is an important 
measure since it is indicative of the government's draw on today's 
credit markets--and its claim on today's economy. But it also masks the 
difference between Social Security's cash flows and those for the rest 
of the budget. Therefore we also need to look beneath the unified 
deficit at the on-budget deficit--what I like to call the "operating 
deficit." And, finally, we should be looking at the financial 
statements' report of net operating cost--the accrual-based deficit. 

Social Security currently takes in more tax revenue than it needs to 
pay benefits. This cash surplus is invested in Treasury securities and 
earns interest in the form of additional securities. The difference 
between the on-budget deficit and the unified budget deficit is the 
total surplus in Social Security (cash and interest) and the U.S. 
Postal Service. Excluding consideration of the $185 billion surplus in 
Social Security and a $1 billion surplus in the Postal Service, the on- 
budget deficit was $434 billion in 2006. Figure 2 shows graphically how 
the on-budget deficit and the off-budget surplus have related and 
combine to lead to the unified deficit. Since the Social Security trust 
fund invests any receipts not needed to pay benefits in Treasury 
securities, its cash surplus reduces the amount the Treasury must 
borrow from the public. As I will note later, this pattern of cash 
flows is important--and it is projected to come to an end just 10 years 
from now. 

Figure 2: Surplus or Deficit as a Share of GDP, Fiscal Years 1962-2006: 

[See PDF for image] 

Sources: Office of Management and Budget, Department of the Treasury, 
and Congressional Budget Office. 

[End of figure] 

The third number, net operating cost, is the amount by which costs 
exceed revenue and it is reported in the federal government's financial 
statements, which are prepared using generally accepted accounting 
principles.[Footnote 1] Costs are recorded on an accrual basis--namely, 
in the period when goods are used or services are performed as opposed 
to when the resulting cash payments are made. However, most revenues, 
on the other hand, are recorded on the modified cash basis--that is, 
they are recorded when collected. The net operating cost can be thought 
of as the accrual deficit. The accrual measure primarily provides more 
information on the longer-term implications of today's policy decisions 
and operations by showing certain costs incurred today but not payable 
for years to come, such as civilian and military pensions and retiree 
health care. In fiscal year 2006 net operating cost was $450 billion. 

All three of these numbers are informative. However, neither accrual 
nor cash measures alone provide a full picture of the government's 
fiscal condition or the cost of government. Used together, they present 
complementary information and provide a more comprehensive picture of 
the government's financial condition today and fiscal position over 
time. For example, the unified budget deficit provides information on 
borrowing needs and current cash flow. The accrual deficit provides 
information on the current cost of government, but it does not provide 
information on how much the government has to borrow in the current 
year to finance government activities. Also, while accrual deficits 
provide more information on the longer-term consequences of current 
government activities, they do not include the longer-term cost 
associated with social insurance programs like Social Security and 
Medicare. In addition, they are not designed to provide information 
about the timing of payments and receipts, which can be very important. 
Therefore, just as investors need income statements, statements of cash 
flow, and balance sheets to understand a business's financial 
condition, both cash and accrual measures are important for 
understanding the government's financial condition.[Footnote 2] 

Although looking at both the cash and accrual measures provides a more 
complete picture of the government's fiscal stance today and over time 
than looking at either alone, even these together do not tell us the 
full story. For example, as shown in table 1, all three of these 
deficits improved between fiscal year 2005 and fiscal year 
2006.[Footnote 3] This improvement, however, did not result from a 
change in the fundamental drivers of our long-term challenge and did 
not signal an improvement in that outlook. To understand the long-term 
implications of our current path requires more than a single year's 
snapshot. In this regard, the long-term outlook has worsened 
significantly in the last several years. That is why for more than a 
decade GAO has been running simulations to tell this longer-term story. 

Table 1: Fiscal Year 2005 and 2006 Deficits and Net Operating Cost: 

Dollars in billions. 

On-budget deficit; 
Fiscal year 2005: ($494); 
Fiscal year 2006: ($434). 

Unified deficit; 
Fiscal year 2005: (318); 
Fiscal year 2006: (248). 

Net operating cost[A]; 
Fiscal year 2005: (760); 
Fiscal year 2006: (450). 

Sources: Office of Management and Budget and Department of the 
Treasury. 

[A] Fiscal year 2005 and 2006 net operating cost figures reflect 
significant but opposite changes in certain actuarial costs. For 
example, changes in interest rates and other assumptions used to 
estimate future veterans' compensation benefits increased net operating 
cost by $228 billion in 2005 and reduced net operating cost by $167 
billion in 2006. 

[End of table] 

The Current Long-term Fiscal Outlook is Unacceptable: 

As I mentioned, it is not the recent past shown in figure 1--nor the 
outlook for this year--that should concern us. Rather it is the picture 
in figure 3 that should worry us. 

Long-term fiscal simulations by GAO, CBO, and others all show that we 
face large and growing structural deficits driven primarily by rising 
health care costs and known demographic trends. GAO runs simulations 
under two sets of assumptions. One takes the legislatively-mandated 
baseline from CBO for the first 10 years and then keeps discretionary 
spending and revenues constant as a share of GDP while letting Social 
Security, Medicare, and Medicaid grow as projected by the Trustees and 
CBO under midrange assumptions.[Footnote 4] The other, perhaps more 
realistic, scenario based on the Administration's announced policy 
preferences changes only two things in the first 10 years: 
discretionary spending grows with the economy and all expiring tax 
provisions are extended.[Footnote 5] Like the "Baseline Extended" 
scenario, after 10 years both revenues and discretionary spending 
remain constant as a share of the economy. As figure 3 shows, deficits 
spiral out of control under either scenario. We will be updating these 
figures with the release of the new CBO baseline later this month, but 
even with the lower deficit in 2006, the long-term picture will remain 
daunting. 

Figure 3: Unified Surpluses and Deficits as a Share of GDP under 
Alternative Fiscal Policy Simulations: 

[See PDF for image] 

Source: GAO's August 2006 analysis. 

Note: Assumes currently scheduled Social Security benefits are paid in 
full throughout the simulation period. 

[End of figure] 

Looking more closely at each scenario gives a fuller understanding of 
what the impact of continuing these trends would have on what 
government does. And it shows us "Why Deficits Matter." 

First, it makes sense to look back to 2001--it is worth understanding 
how much worse the situation has become. As I noted, despite some 
recent improvements in short-term deficits, the long-term outlook is 
moving in the wrong direction. 

Figures 4 and 5 show the composition of spending under our "Baseline 
Extended" scenario in 2001 and 2006. Even with short-term surpluses, we 
had a long-term problem in 2001, but it was more than 40 years out. 
Certainly an economic slowdown and various decisions driven by the 
attacks of 9/11 and the need to respond to natural disasters have 
contributed to the change in outlook. However, these items alone do not 
account for the dramatic worsening. Tax cuts played a major role, but 
the single largest contributor to the deterioration of our long-term 
outlook was the passage of the Medicare prescription drug benefit in 
2003. 

Figure 4: Composition of Spending as a Share of GDP under Baseline 
Extended, January 2001: 

[See PDF for image] 

Source: GAO's January 2001 analysis. 

Note: All other spending is net of offsetting interest receipts in 2015-
2040. 

[End of figure] 

Figure 5: Composition of Spending as a Share of GDP under Baseline 
Extended, August 2006: 

[See PDF for image] 

Source: GAO's August 2006 analysis. 

Notes: In addition to the expiration of tax cuts, revenue as a share of 
GDP increases through 2016 due to (1) real bracket creep, (2) more 
taxpayers becoming subject to the alternative minimum tax, and (3) 
increased revenue from tax-deferred retirement accounts. After 2016, 
revenue as a share of GDP is held constant. 

[End of figure] 

Figure 5 illustrates today's cold hard truth, that neither slowing the 
growth in discretionary spending nor allowing the tax provisions to 
expire--nor both together--would eliminate the imbalance. This is even 
clearer under the more realistic scenario as shown in figure 6. 
Estimated growth in the major entitlement programs results in an 
unsustainable fiscal future regardless of whether one assumes future 
revenue will be somewhat above historical levels as a share of the 
economy as in the first simulation (fig. 5) or lower as shown in figure 
6. 

Figure 6: Composition of Spending as a Share of GDP Assuming 
Discretionary Spending Grows with GDP after 2006 and All Expiring Tax 
Provisions Are Extended: 

[See PDF for image] 

Source: GAO's August 2006 analysis. 

[End of figure] 

Both these simulations remind us "Why Deficits Matter." They illustrate 
that without policy changes on the spending and revenue side of the 
budget, the growth in spending on federal retirement and health 
entitlements will encumber an escalating share of the government's 
resources. A government that in our children's lifetimes does nothing 
more than pay interest on its debt and mail checks to retirees and some 
of their health providers is unacceptable. 

Although Social Security is a major part of the fiscal challenge, 
contrary to popular perception, it is far from our biggest challenge. 
While today Social Security spending exceeds federal spending for 
Medicare and Medicaid, that will change. Over the past several decades, 
health care spending on average has grown much faster than the economy, 
absorbing increasing shares of the nation's resources, and this rapid 
growth is projected to continue. CBO estimates that Medicare and 
Medicaid spending will reach 6.3 percent of GDP in 2016, up from 4.6 
percent this year (2007), while spending for Social Security will only 
reach 4.7 percent of GDP in 2016 up from 4.2 percent this year. For 
this reason and others, rising health care costs pose a fiscal 
challenge not just to the federal budget but also to states, American 
business, and our society as a whole. 

While there is always some uncertainty in long-term projections, two 
things are certain: the population is aging and the baby boom 
generation is nearing retirement age. The aging population and rising 
health care spending will have significant implications not only for 
the budget but also for the economy as a whole. Figure 7 shows the 
total future draw on the economy represented by Social Security, 
Medicare, and Medicaid. Under the 2006 Trustees' intermediate estimates 
and CBO's long-term Medicaid estimates, federal spending for these 
entitlement programs combined will grow to 15.5 percent of GDP in 2030 
from today's 9 percent. This graphic is another illustration of why we 
have to act. I do not believe we are prepared to have programs that 
provide income for us in retirement and pay our doctors absorb this 
much of our children's and grandchildren's economy. It is clear that 
taken together, Social Security, Medicare, and Medicaid under current 
law represent an unsustainable burden on future generations. 

Figure 7: Social Security, Medicare, and Medicaid Spending: 

[See PDF for image] 

Source: GAO analysis based on data from the Office of the Chief 
Actuary, Social Security Administration, Office of the Actuary, Centers 
for Medicare and Medicaid Services, and the Congressional Budget 
Office. 

Notes: Social Security and Medicare projections based on the 
intermediate assumptions of the 2006 Trustees' Reports. Medicaid 
projections based on CBO's August 2006 short-term Medicaid estimates 
and CBO's December 2005 long-term Medicaid projections under midrange 
assumptions. 

[End of figure] 

While Social Security, Medicare, and Medicaid dominate the long-term 
outlook, they are not the only federal programs or activities that bind 
the future. Part of what we owe the future is leaving enough 
flexibility to meet whatever challenges arise. So beyond dealing with 
the "big 3," we need to look at other policies that limit that 
flexibility--not to eliminate all of them but to at least be aware of 
them and make a conscious decision about them. The federal government 
undertakes a wide range of programs, responsibilities, and activities 
that obligate it to future spending or create an expectation for 
spending and potentially limit long-term budget flexibility. GAO has 
described 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. 

Figure 8 shows that despite improvement in both the fiscal year 2006 
reported net operating cost and the cash-based budget deficit, the U.S. 
government's major reported liabilities, social insurance commitments, 
and other fiscal exposures continue to grow. They now total 
approximately $50 trillion--about four times the nation's total output 
(GDP) in fiscal year 2006--up from about $20 trillion, or two times GDP 
in fiscal year 2000. 

Clearly, despite recent progress on our short-term deficits, we have 
been moving in the wrong direction in connection with our long-range 
imbalance in recent years. Our long-range imbalance is growing daily 
due to continuing deficits, known demographic trends, rising health 
care costs, and compounding interest expense. 

Figure 8: Major Reported Fiscal Exposures (Dollars in Trillions): 

[See PDF for image] 

Source: Department of Treasury. 

Notes: Data from 2000 and 2006 Financial Report of the United States 
Government. Estimates for Social Security and Medicare are at present 
value as of January 1 of each year and all other data are as of 
September 30. Percentage increases are based on actual data and may 
differ from increases calculated from rounded data shown in table. 

[End of figure] 

We all know that it is hard to make sense of what "trillions" means. 
Figure 9 provides some ways to think about these numbers: if we wanted 
to put aside today enough to cover these promises, it would take 
$170,000 for each and every American or approximately $440,000 per 
American household. Considering that median household income is about 
$46,000, the household burden is about 9.5 times median income. 

Figure 9: Understanding the Size of Our Major Reported Fiscal 
Exposures: 

[See PDF for image] 

Sources: GAO analysis of data from the Department of the Treasury, 
Federal Reserve Board, U.S. Census Bureau and Bureau of Economic 
Analysis. 

[End of figure] 

Process and Presentational Changes to Increase Transparency and Focus 
on Long-Term Consequences Can Help: 

Since at its heart the budget challenge is a debate about the 
allocation of limited resources, the budget process can and should play 
a key role in helping to address our long-term fiscal challenge and the 
broader challenge of modernizing government for the 21st century. I 
have said that Washington suffers from myopia and tunnel vision. This 
can be especially true in the budget debate in which we focus on one 
program at a time and the deficit for a single year or possibly the 
costs over 5 years without asking about the bigger picture and whether 
the long term is getting better or worse. We at GAO are in the 
transparency and accountability business. Therefore it should come as 
no surprise that I believe we need to increase the understanding of and 
focus on the long term in our policy and budget debates. To that end-- 
as I noted earlier--I have been talking with a number of Members of the 
Senate and the House as well as various groups concerned about this 
issue concerning a number of steps that might help. I've attached a 
summary of some of these ideas to this statement. Let me highlight 
several critical elements here. 

* The President's budget proposal should again cover 10 years. This is 
especially important given that some policies--both spending and tax-- 
cost significantly more (or lose significantly more revenue) in the 
second 5 years than in the first. In addition, the budget should 
disclose the impact of major tax or spending proposals on the short, 
medium, and long term. 

* The executive branch should also provide information on fiscal 
exposures--both spending programs and tax expenditures--that is, the 
long-term budget costs represented by current individual programs, 
policies, or activities as well as the total. 

* The budget process needs to pay more attention to the long-term 
implication of the choices being debated. For example, elected 
representatives should be provided with more explicit information on 
the long-term costs of any major tax or spending proposal before it is 
voted upon. It is sobering to recall that during the debate over adding 
prescription drug coverage to Medicare, a great deal of attention was 
paid to whether the 10-year cost was over or under $400 billion. Not 
widely publicized--and certainly not surfaced in the debate--was that 
the present value of the long-term cost of this legislation was about 
$8 trillion! 

Of course, when you are in a hole, the first thing to do is stop 
digging. I have urged reinstitution of the statutory controls--both 
meaningful caps on discretionary spending and pay-as-you-go (PAYGO) on 
both the tax and spending sides of the ledger--that expired in 2002. 
However given the severity of our current challenge, Congress should 
look beyond the return to PAYGO and discretionary caps. Mandatory 
spending cannot remain on autopilot--it will not be enough simply to 
prevent actions to worsen the outlook. We have suggested that Congress 
might wish to design "triggers" for mandatory programs--some measure 
that would prompt action when the spending path increased 
significantly. In addition, Congress may wish to look at rules to 
govern the use of "emergency supplementals." However, as everyone in 
this committee knows, these steps alone will not solve the problem. 
That is why building in more consideration of the long-term impact of 
decisions is necessary. 

Meeting the Long-Term Fiscal Challenge Requires Action on the Spending 
and Tax Sides of the Budget--Cooperation and Compromise Will Be 
Necessary: 

There is no easy way out of the challenge we face. Economic growth is 
essential, but we will not be able to simply grow our way out of the 
problem. The numbers speak loudly: our projected fiscal gap is simply 
too great. To "grow our way out" of the current long-term fiscal gap 
would require sustained economic growth far beyond that experienced in 
U.S. economic history since World War II. 

Similarly, those who believe we can solve this problem solely by 
cutting spending or solely raising taxes are not being realistic. While 
the appropriate level of revenues will be part of the debate about our 
fiscal future, making no changes to Social Security, Medicare, 
Medicaid, and other drivers of the long-term fiscal gap would require 
ever-increasing tax levels--something that seems both inappropriate and 
implausible. That is why I have said that substantive reform of Social 
Security and our major health programs remains critical to recapturing 
our future fiscal flexibility. I believe we must start now to reform 
these programs. 

Although the long-term outlook is driven by Social Security and health 
care costs, this does not mean the rest of the budget can be exempt 
from scrutiny. Restructuring and constraint will be necessary beyond 
the major entitlement programs. This effort offers us the chance to 
bring our government and its programs in line with 21ST century 
realities.[Footnote 6] Many tax expenditures act like entitlement 
programs, but with even less scrutiny. Other programs and activities 
were designed for a very different time. 

Taken together, entitlement reform and reexamination of other programs 
and activities could engender a national discussion about what 
Americans want from their government and how much they are willing to 
pay for those things. 

Finally, given demographic and health care cost trends, the size of the 
spending cuts necessary to hold revenues at today's share of GDP seems 
implausible. It is not realistic to assume we can remain at 18.2 
percent of GDP--we will need more revenues. Obviously we want to 
minimize the tax burden on the American people and we want to remain 
competitive with other industrial nations--but in the end the numbers 
have to add up. 

As I noted, we need to start with real changes in existing entitlement 
programs to change the path of those programs. However, reform of the 
major entitlement programs alone will not be sufficient. 
Reprioritization and constraint will be necessary in other spending 
programs. Finally, we will need more revenues--hopefully through a 
reformed tax system. 

The only way to get this done is through bipartisan cooperation and 
compromise--involving both the Congress and the White House. 

Delay only makes matters worse. GAO's simulations show that if no 
action is taken, balancing the budget in 2040 could require actions as 
large as cutting total federal spending by 60 percent or raising 
federal taxes to two times today's level. 

Further Delay Will Only Worsen the Outlook: 

For many years those of us who talk about the need to put Social 
Security on a sustainable course and to reform Medicare have talked 
about the benefits of early action. Acting sooner rather than later can 
turn compound interest from an enemy to an ally. Acting sooner rather 
than later permits changes to be phased in more gradually and gives 
those affected time to adjust to the changes. Delay does not avoid 
action--it just makes the steps that have to be taken more dramatic and 
potentially harder. 

Unfortunately, it is getting harder to talk about early action--the 
future is upon us. 

Next year members of the baby boom generation start to leave the labor 
force. Figure 10 shows the impact of demographics on labor force 
growth. 

Figure 10: Labor Force Growth Will Continue to Decline: 

[See PDF for image] 

Source: GAO analysis of data from the Office of the Chief Actuary, 
Social Security Administration. 

Note: Percentage change is calculated as a centered 5-yr moving average 
of projections based on the intermediate assumptions of the 2006 
Trustees' Reports. 

[End of figure] 

Reflecting this demographic shift, CBO projects the average annual 
growth rate of real GDP will decline from 3.1 percent in 2008 to 2.6 
percent in the period 2012-2016. This slowing of economic growth will 
come just as spending on Social Security, Medicare and Medicaid will 
begin to accelerate--accounting for 56 percent of all federal spending 
by 2016 compared to 43 percent in 2006. 

As I noted earlier, today Social Security's cash surplus helps offset 
the deficit in the rest of the budget, thus reducing the amount 
Treasury must borrow from the public and increasing budget flexibility-
-but this is about to change. 

Growth in Social Security spending is expected to increase from an 
estimated 4.8 percent in 2008 to 6.5 percent in 2016. The result, as 
shown in figure 11, is that the Social Security surpluses begin a 
permanent decline in 2009. At that time the rest of the budget will 
begin to feel the squeeze since the ability of Social Security 
surpluses to offset deficits in the rest of the budget will begin to 
shrink. In 2017 Social Security will no longer run a cash surplus and 
will begin adding to the deficit. That year Social Security will need 
to redeem the special securities it holds in order to pay benefits. 
Treasury will honor those claims--the United States has never 
defaulted. But there is no free money. The funds to redeem those 
securities will have to come from higher taxes, lower spending on other 
programs, higher borrowing from the public, or a combination of all 
three. 

Figure 11: Projected Cash Surpluses and Deficits in the Combined Social 
Security Trust Fund: 

[See PDF for image] 

Source: GAO analysis of data from the Office of the Chief Actuary, 
Social Security Administration. 

Note: Projections based on the intermediate assumptions of the 2006 
Trustees' Reports. The consumer price index is used to adjust from 
current to constant dollars. 

[End of figure] 

I spoke before of how big the changes would have to be if we were to do 
nothing until 2040. Of course, we won't get to that point--something 
will force action before then. If we act now, we have more choices and 
will have more time to phase-in related changes. 

Concluding Remarks: 

Chairman Spratt, Mr. Ryan, Members of the Committee--in holding this 
hearing even before the President's Budget is submitted you are 
signaling the importance of considering any proposal within the context 
of the long-term fiscal challenge. This kind of leadership will be 
necessary if progress is to be made. 

I have long believed that the American people can accept difficult 
decisions as long as they understand why such steps are necessary. They 
need to be given the facts about the fiscal outlook: what it is, what 
drives it, and what it will take to address it. As most of you know, I 
have been investing a good deal of time in the Fiscal Wake-Up Tour 
(FWUT) led by the Concord Coalition. Scholars from both the Brookings 
Institution and the Heritage Foundation join with me and Concord in 
laying out the facts and discussing the possible ways forward. In our 
experience, having these people, with quite different policy views on 
how to address our long-range imbalance, agree on the nature, scale, 
and importance of the issue--and on the need to sit down and work 
together--resonates with the audiences. Although the major participants 
have been Concord, GAO, Brookings, and Heritage, others include such 
organizations as the Committee for Economic Development (CED); the 
American Institute of Certified Public Accountants (AICPA); the 
Association of Government Accountants (AGA); the National Association 
of State Auditors, Comptrollers and Treasurers (NASACT); and AARP. The 
FWUT also has received the active support and involvement of community 
leaders, local colleges and universities, the media, the business 
community, and both former and current elected officials. We have been 
to 17 cities to-date. The discussion has been broadcast on public 
television stations in Atlanta and Philadelphia. Earlier this month OMB 
Director Portman and former Senator Glenn joined us at an event at the 
John Glenn School of Public Affairs at Ohio State University in 
Columbus, Ohio. 

The specific policy choices made to address this fiscal challenge are 
the purview of elected officials. The policy debate will reflect 
differing views of the role of government and differing priorities for 
our country. What the FWUT can do--and what I will continue to do--is 
lay out the facts, debunk various myths, and prepare the way for tough 
choices by elected officials. The American people know--or sense--that 
there is something wrong; that these deficits are a problem. If they 
understand that there truly is no magic bullet--if they understand 
that: 

* we cannot grow our way out of this problem; 

* eliminating earmarks will not solve the problem; 

* wiping out fraud, waste, and abuse will not solve the problem; 

* ending the war or cutting way back on defense will not solve the 
problem; 

* restraining discretionary spending will not solve the problem; and: 

* letting the recent tax cuts expire will not solve this problem; 

then the American people can engage with you in a discussion about what 
government should do and how. 

People ask me how I think this can happen. I know that some Members 
believe a carefully structured commission will be necessary to prepare 
a package while others feel strongly that elected officials should take 
up the task of developing that package. Whatever the vehicle, success 
will require the active and open-minded involvement of both parties in 
and both houses of the Congress and of the President. With that it 
should be possible to develop a package which accomplishes at least 
three things: (1) a comprehensive solution to the Social Security 
imbalance--one that is not preprogrammed to require us to have to come 
back again, (2) Round I of comprehensive tax reform, and (3) Round I of 
Health Care Reform. 

This is a great nation. We have faced many challenges in the past and 
we have met them. It is a mistake to underestimate the commitment of 
the American people to their children and grandchildren; to 
underestimate their willingness and ability to hear the truth and 
support the decisions necessary to deal with this challenge. We owe it 
to our country, to our children and to our grandchildren to address 
this fiscal imbalance. The world will present them with new challenges-
-we need not bequeath them this burden too. The time for action is now. 

Mr. Chairman, Mr. Ryan, Members of the Committee, let me repeat my 
appreciation for your commitment and concern in this matter. We at GAO 
stand ready to assist you in this important endeavor. 

Contact and Acknowledgments: 

For further information on this testimony, please contact Susan J. 
Irving at (202) 512-9142 or irvings@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this testimony. Individuals making key contributions 
to this testimony include Jay McTigue, Assistant Director; Linda Baker 
and Melissa Wolf. 

[End of section] 

Appendix I: Ideas for Improving the Transparency of Long-term Costs and 
the Attention Paid to These Costs before Decisions Are Made: 

Supplemental Reporting in the President's Annual Budget Submission: 

* Produce an annual Statement of Fiscal Exposures, including a concise 
list and description of exposures, cost estimates where possible, and 
an assessment of methodologies and data used to produce such cost 
estimates. 

* Increase the transparency of tax expenditures by including them in 
the annual Fiscal Exposures Statement and, where possible, also showing 
them along with spending and credit programs in the same policy area. 

* Provide information on the impact of major tax or spending proposals 
on short-term, mid-term, and long-term fiscal exposures and on the path 
of surplus/deficit and debt as percent of gross domestic product (GDP) 
over 10-year and longer-term horizons (and assuming no sunset if sunset 
is part of the proposal). 

* Cover 10 years in the budget. 

* Consider requiring the President to include in his annual budget 
submission a long-term fiscal goal (e.g., balance, surplus, or deficit 
as percent of GDP). 

Additional Executive Branch Reports: 

* Prepare and publish a Summary Annual Report or Citizen's Summary that 
summarizes, in a clear, concise, plain English, and transparent manner, 
key financial and performance information included in the Consolidated 
Financial Report. 

* Prepare and publish a report on long-range fiscal sustainability 
every 2 to 4 years. 

Additional Cost Information on Proposals before Adoption: 

* Require improved disclosure--at the time proposals are debated but 
before they are adopted--of the long-term costs of individual mandatory 
spending and tax proposals over a certain size and for which costs will 
ramp up over time. 

GAO Reports: 

* An annual report or reports by GAO including comments on the 
Consolidated Financial Statement (CFS), results of the latest long-term 
fiscal simulations, comments on the adequacy of information regarding 
long-term cost implications of existing and proposed policies in the 
previous year as well as any other significant financial and fiscal 
issues. 

Other Areas in Which GAO Has Suggested That Congress Might Consider 
Changing the Budget Treatment: 

* Use accrual budgeting for the following areas where cash basis 
obligations do not adequately represent the government's commitment: 

- employee pension programs (pre-Federal Employee Retirement System 
employees); 

- retiree health programs; and: 

- federal insurance programs, such as the Pension Benefit Guaranty 
Corporation and crop insurance. 

* Explore techniques for expanding accrual budgeting to: 

- environmental cleanup and: 

- social insurance--could consider deferring recognition of social 
insurance receipts until they are used to make payments in the future 
(this was suggested in GAO's accrual budgeting report as an idea to 
explore, possibly with a commission designed to explore budget 
concepts). 

FOOTNOTES 

[1] The Financial Report of the United States Government, 2006 can be 
found at [Hyperlink, http://www.fms.treas.gov/fr/index.html]. 

[2] GAO is responsible for auditing the financial statements included 
in the Financial Report, but we have been unable to express an opinion 
on them for 10 years because the federal government could not 
demonstrate the reliability of significant portions of the financial 
statements, especially in connection with the Department of Defense. 
Accordingly, amounts taken from the Financial Report may not be 
reliable. 

[3] The decline in both the cash and accrual deficits in 2006 was 
primarily driven by an increase in federal revenue by almost 12 
percent. In addition, the decline in the accrual deficit relative to 
the cash deficit was primarily due to a decrease in accrual-based 
expenses resulting from changes in assumptions that are the basis for 
actuarial estimates for certain accrued long-term liabilities. For a 
discussion of how the accrual and cash deficits relate to each other 
see GAO, Understanding Similarities and Differences between Accrual and 
Cash Deficits, GAO-07-117SP (Washington, D.C.: December 2006) and 
Understanding Similarities and Differences between Accrual and Cash 
Deficits, Update for Fiscal Year 2006, GAO-07-341SP (Washington, D.C. 
January 2006). 

[4] Social Security and Medicare spending is based on the May 2006 
Trustees' intermediate projections. Medicaid spending is based on CBO's 
December 2005 long-term projections under midrange assumptions. 

[5] Additional information about the GAO model, its assumptions, data, 
and charts can be found at [Hyperlink, 
http://www.gao.gov/special.pubs/longterm/]. 

[6] GAO, 21ST Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005) and 
Suggested Areas for Oversight for the 110th Congress, GAO-07-235R 
(Washington, D.C.: Nov. 17, 2006). 

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