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entitled 'Social Security Reform: Greater Transparency Needed about 
Potential General Revenue Financing' which was released on March 22, 
2007. 

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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

March 2007: 

Social Security Reform: 

Greater Transparency Needed about Potential General Revenue Financing: 

GAO-07-213: 

GAO Highlights: 

Highlights of GAO-07-213, a report to congressional committees 

Why GAO Did This Study: 

Absent reform, Social Security’s financing gap will grow until 
currently scheduled benefits can no longer be paid in full. Recent 
reform proposals often include general revenue (GR)—a major change that 
can have significant implications for the budget as a whole. This 
report addresses these issues: (1) What information is available about 
GR in recent proposal scorings by Social Security’s Office of the Chief 
Actuary (OCACT)? (2) What common mechanisms, especially GR mechanisms, 
are used to increase program revenue? (3) What are the implications of 
GR for the trust fund and the federal budget? We have prepared this 
report under the Comptroller General’s statutory authority to conduct 
evaluations on his own initiative as part of a continued effort to 
assist Congress in addressing the challenges facing Social Security. 

What GAO Found: 

Although focused on the trust fund, OCACT scoring memos are also the 
primary source of information on how proposals would impact the federal 
budget. Memos provide information on GR use and its effects, but 
experts said comparing proposals on this element presents challenges, 
requiring extensive efforts to understand complex tables shown at the 
end of the memos. 

Fourteen of 17 proposals GAO reviewed provided GR (1) as needed to 
maintain trust fund solvency or (2) as specified by formula, amount, or 
source. Nine of the 17 achieved “sustainable solvency” under OCACT’s 
definition using the first approach. This type of unlimited transfer 
poses the greatest potential risk to the federal budget, especially 
when combined with benefit guarantees. In proposals reviewed, amounts 
of GR under both types of approaches ranged up to about twice program 
shortfall. 

In all proposals using GR, the GR was reallocated from the non–Social 
Security budget. While any additional revenue to the trust fund will 
help solvency, unified federal budget effects depend on the type of 
revenue—whether it is new revenue (additional payroll tax revenue or GR 
that is new to the federal budget) versus reallocated GR. Absent other 
changes, new revenue would improve the long-term fiscal imbalance while 
reallocated GR would do nothing to address it. Although raising taxes 
(payroll or other) or cutting benefits would have tangible consequences 
for taxpayers and beneficiaries, e.g., less take-home pay or smaller 
benefit checks, the consequences of transfers from the non–Social 
Security budget in the form of reallocated GR are less likely to be 
clearly observable. Reallocated GR, however, is not free. Regardless of 
how GR is provided to Social Security, it must be paid for at some 
point. The question is when, and by whom. 

Figure: new Revenue versus Reallocated General Revenue: 

[See PDF for Image] 

Source: GAO. 

[End of figure] 

What GAO Recommends: 

GAO recommends that the Commissioner of SSA direct OCACT to include a 
summary presentation of its analysis to facilitate comparisons of 
reform proposals especially with respect to use of GR and federal 
budget implications. SSA suggested that a table showing how each 
provision affects the actuarial deficit would be helpful. GAO agrees 
but remains of the view that a table that can clearly and quickly 
communicate both trust fund effects and federal budget implications is 
needed. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-213]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Susan J. Irving at (202) 
512-9142 or irvings@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

OCACT Scoring Memos Are Primary Source of Information on Reform 
Proposals, but Detailed Tables Are Difficult to Use for Understanding 
General Revenue and Federal Budget Effects: 

Recent Proposals Differ by Revenue Mechanism and Reform Approach Used, 
but Most Reallocate General Revenue and Aim to Increase Investment 
Returns: 

Additional Revenue Improves Trust Fund Solvency but Effects on the 
Federal Budget May Differ Greatly: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Comments from the Social Security Administration: 

Glossary of Terms: 

Tables: 

Table 1: Revenue Mechanisms in Reform Proposals by New and Reallocated 
Revenue: 

Table 2: Revenue Mechanisms in Reform Proposals by Reform Approach: 

Table 3: Size of Reallocated General Revenue in Proposals Reviewed by 
Mechanism Used: 

Figures: 

Figure 1: New Revenue versus Reallocated General Revenue in Social 
Security Reform: 

Figure 2: Composition of Spending as a Share of GDP Assuming 
Discretionary Spending Grows with the Economy After 2007 and All 
Expiring Tax Cuts Are Extended: 

Figure 3: Social Security Flows Today: 

Abbreviations: 

CBO: Congressional Budget Office: 
CES: Committee on Economic Security: 
CPI: Consumer Price Index: 
GR: general revenue: 
HI: Hospital Insurance: 
IA: individual account: 
OASDI: Old-Age, Survivors, and Disability Insurance: 
OCACT: Office of the Chief Actuary: 
SSA: Social Security Administration: 

United States Government Accountability Office: 
Washington, DC 20548: 

March 22, 2007: 

The Honorable Max Baucus: 
Chairman: 
Committee on Finance: 
United States Senate: 

The Honorable Herb Kohl: 
Chairman: 
The Honorable Gordon Smith: 
Ranking Member: 
Special Committee on Aging: 
United States Senate: 

The Honorable Charles B. Rangel: 
Chairman: 
The Honorable Jim McCrery: 
Ranking Member: 
Committee on Ways and Means: 
House of Representatives: 

The Honorable Michael R. McNulty: 
Chairman: 
The Honorable Sam Johnson: 
Ranking Member: 
Subcommittee on Social Security: 
Committee on Ways and Means: 
House of Representatives: 

Absent substantive reform, the gap between expected Social Security 
cash revenues and benefits that is expected to begin in 2017 will grow 
until the Social Security combined Old-Age Survivors and Disability 
Insurance (OASDI) trust fund[Footnote 1] is exhausted and benefits at 
currently scheduled levels can no longer be paid in full. Under the 
2006 intermediate Trustees' estimates, Social Security's long-term 
financial shortfall is estimated at 2.02 percent of total taxable 
payroll,[Footnote 2] and its trust fund is projected to reach 
exhaustion in 2040.[Footnote 3] Since its inception in 1935, Social 
Security has been financed primarily by the payroll tax contributions 
of employers and employees. However, recent reform proposals have often 
used--and in some cases relied primarily on--general revenue 
financing[Footnote 4] to help address the program's financial 
shortfall. Many of the reform proposals estimated (scored) by the 
Office of the Chief Actuary (OCACT) at the Social Security 
Administration (SSA) as achieving "sustainable solvency"[Footnote 5] 
for the trust fund would give Social Security significant amounts of 
general revenue as part of a package of modifications. 

Such use of general revenue for Social Security would represent a major 
shift for this important and popular program. Since enactment in 1935, 
Social Security payroll taxes have been increased and benefits 
expanded, but the program's financing framework has remained largely 
the same. The use of general revenue was proposed both before the 
actual creation of Social Security and during short-term financing 
crises in the 1970s and 1980s as an alternative to payroll tax 
increases, but Congress for the most part has rejected general revenue 
financing for Social Security. Use of general revenue would change the 
"self-supporting" nature of the program and has thus been 
controversial. Some have feared that such a shift would facilitate 
benefit expansion by undermining the fiscal discipline that requires 
limiting benefit outlays to trust fund balances; others have feared 
that use of general revenue would lead ultimately to a change from a 
universal program to a reduced, means-tested benefit. Since 1983, small 
amounts of general revenue from taxation of the Social Security 
benefits of upper-income retirees have been dedicated to the 
program.[Footnote 6] 

In the coming years, as the baby boom generation retires, the nation 
will face a daunting and unprecedented long-term fiscal challenge. 
GAO's long-term budget simulations show that current fiscal policy is 
unsustainable and, absent changes, will lead to an escalating spiral of 
federal deficits and debt.[Footnote 7] Social Security is not the major 
driver of the long-term fiscal challenge--the cost of government- 
financed health care is--but Social Security reform has the potential 
to affect not only the financial condition of the program's trust fund 
but also the financial condition of the Nation. As the reform debate 
resumes, it will be important to make transparent the implications of 
general revenue use not only for the trust fund but also for the 
federal budget as a whole. 

This report seeks to answer the following questions: (1) What 
information is available about general revenue use in recent Social 
Security proposal scoring memos by OCACT and how can available 
information about general revenue use best be presented in order to 
facilitate comparison of reform proposals? (2) In recent Social 
Security reform proposals, what common mechanisms, especially general 
revenue mechanisms, are used to increase revenue to the program? (3) 
What are the implications of general revenue use for the trust fund and 
the federal budget? 

To answer these questions, we reviewed relevant literature on Social 
Security and performed an in-depth analysis of 17 OCACT proposal 
scoring memos done from 2001 through 2006. These included all proposals 
scored as achieving long-range solvency. Where a proposal was scored in 
multiple years, we used the most recent scoring. We also interviewed 
selected federal budget experts representing a range of views on reform 
approaches and met with officials from OCACT and Congressional Budget 
Office (CBO) involved in proposal scorings. (See app. I for more 
details on our scope and methodology.) 

We have prepared this report under the Comptroller General's authority 
to conduct evaluations on his own initiative, and it is intended to 
assist Congress in its deliberations on Social Security and retirement 
issues. The report is addressed to interested congressional committees. 

We performed our work between May 2005 and December 2006 in accordance 
with generally accepted government auditing standards. We requested 
comments on a draft of this report from the Commissioner of Social 
Security and incorporated those comments as appropriate. (See "Agency 
Comments and Our Evaluation" and app. II.) 

Results in Brief: 

Scoring memos prepared by OCACT usually serve as the basis for 
discussion of the financing changes--including any use of general 
revenue--contained in reform proposals.[Footnote 8] These memos focus 
on the impact of a proposal on the combined OASDI trust fund. 
Understanding the use of any general revenue in a given proposal, the 
proposal's impact on the federal budget, and how different proposals 
compare on these dimensions presents challenges. Although OCACT 
scorings have evolved in recent years to include estimates of a 
proposal's use of general revenue and the proposal's year-by-year 
impact on the federal budget, detailed information on these effects is 
available primarily in the complex technical tables at the end of the 
scoring memo. 

In OCACT's recent scorings, five different mechanisms were used to 
provide general revenue to maintain the current Social Security 
program[Footnote 9] or to a restructured Social Security system that 
included individual accounts (IA). These mechanisms can be 
characterized as providing for either unlimited or limited amounts of 
general revenue financing. The first mechanism provides for unlimited 
amounts of general revenue to be transferred to the trust fund as 
needed to maintain solvency (e.g., a 100 percent trust fund ratio). The 
other four mechanisms provide limited or defined amounts of general 
revenue through (1) general revenue transfers to the trust fund 
specified by formula or amount; (2) refundable tax credits, used to 
fund IAs; (3) dedication of estate tax revenue to the trust fund; and 
(4) redirection of Social Security benefit taxation revenue from 
Medicare's Hospital Insurance trust fund to the Social Security trust 
fund. Fourteen of the 17 proposals we reviewed used reallocated general 
revenue, most often to finance program restructuring, and 9 proposals 
used the mechanism of unlimited transfers as needed to achieve a 
specified trust fund ratio, which guaranteed "sustainable solvency" for 
the trust fund under OCACT's definition. (See text box for definition 
of "reallocated general revenue.") Three proposals did not use general 
revenue. Of the 17 proposals, 7 increased payroll tax revenues. 

Text Box: 

New versus Reallocated General Revenue in Social Security

In this report, “general revenue” in Social Security is defined as any 
revenue that does not derive from payroll tax contributions. In this 
framework, interest on trust fund assets is considered as deriving from 
payroll tax contributions.[A] All other revenue to Social Security, 
including revenue from taxation of certain Social Security benefits, is 
classified as general revenue.[B] This framework accords with the 
federal budget accounting perspective of our analysis. This conforms to 
the discussion of general revenue use in Social Security found on SSA’s 
history web site.[C]  

Although any additional payroll tax revenue would be new to the federal 
budget, general revenue may be either new to the federal budget as a 
whole or reallocated from other federal priorities.  

* New general revenue is revenue that derives from a new source, that 
is, from a new tax or increase to an existing tax. For example, in 
1983, the Social Security benefits of upper income retirees were made 
subject to income taxation, and the revenue from this new tax was 
dedicated to the Social Security trust funds. From a federal budget 
perspective, this change represented new general revenue at that time.  
This change has remained in place and constitutes a permanent form of 
general revenue in today’s Social Security program.  

* Reallocated general revenue does not come from a new source. Rather, 
it is reallocated from existing revenue to the Treasury. Following 
World War II, reallocated general revenue was used to fund Social 
Security benefits for military personnel and also a small flat benefit 
for individuals who were at least age 72 in 1968 but not entitled to 
Social Security through their work history.  

[A] GAO’s definition of general revenue assumes that the interest rate 
used to credit the trust funds reflects the rates for long-term federal 
marketable government securities, as is the case under current law. The 
Department of Treasury determines the interest rate earned on trust 
fund balances for Social Security using a statutory formula that sets 
the interest rate equal, at the time of issue, to the average market 
yield on outstanding marketable government securities not due or 
redeemable for at least 4 years. 

[B] From a tax perspective, accounting treatments are more complex.  
For example, the earned income tax credit, a refundable tax credit 
available to certain lower income earners, was intended to help offset  
Social Security payroll taxes for those eligible. See GAO, Tax 
Administration: Earned Income Credit—Data on Noncompliance and Illegal 
Alien Recipients, GAO/GGD-95-27 (Washington, D.C.: Oct. 25, 1994).  

[C] See http://www.ssa.gov/history/genrev.html.

[End of text box] 

All proposals we reviewed were scored by OCACT as able to pay benefits 
as scheduled in that proposal over the 75-year period, but the effects 
on the federal budget shown in OCACT's technical tables varied widely. 
For example, the effect on debt held by the public ranged from an 
improvement of $45 trillion to a worsening of $41 trillion over the 75- 
year projection period.[Footnote 10] Unlimited transfers of reallocated 
general revenue as needed to achieve trust fund solvency--by 
definition--pose the greatest potential risk to the budget especially 
when combined with benefit guarantees. In the proposals we reviewed, 
amounts of general revenue transferred under this mechanism ranged up 
to about twice total program financial shortfall. Limited transfers, 
however, were also quite large, in some cases somewhat more than twice 
program shortfall. 

From the trust fund perspective, any type of increased revenue the 
trust fund receives --new general revenue, reallocated general revenue, 
or increased payroll tax revenue--will improve the actuarial balance 
and increase the trust fund's capacity to pay benefits. From the budget 
perspective, however, new revenue from any source would improve the 
long-term fiscal imbalance while reallocated general revenue would do 
nothing to address it, all other things equal. (See fig. 1.) New 
revenue would have tangible consequences for taxpayers, e.g., less take-
home pay, while reallocated general revenue is less likely to be 
clearly observable. Reallocated general revenue, however, is not free. 
Regardless of how general revenue is provided to Social Security, it 
must be paid for at some point. The question is when, and by whom. 

Figure 1: New Revenue versus Reallocated General Revenue in Social 
Security Reform: 

[See PDF for image] 

Source: GAO. 

[End of figure] 

Regardless of their views on reform, most budget experts we spoke with 
believed greater transparency was needed concerning the use of general 
revenue in reform proposals. In view of the long-term fiscal challenge 
facing the nation, some experts were especially concerned about 
proposals' use of reallocated general revenue for Social Security. As 
one of these experts emphasized, the public needs to understand that 
reallocated general revenue for Social Security is not "free." 
Reallocated general revenue would need to be paid for now or later 
through lower spending, higher taxes, and/or more debt.[Footnote 11] 
Other budget experts viewed the use of reallocated general revenue as 
making possible a transition to a restructured Social Security system 
that would include IAs. These experts viewed the use of reallocated 
general revenue as a transition cost that would eventually be repaid to 
the budget as a whole.[Footnote 12] Most experts we spoke with were 
concerned about the mechanism of providing for unlimited transfers of 
reallocated general revenue as needed to assure trust fund solvency. 
They noted that since this mechanism in effect removes the possibility 
of trust fund exhaustion, it disables the trust fund's capacity to 
signal policymakers and the public of a need to take action. 

In coming decades, our nation will face a serious long-term fiscal 
challenge that will put America's fiscal future at risk. Substantive 
reform of Social Security will involve hard choices. OCACT's valuable 
information and complex analyses could make an even greater 
contribution to the reform debate if they were more readily accessible 
to nonexpert users. To improve understanding of proposed changes to 
Social Security, GAO is recommending that the Commissioner of SSA 
direct the Office of the Chief Actuary to include a summary 
presentation of its analysis in future scoring memoranda that will 
enable policymakers and the general public to quickly and easily 
compare Social Security reform proposals especially with respect to 
proposed use of general revenue and implications for the federal budget 
as a whole. This type of presentational change would not require any 
additional analysis but could greatly facilitate comparison of 
proposals to one another. 

SSA did not explicitly agree or disagree with our recommendation in its 
comments. In response to the recommendation, SSA noted that recent 
OCACT memos had added an additional table ("table d") that, SSA 
believes, already provides key information on general revenue use in 
proposals. SSA also expressed the view that a summary table showing the 
effects on the actuarial deficit of each proposal provision would be 
helpful. As our report had noted, this table has been included in some 
memoranda at the request of the proposal's sponsor. 

While we agree with SSA that both the technical and summary table it 
describes add value, we remain of the view that OCACT needs to develop 
a new table that can clearly and quickly communicate both trust fund 
effects and federal budget implications of a proposal. Our report 
acknowledged the value and completeness of OCACT's analyses including 
those presented in "table d." The message of our report was not that 
OCACT needs to do additional analytic work. Our message was rather that 
OCACT's existing analyses need to be summarized and highlighted so that 
a proposal's implications for both the trust fund and the federal 
budget as a whole are immediately clear. 

Background: 

When Social Security was enacted in 1935, the nation was in the midst 
of the Great Depression. About half of the elderly depended on others 
for their livelihood, and roughly one-sixth received public charity. 
Many had lost their savings. Social Security was created to help ensure 
that in the future the elderly would have adequate incomes in 
retirement and would not have to depend on welfare. Instead, the new 
program would provide benefits based on the payroll tax contributions 
of workers and their employers. Today Social Security is much more than 
a retirement program. In 1939 Social Security coverage was extended to 
the dependents of retired and deceased workers and in 1956 to the 
disabled. Over one-third of beneficiaries receive benefits for reasons 
other than old age.[Footnote 13] 

Social Security Is One Part of the Long-Term Fiscal Challenge: 

Our work on Social Security reform has emphasized the need for change 
not only because future program revenues are expected to fall short of 
what is needed to pay currently scheduled benefits in full but because 
Social Security, Medicare, and Medicaid taken together will consume an 
increasing share of the budget and the economy. To move into the future 
with no changes in federal health and retirement programs is to 
envision a very different role for the federal government. Little room 
would be left for other federal spending priorities such as national 
defense, education, and law enforcement. Absent changes in the 
structure of Social Security and Medicare, some time during the 2040s 
government would do nothing but pay interest on the debt and mail 
checks to retirees. Accordingly, substantive reform of Social Security 
and health programs remains critical to recapturing our future fiscal 
flexibility. 

Overall, the federal budget is facing unsustainable deficits and debt. 
Our most recent long-term budget simulations provide a compelling 
illustration of how unsustainable the long-term fiscal outlook is under 
current policies. 

As shown in figure 2, the long-term outlook under plausible assumptions 
is bleak. A demographic shift will begin to affect the federal budget 
in 2008 as the first baby boomers become eligible for Social Security 
benefits. Over time, this shift will cause spending for federal health 
and retirement programs including Social Security to swell. Long-term 
commitments for these and other federal programs will drive a massive 
imbalance between spending and revenues that cannot be eliminated 
without difficult policy choices and ultimately significant policy 
changes. 

Figure 2: Composition of Spending as a Share of GDP Assuming 
Discretionary Spending Grows with the Economy After 2007 and All 
Expiring Tax Cuts Are Extended: 

[See PDF for image] 

Source: GAO's January 2007 analysis. 

[End of figure] 

As figure 2 shows, contrary to popular perception, although Social 
Security grows in size, it is not the major driver of the long-term 
fiscal challenge. Spending for Medicare and Medicaid is expected to 
grow much faster. Many specific solutions have been proposed for Social 
Security, but approaches to reducing health care cost growth remain 
elusive. Moreover, addressing federal programs such as Medicare and the 
federal-state Medicaid program will need to involve changes in the 
health care system of which they are a part. This will be a societal 
challenge affecting all age groups. While Social Security reform alone 
cannot eliminate the long-term fiscal challenge, the likely effects of 
reform on the nation's fiscal future should be clearly understood and 
taken into account. 

Social Security's Trust Fund and the Federal Budget: 

Social Security's benefit payments and program receipts are tracked in 
federal budget accounts that are known as trust funds. Trust funds are 
one type of mechanism created to account for receipts that are 
dedicated to a specific fund for a specific purpose.[Footnote 14] 
Social Security has two trust funds, the Old-Age Survivors Insurance 
(OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. The 
combined OASDI trust fund comprises the financial resources of the 
Social Security system.[Footnote 15] Social Security has a permanent 
appropriation that permits the payment of benefits as long as the 
relevant trust fund account has a sufficient balance. 

Social Security's outlays are limited to trust fund balances, but the 
program's outlays and revenues are also part of the federal unified 
budget. Today, Social Security payroll tax revenues exceed benefits. In 
2005, the Social Security trust fund paid $530 billion in benefit 
payments and administrative costs and took in $608 billion in cash 
revenues, leaving a cash surplus of about $78 billion.[Footnote 16] By 
law, the Social Security trust fund must invest any cash surpluses in 
interest-bearing federal government securities. Throughout its history, 
Social Security has invested mostly in a special type of nonmarketable 
securities that, like debt held by the public, are guaranteed by the 
full faith and credit of the U.S. government. Treasury borrows the cash 
from Social Security's surplus to pay for other government expenses, 
and this use of Social Security's excess cash revenues reduces the 
amount Treasury would otherwise need to borrow from the public to 
finance other federal programs.[Footnote 17] (See fig. 3). 

Figure 3: Social Security Flows Today: 

[See PDF for image] 

Source: GAO. 

[End of figure] 

These excess cash revenues, however, will begin to diminish in 2009, 
one year after the oldest members of the baby boom generation first 
become eligible for Social Security old age benefits. This downturn in 
the Social Security cash surplus--the difference between payroll taxes 
and benefits paid--will begin a squeeze on the rest of the budget that 
will worsen in the coming years, making less cash revenue available for 
other federal priorities. By 2017 trust fund cash revenues will be 
inadequate to pay currently scheduled benefits in full, and the Social 
Security trust fund will need to redeem trust fund assets from the 
Treasury. To pay the trust fund, Treasury will need to provide cash 
from general revenues in exchange for those trust fund securities. This 
can come only through increased revenue, increased borrowing from the 
public, reduced spending in the rest of the government, or some 
combination of these. While the trust fund is redeeming its securities, 
it will continue to pay full benefits, but the redemptions will reduce 
overall federal budgetary flexibility. 

Our Framework for Evaluating Reform Proposals: 

As we have said previously, Social Security reform proposals will need 
to be evaluated on a number of criteria. Our work on various aspects of 
this important program has emphasized that Social Security reform is 
about more than solvency. To evaluate reform proposals, we have 
suggested that policy makers should consider three basic criteria: 

1. the extent to which the proposal achieves sustainable solvency and 
how the proposal would affect the economy and the federal budget; 

2. the balance struck between the twin goals of individual equity 
(rates of return on individual contributions) and income adequacy 
(level and certainty of benefits);[Footnote 18] and: 

3. how readily such changes could be implemented, administered, and 
explained to the public. 

Our first criterion of sustainable solvency reflects the need to look 
at Social Security reform both in terms of its trust fund and in the 
larger context of the federal budget as a whole. It is different from 
OCACT's definition, which is focused solely on the trust fund, for 
which they are responsible. 

From a micro perspective, projected trust fund balances can provide a 
vital though imperfect signaling function for policymakers about 
underlying fiscal imbalances in covered programs. Tracking the 
estimated future balances makes it possible in turn to estimate how 
much more funding is needed to pay for the benefits scheduled in 
current law. A shortfall between the long-term projected fund balance 
and projected costs can signal that the fund, either by design or 
because of changes, is collecting insufficient monies to finance 
currently scheduled future payments. This signaling device can 
eventually prompt policymakers to action. 

From a macro perspective, however, program solvency measures such as 
the trust fund exhaustion date and the actuarial balance calculation 
provide no information about the broader question of program 
sustainability--that is, the capacity of the future economy and the 
federal unified budget to pay program benefits over the long run. When 
a program is not fully self-financed, as is the case with Social 
Security, projected accumulated trust fund balances do not necessarily 
reflect the full future cost of existing government commitments. 
Accordingly, trust fund balances are not an adequate measure of Social 
Security's sustainability. The critical question is whether the Nation 
and the government as a whole can afford the benefits in the future and 
at what cost in terms of other claims on scarce resources. Extending a 
trust fund's solvency without reforms to make the underlying program 
more sustainable over the long term can obscure the warning signals 
that trust fund balances provide, thereby creating a false sense of 
security and delaying needed program reform. 

Evaluating proposals is a complex task involving trade-offs between 
competing goals. Reform proposals should be evaluated as packages that 
strike a balance among individual reform elements and important 
interactive effects between these elements. The overall evaluation of 
any particular reform proposal depends on the weight individual policy 
makers place on each criterion. 

Social Security Financing Has Evolved, but Payroll Taxes Remain the 
Principal Financing Mechanism: 

Since its establishment in 1935 Social Security has been financed 
primarily by payroll taxes contributed equally by employers and 
employees. Both tax rates and benefits have changed over time, but 
Congress has generally rejected proposals for including general revenue 
in financing Social Security benefits. Payroll tax rates have 
increased, from a total of 2 percent of taxable payroll in 1937--when 
payroll taxes were first collected--to 12.4 percent today. Benefits 
have also been expanded to include workers' families and the disabled. 

The question of whether some general revenue should be used to minimize 
the burden of payroll taxes has been debated since the program's 
inception. The Committee on Economic Security (CES), tasked by 
President Roosevelt with designing the program, believed that expected 
benefit payments would exceed expected payroll tax revenues beginning 
about 1965 and at that time general revenue should be used to fill the 
gap. Under this financing arrangement, the general revenue share was 
ultimately expected to reach about one-third of total revenues. 
President Roosevelt rejected the idea of using general revenue in 
program financing. He endorsed payroll tax financing on the grounds 
that it would ensure the new program would be "self-supporting." A 
perceived link between benefits and payroll tax contributions would, he 
believed, serve to preserve the program in the future. Using general 
revenue would make the program welfare--in President Roosevelt's words, 
"the dole by another name." 

President Roosevelt's financing approach envisioned the buildup of a 
reserve fund that would serve to fund benefits in the long term, but 
objections were made to this approach. Some believed that the existence 
of a large reserve fund would lead to higher benefit levels or other 
increased government spending; others objected to the underlying 
concept of prefunding benefits which they believed would lock in 
specific levels of support for aged beneficiaries in the future. 
Congressional changes to the program that expanded benefits and 
postponed scheduled payroll tax increases put the program on a pay-as- 
you-go basis, that is, revenues from current workers in a given year 
pay for the benefits of current beneficiaries in that year. 

Nevertheless, the issue of whether general revenue should be used to 
supplement payroll tax financing has recurred throughout Social 
Security's history. During short-term financing crises in the late 
1970s and early 1980s, proposals were made for general revenue use. At 
that time some opposed this use of general revenue believing that it 
would obscure the true cost of the program and lead to benefit 
expansion. Reform legislation passed in 1983 did include permanent use 
of some general revenue by imposing a new income tax on the Social 
Security benefits of upper income retirees and dedicating that tax to 
the trust fund.[Footnote 19] Although the income thresholds were not 
indexed to inflation, amounts of revenue to Social Security from this 
source have been and remain small relative to total program tax 
revenue. 

Since the legislation passed in 1977 and 1983, a temporary build up of 
trust fund assets has caused Social Security to temporarily deviate 
somewhat from pay-as-you-go financing. This occurred in part because 
the large baby boom generation makes the size of the workforce large 
relative to the beneficiary population. As the baby boom generation 
retires and is replaced by a workforce that will grow less rapidly than 
in the past, trust fund assets will be redeemed to pay benefits, but 
these assets plus payroll tax revenues will eventually be insufficient 
to pay currently scheduled benefits in full. To deal with this 
structural imbalance, many proposals have included the use of general 
revenue to supplement payroll tax financing--often in large amounts 
relative to total financing and over extended time periods. For 
example, both proposals made by President Clinton in 1999 and reform 
models put forward in 2003 by the Commission to Strengthen Social 
Security established by President George W. Bush included the use of 
general revenue. 

OCACT Scoring Memos Are Primary Source of Information on Reform 
Proposals, but Detailed Tables Are Difficult to Use for Understanding 
General Revenue and Federal Budget Effects: 

OCACT scoring memos are the primary source of information on recent 
Social Security reform proposals. Since the mid-1990's, OCACT has 
scored a wide variety of comprehensive reform proposals. Each proposal 
modifies the OASDI program using one or several of the following 
provisions that: (1) reduce benefits, e.g. through changes to indexing 
formulas and/or other methods; (2) increase benefits for special 
populations; (3) raise revenue through payroll tax increases; (4) use 
general revenue financing through a range of mechanisms (not always 
specified as general revenue); (5) invest trust fund assets through 
government investment in marketable securities; or (6) change the 
current structure of the program by creating IAs.[Footnote 20] The 
format of these scoring memos has evolved over time, partially in 
response to feedback from users. More recent scoring memos are 
available on OCACT's web site.[Footnote 21] In addition, OCACT has 
begun to post estimates of many of the stand-alone provisions that have 
been suggested to modify the Social Security program and improve its 
financial status. Many of these are also included in the various 
comprehensive proposals. 

OCACT's scoring memos typically emphasize two important summary 
measures: (1) the change to actuarial balance and (2) ability of the 
trust fund to meet obligations throughout the 75-year period and 
beyond, an indicator of "sustainable solvency" as defined by 
OCACT.[Footnote 22] In recent years, sustainable solvency as defined by 
OCACT has become the standard by which reform proposals are measured. 
When OCACT evaluates a reform proposal as meeting the definition of 
sustainably solvent, the proposal sponsor often highlights this point 
in press statements and other statements. This measure, however, 
considers only trust fund effects and not the effect of the proposal on 
the federal budget.[Footnote 23] 

To discover crucial information on a proposal's general revenue use and 
federal budget effects, a user of OCACT's scoring memos must consult 
the detailed tables at the end of the memo. The type and amount of 
information included in the tables has increased over time. Current 
tables are generally comprehensive in presenting a proposal's financial 
effects. Columns display year-to-year changes in the financial 
operations of the trust fund and the unified budget as well as the 
cashflow between the trust fund and the general fund of the U.S. 
Treasury. For those plans that include either government or IA 
investment in equity markets, OCACT publishes two sets of tables, one 
reflecting "expected-yield" assumptions on investments and a second set 
reflecting "low-yield" assumptions. A few of the scoring memos we 
analyzed included other tables that provide insight into general 
revenue use. One of these tables shows the impact of each individual 
provision on the long-range actuarial balance (as a percentage of 
payroll). This table shows to what extent a single provision, by 
itself, either improves or worsens the actuarial balance.[Footnote 24] 

Budget experts we spoke with agreed that the tables had evolved and now 
provide more information but they also said that the tables are 
difficult to use and take much effort to understand. In particular, 
they said that the "information is not reader-friendly" and "key 
estimates of general revenue are not highlighted and it is not always 
clear if there is a specified source for the general revenue." Our 
analysis of 17 recent scoring memos generally confirmed this 
assessment. Policymakers and the public may have a difficult time 
comparing how different plans get to sustainable solvency and the 
implications for the rest of the budget, future deficits, and debt held 
by the public. Similarly, the 1999 and 2003 Technical Panels on 
Assumptions and Methods, convened by the Social Security Advisory 
Board, expressed concerns about consistency in presentation of 
information in scoring memos. One recommendation made by budget experts 
was for an up-front summary table with crucial information that a 
reader needs in order to compare plans. Although we found no agreement 
on precise content for the table, information about benefit cuts, tax 
increases, and general revenue could somehow be included. 

OCACT staff told us that the principal purpose of their scorings was to 
show the effect of a proposal on trust fund solvency and not on the 
budget as a whole. They added that they were generally satisfied with 
the current format for scoring memos, noting that they had not received 
any negative feedback from users. They did agree that information could 
be more user-friendly and are considering ways to achieve this goal, 
for example through the inclusion of visuals. OCACT staff further noted 
that scoring proposals is resource-intensive. Although some scorings 
can take up to a year, others must be done under tight timeframes, 
e.g., when sponsors are planning to introduce legislation. They also 
told us that they have discussed options for a summary table with 
selected users but had not found any consensus on what information 
should be highlighted. OCACT staff emphasized that their scorings are 
and need to continue to be perceived as objective. In any case, OCACT 
staff did not think that the use of general revenue should be 
highlighted above other proposal changes. 

More recently, CBO has developed the capacity to do long-term estimates 
of Social Security reform proposals and has completed five long-term 
scoring memos to date. OCACT and CBO scoring memos have key substantive 
and presentational differences. One particularly important difference 
is the use of different economic assumptions, which results in CBO 
currently having more optimistic estimates of current-law program 
finances. Although budget experts we spoke with generally thought that 
CBO scoring memos have been beneficial analytical tools, they also 
thought that OCACT scoring memos were likely to continue to be the 
primary source of information in any debate over reform proposals. 
Therefore, having OCACT scoring memos provide clear and easily 
accessible information on any use of general revenue and on the impact 
of any reform proposal on the broader budget remains important. 

Recent Proposals Differ by Revenue Mechanism and Reform Approach Used, 
but Most Reallocate General Revenue and Aim to Increase Investment 
Returns: 

Almost all proposals we reviewed package multiple revenue options and/ 
or benefit changes to achieve sustainable solvency, but they 
differ[Footnote 25] in both the broad approach they take for dealing 
with the long-range solvency problem and the revenue mechanisms they 
use. Reform approaches can be divided into two broad categories: 
approaches that maintain the current structure, that is, a pay-as-you- 
go social insurance program of defined benefits paid for primarily by 
payroll tax revenue, and approaches that create a new structure that 
includes IAs. 

Provisions that guarantee revenue to the Social Security trust fund can 
be classified as: reallocated general revenue mechanisms, payroll tax 
mechanisms, or new general revenue mechanisms (see Text Box). A 
reallocated general revenue mechanism is any provision that increases 
revenue to the program by redirecting existing general revenue expected 
under existing law to the trust fund. Payroll tax mechanisms directly 
change the amount of payroll taxes contributed and therefore increase 
payroll taxes flowing into the trust fund. A new general revenue 
mechanism would establish a new source of income to the general fund 
and dedicate it to the Social Security trust fund. Examples would be 
the creation of a national sales tax or increases in income or excise 
taxes with the revenue from any of these dedicated to the Social 
Security trust fund. None of the proposals we examined introduced new 
general revenues. All of them--although described and characterized in 
various ways--used only mechanisms that would reallocate general 
revenue and/or increase payroll taxes. 

All 17 of the Social Security reform proposals we analyzed include at 
least one mechanism to increase revenue to Social Security and some use 
more than one mechanism.[Footnote 26] Fourteen of the 17 proposals we 
examined would reallocate general revenue, that is, transfer existing 
revenue from the general fund; the other 3 proposals did not use 
general revenue. 

The 14 proposals that used reallocated general revenue did so by means 
of five different mechanisms. These mechanisms can be characterized as 
providing for either unlimited or limited amounts of general revenue 
financing. The first mechanism provides for unlimited general revenue; 
the other four use varying means to provide limited or defined amounts 
of general revenue financing. Unlike plans with unlimited transfers to 
assure trust fund solvency, proposals with general revenue transfers 
limited by specified amounts, source, or formula, could be insolvent at 
some point in time if the actual financial condition of the program 
differs from the OCACT estimates. 

Unlimited mechanism: 

* Unlimited general revenue transfers to the trust fund of whatever 
amount is necessary to maintain trust fund solvency (e.g., a 100 
percent trust fund ratio).[Footnote 27] This mechanism is the most 
frequently used general revenue option. It is found in 9 of the 17 
plans we examined. This provision usually states that general revenue 
transfers are to be made if, at any time, the combined OASDI trust fund 
ratio is projected to fall below 100 percent under the provisions of 
the plan.[Footnote 28] Transfers of sufficient amount and timing will 
be made to prevent the trust fund from falling below 100 percent of the 
annual program cost. In simple terms, funds sufficient to pay projected 
benefits for the year, that is, to maintain solvency, would be 
transferred as needed from the general fund to the Social Security 
trust fund without regard to the amount. This provision alone 
guarantees program solvency under any circumstance because it provides 
the trust fund with an unlimited and open-ended draw on the general 
fund.[Footnote 29] 

Limited mechanisms: 

* General revenue transfers specified by formula or amount. Six plan 
sponsors propose using this mechanism, which specifies--in actual 
dollars, as a percentage of taxable payroll or using a formula--how 
much general revenue would be transferred to the trust fund in a given 
year. Transfers would be limited by these specifications. In other 
words, transfer amounts are made independent of the financial condition 
of the program as measured by the trust fund ratio).[Footnote 30] 

* "Refundable tax credits" for individual add-on accounts (or to 
individuals to offset account contributions). Alone among the general 
revenue options discussed, under this mechanism revenue would not be 
transferred to the OASDI trust fund, but would be outlaid immediately-
-either to provide funding to individual add-on accounts or to offset 
the cost of those accounts. The four proposals using this option would 
either credit the general revenue directly to the workers' add-on 
accounts (the amount would be determined by the plan's provisions) or 
include the amount as a credit on the individuals' income taxes to 
partially offset the payroll tax increase introduced to fund the 
account. Although in these proposals the add-on accounts would be 
financed outside of the current program--either entirely or partially 
funded using reallocated general revenue[Footnote 31]--they would be 
considered part of a new Social Security system. 

* Dedication of revenue generated from the estate tax to the trust 
fund. This revenue option would dedicate revenue from the estate tax to 
the Social Security trust fund to help finance the current structure. 
One proposal would permanently establish a tax of 45 percent on all 
estates of deceased taxpayers with taxable assets in excess of $3.5 
million (as in current law for 2009).[Footnote 32] The tax revenue 
would be dedicated to the OASDI trust fund instead of to the general 
fund. 

* Redirection of those revenues from Social Security benefit taxation 
that now go to the Medicare Hospital Insurance (HI) trust fund to the 
OASDI trust fund. Currently, up to 85 percent of an individual's or 
couple's OASDI benefits may be subject to federal income taxation if 
their income exceeds certain thresholds. The income tax revenue 
attributable to the first 50 percent of OASDI benefits is already 
dedicated to the Social Security trust fund, but the revenue associated 
with the amount between 50 and 85 percent of benefits is dedicated to 
the Medicare HI trust fund. Two proposals would dedicate all of the 
income from the tax on OASDI benefits to OASDI. 

Reform plans with individual accounts may have indirect effects on 
income from benefit taxation. Proposal sponsors typically stipulate 
whether disbursements from individual accounts would be taxed like 
current Social Security benefits or not taxed at all. If account 
disbursements are considered OASDI benefits for income tax purposes, 
income to the trust fund could be greater (or smaller) in cases where 
the combined traditional benefit and account disbursement yields are 
greater (or lesser) than under current law. There would be similar 
implications for the HI trust fund if benefit taxation income is 
distributed as under current law. Plans that reduce the taxable 
traditional OASDI benefits and do not tax individual account 
distributions would lower trust fund revenue from this source. 

Of the 17 proposals, 7 increase payroll tax revenue using one or more 
of the following four mechanisms: 

* Raise or eliminate the "taxable maximum limit" or "cap" on covered 
earnings[Footnote 33] (with or without retaining the cap for benefit 
calculation). Incorporated in five proposals, this is the most common 
mechanism for bringing in new payroll tax revenue. This mechanism would 
not change the 12.4 percent tax rate but would either increase the 
level of wages taxed or completely eliminate the cap so that all 
covered earnings are taxed. This latter option is similar to the 
Medicare HI payroll tax of 2.9 percent, which applies to all covered 
earnings. SSA recently estimated that in 2005 about 84 percent of 
covered earnings were subject to the OASDI tax (i.e., were taxable) and 
projected decreases in the ratio of taxable wages to covered wages 
through 2015. After 2015, SSA expects this percentage to be held 
approximately constant at 82 percent of covered earnings. Four plans 
propose to increase the percentage of taxable earnings under the "cap" 
to a level between 87 and 90 percent of covered earnings. A fifth plan 
would completely eliminate the earnings cap and would tax all earnings 
at the 12.4 percent rate. 

* Increase the 12.4 percent payroll tax on taxable earnings. Four plans 
propose raising payroll tax rates by between 1 and 3 percentage points. 
None of the plans we reviewed propose an immediate tax rate increase of 
2.02 percentage points, the estimated increase needed to achieve 75- 
year solvency through year 2080.[Footnote 34] 

* Expand coverage to state and local government employees not currently 
covered. Three plans would require those public employers not currently 
providing Social Security coverage to cover newly hired 
employees.[Footnote 35] 

* Tax covered earnings above the "cap" but at a lower tax rate (with or 
without retaining the "cap" for benefit calculation). Two proposals 
apply a rate much lower than 12.4 percent, between 3 and 4 percent, to 
covered earnings above the established taxable maximum. 

Some of the mechanisms to increase payroll tax revenue could also 
result in increased benefit costs. For example, proposals that raise or 
eliminate the "cap" on covered earnings or tax earnings above the "cap" 
may or may not include these wages when calculating benefits. If the 
wages are included in the benefit formula, benefit costs would increase 
in the future and the improvement in the actuarial deficit would be 
smaller than if the wages were not included in the benefit calculation. 
Expanding coverage to all state and local government workers would 
bring in additional payroll tax revenue but would also increase the 
long-term benefit costs as newly covered earnings would entitle 
affected workers to the associated benefits. 

None of the five general revenue mechanisms in the plans we examined 
would come from new revenue sources and hence would bring no new 
revenue to the federal budget; the four payroll tax mechanisms would 
bring new revenue to the budget as a whole. Table 1 categorizes the 
mechanisms in terms of this framework. The number in parentheses 
indicates the number of reform proposals that contain this mechanism. 

Table 1: Revenue Mechanisms in Reform Proposals by New and Reallocated 
Revenue: 

Limited, specified funding source; 
New Revenue: 
* Increase the 12.4 percent payroll tax (4); 
* Raise or eliminate earnings cap for payroll tax (5); 
* Tax earnings above the cap at a lower rate (2); 
* Expand coverage to state/local employees not covered (3); 
Reallocated Revenue: 
* Redirect all revenue from taxation of OASDI benefits to OASDI trust 
fund (2); 
* Dedicated estate tax[A] (1). 

Limited, no specified funding source; 
New Revenue: [Empty]; 
Reallocated Revenue: 
* General revenue transfers specified by amount or formula[B] (6); 
* Refundable tax credits (4). 

Unlimited, no specified funding; 
New Revenue: [Empty]; 
Reallocated Revenue: 
* General revenue transfers as needed to maintain trust fund solvency 
(e.g., a 100% trust fund ratio)[B] (9). 

Source: GAO. 

Notes: Payroll tax mechanisms are in italics. The number of reform 
proposals do not sum to 17 since some reform plans contain more than 
one revenue mechanism. 

[A] Sunset provisions in the Economic Growth and Tax Relief 
Reconciliation Act of 2001 would result in the estate tax being treated 
in the budget as new revenue in 2010 (the only year that the tax is 
repealed under current law) and reallocated revenue in all succeeding 
years. 

[B] In some cases, proposal sponsors suggest or assume sources of non- 
Social Security program savings or increases in revenue to help offset 
the costs to the general fund. However, the transfers to the trust fund 
in these proposals would not be contingent on achieving the estimated 
reductions in federal spending or increases in tax income on which 
transfer amounts are based. 

[End of table] 

Although there is no analytic link between the inclusion of IAs and the 
selection of a specific revenue mechanism, in our review we found that 
most of the time reallocated general revenue mechanisms are used to 
help structure a new Social Security system with IAs. On the other 
hand, payroll tax mechanisms are used about half the time to help 
finance the current program and about half the time in proposals 
creating a new system including IAs. Table 2 summarizes the reform 
approach and revenue mechanisms used in reform plans. The numbers in 
parentheses indicate the number of reform proposals that contain a 
particular mechanism. 

Table 2: Revenue Mechanisms in Reform Proposals by Reform Approach: 

General revenue mechanisms; 
Maintain Current Structure: 
* Unlimited general revenue transfers as needed to maintain solvency 
(e.g., a 100% trust fund ratio) (1); 
* Dedicated estate tax (1); 
New Structure with IAs: 
* Unlimited general revenue transfers as needed to maintain solvency 
(e.g., a 100% trust fund ratio) (8); 
* General revenue transfers specified by amount or formula (6); 
* Refundable tax credit (4); 
* Redirect all revenue from taxation of OASDI benefits to OASDI trust 
fund (2). 

Payroll mechanisms; 
Maintain Current Structure: 
* Raise or eliminate earnings cap for payroll tax (3); 
* Increase the 12.4 percent payroll tax (2); 
* Tax earnings above the cap at a lower rate (1); 
* Expand coverage to state/local employees not covered (2); 
New Structure with IAs: 
* Raise or eliminate earnings cap for payroll tax (2); 
* Increase the 12.4 percent payroll tax (2); 
* Tax earnings above the cap at a lower rate (1); 
* Expand coverage to state/local employees not covered (1). 

Source: GAO. 

Note: Payroll tax mechanisms are in italics. The number of reform 
proposals do not sum to 17 since some reform plans contain more than 
one revenue mechanism. 

[End of table] 

Most proposals--15 of the 17 we reviewed--included provisions aimed at 
increasing revenue through investment in private markets. Two proposals 
used direct government investing in marketable securities through the 
current program structure and 13 created a new Social Security 
structure including individual accounts.[Footnote 36] Investing in 
marketable securities creates the potential for improved returns but 
increases investment risk for the investing party (the government or 
individuals). Therefore, unlike reallocated revenue and payroll tax 
mechanisms, neither investment approach assures additional income. 

Proposals for government investment of the trust fund anticipate 
returns that would increase revenue to the trust fund while in most IA 
proposals the benefit obtained from any increased returns would be 
credited to the individuals' accounts and generally included as part of 
the account distribution. Individual account proposals may redirect 
revenue from the program or the federal budget but typically compensate 
for lost revenue through either across-the-board benefit cuts or 
"benefit offsets"[Footnote 37] to currently-scheduled benefits. In 
these proposals, the "total benefit" from the new Social Security 
system consists of a combination of the traditional Social Security 
defined benefit (including any modifications/offsets) and the 
individual account distribution (including any modifications/offsets). 

Some plans establishing IAs propose to guarantee benefit levels 
irrespective of actual returns; they are able to do this by using 
general revenue transfers. Guarantees would benefit account holders by 
partially or fully protecting them from risk. However, the increased 
benefits to account holders would create a corresponding cost for the 
federal government. Whenever an account fell short of promised 
benefits, the government--and, implicitly, taxpayers--would make up the 
difference.[Footnote 38] 

Additional Revenue Improves Trust Fund Solvency but Effects on the 
Federal Budget May Differ Greatly: 

The effect of a reform proposal on federal budget balances and debt 
cannot be determined from its effect on trust fund solvency. The 
proposals we reviewed illustrate this. All plans included in our review 
were scored by OCACT as able to pay the plan's benefits in full over 
the 75-year period. However, plans' impact on the federal budget as a 
whole varied widely in the scorings. For example, the effect on debt 
held by the public ranged from an improvement of $45 trillion to a 
worsening of $41 trillion over the 75-year projection period.[Footnote 
39] The impact of a proposal package on the federal budget is shown in 
the year-by-year scoring of effects on unified deficits and debt that 
OCACT provides in its technical tables. 

That the impact on the trust fund and the impact on the budget as a 
whole can differ is not surprising. By definition, any increase in 
revenue provided to the trust fund--whether new general revenue, 
reallocated general revenue, or increased payroll tax revenue--will 
increase the trust fund's capacity to pay benefits. Effects on the 
federal budget, however, depend on the type and amount of revenue and 
also on assumptions about payment of currently scheduled 
benefits.[Footnote 40] 

We compare the impact of new and reallocated revenue on the budget and 
long-term fiscal outlook under two different assumptions about the 
payment of currently scheduled benefits beyond projected trust fund 
exhaustion in 2040.[Footnote 41] First, assume as OCACT does in its 
memos and GAO does in its long-range simulations, that currently 
scheduled benefits would be paid in full throughout the estimating 
period (i.e., borrowing would increase to fund the benefits). Under 
these assumptions--and assuming no other changes in spending and/or 
revenue--either new general revenue or additional payroll tax revenue 
would replace some of that borrowing and improve the long-term fiscal 
outlook. Reallocated general revenue equal to (or less than) the Social 
Security financial shortfall would have no impact on federal budget 
deficits, debt, or the long-term fiscal outlook. In amounts greater 
than the shortfall, reallocated general revenue would make the long- 
term outlook worse, all other things equal. 

As an alternative, assume instead that benefit outlays will be limited 
to trust fund income once the trust fund has reached exhaustion in 
2040.[Footnote 42] Under this alternative, federal budget balances 
would be the same through 2040 as under the first assumption, then 
improved over the longer term due to lower annual outlays and less 
borrowing. 

Under this "trust fund exhaustion scenario," new revenue dedicated to 
Social Security early in the projection period would improve annual 
budget balances and extend the time period during which currently 
scheduled benefits could be paid in full. The new revenue would also 
reduce debt for most of the 75-year period.[Footnote 43] Any amount of 
reallocated general revenue on the other hand would increase federal 
budget deficits, reduce budgetary flexibility, and increase debt held 
by the public relative to this alternative assumption of trust fund 
exhaustion. All else equal, the reallocated general revenue would 
provide additional income to the trust fund and make possible 
additional benefit outlays, but borrowing from the public would be 
needed to pay for these outlays. 

Use of different time frames can also lead to different conclusions 
about the federal budget effects of additional revenue including 
reallocated general revenue. For example, some proposals that 
restructure the Social Security system to rely more on individual 
accounts--funded in part through a "carve-out" of current payroll tax 
revenues--use large amounts of reallocated general revenue at the 
outset to help make up the gap as benefit reductions from currently 
scheduled levels are phased in. Those favoring this approach to system 
restructuring may view the reallocated general revenue as a loan from 
the rest of the budget that will be paid back. Advocates for these 
types of changes point out that once the transition to the new system 
is complete, the cost of the Social Security program will have been 
reduced compared to paying currently scheduled benefits in full. Some 
favoring program restructuring have advocated use of an infinite 
horizon rather than the 75-year time frame traditionally used for 
actuarial assessment of the trust fund.[Footnote 44] These analysts 
view 75 years as an arbitrary cut-off point. They note that the use of 
this horizon can be misleading where a gap between projected revenues 
and benefit payments continues to grow after the 75-year window, as is 
the case with the current program. 

Those who oppose using reallocated general revenue to achieve system 
restructuring include an emphasis on a shorter time frame in their 
analyses. They point to higher levels of federal spending and debt held 
by the public over at least the next several decades resulting from 
this approach to reform. These analysts emphasize that it is in this 
nearer time frame the baby boom generation will retire and the cost to 
the government will escalate dramatically, driven by demographics and 
compounded by federal spending on health. These analysts were concerned 
that revenue used for Social Security will not be available for 
Medicare and Medicaid, and absent changes in fiscal policy, spending on 
the three major entitlements will lead to unsustainable levels of debt 
long before Social Security restructuring will have reduced federal 
commitments for that program. These analysts called for a focus on the 
long-term federal budget problem as a whole and a search for solutions 
to Social Security's financing problems within that larger context. 

In concept, the mechanism of unlimited reallocated general revenue as 
needed to assure trust fund solvency, used in 9 of the 17 proposals we 
reviewed, represents the largest potential draw on the federal budget. 
The amount of reallocated general revenue actually provided to the 
trust fund in these proposals would vary depending on the financial 
requirements of the Social Security program, and these would depend on 
the other proposal provisions. The other four general revenue 
mechanisms would use specified amounts of reallocated general revenues. 
That is, the amount of general revenue used would not vary according to 
the financial requirements of the Social Security program but would be 
dictated by the parameters of the mechanism, e.g., specified in current 
dollars or as a share of taxable payroll in specific years. 

In terms of size, amounts of reallocated general revenue used by 
mechanisms in proposals we reviewed varied widely, ranging up to over 
200 percent of total program financial shortfall. Estimates for general 
revenue deriving both from the mechanism of unlimited reallocated 
general revenue as needed to assure trust fund solvency and from 
specified general revenue transfer amounts were large in some cases. 
Table 3 shows amounts of reallocated general revenue by type of 
mechanism. 

Table 3: Size of Reallocated General Revenue in Proposals Reviewed by 
Mechanism Used: 

Unlimited; 
Mechanisms for reallocating general revenue: General revenue transfers 
as needed to maintain solvency (e.g., a 100% trust fund ratio); 
Amount: As a share of 75-year program financial shortfall: Up to 
184%[A]; 
Amount: As a percent of taxable payroll: Up to 3.5%; 
Number of proposals using mechanism: 9. 

Limited; 
Mechanisms for reallocating general revenue: General revenue transfers 
to the trust fund specified by formula or amount; 
Amount: As a share of 75-year program financial shortfall: Up to 207%; 
Amount: As a percent of taxable payroll: Up to 4.0 %; 
Number of proposals using mechanism: 6. 

Limited; 
Mechanisms for reallocating general revenue: Refundable tax credits[B]; 
Amount: As a share of 75-year program financial shortfall: Up to 115%; 
Amount: As a percent of taxable payroll: Up to 2.2%; 
Number of proposals using mechanism: 4. 

Limited; 
Mechanisms for reallocating general revenue: Redirect all revenue from 
taxation of OASDI benefits to OASDI trust funds; 
Amount: As a share of 75-year program financial shortfall: 22%-23%; 
Amount: As a percent of taxable payroll: 0.4%; 
Number of proposals using mechanism: 2. 

Limited; 
Mechanisms for reallocating general revenue: Dedicated estate tax; 
Amount: As a share of 75-year program financial shortfall: 27%; 
Amount: As a percent of taxable payroll: 0.5%; 
Number of proposals using mechanism: 1. 

Source: GAO analysis of OCACT scorings. 

Notes: 

The numbers shown in this table do not sum to 17 since some reform 
plans contain more than 1 revenue option. 

As shown in this table, "program financial shortfall" is defined as the 
cost of achieving actuarial balance including the cost of an ending 
trust fund ratio of 100 percent. 

Estimates shown are based on available information in OCACT scoring 
memos. In some cases, scorings for individual mechanisms were not shown 
separately. 

Where account yields affected the amounts of general revenue a proposal 
would use, OCACT's expected yield estimate was used. 

[A] Based on proposals reviewed as scored by OCACT under their expected 
yield assumption. Under OCACT's low yield assumption, estimated amounts 
for this mechanism would range up to 245 percent of program shortfall. 

[B] Not transferred to the trust fund; used to fund individual add-on 
accounts. 

[End of table] 

Some of the budget experts with whom we spoke suggested an approach we 
did not find in any of the reform proposals we examined. These experts 
suggested that plans could establish a new source of general revenue 
and dedicate the new revenue to the Social Security trust fund. For 
example, they suggested that instead of payroll tax increases, income 
taxes could be raised or a value-added tax[Footnote 45] instituted with 
all or part of the revenue dedicated to Social Security. Some of the 
budget experts we spoke with observed that any policy decision to 
introduce new revenues dedicated to a particular program could have 
implications for the capacity of the rest of the budget to deal with 
other fiscal challenges. Enactment of any new taxes for Social Security 
could affect the public's willingness to bear taxes to fund other 
important national priorities, such as Medicare. In addition, taxes may 
have effects on individuals' saving behavior and on labor supply, 
effects that are beyond the scope of this report. 

Despite their differing views on reform approaches, budget experts 
generally either believed or advocated that some use of general revenue 
would be part of reform. Some of them were concerned about the use of 
reallocated general revenue for Social Security in view of the long- 
term fiscal challenge facing the nation. One emphasized that the public 
needs to understand that reallocated general revenue for Social 
Security is not "free." Reallocated general revenue would need to be 
paid for now or later through lower spending, higher taxes, and/or more 
debt.[Footnote 46] Another expert expressed the view that general 
revenue would be needed to reduce the political pain involved in reform 
but cautioned that using general revenue for Social Security could mean 
an even larger share of federal resources committed to funding programs 
that serve the elderly in coming decades, further squeezing out other 
national priorities. Most experts expressed the view that greater 
transparency about the use of general revenue use in reform plans was 
needed. 

Most budget experts with whom we spoke expressed concern about any 
provision of reallocated general revenue as needed for Social Security 
to assure trust fund solvency. These analysts, including some who 
generally do not find trust fund accounting meaningful, said that the 
signaling provided by the Trustees' projected trust fund exhaustion 
date has served a useful purpose by alerting policymakers and the 
public of the need for program reform. Providing for the use of 
reallocated unlimited general revenue transfers to achieve sustainable 
solvency would mean that the trust fund would never be projected to 
reach exhaustion. As a result, these analysts observed, the true costs 
of the program would become less transparent while at the same time the 
public might think that the Social Security financing shortfall had 
been resolved. 

One expert was especially concerned that explicit guarantees that total 
payouts from accounts plus Social Security would be not less than 
currently scheduled benefit levels could prove expensive for the 
federal budget. Such guarantees will likely add to the cost of the 
Social Security system, because individuals will have protection 
against downside risks but are allowed by a guarantee to benefit on the 
upside, this expert said. In earlier work we noted that any proposal 
that would guarantee benefits and rely on enhanced rates of return on 
individual accounts to finance long-term solvency may create an 
additional draw on general revenue that could serve to increase the 
deficit over the long term.[Footnote 47] Four of the 17 proposals we 
reviewed for this report included this type of provision; 3 of the 4 
also provided for unlimited transfers of reallocated general revenue to 
maintain trust fund solvency. 

Conclusions: 

In coming decades, our nation will face a serious long-term fiscal 
challenge that will put America's fiscal future at risk. As we have 
said in our body of work on Social Security, substantive reform of this 
important program will involve hard choices that will need to modify 
the program's underlying commitments for the future. To do this--to 
achieve the goal of saving Social Security and making it sustainable 
for the future--reform will need to increase program revenues and/or 
decrease program expenses. These are the only options. 

It may well be that some general revenue will be part of reform. If so, 
this would a major substantive change. Considering both the long-term 
fiscal situation and the potential implications for Social Security, 
the use of any general revenue in proposals--reallocated or new--will 
need to be clearly understood by both policymakers and the general 
public. 

Although OCACT's determination of "sustainable solvency" for a reform 
plan will remain an important threshold that plans will need to meet, 
it is not a sufficient benchmark in the context of the long-term fiscal 
outlook facing the United States. It is also an incomplete metric for 
comparing and evaluating reform plan financing implications. Given that 
most recent proposals use reallocated general revenue, a determination 
of trust fund solvency alone can be especially misleading. By 
definition a determination of trust fund solvency is not designed to 
and does not provide any information on how, when, or to what extent a 
plan is likely to worsen or improve the already daunting future federal 
fiscal imbalances. Clarity about these broader implications of any 
proposal will be essential as reform changes are debated. 

Although raising taxes (payroll or other) or cutting benefits would 
have tangible consequences for taxpayers and beneficiaries, e.g., less 
take-home pay or smaller benefit checks, the consequences of transfers 
from the non-Social Security budget in the form of reallocated general 
revenue are less likely to be clearly observable. Reallocated general 
revenue, however, is not without cost. Regardless of how general 
revenue is provided to Social Security, it must be paid for at some 
point. The question is when, and by whom. 

OCACT scoring memos have played and will continue to play an 
indispensable role in the debate by analyzing how proposals would 
affect the trust fund's finances and in more recent years how proposals 
would affect the federal budget. OCACT's valuable information and 
complex analyses could make an even greater contribution if they were 
more readily accessible to nonexpert users. It would be helpful for 
OCACT to include near the beginning of each memo a summary of the 
relative contribution of each provision in a proposal package to trust 
fund solvency. In addition, OCACT could devise a way to enable 
policymakers and the public to quickly and accurately grasp how the 
elements of a proposal, including any general revenue, work together to 
affect the trust fund and the overall federal budget. This type of 
presentational change would not require any additional analysis but 
could greatly facilitate comparison of proposals to one another. 

We recognize that developing a summary that would be easily accessible 
to policymakers and the general public and perceived as fair by all 
participants in the reform debate will present challenges. The elements 
of reform proposals are likely to continue to evolve, and new formats 
and analyses may become necessary. We recognize that a balance will 
need to be struck between standardizing formats and allowing the 
information provided to continue to evolve with the debate. 
Nevertheless, a more standardized summary early on could make clear the 
relative contributions of benefit cuts and increased revenue from 
payroll and nonpayroll taxes. In addition, it could illuminate any use 
of general revenue and how use of such revenue is likely to affect the 
long-term budget outlook. This summary would be a presentational, not 
analytical, modification with major potential benefits to greater 
public understanding of proposed changes to this popular program that 
is important to virtually all Americans. 

Recommendation for Executive Action: 

To improve public understanding of proposed changes to Social Security, 
we recommend that the Commissioner of SSA direct the Office of the 
Chief Actuary at SSA to include a summary presentation of its analysis 
in future scoring memoranda that will enable policymakers and the 
general public to quickly and easily compare Social Security reform 
proposals especially with respect to proposed use of general revenue 
and federal budget implications. 

Agency Comments and Our Evaluation: 

In written comments (reprinted in app. II) on a draft of this report, 
SSA suggested that we should direct our recommendation to the Chief 
Actuary, not to the Commissioner. This change, SSA said, would target 
the entity that develops the analysis and would also be sensitive to 
the independence of the Chief Actuary. 

As SSA stated in its comments, by legal mandate the Chief Actuary does 
report directly to the Commissioner. Because our recommendation 
concerns only the presentation of actuarial estimates--not any change 
in which estimates are developed nor in the analytical work required to 
develop them--we believe the recommendation as it stands recognizes and 
is appropriately sensitive to the independence of the Chief Actuary 
while at the same time reflecting the organizational structure of the 
Office of the Chief Actuary within SSA. 

SSA did not explicitly agree or disagree with our recommendation in its 
comments. In response to the recommendation, SSA noted that recent 
OCACT memos had added an additional table ("table d") that, SSA 
believes, already provides key information on general revenue use in 
proposals. SSA also expressed the view that a summary table showing the 
effects on the actuarial deficit of each proposal provision would be 
helpful. As our report had noted, this table has been included in some 
memoranda at the request of the proposal's sponsor. 

While we agree with SSA that both the technical and summary table it 
describes add value, we remain of the view that OCACT needs to develop 
a new table that can clearly and quickly communicate both trust fund 
effects and federal budget implications of a proposal. Our report 
acknowledged the value and completeness of OCACT's analyses including 
those presented in "table d." The message of our report was not that 
OCACT needs to do additional analytic work. Our message was rather that 
OCACT's existing analyses need to be summarized and highlighted so that 
a proposal's implications for both the trust fund and the federal 
budget as a whole are immediately clear. 

Neither of SSA's two suggestions is fully responsive to this goal. SSA 
itself noted in its comments that "table d" is "somewhat complicated." 
With regard to the summary table showing how each provision affects the 
actuarial deficit, we agree that this table adds considerable value and 
can help facilitate certain types of comparisons across plans. It does 
not, however, make clear how each provision or the proposal as a whole 
would affect the federal budget. It is this kind of information, now 
available only to experienced users of OCACT memos, that needs to be 
made more accessible. Given the long-term fiscal challenge facing the 
Nation, the reform debate needs to take place not simply in the context 
of trust fund solvency but also in the larger context of the federal 
budget as a whole. 

SSA also provided technical comments, which we incorporated as 
appropriate. 

We are sending copies of this report to the Commissioner of Social 
Security as well as other interested parties. Copies will also be made 
available to others upon request. In addition, the report will be 
available at no charge on the GAO Web site at http://www.gao.gov. 
Please contact Susan Irving at (202) 512-9142 or Barbara Bovbjerg at 
(202) 512-7215 if you have any questions about this report. Key 
contributors to this assignment were Jay McTigue, Joseph Applebaum, 
Jennifer Ashford, Linda Baker, Michael Collins, and Melissa Wolf. 

Signed by; 

Susan J. Irving: 
Director, Federal Budget Analysis, Strategic Issues: 

Signed by: 

Barbara D. Bovbjerg: 
Director, Education, Workforce, and Income Security Issues: 

[End of section] 

Appendix I: Scope and Methodology: 

To answer the questions in this report, we reviewed relevant historical 
documents and other literature on Social Security, including GAO 
reports and testimonies.[Footnote 48] We undertook a review of the 26 
OCACT proposal scoring memos done from 2001 through 2006, ultimately 
performing an in-depth analysis of 17 of those scoring memos.[Footnote 
49] We eliminated nine of the scoring memos either because they were 
proposals that were scored in multiple years or because they were not 
scored by OCACT as able to pay plan benefits in full throughout the 75- 
year period. Most of the 17 proposals were characterized by OCACT as 
meeting its definition of "sustainably solvent." We also reviewed 
proposal scorings done by Congressional Budget Office (CBO) and met 
with officials from OCACT and CBO who were responsible for proposal 
scorings. To enhance our understanding of the relationship between 
Social Security and the federal budget, we interviewed selected federal 
budget experts from think tanks and other policy organizations who 
represented a range of views on reform approaches. Some of these 
experts were former officials of the Social Security Administration 
and/or Congressional Budget Office. 

Our analysis, like the scorings of the Office of the Chief Actuary and 
recent scorings by CBO, is limited to first order effects of reform 
changes. Accordingly, second order effects of proposed reforms on the 
federal budget, such as effects on economic growth, are beyond the 
scope of this report. This report also does not address the effects of 
general revenue use on program equity. As discussed in other GAO work, 
the use of significant amounts of general revenue transfers could 
change program equity in ways that are difficult to quantify.[Footnote 
50] 

[End of section] 

Appendix II: Comments from the Social Security Administration: 

Social Security: 
The Commissioner: 
March 2, 2007: 

Ms. Barbara Bovbjerg: 
Director, Education, Workforce and Income Security Issues: 
U.S. Government Accountability Office: 
Washington, D.C. 20548: 

Dear Ms. Bovbjerg: 

Thank you for the opportunity to review and comment on the draft 
report, "Social Security Reform: Greater Transparency Needed about 
Potential General Revenue Financing" (GAO-07-213). 

If you have any questions, please contact Candace Skurnik, Director, 
Audit Management and Liaison Staff, at (410) 965-4636. 

Sincerely, 

Signed by: 

Michael J. Astrue: 

Enclosure: 

Social Security Administration Baltimore MD 21235-0001: 

Comments On The Government Accountability Office (GAO) Draft Report, 
"Social Security Reform: Greater Transparency Needed About Potential 
General Revenue Financing"(GAO-07-213): 

Thank you for the opportunity to review and comment on the draft 
report. We appreciate your conducting this audit of the use of general 
revenue (GR) financing in Social Security reform proposals and the 
impact of this financing on the unified Federal budget. 

Recommendation 1: 

To improve public understanding of proposed changes to Social Security, 
GAO recommends that the Commissioner of the Social Security 
Administration direct SSA's Office of the Chief Actuary (OCACT) to 
include a summary presentation of its analysis in future scoring 
memoranda that will enable policymakers and the general public to 
quickly and easily compare Social Security reform proposals especially 
with respect to proposed use of GR and federal budget implications. 

Comment: 

We suggest that GAO revise the recommendation from suggesting that the 
Commissioner of Social Security direct OCACT to develop further 
analysis to a recommendation directed to the Chief Actuary. This would 
target the entity that actually develops the analysis in question, and 
would also be sensitive to the independence of the Chief Actuary. By 
legal mandate, the Chief Actuary of Social Security does report 
directly to the Commissioner. However, it is critical to the 
credibility of the actuarial estimates and analyses produced by OCACT 
that these be wholly objective and unbiased both in content and 
presentation. They should not be, nor appear to be, influenced or 
controlled by any other entity, even the Commissioner. 

It should be noted that, for over a year, OCACT has been including an 
additional table "d" which provides the specific implications for the 
Old-Age, Survivors and Disability Insurance unfunded obligation of 
different provisions in the overall proposal. In particular, a separate 
column in the table has been provided indicating the extent to which GR 
transfers that do not represent new income to the government affect the 
unfunded obligation of the program. While somewhat complicated, this 
table does already provide much of what is called for by GAO. We do 
agree, however, that general inclusion of a simple table showing the 
effects on the actuarial deficit of each provision would be helpful. 

[End of section] 

Glossary of Terms: 

The majority of the definitions provided here are from the Social 
Security Administration, The 2006 Annual Report of the Board of 
Trustees of the Federal Old-Age and Survivors Insurance and Disability 
Insurance Trust Funds (Washington, D.C.: May 1, 2006) and GAO, A 
Glossary of Terms Used in the Federal Budget Process, GAO-05-734SP 
(Washington, D.C.: September 2005). 

Actuarial balance: 

The difference between the summarized income rate and the summarized 
cost rate over a given valuation period. 

Actuarial deficit: 

A negative actuarial balance. 

Assumptions: 

Values relating to future trends in certain key factors which affect 
the balance in the trust funds. Three sets of demographic, economic, 
and program-specific assumptions are presented in the annual Trustees' 
report. 

* Demographic assumptions include fertility, mortality, net 
immigration, marriage, and divorce. 

* Economic assumptions include unemployment rates, average earnings, 
inflation, interest rates, and productivity. 

* Program-specific assumptions include retirement patterns, and 
disability incidence and termination rates. 

The three sets of assumptions are described as follows: 

* Alternative II is the intermediate set of assumptions, and represents 
the Trustees' best estimates of likely future conditions. 

* Alternative I is characterized as a low cost set--it assumes 
relatively rapid economic growth, low inflation, and favorable (from 
the standpoint of program financing) demographic conditions. 

* Alternative III is characterized as a high cost set--it assumes 
relatively slow economic growth, high inflation, and unfavorable (from 
the standpoint of program financing) demographic conditions. 

In its estimates of reform proposals, OCACT uses the intermediate set 
of assumptions, which represents the Trustees' best estimates of likely 
future demographic, economic, and program-specific conditions. 

Board of Trustees: 

A Board established by the Social Security Act to oversee the financial 
operations of the Federal Old-Age and Survivors Insurance Trust Fund 
and the Federal Disability Insurance Trust Fund. The Board is composed 
of six members, four of whom serve automatically by virtue of their 
positions in the federal government: the Secretary of the Treasury, who 
is the Managing Trustee, the Secretary of Labor, the Secretary of 
Health and Human Services, and the Commissioner of Social Security. The 
other two members are appointed by the President to serve as public 
representatives. 

Constant dollars: 

Amounts adjusted by the consumer price index (CPI) to the value of the 
dollar in a particular year. 

Cost rate: 

The cost rate for a year is the ratio of the cost of the program to the 
taxable payroll for the year. In this context, the cost is defined to 
include scheduled benefit payments, special monthly payments to certain 
uninsured persons who have 3 or more quarters of coverage (and whose 
payments are therefore not reimbursable from the General Fund of the 
Treasury), administrative expenses, net transfers from the trust funds 
to the Railroad Retirement program under the financial-interchange 
provisions, and payments for vocational rehabilitation services for 
disabled beneficiaries; it excludes special monthly payments to certain 
uninsured persons whose payments are reimbursable from the General Fund 
of the Treasury, and transfers under the interfund borrowing 
provisions. 

Covered earnings: 

Earnings in employment covered by the Old-Age Survivors and Disability 
Insurance program. 

Current dollar: 

"In current dollars" means valued in the prices of the current year. 
Amounts are expressed in nominal dollars with no adjustment for 
inflationary changes in the value of the dollar over time. The current 
dollar value of a good or service is its value in terms of prices 
current at the time the good or service is acquired or sold. 

Debt held by government accounts: 

Federal debt owed by the federal government to itself. Most of this 
debt is held by trust funds, such as Social Security and Medicare. The 
Office of Management and Budget (OMB) contrasts it to debt held by the 
public by noting that it is not a current transaction of the government 
with the public; it is not financed by private saving and thus does not 
compete with the private sector for available funds in the credit 
market; and it does not represent an obligation to make payments to the 
public. 

Debt held by the public: 

That portion of the gross federal debt held outside of the federal 
government. This includes any federal debt held by individuals, 
corporations, state or local governments, the Federal Reserve System, 
and foreign governments and central banks. Debt held by government 
accounts (intragovernmental debt) is excluded from debt held by the 
public. Debt held by the public is not the same as public debt or 
Treasury debt. 

Exhaustion Date: 

As reported in the Trustees' Report and for the purposes of this 
report, the year in which the OASDI trust fund would become unable to 
pay currently-scheduled benefits when due because the assets of the 
fund were exhausted. 

Although plan sponsors sometimes propose spending cuts and/or assume 
revenue increases in non-Social Security programs to offset these 
general fund transfers; the transfers are not conditional on the 
savings/revenue increases being achieved and would be made regardless 
of the success of these changes. 

General fund of the Treasury: 

Funds held by the Treasury of the United States, other than receipts 
collected for a specific purpose (such as Social Security) and 
maintained in a separate account for that purpose. 

General revenue: 

For a discussion of how it is defined for the purposes of this report, 
see page 6. 

Income rate: 

Ratio of income from tax revenues on a liability basis (payroll tax 
contributions and income from the taxation of scheduled benefits) to 
the OASDI taxable payroll for the year. 

Inflation: 

An increase in the volume of money and credit relative to available 
goods, resulting in an increase in the general price level. 

Interest: 

A payment in exchange for the use of money during a specified period. 

Interest rate: 

For the OASDI trust funds, interest rates on new public-debt 
obligations issuable to federal trust funds are determined monthly. 
Such rates are set equal to the average market yield on all outstanding 
marketable U.S. securities not due or callable until after 4 years from 
the date the rate is determined. The effective interest rate for a 
trust fund is the ratio of the interest earned by the fund over a given 
period of time to the average level of assets held by the fund during 
the period. The effective rate of interest thus represents a measure of 
the overall average interest earnings on the fund's portfolio of 
assets. 

Long range: 

The next 75 years. Long-range actuarial estimates are made for this 
period because it is approximately the maximum remaining lifetime of 
current Social Security participants. 

Maximum taxable limit: 

The limit or "cap" on covered earnings that are subject to the 12.4 
percent payroll tax and that can be used in the benefit formula, 
thereby limiting the size of taxes and benefits. This "cap" is indexed 
annually for average wage growth and therefore it changes every year. 
In 2007, the taxable maximum limit is $97,500. 

Nominal dollar: 

See under Current dollar. 

Outlay: 

The issuance of checks, disbursement of cash, or electronic transfer of 
funds made to liquidate a federal obligation. Outlays during a fiscal 
year may be for payment of obligations incurred in prior years (prior- 
year obligations) or in the same year. Outlays, therefore, flow in part 
from unexpended balances of prior-year budgetary resources and in part 
from budgetary resources provided for the year in which the money is 
spent. Total government outlays include outlays of off-budget federal 
entities, such as the Social Security trust fund. 

Pay-as-you-go financing: 

A financing method where taxes are scheduled to produce just as much 
income as required to pay current benefits, with trust fund assets 
built up only to the extent needed to prevent exhaustion of the fund by 
random economic fluctuations. 

Payroll taxes: 

A tax levied on the gross wages of workers. 

Present value: 

The equivalent value, at the present time, of a future stream of 
payments (either income or cost). The present value of a future stream 
of payments may be thought of as the lump-sum amount that, if invested 
today, together with interest earnings would be just enough to meet 
each of the payments as they fell due. Present values are widely used 
in calculations involving financial transactions over long periods of 
time to account for the time value of money (interest). For the purpose 
of present-value calculations for this report, values are discounted by 
the effective yield on trust fund assets. 

Solvency: 

A program is solvent at a point in time if it is able to pay scheduled 
benefits when due with scheduled financing. For example, the OASDI 
program is considered solvent over any period for which the trust funds 
maintain a positive balance throughout the period. 

Summarized balance: 

The difference between the summarized cost rate and the summarized 
income rate, expressed as a percentage of taxable payroll. 

Summarized cost rate: 

The ratio of the present value of cost to the present value of the 
taxable payroll for the years in a given period, expressed as a 
percentage. This percentage can be used as a measure of the relative 
level of cost during the period in question. For purposes of evaluating 
the financial adequacy of the program, the summarized cost rate is 
adjusted to include the cost of reaching and maintaining a target trust 
fund level. Because a trust fund level of about 1 year's cost is 
considered to be an adequate reserve for unforeseen contingencies, the 
targeted trust fund ratio used in determining summarized cost rates is 
100 percent of annual cost. Accordingly, the adjusted summarized cost 
rate is equal to the ratio of (a) the sum of the present value of the 
cost during the period plus the present value of the targeted ending 
trust fund level, to (b) the present value of the taxable payroll 
during the projection period. 

Summarized income rate: 

The ratio of the present value of scheduled tax income to the present 
value of taxable payroll for the years in a given period, expressed as 
a percentage. This percentage can be used as a measure of the relative 
level of income during the period in question. For purposes of 
evaluating the financial adequacy of the program, the summarized income 
rate is adjusted to include assets on hand at the beginning of the 
period. Accordingly, the adjusted summarized income rate equals the 
ratio of (a) the sum of the trust fund balance at the beginning of the 
period plus the present value of the total income from taxes during the 
period, to (b) the present value of the taxable payroll for the years 
in the period. 

Sustainable solvency: 

As defined by OCACT, sustainable solvency for the financing of the 
program is achieved when the program has positive trust fund ratios 
throughout the 75-year projection period and these ratios are stable or 
rising at the end of the period. 

Taxable earnings: 

Wages and/or self-employment income, in employment covered by the OASDI 
and/or Hospital Insurance (HI) programs, that is under the applicable 
annual maximum taxable limit. For 1994 and later, no maximum taxable 
limit applies to the HI program. 

Taxable payroll: 

A weighted average of taxable wages and taxable self-employment income. 
When multiplied by the combined employee-employer tax rate, it yields 
the total amount of taxes incurred by employees, employers, and the 
self-employed for work during the period. 

Taxable wages: 

See under "Taxable earnings." 

Trust fund: 

As discussed in this report, the OASDI trust funds are separate 
accounts in the United States Treasury in which are deposited the taxes 
received under the Federal Insurance Contributions Act and the Self- 
Employment Contributions Act, as well as taxes resulting from coverage 
of state and local government employees; any sums received under the 
financial interchange with the railroad retirement account; voluntary 
hospital and medical insurance premiums; and transfers of Federal 
general revenues. Funds not withdrawn for current monthly or service 
benefits, the financial interchange, and administrative expenses are 
invested in interest-bearing federal securities, as required by law; 
the interest earned is also deposited in the trust funds. 

* Old-Age and Survivors Insurance (OASI). The trust fund used for 
paying monthly benefits to retired-worker (old-age) beneficiaries and 
their spouses and children and to survivors of deceased insured 
workers. 

* Disability Insurance (DI). The trust fund used for paying monthly 
benefits to disabled-worker beneficiaries and their spouses and 
children and for providing rehabilitation services to the disabled. 

* Hospital Insurance (HI). The trust fund used for paying part of the 
costs of inpatient hospital services and related care for aged and 
disabled individuals who meet the eligibility requirements. Also known 
as Medicare Part A. 

Trust fund ratio: 

A measure of the adequacy of the trust fund level. Defined as the 
assets at the beginning of the year expressed as a percentage of the 
cost during the year. The trust fund ratio represents the proportion of 
a year's cost which could be paid with the funds available at the 
beginning of the year. 

Unified budget: 

Under budget concepts set forth in the Report of the President's 
Commission on Budget Concepts, a comprehensive budget in which receipts 
and outlays from federal and trust funds are consolidated. When these 
fund groups are consolidated to display budget totals, transactions 
that are outlays of one fund group for payment to the other fund group 
(that is, interfund transactions) are deducted to avoid double 
counting. The unified budget should, as conceived by the President's 
Commission, take in the full range of federal activities. By law, 
budget authority, outlays, and receipts of off-budget programs 
(currently only the Postal Service and Social Security) are excluded 
from the current budget, but data relating to off-budget programs are 
displayed in the budget documents. However, the most prominent total in 
the budget is the unified total, which is the sum of the on-and off- 
budget totals. 

FOOTNOTES 

[1] In this report, the combined OASDI Trust Funds are referred to as 
the Social Security trust fund. For more information on federal trust 
funds and other funds dedicated to specific programs, see GAO's report 
Federal Trust and Other Earmarked Funds: Answers to Frequently Asked 
Questions, GAO-01-199SP (Washington, D.C.: January 2001). 

[2] For explanation of technical terms, see the glossary at the end of 
this report. 

[3] Social Security's financial condition has traditionally been 
measured separately from that of the rest of the budget by comparing 
the program's expected revenues with expected costs over a 75-year 
timeframe. Estimates of the solvency of Social Security's trust funds 
in this framework have been prepared by the Office of the Chief Actuary 
(OCACT) at the Social Security Administration (SSA) each year since 
1941. 

[4] As used in this report, general revenue refers to any revenue not 
derived from payroll tax contributions. (See text box.) 

[5] When OCACT describes a proposal as modifying the program so that 
there is a positive trust fund ratio throughout the 75-year projection 
period and these ratios are stable or rising at the end of the period, 
this meets the definition of "sustainable solvency" in the 2006 
Trustees' Report. 

[6] The Social Security Amendments of 1983 require beneficiaries with 
income (defined as adjusted gross income plus tax-exempt bond interest 
plus one-half of Social Security benefits) of more than $25,000 if 
single, and $32,000 if married filing jointly, to include up to 50 
percent of their benefits in their taxable income, beginning in 1984. 
Revenues from this provision are credited to the OASDI Trust Funds. The 
Omnibus Budget Reconciliation Act of 1993 required beneficiaries with 
incomes of more than $34,000 if single, and $44,000 if married filing 
jointly, to include up to 85 percent of their benefits in their taxable 
income, beginning in 1994. Revenues attributable to taxation of over 50 
percent of Social Security benefits are credited to the Medicare 
Hospital Insurance (HI) trust fund. These levels are not adjusted for 
inflation or wage growth, so the percentage of beneficiaries paying tax 
on Social Security benefits is expected to rise in the future. 

[7] GAO's long-term simulations assume that scheduled benefits for 
Social Security and Medicare's HI Trust Fund are paid through 
borrowing, that is, by using reallocated general revenue after program 
trust funds reach exhaustion. (See textbox, "New Versus Reallocated 
General Revenue in Social Security.") For more information on GAO's 
simulations, see [Hyperlink, 
http://www.gao.gov/special.pubs/longterm/]. 

[8] While OCACT has primary responsibility for scoring reform 
proposals, CBO has more recently begun to publish long-term scorings of 
some proposals. OCACT and CBO scorings have both substantive and 
presentational differences including: different assumptions, baselines, 
and time periods covered. One particularly important difference is the 
use of different economic assumptions, which results in CBO having more 
optimistic estimates of current-law program finances. 

[9] That is, maintain a modified pay-as-you-go social insurance program 
of defined benefits paid for primarily by payroll tax revenue. 

[10] In constant 2005 dollars under OCACT's expected yield assumption. 
Estimates are based on OCACT scorings and represent change in debt 
levels compared to a baseline in which scheduled benefits are paid in 
full and no other changes are made. Estimates were not available for 
one of the plans reviewed. 

[11] See GAO, Options for Social Security Reform, GAO-05-649R 
(Washington, D.C.: May 6, 2005). 

[12] Advocates for these types of changes state that over time, the 
savings to the government (compared to paying currently scheduled 
benefits in full) will come to exceed the cost of funding individual 
accounts. 

[13] For more information on the Social Security program, see GAO, 
Social Security Reform: Answers to Key Questions, GAO-05-193SP (May 
2005). 

[14] In contrast to private trust funds, the federal government does 
not have a fiduciary responsibility to the trust fund beneficiaries. 
Congress can raise or lower future trust fund collections and payments 
by changing existing laws. 

[15] In this report, the combined OASDI Trust Funds are referred as the 
Social Security trust fund. For more information on federal trust funds 
and other funds dedicated to specific programs, see GAO-01-199SP. 

[16] Total receipts to the combined trust funds, including $94 billion 
in interest income, were $702 billion in calendar year 2005. 

[17] If Treasury could not borrow from the Social Security trust fund, 
it would have to borrow more in the private capital market and pay 
interest in cash to finance current budget policy. However, Treasury 
still has to pay the trust fund interest on these securities. For a 
more detailed discussion of the temporary trust fund buildup and how it 
interacts with the federal unified budget, see GAO, Social Security 
Financing: Implications of Government Stock Investing for the Trust 
Fund, the Federal Budget, and the Economy, GAO/AIMD/HEHS-98-74 
(Washington, D.C.: Apr. 22, 1998). 

[18] See GAO, Social Security: Program's Role in Helping Ensure Income 
Adequacy, GAO-02-62 (Washington, D.C.: Nov. 30, 2001. For a discussion 
of individual equity issues, see GAO, Social Security: Issues in 
Comparing Rates of Return with Market Investments, GAO/HEHS-99-110 
(Washington, D.C.: Aug. 5, 1999). 

[19] Since Social Security benefits had previously been untaxed, this 
was seen by some as a benefit cut. 

[20] For a more detailed discussion see GAO-05-649R and GAO, Social 
Security Reform: Implications of Different Indexing Choices, GAO-06-804 
(Washington, D.C.: Sept. 14, 2006). 

[21] [Hyperlink, http://www.ssa.gov/OACT/solvency/index.html]. 

[22] When OCACT describes a proposal as modifying the program so that 
there is a positive trust fund ratio throughout the 75-year projection 
period and these ratios are stable or rising at the end of the period, 
this meets the definition of "sustainable solvency" in the 2006 
Trustees' Report. 

[23] On the other hand, our criterion for sustainable solvency measures 
the effect on the trust fund and includes evaluating how a proposal 
would affect the U.S. economy and the federal budget. 

[24] OCACT officials told us that this table was included only when 
specifically requested by the plan sponsor. 

[25] For analysis of benefit and revenue options described in terms of 
GAO's framework for evaluating Social Security reform plans, see GAO, 
Options for Social Security Reform, GAO-05-649R (Washington, D.C.: May 
6, 2005). 

[26] Because some proposals were scored in multiple years or were not 
designed to achieve 75-year solvency, the universe of proposals 
discussed in this report is comprised of 17 proposals. Scorings can be 
found at [Hyperlink, http://www.ssa.gov/OACT/solvency/index.html]. 

[27] The trust fund ratio is a measure of the adequacy of the trust 
fund level. It is defined as the assets at the beginning of the year 
expressed as a percentage of the cost during the year. The trust fund 
ratio represents the proportion of a year's cost that could be paid 
with the funds available at the beginning of the year. Having a trust 
fund ratio of 100 percent or more--that is, assets at the beginning of 
each year at least equal to projected outgo during the year--is 
considered a good indication of a trust fund's ability to cover most 
short-term contingencies. 

[28] Most plans specify unlimited transfers to meet a 100 percent trust 
fund ratio, but one plan specifies transfers to maintain a 90 percent 
trust fund ratio. This trust fund ratio level still maintains solvency 
because the program can pay scheduled benefits when due. 

[29] In some cases, proposal sponsors suggest sources of non-Social 
Security program savings to help offset the costs to the general fund. 
However, the transfers to the trust fund would not be contingent on 
achieving the reductions in actual federal spending. 

[30] Although plan sponsors sometimes propose spending cuts and/or 
assume revenue increases in non-Social Security programs to offset 
these general fund transfers; the transfers are not conditional on the 
savings/revenue increases being acheived and would be made regardless 
of the success of these changes. 

[31] Plans may require individuals to contribute to the add-on account 
in order to receive credits. 

[32] Under current law (as of January 2007), the estate tax would be 
repealed for 2010 but would be restored with a lower exemption and a 
higher rate than in effect for 2009. Thus, compared to current law the 
estate tax in this proposal would be new revenue to the budget only in 
the year 2010 and reallocated revenue in all succeeding years. 

[33] SSA defines covered earnings to mean wages and self-employment 
earnings that are covered by the OASDI and/or HI programs. Under 
current law, all covered earnings are taxed at a rate of 2.9 percent 
for Medicare HI, but for OASDI only covered earnings up to a "taxable 
maximum limit" or "cap" are taxed at the 12.4 percent rate. This limits 
taxes as well as the earnings reflected in the benefit formula. The 
level of "taxable earnings" reflects only the portion of covered 
earnings that is at or below this cap. This taxable maximum limit is 
indexed annually for average wage growth and therefore it changes every 
year. In 2007, the cap is $97,500. 

[34] However, significantly larger changes would be required to 
maintain solvency beyond 75 years. 

[35] About one-fourth of public employees do not pay Social Security 
taxes on the earnings from their government jobs. Extending coverage to 
include them could result in potentially significant transition costs 
for some of their state and local government employers. See GAO, Social 
Security: Implication of Extending Mandatory Coverage to State and 
Local Government Employees, GAO/HEHS-98-196 (Washington, D.C.: Aug. 18, 
1998). 

[36] For GAO's discussion of the key issues to consider in comparing 
Social Security and private market rates of return, see GAO/ HEHS-99-
110. 

[37] The purpose of benefit offsets is to compensate the trust funds 
for foregone taxes and to equitably distinguish between those who do, 
and those who do not, shift Social Security taxes to voluntary personal 
accounts. There are different methods for calculating the offset. For a 
more thorough discussion of offsets, see Virginia P. Reno, Michael J. 
Graetz, Kenneth S. Apfel, Joni Lavery, and Catherine Hill, eds., 
Uncharted Waters: Paying Benefits from Individual Accounts in Federal 
Retirement Policy, Study Panel Final Report, National Academy of Social 
Insurance (Washington, D.C.: January 2005), ch. 9. 

[38] For a discussion of issues raised by estimating guarantee costs, 
see CBO, Evaluating Benefit Guarantees in Social Security (Washington, 
D.C.: March 2006). 

[39] In constant 2005 dollars under OCACT's expected yield assumption. 
Estimates are based on OCACT scorings and represent change in debt 
levels compared to a baseline in which scheduled benefits are paid in 
full through borrowing and no other changes are made. Estimates were 
not available for one of the plans reviewed. 

[40] In this section, as elsewhere in the report, our analysis follows 
that of OCACT in being limited to first order effects. 

[41] For GAO analyses of reform proposals using multiple sets of 
assumptions, see Social Security: Evaluating Reform Proposals, GAO/ 
AIMD/HEHS-00-29 (Washington, D.C.: Nov. 4, 1999); Social Security 
Reform: Analysis of Reform Models Developed by the President's 
Commission to Strengthen Social Security, GAO-03-310 (Washington, D.C.: 
Jan. 15, 2003); and Social Security Reform: Analysis of a Trust Fund 
Exhaustion Scenario, GAO-03-907 (Washington, D.C.: July 29, 2003). 

[42] The Trustees 2006 Report notes that even if a trust fund's assets 
are exhausted, tax income will continue to flow into the fund. Present 
tax rates would be sufficient to pay 74 percent of scheduled benefits 
after trust fund exhaustion in 2040 and 70 percent of scheduled 
benefits in 2080. For an analysis of an illustrative assumption along 
these lines, see GAO-03-907. This scenario was developed as an analytic 
tool, not a legal determination. 

[43] The effect on debt by the end of the period would depend on the 
amount of new revenue raised for Social Security. If this was equal to 
the 75-year Social Security shortfall in present value terms, debt by 
the end of the period would be the same as under the alternative 
assumption. This is because the additional new revenue would have been 
used to pay for additional benefit outlays of equal size. All else 
equal, debt at the end of the period would be lower relative to the 
trust fund exhaustion scenario if the new revenue exceeded program 
shortfall. 

[44] CBO uses a 100-year time frame for analysis. 

[45] A value-added tax is a tax levied at each stage of production or 
distribution on the value added to the product during that stage of 
production. Value-added taxes are now commonly used in many Western 
European countries as a source of revenue. 

[46] See GAO-05-649R (Washington, D.C.: May 6, 2005). 

[47] GAO/AIMD/HEHS-00-29 (Washington, D.C.: Nov. 4, 1999). 

[48] In particular this report builds on GAO's analysis of revenue 
options for reform as discussed in Options for Social Security Reform, 
GAO-05-649R (Washington, D.C.: May 6, 2005). 

[49] Scorings can be found at http://www.ssa.gov/OACT/solvency/ 
index.html. 

[50] See GAO-05-649R and GAO, Social Security: Distribution of Benefits 
and Taxes Relative to Earnings Level, GAO-04-747 (Washington, D.C.: 
June 15, 2004). 

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