This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

21st Century Issues: U.S. Financial Condition and Selected DOD 
Transformation Issues: 

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

Knight Center for Specialized Journalism: 
February 13, 2006: 

Composition of Federal Spending: 

[See PDF for image] - graphic text 

3 pie charts with 5 items each. 

1965: 
Defense: 43.0%; 
Social Security: 15.0%; 
Medicare & Medicaid: 0%; 
Net interest: 7.0%; 
All other spending: 35.0%. 

1985: 
Defense: 27.0%; 
Social Security: 20.0%; 
Medicare & Medicaid: 9.0%; 
Net interest: 14.0%; 
All other spending: 30.0%. 

2005: 
Defense: 20.0%; 
Social Security: 21.0%; 
Medicare & Medicaid: 19.0%; 
Net interest: 7.0%; 
All other spending: 32.0%. 

Source: Office of Management and Budget and Department of Treasury, 
Financial Management Service. 

[End of figure] 

Federal Spending for Mandatory and Discretionary Programs: 

[See PDF for image] - graphic text 

3 pie charts with 3 items each. 

1965: 
Discretionary: 66%; 
Mandatory: 27%; 
Net Interest: 7%. 

1985: 
Discretionary: 44%; 
Mandatory: 42%; 
Net Interest: 14%. 

2005: 
Discretionary: 39%; 
Mandatory: 54%; 
Net Interest: 7%. 

Source: Office of Management and Budget and Congressional Budget 
Office. 

Note: Fiscal year 2005 data are estimated. 

[End of figure] 

Surplus or Deficit as a Share of GDP: Fiscal Years 1962-2005: 

[See PDF for image] - graphic text: 

Line/Stacked Bar combo chart with 1 line (Unified) and 44 bars. 

Fiscal year: 1962; 
On-budget: -1%; 
Off-budget: -0.2%; 
Unified: -1.3%. 

Fiscal year: 1963; 
On-budget: -0.7%; 
Off-budget: -0.1%; 
Unified: -0.8%. 

Fiscal year: 1964; 
On-budget: -1%; 
Off-budget: 0.1%; 
Unified: -0.9%. 

Fiscal year: 1965; 
On-budget: -0.2%; 
Off-budget: No data; 
Unified: -0.2%. 

Fiscal year: 1966; 
On-budget: -0.4%; 
Off-budget: -0.1%; 
Unified: -0.5%. 

Fiscal year: 1967; 
On-budget: -1.6%; 
Off-budget: 0.5%; 
Unified: -1.1%. 

Fiscal year: 1968; 
On-budget: -3.2%; 
Off-budget: 0.3%; 
Unified: -2.9%. 

Fiscal year: 1969; 
On-budget: -0.1%; 
Off-budget: 0.4%; 
Unified: 0.3%. 

Fiscal year: 1970; 
On-budget: -0.9%; 
Off-budget: 0.6%; 
Unified: -0.3%. 

Fiscal year: 1971; 
On-budget: -2.4%; 
Off-budget: 0.3%; 
Unified: -2.1%. 

Fiscal year: 1972; 
On-budget: -2.2%; 
Off-budget: 0.3%; 
Unified: -2%. 

Fiscal year: 1973; 
On-budget: -1.2%; 
Off-budget: No data; 
Unified: -1.1%. 

Fiscal year: 1974; 
On-budget: -0.6%; 
Off-budget: 0.1%; 
Unified: -0.4%. 

Fiscal year: 1975; 
On-budget: -3.5%; 
Off-budget: 0.1%; 
Unified: -3.4%. 

Fiscal year: 1976; 
On-budget: -4.1%; 
Off-budget: -0.2%; 
Unified: -4.2%. 

Fiscal year: 1977; 
On-budget: -2.5%; 
Off-budget: -0.2%; 
Unified: -2.7%. 

Fiscal year: 1978; 
On-budget: -2.5%; 
Off-budget: -0.2%; 
Unified: -2.7%. 

Fiscal year: 1979; 
On-budget: -1.5%; 
Off-budget: -0.1%; 
Unified: -1.6%. 

Fiscal year: 1980; 
On-budget: -2.7%; 
Off-budget: No data; 
Unified: -2.7%. 

Fiscal year: 1981; 
On-budget: -2.4%; 
Off-budget: -0.2%; 
Unified: -2.6%. 

Fiscal year: 1982; 
On-budget: -3.7%; 
Off-budget: -0.2%; 
Unified: -4%. 

Fiscal year: 1983; 
On-budget: -6%; 
Off-budget: No data; 
Unified: -6%. 

Fiscal year: 1984; 
On-budget: -4.8%; 
Off-budget: No data; 
Unified: -4.8%. 

Fiscal year: 1985; 
On-budget: -5.3%; 
Off-budget: 0.2%; 
Unified: -5.1%. 

Fiscal year: 1986; 
On-budget: -5.4%; 
Off-budget: 0.4%; 
Unified: -5%. 

Fiscal year: 1987; 
On-budget: -3.6%; 
Off-budget: 0.4%; 
Unified: -3.2%. 

Fiscal year: 1988; 
On-budget: -3.9%; 
Off-budget: 0.8%; 
Unified: -3.1%. 

Fiscal year: 1989; 
On-budget: -3.8%; 
Off-budget: 1%; 
Unified: -2.8%. 

Fiscal year: 1990; 
On-budget: -4.8%; 
Off-budget: 1%; 
Unified: -3.9%. 

Fiscal year: 1991; 
On-budget: -5.4%; 
Off-budget: 0.9%; 
Unified: -4.5%. 

Fiscal year: 1992; 
On-budget: -5.5%; 
Off-budget: 0.8%; 
Unified: -4.7%. 

Fiscal year: 1993; 
On-budget: -4.6%; 
Off-budget: 0.7%; 
Unified: -3.9%. 

Fiscal year: 1994; 
On-budget: -3.7%; 
Off-budget: 0.8%; 
Unified: -2.9%. 

Fiscal year: 1995; 
On-budget: -3.1%; 
Off-budget: 0.9%; 
Unified: -2.2%. 

Fiscal year: 1996; 
On-budget: -2.3%; 
Off-budget: 0.9%; 
Unified: -1.4%. 

Fiscal year: 1997; 
On-budget: -1.3%; 
Off-budget: 1%; 
Unified: -0.3%. 

Fiscal year: 1998; 
On-budget: -0.3%; 
Off-budget: 1.1%; 
Unified: 0.8%. 

Fiscal year: 1999; 
On-budget: No data; 
Off-budget: 1.4%; 
Unified: 1.4%. 

Fiscal year: 2000; 
On-budget: 0.9%; 
Off-budget: 1.5%; 
Unified: 2.4%. 

Fiscal year: 2001; 
On-budget: -0.3%; 
Off-budget: 1.6%; 
Unified: 1.3%. 

Fiscal year: 2002; 
On-budget: -3.1%; 
Off-budget: 1.5%; 
Unified: -1.5%. 

Fiscal year: 2003; 
On-budget: -4.9%; 
Off-budget: 1.5%; 
Unified: -3.5%. 

Fiscal year: 2004; 
On-budget: -4.9%; 
Off-budget: 1.3%; 
Unified: -3.6%. 

Fiscal year: 2005; 
On-budget: -4%; 
Off-budget: 1.3%; 
Unified: -2.6%. 

Source: Office of Management and Budget and Congressional Budget 
Office. 

[End of figure] 

Fiscal Year 2004 and 2005 Deficits and Net Operating Costs: 

Dollars in billions. 

On-Budget Deficit; 
Fiscal Year 2004: ($567); 
Fiscal Year 2005: ($494). 

Off-Budget Surplus*; 
Fiscal Year 2004: $155; 
Fiscal Year 2005: $175. 

Unified Deficit; 
Fiscal Year 2004: ($412); 
Fiscal Year 2005: ($319). 

Net Operating Cost; 
Fiscal Year 2004: ($616); 
Fiscal Year 2005: ($760). 

* Includes $151 billion in fiscal year 2004 and $173 billion in fiscal 
year 2005 in Social Security surpluses and $4 billion in fiscal year 
2004 and $2 billion in fiscal year 2005 in Postal Service surpluses. 

[End of table] 

Estimated Fiscal Exposures (in $ trillions): 

Explicit liabilities (Publicly held debt, military & civilian pensions 
& retiree health, other); 
2000: $6.9; 
2005: $9.9. 

Commitments & Contingencies: e.g., PBGC, undelivered orders; 
2000: $0.5; 
2005: $0.9. 

Implicit exposures; 
2000: $13.0; 
2005: $35.6. 

Implicit exposures: Future Social Security benefits; 
2000: $3.8; 
2005: $5.7. 

Implicit exposures: Future Medicare Part A benefits; 
2000: $2.7; 
2005: $8.8. 

Implicit exposures: Medicare Part B benefits; 
2000: $6.5; 
2005: $12.4. 

Implicit exposures: Medicare Part D benefits; 
2005: $8.7. 

Total; 
2000: $20.4; 
2005: $46.4. 

Sources: Consolidated Financial Statements. 

Note: Estimates for Social Security and Medicare are PV as of January 1 
of each year as reported in the Consolidated Financial Statements and 
all other data are as of September 30. 

[End of table] 

How Big is Our Growing Fiscal Burden? 

Total Fiscal Exposures; 
2000: $20.4 trillion; 
2005: $46.4 trillion; 

Burden: Per Person; 
2000: $72,000; 
2005: $156,000. 

Burden: Per Full-time Worker; 
2000: $165,000; 
2005: $375,000. 

Burden: Per Household; 
2000: $189,000; 
2005: $411,000. 

Source: GAO analysis. 

[End of table] 

Composition of Spending as a Share of GDP Under Baseline Extended: 

[See PDF for image] - graphic text: 

Line/Stacked Bar combo chart with 4 groups, 1 line (Revenue) and 4 bars 
per group. 

2004; 
Net interest: 1.4%; 
Social Security: 4.4%; 
Medicare & Medicaid: 3.8%; 
All other spending: 10.4%; 
Revenue: 16.3%. 

2015; 
Net interest: 1.8%; 
Social Security: 4.7%; 
Medicare & Medicaid: 5.3%; 
All other spending: 8.1%; 
Revenue: 19.5%. 

2030; 
Net interest: 2.8%; 
Social Security: 6.4%; 
Medicare & Medicaid: 8%; 
All other spending: 8.1%; 
Revenue: 19.5%. 

2040; 
Net interest: 5.7%; 
Social Security: 6.9%; 
Medicare & Medicaid: 9.7%; 
All other spending: 8.1%; 
Revenue: 19.5%. 

Notes: In addition to the expiration of tax cuts, revenue as a share of 
GDP increases through 2015 due to (1) real bracket creep, (2) more 
taxpayers becoming subject to the AMT, and (3) increased revenue from 
tax-deferred retirement accounts. After 2015, revenue as a share of GDP 
is held constant. 

Source: GAO’s August 2005 analysis. 

[End of figure] 

Composition of Spending as a Share of GDP Assuming Discretionary 
Spending Grows with GDP after 2005 and All Expiring Tax Provisions are 
Extended: 

[See PDF for image] - graphic text: 

Line/Stacked Bar combo chart with 4 groups, 1 line (Revenue) and 4 bars 
per group. 

2004; 
Net interest: 1.4%; 
Social Security: 4.4%; 
Medicare & Medicaid: 3.8%; 
All other spending: 10.4%; 
Revenue: 16.3%. 

2015; 
Net interest: 2.8%; 
Social Security: 4.7%; 
Medicare & Medicaid: 5.3%; 
All other spending: 9.9%; 
Revenue: 17.4. 

2030; 
Net interest: 8%; 
Social Security: 6.7%; 
Medicare & Medicaid: 8%; 
All other spending: 9.9%; 
Revenue: 17.4%. 

2040; 
Net interest: 15.8%; 
Social Security: 7.7%; 
Medicare & Medicaid: 9.7%; 
All other spending: 9.9%; 
Revenue: 17.4%. 

Notes: Although expiring tax provisions are extended, revenue as a 
share of GDP increases through 2015 due to (1) real bracket creep, (2) 
more taxpayers becoming subject to the AMT, and (3) increased revenue 
from tax-deferred retirement accounts. After 2015, revenue as a share 
of GDP is held constant. 

Source: GAO's August 2005 analysis. 

[End of figure] 

Growth in Spending for Social Security, Medicare, and Medicaid Expected 
to Outpace Economic Growth: 

[See PDF for image] – graphic text: 

Bar graph with four items. 

Growth in constant dollars 2005-2030. 

GDP: 72%; 
Social Security Spending: 147%; 
Medicaid Spending: 166%; 
Medicare Spending: 331%. 

Note: Social Security and Medicare projections based on the 
intermediate assumptions of the 2005 Trustees' Reports. Medicaid 
projections based on CBO's December 2003 long-term projections for 
federal spending on Medicaid under mid-range assumptions. 

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

[End of figure] 

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

[See PDF for image] – graphic text: 

Area graph with 81 Groups and 3 items per Group. 

2000; 
Social Security: 4.23%; 
Medicaid: 1.23%; 
Medicare: 2.29%. 

2001; 
Social Security: 4.33%; 
Medicaid: 1.32%; 
Medicare: 2.44%. 

2002; 
Social Security: 4.4%; 
Medicaid: 1.44%; 
Medicare: 2.53%. 

2003; 
Social Security: 4.35%; 
Medicaid: 1.5%; 
Medicare: 2.57%. 

2004; 
Social Security: 4.27%; 
Medicaid: 1.52%; 
Medicare: 2.63%. 

2005; 
Social Security: 4.26%; 
Medicaid: 1.51%; 
Medicare: 2.69%. 

2006; 
Social Security: 4.21%; 
Medicaid: 1.5%; 
Medicare: 3.33%. 

2007; 
Social Security: 4.19%; 
Medicaid: 1.52%; 
Medicare: 3.36%. 

2008; 
Social Security: 4.2%; 
Medicaid: 1.57%; 
Medicare: 3.41%. 

2009; 
Social Security: 4.24%; 
Medicaid: 1.62%; 
Medicare: 3.45%. 

2010; 
Social Security: 4.28%; 
Medicaid: 1.68%; 
Medicare: 3.5%. 

2011; 
Social Security: 4.34%; 
Medicaid: 1.74%; 
Medicare: 3.56%. 

2012; 
Social Security: 4.42%; 
Medicaid: 1.8%; 
Medicare: 3.67%. 

2013; 
Social Security: 4.51%; 
Medicaid: 1.87%; 
Medicare: 3.81%. 

2014; 
Social Security: 4.61%; 
Medicaid: 1.93%; 
Medicare: 3.96%. 

2015; 
Social Security: 4.71%; 
Medicaid: 1.95%; 
Medicare: 4.12%. 

2016; 
Social Security: 4.81%; 
Medicaid: 1.95%; 
Medicare: 4.29%. 

2017; 
Social Security: 4.92%; 
Medicaid: 1.95%; 
Medicare: 4.44%. 

2018; 
Social Security: 5.02%; 
Medicaid: 1.95%; 
Medicare: 4.61%. 

2019; 
Social Security: 5.13%; 
Medicaid: 1.95%; 
Medicare: 4.78%. 

2020; 
Social Security: 5.24%; 
Medicaid: 1.95%; 
Medicare: 4.96%. 

2021; 
Social Security: 5.35%; 
Medicaid: 1.99%; 
Medicare: 5.14%. 

2022; 
Social Security: 5.45%; 
Medicaid: 2.02%; 
Medicare: 5.33%. 

2023; 
Social Security: 5.55%; 
Medicaid: 2.06%; 
Medicare: 5.51%. 

2024; 
Social Security: 5.65%; 
Medicaid: 2.09%; 
Medicare: 5.71%. 

2025; 
Social Security: 5.75%; 
Medicaid: 2.13%; 
Medicare: 5.9%. 

2026; 
Social Security: 5.85%; 
Medicaid: 2.17%; 
Medicare: 6.08%. 

2027; 
Social Security: 5.93%; 
Medicaid: 2.2%; 
Medicare: 6.26%. 

2028; 
Social Security: 6.01%; 
Medicaid: 2.23%; 
Medicare: 6.43%. 

2029; 
Social Security: 6.08%; 
Medicaid: 2.27%; 
Medicare: 6.6%. 

2030; 
Social Security: 6.14%; 
Medicaid: 2.31%; 
Medicare: 6.77%. 

2031; 
Social Security: 6.19%; 
Medicaid: 2.35%; 
Medicare: 6.93%. 

2032; 
Social Security: 6.24%; 
Medicaid: 2.4%; 
Medicare: 7.08%. 

2033; 
Social Security: 6.27%; 
Medicaid: 2.45%; 
Medicare: 7.22%. 

2034; 
Social Security: 6.29%; 
Medicaid: 2.5%; 
Medicare: 7.37%. 

2035; 
Social Security: 6.31%; 
Medicaid: 2.55%; 
Medicare: 7.52%. 

2036; 
Social Security: 6.32%; 
Medicaid: 2.6%; 
Medicare: 7.67%. 

2037; 
Social Security: 6.33%; 
Medicaid: 2.65%; 
Medicare: 7.8%. 

2038; 
Social Security: 6.32%; 
Medicaid: 2.7%; 
Medicare: 7.92%. 

2039; 
Social Security: 6.32%; 
Medicaid: 2.75%; 
Medicare: 8.03%. 

2040; 
Social Security: 6.31%; 
Medicaid: 2.8%; 
Medicare: 8.14%. 

2041; 
Social Security: 6.3%; 
Medicaid: 2.85%; 
Medicare: 8.25%. 

2042; 
Social Security: 6.29%; 
Medicaid: 2.9%; 
Medicare: 8.36%. 

2043; 
Social Security: 6.28%; 
Medicaid: 2.95%; 
Medicare: 8.46%. 

2044; 
Social Security: 6.27%; 
Medicaid: 3%; 
Medicare: 8.58%. 

2045; 
Social Security: 6.26%; 
Medicaid: 3.05%; 
Medicare: 8.7%. 

2046; 
Social Security: 6.26%; 
Medicaid: 3.1%; 
Medicare: 8.82%. 

2047; 
Social Security: 6.25%; 
Medicaid: 3.14%; 
Medicare: 8.93%. 

2048; 
Social Security: 6.25%; 
Medicaid: 3.19%; 
Medicare: 9.03%. 

2049; 
Social Security: 6.24%; 
Medicaid: 3.23%; 
Medicare: 9.14%. 

2050; 
Social Security: 6.24%; 
Medicaid: 3.27%; 
Medicare: 9.25%. 

2051; 
Social Security: 6.24%; 
Medicaid: 3.31%; 
Medicare: 9.36%. 

2052; 
Social Security: 6.24%; 
Medicaid: 3.35%; 
Medicare: 9.47%. 

2053; 
Social Security: 6.24%; 
Medicaid: 3.39%; 
Medicare: 9.59%. 

2054; 
Social Security: 6.25%; 
Medicaid: 3.44%; 
Medicare: 9.71%. 

2055; 
Social Security: 6.25%; 
Medicaid: 3.48%; 
Medicare: 9.84%. 

2056; 
Social Security: 6.26%; 
Medicaid: 3.52%; 
Medicare: 9.98%. 

2057; 
Social Security: 6.27%; 
Medicaid: 3.57%; 
Medicare: 10.12%. 

2058; 
Social Security: 6.27%; 
Medicaid: 3.61%; 
Medicare: 10.26%. 

2059; 
Social Security: 6.28%; 
Medicaid: 3.66%; 
Medicare: 10.4%. 

2060; 
Social Security: 6.29%; 
Medicaid: 3.7%; 
Medicare: 10.55%. 

2061; 
Social Security: 6.29%; 
Medicaid: 3.75%; 
Medicare: 10.7%. 

2062; 
Social Security: 6.3%; 
Medicaid: 3.8%; 
Medicare: 10.84%. 

2063; 
Social Security: 6.31%; 
Medicaid: 3.84%; 
Medicare: 10.99%. 

2064; 
Social Security: 6.32%; 
Medicaid: 3.89%; 
Medicare: 11.14%. 

2065; 
Social Security: 6.33%; 
Medicaid: 3.94%; 
Medicare: 11.3%. 

2066; 
Social Security: 6.34%; 
Medicaid: 3.99%; 
Medicare: 11.47%. 

2067; 
Social Security: 6.35%; 
Medicaid: 4.04%; 
Medicare: 11.64%. 

2068; 
Social Security: 6.35%; 
Medicaid: 4.09%; 
Medicare: 11.81%. 

2069; 
Social Security: 6.36%; 
Medicaid: 4.14%; 
Medicare: 11.96%. 

2070; 
Social Security: 6.36%; 
Medicaid: 4.19%; 
Medicare: 12.12%. 

2071; 
Social Security: 6.37%; 
Medicaid: 4.25%; 
Medicare: 12.28%. 

2072; 
Social Security: 6.37%; 
Medicaid: 4.3%; 
Medicare: 12.44%. 

2073; 
Social Security: 6.37%; 
Medicaid: 4.35%; 
Medicare: 12.6%. 

2074; 
Social Security: 6.38%; 
Medicaid: 4.41%; 
Medicare: 12.75%. 

2075; 
Social Security: 6.38%; 
Medicaid: 4.46%; 
Medicare: 12.92%. 

2076; 
Social Security: 6.38%; 
Medicaid: 4.52%; 
Medicare: 13.08%. 

2077; 
Social Security: 6.39%; 
Medicaid: 4.57%; 
Medicare: 13.25%. 

2078; 
Social Security: 6.39%; 
Medicaid: 4.63%; 
Medicare: 13.41%. 

2079; 
Social Security: 6.39%; 
Medicaid: 4.69%; 
Medicare: 13.58%. 

2080; 
Social Security: 6.39%; 
Medicaid: 4.75%; 
Medicare: 13.75%. 

Note: Social Security and Medicare projections based on the 
intermediate assumptions of the 2005 Trustees’ Reports. Medicaid 
projections based on CBO’s January 2004 short-term Medicaid estimates 
and CBO’s December 2003 long-term Medicaid projections under mid-range 
assumptions. 

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

[End of figure] 

Current Fiscal Policy Is Unsustainable: 

The “Status Quo” is Not an Option: 

* We face large and growing structural deficits largely due to known 
demographic trends and rising health care costs. 

* GAO’s simulations show that balancing the budget in 2040 could 
require actions as large as: 

- Cutting total federal spending by about 60 percent or
- Raising taxes to about 2.5 times today's level. 

Faster Economic Growth Can Help, but It Cannot Solve the Problem: 

* Closing the current long-term fiscal gap based on responsible 
assumptions would require real average annual economic growth in the 
double digit range every year for the next 75 years. 

* During the 1990s, the economy grew at an average 3.2 percent per 
year. 

* As a result, we cannot simply grow our way out of this problem. Tough 
choices will be required. 

The Way Forward: Three Pronged Approach: 

* Re-impose budget controls and enhance legislative process. 

* Improve accounting and reporting and metrics. 

* Re-examine, re-prioritize and re-engineer the base of current federal 
spending programs and tax policies. 

Action, Education, and Debate Are Required Now: 

The Sooner We Get Started, the Better: 

* The miracle of compounding is currently working against us; 
* Less change would be needed, and there would be more time to make 
adjustments; 
* Our demographic changes will serve to make reform more difficult over 
time. 

Need Public Education, Discussion, and Debate: 

The role of government in the 21st Century; 
* Which programs and policies should be changed and how; 
* How government should be financed. 

21st Century Challenges Report: 

Provides background, framework, and questions to assist in reexamining 
the base. 

Covers entitlements & other mandatory spending, discretionary spending, 
and tax policies and programs. 

Based on GAO's work for the Congress. 

Issued February 16, 2005. 

Twelve Reexamination Areas: 

Mission Areas: 

* Defense; 
* Education & Employment; 
* Financial Regulation & Housing; 
* Health Care; 
* Homeland Security; 
* International Affairs; 
* Natural Resources, Energy & Environment; 
* Retirement & Disability; 
* Science & Technology; 
* Transportation. 

Crosscutting Areas: 

* Improving Governance; 
* Reexamining the Tax System. 

Illustrative 21st Century Questions: National Defense: 

* How should the historical allocation of resources across services and 
programs be changed to reflect the results of a forward-looking 
comprehensive threat/risk assessment as part of DOD's capabilities- 
based approach to determining defense needs? 

* Can DOD afford to invest in transformational systems such as the 
Future Combat System and national missile defense at the same time it 
continues to pursue large investments in legacy systems such as the FA- 
22 and new systems like the Joint Strike Fighter, especially if cost 
growth and schedule delays continue at historical rates? 

* Given the global availability of rapidly advancing technology, does 
DOD need to reconsider its approach for identifying critical 
technologies and protecting those technologies from being exploited in 
order to maintain its military superiority? 

* Given the growing encumbrance of pay and benefit costs, especially 
health care, within DOD's budget, how might DOD's recruitment, 
retention, and compensation strategies (including benefit programs) be 
reexamined and revised to ensure that DOD maintains a total military 
and civilian workforce with the mix of skills needed to execute the 
national security strategy while using resources in a more targeted, 
evidence-based, and cost-effective manner? 

* Do the role, size, and structure of forces and capabilities 
comprising the strategic triad need to be adjusted to meet the 
challenges of providing strategic deterrence in the new security and 
fiscal environment? 

* Does DOD need to create a senior management position responsible and 
accountable for taking a strategic, integrated, and sustained approach 
to managing the day-to-day business operations of the department, 
including ongoing efforts to transform DOD's business operations and 
address the many related and longstanding high-risk areas? Should 
specific qualifications requirements and periods of tenure or terms be 
established for selected DOD positions related to key business 
operations? 

DOD Lacks An Affordable Plan to Balance Current Requirements With 
Investments in New Capabilities: 

* DOD needs to reexamine its force structure and business processes to 
meet 21st century challenges.

* DOD plans to transform its military capabilities may not be 
affordable or sustainable.

* DOD’s efforts to transform its business systems and processes will 
take many years to achieve.

Active Duty Personnel Pay and Benefits Need To Be Reexamined and 
Revised: 

* The cost of active duty pay and benefits was $158 billion in fiscal 
year 2004 and growing. 

* Enhanced pay and benefits, including health care costs, increased 
costs to an average of $111,783 per person. 

* DOD needs to assess the affordability and sustainability of the 
compensation system and the reasonableness and appropriateness of the 
allocation to cash and benefits and whether changes could more 
efficiently achieve recruiting and retention goals. 

Total Compensation Costs for Fiscal Years 2000-2004: 

[See PDF for image] -- graphic text: 

Bar graph with five items. 

2004 constant dollars. 

2000: $123; 
2001: $131; 
2002: $141; 
2003: $155; 
2004: $158. 

Source: GAO analysis. 

* Our calculations include supplemental funding for the Global War on 
Terrorism. Since fiscal year 2002 over 100,000 mobilized reservists 
were paid out of the cash compensation. If you considered these 
personnel, the average costs to provide compensation would be about 
$5,000 per capita lower. 

[End of figure] 

DOD Continues to Confront Pervasive, Longstanding Management Problems 
Related to Its Business Operations: 

Management weaknesses cut across all DOD’s major business areas, and 
its approach to business transformation was designated as high risk in 
2005. 

Examples of longstanding issues include: 

* Supply chain management has been designated high risk since 1990; 
* Weapons System Acquisition was also designated high risk in 1990; 
* Financial Management has been designated as high-risk since 1995. 

Weapons System Challenges: 

The complex process of buying weapon systems can be depicted in 
simplified form as:

1. Determine capabilities desired. 
2. Make business case. 
3. Execute. 

It’s not working because: 

* DOD-wide process to get from “wants” to “needs” does not exist; 
* Overly optimistic promises as to cost, timing, and performance of key 
systems; 
* Contracting arrangements are overly complex and not sufficiently 
results-oriented; 
* Key program players turnover too frequently; 
* Program investment decisions are made without enough knowledge; 
* Program officials and contractors are not held accountable when 
results do not match promises (e.g. award bonuses even when contractors 
over-promise and under-deliver). 

Needs/Wants: Demand for New Weapons Has Doubled: 

Demand for New Weapons Is Now $1.4 Trillion: 

Top 5 Systems; 
2001: $291B; 
2006: $550B. 

All Major Systems Other; 
2001: $700B; 
2006: $1.4T. 

[End of table] 

* Competition for discretionary funds both outside and inside DOD make 
getting this kind of money very unlikely. 

* Even if the money was available, cost growth would rob the buying 
power of the investments. 

* 30-40% cost growth is the historical experience. 

F/A-22 Fighter Example: 

[See PDF for image] -- graphic text: 

Bar chart with two groups with two items each. 

Initial Promise; 
648 aircraft; 
$81.1 billion. 

Current Plan; 
181 aircraft; 
$65.4 billion. 

Source: GAO analysis. 

[End of figure] 

The Way Forward: Selected Potential DOD Related Actions: 

* Revise the current approach to developing national military strategy 
(e.g., order, integration); 

* Take a longer range, and more enterprise-wide approach to program 
planning and budget integration (e.g., life cycles, opportunity costs); 

* Employ a total force management approach to planning and execution 
(e.g., military, civilian, contractors); 

* Revise the process for developing and communicating key changes 
(e.g., DOD transformation, NSPS legislative proposal); 

* Reduce the number of layers, silos, and footprints; 

* Strengthen emphasis on horizontal and external activities (e.g., 
partnerships); 

* Differentiate between war fighting and business systems development, 
implementation and maintenance (e.g., resource control, project 
approval); 

* Make it okay to pull the plug or reduce quantities of weapon systems 
and information systems projects when the facts and circumstances 
warrant it; 

* Recognize the difference between approving and informing; 

* Create a Chief Management Officer to drive the business 
transformation process; 

* Get the design and implementation of the NSPS right, including 
modernizing and integrating the DOD, Service, domain, unit and 
individual performance measurement and reward systems ; 

* Employ a more targeted and market based approach to compensation and 
other key human capital strategies ; 

* Streamline yet strengthen current commercial contracts (e.g., 
incentives, transparency and accountability mechanisms); 

* Provide for longer tours of duty in connection with key acquisitions 
and operations positions (e.g., responsibility and accountability); 

* Focus on achieving real success in connection with financial 
management efforts (e.g., systems, controls, information, compliance 
and opinions); 

* Employ a more reasonable, strategic, and integrated approach to 
business information system efforts and financial audit initiatives. 

[End of slide presentation] 

GAO's Mission: 

The Government Accountability Office, the investigative arm of 
Congress, exists to support Congress in meeting its constitutional 
responsibilities and to help improve the performance and accountability 
of the federal government for the American people. GAO examines the use 
of public funds; evaluates federal programs and policies; and provides 
analyses, recommendations, and other assistance to help Congress make 
informed oversight, policy, and funding decisions. GAO's commitment to 
good government is reflected in its core values of accountability, 
integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains 
abstracts and full-text files of current reports and testimony and an 
expanding archive of older products. The Web site features a search 
engine to help you locate documents using key words and phrases. You 
can print these documents in their entirety, including charts and other 
graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 
correspondence. GAO posts this list, known as "Today's Reports," on its 
Web site daily. The list contains links to the full-text document 
files. To have GAO e-mail this list to you every afternoon, go to 
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order 
GAO Products" heading. 

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548: 

To order by Phone: 

Voice: (202) 512-6000: 

TDD: (202) 512-2537: 

Fax: (202) 512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov 

Automated answering system: (800) 424-5454 or (202) 512-7470: 

Public Affairs: 

Jeff Nelligan, managing director, 

NelliganJ@gao.gov 

(202) 512-4800 

U.S. Government Accountability Office, 

441 G Street NW, Room 7149 

Washington, D.C. 20548: