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Before the Committee on Ways and Means, House of Representatives:

United States Government Accountability Office:


For Release on Delivery Expected at 10:30 a.m. EST:

Wednesday, March 9, 2005:

Social Security Reform: 

Early Action Would Be Prudent:

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


GAO Highlights:

Highlights of GAO-05-397T, a report to the Committee on Ways and Means, 
House of Representatives:

Why GAO Did This Study:

Social Security is the foundation of the nation’s retirement income 
system, helping to protect the vast majority of American workers and 
their families from poverty in old age. However, it is much more than a 
retirement program, also providing millions of Americans with 
disability insurance and survivors’ benefits. Over the long term, as 
the baby boom generation retires and as Americans continue to live 
longer and have fewer children, Social Security’s financing shortfall 
presents a major program solvency and sustainability challenge that is 
widening as time passes.

The Committee asked GAO to discuss the need for Social Security reform. 
This testimony addresses the nature of Social Security’s long-term 
financing problem and why it would be prudent for Congress to take 
action sooner rather than later. This testimony also notes the broader 
context in which reform proposals should be considered and the criteria 
that GAO has recommended as a basis for analyzing any Social Security 
reform proposals.

What GAO Found:

Although the Social Security system is not in crisis, it faces a 
serious solvency and sustainability challenge that is growing as time 
passes. If we do nothing until 2042, achieving actuarial balance would 
require a 30-percent reduction in benefits or a 43-percent increase in 
payroll taxes for the period 2042-2078. Furthermore, Social Security’s 
problems are a subset of the grave fiscal challenge facing our nation. 
Absent changes in budget policy, the nation will ultimately have to 
choose among escalating federal deficits and debt, huge tax increases 
and/or dramatic budget cuts. As GAO’s long-term budget simulations 
show, substantive reform of Social Security and our major federal 
health programs (e.g., Medicare and Medicaid) is critical to saving our 
nation’s fiscal future. (See figure below.) Taking action soon would 
serve to reduce the magnitude of changes needed to ensure that Social 
Security is solvent, sustainable, and secure for current and future 
generations. It would also allow time to phase in certain changes and 
time for individuals to adjust to any such changes. Acting sooner would 
also serve to improve the federal government’s credibility with 
financial markets and bolster the confidence of the American people in 
our government’s ability to address long-range financial challenges.

However, financial solvency and sustainability should not be the only 
consideration when evaluating Social Security reform proposals. Other 
key objectives, such as balancing the adequacy and equity of the 
benefit structure and various administrative and operational issues 
need to be considered. Furthermore, any changes to Social Security 
should be considered in the context both of the whole program—including 
disability and survivors’ benefits—and of the broader challenges facing 
our nation, such as the changing nature of the private pension system, 
long-term care needs, escalating health care costs, and the need to 
reform the Medicare and Medicaid programs.

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

[See PDF for image]

[End of figure]

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Barbara Bovbjerg at (202) 
512-7215 or

[End of section]

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss the underlying structural 
problems and long-term challenges facing the Social Security 
program.[Footnote 1] Before addressing these matters specifically, I 
would like to place these challenges in the context of the larger 
challenges facing the federal government today, which we discuss in our 
recently issued 21st Century Challenges report.[Footnote 2]1 There is a 
need to bring the federal government and its programs into line with 
21st century realities. This challenge has many related pieces: 
addressing our nation's large and growing long-term fiscal gap; 
deciding on the appropriate role and size of the federal government-and 
how to finance that government-and bringing the panoply of federal 
activities into line with today's world. Continuing on our current 
unsustainable fiscal path will gradually erode, if not suddenly damage, 
our economy, our standard of living, and ultimately our national 
security. We therefore must fundamentally reexamine major spending and 
tax policies and priorities in an effort to recapture our fiscal 
flexibility and ensure that our programs and priorities respond to 
emerging security, social, economic, and environmental changes and 

Social Security represents the foundation of retirement income for 
millions of Americans and has helped to prevent many former workers and 
their families from living their retirement years in poverty. It 
provides millions of Americans with disability insurance and survivors' 
benefits, thus, providing benefits that are critical to the current and 
future well-being of tens of millions of Americans. Fixing Social 
Security is about more than finances. It is also about maintaining an 
adequate safety net for American workers against loss of income from 
retirement, disability, or death.

As I have said in congressional testimonies over the past several 
years, the Social Security system faces serious solvency and 
sustainability challenges in the longer term.[Footnote 3] While the 
Social Security program does not face an immediate crisis, it does have 
a $3.7 trillion gap between promised and funded benefits in current 
dollar terms over the next 75 years. This gap is growing as time passes 
and, given this and other major fiscal challenges, including expected 
growth in federal health spending, it would be prudent to act sooner 
rather than later to reform the Social Security program. Failure to 
take steps to address our large and structural long-range fiscal 
imbalance, which is driven in large part by projected increases in 
Medicare, Medicaid, and Social Security spending, will ultimately have 
significant adverse consequences for our future economy and the quality 
of life of our children, grandchildren, and future generations of 

Let me begin by highlighting a number of important points concerning 
the Social Security challenge and our broader fiscal and economic 

* Solving Social Security's long-term financing problem is more 
important and complex than simply making the numbers add up. Social 
Security is an important and successful social insurance program that 
affects virtually every American family. It currently pays benefits to 
more than 47 million people, including retired workers, disabled 
workers, the spouses and children of retired and disabled workers, and 
the survivors of deceased workers. The number of individuals receiving 
benefits is expected to grow to almost 69 million by 2020. The program 
has been highly effective at helping to reduce the incidence of poverty 
among the elderly, and the disability and survivor benefits have been 
critical to the financial well-being of millions of others.

* Focusing on trust fund solvency alone is not sufficient. We need to 
put the program on a path toward sustainable solvency. Trust fund 
solvency is an important concept, but focusing on trust fund solvency 
alone can lead to a false sense of security about the overall financial 
condition of the Social Security program. After all, the Social 
Security Trust Fund is a subaccount of the federal government rather 
than a private trust fund. Its assets are not readily marketable nor 
are they convertible into cash other than through raising revenues, 
cutting other government expenses, increasing debt held by the public, 
or some combination of these. Furthermore, the size of the trust fund 
does not tell us whether the program is sustainable--that is, whether 
the government will have the capacity to pay future claims or what else 
will have to be squeezed to pay those claims. Aiming for sustainable 
solvency would increase the chance that future policymakers would not 
have to face these difficult questions on a recurring basis. Estimates 
of what it would take to achieve 75-year trust fund solvency understate 
the extent of the problem because the program's financial imbalance 
gets worse in the 76th and subsequent years.

* Social Security reform is part of a broader fiscal and economic 
challenge. If you look ahead in the federal budget, Social Security 
together with the rapidly growing health programs (Medicare and 
Medicaid) dominate the federal government's future fiscal outlook. 
While this hearing is not about the complexities of Medicare, it is 
important to note that Medicare presents a much greater, more complex, 
and more urgent fiscal challenge than Social Security. Medicare growth 
rates reflect not only a burgeoning beneficiary population, but also 
the escalation of health care costs at rates well exceeding general 
rates of inflation. Federal and state spending for Medicaid will 
especially be stressed by anticipated growing demand for long-term care 
services by the aging baby boom population. Taken together, Social 
Security, Medicare, and Medicaid represent an unsustainable burden on 
future generations. Under the 2004 Trustees' intermediate estimates and 
the Congressional Budget Office's (CBO) long-term Medicaid estimates, 
spending for Social Security, Medicare, and Medicaid combined will grow 
from 8.5 percent of GDP today to 15.6 percent in 2030. Absent 
meaningful changes to these programs, the nation will ultimately have 
to choose among persistent, escalating federal deficits, huge tax 
increases, and/or dramatic budget cuts. Furthermore, any changes to 
Social Security should be considered in the context of the problems 
currently facing our nation's private pension system. These include the 
chronically low levels of pension coverage of the private sector 
workforce, the continued decline in the number of defined benefit plans 
coupled with the termination of large underfunded plans by bankrupt 
firms, and the shift by employers to defined contribution plans, where 
workers face the potential for greater return but also assume greater 
financial risk. Similarly, the growing demand for long-term care will 
also likely exacerbate current concerns regarding the provision and 
financing of these services. These include the potential for families 
to face the financially catastrophic costs of long-term care. In 
addition, the heavy reliance on unpaid care from family members and 
other informal caregivers already has led, in many cases, to severe 
personal burdens. This strain will likely be exacerbated, with possibly 
fewer caregivers available in the coming decades.

* Acting sooner rather than later helps to ease the difficulty of 
change. The challenge of facing the imminent and daunting budget 
pressure from Medicare, Medicaid, and Social Security increases over 
time. Social Security will begin to constrain the budget long before 
the trust fund is exhausted in 2042. The Social Security cash surpluses 
that are now helping to finance the rest of the government's budgetary 
needs will begin to decline in 2008, and by 2018, the cash surpluses 
will turn to deficits. Beginning in 2008, Social Security's declining 
cash flow will begin to place increasing pressure on the rest of the 
budget. In addition, starting in 2018, the government will have to 
either increase revenues, decrease other government spending, or 
increase debt held by the public to convert the bonds in the trust 
funds into cash in order to pay full benefits when due. Waiting until 
Social Security faces an immediate solvency crisis will limit the scope 
of feasible solutions and could reduce the options to only those 
choices that are the most difficult. It could also contribute to a 
further delay of the really tough decisions on Medicare and Medicaid. 
Acting sooner rather than later would allow changes to be more modest 
while also being phased in so that future and near-term retirees will 
have time to adjust their retirement planning. Furthermore, acting 
sooner rather than later would serve to increase our credibility with 
the markets and improve the public's confidence in the federal 
government's ability to deal with our significant long-range fiscal 
challenges before they reach crisis proportions.

* Reform proposals should be evaluated as packages. The elements of any 
reform proposal interact; every proposal will have pluses and minuses, 
and no plan will satisfy everyone on all dimensions. Reform elements 
can take a variety of shapes; examples include benefit reductions, like 
changing replacement rates, moving from wage to price indexation, or 
increasing the retirement age, increasing payroll taxes or the taxable 
wage base, and/or creating individual accounts. If we focus on the pros 
and cons of each element of reform by itself, we may find it impossible 
to build the bridges necessary to achieve consensus. However, any 
analyses of reform proposals should reflect the fact that the program 
faces a long-term actuarial deficit and that benefit reductions and/or 
revenue increases will be necessary to restore solvency. Therefore, it 
is important to establish the appropriate comparisons or benchmarks 
against which reforms should be measured. This requires looking at 
proposed reforms from at least two benchmarks--one that raises revenue 
to fund currently scheduled benefits (promised benefits) and one that 
adjusts benefits to a level supported by current tax financing (funded 
benefits). Comparing the benefit impact of reform proposals solely to 
currently scheduled Social Security benefits is inappropriate since all 
current scheduled benefits are not funded over the longer term.

Failure to address the Social Security financing problem will, in 
combination with other entitlement spending, lead to an unsustainable 
burden on both the federal government and, ultimately, the economy. As 
the Congress considers proposals to restore the long-term financial 
stability and viability of the Social Security system, it will also 
need to consider the impact of the potential changes on the millions of 
Americans the system serves: specifically, the effects on different 
types of beneficiaries and the resulting implications for the adequacy 
and equity of the benefits structure. The fundamental nature of the 
program's long-term financing challenge means that timely action is 
needed. I believe it is possible to craft a solution that will protect 
Social Security benefits for the nation's current and near-term 
retirees, while ensuring that the system will be solvent, sustainable, 
and secure for future generations. I also believe that it is possible 
to exceed the expectations of all generations of Americans. In 
addition, given our overall fiscal challenge and various trends in the 
private pension and personal savings areas, I believe it would be 
prudent to act sooner rather than later to address this large and 
growing problem.

Social Security's Long-term Financing Problem Is More Urgent Than It 
May Seem:

Today, the Social Security program faces not an immediate crisis but 
rather a long-range financing problem driven primarily by known 
demographic trends. While the crisis is not immediate, the challenge is 
more urgent than it may appear since the program will experience 
increasing negative cash flow starting in 2018. Acting soon to address 
these problems reduces the likelihood that Congress will have to choose 
between imposing severe benefit cuts and unfairly burdening future 
generations with the program's rising costs. Acting soon would also 
allow changes to be phased in so that the individuals who are most 
likely to be affected, namely younger and future workers, will have 
time to adjust their retirement planning while helping to avoid related 
"expectation gaps." On the other hand, failure to take remedial action 
will, in combination with other entitlement spending, lead to a 
situation unsustainable both for the federal government and, 
ultimately, the economy.

The Social Security system has required changes in the past to ensure 
its future solvency. Indeed, the Congress has always taken the actions 
necessary to do this when faced with an immediate solvency crisis. 
While such an immediate crisis will not occur for many years, waiting 
until it is imminent would not be prudent. I would like to spend some 
time describing the nature, timing, and extent of Social Security's 
financing problem.

The Nature of Social Security's Long-Term Financing Problem:

As you all know, Social Security has always been a largely pay-as-you- 
go system. This means that the system's financial condition is directly 
affected by the relative size of the populations of covered workers and 
beneficiaries. Historically, this relationship has been favorable to 
the system's financial condition. Now, however, people are living 
longer, and spending more time in retirement.

As shown in figure 1, the U.S. elderly dependency ratio is expected to 
continue to increase.[Footnote 4] The proportion of the elderly 
population relative to the working-age population in the U.S. rose from 
13 percent in 1950 to 19 percent in 2000. By 2050, there is projected 
to be almost 1 elderly dependent for every 3 people of working age--a 
ratio of 32 percent. Additionally, the average life expectancy of males 
at birth has increased from 66.6 in 1960 to 74.3 in 2000, with females 
at birth experiencing a rise of 6.6 years from 73.1 to 79.7 over the 
same period. As general life expectancy has increased in the United 
States, there has also been an increase in the number of years spent in 
retirement. Improvements in life expectancy have extended the average 
amount of time spent by workers in retirement from 11.5 years in 1950 
to 18 years for the average male worker as of 2003.

Figure 1: U.S. Elderly Dependency Ratio Expected to Continue to 

[See PDF for image]

[End of figure]

A falling fertility rate is the other principal factor underlying the 
growth in the elderly's share of the population. In the 1960s, the 
fertility rate, which is the average number of children that would be 
born to women during their childbearing years, was an average of 3 
children per woman. Today it is a little over 2, and by 2030 it is 
expected to fall to 1.95--a rate that is below what it takes to 
maintain a stable population. Taken together, these trends threaten the 
financial solvency and sustainability of Social Security.

The combination of these trends means that labor force growth will 
begin to slow after 2010 and by 2025 is expected to be less than a 
fifth of what it is today, as shown in figure 2. Relatively fewer U.S. 
workers will be available to produce the goods and services that all 
will consume. Without a major increase in productivity or immigration, 
low labor force growth will lead to slower growth in the economy and to 
slower growth of federal revenues. This in turn will only accentuate 
the overall pressure on the federal budget.

Figure 2: Labor Force Growth Is Expected to Slow Significantly:

[See PDF for image]

Note: Percentage change is calculated as a centered 5-yr moving average 
of projections based on the intermediate assumptions of the 2004 
Trustees Reports.

[End of figure]

This slowing labor force growth has important implications for the 
Social Security system. Social Security's retirement eligibility dates 
are often the subject of discussion and debate and can have a direct 
effect on both labor force growth and the condition of the Social 
Security retirement program. It is also appropriate to consider whether 
and how changes in pension and/or other government policies could 
encourage longer workforce participation. To the extent that people 
choose to work longer as they live longer, the increase in the amount 
of time spent in retirement could be diminished. This could improve the 
finances of Social Security.

The Social Security program's situation is one symptom of this larger 
demographic trend that will have broad and profound effects on our 
nation's future in other ways as well. The aging of the labor force and 
the reduced growth in the number of workers will have important 
implications for the size and composition of the labor force, as well 
as the characteristics of many jobs in our increasingly knowledge-based 
economy, throughout the 21st century. The U.S. workforce of the 21st 
century will be facing a very different set of opportunities and 
challenges than that of previous generations. The slowdown in labor 
force growth can have very negative effects on our nation's economic 
future, as relatively fewer workers will be producing the goods and 
services that everyone will consume. If people do choose to work longer 
this may mitigate the expected slowdown in labor force growth, which 
could strengthen the nation's economic prospects.

Cash Flow Turns Negative in 2018:

Today, the Social Security Trust Funds take in more in taxes than they 
spend. Largely because of the demographic trends I have described, this 
situation will change. Although the trustees' 2004 intermediate 
estimates project that the combined Social Security Trust Funds will be 
solvent until 2042,[Footnote 5] within the next few years, Social 
Security spending will begin to put pressure on the rest of the federal 
budget. Under the trustees' 2004 intermediate estimates, Social 
Security's cash surplus--the difference between program tax income and 
the costs of paying scheduled benefits--will begin a permanent decline 
in 2008. By 2018, the program's cash flow is projected to turn 
negative--its tax income will fall below benefit payments. At that 
time, Social Security will join Medicare's Hospital Insurance Trust 
Fund, whose outlays exceeded cash income in 2004, as a net claimant on 
the rest of the federal budget. (See figure 3.)

Figure 3: Social Security and Medicare's Hospital Insurance Trust Funds 
Face Cash Deficits:

[See PDF for image]

[End of figure]

In 2018, the combined OASDI Trust Funds will begin drawing on its 
Treasury securities to cover the cash shortfall.[Footnote 6] At this 
point, Treasury will need to obtain cash for these redeemed securities 
either through increased taxes, spending cuts, and/or more borrowing 
from the public than would have been the case had Social Security's 
cash flow remained positive. Whatever the means of financing, the shift 
from positive to negative cash flow will place increased pressure on 
the federal budget to raise the resources necessary to meet the 
program's ongoing costs.

Different Measures but Same Challenges and Same Conclusion:

There are different ways to describe the magnitude of Social Security's 
long-term financing challenge, but they all illustrate a need for 
program reform sooner rather than later. A case can be made for a range 
of different measures, as well as different time horizons. For 
instance, the shortfall can be measured in present value, as a 
percentage of GDP, or as a percentage of taxable payroll. The Social 
Security Administration (SSA) has made projections of Social Security 
shortfall using different time horizons. (See table 1.)

Table 1: Different Measures, Same Challenge:

Projection Horizon: 75 year; 
SSA's Projections of Unfunded OASDI Obligations: Present value: $3.7 
SSA's Projections of Unfunded OASDI Obligations: Percent of GDP: 0.7%; 
SSA's Projections of Unfunded OASDI Obligations: Percent of payroll: 

Projection Horizon: Infinite horizon; 
SSA's Projections of Unfunded OASDI Obligations: Present value: $10.4 
SSA's Projections of Unfunded OASDI Obligations: Percent of GDP: 1.2%; 
SSA's Projections of Unfunded OASDI Obligations: Percent of payroll: 

Sources: Social Security Administration, The 2004 Annual Report of the 
Board of Trustees of the Federal Old-Age and Survivors Insurance and 
Disability Insurance Trust Funds. Washington, D.C., March 2004.

[End of table]

While the estimates vary due to different horizons, both identify the 
same long-term challenge: The Social Security system is unsustainable 
in its present form over the long run. Taking action soon on Social 
Security would not only make the necessary action less dramatic than if 
we wait but would also promote increased budgetary flexibility in the 
future and stronger economic growth. Some of the benefits of early 
action--and the costs of delay--can be seen in figure 4. This figure 
compares what it would take to keep Social Security solvent through 
2078, if action were taken at three different points in time, by either 
raising payroll taxes or reducing benefits. If we did nothing until 
2042--the year SSA estimates the Trust Funds will be exhausted-- 
achieving actuarial balance would require changes in benefits of 30 
percent or changes in taxes of 43 percent for the period 2042-2078. As 
figure 4 shows, earlier action shrinks the size of the necessary 
adjustment. However, these changes do not achieve sustainable solvency, 
they only achieve solvency through 2078.

Figure 4: Size of Action Needed to Achieve Social Security Solvency:

[See PDF for image]

Note: This is based on the intermediate assumptions of the 2004 Social 
Security Trustees Report. The benefit adjustments in this graph 
represent a one-time, permanent change to all existing and future 
benefits beginning January 1st of the first year indicated to December 
31, 2078.

[End of figure]

Social Security Reform is Part of a Broader Fiscal and Economic 

As I have already discussed, reducing the relative future burdens of 
Social Security and health programs is essential to a sustainable 
budget policy for the longer term. It is also critical if we are to 
avoid putting unsupportable financial pressures on Americans in the 
future. Reforming Social Security and health programs is essential to 
reclaiming our future fiscal flexibility to address other national 

Changes in the composition of federal spending over the past several 
decades have reduced budgetary flexibility, and our current fiscal path 
will reduce it even further. During this time, spending on mandatory 
programs has consumed an ever-increasing share of the federal budget. 
In 1964, prior to the creation of the Medicare and Medicaid programs, 
spending for mandatory programs plus net interest accounted for about 
33 percent of total federal spending. By 2004, this share had almost 
doubled to approximately 61 percent of the budget.

GAO's long-term simulations illustrate the magnitude of the fiscal 
challenges associated with an aging society and the significance of the 
related challenges the government will be called upon to address. 
Figures 5 and 6 present these simulations under two different sets of 
assumptions. In figure 5, we begin with CBO's January baseline - 
constructed according to the statutory requirements for that 
baseline.[Footnote 7] Consistent with these requirements, discretionary 
spending is assumed to grow with inflation for the first 10 years and 
tax cuts scheduled to expire are assumed to expire. After 2015, 
discretionary spending is assumed to grow with the economy, and revenue 
is held constant as a share of GDP at the 2015 level. In figure 6 two 
assumptions are changed: discretionary spending is assumed to grow with 
the economy after 2005 rather than merely with inflation and the tax 
cuts are extended. For both simulations Social Security and Medicare 
spending is based on the 2004 Trustees' intermediate projections, and 
we assume that benefits continue to be paid in full after the trust 
funds are exhausted. Medicaid spending is based on CBO's December 2003 
long-term projections under mid-range assumptions.

Figure 5: Composition of Spending as a Share of Gross Domestic Product 
(GDP) Assuming Discretionary Spending Grows with GDP after 2005 and All 
Existing Tax Cuts Expire:

[See PDF for image]

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.

[End of figure]

Figure 6: 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]

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.

[End of figure]

Both these simulations illustrate that, absent policy changes, the 
growth in spending on federal retirement and health entitlements will 
encumber an escalating share of the government's resources. Indeed, 
when we assume that recent tax reductions are made permanent and 
discretionary spending keeps pace with the economy, our long-term 
simulations suggest that by 2040 federal revenues may be adequate to 
pay little more than interest on the federal debt. Neither slowing the 
growth in discretionary spending nor allowing the tax provisions to 
expire--nor both together--would eliminate the imbalance. Although 
revenues will be part of the debate about our fiscal future, the 
failure to reform Social Security, Medicare, Medicaid, and other 
drivers of the long term fiscal gap would require at least a doubling 
of taxes--and that seems implausible. Accordingly, substantive reform 
of Social Security and our major health programs remains critical to 
recapturing our future fiscal flexibility.

Alternatively, taking action soon on Social Security would not only 
promote increased budgetary flexibility in the future and stronger 
economic growth but would also make the necessary action less dramatic 
than if we wait. Indeed, long-term budget flexibility is about more 
than Social Security and Medicare. While these programs dominate the 
long-term outlook, they are not the only federal programs or activities 
that bind the future. The federal government undertakes a wide range of 
programs, responsibilities, and activities that obligate it to future 
spending or create an expectation for spending. GAO has described the 
range and measurement of such fiscal exposures--from explicit 
liabilities such as environmental cleanup requirements to the more 
implicit obligations presented by life-cycle costs of capital 
acquisition or disaster assistance.[Footnote 8] Making government face 
and address the challenges of the future will require not only dealing 
with the drivers--entitlements for the elderly--but also looking at the 
range of federal activities. A fundamental review of what the federal 
government does, how it does it, and how it finances its operations is 
both needed and overdue.

Also, at the same time it is important to look beyond the federal 
budget to the economy as a whole. Under the 2004 Trustees' intermediate 
estimates and CBO's long-term Medicaid estimates, spending for Social 
Security, Medicare, and Medicaid combined will grow to 15.6 percent of 
GDP in 2030 from today's 8.5 percent. (See figure 7.) Taken together, 
Social Security, Medicare, and Medicaid represent an unsustainable 
burden on future generations of Americans.

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

[See PDF for image]

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

[End of figure]

The government can help ease future fiscal burdens through spending or 
revenue actions that reduce debt held by the public, thereby saving for 
the future and enhancing the pool of economic resources available for 
private investment and long-term growth. Economic growth can help, but 
given the size of our projected fiscal gap we will not be able to 
simply grow our way out of the problem. Closing the current long-term 
fiscal gap would require sustained economic growth far beyond that 
experienced in U.S. economic history since World War II. Tough choices 
are inevitable, and the sooner we act, the better.

Considerations in Assessing Reform Options:

As important as financial stability may be for Social Security, it 
cannot be the only consideration. As a former public trustee of Social 
Security and Medicare, I am well aware of the central role these 
programs play in the lives of millions of Americans. Social Security 
remains the foundation of the nation's retirement system. It is also 
much more than just a retirement program; it pays benefits to disabled 
workers and their dependents, spouses and children of retired workers, 
and survivors of deceased workers. In 2004, Social Security paid almost 
$493 billion in benefits to more than 47 million people. Since its 
inception, the program has successfully reduced poverty among the 
elderly. In 1959, 35 percent of the elderly were poor. In 2000, about 8 
percent of beneficiaries aged 65 or older were poor, and 48 percent 
would have been poor without Social Security. Because the program is so 
deeply woven into the fabric of our nation, any proposed reform must 
consider the program in its entirety, rather than one aspect alone. To 
assist policymakers, GAO has developed a broad framework for evaluating 
reform proposals that considers solvency as well as other aspects of 
the program. Our criteria aim to balance financial and economic 
considerations with benefit adequacy and equity issues and the 
administrative challenges associated with various proposals.

GAO Framework For Evaluating Reform Proposals:

GAO developed an analytic framework to assess reform proposals using 
three basic criteria:

* Financing Sustainable Solvency --the extent to which a proposal 
achieves sustainable solvency and how it would affect the economy, the 
federal budget, and national saving. Our sustainable solvency standard 
encompasses several different ways of looking at the Social Security 
program's financing needs. While a 75-year actuarial balance has 
generally been used in evaluating the long-term financial outlook of 
the Social Security program and reform proposals, it is not sufficient 
in gauging the program's solvency after the 75th year. For example, 
under the trustees' intermediate assumptions, each year the 75-year 
actuarial period changes, and a year with a surplus is replaced by a 
new 75th year that has a significant deficit. As a result, changes made 
to restore trust fund solvency only for the 75-year period can result 
in future actuarial imbalances almost immediately. Reform plans that 
lead to sustainable solvency would be those that consider the broader 
issues of fiscal sustainability and affordability over the long term. 
Specifically, a standard of sustainable solvency also involves looking 
at (1) the balance between program income and costs beyond the 75th 
year and (2) the share of the budget and economy consumed by Social 
Security spending.

* Balancing Adequacy and Equity --the relative balance struck between 
the goals of individual equity and income adequacy. The current Social 
Security system's benefit structure attempts to strike a balance 
between these two goals. From the beginning, Social Security benefits 
were set in a way that focused especially on replacing some portion of 
workers' preretirement earnings. Over time other changes were made that 
were intended to enhance the program's role in helping ensure adequate 
incomes. Retirement income adequacy, therefore, is addressed in part 
through the program's progressive benefit structure, providing 
proportionately larger benefits to lower earners and certain household 
types, such as those with dependents. Individual equity refers to the 
relationship between contributions made and benefits received. This can 
be thought of as the rate of return on individual contributions. 
Balancing these seemingly conflicting objectives through the political 
process has resulted in the design of the current Social Security 
program and should still be taken into account in any proposed reforms.

* Implementing and Administering Proposed Reforms --how readily a 
proposal could be implemented, administered, and explained to the 
public. Program complexity makes implementation and administration both 
more difficult and harder to explain. Some degree of implementation and 
administrative complexity arises in virtually all proposed changes to 
Social Security, even those that make incremental changes in the 
already existing structure. While these issues may seem technical or 
routine on the surface, they are important. In particular, if these 
issues are not considered early enough for planning purposes, they 
could potential delay--if not derail--reform. Moreover, issues such as 
feasibility and cost can, and should, influence policy choices. 
Continued public acceptance of and confidence in the Social Security 
program require that any reforms and their implications for benefits be 
well understood. This means that the American people must understand 
why change is necessary, what the reforms are, why they are needed, how 
they are to be implemented and administered, and how they will affect 
their own retirement income. All reform proposals will require some 
additional outreach to the public so that future beneficiaries can 
adjust their retirement planning accordingly. The more transparent the 
implementation and administration of reform, and the more carefully 
such reform is phased in, the more likely it will be understood and 
accepted by the American people.

The weight that different policymakers place on different criteria will 
vary, depending on how they value different attributes. For example, if 
offering individual choice and control is less important than 
maintaining replacement rates for low-income workers, then a reform 
proposal emphasizing adequacy considerations might be preferred. As 
they fashion a comprehensive proposal, however, policymakers will 
ultimately have to balance the relative importance they place on each 
of these criteria. As we have noted in the past, a comprehensive 
evaluation is needed that considers a range of effects together. 
Focusing on comprehensive packages of reforms will enable us to foster 
credibility and acceptance. This will help us avoid getting mired in 
the details and losing sight of important interactive effects. It will 
help build the bridges necessary to achieve consensus.

One issue that often arises within the Social Security debate concerns 
the appropriate comparisons or benchmarks to be used when assessing a 
particular proposal. While this issue may seem to be somewhat abstract, 
it has critical implications, for depending on the comparisons chosen, 
a proposal can be made more or less attractive. Some analyses compare 
proposals to a single benchmark and as a result can lead to incomplete 
or misleading conclusions. For that reason, GAO has used several 
benchmarks in assessing reform proposals.[Footnote 9] Currently 
promised benefits are not fully financed, and so any analysis that 
seeks to fairly evaluate reform proposals should include comparisons to 
benchmarks that reflect a policy of an adequately financed system. 
Similarly, it is important to have benchmarks that are consistent with 
each other. Using one that relies on action relatively soon versus one 
that posits no action at all are not consistent and could also lead to 
misleading conclusions. Estimating future effects on Social Security 
benefits should reflect the fact that the program faces a long-term 
actuarial deficit and that conscious policies of benefit reduction and/ 
or revenue increases will be necessary to restore solvency and sustain 
it over time.

Reform's Potential Effects on the Social Security Program:

A variety of proposals have been offered to address Social Security's 
financial problems. Some of these proposals work within the current 
structure of Social Security and others would restructure the program. 
For instance, many proposals contain reforms that would alter benefits 
or revenues within the structure of the current defined benefits 
system. Also, a number of proposals seek to restructure the program 
through the creation of individual accounts. The discussion about 
examples of reform in this section are meant for illustrative purposes, 
and are by no means intended to be exhaustive of all the reform options 
proposed or the issues related to these approaches.

Some proposals would reduce benefits relative to scheduled benefits by 
modifying the benefit formula. For example, increasing the number of 
years used to calculate benefits or using price-indexing instead of 
wage-indexing would reduce the benefits individuals receive. Since 
wages generally grow faster than prices, indexing earnings to prices 
rather than wages would reduce the measure of average lifetime earnings 
used in the formula--reducing benefits. Changing the number of working 
years used to calculate benefits to include more than the highest 35 
years of earnings would reduce the average lifetime earnings; thus, 
reducing benefits as compared to current levels. Other proposals 
include options to reduce cost-of-living adjustments (COLA) by lowering 
the COLA to less than the CPI, limiting the COLA to a specified 
threshold, or delaying the COLA; to raise the normal and/or early 
retirement ages or to reduce benefits more for workers who retire 
before the full retirement age; and to revise dependent benefits. Some 
of the proposals also include measures or benefit changes that seek to 
strengthen progressivity (e.g., replacement rates) in an effort to 
mitigate the effect on low-income workers.

Others have proposed options that would provide revenue increases. For 
example, raising the payroll tax or expanding the Social Security 
taxable wage base that finances the system would result in more revenue 
coming into the system. In 2005, earnings above $90,000 are not subject 
to payroll taxes. If the cap were raised and the benefit formula 
remained the same, workers with earnings above the old cap would 
ultimately receive somewhat higher benefits as well as pay more taxes. 
Other options to increase revenues include increasing the taxation of 
benefits or covering those few remaining workers not currently required 
to participate in Social Security, such as some state and local 
government employees, although such new participants would increase 
future spending commitments as well. In addition to these proposals, 
Social Security can obtain revenues from sources outside of the 
program, such as by increasing the investment returns on Social 
Security holdings or by earmarking revenue from estate taxes or other 

A number of proposals also seek to restructure the program through the 
creation of individual accounts. Under a system of individual accounts, 
workers would manage a portion of their own Social Security 
contributions to varying degrees. This would expose workers to a 
greater degree of risk in return for both greater individual choice in 
retirement investments and the possibility of a higher rate of return 
on contributions than available under current law. There are many 
different ways that an individual account system could be set up. For 
example, contributions to individual accounts could be mandatory or 
they could be voluntary. Proposals also differ in the manner in which 
accounts would be financed, the extent of choice and flexibility 
concerning investment options, the way in which benefits are paid out, 
and the way the accounts would interact with the existing Social 
Security program--individual accounts could serve either as an addition 
to or as a replacement for part of the current benefit structure.

In addition, the timing and impact of individual accounts on the 
solvency, sustainability, adequacy, equity, net savings, and rate of 
return associated with the Social Security system varies depending on 
the structure of the total reform package. Individual accounts by 
themselves will not lead the system to sustainable solvency--an 
increase in revenue, a decrease in benefits, or both will also be 
necessary. Furthermore, incorporating a system of individual accounts 
may involve significant transition costs. These costs come about 
because the Social Security system would have to continue paying out 
benefits to current and near-term retirees concurrently with 
establishing new individual accounts.

Individual accounts can contribute to sustainability as they could 
provide a mechanism to prefund retirement benefits that would be immune 
to demographic booms and busts. However, if these accounts are financed 
through borrowing, prefunding will not be achieved until the additional 
debt has been repaid.[Footnote 10] An additional important 
consideration in adopting a reform package that contains individual 
accounts would be the level of benefit adequacy achieved by the reform. 
To the extent that benefits are not adequate, it may result in the 
government eventually providing additional resources to make up the 

Some degree of implementation and administrative complexity arises in 
virtually all proposed changes to Social Security. However, the 
greatest potential implementation and administrative challenges are 
associated with proposals that would create individual accounts. These 
include, for example, issues concerning the management of the 
information and money flow needed to maintain such a system, the degree 
of choice and flexibility individuals would have over investment 
options and access to their accounts, investment education and 
transitional efforts, and the mechanisms that would be used to pay out 
benefits upon retirement. The federal Thrift Savings Plan (TSP) could 
serve as a model for providing a limited amount of options that reduce 
risk and administrative costs while still providing some degree of 
choice. However, a system of accounts that spans the entire national 
workforce and millions of employers would be significantly larger and 
more complex than TSP or any other system we have in place today.

Harmonizing a system that includes individual accounts with the 
regulatory framework that governs our nation's private pension system 
would also be a complicated endeavor. However, the complexity of 
meshing these systems should be weighed against the potential benefits 
of extending participation in individual accounts through payroll 
deductions to millions of workers who currently lack private pension 

Social Security Reform Should be Considered in the Context of Broader 

Other broader concerns for Social Security reform include evaluating a 
proposal's effect on national saving and a proposal's implications for 
other sources of retirement income, access to long-term care and 
retirement security generally. An important economic consideration is 
assessing a proposal's effect on national saving. Individual account 
proposals designed as a carve-out that finance accounts through the 
redirection of payroll taxes or general revenue, do not increase 
national saving on a first order basis. The redirection of payroll 
taxes or general revenue reduces government saving by the same amount 
that the individual accounts increase private saving. Individual 
accounts that are structured as "add-ons" may increase saving. However, 
this will depend on how the accounts are financed and how they are 
structured i.e. do they target low income workers who currently may not 
have high saving rates. Individual accounts that achieve prefunding 
without borrowing might increase government and individual saving. The 
effect of individual accounts on national saving will also be affected 
by other elements, such as benefit cuts or tax increases, that are part 
of the overall reform package.

Beyond these first order effects, the actual net effect of a proposal 
on national saving is difficult to estimate due to uncertainties in 
predicting changes in future spending and revenue policies of the 
government as well as changes in the saving behavior of private 
households and individuals. For example, the higher deficits that 
result from redirecting payroll taxes to individual accounts could 
prompt changes in fiscal policy that reduce spending or increase 
revenue thereby resulting in lower deficits that would otherwise have 
been the case and increase net national saving. On the other hand, 
households may respond by reducing their other saving in response to 
the creation of individual accounts. No expert consensus exists on how 
Social Security reform proposals would affect the saving behavior of 
private households and businesses.

Besides the effect on savings, Social Security reform proposals may 
also have implications for retirement security in general. Economic 
security in retirement requires both adequate retirement income--Social 
Security, pensions, personal savings, and earnings from continued 
employment--and affordable health care--Medicare and retiree health 
care; and long-term care coverage. In addition to the issues I have 
discussed regarding the financing challenges that Social Security, 
Medicare and Medicaid face, the nation also faces serious challenges 
associated with the private pension system and long-term care financing.

Only about half of the private sector workforce is covered by a pension 
plan. A number of large underfunded traditional defined benefit plans-
-plans where the employer bears the risk of investment--have been 
terminated by bankrupt firms, including household names like Bethlehem 
Steel, US Airways, and Polaroid. These terminations have resulted in 
thousands of workers losing promised benefits and have saddled the 
Pension Benefit Guaranty Corporation, the government corporation that 
partially insures certain defined benefit pension benefits, with 
billions of dollars in liabilities that threaten its long-term 
solvency. Meanwhile, the number of traditional defined benefit pension 
plans continues to decline as employers increasingly offer workers 
defined contribution plans like 401(k) plans where, like individual 
accounts, workers face the potential of both greater return and greater 
risk. These challenges serve to reinforce the imperative to place 
Social Security on a sound financial footing which provides a 
foundation of certain and secure retirement income.

In 2002, GAO reported that the total number of disabled elderly could 
be as high as 12.1 million, by 2040. Long-term care includes an array 
of health, personal care, and supportive services provided to persons 
with physical or mental disabilities. It relies heavily on financing by 
public payers, especially Medicaid, and has significant implications 
for state budgets as well as the federal budget.

Current problems with the provision and financing of long-term care 
could be exacerbated by the swelling numbers of the baby-boom 
generation needing care. These problems include whether individuals 
with disabilities receive adequate services, the potential for families 
to face financially catastrophic long-term care costs, and the burdens 
that heavy reliance on unpaid care from family members and other 
informal caregivers create coupled with possibly fewer caregivers 
available in coming generations.

Given the broader fiscal challenges that our nation faces and the 
potential future changes to Social Security, Medicare, and Medicaid, as 
well as the state of private pensions and long-term care trends, it is 
even more important that individuals are educated about what to expect 
in retirement. In this respect, regardless of what type of Social 
Security reform package is adopted, continued confidence in the Social 
Security program is essential. This means that the American people must 
understand why change is necessary, what the reforms are, why they are 
needed, how they are to be implemented and administered, and how they 
will affect their own retirement income. All reform proposals will 
require some additional outreach to the public so that future 
beneficiaries can adjust their retirement planning accordingly. The 
more transparent the implementation and administration of reform, and 
the more carefully such reform is phased in, the more likely it will be 
understood and accepted by the American people.


Social Security does not face an immediate crisis but it does face a 
large and growing financial problem. In addition, our Social Security 
challenge is only part of a much broader fiscal challenge that 
includes, among other things, the need to reform Medicare, Medicaid, 
and our overall health care system.

Many retirees and near retirees fear cuts that would affect them in the 
immediate future while young people believe they will get little or no 
Social Security benefits in the longer term. I believe that it is 
possible to reform Social Security in a way that will ensure the 
program's solvency, sustainability, and security while exceeding the 
expectations of all generations of Americans.

In my view, there is a window of opportunity to reform Social Security; 
however, this window of opportunity will begin to close as the baby 
boom generation begins to retire. We have an opportunity to address 
Social Security as a first step toward improving the nation's long-term 
fiscal outlook. Furthermore, it would be prudent to move forward to 
address Social Security now because we have much larger challenges 
confronting us that will take years to resolve. The fact is, compared 
to addressing our long-range health care financing problem, reforming 
Social Security should be easy lifting. As I have said before, the 
future sustainability of programs is the key issue policy makers should 
address--i.e., the capacity of the economy and budget to afford the 
commitment over time. Absent substantive reform, these important 
federal programs will not be sustainable. Furthermore, absent reform, 
younger workers will face dramatic benefit reductions or tax increases 
that will grow over time.

Irrespective of when Social Security reform may occur and what form it 
may take, other Social Security related issues also need to be 
explored. These include, but are not limited to, the current 
accounting/reporting and budget treatment of Social Security and the 
related trust funds; its current investment options and strategy, and 
the current composition of the Social Security Board of Trustees.

We at GAO look forward to continuing to work with this Committee and 
the Congress in addressing this and other important issues facing our 
nation. In doing so, we will be true to our core values of 
accountability, integrity, and reliability. 


[1] In this statement, Social Security refers to the Old-Age and 
Survivors Insurance and Disability Insurance (OASDI) program.

[2] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005).

[3] GAO, Budget Issues: Long-Term Fiscal Challenges, GAO-02-467T 
(Washington, D.C.: Feb. 27, 2002); Social Security: Long-Term Financing 
Shortfall Drives Need for Reform, GAO-02-845T (Washington, D.C.: June 
19, 2002); Social Security: Long-Term Challenges Warrant Early Action, 
GAO-05-303T (Washington, D.C.: Feb. 3, 2005); and Long-Term Fiscal 
Issues: The Need for Social Security Reform, GAO-05-318T (Washington, 
D.C.: Feb. 9, 2005). 

[4] The elderly dependency ratio is the ratio of the population aged 65 
years or over to the population aged 15 to 64.

[5] Separately, the Disability Insurance (DI) fund is projected to be 
exhausted in 2029 and the Old-Age and Survivors' Insurance (OASI) fund 
in 2044. Using slightly different economic assumptions and model 
specifications, CBO estimated the combined Social Security trust fund 
will be solvent until 2052. See Congressional Budget Office, The 
Outlook for Social Security (Washington, D.C.: June 2004) and Updated 
Long-Term Projections for Social Security (Washington, D.C.: January 

[6] CBO estimates that OASDI cash flow will turn negative in 2020.

[7] The Congressional Budget Office, The Budget and Economic Outlook: 
Fiscal Years 2006 to 2015, (Washington, D.C.: January 2005).

[8] GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term 
Costs and Uncertainties, GAO-03-213 (Washington, D.C.: Jan 24, 2003). 

[9] GAO, 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). 

[10] After the accounts have been established and the transition costs 
have been repaid prefunding may be achieved, but this is likely not to 
happen for many decades.