Social Security:

Restoring Long-Term Solvency Will Require Difficult Choices

T-HEHS-98-95: Published: Feb 10, 1998. Publicly Released: Feb 10, 1998.

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Jane L. Ross
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Pursuant to a congressional request, GAO discussed the goals of the social security program and the difficult choices that restoring its long-term solvency will require, focusing on: (1) balancing income adequacy and individual equity; (2) determining who bears risks and responsibilities; (3) choosing among various benefit reductions and revenue increases; (4) using pay-as-you-go or advance funding; and (5) deciding how much to save and invest in the nation's productive capacity.

GAO noted that: (1) helping ensure adequate retirement income has been a fundamental goal of social security; (2) virtually all reform proposals also pay some attention to income adequacy, but some place a different emphasis on it relative to the goal of individual equity, which seeks to ensure that benefits bear some relationship to contributions; (3) some proponents of reform believe that increasing the role of individual retirement savings could improve individual equity without diminishing income adequacy; (4) the balance between income adequacy and individual equity also influences how much risk and responsibility are borne by individuals and the government; (5) workers face a variety of risks regarding their retirement income security; (6) no matter what shape social security reform takes, restoring long-term solvency will require some combination of benefit reductions and revenue increases; (7) revenue increases might take the form of increases in payroll tax rate, expanding coverage to include the relatively few workers who are still not covered under social security, or allowing the trust funds to be invested in potentially higher-yielding securities such as stocks; (8) reforms that increase the role of individual retirement savings would also involve social security benefit reductions or revenue increases, which might take slightly different forms; (9) reform proposals have also raised the issue of increasing the degree to which the nation sets aside funds to pay for future social security benefits; (10) advanced funding could reduce payroll tax rates in the long term and improve intergenerational equity but would involve significant transition costs; (11) in a pure pay-as-you-go arrangement, virtually all revenues come from payroll taxes since trust funds are kept to a relatively small contingency reserve that earns relatively little interest compared with the interest that a fully funded system would earn; (12) in contrast, defined benefit employer pensions are generally fully advance funded; (13) ideally, social security reforms would help address the fundamental economic implications of the demographic trends that underlie social security's financing problems; (14) economic growth, and more specifically growth in labor productivity, could help ease the strains of providing for a larger elderly population; and (15) increased investment in physical and human capital should generally increase productivity and economic growth, but investment depends on national saving, which has been at historically low levels.

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