oversight

Social Security: What the President's Proposal Does and Does Not Do

Published by the Government Accountability Office on 1999-02-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

GAO                       Testimony
                          Before the Committee on Finance, U.S. Senate




For Release on Delivery
Expected at
10 a.m.
                          SOCIAL SECURITY
Tuesday,
February 9, 1999

                          What the President’s
                          Proposal Does and Does
                          Not Do
                          Statement of David M. Walker
                          Comptroller General of the United States




GAO/T-AIMD/HEHS-99-76
PAGE 3   GAO/XXXX-98-??? NAME OF DOCUMENT
                       Mr. Chairman and Members of the Committee:

                       It is a pleasure to be here today to discuss the President’s recent proposal
                       for addressing Social Security and use of the budget surplus. These
                       proposals address some of the most important issues facing the nation,
                       both now and over the longer term. The proposals have stimulated much
                       controversy and dialogue in the past few weeks.

                       The President’s proposal is complex, which makes it all the more important
                       for us to focus our attention on what it does—and what it does not do—for
                       our long-term future. In summary, the President’s proposal:

                       • It reduces debt held by the public from current levels, thereby also
                         reducing net interest costs, raising national saving, and contributing to
                         future economic growth.
                       • It fundamentally changes Social Security financing in two ways:
                         • It promises general funds in the future by, in effect, trading publicly
                             held debt for debt held by the Social Security Trust Fund (SSTF).
                         • It invests some of the trust fund in equities with the goal of capturing
                             higher returns over the long term.
                       • It does not have any effect on the projected cash flow imbalance in the
                         Social Security program’s taxes and benefits.
                       • It does not represent a Social Security reform plan.



Context: Long-Term     It is important to look at the President’s proposal in the context of the fiscal
                       situation in which we find ourselves. After nearly 30 years of unified
Outlook Is Important   budget deficits, we look ahead to projections for “surpluses as far as the
                       eye can see.” At the same time, we know that we face a demographic
                       tsunami in the future that poses significant challenges for the Social
                       Security system and our economy as a whole. In this context, we should
                       recognize that the President uses a longer-term framework for resource
                       allocation than has been customary in federal budgeting.

                       Although all projections are uncertain—and they get more uncertain the
                       farther out they go—we have long held that a long-term perspective is
                       important in formulating fiscal policy for the nation. Each generation is in
                       part the custodian for the economy it hands the next and the nation’s long-
                       term economic future depends in large part on today’s budget decisions.
                       This perspective is particularly important because our model and that of
                       the Congressional Budget Office (CBO) continue to show that absent a
                       change in policy, the changing demographics to which I referred above will



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                             lead to renewed deficits. This longer-term problem provides the critical
                             backdrop for making decisions about today’s surpluses.

                             Surpluses are the result of a good economy and difficult policy decisions.
                             They also provide a unique opportunity to put our nation on a more
                             sustainable path for the long term, both for fiscal policy and the Social
                             Security program itself. Current decisions can help in several important
                             respects: (1) current fiscal policy decisions can help expand the future
                             capacity of our economy by increasing national savings and investment,
                             (2) engaging in substantive reforms of retirement and health programs can
                             reduce future claims, (3) by acting now, we have the opportunity of
                             phasing in changes to Social Security and health programs over a sufficient
                             period of time to enable our citizens to adjust, and (4) failure to achieve
                             needed reforms in the Social Security and Medicare programs will drive
                             future spending to unsustainable levels.



The Proposal                 Let me first briefly describe the President’s proposal. The President
                             proposes to use approximately two-thirds of the total projected unified
                             budget surpluses over the next 15 years to reduce debt held by the public
                             and to address Social Security’s financing problem. His approach to this,
                             however, is extremely complex and confusing. The President proposes to
                             “transfer” an amount equal to a portion of the projected surplus to the
                             Social Security and Medicare trust funds.1 This transfer is projected to
                             extend the solvency of Social Security from 2032 to 2049. His proposal to
                             permit the trust fund to invest in equities is expected to further extend trust
                             fund solvency to 2055.

                             To understand and evaluate this proposal it is important to understand the
                             nature of the federal budget, how trust funds fit into that budget, and the
                             challenges of “saving” within the federal budget.


Can We Save for the Future   The federal budget is a vehicle for making choices about the allocation of
in the Federal Budget?       scarce resources. It is different from state budgets in ways important to
                             this discussion. Most states use “fund budgeting” in which pension funds
                             build up surpluses that are routinely invested in assets outside the
                             government. In contrast, the federal government’s unified budget shows all

                             1
                               In this testimony, I will address only the Social Security portion of this transfer. The issues are similar
                             but not identical for the Medicare trust fund transfer.




                             Page 2                                                                        GAO/T-AIMD/HEHS-99-76
governmental transactions and all funds are available for current activities.
We cannot park our surplus in a cookie jar. The only way to save in the
federal budget is to run a surplus or purchase a financial asset. When there
is a cash surplus it is used to reduce debt held by the public. Therefore, to
the extent that there is an actual cash surplus, debt held by the public falls.

This presents a problem for any attempt to “advance fund” all or part of
future Social Security benefits. Advance funding within the current
program would mean increasing the flows to the SSTF. Although it is
officially “off budget,” the fact remains that the SSTF is a governmental fund.
In the federal budget, trust funds are not like private trust funds. They are
simply budget accounts used to record receipts and expenditures
earmarked for specific purposes. A private trust fund can set aside money
for the future by increasing its assets. However, under current law, when
the SSTF receipts increase, they are invested in Treasury securities and used
to meet current cash needs of the government. The increase in assets to
the SSTF is an equal increase in claims on the Treasury. One government
fund is lending to another. These net out on the government’s books. Any
increase in the trust fund balances would only become an increase in
saving if this increment were to add to the unified budget surplus (or
decrease the unified budget deficit) and thereby reduce the debt held by
the public.

How do these transactions affect the government’s debt? Gross federal
debt is the sum of debt held by the public and debt held by governmental
accounts—largely trust funds. This means that increases in the trust fund
surplus will increase gross debt unless debt held by the public declines by
at least the same amount. Any reform of Social Security that increases the
annual SSTF surplus would increase debt held by government accounts
since, under current law, any excess of revenues over benefit payments is
loaned to Treasury for current needs. As a result, total government debt
would go up unless these surpluses were used to reduce debt held by the
public by an equivalent amount.

Debt held by the public and debt held by trust funds represent very
different concepts. Debt held by the public approximates the federal
government’s competition with other sectors in the credit markets. This
affects interest rates and private capital accumulation. Further, interest on
debt held by the public is a current burden on taxpayers. In contrast, debt
held by trust funds performs an accounting function and represents the
cumulative annual surpluses of these funds (i.e., excess of receipts over
disbursements plus accrued interest). It provides the account with a claim



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                           on the U.S. Treasury for the future, but it does not represent an estimate of
                           the size of the account’s future transactions with the public. In particular,
                           debt held by the SSTF does not represent the actuarial present value of
                           expected future benefits for either current or future participants. Nor does
                           it have any of the economic effects of borrowing from the public. It is not a
                           current transaction of the government with the public; it does not compete
                           with the private sector for available funds in the credit market.


How Does the President’s   This information is important to an understanding of the President’s
Proposal Work?             proposal because in large part he proposes to, in effect, trade debt held by
                           the public for debt held by the SSTF. By running a cash surplus over the
                           next 15 years, debt held by the public falls. To “save” this surplus, the
                           President proposes to “transfer” it to the trust fund in the form of increased
                           Treasury securities. Under his proposal, debt held by the public falls, but
                           debt held by the trust funds increases. Because he shows the transfer as a
                           subtraction from the surplus—a new budgetary concept—he shows no
                           surplus. As a result, he attempts to save it by hiding it.

                           The mechanics of the proposed transfer of surpluses to the SSTF are
                           complex and difficult to follow. Few details have been made available, and
                           there is conflicting information on exactly how it would work. Figures 1
                           and 2 are flow charts representing our best understanding of the Social
                           Security portion of this transfer. Since it is impossible to understand the
                           changes proposed by the President without understanding the present
                           system, figure 1 shows the flows under the current system. Under current
                           law, annual cash flow surpluses (largely attributable to excess payroll taxes
                           over benefits payments and program expenses) are invested in Treasury
                           securities.2 This excess “cash” is commingled with other revenues and
                           used to finance other governmental activities. In this way, SSTF surpluses
                           have helped and continue to help finance the rest of the government. This
                           year, the SSTF surplus is expected to exceed the general fund deficit so
                           there is also a surplus in the unified budget. Over the entire 15-year period,
                           more than half of the projected unified surplus is composed of Social
                           Security surpluses. Absent any change in policy, these unified surpluses
                           will be used to reduce the debt held by the public.




                           2
                             This presentation is somewhat simplified. In reality, FICA taxes are collected with income and
                           corporate taxes by the Treasury and then allocated by the Treasury to Social Security, Medicare, or the
                           general fund.




                           Page 4                                                                    GAO/T-AIMD/HEHS-99-76
Figure 1: Current Social Security Flows




*Merged surplus = FICA surplus + General Fund surplus


Under the President’s proposal, this would continue. However, as shown in
figure 2, at the point where total tax receipts are allocated to pay for
government activities, a new financing step would be added to “transfer” a
portion of the unified budget surpluses to the Social Security and Medicare
trust funds. The unified budget would do this by providing a new set of
securities for these trust funds. However, the excess cash would still be
used to reduce the debt held by the public.




Page 5                                                  GAO/T-AIMD/HEHS-99-76
Figure 2: Social Security Flows Under President’s Proposal




                                          In essence, this swaps debt held by the public for debt held by the trust
                                          funds. While there are many benefits to reducing publicly held debt, it is
                                          important to recognize that under the current law baseline—i.e., with no
                                          changes in tax or spending policy—this would happen without crediting
                                          additional securities to the trust funds.

                                          The administration has defended this approach as a way of assuring both a
                                          reduction in debt held by the public and giving Social Security first claim
                                          on what they call the “debt-reduction dividend” to pay future benefits.

                                          However, issuing these additional securities to the SSTF is a discretionary
                                          act with major legal and economic consequences for the future. Some
                                          could view this as double counting. Importantly, to the extent it appears
                                          that way to the public, it could undermine confidence in a system that is
                                          already difficult to explain. However, the debate over double counting
                                          focuses on the form of the proposal rather than its substance. Although
                                          form is important when it interferes with our ability to understand the



                                          Page 6                                                 GAO/T-AIMD/HEHS-99-76
                       substance—and I think this proposal falls into that trap—the important
                       debate must be on the substance of the proposal.

                       This proposal represents a fundamental shift in the way the Social Security
                       program is financed. It moves it away from payroll financing toward a
                       formal commitment of future general fund resources for the program. This
                       is unprecedented. Later in my statement, I will discuss the implications of
                       this proposal for overall fiscal policy and for the Social Security program.



Government Financing   The President’s proposals would have the effect of reducing debt held by
                       the public from the current level of 44 percent of Gross Domestic Product
and Debt               to 7 percent over the 15-year period. Nearly two-thirds of the projected
                       unified budget surplus would be used to reduce debt held by the public.
                       Because the surplus is also to be used for other governmental activities, the
                       amount of debt reduction achieved would be less than the baseline, but
                       nonetheless the outcome would confer significant benefits to the budget
                       and the economy.

                       Our previous work on the long-term effects of federal fiscal policy has
                       shown the substantial benefits of debt reduction.3 Reducing publicly held
                       debt reduces payments on net interest within the budget. For example, CBO
                       estimates that the difference between spending the surplus and saving the
                       surplus is $123 billion in annual interest payments by 2009. Lower interest
                       payments lead to larger surpluses, which in turn reduce debt: the miracle of
                       compound interest produces a virtuous circle. The result—future
                       decisionmakers gain significant budgetary flexibility to address other
                       needs in the future.

                       For the economy, lowering debt levels increases national saving and frees
                       up resources for private investment. This in turn leads to increased
                       productivity and stronger economic growth over the long term. Over the
                       last several years, we and CBO have both simulated the long-term economic
                       results from various fiscal policy paths. These projections consistently
                       show that reducing debt held by the public increases national income over
                       the next 50 years, thereby making it easier for the nation to meet future
                       needs and commitments. As Treasury Secretary Rubin has noted, reduced




                       3
                           Budget Issues: Analysis of Long-Term Fiscal Outlook (GAO/AIMD/OCE-98-19, October 22, 1997).




                       Page 7                                                                   GAO/T-AIMD/HEHS-99-76
                                          debt now helps the federal government increase its capacity to handle
                                          borrowing in the future.

                                          The President’s proposal, in effect, trades debt held by the public for debt
                                          held by government accounts, but he also spends part of the surplus. Debt
                                          held by trust funds goes up more rapidly than debt held by the public falls,
                                          largely due to the additional securities transferred to the trust funds. Gross
                                          debt, therefore, increases. It is gross debt—with minor exceptions—that is
                                          the measure that is subject to the debt limit. The current limit is
                                          $5.95 trillion. Under the President’s plan, the limit would need to be raised
                                          sometime during 2001. Under either the CBO or the Office of Management
                                          and Budget baseline (i.e., save the entire surplus), the limit would not need
                                          to be raised during at least the next 5 years. This is shown in figure 3
                                          below.



Figure 3: Debt Subject to Limit Under Baseline and President’s Proposal




                                          Source: Budget of the United States Government, Fiscal Year 2000.




                                          Page 8                                                              GAO/T-AIMD/HEHS-99-76
                         While reducing debt held by the public appears to be a centerpiece of the
                         proposal—and has significant benefits—as I noted above, the transfer of
                         unified surpluses to Social Security is a separate issue. The transfer is not
                         technically necessary: whenever revenue exceeds outlays and the cash
                         needs of the Treasury—whenever there is an actual surplus—debt held by
                         the public falls. The President’s proposal appears to be premised on the
                         belief that the only the way to sustain surpluses is to tie them to Social
                         Security. He has merged two separate questions: (1) how much of the
                         surplus should be devoted to reducing debt held by the public and (2) how
                         should the nation finance the Social Security program in the future.

                         Let me turn now to the question of Social Security financing.



Social Security          The President proposes two changes in the financing of Social Security: a
                         pledge of general funds in the future and a modest amount of investment in
Financing                equities. Both of these represent major shifts in approach to financing the
                         program.


General Fund Financing   By, in effect, trading debt held by the public for debt held by the trust funds,
                         the President is committing future general revenues to the Social Security
                         program. This is true because the newly transferred securities would be in
                         addition to any buildup of payroll tax surpluses. Securities held by the SSTF
                         have always represented annual cash flows in excess of benefits and
                         expenses, plus interest.4 Under the President’s proposal, this would no
                         longer continue to be true. The value of the securities held by the SSTF
                         would be greater than the amount by which annual revenues exceed annual
                         benefits and expenditures.

                         This means that for the first time there is an explicit and legal claim on the
                         general fund. This is a major change in the underlying theoretical design of
                         this program. Whether you believe it is a major change in reality depends
                         on what you assume about the likely future use of general revenues under
                         the current circumstances. For example, current projections are that in



                         4
                           Cash flow into the SSTF is composed of payroll taxes and a portion of the income taxes paid on Social
                         Security benefits. Income taxes make up a relatively small component of the surplus. Interest paid to
                         Social Security is analogous to interest paid on publicly held debt. Both come from the general fund.
                         Interest on publicly held debt is paid in cash while interest to the trust fund is credited in the form of
                         additional treasury securities.




                         Page 9                                                                      GAO/T-AIMD/HEHS-99-76
                         2032 the fund will lack sufficient resources to pay the full promised
                         benefits. If you believe that this shortfall would—when the time came—be
                         made up with general fund moneys, then the shift embedded in the
                         President’s proposal merely makes that explicit. If, however, you believe
                         that there would be changes in the benefit or tax structure of the fund
                         instead, then the President’s proposal represents a very big change. In
                         either case, the question of bringing significant general revenues into the
                         financing of Social Security is a question that deserves full and open
                         debate. The debate should not be overshadowed by the accounting
                         complexity and budgetary confusion of the proposal.

                         One disconcerting aspect of the President’s proposal is that it appears that
                         the transfers to the trust fund would be made regardless of whether the
                         expected budget surpluses are actually realized. The amounts to be
                         transferred to Social Security apparently would be written into law as
                         either a fixed dollar amount or as a percent of taxable payroll rather than as
                         a percent of the actual unified surplus in any given year. These transfers
                         would have a claim on the general fund even if the actual surplus fell below
                         the amount specified for transfer to Social Security—and that does present
                         a risk.5

                         It should be noted that any proposal to allocate surpluses—particularly
                         over a long period of time—is vulnerable to the risk that those projected
                         surpluses may not materialize. The history of budget forecasts should
                         remind us not to be complacent about the certainty of these large projected
                         surpluses. Accordingly, we should consider carefully any permanent
                         commitments that are dependent on the realization of a long-term forecast.


Investment in Equities   Under current law, the SSTF is required to invest in securities that are issued
                         or backed by the Treasury. The President proposes changing current law to
                         allow the SSTF to invest a portion of its assets in equities. His proposal calls
                         for the fund to gradually invest 15 percent of its total assets in the equity
                         market. According to the administration’s estimates, the SSTF’s equity
                         holdings would represent only a small portion—about 4 percent—of the
                         total equity market. To insulate investment decisions from political
                         considerations, the administration proposes investing passively in a broad-

                         5
                           It is worth noting that something like this happens now. Treasury does not track how much of the
                         revenues it collects are for Social Security and how much for income taxes. It credits the SSTF with
                         funds equal to the appropriate tax rate applied to the taxable wage base—whether or not those FICA
                         taxes were actually paid.




                         Page 10                                                                  GAO/T-AIMD/HEHS-99-76
                       based stock index and creating an independent board to oversee the
                       portfolio.

                       Last year, we reported on the implications of allowing the SSTF to invest in
                       equities.6 In that report, we concluded that stock investing offers the
                       prospect of higher returns in exchange for greater risk. We found that, by
                       itself, stock investing was unlikely to solve Social Security’s long-term
                       financing imbalance but that it could reduce the size of other reforms
                       needed to restore the program’s solvency. We also concluded that investing
                       in a broad-based index would help reduce, but not eliminate, the possibility
                       of political influence over stock selections. However, the issue of how to
                       handle stock voting rights could prove more difficult to resolve. If the
                       government voted its shares, it would raise concerns about potential
                       federal involvement in corporate affairs. If the government chose not to
                       vote, it would affect corporate decision-making by enhancing the voting
                       power of other shareholders or investment managers. The model
                       applicable to passive private sector investment managers under the
                       Employee Retirement Income Security Act may be relevant to the
                       resolution of this issue.

                       Stock investing would have approximately the same impact on national
                       saving as using the same amount of money to reduce debt held by the
                       public. Both approaches would add about the same amount of funds to
                       private capital markets, meaning that national saving would essentially be
                       unchanged. From a budget accounting standpoint, they are not the same.
                       Under current scoring rules the purchase of equities would be counted as
                       an outlay, but the proposal apparently would change that. Equity
                       purchases would not be scored as an outlay since they would be made out
                       of the amount transferred to Social Security, which is already scored as
                       reducing the surplus.



Have Other Countries   I should note that although the dilemma we are facing of whether and how
                       to save for the future is a very difficult one, it is not unique. A look at other
Tackled These          democracies shows that surpluses are difficult to sustain. However,
Problems?              several nations have succeeded in sustaining surpluses. In those nations,
                       political leaders were able to articulate a compelling rationale to justify the
                       need to set aside current resources for future needs.


                       6
                        Social Security Financing: Implications of Government Stock Investing for the Trust Fund, the Federal
                       Budget, and the Economy (GAO/AIMD/HEHS-98-74, April 22, 1998).




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                         For example, those countries that have come to the conclusion that the
                         debt burden matters make it an explicit part of their fiscal decision making
                         process. Australia, New Zealand, and the United Kingdom all attempt to
                         define prudent debt levels as a national goal to strive for. These debt goals
                         can prove important in times of surplus. New Zealand, for example, used
                         its debt goals as justification for maintaining spending restraint and
                         attempting to run sustained surpluses. They promised that once they met
                         their initial debt target they would give a tax cut. Importantly, when they
                         hit that specified debt target, they delivered on their promise of tax cuts.

                         Other countries have saved for the future by separating their pension or
                         Social Security-related assets from the rest of the government’s budget.
                         For example, the Canadian Pension Plan is completely separate from both
                         federal and provincial budgets. When the fund earns surplus cash, it is
                         invested in provincial debt securities and, starting this year, in the stock
                         market. Sweden also maintains a pension fund outside the government’s
                         budget and invests assets in stocks and bonds.

                         Norway may be the most dramatic example of setting aside current
                         surpluses to address long-term fiscal and economic concerns. Norway
                         faces the two-edged problem of a rapidly aging population and declining oil
                         revenues—a significant source of current government revenue. To address
                         these long-term concerns, Norway started setting aside year-end budget
                         surpluses in 1996 to be invested in foreign stocks and bonds. Their express
                         intention is to draw down these assets to pay for the retirement costs for
                         their baby boomers.

                         It should be noted that other nations that have attempted to directly
                         address their debt and pension problems have usually done so during or
                         shortly after a fiscal or economic crisis. Fortunately, we do not have that
                         problem. Instead, we have a unique opportunity to use our current good
                         fortune to meet the challenges of the future.



Social Security Reform   Finally, it is important to note that the President's proposal does not alter
                         the projected cash flow imbalances in the Social Security program. Benefit
Is Still Needed          costs and revenues currently associated with the program will not be
                         affected by even 1 cent. Figure 4, which shows Social Security's payroll tax
                         receipts and benefit payments, illustrates this point. Without the
                         President's proposal, payroll tax receipts will fall short of benefit payments
                         in 2013; with the President's proposal, payroll tax receipts also fall short of
                         benefit payments in 2013—the graph doesn't change at all. Under the



                         Page 12                                                  GAO/T-AIMD/HEHS-99-76
                                        President’s proposal, expected stock market returns would be used to fill
                                        part of this gap, but from 2013 on the trust funds will be reliant on cash
                                        from redeemed securities, whether or not the President's proposal is
                                        adopted. The changes to the Social Security program will thus be more
                                        perceived than real: although the trust funds will appear to have more
                                        resources as a result of the proposal, in reality, nothing about the program
                                        has changed. The proposal does not represent Social Security reform, but
                                        rather it represents a different means to finance the current program. One
                                        of the risks of the proposal is that the additional years of financing may
                                        very well diminish the urgency to achieve meaningful changes in the
                                        program. This would not be in the overall best interests of the nation.



Figure 4: SSTF Projected Cash Income and Outflow Through 2019




                                        Source: Social Security Trustees 1998 Report, Intermediate Assumptions.




                                        Page 13                                                               GAO/T-AIMD/HEHS-99-76
To achieve long-term solvency and sustainability, the Social Security
program itself must be reformed. The demographic trends that are driving
the program's financial problems affect the program well into the future.
The impending retirement of the baby boom generation is the most well-
known of these trends, but is not the only challenge the system faces. If
this were so, perhaps a one-time financing strategy could be sufficient. But
people are retiring earlier, birth rates have fallen, and life expectancies are
increasing—all these factors suggest that Social Security's financial
problems will outlive the baby boom generation and continue far into the
future. These problems cannot be addressed without changes to the Social
Security program itself.

These changes should be made sooner rather than later. The longer
meaningful action is delayed, the more severe such actions will have to be
in the future. Changes made today would be relatively minor compared to
what could be necessary years from now, with less time for the fiscal
effects of those changes to build. Moreover, acting now would allow any
benefit changes to be phased in gradually so that participants would have
time to adjust their saving or retirement goals accordingly. It would be
tragic indeed if this proposal, through its budgetary accounting complexity,
masked the urgency of the Social Security solvency problem and served to
delay much-needed action.

There is another reason to take action on Social Security now. Social
Security is not the only entitlement program needing urgent attention. In
fact, the issues surrounding the Medicare program are much more urgent
and complex. Furthermore, the many variables associated with health care
consumption and Medicare costs and the personal emotions associated
with health decisions make reform in this program particularly difficult.
Let us address Social Security for the long term today so that the nation can
turn its attention to these other more pressing and difficult issues early in
the new millenium. Much remains to be done in reforming entitlement
programs, and engaging in meaningful Social Security reform would
represent an important and significant first step. The Congress and the
administration, working together, can find a comprehensive and
sustainable solution to this important challenge.

I recognize, though, that restoring Social Security solvency is not easy.
Ultimately, any reforms to Social Security will address not only the
relatively narrow question of how to restore solvency and assure
sustainability but will also go to the larger question of what role Social
Security and the federal government should play in providing retirement



Page 14                                                  GAO/T-AIMD/HEHS-99-76
income. There are many proposals being made to address these questions;
choosing among them will involve difficult and complex choices, choices
that will be critically important to nearly every American’s retirement
income.

In my view, progress is likely to be greatest if we see these choices not as
“either/or” decisions but rather as an array of possibilities along a
continuum. Combining elements of different approaches may offer the
best chance to produce a package that addresses the problem
comprehensively for the long term in a way that is meaningful and
acceptable to the American people. For example, such a continuum may
identify individual accounts that could serve as a voluntary or mandatory
supplement to a financially sound and sustainable base defined benefit
structure. In addition, master trust principles can be used to provide for
collective investment of base defined benefit and individual account funds
in ways that would serve to prevent political manipulation of investments.

In order to help structure these choices, I would suggest five criteria for
evaluating possible Social Security proposals.

Sustainable solvency: A proposal should eliminate the gap between trust
fund resources and expenditures over 75 years, and have the ability to
sustain a stable system beyond that time period.

Equity: A proposal should create no "big winners" or "big losers." Those
who are most reliant on Social Security for retirement and disability
income should continue to receive adequate support; those who contribute
the most would also benefit from participation in the system, and
intergenerational equity would improve.

Adequacy: Consistent with Social Security’s social insurance feature, a
proposal should provide for a certain and secure defined benefit promise
that is geared to providing higher replacement rates for lower-income
workers and reasonable minimum benefits to minimize poverty among the
elderly.

Feasibility: A proposal should be structured so that it could be
implemented within a reasonable time period, it could be readily
administered, and the administrative costs associated with it would be
reasonable.




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              Transparency: A proposal should be readily understandable to the general
              public and, as a result, generate broad support.

              Applying such criteria will require a detailed understanding of the possible
              outcomes and issues associated with the various elements of proposals.
              We are working to provide the data, information, and analysis needed to
              help policymakers evaluate the relative merits of various proposals and
              move toward agreement on a comprehensive Social Security reform
              proposal.



Conclusions   Budget surpluses provide a valuable opportunity to capture significant
              long-term gains to both improve the nation’s capacity to address the
              looming fiscal challenges arising from demographic change and aid in the
              transition to a more sustainable Social Security program. The President’s
              proposal offers a valuable opportunity for us to address both how much of
              our current resources we want to save for the future and how we can best
              do so. The President’s proposal is both wide ranging and complex, and it
              behooves us to clarify the consequences for both our national economy and
              the Social Security program.

              A substantial share of the surpluses would be used to reduce publicly held
              debt, providing demonstrable gains for our economic capacity to afford our
              future commitments. In this way, the proposal would help us, in effect,
              prefund these commitments by using today’s wealth earned by current
              workers to enhance the resources for the next generations.

              However, the President’s proposal does not include any Social Security
              program reforms to make the program’s commitments more affordable.
              The transfer of surplus resources to the trust fund, which the
              administration argues is necessary to lock in surpluses for the future,
              would nonetheless constitute a major shift in financing for the Social
              Security program. Moreover, the proposed transfer may very well make it
              more difficult for the public to understand and support the savings goals
              articulated. Several other nations have shown how debt reduction itself
              can be made to be publicly compelling, but only you can decide whether
              such an approach will work here.

              I am very concerned that enhancing the financial condition of the trust fund
              alone without any comprehensive and meaningful program reforms may in
              fact undermine the case for fundamental program changes. Delay will only
              serve to make the necessary changes more painful down the road. The time



              Page 16                                                GAO/T-AIMD/HEHS-99-76
                   has come for meaningful Social Security reform. After all, we have much
                   larger and more complex challenges to tackle. Explicitly pledging federal
                   general revenues to Social Security will limit the options for dealing with
                   other national issues.

                   As you consider various proposals, you might focus on the following
                   questions.

                   • How much of the unified budget surplus should go to debt reduction
                     versus other priorities?
                   • If we are to use some portion of the surplus to reduce publicly held debt,
                     is the President’s proposed approach the way to do this?
                   • Should Social Security be financed in part by general revenues?
                   • Should the SSTF invest in the stock market?
                   • How can we best assure the solvency, sustainability, equity, and integrity
                     of the Social Security program for current and future generations of
                     Americans?
                   • How can we best assure the public’s understanding of and support for
                     any comprehensive Social Security reform proposal?

                   We at GAO stand ready to help you address both Social Security reform and
                   other critical national challenges. Working together, we can make a
                   positive and lasting difference for our country and the American people.




(935300)   Leter   Page 17                                                GAO/T-AIMD/HEHS-99-76
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