21st Century Challenges: Reexamining the Base of the Federal
Government (01-FEB-05, GAO-05-325SP).
This report is intended to help the Congress in reviewing and
reconsidering the base of federal spending and tax programs. It
is intended as one input among many that Congress will receive as
it decides what its agenda will be for oversight and program
review. We have framed the issues presented as illustrative
questions for policymakers to consider as a supplement to their
own efforts. The questions are drawn from GAO's issued work, our
strategic plan prepared in consultation with the Congress, input
from several inspectors general and the institutional knowledge
of our staff. They cover discretionary spending, mandatory
spending, including entitlements, as well as tax policies and
programs. While answers to these questions may draw on the work
of GAO and others, only elected officials can and should decide
which questions to address as well as how and when to address
them. The report is organized in three sections. The first
section sets the stage by providing the rationale for reexamining
the base of the federal government and the scope of GAO's effort.
The second section is organized around 12 areas of federal
activity and includes narratives discussing emerging changes in
each area as well as several illustrative reexamination questions
for each area. The third section provides some perspective on
various strategies, processes, and approaches that should be
considered as a possible means to address the issues and
questions raised in this report.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-325SP
ACCNO: A17476
TITLE: 21st Century Challenges: Reexamining the Base of the
Federal Government
DATE: 02/01/2005
SUBJECT: Balanced budgets
Budget deficit
Deficit reduction
Financial management
Fiscal policies
Future budget projections
National policies
Productivity in government
Strategic planning
Federal taxes
Internal controls
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GAO-05-325SP
This section provides short narratives describing the emerging forces
prompting the need to reexamine the goals, designs, and strategies
underlying the portfolio of programs in each of 12 broad reexamination
areas. As shown in figure 4, the reexamination areas correspond with major
federal missions and governmentwide processes.
Source: GAO.
For each area, a summary of challenges and illustrative 21st century
reexamination questions demonstrate the type of review needed. Questions
are neither exhaustive nor representative of the highest priorities. Nor
are they intended to prescribe solutions or constitute GAO findings
regarding the program areas they discuss. They do, however, provide
examples of the types of questions-based on current trends, future fiscal
realities, and GAO's work and expertise-that a fundamental reexamination
of the base of federal government policies, programs, functions, and
activities could address for each of the 12 areas. The questions were
selected for their fiscal significance, their balance between a strategic
and operational level, and their relationship to GAO's strategic plan for
serving the Congress.
In the past 15 years, the world has experienced dramatic changes in the
overall security environment, with the focus shifting from conventional
threats posed during the Cold War era to more unconventional and
asymmetric threats evidenced in the events of September 11, 2001. To
respond to these events and the ensuing global war on terrorism, the
Department of Defense (DOD) has been given a significant infusion of
funds, with an annual appropriation totaling over $400 billion for fiscal
year 2005 and supplemental funding for homeland defense and overseas
military operations approximating $190 billion over the past 3 fiscal
years. In addition to providing additional resources to enhance
war-fighting capabilities, the Congress has also taken steps to fund
enhanced compensation and benefit programs for active duty and reserve
personnel.
As DOD seeks to meet the demands of the new security environment, it
continues to bear the costs of the past by implicitly maintaining or
continuing to pursue many programs and practices from the Cold War era. In
this context, the magnitude of funding and potential for current
investments and operations to turn into long-term financial commitments
are prompting real questions about the affordability and sustainability of
the rate of growth in defense spending. For example, in September 2004,
the Congressional Budget Office reported that carrying out current defense
plans would require annual funding to be sustained over the longer term at
higher real (inflation-adjusted) levels than have occurred since 1980,
excluding supplemental appropriations. Many factors should be considered,
including reassessing the base and rate of growth in defense and related
spending. Failure to do so will result in significant waste today and
opportunity costs over time. Moreover, the recent 9/11 Commission Report
suggests that changes are needed across the government to strengthen
national security institutions and move beyond the legacy of the Cold War,
including reforming the nation's intelligence organizations and
capabilities. As such, meeting the nation's defense needs in the 21st
century may prompt decision makers to reexamine fundamental aspects of the
nation's national security programs such as how DOD plans and budgets,
organizes its forces, manages the total force, acquires new capabilities,
positions our forces, and considers alternatives to past approaches.
In addition to maintaining readiness and sustaining the current force, DOD
is faced with identifying capabilities, including critical technologies,
needed to meet the demands of the new security environment, as well as
determining the best way to provide those capabilities and retain the U.S.
military's technological superiority. Striking an affordable balance
between current and future needs will be an ongoing challenge,
particularly with the federal government's current and projected fiscal
imbalance. The upcoming quadrennial defense review will provide an
opportunity for DOD to move beyond the legacy of the past, assess the
capabilities required to meet current, emerging and future threats,
establish near-term and long-term priorities, and adopt realistic funding
plans.
To adapt to the new security environment, DOD is currently embarked on an
effort to transform its war-fighting capabilities and how it does business
to support the war fighter. DOD's civilian and military leaders appear
committed to reform; however, the department faces significant challenges
in accomplishing its transformation goals.
The following challenges and illustrative questions provide a framework
for thinking about these issues in the future.
To successfully transform itself, DOD must overcome cultural resistance to
change and the inertia of various organizations, policies, and practices
that became well rooted in the Cold War era. Longstanding organizational
and budgetary problems need to be addressed, such as the existence of
stove-piped or siloed organizations, the involvement of many layers and
players involved in decision-making, the allocation of budget allocations
on a proportional rather than strategic basis among the military services,
and the use of traditional approaches to basing forces and replacing or
enhancing capabilities (typically on a platform by platform rather than a
joint basis). DOD's current approach to planning and budgeting often
results in a mismatch between programs and budgets. And it does not always
fully consider long-term resource implications and the opportunity cost of
selecting one alternative over another.
How should the historical allocation of resources across services and
programs be changed to reflect the results of a forward-looking
comprehensive threat/risk assessment as part of DOD's capabilities-based
approach to determining defense needs?
Can DOD afford to invest in transformational systems such as the Future
Combat System and national missile defense at the same time it continues
to pursue large investments in legacy systems such as the FA-22 and new
systems like the Joint Strike Fighter, especially if cost growth and
schedule delays continue at historical rates?
Are sufficient investments being made in capabilities that cross service
lines, such as joint communications and interoperable systems? For
example, is the Global Information Grid well enough defined and understood
to enable sound investments to be made in its key components such as the
Transformational Satellite?
Given the global availability of rapidly advancing technology, does DOD
need to reconsider its approach for identifying critical technologies and
protecting those technologies from being exploited in order to maintain
its military superiority?
The global war on terrorism has required the military forces to operate
differently from the ways it was organized, equipped, staffed and deployed
to operate under post-Cold War planning assumptions based on regional
threats. Current operations have required significant numbers of ready
forces, both active and reserve, to be mobilized for long periods and
created demand for certain skills, such as military police, that exceeds
the available supply. While DOD has taken steps to meet short term
operational needs, it has not yet determined how it will meet the longer
term challenges of reorganizing its forces and identifying the
capabilities it will need to protect the country from current, emerging,
and future conventional and unconventional security threats.
Do the role, size, and structure of forces and capabilities comprising the
strategic triad need to be adjusted to meet the challenges of providing
strategic deterrence in the new security and fiscal environment?
Are the active and reserve components appropriately sized, structured, and
used to meet the current and future national security demands? Is the
current business model sustainable for the reserve component?
What is the appropriate role for contractors, especially in forward
deployment and conflict areas, to maximize the capabilities of military
and contract personnel and to ensure effective integration of contractors
into military operations and support cost-effectively?
Does DOD's plan for realigning forces at overseas locations and
redeploying some forces from overseas to stateside locations provide a
significantly improved capability to respond to global threats in the new
security environment considering diplomatic, operational, and cost
considerations?
DOD's military personnel outlays are large and growing, increasing from
about $76 billion to an estimated $109 billion between fiscal years 2000
and 2005. In fact, personnel costs comprise the second largest component
of DOD's total fiscal year 2005 budget. The growth in military personnel
costs has been fueled in part by increases in basic pay, housing
allowances, recruitment and retention bonuses, incentive pays and
allowances, and other special pays. Furthermore, DOD's costs to provide
benefits, such as health care, have continued to spiral upward. Expanded
health care to reservists and their families and retirees has been the
primary cost driver in growing benefits costs. Also, a large portion of
DOD's compensation-related costs is in the form of benefits and deferred
compensations. In some cases, such benefits exceeded those offered by
private sector organizations. As the total and per capita cost to DOD for
military pay and benefits grows, questions arise as to whether DOD has the
right pay and compensation strategies to cost-effectively sustain the
total force in the future. Regarding its civilian workforce, DOD is
preparing to implement a congressionally authorized personnel system,
which will change the way civilian employees are hired, assigned,
compensated, promoted, disciplined, and, if necessary, fired.
Given the growing encumbrance of pay and benefit costs, especially health
care, within DOD's budget, how might DOD's recruitment, retention, and
compensation strategies (including benefit programs) be reexamined and
revised to ensure that DOD maintains a total military and civilian
workforce with the mix of skills needed to execute the national security
strategy while using resources in a more targeted, evidence-based, and
cost-effective manner?
Is DOD pursuing the design and implementation of its new national security
personnel system initiatives in a manner that maximizes the chance of
success?
Given its size and mission, DOD is one of the largest and most complex
organizations to manage in the world. While the unparalleled combat
effectiveness of U.S. forces has been well evidenced in the Persian Gulf
and elsewhere, DOD has not been effective in managing its ongoing business
operations. Complicating DOD's efforts are numerous systems problems and a
range of other longstanding weaknesses in the key business areas of
strategic planning and budgeting, human capital management,
infrastructure, supply chain management, financial management, information
technology, weapons systems acquisition, and contracting. For example, 8
individual items on GAO's list of high-risk government operations and
several of the governmentwide high-risk areas apply to key DOD business
operations. These problems that continue to result in substantial waste
and inefficiency adversely affect mission performance and result in a lack
of transparency and accountability.
Does DOD need to create a senior management position responsible and
accountable for taking a strategic, integrated, and sustained approach to
managing the day-to-day business operations of the department, including
ongoing efforts to transform DOD's business operations and address the
many related and longstanding high-risk areas? Should specific
qualifications requirements and periods of tenure or terms be established
for selected DOD positions related to key business operations?
Are current organizations aligned and empowered to meet the demands of the
new security environment as efficiently as possible? What kinds of
economies of scale and improvements in delivery of support services would
result from combining, realigning, or otherwise changing selected support
functions (e.g., combat support, training, logistics, procurement,
infrastructure, or health care delivery)?
The shift to a global economy and changes in technology, the nature of
work, and workforce demographics are challenging customary federal
approaches to education and employment. The global economy and advances in
technology enable work to be shifted to other countries or render some
jobs obsolete. If we are to compete effectively in a growing,
knowledge-based economy, our educational system must equip children with
appropriate skills to meet high standards and provide means for adults to
continue to learn new skills and enhance their existing abilities. This
will require ensuring that diverse populations have access to
postsecondary, vocational, and adult education. As an increasingly
volatile job market creates and eliminates jobs, federal programs that
train new workers or support workers who lose their jobs must also be
capable of responding to sudden changes in the economy. Federal efforts to
protect workers must account for changes in the nature of work: membership
in organized labor has declined, traditional work arrangements are giving
way to alternatives such as temporary employment and teleworking, and
lifelong service with a single employer is becoming much less common.
Changes in workforce demographics pose additional challenges. The U.S.
labor force has more than doubled in the past 50 years but is now growing
at a much slower rate. Women, who helped fuel past workforce growth, are
expected to join the workforce at a constant rate, and baby boomers are
likely to begin retiring in large numbers in less than 5 years. As a
result, those leaving jobs are expected to outnumber those seeking jobs in
certain industries. The tighter job market will challenge federal efforts
to ensure that employers have enough workers with the right skills to help
promote economic growth. This trend also underscores the importance of
addressing current pension, disability, health, and immigration policies.
With regard to the latter, it will be important to consider whether the
number of visas allowed for both employment and education may affect
long-term competitiveness, and our ability to build bridges with other
nations, their people, and their cultures while addressing our national
and homeland security needs.
The following challenges and illustrative questions provide a framework
for thinking about these issues in the future.
With rapid advances in technology, increases in global trade, and the
availability of highly educated foreign workers, U.S. workers increasingly
need advanced skills to remain competitive. Determining what skills
workers need and providing the right opportunities for acquiring those
skills will depend, in part, on building partnerships among the multiple
federal agencies and other key nonfederal players that support employment
training, industries, and employers. In developing these partnerships,
avoiding redundancy and ensuring sufficient numbers of workers with the
right skills will be crucial. This challenge may become more difficult to
address if labor markets tighten over the next 20 years as the baby boom
generation retires, labor force participation rates for women remain flat,
and immigrants face potential difficulties in obtaining visas given
heightened security concerns. These shortages will have implications for
the broader economy and budget as well as the Department of Labor's
efforts to ensure that employers have sufficient numbers of workers with
the right skills.
Should federally funded training programs operated across multiple federal
agencies-9 federal agencies administer 44 such programs-be better
integrated and restructured in order to increase their cost effectiveness?
How can existing policies and programs be reformed to ensure that
employers have sufficient numbers of workers with the right skills (for
example, modifying pension policies and regulations so that workers can
work part-time and still receive a pension)?
Many of the federal government's higher education policy tools-especially
its grant and loan programs-were designed decades ago to meet the needs of
traditional students in traditional academic settings. However, they may
not be well suited to an increasingly diverse population that includes
working adults, single parents, students with disabilities, and increasing
numbers of minorities. In addition, these tools may not be structured to
take advantage of the potential for cost savings or widening access
provided by distance education technologies. The adoption of tax policy
tools in the last decade has resulted in some of these policies working at
cross-purposes to traditional grant and loan programs. For example, under
the Higher Education Act, students seeking federal grants and loans are
penalized for having saved funds to pay for their education, while the
Internal Revenue Code has encouraged saving by exempting individuals from
federal income taxation on interest income used to pay for postsecondary
education.
Is there a need for better coordination-or integration-among higher
education policy tools (such as grants, loans, and tax preferences) or
periodic examination of those policy tools that are not routinely subject
to periodic reauthorization or appropriation, such as the Hope and
Lifetime Learning tax credits, for which tax filers claimed nearly $5
billion in 2002?
Higher education is increasingly global in nature as students study
outside their country of origin with greater frequency and universities
have become multinational institutions. While the United States has long
been the global leader in higher education-and the most desired
destination of foreign students seeking higher education-recent graduate
enrollments have fallen, and institutions in other countries have captured
an increasing share of the international student population. The adoption
of tighter security requirements has widely been argued as contributing to
the decreased enrollments of foreign students in the United States.
How can the United States balance immigration policies-such as worker and
student visa programs-to address employers' need for workers with
particular skills, particularly math and science, the nation's need to
maintain global leadership in areas such as science and higher education,
and the nation's homeland security requirements?
The large achievement gap between students of different backgrounds has
persisted for four decades despite a significant federal investment in
educating disadvantaged students during that time. Many disadvantaged
children start school with fewer skills than their more advantaged peers.
Research shows that early intervention helps children succeed in school
and is particularly effective for the most disadvantaged students. It is
less clear whether current levels of coordination among the myriad federal
and state programs efficiently produce desired results for particular
subgroups of children. For example, systematic information is not
available on the total number of preschool children receiving subsidies
through various federal programs and/or participating in state-funded
preschool. This prevents a comprehensive assessment of how fully the
combination of federal and state programs addresses preschoolers' needs.
Recent legislative initiatives, such as the No Child Left Behind Act with
its emphasis on accountability, may help change this trend and could be
aided by retargeting of federal investments. The Elementary and Secondary
Education Act was passed in 1965 to provide assistance to states in
educating disadvantaged students through Title I, the largest federal
program for elementary and secondary education. However, since about 90
percent of school districts receive these Title I funds to improve the
education of disadvantaged students, including a growing number with
limited English proficiency, an opportunity exists to improve targeting of
funds to school districts having the greatest number and percentage of
disadvantaged children.
Is there a need to reexamine the federal investment for early childhood
programs (e.g., funds provided under the Child Care and Development Block
grant and certain expenditures under Title I) to better coordinate them
and support state and local efforts to prepare disadvantaged children to
succeed in school?
In light of the increasing diversity of the nation's school age
population, should the Department of Education reexamine whether there are
opportunities to better target limited resources such as Title I funds so
that the needs of disadvantaged students including those with limited
English proficiency are better addressed?
Federal agencies that help employers provide safe, healthy, and productive
workplaces, such as the Occupational Safety and Health Agency (OSHA), will
have to adapt to both changes in workforce demographics-the rising
proportion of older workers in general and immigrant workers in some
occupations-and the rise of nontraditional workplace arrangements, such as
increased use of independent contractors not covered by most worker
protection laws.
Do recent changes in the labor force makeup and work arrangements-such as
the growing use of telework and the increasing number of independent
contractors-warrant a reconsideration of the Department of Labor's focus,
such as through OSHA, on traditional workplaces as part of its efforts to
ensure worker safety?
Increased global interdependency and rapid technological advancement in
the financial services industry pose significant challenges to U.S.
regulatory institutions charged with ensuring well-functioning markets and
to government agencies charged with managing loan guarantee or mortgage
insurance programs that, to some extent, compete with the private sector.
Globalization has become increasingly prevalent as technology allows money
to be moved around the world literally at the push of a button,
challenging regulators whose authority is defined by national borders.
Households can invest in companies worldwide and can be defrauded or have
their identities stolen from almost anywhere. The financial services
sector has been and continues to be one of the most technologically
sophisticated, whether in adapting technology to new uses or providing
incentives to develop state-of-the-art products to solve a range of risk
management problems. Lastly, immigration patterns, demographic trends, and
a range of quality-of-life issues are important factors pushing up housing
prices and related rents in certain regions and local real estate markets,
which quickly outpace wage growth and put increasing strain on housing
affordability in those areas.
The following challenges and illustrative questions provide a framework
for thinking about these issues in the future.
The present federal financial regulatory structure evolved largely as a
result of periodic ad hoc responses to crises such as financial panics. In
the last few decades, however, the financial services industry, especially
as represented by the largest firms, has evolved, becoming more global,
more concentrated, complex, and consolidated across sectors, and
increasingly converging in terms of product offerings. Multiple
specialized regulators bring critical skills to bear in their areas of
expertise but have difficulty seeing the total risk exposure at large
conglomerate firms or identifying and preemptively responding to risks
that cross industry lines.
Is it time to modernize our financial regulatory system by consolidating
various federal regulatory agencies to promote a more coherent and
integrated structure, specify goals more clearly, and provide sufficient
resources along with the flexibility and incentives to prospectively
target resources to risk? To what extent can specialized or consolidated
regulators effectively address companywide and systemic risks that arise
from the potential failure of large, diversified financial firms?
The need to improve consumers' financial literacy-their ability to make
informed judgments and effective decisions about the management of money
and credit-has become increasingly important. Consumers are faced with an
increasingly complicated array of options for managing their personal
finances and selecting investments and credit products. In addition,
available data show that many consumers are not adequately saving for
their retirement, despite concerns about the adequacy of Social Security,
private pensions, and retiree health benefits. At the same time, unsecured
consumer debt (especially credit card debt) has grown rapidly in the past
two decades, bankruptcy filings have increased substantially, and
predatory lending has become a growing concern.
What role should the federal government take in improving financial
literacy among consumers, and what are the most effective strategies for
doing so? Where are there gaps or overlaps in federal financial literacy
programs? How many agencies should be involved? Can disclosures be
improved and what are the limitations of improved disclosures in
protecting consumers?
Government-sponsored enterprises (GSE) were created throughout the 20th
century to address perceived market imperfections in financing housing,
agriculture, and higher education. With the federal benefits they have
been provided, the GSEs have linked local lending markets and national
capital markets. Two of the housing GSEs, Fannie Mae and Freddie Mac, have
played a critical role in establishing a nationwide secondary mortgage
market and increasing efficiency through greater standardization of
mortgage products. However, with rapid developments spurred by technical
change, the private marketplace has evolved dramatically. While one GSE,
Sallie Mae, has undergone privatization, the other GSEs have used their
special federally provided status and related benefits to expand into new
activities. These entities are also taking on more risk and using more
sophisticated and less transparent risk management strategies. The public
benefits and potential risks to taxpayers from such expansion, as well as
from the continued existence of the GSEs, are a subject of great debate.
Is the current federal GSE regulatory framework appropriately structured,
and do the regulators have the necessary authorities to address the risks
of the GSEs? For example, should the Office of Federal Housing Enterprise
Oversight be combined with the other housing GSE regulators into one
comprehensive housing GSE regulator? What is the GSE track record in
achieving homeownership goals, especially for low-income and protected
groups? Do the GSEs continue to serve an important public policy purpose?
Should their mission focus be restrained to limit expansion into new
activities, or adjusted in any way? Should they be privatized?
New information-based technologies are transforming the credit markets at
a rapid pace. Private sector financial institutions have been using credit
scoring and other tools to make finer distinctions among potential risks,
allowing them to measure and price risk more effectively. Government
lenders, loan guarantors, and insurers have been slower to adopt similar
tools for their decision making. While federal credit programs can adopt
some of the new technologies to better measure risk, lags in such adoption
increase the prospect of adverse selection-if the private sector and GSEs
take a larger share of lower risk customers, government programs will be
left to take on the less well understood and potentially riskier
remainder.
Do federal lending programs need to be reexamined to address the increased
risks and potential costs to the government? For example, should the
Federal Housing Administration (FHA) continue to fully guarantee mortgages
or move to a partial guarantee? If the cost of credit is linked more
closely with risk, what role might the federal government play in reducing
the cost of borrowing for those borrowers with little or no credit
history? For example, should FHA focus more of its activities on those
with little or no credit history?
Homeownership continues to be one of the primary means for many families
to accumulate wealth in this country, and is also thought to contribute to
stable and vital communities. While the overall homeownership rate is at a
historic high, in certain subpopulations the rate lags behind. Numerous
tools have been applied to increase home ownership in the United States.
Some of these tools are broadly based, such as the tax deduction for home
mortgage interest and GSEs and their effect on mortgage interest rates.
Both of these attract capital away from other sectors of the economy and
toward the housing sector. Other tools are more narrowly focused on
particular areas or populations, such as the FHA mortgage insurance
program and other loan programs administered by the U.S. Department of
Housing and Urban Development (HUD) and USDA's Rural Housing Service
(RHS). In addition, lenders and others have developed mortgage products
that permit households to become homeowners sooner than would be the case
otherwise.
To what extent do the tools and incentives increase spending on housing
rather than promote affordable housing? Can the tools and incentives
provided to homeownership be better targeted toward increasing home
ownership among selected groups with less capacity to access credit
markets? For example, should the cap on the mortgage interest deduction be
more precisely targeted?
What are the potential risks of recent homeownership initiatives for
borrowers, financial institutions, and taxpayers? Are the recent increases
in the home ownership rate sustainable; i.e., how will families and
financial markets cope with increases in mortgage interest rates and
slower growth in home equity?
A number of programs provided by HUD, RHS, and other agencies, as well as
other tools and incentives, are designed to provide decent rental housing
affordable to target populations. Over the years, the emphasis of these
incentives has shifted from the supply side (production subsidies) to the
demand side (vouchers). In recent years, most construction of federally
financed affordable rental housing has resulted from tax provisions. In
addition, a number of federally assisted units are eligible to leave some
older subsidy programs in the next two decades. Finally, the costs of
HUD's housing choice voucher program continue to grow, driven in part by
the difference between the eligible population's income growth and the
cost of privately owned rental housing; this gap is increasing rapidly in
certain markets. HUD and its public housing agency partners have struggled
to balance the competing demands of maintaining assistance for a specified
number of households while controlling the increasing costs of doing so.
What are the advantages and disadvantages of demand-based subsidies
(vouchers) versus supply-based incentives (production or financing
subsidies) for providing affordable housing to target populations? To what
extent are these advantages and disadvantages dependent on local housing
market conditions? To the extent that market forces drive the housing
voucher's program cost, how might the Congress best reconcile the
competing demands of continued assistance to a targeted number of
households while addressing the long-term budget implications?
Between 1992 and 2002, overall health care spending rose from $827 billion
to about $1.6 trillion; it is projected to nearly double to $3.1 trillion
in the following decade. This price tag results, in part, from advances in
expensive medical technology, including new drug therapies, and the
increased use of high-cost services and procedures. Many policymakers,
industry experts, and medical practitioners contend that the U.S. health
care system-in both the public and private sectors-is in crisis. In the
public sector, long-term simulations of the federal budget show a large
and growing structural deficit resulting, in large part, from known
demographic trends and rising health care costs. Since Medicare spending
is driven by both these factors, its burden on the budget and the economy
will balloon-tripling by 2035 and quintupling by 2075. One of the
fastest-growing segments of health care in both the public and private
sectors is prescription drugs. In 2004 the Medicare Trustees estimated
that over a 75-year period the federal share of the new Medicare benefit
would be $8.1 trillion in current dollar terms. In the private sector,
employers and other private purchasers of health care services find that
the soaring cost of health insurance premiums poses a threat to their
competitive position in an increasingly global market, often contributing
to company decisions to outsource American jobs overseas, to hire
part-time rather than full-time workers, and to minimize cash wage
increases and pension costs.
Despite the significant share of the economy consumed by health care, U.S.
health outcomes continue to lag behind other industrialized nations. The
United States now spends over 15 percent of its gross domestic product on
health care-far more than other major industrialized nations. Yet relative
to these nations, the United States performs below par in such measures as
rates of infant mortality, life expectancy, and premature and preventable
deaths. Moreover, evidence suggests that the American people are not
getting the best value for their health care dollars. Studies show that
quality is uneven across the nation, with a large share of patients not
receiving clinically proven, effective treatments. At the same time,
access to basic health care coverage remains an elusive goal for nearly 45
million Americans without insurance, with a growing percentage of workers
losing their employer-based coverage. Many more millions of Americans are
underinsured or have lost some of the benefits their health plans
previously afforded.
The following challenges and illustrative questions provide a framework
for thinking about these issues in the future.
Defining differences between needs, wants, affordability, and
sustainability is fundamental to rethinking the design of our current
health care system. Americans with good health insurance have access to an
array of advanced technology procedures at world-class health facilities,
but clinical studies suggest that not all of this care is desirable or
needed. Rising health costs are compelling both public and private payers
to examine whether these procedures can continue to be financed without
better accounting for their clinical effectiveness. Additional health care
spending over time will draw resources away from other economic sectors
and could have adverse economic implications for all levels of
governments, individuals, and other private purchasers of health care.
How can we perform a systematic reexamination of our current health care
system? For example, could public and private entities work jointly to
establish formal reexamination processes that would (1) define and update
as needed a minimum core of essential health care services, (2) ensure
that all Americans have access to the defined minimum core services, (3)
allocate responsibility for financing these services among such entities
as government, employers, and individuals, and (4) provide the opportunity
for individuals to obtain additional services at their discretion and
cost?
The impact that federal health care outlays have on the federal budget
cannot be overstated. Medicare and Medicaid-entitlement programs for which
federal spending is mandatory-are consuming increasing shares of the
federal budget and shrinking the government's flexibility to pay for other
federal obligations, such as national and homeland security, environmental
cleanup, and disaster assistance. Today, Medicare and Medicaid's combined
share of the federal budget-at 20 percent-has more than doubled in the
last 2 decades. Moveover, long-term care for chronic illness will be a
growing challenge as the aged population continues to grow. In addition,
health care expenditures for the Departments of Defense (DOD) and Veterans
Affairs (VA) are increasing. DOD's health care spending has gone from
about $12 billion in 1990 to about $26 billion in 2003-in part, to meet
additional demand resulting from program eligibility expansions for
military retirees, reservists, and the dependents of those 2 groups and
for the increased needs of active duty personnel involved in conflicts in
Iraq, Bosnia, and Afghanistan. VA's expenditures have also grown-from
about $12 billion in 1990 to about $24 billion in 2003-as an increasing
number of veterans look to the VA to supply their health care needs.
How can we make our current Medicare and Medicaid programs sustainable?
For example, should the eligibility requirements (e.g., age, income
requirements) for these programs be modified?
How can the federal government best leverage its purchasing power for
health care products and services?
What options are there for rethinking the federal, state, and private
insurance roles in financing long-term care?
How can the benefits, eligibility, and health delivery systems of VA and
DOD be optimally structured to ensure quality and efficiency? For example,
should changes in eligibility and the benefit structure of VA and the
military health system be considered?
With billions of federal dollars going to DOD and VA for health care, what
options are available to reduce spending growth through increased
collaboration in, and integration of, health care delivery between those
two agencies?
In the past several decades, the responsibility for financing health care
has shifted away from the individual patient. In 1962, nearly half-46
percent-of health care spending was financed by individuals. The rest was
financed by a combination of private health insurance and public programs.
By 2002, the amount of health care spending financed by individuals'
out-of-pocket spending at the point of service was estimated to have
dropped to 14 percent. Tax preferences for insured individuals and their
employers have also shifted some of the financial burden for private
health care to all taxpayers. Tax policies permit the value of employees'
health insurance premiums to be excluded from the calculation of their
taxable earnings and exclude the value of the premium from the employers'
calculation of payroll taxes for both themselves and employees. Health
savings accounts and other consumer-directed plans, which shift more of
health financing to the individual, also have tax preferences. These tax
exclusions represent a significant source of forgone federal revenue and
work at cross-purposes to the goal of moderating health care spending.
How can health care tax incentives be designed to encourage employers and
employees to better control health care cost? For example, should tax
preferences for health care be designed to cap the health insurance
premium amount that can be excluded from an individual's taxable income?
What reforms will encourage the private health insurance market to
sufficiently pool risk and offer alternative levels of affordable coverage
to ensure that all Americans have access to essential health care
coverage? For example, are there alternatives to employer-based coverage
through professional organizations, trade associations, or other entities?
The variation by geographic region in Americans' use of health care
services suggests, in part, quality and efficiency problems. Studies of
Medicare patients in different geographic areas have found that despite
receiving a greater volume of care, patients in higher use areas did not
have better health outcomes or experience greater satisfaction with care
than those living in lower use areas. Public and private payers are
experimenting with payment reforms designed to foster the delivery of care
that is clinically proven to be effective. Ideally, identifying and
rewarding efficient providers and encouraging inefficient providers to
emulate best practices will result in better value for the dollars spent
on care. However, implementing performance-based payment reforms, among
other strategies, on a systemwide basis, will depend on system components
that are not currently in place nationwide-such as compatible information
systems to facilitate the production and dissemination of medical outcome
data, safeguards to insure the privacy of electronic medical records,
improved transparency through increased measurement and reporting efforts,
and incentives to encourage adoption of evidence-based practices. These
same system components would be required to develop medical practice
standards, which could serve as the underpinning for effective medical
malpractice reform. Policymakers would need to consider the extent to
which federal leadership could foster these system components.
How can technology be leveraged to reduce costs and enhance quality while
protecting patient privacy?
How can industry standards for acceptable care be established and payment
reforms be designed to bring about reductions in unwarranted medical
practice variation? For example, what can or should the federal government
do to promote uniform standards of practice for selected procedures and
illnesses?
How can a medical information infrastructure be fostered, complete with
privacy safeguards, that will help reduce the occurrence of medical errors
and malpractice litigation and will furnish health outcomes data to better
inform consumer choice?
What reforms will help control health care costs associated with medical
liability without undercutting provider accountability?
The attacks of September 11, 2001, and subsequent anthrax incidents-as
well as disease outbreaks, such as the West Nile virus and SARS-have
elevated to priority status concerns about the quality and availability of
the nation's public health resources at the federal, state, and local
levels. In recent years, it has been apparent that, despite improvements,
the nation's public health infrastructure remains too fragmented and
uncoordinated and lacks the capacity to effectively manage a large
epidemic or bioterrorist attack. Since fiscal year 2002, substantial
federal funding has gone to state and local governments to improve disease
surveillance systems, laboratory capacity, communication systems, and
workforces. Federal funds directed at basic biomedical research to improve
treatment and vaccinations for infectious diseases caused by biological
agents have also been substantial. In an era of growing demand and
shrinking resources, however, it may be prudent to determine how best to
target the nation's public health dollars.
What are the most effective strategies for tracking emerging infectious
diseases and targeting resources to prepare for treating these diseases?
How can our international agreements encourage the equitable sharing of
financial responsibility for developing pharmaceuticals and other medical
technologies and eradicating AIDS and other worldwide disease outbreaks?
For example, what can be done to facilitate more international
burden-sharing for prescription drug research and development currently
financed through public expenditures and higher U.S. prices?
Global interdependence and efficient transportation systems have
heightened U.S. vulnerability to a broad range of infectious diseases,
such as SARS and avian influenza. Moreover, HIV/AIDS, tuberculosis, and
malaria are increasingly viewed as a threat to economic growth and
political stability in many nations. The number of people with HIV/AIDS
will grow significantly by 2010, driven by the spread of the disease in
five populous and strategically significant countries-China, India,
Nigeria, Russia, and Ethiopia. To combat the spread of these diseases, the
United States pursues multiple approaches, including partnerships with
international organizations, such as taking the lead in support of the
World Health Organization (WHO). At the same time, the United States also
supports numerous bilateral programs to strengthen other countries' health
care systems. The increasingly global spread of infectious diseases
presents a challenge to these approaches and prompts the need to reexamine
the balance between and possible integration of these approaches.
Should the United States reexamine its central role in supporting WHO in
global efforts to control the spread of emerging diseases such as SARS and
encourage other nations to provide more support to WHO with their
personnel and resources? Do U.S. commitments to infectious disease
interventions abroad, such as those for HIV/AIDS, need to be reexamined to
better ensure human well-being, economic growth, and political stability
in many nations? For example, can better coordination or integration of
current multilateral and bilateral approaches to combating disease achieve
greater effectiveness and efficiency?
The terrorist attacks of September 11, 2001, evoked with stunning clarity
the face and intent of enemies very different from those the nation has
faced before-terrorists such as al Qaeda, willing and able to attack us in
our territory using tactics designed to take advantage of our relatively
open society and individual freedoms. In the 3 years since the attacks,
the nation has begun confronting the enemy abroad and domestically at the
federal, state, local, and private levels. For example, the Congress
enacted legislation creating the Department of Homeland Security (DHS) and
strengthening other security measures in law enforcement and border and
transportation security. Military action destroyed many terrorist
sanctuaries and support networks. The new Northern Command provided
additional resources and authority for homeland defense. Law enforcement
disrupted terrorist cells and worked with international authorities to
identify and disrupt other terrorist threats and target terrorist
financing. National strategies, such as the National Strategy for Homeland
Security, set initiatives in many homeland security areas. A series of
homeland security presidential decision directives provided further
guidance and objectives in areas such as critical infrastructure
protection, national warning systems, and national preparedness goals and
metrics.
However, the threat of terrorism will persist well into the 21st century.
Terrorists are dispersed in loosely organized, self-financed,
international networks of terrorists, some of which are cross-national.
Domestic terrorist groups remain a security threat, though currently to a
much lesser extent than the international terrorist movement. We must
fundamentally reexamine our approaches to terrorism and homeland
security-the nature of the terrorist threat, its long-term impact, and the
impact of our strategies. While most believe we are safer than we were on
the day of the September 11 attacks, we still are not safe.
The following challenges and illustrative questions provide a framework
for thinking about these issues in the future.
Defining an acceptable, achievable (within constrained budgets) level of
risk is an imperative to address current and future threats. Many have
pointed out, as did the Gilmore and 9/11 Commissions, that the nation will
never be completely safe and total security is an unachievable goal. Risks
have been exposed in many aspects of normal life, with perhaps many of the
greatest dangers posed in areas that Americans have simply taken for
granted, such as air and water supplies, food production chains,
information systems, airports and train stations, ports, borders, and
shopping malls. However, we cannot afford to protect everything against
all threats-choices must be made about protection priorities given the
risk and how to best allocate available resources. While risk-based
allocation decision-making is still evolving, we must take a more
systematic, reasonable approach to allocating resources. Adoption of
management system standards, such as the National Fire Protection
Association 1600 standard for national preparedness, can also aid in
assessing risk and defining key homeland security activities.
What is an acceptable level of risk to guide homeland security strategies
and investments, particularly federal funding? For example, how should
risk be managed in making sound threat, risk, and criticality assessments,
developing countermeasure options, and implementing those options
considered the most effective and the most efficient? What criteria should
be used to target federal funding for homeland security in order to
maximize results and mitigate risk within available resource levels?
Confronting asymmetric threats requires new international and domestic
strategies and related tactics on our part. International and domestic
terrorists will not be defeated by conventional force projection and
weapons systems, law enforcement, or infrastructure protection alone.
Instead, our tactics will hinge more on intelligence, diplomatic efforts,
and domestic partnerships across many actors. Understanding the underlying
causes of terrorism-the isolation and alienation that feeds violence-and
focusing on mitigating those causes is likely to be the only way to truly
diminish the levels of terrorism globally and domestically. For example,
the international terrorist movement draws on a hatred of what is seen as
the corrupting influences of western culture and values. Instigators of
terrorism can find recruits for violent actions among those who see
themselves with little or nothing to lose. Thus, efforts to confront
ideological differences and offer hope for the future are essential to the
long-term effectiveness of combating terrorism. Public diplomacy will be
challenged to target and better reach audiences in areas where new threats
are emerging.
What new international and domestic strategies and related tactics will
effectively confront the asymmetric tactics we now face and, for the
longer term, address the root causes of terrorism? For example, how can we
best anticipate, and thus counter, asymmetric threats such as suicide
attacks, biological and chemical terrorism, and cyber attacks? What
approaches will address the root causes of terrorism, whether from
domestic or international groups? For example, should the current U.S.
approach to overseas broadcasting be realigned to target and better reach
audiences in areas where new threats are?
Establishing effective federal, state, and local government; private
sector; nongovernmental; and nation-state partnerships is crucial to
addressing risk across the nation. The Constitution requires the federal
government to "provide for the common defense" and to "repel invasions."
Many would interpret those requirements to justify homeland security and
related counterterrorism activities as an inherently governmental
obligation. However, the vast majority of the targets that require
protection are those owned by the private sector-critical infrastructure
such as water and power sources and information systems. Many of the
emergency response and recovery capabilities are those with nonfederal or
not-for-profit entities, such as public health facilities.
Are existing incentives sufficient to support private sector protection of
critical infrastructure it owns, and what changes might be necessary? How
can intelligence and information on threats be shared with other levels of
government and other critical entities, yet be held secure?
Measuring progress in the current war on terrorism is very much a work in
progress. Measures in use-such as the number of terrorists detained or
arrested worldwide or kept on the run-may be extremely limited or
meaningless without knowing if such actions seriously destroy, degrade, or
disrupt terrorists' plans or seriously degrade or dissuade their
recruitment efforts and community support. The apparent lack of
international terrorist attacks within our borders since the September
2001 attacks suggests positive results from our homeland security actions,
but it may also simply reflect terrorist choice of the time and place of
another attack. Small-scale domestic terrorist attacks still occur. Fully
addressing the range of threats posed by terrorism and its causes requires
more sophisticated ways to gauge progress.
What is the most viable way to approach homeland security results
management and accountability? For example, how should progress in the
current war on terrorism be measured and assessed? What are the
appropriate goals for prevention, vulnerability reduction, and response
and recovery? Who is accountable for the many components of homeland
security when many partners and functions and disciplines are involved?
How can these actors be held accountable and by whom?
Traditionally, state and local governments have had the primary
responsibility for financing first responders' preparation for and
response to disasters, whether natural or manmade, which are generally
local in their cause and effect. Prior to September 11, 2001, the federal
government's role was limited primarily to providing guidance, some grants
for planning, mitigation, and equipment, and disaster response and
recovery assistance after such major disasters as hurricanes, earthquakes,
and floods. Since September 11, 2001, the federal government has provided
billions of dollars to state and local governments for planning,
equipment, and training to enhance the capabilities of first responders to
respond to both smaller scale natural disasters and terrorist attacks.
However, the federal financial assistance provided in the last several
years has not been guided by a clear risk-based strategic plan that
outlines the role of federal, state, and local governments in identifying,
enhancing, maintaining, and financing critical first responder
capabilities for emergencies. Moreover, while planning and assistance has
largely been focused on single jurisdictions and their immediately
adjacent neighbors, well-documented problems with first responders from
multiple organizations to communicate at the site of an incident and the
potential for large scale terrorist incidents have generated a debate on
the extent to which first responders should be focusing their planning and
preparation on a regional and multi-governmental basis. In addition, no
standards have been established on which to determine the equipment,
skills, and capacities that first responders need given the risks
individual locations may face. In the absence of risk-based performance
standards that could be used to establish baseline capabilities and
critical capacities, state and local governments have used their own
criteria for determining how federal grant funds should be spent. The
absence of standards has also made it difficult for first responders to
define the gap between what is and what should be and measure their
progress in achieving defined performance goals.
What should be the role of federal, state, and local governments in
identifying risks-from nature or man-in individual states and localities
and establishing standards for the equipment, skills, and capacities that
first responders need?
What costs should be borne by federal, state, and local governments or the
private sector in preparing for, responding to, and recovering from
disasters large and small-whether the acts of nature or man, accidental or
deliberate?
To what extent and how should the federal government encourage and foster
a role for regional or multistate entities in emergency planning and
response?
The United States faces rising challenges and threats to its national and
economic security. These threats include terrorism, regional conflicts,
and global instability sparked by growing gaps between the "haves" and
"have nots," as well as by corruption, ethnic hatred, and disease. At the
same time, the world grows increasingly interconnected through more open
markets, rapidly developing technology, and efficient transportation
systems.
In this environment, advancing and protecting U.S. international interests
requires the use of all available instruments of power-military,
diplomatic, and economic. The United States has periodically employed its
armed forces and civilian agencies, often in conjunction with U.S. allies
and the international community, to address various threats to regional
and international peace and stability. The United States also maintains a
vast network of embassies and consulates at about 260 locations around the
world, staffed by about 60,000 U.S. and foreign national employees, to
carry out foreign policy and public diplomacy programs. In addition, the
United States seeks to advance its interests by participating in a wide
variety of multilateral organizations. While trying to anticipate and
address emerging threats, the U.S. government also seeks to promote
foreign policy goals, national and economic security objectives, sound
trade policies, and other strategies to advance the interests of the
United States and its trading partners and allies. The 21st century will
bring increased challenges in balancing security concerns with the desire
to maintain strong economic and cultural ties essential to domestic well
being.
The following challenges and illustrative questions provide a framework
for thinking about these issues in the future.
The continuing proliferation of biological, chemical, and nuclear weapons
and delivery systems poses serious threats to the security of the United
States and its allies. The increasing likelihood that a rogue regime or
terrorists will attempt to threaten or attack the United States or its
allies with weapons of mass destruction (WMD) will challenge the U.S.
nonproliferation and counterproliferation efforts and preparations for the
consequences of WMD use. For example, the great majority of Russian
chemical weapons remain vulnerable to theft or diversion by terrorists or
rogue states.
Do U.S. efforts to reduce or prepare for such WMD threats need to be
reexamined? For example, does U.S. nonproliferation assistance, currently
provided almost exclusively to Russia, need to be extended to other
countries, such as Libya, that have WMD assets that must be eliminated or
secured? What U.S. and international responses are needed to better deal
with the increased security threats posed by rogue states and terrorists
seeking to acquire and use WMD? How can the United States better work with
our allies and others to prevent the spread of WMD?
Protecting U.S. strategic interests in the face of new tests has presented
challenges for alliances established decades ago. For example, serious
disagreement with North Atlantic Treaty Organization (NATO) allies France
and Germany over U.S. policy in Iraq exposed fundamental differences over
how the alliance should respond to security threats. Conflict
interventions to make or keep peace, stabilize failed states, and end
terrorist regimes have dominated U.S. foreign policy actions in recent
years. Such interventions will likely continue to play a prominent role in
efforts to stabilize regions where U.S. interests are undermined or
threatened.
Do we need to reexamine the U.S. force structure used for nation building
and peacekeeping activities by the United Nations, NATO, and other
international institutions? Should the United States have a separate force
devoted to such functions? What role should the United Nations, NATO, and
other international institutions perform in connection with such
functions?
Increasing global interdependency and shifting trade patterns create a
range of challenges for policymakers. The high level of U.S. trade
deficits, rapid increases in imports from nations such as China, and the
increase in services trade have led to questions about the best way to
ensure that trade is fair and contributes to the well-being of the
American people. To date, new trade concerns, such as offshoring of
high-tech services and currency interventions, have generally not been
dealt with directly by traditional U.S. trade policy tools, such as trade
agreements, and will challenge policymakers to develop new strategies for
dealing with them. Moreover, the globalization of economic activity is
bringing an increasing share of the U.S. economy under the domain of
international agreements. Economic activity historically viewed as
isolated from international trade agreements, such as local government
procurement practices, may come under the scrutiny of other parties to the
trade agreements, and increasingly be subject to their enforcement
machinery.
Does the U.S. portfolio of international trade policy tools, such as its
heavy reliance on industry-specific trade agreements, need to be
reexamined for its effectiveness and relevance in addressing new trade
concerns such as offshoring and currency interventions?
What types of policy commitments and programs, such as agricultural
subsidies and import restrictions on textiles, may need to be reexamined
for their consistency with broader international trade goals?
Although the United States' commitment to foreign aid has spanned more
than half a century, questions persist about the effectiveness of
bilateral U.S. aid to developing countries and multilateral aid provided
by international financial institutions. The United States recently
established a new foreign assistance program, the Millennium Challenge
Account (MCA), to function alongside the U.S. Agency for International
Development. MCA's goal is to reduce global poverty through economic
growth in countries that govern justly, invest in their people, and
encourage economic freedom. However, like other foreign assistance
efforts, MCA will face challenges such as inconsistent political will,
ineffective donor coordination, and limited capacity of recipient nations
to absorb donor resources. Moreover, few, if any, countries that have
received bilateral aid have significantly reduced poverty, and rapid
advances in technology have caused poorer countries to fall further
behind. Regarding multilateral aid, the World Bank and International
Monetary Fund (IMF) did not prevent or quickly resolve the recent
financial crisis in Argentina, although Argentina had implemented reform
programs funded by those institutions since at least the early 1990s.
Similarly, despite 9 years of ongoing efforts by the World Bank and IMF,
the debt problems of the poorest nations will likely continue for decades.
Should the United States reevaluate its approach to reducing world
poverty? For example, what role should continued bilateral U.S. aid or
support of loans and grants through multilateral agencies play? Should
certain existing multilateral development loans be forgiven? Are
international financial institutions structured to achieve the long-term
financial health and stability of the countries they seek to help?
U.S. embassies and consulates are on the front lines, conducting
diplomatic activities and operating programs that are critical to
achieving a wide range of foreign policy interests. In addition to
interacting with foreign governments, embassies and consulates conduct
public diplomacy, promote trade, screen visa applicants wishing to visit
the United States, assist American citizens overseas, and play a key role
in fostering military alliances and providing military and economic aid.
Security priorities after 9/11 have further complicated their mission. The
demands placed on embassies and consulates by a rapidly changing world
challenge their existing ways of organizing themselves and matching their
resources and skills to meet those demands. While there have been attempts
to review how overseas resource allocations are made, the rapidly changing
world prompts the need to continually reexamine mission priorities to
determine the "who, where, and when," as well as the mix of U.S.
government and nongovernmental personnel that should be overseas. Concerns
over security for staff assigned overseas and fiscal pressures will also
prompt the consideration of alternative ways of doing business overseas,
such as streamlining or outsourcing functions and performing functions
from the United States or other remote locations.
How can the U.S. presence overseas be rationalized to "right place" as
well as "right size" embassies and consulates and ensure secure and
cost-effective overseas operations while continuing to meet key foreign
policy objectives and priorities?
Following passage of major environmental legislation in the 1970s, the
nation made a number of gains in its air and water quality, and expressed
a commitment to improved management of our natural resources. As the
nation moves into the 21st century, it is becoming increasingly apparent
that the current approach to natural resource use (including energy) and
environmental protection may need modification to successfully address the
long-term stresses affecting so many of our nation's and the world's
natural ecosystems. Evidence of this stress can be found on many fronts,
including depleted fresh water supplies, deteriorating fisheries, multiple
energy crises, and accelerated loss of biodiversity. Similarly, the
globalization of agribusiness coupled with increasing concentration in the
nation's agriculture sector raises questions about whether the historic
agriculture subsidy and support structures remain appropriate.
In this context, the broad, long-term challenge is determining how the
nation can reconcile the desire for consumption today with the need to
protect resources to sustain the future. From the available evidence,
there is reason to reexamine existing programs to determine the balance
between supporting the needs of today's economy with our stewardship
obligations to the generations to come. Federal regulatory and economic
programs, policies, and approaches devised and implemented decades ago may
need to be reassessed, and new approaches, such as pricing strategies,
need to be considered to ration scarce resources. Natural resource,
energy, and environmental concerns are inextricably linked.
The following challenges and illustrative questions provide a framework
for thinking about these issues in the future.
Land use planning practices that do not adequately consider land, water,
and petroleum availability can contribute to sprawling development and a
host of problems. Such practices have had a part in automobile usage
reaching new highs each year, open space dwindling, air pollution becoming
more difficult to control, and the reliance on imported oil continuing to
climb. Likewise, population growth, particularly in arid regions of the
country, may soon face a limiting obstacle-the availability of fresh
water. In fact, water managers in 36 states expect water shortages to
occur within the next 10 years under even normal conditions. In many parts
of the country, drought conditions are giving an early indication of what
may occur on a much more widespread basis in the future. Federal
transportation and other incentive structures have played a role in
current land use planning results. In this context, it may be time to
examine land use planning and associated federal incentive structures to
ensure that they are not having unintended consequences. Relatedly,
federal natural resource allocation and usage decisions are distorted when
the federal government does not charge fair market value when offering
these resources for sale. Whether it be oil and gas, timber, grazing
rights, or water, the federal government has a history of selling its
assets at much lower prices than others or perhaps even below the cost of
delivering the asset. When this occurs, the federal government
shortchanges the Treasury and distorts markets for these resources.
Can alternative federal approaches to transportation, land management, and
water policies be adjusted to better promote sustainable management of our
nation's land and water resources? For example, given projected water
supply shortages, is there a need to reassess the balance between urban
expansion in water-scarce regions and continuance of existing crop
irrigation practices? Additionally, should steps be taken to ensure that
user fees commensurate with fair market value or the costs of providing
services are collected when federal natural resources are sold?
The nation's energy consumption is significant and growing. Today,
according to our analysis of U.S. Department of Energy (DOE) data, total
U.S. energy consumption is equivalent to about 790 billion gallons of
gasoline per year, which is nearly 2,800 gallons consumed by every man,
woman, and child each year. Energy consumption is expected to increase
about 30 percent over the next 20 years. As a result of these
ever-increasing demands, energy reliability, affordability, efficiency,
and sustainability remain a concern. Not only has our nation experienced
multiple energy crises, but our systems remain perpetually on the cusp of
critical supply/demand imbalances. These imbalances can quickly lead to
price volatility that burdens consumers and the industry and adversely
affects our economy. While there are differences of opinion as to how long
the nation can rely on finite fossil energy supplies to meet the majority
of its energy needs, there seems little doubt that at some point the
nation will need to transition to alternatives. Enhanced conservation
could delay this transition point, but many believe that without a vision
for a sustainable energy future, our nation's energy markets in the 21st
century will likely continue to experience the turmoil of the past with
increasing frequency. The recent collapse of the energy grid in
northeastern and midwestern states and the cascading blackouts that
followed, as well as the increases in gasoline and heating oil prices, may
be early warning signs of more pressing problems to come. In this context,
in addition to aggressively pursuing opportunities to increase production,
it may be time to consider placing a similar emphasis on and investment in
demand reduction strategies and development of alternative or renewable
energy supplies and technologies. Preparing the nation for its long-term
energy future may be dependent on an approach that adequately balances all
its options.
To what extent are federal energy policies and incentive structures
adequately preparing the nation to satisfy its energy needs over the long
term? What is the appropriate balance between efforts to promote enhanced
production of fossil fuels, alternative renewable energy sources, and
energy conservation?
While the nation has made great strides in improving the quality of our
air and water, questions are increasingly being raised about whether the
current policies, strategies, regulatory approaches, and organizational
structures-that in some cases were put in place in the 1970s-will be up to
the challenge of protecting our air and water quality in the decades to
come. Our nation's urbanized areas are continually battling to keep air
pollution in check, and the regional dimensions of air-quality problems
are being increasingly exposed by concerns over the spread of pollution
from coal-fired power plants and other industrial sources in the Midwest
into the Northeast states. Likewise, it continues to be a challenge to
restore and protect national treasures such as the Chesapeake Bay and the
Great Lakes. Despite hundreds of millions of dollars being spent, efforts
to restore these waters to healthy conditions are not showing as much
progress as hoped. In addition, the nation faces a more than $150 billion
burden over the next two decades to repair, replace, and upgrade the
nation's over 55,000 community drinking water and wastewater systems to
protect public health. A reexamination of current approaches to address
these problems may be in order to better achieve overall environmental
outcomes while providing more flexibility in achieving them. The
establishment and institutionalization of a science-based, widely accepted
set of environmental indicators to improve the quality of air and water
quality data is an essential prerequisite to evaluate alternative
approaches.
Does the existing federal regulatory approach for controlling air and
water pollution need to be modernized to generate improved results? In
particular, can the current prescriptive "command and control" regulatory
structure be changed to more cost effectively reduce pollution and better
protect the environment?
Is there a way for the federal government to implement environmental
regulations more efficiently and effectively by taking into account the
cumulative costs of multiple environmental regulations to state, local,
and tribal governments while at the same time ensuring benefits to human
health and the environment?
It is also unclear whether current agricultural practices and the federal
policies that have promoted them remain appropriate and sustainable. When
federal agricultural policies were first implemented, the United States
was a largely rural nation. Farming and its related federal support were
the lifeblood of many rural communities. Today, the U.S. agricultural
sector is dominated by a relatively small number of agribusiness giants
and very large farming operations that operate globally. For example,
while there are still over 2 million farms in the United States, less than
10 percent of them provide 70 percent of the nation's food and fiber and
account for the vast majority of the $60 billion worth of agricultural
exports that help sustain the sector. Federal support for agriculture
exceeds $25 billion annually. Critics question the need for this level of
subsidies, which mostly go to larger producers, particularly considering
the government's current and projected fiscal imbalance. In addition,
while the Congress recently passed legislation to phase out support to
tobacco growers, large subsidies remain for a number of crops that are
often criticized in the international marketplace as being
anticompetitive. Furthermore, farming and livestock operations have become
highly concentrated, and the associated fertilizer, pesticide, and animal
waste run-off are being increasingly recognized as major contributors to
water pollution. Finally, rural communities have changed as well. Farming
is no longer the dominant activity in many rural communities, and many of
the large-scale electrification and related infrastructure development
programs are logical candidates for reexamination. Accordingly, new
approaches to agricultural programs and policies better oriented to modern
challenges may be in order.
Do current federal agricultural policies and programs, which largely rely
on subsidies, remain relevant to the modern agricultural sector? In
addition, are current policies contributing to unfair trade practices?
Can these policies and programs be sustained? Could alternative approaches
produce desired results more economically, effectively, and efficiently?
For example, could the federal crop insurance program be expanded to play
a larger role in the federal safety net for farmers?
Are government supports for or ownership of energy production and
electricity generation in rural areas and particular regions still
necessary given fundamental changes in the past 50 years in energy market
infrastructure?
According to the combined estimates from DOE, DOD, and the U.S.
Environmental Protection Agency (EPA), it could cost in excess of $500
billion in current dollars to clean up (1) the radioactive wastes
accumulated during 50 years of nuclear weapons production at DOE
facilities, (2) unexploded ordnance, discarded munitions, and related
contamination at current or former U.S. military sites, and (3) hundreds
of thousands of Superfund and other hazardous waste sites created by
private sector activities. Some of the contamination in these sites may
take 50 to 70 years to clean up; at other sites, the contamination is so
extensive that it may be irreversible and the site may be irretrievable.
Frequently, the progress in cleaning up these sites does not meet expected
time frames and the costs dramatically exceed available funding levels.
For example, DOE's projects for treating and storing radioactive and
hazardous waste, a by-product of nuclear weapons production at DOE
facilities, are estimated to cost more than $140 billion and could take
decades to complete. Furthermore, the current approaches to cleaning up
DOE, DOD, and EPA sites are not consistent and, in some cases, not
especially efficient or effective; development of more innovative
incentives and approaches may be needed. The enormity of this task,
combined with the fiscal constraints facing the nation, raises questions
about whether existing cleanup standards are realistic.
Does the current pace and cost of nuclear and hazardous materials cleanup
activities at DOE, DOD, and EPA sites suggest the need for alternative
approaches to address these issues? Can the nation afford to cleanup
radioactive and hazardous waste sites to the standards currently being
applied? For example, are there opportunities for DOE to apply risk
factors, just as EPA assigns risk factors to Superfund sites, to determine
the most cost-effective approach to clean up a site, possibly resulting in
disposal of more waste at current sites rather than moving it to the
planned underground repository?
One of the great American achievements of the 20th century was the
development of a comprehensive national social insurance system. A core
element of the system was a sturdy retirement component-with Social
Security as a foundation, supplemented by a private pension system and
individual savings arrangements-which sought to conquer the long-standing
economic fear of poverty in old age. For the last half century, millions
of American workers were able to look forward to their retirement as a
time of dignity, respect, and security. The Congress later extended these
social insurance protections to those workers who were unable to engage in
gainful economic activity because of disability. Indeed, insuring workers
and their families from the potentially devastating income loss caused by
unexpected injury, illness, or death removed another great risk to their
economic well-being.
The challenges facing retirement and disability programs are long-term,
severe, and structural in nature. A successful policy response to these
challenges will require a fundamental and comprehensive reassessment of
each of the key components of our national retirement and disability
system.
The following challenges and illustrative questions provide a framework
for thinking about these issues in the future.
Social Security faces severe, long-term, structural financing challenges
that if not addressed, could lead to the depletion of its trust funds. The
unfunded obligation for the Old Age, Survivors, and Disability Insurance
(OASDI) trust funds for the next 75 years is $3.7 trillion in present
value as of 2004. Projected tax income to the OASDI trust funds will begin
to fall short of outlays in 2018 and, by 2042, trust fund balances will be
insufficient to fully finance benefits promised under the current program.
Social Security faces this long-term financing shortfall largely because
of several concurrent demographic trends, namely that people are living
longer, spending more time in retirement, and having fewer children. For
example, average time in retirement grew from 11.5 years in 1950 to 18
years for the average male worker as of 2003. Women are also having fewer
children. In the 1960s, the fertility rate was an average of 3 children
per woman, but by 2030 it is expected to fall to 1.95-a rate that is below
replacement. Taken together, these trends threaten the financial solvency
and sustainability of Social Security as well as the federal budget as a
whole. Social Security could be brought into balance over the next 75
years in various ways, including an immediate increase in payroll taxes of
15 percent or an immediate reduction in currently promised benefits of 13
percent (or some combination of the two). Ensuring the sustainability of
the system beyond 75 years will require even larger changes. Encouraging
older workers to extend their labor force participation can also improve
program solvency while contributing to overall economic growth. Lastly,
highlighting the need for early action, even greater adjustments in
scheduled benefits and revenues will be required the longer Social
Security's financial challenges remain unaddressed.
How should Social Security be reformed to provide for long-term program
solvency and sustainability while also ensuring adequate benefits (for
example, increase the retirement age, restructure benefits, increase
taxes, and/or create individual accounts)?
How can existing policies and programs be reformed to encourage older
workers to work longer and to facilitate phased retirement approaches to
employment (for example, more flexible work schedules or receiving partial
pensions while continuing to work)?
Serious weaknesses have become manifest in our nation's private pension
system. Despite sustained large federal tax subsidies, total pension
coverage continues to hover at about half of the total private sector
labor force. The number of traditional defined benefit plans in which
employers rather than employees bear the risk of investment has been
contracting for decades, and recent plan terminations by bankrupt sponsors
of large defined benefit plans have threatened the solvency of the Pension
Benefit Guaranty Corporation (PBGC), the federal agency that insures
certain benefits under such plans. Recognizing the long-term challenges
facing PBGC, GAO has placed PBGC's single-employer pension program on its
high-risk list of programs needing further attention and congressional
action. As of the end of fiscal year 2004, the agency's single-employer
pension program registered a net negative accumulated position of $23.3
billion. While growth in the number and coverage of defined contribution
plans-where each worker has an individual account that receives
contributions-has somewhat mitigated the decline of more traditional
defined benefit plans, these plans have also experienced problems. Many
workers covered by defined contribution pension plans continue to choose
not to participate, potentially leaving them with an inadequate retirement
income. The risk burden of defined contribution plans requires individual
employees to be knowledgeable about investment and other retirement
decisions, yet information and education are not always available. Large
holdings of company stock in such plans may add to employees' risk that
their retirement savings will be inadequate to provide levels of income
needed in retirement. Finally, workers receiving their retirement benefit
in a lump sum and the ability to withdraw or borrow money from retirement
saving plans prior to retirement to supplement current consumption can
drain workers' accounts of needed benefits well before retirement.
Policymakers will need to consider how to best encourage wider pension
coverage and adequate and secure pension benefits that are preserved for
retirement purposes for the current and the future labor force, and how
such pensions might best interact with changes to the Social Security
program.
What changes should be made to enhance the retirement income security of
workers while protecting the fiscal integrity of the PBGC insurance
program (for example, increasing transparency in connection with
underfunded plans, modifying PBGC's premium structure and insurance
guarantees, reforming plan funding rules, or restricting benefit increases
and the distribution of lump sum benefits in connection with certain
underfunded plans)?
How can existing policies be reformed to encourage income preservation
strategies so that retirement income lasts an individual's entire life
(for example, benefit annuitization)?
Meanwhile, federal disability programs, such as those at the Social
Security Administration (SSA) and the Department of Veterans Affairs (VA),
have experienced significant growth over the past decade and are expected
to grow even more as increasing numbers of baby boomers reach their
disability-prone years. Moreover, the composition of the disability rolls
has changed significantly, with a larger proportion of beneficiaries with
mental impairments receiving benefits today than in the past. At the same
time, recent scientific advances as well as economic and social changes
have redefined the relationship between impairments and work. Advances in
medicine and technology have reduced the severity of some medical
conditions and have allowed individuals to live with greater independence
and function in work settings. Moreover, the nature of work has changed in
recent decades as the national economy has moved away from
manufacturing-based jobs to service- and knowledge-based employment. Given
the projected slowdown in the growth of the nation's labor force, it is
imperative that those who can work are supported in their efforts to do
so. Yet federal disability programs remain mired in concepts from the past
and are poorly positioned to provide meaningful and timely support for
workers with disabilities. Further, in light of a congressionally
established commission to study the appropriateness of veterans' benefits,
VA may be faced with the need to reform its eligibility criteria. Over the
last decade, GAO has built a body of work examining these issues and, more
recently, has called for the fundamental transformation and modernization
of federal disability programs, including SSA's Disability Insurance and
Supplemental Security Income programs and VA's disability programs. In
January 2003, GAO added modernizing federal disability programs to its
high-risk list.
How can federal disability programs, and their eligibility criteria, be
brought into line with the current state of science, medicine, technology,
and labor market conditions (for example, which jobs are based on
knowledge and skills rather than on strength and endurance)? How can such
programs better facilitate the participation of people with disabilities
in the workforce and society (for example, earlier intervention in
providing vocational rehabilitation or assistive technology devices such
as voice synthesizers or standing wheelchairs)?
What options could be considered for reforming VA's current disability
benefits structure for veterans (such as revisiting the definition of
service-connected benefits) that would ensure appropriate and adequate
benefits?
For society and government, developments in science and technology present
great opportunities to improve the quality of life, the performance of the
economy and the government, and the relationship of government to its
citizens. Advances in science and technology in the United States have
historically been fueled by combined public and private sector research
and development investments of about $284 billion annually. These
investments, along with the nation's strong research and development
infrastructure and intellectual property protections, have long ensured
the United States a leadership position in the development and
commercialization of scientific advances and have helped nurture
entrepreneurship and dissemination of information on new technologies. The
benefits of applying technological innovation, such as information
technology, in the United States, have not only resulted in many positive
outcomes but have also presented many new challenges, concerns, and
vulnerabilities.
The following challenges and illustrative questions provide a framework
for thinking about these issues in the future.
As the pace of innovation has quickened over the past 30 years,
competition in the global economy has also accelerated and other nations
are increasingly gaining in their ability to commercialize technological
advances, educate highly skilled technical workforces, and offer
world-class research opportunities to the best and brightest minds. These
strides in global scientific and technological innovation are beginning to
challenge the United States' preeminent position.
How can the federal government develop a more coordinated and targeted
approach to setting the U.S. research agenda that also ensures the best
return on investment? For example, can the current patchwork of federal
investments in scientific research provided by multiple agencies and
programs be integrated or better coordinated to more effectively and
efficiently identify and prioritize critical emerging technologies?
Are different kinds of federal incentives needed to encourage greater
private sector collaboration and nurture interdisciplinary research and
development approaches that can enhance U.S. competitiveness and
productivity? For example, does the current research tax credit actually
stimulate private sector research spending that would not have occurred
otherwise? Are the types of research being done by businesses that claim
most of the tax credit enhancing U.S. competitiveness and productivity?
Can existing program structures and funding processes maintain the
nation's position as a critical collaborator in jointly funded
international scientific research and ensure that the United States can
continue to attract global investments in new technologies? For example,
how can the U.S. nanotechnology research and development effort
effectively collaborate with global nanotechnology research and
development efforts without compromising the nation's intellectual
property or competitiveness?
Compounding these external challenges are domestic demographic and
educational changes that have reduced the size and quality of the U.S.
scientific workforce, such as the lagging performance of U.S. students in
science, math, and engineering; the large numbers of U.S. scientists
reaching retirement age; and reduced numbers of foreign-born scientists
and researchers coming to the United States because of heightened security
concerns and opportunities in other nations.
How can the United States better develop a world-class technical and
scientific domestic workforce that is not as dependent on large inflows of
international students and researchers? For example, are different
educational tools or targeted funding strategies needed to enhance U.S.
student achievements in math and the sciences?
Do current workforce retraining programs provide adequate incentives to
help the United States develop lifelong learning strategies and proactive
training programs that will meet the needs of a rapidly changing
technological environment? For example, should the federal government
consider providing training tax credits to employers or individuals so
that U.S. workers can obtain the training they need to stay current in a
knowledge-based economy?
Information technology advancements have contributed to substantial gains
in U.S. productivity, opened the workforce to people who were previously
barred because of physical disabilities or geographic distances, and have
begun to alter the way citizens interact with their government. However,
interconnectivity has also raised the potential for unauthorized access to
personal and confidential data and created new vulnerabilities to the
nation's critical operations and the infrastructures they support.
How can the federal government effectively utilize advanced technologies
to further enhance homeland security while also protecting the privacy of
U.S. citizens? For example, should the federal government encourage states
to use biometric technologies that could help ensure that drivers licenses
are issued only to authorized and authenticated individuals?
What cybersecurity technologies can be applied to protect critical
infrastructures from attack given current threat assessments and what
implementation challenges, such as effective information sharing among key
public and private stakeholders, will have to be addressed?
Similarly, despite many successes in the exploration of space, the loss of
life, unsuccessful missions, and unforeseen cost overruns have recently
increased the level of concern over the benefits of such exploration,
particularly with regard to human space flight activities. Since its
inception, the National Aeronautics and Space Administration (NASA) has
undertaken programs that have greatly advanced scientific and
technological knowledge. However, a painful symbol of the difficult
environment in which NASA must perform its mission, as well as the risks
associated with human space exploration, is the recent loss of Shuttle
Columbia and its crew. The complexities NASA faces in returning the
remaining three shuttles to flight so that construction can resume on the
International Space Station and the debate over the potential cost and the
federal government's role in implementing the administration's vision for
space exploration are emblematic of the challenges the nation will need to
resolve in the years ahead.
What objectives are both appropriate and affordable for the U.S. space
program? For example, can all existing programs continue to be effectively
implemented at current resource levels and without substantial involvement
by the private sector?
The nation's economic vitality and the quality of life of its citizens
depend significantly on the soundness, security, and availability of its
physical infrastructure. The nation's transportation system presents
particularly complex policy challenges, because it encompasses many
modes-air, water, highway, transit, and rail-on systems owned, funded, and
operated by both the public and private sectors. Increasing passenger and
freight travel has led to growing congestion, and policymakers face the
challenge of maintaining the safety and condition of the transportation
system while preventing congestion from overwhelming it. Transportation
decisions are inextricably linked with economic, environmental, and energy
policy concerns, and coordination across levels of government and
different sectors is daunting and complex. New security imperatives in a
world after 9/11 present additional challenges for all modes of
transportation that must be addressed in a rapidly changing demographic
and technological landscape. Successfully addressing transportation needs
in the face of these complex, crosscutting challenges requires strategic
and intermodal approaches, effective tools and programs, and coordinated
solutions involving all levels of government and the private sector.
These requirements, in combination with the looming fiscal crisis faced by
all levels of government, challenge the nation to fundamentally reexamine
existing government transportation programs and commitments, to ask
whether existing program constructs and financing mechanisms are relevant
to the challenges of the 21st century, and to make tough choices in
setting priorities and linking resources to results.
The following challenges and illustrative questions provide a framework
for thinking about these issues in the future.
The transportation grant programs funded by the Highway Trust
Fund-including the nation's highway and transit programs-have evolved
slowly since the Trust Fund was created in 1956. While the program was
created for the purpose of constructing the interstate highway system, and
the interstate is complete, the basic construct of the program, in terms
of its financing and delivery mechanisms, has not changed. In addition,
this and other federal transportation programs do not have the mechanisms
to link funding levels with the accomplishment of specific
performance-related goals and outcomes, such as improvements in mobility
and security. Most highway grant funds are apportioned by formula, without
regard to the needs or capacity of recipients. Because many state and
local governments select most projects receiving this funding, there is
little assurance that the projects selected and funded best meet the
nation's mobility and security needs.
How narrowly or broadly should the federal role and interest in the
nation's transportation system be defined? For example, should federal
programs and spending be more closely aligned with specific national
interests and purposes, such as interstate freight mobility or national
and homeland defense? Concurrently, should responsibilities and authority
for projects that support regional mobility and other needs be devolved to
state and local governments along with the revenue sources that support
them?
Should the federal transportation formula grant programs for state and
local governments be revised to better consider factors such as need,
performance, capacity, and level of effort by the states and localities?
Transportation programs and funding mechanisms are largely stovepiped by
modes of transportation. For example, while passenger and freight travel
occurs on all modes, federal funding and planning requirements focus
largely on highway, transit, and aviation passenger travel. This framework
makes it difficult for intermodal projects and other modal projects (e.g.,
freight or passenger rail) to be integrated into the transportation
system.
Can intermodal solutions to the needs of modes such as freight, air, and
passenger rail service be effectively carried out within the framework of
the existing trust funds and other transportation programs or is another
model needed? Do the existing tools and delivery mechanisms, such as
existing trust funds dedicated only to certain modes of transportation,
have the wherewithal to provide intermodal, efficient, cost-effective
solutions to mobility and security challenges?
While the trust funds were originally based on the concept of having users
pay for the transportation systems, this concept is beginning to fray.
Revenues to the Highway Trust Fund, which funds the majority of highway
and surface transportation safety spending and a large portion of transit
spending, are drawn from fuel taxes and user fees. The purchasing power of
these revenues is declining and future fuel tax revenues will be further
eroded by the increasing fuel efficiency of vehicles. Aviation Trust Fund
revenues are also declining, in part because of lower cost airline tickets
and other factors. The Federal Aviation Adminstration will face
significant challenges in supporting its four major accounts, which
include operations, facilities and equipment, airport improvement program,
and research, engineering, and development. Many experts question whether
the current financing scheme for transportation is ultimately sustainable.
As a result, decisionmakers are increasingly looking more to the general
fund to finance transportation programs, and state and local governments
are increasingly relying on property and sales taxes to fund
transportation improvements.
Should the federal government continue to provide public financing through
grant programs or develop alternative, targeted, market-driven incentives,
such as credit enhancements, to stimulate private financing, particularly
in areas such as freight, maritime, and aviation where a mix of private
and public beneficiaries exist?
The use of tolls, congestion pricing, and user fees holds promise for
helping to solve congestion and mobility problems and provide new revenues
for infrastructure improvements. However, the availability of competing
federal grant funds and federal restrictions on tolling, pricing, and fees
can work at cross purposes by dissuading state and local governments and
transportation service providers from adopting these tools.
What other mechanisms are available-e.g., tolls, pricing, demand
management, or user fees-that could be used to a greater degree than today
to help finance the nation's transportation infrastructure that are both
sustainable and would promote efficiency in the use of infrastructure and
better capture revenue from beneficiaries?
The federal government must address and adapt to a range of major trends
and challenges in the nation and the world-a long-term, structural fiscal
imbalance; a transformation from an industrially based to a
knowledge-based economy; revolutionary changes in technology that have
altered how we communicate and do business globally; greater reliance on
market forces and competition; and changing national security threats. To
respond to these trends and challenges, government must have the
institutional capacity to plan more strategically, identify and react more
expediently, and focus on achieving results.
There are signs of transformation as the Congress has established agencies
that can meet evolving challenges. For example, recognizing growing
security threats, the Congress created the Department of Homeland Security
to fundamentally transform how the government is structured to respond to
these threats and has recently restructured the intelligence community to
ensure the nation has the critical information it needs to defeat these
threats. Likewise, agencies including the Federal Bureau of Investigation
(FBI), GAO, National Aeronautics and Space Administration (NASA), the
Department of Defense (DOD), and the U.S. Postal Service are undertaking
major efforts to transform their operations. Furthermore, the government
is partnering with the private sector to devise a comprehensive set of key
national indicators to provide the nation with quality data that the
public, media, policymakers, and both government and nongovernment
institutions can use to assess the nation's progress in addressing key
challenges.
Yet, in many cases, the government is still trying to do business in ways
that are based on conditions, priorities, and approaches that existed
decades ago and are not well suited to addressing 21st century challenges.
For example, some agencies do not yet have all the necessary abilities,
more flexible legal authorities, and leadership and management
capabilities to transform their cultures and operations. Consequently, to
successfully navigate transformations across the government, it must
fundamentally reexamine not only its business processes, but also its
outmoded organizational structures, management approaches, and in some
cases, outdated missions.
The following challenges and illustrative questions provide a framework
for thinking about these issues in the future.
To be a leading democracy in the information age may very well mean
producing unique public sources of objective, independent, scientifically
grounded, and widely shared quality information so that we know where the
United States stands now and what the trends are on both an absolute and
relative bases-including comparisons with other nations. By ensuring that
the best facts are made more accessible and usable by the many different
members of our society, we increase the probability of well-framed
problems, good decisions, and effective solutions. The stakes are high,
including considerations regarding allocating scarce public resources,
strengthening the economy, creating jobs, stimulating future industries,
enhancing security, promoting safety, strengthening our competitive edge,
and sustaining the environment.
Is the federal government effectively informed by a key national indicator
system about the position and progress of the nation as a whole-both on an
absolute and relative bases compared to other nations-as a guide to
helping set agency and program goals and priorities?
Is the federal statistical system adapting effectively to the nation's
needs for information? Is it effective at all levels and sectors of
society to meet evolving information requirements? Are the large amounts
of data that it collects being effectively disseminated to the widest
possible audiences, with due consideration to privacy and confidentiality
issues?
Most major outcomes of federal activities are supported by multiple
programs and tools that, in turn, are often sponsored by many different
federal agencies. Although these individual programs address common or
similar performance goals, they result in an overly fragmented delivery
network and at times work at cross purposes. For example, federal food
safety programs are carried out by 12 agencies with differing enforcement
criteria and inspection practices. The fragmentation of federal programs
reflects a policymaking process that is overly stovepiped by agency and
program, with insufficient focus on how individual programs contribute to
overarching, crosscutting goals and missions. As a result, the capacity to
periodically reexamine the alignment and relevance of policy portfolios in
a changing society is limited. The Government Performance and Results Act
(GPRA) provided for a governmentwide performance plan to address these
issues, but this plan has not yet been developed by the executive branch.
Furthermore, the federal government lacks a governmentwide strategic plan
to provide a framework for addressing crosscutting goals.
How can the executive branch and the Congress have a more strategic,
crosscutting focus on policy and budget decisions to address goals that
cut across conventional agency and program boundaries? Can the
governmentwide performance plan required by GPRA be implemented to provide
the necessary crosscutting focus?
How can agencies partner or integrate their activities in new ways,
especially with each other, on crosscutting issues, share accountability
for crosscutting outcomes, and evaluate their individual and
organizational contributions to these outcomes? How can agencies more
strategically manage their portfolio of tools and adopt more innovative
methods to contribute to the achievement of national outcomes? For
example, how can the myriad federal food safety programs managed across
several federal agencies be consolidated to better promote safety and the
integrity of the nation's food supply?
Increasingly, the government relies on new networks and partnerships to
achieve critical results and develop public policy, often including
multiple federal agencies, domestic and international non- or
quasi-government organizations, for-profit and not-for-profit contractors,
and state and local governments. The federal government uses an array of
different tools and program designs to work in this environment, such as
direct service delivery, loans and loan guarantees, tax preferences,
insurance programs, grants, and regulations. Ranging from education to
homeland security, a complex network of governmental and nongovernmental
entities shape the actual outcomes achieved, whether it be through formal
partnerships in grant programs or through independent actions of each
acting locally to address common problems. Notwithstanding the increased
linkages in our system, each level of government often makes decisions on
these interrelated programs independently, with little interaction or
intergovernmental dialogue. While the magnitude of the nation's challenges
calls for a concerted effort across sectors, there are insufficient
opportunities for leaders of those sectors to come together to reach
consensus about the kinds of mutual commitments that are necessary.
How can greater coordination and dialogue be achieved across all levels of
government to ensure a concerted effort by the public sector as a whole in
addressing key national challenges and problems? For example, what
mechanisms might usefully bring together leaders across governments to
address joint problems, perhaps through establishing commissions or other
vehicles for promoting dialogue?
More specifically, government has also begun to fundamentally change who
does its business-recognizing that it could better partner with the
private sector in new, more cost-effective ways. Agencies are assessing
what functions and transactions the private sector could perform and
asking their employees to compete with private entities for this business
to improve quality and reduce costs. But the government does not yet know
how this trend is affecting its workforce and its ability to refocus more
on strategic needs or the extent to which it has delivered real cost
savings. Collecting and evaluating data to ensure such transformations are
implemented effectively and deliver the desired results will be critical.
Has the government's approach to competitive sourcing-using the private
sector to do more of the government's business-proven successful? Should
it be modified to improve results and reduce costs in a timely, fair, and
equitable manner? For example, should federal agencies be more consistent
in determining what work is inherently governmental and, therefore should
be performed by federal employees? For work that is not inherently
governmental, should agencies be required to develop plans for competing
this work in order to achieve measurable efficiencies and performance
improvements?
Performance, mission, cost, schedule, and other risks are inherent in
major federal programs and investments such as weapons systems, homeland
security, federal buildings and other infrastructure, transportation
subsidies, environmental clean-up, and information technology systems.
Despite these risks, federal agencies often lack comprehensive risk
management strategies that are well integrated with program, budget, and
investment decisions. As one example among many, homeland security
investments are designed to reduce risks to the nation's communities and
assets, but the availability of a common set of analytical tools and
procedures on how agency management should use them can be improved to
better align the allocation of homeland security resources with
risk-related measures, such as relative risk and risk reduction per dollar
invested. Governmentwide guidance generally does not fully integrate risk
management into all aspects of decision-making such as policy making,
program planning, implementation, and monitoring. More broadly, the
Congress and the executive branch face a series of difficult and
contentious trade-offs as they re-examine, re-prioritize, and restructure
the base of federal programs in response to current budget demands and
long-term fiscal challenges and the changing risk profiles faced by
programs and agencies change. As was discussed in section 1, much of the
base of the federal government was put in place in response to the wants,
needs, and affordabilities of an earlier era. For example, some risks to
farmers and to the aging population as discussed elsewhere in this section
have changed over the decades, as have the tools for evaluating and
communicating risk about costs and other outcomes. A more thorough and
disciplined approach to identifying and managing risk across the federal
government could help in structuring and informing the daunting decisions
that need to be made.
How could the federal government consistently apply a comprehensive risk
management framework to help guide federal programs and apply resources
efficiently and to best effect? For example, can the Office of Management
and Budget and the Department of Homeland Security develop guidance for
Homeland Security to better align federal investments in preparedness with
the potential risk and threat facing the nation's assets and communities?
To what extent should federal agencies, such as DOD or NASA, consider and
report on the uncertainty of cost estimates for major procurements in
budget requests? To what extent can changing risks be monitored across
federal programs and how can these changes be used to review the base of
ongoing federal commitments?
A range of individual agencies need to successfully complete their
specific transformation initiatives. For example, the U.S. Postal Service
is under increasing financial pressure as the Internet, electronic bill
payment, and growing competition from private delivery companies are
changing the nation's communication and delivery sectors and adversely
affecting mail volume. Yet the Postal Service's ability to address these
challenges is hindered by an outmoded business model that relies on mail
volume growth to cover rising costs. The service is working to cut costs,
improve productivity, reduce its workforce, and make other needed changes,
but it will need attention and support as it adapts a new and more
competitive business model.
How should agencies, including the U.S. Postal Service, transform their
services, infrastructure, legal framework, operations, and workforce to
keep pace with rapid changes in technology as well as in the
communications, labor, and other sectors of the economy?
What are the specific leadership models that can be used to improve agency
management and address transformation challenges? For example, should we
create chief operating officer or chief management officer positions with
term appointments within selected agencies to elevate, integrate, and
institutionalize responsibility and authority for business management and
transformation efforts?
The government has not transformed, in many cases, how it motivates and
compensates its employees to achieve maximum results within available
resources and existing authorities. Even though people are critical to any
agency's successful transformation, define its culture, develop its
knowledge, and are its most important asset, a number of agencies still
try to manage this asset with a "one-size-fits-all" approach. For example,
employees are compensated through an outmoded system that (1) rewards
length of service rather than individual performance and contributions,
(2) automatically provides across-the-board annual pay increases, even to
poor performers, and (3) compensates employees living in various
localities without adequately considering the local labor market rates for
these employees. To address these problems and provide the services the
public expects, the federal civil service system must be reformed
governmentwide, and this reform must be guided by a set of consistent
principles, criteria, and practices.
How should the federal government update its compensation systems to be
more market-based and performance-oriented? For example, should poor
performers be guaranteed pay increases? How can these systems ensure pay
comparability and provide reasonable annual pay adjustments while also
competing for critical occupations or in higher cost locations? In
addition, how can the government make an increasing percentage of federal
compensation "at risk" or dependent on achieving individual and
organizational results by, for example, providing more compensation as
one-time bonuses rather than as permanent salary increases?
More than 30 federal agencies control about $328 billion in real property
assets worldwide, and maintain a "brick and mortar" buildings and office
presence in 11 regions across the nation. But this organization and
infrastructure reflects a business model and the technological and
transportation environment of the 1950s. Many of these assets are no
longer needed; others are not effectively aligned with, or responsive to,
agencies' changing missions; and many others are in an alarming state of
deterioration, potentially costing taxpayers tens of billions of dollars
to restore and repair. The Congress and several agencies have recognized
and begun to address this issue, but this financial liability still looms.
In a modern society with advanced telecommunications and electronic
information capabilities, does the government still need 11 regions? Which
agencies still need a physical presence in all major cities?
What opportunities exist to more strategically manage the federal
government's real property assets, such as disposing of excess federal
facilities or better leveraging surplus in the private sector to make the
federal portfolio more relevant to current missions and less costly?
American taxpayers paid about $1.9 trillion in combined federal taxes,
including income, payroll, and excise taxes, in fiscal year 2004. These
taxes, along with over $400 billion in deficit borrowing, funded the
federal government. The tax revenue raised represented about 16 percent of
gross domestic product--at the low end of the range of federal taxes as a
share of GDP for the last 40 years.
Beyond funding government, any tax system, including the current one, has
profound effects on the economy as a whole and on individual taxpayers,
both for today and tomorrow. Taxes affect decisionmaking throughout the
economy, including decisions concerning how much and where to work, save,
and invest. These decisions, in turn, affect economic growth and future
income, and thus future tax revenues.
Concerns about the tax system's effect on future economic performance are
one driver of the current debate about the future of that system. The U.S.
position in the worldwide economy has fundamentally changed and the
structure and composition of our economy has shifted. U.S. workers and
firms must now succeed in a world of fast-paced technological change and
constantly evolving global competition. Also, as noted in section 1, the
imbalance between federal revenues and expenditures, if allowed to persist
long term, will affect economic growth. Addressing the imbalance will
require greater scrutiny of both tax revenues and expenditures.
The following challenges and illustrative questions provide a framework
for thinking about these issues in the future.
The success of our tax system hinges very much on the public's perception
of its fairness and understandability. Fairness is ultimately a matter of
personal judgment about issues such as how progressive tax rates should be
and what constitutes ability to pay. Fairness also depends on the extent
to which taxpayers believe their friends, neighbors, and business
competitors are complying with the tax laws and actually paying their
taxes. Compliance is influenced by the effectiveness of the Internal
Revenue Service's (IRS) enforcement efforts but also by Americans'
attitudes about the tax system and government. Disturbing recent polls
indicate that about 1 in 5 respondents say it is acceptable to cheat on
their taxes.
Given our current tax system, what tax rate structure is most likely to
raise sufficient revenue to fund government and satisfy the public's
perception of reasonableness and fairness?
How can we best strengthen enforcement of tax laws to give taxpayers
confidence that their friends, neighbors, and business competitors are
paying their fair share? For example, can we increase compliance with the
tax laws and reduce the need for IRS enforcement activities through
greater use of withholding and information reporting? Would improved
compliance data allow IRS to better allocate its enforcement resources?
Could increased penalties and disclosure reduce the use of abusive tax
shelters?
Over the years the federal tax system and especially the federal income
tax has become more complex, less transparent, and subject to frequent
revision. Some complexity is understandable in an economy as diverse and
sophisticated as ours. However, tax system complexity and frequent
revisions make it more difficult and costly for taxpayers who want to
comply to do so and for IRS to explain and enforce the tax laws. Many
argue that complexity creates opportunities for tax evasion, through
vehicles such as tax shelters, which in turn motivate further changes in
tax laws and regulations and perhaps more complexity. A lack of
transparency also risks creating disrespect for the tax system and the
government.
What opportunities exist to streamline and simplify the current tax system
and thereby make it more transparent to taxpayers, reduce opportunities
for tax evasion, and decrease the compliance burden on taxpayers? For
example, can the Alternative Minimum Tax be eliminated? Can the Earned
Income Tax Credit eligibility rules be simplified? Could the measurement
of income be simplified?
The growing complexity of the tax system stems in part from the extensive
use of tax incentives to promote social and economic objectives. The tax
system includes hundreds of billions of dollars of such incentives-the
same magnitude as total discretionary spending. For instance, the Low
Income Housing Tax Credit is the federal government's largest program for
creating new affordable housing units and the Earned Income Credit is its
largest cash assistance program for low-income families. However, tax
incentives do not compete in the annual budget process and effectively are
"fully funded" before any discretionary spending is considered. Further,
relatively little is known about the effectiveness of tax incentives in
achieving the objectives intended by the Congress. As far back as 1994,
GAO concluded these incentives deserved more scrutiny.
Which tax incentives need to be reconsidered because they fail to achieve
the objectives intended by the Congress, their costs outweigh their
benefits, they duplicate other programs, or other more cost-effective
means exist for achieving their objectives? For example, could
health-related tax incentives, including the treatment of
employer-provided health insurance, which has been estimated to be over
$180 billion in both income and certain payroll taxes, be better used to
promote broader health care access, more efficient health care delivery,
and more effectively control costs?
Rather than reconsider specific types of tax incentives, is it time to
consider another 1986-style tax reform (broadening and simplifying the tax
base by eliminating many tax preferences thus allowing tax rates to be
minimized)?
Incentives for savings are a particular concern. Private sector savings
are near historical lows and government savings, due to federal budget
deficits, are negative. Low rates of domestic saving force the nation to
rely on foreign lenders to finance new investment. The tax code includes
many incentives intended to increase savings to finance retirement, health
care, higher education, and so on. These savings incentives, which exempt
some income from tax, have moved the current tax system in the direction
of a consumption base. These incentives, however, are complex and,
although not completely settled, researchers have raised questions about
how much, if any, net new savings they stimulate.
How effective are existing tax incentives at increasing savings for their
targeted purposes? How effective are they at increasing overall national
savings? Could the myriad savings incentives (IRAs, health savings
accounts, several education savings incentives, etc.) that complicate the
current tax system be consolidated and simplified while promoting
increased savings?
The debate about the future tax system is partly about whether the goals
for the nation's tax system can be best achieved using the current
structure, which is heavily dependent on income taxes, or a fundamentally
reformed structure, which might include more dependence on consumption
taxes, a flatter rate schedule, and fewer tax incentives. Increasing
globalization, which makes it easier to move assets, income, and jobs
across international borders, is another motivator for the debate. As
policymakers grapple with such issues, they will have to balance multiple
objectives such as economic growth, equity, simplicity, transparency, and
administrability while raising the needed revenue. The appropriate balance
among these objectives may also be affected by (1) how, if at all, to take
into account that, including both the employer and the employee share, an
estimated two-thirds of taxpayers would pay more in 2004 in payroll
taxes-which are levied to fund social security and Medicare benefits-than
they pay in income taxes and (2) whether and how to tax wealth.
Is the federal income-based tax system sustainable and administrable in a
global economy? How should we tax the income of U.S. multinational
corporations that is earned outside of the U.S.?
Should the basis of the existing system or any new reforms be changed from
an income to a consumption base (today we actually have a hybrid system)?
Would such a change help respond to challenges posed by demographic,
economic, and technological changes? How would such a change affect
savings and work incentives?
Regardless of whether a consumption tax is created, the current income tax
is revised, or other fundamental tax system changes are made, how should
the burden be allocated among taxpayers? Who should pay more and who
should pay less? How can burden be distributed according to policymakers'
decisions while minimizing complexity and preserving the desired benefits
of any fundamental tax policy changes?
How would the interrelationships between the federal and state and local
tax systems and with the payroll tax system be taken into account when
changing the federal tax system? How should wealth be taxed, if at all, in
either an income or consumption based tax system and in any conversion to
a consumption tax? How should transfers of wealth be taxed, if at all?
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