Social Security Reform: Greater Transparency Needed about
Potential General Revenue Financing (22-MAR-07, GAO-07-213).
Absent reform, Social Security's financing gap will grow until
currently scheduled benefits can no longer be paid in full.
Recent reform proposals often include general revenue (GR)--a
major change that can have significant implications for the
budget as a whole. This report addresses these issues: (1) What
information is available about GR in recent proposal scorings by
Social Security's Office of the Chief Actuary (OCACT)? (2) What
common mechanisms, especially GR mechanisms, are used to increase
program revenue? (3) What are the implications of GR for the
trust fund and the federal budget? We have prepared this report
under the Comptroller General's statutory authority to conduct
evaluations on his own initiative as part of a continued effort
to assist Congress in addressing the challenges facing Social
Security.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-213
ACCNO: A67125
TITLE: Social Security Reform: Greater Transparency Needed about
Potential General Revenue Financing
DATE: 03/22/2007
SUBJECT: Budgets
Federal social security programs
Financial analysis
Financial management
Personal income taxes
Program evaluation
Program management
Social security benefits
Strategic planning
Trust funds
Trust fund sustainable solvency
Social Security Trust Fund
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GAO-07-213
* [1]Results in Brief
* [2]Background
* [3]Social Security Is One Part of the Long-Term Fiscal Challeng
* [4]Social Security's Trust Fund and the Federal Budget
* [5]Our Framework for Evaluating Reform Proposals
* [6]Social Security Financing Has Evolved, but Payroll Taxes Rem
* [7]OCACT Scoring Memos Are Primary Source of Information on Ref
* [8]Recent Proposals Differ by Revenue Mechanism and Reform Appr
* [9]Additional Revenue Improves Trust Fund Solvency but Effects
* [10]Conclusions
* [11]Recommendation for Executive Action
* [12]Agency Comments and Our Evaluation
* [13]Appendix I: Scope and Methodology
* [14]Appendix II: Comments from the Social Security Administratio
* [15]Glossary of Terms
* [16]Actuarial balance
* [17]Actuarial deficit
* [18]Assumptions
* [19]Board of Trustees
* [20]Constant dollars
* [21]Cost rate
* [22]Covered earnings
* [23]Current dollar
* [24]Debt held by government accounts
* [25]Debt held by the public
* [26]Exhaustion Date
* [27]General fund of the Treasury
* [28]General revenue
* [29]Income rate
* [30]Inflation
* [31]Interest
* [32]Interest rate
* [33]Long range
* [34]Maximum taxable limit
* [35]Nominal dollar
* [36]Outlay
* [37]Pay-as-you-go financing
* [38]Payroll taxes
* [39]Present value
* [40]Solvency
* [41]Summarized balance
* [42]Summarized cost rate
* [43]Summarized income rate
* [44]Sustainable solvency
* [45]Taxable earnings
* [46]Taxable payroll
* [47]Taxable wages
* [48]Trust fund
* [49]Trust fund ratio
* [50]Unified budget
* [51]Order by Mail or Phone
Report to Congressional Committees
United States Government Accountability Office
GAO
March 2007
SOCIAL SECURITY REFORM
Greater Transparency Needed about Potential General Revenue Financing
GAO-07-213
Contents
Letter 1
Results in Brief 4
Background 9
OCACT Scoring Memos Are Primary Source of Information on Reform Proposals,
but Detailed Tables Are Difficult to Use for Understanding General Revenue
and Federal Budget Effects 17
Recent Proposals Differ by Revenue Mechanism and Reform Approach Used, but
Most Reallocate General Revenue and Aim to Increase Investment Returns 20
Additional Revenue Improves Trust Fund Solvency but Effects on the Federal
Budget May Differ Greatly 27
Conclusions 33
Recommendation for Executive Action 35
Agency Comments and Our Evaluation 35
Appendix I Scope and Methodology 37
Appendix II Comments from the Social Security Administration 38
Glossary of Terms 40
Tables
Table 1: Revenue Mechanisms in Reform Proposals by New and Reallocated
Revenue 25
Table 2: Revenue Mechanisms in Reform Proposals by Reform Approach 26
Table 3: Size of Reallocated General Revenue in Proposals Reviewed by
Mechanism Used 31
Figures
Figure 1: New Revenue versus Reallocated General Revenue in Social
Security Reform 8
Figure 2: Composition of Spending as a Share of GDP Assuming Discretionary
Spending Grows with the Economy After 2007 and All Expiring Tax Cuts Are
Extended 11
Figure 3: Social Security Flows Today 13
Abbreviations
CBO Congressional Budget Office
CES Committee on Economic Security
CPI Consumer Price Index
GR general revenue
HI Hospital Insurance
IA individual account
OASDI Old-Age, Survivors, and Disability Insurance
OCACT Office of the Chief Actuary
SSA Social Security Administration
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.
United States Government Accountability Office
Washington, DC 20548
March 22, 2007
The Honorable Max Baucus
Chairman
Committee on Finance
United States Senate
The Honorable Herb Kohl
Chairman
The Honorable Gordon Smith
Ranking Member
Special Committee on Aging
United States Senate
The Honorable Charles B. Rangel
Chairman
The Honorable Jim McCrery
Ranking Member
Committee on Ways and Means
House of Representatives
The Honorable Michael R. McNulty
Chairman
The Honorable Sam Johnson
Ranking Member
Subcommittee on Social Security
Committee on Ways and Means
House of Representatives
Absent substantive reform, the gap between expected Social Security cash
revenues and benefits that is expected to begin in 2017 will grow until
the Social Security combined Old-Age Survivors and Disability Insurance
(OASDI) trust fund^1 is exhausted and benefits at currently scheduled
levels can no longer be paid in full. Under the 2006 intermediate
Trustees' estimates, Social Security's long-term financial shortfall is
estimated at 2.02 percent of total taxable payroll,^2 and its trust fund
is projected to reach exhaustion in 2040.^3 Since its inception in 1935,
Social Security has been financed primarily by the payroll tax
contributions of employers and employees. However, recent reform proposals
have often used--and in some cases relied primarily on--general revenue
financing^4 to help address the program's financial shortfall. Many of the
reform proposals estimated (scored) by the Office of the Chief Actuary
(OCACT) at the Social Security Administration (SSA) as achieving
"sustainable solvency"^5 for the trust fund would give Social Security
significant amounts of general revenue as part of a package of
modifications.
^1In this report, the combined OASDI Trust Funds are referred to as the
Social Security trust fund. For more information on federal trust funds
and other funds dedicated to specific programs, see GAO's report Federal
Trust and Other Earmarked Funds: Answers to Frequently Asked Questions,
[52]GAO-01-199SP (Washington, D.C.: January 2001).
Such use of general revenue for Social Security would represent a major
shift for this important and popular program. Since enactment in 1935,
Social Security payroll taxes have been increased and benefits expanded,
but the program's financing framework has remained largely the same. The
use of general revenue was proposed both before the actual creation of
Social Security and during short-term financing crises in the 1970s and
1980s as an alternative to payroll tax increases, but Congress for the
most part has rejected general revenue financing for Social Security. Use
of general revenue would change the "self-supporting" nature of the
program and has thus been controversial. Some have feared that such a
shift would facilitate benefit expansion by undermining the fiscal
discipline that requires limiting benefit outlays to trust fund balances;
others have feared that use of general revenue would lead ultimately to a
change from a universal program to a reduced, means-tested benefit. Since
1983, small amounts of general revenue from taxation of the Social
Security benefits of upper-income retirees have been dedicated to the
program.^6
2For explanation of technical terms, see the glossary at the end of this
report.
^3Social Security's financial condition has traditionally been measured
separately from that of the rest of the budget by comparing the program's
expected revenues with expected costs over a 75-year timeframe. Estimates
of the solvency of Social Security's trust funds in this framework have
been prepared by the Office of the Chief Actuary (OCACT) at the Social
Security Administration (SSA) each year since 1941.
^4As used in this report, general revenue refers to any revenue not
derived from payroll tax contributions. (See text box.)
^5When OCACT describes a proposal as modifying the program so that there
is a positive trust fund ratio throughout the 75-year projection period
and these ratios are stable or rising at the end of the period, this meets
the definition of "sustainable solvency" in the 2006 Trustees' Report.
In the coming years, as the baby boom generation retires, the nation will
face a daunting and unprecedented long-term fiscal challenge. GAO's
long-term budget simulations show that current fiscal policy is
unsustainable and, absent changes, will lead to an escalating spiral of
federal deficits and debt.^7 Social Security is not the major driver of
the long-term fiscal challenge--the cost of government-financed health
care is--but Social Security reform has the potential to affect not only
the financial condition of the program's trust fund but also the financial
condition of the Nation. As the reform debate resumes, it will be
important to make transparent the implications of general revenue use not
only for the trust fund but also for the federal budget as a whole.
This report seeks to answer the following questions: (1) What information
is available about general revenue use in recent Social Security proposal
scoring memos by OCACT and how can available information about general
revenue use best be presented in order to facilitate comparison of reform
proposals? (2) In recent Social Security reform proposals, what common
mechanisms, especially general revenue mechanisms, are used to increase
revenue to the program? (3) What are the implications of general revenue
use for the trust fund and the federal budget?
To answer these questions, we reviewed relevant literature on Social
Security and performed an in-depth analysis of 17 OCACT proposal scoring
memos done from 2001 through 2006. These included all proposals scored as
achieving long-range solvency. Where a proposal was scored in multiple
years, we used the most recent scoring. We also interviewed selected
federal budget experts representing a range of views on reform approaches
and met with officials from OCACT and Congressional Budget Office (CBO)
involved in proposal scorings. (See app. I for more details on our scope
and methodology.)
^6The Social Security Amendments of 1983 require beneficiaries with income
(defined as adjusted gross income plus tax-exempt bond interest plus
one-half of Social Security benefits) of more than $25,000 if single, and
$32,000 if married filing jointly, to include up to 50 percent of their
benefits in their taxable income, beginning in 1984. Revenues from this
provision are credited to the OASDI Trust Funds. The Omnibus Budget
Reconciliation Act of 1993 required beneficiaries with incomes of more
than $34,000 if single, and $44,000 if married filing jointly, to include
up to 85 percent of their benefits in their taxable income, beginning in
1994. Revenues attributable to taxation of over 50 percent of Social
Security benefits are credited to the Medicare Hospital Insurance (HI)
trust fund. These levels are not adjusted for inflation or wage growth, so
the percentage of beneficiaries paying tax on Social Security benefits is
expected to rise in the future.
^7GAO's long-term simulations assume that scheduled benefits for Social
Security and Medicare's HI Trust Fund are paid through borrowing, that is,
by using reallocated general revenue after program trust funds reach
exhaustion. (See textbox, "New Versus Reallocated General Revenue in
Social Security.") For more information on GAO's simulations, see
http://www.gao.gov/special.pubs/longterm/ .
We have prepared this report under the Comptroller General's authority to
conduct evaluations on his own initiative, and it is intended to assist
Congress in its deliberations on Social Security and retirement issues.
The report is addressed to interested congressional committees.
We performed our work between May 2005 and December 2006 in accordance
with generally accepted government auditing standards. We requested
comments on a draft of this report from the Commissioner of Social
Security and incorporated those comments as appropriate. (See "Agency
Comments and Our Evaluation" and app. II.)
Results in Brief
Scoring memos prepared by OCACT usually serve as the basis for discussion
of the financing changes--including any use of general revenue--contained
in reform proposals.^8 These memos focus on the impact of a proposal on
the combined OASDI trust fund. Understanding the use of any general
revenue in a given proposal, the proposal's impact on the federal budget,
and how different proposals compare on these dimensions presents
challenges. Although OCACT scorings have evolved in recent years to
include estimates of a proposal's use of general revenue and the
proposal's year-by-year impact on the federal budget, detailed information
on these effects is available primarily in the complex technical tables at
the end of the scoring memo.
In OCACT's recent scorings, five different mechanisms were used to provide
general revenue to maintain the current Social Security program^9 or to a
restructured Social Security system that included individual accounts
(IA). These mechanisms can be characterized as providing for either
unlimited or limited amounts of general revenue financing. The first
mechanism provides for unlimited amounts of general revenue to be
transferred to the trust fund as needed to maintain solvency (e.g., a 100
percent trust fund ratio). The other four mechanisms provide limited or
defined amounts of general revenue through (1) general revenue transfers
to the trust fund specified by formula or amount; (2) refundable tax
credits, used to fund IAs; (3) dedication of estate tax revenue to the
trust fund; and (4) redirection of Social Security benefit taxation
revenue from Medicare's Hospital Insurance trust fund to the Social
Security trust fund. Fourteen of the 17 proposals we reviewed used
reallocated general revenue, most often to finance program restructuring,
and 9 proposals used the mechanism of unlimited transfers as needed to
achieve a specified trust fund ratio, which guaranteed "sustainable
solvency" for the trust fund under OCACT's definition. (See text box for
definition of "reallocated general revenue.") Three proposals did not use
general revenue. Of the 17 proposals, 7 increased payroll tax revenues.
^8While OCACT has primary responsibility for scoring reform proposals, CBO
has more recently begun to publish long-term scorings of some proposals.
OCACT and CBO scorings have both substantive and presentational
differences including: different assumptions, baselines, and time periods
covered. One particularly important difference is the use of different
economic assumptions, which results in CBO having more optimistic
estimates of current-law program finances.
^9That is, maintain a modified pay-as-you-go social insurance program of
defined benefits paid for primarily by payroll tax revenue.
New versus Reallocated General Revenue in Social Security
In this report, "general revenue" in Social Security is defined as any
revenue that does not derive from payroll tax contributions. In this
framework, interest on trust fund assets is considered as deriving from
payroll tax contributions.^a All other revenue to Social Security,
including revenue from taxation of certain Social Security benefits, is
classified as general revenue.^b This framework accords with the federal
budget accounting perspective of our analysis. This conforms to the
discussion of general revenue use in Social Security found on SSA's
history web site.^c
Although any additional payroll tax revenue would be new to the federal
budget, general revenue may be either new to the federal budget as a whole
or reallocated from other federal priorities.
o New general revenue is revenue that derives from a new source,
that is, from a new tax or increase to an existing tax. For
example, in 1983, the Social Security benefits of upper income
retirees were made subject to income taxation, and the revenue
from this new tax was dedicated to the Social Security trust
funds. From a federal budget perspective, this change represented
new general revenue at that time. This change has remained in
place and constitutes a permanent form of general revenue in
today's Social Security program.
o Reallocated general revenue does not come from a new source.
Rather, it is reallocated from existing revenue to the Treasury.
Following World War II, reallocated general revenue was used to
fund Social Security benefits for military personnel and also a
small flat benefit for individuals who were at least age 72 in
1968 but not entitled to Social Security through their work
history.
aGAO's definition of general revenue assumes that the interest rate used
to credit the trust funds reflects the rates for long-term federal
marketable government securities, as is the case under current law. The
Department of Treasury determines the interest rate earned on trust fund
balances for Social Security using a statutory formula that sets the
interest rate equal, at the time of issue, to the average market yield on
outstanding marketable government securities not due or redeemable for at
least 4 years.
bFrom a tax perspective, accounting treatments are more complex. For
example, the earned income tax credit, a refundable tax credit available
to certain lower income earners, was intended to help offset Social
Security payroll taxes for those eligible. See GAO, Tax Administration:
Earned Income Credit--Data on Noncompliance and Illegal Alien Recipients,
GAO/GGD-95-27 (Washington, D.C.: Oct. 25, 1994).
cSee http://www.ssa.gov/history/genrev.html.
All proposals we reviewed were scored by OCACT as able to pay benefits as
scheduled in that proposal over the 75-year period, but the effects on the
federal budget shown in OCACT's technical tables varied widely. For
example, the effect on debt held by the public ranged from an improvement
of $45 trillion to a worsening of $41 trillion over the 75-year projection
period.^10 Unlimited transfers of reallocated general revenue as needed to
achieve trust fund solvency--by definition--pose the greatest potential
risk to the budget especially when combined with benefit guarantees. In
the proposals we reviewed, amounts of general revenue transferred under
this mechanism ranged up to about twice total program financial shortfall.
Limited transfers, however, were also quite large, in some cases somewhat
more than twice program shortfall.
From the trust fund perspective, any type of increased revenue the trust
fund receives --new general revenue, reallocated general revenue, or
increased payroll tax revenue--will improve the actuarial balance and
increase the trust fund's capacity to pay benefits. From the budget
perspective, however, new revenue from any source would improve the
long-term fiscal imbalance while reallocated general revenue would do
nothing to address it, all other things equal. (See fig. 1.) New revenue
would have tangible consequences for taxpayers, e.g., less take-home pay,
while reallocated general revenue is less likely to be clearly observable.
Reallocated general revenue, however, is not free. Regardless of how
general revenue is provided to Social Security, it must be paid for at
some point. The question is when, and by whom.
^10In constant 2005 dollars under OCACT's expected yield assumption.
Estimates are based on OCACT scorings and represent change in debt levels
compared to a baseline in which scheduled benefits are paid in full and no
other changes are made. Estimates were not available for one of the plans
reviewed.
Figure 1: New Revenue versus Reallocated General Revenue in Social
Security Reform
Regardless of their views on reform, most budget experts we spoke with
believed greater transparency was needed concerning the use of general
revenue in reform proposals. In view of the long-term fiscal challenge
facing the nation, some experts were especially concerned about proposals'
use of reallocated general revenue for Social Security. As one of these
experts emphasized, the public needs to understand that reallocated
general revenue for Social Security is not "free." Reallocated general
revenue would need to be paid for now or later through lower spending,
higher taxes, and/or more debt.^11 Other budget experts viewed the use of
reallocated general revenue as making possible a transition to a
restructured Social Security system that would include IAs. These experts
viewed the use of reallocated general revenue as a transition cost that
would eventually be repaid to the budget as a whole.^12 Most experts we
spoke with were concerned about the mechanism of providing for unlimited
transfers of reallocated general revenue as needed to assure trust fund
solvency. They noted that since this mechanism in effect removes the
possibility of trust fund exhaustion, it disables the trust fund's
capacity to signal policymakers and the public of a need to take action.
^11See GAO, Options for Social Security Reform, [54]GAO-05-649R
(Washington, D.C.: May 6, 2005).
^12Advocates for these types of changes state that over time, the savings
to the government (compared to paying currently scheduled benefits in
full) will come to exceed the cost of funding individual accounts.
In coming decades, our nation will face a serious long-term fiscal
challenge that will put America's fiscal future at risk. Substantive
reform of Social Security will involve hard choices. OCACT's valuable
information and complex analyses could make an even greater contribution
to the reform debate if they were more readily accessible to nonexpert
users. To improve understanding of proposed changes to Social Security,
GAO is recommending that the Commissioner of SSA direct the Office of the
Chief Actuary to include a summary presentation of its analysis in future
scoring memoranda that will enable policymakers and the general public to
quickly and easily compare Social Security reform proposals especially
with respect to proposed use of general revenue and implications for the
federal budget as a whole. This type of presentational change would not
require any additional analysis but could greatly facilitate comparison of
proposals to one another.
SSA did not explicitly agree or disagree with our recommendation in its
comments. In response to the recommendation, SSA noted that recent OCACT
memos had added an additional table ("table d") that, SSA believes,
already provides key information on general revenue use in proposals. SSA
also expressed the view that a summary table showing the effects on the
actuarial deficit of each proposal provision would be helpful. As our
report had noted, this table has been included in some memoranda at the
request of the proposal's sponsor.
While we agree with SSA that both the technical and summary table it
describes add value, we remain of the view that OCACT needs to develop a
new table that can clearly and quickly communicate both trust fund effects
and federal budget implications of a proposal. Our report acknowledged the
value and completeness of OCACT's analyses including those presented in
"table d." The message of our report was not that OCACT needs to do
additional analytic work. Our message was rather that OCACT's existing
analyses need to be summarized and highlighted so that a proposal's
implications for both the trust fund and the federal budget as a whole are
immediately clear.
Background
When Social Security was enacted in 1935, the nation was in the midst of
the Great Depression. About half of the elderly depended on others for
their livelihood, and roughly one-sixth received public charity. Many had
lost their savings. Social Security was created to help ensure that in the
future the elderly would have adequate incomes in retirement and would not
have to depend on welfare. Instead, the new program would provide benefits
based on the payroll tax contributions of workers and their employers.
Today Social Security is much more than a retirement program. In 1939
Social Security coverage was extended to the dependents of retired and
deceased workers and in 1956 to the disabled. Over one-third of
beneficiaries receive benefits for reasons other than old age.^13
Social Security Is One Part of the Long-Term Fiscal Challenge
Our work on Social Security reform has emphasized the need for change not
only because future program revenues are expected to fall short of what is
needed to pay currently scheduled benefits in full but because Social
Security, Medicare, and Medicaid taken together will consume an increasing
share of the budget and the economy. To move into the future with no
changes in federal health and retirement programs is to envision a very
different role for the federal government. Little room would be left for
other federal spending priorities such as national defense, education, and
law enforcement. Absent changes in the structure of Social Security and
Medicare, some time during the 2040s government would do nothing but pay
interest on the debt and mail checks to retirees. Accordingly, substantive
reform of Social Security and health programs remains critical to
recapturing our future fiscal flexibility.
Overall, the federal budget is facing unsustainable deficits and debt. Our
most recent long-term budget simulations provide a compelling illustration
of how unsustainable the long-term fiscal outlook is under current
policies.
As shown in figure 2, the long-term outlook under plausible assumptions is
bleak. A demographic shift will begin to affect the federal budget in 2008
as the first baby boomers become eligible for Social Security benefits.
Over time, this shift will cause spending for federal health and
retirement programs including Social Security to swell. Long-term
commitments for these and other federal programs will drive a massive
imbalance between spending and revenues that cannot be eliminated without
difficult policy choices and ultimately significant policy changes.
^13For more information on the Social Security program, see GAO, Social
Security Reform: Answers to Key Questions, [55]GAO-05-193SP (May 2005).
Figure 2: Composition of Spending as a Share of GDP Assuming Discretionary
Spending Grows with the Economy After 2007 and All Expiring Tax Cuts Are
Extended
As figure 2 shows, contrary to popular perception, although Social
Security grows in size, it is not the major driver of the long-term fiscal
challenge. Spending for Medicare and Medicaid is expected to grow much
faster. Many specific solutions have been proposed for Social Security,
but approaches to reducing health care cost growth remain elusive.
Moreover, addressing federal programs such as Medicare and the
federal-state Medicaid program will need to involve changes in the health
care system of which they are a part. This will be a societal challenge
affecting all age groups. While Social Security reform alone cannot
eliminate the long-term fiscal challenge, the likely effects of reform on
the nation's fiscal future should be clearly understood and taken into
account.
Social Security's Trust Fund and the Federal Budget
Social Security's benefit payments and program receipts are tracked in
federal budget accounts that are known as trust funds. Trust funds are one
type of mechanism created to account for receipts that are dedicated to a
specific fund for a specific purpose.^14 Social Security has two trust
funds, the Old-Age Survivors Insurance (OASI) Trust Fund and the
Disability Insurance (DI) Trust Fund. The combined OASDI trust fund
comprises the financial resources of the Social Security system.^15 Social
Security has a permanent appropriation that permits the payment of
benefits as long as the relevant trust fund account has a sufficient
balance.
Social Security's outlays are limited to trust fund balances, but the
program's outlays and revenues are also part of the federal unified
budget. Today, Social Security payroll tax revenues exceed benefits. In
2005, the Social Security trust fund paid $530 billion in benefit payments
and administrative costs and took in $608 billion in cash revenues,
leaving a cash surplus of about $78 billion.^16 By law, the Social
Security trust fund must invest any cash surpluses in interest-bearing
federal government securities. Throughout its history, Social Security has
invested mostly in a special type of nonmarketable securities that, like
debt held by the public, are guaranteed by the full faith and credit of
the U.S. government. Treasury borrows the cash from Social Security's
surplus to pay for other government expenses, and this use of Social
Security's excess cash revenues reduces the amount Treasury would
otherwise need to borrow from the public to finance other federal
programs.^17 (See fig. 3).
^14In contrast to private trust funds, the federal government does not
have a fiduciary responsibility to the trust fund beneficiaries. Congress
can raise or lower future trust fund collections and payments by changing
existing laws.
^15In this report, the combined OASDI Trust Funds are referred as the
Social Security trust fund. For more information on federal trust funds
and other funds dedicated to specific programs, see [56]GAO-01-199SP .
^16Total receipts to the combined trust funds, including $94 billion in
interest income, were $702 billion in calendar year 2005.
^17If Treasury could not borrow from the Social Security trust fund, it
would have to borrow more in the private capital market and pay interest
in cash to finance current budget policy. However, Treasury still has to
pay the trust fund interest on these securities. For a more detailed
discussion of the temporary trust fund buildup and how it interacts with
the federal unified budget, see GAO, Social Security Financing:
Implications of Government Stock Investing for the Trust Fund, the Federal
Budget, and the Economy, [57]GAO/AIMD/HEHS-98-74 (Washington, D.C.: Apr.
22, 1998).
Figure 3: Social Security Flows Today
These excess cash revenues, however, will begin to diminish in 2009, one
year after the oldest members of the baby boom generation first become
eligible for Social Security old age benefits. This downturn in the Social
Security cash surplus--the difference between payroll taxes and benefits
paid--will begin a squeeze on the rest of the budget that will worsen in
the coming years, making less cash revenue available for other federal
priorities. By 2017 trust fund cash revenues will be inadequate to pay
currently scheduled benefits in full, and the Social Security trust fund
will need to redeem trust fund assets from the Treasury. To pay the trust
fund, Treasury will need to provide cash from general revenues in exchange
for those trust fund securities. This can come only through increased
revenue, increased borrowing from the public, reduced spending in the rest
of the government, or some combination of these. While the trust fund is
redeeming its securities, it will continue to pay full benefits, but the
redemptions will reduce overall federal budgetary flexibility.
Our Framework for Evaluating Reform Proposals
As we have said previously, Social Security reform proposals will need to
be evaluated on a number of criteria. Our work on various aspects of this
important program has emphasized that Social Security reform is about more
than solvency. To evaluate reform proposals, we have suggested that policy
makers should consider three basic criteria:
1. the extent to which the proposal achieves sustainable solvency and how
the proposal would affect the economy and the federal budget;
2. the balance struck between the twin goals of individual equity (rates
of return on individual contributions) and income adequacy (level and
certainty of benefits);^18 and
3. how readily such changes could be implemented, administered, and
explained to the public.
Our first criterion of sustainable solvency reflects the need to look at
Social Security reform both in terms of its trust fund and in the larger
context of the federal budget as a whole. It is different from OCACT's
definition, which is focused solely on the trust fund, for which they are
responsible.
From a micro perspective, projected trust fund balances can provide a
vital though imperfect signaling function for policymakers about
underlying fiscal imbalances in covered programs. Tracking the estimated
future balances makes it possible in turn to estimate how much more
funding is needed to pay for the benefits scheduled in current law. A
shortfall between the long-term projected fund balance and projected costs
can signal that the fund, either by design or because of changes, is
collecting insufficient monies to finance currently scheduled future
payments. This signaling device can eventually prompt policymakers to
action.
From a macro perspective, however, program solvency measures such as the
trust fund exhaustion date and the actuarial balance calculation provide
no information about the broader question of program sustainability--that
is, the capacity of the future economy and the federal unified budget to
pay program benefits over the long run. When a program is not fully
self-financed, as is the case with Social Security, projected accumulated
trust fund balances do not necessarily reflect the full future cost of
existing government commitments. Accordingly, trust fund balances are not
an adequate measure of Social Security's sustainability. The critical
question is whether the Nation and the government as a whole can afford
the benefits in the future and at what cost in terms of other claims on
scarce resources. Extending a trust fund's solvency without reforms to
make the underlying program more sustainable over the long term can
obscure the warning signals that trust fund balances provide, thereby
creating a false sense of security and delaying needed program reform.
^18See GAO, Social Security: Program's Role in Helping Ensure Income
Adequacy, [58]GAO-02-62 (Washington, D.C.: Nov. 30, 2001. For a discussion
of individual equity issues, see GAO, Social Security: Issues in Comparing
Rates of Return with Market Investments, [59]GAO/HEHS-99-110 (Washington,
D.C.: Aug. 5, 1999).
Evaluating proposals is a complex task involving trade-offs between
competing goals. Reform proposals should be evaluated as packages that
strike a balance among individual reform elements and important
interactive effects between these elements. The overall evaluation of any
particular reform proposal depends on the weight individual policy makers
place on each criterion.
Social Security Financing Has Evolved, but Payroll Taxes Remain the Principal
Financing Mechanism
Since its establishment in 1935 Social Security has been financed
primarily by payroll taxes contributed equally by employers and employees.
Both tax rates and benefits have changed over time, but Congress has
generally rejected proposals for including general revenue in financing
Social Security benefits. Payroll tax rates have increased, from a total
of 2 percent of taxable payroll in 1937--when payroll taxes were first
collected--to 12.4 percent today. Benefits have also been expanded to
include workers' families and the disabled.
The question of whether some general revenue should be used to minimize
the burden of payroll taxes has been debated since the program's
inception. The Committee on Economic Security (CES), tasked by President
Roosevelt with designing the program, believed that expected benefit
payments would exceed expected payroll tax revenues beginning about 1965
and at that time general revenue should be used to fill the gap. Under
this financing arrangement, the general revenue share was ultimately
expected to reach about one-third of total revenues. President Roosevelt
rejected the idea of using general revenue in program financing. He
endorsed payroll tax financing on the grounds that it would ensure the new
program would be "self-supporting." A perceived link between benefits and
payroll tax contributions would, he believed, serve to preserve the
program in the future. Using general revenue would make the program
welfare--in President Roosevelt's words, "the dole by another name."
President Roosevelt's financing approach envisioned the buildup of a
reserve fund that would serve to fund benefits in the long term, but
objections were made to this approach. Some believed that the existence of
a large reserve fund would lead to higher benefit levels or other
increased government spending; others objected to the underlying concept
of prefunding benefits which they believed would lock in specific levels
of support for aged beneficiaries in the future. Congressional changes to
the program that expanded benefits and postponed scheduled payroll tax
increases put the program on a pay-as-you-go basis, that is, revenues from
current workers in a given year pay for the benefits of current
beneficiaries in that year.
Nevertheless, the issue of whether general revenue should be used to
supplement payroll tax financing has recurred throughout Social Security's
history. During short-term financing crises in the late 1970s and early
1980s, proposals were made for general revenue use. At that time some
opposed this use of general revenue believing that it would obscure the
true cost of the program and lead to benefit expansion. Reform legislation
passed in 1983 did include permanent use of some general revenue by
imposing a new income tax on the Social Security benefits of upper income
retirees and dedicating that tax to the trust fund.^19 Although the income
thresholds were not indexed to inflation, amounts of revenue to Social
Security from this source have been and remain small relative to total
program tax revenue.
Since the legislation passed in 1977 and 1983, a temporary build up of
trust fund assets has caused Social Security to temporarily deviate
somewhat from pay-as-you-go financing. This occurred in part because the
large baby boom generation makes the size of the workforce large relative
to the beneficiary population. As the baby boom generation retires and is
replaced by a workforce that will grow less rapidly than in the past,
trust fund assets will be redeemed to pay benefits, but these assets plus
payroll tax revenues will eventually be insufficient to pay currently
scheduled benefits in full. To deal with this structural imbalance, many
proposals have included the use of general revenue to supplement payroll
tax financing--often in large amounts relative to total financing and over
extended time periods. For example, both proposals made by President
Clinton in 1999 and reform models put forward in 2003 by the Commission to
Strengthen Social Security established by President George W. Bush
included the use of general revenue.
^19Since Social Security benefits had previously been untaxed, this was
seen by some as a benefit cut.
OCACT Scoring Memos Are Primary Source of Information on Reform Proposals, but
Detailed Tables Are Difficult to Use for Understanding General Revenue and
Federal Budget Effects
OCACT scoring memos are the primary source of information on recent Social
Security reform proposals. Since the mid-1990's, OCACT has scored a wide
variety of comprehensive reform proposals. Each proposal modifies the
OASDI program using one or several of the following provisions that: (1)
reduce benefits, e.g. through changes to indexing formulas and/or other
methods; (2) increase benefits for special populations; (3) raise revenue
through payroll tax increases; (4) use general revenue financing through a
range of mechanisms (not always specified as general revenue); (5) invest
trust fund assets through government investment in marketable securities;
or (6) change the current structure of the program by creating IAs.^20 The
format of these scoring memos has evolved over time, partially in response
to feedback from users. More recent scoring memos are available on OCACT's
web site.^21 In addition, OCACT has begun to post estimates of many of the
stand-alone provisions that have been suggested to modify the Social
Security program and improve its financial status. Many of these are also
included in the various comprehensive proposals.
OCACT's scoring memos typically emphasize two important summary measures:
(1) the change to actuarial balance and (2) ability of the trust fund to
meet obligations throughout the 75-year period and beyond, an indicator of
"sustainable solvency" as defined by OCACT.^22 In recent years,
sustainable solvency as defined by OCACT has become the standard by which
reform proposals are measured. When OCACT evaluates a reform proposal as
meeting the definition of sustainably solvent, the proposal sponsor often
highlights this point in press statements and other statements. This
measure, however, considers only trust fund effects and not the effect of
the proposal on the federal budget.^23
20For a more detailed discussion see [60]GAO-05-649R and GAO, Social
Security Reform: Implications of Different Indexing Choices,
[61]GAO-06-804 (Washington, D.C.: Sept. 14, 2006).
^21 http://www.ssa.gov/OACT/solvency/index.html .
^22When OCACT describes a proposal as modifying the program so that there
is a positive trust fund ratio throughout the 75-year projection period
and these ratios are stable or rising at the end of the period, this meets
the definition of "sustainable solvency" in the 2006 Trustees' Report.
To discover crucial information on a proposal's general revenue use and
federal budget effects, a user of OCACT's scoring memos must consult the
detailed tables at the end of the memo. The type and amount of information
included in the tables has increased over time. Current tables are
generally comprehensive in presenting a proposal's financial effects.
Columns display year-to-year changes in the financial operations of the
trust fund and the unified budget as well as the cashflow between the
trust fund and the general fund of the U.S. Treasury. For those plans that
include either government or IA investment in equity markets, OCACT
publishes two sets of tables, one reflecting "expected-yield" assumptions
on investments and a second set reflecting "low-yield" assumptions. A few
of the scoring memos we analyzed included other tables that provide
insight into general revenue use. One of these tables shows the impact of
each individual provision on the long-range actuarial balance (as a
percentage of payroll). This table shows to what extent a single
provision, by itself, either improves or worsens the actuarial balance.^24
Budget experts we spoke with agreed that the tables had evolved and now
provide more information but they also said that the tables are difficult
to use and take much effort to understand. In particular, they said that
the "information is not reader-friendly" and "key estimates of general
revenue are not highlighted and it is not always clear if there is a
specified source for the general revenue." Our analysis of 17 recent
scoring memos generally confirmed this assessment. Policymakers and the
public may have a difficult time comparing how different plans get to
sustainable solvency and the implications for the rest of the budget,
future deficits, and debt held by the public. Similarly, the 1999 and 2003
Technical Panels on Assumptions and Methods, convened by the Social
Security Advisory Board, expressed concerns about consistency in
presentation of information in scoring memos. One recommendation made by
budget experts was for an up-front summary table with crucial information
that a reader needs in order to compare plans. Although we found no
agreement on precise content for the table, information about benefit
cuts, tax increases, and general revenue could somehow be included.
^23On the other hand, our criterion for sustainable solvency measures the
effect on the trust fund and includes evaluating how a proposal would
affect the U.S. economy and the federal budget.
^24OCACT officials told us that this table was included only when
specifically requested by the plan sponsor.
OCACT staff told us that the principal purpose of their scorings was to
show the effect of a proposal on trust fund solvency and not on the budget
as a whole. They added that they were generally satisfied with the current
format for scoring memos, noting that they had not received any negative
feedback from users. They did agree that information could be more
user-friendly and are considering ways to achieve this goal, for example
through the inclusion of visuals. OCACT staff further noted that scoring
proposals is resource-intensive. Although some scorings can take up to a
year, others must be done under tight timeframes, e.g., when sponsors are
planning to introduce legislation. They also told us that they have
discussed options for a summary table with selected users but had not
found any consensus on what information should be highlighted. OCACT staff
emphasized that their scorings are and need to continue to be perceived as
objective. In any case, OCACT staff did not think that the use of general
revenue should be highlighted above other proposal changes.
More recently, CBO has developed the capacity to do long-term estimates of
Social Security reform proposals and has completed five long-term scoring
memos to date. OCACT and CBO scoring memos have key substantive and
presentational differences. One particularly important difference is the
use of different economic assumptions, which results in CBO currently
having more optimistic estimates of current-law program finances. Although
budget experts we spoke with generally thought that CBO scoring memos have
been beneficial analytical tools, they also thought that OCACT scoring
memos were likely to continue to be the primary source of information in
any debate over reform proposals. Therefore, having OCACT scoring memos
provide clear and easily accessible information on any use of general
revenue and on the impact of any reform proposal on the broader budget
remains important.
Recent Proposals Differ by Revenue Mechanism and Reform Approach Used, but Most
Reallocate General Revenue and Aim to Increase Investment Returns
Almost all proposals we reviewed package multiple revenue options and/or
benefit changes to achieve sustainable solvency, but they differ^25 in
both the broad approach they take for dealing with the long-range solvency
problem and the revenue mechanisms they use. Reform approaches can be
divided into two broad categories: approaches that maintain the current
structure, that is, a pay-as-you-go social insurance program of defined
benefits paid for primarily by payroll tax revenue, and approaches that
create a new structure that includes IAs.
Provisions that guarantee revenue to the Social Security trust fund can be
classified as: reallocated general revenue mechanisms, payroll tax
mechanisms, or new general revenue mechanisms (see Text Box). A
reallocated general revenue mechanism is any provision that increases
revenue to the program by redirecting existing general revenue expected
under existing law to the trust fund. Payroll tax mechanisms directly
change the amount of payroll taxes contributed and therefore increase
payroll taxes flowing into the trust fund. A new general revenue mechanism
would establish a new source of income to the general fund and dedicate it
to the Social Security trust fund. Examples would be the creation of a
national sales tax or increases in income or excise taxes with the revenue
from any of these dedicated to the Social Security trust fund. None of the
proposals we examined introduced new general revenues. All of
them--although described and characterized in various ways--used only
mechanisms that would reallocate general revenue and/or increase payroll
taxes.
All 17 of the Social Security reform proposals we analyzed include at
least one mechanism to increase revenue to Social Security and some use
more than one mechanism.^26 Fourteen of the 17 proposals we examined would
reallocate general revenue, that is, transfer existing revenue from the
general fund; the other 3 proposals did not use general revenue.
The 14 proposals that used reallocated general revenue did so by means of
five different mechanisms. These mechanisms can be characterized as
providing for either unlimited or limited amounts of general revenue
financing. The first mechanism provides for unlimited general revenue; the
other four use varying means to provide limited or defined amounts of
general revenue financing. Unlike plans with unlimited transfers to assure
trust fund solvency, proposals with general revenue transfers limited by
specified amounts, source, or formula, could be insolvent at some point in
time if the actual financial condition of the program differs from the
OCACT estimates.
^25For analysis of benefit and revenue options described in terms of GAO's
framework for evaluating Social Security reform plans, see GAO, Options
for Social Security Reform, [63]GAO-05-649R (Washington, D.C.: May 6,
2005).
^26Because some proposals were scored in multiple years or were not
designed to achieve 75-year solvency, the universe of proposals discussed
in this report is comprised of 17 proposals. Scorings can be found at
http://www.ssa.gov/OACT/solvency/index.html .
Unlimited mechanism:
o Unlimited general revenue transfers to the trust fund of
whatever amount is necessary to maintain trust fund solvency
(e.g., a 100 percent trust fund ratio).^27 This mechanism is the
most frequently used general revenue option. It is found in 9 of
the 17 plans we examined. This provision usually states that
general revenue transfers are to be made if, at any time, the
combined OASDI trust fund ratio is projected to fall below 100
percent under the provisions of the plan.^28 Transfers of
sufficient amount and timing will be made to prevent the trust
fund from falling below 100 percent of the annual program cost. In
simple terms, funds sufficient to pay projected benefits for the
year, that is, to maintain solvency, would be transferred as
needed from the general fund to the Social Security trust fund
without regard to the amount. This provision alone guarantees
program solvency under any circumstance because it provides the
trust fund with an unlimited and open-ended draw on the general
fund.^29
Limited mechanisms:
o General revenue transfers specified by formula or amount. Six
plan sponsors propose using this mechanism, which specifies--in
actual dollars, as a percentage of taxable payroll or using a
formula--how much general revenue would be transferred to the
trust fund in a given year. Transfers would be limited by these
specifications. In other words, transfer amounts are made
independent of the financial condition of the program as measured
by the trust fund ratio).^30
o "Refundable tax credits" for individual add-on accounts (or to
individuals to offset account contributions). Alone among the
general revenue options discussed, under this mechanism revenue
would not be transferred to the OASDI trust fund, but would be
outlaid immediately-- either to provide funding to individual
add-on accounts or to offset the cost of those accounts. The four
proposals using this option would either credit the general
revenue directly to the workers' add-on accounts (the amount would
be determined by the plan's provisions) or include the amount as a
credit on the individuals' income taxes to partially offset the
payroll tax increase introduced to fund the account. Although in
these proposals the add-on accounts would be financed outside of
the current program--either entirely or partially funded using
reallocated general revenue^31--they would be considered part of a
new Social Security system.
o Dedication of revenue generated from the estate tax to the trust
fund. This revenue option would dedicate revenue from the estate
tax to the Social Security trust fund to help finance the current
structure. One proposal would permanently establish a tax of 45
percent on all estates of deceased taxpayers with taxable assets
in excess of $3.5 million (as in current law for 2009).^32 The tax
revenue would be dedicated to the OASDI trust fund instead of to
the general fund.
o Redirection of those revenues from Social Security benefit
taxation that now go to the Medicare Hospital Insurance (HI) trust
fund to the OASDI trust fund. Currently, up to 85 percent of an
individual's or couple's OASDI benefits may be subject to federal
income taxation if their income exceeds certain thresholds. The
income tax revenue attributable to the first 50 percent of OASDI
benefits is already dedicated to the Social Security trust fund,
but the revenue associated with the amount between 50 and 85
percent of benefits is dedicated to the Medicare HI trust fund.
Two proposals would dedicate all of the income from the tax on
OASDI benefits to OASDI.
Reform plans with individual accounts may have indirect effects on
income from benefit taxation. Proposal sponsors typically
stipulate whether disbursements from individual accounts would be
taxed like current Social Security benefits or not taxed at all.
If account disbursements are considered OASDI benefits for income
tax purposes, income to the trust fund could be greater (or
smaller) in cases where the combined traditional benefit and
account disbursement yields are greater (or lesser) than under
current law. There would be similar implications for the HI trust
fund if benefit taxation income is distributed as under current
law. Plans that reduce the taxable traditional OASDI benefits and
do not tax individual account distributions would lower trust fund
revenue from this source.
Of the 17 proposals, 7 increase payroll tax revenue using one or
more of the following four mechanisms:
o Raise or eliminate the "taxable maximum limit" or "cap" on
covered earnings^33 (with or without retaining the cap for benefit
calculation). Incorporated in five proposals, this is the most
common mechanism for bringing in new payroll tax revenue. This
mechanism would not change the 12.4 percent tax rate but would
either increase the level of wages taxed or completely eliminate
the cap so that all covered earnings are taxed. This latter option
is similar to the Medicare HI payroll tax of 2.9 percent, which
applies to all covered earnings. SSA recently estimated that in
2005 about 84 percent of covered earnings were subject to the
OASDI tax (i.e., were taxable) and projected decreases in the
ratio of taxable wages to covered wages through 2015. After 2015,
SSA expects this percentage to be held approximately constant at
82 percent of covered earnings. Four plans propose to increase the
percentage of taxable earnings under the "cap" to a level between
87 and 90 percent of covered earnings. A fifth plan would
completely eliminate the earnings cap and would tax all earnings
at the 12.4 percent rate.
o Increase the 12.4 percent payroll tax on taxable earnings. Four
plans propose raising payroll tax rates by between 1 and 3
percentage points. None of the plans we reviewed propose an
immediate tax rate increase of 2.02 percentage points, the
estimated increase needed to achieve 75-year solvency through year
2080.^34
o Expand coverage to state and local government employees not
currently covered. Three plans would require those public
employers not currently providing Social Security coverage to
cover newly hired employees.^35
o Tax covered earnings above the "cap" but at a lower tax rate
(with or without retaining the "cap" for benefit calculation). Two
proposals apply a rate much lower than 12.4 percent, between 3 and
4 percent, to covered earnings above the established taxable
maximum.
Some of the mechanisms to increase payroll tax revenue could also
result in increased benefit costs. For example, proposals that
raise or eliminate the "cap" on covered earnings or tax earnings
above the "cap" may or may not include these wages when
calculating benefits. If the wages are included in the benefit
formula, benefit costs would increase in the future and the
improvement in the actuarial deficit would be smaller than if the
wages were not included in the benefit calculation. Expanding
coverage to all state and local government workers would bring in
additional payroll tax revenue but would also increase the
long-term benefit costs as newly covered earnings would entitle
affected workers to the associated benefits.
None of the five general revenue mechanisms in the plans we
examined would come from new revenue sources and hence would bring
no new revenue to the federal budget; the four payroll tax
mechanisms would bring new revenue to the budget as a whole. Table
1 categorizes the mechanisms in terms of this framework. The
number in parentheses indicates the number of reform proposals
that contain this mechanism.
^27The trust fund ratio is a measure of the adequacy of the trust fund
level. It is defined as the assets at the beginning of the year expressed
as a percentage of the cost during the year. The trust fund ratio
represents the proportion of a year's cost that could be paid with the
funds available at the beginning of the year. Having a trust fund ratio of
100 percent or more--that is, assets at the beginning of each year at
least equal to projected outgo during the year--is considered a good
indication of a trust fund's ability to cover most short-term
contingencies.
^28Most plans specify unlimited transfers to meet a 100 percent trust fund
ratio, but one plan specifies transfers to maintain a 90 percent trust
fund ratio. This trust fund ratio level still maintains solvency because
the program can pay scheduled benefits when due.
^29In some cases, proposal sponsors suggest sources of non-Social Security
program savings to help offset the costs to the general fund. However, the
transfers to the trust fund would not be contingent on achieving the
reductions in actual federal spending.
^30Although plan sponsors sometimes propose spending cuts and/or assume
revenue increases in non-Social Security programs to offset these general
fund transfers; the transfers are not conditional on the savings/revenue
increases being achieved and would be made regardless of the success of
these changes.
^31Plans may require individuals to contribute to the add-on account in
order to receive credits.
^32Under current law (as of January 2007), the estate tax would be
repealed for 2010 but would be restored with a lower exemption and a
higher rate than in effect for 2009. Thus, compared to current law the
estate tax in this proposal would be new revenue to the budget only in the
year 2010 and reallocated revenue in all succeeding years.
^33SSA defines covered earnings to mean wages and self-employment earnings
that are covered by the OASDI and/or HI programs. Under current law, all
covered earnings are taxed at a rate of 2.9 percent for Medicare HI, but
for OASDI only covered earnings up to a "taxable maximum limit" or "cap"
are taxed at the 12.4 percent rate. This limits taxes as well as the
earnings reflected in the benefit formula. The level of "taxable earnings"
reflects only the portion of covered earnings that is at or below this
cap. This taxable maximum limit is indexed annually for average wage
growth and therefore it changes every year. In 2007, the cap is $97,500.
^34However, significantly larger changes would be required to maintain
solvency beyond 75 years.
^35About one-fourth of public employees do not pay Social Security taxes
on the earnings from their government jobs. Extending coverage to include
them could result in potentially significant transition costs for some of
their state and local government employers. See GAO, Social Security:
Implication of Extending Mandatory Coverage to State and Local Government
Employees, [65]GAO/HEHS-98-196 (Washington, D.C.: Aug. 18, 1998).
Table 1: Revenue Mechanisms in Reform Proposals by New and Reallocated
Revenue
New Revenue Reallocated Revenue
Limited, specified o Increase the 12.4 o Redirect all revenue from
funding source percent payroll tax taxation of OASDI benefits
(4) to OASDI trust fund (2)
o Raise or eliminate o Dedicated estate tax^a
earnings cap for (1)
payroll tax (5)
o Tax earnings above
the cap at a lower
rate (2)
o Expand coverage to
state/local employees
not covered (3)
Limited, no o General revenue transfers
specified funding specified by amount or
source formula^b (6)
o Refundable tax credits
(4)
Unlimited, no o General revenue transfers
specified funding as needed to maintain trust
fund solvency (e.g., a 100%
trust fund ratio)^b (9)
Source: GAO.
Notes: Payroll tax mechanisms are in italics. The number of reform
proposals do not sum to 17 since some reform plans contain more than one
revenue mechanism.
aSunset provisions in the Economic Growth and Tax Relief Reconciliation
Act of 2001 would result in the estate tax being treated in the budget as
new revenue in 2010 (the only year that the tax is repealed under current
law) and reallocated revenue in all succeeding years.
bIn some cases, proposal sponsors suggest or assume sources of non-Social
Security program savings or increases in revenue to help offset the costs
to the general fund. However, the transfers to the trust fund in these
proposals would not be contingent on achieving the estimated reductions in
federal spending or increases in tax income on which transfer amounts are
based.
Although there is no analytic link between the inclusion of IAs and the
selection of a specific revenue mechanism, in our review we found that
most of the time reallocated general revenue mechanisms are used to help
structure a new Social Security system with IAs. On the other hand,
payroll tax mechanisms are used about half the time to help finance the
current program and about half the time in proposals creating a new system
including IAs. Table 2 summarizes the reform approach and revenue
mechanisms used in reform plans. The numbers in parentheses indicate the
number of reform proposals that contain a particular mechanism.
Table 2: Revenue Mechanisms in Reform Proposals by Reform Approach
Maintain Current Structure New Structure with IAs
General revenue o Unlimited general revenue o Unlimited general
mechanisms transfers as needed to revenue transfers as
maintain solvency (e.g., a needed to maintain
100% trust fund ratio) (1) solvency (e.g., a 100%
o Dedicated estate tax (1) trust fund ratio) (8)
o General revenue
transfers specified by
amount or formula (6)
o Refundable tax credit
(4)
o Redirect all revenue
from taxation of OASDI
benefits to OASDI trust
fund (2)
Payroll o Raise or eliminate o Raise or eliminate
mechanisms earnings cap for payroll earnings cap for payroll
tax (3) tax (2)
o Increase the 12.4 percent o Increase the 12.4
payroll tax (2) percent payroll tax (2)
o Tax earnings above the o Tax earnings above the
cap at a lower rate (1) cap at a lower rate (1)
o Expand coverage to o Expand coverage to
state/local employees not state/local employees
covered (2) not covered (1)
Source: GAO.
Note: Payroll tax mechanisms are in italics. The number of reform
proposals do not sum to 17 since some reform plans contain more than one
revenue mechanism.
Most proposals--15 of the 17 we reviewed--included provisions aimed at
increasing revenue through investment in private markets. Two proposals
used direct government investing in marketable securities through the
current program structure and 13 created a new Social Security structure
including individual accounts.^36 Investing in marketable securities
creates the potential for improved returns but increases investment risk
for the investing party (the government or individuals). Therefore, unlike
reallocated revenue and payroll tax mechanisms, neither investment
approach assures additional income.
Proposals for government investment of the trust fund anticipate returns
that would increase revenue to the trust fund while in most IA proposals
the benefit obtained from any increased returns would be credited to the
individuals' accounts and generally included as part of the account
distribution. Individual account proposals may redirect revenue from the
program or the federal budget but typically compensate for lost revenue
through either across-the-board benefit cuts or "benefit offsets"^37 to
currently-scheduled benefits. In these proposals, the "total benefit" from
the new Social Security system consists of a combination of the
traditional Social Security defined benefit (including any
modifications/offsets) and the individual account distribution (including
any modifications/offsets).
^36For GAO's discussion of the key issues to consider in comparing Social
Security and private market rates of return, see [66]GAO/HEHS-99-110 .
Some plans establishing IAs propose to guarantee benefit levels
irrespective of actual returns; they are able to do this by using general
revenue transfers. Guarantees would benefit account holders by partially
or fully protecting them from risk. However, the increased benefits to
account holders would create a corresponding cost for the federal
government. Whenever an account fell short of promised benefits, the
government--and, implicitly, taxpayers--would make up the difference.^38
Additional Revenue Improves Trust Fund Solvency but Effects on the Federal
Budget May Differ Greatly
The effect of a reform proposal on federal budget balances and debt cannot
be determined from its effect on trust fund solvency. The proposals we
reviewed illustrate this. All plans included in our review were scored by
OCACT as able to pay the plan's benefits in full over the 75-year period.
However, plans' impact on the federal budget as a whole varied widely in
the scorings. For example, the effect on debt held by the public ranged
from an improvement of $45 trillion to a worsening of $41 trillion over
the 75-year projection period.^39 The impact of a proposal package on the
federal budget is shown in the year-by-year scoring of effects on unified
deficits and debt that OCACT provides in its technical tables.
^37The purpose of benefit offsets is to compensate the trust funds for
foregone taxes and to equitably distinguish between those who do, and
those who do not, shift Social Security taxes to voluntary personal
accounts. There are different methods for calculating the offset. For a
more thorough discussion of offsets, see Virginia P. Reno, Michael J.
Graetz, Kenneth S. Apfel, Joni Lavery, and Catherine Hill, eds., Uncharted
Waters: Paying Benefits from Individual Accounts in Federal Retirement
Policy, Study Panel Final Report, National Academy of Social Insurance
(Washington, D.C.: January 2005), ch. 9.
^38For a discussion of issues raised by estimating guarantee costs, see
CBO, Evaluating Benefit Guarantees in Social Security (Washington, D.C.:
March 2006).
^39In constant 2005 dollars under OCACT's expected yield assumption.
Estimates are based on OCACT scorings and represent change in debt levels
compared to a baseline in which scheduled benefits are paid in full
through borrowing and no other changes are made. Estimates were not
available for one of the plans reviewed.
That the impact on the trust fund and the impact on the budget as a whole
can differ is not surprising. By definition, any increase in revenue
provided to the trust fund--whether new general revenue, reallocated
general revenue, or increased payroll tax revenue--will increase the trust
fund's capacity to pay benefits. Effects on the federal budget, however,
depend on the type and amount of revenue and also on assumptions about
payment of currently scheduled benefits.^40
We compare the impact of new and reallocated revenue on the budget and
long-term fiscal outlook under two different assumptions about the payment
of currently scheduled benefits beyond projected trust fund exhaustion in
2040.^41 First, assume as OCACT does in its memos and GAO does in its
long-range simulations, that currently scheduled benefits would be paid in
full throughout the estimating period (i.e., borrowing would increase to
fund the benefits). Under these assumptions--and assuming no other changes
in spending and/or revenue--either new general revenue or additional
payroll tax revenue would replace some of that borrowing and improve the
long-term fiscal outlook. Reallocated general revenue equal to (or less
than) the Social Security financial shortfall would have no impact on
federal budget deficits, debt, or the long-term fiscal outlook. In amounts
greater than the shortfall, reallocated general revenue would make the
long-term outlook worse, all other things equal.
As an alternative, assume instead that benefit outlays will be limited to
trust fund income once the trust fund has reached exhaustion in 2040.^42
Under this alternative, federal budget balances would be the same through
2040 as under the first assumption, then improved over the longer term due
to lower annual outlays and less borrowing.
^40In this section, as elsewhere in the report, our analysis follows that
of OCACT in being limited to first order effects.
^41For GAO analyses of reform proposals using multiple sets of
assumptions, see Social Security: Evaluating Reform Proposals,
[67]GAO/AIMD/HEHS-00-29 (Washington, D.C.: Nov. 4, 1999); Social Security
Reform: Analysis of Reform Models Developed by the President's Commission
to Strengthen Social Security, [68]GAO-03-310 (Washington, D.C.: Jan. 15,
2003); and Social Security Reform: Analysis of a Trust Fund Exhaustion
Scenario, [69]GAO-03-907 (Washington, D.C.: July 29, 2003).
^42The Trustees 2006 Report notes that even if a trust fund's assets are
exhausted, tax income will continue to flow into the fund. Present tax
rates would be sufficient to pay 74 percent of scheduled benefits after
trust fund exhaustion in 2040 and 70 percent of scheduled benefits in
2080. For an analysis of an illustrative assumption along these lines, see
[70]GAO-03-907 . This scenario was developed as an analytic tool, not a
legal determination.
Under this "trust fund exhaustion scenario," new revenue dedicated to
Social Security early in the projection period would improve annual budget
balances and extend the time period during which currently scheduled
benefits could be paid in full. The new revenue would also reduce debt for
most of the 75-year period.^43 Any amount of reallocated general revenue
on the other hand would increase federal budget deficits, reduce budgetary
flexibility, and increase debt held by the public relative to this
alternative assumption of trust fund exhaustion. All else equal, the
reallocated general revenue would provide additional income to the trust
fund and make possible additional benefit outlays, but borrowing from the
public would be needed to pay for these outlays.
Use of different time frames can also lead to different conclusions about
the federal budget effects of additional revenue including reallocated
general revenue. For example, some proposals that restructure the Social
Security system to rely more on individual accounts--funded in part
through a "carve-out" of current payroll tax revenues--use large amounts
of reallocated general revenue at the outset to help make up the gap as
benefit reductions from currently scheduled levels are phased in. Those
favoring this approach to system restructuring may view the reallocated
general revenue as a loan from the rest of the budget that will be paid
back. Advocates for these types of changes point out that once the
transition to the new system is complete, the cost of the Social Security
program will have been reduced compared to paying currently scheduled
benefits in full. Some favoring program restructuring have advocated use
of an infinite horizon rather than the 75-year time frame traditionally
used for actuarial assessment of the trust fund.^44 These analysts view 75
years as an arbitrary cut-off point. They note that the use of this
horizon can be misleading where a gap between projected revenues and
benefit payments continues to grow after the 75-year window, as is the
case with the current program.
^43The effect on debt by the end of the period would depend on the amount
of new revenue raised for Social Security. If this was equal to the
75-year Social Security shortfall in present value terms, debt by the end
of the period would be the same as under the alternative assumption. This
is because the additional new revenue would have been used to pay for
additional benefit outlays of equal size. All else equal, debt at the end
of the period would be lower relative to the trust fund exhaustion
scenario if the new revenue exceeded program shortfall.
^44CBO uses a 100-year time frame for analysis.
Those who oppose using reallocated general revenue to achieve system
restructuring include an emphasis on a shorter time frame in their
analyses. They point to higher levels of federal spending and debt held by
the public over at least the next several decades resulting from this
approach to reform. These analysts emphasize that it is in this nearer
time frame the baby boom generation will retire and the cost to the
government will escalate dramatically, driven by demographics and
compounded by federal spending on health. These analysts were concerned
that revenue used for Social Security will not be available for Medicare
and Medicaid, and absent changes in fiscal policy, spending on the three
major entitlements will lead to unsustainable levels of debt long before
Social Security restructuring will have reduced federal commitments for
that program. These analysts called for a focus on the long-term federal
budget problem as a whole and a search for solutions to Social Security's
financing problems within that larger context.
In concept, the mechanism of unlimited reallocated general revenue as
needed to assure trust fund solvency, used in 9 of the 17 proposals we
reviewed, represents the largest potential draw on the federal budget. The
amount of reallocated general revenue actually provided to the trust fund
in these proposals would vary depending on the financial requirements of
the Social Security program, and these would depend on the other proposal
provisions. The other four general revenue mechanisms would use specified
amounts of reallocated general revenues. That is, the amount of general
revenue used would not vary according to the financial requirements of the
Social Security program but would be dictated by the parameters of the
mechanism, e.g., specified in current dollars or as a share of taxable
payroll in specific years.
In terms of size, amounts of reallocated general revenue used by
mechanisms in proposals we reviewed varied widely, ranging up to over 200
percent of total program financial shortfall. Estimates for general
revenue deriving both from the mechanism of unlimited reallocated general
revenue as needed to assure trust fund solvency and from specified general
revenue transfer amounts were large in some cases. Table 3 shows amounts
of reallocated general revenue by type of mechanism.
Table 3: Size of Reallocated General Revenue in Proposals Reviewed by
Mechanism Used
Amount
As a share of Number of
Mechanisms for 75-year program As a percent proposals
reallocating general financial of taxable using
revenue shortfall payroll mechanism
Unlimited General revenue transfers Up to 184%^a Up to 3.5% 9
as needed to maintain
solvency (e.g., a 100%
trust fund ratio)
Limited General revenue transfers Up to 207% Up to 4.0 % 6
to the trust fund
specified by formula or
amount
Refundable tax credits^b Up to 115% Up to 2.2% 4
Redirect all revenue from 22%-23% 0.4% 2
taxation of OASDI
benefits to OASDI trust
funds
Dedicated estate tax 27% 0.5% 1
Source: GAO analysis of OCACT scorings.
Notes:
The numbers shown in this table do not sum to 17 since some reform plans
contain more than 1 revenue option.
As shown in this table, "program financial shortfall" is defined as the
cost of achieving actuarial balance including the cost of an ending trust
fund ratio of 100 percent.
Estimates shown are based on available information in OCACT scoring memos.
In some cases, scorings for individual mechanisms were not shown
separately.
Where account yields affected the amounts of general revenue a proposal
would use, OCACT's expected yield estimate was used.
aBased on proposals reviewed as scored by OCACT under their expected yield
assumption. Under OCACT's low yield assumption, estimated amounts for this
mechanism would range up to 245 percent of program shortfall.
bNot transferred to the trust fund; used to fund individual add-on
accounts.
Some of the budget experts with whom we spoke suggested an approach we did
not find in any of the reform proposals we examined. These experts
suggested that plans could establish a new source of general revenue and
dedicate the new revenue to the Social Security trust fund. For example,
they suggested that instead of payroll tax increases, income taxes could
be raised or a value-added tax^45 instituted with all or part of the
revenue dedicated to Social Security. Some of the budget experts we spoke
with observed that any policy decision to introduce new revenues dedicated
to a particular program could have implications for the capacity of the
rest of the budget to deal with other fiscal challenges. Enactment of any
new taxes for Social Security could affect the public's willingness to
bear taxes to fund other important national priorities, such as Medicare.
In addition, taxes may have effects on individuals' saving behavior and on
labor supply, effects that are beyond the scope of this report.
^45A value-added tax is a tax levied at each stage of production or
distribution on the value added to the product during that stage of
production. Value-added taxes are now commonly used in many Western
European countries as a source of revenue.
Despite their differing views on reform approaches, budget experts
generally either believed or advocated that some use of general revenue
would be part of reform. Some of them were concerned about the use of
reallocated general revenue for Social Security in view of the long-term
fiscal challenge facing the nation. One emphasized that the public needs
to understand that reallocated general revenue for Social Security is not
"free." Reallocated general revenue would need to be paid for now or later
through lower spending, higher taxes, and/or more debt.^46 Another expert
expressed the view that general revenue would be needed to reduce the
political pain involved in reform but cautioned that using general revenue
for Social Security could mean an even larger share of federal resources
committed to funding programs that serve the elderly in coming decades,
further squeezing out other national priorities. Most experts expressed
the view that greater transparency about the use of general revenue use in
reform plans was needed.
Most budget experts with whom we spoke expressed concern about any
provision of reallocated general revenue as needed for Social Security to
assure trust fund solvency. These analysts, including some who generally
do not find trust fund accounting meaningful, said that the signaling
provided by the Trustees' projected trust fund exhaustion date has served
a useful purpose by alerting policymakers and the public of the need for
program reform. Providing for the use of reallocated unlimited general
revenue transfers to achieve sustainable solvency would mean that the
trust fund would never be projected to reach exhaustion. As a result,
these analysts observed, the true costs of the program would become less
transparent while at the same time the public might think that the Social
Security financing shortfall had been resolved.
One expert was especially concerned that explicit guarantees that total
payouts from accounts plus Social Security would be not less than
currently scheduled benefit levels could prove expensive for the federal
budget. Such guarantees will likely add to the cost of the Social Security
system, because individuals will have protection against downside risks
but are allowed by a guarantee to benefit on the upside, this expert said.
In earlier work we noted that any proposal that would guarantee benefits
and rely on enhanced rates of return on individual accounts to finance
long-term solvency may create an additional draw on general revenue that
could serve to increase the deficit over the long term.^47 Four of the 17
proposals we reviewed for this report included this type of provision; 3
of the 4 also provided for unlimited transfers of reallocated general
revenue to maintain trust fund solvency.
^46See [71]GAO-05-649R (Washington, D.C.: May 6, 2005).
Conclusions
In coming decades, our nation will face a serious long-term fiscal
challenge that will put America's fiscal future at risk. As we have said
in our body of work on Social Security, substantive reform of this
important program will involve hard choices that will need to modify the
program's underlying commitments for the future. To do this--to achieve
the goal of saving Social Security and making it sustainable for the
future--reform will need to increase program revenues and/or decrease
program expenses. These are the only options.
It may well be that some general revenue will be part of reform. If so,
this would a major substantive change. Considering both the long-term
fiscal situation and the potential implications for Social Security, the
use of any general revenue in proposals--reallocated or new--will need to
be clearly understood by both policymakers and the general public.
Although OCACT's determination of "sustainable solvency" for a reform plan
will remain an important threshold that plans will need to meet, it is not
a sufficient benchmark in the context of the long-term fiscal outlook
facing the United States. It is also an incomplete metric for comparing
and evaluating reform plan financing implications. Given that most recent
proposals use reallocated general revenue, a determination of trust fund
solvency alone can be especially misleading. By definition a determination
of trust fund solvency is not designed to and does not provide any
information on how, when, or to what extent a plan is likely to worsen or
improve the already daunting future federal fiscal imbalances. Clarity
about these broader implications of any proposal will be essential as
reform changes are debated.
^47 [72]GAO/AIMD/HEHS-00-29 (Washington, D.C.: Nov. 4, 1999).
Although raising taxes (payroll or other) or cutting benefits would have
tangible consequences for taxpayers and beneficiaries, e.g., less
take-home pay or smaller benefit checks, the consequences of transfers
from the non-Social Security budget in the form of reallocated general
revenue are less likely to be clearly observable. Reallocated general
revenue, however, is not without cost. Regardless of how general revenue
is provided to Social Security, it must be paid for at some point. The
question is when, and by whom.
OCACT scoring memos have played and will continue to play an indispensable
role in the debate by analyzing how proposals would affect the trust
fund's finances and in more recent years how proposals would affect the
federal budget. OCACT's valuable information and complex analyses could
make an even greater contribution if they were more readily accessible to
nonexpert users. It would be helpful for OCACT to include near the
beginning of each memo a summary of the relative contribution of each
provision in a proposal package to trust fund solvency. In addition, OCACT
could devise a way to enable policymakers and the public to quickly and
accurately grasp how the elements of a proposal, including any general
revenue, work together to affect the trust fund and the overall federal
budget. This type of presentational change would not require any
additional analysis but could greatly facilitate comparison of proposals
to one another.
We recognize that developing a summary that would be easily accessible to
policymakers and the general public and perceived as fair by all
participants in the reform debate will present challenges. The elements of
reform proposals are likely to continue to evolve, and new formats and
analyses may become necessary. We recognize that a balance will need to be
struck between standardizing formats and allowing the information provided
to continue to evolve with the debate. Nevertheless, a more standardized
summary early on could make clear the relative contributions of benefit
cuts and increased revenue from payroll and nonpayroll taxes. In addition,
it could illuminate any use of general revenue and how use of such revenue
is likely to affect the long-term budget outlook. This summary would be a
presentational, not analytical, modification with major potential benefits
to greater public understanding of proposed changes to this popular
program that is important to virtually all Americans.
Recommendation for Executive Action
To improve public understanding of proposed changes to Social Security, we
recommend that the Commissioner of SSA direct the Office of the Chief
Actuary at SSA to include a summary presentation of its analysis in future
scoring memoranda that will enable policymakers and the general public to
quickly and easily compare Social Security reform proposals especially
with respect to proposed use of general revenue and federal budget
implications.
Agency Comments and Our Evaluation
In written comments (reprinted in app. II) on a draft of this report, SSA
suggested that we should direct our recommendation to the Chief Actuary,
not to the Commissioner. This change, SSA said, would target the entity
that develops the analysis and would also be sensitive to the independence
of the Chief Actuary.
As SSA stated in its comments, by legal mandate the Chief Actuary does
report directly to the Commissioner. Because our recommendation concerns
only the presentation of actuarial estimates--not any change in which
estimates are developed nor in the analytical work required to develop
them--we believe the recommendation as it stands recognizes and is
appropriately sensitive to the independence of the Chief Actuary while at
the same time reflecting the organizational structure of the Office of the
Chief Actuary within SSA.
SSA did not explicitly agree or disagree with our recommendation in its
comments. In response to the recommendation, SSA noted that recent OCACT
memos had added an additional table ("table d") that, SSA believes,
already provides key information on general revenue use in proposals. SSA
also expressed the view that a summary table showing the effects on the
actuarial deficit of each proposal provision would be helpful. As our
report had noted, this table has been included in some memoranda at the
request of the proposal's sponsor.
While we agree with SSA that both the technical and summary table it
describes add value, we remain of the view that OCACT needs to develop a
new table that can clearly and quickly communicate both trust fund effects
and federal budget implications of a proposal. Our report acknowledged the
value and completeness of OCACT's analyses including those presented in
"table d." The message of our report was not that OCACT needs to do
additional analytic work. Our message was rather that OCACT's existing
analyses need to be summarized and highlighted so that a proposal's
implications for both the trust fund and the federal budget as a whole are
immediately clear.
Neither of SSA's two suggestions is fully responsive to this goal. SSA
itself noted in its comments that "table d" is "somewhat complicated."
With regard to the summary table showing how each provision affects the
actuarial deficit, we agree that this table adds considerable value and
can help facilitate certain types of comparisons across plans. It does
not, however, make clear how each provision or the proposal as a whole
would affect the federal budget. It is this kind of information, now
available only to experienced users of OCACT memos, that needs to be made
more accessible. Given the long-term fiscal challenge facing the Nation,
the reform debate needs to take place not simply in the context of trust
fund solvency but also in the larger context of the federal budget as a
whole.
SSA also provided technical comments, which we incorporated as
appropriate.
We are sending copies of this report to the Commissioner of Social
Security as well as other interested parties. Copies will also be made
available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov .
Please contact Susan Irving at (202) 512-9142 or Barbara Bovbjerg at (202)
512-7215 if you have any questions about this report. Key contributors to
this assignment were Jay McTigue, Joseph Applebaum, Jennifer Ashford,
Linda Baker, Michael Collins, and Melissa Wolf.
Susan J. Irving
Director, Federal Budget Analysis, Strategic Issues
Barbara D. Bovbjerg
Director, Education, Workforce, and Income Security
Issues
Appendix I: Scope and Methodology
To answer the questions in this report, we reviewed relevant historical
documents and other literature on Social Security, including GAO reports
and testimonies.^1 We undertook a review of the 26 OCACT proposal scoring
memos done from 2001 through 2006, ultimately performing an in-depth
analysis of 17 of those scoring memos.^2 We eliminated nine of the scoring
memos either because they were proposals that were scored in multiple
years or because they were not scored by OCACT as able to pay plan
benefits in full throughout the 75-year period. Most of the 17 proposals
were characterized by OCACT as meeting its definition of "sustainably
solvent." We also reviewed proposal scorings done by Congressional Budget
Office (CBO) and met with officials from OCACT and CBO who were
responsible for proposal scorings. To enhance our understanding of the
relationship between Social Security and the federal budget, we
interviewed selected federal budget experts from think tanks and other
policy organizations who represented a range of views on reform
approaches. Some of these experts were former officials of the Social
Security Administration and/or Congressional Budget Office.
Our analysis, like the scorings of the Office of the Chief Actuary and
recent scorings by CBO, is limited to first order effects of reform
changes. Accordingly, second order effects of proposed reforms on the
federal budget, such as effects on economic growth, are beyond the scope
of this report. This report also does not address the effects of general
revenue use on program equity. As discussed in other GAO work, the use of
significant amounts of general revenue transfers could change program
equity in ways that are difficult to quantify.^3
1In particular this report builds on GAO's analysis of revenue options for
reform as discussed in Options for Social Security Reform, [74]GAO-05-649R
(Washington, D.C.: May 6, 2005).
^2Scorings can be found at http://www.ssa.gov/OACT/solvency/index.html
.
^3See [76]GAO-05-649R and GAO, Social Security: Distribution of Benefits
and Taxes Relative to Earnings Level, [77]GAO-04-747 (Washington, D.C.:
June 15, 2004).
Appendix II: Comments from the Social Security Administration
Glossary of Terms
The majority of the definitions provided here are from the Social Security
Administration, The 2006 Annual Report of the Board of Trustees of the
Federal Old-Age and Survivors Insurance and Disability Insurance Trust
Funds (Washington, D.C.: May 1, 2006) and GAO, A Glossary of Terms Used in
the Federal Budget Process, [78]GAO-05-734SP (Washington, D.C.: September
2005).
Actuarial balance
The difference between the summarized income rate and the summarized cost
rate over a given valuation period.
Actuarial deficit
A negative actuarial balance.
Assumptions
Values relating to future trends in certain key factors which affect the
balance in the trust funds. Three sets of demographic, economic, and
program-specific assumptions are presented in the annual Trustees' report.
o Demographic assumptions include fertility, mortality, net
immigration, marriage, and divorce.
o Economic assumptions include unemployment rates, average
earnings, inflation, interest rates, and productivity.
o Program-specific assumptions include retirement patterns, and
disability incidence and termination rates.
The three sets of assumptions are described as follows:
o Alternative II is the intermediate set of assumptions, and
represents the Trustees' best estimates of likely future
conditions.
o Alternative I is characterized as a low cost set--it assumes
relatively rapid economic growth, low inflation, and favorable
(from the standpoint of program financing) demographic conditions.
o Alternative III is characterized as a high cost set--it assumes
relatively slow economic growth, high inflation, and unfavorable
(from the standpoint of program financing) demographic conditions.
In its estimates of reform proposals, OCACT uses the intermediate
set of assumptions, which represents the Trustees' best estimates
of likely future demographic, economic, and program-specific
conditions.
Board of Trustees
A Board established by the Social Security Act to oversee the
financial operations of the Federal Old-Age and Survivors
Insurance Trust Fund and the Federal Disability Insurance Trust
Fund. The Board is composed of six members, four of whom serve
automatically by virtue of their positions in the federal
government: the Secretary of the Treasury, who is the Managing
Trustee, the Secretary of Labor, the Secretary of Health and Human
Services, and the Commissioner of Social Security. The other two
members are appointed by the President to serve as public
representatives.
Constant dollars
Amounts adjusted by the consumer price index (CPI) to the value of
the dollar in a particular year.
Cost rate
The cost rate for a year is the ratio of the cost of the program
to the taxable payroll for the year. In this context, the cost is
defined to include scheduled benefit payments, special monthly
payments to certain uninsured persons who have 3 or more quarters
of coverage (and whose payments are therefore not reimbursable
from the General Fund of the Treasury), administrative expenses,
net transfers from the trust funds to the Railroad Retirement
program under the financial-interchange provisions, and payments
for vocational rehabilitation services for disabled beneficiaries;
it excludes special monthly payments to certain uninsured persons
whose payments are reimbursable from the General Fund of the
Treasury, and transfers under the interfund borrowing provisions.
Covered earnings
Earnings in employment covered by the Old-Age Survivors and
Disability Insurance program.
Current dollar
"In current dollars" means valued in the prices of the current
year. Amounts are expressed in nominal dollars with no adjustment
for inflationary changes in the value of the dollar over time. The
current dollar value of a good or service is its value in terms of
prices current at the time the good or service is acquired or
sold.
Debt held by government accounts
Federal debt owed by the federal government to itself. Most of
this debt is held by trust funds, such as Social Security and
Medicare. The Office of Management and Budget (OMB) contrasts it
to debt held by the public by noting that it is not a current
transaction of the government with the public; it is not financed
by private saving and thus does not compete with the private
sector for available funds in the credit market; and it does not
represent an obligation to make payments to the public.
Debt held by the public
That portion of the gross federal debt held outside of the federal
government. This includes any federal debt held by individuals,
corporations, state or local governments, the Federal Reserve
System, and foreign governments and central banks. Debt held by
government accounts (intragovernmental debt) is excluded from debt
held by the public. Debt held by the public is not the same as
public debt or Treasury debt.
Exhaustion Date
As reported in the Trustees' Report and for the purposes of this
report, the year in which the OASDI trust fund would become unable
to pay currently-scheduled benefits when due because the assets of
the fund were exhausted.
General fund of the Treasury
Funds held by the Treasury of the United States, other than
receipts collected for a specific purpose (such as Social
Security) and maintained in a separate account for that purpose.
General revenue
For a discussion of how it is defined for the purposes of this
report, see page 6.
Income rate
Ratio of income from tax revenues on a liability basis (payroll
tax contributions and income from the taxation of scheduled
benefits) to the OASDI taxable payroll for the year.
Inflation
An increase in the volume of money and credit relative to
available goods, resulting in an increase in the general price
level.
Interest
A payment in exchange for the use of money during a specified
period.
Interest rate
For the OASDI trust funds, interest rates on new public-debt
obligations issuable to federal trust funds are determined
monthly. Such rates are set equal to the average market yield on
all outstanding marketable U.S. securities not due or callable
until after 4 years from the date the rate is determined. The
effective interest rate for a trust fund is the ratio of the
interest earned by the fund over a given period of time to the
average level of assets held by the fund during the period. The
effective rate of interest thus represents a measure of the
overall average interest earnings on the fund's portfolio of
assets.
Long range
The next 75 years. Long-range actuarial estimates are made for
this period because it is approximately the maximum remaining
lifetime of current Social Security participants.
Maximum taxable limit
The limit or "cap" on covered earnings that are subject to the
12.4 percent payroll tax and that can be used in the benefit
formula, thereby limiting the size of taxes and benefits. This
"cap" is indexed annually for average wage growth and therefore it
changes every year. In 2007, the taxable maximum limit is $97,500.
Nominal dollar
See under Current dollar.
Outlay
The issuance of checks, disbursement of cash, or electronic
transfer of funds made to liquidate a federal obligation. Outlays
during a fiscal year may be for payment of obligations incurred in
prior years (prior-year obligations) or in the same year. Outlays,
therefore, flow in part from unexpended balances of prior-year
budgetary resources and in part from budgetary resources provided
for the year in which the money is spent. Total government outlays
include outlays of off-budget federal entities, such as the Social
Security trust fund.
Pay-as-you-go financing
A financing method where taxes are scheduled to produce just as
much income as required to pay current benefits, with trust fund
assets built up only to the extent needed to prevent exhaustion of
the fund by random economic fluctuations.
Payroll taxes
A tax levied on the gross wages of workers.
Present value
The equivalent value, at the present time, of a future stream of
payments (either income or cost). The present value of a future
stream of payments may be thought of as the lump-sum amount that,
if invested today, together with interest earnings would be just
enough to meet each of the payments as they fell due. Present
values are widely used in calculations involving financial
transactions over long periods of time to account for the time
value of money (interest). For the purpose of present-value
calculations for this report, values are discounted by the
effective yield on trust fund assets.
Solvency
A program is solvent at a point in time if it is able to pay
scheduled benefits when due with scheduled financing. For example,
the OASDI program is considered solvent over any period for which
the trust funds maintain a positive balance throughout the period.
Summarized balance
The difference between the summarized cost rate and the summarized
income rate, expressed as a percentage of taxable payroll.
Summarized cost rate
The ratio of the present value of cost to the present value of the
taxable payroll for the years in a given period, expressed as a
percentage. This percentage can be used as a measure of the
relative level of cost during the period in question. For purposes
of evaluating the financial adequacy of the program, the
summarized cost rate is adjusted to include the cost of reaching
and maintaining a target trust fund level. Because a trust fund
level of about 1 year's cost is considered to be an adequate
reserve for unforeseen contingencies, the targeted trust fund
ratio used in determining summarized cost rates is 100 percent of
annual cost. Accordingly, the adjusted summarized cost rate is
equal to the ratio of (a) the sum of the present value of the cost
during the period plus the present value of the targeted ending
trust fund level, to (b) the present value of the taxable payroll
during the projection period.
Summarized income rate
The ratio of the present value of scheduled tax income to the
present value of taxable payroll for the years in a given period,
expressed as a percentage. This percentage can be used as a
measure of the relative level of income during the period in
question. For purposes of evaluating the financial adequacy of the
program, the summarized income rate is adjusted to include assets
on hand at the beginning of the period. Accordingly, the adjusted
summarized income rate equals the ratio of (a) the sum of the
trust fund balance at the beginning of the period plus the present
value of the total income from taxes during the period, to (b) the
present value of the taxable payroll for the years in the period.
Sustainable solvency
As defined by OCACT, sustainable solvency for the financing of the
program is achieved when the program has positive trust fund
ratios throughout the 75-year projection period and these ratios
are stable or rising at the end of the period.
Taxable earnings
Wages and/or self-employment income, in employment covered by the
OASDI and/or Hospital Insurance (HI) programs, that is under the
applicable annual maximum taxable limit. For 1994 and later, no
maximum taxable limit applies to the HI program.
Taxable payroll
A weighted average of taxable wages and taxable self-employment
income. When multiplied by the combined employee-employer tax
rate, it yields the total amount of taxes incurred by employees,
employers, and the self-employed for work during the period.
Taxable wages
See under "Taxable earnings."
Trust fund
As discussed in this report, the OASDI trust funds are separate
accounts in the United States Treasury in which are deposited the
taxes received under the Federal Insurance Contributions Act and
the Self-Employment Contributions Act, as well as taxes resulting
from coverage of state and local government employees; any sums
received under the financial interchange with the railroad
retirement account; voluntary hospital and medical insurance
premiums; and transfers of Federal general revenues. Funds not
withdrawn for current monthly or service benefits, the financial
interchange, and administrative expenses are invested in
interest-bearing federal securities, as required by law; the
interest earned is also deposited in the trust funds.
o Old-Age and Survivors Insurance (OASI). The trust fund used for
paying monthly benefits to retired-worker (old-age) beneficiaries
and their spouses and children and to survivors of deceased
insured workers.
o Disability Insurance (DI). The trust fund used for paying
monthly benefits to disabled-worker beneficiaries and their
spouses and children and for providing rehabilitation services to
the disabled.
o Hospital Insurance (HI). The trust fund used for paying part of
the costs of inpatient hospital services and related care for aged
and disabled individuals who meet the eligibility requirements.
Also known as Medicare Part A.
Trust fund ratio
A measure of the adequacy of the trust fund level. Defined as the
assets at the beginning of the year expressed as a percentage of
the cost during the year. The trust fund ratio represents the
proportion of a year's cost which could be paid with the funds
available at the beginning of the year.
Unified budget
Under budget concepts set forth in the Report of the President's
Commission on Budget Concepts, a comprehensive budget in which
receipts and outlays from federal and trust funds are
consolidated. When these fund groups are consolidated to display
budget totals, transactions that are outlays of one fund group for
payment to the other fund group (that is, interfund transactions)
are deducted to avoid double counting. The unified budget should,
as conceived by the President's Commission, take in the full range
of federal activities. By law, budget authority, outlays, and
receipts of off-budget programs (currently only the Postal Service
and Social Security) are excluded from the current budget, but
data relating to off-budget programs are displayed in the budget
documents. However, the most prominent total in the budget is the
unified total, which is the sum of the on- and off-budget totals.
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Highlights of [86]GAO-07-213 , a report to congressional committees
March 2007
SOCIAL SECURITY REFORM
Greater Transparency Needed about Potential General Revenue Financing
Absent reform, Social Security's financing gap will grow until currently
scheduled benefits can no longer be paid in full. Recent reform proposals
often include general revenue (GR)--a major change that can have
significant implications for the budget as a whole. This report addresses
these issues: (1) What information is available about GR in recent
proposal scorings by Social Security's Office of the Chief Actuary
(OCACT)? (2) What common mechanisms, especially GR mechanisms, are used to
increase program revenue?
(3) What are the implications of GR for the trust fund and the federal
budget? We have prepared this report under the Comptroller General's
statutory authority to conduct evaluations on his own initiative as part
of a continued effort to assist Congress in addressing the challenges
facing Social Security.
[87]What GAO Recommends
GAO recommends that the Commissioner of SSA direct OCACT to include a
summary presentation of its analysis to facilitate comparisons of reform
proposals especially with respect to use of GR and federal budget
implications. SSA suggested that a table showing how each provision
affects the actuarial deficit would be helpful. GAO agrees but remains of
the view that a table that can clearly and quickly communicate both trust
fund effects and federal budget implications is needed.
Although focused on the trust fund, OCACT scoring memos are also the
primary source of information on how proposals would impact the federal
budget. Memos provide information on GR use and its effects, but experts
said comparing proposals on this element presents challenges, requiring
extensive efforts to understand complex tables shown at the end of the
memos.
Fourteen of 17 proposals GAO reviewed provided GR (1) as needed to
maintain trust fund solvency or (2) as specified by formula, amount, or
source. Nine of the 17 achieved "sustainable solvency" under OCACT's
definition using the first approach. This type of unlimited transfer poses
the greatest potential risk to the federal budget, especially when
combined with benefit guarantees. In proposals reviewed, amounts of GR
under both types of approaches ranged up to about twice program shortfall.
In all proposals using GR, the GR was reallocated from the non-Social
Security budget. While any additional revenue to the trust fund will help
solvency, unified federal budget effects depend on the type of
revenue--whether it is new revenue (additional payroll tax revenue or GR
that is new to the federal budget) versus reallocated GR. Absent other
changes, new revenue would improve the long-term fiscal imbalance while
reallocated GR would do nothing to address it. Although raising taxes
(payroll or other) or cutting benefits would have tangible consequences
for taxpayers and beneficiaries, e.g., less take-home pay or smaller
benefit checks, the consequences of transfers from the non-Social Security
budget in the form of reallocated GR are less likely to be clearly
observable. Reallocated GR, however, is not free. Regardless of how GR is
provided to Social Security, it must be paid for at some point. The
question is when, and by whom.
New Revenue versus Reallocated General Revenue
References
Visible links
52. http://www.gao.gov/cgi-bin/getrpt?GAO-01-199SP
54. http://www.gao.gov/cgi-bin/getrpt?GAO-05-649R
55. http://www.gao.gov/cgi-bin/getrpt?GAO-05-193SP
56. http://www.gao.gov/cgi-bin/getrpt?GAO-01-199SP
57. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD/HEHS-98-74
58. http://www.gao.gov/cgi-bin/getrpt?GAO-02-62
59. http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-99-110
60. http://www.gao.gov/cgi-bin/getrpt?GAO-05-649R
61. http://www.gao.gov/cgi-bin/getrpt?GAO-06-804
63. http://www.gao.gov/cgi-bin/getrpt?GAO-05-649R
65. http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-98-196
66. http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-99-110
67. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD/HEHS-00-29
68. http://www.gao.gov/cgi-bin/getrpt?GAO-03-310
69. http://www.gao.gov/cgi-bin/getrpt?GAO-03-907
70. http://www.gao.gov/cgi-bin/getrpt?GAO-03-907
71. http://www.gao.gov/cgi-bin/getrpt?GAO-05-649R
72. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD/HEHS-00-29
74. http://www.gao.gov/cgi-bin/getrpt?GAO-05-649R
76. http://www.gao.gov/cgi-bin/getrpt?GAO-05-649R
77. http://www.gao.gov/cgi-bin/getrpt?GAO-04-747
78. http://www.gao.gov/cgi-bin/getrpt?GAO-05-734SP
86. http://www.gao.gov/cgi-bin/getrpt?GAO-07-213
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