Long-Term Budget Outlook: Deficits Matter--Saving Our Future	 
Requires Tough Choices Today (23-JAN-07, GAO-07-389T).		 
                                                                 
The Comptroller General testified before Congress for a hearing  
entitled "Why Deficits Matter." The presentation touched on	 
several points. First, the current financial condition in the	 
United States is worse than is widely understood. Second, the	 
current fiscal path is both imprudent and unsustainable. Third,  
improvements in information and processes are needed and can	 
help. And finally, meeting the long-term fiscal challenge will	 
require (1) significant entitlement reform to change the path of 
those programs; (2) reprioritizing, restructuring and		 
constraining other spending programs; and (3) more		 
revenues--hopefully through a reformed tax system. This will take
bipartisan cooperation and compromise.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-389T					        
    ACCNO:   A65085						        
  TITLE:     Long-Term Budget Outlook: Deficits Matter--Saving Our    
Future Requires Tough Choices Today				 
     DATE:   01/23/2007 
  SUBJECT:   Budget deficit					 
	     Economic growth					 
	     Entitlement programs				 
	     Financial management				 
	     Fiscal policies					 
	     Future budget projections				 
	     Strategic planning 				 
	     Taxes						 
	     Transparency					 

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GAO-07-389T

   

     * [1]Our Fiscal and Financial Condition Is Worse Than Widely Unde
     * [2]The Current Long-term Fiscal Outlook is Unacceptable
     * [3]Process and Presentational Changes to Increase Transparency
     * [4]Meeting the Long-Term Fiscal Challenge Requires Action on th
     * [5]Further Delay Will Only Worsen the Outlook
     * [6]Concluding Remarks
     * [7]Contact and Acknowledgments
     * [8]Appendix I: Ideas for Improving the Transparency of Long-ter

          * [9]Supplemental Reporting in the President's Annual Budget Sub

               * [10]Additional Executive Branch Reports
               * [11]Additional Cost Information on Proposals before Adoption
               * [12]GAO Reports
               * [13]Other Areas in Which GAO Has Suggested That Congress
                 Might
               * [14]Order by Mail or Phone

Testimony

Before the Committee on the Budget, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EST

Tuesday, January 23, 2007

LONG-TERM BUDGET OUTLOOK

Deficits Matter--Saving Our Future Requires Tough Choices Today

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

GAO-07-389T

Chairman Spratt, Mr. Ryan, Members of the Committee:

I appreciate this invitation to talk with you about why deficits
matter--about our nation's long-term fiscal outlook and the challenge it
presents. Your decision to focus on this issue is an important statement
about the seriousness with which you view this challenge and your
commitment to begin to address it.

You all have entitled this hearing "Why Deficits Matter." Let me start
with a very simple reason: they matter for the world we leave our children
and grandchildren. As all of you know--and as I will discuss in this
statement--it is not the short-term deficit that threatens us; it is the
long-term fiscal outlook. We are on an imprudent and unsustainable path.
Continuing on our current fiscal path would gradually erode, if not
suddenly damage, our economy, our standard of living, and ultimately even
our domestic tranquility and our national security. This is a great nation
with much to be proud of and much to be thankful for. But today we are
failing in one of our most important stewardship responsibilities--our
duty to pass on a country better positioned to deal with the challenges of
the future than the one we were given.

The picture I will lay out for you today is not a pretty one and it's
getting worse with the passage of time. But this nation has met difficult
challenges--including challenges to its very existence--in the past and
I'm confident that we can do so again.

The essence of my message today is no surprise to Members of this
Committee:

           o Our current financial condition is worse than is widely
           understood.
           o Our current fiscal path is both imprudent and unsustainable.
           o Improvements in information and processes are needed and can
           help.
           o Meeting our long-term fiscal challenge will require (1)
           significant entitlement reform to change the path of those
           programs; (2) reprioritizing, restructuring and constraining other
           spending programs; and (3) more revenues--hopefully through a
           reformed tax system. This will take bipartisan cooperation and
           compromise.
           o The time to act to save our future is now!

When fiscal year 2006 ended a great deal of attention was paid to the fact
that at $248 billion "the deficit" came in lower than originally predicted
and lower than in 2005. And just this week press reports have noted
that--as figure 1 shows--the (unified) deficit as a share of the economy
is not terribly high.

Figure 1: Unified Surplus or Deficit as a Share of Gross Domestic Product
(GDP), Fiscal Years 1940-2006

Source:  Department of Commerce,  Office of Management and Budget, and
Congressional Budget Office.

This is all true--and it is also misleading. First, a single year's
unified budget deficit is not the critical issue here. Certainly this
improvement in the 1-year fiscal picture is better than a worsening in
that picture, but it did not fundamentally change our long-term fiscal
outlook. In fact, the U.S. government's total reported liabilities, net
social insurance commitments, and other fiscal exposures continue to grow
and now total approximately $50 trillion, representing approximately four
times the nation's total output, or gross domestic product (GDP) in fiscal
year 2006, up from about $20 trillion, or two times GDP in fiscal year
2000.

Further, the long-term challenge is fast becoming a short-term one as the
first of the baby boomers become eligible for early retirement under
Social Security on January 1, 2008--less than one year--and for Medicare
benefits in 2011--less than 4 years from now. The budget and economic
implications of the baby boom generation's retirement have already become
a factor in the Congressional Budget Office's (CBO) 10-year baseline
projections and will only intensify as the baby boomers age. Simply put,
our nation is on an imprudent and unsustainable fiscal path. Herbert Stein
once said that something that is not sustainable will stop. That, however,
should not give us comfort. It is more prudent to change the path than to
wait until a crisis occurs.

And that brings me to my next point. While restraint in the near term and
efforts to balance the budget over the next 5 years can be positive, it is
important that actions to achieve this also address the long-term fiscal
outlook. The real problem is not the near-term deficit--it is the
long-term fiscal outlook. It is important to look beyond year 5 or even
year 10. Both the budget and the budget process need more transparency
about and focus on the long-term implications of current and proposed
spending and tax policies. In this testimony I will suggest a number of
things that I believe will help in this area.

Our Fiscal and Financial Condition Is Worse Than Widely Understood

A great deal of budget reporting focuses on a single number--the unified
budget deficit, which was $248 billion in fiscal year 2006. This largely
cash-based number represents the difference between revenues and outlays
for the government as a whole. It is an important measure since it is
indicative of the government's draw on today's credit markets--and its
claim on today's economy. But it also masks the difference between Social
Security's cash flows and those for the rest of the budget. Therefore we
also need to look beneath the unified deficit at the on-budget
deficit--what I like to call the "operating deficit." And, finally, we
should be looking at the financial statements' report of net operating
cost--the accrual-based deficit.

Social Security currently takes in more tax revenue than it needs to pay
benefits. This cash surplus is invested in Treasury securities and earns
interest in the form of additional securities. The difference between the
on-budget deficit and the unified budget deficit is the total surplus in
Social Security (cash and interest) and the U.S. Postal Service. Excluding
consideration of the $185 billion surplus in Social Security and a $1
billion surplus in the Postal Service, the on-budget deficit was $434
billion in 2006. Figure 2 shows graphically how the on-budget deficit and
the off-budget surplus have related and combine to lead to the unified
deficit. Since the Social Security trust fund invests any receipts not
needed to pay benefits in Treasury securities, its cash surplus reduces
the amount the Treasury must borrow from the public. As I will note later,
this pattern of cash flows is important--and it is projected to come to an
end just 10 years from now.

Figure 2: Surplus or Deficit as a Share of GDP, Fiscal Years 1962-2006

Sources: Office of Management and Budget, Department of the Treasury, and
Congressional Budget Office. Cash deficits begin 2017

The third number, net operating cost, is the amount by which costs exceed
revenue and it is reported in the federal government's financial
statements, which are prepared using generally accepted accounting
principles.^1 Costs are recorded on an accrual basis--namely, in the
period when goods are used or services are performed as opposed to when
the resulting cash payments are made. However, most revenues, on the other
hand, are recorded on the modified cash basis--that is, they are recorded
when collected. The net operating cost can be thought of as the accrual
deficit. The accrual measure primarily provides more information on the
longer-term implications of today's policy decisions and operations by
showing certain costs incurred today but not payable for years to come,
such as civilian and military pensions and retiree health care. In fiscal
year 2006 net operating cost was $450 billion.

All three of these numbers are informative. However, neither accrual nor
cash measures alone provide a full picture of the government's fiscal
condition or the cost of government. Used together, they present
complementary information and provide a more comprehensive picture of the
government's financial condition today and fiscal position over time. For
example, the unified budget deficit provides information on borrowing
needs and current cash flow. The accrual deficit provides information on
the current cost of government, but it does not provide information on how
much the government has to borrow in the current year to finance
government activities. Also, while accrual deficits provide more
information on the longer-term consequences of current government
activities, they do not include the longer-term cost associated with
social insurance programs like Social Security and Medicare. In addition,
they are not designed to provide information about the timing of payments
and receipts, which can be very important. Therefore, just as investors
need income statements, statements of cash flow, and balance sheets to
understand a business's financial condition, both cash and accrual
measures are important for understanding the government's financial
condition.^2

^1 The Financial Report of the United States Government, 2006 can be found
at [15]www.fms.treas.gov/fr/index.html .

Although looking at both the cash and accrual measures provides a more
complete picture of the government's fiscal stance today and over time
than looking at either alone, even these together do not tell us the full
story. For example, as shown in table 1, all three of these deficits
improved between fiscal year 2005 and fiscal year 2006.^3 This
improvement, however, did not result from a change in the fundamental
drivers of our long-term challenge and did not signal an improvement in
that outlook. To understand the long-term implications of our current path
requires more than a single year's snapshot. In this regard, the long-term
outlook has worsened significantly in the last several years. That is why
for more than a decade GAO has been running simulations to tell this
longer-term story.

^2 GAO is responsible for auditing the financial statements included in
the Financial Report, but we have been unable to express an opinion on
them for 10 years because the federal government could not demonstrate the
reliability of significant portions of the financial statements,
especially in connection with the Department of Defense. Accordingly,
amounts taken from the Financial Report may not be reliable.

^3 The decline in both the cash and accrual deficits in 2006 was primarily
driven by an increase in federal revenue by almost 12 percent. In
addition, the decline in the accrual deficit relative to the cash deficit
was primarily due to a decrease in accrual-based expenses resulting from
changes in assumptions that are the basis for actuarial estimates for
certain accrued long-term liabilities. For a discussion of how the accrual
and cash deficits relate to each other see GAO, Understanding Similarities
and Differences between Accrual and Cash Deficits, [16]GAO-07-117SP
(Washington, D.C.: December 2006) and Understanding Similarities and
Differences between Accrual and Cash Deficits, Update for Fiscal Year
2006, GAO-07- [17]341SP (Washington, D.C. January 2006).

Table 1: Fiscal Year 2005 and 2006 Deficits and Net Operating Cost

Dollars in billions                                    
                        Fiscal year 2005 Fiscal year 2006 
On-budget deficit              ($494)           ($434) 
Unified deficit                 (318)            (248) 
Net operating cost^a            (760)            (450) 

Sources: Office of Management and Budget and Department of the Treasury.

a Fiscal year 2005 and 2006 net operating cost figures reflect significant
but opposite changes in certain actuarial costs. For example, changes in
interest rates and other assumptions used to estimate future veterans'
compensation benefits increased net operating cost by $228 billion in 2005
and reduced net operating cost by $167 billion in 2006.

The Current Long-term Fiscal Outlook is Unacceptable

As I mentioned, it is not the recent past shown in figure 1--nor the
outlook for this year--that should concern us. Rather it is the picture in
figure 3 that should worry us.

Long-term fiscal simulations by GAO, CBO, and others all show that we face
large and growing structural deficits driven primarily by rising health
care costs and known demographic trends. GAO runs simulations under two
sets of assumptions. One takes the legislatively-mandated baseline from
CBO for the first 10 years and then keeps discretionary spending and
revenues constant as a share of GDP while letting Social Security,
Medicare, and Medicaid grow as projected by the Trustees and CBO under
midrange assumptions.^4 The other, perhaps more realistic, scenario based
on the Administration's announced policy preferences changes only two
things in the first 10 years: discretionary spending grows with the
economy and all expiring tax provisions are extended.^5 Like the "Baseline
Extended" scenario, after 10 years both revenues and discretionary
spending remain constant as a share of the economy. As figure 3 shows,
deficits spiral out of control under either scenario. We will be updating
these figures with the release of the new CBO baseline later this month,
but even with the lower deficit in 2006, the long-term picture will remain
daunting.

^4 Social Security and Medicare spending is based on the May 2006
Trustees' intermediate projections. Medicaid spending is based on CBO's
December 2005 long-term projections under midrange assumptions.

^5Additional information about the GAO model, its assumptions, data, and
charts can be found at http://www.gao.gov/special.pubs/longterm/ .

Figure 3: Unified Surpluses and Deficits as a Share of GDP under
Alternative Fiscal Policy Simulations

Source: GAO's August 2006 analysis.

Note: Assumes currently scheduled Social Security benefits are paid in
full throughout the simulation period.

Looking more closely at each scenario gives a fuller understanding of what
the impact of continuing these trends would have on what government does.
And it shows us "Why Deficits Matter."

First, it makes sense to look back to 2001--it is worth understanding how
much worse the situation has become. As I noted, despite some recent
improvements in short-term deficits, the long-term outlook is moving in
the wrong direction.

Figures 4 and 5 show the composition of spending under our "Baseline
Extended" scenario in 2001 and 2006. Even with short-term surpluses, we
had a long-term problem in 2001, but it was more than 40 years out.
Certainly an economic slowdown and various decisions driven by the attacks
of 9/11 and the need to respond to natural disasters have contributed to
the change in outlook. However, these items alone do not account for the
dramatic worsening. Tax cuts played a major role, but the single largest
contributor to the deterioration of our long-term outlook was the passage
of the Medicare prescription drug benefit in 2003.

Figure 4: Composition of Spending as a Share of GDP under Baseline
Extended, January 2001

Source: GAO's January 2001 analysis.

Note: All other spending is net of offsetting interest receipts in
2015-2040.

Figure 5: Composition of Spending as a Share of GDP under Baseline
Extended, August 2006

Source: GAO's August 2006 analysis.

Notes: In addition to the expiration of tax cuts, revenue as a share of
GDP increases through 2016 due to (1) real bracket creep, (2) more
taxpayers becoming subject to the alternative minimum tax, and (3)
increased revenue from tax-deferred retirement accounts. After 2016,
revenue as a share of GDP is held constant.

Figure 5 illustrates today's cold hard truth, that neither slowing the
growth in discretionary spending nor allowing the tax provisions to
expire--nor both together--would eliminate the imbalance. This is even
clearer under the more realistic scenario as shown in figure 6. Estimated
growth in the major entitlement programs results in an unsustainable
fiscal future regardless of whether one assumes future revenue will be
somewhat above historical levels as a share of the economy as in the first
simulation (fig. 5) or lower as shown in figure 6.

Figure 6: Composition of Spending as a Share of GDP Assuming Discretionary
Spending Grows with GDP after 2006 and All Expiring Tax Provisions Are
Extended

Source: GAO's August 2006 analysis.

Both these simulations remind us "Why Deficits Matter." They illustrate
that without policy changes on the spending and revenue side of the
budget, the growth in spending on federal retirement and health
entitlements will encumber an escalating share of the government's
resources. A government that in our children's lifetimes does nothing more
than pay interest on its debt and mail checks to retirees and some of
their health providers is unacceptable.

Although Social Security is a major part of the fiscal challenge, contrary
to popular perception, it is far from our biggest challenge. While today
Social Security spending exceeds federal spending for Medicare and
Medicaid, that will change. Over the past several decades, health care
spending on average has grown much faster than the economy, absorbing
increasing shares of the nation's resources, and this rapid growth is
projected to continue. CBO estimates that Medicare and Medicaid spending
will reach 6.3 percent of GDP in 2016, up from 4.6 percent this year
(2007), while spending for Social Security will only reach 4.7 percent of
GDP in 2016 up from 4.2 percent this year. For this reason and others,
rising health care costs pose a fiscal challenge not just to the federal
budget but also to states, American business, and our society as a whole.

While there is always some uncertainty in long-term projections, two
things are certain: the population is aging and the baby boom generation
is nearing retirement age. The aging population and rising health care
spending will have significant implications not only for the budget but
also for the economy as a whole. Figure 7 shows the total future draw on
the economy represented by Social Security, Medicare, and Medicaid. Under
the 2006 Trustees' intermediate estimates and CBO's long-term Medicaid
estimates, federal spending for these entitlement programs combined will
grow to 15.5 percent of GDP in 2030 from today's 9 percent. This graphic
is another illustration of why we have to act. I do not believe we are
prepared to have programs that provide income for us in retirement and pay
our doctors absorb this much of our children's and grandchildren's
economy. It is clear that taken together, Social Security, Medicare, and
Medicaid under current law represent an unsustainable burden on future
generations.

Figure 7: Social Security, Medicare, and Medicaid Spending

Source: GAO analysis based on data from the Office of the Chief Actuary,
Social Security Administration, Office of the Actuary, Centers for
Medicare and Medicaid Services, and the Congressional Budget Office.

Notes: Social Security and Medicare projections based on the intermediate
assumptions of the 2006 Trustees' Reports. Medicaid projections based on
CBO's August 2006 short-term Medicaid estimates and CBO's December 2005
long-term Medicaid projections under midrange assumptions.

While Social Security, Medicare, and Medicaid dominate the long-term
outlook, they are not the only federal programs or activities that bind
the future. Part of what we owe the future is leaving enough flexibility
to meet whatever challenges arise. So beyond dealing with the "big 3," we
need to look at other policies that limit that flexibility--not to
eliminate all of them but to at least be aware of them and make a
conscious decision about them. The federal government undertakes a wide
range of programs, responsibilities, and activities that obligate it to
future spending or create an expectation for spending and potentially
limit long-term budget flexibility. GAO has described the range and
measurement of such fiscal exposures--from explicit liabilities such as
environmental cleanup requirements to the more implicit obligations
presented by life-cycle costs of capital acquisition or disaster
assistance.

Figure 8 shows that despite improvement in both the fiscal year 2006
reported net operating cost and the cash-based budget deficit, the U.S.
government's major reported liabilities, social insurance commitments, and
other fiscal exposures continue to grow. They now total approximately $50
trillion--about four times the nation's total output (GDP) in fiscal year
2006--up from about $20 trillion, or two times GDP in fiscal year 2000.

Clearly, despite recent progress on our short-term deficits, we have been
moving in the wrong direction in connection with our long-range imbalance
in recent years. Our long-range imbalance is growing daily due to
continuing deficits, known demographic trends, rising health care costs,
and compounding interest expense.

Figure 8: Major Reported Fiscal Exposures (Dollars in Trillions)

Source: Department of Treasury.

Notes: Data from 2000 and 2006 Financial Report of the United States
Government. Estimates for Social Security and Medicare are at present
value as of January 1 of each year and all other data are as of September
30. Percentage increases are based on actual data and may differ from
increases calculated from rounded data shown in table.

We all know that it is hard to make sense of what "trillions" means.
Figure 9 provides some ways to think about these numbers: if we wanted to
put aside today enough to cover these promises, it would take $170,000 for
each and every American or approximately $440,000 per American household.
Considering that median household income is about $46,000, the household
burden is about 9.5 times median income.

Figure 9: Understanding the Size of Our Major Reported Fiscal Exposures

Sources: GAO analysis of data from the Department of the Treasury, Federal
Reserve Board, U.S. Census Bureau and Bureau of Economic Analysis

Process and Presentational Changes to Increase Transparency and Focus on
Long-Term Consequences Can Help

Since at its heart the budget challenge is a debate about the allocation
of limited resources, the budget process can and should play a key role in
helping to address our long-term fiscal challenge and the broader
challenge of modernizing government for the 21st century. I have said that
Washington suffers from myopia and tunnel vision. This can be especially
true in the budget debate in which we focus on one program at a time and
the deficit for a single year or possibly the costs over 5 years without
asking about the bigger picture and whether the long term is getting
better or worse. We at GAO are in the transparency and accountability
business. Therefore it should come as no surprise that I believe we need
to increase the understanding of and focus on the long term in our policy
and budget debates. To that end--as I noted earlier--I have been talking
with a number of Members of the Senate and the House as well as various
groups concerned about this issue concerning a number of steps that might
help. I've attached a summary of some of these ideas to this statement.
Let me highlight several critical elements here.

           o The President's budget proposal should again cover 10 years.
           This is especially important given that some policies--both
           spending and tax--cost significantly more (or lose significantly
           more revenue) in the second 5 years than in the first. In
           addition, the budget should disclose the impact of major tax or
           spending proposals on the short, medium, and long term.
           o The executive branch should also provide information on fiscal
           exposures--both spending programs and tax expenditures--that is,
           the long-term budget costs represented by current individual
           programs, policies, or activities as well as the total.
           o The budget process needs to pay more attention to the long-term
           implication of the choices being debated. For example, elected
           representatives should be provided with more explicit information
           on the long-term costs of any major tax or spending proposal
           before it is voted upon. It is sobering to recall that during the
           debate over adding prescription drug coverage to Medicare, a great
           deal of attention was paid to whether the 10-year cost was over or
           under $400 billion. Not widely publicized--and certainly not
           surfaced in the debate--was that the present value of the
           long-term cost of this legislation was about $8 trillion!

           Of course, when you are in a hole, the first thing to do is stop
           digging. I have urged reinstitution of the statutory
           controls--both meaningful caps on discretionary spending and
           pay-as-you-go (PAYGO) on both the tax and spending sides of the
           ledger--that expired in 2002. However given the severity of our
           current challenge, Congress should look beyond the return to PAYGO
           and discretionary caps. Mandatory spending cannot remain on
           autopilot--it will not be enough simply to prevent actions to
           worsen the outlook. We have suggested that Congress might wish to
           design "triggers" for mandatory programs--some measure that would
           prompt action when the spending path increased significantly. In
           addition, Congress may wish to look at rules to govern the use of
           "emergency supplementals." However, as everyone in this committee
           knows, these steps alone will not solve the problem. That is why
           building in more consideration of the long-term impact of
           decisions is necessary.
			  
			  Meeting the Long-Term Fiscal Challenge Requires Action on the
			  Spending and Tax Sides of the Budget--Cooperation and Compromise
			  Will Be Necessary

           There is no easy way out of the challenge we face. Economic growth
           is essential, but we will not be able to simply grow our way out
           of the problem. The numbers speak loudly: our projected fiscal gap
           is simply too great. To "grow our way out" of the current
           long-term fiscal gap would require sustained economic growth far
           beyond that experienced in U.S. economic history since World War
           II.

           Similarly, those who believe we can solve this problem solely by
           cutting spending or solely raising taxes are not being realistic.
           While the appropriate level of revenues will be part of the debate
           about our fiscal future, making no changes to Social Security,
           Medicare, Medicaid, and other drivers of the long-term fiscal gap
           would require ever-increasing tax levels--something that seems
           both inappropriate and implausible. That is why I have said that
           substantive reform of Social Security and our major health
           programs remains critical to recapturing our future fiscal
           flexibility. I believe we must start now to reform these programs.

           Although the long-term outlook is driven by Social Security and
           health care costs, this does not mean the rest of the budget can
           be exempt from scrutiny. Restructuring and constraint will be
           necessary beyond the major entitlement programs. This effort
           offers us the chance to bring our government and its programs in
           line with 21^st century realities.^6 Many tax expenditures act
           like entitlement programs, but with even less scrutiny. Other
           programs and activities were designed for a very different time.

           Taken together, entitlement reform and reexamination of other
           programs and activities could engender a national discussion about
           what Americans want from their government and how much they are
           willing to pay for those things.

           Finally, given demographic and health care cost trends, the size
           of the spending cuts necessary to hold revenues at today's share
           of GDP seems implausible. It is not realistic to assume we can
           remain at 18.2 percent of GDP--we will need more revenues.
           Obviously we want to minimize the tax burden on the American
           people and we want to remain competitive with other industrial
           nations--but in the end the numbers have to add up.

           As I noted, we need to start with real changes in existing
           entitlement programs to change the path of those programs.
           However, reform of the major entitlement programs alone will not
           be sufficient. Reprioritization and constraint will be necessary
           in other spending programs. Finally, we will need more
           revenues--hopefully through a reformed tax system.

           The only way to get this done is through bipartisan cooperation
           and compromise--involving both the Congress and the White House.

           Delay only makes matters worse. GAO's simulations show that if no
           action is taken, balancing the budget in 2040 could require
           actions as large as cutting total federal spending by 60 percent
           or raising federal taxes to two times today's level.
			  
			  Further Delay Will Only Worsen the Outlook

           For many years those of us who talk about the need to put Social
           Security on a sustainable course and to reform Medicare have
           talked about the benefits of early action. Acting sooner rather
           than later can turn compound interest from an enemy to an ally.
           Acting sooner rather than later permits changes to be phased in
           more gradually and gives those affected time to adjust to the
           changes. Delay does not avoid action--it just makes the steps that
           have to be taken more dramatic and potentially harder.

           Unfortunately, it is getting harder to talk about early
           action--the future is upon us.

           Next year members of the baby boom generation start to leave the
           labor force. Figure 10 shows the impact of demographics on labor
           force growth.

           Figure 10: Labor Force Growth Will Continue to Decline

           Source: GAO analysis of data from the Office of the Chief Actuary,
           Social Security Administration.

           Note: Percentage change is calculated as a centered 5-yr moving
           average of projections based on the intermediate assumptions of
           the 2006 Trustees' Reports.

           Reflecting this demographic shift, CBO projects the average annual
           growth rate of real GDP will decline from 3.1 percent in 2008 to
           2.6 percent in the period 2012-2016. This slowing of economic
           growth will come just as spending on Social Security, Medicare and
           Medicaid will begin to accelerate--accounting for 56 percent of
           all federal spending by 2016 compared to 43 percent in 2006.

           As I noted earlier, today Social Security's cash surplus helps
           offset the deficit in the rest of the budget, thus reducing the
           amount Treasury must borrow from the public and increasing budget
           flexibility--but this is about to change.

           Growth in Social Security spending is expected to increase from an
           estimated 4.8 percent in 2008 to 6.5 percent in 2016. The result,
           as shown in figure 11, is that the Social Security surpluses begin
           a permanent decline in 2009. At that time the rest of the budget
           will begin to feel the squeeze since the ability of Social
           Security surpluses to offset deficits in the rest of the budget
           will begin to shrink. In 2017 Social Security will no longer run a
           cash surplus and will begin adding to the deficit. That year
           Social Security will need to redeem the special securities it
           holds in order to pay benefits. Treasury will honor those
           claims--the United States has never defaulted. But there is no
           free money. The funds to redeem those securities will have to come
           from higher taxes, lower spending on other programs, higher
           borrowing from the public, or a combination of all three.

           Figure 11: Projected Cash Surpluses and Deficits in the Combined
           Social Security Trust Fund

           Source: GAO analysis of data from the Office of the Chief Actuary,
           Social Security Administration.

           Note: Projections based on the intermediate assumptions of the
           2006 Trustees' Reports. The consumer price index is used to adjust
           from current to constant dollars.

           I spoke before of how big the changes would have to be if we were
           to do nothing until 2040. Of course, we won't get to that
           point--something will force action before then. If we act now, we
           have more choices and will have more time to phase-in related
           changes.
			  
			  Concluding Remarks

           Chairman Spratt, Mr. Ryan, Members of the Committee--in holding
           this hearing even before the President's Budget is submitted you
           are signaling the importance of considering any proposal within
           the context of the long-term fiscal challenge. This kind of
           leadership will be necessary if progress is to be made.

           I have long believed that the American people can accept difficult
           decisions as long as they understand why such steps are necessary.
           They need to be given the facts about the fiscal outlook: what it
           is, what drives it, and what it will take to address it. As most
           of you know, I have been investing a good deal of time in the
           Fiscal Wake-Up Tour (FWUT) led by the Concord Coalition. Scholars
           from both the Brookings Institution and the Heritage Foundation
           join with me and Concord in laying out the facts and discussing
           the possible ways forward. In our experience, having these people,
           with quite different policy views on how to address our long-range
           imbalance, agree on the nature, scale, and importance of the
           issue--and on the need to sit down and work together--resonates
           with the audiences. Although the major participants have been
           Concord, GAO, Brookings, and Heritage, others include such
           organizations as the Committee for Economic Development (CED); the
           American Institute of Certified Public Accountants (AICPA); the
           Association of Government Accountants (AGA); the National
           Association of State Auditors, Comptrollers and Treasurers
           (NASACT); and AARP. The FWUT also has received the active support
           and involvement of community leaders, local colleges and
           universities, the media, the business community, and both former
           and current elected officials. We have been to 17 cities to-date.
           The discussion has been broadcast on public television stations in
           Atlanta and Philadelphia. Earlier this month OMB Director Portman
           and former Senator Glenn joined us at an event at the John Glenn
           School of Public Affairs at Ohio State University in Columbus,
           Ohio.

           The specific policy choices made to address this fiscal challenge
           are the purview of elected officials. The policy debate will
           reflect differing views of the role of government and differing
           priorities for our country. What the FWUT can do--and what I will
           continue to do--is lay out the facts, debunk various myths, and
           prepare the way for tough choices by elected officials. The
           American people know--or sense--that there is something wrong;
           that these deficits are a problem. If they understand that there
           truly is no magic bullet--if they understand that

           o we cannot grow our way out of this problem;
           o eliminating earmarks will not solve the problem;
           o wiping out fraud, waste, and abuse will not solve the problem;
           o ending the war or cutting way back on defense will not solve the
           problem;
           o restraining discretionary spending will not solve the problem;
           and
           o letting the recent tax cuts expire will not solve this problem;

           then the American people can engage with you in a discussion about
           what government should do and how.

           People ask me how I think this can happen. I know that some
           Members believe a carefully structured commission will be
           necessary to prepare a package while others feel strongly that
           elected officials should take up the task of developing that
           package. Whatever the vehicle, success will require the active and
           open-minded involvement of both parties in and both houses of the
           Congress and of the President. With that it should be possible to
           develop a package which accomplishes at least three things: (1) a
           comprehensive solution to the Social Security imbalance--one that
           is not preprogrammed to require us to have to come back again, (2)
           Round I of comprehensive tax reform, and (3) Round I of Health
           Care Reform.

           This is a great nation. We have faced many challenges in the past
           and we have met them. It is a mistake to underestimate the
           commitment of the American people to their children and
           grandchildren; to underestimate their willingness and ability to
           hear the truth and support the decisions necessary to deal with
           this challenge. We owe it to our country, to our children and to
           our grandchildren to address this fiscal imbalance. The world will
           present them with new challenges--we need not bequeath them this
           burden too. The time for action is now.

           Mr. Chairman, Mr. Ryan, Members of the Committee, let me repeat my
           appreciation for your commitment and concern in this matter. We at
           GAO stand ready to assist you in this important endeavor.
			  
			  Contact and Acknowledgments

           For further information on this testimony, please contact Susan J.
           Irving at (202) 512-9142 or [email protected]. Contact points for
           our Offices of Congressional Relations and Public Affairs may be
           found on the last page of this testimony. Individuals making key
           contributions to this testimony include Jay McTigue, Assistant
           Director; Linda Baker and Melissa Wolf.
			  
^6 GAO, 21 Century Challenges: Reexamining the Base of the Federal
Government^st, [25]GAO-05-325SP (Washington, D.C.: February 2005) and
Suggested Areas for Oversight for the 110th Congress,  [26]GAO-07-235R
(Washington, D.C.: Nov. 17, 2006).			  
			  
			  Appendix I: Ideas for Improving the Transparency of Long-term
			  Costs and the Attention Paid to These Costs before Decisions Are
			  Made
			  
			  Supplemental Reporting in the Presidentâs Annual Budget Submission

           o Produce an annual Statement of Fiscal Exposures, including a
           concise list and description of exposures, cost estimates where
           possible, and an assessment of methodologies and data used to
           produce such cost estimates.
           o Increase the transparency of tax expenditures by including them
           in the annual Fiscal Exposures Statement and, where possible, also
           showing them along with spending and credit programs in the same
           policy area.
           o Provide information on the impact of major tax or spending
           proposals on short-term, mid-term, and long-term fiscal exposures
           and on the path of surplus/deficit and debt as percent of gross
           domestic product (GDP) over 10-year and longer-term horizons (and
           assuming no sunset if sunset is part of the proposal).
           o Cover 10 years in the budget.
           o Consider requiring the President to include in his annual budget
           submission a long-term fiscal goal (e.g., balance, surplus, or
           deficit as percent of GDP).
			  
			  Additional Executive Branch Reports

           o Prepare and publish a Summary Annual Report or Citizen's Summary
           that summarizes, in a clear, concise, plain English, and
           transparent manner, key financial and performance information
           included in the Consolidated Financial Report.
           o Prepare and publish a report on long-range fiscal sustainability
           every 2 to 4 years.
			  
			  Additional Cost Information on Proposals before Adoption

           o Require improved disclosure--at the time proposals are debated
           but before they are adopted--of the long-term costs of individual
           mandatory spending and tax proposals over a certain size and for
           which costs will ramp up over time.
			  
			  GAO Reports

           o An annual report or reports by GAO including comments on the
           Consolidated Financial Statement (CFS), results of the latest
           long-term fiscal simulations, comments on the adequacy of
           information regarding long-term cost implications of existing and
           proposed policies in the previous year as well as any other
           significant financial and fiscal issues.
			  
			  Other Areas in Which GAO Has Suggested That Congress Might
			  Consider Changing the Budget Treatment

           o Use accrual budgeting for the following areas where cash basis
           obligations do not adequately represent the government's
           commitment:

                        o employee pension programs (pre-Federal Employee
                        Retirement System employees);
                        o retiree health programs; and
                        o federal insurance programs, such as the Pension
                        Benefit Guaranty Corporation and crop insurance.

           o Explore techniques for expanding accrual budgeting to
			  
                        o environmental cleanup and
                        o social insurance--could consider deferring
                        recognition of social insurance receipts until they
                        are used to make payments in the future (this was
                        suggested in GAO's accrual budgeting report as an
                        idea to explore, possibly with a commission designed
                        to explore budget concepts).
								
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