Social Security: What the President's Proposal Does and Does Not Do
(Testimony, 02/09/99, GAO/T-AIMD/HEHS-99-76).

Pursuant to a congressional request, GAO discussed the President's
proposal for addressing Social Security and use of the budget surplus.

GAO noted that: (1) the President's proposal: (a) reduces debt held by
the public from current levels, thereby also reducing net interest
costs, raising national saving, and contributing to future economic
growth; (b) fundamentally changes Social Security financing by promising
general funds in the future by trading publicly held debt for debt held
by the Social Security Trust Fund and by investing some of the trust
fund in equities with the goal of capturing higher returns over the long
term; (c) does not have any effect on the projected cash flow imbalance
in the Social Security program's taxes and benefits; and (d) does not
represent a Social Security reform plan; (2) budget surpluses provide a
valuable opportunity to capture significant long term gains to both
improve the nation's capacity to address the looming fiscal challenges
arising from demographic change and aid in the transition to a more
sustainable Social Security program; (3) the President's proposal offers
a valuable opportunity to address both how much of the current resources
the nation wants to save for the future and how it can best do so; (4) a
substantial share of the surpluses would be used to reduce publicly held
debt, providing demonstrable gains for the nation's economic capacity to
afford future commitments; (5) in this way, the proposal would help
prefund these commitments by using today's wealth earned by current
workers to enhance the resources for the next generations; (6) however,
the President's proposal does not include any Social Security program
reforms to make the program's commitments more affordable; (7) the
transfer of surplus resources to the trust fund, which the
administration argues is necessary to lock in surpluses for the future,
would nonetheless constitute a major shift in financing for the Social
Security program; (8) moreover, the proposed transfer may very well make
it more difficult for the public to understand and support the savings
goals articulated; (9) several other nations have shown how debt
reduction itself can be made to be publicly compelling, but only
Congress can decide whether such an approach will work in the United
States; (10) GAO is concerned that enhancing the financial condition of
the trust fund alone without any comprehensive and meaningful Social
Security reforms may in fact undermine the case for fundamental program
changes; and (11) explicitly pledging federal general revenues to Social
Security will limit the options for dealing with other national issues.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-AIMD/HEHS-99-76
     TITLE:  Social Security: What the President's Proposal Does and
	     Does Not Do
      DATE:  02/09/99
   SUBJECT:  Economic analysis
	     Presidential proposals
	     Deficit reduction
	     Stocks (securities)
	     Federal social security programs
	     Trust funds
	     Budget surplus
	     Debt held by public
	     Fiscal policies
	     Financial management
IDENTIFIER:  Social Security Trust Fund
	     Social Security Program

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GAO

United States General Accounting OfficeTestimony

Before the Committee on Finance, U.S. Senate

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

SOCIAL SECURITY What the President's

Proposal Does and Does Not Do

Statement of David M. WalkerComptroller General of the United
States

GAO/T-AIMD/HEHS-99-76 

PAGE 3 GAO/XXXX-98-??? NAME OF DOCUMENT Page
1 GAO/T-AIMD/HEHS-99-76

Mr. Chairman and Members of the Committee:  It is a pleasure to be
here today to discuss the President's recent proposal for
addressing Social Security and use of the budget surplus.  These
proposals address some of the most important issues facing the
nation, both now and over the longer term.  The proposals have
stimulated much  controversy and dialogue in the past few weeks.
The President's proposal is complex, which makes it all the more
important for us to focus our attention on what it does--and what
it does not do--for  our long-term future.  In summary, the
President's proposal:

* It reduces debt held by the public from current levels, thereby
also reducing net interest costs, raising national saving, and
contributing to

future economic growth.* It fundamentally changes Social Security
financing in two ways:

* It promises general funds in the future by, in effect, trading
publicly held debt for debt held by the Social Security Trust Fund
(

SSTF).* It invests some of the trust fund in equities with the
goal of capturing

higher returns over the long term.* It does not have any effect on
the projected cash flow imbalance in the  Social Security
program's taxes and benefits.* It does not represent a Social
Security reform plan.

Context:  Long-Term Outlook Is Important It is important to look
at the President's proposal in the context of the fiscal situation
in which we find ourselves.  After nearly 30 years of unified

budget deficits, we look ahead to projections for "surpluses as
far as the eye can see."  At the same time, we know that we face a
demographic

tsunami in the future that poses significant challenges for the
Social Security system and our economy as a whole.  In this
context, we should  recognize that the President uses a longer-
term framework for resource allocation than has been customary in
federal budgeting.

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

Page 2 GAO/T-AIMD/HEHS-99-76

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

The Proposal Let me first briefly describe the President's
proposal.  The President proposes to use approximately two-thirds
of the total projected unified

budget surpluses over the next 15 years to reduce debt held by the
public and to address Social Security's financing problem.  His
approach to this,

however, is extremely complex and confusing.  The President
proposes to "transfer" an amount equal to a portion of the
projected surplus to the  Social Security and Medicare trust
funds.1  This transfer is projected to extend the solvency of
Social Security from 2032 to 2049.  His proposal to  permit the
trust fund to invest in equities is expected to further extend
trust fund solvency to 2055.

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

Can We Save for the Future in the Federal Budget? The federal
budget is a vehicle for making choices about the allocation of
scarce resources.  It is different from state budgets in ways
important to

this discussion.  Most states use "fund budgeting" in which
pension funds build up surpluses that are routinely invested in
assets outside the  government.  In contrast, the federal
government's unified budget shows all

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

Page 3 GAO/T-AIMD/HEHS-99-76

governmental transactions and all funds are available for current
activities.  We cannot park our surplus in a cookie jar.  The only
way to save in the  federal budget is to run a surplus or purchase
a financial asset.  When there is a cash surplus it is used to
reduce debt held by the public.  Therefore, to  the extent that
there is an actual cash surplus, debt held by the public falls.
This presents a problem for any attempt to "advance fund" all or
part of future Social Security benefits.  Advance funding within
the current  program would mean increasing the flows to the SSTF.
Although it is officially "off budget," the fact remains that the

SSTF is a governmental fund.  In the federal budget, trust funds
are not like private trust funds.  They are

simply budget accounts used to record receipts and expenditures
earmarked for specific purposes.  A private trust fund can set
aside money  for the future by increasing its assets.  However,
under current law, when the

SSTF receipts increase, they are invested in Treasury securities
and used to meet current cash needs of the government.  The
increase in assets to

the SSTF is an equal increase in claims on the Treasury.  One
government fund is lending to another.  These net out on the
government's books.  Any  increase in the trust fund balances
would only become an increase in saving if this increment were to
add to the unified budget surplus (or  decrease the unified budget
deficit) and thereby reduce the debt held by the public.

How do these transactions affect the government's debt?  Gross
federal debt is the sum of debt held by the public and debt held
by governmental  accounts--largely trust funds.  This means that
increases in the trust fund surplus will increase gross debt
unless debt held by the public declines by  at least the same
amount.  Any reform of Social Security that increases the annual

SSTF surplus would increase debt held by government accounts
since, under current law, any excess of revenues over benefit
payments is

loaned to Treasury for current needs.  As a result, total
government debt would go up unless these surpluses were used to
reduce debt held by the  public by an equivalent amount.  Debt
held by the public and debt held by trust funds represent very
different concepts.  Debt held by the public approximates the
federal  government's competition with other sectors in the credit
markets.  This affects interest rates and private capital
accumulation.  Further, interest on  debt held by the public is a
current burden on taxpayers.  In contrast, debt held by trust
funds performs an accounting function and represents the
cumulative annual surpluses of these funds (i.e., excess of
receipts over disbursements plus accrued interest).  It provides
the account with a claim

Page 4 GAO/T-AIMD/HEHS-99-76

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

How Does the President's Proposal Work? This information is
important to an understanding of the President's proposal because
in large part he proposes to, in effect, trade debt held by

the public for debt held by the SSTF.  By running a cash surplus
over the next 15 years, debt held by the public falls.  To "save"
this surplus, the  President proposes to "transfer" it to the
trust fund in the form of increased Treasury securities.  Under
his proposal, debt held by the public falls, but  debt held by the
trust funds increases.  Because he shows the transfer as a
subtraction from the surplus--a new budgetary concept--he shows no
surplus.  As a result, he attempts to save it by hiding it. The
mechanics of the proposed transfer of surpluses to the SSTF are
complex and difficult to follow.  Few details have been made
available, and  there is conflicting information on exactly how it
would work.  Figures 1 and 2 are flow charts representing our best
understanding of the Social  Security portion of this transfer.
Since it is impossible to understand the changes proposed by the
President without understanding the present  system, figure 1
shows the flows under the current system.  Under current law,
annual cash flow surpluses (largely attributable to excess payroll
taxes  over benefits payments and program expenses) are invested
in Treasury securities.2  This excess "cash" is commingled with
other revenues and  used to finance other governmental activities.
In this way, SSTF surpluses have helped and continue to help
finance the rest of the government.  This  year, the SSTF surplus
is expected to exceed the general fund deficit so there is also a
surplus in the unified budget.  Over the entire 15-year period,
more than half of the projected unified surplus is composed of
Social Security surpluses.  Absent any change in policy, these
unified surpluses  will be used to reduce the debt held by the
public.

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

Page 5 GAO/T-AIMD/HEHS-99-76

Figure 1:  Current Social Security Flows

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

Page 6 GAO/T-AIMD/HEHS-99-76

Figure 2:  Social Security Flows Under President's Proposal

In essence, this swaps debt held by the public for debt held by
the trust funds.  While there are many benefits to reducing
publicly held debt, it is  important to recognize that under the
current law baseline--i.e., with no changes in tax or spending
policy--this would happen without crediting  additional securities
to the trust funds.  The administration has defended this approach
as a way of assuring both a reduction in debt held by the public
and giving Social Security first claim  on what they call the
"debt-reduction dividend" to pay future benefits. However, issuing
these additional securities to the SSTF is a discretionary act
with major legal and economic consequences for the future.  Some
could view this as double counting.  Importantly, to the extent it
appears that way to the public, it could undermine confidence in a
system that is  already difficult to explain.  However, the debate
over double counting focuses on the form of the proposal rather
than its substance.  Although  form is important when it
interferes with our ability to understand the

Page 7 GAO/T-AIMD/HEHS-99-76

substance--and I think this proposal falls into that trap--the
important debate must be on the substance of the proposal. This
proposal represents a fundamental shift in the way the Social
Security program is financed.  It moves it away from payroll
financing toward a  formal commitment of future general fund
resources for the program.  This is unprecedented.  Later in my
statement, I will discuss the implications of  this proposal for
overall fiscal policy and for the Social Security program.

Government Financing and Debt The President's proposals would have
the effect of reducing debt held by the public from the current
level of 44 percent of Gross Domestic Product

to 7 percent over the 15-year period.  Nearly two-thirds of the
projected unified budget surplus would be used to reduce debt held
by the public.

Because the surplus is also to be used for other governmental
activities, the amount of debt reduction achieved would be less
than the baseline, but  nonetheless the outcome would confer
significant benefits to the budget and the economy.

Our previous work on the long-term effects of federal fiscal
policy has shown the substantial benefits of debt reduction.3
Reducing publicly held  debt reduces payments on net interest
within the budget.  For example, CBO estimates that the difference
between spending the surplus and saving the  surplus is $123
billion in annual interest payments by 2009.  Lower interest
payments lead to larger surpluses, which in turn reduce debt: the
miracle of  compound interest produces a virtuous circle.  The
result--future decisionmakers gain significant budgetary
flexibility to address other  needs in the future. For the
economy, lowering debt levels increases national saving and frees
up resources for private investment.  This in turn leads to
increased  productivity and stronger economic growth over the long
term.  Over the last several years, we and

CBO have both simulated the long-term economic results from
various fiscal policy paths.  These projections consistently

show that reducing debt held by the public increases national
income over the next 50 years, thereby making it easier for the
nation to meet future  needs and commitments.  As Treasury
Secretary Rubin has noted, reduced

3Budget Issues:  Analysis of Long-Term Fiscal Outlook
(GAO/AIMD/OCE-98-19, October 22, 1997). Page 8 GAO/T-AIMD/HEHS-99-
76

debt now helps the federal government increase its capacity to
handle borrowing in the future. The President's proposal, in
effect, trades debt held by the public for debt held by government
accounts, but he also spends part of the surplus.  Debt  held by
trust funds goes up more rapidly than debt held by the public
falls, largely due to the additional securities transferred to the
trust funds.  Gross  debt, therefore, increases.  It is gross
debt--with minor exceptions--that is the measure that is subject
to the debt limit.  The current limit is $5.95 trillion.  Under
the President's plan, the limit would need to be raised sometime
during 2001.  Under either the

CBO or the Office of Management and Budget baseline (i.e., save
the entire surplus), the limit would not need

to be raised during at least the next 5 years.  This is shown in
figure 3 below.

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

Source: Budget of the United States Government, Fiscal Year 2000.
Page 9 GAO/T-AIMD/HEHS-99-76

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

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

Social Security Financing The President proposes two changes in
the financing of Social Security: a pledge of general funds in the
future and a modest amount of investment in

equities.  Both of these represent major shifts in approach to
financing the program.

General Fund Financing By, in effect, trading debt held by the
public for debt held by the trust funds, the President is
committing future general revenues to the Social Security

program.  This is true because the newly transferred securities
would be in addition to any buildup of payroll tax surpluses.
Securities held by the

SSTF have always represented annual cash flows in excess of
benefits and

expenses, plus interest.4  Under the President's proposal, this
would no longer continue to be true.  The value of the securities
held by the

SSTF would be greater than the amount by which annual revenues
exceed annual

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

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

Interest on publicly held debt is paid in cash while interest to
the trust fund is credited in the form of additional treasury
securities.

Page 10 GAO/T-AIMD/HEHS-99-76

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

One disconcerting aspect of the President's proposal is that it
appears that the transfers to the trust fund would be made
regardless of whether the  expected budget surpluses are actually
realized.  The amounts to be transferred to Social Security
apparently would be written into law as  either a fixed dollar
amount or as a percent of taxable payroll rather than as a percent
of the actual unified surplus in any given year.  These transfers
would have a claim on the general fund even if the actual surplus
fell below the amount specified for transfer to Social Security--
and that does present  a risk.5  It should be noted that any
proposal to allocate surpluses--particularly over a long period of
time--is vulnerable to the risk that those projected  surpluses
may not materialize.  The history of budget forecasts should
remind us not to be complacent about the certainty of these large
projected  surpluses.  Accordingly, we should consider carefully
any permanent commitments that are dependent on the realization of
a long-term forecast.

Investment in Equities Under current law, the SSTF is required to
invest in securities that are issued or backed by the Treasury.
The President proposes changing current law to

allow the SSTF to invest a portion of its assets in equities.  His
proposal calls for the fund to gradually invest 15 percent of its
total assets in the equity  market.  According to the
administration's estimates, the SSTF's equity holdings would
represent only a small portion--about 4 percent--of the  total
equity market.  To insulate investment decisions from political
considerations, the administration proposes investing passively in
a broad

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

taxes were actually paid.

Page 11 GAO/T-AIMD/HEHS-99-76

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

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

Have Other Countries Tackled These  Problems?

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

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

Page 12 GAO/T-AIMD/HEHS-99-76

For example, those countries that have come to the conclusion that
the debt burden matters make it an explicit part of their fiscal
decision making  process.  Australia, New Zealand, and the United
Kingdom all attempt to define prudent debt levels as a national
goal to strive for.  These debt goals  can prove important in
times of surplus.  New Zealand, for example, used its debt goals
as justification for maintaining spending restraint and
attempting to run sustained surpluses.  They promised that once
they met their initial debt target they would give a tax cut.
Importantly, when they  hit that specified debt target, they
delivered on their promise of tax cuts.  Other countries have
saved for the future by separating their pension or Social
Security-related assets from the rest of the government's budget.
For example, the Canadian Pension Plan is completely separate from
both federal and provincial budgets.  When the fund earns surplus
cash, it is  invested in provincial debt securities and, starting
this year, in the stock market.  Sweden also maintains a pension
fund outside the government's  budget and invests assets in stocks
and bonds. Norway may be the most dramatic example of setting
aside current surpluses to address long-term fiscal and economic
concerns.  Norway  faces the two-edged problem of a rapidly aging
population and declining oil revenues--a significant source of
current government revenue.  To address  these long-term concerns,
Norway started setting aside year-end budget surpluses in 1996 to
be invested in foreign stocks and bonds.  Their express  intention
is to draw down these assets to pay for the retirement costs for
their baby boomers.

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

Social Security Reform Is Still Needed Finally, it is important to
note that the President's proposal does not alter the projected
cash flow imbalances in the Social Security program.  Benefit

costs and revenues currently associated with the program will not
be affected by even 1 cent.  Figure 4, which shows Social
Security's payroll tax

receipts and benefit payments, illustrates this point.  Without
the President's proposal, payroll tax receipts will fall short of
benefit payments  in 2013; with the President's proposal, payroll
tax receipts also fall short of benefit payments in 2013--the
graph doesn't change at all.  Under the

Page 13 GAO/T-AIMD/HEHS-99-76

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

Figure 4:  SSTF Projected Cash Income and Outflow Through 2019

Source: Social Security Trustees 1998 Report, Intermediate
Assumptions. Page 14 GAO/T-AIMD/HEHS-99-76

To achieve long-term solvency and sustainability, the Social
Security program itself must be reformed.  The demographic trends
that are driving  the program's financial problems affect the
program well into the future.  The impending retirement of the
baby boom generation is the most wellknown of these trends, but is
not the only challenge the system faces.  If this were so, perhaps
a one-time financing strategy could be sufficient.  But  people
are retiring earlier, birth rates have fallen, and life
expectancies are increasing--all these factors suggest that Social
Security's financial  problems will outlive the baby boom
generation and continue far into the future.  These problems
cannot be addressed without changes to the Social  Security
program itself. These changes should be made sooner rather than
later.  The longer meaningful action is delayed, the more severe
such actions will have to be  in the future.  Changes made today
would be relatively minor compared to what could be necessary
years from now, with less time for the fiscal  effects of those
changes to build.  Moreover, acting now would allow any benefit
changes to be phased in gradually so that participants would have
time to adjust their saving or retirement goals accordingly.  It
would be tragic indeed if this proposal, through its budgetary
accounting complexity,  masked the urgency of the Social Security
solvency problem and served to delay much-needed action.

There is another reason to take action on Social Security now.
Social Security is not the only entitlement program needing urgent
attention.  In  fact, the issues surrounding the Medicare program
are much more urgent and complex.  Furthermore, the many variables
associated with health care  consumption and Medicare costs and
the personal emotions associated with health decisions make reform
in this program particularly difficult.   Let us address Social
Security for the long term today so that the nation can turn its
attention to these other more pressing and difficult issues early
in  the new millenium.  Much remains to be done in reforming
entitlement programs, and engaging in meaningful Social Security
reform would  represent an important and significant first step.
The Congress and the administration, working together, can find a
comprehensive and  sustainable solution to this important
challenge.  I recognize, though, that restoring Social Security
solvency is not easy.  Ultimately, any reforms to Social Security
will address not only the  relatively narrow question of how to
restore solvency and assure sustainability but will also go to the
larger question of what role Social  Security and the federal
government should play in providing retirement

Page 15 GAO/T-AIMD/HEHS-99-76

income.  There are many proposals being made to address these
questions; choosing among them will involve difficult and complex
choices, choices  that will be critically important to nearly
every American's retirement income.

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

Sustainable solvency: A proposal should eliminate the gap between
trust fund resources and expenditures over 75 years, and have the
ability to  sustain a stable system beyond that time period.
Equity: A proposal should create no "big winners" or "big losers."
Those who are most reliant on Social Security for retirement and
disability  income should continue to receive adequate support;
those who contribute the most would also benefit from
participation in the system, and  intergenerational equity would
improve.  Adequacy: Consistent with Social Security's social
insurance feature, a proposal should provide for a certain and
secure defined benefit promise  that is geared to providing higher
replacement rates for lower-income workers and reasonable minimum
benefits to minimize poverty among the  elderly. Feasibility: A
proposal should be structured so that it could be implemented
within a reasonable time period, it could be readily
administered, and the administrative costs associated with it
would be reasonable.

Page 16 GAO/T-AIMD/HEHS-99-76

Transparency: A proposal should be readily understandable to the
general public and, as a result, generate broad support. Applying
such criteria will require a detailed understanding of the
possible outcomes and issues associated with the various elements
of proposals.   We are working to provide the data, information,
and analysis needed to help policymakers evaluate the relative
merits of various proposals and  move toward agreement on a
comprehensive Social Security reform proposal.

Conclusions Budget surpluses provide a valuable opportunity to
capture significant long-term gains to both improve the nation's
capacity to address the

looming fiscal challenges arising from demographic change and aid
in the transition to a more sustainable Social Security program.
The President's

proposal offers a valuable opportunity for us to address both how
much of our current resources we want to save for the future and
how we can best  do so.  The President's proposal is both wide
ranging and complex, and it behooves us to clarify the
consequences for both our national economy and  the Social
Security program.  A substantial share of the surpluses would be
used to reduce publicly held debt, providing demonstrable gains
for our economic capacity to afford our  future commitments.  In
this way, the proposal would help us, in effect, prefund these
commitments by using today's wealth earned by current  workers to
enhance the resources for the next generations.  However, the
President's proposal does not include any Social Security program
reforms to make the program's commitments more affordable.   The
transfer of surplus resources to the trust fund, which the
administration argues is necessary to lock in surpluses for the
future,  would nonetheless constitute a major shift in financing
for the Social Security program.  Moreover, the proposed transfer
may very well make it  more difficult for the public to understand
and support the savings goals articulated.  Several other nations
have shown how debt reduction itself  can be made to be publicly
compelling, but only you can decide whether such an approach will
work here.

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

Page 17 GAO/T-AIMD/HEHS-99-76

has come for meaningful Social Security reform.  After all, we
have much larger and more complex challenges to tackle.
Explicitly pledging federal  general revenues to Social Security
will limit the options for dealing with other national issues.

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

* How much of the unified budget surplus should go to debt
reduction versus other priorities?

* If we are to use some portion of the surplus to reduce publicly
held debt, is the President's proposed approach the way to do
this?

* Should Social Security be financed in part by general revenues?*
Should the

SSTF invest in the stock market?* How can we best assure the
solvency, sustainability, equity, and integrity

of the Social Security program for current and future generations
of Americans?

* How can we best assure the public's understanding of and support
for any comprehensive Social Security reform proposal?

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

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