Social Security: Restoring Long-Term Solvency Will Require Difficult
Choices (Testimony, 02/10/98, GAO/T-HEHS-98-95).

Pursuant to a congressional request, GAO discussed the goals of the
social security program and the difficult choices that restoring its
long-term solvency will require, focusing on: (1) balancing income
adequacy and individual equity; (2) determining who bears risks and
responsibilities; (3) choosing among various benefit reductions and
revenue increases; (4) using pay-as-you-go or advance funding; and (5)
deciding how much to save and invest in the nation's productive
capacity.

GAO noted that: (1) helping ensure adequate retirement income has been a
fundamental goal of social security; (2) virtually all reform proposals
also pay some attention to income adequacy, but some place a different
emphasis on it relative to the goal of individual equity, which seeks to
ensure that benefits bear some relationship to contributions; (3) some
proponents of reform believe that increasing the role of individual
retirement savings could improve individual equity without diminishing
income adequacy; (4) the balance between income adequacy and individual
equity also influences how much risk and responsibility are borne by
individuals and the government; (5) workers face a variety of risks
regarding their retirement income security; (6) no matter what shape
social security reform takes, restoring long-term solvency will require
some combination of benefit reductions and revenue increases; (7)
revenue increases might take the form of increases in payroll tax rate,
expanding coverage to include the relatively few workers who are still
not covered under social security, or allowing the trust funds to be
invested in potentially higher-yielding securities such as stocks; (8)
reforms that increase the role of individual retirement savings would
also involve social security benefit reductions or revenue increases,
which might take slightly different forms; (9) reform proposals have
also raised the issue of increasing the degree to which the nation sets
aside funds to pay for future social security benefits; (10) advanced
funding could reduce payroll tax rates in the long term and improve
intergenerational equity but would involve significant transition costs;
(11) in a pure pay-as-you-go arrangement, virtually all revenues come
from payroll taxes since trust funds are kept to a relatively small
contingency reserve that earns relatively little interest compared with
the interest that a fully funded system would earn; (12) in contrast,
defined benefit employer pensions are generally fully advance funded;
(13) ideally, social security reforms would help address the fundamental
economic implications of the demographic trends that underlie social
security's financing problems; (14) economic growth, and more
specifically growth in labor productivity, could help ease the strains
of providing for a larger elderly population; and (15) increased
investment in physical and human capital should generally increase
productivity and economic growth, but investment depends on national
saving, which has been at historically low levels.

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

 REPORTNUM:  T-HEHS-98-95
     TITLE:  Social Security: Restoring Long-Term Solvency Will Require 
             Difficult Choices
      DATE:  02/10/98
   SUBJECT:  Social security benefits
             Retirement benefits
             Labor force
             Elderly persons
             Investment planning
             Future budget projections
             Population statistics
             Economic analysis
             Federal social security programs
             Social security taxes
IDENTIFIER:  Social Security Program
             Social Security Trust Fund
             
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Cover
================================================================ COVER


Before the Special Committee on Aging, U.S.  Senate

For Release on Delivery
Expected at 10:00 a.m.
Tuesday, February 10, 1998

SOCIAL SECURITY - RESTORING
LONG-TERM SOLVENCY WILL REQUIRE
DIFFICULT CHOICES

Statement of Jane L.  Ross, Director
Income Security Issues
Health, Education, and Human Services Division

GAO/T-HEHS-98-95

GAO/HEHS-98-95T


(207030)


Abbreviations
=============================================================== ABBREV

  AIME - average indexed monthly earnings
  PIA - primary insurance amount
  SSA - Social Security Administration

SOCIAL SECURITY:  RESTORING
LONG-TERM SOLVENCY WILL REQUIRE
DIFFICULT CHOICES
============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

Thank you for inviting me to speak about the goals of the Social
Security program and the difficult choices that restoring its
long-term solvency will require.  Social Security is the foundation
of the nation's retirement income system.  It provides 42 percent of
all the income of the elderly, which is twice as much as any other
single source.  However, because of dramatic demographic changes,
Social Security now faces a serious long-term financing shortfall. 

Today, I would like to discuss five fundamental choices that Social
Security reforms will reflect:  (1) balancing income adequacy and
individual equity, (2) determining who bears risks and
responsibilities, (3) choosing among various benefit reductions and
revenue increases, (4) using pay-as-you-go or advance funding, and
(5) deciding how much to save and invest in the nation's productive
capacity.  My testimony is based on work we have done over the past
few years.\1


--------------------
\1 See the list of related GAO products at the end of this statement. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

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 the elderly would have adequate retirement
incomes and would not have to depend on welfare.  It would provide
benefits that workers had earned because of their contributions and
those of their employers. 

When Social Security started paying benefits, it responded to an
immediate need to bolster the income of the elderly.  The Social
Security benefits that early beneficiaries received significantly
exceeded their contributions, but even the very first beneficiaries
had made some contributions.\2 Initially, funding Social Security
benefits required relatively low payroll taxes because very few of
the elderly had earned benefits under the new system.  Increases in
payroll taxes were always anticipated to keep up with the benefit
payments as the system matured and more retirees received benefits. 
Virtually from the beginning, Social Security was financed on this
type of pay-as-you-go basis, with any single year's revenues
collected primarily to fund that year's benefits.  The Congress had
rejected the idea of advance funding for the program, or collecting
enough revenues to cover future benefit rights as workers accrued
them.  Many expressed concern that if the federal government amassed
huge reserve funds, it would find a way to spend them. 

Over the years, both the size and scope of the program have changed,
and periodic adjustments have been necessary.  In 1939, coverage was
extended to dependents and survivors.  In the 1950s, state and local
governments were given the option of covering their employees.  The
Disability Insurance program was added in 1956.  Beginning in 1975,
benefits were automatically tied to the Consumer Price Index to
ensure that the purchasing power of benefits was not eroded by
inflation.  These benefit expansions led to higher payroll tax rates
in addition to the increases stemming from the maturing of the
system.  Moreover, the long-term solvency of the program has been
reassessed annually.  Changes in demographic and economic projections
have required benefit and revenue adjustments to maintain solvency,
such as the amendments enacted in 1977 and 1983. 

Profound demographic trends are now contributing to Social Security's
long-term financing shortfall.  As a share of the total U.S. 
population, the elderly population grew from 7 percent in 1940 to 13
percent in 1996; this share is expected to increase further to 20
percent by 2050.  As it ages, the baby-boom generation will increase
the size of the elderly population.  However, other demographic
trends are at least as important.  Life expectancy has increased
continually since the 1930s, and further improvements are expected. 
Moreover, the fertility rate has declined from 3.6 children per woman
in 1960 to around 2 children per woman today and is expected to level
off at about 1.9 by 2020.  Combined, increasing life expectancy and
falling fertility rates mean that fewer workers will be contributing
to Social Security for each aged, disabled, dependent, or surviving
beneficiary.  While 3.3 workers support each Social Security
beneficiary today, only 2 workers are expected to be supporting each
beneficiary by 2030. 

As a result of these demographic trends, Social Security revenues are
expected to be about 14 percent less than expenditures over the next
75-year period, and demographic trends suggest that this imbalance
will grow over time.  By 2030, the Social Security trust funds are
projected to be depleted.  From then on, Social Security revenues are
expected to be sufficient to pay only about 70 to 75 percent of
currently promised benefits, given currently scheduled tax rates and
the Social Security Administration's (SSA) intermediate assumptions
about demographic and economic trends.\3 In 2031, the last members of
the baby-boom generation will reach age 67, when they will be
eligible for full retirement benefits under current law. 

Restoring Social Security's long-term solvency will require some
combination of increased revenues and reduced expenditures.  A
variety of options are available within the current structure of the
program, such as raising the retirement age, reducing inflation
adjustments, increasing payroll tax rates, and investing trust fund
reserves in higher-yielding securities. 

However, some proposals would go beyond restoring long-term solvency
and would fundamentally alter the program structure by setting up
individual retirement savings accounts and requiring workers to
contribute to them.  Retirement income from these accounts would
usually replace a portion of Social Security benefits.  Some
proposals would attempt to produce a net gain in retirement income. 
The combination of mandated savings deposits and revised Social
Security taxes would be greater than current Social Security taxes,
in most cases. 


--------------------
\2 While early beneficiaries made relatively small contributions
within the Social Security system, as a group they contributed
substantial amounts outside the system to the retirement incomes of
their parents' generation, which did not qualify for Social Security
benefits.  Such contributions included not only income support that
some provided to their own parents but also taxes and charitable
contributions that paid for other forms of support. 

\3 Some demographers project even more dramatic growth in the elderly
population than Social Security actuaries do.  In particular, the
1994-96 Social Security Advisory Council's Technical Panel on
Assumptions and Methods noted that Social Security's mortality
assumptions reflect a lower rate of mortality improvements than may
be warranted. 


   RELATIVE EMPHASIS BETWEEN
   INCOME ADEQUACY AND INDIVIDUAL
   EQUITY
---------------------------------------------------------- Chapter 0:2

Helping ensure adequate retirement income has been a fundamental goal
of Social Security.  While Social Security was never intended to
guarantee an adequate income, it provides an income base upon which
to build.  Virtually all reform proposals also pay some attention to
"income adequacy," but some place a different emphasis on it relative
to the goal of "individual equity," which seeks to ensure that
benefits bear some relationship to contributions.  Some proponents of
reform believe that increasing the role of individual retirement
savings could improve individual equity without diminishing income
adequacy. 

The current Social Security program seeks to ensure adequate
retirement income in various ways.  First, it makes participation
mandatory, which guards against the possibility that some people
would not otherwise save enough to have even a minimal retirement
income.  Reform proposals also generally make participation
mandatory. 

Second, the current Social Security benefit formula redistributes
income from high earners to low earners to help keep low earners out
of poverty.  It accomplishes this by replacing a larger share of
lifetime earnings for low earners and a smaller share for high
earners.\4 In addition, Social Security helps ensure adequate income
by providing benefits for dependent and surviving spouses and
children who may not have the work history required to earn adequate
benefits.  Also, it automatically ensures that the purchasing power
of benefits keeps pace with inflation, unlike most employer pension
plans or individually purchased annuities. 

While the Social Security benefit formula seeks to ensure adequacy by
redistributing income, it also promotes some degree of individual
equity by ensuring that benefits are at least somewhat higher for
workers with higher lifetime earnings. 

In helping ensure adequate retirement income, Social Security has
contributed to reducing poverty among the elderly.  (See fig.  1.)
Since 1959, poverty rates for the elderly have dropped by two-thirds,
from 35 percent to less than 11 percent in 1996.  While they were
higher than rates for children and for working-age adults (aged 18 to
64), they are now lower than for either group.  For more than half
the elderly, income other than Social Security was less than the
poverty threshold in 1994. 

   Figure 1:  The Decline in
   Poverty Rates for the Elderly

   (See figure in printed
   edition.)

Note:  Estimates for adults 65+ and adults 18-64 are not available
for 1960-65. 

Source:  U.S.  Bureau of the Census. 

While Social Security provides a strong foundation for retirement
income, it is only a foundation.  In 1994, it provided an average of
roughly $9,200 to all elderly households.  Median Social Security
benefits have historically been very close to the poverty threshold. 
Elderly households with below-average income rely heavily on Social
Security, which provided 80 percent of income for 40 percent of
elderly households in 1994.  (See fig.  2.) One in seven elderly
Americans has no income other than Social Security.  Pockets of
poverty remain.  Women, minorities, and persons aged 75 and older are
much more likely to be poor than other elderly persons.  For example,
compared with 11 percent for all elderly persons (aged 65 and older)
in 1996, poverty rates were 23 percent for all elderly women living
alone, roughly 25 percent for elderly blacks and Hispanics, and 31
percent for black women older than 75.  Unmarried women make up more
than 70 percent of poor elderly households, although they account for
only 45 percent of all elderly households. 

   Figure 2:  The Reliance of
   Lower-Income Elderly Households
   on Social Security

   (See figure in printed
   edition.)

Note:  Data are for 1994.  Median incomes for each quintile are GAO
estimates.  Social Security income for the highest fifth may be lower
than for the previous fifth because, among other possible reasons,
some elderly workers or their spouses may not yet be collecting
benefits. 

Source:  GAO analysis of data from Susan Grad, Income of the
Population 55 and Older, 1994 (Washington, D.C.:  SSA, Office of
Research and Statistics, 1996). 

Proposals that would increase the extent to which workers save for
their own retirement would reduce income redistribution because any
contributions to individual accounts that would otherwise go to
Social Security would not be available for redistribution.  Still,
proponents of individual accounts assert that virtually all retirees
would be at least as well off as they are now and that such reforms
would improve individual equity.  Citing historical investment
returns, they argue that the rates of return that workers could earn
on their individual retirement savings would be much higher than the
returns they implicitly earn under the current system and that their
retirement incomes could be higher as a result.  Nevertheless,
earning such higher returns would require investing in riskier assets
such as stocks.  Income adequacy under such reforms would depend on
how workers invest their savings and whether they actually earn
higher returns.  It would also depend on what degree of Social
Security coverage and its income redistribution would remain after
reform. 

In addition to examining the effects of reform proposals on all
retirees generally, attention should be paid to how they affect
specific subpopulations, especially those that are most vulnerable to
poverty, including women, widows, minorities, and the very old. 
Reform proposals vary considerably in their effects on such
subpopulations.  For example, since men and women typically have
different earnings histories, life expectancies, and investment
behaviors, reforms could exacerbate differences in benefits that
already exist.  An individual savings approach that permits little
redistribution would on average generate smaller savings balances at
retirement for women, who tend to have lower earnings from both
employment and investments, and these smaller balances would need to
last longer because women have longer life expectancies.\5


--------------------
\4 Specifically, the primary insurance amount (PIA) is the full
monthly benefit payable to retired workers at age 65 or to disabled
workers when first entitled.  For those entitled to benefits in 1997,
the PIA equalled (1) 90 percent of the first $455 of average indexed
monthly earnings (AIME) plus (2) 32 percent of the next $2,286 of
AIME plus (3) 15 percent of AIME over $2,741.  The bend points in
this formula (dollar amounts of AIME defining each bracket) are
indexed to increases in average national earnings. 

\5 See Social Security Reform:  Implications for Women's Retirement
Income (GAO/HEHS-98-42, Dec.  31, 1997). 


   WHO BEARS RISK AND
   RESPONSIBILITY? 
---------------------------------------------------------- Chapter 0:3

The balance between income adequacy and individual equity also
influences how much risk and responsibility are borne by individuals
and the government.  Workers face a variety of risks regarding their
retirement income security.  These include individually based risks,
such as how long they will be able to work, how long they will live,
whether they will be survived by a spouse or other dependents, how
much they will earn and save over their lifetimes, and how much they
will earn on retirement savings.  Workers also face some collective
risks, such as the performance of the economy and the extent of
inflation.  Different types of retirement income embody different
ways of assigning responsibility for these risks. 

Social Security was based on a social insurance model in which the
society as a whole through the government largely takes
responsibility for all these risks to help ensure adequate income. 
This tends to minimize risks to the individuals and in the process
lowers the rate of return they implicitly earn on their retirement
contributions.  Social Security provides a benefit that provides
income to workers who become disabled and to workers who reach
retirement, for as long as they live, and for their spouse and
dependents.  The government takes responsibility for collecting and
managing the revenues needed to pay benefits.  By redistributing
income, Social Security helps protect workers against low retirement
income that stems from low lifetime earnings. 

Social Security pays a pension benefit that is determined by a
formula that takes lifetime earnings into account.  This type of
pension is called a defined benefit pension.  Many employer pensions
are also defined benefit pensions.  These pensions help smooth out
variations in benefit amounts that can arise from year to year
because of economic fluctuations.  Defined benefit pension providers
assume investment risks and some of the economic risks and take
responsibility for investing and managing pension funds and ensuring
that contributions are adequate to fund promised benefits.  In
contrast, defined contribution pensions, such as 401(k) accounts,
base retirement income solely on the amount of contributions made and
interest earned.  Such pensions resemble individual savings. 

Retirement savings by individuals place virtually all the risk and
responsibility on individuals but give them greater freedom and
control over their income.  Under reform proposals that increase the
role of individual savings, the government role would primarily be to
make sure that workers contribute to their retirement accounts and to
regulate the management of those accounts.  Workers would be
responsible for choosing how to invest their savings and would assume
the investment and economic risks.  Some proposals would allow
workers to invest only in a limited number of "indexed" investment
funds, which like some mutual funds are managed so they mirror the
performance of market indexes like the Standard and Poor 500.  Some
proposals would require workers to buy an annuity at retirement,
while others would place few restrictions on how workers use their
funds in retirement. 

Social Security places relatively greater emphasis on adequacy and
less on individual equity by providing a way for all members of
society to share all the risks.  An individual retirement savings
approach places relatively less emphasis on adequacy and more on
individual equity by making retirement income depend more directly on
each person's contributions and management of the funds.  Reform
proposals that would increase the role of individual savings would
change the overall mix of different types of retirement income and
with it the relative emphasis on adequacy and individual equity
embodied by that mix. 

In addition to changing the relative roles of Social Security and
individual savings, such Social Security reform could indirectly
affect other sources of retirement income and related public
policies.  For example, raising Social Security's retirement age or
cutting its benefit amounts could affect employer pensions.  Some
employers pay supplements to their pensions until retirees start to
receive Social Security income, or they set their pension benefits
relative to Social Security's.  Employers might terminate their
pension plans rather than pay increased costs.  Reforms would also
interact with other income support programs such as Social Security's
Disability Insurance or the Supplemental Security Income public
assistance program.  For example, raising the retirement age could
lead more older workers to apply for Social Security's disability
benefits because those benefits would be greater than retirement
benefits, if they qualify. 


   REDUCING BENEFITS OR INCREASING
   REVENUES? 
---------------------------------------------------------- Chapter 0:4

No matter what shape Social Security reform takes, restoring
long-term solvency will require some combination of benefit
reductions and revenue increases.  Within the current program
structure, examples of possible benefit reductions include modifying
the benefit formula, raising the retirement age, and reducing
cost-of-living adjustments.  Revenue increases might take the form of
increases in the payroll tax rate, expanding coverage to include the
relatively few workers who are still not covered under Social
Security, or allowing the trust funds to be invested in potentially
higher-yielding securities such as stocks.\6 Reforms that increase
the role of individual retirement savings would also involve Social
Security benefit reductions or revenue increases, which might take
slightly different forms.  For example, such reforms might include
Social Security benefit reductions to offset any contributions that
are diverted from the current program or permitting workers to invest
their retirement savings in stocks. 

The choice among various benefit reductions and revenue increases
will affect the balance between income adequacy and individual
equity.  Benefit reductions could pose the risk of diminishing
adequacy, especially for specific subpopulations.  Both benefit
reductions and tax increases that have been proposed could diminish
individual equity by reducing the implicit rates of return the
workers earn on their contributions to the system.  In contrast,
increasing revenues by investing retirement funds in the stock market
could improve rates of return. 

The choice among various benefit reductions and revenue
increases--for example, raising the retirement age--will ultimately
determine not just how much income retirees will have but also how
long they will be expected to continue working and how long their
retirements will be.  Reforms will determine how much consumption
workers will give up during their working years to provide for more
consumption during retirement. 


--------------------
\6 About 4 percent of the workforce remains uncovered, which mostly
includes some state and local government employees and federal
employees hired before 1984. 


   PAY-AS-YOU-GO OR ADVANCE
   FUNDING? 
---------------------------------------------------------- Chapter 0:5

Reform proposals have also raised the issue of increasing the degree
to which the nation sets aside funds to pay for future Social
Security benefits.  Advance funding could reduce payroll tax rates in
the long term and improve intergenerational equity but would involve
significant transition costs.  As noted earlier, Social Security is
largely financed on a pay-as-you-go basis.  In a pure pay-as-you-go
arrangement, virtually all revenues come from payroll taxes since
trust funds are kept to a relatively small contingency reserve that
earns relatively little interest compared with the interest that a
fully funded system would earn.\7

In contrast, defined benefit employer pensions are generally fully
advance funded.  As workers accrue future pension benefit rights,
employers make pension fund contributions that are projected to cover
them.  The pension funds accumulate substantial assets that
contribute a large share of national saving.  The investment earnings
on these funds contribute considerable revenues and reduce the size
of pension fund contributions that would otherwise be required to pay
pension benefits. 

Defined contribution pensions and individual retirement savings are
fully funded by definition, and investment earnings on these
retirement accounts also help provide retirement income.  Similarly,
Social Security reform proposals that increase the role of individual
retirement savings would generally increase advance funding. 

Advance funding is possible in the public sector simply by collecting
more revenue than is necessary to pay current benefits.  However,
advance funding in the public sector raises issues that prompted the
Congress to reject advance funding in designing Social Security.  A
fully funded Social Security program would have trust funds worth
trillions of dollars.  If the trust funds were invested in private
securities, some people would be concerned about the influence that
government could have on the private sector.  If these funds were
invested only in federal government securities, as is required under
current law, taxpayers would eventually pay both interest and
principal to the trust funds and ultimately cover the full cost of
Social Security benefits.  Moreover, the effect of advance funding in
the public sector fundamentally depends on whether the government as
a whole is increasing national saving, as discussed further below. 

If Social Security reforms increase the balances in privately held
retirement funds, interest on those funds could eventually help
finance retirement income and reduce the system's reliance on Social
Security payroll contributions, which in turn would improve
individual equity.  At the same time, the relatively larger
generation of current workers could finance some of their future
benefits now rather than leaving a relatively smaller future
generation of workers with the entire financing responsibility.  In
effect, advance funding shifts responsibility for retirement income
from the children of one generation of retirees to that retiree
generation itself. 

However, larger payroll contributions would be required in the short
term to build up those fund balances.  Social Security would still
need revenues to pay benefits that retirees and current workers have
already been promised.  The contributions needed to fund both current
and future retirement liabilities would clearly be higher than those
currently collected. 

Thus, increasing advance funding in any form involves substantial
transition costs as workers are expected to cover some portion of
both the existing unfunded liability and the liability for their own
future benefits.  Reform proposals handle this transition in a
variety of ways, and the transition costs can be spread out across
one or several generations.  The nature of specific reform proposals
will determine the pace at which advance funding is increased.  For
example, one proposal would increase payroll taxes by 1.52 percent
for 72 years to fund the transition and would involve borrowing $2
trillion from the public during the first 40 years of the transition
to help cover the unfunded liability. 


--------------------
\7 Social Security is now temporarily deviating from pure
pay-as-you-go financing by building up substantial trust fund
reserves.  It is collecting more in revenues than it pays in benefits
each year partly because the baby-boom generation makes the size of
the workforce larger relative to the beneficiary population.  In
2012, shortly after the baby boom starts to retire, the benefit
payments are expected to exceed revenues, and the trust fund reserves
and the interest they earn will help pay the baby boom's retirement
benefits.  For more detail about this temporary trust fund buildup
and how it interacts with the federal budget, see Social Security
Reform:  Demographic Trends Underlie Long-Term Financing Shortage
(GAO/T-HEHS-98-43, Nov.  20, 1997). 


   SAVING AND INVESTING FOR
   PRODUCTIVITY GROWTH
---------------------------------------------------------- Chapter 0:6

Ideally, Social Security reforms would help address the fundamental
economic implications of the demographic trends that underlie Social
Security's financing problems.  Although people are living longer and
healthier lives, they have also been retiring earlier and have been
having smaller families.  Unless these patterns change, relatively
fewer workers will be producing goods and services for a society with
relatively more retirees.  Economic growth, and more specifically
growth in labor productivity, could help ease the strains of
providing for a larger elderly population.  Increased investment in
physical and human capital should generally increase productivity and
economic growth, but investment depends on national saving, which has
been at historically low levels. 

Recognizing these economic fundamentals, proponents of increasing the
role of individual retirement savings generally observe that a
pay-as-you-go financing structure does little to help national
saving, and they argue that the advance funding through individual
accounts would increase saving.  However, reforms would not produce
notable increases in national saving to the extent that workers
reduce their other saving in the belief that their new accounts can
take its place. 

Social Security reforms might also increase national saving within
the current program structure.  Advance funding would increase
saving, and it could be applied to government-controlled trust funds
as well as to individual accounts.  Any additional Social Security
savings in the federal budget could add to national saving but only
if not offset by deficits in the rest of the federal budget.  More
broadly, overall federal budget surpluses or deficits affect national
saving since they represent saving or dissaving by the government. 

To the extent that reforms attempt to increase national saving, they
will vary by how much emphasis they place on doing so through
individual or government saving.  That emphasis will reflect not only
judgments about which is likely to be more effective but also values
regarding the responsibilities of individuals and governments and
attitudes toward the national debt.  While these points will be much
debated, few dispute the need to be aware of the effect of increasing
national saving, although it may be hard to achieve. 


   OBSERVATIONS
---------------------------------------------------------- Chapter 0:7

In some form and to varying degrees, every generation of children has
supported its parents' generation in old age.  In economic terms,
those who do work ultimately produce the goods and services consumed
by those who do not.  The Social Security system and, more broadly,
the nation's retirement income policies, whatever shape they take,
ultimately determine how and to what extent the nation supports the
well-being of the elderly. 

Restoring Social Security's long-term solvency presents complex and
important choices.  These choices include how reforms will balance
income adequacy and individual equity; how risks are shared as a
community or assumed by individuals; how reforms assign roles and
responsibilities among government, employers, and individuals;
whether retirements will start earlier or later and how large
retirement incomes will be; and how much the nation saves and invests
in its capacity to produce goods and services.  Whatever reforms are
adopted will reflect these fundamental choices implicitly, if not
explicitly. 


-------------------------------------------------------- Chapter 0:7.1

This concludes my testimony.  I would be happy to answer any
questions. 

RELATED GAO PRODUCTS

Social Security Reform:  Implications for Women's Retirement Income
(GAO/HEHS-98-42, Dec.  31, 1997). 

Social Security Reform:  Demographic Trends Underlie Long-Term
Financing Shortage (GAO/T-HEHS-98-43, Nov.  20, 1997). 

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

401(k) Pension Plans:  Loan Provisions Enhance Participation but May
Affect Retirement Income Security for Some (GAO/HEHS-98-5, Oct.  1,
1997). 

Retirement Income:  Implications of Demographic Trends for Social
Security and Pension Reform (GAO/HEHS-97-81, July 11, 1997). 

Social Security Reform:  Implications for the Financial Well-Being of
Women (GAO/T-HEHS-97-112, Apr.  10, 1997). 

401(k) Pension Plans:  Many Take Advantage of Opportunity to Ensure
Adequate Retirement Income (GAO/HEHS-96-176, Aug.  2, 1996). 

Social Security:  Issues Involving Benefit Equity for Working Women
(GAO/HEHS-96-55, Apr.  10, 1996). 

Federal Pensions:  Thrift Savings Plan Has Key Role in Retirement
Benefits (GAO/HEHS-96-1, Oct.  19, 1995). 

Social Security Retirement Accounts (GAO/HEHS-94-226R, Aug.  12,
1994). 

Social Security:  Analysis of a Proposal to Privatize Trust Fund
Reserves (GAO/HRD-91-22, Dec.  12, 1990). 

Social Security:  The Trust Fund Reserve Accumulation, the Economy,
and the Federal Budget (GAO/HRD-89-44, Jan.  19, 1989). 


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