Acting soon reduces the likelihood  that the Congress will have to choose between imposing severe benefit  cuts and unfairly burdening future generations with the program’s rising  costs. Acting soon would allow changes to be phased in so the individuals  who are most likely to be affected, namely younger and future workers,  will have time to adjust their retirement planning. 1.) 2.) Although the Trustees’ 2003  intermediate estimates project that the combined Social Security Trust  Funds will be solvent until 2042, program spending will constitute a  rapidly growing share of the budget and the economy well before that  date. In 2008, the first baby boomers will become eligible for Social  Security benefits, and the future costs of serving them are already  becoming a factor in the Congressional Budget Office’s (CBO) 10-year  projections. By 2018, Social Security’s tax income is projected to be insufficient to pay  currently scheduled benefits. The shift from positive to  negative cash flow, however, will place increased pressure on the federal  budget to raise the resources necessary to meet the program’s ongoing  costs. 5.) Social Security remains the foundation of  the nation’s retirement system. The analytic framework GAO has developed to assess proposals  comprises three basic criteria:  the extent to which a proposal achieves sustainable solvency and how it  would affect the economy and the federal budget;  the relative balance struck between the goals of individual equity and  income adequacy; and    how readily a proposal could be implemented, administered, and  explained to the public. As I have already discussed, reducing the relative future burdens of Social  Security and health programs is essential to a sustainable budget policy for  the longer term. Social Security’s Long-Term Financing Shortfall Requires Action Sooner Rather Than Later

As you requested, we applied our criteria to a scenario of Trust Fund  Exhaustion. Under this scenario, currently scheduled benefits would be  paid in full until the combined OASDI Trust Funds are exhausted. In effect, after trust fund exhaustion, all beneficiaries  would experience a sharp drop in benefits. Additional reductions in the  following years would result in benefits equal to about two-thirds of  currently scheduled levels by the end of the 75-year simulation period. The use of our criteria in evaluating the Trust Fund Exhaustion scenario  underscores the need to take action sooner rather than later to address  Social Security’s financing shortfall. By definition this scenario would achieve sustainable solvency because  after the combined trust funds had run out of assets, benefit payments  would be adjusted each year to equal annual tax income. Under the Trust Fund Exhaustion scenario, the effect on benefits would  differ sharply before and after exhaustion took place. Due to the timing of the reductions under the Trust Fund Exhaustion  scenario, younger generations would bear greater benefit reductions. Consequently, lifetime benefits would be reduced  more for younger generations. Under the Trust Fund Exhaustion scenario  we used, benefits would be adjusted proportionately for all recipients,  increasing the likelihood of hardship for lower income retirees and the  disabled. In evaluating Social Security reform proposals, the choice among various  benefit reductions and revenue increases will affect the balance between  income adequacy and individual equity. As the baby boom generation retires and the numbers of those entitled to  these retirement benefits grow, the difficulties of reform will be  compounded. This is a work of the U.S. government and is not subject to copyright protection in the  United States.
Why GAO Did This Study

Social Security is an important social insurance program affecting virtually every American family. It is the foundation of the nation's retirement income system and also provides millions of Americans with disability insurance and survivors' benefits. Over the long term, as the baby boom generation retires, Social Security's financing shortfall presents a major program solvency and sustainability challenge. The Chairman of the Senate Special Committee on Aging asked GAO to discuss Social Security's long-term financing challenges and the results of GAO's analysis of an illustrative "Trust Fund Exhaustion" scenario. Under this scenario, benefits are reduced proportionately for all beneficiaries by the shortfall in revenues occurring upon exhaustion of the combined Old-Age and Survivors Insurance and Disability Insurance Trust Funds. This scenario was developed for analytic purposes and is not a legal determination of how benefits would be paid in the event of trust fund exhaustion. GAO's analysis used the framework it has developed to analyze the implications of reform proposals. This framework consists of three criteria: (1) the extent to which the proposal achieves sustainable solvency and how it would affect the U.S. economy and the federal budget, (2) the balance struck between the twin goals of income adequacy and individual equity, and (3) how readily changes could be implemented, administered, and explained to the public.

What GAO Found

Although the Trustees' 2003 intermediate estimates show that the combined Social Security Trust Funds will be solvent until 2042, program spending will constitute a growing share of the budget and the economy much sooner. Within 5 years, the first baby boomers will become eligible for Social Security. By 2018, Social Security's tax income is projected to be insufficient to pay currently scheduled benefits. This shift from positive to negative cash flow will place increased pressure on the federal budget to raise the resources necessary to meet the program's ongoing costs. In the long term, Social Security, together with rapidly growing federal health programs, will dominate our nation's fiscal outlook. Absent reform, the nation will ultimately have to choose between persistent, escalating federal deficits, significant tax increases, and/or dramatic budget cuts of unprecedented magnitude. The Trust Fund Exhaustion scenario we analyzed dramatically illustrates the need for action sooner rather than later. (See Social Security Reform: Analysis of a Trust Fund Exhaustion Scenario. GAO-03-907 . Washington, D.C.: July 29, 2003.) Under this scenario, after the combined trust funds had been fully depleted, benefit payments would be adjusted each year to equal annual tax income. Under this scenario, after trust fund exhaustion those receiving benefits would experience large and sudden benefit reductions. Additional smaller reductions in the following years would result in benefits equal to about two-thirds of currently scheduled levels by the end of the 75-year simulation period. The Trust Fund Exhaustion scenario raises significant intergenerational equity issues. The timing of the benefit adjustments means the Trust Fund Exhaustion scenario places a much greater burden on younger generations. Lifetime benefits would be reduced much more for younger generations. In addition, under the Trust Fund Exhaustion scenario, benefits would be adjusted proportionately for all recipients, increasing the likelihood of hardship for lower income retirees and the disabled, especially those who rely on Social Security as their primary or sole source of retirement income. Fundamentally, the Trust Fund Exhaustion scenario illustrates trade-offs between achieving sustainable solvency and maintaining benefit adequacy. The longer we wait to take action, the sharper these trade-offs will become. Acting soon would allow changes to be phased in so the individuals who are most likely to be affected, namely younger and future workers, will have time to adjust their retirement planning while helping to avoid related "expectation gaps." Finally, acting soon reduces the likelihood that the Congress will have to choose between imposing severe benefit cuts and unfairly burdening future generations with the program's rising costs.