Acting soon would also allow  changes to be phased in so that 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.” On  the other hand, failure to take remedial action will, in combination with  other entitlement spending, lead to a situation unsustainable both for the  federal government and, ultimately, the economy. The Nature of Social Security’s Long-Term Financing Problem

As you all know, Social Security has always been a largely pay-as-you-go  system. Now, however, people are living longer, and  spending more time in retirement. Taken together, these  trends threaten the financial solvency and sustainability of Social Security. If we did nothing until 2042—the year SSA estimates the Trust  Funds will be exhausted—achieving actuarial balance would require  changes in benefits of 30 percent or changes in taxes of 43 percent for the  period 2042-2078. However, these changes do not achieve sustainable  solvency, they only achieve solvency through 2078. Social Security Reform is Part of a Broader Fiscal and Economic Challenge

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. Accordingly, substantive reform of  Social Security and our major health programs remains critical to  recapturing our future fiscal flexibility. Social Security remains the foundation of  the nation’s retirement system. It is also much more than just a retirement  program; it pays benefits to disabled workers and their dependents,  spouses and children of retired workers, and survivors of deceased  workers. Our criteria aim to  balance financial and economic considerations with benefit adequacy and  equity issues and the administrative challenges associated with various  proposals. Proposals also differ in the manner in which accounts would be financed,  the extent of choice and flexibility concerning investment options, the way  in which benefits are paid out, and the way the accounts would interact  with the existing Social Security program—individual accounts could  serve either as an addition to or as a replacement for part of the current  benefit structure. Social Security Reform Should be Considered in the Context of Broader Challenges

Other broader concerns for Social Security reform include evaluating a  proposal’s effect on national saving and a proposal’s implications for other  sources of retirement income, access to long-term care and retirement  security generally. In addition to the issues I have discussed regarding  the financing challenges that Social Security, Medicare and Medicaid face,  the nation also faces serious challenges associated with the private  pension system and long-term care financing. Given the broader fiscal challenges that our nation faces and the potential  future changes to Social Security, Medicare, and Medicaid, as well as the  state of private pensions and long-term care trends, it is even more  important that individuals are educated about what to expect in  retirement. The fact is, compared to addressing our  long-range health care financing problem, reforming Social Security  should be easy lifting. Furthermore, absent reform, younger workers will face  dramatic benefit reductions or tax increases that will grow over time. We at GAO look forward to continuing to work with this Committee and  the Congress in addressing this and other important issues facing our  nation.
Why GAO Did This Study

Social Security is the foundation of the nation's retirement income system, helping to protect the vast majority of American workers and their families from poverty in old age. However, it is much more than a retirement program, also providing millions of Americans with disability insurance and survivors' benefits. Over the long term, as the baby boom generation retires and as Americans continue to live longer and have fewer children, Social Security's financing shortfall presents a major program solvency and sustainability challenge that is widening as time passes. The House Committee on Ways and Means asked GAO to discuss the need for Social Security reform. This testimony addresses the nature of Social Security's long-term financing problem and why it would be prudent for Congress to take action sooner rather than later. This testimony also notes the broader context in which reform proposals should be considered and the criteria that GAO has recommended as a basis for analyzing any Social Security reform proposals.

What GAO Found

Although the Social Security system is not in crisis, it faces a serious solvency and sustainability challenge that is growing as time passes. If we do nothing until 2042, achieving actuarial balance would require a 30-percent reduction in benefits or a 43-percent increase in payroll taxes for the period 2042-2078. Furthermore, Social Security's problems are a subset of the grave fiscal challenge facing our nation. Absent changes in budget policy, the nation will ultimately have to choose among escalating federal deficits and debt, huge tax increases and/or dramatic budget cuts. As GAO's long-term budget simulations show, substantive reform of Social Security and our major federal health programs (e.g., Medicare and Medicaid) is critical to saving our nation's fiscal future. Taking action soon would serve to reduce the magnitude of changes needed to ensure that Social Security is solvent, sustainable, and secure for current and future generations. It would also allow time to phase in certain changes and time for individuals to adjust to any such changes. Acting sooner would also serve to improve the federal government's credibility with financial markets and bolster the confidence of the American people in our government's ability to address long-range financial challenges. However, financial solvency and sustainability should not be the only consideration when evaluating Social Security reform proposals. Other key objectives, such as balancing the adequacy and equity of the benefit structure and various administrative and operational issues need to be considered. Furthermore, any changes to Social Security should be considered in the context both of the whole program--including disability and survivors' benefits--and of the broader challenges facing our nation, such as the changing nature of the private pension system, long-term care needs, escalating health care costs, and the need to reform the Medicare and Medicaid programs.