	Introduction

The Social Security program is the foundation of the nation’s retirement income system. Objectives, Scope, and Methodology

The Chairman and Ranking Minority Member of the Senate Finance Committee asked us to discuss (1) the various perspectives that underlie the current solvency debate, (2) the reform options within the current structure, and (3) the issues that might arise if Social Security were restructured to include individual accounts. We also discuss the likely effects on national saving of reform proposals that call for more advance funding of Social Security benefits. This view generally leads to a rather different approach to providing retirement income. Rather, the pay-as-you-go financing structure means that current workers pay for the benefits of current retirees and that benefits are promised largely on the basis of the ability of the government to pay them in the future. A Variety of Options Could Restore Program Solvency Within the Existing Program Structure

Resolving Social Security’s long-term financing problem within the program’s current structure would require increasing the program’s revenues, decreasing its expenditures, or both. These revenues are returned to the Social Security Trust Funds. Individual Accounts Invested in Stocks and Bonds Would Likely Generate a Better Rate of Return, Albeit at Some Increased Risk

Individual account systems generally aim to add to the retirement income provided by Social Security. Level of Social Adequacy Would Need to Be Determined

The annuity-welfare concept of social insurance leads to questioning the appropriate role for the government in providing retirement income. If Social Security benefits were reduced, then private employers with integrated plans might experience an increase in their pension costs that could prompt them to redesign their plans. This aspect of the reform debate requires careful scrutiny and additional attention. The Federal Budget Influences National Saving

The realization that there will be relatively fewer workers in the future to produce the goods and services to support not only themselves, but also a larger number of retirees, has led many to focus on the potential contribution of Social Security financing reform to long-term economic growth. Retirement programs, such as pensions, are essentially savings for long-term capital formation. Financing Transition Costs Could Reduce Saving Resulting From Advance Funding Individual Accounts

While increased advance funding of Social Security by the government could potentially have a positive impact on national saving, the impact would depend in part on what happened in the non-Social Security part of the budget. These unfinanced costs of the current system are the transition costs of moving to a fully funded system. Moving even part of Social Security to individual accounts would raise many questions and challenges. Nonetheless, because such action will affect the nation and its economy for years to come, decisions should be made with full knowledge and debate of the trade-offs inherent in each proposed change.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on issues related to social security financing, focusing on: (1) the various perspectives that underlie the current solvency debate; (2) the reform options within the current program structure; (3) the issues that might arise if social security were restructured to include individual retirement accounts; and (4) the likely impacts on national saving of reform proposals that call for changes in how Social Security benefits are funded.

What GAO Found

GAO noted that: (1) many options exist for restoring long-term solvency within the current program structure; (2) these possibilities include raising the retirement age, altering the benefit formula, reducing the cost-of-living adjustment, investing Social Security Trust Fund surpluses in the stock market, and mandating participation of workers who are currently excluded; (3) some combinations of these changes could restore program solvency while retaining the program's social insurance features; (4) while these options generally require reducing benefits or raising revenues, their effects on workers and retirees might be mitigated if adjustments were made sooner, not later; (5) proposals for more fundamental program changes have the potential to increase returns overall but would entail increased risk; (6) moving even part of social security to individual accounts would require careful consideration of the issues raised by such a fundamental change; (7) the consequences for the insurance aspects of the current social security system would require close scrutiny if social security were wholly or partly privatized; (8) most of the reform proposals envision substituting advance funding for the largely pay-as-you-go system that exists today; (9) in principle, advance funding of social security benefits could lead to an increase in national saving; (10) increased saving could lead to higher rates of economic growth and better enable future generations to support themselves and future retirees; (11) moving to an advance funded system would entail substantial transition costs that could offset any potential savings for a number of years; (12) over the years, social security has evolved to be more than a retirement program; (13) social security not only provides the floor for an adequate retirement income, it also insures families in the event of the death or disability of the earner and helps provide retirement income security for low-income workers; (14) restoring the system to financial solvency will require fundamental choices about such issues as the strength of guarantees of retirement income to the nation's elderly, levels of insurance for working families, and the role of government in providing retirement income; and (15) because such decisions will affect the nation and its economy for years to come, they should be made with full knowledge and debate of the trade-offs inherent in each proposed change.