Nor does  this debt have any of the economic effects of borrowing from the public. 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. 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. Social Security Reform Is Still Needed

Finally, it is important to note that the President's proposal does not alter  the projected payroll tax and benefit imbalances in the Social Security  program. In addition, it does not come close to “saving Social Security.”  Benefit costs and revenues currently associated with the program will not  be affected by even 1 cent. 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 may prompt a discussion and decision on both how much of our  current resources we want to save for the future and how we can best do  so. 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. 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, but it would not constitute real Social Security reform  because it does not modify the program’s underlying commitments for the  future. 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 substantive program reforms may, in  fact, undermine the case for fundamental program changes. In addition,  explicitly pledging federal general revenues to Social Security will limit the  options for dealing with other national issues.
Why GAO Did This Study

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

What GAO Found

GAO noted that: (1) the President's proposal: (a) reduces debt held by the public from current levels, thereby also reducing new 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, in effect, 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 which begins in 2013; and (d) does not represent a social security reform plan and does not come close to saving social security; (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 may prompt a discussion and decision on 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 the nation, in effect, prefund these commitments by using today's wealth earned by current workers to enhance the resources for the next generations; (6) 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, but it would not constitute real social security reform because it does not modify the program's underlying commitments for the future; (7) moreover, the proposed transfer may very well make it more difficult for the public to understand and support the savings goals articulated; (8) 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; (9) GAO is very concerned that enhancing the financial condition of the trust fund alone without any comprehensive and substantive program reforms may in fact undermine the fundamental changes; and (10) explicitly pledging federal general revenues to social security will limit the options for dealing with other national issues.