Social Security and Surpluses

The President's recent proposal for addressing Social Security and the use of the budget surplus is complex, which makes it all the more important to focus on what it does -- and what it does not do -- for the nation's long-term future. In summary, the President's proposal does reduce debt held by the public from current levels, thereby also reducing net interest costs, raising national saving, and contributing to future economic growth. The President's proposal also changes Social Security financing in two fundamental ways: it promises general funds in the future by, in effect, trading publicly held debt for debt held by the Social Security Trust Fund and it invests some of the trust fund in equities with the goal of capturing higher returns over the long term. However, the President's proposal does not have any effect on the projected cash flow imbalance in the Social Security program's taxes and benefits, which begins in 2013. In GAO's view, the President's proposal does not represent a Social Security reform plan and does not come close to saving Social Security.

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.