This is the accessible text file for GAO report number GAO-02-467T 
entitled 'Budget Issues: Long-Term Fiscal Challenges' which was 
released on February 27, 2002. 

This text file was formatted by the U.S. General Accounting Office 
(GAO) to be accessible to users with visual impairments, as part of a 
longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

United States General Accounting Office: 
GAO: 

Testimony: 

Before the Committee on the Budget, U.S. Senate. 

For Release on Delivery: 
Expected at 10 a.m. 
Wednesday, February 27, 2002: 

Budget Issues: 

Long-Term Fiscal Challenges: 

Statement of David M. Walker: 
Comptroller General of the United States: 

GAO-02-467T: 

Chairman Conrad, Ranking Member Domenici, and Members of the Committee: 

I am pleased to return this year to present GAO’s perspective on the 
long-range fiscal policy challenges facing this Congress and our 
nation. We meet today in a situation that seems very different from 
that of last February. Today the challenges of combating terrorism and 
ensuring our homeland security have come to the fore as urgent claims 
on our attention and on the federal budget. While there are indications 
that an economic recovery is underway, the recession that began last 
spring has had real consequences for the budget. These are important 
changes in the last year. At the same time, the known fiscal pressures 
created by the retirement of the baby boom generation and rising health 
care costs remain the same. Absent substantive reform of the 
entitlement programs, a rapid escalation of federal spending for Social 
Security, Medicare, and Medicaid beginning less than 10 years from now 
is virtually certain to overwhelm the rest of the federal budget. 
Indeed, the slowing economy and tax and spending decisions, including 
the increased spending levels necessary to respond to new security 
challenges, have increased pressures on the budget. Correspondingly, 
the ultimate task of addressing these needs without unduly exacerbating 
the long-range fiscal challenge has become much more difficult. 

In my testimony today I make the following points: 

* The surpluses that many worked hard to achieve—with help from the 
economy—not only strengthened the economy for the longer term but also 
put us in a stronger position to respond to the events of September 11 
and to the economic slowdown than would otherwise have been the case. 

* Going forward, the nation’s commitment to surpluses will be tested: a 
return to surplus will require sustained discipline and difficult 
choices. 

* Because the longer-term outlook is driven in large part by known 
demographic trends, in some ways we can be surer about the outlook 20 
years from now than the forecast for the next few years. 

* The message of GAO’s updated simulations remains the same as last 
year: absent structural changes in entitlement programs for the 
elderly, in the long term persistent deficits and escalating debt will 
overwhelm the budget. 

* Both longer-term pressures and the new commitments undertaken after 
September 11 sharpen the need to look at competing claims and new 
priorities. A fundamental review of existing programs and activities is 
necessary both to increase fiscal flexibility and to make government 
fit the modern world. Stated differently, there is a need to consider 
what is the proper role of the federal government in the 21st century 
and how should the government do business in the future. 

* The fiscal benchmarks and rules that moved us from deficit to surplus 
expire this fiscal year. Any successor system should facilitate both a 
debate about reprioritization today and a better understanding of the 
long-term implications of different policy choices. Simply stated, 
there are many things that we may be able to afford to do today but we 
may not be able to sustain in the future. 

The Fiscal Backdrop for Today’s Choices: 

Today it is evident that recent surpluses were the result not only of 
hard choices made earlier in the 1990s, but also of fortuitous 
economic, demographic, and policy trends that are no longer working for 
us as we enter the 21st century. In retrospect, the nation emerged from 
deficits of nearly three decades only to find itself in what has been 
called “the eye of the storm.” The passage to surpluses was aided by a 
tailwind consisting of (1) extraordinarily strong economic growth, (2) 
a slowing of health care cost growth, (3) a demographic holiday 
stemming from low birth rates during the Depression and World War II 
paired with a large workforce resulting from the post-war baby 
boom—which together gave rise to a stable worker-to-beneficiary ratio 
in Social Security, and (4) the fall of the Soviet Union permitting a 
decline in defense spending as a share of the economy. 

The fiscal winds have now shifted—many of these fortunate trends have 
now reversed course and are making the choices harder. Although it 
appears the economy may have turned the corner, forecasters are not 
showing a return to the extremely rapid growth the nation enjoyed 
during the last half of the nineties. Health care costs have once again 
resumed growing at double-digit rates. Reductions in defense spending 
can no longer be used as a means to help fund other claims on the 
budget; indeed, spending on defense and homeland security will grow as 
we seek to defeat terrorism worldwide. Finally—and I know this is one 
of the reasons you invited me here today—the nation’s demographic 
holiday is ending. In 2008—only 6 years from now—demographic storm 
clouds will begin to shadow the baseline as the first wave of baby 
boomers become eligible to claim Social Security. 

However one allocates credit across the events and decisions that led 
to years of surpluses, we benefited from that achievement. These large 
surpluses not only helped in the short term by reducing debt and 
interest costs but also strengthened the budget and the economy for the 
longer term. The budgetary surpluses of recent years put us in a 
stronger position to respond both to the events of September 11 and to 
the economic slowdown than would otherwise have been the case. 

However, going forward, the nation’s commitment to surpluses will truly 
be tested. For the last few years surpluses were built in to the 
baseline so that given a lack of policy action, there would be a 
surplus. Last year, the Congressional Budget Office (CBO) baseline not 
only projected unified surpluses for at least the 10-year window but 
also substantial surpluses in the non-Social Security portion of the 
budget. Saving the Social Security surplus became an achievable and 
compelling fiscal policy goal for the nation in this context. This is 
no longer true. At least for the next several years the baseline does 
not turn to unified surplus. A surplus in the non-Social Security 
portion of the budget is not projected under the baseline to emerge 
until 2010. As a result, explicit policy actions on spending and/or 
revenue will be necessary to return to and maintain surpluses over the 
next 10 years. 

Although in important ways you begin the task of crafting a budget this 
year in a very different place than you did last year, in other ways 
the responsibilities remain the same. We still have a stewardship 
obligation to future generations. By stewardship obligation I mean that 
in making budget decisions today, it is important to be mindful of 
their impact on the future. This means that in responding to the 
legitimate needs of today, we should take into account the longer-term 
fiscal pressures we face. The message of GAO’s long-term simulations, 
updated using CBO’s new budget estimates, is consistent with previous 
simulations: absent change, spending for federal health and retirement 
programs eventually overwhelms all other federal spending. 

The Known Demographic Challenge: 

As we look ahead we face an unprecedented demographic challenge. A 
nation that has prided itself on its youth will become older. Between 
now and 2035, the number of people who are 65 or over will double. As 
the share of the population over 65 climbs, federal spending on the 
elderly will absorb larger and ultimately unsustainable shares of the 
federal budget. Federal health and retirement spending are expected to 
surge as people live longer and spend more time in retirement. In 
addition, advances in medical technology are likely to keep pushing up 
the cost of providing health care. Moreover, the baby boomers will have 
left behind fewer workers to support them in retirement, prompting a 
slower rate of economic growth from which to finance these higher 
costs. Absent substantive change in related entitlement programs, large 
deficits return, requiring a combination of unprecedented spending cuts 
in other areas, and/or unprecedented tax increases, and/or 
substantially increased borrowing from the public (or correspondingly 
less debt reduction than would otherwise have been the case). These 
trends have widespread implications for our society, our culture, our 
economy, and—of most relevance here—our budget. 

Ultimately, as this Committee and its counterpart in the House 
recommended on October 4,[Footnote 1] the federal government should 
attempt to return to a position of surplus as the economy returns to a 
higher growth path. Returning to surpluses will take place against the 
backdrop of greater competition of claims within the budget. Although 
budget balance may have been the desired fiscal position in the past 
decade, surpluses would promote the level of savings and investment 
necessary to help future generations better afford the commitments of 
an aging society. 

Early action is important. We all recognize that we have urgent matters 
to address as a nation and our history shows we have been willing to 
run deficits during wars and recessions. However, it remains important 
that to get on with the task of addressing the long-term pressures 
sooner rather than later. Some will suggest that early action may not 
be necessary—for example, that faster economic growth may enable a 
smaller pool of workers to more easily finance the baby boom 
retirement. While this might happen, the best estimates of the 
actuaries suggest it is unlikely. CBO has also said that the nation’s 
long-term fiscal outlook will largely be determined by federal spending 
for retirees, especially for health. 

Although long-term projections are inherently more uncertain than short-
term forecasts, in some ways we can be surer about the outlook 20 years 
from now since it is driven by known demographics. The swing in 1-, 5-, 
and 10-year projections over the last 12 months has served to emphasize 
the extent to which short-term projections are subject to uncertainty. 
And CBO notes that this year the near-term projections are subject to 
unusual uncertainties as the nation wages war on terrorism and recovers 
from a recession. CBO pointed out that it is considered more difficult 
to forecast the economy when it is entering or exiting a recession. 
This year there are additional uncertainties in the near-term budget 
outlook. CBO’s reference case—the baseline—from which you begin your 
deliberations (and which in the first 10 years is the underpinning for 
our long-term model) is a representation of current laws and policies. 
Thus, by definition it does not account for the effects of future 
legislation, including likely increases in spending for defense and 
homeland security to which both parties have agreed in principle. Nor, 
as CBO noted, does it make assumptions about a number of issues, e.g., 
the extension of agriculture programs, Medicare prescription drug 
coverage, changes in the Alternative Minimum Tax, or the extension of 
various expiring tax provisions. 

Given this extreme uncertainty around the next 1 to 5 years, why look 
out 20 or 30 years? Absent some draconian or unexpected dramatic event, 
the long-term budget outlook is driven by factors already in 
motion—most notably the aging of the population. In previous 
testimonies before you, I have talked about a demographic tidal wave. 
Beginning about 2010, the share of the population that is age 65 or 
older will begin to climb, surpassing 20 percent by 2035. (See figure 
1) 

Figure 1: Aged Population as a Share of Total U.S. Population Continues 
to Grow: 

[See PDF for image] 

This figure is a line graph depicting the following data: 

Population aged 65 and over (percent of total populations): 
	
1950: 8.001%;
1955: 8.637%;	
1960: 9.085%;	
1965: 9.351%;	
1970: 9.731%;	
1975: 10.353%;	
1980: 11.136%;	
1985: 11.772%;	
1990: 12.279%;	
1995: 12.497%;	
2000: 12.305%;	
2005: 12.313%;	
2010: 12.71%;	
2015: 14.01%;	
2020: 15.669%;	
2025: 17.522%;	
2030: 18.987%;	
2035: 19.626%;	
2040: 19.733%;	
2045: 19.625%;	
2050: 19.686%;	
2055: 19.898%;	
2060: 20.278%;	
2065: 20.557%;	
2070: 20.851%;	
2075: 21.132%;	 

Note: Projections based on intermediate assumptions of the 2001 
Trustees’ reports. 

Source: The 2001 Annual Report of the Board of Trustees of the Federal 
Old-Age and Survivors Insurance and Disability Insurance Trust Funds. 

[End of figure] 

GAO’s Model Simulations Illustrate Long-Term Budget Challenges: 

Because of the coming demographic shift, the message from our 
simulations remains the same as last year, indeed as since we first 
published results from our long-term model in 1992: Absent policy 
change, in the long term, persistent deficits and escalating debt 
driven by entitlement spending will overwhelm the budget. This year we 
ran three different policy paths to illustrate the implications of a 
range of budgetary choices. I’d like to emphasize again that these 
simulations are not intended to endorse a particular policy but rather 
to illustrate the long-term implications of different scenarios. 

All three scenarios begin with CBO’s baseline estimates. The first 
starts with the baseline where for the first 10 years tax and 
entitlement laws are unchanged—including sunset provisions—and 
discretionary spending grows with inflation. After the first 10 years, 
we hold discretionary spending and revenues constant as a share of 
gross domestic product (GDP) and allow Social Security and Medicare to 
grow based on the actuaries’ intermediate estimates.[Footnote 2] In 
this path, the unified surpluses that emerge in 2004 are saved. 
Nevertheless, deficits return in 2036. At the other end is an 
alternative policy path in which discretionary spending grows with the 
economy in the first 10 years and in which last year’s tax cuts are 
extended. This yields a smaller period of surpluses with deficits 
returning in 2011. In both of these paths taxes remain constant as a 
share of GDP after 2012; this is, of course, a policy decision. To 
illustrate something in between these two paths, we simulated a third 
that tracks the CBO baseline until 2010. After 2010 we assume that the 
full Social Security surplus is saved through 2024[Footnote 3]—this 
requires some combination of tax and spending policy actions. In this 
simulation deficits reemerge in 2025. (See figure 2.) 

Figure 2: Unified Surpluses and Deficits as a Share of GDP Under 
Alternative Fiscal Policy Simulations: 

[See PDF for image] 

This figure is a multiple line graph depicting unified surpluses and 
deficits as a share of GDP under alternative fiscal policy simulations. 
Line represent the following: 
Baseline extended; 
Discretionary spending grows with GDP and tax cuts do not sunset; 
Save the Social Security Surpluses, 2010-2024. 

Source: GAO’s January 2002 analysis. 

[End of figure] 

In all three paths, surpluses eventually give way to large and 
persistent deficits. These simulations show that there is a benefit to 
fiscal discipline—it delays the return to deficits—but that even the 
most demanding path we simulated—a path that does not provide for 
funding Presidential or many Congressional initiatives—is structurally 
imbalanced over the long term. Although savings from higher surpluses 
are important, they must be coupled with action to slow the long-term 
drivers of projected deficits, i.e. Social Security and health 
programs. Surpluses can help—they could, for example, facilitate the 
needed reforms by providing resources to ease transition costs—but, by 
themselves, surpluses will not be sufficient. 

In the long term, under all three paths federal budgetary flexibility 
becomes increasingly constrained and eventually disappears. To move 
into the future with no changes in federal health and retirement 
programs is to envision a very different role for the federal 
government. Assuming, for example, that last year’s tax reductions are 
made permanent and discretionary spending keeps pace with the economy, 
spending for net interest, Social Security, Medicare, and Medicaid 
consumes nearly three-quarters of federal revenue by 2030, leaving 
little room for other federal priorities including defense and 
education. By 2050, total federal revenue is insufficient to fund 
entitlement spending and interest payments—and deficits are escalating 
out of control.[Footnote 4] (See figure 3.) 

Figure 3: Composition of Spending as a Share of GDP Assuming 
Discretionary Spending Grows with GDP and the Tax Cuts Do Not Sunset: 

[See PDF for image] 

This figure is a combination stacked vertical bar and line graph 
depicting the composition of spending as a share of GDP assuming 
discretionary spending grows with GDP and the tax cuts do not sunset. 
The following data is depicted, as a percent of GDP: 

For the years 2000, 2030, and 2050, stacked vertical bars represent: 
Net interest; 
Social Security; 
Medicare and Medicaid; 
All other spending. 

For the same years, a line represents: 
Revenue. 
 
Source: GAO’s January 2002 analysis. 

[End of figure] 

Reducing the relative future burdens of Social Security and federal 
health programs is critical to promoting a sustainable budget policy 
for the longer term. Absent reform, the impact of federal health and 
retirement programs on budget choices will be felt as the baby boom 
generation begins to retire. While much of the public debate concerning 
the Social Security and Medicare programs focuses on trust fund 
balances—that is on the programs’ solvency—the larger issue concerns 
sustainability. 

The 2001 Trustees Reports estimate that the Old-Age Survivors Insurance 
and Disability Insurance (OASDI) Trust Funds will remain solvent 
through 2038 and the Hospital Insurance (HI) Trust Fund through 
2029.[Footnote 5] 

Furthermore, because of the nature of federal trust funds, HI and OASDI 
Trust Fund balances do not provide meaningful information about program 
sustainability—that is, the government’s fiscal capacity to pay 
benefits when the program’s cash income falls below benefit expenses. 
From this perspective, the net cash impact of the trust funds on the 
government as a whole—not trust fund solvency—is the important measure. 
Under the trustees’ intermediate assumptions, the OASDI Trust Funds are 
projected to have a cash deficit beginning in 2016 and the HI Trust 
Fund a deficit also beginning in 2016. (See figure 4.) At that point, 
the programs become net claimants on the Treasury. In addition, as we 
have noted in other testimony,[Footnote 6] a focus on HI solvency 
presents an incomplete picture of the Medicare program’s expected 
future fiscal claims. The Supplementary Medical Insurance (SMI) portion 
of Medicare, which is not reflected in the HI solvency measure, is 
projected to grow even faster than HI in the near future. According to 
the best estimates of the Medicare trustees, Medicare HI and SMI 
together will double as a share of GDP between 2000 and 2030 (from 2.2 
percent to 4.5 percent) and reach 8.5 percent of GDP in 2075. Under the 
trustees’ best estimates, Social Security spending will grow as a share 
of GDP from 4.2 to 6.5 percent between 2000 and 2030, reaching 6.7 
percent in 2075. 

Figure 4: Social Security and Medicare’s Hospital Insurance Trust Funds 
Face Cash Deficits as Baby Boomers Retire: 

[See PDF for image] 

This is a bar graph with vertical bars representing the Medicare HI 
Cash Flow and Social Security Cash Flow for each fiscal year. The bars 
indicate a Medicare HI cash deficit beginning in 2016 and a Social 
Security cash deficit in 2016. The vertical axis of the graph depicts 
billions of 2000 dollars from -600 to +200. The horizontal axis depicts 
fiscal years from 2005 through 2040. 

Note: Projections based on intermediate assumptions of the 2001 OASDI 
and HI reports. 

Source: GAO analysis of data from the Office of the Chief Actuary, 
Social Security Administration and the Office of the Actuary, Health 
Care Financing Administration. 

[End of figure] 

To finance these cash deficits, Social Security and the Hospital 
Insurance portion of Medicare will need to draw on their special issue 
Treasury securities acquired during the years when these programs 
generated cash surpluses. This negative cash flow will placed increased 
pressure on the federal budget to raise the resources necessary to meet 
the program’s ongoing costs. In essence, for OASDI or HI to “redeem” 
their securities, the government will need to obtain cash through 
increased taxes, and/or spending cuts, and/or increased borrowing from 
the public (or correspondingly less debt reduction than would have been 
the case had cash flow remained positive). Our long-term simulations 
illustrate the magnitude of the fiscal challenges associated with an 
aging society and the significance of the related challenges the 
government will be called upon to address. As we have stated 
elsewhere,[Footnote 7] early action to change these programs would 
yield the highest fiscal dividends for the federal budget and would 
provide a longer period for prospective beneficiaries to make 
adjustments in their own planning. Waiting to build economic resources 
and reform future claims entails risks. First, we lose an important 
window where today’s relatively large workforce can increase saving and 
enhance productivity, two elements critical to growing the future 
economy. We lose the opportunity to reduce the burden of interest in 
the federal budget, thereby creating a legacy of higher debt as well as 
elderly entitlement spending for the relatively smaller workforce of 
the future. Most critically, we risk losing the opportunity to phase in 
changes gradually so that all can make the adjustments needed in 
private and public plans to accommodate this historic shift. 
Unfortunately, the long-range challenge has become more difficult, and 
the window of opportunity to address the entitlement challenge is 
narrowing. It remains more important than ever to return to these 
issues over the next several years. Ultimately, the critical question 
is not how much a trust fund has in assets, but whether the government 
as a whole can afford the promised benefits now and in the future and 
at what cost to other claims on scarce resources. 

The Need to Reexamine Government Activities and Programs: 

One of the reasons to address these longer-term pressures is their 
potential to crowd out the capacity to support other important 
priorities throughout the rest of the budget. The tragedy of September 
11 made us all realize the benefits fiscal flexibility provides to our 
nation’s capacity to respond to urgent and newly emergent needs. 
Obviously we will allocate whatever resources are necessary to protect 
the nation. However, these new commitments will compete with and 
increase the pressure on other priorities within the budget. Financing 
these compelling new claims within an overall fiscal framework that 
eventually returns the budget to surplus is a tall order indeed. 

The budget process is the one place where we as a nation can conduct a 
healthy debate about competing claims and new priorities. However, such 
a debate will be needlessly constrained if only new proposals and 
activities are on the table. A fundamental review of existing programs 
and operations can create much-needed fiscal flexibility to address 
emerging needs by weeding out programs that have proven to be outdated, 
poorly targeted, or inefficient in their design and management. It is 
always easier to subject proposals for new activities or programs to 
greater scrutiny than that given to existing ones. It is easy to treat 
existing activities as “given” and force new proposals to compete only 
with each other. Such an approach would move us further, rather than 
nearer, to budgetary surpluses. 

Moreover, it is healthy for the nation periodically to review and 
update its programs, activities and priorities. As we have discussed 
previously,[Footnote 8] many programs were designed years ago to 
respond to earlier challenges. In the early years of a new century, we 
have been reminded how much things have changed. For perspective, 
students who started college this past fall were 9 years old when the 
Soviet Union broke apart and have no memory of the Cold War; their 
lifetimes have always known microcomputers and AIDS. In previous 
testimony,[Footnote 9] both before this Committee and elsewhere, I 
noted that it should be the norm to reconsider the relevance or “fit” 
of any federal program or activity in today’s world and for the future. 
Such a review might weed out programs that have proven to be outdated 
or persistently ineffective, or alternatively could prompt us to update 
and modernize activities through such actions as improving program 
targeting and efficiency, consolidation, or reengineering of processes 
and operations. Ultimately, we should strive to hand to the next 
generations the legacy of a government that is effective and relevant 
to a changing society—a government that is as free as possible of 
outmoded commitments and operations that can inappropriately encumber 
the future. We need to think about what government should do in the 
21st century and how it should do business. 

The events of last fall have provided an impetus for some agencies to 
rethink approaches to long-standing problems and concerns. In 
particular, agencies will need to reassess their strategic goals and 
priorities to enable them to better target available resources to 
address urgent national preparedness needs. For instance, the threat to 
air travel has already prompted attention to chronic problems with 
airport security that we and others have been pointing to for years. 
Moreover, the crisis might prompt a healthy reassessment of the broader 
transportation policy framework with an eye to improving the 
integration of air, rail, and highway systems to better move people and 
goods. 

Other long-standing problems also take on increased relevance in 
today’s world. Take, for example, food safety. Problems such as 
overlapping and duplicative inspections across many federal agencies, 
poor coordination, and inefficient allocations of resources are not new 
and have hampered productivity and safety for years. However, they take 
on new meaning and urgency given the potential threat from 
bioterrorism. We have argued for a consolidated food safety initiative 
merging the separate programs of the multiple federal agencies 
involved. Such a consolidated approach can facilitate a concerted and 
effective response to the new threats. 

The federal role in law enforcement is another area that is ripe for 
reexamination following the events of September 11. In the past 20 
years, the federal government has taken on a larger role in financing 
criminal justice activities that have traditionally been viewed as the 
province of the state and local sector. This is reflected in the growth 
of the federal share of financing—from 12 percent in 1982 to nearly 20 
percent in 1999. 

Given the new daunting new law enforcement responsibilities in the wake 
of September 11 and limited budgetary resources at all levels, the 
question is whether these additional responsibilities should prompt us 
to rethink the priorities and roles of federal, state, and local levels 
of government in the criminal justice area and ultimately whether some 
activities are affordable in this new setting. The Federal Bureau of 
Investigation has already begun thinking about reprioritization and how 
its investigative resources will shift, given the new challenges posed 
by the terrorism threat. 

With the Coast Guard’s focus on homeland security, it has de-emphasized 
some of its other critical missions in the short term, most notably 
fisheries enforcement and drug and migrant interdiction. The Coast 
Guard is currently developing a longer-term mission strategy, although 
it has no plans at present to revise the schedule or asset mix for its 
Deepwater Project (which will be awarded mid-2002). 

In rethinking federal missions and strategies, it is important to 
examine not only spending programs but the wide range of other more 
indirect tools of governance the federal government uses to address 
national objectives. These tools include loans and loan guarantees, tax 
expenditures, and regulations. For instance, in fiscal year 2000, the 
federal health care and Medicare budget functions include $37 billion 
in discretionary budget authority, $319 billion in entitlement outlays, 
$5 million in loan guarantees, and $91 billion in tax expenditures. 

The outcomes achieved by these various tools are in a very real sense 
highly interdependent and are predicated on the response by a wide 
range of third parties, such as states and localities and private 
employers, whose involvement has become more critical to the 
implementation of these federal initiatives. The choice and design of 
these tools is critical in determining whether and how federal 
objectives will be addressed by these third parties. Any review of the 
base of existing policy should address this broader picture of federal 
involvement. 

GAO has also identified a number of areas warranting reconsideration 
based on program performance, targeting, and costs. Every year, we 
issue a report identifying specific options, many scored by CBO, for 
congressional consideration stemming from our audit and evaluation 
work. [Footnote 10] This report provides opportunities for (1) 
reassessing objectives of specific federal programs, (2) improved 
targeting of benefits, and (3) improving the efficiency and management 
of federal initiatives. 

Just as long-standing areas of federal involvement need re-examination, 
so proposed new initiatives designed to address the new terrorism 
threat need appropriate review. With the focus on counterterrorism, you 
will undoubtedly face many proposals redefined as counterterrorism 
activities. The Congress will need to watch for the redefinition of 
many claims into counterterrorism activities. It will be especially 
important to seek to distinguish among these claims. 

In sorting through these proposals, we might apply investment criteria 
in making choices. Well-chosen enhancements to the nation’s 
infrastructure are an important part of our national preparedness 
strategy. Investments in human capital for certain areas such as public 
health or airport security will also be necessary as well to foster and 
maintain the skill sets needed to respond to the threats facing us. A 
variety of governmental tools will be proposed to address these 
challenges—grants, loans, tax expenditures, and/or direct federal 
administration. The involvement of a wide range of third parties—state 
and local governments, nonprofits, private corporations, and even other 
nations—will be a vital part of the national response as well. 

In the short term, we will do whatever is necessary to get this nation 
back on its feet and compassionately deal with the human tragedies left 
in its wake. However, as we think about our longer-term preparedness 
and develop a comprehensive homeland security strategy, we can and 
should select those programs and tools that promise to provide the most 
cost-effective approaches to achieve our goals. 

Budget Process Should Facilitate Discipline and Awareness of Long-Term 
Implications of Decisions: 

Today the Congress faces the challenge of sorting out these many claims 
on the federal budget without the fiscal benchmarks and rules that 
served as guides through the years of deficit reduction. Going forward, 
new rules and goals will be important both to ensure fiscal discipline 
as we sort through these new and compelling claims and to prompt 
policymakers to focus on the longer-term implications of current 
policies and programs. For more than a decade, budget process 
adaptations have been designed to reach a zero deficit. With the advent 
of surpluses, a new framework was needed—one that would permit 
accommodating pent-up demands but not eliminate all controls. A broad 
consensus seemed to develop to use saving the Social Security surplus 
or maintaining on-budget balance as a kind of benchmark. However, the 
combination of the economic slowdown and the need to respond to the 
events of September 11 has overtaken that measure. 

Once again, Congress faces the challenge of designing a budget control 
mechanism. Last October, Mr. Chairman, you and your colleague Senator 
Domenici and your House counterparts called for a return to budget 
surplus as a fiscal goal. This remains an important fiscal goal, but 
achieving it will not be easy. In the near term, limits on 
discretionary spending may be necessary to prompt the kind of 
reexamination of the base I discussed above. There are no easy choices. 
There will be disagreements about the merits of a given 
activity—reasonable people can disagree about federal priorities. There 
may also be disagreements about the appropriate response to program 
failure: Should the program be modified or terminated? Would the 
program work better with more money or should funding be cut? Spending 
limits can be used to force choices; they are more likely to do so, 
however, if they are set at levels viewed as reasonable by those who 
must comply with them. 

Spending limits alone cannot force a reexamination of existing programs 
and activities. However, the recognition that for most agencies the new 
responsibilities acquired since September 11 cannot merely be added to 
existing duties requires that decisions be made about priorities. In 
the last decade Congress and the Administration put in place a set of 
laws designed to improve information about cost and performance. This 
information can help inform the debate about what the federal 
government should do. In addition, the budget debate can benefit from 
the kind of framework I discussed above. In previous testimony before 
this committee, I suggested that Congress might equip itself to engage 
in this debate by developing a congressional performance resolution to 
target its oversight on certain governmentwide performance issues 
cutting across agencies and programs.[Footnote 11] Along with caps, 
this and other measures might help ensure that Congress becomes part of 
the debate over reprioritization and government performance. 

The dramatic shift in budget projections since last year has prompted 
discussion of shortening the budget window. This may well be a sensible 
approach to reducing uncertainty. However, such a change should be 
coupled with steps to provide a broader and longer-term fiscal horizon: 
goals and metrics to address the longer-term implications of today’s 
choices. This does not mean that we should budget for a 20-or 30-year 
period. It does mean considering establishing indicators and targets 
that bring a long-term perspective to budget deliberations and a 
process that prompts attention to the long-term implications of today’s 
decisions. Periodic simulations along the lines we and CBO have 
developed can and should become a regular feature of budget debate. We 
would be the first to say that the simulations are not predictions of 
the future or point estimates, rather they serve as indicators—or 
warning lights—about the magnitude and direction of different policy 
profiles. These scenarios are particularly helpful in comparing long-
term consequences of different fiscal paths or major reforms of 
entitlements using the same assumptions. As I said earlier, the 
demographic tidal wave that drives the long-term budget challenge is a 
known element with predictable consequences. 

Some kind of fiscal targets may be helpful. As a way to frame the 
debate, targets can remind us that today’s decisions are not only about 
current needs but also about how fiscal policy affects the choices over 
the longer term. Other nations have found it useful to embrace broader 
targets such as debt-to-GDP ratios, or surpluses equal to a percent of 
GDP over the business cycle. To work over time targets should not be 
rigid—it is in the nature of things that they will sometimes be missed. 
It should be possible to make some sort of compelling argument for the 
target—and it should be relatively simple to explain. Reaching a target 
is not a straight line but an iterative process. The other nations we 
have studied have found that targets prompted them to take advantage of 
windows of opportunity to save for the future and that decisionmakers 
must have flexibility each year to weigh pressing short-term needs and 
adjust the fiscal path without abandoning the longer-term framework. 

In re-examining what I have called the “drivers” of the long-term 
budget, we need to think about new metrics. We have been locked into 
the artifacts of the trust funds, which do not serve as appropriate 
signals for timely action to address the growth in these programs. As I 
mentioned earlier, trust fund solvency does not answer the question of 
whether a program is sustainable. 

Although aggregate simulations are driven by these programs, the need 
for a longer-term focus is about more than Social Security and 
Medicare. In recent years there has been an increased recognition of 
the long-term costs of Social Security and Medicare. While these are 
the largest and most important long-term commitments—and the ones that 
drive the long-term outlook—they are not the only ones in the budget 
that affect future fiscal flexibility. For Congress, the President, and 
the public to make informed decisions about these other programs, it is 
important to understand their long-term cost implications. A longer 
time horizon is useful not only at the macro level but also at the 
micro-policy level. I am not suggesting that detailed budget estimates 
could be made for all programs with long-term cost implications. 
However, better information on the long-term costs of commitments like 
employee pension and health benefits and environmental cleanup could be 
made available. Here again, new concepts and metrics may be useful. We 
have been developing the concept of “fiscal exposures” to represent a 
range of federal commitments—from explicit liabilities to implicit 
commitments. Exactly how such information would be incorporated into 
the budget debate would need to be worked out—but it is worth serious 
examination. 

Conclusion: 

In one sense much has changed in the budget world since last February. 
There are even more compelling needs and demands on the federal budget 
than a year ago—and policymakers must deal with them absent the 
surpluses that were projected then. However, the demographic trends 
that drive the long-term outlook have not changed. The baby boom 
generation is still getting older and closer to retirement. Because of 
the coming demographic shift, the message from our simulations remains 
the same as last year, indeed as since we first published results from 
our long-term model in 1992: Absent changes in Social Security and 
health programs, in the long term, persistent deficits and escalating 
debt driven by entitlement spending will overwhelm the budget. 

The events of September 11 highlighted the benefits of fiscal 
flexibility. Addressing the long-term drivers in the budget is 
essential to preserving any flexibility in the long term. In the nearer 
term a fundamental review of existing programs and operations can 
create much-needed fiscal flexibility to address emerging needs by 
weeding out programs that have proven to be outdated, poorly targeted, 
or inefficient in their design and management. 

Congress and the President stand at a point where current needs and 
wants must be balanced against known long-term pressures. And you face 
the challenge of sorting out these many claims on the federal budget 
without the fiscal benchmarks and rules that guided us through the 
years of deficit reduction into surplus. Going forward, new rules and 
goals will be important both to ensure fiscal discipline and to prompt 
a focus on the longer-term implications of decisions. It is still the 
case that the federal government needs a decision-making framework that 
permits it to evaluate choices against both today’s needs and the 
longer-term fiscal future that will be handed to future generations. As 
stewards of our nation’s future, we must begin to prepare for tomorrow. 
In this regard, we must determine how best to address these structural 
challenges in a reasonably timely manner in order to identify specific 
actions that need to be taken. 

None of this is easy. We at GAO stand ready to assist you. 

[End of section] 

Footnotes: 

[1] House and Senate Budget Committees, The Revised Budgetary Outlook 
and Principles for Economic Stimulus (Oct. 4, 2001). 

[2] We also assume that all current-law benefits in entitlement 
programs are paid in full (i.e., we assume that all promised Social 
Security and Medicare benefits are paid including after the projected 
exhaustion of the respective trust funds). 

[3] The last year of projected Social Security surpluses (including 
interest income) under the 2001 trustees’ intermediate estimates. As 
discussed later in this testimony, program expenses exceed non-interest 
income beginning in 2016. 

[4] Due to recent changes in methodology as well as updates to 
underlying assumptions, simulations presented in this testimony are not 
comparable to previously published simulations. 

[5] In the FY 2000 Financial Report of the United States Government, 
issued in March 2001, the net present value of the estimated 
expenditures in excess of income as of January 1, 2000, was $3.8 
trillion for Social Security and $2.7 trillion for Medicare Part A. The 
2001 figures will be available at the end of next month. 

[6] Medicare: New Spending Estimates Underscore Need for Reform (GAO-01-
1010T, July 25, 2001). 

[7] Major Management Challenges and Program Risks: A Governmentwide 
Perspective [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-01-241], 
January 2001, p. 45. 

[8] Budget Issues: Effective Oversight and Budget Discipline are 
Essential—Even in a Time of Surplus [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/T-AIMD-00-73], Feb. 1, 2000. 

[9] Homeland Security: Challenges and Strategies in Addressing Short- 
and Long-Term National Needs [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-02-160T], Nov. 7, 2001, and Budget Issues: Effective 
Oversight and Budget Discipline are Essential—Even in a Time of Surplus 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/T-AIMD-00-73], Feb. 
1, 2000. 

[10] Supporting Congressional Oversight: Framework for Considering 
Budgetary Implications of Selected GAO Work [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-01-447], March 9, 2001. 

[11] Budget Issues: Effective Oversight and Budget Discipline Are 
Essential—Even in a Time of Surplus [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/T-AIMD-00-73], Feb. 1, 2000. 

[End of section] 

GAO’s Mission: 

The General Accounting Office, the investigative arm of Congress, 
exists to support Congress in meeting its constitutional 
responsibilities and to help improve the performance and accountability 
of the federal government for the American people. GAO examines the use 
of public funds; evaluates federal programs and policies; and provides 
analyses, recommendations, and other assistance to help Congress make 
informed oversight, policy, and funding decisions. GAO’s commitment to 
good government is reflected in its core values of accountability, 
integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through the Internet. GAO’s Web site [hyperlink, 
http://www.gao.gov] contains abstracts and fulltext files of current 
reports and testimony and an expanding archive of older products. The 
Web site features a search engine to help you locate documents using 
key words and phrases. You can print these documents in their entirety, 
including charts and other graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 
correspondence. GAO posts this list, known as “Today’s Reports,” on its 
Web site daily. The list contains links to the full-text document 
files. To have GAO e-mail this list to you every afternoon, go to 
[hyperlink, http://www.gao.gov] and select “Subscribe to daily E-mail 
alert for newly released products” under the GAO Reports heading. 

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 

Orders should be sent to: 

U.S. General Accounting Office: 
441 G Street NW, Room LM: 
Washington, D.C. 20548: 

To order by Phone: 
Voice: (202) 512-6000: 
TDD: (202) 512-2537: 
Fax: (202) 512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs Contact: 

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 

E-mail: fraudnet@gao.gov: 

Automated answering system: (800) 424-5454 or (202) 512-7470: 

Public Affairs: 
Jeff Nelligan, managing director, NelliganJ@gao.gov: 
(202) 512-4800: 
U.S. General Accounting Office: 
441 G Street NW, Room 7149:
Washington, D.C. 20548: