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T he Livestock Mandatory Reporting Act ( P.L. 106-78 , Title IX; LMR ) requires that meat packers report prices and other information on purchases of cattle, hogs, lamb, boxed beef, wholesale pork, and lamb carcasses and boxed lamb to the U.S. Department of Agriculture (USDA). Authority for mandatory reporting was set to expire on September 30, 2015. Livestock industry stakeholders supported the reauthorization of the act, and producer groups put forward proposals amending mandatory reporting. The House passed a reauthorization bill ( H.R. 2051 ) in June 2015. In September 2015, the Senate amended the House-passed bill, and Congress reauthorized LMR until September 30, 2020, in the enacted Agriculture Reauthorizations Act of 2015 ( P.L. 114-54 ).

	Background

Before livestock mandatory price reporting was enacted by Congress in 1999, the USDA's Agricultural Marketing Service (AMS) collected livestock and meat price and related market information from meat packers on a voluntary basis under the authority of the Agricultural Marketing Act of 1946 (7 U.S.C. §1621 et seq.). AMS market reporters collected and reported prices from livestock auctions, feedlots, and packing plants. The information was disseminated through hundreds of daily, weekly, monthly, and annual written and electronic USDA reports on sales of live cattle, hogs, and sheep and wholesale meat products from these animals. The goal was to provide all buyers and sellers with accurate and objective market information.
By the 1990s, the livestock industry had undergone many sweeping changes, including increased concentration in meat packing and animal feeding, more production specialization, and more vertical integration (firms controlling more than one aspect of production). Fewer animals were sold through negotiated (cash; or "spot") sales, and more frequently sold under alternative marketing arrangements (e.g., formula sales based on a negotiated price established in the future) with prices not publicly disclosed or reported. Some livestock producers, believing such arrangements made it difficult or impossible for them to determine "fair" market prices for livestock going to slaughter, called for mandatory price reporting for packers and others who process and market meat. USDA had estimated in 2000 that the former voluntary system was not reporting 35%-40% of cattle, 75% of hog, and 40% of lamb transactions.
During debate on mandatory price reporting, opponents, including some meat packers and other farmers and ranchers, argued that a mandate would impose costly new burdens on the industry and could cause the release of confidential company information. Nonetheless, some of these earlier opponents decided to support a mandatory price reporting law. Livestock producers had been hit by very low prices in the late 1990s and were looking for ways to strengthen the markets. Some meat packers also decided to support a national consensus bill at least partly to preempt what they viewed as an emerging "patchwork" of state price reporting laws that could alter competition between packers operating under different state reporting laws.

	Legislative and Rulemaking History

The Livestock Mandatory Reporting Act of 1999 (LMR, P.L. 106-78 , Title IX; 7 U.S.C. §1635 et seq.) was enacted in October 1999 as part of the FY2000 Agriculture appropriations act. The law mandated price reporting for live cattle, boxed beef, and live swine and allowed USDA to establish mandatory price reporting for lamb sales. The law authorized appropriations as necessary and required USDA to implement regulations no later than 180 days after the law was enacted. Mandatory price reporting was authorized for five years, until September 30, 2004.
USDA issued a final rule on December 1, 2000. Although reporting for lamb was optional in the LMR statute, USDA established mandatory reporting for lamb in the final rule. The rule was to be implemented on January 30, 2001, but USDA delayed implementation for two months until April 2, 2001, to allow for additional time to test the automated LMR program to ensure program requirements were being met.
The implementation of mandatory reporting did not affect the continuation of the AMS voluntary price-reporting program. AMS continues to publish prices from livestock auctions, and feeder cattle and pig sales, through voluntary-based market news reports.
LMR authority lapsed briefly in October 2004 before Congress extended mandatory price reporting for one year to September 30, 2005. Authority for LMR lapsed again on September 30, 2005. At that time, USDA requested that all packers who were required to report under the 1999 act continue to submit required information voluntarily. About 90% of packers voluntarily reported, which allowed USDA to publish most reports. In October 2006, Congress passed legislation to reauthorize reporting through September 30, 2010. This act also amended swine reporting requirements from the original 1999 law, by separating the reporting requirements for sows and boars from barrows and gilts, among other changes. Because statutory authority for the program had lapsed, USDA determined that it had to reestablish regulatory authority through rulemaking in order to continue LMR operations.
On May 16, 2008, USDA issued the final rule to reestablish and revise the mandatory reporting program. This rule incorporated the swine reporting changes and was intended to enhance the program's overall effectiveness and efficiency based on AMS' experience in the administration of the program. The rule became effective on July 15, 2008.
Mandatory wholesale pork price reporting was not included in the original price-reporting act because the hog industry could not agree on reporting for pork. Section 11001 of the 2008 farm bill ( P.L. 110-246 ) directed USDA to conduct a study on the effects of requiring packers to report the price and volume of wholesale pork cuts, which was a voluntary reporting activity at the time. The farm bill study on wholesale pork pricing was released in November 2009 and concluded that there would be benefits from a mandatory pork reporting program.
On September 27, 2010, the Mandatory Price Reporting Act of 2010 ( P.L. 111-239 ) was enacted, reauthorizing mandatory price reporting through September 30, 2015. The act added a provision for mandatory reporting of wholesale pork cuts, directed the Secretary to engage in negotiated rulemaking to make required regulatory changes for mandatory wholesale pork reporting, and established a negotiated rulemaking committee to develop these changes. The committee was composed of representatives of pork producers, packers, processors, and retailers. The committee met three times, was open to the public, and developed recommendations for mandatory pork reporting. USDA released the final rule on August 22, 2012, and the regulation was implemented on January 7, 2013.
See the Appendix for a description of selected LMR reporting provisions, marketing definitions, confidentiality rules, and USDA reporting and enforcement.

	LMR Reauthorization in 2015

The House Agriculture Subcommittee on Livestock and Foreign Agriculture started the reauthorization process by holding a hearing on April 22, 2015, that included producer representatives from the National Pork Producers Council (NPPC), the National Cattlemen's Beef Association (NCBA), and the American Sheep Industry Association (ASI) and a representative from the North American Meat Institute (NAMI), which represents meat packers. All representatives voiced support for mandatory reporting, and the producer representatives identified changes to specific reporting requirements they would like to see incorporated into LMR. All stakeholders agreed that the loss of reporting during the October 2013 government shutdown was disruptive to the market, and they would like LMR to be deemed an "essential" service that operates if another government shutdown should occur.
On April 28, 2015, the Mandatory Price Reporting Act of 2015 ( H.R. 2051 ) was introduced in the House. The House Committee on Agriculture marked up the bill on April 30. H.R. 2051 reauthorized LMR through September 30, 2020, and included several sections that addressed hog and lamb market issues that livestock stakeholders raised about LMR. (See " Livestock Sector Issues for Reauthorization in 2015 " for a discussion of LMR issues of interest to the livestock industry.) On June 9, 2015, the House passed H.R. 2051 on a voice vote.
On September 17, 2015, by voice vote, the Senate Agriculture Committee marked up and reported to the full Senate an amended version of the House-passed H.R. 2051 . Amended H.R. 2051 , the Agriculture Reauthorizations Act of 2015, included provisions to reauthorize Mandatory Price Reporting, the U.S. Grain Standards Act, and the National Forest Foundation Act, three laws that were set to expire on September 30, 2015. On September 21, 2015, the Senate passed the bill by unanimous consent, and the House passed the Senate-amended bill on September 28 by voice vote. The Agriculture Reauthorizations Act of 2015 ( P.L. 114-54 ) was signed into law on September 30, 2015.

		LMR Provisions Enacted in 2015

The Agriculture Reauthorizations Act of 2015 ( P.L. 114-54 ) extended mandatory price reporting until September 30, 2020. In addition, the act makes several changes to swine reporting, revises definitions in lamb reporting, and requires USDA to conduct a study on LMR ahead of the next reauthorization.
The provisions in P.L. 114-54 on swine and lamb were proposed to Congress by livestock industry stakeholders as measures that would improve LMR (see " Livestock Sector Issues for Reauthorization in 2015 " for selected industry proposals for reauthorization). The cattle industry did not formally propose any changes to cattle LMR requirements, but several swine and lamb industry proposals were incorporated in the House-passed Mandatory Price Reporting Act of 2015 ( H.R. 2051 ).
The Senate-amended version included most of the House-passed provisions. However, the section of the House-passed bill that granted emergency authority to USDA to continue price reporting in the event of a government shutdown because of a lapse in appropriations, which was widely supported by the cattle, swine, and lamb industries, was not included in the enacted law. (See " LMR as an "Essential" Service " below for industry views.)

			Swine Reporting

The enacted legislation establishes the new negotiated formula purchase reporting category. Under this category, swine purchases are based on a formula, negotiated on a lot-by-lot basis, and the swine are scheduled for delivery to the packer no later than 14 days after the formula is negotiated and the swine are committed to packers.
The enacted legislation also amends swine LMR by requiring the reporting of the low and high range of net swine prices, to include the number of barrows and the number of gilts within the ranges, and the total number and weighted average price of barrows and gilts. Lastly, the act requires that next-day reports include transaction prices that were concluded after the previous day's reporting deadlines.
The enacted swine reporting provisions are the same as those in Section 3 of the House-passed bill. (See " New Reporting Proposals for Swine " below for industry views.)

			Lamb Definitions

P.L. 114-54 amends the regulations (7 C.F.R. 59.300) for lamb reporting to redefine lamb importers and lamb packers. Now, importers are defined as entities that import an average of 1,000 metric tons of lamb meat per year during the immediately preceding four years. The original limit was 2,500 metric tons. If an importing entity does not meet the volume limit, the Secretary still may determine that an entity should be considered an importer.
In P.L. 114-54 , lamb packers are defined as entities having 50% or more ownership in facilities, and include federally inspected facilities that slaughter and process an average of 35,000 head per year over the immediately preceding five years. The original threshold was 75,000 head. Also, other facilities may be considered packers if the Secretary determines they should be considered a packer based on processing plant capacity.
These enacted revised definitions for lamb importers and packers are the same as those in Section 4 of the House-passed bill. (See " Concentrated Lamb Markets " below for industry views.)

			Study on Livestock Mandatory Reporting

USDA is required to conduct a study of the price-reporting program for cattle, swine, and lamb in P.L. 114-54 . The study is to be submitted to the House and Senate Agriculture Committees by March 1, 2018. The study, to be conducted by USDA's Agricultural Marketing Service and the Office of Chief Economist, is directed to analyze current marketing practices and to identify legislative and regulatory recommendations that are readily understandable; reflect current market practices; and are relevant and useful to producers, packers, and other market participants. Also, the study is to analyze USDA reporting services.
This LMR study provision was included in Section 5 of the House-passed bill, but with a later deadline of January 1, 2020.

	Livestock Sector Issues for Reauthorization in 2015

A simple reauthorization of mandatory reporting would amend the termination date in Section 260 of the Agricultural Marketing Act of 1946 (7 U.S.C. 1636i). However, like past reauthorizations, livestock industry stakeholders suggested changes that were intended to improve mandatory reporting and to address issues that emerged since the last reauthorization. Several of the issues are discussed below.

		LMR as an "Essential" Service

During the nearly 15 years that LMR has been in place, livestock producers, processors, and industry analysts have come to rely on the AMS mandatory price reporting data to make marketing decisions. Many livestock contracts between buyers and sellers are based on prices reported under LMR. In October 2013, during the government shutdown when most federal operations came to a standstill, meat packers continued to report LMR data to AMS, but mandatory daily and weekly reports were not published. In addition to the loss of price information for producers, the gap in LMR data affected the futures market because the CME Group uses LMR data to settle live hog contracts. CME also uses LMR-reported cattle carcass characteristics to settle live cattle futures contracts. CME has noted that LMR price data are trusted and that few other public alternatives to the LMR data exist.
During the reauthorization debate, livestock stakeholders urged USDA to deem mandatory reporting an "essential" service in order to avoid the loss of livestock price information if another government shutdown, such as in October 2013, occurs due to a lapse in appropriations. Many contend that any gap in mandatory reporting is disruptive to livestock markets. Although the House-passed version ( H.R. 2051 ) contained such a provision, it was not included in the final bill.

		New Reporting Proposals for Swine

The NPPC recommended that AMS add another purchase category for swine called negotiated formula purchase . Under this purchasing arrangement, a producer negotiates the sale of swine on a lot-by-lot basis, but the price will be determined by formula at a later date. NPPC believes this represents a negotiated sale, but under AMS reporting it is classified as a swine or pork market formula purchase because there is no established price at the time of purchase. Negotiated purchases , or cash sales, are often viewed as the true measure of price discovery, but negotiated purchases as a share of total hog sales has dropped to less than 4%. According to NPPC testimony before the Subcommittee on Livestock and Foreign Agriculture of the House Agriculture Committee, the total number of hogs that would trade under this new category is not known, but possibly could increase the number of reported negotiated hog sales by 50-100%. Boosting the volume of negotiated purchases would be expected to increase price discovery.
Some livestock sales occur after the afternoon reporting deadline for packers to send reports to AMS and are not reported in a daily report. Pork producers believe that sales of hogs after the afternoon deadline are usually delivered to packing plants the next day. To provide more timely hog marketing and price information, NPPC recommends that hog trades that occur late in the day be reported in the next day's morning or afternoon daily reports. The additional reporting would better reflect the daily hog market; increase trade volume, thus reducing data disclosure issues; and result in more complete reports.
These swine proposals were included in P.L. 114-54 .

		Concentrated Lamb Markets

The U.S. sheep and lamb industry is confronted with a very concentrated market that results in price-reporting challenges not necessarily experienced by the larger cattle and hog sectors. The sheep and lamb industry as a whole (production, feeding, and processing) believes that LMR is crucial for creating a transparent market, and the American Sheep Industry Association (ASI) worked with AMS from 2012-2014 to amend LMR in ways to improve lamb reporting ahead of reauthorization. Although the ASI effort did not result in rulemaking, proposals developed in earlier years are the basis for the lamb industry's proposals during current reauthorization.
U.S. lamb imports account for half of the lamb consumed in the United States. Therefore, the pricing of lamb imports is crucial for U.S. lamb producers in making marketing decisions. ASI recommended that the reporting threshold for lamb imports be lowered to 1,000 metric tons from the current 2,500 metric tons to capture prices for a greater share of lamb imports.
In addition, smaller or mid-size lamb processors have entered the business to capture specialty lamb markets, but because of the smaller size, these businesses are often exempt from reporting. To capture pricing data from mid-size lamb slaughters and processors, ASI recommended that the threshold for packer reporting be reduced to an average of 35,000 head slaughtered per year during the immediately preceding five years from the current 75,000 head.
These two threshold changes for importers and packers were designed to pick up a larger share of the total lamb market and better reflect average prices in the market. Both proposals were included in P.L. 114-54 .
The sheep and lamb industry also faces the situation where there are few participants in the processing sector. This leads to problems with non-reporting because of confidentiality requirements. Also, a substantial share of lamb processing is conducted on a "custom slaughter" basis, which is not counted as a buyer-seller transaction, and thus not reported under LMR. In addition, almost one-third of U.S. lambs are processed by one cooperative that does not report under LMR because its business structure is treated as a packer-owned operation, even though, reportedly, the cooperative is willing to report under LMR. ASI recommended that AMS be flexible with its packer definitions to allow such an operation to report under LMR. P.L. 114-54 granted USDA discretion to determine that importers and packers not meeting the threshold requirements may still be required to report.

		Cattle Proposals

The cattle industry supported the reauthorization of LMR, but the new law does not contain any cattle-specific proposals. During the markup of the House bill, House Agriculture Committee Chairman Conaway indicated that the cattlemen and meat packers were working on proposals that could be included as amendments to the bill. Various cattle stakeholders raised some issues with mandatory reporting, but no consensus developed to amend LMR cattle provisions.
The NCBA recommended that AMS have flexibility to request additional information, as needed, to identify and report appropriate industry standards as cattle marketing changes. Also, NCBA recommended that LMR include a new category for fed-cows, to be added to reporting for steers and heifers, and cows and bulls. Currently, AMS reports cover all cows, but a breakout of fed-cows could have provided additional price and marketing information beneficial for cattle producers who market fed-cows.
In a letter to the Senate Agriculture Committees, the Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America (R-CALF) expressed specific concerns about new types of cattle purchases that are not captured in LMR. These include (1) negotiated basis trade-type contracts that do not appear to be reported when negotiated, (2) negotiated cash sales that have extended delivery dates, and (3) "Tops" trades, where a negotiated premium is offered on a cash trade and is then reported as a formula purchase. R-CALF also raised concern about the frequency of late-day transactions that miss the day's reporting deadline, thus possibly distorting the day's price.
The National Farms Union (NFU) expressed its support for the reauthorization of mandatory reporting as an important tool for combating market concentration. In letters to the Senate and House Agriculture Committees, NFU suggested changes to LMR for cattle that would have addressed confidentiality rules, reporting on imported cattle that go into feedlots, reporting on weekly market concentration, and separate data from forward contracts from those tied to the futures market.

			Description of the LMR Program

The following sections discuss some of the main Livestock Mandatory Reporting Act (LMR) reporting requirements, as well as confidentiality rules, Agricultural Marketing Service reporting, and enforcement of LMR. The text box, included below, provides definitions for selected terms used in LMR.
Selected Reporting Requirements
Packers that are subject to mandatory reporting are defined as federally inspected plants that have slaughtered a minimum annual average of 125,000 head of cattle, 100,000 head of swine, 200,000 head of sows and boars or a combination thereof, and 35,000 lambs during the immediate five preceding years. If a plant has operated for fewer than five years, USDA will determine, based on capacity, if the packer must report. Packers are required to report the prices established for steers and heifers twice daily (10 a.m. and 2 p.m. central time); cows and bulls twice daily (10 a.m. central for current day, and 2 p.m. for previous-day purchases); barrows and gilts three times daily (7 a.m. central for prior-day purchases, and 10 a.m. and 2 p.m. central); sows and boars once daily (7 a.m. central for prior-day purchases); and lambs once daily (2 p.m. central). Besides the established prices, packers report premiums and discounts and the type of purchase (e.g., negotiated, formula, or forward contract). Packers are required to report, depending on the species, the quantity delivered for the day; the quantity committed to the packer; the estimated weight on a live weight basis or a dressed weight basis; and quality characteristics, such as Choice grade. In addition to daily reporting, on the first reporting day of the week, packers file a cumulative weekly report of the previous week's purchases of steers and heifers, and swine. Lamb packers are required to report the previous week's purchases on the first and second reporting day of the week, depending on the data. Steer and heifer and lamb packers are to include data on type of purchase (negotiated, formula, or forward contract), premiums and discounts, and some carcass characteristics (e.g., quality grade and yield, average dressing percentage). Swine packers are required to report the amount paid in premiums that are based on noncarcass characteristics (e.g., volume, delivery timing, hog breed). Also, packers must make available to producers a list of such premiums. In addition to livestock purchase prices, packers are required to report sales data for boxed beef, wholesale pork, and carcass and boxed lamb. Sales are reported twice daily for beef and pork; once daily for lamb. Packers are required to provide price, quantity, quality grade for beef and lamb, and type of cut. Packers report beef and pork domestic and export sales and domestic boxed lamb sales. Lamb importers who have imported a minimum average of 1,000 metric tons of lamb in the immediate five preceding years are required to report such information as weekly lamb prices, quantities imported, the type of sale (negotiated, formula, or forward contract), cuts of lamb, and delivery period.
Confidentiality
The LMR law requires that price reporting be confidential to protect the identity of packers and contracts and proprietary business information. In determining what data could be published, AMS initially adopted a "3/60" confidentiality guideline (commonly used throughout the federal government), i.e., at least three entities in the regional or national reporting area, and no single entity could account for more than 60% of the reported market volume. Otherwise, the data cannot be published in order to protect the identity of those reporting. AMS found that the "3/60" guideline resulted in large gaps in data reporting. For example, during April 2, 2001, and June 15, 2001, 24% of daily reports and 20% of weekly reports were not published because of confidentiality provisions.
In order to address the data gaps, AMS adopted a "3/70/20" guideline in August 2001. It required that at least three entities report 50% of the time over a 60-day period; no one entity could account for more than 70% of volume over a 60-day period; and in cases where only one entity reports, the entity cannot be the only reporter more than 20% of the time over a 60-day period. These new guidelines substantially eliminated the data gaps.
AMS Reporting
The Livestock, Poultry, and Grain Market News Division (LPGMN) of the AMS Livestock, Poultry, and Seed Program is responsible for compiling and disseminating the information collected under LMR. In addition, LPGMN continues to operate a voluntary reporting program for livestock not covered under LMR, poultry and grain. Under LMR, LPGMN publishes 62 daily reports and 47 weekly reports. AMS publishes 29 daily reports for cattle, 20 for swine, 6 for beef, 4 for pork, and 3 for lamb. Weekly reports total 24 for cattle, 2 for swine, 11 for beef, 8 for pork, and 2 for lamb. According to AMS budget documents, mandatory reporting currently provides data for 79% of total slaughtered cattle, 94% of hogs, and 46% of sheep. For meat products, LMR covers 94% of boxed beef production, 87% of wholesale pork, and 57% of lamb meat. Small plants, which fall below required thresholds, or non-federally inspected plants account for the remaining percentage of slaughter and production. AMS market news operates on an annual appropriation of about $34 million, and the LMR program accounts for about $5 million to $6 million of that amount.
Enforcement
AMS compliance staff enforces LMR through audits once every six months. AMS reviews support documentation for randomly sampled lots. If non-compliance is found, AMS will ask the packer to correct the problem. If the packer does not correct the problem, AMS may issue a warning letter, and ultimately, the packer could be fined $10,000 for each violation if corrective action is not taken. AMS published quarterly compliance reports through September 2014, and then released a six month (October 2014-March 2015) compliance report.

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The U.S. Department of Agriculture's (USDA's) Agricultural Marketing Service (AMS) collected livestock and meat price and related market information from meat packers on a voluntary basis under the authority of the Agricultural Marketing Act of 1946 (7 U.S.C. §1621 et seq.). However, as the livestock industry became increasingly concentrated in the 1990s, fewer animals were sold through negotiated (cash; or "spot") purchases and more frequently sold under alternative marketing arrangements that were not publicly disclosed under voluntary reporting. Some livestock producers, believing such arrangements made it difficult or impossible for them to determine "fair" market prices for livestock going to slaughter, called for mandatory price reporting for packers and others who process and market meat.
In response, Congress passed the Livestock Mandatory Reporting Act of 1999 (P.L. 106-78, Title IX; LMR). The law mandated price reporting for live cattle, boxed beef, and live swine and allowed USDA to establish mandatory price reporting for lamb sales. USDA issued a final rule in December 2000 that went into effect in April 2001. The final rule included mandatory reporting for lamb. The law has been amended to include more detail on swine and to add wholesale pork. The act has been reauthorized three times, and the last reauthorization was set to expire September 30, 2015.
In September 2015, the Senate and House passed the Agriculture Reauthorizations Act of 2015 (H.R. 2051), a Senate-amended version of the House-passed Mandatory Price Reporting Act of 2015, which reauthorized mandatory price reporting until September 30, 2020. The act was signed into law (P.L. 114-54) on September 30, 2015. Reauthorization was widely supported by livestock industry stakeholders. As in past years, stakeholders proposed changes that were intended to improve mandatory reporting as issues emerged between reauthorizations.
In response to livestock stakeholders, the act makes several changes to swine reporting, creating a new negotiated formula purchase category and requiring that transactions reported after the day's reporting deadline be reported in the next-day price reports. It revises the definitions of lamb importers and packers by lowering the volume thresholds for determining if an importer or packer is subject to reporting requirements. Lastly, the act requires USDA to conduct a study on LMR ahead of the next reauthorization.
However, the act did not include a provision to grant emergency authority to USDA to continue price reporting in the event of a government shutdown because of a lapse in appropriations. This provision was widely supported by livestock industry stakeholders and had been included in the House-passed version of H.R. 2051.


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	Social Security’s Long-Term Financing Problem Deserves Timely Action

Today the Social Security program faces a long-range and fundamental  financing problem driven largely by known demographic trends. The lack  of an immediate solvency crisis affects the nature of the challenge, but it  does not eliminate the need for action. Acting soon reduces the likelihood  that the Congress will have to choose between imposing severe benefit  cuts and unfairly burdening future generations with the program’s rising  costs. Acting soon would allow changes to be phased in so the individuals  who are most likely to be affected, namely younger and future workers,  will have time to adjust their retirement planning. Since there is a great  deal of confusion about Social Security’s current financing arrangements  and the nature of its long-term financing problem, I would like to spend  some time describing the nature, timing, and extent of the financing  problem.

		Demographic Trends Drive Social Security’s Long- Term Financing Problem

As you all know, Social Security has always been largely a pay-as-you-go  system. This means that current workers’ taxes generally pay current  retirees’ benefits. As a result, the relative number of workers and  beneficiaries has a major impact on the program’s financial condition. This  ratio, however, is changing. In 1950, before the Social Security system was  mature, the ratio was 16.5:1. In the 1960s, the ratio averaged 4.2:1. Today it  is 3.3:1, and it is expected to drop to around 2.2:1 by 2030. The retirement  of the baby boom generation is not the only demographic challenge facing  the system. People are retiring early and living longer. A falling fertility  rate is the other principal factor underlying the growth in the elderly’s  share of the population. In the 1960s, the fertility rate was an average of 3  children per woman. Today it is a little over 2, and by 2030 it is expected to  fall to 1.95 —a rate that is below the level necessary to replace the  population. Taken together, these trends serve to threaten the financial  solvency and sustainability of this important program. (See fig. 1.)
The combination of these trends means that annual labor force growth will  begin to slow after 2010 and by 2025 is expected to be less than a third of  what it is today. (See fig. 2.) Relatively fewer workers will be available to  produce the goods and services that all will consume. Without a major  increase in productivity, low labor force growth will lead to slower growth  in the economy and to slower growth of federal revenues. This in turn will  only accentuate the overall pressure on the federal budget.
This slowing labor force growth is not always recognized as part of the  Social Security debate. Social Security’s retirement eligibility dates are  often the subject of discussion and debate and can have a direct effect on  both labor force growth and the condition of the Social Security  retirement program. However, it is also appropriate to consider whether  and how changes in pension and/or other government policies could  encourage longer workforce participation. To the extent that people  choose to work longer as they live longer, the increase in the share of life  spent in retirement would be slowed. This could improve the finances of  Social Security and mitigate the expected slowdown in labor force growth.  It could also help to encourage additional economic growth.

	Social Security’s Cash Flow Is Expected to Turn Negative in 2018

Today, the Social Security Trust Funds take in more in taxes than they  spend. Largely because of the known demographic trends I have  described, this situation will change. Although the trustees’ 2004  intermediate estimates project that the combined Social Security Trust  Funds will be solvent until 2042, program spending will constitute a  rapidly growing share of the budget and the economy well before that  date. In 2008, the first baby boomers will become eligible for Social  Security benefits, and the future costs of serving them have already  become a factor in the Congressional Budget Office’s (CBO) 10-year  projections. Under the trustees’ 2004 intermediate estimates, Social  Security’s cash surplus—the difference between program tax income and  the costs of paying scheduled benefits—will begin a permanent decline in  2009. To finance the same level of federal spending as in the previous year,  additional revenues and/or increased borrowing will be needed.
By 2018, Social Security’s tax income is projected to be insufficient to pay  currently scheduled benefits. At that time, Social Security will join  Medicare’s Hospital Insurance Trust Fund, whose outlays are projected to  begin to exceed revenues this year, as a net claimant on the rest of the  federal budget. The combined OASDI Trust Funds will begin drawing on  the Treasury to cover the cash shortfall, first relying on interest income  and eventually drawing down accumulated trust fund assets. The Treasury  will need to obtain cash for those redeemed securities either through  increased taxes, and/or spending cuts, and/or more borrowing from the  public than would have been the case had Social Security’s cash flow  remained positive. Neither the decline in the cash surpluses nor the cash  deficit will affect the payment of benefits. The shift from positive to  negative cash flow, however, will place increased pressure on the federal  budget to raise the resources necessary to meet the program’s ongoing  costs.
Ultimately, the critical question is not how much a trust fund has in assets,  but whether the government as a whole can afford the benefits in the  future and at what cost to other claims on scarce resources. As I have said  before, the future sustainability of programs is the key issue policy makers  should address—i.e., the capacity of the economy and budget to afford the  commitment. Fund solvency can help, but only if promoting solvency  improves the future sustainability of the program.

		Decline in Budgetary Flexibility Absent Entitlement Reform

From the perspective of the federal budget and the economy, the  challenge posed by the growth in Social Security spending becomes even  more significant in combination with the more rapid expected growth in  Medicare and Medicaid spending. This growth in spending on federal  entitlements for retirees will become increasingly unsustainable over the  longer term, compounding an ongoing decline in budgetary flexibility.  Over the past few decades, spending on mandatory programs has  consumed an ever-increasing share of the federal budget. In 1964, prior to  the creation of the Medicare and Medicaid programs, spending for  mandatory programs plus net interest accounted for about 33 percent of  total federal spending. By 2004, this share had almost doubled to  approximately 61 percent of the budget. (See fig. 4.)
In much of the last decade, reductions in defense spending helped  accommodate the growth in these entitlement programs. Even before the  events of September 11, 2001, however, this ceased to be a viable option.  Indeed, spending on defense and homeland security will likely grow as we  seek to combat new threats to our nation’s security.
GAO prepares long-term budget simulations that seek to illustrate the  likely fiscal consequences of the coming demographic tidal wave and  rising health care costs. These simulations continue to show that to move  into the future with no changes in federal retirement and health programs  is to envision a very different role for the federal government. Assuming,  for example, all expiring tax provisions are extended and discretionary  spending keeps pace with the economy, by midcentury federal revenues  may be adequate to pay no more than interest on the federal debt. To  obtain balance, massive spending cuts, tax increases, or some combination  of the two would be necessary. (See fig. 5.) Neither slowing the growth of  discretionary spending nor   This testimony is not about the complexities of Medicare, but it is  important to note that Medicare presents a much greater, more complex,  and more urgent fiscal challenge than does Social Security. Medicare  growth rates reflect not only a burgeoning beneficiary population, but also  the escalation of health care costs at rates well exceeding general rates of  inflation. Increases in the number and quality of health care services have  been fueled by the explosive growth of medical technology. Moreover, the  actual costs of health care consumption are not transparent. Third-party  payers generally insulate consumers from the cost of health care  decisions. These factors and others contribute to making Medicare a much  greater and more complex fiscal challenge than even Social Security. GAO  has developed a health care framework to help focus additional attention  on this important area and to help educate key policy makers and the  public on the current system and related challenges.
Indeed, long-term budget flexibility is about more than Social Security and  Medicare. While these programs dominate the long-term outlook, they are  not the only federal programs or activities that bind the future. The federal  government undertakes a wide range of programs, responsibilities, and  activities that obligate it to future spending or create an expectation for  spending. GAO has described the range and measurement of such fiscal  exposures—from explicit liabilities such as environmental cleanup  requirements to the more implicit obligations presented by life-cycle costs  of capital acquisition or disaster assistance. Making government fit the  challenges of the future will require not only dealing with the drivers— entitlements for the elderly—but also looking at the range of federal  activities. A fundamental review of what the federal government does and  how it does it will be needed.
At the same time it is important to look beyond the federal budget to the  economy as a whole. Figure 6 shows the total future draw on the economy  represented by Social Security, Medicare, and Medicaid. Under the 2004  Trustees’ intermediate estimates and CBO’s long-term Medicaid estimates,  spending for these entitlement programs combined will grow to 15.6  percent of GDP in 2030 from today’s 8.5 percent. Taken together, Social  Security, Medicare, and Medicaid represent an unsustainable burden on  future generations.
When Social Security redeems assets to pay benefits, the program will  constitute a claim on real resources at that time. As a result, taking action  now to increase the future pool of resources is important. To echo Federal  Reserve Chairman Greenspan, the crucial issue of saving in our economy  relates to our ability to build an adequate capital stock to produce enough  goods and services in the future to accommodate both retirees and  workers in the future. The most direct way the federal government can  raise national saving is by increasing government saving, i.e., as the  economy returns to a higher growth path, a much more balanced and  disciplined fiscal policy that recognizes our long-term challenges can help  provide a strong foundation for future economic growth and can enhance  future budgetary flexibility. In the short term, we need to realize that we  are already facing a huge fiscal hole. The first thing that we should do is  stop digging.
Taking action soon on Social Security would not only promote increased  budgetary flexibility in the future and stronger economic growth but  would also make the necessary action less dramatic than if we wait. Some  of the benefits of early action—and the costs of delay—can be seen in  figure 7. This compares what it would take to achieve actuarial balance at  different points in time by either raising payroll taxes or reducing  benefits. If we did nothing until 2042—the year the Trust Funds are  estimated to be exhausted—achieving actuarial balance would require  changes in benefits of 30 percent or changes in taxes of 43 percent. As  figure 7 shows, earlier action shrinks the size of the adjustment.
Thus both sustainability concerns and solvency considerations drive us to  act sooner rather than later. Trust Fund exhaustion may be almost 40  years away, but the squeeze on the federal budget will begin as the baby  boom generation starts to retire. Actions taken today can ease both these  pressures and the pain of future actions. Acting sooner rather than later  also provides a more reasonable planning horizon for future retirees.

	Evaluating Social Security Reform Proposals

As important as financial stability may be for Social Security, it cannot be  the only consideration. As a former public trustee of Social Security and  Medicare, I am well aware of the central role these programs play in the  lives of millions of Americans. 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. Last year, Social Security paid almost $471 billion in benefits to  more than 47 million people. Since its inception, the program has  successfully reduced poverty among the elderly. In 1959, 35 percent of the  elderly were poor. In 2000, about 8 percent of beneficiaries aged 65 or  older were poor, and 48 percent would have been poor without Social  Security. It is precisely because the program is so deeply woven into the  fabric of our nation that any proposed reform must consider the program  in its entirety, rather than one aspect alone. Thus, GAO has developed a  broad framework for evaluating reform proposals that considers not only  solvency but other aspects of the program as well.
The analytic framework GAO has developed to assess proposals  comprises three basic criteria:  the extent to which a proposal achieves sustainable solvency and how it  would affect the economy and the federal budget; the relative balance struck between the goals of individual equity and  income adequacy; and   how readily a proposal could be implemented, administered, and  explained to the public.
The weight that different policy makers may place on different criteria will  vary, depending on how they value different attributes. For example, if  offering individual choice and control is less important than maintaining  replacement rates for low-income workers, then a reform proposal  emphasizing adequacy considerations might be preferred. As they fashion  a comprehensive proposal, however, policy makers will ultimately have to  balance the relative importance they place on each of these criteria.

		Financing Sustainable Solvency

Our sustainable solvency standard encompasses several different ways of  looking at the Social Security program’s financing needs. While 75-year  actuarial balance is generally used in evaluating the long-term financial  outlook of the Social Security program and reform proposals, it is not  sufficient in gauging the program’s solvency after the 75th year. For  example, under the trustees’ intermediate assumptions, each year the 75- year actuarial period changes, and a year with a surplus is replaced by a  new 75th year that has a significant deficit. As a result, changes made to  restore trust fund solvency only for the 75-year period can result in future  actuarial imbalances almost immediately. Reform plans that lead to  sustainable solvency would be those that consider the broader issues of  fiscal sustainability and affordability over the long term. Specifically, a  standard of sustainable solvency also involves looking at (1) the balance  between program income and costs beyond the 75th year and (2) the share  of the budget and economy consumed by Social Security spending.
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. It is also critical if we are to avoid putting unsupportable  financial pressures on future workers. Reforming Social Security and  health programs is essential to reclaiming our future fiscal flexibility to  address other national priorities.

		Balancing Adequacy and Equity

The current Social Security system’s benefit structure attempts to strike a  balance between the goals of retirement income adequacy and individual  equity. From the beginning, benefits were set in a way that focused  especially on replacing some portion of workers’ pre-retirement earnings.  Over time other changes were made that were intended to enhance the  program’s role in helping ensure adequate incomes. Retirement income  adequacy, therefore, is addressed in part through the program’s  progressive benefit structure, providing proportionately larger benefits to  lower earners and certain household types, such as those with  dependents. Individual equity refers to the relationship between  contributions made and benefits received. This can be thought of as the  rate of return on individual contributions. Balancing these seemingly  conflicting objectives through the political process has resulted in the  design of the current Social Security program and should still be taken  into account in any proposed reforms.
Policy makers could assess income adequacy, for example, by considering  the extent to which proposals ensure benefit levels that are adequate to  protect beneficiaries from poverty and ensure higher replacement rates for  low-income workers. In addition, policy makers could consider the impact  of proposed changes on various subpopulations, such as low-income  workers, women, minorities, and people with disabilities. Policy makers  could assess equity by considering the extent to which there are  reasonable returns on contributions at a reasonable level of risk to the  individual, improved intergenerational equity, and increased individual  choice and control. Differences in how various proposals balance each of  these goals will help determine which proposals will be acceptable to  policy makers and the public.

		Implementing and Administering Proposed Reforms

Program complexity makes implementation and administration both more  difficult and harder to explain to the public. Some degree of  implementation and administrative complexity arises in virtually all  proposed changes to Social Security, even those that make incremental  changes in the already existing structure. However, the greatest potential  implementation and administrative challenges are associated with  proposals that would create individual accounts. These include, for  example, issues concerning the management of the information and  money flow needed to maintain such a system, the degree of choice and  flexibility individuals would have over investment options and access to  their accounts, investment education and transitional efforts, and the  mechanisms that would be used to pay out benefits upon retirement.  Harmonizing a system that includes individual accounts with the  regulatory framework that governs our nation’s private pension system  would also be a complicated endeavor. However, the complexity of  meshing these systems should be weighed against the potential benefits of  extending participation in individual accounts to millions of workers who  currently lack private pension coverage.
Continued public acceptance of and confidence in the Social Security  program require that any reforms and their implications for benefits be  well understood. This means that the American people must understand  why change is necessary, what the reforms are, why they are needed, how  they are to be implemented and administered, and how they will affect  their own retirement income. All reform proposals will require some  additional outreach to the public so that future beneficiaries can adjust  their retirement planning accordingly. The more transparent the  implementation and administration of reform, and the more carefully such  reform is phased in, the more likely it will be understood and accepted by  the American people.

	Examining Social Security’s Effects on Distribution of Benefits and Taxes

Under Social Security, retired workers can receive benefits at age 65 that  equal about 50 percent of pre-retirement earnings for an illustrative  worker with relatively lower earnings but only about 30 percent of  earnings for one with relatively higher earnings. To help ensure that  beneficiaries have adequate incomes, Social Security’s benefit formula is  designed to be “progressive,” that is, to provide disproportionately larger  benefits, as a percentage of earnings, to lower earners than to higher  earners. However, the benefit formula is just one of several program  features that influence the way benefits are distributed. Other such  program features include provisions for disabled workers, spouses,  children, and survivors. Changes in the program over time also affect the  distribution of benefits across generations. So the distribution of Social  Security benefits can vary by eligibility, household type, and birth year as  well as by earnings level.
Over the past few years, we have been developing an increasing capacity  at GAO to estimate quantitatively the effects of Social Security reform on  individuals. Such estimates speak directly to applying our second  evaluation criterion to reform proposals. We have just issued a new report  that, in part, uses such estimates to illustrate the varying effects of  different policy scenarios on how Social Security benefits and taxes are  distributed relative to earnings levels. Today, I would like to share our  findings regarding how to define and describe “progressivity,” defining  appropriate benchmarks for assessing the future outlook for individuals’  Social Security benefits, what factors influence the distributional effects of  the current Social Security program, and how various reform proposals  might vary in their distributional effects. Still, remember that progressivity  is only one of several aspects of our criterion of balancing adequacy and  equity, which in turn is only one of three criteria that each consist of  several dimensions.

		Different Distributional Measures Reflect Different Perspectives

Two distinct perspectives on Social Security’s goals suggest different  approaches to measuring progressivity. Both perspectives provide  valuable insights. An adequacy perspective focuses on benefit levels and  how well they help ensure a minimal subsistence or maintain pre- entitlement living standards. For example, replacement rates measure  annual benefits as a percentage of annual earnings before receiving  benefits. An equity perspective focuses on rates of return and other  measures relating lifetime benefits to lifetime contributions. This  perspective gauges whether the system gives all participants a “fair deal”  on their contributions. The measures themselves describe either adequacy  or equity, but their distribution with respect to earnings level describes  progressivity. Note however that equity measures cannot accurately assess  the distributional effects of reform proposals that rely on general revenue  transfers. Such proposals do not generally specify what kind of future  taxes or spending cuts will finance the transfers or who will bear the  related burden; but evaluating progressivity from an equity perspective  requires that all taxes and benefits be clearly allocated.

		Benchmark Policy Scenarios Illustrate a Range of Possible Outcomes

Estimating future effects on Social Security benefits should reflect the fact  that the program faces a long-term actuarial deficit and benefit reductions  and/or revenue increases will be necessary to restore solvency. To  illustrate a full range of possible outcomes, we developed hypothetical  benchmark policy scenarios that would restore solvency over the next 75  years either by only increasing payroll taxes or by only reducing benefits.  Our tax-increase-only benchmark simulates “promised benefits,” or those  benefits defined under current law, while our benefit-reduction-only  benchmarks simulate “funded benefits,” or those benefits for which  currently scheduled revenues are projected to be sufficient. The benefit  reductions are phased in between 2005 and 2035 to strike a balance  between the size of the incremental reductions each year and the size of  the ultimate reduction. At our request, Social Security actuaries scored our  benchmark policies and determined the parameters for each that would  achieve 75-year solvency. For our benefit reduction scenarios, the  actuaries determined these parameters assuming that disabled and  survivor benefits would be reduced on the same basis as retired worker  and dependent benefits. If disabled and survivor benefits were not reduced  at all, reductions in other benefits would be deeper than shown in this  analysis.

		Program’s Distributional Effects Reflect Various Program Features and Demographic Patterns

Social Security’s distributional effects reflect program features, such as its  benefit formula, and demographic patterns among its recipients, such as  marriage between lower and higher earners. The retired worker benefit  formula favors lower earners by design, replacing about 50 percent of pre- retirement earnings at age 65 for an illustrative low earner but only about  30 percent of pre-retirement earnings for an illustrative high earner. (See  fig. 8.) The disability benefit formula also favors lower earners, and  disability recipients are disproportionately lower earners. Our simulations  suggest that for individuals born in 1985, compared with a hypothetical  program without disability insurance, Social Security’s disability  provisions increase lifetime Social Security benefits for the bottom fifth of  earners by 43 percent, compared with 14 percent for the top fifth of  earners. The extent to which the benefit formula and disability benefits  favor lower earners may be offset to some degree by demographic  patterns. Household formation tends to reduce the system’s tilt toward  lower earners because some of the lower-earning individuals helped by the  program live in high-income households. For example, many of the lower- earning individuals that the system favors through spouse and survivor  benefits actually live at some point in higher-income households because  of marriage. In our simulations, the ratio of benefits received to payroll  taxes contributed is higher for lower earners than for higher earners, but  this difference is reduced when we account for household formation. Also,  differences in mortality rates may reduce rates of return for lower earners,  as studies show they may not live as long as higher earners and therefore  would receive benefits for fewer years.

		Distributional Effects Vary across Reform Proposals

Alternative Social Security reform proposals would have different  distributional effects, reflecting the variety of provisions in them. The  various provisions include different ways, within the current program  structure, of reducing certain benefits, enhancing selected benefits, and  enhancing revenues. The various reform provisions also include creating a  new system of individual retirement savings accounts with different  account contribution levels and different ways of adjusting Social Security  defined benefits to reflect the diversion of Social Security contributions  into the accounts. Individually and in combination, these provisions would  affect the distribution of benefits and taxes relative to earnings levels.
For example, Model 2 of the President’s Commission to Strengthen Social  Security (CSSS) proposes a new system of voluntary individual accounts  along with a combination of certain benefit reductions for all beneficiaries  and selected benefit enhancements for selected low earners and survivors.  One of its provisions would reduce Social Security defined benefits  proportionally for all workers by modifying the benefit formula. At the  same time, benefits would be enhanced for certain lower earners and  surviving spouses, and 4 percentage points of individuals’ payroll taxes (up  to a $1,000 annual limit) would be diverted into individual accounts.
In contrast, a proposal offered by Peter Diamond and Peter Orszag would  also include a provision to reduce Social Security defined benefits  proportionally for all workers by modifying the benefit formula. It also has  provisions to enhance benefits for selected lower earners and surviving  spouses. However, it does not contain a provision for individual accounts,  and it does have a variety of provisions for enhancing revenues. The  Diamond-Orszag proposal also has other benefit reduction and benefit  enhancement provisions, such as modifying the benefit formula to reduce  benefits for higher earners only. Another provision would maintain  disability benefits and benefits for survivors of workers who die before  retirement in spite of the other benefit reductions.
Also in contrast to CSSS Model 2, a proposal offered by Peter Ferrara  provides for a new system of voluntary individual accounts but does not  contain any provisions to make changes to Social Security defined  benefits, except for individuals participating in the individual accounts.  Moreover, it would provide for substantially larger contributions to the  accounts than would the CSSS Model 2 proposal. Under this provision,  individual account contributions would be a larger percentage of payroll  for lower earners than for higher earners. Also, for those who participate  in the accounts, Social Security defined benefits would be reduced to  reflect the payroll taxes redirected into the accounts; this account offset  uses a different formula than does CSSS Model 2.
To illustrate the distributional effects of CSSS Model 2, we used a  microsimulation model to estimate benefits under it and under our  benchmark policy scenarios. We did not examine the distribution of equity  measures such as benefit-to-tax ratios or rates of return, because the  proposal’s individual account feature requires general revenue transfers.   Since account participation is voluntary, we used two simulations to  examine the effects of the Model 2 provisions, one with universal account  participation (Model 2-100 percent) and one with no account participation  (Model 2-0 percent). We also assumed that all account participants would  invest in the same portfolios; consequently we did not capture any  distributional effect that might occur if lower earners were to make  different account participation or investment decisions than higher  earners.
According to our simulations, the distribution of benefits under Model 2  could favor lower earners more than the distribution of benefits under  either currently promised or currently funded benefits. For example,  assuming universal account participation, households in the lowest fifth of  earnings may receive about 14 percent of all lifetime benefits under Model  2, compared with about 12.5 percent under the current program. (See fig.  9.)
It should be noted that while the simulations suggest that the distribution  of benefits under Model 2 is more progressive than under the benchmarks,  this does not mean benefit levels are always higher for the bottom fifth  under Model 2. Progressivity is about how the "pie" is divided up, not  about how big the pie is.  So, while Model 2 may improve the relative  position of lower earners, it may not improve the adequacy of their  benefits. (See fig. 10.) According to our simulation, median household  lifetime benefits for the bottom fifth under Model 2-0 percent would be 3  percent higher than under the funded benefits scenario but 21 percent  lower than under the promised benefits scenario. Median household  lifetime benefits for the bottom fifth under Model 2-100 percent would be  26 percent higher than under the funded benefits scenario but 4 percent  lower than under the promised benefits scenario.
We also simulated each of Model 2’s core features, assuming 100 percent  participation in the individual accounts, to illustrate the distributional  effect of each feature. (See fig. 11.) First we simulated a version of Model  2-100 percent that included the individual accounts and the reductions in  Social Security defined benefits, but not the $1,000 cap on account  contributions or the enhanced benefits for low earners and survivors. Next  we simulated a version that included the defined-benefit reductions and  the individual accounts with the $1,000 cap on account contributions.  Finally, we simulated the complete Model 2-100 percent scenario, which  included the enhanced benefits to lower earners and survivors. While the  proposal’s individual accounts and benefit reductions together may favor  higher earners, this is more than offset by a limit on account contributions  and the enhanced benefits for low earners and survivors. Again, this  assumes that all account participants would invest in the same portfolios.  However, if individuals’ investment decisions varied by earnings level,  then the distribution of income from the accounts would differ from our  simulations.
It should be emphasized that these simulations are only for individuals  born in 1985, and the distributional impact of Model 2 could be different  for individuals born in later years. For example, under the proposal, initial  Social Security defined benefits only grow with prices, while initial  benefits from account balances grow with wages. Since wages generally  grow faster than prices, Social Security defined benefits will decline as a  proportion of total benefits, reducing the importance of the progressive  benefit formula, disability benefits, and the enhanced benefits for low  earners and survivors.
It should also be noted that the account feature of Model 2-100 percent  likely exposes recipients to greater financial risk. Greater exposure to risk  may not affect the shares of benefits received by the bottom and top fifths  of earnings. However, greater risk may be more problematic for lower  earners, who likely have fewer resources to fall back on if their accounts  perform poorly.

	Conclusion

By design, Social Security distributes benefits and contributions across  workers and their families in a variety of ways. These distributional effects  illustrate how the program balances the goal of helping ensure adequate  incomes with the goal of giving all workers a fair deal on their  contributions. Any changes to Social Security would potentially alter those  distributional effects and the balance between those goals. Therefore,  policy makers need to understand how to evaluate distributional effects of  alternative policies.
Several key themes inform this understanding. First, it should be noted  that greater benefit progressivity is not the same thing as greater benefit  adequacy. Under some reform scenarios, Social Security could distribute  benefits more progressively than under current law while providing lower,  less adequate benefits. Secondly, our analysis illustrates that it that is  possible for some reform provisions that may not favor lower earners to  be counterbalanced by other, more favorable ones. Finally, benefit  progressivity is only one of several aspects of balancing adequacy and  equity. As our framework suggests, besides balancing adequacy and equity,  a proposal’s effect on the economy and whether it achieves sustainable  solvency should also be considered, as well as how readily it could be  implemented and explained to the public.
As we have noted in the past before this committee and elsewhere, a  comprehensive evaluation is needed that considers a range of effects  together. Focusing on comprehensive packages of reforms will enable us  to foster credibility and acceptance. This will help us avoid getting mired  in the details and losing sight of important interactive effects. It will help  build the bridges necessary to achieve consensus.
The fundamental nature of the program’s long-term financing challenge  means that timely action is needed. I believe it is possible to craft a  solution that will protect Social Security benefits for the nation’s current  and near-term retirees, while ensuring that the system will be there for  future generations. Stated differently, I believe that it is possible to reform  Social Security in a way that will assure the program’s solvency and  sustainability while exceeding the expectations of all generations of  Americans.  In this regard, the sooner we act, the greater the opportunity  to achieve this desirable outcome. It is my hope that we will think about  the unprecedented challenge facing future generations in our aging  society. We need to act now before the approaching demographic tidal  wave makes the imbalances more dramatic and meaningful reform less  feasible. 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. In doing so, we will be true to our core values of  accountability, integrity, and reliability.
Mr. Chairman, and members of the Committee, that concludes my  statement. I’d be happy to answer any questions you may have.

	GAO Contact and Staff Acknowledgments

For information regarding this testimony, please contact Barbara D.  Bovbjerg, Director, Education, Workforce, and Income Security Issues, at  (202) 512-7215. Individuals making key contributions to this testimony  include Ken Stockbridge, Charles Jeszeck, and Gordon Mermin.

Related GAO Products

Social Security: Distribution of Benefits and Taxes Relative to Earnings  Level (GAO-04-747, June 15, 2004).
Social Security Reform: Analysis of a Trust Fund Exhaustion Scenario  (GAO-03-907, July 29, 2003)
Social Security and Minorities: Earnings, Disability Incidence, and  Mortality Are Key Factors That Influence Taxes Paid and Benefits  Received (GAO-03-387, Apr. 23, 2003)
Social Security: Analysis of Issues and Selected Reform Proposals,  (GAO-03-376T, Jan. 15, 2003).
Social Security Reform: Analysis of Reform Models Developed by the  President’s Commission to Strengthen Social Security (GAO-03-310,  Jan. 15, 2003).
Social Security: Long-Term Financing Shortfall Drives Need for Reform  (GAO-02-845T, June 19, 2002).
Social Security: Program’s Role in Helping Ensure Income Adequacy  (GAO-02-62, Nov. 30, 2001).
Social Security Reform: Potential Effects on SSA’s Disability Programs  and Beneficiaries (GAO-01-35, Jan. 24, 2001).
Social Security: Evaluating Reform Proposals (GAO/AIMD/HEHS-00-29,  Nov. 4, 1999).
Social Security: Issues in Comparing Rates of Return with Market  Investments (GAO/HEHS-99-110, Aug. 5, 1999).
Social Security: Criteria for Evaluating Social Security Reform  Proposals (GAO/T-HEHS-99-94, Mar. 25, 1999).
Social Security Financing: Implications of Government Stock Investing  for the Trust Fund, the Federal Budget, and the Economy  (GAO/AIMD/HEHS-98-74, Apr. 22, 1998).
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Output:
Why GAO Did This Study

Under the current Social Security benefit formula, retired workers can receive benefits at age 65 that equal about 50 percent of preretirement earnings for an illustrative low-wage worker but only about 30 percent for an illustrative high-wage worker. Factors other than earnings also influence the distribution of benefits, including the program's provisions for disabled workers, spouses, children, and survivors. Changes in the program over time also affect the distribution of benefits across generations. Social Security faces a long-term structural financing shortfall. Program changes to address that shortfall could alter the way Social Security's benefits and revenues are distributed across the population and affect the income security of millions of Americans. The Chairman of the Senate Special Committee on Aging asked us to discuss how selected Social Security reform proposals might affect the distribution of benefits and taxes.

What GAO Found

Two distinct perspectives on Social Security's goals suggest different approaches to measuring "progressivity," or the distribution of benefits and taxes with respect to various earnings levels. Both perspectives provide valuable insights. An adequacy perspective focuses on benefit levels and how well they maintain pre-retirement living standards. An equity perspective focuses on rates of return and other measures relating lifetime benefits to contributions. Both perspectives examine how their measures are distributed across earnings levels. However, equity measures take all benefits and taxes into account, which is difficult to calculate for reform proposals that rely on general revenue transfers because it is unclear who will bear the relative burden for those general revenues. The Social Security program's distributional effects reflect both program features and demographic patterns among its recipients. In addition to the benefit formula, disability benefits favor lower earners because disabled workers are more likely to be lower lifetime earners. In contrast, certain household patterns reduce the system's tilt toward lower earners, for example, when lower earners have high-earner spouses. The advantage for lower earners is also diminished by the fact that they may not live as long as higher earners and therefore would get benefits for fewer years on average. Proposals to alter the Social Security program would have different distributional effects, depending on their design. Model 2 of the President's Commission to Strengthen Social Security proposes new individual accounts, certain benefit reductions for all beneficiaries, and certain benefit enhancements for selected low earners and survivors. According to our simulations, the combined effect could result in lower earners receiving a greater relative share of all benefits than under the current system if all workers invest in the same portfolio.