This is the accessible text file for CG Presentation number GAO-08-
604CG entitled 'Making Tough Budget Choices to Create a Better Future' 
which was released on March 14, 2008. 

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United States Government Accountability Office: 
GAO: 

Making Tough Budget Choices to Create a Better Future: 

The Honorable David M. Walker: 
Comptroller General of the United States: 

National Defense University: 
Industrial College of the Armed Forces: 
Ft. McNair, Washington, D.C. 
March 12, 2008: 

GAO-08-604CG: 

The Case for Change: 

The federal government is on a “burning platform,” and the status quo 
way of doing business is unacceptable for a variety of reasons, 
including: 

* Past fiscal trends and significant long-range challenges; 

* Selected trends and challenges having no boundaries; 

* Additional resource demands due to Iraq, Afghanistan, incremental 
homeland security needs, and recent natural disasters in the United 
States; 

* Numerous government performance/accountability and high risk 
challenges; 

* Outdated federal organizational structures, policies, and practices; 

* Rising public expectations for demonstrable results and enhanced 
responsiveness. 

Composition of Federal Spending: 

[See PDF for image] 

There are three pie charts, containing the following compositions of 
spending by category: 

Year: 1966;
Defense: 43%;
Social Security: 15%; 
Medicare and Medicaid: 1%; 
Net Interest: 7%; 
All Other: 34%. 

Year: 1986;
Defense: 28%;
Social Security: 20%; 
Medicare and Medicaid: 10%; 
Net Interest: 14%; 
All Other: 29%. 

Year: 2006;
Defense: 20%;
Social Security: 21%; 
Medicare and Medicaid: 19%; 
Net Interest: 9%; 
All Other: 32%. 

Source: Office of Management and Budget and the Department of the 
Treasury. 

Note: Numbers may not add to 100 percent due to rounding. 

[End of figure] 

Federal Spending for Mandatory and Discretionary Programs: 

[See PDF for image] 

There are three pie charts, containing the following compositions of 
spending by category: 

Year: 1966;
Discretionary: 67%; 
Mandatory: 26%; 
Net Interest: 7%. 

Year: 1986;
Discretionary: 44%; 
Mandatory: 42%; 
Net Interest: 14%. 

Year: 2006;
Discretionary: 38%; 
Mandatory: 53%; 
Net Interest: 9%. 

Source: Office of Management and Budget. 

[End of figure] 

Composition of Federal Receipts by Source: 

[See PDF for image] 

This figure contains three pie-charts that depict the following data: 

Year: 1966: 
Individual income: 42%; 
Corporate income: 23%; 
Social insurance and retirement: 20%; 
Other: 15%. 

Year: 1986: 
Individual income: 45%; 
Corporate income: 8%; 
Social insurance and retirement: 37%; 
Other: 1o%. 

Year: 2006: 
Individual income: 43%; 
Corporate income: 15%; 
Social insurance and retirement: 35%; 
Other: 7%. 

Note: Numbers do not add to 100 percent due to rounding. 

Source: GAO analysis of data from the Office of Management and Budget. 

[End of figure] 

Table: Fiscal Year 2006 and 2007 Deficits and Net Operating Costs: 

On-Budget Deficit, Fiscal Year 2006 ($ Billion): (434); 
On-Budget Deficit, Fiscal Year 2007 ($ Billion): (344); 

Unified Deficit[a], Fiscal Year 2006 ($ Billion): (248); 
Unified Deficit[a], Fiscal Year 2007 ($ Billion): (163); 

Net Operating Cost[b], Fiscal Year 2006 ($ Billion): (450); 
Net Operating Cost[b], Fiscal Year 2007 ($ Billion): (276); 

Sources: Office of Management and Budget and Department of the 
Treasury. 

[a] Includes $185 billion in Social Security surpluses for fiscal year 
2006 and $186 billion for fiscal year 2007; $1 billion in Postal 
Service surpluses for fiscal year 2006 and $5 billion for fiscal year 
2007. 

[End of table] 

Table: Major Fiscal Exposures ($ trillions): 

Explicit liabilities (Publicly held debt, Military & civilian pensions 
& retiree health, Other): 
2000: $6.9; 
2007: $10.8; 
Percent increase: 57. 

Commitments & contingencies (e.g., PBGC, undelivered orders):
2000: 0.5;
2007: 1.1; 
Percent increase: 97. 

Implicit exposures: 
2000: 13.0; (Future Social Security benefits: 3.8; Future Medicare Part 
A benefits: 2.7; Future Medicare Part B benefits: 6.5; Future Medicare 
Part D benefits: 0).
2007: 40.8; (Future Social Security benefits: 6.8; Future Medicare Part 
A benefits: 12.3; Future Medicare Part B benefits: 13.4; Future 
Medicare Part D benefits: 8.4).
Percent increase: 197. 

Total, 2000: $20.4; 
Total, 2006: $52.7; 
Percent increase: 158. 

Source: 2000 and 2007 Financial Report of the United States Government. 

Note: Totals and percent increases may not add due to rounding. 
Estimates for Social Security and Medicare are at present value as of 
January 1 of each year and all other data are as of September 30. 

[End of table] 

Table: How Big is Our Growing Fiscal Burden? 

This fiscal burden can be translated and compared as follows: 

Total major fiscal exposures: $52.7 trillion; 
Total household net worth[1]: $58.6 trillion; 
Burden/Net worth ratio: 90 percent. 

Burden[2]: 
Per person: $175,000; 
Per full-time worker: $410,000; 
Per household: $455,000. 

Income: 
Median household income[3]: $48,201; 
Disposable personal income per capita[4]: $33,253. 

Source: GAO analysis. 

Notes: (1) Federal Reserve Board, Flow of Funds Accounts, Table B.100, 
2007:Q3 (December 6, 2007); (2) Burdens are calculated using estimated 
total U.S. population as of 10/01/07, from the U.S. Census Bureau; full-
time workers reported by the Bureau of Economic Analysis, in NIPA table 
6.5D (Aug. 1, 2007); and households reported by the U.S. Census Bureau, 
in Income, Poverty, and Health Insurance Coverage in the United States: 
2006 (Aug. 2007); (3) U.S. Census Bureau, Income, Poverty, and Health 
Insurance Coverage in the United States: 2005 (Aug. 2007); and (4) 
Bureau of Economic Analysis, Personal Income and Outlays table 2, (Nov. 
29, 2007). 

[End of table] 

Potential Fiscal Outcomes Under Baseline Extended (January 2001); 
Revenues and Composition of Spending as a Share of GDP: 

[See PDF for image] - graphic text. 

This is a line/stacked bar graph with one line (revenue) and four 
stacked bars containing four spending items (Net interest, Social 
Security, Medicare and Medicaid, and All other spending). The vertical 
axis represents Percent of GDP and the horizontal axis represents 
fiscal years 2005, 2015[a], 2030[a], and 2040[a]. 

The following data is depicted: 

Fiscal year 2005: 
Net interest: 0.8%; 
Social Security: 4.3%; 
Medicare & Medicaid: 3.7%; 
All other spending: 7.994%; 
Revenue: 20.3%. 

Fiscal year 2015: 
Net interest: 0%; 
Social Security: 5.1%; 
Medicare & Medicaid: 4.9%; 
All other spending: 5.574%; 
Revenue: 20.4%. 

Fiscal year 2030: 
Net interest: 0%; 
Social Security: 6.6%; 
Medicare & Medicaid: 9.4%; 
All other spending: 3.991%; 
Revenue: 20.4%. 

Fiscal year 2040: 
Net interest: 0%; 
Social Security: 6.7%; 
Medicare & Medicaid: 9%; 
All other spending: 4.361%; 
Revenue: 20.4%. 

Source: GAO’s January 2001 analysis. 

[a] All other spending is net of offsetting interest receipts. 

[End of graph] 

Potential Fiscal Outcomes Under Alternative Simulation; Revenues and 
Composition of Spending as a Share of GDP: 

[See PDF for image] - graphic text. 

This is a line/stacked bar graph with one line (revenue) and four 
stacked bars containing four spending items (Net interest, Social 
Security, Medicare and Medicaid, and All other spending). The vertical 
axis represents Percent of GDP and the horizontal axis represents 
fiscal years 2006, 2015, 2030, and 2040. 

The following data is depicted: 

Fiscal year 2006: 
Net interest: 1.7%; 
Social Security: 4.2%; 
Medicare & Medicaid: 3.9%; 
All other spending: 10.6%; 
Revenue: 18.4%. 

Fiscal year 2015: 
Net interest: 2.3%; 
Social Security: 4.8%; 
Medicare & Medicaid: 5.7%; 
All other spending: 9.6%; 
Revenue: 18%. 

Fiscal year 2030: 
Net interest: 5.8%; 
Social Security: 6.6%; 
Medicare & Medicaid: 8.8%; 
All other spending: 9.6%; 
Revenue: 18.6%. 

Fiscal year 2040: 
Net interest: 11.6%; 
Social Security: 7.2%; 
Medicare & Medicaid: 10.8%; 
All other spending: 9.6%; 
Revenue: 18.6%. 

Source: GAO’s August 2007 analysis. 

Notes: AMT exemption amount is retained at the 2006 level through 2017 
and expiring tax provisions are extended. After 2017, revenue as a 
share of GDP returns to its historical level of 18.3 percent of GDP 
plus expected revenues from deferred taxes, i.e. taxes on withdrawals 
from retirement accounts. Medicare spending is based on the Trustees 
April 2007 projections adjusted for the Centers for Medicare and 
Medicaid Services alternative assumption that physician payments are 
not reduced as specified under current law. 

[End of graph] 

Growth in Spending for Social Security, Medicare, and Medicaid Expected 
to Outpace Economic Growth: 

[See PDF for image] 

This image is a bar graph depicting Growth in Spending for Social 
Security, Medicare, and Medicaid Expected to Outpace Economic Growth. 
The vertical axis of the graph represents growth in constant dollars, 
2007-2032 in percentage from 0 to 150. The horizontal axis represents 
spending growth in the four areas. The following data is depicted: 

Growth in Constant dollars, 2007-2032:
GDP: 71%; 
Social Security Spending: 127%; 
Medicaid Spending: 224%; 
Medicare Spending: 235%. 

Source: GAO analysis based on data from the Office of the Chief 
Actuary, Social Security Administration; Office of the Actuary,Centers 
for Medicare and Medicaid Services; and the Congressional Budget 
Office. 

Notes: Social Security and Medicare projections based on the 
intermediate assumptions of the 2007 Trustees’ Reports. Medicaid 
projections based on CBO’s August 2007 short-term Medicaid estimates 
and CBO’s December 2005 long-term Medicaid projections under mid-range 
assumptions. 

[End of graph] 

Federal Tax Expenditures Exceeded Discretionary Spending for Half of 
the Last Decade: 

[See PDF for image] 

This is a line graph with three lines (Mandatory spending; Sum of tax 
expenditure revenue loss estimates; and Discretionary spending). The 
vertical axis represents Dollars in billions (in real 2005 dollars) and 
the horizontal axis represents fiscal years 1982 through 2005. The 
following data is depicted: 

Fiscal year: 1982;	
Mandatory spending excluding net interest: 623.4;	
Sum of tax expenditure revenue loss estimates: 480;
Discretionary Spending: 607. 

Fiscal year: 1983;
Mandatory spending excluding net interest: 651.2;	
Sum of tax expenditure revenue loss estimates: 517.6;	
Discretionary Spending: 630. 

Fiscal year: 1984; 
Mandatory spending excluding net interest: 621.3;	
Sum of tax expenditure revenue loss estimates: 548.8;
Discretionary Spending: 652.5. 

Fiscal year: 1985; 
Mandatory spending excluding net interest: 668.1;	
Sum of tax expenditure revenue loss estimates: 589.3; 
Discretionary Spending: 692.6. 

Fiscal year: 1986; 
Mandatory spending excluding net interest: 677;	
Sum of tax expenditure revenue loss estimates: 641.2; 
Discretionary Spending: 713.8. 

Fiscal year: 1987; 
Mandatory spending excluding net interest: 668.3;	
Sum of tax expenditure revenue loss estimates: 598; 
Discretionary Spending: 704.7. 

Fiscal year: 1988; 
Mandatory spending excluding net interest: 689.3;	
Sum of tax expenditure revenue loss estimates: 464.3; 
Discretionary Spending: 714.2. 

Fiscal year: 1989; 
Mandatory spending excluding net interest: 719.5;	
Sum of tax expenditure revenue loss estimates: 491.7; 
Discretionary Spending: 723.7. 

Fiscal year: 1990; 
Mandatory spending excluding net interest: 811.1;	
Sum of tax expenditure revenue loss estimates: 497.5; 
Discretionary Spending: 714.6. 

Fiscal year: 1991; 
Mandatory spending excluding net interest: 820.8;	
Sum of tax expenditure revenue loss estimates: 489.1;	 
Discretionary Spending: 733.7. 

Fiscal year: 1992; 
Mandatory spending excluding net interest: 870.3;	
Sum of tax expenditure revenue loss estimates: 505.8; 
Discretionary Spending: 716.4. 

Fiscal year: 1993; 
Mandatory spending excluding net interest: 881.1;	
Sum of tax expenditure revenue loss estimates: 512.8; 
Discretionary Spending: 707.8. 

Fiscal year: 1994; 
Mandatory spending excluding net interest: 921.9;	
Sum of tax expenditure revenue loss estimates: 539; 
Discretionary Spending: 695.5. 

Fiscal year: 1995; 
Mandatory spending excluding net interest: 929.7;	
Sum of tax expenditure revenue loss estimates: 558.3;
Discretionary Spending: 685.6. 

Fiscal year: 1996; 
Mandatory spending excluding net interest: 971.3;	
Sum of tax expenditure revenue loss estimates: 561.3; 
Discretionary Spending: 657.6. 

Fiscal year: 1997; 
Mandatory spending excluding net interest: 982.9;	
Sum of tax expenditure revenue loss estimates: 586.2;
Discretionary Spending: 663.9. 

Fiscal year: 1998; 
Mandatory spending excluding net interest: 1030.3;	
Sum of tax expenditure revenue loss estimates: 663.2;
Discretionary Spending: 661.8. 

Fiscal year: 1999; 
Mandatory spending excluding net interest: 1065.3;	
Sum of tax expenditure revenue loss estimates: 713.6; 
Discretionary Spending: 676.8. 

Fiscal year: 2000; 
Mandatory spending excluding net interest: 1103.4;	
Sum of tax expenditure revenue loss estimates: 746.2; 
Discretionary Spending: 713. 

Fiscal year: 2001; 
Mandatory spending excluding net interest: 1141.8;	
Sum of tax expenditure revenue loss estimates: 809.2;
Discretionary Spending: 735.7.	 

Fiscal year: 2002; 
Mandatory spending excluding net interest: 1229.5;	
Sum of tax expenditure revenue loss estimates: 838.1;
Discretionary Spending: 816.4. 

Fiscal year: 2003; 
Mandatory spending excluding net interest: 1287.6;	
Sum of tax expenditure revenue loss estimates: 803.6;
Discretionary Spending: 899.5. 

Fiscal year: 2004; 
Mandatory spending excluding net interest: 1314.4;	
Sum of tax expenditure revenue loss estimates: 773.5;
Discretionary Spending: 951.3. 

Fiscal year: 2005; 
Mandatory spending excluding net interest: 1360.5; 
Sum of tax expenditure revenue loss estimates: 799.6;
Discretionary Spending: 998.4. 

Fiscal year: 2006; 
Mandatory spending excluding net interest: 1412.1; 
Sum of tax expenditure revenue loss estimates: 846.7;
Discretionary Spending: 1016.7. 

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal 
years 1976-2008. 

Note: Summing tax expenditure estimates does not take into account 
interactions between individual provisions. Outlays associated with 
refundable tax credits are included in mandatory spending. 

[End of graph] 

State and Local Governments Face Increasing Fiscal Challenges: 

[See PDF for image] - graphic text. 

This is a line graph with two lines (Operating Surplus/Deficit Measure 
and Net-lending/Net-borrowing). The vertical axis represents Percent of 
GDP from -6 to +2 and the horizontal axis represents fiscal years 1980 
through 2050. The following data is depicted: 

1980: 
Operating Surplus/Deficit Measure: 0.35873454; 
Net-lending/Net-borrowing: -0.236601541. 

1981: 
Operating Surplus/Deficit Measure: 0.34624089; 
Net-lending/Net-borrowing: -0.169415676. 

1982: 
Operating Surplus/Deficit Measure: 0.363124424; 
Net-lending/Net-borrowing: -0.387096774. 

1983: 
Operating Surplus/Deficit Measure: 0.774990811; 
Net-lending/Net-borrowing: -0.138547233. 

1984: 
Operating Surplus/Deficit Measure: 0.8152395; 
Net-lending/Net-borrowing: 0.223736398. 

1985: 
Operating Surplus/Deficit Measure: 0.810172263; 
Net-lending/Net-borrowing: 0.035542497. 

1986: 
Operating Surplus/Deficit Measure: 0.820186878; 
Net-lending/Net-borrowing: -0.103074303. 

1987: 
Operating Surplus/Deficit Measure: 0.348462918; 
Net-lending/Net-borrowing: -0.346028062. 

1988: 
Operating Surplus/Deficit Measure: 0.415329754; 
Net-lending/Net-borrowing: -0.289980015. 

1989: 
Operating Surplus/Deficit Measure: 0.461047699; 
Net-lending/Net-borrowing: -0.302676683. 
	
1990: 
Operating Surplus/Deficit Measure: 0.12076304; 
Net-lending/Net-borrowing: -0.649652772. 

1991: 
Operating Surplus/Deficit Measure: -0.002324922; 
Net-lending/Net-borrowing: -0.823896329. 

1992: 
Operating Surplus/Deficit Measure: 0.105991132; 
Net-lending/Net-borrowing: -0.675323856. 	
	
1993: 
Operating Surplus/Deficit Measure: 0.17518701; 
Net-lending/Net-borrowing: -0.573797579. 

1994: 
Operating Surplus/Deficit Measure: 0.15154266; 
Net-lending/Net-borrowing: -0.429852097. 

1995: 
Operating Surplus/Deficit Measure: 0.226784; 
Net-lending/Net-borrowing: -0.446084594. 
	
1996: 
Operating Surplus/Deficit Measure: 0.382430375; 
Net-lending/Net-borrowing: -0.292955008. 

1997: 
Operating Surplus/Deficit Measure: 0.540310442; 
Net-lending/Net-borrowing: -0.225184543. 

1998: 
Operating Surplus/Deficit Measure: 0.711478221; 
Net-lending/Net-borrowing: -0.113181662. 

1999: 
Operating Surplus/Deficit Measure: 0.528375987; 
Net-lending/Net-borrowing: -0.240602477. 

2000: 
Operating Surplus/Deficit Measure: 0.51757156; 
Net-lending/Net-borrowing: -0.309666904. 

2001: 
Operating Surplus/Deficit Measure: 0.213052923; 
Net-lending/Net-borrowing: -0.800750395. 

2002: 
Operating Surplus/Deficit Measure: -0.212758845; 
Net-lending/Net-borrowing: -1.20443952. 

2003: 
Operating Surplus/Deficit Measure: -0.034231078; 
Net-lending/Net-borrowing: -1.04098241. 

2004: 
Operating Surplus/Deficit Measure: 0.03822412; 
Net-lending/Net-borrowing: -0.899039488. 

2005: 
Operating Surplus/Deficit Measure: 0.262769152; 
Net-lending/Net-borrowing: -0.762696896. 

2006: 
Operating Surplus/Deficit Measure: 0.21944499; 
Net-lending/Net-borrowing: -0.788126765. 

2007: 
Operating Surplus/Deficit Measure: 0.412715768; 
Net-lending/Net-borrowing: -0.638191188. 

2008: 
Operating Surplus/Deficit Measure: 0.345168264; 
Net-lending/Net-borrowing: -0.630180116. 

2009: 
Operating Surplus/Deficit Measure: 0.333020741; 
Net-lending/Net-borrowing: -0.603351831. 

2010: 
Operating Surplus/Deficit Measure: 0.302656141; 
Net-lending/Net-borrowing: -0.605141837. 

2011: 
Operating Surplus/Deficit Measure: 0.257109542; 
Net-lending/Net-borrowing: -0.630946404. 

2012: 
Operating Surplus/Deficit Measure: 0.206218592; 
Net-lending/Net-borrowing: -0.658720463. 

2013: 
Operating Surplus/Deficit Measure: 0.16406332; 
Net-lending/Net-borrowing: -0.681176041. 

2014: 
Operating Surplus/Deficit Measure: 0.119677687; 
Net-lending/Net-borrowing: -0.707576964. 

2015: 
Operating Surplus/Deficit Measure: 0.076206951; 
Net-lending/Net-borrowing: -0.734940534. 

2016: 
Operating Surplus/Deficit Measure: 0.026942361; 
Net-lending/Net-borrowing: -0.769406462. 

2017: 
Operating Surplus/Deficit Measure: -0.032335263; 
Net-lending/Net-borrowing: -0.814653671. 

2018: 
Operating Surplus/Deficit Measure: -0.109446599; 
Net-lending/Net-borrowing: -0.878965311. 

2019: 
Operating Surplus/Deficit Measure: -0.19227354; 
Net-lending/Net-borrowing: -0.950160744. 

2020: 
Operating Surplus/Deficit Measure: -0.28349272; 
Net-lending/Net-borrowing: -1.030954125. 

2021: 
Operating Surplus/Deficit Measure: -0.386388384; 
Net-lending/Net-borrowing: -1.123450085. 

2022: 
Operating Surplus/Deficit Measure: -0.483216203; 
Net-lending/Net-borrowing: -1.211277239. 

2023: 
Operating Surplus/Deficit Measure: -0.557423995; 
Net-lending/Net-borrowing: -1.275859781. 

2024: 
Operating Surplus/Deficit Measure: -0.667104614; 
Net-lending/Net-borrowing: -1.376919803. 

2025: 
Operating Surplus/Deficit Measure: -0.781500085; 
Net-lending/Net-borrowing: -1.482014441. 

2026: 
Operating Surplus/Deficit Measure: -0.866176187; 
Net-lending/Net-borrowing: -1.558258502. 

2027: 
Operating Surplus/Deficit Measure: -0.971014018; 
Net-lending/Net-borrowing: -1.654401786. 

2028: 
Operating Surplus/Deficit Measure: -1.059403133; 
Net-lending/Net-borrowing: -1.733838263. 

2029: 
Operating Surplus/Deficit Measure: -1.167739726; 
Net-lending/Net-borrowing: -1.833479877. 

2030: 
Operating Surplus/Deficit Measure: -1.259948277; 
Net-lending/Net-borrowing: -1.916759702. 

2031: 
Operating Surplus/Deficit Measure: -1.372065386; 
Net-lending/Net-borrowing: -2.020169149. 

2032: 
Operating Surplus/Deficit Measure: -1.467520327; 
Net-lending/Net-borrowing: -2.107108096. 

2033: 
Operating Surplus/Deficit Measure: -1.596865114. 
Net-lending/Net-borrowing: -2.227702996. 

2034: 
Operating Surplus/Deficit Measure: -1.728257684; 
Net-lending/Net-borrowing: -2.350527637. 

2035: 
Operating Surplus/Deficit Measure: -1.829728717; 
Net-lending/Net-borrowing: -2.443203659. 

2036: 
Operating Surplus/Deficit Measure: -1.964429157. 
Net-lending/Net-borrowing: -2.569286091. 

2037: 
Operating Surplus/Deficit Measure: -2.100986709; 
Net-lending/Net-borrowing: -2.697381312. 

2038: 
Operating Surplus/Deficit Measure: -2.205225568; 
Net-lending/Net-borrowing: -2.7928813. 

2039: 
Operating Surplus/Deficit Measure: -2.325201615; 
Net-lending/Net-borrowing: -2.904115765. 

2040: 
Operating Surplus/Deficit Measure: -2.430489372; 
Net-lending/Net-borrowing: -3.00097328. 

2041: 
Operating Surplus/Deficit Measure: -2.569712106; 
Net-lending/Net-borrowing: -3.131648373. 

2042: 
Operating Surplus/Deficit Measure: -2.709424661; 
Net-lending/Net-borrowing: -3.262966376. 

2043: 
Operating Surplus/Deficit Measure: -2.818508477; 
Net-lending/Net-borrowing: -3.363795891. 

2044: 
Operating Surplus/Deficit Measure: -2.947568546; 
Net-lending/Net-borrowing: -3.484450067. 

2045: 
Operating Surplus/Deficit Measure: -3.058317306; 
Net-lending/Net-borrowing: -3.58693672. 

2046: 
Operating Surplus/Deficit Measure: -3.188512473; 
Net-lending/Net-borrowing: -3.709010629. 

2047: 
Operating Surplus/Deficit Measure: -3.300350183; 
Net-lending/Net-borrowing: -3.812861884. 

2048: 
Operating Surplus/Deficit Measure: -3.432143889; 
Net-lending/Net-borrowing: -3.936539309. 

2049: 
Operating Surplus/Deficit Measure: -3.545556545; 
Net-lending/Net-borrowing: -4.041974237. 

2050: 
Operating Surplus/Deficit Measure: -3.686995315; 
Net-lending/Net-borrowing: -4.175627129. 

Sources: Historical data from National Income and Product Accounts. 
Historical data from 1980–2006, GAO projections from 2007–2050 using 
many CBO projections and assumptions, particularly for next 10 years. 

[End of graph] 

Current Fiscal Policy Is Unsustainable: 

The “Status Quo”Is Not an Option. 

* We face large and growing structural deficits largely due to known 
demographic trends and rising health care costs. 

* GAO’s simulations show that balancing the budget in 2040 could 
require actions as large as: 
- Cutting total federal spending by 60 percent or; 
- Raising federal taxes to two times today's level. 

Faster Economic Growth Can Help, but It Cannot Solve the Problem. 

* Closing the current long-term fiscal gap based on reasonable 
assumptions would require real average annual economic growth in the 
double-digit range every year for the next 75 years. 

* During the 1990s, the economy grew at an average 3.2 percent per 
year. 

* As a result, we cannot simply grow our way out of this problem. Tough 
choices will be required. 

The Way Forward: A Three-Pronged Approach: 

1. Improve Financial Reporting, Public Education, and Performance 
Metrics. 

2. Strengthen Budget and Legislative Processes and Controls. 

3. Fundamentally Reexamine & Transform for the 21st Century (i.e., 
entitlement programs, other spending, and tax policy). 

Solutions Require Active Involvement from both the Executive and 
Legislative Branches. 

Key Sustainability Challenges: 

* Fiscal deficits and public debt burdens; 

* Social insurance commitments; 

* Health care quality, access, and costs; 

* K-12 education system•Energy, environment, and resource protection; 

* Tax gaps and policies; 

* Immigration policies; 

* Infrastructure needs; 

* Governance, political reforms, and citizen engagement; 

* Security strategies, including defense and homeland issues, as well 
as Iraq; 

* Foreign policy strategies; 

* Federal workforce and related policies and practices. 

Growth in Health Care Spending Health Care Spending as a Percentage of 
GDP: 

[See PDF for image] 

This figure is a bar graph depicting Growth in Health Care Spending 
Health Care Spending as a Percentage of GDP for five specific years. 
The vertical axis of the graph represents percent from 0 to 25. The 
horizontal axis of the graph represents years 1975, 1985, 1995, 2005, 
and 2015. The following data is depicted: 

Year: 1975; 
National health expenditures as a percent of GDP: 8.1%. 

Year: 1985; 
National health expenditures as a percent of GDP: 10.4%. 

Year: 1995; 
National health expenditures as a percent of GDP: 13.7%. 

Year: 2005; 
National health expenditures as a percent of GDP: 16.0%. 

Year: 2015; 
National health expenditures as a percent of GDP: 19.2%. 

Source: The Centers for Medicare & Medicaid Services, Office of the 
Actuary. 

Notes: The most current data available on health care spending are for 
2005. The figure for 2015 is projected. 

[End of graph] 

Where the United States Ranks on Selected Health Outcome Indicators: 

Outcome: Life expectancy at birth (U.S. = 77.8 years in 2004); 
Rank: 23 out of 30 in 2004. 

Outcome: Infant Mortality (U.S. = 6.8 deaths in 2004); 
Rank: 26 out of 30 in 2004. 

Outcome: Potential Years of Life Lost (U.S. = 5,066 in 2002); 
Rank: 23 out of 26 in 2002. 

Source: OECD Health Data 2006 and 2007. 

Notes: Data are the most recent available for all countries. Life 
expectancy at birth for the total population is estimated by the OECD 
Secretariat for all countries, as the unweighted average of the life 
expectancy of men and women. Infant mortality is measured as the number 
of deaths per 1,000 live births. Potential years of life lost (PYLL) is 
the sum of the years of life lost prior to age 70, given current age-
specific death rates (e.g., a death at 5 years of age is counted as 65 
years of PYLL). 

[End of table] 

Issues to Consider in Examining Our Health Care System: 

The public needs to be educated about the differences between wants, 
needs, affordability, and sustainability at both the individual and 
aggregate level. 

Ideally, health care reform proposals will: 

* Align Incentives for providers and consumers to make prudent 
decisions about the use of medical services; 

* Foster Transparency with respect to the value and costs of care, and; 

* Ensure Accountability from insurers and providers to meet standards 
for appropriate use and quality. 

Ultimately, we need to address four key dimensions: access, cost, 
quality, and personal responsibility. 

Social Security and Medicare’s Hospital Insurance Trust Funds Face Cash 
Deficits: 

[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 2007 and a Social 
Security cash deficit in 2017. The vertical axis of the graph depicts 
billions of 2007 dollars from -900 to +200. The horizontal axis depicts 
fiscal years from 2005 through 2040. The following data is depicted: 

2005:
Medicare HI cash flow: $0.42; 
Social Security cash flow: $81.68; 
Surplus: $82.1. 

2006: 
Medicare HI cash flow: $3.26; 
Social Security cash flow: $88.75; 
Surplus: $90.01. 

2007:	
Medicare HI cash flow: ($1.00); 
Social Security cash flow: $79.40; 
Surplus: $78.40. 

2008:	
Medicare HI cash flow: ($4.88); 
Social Security cash flow: $90.10; 
Surplus: $85.22. 

2009:	
Medicare HI cash flow: ($7.61); 
Social Security cash flow: $94.30; 
Surplus: $86.69. 

2010:	
Medicare HI cash flow: ($11.11); 
Social Security cash flow: $89.80; 
Surplus: $78.69. 

2011:	
Medicare HI cash flow: ($14.40); 
Social Security cash flow: $86.10; 
Surplus: $71.7. 

2012:	
Medicare HI cash flow: ($19.27); 
Social Security cash flow: $76.30; 
Surplus: $57.03. 

2013:	
Medicare HI cash flow: ($23.85); 
Social Security cash flow: $62.10; 
Surplus: $38.25. 

2014:	
Medicare HI cash flow: ($29.83); 
Social Security cash flow: $45.90; 
Surplus: $16.07. 

2015:	
Medicare HI cash flow: ($36.28); 
Social Security cash flow: $29.20; 
Deficit: $7.08. 

2016:	
Medicare HI cash flow: ($43.13); 
Social Security cash flow: $11.50; 
Deficit: $31.63. 

2017:	
Medicare HI cash flow: ($51.11); 
Social Security cash flow: ($6.70); 
Deficit: $57.81. 
	
2018:	
Medicare HI cash flow: ($60.85); 
Social Security cash flow: ($26.30); 
Deficit: $87.15. 	 

2019:	
Medicare HI cash flow: ($70.74); 
Social Security cash flow: ($46.80); 
Deficit: $117.54. 

2020:	
Medicare HI cash flow: ($81.45); 
Social Security cash flow: ($67.80); 
Deficit: $149.25. 

2021:	
Medicare HI cash flow: ($93.57); 
Social Security cash flow: ($88.40); 
Deficit: $181.97. 

2022:	
Medicare HI cash flow: ($107.64); 
Social Security cash flow: ($109.00); 
Deficit: $216.64. 
	
2023:	
Medicare HI cash flow: ($122.16); 
Social Security cash flow: ($129.70); 
Deficit: $251.86. 

2024:	
Medicare HI cash flow: ($137.69); 
Social Security cash flow: ($150.30); 
Deficit: $287.99. 

2025:	
Medicare HI cash flow: ($153.52); 
Social Security cash flow: ($170.90); 
Deficit: $324.42. 

2026:	
Medicare HI cash flow: ($171.35); 
Social Security cash flow: ($191.30); 
Deficit: $362.65. 

2027:	
Medicare HI cash flow: ($189.83); 
Social Security cash flow: ($211.30); 
Deficit: $401.13. 

2028:	
Medicare HI cash flow: ($209.99); 
Social Security cash flow: ($231.30); 
Deficit: $441.29. 

2029:	
Medicare HI cash flow: ($230.01); 
Social Security cash flow: ($249.50); 
Deficit: $479.51. 		 

2030:	
Medicare HI cash flow: ($250.39); 
Social Security cash flow: ($266.50); 
Deficit: $516.89. 

2031:	
Medicare HI cash flow: ($272.06); 
Social Security cash flow: ($282.50); 
Deficit: $554.56. 

2032:	
Medicare HI cash flow: ($293.90); 
Social Security cash flow: ($297.30); 
Deficit: $591.2. 

2033:	
Medicare HI cash flow: ($316.28); 
Social Security cash flow: ($310.30); 
Deficit: $626.58. 

2034:	
Medicare HI cash flow: ($338.68); 
Social Security cash flow: ($321.40); 
Deficit: $660.08. 

2035:	
Medicare HI cash flow: ($361.93); 
Social Security cash flow: ($330.90); 
Deficit: $692.83. 

2036:	
Medicare HI cash flow: ($385.03); 
Social Security cash flow: ($339.60); 
Deficit: $724.63. 

2037:	
Medicare HI cash flow: ($408.36); 
Social Security cash flow: ($347.30); 
Deficit: $762.06. 

2038:	
Medicare HI cash flow: ($430.55); 
Social Security cash flow: ($353.70); 
Deficit: $784.25. 

2039:	
Medicare HI cash flow: ($453.30); 
Social Security cash flow: ($358.80); 
Deficit: $812.1. 

2040:	
Medicare HI cash flow: ($475.73); 
Social Security cash flow: ($363.40); 
Deficit: $839.13. 

Source: GAO analysis of data from the Office of the Chief Actuary, 
Social Security Administration and Office of the Actuary, Centers for 
Medicare and Medicaid Services. 

Note: Projections based on the intermediate assumptions of the 2007 
Trustees’ Reports. The CPI is used to adjust from current to constant 
dollars. 

[End of graph] 

Possible Way Forward on Social Security Reform: 

Make little or no changes to those who are near retirement or already 
retired and make a number of adjustments that would affect younger 
workers: 

* Phase-in an increase in the normal retirement age and index it to 
life expectancy; 

* Consider phasing-in an increase in the early retirement age and index 
it to life expectancy with a modified disability access provision; 

* Modify income replacement and/or indexing formulas for middle and 
upper income earners; 

* Strengthen the minimum benefit; 

* Consider a modest adjustment to the COLA formula; 

* Increase the taxable wage base, if necessary; 

* Consider supplemental individual accounts and mandatory individual 
savings on a payroll deduction basis (e.g., a minimum 2 percent payroll 
contribution and a program designed much like the Federal Thrift 
Savings Plan with a real trust fund and real investments). 

Transformation: 

Webster's definition: An act, process, or instance of change in 
structure appearance, or character; A conversion, revolution, makeover, 
alteration, or renovation. 

The Objective of Transformation for DOD: 

Creating the future of warfare and protecting our national security 
while improving how the department, including all of its various 
component parts, does business in order to support and sustain our 
position as the world’s preeminent military power within current and 
expected resource limits. 

Increased Budget Transparency Needed: 

It is currently difficult to distinguish between incremental costs to 
support specific contingency operations and regular budget costs: 

* GWOT requests include funding for items generally requested in the 
regular budget, such as future weapons systems, transformation, and 
increases in end strength. 

DOD needs to take stronger actions to control GWOT costs by setting 
general parameters to guide commanders’ and services’ cost control 
efforts. 

GAO has found significant reliability problems with the GWOT cost data, 
which impedes the ability of Congress and others to make informed 
decisions about GWOT costs and related funding needs. 

DOD’s Regular Budget DOD Regular Appropriation FY 2001-2007 (Excluding 
GWOT)(Dollars in billions): 

Fiscal year: FY01; 
Nominal $: $296.42; 
Constant 2007 $: $351.4. 

Fiscal year: FY02; 
Nominal $: $327.86; 
Constant 2007 $: $378.1. 
	
Fiscal year: FY03; 
Nominal $: $365.33; 
Constant 2007 $: $409.8. 
	
Fiscal year: FY04; 
Nominal $: $377.50; 
Constant 2007 $: $411.5. 
	
Fiscal year: FY05; 
Nominal $: $400.93; 
Constant 2007 $: $422.5. 

Fiscal year: FY06; 
Nominal $: $415.45; 
Constant 2007 $: $425.5. 

Fiscal year: FY07; 
Nominal $: $431.30; 
Constant 2007 $: $431.3. 

Source: GAO analysis of Congressional Research Service and 
appropriations data. 

[End of figure] 

Total Budgetary Resources Provided to DOD: Total Defense Resources FY 
2005-FY 2007 (Dollars in billions): 

Fiscal year: 2005; 
Regular: $400.93; 
Bridge: $25; 
Supplemental: $75.9. 

Fiscal year: 2006; 
Regular: $415.45; 
Bridge: $50; 
Supplemental: $66. 

Fiscal year: 2007; 
Regular: $431.34; 
Bridge: $70.5; 
Supplemental: $95.2. 

Source: GAO analysis of Congressional Research Service and 
appropriations data. 

Notes: Bridge, or Title IX, is the section of DOD's regular defense 
appropriation that outlines emergency spending provisions for 
operations in support of GWOT. 

[End of figure] 

DOD’s Reported GWOT Obligations for FY 2001 through FY 2007: 

[See PDF for image] 

This figure is a vertical bar graph depicting DOD’s reported GWOT 
obligations for FY 2001 through FY 2007. The vertical axis of the graph 
represents dollars in billions from 0 to 160. The horizontal axis of 
the graph represents fiscal years from 2001 through 2007. The following 
data is depicted: 

FY 01: $0.20; 
FY 02: $29.90; 
FY 03: $67.10; 
FY 04: $71.30; 
FY 05: $84.80; 
FY 06: $98.40; 
FY 07: $139.75. 

Source: GAO analysis of DOD data. 

Note: Reported GWOT obligations include Operation Noble Eagle, 
Operation Enduring Freedom, and Operation Iraqi Freedom. Figures 
include about $19.4 billion obligated in FY 2002 –FY 2003 that DOD did 
not include in its cost reports. Figures do not include any obligations 
for classified activities. GAO has assessed the reliability of DOD’s 
obligation data and found significant problems, such that they may not 
accurately reflect the true dollar value of GWOT obligations. 

[End of figure] 

Systemic Defense Acquisition Challenges: Overview: 

GAO has identified 15 systemic challenges relating to DOD’s acquisition 
and contracting activities. Main areas address: 

* Identifying budgetary needs versus wants; 

* Specifying realistic contract requirements; 

* Ensuring accountability through effective contract oversight and 
management stability. 

The following pages provide more detail. 

Systemic Defense Acquisition Challenges: 

1. Service budgets are allocated largely according to top line 
historical percentages rather than Defense-wide strategic assessments 
and current and likely resource limitations; 

2. Capabilities and requirements are based primarily on individual 
service wants versus collective Defense needs (i.e. based on current 
and expected future threats) that are both affordable and sustainable 
over time; 

3. Defense consistently over-promises and under-delivers in connection 
with major weapons, information, and other systems (i.e. capabilities, 
costs, quantities, schedule); 

4. Defense often employs a “plug and pray approach” when costs escalate 
(i.e. divide total funding dollars by cost per copy, plug the number 
that can be purchased, then pray that Congress will provide more 
funding to buy more quantities); 

5. Congress sometimes forces the department to buy items (e.g. weapons 
systems) and provide services (e.g. additional health care for non-
actives) that the department does not want and we cannot afford; 

6. DOD tries to develop high risk technologies after programs start 
instead of setting up funding, organizations, and processes to conduct 
high risk technology development activities in low cost environments 
(i.e.technology development is not separated from product development). 
Program decisions to move into design and production are made without 
adequate standards or knowledge; 

7. Program requirements are often set at unrealistic levels, then 
changed frequently as recognition sets in that they cannot be achieved. 
As a result, too much time passes, threats may change, and/or members 
of the user and acquisition communities may simply change their mind. 
The resulting program instability causes cost escalation, schedule 
delays, fewer quantities and reduced contractor accountability; 

8. Contracts, especially service contracts, often do not have 
definitive or realistic requirements at the outset in order to control 
costs and facilitate accountability; 

9. Contracts typically do not accurately reflect the complexity of 
projects nor appropriately allocate risk between the contractors and 
the taxpayers (e.g. cost plus, cancellation charges); 

10. Key program staff rotate too frequently thus promoting myopia and 
reducing accountability (i.e. tours based on time versus key 
milestones). Additionally, the revolving door between industry and the 
Department presents potential conflicts of interest; 

11. The acquisition workforce faces serious challenges (e.g. size, 
skills, knowledge, succession planning); 

12. Incentive and award fees are often paid based on contractor 
attitudes and efforts versus positive results (i.e. cost, quality, 
schedule); 

13. Inadequate oversight is being conducted by both the Defense 
Department and the Congress which results in little to no 
accountability for recurring and systemic problems; 

14. Some individual program and funding decisions made within the 
Department and by the Congress serve to undercut sound policies; 

15. Lack of a professional, term-based CMO at DOD serves to slow 
progress on defense transformation and reduce the chance of success in 
the acquisitions/contracting and other key business areas. 

Selected Potential DOD Transformation Related Actions: 

* Revise the current approach to developing national military strategy 
(e.g., order, integration); 

* Take a longer range, and more enterprise-wide approach to program 
planning and budget integration (e.g., life cycles, opportunity costs); 

* Employ a more strategic and integrated approach to business 
information system efforts and financial audit initiatives; 

* Differentiate between war fighting and business systems development, 
implementation, and maintenance (e.g., resource control, project 
approval); 

* Focus on achieving real success in connection with financial 
management efforts (e.g., systems, controls, information, compliance 
and opinions); 

* Employ a total force management approach to planning and execution 
(e.g., military, civilian, contractors); 

* Get the design and implementation of the NSPS right, including 
modernizing and integrating the DOD, Service, domain, unit, and 
individual performance measurement and reward systems; 

* Revise the process for developing and communicating key changes 
(e.g., DOD transformation, NSPS); 

* Reduce the number of layers, silos, and footprints; 

* Recognize the difference between approving and informing; 

* Review and revise current military compensation policies and 
practices (e.g., more targeted and market-based); 

* Strengthen emphasis on horizontal and external activities 
(e.g.,partnerships); 

* Create a Chief Management Officer (CMO) to drive the business 
transformation process. 

Transformation is a Long-Term Process: 

* DOD is perhaps the largest and most complex organization in the 
world; 

* Many of the department’s weaknesses are decades in the making and 
solutions will take time and will not be easy; 

* Hundreds of dedicated and hardworking DOD employees are focusing on 
these issues; 

* The establishment of the Defense Business Systems Management 
Committee and the Business Transformation Agency are good first steps. 

GAO’s Recommendation for a CMO at DOD: 

GAO has recommended that DOD establish a CMO to provide strong and 
sustained leadership over all major business transformation efforts. 
The CMO should be: 

* Experienced with a proven track record as a business process change 
agent in a large, complex, and diverse organization; 

* Codified in statute as a separate and full-time position; 

* Designated an Executive Level II appointment that reports directly to 
the Secretary of Defense; 

* Subject to an extended term (e.g., 5 to 7 years) that spans 
administrations; 

* A single point within the department with the perspective and 
responsibility, as well as authority, to develop an overall and 
integrated business transformation plan and help to ensure the 
effective implementation of related functional management and business 
transformation efforts. 

Moving the Debate Forward: 

The Sooner We Get Started, the Better: 

* The miracle of compounding is currently working against us; 

* Less change would be needed, and there would be more time to make 
adjustments; 

* Our demographic changes will serve to make reform more difficult over 
time. 

Need Public Education, Discussion, and Debate: 

* The role of government in the 21st Century; 

* Which programs and policies should be changed and how; 

* How government should be financed. 

Four National Deficits: 

* Budget; 

* Balance of Payments; 

* Savings; 

* Leadership. 

Key Leadership Attributes Needed for These Challenging and Changing 
Times: 

* Courage; 

* Integrity; 

* Creativity; 

* Partnership; 

* Stewardship. 

[End of presentation] 

On the Web: 

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

Contact: 

Chuck Young, Managing Director, Public Affairs: 
YoungC1@gao.gov; (202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: 

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