from our audit and evaluation work. 10 This report provides opportunities for (1) reassessing objectives of specific Federal programs, (2) improved targeting of benefits, and (3) improving the efficiency and management of Federal initiatives.

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

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

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

Budget Process Should Facilitate Discipline and Awareness of Long-term Implica

tions of Decisions

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

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

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

10 Supporting Congressional Oversight. Framework for Considering Budgetary Implications of Selected GAO Work (GAO-01-447, March 9, 2001).

11 Budget Issues: Effective Oversight and Budget Discipline Are Essential Even in a Time of Surplus (GAO/TAIMD-00–73, Feb. 1, 2000).

this and other measures might help ensure that Congress becomes part of the debate over reprioritization and government performance.

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

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

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

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

Conclusion

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

The events of September 11 highlighted the benefits of fiscal flexibility. Addressing the long-term drivers in the budget is essential to preserving any flexibility in the long term. In the nearer term a fundamental review of existing programs and

operations can create much-needed fiscal flexibility to address emerging needs by weeding out programs that have proven to be outdated, poorly targeted, or inefficient in their design and management.

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

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

Chairman CONRAD. I thank you very much for that testimony.

Let me just say that the importance of this hearing today to me is to share with our colleagues how really big the problem is that we have. And you are quite right to indicate this is a problem that has gotten worse in the last year, but it was very big before then. It is why last year I advocated a budget that saved all the Social Security and Medicare Trust Fund surpluses for the purposes intended. It also set aside $900 billion of general fund money to prepay liability. That is what other countries are doing that face this same kind of demographic wave at least some of them. And I also believe that that would foster economic growth because you would pay down debt with that money, and that would mean theoretically Pay lower interest rates, more money in national savings, more money available for investment, which should lead to greater economic growth.

That course was not chosen, and I don't ask you to pass judgment on that. You are in a position of not recommending policy. Your job is to tell us where we are headed and how serious and how deep the hole is. And you have done that, and you have done it in a clear way.

Let me ask you this: Is it your judgment that we ought to attempt to restore surpluses and build surpluses as the economy recovers? I take it from your testimony that that is part of your advice to us.

Mr. WALKER. That is consistent with what we have said in prior years. And in my testimony I said that—and I think it is also consistent with what the Congress has stated that it wants to do, that it wants to be able to return to surplus. What I am telling you is that it has become more difficult, and it is going to be progressively more difficult because of the factors that I have articulated before.

Chairman CONRAD. How important a role, in your judgment, does increasing the rate of national savings play in our ability to cope with these future challenges?

Mr. WALKER. National saving is critically important. As you noted before, national saving will fuel investment. Investment help to fuel productivity increases. Productivity increases help to increase our economy, and they also help to improve the standard of living for all Americans.

You were right before that most of the increase in net national saving over the past decade have been a result of the Congress' effort to create surpluses. That is true. Individual saving, personal

saving, as currently measured, continues to be abysmally low, and it is something that we are going to have to figure out how best to address, but we have not been successful to date.

Chairman CONRAD. Would somebody listening to you be incorrect to conclude, from what you have said here today, that we have got to restrain both our appetite for spending and our appetite for additional tax cuts? Would that be an appropriate conclusion?

Mr. WALKER. We need to do two things, without getting that specific, Mr. Chairman. We need to, I believe, consider the fiscal risk associated with a range of policy choices.

Last year, I would commend to you and other members of the Committee, one of the things that I presented in my testimony was a chart that talked about different types of actions that the Congress could take and the different degrees of fiscal risk that each of those actions would represent. I suggested that the Congress might want to look at what it is doing in the budget area, and otherwise, as part of portfolio management, which I know, Senator Corzine, you are very familiar with. As part of portfolio management, to consider not only the short-term flexibility, but the longterm implications as policy relates to its overall impact on future fiscal risk for the country.

I noted in there that, obviously, to the extent that you end up taking certain types of actions, whether it be on the spending_side or the tax side, they represent higher risk. I noted, also, that I felt that the highest risk was permanent increases in entitlement spending, where we already have trillions of unfunded obligations associated with those programs.

Chairman CONRAD. Let us talk a little bit about those unfunded obligations. Chairman Greenspan, in a meeting with me before he testified here, told me one of his concerns as we go forward are the so-called contingent liabilities of the Federal Government, contingent liabilities of major entitlement programs, Social Security and Medicare, that are not carried on the books of the Federal Government on the theory that Congress could end those programs on short notice. Therefore, they were considered contingent liabilities.

He said to me he views the vast majority of those commitments as not contingent at all. Would you agree with his assessment?

Mr. WALKER. Well, let me tell you, first, what the current treatment is, and then I will address that.

One of the first things that I did when I came to GAO, given my background and concerns about some of these issues, was to work with the Financial Accounting Standards Advisory Board, which is the body that promulgates general accepted accounting principles for the Federal Government, to increase the transparency and to enhance the visibility of our long-range, unfunded commitments associated with Social Security and Medicare.

Now, today, we have separate statements in the consolidated financial statements of the United States Government dedicated to these programs and, for the first time, we not only demonstrate information that is in the trustees' reports that come out every year, but we show the discounted present value of the unfunded promises associated with these programs, where there has been a

Chairman CONRAD. How big are those unfunded liabilities? This is my last question, and then we will go to Senator Snowe.

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Mr. WALKER. Those numbers are noted in a footnote in my statement. This is based on last year's report. In the fiscal 2000 financial report of the United States Government, on Page 7, footnote 5, $3.8 trillion, in current dollars, for Social Security; $2.7 trillion for Part A alone. The problem with Medicare is much greater than Social Security. And Medicare, while that by itself is much greater than Social Security, that does not count Medicaid. So, in reality, our problem in health care is multiple times our problem in Social Security.

Chairman CONRAD. Could you just repeat that. How much of the $3.8 trillion is attributable-this is unfunded liability-how much of it is attributable to Social Security and how much to Medicare?

Mr. WALKER. Well, right now, $3.8 trillion, discounted present value, the difference between projected revenues, projected costs, $3.8 trillion, as of last year for OASDI, which is the Old Age Survivors and Disability Insurance. So it is both the retirement income and the disability program.

For Part A, which is hospital insurance, HI, which, as you know, is funded by a payroll tax similar to Social Security, it is $2.7 trillion. But that does not count Part B, which is supplemental medical insurance which is, as you know, funded primarily by general revenues, and it does not count Medicaid. And so, when you look at it as a percentage of the economy, as a percentage of the budget, which I also provide in my statement, the health care problem is much greater than the Social Security problem.

Chairman CONRAD. I think that is too little understood. You have presented that before to this Committee. I wish the word would go out that these are the realities of what we confront as a Nation. There is a train wreck coming, folks. There is a train wreck coming, and it is of enormous proportion, and we better wake up before it is too late.

I have attributed or likened this to Enron in the sense that Enron got in trouble, I believe, because they were hiding debt. They were running all of these off-balance sheet operations, and fundamentally hiding debt from the investment community, hiding it from their creditors, perhaps even hiding it from themselves.

I worry very much that that is going on in this Government, that we are not facing up to the true debt that the country faces. We keep talking about surpluses. In my judgment, there are no surpluses. The surpluses are all gone. This money that is called surplus is committed. It is overcommitted, and yet we use the word "surplus." It misleads people.

People conclude from that we have got extra money here, so we can spend more, we can have more tax cuts, and I think the reality of what you are telling us here today is the numbers do not add up. I use your words. The numbers do not add up, and we have got to face up to this as a country, as a Congress, and as a Budget Committee. We have got an obligation, an affirmative obligation, to tell our colleagues where this is all headed. Because I can tell you the appetite for more spending, for more tax cuts is totally out of the box. The gate is wide open.

I will tell you I have a parade of people coming to me, and they want more tax cuts, more spending, and the whole thing does not add up now.