Social Security

This report analyzes the potential budgetary and economic effects of five Social Security reform proposals. Under the proposed Social Security Guarantee Act, current retirement income would not be reduced and could be higher; individual mutual fund accounts financed by refundable tax credits would be mandatory; and benefit payouts would remain the same as under current law or would be based on the annuitized account balance, which would be gradually returned to Old Age and Survivors Insurance and Disability (OASDI) trust funds and left to the heirs of workers who die before receiving benefits. Under the proposed 21st Century Retirement Security Act, benefits would be generally lower than under current law but a minimum benefit would be higher and formula changes would increase the benefit structure's progressivity; mandatory individual investment accounts would be modeled after the Federal Thrift Savings Plan; additional revenue would be available from changes in the cost-of-living adjustment and Social Security benefit taxation currently financing Medicare; and retiring workers could buy annuities or take a monthly pay-out with the balance after death left as a lump sum or rolled over. Under S. 1383, benefits, mandatory individual accounts, additional revenues, and account distributions on retirement and after death would have features similar to the previous proposal. Also, children would have ?KidSave? accounts from birth to age five and retiring workers would take a benefit reduction to reflect government contributions to the individual accounts. Under Congressman Kasich's plan, initial benefits would be lower because they would be indexed to prices rather than to wages; benefits from voluntary individual investment accounts would be reduced at retirement to offset government contributions; and the transition period would be financed by a loan from the general fund to the OASDI trust funds. The President's Social Security Transfer Proposal would keep benefits at current levels and general revenues would provide addition financing. Under his USA Proposal, workers would receive a flat general tax credit and a government match on individual voluntary investment accounts financed from general revenues by means of income tax credits.

GAO noted that: (1) GAO's assessments of the reform proposals are based on the analytic framework GAO provided to Congress last March; (2) that framework consists of three basic criteria: (a) the extent to which the proposal achieves sustainable solvency and how it would affect the economy and the federal budget; (b) the balance struck between the twin goals of income adequacy and individual equity; and (c) how readily such changes could be implemented, administered, and explained to the public; (3) GAO used its long-term economic model in evaluating the various proposals against the first criterion, that of financing sustainable solvency; (4) specifically, GAO used this model to simulate the potential fiscal and economic impacts of each proposal over a 75-year projection period; (5) GAO offers these simulation results not as precise forecasts but rather as a useful way to compare the potential outcomes of alternative policies within a common economic framework; (6) although any proposal's ability to achieve and sustain solvency is sensitive to economic and budgetary assumptions, using a common framework can facilitate comparisons of alternative reform proposals; (7) GAO simulation results also compare each proposal with alternative fiscal policy paths developed in its prior model work; (8) GAO used qualitative research to examine how well the proposals balance adequacy and equity concerns and provide for reasonable implementation and communication of any changes; (9) the use of these criteria to evaluate various reform proposals highlights the trade-offs that exist between efforts to achieve solvency for the Old Age and Survivors Insurance and Disability Insurance trust funds and to maintain adequate retirement income for current and future beneficiaries; (10) in addition, any proposal that would guarantee benefits and rely on enhanced rates of return on individual accounts to finance long-term solvency may create certain contingent liabilities that could serve to increase the deficit over the long term; and (11) further, in any reform proposal, attention must be paid to the impact on poverty among the elderly.