Social Security Reform

Under an option available to state and local governments until 1983, three Texas counties withdrew from Social Security in 1981 and replaced it with a system of individual accounts that provided retirement and disability benefits to their employees. Social Security faces a long-term funding shortfall, and some have suggested that the experience of these three counties underscores the advantages of individual accounts as an element of Social Security financing reform. GAO found that although Social Security and the alternate plans of the three Texas counties offer retirement, disability, and survivor benefits, there are fundamental differences in the purpose and the structure of the two approaches. Social Security is a social insurance program designed to provide a basic level of retirement income to help retired workers, the disabled, and their dependents and survivors avoid poverty. Social Security benefits are tilted to provide relatively higher benefits to low-wage earners and the benefits are fully indexed to protect against inflation. Social Security, a pay-as-you go system, is projected to produce a negative cash flow in 2013 and become insolvent by 2032. In contrast, the alternate plans are advance-funded; that is, the contributions made by workers and their employers, which total 13.915 percent of workers' pay, and the earnings from those invested contributions are used to fund retirement benefits. At retirement, a worker can withdraw the money in the account as a lump sum or choose from several monthly payment options, including a lifetime annuity. GAO's simulations of how workers for the three Texas counties and their dependents might fare under the two systems revealed that outcomes generally depend on individual circumstances and conditions. For example, the alternate plans provide larger benefits for high-wage workers than Social Security would, but in some cases, such as when spousal benefits are involved, Social Security benefits could also eventually exceed those of the alternate plans. GAO notes that the alternate plans' performance is not necessarily indicative of how well individual accounts might perform within Social Security. For example, the alternate plans have followed a very conservative investment strategy that precludes investing in common stocks.

GAO noted that: (1) while social security and the Alternate Plans offer retirement, disability, and survivor benefits to qualified workers, there are fundamental differences in the purpose and structure of the two approaches; (2) Social Security is a social insurance program designed to provide a basic level of retirement income to help retired workers, disabled workers, and their dependents and survivors stay out of poverty; (3) Social Security benefits are tilted to provide relatively higher benefits to low-wage earners, and the benefits are fully indexed to protect against inflation; (4) social security is a pay-as-you-go system that is projected to produce a negative cash flow in 2013 and become insolvent by 2032; (5) the Alternate Plans are advance funded plans; the contributions made by workers and their employers, which total 13.915 percent of workers' pay, and the earnings made on those invested contributions are used to fund retirement benefits; (6) the Alternate Plans' benefits are directly linked to contributions, so that retirement income is based on accumulated contributions and the earnings thereon; (7) at retirement, the worker can take the money in the account as a lump sum or select from a number of monthly payout options, including the purchase of a lifetime annuity; (8) GAO found that certain features of social security, such as the progressive benefit formula and the allowance for spousal benefits, are important factors in providing larger benefits than the Alternate Plans for low-wage earners, single-earner couples, and individuals with dependents; (9) many median-wage earners, while initially receiving higher benefits under the Alternate Plans, would also have received larger benefits under social security after 4 and 12 years after retirement, because social security benefits are indexed for inflation; (10) the Alternate Plans provide larger benefits for higher-wage workers than social security would, but in some cases, such as when spousal benefits are involved, social security benefits could also exceed those of the Alternate Plans; (11) survivor benefits often would be greater under social security than under the Alternate Plans, especially when a worker died at a relatively young age and had dependant children; (12) with regard to disability benefits, all workers in GAO's simulations would receive higher initial benefits under the Alternate Plans; and (13) it is important to note that the Alternate Plans performance is not necessarily indicative of how well a proposed system of individual accounts with social security might perform.