Social Security Reform
Analysis of Reform Models Developed by the President's Commission to Strengthen Social Security Gao ID: GAO-03-310 January 15, 2003Social Security is an important social insurance program affecting virtually every American family. It represents a foundation of the nation's retirement income system and provides millions of Americans with disability insurance and survivors' benefits. Over the long term, as the baby boom generation retires, Social Security's financing shortfall presents a major solvency and sustainability challenge. Numerous reform proposals have been put forward in recent years, and in December 2001 a commission appointed by the President presented three possible reform models. Senator Breaux, Chairman of the Senate Special Committee on Aging, asked GAO to use its analytic framework to evaluate the Commission's models. This framework consists of three criteria: (1) the extent to which a proposal achieves sustainable solvency and how it would affect the economy and the federal budget; (2) the balance struck between the twin goals of income adequacy and individual equity; and (3) how readily such changes could be implemented, administered, and explained to the public.
Applying GAO's criteria to the Commission models highlights key options and trade-offs between efforts to achieve sustainable solvency and maintain adequate retirement income for current and future beneficiaries. For example, the Commission's Model 2 proposal reduces Social Security's defined benefit from currently scheduled levels through various formula changes, provides enhanced benefits for low-wage workers and spousal survivors, and adds a voluntary individual account option in exchange for a benefit reduction. Model 2 would provide for sustainable solvency and reduce the shares of the federal budget and the economy devoted to Social Security compared to currently scheduled benefits (tax increase benchmark) regardless of how many individuals selected accounts. However, with universal account participation, general revenue funding would be needed for about 3 decades. GAO's analysis of benefit adequacy and equity issues relating to Model 2 found that (1) across cohorts, median monthly benefits for those choosing accounts are always higher, despite a benefit offset, than for those who do not; this gap grows over time. In addition, benefits assuming universal account participation are higher than payment of a defined benefit generally corresponding to an amount payable from future Social Security trust fund revenues (benefit reduction benchmark). However, benefits received by those without accounts fall below the benchmark over time. (2) for the lowest quintile, median monthly benefits with universal participation in the accounts tend to be higher than GAO's benefit reduction benchmark, likely due to the enhanced benefit for full-time "minimum wage" workers. This pattern becomes more pronounced across the cohorts analyzed. (3) regardless of whether an account is chosen, many people could receive monthly benefits under Model 2 that are higher than the benefit reduction benchmark. However, a minority could fare worse. Some people could also receive a benefit greater than under the tax increase benchmark although a majority could fare worse. Benefits for those choosing individual accounts will be sensitive to the actual rates of return earned by those accounts. Adding individual accounts would require new administrative structures, adding complexity and cost. Public education will be key to help beneficiaries make sound decisions about account participation, investment diversification, and risk. Finally, any Social Security reform proposal must also be looked at in the context of both the program and the long-term budget outlook. A funding gap exists between promised and funded Social Security benefits which, although it will not occur for a number of years, is significant and will grow over time. In addition, GAO's long-term budget simulations show, difficult choices will be required to reconcile a large and growing gap between projected revenues and spending resulting primarily from known demographic trends and rising health care costs.
GAO-03-310, Social Security Reform: Analysis of Reform Models Developed by the President's Commission to Strengthen Social Security
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Report to the Chairman, Senate Special Committee on Aging, U.S. Senate:
United States General Accounting Office:
GAO:
January 2003:
Social Security Reform:
Analysis of Reform Models Developed by the President‘s Commission to
Strengthen Social Security:
Social Security Reform:
GAO-03-310:
GAO Highlights:
Highlights of GAO-03-310, a report to the Chairman of the Special
Committee
on Aging, U.S. Senate:
January 2003:
Social Security Reform:
Analysis of Reform Models Developed by the President‘s Commission
to
Strengthen Social Security:
Why GAO Did This Study:
Social Security is an important social insurance program affecting
virtually
every American family. It represents a foundation of the nation‘s
retirement
income system and provides millions of Americans with disability
insurance and
survivors‘ benefits. Over the long term, as the baby boom
generation retires,
Social Security‘s financing shortfall presents a major solvency
and
sustainability challenge. Numerous reform proposals have been
put forward in
recent years, and in December 2001 a commission appointed by the
President
presented three possible reform models.
Senator Breaux, Chairman of the Senate Special Committee on
Aging, asked GAO
to use its analytic framework to evaluate the Commission‘s
models. This
framework consists of three criteria: (1) the extent to which
a proposal
achieves sustainable solvency and how it would affect the
economy and the
federal budget; (2) the balance struck between the twin goals
of income
adequacy and individual equity; and (3) how readily such
changes could
be implemented, administered, and explained to the public.
What GAO Found:
Applying GAO‘s criteria to the Commission models highlights
key options and
trade-offs between efforts to achieve sustainable solvency
and maintain
adequate retirement income for current and future beneficiaries.
For example, the Commission‘s Model 2 proposal reduces Social
Security‘s
defined benefit from currently scheduled levels through
various formula
changes, provides enhanced benefits for low-wage workers and
spousal
survivors, and adds a voluntary individual account option in
exchange for
a benefit reduction. Model 2 would provide for sustainable
solvency and
reduce the shares of the federal budget and the economy devoted
to Social
Security compared to currently scheduled benefits (tax increase
benchmark)
regardless of how many individuals selected accounts. However,
with universal
account participation, general revenue funding would be needed
for about 3
decades.
GAO‘s analysis of benefit adequacy and equity issues relating to
Model 2
found that;
* Across cohorts, median monthly benefits for those choosing
accounts
are always higher, despite a benefit offset, than for those
who do not;
this gap grows over time. In addition, benefits assuming
universal
account participation are higher than payment of a defined
benefit
generally corresponding to an amount payable from future
Social Security
trust fund revenues (benefit reduction benchmark). However,
benefits
received by those without accounts fall below the benchmark
over time.
* For the lowest quintile, median monthly benefits with
universal
participation in the accounts tend to be higher than GAO‘s
benefit
reduction benchmark, likely due to the enhanced benefit for
full-time
’minimum wage“ workers. This pattern becomes more pronounced
across the
cohorts analyzed.
* Regardless of whether an account is chosen, many people
could receive
monthly benefits under Model 2 that are higher than the
benefit reduction
benchmark. However, a minority could fare worse. Some people
could also
receive a benefit greater than under the tax increase
benchmark although
a majority could fare worse. Benefits for those choosing
individual accounts
will be sensitive to the actual rates of return earned by
those accounts.
Adding individual accounts would require new administrative
structures,
adding complexity and cost. Public education will be key
to help
beneficiaries make sound decisions about account participation,
investment
diversification, and risk. Finally, any Social Security reform
proposal
must also be looked at in the context of both the program and
the
long-term budget outlook. A funding gap exists between
promised and
funded Social Security benefits which, although it will
not occur for
a number of years, is significant and will grow over time.
In addition,
GAO‘s long-term budget simulations show, difficult choices
will be required
to reconcile a large and growing gap between projected revenues
and
spending resulting primarily from known demographic trends and
rising
health care costs.
www.gao.gov/cgi-bin/getrpt?GAO-03-310.
To view the full report, including the scope and methodology,
click on
the link above.For more information, contact Barbara D.
Bovbjerg at (202)
512-7215 or bovbjergb@gao.gov
Contents:
Letter:
Achieving Sustainable Solvency:
Balancing Adequacy and Equity:
Implementing and Administering Reforms:
Concluding Observations:
Agency Comments and Our Evaluation:
Appendix I: Analysis of Reform Models:
Appendix II: Comments from the Social Security Administration:
Abbreviations:
OASDI: Old-Age and Survivors Insurance and Disability Insurance:
PIA: primary insurance amount:
SSA: Social Security Administration:
Letter:
January 15, 2003:
The Honorable John Breaux
Chairman
Special Committee on Aging
United States Senate:
Dear Mr. Breaux:
This report responds to your request that we apply our criteria for
assessing Social Security reform proposals to the reform models
developed by the President‘s Commission to Strengthen Social
Security.[Footnote 1] Each of the Commission‘s three reform models
represents a different approach to including a voluntary individual
account option to Social Security. Model 1 does not restore solvency
and accordingly is not analyzed in this report. In April 2002, we
provided your staff with a briefing on our preliminary results for
Model 2. This report contains our final results, focusing on Model 2,
with results for Model 3 presented in Appendix I.
We based our interpretation of the Commission‘s reform models in large
part on the memorandum provided by the Office of the Chief Actuary at
the Social Security Administration (SSA) dated January 31, 2002, that
estimated the reform models‘ effects on the Social Security program.
Our interpretation also draws on the Commission‘s final report. As
agreed with your office, our report is based on the analytic framework
we have used in past work to evaluate Social Security reform
proposals.[Footnote 2] That framework consists of three basic criteria:
* the extent to which the proposal achieves sustainable solvency and
how it would affect the U.S. economy and the federal budget,
* the balance struck between the twin goals of income adequacy (level
and certainty of benefits) and individual equity (rates of return on
individual contributions), and:
* how readily such changes could be implemented, administered, and
explained to the public.
In evaluating proposals against the three basic criteria, we used a set
of detailed questions that help describe potential effects of reform
models on important policy and operational aspects of public concern.
These questions are displayed in the report.
Our analysis of the Commission reform models included comparison with
three benchmarks:[Footnote 3]
* The ’benefit reduction benchmark“ assumes a gradual reduction in the
currently scheduled Social Security defined benefit beginning with
those newly eligible for retirement in 2005. Current tax rates are
maintained.
* The ’tax increase benchmark“ assumes an increase in the OASDI payroll
tax beginning in 2002 sufficient to achieve an actuarial balance over
the 75-year period. Currently scheduled benefits are maintained.
* The ’baseline extended“ benchmark is a fiscal policy path developed
in our earlier long-term model work that assumes payment in full of
currently scheduled Social Security benefits and no other changes in
current spending or tax policies.
To show the range of possible outcomes given the voluntary nature of
individual accounts[Footnote 4] in the Commission models, we simulated
each model assuming (1) no participation (0%) in the individual account
option and
(2) universal participation (100%) in the account option. Actual
experience would likely fall between these bounds but cannot be
predicted with any degree of certainty.
As you requested, we used our long-term economic model in assessing
Commission reform models against the first criterion, that of financing
sustainable solvency.[Footnote 5] 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. 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.[Footnote
6]
To examine how the Commission reform models balance adequacy and equity
concerns, we used the GEMINI model, a dynamic microsimulation model for
analyzing the lifetime implications of Social Security policies for a
large sample of people[Footnote 7] born in the same year. GEMINI can
simulate different reform features, including individual accounts with
an offset, for their effects on the level and distribution of
benefits.[Footnote 8] To avoid having the extremely high returns of a
small portion of participants skew the average, we present most of our
statistics as medians. To assess benefit adequacy, we display median
monthly benefit levels for the 1955, 1970, and 1985 birth cohorts to
enable comparisons over time; initial benefits by earnings quintile,
comparing the lowest and highest quintiles; and the effects on the
distribution of initial benefits within each cohort.
To examine how the Commission reform models provide for reasonable
implementation and communication of any changes, we used qualitative
analysis based on GAO‘s issued and ongoing body of work on Social
Security reform. This work addresses various issues raised by reform
approaches, including establishing individual accounts, raising the
retirement age, and the impact of reforms on minorities and women.
Models 2 and 3 restore solvency to the Old-Age and Survivors Insurance
and Disability Insurance (OASDI) Trust Funds through a combination of
changes in the initial benefit calculation, general revenue transfers,
and/or benefit offsets for those who choose to participate in the
individual account option. Model 3 requires an additional contribution
equal to 1 percent of taxable payroll under the voluntary individual
account option. All models share a common framework for administering
individual accounts. As agreed with your office, this report focuses on
Model 2, with results for Model 3 presented in Appendix I.
Achieving Sustainable Solvency:
The use of our criteria to evaluate approaches to Social Security
reform highlights the trade-offs that exist between efforts to achieve
solvency for the OASDI trust funds and efforts to maintain adequate
retirement income for current and future beneficiaries. The models
illustrate some of the options and trade-offs that will need to be
considered as the nation debates how to reform Social Security.
Our analysis of sustainable solvency under Model 2 showed that:
* As estimated by the actuaries, Model 2, with either universal (Model
2--100%) or zero (Model 2--0%) participation in voluntary individual
accounts, is solvent over the 75-year projection period, and the ratio
of annual income to benefit payments at the end of the simulation
period is increasing. However, in Model 2 -100% over three decades of
general revenue transfers are needed to achieve trust fund solvency.
Model 2--0% achieves solvency with no general revenue transfers.
* Model 2-100% would ultimately reduce the budgetary pressures of
Social Security on the unified budget relative to baseline extended.
However, this would not begin until the middle of this century.
Relative to both GAO‘s benefit reduction benchmark and tax increase
benchmark, unified surpluses would be lower and unified deficits higher
throughout the simulation period under Model 2-100%. Model 2-0% would
reduce budgetary pressures due to Social Security beginning around 2015
relative to baseline extended. This fiscal outlook under Model 2-0% is
very similar to the fiscal outlook under GAO‘s benefit reduction
benchmark.
* Under Model 2-100%, the government‘s cash requirement (as a share of
GDP) to fund the individual accounts and the reduced defined benefit
would be about 20 percent higher initially than under both the baseline
extended and tax increase benchmarks. This differential gradually
narrows until the 2030s, after which less cash would be required under
model 2-100%. By 2075, Model 2-100% would require about 40 percent less
cash than the baseline extended and tax increase benchmarks.
* Viewed from the perspective of the economy, total payments (Social
Security defined benefits plus benefit from individual accounts) as a
share of GDP would gradually fall under Model 2-100% relative to the
baseline extended and tax increase benchmarks. In 2075, the share of
the economy absorbed by payments to retirees from the Social Security
system as a whole under Model 2-100% would be roughly 20 percent lower
than the baseline extended or tax increase benchmark and roughly the
same as under the benefit reduction benchmark.
* With regard to national saving, Model 2 increases net national saving
on a first order basis primarily due to the proposed benefit
reductions. The individual account provision does not increase national
saving on a first order basis; the redirection of the payroll taxes to
finance the individual accounts reduces government saving by the same
amount that the individual accounts increase private saving.
Beyond these first order effects, the actual net effect of a proposal
on national saving is difficult to estimate due to uncertainties in
predicting changes in future spending and revenue policies of the
government as well as changes in the saving behavior of private
households and individuals. For example, the lower surpluses and higher
deficits that result from redirecting payroll taxes to individual
accounts could lead to changes in federal fiscal policy that would
increase national saving. However, households may respond by reducing
their other saving in response to the creation of individual
accounts.[Footnote 9]
Model 3 results are presented in Appendix I. Because the benefit
reductions in Model 3 are smaller than in Model 2, long-term unified
deficits are larger under Model 3. Model 3 requires an additional
contribution equal to 1 percent of taxable payroll for those choosing
individual accounts. Assuming universal account participation in both
models, Model 3 would result in a larger share of the economy being
absorbed by total benefit payments to retirees--about the same share as
would be the case under the baseline extended and tax increase
benchmarks.
Balancing Adequacy and Equity:
The Commission‘s proposals also illustrate the difficulty reform
proposals face generally in balancing adequacy (level and certainty of
benefits) and equity (rates of return on individual contributions)
considerations. Each of the models protects benefits for current and
near-term retirees and the shift to advance funding could improve
intergenerational equity. However, under each of the models, some
future retirees also could face potentially significant benefit
reductions in comparison to either the tax increase or the benefit
reduction benchmarks because primary insurance amount (PIA) formula
factors that are reduced by real wage growth, uncertainty in rates of
return earned on accounts, changes in benefit status over time, and
annuity pricing.
Our analysis of Model 2 shows that:
* Median monthly benefits (the Social Security defined benefit plus the
benefit from the individual account) for those choosing individual
accounts are always higher, despite a benefit offset, than for those
who do not choose the account, and this gap grows over time. In
addition, median monthly benefits under universal participation in the
accounts are also higher than the median benefits received under the
benefit reduction benchmark. However, median monthly benefits received
by those without accounts fall below those provided by the benefit
reduction benchmark over time.
* For the lowest quintile of beneficiaries, median monthly benefits
with universal participation in the accounts tend to be higher than the
benefits received under the benefit reduction benchmark, likely due to
the enhanced benefit for full-time ’minimum wage“ workers. This pattern
becomes more pronounced over time.
* Regardless of whether an account is chosen, under Model 2 many people
could receive monthly benefits that are higher than the benefit
reduction benchmark. However, a minority could fare worse. Some people
could also receive a benefit greater than under the tax increase
benchmark although a majority could fare worse. Monthly benefits for
those choosing individual accounts will be sensitive to the actual
rates of return earned by those accounts.
The cohort results for Model 3 are generally similar to Model 2.
However, median monthly benefits for those choosing individual accounts
are higher than the benefit level under the tax increase benchmark for
the 1970 and 1985 cohorts. This result is likely because of Model 3‘s
feature of a mandatory extra 1 percent contribution into the individual
accounts for those who choose to participate. Further results on Model
3 can be found in Appendix I.
Implementing and Administering Reforms:
Each of the models would establish a governing board to administer the
individual accounts, including the choice of available funds and
providing financial information to individuals. While the Commission
had the benefit of prior thinking on these issues, many implementation
issues remain, particularly in ensuring the transparency of the new
system and educating the public to avoid any gaps in expectations. For
example, an education program would be necessary to explain the changes
in the benefit structure, model features like the benefit offset and
how accounts would be split in the event of divorce. Education and
investor information is also important as the system expands and
increases the range of investment selection. Questions about the
harmonization of such features with state laws regarding divorce and
annuities also remain an issue.
Concluding Observations:
The use of our criteria to evaluate approaches to Social Security
reform highlights the trade-offs that exist between efforts to achieve
sustainable solvency and to maintain adequate retirement income for
current and future beneficiaries. These trade-offs can be described as
differences in the extent and nature of the risks for individuals and
the nation as a whole. For example, under certain individual account
approaches, including those developed by the Commission, some financial
risk is shifted to individuals and households to the extent that
individual account income is expected to provide a major source of
income in retirement.
At the same time, the defined benefit under the current Social Security
system is also uncertain. The primary risk is that a significant
funding gap exists between currently scheduled and funded benefits
which, although it will not occur for a number of years, is significant
and will grow over time. Other risks stem from uncertainty in, for
example, future levels of productivity growth, real wage growth, and
demographics. Congress has revised Social Security many times in the
past, and future Congresses could decide to revise benefits in ways
that leave those affected little time to adjust. As Congress
deliberates approaches to Social Security, the national debate also
needs to include discussion of the various types of risk implicit in
each approach and in the timing of reform.
Public education and information will be key to implementing any
changes in Social Security and especially so if individuals must make
choices that affect their future benefits. Since the Commission options
were published, there has been limited explanatory debate. As Congress
and the President consider actions to be taken, it will be important as
well to consider how such actions can be clearly communicated to and
understood by the American people.
Finally, any Social Security reform proposal must also be looked at in
the context of the nation‘s overall long-range fiscal imbalances. As
our long-term budget simulations show,[Footnote 10] difficult choices
will be required of policymakers to reconcile a large and growing gap
between projected revenues and spending resulting primarily from known
demographic trends and rising health care costs.
Agency Comments and Our Evaluation:
We provided SSA an opportunity to comment on the draft report. The
agency provided us with written comments, which appear in Appendix II.
SSA acknowledged the comprehensiveness of our analysis of the
Commission‘s proposals. The agency also concurs with our reform
criterion of achieving sustainable solvency and with our report‘s
overall observations and conclusions. SSA‘s comments and suggestions
can be grouped into a few general categories.
GAO Benchmarks and Their Relationship to Sustainable Solvency - The
agency commends our use of multiple benchmarks with which to compare
alternative proposals. However, they note that our definition of
sustainable solvency differs from that used by SSA in assessing trust
fund financial status. In addition, although they note that our
benchmarks are solvent over the 75-year projection period commonly used
by SSA‘s Office of the Chief Actuary in its preparation of the annual
trustees report, they do not achieve sustainable solvency[Footnote 11].
SSA expresses a concern that unless carefully annotated, the
comparisons made in our report could be misunderstood. Finally, SSA
also suggests the use of several alternative benchmarks, of which one
would provide additional revenue to pay for currently scheduled
benefits.
We agree with SSA that sustainable solvency is an important objective;
indeed it is one of our key criteria with which we suggest that
policymakers evaluate alternative reforms. SSA correctly points out
that GAO‘s benchmarks do not achieve sustainable solvency beyond the
75-year period. We believe our standard is a more encompassing one.
SSA‘s definition relies on analyzing trends in annual balances and
trust fund ratios near the end of the simulation period. Consequently
the definition needs to be supplemented, for example, in cases where
proposals use general revenue transfers or other unspecified sources of
revenue that automatically rise and fall to maintain annual balance or
a certain trust fund ratio. In addition, SSA‘s definition does not
directly consider the resources needed to fund individual accounts. Our
standard includes other measures in an effort to gain a more complete
perspective of a proposal‘s likely effects on the program, the federal
budget, and the economy.
We share SSA‘s emphasis on the importance of careful and complete
annotation. The report explicitly addresses the issue of sustainable
solvency and states that the comparison benchmarks used, while solvent
over the 75-year projection period, are not solvent beyond that period.
Given SSA‘s concerns, we have revised our report to clarify our
analyses, where appropriate, to minimize the potential for
misinterpretation or misunderstanding.
Regarding SSA‘s suggestion about the use of alternative benchmarks, we
already use a benchmark that provides additional revenue to pay
currently scheduled benefits. Our other benchmark maintains current tax
rates, phasing in benefit reductions over a 30-year period. In our
view, the set of benchmarks used provide a fair and objective measuring
stick with which to compare alternative proposals, particularly the
many proposals that introduce reform elements over a number of years.
Both of the benchmarks are explicitly fully funded and in their design
we worked closely with Social Security‘s Office of the Chief Actuary to
calibrate them to ensure their solvency over the 75-year period.
Additional Analysis - Many of SSA‘s comments suggest additional or more
detailed analyses of some of our findings. For example, SSA suggested
additional analyses of the characteristics of those beneficiaries who
fare better or worse under each of the Commission‘s models, further
distributional analyses on groups of beneficiaries who claim benefits
at ages other than 65 and that we conduct analyses on rates of
participation other than the polar cases of 0 percent and 100 percent
individual account participation. The agency also suggested that
substantial analysis on implementation and administration issues is
necessary, given the complexity of administering the commission‘s
models. Although we tried to address most of the critical issues given
our limited time and resources, we agree with SSA that many of their
suggested analyses could provide additional useful insights in
understanding the distributional implications of adopting the
Commission‘s proposals.
Distributional Analysis - SSA expressed a number of concerns about the
SSASIM-GEMINI simulation model that we use to conduct our
distributional analysis of benefits. One concern addresses future
cohorts‘ benefit levels reported in our draft. In this regard, we were
already reviewing the level of benefits received by the 1985 cohort and
the highest quintile of that cohort with outside experts, and our
subsequent analysis suggests findings that are more consistent with
SSA‘s observations: we have made these changes to the report.
Some of SSA‘s concerns also appear to result from confusion over the
structure, design and limitations of the SSASIM-GEMINI model. We have
included some additional documentation in the report that we believe
will help both the layperson as well as a more technical audience
understand the model more easily. We note that while ancillary benefits
can be calculated through the model and are included in our analysis,
we utilize the model to focus on the individual beneficiary and not the
household as the unit of analysis. The model also includes marriage and
divorce rates and their implication for earnings. These marriage and
divorce rates and other key parameters are expressed by probability
rules that drive the lifetime dynamics of the synthetic population.
These rules are not heuristically generated but are validated through a
comparison with data from the Social Security Administration and the
Current Population Survey, among others. We also note that in certain
of instances, for example in specifying the calculation of annuities as
well as the specification of rates of return used in the modeling, we
consulted with SSA‘s Office of the Chief Actuary in an effort to
reflect their projection methodology to extent that it was feasible.
Measures of Debt - SSA notes that unfunded obligations may be
considered a kind of implicit debt and should be considered in the
analysis. In analyzing reform plans, however, the key fiscal and
economic point is the ability of the government and society to afford
the commitments when they come due. Our analysis addresses this key
point by looking at the level and trends over 75 years in deficits,
cash needs, and GDP consumed by the program.
Technical Comments - SSA also provided technical and other clarifying
comments about the minimum benefit provision, our characterization of
stochastic simulation as well as other minor aspects of the report,
which we incorporated as appropriate.
We are sending copies of this report to the Honorable Larry E. Craig,
Ranking Minority Member, Senate Special Committee on Aging, Senator Max
S. Baucus, Chairman, Senate Committee on Finance, Senator Charles E.
Grassley, Ranking Minority Member, Senate Committee on Finance, the
Honorable William M. Thomas, Chairman, and the Honorable Charles B.
Rangel, Ranking Minority Member, House Committee on Ways and Means, the
Honorable E. Clay Shaw, Chairman, and the Honorable Bob Matsui, Ranking
Minority Member, Subcommittee on Social Security, House Committee on
Ways and Means, and the Honorable Jo Ann B. Barnhart, Commissioner,
Social Security Administration. We will also make copies available to
others on request. In addition, the report is available at no charge on
GAO‘s Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please
contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income
Security Issues, on (202) 512-7215, or Susan Irving, Director,
Strategic Issues, on (202) 512-9142.
David M. Walker
Comptroller General
of the United States:
Signed by David M. Walker:
[End of section]
Appendix I: Analysis of Reform Models:
[See PDF for image]
[End of figure]
[End of section]
Appendix II: Comments from the Social Security Administration:
SOCIAL SECURITY:
The Commissioner:
January 10, 2003:
Ms. Barbara D. Bovbjerg Director:
Education, Workforce, and Income Security Issues:
U.S. General Accounting Office Washington, D.C. 20548:
Dear Ms. Bovbjerg:
Thank you for the opportunity to review and comment on the preliminary
draft report ’Social Security Reform: Analysis of Reform Models
Developed by the President‘s Commission to Strengthen Social Security
(GAO-03-310). Our comments on your report are enclosed. Staff questions
may be directed to Alice Wade, Deputy Chief Actuary for Long-Range
Estimates. Ms. Wade can be reached by phone at 410-965-3002 or by email
at Alice.H.Wade@ssa.gov.
Sincerely,
Jo Anne B. Barnhart:
Signed by Jo Anne B. Barnhart:
Enclosure:
SOCIAL SECURITY ADMINISTRATION: BALTIMORE MD 21235-0001:
COMMENTS ON THE GENERAL ACCOUNTING OFFICE (GAO) REPORT ’SOCIAL SECURITY
REFORM: ANALYSIS OF REFORM MODELS DEVELOPED BY THE PRESIDENT‘S
COMMISSION TO STRENGTHEN SOCIAL SECURITY“ (GAO-03-310):
We appreciate the opportunity to review and comment on the draft
report. The General Accounting Office has undertaken a comprehensive
analysis of the reform models developed by the President‘s Commission
to Strengthen Social Security. Major comments are provided first,
followed by a listing of technical comments. We agree with the
Comptroller General that achieving sustainable solvency is an extremely
important goal. In fact, it is one of the four key goals in Social
Security‘s new strategic plan.
Social Security also agrees with the three concluding observations in
your transmittal letter to Senator Breaux. They are: (1) trade offs
exist between efforts to achieve sustainable solvency and to maintain
adequate retirement income for current and future beneficiaries; (2)
public education and information will be key to implementing any
changes in Social Security and this is especially so if individuals
must make choices that affect their future benefits; and (3) any reform
proposal must also be looked at in the context of the Nation‘s overall
long-range fiscal projections.
Benchmarks:
The analysis by GAO compares Models 2 and 3 with three separate
benchmarks. We commend the development of standard benchmarks for
comparison with proposed reforms. We are also developing such
benchmarks. Although the benchmarks used by GAO all assure solvency for
the next 75 years, they do not achieve ’sustainable solvency.“
Therefore, comparing the Commission‘s Models 2 and 3, which do achieve
’sustainable solvency,“ to benchmarks that do not may be misleading.
This sustainability difference should be better highlighted, whenever
there is a comparison of an ’unsustainable“ benchmark and a sustainable
Model. In particular, as the figures may be used on a stand-alone
basis, they should be annotated accordingly.
As an example of the difference between sustainable and unsustainable
solvency, Social Security‘s 2002 Performance and Accountability Report
includes a graph that shows that on a net present value basis the
cumulative shortfall of taxes to pay scheduled benefits over the 75-
year period is $3.3 trillion. This graph shows that the cumulative
shortfall is increasing as we approach the end of the 75-year period,
and would continue to grow thereafter. In contrast, Model 2, assuming
67 percent participation, was projected by our actuaries (based on 2001
assumptions) to have a small cumulative trust fund surplus of 0.4
trillion dollars for the 75-year period.This cumulative trust fund
surplus was growing at the end of the 75-year period.
SSA recognizes the importance of using consistent benchmarks, such as
the ones used by GAO, but notes that they are based on arbitrary
potential changes to Social Security. Perhaps the primary benchmark to
be considered would reflect what would actually happen in the absence
of
reform. Our understanding in this case is that benefits would have to
be
reduced to what is payable with scheduled tax rates once the trust
funds
are exhausted. An additional important benchmark would provide
additional
revenue to permit payment of current law scheduled benefits.
Measures of Debt:
In comparing benchmarks and plans, the analysis considers changes in
Federal debt held by the public. It should also consider reductions in
Social Security‘s unfunded obligations. Unfunded obligations may be
considered a kind of implicit debt.
Winners and Losers:
The analysis of those who would do better or worse by choosing an
individual account raises many questions. If it represents an analysis
of how many people in a given cohort would do better or worse, what
generates the variation in returns? The more important question is the
impact on a typical beneficiary. For example, the extent to which
typical members of a cohort will gain or lose, given the expected
investment returns. There should be more analysis as to who the people
are who do better or worse under the Commission model (i.e.,
differences between men and women, among survivors, divorced, single,
married, and between high earners and average earners).
Participation Rates:
The analysis would benefit from assuming the most plausible rate of
participation in individual accounts, instead of analyzing just the
extremes of zero and 100 percent participation. Although the rate of
participation cannot be predicted with certainty, an analysis of the
incentives contained in a plan and the experience of comparable plans
allow for making a reasonable assumption, which was done in the
Commission‘s analysis of its models. For example, illustrations
provided by our actuaries focused on a 67 percent participation report.
Additional insight into the participation rates may be gained from the
Government Employee Thrift Savings Plan. At a minimum, you should
better
highlight that the zero and 100 percent participation rate cases
represent
only the extremes.
Age at Retirement:
The analysis focuses on retirees who start to draw benefits at age 65
and yet claims to provide representative distributional analysis. Most
beneficiaries claim benefits at an earlier age. Considering the
distribution of actual ages at which people claim benefits is
particularly important in analyzing the full distributional
consequences of the Commission‘s models, especially Model 3 which
changes the incentives for early retirement.
Distributional Analysis - Accuracy:
We have concerns about the accuracy of the distributional analysis
shown in figures 9, 10, 11, A-8, A-9, and A-10. To be truly
representative, the sample of individuals born in the selected years
must include records for all who might potentially be eligible for any
benefit--workers, spouses, and widow(er)s. What controls are in place
to ensure that the sample represents the intended future projection of
individuals and their family formations? It is particularly striking
that the GAO model appears to show very little growth in earnings in
the lowest quintile and substantially above average growth in the
highest quintile. These and other results should be carefully reviewed
before drawing any firm conclusions from the analysis. In addition, we
have concerns that the modeling accurately reflects dual entitlement
and the low earner and widow enhancement provisions under the
Commission model. Such modeling requires accurate representation of the
full distribution of spousal earnings records in marriages and
divorces.
For example, individual workers from the 1985 birth cohort who retire
at age 65 would have higher retired-worker benefits under the tax
increase benchmark than under Model 2 without individual accounts. The
only beneficiaries from this cohort who would have a higher benefit
under Model 2 are (1) those who have been disabled-worker beneficiaries
for many years and had very consistent low earnings before becoming
disabled, and (2) widow(er)s who had fairly low career-average earnings
and a spouse with a similar career-average earnings level. However,
figure 11 suggests that from this cohort, 28 percent fare better under
Model 2 without individual accounts. In discussing this orally, GAO
staff indicated that this analysis includes all kinds of beneficiaries
(disabled, survivors) from these cohorts and comparisons were made as
of age 67 for all beneficiaries. We still do not believe that the
disabled workers with very low earnings and relatively long service and
the survivors where husbands and wives have similar low earnings
histories could account for such a substantial proportion of this
cohort at age 67.
Distributional Analysis - Documentation:
The report provides little information about the model that is used for
the distributional analysis. The report should provide a brief summary
about the Gemini model. Specifically, the report should indicate the
number of individuals in the data sample and how they and the model are
constructed. Finally, the report should also indicate the strengths and
limitations of the model.
We would suggest providing more documentation in the appendix to
describe the analysis and changing the footnotes on the figures to
better reflect the analysis presented. Not enough description of the
analysis is provided to verify the general results shown in the
figures. Clarification should be made to address the following:
*Analysis includes all types of beneficiaries (retired workers,
disabled workers, spouses, survivors) from the cohort that are
receiving benefits at age 67. However, footnotes on the figures state
that estimates are based on 1955, 1970, and 1985 birth cohorts retiring
at age 65, implying that the comparisons are made for retired workers
only.…:
*How investment earnings on individual account accumulations vary among
individuals within a cohort.
*A clear indication of how actual and offset annuities are determined
should be added. In particular, the interest rate assumed for the
actual annuity needs to be specified as does the nature of the annuity
(i.e. fixed versus variable).We note that the Commission used both but
primarily focused on the variable annuity.
Implementing and Administering Reforms and Assessing Administrative
Costs:
As noted, there are significant issues related to administering the
Commission models. The Commission used a 30 basis points (0.3 %) cost
for the administration of personal accounts based on work done by our
Actuary and Policy groups and the potentially extremely large size of
funds being invested. Given the complexity of administering the models
and the charge from the requestor of this report, it will be necessary
to do substantial analysis of implementing and administering personal
accounts and of refining the estimates of administrative costs over
time.
Stochastic Simulation:
It is not clear what role stochastic simulation plays in the overall
results presented, if any. The only reference to stochastic modeling in
the report was the following statement on page 55: Analysis was
performed using stochastic simulation, which included certain asset
returns, mortality, inflation, wage growth, etc. However, no
probabilities, means or variances for these variables or for the
overall results are given.In particular, no distributions on the
medians of the quintiles are presented in the report. If true
stochastic variation has been modeled, then a clear indication of how
it is being illustrated should be included. If, on the other hand, no
results specific to stochastic distributions are being presented, then
references to stochastic simulation should be omitted.
Benefit Levels:
Figures 8 and 15 show benefit levels for the 1985 cohort (in 2001
constant dollars) as high as $4,000. For this cohort, present-law
scheduled individual benefits are projected to reach only about $3,000
(in constant 2001 dollars). Thus, these high reported benefit amounts
seem to imply that benefits for an individual worker may include
payment of any auxiliary benefits from the individual‘s account (such
as spouse benefit in the case on a one-earner couple). However, Figure
6 shows median benefits that are more in line with benefits for the
individual only. Footnotes at the bottom of all figures seem to
indicate that benefits are for individuals at age 67, assuming all
retired-worker beneficiaries retire at age 65. Additional documentation
in the appendix states that the unit of analysis is individuals and
that this unit of analysis is chosen because household composition
varies across birth cohorts. The results lack sufficient explanation
and there appears to be inconsistency in the presentations.These issues
should be addressed.
Baseline extended benchmark:
On page 10, the baseline extended benchmark is defined as a fiscal
policy path that assumes payment in full of all scheduled Social
Security benefits throughout the 75-year period and no other changes in
current policies.If benefits are to be paid in full, current policies
are expected to require change, and this should be indicated. For
example, this baseline could be described as present law modified to
allow borrowing to permit full payment of scheduled benefits.
Minimum benefit:
Many references are made throughout the report to a ’minimum benefit“
provision. A minimum benefit usually refers to a specified minimum
dollar level. In the description of this provision on page 13 for Model
2, the minimum unreduced (for retirement before normal retirement age)
benefit is defined as 120 percent of poverty. However, very few
individuals would actually meet the conditions required to get this
’minimum benefit“ and many more individuals would get increased
benefits that are not equal to 120 percent of poverty. A reference more
accurate than minimum benefit would be enhanced benefit for low
earners.
Sustainable Solvency:
GAO‘s definition of sustainable solvency is different than what has
been referred to as sustainable solvency in the Trustees Report. To
avoid confusion, we suggest that this be at least noted. The Trustees
Report has for several years defined sustainable solvency to require an
expected trust fund ratio that is consistently positive and is stable
or rising at the end of the 75-year period. GAO has included additional
criteria in its definition, directly related to Social Security
solvency. One of these additional criteria is a reduction in the
currently scheduled cost of the OASDI program as a percent of GDP
(which is currently projected to rise to 6.7 percent at the end of the
75-year projection period). Another criterion is a reduction in the
amount of debt held by the public from that projected to result from a
modification of present law to allow borrowing to pay scheduled
benefits.
[End of section]
FOOTNOTES
[1] The Commission‘s report, Strengthening Social Security and Creating
Personal Wealth for All Americans was issued on December 21, 2001
(revised March 19, 2002).
[2] See, for example, U.S. General Accounting Office, Social Security:
Evaluating Reform Proposals, GAO/AIMD/HEHS-00-29 (Washington, D C.:
Nov. 4, 1999) and Social Security Reform: Information on the Archer-
Shaw Proposal, GAO/AIMD/HEHS-00-56 (Washington, D.C.: Jan. 18, 2000).
[3] From the perspective of analyzing benefit adequacy, the tax
increase and baseline extended benchmarks are identical because both
assume payment in full of scheduled Social Security benefits over the
75-year simulation period.
[4] In this report, the term ’individual account“ is used for the
voluntary accounts, consistent with published GAO work. The Commission
used the term ’personal account“ in its final report.
[5] For this analysis, consistent with SSA‘s scoring of the Commission
reform models, our long-term economic model incorporates the 2001
Trustees‘ best, or intermediate, assumptions.
[6] In addition to assessing a proposal‘s likely effect on Social
Security‘s actuarial balance, a standard of sustainable solvency also
involves looking at (1) the balance between program income and cost
beyond the 75th year and (2) the share of the budget and economy
consumed by Social Security spending.
[7] The GEMINI cohorts consist of simulated samples of 100,000
individuals, sometimes called synthetic samples. These samples were
validated against data from the Social Security Administration‘s Annual
Statistical Supplement, the SIPP, the CPS, MINT2, and the PSID.
[8] In simulating the individual accounts, we used the same nominal
rates of return used by SSA‘s Office of the Chief Actuary in January
2002, with 6.3 percent for Treasuries, 6.8 percent for corporate bonds,
and 10 percent for equities.
[9] No expert consensus exists on how Social Security reform proposals
would affect the saving behavior of private households and businesses.
[10] See, for example, U.S. General Accounting Office, Budget Issues:
Long-Term Fiscal Challenges, GAO-02-467T (Washington, D. C. : Feb, 27,
2002) and Social Security: Long-Term Financing Shortfall Drives Need
for Reform, GAO-02-845T (Washington, D. C.: Jun. 19, 2002).
[11] In response to another agency suggestion, we have also clarified
our definition of sustainable solvency in the report.
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