Social Security
Proposed Totalization Agreement with Mexico Presents Unique Challenges Gao ID: GAO-03-1035T September 11, 2003Totalization agreements foster international commerce and protect benefits for persons who have worked in foreign countries. They eliminate dual social security taxes that multinational employers and their employees pay when they operate and reside in countries with parallel social security systems and fill gaps in benefit protection for persons who have worked in different countries. Because Mexicans are believed to represent a large share of the millions of unauthorized workers present in the United States, a totalization agreement with Mexico has raised concerns that they would become newly eligible for social security benefits. To shed light on the possible impacts, this testimony (1) describes the Social Security Administration's (SSA) processes for developing the agreement with Mexico, (2) explains how the agreement might affect the payment of benefits to Mexican citizens, and (3) assesses the cost estimate for such an agreement.
SSA has no written policies or procedures it follows when entering into totalization agreements, and the actions it took to assess the integrity and compatibility of Mexico's social security system were limited and neither transparent nor well-documented. SSA followed the same procedures for the proposed Mexican agreement that it used in all prior agreements. SSA officials told GAO that they briefly toured Mexican facilities, observed how its automated systems functioned, and identified the type of data maintained on Mexican workers. However, SSA provided no information showing that it assessed the reliability of Mexican earnings data and the internal controls used to ensure the integrity of information that SSA will rely on to pay social security benefits. The proposed agreement will likely increase the number of unauthorized Mexican workers and family members eligible for social security benefits. Mexican workers who ordinarily could not receive social security retirement benefits because they lack the required 40 coverage credits for U.S. earnings could qualify for partial Social Security benefits with as few as 6 coverage credits. In addition, under the proposed agreement, more family members of covered Mexican workers would become newly entitled because the agreements usually waive rules that prevent payments to noncitizens' dependents and survivors living outside the United States. The cost of such an agreement is highly uncertain. In March 2003, the Office of the Chief Actuary estimated that the cost of the Mexican agreement would be $78 million in the first year and would grow to $650 million (in constant 2002 dollars) by 2050. The actuarial cost estimate assumes the initial number of newly eligible Mexican beneficiaries is equivalent to the 50,000 beneficiaries living in Mexico today and would grow sixfold over time. However, this proxy figure does not directly consider the estimated millions of current and former unauthorized workers and family members from Mexico and appears small in comparison with those estimates. The estimate also inherently assumes that the behavior of Mexican citizens would not change and does not recognize that an agreement could create an additional incentive for unauthorized workers to enter the United States to work and maintain documentation to claim their earnings under a false identity. Although the actuarial estimate indicates that the agreement would not generate a measurable long-term impact on the actuarial balance of the trust funds, a subsequent sensitivity analysis performed at GAO's request shows that a measurable impact would occur with an increase of more than 25 percent in the estimate of initial, new beneficiaries. For prior agreements, error rates associated with estimating the expected number of new beneficiaries have frequently exceeded 25 percent, even in cases where uncertainties about the number of unauthorized workers were less prevalent. Because of the significant number of unauthorized Mexican workers in the United States, the estimated cost of the proposed totalization agreement is even more uncertain than in prior agreements.
GAO-03-1035T, Social Security: Proposed Totalization Agreement with Mexico Presents Unique Challenges
This is the accessible text file for GAO report number GAO-03-1035T
entitled 'Social Security: Proposed Totalization Agreement with Mexico
Presents Unique Challenges' which was released on September 11, 2003.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Testimony:
Before the Subcommittee on Immigration, Border Security, and Claims,
Committee on the Judiciary, House of Representatives:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 11:00 a.m. EDT:
Thursday, September 11, 2003:
Social Security:
Proposed Totalization Agreement with Mexico Presents Unique Challenges:
Statement of Barbara D. Bovbjerg, Director Education, Workforce, and
Income Security Issues:
GAO-03-1035T:
GAO Highlights:
Highlights of GAO-03-1035T, a testimony before the Subcommittee on
Immigration, Border Security, and Claims, Committee on the Judiciary,
House of Representatives
Why GAO Did This Study:
Totalization agreements foster international commerce and protect
benefits for persons who have worked in foreign countries. They
eliminate dual social security taxes that multinational employers and
their employees pay when they operate and reside in countries with
parallel social security systems and fill gaps in benefit protection
for persons who have worked in different countries. Because Mexicans
are believed to represent a large share of the millions of
unauthorized workers present in the United States, a totalization
agreement with Mexico has raised concerns that they would become newly
eligible for social security benefits.
To shed light on the possible impacts, this testimony (1) describes
the Social Security Administration‘s (SSA) processes for developing
the agreement with Mexico, (2) explains how the agreement might affect
the payment of benefits to Mexican citizens, and (3) assesses the cost
estimate for such an agreement.
What GAO Found:
SSA has no written policies or procedures it follows when entering
into totalization agreements, and the actions it took to assess the
integrity and compatibility of Mexico‘s social security system were
limited and neither transparent nor well-documented. SSA followed the
same procedures for the proposed Mexican agreement that it used in all
prior agreements. SSA officials told GAO that they briefly toured
Mexican facilities, observed how its automated systems functioned, and
identified the type of data maintained on Mexican workers. However,
SSA provided no information showing that it assessed the reliability
of Mexican earnings data and the internal controls used to ensure the
integrity of information that SSA will rely on to pay social security
benefits.
The proposed agreement will likely increase the number of unauthorized
Mexican workers and family members eligible for social security
benefits. Mexican workers who ordinarily could not receive social
security retirement benefits because they lack the required 40
coverage credits for U.S. earnings could qualify for partial Social
Security benefits with as few as 6 coverage credits. In addition,
under the proposed agreement, more family members of covered Mexican
workers would become newly entitled because the agreements usually
waive rules that prevent payments to noncitizens‘ dependents and
survivors living outside the United States.
The cost of such an agreement is highly uncertain. In March 2003, the
Office of the Chief Actuary estimated that the cost of the Mexican
agreement would be $78 million in the first year and would grow to
$650 million (in constant 2002 dollars) by 2050. The actuarial cost
estimate assumes the initial number of newly eligible Mexican
beneficiaries is equivalent to the 50,000 beneficiaries living in
Mexico today and would grow sixfold over time. However, this proxy
figure does not directly consider the estimated millions of current
and former unauthorized workers and family members from Mexico and
appears small in comparison with those estimates. The estimate also
inherently assumes that the behavior of Mexican citizens would not
change and does not recognize that an agreement could create an
additional incentive for unauthorized workers to enter the United
States to work and maintain documentation to claim their earnings
under a false identity. Although the actuarial estimate indicates that
the agreement would not generate a measurable long-term impact on the
actuarial balance of the trust funds, a subsequent sensitivity
analysis performed at GAO‘s request shows that a measurable impact
would occur with an increase of more than 25 percent in the estimate
of initial, new beneficiaries. For prior agreements, error rates
associated with estimating the expected number of new beneficiaries
have frequently exceeded 25 percent, even in cases where uncertainties
about the number of unauthorized workers were less prevalent. Because
of the significant number of unauthorized Mexican workers in the
United States, the estimated cost of the proposed totalization
agreement is even more uncertain than in prior agreements.
www.gao.gov/cgi-bin/getrpt?GAO-03-1035T.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Barbara D. Bovbjerg,
(202) 512-7215, bovbjergb@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss social security totalization
agreements and specific issues related to a potential agreement between
the United States and Mexico.
Totalization agreements foster international commerce and protect
benefits for persons who have worked in foreign countries in two ways.
First, the agreements eliminate dual social security taxes that
multinational employers and their employees must pay when they operate
and reside in countries with parallel social security programs. Second,
the agreements help to fill gaps in benefit protection for persons who
have worked in different countries for portions of their careers. Since
1977, the United States has entered into 20 totalization agreements.
Over the last year, the United States has been negotiating a
totalization agreement with Mexico that has received considerable
attention among the media and others regarding its potential impacts.
Because Mexicans represent a large share of the millions of
unauthorized workers present in the United States, a totalization
agreement with Mexico has raised concerns that many such workers would
become newly eligible for social security benefits at a time when long-
term trust fund solvency is threatened. To shed light on the possible
impacts of such an agreement, the Chairman of the House Judiciary
Committee, and the Chairman of the House Ways and Means Social Security
Subcommittee asked us to (1) describe the Social Security
Administration's (SSA) processes for developing the proposed agreement
with Mexico, (2) explain how the agreement might affect the payment of
social security benefits to Mexican citizens, and (3) assess SSA's cost
estimates for such an agreement.
To address these objectives, we reviewed existing totalization
agreements and the laws governing them; interviewed and obtained key
documentation from SSA, Department of State, and Mexican Embassy
personnel; and reviewed a range of demographic data and estimates
addressing Mexican immigration. We also examined SSA's actuarial cost
estimates and supporting documentation for the proposed Mexican
agreement. We conducted our work between January and August 2003, in
accordance with generally accepted government auditing standards. My
statement today is based on this completed work. Our final report with
recommendations will be issued by September 30th.
In summary, SSA has no written policies or procedures outlining the
specific steps it follows when entering into totalization agreements,
and the actions it took to assess the integrity and compatibility of
Mexico's social security system were limited and neither transparent
nor well-documented. SSA officials briefly toured Mexican facilities,
observed how their automated systems functioned, and identified the
type of data maintained on Mexican workers. However, SSA provided no
information showing that it assessed the reliability of Mexican
earnings data and the internal controls in place to ensure the
integrity of information that SSA will rely on to pay social security
benefits.
The proposed agreement will increase the number of Mexican workers and
family members eligible for social security benefits. Workers who
ordinarily could not receive benefits because they lack the required 40
coverage credits for U.S. earnings could qualify for partial Social
Security benefits with as few as 6 coverage credits. Under the proposed
agreement, more family members of covered Mexican workers would also
become newly entitled because of the waiver of rules that prevent
payment to noncitizens' dependents and survivors living outside the
United States.
Finally, the cost of a totalization agreement with Mexico is highly
uncertain. SSA's actuarial estimate states that the cost of a Mexican
agreement would be $78 million in the first year and would grow to $650
million by 2050. The estimate assumes the initial number of newly
eligible Mexican beneficiaries is equivalent to the 50,000
beneficiaries living in Mexico today and would grow sixfold over time.
However, this proxy figure does not directly consider the estimated
millions of current and former unauthorized workers and family members
from Mexico and appears small in comparison with those estimates.
Although the actuarial estimate indicates that the agreement would not
generate a measurable impact on the trust funds, an increase of more
than 25 percent in the estimate of initial, new beneficiaries would
generate a measurable impact. For prior agreements, error rates
associated with estimating the expected number of new beneficiaries
have frequently exceeded 25 percent. Because of the significant number
of unauthorized Mexican workers in the United States, the estimated
cost of the proposed totalization agreement is even more uncertain than
for the prior agreements.
Background:
SSA administers the Old Age, Survivors, and Disability Insurance
programs under Title II of the Social Security Act. About 96 percent of
the nation's work force is in social security-covered employment and
pays tax on their annual earnings. When workers pay social security
taxes, they earn coverage credits, and 40 credits--equal to at least 10
years of work--entitle them to social security benefits when they reach
retirement age.[Footnote 1]
In 1977, the Congress authorized the President to enter into
totalization agreements with other countries. These bilateral
agreements are intended to accomplish three purposes. First, they
eliminate dual social security coverage and taxes that multinational
employers and employees encounter when they operate and their workers
temporarily reside and work for the corporation, usually no more than 5
years, in a foreign country with its own social security program. Under
the agreements, U.S. employers and their workers sent temporarily
abroad would benefit by paying only U.S. social security taxes, and
foreign businesses and their workers would benefit by paying only
social security taxes to their home country. Second, the agreements
provide benefit protection to workers who have divided their careers
between the United States and a foreign country, but lack enough
coverage under either social security system to qualify for benefits,
despite paying taxes into both systems. Totalization agreements allow
such workers to combine (totalize) work credits earned in both
countries to meet minimum benefit qualification requirements. Third,
most totalization agreements improve the portability of social security
benefits by removing rules that suspend benefits to noncitizens who
live outside the benefit-paying country.
By law, proposed agreements are sent to the Congress together with a
report on the effects on the agreement. Under the statute, the
agreement becomes effective on any date provided in the agreement after
one House of the Congress has been in session 60 days, unless either
House of the Congress adopts a resolution of disapproval.[Footnote 2]
Table 1 shows agreements in effect and the years they became effective.
Table 1: Existing Totalization Agreements between the United States and
Other Countries and Year of Effective Date of the Original Agreements:
Countries: Italy; Year: 1978.
Countries: Germany; Year: 1979.
Countries: Switzerland; Year: 1980.
Countries: Belgium; Year: 1984.
Countries: Norway; Year: 1984.
Countries: Canada; Year: 1984.
Countries: United Kingdom; Year: 1985.
Countries: Sweden; Year: 1987.
Countries: Spain; Year: 1988.
Countries: France; Year: 1988.
Countries: Portugal; Year: 1989.
Countries: Netherlands; Year: 1990.
Countries: Austria; Year: 1991.
Countries: Finland; Year: 1992.
Countries: Ireland; Year: 1993.
Countries: Luxembourg; Year: 1993.
Countries: Greece; Year: 1994.
Countries: South Korea; Year: 2001.
Countries: Chile; Year: 2001.
Countries: Australia; Year: 2002.
Source: SSA.
[End of table]
To qualify for totalized U.S. social security benefits, a worker must
have at least 6 but no more than 39 U.S. coverage credits. Benefit
amounts are based on the portion of time a foreign citizen worked in
the United States and, thus, are almost always lower than full social
security benefits. The average monthly, totalized social security
benefit at the end of 2001 was $162, compared with the average
nontotalized monthly social security benefit of $825. In 2001, SSA paid
about $173 million under totalization agreements to about 89,000
persons, including their dependents.
Under U.S. law, immigrants may not work in the United States unless
specifically authorized. Nevertheless, immigrants often do work without
authorization and pay social security taxes. Under the Social Security
Act, all earnings from covered employment in the United States count
towards earning social security benefits, regardless of the lawful
presence of the worker, his or her citizenship status, or country of
residence. Immigrants become entitled to benefits from unauthorized
work if they can prove that the earnings and related contributions
belong to them. However, they cannot collect such benefits unless they
are either legally present in the United States or living in a country
where SSA is authorized to pay them their benefits. Mexico is such a
country.
SSA's Process for Developing Agreements Is Not Thorough or Well-
Documented:
A lack of transparency in SSA's processes, and the limited nature of
its review of Mexico's program, cause us to question the extent to
which SSA will be positioned to respond to potential program risks
should a totalization agreement with Mexico take place. SSA officials
told us that the process used to develop the proposed totalization
agreement with Mexico was the same as for prior agreements with other
countries. The process--which is not specified by law or outlined in
written policies and procedures--is informal, and the steps SSA takes
when entering into agreements are neither transparent nor well-
documented.
Current law does not prescribe how SSA should select potential
agreement countries. According to SSA, interest in a Mexican agreement
dates back more than 20 years. SSA officials noted that increased
business interaction between the two countries due to the North
American Free Trade Agreement (NAFTA) was a factor in the renewed
negotiations. In addition, because there is a totalization agreement
with Canada, our other NAFTA partner, SSA believed that equity concerns
required consideration of an agreement with Mexico. In February 2002,
SSA sought clearance from the Department of State to begin such
negotiations.
The law also does not specify which elements of other countries' social
security systems must be evaluated during totalization agreement
negotiations. SSA officials met with Mexican officials to exchange
narrative information on their respective programs. Senior SSA
officials also visited Mexico for 2 days in August 2002. During their
visit, these officials told us that they toured social security
facilities, observed how Mexico's automated social security systems
functioned, and identified the type of data maintained on Mexican
workers. SSA took no technical staff on this visit to assess system
controls or data integrity processes. In effect, SSA only briefly
observed the operations of the Mexican social security program.
Moreover, SSA did not document its efforts or perform any additional
analyses then, or at a later time, to assess the integrity of Mexico's
social security data and the controls over that data. In particular,
SSA officials provided no evidence that they examined key elements of
Mexico's program, such as its controls over the posting of earnings,
and its processes for obtaining key birth and death information for
Mexican citizens. Nor did SSA evaluate how access to Mexican data and
records is controlled and monitored to prevent unauthorized use or
whether internal and external audit functions exist to evaluate
operations.
Because all totalization agreements represent a financial commitment
with implications for social security tax revenues and benefit outlays,
a reasonable level of due diligence and analysis is necessary to help
federal managers identify issues that could affect benefit payment
accuracy or expose the nation's system to undue risk. Our Internal
Control Management and Evaluation Tool provides a risk assessment
framework to help federal managers mitigate fraud, waste, abuse, and
mismanagement in public programs, such as social security. A key
component of this framework is the identification of internal and
external risks that could impede the achievement of objectives at both
the entity and program levels. Identified risks should then be analyzed
for their potential effect and an approach devised to mitigate them.
SSA did not conduct these types of analyses in previous agreements or
in the case of the proposed Mexican agreement, despite documented
concerns among Mexican government officials and others regarding the
integrity of Mexico's records, such as those for birth, death, and
marriage, as well as its controls over assigning unique identification
numbers to workers for benefit purposes. Such information will likely
play a role in SSA's ability to accurately determine Mexican workers'
initial and continuing eligibility for benefits under a totalization
agreement.
Totalization Agreements Will Increase Benefit Payments to Mexican
Citizens:
A totalization agreement with Mexico will increase the number of
Mexican citizens who will be paid U.S. social security benefits in two
ways. First, the agreement will make it easier for Mexican workers to
qualify for benefits. Second, it will remove some nonpayment
restrictions that affect benefit payments to non-U.S. citizens' family
members residing in another country, thus providing U.S. social
security benefits to more survivors and dependents of entitled Mexican
workers.
Under current law, a worker must earn sufficient coverage credits to
qualify for benefits under the U.S. Social Security program. For
example, a worker who was born in 1929 or later generally needs 40
coverage credits to be insured for retirement benefits. Credits are
based on a worker's annual earnings in social security-covered
employment. At most, 4 credits can be earned per year so that it takes
at least 10 years of covered earnings in the United States for a worker
to accumulate the necessary 40 credits and become insured for
retirement benefits.
Currently, social security credits are earned by anyone who has worked
in covered employment in the United States. This is true even if the
person was unauthorized to work when he/she earned coverage credits.
For example, noncitizens, including Mexicans, who are at least 62 years
old and lawfully present in the United States, will receive retirement
benefits today as long as they meet the coverage credit threshold. Even
Mexican citizens who are not lawfully present in this country can
receive social security benefits earned through unauthorized employment
if they later return to live in Mexico. Similarly, under current law,
noncitizen dependents and survivors can also receive social security
benefits under some circumstances.
Totalization agreements generally expand benefits to both authorized
and unauthorized workers and create new groups of beneficiaries. This
would be the case for a totalization agreement with Mexico if it
follows the same pattern as all prior totalization agreements. Mexican
citizens with fewer than 40 coverage credits will be permitted to
combine their annual earnings under their home country's social
security program with their annual earnings under the U.S. Social
Security program to meet the 40-credit requirement.[Footnote 3] In
addition, more family members of covered workers will qualify for
dependent and survivor benefits. Totalization agreements generally
override Social Security Act provisions that prohibit benefit payments
to noncitizens' dependents and survivors who reside outside the United
States for more than 6 months, unless they can prove that they lived in
the United States for 5 years in a close family relationship with the
covered worker. If a totalization agreement with Mexico is structured
like others already in force, the 5-year rule for dependents and
survivors will be waived.
However, it is important to understand that not all unauthorized
Mexican citizens who have worked in the United States will receive
totalization benefits. Some will have earned at least 40 coverage
credits and can receive social security benefits without a totalization
agreement. Still others may have worked under false identities and may
not be able to prove that they have the necessary coverage credits to
be entitled to benefits. Others still may not accumulate sufficient
credits under the Mexican social security system to totalize with their
U.S. social security coverage.
Poor Data Undermine the Reliability of SSA's Cost Estimate:
The cost of a totalization agreement with Mexico is highly uncertain.
In March 2003, the Office of the Chief Actuary (OCACT) estimated that
the cost of the Mexican agreement would be $78 million in the first
year and would grow $650 million (in constant 2002 dollars) in 2050.
SSA's actuarial cost estimate assumes the initial number of newly
eligible Mexican beneficiaries was equivalent to the 50,000
beneficiaries living in Mexico today and would grow sixfold over time.
However, this proxy figure is not directly related to the estimated
millions of current and former unauthorized workers and their family
members from Mexico and appears small in comparison to those estimates.
Furthermore, even if the baseline estimate is used, a sensitivity
analysis performed by OCACT shows that an increase of more than 25
percent--or 13,000 new beneficiaries--would produce a measurable impact
on the long-range actuarial balance of the trust funds. Our review of
cost estimates for prior totalization agreements shows that the actual
number of beneficiaries has frequently been underestimated and far
exceeded the original actuarial estimates.
Actuarial Estimates Are Based on Varied Data Sources:
OCACT develops estimates of expected costs of totalization agreements
by analyzing pertinent data from prior agreements, work visas issued,
foreign corporations operating in the United States, and U.S. Census
data. Because of extensive unauthorized immigration from Mexico, OCACT
concluded that U.S. Census data, that would typically be used to
estimate the number of new beneficiaries under an agreement, were not
reliable.
Instead, OCACT used the number of fully insured beneficiaries--U.S.
citizens and others living in Mexico--currently receiving U.S. social
security benefits as a proxy for the number of Mexican citizens who
would initially receive totalized benefits. The principal basis for
this assumption was a 1997 study of Mexican immigration patterns
conducted by a private nonprofit organization.[Footnote 4] This study
indicated that the percentage of Mexican immigrants who returned to
Mexico after more than 10 years and, therefore, could qualify for
benefits is roughly equal to the percentage that returned after staying
2 to 9 years and would not have the required credits. Thus, OCACT
assumed that the potential totalized initial new beneficiaries would be
equivalent to the 50,000 persons currently receiving benefits in
Mexico.
For the proposed Mexican agreement, both a short-term (covering the
first 8 years of the agreement) and a long-term (covering 75 years)
cost estimate were developed.[Footnote 5] The estimated cost to the
Social Security Trust Funds would be about $78 million in the first
year of the agreement. For the long-term cost estimate, OCACT projected
that the number of beneficiaries would ultimately increase sixfold to
300,000 over a 45-year period after the agreement took effect and equal
about $650 million (in constant 2002 dollars) in 2050. However, the
actuarial analysis notes that the methodology was indirect and involved
considerable uncertainty.
As a rough check on the reasonableness of using current beneficiaries
in Mexico for its cost estimate, OCACT analyzed totalized beneficiary
data for Canadian citizens because Canada, like Mexico, is a NAFTA
trading partner and shares a large contiguous border. After determining
the ratio of Canadians receiving totalized versus fully insured
benefits, OCACT applied this ratio to the number of Mexican-born U.S.
social security beneficiaries and found that about 37,000 beneficiaries
would be expected under the agreement initially, if the Canadian
experience proves predictive of the Mexican outcome. According to
OCACT, this comparison increased its confidence that the assumed 50,000
new beneficiaries under the agreement was within a reasonable range.
Estimated Cost of Mexican Agreement Is Highly Uncertain:
Limited data about unauthorized workers make any estimate of the
expected costs of a Mexican totalization agreement highly uncertain. A
significant variable of any totalization agreement cost estimate is the
identification of the number of potential beneficiaries. Estimates of
the number of unauthorized Mexican immigrants living in the United
States vary.[Footnote 6] The federal government's estimate was
published in January 2003 and comes from the former Immigration and
Naturalization Service (INS).[Footnote 7] INS estimated that, as of
January 2000, about 5 million, or 69 percent of all unauthorized
immigrants in the United States, were from Mexico. INS's estimate also
indicated that this figure was expected to increase by about 240,000
persons annually.
The INS estimate, however, does not include unauthorized Mexican
workers and family members who no longer live in the United States and
could also conceivably benefit from a totalization agreement. Economic
disparity between the United States and Mexico has fostered
longstanding immigration from Mexico to the United States dating back
many decades. Various studies also show that fewer than a third of
Mexican immigrants stay more than 10 years in the United States, the
minimum amount of time needed to qualify for social security retirement
benefits.[Footnote 8] For cost analysis purposes, little is known about
the population of former immigrants who have returned to Mexico in
terms of their age, work history, dependents, and social security
coverage. These factors increase the inherent uncertainty of any long-
range forecasts with regard to Mexico. It is under this backdrop that
OCACT set about developing an estimate of the costs of the potential
totalization agreement.
We have several concerns about OCACT's estimate of the number of
expected beneficiaries and cost of an agreement with Mexico. First, the
use of the 50,000 fully insured beneficiaries receiving benefits in
Mexico as a proxy for individuals who might initially benefit from an
agreement, does not directly consider the estimated millions of
unauthorized Mexican immigrants in the United States and Mexico who are
not fully insured and might receive totalized benefits. Furthermore,
despite the availability of key data about earnings, work histories,
years of employment, and dependents for the 50,000 fully insured
beneficiaries, OCACT did not analyze this population to determine
whether they represented a good proxy for individuals likely to qualify
for totalized benefits. The cost estimate also inherently assumes that
the behavior of Mexican citizens would not change after a totalization
agreement goes into effect. Under totalization, unauthorized workers
could have an additional incentive to enter the United States to work
and to maintain the appropriate documentation necessary to claim their
earnings under a false identity. Thus, a large number of Mexican
citizens have likely earned some social security coverage credits
through both authorized and unauthorized work to meet the 40-credit
threshold requirement and are not directly accounted for in SSA's
estimate.
Second, SSA's reasonableness check using Canadian data faces similar
questions. While Mexico and Canada are NAFTA partners and share a
common border with the United States, there is a dramatic difference in
the extent of unauthorized immigration from these two countries and, in
our view, the Canadian experience is not a good predictor of experience
under an agreement with Mexico. Recent INS data show that Mexican
citizens account for about 69 percent of unauthorized U.S. immigrants,
whereas Canadian citizens account for less than 1 percent, and all
other totalization agreement countries combined account for less than 3
percent. It is this population of unauthorized immigrants that makes
estimating the cost of a totalization agreement with Mexico
particularly problematic.
Finally, even though SSA's actuarial analysis increases the number of
beneficiaries sixfold over time, the expected 300,000 beneficiaries in
2050 represents only about 6 percent of the estimated number of
unauthorized Mexicans in the United States today, and thus appears
relatively low. Although it would be unreasonable to expect all
unauthorized Mexicans in the United States to qualify for totalized
benefits, the very large difference between estimated and potential
beneficiaries underscores the uncertainty of the estimate and suggests
that any difference between estimated and actual costs will be on the
high side.
Indeed, it would take only a relatively small increase in new
beneficiaries from the original actuarial assumption of 50,000 initial
new beneficiaries to have a measurable impact on the long-range
actuarial balance of the trust funds. OCACT has estimated that the
agreement would not generate a measurable impact on the long-range
actuarial balance. However, a subsequent sensitivity analysis performed
at our request shows that a measurable impact on the long-range
actuarial balance of the trust funds will occur if the baseline figure
is underestimated by more than 25 percent--just 13,000 additional
beneficiaries above the estimated 50,000 new beneficiaries.
Our analysis of past actuarial estimates of expected beneficiaries
under totalization agreements shows that exceeding the 25 percent
threshold has not been unusual, even in agreements where uncertainty
about the number of unauthorized workers is substantially
less.[Footnote 9] Our review of prior estimates shows that OCACT
frequently either overestimated or underestimated the number of
expected beneficiaries, usually by more than 25 percent (see table 2).
In fact, where underestimates occurred, the differences were huge,
involving several orders of magnitude. However, it is important to note
that the number of estimated beneficiaries for prior agreements is
substantially smaller than for the proposed Mexican agreement.
Therefore, the differences in actual beneficiaries from estimated
beneficiaries have a higher proportional impact. Furthermore, OCACT has
not underestimated the number of expected beneficiaries for the
agreements we analyzed since the 1991 agreement with Austria.
Nevertheless, the numerous uncertainties and data gaps associated with
the Mexican agreement elevate the risks associated with any cost
estimate.
Table 2: Precision of OCACT's Cost Estimates for 11 Prior Totalization
Agreements:
Percent actual beneficiaries is greater/(less) than estimated
beneficiaries: CountryUnited Kingdom: [Empty].
Country: United Kingdom; Effective year of agreement: 1985;
Beneficiaries: Estimated: 3,500; Beneficiaries: Actual: 2,084; Percent
actual beneficiaries is greater/(less) than estimated beneficiaries:
(40).
Country: Sweden; Effective year of agreement: 1987; Beneficiaries:
Estimated: 100; Beneficiaries: Actual: 211; Percent actual
beneficiaries is greater/(less) than estimated beneficiaries: 111.
Country: Spain; Effective year of agreement: 1988; Beneficiaries:
Estimated: 300; Beneficiaries: Actual: 377; Percent actual
beneficiaries is greater/(less) than estimated beneficiaries: 26.
Country: France; Effective year of agreement: 1988; Beneficiaries:
Estimated: 200; Beneficiaries: Actual: 968; Percent actual
beneficiaries is greater/(less) than estimated beneficiaries: 384.
Country: Portugal; Effective year of agreement: 1989; Beneficiaries:
Estimated: 100; Beneficiaries: Actual: 701; Percent actual
beneficiaries is greater/(less) than estimated beneficiaries: 601.
Country: Netherlands; Effective year of agreement: 1990; Beneficiaries:
Estimated: 100; Beneficiaries: Actual: 310; Percent actual
beneficiaries is greater/(less) than estimated beneficiaries: 210.
Country: Austria; Effective year of agreement: 1991; Beneficiaries:
Estimated: 100; Beneficiaries: Actual: 314; Percent actual
beneficiaries is greater/(less) than estimated beneficiaries: 214.
Country: Finland; Effective year of agreement: 1992; Beneficiaries:
Estimated: 100; Beneficiaries: Actual: 38; Percent actual beneficiaries
is greater/(less) than estimated beneficiaries: (62).
Country: Luxembourg; Effective year of agreement: 1993; Beneficiaries:
Estimated: 40; Beneficiaries: Actual: 12; Percent actual beneficiaries
is greater/(less) than estimated beneficiaries: (70).
Country: Ireland; Effective year of agreement: 1993; Beneficiaries:
Estimated: 1,100; Beneficiaries: Actual: 515; Percent actual
beneficiaries is greater/(less) than estimated beneficiaries: (53).
Country: Greece; Effective year of agreement: 1994; Beneficiaries:
Estimated: 1,000; Beneficiaries: Actual: 918; Percent actual
beneficiaries is greater/(less) than estimated beneficiaries: (8).
Source: GAO analysis of SSA data.
Note: Actual data were not available for years prior to 1987 so
comparisons for six earlier agreements could not be made. Also,
comparison could not be made for the three recent agreements.
[End of table]
Conclusions:
Totalization agreements between the United States and other countries
often foster enhanced diplomatic relations and provide mutually
beneficial business, tax, and other incentives to employers and
employees affected by these agreements. At the same time, they impose a
financial cost to both countries' social security programs. SSA's
processes for entering into these agreements have been informal and
have not included specific steps to assess and mitigate potential
risks. Regardless of the country under consideration, sound management
practices dictate that SSA managers have a risk management process in
place to ensure that the interests of the United States and the Social
Security Trust Funds are protected.
Most totalization agreements have been with countries that are
geographically distant to the United States, have developed economies,
and represent only a fraction of the estimated unauthorized immigrants
in the United States. Still, all agreements include some level of
uncertainty, and require due diligence on SSA's part to alleviate those
uncertainties. An agreement with Mexico, however, presents unique and
difficult challenges for SSA because so little is known about the size,
work history, earnings, and dependents of the unauthorized Mexican
population. Furthermore, a common border and economic disparity between
the United States and Mexico have fostered significant and longstanding
unauthorized immigration into the United States, making an agreement
with Mexico potentially far more costly than any other. Thus, for the
Mexican agreement, additional analyses to assess risks and costs may be
called for.
A revised approach for entering into totalization agreements with all
countries would enhance the quality of information provided to the
Congress, which is tasked with reviewing these vital long-term
commitments. A more thorough prospective analysis will also provide a
better basis for determining whether agreements under consideration
meet the mutual economic and business needs of all parties. Finally,
current solvency issues require the Congress to think carefully about
future trust fund commitments resulting from totalization agreements.
Having more timely and complete information on the benefits, costs, and
risks associated with each agreement can only serve to better inform
their decisions.
Mr. Chairman, this concludes my statement. I would be happy to respond
to any questions that you or other members of the Subcommittee may
have.
For information regarding this testimony, please contact Barbara D.
Bovbjerg, Director, Education, Workforce, and Income Security Issues,
on (202) 512-7215. Individuals who made key contributions to this
testimony are Daniel Bertoni, Gerard Grant, William Staab, and Paul
Wright.
FOOTNOTES
[1] Different requirements govern the number of coverage credits
necessary to receive disability and survivors benefits for workers who
become disabled or die with relatively short work careers.
[2] In 1983, the Supreme Court found that a provision in the
Immigration and Nationality Act that allowed either House of the
Congress to adopt a resolution of disapproval of a deportation decision
was unconstitutional (INS v. Chadha, 462 U.S. 919 (1983)). To date,
neither House of the Congress has ever disapproved a proposed
totalization agreement. The effect of the Chadha decision on the part
of the Social Security Act providing for totalization agreements has
not been ruled on by the courts.
[3] Under an agreement, U.S. citizens will also be able to receive
totalized Mexican benefits. The amount of time needed to qualify for
Mexican social security benefits is about 9.6 years under the former
pay-as-you-go plan that closed in July 1997 and 24 years under the
defined contribution plan that replaced it.
[4] Belinda I. Reyes, Dynamics of Immigration: Return Migration to
Western Mexico, Public Policy Institute of California, January 1997.
[5] For prior agreements with other countries, the OCACT developed only
short-term estimates covering periods ranging from 1 to 5 years because
it was determined that the number of expected beneficiaries were too
few to have a measurable cost impact on the long-range actuarial
balance of the trust funds.
[6] For example, the Pew Hispanic Center estimated that there are
between 3.4 and 5.7 million unauthorized Mexican citizens in the United
States, and the Urban Institute has estimated that there are more than
4 million.
[7] In March 2003, INS functions were transferred to the Department of
Homeland Security. Responsibility for deriving these estimates now lies
with the Under Secretary Management, Office of Immigration Statistics.
[8] Reyes (1997), p. 13 lists several studies that document the
temporary and circular nature of Mexican migration to the United
States.
[9] OCACT staff told us that it would be best to look at precision of
past estimates by comparing the estimated number of beneficiaries for
the last year of the estimate with actual data for that same year. We
were able to make this comparison for 11 countries.
