Social Security
Proposed Totalization Agreement with Mexico Presents Unique Challenges Gao ID: GAO-03-993 September 30, 2003Totalization agreements foster international commerce, protect benefits for persons who have worked in foreign countries, and eliminate dual social security taxes that employers and their employees pay when they operate and reside in countries with parallel social security systems. 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, GAO was asked to (1) describe the Social Security Administration's (SSA) processes for developing the agreement with Mexico, (2) explain how the agreement might affect the payment of benefits to Mexican citizens, and (3) assess 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) in 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 would 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.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-03-993, Social Security: Proposed Totalization Agreement with Mexico Presents Unique Challenges
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Report to Congressional Requesters:
United States General Accounting Office:
GAO:
September 2003:
Social Security:
Proposed Totalization Agreement with Mexico Presents Unique Challenges:
GAO-03-993:
GAO Highlights:
Highlights of GAO-03-993, a report to congressional requesters
Why GAO Did This Study:
Totalization agreements foster international commerce, protect
benefits for persons who have worked in foreign countries, and
eliminate dual social security taxes that employers and their
employees pay when they operate and reside in countries with parallel
social security systems. 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, you asked GAO to (1)
describe the Social Security Administration‘s (SSA) processes for
developing the agreement with Mexico, (2) explain how the agreement
might affect the payment of benefits to Mexican citizens, and (3)
assess 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) in 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 would 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.
What GAO Recommends:
GAO recommends that SSA (1) establish a formal process to identify and
assess risks of proposed agreements, (2) make future reports to the
Congress on these agreements more consistent and informative, and (3)
work with the Office of the Chief Actuary to improve the cost
estimates for agreements. SSA disagreed that additional processes were
needed to assess risks, but it agreed that cost estimates should be
more consistent and that it should regularly re-examine the accuracy
of its estimates.
www.gao.gov/cgi-bin/getrpt?GAO-03-993.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Barbara D. Bovbjerg,
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[End of section]
Contents:
Letter:
Results in Brief:
Background:
SSA's Process for Developing Agreements Is Not Thorough or Well-
Documented:
Totalization Agreements Will Increase Benefit Payments to Mexican
Citizens:
Poor Data Undermine the Reliability of SSA's Cost Estimate:
Conclusions:
Recommendations:
Agency Comments and Our Evaluation:
Appendix I: Comparison of Totalized and Minimum Social Security
Benefits:
Appendix II: Comments from the Social Security Administration:
Tables:
Table 1: Existing Totalization Agreements between the United States and
Other Countries and Year of Effective Date of the Original Agreements:
Table 2: Precision of OCACT's Cost Estimates for 11 Prior Totalization
Agreements:
Table 3: Monthly Social Security Benefits Payable in 2003 at Different
Earnings and Coverage Levels under a Totalization Agreement and
Compared to the Minimum Benefit Payable:
Abbreviations:
INS: Immigration and Naturalization Service:
NAFTA: North American Free Trade Agreement:
OCACT: Office of the Chief Actuary:
SSA: Social Security Administration:
United States General Accounting Office:
Washington, DC 20548:
September 30, 2003:
The Honorable F. James Sensenbrenner, Jr.
Chairman
Committee on the Judiciary
House of Representatives:
The Honorable E. Clay Shaw, Jr.
Chairman
Subcommittee on Social Security
Committee on Ways and Means
House of Representatives:
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, you 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.
Results in Brief:
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 said the process it used to develop the proposed
totalization agreement with Mexico was the same as for prior
totalization agreements. SSA officials told us that they 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 Mexico uses 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. Mexican 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. In
addition, 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.
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 of the agreement and would grow to $650 million (in constant 2002
dollars) in 2050. SSA's 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. Although the actuarial estimate indicates that the agreement
would not generate a measurable impact on the long-range actuarial
balance of 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, 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 for the prior agreements.
This report recommends that SSA establish formal processes for entering
into totalization agreements that include mechanisms to assess the
risks associated with such agreements and to document the range of
analyses SSA conducts. The report also recommends that reports of
proposed agreements be enhanced to make them more consistent and
informative and that SSA establish a regular process to reassess the
accuracy of its actuarial estimates. SSA and the OCACT commented on
this report. SSA said that the report did not sufficiently discuss the
benefits of totalization agreements and that its current process for
evaluating whether to enter into negotiations for totalization
agreements was sufficient to identify and assess risks. Our report
specifically notes that such agreements foster international commerce,
protect benefits for persons who have worked in foreign countries,
eliminate dual social security taxes, and foster enhanced diplomatic
relations. With regard to SSA's current processes, we could find no
specific references to SSA examining data reliability and program
integrity. We are hopeful that SSA will conduct such examinations of
the Mexican Social Security system before submitting a proposed
agreement to the Congress for its review. OCACT generally agreed with
our recommendations and noted that they are consistent with current
practices. OCACT, however, took exception to the implication of our
statement that its estimated cost was more likely to be understated
than overstated. Our intent was not to imply that the OCACT estimate
was biased. Accordingly, we have revised our report to state the very
large difference between estimated and potential beneficiaries
underscores the uncertainty of the estimate, and the potential costs of
an agreement could be higher than OCACT projects. The full text of
SSA's and OCACT's comments appears in appendix II. The State Department
was also provided a copy of the draft report for review and advised us
that it had no comments.
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 its 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, which has 60
legislative days to review them. The agreements become effective unless
either House of the Congress adopts a resolution of disapproval. 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. (Appendix I compares the amount of
U.S. totalized benefits for different coverage credits and earnings
levels with a minimum benefit that would be paid to a worker with 40
credits.):
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 or 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 2] 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 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 3] 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 4] 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 5] The federal government's estimate was published
in January 2003 and comes from the former Immigration and
Naturalization Service (INS)[Footnote 6] 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 7] 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
would 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 the
potential costs of an agreement could be higher than OCACT projects.
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 8] 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.
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, the
agreements 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.
Recommendations:
In light of the potential impact of totalization agreements on the
Social Security Trust Funds, we recommend that the Commissioner of
Social Security:
* establish a formal process to identify and assess the major risks
associated with entering into agreements with other countries. Such a
process should include mechanisms to assess the integrity of a
country's retirement data and records, as well as a means for
documenting the range of analyses conducted by SSA;
* enhance future reports to the Congress for proposed totalization
agreements with other countries by making them more consistent and
informative. Such reports should include consistent time periods for
estimating both the short-and long-term effects on the trust fund and,
as appropriate, include data on how alternative assumptions or
sensitivity analyses could affect costs and potential beneficiaries;
and:
* work with the Office of the Chief Actuary to establish a regular
process that examines original projected costs and beneficiaries
affected versus what actually transpired over time and use this
information, as appropriate, to adjust future estimating methods for
totalization agreements.
Agency Comments and Our Evaluation:
We obtained written comments on a draft of this report from the
Commissioner of SSA, as well as OCACT. The full texts of these comments
are reproduced in appendix II. We made limited changes to the report as
appropriate. The State Department was also provided a copy of the draft
report for review and advised us that it had no comments.
SSA said that the report did not sufficiently discuss the benefits of
totalization agreements to U.S. workers and employers and disagreed
with our recommendation that the agency establish a formal process to
identify and assess the major risks associated with entering into
agreements with other countries. The agency noted that its current
informal process for evaluating whether to enter into negotiations for
totalization agreements was sufficient to identify and assess risks.
Regarding the potential benefits of totalization agreements, our report
specifically notes that such agreements foster international commerce,
protect benefits for persons who have worked in foreign countries, and
eliminate dual social security taxes for multinational employers and
employees. Our concluding remarks also note that totalization
agreements often foster enhanced diplomatic relations between
participating countries. However, these agreements also have costs to
the U.S. social security system, and we continue to believe that SSA
should take steps to assess and mitigate risk during the negotiation
process rather than after an agreement is signed.
SSA also noted that it has specific criteria it follows when deciding
whether to enter into totalization agreements with other countries and
that the agency received detailed information on Mexico's social
security system during its 2-day visit to Mexico City. In reviewing
SSA's criteria, we could find no specific reference to data reliability
and program integrity as a factor in negotiations. Further, our review
of the activities surrounding SSA's visit to Mexico and the limited
documentation SSA received from Mexican social security officials shows
that data integrity issues and systems controls were not sufficiently
examined. In its comments, SSA notes that it is currently in the
process of scheduling additional visits to Mexican facilities outside
of Mexico City and will utilize SSA technical staff to further examine
Mexico's social security system. We are hopeful that--prior to
submitting a proposed agreement with Mexico--SSA will take additional
steps to assess key data it will rely on to determine Mexican worker's
initial and continuing eligibility for U.S. totalized benefits and that
it will sufficiently document its efforts. Enhancing its due diligence
efforts and formalizing this process to include all future totalization
agreements would further improve SSA's risk assessment efforts.
OCACT generally agreed with our recommendations that cost estimates for
future totalization agreements should be more consistent and
informative and that such agreements should be regularly analyzed to
examine the differences between original projections and actual
experience as an aid to making better estimates. OCACT noted that,
consistent with the U.S./Mexican totalization agreement, all future
potential agreements would include both long-range (75 year) and short-
range (10 year) cost projections. OCACT also noted that regularly
examining the differences between original projections and actual
experience for future totalization agreements made sense and was
consistent with current practice. Although we could find no evidence
during our review that such analyses had occurred on a systematic
basis, we are pleased to hear that such analyses are now being done and
are hopeful that OCACT will both complete them in the future and
document and make available the results.
Both SSA and OCACT disagreed with our analysis and conclusions
regarding the estimates of the potential cost of a totalization
agreement with Mexico, as well as our statement that any difference
between estimated and actual costs will be on the high side. OCACT
noted that, given the relative uncertainty of the data, this outcome is
possible, but that our statement inaccurately implied that there was
evidence that OCACT estimates are more likely to be understated than
overstated. OCACT went on to note that a number of factors suggest that
OCACT's estimate of 50,000 new beneficiaries, which will increase
sixfold to 300,000 by 2050, could indeed be too high.
Our intent was not to imply that OCACT's estimate was biased. Thus, we
have revised our report to state that, given the large disparity
between the estimated beneficiaries and the large number of
undocumented Mexican workers, the potential cost of an agreement could
be higher than OCACT projects. However, we continue to believe that a
totalization agreement with Mexico is both qualitatively and
quantitatively different than any other agreement signed to date,
especially regarding estimating the potential impact of millions of
unauthorized workers and their families. Thus, in assessing the risks
of a totalization agreement with Mexico, we believe it is important to
discuss the potentially significant impact that any underestimate of
beneficiaries could have on the Social Security Trust Funds. As table 2
shows, error rates associated with SSA's estimates of potential
beneficiaries under prior agreements have often been substantial, even
in cases where uncertainties about the number of unauthorized workers
were less prevalent. OCACT's comment that "taken as a whole" its
estimate of initial beneficiaries differs from actual initial
beneficiaries by only 3 percent is misleading because it nets
overestimates against underestimates. OCACT prepares estimates of
initial beneficiaries for each proposed agreement with an individual
country. Thus, any comparison of estimated to actual initial
beneficiaries should be on a country-by-country basis, rather than by
aggregating the error rates for all agreements.
Finally, in response to our concern that the OCACT's original baseline
estimate of 50,000 first-year totalization beneficiaries did not
directly consider millions of current and former unauthorized Mexican
workers, OCACT said that this estimate was based on the best available
data. OCACT's comments also included excerpted text from the original
estimate in order to illustrate the analyses and assumptions that
supported using the 50,000 individuals already receiving Old-Age,
Survivors, and Disability Insurance benefits in Mexico as a proxy for
potential totalization beneficiaries. We acknowledge the data
limitations facing OCACT as well as its good faith effort to reasonably
estimate the costs of a totalization agreement with Mexico. However,
based on our audit work--which involved a thorough review of the full
text of the actuarial estimate, numerous in-depth interviews with OCACT
officials to discuss issues of concern, and regular consultation with
our own Chief Actuary--it seems reasonable to examine all sources of
data and address the estimates of unauthorized Mexican immigrants
directly to provide a more complete picture of possible outcomes from
an agreement with Mexico. We continue to believe that, given the
magnitude of the proposed Mexican agreement relative to other
totalization agreements, it is not unreasonable to expect that OCACT
should develop and use a variety of approaches to estimate potential
costs and perhaps develop a range of cost estimates based on those data
sources and alternative assumptions. Such efforts would better serve
the information needs of the Congress in the event that an agreement is
ultimately submitted for its review.
We are sending copies of this report to the House and Senate committees
with oversight responsibilities for the Social Security Administration.
We will also make copies available to other interested parties upon
request. In addition, the report will be available at no charge on
GAO's Web site at http://www.gao.gov. If you or your offices have any
questions concerning this report, please call me or Daniel Bertoni,
Assistant Director, on:
(202) 512-7215. Other major contributors to this report are Patrick
Dibattista, Gerard Grant, Daniel Schwimer, William Staab, and Paul
Wright.
Barbara D. Bovbjerg
Director, Education, Workforce, and Income Security Issues:
Signed by Barbara D. Bovbjerg:
[End of section]
Appendix I: Comparison of Totalized and Minimum Social Security
Benefits:
Table 3: Monthly Social Security Benefits Payable in 2003 at Different
Earnings and Coverage Levels under a Totalization Agreement and
Compared to the Minimum Benefit Payable:
Monthly social security benefit with 40 credits earned: Social security
earnings level[A]Low earnings: [Empty].
Social security earnings level[A]: Low earnings; Monthly totalized
social security retirement benefit for the credits earned: 8 credits:
$39.00; Monthly totalized social security retirement benefit for the
credits earned: 20 credits: $99.00; Monthly totalized social security
retirement benefit for the credits earned: 36 credits: $178.00; Monthly
social security benefit with 40 credits earned: $296.00.
Social security earnings level[A]: Average earnings; Monthly totalized
social security retirement benefit for the credits earned: 8 credits:
$65.00; Monthly totalized social security retirement benefit for the
credits earned: 20 credits: $163.00; Monthly totalized social security
retirement benefit for the credits earned: 36 credits: $294.00; Monthly
social security benefit with 40 credits earned: $561.00.
Social security earnings level[A]: High earnings; Monthly totalized
social security retirement benefit for the credits earned: 8 credits:
$85.00; Monthly totalized social security retirement benefit for the
credits earned: 20 credits: $212.00; Monthly totalized social security
retirement benefit for the credits earned: 36 credits: $382.00; Monthly
social security benefit with 40 credits earned: $702.00.
Social security earnings level[A]: Maximum earnings; Monthly totalized
social security retirement benefit for the credits earned: 8 credits:
$94.00; Monthly totalized social security retirement benefit for the
credits earned: 20 credits: $237.00; Monthly totalized social security
retirement benefit for the credits earned: 36 credits: $427.00; Monthly
social security benefit with 40 credits earned: $899.00.
Source: Office of International Programs, SSA.
[A] A low earnings level equals 45 percent below the national average
wages for each year. An average earnings level equals the national
average wages for each year. A high earnings level equals 60 percent
above the national average wages for each year. A maximum earnings
level equals the maximum taxable amount of covered earnings for each
year.
[End of table]
[End of section]
Appendix II: Comments from the Social Security Administration:
[See PDF for image]
[End of section]
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] 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.
[3] Belinda I. Reyes, Dynamics of Immigration: Return Migration to
Western Mexico, Public Policy Institute of California, January 1997.
[4] 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.
[5] 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.
[6] 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.
[7] Reyes (1997), p. 13 lists several studies that document the
temporary and circular nature of Mexican migration to the United
States.
[8] 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.
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