Options for Social Security Reform
Gao ID: GAO-05-649R May 6, 2005This report provides a list of the various options available to reform the Social Security program. It includes a table that lists a wide range of provisions that various proposals have used in some form. In addition, there is a list of such proposals, all of which have been scored by the Social Security Administration's Office of the Chief Actuary (SSA/OCACT). Our list of provisions is intended to be generic and conceptual in nature. The list attempts to reflect, in general terms, all provisions that have appeared in SSA-scored proposals in the past few years. For each generic provision, a variety of approaches and parameters could be applied and have been proposed. For example, provisions to raise the retirement age take a variety of forms, including simply speeding up the currently scheduled increase from age 65 to 67, increasing the full retirement age to 68 or 70, indexing the retirement age to improvements in longevity, and even combinations of these. All of these variations have been consolidated into one general provision for increasing the retirement age. The table also briefly discusses each reform option in general terms according to GAO's framework for evaluating Social Security reform proposals, which is described below. Our observations draw on GAO's extensive body of work evaluating various aspects of Social Security reform.
GAO's framework for evaluating reform proposals considers not only solvency but other aspects of the program as well. Specifically, the framework uses three basic criteria: the extent to which a proposal achieves sustainable solvency and how it would affect the economy, including overall savings rates, and the federal budget; the relative balance struck between the goals of individual equity (rates of return on individual contributions) and income adequacy (level and certainty of benefits); and how readily a proposal could be implemented, administered, and explained to the public. The weight that different policy makers may place on different criteria will vary, depending on how they value different attributes. For example, if policy makers determine that offering individual choice and control is a primary concern, then a reform proposal emphasizing individual equity considerations might be preferred. Alternatively, if policy makers determine that benefit certainty and security are of primary concern, then reform proposals that stress adequacy and sustainable solvency might be preferred. As the Congress fashions a comprehensive proposal, however, it will ultimately have to consider the relative importance it places on each of these criteria.
GAO-05-649R, Options for Social Security Reform
This is the accessible text file for GAO report number GAO-05-649R
entitled 'Options for Social Security Reform' which was released on May
6, 2005.
This text file was formatted by the U.S. Government Accountability
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.
United States Government Accountability Office:
Washington, DC 20548:
May 6, 2005:
The Honorable Bill Thomas:
Chairman:
Committee on Ways and Means:
House of Representatives:
Subject: Options for Social Security Reform:
Dear Mr. Chairman:
As you requested during my testimony before your committee on March 9,
2005,[Footnote 1] this report provides a list of the various options
available to reform the Social Security program. Following this
introduction is a table that lists a wide range of provisions that
various proposals have used in some form. Following the table is a list
of such proposals, all of which have been scored by the Social Security
Administration's Office of the Chief Actuary (SSA/OCACT).[Footnote 2]
Our list of provisions is intended to be generic and conceptual in
nature. The list attempts to reflect, in general terms, all provisions
that have appeared in SSA-scored proposals in the past few years. For
each generic provision, a variety of approaches and parameters could be
applied and have been proposed. For example, provisions to raise the
retirement age take a variety of forms, including simply speeding up
the currently scheduled increase from age 65 to 67, increasing the full
retirement age to 68 or 70, indexing the retirement age to improvements
in longevity, and even combinations of these. All of these variations
have been consolidated into one general provision for increasing the
retirement age.
The table also briefly discusses each reform option in general terms
according to GAO's framework for evaluating Social Security reform
proposals, which is described below. Our observations draw on GAO's
extensive body of work evaluating various aspects of Social Security
reform.[Footnote 3]
The Social Security program is so deeply woven into the fabric of our
nation that any proposed reform should be considered as a package and
with respect to all of the major elements of the Social Security
program (e.g., retirement, disability, and survivors). The provisions
of any particular reform proposal can interact with one another. In
addition, every proposal will have pluses and minuses, and no plan will
satisfy everyone on all dimensions. As a result, Social Security reform
proposals should be evaluated as a package of reform options designed
to meet certain stated objectives.
Furthermore, any analyses of reform proposals should reflect the fact
that the program faces a long-term actuarial deficit and that benefit
reductions and/or revenue increases will be necessary to restore
solvency. Therefore, it is important to establish the appropriate
comparisons or benchmarks against which reforms should be measured.
This requires looking at proposed reforms from at least two benchmarks-
-one that raises revenue to fund currently scheduled benefits (promised
benefits) and one that adjusts benefits to a level supported by current
tax financing (funded benefits).
GAO's framework for evaluating reform proposals considers not only
solvency but other aspects of the program as well. Specifically, the
framework uses three basic criteria:
* the extent to which a proposal achieves sustainable solvency and how
it would affect the economy, including overall savings rates, and the
federal budget;
* the relative balance struck between the goals of individual equity
(rates of return on individual contributions) and income adequacy
(level and certainty of benefits); and:
* how readily a proposal could be implemented, administered, and
explained to the public.
The weight that different policy makers may place on different criteria
will vary, depending on how they value different attributes. For
example, if policy makers determine that offering individual choice and
control is a primary concern, then a reform proposal emphasizing
individual equity considerations might be preferred. Alternatively, if
policy makers determine that benefit certainty and security are of
primary concern, then reform proposals that stress adequacy and
sustainable solvency might be preferred. As the Congress fashions a
comprehensive proposal, however, it will ultimately have to consider
the relative importance it places on each of these criteria.
Financing Sustainable Solvency:
Our sustainable solvency standard encompasses several ways of looking
at the Social Security program's financing needs. While 75-year
actuarial balance is generally used in evaluating the long-term
financial outlook of the Social Security program and reform proposals,
it is not sufficient in gauging the program's solvency after the 75th
year. For example, under the trustees' intermediate assumptions, each
year the 75-year actuarial period changes, and a year with a surplus is
replaced by a new 75th year that has an increasingly significant
deficit. As a result, changes made to restore trust fund solvency only
for the 75-year period can result in future actuarial imbalances almost
immediately. Reform plans that lead to sustainable solvency would be
those that consider the broader issues of fiscal sustainability and
affordability over the long term. Specifically, a standard of
sustainable solvency also involves looking at (1) the balance between
program income and costs beyond the 75th year and (2) the share of the
budget and economy consumed by Social Security spending.
Balancing Adequacy and Equity:
The current Social Security system's benefit structure attempts to
strike a balance between the goals of retirement income adequacy and
individual equity. From the beginning, benefits were set in a way that
focused especially on replacing some portion of workers' pre-retirement
earnings. Over time other changes were made that were intended to
enhance the program's role in helping ensure adequate incomes. Income
adequacy, therefore, is addressed in part through the program's
progressive benefit structure, providing proportionately larger
benefits to lower earners and certain household types, such as those
with dependents. Income adequacy may pose special concerns for Social
Security's disability and survivor beneficiaries. Such beneficiaries
generally have lower benefits than old-age beneficiaries; shorter work
histories may contribute to those lower benefit levels. In addition,
since they generally start collecting benefits earlier in their lives
than old-age beneficiaries, they may collect benefits over longer
periods of time, so benefit reductions may affect them more, especially
if the reductions have a compounding effect.
In contrast to income adequacy, individual equity refers to the
relationship between contributions made and benefits received. This can
be thought of as the rate of return on individual contributions.
Individual equity concerns can also include equity effects between
generations and how much choice and control individuals have over their
program contributions.
Balancing the seemingly conflicting objectives of adequacy and equity
through the political process has resulted in the design of the current
Social Security program and should still be taken into account in any
proposed reforms. Moreover, proposals can have a range of effects that
vary by income level and other characteristics, and this variation may
reflect interactions among various provisions. For example, some
proposals reduce promised benefits overall while simultaneously
enhancing benefits for low earners or widows, who face greater risks of
poverty.[Footnote 4]
Implementing and Administering Proposed Reforms:
Any reforms will require time and resources to implement, and those
demands will depend on the complexity of the changes. Moreover, greater
program complexity makes implementation and administration more costly
and harder to explain to the public. Continued public acceptance of and
confidence in the Social Security program requires that any reforms and
their implications for benefits be clearly communicated and well
understood. This means that the American people must understand why
change is necessary, what the reforms are, how they are to be
implemented and administered, and how they will affect workers' own
retirement, disability, or survivors' income. All reform proposals will
require some additional outreach and assistance to the public so that
future beneficiaries can adjust their retirement and other financial
planning accordingly. The more transparent the implementation and
administration of reform, and the more carefully such reform is phased
in, the more likely it will be understood and accepted by the American
people.
As you know, the Social Security system faces serious solvency and
sustainability challenges in the longer term. While the Social Security
program does not face an immediate crisis, it does have a $4 trillion
gap between promised and funded benefits in current dollar terms over
the next 75 years. This gap is growing as time passes, and given this
and other major fiscal challenges, including expected growth in federal
health spending, it would be prudent to act sooner rather than later to
reform the Social Security program.
Furthermore, Social Security's finances have important implications for
the overall federal budget. The current Social Security surpluses will
begin to decline in 2009, thereby putting additional pressure on the
balance of the federal budget. In addition, Social Security will start
running a cash flow deficit in 2017, which will require the federal
government to either increase federal taxes, cut other federal
spending, or borrow additional funds from the public in order to redeem
bonds in the Social Security trust funds.
Social Security is not the only challenge we face in addressing the
economic security needs of our elderly and disabled populations. Any
changes to Social Security should be considered in the context of the
problems currently facing our nation's private pension system. These
include the chronically low levels of pension coverage of the private
sector workforce; the continued decline in the number of defined
benefit plans, coupled with the termination of large underfunded plans
by bankrupt firms; and the shift by employers to defined contribution
plans, where workers face the potential for greater return but also
assume greater financial risk. Health care and long-term care needs
will also place growing demands on the government, employers,
beneficiaries, and their families. At the same time, our nation's
personal savings rate is low by international standards.
Failure to take steps to address our large and structural long-range
fiscal imbalance, which is driven in large part by projected increases
in Medicare, Medicaid, and Social Security spending, will ultimately
have significant adverse consequences for our future economy and the
quality of life of our children, grandchildren, and future generations
of Americans. As a result, the federal government needs to engage in a
fundamental review, reassessment, and reprioritization that will
ultimately have to span all major spending programs and tax policies.
We look forward to continuing to work with your committee and the
Congress to address Social Security and other important issues.
Signed by:
David M. Walker:
Comptroller General of the United States:
Table 1: Options for Social Security Reform and Examples of Potential
Implications:
Options: Changing benefits;
Balancing adequacy and equity:
* Effects can vary by earnings and other characteristics;
* Some proposals reduce benefits overall while enhancing benefits for
low earners and/or widows;
Additional considerations:
* Choosing benefit reductions instead of increases to payroll tax
revenues implies a societal choice that workers will have less income
during retirement and more during working years.
Options: Changing the formula for initial benefits: Adjusting formula
factors[Footnote 5]; e.g., reducing 15% factor to 10%, or,
alternatively, reducing all factors proportionally by x percent;
Sustainable solvency:
* Can range from small to very large reductions in Social Security's
actuarial deficit;
* Sustainability might require further reductions as longevity
continues to improve;
Balancing adequacy and equity:
* Reductions can be either proportional or nonproportional;
* Nonproportional reductions could be targeted toward benefit adequacy
for lower earners but might raise equity concerns:
-Progressive benefits not the same as adequate benefits[Footnote 6];
-To avoid unintended benefit effects, disability and survivor benefits
might require other changes;
Implementation and administration:
* Relies on existing administrative framework;
* Disability applications might increase because annual formula
reductions create incentive to qualify for benefits in earliest
possible year;
Additional considerations:
* Provides flexibility;
* Can be used, in effect, to implement other types of reductions for
some or all covered workers, e.g., indexing benefits to prices instead
of wages.
Options: Changing the formula for initial benefits: Indexing formula to
prices instead of wages;
Sustainable solvency:
* Could largely or completely eliminate actuarial deficit by itself,
depending on specifics;
* Ongoing indexing could result in benefit reductions greater than
needed to achieve sustainable solvency;
Balancing adequacy and equity:
* If applied across the board, would be a type of proportional
reduction;
* Results in gradually and perpetually declining replacement rates;
that is, benefits would replace smaller and smaller percentage of pre-
retirement earnings;
* In effect, fixes benefit levels relative to the standard of living of
a particular year (e.g., 2005)[Footnote 7];
* Effect may be smaller on disabled and young survivor beneficiaries,
given shorter work histories;
* Could be applied differently according to earnings level to minimize
adequacy effects (e.g. progressive indexing);
Implementation and administration:
* Could be implemented with changes to existing benefit formula, using
existing administrative framework[Footnote 8];
* Disability applications might increase because annual formula
reductions create incentive to qualify for benefits in earliest
possible year.
Options: Changing the formula for initial benefits: Indexing formula to
longevity;
Sustainable solvency:
* Small to moderate reduction in actuarial deficit, depending on
specifics;
Balancing adequacy and equity:
* A type of proportional reduction;
* Benefits would replace smaller and smaller percentage of pre-
retirement earnings;
* To avoid unintended benefit effects, disability and survivor benefits
might require other changes;
Implementation and administration:
* Could be implemented with proportional reduction to formula factors,
using existing administrative framework[Footnote 9];
* Disability applications might increase because annual formula
reductions create incentive to qualify for benefits in earliest
possible year.
Options: Changing the formula for initial benefits: Increasing benefit
computation period, e.g., from 35 to 38 or 40 years;
Sustainable solvency:
* Relatively small reduction in actuarial deficit;
Balancing adequacy and equity:
* Would parallel existing increase in Full Retirement Age;
* Might create additional incentive to work longer;
* Increase to 38 years would reduce benefits by roughly 3%-6% depending
on earnings pattern;
* Largest reductions for those groups more likely to have intermittent
work histories, e.g., women with children;
Implementation and administration:
* Relies on existing administrative framework.
Options: Changing the formula for initial benefits: Increasing benefits
for widow(er)s, e.g., pay 75% of couples' benefit;
Sustainable solvency:
* Very small increase in actuarial deficit;
Balancing adequacy and equity:
* Enhances benefit adequacy for widows;
Implementation and administration:
* Relies on existing administrative framework.
Options: Changing the formula for initial benefits: Enhancing benefits
for lower income workers, e.g., minimum benefit amounts as percentage
of poverty for qualifying workers;
Sustainable solvency:
* Small increase in actuarial deficit, depending on proposal;
Balancing adequacy and equity:
* Enhances benefit adequacy for low-wage full-career workers;
* Qualifications for years of work could be scaled for workers who
become disabled or die before retirement;
* Proposals so far generally do not provide enhanced benefit for those
groups more likely to have intermittent work histories, e.g., women
with children;
Implementation and administration:
* Proposed provisions have involved fairly complicated formulas.
Options: Changing the formula for initial benefits: Increasing
actuarial adjustment factors for early or delayed retirement;
Sustainable solvency:
* On balance, small reduction in actuarial deficit;
* Increasing delayed retirement credit would slightly increase
actuarial deficit;
Balancing adequacy and equity:
* Currently, earnings after retirement have small effect on benefit
amounts;
* Increasing reductions for early retirement may affect adequacy;
Implementation and administration:
* Relies on existing administrative framework;
Additional considerations:
* Would increase incentives to work longer, which could help reduce
overall fiscal pressures on federal budget.
Options: Changing the formula for initial benefits: Modifying annual
cost-of-living adjustments (COLAs) to benefits, e.g., reducing by 0.5
or 1.0 percentage points;
Sustainable solvency:
* Moderate to large reduction in actuarial deficit;
Balancing adequacy and equity:
* Would have increasing cumulative effect over additional years
benefits are received;
* Greatest potential adverse effect on oldest, disabled, and survivors,
who are at higher risk of poverty;
Implementation and administration:
* Relies on existing administrative framework;
Additional considerations:
* Adjustment could more accurately reflect inflation.
Options: Changing the formula for initial benefits: Increasing full
retirement age, e.g., eliminating hiatus in current increase, increase
to age 68 or 70;
Sustainable solvency:
* Depending on provision, small to moderate reduction in actuarial
deficit;
Balancing adequacy and equity:
* Largely the same, in effect, as proportional benefit reduction,
especially if early retirement age remains at 62;
* Workers in certain occupations (e.g., construction) may not be able
to work longer and have to take benefit reductions, though other
program changes could address this concern;
Implementation and administration:
* Relies on existing administrative framework;
* Increasing full retirement age could increase disability
applications;
Additional considerations:
* Would reflect increasing longevity, which is primary contributor to
insolvency;
* Raises question of whether to also increase early retirement age (now
62), which would encourage individuals to work longer.
Options: Changing revenues;
Sustainable solvency:
* May have adverse labor supply and growth effects, depending on amount
and design;
Balancing adequacy and equity:
* Distributional effects depend on approach to increase;
Additional considerations:
* Choosing increases to payroll tax revenues instead of benefit
reductions implies a societal choice that workers will have less income
during working years and more during retirement.
Options: Raising payroll tax revenues: Increasing payroll tax rate;
Sustainable solvency:
* Effect on actuarial deficit depends on size of increase;
* Increase of 1.92 percentage points would achieve 75-year solvency,
but 76th year would lead back to an actuarial deficit;
Balancing adequacy and equity:
* The sooner it applies, the greater the intergenerational equity,
since earlier birth groups enjoy higher implicit returns;
* Would help avoid benefit reductions;
* Regressive nature of tax falls more heavily on low wage workers and
their employers[Footnote 10];
Implementation and administration:
* Relies on existing administrative framework.
Options: Raising payroll tax revenues: Raising cap on taxable earnings
(with or without retaining cap for benefit calculation);
Sustainable solvency:
* Effects range from small to more than eliminating actuarial deficit;
* If higher earnings would also be used in benefit computations, would
also increase long-term benefit payouts, but at lowest replacement rate
(15 percent);
Balancing adequacy and equity:
* Increase could make percentage of earnings covered more comparable to
historical levels;
* Diminishes equity because earnings above the cap are replaced at
lower rate than lower earnings levels;
* Burden falls on those 6 percent of covered workers with earnings
above present cap, especially those who are self-employed or small
business owners, who effectively pay both employer and employee share;
Implementation and administration:
* Relies on existing administrative framework;
Additional considerations:
* Would increase incentives for higher earners to structure more of
their compensation as nonwage income, (e.g., other benefits, stock
options).
Options: Raising payroll tax revenues: Expanding coverage to all state
and local government workers;
Sustainable solvency:
* Small reduction in actuarial deficit;
* Would also increase long-term benefit levels as newly covered
earnings would entitle affected workers to associated benefits;
Balancing adequacy and equity:
* Would improve equity in the sense that all workers would be treated
the same;
* Social Security may offer employees additional protections compared
with their current benefit packages, depending on how those packages
change;
Implementation and administration:
* Would simplify administration and, in long run, address equity
concerns arising from GPO and WEP[Footnote 11];
* Affected state and local governments and employees would need time to
adjust and to implement complementary changes;
Additional considerations:
* May impose additional costs on state and local governments.
Options: Other revenue options: Tapping other revenue sources, e.g.,
general fund transfers, dedicated revenue sources;
Sustainable solvency:
* Effect on actuarial balance depends upon the size and use of
transfers;
* General fund transfers raise government's need for cash, which must
be raised with spending cuts, tax increases or borrowing from the
public;
* Would compete with other programs or tax reductions in the general
budget;
* Could worsen long-range fiscal imbalance;
Balancing adequacy and equity:
* Could change equity of program significantly but in ways that are
hard to quantify;
* Given current and projected budget deficits, transfers likely to
result in additional tax burdens in future years;
* Difficult to determine who bears burden of transfers;
Additional considerations:
* Dilutes principle that program is self-financed, which;
* imposes discipline that benefits cannot expand beyond what dedicated
revenues can pay for;
* since benefits are "paid for," avoids stigma that they are welfare;
* Introduction of general fund transfers could lead to incremental
enhancement of benefits;
* Could increase political risk of future benefit reductions.
Options: Other revenue options: Change taxation of Social Security
benefits, e.g., tax them in a manner similar to private pension income,
that is, tax benefits that exceed contributions;
Sustainable solvency:
* Small reduction in actuarial deficit;
Balancing adequacy and equity:
* Would parallel treatment of other retirement income;
* Given other existing tax provisions, roughly a third of Social
Security beneficiaries would still not pay income tax on their
benefits;
Implementation and administration:
* Administration may be manageable with phase-in.
Options: Other revenue options: Increasing investment returns, either
by government investing or through individual accounts;
Sustainable solvency:
* Potential effect depends on size of trust funds, extent of advanced
funding, portfolio, and fees;
* Investing trust fund surplus would increase government borrowing
needs and debt held by the public;
Balancing adequacy and equity:
* Increasing returns improves equity;
* Effect on adequacy depends on how risk is distributed;
Implementation and administration:
* Administration is likely manageable, depending on approach;
Additional considerations:
* Could be done either by trust funds or through individual accounts;
* Trust fund investment raises concern about role of government in
investment markets, though some approaches may mitigate that concern.
Options: Changing the program structure with individual accounts;
Sustainable solvency:
* Would not achieve solvency unless coupled with other changes;
* Would move system toward more advance funding;
* Effect on national saving depends on a variety of factors, including
how the accounts are funded;
increases in personal saving may be offset by increases in government
or personal borrowing or reductions in other personal savings;
Balancing adequacy and equity:
* Would generally improve equity;
* With higher returns, might help make up for benefit reductions used
to achieve solvency;
* Shifts system from social insurance to individual responsibility for
saving;
* Shifts program from an exclusively defined-benefit structure;
* Redistributes risk;
* If market returns are poor, would raise adequacy risks;
Implementation and administration:
* By adding new system, involves more complexity and cost, including
services for:
-collection of deposits;
-account administration;
-investment management;
-distribution in retirement;
-educational efforts relating to all phases;
* Posting contributions to individuals' accounts in real time might be
expected but much more difficult than current record keeping;
Additional considerations:
* Depending on approach, government, employers, financial institutions,
and individuals could play various roles in contribution, accumulation,
and distribution phases;
* Provides additional saving vehicle for those without a pension.
Options: Contribution phase: A voluntary approach would (in comparison
to a mandatory one);
Sustainable solvency:
* Raise question of whether incentives are desired;
* Possibly pose adverse selection issues;
Balancing adequacy and equity:
* Give greater choice;
Implementation and administration:
* Require greater level of educational effort;
* Require additional administrative complexity and cost.
Options: Contribution phase: Account contribution rate;
Balancing adequacy and equity:
* Contribution rates can be proportional or progressive;
Additional considerations:
* Size of contribution rate determines relative role of DC vs. DB
portion of program.
Options: Contribution phase: Add-on vs. carve-out[Footnote 12];
Sustainable solvency:
* Add-ons require additional revenue;
* Carve-outs pose transition costs, which are typically financed with
general revenue transfers (see above);
* Either, if using general revenues, would raise government's need for
cash, and without compensating elements, compound fiscal challenges;
Balancing adequacy and equity:
* Carve-outs divert revenues from current system, involve commensurate
offsets to Social Security defined benefit, while offering ownership of
new account;
Implementation and administration:
* Add-ons or carve-outs could build on existing IRA, 401(k), 403(b),
457, Thrift Savings Plan, and other defined contribution systems;
* Carve-outs require additional, potentially complicated, calculations
for benefit offsets.
Options: Accumulation phase: Investment options;
Balancing adequacy and equity:
* For workers who become disabled or die, less time to accumulate
compound earnings;
also, some proposals limit their access to accounts before retirement
age;
Implementation and administration:
* Limiting investment alternatives may minimize administrative costs,
promote diversification (by limiting ability to concentrate), and
simplify individual decision making while also reducing individual
choice and control.
Options: Distribution phase: Draw down alternatives, e.g., annuities
vs. phased withdrawal;
Sustainable solvency:
* Any government role in annuitization or other distributions could
affect its cash position;
Balancing adequacy and equity:
* Mandatory annuity effectively transfers income from the shorter-lived
to the longer-lived;
* Mandatory annuity might be limited to amount necessary to avoid
poverty;
* For workers who become disabled, if allowed access to accounts before
retirement, may need to stretch assets over more years;
* Concern is preserving assets to meet adequacy needs for rest-of-life
and avoid leakages;
Implementation and administration:
* Annuitization incurs additional costs, e.g. risk premia, unless
government annuitizes;
* Mandatory annuitization could minimize adverse selection[Footnote
13];
* Phased withdrawal could mirror minimum distribution requirements for
IRAs while adding maximum distributions;
* Would require new rules to handle cases of survivors, divorced
beneficiaries, and other situations;
Additional considerations:
* Once purchased, annuities might not provide for any bequest (or
having bequest feature would cost more and in turn reduce benefit);
* Annuities involve risk premia paid to insurers while phased
withdrawal amounts to self-insuring.
Options: Distribution phase: Guarantees;
Sustainable solvency:
* Could create risk to taxpayers through contingent liability and moral
hazard issues[Footnote 14];
Balancing adequacy and equity:
* Help ensure provision of specified benefit level;
Implementation and administration:
* Some guarantee provisions require maintaining alternative benefit
computations;
Additional considerations:
* Offer incentive to participate.
Options: Distribution phase: Pre-retirement access;
Balancing adequacy and equity:
* Risks leakage that diminishes adequacy in retirement;
* Enhances individual sense of ownership and control;
Implementation and administration:
* Would involve additional administrative services;
Additional considerations:
* Greater incentive to participate.
Options: Administration: Centralized vs. decentralized;
Balancing adequacy and equity:
* Decentralized offers greater choice and control to individuals;
Implementation and administration:
* Centralized would be much less costly.
[End of table]
Proposals That Include the Various Options Listed in Table 1:
The following proposals include one or more of the options listed in
table 1. All of these proposals have been scored by the Social Security
Administration's Office of the Chief Actuary:[Footnote 15]
* Ball:
* Commission to Strengthen Social Security (CSSS):
* DeFazio:
* DeMint:
* Diamond-Orszag:
* Ferrara:
* Graham:
* Hagel:
* Johnson:
* Kolbe-Stenholm:
* Pozen:
* Ryan-Sununu:
* Shaw:
* Smith:
In addition, many of the options listed in table 1 appear in the
proposals of the 1994-1996 Advisory Council on Social Security, the
Center for Strategic and International Studies, and the Committee for
Economic Development. Also, the Social Security Advisory Board recently
asked the Social Security actuaries to score a number of provisions,
all of which are included in the list in table 1.
[End of section]
Related GAO Products:
Social Security Reform: Early Action Would Be Prudent. GAO-05-397T.
Washington, D.C.: March 9, 2005.
Social Security: Distribution of Benefits and Taxes Relative to
Earnings Level. GAO-04-747. Washington, D.C.: June 15, 2004.
Social Security Reform: Analysis of a Trust Fund Exhaustion Scenario.
GAO-03-907. Washington, D.C.: July 29, 2003.
Social Security: Issues Relating to Noncoverage of Public Employees.
GAO-03-710T. Washington, D.C.: May 1, 2003.
Social Security and Minorities: Earnings, Disability Incidence, and
Mortality Are Key Factors That Influence Taxes Paid and Benefits
Received. GAO-03-387. Washington, D.C.: April 23, 2003.
Social Security Reform: Analysis of Reform Models Developed by the
President's Commission to Strengthen Social Security. GAO-03-310.
Washington, D.C.: January 15, 2003.
Social Security Reform: Information on Using a Voluntary Approach to
Individual Accounts. GAO-03-309. Washington, D.C.: March 10, 2003.
Social Security: Program's Role in Helping Ensure Income Adequacy. GAO-
02-62. Washington, D.C.: November 30, 2001.
Social Security Reform: Potential Effects on SSA's Disability Programs
and Beneficiaries. GAO-01-35. Washington, D.C.: January 24, 2001.
Social Security Reform: Information on the Archer-Shaw Proposal. GAO/
AIMD/HEHS-00-56. Washington, D.C.: January 18, 2000.
Social Security: Evaluating Reform Proposals. GAO/AIMD/HEHS-00-29.
Washington, D.C.: November 4, 1999.
Social Security Reform: Implications of Raising the Retirement Age.
GAO/HEHS-99-112. Washington, D.C.: August 27, 1999.
Social Security: Issues in Comparing Rates of Return With Market
Investments. GAO/HEHS-99-110. Washington, D.C.: August 5, 1999.
Social Security: Criteria for Evaluating Social Security Reform
Proposals. GAO/T-HEHS-99-94. Washington, D.C.: March 25, 1999.
Social Security: Implications of Extending Mandatory Coverage to State
and Local Employees. GAO/HEHS-98-196. Washington, D.C.: August 18, 1998.
Social Security: Different Approaches for Addressing Program Solvency.
GAO/HEHS-98-33. Washington, D.C.: July 22, 1998.
Social Security Financing: Implications of Government Stock Investing
for the Trust Fund, the Federal Budget, and the Economy. GAO/AIMD/HEHS-
98-74. Washington, D.C.: April 22, 1998.
Social Security: Restoring Long-Term Solvency Will Require Difficult
Choices. GAO/T-HEHS-98-95. Washington, D.C.: February 10, 1998.
FOOTNOTES
[1] GAO, Social Security Reform: Early Action Would Be Prudent. GAO-05-
397T. Washington, D.C.: March 9, 2005.
[2] These actuarial scorings can be found at http://www.ssa.gov/OACT/
solvency/index.html.
[3] A list of GAO reports on Social Security is included at the end of
this report. In these reports, you can find more detailed discussions
about more specific proposals than the generic options listed in this
report. All of the reports are available at http://www.gao.gov/.
[4] GAO, Social Security: Distribution of Benefits and Taxes Relative
to Earnings Level. GAO-04-747. Washington, D.C.: June 15, 2004.
[5] When workers retire, become disabled, or die, Social Security uses
their lifetime earnings records to determine their Primary Insurance
Amount (PIA), on which initial monthly benefits are based. The PIA is
determined by applying the Social Security benefit formula to a
worker‘s Average Indexed Monthly Earnings (AIME). The AIME is
determined by taking the lifetime earnings record, indexing it to
average wage growth, and taking the average. For workers who become
eligible for benefits in 2005, PIA equals 90 percent of the first $627
dollars of AIME plus 32 percent of AIME over $627 through $3,779
dollars of AIME plus 15 percent of AIME above $3,779.
[6] Under some reform scenarios, Social Security could distribute
benefits more progressively than current law yet provide lower, less
adequate benefits.
[7] When wages grow faster than prices, workers can afford to consume
more goods and services, their purchasing power increases, and the
standard of living improves. Historically, wages have grown faster than
prices, on average. Since Social Security‘s current benefit formula is
indexed to wages, increases in initial benefits keep pace with
improvements in the standard of living. Indexing benefits to prices
instead of wages would make the purchasing power of benefits remain
constant even if wage growth were improving purchasing power for the
rest of society.
[8] In its scorings, SSA/OCACT implements this provision using changes
to the PIA benefit formula.
[9] In its scorings, SSA/OCACT implements this provision using a
proportional reduction to the benefit formula factors.
[10] The payroll tax is regressive due to the cap on taxable earnings
even though the tax rate is itself proportional.
[11] The Government Pension Offset (GPO) and the Windfall Elimination
Provision (WEP) are existing Social Security provisions that reduce
Social Security benefits for those who also receive pensions from
employment that is not covered by Social Security. Noncovered workers
do not pay Social Security taxes on their noncovered earnings. These
provisions are intended to treat such beneficiaries in a manner that
parallels treatment of beneficiaries who paid Social Security taxes on
all their lifetime earnings. See GAO, Social Security: Issues Relating
to Noncoverage of Public Employees. GAO 03 710T. Washington, D.C.: May
1, 2003.
[12] In GAO‘s work to date, we have used the term ’add-on“ accounts to
refer to accounts that would have no effect on Social Security
benefits, would supplement those benefits, and would draw contributions
from new revenue streams. In contrast, we have used the term ’carve-
out“ accounts to refer to accounts that would result in some reduction
or offset to Social Security benefits because contributions to those
accounts would draw on existing Social Security revenues. Others have
used these terms in different manners. For example, some have used ’add-
ons“ in connection with new individual accounts funded from new revenue
sources that result in a reduction or offset to some or all Social
Security benefits. In the final analysis, there are two key dimensions:
first, whether individual accounts are funded from existing or new
revenue sources; second, whether individual accounts result in some
reduction or offset to Social Security benefits.
[13] Adverse selection occurs, for example, when only healthy people
buy annuities and on average live longer than nonbuyers, driving up the
cost of annuities.
[14] Moral hazard would occur if account holders faced an incentive to
take more investment risk than they would otherwise as a result of
having guarantee to fall back on.
[15] These actuarial scorings can be found at
http://www.ssa.gov/OACT/solvency/index.html.
