Social Security Reform
Issues for Disability and Dependent Benefits Gao ID: GAO-08-26 October 26, 2007Many recent Social Security reform proposals to improve program solvency include elements that would reduce benefits currently scheduled for future recipients. To date, debate has focused primarily on the potential impact on retirees, with less attention to the effects on other Social Security recipients, such as disabled workers and dependents. As these beneficiaries may have fewer alternative sources of income than traditional retirees, there has been interest in considering various options to protect the benefits of disabled workers and certain dependents. This report examines (1) how certain elements of Social Security reform proposals could affect disability and dependent benefits, (2) options for protecting these benefits and how they might affect disabled workers and dependents, and (3) how protecting benefits could affect the Social Security program. To conduct this study, GAO used a microsimulation model to simulate benefits under various reform scenarios. GAO also interviewed experts and reviewed various reform plans, current literature, and GAO's past work.
We considered several reform elements that could improve Social Security Trust Fund solvency by reducing the initial benefits received or the growth of individual benefits over time. According to our simulations, these reform elements would reduce median lifetime benefits for disabled workers by up to 27 percent and dependents by up to 30 percent of currently scheduled levels. While the size of the benefit reduction could vary across individuals, it could be substantial for the vast majority of these beneficiaries, depending upon the reform element. Options for protecting the benefits of disabled workers and dependents from the impact of reform elements include, among others, a partial exemption, whereby currently scheduled benefits are maintained until retirement age. For example, while simulations showed that one reform element could decrease median lifetime benefits of disabled workers to about 89 percent of currently scheduled levels, a partial exemption could restore them to about 96 percent. Further, these protections could be more targeted. For example, a larger cost of living adjustment would result in more rapid benefit growth for those disabled workers who receive benefits for a prolonged period of time. Some protections for dependent benefits could be targeted to a single group of dependents, such as widows, while others could affect multiple groups. For example, increasing the maximum benefit a family can receive could protect a wider group of beneficiaries, including children and spouses of disabled workers, and disabled adult children. While it may be desirable to protect the benefits of disabled workers and certain dependents, such protections would come at a cost to Social Security. Protecting benefits could lessen the impact that a reform element would have on solvency. In addition, such protections could create incentives to apply for Disability Insurance, if disability benefits remained stable while retirement benefits were reduced.
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
October 2007:
Social Security Reform:
Issues for Disability and Dependent Benefits:
Issues for Disability and Dependent Benefits:
GAO-08-26:
GAO Highlights:
Highlights of GAO-08-26, a report to congressional requesters.
Why GAO Did This Study:
Many recent Social Security reform proposals to improve program
solvency include elements that would reduce benefits currently
scheduled for future recipients. To date, debate has focused primarily
on the potential impact on retirees, with less attention to the effects
on other Social Security recipients, such as disabled workers and
dependents. As these beneficiaries may have fewer alternative sources
of income than traditional retirees, there has been interest in
considering various options to protect the benefits of disabled workers
and certain dependents.
This report examines (1) how certain elements of Social Security reform
proposals could affect disability and dependent benefits, (2) options
for protecting these benefits and how they might affect disabled
workers and dependents, and (3) how protecting benefits could affect
the Social Security program. To conduct this study, GAO used a
microsimulation model to simulate benefits under various reform
scenarios. GAO also interviewed experts and reviewed various reform
plans, current literature, and GAO‘s past work.
What GAO Found:
We considered several reform elements that could improve Social
Security Trust Fund solvency by reducing the initial benefits received
or the growth of individual benefits over time. According to our
simulations, these reform elements would reduce median lifetime
benefits for disabled workers by up to 27 percent (see graph) and
dependents by up to 30 percent of currently scheduled levels. While the
size of the benefit reduction could vary across individuals, it could
be substantial for the vast majority of these beneficiaries, depending
upon the reform element.
Figure: Simulated Median Lifetime Benefits for Disabled Workers (1985
Cohort):
This figure is a bar graph showing stimulated median lifetime benefits
for disabled workers:
Scheduled benefits: 100;
Reduced COLA 1 Percentage point: 90;
Longevity indexing: 85;
Price indexing: 72;
Progressive price indexing: 93.
[See PDF for image]
Source: GAO analysis of GEMINI data.
Note: Currently scheduled benefits are not attainable under current
funding levels.
[End of figure]
Options for protecting the benefits of disabled workers and dependents
from the impact of reform elements include, among others, a partial
exemption, whereby currently scheduled benefits are maintained until
retirement age. For example, while simulations showed that one reform
element could decrease median lifetime benefits of disabled workers to
about 89 percent of currently scheduled levels, a partial exemption
could restore them to about 96 percent. Further, these protections
could be more targeted. For example, a larger cost of living adjustment
would result in more rapid benefit growth for those disabled workers
who receive benefits for a prolonged period of time. Some protections
for dependent benefits could be targeted to a single group of
dependents, such as widows, while others could affect multiple groups.
For example, increasing the maximum benefit a family can receive could
protect a wider group of beneficiaries, including children and spouses
of disabled workers, and disabled adult children.
While it may be desirable to protect the benefits of disabled workers
and certain dependents, such protections would come at a cost to Social
Security. Protecting benefits could lessen the impact that a reform
element would have on solvency. In addition, such protections could
create incentives to apply for Disability Insurance, if disability
benefits remained stable while retirement benefits were reduced.
What GAO Recommends:
Congress should consider the potential implications of reform on
disability and dependent beneficiaries.
GAO received general and technical comments from SSA and the Department
of the Treasury, which were incorporated as appropriate.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-26].
For more information, contact Barbara Bovbjerg at (202) 512-7215 or
bovbjergb@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Certain Benefit-Reducing Reform Elements Could Have a Substantial
Impact on Disabled Workers and Dependents:
Options Protecting the Benefits of Disabled Workers and Dependents
Could Mitigate the Effects of Benefit-Reducing Reform Elements:
Some Protection Options May Create New Costs and Unintended Incentives
for the Social Security Program:
Conclusions:
Matter for Congressional Consideration:
Agency Comments:
Appendix I: Methodology:
Microsimulation Model:
Description of Social Security Reform Elements:
Description of Protection Options:
Options Modeled to Protect Benefits of Disabled Workers:
Data Reliability:
Appendix II: Calculating OASDI Benefits:
Calculating Old-Age Benefits:
Calculating Disability Benefits:
Calculating Benefits for Dependents of Retired and Disabled Workers:
Calculating Survivors' Benefits:
Appendix III: Comments from the Social Security Administration:
Related GAO Products:
Tables:
Table 1: Reform Elements, Their Solvency Impacts, and the Percentage of
Disabled Workers and Dependents with Reduced Total Lifetime Benefit
Levels for the 1985 Cohort:
Table 2: Options for Protecting Disabled Worker and Dependent Benefits
from Social Security Reform:
Table 3: Child Beneficiaries:
Table 4: Total Lifetime and Average Monthly Benefits of Two Simulated
Individuals Who Began Receiving Benefits at Age 62, Exemptions Apply to
Disabled Workers (1985 Cohort):
Table 5: Options for Protecting Disabled Worker and Dependent Benefits
from Social Security Reform:
Table 6: Dependent Benefits:
Figures:
Figure 1: Social Security Beneficiaries by Beneficiary Status, 2007:
Figure 2: Disabled Worker and Dependent Benefits Timeline:
Figure 3: Evolution of the OASDI Program:
Figure 4: Projected Median Lifetime Benefits for Disabled Workers (1985
Cohort):
Figure 5: Projected Median Lifetime Benefits for Those Who Have Ever
Received Dependent Benefits (1985 Cohort):
Figure 6: Percentage Range of Projected Reductions in Total Lifetime
Benefits for Disabled Workers (1985 Cohort):
Figure 7: Percentage Range of Projected Reductions in Total Lifetime
Benefits for Individuals Who Have Ever Received Dependent Benefits
(1985 Cohort):
Figure 8: Projected Median Lifetime Benefits under a COLA Reduction of
1 Percentage Point (1985 Cohort):
Figure 9: Projected Median Lifetime Benefits under Price Indexing (1985
Cohort):
Figure 10: Projected Median Lifetime Benefits under Longevity Indexing
(1985 Cohort):
Figure 11: Projected Median Lifetime Benefits under Progressive Price
Indexing (1985 Cohort):
Figure 12: Simulated Total Lifetime Benefits for Two Similar
Individuals Who Began Receiving Benefits at Age 62, Exemptions Apply to
Disabled Workers (1985 Cohort):
Figure 13: Calculating Benefits for Retirees:
Figure 14: Calculating Benefits for Disabled Workers:
Abbreviations:
AIME: Average Indexed Monthly Earnings:
COLA: cost-of-living adjustment:
CPI: Consumer Price Index:
CPI-U: consumer price index for urban consumers:
CPI-W: consumer price index for urban wage earners and clerical
workers:
CSSS: Commission to Strengthen Social Security:
DAC: disabled adult children:
DI: Disability Insurance:
FRA: full retirement age:
GEMINI: Genuine Microsimulation of Social Security Accounts:
MINT3: Modeling Income in the Near Term:
OASDI: Old Age, Survivors, and Disability Insurance:
OCACT: Office of the Chief Actuary:
PENSIM: Pension Simulator:
PIA: primary insurance amount:
PSG: Policy Simulation Group:
SI: Survivors'Insurance:
SSAB: Social Security Advisory Board:
SSASIM: Social Security and Accounts Simulator:
United States Government Accountability Office:
Washington, DC 20548:
October 26, 2007:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Jim McCrery:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
The Honorable Michael R. McNulty:
Chairman:
The Honorable Sam Johnson:
Ranking Member:
Subcommittee on Social Security:
Committee on Ways and Means:
House of Representatives:
The Honorable Sander M. Levin:
House of Representatives:
Social Security forms the foundation of retirement income, providing
old age benefits to millions of Americans. However, Social Security is
more than a retirement program; it provides benefits to survivors and
other dependents as well as to disabled workers. For all these
recipients, benefits are determined through a common formula.
Therefore, the prospect of altering the benefit formula to address
Social Security's financial shortfall would affect all beneficiaries,
not just retired workers. Moreover, changes to the benefit formula
could have a large impact on those beneficiaries who are least able to
compensate for any reduction in benefits. For example, disabled workers
may have fewer alternative sources of income--especially earnings-
related income--than do retired workers, to offset any planned
reduction in benefits. In addition, certain dependents, such as older
widows, may rely more heavily on Social Security benefits and may not
have the means to offset reductions caused by reform. Hence, benefit
reductions related to reform could potentially affect the welfare of
disabled workers and dependent beneficiaries more substantially than
those of retired workers.
Nonetheless, the debate over Social Security reform has focused
primarily on the effects proposed reforms would have on retirees--with
little discussion of how they might affect disabled workers and
dependents. Given interest in protecting these beneficiaries, this
report discusses (1) how certain elements of Social Security reform
plans would affect disability and dependent benefits, (2) some options
for protecting these benefits and how these options might affect
disabled workers and dependents, and (3) how protecting these benefits
could affect the Social Security program itself.
To determine how certain elements of reform would affect disability and
dependent benefits,[Footnote 1] we first selected reforms by reviewing
a number of reform plans, current literature, and our past work to
identify reform elements that would have an impact on benefits. We then
estimated the percentage of disabled workers and dependents whose
benefits would be affected by certain reform elements by simulating the
outcome for a sample of workers born in 1985, using a microsimulation
model.[Footnote 2] We also used data from this model to analyze the
difference in both median and total lifetime benefits between currently
scheduled benefits and those under each reform element.[Footnote 3]
Rather than consider the distribution of benefits across recipients, we
show the impact of reform and protections on median benefits. This
approach provides a snapshot of how the reforms would affect
individuals in each target group (disabled workers and dependents). In
addition, when we consider total lifetime benefits, we are able to
examine the extent to which individuals are affected. While scheduled
benefits are not attainable under current funding levels, they
nevertheless provide us with a point of comparison in examining the
impact of various reform elements. To identify options for protecting
disabled worker and dependent benefits, we reviewed the current
literature and our past work and interviewed relevant experts. To
determine how these protections would affect both disability and
dependent benefits, we analyzed the change in median lifetime benefits
given various reform elements and different protections, using the
microsimulation model, as well as some qualitative analysis. Finally,
to determine the impact that protecting benefits could have on the
Social Security program itself, we interviewed relevant experts,
reviewed the literature, and conducted a qualitative analysis of the
issues involved. Throughout our analysis, we assume that the Disability
Insurance (DI) program maintains its current operational structure in
terms of disability determination, although GAO has recommended certain
measures that Social Security should take to modernize the program and
its administration. For more details on our approach to this study and
on the microsimulation model, please see appendix I.
Throughout this report, the term "dependents" refers to those
beneficiaries who receive some or all of their Social Security benefits
based on a family member's earnings record. Our dependent category
includes survivors--such as widow(er)s and surviving children--as well
as spouses and children of both retirees and individuals receiving
disability benefits. Specifically, dependents need not demonstrate
financial dependence, but rather familial relationships such as those
listed above. Also, throughout the report, "disabled worker benefits"
refers to the type of benefit that an individual with disabilities who
qualifies for the DI program would receive based on his or her own
earnings record. Further, those individuals who receive disabled worker
benefits are referred to as "disabled workers." While we understand the
sensitivity associated with this terminology, our use of this term is
consistent with the Social Security Administration's terminology and
aims to precisely represent such beneficiaries and their benefits.
We conducted our work between October 2006 and October 2007 in
accordance with generally accepted government auditing standards.
Results in Brief:
Most of the elements for reforming Social Security that we considered
would reduce future benefits from currently scheduled levels for Social
Security recipients, including the great majority of disabled workers
and dependents. These reform elements include longevity indexing
(changing benefits to reflect increased life expectancies), price
indexing (adjusting benefits so they grow at the rate of inflation
rather than wages), progressive price indexing (a graduated form of
price indexing), and changes to the cost-of-living adjustment.
According to our simulations, most such changes would reduce benefits
for at least three-quarters of disabled workers and dependent
beneficiaries in the 1985 cohort. For example, progressive price
indexing would affect more than 75 percent of these beneficiaries,
while other reform elements we analyzed would affect virtually all
beneficiaries. In addition, most reform elements would reduce the
median lifetime benefits of disabled workers and dependents to between
70 and 93 percent of currently scheduled levels, with price indexing
resulting in the largest reduction. These reform elements would not
affect individuals uniformly. For example, longevity indexing would
reduce the lifetime benefits of 86 percent of disabled workers by
between 10 to 25 percent; the other 14 percent would generally face
reductions of 10 percent or less.
There are many options for protecting both disabled worker and
dependent benefits. Some of these options can be targeted to particular
groups of beneficiaries. The options include, among others, a partial
exemption--by which the beneficiary receives currently scheduled
benefits until retirement age--and a full exemption--by which the
beneficiary receives benefits at the currently scheduled level
throughout the remainder of his or her life. Through our simulation of
reform elements and various protections, for example, we found that a
one percentage point reduction in the cost-of-living adjustment would
reduce the median lifetime benefits of disabled workers to about 89
percent of their currently scheduled level, but a partial exemption
could restore them to about 96 percent. Options for protecting the
benefits of disabled workers could also be structured to mitigate
benefit reductions that result from changes to the initial benefit
calculation. For example, disabled workers who receive benefits for a
prolonged period of time could be given a "super COLA" that would allow
their benefits to grow more rapidly. In terms of dependent benefits,
protections could cover a single group, such as widows, or multiple
groups. For example, increasing the maximum family benefits could
protect the benefits of child survivors, widowed parents, children and
spouses of disabled workers, and disabled adult children.
In general, although it may be desirable to protect the benefits of
certain disabled workers and dependents, such protections would come at
a cost to the program and could create unintended incentives that would
negatively affect Social Security's finances. While the reforms we
considered were aimed at improving the solvency of Social Security,
protecting the benefits of these populations would lessen the effect of
each of these reforms. In addition, certain protections may create
incentives for individuals who might not otherwise apply for Disability
Insurance to do so. For example, those nearing retirement may apply for
the Disability Insurance program if disability insurance benefits
remained stable while retirement benefits fell.
The Department of the Treasury provided technical comments. The Social
Security Administration (SSA) provided general and technical comments.
We incorporated the comments throughout our report as appropriate.
Background:
Social Security is one the largest federal programs in the United
States, providing about $546 billion in benefits in 2006 to over 49
million beneficiaries. Although the majority of Social Security
benefits are paid to retirees, Social Security does much more than
provide retirement income. Social Security Disability Insurance (DI)
pays monthly cash benefits to nearly 7 million workers who, due to a
severe long-term disability, can no longer remain in the workforce.
Additionally, Social Security provides benefits to over 11 million
dependents,[Footnote 4] including payments to widows and widowers as
well as surviving parents and children under Survivors' Insurance (SI),
plus benefits to dependent spouses and children of retired and disabled
workers paid from the Old Age Insurance (or Old Age) and DI trust
funds. Social Security benefits often represent a significant source of
income for their recipients, providing an average of $1,051 a month (as
of July 2007) to retired workers, $995 a month to widows and widowers,
and $979 a month to disabled workers. Although disabled workers and
dependents receive slightly lower average monthly benefits than retired
workers, benefits could be particularly important to these individuals.
These beneficiaries may face considerable hardships; for example, a
disabling condition may make work and other activities of daily living
more difficult. As a result, these beneficiaries may have financial
difficulties planning and preparing for death or disability in the way
one might plan for retirement. Social Security was never intended to
provide an adequate income by itself, but instead serves as an income
base on which to build. In fact, the Social Security program balances
the goals of income adequacy with individual equity, i.e., that lower
income beneficiaries should receive higher benefits relative to wages
than higher income beneficiaries (adequacy), and beneficiaries with
higher lifetime income receive higher benefits in accordance with their
income/lifetime contributions (equity).
Figure 1: Social Security Beneficiaries by Beneficiary Status, 2007:
This figure is a pie chart showing social security beneficiaries by
beneficiary status in 2007:
Retired workers: 64%;
Disabled workers: 14%;
Widow(er)s and parents: 9%;
Dependent spouses: 5%;
Dependent children: 4%;
Surviving children: 4%.
[See PDF for image]
Source: GAO analysis of July 2007 SSA data.
Notes: Some Social Security beneficiaries are entitled to more than one
type of benefit. If both benefits are financed from the same trust
fund, the beneficiary is usually counted only once in the statistics,
as a retired-worker or a disabled-worker beneficiary, and the benefit
amount recorded is the larger amount associated with the auxiliary
benefit. If the benefits are paid from different trust funds, the
beneficiary is counted twice and the respective benefit amounts are
recorded for each type of benefit. Accessed from [hyperlink,
http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/] on August 29,
2007.
[End of figure]
History and Development of DI and Dependents' Benefits:
Although Social Security had originally been envisioned to include
disability and survivors' insurance, the 1935 Social Security Act
created only a retirement program.[Footnote 5] Over the next 40 years,
the program expanded both the size and type of its benefits,
introducing benefits for dependents and disabled workers (fig. 2). The
first new type of benefits went to dependents, as the 1939 amendments
offered payments to elderly dependent wives and widows, as well as
dependent children. (Some husbands and widowers were allowed to receive
these same benefits after 1950[Footnote 6]). Creating these benefits
was not only seen as socially desirable, but also offered additional
protections for workers and their families from risk and spent down
surpluses created by the system. Disability Insurance, which had been
recommended by the 1938 and 1948 advisory councils, was established in
1956 to provide cash benefits to permanently disabled workers over the
age of 50. The DI program was later expanded to include disabled
workers under the age of 50 as well. In 1961, widows benefits increased
from 75 to 85 percent of their deceased spouse's benefits, and then to
100 percent in 1972. In addition, eligibility was extended to divorced
spouses as well as to the spouses and children of disabled workers.
Furthermore, benefit levels for retirees, dependents, and disabled
worker beneficiaries grew during this time period. However, facing
solvency crises, legislative efforts to control the size of the Social
Security program were made in the mid 1970s and early 1980s.
Figure 2: Disabled Worker and Dependent Benefits Timeline:
This figure is a timeline showing disabled worker and dependent
benefits:
1935: Social Security Act establishes retirement benefits;
1939: Benefits established for wives, widows, and dependent children;
1950: Benefits expanded to husbands, widowers, and some divorced
widows;
1954: Disability Freeze enacted to exempt years an individual is unable
to work due to disability from benefit calculation for disabled
workers;
1956: Social Security Disability Insurance (DI) established;
1958: Benefits established for dependents of disabled workers;
1960: Age requirement for DI benefits eliminated;
1965: Benefits established for divorced wives under certain conditions;
1972: Automatic indexing implemented. Divorced wives‘ benefits
liberalized;
1977: Indexing formula corrected, causing reductions in scheduled
benefits;
1980: Continuing disability reviews become mandatory;
1981: Benefits for post-secondary students eliminated;
1983: Major reform permanently delayed COLA, resulting in lifetime
benefit reductions in all programs. Full retirement age raised from 65
to 67, between 2003 and 2027;
1984: Medical Improvement Standard implemented for continuing
disability reviews;
1990: The definition of a disabled widow(er) liberalized;
1999: Ticket to Work Act aimed to reintroduce disabled workers into
labor force;
[See PDF for image]
Source: GAO analysis.
[End of figure]
In order to maintain trust fund solvency, major changes were enacted to
reduce the growth of Social Security benefit levels from the mid1970s
to the early 1980s. Additionally, a number of legislative changes to
the DI and dependents' programs eliminated or reduced certain benefits
and tightened the eligibility standards for receiving other benefits.
However, despite ongoing fiscal concerns, eligibility for a few
dependents' and disability benefits has been expanded since 1975,
suggesting an interest in protecting some vulnerable populations who
may rely on Social Security for a significant portion of their monthly
income. Although recent reform proposals have focused on elements
intended to improve solvency, there continues to be some interest in
protecting some or all DI and dependents' benefits from potential
benefit reductions. Figure 3 shows how Old Age, Survivors, and
Disability Insurance (OASDI) has grown financially and in terms of
beneficiaries over time.
Figure 3: Evolution of the OASDI Program:
This figure is a chart with illustration showing the evolution of the
OASDI program. The number of people in millions is on the left. The
cost in billions, 2005 dollars, is on the right:
1945: Retirement: .52;
1945: DI: 0;
1945: Dependent: 0.77;
1945: Cost in billions, 2005 dollars: 3.3.
1960: Retirement: 8.06;
1960: DI: 0.46;
1960: Dependent: 6.33;
1960: Cost in billions, 2005 dollars: 77.8.
1975: Retirement: 16.59;
1975: DI: 2.49;
1975: Dependent: 13.01;
1975: Cost in billions, 2005 dollars: 251.1.
1990: Retirement: 24.84;
1990: DI: 3.01;
1990: Dependent: 11.98;
19901: Cost in billions, 2005 dollars: 378.2.
2005: Retirement: 30.46;
2005: DI: 6.52;
2005: Dependent: 11.45;
2005: Cost in billions, 2005 dollars: 529.9.
[See PDF for image]
Source: GAO analysis of SSA data; Art Explosion, images.
[End of figure]
Development of a Single Benefit Formula:
Although the 1935 act did not provide for disability and dependents'
benefits, those benefits were later built upon the existing Social
Security structure, and today all benefits continue to be calculated
from a common formula. Dependents' benefit levels were set as fractions
of the benefits owed to the person upon whom beneficiaries depended.
For example, under the 1939 legislation, a widow would receive 75
percent of her deceased husband's benefits, and dependent children or
spouses would receive 50 percent of the retired worker's benefits. When
Congress created the DI program in 1956, it provided a lower retirement
age (50) for those who were permanently and totally disabled. The same
benefit formula used in computing OASI benefits was adopted for
disability benefits because the original DI program treated disabled
workers as being forced into premature retirement. In 1960, when
Congress expanded the DI program by eliminating the requirement that
disabled workers had to be 50 years old, the same benefit formula
applied. Because benefit types shared a common formula, automatic
indexing provisions implemented in 1972 and 1977 applied across the
board.
The OASDI programs are tightly linked in other ways as well. These
programs are financed through a common mechanism--payroll taxes;
receipts from the payroll tax are deposited into the OASI and DI trust
funds which, like the two programs, are separate but often combined in
discussion and analysis of Social Security's solvency and
sustainability.[Footnote 7] Furthermore, beneficiaries can receive
multiple types of benefits over their lifetimes, moving into, out of,
and among Social Security programs at different life stages. When
disabled workers reach the full retirement age (FRA), for example, they
begin to receive retirement benefits from the Old Age program, in place
of DI benefits; the common benefit formula keeps such individuals'
benefit levels stable.[Footnote 8] In another case, a recent widow(er)
might have her (or his) retirement or spousal benefits replaced with
survivors' benefits based on the relative earnings of the deceased
spouse. Because parents, children, or spouses may be eligible for
dependents' benefits through the Old Age, Survivors, and Disability
Insurance programs, a person can collect several types of Social
Security benefits over a lifetime, although generally not
simultaneously.[Footnote 9] The many linked pieces of Social Security
could make developing a single, comprehensive reform package
challenging because such a package would need to take into account all
of these pieces.
Benefits under Current Law:
Under current law, Old Age benefits are generally calculated through a
four-step process in which a progressive yet earnings-based formula is
applied to an earnings history, and then updated annually through a
cost-of-living adjustment (COLA).[Footnote 10] For those who receive
retirement benefits, this earnings history is generally based on the 40
years in which credited earnings were highest, with the 5 lowest-
earning years dropped out (leaving the highest 35 years of indexed
earnings to be included in the initial benefit calculation).[Footnote
11] Dependents' benefit levels are determined as a given percentage of
Old Age benefit levels. Eligible children and spouses can receive up to
50 percent of a worker's benefit; widow(er)s can be given up to 100
percent; and surviving parents or children can collect up to 75
percent, subject to a family maximum.
DI benefits are calculated similarly to Old Age benefits, but are
generally based upon a shortened work history. (For more detail on how
benefits are calculated, refer to app. II.) To be eligible for
benefits, individuals must have a specified number of recent work
credits under Social Security when they first become disabled.
Individuals must also demonstrate the inability to engage in
substantial gainful activity by reason of a physical or mental
impairment that has lasted or is expected to last for twelve continuous
months or to result in death. If not eligible on medical grounds, SSA
must also consider age, education and past work history. In particular,
medical eligibility criteria for DI are less stringent for applicants
over the age of 55.
Based on prior work, GAO has designated modernizing federal disability
programs (including the DI program) as a high risk area because of
challenges that continue today.[Footnote 12] For example, GAO found
that federal disability programs remain grounded in outmoded concepts
that equate medical conditions with work incapacity. While SSA has
taken some actions in response to prior GAO recommendations, GAO
continues to believe that SSA should continue to take a lead role in
examining the fundamental causes of program problems and seek the
regulatory and legislative solutions needed to modernize its programs
so that they are aligned with the current state of science, medicine,
technology, and labor market conditions. Moreover, SSA should continue
to develop and implement strategies to better manage the programs'
accuracy, timeliness, and consistency of decision making.
Social Security's Financing:
Social Security is currently financed primarily on a pay-as-you-go
basis, in which payroll tax contributions of current workers are used
primarily to pay for current benefits. Since the mid1980s, the Social
Security program has collected more in taxes than it has paid out in
benefits. However, because of the retirement of the baby boomers
coupled with increases in life expectancy, and decreases in the
fertility rate, this situation will soon reverse itself. According to
the Social Security Administration's 2007 intermediate
assumptions,[Footnote 13] annual cash surpluses are predicted to turn
into ever-growing cash deficits beginning in 2017. Absent changes to
the program, these deficits are projected to deplete the Social
Security DI trust fund in 2026 and the OASI trust fund in 2042, leaving
the combined system unable to pay full benefits by 2041. Reductions in
benefits, increases in revenues, or a combination of both will likely
be needed to restore long-term solvency. A number of proposals have
been made to restore fiscal solvency to the program, and many include
revenue enhancements, benefit reductions, or structural changes such as
the introduction of individual accounts as a part of Social Security.
Because many reforms to the benefit side of the equation would reduce
benefits through changes in the benefit formula, they could affect DI
and dependents' benefits as well as Old Age benefits. Unless
accompanied by offsets or protections, these reforms might reduce the
income of disabled workers and dependents. This situation could be
challenging for these beneficiaries as they may have relatively low
incomes or higher health care costs and rely heavily on Social Security
income. Many disabled workers and dependents may also have trouble
taking on additional work and accumulating more savings and, thus, have
difficulty preparing for Social Security benefit reductions.
Certain Benefit-Reducing Reform Elements Could Have a Substantial
Impact on Disabled Workers and Dependents:
Many reform elements could have a substantial impact on the benefits of
Social Security recipients, including those of disabled workers and
dependents. We considered six such elements that have been included in
reform proposals to improve trust fund solvency. These reform elements
take a variety of forms and would change either the initial benefit
calculation or the growth of individual benefits over time. Our
projections indicated that most of these elements would reduce benefits
from currently scheduled levels[Footnote 14] for the majority of both
disabled workers and dependents. That is, most would reduce median
lifetime benefits for these beneficiary types--some more substantially
than others. Many of these beneficiaries would also experience a
reduction in total lifetime benefits; the extent of which would depend
on the reform element and individual.
Benefit-Reducing Reform Elements Take Different Forms:
We considered six different reform elements that could help control
costs and improve Social Security solvency by reducing
benefits.[Footnote 15] Five would change how initial benefits are
calculated, and one would limit the growth of an individual's benefits
over time.
We considered several ways to improve solvency:[Footnote 16]
* Longevity indexing would lower the amount of the initial benefit in
order to reflect projected increases in life expectancy. Such indexing
would maintain relatively comparable levels of lifetime benefits across
birth years by proportionally reducing the replacement factors in the
initial benefit formula.
* Price indexing would maintain purchasing power while slowing the
growth of initial benefits. This would be accomplished by indexing
initial benefits to the growth in prices rather than wages, as wages
tend to increase faster than prices.
* Progressive price indexing, a form of price indexing, would control
costs while protecting the benefits of those beneficiaries at the
lowest earnings levels (in terms of career average earnings). It would
continue to index initial benefit levels to wages for those below a
certain earnings threshold and employ a graduated combination of price
indexing and wage indexing for those above this threshold.
* Increasing the number of years used in the benefit calculation would
also control program costs. For example, initial benefits could be
based on the highest 40, rather than 35, years of indexed earnings.
This could be done either by eliminating the 5 years normally excluded
from the calculation or by increasing the total number of years
factored in from 40 to 45 years. In either of these cases, the initial
Old Age benefit would be calculated using the highest 40 years of
indexed earnings.[Footnote 17] (For more information on these reform
elements and how we incorporated them into our microsimulation model,
see app. I.)
* Raising the age at which people are eligible for full retirement
benefits could change the amount and/or the timing of initial benefits.
Increasing the full retirement age would improve solvency by generally
increasing the number of years worked, reducing the number of years
benefits are received and increasing revenue to the system through
payroll taxes in the additional years worked. Further, those who retire
early would have their benefits actuarially reduced.
* Though it would not generally affect initial benefit amounts, a
change to Social Security's cost-of-living adjustment (COLA) could also
control costs and improve solvency by limiting the growth of an
individual's benefits over time. The COLA adjusts benefits to account
for inflation by indexing benefits to price growth annually, using the
Consumer Price Index (CPI).[Footnote 18] Setting the COLA below the CPI
would limit the nominal growth of an individual's benefits over
time,[Footnote 19] and as such those who receive benefits for a
prolonged period of time would see the largest reductions.
Most of the Social Security Reform Elements We Considered Would Reduce
Benefits for Virtually All Beneficiaries:
According to our projections for the 1985 cohort, four of the five
reform elements that we analyzed would reduce total lifetime benefits
for more than three-quarters of disabled workers and dependents,
relative to currently scheduled benefits.[Footnote 20] Table 1 shows
the proportions of disabled workers and dependents affected by each of
the reform elements. For three of the elements--reducing the COLA by
one percentage point, price indexing and progressive price indexing--
the percentage of disabled workers affected is very similar to the
percentage of dependents affected. Moreover, for these three reform
elements, more than 99 percent, or virtually all, disabled workers and
dependents would see their benefits reduced. In contrast, progressive
price indexing differs from other reform elements in its impact: fewer
beneficiaries are affected, and the percentage of disabled workers
affected varies from that of dependents. While an estimated 87 percent
of dependents would experience a reduction in lifetime benefits under
progressive price indexing, an estimated 77 percent of disabled workers
would do so.
While the COLA reduction, longevity indexing and price indexing are all
designed in such a way that they affect virtually all beneficiaries,
the COLA, which has a greater impact on solvency than longevity
indexing,[Footnote 21] affects relatively fewer disabled workers and
dependents. This is because the COLA reduction would first affect
benefits one year after the initial benefit payment was made, whereas
both longevity indexing and price indexing affect the initial benefit
amount. Our simulations indicated that 1.11 percent of disabled workers
died within the first year of receiving benefits, while only 0.35
percent of dependents did so. Most such beneficiaries would not have
received a COLA.
Table 1: Reform Elements, Their Solvency Impacts, and the Percentage of
Disabled Workers and Dependents with Reduced Total Lifetime Benefit
Levels for the 1985 Cohort:
Element[A]: COLA reduction - 1percentage point[D];
Solvency impact[B] (actuarial scoring)c: 1.49;
Percentage of disabled workers with reduced total lifetime benefits
(1985 Cohort): 99.15;
Percentage of dependents with reduced total lifetime benefits (1985
Cohort): 99.87.
Element[A]: Increase the number of computation years--from 35 to 40[D];
Solvency impact[B] (actuarial scoring)c: 0.46;
Percentage of disabled workers with reduced total lifetime benefits
(1985 Cohort): n/a[E];
Percentage of dependents with reduced total lifetime benefits (1985
Cohort): 99.99.
Element[A]: Longevity Indexing--reducing formula factors by 0.5%[F];
Solvency impact[B] (actuarial scoring)c: 1.17;
Percentage of disabled workers with reduced total lifetime benefits
(1985 Cohort): 99.89;
Percentage of dependents with reduced total lifetime benefits (1985
Cohort): 99.98.
Element[A]: Price indexing[D];
Solvency impact[B] (actuarial scoring)c: 2.38;
Percentage of disabled workers with reduced total lifetime benefits
(1985 Cohort): 99.95;
Percentage of dependents with reduced total lifetime benefits (1985
Cohort): 99.97.
Element[A]: Progressive price indexing[D,G];
Solvency impact[B] (actuarial scoring)c: 1.43;
Percentage of disabled workers with reduced total lifetime benefits
(1985 Cohort): 76.78;
Percentage of dependents with reduced total lifetime benefits (1985
Cohort): 86.90.
Source: GAO analysis of GEMINI data and SSA OCACT.
[A] Because of modeling constraints, we were unable to analyze the
effects of a change in the FRA. However, Social Security actuaries have
estimated the solvency impact of increasing the FRA to age 68. This
reform would improve actuarial balance by 0.62 percent of taxable
payroll.
[B] Solvency impacts come from SSA's Office of the Chief Actuary
(OCACT). Taken individually, each of the reform elements would improve
Social Security solvency. For more on how the reform elements were
scored for solvency, see appendix I.
[C] Actuarial balance as a percentage of taxable payroll.
[D] OCACT Score based on 2005 Trustees Report intermediate assumptions.
[E] We were also unable to analyze the effects of increasing the number
of computation years for disabled workers.
[F] OCACT Score based on 2001 Trustees Report intermediate assumptions.
[G] In the microsimulation model, approximately 80 percent of all
beneficiaries were affected by the progressive price indexing reform.
Some disabled workers also received benefits as dependents at some
point in their life, and if those workers are excluded then the
percentage of disabled workers affected would fall.
Note: Using the 1985 cohort, we also projected the percentage of
workers with reduced total lifetime benefits for Social Security
beneficiaries who were never disabled. 99.68% of Social Security
beneficiaries who were never disabled would see benefit reductions if
the COLA were reduced by 1 percentage point, and 100% would see benefit
reductions if the number of computation years was increased from 35 to
40. Under longevity indexing, price indexing, and progressive price
indexing the percentage of beneficiaries affected would be 99.99%,
99.99%, and 80.97%, respectively.
[End of table]
Reform Elements Reduce Median Lifetime Benefits for Disabled Workers
and Dependents to Varying Degrees:
According to our simulations each of the reform elements we selected
would reduce median lifetime benefits for both disabled workers and
dependents relative to currently scheduled benefits (figs. 4 and
5).[Footnote 22] However, our projections also indicated that these
reductions would vary by reform element. Price indexing would have the
largest impact on disabled workers and dependents, reducing median
lifetime benefits by more than 25 percent. Median lifetime benefits
would fall from $473,960 to $343,350 for disabled workers and from
$351,910 to $244,745 for dependents. Progressive price indexing, on the
other hand, would create the smallest reduction in median lifetime
benefits, with median lifetime benefits falling by 7 percent for
disabled workers and 8 percent for dependents.[Footnote 23]
Figure 4: Projected Median Lifetime Benefits for Disabled Workers (1985
Cohort):
This figure is a bar graph showing projected median lifetime benefits
for disabled workers (1986 cohort:
Scheduled benefits: 100;
Reduced COLA 1 Percentage point: 90;
Longevity indexing: 85;
Price indexing: 72;
Progressive price indexing: 93.
[See PDF for image]
Source: GAO analysis of GEMINI data.
[End of figure]
Figure 5: Projected Median Lifetime Benefits for Those Who Have Ever
Received Dependent Benefits (1985 Cohort):
This figure is a bar chart showing projected median lifetime benefits
for those who have ever received dependent benefits (1985 Cohort):
Scheduled benefits: 100;
Longevity indexing: 83;
Price indexing: 70;
Progressive price indexing: 92.
[See PDF for image]
Source: GAO analysis of GEMINI data.
[End of figure]
Additionally, increasing the full retirement age and increasing the
number of computation years would likely reduce median lifetime
benefits for dependents.[Footnote 24] Since dependent benefits are
linked to those of the primary worker, an increase in the full
retirement age could shorten the period of time over which they both
receive benefits. Alternatively, some workers may decide not to adjust
their retirement plans in response to the increase in the FRA. Those
who maintain their original retirement plans, retiring prior to the new
FRA, will also receive reduced benefits relative to current law. (See
app. II for a discussion of how benefits are adjusted for early
retirement.) Thus, under both scenarios, total lifetime benefits would
be reduced, and so, too, would median lifetime benefits. A similar
outcome results from increasing the number of computation years by
which initial benefits are calculated. By increasing the number of
computation years, a worker's earnings history is expanded to include
years of possibly lower indexed earnings. As a result, total benefits
for some retired workers, and therefore, their dependents, would likely
be reduced, as would median lifetime benefits.
Disabled and Dependent Beneficiaries Are Not Uniformly Affected by
Reform Elements:
Our projections suggest that, while lifetime benefits would be reduced
for virtually all disabled workers and dependents, such reductions
would not be uniform across individuals. Figures 6 and 7 compare
beneficiaries' total lifetime benefit reductions by each reform
element, for disabled workers and dependents, respectively. If the COLA
were reduced by one percentage point, our projections show that
approximately 58 percent of disabled workers experienced lifetime
benefit reductions of 10 percent or less,[Footnote 25] while about 42
percent of disabled workers experienced lifetime benefits reduced by 10
to 25 percent. Almost no disabled workers would see benefits fall by
more than 25 percent.
Figure 6: Percentage Range of Projected Reductions in Total Lifetime
Benefits for Disabled Workers (1985 Cohort):
This figure is a shaded bar chart showing percentage range of projected
reductions in total lifetime benefits for disabled workers:
[See PDF for image]
Source: GAO analysis of GEMINI data.
Note: The above intervals include the upper endpoint. For example
"Between 1 and 5 percent" includes 5, but not 1. No disabled workers
had total lifetime benefit reductions of more than 50 percent.
[End of figure]
Figure 7: Percentage Range of Projected Reductions in Total Lifetime
Benefits for Individuals Who Have Ever Received Dependent Benefits
(1985 Cohort):
This figure is a shaded bar chart showing percentage n Total Lifetime
Benefits for Individuals Who Have Ever Received Dependent Benefits
(1985 Cohort):
[See PDF for image]
Source: GAO analysis of GEMINI data.
Note: The above intervals include the upper endpoint. For example
"Between 1 and 5 percent" includes 5, but not 1. For those who were
ever classified as a dependent, only a very few individuals had total
lifetime benefit reductions of more than 50 percent. Four individuals
experienced a benefit reduction of more than 50 percent under the COLA
reduction, 21 individuals under increasing the number of computation
years, 13 under longevity indexing, 34 under price indexing, and 5
under progressive price indexing.
[End of figure]
Certain reform elements would create reductions in total lifetime
benefits for the vast majority of disabled workers and dependents.
These reductions may create new hardships for certain beneficiaries,
such as disabled workers, who may not be able to easily replace lost
income. According to our projections, price indexing would result in
the greatest benefit reductions for the largest percentage of
beneficiaries, with decreases in lifetime benefits of between 25
percent and 50 percent for almost 70 percent of disabled workers and
about 90 percent of dependents. Both price indexing and longevity
indexing have a greater effect on initial benefit amounts the longer
the reform is in place. As such, people who leave the workforce early
may experience a smaller reduction in lifetime benefits than those who
leave at full retirement age.[Footnote 26] For example, as shown in
figures 6 and 7, longevity indexing could reduce lifetime benefits for
about 86 percent of disabled workers and about 96 percent of dependents
by 10 to 25 percent.[Footnote 27]
Progressive price indexing may have a more moderate effect on the
benefits of disabled workers and certain dependents because it is
designed to protect benefit levels for low earners and gradually apply
benefit reductions to beneficiaries with higher earnings. Because of
shorter earnings histories, some disabled workers would be in the low
end of the earnings distribution.[Footnote 28] Thus, under progressive
price indexing, a greater proportion of disabled workers would be
likely to have benefits adjusted by wage indexing. According to our
projections, progressive price indexing would reduce total lifetime
benefits by 5 percent or less for 46 percent of disabled workers and 35
percent of dependents.
Options Protecting the Benefits of Disabled Workers and Dependents
Could Mitigate the Effects of Benefit-Reducing Reform Elements:
Various options are available to protect benefits in different ways,
including accelerating the growth of an individual's benefits,
modifying current constraints on benefit levels, and exempting certain
populations from reforms. Options can also target certain types of
beneficiaries. We analyzed some of these protections and found they
could be structured to mitigate the effects of benefit reductions for
varying lengths of time. In addition, we found that specific options to
protect dependent benefits could be targeted to certain vulnerable
beneficiaries, such as widows and dependent children.
Many Options Exist for Protecting Social Security Benefits, Including
Full and Partial Exemptions:
We found a wide range of options exist for protecting disabled workers
and dependents from benefit-reducing reforms. Table 2 provides a
summary of the options.[Footnote 29] The protection options may be very
specific in terms of whom they protect and how, or broader in scope.
For example, while two protection options focus specifically on
disabled adult children (DAC), others, such as partial exemptions could
apply to any vulnerable population. In addition to each option having
its own strengths and weaknesses, the options could interact with each
other and with the various reform elements. When implementing a
protection option, all of these factors could influence its impact.
Table 2: Options for Protecting Disabled Worker and Dependent Benefits
from Social Security Reform:
Protection option available for: Any beneficiary type;
Protection option: Full exemption;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: Check;
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Any beneficiary type;
Protection option: Partial exemption;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: Check;
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: Check.
Protection option available for: Any beneficiary type;
Protection option: Minimum benefit;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Any beneficiary type;
Protection option: Super COLA;
Given a specific reform, the protection option could affect the:
Initial benefit amount: [Empty];
Given a specific reform, the protection option could affect the: Growth
of individual benefits: Check;
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Any beneficiary type;
Protection option: Age-indexed super COLA;
Given a specific reform, the protection option could affect the:
Initial benefit amount: [Empty];
Given a specific reform, the protection option could affect the: Growth
of individual benefits: Check;
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Children and families of disabled
workers;
Protection option: Increase the percentage of the worker's benefit that
the dependent family member receives as his/her benefit;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Children and families of disabled
workers;
Protection option: Increase the family maximum benefit level for DI;
Given a specific reform, the protection option could affect the:
Initial benefit amount: [Empty];
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: Check;
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Children and families of disabled
workers;
Protection option: Increase the percentage of the worker's benefit that
a dependent child or a disabled adult child (DAC) receives as his/her
benefit in combination with increasing the family maximum benefit;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: Check;
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Children and families of disabled
workers;
Protection option: Decouple DAC benefits from other family benefits;
Given a specific reform, the protection option could affect the:
Initial benefit amount: [Empty];
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: Check;
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Children and families of disabled
workers;
Protection option: Hold initial benefit amount harmless for family
benefits;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Children and families of retired
workers;
Protection option: Expand eligibility rules for divorced spouses;
Given a specific reform, the protection option could affect the:
Initial benefit amount: [Empty];
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: Check;
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Children and families of retired
workers;
Protection option: Increase the percentage of the worker's benefit that
the dependent family member receives as his/her benefit;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Children and families of retired
workers;
Protection option: Increase the percentage of the worker's benefit that
a dependent child or DAC receives as his/her benefit in combination
with increasing the family maximum benefit;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: Check;
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Children and families of retired
workers;
Protection option: Decouple DAC benefits from other family benefits;
Given a specific reform, the protection option could affect the:
Initial benefit amount: [Empty];
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: Check;
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Spouses;
Protection option: Increase the percentage of the worker's benefit that
the spouse receives as his/ her benefit;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Spouses;
Protection option: Implement a child/family care credit[A];
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Survivors;
Protection option: Hold initial benefit amount harmless for family
benefits;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Survivors;
Protection option: Hold early survivors (young children or young
widow(er)s) harmless;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: Check;
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Survivors;
Protection option: Increase the surviving spouse benefit to 2/3 or 3/4
of the combined couples' benefit;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Survivors;
Protection option: Increase benefits for aged survivors;
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Protection option available for: Survivors;
Protection option: Increase the early retirement age[B];
Given a specific reform, the protection option could affect the:
Initial benefit amount: Check;
Given a specific reform, the protection option could affect the: Growth
of individual benefits: [Empty];
Given a specific reform, the protection option could affect the:
Maximum family benefit available: [Empty];
Given a specific reform, the protection option could affect the:
Eligibility for benefits: [Empty];
Given a specific reform, the protection option could affect the:
Conversion at the full retirement age: [Empty].
Source: GAO.
[A] If the spouse is eligible for retirement benefits based on his or
her own earnings record, Social Security will pay that amount first.
However, if the spouse benefit (based on his or her husband's earnings
record) would be a higher amount, Social Security will combine the
benefits and pay the higher amount. A spouse receiving such a benefit
may also be eligible for a care credit for his or her own earnings
record. This care credit could change the initial benefit amount.
[B] While an increase in the early retirement age could increase the
initial benefit amounts for those who retire at the new early
retirement age, others who may need to stop working at 62 may have no
Social Security payments for the elapsed time.
[End of table]
There are several protection options that could be applied to all
disabled workers and dependents. Under a full exemption, beneficiaries
would not be subject to a reform and their benefits would remain
unchanged. Under a partial exemption, beneficiaries would not be
subject to a reform until a certain point in time. For example,
disabled workers could be exempt from benefit changes until they are
converted to the Old Age program at the full retirement age. At this
point, their benefit amount would be recalculated to reflect the reform
in proportion to the years they spent working. In addition, a super
COLA could help protect the benefits of disabled workers and
dependents. A super COLA would mitigate some of the effects of a
benefit-reducing reform by annually increasing benefits at a rate above
the consumer price index--which is currently used to index benefits.
Some protection options could cover all dependents by increasing the
percentage of the worker's benefit that the dependent receives. (See
app. II for more detail on how dependent benefits are calculated.) For
example, a number of proposals have called for increasing the
percentage of the worker's benefit that widow(er)s receive. Another
option that could protect the benefits of a wide range of dependents
would be to raise the maximum benefit that families can receive based
on one worker's earnings record. Other protection options, such as
caregiver credits, could focus on protecting particular groups of
dependents. Several reform proposals have, in fact, called for
providing caregiver credits to individuals who spend time out of the
workforce to care for their dependents or to those with reduced or low
earnings while attending to care-giving responsibilities. Some
proposals assign caregivers a specified level of earnings for each year
the caregiver received zero or low earnings compared to prior years.
Other proposals exclude zero-earning care years from the initial
benefit calculation.[Footnote 30] Another option specific to a certain
type of dependent would be to increase benefits for aged survivors,
since they are more likely to rely on Social Security to stay out of
poverty and could have fewer opportunities, such as returning to work,
to respond to benefit-reducing reforms.
Increasing the early retirement age could offer some protection for
survivors. If the early retirement age were raised--for example, from
62 to 64--then workers who take early retirement would receive
actuarially adjusted benefits for a shorter period of time under the
new early retirement age, and thus their monthly benefits would be
relatively higher than the monthly benefits they would have received if
they had retired at the current early retirement age.[Footnote 31]
Since a dependent's benefit is linked to the worker's initial benefit
amount, an increase in the worker's benefit would also increase the
dependent's benefit, mitigating some of the negative effects of other
reforms. Similarly, raising the FRA coupled with a partial exemption
from a benefit reduction could offer some additional protection for
disabled worker benefits. With an increase in the FRA, disabled workers
would receive (exempted) DI benefits for a longer period of time
because the age at which their disability benefits are converted to
retiree benefits would rise with the new FRA.
Some Benefit Protections Could Restore Benefits to Levels near Those
Scheduled under Current Law:
In general, the reform elements we examined reduce median lifetime
benefits for disabled workers and dependents. Because disabled workers
may not have the financial resources--especially earnings related
income--to adjust to benefit reductions, we explored the interaction of
reform elements and certain options to offset them.
According to our projections, protections from a reduction in the COLA
could restore benefits of disabled workers to levels close to those
scheduled under current law. Reducing the COLA by one percentage point
would result in about a 10 percent decrease in median lifetime benefits
for workers who become disabled before age 60. To offset such a
decrease, they could be partially or fully exempted. With a COLA
reduction, a partial exemption would mean that the Social Security
Administration would increase a disabled worker's benefits annually as
scheduled under current law (i.e., using the full COLA) until the
worker reached the full retirement age. At that point, the disabled
worker's benefits would grow annually by the reduced COLA (1 percentage
point lower than what it would be under current law). Our projections
showed that a partial exemption as described above would raise median
lifetime benefits from their reduced levels by 7 percent (up to 96
percent of scheduled levels under current law). In contrast, a full
exemption would allow annual COLA adjustments in line with current law
until death (fig. 8).[Footnote 32]
Figure 8: Projected Median Lifetime Benefits under a COLA Reduction of
1 Percentage Point (1985 Cohort):
This figure is a bar chart showing projected median lifetime benefits
under a COLA Reduction of 1 Percentage Point (1985 Cohort). The
disability status is on the X axis, and the percentage of currently
scheduled benefits is on the Y axis:
[See PDF for image]
Source: GAO analysis of GEMINI data.
Notes: In figures 8 to 11, the population labeled "Never disabled"
refers to all beneficiaries--dependent or retirees on their own record-
-who were never disabled.
In figures 8 to 11, the benefits under a full exemption do not
completely return to pre-reform levels. This is because some
individuals receiving disabled worker benefits also received some
benefits as dependents from another worker's record at some point in
their lifetime. As those benefits would not be subject to the same
protections, median lifetime benefits for such disabled workers may
remain slightly lower than those under current law.
[End of figure]
In addition to a decrease in the COLA, we analyzed options for
protecting the benefits of disabled workers under three reform elements
that have an impact on the initial benefit amount a disabled worker
receives--price indexing, longevity indexing, and progressive price
indexing. There are several protection options for mitigating the
effects of these reform elements, including full and partial
exemptions. In the case of price indexing initial benefits, we
projected that the median lifetime benefits of disabled workers would
be about 75 percent of the median benefits under current law (fig. 9).
A full exemption for disabled workers would raise the benefits of those
disabled workers who exclusively receive DI benefits to the currently
scheduled levels. However, a partial exemption from price indexing
would restore the median lifetime benefit to 89 to 90 percent of
scheduled levels, depending on how the partial exemption is
implemented.[Footnote 33] One type of partial exemption (Type I) uses
price indexing to calculate the portion of the benefits based on the
years a person is out of the workforce and receiving DI benefits. In
contrast, the other type of partial exemption (Type II) uses wage
indexing to cover the same time period. (For more details, please see
app. I.) The difference between the two partial exemptions becomes more
substantial the earlier one becomes disabled, as the difference between
wages and prices increases over time. While offering some protection
from benefit reductions, both types of partial exemptions involve a
recalculation of benefits at the full retirement age. This
recalculation would result in lower benefits for the DI recipient and
could create a potential problem if that individual relied on the prior
benefit amount and had limited options for replacing the lost income.
(See figs. 10 and 11 for longevity indexing and progressive price
indexing, respectively.)
Figure 9: Projected Median Lifetime Benefits under Price Indexing (1985
Cohort):
This figure is a bar chart showing projected median lifetime benefits
under price indexing (1985 Cohort):
[See PDF for image]
Source: GAO analysis of GEMINI data.
Notes: In figures 8 to 11, the population labeled "Never disabled"
refers to all beneficiaries--dependent or retirees on their own record-
-who were never disabled.
In figures 8 to 11, the benefits under a full exemption do not
completely return to pre-reform levels. This is because some
individuals receiving disabled worker benefits also received some
benefits as dependents from another worker's record at some point in
their lifetime. As those benefits would not be subject to the same
protections, median lifetime benefits for such disabled workers may
remain slightly lower than those under current law.
[End of figure]
Figure 10: Projected Median Lifetime Benefits under Longevity Indexing
(1985 Cohort):
This figure is a bar chart showing projected median lifetime benefits
under longevity indexing (1985 Cohort). The X axis is the disability
status, and the Y axis is the percentage of currently scheduled
benefits:
[See PDF for image]
Source: GAO analysis of GEMINI data.
Notes: In figures 8 to11, the population labeled "Never disabled"
refers to all beneficiaries--dependent or retirees on their own record-
-who were never disabled.
[End of figure]
In figures 8 to 11, the benefits under a full exemption do not
completely return to pre-reform levels. This is because some
individuals receiving disabled worker benefits also received some
benefits as dependents from another worker's record at some point in
their lifetime. As those benefits would not be subject to the same
protections, median lifetime benefits for such disabled workers may
remain slightly lower than those under current law.
Figure 11: Projected Median Lifetime Benefits under Progressive Price
Indexing (1985 Cohort):
This figure is a bar chart showing projected median lifetime benefits
under progressive price indexing (1985 cohort). The X axis is the
disability status, and the Y axis is the percentage of currently
scheduled benefits.
[See PDF for image]
Source: GAO analysis of GEMINI data.
Notes: In figures 8 to 11, the population labeled "Never disabled"
refers to all beneficiaries--dependent or retirees on their own record-
-who were never disabled.
[End of figure]
In figures 8 to 11, the benefits under a full exemption do not
completely return to pre-reform levels. This is because some
individuals receiving disabled worker benefits also received some
benefits as dependents from another worker's record at some point in
their lifetime. As those benefits would not be subject to the same
protections, median lifetime benefits for such disabled workers may
remain slightly lower than those under current law.
Another protection option would be to allow disability benefits to grow
at a greater rate than other benefits. For example, disabled workers
could be explicitly included in the scope of the reform, and receive
reduced initial benefits. However, instead of receiving annual
increases based on the current-law COLA, disabled workers could have
their benefits increased by a "super COLA"--one that is set above the
Consumer Price Index. In this case, benefits for the disabled would
grow at a faster rate than they would under current law and could
approach or even exceed current law levels. Variations on the super-
COLA could include an "age-indexed super COLA" which would be greater
for those disabled at younger ages. For those workers who become
disabled near the full retirement age the COLA would be closer to that
used for retirees. These protections could be particularly beneficial
for disabled workers who receive benefits for a prolonged period of
time.
Protections for Dependent Benefits Could Be Targeted to Certain
Vulnerable Beneficiaries, Including Survivors:
While protections for disabled workers would generally cover all such
beneficiaries, the options for protecting dependent benefits could be
more targeted to specific dependents and not necessarily applied to the
full range of dependents, which includes spouses, divorcees,
widow(er)s, and child survivors. The circumstances around which a
person becomes a dependent vary greatly, as does the role of Social
Security benefits in their lives. For some, Social Security may be the
primary source of support; for others, it may be only a small
proportion of their income.
Protections could target children, who make up about 8 percent of
Social Security beneficiaries, receiving benefits as the survivors or
dependents of disabled or retired workers. Table 3 shows the number of
children who receive benefits in each category and the average monthly
benefit for these children. One way to protect the benefits of children
would be to exempt them from any reform, keeping their benefit
calculation tied to current law. Another way to protect their benefits
to some degree would be to raise the maximum benefit a family could
receive on a single worker's earnings record.[Footnote 34]
Table 3: Child Beneficiaries:
Program: All;
Number of children receiving benefits (thousands): 3959;
Children as a percentage of program beneficiaries: 8.0;
Total monthly benefit children receive (in millions of dollars): 1993;
Average monthly benefit (in dollars): 503.
Program: Old Age;
Number of children receiving benefits (thousands): 485;
Children as a percentage of program beneficiaries: 1.4;
Total monthly benefit children receive (in millions of dollars): 253;
Average monthly benefit (in dollars): 522.
Program: Survivors;
Number of children receiving benefits (thousands): 1850;
Children as a percentage of program beneficiaries: 28.6;
Total monthly benefit children receive (in millions of dollars): 1269;
Average monthly benefit (in dollars): 686.
Program: Disability;
Number of children receiving benefits (thousands): 1624;
Children as a percentage of program beneficiaries: 18.6;
Total monthly benefit children receive (in millions of dollars): 471;
Average monthly benefit (in dollars): 290.
Source: GAO analysis. of Social Security data.
Note: Data accessed from [hyperlink,
http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/] on August 29,
2007. The children referred to in this chart receive benefits off
someone else's work record - generally a parent. For example, the
1,624,000 children receiving benefits from the DI program have a
parent/guardian who is disabled.
[End of table]
The majority of experts with whom we spoke told us that increasing the
maximum amount that a family could receive from one worker's earnings
record could help protect child and other dependent benefits. Such an
increase could help those dependents who are constrained by the family
maximum. A family may have several people receiving benefits based on
one worker's record. The sum of the family members' benefits may exceed
the specified maximum, which is calculated as a percentage of the
worker's benefit amount. Thus, any reform that would result in a
decrease in the primary benefit amount would also result in a decrease
in the amount that each eligible family member would receive and a
corresponding decrease in the total amount a family would receive.
Certain options, including increased allowable benefits for widows or
partial exemptions, could be designed to protect the benefits of
widow(er)s or others who may have fewer resources available to them.
Under current law, widows and widowers can collect 100 percent of their
deceased spouse's benefits (or their own benefit--whichever is
greater); a "widow's boost" would allow them to receive up to 75
percent of the couple's combined benefits. Widow(er)s may rely on
Social Security for a large percentage of their retirement income, in
part because they may live many years beyond the exhaustion of other
financial resources, may find it difficult to work, or may incur large
health expenses that deplete their other resources.
A reduction in the COLA may be particularly detrimental to the lifetime
benefits of those who live long lives, because the effect of reducing
the COLA is compounded over time. As such, it may be desirable to
protect older widow(er)s--along with other individuals who receive
benefits for a prolonged period of time--from the effect of a COLA
reduction. For example, in our projections for the COLA reduction, we
found that for the group of widows who received some benefits and who
died before age 75, median lifetime benefits would be approximately 93
percent of those under current law. In contrast for those who lived
past age 95, median lifetime benefits would be only 83 percent of
currently scheduled levels.
Some Protection Options May Create New Costs and Unintended Incentives
for the Social Security Program:
The options for protecting the benefits of disabled workers and those
of dependents come at a cost to the Social Security program in terms of
its solvency. In addition, some protections options may create
incentives for people to apply to the Disability Insurance program if
DI benefits increase while retirement benefits stay stable. Further,
protection options could provide disincentives for some to return to
work.
Protecting the Benefits of Disabled Workers and Dependents Would
Increase Costs for the Social Security Program:
The Social Security reform elements we examined were designed primarily
to improve program solvency. These reform elements would generally
reduce benefits from their currently scheduled but underfunded
levels.[Footnote 35] While protecting the benefits of disabled workers
and dependents may be socially desirable, such protection would come at
some cost to the Social Security program. In particular, the
protections lessen the degree to which the potential reforms could
restore solvency. One could counter these costs with further benefit
reductions to beneficiaries considered less vulnerable than those
recipients whose benefits are specifically protected. That is, reform
packages with certain benefit protections for vulnerable populations
may necessitate further reductions in the benefits of retired workers
or increases in revenues to achieve the intended solvency effect. In
addition to the effects on solvency, some of the protections discussed
may also have administrative costs associated with them.
Certain Protections May Create Incentives for Individuals to Apply for
Disability Benefits:
Protecting the benefits of disabled workers may increase the number of
people who apply for disability benefits. This may also be relevant to
certain reform elements. An increase in the full retirement age coupled
with the reduction in benefits for early retirement could motivate some
individuals approaching the early retirement age to apply for
disability benefits, if they believed that they could qualify for the
now greater DI benefits.[Footnote 36] For example, before a change in
the retirement age a worker who is a year away from the full retirement
age, and who would qualify for DI but is unsure of that outcome, may
choose to wait and only receive Old Age benefits. Once the full
retirement age is raised, this worker may choose to apply for DI,
rather than waiting to receive retirement benefits. The greater the
benefit disparity between the two programs, the more likely it may be
that DI applications and enrollment will increase. Thus, the potential
for an increase in DI program costs exists with any reform elements
that decrease the generosity of the Old Age component of OASDI without
a corresponding decrease in that of the DI component.[Footnote 37]
Under current law, there may already be an incentive for older workers
to apply for DI rather than retire early. Using individual level data
from the simulation model, we analyzed the benefits of two similar
individuals under current law and under price indexing with and without
full and partial exemptions. Both of the simulated individuals had
similar lifetime earnings, close to the median for the simulated 1985
cohort, and both would have received initial benefits at age 62.
However, they differed in two significant ways: one retired at age 62,
while the other was disabled at age 62, and the retiree had lower
lifetime benefits under current law.[Footnote 38] The retiree, who died
at age 84, had lifetime benefits of about $433,000, while the disabled
worker, who died at age 82, had lifetime benefits of about $505,000--
about 16 percent higher than those of the retired worker.
A full exemption for disabled workers from certain reform elements
could similarly create discrepancies between the two programs,
resulting in incentives to apply for the DI program. Under price
indexing, the lifetime benefits of both individuals would be reduced,
but the relative difference would remain at about 16 percent. However,
if disabled workers were fully exempted from price indexing, the
simulated disabled worker's lifetime benefits would be back to the
initial amount of $505,000, or 72 percent greater than those of the
retired worker. This difference in potential benefits would likely
increase the incentive to apply for the DI program. Figure 12 and table
4 show the total lifetime benefits and the average monthly benefits of
these two simulated individuals under current law, price indexing, and
with exemptions.
Figure 12: Simulated Total Lifetime Benefits for Two Similar
Individuals Who Began Receiving Benefits at Age 62, Exemptions Apply to
Disabled Workers (1985 Cohort):
This figure is a bar chart showing simulated total lifetime benefits
for two similar individuals who began receiving benefits at age 62,
exemptions apply to disabled workers (1985 Cohort). The X axis
represents Reform scenario, and the Y axis represents dollars.
[See PDF for image]
Source: GAO analysis of GEMINI data.
[End of figure]
Table 4: Total Lifetime and Average Monthly Benefits of Two Simulated
Individuals Who Began Receiving Benefits at Age 62, Exemptions Apply to
Disabled Workers (1985 Cohort):
Current law;
Total lifetime benefits: Retired worker: $433,000;
Total lifetime benefits: Disabled worker: $505,000;
Total lifetime benefits: Difference as a percentage of the retired
worker's benefits: 16.63%;
Average monthly benefits: Retired worker: $1,640;
Average monthly benefits: Disabled worker: $2,104;
Average monthly benefits: Difference as a percentage of the retired
worker's benefits: 28.29%.
Price indexing;
Total lifetime benefits: Retired worker: $293,000;
Total lifetime benefits: Disabled worker: $341,000;
Total lifetime benefits: Difference as a percentage of the retired
worker's benefits: 16.38%;
Average monthly benefits: Retired worker: $1,110;
Average monthly benefits: Disabled worker: $1,421;
Average monthly benefits: Difference as a percentage of the retired
worker's benefits: 28.02%.
Full exemption;
Total lifetime benefits: Retired worker: $293,000;
Total lifetime benefits: Disabled worker: $505,000;
Total lifetime benefits: Difference as a percentage of the retired
worker's benefits: 72.35%;
Average monthly benefits: Retired worker: $1,110;
Average monthly benefits: Disabled worker: $2,104;
Average monthly benefits: Difference as a percentage of the retired
worker's benefits: 89.59%.
Partial exemption;
Total lifetime benefits: Retired worker: $293,000;
Total lifetime benefits: Disabled worker: $389,380;
Total lifetime benefits: Difference as a percentage of the retired
worker's benefits: 32.89%;
Average monthly benefits: Retired worker: $1,110;
Average monthly benefits: Disabled worker: $1,622;
Average monthly benefits: Difference as a percentage of the retired
worker's benefits: 46.18%.
Source: GAO analysis of GEMINI data.
[End of table]
However, partial rather than full exemptions or other protections, such
as an age-indexed super COLA, could provide benefit protections without
substantially increasing the disparity between the programs for people
approaching the early or full retirement ages. Under a partial
exemption, in which the disabled worker would be exempted from the
reform until full retirement age, the added incentive that could be
created by a full exemption would be reduced. Such a partial exemption
for the disabled worker in our example would result in lifetime
benefits that are about 33 percent higher than those of the retired
worker under price indexing.
Certain Protections May Affect the Work Decisions of Beneficiaries:
The family maximum limits the amount that can be received off of a
worker's record. This limit is compatible with the incentive for
individuals to work. Changing such a limit could affect beneficiaries'
work decisions. For example, protecting benefits of dependents by
increasing the family maximum could affect an individual's work
decisions. Under the current family maximum with a benefit reduction in
place, if a person chooses to work 30 hours a week, an increase in the
total amount a family (or individual dependents) could receive might
affect this decision and decrease the person's time in the workforce.
In such a case, the individual may find that the increase in the
benefits received would allow for fewer weekly hours of work without a
change in total income. In addition, protections that increase the
benefits of disabled workers, such as the super COLA, can also create
disincentives for such beneficiaries to return to work. As such, some
individuals may continue to rely on the DI program, rather than finding
a way to re-enter the workforce.
Conclusions:
Social Security's financial challenges may result in program
modifications that may include benefit reductions. These benefit
reductions will likely affect all beneficiaries, including vulnerable
individuals who may not be able to adjust to these reductions or who
rely on Social Security as their primary source of income. While
protecting the benefits of vulnerable populations may be desirable,
such action does come at a cost. Further benefit reductions or revenue
increases would be needed to achieve program solvency. These offsets,
in turn, may create new financial vulnerabilities among other
beneficiaries who would bear the burden of these protections.
Few reform proposals consider the impact that benefit reductions would
have on all beneficiary types, instead treating all beneficiaries
similarly. However, some special consideration should be given to the
effects of the reform on the benefits of the most vulnerable,
especially when these individuals are disproportionately affected. If
the solution to Social Security's financing problems includes benefit
reductions, then the equal treatment of all beneficiaries may need to
be reconsidered, and the complex interactions of benefit reductions,
protections, and direct and indirect costs to the system and to other
retirees will need to be weighed carefully. Benefit protections can be
a part of a comprehensive reform package and the reform debate should
consider the design, inclusion, and implications of such measures to
assure income adequacy. Likewise, to the extent that Social Security
aligns the disability program with the current state of science,
medicine, technology, and labor market conditions, such modernization
should also be considered.
Matter for Congressional Consideration:
Accordingly, in light of potential reform, Congress should consider the
potential implications of reform on disability and dependent
beneficiaries. Such a review might usefully be coordinated with any
modernization of the Social Security disability program.
Agency Comments:
We provided a draft of this report to SSA and the Department of the
Treasury, which generally agreed with our findings. Both provided
technical comments, and SSA also provided general comments, which
appear in appendix III. We incorporated the comments throughout our
report as appropriate.
In general, SSA concurred with the methodology, overall findings, and:
conclusions of the report. However, SSA felt that the report could
benefit from a more direct comparison of disabled beneficiaries and
retired beneficiaries (and a similar construct for dependents). While
such a comparison could be beneficial and give context to the reform
discussion, this report was premised on the notion that certain
beneficiaries would be less able to offset benefit reductions, rather
than a comparison of relative welfare.
Finally, GAO agrees that one could better assess the degree to which a
reform element or protection option support the program's goal of
adequacy if benefits were compared to a standard of adequacy;
however such a comparison was beyond the scope of the current study.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution until 30 days after the date
of this letter. At that time, we will send copies of this report to the
Social Security Administration and the Department of the Treasury, as
well as other interested parties. Copies will also be made available to
others upon request. In addition, the report will be available at no
charge on the GAO Web site at [hyperlink,http://www.gao.gov]. Please
contact me at (202) 512-7215, if you have any questions about this
report. Other major contributors include Michael Collins, Nagla'a El-
Hodiri, Jennifer Gregory, Joe Applebaum, Melinda Cordero, Mark
Goldwein, Meaghan Mann, and Dan Schwimer.
Signed by:
Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Methodology:
Microsimulation Model:
To analyze the effects of individual reform elements and certain
protections from these reforms on Social Security benefit levels for
disabled workers and dependents, we simulated their benefits using the
Policy Simulation Group's (PSG) microsimulation models. We based our
analysis on projected lifetime benefits for a simulated 1985 birth
cohort. In order to have a point of comparison, we also used the
microsimulation models to simulate Social Security benefits of retirees
who receive benefits on their own record.
Description:
For our simulations, we used the PSG's Social Security and Accounts
Simulator (SSASIM) and Genuine Microsimulation of Social Security
Accounts (GEMINI) simulation models. GEMINI simulates Social Security
benefits and taxes for large representative samples of people born in
the same year. GEMINI simulates all types of Social Security benefits
including retired workers', spouses', survivors', and disability
benefits. It can be used to model a variety of Social Security reforms.
GEMINI uses inputs from SSASIM, which has been used in numerous GAO
reports,[Footnote 39] and from the Pension Simulator (PENSIM), which
was developed for the Department of Labor. GEMINI relies on SSASIM for
economic and demographic projections and relies on PENSIM for simulated
life histories of large representative samples of people born in the
same year and their spouses.[Footnote 40] Life histories include
educational attainment, labor force participation, earnings, job
mobility, marriage, disability, childbirth, retirement, and death. Life
histories are validated by PSG against data from the Survey of Income
and Program Participation, the Current Population Survey, Modeling
Income in the Near Term (MINT3),[Footnote 41] and the Panel Study of
Income Dynamics. Additionally, any projected statistics (such as life
expectancy, employment patterns, and marital status at age 60) are,
where possible, consistent with intermediate cost projections from
Social Security Administration's Office of the Chief Actuary (OCACT).
At their best, such models can provide only very rough estimates of
future incomes. However, these estimates may be useful for comparing
future incomes across alternative policy scenarios and over time.
For this report, we used the Genuine Microsimulation of Social Security
Accounts (GEMINI) to estimate Social Security benefits for a sample of
approximately 2 percent of individuals born in the 1985 cohort. This
consisted of just over 97,000 individuals, with positive benefit levels
for just over 83,400 individuals.
For our baseline, benefits were simulated under current law. These
simulations are based on the Social Security Trustees' 2007
intermediate economic and actuarial assumptions. While our simulations
provide projections of future retirement income, as promised under
current law, there is a considerable amount of uncertainty involved
with these estimates. Since these estimates could change significantly,
depending on assumptions used and behavior responses, they should not
be considered predictions. In addition, because simulations are
sensitive to economic and demographic assumptions, it is more
appropriate to compare benefits across the scenarios than to focus on
the actual estimates themselves.
Evaluating Reform Proposals:
In general, GAO has suggested that policy makers should consider three
basic criteria when evaluating reform proposals[Footnote 42]
* the extent to which the proposal achieves sustainable solvency and
how the proposal would affect the economy and the federal budget;
* the balance struck between the goals of individual equity[Footnote
43] (rates of return on individual contributions) and income
adequacy[Footnote 44] (level and certainty of monthly benefits); and:
* how readily such changes could be implemented, administered, and
explained to the public.
Moreover, reform proposals should be evaluated as packages that strike
a balance among the individual elements of the proposal and the
interactions among these elements. The overall evaluation of any
particular reform proposal depends on the weight individual policy
makers place on each of the above criteria.
However, for the purposes of this study, we did evaluate individual
reform elements and individual protection options. We looked at
specific elements of solvency-improving reform proposals to analyze
their effects on our populations of interest--disabled workers and
dependents. In particular, we wanted to isolate each element in order
to project the magnitude of their effects on these populations and in
order to model certain protection options. Nevertheless, we recognize
that there would be important interactive effects with any set of
reforms and maintain the importance of considering all possible effects
of any reform package as a whole.
Assumptions and Limitations:
Simulating retirement income almost 50 years into the future requires
many assumptions and simplifications and, consequently, our simulations
have a number of limitations. A primary limitation of our analysis is
that our simulations do not include important components of retirement
income, such as personal savings, earnings in retirement, health
benefits, and other public assistance programs such as SSI. These
sources could also be used to offset benefit reductions. In addition,
the model is structured such that changes in Social Security benefits
have no behavioral consequences in terms of decisions regarding work,
disability, or retirement. As a result, the individuals would not
change their work decisions (earnings/retirement) based on the reforms.
2007 Social Security Trustees' Assumptions:
The simulations are based on economic and demographic assumptions from
the 2007 Social Security Trustees' report.[Footnote 45] We used
Trustees' intermediate assumptions for inflation, real wage growth,
mortality decline, immigration, labor force participation, and interest
rates.
Specification of Disabled Workers and Dependents:
For the purpose of this analysis:
Disabled Workers consisted of those individuals who had a valid
disability onset age and who received a positive amount of benefits
from Disability Insurance. This includes any disabled workers who were
dependents at some point in time.
Dependents consisted of those individuals who received benefits based
on someone else's earnings record, at any point. Specifically,
dependents excluded those who only received benefits based on their own
record as retirees or as disabled workers.
Description of Social Security Reform Elements:
Longevity Indexing:
To simulate longevity indexing, which links the growth of initial
benefits to changes in life expectancy, we successively modified the
PIA formula replacement factors (90, 32, 15) beginning in 2009,
reducing them annually by multiplying them by 0.995. This specification
mimics provision 1 of Model 3 of the President's Commission to
Strengthen Social Security (CSSS).[Footnote 46] The CSSS solvency
memorandum notes that the 0.995 successive reductions "reduces monthly
benefit levels by an amount equivalent to increasing the normal
retirement age (NRA) for retired workers by enough to maintain a
constant life expectancy at NRA, for any fixed age of benefit
entitlement."[Footnote 47] This provision as specified and scored--
using the intermediate assumptions of the 2001 Trustees' report--in the
CSSS memo by SSA's Office of the Chief Actuary would improve the long-
range OASDI actuarial balance (reduce the actuarial deficit) by an
estimated 1.17 percent of taxable payroll.
Price Indexing:
We also simulated the effects of price indexing, where initial benefits
would be indexed to the consumer price index (CPI) in order to limit
the growth of benefits. We successively modified the primary insurance
amount (PIA) formula replacement factors (90, 32, and 15) beginning in
2012, reducing them successively by real wage growth in the second
prior year. This specification mimics provision B6 of the August 10,
2005, memorandum to SSA's Chief Actuary regarding the provision
requested by the Social Security Advisory Board (SSAB), which is an
update of provision 1 of Model 2 of the CSSS.[Footnote 48] As noted in
the CSSS's solvency memorandum from SSA's Chief Actuary, "[t]his
provision would result in increasing benefit levels for individuals
with equivalent lifetime earnings across generations (relative to the
average wage level) at the rate of price growth (increase in the CPI),
rather than at the rate of growth in the average wage level as in
current law." This provision as specified and scored by OCACT in the
SSAB memo would improve the long-range OASDI actuarial balance (reduce
the actuarial deficit) by an estimated 2.38 percent of taxable payroll.
Progressive Price Indexing:
To simulate the effects of implementing a progressive price index, we
mimicked provision B7 of the August 10, 2005, memorandum to SSA's Chief
Actuary.[Footnote 49] We created a new bend point at the 30th
percentile of earnings, beginning in 2012. We maintained current-law
benefits for earners at the 30th percentile and below. We also
maintained the lower two PIA formula replacement factors (90 and 32).
We reduced the upper two PIA formula replacement factors (32 and 15) so
that maximum worker benefits from one generation to the next grew by
inflation rather than the growth in average wages. This provision as
specified and scored by OCACT would improve the long-range OASDI
actuarial balance (reduce the actuarial deficit) by an estimated 1.43
percent of taxable payroll.
Increase the Number of Computation Years Used in the Initial Benefit
Calculation:
In our modeling of this reform element, we gradually reduced the number
of drop out years from 5 to 0, thereby extending the number of
computation years from 35 to 40. The number of computation years would
increase to 36 in 2007, 37 in 2008, 38 in 2010, 39 in 2012, and 40 in
2014. This specification mimics provision B2 of the August 10, 2005
memorandum to SSA's Chief Actuary.[Footnote 50] This provision as
specified and scored by OCACT would improve the long-range OASDI
actuarial balance (reduce the actuarial deficit) by an estimated 0.46
percent of taxable payroll.
Reduction in the Cost-of-Living Adjustment:
We also simulated a reduction in the cost-of-living adjustment (COLA)
of one percentage point, beginning in 2012. This specification mimics
provision A2 of the August 10, 2005, memorandum to SSA's Chief
Actuary.[Footnote 51] This provision as specified and scored by OCACT
would improve the long-range OASDI actuarial balance (reduce the
actuarial deficit) by an estimated 1.49 percent of taxable payroll.
Some reform proposals have called for reducing the COLA by about 0.2
percent to 0.4 percent, in response to methodological concerns that the
CPI for urban wage earners and clerical workers, the current CPI
measure used to adjust benefits, overstates inflation. The intent of
these proposals is to implement a COLA that may more accurately reflect
inflation.
Description of Protection Options:
Table 5: Options for Protecting Disabled Worker and Dependent Benefits
from Social Security Reform:
Protection option available for: Any beneficiary type;
Protection option: Full exemption;
How the protection option could work: The beneficiary would not be
subject to reform. Benefits would be unchanged.
Protection option available for: Any beneficiary type;
Protection option: Partial exemption;
How the protection option could work: Benefits would not be subject to
reform until a certain point in time. At this point in time, benefits
would be adjusted to reflect reform.
Protection option available for: Any beneficiary type;
Protection option: Minimum benefit;
How the protection option could work: Beneficiaries would be guaranteed
a specified minimum benefit level.
Protection option available for: Any beneficiary type;
Protection option: Super COLA;
How the protection option could work: A larger COLA would be applied to
benefits to partially mitigate reductions.
Protection option available for: Any beneficiary type;
Protection option: Age-indexed super COLA;
How the protection option could work: Works similarly to the super
COLA. However, this COLA would vary in size, with younger beneficiaries
receiving larger adjustments.
Protection option available for: Children and families of disabled
workers;
Protection option: Increase the percentage of the worker's benefit that
the dependent family member receives as his/her benefit;
How the protection option could work: Children and spouses receiving
benefits from a parent's or spouse's earnings record receive a set
percentage of their parent's or spouse's benefits as their benefit.
This option would increase the size of this percentage.
Protection option available for: Children and families of disabled
workers;
Protection option: Increase the family maximum benefit level for DI;
How the protection option could work: Families would be subject to a
higher family maximum benefit level if they receive benefits off the
earnings record of a disabled worker.
Protection option available for: Children and families of disabled
workers;
Protection option: Increase the percentage of the worker's benefit that
a dependent child or a disabled adult child (DAC) receives as his/her
benefit in combination with increasing the family maximum benefit;
How the protection option could work: This option would increase the
percentage used to determine a dependent child or DAC's benefit level
while also increasing the family maximum benefit level.
Protection option available for: Children and families of disabled
workers;
Protection option: Decouple DAC benefits from other family benefits;
How the protection option could work: This option would exclude DAC
benefits from the family benefit calculation. While a DAC would
continue to receive benefits based from his/her parent's earnings
record, DAC benefits would not be included in the calculation of total
family benefits when determining whether family benefits have exceeded
the maximum family benefit.
Protection option available for: Children and families of disabled
workers;
Protection option: Hold initial benefit amount harmless for family
benefits;
How the protection option could work: If reform adjusts the initial
benefit amount for a disabled worker, the amount used for calculating
the benefits for any dependent of a disabled worker would be unchanged.
Protection option available for: Children and families of retired
workers;
Protection option: Expand eligibility rules for divorced spouses;
How the protection option could work: This option would alter
eligibility rules for divorced spouses (e.g. shorten the duration of
marriage requirement for the divorced spouse to receive benefits from
his/her spouse's earnings record).
Protection option available for: Children and families of retired
workers;
Protection option: Increase the percentage of the worker's benefit that
the dependent family member receives as his/her benefit;
How the protection option could work: Children and spouses receiving
benefits from a parent's or spouse's earnings record receive a set
percentage of their parent's or spouse's benefits as their benefit.
This option would increase the size of this percentage.
Protection option available for: Children and families of retired
workers;
Protection option: Increase the percentage of the worker's benefit that
a dependent child or DAC receives as his/her benefit in combination
with increasing the family maximum benefit;
How the protection option could work: This option would increase the
percentage used to determine a dependent child or DAC's benefit level
while also increasing the family maximum benefit level.
Protection option available for: Children and families of retired
workers;
Protection option: Protection option available for Spouses: Decouple
DAC benefits from other family benefits;
How the protection option could work: Protection option available for
Spouses: This option would exclude DAC benefits from the family benefit
calculation. While a DAC would continue to receive benefits based from
his/her parent's earnings record, DAC benefits would not be included in
the calculation of total family benefits when determining whether
family benefits have exceeded the maximum family benefit.
Protection option available for: Spouses;
Protection option: Increase the percentage of the worker's benefit that
the spouse receives as his/ her benefit;
How the protection option could work: Husbands and wives receiving
benefits from their spouses' earnings records receive a set percentage
of their spouses' benefits as their benefit. This option would increase
the size of this percentage.
Protection option available for: Spouses;
Protection option: Implement a child/family care credit;
How the protection option could work: A child/family care credit could
be work in one of three ways: Reduce the number of computation years
for caregivers: A certain number of years would be "dropped" from the
initial benefit level calculation to credit years an individual spent
caring for children or other dependent family members;
Credit caregivers a particular dollar amount for years spent out of the
labor force providing care to children: Earnings used to calculate an
individual's initial benefit level would be adjusted upward for a
particular number of years;
Provide caregivers with a credit equal to 1/2 of median worker earnings
for the years spent working part-time or earning low incomes because
caring for children or other family members: Replaces years with no or
low earnings, up to a certain number of years. Alternatively, instead
of using 1/2 of median worker earnings as the replacement, could use
1/2 of the median earnings from a caregiver's remaining work years.
Protection option available for: Survivors;
Protection option: Hold initial benefit amount harmless for family
benefits;
How the protection option could work: If a reform adjusts the initial
benefit amount for a primary beneficiary, the amount for calculating
the benefits for any survivor of a worker would be unchanged.
Protection option available for: Survivors;
Protection option: Hold early survivors (young children or young
widow(er)s) harmless;
How the protection option could work: Early survivors would not be
subject to any benefit change resulting from reform.
Protection option available for: Survivors;
Protection option: Increase the surviving spouse benefit to 2/3 or 3/4
of the combined couples' benefit;
How the protection option could work: This option would increase the
size of the benefit a surviving spouse receives to 2/3 or 3/4 of what
the couples' combined benefit would have been.
Protection option available for: Survivors;
Protection option: Increase benefits for aged survivors;
How the protection option could work: This option increases the size of
benefits older survivors receive.
Protection option available for: Survivors;
Protection option: Increase the early retirement age;
How the protection option could work: This option would increase the
early retirement age. Survivors' benefits are based on workers'
benefit. If a worker takes benefits during the early retirement period,
then the monthly benefit level is reduced. By increasing the early
retirement age, a worker wouldn't be able to receive as large a reduced
monthly benefit or receive benefits for as long a period of time.
Accordingly, any survivor's benefit would be larger.
Source: GAO.
[End of table]
Options Modeled to Protect Benefits of Disabled Workers:
Full Exemption:
To simulate the effects of fully exempting disabled workers from the
various reform elements, we modified the simulation to exclude the
benefits of disabled workers from the reform elements. As such, there
would be no recalculation of benefits when the exempted beneficiary
reached full retirement age.
Partial Exemptions:
We defined partial exemptions for disabled workers to mean that their
benefit would be exempted from any simulated reform until the FRA and
then would be recalculated. For the COLA reduction, we simply started
the one percentage point reduction at the FRA for disabled workers.
However, for the reforms that involved a change in the initial benefit
amount (longevity indexing, price indexing, and progressive price
indexing), we simulated the recalculation of benefits at the FRA in two
different ways.
Partial Exemption Type I--Kolbe-Stenholm:
The first partial exemption, which we refer to as Partial Exemption
Type I, followed the Kolbe-Stenholm model of converting benefits at the
FRA. The Kolbe-Stenholm model reduces benefits in proportion to the
difference in the disabled-worker PIA and the retired-worker PIA at the
DI-onset age. This OASI benefit amount would be indexed by the COLA to
for the years between the disability onset age and age 62.
Partial Exemption Type II--Graham:
The second partial exemption, or Partial Exemption Type II, followed
the Graham model of converting benefits at the FRA. The mechanism for
converting from DI to Old Age benefits is as follows:
(DIc)(Yd)/40 + (OASI62)(40-Yd)/40:
where:
DIc is the promised DI benefit level under current law:
Yd is the number of years (ages 21 to 62) that the disabled worker
received DI benefits:
OASI62 is the OASI benefit level, calculated by computing the PIA under
the reform using the formula applicable for newly eligible retired
workers in the year the converting worker reached age 62. In this case,
earnings from the years prior to disability would be wage indexed. The
disability freeze years[Footnote 52] would apply in computing the AIME.
Data Reliability:
To assess the reliability of simulated data from GEMINI, we reviewed
PSG's published validation checks and examined the data for
reasonableness and consistency.
PSG has published a number of validation checks of its simulated life
histories. For example, simulated life expectancy is compared with
projections from the Social Security Trustees;
simulated benefits at age 62 are compared with administrative data from
SSA;
and simulated educational attainment, labor force participation rates,
and job tenure are compared with values from the Current Population
Survey. We found that simulated statistics for the life histories were
reasonably close to the validation targets.
[End of section]
Appendix II: Calculating OASDI Benefits:
Social Security offers a variety of types of benefits, and although
they are all based upon the same formula, they are calculated in
different ways. The methods for calculating the different types of
benefits are outlined below[Footnote 53].
Calculating Old-Age Benefits:
Old Age benefits are calculated through a four-step process in order to
provide retirees with progressive yet wage-based cash payments (see
fig. 13).
Figure 13: Calculating Benefits for Retirees:
This figure shows a chart calculating benefits for retirees:
[See PDF for image]
Source: GAO.
Notes: Specifically, Social Security's COLAs are based on the consumer
price index for urban wage earners and clerical workers (CPI-W), as
opposed to the CPI series for all urban consumers (CPI-U).
Also the PIA numbers in step 2 refer to workers attaining age 62 in
2007.
[End of figure]
First a worker's Average Indexed Monthly Earnings (AIME) is calculated
by indexing the worker's past earnings to changes in average wage
levels over the worker's lifetime and then averaging them. The AIME
formula considers all years in which a worker earned covered
earnings.[Footnote 54] It then uses the number of elapsed years from
1950 or attainment of age 21 through the age of 62 (or death) and
allows for 5 "drop-out years" so that the worker's highest 35 years of
covered indexed earnings are used in the calculation.[Footnote 55] Once
the AIME is determined, a progressive formula is applied to the AIME to
yield a worker's Primary Insurance Amount (PIA). In 2007, the PIA
formula had the following bend points: 90 percent of the first $680 of
AIME, plus 32 percent of the next $3,420, and 15 percent of any
earnings above that level (fig. 13). For example, the PIA of a worker
whose AIME was $1000, the equivalent of at $12,000 annual salary, would
be the sum of $612 (90 percent of $680) and $102.40 (32 percent of
$320), yielding a total initial monthly benefit of around $715.
Similarly, the PIA of a worker with an $8,000 AIME (the equivalent of a
$96,000 annual salary) would be the sum of $612 (90 percent of $680),
$1094.40 (32 percent of $3420), and $585 (15 percent of $3,900), for a
total of just under $2,292. Because the formula is both wage-based and
progressive, the second worker receives a much higher actual benefit
than the first worker ($2,292 versus $715), but his benefits are a much
lower proportion of his past earnings than the first worker's benefits
(28.6 percent versus 71.4 percent).
If a worker retires at the full retirement age, which is currently
between ages 65 and 66, and legislated to reach 67 in 2027, this PIA
represents the first year's benefit (although it is adjusted for
inflation through a cost-of-living adjustment (COLA)). However, workers
can begin receiving reduced benefits at 62; benefits are progressively
larger for each month workers postpone drawing them, up to age
70.[Footnote 56] In general, benefits are actuarially neutral to the
Social Security program; that is, the reduction for starting benefits
before full retirement age and the credit for starting after full
retirement age are such that the total value of benefits received over
one's lifetime is approximately equivalent for the average
individual.[Footnote 57] Those receiving benefits before the full
retirement age will also be subject to an earnings test. If earned
income is above a certain threshold, Social Security withholds one
dollar of benefits for every two dollars of earning above the
threshold. Each year, benefits receive a COLA to keep pace with
inflation.
Calculating Disability Benefits:
Similarly to Old Age benefits, disability benefits are determined by
calculating a worker's AIME, applying the progressive PIA formula to
it, and then adjusting benefit levels through yearly COLAs (fig. 14).
Figure 14: Calculating Benefits for Disabled Workers:
This figure is a flow chart calculating benefits for disabled workers:
[See PDF for image]
Source: GAO.
Note: The PIA numbers in step three refer to workers qualify for
receiving DI benefits in 2007.
[End of figure]
However, because disabled workers are likely to have shorter work
histories, their benefits calculation relies on fewer years of
earnings. In general, the number of years of earnings used to calculate
the AIME is based on the total number of years between when a worker
turns 21 and when he applies for DI. If this number of years is 25 or
more, a worker's 5 lowest (or zero) earnings years will be dropped from
the calculation. The number of drop-out years gradually declines as a
worker applies for disability earlier in life. If the disabled worker
is 60 at the time of application, for example, 38 years would have
elapsed since age 21. He will receive 5 drop out years, and his AIME
will be calculated based upon his 33 highest-earning years. In
contrast, if a worker applies for DI at 32, he would have only had 10
elapsed years since age 21, and only be eligible for 2 drop-out years;
his AIME would be calculated based upon his top 8 years. At the full
retirement age, disabled workers begin receiving retirement benefits,
instead of disability benefits; however, benefit levels remain the same
and continue to grow through annual COLAs.
Calculating Benefits for Dependents of Retired and Disabled Workers:
* Spouses: In addition to being eligible to receive retirement benefits
on their own earnings records as early as age 62, individuals can also
receive dependents' benefits at age 62, based on their spouse's benefit
amount or, in some cases, that of an ex-spouse (table 5). These
individuals can collect these benefits regardless of whether their
spouse is concurrently receiving retired or disabled worker benefits.
If collection begins at full retirement age, these individuals are
eligible for either one-half of their spouse's benefit amount, or the
benefits based on their own earnings record; whichever is greater. As
with Old Age benefits, adjustments are made if these individuals
chooses to take early retirement.
* Dependent Children: Dependent children may also qualify for one-half
of their retired or disabled parent's benefit amount. This benefit is
available for disabled adult children who are not working on a regular
basis, children under age 18, or children still in high school and
under age 19.
Like other benefits, dependents' benefits receive annual COLAs.
Dependent benefits are subject to a family maximum, whereby a family is
limited in the total amount of benefits that can be received from a
single individual's earnings record. The size of the family maximum is
currently between 150 percent and 188 percent of the primary
beneficiary's benefit.[Footnote 58]
Table 6: Dependent Benefits:
Child of worker;
Worker retires or becomes disabled: Can collect 50% of worker's
benefits if under 18, in high school, or disabled;
Worker dies: Can collect 75% of worker's benefits if under 18, in high
school, or disabled.
Spouse of worker;
Worker retires or becomes disabled: Can collect 50% of worker's
benefits at FRA or reduced amount at age 62;
Worker dies: Can collect 100% of worker's benefit at FRA or reduced
amount at age 60.
Spouse taking care of young or disabled child;
Worker retires or becomes disabled: Can collect 50% of worker's
benefits at any age;
Worker dies: Can collect 75% of worker's benefits if not eligible for
more through other provisions.
Disabled spouse;
Worker retires or becomes disabled: No special provision;
Worker dies: Can collect 100% of worker's benefits at age 50.
Ex-Spouse of worker;
Worker retires or becomes disabled: Can collect normal spousal benefits
if marriage lasted longer than 10 years and dependent is unmarried;
Worker dies: Can collect normal spousal benefits if marriage lasted
longer than 10 years and survivor is unmarried.
Parent of worker;
Worker retires or becomes disabled: No special provision;
Worker dies: Can collect 75% or 82.5% (if only one parent is entitled)
of worker's benefits if parent is age 62 or above, and dependent on
worker for over half of income.
Source: GAO.
Note: All benefits, except those for divorcees, are subject to the
family maximum. A spouse can collect benefits on his own earnings
record, if this amount is greater than the corresponding dependent
benefits.
[End of table]
Calculating Survivors' Benefits:
Widow(er)s may be eligible to receive a one-time death benefit of $255.
In addition, widow(er)s, surviving parents, children under the age of
18 (19 if the child is still in school) and disabled adult children can
collect benefits off of the deceased person's earnings record. A
widow(er) at full retirement age will receive 100 percent of his or her
spouse's benefits, unless his or her own benefit is higher. Younger
widow(er)s (those between age 60 and the full retirement age) can
receive between 71 and 99 percent of their deceased spouses' benefits
depending on how close they are to the full retirement age.[Footnote
59] Furthermore, regardless of age, a widow(er) with young children,
can receive 75 percent of the deceased spouse's benefit. Surviving
parents and children can also collect up to 75 percent of their
deceased family members' benefits. All of these benefits receive annual
COLA adjustments and are subject to the family maximum.
[End of section]
Appendix III: Comments from the Social Security Administration:
Social Security:
The Commissioner:
Social Security Administration:
Baltimore MD 21235-0001:
October 17, 2007:
Ms. Barbara D. Bovbjerg
Director, Education, Workforce, and Income Security Issues:
U.S. Government Accountability Office:
Washington, D.C. 20548:
Dear Ms. Bovbjerg:
Thank you for the opportunity to review and comment on the draft
report, "Social Security Reform: Issues for Disability and Dependent
Benefits" (GAO-08-26).
If you have any questions, please contact Ms. Candace Skurnik,
Director, Audit Management and Liaison Staff, at (410) 965-4636.
Signed by:
Michael J. Astrue:
Enclosure:
Comments On The Government Accountability Office (Gao) Draft Report,
"Social Security Reform: Issues For Disability And Dependent Benefits"
(GAO-08-26):
Thank you for the opportunity to review and comment on the draft
report. This report is very complete and gives a good overview of the
potential effects of various reforms. However, the report would benefit
from a better framing of the discussion with some context. While we
would not expect an exhaustive analysis of the disability/dependent
population, the following questions could be addressed:
* Are the current disabled beneficiaries worse off than the current
retired beneficiaries?
* How about dependents? Where do dependents rank economically as
compared to the general population?
General and Technical Comments:
The GAO methodology involves compiling data from different sources and
performing simulations, computations, and analyses. It would require a
considerable amount of time, with complete access to GAO's data,
mathematical derivations, and detailed computer logic, in order to
determine whether or not the GAO results are technically correct. It
would be helpful if the report provided information on the magnitude of
estimation errors (e.g., upper bounds) for the benefit reduction
estimates computed under the respective proposals.
In considering the options used to protect the benefits of disabled and
dependent individuals, GAO should consider whether such options
(especially if they distinguish between classes of persons based on
age, disability, or other protected class) could violate the due
process or equal rights of any particular class members.
There are several references to (and/or explanations ot) how various
benefits are calculated under the Social Security Act, and how
individuals qualify for such benefits. However, there are no citations
to the relevant, controlling authorities; i.e., the Social Security Act
and Title 20 of the Code of Federal Regulations. This report would
benefit from citations to the applicable source when such issues are
discussed.
In describing the provision that reduces the cost-of-living adjustment,
the phrase "one percent reduction" is used throughout this report. We
suggest that this phrase be replaced with "one percentage point
reduction."
Page 5, the last sentence, ".the Social Security program balances the
goals of income adequacy with individual equity." given the importance
of benefit adequacy and equity, it seems that not much consideration
was given to these issues while evaluating how disabled beneficiaries
and their dependents would fare under different reform elements.
Instead, the report evaluates six reform elements by measuring the
benefit reductions individuals may incur. The reader could better
assess the degree to which a reform option supports the disability
insurance (DI) adequacy goal if GAO compared reform benefits to a
standard of adequacy (i.e., the Census poverty standard). This would
gauge whether or not disabled persons and their dependents would be
able to meet their basic needs with reduced benefits. Secondly, readers
could better gauge the equity of reform elements if the report
illustrated the distribution of benefit reductions among all disabled
beneficiaries and dependents, and persons differentiated by the number
of years since their date of disability onset, gender, and earnings
history.
[End of section]
Related GAO Products:
Retirement Security: Women Face Challenges in Ensuring Financial
Security in Retirement. GAO-08-105. Washington, D.C.: October 11, 2007.
Retirement Decisions: Federal Policies Offer Mixed Signals about When
to Retire. GAO-07-753. Washington, D.C.: July 11, 2007.
Social Security Reform: Implications of Different Indexing Choice. GAO-
06-804. Washington, D.C.: Sept ember 14, 2006.
Social Security: Societal Changes Add Challenges to Program
Protections. GAO-05-706T. Washington, D.C.: May 17, 2005.
Options for Social Security Reform. GAO-05-649R. Washington, D.C.: May
6, 2005.
Social Security Reform: Answers to Key Questions. GAO-05-193SP.
Washington, D.C.: May 2, 2005.
Social Security Reform: Early Action Would Be Prudent. GAO-05-397T.
Washington, D.C.: March 9, 2005.
Long Term Fiscal Issues: The Need for Social Security Reform. GAO-05-
318T. Washington, D.C. February 9, 2005.
Social Security: Distribution of Benefits and Taxes Relative to
Earnings Level. GAO-04-747. Washington, D.C.: June 15, 2004.
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: 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. GA0/T-HEHS-99-94. Washington, D.C.: March 25, 1999.
[End of section]
Footnotes:
[1] Our approach to the analysis is based on the premise that, under
benefit reducing reforms, disabled workers and certain dependents would
likely have limited options for alternative sources of income to make
up for the loss in benefits. In particular, comparisons of the relative
welfare of disabled workers, dependents, and retirees are beyond the
scope of this job.
[2] We used the Genuine Microsimulation of Social Security (GEMINI)
microsimulation model under a license from the Policy Simulation Group,
a private contractor. GEMINI estimates individual effects of policy
scenarios for a representative sample of future beneficiaries. GEMINI
can simulate different reform features for their effects on the level
and distribution of benefits. See appendix I for more detail on the
modeling analysis, including a discussion of our assessment of the data
reliability of the model.
[3] We analyzed the impact of each reform element individually. We did
not simulate a scenario in which reform elements were combined and
implemented simultaneously. It is important to note that the individual
reform elements can interact with one another and that the impact of
one reform element, taken on its own, may change when combined with
other reform elements in a proposal. Moreover, each reform element has
pluses and minuses. As a result, Social Security reform proposals
should be evaluated as a package of reform options designed to meet
certain stated objectives.
[4] For the purpose of this report, dependents will encompass benefits
to survivors as well as all dependent spouses and children.
[5] The Social Security Act of 1935 also included aid to states for
programs which are no longer considered to be part of Social Security.
[6] In order to receive these benefits, husbands and widowers needed to
be currently and fully insured at the time of their wives' retirement
or death. In addition, the husband (or widower) had to prove he was
financially dependent on his wife. In 1983, virtually all gender-based
distinctions were eliminated.
[7] Payroll tax rates are specified separately for each program and
receipts deposited into two separate accounts in the United States
Treasury. However, over the years, there have been tax rate
reallocations and loans between the two trust funds.
[8] Then a person is converted from the DI program to the Old Age
programs, there is no recalculation of his benefits, which continue to
receive annual COLAs; however, the benefits will be paid from the OASI
trust fund instead of the DI trust fund.
[9] Some beneficiaries may be dually entitled and receive benefits
based on their own record and on that of their spouse.
[10] 42 U.S.C. § 415.
[11] The total number of years to be counted in the work history is the
number of elapsed years from the latter of 1950 or the year in which
the worker attains age 21 and before the worker becomes disabled, dies,
or attains age 62 (thus the 40 years in the text above)--whichever
comes first--excluding any years in which the worker is in a period of
disability.
[12] See GAO, High Risk Series, An Update, GAO-07-310 (Washington,
D.C.: January 2007).
[13] Because the future is uncertain, the Trustees use three
alternative sets of assumptions to show a range of possible outcomes.
The intermediate assumptions represent the Social Security
Administration's best estimate of the trust funds' future financial
outlook. The Trustees also present estimates using low cost and high
cost sets of assumptions. In addition, the Trustees Report describes a
range of possible outcomes using stochastic modeling techniques.
[14] While currently scheduled benefits are not attainable under
current funding levels, they nonetheless provide a point of comparison
in examining the impact of various reform elements.
[15] These reform elements have been proposed as part of recent larger
reform proposals.
[16] See appendix II for a full explanation of how benefits are
currently calculated.
[17] Changing the number of drop-out years would have less of an effect
(or no effect) on disabled workers because their drop-out years are
calculated differently. For more on how initial benefits are calculated
for disabled workers, see appendix II.
[18] Specifically, Social Security's COLAs are based on the consumer
price index for urban wage earners and clerical workers (CPI-W), as
opposed to the CPI series for all urban consumers (CPI-U).
[19] We identified two options for modifying the COLA. The first
option, which we analyzed in this report, would reduce the COLA by 1
percentage point to improve solvency. The second option, which we did
not analyze, would reduce the COLA by 0.2 to 0.4 percentage points in
response to methodological concerns that the CPI overstates the true
rate of inflation.
[20] We did not analyze the simulated change in the FRA for both
disabled workers and dependents because of modeling constraints nor did
we analyze the increase in the number of computation years for disabled
workers.
[21] A 1 percentage point decrease in the COLA may have a greater
effect on solvency than longevity indexing as we've modeled it. In part
because while the effects of both reforms are compounded over time, the
COLA would affect all beneficiaries once it is implemented and continue
over a longer horizon--until death. In contrast, longevity indexing
would not affect those who have already retired, nor would it have a
great impact on those who retire close to the implementation date. Its
effects would be greater on the benefits of those individuals who
retire further out from the implementation date.
[22] While this report focuses on the impact of certain reforms on
disabled worker and dependent benefits, the reforms would affect the
benefits of other Social Security recipients as well.
[23] Additionally, according to our simulations, disabled workers
experienced greater absolute reductions in median lifetime benefits
than did beneficiaries who were never disabled for each of the reform
elements considered. However, disabled workers also experienced a
smaller percentage change in median lifetime benefits than those who
were never disabled. Under current law, disabled workers would have
higher lifetime benefits (since they may receive benefits for a longer
period of time); therefore, the reduction in benefits represents a
smaller share of current law benefits.
[24] Increasing the FRA would not affect disabled workers because the
initial benefits calculation for disabled workers does not involve the
FRA. However, it would change the age of conversion to retirement
benefits. Similarly, changing the number of drop-out years would have
less of an effect (or no effect) on disabled workers because drop-out
years are calculated differently for disabled workers. For more on how
initial benefits are calculated for disabled workers, see appendix II.
[25] In particular, under the COLA reduction, less than 1 percent of
disabled workers had no change in lifetime benefits; about 2 percent of
disabled workers had a change of 1 percent or less; about 14 percent
had a change of more than 1 and up to 5 percent; and about 41 percent
had lifetime benefits change by more than 5 and up to 10 percent.
[26] Many disabled workers leave the workforce in their fifties.
[27] The other 14 percent generally had reductions of 10 percent or
less, and very few disabled workers had reductions in lifetime benefits
of more than 25 percent under longevity indexing.
[28] Many people have lower relative earnings in their first years of
work.
[29] This table results from our discussions with knowledgeable experts
and relevant officials as well as a review of the current literature on
Social Security reform. For more information on how these options could
work, see appendix I.
[30] For more information on caregiver credits and other program
modifications, see GAO, Retirement Security: Women Face Challenges in
Ensuring Financial Security in Retirement, GAO-08-105 (Washington,
D.C.: Oct. 11, 2007).
[31] This would not be the case if at age 62 a worker could no longer
remain in the workforce. In such a case, a person may have to apply for
DI or may be unemployed (and have low income) for the 2 years prior to
taking early retirement.
[32] In figures 8 to 11, the benefits under a full exemption do not
completely return to pre-reform levels. This is because some
individuals receiving disabled worker benefits also received some
benefits as dependents from another worker's record. As those benefits
would not be subject to the same protections, median lifetime benefits
for such disabled workers may remain slightly lower than those under
current law.
[33] We modeled two different ways of partially exempting disabled
workers from the various indexing reforms--one follows the methods
outlined in the Kolbe-Stenholm (2001) proposal, which we refer to as
Type I . The other partial exemption follows the methods outlined in
the Graham (2003) proposal, which we refer to as Type II. For more
details on the difference, please see appendix I.
[34] Rather than being an absolute amount, the family maximum is
defined as a percentage of the primary worker's benefit. Therefore, if
a reform reduces benefits, the maximum amount a family could receive
would also decrease. See appendix II for more details on the family
maximum.
[35] As mentioned earlier, solvency could also be improved by
increasing revenues (taxes).
[36] Some research has been done on whether there is a link between the
increase in the FRA and the recent increase in the number and
percentage of people applying for DI. For example, Duggan, Singleton,
and Song (2005) find that the 1985 increase in the FRA had an important
effect on the percent of people applying for DI.
[37] Besides incentive-related costs, increasing the FRA would create
other costs for the DI program by expanding the size of the DI-eligible
population. Workers who remain in the workforce past the old FRA and
become injured prior to the new FRA may enroll in the DI program.
[38] In part, this may be because the retired individual chose to
retire early (at age 62) and thus his benefits were actuarially
reduced. In addition, while the present value of the individuals'
lifetime earnings were similar, the distribution of these earnings
could have been different and as such, the average indexed monthly
earnings used as the basis for determining benefit amounts could be
different.
[39] See GAO-08-105; GAO, Social Security Reform: Implications of
Different Indexing Choices, GAO-06-804 (Washington, D.C.: Sept. 14,
2005); and GAO, Distribution of Benefits and Taxes Relative to Earnings
Level, GAO-04-747 (Washington, D.C.: June 15, 2004).
[40] While these models use sample data, our report, like others using
these models, does not address the issue of sampling errors. The
results of the analysis reflect outcomes for individuals in the
simulated populations and do not attempt to estimate outcomes for an
actual population.
[41] MINT3 is a detailed microsimulation model developed jointly by the
Social Security Administration, the Brookings Institution, RAND, and
the Urban Institute to project the distribution of income in retirement
for the 1931 to 1960 birth cohorts.
[42] See GAO, Social Security: Criteria for Evaluating Reform
Proposals, GAO/T-HEHS-99-94 (Washington, D.C.: Mar. 25, 1999) and GAO,
Social Security: Evaluating Reform Proposals, GAO/AIMD/HEHS-00-29
(Washington, D.C.: Nov. 4, 1999).
[43] For a discussion of individual equity issues, see GAO, Social
Security: Issues in Comparing Rates of Return with Market Investments,
GAO/HEHS-99-110 (Washington, D.C.: Aug. 5, 1999).
[44] See GAO, Social Security: Program's Role in Helping Ensure Income
Adequacy, GAO-02-62 (Washington, D.C.: Nov. 30, 2001).
[45] The Board of Trustees, Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds, The 2007 Annual Report of the Board
of Trustees of the Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds (Washington, D.C.: Apr. 23, 2007).
[46] For more information on provision 1 or Model 3, see page 8 of the
CSSS proposal at [hyperlink,
http://www.ssa.gov/OACT/solvency/PresComm_20020131.pdf].
[47] We chose the CSSS specification because it was already scored and
readily available. Other constructions or interpretations of a
longevity index are certainly possible. For example, life expectancy at
birth or some other age could be used. Further, life expectancy could
be defined as period or cohort. A period life table represents the
mortality conditions at a specific point in time, whereas a cohort
table depicts the mortality conditions of a specific group of
individuals born in the same year or series of years.
[48] See page 3 of [hyperlink,
http://www.ssab.gov/documents/advisoryboardmemo--2005tr--08102005.pdf]
for description of the provision. For the original provision from the
President's Commission to Strengthen Social Security, see page 4 of
[hyperlink, http://www.ssa.gov/OACT/solvency/PresComm_20020131.pdf].
[49] See the August 10, 2005, memorandum to SSA's Chief Actuary, page 3
of [hyperlink, http://www.ssab.gov/documents/advisoryboardmemo--2005tr--
08102005.pdf], for a description of the provision.
[50] See the August 10, 2005, memorandum to SSA's Chief Actuary, page 3
of [hyperlink, http://www.ssab.gov/documents/advisoryboardmemo--2005tr--
08102005.pdf], for description of the provision.
[51] See page 3 of [hyperlink,
http://www.ssab.gov/documents/advisoryboardmemo--2005tr--08102005.pdf]
for description of the provision. We did make one adjustment to this
provision. We modeled the change beginning in 2012 so that the
simulation start date was consistent with the start date for price
indexing and progressive price indexing.
[52] The disability freeze is a special rule that helps increase
retirement or disability benefits. People who have a disability or are
legally blind, not on DI, and working may have lower earnings because
of the disability or blindness. In such a case, SSA can exclude those
years when calculating retirement or disability benefits. Because
Social Security benefits are based on average lifetime earnings, the
exclusion of those years increases benefits.
[53] To summarize the calculation of benefits, we relied on several
Social Security publications, including the Social Security Handbook
and a variety of resources available on SSA's website, [hyperlink,
http://www.ssa.gov].
[54] Years with wages greater than those earned from 21 to 62 would
also be considered as long as the worker had "credited" earnings.
[55] For example, if a worker had some of his or her highest covered
earnings between the ages of 18 and 22, these would be counted. The 40
years between age 22 and 62 simply give the formula the number of years
to consider when picking the top earning years.
[56] SSA reduces retired worker benefits by 5/9 of 1 percent per month
for the first 36 months and 5/12 of one percent for each additional
month that a worker elects to start benefits in advance of full
retirement age. Conversely, delayed retirement credits increase
benefits for each month the worker delays the start of benefits after
full retirement age until they reach age 70. The factor used to
calculate these credits varies by birth year. For workers born in1943
or later the increase is 2/3 of 1 percent each month (8 percent per
year).
[57] This is the case if lifetime benefits are calculated on a present
value basis with a discount rate equal to the expected return for the
Social Security trust fund--that is, 2.9 percentage points above the
rate of inflation after 2015, according to the intermediate assumptions
in the Trustees' 2007 report--The Board of Trustees, Federal Old Age
and Survivors Insurance and Federal Disability Insurance Trust Funds,
The 2007 Annual Report of the Board of Trustees of the Federal Old Age
and Survivors Insurance and Federal Disability Insurance Trust Funds
(Washington, D.C.: Apr. 23, 2007) 94.
[58] The formula used to compute the OASI family maximum is similar to
that used to compute the PIA. It involves computing the sum of four
separate percentages of portions of the worker's PIA. For 2007, these
are 150 percent of the first $869, 272 percent of the amount between
$869 and $1,255, 134 percent of the amount between $1,255 and $1,636,
and 175 percent of the amount over $1,636. The disability family
maximum is equal to 85 percent of the disabled worker's AIME, but
cannot be less than his or her PIA, nor more than 150 percent of his or
her PIA.
[59] Widow(er)s who begin collecting benefits at age 60 receive 71
percent of their deceased spouses' benefit amount, and this percentage
increases for every year they delay collecting survivors benefit,
reaching 100 percent at the FRA.
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