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Report to the Chairman, Senate Special Committee on Aging, U.S. Senate:



United States General Accounting Office:



GAO:



January 2003:



Social Security Reform:



Analysis of Reform Models Developed by the President’s Commission to 

Strengthen Social Security:



Social Security Reform:



GAO-03-310:



GAO Highlights:



Highlights of GAO-03-310, a report to the Chairman of the Special 

Committee 

on Aging, U.S. Senate:



January 2003:



Social Security Reform:



Analysis of Reform Models Developed by the President’s Commission 

to 

Strengthen Social Security: 



Why GAO Did This Study:



Social Security is an important social insurance program affecting 

virtually 

every American family. It represents a foundation of the nation’s 

retirement 

income system and provides millions of Americans with disability 

insurance and 

survivors’ benefits. Over the long term, as the baby boom 

generation retires, 

Social Security’s financing shortfall presents a major solvency 

and 

sustainability challenge.  Numerous reform proposals have been 

put forward in 

recent years, and in December 2001 a commission appointed by the 

President 

presented three possible reform models.   



Senator Breaux, Chairman of the Senate Special Committee on 

Aging, asked GAO 

to use its analytic framework to evaluate the Commission’s 

models. This 

framework consists of three criteria: (1) the extent to which 

a proposal 

achieves sustainable solvency and how it would affect the 

economy and the 

federal budget; (2) the balance struck between the twin goals 

of income 

adequacy and individual equity; and (3) how readily such 

changes could 

be implemented, administered, and explained to the public.  



What GAO Found:



Applying GAO’s criteria to the Commission models highlights 

key options and 

trade-offs between efforts to achieve sustainable solvency 

and maintain 

adequate retirement income for current and future beneficiaries.  



For example, the Commission’s Model 2 proposal reduces Social 

Security’s 

defined benefit from currently scheduled levels through 

various formula 

changes, provides enhanced benefits for low-wage workers and 

spousal 

survivors, and adds a voluntary individual account option in 

exchange for 

a benefit reduction. Model 2 would provide for sustainable 

solvency and 

reduce the shares of the federal budget and the economy devoted 

to Social 

Security compared to currently scheduled benefits (tax increase 

benchmark) 

regardless of how many individuals selected accounts. However, 

with universal 

account participation, general revenue funding would be needed 

for about 3 

decades. 



GAO’s analysis of benefit adequacy and equity issues relating to 

Model 2 

found that;

 

* Across cohorts, median monthly benefits for those choosing 

accounts 

are always higher, despite a benefit offset, than for those 

who do not; 

this gap grows over time. In addition, benefits assuming 

universal 

account participation are higher than payment of a defined 

benefit 

generally corresponding to an amount payable from future 

Social Security 

trust fund revenues (benefit reduction benchmark). However, 

benefits 

received by those without accounts fall below the benchmark 

over time. 



* For the lowest quintile, median monthly benefits with 

universal 

participation in the accounts tend to be higher than GAO’s 

benefit 

reduction benchmark, likely due to the enhanced benefit for 

full-time 

“minimum wage” workers. This pattern becomes more pronounced 

across the 

cohorts analyzed. 

	

* Regardless of whether an account is chosen, many people 

could receive 

monthly benefits under Model 2 that are higher than the 

benefit reduction 

benchmark. However, a minority could fare worse. Some people 

could also 

receive a benefit greater than under the tax increase 

benchmark although 

a majority could fare worse. Benefits for those choosing 

individual accounts 

will be sensitive to the actual rates of return earned by 

those accounts.  



Adding individual accounts would require new administrative 

structures, 

adding complexity and cost. Public education will be key 

to help 

beneficiaries make sound decisions about account participation, 

investment 

diversification, and risk. Finally, any Social Security reform 

proposal 

must also be looked at in the context of both the program and 

the 

long-term budget outlook. A funding gap exists between 

promised and 

funded Social Security benefits which, although it will 

not occur for 

a number of years, is significant and will grow over time. 

In addition, 

GAO’s long-term budget simulations show, difficult choices 

will be required 

to reconcile a large and growing gap between projected revenues 

and 

spending resulting primarily from known demographic trends and 

rising 

health care costs.



www.gao.gov/cgi-bin/getrpt?GAO-03-310.



To view the full report, including the scope and methodology, 

click on 

the link above.For more information, contact Barbara D. 

Bovbjerg at (202) 

512-7215 or bovbjergb@gao.gov



Contents:



Letter:



Achieving Sustainable Solvency:



Balancing Adequacy and Equity:



Implementing and Administering Reforms:



Concluding Observations:



Agency Comments and Our Evaluation:



Appendix I: Analysis of Reform Models:



Appendix II: Comments from the Social Security Administration:



Abbreviations:



OASDI: Old-Age and Survivors Insurance and Disability Insurance:



PIA: primary insurance amount:



SSA: Social Security Administration:



Letter:



January 15, 2003:



The Honorable John Breaux

Chairman

Special Committee on Aging

United States Senate:



Dear Mr. Breaux:



This report responds to your request that we apply our criteria for 

assessing Social Security reform proposals to the reform models 

developed by the President’s Commission to Strengthen Social 

Security.[Footnote 1] Each of the Commission’s three reform models 

represents a different approach to including a voluntary individual 

account option to Social Security. Model 1 does not restore solvency 

and accordingly is not analyzed in this report. In April 2002, we 

provided your staff with a briefing on our preliminary results for 

Model 2. This report contains our final results, focusing on Model 2, 

with results for Model 3 presented in Appendix I.



We based our interpretation of the Commission’s reform models in large 

part on the memorandum provided by the Office of the Chief Actuary at 

the Social Security Administration (SSA) dated January 31, 2002, that 

estimated the reform models’ effects on the Social Security program. 

Our interpretation also draws on the Commission’s final report. As 

agreed with your office, our report is based on the analytic framework 

we have used in past work to evaluate Social Security reform 

proposals.[Footnote 2] That framework consists of three basic criteria:



* the extent to which the proposal achieves sustainable solvency and 

how it would affect the U.S. economy and the federal budget,



* the balance struck between the twin goals of income adequacy (level 

and certainty of benefits) and individual equity (rates of return on 

individual contributions), and:



* how readily such changes could be implemented, administered, and 

explained to the public.



In evaluating proposals against the three basic criteria, we used a set 

of detailed questions that help describe potential effects of reform 

models on important policy and operational aspects of public concern. 

These questions are displayed in the report.



Our analysis of the Commission reform models included comparison with 

three benchmarks:[Footnote 3]



* The “benefit reduction benchmark” assumes a gradual reduction in the 

currently scheduled Social Security defined benefit beginning with 

those newly eligible for retirement in 2005. Current tax rates are 

maintained.



* The “tax increase benchmark” assumes an increase in the OASDI payroll 

tax beginning in 2002 sufficient to achieve an actuarial balance over 

the 75-year period. Currently scheduled benefits are maintained.



* The “baseline extended” benchmark is a fiscal policy path developed 

in our earlier long-term model work that assumes payment in full of 

currently scheduled Social Security benefits and no other changes in 

current spending or tax policies.



To show the range of possible outcomes given the voluntary nature of 

individual accounts[Footnote 4] in the Commission models, we simulated 

each model assuming (1) no participation (0%) in the individual account 

option and 

(2) universal participation (100%) in the account option. Actual 

experience would likely fall between these bounds but cannot be 

predicted with any degree of certainty.



As you requested, we used our long-term economic model in assessing 

Commission reform models against the first criterion, that of financing 

sustainable solvency.[Footnote 5] Although any proposal’s ability to 

achieve and sustain solvency is sensitive to economic and budgetary 

assumptions, using a common framework can facilitate comparisons of 

alternative reform proposals. Our sustainable solvency standard 

encompasses several different ways of looking at the Social Security 

program’s financing needs. While 75-year actuarial balance is generally 

used in evaluating the long-term financial outlook of the Social 

Security program and reform proposals, it is not sufficient in gauging 

the program’s solvency after the 75th year. For example, under the 

Trustees’ intermediate assumptions, each year the 75-year actuarial 

period changes, and a year with a surplus is replaced by a new 75th 

year that has a significant deficit. As a result, changes made to 

restore trust fund solvency only for the 75-year period can result in 

future actuarial imbalances almost immediately. Reform plans that lead 

to sustainable solvency would be those that consider the broader issues 

of fiscal sustainability and affordability over the long term.[Footnote 

6]



To examine how the Commission reform models balance adequacy and equity 

concerns, we used the GEMINI model, a dynamic microsimulation model for 

analyzing the lifetime implications of Social Security policies for a 

large sample of people[Footnote 7] born in the same year. GEMINI can 

simulate different reform features, including individual accounts with 

an offset, for their effects on the level and distribution of 

benefits.[Footnote 8] To avoid having the extremely high returns of a 

small portion of participants skew the average, we present most of our 

statistics as medians. To assess benefit adequacy, we display median 

monthly benefit levels for the 1955, 1970, and 1985 birth cohorts to 

enable comparisons over time; initial benefits by earnings quintile, 

comparing the lowest and highest quintiles; and the effects on the 

distribution of initial benefits within each cohort.



To examine how the Commission reform models provide for reasonable 

implementation and communication of any changes, we used qualitative 

analysis based on GAO’s issued and ongoing body of work on Social 

Security reform. This work addresses various issues raised by reform 

approaches, including establishing individual accounts, raising the 

retirement age, and the impact of reforms on minorities and women.



Models 2 and 3 restore solvency to the Old-Age and Survivors Insurance 

and Disability Insurance (OASDI) Trust Funds through a combination of 

changes in the initial benefit calculation, general revenue transfers, 

and/or benefit offsets for those who choose to participate in the 

individual account option. Model 3 requires an additional contribution 

equal to 1 percent of taxable payroll under the voluntary individual 

account option. All models share a common framework for administering 

individual accounts. As agreed with your office, this report focuses on 

Model 2, with results for Model 3 presented in Appendix I.



Achieving Sustainable Solvency:



The use of our criteria to evaluate approaches to Social Security 

reform highlights the trade-offs that exist between efforts to achieve 

solvency for the OASDI trust funds and efforts to maintain adequate 

retirement income for current and future beneficiaries. The models 

illustrate some of the options and trade-offs that will need to be 

considered as the nation debates how to reform Social Security.



Our analysis of sustainable solvency under Model 2 showed that:



* As estimated by the actuaries, Model 2, with either universal (Model 

2--100%) or zero (Model 2--0%) participation in voluntary individual 

accounts, is solvent over the 75-year projection period, and the ratio 

of annual income to benefit payments at the end of the simulation 

period is increasing. However, in Model 2 -100% over three decades of 

general revenue transfers are needed to achieve trust fund solvency. 

Model 2--0% achieves solvency with no general revenue transfers.



* Model 2-100% would ultimately reduce the budgetary pressures of 

Social Security on the unified budget relative to baseline extended. 

However, this would not begin until the middle of this century. 

Relative to both GAO’s benefit reduction benchmark and tax increase 

benchmark, unified surpluses would be lower and unified deficits higher 

throughout the simulation period under Model 2-100%. Model 2-0% would 

reduce budgetary pressures due to Social Security beginning around 2015 

relative to baseline extended. This fiscal outlook under Model 2-0% is 

very similar to the fiscal outlook under GAO’s benefit reduction 

benchmark.



* Under Model 2-100%, the government’s cash requirement (as a share of 

GDP) to fund the individual accounts and the reduced defined benefit 

would be about 20 percent higher initially than under both the baseline 

extended and tax increase benchmarks. This differential gradually 

narrows until the 2030s, after which less cash would be required under 

model 2-100%. By 2075, Model 2-100% would require about 40 percent less 

cash than the baseline extended and tax increase benchmarks.



* Viewed from the perspective of the economy, total payments (Social 

Security defined benefits plus benefit from individual accounts) as a 

share of GDP would gradually fall under Model 2-100% relative to the 

baseline extended and tax increase benchmarks. In 2075, the share of 

the economy absorbed by payments to retirees from the Social Security 

system as a whole under Model 2-100% would be roughly 20 percent lower 

than the baseline extended or tax increase benchmark and roughly the 

same as under the benefit reduction benchmark.



* With regard to national saving, Model 2 increases net national saving 

on a first order basis primarily due to the proposed benefit 

reductions. The individual account provision does not increase national 

saving on a first order basis; the redirection of the payroll taxes to 

finance the individual accounts reduces government saving by the same 

amount that the individual accounts increase private saving.



Beyond these first order effects, the actual net effect of a proposal 

on national saving is difficult to estimate due to uncertainties in 

predicting changes in future spending and revenue policies of the 

government as well as changes in the saving behavior of private 

households and individuals. For example, the lower surpluses and higher 

deficits that result from redirecting payroll taxes to individual 

accounts could lead to changes in federal fiscal policy that would 

increase national saving. However, households may respond by reducing 

their other saving in response to the creation of individual 

accounts.[Footnote 9]



Model 3 results are presented in Appendix I. Because the benefit 

reductions in Model 3 are smaller than in Model 2, long-term unified 

deficits are larger under Model 3. Model 3 requires an additional 

contribution equal to 1 percent of taxable payroll for those choosing 

individual accounts. Assuming universal account participation in both 

models, Model 3 would result in a larger share of the economy being 

absorbed by total benefit payments to retirees--about the same share as 

would be the case under the baseline extended and tax increase 

benchmarks.



Balancing Adequacy and Equity:



The Commission’s proposals also illustrate the difficulty reform 

proposals face generally in balancing adequacy (level and certainty of 

benefits) and equity (rates of return on individual contributions) 

considerations. Each of the models protects benefits for current and 

near-term retirees and the shift to advance funding could improve 

intergenerational equity. However, under each of the models, some 

future retirees also could face potentially significant benefit 

reductions in comparison to either the tax increase or the benefit 

reduction benchmarks because primary insurance amount (PIA) formula 

factors that are reduced by real wage growth, uncertainty in rates of 

return earned on accounts, changes in benefit status over time, and 

annuity pricing.



Our analysis of Model 2 shows that:



* Median monthly benefits (the Social Security defined benefit plus the 

benefit from the individual account) for those choosing individual 

accounts are always higher, despite a benefit offset, than for those 

who do not choose the account, and this gap grows over time. In 

addition, median monthly benefits under universal participation in the 

accounts are also higher than the median benefits received under the 

benefit reduction benchmark. However, median monthly benefits received 

by those without accounts fall below those provided by the benefit 

reduction benchmark over time.



* For the lowest quintile of beneficiaries, median monthly benefits 

with universal participation in the accounts tend to be higher than the 

benefits received under the benefit reduction benchmark, likely due to 

the enhanced benefit for full-time “minimum wage” workers. This pattern 

becomes more pronounced over time.



* Regardless of whether an account is chosen, under Model 2 many people 

could receive monthly benefits that are higher than the benefit 

reduction benchmark. However, a minority could fare worse. Some people 

could also receive a benefit greater than under the tax increase 

benchmark although a majority could fare worse. Monthly benefits for 

those choosing individual accounts will be sensitive to the actual 

rates of return earned by those accounts.



The cohort results for Model 3 are generally similar to Model 2. 

However, median monthly benefits for those choosing individual accounts 

are higher than the benefit level under the tax increase benchmark for 

the 1970 and 1985 cohorts. This result is likely because of Model 3’s 

feature of a mandatory extra 1 percent contribution into the individual 

accounts for those who choose to participate. Further results on Model 

3 can be found in Appendix I.



Implementing and Administering Reforms:



Each of the models would establish a governing board to administer the 

individual accounts, including the choice of available funds and 

providing financial information to individuals. While the Commission 

had the benefit of prior thinking on these issues, many implementation 

issues remain, particularly in ensuring the transparency of the new 

system and educating the public to avoid any gaps in expectations. For 

example, an education program would be necessary to explain the changes 

in the benefit structure, model features like the benefit offset and 

how accounts would be split in the event of divorce. Education and 

investor information is also important as the system expands and 

increases the range of investment selection. Questions about the 

harmonization of such features with state laws regarding divorce and 

annuities also remain an issue.



Concluding Observations:



The use of our criteria to evaluate approaches to Social Security 

reform highlights the trade-offs that exist between efforts to achieve 

sustainable solvency and to maintain adequate retirement income for 

current and future beneficiaries. These trade-offs can be described as 

differences in the extent and nature of the risks for individuals and 

the nation as a whole. For example, under certain individual account 

approaches, including those developed by the Commission, some financial 

risk is shifted to individuals and households to the extent that 

individual account income is expected to provide a major source of 

income in retirement.



At the same time, the defined benefit under the current Social Security 

system is also uncertain. The primary risk is that a significant 

funding gap exists between currently scheduled and funded benefits 

which, although it will not occur for a number of years, is significant 

and will grow over time. Other risks stem from uncertainty in, for 

example, future levels of productivity growth, real wage growth, and 

demographics. Congress has revised Social Security many times in the 

past, and future Congresses could decide to revise benefits in ways 

that leave those affected little time to adjust. As Congress 

deliberates approaches to Social Security, the national debate also 

needs to include discussion of the various types of risk implicit in 

each approach and in the timing of reform.



Public education and information will be key to implementing any 

changes in Social Security and especially so if individuals must make 

choices that affect their future benefits. Since the Commission options 

were published, there has been limited explanatory debate. As Congress 

and the President consider actions to be taken, it will be important as 

well to consider how such actions can be clearly communicated to and 

understood by the American people.



Finally, any Social Security reform proposal must also be looked at in 

the context of the nation’s overall long-range fiscal imbalances. As 

our long-term budget simulations show,[Footnote 10] difficult choices 

will be required of policymakers to reconcile a large and growing gap 

between projected revenues and spending resulting primarily from known 

demographic trends and rising health care costs.



Agency Comments and Our Evaluation:



We provided SSA an opportunity to comment on the draft report. The 

agency provided us with written comments, which appear in Appendix II. 

SSA acknowledged the comprehensiveness of our analysis of the 

Commission’s proposals. The agency also concurs with our reform 

criterion of achieving sustainable solvency and with our report’s 

overall observations and conclusions. SSA’s comments and suggestions 

can be grouped into a few general categories.



GAO Benchmarks and Their Relationship to Sustainable Solvency - The 

agency commends our use of multiple benchmarks with which to compare 

alternative proposals. However, they note that our definition of 

sustainable solvency differs from that used by SSA in assessing trust 

fund financial status. In addition, although they note that our 

benchmarks are solvent over the 75-year projection period commonly used 

by SSA’s Office of the Chief Actuary in its preparation of the annual 

trustees report, they do not achieve sustainable solvency[Footnote 11]. 

SSA expresses a concern that unless carefully annotated, the 

comparisons made in our report could be misunderstood. Finally, SSA 

also suggests the use of several alternative benchmarks, of which one 

would provide additional revenue to pay for currently scheduled 

benefits.



We agree with SSA that sustainable solvency is an important objective; 

indeed it is one of our key criteria with which we suggest that 

policymakers evaluate alternative reforms. SSA correctly points out 

that GAO’s benchmarks do not achieve sustainable solvency beyond the 

75-year period. We believe our standard is a more encompassing one. 

SSA’s definition relies on analyzing trends in annual balances and 

trust fund ratios near the end of the simulation period. Consequently 

the definition needs to be supplemented, for example, in cases where 

proposals use general revenue transfers or other unspecified sources of 

revenue that automatically rise and fall to maintain annual balance or 

a certain trust fund ratio. In addition, SSA’s definition does not 

directly consider the resources needed to fund individual accounts. Our 

standard includes other measures in an effort to gain a more complete 

perspective of a proposal’s likely effects on the program, the federal 

budget, and the economy.



We share SSA’s emphasis on the importance of careful and complete 

annotation. The report explicitly addresses the issue of sustainable 

solvency and states that the comparison benchmarks used, while solvent 

over the 75-year projection period, are not solvent beyond that period. 

Given SSA’s concerns, we have revised our report to clarify our 

analyses, where appropriate, to minimize the potential for 

misinterpretation or misunderstanding.



Regarding SSA’s suggestion about the use of alternative benchmarks, we 

already use a benchmark that provides additional revenue to pay 

currently scheduled benefits. Our other benchmark maintains current tax 

rates, phasing in benefit reductions over a 30-year period. In our 

view, the set of benchmarks used provide a fair and objective measuring 

stick with which to compare alternative proposals, particularly the 

many proposals that introduce reform elements over a number of years. 

Both of the benchmarks are explicitly fully funded and in their design 

we worked closely with Social Security’s Office of the Chief Actuary to 

calibrate them to ensure their solvency over the 75-year period.



Additional Analysis - Many of SSA’s comments suggest additional or more 

detailed analyses of some of our findings. For example, SSA suggested 

additional analyses of the characteristics of those beneficiaries who 

fare better or worse under each of the Commission’s models, further 

distributional analyses on groups of beneficiaries who claim benefits 

at ages other than 65 and that we conduct analyses on rates of 

participation other than the polar cases of 0 percent and 100 percent 

individual account participation. The agency also suggested that 

substantial analysis on implementation and administration issues is 

necessary, given the complexity of administering the commission’s 

models. Although we tried to address most of the critical issues given 

our limited time and resources, we agree with SSA that many of their 

suggested analyses could provide additional useful insights in 

understanding the distributional implications of adopting the 

Commission’s proposals.



Distributional Analysis - SSA expressed a number of concerns about the 

SSASIM-GEMINI simulation model that we use to conduct our 

distributional analysis of benefits. One concern addresses future 

cohorts’ benefit levels reported in our draft. In this regard, we were 

already reviewing the level of benefits received by the 1985 cohort and 

the highest quintile of that cohort with outside experts, and our 

subsequent analysis suggests findings that are more consistent with 

SSA’s observations: we have made these changes to the report.



Some of SSA’s concerns also appear to result from confusion over the 

structure, design and limitations of the SSASIM-GEMINI model. We have 

included some additional documentation in the report that we believe 

will help both the layperson as well as a more technical audience 

understand the model more easily. We note that while ancillary benefits 

can be calculated through the model and are included in our analysis, 

we utilize the model to focus on the individual beneficiary and not the 

household as the unit of analysis. The model also includes marriage and 

divorce rates and their implication for earnings. These marriage and 

divorce rates and other key parameters are expressed by probability 

rules that drive the lifetime dynamics of the synthetic population. 

These rules are not heuristically generated but are validated through a 

comparison with data from the Social Security Administration and the 

Current Population Survey, among others. We also note that in certain 

of instances, for example in specifying the calculation of annuities as 

well as the specification of rates of return used in the modeling, we 

consulted with SSA’s Office of the Chief Actuary in an effort to 

reflect their projection methodology to extent that it was feasible.



Measures of Debt - SSA notes that unfunded obligations may be 

considered a kind of implicit debt and should be considered in the 

analysis. In analyzing reform plans, however, the key fiscal and 

economic point is the ability of the government and society to afford 

the commitments when they come due. Our analysis addresses this key 

point by looking at the level and trends over 75 years in deficits, 

cash needs, and GDP consumed by the program.



Technical Comments - SSA also provided technical and other clarifying 

comments about the minimum benefit provision, our characterization of 

stochastic simulation as well as other minor aspects of the report, 

which we incorporated as appropriate.



We are sending copies of this report to the Honorable Larry E. Craig, 

Ranking Minority Member, Senate Special Committee on Aging, Senator Max 

S. Baucus, Chairman, Senate Committee on Finance, Senator Charles E. 

Grassley, Ranking Minority Member, Senate Committee on Finance, the 

Honorable William M. Thomas, Chairman, and the Honorable Charles B. 

Rangel, Ranking Minority Member, House Committee on Ways and Means, the 

Honorable E. Clay Shaw, Chairman, and the Honorable Bob Matsui, Ranking 

Minority Member, Subcommittee on Social Security, House Committee on 

Ways and Means, and the Honorable Jo Ann B. Barnhart, Commissioner, 

Social Security Administration. We will also make copies available to 

others on request. In addition, the report is available at no charge on 

GAO’s Web site at http://www.gao.gov.



If you or your staffs have any questions about this report, please 

contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income 

Security Issues, on (202) 512-7215, or Susan Irving, Director, 

Strategic Issues, on (202) 512-9142.



David M. Walker

Comptroller General

of the United States:



Signed by David M. Walker:



[End of section]



Appendix I: Analysis of Reform Models:



[See PDF for image]



[End of figure]



[End of section]



Appendix II: Comments from the Social Security Administration:



SOCIAL SECURITY:



The Commissioner:



January 10, 2003:



Ms. Barbara D. Bovbjerg Director:



Education, Workforce, and Income Security Issues:



U.S. General Accounting Office Washington, D.C. 20548:



Dear Ms. Bovbjerg:



Thank you for the opportunity to review and comment on the preliminary 

draft report “Social Security Reform: Analysis of Reform Models 

Developed by the President’s Commission to Strengthen Social Security 

(GAO-03-310). Our comments on your report are enclosed. Staff questions 

may be directed to Alice Wade, Deputy Chief Actuary for Long-Range 

Estimates. Ms. Wade can be reached by phone at 410-965-3002 or by email 

at Alice.H.Wade@ssa.gov.



Sincerely,



Jo Anne B. Barnhart:



Signed by Jo Anne B. Barnhart:



Enclosure:



SOCIAL SECURITY ADMINISTRATION: BALTIMORE MD 21235-0001:



COMMENTS ON THE GENERAL ACCOUNTING OFFICE (GAO) REPORT “SOCIAL SECURITY 

REFORM: ANALYSIS OF REFORM MODELS DEVELOPED BY THE PRESIDENT’S 

COMMISSION TO STRENGTHEN SOCIAL SECURITY” (GAO-03-310):



We appreciate the opportunity to review and comment on the draft 

report. The General Accounting Office has undertaken a comprehensive 

analysis of the reform models developed by the President’s Commission 

to Strengthen Social Security. Major comments are provided first, 

followed by a listing of technical comments. We agree with the 

Comptroller General that achieving sustainable solvency is an extremely 

important goal. In fact, it is one of the four key goals in Social 

Security’s new strategic plan.



Social Security also agrees with the three concluding observations in 

your transmittal letter to Senator Breaux. They are: (1) trade offs 

exist between efforts to achieve sustainable solvency and to maintain 

adequate retirement income for current and future beneficiaries; (2) 

public education and information will be key to implementing any 

changes in Social Security and this is especially so if individuals 

must make choices that affect their future benefits; and (3) any reform 

proposal must also be looked at in the context of the Nation’s overall 

long-range fiscal projections.



Benchmarks:



The analysis by GAO compares Models 2 and 3 with three separate 

benchmarks. We commend the development of standard benchmarks for 

comparison with proposed reforms. We are also developing such 

benchmarks. Although the benchmarks used by GAO all assure solvency for 

the next 75 years, they do not achieve “sustainable solvency.” 

Therefore, comparing the Commission’s Models 2 and 3, which do achieve 

“sustainable solvency,” to benchmarks that do not may be misleading. 

This sustainability difference should be better highlighted, whenever 

there is a comparison of an “unsustainable” benchmark and a sustainable 

Model. In particular, as the figures may be used on a stand-alone 

basis, they should be annotated accordingly.



As an example of the difference between sustainable and unsustainable 

solvency, Social Security’s 2002 Performance and Accountability Report 

includes a graph that shows that on a net present value basis the 

cumulative shortfall of taxes to pay scheduled benefits over the 75-

year period is $3.3 trillion. This graph shows that the cumulative 

shortfall is increasing as we approach the end of the 75-year period, 

and would continue to grow thereafter. In contrast, Model 2, assuming 

67 percent participation, was projected by our actuaries (based on 2001 

assumptions) to have a small cumulative trust fund surplus of 0.4 

trillion dollars for the 75-year period.This cumulative trust fund 

surplus was growing at the end of the 75-year period.



SSA recognizes the importance of using consistent benchmarks, such as 

the ones used by GAO, but notes that they are based on arbitrary 

potential changes to Social Security. Perhaps the primary benchmark to 

be considered would reflect what would actually happen in the absence 
of 

reform. Our understanding in this case is that benefits would have to 
be 

reduced to what is payable with scheduled tax rates once the trust 
funds 

are exhausted. An additional important benchmark would provide 
additional 

revenue to permit payment of current law scheduled benefits.



Measures of Debt:



In comparing benchmarks and plans, the analysis considers changes in 

Federal debt held by the public. It should also consider reductions in 

Social Security’s unfunded obligations. Unfunded obligations may be 

considered a kind of implicit debt.



Winners and Losers:



The analysis of those who would do better or worse by choosing an 

individual account raises many questions. If it represents an analysis 

of how many people in a given cohort would do better or worse, what 

generates the variation in returns? The more important question is the 

impact on a typical beneficiary. For example, the extent to which 

typical members of a cohort will gain or lose, given the expected 

investment returns. There should be more analysis as to who the people 

are who do better or worse under the Commission model (i.e., 

differences between men and women, among survivors, divorced, single, 

married, and between high earners and average earners).



Participation Rates:



The analysis would benefit from assuming the most plausible rate of 

participation in individual accounts, instead of analyzing just the 

extremes of zero and 100 percent participation. Although the rate of 

participation cannot be predicted with certainty, an analysis of the 

incentives contained in a plan and the experience of comparable plans 

allow for making a reasonable assumption, which was done in the 

Commission’s analysis of its models. For example, illustrations 

provided by our actuaries focused on a 67 percent participation report. 

Additional insight into the participation rates may be gained from the 

Government Employee Thrift Savings Plan. At a minimum, you should 
better 

highlight that the zero and 100 percent participation rate cases 
represent 

only the extremes.



Age at Retirement:



The analysis focuses on retirees who start to draw benefits at age 65 

and yet claims to provide representative distributional analysis. Most 

beneficiaries claim benefits at an earlier age. Considering the 

distribution of actual ages at which people claim benefits is 

particularly important in analyzing the full distributional 

consequences of the Commission’s models, especially Model 3 which 

changes the incentives for early retirement.



Distributional Analysis - Accuracy:



We have concerns about the accuracy of the distributional analysis 

shown in figures 9, 10, 11, A-8, A-9, and A-10. To be truly 

representative, the sample of individuals born in the selected years 

must include records for all who might potentially be eligible for any 

benefit--workers, spouses, and widow(er)s. What controls are in place 

to ensure that the sample represents the intended future projection of 

individuals and their family formations? It is particularly striking 

that the GAO model appears to show very little growth in earnings in 

the lowest quintile and substantially above average growth in the 

highest quintile. These and other results should be carefully reviewed 

before drawing any firm conclusions from the analysis. In addition, we 

have concerns that the modeling accurately reflects dual entitlement 

and the low earner and widow enhancement provisions under the 

Commission model. Such modeling requires accurate representation of the 

full distribution of spousal earnings records in marriages and 

divorces.



For example, individual workers from the 1985 birth cohort who retire 

at age 65 would have higher retired-worker benefits under the tax 

increase benchmark than under Model 2 without individual accounts. The 

only beneficiaries from this cohort who would have a higher benefit 

under Model 2 are (1) those who have been disabled-worker beneficiaries 

for many years and had very consistent low earnings before becoming 

disabled, and (2) widow(er)s who had fairly low career-average earnings 

and a spouse with a similar career-average earnings level. However, 

figure 11 suggests that from this cohort, 28 percent fare better under 

Model 2 without individual accounts. In discussing this orally, GAO 

staff indicated that this analysis includes all kinds of beneficiaries 

(disabled, survivors) from these cohorts and comparisons were made as 

of age 67 for all beneficiaries. We still do not believe that the 

disabled workers with very low earnings and relatively long service and 

the survivors where husbands and wives have similar low earnings 

histories could account for such a substantial proportion of this 

cohort at age 67.



Distributional Analysis - Documentation:



The report provides little information about the model that is used for 

the distributional analysis. The report should provide a brief summary 

about the Gemini model. Specifically, the report should indicate the 

number of individuals in the data sample and how they and the model are 

constructed. Finally, the report should also indicate the strengths and 

limitations of the model.



We would suggest providing more documentation in the appendix to 

describe the analysis and changing the footnotes on the figures to 

better reflect the analysis presented. Not enough description of the 

analysis is provided to verify the general results shown in the 

figures. Clarification should be made to address the following:



*Analysis includes all types of beneficiaries (retired workers, 

disabled workers, spouses, survivors) from the cohort that are 

receiving benefits at age 67. However, footnotes on the figures state 

that estimates are based on 1955, 1970, and 1985 birth cohorts retiring 

at age 65, implying that the comparisons are made for retired workers 

only.‘:



*How investment earnings on individual account accumulations vary among 

individuals within a cohort.



*A clear indication of how actual and offset annuities are determined 

should be added. In particular, the interest rate assumed for the 

actual annuity needs to be specified as does the nature of the annuity 

(i.e. fixed versus variable).We note that the Commission used both but 

primarily focused on the variable annuity.



Implementing and Administering Reforms and Assessing Administrative 

Costs:



As noted, there are significant issues related to administering the 

Commission models. The Commission used a 30 basis points (0.3 %) cost 

for the administration of personal accounts based on work done by our 

Actuary and Policy groups and the potentially extremely large size of 

funds being invested. Given the complexity of administering the models 

and the charge from the requestor of this report, it will be necessary 

to do substantial analysis of implementing and administering personal 

accounts and of refining the estimates of administrative costs over 

time.



Stochastic Simulation:



It is not clear what role stochastic simulation plays in the overall 

results presented, if any. The only reference to stochastic modeling in 

the report was the following statement on page 55: Analysis was 

performed using stochastic simulation, which included certain asset 

returns, mortality, inflation, wage growth, etc. However, no 

probabilities, means or variances for these variables or for the 

overall results are given.In particular, no distributions on the 

medians of the quintiles are presented in the report. If true 

stochastic variation has been modeled, then a clear indication of how 

it is being illustrated should be included. If, on the other hand, no 

results specific to stochastic distributions are being presented, then 

references to stochastic simulation should be omitted.



Benefit Levels:



Figures 8 and 15 show benefit levels for the 1985 cohort (in 2001 

constant dollars) as high as $4,000. For this cohort, present-law 

scheduled individual benefits are projected to reach only about $3,000 

(in constant 2001 dollars). Thus, these high reported benefit amounts 

seem to imply that benefits for an individual worker may include 

payment of any auxiliary benefits from the individual’s account (such 

as spouse benefit in the case on a one-earner couple). However, Figure 

6 shows median benefits that are more in line with benefits for the 

individual only. Footnotes at the bottom of all figures seem to 

indicate that benefits are for individuals at age 67, assuming all 

retired-worker beneficiaries retire at age 65. Additional documentation 

in the appendix states that the unit of analysis is individuals and 

that this unit of analysis is chosen because household composition 

varies across birth cohorts. The results lack sufficient explanation 

and there appears to be inconsistency in the presentations.These issues 

should be addressed.



Baseline extended benchmark:



On page 10, the baseline extended benchmark is defined as a fiscal 

policy path that assumes payment in full of all scheduled Social 

Security benefits throughout the 75-year period and no other changes in 

current policies.If benefits are to be paid in full, current policies 

are expected to require change, and this should be indicated. For 

example, this baseline could be described as present law modified to 

allow borrowing to permit full payment of scheduled benefits.



Minimum benefit:



Many references are made throughout the report to a “minimum benefit” 

provision. A minimum benefit usually refers to a specified minimum 

dollar level. In the description of this provision on page 13 for Model 

2, the minimum unreduced (for retirement before normal retirement age) 

benefit is defined as 120 percent of poverty. However, very few 

individuals would actually meet the conditions required to get this 

“minimum benefit” and many more individuals would get increased 

benefits that are not equal to 120 percent of poverty. A reference more 

accurate than minimum benefit would be enhanced benefit for low 

earners.



Sustainable Solvency:



GAO’s definition of sustainable solvency is different than what has 

been referred to as sustainable solvency in the Trustees Report. To 

avoid confusion, we suggest that this be at least noted. The Trustees 

Report has for several years defined sustainable solvency to require an 

expected trust fund ratio that is consistently positive and is stable 

or rising at the end of the 75-year period. GAO has included additional 

criteria in its definition, directly related to Social Security 

solvency. One of these additional criteria is a reduction in the 

currently scheduled cost of the OASDI program as a percent of GDP 

(which is currently projected to rise to 6.7 percent at the end of the 

75-year projection period). Another criterion is a reduction in the 

amount of debt held by the public from that projected to result from a 

modification of present law to allow borrowing to pay scheduled 

benefits.



[End of section]



FOOTNOTES



[1] The Commission’s report, Strengthening Social Security and Creating 

Personal Wealth for All Americans was issued on December 21, 2001 

(revised March 19, 2002).



[2] See, for example, U.S. General Accounting Office, Social Security: 

Evaluating Reform Proposals, GAO/AIMD/HEHS-00-29 (Washington, D C.: 

Nov. 4, 1999) and Social Security Reform: Information on the Archer-

Shaw Proposal, GAO/AIMD/HEHS-00-56 (Washington, D.C.: Jan. 18, 2000).



[3] From the perspective of analyzing benefit adequacy, the tax 

increase and baseline extended benchmarks are identical because both 

assume payment in full of scheduled Social Security benefits over the 

75-year simulation period.



[4] In this report, the term “individual account” is used for the 

voluntary accounts, consistent with published GAO work. The Commission 

used the term “personal account” in its final report.



[5] For this analysis, consistent with SSA’s scoring of the Commission 

reform models, our long-term economic model incorporates the 2001 

Trustees’ best, or intermediate, assumptions.



[6] In addition to assessing a proposal’s likely effect on Social 

Security’s actuarial balance, a standard of sustainable solvency also 

involves looking at (1) the balance between program income and cost 

beyond the 75th year and (2) the share of the budget and economy 

consumed by Social Security spending. 



[7] The GEMINI cohorts consist of simulated samples of 100,000 

individuals, sometimes called synthetic samples. These samples were 

validated against data from the Social Security Administration’s Annual 

Statistical Supplement, the SIPP, the CPS, MINT2, and the PSID.



[8] In simulating the individual accounts, we used the same nominal 

rates of return used by SSA’s Office of the Chief Actuary in January 

2002, with 6.3 percent for Treasuries, 6.8 percent for corporate bonds, 

and 10 percent for equities. 



[9] No expert consensus exists on how Social Security reform proposals 

would affect the saving behavior of private households and businesses.



[10] See, for example, U.S. General Accounting Office, Budget Issues: 

Long-Term Fiscal Challenges, GAO-02-467T (Washington, D. C. : Feb, 27, 

2002) and Social Security: Long-Term Financing Shortfall Drives Need 

for Reform, GAO-02-845T (Washington, D. C.: Jun. 19, 2002).



[11] In response to another agency suggestion, we have also clarified 

our definition of sustainable solvency in the report.



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