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Report to the Ranking Minority Member, Subcommittee on Social Security, 
Committee on Ways and Means, House of Representatives:

United States General Accounting Office:

GAO:

April 2003:

Social Security and Minorities:

Earnings, Disability Incidence, and Mortality Are Key Factors That 
Influence Taxes Paid and Benefits Received:

GAO-03-387:

GAO Highlights:

Highlights of GAO-03-387, a report to the Ranking Minority Member, 
Subcommittee on Social Security, Committee on Ways and Means, House of 
Representatives 

Why GAO Did This Study:

Although Social Securityís benefit and contribution provisions are 
neutral with respect to race, ethnicity, and gender, concerns about the 
experiences of minority groups under Social Security focus on whether 
they benefit less than whites, particularly because of the shorter life 
expectancy of blacks.  These concerns are related to the concept of 
equity, or how benefits compare with taxes.  To gain a thorough 
understanding of the experiences of minority populations under Social 
Security, GAO was asked to examine (1) what socioeconomic and 
demographic factors influence Social Security taxes paid and benefits 
received and (2) how different equity measures compare across racial 
groups.

Because of the current systemís projected actuarial deficit, to conduct 
this study, GAO made its calculations using three policy scenarios, 
each of which achieves 75-year solvency: a payroll tax increase and a 
progressive and proportional benefit cut.  Further, GAO used three 
measures of equity: lifetime benefit-to-tax ratios, net lifetime 
benefits, and real internal rates of return. GAO also examined four 
birth cohorts: 1931-40, 1941-45, 1946-55, and 1956-64.

What GAO Found:

Lifetime earnings, the incidence of disability, and mortality are three 
key factors that influence the taxes individuals pay into the Social 
Security system and the benefits they receive. Lifetime earnings factor 
directly into the Social Security benefit formula, which is designed to 
replace a larger proportion of pre-retirement-covered earnings for 
low-income earners than for higher-income earners. Additionally, the 
probability of being on the Disability Insurance rolls affects the 
expected value of benefits. People who are disabled start receiving 
benefits earlier. The third factor, mortality, affects the benefits 
received relative to taxes paid because it determines the number of 
years a person will pay taxes and receive benefits. 

Differences by race in the relationship between taxes paid and benefits 
received under Social Security are due mainly to differences in 
lifetime earnings, the incidence of disability, and mortality among the 
groups. In the aggregate, blacks and Hispanics have higher disability 
rates and lower lifetime earnings, and thus as a group tend to receive 
greater benefits relative to taxes than whites. However, whites with 
low lifetime earnings or high disability rates also receive greater 
benefits relative to taxes than their higher-income or nondisabled 
counterparts. Higher benefits relative to taxes paid are associated 
with lower lifetime earnings and higher disability incidence.

www.gao.gov/cgi-bin/getrpt?GAO-03-387.

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.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Certain Key Factors Influence Racial Groups' Receipt of Social Security 
Benefits and Payment of Social Security Taxes:

Higher Benefits Relative to Taxes Paid are Associated with Lower 
Lifetime Earnings and Higher Disability Incidence:

Concluding Observations:

Agency Comments:

Appendix I: Scope and Methodology:

Equity Measures:

Benchmark Policy Scenarios:

Modeling Income in the Near Term:

The Effects of Mortality:

Appendix II: Social Security Equity Measures:

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Staff Acknowledgments:

Bibliography:

Related GAO Products:

Tables:

Table 1: Life Expectancy, by Race:

Table 2: Expected Number of Years in Retirement for an Individual, Age 
20 in 2001:

Table 3: Summary of Policy Scenario Parameters:

Figures:

Figure 1: OASDI Lifetime Benefit-to-Tax Ratio for Individuals Born 
between 1931 and 1940:

Figure 2: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1931 and 1940:

Figure 3: Percent of Race/Ethnic Group by Shared Earnings Quintile for 
Individuals Born between 1931 and 1940:

Figure 4: Median Lifetime Benefit-to-Tax Ratio for Individuals Born 
between 1931 and 1940:

Figure 5: Percent of MINT3 Sample and Percent of MINT3 Sample Who Are 
DI Beneficiaries, by Race/Ethnicity:

Figure 6: Percent of MINT3 Sample and Percent of MINT3 Sample Dying 
before Age 62, by Race/Ethnicity:

Figure 7: OASDI Real IRR for Individuals Born between 1931 and 1940, 
under the Progressive Benefit Cut Scenario:

Figure 8: OASDI Real IRR for Individuals Born between 1931 and 1940, 
under the Proportional Benefit Cut Scenario:

Figure 9: OASDI Real IRR for Individuals Born between 1931 and 1940, 
under the Payroll Tax Increase Scenario:

Figure 10: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1931 and 1940, under the Progressive Benefit Cut Scenario:

Figure 11: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1931 and 1940, under the Proportional Benefit Cut Scenario:

Figure 12: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1931 and 1940, under the Payroll Tax Increase Scenario:

Figure 13: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1931 and 1940, under the Progressive Benefit Cut Scenario:

Figure 14: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1931 and 1940, under the Proportional Benefit Cut 
Scenario:

Figure 15: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1931 and 1940, under the Payroll Tax Increase Scenario:

Figure 16: OASDI Real IRR for Individuals Born between 1941 and 1945, 
under the Progressive Benefit Cut Scenario:

Figure 17: OASDI Real IRR for Individuals Born between 1941 and 1945, 
under the Proportional Benefit Cut Scenario:

Figure 18: OASDI Real IRR for Individuals Born between 1941 and 1945, 
under the Payroll Tax Increase Scenario:

Figure 19: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1941 and 1945, under the Progressive Benefit Cut Scenario:

Figure 20: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1941 and 1945, under the Proportional Benefit Cut Scenario:

Figure 21: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1941 and 1945, under the Payroll Tax Increase Scenario:

Figure 22: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1941 and 1945, under the Progressive Benefit Cut Scenario:

Figure 23: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1941 and 1945, under the Proportional Benefit Cut 
Scenario:

Figure 24: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1941 and 1945, under the Payroll Tax Increase Scenario:

Figure 25: OASDI Real IRR for Individuals Born between 1946 and 1955, 
under the Progressive Benefit Cut Scenario:

Figure 26: OASDI Real IRR for Individuals Born between 1946 and 1955, 
for the Proportional Benefit Cut Scenario:

Figure 27: OASDI Real IRR for Individuals Born between 1946 and 1955, 
under the Payroll Tax Increase Scenario:

Figure 28: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1946 and 1955, under the Progressive Benefit Cut Scenario:

Figure 29: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1946 and 1955, under the Proportional Benefit Cut Scenario:

Figure 30: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1946 and 1955, under the Payroll Tax Increase Scenario:

Figure 31: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1946 and 1955, under the Progressive Benefit Cut Scenario:

Figure 32: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1946 and 1955, under the Proportional Benefit Cut 
Scenario:

Figure 33: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1946 and 1955, under the Payroll Tax Increase Scenario:

Figure 34: OASDI Real IRR for Individuals Born between 1956 and 1964, 
under the Progressive Benefit Cut Scenario:

Figure 35: OASDI Real IRR for Individuals Born between 1956 and 1964, 
under the Proportional Benefit Cut Scenario:

Figure 36: OASDI Real IRR for Individuals Born between 1956 and 1964, 
under the Payroll Tax Increase Scenario:

Figure 37: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1956 and 1964, under the Progressive Benefit Cut Scenario:

Figure 38: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1956 and 1964, under the Proportional Benefit Cut Scenario:

Figure 39: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1956 and 1964, under the Payroll Tax Increase Scenario:

Figure 40: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1956 and 1964, under the Progressive Benefit Cut Scenario:

Figure 41: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1956 and 1964, under the Proportional Benefit Cut 
Scenario:

Figure 42: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1956 and 1964, under the Payroll Tax Increase Scenario:

Abbreviations:

AIME: Average Indexed Monthly Earnings:

DI: Disability Insurance:

IRR: Internal Rates of Return:

MBR: Master Beneficiary Records:

MINT: Modeling Income in the Near Term:

MTR: Maintain Tax Rates:

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

OASI: Old-Age and Survivors Insurance:

PIA: Primary Insurance Amount:

SER: Social Security Summary Earnings Records:

SIPP: Survey of Income and Program Participation:

SSA: Social Security Administration:

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United States General Accounting Office:

Washington, DC 20548:

April 23, 2003:

The Honorable Robert T. Matsui
Ranking Minority Member
Subcommittee on Social Security
Committee on Ways and Means
House of Representatives:

Dear Mr. Matsui:

In 2002, the Social Security program paid out approximately $454 
billion in retired worker, dependent, survivor, and disability 
insurance benefits to about 46.4 million recipients.[Footnote 1] 
Protecting against loss of earnings due to disability, retirement, and 
death, the social insurance program is an important source of 
retirement income security for both minority and nonminority workers 
and their families. While approximately 18 percent of white retirees 
aged 65 and older rely on Social Security as their only source of 
retirement income, about 38 percent of minority retirees aged 
65 and older rely on it to the same extent.[Footnote 2] However, the 
Social Security Administration's (SSA) projections suggest that the 
trust funds that finance Old-Age, Survivors, and Disability Insurance 
(OASDI) will begin running cash deficits in 2018 and will be exhausted 
by 2042; thus, the program in its current form is unsustainable in the 
long term.[Footnote 3]

Although Social Security's benefit and contribution provisions are 
neutral with respect to race, ethnicity, and gender, concerns about the 
experiences of minority groups under Social Security focus on whether 
they benefit less than whites from the Social Security system, 
particularly because of their shorter life expectancies. These concerns 
are related to the concept of equity, or how benefits compare with 
taxes. To gain a thorough understanding of the experiences of minority 
populations under Social Security, you asked us to examine (1) what 
socioeconomic and demographic factors influence Social Security taxes 
paid and benefits received and (2) how different equity measures 
compare across racial groups.

Because of the current system's projected actuarial deficit, we made 
our calculations using three policy scenarios, each of which achieves 
75-year solvency--a payroll tax increase and two benefit-reduction only 
benchmarks.[Footnote 4] The benefit-reduction-only benchmarks 
gradually phase in reductions from 2005 to 2035; the reductions are 
accomplished by changing the parameters of the benefit formula in 
various ways to achieve either progressive or proportional reductions. 
The proportional benefit cut reduces the benefit formula factors 
proportionally across all earnings levels, while the progressive 
benefit cut reduces the benefit formula factors by smaller scales for 
lower earners. To conduct our analyses, we asked SSA's Office of Policy 
to apply the three scenarios to the latest version of its 
microsimulation model, Modeling Income in the Near Term (MINT3). The 
MINT3 model includes some dependent and survivor beneficiaries, such as 
current and divorced spouses, as well as widows, but does not include 
child beneficiaries. The model does, however, control for the exclusion 
of children.[Footnote 5] The MINT3 examines four birth cohorts: 1931-
40, 1941-45, 1946-55, and 1956-64. In our analysis, we used three 
measures of equity--the extent to which returns are commensurate with 
contributions: lifetime benefit-to-tax ratios, net lifetime benefits 
(benefits minus taxes), and real internal rates of return.[Footnote 6] 
For our equity measures, we use the "shared" concept of benefits and 
earnings, which incorporates some spousal taxes and benefits along with 
those of the individual worker. For ease of exposition, this report 
focuses on one birth cohort and one equity measure: the 1931-40 birth 
cohort and the lifetime benefit-to-tax ratio.[Footnote 7]

We conducted our work between January 2002 and April 2003 in accordance 
with generally accepted government auditing standards. A more detailed 
discussion of our scope and methodology appears in appendix I.

Results in Brief:

Lifetime earnings, the incidence of disability, and mortality are three 
key factors that influence the taxes individuals pay into the Social 
Security system and the benefits they receive. Lifetime earnings factor 
directly into Social Security's progressive benefit formula, which 
replaces a larger proportion of covered earnings for low-income earners 
than it does for higher-income earners when an insured event (death, 
disability, or retirement) occurs. Additionally, the probability of 
being on the Disability Insurance (DI) rolls affects the expected value 
of benefits. People who are disabled start receiving benefits earlier 
and pay taxes for fewer years. The third factor, mortality, affects the 
benefits received relative to taxes paid because it determines the 
number of years a person will pay taxes and whether and for how long an 
individual receives benefits.

Differences by race in the relationship between taxes paid and benefits 
received under Social Security are due mainly to differences in 
lifetime earnings, the incidence of disability, and mortality among the 
groups. In the aggregate, blacks and Hispanics have higher disability 
rates and lower lifetime earnings, and thus as a group tend to receive 
greater benefits relative to taxes than whites. However, whites with 
low lifetime earnings or high disability rates also receive greater 
benefits relative to taxes than their higher-income or nondisabled 
counterparts. Higher benefits relative to taxes paid are associated 
with lower lifetime earnings and higher disability incidence.

Background:

Title II of the Social Security Act, as amended, establishes the Old-
Age, Survivors, and Disability Insurance program, which is generally 
known as Social Security. The program provides cash benefits to retired 
and disabled workers and their dependents and survivors. The Congress 
designed Social Security benefits, at least implicitly, with a focus on 
replacing lost wages.[Footnote 8] Because the program is financed on a 
modified pay-as-you-go basis, payroll tax contributions of those 
currently working are transferred to current beneficiaries. Current 
beneficiaries include insured workers who are entitled to retirement or 
disability benefits, and their dependents, as well as survivors of 
deceased insured workers. The progressive benefit structure effectively 
provides greater insurance protection relative to contributions to 
earners with lower wages than to high-wage earners. Workers become 
eligible when they have enough quarters of coverage under Social 
Security, (i.e., quarters of the year with earnings from which Social 
Security taxes are deducted); they and their employers pay payroll 
taxes on those covered earnings to finance benefits.[Footnote 9] In 
2002, 153 million people had earnings covered by Social Security, and 
46.4 million people received approximately $454 billion in OASDI 
benefits.

Social Security was originally an old-age retirement program. However, 
the Social Security Amendments of 1939 added two new categories of 
benefits: dependent benefits paid to the spouse and minor children of a 
retired worker, and survivor benefits paid to the family after the 
death of a covered worker. In calendar year 2002, about 10 million 
people received approximately $106 billion in survivor and dependent 
benefits. Further, the amount of Old-Age and Survivors Insurance (OASI) 
benefits paid in 2002 totaled $388 billion for 39 million recipients.

Established in 1956, Social Security Disability Insurance provides 
monthly payments to eligible workers with disabilities who are under 
the normal retirement age and to their dependents.[Footnote 10] To be 
eligible for DI benefits as an adult, a person must have enough 
quarters of covered earnings[Footnote 11] and must be unable to perform 
any substantial gainful activity by reason of a medically determinable 
physical or mental impairment that is expected to result in death or 
that has lasted or can be expected to last for a continuous period of 
at least 12 months.[Footnote 12] As with retired worker benefits, 
disability benefits are funded by payroll taxes paid by covered 
employees and their employers. In calendar year 2002, about 7.2 million 
individuals received approximately $65.6 billion in DI 
benefits.[Footnote 13]

Our previous work on Social Security includes research on the effects 
of Social Security reform on women, the disability insurance program, 
the effects of increasing the retirement age, and adequacy issues 
associated with the program. See our related products section for a 
listing of our previous work in this area.

Further, analysis by other organizations also has examined the 
experiences of minority groups under Social Security. Incorporating 
both different earnings and life expectancies of the racial/ethnic 
groups, some of the research has focused on the relative importance of 
Social Security for minorities.[Footnote 14] Others have suggested that 
blacks benefit less than whites under the current system and that both 
blacks and Hispanics would experience higher returns under a system 
that incorporated individual accounts.[Footnote 15]

Following the analysis of Cohen, Steuerle and Carasso,[Footnote 16] our 
analysis takes a broader approach to the measurement of Social 
Security. We analyze data on the overall program, OASDI, as well as the 
component programs, OASI and DI.

Certain Key Factors Influence Racial Groups' Receipt of Social Security 
Benefits and Payment of Social Security Taxes:

A variety of socioeconomic and demographic factors influence the 
receipt of Social Security--most significantly, lifetime earnings, the 
incidence of disability,[Footnote 17] and mortality. Lifetime earnings 
factor directly into the progressive benefit formula, which replaces a 
larger proportion of pre-retirement covered earnings for low-income 
earners than it does for higher-income earners. Additionally, the 
probability of being on the Disability Insurance rolls affects the 
expected value of benefits. Finally, mortality determines the number of 
years an individual will receive benefits and pay taxes and, therefore, 
the total benefits received.

One key factor affecting the level of Social Security benefits is 
earnings. The calculation of Social Security benefits is designed to 
replace a larger proportion of the earnings of lower earners than it 
does for higher earners. Thus, the benefit formula is progressive. For 
example, workers who retire at the normal retirement age in 2003 with 
scaled, low lifetime covered earnings will have benefits that replace 
approximately 56 percent of their earnings. Workers with scaled, medium 
lifetime earnings will have about 42 percent of their earnings 
replaced, and workers with lifetime earnings at the maximum taxable 
level will have approximately 30 percent replaced.[Footnote 18]

The probability of becoming disabled also affects the expected value of 
Social Security benefits. DI recipients start drawing Social Security 
earlier and simultaneously see their tax liability reduced; in general, 
they will receive greater benefits in relation to the taxes they pay. 
DI benefits are based on the same formula as OASI benefits, so that 
benefits for low-income workers replace a larger proportion of their 
earnings. The average age of disabled workers is approximately 
50.[Footnote 19]

Disability trends will have a significant effect on future Social 
Security program costs as the Baby Boom generation ages. The highest 
rates of disability incidence within the DI program occur from age 50 
to 65. Because of changing demographics, the number of DI beneficiaries 
is expected to more than double over the next 75 years, from the 
current 
7.2 million to more than 16 million.[Footnote 20]

Finally, mortality rates determine the expected number of years a 
person will contribute taxes and receive benefits and, therefore, the 
amount of total benefits received.[Footnote 21] For example, if a 
nondisabled person dies before retirement, that individual's benefit-
to-tax ratio is expected to be lower than the ratio for an individual 
who lives to receive retirement benefits.[Footnote 22] Individuals who 
die before retirement will no longer make contributions to the Social 
Security program. However, they may have dependents who would benefit 
from the survivor portion of the program.

Higher Benefits Relative to Taxes Paid are Associated with Lower 
Lifetime Earnings and Higher Disability Incidence:

Differences by race in the relationship between taxes paid and benefits 
received under Social Security are due to differences in lifetime 
earnings, the incidence of disability, and mortality between the 
groups. In the aggregate, blacks and Hispanics have higher disability 
rates and lower lifetime earnings, and thus receive greater benefits 
relative to taxes than whites. However, whites with low lifetime 
earnings and high disability rates also receive greater benefits 
relative to taxes than their higher-income and nondisabled 
counterparts. Because blacks have higher mortality than whites, their 
ratio of benefits to taxes may be lower in comparison, but this 
depends, in part, on whether they have survivors.[Footnote 23] Although 
blacks die younger than whites, and may receive fewer years of 
retirement benefits, they may also leave survivors who receive benefits 
for more years than their white counterparts.

As a Group, on Average Minorities Accrue Higher Benefits in Relation to 
the Taxes They Pay:

In the aggregate, blacks and Hispanics generally have higher disability 
rates and lower lifetime earnings, and thus receive greater benefits 
relative to taxes than whites. Figure 1 presents the median lifetime 
benefit-to-tax ratio for the 1931-40 birth cohort.

Figure 1: OASDI Lifetime Benefit-to-Tax Ratio for Individuals Born 
between 1931 and 1940:

[See PDF for image]

Note: Calculations are made using the 2001 Trust Fund discount rate 
under the payroll-tax-increase scenario.

[End of figure]:

However, these aggregate differences by race are small, for example, 
compared to the differences between high and low earners within racial 
groups. The aggregate results are affected by other factors that vary 
by race, such as lifetime earnings, disability incidence, and 
mortality.[Footnote 24]

Individuals with Low Lifetime Earnings Receive Higher Social Security 
Benefits Relative to Taxes Than Individuals with High Lifetime 
Earnings:

When examined by earnings quintiles, those in the lowest earnings 
quintile experience a higher benefit-to-tax ratio relative to those in 
the upper quintiles. This finding is true across all birth cohorts we 
examined, which cover people from 1931-64, and the three policy 
scenarios we examined. Figure 2 presents OASDI's lifetime median 
benefit-to-tax ratios experienced by individuals in the 1931-40-birth 
group for different earnings categories under the payroll-tax increase 
scenario. Those in the lowest quintile, regardless of race, have a 
higher benefit-to-tax ratio than those in the upper quintiles because 
the benefit calculation replaces a higher proportion of their earnings 
compared with higher earners.[Footnote 25]

Figure 2: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1931 and 1940:

[See PDF for image]

Note: Calculations are made using the 2001 Trust Fund discount rate 
under the payroll-tax-increase scenario.

[End of figure]:

Figure 3 shows that approximately 38 percent of Hispanics are in the 
lowest-earnings quintile, while about 35 percent of blacks and 17 
percent of whites are. Moreover, about 9 percent of Hispanics are in 
the highest-earnings quintile; the corresponding percentages for blacks 
and whites are 11 percent and 22 percent, respectively. (See fig. 3.) 
Because minorities are over-represented in the lowest earnings quintile 
and under-represented in the highest quintile, they sometimes have 
higher benefit-to-tax ratios than whites.

Figure 3: Percent of Race/Ethnic Group by Shared Earnings Quintile for 
Individuals Born between 1931 and 1940:

[See PDF for image]

[End of figure]

Disability Insurance Yields Higher Benefits Relative to Taxes for 
Individuals Who Are Low Earners Than for Individuals Who Are High 
Earners:

In general, groups who are more likely to be disabled receive greater 
OASDI benefits relative to taxes paid than those who are not disabled. 
As shown in figure 4, low-income individuals, particularly blacks, 
achieve higher benefit-to-tax ratios under OASDI (when the disability 
program is included) than under OASI.

Figure 4: Median Lifetime Benefit-to-Tax Ratio for Individuals Born 
between 1931 and 1940:

[See PDF for image]

Note: Calculations are made using the 2001 Trust Fund discount rate, 
under the payroll-tax increase scenario.

[End of figure]


This is because in addition to having lower lifetime earnings than 
whites, blacks are more likely to be on DI than whites or Hispanics. As 
shown in figure 5, blacks make up 10.3 percent of the sample, but 16.9 
percent of the DI beneficiaries, while Hispanics make up about 8.4 
percent of the sample, and 10.1 percent of DI beneficiaries. Whites are 
the only group to make up a smaller percent of DI beneficiaries than of 
the whole sample.

Figure 5: Percent of MINT3 Sample and Percent of MINT3 Sample Who Are 
DI Beneficiaries, by Race/Ethnicity:

[See PDF for image]

[End of figure]

Mortality Rates of the Different Racial Groups Are Relevant to the 
Receipt of Social Security Benefits:

The relationship between mortality and the ratio of benefits to taxes 
for an individual is more complicated than it is for lifetime earnings 
and the incidence of disability. In general, mortality rates affect the 
expected number of years a person will contribute taxes and receive 
benefits and, therefore, the amount of total benefits received. For 
individuals who die before they retire, the benefit-to-tax ratio is 
expected to be lower than for individuals who live to receive 
retirement benefits. Mortality rates among different racial groups 
suggest that blacks are more likely to die before receiving a 
retirement benefit than their Hispanic or white counterparts.[Footnote 
26] (See fig. 6.) Though blacks make up about 10.3 percent of our 
sample, over 16 percent of those dying before age 62 are 
black.[Footnote 27]

Figure 6: Percent of MINT3 Sample and Percent of MINT3 Sample Dying 
before Age 62, by Race/Ethnicity:

[See PDF for image]

[End of figure]


Those not dying, or becoming disabled, before receiving a retirement 
benefit continue to make contributions to the program while in covered 
employment. Census data show that Hispanics and whites have a greater 
life expectancy than blacks, as shown in tabl[Footnote 28]e 1.:

Table 1: Life Expectancy, by Race:

Male; White,non-Hispanic: 75; Black,non-Hispanic: 69; Hispanic: 77.

Female; White,non-Hispanic: 80; Black,non-Hispanic: 76; Hispanic: 84.

Source: Bureau of the Census.

Note: Life expectancy is calculated from birth. The life tables used 
are 2001 projections.

[End of table]


Moreover, because of the differential life expectancies and the 
probabilities of survival beyond retirement age, on average, whites and 
Hispanics can expect to receive more years of benefits than blacks. 
(See table 2.):

Table 2: Expected Number of Years in Retirement for an Individual, Age 
20 in 2001:

Male; White,
non-Hispanic: 16; Black,
non-Hispanic: 12; Hispanic: 19.

Female; White,
non-Hispanic: 20; Black,
non-Hispanic: 17; Hispanic: 23.

Source: Bureau of the Census.

Note: Retirement is defined to begin at age 62, the earliest age of 
eligibility. Expected number of years in retirement is calculated by 
multiplying (1) the probability that an individual age 20 in 2001, 
survives to age 62 and (2) the life expectancy at age 62. The life 
tables used are 2001 projections.

[End of table]
:

While those who live longer have a greater benefit-to-tax ratio, those 
who die may leave survivors who would benefit from the survivor portion 
of the program.[Footnote 29]

Concluding Observations:

On the basis of our review, three factors are key in determining the 
amount of Social Security benefits received relative to taxes paid--
lifetime earnings, disability incidence, and mortality. Social Security 
is intended to insure workers and their families against lost wages due 
to disability, retirement, or death, and the benefit structure is 
designed to afford greater protection to low earners. In general, 
minorities benefit more from these protections because, 
disproportionately, they are low earners and also have a greater 
likelihood of receiving disability benefits. Because of their lower 
life expectancies, blacks gain the most advantage from disability or 
survivors' benefits while, due to their higher life expectancies, 
Hispanics receive retirement benefits for a longer period and, 
therefore, receive higher lifetime benefits. As a group, blacks gain 
from Social Security's progressive benefit formula, the early 
retirement option, and comprehensive insurance plans. Hispanics also 
gain from the progressive benefit formula, and they have the ability to 
gain more from Social Security's annual cost-of-living adjustment 
because they live longer.

Given the long-run financial problems facing Social Security, 
policymakers are considering a variety of potential reforms to make the 
system sustainable. Reforms that do so by tying benefits more directly 
to contributions may affect the progressivity of the system and are 
likely to disproportionately affect equity for minorities as measured 
in this report. Further, disability, survivors', and dependents' 
benefits also could be affected by any changes to the structure of the 
program.

The choices the Congress will make to restore Social Security's long-
term solvency and sustainability could affect the distributional 
effects of the program. Thus, if progressivity remains one of the 
important goals for the program, the debate over system reforms should 
consider the extent to which the specific reforms might alter that 
progressivity, as it is likely to have a disproportionate impact on 
minorities, absent other, mitigating, changes.

Agency Comments:

We provided a draft of this report to SSA and the Bureau of the Census. 
SSA provided technical comments, which we have incorporated where 
appropriate.

We are sending copies of this report to SSA and Census. We will also 
make copies available to others on request. In addition, the report 
will be available at no charge on GAO's Web site at http://www.gao.gov.

If you have any questions concerning this report, please contact me at 
(202) 512-7215. See appendix III for other contacts and staff 
acknowledgments.

Sincerely yours,

Barbara D. Bovbjerg
Director, Education, Workforce and Income Security Issues:

Signed by Barbara D. Bovbjerg

[End of section]

Appendix I: Scope and Methodology:

This appendix provides more details about our analysis of the taxes 
paid and benefits received by minority and nonminority participants in 
the Social Security program. To conduct our assessment, we examined 
three socioeconomic and demographic factors that are relevant to racial 
groups' receipt of Social Security benefits--earnings, the disability 
incidence rate, and mortality. Additionally, we used three measures of 
equity-lifetime benefit-to-tax ratio, net lifetime benefits, and 
internal rates of return--to analyze the relationship between Social 
Security contributions and benefits under Old-Age, Survivors and 
Disability Insurance (OASDI), Old-Age and Survivors Insurance (OASI) 
and Disability Insurance (DI). Further, we examined four birth cohorts 
of Social Security beneficiaries: individuals born during the 
Depression, 1931-40; those born during WWII, 1941-45; the early Baby 
Boomers, 1946-55, and the late Baby Boomers, 1956-64.

We also used three benchmark-policy scenarios that restore the 75-year 
actuarial balance of the Social Security system--a payroll tax 
increase, a progressive benefit reduction, and a proportional benefit 
reduction.[Footnote 30] These scenarios were applied to the 
microsimulation model, Modeling Income in the Near Term[Footnote 31] 
(MINT3) to determine the relationship between taxes paid and benefits 
received from the program. Social Security's Office of the Chief 
Actuary has scored the benchmark policy scenarios using the 
intermediate assumptions of the 2001 Trustees Report.

Equity Measures:

The Social Security program addresses the twin goals of individual 
equity and social adequacy. Equity[Footnote 32] refers to how benefits 
compare with taxes; adequacy refers to the level and certainty of 
benefits provided to retirees, the disabled, dependents, and survivors. 
Three equity measures are used to determine how groups compare in terms 
of the taxes they pay and the benefits they receive under Social 
Security. The equity measures we used were the ratio of lifetime 
benefits to lifetime taxes, net lifetime benefits, and real internal 
rates of return. The ratio of lifetime benefits to lifetime taxes 
presents information on the relationship between the value of taxes 
paid and the value of benefits received. The ratio compares the 
interest-adjusted value of lifetime benefits with lifetime taxes. Net 
lifetime benefits are benefits minus taxes over the course of an 
individual's lifetime; net lifetime benefits also are interest 
adjusted. Internal rates of return (IRR) for Social Security reflect 
the constant discount rate that equates the present discounted value of 
taxes with the present discounted value of benefits.[Footnote 33]

Benchmark Policy Scenarios:

According to current projections of the Social Security trustees for 
the next 75 years, revenues will not be adequate to pay full benefits 
as defined under current law. Therefore, estimating future Social 
Security benefits should reflect that actuarial deficit and account for 
the fact that some combination of benefit reductions and revenue 
increases will be necessary to restore long-term solvency. To 
illustrate a full range of possible outcomes, we use previously 
developed policy scenarios[Footnote 34] that would achieve 75-year 
solvency either by only increasing payroll taxes or by only reducing 
benefits. These policies have been scored by the Social Security 
Administration's Office of the Chief Actuary.

Tax Increase Only Policy:

We use only one tax-increase-only benchmark policy scenario because 
policies that only increase payroll tax rates have no effect on 
benefits. Our tax-increase-only benchmark raises payroll tax rates 
immediately (in 2002). We increase OASI and DI taxes separately by the 
amount of the actuarial deficit of each fund. It results in the 
smallest tax rate in 2077 of those we considered and spreads the tax 
burden most evenly across generations; this is the primary basis for 
our selection. The later that taxes are increased, the higher the tax 
rate needed to achieve 75-year solvency, and in turn the higher the tax 
burden on later taxpayers and lower on earlier taxpayers. Alternative 
approaches to increasing revenues could have very different effects on 
individual equity.

Benefit-Reduction Only Policies:

We use two benefit-reduction benchmarks for our analysis. Both benefit-
reduction benchmarks take the form of reductions in Social Security's 
Primary Insurance Amount (PIA) formula factors; they differ in the 
relative size of those reductions across the three factors, which are 
90, 32, and 15 percent under current law. Each benchmark has three 
dimensions of specification: scope, phase-in period, and the factor 
changes themselves.

When workers retire, become disabled, or die, Social Security uses 
their lifetime earnings records to determine each worker's PIA, on 
which the individual's benefit and any dependent and survivor benefits 
are based. PIA is the result of two elements--the Average Indexed 
Monthly Earnings (AIME) and the benefit formula. The AIME for a retired 
worker is determined by taking the 35 highest earnings years in the 
lifetime earnings record, indexing them, and taking the average. The 
AIME for disabled workers is based on fewer years of earnings. To 
determine the PIA, AIME is then applied to a step-like formula, shown 
here for 2001.

PIA = 90% * (AIME1 $561):

+ 32% * (AIME2 > $561 and $3381):

+ 15% * (AIME3 > $3381),

where AIMEi is the applicable portion of AIME.

The PIA is the basic monthly benefit, unless it is further adjusted 
based on early and delayed retirement, the spouse's benefit, and other 
factors.

Scope:

For our analysis, we want the benefit reductions in our benchmarks to 
apply very generally to all types of benefits, including disability and 
survivor benefits as well as old-age benefits. Our objective is to find 
policies that achieve 75-year solvency while reflecting the 
distributional effects of the current program as closely as possible. 
Therefore, it would not be appropriate to reduce some benefits and not 
others. If disabled and survivor benefits were not reduced at all, 
reductions in other benefits would be deeper than shown in this 
analysis.

Phase-in Period:

We selected a phase-in period that begins with those reaching age 62 in 
2005 and continues for 30 years. We chose this phase-in period to 
achieve a balance between two competing objectives: minimizing the size 
of the ultimate benefit reduction and minimizing the size of each 
year's incremental reduction to avoid notches and unduly large 
incremental reductions. Since later birth cohorts are generally agreed 
to experience lower rates of return on their contributions already 
under current law, minimizing the size of the ultimate benefit 
reduction would minimize further reductions in later cohorts' rates of 
return. The smaller each year's reduction, the longer it will take for 
benefit reductions to achieve solvency and in turn, the deeper the 
eventual reductions will have to be. However, the smallest possible 
ultimate reduction would be achieved by reducing benefits immediately 
for all new retirees by over 10 percent; this would create a "notch" 
however, that is, create some marked inequities between beneficiaries 
close to each other in age.

Our analysis shows that a 30-year phase-in should produce incremental 
annual reductions that would be of lesser size and thus avoid 
significant notches. Therefore, it would be preferable to longer phase-
in periods, which would require deeper ultimate reductions.

In addition, we believe it is appropriate to delay the first year of 
the benefit reductions for a few years because those within a few years 
of retirement would not have had adequate time to adjust their 
retirement planning if the reductions applied immediately. The Maintain 
Tax Rates (MTR) benchmark in the 1994-96 Advisory Council Report also 
provided for a similar delay.[Footnote 35]

Defining the Primary Insurance Amount Formula Factor Reductions:

Each of our benefit-reduction benchmarks are variations of changes in 
PIA formula factors and all are special cases of the following 
generalized form, where Fi represents the 3 PIA formula factors, which 
are 90, 32, and 15 percent under current law.

F(^i) of t+1 = (F(^1) of 2001 times x times weight of x) - y times 
weight of y

where:

t = the year of the factor,

x = constant proportional benefit reduction,

y = constant "subtractive" benefit reduction, and:

weight x and weight y determine the relative effects of x and y and sum 
to 1.

Our potential benchmarks can now be described as follows:

Proportional Offset: weight x = 1 and weight y = 0. The value of x is 
calculated to achieve 75-year solvency, given the chosen phase-in 
period and scope of reductions.

The formula specifies that the proportional reduction is always taken 
as a proportion of the base-year factor value rather than the prior 
year. This maintains a constant rate of benefit reduction from year to 
year. In contrast, taking the reduction as a proportion of the prior 
year's factor value implies a decelerating of the benefit reduction 
over time because the prior year's factor gets smaller with each 
reduction. To achieve the same level of 75-year solvency, this would 
require a greater proportional reduction in earlier years because of 
the smaller reductions in later years.

The proportional offset hits lower earners especially hard because the 
constant x percent of the higher formula factors results in a larger 
percentage reduction over that segment of the formula, while the higher 
formula factors apply to the lower earnings segments of the formula. 
For example, in a year when the cumulative size of the proportional 
reduction has reached 10 percent, the 90-percent factor would then have 
been reduced by 9 percentage points, the 32-percent factor by 3.2 
percentage points, and the 15-percent factor by 1.5 percentage points. 
As a result, earnings below the first bendpoint would be replaced at 9 
percentage points less than current law, while earnings above the 
second bendpoint would be replaced at only 1.5 percentage points less 
than current law. Still, the proportional offset is easily described as 
a constant percentage reduction of current law benefits for everyone. 
In the example, beneficiaries of all earnings levels would have their 
benefits reduced by 
10 percent.

Progressive Offset: weight x = 0 and weight y = 1. The value of y is 
calculated to achieve 75-year solvency, given the chosen phase-in 
period and scope of reductions.

This offset results in equal percentage point reductions in the formula 
factors, by definition, and subjects earnings across all segments of 
the PIA formula to the same reduction. Therefore, the offset avoids 
hitting lower earners especially hard as the proportional offset does.

As it happens, this offset produces exactly the same effect as the 
offset we used in our 1990 analysis of a partial privatization 
proposal.[Footnote 36] In that analysis, we were charged with finding a 
benefit reduction that would leave the redistributive effects of the 
program unchanged while allowing a diversion of 2 percentage points of 
contributions into individual accounts. We calculated these benefit 
reductions by computing the Social Security annuity value of the 
balance of a hypothetical account that earned interest on the diverted 
contributions at the rate of return for each individual's cohort as a 
whole. We demonstrated the distributional neutrality of this benefit 
reduction by showing that if all individuals earned exactly the cohort 
rate of return on their individual accounts, then their income under 
the proposal from Social Security and the new accounts would be exactly 
the same as under current law.

The hypothetical account approach to reducing benefits must be 
translated into our PIA factor changes because such a reduction is 
proportional to AIME, not to PIA. The contributions to a hypothetical 
account are proportional to earnings. Therefore, a benefit reduction 
based on such an account would also be proportional to earnings; that 
is:

Benefit reduction = y *AIME:

Therefore, the new PIA would be:

PIA new =90% * AIME1 + 32% * AIME2 + 15% * AIME3 - y * AIMET:

Where AIMEi is the applicable portion of AIME and AIMET is the total 
AIME. In turn,

PIA new =(90% - y) * AIME1 + (32% - y) * AIME2 + (15% - y) * AIME3:

Thus, the reduction from a hypothetical account can be translated into 
a change in the PIA formula factors.

Because this offset can be described as subtracting a constant amount 
from each PIA formula factor, it is reasonably transparent, especially 
in comparison to describing it as a hypothetical account offset. Table 
3 summarizes the features of our policy scenarios.

Table 3: Summary of Policy Scenario Parameters:

Policy scenario; [Empty].

Tax increase only; Phase-in period: 2002; Annual PIA factor reduction 
(percentage point): 90-percent factor: 0.00; Annual PIA factor 
reduction (percentage point): 32-percent factor: 0.00; Annual PIA 
factor reduction (percentage point): 15-percent factor: 0.00; [Empty]; 
Ultimate PIA factor (2035) percent: 90-percent factor: 90.00; Ultimate 
PIA factor (2035) percent: 32-percent factor: 32.00; Ultimate PIA 
factor (2035) percent: 15-percent factor: 15.00.

Proportional benefit reduction; Phase-in period: 2005-2035; Annual PIA 
factor reduction (percentage point): 90-percent factor: 0.71; Annual 
PIA factor reduction (percentage point): 32-percent factor: 0.25; 
Annual PIA factor reduction (percentage point): 15-percent factor: 
0.12; [Empty]; Ultimate PIA factor (2035) percent: 90-percent factor: 
68.10; Ultimate PIA factor (2035) percent: 32-percent factor: 24.21; 
Ultimate PIA factor (2035) percent: 15-percent factor: 11.35.

Progressive benefit reduction; Phase-in period: 2005-2035; Annual PIA 
factor reduction (percentage point): 90-percent factor: 0.32; Annual 
PIA factor reduction (percentage point): 32-percent factor: 0.32; 
Annual PIA factor reduction (percentage point): 15-percent factor: 
0.32; [Empty]; Ultimate PIA factor (2035) percent: 90-percent factor: 
80.11; Ultimate PIA factor (2035) percent: 32-percent factor: 22.11; 
Ultimate PIA factor (2035) percent: 15-percent factor: 5.11.

Source: SSA's Office of the Chief Actuary.

[End of table]

Modeling Income in the Near Term:

Modeling Income in the Near Term (MINT) is a detailed microsimulation 
model developed jointly by the Social Security Administration, the 
Brookings Institution, and the Urban Institute (the version used in 
this report, MINT3, was published in June 2002). The base data sets 
used in the model are 1990-93 panels of the Census Bureau's Survey of 
Income and Program Participation (SIPP), matched to Social Security 
Summary Earnings Records (SER) and Master Beneficiary Records (MBR). 
The SER contains earnings histories for the years 1951 to 1999. MINT 
uses data on the matched files for individuals in the 1931 to 1965 
birth cohorts to project their incomes.[Footnote 37] MINT3 projects 
marital change, Social Security-covered work and earnings, disability, 
retirement income, and death for a SIPP subsample. The sample consists 
of 69,612 SIPP respondents from the 1990-93 surveys who were born 
between 1931 and 1964. Marriage, divorce, and re-marriage are projected 
with hazard models allowing up to nine marriages, although after 
retirement, only one re-marriage is allowed. Marital status is 
projected for each respondent until death. Work and earnings are taken 
from the SER, and earnings are projected from 2000 to 2031. Spouse 
earnings are also based on the SER. Earnings of missing spouses are 
imputed from similar survey respondents, and complete earnings 
histories are imputed for respondents who did not report a Social 
Security number. The MINT model provides SSA with the capability to 
assess the distributional impact of changes to the Social Security 
program.

MINT projects earnings histories for persons in the sample who have not 
yet completed their careers. MINT also projects the year of initial 
receipt of Social Security benefits and benefit amounts, in addition to 
other sources of retirement income including pensions, asset income, 
and earnings of working Social Security beneficiaries.

Methodologically, we chose MINT3 for this report for:

* its capability to project marital changes, Social Security-covered 
work and earnings, disability, retirement, and mortality;

* its ability to prospectively assess and model various Social Security 
programmatic alternatives;

* its ability to examine a large portion of the Social Security 
population (those born between 1931 and 1964, in the current analysis); 
and:

* its ability to examine various subgroups, notably by race and 
ethnicity; and its use as a policy tool already employed by SSA;

While the MINT model provides data that are well-suited to our 
analysis, there are some shortcomings of those data as well. First, the 
model excludes a number of dependent and survivor beneficiaries in the 
projections of benefits that are received on a primary insured worker's 
record. Among the excluded groups are children of disabled, retired, or 
deceased workers.[Footnote 38] In order to correct for this omission, 
SSA reduced the OASI and DI tax rates--both historical and prospective-
-by the percentage of program expenditures that were paid to those 
excluded beneficiaries.[Footnote 39]

As noted earlier, in our analysis, we use the "shared" measure of OASDI 
taxes and benefits. For this measure, during years in which the 
individual is unmarried--either as a beneficiary or as a payroll 
taxpayer--the full measure of the individual's taxes paid or benefits 
received (regardless of whose earnings those benefits are based upon) 
is counted. While the individual is married, the taxes or benefits 
counted are half of the sum of the individual's total payroll taxes or 
benefits plus the spouse's total payroll taxes or benefits.[Footnote 
40]

The Effects of Mortality:

The U.S. Census Bureau, under the Department of Commerce, publishes 
population projections for the United States. Mortality assumptions are 
represented as life tables for selected calendar years from 1999 to 
2100 and are published by age, gender, race, and Hispanic origin. We 
used the published 2001 life tables for the non-Hispanic white, non-
Hispanic Black, and Hispanic populations to determine the number of 
years an individual, age 20 in 2001, could expect to receive benefits. 
These tables are located on the Bureau's website at: http://
www.census.gov/population/projections/nation/detail/lt99_10.a:

Mortality affects the benefits received relative to taxes paid because 
it determines the number of years a person will pay taxes and receive 
benefits. Furthermore, mortality rates affect individuals' lifetime 
earnings and their incidences of disability. Finally, mortality affects 
the amount of benefits paid to survivors of deceased workers.

Incorporating survivors who have a right to benefits on the decedent's 
social security record complicates the impact of mortality on our 
measures of social security benefits relative to taxes paid. For 
example, dependent children and their surviving parents may begin to 
receive survivor benefits. Aged (60 years or older) widows may begin to 
receive benefits, or they may experience a change in the amount of 
benefits they receive, as well as a change in whether the benefits are 
based on their own or their deceased spouses' earnings.

As noted above, Hispanics generally have the lowest mortality rates and 
blacks have the highest. Earlier work using the MINT3 model shows that, 
in practice, higher mortality tends to lower our measures of benefits 
relative to taxes.[Footnote 41] Internal rates of return for blacks and 
Hispanics fall further than those for whites when examining the effects 
of incorporating actual mortality patterns.

[End of section]

Appendix II: Social Security Equity Measures:

For the median lifetime net benefits and the benefit-to-tax ratio, 
calculations are made using the 2001 trust fund discount rate, and the 
dollar figures reported are in 2000 dollars. The two dominant results 
that the following figures reveal are that the lowest income quintile 
group always has higher values of the three equity measures than does 
the highest income quintile group and that earlier birth cohort groups 
generally have higher values than do later birth cohort groups.

Figure 7: OASDI Real IRR for Individuals Born between 1931 and 1940, 
under the Progressive Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the inflation rates assumed under the 
intermediate assumption of the 2001 Trustees Report.

[End of figure]:

Figure 8: OASDI Real IRR for Individuals Born between 1931 and 1940, 
under the Proportional Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the inflation rates assumed under the 
intermediate assumption of the 2001 Trustees Report.

[End of figure]
:

Figure 9: OASDI Real IRR for Individuals Born between 1931 and 1940, 
under the Payroll Tax Increase Scenario:

[See PDF for image]

Note: Calculations are made using the inflation rates assumed under the 
intermediate assumption of the 2001 Trustees Report.

[End of figure]

Figure 10: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1931 and 1940, under the Progressive Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 11: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1931 and 1940, under the Proportional Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 12: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1931 and 1940, under the Payroll Tax Increase Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 13: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1931 and 1940, under the Progressive Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 14: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1931 and 1940, under the Proportional Benefit Cut 
Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 15: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1931 and 1940, under the Payroll Tax Increase Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 16: OASDI Real IRR for Individuals Born between 1941 and 1945, 
under the Progressive Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the inflation rates assumed under the 
intermediate assumption of the 2001 Trustees Report.

[End of figure]

Figure 17: OASDI Real IRR for Individuals Born between 1941 and 1945, 
under the Proportional Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the inflation rates assumed under the 
intermediate assumption of the 2001 Trustees Report.

[End of figure]

Figure 18: OASDI Real IRR for Individuals Born between 1941 and 1945, 
under the Payroll Tax Increase Scenario:

[See PDF for image]

Note: Calculations are made using the inflation rates assumed under the 
intermediate assumption of the 2001 Trustees Report.

[End of figure]

Figure 19: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1941 and 1945, under the Progressive Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 20: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1941 and 1945, under the Proportional Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 21: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1941 and 1945, under the Payroll Tax Increase Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 22: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1941 and 1945, under the Progressive Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 23: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1941 and 1945, under the Proportional Benefit Cut 
Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 24: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1941 and 1945, under the Payroll Tax Increase Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 25: OASDI Real IRR for Individuals Born between 1946 and 1955, 
under the Progressive Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the inflation rates assumed under the 
intermediate assumption of the 2001 Trustees Report.

[End of figure]

Figure 26: OASDI Real IRR for Individuals Born between 1946 and 1955, 
for the Proportional Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the inflation rates assumed under the 
intermediate assumption of the 2001 Trustees Report.

[End of figure]

Figure 27: OASDI Real IRR for Individuals Born between 1946 and 1955, 
under the Payroll Tax Increase Scenario:

[See PDF for image]

Note: Calculations are made using the inflation rates assumed under the 
intermediate assumption of the 2001 Trustees Report.

[End of figure]

Figure 28: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1946 and 1955, under the Progressive Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 29: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1946 and 1955, under the Proportional Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 30: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1946 and 1955, under the Payroll Tax Increase Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 31: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1946 and 1955, under the Progressive Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 32: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1946 and 1955, under the Proportional Benefit Cut 
Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 33: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1946 and 1955, under the Payroll Tax Increase Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 34: OASDI Real IRR for Individuals Born between 1956 and 1964, 
under the Progressive Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the inflation rates assumed under the 
intermediate assumption of the 2001 Trustees Report.

[End of figure]

Figure 35: OASDI Real IRR for Individuals Born between 1956 and 1964, 
under the Proportional Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the inflation rates assumed under the 
intermediate assumption of the 2001 Trustees Report.

[End of figure]

Figure 36: OASDI Real IRR for Individuals Born between 1956 and 1964, 
under the Payroll Tax Increase Scenario:

[See PDF for image]

Note: Calculations are made using the inflation rates assumed under the 
intermediate assumption of the 2001 Trustees Report.

[End of figure]

Figure 37: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1956 and 1964, under the Progressive Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 38: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1956 and 1964, under the Proportional Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 39: OASDI Median Lifetime Net Benefits for Individuals Born 
between 1956 and 1964, under the Payroll Tax Increase Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 40: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1956 and 1964, under the Progressive Benefit Cut Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 41: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1956 and 1964, under the Proportional Benefit Cut 
Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

Figure 42: OASDI Median Lifetime Benefit-to-Tax Ratio for Individuals 
Born between 1956 and 1964, under the Payroll Tax Increase Scenario:

[See PDF for image]

Note: Calculations are made using the effective interest rates assumed 
to be earned by the OASDI Trust Funds under the intermediate assumption 
of the 2001 Trustees Report.

[End of figure]

[End of section]

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Alicia Puente Cackley, (202) 512-7022
Gretta L. Goodwin, (202) 512-7952:

Staff Acknowledgments:

In addition to those named above, the following individuals made 
significant contributions to this report: Brendan Cushing-Daniels and 
Patrick DiBattista, Education, Workforce, and Income Security Issues; 
Joseph Applebaum, Robert Parker, Joan Vogel, and Grant Mallie, Applied 
Research and Methods; Jeffrey Baldwin-Bott, International Affairs and 
Trade; Richard Burkard and Roger Thomas, General Counsel; and 
Lee Cohen, the Social Security Administration.

[End of section]

Bibliography:

Hayward, Mark D., and Melonie Heron. (1999) "Racial Inequality in 
Active Life Among Adult Americans," Demography 36(1): 77-91.

Honig, Majorie. 2000. "Minorities Face Retirement: Worklife Disparities 
Repeated?" in Olivia S. McMillan, P. Brett Hammond, and Anna M. 
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Pension Research Council. Philadelphia: University of Pennsylvania 
Press: 208-234.

Lian, Robert Keng Heong, Emiliano A. Valdez, and Chan Kee Low (2000) 
"Actuarial Analysis of Retirement Income Replacement Ratios," Journal 
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Leimer, Dean R., "Simulating the Long-Run Aggregate Economic and 
Intergenerational Redistributive Effects of Social Security Policy" 
(1992) ORS Working Paper 56, Division of Economic Research.

Leimer, Dean R., "Cohort-Specific Measures of Lifetime Net Social 
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Liebman, Jeffrey B., "Redistribution in the Current U.S. Social 
Security System" (2001) National Bureau of Economic Research working 
paper 8625. http://www.nber.org/papers/w8625.

Nichols, Orlo R., Michael D. Clingman, and Milton P. Glanz (2001) 
"Internal Real Rates of Return under the OASDI Program for Hypothetical 
Workers," Social Security Administration, Office of the Chief Actuary 
Actuarial Note 144.

Sorlie, Paul D., Eric Backlund, Norman J. Johnson, and Eugene Rogot 
(1993) "Mortality by Hispanic Status In the United States," JAMA 
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Sorlie, Paul D., Eugene Rogot, and Norman J. Johnson (1992) "Validity 
of Demographic Characteristics on the Death Certificate," Epidemiology 
3(2): 181-184.

Sze, Michael, Stephen C. Goss and Jose Gomez de Leon (1998). "Effect of 
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Urban Institute. Final Report: Modeling Income in the Near Term: 
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[End of section]

Related GAO Products:

Social Security: Analysis of Reform Models Developed by the President's 
Commission to Strengthen Social Security. GAO-03-310. Washington, D.C.: 
January 15, 2003.

Social Security: 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 Program 
and Beneficiaries. GAO-01-35. Washington, D.C.: January 24, 2001.

Social Security: Issues in Comparing Rates of Return with Market 
Investments. GAO/HEHS-99-110. Washington, D.C.: August 5, 1999.

Social Security Reform: Implications of Raising the Retirement Age. 
GAO/HEHS-99-112. Washington, D.C.: August 27, 1999.

Social Security and Minorities: Current Benefits and Implications of 
Reform. GAO/T-HEHS-99-60. Washington, D.C.: February 10, 1999.

Social Security Reform: Different Approaches for Addressing Program 
Solvency. GAO/HEHS-98-33. Washington, D.C.: July 22, 1998.

Social Security Reform: Implications for Women's Retirement Income. 
GAO/HEHS-98-42. Washington, D.C.: December 31, 1997.

[End of section]

FOOTNOTES

[1] The numbers of beneficiaries are for the month of December 2002, 
while the benefit amounts given are amounts paid during 2002. 

[2] The racial/ethnic groups examined in this study are Hispanics, non-
Hispanic blacks, and non-Hispanic whites; we use the terms Hispanics, 
blacks, and whites when referring to these groups, respectively. We use 
the term minorities to refer to Hispanics and blacks and nonminorities 
to refer to whites. Due to data limitations, the Asian, Native 
Hawaiian/Pacific Islander, and American Indian/Alaska Native racial/
ethnic groups were excluded from our sample.

[3] Each year the Board of Trustees of the Federal Old-Age, Survivors 
and Disability Insurance trust funds report in detail on the funds' 
current status and their projected condition over the next 75 years. 
The current information on the financial condition of OASDI funds is 
based on the intermediate assumptions of the 2003 Trustees Report. 
Examined separately, the Old-Age and Survivors Insurance trust fund is 
projected to be exhausted by 2044, and the Disability Insurance trust 
fund by 2028.

[4] SSA's Office of the Chief Actuary provided long-range estimates of 
the effects that each of these benchmarks would have on the financial 
status of the OASDI program, using the intermediate assumptions of the 
2001 Trustees Report. The MINT3 model incorporates economic and 
demographic assumptions of both the 2002 and the 2001 Trustees Reports. 
See appendix I for a detailed discussion of the benchmarks.

[5] Aged parents and widowed mothers and fathers also are excluded from 
the MINT3 analysis, and these exclusions also are controlled for in the 
model. 

[6] Contributions to the social security system are not investments. 
Rates of return are calculated by determining what rate of interest 
would set contributions equal to the benefits received. In this report, 
we focus on the benefit-to-tax ratio. See appendix II for a detailed 
presentation of the other equity measures.

[7] The results are similar across cohort groups, but not across equity 
measures. See appendix II for a detailed presentation of the cohorts 
and the equity measures.

[8] The original formula, as well as subsequent modifications, computed 
benefits as a percentage of wages covered under the program in a way 
that favors lower earners.

[9] In general, a worker needs 40 quarters of coverage to be eligible 
for retirement benefits. For workers who become disabled or die before 
age 62, the number of quarters of coverage required for eligibility 
depends on their age at the time the worker is disabled or dies. 

[10] In 1956, the Social Security Act was amended to provide benefits 
to disabled workers aged 50-64 and disabled adult children. Over the 
next 4 years, Congress broadened the scope of the program, permitting 
disabled workers under age 50 and their dependents to qualify for 
benefits, and eventually disabled workers at any age could qualify.

[11] The eligibility requirements for DI are different from the 
requirements for OASI.

[12] Work activity is generally considered substantial and gainful if 
the person's earnings exceed a particular level established by statute 
and regulations. 

[13] These numbers do not include adult disabled children who are 
dependents of deceased or retired workers, disabled widows and 
widowers, or disabled parents, who receive their disability benefits 
from the Old-Age and Survivors Insurance program. About $5.7 billion 
were paid out of the program's trust fund to these beneficiaries.

[14] See Steve Goss, "Problems with 'Social Security's Rate of Return: 
A Report of the Heritage Center for Data Analysis'," Deputy Chief 
Actuary, Social Security Administration, memorandum, February 4, 1998; 
Alexa Hendley and Natasha Bilimoria, "Minorities and Social Security: 
An Analysis of Racial and Ethnic Differences in the Current Program," 
Social Security Bulletin 62(2), 1999; and Kilolo Kijakazi "The 
Importance of Social Security to People of Color and Women," Center on 
Budget and Policy Priorities, July 2001, and "African Americans, 
Hispanic Americans, and Social Security: The Shortcomings of the 
Heritage Foundation Reports," October 1998.

[15] See William W. Beach and Gareth G. Davis, "Social Security's Rate 
of Return," Heritage Foundation, January 1998, and "Social Security's 
Rate of Return for Hispanic Americans," Heritage Foundation, March 
1998; and Michael Tanner, "Disparate Impact: Social Security and 
African Americans," CATO Institute, February 2001.

[16] See Lee Cohen, C. Eugene Steuerle and Adam Carasso, "The Effects 
of Disability Insurance on Redistribution Within Social Security by 
Gender, Lifetime Earnings, Education, and Race," Fifteenth Annual 
Conference of the National Academy of Social Insurance, January 2003; 
"The Effects of Disability Insurance on Redistribution Within Social 
Security by Gender, Lifetime Earnings, Education, and Race," Fifty-
Fifth Annual Scientific Meeting of the Gerontological Society of 
America, November 2002; "The Effects of Disability Insurance on 
Redistribution Within Social Security by Gender, Education, Race, and 
Income," Fourth Annual Joint Conference for the Retirement Research 
Consortium, May 2002; and "Social Security Redistribution by Education, 
Race, and Income: How Much and Why," Third Annual Conference of the 
Retirement Research Consortium, May 2001.

[17] The disability incidence rate is the probability that a worker 
enters the DI rolls in a given year; it is defined as the number of 
people who are DI-entitled divided by the number of people who are DI-
insured.

[18] Information on replacement ratios applies to individuals who 
retire at the normal retirement age. Persons retiring at the early 
eligibility age will have a different benefit calculation. The payment 
of taxes is contingent upon being alive and not being disabled.

[19] Mortality rates for persons with disabilities differ from, and 
generally are higher than, those for the nondisabled population.

[20] The number of OASI beneficiaries is also expected to more than 
double over the next 
75 years, from the current 39 million to more than 97 million. 

[21] Mortality is reflected in life expectancy.

[22] We conducted separate examinations of OASDI, along with the OASI 
and DI components of the Social Security program for each of the four 
birth cohorts. We did not conduct a separate analysis of the Old-Age 
Insurance component of the program, which partly explains why our 
results differ from some researchers. For example, the Old-Age 
Insurance, or retirement, portion of Social Security is highly 
dependent on life expectancy and excludes dependents and survivor 
benefits, and in general, minority groups experience shorter life 
expectancies than whites. Therefore, when examined under the Old-Age 
Insurance component of the program, some minority groups, blacks in 
particular, would experience lower equity measures relative to whites. 
Additional information on differing mortality patterns is provided in 
appendix I. 

[23] Although the available evidence on mortality suggests that the 
life expectancy for Hispanics is higher than it is for whites, the 
accuracy of these estimates is questionable. For example, researchers 
note that it is difficult to construct precise life tables for 
Hispanics because there is a tendency to misclassify the race/ethnicity 
of Hispanics on the death certificates.

[24] The net benefit and the benefit-to-tax ratio measures both depend 
on the choice of discount rate used. We use the historical and 
projected trust fund yields for this analysis. 

[25] Differing mortality rates for each of the racial/ethnic groups are 
incorporated in the analysis.

[26] We selected age 62 as a reference age because a substantial 
proportion of individuals begin receiving retirement benefits at the 
early retirement age. For example, approximately 47 percent of men and 
51 percent of women start receiving benefits at age 62, while about 19 
percent of all workers begin receiving retirement benefits between ages 
63 and 64. The average age of retirement is 63.7.

[27] Some of these individuals may have received disability benefits.

[28] Life expectancy at age 62 for men is 22 for Hispanics, 17 for 
blacks, and 18 for whites. Life expectancy at age 62 for women is 25 
for Hispanics, 20 for blacks, and 22 for whites. The 2001 life tables 
are located on the Census Bureau's website: http://www.census.gov/
population/projections/nation/detail/lt99_10.a

[29] Of the nearly 1.9 million children receiving survivor benefits in 
2001, the SSA reports that approximately 23 percent are black and less 
than 68 percent are white. Put another way, 
47 percent of blacks receiving survivor benefits are children, compared 
with 22 percent of whites. Thus, blacks are disproportionately 
represented in the category of children receiving benefits as survivors 
of deceased workers. 

[30] For a detailed description of the development of these policy 
scenarios, see U.S. General Accounting Office, Social Security: 
Program's Role in Helping Ensure Income Adequacy, GAO-02-62 
(Washington, D.C.: Nov. 30, 2001). Although these scenarios ensure 
solvency for the next 75 years, they do not achieve "sustainable 
solvency," solvency beyond the 75-year period.

[31] Information on the MINT3 model is provided in a separate section 
of this appendix.

[32] Our equity measures employ the shared concept of benefit and 
earnings. For taxes, shared refers to the full measure of taxes paid as 
a single person (before marriage) and half of the taxes paid by both 
spouses during marriage. For benefits, shared includes half the 
benefits paid to the couple while both spouses survive plus the full 
benefit paid to the surviving spouse. Although certain dependent 
benefits are excluded from the analysis, the "shared" concept does 
capture some survivor benefits. The section on the MINT model provides 
a more detailed explanation. Both lifetime benefit/lifetime tax ratio 
and the net lifetime benefits discount taxes and benefits to 2000 
dollars.

[33] Equity is only one of Social Security's objectives. The program's 
insurance features inherently place great emphasis on helping ensure 
that beneficiaries have adequate income; without its built-in income 
transfers across and within birth groups, Social Security would provide 
identical rates of return on contributions.

[34] See U.S. General Accounting Office, Social Security: Program's 
Role in Helping Ensure Income Adequacy, GAO-02-62 (Washington, D.C.: 
Nov. 30, 2001).

[35] Advisory Council on Social Security: Report of the 1994-1996 
Advisory Council on Social Security, Vols. 1 and 2. (Washington, D.C.: 
Jan. 1997).

[36] See U.S. General Accounting Office, Social Security: Analysis of a 
Proposal to Privatize Trust Fund Reserves, GAO/HRD-91-22 (Washington, 
D.C.: Dec. 12, 1990).

[37] For a complete description of the MINT model and projections see 
The Urban Institute, Final Report: Modeling Income in the Near Term: 
Revised Projections of Retirement Income Through 2020 for the 1931-1960 
Birth Cohorts, June 2002.

[38] Other excluded groups include aged parents and widowed mothers and 
fathers.

[39] The tax reductions were the same across race/ethnic groups, which 
may introduce bias in our results. Blacks account for only about 10 
percent of the total OASDI caseload, but they account for approximately 
22 percent of child beneficiaries. Furthermore, while average benefits 
for blacks relative to whites is approximately 85 percent and 90 
percent for retired workers and disabled workers, respectively, the 
ratio is about 78 percent for surviving children. Thus, a race-blind 
reduction in that tax rate for omitting child beneficiaries would 
artificially lower the measures of generosity of OASDI for blacks 
relative to whites since there are relatively fewer white children 
beneficiaries than black children beneficiaries. On the other hand, the 
fact that white surviving children receive higher benefits, on average, 
than black surviving child beneficiaries offsets this effect to some 
degree.

[40] Since MINT tracks some but not all past and future family 
relationships and the benefits that are due those individuals, the 
shared measure does not account for all taxes and benefits connected to 
each earnings record. However, we relied on the recommendation of SSA's 
Office of Policy that the shared measures most closely match taxes paid 
and benefits received.

[41] The Cohen, Steuerle, and Carasso (2001) study uses the MINT2 model 
under current law.

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