This is the accessible text file for GAO report number GAO-03-993 
entitled 'Social Security: Proposed Totalization Agreement with Mexico 
Presents Unique Challenges' which was released on September 30, 2003.

This text file was formatted by the U.S. General Accounting Office 
(GAO) to be accessible to users with visual impairments, as part of a 
longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov.

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately.

Report to Congressional Requesters:

United States General Accounting Office:

GAO:

September 2003:

Social Security:

Proposed Totalization Agreement with Mexico Presents Unique Challenges:

GAO-03-993:

GAO Highlights:

Highlights of GAO-03-993, a report to congressional requesters 

Why GAO Did This Study:

Totalization agreements foster international commerce, protect 
benefits for persons who have worked in foreign countries, and 
eliminate dual social security taxes that employers and their 
employees pay when they operate and reside in countries with parallel 
social security systems. Because Mexicans are believed to represent a 
large share of the millions of unauthorized workers present in the 
United States, a totalization agreement with Mexico has raised 
concerns that they would become newly eligible for social security 
benefits. To shed light on the possible impacts, you asked GAO to (1) 
describe the Social Security Administrationís (SSA) processes for 
developing the agreement with Mexico, (2) explain how the agreement 
might affect the payment of benefits to Mexican citizens, and (3) 
assess the cost estimate for such an agreement.

What GAO Found:

SSA has no written policies or procedures it follows when entering 
into totalization agreements, and the actions it took to assess the 
integrity and compatibility of Mexicoís social security system were 
limited and neither transparent nor well-documented. SSA followed the 
same procedures for the proposed Mexican agreement that it used in all 
prior agreements. SSA officials told GAO that they briefly toured 
Mexican facilities, observed how its automated systems functioned, and 
identified the type of data maintained on Mexican workers. However, 
SSA provided no information showing that it assessed the reliability 
of Mexican earnings data and the internal controls used to ensure the 
integrity of information that SSA will rely on to pay social security 
benefits. 

The proposed agreement will likely increase the number of unauthorized 
Mexican workers and family members eligible for social security 
benefits. Mexican workers who ordinarily could not receive social 
security retirement benefits because they lack the required 40 
coverage credits for U.S. earnings could qualify for partial social 
security benefits with as few as 6 coverage credits. In addition, 
under the proposed agreement, more family members of covered Mexican 
workers would become newly entitled because the agreements usually 
waive rules that prevent payments to noncitizensí dependents and 
survivors living outside the United States. 

The cost of such an agreement is highly uncertain. In March 2003, the 
Office of the Chief Actuary estimated that the cost of the Mexican 
agreement would be $78 million in the first year and would grow to 
$650 million (in constant 2002 dollars) in 2050. The actuarial cost 
estimate assumes the initial number of newly eligible Mexican 
beneficiaries is equivalent to the 50,000 beneficiaries living in 
Mexico today and would grow sixfold over time. However, this proxy 
figure does not directly consider the estimated millions of current 
and former unauthorized workers and family members from Mexico and 
appears small in comparison with those estimates. The estimate also 
inherently assumes that the behavior of Mexican citizens would not 
change and does not recognize that an agreement would create an 
additional incentive for unauthorized workers to enter the United 
States to work and maintain documentation to claim their earnings 
under a false identity. Although the actuarial estimate indicates that 
the agreement would not generate a measurable long-term impact on the 
actuarial balance of the trust funds, a subsequent sensitivity 
analysis performed at GAOís request shows that a measurable impact 
would occur with an increase of more than 25 percent in the estimate 
of initial, new beneficiaries. For prior agreements, error rates 
associated with estimating the expected number of new beneficiaries 
have frequently exceeded 25 percent, even in cases where uncertainties 
about the number of unauthorized workers were less prevalent. Because 
of the significant number of unauthorized Mexican workers in the 
United States, the estimated cost of the proposed totalization 
agreement is even more uncertain than in prior agreements. 

What GAO Recommends:

GAO recommends that SSA (1) establish a formal process to identify and 
assess risks of proposed agreements, (2) make future reports to the 
Congress on these agreements more consistent and informative, and (3) 
work with the Office of the Chief Actuary to improve the cost 
estimates for agreements. SSA disagreed that additional processes were 
needed to assess risks, but it agreed that cost estimates should be 
more consistent and that it should regularly re-examine the accuracy 
of its estimates. 	

www.gao.gov/cgi-bin/getrpt?GAO-03-993.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Barbara D. Bovbjerg, 
(202) 512-7215, bovbjergb@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

SSA's Process for Developing Agreements Is Not Thorough or Well-
Documented:

Totalization Agreements Will Increase Benefit Payments to Mexican 
Citizens:

Poor Data Undermine the Reliability of SSA's Cost Estimate:

Conclusions:

Recommendations:

Agency Comments and Our Evaluation:

Appendix I: Comparison of Totalized and Minimum Social Security 
Benefits:

Appendix II: Comments from the Social Security Administration:

Tables:

Table 1: Existing Totalization Agreements between the United States and 
Other Countries and Year of Effective Date of the Original Agreements:

Table 2: Precision of OCACT's Cost Estimates for 11 Prior Totalization 
Agreements:

Table 3: Monthly Social Security Benefits Payable in 2003 at Different 
Earnings and Coverage Levels under a Totalization Agreement and 
Compared to the Minimum Benefit Payable:

Abbreviations:

INS: Immigration and Naturalization Service:

NAFTA: North American Free Trade Agreement:

OCACT: Office of the Chief Actuary:

SSA: Social Security Administration:

United States General Accounting Office:

Washington, DC 20548:

September 30, 2003:

The Honorable F. James Sensenbrenner, Jr. 
Chairman 
Committee on the Judiciary 
House of Representatives:

The Honorable E. Clay Shaw, Jr. 
Chairman 
Subcommittee on Social Security 
Committee on Ways and Means 
House of Representatives:

Totalization agreements foster international commerce and protect 
benefits for persons who have worked in foreign countries in two ways. 
First, the agreements eliminate dual social security taxes that 
multinational employers and their employees must pay when they operate 
and reside in countries with parallel social security programs. Second, 
the agreements help to fill gaps in benefit protection for persons who 
have worked in different countries for portions of their careers. Since 
1977, the United States has entered into 20 totalization agreements.

Over the last year, the United States has been negotiating a 
totalization agreement with Mexico that has received considerable 
attention among the media and others regarding its potential impacts. 
Because Mexicans represent a large share of the millions of 
unauthorized workers present in the United States, a totalization 
agreement with Mexico has raised concerns that many such workers would 
become newly eligible for social security benefits at a time when long-
term trust fund solvency is threatened. To shed light on the possible 
impacts of such an agreement, you asked us to (1) describe the Social 
Security Administration's (SSA) processes for developing the proposed 
agreement with Mexico, (2) explain how the agreement might affect the 
payment of social security benefits to Mexican citizens, and (3) assess 
SSA's cost estimates for such an agreement.

To address these objectives, we reviewed existing totalization 
agreements and the laws governing them; interviewed and obtained key 
documentation from SSA, Department of State, and Mexican Embassy 
personnel; and reviewed a range of demographic data and estimates 
addressing Mexican immigration. We also examined SSA's actuarial cost 
estimates and supporting documentation for the proposed Mexican 
agreement. We conducted our work between January and August 2003, in 
accordance with generally accepted government auditing standards.

Results in Brief:

SSA has no written policies or procedures outlining the specific steps 
it follows when entering into totalization agreements, and the actions 
it took to assess the integrity and compatibility of Mexico's social 
security system were limited and neither transparent nor well-
documented. SSA said the process it used to develop the proposed 
totalization agreement with Mexico was the same as for prior 
totalization agreements. SSA officials told us that they briefly toured 
Mexican facilities, observed how their automated systems functioned, 
and identified the type of data maintained on Mexican workers. However, 
SSA provided no information showing that it assessed the reliability of 
Mexican earnings data and the internal controls Mexico uses to ensure 
the integrity of information that SSA will rely on to pay social 
security benefits.

The proposed agreement will increase the number of Mexican workers and 
family members eligible for social security benefits. Mexican workers 
who ordinarily could not receive benefits because they lack the 
required 40 coverage credits for U.S. earnings could qualify for 
partial Social Security benefits with as few as 6 coverage credits. In 
addition, under the proposed agreement, more family members of covered 
Mexican workers would also become newly entitled because of the waiver 
of rules that prevent payment to noncitizens' dependents and survivors 
living outside the United States.

The cost of a totalization agreement with Mexico is highly uncertain. 
In March 2003, the Office of the Chief Actuary (OCACT) estimated that 
the cost of the Mexican agreement would be $78 million in the first 
year of the agreement and would grow to $650 million (in constant 2002 
dollars) in 2050. SSA's actuarial cost estimate assumes the initial 
number of newly eligible Mexican beneficiaries is equivalent to the 
50,000 beneficiaries living in Mexico today and would grow sixfold over 
time. However, this proxy figure does not directly consider the 
estimated millions of current and former unauthorized workers and 
family members from Mexico and appears small in comparison with those 
estimates. Although the actuarial estimate indicates that the agreement 
would not generate a measurable impact on the long-range actuarial 
balance of the trust funds, an increase of more than 25 percent in the 
estimate of initial, new beneficiaries would generate a measurable 
impact. For prior agreements, error rates associated with estimating 
the expected number of new beneficiaries have frequently exceeded 25 
percent, even in cases where uncertainties about the number of 
unauthorized workers were less prevalent. Because of the significant 
number of unauthorized Mexican workers in the United States, the 
estimated cost of the proposed totalization agreement is even more 
uncertain than for the prior agreements.

This report recommends that SSA establish formal processes for entering 
into totalization agreements that include mechanisms to assess the 
risks associated with such agreements and to document the range of 
analyses SSA conducts. The report also recommends that reports of 
proposed agreements be enhanced to make them more consistent and 
informative and that SSA establish a regular process to reassess the 
accuracy of its actuarial estimates. SSA and the OCACT commented on 
this report. SSA said that the report did not sufficiently discuss the 
benefits of totalization agreements and that its current process for 
evaluating whether to enter into negotiations for totalization 
agreements was sufficient to identify and assess risks. Our report 
specifically notes that such agreements foster international commerce, 
protect benefits for persons who have worked in foreign countries, 
eliminate dual social security taxes, and foster enhanced diplomatic 
relations. With regard to SSA's current processes, we could find no 
specific references to SSA examining data reliability and program 
integrity. We are hopeful that SSA will conduct such examinations of 
the Mexican Social Security system before submitting a proposed 
agreement to the Congress for its review. OCACT generally agreed with 
our recommendations and noted that they are consistent with current 
practices. OCACT, however, took exception to the implication of our 
statement that its estimated cost was more likely to be understated 
than overstated. Our intent was not to imply that the OCACT estimate 
was biased. Accordingly, we have revised our report to state the very 
large difference between estimated and potential beneficiaries 
underscores the uncertainty of the estimate, and the potential costs of 
an agreement could be higher than OCACT projects. The full text of 
SSA's and OCACT's comments appears in appendix II. The State Department 
was also provided a copy of the draft report for review and advised us 
that it had no comments.

Background:

SSA administers the Old Age, Survivors, and Disability Insurance 
programs under Title II of the Social Security Act. About 96 percent of 
the nation's work force is in social security-covered employment and 
pays tax on its annual earnings. When workers pay social security 
taxes, they earn coverage credits, and 40 credits--equal to at least 10 
years of work--entitle them to social security benefits when they reach 
retirement age.[Footnote 1]

In 1977, the Congress authorized the President to enter into 
totalization agreements with other countries. These bilateral 
agreements are intended to accomplish three purposes. First, they 
eliminate dual social security coverage and taxes that multinational 
employers and employees encounter when they operate and their workers 
temporarily reside and work for the corporation, usually no more than 5 
years, in a foreign country with its own social security program. Under 
the agreements, U.S. employers and their workers sent temporarily 
abroad would benefit by paying only U.S. social security taxes, and 
foreign businesses and their workers would benefit by paying only 
social security taxes to their home country. Second, the agreements 
provide benefit protection to workers who have divided their careers 
between the United States and a foreign country, but lack enough 
coverage under either social security system to qualify for benefits, 
despite paying taxes into both systems. Totalization agreements allow 
such workers to combine (totalize) work credits earned in both 
countries to meet minimum benefit qualification requirements. Third, 
most totalization agreements improve the portability of social security 
benefits by removing rules that suspend benefits to noncitizens who 
live outside the benefit-paying country.

By law, proposed agreements are sent to the Congress, which has 60 
legislative days to review them. The agreements become effective unless 
either House of the Congress adopts a resolution of disapproval. Table 
1 shows agreements in effect and the years they became effective.

Table 1: Existing Totalization Agreements between the United States and 
Other Countries and Year of Effective Date of the Original Agreements:

Countries: Italy; Year: 1978.

Countries: Germany; Year: 1979.

Countries: Switzerland; Year: 1980.

Countries: Belgium; Year: 1984.

Countries: Norway; Year: 1984.

Countries: Canada; Year: 1984.

Countries: United Kingdom; Year: 1985.

Countries: Sweden; Year: 1987.

Countries: Spain; Year: 1988.

Countries: France; Year: 1988.

Countries: Portugal; Year: 1989.

Countries: Netherlands; Year: 1990.

Countries: Austria; Year: 1991.

Countries: Finland; Year: 1992.

Countries: Ireland; Year: 1993.

Countries: Luxembourg; Year: 1993.

Countries: Greece; Year: 1994.

Countries: South Korea; Year: 2001.

Countries: Chile; Year: 2001.

Countries: Australia; Year: 2002.

Source: SSA.

[End of table]

To qualify for totalized U.S. social security benefits, a worker must 
have at least 6 but no more than 39 U.S. coverage credits. Benefit 
amounts are based on the portion of time a foreign citizen worked in 
the United States, and thus, are almost always lower than full social 
security benefits. The average monthly, totalized social security 
benefit at the end of 2001 was $162, compared with the average 
nontotalized monthly social security benefit of $825. In 2001, SSA paid 
about $173 million under totalization agreements to about 89,000 
persons, including their dependents. (Appendix I compares the amount of 
U.S. totalized benefits for different coverage credits and earnings 
levels with a minimum benefit that would be paid to a worker with 40 
credits.):

Under U.S. law, immigrants may not work in the United States unless 
specifically authorized. Nevertheless, immigrants often do work without 
authorization and pay social security taxes. Under the Social Security 
Act, all earnings from covered employment in the United States count 
towards earning social security benefits, regardless of the lawful 
presence of the worker, his or her citizenship status, or country of 
residence. Immigrants become entitled to benefits from unauthorized 
work if they can prove that the earnings and related contributions 
belong to them. However, they cannot collect such benefits unless they 
are either legally present in the United States or living in a country 
where SSA is authorized to pay them their benefits. Mexico is such a 
country.

SSA's Process for Developing Agreements Is Not Thorough or Well-
Documented:

A lack of transparency in SSA's processes, and the limited nature of 
its review of Mexico's program, cause us to question the extent to 
which SSA will be positioned to respond to potential program risks 
should a totalization agreement with Mexico take place. SSA officials 
told us that the process used to develop the proposed totalization 
agreement with Mexico was the same as for prior agreements with other 
countries. The process--which is not specified by law or outlined in 
written policies and procedures--is informal, and the steps SSA takes 
when entering into agreements are neither transparent nor well-
documented.

Current law does not prescribe how SSA should select potential 
agreement countries. According to SSA, interest in a Mexican agreement 
dates back more than 20 years. SSA officials noted that increased 
business interaction between the two countries due to the North 
American Free Trade Agreement (NAFTA) was a factor in the renewed 
negotiations. In addition, because there is a totalization agreement 
with Canada, our other NAFTA partner, SSA believed that equity concerns 
required consideration of an agreement with Mexico. In February 2002, 
SSA sought clearance from the Department of State to begin such 
negotiations.

The law also does not specify which elements of other countries' social 
security systems must be evaluated during totalization agreement 
negotiations. SSA officials met with Mexican officials to exchange 
narrative information on their respective programs. Senior SSA 
officials also visited Mexico for 2 days in August 2002. During their 
visit, these officials told us that they toured social security 
facilities, observed how Mexico's automated social security systems 
functioned, and identified the type of data maintained on Mexican 
workers. SSA took no technical staff on this visit to assess system 
controls or data integrity processes. In effect, SSA only briefly 
observed the operations of the Mexican social security program. 
Moreover, SSA did not document its efforts or perform any additional 
analyses then, or at a later time, to assess the integrity of Mexico's 
social security data and the controls over that data. In particular, 
SSA officials provided no evidence that they examined key elements of 
Mexico' s program, such as its controls over the posting of earnings 
and its processes for obtaining key birth and death information for 
Mexican citizens. Nor did SSA evaluate how access to Mexican data and 
records is controlled and monitored to prevent unauthorized use or 
whether internal and external audit functions exist to evaluate 
operations.

Because all totalization agreements represent a financial commitment 
with implications for social security tax revenues and benefit outlays, 
a reasonable level of due diligence and analysis is necessary to help 
federal managers identify issues that could affect benefit payment 
accuracy or expose the nation's system to undue risk. Our Internal 
Control Management and Evaluation Tool provides a risk assessment 
framework to help federal managers mitigate fraud, waste, abuse, and 
mismanagement in public programs, such as social security. A key 
component of this framework is the identification of internal and 
external risks that could impede the achievement of objectives at both 
the entity and program levels. Identified risks should then be analyzed 
for their potential effect and an approach devised to mitigate them.

SSA did not conduct these types of analyses in previous agreements or 
in the case of the proposed Mexican agreement, despite documented 
concerns among Mexican government officials and others regarding the 
integrity of Mexico's records, such as those for birth, death, and 
marriage, as well as its controls over assigning unique identification 
numbers to workers for benefit purposes. Such information will likely 
play a role in SSA's ability to accurately determine Mexican workers' 
initial and continuing eligibility for benefits under a totalization 
agreement.

Totalization Agreements Will Increase Benefit Payments to Mexican 
Citizens:

A totalization agreement with Mexico will increase the number of 
Mexican citizens who will be paid U.S. social security benefits in two 
ways. First, the agreement will make it easier for Mexican workers to 
qualify for benefits. Second, it will remove some nonpayment 
restrictions that affect benefit payments to non-U.S. citizens' family 
members residing in another country, thus providing U.S. social 
security benefits to more survivors and dependents of entitled Mexican 
workers.

Under current law, a worker must earn sufficient coverage credits to 
qualify for benefits under the U.S. Social Security program. For 
example, a worker who was born in 1929 or later generally needs 40 
coverage credits to be insured for retirement benefits. Credits are 
based on a worker's annual earnings in social security-covered 
employment. At most, 4 credits can be earned per year so that it takes 
at least 10 years of covered earnings in the United States for a worker 
to accumulate the necessary 40 credits and become insured for 
retirement benefits.

Currently, social security credits are earned by anyone who has worked 
in covered employment in the United States. This is true even if the 
person was unauthorized to work when he or she earned coverage credits. 
For example, noncitizens, including Mexicans, who are at least 62 years 
old and lawfully present in the United States, will receive retirement 
benefits today as long as they meet the coverage credit threshold. Even 
Mexican citizens who are not lawfully present in this country can 
receive social security benefits earned through unauthorized employment 
if they later return to live in Mexico. Similarly, under current law, 
noncitizen dependents and survivors can also receive social security 
benefits under some circumstances.

Totalization agreements generally expand benefits to both authorized 
and unauthorized workers and create new groups of beneficiaries. This 
would be the case for a totalization agreement with Mexico if it 
follows the same pattern as all prior totalization agreements. Mexican 
citizens with fewer than 40 coverage credits will be permitted to 
combine their annual earnings under their home country's social 
security program with their annual earnings under the U.S. Social 
Security program to meet the 40-credit requirement.[Footnote 2] In 
addition, more family members of covered workers will qualify for 
dependent and survivor benefits. Totalization agreements generally 
override Social Security Act provisions that prohibit benefit payments 
to noncitizens' dependents and survivors who reside outside the United 
States for more than 6 months, unless they can prove that they lived in 
the United States for 5 years in a close family relationship with the 
covered worker. If a totalization agreement with Mexico is structured 
like others already in force, the 5-year rule for dependents and 
survivors will be waived.

However, it is important to understand that not all unauthorized 
Mexican citizens who have worked in the United States will receive 
totalization benefits. Some will have earned at least 40 coverage 
credits and can receive social security benefits without a totalization 
agreement. Still others may have worked under false identities and may 
not be able to prove that they have the necessary coverage credits to 
be entitled to benefits. Others still may not accumulate sufficient 
credits under the Mexican social security system to totalize with their 
U.S. social security coverage.

Poor Data Undermine the Reliability of SSA's Cost Estimate:

The cost of a totalization agreement with Mexico is highly uncertain. 
In March 2003, the Office of the Chief Actuary estimated that the cost 
of the Mexican agreement would be $78 million in the first year and 
would grow $650 million (in constant 2002 dollars) in 2050. SSA's 
actuarial cost estimate assumes the initial number of newly eligible 
Mexican beneficiaries was equivalent to the 50,000 beneficiaries living 
in Mexico today and would grow sixfold over time. However, this proxy 
figure is not directly related to the estimated millions of current and 
former unauthorized workers and their family members from Mexico and 
appears small in comparison to those estimates. Furthermore, even if 
the baseline estimate is used, a sensitivity analysis performed by 
OCACT shows that an increase of more than 25 percent--or 13,000 new 
beneficiaries--would produce a measurable impact on the long-range 
actuarial balance of the trust funds. Our review of cost estimates for 
prior totalization agreements shows that the actual number of 
beneficiaries has frequently been underestimated and far exceeded the 
original actuarial estimates.

Actuarial Estimates Are Based on Varied Data Sources:

OCACT develops estimates of expected costs of totalization agreements 
by analyzing pertinent data from prior agreements, work visas issued, 
foreign corporations operating in the United States, and U.S. Census 
data. Because of extensive unauthorized immigration from Mexico, OCACT 
concluded that U.S. Census data, that would typically be used to 
estimate the number of new beneficiaries under an agreement, were not 
reliable.

Instead, OCACT used the number of fully insured beneficiaries--U.S. 
citizens and others living in Mexico--currently receiving U.S. social 
security benefits as a proxy for the number of Mexican citizens who 
would initially receive totalized benefits. The principal basis for 
this assumption was a 1997 study of Mexican immigration patterns 
conducted by a private nonprofit organization.[Footnote 3] This study 
indicated that the percentage of Mexican immigrants who returned to 
Mexico after more than 10 years and, therefore, could qualify for 
benefits is roughly equal to the percentage that returned after staying 
2 to 9 years and would not have the required credits. Thus, OCACT 
assumed that the potential totalized initial new beneficiaries would be 
equivalent to the 50,000 persons currently receiving benefits in 
Mexico.

For the proposed Mexican agreement, both a short-term (covering the 
first 8 years of the agreement) and a long-term (covering 75 years) 
cost estimate were developed.[Footnote 4] The estimated cost to the 
Social Security Trust Funds would be about $78 million in the first 
year of the agreement. For the long-term cost estimate, OCACT projected 
that the number of beneficiaries would ultimately increase sixfold to 
300,000 over a 45-year period after the agreement took effect and equal 
about $650 million (in constant 2002 dollars) in 2050. However, the 
actuarial analysis notes that the methodology was indirect and involved 
considerable uncertainty.

As a rough check on the reasonableness of using current beneficiaries 
in Mexico for its cost estimate, OCACT analyzed totalized beneficiary 
data for Canadian citizens because Canada, like Mexico, is a NAFTA 
trading partner and shares a large contiguous border. After determining 
the ratio of Canadians receiving totalized versus fully insured 
benefits, OCACT applied this ratio to the number of Mexican-born U.S. 
social security beneficiaries and found that about 37,000 beneficiaries 
would be expected under the agreement initially, if the Canadian 
experience proves predictive of the Mexican outcome. According to 
OCACT, this comparison increased its confidence that the assumed 50,000 
new beneficiaries under the agreement was within a reasonable range.

Estimated Cost of Mexican Agreement Is Highly Uncertain:

Limited data about unauthorized workers make any estimate of the 
expected costs of a Mexican totalization agreement highly uncertain. A 
significant variable of any totalization agreement cost estimate is the 
identification of the number of potential beneficiaries. Estimates of 
the number of unauthorized Mexican immigrants living in the United 
States vary[Footnote 5] The federal government's estimate was published 
in January 2003 and comes from the former Immigration and 
Naturalization Service (INS)[Footnote 6] INS estimated that, as of 
January 2000, about 5 million, or 69 percent of all unauthorized 
immigrants in the United States, were from Mexico. INS's estimate also 
indicated that this figure was expected to increase by about 240,000 
persons annually.

The INS estimate, however, does not include unauthorized Mexican 
workers and family members who no longer live in the United States and 
could also conceivably benefit from a totalization agreement. Economic 
disparity between the United States and Mexico has fostered 
longstanding immigration from Mexico to the United States dating back 
many decades. Various studies also show that fewer than a third of 
Mexican immigrants stay more than 10 years in the United States, the 
minimum amount of time needed to qualify for social security retirement 
benefits.[Footnote 7] For cost analysis purposes, little is known about 
the population of former immigrants who have returned to Mexico in 
terms of their age, work history, dependents, and social security 
coverage. These factors increase the inherent uncertainty of any long-
range forecasts with regard to Mexico. It is under this backdrop that 
OCACT set about developing an estimate of the costs of the potential 
totalization agreement.

We have several concerns about OCACT's estimate of the number of 
expected beneficiaries and cost of an agreement with Mexico. First, the 
use of the 50,000 fully insured beneficiaries receiving benefits in 
Mexico as a proxy for individuals who might initially benefit from an 
agreement, does not directly consider the estimated millions of 
unauthorized Mexican immigrants in the United States and Mexico who are 
not fully insured and might receive totalized benefits. Furthermore, 
despite the availability of key data about earnings, work histories, 
years of employment, and dependents for the 50,000 fully insured 
beneficiaries, OCACT did not analyze this population to determine 
whether they represented a good proxy for individuals likely to qualify 
for totalized benefits. The cost estimate also inherently assumes that 
the behavior of Mexican citizens would not change after a totalization 
agreement goes into effect. Under totalization, unauthorized workers 
would have an additional incentive to enter the United States to work 
and to maintain the appropriate documentation necessary to claim their 
earnings under a false identity. Thus, a large number of Mexican 
citizens have likely earned some social security coverage credits 
through both authorized and unauthorized work to meet the 40-credit 
threshold requirement and are not directly accounted for in SSA's 
estimate.

Second, SSA's reasonableness check using Canadian data faces similar 
questions. While Mexico and Canada are NAFTA partners and share a 
common border with the United States, there is a dramatic difference in 
the extent of unauthorized immigration from these two countries and, in 
our view, the Canadian experience is not a good predictor of experience 
under an agreement with Mexico. Recent INS data show that Mexican 
citizens account for about 69 percent of unauthorized U.S. immigrants, 
whereas Canadian citizens account for less than 1 percent, and all 
other totalization agreement countries combined account for less than 3 
percent. It is this population of unauthorized immigrants that makes 
estimating the cost of a totalization agreement with Mexico 
particularly problematic.

Finally, even though SSA's actuarial analysis increases the number of 
beneficiaries sixfold over time, the expected 300,000 beneficiaries in 
2050 represents only about 6 percent of the estimated number of 
unauthorized Mexicans in the United States today, and thus appears 
relatively low. Although it would be unreasonable to expect all 
unauthorized Mexicans in the United States to qualify for totalized 
benefits, the very large difference between estimated and potential 
beneficiaries underscores the uncertainty of the estimate and the 
potential costs of an agreement could be higher than OCACT projects.

Indeed, it would take only a relatively small increase in new 
beneficiaries from the original actuarial assumption of 50,000 initial 
new beneficiaries to have a measurable impact on the long-range 
actuarial balance of the trust funds. OCACT has estimated that the 
agreement would not generate a measurable impact on the long-range 
actuarial balance. However, a subsequent sensitivity analysis performed 
at our request shows that a measurable impact on the long-range 
actuarial balance of the trust funds will occur if the baseline figure 
is underestimated by more than 25 percent--just 13,000 additional 
beneficiaries above the estimated 50,000 new beneficiaries.

Our analysis of past actuarial estimates of expected beneficiaries 
under totalization agreements shows that exceeding the 25 percent 
threshold has not been unusual, even in agreements where uncertainty 
about the number of unauthorized workers is substantially 
less.[Footnote 8] Our review of prior estimates shows that OCACT 
frequently either overestimated or underestimated the number of 
expected beneficiaries, usually by more than 25 percent (see table 2). 
In fact, where underestimates occurred, the differences were huge, 
involving several orders of magnitude. However, it is important to note 
that the number of estimated beneficiaries for prior agreements is 
substantially smaller than for the proposed Mexican agreement. 
Therefore, the differences in actual beneficiaries from estimated 
beneficiaries have a higher proportional impact. Furthermore, OCACT has 
not underestimated the number of expected beneficiaries for the 
agreements we analyzed since the 1991 agreement with Austria. 
Nevertheless, the numerous uncertainties and data gaps associated with 
the Mexican agreement elevate the risks associated with any cost 
estimate.

Table 2: Precision of OCACT's Cost Estimates for 11 Prior Totalization 
Agreements:

Percent actual beneficiaries is greater/(less) than estimated 
beneficiaries: CountryUnited Kingdom: [Empty].

Country: United Kingdom; Effective year of agreement: 1985; 
Beneficiaries: Estimated: 3,500; Beneficiaries: Actual: 2,084; Percent 
actual beneficiaries is greater/(less) than estimated beneficiaries: 
(40).

Country: Sweden; Effective year of agreement: 1987; Beneficiaries: 
Estimated: 100; Beneficiaries: Actual: 211; Percent actual 
beneficiaries is greater/(less) than estimated beneficiaries: 111.

Country: Spain; Effective year of agreement: 1988; Beneficiaries: 
Estimated: 300; Beneficiaries: Actual: 377; Percent actual 
beneficiaries is greater/(less) than estimated beneficiaries: 26.

Country: France; Effective year of agreement: 1988; Beneficiaries: 
Estimated: 200; Beneficiaries: Actual: 968; Percent actual 
beneficiaries is greater/(less) than estimated beneficiaries: 384.

Country: Portugal; Effective year of agreement: 1989; Beneficiaries: 
Estimated: 100; Beneficiaries: Actual: 701; Percent actual 
beneficiaries is greater/(less) than estimated beneficiaries: 601.

Country: Netherlands; Effective year of agreement: 1990; Beneficiaries: 
Estimated: 100; Beneficiaries: Actual: 310; Percent actual 
beneficiaries is greater/(less) than estimated beneficiaries: 210.

Country: Austria; Effective year of agreement: 1991; Beneficiaries: 
Estimated: 100; Beneficiaries: Actual: 314; Percent actual 
beneficiaries is greater/(less) than estimated beneficiaries: 214.

Country: Finland; Effective year of agreement: 1992; Beneficiaries: 
Estimated: 100; Beneficiaries: Actual: 38; Percent actual beneficiaries 
is greater/(less) than estimated beneficiaries: (62).

Country: Luxembourg; Effective year of agreement: 1993; Beneficiaries: 
Estimated: 40; Beneficiaries: Actual: 12; Percent actual beneficiaries 
is greater/(less) than estimated beneficiaries: (70).

Country: Ireland; Effective year of agreement: 1993; Beneficiaries: 
Estimated: 1,100; Beneficiaries: Actual: 515; Percent actual 
beneficiaries is greater/(less) than estimated beneficiaries: (53).

Country: Greece; Effective year of agreement: 1994; Beneficiaries: 
Estimated: 1,000; Beneficiaries: Actual: 918; Percent actual 
beneficiaries is greater/(less) than estimated beneficiaries: (8).

Source: GAO analysis.

Note: Actual data were not available for years prior to 1987 so 
comparisons for six earlier agreements could not be made. Also, 
comparison could not be made for the three recent agreements.

[End of table]

Conclusions:

Totalization agreements between the United States and other countries 
often foster enhanced diplomatic relations and provide mutually 
beneficial business, tax, and other incentives to employers and 
employees affected by these agreements. At the same time, the 
agreements impose a financial cost to both countries' social security 
programs. SSA's processes for entering into these agreements have been 
informal and have not included specific steps to assess and mitigate 
potential risks. Regardless of the country under consideration, sound 
management practices dictate that SSA managers have a risk management 
process in place to ensure that the interests of the United States and 
the Social Security Trust Funds are protected.

Most totalization agreements have been with countries that are 
geographically distant to the United States, have developed economies, 
and represent only a fraction of the estimated unauthorized immigrants 
in the United States. Still, all agreements include some level of 
uncertainty and require due diligence on SSA's part to alleviate those 
uncertainties. An agreement with Mexico, however, presents unique and 
difficult challenges for SSA because so little is known about the size, 
work history, earnings, and dependents of the unauthorized Mexican 
population. Furthermore, a common border and economic disparity between 
the United States and Mexico have fostered significant and longstanding 
unauthorized immigration into the United States, making an agreement 
with Mexico potentially far more costly than any other. Thus, for the 
Mexican agreement, additional analyses to assess risks and costs may be 
called for.

A revised approach for entering into totalization agreements with all 
countries would enhance the quality of information provided to the 
Congress, which is tasked with reviewing these vital long-term 
commitments. A more thorough prospective analysis will also provide a 
better basis for determining whether agreements under consideration 
meet the mutual economic and business needs of all parties. Finally, 
current solvency issues require the Congress to think carefully about 
future trust fund commitments resulting from totalization agreements. 
Having more timely and complete information on the benefits, costs, and 
risks associated with each agreement can only serve to better inform 
their decisions.

Recommendations:

In light of the potential impact of totalization agreements on the 
Social Security Trust Funds, we recommend that the Commissioner of 
Social Security:

* establish a formal process to identify and assess the major risks 
associated with entering into agreements with other countries. Such a 
process should include mechanisms to assess the integrity of a 
country's retirement data and records, as well as a means for 
documenting the range of analyses conducted by SSA;

* enhance future reports to the Congress for proposed totalization 
agreements with other countries by making them more consistent and 
informative. Such reports should include consistent time periods for 
estimating both the short-and long-term effects on the trust fund and, 
as appropriate, include data on how alternative assumptions or 
sensitivity analyses could affect costs and potential beneficiaries; 
and:

* work with the Office of the Chief Actuary to establish a regular 
process that examines original projected costs and beneficiaries 
affected versus what actually transpired over time and use this 
information, as appropriate, to adjust future estimating methods for 
totalization agreements.

Agency Comments and Our Evaluation:

We obtained written comments on a draft of this report from the 
Commissioner of SSA, as well as OCACT. The full texts of these comments 
are reproduced in appendix II. We made limited changes to the report as 
appropriate. The State Department was also provided a copy of the draft 
report for review and advised us that it had no comments.

SSA said that the report did not sufficiently discuss the benefits of 
totalization agreements to U.S. workers and employers and disagreed 
with our recommendation that the agency establish a formal process to 
identify and assess the major risks associated with entering into 
agreements with other countries. The agency noted that its current 
informal process for evaluating whether to enter into negotiations for 
totalization agreements was sufficient to identify and assess risks.

Regarding the potential benefits of totalization agreements, our report 
specifically notes that such agreements foster international commerce, 
protect benefits for persons who have worked in foreign countries, and 
eliminate dual social security taxes for multinational employers and 
employees. Our concluding remarks also note that totalization 
agreements often foster enhanced diplomatic relations between 
participating countries. However, these agreements also have costs to 
the U.S. social security system, and we continue to believe that SSA 
should take steps to assess and mitigate risk during the negotiation 
process rather than after an agreement is signed.

SSA also noted that it has specific criteria it follows when deciding 
whether to enter into totalization agreements with other countries and 
that the agency received detailed information on Mexico's social 
security system during its 2-day visit to Mexico City. In reviewing 
SSA's criteria, we could find no specific reference to data reliability 
and program integrity as a factor in negotiations. Further, our review 
of the activities surrounding SSA's visit to Mexico and the limited 
documentation SSA received from Mexican social security officials shows 
that data integrity issues and systems controls were not sufficiently 
examined. In its comments, SSA notes that it is currently in the 
process of scheduling additional visits to Mexican facilities outside 
of Mexico City and will utilize SSA technical staff to further examine 
Mexico's social security system. We are hopeful that--prior to 
submitting a proposed agreement with Mexico--SSA will take additional 
steps to assess key data it will rely on to determine Mexican worker's 
initial and continuing eligibility for U.S. totalized benefits and that 
it will sufficiently document its efforts. Enhancing its due diligence 
efforts and formalizing this process to include all future totalization 
agreements would further improve SSA's risk assessment efforts.

OCACT generally agreed with our recommendations that cost estimates for 
future totalization agreements should be more consistent and 
informative and that such agreements should be regularly analyzed to 
examine the differences between original projections and actual 
experience as an aid to making better estimates. OCACT noted that, 
consistent with the U.S./Mexican totalization agreement, all future 
potential agreements would include both long-range (75 year) and short-
range (10 year) cost projections. OCACT also noted that regularly 
examining the differences between original projections and actual 
experience for future totalization agreements made sense and was 
consistent with current practice. Although we could find no evidence 
during our review that such analyses had occurred on a systematic 
basis, we are pleased to hear that such analyses are now being done and 
are hopeful that OCACT will both complete them in the future and 
document and make available the results.

Both SSA and OCACT disagreed with our analysis and conclusions 
regarding the estimates of the potential cost of a totalization 
agreement with Mexico, as well as our statement that any difference 
between estimated and actual costs will be on the high side. OCACT 
noted that, given the relative uncertainty of the data, this outcome is 
possible, but that our statement inaccurately implied that there was 
evidence that OCACT estimates are more likely to be understated than 
overstated. OCACT went on to note that a number of factors suggest that 
OCACT's estimate of 50,000 new beneficiaries, which will increase 
sixfold to 300,000 by 2050, could indeed be too high.

Our intent was not to imply that OCACT's estimate was biased. Thus, we 
have revised our report to state that, given the large disparity 
between the estimated beneficiaries and the large number of 
undocumented Mexican workers, the potential cost of an agreement could 
be higher than OCACT projects. However, we continue to believe that a 
totalization agreement with Mexico is both qualitatively and 
quantitatively different than any other agreement signed to date, 
especially regarding estimating the potential impact of millions of 
unauthorized workers and their families. Thus, in assessing the risks 
of a totalization agreement with Mexico, we believe it is important to 
discuss the potentially significant impact that any underestimate of 
beneficiaries could have on the Social Security Trust Funds. As table 2 
shows, error rates associated with SSA's estimates of potential 
beneficiaries under prior agreements have often been substantial, even 
in cases where uncertainties about the number of unauthorized workers 
were less prevalent. OCACT's comment that "taken as a whole" its 
estimate of initial beneficiaries differs from actual initial 
beneficiaries by only 3 percent is misleading because it nets 
overestimates against underestimates. OCACT prepares estimates of 
initial beneficiaries for each proposed agreement with an individual 
country. Thus, any comparison of estimated to actual initial 
beneficiaries should be on a country-by-country basis, rather than by 
aggregating the error rates for all agreements.

Finally, in response to our concern that the OCACT's original baseline 
estimate of 50,000 first-year totalization beneficiaries did not 
directly consider millions of current and former unauthorized Mexican 
workers, OCACT said that this estimate was based on the best available 
data. OCACT's comments also included excerpted text from the original 
estimate in order to illustrate the analyses and assumptions that 
supported using the 50,000 individuals already receiving Old-Age, 
Survivors, and Disability Insurance benefits in Mexico as a proxy for 
potential totalization beneficiaries. We acknowledge the data 
limitations facing OCACT as well as its good faith effort to reasonably 
estimate the costs of a totalization agreement with Mexico. However, 
based on our audit work--which involved a thorough review of the full 
text of the actuarial estimate, numerous in-depth interviews with OCACT 
officials to discuss issues of concern, and regular consultation with 
our own Chief Actuary--it seems reasonable to examine all sources of 
data and address the estimates of unauthorized Mexican immigrants 
directly to provide a more complete picture of possible outcomes from 
an agreement with Mexico. We continue to believe that, given the 
magnitude of the proposed Mexican agreement relative to other 
totalization agreements, it is not unreasonable to expect that OCACT 
should develop and use a variety of approaches to estimate potential 
costs and perhaps develop a range of cost estimates based on those data 
sources and alternative assumptions. Such efforts would better serve 
the information needs of the Congress in the event that an agreement is 
ultimately submitted for its review.

We are sending copies of this report to the House and Senate committees 
with oversight responsibilities for the Social Security Administration. 
We will also make copies available to other interested parties upon 
request. In addition, the report will be available at no charge on 
GAO's Web site at http://www.gao.gov. If you or your offices have any 
questions concerning this report, please call me or Daniel Bertoni, 
Assistant Director, on:

(202) 512-7215. Other major contributors to this report are Patrick 
Dibattista, Gerard Grant, Daniel Schwimer, William Staab, and Paul 
Wright.

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

Signed by Barbara D. Bovbjerg: 

[End of section]

Appendix I: Comparison of Totalized and Minimum Social Security 
Benefits:

Table 3: Monthly Social Security Benefits Payable in 2003 at Different 
Earnings and Coverage Levels under a Totalization Agreement and 
Compared to the Minimum Benefit Payable:

Monthly social security benefit with 40 credits earned: Social security 
earnings level[A]Low earnings: [Empty].

Social security earnings level[A]: Low earnings; Monthly totalized 
social security retirement benefit for the credits earned: 8 credits: 
$39.00; Monthly totalized social security retirement benefit for the 
credits earned: 20 credits: $99.00; Monthly totalized social security 
retirement benefit for the credits earned: 36 credits: $178.00; Monthly 
social security benefit with 40 credits earned: $296.00.

Social security earnings level[A]: Average earnings; Monthly totalized 
social security retirement benefit for the credits earned: 8 credits: 
$65.00; Monthly totalized social security retirement benefit for the 
credits earned: 20 credits: $163.00; Monthly totalized social security 
retirement benefit for the credits earned: 36 credits: $294.00; Monthly 
social security benefit with 40 credits earned: $561.00.

Social security earnings level[A]: High earnings; Monthly totalized 
social security retirement benefit for the credits earned: 8 credits: 
$85.00; Monthly totalized social security retirement benefit for the 
credits earned: 20 credits: $212.00; Monthly totalized social security 
retirement benefit for the credits earned: 36 credits: $382.00; Monthly 
social security benefit with 40 credits earned: $702.00.

Social security earnings level[A]: Maximum earnings; Monthly totalized 
social security retirement benefit for the credits earned: 8 credits: 
$94.00; Monthly totalized social security retirement benefit for the 
credits earned: 20 credits: $237.00; Monthly totalized social security 
retirement benefit for the credits earned: 36 credits: $427.00; Monthly 
social security benefit with 40 credits earned: $899.00.

Source: Office of International Programs, SSA.

[A] A low earnings level equals 45 percent below the national average 
wages for each year. An average earnings level equals the national 
average wages for each year. A high earnings level equals 60 percent 
above the national average wages for each year. A maximum earnings 
level equals the maximum taxable amount of covered earnings for each 
year.

[End of table]

[End of section]

Appendix II: Comments from the Social Security Administration:

[See PDF for image]

[End of section]


FOOTNOTES

[1] Different requirements govern the number of coverage credits 
necessary to receive disability and survivors benefits for workers who 
become disabled or die with relatively short work careers.

[2] Under an agreement, U.S. citizens will also be able to receive 
totalized Mexican benefits. The amount of time needed to qualify for 
Mexican social security benefits is about 9.6 years under the former 
pay-as-you-go plan that closed in July 1997 and 24 years under the 
defined contribution plan that replaced it. 

[3] Belinda I. Reyes, Dynamics of Immigration: Return Migration to 
Western Mexico, Public Policy Institute of California, January 1997.

[4] For prior agreements with other countries, the OCACT developed only 
short-term estimates covering periods ranging from 1 to 5 years because 
it was determined that the number of expected beneficiaries were too 
few to have a measurable cost impact on the long-range actuarial 
balance of the trust funds.

[5] For example, the Pew Hispanic Center estimated that there are 
between 3.4 and 5.7 million unauthorized Mexican citizens in the United 
States and the Urban Institute has estimated that there are more than 4 
million.

[6] In March 2003, INS functions were transferred to the Department of 
Homeland Security. Responsibility for deriving these estimates now lies 
with the Under Secretary Management, Office of Immigration Statistics.

[7] Reyes (1997), p. 13 lists several studies that document the 
temporary and circular nature of Mexican migration to the United 
States.

[8] OCACT staff told us that it would be best to look at precision of 
past estimates by comparing the estimated number of beneficiaries for 
the last year of the estimate with actual data for that same year. We 
were able to make this comparison for 11 countries.

GAO's Mission:

The General Accounting Office, the investigative arm of Congress, 
exists to support Congress in meeting its constitutional 
responsibilities and to help improve the performance and accountability 
of the federal government for the American people. GAO examines the use 
of public funds; evaluates federal programs and policies; and provides 
analyses, recommendations, and other assistance to help Congress make 
informed oversight, policy, and funding decisions. GAO's commitment to 
good government is reflected in its core values of accountability, 
integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony:

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains 
abstracts and full-text files of current reports and testimony and an 
expanding archive of older products. The Web site features a search 
engine to help you locate documents using key words and phrases. You 
can print these documents in their entirety, including charts and other 
graphics.

Each day, GAO issues a list of newly released reports, testimony, and 
correspondence. GAO posts this list, known as "Today's Reports," on its 
Web site daily. The list contains links to the full-text document 
files. To have GAO e-mail this list to you every afternoon, go to 
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order 
GAO Products" heading.

Order by Mail or Phone:

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to:

U.S. General Accounting Office

441 G Street NW,

Room LM Washington,

D.C. 20548:

To order by Phone: 	

	Voice: (202) 512-6000:

	TDD: (202) 512-2537:

	Fax: (202) 512-6061:

To Report Fraud, Waste, and Abuse in Federal Programs:

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470:

Public Affairs:

Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800 U.S.

General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C.

20548: