Social Security:

Proposed Totalization Agreement with Mexico Presents Unique Challenges

GAO-03-993: Published: Sep 30, 2003. Publicly Released: Sep 30, 2003.

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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, GAO was asked to (1) describe the Social Security Administration's (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.

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 Mexico's 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 noncitizens' 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 GAO's 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.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: In light of the potential impact of totalization agreements on the Social Security Trust Funds, the Commissioner of Social Security should 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.

    Agency Affected: Social Security Administration

    Status: Closed - Implemented

    Comments: SSA returned to Mexico and conducted the additional studies of the Mexican social security program that GAO felt was lacking. The agency also developed several initiatives to identify risk associated with totalization agreements, including conducting vulnerability assessments to detect potential problems with foreign countries' documents and data. This has allowed SSA to thoroughly assess the risks involved and to resolve major issues.

    Recommendation: In light of the potential impact of totalization agreements on the Social Security Trust Funds, the Commissioner of Social Security should 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.

    Agency Affected: Social Security Administration

    Status: Closed - Implemented

    Comments: SSA provides both short- and long-range projections on the costs of future totalization agreements. These estimates, made by the Office of the Actuary (OCACT), consistently reflected expected changes in cost and income over the first 5 years after implementation. OCACT produced estimates that would extend through the short-range (10-year), as well as estimates for the potential effects through the long-range (75-year) projection period. OCACT will continue to provide short- and long-range estimates for future potential agreements. In addition, OCACT developed methods for providing illustrations of potential variation in cost estimates for future potential totalization agreements.

    Recommendation: In light of the potential impact of totalization agreements on the Social Security Trust Funds, the Commissioner of Social Security should 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 Affected: Social Security Administration

    Status: Closed - Implemented

    Comments: SSA's Office of the Chief Actuary (OCACT) is now basing its estimates on relationships between data that are known before an agreement is implemented and the actual effects after implementation of agreements put into effect in past years. OCACT used information from actual experience to expand the base of data available to update and improve estimating methods that have sharpened its projections.

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