    Social Security Reform: Potential Effects on SSA's Disability Programs
    and Beneficiaries (Letter Report, 01/24/2001, GAO/GAO-01-35).

    There has not been much analysis of how the various Social Security
    reform proposals will affect the Social Security Disability Insurance
    (DI) Program. GAO assessed to potential of these proposals on the
    solvency of the DI trust fund. GAO's analyses indicate that most
    disabled beneficiaries would receive higher benefits under the various
    Social Security reform proposals it reviewed than under a solvency
    scenario that maintained payroll tax rates while reducing benefits.
    However, most disabled beneficiaries with the characteristics GAO
    studied would receive lower benefits under three of the reform proposals
    reviewed than under a solvency scenario that maintained current-law
    benefits while raising payroll taxes. The proposals GAO studied treat DI
    beneficiaries similar to Old-Age and Survivor Insurance beneficiaries.
    However, the circumstances facing disabled workers differ from those
    facing retired workers. The differences between disabled and retired
    workers suggest that Social Security reform proposals should be viewed
    not only in light of their effects on retired workers but also
    explicitly for their effect on disabled beneficiaries and their
    families.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  GAO-01-35
         TITLE:  Social Security Reform: Potential Effects on SSA's
    	     Disability Programs and Beneficiaries
          DATE:  01/24/2001
       SUBJECT:  Social security benefits
    	     Disability benefits
    	     Retirement benefits
    	     Disability insurance
    	     Federal social security programs
    	     Income maintenance programs
    IDENTIFIER:  Social Security Program
    	     Social Security Disability Insurance Program
    	     Supplemental Security Income Program
    	     Old-Age and Survivors Insurance Program
    	     SSI

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    GAO-01-35

    A

    Report to the Ranking Member, Subcommittee on Labor, Health and Human
    Services, Education, and Related

    Agencies, Committee on Appropriations, U. S. Senate

    January 2001 SOCIAL SECURITY REFORM

    Potential Effects on SSA's Disability Programs and Beneficiaries

    GAO- 01- 35

    Letter 3 Appendixes Appendix I: The Social Security Reform Proposals and
    Their

    Provisions 40 Appendix II: Alternative Solvency Scenarios and the Social
    Security

    Simulation Model 42 Appendix III: Comments From the Social Security
    Administration 50

    Tables Table 1: Effect of Reform Proposals on Trust Fund Solvency and
    Benefit Income 7

    Table 2: Proposals That Maintain the Current Level and Structure of Benefits
    12 Table 3: Proposals That Affect the Current Level and Structure of

    Benefits 13 Table 4: Actuarial Balance of Social Security Trust Funds Under

    Current Law and Selected Reform Proposals 16 Table 5: Estimated Change in
    Current Law Actuarial Balance

    for Selected Reform Provisions 20 Table 6: Social Security Reform Provisions
    40 Table 7: Individual Account Provisions 41 Table 8: Reductions in Benefits
    42 Tabl e 9: Payroll Tax Rates 44 Table 10: Economic and Demographic
    Intermediate Assumptions

    From the 1999 Trustees Report 45 Figures Figure 1: Lifetime Benefit Income
    of Low- Earnings Worker and

    Dependents Under Selected Proposals and Alternative Solvency Scenarios 22
    Figure 2: Lifetime Benefit Income of Average- Earnings Worker and

    Dependents Under Selected Proposals and Alternative Solvency Scenarios 23
    Figure 3: Comparison of COLA Changes to Lifetime Insurance

    Benefits of Disabled Workers With Alternative Solvency Scenarios 26 Figure
    4: Comparison of PIA Changes to Lifetime Insurance

    Benefits of Disabled Workers With Alternative Solvency Scenarios 27

    Figure 5: Comparison of PIA Changes to Lifetime Insurance Benefits With
    Alternative Solvency Scenarios for Adult Disabled Child Dependent of Retired
    Worker 28 Figure 6: Lifetime Benefit Income of Disabled Workers Under IA
    Provisions and Alternative Solvency Scenarios 30

    Figure 7: Lifetime Benefit Income of Dependent of Disabled Worker Under IA
    Provisions and Alternative Solvency Scenarios 31 Figure 8: Lifetime Benefit
    Income of Adult Disabled Child

    Dependent of Retired Worker Under IA Provisions and Alternative Solvency
    Scenarios 32 Figure 9: Net Addition of IA to Current- Law Lifetime Benefit
    Income Under Selected Reform Proposals: Low- Earnings

    Worker Disabled at Various Ages 34 Figure 10: Net Addition of IA to Current-
    Law Lifetime Benefit IncomeUnder Selected Reform Proposals: Average-
    Earnings

    Worker Disabled at Various Ages 35

    Abbreviations

    AIME average indexed monthly earnings COLA cost- of- living adjustment CPI
    Consumer Price Index DI Disability Insurance IA individual account NRA
    normal retirement age OASI Old- Age and Survivor Insurance PIA primary
    insurance amount SSA Social Security Administration SSI Supplemental
    Security Income

    Lett er

    January 24, 2001 The Honorable Tom Harkin Ranking Member, Subcommittee on
    Labor,

    Health and Human Services, Education, and Related Agencies Committee on
    Appropriations United States Senate

    Dear Senator Harkin: Although much has been written about the effects of
    reform on the solvency of the Social Security program and on the benefits of
    retired workers, little attention has been directed to the effects of reform
    proposals on the Social Security Disability Insurance (DI) program or on

    the benefits that disabled beneficiaries and their families receive. Yet, in
    1999, disabled beneficiaries and their families accounted for about 17
    percent of all Social Security beneficiaries. These 7.4 million
    beneficiaries included disabled workers, families of disabled workers, and
    adult disabled children who were dependents of disabled, deceased, or
    retired workers. You asked us to assess the potential effects of Social
    Security reform options on the solvency of the DI trust fund and the
    benefits disabled beneficiaries receive. In this report, we analyze both the
    potential effects of comprehensive Social Security reform proposals on the
    solvency of the DI

    trust fund and on the benefits disabled beneficiaries receive and the likely
    contribution that individual proposal provisions would make to these
    effects. You also asked us to examine the potential implications of Social
    Security reform for the Supplemental Security Income (SSI) program, which
    provides significant income support for low- income individuals with
    disabilities.

    In response to your request, we analyzed the five Social Security reform
    proposals that we have previously reviewed. 1 These proposals include that
    of President Clinton as well as four of the proposals discussed in the 106th
    Congress: Archer- Shaw, Kolbe- Stenholm (H. R. 1793), Gregg- Kerrey-
    BreauxGrassley (S. 1383), and Kasich. In these proposals, we identified 11
    major

    1 Social Security: Evaluating Reform Proposals (GAO/ AIMD/ HEHS- 00- 29,
    Nov. 4, 1999). With respect to the President's proposal, we evaluated the
    version that was presented in the President's fiscal year 2001 budget on
    Feb. 7, 2000.

    types of provisions and examined their effect on trust fund solvency and DI
    benefits. 2 We compared the benefits under these reform proposals with
    benefits under two alternative current- program scenarios that also achieve
    trust fund solvency: one that would maintain current benefits while
    increasing payroll taxes and another that would maintain current payroll tax
    rates while reducing benefits.

    To analyze the effects of Social Security reform on DI trust fund solvency,
    we used estimates produced by the Social Security Administration's (SSA)
    Office of the Chief Actuary as well as our estimates using the SSASIM policy
    simulation model. 3 We also used the SSASIM model to examine the effects of
    these reforms on benefits that disabled beneficiaries receive. Our estimates
    using the SSASIM model are based on the intermediate assumptions reported in
    the 1999 Social Security Trustees Report because the Office of the Chief
    Actuary has scored only a few of the proposals we studied using the
    assumptions in the 2000 Social Security Trustees Report.

    We analyzed the effects of Social Security reform on the Old- Age and
    Survivors Insurance (OASI) program as well as on the DI program because the
    solvency estimates are generally available for the combined programs only
    and because many disabled beneficiaries receive benefits from the

    OASI program. For example, more than 90 percent of the adult disabled
    children who receive Social Security benefits are dependents of deceased or
    retired workers and therefore receive OASI benefits. Disabled workers who
    have reached retirement age and their dependents receive benefits from the
    OASI program because DI benefits are automatically converted to

    retirement insurance benefits at the normal retirement age (NRA). Because
    little information is available about the earnings levels and work history
    of DI beneficiaries, we assumed the best possible case for disabled
    beneficiaries. Such an assumption would generally provide an upper limit to
    the benefits that most disabled beneficiaries could expect to receive under
    the Social Security reform proposals. We assumed they work fulltime until
    they receive disability benefits. We also assumed they received

    2 See app. I for information on these provisions. 3 The SSASIM model,
    developed by the Policy Simulation Group, Inc., can simulate a variety of
    policy reforms to the Social Security program from incremental changes in
    the Old- Age and Survivors Insurance (OASI) and DI programs to broader
    structural reforms that would introduce an individual account (IA) component
    to the Social Security system. Additional information on the model and the
    assumptions we made in using it are in app. II.

    earnings equal to either the average economywide earnings of men or 45
    percent of the average earnings of men. Following the approach taken in the
    Report of the 1994- 96 Advisory Council on Social Security, we chose a low
    administrative cost for the individual account (IA), implicitly assuming

    a centralized system of recordkeeping and a limited number of investment
    options. We assumed that individuals self- annuitized by drawing down the
    balance in the IAs through periodic withdrawals. As a result, the benefit
    income for the disabled beneficiaries whom we studied in this report will
    clearly be greater than that for disabled beneficiaries with intermittent or

    less than full- time employment who pay annuitization costs and relatively
    higher administrative costs on their IAs. We conducted our work between
    September 1999 and November 2000 in accordance with generally accepted
    government auditing standards. Results in Brief According to estimates of
    SSA's Office of the Chief Actuary, the Social Security reform proposals that
    we examined would improve the solvency

    of the combined DI and OASI trust funds. Table 1 shows that the extent of
    the improvement varies across proposals. Most of the individual proposal
    provisions, such as those that call for general revenue transfers or benefit
    reductions, would have a positive effect on the solvency of the DI trust
    fund by increasing revenues and decreasing costs, respectively. Only a few
    provisions, such as those redirecting payroll taxes to IAs, which would
    reduce trust fund revenues, and those establishing a minimum benefit,

    which would increase some benefits and therefore costs, would have a
    negative effect on the DI trust fund.

    With regard to benefits, our analysis shows that three proposals- Kasich,
    Kolbe- Stenholm, and Gregg- Kerrey- Breaux- Grassley- would result in
    reduced benefit income for most of the disabled beneficiaries with the
    selected characteristics that we simulated when compared with a solvency
    scenario that maintains current- law benefits by increasing payroll taxes or
    other sources of revenue. 4 (See table 1.) However, most disabled

    beneficiaries would receive greater benefit income under any of these three
    proposals than under a scenario that would achieve solvency and maintain
    current payroll tax rates by reducing benefits. 5 These proposals
    distinguish

    between the insurance benefits received from Social Security and the income
    that would be received from the IAs created under these proposals. 6 The
    reform proposals would reduce insurance benefits while creating IAs, with
    the expectation that the income from an IA would largely

    offset reductions in the insurance benefits. In our estimates, the income
    from the IA was not sufficient to compensate for the decline in the
    insurance benefits that disabled beneficiaries would receive. This is
    especially true for the Kasich and the Gregg- Kerrey- Breaux- Grassley
    proposals, which would further reduce the insurance benefit in response to
    the potential income from the IA. Our estimates also indicate that the

    longer a beneficiary works before becoming disabled, the greater the income
    from the IA will be.

    4 President Clinton's proposal maintains current- law benefits and does not
    include an IA provision. The Archer- Shaw proposal differs from the other
    proposals that contain an IA provision in that it guarantees that
    individuals will receive at least the amount of their current- law benefits.

    5 Following the approach used in the Report of the 1994- 96 Advisory Council
    on Social Security, we adjusted the benefit formula so that only the
    benefits at the higher levels are reduced while the benefits at the lowest
    levels are unaffected. For additional information, see app. II. 6 In this
    report, we look at two kinds of benefits: the traditional benefit provided
    by Social Security, which we refer to as the insurance benefit, and the
    income from the IA. We refer to

    the sum of these two benefits as benefit income. The income from the IAs
    depends on assumptions as to rate of return, administrative costs, and so
    on, which we describe later in this letter and in app. II.

    Table 1: Effect of Reform Proposals on Trust Fund Solvency and Benefit
    Income Benefit income: average earner who

    first receives DI at age 45 b OASDI trust fund

    Maintain Proposal

    solvency a benefits Maintain tax rates

    Current law 0.07 c c President Clinton's 0.80 c c Kasich +0. 00 d 15. 6 +28.
    1 Kolbe- Stenholm +0.07 17. 7 +25. 0 Archer- Shaw +0.09 c c Gregg- Kerrey-
    BreauxGrassley +0. 28 4.2 +45.3 a This columns represents actuarial balance
    as a percentage of taxable payroll. OASDI, Old- Age, Survivors, and
    Disability Insurance, refers to the combined OASI and DI programs. b These
    columns represent percentage change. c Proposal does not affect the level
    and structure of benefits. d Assumes everyone opts for the IA, which is
    voluntary in this proposal. If no one opts for the IA, the

    actuarial balance is +0.24 Source: Estimates are based on 1999 Social
    Security Trustees Report.

    The Social Security reform proposals we reviewed could increase costs for
    the SSI program. Individuals receiving DI or OASI benefits who have low
    levels of income and assets could supplement their income with benefits from
    the SSI program. The SSI program could be affected in two different ways.
    First, for beneficiaries who already receive SSI benefits, a reduction

    in Social Security benefits resulting from reforms could lead to an increase
    in SSI benefits (up to the legislated maximum) and thus to an increase in
    costs for the SSI program. 7 Second, a reduction in DI and OASI benefits as
    a

    result of reform would likely make some individuals not currently receiving
    SSI newly eligible for its benefits.

    In commenting on this report, SSA noted that we addressed an important topic
    that has until now received little attention. The agency specifically
    highlighted two points in our report as being important for policy makers

    7 If the individual account accumulations are treated as assets with regard
    to determining SSI eligibility, some low- income individuals may lose SSI
    benefits. Whether this loss of benefits in the case of disabled
    beneficiaries would occur when they first received benefits or when they
    reached retirement age depends upon the proposal.

    considering changes to Social Security: IAs might not fully offset Social
    Security insurance benefit reductions for some beneficiaries, and SSI
    benefits might increase as they compensate for the decline in DI benefits
    resulting from Social Security reform. However, the agency had some concerns
    about our use of a “best case” scenario to estimate the effects
    of policy options and about the assumptions underlying this scenario. SSA
    also expressed concern regarding our focus on lifetime benefits, a measure
    that it believes does not adequately reflect differences in living standards
    across policy options at specific points in time. Finally, it suggested that
    we include a measure reporting on money's worth or internal rates of return
    in

    our comparison of costs and benefits of Social Security reform proposals.
    Our use of a “best case” scenario demonstrated that even under
    the best of circumstances, Social Security reform proposals could reduce
    benefits to DI beneficiaries- people who would find it more difficult than
    most nondisabled retirees to replace lost benefits with other sources of
    income such as earnings. We did not examine “worse case”
    scenarios because the

    “best case” scenario demonstrates that most DI beneficiaries
    would be adversely affected by the reform proposals we analyzed. With
    respect to the agency's concern with our focus on lifetime benefits, we
    acknowledge that we do not address the issue of variations across plans in
    living standards before retirement age resulting from differences in the
    accessibility of income from the IAs. As for the inclusion of money's worth
    or internal rate of return measures, we agree that such analysis would be
    useful, but these measures are beyond the scope of this report.

    Background Working- age adults with disabilities may obtain cash benefits
    from a number of private and public programs. 8 After the onset of a
    disabling

    condition, workers needing long- term cash benefits may receive assistance
    from workers' compensation, private disability insurance, or DI. However, in
    1996, only 26 percent of private sector employees had long- term disability
    coverage under employer- sponsored private insurance plans. 9 Thus, the DI
    program is an important provider of monthly benefits to workers who are no
    longer able to work because of a severe long- term disability.

    8 SSA Disability: Return- to- Work Strategies From Other Systems May Improve
    Federal Programs (GAO/ HEHS- 96- 133, July 11, 1996). 9 Private Disability
    Insurance (GAO/ HEHS- 00- 18R, Nov. 5, 1999).

    Most Social Security disabled beneficiaries, including disabled workers and
    their dependents, receive benefits from the DI program. However, adult
    disabled children who are dependents of deceased or retired workers, and
    disabled workers who have reached retirement age and their dependents,
    receive monthly benefits from the OASI program. 10 In 1999, about 6.5
    million beneficiaries received DI cash benefits totaling about $51.3
    billion,

    while about 38.0 million beneficiaries received OASI cash benefits totaling
    about $334.4 billion. 11

    Benefits Available Under Benefits for both OASI and DI beneficiaries are
    based on the application of Current Law

    the Social Security benefit formula to the worker's average monthly lifetime
    earnings. The resulting monthly benefit is the amount payable to a worker
    who becomes entitled to disability benefits or retires at the NRA. Because
    monthly benefits for DI and OASI beneficiaries are based on the same benefit
    formula, any change in this formula, as has been proposed in some Social
    Security reform plans, could affect benefits disabled workers as well as
    retired workers receive. Both DI and OASI monthly benefits will also be
    affected by other proposed Social Security reform changes, such as

    decreases in the cost- of- living adjustment (COLA). However, only OASI
    monthly benefits are affected by proposed changes in the retirement age. 12

    Under current law, the age at which an individual is first eligible to
    receive full retirement benefits, or NRA, is gradually increasing from 65 to
    66 for those who turn 62 in 2005 and to 67 for those who turn 62 in 2022.
    Benefits retired workers take before NRA are subject to an actuarial
    reduction.

    Benefits taken by workers who postpone retirement and work between NRA and
    age 70 are increased through a delayed retirement credit for each month
    retirement is delayed. The benefit formula is weighted in favor of 10
    Disability insurance benefits are automatically converted to retirement
    insurance benefits at the NRA.

    11 The 6.5 million beneficiaries receiving DI cash benefits do not include
    adult disabled children who are dependents of deceased or retired workers
    and, therefore, receive benefits from the OASI program. Consequently, this
    number differs from the 7. 4 million disabled beneficiaries, reported
    earlier, who do include adult disabled children who are dependents of
    deceased or retired workers. The 38. 0 million OASI beneficiaries include
    adult disabled children who are dependents of deceased or retired workers
    and disabled workers whose benefits have been converted to retirement
    insurance benefits.

    12 The decrease in OASI benefits as a result of the increase in the
    retirement age may prompt older workers to apply to the DI program in order
    to receive what would be relatively greater disability benefits.

    workers with lower earnings, so that benefits replace a larger proportion of
    their earnings. Benefits are adjusted each year, based on increases in the
    Consumer Price Index (CPI) in order to account for inflation. Auxiliary
    benefits are paid to eligible dependents and are 50 percent of the Social
    Security benefit that the disabled or retired worker receives, subject to a
    maximum family limit on benefits. Upon the death of an insured worker, the
    eligible spouse receives 100 percent of the worker's benefit (subject to
    reduction for age) and the eligible surviving child receives 75 percent of
    the benefit. 13 Individuals who receive low levels of DI or OASI benefits
    can supplement them with benefits from SSI. 14 The SSI program, which was
    authorized in

    1972 under title XVI of the Social Security Act, is funded through general
    revenues and provides monthly benefits to aged, blind, and disabled
    individuals who have income and resources below specified thresholds.

    The DI and SSI programs use the same criteria and procedures for determining
    disability. However, unlike DI beneficiaries, SSI recipients do not need to
    have a work history to qualify for benefits. The maximum federal SSI monthly
    benefit in 1999 was $500 for an individual. This monthly benefit level is
    reduced, depending on a recipient's income and

    other sources of support, such as Social Security benefits. In 1999, 36
    percent of SSI recipients also received Social Security benefits from either
    OASI or DI. The average federal monthly benefit in 1999 was $249 for the
    aged, $351 for the blind, and $364 for the disabled. In addition to the
    federal SSI benefits, some states provide supplemental benefits that are
    intended to reflect regional differences in living costs.

    Social Security is financed primarily on a pay- as- you- go basis, which
    means that the Social Security payroll taxes that current workers pay are
    used to pay for current benefits. In 1999, there were approximately 3.4
    workers for every beneficiary, but this number is projected to fall to 2.1
    by 2030.

    13 Spouses may also be eligible for benefits based on their own work
    records. In these cases, spouses receive their own worker benefits plus the
    difference between their spouse benefit and their own worker benefit.
    Children younger than 18 are eligible for insurance benefits. In addition,
    children who are full- time elementary or secondary students might receive
    insurance benefits until age 19. Children older than 18 might receive
    benefits if they are suffering a disability that began before age 22.

    14 An individual might also supplement DI benefits with benefits from
    private insurance. Benefits from private insurance might come from long-
    term disability insurance or from pension plans with disability pension
    features.

    Because of this change in the ratio of workers to beneficiaries, and other
    factors, the Social Security trust funds will have a projected financial
    shortfall or funding gap of approximately $3 trillion over the next 75
    years. According to estimates in the 2000 Trustees Report, the OASI trust
    fund is projected to have sufficient funds to fully finance benefits until
    2039, while

    the DI trust fund is projected to have sufficient funds to fully finance
    benefits until 2023. After the trust funds are exhausted- that is, after
    2039 for the OASI trust fund and 2023 for the DI trust fund- the annual tax
    revenues of the trust funds are expected to be sufficient to cover only
    about 70 percent of annual expenditures. 15

    Social Security Reform In order to address the solvency of the trust funds,
    a number of Social Proposals Address Solvency Security reforms have been
    proposed. We assessed five of these proposals,

    by Affecting the Level and some of which maintain the level of current law
    benefits and some of which

    Structure of Benefits reduce and restructure these benefits. Table 6 in
    appendix I lists the provisions in each proposal.

    Two of the proposals we studied, President Clinton's proposal and the
    Archer- Shaw proposal, maintain the current level and structure of benefits.
    (See table 2.) Three of the reform proposals we studied- Kasich,
    KolbeStenholm, and Gregg- Kerry- Breaux- Grassley- both reduce and
    restructure current benefits. (See table 3.)

    15 The OASI and DI trust funds, which together make up Social Security, are
    set up as two separate accounts in the U. S. Treasury. However,
    historically, there has been little real significance to this division with
    respect to the financing of the program since, over the years, there have
    been tax rate reallocations and loans between the two trust funds. The
    assets in the combined OASDI trust funds will be exhausted in 2037,
    according to projections by SSA's Office of the Chief Actuary as reported in
    the 2000 Trustees Report.

    Table 2: Proposals That Maintain the Current Level and Structure of Benefits
    Proposal Description

    President Clinton's a ? Maintains current- law benefits for current and
    future retirees and disability insurance beneficiaries by requiring
    additional general fund transfers to OASDI trust funds in each fiscal year
    beginning

    in 2011 through 2050. In addition, a portion of these transfers would be
    invested in equities.

    Archer- Shaw ? Maintains current law benefits for current and future
    beneficiaries. Requires mandatory “add- on” individual accounts
    financed through a refundable tax credit paid from the general fund. The
    contribution to the IA equals 2 percent of taxable payroll. Beginning at
    retirement or disability, the account balance is gradually returned to the
    OASDI trust funds to finance benefits.

    ? Actual retirement or disability income could be higher, depending on the
    account balance. The benefit amount paid each month is either the current
    law amount or the payout based on the annuitized account balance, whichever
    is higher. a The version of President Clinton's proposal that was presented
    in his fiscal year 2001 budget on Feb. 7, 2000.

    Table 3: Proposals That Affect the Current Level and Structure of Benefits
    Proposal Description

    Kasich a ? Reduces current law benefits by indexing initial benefits to
    prices rather than average wages, as under current law. b

    ? Restructures benefits by offering voluntary individual “carve-
    out” accounts with contributions financed by redirection of between 1
    and 3.5 percent of individuals' taxable earnings, with a higher percentage
    available to lower- income earners. For workers choosing the account option,
    an additional benefit reduction is made at retirement to offset
    contributions to their accounts. c Gregg- Kerrey- BreauxGrassley

    ? Reduces current law benefits by reducing the COLA, increasing the NRA to
    67 sooner than under current law, and increasing the benefit computation
    period. d ? Affects current- law benefits of both retired and disabled
    workers by changing the primary insurance

    amount (PIA) formula to increase the progressivity of this formula. e
    Additional reductions in PIA formula factors apply only to retired worker
    benefits.

    ? Restructures benefits by creating a mandatory individual “carve-
    out” account financed by redirecting 2 percent of individuals' taxable
    earnings. f ? At retirement age, insurance benefits for both retired and
    disabled workers are reduced or offset by an

    amount equal to the contributions plus interest that would have accrued had
    these contributions been invested at the interest rate earned by the OASDI
    trust funds. g

    ? Provides a minimum benefit for newly eligible aged surviving spouses of
    retired workers. Kolbe- Stenholm ? Reduces current- law benefits by reducing
    the COLA, increasing the NRA to 67 sooner than under

    current law and indexing it to changes in average life expectancy, and
    increasing the benefit computation period. h ? Reduces benefits for both
    retired and disabled workers by modifying the PIA formula. Additional
    reductions in benefits because of changes in longevity apply only to retired
    workers. Requires a report to

    the Congress in 2001 that may recommend similar reductions in DI benefits.
    Formula changes may increase the progressivity of the benefit structure.

    ? Restructures benefits by creating a mandatory individual “carve-
    out” account financed by redirection of 2 percent of individuals'
    taxable earnings. i ? Provides a minimum benefit for newly eligible retired
    and disabled beneficiaries.

    ? Insurance benefits are not reduced or offset by individual account
    balances. j a The Kasich proposal does not explicitly refer to DI
    beneficiaries.

    b Because over time increases in wages have been, and are expected to
    continue to be, greater than increases in prices, indexing the benefit
    formula to prices rather than to wages would reduce initial benefits. Under
    current law, once the beneficiary receives the benefit, further increases in
    benefits are

    based on changes in the CPI. These increases in benefits are affected by
    changes in the COLA. c Disabled workers who choose the account option have
    the additional benefit reduction when they receive DI benefits, according to
    Congressman Kasich's staff.

    d Current and near retirees are excluded from the reduction in the COLA. NRA
    increases have no effect on benefit levels for those who receive disability
    benefits up to the age they are eligible for retirement benefits. Disabled
    beneficiaries are exempt from increases in the benefit computation period. e
    The PIA is the monthly amount payable to a retired worker who begins to
    receive benefits on reaching the NRA or to a disabled worker who has never
    received a retirement benefit reduced for age. f The proposal also allows
    additional voluntary contributions up to $2,000 annually. Lower- income and

    middle- income earners are also eligible for a partial match. These features
    were not included in our analysis. g KidSave accounts are established for
    each child at birth with government contributions financed from the general
    fund; these continue until the child is 5 years old. Half of the KidSave
    contributions are included in calculating the offset when the individual
    with the KidSave account retires. This feature is

    not included in our analysis because the KidSave accounts begin with the
    cohort born in 2000, whereas we analyze the cohorts born in 1986 and
    earlier. h NRA increases have no effect on benefit levels for persons who
    receive disability benefits up to the age when they are eligible for
    retirement benefits. Disabled beneficiaries are exempt from increases in the
    benefit computation period.

    i The proposal also allows additional voluntary contributions up to $2,000
    annually. Lower- income earners are also eligible for a partial government
    match and may use the earned income tax credit to contribute. These features
    were not included in our analysis.

    j The worker may purchase an annuity or request a monthly pay- out. If the
    monthly pay- out plus Social Security benefits guarantees a lifetime income
    equal to the poverty level, then the balance in excess of this requirement
    may be withdrawn.

    The proposals we studied vary in the degree to which they explicitly refer
    to disabled beneficiaries. President Clinton's proposal refers to
    maintaining current- law benefits for both retired and disabled workers. The
    ArcherShaw proposal implicitly refers to both disabled and retired workers
    when it states that beneficiaries will be guaranteed at least current- law
    benefits. However, it explicitly refers to disabled workers when it
    discusses distributions from the IAs. Workers can receive distributions from
    their IAs when they become entitled to either DI or OASI benefits.

    The Kasich proposal does not explicitly refer to disabled beneficiaries when
    discussing changes in benefits or the establishment of IAs, although
    disability benefits are affected by the provisions in the Kasich proposal.
    Rather, it emphasizes that the provisions described will not affect the
    benefits of retired workers or those near retirement. The discussion of the
    expected returns to the IAs clearly refers only to retired workers, with
    their longer work history. Most of the provisions in the Gregg- Kerrey-
    Breaux- Grassley and KolbeStenholm

    proposals explicitly refer to disabled or retired workers. Under both
    proposals, the benefits of disabled workers are affected by one reduction in
    the PIA formula but are exempted from a second reduction. Benefits of both
    disabled and retired workers are affected by reductions in the COLA.
    However, the provision in both proposals that increases the

    benefit computation period amends a clause in the Social Security Act that
    refers only to retired workers. The provision increasing the retirement age
    affects only the benefits of retired workers. Under both proposals, the
    restrictions on IA distributions refer to receipt either at retirement age
    or at the attainment of a particular level of funds in the IA. Under the
    GreggKerrey-

    Breaux- Grassley proposal, the insurance benefit is reduced by an offset
    related to the amount of contributions to the IA. DI beneficiaries are
    exempt from this adjustment to the insurance benefit when benefits are first
    received. However, at retirement age, when they are able to gain

    access to the income from their IAs, insurance benefits are reduced by the
    appropriate offset.

    Social Security Reform Estimates by SSA's Office of the Chief Actuary
    indicate that all the Is Likely to Improve DI

    proposals would improve the solvency of the combined DI and OASI trust
    funds, with the extent of the improvement varying across proposals. In Trust
    Fund Solvency addition, most of the specific provisions in the proposals,
    such as transfers from general funds and reductions in benefit levels, would
    have a positive effect on the solvency of the DI trust fund. However, a
    provision such as the increase in the retirement age would have a negative
    effect on the DI trust fund while at the same time improving the OASI trust
    fund balance.

    The Reform Proposals The reform proposals we studied had a range of effects
    on the trust funds' Differ in Their Effect on solvency as measured by the
    actuarial balance. The actuarial balance as Solvency

    calculated by the Office of the Chief Actuary is the difference between the
    present value of the Social Security program's revenues and costs over a
    75year period and is expressed as a percentage of taxable payroll. 16 If
    revenues exceed costs, the actuarial balance is positive; if costs exceed
    revenues, the actuarial balance is negative, indicating a deficit. In 1999,
    under current law, the Social Security program faced an actuarial deficit
    equal to 2. 07 percent of taxable payroll. 17 This figure represents the
    amount of the payroll tax rate increase in 1999 that would establish
    actuarial balance in the Social Security trust funds over the subsequent 75
    years. In

    other words, increasing the payroll tax rate from the current 12. 4 percent
    to 14. 47 percent of payroll would establish actuarial balance in the trust
    funds.

    The Office of the Chief Actuary provides annual estimates of the actuarial
    balance for the combined OASI and DI trust funds under current law and, when
    requested by the Congress or the executive branch, estimates of the 16 The
    Social Security program's revenues include the sum of the trust fund balance
    at the

    beginning of the period plus the total income during the period. The costs
    include the outgo during the period plus the targeted trust fund level at
    the end of the period equal to the following year's outgo.

    17 This is the actuarial deficit as presented in the 1999 Trustees Report,
    based on the intermediate cost assumptions. We used it because the Office of
    the Chief Actuary scored the proposals we analyzed using the assumptions of
    the 1999 Trustees Report. According to the 2000 Trustees Report, the
    actuarial deficit is 1.89.

    actuarial balance under reform proposals. 18 The estimates of the actuarial
    balance under current law and each of the reform proposals we studied are
    presented in table 4. The actuaries estimated that the trust funds' deficit
    of 2.07 percent of taxable payroll under current law would either be sharply
    reduced or become a surplus for the combined trust funds under the reform
    proposals we studied. A surplus in the combined trust funds could mean a
    surplus in one trust fund and a deficit in the other. However, a
    reallocation of payroll tax rates between the two funds would be expected in
    this case.

    Table 4: Actuarial Balance of Social Security Trust Funds Under Current Law
    and Selected Reform Proposals

    OASI and DI trust funds

    Current law 2.07% President's proposal 0.80 Kasich +0.00/+ 0.24 a Kolbe-
    Stenholm +0.07 Archer- Shaw +0.09 b Gregg- Kerrey- Breaux- Grassley +0.28 a
    Under the Kasich proposal, the IA is voluntary. If everyone opts for the IA,
    the actuarial balance is 0. If no one opts for the IA, the actuarial balance
    is 0.24.

    b Under the Archer- Shaw proposal, the payroll tax rate would be reduced
    from 12.4 to 9.9 in 2050 and 8.9 in 2060. Source: Office of the Chief
    Actuary, memorandums to the chief actuary on the effects of selected Social
    Security reform proposals. Estimates are based on the 1999 Trustees Report.

    The President's proposal would reduce the actuarial deficit but is not
    expected to eliminate it. This would be achieved through general fund
    transfers every year from 2011 to 2050 and by allowing some limited
    investment in equities, which have a higher rate of return than do the
    government bonds in which the trust funds have traditionally been

    18 The Office of the Chief Actuary does not necessarily provide estimates of
    the actuarial balance under the reform proposals separately for the DI and
    the OASI trust funds. For major solvency proposals, the OASDI program is
    generally considered on a combined basis, with the presumption of
    reallocation of the tax rates as needed.

    invested. 19 Estimates for two other proposals result in a small surplus for
    the combined trust funds. The Kolbe- Stenholm proposal would generate its
    surplus through benefit cuts and general fund transfers. 20 In the
    ArcherShaw proposal, general fund transfers would finance the contributions
    to the IAs that the proposal would establish. The proceeds from these

    accounts would be transferred to the trust funds when benefits are received.
    The proposal also calls for reducing payroll taxes in response to the
    additional trust fund revenue expected to accrue from the proceeds of these
    IAs. The other proposals we examined would result in larger estimated

    actuarial surpluses for the combined trust funds. The Kasich proposal would
    accomplish this by reducing the initial level of insurance benefits and then
    further decreasing insurance benefits by a fixed percentage for each year of
    contribution to an IA, as well as by borrowing from the general fund. The
    Gregg- Kerrey- Breaux- Grassley proposal would achieve its surplus through a
    mix of benefit cuts and revenue transfers that would offset the loss of
    trust fund revenues resulting from the redirection of a portion of the
    payroll taxes to the IAs.

    The reform proposals we studied differ in the magnitude of the stipulated
    transfers from general revenue. Transfers are smaller under the
    KolbeStenholm and Gregg- Kerrey- Breaux- Grassley proposals, which contain a
    number of provisions to achieve solvency by changing benefits or revenues.
    Under the Kolbe- Stenholm proposal, general revenue transfers range from 0.
    03 percent of taxable payroll in 2000 to 0.80 percent of taxable

    payroll in 2060. General revenue transfers under the Gregg- Kerrey-
    BreauxGrassley proposal range from 0.6 percent of taxable payroll in 2000 to
    1.2 percent of taxable payroll in 2060. General revenue transfers are larger
    under the proposals with fewer alternative provisions for attaining
    solvency. Under the Kasich proposal, for example, the magnitude of the
    transfers ranges from 1.17 percent of taxable payroll in 2000 to 1.57
    percent of taxable payroll around 2030. 21 Under the President's proposal,
    transfers

    range from a high of 2.41 percent of taxable payroll to a low of 0.52
    percent 19 The general fund means the accounts for receipts not earmarked by
    law for a specific purpose, the proceeds of general borrowing, and the
    expenditure of this money. Transfers between the general fund and the trust
    funds do not affect the surplus or deficit in the government's unified
    budget.

    20 These benefit cuts and revenue transfers would offset the loss of revenue
    to the trust funds that would result from the IAs.

    of taxable payroll between 2011 and 2050. Finally, the Archer- Shaw proposal
    calls for a general revenue transfer equal to 2 percent of taxable payroll
    beginning in 2000.

    Most, but Not All, Proposal Although most provisions in the proposals we
    examined potentially have a

    Provisions Would Affect the positive effect on the solvency of the DI trust
    fund, some provisions would

    DI Trust Fund Positively have a negative effect. The President's proposal
    has two provisions- the transfer of funds from general revenue to the
    combined OASI and DI trust funds and the investment of a portion of these
    funds in equities. According

    to the Office of the Chief Actuary, both provisions would be expected to
    have a positive effect on the solvency of the DI trust fund. The Archer-
    Shaw proposal calls for a gradual transfer of the income from the IA
    balances, which are financed from general revenue, to the trust funds. In
    the case of disabled workers, the income from the IA balances would be
    transferred to the DI trust fund. This provision also would have a positive
    effect on the DI trust fund. The Kasich proposal contains three provisions
    that would have a positive effect on DI trust fund solvency: the indexing of
    benefits to prices rather than to wages, which reduces benefits; the
    reduction in benefits for individuals who opt to contribute a portion of
    their payroll tax to an IA; and the borrowing of funds from general revenue.
    22 The loss of payroll tax revenue associated with individuals opting for
    IAs would increase the DI trust fund's deficit, and the general fund loans
    are designed to compensate for this. 23

    Both the Kolbe- Stenholm and the Gregg- Kerrey- Breaux- Grassley proposals
    contain multiple provisions that would affect DI trust fund solvency.
    Provisions that reduce the COLA and change the PIA formula so as to reduce
    benefits for disabled workers lower program costs and, therefore, improve
    the actuarial balance for the DI program. However, provisions such as the
    redirection of payroll taxes to IAs and the establishment of a minimum
    benefit have potentially a negative effect on the DI trust fund.

    21 Under the Kasich proposal, this general revenue transfer is considered a
    loan that will be paid off beginning in 2060. 22 Although the Kasich
    proposal contains a provision describing a loan from general revenue, this
    loan is, in effect, very similar to a general revenue transfer. There would
    be no principal repayment or interest repayment on this loan until 60 years
    into the future.

    23 For the version of the Kasich proposal in which all individuals are
    assumed to opt for the IA, the version we analyze in this report, the Office
    of the Chief Actuary estimates only the effect of the entire proposal, not
    the effects of the individual provisions.

    Redirecting payroll taxes reduces revenues to the trust fund while
    establishing a minimum benefit increases program costs for beneficiaries who
    were receiving benefits below the minimum. Even provisions that appear to be
    focused on retirement benefits can have an effect on the DI

    trust fund. For example, increasing the retirement age also increases the
    age at which disability insurance benefits are converted to retirement
    insurance benefits. 24 As a result, disability beneficiaries remain on the
    DI program longer, increasing costs to the DI program. 25 We were able to
    use the SSASIM model to estimate the effects on solvency of certain of the
    provisions in the reform proposals. Our estimates using the model are based
    on the intermediate assumptions reported in the 1999 Social Security
    Trustees Report because the SSA's Office of the Chief Actuary used these
    assumptions to score the Social Security reform proposals we analyzed. Table
    5 presents our results. Reductions in benefits have a positive effect on DI
    trust fund solvency. The increase in the

    retirement age results in the expected negative effect on solvency of the DI
    trust fund.

    24 Also, the resulting decrease in OASI benefit levels might cause some
    individuals to apply for DI benefits rather than waiting to retire and apply
    for OASI benefits, as they would otherwise do. If such an increase in
    applications were to result in an increase in DI beneficiaries, there could
    be an increase in costs to the DI program and a resulting increase in the
    actuarial deficit. According to recent estimates that SSA's Office of the
    Chief Actuary has made, this effect is relatively small.

    25 Social Security Reform: Implications of Raising the Retirement Age (GAO/
    HEHS- 99- 112, Aug. 27, 1999).

    Table 5: Estimated Change in Current Law Actuarial Balance for Selected
    Reform Provisions

    OASI DI Actuarial balance

    Current law 1.70% 0.38%

    Change in actuarial balance

    Reduction in COLA (Gregg- Kerrey- Breaux- Grassley) +0.58 +0.06 Indexing
    benefits to prices (Kasich) +1.90 +0.40 Raising retirement age (Gregg-
    Kerrey- Breaux- Grassley) +0.18 0.01 Source: GAO estimates using the SSASIM
    model. These estimates are consistent with independent estimates produced by
    the Office of the Chief Actuary. Certain Reform

    Two reform proposals we studied either maintain current- law benefits-
    Proposals Could the President's proposal- or guarantee that the beneficiary
    would receive at least the amount of current- law benefits- the Archer- Shaw
    proposal. Reduce Benefit Income

    The remaining three reform proposals- Kasich, Kolbe- Stenholm, and for
    Disabled Gregg- Kerrey- Breaux- Grassley- would affect the levels of
    insurance Beneficiaries

    benefits DI and OASI beneficiaries receive by changing the PIA formula for
    calculating initial benefits, reducing the COLA, raising the retirement age,
    or increasing the number of years of earnings used in computing benefits.
    How a beneficiary's total benefit income (reduced insurance benefits plus IA
    income) under these three proposals compares with the benefits received
    under a maintain- benefits scenario or a maintain- tax- rates scenario
    depends both on the extent of the decrease in the insurance

    benefits and on the amount of income received from the IA. Our maintain-
    benefits scenario achieves solvency through increased payroll taxes while
    current- law benefits are maintained. 26 Our maintain- taxrates scenario
    achieves solvency through benefit reductions while holding current payroll
    tax rates at today's levels. These two scenarios represent a range of
    benefit levels, with the maintenance of current- law benefits being

    26 The maintain- benefits scenario could also be funded through transfers
    from the general fund to the trust fund. For our analysis of the effect of
    Social Security reform on benefits, the funding source is not material.
    However, the source of funding- whether revenue transfers or payroll tax
    increases- will have implications for individuals' net earnings and for the
    economy as a whole.

    at the upper end and the reduced benefits necessary for the maintenance of
    current payroll taxes being at the lower end. We compared the benefit income
    received under each of the three proposals with that received under the
    maintain- benefits scenario and the maintain- tax- rates scenario for each
    of three beneficiary groups with the selected characteristics that we
    simulated: disabled workers, dependents of disabled workers (including
    spouses, children younger than 18, and

    adult disabled children), and adult disabled children who are dependents of
    retired workers. 27 We made the comparisons under each of several different
    assumptions about the year in which the worker was born, the worker's
    earnings level, and the worker's age when the worker first received DI
    benefits. 28 We chose the ages of initial benefit receipt to reflect SSA
    data indicating that individuals are receiving DI benefits at younger ages.
    29 For the IAs in our analysis, we assumed that individuals would have
    portfolios with a smaller percentage invested in equities as they got older.
    We assumed the return on equities would be a constant, inflation- adjusted 7

    percent per year, which reflects the long- term historical average return on
    equities.

    Some Reform Proposals According to our estimates, the disabled beneficiaries
    with the selected

    Would Reduce Benefit characteristics we simulated would, in general, receive
    higher benefits Income

    under the maintain- benefits scenario than they would under the Kasich,
    Kolbe- Stenholm, or Gregg- Kerrey- Breaux- Grassley proposals. Figures 1 and
    2 present the results for workers as well as their dependents. The

    workers were born in 1986 and have low or average earnings and, in the 27 In
    the following analysis, we use the present value of all lifetime benefit
    income received by the beneficiary to compare proposals and scenarios. The
    present value of benefit income is the equivalent value, at a point in time,
    of the entire stream of insurance benefits and IA income the individual
    receives in his or her lifetime. In our analysis, lifetime benefit income
    was discounted using the Treasury bond rate. 28 See app. II for a discussion
    of these assumptions. 29 We focus on individuals who begin receiving DI
    benefits at age 45 for the following reasons. The average age of new
    beneficiaries in 1999 was slightly younger than 50, compared with 30 years
    ago, when the average age was consistently above 50. Further, most
    terminations of benefits result from death or retirement. Thus,
    beneficiaries are staying in the program longer, and it is important to
    understand how Social Security reform affects these younger disabled
    workers. Additional information on the characteristics of DI beneficiaries
    is in app. II.

    case of disabled workers, first receive DI benefits at the age of 45 and
    never work again.

    Figure 1: Lifetime Benefit Income of Low- Earnings Worker and Dependents
    Under Selected Proposals and Alternative Solvency Scenarios

    Present Value of Benefit Income (Dollars in Thousands)

    Disabled Worker 450

    Disabled Worker Dependent 400

    Adult Disabled Child 350 300 250 200 150 100

    50 0

    Maintain Benefits Gregg- Kerrey

    Kasich Kolbe- Stenholm Maintain Tax Rates Breaux- Grassley

    Proposals/ Scenarios

    Note: Assumes 1986 birth cohort. Disabled worker receives DI first at age 45
    and never works again. Adult disabled child benefit is based only on retired
    worker's benefit. The alternative solvency scenarios are the maintain-
    benefits scenario, which achieves solvency through increased payroll taxes
    while current- law benefits are maintained, and the maintain- tax- rates
    scenario, which achieves solvency through benefit reductions while
    maintaining current payroll tax rates.

    Figure 2: Lifetime Benefit Income of Average- Earnings Worker and Dependents
    Under Selected Proposals and Alternative Solvency Scenarios

    Present Value of Benefit Income (Dollars in Thousands)

    Disabled Worker 700

    Disabled Worker Dependent Adult Disabled Child 600

    500 400 300 200 100

    0 Maintain Benefits

    Gregg- Kerrey Kasich Kolbe- Stenholm Maintain Tax Rates Breaux- Grassley

    Proposals/ Scenarios

    Note: Assumes 1986 birth cohort. Disabled worker receives DI first at age 45
    and never works again. Adult disabled child benefit is based only on retired
    worker's benefit. The alternative solvency scenarios are the maintain-
    benefits scenario, which achieves solvency through increased payroll taxes
    while current- law benefits are maintained, and the maintain- tax- rates
    scenario, which achieves solvency through benefit reductions while
    maintaining current payroll tax rates.

    These reform proposals would reduce insurance benefits while providing
    income from the IAs. Under these proposals, it is possible that the IA
    income might compensate for the decline in insurance benefits resulting from
    other provisions. However, this is less likely for disabled- worker
    beneficiaries than for retired- worker beneficiaries because disabled
    workers are likely to have shorter work histories and thus have smaller IA

    balances. 30 The reductions in benefits resulting from the decline in the
    COLA and the changes in the PIA formula are so great that the income from 30
    In addition, under the Gregg- Kerrey- Breaux- Grassley and Kolbe- Stenholm
    proposals, disabled workers would in most cases not be able to gain access
    to the income from their IA accounts until they reached retirement age.
    Therefore, depending on the age when they begin receiving DI benefits, they
    could be receiving reduced insurance benefits for a long time before
    receiving IA income. See table 7 in app. I and accompanying text for a
    fuller discussion of this issue.

    the IA would be insufficient to completely compensate for this loss for the
    disabled- worker beneficiaries with the selected characteristics that we
    examined. Disabled workers with low earnings and their dependents would
    receive greater benefit income under the Gregg- Kerrey- Breaux- Grassley
    proposal than under the maintain- benefits solvency scenario. However, this
    higher benefit income is largely the result of changes in the PIA formula
    that increase the progressivity of the benefit structure. 31 For the
    proposals we examined, we included the income from the IA only in the
    benefit income of the disabled or retired worker, not in that of the

    worker's dependents, since apportioning the IA income among family members
    is an individual matter and would vary by household. 32 Consequently,
    benefit income for dependents of disabled or retired

    workers would be reduced under the Gregg- Kerrey- Breaux- Grassley, Kasich,
    and Kolbe- Stenholm proposals not only because of reductions in the
    insurance benefit but also because it does not include income from
    individual accounts. In addition, the insurance benefits of dependents

    include only the amount received during the years in which the worker on
    whose earnings record the benefits are payable is receiving insurance
    benefits.

    Contrary to the results of our comparisons with the maintain- benefits
    scenario, in our comparison of each of the three proposals with the
    maintain- tax- rates scenario, we found that in most cases the beneficiary
    would receive higher benefit income under the proposals than under the
    scenario. However, dependents of low- earner disabled workers under the
    Kasich proposal would receive benefit income that is less than under the

    maintain- tax- rates scenario. Also, adult disabled children of retired
    workers would receive somewhat lower benefit income under all three

    31 Adult disabled children who are dependents of retired workers also
    benefit from these changes in the PIA formula that increase the
    progressivity of the benefit structure. However, adult disabled children are
    also, as OASI beneficiaries, subject to another PIA provision in the
    proposal that decreases benefits.

    32 In this report, we do not consider the effect on benefits resulting from
    the application of the maximum family benefit. For further discussion of
    this issue, see app. II.

    proposals in almost all cases. 33 These results are presented in figures 1
    and 2. The benefit income received under the three proposals would generally
    be greater than the benefits received under the maintain- tax- rates
    solvency scenario because the proposals have provisions for achieving
    solvency, such as general revenue transfers, in addition to reducing
    benefits. As a result, the insurance benefits would not have to decline as
    much as in the maintain- tax- rates scenarios. Further, the benefit income
    workers would receive under the proposals includes income from IAs.

    Most Proposal Provisions We also examined individual provisions within the
    three proposals to Would Reduce Insurance

    assess their contribution to the change in the level of insurance benefits
    Benefits

    received. Reductions in the COLA instituted under the Gregg- KerreyBreaux-
    Grassley and Kolbe- Stenholm proposals would decrease insurance benefits
    relatively little compared with the maintain- benefits scenario for both
    disabled workers and their beneficiaries and for adult disabled children of
    retired workers. 34 Figure 3 presents the estimated effects of the decrease
    in the COLA on workers born in 1986 who first receive disability benefits at
    the age of 45 and never work again. The pattern of change in the present
    value of benefit income for dependents of disabled workers and for adult
    disabled children who are dependents of retired workers is similar to that
    shown in figure 3 for disabled workers.

    33 Under the Gregg- Kerrey- Breaux- Grassley and Kolbe- Stenholm proposals,
    the insurance benefits of adult disabled children are subject to the same
    reductions as those of disabled beneficiaries as well as to an additional
    PIA reduction from which disabled beneficiaries are exempt. The Kasich
    proposal adjusts the PIA formula so that benefits at all earnings levels are
    reduced. Under the maintain- tax- rates scenario, we adjust the PIA formula
    so that the benefits at the lowest levels are not reduced; only the benefits
    at the higher levels are

    reduced. Consequently, the benefits for lower earners would be smaller under
    the Kasich proposal than under the maintain- tax- rates scenario. For a more
    detailed description of how we adjusted the PIA formula, see app. II. 34 The
    difference across proposals in the magnitude of the effect reflects the
    extent of reduction specified- 0.33 percentage point in the Kolbe- Stenholm
    proposal and 0. 5

    percentage point in the Gregg- Kerrey- Breaux- Grassley proposal. The effect
    of a COLA reduction is compounded over time. The cumulative effect of a 0.5
    percentage point reduction over a period of 30 years is 13. 5 percent.

    Figure 3: Comparison of COLA Changes to Lifetime Insurance Benefits of
    Disabled Workers With Alternative Solvency Scenarios

    Present Value of Insurance Benefits (Dollars in Thousands)

    Average Earner 700

    Low Earner 600 500 400 300 200 100

    0 Maintain Benefits

    Gregg- Kerry Kolbe- Stenholm Maintain Tax Rates Breaux- Grassley

    Proposals/ Scenarios

    Note: Assumes disabled worker born in 1986, receives DI first at age 45, and
    never works again. The Kasich proposal is not included because it does not
    have a COLA provision. The alternative solvency scenarios are the maintain-
    benefits scenario, which achieves solvency through increased payroll taxes
    while current- law benefits are maintained, and the maintain tax- rates
    scenario, which achieves

    solvency through benefit reductions while maintaining current payroll tax
    rates.

    Changes in the PIA formula, however, generally result in large reductions in
    insurance benefits relative to the maintain- benefits scenario. The one
    exception is a provision of the Gregg- Kerrey- Breaux- Grassley proposal
    that would increase benefits for workers with certain levels of earnings,
    thereby

    increasing benefits for low earners and decreasing benefits by a relatively
    smaller amount for average earners. Figure 4 displays the effects on
    disabled workers of changes in the benefit calculation formula. The pattern
    in the present value of benefit income for the two other categories of
    beneficiaries is similar to that shown in figure 4 for disabled workers.

    Figure 4: Comparison of PIA Changes to Lifetime Insurance Benefits of
    Disabled Workers With Alternative Solvency Scenarios

    Present Value of Insurance Benefits (Dollars in Thousands)

    Average Earner 700

    Low Earner 600 500 400 300 200 100

    0 Maintain Benefits

    Gregg- Kerrey Kasich Kolbe- Stenholm Maintain Tax Rates Breaux- Grassley

    Proposals/ Scenarios

    Note: For PIA changes that affect both disabled and retired workers. Assumes
    disabled worker born in 1986, receives DI first at age 45, and never works
    again. The alternative solvency scenarios are the maintain- benefits
    scenario, which achieves solvency through increased payroll taxes while
    current- law benefits are maintained, and the maintain tax- rates scenario,
    which achieves solvency through benefit reductions while maintaining current
    payroll tax rates.

    The insurance benefits of adult disabled children who are dependents of
    retired workers would also be significantly decreased by an additional
    change in the PIA formula applicable only to OASI benefits under the Gregg-
    Kerrey- Breaux- Grassley and Kolbe- Stenholm proposals. Figure 5 displays
    the effects on the insurance benefits of adult disabled children resulting
    from this PIA change. 35

    35 We also analyzed the effect on benefits of increases in the NRA and in
    the number of years of earnings used to compute benefits. These provisions
    affect only the benefits of retired workers and their dependents. The
    provision increasing the NRA had little effect on benefits because the NRA
    (67) is the same for the 1986 birth cohort under the maintain- benefits
    scenario and the Gregg- Kerrey- Breaux- Grassley proposal and only slightly
    higher under the Kolbe- Stenholm proposal. The provision increasing the
    number of years in the benefit calculation had little effect because we
    assumed the retired worker was steadily employed with no years of low or no
    earnings.

    Figure 5: Comparison of PIA Changes to Lifetime Insurance Benefits With
    Alternative Solvency Scenarios for Adult Disabled Child Dependent of Retired
    Worker Present Value of Insurance Benefits (Dollars in Thousands)

    Average Earner 120

    Low Earner 100

    80 60 40 20

    0 Maintain Benefits

    Gregg- Kerry Kolbe- Stenholm Maintain Tax Rates Breaux- Grassley

    Proposals/ Scenarios

    Note: For PIA changes that affect only retired workers. Assumes retired
    worker born in 1986. Kasich proposal does not have PIA changes that affect
    only retired workers. The alternative solvency scenarios are the maintain-
    benefits scenario, which achieves solvency through increased payroll taxes
    while current- law benefits are maintained, and the maintain tax- rates
    scenario, which achieves

    solvency through benefit reductions while maintaining current payroll tax
    rates.

    As we stated earlier and as is shown in figure 3, reductions in the COLA
    result in relatively small declines in the level of current- law benefits.
    Consequently, the levels of insurance benefits that would be received under
    this provision would be greater than the benefit income received under the
    maintain- payroll- tax- rates scenario, in which benefits would be reduced
    to levels supportable by current payroll tax rates. Despite the large
    reductions in insurance benefits resulting from the changes in the PIA
    formula, most disabled beneficiaries would be better off under this
    provision in the

    proposals than under the maintain- tax- rates scenario. The exception occurs
    for all three types of low- earner beneficiaries under the Kasich proposal's
    change in the PIA formula. This provision in the Kasich proposal indexes
    initial benefits to prices rather than to wages, resulting in a sharp
    decline in benefits. The effects of the PIA changes on the disabled worker
    are shown in figure 4.

    Provisions for Individual According to our estimates, the effect on the
    disabled worker's benefit

    Accounts Would Slightly income of the IA provision alone is positive under
    the Gregg- KerreyBreaux-

    Grassley, Kasich, and Kolbe- Stenholm proposals. 36 Benefit income Increase
    Benefit Income for

    would increase the most under the Kolbe- Stenholm proposal because the
    Disabled Workers

    IA income does not reduce insurance benefits. Benefit income under the
    Gregg- Kerrey- Breaux- Grassley proposal would also increase but by less
    because the proposal reduces insurance benefits by an amount that reflects
    the present value of the government contributions to the IA plus the
    interest that would have accrued had these contributions been invested at
    the interest rate earned by the OASDI trust funds. 37 The benefit income
    received under the Kasich proposal would also be less than that received

    under the Kolbe- Stenholm proposal because under the Kasich proposal
    insurance benefits would be reduced by a fixed percentage for each year of
    contributions to the IA. 38 Figure 6 shows the effect of the IA provision
    for

    both the low- earning and the average- earning disabled worker. 36 Our
    analysis assumes that the IA balance is used up by the account holder during
    his or her lifetime so that the treatment of the balance at death is not an
    issue. 37 DI beneficiaries are subject to this offset when they gain access
    to their IA balances, which for most DI beneficiaries would occur at
    retirement age. (See app. I.) Until the beneficiary reaches retirement age,
    his or her benefits are unaffected by the balance in the IA.

    38 IAs under the Kasich proposal would be voluntary. Our analysis looked at
    beneficiaries who opt for the IA because we were asked to analyze the
    effects of IA provisions in the proposals.

    Figure 6: Lifetime Benefit Income of Disabled Workers Under IA Provisions
    and Alternative Solvency Scenarios

    Present Value of Benefit Income (Dollars in Thousands)

    Average Earner 700

    Low Earner 600 500 400 300 200 100

    0 Maintain Benefits

    Gregg- Kerrey Kasich Kolbe- Stenholm Maintain Tax Rates Breaux- Grassley

    Proposals/ Scenarios

    Note: Assumes disabled worker born in 1986, receives DI first at age 45, and
    never works again. Under the Gregg- Kerrey- Breaux- Grassley and Kasich
    proposals, the insurance benefit is reduced by an amount reflecting the
    contribution to the IA. We assume all IA income is received by the disabled
    worker and not by dependents. The alternative solvency scenarios are the
    maintain- benefits scenario, which achieves solvency through increased
    payroll taxes while current- law benefits are maintained, and the maintain
    tax- rates scenario, which achieves solvency through benefit reductions
    while maintaining current payroll tax rates.

    In our analysis, we assigned the income from the IA to the disabled or
    retired worker, not to the worker's dependents, because the apportionment of
    the IA income among family members is an individual matter and would vary by
    household. Thus, our estimates reflect the most that the worker would
    receive from the IAs, whereas our estimates for the dependents reflect the
    most that their benefits would be reduced under these proposals.
    Accordingly, for the dependent of the disabled worker and for the adult
    disabled child, the IA will not increase benefit income because we assumed
    that these beneficiaries, unlike the worker, receive no income from the IA.
    Under the Kolbe- Stenholm proposal, there would be no

    reduction in the benefit income of dependents because changes in IA income
    do not affect the level of insurance benefits. However, the Kasich proposal
    would decrease the insurance benefit of the worker by a set percentage for
    each year of contributions to the IA. The Gregg- KerreyBreaux- Grassley
    proposal would reduce the insurance benefit of the

    worker by an amount that reflects the present value of the government
    contribution to the IA plus the interest that would have accrued had these
    contributions been invested at the interest rate the OASDI trust funds earn.
    The insurance benefit that the dependent receives is a proportion of what
    the worker receives. Consequently, the insurance benefit that the

    dependent receives would be reduced under our assumption that dependents
    receive no compensating income from the IA under the GreggKerrey- Breaux-
    Grassley and Kasich proposals. (See figures 7 and 8.) 39

    Figure 7: Lifetime Benefit Income of Dependent of Disabled Worker Under IA
    Provisions and Alternative Solvency Scenarios

    Present Value of Benefit Income (Dollars in Thousands)

    Average Earner 350

    Low Earner 300 250 200 150 100

    50 0

    Maintain Benefits Gregg- Kerrey

    Kasich Kolbe- Stenholm Maintain Tax Rates Breaux- Grassley

    Proposals/ Scenarios

    Note: Assumes disabled worker born in 1986, receives DI first at age 45, and
    never works again. Under the Gregg- Kerrey- Breaux- Grassley and Kasich
    proposals, the insurance benefit is reduced by an amount reflecting the
    contribution to the IA. We assume all IA income is received by the disabled
    worker and not by dependents. The alternative solvency scenarios are the
    maintain- benefits scenario, which achieves solvency through increased
    payroll taxes while current- law benefits are maintained, and the maintain-
    tax- rates scenario, which achieves solvency through benefit reductions
    while maintaining current payroll tax rates.

    39 See app. I for how the IAs differ across proposals. The effect of IAs on
    lifetime benefit income also depends on the legislated characteristics of
    the IA (for example, how much can be invested and in what types of assets)
    and the assumptions about the return on investments, administrative costs,
    and so on.

    Figure 8: Lifetime Benefit Income of Adult Disabled Child Dependent of
    Retired Worker Under IA Provisions and Alternative Solvency Scenarios

    Present Value of Benefit Income (Dollars in Thousands)

    Average Earner 120

    Low Earner 100

    80 60 40 20

    0 Maintain Benefits

    Gregg- Kerrey Kasich Kolbe- Stenholm Maintain Tax Rates Breaux- Grassley

    Proposals/ Scenarios

    Note: Assumes retired worker born in 1986. Under the Gregg- Kerrey- Breaux-
    Grassley and Kasich proposals, the insurance benefit is reduced by an amount
    reflecting the contribution to the IA. We assume all IA income is received
    by the retired worker and not by dependents. The alternative

    solvency scenarios are the maintain- benefits scenario, which achieves
    solvency through increased payroll taxes while current- law benefits are
    maintained, and the maintain tax- rates scenario, which achieves solvency
    through benefit reductions while maintaining current payroll tax rates.

    The IA provision would increase benefit income for disabled workers compared
    with the maintain- benefits scenario. Consequently, the benefit income of
    the disabled workers we examined would also be greater than the benefits
    available under the maintain- tax- rates scenario. In our

    analysis, we assigned all the IA income to the disabled or retired worker
    and none to the worker's dependents. As a result, under the Gregg-
    KerreyBreaux- Grassley and Kasich proposals, dependents would experience the
    reduction in insurance benefits related to the existence of an IA but would

    not receive any compensating income from the IA, under our assumptions.
    However, even the reduced insurance benefits that dependents would receive
    would be greater than the benefits they would receive under the maintain-
    tax- rates scenario.

    In the analysis presented so far, we have provided graphs showing the effect
    of the reform proposals on the worker who first receives DI benefits at the
    age of 45 and never works again. 40 However, the income from the IA

    is affected by the number of years for which contributions are made to the
    IA and, therefore, by the age at which the worker leaves the labor force and
    begins receiving DI benefits. To see how the income received from the IA
    would vary by age of first receipt of DI benefits, we compared the income
    received from the IA by workers who began receiving DI benefits at

    different ages. Figures 9 and 10 provide the net addition of the IAs to
    benefit income- that is, the addition to benefit income after reductions are
    made in the insurance benefit in response to the income from the IA. Figures
    9 and 10 indicate that the income received from the IA increases with the
    age of first receipt of DI benefits. The later that DI benefits are

    received, the greater the number of years in the labor force, the number of
    years funds are deposited in the IA, and the number of years the IAs accrue
    compound interest. The addition of IA income to benefit income across ages
    would be greatest under the Kolbe- Stenholm proposal, which would not reduce
    the insurance benefit in response to the income received from the IA. The
    Gregg- Kerrey- Breaux- Grassley proposal would reduce the insurance benefit
    by an amount that reflects the present value of the government contributions
    to the IA plus the interest that would have accrued had these contributions
    been invested at the interest rate earned by the OASDI trust funds. The
    Kasich proposal would reduce the insurance benefit by one- third of a
    percent for each year of participation in the IA.

    40 We assumed in our analysis that the worker remains in the labor force
    until he or she begins receiving DI benefits.

    Figure 9: Net Addition of IA to Current- Law Lifetime Benefit Income Under
    Selected Reform Proposals: Low- Earnings Worker Disabled at Various Ages

    Present Value of Benefit Income (Dollars in Thousands)

    40,000 Disabled at 35

    35,000 Disabled at 45

    Disabled at 55 30,000

    25,000 20,000 15,000 10,000

    5,000 0

    Gregg- Kerrey- Breaux- Grassley Kasich Kolbe- Stenholm Reform Proposals

    Note: Assumes 1986 birth cohort. Under the Gregg- Kerrey- Breaux- Grassley
    and Kasich proposals, the insurance benefit is reduced by an amount
    reflecting the contribution to the IA. We assume all IA income is received
    by the disabled worker, not by dependents.

    Figure 10: Net Addition of IA to Current- Law Lifetime Benefit Income Under
    Selected Reform Proposals: Average- Earnings Worker Disabled at Various Ages

    Present Value of Benefit Income (Dollars in Thousands)

    90,000 Disabled at 35

    80,000 Disabled at 45

    Disabled at 55 70,000

    60,000 50,000 40,000 30,000 20,000 10,000

    0 Gregg- Kerrey- Breaux- Grassley

    Kasich Kolbe- Stenholm Reform Proposals

    Note: Assumes 1986 birth cohort. Under the Gregg- Kerrey- Breaux- Grassley
    and Kasich proposals, the insurance benefit is reduced by an amount
    reflecting the contribution to the IA. We assume all IA income is received
    by the disabled worker, not by dependents.

    Certain Reform Some Social Security reform proposals could increase costs
    for the SSI Proposals Could program. Individuals receiving benefits from
    both Social Security (DI or OASI) and SSI might become eligible for larger
    SSI benefits if their Social Increase SSI Program

    Security benefits decrease as a result of reform. In addition, some Social
    Costs Security beneficiaries not currently eligible for SSI might become
    eligible if their Social Security benefits declined as a result of reform.
    As we stated earlier, we estimated that three Social Security reform
    proposals- Gregg- Kerrey- Breaux- Grassley, Kasich, and Kolbe- Stenholm-

    would lower Social Security benefit income, which includes income from IAs,
    in most of the cases we studied. For DI and OASI beneficiaries who also
    receive SSI, the decrease in Social Security benefit income would lower
    their unearned income, which means that their SSI benefit would

    increase. 41 This would have no effect on the number of recipients but would
    increase the cost to the program. For the beneficiaries who receive only
    Social Security and not SSI, the previously mentioned decrease in benefit
    income would lower unearned income, which would make some eligible for SSI
    benefits. This would increase both the number of beneficiaries and the cost
    to the program. However, the full effect on SSI

    would not be felt immediately because most of the individual provisions
    within these proposals are to be phased in over time and in many cases are
    not to be completely in effect until 2020. Given the complexity of the
    interactions between Social Security and SSI and the difficulty of
    projecting SSI caseloads so far into the future, it would be extremely

    difficult to estimate precisely what the effects of reform proposals would
    be on SSI program costs.

    Concluding In the cases we studied, our analyses indicate that most disabled
    Observations beneficiaries would receive higher benefits under Social
    Security reform proposals than under a solvency scenario that maintained
    payroll tax rates while reducing benefits. However, most disabled
    beneficiaries with the characteristics we studied would receive lower
    benefits under reform than

    under a solvency scenario that maintained current- law benefits while
    raising payroll taxes. This reduction in benefits under reform to levels
    below that of current law would occur even though we assumed an optimal set
    of conditions for disabled beneficiaries: full- time work until receipt of
    DI benefits and low administrative costs and no annuitization costs for the
    IAs. Consequently, the typical DI beneficiary could receive lower benefits
    than the DI beneficiaries with the selected characteristics we studied.

    The proposals we studied treat DI beneficiaries similarly to OASI
    beneficiaries. However, the circumstances facing disabled workers differ
    from those facing retired workers. For example, the disabled worker's
    options for alternative sources of income, especially earnings- related
    income, to augment the reduced benefits are likely to be more limited than
    are those for the retired worker. Further, DI beneficiaries are entering the
    program at younger ages and remaining in the program in most cases until
    death or retirement. Thus, disabled beneficiaries could be subject to these

    41 If the individual account accumulations are treated as assets with regard
    to determining SSI eligibility, some low- income individuals may lose SSI
    benefits. Whether this loss of benefits in the case of disabled
    beneficiaries would occur when they first received benefits

    or when they reached retirement age depends on the proposal.

    reductions in benefits for many years. They will also have smaller balances
    in their IAs because of fewer working years in which to make IA
    contributions and accrue compounded interest. In addition, under several
    proposals, disabled beneficiaries cannot gain access to income from
    individual accounts until they reach retirement age. These differences
    between disabled and retired workers suggest that Social Security reform
    proposals should be viewed not only in light of their effects on retired

    workers but also explicitly for their effect on disabled beneficiaries and
    their families.

    Agency Comments We provided a draft of this report to SSA. In commenting on
    this report, the agency noted that we addressed an important topic that has
    until now received little attention. Specifically, SSA highlighted two
    points in our report as being important for policy makers considering
    changes to Social Security: that individual accounts might not fully offset
    Social Security insurance benefit reductions for some beneficiaries and that
    SSI benefits might increase as they compensate for the decline in DI
    benefits resulting from Social Security reform. However, the agency had some
    concerns about our use of a “best case” scenario to estimate the
    effects of policy options and about the assumptions underlying this
    “best case” scenario, citing specifically earnings levels, life
    expectancy, and investment return assumptions that SSA thought did not
    reflect the actual situation of disabled beneficiaries. On the basis of
    these concerns, the agency suggested that we give the report balance by
    adding a “worst case” scenario. SSA also expressed concern
    regarding our focus on lifetime benefits, a measure that it believes does
    not adequately reflect living

    standards at specific points in time. Finally, SSA suggested that we include
    a measure reporting on money's worth or internal rates of return in our
    table 1 that compares costs and benefits of Social Security reform
    proposals. SSA also made a number of technical comments, which we

    incorporated where appropriate. Our use of a “best case”
    scenario demonstrated that, even under the best of circumstances, Social
    Security reform proposals would reduce current- law benefits to DI
    beneficiaries- people who would find it more difficult than most nondisabled
    retired workers to replace lost benefits with other sources of income such
    as earnings. We did not examine “worse case” scenarios because
    the “best case” scenario demonstrates that most DI

    beneficiaries would be adversely affected by the reform proposals we
    analyzed. While including the “worst case” scenario SSA
    suggested could provide a specific lower limit to a range of possible
    benefit outcomes, that

    lower limit would be useful only if accompanied by an evaluation of the
    adequacy of that benefit level, which is beyond the scope of this report. In
    building a “best case” scenario, we used the earnings of men
    because they tend to have higher earnings than women do. To examine low-
    wage

    earners, we simulated workers who earn 45 percent of average earners, which
    is the standard low level of earnings the Office of the Chief Actuary uses.
    Benefits declined at this earnings level as they would for workers earning
    even less. We assumed individuals lived until 79 because almost

    one- third of individuals first receiving DI benefits at age 45 live that
    long, and the number of these individuals is significant enough to warrant
    study. With respect to SSA's concern about our use of an equity return of 7
    percent, we note that this is a figure currently used in projections,
    including

    those of the Office of the Chief Actuary. We chose not to adjust for risk
    because there is no one risk- adjusted measure that everyone agrees is the
    best measure, and we believed that our analysis would be more clearly
    understood with the simplifying “best case” assumptions.

    With respect to SSA's concern with our focus on lifetime benefits, we
    acknowledge that we do not address the issue of variations across plans in
    living standards before retirement age resulting from differences in account
    access rules. This is certainly an issue on which future reports could
    usefully focus. As for the inclusion of money's worth or internal rate of
    return measures, we agree that such analysis would be useful, but these

    measures are beyond the scope of this report. SSA's written comments are
    printed in appendix III. We are sending copies of this report to the
    Commissioner of the Social Security Administration and others who are
    interested. We will also make copies available to others on request. If you
    or your staff have any questions concerning this report, please call me on
    (202) 512- 7215. The

    major contributors to this report are Carol Dawn Petersen, Assistant
    Director, (202) 512- 7066; Barbara A. Smith, Senior Economist; Michael
    Collins, Economist; and Kim Granger, Economist.

    Sincerely, Barbara D. Bovbjerg, Director Education, Workforce, and Income
    Security Team

    Appendi xes The Social Security Reform Proposals and

    Appendi x I

    Their Provisions Table 6 lists the provisions in the five proposals we
    studied.

    Table 6: Social Security Reform Provisions Proposal Provision

    P ASGKBG KS K

    Reduce the cost- of- living adjustment (COLA) a x x Change the primary
    insurance amount (PIA)

    x x x formula a Establish a minimum level of benefits a x

    Raise the normal retirement age (NRA) a, b x x Increase the benefit
    computation period a x x Introduce individual accounts (IA) a x x x x
    Transfer funds explicitly from the general fund x x x x x c Credit benefit
    taxation revenue to the trust

    x x funds Maintain coverage of taxable earnings x

    Establish a minimum level of spousal benefits x Establish individual
    accounts for newborns x Note: P = President's proposal, AS = Archer- Shaw,
    GKBG = Gregg- Kerrey- Breaux- Grassley (S. 1383), KS = Kolbe- Stenholm (H.
    R. 1793), K = Kasich. a Affects benefits received by disabled beneficiaries,
    including disabled workers and their dependents

    and disabled dependents of retired workers. b Raising the NRA refers to
    either accelerating the already scheduled increases in the NRA or
    immediately increasing the age of eligibility for retirement benefits. c
    Although the Kasich proposal contains a provision describing a loan from
    general revenue, this loan is in effect very similar to a general revenue
    transfer. There is no principal repayment or interest repayment until 60
    years into the future.

    Source: Analysis performed and outlined in the SSA Office of the Chief
    Actuary memorandums.

    Table 7 shows that the access to the IA and the relationship between the IA
    and the insurance benefit vary across the proposals we studied. Under the
    Archer- Shaw and Kasich proposals, individuals can obtain funds from their
    IAs at the age of retirement or when they become eligible for Disability
    Insurance (DI) benefits. Under the Gregg- Kerrey- Breaux- Grassley and

    Kolbe- Stenholm proposals, disabled individuals are able to obtain IA income
    before retirement age only if the funds in the IA are sufficient to provide
    a monthly income that, when added to the insurance benefit, is at least
    equal to 1/ 12 of the current poverty line. According to the Social Security
    Administration (SSA), this threshold for account access would be virtually
    impossible for workers disabled at a relatively young age to meet

    because they would not have the time to build up an IA. In addition,
    insurance benefits are not affected by the presence of IA income under the
    Archer- Shaw and Kolbe- Stenholm proposals. Under the Gregg- KerreyBreaux-
    Grassley and Kasich proposals, there are reductions in the insurance benefit
    because of the existence of an IA.

    Table 7: Individual Account Provisions Adjustment to insurance Proposal
    Beneficiary access to IA income benefit Effect on beneficiaries

    Archer- Shaw When individual attains normal or No reduction in insurance

    Beneficiary receives larger of early retirement age or becomes benefits.
    Proceeds from IA are

    current law benefit or monthly eligible for DI benefits. transferred to Old-
    Age, income from IA. Survivors, and Disability Insurance (OASDI) trust
    funds.

    Gregg- Kerrey- BreauxGrassley When individual attains normal or

    Insurance benefit reduced or When IA income is received, early retirement
    age or when funds offset by amount of contribution beneficiary also receives
    reduced

    in IA are sufficient to provide plus interest accrued at rate insurance
    benefit.

    monthly benefit that, when added to earned by the OASDI trust

    insurance benefit, equals or funds.

    exceeds 1/ 12 of poverty line. Kasich When individual attains normal or

    Insurance benefit reduced by At qualifying age, DI beneficiary early
    retirement age or becomes 1/ 3 percent for each year receives both reduced
    insurance eligible for DI benefits.

    contributions are made to IA. benefit and income from IA. IA income could
    make up for reduction in insurance benefit.

    Kolbe- Stenholm Same as Gregg- Kerrey- Breaux None, no offset due to IA. But

    Beneficiary receives income from Grassley. insurance benefit is less than IA
    in addition to insurance benefit. current- law benefit because of IA income
    could compensate for other provisions in bill.

    decline in insurance benefit because of other provisions.

    Alternative Solvency Scenarios and the Social

    Appendi x II

    Security Simulation Model The Calculation of Alternative Scenarios Maintain
    Tax Rates and

    This scenario maintains current payroll tax rates while reducing Social
    Decrease Benefits Security benefits to levels supportable by these tax
    rates. There are many ways to reduce benefits, including waiting until the
    trust funds are exhausted and abruptly reducing benefits by the full amount
    necessary to be supported by current payroll taxes. We decided to follow a
    more gradual approach similar to that used in the “MTR (maintain tax
    rates) Proposal” presented in the Report of the 1994- 96 Advisory
    Council on Social Security.

    The Council's proposal reduces the 0. 32 and 0.15 PIA formula factors by 0.5
    percent for 1998- 2011 and 1.5 percent for 2012- 30. The PIA adjustments
    used in this report also reduce the 0.32 and 0.15 formula factors but by 2.
    0

    percent for 2000- 13 and 3.0 percent for 2014- 32, which results in the
    percentage reductions in benefits shown in table 8.

    Table 8: Reductions in Benefits OASI and DI Year Women Men

    2005 a 3.17% 5. 88% 2016 8. 68 16. 07 2022 11. 87 21.98 2034 16. 74 31.01 a
    The year in which the benefit reduction amount is realized, based on the PIA
    reductions. For example, a woman retiring in 2005 would receive a benefit
    that is 3.17 percent lower than current law. Because

    the SSASIM model has benefit relative to earnings by gender, reductions are
    calculated separately for men and women. These percentage declines in
    benefits result in trust fund solvency through 2074 under the 1999 Trustee's
    Report intermediate assumptions. We assume no behavioral changes in response
    to the decline in benefits because it is not clear how individuals will
    respond to the decline in benefits- whether they will continue to retire at
    younger ages or will postpone retirement to later ages in order to receive
    larger benefits.

    We instituted benefit reductions in the maintain- tax- rates scenario by
    reducing only the 0.15 and the 0.32 brackets of the PIA formula, following
    the approach used by the Advisory Council. (The PIA formula is described
    below.) This is important to take into account when comparing benefits under
    the maintain- tax- rates scenario with benefits for disabled

    beneficiaries under the Social Security reform proposals. Kasich reduces all
    three brackets, the 0. 90 bracket as well as the 0.15 and 0.32 brackets.
    These reductions apply to both disabled and retired workers and their
    dependents. This is why benefits for lower earners under Kasich's PIA
    provision are below those calculated in the maintain- tax- rates scenario.
    The Kolbe- Stenholm proposal, however, reduces only the upper two

    brackets for disabled- worker beneficiaries and does not reduce these
    brackets by as much as the maintain- tax- rates scenario does. 1 Therefore,
    benefits for disabled low earners and their dependents under the
    KolbeStenholm proposal are greater than benefits under the maintain- tax-
    rates scenario. The Gregg- Kerrey- Breaux- Grassley proposal creates an
    additional bracket and increases the 0. 32 bracket to 0.70. This explains
    the

    increase in benefits for low earners above the benefits received under the
    maintain- benefits scenario. The full unreduced monthly benefit amount for
    worker beneficiaries is

    determined by using the PIA formula. This formula consists of three brackets
    separated by two bend points. In 1999, these bend points were $505 and
    $3,043 for newly eligible beneficiaries. A worker's PIA is calculated as
    0.90 of the first $505 of career- average indexed monthly

    earnings (AIME), plus 0.32 of any AIME amount between $505 and $3,043 and
    0.15 of any AIME amount in excess of $3, 043.

    Maintain Benefits and This scenario maintains current- law benefits while
    increasing payroll tax

    Increase Tax Rates rates to levels that support those benefits. There are
    many ways to increase

    payroll tax rates, including waiting until the trust fund is exhausted and
    then abruptly increasing payroll tax rates to levels that would support
    current- law benefits. We follow an approach similar to that used in the
    “PL

    PAYGO Proposal” presented in the Report of the 1994- 96 Advisory
    Council on Social Security in which payroll tax rates are increased more
    gradually. The PL PAYGO option modifies the present law payroll tax rate
    schedule

    1 Under Kolbe- Stenholm, retired workers face an additional benefit
    reduction to all three PIA factors (0. 90, 0. 32, and 0. 15) of 0.5 percent.
    These PIA reductions also affect benefits for adult disabled children of
    retired workers.

    from 12. 4 percent beginning in 1995 and reaching 17.1 percent in 2060. The
    present law payroll tax rate adjustments used for this report are in table
    9.

    Table 9: Payroll Tax Rates Year a OASDI OASI DI

    2000- 24 12. 4 10.6 1. 80 2025- 29 15. 4 13.12 2.28 2030- 49 16. 2 13.79
    2.41 2050- 59 17. 1 14.55 2.55 2060- 73 18. 0 15.31 2.69 a The year the
    adjustments are made to payroll taxes in the SSASIM model.

    These payroll tax rates result in trust fund solvency through 2074 under the
    1999 Trustees Report intermediate assumptions. Note that 85 percent of the
    OASDI payroll tax rate is assigned to the OASI program, 15 percent to the DI
    program.

    The SSASIM Model To assess how the Social Security reform proposals affect
    the solvency of the Social Security trust funds and the level of benefits
    individuals receive, we conducted a variety of simulations using the SSASIM
    model, developed

    by the Policy Simulation Group. The initial version of the model was
    developed under a series of contracts from SSA as part of the 1994- 96
    Advisory Council on Social Security's activities. The model was

    subsequently enhanced with major support from the American Association of
    Retired Persons, the Employee Benefit Research Institute, and SSA as well as
    other organizations. The model can simulate a variety of policy

    reforms to the Social Security program, from incremental changes in the OASI
    and DI programs to broader structural reforms that would introduce an IA
    component to the Social Security system.

    The SSASIM model simulates the dynamic interaction of the labor force, the
    economy, and the Social Security programs and can be used to generate
    aggregate program cost and income estimates as well as estimates for the
    OASI and DI trust funds. Changes in program structure can be analyzed for
    any specified future time periods. Consistent with SSA's annual projections,

    we explored the effect of such changes on OASI and DI trust fund solvency
    for the 75- year period 1999- 2074. The implications of a reform relative to

    one of the alternative scenarios that achieve solvency are determined by
    comparing the output results from a simulation that assumes the reform
    policy with results from a simulation that assumes one of the two
    alternative scenarios. Assumptions Used in the In our analysis, we made a
    number of assumptions. With respect to Analysis of the Effects of

    population and economic projections, we used the intermediate the Social
    Security Reform assumptions in the 1999 Annual Report of the Board of
    Trustees of the

    Proposals on Solvency federal OASI and DI trust funds. We use the
    assumptions in the 1999

    Trustees Report because the Office of the Chief Actuary used these
    assumptions to score the Social Security reform proposals we analyzed. (See
    table 10.)

    Table 10: Economic and Demographic Intermediate Assumptions From the 1999
    Trustees Report Ultimate Year ultimate Assumption value value was attained a

    Annual percentage

    Labor force participation Women 60. 6 2075 Men 73. 8 2075 Unemployment rate
    5.5 2009 Inflation rate 3. 3 2007 Labor productivity growth 1. 3 2008 Growth
    rate of wages as share of compensation 0. 2 2008 Growth rate of hours worked
    0. 1 2008 Nominal interest rate 6.3 2007 Mortality rate decline 0. 6 2023

    Annual number

    Total fertility rate 1. 9 b 2023 Net immigration 900,000 c 1999 Note: The
    intermediate assumptions represent the trustees' “best
    estimates” of likely future economic and demographic conditions. We
    used these numbers throughout our analysis. a The ultimate value is
    maintained for the remainder of the 75- year projection period. b Number of
    children per woman. c Number of persons per year.

    Assumptions in the Analysis We analyzed how the reforms affect individuals
    born in 1946, 1966, and

    of the Effects of the Reform 1986 in order to assess the effects of
    provisions that are phased in over

    Proposals on Individual time. We analyzed how the reforms affect individuals
    with average earnings Benefits

    and with 45 percent of average earnings to see how the reform provisions
    affect workers at different earnings levels. The model contains information
    on earnings separately for men and women. The user can specify a
    genderrelated earnings pattern. Our analysis uses the earnings pattern for
    men. These earnings are based on the national average annual earnings of
    covered workers with earnings. Using 1998 data from SSA, we compared our
    choice of earnings levels with the earnings levels of actual new
    beneficiaries. We did so by calculating the DI benefit corresponding to our

    selected earnings levels and comparing these benefit levels with the
    distribution of benefits actual DI beneficiaries received in 1998. We found
    that about 42 percent of all new beneficiaries in 1998 received benefits
    that correspond to earnings that are less than 45 percent of average
    earnings, about 38 percent of new beneficiaries received benefits
    corresponding to earnings that are between 45 percent of average earnings
    and average earnings, and about 20 percent of new beneficiaries received
    benefits corresponding to earnings that are greater than the average level.
    We analyzed how the reforms affected individuals with three different ages
    of first receipt of DI benefits (35, 45, and 55) to compare the experiences
    of people disabled at younger ages with those disabled at older ages. These

    three ages reflect the experiences of individuals with different lengths of
    time in the DI program and with different lengths of time in the labor
    force. According to SSA, the average age of a new male DI beneficiary in
    1999 was 49. 6 years, down from 51.2 years in 1980. In 1999, 19.3 percent of
    men's new

    benefits were awarded to individuals younger than 40, 24 percent to those in
    their 40s, and 40 percent to those in their 50s. 2 DI benefits for disabled
    workers are terminated mostly because of the death of the beneficiary or the
    attainment of retirement age and conversion of benefits to the OASI program;
    only half of 1 percent of DI beneficiaries leave the program each

    year because of work. 3 2 2000 Annual Statistical Supplement to the Social
    Security Bulletin. 3 2000 Annual Statistical Supplement to the Social
    Security Bulletin and Work Incentives for Blind and Disabled Social Security
    Beneficiaries (GAO/ HEHS unnumbered correspondence, Aug. 8, 2000).

    According to SSA data on awards made to DI beneficiaries in 1998, the type
    of disability that new DI beneficiaries claimed is somewhat associated with
    age. In 1998, mental disorders were the most common diagnosis for new DI
    awardees younger than 35, while diseases of the musculoskeletal system were
    the most common diagnosis for those aged 50 and older. For new awardees
    younger than 35, mental disorders accounted for 34 percent while diseases of
    the musculoskeletal system accounted for 11 percent. For new DI awardees
    aged 50 and older, diseases of the musculoskeletal system accounted for 27
    percent while mental disorders accounted for

    11 percent. 4 We assumed that individuals enter the workforce at age 22 and
    work fulltime until disability or retirement with no years out of the labor
    force. We chose these assumptions because they represent a “best
    case” for the disabled individual. Many disabled individuals are
    likely to work less than full- time and to have periods of time out of the
    labor force. 5 However, little information is available on the wages,
    earnings histories, and periods of nonwork of the disabled. This makes it
    difficult to choose a “typical” earnings level and earnings
    pattern for them. The benefit income for our “best case”
    disabled individuals will clearly be greater than that for

    disabled individuals receiving lower earnings from intermittent and less
    than full- time employment. Our results, therefore, represent a maximum
    level of benefit income that disabled beneficiaries could expect to receive
    under the Social Security reform proposals that we modeled.

    We also assumed that the nondisabled workers we simulated retire at age 67
    and that all the individuals we simulated die at age 79. We made these
    assumptions so that in our simulations the retired workers and all disabled
    workers with a given age of first receipt of DI benefits would have the same
    number of years of receiving benefits. Thus, differences in benefit income
    across individuals would be the result of differences in reform proposals

    and not the result of differences in individual characteristics. Because of
    the possibility that actual disabled individuals might have a lower life 4
    See SSA, 1999 Annual Statistical Supplement to the Social Security Bulletin
    (Washington, D. C.: 2000). 5 In an earlier report, we found that an
    increasing number of new DI applicants need supplementary SSI benefits,
    which suggests that these applicants are less well off and might have less
    extensive and less highly paid work histories than DI applicants had in the
    past. See Social Security: Disability Rolls Keep Growing, While Explanations
    Remain Elusive (GAO/ HEHS- 94- 34, Feb. 8, 1994).

    expectancy than we assumed for our simulation, we asked SSA's Office of the
    Chief Actuary to send us death rates for men who were born in 1986 and began
    receiving DI benefits at age 45. We then calculated the proportion who would
    still be alive at ages 46 to 79. According to our calculations, 49 percent
    of these individuals would still be alive at 70, and 31 percent would still
    be alive at 79.

    We assumed that the benefits workers and their dependents received were not
    affected by the application of the maximum family benefit. The maximum
    family benefit refers to the maximum amount that can be paid on a worker's
    earnings record. In the case of retired or deceased workers, the maximum
    varies from 150 to 188 percent of the PIA. In the case of disabled workers,
    the maximum family benefit is the smaller of 85 percent of the

    worker's AIME or 150 percent of the worker's PIA. The family maximum cannot
    be exceeded, regardless of the number of beneficiaries entitled on that
    earnings record, although any benefit payable to a divorced spouse is not
    included. Whenever the total of the individual monthly benefits payable to
    all the beneficiaries entitled on one earnings record exceeds the

    maximum, each dependent's or survivor's benefit is reduced in equal
    proportion to bring the total within the maximum. For the analysis of IAs,
    we assumed that administrative costs are 0.105 percent of assets. Our
    estimate of administrative costs is that used in the Report of the 1994- 96
    Advisory Council on Social Security. The Council considered an option to
    create IAs alongside the Social Security system with a centralized system of
    recordkeeping and limited investment choices. The estimate of 0.105 percent
    of assets was a consensus of the Council members. We also assumed that
    individuals do not annuitize but, rather,

    draw down the balance in the IA through periodic withdrawals. 6
    Consequently, the balance in the account is not reduced by the costs
    associated with purchasing an annuity. We also assumed that individuals know
    how long they are going to live and thus determine the schedule of periodic
    withdrawals so as to use up the entire balance in the IA by the

    time they die. These assumptions result in the largest balance possible in
    the IAs.

    6 Very few individuals in the United States purchase life annuities,
    according to the studies we consulted.

    For the Kolbe- Stenholm, Gregg- Kerrey- Breaux- Grassley, and Kasich
    proposals, we used the same assumptions that SSA's Office of the Chief
    Actuary used in scoring the Kolbe- Stenholm proposal. Following the approach
    taken in the Report of the 1994- 96 Advisory Council on Social Security, we
    varied the percentage invested in equities according to age. We assumed that
    persons younger than 40 would invest 55 percent of their account in
    equities, with an average real return of 4.8 percent for the portfolio. We
    assumed that those 40 to 49 would invest 50 percent of their account in
    equities, with an average real return of 4.5 percent. We assumed

    that those 50 to 59 would invest 40 percent of their account in equities,
    with an average real rate of return of 4. 1 percent. We assumed that those
    60 to 69 would invest 20 percent of their accounts in equities, with an
    average real return of 3.1 percent. We assumed the portion not invested in
    equities would be invested in Treasury bonds and the return on equities
    would be a constant, inflation- adjusted 7 percent per year, which reflects
    the long- term historical average return on equities. We note that the
    assumption of a 7 percent return on equities in the future has been
    criticized by some as being optimistic. 7 We did not adjust the rates of
    return on equities for risk. As we stated in a recent report, there are
    numerous ways to adjust for risk but no clearly best way, and there is no
    one risk- adjusted measure that everyone agrees is the correct measure. 8 As
    a result, the returns on equity that we use are

    likely to be higher than the risk- adjusted returns. 7 See the 1999
    Technical Panel on Assumptions and Methods. 8 Social Security: Capital
    Markets and Educational Issues Associated With Individual Accounts (GAO/
    GGD- 99- 115, June 28, 1999).

    Comments From the Social Security

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    GAO United States General Accounting Office

    Page 1 GAO- 01- 35 Social Security Reform

    Contents

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    Appendix I

    Appendix I The Social Security Reform Proposals and Their Provisions

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    Appendix II

    Appendix II Alternative Solvency Scenarios and the Social Security
    Simulation Model

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    Appendix II Alternative Solvency Scenarios and the Social Security
    Simulation Model

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    Appendix II Alternative Solvency Scenarios and the Social Security
    Simulation Model

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    Appendix II Alternative Solvency Scenarios and the Social Security
    Simulation Model

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    Appendix II Alternative Solvency Scenarios and the Social Security
    Simulation Model

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    Appendix II Alternative Solvency Scenarios and the Social Security
    Simulation Model

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    Appendix II Alternative Solvency Scenarios and the Social Security
    Simulation Model

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    Appendix III

    Appendix III Comments From the Social Security Administration

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    Appendix III Comments From the Social Security Administration

    Page 52 GAO- 01- 35 Social Security Reform

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