Social Security: Proposed Totalization Agreement with Mexico	 
Presents Unique Challenges (11-SEP-03, GAO-03-1035T).		 
                                                                 
Totalization agreements foster international commerce and protect
benefits for persons who have worked in foreign countries. They  
eliminate dual social security taxes that multinational employers
and their employees pay when they operate and reside in countries
with parallel social security systems and fill gaps in benefit	 
protection for persons who have worked in different countries.	 
Because Mexicans are believed to represent a large share of the  
millions of unauthorized workers present in the United States, a 
totalization agreement with Mexico has raised concerns that they 
would become newly eligible for social security benefits. To shed
light on the possible impacts, this testimony (1) describes the  
Social Security Administration's (SSA) processes for developing  
the agreement with Mexico, (2) explains how the agreement might  
affect the payment of benefits to Mexican citizens, and (3)	 
assesses the cost estimate for such an agreement.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-1035T					        
    ACCNO:   A08421						        
  TITLE:     Social Security: Proposed Totalization Agreement with    
Mexico Presents Unique Challenges				 
     DATE:   09/11/2003 
  SUBJECT:   Alien labor					 
	     Cost analysis					 
	     Cost control					 
	     Dependents 					 
	     Federal social security programs			 
	     Illegal aliens					 
	     International agreements				 
	     Resident aliens					 
	     Social security benefits				 
	     Social security taxes				 
	     Policies and procedures				 
	     Mexico						 

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GAO-03-1035T

Testimony Before the Subcommittee on Immigration, Border Security, and
Claims, Committee on the Judiciary, House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 11: 00 a. m. EDT Thursday,
September 11, 2003 SOCIAL SECURITY

Proposed Totalization Agreement with Mexico Presents Unique Challenges

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

GAO- 03- 1035T

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

The proposed agreement will likely increase the number of unauthorized
Mexican workers and family members eligible for social security benefits.
Mexican workers who ordinarily could not receive social security
retirement benefits because they lack the required 40 coverage credits for
U. S. earnings could qualify for partial Social Security benefits with as
few as 6 coverage credits. In addition, under the proposed agreement, more
family members of

covered Mexican workers would become newly entitled because the agreements
usually waive rules that prevent payments to noncitizens* dependents and
survivors living outside the United States.

The cost of such an agreement is highly uncertain. In March 2003, the
Office of the Chief Actuary estimated that the cost of the Mexican
agreement would be $78 million in the first year and would grow to $650
million (in constant 2002 dollars) by 2050. The actuarial cost estimate
assumes the initial number of newly eligible Mexican beneficiaries is
equivalent to the 50, 000

beneficiaries living in Mexico today and would grow sixfold over time.
However, this proxy figure does not directly consider the estimated
millions of current and former unauthorized workers and family members
from Mexico and appears small in comparison with those estimates. The
estimate also inherently assumes that the behavior of Mexican citizens
would not

change and does not recognize that an agreement could create an additional
incentive for unauthorized workers to enter the United States to work and
maintain documentation to claim their earnings under a false identity.
Although the actuarial estimate indicates that the agreement would not
generate a measurable long- term impact on the actuarial balance of the
trust funds, a subsequent sensitivity analysis performed at GAO*s request
shows that a measurable impact would occur with an increase of more than
25 percent in the estimate of initial, new beneficiaries. For prior
agreements, error rates associated with estimating the expected number of
new beneficiaries have frequently exceeded 25 percent, even in cases where
uncertainties about the number of unauthorized workers were less
prevalent. Because of the significant number of unauthorized Mexican

workers in the United States, the estimated cost of the proposed
totalization agreement is even more uncertain than in prior agreements.
Totalization agreements foster international commerce and protect benefits
for persons who have worked in foreign countries.

They eliminate dual social security taxes that multinational employers and
their employees pay when they operate and reside in countries with
parallel social security systems and fill gaps in benefit protection for
persons who have worked in different countries. Because Mexicans are
believed to represent a large share of the millions of unauthorized
workers present in the United States, a totalization agreement with Mexico
has raised concerns that they would become newly eligible for social
security benefits.

To shed light on the possible impacts, this testimony (1) describes the
Social Security Administration*s (SSA) processes

for developing the agreement with Mexico, (2) explains how the agreement
might affect the payment of benefits to Mexican citizens, and (3) assesses
the cost estimate for such an agreement.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 1035T. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Barbara D. Bovbjerg, (202) 512- 7215, bovbjergb@ gao.
gov. Highlights of GAO- 03- 1035T, a testimony

before the Subcommittee on Immigration, Border Security, and Claims,
Committee on the Judiciary, House of Representatives

September 11, 2003

SOCIAL SECURITY

Proposed Totalization Agreement with Mexico Presents Unique Challenges

Page 1 GAO- 03- 1035T Mr. Chairman and Members of the Subcommittee I am
pleased to be here today to discuss social security totalization

agreements and specific issues related to a potential agreement between
the United States and Mexico.

Totalization agreements foster international commerce and protect benefits
for persons who have worked in foreign countries in two ways. First, the
agreements eliminate dual social security taxes that multinational
employers and their employees must pay when they operate and reside in
countries with parallel social security programs. Second, the

agreements help to fill gaps in benefit protection for persons who have
worked in different countries for portions of their careers. Since 1977,
the United States has entered into 20 totalization agreements.

Over the last year, the United States has been negotiating a totalization
agreement with Mexico that has received considerable attention among the
media and others regarding its potential impacts. Because Mexicans
represent a large share of the millions of unauthorized workers present in
the United States, a totalization agreement with Mexico has raised
concerns that many such workers would become newly eligible for social
security benefits at a time when long- term trust fund solvency is

threatened. To shed light on the possible impacts of such an agreement,
the Chairman of the House Judiciary Committee, and the Chairman of the
House Ways and Means Social Security Subcommittee asked us to (1) describe
the Social Security Administration*s (SSA) processes for developing the
proposed agreement with Mexico, (2) explain how the agreement might affect
the payment of social security benefits to Mexican citizens, and (3)
assess SSA*s cost estimates for such an agreement.

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

statement today is based on this completed work. Our final report with
recommendations will be issued by September 30th.

In summary, SSA has no written policies or procedures outlining the
specific steps it follows when entering into totalization agreements, and

Page 2 GAO- 03- 1035T the actions it took to assess the integrity and
compatibility of Mexico*s social security system were limited and neither
transparent nor welldocumented.

SSA officials briefly toured Mexican facilities, observed how their
automated systems functioned, and identified the type of data maintained
on Mexican workers. However, SSA provided no information showing that it
assessed the reliability of Mexican earnings data and the internal
controls in place to ensure the integrity of information that SSA will
rely on to pay social security benefits.

The proposed agreement will increase the number of Mexican workers and
family members eligible for social security benefits. Workers who
ordinarily could not receive benefits because they lack the required 40
coverage credits for U. S. earnings could qualify for partial Social
Security benefits with as few as 6 coverage credits. Under the proposed
agreement, more family members of covered Mexican workers would also
become

newly entitled because of the waiver of rules that prevent payment to
noncitizens* dependents and survivors living outside the United States.

Finally, the cost of a totalization agreement with Mexico is highly
uncertain. SSA*s actuarial estimate states that the cost of a Mexican
agreement would be $78 million in the first year and would grow to $650
million by 2050. The estimate assumes the initial number of newly eligible
Mexican beneficiaries is equivalent to the 50, 000 beneficiaries living in

Mexico today and would grow sixfold over time. However, this proxy figure
does not directly consider the estimated millions of current and former
unauthorized workers and family members from Mexico and appears small in
comparison with those estimates. Although the actuarial estimate indicates
that the agreement would not generate a measurable impact on the trust
funds, an increase of more than 25 percent in the estimate of initial, new
beneficiaries would generate a measurable impact. For prior agreements,
error rates associated with estimating the expected

number of new beneficiaries have frequently exceeded 25 percent. Because
of the significant number of unauthorized Mexican workers in the United
States, the estimated cost of the proposed totalization agreement is even
more uncertain than for the prior agreements.

SSA administers the Old Age, Survivors, and Disability Insurance programs
under Title II of the Social Security Act. About 96 percent of the
nation*s work force is in social security- covered employment and pays tax
on their Background

Page 3 GAO- 03- 1035T annual earnings. When workers pay social security
taxes, they earn coverage credits, and 40 credits* equal to at least 10
years of work*

entitle them to social security benefits when they reach retirement age. 1
In 1977, the Congress authorized the President to enter into totalization
agreements with other countries. These bilateral agreements are intended
to accomplish three purposes. First, they eliminate dual social security
coverage and taxes that multinational employers and employees encounter
when they operate and their workers temporarily reside and work for the
corporation, usually no more than 5 years, in a foreign country with its
own social security program. Under the agreements, U. S. employers and
their workers sent temporarily abroad would benefit by paying only U. S.
social security taxes, and foreign businesses and their

workers would benefit by paying only social security taxes to their home
country. Second, the agreements provide benefit protection to workers who
have divided their careers between the United States and a foreign
country, but lack enough coverage under either social security system to
qualify for benefits, despite paying taxes into both systems. Totalization
agreements allow such workers to combine (totalize) work credits earned in
both countries to meet minimum benefit qualification requirements. Third,
most totalization agreements improve the portability of social security
benefits by removing rules that suspend benefits to noncitizens who live
outside the benefit- paying country.

By law, proposed agreements are sent to the Congress together with a
report on the effects on the agreement. Under the statute, the agreement
becomes effective on any date provided in the agreement after one House of
the Congress has been in session 60 days, unless either House of the
Congress adopts a resolution of disapproval. 2 Table 1 shows agreements in
effect and the years they became effective.

1 Different requirements govern the number of coverage credits necessary
to receive disability and survivors benefits for workers who become
disabled or die with relatively short work careers. 2 In 1983, the Supreme
Court found that a provision in the Immigration and Nationality Act that
allowed either House of the Congress to adopt a resolution of disapproval
of a deportation decision was unconstitutional (INS v. Chadha, 462 U. S.
919 (1983)). To date,

neither House of the Congress has ever disapproved a proposed totalization
agreement. The effect of the Chadha decision on the part of the Social
Security Act providing for totalization agreements has not been ruled on
by the courts.

Page 4 GAO- 03- 1035T Table 1: Existing Totalization Agreements between
the United States and Other Countries and Year of Effective Date of the
Original Agreements

Countries Year Italy 1978 Germany 1979 Switzerland 1980 Belgium 1984
Norway 1984 Canada 1984 United Kingdom 1985 Sweden 1987 Spain 1988 France
1988 Portugal 1989 Netherlands 1990 Austria 1991 Finland 1992 Ireland 1993
Luxembourg 1993 Greece 1994 South Korea 2001 Chile 2001 Australia 2002
Source: SSA.

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

Under U. S. law, immigrants may not work in the United States unless
specifically authorized. Nevertheless, immigrants often do work without
authorization and pay social security taxes. Under the Social Security
Act, all earnings from covered employment in the United States count
towards earning social security benefits, regardless of the lawful
presence of the

Page 5 GAO- 03- 1035T worker, his or her citizenship status, or country of
residence. Immigrants become entitled to benefits from unauthorized work
if they can prove that

the earnings and related contributions belong to them. However, they
cannot collect such benefits unless they are either legally present in the
United States or living in a country where SSA is authorized to pay them
their benefits. Mexico is such a country.

A lack of transparency in SSA*s processes, and the limited nature of its
review of Mexico*s program, cause us to question the extent to which SSA
will be positioned to respond to potential program risks should a
totalization agreement with Mexico take place. SSA officials told us that
the process used to develop the proposed totalization agreement with
Mexico was the same as for prior agreements with other countries. The
process* which is not specified by law or outlined in written policies and
procedures* is informal, and the steps SSA takes when entering into

agreements are neither transparent nor well- documented. Current law does
not prescribe how SSA should select potential agreement countries.
According to SSA, interest in a Mexican agreement dates back more than 20
years. SSA officials noted that increased business interaction between the
two countries due to the North American Free Trade Agreement (NAFTA) was a
factor in the renewed negotiations. In addition, because there is a
totalization agreement with Canada, our other NAFTA partner, SSA believed
that equity concerns required consideration of an agreement with Mexico.
In February 2002, SSA sought clearance from the Department of State to
begin such negotiations.

The law also does not specify which elements of other countries* social
security systems must be evaluated during totalization agreement
negotiations. SSA officials met with Mexican officials to exchange
narrative information on their respective programs. Senior SSA officials
also visited Mexico for 2 days in August 2002. During their visit, these
officials told us that they toured social security facilities, observed
how Mexico*s automated social security systems functioned, and identified
the type of data maintained on Mexican workers. SSA took no technical
staff on this visit to assess system controls or data integrity processes.
In effect,

SSA only briefly observed the operations of the Mexican social security
program. Moreover, SSA did not document its efforts or perform any
additional analyses then, or at a later time, to assess the integrity of
Mexico*s social security data and the controls over that data. In
particular, SSA officials provided no evidence that they examined key
elements of Mexico* s program, such as its controls over the posting of
earnings, and SSA*s Process for Developing

Agreements Is Not Thorough or WellDocumented

Page 6 GAO- 03- 1035T its processes for obtaining key birth and death
information for Mexican citizens. Nor did SSA evaluate how access to
Mexican data and records is

controlled and monitored to prevent unauthorized use or whether internal
and external audit functions exist to evaluate operations.

Because all totalization agreements represent a financial commitment with
implications for social security tax revenues and benefit outlays, a
reasonable level of due diligence and analysis is necessary to help
federal managers identify issues that could affect benefit payment
accuracy or

expose the nation*s system to undue risk. Our Internal Control Management
and Evaluation Tool provides a risk assessment framework to help federal
managers mitigate fraud, waste, abuse, and mismanagement in public
programs, such as social security. A key component of this framework is
the identification of internal and external risks that could impede the
achievement of objectives at both the entity and program levels.
Identified risks should then be analyzed for their potential effect and an
approach devised to mitigate them.

SSA did not conduct these types of analyses in previous agreements or in
the case of the proposed Mexican agreement, despite documented concerns
among Mexican government officials and others regarding the integrity of
Mexico*s records, such as those for birth, death, and marriage, as well as
its controls over assigning unique identification numbers to

workers for benefit purposes. Such information will likely play a role in
SSA*s ability to accurately determine Mexican workers* initial and
continuing eligibility for benefits under a totalization agreement.

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

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

Agreements Will Increase Benefit Payments to Mexican Citizens

Page 7 GAO- 03- 1035T in the United States for a worker to accumulate the
necessary 40 credits and become insured for retirement benefits.

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

Totalization agreements generally expand benefits to both authorized and
unauthorized workers and create new groups of beneficiaries. This would be
the case for a totalization agreement with Mexico if it follows the same
pattern as all prior totalization agreements. Mexican citizens with fewer

than 40 coverage credits will be permitted to combine their annual
earnings under their home country*s social security program with their
annual earnings under the U. S. Social Security program to meet the 40-
credit requirement. 3 In addition, more family members of covered workers
will qualify for dependent and survivor benefits. Totalization agreements
generally override Social Security Act provisions that prohibit benefit
payments to noncitizens* dependents and survivors who reside outside the
United States for more than 6 months, unless they can prove that they
lived in the United States for 5 years in a close family relationship with
the covered worker. If a totalization agreement with Mexico is structured
like others already in force, the 5- year rule for dependents and
survivors will be waived.

However, it is important to understand that not all unauthorized Mexican
citizens who have worked in the United States will receive totalization
benefits. Some will have earned at least 40 coverage credits and can
receive social security benefits without a totalization agreement. Still
others may have worked under false identities and may not be able to

3 Under an agreement, U. S. citizens will also be able to receive
totalized Mexican benefits. The amount of time needed to qualify for
Mexican social security benefits is about 9. 6 years under the former pay-
as- you- go plan that closed in July 1997 and 24 years under the defined
contribution plan that replaced it.

Page 8 GAO- 03- 1035T prove that they have the necessary coverage credits
to be entitled to benefits. Others still may not accumulate sufficient
credits under the

Mexican social security system to totalize with their U. S. social
security coverage.

The cost of a totalization agreement with Mexico is highly uncertain. In
March 2003, the Office of the Chief Actuary (OCACT) estimated that the
cost of the Mexican agreement would be $78 million in the first year and
would grow $650 million (in constant 2002 dollars) in 2050. SSA*s
actuarial cost estimate assumes the initial number of newly eligible
Mexican

beneficiaries was equivalent to the 50, 000 beneficiaries living in Mexico
today and would grow sixfold over time. However, this proxy figure is not
directly related to the estimated millions of current and former
unauthorized workers and their family members from Mexico and appears
small in comparison to those estimates. Furthermore, even if the baseline
estimate is used, a sensitivity analysis performed by OCACT shows that an

increase of more than 25 percent* or 13,000 new beneficiaries* would
produce a measurable impact on the long- range actuarial balance of the
trust funds. Our review of cost estimates for prior totalization
agreements shows that the actual number of beneficiaries has frequently
been underestimated and far exceeded the original actuarial estimates.

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

citizens and others living in Mexico* currently receiving U. S. social
security benefits as a proxy for the number of Mexican citizens who would
initially receive totalized benefits. The principal basis for this
assumption

was a 1997 study of Mexican immigration patterns conducted by a private
nonprofit organization. 4 This study indicated that the percentage of
Mexican immigrants who returned to Mexico after more than 10 years and,

4 Belinda I. Reyes, Dynamics of Immigration: Return Migration to Western
Mexico, Public Policy Institute of California, January 1997. Poor Data
Undermine

the Reliability of SSA*s Cost Estimate Actuarial Estimates Are Based on
Varied Data Sources

Page 9 GAO- 03- 1035T therefore, could qualify for benefits is roughly
equal to the percentage that returned after staying 2 to 9 years and would
not have the required credits. Thus, OCACT assumed that the potential
totalized initial new beneficiaries

would be equivalent to the 50,000 persons currently receiving benefits in
Mexico.

For the proposed Mexican agreement, both a short- term (covering the first
8 years of the agreement) and a long- term (covering 75 years) cost
estimate were developed. 5 The estimated cost to the Social Security Trust
Funds would be about $78 million in the first year of the agreement. For
the long- term cost estimate, OCACT projected that the number of
beneficiaries would ultimately increase sixfold to 300,000 over a 45- year
period after the agreement took effect and equal about $650 million (in
constant 2002 dollars) in 2050. However, the actuarial analysis notes that
the methodology was indirect and involved considerable uncertainty.

As a rough check on the reasonableness of using current beneficiaries in
Mexico for its cost estimate, OCACT analyzed totalized beneficiary data
for Canadian citizens because Canada, like Mexico, is a NAFTA trading

partner and shares a large contiguous border. After determining the ratio
of Canadians receiving totalized versus fully insured benefits, OCACT
applied this ratio to the number of Mexican- born U. S. social security
beneficiaries and found that about 37,000 beneficiaries would be expected
under the agreement initially, if the Canadian experience proves
predictive of the Mexican outcome. According to OCACT, this comparison
increased its confidence that the assumed 50,000 new beneficiaries under
the agreement was within a reasonable range.

Limited data about unauthorized workers make any estimate of the expected
costs of a Mexican totalization agreement highly uncertain. A significant
variable of any totalization agreement cost estimate is the identification
of the number of potential beneficiaries. Estimates of the number of
unauthorized Mexican immigrants living in the United States

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

Agreement Is Highly Uncertain

Page 10 GAO- 03- 1035T vary. 6 The federal government*s estimate was
published in January 2003 and comes from the former Immigration and
Naturalization Service (INS). 7 INS estimated that, as of January 2000,
about 5 million, or 69 percent of all

unauthorized immigrants in the United States, were from Mexico. INS*s
estimate also indicated that this figure was expected to increase by about
240,000 persons annually.

The INS estimate, however, does not include unauthorized Mexican workers
and family members who no longer live in the United States and could also
conceivably benefit from a totalization agreement. Economic disparity
between the United States and Mexico has fostered longstanding immigration
from Mexico to the United States dating back many decades.

Various studies also show that fewer than a third of Mexican immigrants
stay more than 10 years in the United States, the minimum amount of time
needed to qualify for social security retirement benefits. 8 For cost
analysis purposes, little is known about the population of former
immigrants who

have returned to Mexico in terms of their age, work history, dependents,
and social security coverage. These factors increase the inherent
uncertainty of any long- range forecasts with regard to Mexico. It is
under this backdrop that OCACT set about developing an estimate of the
costs of the potential totalization agreement.

We have several concerns about OCACT*s estimate of the number of expected
beneficiaries and cost of an agreement with Mexico. First, the use of the
50, 000 fully insured beneficiaries receiving benefits in Mexico as a
proxy for individuals who might initially benefit from an agreement, does

not directly consider the estimated millions of unauthorized Mexican
immigrants in the United States and Mexico who are not fully insured and
might receive totalized benefits. Furthermore, despite the availability of

key data about earnings, work histories, years of employment, and
dependents for the 50,000 fully insured beneficiaries, OCACT did not
analyze this population to determine whether they represented a good

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

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

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

Page 11 GAO- 03- 1035T proxy for individuals likely to qualify for
totalized benefits. The cost estimate also inherently assumes that the
behavior of Mexican citizens

would not change after a totalization agreement goes into effect. Under
totalization, unauthorized workers could have an additional incentive to
enter the United States to work and to maintain the appropriate
documentation necessary to claim their earnings under a false identity.
Thus, a large number of Mexican citizens have likely earned some social

security coverage credits through both authorized and unauthorized work to
meet the 40- credit threshold requirement and are not directly accounted
for in SSA*s estimate.

Second, SSA*s reasonableness check using Canadian data faces similar
questions. While Mexico and Canada are NAFTA partners and share a common
border with the United States, there is a dramatic difference in the
extent of unauthorized immigration from these two countries and, in

our view, the Canadian experience is not a good predictor of experience
under an agreement with Mexico. Recent INS data show that Mexican citizens
account for about 69 percent of unauthorized U. S. immigrants, whereas
Canadian citizens account for less than 1 percent, and all other
totalization agreement countries combined account for less than 3 percent.
It is this population of unauthorized immigrants that makes estimating the
cost of a totalization agreement with Mexico particularly problematic.

Finally, even though SSA*s actuarial analysis increases the number of
beneficiaries sixfold over time, the expected 300, 000 beneficiaries in
2050 represents only about 6 percent of the estimated number of
unauthorized

Mexicans in the United States today, and thus appears relatively low.
Although it would be unreasonable to expect all unauthorized Mexicans in
the United States to qualify for totalized benefits, the very large
difference

between estimated and potential beneficiaries underscores the uncertainty
of the estimate and suggests that any difference between estimated and
actual costs will be on the high side. Indeed, it would take only a
relatively small increase in new beneficiaries from the original actuarial
assumption of 50,000 initial new beneficiaries to have a measurable impact
on the long- range actuarial balance of the trust funds. OCACT has
estimated that the agreement would not generate a

measurable impact on the long- range actuarial balance. However, a
subsequent sensitivity analysis performed at our request shows that a
measurable impact on the long- range actuarial balance of the trust funds
will occur if the baseline figure is underestimated by more than 25
percent* just 13,000 additional beneficiaries above the estimated 50,000
new beneficiaries.

Page 12 GAO- 03- 1035T Our analysis of past actuarial estimates of
expected beneficiaries under totalization agreements shows that exceeding
the 25 percent threshold has

not been unusual, even in agreements where uncertainty about the number of
unauthorized workers is substantially less. 9 Our review of prior
estimates shows that OCACT frequently either overestimated or
underestimated the number of expected beneficiaries, usually by more than
25 percent (see table 2). In fact, where underestimates occurred, the
differences were huge, involving several orders of magnitude. However, it
is important to note that the number of estimated beneficiaries for prior
agreements is substantially smaller than for the proposed Mexican
agreement. Therefore, the differences in actual beneficiaries from
estimated beneficiaries have a higher proportional impact. Furthermore,
OCACT has not underestimated the number of expected beneficiaries for the
agreements we analyzed since the 1991 agreement with Austria.
Nevertheless, the numerous uncertainties and data gaps associated with the
Mexican agreement elevate the risks associated with any cost estimate.

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

Page 13 GAO- 03- 1035T Table 2: Precision of OCACT*s Cost Estimates for 11
Prior Totalization Agreements Country Effective year

of agreement Beneficiaries Percent actual beneficiaries is

greater/( less) than estimated beneficiaries Estimated Actual United
Kingdom 1985 3,500 2,084 (40) Sweden 1987 100 211 111 Spain 1988 300 377
26 France 1988 200 968 384 Portugal 1989 100 701 601 Netherlands 1990 100
310 210 Austria 1991 100 314 214 Finland 1992 100 38 (62) Luxembourg 1993
40 12 (70) Ireland 1993 1,100 515 (53) Greece 1994 1,000 918 (8) Source:
GAO analysis of SSA data. Note: Actual data were not available for years
prior to 1987 so comparisons for six earlier agreements could not be made.
Also, comparison could not be made for the three recent agreements.

Totalization agreements between the United States and other countries
often foster enhanced diplomatic relations and provide mutually beneficial
business, tax, and other incentives to employers and employees affected by
these agreements. At the same time, they impose a financial cost to both
countries* social security programs. SSA*s processes for entering into
these agreements have been informal and have not included specific steps

to assess and mitigate potential risks. Regardless of the country under
consideration, sound management practices dictate that SSA managers have a
risk management process in place to ensure that the interests of the
United States and the Social Security Trust Funds are protected.

Most totalization agreements have been with countries that are
geographically distant to the United States, have developed economies, and
represent only a fraction of the estimated unauthorized immigrants in the
United States. Still, all agreements include some level of uncertainty,
and require due diligence on SSA*s part to alleviate those uncertainties.
An

agreement with Mexico, however, presents unique and difficult challenges
for SSA because so little is known about the size, work history, earnings,
Conclusions

Page 14 GAO- 03- 1035T and dependents of the unauthorized Mexican
population. Furthermore, a common border and economic disparity between
the United States and

Mexico have fostered significant and longstanding unauthorized immigration
into the United States, making an agreement with Mexico potentially far
more costly than any other. Thus, for the Mexican agreement, additional
analyses to assess risks and costs may be called for. A revised approach
for entering into totalization agreements with all

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

Mr. Chairman, this concludes my statement. I would be happy to respond to
any questions that you or other members of the Subcommittee may have. For
information regarding this testimony, please contact Barbara D. Bovbjerg,
Director, Education, Workforce, and Income Security Issues, on (202) 512-
7215. Individuals who made key contributions to this testimony are Daniel
Bertoni, Gerard Grant, William Staab, and Paul Wright.

(130287)

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