Social Security Reform: Analysis of Reform Models Developed by	 
the President's Commission to Strengthen Social Security	 
(15-JAN-03, GAO-03-310).					 
                                                                 
Social Security is an important social insurance program	 
affecting virtually every American family. It represents a	 
foundation of the nation's retirement income system and provides 
millions of Americans with disability insurance and survivors'	 
benefits. Over the long term, as the baby boom generation	 
retires, Social Security's financing shortfall presents a major  
solvency and sustainability challenge. Numerous reform proposals 
have been put forward in recent years, and in December 2001 a	 
commission appointed by the President presented three possible	 
reform models. Senator Breaux, Chairman of the Senate Special	 
Committee on Aging, asked GAO to use its analytic framework to	 
evaluate the Commission's models. This framework consists of	 
three criteria: (1) the extent to which a proposal achieves	 
sustainable solvency and how it would affect the economy and the 
federal budget; (2) the balance struck between the twin goals of 
income adequacy and individual equity; and (3) how readily such  
changes could be implemented, administered, and explained to the 
public. 							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-310 					        
    ACCNO:   A05859						        
  TITLE:     Social Security Reform: Analysis of Reform Models	      
Developed by the President's Commission to Strengthen Social	 
Security							 
     DATE:   01/15/2003 
  SUBJECT:   Disability insurance				 
	     Economic analysis					 
	     Federal social security programs			 
	     Funds management					 
	     Future budget projections				 
	     Retirement benefits				 
	     Social security benefits				 
	     Old Age and Survivors Insurance Trust		 
	     Fund						 
                                                                 
	     Social Security Program				 

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GAO-03-310

Report to the Chairman, Senate Special Committee on Aging, U. S. Senate

United States General Accounting Office

GAO

January 2003 SOCIAL SECURITY REFORM

Analysis of Reform Models Developed by the President*s Commission to
Strengthen Social Security

GAO- 03- 310

Applying GAO*s criteria to the Commission models highlights key options
and trade- offs between efforts to achieve sustainable solvency and
maintain adequate retirement income for current and future beneficiaries.

For example, the Commission*s Model 2 proposal reduces Social Security*s
defined benefit from currently scheduled levels through various formula
changes, provides enhanced benefits for low- wage workers and spousal
survivors, and adds a voluntary individual account option in exchange for
a benefit reduction. Model 2 would provide for sustainable solvency and
reduce the shares of the federal budget and the economy devoted to Social
Security compared to currently scheduled benefits (tax increase benchmark)
regardless of how many individuals selected accounts. However, with
universal account participation, general revenue funding would be needed
for about 3 decades.

GAO*s analysis of benefit adequacy and equity issues relating to Model 2
found that

. Across cohorts, median monthly benefits for those choosing accounts are
always higher, despite a benefit offset, than for those who do not; this
gap grows over time. In addition, benefits assuming universal account
participation are higher than payment of a defined benefit generally
corresponding to an amount payable from future Social Security trust fund
revenues (benefit reduction benchmark). However, benefits received by
those without accounts fall below the benchmark over time.

. For the lowest quintile, median monthly benefits with universal
participation in the accounts tend to be higher than GAO*s benefit
reduction benchmark, likely due to the enhanced benefit for full- time
*minimum wage* workers. This pattern becomes more pronounced across the
cohorts analyzed. . Regardless of whether an account is chosen, many
people could receive

monthly benefits under Model 2 that are higher than the benefit reduction
benchmark. However, a minority could fare worse. Some people could also
receive a benefit greater than under the tax increase benchmark although a
majority could fare worse. Benefits for those choosing individual accounts
will be sensitive to the actual rates of return earned by those accounts.

Adding individual accounts would require new administrative structures,
adding complexity and cost. Public education will be key to help
beneficiaries make sound decisions about account participation, investment
diversification, and risk. Finally, any Social Security reform proposal
must also be looked at in the context of both the program and the long-
term budget outlook. A funding gap exists between promised and funded
Social Security benefits which, although it will not occur for a number of
years, is significant and will grow over time. In addition, GAO*s long-
term budget simulations show, difficult choices will be required to
reconcile a large and growing gap between projected revenues and spending
resulting primarily from known demographic trends and rising health care
costs.

SOCIAL SECURITY REFORM

Analysis of Reform Models Developed by the President*s Commission to
Strengthen Social Security

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 310. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Barbara D. Bovbjerg at (202) 512- 7215 or bovbjergb@
gao. gov. Highlights of GAO- 03- 310, a report to the

Chairman of the Special Committee on Aging, U. S. Senate

January 2003

Social Security is an important social insurance program affecting
virtually every American family. It represents a foundation of the
nation*s retirement income system and provides millions of Americans with
disability insurance and survivors* benefits. Over the long term, as the
baby boom generation retires, Social Security*s financing shortfall
presents a major solvency and sustainability challenge. Numerous reform
proposals have

been put forward in recent years, and in December 2001 a commission
appointed by the President presented three possible reform models.

Senator Breaux, Chairman of the Senate Special Committee on Aging, asked
GAO to use its analytic framework to evaluate the Commission*s models.
This framework consists of three criteria: (1) the extent to which a

proposal achieves sustainable solvency and how it would affect the economy
and the federal budget; (2) the balance struck between the twin goals of
income adequacy and individual equity; and (3) how readily such changes
could be implemented, administered, and explained to the public.

Page i GAO- 03- 310 Social Security Reform Letter 1 Achieving Sustainable
Solvency 4 Balancing Adequacy and Equity 6 Implementing and Administering
Reforms 7 Concluding Observations 7 Agency Comments and Our Evaluation 8
Appendix I Analysis of Reform Models 12

Appendix II Comments from the Social Security Administration 100

Abbreviations

OASDI Old- Age and Survivors Insurance and Disability Insurance PIA
primary insurance amount SSA Social Security Administration Contents

Page 1 GAO- 03- 310 Social Security Reform January 15, 2003 The Honorable
John Breaux

Chairman Special Committee on Aging United States Senate

Dear Mr. Breaux: This report responds to your request that we apply our
criteria for assessing Social Security reform proposals to the reform
models developed by the President*s Commission to Strengthen Social
Security. 1 Each of the Commission*s three reform models represents a
different

approach to including a voluntary individual account option to Social
Security. Model 1 does not restore solvency and accordingly is not
analyzed in this report. In April 2002, we provided your staff with a
briefing on our preliminary results for Model 2. This report contains our
final results, focusing on Model 2, with results for Model 3 presented in
Appendix I. We based our interpretation of the Commission*s reform models
in large

part on the memorandum provided by the Office of the Chief Actuary at the
Social Security Administration (SSA) dated January 31, 2002, that
estimated the reform models* effects on the Social Security program. Our
interpretation also draws on the Commission*s final report. As agreed with
your office, our report is based on the analytic framework we have used in

past work to evaluate Social Security reform proposals. 2 That framework
consists of three basic criteria:

 the extent to which the proposal achieves sustainable solvency and how
it would affect the U. S. economy and the federal budget, 1 The
Commission*s report, Strengthening Social Security and Creating Personal
Wealth for All Americans was issued on December 21, 2001 (revised March
19, 2002). 2 See, for example, U. S. General Accounting Office, Social
Security: Evaluating Reform Proposals, GAO/ AIMD/ HEHS- 00- 29
(Washington, D C.: Nov. 4, 1999) and Social Security Reform: Information
on the Archer- Shaw Proposal, GAO/ AIMD/ HEHS- 00- 56 (Washington,

D. C.: Jan. 18, 2000).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 310 Social Security Reform  the balance struck between
the twin goals of income adequacy (level and certainty of benefits) and
individual equity (rates of return on individual contributions), and

 how readily such changes could be implemented, administered, and
explained to the public. In evaluating proposals against the three basic
criteria, we used a set of detailed questions that help describe potential
effects of reform models on important policy and operational aspects of
public concern. These

questions are displayed in the report. Our analysis of the Commission
reform models included comparison with three benchmarks: 3  The *benefit
reduction benchmark* assumes a gradual reduction in the currently
scheduled Social Security defined benefit beginning with those newly
eligible for retirement in 2005. Current tax rates are maintained.  The
*tax increase benchmark* assumes an increase in the OASDI payroll

tax beginning in 2002 sufficient to achieve an actuarial balance over the
75- year period. Currently scheduled benefits are maintained.  The
*baseline extended* benchmark is a fiscal policy path developed in

our earlier long- term model work that assumes payment in full of
currently scheduled Social Security benefits and no other changes in
current spending or tax policies. To show the range of possible outcomes
given the voluntary nature of

individual accounts 4 in the Commission models, we simulated each model
assuming (1) no participation (0%) in the individual account option and
(2) universal participation (100%) in the account option. Actual
experience would likely fall between these bounds but cannot be predicted
with any degree of certainty.

As you requested, we used our long- term economic model in assessing
Commission reform models against the first criterion, that of financing

3 From the perspective of analyzing benefit adequacy, the tax increase and
baseline extended benchmarks are identical because both assume payment in
full of scheduled Social Security benefits over the 75- year simulation
period.

4 In this report, the term *individual account* is used for the voluntary
accounts, consistent with published GAO work. The Commission used the term
*personal account* in its final report.

Page 3 GAO- 03- 310 Social Security Reform sustainable solvency. 5
Although any proposal*s ability to achieve and sustain solvency is
sensitive to economic and budgetary assumptions,

using a common framework can facilitate comparisons of alternative reform
proposals. Our sustainable solvency standard encompasses several different
ways of looking at the Social Security program*s financing needs. While
75- year actuarial balance is generally used in evaluating the longterm
financial outlook of the Social Security program and reform proposals, it
is not sufficient in gauging the program*s solvency after the 75th year.
For example, under the Trustees* intermediate assumptions, each year the
75- year actuarial period changes, and a year with a surplus is replaced
by a new 75th year that has a significant deficit. As a result, changes
made to restore trust fund solvency only for the 75- year period can
result in future actuarial imbalances almost immediately. Reform plans
that lead to sustainable solvency would be those that consider the

broader issues of fiscal sustainability and affordability over the long
term. 6 To examine how the Commission reform models balance adequacy and
equity concerns, we used the GEMINI model, a dynamic microsimulation model
for analyzing the lifetime implications of Social Security policies for a
large sample of people 7 born in the same year. GEMINI can simulate
different reform features, including individual accounts with an offset,
for their effects on the level and distribution of benefits. 8 To avoid
having the

extremely high returns of a small portion of participants skew the
average, we present most of our statistics as medians. To assess benefit
adequacy, we display median monthly benefit levels for the 1955, 1970, and
1985 birth

cohorts to enable comparisons over time; initial benefits by earnings 5
For this analysis, consistent with SSA*s scoring of the Commission reform
models, our long- term economic model incorporates the 2001 Trustees*
best, or intermediate, assumptions. 6 In addition to assessing a
proposal*s likely effect on Social Security*s actuarial balance, a
standard of sustainable solvency also involves looking at (1) the balance
between program income and cost beyond the 75th year and (2) the share of
the budget and economy consumed by Social Security spending.

7 The GEMINI cohorts consist of simulated samples of 100,000 individuals,
sometimes called synthetic samples. These samples were validated against
data from the Social Security Administration*s Annual Statistical
Supplement, the SIPP, the CPS, MINT2, and the PSID. 8 In simulating the
individual accounts, we used the same nominal rates of return used by

SSA*s Office of the Chief Actuary in January 2002, with 6. 3 percent for
Treasuries, 6. 8 percent for corporate bonds, and 10 percent for equities.

Page 4 GAO- 03- 310 Social Security Reform quintile, comparing the lowest
and highest quintiles; and the effects on the distribution of initial
benefits within each cohort. To examine how the Commission reform models
provide for reasonable

implementation and communication of any changes, we used qualitative
analysis based on GAO*s issued and ongoing body of work on Social Security
reform. This work addresses various issues raised by reform approaches,
including establishing individual accounts, raising the retirement age,
and the impact of reforms on minorities and women.

Models 2 and 3 restore solvency to the Old- Age and Survivors Insurance
and Disability Insurance (OASDI) Trust Funds through a combination of
changes in the initial benefit calculation, general revenue transfers,
and/ or benefit offsets for those who choose to participate in the
individual account option. Model 3 requires an additional contribution
equal to 1 percent of taxable payroll under the voluntary individual
account option. All models share a common framework for administering
individual accounts. As agreed with your office, this report focuses on
Model 2, with results for Model 3 presented in Appendix I.

The use of our criteria to evaluate approaches to Social Security reform
highlights the trade- offs that exist between efforts to achieve solvency
for the OASDI trust funds and efforts to maintain adequate retirement
income for current and future beneficiaries. The models illustrate some of
the options and trade- offs that will need to be considered as the nation
debates how to reform Social Security.

Our analysis of sustainable solvency under Model 2 showed that  As
estimated by the actuaries, Model 2, with either universal (Model 2* 100%)
or zero (Model 2* 0%) participation in voluntary individual

accounts, is solvent over the 75- year projection period, and the ratio of
annual income to benefit payments at the end of the simulation period is
increasing. However, in Model 2 *100% over three decades of general
revenue transfers are needed to achieve trust fund solvency. Model 2* 0%
achieves solvency with no general revenue transfers.  Model 2- 100% would
ultimately reduce the budgetary pressures of Social

Security on the unified budget relative to baseline extended. However,
this would not begin until the middle of this century. Relative to both
GAO*s benefit reduction benchmark and tax increase benchmark, unified
surpluses would be lower and unified deficits higher throughout the
simulation period under Model 2- 100%. Model 2- 0% would reduce Achieving
Sustainable Solvency

Page 5 GAO- 03- 310 Social Security Reform budgetary pressures due to
Social Security beginning around 2015 relative to baseline extended. This
fiscal outlook under Model 2- 0% is very similar

to the fiscal outlook under GAO*s benefit reduction benchmark.  Under
Model 2- 100%, the government*s cash requirement (as a share of

GDP) to fund the individual accounts and the reduced defined benefit would
be about 20 percent higher initially than under both the baseline extended
and tax increase benchmarks. This differential gradually narrows until the
2030s, after which less cash would be required under model 2- 100%. By
2075, Model 2- 100% would require about 40 percent less cash than the
baseline extended and tax increase benchmarks.  Viewed from the
perspective of the economy, total payments (Social

Security defined benefits plus benefit from individual accounts) as a
share of GDP would gradually fall under Model 2- 100% relative to the
baseline extended and tax increase benchmarks. In 2075, the share of the
economy absorbed by payments to retirees from the Social Security system
as a whole under Model 2- 100% would be roughly 20 percent lower than the
baseline extended or tax increase benchmark and roughly the same as under
the benefit reduction benchmark.  With regard to national saving, Model 2
increases net national saving on a

first order basis primarily due to the proposed benefit reductions. The
individual account provision does not increase national saving on a first
order basis; the redirection of the payroll taxes to finance the
individual accounts reduces government saving by the same amount that the
individual accounts increase private saving. Beyond these first order
effects, the actual net effect of a proposal on national saving is
difficult to estimate due to uncertainties in predicting changes in future
spending and revenue policies of the government as well as changes in the
saving behavior of private households and individuals. For example, the
lower surpluses and higher deficits that result from redirecting payroll
taxes to individual accounts could lead to changes in federal fiscal
policy that would increase national saving. However,

households may respond by reducing their other saving in response to the
creation of individual accounts. 9 Model 3 results are presented in
Appendix I. Because the benefit

reductions in Model 3 are smaller than in Model 2, long- term unified
deficits are larger under Model 3. Model 3 requires an additional
contribution equal to 1 percent of taxable payroll for those choosing
individual accounts. Assuming universal account participation in both 9 No
expert consensus exists on how Social Security reform proposals would
affect the saving behavior of private households and businesses.

Page 6 GAO- 03- 310 Social Security Reform models, Model 3 would result in
a larger share of the economy being absorbed by total benefit payments to
retirees* about the same share as would be the case under the baseline
extended and tax increase

benchmarks. The Commission*s proposals also illustrate the difficulty
reform proposals face generally in balancing adequacy (level and certainty
of benefits) and equity (rates of return on individual contributions)
considerations. Each of the models protects benefits for current and near-
term retirees and the

shift to advance funding could improve intergenerational equity. However,
under each of the models, some future retirees also could face potentially
significant benefit reductions in comparison to either the tax increase or
the benefit reduction benchmarks because primary insurance amount (PIA)
formula factors that are reduced by real wage growth, uncertainty in rates
of return earned on accounts, changes in benefit status over time,

and annuity pricing. Our analysis of Model 2 shows that:  Median monthly
benefits (the Social Security defined benefit plus the

benefit from the individual account) for those choosing individual
accounts are always higher, despite a benefit offset, than for those who
do not choose the account, and this gap grows over time. In addition,
median monthly benefits under universal participation in the accounts are
also higher than the median benefits received under the benefit reduction
benchmark. However, median monthly benefits received by those without
accounts fall below those provided by the benefit reduction benchmark over
time.  For the lowest quintile of beneficiaries, median monthly benefits
with

universal participation in the accounts tend to be higher than the
benefits received under the benefit reduction benchmark, likely due to the
enhanced benefit for full- time *minimum wage* workers. This pattern
becomes more pronounced over time.  Regardless of whether an account is
chosen, under Model 2 many people

could receive monthly benefits that are higher than the benefit reduction
benchmark. However, a minority could fare worse. Some people could also
receive a benefit greater than under the tax increase benchmark although a
majority could fare worse. Monthly benefits for those choosing individual
accounts will be sensitive to the actual rates of return earned by those
accounts. The cohort results for Model 3 are generally similar to Model 2.
However, median monthly benefits for those choosing individual accounts
are higher Balancing Adequacy

and Equity

Page 7 GAO- 03- 310 Social Security Reform than the benefit level under
the tax increase benchmark for the 1970 and 1985 cohorts. This result is
likely because of Model 3*s feature of a

mandatory extra 1 percent contribution into the individual accounts for
those who choose to participate. Further results on Model 3 can be found
in Appendix I.

Each of the models would establish a governing board to administer the
individual accounts, including the choice of available funds and providing
financial information to individuals. While the Commission had the benefit
of prior thinking on these issues, many implementation issues remain,
particularly in ensuring the transparency of the new system and educating
the public to avoid any gaps in expectations. For example, an education
program would be necessary to explain the changes in the benefit
structure, model features like the benefit offset and how accounts would
be split in the event of divorce. Education and investor information is
also important as the system expands and increases the range of investment
selection. Questions about the harmonization of such features with state
laws regarding divorce and annuities also remain an issue.

The use of our criteria to evaluate approaches to Social Security reform
highlights the trade- offs that exist between efforts to achieve
sustainable solvency and to maintain adequate retirement income for
current and future beneficiaries. These trade- offs can be described as
differences in the extent and nature of the risks for individuals and the
nation as a whole. For example, under certain individual account
approaches, including those developed by the Commission, some financial
risk is shifted to individuals and households to the extent that
individual account income is expected to provide a major source of income
in retirement.

At the same time, the defined benefit under the current Social Security
system is also uncertain. The primary risk is that a significant funding
gap exists between currently scheduled and funded benefits which, although
it will not occur for a number of years, is significant and will grow over
time.

Other risks stem from uncertainty in, for example, future levels of
productivity growth, real wage growth, and demographics. Congress has
revised Social Security many times in the past, and future Congresses
could decide to revise benefits in ways that leave those affected little
time to adjust. As Congress deliberates approaches to Social Security, the

national debate also needs to include discussion of the various types of
risk implicit in each approach and in the timing of reform. Implementing
and

Administering Reforms

Concluding Observations

Page 8 GAO- 03- 310 Social Security Reform Public education and
information will be key to implementing any changes in Social Security and
especially so if individuals must make choices that

affect their future benefits. Since the Commission options were published,
there has been limited explanatory debate. As Congress and the President
consider actions to be taken, it will be important as well to consider how

such actions can be clearly communicated to and understood by the American
people.

Finally, any Social Security reform proposal must also be looked at in the
context of the nation*s overall long- range fiscal imbalances. As our
longterm budget simulations show, 10 difficult choices will be required of
policymakers to reconcile a large and growing gap between projected
revenues and spending resulting primarily from known demographic trends
and rising health care costs.

We provided SSA an opportunity to comment on the draft report. The agency
provided us with written comments, which appear in Appendix II. SSA
acknowledged the comprehensiveness of our analysis of the

Commission*s proposals. The agency also concurs with our reform criterion
of achieving sustainable solvency and with our report*s overall
observations and conclusions. SSA*s comments and suggestions can be
grouped into a few general categories.

GAO Benchmarks and Their Relationship to Sustainable Solvency - The agency
commends our use of multiple benchmarks with which to compare alternative
proposals. However, they note that our definition of sustainable solvency
differs from that used by SSA in assessing trust fund financial status. In
addition, although they note that our benchmarks are solvent over the 75-
year projection period commonly used by SSA*s Office of the Chief Actuary
in its preparation of the annual trustees report, they do not achieve
sustainable solvency 11 . SSA expresses a concern that unless carefully
annotated, the comparisons made in our report could be misunderstood.
Finally, SSA also suggests the use of several alternative

10 See, for example, U. S. General Accounting Office, Budget Issues: Long-
Term Fiscal Challenges, GAO- 02- 467T (Washington, D. C. : Feb, 27, 2002)
and Social Security: LongTerm Financing Shortfall Drives Need for Reform,
GAO- 02- 845T (Washington, D. C.: Jun. 19, 2002).

11 In response to another agency suggestion, we have also clarified our
definition of sustainable solvency in the report. Agency Comments and Our
Evaluation

Page 9 GAO- 03- 310 Social Security Reform benchmarks, of which one would
provide additional revenue to pay for currently scheduled benefits.

We agree with SSA that sustainable solvency is an important objective;
indeed it is one of our key criteria with which we suggest that
policymakers evaluate alternative reforms. SSA correctly points out that
GAO*s benchmarks do not achieve sustainable solvency beyond the 75- year
period. We believe our standard is a more encompassing one. SSA*s
definition relies on analyzing trends in annual balances and trust fund
ratios near the end of the simulation period. Consequently the definition
needs to be supplemented, for example, in cases where proposals use
general revenue transfers or other unspecified sources of revenue that
automatically rise and fall to maintain annual balance or a certain trust
fund ratio. In addition, SSA*s definition does not directly consider the
resources needed to fund individual accounts. Our standard includes other
measures in an effort to gain a more complete perspective of a proposal*s
likely effects on the program, the federal budget, and the economy.

We share SSA*s emphasis on the importance of careful and complete
annotation. The report explicitly addresses the issue of sustainable
solvency and states that the comparison benchmarks used, while solvent
over the 75- year projection period, are not solvent beyond that period.
Given SSA*s concerns, we have revised our report to clarify our analyses,
where appropriate, to minimize the potential for misinterpretation or
misunderstanding.

Regarding SSA*s suggestion about the use of alternative benchmarks, we
already use a benchmark that provides additional revenue to pay currently
scheduled benefits. Our other benchmark maintains current tax rates,
phasing in benefit reductions over a 20- year period. In our view, the set
of benchmarks used provide a fair and objective measuring stick with which

to compare alternative proposals, particularly the many proposals that
introduce reform elements over a number of years. Both of the benchmarks
are explicitly fully funded and in their design we worked closely with
Social Security*s Office of the Chief Actuary to calibrate them to ensure
their solvency over the 75- year period. Additional Analysis * Many of
SSA*s comments suggest additional or more

detailed analyses of some of our findings. For example, SSA suggested
additional analyses of the characteristics of those beneficiaries who fare
better or worse under each of the Commission*s models, further
distributional analyses on groups of beneficiaries who claim benefits at
ages other than 65 and that we conduct analyses on rates of participation

Page 10 GAO- 03- 310 Social Security Reform other than the polar cases of
0 percent and 100 percent individual account participation. The agency
also suggested that substantial analysis on

implementation and administration issues is necessary, given the
complexity of administering the commission*s models. Although we tried to
address most of the critical issues given our limited time and resources,

we agree with SSA that many of their suggested analyses could provide
additional useful insights in understanding the distributional
implications of adopting the Commission*s proposals.

Distributional Analysis - SSA expressed a number of concerns about the
SSASIM- GEMINI simulation model that we use to conduct our distributional
analysis of benefits. One concern addresses future cohorts* benefit levels
reported in our draft. In this regard, we were already reviewing the level
of benefits received by the 1985 cohort and the highest quintile of that
cohort with outside experts, and our subsequent analysis suggests findings
that are more consistent with SSA*s observations: we have made these
changes to the report.

Some of SSA*s concerns also appear to result from confusion over the
structure, design and limitations of the SSASIM- GEMINI model. We have
included some additional documentation in the report that we believe will
help both the layperson as well as a more technical audience understand
the model more easily. We note that while ancillary benefits can be
calculated through the model and are included in our analysis, we utilize
the model to focus on the individual beneficiary and not the household as
the unit of analysis. The model also includes marriage and divorce rates
and their implication for earnings. These marriage and divorce rates and
other key parameters are expressed by probability rules that drive the

lifetime dynamics of the synthetic population. These rules are not
heuristically generated but are validated through a comparison with data
from the Social Security Administration and the Current Population Survey,
among others. We also note that in certain of instances, for example in
specifying the calculation of annuities as well as the specification of
rates of return used in the modeling, we consulted with SSA*s Office of
the Chief Actuary in an effort to reflect their projection methodology to
extent that it was feasible.

Measures of Debt - SSA notes that unfunded obligations may be considered a
kind of implicit debt and should be considered in the analysis. In
analyzing reform plans, however, the key fiscal and economic point is the
ability of the government and society to afford the commitments when they
come due. Our analysis addresses this key point

Page 11 GAO- 03- 310 Social Security Reform by looking at the level and
trends over 75 years in deficits, cash needs, and GDP consumed by the
program.

Technical Comments * SSA also provided technical and other clarifying
comments about the minimum benefit provision, our characterization of
stochastic simulation as well as other minor aspects of the report, which
we incorporated as appropriate.

We are sending copies of this report to the Honorable Larry E. Craig,
Ranking Minority Member, Senate Special Committee on Aging, Senator Max S.
Baucus, Chairman, Senate Committee on Finance, Senator Charles E.
Grassley, Ranking Minority Member, Senate Committee on Finance, the
Honorable William M. Thomas, Chairman, and the Honorable Charles B.
Rangel, Ranking Minority Member, House Committee on Ways and Means, the
Honorable E. Clay Shaw, Chairman, and the Honorable Bob Matsui, Ranking
Minority Member, Subcommittee on Social Security, House Committee on Ways
and Means, and the Honorable Jo Ann B. Barnhart, Commissioner, Social
Security Administration. We will also make copies available to others on
request. In addition, the report is available at no

charge on GAO*s Web site at http:// www. gao. gov. If you or your staffs
have any questions about this report, please contact Barbara D. Bovbjerg,
Director, Education, Workforce, and Income Security Issues, on (202) 512-
7215, or Susan Irving, Director, Strategic Issues, on (202) 512- 9142.

David M. Walker Comptroller General of the United States

Appendix I: Analysis of Reform Models Page 12 GAO- 03- 310 Social Security
Reform Appendix I: Analysis of Reform Models

Analysis of Reform Models Developed by the President*s

Commission to Strengthen Social Security

January 2003

Appendix I: Analysis of Reform Models Page 13 GAO- 03- 310 Social Security
Reform Objectives

* Evaluation of reform models put forward by the President*s Commission to
Strengthen Social Security.  The evaluation uses the three basic criteria
GAO has

developed that provide policymakers with a framework for assessing reform
plans: * Financing Sustainable Solvency * Balancing Adequacy and Equity in
the Benefits Structure * Implementing and Administering Reforms

Appendix I: Analysis of Reform Models Page 14 GAO- 03- 310 Social Security
Reform Evaluating Social Security Reform Proposals

 Comprehensive proposals can be evaluated against three basic criteria. 
Reform proposals should be evaluated as packages that strike a

balance among individual reform elements and important interactive
effects.  Some proposals will fare better or worse than other proposals

under each criterion.  Overall evaluation of each proposal depends on the
weight individual policymakers place on each criterion.

Appendix I: Analysis of Reform Models Page 15 GAO- 03- 310 Social Security
Reform  No changes to benefits for retirees or near- retirees. 
Dedication of entire Social Security surplus to Social Security.

 No increase in Social Security payroll taxes.  No government investment
of Social Security funds in the stock market.  Preservation of disability
and survivor components.  Inclusion of individually controlled voluntary
individual retirement accounts. To develop reform plans that strengthen
Social Security and increase its fiscal sustainability while meeting these
principles:

The President*s Charge to the Commission to Strengthen Social Security

Appendix I: Analysis of Reform Models Page 16 GAO- 03- 310 Social Security
Reform Overview of Commission Reform Models  The Commission developed
three reform models, each of which represents a different approach to
including a voluntary individual account component in Social Security. 
Model 1 does not change the defined benefit and does not restore

solvency; Models 2 and 3 restore solvency through a combination of changes
in the initial benefit calculation, general revenue transfers, and/ or
benefit offsets for those who choose to participate in the individual
account option.

 Account contribution amounts, benefit offset in exchange for account
participation, and calculation of an individual*s initial benefit differ
among the three models.  All models share a common framework for
administering accounts.

Appendix I: Analysis of Reform Models Page 17 GAO- 03- 310 Social Security
Reform  Voluntary individual accounts in exchange for reduction in Social
Security defined portion of benefit. This benefit offset is linked to
account contributions, not actual account balance.

 Governing Board to administer individual accounts structured along
Thrift Savings Plan (TSP) or Federal Reserve Board model.

 Two- tier investment framework: * Initially, balance must be invested
through TSP- like system with several fund choices; later, if balance is
above a

threshold, account may be invested in a range of qualified private sector
funds. * Annual option to change allocation.

Individual Accounts: Framework Common to All Commission Models

Appendix I: Analysis of Reform Models Page 18 GAO- 03- 310 Social Security
Reform  Account access: * Account may be left to heirs if owner dies
before retirement.

* No withdrawals before retirement (for disabled, before normal retirement
age). 1 * At retirement, conversion to phased withdrawals or annuity.

Above a specified threshold, balance may be taken as a lump sum.

Individual Accounts: Framework Common to All Commission Models 1 The
Commission*s report stated that due to the complex and sensitive issues
involved, time did not permit the development of specific recommendations
for DI. Accordingly, the Commission recommended the President address DI
through a separate policy process.

Appendix I: Analysis of Reform Models Page 19 GAO- 03- 310 Social Security
Reform  Annuities: * For married workers, joint and two- thirds survivor
annuity. 1

* Several types of annuities to be made available, including inflation-
indexed annuities and annuities permitting bequest if owner dies before a
specified time.  Spousal protections: * Account balance acquired during
the marriage divided

equally at divorce. * Balances acquired before marriage not shared at time
of divorce.

1 Or alternative arrangement, agreed to by both spouses, consistent with
the principle that total benefit income will be sufficient to keep both
spouses above the poverty line in retirement.

Individual Accounts: Framework Common to All Commission Models

Appendix I: Analysis of Reform Models Page 20 GAO- 03- 310 Social Security
Reform GAO*s Methodology

 Financing Sustainable Solvency * GAO*s long- term economic model was
used to help assess the potential

fiscal and economic impacts of Social Security reform proposals. *
Estimates of reform models* costs and income are those made by the

Office of the Chief Actuary, Social Security Administration.  Balancing
Adequacy and Equity

* The GEMINI model, a dynamic microsimulation model, 1 was used to analyze
the 1955, 1970, and 1985 birth cohorts to enable comparison of results
over time as reform models are fully implemented.

 Implementing and Administering Reforms * Qualitative analysis based on
GAO*s issued and ongoing body of work on

Social Security reform was used. 1 GEMINI is useful for analyzing the
lifetime implications of Social Security policies for a large sample of
people born in the same year and can simulate different reform features,
including individual accounts with an offset, for their effects on the
level and distribution of benefits. GEMINI was used to analyze Models 2
and 3 both with 0 and 100 percent participation in the individual account
features of the proposals.

Appendix I: Analysis of Reform Models Page 21 GAO- 03- 310 Social Security
Reform Benchmarks

GAO*s analysis uses three benchmarks:  Benefit reduction maintains
current payroll tax rates and assumes a

gradual reduction in Social Security benefits beginning with those
reaching age 62 in 2005 and continuing for the next 30 years.  Tax
increase 1 assumes that the combined employer- employee payroll

tax rate is increased by 0.34 percent for DI and 1.56 percent for OASI
beginning in 2002 in order to pay scheduled benefits.  Baseline extended
is a fiscal policy path that assumes payment in full of all scheduled
Social Security benefits throughout the 75- year period and no other
changes in current policies. In this analysis, it uses the 2001 Trustees
intermediate economic assumptions, consistent with SSA scoring of reform
models.

1 The benefit reduction and tax increase benchmarks were developed by GAO
with technical input from SSA*s Office of the Chief Actuary. Both use the
2001 Trustees intermediate economic assumptions. Both restore 75- year
actuarial balance to Social Security, but are not solvent beyond this
period.

Appendix I: Analysis of Reform Models Page 22 GAO- 03- 310 Social Security
Reform Benchmarks

 All three benchmarks are used in analyzing sustainable solvency. From
the perspective of sustainable solvency, the baseline extended differs
from the tax increase benchmark. The tax increase

benchmark assumes payroll tax financing of all scheduled benefits whereas
the baseline extended benchmark assumes all scheduled benefits will be
paid but does not specify any new financing.

 There is no difference between the tax increase and baseline extended
benchmarks in analyzing benefit levels, since only the financing of
benefits differs, not the actual benefit levels. Therefore only the
benefit reduction and tax increase benchmarks are used in analyzing
benefit adequacy.  Benchmarks are to be viewed as illustrative, polar
cases or bounds

for changes within the current system. Other benchmarks could be devised
with different tax and/ or benefit adjustments that would perform the same
function.

Appendix I: Analysis of Reform Models Page 23 GAO- 03- 310 Social Security
Reform Scope

 Briefing focuses on Model 2, with results for Model 3 presented in the
appendix. 1  The Commission*s models include a voluntary individual
account option. In our analysis we looked at the two bounds of possible

outcomes* universal participation (100%) in the account option, or no
participation (0%). In analyzing benefit levels, we refer to these
outcomes as *with* and *without* accounts.

1 Models 2 and 3 restore Social Security solvency; Model 1 does not and
accordingly is not the focus of GAO*s analysis.

Appendix I: Analysis of Reform Models Page 24 GAO- 03- 310 Social Security
Reform Model 2

 Voluntary individual account contribution of 4 percent of taxable
payroll up to $1,000 annually in exchange for benefit reduction. 1  For
all those age 62 in 2009 or younger, defined benefits reduced from
currently

scheduled by indexing initial benefit to prices rather than wages. 
Enhanced spousal survival benefit beginning in 2009.

* Increase in widow( er) benefit up to 75 percent of combined spousal
benefit (up to average benefit levels).  A new enhanced benefit for full-
time *minimum- wage* workers who work more

than 20 years. 2 * Accelerated growth in initial benefits from 2009 to
2018. * By 2018, a minimum wage worker with 30 years of program coverage
would

receive an inflation- indexed benefit equal to 120 percent of poverty
level.  To the extent that there is participation in individual accounts,
financing through

general revenue transfers will be needed. If participation were universal,
transfers would be needed for about three decades.

1 Maximum contribution amount indexed annually to wage growth. Benefit
reduction based on amount of account contributions compounded at a real
interest rate of 2 percent. 2 The minimum wage is the current Fair Labor
Standards Act minimum of $5. 15 an hour but is assumed to grow with the
Social Security average wage index.

Appendix I: Analysis of Reform Models Page 25 GAO- 03- 310 Social Security
Reform Sustainable Solvency

 While achieving solvency for the OASDI Trust Funds is important, the
concept of sustainable solvency goes beyond 75- year actuarial balance.

 Sustainable solvency includes reforming the Social Security program in
such a way as to avoid the need to periodically revisit actuarial
imbalances of the OASDI Trust Funds. For example, a rising or level trust
fund ratio at the end of the 75- year period can be an indicator of future
program solvency.

 However, trust fund ratios can give an incomplete picture. They do not
provide information about the effect of program spending on the federal
budget or the economy. In addition, trust fund ratios can be affected by
timing of tax and benefit adjustments and use of general revenues.

 Sustainable solvency also includes assessing the effects of proposed
program changes on the federal budget and on the economy.  Reforms that
reduce pressures on the federal budget and reduce the size of the

economy that will be absorbed in the future by the Social Security system
can lead to sustainable solvency.

Appendix I: Analysis of Reform Models Page 26 GAO- 03- 310 Social Security
Reform Financing Sustainable Solvency To what extent does the proposal:

 Reduce future budgetary pressures?  Reduce debt held by the public? 
Reduce the cost of the Social Security system as a percentage of GDP? 
Reduce the percentage of federal revenues consumed by the Social

Security system?  Increase national saving?  Restore 75- year actuarial
balance and create a stable system?  Raise payroll taxes, draw on general
revenues, and/ or use Social Security

trust fund surpluses to finance changes?  Create contingent liabilities?
 Include *safety valves* to control future program growth? This criterion
evaluates the extent to which the proposal achieves sustainable

solvency, including how the proposal would affect the economy and the
federal budget.

Appendix I: Analysis of Reform Models Page 27 GAO- 03- 310 Social Security
Reform Model 2 Financing Sustainable Solvency

Figure 1  Compared to the baseline extended, Model 2 with universal

participation (Model 2 - 100%) in the individual accounts (IA) option
results in larger unified deficits as a share of GDP through the 2040s,
thereafter unified deficits are progressively lower.  Model 2 with no
participation (Model 2 - 0%) in IAs results in higher

unified surpluses and lower unified deficits beginning around 2015 through
the end of the simulation period compared to baseline extended.  Greater
participation in IAs results in lower surpluses/ higher deficits

over the simulation period.  Throughout the simulation period, unified
surpluses are considerably

lower and unified deficits are considerably higher under Model 2- 100%
than under the tax increase benchmark and, to a lesser extent, the benefit
reduction benchmark.  Through the 2060s, the fiscal outlook under Model
2- 0% is quite similar

to the outlook under the benefit reduction benchmark but compared to the
tax increase benchmark, unified surpluses are lower and unified deficits
are higher over the same time frame.

Appendix I: Analysis of Reform Models Page 28 GAO- 03- 310 Social Security
Reform -20 -15

-10 -5

0 5

2000 2010 2020 2030 2040 2050 2060 2075 Fiscal year Percent of GDP

Baseline extended Benefit reduction Model 2 - 0% Model 2 - 100% Tax
increase

Figure 1: Model 2 Unified Surpluses and Deficits as a Share of GDP

Source: GAO analysis.

Appendix I: Analysis of Reform Models Page 29 GAO- 03- 310 Social Security
Reform Model 2 Financing Sustainable Solvency

Figure 2  Compared to the baseline extended, net debt held by the public
as a

share of GDP is higher under Model 2- 100% until about 2060; thereafter,
debt held by the public is lower.  Under Model 2- 0%, net debt held by
the public is lower beginning about

2020 through the end of the simulation period.  Greater participation in
the IAs results in higher net debt held by the

public throughout the simulation period.  Throughout the simulation
period, net debt held by the public under

Model 2- 100% is considerably higher than the tax increase benchmark and,
to a lesser extent, the benefit reduction benchmark.  Net debt held by
the public under Model 2- 0% is slightly higher than

under the benefit reduction benchmark and much higher than under the tax
increase benchmark until the end of the simulation period.

Appendix I: Analysis of Reform Models Page 30 GAO- 03- 310 Social Security
Reform -50 0

50 100

150 200

2000 2010 2020 2030 2040 2050 2060 2075 Fiscal year Percent of GDP

Baseline extended Benefit reduction Model 2 - 0% Model 2 - 100% Tax
increase

Figure 2: Model 2 Debt Held by the Public as a Share of GDP

Source: GAO analysis.

Appendix I: Analysis of Reform Models Page 31 GAO- 03- 310 Social Security
Reform Model 2 Financing Sustainable Solvency

Figure 3:  The government*s cash requirement includes the amount of cash
required to pay defined benefits and redirect payroll taxes to individual
accounts. Under Model 2- 100%, the

government*s cash requirement would be greater than under both the
baseline extended and tax increase benchmarks in the near term* by about
20 percent in 2010. Beginning in the 2030s, less cash would be required
for Model 2- 100% than the baseline extended and tax increase benchmarks.
In 2075, Model 2- 100% would require about 40 percent less cash than the
baseline extended and tax increase benchmarks.  The cash requirement for
Model 2- 0% would be the same or less than the baseline extended/ tax
increase benchmarks throughout the period. In 2075, Model 2- 0% would

require less cash* nearly 40 percent* than both the baseline extended and
tax increase benchmarks.

 The government*s cash requirement for Model 2 would be greater than the
benefit reduction benchmark until the 2050s. In 2075, Model 2 cash
requirements would be about 20 percent lower than the benefit reduction
benchmark.  In the near term, the greater the individual account
participation, the more cash required. Over the long term, however,
greater individual account participation would reduce the government*s
cash requirements.

Appendix I: Analysis of Reform Models Page 32 GAO- 03- 310 Social Security
Reform 0% 1%

2% 3%

4% 5%

6% 7%

8% 9%

10% 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065
2070 2075

Calendar year Percent of GDP

Baseline extended/ Tax increase Benefit reduction Model 2, 0 percent Model
2, 100 percent

Figure 3: Model 2 Government Cash Requirements

Source: GAO analysis of data from the Office of the Chief Actuary, SSA.
Benefit amounts shown for the baseline extended and tax increase
benchmarks are scheduled benefits as estimated by the actuaries. All
estimates are based on the Trustees' 2001 intermediate assumptions. Note:
Includes cash for defined benefits paid out under the traditional system
and redirect of payroll taxes to individual accounts.

Appendix I: Analysis of Reform Models Page 33 GAO- 03- 310 Social Security
Reform Model 2 Financing Sustainable Solvency

Figure 4:  In 2015, total benefit payments (Social Security benefits plus
individual account

disbursements) as a share of GDP under Model 2 would be about the same as
under the baseline extended or tax increase benchmark and slightly higher
than the benefit reduction benchmark.  In 2030, total benefit payments as
a share of GDP under model 2 would be

somewhat (6- 8 percent) lower than under the baseline extended and tax
increase benchmark but somewhat higher (4- 5 percent) compared with the
benefit reduction benchmark.  In 2075, total benefit payments as a share
of GDP under Model 2- 100% would

be about one fifth lower than under the baseline extended or tax increase
benchmark but somewhat (4 percent) higher than under the benefit reduction
benchmark. The difference in total benefit payments between Model 2- 100%
and Model 2- 0% becomes pronounced over time, with payments under Model 2-
0% more than a third lower than the baseline extended or tax increase
benchmark by 2075.

Appendix I: Analysis of Reform Models Page 34 GAO- 03- 310 Social Security
Reform 0% 1%

2% 3%

4% 5%

6% 7%

8% 2000 2015 2030 2050 2075

Calendar year Percent of GDP

Actual Benefit reduction Model 2 - 0% Model 2 - 100% Baseline extended/
Tax increase

Figure 4: Model 2 Combined Social Security and Individual Account
Disbursements as a Share of GDP Source: GAO analysis of data from the
Office of the Chief Actuary, SSA. Benefit amounts shown for baseline
extended and tax increase

benchmarks are scheduled benefits as estimated by the actuaries. All
estimates are based on the Trustees' 2001 intermediate assumptions.

Appendix I: Analysis of Reform Models Page 35 GAO- 03- 310 Social Security
Reform Model 2 Financing Sustainable Solvency

 Under Model 2, national saving would increase primarily due to the
improved fiscal position of the government resulting from the proposed
benefit reductions. The redirection of payroll taxes under the IA option,

would increase private saving and decrease government saving with no net
effect on national saving. 1

 Model 2 restores 75- year actuarial balance with either no participation
or universal participation in the IA option. The trust fund ratio would be
rising at the end of the 75- year period under both Model 2- 0% and Model
2- 100%.  Model 2- 0% requires no additional revenue. IAs are financed as
a

redirection of payroll taxes. General revenue transfers would be used to
keep the OASDI trust funds solvent under Model 2- 100%.  Model 2 does not
create any new contingent liabilities. Individuals bear the risk of IA
investment performance.  Model 2 contains no new *safety valves* to
control future program growth.

1 Analysis limited to first order effects on saving. Effects on saving
behavior in response to specific reform provisions are not considered
given the lack of expert consensus.

Appendix I: Analysis of Reform Models Page 36 GAO- 03- 310 Social Security
Reform Balancing Adequacy and Equity To what extent does the proposal:

 Change scheduled benefits for current and future retirees?  Maintain
benefits for low- income workers who are most reliant on Social

Security?  Maintain benefits for the disabled, dependents, and survivors?
 Ensure that those who contribute receive benefits?  Provide higher
replacement rates for lower income earners?  Expand individual choice and
control over program contributions?  Increase returns on investment? 
Improve intergenerational equity? This criterion evaluates the balance
struck between the twin goals of

income adequacy (level and certainty of benefits) and individual equity
(rates of return on individual contributions).

Appendix I: Analysis of Reform Models Page 37 GAO- 03- 310 Social Security
Reform Balancing Adequacy and Equity:

GAO Analysis

 We evaluate the adequacy and equity criterion for Model 2 in comparison
with GAO benchmarks through analyses of * Median monthly benefits for the
1955, 1970 and

1985 birth cohorts. * Median monthly benefits by benefit quintile. *
Distribution of benefits within each cohort.

Appendix I: Analysis of Reform Models Page 38 GAO- 03- 310 Social Security
Reform Balancing Adequacy and EquitySpecific Provisions Affecting Benefits
Model 2

 Maintains current benefit structure for current and near retirees. 
Reduces OASDI defined benefits for new retirees, survivors, dependents,
and

disabled workers starting in 2009 by altering the benefit formula. * Slows
growth in benefits by reducing PIA formula factors by real wage

growth. This essentially increases benefits levels across generations
according to price growth (absolute terms) rather than wage growth
(relative terms). * For those who participate in the individual accounts,
there is a further offset

based on the hypothetical account accumulation, where contributions accrue
at a real rate of 2 percent.  Increases benefits for certain widow( er) s
and low- income earners.  PIA formula factor reductions and the benefit
offset disproportionately

decreases replacement rates. However, minimum benefit guarantees increase
replacement rates for workers who qualify. Therefore, overall
progressivity of the system is unclear given these provisions and the
uncertainty of market returns, the magnitude of participation, and the
characteristics of future participants.

Appendix I: Analysis of Reform Models Page 39 GAO- 03- 310 Social Security
Reform Overview of Model 2 Cohort Results

 Across cohorts, median monthly benefits are higher than the benefit
reduction benchmark for persons who participate in an individual account
(see Figure 6).  However, benefit levels received without accounts fall

below the benefit reduction benchmark over time. This is due to the timing
and structure of the benefit reductions under both the without accounts
scenario and the benefit reduction benchmark (see Figure 6).  The gap in
benefits between the without accounts

scenario and the tax increase benchmark and with accounts scenario grows
across cohorts (see Figure 6).

Appendix I: Analysis of Reform Models Page 40 GAO- 03- 310 Social Security
Reform Figure 6: Model 2 Cohort Analysis * Median Monthly Benefits by
Cohort

0 500

1000 1500

2000 2500

3000 1955 1970 1985 Constant 2001 Dollars

Be ne f it R e duct ion Be nchmark Model 2 without Accounts Model 2 with
Accounts Tax Increas e Benchmark

Source: GAO*s analysis using the GEMINI model. Note: Median monthly
benefits at age 67 for all beneficiaries. Estimates based on 1955, 1970,
and 1985 birth cohorts assuming retired workers retire at age 65,
uncertain asset returns and inflation, and full annuitization of account
balance at retirement age. *With accounts* implies all individuals in the
cohort participate in the individual accounts.

Appendix I: Analysis of Reform Models Page 41 GAO- 03- 310 Social Security
Reform Overview of Model 2 Quintile Analysis: Lowest and Highest Quintiles
by Cohort

 Median monthly benefits for the 1955 and 1970 cohorts are maintained
above the benefit reduction benchmark for the lowest quintile regardless
of participation in individual accounts, likely due to the enhanced
benefit for full- time *minimum wage* workers (see Figure 7).  However,
participation in the individual accounts may provide a

benefit level even higher than the enhanced benefit for the lowest
quintile since, over time, fewer workers will receive this enhanced
benefit as wages are assumed to outpace inflation in the future. 
Comparing median monthly benefits across cohorts in the lowest

and highest quintiles indicates that the enhanced benefit for fulltime
*minimum wage* workers and individual accounts maintain benefits above the
tax increase benchmark only for those in the lowest quintile in the 1955
and 1985 birth cohorts (see Figures 7 and 8).

Appendix I: Analysis of Reform Models Page 42 GAO- 03- 310 Social Security
Reform Figure 7: Model 2 Quintile Analysis * Median Monthly Benefits by
Cohort for the Lowest Quintile

0 500

1000 1500

2000 2500

3000 1955 1970 1985 Constant 2001 Dollars

Benefit Reduction Benchmark Model 2 without Accounts Model 2 withAccounts
Tax Increase Benchmark

Source: GAO*s analysis using the GEMINI model. Note: Estimates based on
the 1955, 1970, and 1985 birth cohorts assuming retired workers retire at
age 65, uncertain asset returns and inflation, and full annuitization of
account balance at retirement age. *With accounts* implies all individuals
in the cohort participate in the individual accounts. Quintiles are based
on the distribution of benefits at age 67 under tax increase benchmark.

Appendix I: Analysis of Reform Models Page 43 GAO- 03- 310 Social Security
Reform Figure 8: Model 2 Quintile Analysis * Median Monthly Benefits by
Cohort for the Highest Quintile

0 500

1000 1500

2000 2500

3000 1955 1970 1985 Constant 2001 Dollars

Benefit Reduction Benchmark Model 2 without Accounts Model 2 withAccounts
Tax Increase Benchmark

Source: GAO*s analysis using the GEMINI model. Note: Estimates based on
the 1955, 1970, and 1985 birth cohorts assuming retired workers retire at
age 65, uncertain asset returns and inflation, and full annuitization of
account balance at retirement age. *With accounts* implies all individuals
in the cohort participate in the individual accounts. Quintiles are based
on the distribution of benefits at age 67 under tax increase benchmark.

Appendix I: Analysis of Reform Models Page 44 GAO- 03- 310 Social Security
Reform Balancing Adequacy and Equity: Effects of Models on Total
Distribution of Initial Benefits

 Each model has individuals who *gain* and *lose*. Those who gain are
either * those who participated in a individual account and received a
benefit above

the reduced defined benefit, or * those whose change in benefits exceed
the relevant benchmarks.  Other factors which may have an effect on
benefit outcomes:

* Effect of minimum benefit provision * Uncertainty (variation) in rates
of return earned on accounts 1 * Changes in benefit status over time 2 *
Annuity pricing 3  How people fare under Model 2 is a function of their

* cohort * quintile * choice of participation in private account * risk
and rate of return on individual account, and * benchmark comparison.

1 Account yields must be greater than the level specified for the benefit
offset to generate larger benefits. 2 OASDI eligible beneficiaries such as
those who become disabled before retirement age, divorced spouses, or a
disabled dependent may be

especially affected since account availability may be hindered and length
of time spent contributing to the account may be reduced. 3 Upon
annuitization, the price of the annuity, which fluctuates with interest
rates, would reduce the monthly benefit amount received from the
individual account. In general, the higher the annuity price the greater
the benefit reduction.

Appendix I: Analysis of Reform Models Page 45 GAO- 03- 310 Social Security
Reform Model 2 Distributional Analysis: Distributional Effects Comparing
100 Percent Participation Against Zero Percent Participation

 The risk of participating decreases across cohorts when comparing
scenarios with accounts and without accounts, primarily because of the
lengthening of the investment horizon. For example, 71 percent of the 1955
cohort would gain by choosing an individual account, as did 83 and 90
percent of the 1970 and

1985 cohorts (see Figure 9).  Of those who gained, the median gain was
$32 per month in 2001 dollars for the 1955 cohort, while the median loss
was about $11 per month among those

who did not gain. For the 1970 and 1985 cohorts, the median gain was $147
and $397 per month in 2001 dollars, while the median loss was $33 and $57,
respectively.

Appendix I: Analysis of Reform Models Page 46 GAO- 03- 310 Social Security
Reform Figure 9: Model 2 Distributional Analysis * Performance of
Individual Accounts Under 100 Percent Participation

Scenario by Cohort

Source: GAO*s analysis using the GEMINI model. Note: For example, in 1955
if 100 percent of beneficiaries participated in individual accounts, 71
percent did better by choosing the accounts and 29 percent would have done
better by not choosing the accounts. Estimates based on 1955, 1970, and
1985 birth cohorts assuming retired workers retire at age 65, full
annuitization of account balance at retirement age. Uncertain asset
returns and inflation are also assumed, where the mean nominal rates of
return used for the individual accounts are 6. 3% for Treasuries, 6. 8%
for corporate bonds, and 10% for equities.

71 83 -29 -17

90 -10 -60% -40%

-20% 0%

20% 40%

60% 80%

100%

Percentage of Beneficiaries

Percent of Beneficiaries Who Did Worse by Choosing an Individual Account
Percent of Beneficiaries Who Did Better by Choosing an Individual Account

1985 1955 1970

Appendix I: Analysis of Reform Models Page 47 GAO- 03- 310 Social Security
Reform Model 2 Distributional Analysis: Distributional Effects of Model 2
in Comparison with Benefit Reduction Benchmark

 Regardless of whether an account is chosen, a number of people fare
better when compared to the benefit reduction benchmark. This is primarily
because the benefit reduction benchmark*s PIA formula reductions are
initially deeper than Model 2 PIA reductions (see Figure 10).  A majority
of persons with accounts fare better than the benefit

reduction benchmark and this majority decreases from 87 to 80 percent
across cohorts. In contrast, the number of people without accounts who
fare better than the benefit reduction

benchmark declines from 87 to 15 percent across cohorts.  A minority of
persons (13 to 20 percent) with accounts fare worse than the benefit
reduction benchmark, as do 13 to 85

percent of persons without individual accounts (see figure 10).

Appendix I: Analysis of Reform Models Page 48 GAO- 03- 310 Social Security
Reform Figure 10: Model 2 Distributional Analysis * Distribution of
Benefits by Cohort and Account Participation Compared to the Benefit
Reduction Benchmark

Source: GAO*s analysis using the GEMINI model. Note: Monthly benefit level
at age 67 is compared to the benefit level under the benchmark to
determine if individuals are above or below the benchmark. Estimates based
on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at
age 65, full annuitization of account balance at retirement age. Uncertain
asset returns and inflation are also assumed, where the mean nominal rates
of return used for the individual accounts are 6.3% for Treasuries, 6.8%
for corporate bonds, and 10% for equities. *With accounts* implies all
individuals in the cohort participate in the individual accounts.

86 87 80 87 62

15

-38 -13 -20 -13 -14 -85

-80% -60%

-40% -20%

0% 20%

40% 60%

80% 100%

1955 1970 1985 1955 1970 1985 Percent of All Benficiaries Below or Above t
he Benchmark

WithIndividual Accounts Wit houtIndividual Accounts

Appendix I: Analysis of Reform Models Page 49 GAO- 03- 310 Social Security
Reform Model 2 Distributional Analysis: Distributional Effects of Model 2
in Comparison with Tax Increase Benchmark

 Across cohorts: * A number of people with accounts fare better than the
tax increase benchmark and this number increases (19 to 40 percent) across
cohorts (see Figure 11).

* A minority of people without accounts fare better than the tax increase
benchmark and this minority declines over time (9 to 1 percent).

Appendix I: Analysis of Reform Models Page 50 GAO- 03- 310 Social Security
Reform Figure 11: Model 2 Distributional Analysis * Distribution of
Benefits by Cohort and Account Participation Compared to the Tax Increase
Benchmark

Source: GAO*s analysis using the GEMINI model. Note: Monthly benefit level
at age 67 is compared to the benefit level under the benchmark to
determine if individuals are above or below the benchmark. Estimates based
on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at
age 65, full annuitization of account balance at retirement age. Uncertain
asset returns and inflation are also assumed, where the mean nominal rates
of return used for the individual accounts are 6.3% for Treasuries, 6.8%
for corporate bonds, and 10% for equities. *With accounts* implies all
individuals in the cohort participate in the individual accounts.

19 28 40 9 5 1

-81 -72 -60 -91 -95 -99

- 100% - 80%

- 60% - 40%

- 20% 0%

20% 40%

1955 1970 1985 1955 1970 1985

Percent of All Benficiaries with Benef it s Below or Above t he Benchmark
Wit h I ndivi dual Account s Wit hout Individual Accounts

Appendix I: Analysis of Reform Models Page 51 GAO- 03- 310 Social Security
Reform Model 2 Sensitivity Analysis, Varying the Real Rate of Return *
Account Participation vs. Benchmarks by Cohort

 Although varying the rates of return does not alter the findings
substantially for older cohorts, the effects of varying the real rate of
return by plus or minus 1 percent increases over time.

* Compared to the benefit reduction benchmark, the 1955 cohort has a +-2%
change in its distribution from a +-1% change in the real rate of return,
whereas the 1985 cohort has about a +-11% change in its distribution (see
Figure 12). * Compared to the tax increase benchmark, the 1955 cohort has

approximately a +-3% change in its distribution from a +-1% change in the
real rate of return, whereas the 1985 cohort has about a +-15% change in
its distribution (see Figure 13).

Appendix I: Analysis of Reform Models Page 52 GAO- 03- 310 Social Security
Reform Figure 12: Model 2 Sensitivity Analysis - Distribution of Benefits
by Cohort Compared to Benefit Reduction Benchmark, Varying Real Rates of
Return by Plus 1 and Minus 1 Percent

Source: GAO*s analysis using the GEMINI model. Note: Monthly benefit level
at age 67 is compared to the benefit level under the benchmark to
determine if individuals are above or below the benchmark. Estimates based
on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at
age 65, full annuitization of account balance at retirement age. Uncertain
asset returns and inflation are also assumed, where the mean nominal rates
of return used for the individual accounts are 6. 3% for Treasuries, 6.8%
for corporate bonds, and 10% for equities.

84 86 88 81 87 91 68 80 89

-32 -19 -16 -11 -20 -9 -13 -12 -14

-6 0% -4 0%

-2 0% 0%

2 0% 4 0%

6 0% 8 0%

10 0 %

Percent of All Beneficiaries Above or Below the Benchmark

1955 Birth Cohort 1970 Birth Cohort 1985 Bir t h Cohort -1 -1 -1 +1 +1 +1

Appendix I: Analysis of Reform Models Page 53 GAO- 03- 310 Social Security
Reform Figure 13: Model 2 Sensitivity Analysis - Distribution of Benefits
by Cohort Compared to Tax Increase Benchmark, Varying Real Rates of Return
by Plus 1 and Minus 1 Percent

Source: GAO*s analysis using the GEMINI model. Note: Monthly benefit level
at age 67 is compared to the benefit level under the benchmark to
determine if individuals are above or below the benchmark. Estimates based
on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at
age 65, full annuitization of account balance at retirement age. Uncertain
asset returns and inflation are also assumed, where the mean nominal rates
of return used for the individual accounts are 6. 3% for Treasuries, 6.8%
for corporate bonds, and 10% for equities.

17 19 22 20 28 37 26 40 55 -81 -78 -72 -63 -60 -45 -83 -80 -74

-100 % -80%

-60% -40%

-20% 0%

20% 40%

60%

Percent of All Benefi ciaries Above or Below t he Ben chmark

1955 Bir th Cohort 1970 Birt h Cohor t 1985 Bir th Cohor t -1 - 1 -1 +1 +1
+1

Appendix I: Analysis of Reform Models Page 54 GAO- 03- 310 Social Security
Reform Overview of Model 2 Disabled Worker Quintile Analysis * Lowest and
Highest Quintile by Cohort

 Median monthly benefits are maintained above the benefit reduction
benchmark for the lowest quintile regardless of participation in
individual accounts, likely due to the enhanced benefit for full- time
*minimum wage* workers (see Figure 14). * This enhanced benefit could
apply to low- earning disabled workers who

work most of their career prior to becoming disabled. In our sample the
average age of disability onset is 55.  Participation in the individual
accounts is also important for disabled

workers, especially those in the later cohorts and in the upper quintiles
(see Figures 14 and 15). However, the earlier a disabled worker becomes
disabled the fewer years they contribute to their account and the smaller
is their account balance.  Since disabled workers do not have access to
their accounts until

conversion to retired worker benefits at the normal retirement age (NRA),
benefit levels before conversion would be in line with benefit levels for
those without individual accounts.  Benefit levels for disabled workers
may be higher than those of retired

workers since disabled workers are entitled to benefits at earlier ages,
thus the reductions in their PIA factors would be smaller. This may create
an incentive for older workers to apply for disability benefits.

Appendix I: Analysis of Reform Models Page 55 GAO- 03- 310 Social Security
Reform Figure 14: Model 2 Quintile Analysis * Median Monthly Benefits by
Cohort for Disabled Workers in

the Lowest Quintile

0 500

1000 1500

2000 2500

3000 1955 1970 1985 Constant 2001 Dollars

Benefit Reduction Benchmark Model 2 without Accounts Model 2 withAccounts
Tax Increase Benchmark

Source: GAO*s analysis using the GEMINI model. Note: Median monthly
benefits at age 67 for disabled workers. Estimates based on 1955, 1970,
and 1985 birth cohorts assuming uncertain asset returns and inflation, and
full annuitization of account balance at retirement age. *With accounts*
implies all

individuals in the cohort participate in the individual accounts.
Quintiles are based on the distribution of benefits at age 67 under tax
increase benchmark.

Appendix I: Analysis of Reform Models Page 56 GAO- 03- 310 Social Security
Reform Figure 15: Model 2 Quintile Analysis - Median Monthly Benefits by
Cohort for Disabled Workers in the Highest Quintile

0 500

1000 1500

2000 2500

3000 1955 1970 1985 Constant 2001 Dollars

Benefit Reduction Benchmark Model 2 without Accounts Model 2 withAccounts
Tax Increase Benchmark

Source: GAO*s analysis using the GEMINI model. Note: Median monthly
benefits at age 67 for disabled workers. Estimates based on 1955, 1970,
and 1985 birth cohorts assuming uncertain asset returns and inflation, and
full annuitization of account balance at retirement age. *With accounts*
implies all

individuals in the cohort participate in the individual accounts.
Quintiles are based on the distribution of benefits at age 67 under tax
increase benchmark.

Appendix I: Analysis of Reform Models Page 57 GAO- 03- 310 Social Security
Reform Balancing Adequacy and Equity- Overall Equity

Model 2  Provides workers some investment choice and control, subject to

certain limitations. This might enable individuals to earn a higher rate
of return on their contributions with an increased measure of risk,
primarily that the return expected may not be realized.  May improve
intergenerational equity through the move to advanced funding of Social
Security and the inheritance feature

of individual accounts.  Make determining the rate of return difficult as
the link between

contributions and benefits becomes unclear due to general revenue
transfers. Thus, we did not quantitatively assess the equity effects of
the models.

Appendix I: Analysis of Reform Models Page 58 GAO- 03- 310 Social Security
Reform Implementing and Administering

Reforms To what extent does the proposal:

 Provide reasonable timing and funds for implementation and result in
reasonable administrative costs?

 Allow the general public to readily understand its financing structure
and increase public confidence?

 Allow the general public to readily understand the benefit structure and
avoid expectation gaps?  Limit the potential for politically motivated
investing? This criterion evaluates how readily such changes could be

implemented, administered, and explained to the public.

Appendix I: Analysis of Reform Models Page 59 GAO- 03- 310 Social Security
Reform Implementing and Administering Reforms

 Funding for the transition from a pay- as- you- go system to a partially
funded system would be handled by transfers from the General Fund of the
Treasury and could be repaid when the trust funds experience cash flow
surpluses.  An education program will be necessary to explain the changes
in the

benefit structure and to avoid expectation gaps. * Benefit offset feature,
financing structure of the system may be

difficult to explain, which increases the importance of an education
program.  An education program will also be necessary to inform OASDI
eligible

workers on making sound investment decisions regarding diversification,
risk, and participation.  The Commission did not explicitly address the
costs of an education

program.  It is unclear how the Commission*s proposed account splitting
at

divorce would fit into divorce law.

Appendix I: Analysis of Reform Models Page 60 GAO- 03- 310 Social Security
Reform Implementing and Administering Reforms

 The proposal establishes a Governing Board to administer the individual
accounts, which is intended to limit the potential for politically
motivated investing. The board*s duties include the choice of available
funds and providing financial information to individuals.  The design of
the voluntary individual account feature places

an additional administrative burden on the SSA. Specifically, the
hypothetical account, benefit offset, inheritance feature, and account
splitting at divorce would create additional responsibilities for SSA. 
There is not enough information to estimate administrative

costs. Such costs are affected by the level of participation in the
individual accounts. However, the Commission believes that individual
accounts can be administered at a low cost since they envision the system
being structured similar to the TSP.  There is not enough information to
address how annuities

and annuity pricing will be handled; therefore, we used the same
assumptions as the SSA Actuaries and did not quantitatively analyze their
effect on benefit levels.

Appendix I: Analysis of Reform Models Page 61 GAO- 03- 310 Social Security
Reform Appendix I: Analysis of Model 3 and Methodology

Appendix I: Analysis of Reform Models Page 62 GAO- 03- 310 Social Security
Reform Financing Sustainable Solvency Interpreting Long- term Simulations

 Long- term simulations provide illustrations-- not precise forecasts--
of the relative fiscal and economic outcomes associated with alternative
policy paths.

 Long- term simulations are useful for comparing the potential outcomes
of alternative policies within a common economic framework over the long
term. * Recognizing the inherent uncertainties of long- term simulations,
we have

generally chosen conservative assumptions, such as holding interest rates
and total factor productivity growth constant. Variations in these
assumptions generally would not affect the relative outcomes of
alternative policies. * The model simulates the interrelationships between
the budget and the

economy over the long term and does not reflect their interaction during
short- term business cycles.

 Long- term simulations are not predictions of what will happen in the
future. In reality, policymakers likely would take action before the
occurrence of the negative out- year fiscal and economic consequences
reflected in some simulated fiscal policy paths.

Appendix I: Analysis of Reform Models Page 63 GAO- 03- 310 Social Security
Reform Financing Sustainable Solvency Social Security Reform Proposals in
the Model

 Reform proposal cost and income estimates are from SSA*s Office of the
Chief Actuary. * For each proposal, the OASDI cost estimate reflects all
proposed

reforms affecting benefits. These include changes in the index used to
adjust initial benefit levels, benefit reductions meant to offset
individual accounts, and other proposed changes.

* For each proposal, the OASDI income estimate reflects such elements as
transfers from the general fund to the trust funds and amounts redirected
from the payroll tax used to establish individual accounts.

Appendix I: Analysis of Reform Models Page 64 GAO- 03- 310 Social Security
Reform Fiscal Model Assumption Summary Model inputs Assumptions

Social Security spending (OASDI) 2001 Social Security Trustees*
intermediate projections Medicare spending (HI and SMI) 2001 Medicare
Trustees* intermediate assumption that per enrollee Medicare spending
grows with GDP per capita plus 1 percentage point

Medicaid spending CBO*s July 2002 long- term assumption that per enrollee
Medicaid spending grows with GDP per capita plus 1 percentage point Other
mandatory spending CBO*s August 2002 baseline through 2012; thereafter
increases at the rate of economic growth (i. e., remains constant as a
share of GDP) Discretionary spending CBO*s August 2002 baseline through
2012, adjusted for the 2001 Social Security Trustees* inflation
assumptions; thereafter increases at the rate of economic growth Revenue
CBO*s August 2002 baseline through 2012; thereafter remains constant at
20. 5 percent of GDP (CBO*s projection in 2012) Nonfederal saving (percent
of GDP): gross saving of the private sector and state and local government
sector Increases gradually over the first 10 years to 17. 5 percent of GDP
(the average nonfederal saving rate from 1992- 2001) Net foreign
investment (percent of GDP) Increases (or decreases) from 2002 share of
GDP by one- third of any

increase (or decrease) in gross national saving through 2012; thereafter
increases (or decreases) from 2012 nominal dollar level by one- third of
any increase (or decrease) in gross national saving Labor: growth in hours
worked 2001 Social Security Trustees* intermediate projections Total
factor productivity growth Consistent with labor productivity growth in
2001 Social Security Trustees* intermediate projections

Inflation (GDP price index and CPI) 2001 Social Security Trustees*
intermediate projections Interest rate (average on the national debt)
CBO*s August 2002 implied real average interest rate through 2011 adjusted
for the 2001 Social Security Trustees* intermediate inflation assumptions;
6.3% thereafter

Appendix I: Analysis of Reform Models Page 65 GAO- 03- 310 Social Security
Reform Balancing Adequacy and Equity - Benchmarks

 Initial benefits from both models are compared with several benchmarks 1
: * The tax increase (maintain benefits) benchmark * increases the

payroll tax once and immediately by the amount of the OASDI actuarial
deficit as a percent of payroll so that benefits received under the
current system can continue to be paid throughout the projection period.
This spreads the tax burden evenly across generations. This can also be
accomplished by general revenue transfers. For our analysis, we assumed
that this would be implemented as a tax increase to maintain the
relationship between contributions and benefits. * The benefit reduction
(maintain taxes) benchmark reduces the

formula factors by equal percentage point reductions (by 0.319 each year
for 30 years) for those newly eligible in 2005, subjecting earnings across
all segments of the PIA formula to the same reduction.  It is expected
that Model 3 should, on average, provide higher initial

benefits than model 2 when compared to the benchmarks due to the required
additional 1% contributions to the individual accounts for those who
choose to participate.

1 For additional information regarding the benchmarks, see U. S. General
Accounting Office, Social Security: Program*s Role in Helping Ensure
Income Adequacy, GAO- 02- 62 (Washington, D. C.: Nov. 30, 2001).

Appendix I: Analysis of Reform Models Page 66 GAO- 03- 310 Social Security
Reform Balancing Adequacy and EquityModel Assumptions

 Our unit of analysis for this report is individuals. Depending upon how
households split account distributions, our results may over/ understate
some individuals* benefit levels. Since we were interested in the effect
that

reform has on certain birth cohorts, we chose to focus on individuals
because household composition can vary across birth cohorts.  Analysis
was performed using microsimulation with stochastic elements,

which included uncertain asset returns, inflation, wage growth, etc. These
variables varied across time and individuals.  The nominal mean rates of
return used in the model for the individual

accounts are 6.3% for Treasuries, 6.8% for corporate bonds, and 10% for
equities. These assumptions are consistent with those used in the SSA
Actuaries* scoring.  All individuals are assumed to annuitize their
entire account balance at

retirement by purchasing a fixed annuity. Our procedure for annuitization
is consistent with that utilized by the SSA Actuaries.  Each individual
in each of the cohorts retires at age 65. This can have

implications for model 3 results since model 3 modifies the actuarial
reduction and increment factors.  Since access to accounts for disabled
workers occurs at the NRA, benefit

levels for all beneficiaries are reported at age 67.

Appendix I: Analysis of Reform Models Page 67 GAO- 03- 310 Social Security
Reform Model 3

 Voluntary individual accounts in exchange for benefit reduction. * An
additional contribution equal to 1 percent of an individual*s

taxable payroll is required to participate, with partial subsidy for lower
wage workers as a refundable tax credit.

* Account contribution equal to 2.5 percent of payroll tax up to an annual
maximum of $1,000 1 redirected from payroll tax.

* At retirement, reduction to defined benefit based on the amount of
account contributions (not including the additional 1 percent
contribution) compounded at a real interest rate of 2  1/2 percent.

1 Maximum contribution amount indexed annually to wage growth.

Appendix I: Analysis of Reform Models Page 68 GAO- 03- 310 Social Security
Reform Model 3

 Changes to defined benefits beginning in 2009: * Initial benefit reduced
from currently scheduled by indexing

to expected gains in life expectancy. * Initial benefits for upper income
earners reduced: from 20092028, third highest bend point factor gradually
reduced from 15 to 10 percent.

* Initial benefits reduced for those who retire early and increased for
those who delay retirement.

Appendix I: Analysis of Reform Models Page 69 GAO- 03- 310 Social Security
Reform Model 3

 A new enhanced benefit for full- time minimum wage 1 workers with more
than 20 years of work * Accelerated growth in initial benefits from 2009-
2018. * By 2018, a minimum wage worker with 30 years of program

coverage would receive a benefit equal to 100 percent of poverty level;
thereafter, benefits would be expected to increase about 0.5 percent per
year faster than growth in the CPI and the poverty level.  Enhanced
spousal survival benefit

* Increase in widow( er) benefit up to 75 percent of combined spousal
benefit (up to average benefit levels).

 Additional financing from permanent dedicated revenue sources and
general revenue transfers.

1 The minimum wage is the current Fair Labor Standards Act minimum of $5.
15 an hour but is assumed to be grow with the Social Security average wage
index.

Appendix I: Analysis of Reform Models Page 70 GAO- 03- 310 Social Security
Reform Model 3 Financing Sustainable Solvency

Figure A- 1  Compared to baseline extended, as a share of GDP unified
surpluses are

smaller and unified deficits are larger under Model 3- 100% until the
2050s; thereafter, unified deficits are smaller.  Under Model 3- 0%,
beginning around 2015, projected unified surpluses

are higher and projected unified deficits are lower than under baseline
extended throughout the simulation period.  Greater participation in IAs
results in lower surpluses/ higher deficits over

the simulation period.  Throughout the simulation period, unified
surpluses are considerably lower

and unified deficits are considerably higher under Model 3- 100% than
under the tax increase benchmark and, to a lesser extent, the benefit
reduction benchmark.  Under Model 3- 0%, unified surpluses are lower and
unified deficits are

higher than under the tax increase benchmark throughout the simulation
period and beginning around 2010, unified surpluses are lower and unified
deficits are higher than under the benefit reduction benchmark.

Appendix I: Analysis of Reform Models Page 71 GAO- 03- 310 Social Security
Reform -20 -15

-10 -5

0 5

2000 2010 2020 2030 2040 2050 2060 2075 Fiscal year Percent of GDP

Baseline extended Benefit reduction Model 3 - 0% Model 3 -100% Tax
increase

Figure A- 1: Model 3 Unified Surpluses and Deficits as a Share of GDP

Source: GAO analysis.

Appendix I: Analysis of Reform Models Page 72 GAO- 03- 310 Social Security
Reform Model 3 Financing Sustainable Solvency

Figure A- 2  Compared to baseline extended, net debt held by the public
as a share

of GDP is higher under Model 3- 100% until about 2060; thereafter, debt
held by the public is lower.  Under Model 3- 0% net debt held by the
public would be reduced

compared to the baseline extended beginning about 2015 through the end of
the simulation period.  Greater participation in the IAs results in
higher net debt held by the

public throughout the simulation period.  Throughout the simulation
period, net debt held by the public under

Model 3- 100% is considerably higher than the tax increase benchmark and
the benefit reduction benchmark.  Net debt held by the public under Model
3- 0% is higher than under the

benefit reduction benchmark and much higher than under the tax increase
benchmark through the end of the simulation period.

Appendix I: Analysis of Reform Models Page 73 GAO- 03- 310 Social Security
Reform -50 0

50 100

150 200

2000 2010 2020 2030 2040 2050 2060 2075 Fiscal year Percent of GDP

Baseline extended Benefit reduction Model 3 - 0% Model 3 - 100% Tax
increase

Figure A- 2: Model 3 Debt held by the Public as a Share of GDP

Source: GAO analysis.

Appendix I: Analysis of Reform Models Page 74 GAO- 03- 310 Social Security
Reform Model 3 Financing Sustainable Solvency

Figure A- 3:  The government*s cash requirement includes the amount of
cash required to pay defined benefits and redirect payroll taxes to
individual accounts. Under Model 3- 100%, the

government*s cash requirement would be greater than both the baseline
extended and tax increase benchmarks in the near term* by more than 15
percent in 2010. Beginning in the 2030s, less cash would be required for
Model 3- 100% than the baseline extended and tax increase benchmarks. In
2075, Model 3- 100% would require about 30 percent less cash than the
baseline extended and tax increase benchmarks.  The cash requirement for
Model 3- 0% would be slightly greater than both the baseline extended and
tax increase benchmarks until after 2010. Thereafter, Model 3- 0% would

require less cash than both the baseline extended and tax increase
benchmarks; in 2075, about 25 percent less cash would be required for
Model 3- 0%.

 The government*s cash requirement for Model 3 would be greater than the
benefit reduction benchmark for most of the simulation. In 2075, Model 3-
0% would require about the same amount of cash as the benefit reduction
benchmark and Model 3- 100% would require over 5 percent less cash than
the benefit reduction benchmark.  In the near term, the greater the
individual account participation, the more cash required.

Over the long term, however, greater individual account participation
would reduce the government*s cash requirements.

Appendix I: Analysis of Reform Models Page 75 GAO- 03- 310 Social Security
Reform 0% 1%

2% 3%

4% 5%

6% 7%

8% 9%

10% 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065
2070 2075

Calendar year Percent of GDP

Baseline extended/ Tax increase Benefit reduction Model 3, 0 percent Model
3, 100 percent

Figure A- 3: Model 3 Government Cash Requirements

Source: GAO analysis of data from the Office of the Chief Actuary, SSA.
Benefit amounts shown for baseline extended and tax increase benchmarks
are scheduled benefits as estimated by the actuaries. All estimates are
based on the Trustees' 2001 intermediate assumptions.

Note: Includes cash for defined benefits paid out under the traditional
system and redirect of payroll taxes to individual accounts.

Appendix I: Analysis of Reform Models Page 76 GAO- 03- 310 Social Security
Reform Model 3 Financing Sustainable Solvency

Figure A- 4:  In 2015, total benefit payments (Social Security benefits
plus individual account

disbursements) as a share of GDP under Model 3 would be slightly (1
percent) lower than under the baseline extended or tax increase benchmark
and about 3 percent higher than the benefit reduction benchmark.  In
2030, total benefit payments as a share of GDP under model 3- 100% would
be

nearly 4 percent lower than under the baseline extended or tax increase
benchmark but 8 percent higher compared to the benefit reduction
benchmark. Under Model 3- 0%, benefit payments would be about 7 percent
lower than the baseline extended or tax increase benchmark but nearly 5
percent higher than the benefit reduction benchmark.  In 2075, total
benefit payments as a share of GDP under Model 3- 100% would be

the same as under the baseline extended or tax increase benchmark and
nearly one- third higher than under the benefit reduction benchmark. By
2075, the difference in total benefit payments between Model 3- 100% and
Model 3- 0% becomes pronounced with payments under Model 3- 0% about the
same as the benefit reduction benchmark but only three- fourths the level
as under Model 3- 100% or the baseline extended or tax increase benchmark.

Appendix I: Analysis of Reform Models Page 77 GAO- 03- 310 Social Security
Reform 0% 1%

2% 3%

4% 5%

6% 7%

8% 2000 2015 2030 2050 2075

Calendar year Percent of GDP

Actual Benefit reduction Model 3 - 0% Model 3 - 100% Baseline extended/
Tax increase

Figure A- 4: Model 3 Combined Social Security and Individual Account
Disbursements as a Share of GDP Source: GAO analysis of data from the
Office of the Chief Actuary, SSA. Benefit amounts shown for baseline
extended and tax increase benchmarks are scheduled benefits as estimated
by the actuaries. All estimates are based on the Trustees' 2001
intermediate assumptions.

Appendix I: Analysis of Reform Models Page 78 GAO- 03- 310 Social Security
Reform Model 3 Financing Sustainable Solvency

 National saving would increase primarily due to the improved fiscal
position of the government resulting from the proposed benefit reductions.
The redirection of payroll taxes under the IA option would increase
private saving and decrease government

saving with no net effect on national saving. The required 1 percent
additional contribution would result in an increase in personal saving,
although the progressive subsidy would reduce government saving and reduce
any net increase in national saving. 1  Restores 75- year actuarial
balance with either no participation or universal participation in the IA
option. Trust fund ratio at the end of the 75- year period is declining by
about 3

percent a year under Model 3- 0% but rising under Model 3- 100% by about 8
percent a year.

 Requires new dedicated revenue from an unspecified source. The IAs are
financed as a redirect of payroll taxes. In addition to the new dedicated
revenue, Model 3- 100% requires general revenue transfers to keep the
OASDI trust fund solvent.  Does not create any new contingent liability.
Individual bears risk of personal account

investment performance.  Indexing initial benefits to increases in life
expectancy and updating the indexation every

10 years to reflect actual increases could help guard against
unanticipated growth in lifetime benefits. 1 Analysis limited to first
order effects on saving. Effects on saving behavior in response to
specific reform provisions are not considered given the lack of expert
consensus.

Appendix I: Analysis of Reform Models Page 79 GAO- 03- 310 Social Security
Reform Balancing Adequacy and EquityDistributional Effect of Specific
Provisions

Model 3  Maintain current benefit structure for current and near
retirees.  Reduces OASDI defined benefits for new retirees, survivors,
dependents,

and disabled workers starting in 2009. * Benefits are reduced due to
indexing initial benefit calculations to

longevity rather than wages. * Gradually reduces the third PIA formula
factor. * For those who participate in the individual accounts, there is a
further

offset based on the hypothetical account accumulation , where
contributions accrue at a real rate of 2.5 percent. * Increases the
actuarial reduction for early retirement.  Increases benefits for certain
beneficiaries: some widow( er) s, low- income

earners, and increases the delayed retirement credit starting in 2010. 
PIA formula factor reductions and the benefit offset disproportionately

decreases replacement rates. However, minimum benefit guarantees increase
replacement rates for workers who qualify. Therefore, overall
progressivity of the system is unclear given these provisions and the
uncertainty of market returns, the magnitude of participation, and the
characteristics of future participants.

Appendix I: Analysis of Reform Models Page 80 GAO- 03- 310 Social Security
Reform Overview of Model 3 Cohort Results

 Across cohorts, median monthly benefits are higher than the benefit
reduction benchmark regardless of participation in individual accounts
(see Figure A- 5).  The gap in benefits between the without accounts
scenario and the tax increase benchmark and with accounts scenario grows
across cohorts (see Figure A- 5).

Appendix I: Analysis of Reform Models Page 81 GAO- 03- 310 Social Security
Reform Figure A- 5: Model 3 Cohort Analysis * Median Monthly Benefits by
Cohort

0 500

1000 1500

2000 2500

3000

1955 1970 1985

Constant 2001 Dollars Benefit R eduction Benchmark Mode l 3 without Acc
ounts Model 3 with Accounts Tax Increase Be nchmark

Source: GAO*s analysis using the GEMINI model. Note: Median monthly
benefits at age 67 for all beneficiaries. Estimates based on 1955, 1970,
and 1985 birth cohorts assuming retired workers retire at age 65,
uncertain asset returns and inflation, and full annuitization of account
balance at retirement age. *With accounts* implies all individuals in the
cohort participate in the individual accounts.

Appendix I: Analysis of Reform Models Page 82 GAO- 03- 310 Social Security
Reform Overview of Model 3 Quintile Analysis: Lowest and Highest Quintiles
by Cohort

 Median monthly benefits are maintained above the benefit reduction
benchmark for the lowest quintile regardless of participation in
individual accounts, likely due to the enhanced benefit for full- time
*minimum wage* workers (see Figure A- 6).  However, participation in the
individual accounts may

provide a benefit level even higher than the enhanced benefit for the
lowest quintile since, over time, fewer workers will receive this enhanced
benefit as wages are assumed to outpace inflation in the future (see
figure A- 6).  Comparing median monthly benefits across cohorts in the

lowest and highest quintiles indicates that the enhanced benefit for full-
time *minimum wage* workers and individual accounts maintain benefits
above the tax increase benchmark only for those in the lowest quintile and
the later cohorts in the highest quintile (see Figures A- 6 and A- 7).

Appendix I: Analysis of Reform Models Page 83 GAO- 03- 310 Social Security
Reform Figure A- 6: Model 3 Quintile Analysis * Median Monthly Benefits by
Cohort for the Lowest Quintile

0 500

1000 1500

2000 2500

3000 1955 1970 1985 Constant 2001 Dollars

Benefit Reduction Benchmark Model 3 without Accounts Model 3 withAccounts
Tax Increase Benchmark

Source: GAO*s analysis using the GEMINI model. Note: Estimates based on
the 1955, 1970, and 1985 birth cohorts assuming retired workers retire at
age 65, uncertain asset returns and inflation, and full annuitization of
account balance at retirement age. *With accounts* implies all individuals
in the cohort participate in the individual accounts. Quintiles are based
on the distribution of benefits at age 67 under tax increase benchmark.

Appendix I: Analysis of Reform Models Page 84 GAO- 03- 310 Social Security
Reform Figure A- 7: Model 3 Quintile Analysis * Median Monthly Benefits by
Cohort for the Highest Quintile

0 500

1000 1500

2000 2500

3000 1955 1970 1985 Constant 2001 Dollars

Benefit Reduction Benchmark Model 3 without Accounts Model 3 withAccounts
Tax Increase Benchmark

Source: GAO*s analysis using the GEMINI model. Note: Estimates based on
the 1955, 1970, and 1985 birth cohorts assuming retired workers retire at
age 65, uncertain asset returns and inflation, and full annuitization of
account balance at retirement age. *With accounts* implies all individuals
in the cohort participate in the individual accounts. Quintiles are based
on the distribution of benefits at age 67 under tax increase benchmark.

Appendix I: Analysis of Reform Models Page 85 GAO- 03- 310 Social Security
Reform Model 3 Distributional Analysis: Distributional Effects Comparing
100 Percent Participation Against Zero Percent Participation

 The risk of participating decreases across cohorts when comparing
scenarios with accounts and without accounts, primarily because of the
lengthening of the investment horizon. For example, 86 percent of the 1955
cohort would gain by choosing an individual account, as did 93 and 95
percent of the 1970 and

1985 cohorts (see Figure A- 8).  Of those who gained, the median gain was
$50 per month in 2001 dollars for the 1955 cohort, while the median loss
was about $4 per month among those

who did not gain. For the 1970 and 1985 cohorts, the median gain was $223
and $540 per month in 2001 dollars, while the median loss was $25 and $51,
respectively.

Appendix I: Analysis of Reform Models Page 86 GAO- 03- 310 Social Security
Reform 86 93 95 -14 -5 -7

-60% -40%

-20% 0%

20% 40%

60% 80%

100%

Percentage of Beneficiaries

Percentof Beneficiaries Who Did Worse byChoosing an Individual Account
Percentof Beneficiaries Who Did Better byChoosing an Individual Account

1955 1970 1985

Figure A- 8: Model 3 Distributional Analysis Performance of Individual
Accounts Under 100 Percent

Participation Scenario by Cohort

Source: GAO*s analysis using the GEMINI model. Note: For example, in 1955
if 100 percent of beneficiaries participated in individual accounts, 86
percent did better by choosing the accounts and 14 percent would have done
better by not choosing the accounts. Estimates based on 1955, 1970, and
1985 birth cohorts assuming retired workers retire at age 65, full
annuitization of account balance at retirement age. Uncertain asset
returns and inflation are also assumed, where the mean nominal rates of
return used for the individual accounts are 6.3% for Treasuries, 6. 8% for
corporate bonds, and 10% for equities.

Appendix I: Analysis of Reform Models Page 87 GAO- 03- 310 Social Security
Reform Model 3 Distributional Analysis: Distributional Effects of Model 3
in Comparison with Benefit

Reduction Benchmark

 Regardless of whether an account is chosen, a number of people fare
better when compared to the benefit reduction benchmark. This is primarily
because the benchmark*s PIA formula reductions are initially deeper than
Model 3 PIA reductions and the additional 1% contribution (see Figure A-
9).  A majority of persons with accounts fare better than the benefit

reduction benchmark and this majority ranges from 95 to 99 percent across
cohorts. In contrast, the number of people without accounts who fare
better than the benefit reduction benchmark ranges from 93 to 97 percent
across cohorts.  A minority of persons (1 to 5 percent) with accounts
fare worse than

the benefit reduction benchmark, as do 3 to 7 percent of persons without
individual accounts (see figure A- 9).

Appendix I: Analysis of Reform Models Page 88 GAO- 03- 310 Social Security
Reform 95 99 97 93 97 94

-5 -1 -3 -7 -3 -6

-20% 0%

20% 40%

60% 80%

100% 1955 1970 1985 1955 1970 1985

Percent of All Benfi ci ari es with Benefits Below and Above the Benchmark
With Individual Accounts Wi thout Individual Accounts

Source: GAO*s analysis using the GEMINI model. Note: Monthly benefit level
at age 67 is compared to the benefit level under the benchmark to
determine if individuals are above or below the benchmark. Estimates based
on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at
age 65, full annuitization of account balance at retirement age. Uncertain
asset returns and inflation are also assumed, where the mean nominal rates
of return used for

the individual accounts are 6. 3% for Treasuries, 6. 8% for corporate
bonds, and 10% for equities. *With accounts* implies all individuals in
the cohort participate in the individual accounts.

Figure A- 9: Model 3 Distributional Analysis * Distribution of Benefits by
Cohort and Account Participation Compared to the Benefit Reduction
Benchmark

Appendix I: Analysis of Reform Models Page 89 GAO- 03- 310 Social Security
Reform Model 3 Distributional Analysis: Distributional Effects of Model 3
in Comparison with Tax Increase Benchmark

 Across cohorts: * Except for the 1955 cohort, a majority of people with

accounts fare better than the tax increase benchmark and this number
increases (41 to 67 percent) across cohorts (see Figure A- 10). * A
minority of people without accounts fare better than the tax increase
benchmark and this minority declines (9 to 1

percent) over time (see Figure A- 10).

Appendix I: Analysis of Reform Models Page 90 GAO- 03- 310 Social Security
Reform 41 55 67

9 2 1

-45 -33

-91 -98 -99 -59

-100% -80%

-60% -40%

-20% 0%

20% 40%

60% 80%

1955 1970 1985 1955 1970 1985

Percent o f All Benfi ci ari es with Benefits Below and Above the
Benchmark With Individual Accounts Without Individual Accounts

Figure A- 10: Model 3 Distributional Analysis * Distribution of Benefits
by Cohort and Account Participation Compared to the Tax Increase Benchmark

Source: GAO*s analysis using the GEMINI model. Note: Monthly benefit level
at age 67 is compared to the benefit level under the benchmark to
determine if individuals are above or below the benchmark. Estimates based
on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at
age 65, full annuitization of account balance at retirement age. Uncertain
asset returns and inflation are also assumed, where the mean nominal rates
of return used for

the individual accounts are 6. 3% for Treasuries, 6. 8% for corporate
bonds, and 10% for equities. *With accounts* implies all individuals in
the cohort participate in the individual accounts.

Appendix I: Analysis of Reform Models Page 91 GAO- 03- 310 Social Security
Reform Model 3 Sensitivity Analysis, Varying the Real Rate of Return *
Account Participation vs. Benchmarks by Cohort

 Although varying the rates of return does not alter the findings
considerably for older cohorts, the effects of varying the real rate of
return by plus or minus 1 percent increases over time. The increased
volatility is likely due to the additional 1% contribution. * Compared to
the benefit reduction benchmark, the 1955

cohort has about a +-1% change in its distribution, whereas the 1985
cohort has about a +-2% change in its distribution (see figure A- 11). *
Compared to the tax increase benchmark, the 1955

cohort has approximately a +-5% change in its distribution, whereas the
1985 cohort has approximately a +-14% change in its distribution (see
Figure A- 12).

Appendix I: Analysis of Reform Models Page 92 GAO- 03- 310 Social Security
Reform Figure A- 11: Model 3 Sensitivity Analysis - Distribution of
Benefits by Cohort Compared to Benefit Reduction Benchmark, Varying Real
Rates of Return by Plus 1 and Minus 1 Percent

Source: GAO*s analysis using the GEMINI model. Note: Monthly benefit level
at age 67 is compared to the benefit level under the benchmark to
determine if individuals are above or below the benchmark. Estimates based
on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at
age 65, full annuitization of account balance at retirement age. Uncertain
asset returns and inflation are also assumed, where the mean nominal rates
of return used for the individual accounts are 6.3% for Treasuries, 6.8%
for corporate bonds, and 10% for equities.

95 95 96 98 99 99 95 97 99

-5 -5 -4 -2 -1 -1 -5 -3 -1

-2 0% 0%

20% 40%

60% 80%

100%

Percent of All Beneficiaries Above or Below the Benchmark

-1 +1 1955 Birth Cohort 1970 Birth Cohort 1985 Birth Cohort -1 +1 -1 +1

Appendix I: Analysis of Reform Models Page 93 GAO- 03- 310 Social Security
Reform Figure A- 12: Model 3 Sensitivity Analysis - Distribution of
Benefits by Cohort Compared to Tax Increase Benchmark, Varying Real Rates
of Return by Plus 1 and Minus 1 Percent

Source: GAO*s analysis using the GEMINI model. Note: Monthly benefit level
at age 67 is compared to the benefit level under the benchmark to
determine if individuals are above or below the benchmark. Estimates based
on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at
age 65, full annuitization of account balance at retirement age. Uncertain
asset returns and inflation are also assumed, where the mean nominal rates
of return used for the individual accounts are 6.3% for Treasuries, 6.8%
for corporate bonds, and 10% for equities.

36 41 46 44 55

66 53

67 80

-64 -59 -54 -56 -45

-34 -47

-33 -20

-80% -60%

-40% -20%

0% 20%

40% 60%

80%

Percent of All Beneficiaries Above or Below the Benchmark

-1 +1 -1 +1 -1 +1 1955 Birth Cohort 1970 Birth Cohort 1985 Birth Cohort

Appendix I: Analysis of Reform Models Page 94 GAO- 03- 310 Social Security
Reform Overview of Model 3 Disabled Worker Quintile Analysis * Lowest and
Highest Quintile by Cohort

 Median monthly benefits are maintained above the benefit reduction
benchmark for the lowest quintile regardless of participation in
individual accounts likely due to the enhanced benefit for full- time
*minimum wage* workers (see Figure A- 13). * This enhanced benefit could
apply to low- earning disabled workers

who work most of their career prior to becoming disabled. In our sample
the average age of disability onset is 55.  Participation in the
individual accounts is also important for disabled

workers, especially those in the later cohorts and in the upper quintiles.
However, the earlier a disabled worker becomes disabled the fewer years
they contribute to their account and the smaller is their account balance
(see Figures A- 13 and A- 14).  Since disabled workers do not have access
to their accounts until

conversion to retired worker benefits at the NRA, benefit levels before
conversion would be in line with benefit levels for those without
individual accounts.  Benefit levels for disabled workers may be higher
than those of retired

workers since disabled workers are entitled to benefits at earlier ages,
thus the reductions in their PIA factors would be smaller. This may create
an incentive for older workers to apply for disability benefits.

Appendix I: Analysis of Reform Models Page 95 GAO- 03- 310 Social Security
Reform Figure A- 13: Model 3 Quintile Analysis * Median Monthly Benefits
by Cohort for Disabled Workers in

the Lowest Quintile

0 500

1000 1500

2000 2500

3000 3500

1955 1970 1985 Constant 2001 Dollars

Benefit Reduction Benchmark Model 3 without Accounts Model 3 withAccounts
Tax Increase Benchmark

Source: GAO*s analysis using the GEMINI model. Note: Median monthly
benefits at age 67 for disabled workers. Estimates based on 1955, 1970,
and 1985 birth cohorts assuming uncertain asset returns and inflation, and
full annuitization of account balance at retirement age. *With accounts*
implies all

individuals in the cohort participate in the individual accounts.
Quintiles are based on the distribution of benefits at age 67 under tax
increase benchmark.

Appendix I: Analysis of Reform Models Page 96 GAO- 03- 310 Social Security
Reform Figure A- 14: Model 3 Quintile Analysis * Median Monthly Benefits
by Cohort for Disabled Workers in

the Highest Quintile

0 500

1000 1500

2000 2500

3000 3500

1955 1970 1985 Constant 2001 Dollars

Benefit Reduction Benchmark Model 3 without Accounts Model 3 withAccounts
Tax Increase Benchmark

Source: GAO*s analysis using the GEMINI model. Note: Median monthly
benefits at age 67 for disabled workers. Estimates based on 1955, 1970,
and 1985 birth cohorts assuming uncertain asset returns and inflation, and
full annuitization of account balance at retirement age. *With accounts*
implies all individuals in the cohort participate in the individual
accounts. Quintiles are based on the distribution of benefits at age 67
under tax increase benchmark.

Appendix I: Analysis of Reform Models Page 97 GAO- 03- 310 Social Security
Reform Balancing Adequacy and Equity- Overall Equity

Model 3  Provide workers some investment choice and control, subject to
certain limitations. This might enable individuals to earn a higher rate
of return on their contributions with an increased measure of

risk, primarily that the return expected may not be realized.  May
improve intergenerational equity through the move to advanced funding of
Social Security and the inheritance feature of individual accounts.  Make
determining the rate of return difficult as the link between

contributions and benefits becomes unclear due to general revenue
transfers. Thus, we did not quantitatively assess the equity effects of
the models.

Appendix I: Analysis of Reform Models Page 98 GAO- 03- 310 Social Security
Reform Implementing and Administering Reforms

 Funding for the transition from a pay- as- you- go system to a partially
funded system would be handled by transfers from the General Fund of the
Treasury and could be repaid when the trust funds experience cash flow
surpluses.  An education program will be necessary to explain the changes
in the

benefit structure and to avoid expectation gaps. * Benefit offset feature,
financing structure of the system may be

difficult to explain, which increases the importance of an education
program.  An education program will also be necessary to inform OASDI
eligible

workers on making sound investment decisions regarding diversification,
risk, and participation.  The Commission did not explicitly address the
costs of an education

program.  It is unclear how the Commission*s proposed account splitting
at divorce

would fit into divorce law.

Appendix I: Analysis of Reform Models Page 99 GAO- 03- 310 Social Security
Reform Implementing and Administering Reforms

 The proposal establishes a Governing Board to administer the individual
accounts, which is intended to limit the potential for politically
motivated investing. The board*s duties include the choice of available
funds and providing financial information to individuals.  The design of
the voluntary individual account feature places an

additional administrative burden on the SSA. Specifically, the
hypothetical account, benefit offset, inheritance feature, and account
splitting at divorce would create additional responsibilities for SSA. 
There is not enough information to estimate administrative costs. Such

costs are affected by the level of participation in the individual
accounts. However, the Commission believes that individual accounts can be
administered at a low cost since they envision the system being structured
similar to the TSP.  There is not enough information to address how
annuities and annuity

pricing will be handled; therefore, we used the same assumptions as the
SSA Actuaries and did not quantitatively analyze their effect on benefit
levels.

Appendix II: Comments from the Social Security Administration Page 100
GAO- 03- 310 Social Security Reform Appendix II: Comments from the Social

Security Administration

Appendix II: Comments from the Social Security Administration Page 101
GAO- 03- 310 Social Security Reform

Appendix II: Comments from the Social Security Administration Page 102
GAO- 03- 310 Social Security Reform

Appendix II: Comments from the Social Security Administration Page 103
GAO- 03- 310 Social Security Reform

Appendix II: Comments from the Social Security Administration Page 104
GAO- 03- 310 Social Security Reform

Appendix II: Comments from the Social Security Administration Page 105
GAO- 03- 310 Social Security Reform (130108)

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