Social Security Reform: Analysis of a Trust Fund Exhaustion	 
Scenario (29-JUL-03, GAO-03-907).				 
                                                                 
Social Security is an important social insurance program	 
affecting virtually every American family. It is the foundation  
of the nation's retirement income system and also 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. The Chairman of the Senate
Special Committee on Aging and the Chairman of the Senate	 
Committee on Finance asked GAO to use its analytic framework to  
evaluate an illustrative "Trust Fund Exhaustion" scenario under  
which benefits are reduced proportionately for all beneficiaries 
by the shortfall in revenues occurring upon exhaustion of the	 
combined Old-Age and Survivors Insurance and Disability Insurance
Trust Funds. The analytic framework consists of three basic	 
criteria: (1) the extent to which the proposal achieves 	 
sustainable solvency and how it would affect the U.S. economy and
the federal budget; (2) the balance struck between the twin goals
of income adequacy and individual equity; and (3) how readily	 
changes could be implemented, administered, and explained to the 
public. The Trust Fund Exhaustion scenario is intended as an	 
analytic tool, not a legal determination.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-907 					        
    ACCNO:   A07772						        
  TITLE:     Social Security Reform: Analysis of a Trust Fund	      
Exhaustion Scenario						 
     DATE:   07/29/2003 
  SUBJECT:   Disability benefits				 
	     Federal social security programs			 
	     Social security benefits				 
	     Trust funds					 
	     Retirement benefits				 
	     Program management 				 
	     Administrative remedies				 
	     Old Age and Survivors Insurance Trust		 
	     Fund						 
                                                                 
	     Social Security Disability Insurance		 
	     Trust Fund 					 
                                                                 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-03-907

Report to Congressional Requesters

United States General Accounting Office

GAO

July 2003 SOCIAL SECURITY REFORM

Analysis of a Trust Fund Exhaustion Scenario

GAO- 03- 907

The *Trust Fund Exhaustion* scenario underscores the need to take action
sooner rather than later to address Social Security*s financing shortfall.
In so doing, the scenario illustrates trade- offs between sustainable
solvency and benefit adequacy and equity.

By definition this scenario would achieve sustainable solvency because
after trust fund exhaustion, benefit payments would be adjusted each year
to equal annual tax income. Before exhaustion, the scenario would have the
same unified fiscal results as paying currently scheduled benefits with no
policy changes. After exhaustion, fiscal results would be increasingly
similar to funding currently scheduled benefits with a tax increase (tax
increase

benchmark) and a benefit reduction benchmark that incorporates gradual and
progressive reductions.

Benefits would differ sharply over time. Before trust fund exhaustion,
currently scheduled benefits would be paid in full. After, benefits for
all would be reduced across the board by 27 percent (to 73 percent of
currently scheduled levels). Additional reductions would need to be taken
in successive years such that at the end of the 75- year projection
period, benefits would be reduced by 33 percent (to 67 percent of
currently scheduled levels).

The Trust Fund Exhaustion scenario raises significant intergenerational
equity issues. Specifically, a much greater burden would be placed on
younger generations. Those born in 1955 would see no benefit reductions
until age 83, while those born in 1985 would experience reduced benefits
immediately upon retirement and benefits lower than under either GAO*s
benefit reduction benchmark or tax increase benchmark in all years of
retirement. Consequently, lifetime benefits would be reduced more for
younger generations. Benefits would be adjusted proportionately for all
recipients, increasing the likelihood of hardship for lower- income
retirees and the disabled.

Assessing the Social Security Administration*s (SSA) administrative
challenges under this scenario is difficult given a lack of historical
precedent and legislative clarity on how SSA would proceed. A focus on
cash management would be needed to calculate and implement the needed
ongoing benefit adjustments. Social Security is an important

social insurance program affecting virtually every American family. It is
the foundation of the nation*s retirement income system and also 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.

The Chairman of the Senate Special Committee on Aging and the Chairman of
the Senate Committee on Finance asked GAO to use its analytic framework to
evaluate an illustrative *Trust Fund

Exhaustion* scenario under which benefits are reduced proportionately for
all beneficiaries by the shortfall in revenues occurring upon exhaustion
of the combined Old- Age and Survivors Insurance and Disability Insurance
Trust Funds. The analytic

framework consists of three basic criteria: (1) the extent to which the
proposal achieves sustainable solvency and how it would affect the U. S.
economy and the federal budget; (2) the balance struck between the twin
goals of income adequacy and individual equity; and (3) how readily
changes could be implemented, administered, and

explained to the public. The Trust Fund Exhaustion scenario is intended as
an analytic tool, not a legal determination.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 907. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Barbara Bovbjerg at (202) 512- 7215 or Susan Irving
at (202) 512- 9142. Highlights of GAO- 03- 907, a report to

congressional requesters

July 2003

SOCIAL SECURITY REFORM

Analysis of a Trust Fund Exhaustion Scenario

Page i GAO- 03- 907 Social Security Reform Letter 1 Concluding
Observations 7 Agency Comments and Our Evaluation 8 Appendix I Briefing
Slides 9

Appendix II Methodology 44 Fiscal Model 44 Benefit Model 45 Table

Table 1: Fiscal Model Assumption Summary 44 Abbreviations

GDP gross domestic product GEMINI Genuine Microsimulation of Social
Security

and Accounts MINT3 Modeling Income in the Near Term OASDI Old- Age and
Survivors Insurance and Disability Insurance PENSIM Pension Simulator PSG
Policy Simulation Group SSA Social Security Administration SSASIM Social
Security and Accounts Simulator Contents

This is a work of the U. S. Government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. It may contain
copyrighted graphics, images or other materials. Permission from the
copyright holder may be necessary should you wish to reproduce copyrighted
materials separately from GAO*s product.

Page 1 GAO- 03- 907 Social Security Reform July 29, 2003 The Honorable
Larry E. Craig Chairman

Special Committee on Aging United States Senate

The Honorable Charles Grassley Chairman Committee on Finance United States
Senate

This report responds to your request that we apply our criteria for
assessing Social Security reform proposals to a *Trust Fund Exhaustion*
scenario. As requested, this analysis assumes that once the combined
OldAge and Survivors Insurance and Disability Insurance (OASDI) Trust
Funds are exhausted, monthly benefit checks will be reduced in proportion
to the annual shortfall, effectively reducing everyone*s benefits across-
the- board. 1 As agreed with your offices, our report is based on the
analytic framework

we have previously used to evaluate Social Security reform proposals. 2
This 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.  The
balance struck between the twin goals of income adequacy (level

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

1 As presented in this report, the Trust Fund Exhaustion scenario
illustrates potential outcomes, assuming that (a) the exhaustion of the
combined OASDI Trust Funds in 2038 under the intermediate assumptions of
the 2001 OASDI Trustees Report, (b) future

program income and costs follow projections made by the Office of Chief
Actuary at the Social Security Administration, and (c) only payroll taxes
and taxes on benefits flow into the trust fund. The scenario is intended
as an analytic tool, not a legal determination.

2 See 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- 907 Social Security Reform  How readily changes could be
implemented, administered, and explained to the public.

As in our evaluations of reform proposals, our assessment of the Trust
Fund Exhaustion scenario uses 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. It is important to keep in mind that focusing on trust fund
solvency alone is not sufficient. Solvency does not tell us whether the
program is sustainable* that is, whether the government will have the
capacity to pay future claims or what else will have to be squeezed to pay
those claims.

Although the Trustees* 2003 intermediate estimates show that the combined
Social Security Trust Funds will be solvent until 2042, 3 program spending
will constitute a growing share of the budget and the economy well before
that date. In 2008, the first baby boomers will become eligible for Social
Security benefits, and in 2009 Social Security*s cash surplus* the
difference between program tax income and the costs of paying scheduled
benefits* will begin a permanent decline. By 2018, Social Security*s tax
income is projected to be insufficient to pay currently scheduled
benefits. Importantly, neither the decline in the cash surpluses nor the
cash deficit will affect the payment of benefits. However, the shift from
positive to negative cash flow will place increased pressure on the

federal budget to raise the resources necessary to meet the program*s
ongoing costs. If you look ahead in the federal budget, Social Security
together with the rapidly growing health programs (Medicare and Medicaid)
will dominate the federal government*s future fiscal outlook. Absent
reform, the nation will ultimately have to choose between persistent,
escalating federal deficits, significant tax increases, and/ or dramatic
budget cuts of unprecedented magnitude.

In analyzing the Trust Fund Exhaustion scenario, we used estimates
provided in a memorandum dated May 8, 2003, prepared by the Social
Security Administration*s (SSA) Office of the Chief Actuary. Under these

estimates, the cost of OASDI benefits equals OASDI income once the 3
Separately, the Disability Insurance (DI) Trust Fund is projected to be
exhausted in 2028 and the Old- Age and Survivors Insurance (OASI) Trust
Fund in 2044.

Page 3 GAO- 03- 907 Social Security Reform combined trust funds are
exhausted. 4 The analyses presented in this report are based on the
Trustees* best, or intermediate, estimates of the 2001

OASDI Trustees Report. 5 Accordingly, our assessment uses the same
framework as our January 15, 2003, report to you on the reform models put
forward by the President*s Commission to Strengthen Social Security. 6
This report follows the format of and uses the same economic

assumptions as that report. 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 analysis of the Trust Fund Exhaustion scenario uses the
same three benchmarks as did our January report: 7  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

4 Income is defined as income from scheduled payroll- tax contributions
and a portion of the income from taxation of scheduled benefits. The
latter was adjusted to reflect the lower expected revenues from benefit
taxation. 5 Under the 2001 Trustees* intermediate estimates, the combined
OASDI Trust Funds are projected to reach exhaustion in 2038. Under the
2003 Trustees* intermediate estimates, the projected exhaustion date is
2042.

6 See U. S. General Accounting Office, Social Security Reform: Analysis of
Reform Models Developed by the President*s Commission to Strengthen Social
Security, GAO- 03- 310 (Washington, D. C.: Jan. 15, 2003). 7 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.
Our benchmarks are solvent for

the 75- year projection period commonly used by SSA*s Office of the Chief
Actuary, but they do not achieve sustainable solvency. Both the benefit
reduction and tax increase benchmarks are explicitly fully funded, and we
worked closely with SSA*s Office of the Chief Actuary in its design.

Page 4 GAO- 03- 907 Social Security Reform currently scheduled Social
Security benefits throughout the simulation period and no other changes in
current spending or tax policies. 8 As in other work assessing Social
Security reform proposals, we used our

long- term economic model in assessing the Trust Fund Exhaustion scenario
against the first criterion, that of financing sustainable solvency. 9 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, the 75- year
actuarial period changes each year, 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. 10
In analyzing reform plans, 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 by looking at the level and
trends over 75 years in deficits, cash needs, and gross domestic product
(GDP) consumed by the program.

To examine how the Trust Fund Exhaustion scenario balances adequacy and
equity concerns, we used the Genuine Microsimulaion of Social Security and
Accounts (GEMINI) model, a dynamic microsimulation model for analyzing the
lifetime implications of Social Security policies for

8 Implicitly, therefore, after exhaustion benefits are paid in part by
increased borrowing from the public. 9 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. 10 The Trustees have used the term *sustainable solvency* to
mean maintaining a trust fund balance that is positive and either level or
increasing as a percent of the annual cost of the program at the end of
the 75- year period. GAO*s definition of sustainable solvency seeks to
gain a more complete perspective of a proposal*s likely effects on the
program, the federal budget, and the economy.

Page 5 GAO- 03- 907 Social Security Reform a large sample of people 11
born in the same year. GEMINI can simulate different reform features for
their effects on the level and distribution of

benefits. To assess benefit adequacy over time, we display median monthly
benefit levels for those born in 1955, 1970, and 1985 (* birth cohorts*)
at different ages as well as their median lifetime benefits.

In analyzing reform proposals, we have stated that 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 combined OASDI
Trust Funds and efforts to maintain adequate retirement income for current
and future beneficiaries. For example, in our January report, we observed
that the Commission reform models illustrate some of the options and
trade- offs that will need to be considered as the nation debates how to
reform Social Security. The Commission*s proposals also illustrated the
difficulty reform proposals face generally in balancing adequacy (level
and certainty of benefits) and equity (rates of return on individual
contributions) considerations.

The Trust Fund Exhaustion scenario illustrates the trade- offs between
sustainable solvency and benefit adequacy and equity in a different way.
By definition, this scenario would achieve sustainable solvency because

once the combined trust funds have run out, benefit payments would be
adjusted (i. e., reduced) each year to equal annual tax income. Under this
scenario, shares of the federal budget and the economy devoted to Social
Security would be lower compared to currently scheduled benefits. From a
fiscal perspective, before exhaustion, the scenario would have the same
unified fiscal results as paying currently scheduled benefits with no
policy changes. Before 2038, the Trust Fund Exhaustion scenario would
reduce unified surpluses and increase unified deficits compared to the tax
increase benchmark by the same amounts as the baseline extended benchmark.
Subsequently, the Trust Fund Exhaustion scenario would result in unified
fiscal results increasingly similar to both the tax increase benchmark and
the benefit reduction scenario over the 75- year period. Before 2038, the
Trust Fund Exhaustion scenario would require the same amounts of cash as
the tax increase or baseline extended benchmarks;

11 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 Survey of Income and Program Participation, the Current
Population Survey, Modeling Income in the Near Term, and the Panel Survey
of Income Dynamics.

Page 6 GAO- 03- 907 Social Security Reform subsequently, the Trust Fund
Exhaustion scenario would require less cash each year than any of the
three benchmarks.

Under the Trust Fund Exhaustion scenario, the effect on benefits would
differ sharply before and after exhaustion took place. Before exhaustion,
benefits would be the same as those currently scheduled, reflected in both
the tax increase and baseline extended benchmarks. Once the combined trust
funds run out, benefits for all would be reduced across the board and
remain below currently scheduled levels. Accordingly, after trust fund
exhaustion all those receiving benefits would experience a sharp drop in
benefits compared to currently scheduled levels; under the Trustees*

2001 intermediate estimates, this drop is estimated at 27 percent (or 73
percent of currently scheduled levels) in 2039. 12 Small further
reductions would need to be taken in successive years such that by 2076
benefits would be one- third below currently scheduled benefits (i. e., to
67 percent of currently scheduled levels).

The Trust Fund Exhaustion scenario raises significant intergenerational
issues. Specifically, due to the timing of the reductions under the Trust
Fund Exhaustion scenario, younger generations would bear much greater
benefit reductions. Those born in 1955 would see no benefit reductions
until they reached age 83, 13 while those born in 1985 would receive lower
benefits than under either GAO*s benefit reduction or tax increase
benchmarks in all years of retirement. Consequently, lifetime benefits
would be reduced more for younger generations. Under the Trust Fund
Exhaustion scenario that we used, benefits would be adjusted
proportionately for all recipients, increasing the likelihood of hardship
for lower- income retirees and the disabled, especially those who rely on
Social Security as their primary or sole source of retirement income.

The nature and scope of SSA*s administrative challenges under the Trust
Fund Exhaustion scenario are difficult to describe or assess given a lack
of historical precedent and legislative clarity on how SSA would proceed.
At a minimum, a focus on cash management would be needed for SSA to

12 In 2038, the year the trust fund is exhausted, the benefit reduction
would be about 7 percent because trust fund assets would be available for
part of the year to pay benefits. In 2039, the first full year after the
trust fund is exhausted, benefits would fall sharply, to about 27 percent
below currently scheduled levels. Under the Trustees 2003 intermediate
estimates, the overall drop is approximately the same. 13 Assuming
individuals are born on January 1st.

Page 7 GAO- 03- 907 Social Security Reform calculate and implement the
ongoing benefit adjustments required under the scenario.

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 nature and extent of the risks for individuals and the
nation as a whole.

At the same time, the defined benefit under the current Social Security
system is also uncertain. The primary risk is that a 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 options
for reform and the timing in which it should occur.

Early action to change Social Security would yield the highest fiscal
dividends for the federal budget and would provide a longer period for
prospective beneficiaries to make adjustments in their own planning.
Waiting to build economic resources and reform future claims entails
risks. First, we lose an important window where today*s relatively large
workforce can increase saving and enhance productivity, two elements
critical to economic growth. We also lose the opportunity to reduce the
burden of interest payments, thereby creating a legacy of higher debt as
well as elderly entitlement spending for the relatively smaller workforce
of the future. Most critically, we risk losing the opportunity to phase in
changes gradually so that all can make the adjustments needed in private
and public plans to accommodate this historic shift. Unfortunately, the

window of opportunity to address the entitlement challenge is narrowing.
As the baby boom generation retires and the numbers of those entitled to
these retirement benefits grow, the difficulties of reform will be

compounded. Accordingly, it remains more important than ever to deal with
these issues over the next several years. Concluding

Observations

Page 8 GAO- 03- 907 Social Security Reform We provided a draft of this
report to SSA. SSA provided informal technical comments, which we have
incorporated where appropriate.

We are sending copies of this report to Senator John Breaux, Ranking
Minority Member, Senate Special Committee on Aging; Senator Max S. Baucus,
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 will be available at

no charge on GAO*s Web site at http:// www. gao. gov. If you or your
offices 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 Agency Comments

and Our Evaluation

Appendix I: Briefing Slides Page 9 GAO- 03- 907 Social Security Reform
Appendix I: Briefing Slides

1

Analysis of a Trust Fund Exhaustion Scenario

July 2003

Appendix I: Briefing Slides Page 10 GAO- 03- 907 Social Security Reform 2

Objectives

 Evaluation of a scenario in which no changes are made to Social Security
before the combined Old- Age and Survivors Insurance and Disability
Insurance (OASDI) Trust Funds reach exhaustion.  This evaluation uses the
three basic criteria GAO has developed that provide policymakers with a
framework for assessing proposed changes

to Social Security: * Financing Sustainable Solvency. * Enhancing Adequacy
and Equity in the Benefits Structure. * Implementing and Administering
Reforms.

Appendix I: Briefing Slides Page 11 GAO- 03- 907 Social Security Reform 3

Methodology

 Financing Sustainable Solvency

* GAO*s long- term economic model was used to help assess the potential
fiscal and economic impacts of changes to Social Security.

* Estimates of scenario costs and income are those made by the Office of
the Chief Actuary, Social Security Administration (SSA), under the
Trustees* 2001 intermediate assumptions.

 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.

Appendix I: Briefing Slides Page 12 GAO- 03- 907 Social Security Reform 4

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. In each of those years, this
benchmark applies equal percentage point reductions to all three Primary
Insurance Amount (PIA) formula factors. Relative to a proportional
reduction, this benchmark is progressive in that it reduces benefits less
for lower

earners.  Tax increase 1 assumes that the combined employer- employee
payroll tax rate is increased by 0.34 percent for Disability Insurance
(DI) and 1.56 percent for

Old- Age and Survivor Insurance (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, implicitly financing trust fund shortfalls with debt held by the
public. 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 and reflect cash
outlays for benefits. Both restore 75- year actuarial balance to Social
Security but are not solvent beyond this period. For more detailed
information on the benefit reduction and tax increase benchmarks see
appendix III of Social Security: Program's Role in Helping Ensure Income
Adequacy. GAO- 02- 62. Washington, D. C.: November 30, 2001.

Appendix I: Briefing Slides Page 13 GAO- 03- 907 Social Security Reform 5
 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-- implicitly benefits are financed by
increasing debt held by the public.

 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.

Benchmarks (continued)

Appendix I: Briefing Slides Page 14 GAO- 03- 907 Social Security Reform 6

Trust Fund Exhaustion Scenario

 Under *Trust Fund Exhaustion,* no changes would be made to program
financing. Current tax rates would be maintained.  Currently scheduled
benefits would be paid in full until the year in which the

combined OASDI Trust Funds are exhausted. 1 In that year, benefits are
assumed to be reduced such that total benefits equal the remaining trust
fund assets plus program income from present- law taxes. 2 Thereafter,
benefits would be reduced in proportion to the annual Social Security
shortfall, effectively reducing benefits for everyone. 3 (See fig. 1.) 1
The DI Trust Fund is projected to reach exhaustion before the OASI Trust
Fund. Treating them as one combined fund assumes assets will be
transferred as needed from OASI to DI such that both funds reach
exhaustion at the same time. 2 Annual revenue from present- law taxes
includes income from scheduled payroll- tax contributions and income from
taxation of scheduled benefits. The latter was adjusted to reflect the
lower expected revenues from benefit taxation. 3 This definition of a
Trust Fund Exhaustion scenario represents an analytic convenience and not
a legal determination as to how benefits would fare in the event the
combined OASDI Trust Funds were exhausted.

Appendix I: Briefing Slides Page 15 GAO- 03- 907 Social Security Reform 7

Figure 1: Trust Fund Exhaustion Scenario Change in Currently Scheduled
Benefits under Trust Fund Exhaustion Scenario - 2001 Trustees Report

Trust Fund Exhaustion Scenario (continued)

Appendix I: Briefing Slides Page 16 GAO- 03- 907 Social Security Reform 8

Financing Sustainable Solvency

This criterion evaluates the extent to which the proposal achieves
sustainable solvency, including how the proposal would affect the economy
and the federal budget.

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?

Appendix I: Briefing Slides Page 17 GAO- 03- 907 Social Security Reform 9
Figure 2

 The fiscal path under the Trust Fund Exhaustion scenario is the same as
baseline extended through 2037; shortly thereafter unified deficits as a
share of GDP are significantly lower under the Trust Fund Exhaustion
scenario.

 Under the Trust Fund Exhaustion scenario, beginning about 2020 unified
surpluses are considerably smaller and deficits considerably larger than
under the benefit reduction benchmark until the combined OASDI Trust

Funds are exhausted. From about 2040 through the end of the simulation
period, the fiscal outlook under Trust Fund Exhaustion is quite similar to
the fiscal outlook under the benefit reduction benchmark.

 Compared to the tax increase benchmark, unified surpluses are much
smaller and deficits are much larger under the Trust Fund Exhaustion
scenario through 2037, thereafter, the difference between the fiscal paths
declines until the two are virtually indistinguishable after 2065 through
the end of the simulation period.

Note: Analysis based on estimates from the Office of the Chief Actuary,
SSA, under the Trustees 2001 intermediate assumptions and CBO's August
2002 baseline assumptions, including the scheduled expiration (sunset) of
the tax reductions in the Economic Growth and Tax Relief Reconciliation
Act of 2001.

Financing Sustainable Solvency (continued)

Appendix I: Briefing Slides Page 18 GAO- 03- 907 Social Security Reform 10

Figure 2: Trust Fund Exhaustion Scenario Unified Surpluses and Deficits as
a Share of GDP

Note: Analysis based on estimates from the Office of the Chief Actuary,
SSA, under the Trustees 2001 intermediate assumptions and CBO's August
2002 baseline assumptions, including the scheduled expiration (sunset) of
the tax reductions in the Economic Growth and Tax Relief Reconciliation
Act of 2001.

Financing Sustainable Solvency (continued)

Appendix I: Briefing Slides Page 19 GAO- 03- 907 Social Security Reform 11
Figure 3

 Debt held by the public under the Trust Fund Exhaustion scenario is the
same as baseline extended through 2037, soon thereafter debt as a share of
GDP is significantly lower under the Trust Fund Exhaustion scenario, and
the gap

increases over time.  Under the Trust Fund Exhaustion scenario, debt held
by the public as a share of

GDP is higher than under the benefit reduction benchmark throughout the
simulation period.

 Compared to the tax increase benchmark, debt held by the public as a
share of GDP is significantly higher under the Trust Fund Exhaustion
scenario for most of the simulation period.

Note: Analysis based on estimates from the Office of the Chief Actuary,
SSA, under the Trustees 2001 intermediate assumptions and CBO's August
2002 baseline assumptions, including the scheduled expiration (sunset) of
the tax reductions in the Economic Growth and Tax Relief Reconciliation
Act of 2001.

Financing Sustainable Solvency (continued)

Appendix I: Briefing Slides Page 20 GAO- 03- 907 Social Security Reform 12

Figure 3: Trust Fund Exhaustion Scenario Debt Held by the Public as a
Share of GDP

Note: Analysis based on estimates from the Office of the Chief Actuary,
SSA, under the Trustees 2001 intermediate assumptions and CBO's August
2002 baseline assumptions, including the scheduled expiration (sunset) of
the tax reductions in the Economic Growth and Tax Relief Reconciliation
Act of 2001.

Financing Sustainable Solvency (continued)

Appendix I: Briefing Slides Page 21 GAO- 03- 907 Social Security Reform 13
Figure 4

 The government*s cash requirement under the Trust Fund Exhaustion
scenario is the same as both the baseline extended and tax increase
benchmarks through 2037. After the combined OASDI Trust Funds are
exhausted, the government*s cash requirement falls significantly compared
to the baseline

extended and tax increase benchmarks and remains relatively constant as a
share of GDP through the end of the simulation period.  Compared to the
benefit reduction benchmark, the government*s cash requirement as a share
of GDP is lower beginning in 2039 through the end of the simulation
period.

Note: Analysis based on estimates from the Office of the Chief Actuary,
SSA, under the Trustees 2001 intermediate assumptions and CBO's August
2002 baseline assumptions, including the scheduled expiration (sunset) of
the tax reductions in the Economic Growth and Tax Relief Reconciliation
Act of 2001.

Financing Sustainable Solvency (continued)

Appendix I: Briefing Slides Page 22 GAO- 03- 907 Social Security Reform 14

Figure 4: Trust Fund Exhaustion Scenario Government Cash Requirements

Note: All estimates are based on the Trustees' 2001 intermediate
assumptions and reflect cash outlays for benefits. Benefit amounts shown
for the baseline extended and tax increase benchmarks are scheduled
benefits as estimated by the actuaries.

Financing Sustainable Solvency (continued)

Appendix I: Briefing Slides Page 23 GAO- 03- 907 Social Security Reform 15
1 Analysis limited to first order effects on saving. Effects on saving
behavior in response to changes are not considered given the lack of
expert

consensus. Under the Trust Fund Exhaustion scenario:

 National saving would increase on a first- order basis due to the
improved fiscal position of the government resulting from the reduced
benefit payments beginning in 2038. 1

 75- year actuarial balance would result as benefits are reduced to match
program income. The system is stable at the reduced benefit level.

 No changes are assumed in program financing.  No new contingent
liabilities are created.  Program growth is limited to growth in program
income.

Financing Sustainable Solvency (continued)

Appendix I: Briefing Slides Page 24 GAO- 03- 907 Social Security Reform 16

Balancing Adequacy and 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).

To what extent does the proposal:

 Change scheduled benefits for current and future retirees?  Maintain
benefits for the disabled, dependents, and survivors?  Maintain benefits
for low- income workers who are most reliant on Social Security?  Provide
higher replacement rates for lower income earners?  Improve
intergenerational equity?  Ensure that those who contribute receive
benefits?  Expand individual choice and control over program
contributions?  Increase returns on investment?

Appendix I: Briefing Slides Page 25 GAO- 03- 907 Social Security Reform 17

Balancing Adequacy and Equity-- Methodology and Assumptions

 We evaluate the adequacy and equity criterion for the Social Security
Trust Fund Exhaustion scenario in comparison with GAO benchmark through
analyses of:

* Median monthly benefits for those born in 1955, 1970, and 1985 (birth
cohorts) at various ages.

* The present value 1 of lifetime benefits for beneficiaries surviving to
age 65 and beyond.

* Distribution of monthly benefits by benefit quintile and history of
disability receipt.

 All cohorts we analyzed were produced using the GEMINI model, a dynamic
microsimulation model of a representative sample of 100,000 individuals.

 Model Assumptions: * No cohort members work past age 65. * Retired
worker beneficiaries start collecting benefits at age 65. 2 1 The current
value of one or more future benefit payments discounted at an appropriate
interest rate-- for our analysis the Treasury rate specified by the
intermediate assumptions of the 2001 OASDI Trustees* Report. 2 Disability
recipients, certain surviving spouses, and others may receive benefits
prior to age 65.

Appendix I: Briefing Slides Page 26 GAO- 03- 907 Social Security Reform 18

Balancing Adequacy and Equity-- Overview of Trust Fund Exhaustion Scenario

 Scenario results in a benefits *cliff*-- 27 percent reduction in
benefits in 2039 followed by continued benefit reductions. * Does not
exempt current retirees and those near retirement age. (Those

currently retired would be affected if they were receiving benefits in
2038.) * Benefits are reduced in a manner that does not protect low-
income and

disabled workers.  Scenario reduces lifetime benefits more for younger
generations.  For those born in the same year, the scenario reduces
lifetime benefits more for

retirees who survive to older ages beyond the *cliff*.

Appendix I: Briefing Slides Page 27 GAO- 03- 907 Social Security Reform 19

Changes in Scheduled Benefits for Current and Future Retirees

 Under the Trust Fund Exhaustion scenario, the combined OASDI Trust Funds
reach exhaustion in 2038, with benefits reduced in that year and all
subsequent years. * Benefits are reduced across the board relative to
currently scheduled benefits by 7 percent in 2038, about 27 percent
between 2039 and 2045, and by increasingly larger percentages in
subsequent years.

 Benefits under Trust Fund Exhaustion: * Mirror the the tax increase
benchmark before 2038 and are substantially lower afterwards.

* Are higher than the benefit reduction benchmark before 2038 and lower
afterwards.

Table 1: Timing of the Benefit *Cliff*

Note: Analysis assumes cohort members are born on January 1 st .

Appendix I: Briefing Slides Page 28 GAO- 03- 907 Social Security Reform 20
Figure 5

 Shows benefits in 2001 dollars for illustrative individual born in 1955,
1970, and 1985 under Trust Fund Exhaustion scenario.

 The 1955 and 1970 illustrative individuals receive currently promised
benefits until ages 82 and 67, respectively, followed by a benefit *cliff*
with reduced benefits thereafter.

 The 1985 illustrative individual never receives currently scheduled
benefits; all benefits are received after the benefit *cliff* and benefits
gradually decline with age. Figures 6, 7, and 8  Show median benefits for
all surviving members of each birth cohort under Trust

Fund Exhaustion scenario and benefit reduction and tax increase
benchmarks.  Benefits increase slightly over time under Trust Fund
Exhaustion and

benchmarks because some retirees change benefit status as they age. 1 1
When retirees become widowed they may receive the larger of either their
own benefit or their spouses* benefit.

Changes in Scheduled Benefits (continued)

Appendix I: Briefing Slides Page 29 GAO- 03- 907 Social Security Reform 21
Note: Illustrative workers retire at age 65 and receive benefits equal to
the median for the appropriate GEMINI cohort under the Trust Fund
Exhaustion scenario. In years after 2038, real benefits are reduced
according to the Trust Fund Exhaustion scenario (see fig. 1). In GEMINI,
the median age of death for those living to age 65 and receiving a retired
workers benefit is 84, 85, and 86 for the 1955, 1970, and 1985 cohorts,
respectively. Figure 5: Trust Fund Exhaustion Scenario Monthly Benefits
under Trust Fund Exhaustion Scenario for an Illustrative

Individual by Selected Birth Year

Changes in Scheduled Benefits (continued)

Appendix I: Briefing Slides Page 30 GAO- 03- 907 Social Security Reform 22

Figure 6: Trust Fund Exhaustion Scenario Median Monthly Benefits by Age
for Those Born in 1955

Note: The tax increase benchmark assumes a higher level of payroll tax (an
increase of 1. 9 percentage points beginning in 2002) than either the
benefit reduction benchmark or the Trust Fund Exhaustion scenario.

Changes in Scheduled Benefits (continued)

Appendix I: Briefing Slides Page 31 GAO- 03- 907 Social Security Reform 23

Figure 7: Trust Fund Exhaustion Scenario Median Monthly Benefits by Age
for Those Born in 1970

Note: The tax increase benchmark assumes a higher level of payroll tax (an
increase of 1. 9 percentage points beginning in 2002) than either the
benefit reduction benchmark or the Trust Fund Exhaustion scenario.

Changes in Scheduled Benefits (continued)

Appendix I: Briefing Slides Page 32 GAO- 03- 907 Social Security Reform 24

Figure 8: Trust Fund Exhaustion Scenario Median Monthly Benefits by Age
for Those Born in 1985

Note: The tax increase benchmark assumes a higher level of payroll tax (an
increase of 1. 9 percentage points beginning in 2002) than either the
benefit reduction benchmark or the Trust Fund Exhaustion scenario.

Changes in Scheduled Benefits (continued)

Appendix I: Briefing Slides Page 33 GAO- 03- 907 Social Security Reform 25

Benefit Outcomes for Low- Income Beneficiaries

Figures 9 and 10 Trust Fund Exhaustion scenario:  Reduces benefits in a
manner that does not protect low- income workers.

 Reduces benefits relative to the benefit reduction benchmark by more for
the lower benefit quintiles * Benefit reduction benchmark cuts benefits in
a more progressive manner.  Reduces benefits relative to the tax increase
benchmark by the same proportion

for all benefit quintiles.  Is more likely to adversely affect benefit
adequacy and poverty rates than a more progressive reduction, all else
equal.

Appendix I: Briefing Slides Page 34 GAO- 03- 907 Social Security Reform 26
Note: Benefit quintiles are based on the distribution of benefits at age
67 under the tax increase benchmark. The tax increase benchmark assumes a
higher level of payroll tax (an increase of 1.9 percentage points
beginning in 2002) than either the benefit reduction benchmark or the
Trust Fund

Exhaustion scenario.

Figure 9: Trust Fund Exhaustion Scenario Median Real Monthly Benefits at
Age 67 by Quintile for Those Born in 1985

Benefit Outcomes (continued)

Appendix I: Briefing Slides Page 35 GAO- 03- 907 Social Security Reform 27
Note: Compared to the proportional reduction specified by the Trust Fund
Exhaustion scenario, the benefit reduction benchmark is progressive in
that it reduces benefits less for lower earners. Benefit quintiles are
based on the distribution of benefits at age 67 under the tax increase
benchmark. The tax increase benchmark assumes a higher level of payroll
tax (an increase of 1.9 percentage points beginning in 2002) than

either the benefit reduction benchmark or the Trust Fund Exhaustion
scenario. Similar analysis for the 1955 and 1970 cohorts shows similar
results* benefits are not reduced by smaller percentages for the lower
benefit quintiles relative to either benchmark.

Figure 10: Trust Fund Exhaustion Scenario Percentage Change in Benefits at
Age 67 under the Trust Fund Exhaustion Scenario Relative to the Tax
Increase and Benefit Reduction Benchmarks by Benefit Quintile for Those
Born in 1985

Benefit Outcomes (continued)

Appendix I: Briefing Slides Page 36 GAO- 03- 907 Social Security Reform 28

Benefit Outcomes for Disabled Beneficiaries 1 Trust Fund Exhaustion
scenario

Figure 11  Reduces benefits by the same proportion for all beneficiaries
including disabled

workers. Figure 12  Reduces benefits relative to the benefit reduction
benchmark by more for those who received disability before reaching the
normal retirement age.

* Disability recipients have lower lifetime earnings. * Benefit reduction
benchmark cuts benefits in a more progressive manner.

 Reduces benefits relative to the tax increase benchmark by the same
proportion for those who received disability and those who did not.

1 Neither the Trust Fund Exhaustion scenario nor the benchmarks contain
any specific provisions relating to disabled beneficiaries. For instance
differences among the Trust Fund Exhaustion scenario and the benefit
reduction benchmark are due in large part to the differing treatment of
low lifetime earners.

Appendix I: Briefing Slides Page 37 GAO- 03- 907 Social Security Reform 29

Figure 11: Trust Fund Exhaustion Scenario Median Real Monthly Benefits at
Age 67 by History of DI Receipt for Those Born in 1985

Note: The tax increase benchmark assumes a higher level of payroll tax (an
increase of 1. 9 percentage points beginning in 2002) than either the
benefit reduction benchmark or the Trust Fund Exhaustion scenario. Benefit
Outcomes (continued)

Appendix I: Briefing Slides Page 38 GAO- 03- 907 Social Security Reform 30

Figure 12. Trust Fund Exhaustion Scenario Percentage Reduction in Median
Monthly Benefits under Trust Fund Exhaustion Scenario at Age 67 Relative
to the Tax Increase and Benefit Reduction Benchmarks by History of DI
Receipt for Those Born in 1985

Note: Compared to the proportional reduction specified by the Trust Fund
Exhaustion scenario, the benefit reduction benchmark is progressive in
that it reduces benefits less for lower earners. The tax increase
benchmark assumes a higher level of payroll tax (an increase of 1.9
percentage points beginning in 2002) than either the benefit reduction
benchmark or the Trust Fund Exhaustion scenario. Similar analysis for the
1955 and 1970 cohorts shows the similar results* benefits are not reduced
by smaller percentages for the disabled relative to either benchmark.

Benefit Outcomes (continued)

Appendix I: Briefing Slides Page 39 GAO- 03- 907 Social Security Reform 31

Effect on Generational Equity

Figures 13 and 14  For those born in 1955, lifetime benefits are higher
under the Trust Fund

Exhaustion scenario than under the benefit reduction benchmark. However,
those living to age 83 and older would experience the *cliff.*

 For those born in 1970 cohort, lifetime benefits are about the same
under the Trust Fund Exhaustion scenario and the benefit reduction
benchmark. 1 However, those surviving to age 69 and older would see their
monthly benefits reduced well below the benefit reduction benchmark.

 Lifetime benefits for those born in 1985 are about 7 percent lower under
the Trust Fund Exhaustion scenario than under the benefit reduction
benchmark (see fig. 14). 1 The Trust Fund Exhaustion scenario yields about
1 percent greater lifetime benefits relative to the benefit reduction
benchmark (see fig. 14).

Appendix I: Briefing Slides Page 40 GAO- 03- 907 Social Security Reform 32
Note: Benefits are calculated for individuals that survive to ages 65 and
older. Assumes that benefits continue to decline beyond 2080 at the rate
of decline for the period 2071- 2080. This assumption affects benefits
only for those born in 1985 surviving to age 95 or older. The tax increase

benchmark assumes a higher level of payroll tax (an increase of 1.9
percentage points beginning in 2002) than either the benefit reduction
benchmark or the Trust Fund Exhaustion scenario. Analysis does not reflect
any behavioral changes resulting from the benchmark or scenario, such as
the impact of higher taxes on consumption or retirement saving under the
tax increase benchmark.

Figure 13: Trust Fund Exhaustion Scenario Present Value of Lifetime Social
Security Benefits by Birth Year

Effect on Generational Equity (continued)

Appendix I: Briefing Slides Page 41 GAO- 03- 907 Social Security Reform 33
Note: Compared to the proportional reduction specified by the Trust Fund
Exhaustion scenario, the benefit reduction benchmark is progressive in

that it reduces benefits less for lower earners. The present value of
lifetime benefits are calculated in 2001 dollars for cohort members that
survive to ages 65 and older. The tax increase benchmark assumes a higher
level of payroll tax (an increase of 1. 9 percentage points beginning in
2002) than either the benefit reduction benchmark or the Trust Fund
Exhaustion scenario. Analysis does not reflect any behavioral changes
resulting

from the benchmark or scenario, such as the impact of higher taxes on
consumption or retirement saving under the tax increase benchmark.

Figure 14: Trust Fund Exhaustion Scenario Percentage Change in Lifetime
Benefits under the Trust Fund Exhaustion Scenario Relative to the Tax
Increase and Benefit Reduction Benchmarks

Effect on Generational Equity (continued)

Appendix I: Briefing Slides Page 42 GAO- 03- 907 Social Security Reform 34

Implementing and Administering Reforms

This criterion evaluates how readily such changes could be implemented,
administered, and explained to the public.

To what extent does the scenario:

 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?

Appendix I: Briefing Slides Page 43 GAO- 03- 907 Social Security Reform 35
 Assessing the Social Security Administration*s administrative and

implementation challenges posed by a Trust Fund Exhaustion scenario is
complicated by a lack of historical precedent and legislative clarity on
how SSA would proceed.

 Any determination of benefit distributions after exhaustion of the
combined OASDI Trust Funds would pose challenges to fundamental
administrative functions of SSA.

* At a minimum, a focus on cash management would be needed for SSA to
calculate and implement the ongoing benefit adjustments required under the
scenario.

 This Trust Fund Exhaustion scenario would require an educational
campaign to make public aware of *cliff* in benefits and of subsequent
reductions.  Difficulty added to individuals* retirement planning as
benefits develop into a

moving target** cliff* may be foreseen, but cuts tend to be deeper as an
individual ages.

Implementing and Administering Reforms (continued)

Appendix II: Methodology Page 44 GAO- 03- 907 Social Security Reform 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 provide illustrations*
not precise forecasts* of the relative fiscal and economic outcomes
associated with alternative policy paths. They are useful for comparing
the potential outcomes of alternative policies within a common economic
framework over the long term. Recognizing their inherent uncertainties, 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.

Table 1: 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 percent thereafter.

Source: GAO. Appendix II: Methodology Fiscal Model

Appendix II: Methodology Page 45 GAO- 03- 907 Social Security Reform
Genuine Microsimulation of Social Security and Accounts (GEMINI) is a
microsimulation model developed by the Policy Simulation Group (PSG).

GEMINI is linked with two other PSG models, the Social Security and
Accounts Simulator (SSASIM), which has been used in numerous GAO reports,
and the Pension Simulator (PENSIM), which has been developed for the
Department of Labor. For our report, we used SSASIM to produce Social
Security policy regimes consistent with the benefit reduction benchmark,
the tax increase benchmark, and the Trust Fund Exhaustion scenario. PENSIM
produced simulated samples, sometimes called synthetic samples, of
lifetime histories, including earnings, educational attainment, marriage,
disability, and death, for the cohorts born in 1955, 1970, and 1985. The
lifetime histories were validated against data from the Survey of Income
and Program Participation, the Current Population Survey, Modeling Income
in the Near Term (MINT3), 1 and the Panel Study of Income Dynamics.
Additionally, any projected statistics (such as life expectancy,
educational attainment, employment patterns, and marital status at age 60)
are, where possible, consistent with intermediate- cost projections from
SSA*s Office of the Chief Actuary. Because PENSIM cannot yet
stochastically determine the age at which a member of the sample applies
for benefits, we assumed that all retired worker beneficiaries claim
benefits at age 65. GEMINI used the lifetime histories produced by PENSIM
and the policy regimes produced by SSASIM to simulate Social Security
benefits for retired and disabled workers and auxiliary benefits paid to
spouses, widows, and children.

Additional information about GEMINI may be found in three previous GAO
reports that used the model: Retirement Income: Intergenerational
Comparisons of Wealth and Future Income, GAO- 03- 429 (Washington, D. C.:
Apr. 25, 2003); Social Security Reform: Analysis of Reform Models
Developed by the President*s Commission to Strengthen Social Security,
GAO- 03- 310 (Washington, D. C.: Jan. 15, 2003); and Social Security:
Program*s Role in Helping Ensure Income Adequacy,

GAO- 02- 62 (Washington, D. C.: Nov. 30, 2001). The GEMINI, PENSIM, and
SSASIM models are updated to reflect changes in information sources.
Notable changes from recent reports include updated mortality and
disability patterns to reflect new information from

1 MINT3 is a detailed microsimulation model developed jointly by the
Social Security Administration, the Brookings Institution, RAND, and the
Urban Institute to project the distribution of income in retirement for
the 1931 to 1960 birth cohorts. Benefit Model

Appendix II: Methodology Page 46 GAO- 03- 907 Social Security Reform SSA*s
Office of the Chief Actuary. For more information on the models, see the
PSG Web site at www. polsim. com.

(130251)

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

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

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

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to: U. S. General Accounting Office 441 G Street NW, Room LM
Washington, D. C. 20548

To order by Phone: Voice: (202) 512- 6000 TDD: (202) 512- 2537 Fax: (202)
512- 6061

Contact: Web site: www. gao. gov/ fraudnet/ fraudnet. htm E- mail:
fraudnet@ gao. gov Automated answering system: (800) 424- 5454 or (202)
512- 7470 Jeff Nelligan, Managing Director, NelliganJ@ gao. gov (202) 512-
4800

U. S. General Accounting Office, 441 G Street NW, Room 7149 Washington, D.
C. 20548 GAO*s Mission

Obtaining Copies of GAO Reports and Test i mony Order by Mail or Phone

To Report Fraud, Waste, and Abuse in Federal Programs Public Affairs
*** End of document. ***