Social Security: Societal Changes Add Challenges to Program	 
Protections (17-MAY-05, GAO-05-706T).				 
                                                                 
Before Social Security was enacted in 1935, at least half of	 
those 65 and older in the United States were financially	 
dependent upon others, including family members and public	 
assistance. Today, the elderly's dependency on public assistance 
has dropped to a fraction of its depression-era levels, and	 
poverty rates among this group are now lower than for the	 
population as a whole. However, Social Security's long-term	 
financing problems will require changes to restore fiscal	 
stability to the program. The challenge for policymakers will be 
to make the necessary changes while retaining protections that	 
are so important to millions of Americans. The Chairman of the	 
Subcommittee on Social Security of the House Committee on Ways	 
and Means asked GAO to discuss the importance of Social Security 
for vulnerable populations. This testimony will address the key  
provisions in the Social Security program that support vulnerable
populations, the ways in which those populations and American	 
society in general have changed over time, and the implications  
of those changes for the Social Security program.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-706T					        
    ACCNO:   A24278						        
  TITLE:     Social Security: Societal Changes Add Challenges to      
Program Protections						 
     DATE:   05/17/2005 
  SUBJECT:   Elderly persons					 
	     Federal social security programs			 
	     Income maintenance programs			 
	     Income statistics					 
	     Labor force					 
	     Labor statistics					 
	     Population statistics				 
	     Program evaluation 				 
	     Social security benefits				 
	     Statistical data					 
	     Strategic planning 				 
	     Social Security Program				 

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GAO-05-706T

United States Government Accountability Office

GAO	Testimony Before the Subcommittee on Social Security, Committee on
Ways and Means, House of Representatives

For Release on Delivery Expected at 2:00 p.m. EDT Tuesday, May 17, 2005

SOCIAL SECURITY

             Societal Changes Add Challenges to Program Protections

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

GAO-05-706T

[IMG]

May 17, 2005

SOCIAL SECURITY

Societal Changes Add Challenges to Program Protections

                                 What GAO Found

The Social Security program today continues to provide protection from
poverty in old age just as it was designed to do 70 years ago. Social
Security protects workers through a benefit formula that advantages
low-wage workers, benefits for the disabled, spousal and survivor
benefits, and a monthly annuity and yearly cost of living adjustment. At
the same time, much in American society has changed greatly since the
inception of the Social Security program. People are living longer,
women's labor force participation has increased significantly and
household composition has changed dramatically. In addition, labor force
growth has slowed significantly, and the nature of work has changed in
ways that affect workers' ability to save for retirement. These changes
suggest that the Social Security system as it is currently designed may
not be as effective as it could be in addressing the needs of our society.
Some of the areas where changes in design could bring the program more in
alignment with the current structures of work and families include
encouraging older workers to remain in the labor force, addressing
questions about the equity of spousal benefits, and redesigning the
Disability Insurance program.

Given its long-term solvency problems, however, there are difficult
decisions to be made about Social Security, largely because the program is
so important to so many. In addition, the more immediate financial
problems of the Medicare program also require attention. Policymakers will
need to address the escalating costs of both Social Security and Medicare
while recognizing that these programs are crucial to retirement wellbeing.
Most importantly, the solvency and sustainability of Social Security
should be addressed within the context of the program's role of protecting
vulnerable populations, while at the same time considering how carrying
out that role may need to change to better address changing societal
needs.

Poverty Rates for Elderly Have Declined Faster than for Other Groups

Percent of population below poverty40

                                                          35 30 25 20 15 10 5

59191

6419

6919

7419

7919

8419

8919

9419

9929

0400

Source: U.S. Bureau of the Census. Note: Data for years indicated by
dashed lines were not available but are available for 1959.

United States Government Accountability Office

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss how the Social Security program
protects vulnerable populations and how the program may need to evolve to
meet their changing needs. Before Social Security was enacted in 1935, at
least half of those 65 and older in the United States were financially
dependent upon others, including family members and public assistance.1
Today, the elderly's dependency on public assistance has dropped to a
fraction of its Depression-era levels, and poverty rates among this group
are now lower than for the population as a whole. At the same time, Social
Security has become the single largest source of retirement income for
Americans, supporting over 90 percent of those 65 and older. Moreover, it
is the only source of income for approximately 22 percent of the elderly
population. However, Social Security's long-term financing problems will
require changes to restore fiscal stability to the program. The challenge
for policymakers will be to make the necessary changes while retaining
protections that are so important to millions of Americans.

Today, I would like to talk about the key provisions in the Social
Security program that support vulnerable populations, the ways in which
those populations and American society in general have changed over time,
and the implications of those changes for the Social Security program. GAO
has conducted several studies related to Social Security reform and its
impact on vulnerable populations;2 my statement is largely based on that
work.

In summary, the Social Security program today continues to provide
protection from poverty in old age just as it was designed to do 70 years
ago. Social Security protects workers through a benefit formula that
advantages low-wage workers, benefits for the disabled, spousal and
survivor benefits, and a monthly annuity and yearly cost of living
adjustment. At the same time, much in American society has changed

1 S. Rep. No. 74-628 at 4 (1935).

2 See Social Security and Minorities: Earnings, Disability Incidence, and
Mortality Are Key Factors That Influence Taxes Paid and Benefits Received,
GAO-03-387 (Washington, DC: April 23, 2003); Social Security: Program's
Role in Helping Ensure Income Adequacy, GAO-02-62 (Washington, DC: Nov.
30, 2001); Social Security Reform: Potential Effects on SSA's Disability
Programs and Beneficiaries, GAO-01-35 (Washington, DC: Jan. 24, 2001);
Social Security Reform: Implications of Raising the Retirement Age,
GAO/HEHS-99-112 (Washington, DC: Aug. 27, 1999); Social Security Reform:
Implications for Women's Retirement Income, GAO/HEHS-98-42, (Washington,
DC: Dec. 31, 1997).

Background

greatly since the inception of the Social Security program. People are
living longer, women's labor force participation has increased
significantly and household composition has changed dramatically. In
addition, labor force growth has slowed significantly, and the nature of
work has changed in many ways, some of which affect workers' ability to
save for retirement. These changes suggest that the Social Security system
as it is currently designed may not be as effective as it could be in
addressing the needs of our society. Some of the areas where changes in
design could bring the program more in alignment with the current
structures of work and families include encouraging older workers to
remain in the labor force, addressing questions about the equity of
spousal benefits, and redesigning the Disability Insurance program. At the
same time, as policymakers consider changes that will restore financial
solvency and modernize the program, it will be important for them to keep
in mind Social Security's role in protecting vulnerable populations.

Title II of the Social Security Act, as amended, establishes the Old-Age,
Survivors, and Disability Insurance program, which is generally known as
Social Security. The program provides cash benefits to retired and
disabled workers and their dependents and survivors. The Congress designed
Social Security benefits, at least implicitly, with a focus on replacing
lost wages.3 Because the program is financed on a modified payas-you-go
basis, payroll tax contributions of those currently working are
transferred to current beneficiaries. Current beneficiaries include
insured workers who are eligible for retirement or who cannot work due to
disability, these workers' dependents, and certain survivors of deceased
insured workers. Workers become eligible when they have enough years of
earnings covered under Social Security (i.e., earnings from which Social
Security taxes are deducted); they and their employers pay payroll taxes
on those covered earnings to finance benefits. In 2004, more than 156
million people had earnings covered by Social Security.

Social Security was originally an old-age retirement program. However, the
Social Security Amendments of 1939 added two new categories of benefits:
dependent benefits paid to the spouse and minor children of a retired
worker, and survivor benefits paid to the family after the death of a
covered worker. The Amendments transformed Social Security from a

3 The original formula, as well as subsequent modifications, computed
benefits as a percentage of wages covered under the program in a way that
favors low-wage earners.

retirement program for workers into a family-based economic security
program. The amount of Old-Age and Survivors Insurance (OASI) benefits
paid in 2004 totaled $415 billion for about 40 million recipients.

Similarly, the Social Security Disability Insurance (DI) program was
established in 1956 to provide monthly payments to eligible workers with
disabilities who are under the normal retirement age, and to their
dependents.4 To be eligible for DI benefits as an adult, a person must
have a certain number of recent quarters of covered earnings5 and must be
unable to perform any substantial gainful activity by reason of a
medically determinable physical or mental impairment. The impairment must
be expected to result in death or last or be expected to last for a
continuous period of at least 12 months.6 As with retired worker benefits,
disability benefits are funded by payroll taxes paid by covered employees
and their employers. In calendar year 2004, about 8 million individuals
received approximately $78 billion in DI benefits.7

Outside Social Security, but integrated with the program, other
legislation has also addressed income adequacy in various ways. In 1965,
Medicare and Medicaid were created to alleviate the historically
increasing strain that health care placed on incomes. In 1972, Title XVI's
Supplemental Security Income (SSI) replaced Title I's Old-Age Assistance.
This meanstested program provides cash to meet basic needs for food,
clothing, and shelter. It is the nation's largest cash assistance program
for the poor, and although it is administered by the Social Security
Administration, it is funded by general tax revenues and not the Social
Security trust fund.8

4 In 1956, the Social Security Act was amended to provide benefits to
disabled workers aged 50-64 and disabled adult children. Over the next 4
years, Congress broadened the scope of the program, permitting disabled
workers under age 50 and their dependents to qualify for benefits, and
eventually disabled workers at any age could qualify.

5 The eligibility requirements for DI are different from the requirements
for OASI.

6 Work activity is generally considered substantial and gainful if the
person's earnings exceed a particular level established by statute and
regulations.

7 These numbers do not include adult disabled children who are dependents
of deceased or retired workers, disabled widows and widowers, or disabled
parents, who receive their disability benefits from the OASI program.
About $6 billion were paid out of the OASI trust fund to these
beneficiaries.

8 States have the option of supplementing their residents' SSI payments.
This statesupplemented SSI payment may be administered by the state, or
states may choose to have the additional payments administered by the
federal government.

Over the years Social Security has contributed to reducing poverty among
the elderly. (See fig. 1) Since 1959, poverty rates for the elderly have
dropped by more than two-thirds, from 35 percent to about 10 percent in
2003. While poverty rates for the elderly in 1959 were higher than for
children or for working-age adults (aged 18 to 64), in 2003 they were
lower than for either group. Factors other than Social Security, for
example, employer-provided pensions, have also contributed to lower
poverty for the elderly. Still, for about half of today's elderly, their
incomes excluding Social Security benefits are below the poverty
threshold, the level of income needed to maintain a minimal standard of
living. Nearly two-thirds of the elderly get at least half of their income
from Social Security.

Figure 1: Poverty Rates for Elderly Have Declined Faster than for Other
Groups

Percent of population below poverty 40

35

30

25

20

15

10

5

0 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004

Source: U.S. Bureau of the Census

Notes: Data for years indicated by dashed lines were not available but are
available for 1959.

Currently Social Security faces a long-term structural financing
shortfall, largely because people are living longer and having fewer
children. Social Security's benefit costs will soon start to grow rapidly.
According to the 2005 intermediate-or best-estimate-assumptions of the
Social Security trustees, Social Security's annual benefit payments will
exceed annual revenues beginning in 2017, and it will be necessary to draw
on trust fund reserves to pay full benefits. And, in 2041 the trust funds
will be depleted. At that time, annual income will only be sufficient to
pay about 74 percent of promised benefits. As a result, some combination
of benefit and/or

Key Provisions of the Social Security Program Protect the Most Vulnerable
Populations

revenue changes will be needed to restore the long-term solvency and
sustainability of the program.

From its inception, Social Security was intended to help reduce the extent
of dependency on public assistance programs. Over time, that objective has
come to be stated more broadly as helping ensure adequate incomes. Several
key provisions of the program have helped to protect the most vulnerable
individuals: the progressive benefit formula that advantages low-wage
workers, disability insurance benefits, survivor and dependent benefits,
and the fact that the benefit comes in the form of an annuity, with an
annual cost-of-living adjustment (COLA).

Progressive Benefit Formula

Social Security's benefit formula is designed to be progressive; that is,
it provides disproportionately larger benefits, as a percentage of
earnings, to low-wage earners than to high-wage earners.9 By replacing a
larger percentage of low-wage workers' pre-retirement income in this way,
the Social Security benefit helps ensure adequate retirement incomes for
these workers. The progressive nature of the Social Security system
remains even after taking account of the fact that contributions to the
system come in the form of a regressive payroll tax.

Disability Insurance and Supplemental Security Income Benefits

From its origin in 1956, the purpose of the DI program has been to provide
compensation for the reduced earnings of individuals who, having worked
long enough and recently enough to become insured, have lost their ability
to work.10 Payroll deductions paid into a trust fund by employers and
workers fund DI benefits. Thus, DI, while it has important protections for
vulnerable populations, is designed to provide insurance for all insured
workers. The purpose of the SSI program, on the other hand, is to provide
cash assistance to those who are age 65 and older, blind, or disabled and
who have limited income and resources. It is a means-tested program that
serves those not insured by Social Security or those whose Social Security
benefits fall below SSI's means-test threshold.

9 Social Security: Distribution of Benefits and Taxes Relative to Earnings
Level, GAO-04-747 (Washington, D.C.: Jun. 15, 2004).

10 The DI program was established under title II of the Social Security
Act.

Spousal and Survivors' Benefits

Workers' earnings may generate Social Security benefits for their spouses
and dependents as well as themselves. For example, spouses of retired or
disabled workers may receive benefits based on a percentage of the
workers' benefits. Additionally, after the worker has died, their eligible
dependents receive survivor benefits.11 Because workers do not make any
additional contributions to receive these auxiliary benefits, workers with
families receive a higher implicit rate of return than workers without
families. Benefits are paid to family members of workers under certain
circumstances. Spouses and divorced spouses of eligible workers may also
be eligible at age 62 but can be eligible at younger ages if they are
disabled, widowed, or caring for eligible children. An eligible worker's
children under 18 are eligible for survivors' benefits, and adult children
are eligible if they became disabled before age 22. Dependent parents and
grandchildren of eligible workers are also eligible for survivors'
benefits under certain circumstances.

Annuitization and Cost of Living Adjustment

Changes in the Workforce and the Nature of Work

Social Security benefits are paid out in the form of an annuity. Annuities
are monthly payments for a specific period time, for example, the lifetime
of a retired worker.12 Benefits are also increased each year to keep pace
with increases in the cost-of-living (inflation). The COLA is based on the
Consumer Price Index. This automatic adjustment was not always a feature
of the program. It was introduced in the 1970s, as part of a broader set
of reforms, in order to ensure that benefits did not erode over time.

Much in American society has changed greatly since the inception of the
Social Security program. People are living longer, women's labor force
participation has increased significantly and household composition has
changed dramatically. In addition labor force growth has slowed
significantly, and the nature of work and workers' benefits has changed in
many ways, some of which affect workers' ability to save for retirement.

11 Some workers qualify for Social Security benefits from both their own
work and their spouses'. Such workers are called dually entitled spouses.
Such workers do not receive both the benefits earned as a worker and the
full spousal benefit; rather the worker receives the higher amount of the
two.

12 Social Security benefits are not paid for the lifetime of all
beneficiaries depending on various eligibility requirements, for example,
for surviving parents of young children.

Life expectancy 	Life expectancy has increased continually since the
1930s, and further increases are expected. The average life expectancy for
men who reach age 65 has increased from 12 years in the 1940s to 16 years
in 2005, and is projected to increase to 17 years by 2020. Women have
experienced a similar rise-from 14 years in the 1940s to over 19 years in
2005. Life expectancy for women who reach age 65 is projected to be 20
years by 2020. (See fig. 2)

Figure 2: Life Expectancy at Age 65 Has Increased

Life expectancy at age 65, in years 22

20

18

16

14

12

10

0 1940 1950 1960 1970 1980 1990 2000 2010 2020

Men

Women

Source: Felicitie C. Bell and Michael L. Miller, "Life Tables for the
United States Social Security Area 1900-2100," Actuarial Study No. 116,
http://www.ssa.gov/OACT/NOTES/as116/as116TOC.html.

Note: Life expectancy numbers are based on period tables.

The aged population is growing dramatically, as a result of increased life
expectancy and the aging of the baby boom generation. For example,
individuals aged 65 and over are currently 12 percent of the population.
In 30 years, they will be more than 20 percent of the population.

Changing Composition of Households and Increased Labor Force Participation
of Women

Social Security was designed around a working father, a stay-at-home
mother, and children. Society has moved away from this model. There are
many more single parent and two-earner households than in the past.
Women's labor force participation rates are now at 59 percent -a
substantial increase from their participation rates when the program was
introduced.13 At the same time, women have different work patterns from
men. Women are more likely to work part-time and work intermittently as
they may take time out of the labor force to raise children or care for
elderly parents.

                            Slow Labor Force Growth

Increasing life expectancy, coupled with lower fertility rates, means that
labor force growth will begin to slow by 2010. By 2025 it is expected to
be less than a fifth of what it is today. (See fig. 3) Relatively fewer
U.S. workers will be available to produce the goods and services that all
will consume. Without a major increase in productivity or immigration, low
labor force growth will lead to slower growth in the economy and to slower
growth of federal revenues. This in turn will only increase the overall
pressure on the federal budget.

13 In 1961, women's labor force participation rate was 38 percent,
compared to 83 percent for men.

        Figure 3: Labor Force Growth Is Expected to Slow Significantly 3

                    Percentage change (5-yr moving average)

In recent decades the national economy has moved away from
manufacturing-based jobs to service-and knowledge-based employment.
Another change in the nature of work is employers' increasing use of
temporary and contingent workers. Contingent workers are less likely than
the rest of the workforce to receive health insurance and pension benefits
through their employers. Many of these workers either are not offered
benefits by their employers or do not qualify for benefits because they do
not work enough hours or have not worked for their employers long enough.
Furthermore, when their employers offer health insurance and pension
plans, many contingent workers do not participate because of the cost of
the plans. The mobility of these workers also has an impact on their
ability to save for retirement, since they may not stay with one employer
long enough to qualify for a pension.

                                       2

                                       1

                                       0

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Source: GAO analysis of data from the Office of the Chief Actuary, SSA.

Note: Percentage change is calculated as a centered 5-yr moving average of
projections based on the intermediate assumptions of the 2005 Trustees
Reports.

This slowing labor force growth, as well as the increases in life
expectancy, has important implications for the solvency of the Social
Security system. Fewer workers will be contributing to Social Security for
each aged, disabled, dependent, or surviving beneficiary.

Change in the Nature of Work

Re-structuring of Employer-Sponsored Pension Plans

Changing Needs of Society Has Implications for Social Security

Currently, only about 50 percent of workers have an employer-sponsored
pension plan to supplement their Social Security benefit. For those
workers who do have pensions, however, the structure of those plans has
changed over time. More and more employers are switching from defined
benefit (DB) to defined contribution (DC) plans. In doing so they are
shifting an increasing share of the responsibility for providing for one's
retirement from the employer to the employee. DC plans have lower
participation rates than DB plans because many DC plans require the
employee to opt for coverage, whereas most DB plans enroll participants
automatically. Additionally, increasing costs of other benefits, such as
health care, are making employers less willing or able to increase other
forms of compensation packages, including pensions. As a result,
employer-sponsored pensions may provide workers a smaller share of
retirement income than they have in the past.

Regardless of all these changes, and in some cases, because of them, many
workers still rely heavily on Social Security for their retirement. At the
same time, changes in household structure, labor force participation, and
life expectancy all suggest that the system as it is currently designed is
not as effective as it could be in addressing the needs of our society.
There are several areas where changes in design could bring the program
more in alignment with the current structures of work and family.

Working Longer	As a consequence of increases in life expectancy,
individuals are generally spending more years in retirement. The average
male worker spent 18 years in retirement in 2003, up from less than 12
years in 1950. Encouraging older workers to remain in the labor force
could increase revenues to Social Security and significantly improve
individuals' standard of living in retirement. Although some workers may
face significant health problems, there is evidence that the health of
older persons generally is improving. Research has shown that the majority
of workers aged 62 to 67 do not appear to have health limitations that
would prevent them from extending their careers, although some could face
severe challenges in attempting to remain in the workforce.14 In general,
however, today's older population may have an increased capacity to work
compared with that of

14 GAO/HEHS-99-112.

previous generations.15 Congress has already provided an incentive for
older workers to continue working by repealing the earnings test for
individuals at or above the full retirement age. This change allows older
workers to continue working without any reduction in their Social Security
benefits. It will be important to have institutions in place that can
further facilitate the continued employment of older workers.

                                Spousal Benefits

As women's participation in the labor force has increased, more of them
may be entitled to Social Security benefits based on their own earnings
records rather than their spouses'. As a result, there will probably be
relatively more two-earner couples and relatively fewer one-earner couples
in the system. Under the current program, non-working spouses can receive
a spousal benefit even though they had no covered earnings of their own.
Spouses can be entitled to a benefit based on their own earnings record
that is equal to or less than the benefit they are entitled to on their
spouses' earnings records. The household benefit in such cases is no
greater than if such spouses had never worked at all. Similarly, when a
woman becomes widowed, her total household income can potentially be cut
much more deeply if she was receiving a retirement benefit based on her
own earnings while her spouse was alive, compared to a widow whose benefit
was based only on her spouse's earnings. Thus two-earner couples may
question whether they are receiving an adequate return on their
contributions. In considering alternatives to the one-earner model on
which the program was created, however, a two-earner model is not
necessarily the answer. In a country as heterogeneous as America, probably
no one model is optimal. The increase in women in the workforce and
two-earner couples raises questions about the equity for working women of
the current design of the spousal benefit.

Federal Disability Programs

The DI program is based on the concept of assisting individuals whose
impairments have adversely affected their work capabilities. The program
provides compensation for reduced earnings due to a disability and
attempts to facilitate the efforts of individuals with disabilities to
return to work. However, GAO's work on federal disability programs,16
including DI, has found that these programs are neither well aligned with
21st Century

15 It should be noted, however, that life expectancy is related to income,
and low-income workers tend to have lower life expectancies and poorer
health outcomes.

16 High-Risk Series: An Update, GAO-05-207 (Washington, DC: Jan. 2005).

Concluding Observations

realities nor are they positioned to provide meaningful and timely support
for Americans with disabilities. Our work suggests that these programs
remain grounded in outmoded concepts of disability, and are not updated to
reflect scientific, medical, technological and labor market improvements.
Moreover, the enactment of various DI work incentives that are intended to
encourage beneficiaries to work-and, potentially, to leave the disability
rolls- has had little discernible impact on beneficiaries' success in
returning to the workforce. Policymakers will need to consider how these
realities fit into the evolving role of the DI program, particularly as
the baby boom generation reaches their disabilityprone years.17

Before the advent of Social Security, being old often meant being poor.
Today, older Americans' dependency on public assistance is dramatically
lower than Depression-era levels, and poverty rates among the elderly are
now lower than for the population as a whole. At the same time, Social
Security has become the single largest source of income for the elderly,
providing retirement income to more than 90 percent of persons aged 65 and
older.

Given its long-term solvency problems, however, there are difficult
decisions to be made about Social Security, largely because the program is
so important to so many people. The challenges posed by the growth in
Social Security spending become even more significant in combination with
the more rapid growth expected in Medicare and Medicaid spending and the
need for reform of the private pension system. Medicare, in particular,
presents a much greater, and more complex fiscal challenge than does
Social Security. Policymakers will need to address the escalating costs of
both Social Security and Medicare while recognizing that these programs
are crucial to retirement wellbeing, especially for vulnerable
populations.

There are tough decisions to be made, and action is needed sooner rather
than later. Most importantly, however, the solvency and sustainability of
Social Security should be addressed within the context of the program's
role of protecting vulnerable populations, while at the same time
considering how carrying out that role may need to change to better
address changing societal needs. We at GAO look forward to continuing to

17 The average age of disabled workers is approximately 50.

work with this Committee and the Congress in addressing this and other
important issues facing our nation.

Mr. Chairman and Members of the Subcommittee, this concludes my prepared
statement. I'd be happy to answer any questions you may have.

GAO Contacts and 	For further information regarding this testimony, please
contact Alicia Puente Cackley, Assistant Director, on (202) 512-7215.

Staff Gretta L. Goodwin also made key contributions to this testimony.

Acknowledgments

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