When workers pay social security taxes, they earn  coverage credits, and 40 credits—equal to at least 10 years of work—  entitle them to social security benefits when they reach retirement age. SSA officials told us that  the process used to develop the proposed totalization agreement with  Mexico was the same as for prior agreements with other countries. The  process—which is not specified by law or outlined in written policies and  procedures—is informal, and the steps SSA takes when entering into  agreements are neither transparent nor well-documented. During their visit, these  officials told us that they toured social security facilities, observed how  Mexico’s automated social security systems functioned, and identified the  type of data maintained on Mexican workers. In effect,  SSA only briefly observed the operations of the Mexican social security  program. Totalization Agreements Will Increase Benefit Payments to Mexican Citizens

A totalization agreement with Mexico will increase the number of Mexican  citizens who will be paid U.S. social security benefits in two ways. In addition, more family members of covered workers  will qualify for dependent and survivor benefits. Totalization agreements  generally override Social Security Act provisions that prohibit benefit  payments to noncitizens’ dependents and survivors who reside outside the  United States for more than 6 months, unless they can prove that they  lived in the United States for 5 years in a close family relationship with the  covered worker. In  March 2003, the Office of the Chief Actuary estimated that the cost of the  Mexican agreement would be $78 million in the first year and would grow  $650 million (in constant 2002 dollars) in 2050. SSA’s actuarial cost  estimate assumes the initial number of newly eligible Mexican  beneficiaries was equivalent to the 50,000 beneficiaries living in Mexico  today and would grow sixfold over time. However, this proxy figure is not  directly related to the estimated millions of current and former  unauthorized workers and their family members from Mexico and appears  small in comparison to those estimates. Estimated Cost of Mexican  Limited data about unauthorized workers make any estimate of the  Agreement Is Highly  Uncertain  expected costs of a Mexican totalization agreement highly uncertain. The INS estimate, however, does not include unauthorized Mexican  workers and family members who no longer live in the United States and  could also conceivably benefit from a totalization agreement. The cost  estimate also inherently assumes that the behavior of Mexican citizens  would not change after a totalization agreement goes into effect. Under  totalization, unauthorized workers would have an additional incentive to  enter the United States to work and to maintain the appropriate  documentation necessary to claim their earnings under a false identity. Although it would be unreasonable to expect all unauthorized Mexicans in  the United States to qualify for totalized benefits, the very large difference  between estimated and potential beneficiaries underscores the uncertainty  of the estimate and the potential costs of an agreement could be higher  than OCACT projects. OCACT has estimated that the agreement would not generate a  measurable impact on the long-range actuarial balance. However, a  subsequent sensitivity analysis performed at our request shows that a  measurable impact on the long-range actuarial balance of the trust funds  will occur if the baseline figure is underestimated by more than  25 percent—just 13,000 additional beneficiaries above the estimated  50,000 new beneficiaries. However, it  is important to note that the number of estimated beneficiaries for prior  agreements is substantially smaller than for the proposed Mexican  agreement. Regarding the potential benefits of totalization agreements, our report  specifically notes that such agreements foster international commerce,  protect benefits for persons who have worked in foreign countries, and  eliminate dual social security taxes for multinational employers and  employees. As table 2 shows, error rates associated with SSA’s estimates of  potential beneficiaries under prior agreements have often been  substantial, even in cases where uncertainties about the number of  unauthorized workers were less prevalent. OCACT prepares estimates of initial beneficiaries  for each proposed agreement with an individual country. Appendix II: Comments from the Social Security Administration
Why GAO Did This Study

Totalization agreements foster international commerce, protect benefits for persons who have worked in foreign countries, and eliminate dual social security taxes that employers and their employees pay when they operate and reside in countries with parallel social security systems. Because Mexicans are believed to represent a large share of the millions of unauthorized workers present in the United States, a totalization agreement with Mexico has raised concerns that they would become newly eligible for social security benefits. To shed light on the possible impacts, GAO was asked to (1) describe the Social Security Administration's (SSA) processes for developing the agreement with Mexico, (2) explain how the agreement might affect the payment of benefits to Mexican citizens, and (3) assess the cost estimate for such an agreement.

What GAO Found

SSA has no written policies or procedures it follows when entering into totalization agreements, and the actions it took to assess the integrity and compatibility of Mexico's social security system were limited and neither transparent nor well-documented. SSA followed the same procedures for the proposed Mexican agreement that it used in all prior agreements. SSA officials told GAO that they briefly toured Mexican facilities, observed how its automated systems functioned, and identified the type of data maintained on Mexican workers. However, SSA provided no information showing that it assessed the reliability of Mexican earnings data and the internal controls used to ensure the integrity of information that SSA will rely on to pay social security benefits. The proposed agreement will likely increase the number of unauthorized Mexican workers and family members eligible for social security benefits. Mexican workers who ordinarily could not receive social security retirement benefits because they lack the required 40 coverage credits for U.S. earnings could qualify for partial social security benefits with as few as 6 coverage credits. In addition, under the proposed agreement, more family members of covered Mexican workers would become newly entitled because the agreements usually waive rules that prevent payments to noncitizens' dependents and survivors living outside the United States. The cost of such an agreement is highly uncertain. In March 2003, the Office of the Chief Actuary estimated that the cost of the Mexican agreement would be $78 million in the first year and would grow to $650 million (in constant 2002 dollars) in 2050. The actuarial cost estimate assumes the initial number of newly eligible Mexican beneficiaries is equivalent to the 50,000 beneficiaries living in Mexico today and would grow sixfold over time. However, this proxy figure does not directly consider the estimated millions of current and former unauthorized workers and family members from Mexico and appears small in comparison with those estimates. The estimate also inherently assumes that the behavior of Mexican citizens would not change and does not recognize that an agreement would create an additional incentive for unauthorized workers to enter the United States to work and maintain documentation to claim their earnings under a false identity. Although the actuarial estimate indicates that the agreement would not generate a measurable long-term impact on the actuarial balance of the trust funds, a subsequent sensitivity analysis performed at GAO's request shows that a measurable impact would occur with an increase of more than 25 percent in the estimate of initial, new beneficiaries. For prior agreements, error rates associated with estimating the expected number of new beneficiaries have frequently exceeded 25 percent, even in cases where uncertainties about the number of unauthorized workers were less prevalent. Because of the significant number of unauthorized Mexican workers in the United States, the estimated cost of the proposed totalization agreement is even more uncertain than in prior agreements.