	Achieving Sustainable Solvency

The use of our criteria to evaluate approaches to Social Security reform  highlights the trade-offs that exist between efforts to achieve solvency for  the OASDI trust funds and efforts to maintain adequate retirement income  for current and future beneficiaries. Our analysis of Model 2 shows that:    Median monthly benefits (the Social Security defined benefit plus the  benefit from the individual account) for those choosing individual  accounts are always higher, despite a benefit offset, than for those who do  not choose the account, and this gap grows over time. For the lowest quintile of beneficiaries, median monthly benefits with  universal participation in the accounts tend to be higher than the benefits  received under the benefit reduction benchmark, likely due to the  enhanced benefit for full-time “minimum wage” workers. This pattern  becomes more pronounced over time. Regardless of whether an account is chosen, under Model 2 many people  could receive monthly benefits that are higher than the benefit reduction  benchmark. However, a minority could fare worse. Some people could  also receive a benefit greater than under the tax increase benchmark  although a majority could fare worse. Monthly benefits for those choosing  individual accounts will be sensitive to the actual rates of return earned by  those accounts. The primary risk is that a significant funding gap  exists between currently scheduled and funded benefits which, although it  will not occur for a number of years, is significant and will grow over time. Finally, any Social Security reform proposal must also be looked at in the  context of the nation’s overall long-range fiscal imbalances. As our long- term budget simulations show, difficult choices will be required of  policymakers to reconcile a large and growing gap between projected  revenues and spending resulting primarily from known demographic  trends and rising health care costs. Briefing focuses on Model 2, with results for Model 3 presented in   The Commission’s models include a voluntary individual account  option. If participation were universal,  transfers would be needed for about three decades. Sustainable solvency also includes assessing the effects of proposed program  changes on the federal budget and on the economy. Reforms that reduce pressures on the federal budget and reduce the size of the  economy that will be absorbed in the future by the Social Security system can  lead to sustainable solvency. 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? However, benefit levels received without accounts fall  below the benefit reduction benchmark over time. Model inputs  Social Security spending (OASDI)  Medicare spending (HI and SMI)
Nonfederal saving (percent of GDP):  gross saving  of the private sector and state and local government  sector  Net foreign investment (percent of GDP)
Assumptions  2001 Social Security Trustees’ intermediate projections  2001 Medicare Trustees’ intermediate assumption that per enrollee  Medicare spending grows with GDP per capita plus 1 percentage point  CBO’s July 2002 long-term assumption that per enrollee Medicaid  spending grows with GDP per capita plus 1 percentage point  CBO’s August 2002 baseline through 2012; thereafter increases at the  rate of economic growth (i.e., remains constant as a share of GDP)  CBO’s August 2002 baseline through 2012, adjusted for the 2001  Social Security Trustees’ inflation assumptions; thereafter increases at  the rate of economic growth  CBO’s August 2002 baseline through 2012; thereafter remains  constant at 20.5 percent of GDP (CBO’s projection in 2012)  Increases gradually over the first 10 years to 17.5 percent of GDP (the  average nonfederal saving rate from 1992-2001)
Inflation (GDP price index and CPI)  Interest rate (average on the national debt)

		Balancing Adequacy and Equity - Benchmarks

			– The tax increase (maintain benefits) benchmark – increases the

payroll tax once and immediately by the amount of the OASDI  actuarial deficit as a percent of payroll so that benefits received  under the current system can continue to be paid throughout the  projection period. Over the long term, however, greater individual account participation would reduce the  government’s cash requirements. by Cohort Compared to Benefit Reduction Benchmark, Varying Real

			Benefits by Cohort Compared to Tax Increase Benchmark, Varying Real Rates of Return by Plus 1 and Minus 1 Percent

		Overview of Model 3 Disabled Worker Quintile

Median monthly benefits are maintained above the benefit reduction  benchmark for the lowest quintile regardless of participation in individual  accounts likely due to the enhanced benefit for full-time “minimum wage” workers (see Figure A-13).
Why GAO Did This Study

Social Security is an important social insurance program affecting virtually every American family. It represents a foundation of the nation's retirement income system and provides millions of Americans with disability insurance and survivors' benefits. Over the long term, as the baby boom generation retires, Social Security's financing shortfall presents a major solvency and sustainability challenge. Numerous reform proposals have been put forward in recent years, and in December 2001 a commission appointed by the President presented three possible reform models. Senator Breaux, Chairman of the Senate Special Committee on Aging, asked GAO to use its analytic framework to evaluate the Commission's models. This framework consists of three criteria: (1) the extent to which a proposal achieves sustainable solvency and how it would affect the economy and the federal budget; (2) the balance struck between the twin goals of income adequacy and individual equity; and (3) how readily such changes could be implemented, administered, and explained to the public.

What GAO Found

Applying GAO's criteria to the Commission models highlights key options and trade-offs between efforts to achieve sustainable solvency and maintain adequate retirement income for current and future beneficiaries. For example, the Commission's Model 2 proposal reduces Social Security's defined benefit from currently scheduled levels through various formula changes, provides enhanced benefits for low-wage workers and spousal survivors, and adds a voluntary individual account option in exchange for a benefit reduction. Model 2 would provide for sustainable solvency and reduce the shares of the federal budget and the economy devoted to Social Security compared to currently scheduled benefits (tax increase benchmark) regardless of how many individuals selected accounts. However, with universal account participation, general revenue funding would be needed for about 3 decades. GAO's analysis of benefit adequacy and equity issues relating to Model 2 found that (1) across cohorts, median monthly benefits for those choosing accounts are always higher, despite a benefit offset, than for those who do not; this gap grows over time. In addition, benefits assuming universal account participation are higher than payment of a defined benefit generally corresponding to an amount payable from future Social Security trust fund revenues (benefit reduction benchmark). However, benefits received by those without accounts fall below the benchmark over time. (2) for the lowest quintile, median monthly benefits with universal participation in the accounts tend to be higher than GAO's benefit reduction benchmark, likely due to the enhanced benefit for full-time "minimum wage" workers. This pattern becomes more pronounced across the cohorts analyzed. (3) regardless of whether an account is chosen, many people could receive monthly benefits under Model 2 that are higher than the benefit reduction benchmark. However, a minority could fare worse. Some people could also receive a benefit greater than under the tax increase benchmark although a majority could fare worse. Benefits for those choosing individual accounts will be sensitive to the actual rates of return earned by those accounts. Adding individual accounts would require new administrative structures, adding complexity and cost. Public education will be key to help beneficiaries make sound decisions about account participation, investment diversification, and risk. Finally, any Social Security reform proposal must also be looked at in the context of both the program and the long-term budget outlook. A funding gap exists between promised and funded Social Security benefits which, although it will not occur for a number of years, is significant and will grow over time. In addition, GAO's long-term budget simulations show, difficult choices will be required to reconcile a large and growing gap between projected revenues and spending resulting primarily from known demographic trends and rising health care costs.