The benefit amounts are based primarily on a worker’s earnings. Proponents of adding rates of return to the PEBES believe these rates would provide individuals with information on the current program and enable them to compare their rate of return for Social Security with rates for other investments. Using Rate of Return Estimates for Social Security Poses Challenges

Analysts disagree about whether it is appropriate to use rates of return to evaluate the Social Security program and the options for reform. Analysts Disagree on Using a Rate of Return for Social Security

As part of the Social Security reform debate, some analysts contend that comparing rates of return for Social Security with rates for the private market will help individuals understand that they could have potentially higher retirement incomes with a new system of individual retirement savings accounts. Other analysts, however, contend that the rate of return concept should not be applied to Social Security for various reasons. For example, the Social Security program is designed to help ensure that low-wage earners have adequate income in their retirement. To be clearly understood, rate of return estimates for Social Security need an explanation of how they are calculated and how uncertain the estimates are. Factors Contributing to Uncertainty of Estimates

Many factors that would be included in rate of return estimates for Social Security are subject to considerable uncertainty, and these uncertainties mean that the actual rates of return that individuals receive could vary substantially from their estimates. Explanations would be needed to understand a number of important factors, including whether the rates of return incorporated the transaction and administrative costs for investments or annuities, the differences in risk associated with Social Security and private investments, and the questions of how to treat the costs of the benefits promised under the current system when switching to any other retirement system. Presenting Rate of Return Information Would Complicate PEBES

The PEBES aims to provide information about the complex programs and benefits available through the Social Security program; however, the current statement is already lengthy and difficult to understand. Rate of Return Information Would Further Complicate PEBES

For rate of return information on the PEBES to be understood, SSA would need to (1) decide how much information to provide and (2) explain it in simple straightforward language—language that could be easily understood by the diverse population of workers slated to receive the statement. Personal Earnings and Benefit Estimate Statement

Comments From the Social Security Administration

The first copy of each GAO report and testimony is free.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the recent proposal that would require the Social Security Administration (SSA) to place on the Personal Earnings and Benefit Estimate Statements (PEBES) an individualized estimate of the rates of return workers receive on their contributions to the Social Security program, focusing on the: (1) general implications of using a rate of return for social security; and (2) challenges of including this information on the PEBES.

What GAO Found

GAO noted that: (1) there is substantial disagreement about whether the rate of return concept should be applied to the Social Security program; (2) supporters of such an application point out that a rate of return would provide individuals information about the return they receive on their contributions to the program; (3) however, others contend that it is inappropriate to use rate of return estimates for social security because the program is designed to pursue social insurance goals, such as ensuring that low-wage earners have adequate income in their old age or that dependent survivors are adequately provided for; (4) in addition, calculations for rates of return rely on a number of assumptions that affect the resulting estimates; (5) for individuals, the actual rates of return can vary substantially from the estimates due to various uncertainties, such as a worker's actual retirement age and future earnings; (6) to be clearly understood, the underlying assumptions and their effect on the estimates should be explained in any presentation of rate of return information; (7) furthermore, comparing rate of return estimates for social security with estimates for private investments could be difficult for various reasons; (8) for example, the comparisons would need to indicate whether the estimates for other investments include the transaction and administrative costs and the differences in risk associated with the social security trust funds and private investments; (9) providing rate of return information on the PEBES could further complicate and lengthen an already complex and difficult-to-understand statement; (10) in GAO's previous work, it concluded that the current PEBES is too long and its explanations of social security's complex programs are not easy for the public to understand; and (11) adding rate of return estimates to the PEBES would require detailed explanations about how the calculations were made and what assumptions were used about comparing a rate of return for social security with rates for private investments.