To evaluate reform proposals, we have suggested that policy makers  should consider three basic criteria:  1.  the extent to which the proposal achieves sustainable solvency and  how the proposal would affect the economy and the federal budget;  2.  the balance struck between the twin goals of individual equity (rates  of return on individual contributions) and income adequacy (level and  certainty of benefits); and  3.  how readily such changes could be implemented, administered, and  explained to the public. In 2001, the President created the Commission to Strengthen Social  Security to develop reform plans that strengthen Social Security and  increase its fiscal sustainability while meeting certain principles:    no changes to benefits for retirees or near retirees,    dedication of entire Social Security surplus to Social Security,    no increase in Social Security payroll taxes,    no government investment of Social Security funds in the stock market,    preservation of disability and survivor components, and  inclusion of individually controlled voluntary individual retirement  accounts. Different Distributional Measures Reflect Different Perspectives

To assess the extent to which the Social Security program or reform  options are progressive—distributes in a way that favors lower earners— researchers first select a number of measures and then compare how  different groups of earners fare according to those measures. One way to assess the distributional effect of the current Social Security  program or of various reform options is to look at how these adequacy  measures are distributed across earners. If, for example, benefits collected by  individuals in the 20th percentile of the earnings distribution relative to  benefits collected by those in the 80th percentile increased from one  Social Security system to the next, the adequacy perspective would  conclude that, other things being equal, the second is more progressive,  that it is tilted toward lower earners. Program’s Distributional Effects Reflect Various Program Features and Demographic Patterns

Social Security’s distributional effects reflect program features, such as its  benefit formula, and demographic patterns among its recipients, such as  marriage between lower and higher earners. Consequently, the benefit formula replaces a higher  proportion of pre-retirement earnings for lower lifetime earners than for  higher lifetime earners. Disability Insurance favors lower earners  because it uses the same progressive benefit formula as retired worker  benefits and because DI recipients are more likely to be lower earners. A number of studies suggest that  lower earners do not live as long as higher earners. When fully implemented, initial benefits for  certain low-wage workers with steady work histories could be raised by as  much as 40 percent. General revenue transfers are problematic when calculating equity  measures because it is difficult to determine who ultimately pays for the  additional financing. For example, households in  the bottom fifth of earnings received about 12.5 percent of all lifetime  benefits under both benchmark scenarios. Greater exposure to risk  may not affect the shares of benefits received by the bottom and top fifths  of earnings. The Ferrara proposal also would have significant distributional effects  from an equity perspective due to its revenue provisions. GEMINI simulates  all types of Social Security benefits including retired workers’, spouses’,  survivors’, and disability benefits. However, the distributional effects of Model 2 might change over time. Since wages generally grow faster than prices, Social Security  defined benefits will decline as a proportion of total benefits, reducing the  importance of the progressive benefit formula, disability benefits, and the  enhanced benefits for low earners and survivors. In  particular, it should try to reflect the goals and effects of the current  system with respect to redistribution of income. We demonstrated the distributional  neutrality of this benefit reduction by showing that if all individuals earned  exactly the cohort rate of return on their individual accounts, then their  income under the proposal from Social Security and the new accounts  would be exactly the same as under the current system. Social Security Reform: Potential Effects on SSA’s Disability Programs  and Beneficiaries. Social Security: Different Approaches for Addressing Program Solvency.
Why GAO Did This Study

Under the current Social Security benefit formula, retired workers receive benefits that equal about 50 percent of pre-retirement earnings for a low-wage worker but only about 30 percent for a relatively high-wage worker. Factors other than earnings also influence the distribution of benefits, including the program's provisions for disabled workers, spouses, children, and survivors. Changes in the program over time also affect the distribution of benefits across generations. Social Security faces a long-term structural financing shortfall. Program changes to address that shortfall could alter the way Social Security's benefits and revenues are distributed across the population and affect the income security of millions of Americans. To gain a better understanding of the distributional effects of potential program changes, the Chairman and Ranking Minority Member of the Senate Special Committee on Aging asked us to address (1) how to define and describe "progressivity," that is, the distribution of benefits and taxes with respect to earnings level, when assessing the current Social Security system or proposed changes to it; (2) what factors influence the distributional effects of the current Social Security program; and (3) what would be the distributional effects of various reform proposals, compared with alternative solvent baselines for the current system.

What GAO Found

Two distinct perspectives on Social Security's goals suggest different approaches to measuring "progressivity," or the distribution of benefits and taxes with respect to earnings level. Both perspectives provide valuable insights. An adequacy perspective focuses on benefit levels and how well they maintain pre-entitlement living standards. An equity perspective focuses on rates of return and other measures relating lifetime benefits to contributions. Both perspectives examine how their measures are distributed across earnings levels. However, equity measures take all benefits and taxes into account, which is difficult for reform proposals that rely on general revenue transfers because it is unclear who pays for those general revenues. The Social Security program's distributional effects reflect both program features and demographic patterns among its recipients. In addition to the benefit formula, disability benefits favor lower earners because disabled workers are more likely to be lower lifetime earners. In contrast, household patterns reduce the system's tilt toward lower earners, for example, when lower earners have high-earner spouses. The advantage for lower earners is also diminished by the fact that they may not live as long as higher earners and therefore would get benefits for fewer years on average. Proposals to alter the Social Security program would have different distributional effects, depending on their design. Model 2 of the President's Commission to Strengthen Social Security proposes new individual accounts, certain benefit reductions for all beneficiaries, and certain benefit enhancements for selected low earners and survivors. According to our simulations, the combined effect could result in lower earners receiving a greater share of all benefits than promised or funded under the current system if all workers invest in the same portfolio.