oversight

Social Security: Proposed Totalization Agreement with Mexico Presents Unique Challenges

Published by the Government Accountability Office on 2003-09-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                               United States General Accounting Office

GAO                            Testimony
                               Before the Subcommittee on Immigration,
                               Border Security, and Claims, Committee
                               on the Judiciary, House of Representatives

For Release on Delivery
Expected at 11:00 a.m. EDT
Thursday, September 11, 2003   SOCIAL SECURITY
                               Proposed Totalization
                               Agreement with Mexico
                               Presents Unique Challenges
                               Statement of Barbara D. Bovbjerg, Director
                               Education, Workforce, and Income Security Issues




GAO-03-1035T
                                                September 11, 2003


                                                SOCIAL SECURITY

                                                Proposed Totalization Agreement with
Highlights of GAO-03-1035T, a testimony         Mexico Presents Unique Challenges
before the Subcommittee on Immigration,
Border Security, and Claims, Committee
on the Judiciary, House of
Representatives




Totalization agreements foster                  SSA has no written policies or procedures it follows when entering into
international commerce and                      totalization agreements, and the actions it took to assess the integrity and
protect benefits for persons who                compatibility of Mexico’s social security system were limited and neither
have worked in foreign countries.               transparent nor well-documented. SSA followed the same procedures for the
They eliminate dual social security             proposed Mexican agreement that it used in all prior agreements. SSA
taxes that multinational employers
and their employees pay when they
                                                officials told GAO that they briefly toured Mexican facilities, observed how
operate and reside in countries                 its automated systems functioned, and identified the type of data maintained
with parallel social security                   on Mexican workers. However, SSA provided no information showing that it
systems and fill gaps in benefit                assessed the reliability of Mexican earnings data and the internal controls
protection for persons who have                 used to ensure the integrity of information that SSA will rely on to pay social
worked in different countries.                  security benefits.
Because Mexicans are believed to
represent a large share of the                  The proposed agreement will likely increase the number of unauthorized
millions of unauthorized workers                Mexican workers and family members eligible for social security benefits.
present in the United States, a                 Mexican workers who ordinarily could not receive social security retirement
totalization agreement with Mexico              benefits because they lack the required 40 coverage credits for U.S. earnings
has raised concerns that they
would become newly eligible for
                                                could qualify for partial Social Security benefits with as few as 6 coverage
social security benefits.                       credits. In addition, under the proposed agreement, more family members of
                                                covered Mexican workers would become newly entitled because the
To shed light on the possible                   agreements usually waive rules that prevent payments to noncitizens’
impacts, this testimony (1)                     dependents and survivors living outside the United States.
describes the Social Security
Administration’s (SSA) processes                The cost of such an agreement is highly uncertain. In March 2003, the Office
for developing the agreement with               of the Chief Actuary estimated that the cost of the Mexican agreement would
Mexico, (2) explains how the                    be $78 million in the first year and would grow to $650 million (in constant
agreement might affect the                      2002 dollars) by 2050. The actuarial cost estimate assumes the initial
payment of benefits to Mexican                  number of newly eligible Mexican beneficiaries is equivalent to the 50,000
citizens, and (3) assesses the cost
estimate for such an agreement.
                                                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 could 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
www.gao.gov/cgi-bin/getrpt?GAO-03-1035T.
                                                uncertainties about the number of unauthorized workers were less
To view the full product, including the scope   prevalent. Because of the significant number of unauthorized Mexican
and methodology, click on the link above.       workers in the United States, the estimated cost of the proposed totalization
For more information, contact Barbara D.
Bovbjerg, (202) 512-7215,
                                                agreement is even more uncertain than in prior agreements.
bovbjergb@gao.gov.
Mr. Chairman and Members of the Subcommittee

I am pleased to be here today to discuss social security totalization
agreements and specific issues related to a potential agreement between
the United States and Mexico.

Totalization agreements foster international commerce and protect
benefits for persons who have worked in foreign countries in two ways.
First, the agreements eliminate dual social security taxes that
multinational employers and their employees must pay when they operate
and reside in countries with parallel social security programs. Second, the
agreements help to fill gaps in benefit protection for persons who have
worked in different countries for portions of their careers. Since 1977, the
United States has entered into 20 totalization agreements.

Over the last year, the United States has been negotiating a totalization
agreement with Mexico that has received considerable attention among
the media and others regarding its potential impacts. Because Mexicans
represent a large share of the millions of unauthorized workers present in
the United States, a totalization agreement with Mexico has raised
concerns that many such workers would become newly eligible for social
security benefits at a time when long-term trust fund solvency is
threatened. To shed light on the possible impacts of such an agreement,
the Chairman of the House Judiciary Committee, and the Chairman of the
House Ways and Means Social Security Subcommittee asked us to (1)
describe the Social Security Administration’s (SSA) processes for
developing the proposed agreement with Mexico, (2) explain how the
agreement might affect the payment of social security benefits to Mexican
citizens, and (3) assess SSA’s cost estimates for such an agreement.

To address these objectives, we reviewed existing totalization agreements
and the laws governing them; interviewed and obtained key
documentation from SSA, Department of State, and Mexican Embassy
personnel; and reviewed a range of demographic data and estimates
addressing Mexican immigration. We also examined SSA’s actuarial cost
estimates and supporting documentation for the proposed Mexican
agreement. We conducted our work between January and August 2003, in
accordance with generally accepted government auditing standards. My
statement today is based on this completed work. Our final report with
recommendations will be issued by September 30th.

In summary, SSA has no written policies or procedures outlining the
specific steps it follows when entering into totalization agreements, and

Page 1                                                         GAO-03-1035T
             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 officials briefly toured Mexican facilities, observed how
             their 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 in place to ensure the integrity of information that SSA
             will rely on to pay social security benefits.

             The proposed agreement will increase the number of Mexican workers
             and family members eligible for social security benefits. Workers who
             ordinarily could not receive 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. Under the proposed agreement,
             more family members of covered Mexican workers would also become
             newly entitled because of the waiver of rules that prevent payment to
             noncitizens’ dependents and survivors living outside the United States.

             Finally, the cost of a totalization agreement with Mexico is highly
             uncertain. SSA’s actuarial estimate states that the cost of a Mexican
             agreement would be $78 million in the first year and would grow to $650
             million by 2050. The 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. Although the actuarial
             estimate indicates that the agreement would not generate a measurable
             impact on the trust funds, an increase of more than 25 percent in the
             estimate of initial, new beneficiaries would generate a measurable impact.
             For prior agreements, error rates associated with estimating the expected
             number of new beneficiaries have frequently exceeded 25 percent.
             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 for the prior agreements.


             SSA administers the Old Age, Survivors, and Disability Insurance programs
Background   under Title II of the Social Security Act. About 96 percent of the nation’s
             work force is in social security-covered employment and pays tax on their




             Page 2                                                         GAO-03-1035T
annual earnings. 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.1

In 1977, the Congress authorized the President to enter into totalization
agreements with other countries. These bilateral agreements are intended
to accomplish three purposes. First, they eliminate dual social security
coverage and taxes that multinational employers and employees
encounter when they operate and their workers temporarily reside and
work for the corporation, usually no more than 5 years, in a foreign
country with its own social security program. Under the agreements, U.S.
employers and their workers sent temporarily abroad would benefit by
paying only U.S. social security taxes, and foreign businesses and their
workers would benefit by paying only social security taxes to their home
country. Second, the agreements provide benefit protection to workers
who have divided their careers between the United States and a foreign
country, but lack enough coverage under either social security system to
qualify for benefits, despite paying taxes into both systems. Totalization
agreements allow such workers to combine (totalize) work credits earned
in both countries to meet minimum benefit qualification requirements.
Third, most totalization agreements improve the portability of social
security benefits by removing rules that suspend benefits to noncitizens
who live outside the benefit-paying country.

By law, proposed agreements are sent to the Congress together with a
report on the effects on the agreement. Under the statute, the agreement
becomes effective on any date provided in the agreement after one House
of the Congress has been in session 60 days, unless either House of the
Congress adopts a resolution of disapproval.2 Table 1 shows agreements in
effect and the years they became effective.




1
  Different requirements govern the number of coverage credits necessary to receive
disability and survivors benefits for workers who become disabled or die with relatively
short work careers.
2
 In 1983, the Supreme Court found that a provision in the Immigration and Nationality Act
that allowed either House of the Congress to adopt a resolution of disapproval of a
deportation decision was unconstitutional (INS v. Chadha, 462 U.S. 919 (1983)). To date,
neither House of the Congress has ever disapproved a proposed totalization agreement.
The effect of the Chadha decision on the part of the Social Security Act providing for
totalization agreements has not been ruled on by the courts.



Page 3                                                                      GAO-03-1035T
Table 1: Existing Totalization Agreements between the United States and Other
Countries and Year of Effective Date of the Original Agreements

 Countries                                                                 Year
 Italy                                                                     1978
 Germany                                                                   1979
 Switzerland                                                               1980
 Belgium                                                                   1984
 Norway                                                                    1984
 Canada                                                                    1984
 United Kingdom                                                            1985
 Sweden                                                                    1987
 Spain                                                                     1988
 France                                                                    1988
 Portugal                                                                  1989
 Netherlands                                                               1990
 Austria                                                                   1991
 Finland                                                                   1992
 Ireland                                                                   1993
 Luxembourg                                                                1993
 Greece                                                                    1994
 South Korea                                                               2001
 Chile                                                                     2001
 Australia                                                                 2002
Source: SSA.



To qualify for totalized U.S. social security benefits, a worker must have at
least 6 but no more than 39 U.S. coverage credits. Benefit amounts are
based on the portion of time a foreign citizen worked in the United States
and, thus, are almost always lower than full social security benefits. The
average monthly, totalized social security benefit at the end of 2001 was
$162, compared with the average nontotalized monthly social security
benefit of $825. In 2001, SSA paid about $173 million under totalization
agreements to about 89,000 persons, including their dependents.

Under U.S. law, immigrants may not work in the United States unless
specifically authorized. Nevertheless, immigrants often do work without
authorization and pay social security taxes. Under the Social Security Act,
all earnings from covered employment in the United States count towards
earning social security benefits, regardless of the lawful presence of the


Page 4                                                              GAO-03-1035T
                    worker, his or her citizenship status, or country of residence. Immigrants
                    become entitled to benefits from unauthorized work if they can prove that
                    the earnings and related contributions belong to them. However, they
                    cannot collect such benefits unless they are either legally present in the
                    United States or living in a country where SSA is authorized to pay them
                    their benefits. Mexico is such a country.


                    A lack of transparency in SSA’s processes, and the limited nature of its
SSA’s Process for   review of Mexico’s program, cause us to question the extent to which SSA
Developing          will be positioned to respond to potential program risks should a
                    totalization agreement with Mexico take place. SSA officials told us that
Agreements Is Not   the process used to develop the proposed totalization agreement with
Thorough or Well-   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
Documented          procedures—is informal, and the steps SSA takes when entering into
                    agreements are neither transparent nor well-documented.

                    Current law does not prescribe how SSA should select potential
                    agreement countries. According to SSA, interest in a Mexican agreement
                    dates back more than 20 years. SSA officials noted that increased business
                    interaction between the two countries due to the North American Free
                    Trade Agreement (NAFTA) was a factor in the renewed negotiations. In
                    addition, because there is a totalization agreement with Canada, our other
                    NAFTA partner, SSA believed that equity concerns required consideration
                    of an agreement with Mexico. In February 2002, SSA sought clearance
                    from the Department of State to begin such negotiations.

                    The law also does not specify which elements of other countries’ social
                    security systems must be evaluated during totalization agreement
                    negotiations. SSA officials met with Mexican officials to exchange
                    narrative information on their respective programs. Senior SSA officials
                    also visited Mexico for 2 days in August 2002. 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. SSA took no technical staff
                    on this visit to assess system controls or data integrity processes. In effect,
                    SSA only briefly observed the operations of the Mexican social security
                    program. Moreover, SSA did not document its efforts or perform any
                    additional analyses then, or at a later time, to assess the integrity of
                    Mexico’s social security data and the controls over that data. In particular,
                    SSA officials provided no evidence that they examined key elements of
                    Mexico’ s program, such as its controls over the posting of earnings, and

                    Page 5                                                           GAO-03-1035T
                      its processes for obtaining key birth and death information for Mexican
                      citizens. Nor did SSA evaluate how access to Mexican data and records is
                      controlled and monitored to prevent unauthorized use or whether internal
                      and external audit functions exist to evaluate operations.

                      Because all totalization agreements represent a financial commitment with
                      implications for social security tax revenues and benefit outlays, a
                      reasonable level of due diligence and analysis is necessary to help federal
                      managers identify issues that could affect benefit payment accuracy or
                      expose the nation’s system to undue risk. Our Internal Control
                      Management and Evaluation Tool provides a risk assessment framework
                      to help federal managers mitigate fraud, waste, abuse, and
                      mismanagement in public programs, such as social security. A key
                      component of this framework is the identification of internal and external
                      risks that could impede the achievement of objectives at both the entity
                      and program levels. Identified risks should then be analyzed for their
                      potential effect and an approach devised to mitigate them.

                      SSA did not conduct these types of analyses in previous agreements or in
                      the case of the proposed Mexican agreement, despite documented
                      concerns among Mexican government officials and others regarding the
                      integrity of Mexico’s records, such as those for birth, death, and marriage,
                      as well as its controls over assigning unique identification numbers to
                      workers for benefit purposes. Such information will likely play a role in
                      SSA’s ability to accurately determine Mexican workers’ initial and
                      continuing eligibility for benefits under a totalization agreement.


                      A totalization agreement with Mexico will increase the number of Mexican
Totalization          citizens who will be paid U.S. social security benefits in two ways. First,
Agreements Will       the agreement will make it easier for Mexican workers to qualify for
                      benefits. Second, it will remove some nonpayment restrictions that affect
Increase Benefit      benefit payments to non-U.S. citizens’ family members residing in another
Payments to Mexican   country, thus providing U.S. social security benefits to more survivors and
                      dependents of entitled Mexican workers.
Citizens
                      Under current law, a worker must earn sufficient coverage credits to
                      qualify for benefits under the U.S. Social Security program. For example, a
                      worker who was born in 1929 or later generally needs 40 coverage credits
                      to be insured for retirement benefits. Credits are based on a worker’s
                      annual earnings in social security-covered employment. At most, 4 credits
                      can be earned per year so that it takes at least 10 years of covered earnings



                      Page 6                                                          GAO-03-1035T
in the United States for a worker to accumulate the necessary 40 credits
and become insured for retirement benefits.

Currently, social security credits are earned by anyone who has worked in
covered employment in the United States. This is true even if the person
was unauthorized to work when he/she earned coverage credits. For
example, noncitizens, including Mexicans, who are at least 62 years old
and lawfully present in the United States, will receive retirement benefits
today as long as they meet the coverage credit threshold. Even Mexican
citizens who are not lawfully present in this country can receive social
security benefits earned through unauthorized employment if they later
return to live in Mexico. Similarly, under current law, noncitizen
dependents and survivors can also receive social security benefits under
some circumstances.

Totalization agreements generally expand benefits to both authorized and
unauthorized workers and create new groups of beneficiaries. This would
be the case for a totalization agreement with Mexico if it follows the same
pattern as all prior totalization agreements. Mexican citizens with fewer
than 40 coverage credits will be permitted to combine their annual
earnings under their home country’s social security program with their
annual earnings under the U.S. Social Security program to meet the 40-
credit requirement.3 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. If a totalization agreement with Mexico is structured like
others already in force, the 5-year rule for dependents and survivors will
be waived.

However, it is important to understand that not all unauthorized Mexican
citizens who have worked in the United States will receive totalization
benefits. Some will have earned at least 40 coverage credits and can
receive social security benefits without a totalization agreement. Still
others may have worked under false identities and may not be able to


3
 Under an agreement, U.S. citizens will also be able to receive totalized Mexican benefits.
The amount of time needed to qualify for Mexican social security benefits is about 9.6 years
under the former pay-as-you-go plan that closed in July 1997 and 24 years under the defined
contribution plan that replaced it.



Page 7                                                                      GAO-03-1035T
                           prove that they have the necessary coverage credits to be entitled to
                           benefits. Others still may not accumulate sufficient credits under the
                           Mexican social security system to totalize with their U.S. social security
                           coverage.


                           The cost of a totalization agreement with Mexico is highly uncertain. In
Poor Data Undermine        March 2003, the Office of the Chief Actuary (OCACT) estimated that the
the Reliability of SSA’s   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              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. Furthermore, even if the baseline
                           estimate is used, a sensitivity analysis performed by OCACT shows that an
                           increase of more than 25 percent—or 13,000 new beneficiaries—would
                           produce a measurable impact on the long-range actuarial balance of the
                           trust funds. Our review of cost estimates for prior totalization agreements
                           shows that the actual number of beneficiaries has frequently been
                           underestimated and far exceeded the original actuarial estimates.


Actuarial Estimates Are    OCACT develops estimates of expected costs of totalization agreements
Based on Varied Data       by analyzing pertinent data from prior agreements, work visas issued,
Sources                    foreign corporations operating in the United States, and U.S. Census data.
                           Because of extensive unauthorized immigration from Mexico, OCACT
                           concluded that U.S. Census data, that would typically be used to estimate
                           the number of new beneficiaries under an agreement, were not reliable.

                           Instead, OCACT used the number of fully insured beneficiaries—U.S.
                           citizens and others living in Mexico—currently receiving U.S. social
                           security benefits as a proxy for the number of Mexican citizens who would
                           initially receive totalized benefits. The principal basis for this assumption
                           was a 1997 study of Mexican immigration patterns conducted by a private
                           nonprofit organization.4 This study indicated that the percentage of
                           Mexican immigrants who returned to Mexico after more than 10 years and,



                           4
                           Belinda I. Reyes, Dynamics of Immigration: Return Migration to Western Mexico, Public
                           Policy Institute of California, January 1997.



                           Page 8                                                                GAO-03-1035T
                            therefore, could qualify for benefits is roughly equal to the percentage that
                            returned after staying 2 to 9 years and would not have the required credits.
                            Thus, OCACT assumed that the potential totalized initial new beneficiaries
                            would be equivalent to the 50,000 persons currently receiving benefits in
                            Mexico.

                            For the proposed Mexican agreement, both a short-term (covering the first
                            8 years of the agreement) and a long-term (covering 75 years) cost
                            estimate were developed.5 The estimated cost to the Social Security Trust
                            Funds would be about $78 million in the first year of the agreement. For
                            the long-term cost estimate, OCACT projected that the number of
                            beneficiaries would ultimately increase sixfold to 300,000 over a 45-year
                            period after the agreement took effect and equal about $650 million (in
                            constant 2002 dollars) in 2050. However, the actuarial analysis notes that
                            the methodology was indirect and involved considerable uncertainty.

                            As a rough check on the reasonableness of using current beneficiaries in
                            Mexico for its cost estimate, OCACT analyzed totalized beneficiary data
                            for Canadian citizens because Canada, like Mexico, is a NAFTA trading
                            partner and shares a large contiguous border. After determining the ratio
                            of Canadians receiving totalized versus fully insured benefits, OCACT
                            applied this ratio to the number of Mexican-born U.S. social security
                            beneficiaries and found that about 37,000 beneficiaries would be expected
                            under the agreement initially, if the Canadian experience proves predictive
                            of the Mexican outcome. According to OCACT, this comparison increased
                            its confidence that the assumed 50,000 new beneficiaries under the
                            agreement was within a reasonable range.


Estimated Cost of Mexican   Limited data about unauthorized workers make any estimate of the
Agreement Is Highly         expected costs of a Mexican totalization agreement highly uncertain. A
Uncertain                   significant variable of any totalization agreement cost estimate is the
                            identification of the number of potential beneficiaries. Estimates of the
                            number of unauthorized Mexican immigrants living in the United States




                            5
                             For prior agreements with other countries, the OCACT developed only short-term
                            estimates covering periods ranging from 1 to 5 years because it was determined that the
                            number of expected beneficiaries were too few to have a measurable cost impact on the
                            long-range actuarial balance of the trust funds.



                            Page 9                                                                     GAO-03-1035T
vary.6 The federal government’s estimate was published in January 2003
and comes from the former Immigration and Naturalization Service (INS).7
INS estimated that, as of January 2000, about 5 million, or 69 percent of all
unauthorized immigrants in the United States, were from Mexico. INS’s
estimate also indicated that this figure was expected to increase by about
240,000 persons annually.

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. Economic
disparity between the United States and Mexico has fostered longstanding
immigration from Mexico to the United States dating back many decades.
Various studies also show that fewer than a third of Mexican immigrants
stay more than 10 years in the United States, the minimum amount of time
needed to qualify for social security retirement benefits.8 For cost analysis
purposes, little is known about the population of former immigrants who
have returned to Mexico in terms of their age, work history, dependents,
and social security coverage. These factors increase the inherent
uncertainty of any long-range forecasts with regard to Mexico. It is under
this backdrop that OCACT set about developing an estimate of the costs of
the potential totalization agreement.

We have several concerns about OCACT’s estimate of the number of
expected beneficiaries and cost of an agreement with Mexico. First, the
use of the 50,000 fully insured beneficiaries receiving benefits in Mexico as
a proxy for individuals who might initially benefit from an agreement, does
not directly consider the estimated millions of unauthorized Mexican
immigrants in the United States and Mexico who are not fully insured and
might receive totalized benefits. Furthermore, despite the availability of
key data about earnings, work histories, years of employment, and
dependents for the 50,000 fully insured beneficiaries, OCACT did not
analyze this population to determine whether they represented a good



6
 For example, the Pew Hispanic Center estimated that there are between 3.4 and 5.7 million
unauthorized Mexican citizens in the United States, and the Urban Institute has estimated
that there are more than 4 million.
7
  In March 2003, INS functions were transferred to the Department of Homeland Security.
Responsibility for deriving these estimates now lies with the Under Secretary Management,
Office of Immigration Statistics.
8
 Reyes (1997), p. 13 lists several studies that document the temporary and circular nature
of Mexican migration to the United States.



Page 10                                                                     GAO-03-1035T
proxy for individuals likely to qualify for totalized benefits. 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 could 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.
Thus, a large number of Mexican citizens have likely earned some social
security coverage credits through both authorized and unauthorized work
to meet the 40-credit threshold requirement and are not directly accounted
for in SSA’s estimate.

Second, SSA’s reasonableness check using Canadian data faces similar
questions. While Mexico and Canada are NAFTA partners and share a
common border with the United States, there is a dramatic difference in
the extent of unauthorized immigration from these two countries and, in
our view, the Canadian experience is not a good predictor of experience
under an agreement with Mexico. Recent INS data show that Mexican
citizens account for about 69 percent of unauthorized U.S. immigrants,
whereas Canadian citizens account for less than 1 percent, and all other
totalization agreement countries combined account for less than 3 percent.
It is this population of unauthorized immigrants that makes estimating the
cost of a totalization agreement with Mexico particularly problematic.

Finally, even though SSA’s actuarial analysis increases the number of
beneficiaries sixfold over time, the expected 300,000 beneficiaries in 2050
represents only about 6 percent of the estimated number of unauthorized
Mexicans in the United States today, and thus appears relatively low.
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 suggests that any difference between estimated and
actual costs will be on the high side.

Indeed, it would take only a relatively small increase in new beneficiaries
from the original actuarial assumption of 50,000 initial new beneficiaries to
have a measurable impact on the long-range actuarial balance of the trust
funds. 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.

Page 11                                                         GAO-03-1035T
Our analysis of past actuarial estimates of expected beneficiaries under
totalization agreements shows that exceeding the 25 percent threshold has
not been unusual, even in agreements where uncertainty about the number
of unauthorized workers is substantially less.9 Our review of prior
estimates shows that OCACT frequently either overestimated or
underestimated the number of expected beneficiaries, usually by more
than 25 percent (see table 2). In fact, where underestimates occurred, the
differences were huge, involving several orders of magnitude. However, it
is important to note that the number of estimated beneficiaries for prior
agreements is substantially smaller than for the proposed Mexican
agreement. Therefore, the differences in actual beneficiaries from
estimated beneficiaries have a higher proportional impact. Furthermore,
OCACT has not underestimated the number of expected beneficiaries for
the agreements we analyzed since the 1991 agreement with Austria.
Nevertheless, the numerous uncertainties and data gaps associated with
the Mexican agreement elevate the risks associated with any cost
estimate.




9
 OCACT staff told us that it would be best to look at precision of past estimates by
comparing the estimated number of beneficiaries for the last year of the estimate with
actual data for that same year. We were able to make this comparison for 11 countries.



Page 12                                                                    GAO-03-1035T
              Table 2: Precision of OCACT’s Cost Estimates for 11 Prior Totalization Agreements

                                                                                                 Percent actual
                                                                                                beneficiaries is
                                            Effective year                                   greater/(less) than
               Country                      of agreement        Beneficiaries           estimated beneficiaries
                                                             Estimated        Actual
               United Kingdom                        1985        3,500          2,084                          (40)
               Sweden                                1987         100            211                           111
               Spain                                 1988         300            377                             26
               France                                1988         200            968                            384
               Portugal                              1989         100            701                           601
               Netherlands                           1990         100            310                           210
               Austria                               1991         100            314                           214
               Finland                               1992         100              38                          (62)
               Luxembourg                            1993          40              12                          (70)
               Ireland                               1993        1,100           515                           (53)
               Greece                                1994        1,000           918                             (8)
              Source: GAO analysis of SSA data.

              Note: Actual data were not available for years prior to 1987 so comparisons for six earlier agreements
              could not be made. Also, comparison could not be made for the three recent agreements.




              Totalization agreements between the United States and other countries
Conclusions   often foster enhanced diplomatic relations and provide mutually beneficial
              business, tax, and other incentives to employers and employees affected
              by these agreements. At the same time, they impose a financial cost to
              both countries’ social security programs. SSA’s processes for entering into
              these agreements have been informal and have not included specific steps
              to assess and mitigate potential risks. Regardless of the country under
              consideration, sound management practices dictate that SSA managers
              have a risk management process in place to ensure that the interests of the
              United States and the Social Security Trust Funds are protected.

              Most totalization agreements have been with countries that are
              geographically distant to the United States, have developed economies,
              and represent only a fraction of the estimated unauthorized immigrants in
              the United States. Still, all agreements include some level of uncertainty,
              and require due diligence on SSA’s part to alleviate those uncertainties. An
              agreement with Mexico, however, presents unique and difficult challenges
              for SSA because so little is known about the size, work history, earnings,

              Page 13                                                                             GAO-03-1035T
           and dependents of the unauthorized Mexican population. Furthermore, a
           common border and economic disparity between the United States and
           Mexico have fostered significant and longstanding unauthorized
           immigration into the United States, making an agreement with Mexico
           potentially far more costly than any other. Thus, for the Mexican
           agreement, additional analyses to assess risks and costs may be called for.

           A revised approach for entering into totalization agreements with all
           countries would enhance the quality of information provided to the
           Congress, which is tasked with reviewing these vital long-term
           commitments. A more thorough prospective analysis will also provide a
           better basis for determining whether agreements under consideration
           meet the mutual economic and business needs of all parties. Finally,
           current solvency issues require the Congress to think carefully about
           future trust fund commitments resulting from totalization agreements.
           Having more timely and complete information on the benefits, costs, and
           risks associated with each agreement can only serve to better inform their
           decisions.


           Mr. Chairman, this concludes my statement. I would be happy to respond
           to any questions that you or other members of the Subcommittee may
           have.

           For information regarding this testimony, please contact Barbara D.
           Bovbjerg, Director, Education, Workforce, and Income Security Issues, on
           (202) 512-7215. Individuals who made key contributions to this testimony
           are Daniel Bertoni, Gerard Grant, William Staab, and Paul Wright.




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           Page 14                                                       GAO-03-1035T
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