oversight

Social Security Reform: Analysis of a Trust Fund Exhaustion Scenario

Published by the Government Accountability Office on 2003-07-29.

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

             United States General Accounting Office

GAO          Report to Congressional Requesters




July 2003
             SOCIAL SECURITY
             REFORM

             Analysis of a Trust
             Fund Exhaustion
             Scenario




GAO-03-907
                                                July 2003


                                                SOCIAL SECURITY REFORM

                                                Analysis of a Trust Fund Exhaustion
Highlights of GAO-03-907, a report to           Scenario
congressional requesters




Social Security is an important                 The “Trust Fund Exhaustion” scenario underscores the need to take action
social insurance program affecting              sooner rather than later to address Social Security’s financing shortfall. In so
virtually every American family. It             doing, the scenario illustrates trade-offs between sustainable solvency and
is the foundation of the nation’s               benefit adequacy and equity.
retirement income system and also
provides millions of Americans
with disability insurance and
                                                By definition this scenario would achieve sustainable solvency because after
survivors’ benefits. Over the long              trust fund exhaustion, benefit payments would be adjusted each year to
term, as the baby boom generation               equal annual tax income. Before exhaustion, the scenario would have the
retires, Social Security’s financing            same unified fiscal results as paying currently scheduled benefits with no
shortfall presents a major solvency             policy changes. After exhaustion, fiscal results would be increasingly similar
and sustainability challenge.                   to funding currently scheduled benefits with a tax increase (tax increase
                                                benchmark) and a benefit reduction benchmark that incorporates gradual
The Chairman of the Senate Special              and progressive reductions.
Committee on Aging and the
Chairman of the Senate Committee                Benefits would differ sharply over time. Before trust fund exhaustion,
on Finance asked GAO to use its                 currently scheduled benefits would be paid in full. After, benefits for all
analytic framework to evaluate an               would be reduced across the board by 27 percent (to 73 percent of currently
illustrative “Trust Fund
                                                scheduled levels). Additional reductions would need to be taken in
Exhaustion” scenario under which
benefits are reduced                            successive years such that at the end of the 75-year projection period,
proportionately for all beneficiaries           benefits would be reduced by 33 percent (to 67 percent of currently
by the shortfall in revenues                    scheduled levels).
occurring upon exhaustion of the
combined Old-Age and Survivors                  The Trust Fund Exhaustion scenario raises significant intergenerational
Insurance and Disability Insurance              equity issues. Specifically, a much greater burden would be placed on
Trust Funds. The analytic                       younger generations. Those born in 1955 would see no benefit reductions
framework consists of three basic               until age 83, while those born in 1985 would experience reduced benefits
criteria: (1) the extent to which the           immediately upon retirement and benefits lower than under either GAO’s
proposal achieves sustainable                   benefit reduction benchmark or tax increase benchmark in all years of
solvency and how it would affect                retirement. Consequently, lifetime benefits would be reduced more for
the U.S. economy and the federal
                                                younger generations. Benefits would be adjusted proportionately for all
budget; (2) the balance struck
between the twin goals of income                recipients, increasing the likelihood of hardship for lower-income retirees
adequacy and individual equity; and             and the disabled.
(3) how readily changes could be
implemented, administered, and                  Assessing the Social Security Administration’s (SSA) administrative
explained to the public. The Trust              challenges under this scenario is difficult given a lack of historical precedent
Fund Exhaustion scenario is                     and legislative clarity on how SSA would proceed. A focus on cash
intended as an analytic tool, not a             management would be needed to calculate and implement the needed
legal determination.                            ongoing benefit adjustments.




www.gao.gov/cgi-bin/getrpt?GAO-03-907.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Barbara
Bovbjerg at (202) 512-7215 or Susan Irving at
(202) 512-9142.
Contents


Letter                                                                                                   1
              Concluding Observations                                                                   7
              Agency Comments and Our Evaluation                                                        8

Appendix I    Briefing Slides                                                                            9



Appendix II   Methodology                                                                               44
              Fiscal Model                                                                              44
              Benefit Model                                                                             45


Table
              Table 1: Fiscal Model Assumption Summary                                                  44




              Abbreviations

              GDP               gross domestic product
              GEMINI            Genuine Microsimulation of Social Security
                                 and Accounts
              MINT3             Modeling Income in the Near Term
              OASDI             Old-Age and Survivors Insurance and Disability Insurance
              PENSIM            Pension Simulator
              PSG               Policy Simulation Group
              SSA               Social Security Administration
              SSASIM            Social Security and Accounts Simulator




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              Page i                                                GAO-03-907 Social Security Reform
United States General Accounting Office
Washington, DC 20548




                                   July 29, 2003

                                   The Honorable Larry E. Craig
                                   Chairman
                                   Special Committee on Aging
                                   United States Senate

                                   The Honorable Charles Grassley
                                   Chairman
                                   Committee on Finance
                                   United States Senate

                                   This report responds to your request that we apply our criteria for
                                   assessing Social Security reform proposals to a “Trust Fund Exhaustion”
                                   scenario. As requested, this analysis assumes that once the combined Old-
                                   Age and Survivors Insurance and Disability Insurance (OASDI) Trust
                                   Funds are exhausted, monthly benefit checks will be reduced in
                                   proportion to the annual shortfall, effectively reducing everyone’s benefits
                                   across-the-board.1

                                   As agreed with your offices, our report is based on the analytic framework
                                   we have previously used to evaluate Social Security reform proposals.2
                                   This framework consists of three basic criteria:

                                   •   The extent to which the proposal achieves sustainable solvency and
                                       how it would affect the U.S. economy and the federal budget.

                                   •   The balance struck between the twin goals of income adequacy (level
                                       and certainty of benefits) and individual equity (rates of return on
                                       individual contributions).


                                   1
                                    As presented in this report, the Trust Fund Exhaustion scenario illustrates potential
                                   outcomes, assuming that (a) the exhaustion of the combined OASDI Trust Funds in
                                   2038 under the intermediate assumptions of the 2001 OASDI Trustees Report, (b) future
                                   program income and costs follow projections made by the Office of Chief Actuary at the
                                   Social Security Administration, and (c) only payroll taxes and taxes on benefits flow into
                                   the trust fund. The scenario is intended as an analytic tool, not a legal determination.
                                   2
                                    See U.S. General Accounting Office, Social Security: Evaluating Reform Proposals,
                                   GAO/AIMD/HEHS-00-29 (Washington, D.C.: Nov. 4, 1999) and Social Security Reform:
                                   Information on the Archer-Shaw Proposal, GAO/AIMD/HEHS-00-56 (Washington, D.C.:
                                   Jan. 18, 2000).



                                   Page 1                                                 GAO-03-907 Social Security Reform
•   How readily changes could be implemented, administered, and
    explained to the public.

As in our evaluations of reform proposals, our assessment of the Trust
Fund Exhaustion scenario uses a set of detailed questions that help
describe potential effects of reform models on important policy and
operational aspects of public concern. These questions are displayed in
the report.

It is important to keep in mind that focusing on trust fund solvency alone
is not sufficient. Solvency does not tell us whether the program is
sustainable—that is, whether the government will have the capacity to pay
future claims or what else will have to be squeezed to pay those claims.

Although the Trustees’ 2003 intermediate estimates show that the
combined Social Security Trust Funds will be solvent until 2042,3 program
spending will constitute a growing share of the budget and the economy
well before that date. In 2008, the first baby boomers will become eligible
for Social Security benefits, and in 2009 Social Security’s cash surplus—
the difference between program tax income and the costs of paying
scheduled benefits—will begin a permanent decline. By 2018, Social
Security’s tax income is projected to be insufficient to pay currently
scheduled benefits. Importantly, neither the decline in the cash surpluses
nor the cash deficit will affect the payment of benefits. However, the shift
from positive to negative cash flow will place increased pressure on the
federal budget to raise the resources necessary to meet the program’s
ongoing costs. If you look ahead in the federal budget, Social Security
together with the rapidly growing health programs (Medicare and
Medicaid) will dominate the federal government’s future fiscal outlook.
Absent reform, the nation will ultimately have to choose between
persistent, escalating federal deficits, significant tax increases, and/or
dramatic budget cuts of unprecedented magnitude.

In analyzing the Trust Fund Exhaustion scenario, we used estimates
provided in a memorandum dated May 8, 2003, prepared by the Social
Security Administration’s (SSA) Office of the Chief Actuary. Under these
estimates, the cost of OASDI benefits equals OASDI income once the




3
 Separately, the Disability Insurance (DI) Trust Fund is projected to be exhausted in
2028 and the Old-Age and Survivors Insurance (OASI) Trust Fund in 2044.




Page 2                                                 GAO-03-907 Social Security Reform
combined trust funds are exhausted.4 The analyses presented in this report
are based on the Trustees’ best, or intermediate, estimates of the 2001
OASDI Trustees Report.5 Accordingly, our assessment uses the same
framework as our January 15, 2003, report to you on the reform models
put forward by the President’s Commission to Strengthen Social Security.6
This report follows the format of and uses the same economic
assumptions as that report.

Although any proposal’s ability to achieve and sustain solvency is sensitive
to economic and budgetary assumptions, using a common framework can
facilitate comparisons of alternative reform proposals. Our analysis of the
Trust Fund Exhaustion scenario uses the same three benchmarks as did
our January report:7

•   The “benefit reduction benchmark” assumes a gradual reduction in the
    currently scheduled Social Security defined benefit beginning with
    those newly eligible for retirement in 2005. Current tax rates are
    maintained.

•   The “tax increase benchmark” assumes an increase in the OASDI
    payroll tax beginning in 2002 sufficient to achieve an actuarial balance
    over the 75-year period. Currently scheduled benefits are maintained.

•   The “baseline extended” benchmark is a fiscal policy path developed in
    our earlier long-term model work that assumes payment in full of



4
 Income is defined as income from scheduled payroll-tax contributions and a portion of the
income from taxation of scheduled benefits. The latter was adjusted to reflect the lower
expected revenues from benefit taxation.
5
  Under the 2001 Trustees’ intermediate estimates, the combined OASDI Trust Funds are
projected to reach exhaustion in 2038. Under the 2003 Trustees’ intermediate estimates, the
projected exhaustion date is 2042.
6
 See U.S. General Accounting Office, Social Security Reform: Analysis of Reform Models
Developed by the President’s Commission to Strengthen Social Security, GAO-03-310
(Washington, D.C.: Jan. 15, 2003).
7
  From the perspective of analyzing benefit adequacy, the tax increase and baseline
extended benchmarks are identical because both assume payment in full of scheduled
Social Security benefits over the 75-year simulation period. Our benchmarks are solvent for
the 75-year projection period commonly used by SSA’s Office of the Chief Actuary, but they
do not achieve sustainable solvency. Both the benefit reduction and tax increase
benchmarks are explicitly fully funded, and we worked closely with SSA’s Office of the
Chief Actuary in its design.




Page 3                                                GAO-03-907 Social Security Reform
     currently scheduled Social Security benefits throughout the simulation
     period and no other changes in current spending or tax policies.8

As in other work assessing Social Security reform proposals, we used our
long-term economic model in assessing the Trust Fund Exhaustion
scenario against the first criterion, that of financing sustainable solvency.9
Our sustainable solvency standard encompasses several different ways of
looking at the Social Security program’s financing needs.

While 75-year actuarial balance is generally used in evaluating the long-
term financial outlook of the Social Security program and reform
proposals, it is not sufficient in gauging the program’s solvency after the
75th year. For example, under the Trustees’ intermediate assumptions, the
75-year actuarial period changes each year, and a year with a surplus is
replaced by a new 75th year that has a significant deficit. As a result,
changes made to restore trust fund solvency only for the 75-year period
can result in future actuarial imbalances almost immediately. Reform
plans that lead to sustainable solvency would be those that consider the
broader issues of fiscal sustainability and affordability over the long term.10
In analyzing reform plans, the key fiscal and economic point is the ability
of the government and society to afford the commitments when they come
due. Our analysis addresses this key point by looking at the level and
trends over 75 years in deficits, cash needs, and gross domestic product
(GDP) consumed by the program.

To examine how the Trust Fund Exhaustion scenario balances adequacy
and equity concerns, we used the Genuine Microsimulaion of Social
Security and Accounts (GEMINI) model, a dynamic microsimulation
model for analyzing the lifetime implications of Social Security policies for




8
 Implicitly, therefore, after exhaustion benefits are paid in part by increased borrowing
from the public.
9
 For this analysis, consistent with SSA’s scoring of the Commission reform models, our
long-term economic model incorporates the 2001 Trustees’ best, or intermediate,
assumptions.
10
 The Trustees have used the term “sustainable solvency” to mean maintaining a trust fund
balance that is positive and either level or increasing as a percent of the annual cost of the
program at the end of the 75-year period. GAO’s definition of sustainable solvency seeks to
gain a more complete perspective of a proposal’s likely effects on the program, the federal
budget, and the economy.




Page 4                                                  GAO-03-907 Social Security Reform
a large sample of people11 born in the same year. GEMINI can simulate
different reform features for their effects on the level and distribution of
benefits. To assess benefit adequacy over time,
we display median monthly benefit levels for those born in 1955, 1970, and
1985 (“birth cohorts”) at different ages as well as their median lifetime
benefits.

In analyzing reform proposals, we have stated that 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 combined OASDI
Trust Funds and efforts to maintain adequate retirement income for
current and future beneficiaries. For example, in our January report, we
observed that the Commission reform models illustrate some of the
options and trade-offs that will need to be considered as the nation
debates how to reform Social Security. The Commission’s proposals also
illustrated the difficulty reform proposals face generally in balancing
adequacy (level and certainty of benefits) and equity (rates of return on
individual contributions) considerations.

The Trust Fund Exhaustion scenario illustrates the trade-offs between
sustainable solvency and benefit adequacy and equity in a different way.
By definition, this scenario would achieve sustainable solvency because
once the combined trust funds have run out, benefit payments would be
adjusted (i.e., reduced) each year to equal annual tax income. Under this
scenario, shares of the federal budget and the economy devoted to Social
Security would be lower compared to currently scheduled benefits. From
a fiscal perspective, before exhaustion, the scenario would have the same
unified fiscal results as paying currently scheduled benefits with no policy
changes. Before 2038, the Trust Fund Exhaustion scenario would reduce
unified surpluses and increase unified deficits compared to the tax
increase benchmark by the same amounts as the baseline extended
benchmark. Subsequently, the Trust Fund Exhaustion scenario would
result in unified fiscal results increasingly similar to both the tax increase
benchmark and the benefit reduction scenario over the 75-year period.
Before 2038, the Trust Fund Exhaustion scenario would require the same
amounts of cash as the tax increase or baseline extended benchmarks;


11
 The GEMINI cohorts consist of simulated samples of 100,000 individuals, sometimes
called synthetic samples. These samples were validated against data from the Social
Security Administration’s Annual Statistical Supplement, the Survey of Income and
Program Participation, the Current Population Survey, Modeling Income in the Near Term,
and the Panel Survey of Income Dynamics.




Page 5                                              GAO-03-907 Social Security Reform
subsequently, the Trust Fund Exhaustion scenario would require less cash
each year than any of the three benchmarks.

Under the Trust Fund Exhaustion scenario, the effect on benefits would
differ sharply before and after exhaustion took place. Before exhaustion,
benefits would be the same as those currently scheduled, reflected in both
the tax increase and baseline extended benchmarks. Once the combined
trust funds run out, benefits for all would be reduced across the board and
remain below currently scheduled levels. Accordingly, after trust fund
exhaustion all those receiving benefits would experience a sharp drop in
benefits compared to currently scheduled levels; under the Trustees’
2001 intermediate estimates, this drop is estimated at 27 percent (or
73 percent of currently scheduled levels) in 2039.12 Small further
reductions would need to be taken in successive years such that by
2076 benefits would be one-third below currently scheduled benefits
(i.e., to 67 percent of currently scheduled levels).

The Trust Fund Exhaustion scenario raises significant intergenerational
issues. Specifically, due to the timing of the reductions under the Trust
Fund Exhaustion scenario, younger generations would bear much greater
benefit reductions. Those born in 1955 would see no benefit reductions
until they reached age 83,13 while those born in 1985 would receive lower
benefits than under either GAO’s benefit reduction or tax increase
benchmarks in all years of retirement. Consequently, lifetime benefits
would be reduced more for younger generations. Under the Trust Fund
Exhaustion scenario that we used, benefits would be adjusted
proportionately for all recipients, increasing the likelihood of hardship for
lower-income retirees and the disabled, especially those who rely on
Social Security as their primary or sole source of retirement income.

The nature and scope of SSA’s administrative challenges under the Trust
Fund Exhaustion scenario are difficult to describe or assess given a lack
of historical precedent and legislative clarity on how SSA would proceed.
At a minimum, a focus on cash management would be needed for SSA to



12
  In 2038, the year the trust fund is exhausted, the benefit reduction would be about 7
percent because trust fund assets would be available for part of the year to pay benefits.
In 2039, the first full year after the trust fund is exhausted, benefits would fall sharply, to
about 27 percent below currently scheduled levels. Under the Trustees 2003 intermediate
estimates, the overall drop is approximately the same.
13
     Assuming individuals are born on January 1st.




Page 6                                                    GAO-03-907 Social Security Reform
               calculate and implement the ongoing benefit adjustments required under
               the scenario.


               The use of our criteria to evaluate approaches to Social Security reform
Concluding     highlights the trade-offs that exist between efforts to achieve sustainable
Observations   solvency and to maintain adequate retirement income for current and
               future beneficiaries. These trade-offs can be described as differences in
               the nature and extent of the risks for individuals and the nation as a whole.

               At the same time, the defined benefit under the current Social Security
               system is also uncertain. The primary risk is that a 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.
               Other risks stem from uncertainty in, for example, future levels of
               productivity growth, real wage growth, and demographics. Congress has
               revised Social Security many times in the past, and future Congresses
               could decide to revise benefits in ways that leave those affected little time
               to adjust. As Congress deliberates approaches to Social Security, the
               national debate also needs to include discussion of the various options for
               reform and the timing in which it should occur.

               Early action to change Social Security would yield the highest fiscal
               dividends for the federal budget and would provide a longer period for
               prospective beneficiaries to make adjustments in their own planning.
               Waiting to build economic resources and reform future claims entails
               risks. First, we lose an important window where today’s relatively large
               workforce can increase saving and enhance productivity, two elements
               critical to economic growth. We also lose the opportunity to reduce the
               burden of interest payments, thereby creating a legacy of higher debt as
               well as elderly entitlement spending for the relatively smaller workforce of
               the future. Most critically, we risk losing the opportunity to phase in
               changes gradually so that all can make the adjustments needed in private
               and public plans to accommodate this historic shift. Unfortunately, the
               window of opportunity to address the entitlement challenge is narrowing.
               As the baby boom generation retires and the numbers of those entitled to
               these retirement benefits grow, the difficulties of reform will be
               compounded. Accordingly, it remains more important than ever to deal
               with these issues over the next several years.




               Page 7                                        GAO-03-907 Social Security Reform
                     We provided a draft of this report to SSA. SSA provided informal technical
Agency Comments      comments, which we have incorporated where appropriate.
and Our Evaluation
                     We are sending copies of this report to Senator John Breaux, Ranking
                     Minority Member, Senate Special Committee on Aging; Senator Max S.
                     Baucus, Ranking Minority Member, Senate Committee on Finance; the
                     Honorable William M. Thomas, Chairman, and the Honorable Charles B.
                     Rangel, Ranking Minority Member, House Committee on Ways and Means;
                     the Honorable E. Clay Shaw, Chairman, and the Honorable Bob Matsui,
                     Ranking Minority Member, Subcommittee on Social Security, House
                     Committee on Ways and Means; and the Honorable Jo Ann B. Barnhart,
                     Commissioner, Social Security Administration. We will also make copies
                     available to others on request. In addition, the report will be available at
                     no charge on GAO’s Web site at http://www.gao.gov.

                     If you or your offices have any questions about this report, please contact
                     Barbara D. Bovbjerg, Director, Education, Workforce, and Income
                     Security Issues, on (202) 512-7215, or Susan Irving, Director, Strategic
                     Issues, on (202) 512-9142.




                     David M. Walker
                     Comptroller General
                     of the United States




                     Page 8                                       GAO-03-907 Social Security Reform
                Appendix I: Briefing Slides
Appendix I: Briefing Slides




   Analysis of a Trust Fund Exhaustion Scenario

                            July 2003




                                                                            1




                Page 9                        GAO-03-907 Social Security Reform
                     Appendix I: Briefing Slides




Objectives

• Evaluation of a scenario in which no changes are made to Social
  Security before the combined Old-Age and Survivors Insurance and
  Disability Insurance (OASDI) Trust Funds reach exhaustion.

• This evaluation uses the three basic criteria GAO has developed that
  provide policymakers with a framework for assessing proposed changes
  to Social Security:

   – Financing Sustainable Solvency.
   – Enhancing Adequacy and Equity in the Benefits Structure.
   – Implementing and Administering Reforms.




                                                                                    2




                     Page 10                          GAO-03-907 Social Security Reform
                                                     Appendix I: Briefing Slides




     Methodology

     • Financing Sustainable Solvency
        – GAO’s long-term economic model was used to help assess the potential
          fiscal and economic impacts of changes to Social Security.
        – Estimates of scenario costs and income are those made by the Office of
          the Chief Actuary, Social Security Administration (SSA), under the
          Trustees’ 2001 intermediate assumptions.

     • Balancing Adequacy and Equity
        – The GEMINI model, a dynamic microsimulation model,1 was used to
          analyze the 1955, 1970, and 1985 birth cohorts to enable comparison of
          results over time as reform models are fully implemented.

     • Implementing and Administering Reforms
        – Qualitative analysis based on GAO’s issued and ongoing body of work on
          Social Security reform was used.
1   GEMINI is useful for analyzing the lifetime implications of Social Security policies for a large sample of people born in the same year.


                                                                                                                                                    3




                                                     Page 11                                                            GAO-03-907 Social Security Reform
                                               Appendix I: Briefing Slides




 Benchmarks

 GAO’s analysis uses three benchmarks:
 •    Benefit reduction maintains current payroll tax rates and assumes a gradual
      reduction in Social Security benefits beginning with those reaching age 62 in
      2005 and continuing for the next 30 years. In each of those years, this
      benchmark applies equal percentage point reductions to all three Primary
      Insurance Amount (PIA) formula factors. Relative to a proportional reduction,
      this benchmark is progressive in that it reduces benefits less for lower
      earners.
 •    Tax increase1 assumes that the combined employer-employee payroll tax rate
      is increased by 0.34 percent for Disability Insurance (DI) and 1.56 percent for
      Old-Age and Survivor Insurance (OASI) beginning in 2002 in order to pay
      scheduled benefits.
 •    Baseline extended is a fiscal policy path that assumes payment in full of all
      scheduled Social Security benefits throughout the 75-year period and no other
      changes in current policies. In this analysis, it uses the 2001 Trustees
      intermediate economic assumptions, consistent with SSA scoring of reform
      models, implicitly financing trust fund shortfalls with debt held by the public.

 1The benefit reduction and tax increase benchmarks were developed by GAO with technical input from SSA’s Office of the Chief Actuary. Both use
the 2001 Trustees intermediate economic assumptions and reflect cash outlays for benefits. Both restore 75-year actuarial balance to Social
Security but are not solvent beyond this period. For more detailed information on the benefit reduction and tax increase benchmarks see appendix
III of Social Security: Program's Role in Helping Ensure Income Adequacy. GAO-02-62. Washington, D.C.: November 30, 2001.                          4




                                               Page 12                                                       GAO-03-907 Social Security Reform
                          Appendix I: Briefing Slides




                                                                  Benchmarks (continued)




•   All three benchmarks are used in analyzing sustainable solvency. From
    the perspective of sustainable solvency, the baseline extended differs
    from the tax increase benchmark. The tax increase benchmark assumes
    payroll tax financing of all scheduled benefits whereas the baseline
    extended benchmark assumes all scheduled benefits will be paid but
    does not specify any new financing--implicitly benefits are financed by
    increasing debt held by the public.

•   There is no difference between the tax increase and baseline extended
    benchmarks in analyzing benefit levels, since only the financing of
    benefits differs, not the actual benefit levels. Therefore only the benefit
    reduction and tax increase benchmarks are used in analyzing benefit
    adequacy.

•   Benchmarks are to be viewed as illustrative, polar cases or bounds for
    changes within the current system. Other benchmarks could be devised
    with different tax and/or benefit adjustments that would perform the same
    function.




                                                                                            5




                          Page 13                               GAO-03-907 Social Security Reform
                                                  Appendix I: Briefing Slides




    Trust Fund Exhaustion Scenario

    •   Under “Trust Fund Exhaustion,” no changes would be made to program
        financing. Current tax rates would be maintained.

    •   Currently scheduled benefits would be paid in full until the year in which the
        combined OASDI Trust Funds are exhausted.1 In that year, benefits are
        assumed to be reduced such that total benefits equal the remaining trust
        fund assets plus program income from present-law taxes.2 Thereafter,
        benefits would be reduced in proportion to the annual Social Security
        shortfall, effectively reducing benefits for everyone.3 (See fig. 1.)




1
  The DI Trust Fund is projected to reach exhaustion before the OASI Trust Fund. Treating them as one combined fund assumes assets will be transferred as
needed from OASI to DI such that both funds reach exhaustion at the same time.
2
  Annual revenue from present-law taxes includes income from scheduled payroll-tax contributions and income from taxation of scheduled benefits. The latter
was adjusted to reflect the lower expected revenues from benefit taxation.
3
                                                                                                                                                                    6
  This definition of a Trust Fund Exhaustion scenario represents an analytic convenience and not a legal determination as to how benefits would fare in the event
the combined OASDI Trust Funds were exhausted.




                                                  Page 14                                                              GAO-03-907 Social Security Reform
                       Appendix I: Briefing Slides




                                                     Trust Fund Exhaustion Scenario (continued)



Figure 1: Trust Fund Exhaustion Scenario

Change in Currently Scheduled Benefits under Trust Fund Exhaustion
Scenario - 2001 Trustees Report




                                                                                                 7




                       Page 15                                       GAO-03-907 Social Security Reform
                              Appendix I: Briefing Slides




Financing Sustainable Solvency
This criterion evaluates the extent to which the proposal achieves sustainable
solvency, including how the proposal would affect the economy and the federal
budget.
To what extent does the proposal:
• Reduce future budgetary pressures?
• Reduce debt held by the public?
• Reduce the cost of the Social Security system as a percentage of GDP?
• Reduce the percentage of federal revenues consumed by the Social Security system?
• Increase national saving?
• Restore 75-year actuarial balance and create a stable system?
• Raise payroll taxes, draw on general revenues, and/or use Social Security trust fund
surpluses to finance changes?
• Create contingent liabilities?
• Include “safety valves” to control future program growth?


                                                                                              8




                              Page 16                             GAO-03-907 Social Security Reform
                                             Appendix I: Briefing Slides




                                                                                      Financing Sustainable Solvency (continued)



 Figure 2
 • The fiscal path under the Trust Fund Exhaustion scenario is the same as
    baseline extended through 2037; shortly thereafter unified deficits as a
    share of GDP are significantly lower under the Trust Fund Exhaustion
    scenario.

 •     Under the Trust Fund Exhaustion scenario, beginning about 2020 unified
       surpluses are considerably smaller and deficits considerably larger than
       under the benefit reduction benchmark until the combined OASDI Trust
       Funds are exhausted. From about 2040 through the end of the simulation
       period, the fiscal outlook under Trust Fund Exhaustion is quite similar to
       the fiscal outlook under the benefit reduction benchmark.

 •     Compared to the tax increase benchmark, unified surpluses are much
       smaller and deficits are much larger under the Trust Fund Exhaustion
       scenario through 2037, thereafter, the difference between the fiscal paths
       declines until the two are virtually indistinguishable after 2065 through the
       end of the simulation period.



Note: Analysis based on estimates from the Office of the Chief Actuary, SSA, under the Trustees 2001 intermediate assumptions and CBO's
August 2002 baseline assumptions, including the scheduled expiration (sunset) of the tax reductions in the Economic Growth and Tax Relief
Reconciliation Act of 2001.
                                                                                                                                            9




                                             Page 17                                                       GAO-03-907 Social Security Reform
                                              Appendix I: Briefing Slides




                                                                                      Financing Sustainable Solvency (continued)


Figure 2: Trust Fund Exhaustion Scenario

Unified Surpluses and Deficits as a Share of GDP




Note: Analysis based on estimates from the Office of the Chief Actuary, SSA, under the Trustees 2001 intermediate assumptions and CBO's
August 2002 baseline assumptions, including the scheduled expiration (sunset) of the tax reductions in the Economic Growth and Tax Relief
Reconciliation Act of 2001.
                                                                                                                                            10




                                              Page 18                                                         GAO-03-907 Social Security Reform
                                              Appendix I: Briefing Slides




                                                                                      Financing Sustainable Solvency (continued)



Figure 3
• Debt held by the public under the Trust Fund Exhaustion scenario is the same
   as baseline extended through 2037, soon thereafter debt as a share of GDP is
   significantly lower under the Trust Fund Exhaustion scenario, and the gap
   increases over time.

• Under the Trust Fund Exhaustion scenario, debt held by the public as a share of
  GDP is higher than under the benefit reduction benchmark throughout the
  simulation period.

• Compared to the tax increase benchmark, debt held by the public as a share of
  GDP is significantly higher under the Trust Fund Exhaustion scenario for most of
  the simulation period.




Note: Analysis based on estimates from the Office of the Chief Actuary, SSA, under the Trustees 2001 intermediate assumptions and CBO's
August 2002 baseline assumptions, including the scheduled expiration (sunset) of the tax reductions in the Economic Growth and Tax Relief
Reconciliation Act of 2001.
                                                                                                                                            11




                                              Page 19                                                         GAO-03-907 Social Security Reform
                                             Appendix I: Briefing Slides




                                                                                       Financing Sustainable Solvency (continued)


Figure 3: Trust Fund Exhaustion Scenario

Debt Held by the Public as a Share of GDP




Note: Analysis based on estimates from the Office of the Chief Actuary, SSA, under the Trustees 2001 intermediate assumptions and CBO's
August 2002 baseline assumptions, including the scheduled expiration (sunset) of the tax reductions in the Economic Growth and Tax Relief
Reconciliation Act of 2001.
                                                                                                                                            12




                                             Page 20                                                       GAO-03-907 Social Security Reform
                                             Appendix I: Briefing Slides




                                                                                       Financing Sustainable Solvency (continued)



Figure 4
• The government’s cash requirement under the Trust Fund Exhaustion scenario
   is the same as both the baseline extended and tax increase benchmarks
   through 2037. After the combined OASDI Trust Funds are exhausted, the
   government’s cash requirement falls significantly compared to the baseline
   extended and tax increase benchmarks and remains relatively constant as a
   share of GDP through the end of the simulation period.
• Compared to the benefit reduction benchmark, the government’s cash
   requirement as a share of GDP is lower beginning in 2039 through the end of
   the simulation period.




Note: Analysis based on estimates from the Office of the Chief Actuary, SSA, under the Trustees 2001 intermediate assumptions and CBO's
August 2002 baseline assumptions, including the scheduled expiration (sunset) of the tax reductions in the Economic Growth and Tax Relief
Reconciliation Act of 2001.
                                                                                                                                            13




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                                           Appendix I: Briefing Slides




                                                                                      Financing Sustainable Solvency (continued)


Figure 4: Trust Fund Exhaustion Scenario

Government Cash Requirements




Note: All estimates are based on the Trustees' 2001 intermediate assumptions and reflect cash outlays for benefits. Benefit amounts shown for
the baseline extended and tax increase benchmarks are scheduled benefits as estimated by the actuaries.
                                                                                                                                                14




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                                               Appendix I: Briefing Slides




                                                                                         Financing Sustainable Solvency (continued)



Under the Trust Fund Exhaustion scenario:

• National saving would increase on a first-order basis due to the improved fiscal
  position of the government resulting from the reduced benefit payments
  beginning in 2038.1
• 75-year actuarial balance would result as benefits are reduced to match program
  income. The system is stable at the reduced benefit level.

• No changes are assumed in program financing.

• No new contingent liabilities are created.

• Program growth is limited to growth in program income.




1Analysis limited to first order effects on saving. Effects on saving behavior in response to changes are not considered given the lack of expert

consensus.
                                                                                                                                                    15




                                               Page 23                                                           GAO-03-907 Social Security Reform
                          Appendix I: Briefing Slides




Balancing Adequacy and Equity

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?
• Maintain benefits for the disabled, dependents, and survivors?
• Maintain benefits for low-income workers who are most reliant on Social Security?
• Provide higher replacement rates for lower income earners?
• Improve intergenerational equity?
• Ensure that those who contribute receive benefits?
• Expand individual choice and control over program contributions?
• Increase returns on investment?



                                                                                         16




                          Page 24                              GAO-03-907 Social Security Reform
                                                Appendix I: Briefing Slides




 Balancing Adequacy and Equity--Methodology and Assumptions

 • We evaluate the adequacy and equity criterion for the Social Security Trust
   Fund Exhaustion scenario in comparison with GAO benchmark through
   analyses of:

         – Median monthly benefits for those born in 1955, 1970, and 1985 (birth
           cohorts) at various ages.
         – The present value1 of lifetime benefits for beneficiaries surviving to age 65
           and beyond.
         – Distribution of monthly benefits by benefit quintile and history of disability
           receipt.

 • All cohorts we analyzed were produced using the GEMINI model, a dynamic
   microsimulation model of a representative sample of 100,000 individuals.

 • Model Assumptions:
    – No cohort members work past age 65.
    – Retired worker beneficiaries start collecting benefits at age 65.2
1The current value of one or more future benefit payments discounted at an appropriate interest rate--for our analysis the Treasury rate specified by
the intermediate assumptions of the 2001 OASDI Trustees’ Report.
2 Disability recipients, certain surviving spouses, and others may receive benefits prior to age 65.
                                                                                                                                                        17




                                                Page 25                                                          GAO-03-907 Social Security Reform
                           Appendix I: Briefing Slides




Balancing Adequacy and Equity--Overview of Trust Fund Exhaustion
Scenario
• Scenario results in a benefits “cliff”--27 percent reduction in benefits in 2039
  followed by continued benefit reductions.

    – Does not exempt current retirees and those near retirement age. (Those
      currently retired would be affected if they were receiving benefits in 2038.)

    – Benefits are reduced in a manner that does not protect low-income and
      disabled workers.

• Scenario reduces lifetime benefits more for younger generations.

• For those born in the same year, the scenario reduces lifetime benefits more for
  retirees who survive to older ages beyond the “cliff”.




                                                                                              18




                           Page 26                             GAO-03-907 Social Security Reform
                                             Appendix I: Briefing Slides




Changes in Scheduled Benefits for Current and Future Retirees

• Under the Trust Fund Exhaustion scenario, the combined OASDI Trust Funds reach
  exhaustion in 2038, with benefits reduced in that year and all subsequent years.
   – Benefits are reduced across the board relative to currently scheduled benefits by
      7 percent in 2038, about 27 percent between 2039 and 2045, and by increasingly
      larger percentages in subsequent years.

• Benefits under Trust Fund Exhaustion:
   – Mirror the the tax increase benchmark before 2038 and are substantially lower
      afterwards.
   – Are higher than the benefit reduction benchmark before 2038 and lower
      afterwards.
 Table 1: Timing of the Benefit “Cliff”




Note: Analysis assumes cohort members are born on January 1st.


                                                                                                        19




                                             Page 27                       GAO-03-907 Social Security Reform
                                               Appendix I: Briefing Slides




                                                                                           Changes in Scheduled Benefits (continued)



Figure 5
• Shows benefits in 2001 dollars for illustrative individual born in 1955, 1970, and
   1985 under Trust Fund Exhaustion scenario.

• The 1955 and 1970 illustrative individuals receive currently promised benefits
  until ages 82 and 67, respectively, followed by a benefit “cliff” with reduced
  benefits thereafter.

• The 1985 illustrative individual never receives currently scheduled benefits; all
  benefits are received after the benefit “cliff” and benefits gradually decline with
  age.

Figures 6, 7, and 8
• Show median benefits for all surviving members of each birth cohort under Trust
   Fund Exhaustion scenario and benefit reduction and tax increase benchmarks.

• Benefits increase slightly over time under Trust Fund Exhaustion and
  benchmarks because some retirees change benefit status as they age.1

1When   retirees become widowed they may receive the larger of either their own benefit or their spouses’ benefit.


                                                                                                                                             20




                                               Page 28                                                         GAO-03-907 Social Security Reform
                                              Appendix I: Briefing Slides




                                                                                          Changes in Scheduled Benefits (continued)



Figure 5: Trust Fund Exhaustion Scenario
Monthly Benefits under Trust Fund Exhaustion Scenario for an Illustrative
Individual by Selected Birth Year




Note: Illustrative workers retire at age 65 and receive benefits equal to the median for the appropriate GEMINI cohort under the Trust Fund
Exhaustion scenario. In years after 2038, real benefits are reduced according to the Trust Fund Exhaustion scenario (see fig. 1). In GEMINI, the
median age of death for those living to age 65 and receiving a retired workers benefit is 84, 85, and 86 for the 1955, 1970, and 1985 cohorts,
respectively.                                                                                                                                      21




                                              Page 29                                                          GAO-03-907 Social Security Reform
                                               Appendix I: Briefing Slides




                                                                                         Changes in Scheduled Benefits (continued)



Figure 6: Trust Fund Exhaustion Scenario
Median Monthly Benefits by Age for Those Born in 1955




Note: The tax increase benchmark assumes a higher level of payroll tax (an increase of 1.9 percentage points beginning in 2002) than either the
benefit reduction benchmark or the Trust Fund Exhaustion scenario.

                                                                                                                                                  22




                                               Page 30                                                          GAO-03-907 Social Security Reform
                                               Appendix I: Briefing Slides




                                                                                         Changes in Scheduled Benefits (continued)



Figure 7: Trust Fund Exhaustion Scenario
Median Monthly Benefits by Age for Those Born in 1970




Note: The tax increase benchmark assumes a higher level of payroll tax (an increase of 1.9 percentage points beginning in 2002) than either the
benefit reduction benchmark or the Trust Fund Exhaustion scenario.

                                                                                                                                                  23




                                               Page 31                                                          GAO-03-907 Social Security Reform
                                               Appendix I: Briefing Slides




                                                                                         Changes in Scheduled Benefits (continued)



Figure 8: Trust Fund Exhaustion Scenario
Median Monthly Benefits by Age for Those Born in 1985




Note: The tax increase benchmark assumes a higher level of payroll tax (an increase of 1.9 percentage points beginning in 2002) than either the
benefit reduction benchmark or the Trust Fund Exhaustion scenario.

                                                                                                                                                  24




                                               Page 32                                                          GAO-03-907 Social Security Reform
                          Appendix I: Briefing Slides




Benefit Outcomes for Low-Income Beneficiaries

Figures 9 and 10

Trust Fund Exhaustion scenario:
• Reduces benefits in a manner that does not protect low-income workers.

• Reduces benefits relative to the benefit reduction benchmark by more for the
  lower benefit quintiles
    – Benefit reduction benchmark cuts benefits in a more progressive manner.

• Reduces benefits relative to the tax increase benchmark by the same proportion
  for all benefit quintiles.

• Is more likely to adversely affect benefit adequacy and poverty rates than a
  more progressive reduction, all else equal.




                                                                                          25




                          Page 33                            GAO-03-907 Social Security Reform
                                               Appendix I: Briefing Slides




                                                                                                           Benefit Outcomes (continued)



Figure 9: Trust Fund Exhaustion Scenario
Median Real Monthly Benefits at Age 67 by Quintile for Those Born in 1985




Note: Benefit quintiles are based on the distribution of benefits at age 67 under the tax increase benchmark. The tax increase benchmark assumes a
higher level of payroll tax (an increase of 1.9 percentage points beginning in 2002) than either the benefit reduction benchmark or the Trust Fund
Exhaustion scenario.
                                                                                                                                                 26




                                               Page 34                                                         GAO-03-907 Social Security Reform
                                              Appendix I: Briefing Slides




                                                                                                            Benefit Outcomes (continued)



Figure 10: Trust Fund Exhaustion Scenario
Percentage Change in Benefits at Age 67 under the Trust Fund Exhaustion
Scenario Relative to the Tax Increase and Benefit Reduction Benchmarks
by Benefit Quintile for Those Born in 1985




Note: Compared to the proportional reduction specified by the Trust Fund Exhaustion scenario, the benefit reduction benchmark is progressive in
that it reduces benefits less for lower earners. Benefit quintiles are based on the distribution of benefits at age 67 under the tax increase
benchmark. The tax increase benchmark assumes a higher level of payroll tax (an increase of 1.9 percentage points beginning in 2002) than
either the benefit reduction benchmark or the Trust Fund Exhaustion scenario. Similar analysis for the 1955 and 1970 cohorts shows similar        27
results—benefits are not reduced by smaller percentages for the lower benefit quintiles relative to either benchmark.




                                              Page 35                                                        GAO-03-907 Social Security Reform
                                              Appendix I: Briefing Slides




Benefit Outcomes for Disabled Beneficiaries1

Trust Fund Exhaustion scenario

Figure 11
• Reduces benefits by the same proportion for all beneficiaries including disabled
   workers.

Figure 12
• Reduces benefits relative to the benefit reduction benchmark by more for those
   who received disability before reaching the normal retirement age.
    – Disability recipients have lower lifetime earnings.
    – Benefit reduction benchmark cuts benefits in a more progressive manner.

• Reduces benefits relative to the tax increase benchmark by the same proportion
  for those who received disability and those who did not.

1  Neither the Trust Fund Exhaustion scenario nor the benchmarks contain any specific provisions relating to disabled beneficiaries. For instance
differences among the Trust Fund Exhaustion scenario and the benefit reduction benchmark are due in large part to the differing treatment of low
lifetime earners.
                                                                                                                                                    28




                                              Page 36                                                         GAO-03-907 Social Security Reform
                                              Appendix I: Briefing Slides




                                                                                                            Benefit Outcomes (continued)



Figure 11: Trust Fund Exhaustion Scenario
Median Real Monthly Benefits at Age 67 by History of DI Receipt for
Those Born in 1985




Note: The tax increase benchmark assumes a higher level of payroll tax (an increase of 1.9 percentage points beginning in 2002) than either the
benefit reduction benchmark or the Trust Fund Exhaustion scenario.

                                                                                                                                                  29




                                              Page 37                                                        GAO-03-907 Social Security Reform
                                             Appendix I: Briefing Slides




                                                                                                            Benefit Outcomes (continued)



Figure 12. Trust Fund Exhaustion Scenario
Percentage Reduction in Median Monthly Benefits under Trust Fund
Exhaustion Scenario at Age 67 Relative to the Tax Increase and Benefit
Reduction Benchmarks by History of DI Receipt for Those Born in 1985




Note: Compared to the proportional reduction specified by the Trust Fund Exhaustion scenario, the benefit reduction benchmark is progressive in
that it reduces benefits less for lower earners. The tax increase benchmark assumes a higher level of payroll tax (an increase of 1.9 percentage
points beginning in 2002) than either the benefit reduction benchmark or the Trust Fund Exhaustion scenario. Similar analysis for the 1955 and 1970
cohorts shows the similar results—benefits are not reduced by smaller percentages for the disabled relative to either benchmark.                    30




                                             Page 38                                                       GAO-03-907 Social Security Reform
                                                   Appendix I: Briefing Slides




Effect on Generational Equity

Figures 13 and 14
• For those born in 1955, lifetime benefits are higher under the Trust Fund
   Exhaustion scenario than under the benefit reduction benchmark. However,
   those living to age 83 and older would experience the “cliff.”

• For those born in 1970 cohort, lifetime benefits are about the same under the
  Trust Fund Exhaustion scenario and the benefit reduction benchmark.1
  However, those surviving to age 69 and older would see their monthly benefits
  reduced well below the benefit reduction benchmark.

• Lifetime benefits for those born in 1985 are about 7 percent lower under the
  Trust Fund Exhaustion scenario than under the benefit reduction benchmark
  (see fig. 14).




1   The Trust Fund Exhaustion scenario yields about 1 percent greater lifetime benefits relative to the benefit reduction benchmark (see fig. 14).


                                                                                                                                                     31




                                                   Page 39                                                           GAO-03-907 Social Security Reform
                                              Appendix I: Briefing Slides




                                                                                              Effect on Generational Equity (continued)



Figure 13: Trust Fund Exhaustion Scenario
Present Value of Lifetime Social Security Benefits by Birth Year




Note: Benefits are calculated for individuals that survive to ages 65 and older. Assumes that benefits continue to decline beyond 2080 at the rate
of decline for the period 2071-2080. This assumption affects benefits only for those born in 1985 surviving to age 95 or older. The tax increase
benchmark assumes a higher level of payroll tax (an increase of 1.9 percentage points beginning in 2002) than either the benefit reduction
benchmark or the Trust Fund Exhaustion scenario. Analysis does not reflect any behavioral changes resulting from the benchmark or scenario,          32
such as the impact of higher taxes on consumption or retirement saving under the tax increase benchmark.




                                              Page 40                                                          GAO-03-907 Social Security Reform
                                              Appendix I: Briefing Slides




                                                                                               Effect on Generational Equity (continued)



Figure 14: Trust Fund Exhaustion Scenario
Percentage Change in Lifetime Benefits under the Trust Fund Exhaustion
Scenario Relative to the Tax Increase and Benefit Reduction Benchmarks




Note: Compared to the proportional reduction specified by the Trust Fund Exhaustion scenario, the benefit reduction benchmark is progressive in
that it reduces benefits less for lower earners. The present value of lifetime benefits are calculated in 2001 dollars for cohort members that survive
to ages 65 and older. The tax increase benchmark assumes a higher level of payroll tax (an increase of 1.9 percentage points beginning in 2002)
than either the benefit reduction benchmark or the Trust Fund Exhaustion scenario. Analysis does not reflect any behavioral changes resulting            33
from the benchmark or scenario, such as the impact of higher taxes on consumption or retirement saving under the tax increase benchmark.




                                              Page 41                                                          GAO-03-907 Social Security Reform
                            Appendix I: Briefing Slides




Implementing and Administering Reforms

This criterion evaluates how readily such changes could be implemented,
administered, and explained to the public.

To what extent does the scenario:
• Provide reasonable timing and funds for implementation and result in reasonable
administrative costs?
• Allow the general public to readily understand its financing structure and increase
public confidence?
• Allow the general public to readily understand the benefit structure and avoid
expectation gaps?
• Limit the potential for politically motivated investing?




                                                                                          34




                            Page 42                             GAO-03-907 Social Security Reform
                          Appendix I: Briefing Slides




                                                        Implementing and Administering Reforms (continued)



• Assessing the Social Security Administration’s administrative and
  implementation challenges posed by a Trust Fund Exhaustion scenario is
  complicated by a lack of historical precedent and legislative clarity on how SSA
  would proceed.

• Any determination of benefit distributions after exhaustion of the combined
  OASDI Trust Funds would pose challenges to fundamental administrative
  functions of SSA.
    – At a minimum, a focus on cash management would be needed for SSA to
      calculate and implement the ongoing benefit adjustments required under the
      scenario.

• This Trust Fund Exhaustion scenario would require an educational campaign to
  make public aware of “cliff” in benefits and of subsequent reductions.

• Difficulty added to individuals’ retirement planning as benefits develop into a
  moving target—”cliff” may be foreseen, but cuts tend to be deeper as an
  individual ages.



                                                                                                            35




                          Page 43                                            GAO-03-907 Social Security Reform
                                                Appendix II: Methodology
Appendix II: Methodology


                                                The model simulates the interrelationships between the budget and the
Fiscal Model                                    economy over the long term and does not reflect their interaction during
                                                short-term business cycles. Long-term simulations provide illustrations—
                                                not precise forecasts—of the relative fiscal and economic outcomes
                                                associated with alternative policy paths. They are useful for comparing the
                                                potential outcomes of alternative policies within a common economic
                                                framework over the long term. Recognizing their inherent uncertainties,
                                                we have generally chosen conservative assumptions, such as holding
                                                interest rates and total factor productivity growth constant. Variations in
                                                these assumptions generally would not affect the relative outcomes of
                                                alternative policies.

Table 1: Fiscal Model Assumption Summary

 Model Inputs                                                Assumptions
 Social Security spending (OASDI)                            2001 Social Security Trustees’ intermediate projections.
 Medicare spending (HI and SMI)                              2001 Medicare Trustees’ intermediate assumption that per enrollee
                                                             Medicare spending grows with GDP per capita plus 1 percentage point.
 Medicaid spending                                           CBO’s July 2002 long-term assumption that per enrollee Medicaid
                                                             spending grows with GDP per capita plus 1 percentage point.
 Other mandatory spending                                    CBO’s August 2002 baseline through 2012; thereafter increases at the rate
                                                             of economic growth (i.e., remains constant as a share of GDP).
 Discretionary spending                                      CBO’s August 2002 baseline through 2012, adjusted for the 2001 Social
                                                             Security Trustees’ inflation assumptions; thereafter increases at the rate of
                                                             economic growth.
 Revenue                                                     CBO’s August 2002 baseline through 2012; thereafter remains constant at
                                                             20.5 percent of GDP (CBO’s projection in 2012).
 Nonfederal saving (percent of GDP): gross saving of the Increases gradually over the first 10 years to 17.5 percent of GDP (the
 private sector and state and local government sector    average nonfederal saving rate from 1992-2001).
 Net foreign investment (percent of GDP)                     Increases (or decreases) from 2002 share of GDP by one-third of any
                                                             increase (or decrease) in gross national saving through 2012; thereafter
                                                             increases (or decreases) from 2012 nominal dollar level by one-third of any
                                                             increase (or decrease) in gross national saving.
 Labor: growth in hours worked                               2001 Social Security Trustees’ intermediate projections.
 Total factor productivity growth                            Consistent with labor productivity growth in 2001 Social Security Trustees’
                                                             intermediate projections.
 Inflation (GDP price index and CPI)                         2001 Social Security Trustees’ intermediate projections.
 Interest rate (average on the national debt)                CBO’s August 2002 implied real average interest rate through 2011
                                                             adjusted for the 2001 Social Security Trustees’ intermediate inflation
                                                             assumptions; 6.3 percent thereafter.
Source: GAO.




                                                Page 44                                              GAO-03-907 Social Security Reform
                Appendix II: Methodology




                Genuine Microsimulation of Social Security and Accounts (GEMINI) is a
Benefit Model   microsimulation model developed by the Policy Simulation Group (PSG).
                GEMINI is linked with two other PSG models, the Social Security and
                Accounts Simulator (SSASIM), which has been used in numerous GAO
                reports, and the Pension Simulator (PENSIM), which has been developed
                for the Department of Labor. For our report, we used SSASIM to produce
                Social Security policy regimes consistent with the benefit reduction
                benchmark, the tax increase benchmark, and the Trust Fund Exhaustion
                scenario. PENSIM produced simulated samples, sometimes called
                synthetic samples, of lifetime histories, including earnings, educational
                attainment, marriage, disability, and death, for the cohorts born in
                1955, 1970, and 1985. The lifetime histories were validated against data
                from the Survey of Income and Program Participation, the Current
                Population Survey, Modeling Income in the Near Term (MINT3),1 and the
                Panel Study of Income Dynamics. Additionally, any projected statistics
                (such as life expectancy, educational attainment, employment patterns,
                and marital status at age 60) are, where possible, consistent with
                intermediate-cost projections from SSA’s Office of the Chief Actuary.
                Because PENSIM cannot yet stochastically determine the age at which a
                member of the sample applies for benefits, we assumed that all retired
                worker beneficiaries claim benefits at age 65. GEMINI used the lifetime
                histories produced by PENSIM and the policy regimes produced by
                SSASIM to simulate Social Security benefits for retired and disabled
                workers and auxiliary benefits paid to spouses, widows, and children.

                Additional information about GEMINI may be found in three previous
                GAO reports that used the model: Retirement Income: Intergenerational
                Comparisons of Wealth and Future Income, GAO-03-429 (Washington,
                D.C.: Apr. 25, 2003); Social Security Reform: Analysis of Reform Models
                Developed by the President’s Commission to Strengthen Social
                Security, GAO-03-310 (Washington, D.C.: Jan. 15, 2003); and Social
                Security: Program’s Role in Helping Ensure Income Adequacy,
                GAO-02-62 (Washington, D.C.: Nov. 30, 2001).

                The GEMINI, PENSIM, and SSASIM models are updated to reflect changes
                in information sources. Notable changes from recent reports include
                updated mortality and disability patterns to reflect new information from



                1
                  MINT3 is a detailed microsimulation model developed jointly by the Social Security
                Administration, the Brookings Institution, RAND, and the Urban Institute to project the
                distribution of income in retirement for the 1931 to 1960 birth cohorts.




                Page 45                                               GAO-03-907 Social Security Reform
           Appendix II: Methodology




           SSA’s Office of the Chief Actuary. For more information on the models,
           see the PSG Web site at www.polsim.com.




(130251)
           Page 46                                     GAO-03-907 Social Security Reform
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