oversight

Social Security: Evaluating Reform Proposals

Published by the Government Accountability Office on 1999-11-04.

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

                      United States General Accounting Office

GAO                   Report to Congressional Requesters




November 1999
                      SOCIAL SECURITY

                      Evaluating Reform
                      Proposals




GAO/AIMD/HEHS-00-29
United States General Accounting Office                                                              Comptroller General
Washington, D.C. 20548                                                                               of the United States



                                    B-283957                                                                                Leter




                                    November 4, 1999

                                    Congressional Requesters

                                    This report responds to your request that we analyze the potential
                                    budgetary and economic effects of several Social Security reform
                                    proposals, together with the Social Security framework outlined by the
                                    President and his Universal Savings Account (USA) proposal. We agreed to
                                    examine how these proposals balance adequacy and equity concerns and
                                    provide for reasonable implementation and communication of any
                                    changes. A wide array of proposals has been put forth to restore Social
                                    Security's long-term solvency, reflecting different perspectives on and
                                    approaches to addressing the program's financing problem.

                                    As requested, we examined the following reform proposals: (1) the Social
                                    Security Guarantee Act outlined by Ways and Means Committee Chairman
                                    Bill Archer and Social Security Subcommittee Chairman Clay Shaw,
                                    (2) H.R. 1793, the 21st Century Retirement Security Act, (3) the Senate
                                    Bipartisan bill announced by Senators Judd Gregg, Bob Kerrey, John
                                    Breaux, and Chuck Grassley, (4) the Social Security plan outlined by
                                    Budget Committee Chairman John Kasich, and (5) the Social Security
                                    framework outlined by the President, including the USA proposal. On
                                    October 13, 1999, we briefed your offices on the results of our analysis. Our
                                    briefing, updated to reflect the President's October 26, 1999, Social Security
                                    financing proposal, is reprinted in appendix I. We conducted this work
                                    from August 1999 through October 1999 in accordance with generally
                                    accepted government auditing standards.

                                    As agreed with your offices, our assessments of the reform proposals are
                                    based on the analytic framework we provided to the Congress last March.1
                                    That framework consists of three basic criteria:

                                    • the extent to which the proposal achieves sustainable solvency and how
                                      it would affect the economy and the federal budget,




                                    1
                                     Social Security: Criteria for Evaluating Social Security Reform Proposals
                                    (GAO/T-HEHS-99-94, March 25, 1999).




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• the balance struck between the twin goals of income adequacy (level
  and certainty of benefits) and individual equity (rates of return on
  individual contributions), and
• how readily such changes could be implemented, administered, and
  explained to the public.2

In evaluating each of the proposals against the three basic criteria, we used
a set of detailed questions, which can be found in the appendix to this
letter, that help describe potential effects of reform proposals on important
policy and operational aspects of public concern.

As you requested, we used our long-term economic model in evaluating the
various proposals against the first criterion, that of financing sustainable
solvency. Specifically, we used this model to simulate the potential fiscal
and economic impacts of each proposal over a 75-year projection period.
We offer these simulation results not as precise forecasts but rather as a
useful way to compare the potential outcomes of alternative policies within
a common economic framework. 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. Since 1992, we have provided the Congress with a long-
term perspective by modeling the implications of differing fiscal policy
paths for the nation's economy.3 For these paths we use the Trustees'
intermediate estimates for Medicare and Social Security spending; in other
respects, we generally rely on the Congressional Budget Office's (CBO)
fiscal and economic assumptions.




2
 Social Security Reform: Implementation Issues for Individual Accounts
(GAO/HEHS-99-122, June 18, 1999) and Social Security Reform: Administrative Costs for
Individual Accounts Depend on System Design (GAO/HEHS-99-131, June 18, 1999).
3
For more information on GAO's long-term model, see Budget Issues: Long-Term Fiscal
Outlook (GAO/T-AIMD/OCE-98-83, February 25, 1998).




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In simulating the reform proposals, we relied on income and cost estimates
prepared by the Office of the Actuary at the Social Security Administration
(SSA), and we adapted the model as appropriate to reflect specific reform
proposal provisions. We considered each proposal in isolation. That is, we
did not include any other proposals made by reform sponsors or the
President that would have other fiscal effects, such as proposed non-Social
Security related tax cuts or spending increases. For the President's
financing proposal, we analyzed the transfers as specified in his October
1999 proposal−the Strengthen Social Security and Medicare Act of 1999.4
That administration proposal does not include USAs. Since we did not have
sufficient data to simulate USAs, we provide a qualitative evaluation. As
you requested, our simulation results also compare each proposal with
alternative fiscal policy paths developed in our prior model work.

We used qualitative research to examine how well the proposals balance
adequacy and equity concerns and provide for reasonable implementation
and communication of any changes. In so doing, we relied on GAO's issued
and ongoing body of work on Social Security reform. This work addresses
various issues raised by reform approaches, including establishing
individual accounts, raising the retirement age, and the impact of reforms
on minorities and women. 5

The use of these criteria to evaluate various reform proposals highlights the
trade-offs that exist between efforts to achieve solvency for the Old Age
and Survivors Insurance and Disability Insurance (OASDI) trust funds and
to maintain adequate retirement income for current and future
beneficiaries. For example, proposals that achieve solvency by reducing
current-law benefits and establishing individual accounts will result in


4
  For our evaluation of the President's January proposal, see Social Security: What the
President's Proposal Does and Does Not Do (GAO/T-AIMD/HEHS-99-76, February 9, 1999),
and Social Security and Surpluses: GAO's Perspective on the President's Proposals
(GAO/T-AIMD/HEHS-99-96, February 23, 1999). For our observations on the President's
Midsession Review, see Federal Budget: The President's Midsession Review
(GAO/OCG-99-29, July 27, 1999).
5
 See Social Security: Individual Accounts as an Element of Long-Term Financing Reform
(GAO/T-HEHS-99-86, March 16, 1999); Social Security Reform: Implications of Private
Annuities for Individual Accounts (GAO/HEHS-99-160, July 30, 1999); Social Security: Issues
in Comparing Rates of Return With Market Investments (GAO/HEHS-99-110, August 5,
1999); Social Security Reform: Implications of Raising the Retirement Age
(GAO/HEHS-99-112, August 27, 1999); Social Security Reform: Implications for Women
(GAO/T-HEHS-99-52, February 3, 1999); and Social Security and Minorities: Current Benefits
and Implications of Reform (GAO/T-HEHS-99-60, February 10, 1999).




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greater uncertainty and variability in retirement income levels among
similarly situated individuals. In addition, any proposal that would
guarantee benefits and rely on enhanced rates of return on individual
accounts to finance long-term solvency may create certain contingent
liabilities that could serve to increase the deficit over the long term.
Further, in any reform proposal, attention must be paid to the impact on
poverty among the elderly.

We requested comments on a draft of this report from the Social Security
Administration. SSA provided technical comments, which we have
incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until tomorrow. At that
time, we will send copies to the Honorable Bill Archer, Chairman, and the
Honorable Charles B. Rangel, Ranking Member, House Ways and Means
Committee; the Honorable Clay Shaw, Chairman, and the Honorable
Robert T. Matsui, Ranking Member, Subcommittee on Social Security,
House Ways and Means Committee; other interested congressional
committees; the Honorable Kenneth S. Apfel, Commissioner of Social
Security; and the Honorable Lawrence Summers, Secretary of the Treasury.
Copies will be made available to others upon request.

If you or your staffs have any questions about this report, please contact
Cynthia M. Fagnoni, Director, Education, Workforce, and Income Security
Issues, on (202) 512-7215 or Paul L. Posner, Director, Budget Issues, on
(202) 512-9573.




David M. Walker
Comptroller General
of the United States




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List of Requesters

The Honorable John B. Breaux
The Honorable Charles E. Grassley
The Honorable Judd Gregg
The Honorable Robert Kerrey
United States Senate

The Honorable John R. Kasich
The Honorable Jim Kolbe
The Honorable Charles W. Stenholm
House of Representatives




Page 5                    GAO/AIMD/HEHS-00-29 Social Security Reform Proposals
Appendix I

Evaluating Social Security Reform Proposals                                                      Appendx
                                                                                                       Ii




        GAO




              Evaluating Social Security Reform Proposals




                     Briefing for Congressional Requesters




                         Page 6               GAO/AIMD/HEHS-00-29 Social Security Reform Proposals
                    Appendix I
                    Evaluating Social Security Reform Proposals




                       Proposals Studied


•   Archer-Shaw

•   Kolbe-Stenholm, H.R. 1793

•   Gregg-Kerrey-Breaux-Grassley, S. 1383

•   Kasich

•   President’s Social Security Transfer Proposal and the Universal
    Savings Account (USA) Proposal


                                                                                         2




                    Page 7                           GAO/AIMD/HEHS-00-29 Social Security Reform Proposals
                   Appendix I
                   Evaluating Social Security Reform Proposals




                  Criteria for Evaluating
            Social Security Reform Proposals

The three basic criteria that provide policymakers with a framework
for assessing reform plans:

•   Financing Sustainable Solvency

•   Balancing Adequacy and Equity in the Benefits Structure

•   Implementing and Administering Reforms




                                                                                        3




                   Page 8                           GAO/AIMD/HEHS-00-29 Social Security Reform Proposals
                      Appendix I
                      Evaluating Social Security Reform Proposals




     Evaluating Social Security Reform Proposals


•   Comprehensive proposals can be evaluated against three basic
    criteria.

•   Reform proposals should be evaluated as packages that strike a
    balance among individual reform elements and important interactive
    effects.

•   Some proposals will fare better or worse than other proposals under
    each criterion.

•   Overall evaluation of each proposal depends on the weight individual
    policymakers place on each criterion.


                                                                                           4




                      Page 9                           GAO/AIMD/HEHS-00-29 Social Security Reform Proposals
                          Appendix I
                          Evaluating Social Security Reform Proposals




                 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?
                                                                                               5




                          Page 10                          GAO/AIMD/HEHS-00-29 Social Security Reform Proposals
                        Appendix I
                        Evaluating Social Security Reform Proposals




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


                                                                                             6




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                          Appendix I
                          Evaluating Social Security Reform Proposals




         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 proposal:
•   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?




                                                                                               7




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                     Appendix I
                     Evaluating Social Security Reform Proposals




             Financing Sustainable Solvency
            GAO’s Long-term Economic Model


•   GAO’s long-term economic model is used to help assess the potential
    fiscal and economic impacts of Social Security reform proposals.

•   The economic model was originally developed by economists at the
    Federal Reserve Bank of New York.

•   The key interaction between the budget and the economy in the model
    is the effect of the unified federal deficit/surplus on the amount of
    national saving available for investment, which influences long-term
    economic growth.




                                                                                          8




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                         Appendix I
                         Evaluating Social Security Reform Proposals




                Financing Sustainable Solvency
              Interpreting Long-term Simulations
•   Long-term simulations provide illustrations--not precise forecasts--of the relative
    fiscal and economic outcomes associated with alternative policy paths.

•   Long-term simulations are useful for comparing the potential outcomes of
    alternative policies within a common economic framework over the long term.
     – Recognizing the inherent uncertainties of long-term simulations, 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.
     – The model simulates the interrelationships between the budget and the
         economy over the long term and does not reflect their interaction during
         short-term business cycles.

•   Long-term simulations are not predictions of what will happen in the future. In
    reality, policymakers likely would take action before the occurrence of the negative
    out-year fiscal and economic consequences reflected in some simulated fiscal
    policy paths.
                                                                                              9




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                                  Appendix I
                                  Evaluating Social Security Reform Proposals




              Financing Sustainable Solvency
       Social Security Reform Proposals in the Model

•      Reform proposal cost and income estimates are from SSA’s Office of the
       Actuary.
        – For each proposal, the OASDI cost estimate reflects all proposed reforms
          affecting benefits. These include increases in the retirement age, reduced
          COLAs, changes in the index used to adjust initial benefit levels, benefit
          reductions meant to offset individual accounts, and other proposed
          changes.
        – For each proposal, the OASDI income estimate reflects such elements as
          transfers from the general fund to the trust funds, the redirection of
          revenue from the taxation of benefits from the HI trust fund to the OASDI
          trust funds, and “carve-outs” from the payroll tax used to establish
          individual accounts.
•      For all reform proposals, on-budget revenue and spending reflect the
       assumptions included in GAO’s no action path,1 adjusted for proposed reform
       proposal changes affecting on-budget totals.
        – Changes include transfers from the general fund to the OASDI trust
          funds, tax credits used to fund individual accounts, and other provisions
          that would affect on-budget totals.
                                                                                                         10
    1Assumptions   underlying the no action path are shown in attachment I.




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                             Appendix I
                             Evaluating Social Security Reform Proposals




                 Financing Sustainable Solvency
               Alternative Fiscal Policy Simulations
Reform simulations are compared to several long-term simulations developed as part of GAO’s
ongoing model work. These simulations all assume payment of current-law Social Security
benefits using general revenues to supplement payroll tax financing.

•   No action assumes no changes in current policies and thus results in saving the unified surpluses.
    This assumption implies no emergency spending and actual spending that falls within the existing
    discretionary caps. Thus, unified budget surpluses through 2029 are used to reduce debt held by
    the public. Thereafter, deficits are permitted to emerge. Discretionary spending follows CBO’s 10-
    year projections, which assume compliance with the spending caps through 2002 and growth with
    inflation through 2008. Thereafter, we assume discretionary spending grows with the economy.

•   Eliminate non-Social Security surpluses assumes that permanent unspecified policy actions (i.e.,
    spending increases and/or tax cuts) are taken through 2009 that eliminate the projected on-budget
    surpluses. Thereafter, these unspecified actions are projected through the end of the simulation
    period. On-budget deficits emerge in 2010, followed by unified deficits in 2017.

•   Long-term on-budget balance assumes that the on-budget surplus is eliminated through 2009, as
    in the previous path. Thereafter, the on-budget portion is kept in balance by actions that cut
    spending and/or raise revenue to prevent on-budget deficits from emerging. This results in a unified
    surplus/deficit equal to the OASDI trust funds’ annual surplus/deficit through 2034 and equal to the
    Social Security annual cash deficit thereafter.

                                                                                                     11




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                             Appendix I
                             Evaluating Social Security Reform Proposals




                                     Archer-Shaw

• No reduction in current-law benefit. Actual retirement income
  could be higher depending on account balance.

• Mandatory “add-on” individual accounts equal to 2% of taxable
  payroll. Worker chooses among several mutual fund options,
  each 60% equities and 40% fixed income securities.

• Individual accounts are financed through a refundable tax
         1
  credit. Payroll tax rates are reduced by 2.5 percentage points in
                                                     2
  2050 and an additional 1 percentage point in 2060.

• Benefit amount: benefit is either current law or payout based on
  annuitized account balance, whichever is higher. Account
  balance is gradually returned to OASDI trust funds to finance
  benefits. Account balance is left to heirs if worker dies before
  receiving benefits.
   1Participants would not actually file for this credit on their tax returns; rather, it would be automatically
   credited to their individual accounts.
                                                                                                                   12
   2According   to committee staff, this provision may be changed.




                             Page 17                                GAO/AIMD/HEHS-00-29 Social Security Reform Proposals
                                 Appendix I
                                 Evaluating Social Security Reform Proposals




                               Archer-Shaw
                      Financing Sustainable Solvency

As illustrated in the following graphs, compared to No Action, the Archer-Shaw
proposal:

•    Reduces projected unified surpluses and increases projected unified deficits as
     a share of GDP through the middle of the next century, then reduces projected
     unified deficits through the end of the simulation period. (Figure 1)
•    Results in higher levels of debt held by the public until the final years of the
     simulation period. (Figure 2)
•    Has little impact on the net government cost of Social Security as a share of
     GDP in 2030 but cuts the cost of the program roughly in half by 2074. (Figure 3)
•    Lowers net Social Security spending slightly as a share of federal revenues in
     2030. In 2074 program spending would consume about half as much of federal
     revenues as in No Action--or about the same share of federal revenues as
     today. (Figure 4)

Note: Social Security spending is net of the offset from the individual accounts.
                                                                                                         13




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                                                      Appendix I
                                                      Evaluating Social Security Reform Proposals




                                        Figure 1: Archer-Shaw
                             Unified Deficits/Surpluses as a Share of GDP
                                                             Eliminate non-Social
                 10                                          Security surpluses *
                                                                                                            No action*
                                                                                                                                 Archer-Shaw



                  5
Percent of GDP

                  Deficit




                                                                                                                        Long-term
                                                                                                                    on-budget balance
                  0
                  Surplus




                 -5
                      1999    2004   2009   2014   2019   2024   2029   2034    2039   2044   2049   2054   2059   2064   2069    2074


                             *Data end when deficits reach 10 percent of GDP.
                                                                                                                                         14




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                                                Appendix I
                                                Evaluating Social Security Reform Proposals




                                    Figure 2: Archer-Shaw
                           Debt Held by the Public as a Share of GDP

                                                               Eliminate non-Social
                 150                                           Security surpluses *                      No action

                                                                                                                     Archer-Shaw
                 100
Percent of GDP




                                                                                                            Long-term
                  50                                                                                    on-budget balance




                   0




                 -50
                       1999 2004 2009 2014 2019 2024 2029 2034 2039 2044 2049 2054 2059 2064 2069 2074




                       *Data end when debt reaches 150 percent of GDP.
                                                                                                                            15




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                                                           Appendix I
                                                           Evaluating Social Security Reform Proposals




                                      Figure 3: Composition of Spending as a
                                          Share of GDP in 1998 and Under
                                            No Action and Archer-Shaw

                                          No action                                                               Archer-Shaw

                 40                                                                     40



                 30                                                                     30
Percent of GDP




                                Revenue                                                        Revenue
                 20                                                                     20



                 10                                                                     10



                  0                                                                      0
                            1998           2030          2050           2074                     1998       2030**          2050          2074

                                       Social Security                 Health                Net interest              All other spending*
                      *All other spending includes offsetting interest receipts in 2030 under no action.
                      **Net interest is .03 percent in 2030.
                      Note: Since a tax credit reduces revenue, revenue under Archer-Shaw is net of the tax credit for individual accounts.   16
                      Social Security spending is net of the offset from the individual accounts.




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                                                 Appendix I
                                                 Evaluating Social Security Reform Proposals




  Figure 4: Social Security Spending as a Share of
      Total Federal Revenue in 1998 and Under
             No Action and Archer-Shaw

                                                                                                    39.0
                                     40
  Percent of total federal revenue




                                                           32.4                33.1
                                                                    30.1
                                     30
                                                                                         23.3
                                          20.8                                                              21.5
                                     20


                                     10


                                     0
                                          1998                2030                 2050                2074


                                          1998 share              No action           Archer-Shaw
Note: Since a tax credit reduces revenue, revenue under Archer-Shaw is net of the tax credit for individual accounts.
Social Security spending is net of the offset from the individual accounts.
                                                                                                                        17




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                                  Appendix I
                                  Evaluating Social Security Reform Proposals




                                Archer-Shaw
                       Financing Sustainable Solvency
•     Initially, no net effect on national saving. Government saving is reallocated to
      private saving. The government captures a greater portion of the returns to
      national saving through individual account investments in private equities.
      Payroll tax reductions in 2050 and 2060 would reduce national saving.1
•     Restores 75-year actuarial balance and produces a stable trust fund ratio at the
      end of the 75-year projection period. Actuaries note that these results depend
      greatly on the assumed yield on the individual account investments.2
•     Finances individual accounts from general revenues by means of a refundable
      tax credit. Returns to individual accounts determine magnitude of benefit offset.
      Payroll tax reductions begin in 2050.3
•     Creates a contingent liability through guarantee of current law benefits
      regardless of individual account performance.
•     Contains no new “safety valves” to control future program growth.

    1Analysis limited to first order effects on saving. Effects on saving behavior in response to specific
    reform provisions are not considered given the lack of expert consensus.
    2The actuaries assumed an expected real portfolio yield of 5.35 percent net of administrative expense.

    3 According to committee staff, this provision may be changed.                                           18




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                                 Appendix I
                                 Evaluating Social Security Reform Proposals




                              Archer-Shaw
                     Balancing Adequacy and Equity

•   Maintains current-law benefits for current and future retirees, including low-
    income workers and others most reliant on Social Security.
•   There are no changes to disabled, dependents, or survivor benefits.
•   No change from the current OASDI structure in the way workers are covered.
    Each covered worker receives an annual refundable tax credit that is invested in
    an individual account.1
•   The progressivity of the OASDI benefit structure remains unchanged. No
    progressivity built into the individual account structure.
•   Workers have some investment choice, subject to certain limitations.
•   There is the potential for higher returns on investment. In most cases these
    returns will be recaptured by the government.
•   The move to advanced funding of Social Security may eventually improve
    intergenerational equity.
    1 Participants would not actually file for this credit on their tax returns; rather, it would be automatically
    credited to their individual account.                                                                            19




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                         Appendix I
                         Evaluating Social Security Reform Proposals




                     Archer-Shaw
        Implementing and Administering Reforms

•   Funding for implementation is not explicitly discussed. The proposal provides
    no time frames for implementation.
•   Proposal’s estimate of 25 basis points may not be realistic, especially in the long
    term.
•   Tax credit financing of the system may be difficult to explain.
•   The “offset” feature of the proposal must be clearly explained; otherwise retirees
    may expect a larger return than the proposal actually provides, potentially
    creating an “expectations gap.” An education program will be necessary.
•   The proposal establishes a Social Security Board to oversee fund management.




                                                                                             20




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                        Appendix I
                        Evaluating Social Security Reform Proposals




                     Kolbe-Stenholm, H.R. 1793

• Social Security defined benefits are generally reduced from current law.
  A new minimum benefit above current law is added, and formula
  changes increase progressivity of benefit structure.

• Individual mandatory “carve-out” accounts equal to 2% of taxable payroll.
  Additional voluntary contributions are allowed up to $2,000 annually.
  Lower income earners are also eligible for partial government match and
  may use EITC to contribute. Investment framework is modeled after
  Federal Thrift Savings Plan.

• Additional financing from (a) general revenues due to changes in cost-of-
  living adjustment and (b) revenues from taxation of Social Security
  benefits currently used to finance Medicare.

• At retirement, worker may purchase annuity or request monthly pay-out.
  If monthly pay-out plus Social Security benefit guarantee a lifetime
  income equal to poverty level, balance in excess of this requirement may
  be withdrawn. At death, balance may be left as lump sum or rolled over.
                                                                                            21




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                         Appendix I
                         Evaluating Social Security Reform Proposals




                   Kolbe-Stenholm, H.R. 1793
                Financing Sustainable Solvency

As illustrated in the following graphs, compared to No Action, the Kolbe-Stenholm,
H.R. 1793, proposal:

•   Reduces projected unified surpluses through about 2020, then maintains unified
    surpluses that average about 1.6 percent of GDP through the end of the
    simulation period. (Figure 5)
•   Results in slightly higher debt held by the public in the short run. Debt held by
    the public eliminated about 2013 and long-run financial position of the
    government significantly improved. (Figure 6)
•   Lowers the cost of Social Security as share of GDP in 2030 by 1.6 percentage
    points--about one fourth. Compared to No Action, the proposal cuts the cost of
    the program roughly in half by 2074. (Figure 7)
•   Lowers Social Security spending as a share of federal revenues in 2030 by
    7 percentage points--about one fifth. In 2074, program spending would
    consume about half as much of federal revenues as in No Action--or about the
    same share of federal revenues as today. (Figure 8)
                                                                                             22




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                                                       Appendix I
                                                       Evaluating Social Security Reform Proposals




                          Figure 5: Kolbe-Stenholm, H.R. 1793
                      Unified Deficits/Surpluses as a Share of GDP

                 10                                                                                                 No action*
                                                                 Eliminate non-Social
                                                                 Security surpluses*




                    5
Percent of GDP
                 Deficit




                                                                                                          Long-term on-budget balance



                    0
                 Surplus




                                                                                                                 Kolbe-Stenholm




                  -5
                           1999   2004   2009   2014    2019   2024   2029    2034   2039   2044   2049   2054   2059   2064   2069   2074


                           *Data end when deficits reach 10 percent of GDP.
                                                                                                                                        23




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                            Figure 6: Kolbe-Stenholm, H.R. 1793
                                  Debt as a Share of GDP

                 150                                        Eliminate non-Social
                                                            Security surpluses*                           No action



                 100
Percent of GDP




                                                                                                                Long-term
                                                                                                            on-budget balance
                  50




                   0

                                                                                                     Kolbe-Stenholm

                 -50
                       1999 2004 2009 2014 2019 2024 2029 2034 2039 2044 2049 2054 2059 2064 2069 2074


                   *Data end when debt reaches 150 percent of GDP.
                                                                                                                       24




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                                Figure 7: Composition of Spending as a
                                    Share of GDP in 1998 and Under
                                    No Action and Kolbe-Stenholm
                                       No action                                                              Kolbe-Stenholm

                 40                                                               40


                 30                                                               30
Percent of GDP




                       Revenue                                                            Revenue

                 20                                                               20


                 10                                                               10



                  0                                                                0
                         1998          2030          2050           2074                   1998           2030           2050           2074

                                      Social Security            Health            Net interest            All other spending*


                  *All other spending includes offsetting interest receipts in 2030 in no action and in 2030, 2050, and 2074 under Kolbe-Stenholm.
                   Note: Since a payroll tax carve-out reduces revenue, revenue under Kolbe-Stenholm is net of the carve-out amount.
                                                                                                                                           25




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                                   Figure 8: Social Security Spending as a Share
                                    of Total Federal Revenue in 1998 and Under
                                           No Action and Kolbe-Stenholm

                                                                                                                         39.0
                                   40
Percent of total federal revenue




                                                                       32.4                    33.1

                                   30
                                                                                 25.4

                                                  20.8                                                    20.1                       20.4
                                   20



                                   10



                                   0
                                                 1998                      2030                      2050                     2074

                                              1998 share               No action               Kolbe-Stenholm
                                   Note: Since a payroll tax carve-out reduces revenue, revenue under Kolbe-Stenholm is net of the carve-out amount.
                                                                                                                                               26




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                           Kolbe-Stenholm, H.R. 1793
                        Financing Sustainable Solvency
•     National saving would increase primarily due to the improved fiscal position of
      the government resulting from the proposed benefit reductions. The carve-out
      would increase private saving and decrease government saving with no net
      effect on national saving. Saving subsidy for low-income workers could result in
      some increase in national saving.1
•     Restores 75-year actuarial balance and produces trust fund ratio that at the end
      of the 75-year projection period is rising by about 6 percentage points per year.
•     Finances individual accounts from payroll taxes. Government matching of
      voluntary contributions by low-income workers funded from general revenues.
      General revenue transfers in amounts reflecting COLA reductions are used to
      help finance Social Security benefits. Redirects all revenue from taxation of
      Social Security benefits to OASDI trust funds.
•     Does not create contingent liabilities.
•     Contains provision requiring SSA trustees to recommend statutory changes to
      the program in the event of unforeseen deterioration in Social Security solvency.
    1Analysis limited to first order effects on saving. Effects on saving behavior in response to specific   27
    reform provisions are not considered given the lack of expert consensus.




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                      Kolbe-Stenholm, H.R. 1793
                    Balancing Adequacy and Equity

•   Phases in reductions to current-law benefits by reducing the COLA, increasing the
    NRA and ERA, increasing the number of years of earnings used to calculate
    benefits, and the benefit computation period.
•   Establishes a minimum benefit guarantee.
•   Some of the changes in the way benefits are calculated could reduce disabled,
    dependents, and survivor benefits.
•   All workers under age 55 are covered by the proposal.
•   Formula changes increase the progressivity of the OASDI benefit structure;
    however, overall progressivity of the system becomes unclear given other
    offsetting changes to the benefit structure. Individual account structure includes a
    government match that decreases with income.
•   There is potential for higher returns on investments; the risk is borne by the
    individual.
•   Workers have some investment choice, subject to certain limitations.
•   The move to advanced funding of Social Security may improve intergenerational
    equity.                                                                                     28




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              Kolbe-Stenholm, H.R. 1793
        Implementing and Administering Reforms

•   Funding for implementation is not explicitly discussed. The bill provides no time
    frames for implementation.
•   There is not enough information to allow an estimate of administrative costs.
•   Financing structure of the system may be difficult to explain.
•   The changes to the benefit structure may be difficult to explain. An education
    program will be necessary.
•   The proposal establishes an Individual Security Fund Board to oversee fund
    management.




                                                                                             29




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         Gregg-Kerrey-Breaux-Grassley, S. 1383

• Social Security defined benefits are generally reduced from current
  law, but formula changes increase progressivity of benefit structure.
  No changes to benefits for current and near-retirees.

• Mandatory individual “carve-out” accounts equal to 2% of taxable
  payroll, with additional voluntary contributions allowed up to $2,000
  annually. Lower and middle income earners are eligible for partial
  match. KidSave accounts are established for each child at birth with
  government contributions; these continue until child is age 5.
  Investment framework modeled on Thrift Savings Plan.

• Additional financing from (a) general revenues due to changes in
  cost-of-living adjustment and (b) portion of revenues from taxation of
  Social Security benefits currently used to finance Medicare.

• At retirement, a benefit reduction is taken to reflect government
  contributions to the individual account. Half of KidSave contributions
  are included in calculating the offset. Account distributions and
  treatment at death same as in Kolbe-Stenholm.                                            30




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          Gregg-Kerrey-Breaux-Grassley, S. 1383
             Financing Sustainable Solvency

As illustrated in the following graphs, compared to No Action, the
Gregg-Kerrey-Breaux-Grassley, S. 1383, proposal:

•   Reduces projected unified surpluses through about 2020, then maintains unified
    surpluses that average about 1.7 percent of GDP through the end of the
    simulation period. (Figure 9)
•   Results in slightly higher debt held by the public in the short run. Debt held by
    the public eliminated about 2014 and the long-run financial position of the
    government significantly improved. (Figure 10)
•   Lowers the cost of Social Security as share of GDP in 2030 by 1.5 percentage
    points--about one fifth. Compared to No Action, the proposal cuts the cost of
    the program roughly in half by 2074. (Figure 11)
•   Lowers Social Security spending as a share of federal revenues in 2030 by 6.7
    percentage points--about one fifth. In 2074, program spending would consume
    about half as much of federal revenues as in No Action--or about the same
    share of federal revenues as today. (Figure 12)
                                                                                             31




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     Figure 9: Gregg-Kerrey-Breaux-Grassley, S. 1383
       Unified Deficits/Surpluses as a Share of GDP

         10                                             Eliminate non-Social                             No action*
                                                        Security surpluses*




             5
Percent of GDP
      Deficit




                                                                                                 Long-term on-budget balance



             0
        Surplus




                                                                                                                 GKBG




           -5
             1999       2004 2009     2014    2019 2024    2029 2034     2039 2044   2049 2054    2059    2064 2069     2074


                  *Data end when deficits reach 10 percent of GDP.
                                                                                                                          32




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Figure 10: Gregg-Kerrey-Breaux-Grassley, S. 1383
    Debt Held by the Public as a Share of GDP

                 150                                           Eliminate non-Social                       No action
                                                               Security surpluses*



                 100
Percent of GDP




                  50
                                                                                                       Long-term
                                                                                                   on-budget balance

                   0


                                                                                                          GKBG

                 -50
                       1999 2004 2009 2014 2019 2024 2029 2034 2039 2044 2049 2054 2059 2064 2069 2074


                   *Data end when debt reaches 150 percent of GDP.
                                                                                                                       33




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                            Figure 11: Composition of Spending as a
                                Share of GDP in 1998 and Under
                          No Action and Gregg-Kerrey-Breaux-Grassley
                                        No action                                                  Gregg-Kerrey-Breaux-Grassley
                 40                                                               40



                 30                                                               30
Percent of GDP




                            Revenue                                                          Revenue

                 20                                                               20



                 10                                                               10



                  0                                                                0
                         1998          2030          2050          2074                    1998          2030          2050          2074

                                  Social Security               Health              Net interest              All other spending*


                 *All other spending includes offsetting interest receipts in 2030 under no action and in 2030, 2050, and 2074 under Gregg-Kerrey-
                 Breaux-Grassley.
                 Note: Since a payroll tax carve-out reduces revenue, revenue under Gregg-Kerrey-Breaux-Grassley is net of the carve-out amount.
                                                                                                                                        34




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   Figure 12: Social Security Spending as a Share of Total
                Federal Revenue in 1998 and
     Under No Action and Gregg-Kerrey-Breaux-Grassley

                                                                                                          39.0
                                            40
         Percent of total federal revenue




                                                                  32.4                33.1

                                            30                           25.7

                                                 20.8                                          21.1                19.7
                                            20



                                            10



                                            0
                                                 1998                2030                 2050                 2074
                                                 1998 share       No action       Gregg-Kerrey-Breaux-Grassley

Note: Since a payroll tax carve-out reduces revenue, revenue under Gregg-Kerrey-Breaux-Grassley is net of the carve-out amount.
                                                                                                                            35




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                  Gregg-Kerrey-Breaux-Grassley, S. 1383
                     Financing Sustainable Solvency
•   National saving would increase primarily due to the improved fiscal position of the
    government resulting from the proposed benefit reductions. The carve-out and KidSave
    accounts would increase private saving and decrease government saving with no net
    effect on national saving. Saving subsidy for low-income workers could result in some
    increase in national saving.1
•   Restores 75-year actuarial balance and produces trust fund ratio that at the end of the 75-
    year projection period is rising by about 20 percentage points per year.
•   Finances individual accounts from payroll taxes. Government matching of voluntary
    contributions by low and middle income workers and KidSave accounts funded from
    general revenues. General revenue transfers in amounts reflecting COLA reductions are
    used to help finance Social Security benefits. Redirects all revenue from taxation of
    Social Security benefits to OASDI trust funds.
•   Does not create contingent liabilities.
•   Contains provision requiring SSA trustees to recommend statutory changes to the
    program in the event of unforeseen deterioration in Social Security solvency.

      1Analysis limited to first order effects on saving. Effects on saving behavior in response to specific   36
      reform provisions are not considered given the lack of expert consensus.




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          Gregg-Kerrey-Breaux-Grassley, S. 1383
             Balancing Adequacy and Equity
•   Reduces current-law benefits by reducing the COLA, reducing “bend” points,
    increasing the NRA, and increasing the benefit computation period. There is a
    further offset based on government contributions to the individual account.
    Current and near-retirees are excluded from the reduction in the COLA.
•   Dependent and survivor benefits could be affected by the changes to the NRA,
    the bend points, the COLA, and the benefit computation period.
•   Disabled worker benefits could be affected by the changes to the bend points
    and the COLA.
•   All workers under the age of 62 are covered by the proposal.
•   Formula changes increase the progressivity of the OASDI benefit structure;
    however, overall progressivity of the system becomes unclear given other
    offsetting changes to the benefit structure. Individual account structure includes
    a government match that decreases with income.
•   There is potential for higher returns on investments; the risk is borne by the
    individual.
•   Workers have some investment choice, subject to certain limitations.
•   The move to advanced funding of Social Security may improve intergenerational
    equity.                                                                    37




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         Gregg-Kerrey-Breaux-Grassley, S. 1383
        Implementing and Administering Reforms

•   Funding for implementation is not explicitly discussed. The bill provides no time
    frames for implementation.
•   There is not enough information to allow an estimate of administrative costs.
•   Financing structure of the system may be difficult to explain.
•   The changes to the benefit structure may be difficult to explain. An education
    program will be necessary.
•   The proposal establishes an Individual Savings Fund Board to oversee fund
    management.




                                                                                             38




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                                     Kasich


• Initial benefits are reduced from current law by indexing them to prices
  rather than wages as under current law.

• At worker’s option, voluntary individual “carve-out” accounts equal to
  between 1 and 3.5 percent of taxable payroll, with higher percentages
  available to lower income earners.

• The transition period is financed by a loan from the general fund to the
  OASDI Trust Fund to ensure a contingency reserve. SSA actuaries
  estimate that if all workers participate in the individual account option, the
  Trust Fund would borrow from 2000 through 2045 and begin repaying in
  2060 as the Trust Fund balance begins to grow.

• For workers choosing the account option, an additional benefit reduction is
  made at retirement to offset contributions to their accounts.


                                                                                            39




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                              Kasich
                  Financing Sustainable Solvency
The effects of the Kasich proposal depend on assumed participation in the individual account
option. SSA’s actuaries analyzed the proposal assuming no participation (Kasich 0%) and
universal participation (Kasich 100%). As illustrated in the following graphs, compared to
No Action, the Kasich proposal:

•    Under Kasich 0%, increases projected unified surpluses over the entire simulation period
     that average about 2 percent of GDP. Under Kasich 100%, projected unified surpluses are
     smaller and deficits larger through 2034; thereafter, projected unified deficits are significantly
     reduced. (Figure 13)
•    Under Kasich 0%, permanently eliminates debt held by the public beginning in 2011 and the
     long-run financial position of the government is significantly improved. Kasich 100% results
     in higher debt held by the public through 2047 and then progressively lower debt levels
     compared to No Action. (Figure 14)
•    Lowers the cost of Social Security as a share of GDP in 2030 by about 1 percentage point--
     about one sixth--under either assumption. Compared to No Action, the proposal cuts the
     cost of the program by slightly more than half by 2074. (Figures 15 and 16)
•    Lowers Social Security spending as a share of federal revenues in 2030 by about 5
     percentage points--a little more than one seventh--under either assumption. In 2074
     program spending would consume about half as much of federal revenues as in No Action--
     or about the same share of federal revenues as today. (Figure 17)
                                                                                                   40




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                                                 Figure 13: Kasich
                                   Unified Deficits/Surpluses as a Share of GDP
                                                                    Eliminate non-Social
                 10.0                                               Security surpluses *
                                                                                                                No action*




                  5.0                                                                                                             Kasich
                                                                                                                              100% participation
Percent of GDP

                  Deficit




                                                                                                                       Long-term on-budget
                                                                                                                             balance
                  0.0
                                                                                                                                    Kasich
                                                                                                                                 0% participation
                  Surplus




                 -5.0
                            1999   2004   2009   2014   2019   2024 2029    2034   2039    2044   2049   2054   2059   2064    2069   2074


                               *Data end when deficits reach 10 percent of GDP.
                                                                                                                                             41




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                                      Figure 14: Kasich
                           Debt Held by the Public as a Share of GDP

                                                                 Eliminate non-Social
                 150                                             Security surpluses *                       No action




                 100
Percent of GDP




                                                                                                              Long-term
                                                                                                          on-budget balance
                  50
                                                                                                                    Kasich
                                                                                                                100% participation

                   0

                                                                                                                   Kasich
                                                                                                                0% participation
                 -50
                       1999 2004 2009 2014 2019 2024 2029 2034 2039 2044 2049 2054 2059 2064 2069 2074




                       *Data end when debt reaches 150 percent of GDP.
                                                                                                                              42




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                        Figure 15: Composition of Spending as a
                            Share of GDP Under No Action and
                      Kasich with No Individual Account Participation
                                   No action
                                                                                      With no participation in individual accounts
                 40                                                        40



                 30                                                        30
Percent of GDP




                         Revenue                                                         Revenue
                 20                                                        20



                 10                                                        10



                  0                                                          0
                      1998          2030          2050            2074               1998          2030           2050           2074

                       Social Security                   Health                  Net interest                All other spending*



                       *All other spending includes offsetting interest receipts in 2030 under no action and in 2030, 2050, and 2074
                       under Kasich 0%.
                                                                                                                                        43




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                  Figure 16: Composition of Spending as a Share of GDP
                             Under No Action and Kasich With
                     100 Percent Participation in Individual Accounts
                                  No action                                         100 percent participation in individual accounts

                 40                                                           40



                 30                                                           30
Percent of GDP




                             Revenue                                                    Revenue
                 20                                                           20



                 10                                                           10



                  0                                                            0
                      1998         2030           2050           2074                  1998           2030           2050           2074

                       Social Security                 Health                 Net interest                 All other spending*

                        *All other spending includes offsetting interest receipts in 2030 under no action and in 2030 under Kasich 100%.
                        Note: Since a payroll tax carve-out reduces revenue, revenue under Kasich 100% is net of the carve-out amount.


                                                                                                                                     44




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                  Figure 17: Social Security Spending as a
                 Share of Total Federal Revenue in 1998 and
                Under No Action and Kasich Reform Proposal
                                    40                                                                    39.0
 Percent of total federal revenue




                                                         32.4                    33.1

                                    30                           27.7   27.4
                                                                                          23.3
                                         20.8                                                    22.2
                                                                                                                    20.1   19.4
                                    20



                                    10



                                     0
                                         1998                   2030                      2050                      2074

                                          No action
                                          Social Security spending with 0% participation in individual accounts
                                          Social Security spending with 100% participation in individual accounts
                                          1998 share
Note: Since a payroll tax carve-out reduces revenue, revenue under Kasich 100% is net of the carve-out amount.
                                                                                                                                  45




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                                Kasich
                    Financing Sustainable Solvency

•   National saving would increase primarily due to the improved fiscal position of
    the government resulting from the proposed benefit reductions. The carve-out
    would increase private saving and decrease government saving with no net
    effect on national saving.1
•   Restores 75-year actuarial balance under either assumption. The Kasich 0%
    produces a trust fund ratio at the end of the 75-year projection period that is
    rising by about 20 percentage points per year. Under the Kasich 100%
    assumption, the trust fund ratio stays at about 100 percent after 2060.
•   Finances individual accounts from payroll taxes. General revenues are loaned to
    the trust fund to make up for the payroll tax revenue redirected to individual
    accounts. Repayment of loan begins in 2060 and extends beyond the 75-year
    period.
•   Does not appear to create new contingent liabilities.
•   Does not appear to contain "safety valves" to control future program growth.
    1Analysis limited to first order effects on saving. Effects on saving behavior in response to specific
    reform provisions are not considered given the lack of expert consensus.                                 46




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                        Kasich
             Balancing Adequacy and Equity

•   Reduces current-law benefits by reducing the rate of growth in the OASDI benefit
    level. A further reduction of OASDI benefits is proposed for workers who opt for an
    individual account. Near-retirees are not affected by the changes unless they
    choose an individual account.
•   The reduction in the rate of growth of OASDI benefit levels would affect disabled,
    dependent, and survivor benefits, although reductions for disabled workers would
    be smaller.
•   All workers born in 1946 or later are covered by the proposal.
•   The progressivity of the OASDI benefit structure should remain unchanged. The
    proposal allows for individual contributions of between 1% and 3.5% depending on
    income level.
•   There is potential for higher returns on investments; the risk is borne by the
    individual.
•   Workers have some investment choice, subject to certain limitations.
•   The move to advanced funding of Social Security may improve intergenerational
    equity.                                                                     47




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                        Kasich
        Implementing and Administering Reforms

•   Funding for implementation is not explicitly discussed. The proposal provides
    no time frames for implementation.
•   There is not enough information to allow for an estimate of administrative costs.
•   Financing structure of the system through a general fund loan may be difficult to
    explain.
•   Changes to the benefit structure may be difficult to explain. An education
    program will be necessary.
•   The proposal does not address the issue of preventing politically motivated
    investing.




                                                                                             48




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       President’s Social Security Transfer Proposal and
                         USA Proposal
Universal Savings Accounts (USAs) considered separate from Social Security.1
                                              2
Social SecurityTransfer Proposal:

•      No change in current-law benefit.

•      Additional financing from general revenues. General fund transfers to OASDI
       begin in 2011 and continue through 2044. These transfers would make some
       currently implicit future Social Security funding obligations explicit.

USA Proposal:

•      Individual accounts proposed, with workers receiving a flat annual general tax
       credit of a maximum of $300 annually and a 50-100% match on voluntary
       contributions. Both the credit and the matching rate would be reduced or
       eliminated for higher income earners. According to administration statements,
       total voluntary contributions could not exceed $1,000 annually, including
       government match.1

•       Finances USAs and government match of voluntary contributions from general
        revenues by means of income tax credits.1
    Information in this sentence is based on administration statements made on April 14, 1999.
1

2
                                                                                                                49
    The Strengthen Social Security and Medicare Act of 1999, transmitted to the Congress on October 26, 1999.




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    President's Social Security Transfer Proposal and
                      USA Proposal
            Financing Sustainable Solvency
As illustrated in the following graphs, compared to No Action, the
President’s Social Security transfer proposal would:

•   Have no impact on projected unified surpluses or deficits. (Figure 18)

•   Have no impact on debt held by the public. (Figure 19)

•   Have no effect on Social Security spending as a share of GDP or
    federal revenues. (Figures 20 and 21)

In general, compared to No Action, the President’s USA proposal would:

•   Reduce projected unified surpluses and increase projected unified
    deficits.

•   Increase debt held by the public.


                                                                                           50




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Figure 18: President’s Social Security Transfer Proposal
                    (Excluding USAs)
      Unified Deficits/Surpluses as a Share of GDP
                                                              Eliminate non-Social
                 10                                           Security surpluses *                      President’s Social
                                                                                                        Security transfer
                                                                                                            proposal*
                                                                                                                           No action*


                  5
Percent of GDP

                  Deficit




                                                                                                                             Long-term
                                                                                                                         on-budget balance
                  0
                  Surplus




                 -5
                      1999   2004   2009    2014   2019    2024   2029    2034   2039    2044   2049    2054   2059    2064   2069    2074

                      *Data end when deficits reach 10 percent of GDP.
                      Note: As noted in the text, the President’s Social Security transfer proposal follows the no action path. Analysis is
                      limited to the effects of the President’s proposal for general revenue transfers to the OASDI trust funds. Sufficient   51
                      data were unavailable to incorporate effects of the proposed USAs.




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                         Figure 19: President’s Social Security
                          Transfer Proposal (Excluding USAs)
                        Debt Held by the Public as a Share of GDP

                                                                 Eliminate non-Social
                 150                                             Security surpluses *                  President’s Social
                                                                                                       Security transfer
                                                                                                           proposal
                                                                                                                             No action
                 100
Percent of GDP




                                                                                                                     Long-term
                                                                                                                 on-budget balance
                 50




                   0




                 -50
                    1999 2004 2009 2014 2019 2024 2029 2034 2039 2044 2049 2054 2059 2064 2069 2074

                  *Data end when debt reaches 150 percent of GDP.
                  Note: As noted in the text, the President’s Social Security transfer proposal follows the no action path. Analysis
                  is limited to the effects of the President’s proposal for general revenue transfers to the OASDI trust funds.
                  Sufficient data were unavailable to incorporate effects of the proposed USAs.                                        52




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                                                           Evaluating Social Security Reform Proposals




                                Figure 20: Composition of Spending as a
                                     Share of GDP in 1998 and Under
                               No Action and the President’s Social Security
                                   Transfer Proposal (Excluding USAs)
                                          No action                                               President's Social Security transfer proposal
                 40                                                                    40


                 30                                                                    30
Percent of GDP




                               Revenue                                                         Revenue
                 20                                                                    20


                 10                                                                    10


                  0                                                                      0
                            1998           2030          2050           2074                     1998          2030           2050           2074

                                   Social Security                   Health                   Net interest                  All other spending*


                      *All other spending includes offsetting interest receipts in 2030 under no action and the President’s transfer proposal.
                      Note: Analysis is limited to the effects of the President’s proposal for general revenue transfers to the OASDI trust funds.
                      Sufficient data were unavailable to incorporate effects of the proposed USAs.                                                53




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                                                    Appendix I
                                                    Evaluating Social Security Reform Proposals




  Figure 21: Social Security Spending as a Share of
      Total Federal Revenue in 1998 and Under
    No Action and the President’s Social Security
         Transfer Proposal (Excluding USAs)
                                                                                                        39.0      39.0
                                       40

                                                              32.4          32.4   33.1      33.1
    Percent of total federal revenue




                                       30

                                            20.8
                                       20



                                       10



                                        0
                                            1998                     2030                 2050                 2074


                                            1998 share                No action    President’s Social Security transfer proposal

Note: Analysis is limited to the effects of the President’s proposal for general revenue transfers to the OASDI trust funds.
Sufficient data were unavailable to incorporate effects of the proposed USAs.
                                                                                                                               54




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                        Appendix I
                        Evaluating Social Security Reform Proposals




    President's Social Security Transfer Proposal and
                      USA Proposal
            Financing Sustainable Solvency
Social Security Transfer Proposal:


•    Does not address sustainable solvency. Reduces the OASDI trust
     funds’ actuarial deficit by 0.91 percent of taxable payroll but does not
     restore 75-year actuarial balance. According to the SSA actuaries, the
     proposal extends the solvency of the trust funds until 2050.

•    Uses general revenue to pay a portion of current-law benefits and
     extend trust fund solvency.

•    Does not create contingent liabilities.

•    Contains no new "safety valves" to control future program growth.


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                                 Appendix I
                                 Evaluating Social Security Reform Proposals




    President's Social Security Transfer Proposal and
                      USA Proposal
            Financing Sustainable Solvency
USA Proposal:


•    General tax credit for Universal Saving Accounts (USAs) would
     increase private saving and reduce government saving with no net
     effect on national saving. The incentive provided by the government
     match of voluntary contributions to USAs could result in some increase
     in national saving.1

•    Finances USAs and government match of voluntary contributions from
     general revenues by means of income tax credits.




1Analysis limited to first order effects on saving. Effects on saving behavior in response to specific
reform provisions are not considered given the lack of expert consensus.
                                                                                                         56




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                        Appendix I
                        Evaluating Social Security Reform Proposals




    President's Social Security Transfer Proposal and
                      USA Proposal
            Balancing Adequacy and Equity
Social Security Transfer Proposal:


•   Maintains current-law benefits for current and future retirees, including low-
    income workers and others most reliant on Social Security.

•   There are no changes to disabled, dependent, or survivor benefits.

•   No change from the current OASDI structure in the way workers are
    covered.

•   No change in the progressivity of the OASDI benefit structure.

•   Does not address intergenerational equity issues.



                                                                                            57




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                            Appendix I
                            Evaluating Social Security Reform Proposals




        President's Social Security Transfer Proposal and
                          USA Proposal
                Balancing Adequacy and Equity
USA Proposal:

•   A USA is established for each worker with family earnings of at least
    $5,000 annually.1

•   Progressivity is built into the USA structure through a government match.
    Low-income workers get a one-to-one match to their contributions, while
    higher income workers receive a lower percentage match or none at all.1

•   Individuals would earn market returns but would bear the risk.

•   Workers have some investment choice, subject to certain limitations.

•   To the degree that USAs increase individual retirement savings,
    intergenerational equity may improve.

    Information in this sentence is based on administration statements made on April 14, 1999.
    1

                                                                                                 58




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                        Appendix I
                        Evaluating Social Security Reform Proposals




    President's Social Security Transfer Proposal and
                      USA Proposal
        Implementing and Administering Reforms
Social Security Transfer Proposal:


•    No new implementation costs for the current Social Security program.

•    Current Social Security program has administrative costs of less than
     1% of benefit outlays.

•    Financing structure of the transfer proposal may be difficult to explain.

•    Benefits structure of Social Security does not change.




                                                                                            59




                        Page 64                          GAO/AIMD/HEHS-00-29 Social Security Reform Proposals
                       Appendix I
                       Evaluating Social Security Reform Proposals




    President's Social Security Transfer Proposal and
                      USA Proposal
        Implementing and Administering Reforms
USA Proposal:


•    The USA proposal does not discuss funds for implementation.

•    There is not enough information to allow an estimate of USA
     administrative costs.

•    An education program will be necessary to explain the contribution and
     matching funds structure of the USA.

•    Not enough information to assess whether the USA proposal would
     address the issue of preventing politically motivated investing.



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                        Appendix I
                        Evaluating Social Security Reform Proposals




     Evaluating Social Security Reform Proposals
                     Conclusion


• A proposal’s ability to achieve and sustain solvency is sensitive to economic
  and budgetary assumptions.

• All proposals present trade-offs between unified budget results and benefit
  levels.

• Proposals that guarantee benefits place the risk of financing those benefits on
  the government. Proposals that provide more choice and control to individuals
  may place individual benefits at greater financial risk.

• In any reform proposal, attention must be paid to the impact on poverty among
  the elderly.

• None of the proposals fully address implementation and administrative issues.



                                                                                            61




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                                                                 Appendix I
                                                                 Evaluating Social Security Reform Proposals




                                             Attachment I: No Action Model Assumptions

                    Model Inputs                                                                       Assumptions
                    Unified surplus/deficit                                                            CBO through 2008; GAO simulations thereafter
                    Social Security spending (OASDI)                                                   1999 Social Security Trustees’ Intermediate
                                                                                                       projections
                    Medicare spending (HI and SMI)                                                     1999 Medicare Trustees’ Intermediate projections
                    Medicaid spending                                                                  CBO’s projections
                    Other mandatory spending                                                           CBO’s assumed levels through 2008; thereafter,
                                                                                                       increases at the rate of economic growth
                                                                                                       (i.e., remains constant as a share of GDP)
                    Discretionary spending                                                             CBO through 2008; thereafter, increases at the rate
                                                                                                       of economic growth
                    Receipts                                                                           CBO’s assumed levels through 2008; in subsequent
                                                                                                       years, receipts held constant at 21.1% of GDP
                                                                                                       (ratio) in 2008
                    Saving rate: gross saving of the private sector and                                17.4%
                    state and local government sector
                    Share of gross national saving that flows abroad                                   33.3%
                    Labor: growth in hours worked                                                      1999 Social Security Trustees’ Intermediate
                                                                                                       projections
                    Total factor productivity growth                                                   1.1%
                    Inflation (GDP price index)                                                        CBO through 2009; 1.9% thereafter (CBO’s
                                                                                                       projection in 2009)
                    Interest rate (average on the national debt)                                       Average rate implied by CBO’s interest payment
                                                                                                       projections through 2008; 5.6% thereafter (CBO’s
                                                                                                       implied rate in 2008)
                   Note 1: These assumptions apply to our base simulation, no action. For alternative fiscal policy simulations, certain assumptions are varied, which are
                   noted in the discussion of the alternative paths.
                   Note 2: In our work, all CBO budget projections were converted from a fiscal year to a calendar year basis. The last year of CBO’s projection period is fiscal
                   year 2009, permitting the calculations of calendar year values through 2008.

                                                                                                                                                                                    62




(935328/207079/935339)        Leter                              Page 67                                                 GAO/AIMD/HEHS-00-29 Social Security Reform Proposals
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