Page 1 GAO-05-649R 

May 6, 2005 

The Honorable Bill Thomas 

Chairman 

Committee on Ways and Means 

House of Representatives 

Subject: Options for Social Security Reform

Dear Mr. Chairman: 

As you requested during my testimony before your committee on March 9, 

2005,1

 this report provides a list of the various options available to reform 

the Social Security program. Following this introduction is a table that 

lists a wide range of provisions that various proposals have used in some 

form. Following the table is a list of such proposals, all of which have been 

scored by the Social Security Administration’s Office of the Chief Actuary 

(SSA/OCACT).2

Our list of provisions is intended to be generic and conceptual in nature. 

The list attempts to reflect, in general terms, all provisions that have 

appeared in SSA-scored proposals in the past few years. For each generic 

provision, a variety of approaches and parameters could be applied and 

have been proposed. For example, provisions to raise the retirement age 

take a variety of forms, including simply speeding up the currently 

scheduled increase from age 65 to 67, increasing the full retirement age to 

68 or 70, indexing the retirement age to improvements in longevity, and 

even combinations of these. All of these variations have been consolidated 

into one general provision for increasing the retirement age. 

The table also briefly discusses each reform option in general terms 

according to GAO’s framework for evaluating Social Security reform 

proposals, which is described below. Our observations draw on GAO’s 

 1

GAO, Social Security Reform: Early Action Would Be Prudent. GAO-05-397T. 

Washington, D.C.: March 9, 2005. 

2

These actuarial scorings can be found at http://www.ssa.gov/OACT/solvency/index.html. 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-05-649R 

extensive body of work evaluating various aspects of Social Security 

reform.3

The Social Security program is so deeply woven into the fabric of our 

nation that any proposed reform should be considered as a package and 

with respect to all of the major elements of the Social Security program 

(e.g., retirement, disability, and survivors). The provisions of any 

particular reform proposal can interact with one another. In addition, 

every proposal will have pluses and minuses, and no plan will satisfy 

everyone on all dimensions. As a result, Social Security reform proposals 

should be evaluated as a package of reform options designed to meet 

certain stated objectives. 

Furthermore, any analyses of reform proposals should reflect the fact that 

the program faces a long-term actuarial deficit and that benefit reductions 

and/or revenue increases will be necessary to restore solvency. Therefore, 

it is important to establish the appropriate comparisons or benchmarks 

against which reforms should be measured. This requires looking at 

proposed reforms from at least two benchmarks—one that raises revenue 

to fund currently scheduled benefits (promised benefits) and one that 

adjusts benefits to a level supported by current tax financing (funded 

benefits). 

GAO’s framework for evaluating reform proposals considers not only 

solvency but other aspects of the program as well. Specifically, the 

framework uses three basic criteria: 

• the extent to which a proposal achieves sustainable solvency and how 

it would affect the economy, including overall savings rates, and the 

federal budget; 

• the relative balance struck between the goals of individual equity (rates 

of return on individual contributions) and income adequacy (level and 

certainty of benefits); and 

• how readily a proposal could be implemented, administered, and 

explained to the public. 

 3

A list of GAO reports on Social Security is included at the end of this report. In these 

reports, you can find more detailed discussions about more specific proposals than the 

generic options listed in this report. All of the reports are available at http://www.gao.gov/. 
Page 3 GAO-05-649R 

The weight that different policy makers may place on different criteria will 

vary, depending on how they value different attributes. For example, if 

policy makers determine that offering individual choice and control is a 

primary concern, then a reform proposal emphasizing individual equity 

considerations might be preferred. Alternatively, if policy makers 

determine that benefit certainty and security are of primary concern, then 

reform proposals that stress adequacy and sustainable solvency might be 

preferred. As the Congress fashions a comprehensive proposal, however, 

it will ultimately have to consider the relative importance it places on each 

of these criteria. 

Our sustainable solvency standard encompasses several ways of looking at 

the Social Security program’s financing needs. While 75-year actuarial 

balance is generally used in evaluating the long-term financial outlook of 

the Social Security program and reform proposals, it is not sufficient in 

gauging the program’s solvency after the 75th year. For example, under the 

trustees’ intermediate assumptions, each year the 75-year actuarial period 

changes, and a year with a surplus is replaced by a new 75th year that has 

an increasingly significant deficit. As a result, changes made to restore 

trust fund solvency only for the 75-year period can result in future 

actuarial imbalances almost immediately. Reform plans that lead to 

sustainable solvency would be those that consider the broader issues of 

fiscal sustainability and affordability over the long term. Specifically, a 

standard of sustainable solvency also involves looking at (1) the balance 

between program income and costs beyond the 75th year and (2) the share 

of the budget and economy consumed by Social Security spending. 

The current Social Security system’s benefit structure attempts to strike a 

balance between the goals of retirement income adequacy and individual 

equity. From the beginning, benefits were set in a way that focused 

especially on replacing some portion of workers’ pre-retirement earnings. 

Over time other changes were made that were intended to enhance the 

program’s role in helping ensure adequate incomes. Income adequacy, 

therefore, is addressed in part through the program’s progressive benefit 

structure, providing proportionately larger benefits to lower earners and 

certain household types, such as those with dependents. Income adequacy 

may pose special concerns for Social Security’s disability and survivor 

beneficiaries. Such beneficiaries generally have lower benefits than oldage beneficiaries; shorter work histories may contribute to those lower 

benefit levels. In addition, since they generally start collecting benefits 

earlier in their lives than old-age beneficiaries, they may collect benefits 

Financing Sustainable 

Solvency 

Balancing Adequacy 

and Equity 
Page 4 GAO-05-649R 

over longer periods of time, so benefit reductions may affect them more, 

especially if the reductions have a compounding effect. 

In contrast to income adequacy, individual equity refers to the relationship 

between contributions made and benefits received. This can be thought of 

as the rate of return on individual contributions. Individual equity 

concerns can also include equity effects between generations and how 

much choice and control individuals have over their program 

contributions. 

Balancing the seemingly conflicting objectives of adequacy and equity 

through the political process has resulted in the design of the current 

Social Security program and should still be taken into account in any 

proposed reforms. Moreover, proposals can have a range of effects that 

vary by income level and other characteristics, and this variation may 

reflect interactions among various provisions. For example, some 

proposals reduce promised benefits overall while simultaneously 

enhancing benefits for low earners or widows, who face greater risks of 

poverty.4

Any reforms will require time and resources to implement, and those 

demands will depend on the complexity of the changes. Moreover, greater 

program complexity makes implementation and administration more 

costly and harder to explain to the public. Continued public acceptance of 

and confidence in the Social Security program requires that any reforms 

and their implications for benefits be clearly communicated and well 

understood. This means that the American people must understand why 

change is necessary, what the reforms are, how they are to be 

implemented and administered, and how they will affect workers’ own 

retirement, disability, or survivors’ income. All reform proposals will 

require some additional outreach and assistance to the public so that 

future beneficiaries can adjust their retirement and other financial 

planning accordingly. The more transparent the implementation and 

administration of reform, and the more carefully such reform is phased in, 

the more likely it will be understood and accepted by the American 

people. 

 4

GAO, Social Security: Distribution of Benefits and Taxes Relative to Earnings Level. 

GAO-04-747. Washington, D.C.: June 15, 2004. 

Implementing and 

Administering 

Proposed Reforms 
Page 5 GAO-05-649R 

As you know, the Social Security system faces serious solvency and 

sustainability challenges in the longer term. While the Social Security 

program does not face an immediate crisis, it does have a $4 trillion gap 

between promised and funded benefits in current dollar terms over the 

next 75 years. This gap is growing as time passes, and given this and other 

major fiscal challenges, including expected growth in federal health 

spending, it would be prudent to act sooner rather than later to reform the 

Social Security program. 

Furthermore, Social Security’s finances have important implications for 

the overall federal budget. The current Social Security surpluses will begin 

to decline in 2009, thereby putting additional pressure on the balance of 

the federal budget. In addition, Social Security will start running a cash 

flow deficit in 2017, which will require the federal government to either 

increase federal taxes, cut other federal spending, or borrow additional 

funds from the public in order to redeem bonds in the Social Security trust 

funds. 

Social Security is not the only challenge we face in addressing the 

economic security needs of our elderly and disabled populations. Any 

changes to Social Security should be considered in the context of the 

problems currently facing our nation’s private pension system. These 

include the chronically low levels of pension coverage of the private sector 

workforce; the continued decline in the number of defined benefit plans, 

coupled with the termination of large underfunded plans by bankrupt 

firms; and the shift by employers to defined contribution plans, where 

workers face the potential for greater return but also assume greater 

financial risk. Health care and long-term care needs will also place 

growing demands on the government, employers, beneficiaries, and their 

families. At the same time, our nation’s personal savings rate is low by 

international standards. 

Failure to take steps to address our large and structural long-range fiscal 

imbalance, which is driven in large part by projected increases in 

Medicare, Medicaid, and Social Security spending, will ultimately have 

significant adverse consequences for our future economy and the quality 

of life of our children, grandchildren, and future generations of Americans. 

As a result, the federal government needs to engage in a fundamental 

review, reassessment, and reprioritization that will ultimately have to span 

all major spending programs and tax policies. 
Page 6 GAO-05-649R 

We look forward to continuing to work with your committee and the 

Congress to address Social Security and other important issues. 

David M. Walker 

Comptroller General 

of the United States 
Page 7 GAO-05-649R 

Table 1: Options for Social Security Reform and Examples of Potential Implications 

Options Sustainable solvency 

Balancing adequacy and 

equity 

Implementation and 

administration 

Additional 

considerations 

Changing benefits • Effects can vary by 

earnings and other 

characteristics 

• Some proposals reduce 

benefits overall while 

enhancing benefits for 

low earners and/or 

widows 

• Choosing benefit 

reductions instead 

of increases to 

payroll tax 

revenues implies a 

societal choice 

that workers will 

have less income 

during retirement 

and more during 

working years 

• Changing the formula for initial benefits 

• Adjusting formula factors5

e.g., reducing 15% factor to 

10%, or, alternatively, 

reducing all factors 

proportionally by x percent 

• Can range from small 

to very large 

reductions in Social 

Security’s actuarial 

deficit 

• Sustainability might 

require further 

reductions, for 

example, as longevity 

continues to improve 

• Reductions can be 

either proportional or 

nonproportional 

• Nonproportional 

reductions could be 

targeted toward benefit 

adequacy for lower 

earners but might raise 

equity concerns 

- Progressive 

 benefits not the 

 same as 

 adequate benefits6

- To avoid unintended 

 benefit effects, 

 disability and 

 survivor benefits 

 might require other 

 changes 

• Relies on existing 

administrative 

framework 

• Disability 

applications might 

increase because 

annual formula 

reductions create 

incentive to qualify 

for benefits in 

earliest possible 

year 

• Provides flexibility 

• Can be used, in 

effect, to 

implement other 

types of reductions 

for some or all 

covered workers, 

e.g., indexing 

benefits to prices 

instead of wages. 

 5

When workers retire, become disabled, or die, Social Security uses their lifetime earnings 

records to determine their Primary Insurance Amount (PIA), on which initial monthly 

benefits are based. The PIA is determined by applying the Social Security benefit formula 

to a worker’s Average Indexed Monthly Earnings (AIME). The AIME is determined by 

taking the lifetime earnings record, indexing it to average wage growth, and taking the 

average. For workers who become eligible for benefits in 2005, PIA equals 90 percent of the 

first $627 dollars of AIME plus 32 percent of AIME over $627 through $3,779 dollars of 

AIME plus 15 percent of AIME above $3,779. 

6

Under some reform scenarios, Social Security could distribute benefits more progressively 

than current law yet provide lower, less adequate benefits. 
Page 8 GAO-05-649R 

Options Sustainable solvency 

Balancing adequacy and 

equity 

Implementation and 

administration 

Additional 

considerations 

• Indexing formula to prices 

instead of wages 

• Could largely or 

completely eliminate 

actuarial deficit by 

itself, depending on 

specifics 

• Ongoing indexing 

could result in benefit 

reductions greater 

than needed to 

achieve sustainable 

solvency 

• If applied across the 

board, would be a type 

of proportional reduction

• Results in gradually and 

perpetually declining 

replacement rates; that 

is, benefits would 

replace smaller and 

smaller percentage of 

pre-retirement earnings 

• In effect, fixes benefit 

levels relative to the 

standard of living of a 

particular year (e.g., 

2005)7

• Effect may be smaller 

on disabled and young 

survivor beneficiaries, 

given shorter work 

histories 

• Could be applied 

differently according to 

earnings level to 

minimize adequacy 

effects (e.g. progressive 

indexing) 

• Could be 

implemented with 

changes to existing 

benefit formula, 

using existing 

administrative 

framework8

• Disability 

applications might 

increase because 

annual formula 

reductions create 

incentive to qualify 

for benefits in 

earliest possible 

year 

• Indexing formula to longevity • Small to moderate 

reduction in actuarial 

deficit, depending on 

specifics 

• A type of proportional 

reduction 

• Benefits would replace 

smaller and smaller 

percentage of preretirement earnings 

• To avoid unintended 

benefit effects, disability 

• Could be 

implemented with 

proportional 

reduction to 

formula factors, 

using existing 

administrative 

framework9

• Disability

 7

When wages grow faster than prices, workers can afford to consume more goods and 

services, their purchasing power increases, and the standard of living improves. 

Historically, wages have grown faster than prices, on average. Since Social Security’s 

current benefit formula is indexed to wages, increases in initial benefits keep pace with 

improvements in the standard of living. Indexing benefits to prices instead of wages would 

make the purchasing power of benefits remain constant even if wage growth were 

improving purchasing power for the rest of society. 

8

In its scorings, SSA/OCACT implements this provision using changes to the PIA benefit 

formula. 

9

In its scorings, SSA/OCACT implements this provision using a proportional reduction to 

the benefit formula factors. 
Page 9 GAO-05-649R 

Options Sustainable solvency 

Balancing adequacy and 

equity 

Implementation and 

administration 

Additional 

considerations 

and survivor benefits 

might require other 

changes 

applications might 

increase because 

annual formula 

reductions create 

incentive to qualify 

for benefits in 

earliest possible 

year 

• Increasing benefit computation 

period, e.g., from 35 to 38 or 

40 years. 

• Relatively small 

reduction in actuarial 

deficit 

• Would parallel existing 

increase in Full 

Retirement Age 

• Might create additional 

incentive to work longer 

• Increase to 38 years 

would reduce benefits 

by roughly 3%-6% 

depending on earnings 

pattern 

• Largest reductions for 

those groups more likely 

to have intermittent 

work histories, e.g., 

women with children 

• Relies on existing 

administrative 

framework 

• Increasing benefits for 

widow(er)s, e.g., pay 75% of 

couples’ benefit 

• Very small increase in 

actuarial deficit 

• Enhances benefit 

adequacy for widows 

• Relies on existing 

administrative 

framework 

• Enhancing benefits for lower 

income workers, e.g., 

minimum benefit amounts as 

percentage of poverty for 

qualifying workers 

• Small increase in 

actuarial deficit, 

depending on 

proposal 

• Enhances benefit 

adequacy for low-wage 

full-career workers 

• Qualifications for years 

of work could be scaled 

for workers who 

become disabled or die 

before retirement. 

• Proposals so far 

generally do not provide 

enhanced benefit for 

those groups more likely 

to have intermittent 

work histories, e.g., 

women with children 

• Proposed 

provisions have 

involved fairly 

complicated 

formulas 

• Increasing actuarial 

adjustment factors for early or 

delayed retirement 

• On balance, small 

reduction in actuarial 

deficit 

• Increasing delayed 

retirement credit 

would slightly 

increase actuarial 

deficit 

• Currently, earnings after 

retirement have small 

effect on benefit 

amounts 

• Increasing reductions 

for early retirement may 

affect adequacy 

• Relies on existing 

administrative 

framework 

• Would increase 

incentives to work 

longer, which 

could help reduce 

overall fiscal 

pressures on 

federal budget 
Page 10 GAO-05-649R 

Options Sustainable solvency 

Balancing adequacy and 

equity 

Implementation and 

administration 

Additional 

considerations 

• Modifying annual cost-of-living 

adjustments (COLAs) to 

benefits, e.g., reducing by 0.5 

or 1.0 percentage points 

• Moderate to large 

reduction in actuarial 

deficit 

• Would have increasing 

cumulative effect over 

additional years benefits 

are received 

• Greatest potential 

adverse effect on 

oldest, disabled, and 

survivors, who are at 

higher risk of poverty 

• Relies on existing 

administrative 

framework 

• Adjustment could 

more accurately 

reflect inflation 

• Increasing full retirement age, 

e.g., eliminating hiatus in 

current increase, increase to 

age 68 or 70 

• Depending on 

provision, small to 

moderate reduction in 

actuarial deficit 

• Largely the same, in 

effect, as proportional 

benefit reduction, 

especially if early 

retirement age remains 

at 62 

• Workers in certain 

occupations (e.g., 

construction) may not 

be able to work longer 

and have to take benefit 

reductions, though other 

program changes could 

address this concern 

• Relies on existing 

administrative 

framework 

• Increasing full 

retirement age 

could increase 

disability 

applications 

• Would reflect 

increasing 

longevity, which is 

a contributor to 

insolvency 

• Raises question of 

whether to also 

increase early 

retirement age 

(now 62), which 

would encourage 

individuals to work 

longer 

Changing revenues • May have adverse 

labor supply and 

growth effects, 

depending on amount 

and design 

• Distributional effects 

depend on approach to 

increase 

• Choosing 

increases to 

payroll tax 

revenues instead 

of benefit 

reductions implies 

a societal choice 

that workers will 

have less income 

during working 

years and more 

during retirement 

• Raising payroll tax revenues 

• Increasing payroll tax rate • Effect on actuarial 

deficit depends on 

size of increase 

• Increase of 1.92 

percentage points 

would achieve 

75-year solvency, but 

76th year would lead 

• The sooner it applies, 

the greater the 

intergenerational equity, 

since earlier birth 

groups enjoy higher 

implicit returns 

• Would help avoid 

benefit reductions 

• Relies on existing 

administrative 

framework 

 10The payroll tax is regressive due to the cap on taxable earnings even though the tax rate is 

itself proportional. 
Page 11 GAO-05-649R 

Options Sustainable solvency 

Balancing adequacy and 

equity 

Implementation and 

administration 

Additional 

considerations 

back to an actuarial 

deficit 

• - Regressive nature of 

 tax10 falls more heavily 

 on low wage workers 

 and their employers 

• Raising cap on taxable 

earnings (with or without 

retaining cap for benefit 

calculation) 

• Effects range from 

small to more than 

eliminating actuarial 

deficit 

• If higher earnings 

would also be used in 

benefit computations, 

would also increase 

long-term benefit 

payouts, but at lowest 

replacement rate 

(15 percent) 

• Increase could make 

percentage of earnings 

covered more 

comparable to historical 

levels 

• Diminishes equity 

because earnings 

above the cap are 

replaced at lower rate 

than lower earnings 

levels 

• Burden falls on those 

6 percent of covered 

workers with earnings 

above present cap, 

especially those who 

are self-employed or 

small business owners, 

who effectively pay both 

employer and employee 

share. 

• Relies on existing 

administrative 

framework 

• Would increase 

incentives for 

higher earners to 

structure more of 

their 

compensation as 

nonwage income, 

(e.g., other 

benefits, stock 

options) 

• Expanding coverage to all 

state and local government 

workers 

• Small reduction in 

actuarial deficit 

• Would also increase 

long-term benefit 

levels as newly 

covered earnings 

would entitle affected 

workers to associated 

benefits 

• Would improve equity in 

the sense that all 

workers would be 

treated the same 

• Social Security may 

offer employees 

additional protections 

compared with their 

current benefit 

packages, depending 

on how those packages 

change 

• Would simplify 

administration and, 

in long run, address 

equity concerns 

arising from GPO 

and WEP11

• Affected state and 

local governments 

and employees 

would need time to 

adjust and to 

implement 

complementary 

changes 

• May impose 

additional costs on 

state and local 

governments 

 11The Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP) are 

existing Social Security provisions that reduce Social Security benefits for those who also 

receive pensions from employment that is not covered by Social Security. Noncovered 

workers do not pay Social Security taxes on their noncovered earnings. These provisions 

are intended to treat such beneficiaries in a manner that parallels treatment of beneficiaries 

who paid Social Security taxes on all their lifetime earnings. See GAO, Social Security: 

Issues Relating to Noncoverage of Public Employees. GAO-03-710T. Washington, D.C.: 

May 1, 2003. 
Page 12 GAO-05-649R 

Options Sustainable solvency 

Balancing adequacy and 

equity 

Implementation and 

administration 

Additional 

considerations 

• Other revenue options 

• Tapping other revenue 

sources, e.g., general fund 

transfers, dedicated revenue 

sources 

• Effect on actuarial 

balance depends 

upon the size and use 

of transfers 

• General fund 

transfers raise 

government’s need 

for cash, which must 

be raised with 

spending cuts, tax 

increases or 

borrowing from the 

public. 

• Would compete with 

other programs or tax 

reductions in the 

general budget 

• Could worsen longrange fiscal 

imbalance 

• Could change equity of 

program significantly but 

in ways that are hard to 

quantify 

• Given current and 

projected budget 

deficits, transfers likely 

to result in additional tax 

burdens in future years 

• Difficult to determine 

who bears burden of 

transfers 

• Dilutes principle 

that program is 

self-financed, 

which 

- imposes 

 discipline that 

 benefits cannot 

 expand beyond 

 what dedicated 

 revenues can 

 pay for 

- since benefits 

 are “paid for,” 

 avoids stigma 

 that they are 

 welfare 

• Introduction of 

general fund 

transfers could 

lead to 

incremental 

enhancement of 

benefits 

• Could increase 

political risk of 

future benefit 

reductions 

• Change taxation of Social 

Security benefits, e.g., tax 

them in a manner similar to 

private pension income, that 

is, tax benefits that exceed 

contributions 

• Small reduction in 

actuarial deficit 

• Would parallel treatment 

of other retirement 

income 

• Given other existing tax 

provisions, roughly a 

third of Social Security 

beneficiaries would still 

not pay income tax on 

their benefits 

• Administration may 

be manageable 

with phase-in 

• Increasing investment returns, 

either by government investing 

or through individual accounts 

• Potential effect 

depends on size of 

trust funds, extent of 

advanced funding, 

portfolio, and fees 

• Investing trust fund 

surplus would 

increase government 

borrowing needs and 

debt held by the 

public 

• Increasing returns 

improves equity 

• Effect on adequacy 

depends on how risk is 

distributed 

• Administration is 

likely manageable, 

depending on 

approach 

• Could be done 

either by trust 

funds or through 

individual 

accounts 

• Trust fund 

investment raises 

concern about role 

of government in 

investment 

markets, though 

some approaches 

may mitigate that 
Page 13 GAO-05-649R 

Options Sustainable solvency 

Balancing adequacy and 

equity 

Implementation and 

administration 

Additional 

considerations 

concern 

Changing the program 

structure with individual 

accounts 

• Would not achieve 

solvency unless 

coupled with other 

changes 

• Would move system 

toward more advance 

funding 

• Effect on national 

saving depends on a 

variety of factors, 

including how the 

accounts are funded; 

increases in personal 

saving may be offset 

by increases in 

government or 

personal borrowing or 

reductions in other 

personal savings 

• Would generally 

improve equity 

• With higher returns, 

might help make up for 

benefit reductions used 

to achieve solvency 

• Shifts system from 

social insurance to 

individual responsibility 

for saving 

• Shifts program from an 

exclusively definedbenefit structure 

• Redistributes risk 

• If market returns are 

poor, would raise 

adequacy risks 

• By adding new 

system, involves 

more complexity 

and cost, including 

services for 

- collection of 

 deposits 

- account 

 administration 

- investment 

 management 

- distribution in 

 retirement 

- educational efforts 

 relating to all 

phases 

• Posting 

contributions to 

individuals’ 

accounts in real 

time might be 

expected but much 

more difficult than 

current record 

keeping 

• Depending on 

approach, 

government, 

employers, 

financial 

institutions, and 

individuals could 

play various roles 

in contribution, 

accumulation, and 

distribution phases

• Could provide 

additional saving 

vehicle for those 

without a pension 

• Contribution phase 

• A voluntary approach would (in 

comparison to a mandatory 

one) 

• Raise question of 

whether incentives 

are desired 

• Possibly pose 

adverse selection 

issues 

• Give greater choice • Require greater 

level of educational 

effort 

• Require additional 

administrative 

complexity and cost 

• Account contribution rate • Contribution rates can 

be proportional or 

progressive 

• Size of 

contribution rate 

determines 

relative role of DC 

vs. DB portion of 

program 
Page 14 GAO-05-649R 

Options Sustainable solvency 

Balancing adequacy and 

equity 

Implementation and 

administration 

Additional 

considerations 

• Add-on vs. carve-out12 • Carve-outs pose 

transition costs, which 

are typically financed 

with general revenue 

transfers (see above)

• Either option, if using 

general revenues, 

would raise 

government’s need 

for cash, and without 

compensating 

elements, compound 

fiscal challenges 

• Carve-outs divert 

revenues from current 

system, involve 

commensurate offsets 

to Social Security 

defined benefit, while 

offering ownership of 

new account 

• Add-ons or carveouts could build on 

existing IRA, 

401(k), 403(b), 457, 

Thrift Savings Plan, 

and other defined 

contribution 

systems 

• Carve-outs require 

additional, 

potentially 

complicated, 

calculations for 

benefit offsets 

• Accumulation phase 

• Investment options • For workers who 

become disabled or die, 

less time to accumulate 

compound earnings; 

also, some proposals 

limit their access to 

accounts before 

retirement age 

• Limiting investment 

alternatives may 

minimize 

administrative 

costs, promote 

diversification (by 

limiting ability to 

concentrate), and 

simplify individual 

decision making 

while also reducing 

individual choice 

and control 

 12In GAO’s work to date, we have used the term “add-on” accounts to refer to accounts that 

would have no effect on Social Security benefits, would supplement those benefits, and 

would draw contributions from new revenue streams. In contrast, we have used the term 

“carve-out” accounts to refer to accounts that would result in some reduction or offset to 

Social Security benefits because contributions to those accounts would draw on existing 

Social Security revenues. Others have used these terms in different manners. For example, 

some have used “add-ons” in connection with new individual accounts funded from new 

revenue sources that result in a reduction or offset to some or all Social Security benefits. 

In the final analysis, there are two key dimensions: first, whether individual accounts are 

funded from existing or new revenue sources; second, whether individual accounts result 

in some reduction or offset to Social Security benefits. 
Page 15 GAO-05-649R 

Options Sustainable solvency 

Balancing adequacy and 

equity 

Implementation and 

administration 

Additional 

considerations 

• Distribution phase 

• Draw down alternatives, e.g., 

annuities vs. phased 

withdrawal 

• Increased 

government role in 

annuitization or other 

distributions could 

potentially affect its 

cash position 

• Mandatory annuity 

effectively transfers 

income from the 

shorter-lived to the 

longer-lived 

• Mandatory annuity 

might be limited to 

amount necessary to 

avoid poverty 

• For workers who 

become disabled, if 

allowed access to 

accounts before 

retirement, may need to 

stretch assets over 

more years 

• Concern is preserving 

assets to meet 

adequacy needs for 

rest-of-life and avoid 

leakages 

• Mandatory 

annuitization could 

minimize adverse 

selection13

• Phased withdrawal 

could mirror 

minimum 

distribution 

requirements for 

IRAs while adding 

maximum 

distributions 

• Would require new 

rules to handle 

cases of survivors, 

divorced 

beneficiaries, and 

other situations 

• Annuities involve 

risk shifting to 

insurers with an 

associated cost 

• Guarantees • Could create risk to 

taxpayers through 

contingent liability and 

moral hazard issues14

• Help ensure provision of 

specified benefit level 

• Offer incentive to 

participate 

• Pre-retirement access • Risks leakage that 

diminishes adequacy in 

retirement 

• Enhances individual 

sense of ownership and 

control 

• Would involve 

additional 

administrative 

services 

• Greater incentive 

to participate 

• Administration 

• Centralized vs. decentralized • Decentralized offers 

greater choice and 

control to individuals 

• Centralized would 

be much less costly 

Source: GAO. 

 13Adverse selection occurs, for example, when only healthy people buy annuities and on 

average live longer than nonbuyers, driving up the cost of annuities. 

14Moral hazard would occur if account holders faced an incentive to take more investment 

risk than they would otherwise as a result of having guarantee to fall back on. 
Page 16 GAO-05-649R 

The following proposals include one or more of the options listed in table 

1. All of these proposals have been scored by the Social Security 

Administration’s Office of the Chief Actuary:15

• Ball 

• Commission to Strengthen Social Security (CSSS) 

• DeFazio 

• DeMint 

• Diamond-Orszag 

• Ferrara 

• Graham 

• Hagel 

• Johnson 

• Kolbe-Stenholm 

• Pozen 

• Ryan-Sununu 

• Shaw 

• Smith 

In addition, many of the options listed in table 1 appear in the proposals of 

the 1994-1996 Advisory Council on Social Security, the Center for Strategic 

and International Studies, and the Committee for Economic Development. 

Also, the Social Security Advisory Board recently asked the Social Security 

actuaries to score a number of provisions, all of which are included in the 

list in table 1. 

 15These actuarial scorings can be found at http://www.ssa.gov/OACT/solvency/index.html. 

Proposals That 

Include the Various 

Options Listed in 

Table 1 
Related GAO Products 

Page 17 GAO-05-649R 

Social Security Reform: Early Action Would Be Prudent. GAO-05-397T. 

Washington, D.C.: March 9, 2005. 

Social Security: Distribution of Benefits and Taxes Relative to Earnings 

Level. GAO-04-747. Washington, D.C.: June 15, 2004. 

Social Security Reform: Analysis of a Trust Fund Exhaustion Scenario. 

GAO-03-907. Washington, D.C.: July 29, 2003. 

Social Security: Issues Relating to Noncoverage of Public Employees. 

GAO-03-710T. Washington, D.C.: May 1, 2003. 

Social Security and Minorities: Earnings, Disability Incidence, and 

Mortality Are Key Factors That Influence Taxes Paid and Benefits 

Received. GAO-03-387. Washington, D.C.: April 23, 2003. 

Social Security Reform: Analysis of Reform Models Developed by the 

President’s Commission to Strengthen Social Security. GAO-03-310. 

Washington, D.C.: January 15, 2003. 

Social Security Reform: Information on Using a Voluntary Approach to 

Individual Accounts. GAO-03-309. Washington, D.C.: March 10, 2003. 

Social Security: Program’s Role in Helping Ensure Income Adequacy. 

GAO-02-62. Washington, D.C.: November 30, 2001. 

Social Security Reform: Potential Effects on SSA’s Disability Programs 

and Beneficiaries. GAO-01-35. Washington, D.C.: January 24, 2001. 

Social Security Reform: Information on the Archer-Shaw Proposal. 

GAO/AIMD/HEHS-00-56. Washington, D.C.: January 18, 2000. 

Social Security: Evaluating Reform Proposals. GAO/AIMD/HEHS-00-29. 

Washington, D.C.: November 4, 1999. 

Social Security Reform: Implications of Raising the Retirement Age. 

GAO/HEHS-99-112. Washington, D.C.: August 27, 1999. 

Social Security: Issues in Comparing Rates of Return With Market 

Investments. GAO/HEHS-99-110. Washington, D.C.: August 5, 1999. 

Social Security: Criteria for Evaluating Social Security Reform 

Proposals. GAO/T-HEHS-99-94. Washington, D.C.: March 25, 1999. 

Related GAO Products 
Related GAO Products 

Page 18 GAO-05-649R 

Social Security: Implications of Extending Mandatory Coverage to State 

and Local Employees. GAO/HEHS-98-196. Washington, D.C.: August 18, 

1998. 

Social Security: Different Approaches for Addressing Program Solvency. 

GAO/HEHS-98-33. Washington, D.C.: July 22, 1998. 

Social Security Financing: Implications of Government Stock Investing 

for the Trust Fund, the Federal Budget, and the Economy. 

GAO/AIMD/HEHS-98-74. Washington, D.C.: April 22, 1998. 

Social Security: Restoring Long-Term Solvency Will Require Difficult 

Choices. GAO/T-HEHS-98-95. Washington, D.C.: February 10, 1998. 

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