Testimony 

Before the Special Committee on Aging, 

U.S. Senate

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 10:00 a.m. EDT 

Tuesday, June 15, 2004 SOCIAL SECURITY

Reform Proposals Could 

Have a Variety of Effects on 

Distribution of Benefits and 

Payroll Taxes 

Statement of David M. Walker 

Comptroller General of the United States 

GAO-04-872T 
www.gao.gov/cgi-bin/getrpt?GAO-04-872T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Barbara 

Bovbjerg at (202) 512-7215 or 

bovbjergb@gao.gov. 

Highlights of GAO-04-872T, a testimony 

for the Special Committee on Aging, 

United States Senate 

June 15, 2004

SOCIAL SECURITY

Reform Proposals Could Have a Variety 

of Effects on Distribution of Benefits and 

Payroll Taxes 

Two distinct perspectives on Social Security’s goals suggest different 

approaches to measuring “progressivity,” or the distribution of benefits and 

taxes with respect to various earnings levels. Both perspectives provide 

valuable insights. An adequacy perspective focuses on benefit levels and 

how well they maintain pre-retirement living standards. An equity 

perspective focuses on rates of return and other measures relating lifetime 

benefits to contributions. Both perspectives examine how their measures 

are distributed across earnings levels. However, equity measures take all 

benefits and taxes into account, which is difficult to calculate for reform 

proposals that rely on general revenue transfers because it is unclear who 

will bear the relative burden for those general revenues. 

The Social Security program’s distributional effects reflect both program 

features and demographic patterns among its recipients. In addition to the 

benefit formula, disability benefits favor lower earners because disabled 

workers are more likely to be lower lifetime earners. In contrast, certain 

household patterns reduce the system’s tilt toward lower earners, for 

example, when lower earners have high-earner spouses. The advantage for 

lower earners is also diminished by the fact that they may not live as long as 

higher earners and therefore would get benefits for fewer years on average. 

Proposals to alter the Social Security program would have different 

distributional effects, depending on their design. Model 2 of the President’s 

Commission to Strengthen Social Security proposes new individual 

accounts, certain benefit reductions for all beneficiaries, and certain benefit 

enhancements for selected low earners and survivors. According to our 

simulations, the combined effect could result in lower earners receiving a 

greater relative share of all benefits than under the current system if all 

workers invest in the same portfolio. 

Social Security Benefit Formula Provides Higher Replacement Rates for Lower Earners 

0

10

20

30

40

50

60

 High

steady

earner

Average

steady

earner

Low

steady

earner

Source: GAO analysis using SSA ANYPIA program.

Percentage replacement rate at age 65

49

30

37

Notes: Replacement rates are the annual retired worker benefits at age 65 for workers born in 1985 

divided by the earnings in the previous year. For such workers, the full retirement age will be 67. 

Steady earners have earnings equal to various percentages of Social Security’s Average Wage 

Index in every year of their careers. 

Under the current Social Security 

benefit formula, retired workers 

can receive benefits at age 65 that 

equal about 50 percent of preretirement earnings for an 

illustrative low-wage worker but 

only about 30 percent for an 

illustrative high-wage worker. 

Factors other than earnings also 

influence the distribution of 

benefits, including the program’s 

provisions for disabled workers, 

spouses, children, and survivors. 

Changes in the program over time 

also affect the distribution of 

benefits across generations. 

Social Security faces a long-term 

structural financing shortfall. 

Program changes to address that 

shortfall could alter the way Social 

Security’s benefits and revenues 

are distributed across the 

population and affect the income 

security of millions of Americans. 

The Chairman of the Senate Special 

Committee on Aging asked us to 

discuss how selected Social 

Security reform proposals might 

affect the distribution of benefits 

and taxes. 
Page 1 GAO-04-872T 

Mr. Chairman and Members of the Committee: 

Thank you for inviting me here today to discuss the potential effects of 

selected Social Security reform proposals.1

 Social Security not only 

represents the foundation of our retirement income system; it also 

provides millions of Americans with disability insurance and survivor’s 

benefits. As a result, Social Security provides benefits that are critical to 

the current and future well-being of virtually all Americans. However, as I 

have said in congressional testimonies over the past several years,2 the 

system faces both solvency and sustainability challenges in the longer 

term. The challenges of combating terrorism have come to the fore as 

urgent claims on the federal budget. At the same time, Social Security’s 

long-term pressures on the budget have not diminished. Indeed, our longrange challenges are greater than ever. Without substantive reforms, 

Social Security and Medicare are unsustainable, and their long-term 

impact on the federal budget and the economy will be dramatic. 

Social Security faces a long-term structural financing shortfall largely 

because people are living longer and having fewer children. According to 

the 2004 intermediate—or best-estimate—assumptions of the Social 

Security trustees, Social Security’s annual benefit payments will exceed 

annual cash revenues beginning in 2018, and it will be necessary to draw 

on trust fund reserves to pay full benefits. To do this, the Treasury will 

need to obtain cash for those redeemed securities either through 

increased taxes and/or spending cuts and/or more borrowing from the 

public. In 2042, the trust funds will be exhausted, and annual revenues will 

only be sufficient to pay about 73 percent of benefits. As a result, some 

combination of benefit and/or revenue changes will be needed to restore 

the long-term solvency and sustainability of the program. 

Last July, I testified before this committee on the need for early action to 

reform Social Security and specifically how failing to do so would place a 

burden on younger generations, lower earners, and the disabled. In point 

of fact, any reform proposal will have implications for how benefits and 

related taxes are distributed across the entire population. Today, we are 

issuing a report you requested to examine such distributional effects, 

specifically those effects relative to various earnings levels. I hope my 

 1

Social Security refers here to the Old-Age, Survivors, and Disability Insurance (OASDI) 

program. 

2

See the list of related GAO products at the end of this statement. 
Page 2 GAO-04-872T 

testimony today will help illustrate the potential distributional effects of 

Social Security reforms and will place such effects in a broader context. 

Before I summarize the findings from this analysis, let me first highlight a 

number of important points in connection with our Social Security 

challenge. 

• Social Security reform is part of a broader fiscal and economic 

challenge. If you look ahead in the federal budget, the combined Social 

Security program (Old-Age and Survivors Insurance and Disability 

Insurance), together with the rapidly growing health programs (Medicare 

and Medicaid), will dominate the federal government’s future fiscal 

outlook. Absent reform, the nation will ultimately have to choose between 

persistent, escalating federal deficits and debt, huge tax increases and/or 

dramatic budget cuts. 

• Focusing on trust fund solvency alone is not sufficient. We need to 

put the program on a path toward sustainable solvency. Trust fund 

solvency is an important concept, but focusing on trust fund solvency 

alone can lead to a false sense of security about the overall condition of 

the Social Security program. The size of the trust fund does not tell us 

whether the program is sustainable—that is, whether the government will 

have the capacity to pay future claims or what else will have to be 

squeezed to pay those claims. Aiming for sustainable solvency would 

increase the chance that future policy makers would not have to face these 

difficult questions on a recurring basis. Estimates of what it would take to 

achieve 75-year trust fund solvency understate the extent of the problem 

because the program’s financial imbalance gets worse in the 76th and each 

subsequent year.3

• Solving Social Security’s long-term financing problem is more 

important and complex than simply making the numbers add up. 

Social Security is an important and successful social program that affects 

virtually every American family. It currently pays benefits to more than 46 

million people, including retired workers, disabled workers, the spouses 

and children of retired and disabled workers, and the survivors of 

deceased workers. The number of individuals receiving benefits is 

expected to grow to over 68 million by 2020. The program has been highly 

 3

In addition to assessing a proposal’s likely effect on Social Security’s actuarial balance, a 

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

income and cost beyond the 75th year and (2) the share of the budget and economy 

consumed by Social Security spending. 
Page 3 GAO-04-872T 

effective at reducing the incidence of poverty among the elderly, and the 

disability and survivor benefits have been critical to the financial well 

being of millions of others. 

• Acting sooner rather than later would help to ease the difficulty of 

change. As I noted previously, the challenge of facing the imminent and 

daunting budget pressure from Medicare, Medicaid, and OASDI increases 

over time. Social Security will begin to constrain the budget long before 

the trust funds are exhausted in 2042. The program’s annual cash flow is 

projected to be negative beginning in 2018. Social Security’s annual cash 

deficit will place increasing pressure on the rest of the budget to raise the 

resources necessary to meet the program’s costs. Waiting until Social 

Security faces an immediate solvency crisis will limit the scope of feasible 

solutions and could reduce the options to only those choices that are the 

most difficult. Acting soon would allow changes to be phased in so the 

individuals who are most likely to be affected, namely younger and future 

workers, will have time to adjust their retirement planning while helping 

to avoid related “expectation gaps.” It would also help to ensure that the 

“miracle of compounding” works for us rather than against us. Finally, 

acting soon reduces the likelihood that the Congress will have to choose 

between imposing severe benefit cuts and unfairly burdening future 

generations with the program’s rising costs. 

To assist the Congress in its deliberations, GAO has developed criteria for 

evaluating various Social Security reform proposals. These criteria aim to 

balance financial and economic considerations with benefit adequacy and 

equity issues and the administrative challenges associated with various 

proposals. The use of these criteria can help facilitate fair consideration 

and informed debate about Social Security reform proposals. 

To help ensure adequate incomes, Social Security’s benefit provisions are 

designed to favor lower earners, disabled workers, and workers with 

dependents. Changes in the program over time also affect the distribution 

of benefits and taxes across generations. So, Social Security’s 

distributional effects can vary by eligibility, household type, and birth year, 

as well as by earnings level. Our focus today is the distribution of benefits 

and taxes relative to various earnings levels, or “progressivity.” Two 

distinct perspectives on Social Security’s goals suggest different 

approaches to measuring progressivity, and both provide valuable insights. 

One perspective focuses on measures of the adequacy of benefits while 

the other focuses on “equity” measures, such as internal rates of return. 

The measures themselves describe either adequacy or equity, but their 

distribution with respect to earnings level describes progressivity. 
Page 4 GAO-04-872T 

However, when proposals use general revenue transfers, estimating equity 

measures becomes difficult because such proposals do not generally 

specify what kind of future taxes or spending cuts will finance the 

transfers or who will bear the related burden. 

The Social Security program’s distributional effects reflect both program 

features and demographic patterns among its recipients. While the benefit 

formula and disability provisions favor lower earners, household and 

mortality patterns serve to reduce the system’s tilt toward lower earners. 

Alternative Social Security reform proposals would have different 

distributional effects, reflecting the variety of provisions in them. The 

various provisions include different ways, within the current program 

structure, of reducing certain benefits, enhancing selected benefits, and 

enhancing revenues. Certain reform provisions also include creating a new 

system of individual retirement savings accounts with different account 

contribution levels and different ways of adjusting Social Security defined 

benefits to reflect the diversion of Social Security contributions into the 

accounts. Individually and in combination, these provisions would affect 

the distribution of benefits and taxes relative to various earnings levels. 

Today the Social Security program faces a long-range and fundamental 

financing problem driven largely by known demographic trends. The lack 

of an immediate solvency crisis affects the nature of the challenge, but it 

does not eliminate the need for action. Acting soon reduces the likelihood 

that the Congress will have to choose between imposing severe benefit 

cuts and unfairly burdening future generations with the program’s rising 

costs. Acting soon would allow changes to be phased in so the individuals 

who are most likely to be affected, namely younger and future workers, 

will have time to adjust their retirement planning. Since there is a great 

deal of confusion about Social Security’s current financing arrangements 

and the nature of its long-term financing problem, I would like to spend 

some time describing the nature, timing, and extent of the financing 

problem. 

As you all know, Social Security has always been largely a pay-as-you-go 

system. This means that current workers’ taxes generally pay current 

retirees’ benefits. As a result, the relative number of workers and 

beneficiaries has a major impact on the program’s financial condition. This 

ratio, however, is changing. In 1950, before the Social Security system was 

mature, the ratio was 16.5:1. In the 1960s, the ratio averaged 4.2:1. Today it 

Social Security’s 

Long-Term Financing 

Problem Deserves 

Timely Action 

Demographic Trends Drive 

Social Security’s LongTerm Financing Problem 
Page 5 GAO-04-872T 

is 3.3:1, and it is expected to drop to around 2.2:1 by 2030. The retirement 

of the baby boom generation is not the only demographic challenge facing 

the system. People are retiring early and living longer. A falling fertility 

rate is the other principal factor underlying the growth in the elderly’s 

share of the population. In the 1960s, the fertility rate was an average of 3 

children per woman. Today it is a little over 2, and by 2030 it is expected to 

fall to 1.95 —a rate that is below the level necessary to replace the 

population. Taken together, these trends serve to threaten the financial 

solvency and sustainability of this important program. (See fig. 1.) 

Figure 1: Social Security Workers per Beneficiary 

Note: This is based on the intermediate assumptions of the 2004 Social Security trustees’ reports. 

The combination of these trends means that annual labor force growth will 

begin to slow after 2010 and by 2025 is expected to be less than a third of 

what it is today. (See fig. 2.) Relatively fewer workers will be available to 

produce the goods and services that all will consume. Without a major 

increase in productivity, low labor force growth will lead to slower growth 

in the economy and to slower growth of federal revenues. This in turn will 

only accentuate the overall pressure on the federal budget. 

Source: Office of the Chief Actuary, Social Security Administration.

0

1

2

3

4

5

6

Covered workers per OASDI beneficiary

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080
Page 6 GAO-04-872T 

Figure 2: Labor Force Growth Is Expected to be Negligible by 2050 

Note: This analysis is based on the intermediate assumptions of the 2004 Social Security trustees’ 

report. Percentage change is calculated as a centered 5-year moving average. 

This slowing labor force growth is not always recognized as part of the 

Social Security debate. Social Security’s retirement eligibility dates are 

often the subject of discussion and debate and can have a direct effect on 

both labor force growth and the condition of the Social Security 

retirement program. However, it is also appropriate to consider whether 

and how changes in pension and/or other government policies could 

encourage longer workforce participation. To the extent that people 

choose to work longer as they live longer, the increase in the share of life 

spent in retirement would be slowed. This could improve the finances of 

Social Security and mitigate the expected slowdown in labor force growth. 

It could also help to encourage additional economic growth. 

Source: GAO analysis of data from the Office of the Chief Actuary, Social Security Administration.

0

1

2

3

Percentage change (5-yr moving average)

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080
Page 7 GAO-04-872T 

Today, the Social Security Trust Funds take in more in taxes than they 

spend. Largely because of the known demographic trends I have 

described, this situation will change. Although the trustees’ 2004 

intermediate estimates project that the combined Social Security Trust 

Funds will be solvent until 2042,4

 program spending will constitute a 

rapidly growing share of the budget and the economy well before that 

date. In 2008, the first baby boomers will become eligible for Social 

Security benefits, and the future costs of serving them have already 

become a factor in the Congressional Budget Office’s (CBO) 10-year 

projections. Under the trustees’ 2004 intermediate estimates, Social 

Security’s cash surplus—the difference between program tax income and 

the costs of paying scheduled benefits—will begin a permanent decline in 

2009. To finance the same level of federal spending as in the previous year, 

additional revenues and/or increased borrowing will be needed. 

By 2018, Social Security’s tax income is projected to be insufficient to pay 

currently scheduled benefits. At that time, Social Security will join 

Medicare’s Hospital Insurance Trust Fund, whose outlays are projected to 

begin to exceed revenues this year, as a net claimant on the rest of the 

federal budget. The combined OASDI Trust Funds will begin drawing on 

the Treasury to cover the cash shortfall, first relying on interest income 

and eventually drawing down accumulated trust fund assets. The Treasury 

will need to obtain cash for those redeemed securities either through 

increased taxes, and/or spending cuts, and/or more borrowing from the 

public than would have been the case had Social Security’s cash flow 

remained positive.5

 Neither the decline in the cash surpluses nor the cash 

deficit will affect the payment of benefits. The shift from positive to 

negative cash flow, however, will place increased pressure on the federal 

budget to raise the resources necessary to meet the program’s ongoing 

costs. 

 4

Separately, the Disability Insurance (DI) fund is projected to be exhausted in 2029 and the 

Old-Age and Survivors’ Insurance (OASI) fund in 2044. 

5

If the unified budget is in surplus at this point, then financing the excess benefits will 

require less debt redemption rather than increased borrowing. 

Social Security’s Cash 

Flow Is Expected to 

Turn Negative in 2018 
Page 8 GAO-04-872T 

Figure 3: Social Security’s (OASDI) Trust Funds Face Cash Deficits as Baby 

Boomers Retire 

Note: These projections are based on the intermediate assumptions of the 2004 Social Security 

trustees’ report. 

Ultimately, the critical question is not how much a trust fund has in assets, 

but whether the government as a whole can afford the benefits in the 

future and at what cost to other claims on scarce resources. As I have said 

before, the future sustainability of programs is the key issue policy makers 

should address—i.e., the capacity of the economy and budget to afford the 

commitment. Fund solvency can help, but only if promoting solvency 

improves the future sustainability of the program. 

From the perspective of the federal budget and the economy, the 

challenge posed by the growth in Social Security spending becomes even 

more significant in combination with the more rapid expected growth in 

Medicare and Medicaid spending. This growth in spending on federal 

entitlements for retirees will become increasingly unsustainable over the 

longer term, compounding an ongoing decline in budgetary flexibility. 

Over the past few decades, spending on mandatory programs has 

consumed an ever-increasing share of the federal budget. In 1964, prior to 

Decline in Budgetary 

Flexibility Absent 

Entitlement Reform 

Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration. 

Billions of 2004 dollars

-400

-300

-200

-100

0

100

200

Social Security cash flow

2000 2005 2010 2015 2020 2025 2030 2035 2040

Social Security

cash deficit

2018
Page 9 GAO-04-872T 

the creation of the Medicare and Medicaid programs, spending for 

mandatory programs plus net interest accounted for about 33 percent of 

total federal spending. By 2004, this share had almost doubled to 

approximately 61 percent of the budget. (See fig. 4.) 

Figure 4: Federal Spending for Mandatory and Discretionary Programs, Fiscal Years 1964, 1984, and 2004 

In much of the last decade, reductions in defense spending helped 

accommodate the growth in these entitlement programs. Even before the 

events of September 11, 2001, however, this ceased to be a viable option. 

Indeed, spending on defense and homeland security will likely grow as we 

seek to combat new threats to our nation’s security. 

GAO prepares long-term budget simulations that seek to illustrate the 

likely fiscal consequences of the coming demographic tidal wave and 

rising health care costs. These simulations continue to show that to move 

into the future with no changes in federal retirement and health programs 

is to envision a very different role for the federal government. Assuming, 

for example, all expiring tax provisions are extended and discretionary 

spending keeps pace with the economy, by midcentury federal revenues 

may be adequate to pay no more than interest on the federal debt. To 

67%

26%

7%

42%

45%

13%

54% 39%

7%

Source: Budget of the United States Government, FY 2005, Office of Management and Budget.

Net interest

Discretionary

Mandatory

1964 1984 2004 (estimate)
Page 10 GAO-04-872T 

obtain balance, massive spending cuts, tax increases, or some combination 

of the two would be necessary. (See fig. 5.) Neither slowing the growth of 

discretionary spending nor 

Figure 5: Composition of Spending as a Share of Gross Domestic Product (GDP), 

Assuming Discretionary Spending Grows with GDP after 2004 and All Expiring Tax 

Provisions Are Extended 

Note: Although expiring tax provisions are extended, revenue as a share of GDP increases through 

2014 due to (1) real bracket creep, (2) more taxpayers becoming subject to the Alternative Minimum 

Tax, and (3) increased revenue from tax-deferred retirement accounts. After 2014, revenue as a 

share of GDP is held constant. 

This testimony is not about the complexities of Medicare, but it is 

important to note that Medicare presents a much greater, more complex, 

and more urgent fiscal challenge than does Social Security. Medicare 

growth rates reflect not only a burgeoning beneficiary population, but also 

the escalation of health care costs at rates well exceeding general rates of 

inflation. Increases in the number and quality of health care services have 

Source: GAO’s March 2004 analysis.

Percentage of GDP

0

10

20

30

40

50

All other spending

Medicare and Medicaid

Social Security

Net interest

2003 2015 2030 2040 

Revenue

Fiscal year

 
Page 11 GAO-04-872T 

been fueled by the explosive growth of medical technology. Moreover, the 

actual costs of health care consumption are not transparent. Third-party 

payers generally insulate consumers from the cost of health care 

decisions. These factors and others contribute to making Medicare a much 

greater and more complex fiscal challenge than even Social Security. GAO 

has developed a health care framework to help focus additional attention 

on this important area and to help educate key policy makers and the 

public on the current system and related challenges.6

Indeed, long-term budget flexibility is about more than Social Security and 

Medicare. While these programs dominate the long-term outlook, they are 

not the only federal programs or activities that bind the future. The federal 

government undertakes a wide range of programs, responsibilities, and 

activities that obligate it to future spending or create an expectation for 

spending. GAO has described the range and measurement of such fiscal 

exposures—from explicit liabilities such as environmental cleanup 

requirements to the more implicit obligations presented by life-cycle costs 

of capital acquisition or disaster assistance.7

 Making government fit the 

challenges of the future will require not only dealing with the drivers—

entitlements for the elderly—but also looking at the range of federal 

activities. A fundamental review of what the federal government does and 

how it does it will be needed. 

At the same time it is important to look beyond the federal budget to the 

economy as a whole. Figure 6 shows the total future draw on the economy 

represented by Social Security, Medicare, and Medicaid. Under the 2004 

Trustees’ intermediate estimates and CBO’s long-term Medicaid estimates, 

spending for these entitlement programs combined will grow to 15.6 

percent of GDP in 2030 from today’s 8.5 percent. Taken together, Social 

Security, Medicare, and Medicaid represent an unsustainable burden on 

future generations. 

 6

GAO’s health care framework can be found at www.gao.gov/cghome/hccrisis/health.pdf. 

See also U.S. General Accounting Office, Comptroller General’s Forum on Health Care: 

Unsustainable Trends Necessitate Comprehensive and Fundamental Reforms to Control 

Spending and Improve Value, GAO-04-793SP (Washington, D. C.: May 1, 2004).

7

U.S. General Accounting Office, Fiscal Exposures: Improving the Budgetary Focus on 

Long-Term Costs and Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003). 
Page 12 GAO-04-872T 

Figure 6: Social Security, Medicare, and Medicaid Spending as a Percentage of GDP 

Note: Social Security and Medicare projections are based on the intermediate assumptions of the 

2004 trustees’ reports. Medicaid projections are based on CBO’s January 2004 short-term Medicaid 

estimates and CBO’s December 2003 long-term Medicaid projections under midrange assumptions. 

When Social Security redeems assets to pay benefits, the program will 

constitute a claim on real resources at that time. As a result, taking action 

now to increase the future pool of resources is important. To echo Federal 

Reserve Chairman Greenspan, the crucial issue of saving in our economy 

relates to our ability to build an adequate capital stock to produce enough 

goods and services in the future to accommodate both retirees and 

workers in the future.8

 The most direct way the federal government can 

raise national saving is by increasing government saving, i.e., as the 

economy returns to a higher growth path, a much more balanced and 

disciplined fiscal policy that recognizes our long-term challenges can help 

 8

Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, 

July 24, 2001. 

Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration, Office of the Actuary,

Centers for Medicare and Medicaid Services, and the Congressional Budget Office.

0

5

10

15

20

25

30

Medicare

Medicaid

Social Security

2000 2010 2020 2030 2040 2050 2060 2070 2080

Percentage of GDP
Page 13 GAO-04-872T 

provide a strong foundation for future economic growth and can enhance 

future budgetary flexibility. In the short term, we need to realize that we 

are already facing a huge fiscal hole. The first thing that we should do is 

stop digging. 

Taking action soon on Social Security would not only promote increased 

budgetary flexibility in the future and stronger economic growth but 

would also make the necessary action less dramatic than if we wait. Some 

of the benefits of early action—and the costs of delay—can be seen in 

figure 7. This compares what it would take to achieve actuarial balance at 

different points in time by either raising payroll taxes or reducing 

benefits.9

 If we did nothing until 2042—the year the Trust Funds are 

estimated to be exhausted—achieving actuarial balance would require 

changes in benefits of 30 percent or changes in taxes of 43 percent. As 

figure 7 shows, earlier action shrinks the size of the adjustment. 

 9

Solvency could also be achieved through a combination of tax and benefit actions. This 

would reduce the magnitude of the required change in taxes or benefits compared with 

making changes exclusively to taxes or benefits as shown in figure 7. 
Page 14 GAO-04-872T 

Figure 7: Size of Action Needed to Achieve Social Security Solvency 

Note: This is based on the intermediate assumptions of the 2004 Social Security trustees’ report. The 

benefit adjustments in this graph represent a one-time, permanent change to all existing and future 

benefits beginning in the first year indicated. 

Thus both sustainability concerns and solvency considerations drive us to 

act sooner rather than later. Trust Fund exhaustion may be almost 40 

years away, but the squeeze on the federal budget will begin as the baby 

boom generation starts to retire. Actions taken today can ease both these 

pressures and the pain of future actions. Acting sooner rather than later 

also provides a more reasonable planning horizon for future retirees. 

As important as financial stability may be for Social Security, it cannot be 

the only consideration. As a former public trustee of Social Security and 

Medicare, I am well aware of the central role these programs play in the 

lives of millions of Americans. Social Security remains the foundation of 

the nation’s retirement system. It is also much more than just a retirement 

program; it pays benefits to disabled workers and their dependents, 

spouses and children of retired workers, and survivors of deceased 

workers. Last year, Social Security paid almost $471 billion in benefits to 

Evaluating Social 

Security Reform 

Proposals 

0

10

20

30

40

50

Tax adjustment

Benefit adjustment

2004-2078 2018-2078 2042-2078 

Percentage

Source: Office of the Chief Actuary, Social Security Administration.

43

21

15

13

30

16
Page 15 GAO-04-872T 

more than 47 million people. Since its inception, the program has 

successfully reduced poverty among the elderly. In 1959, 35 percent of the 

elderly were poor. In 2000, about 8 percent of beneficiaries aged 65 or 

older were poor, and 48 percent would have been poor without Social 

Security. It is precisely because the program is so deeply woven into the 

fabric of our nation that any proposed reform must consider the program 

in its entirety, rather than one aspect alone. Thus, GAO has developed a 

broad framework for evaluating reform proposals that considers not only 

solvency but other aspects of the program as well. 

The analytic framework GAO has developed to assess proposals 

comprises three basic criteria: 

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

would affect the economy and the federal budget; 

• the relative balance struck between the goals of individual equity and 

income adequacy; and 

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

explained to the public. 

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

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

offering individual choice and control is less important than maintaining 

replacement rates for low-income workers, then a reform proposal 

emphasizing adequacy considerations might be preferred. As they fashion 

a comprehensive proposal, however, policy makers will ultimately have to 

balance the relative importance they place on each of these criteria. 

Our sustainable solvency standard encompasses several different ways of 

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

actuarial balance is generally used in evaluating the long-term financial 

outlook of the Social Security program and reform proposals, it is not 

sufficient in gauging the program’s solvency after the 75th year. For 

example, under the trustees’ intermediate assumptions, each year the 75-

year actuarial period changes, and a year with a surplus is replaced by a 

new 75th year that has a significant deficit. As a result, changes made to 

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

actuarial imbalances almost immediately. Reform plans that lead to 

sustainable solvency would be those that consider the broader issues of 

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

Financing Sustainable 

Solvency 
Page 16 GAO-04-872T 

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. 

As I have already discussed, reducing the relative future burdens of Social 

Security and health programs is essential to a sustainable budget policy for 

the longer term. It is also critical if we are to avoid putting unsupportable 

financial pressures on future workers. Reforming Social Security and 

health programs is essential to reclaiming our future fiscal flexibility to 

address other national priorities. 

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. Retirement 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. 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. Balancing these seemingly 

conflicting objectives 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. 

Policy makers could assess income adequacy, for example, by considering 

the extent to which proposals ensure benefit levels that are adequate to 

protect beneficiaries from poverty and ensure higher replacement rates for 

low-income workers. In addition, policy makers could consider the impact 

of proposed changes on various subpopulations, such as low-income 

workers, women, minorities, and people with disabilities. Policy makers 

could assess equity by considering the extent to which there are 

reasonable returns on contributions at a reasonable level of risk to the 

individual, improved intergenerational equity, and increased individual 

choice and control. Differences in how various proposals balance each of 

these goals will help determine which proposals will be acceptable to 

policy makers and the public. 

Balancing Adequacy and 

Equity 
Page 17 GAO-04-872T 

Program complexity makes implementation and administration both more 

difficult and harder to explain to the public. Some degree of 

implementation and administrative complexity arises in virtually all 

proposed changes to Social Security, even those that make incremental 

changes in the already existing structure. However, the greatest potential 

implementation and administrative challenges are associated with 

proposals that would create individual accounts. These include, for 

example, issues concerning the management of the information and 

money flow needed to maintain such a system, the degree of choice and 

flexibility individuals would have over investment options and access to 

their accounts, investment education and transitional efforts, and the 

mechanisms that would be used to pay out benefits upon retirement. 

Harmonizing a system that includes individual accounts with the 

regulatory framework that governs our nation’s private pension system 

would also be a complicated endeavor. However, the complexity of 

meshing these systems should be weighed against the potential benefits of 

extending participation in individual accounts to millions of workers who 

currently lack private pension coverage. 

Continued public acceptance of and confidence in the Social Security 

program require that any reforms and their implications for benefits be 

well understood. This means that the American people must understand 

why change is necessary, what the reforms are, why they are needed, how 

they are to be implemented and administered, and how they will affect 

their own retirement income. All reform proposals will require some 

additional outreach to the public so that future beneficiaries can adjust 

their retirement 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. 

Under Social Security, retired workers can receive benefits at age 65 that 

equal about 50 percent of pre-retirement earnings for an illustrative 

worker with relatively lower earnings but only about 30 percent of 

earnings for one with relatively higher earnings. To help ensure that 

beneficiaries have adequate incomes, Social Security’s benefit formula is 

designed to be “progressive,” that is, to provide disproportionately larger 

benefits, as a percentage of earnings, to lower earners than to higher 

earners. However, the benefit formula is just one of several program 

features that influence the way benefits are distributed. Other such 

program features include provisions for disabled workers, spouses, 

children, and survivors. Changes in the program over time also affect the 

Implementing and 

Administering Proposed 

Reforms 

Examining Social 

Security’s Effects on 

Distribution of 

Benefits and Taxes 
Page 18 GAO-04-872T 

distribution of benefits across generations. So the distribution of Social 

Security benefits can vary by eligibility, household type, and birth year as 

well as by earnings level. 

Over the past few years, we have been developing an increasing capacity 

at GAO to estimate quantitatively the effects of Social Security reform on 

individuals. Such estimates speak directly to applying our second 

evaluation criterion to reform proposals. We have just issued a new report 

that, in part, uses such estimates to illustrate the varying effects of 

different policy scenarios on how Social Security benefits and taxes are 

distributed relative to earnings levels.10 Today, I would like to share our 

findings regarding how to define and describe “progressivity,” defining 

appropriate benchmarks for assessing the future outlook for individuals’ 

Social Security benefits, what factors influence the distributional effects of 

the current Social Security program, and how various reform proposals 

might vary in their distributional effects. Still, remember that progressivity 

is only one of several aspects of our criterion of balancing adequacy and 

equity, which in turn is only one of three criteria that each consist of 

several dimensions. 

Two distinct perspectives on Social Security’s goals suggest different 

approaches to measuring progressivity. Both perspectives provide 

valuable insights. An adequacy perspective focuses on benefit levels and 

how well they help ensure a minimal subsistence or maintain preentitlement living standards. For example, replacement rates measure 

annual benefits as a percentage of annual earnings before receiving 

benefits. An equity perspective focuses on rates of return and other 

measures relating lifetime benefits to lifetime contributions. This 

perspective gauges whether the system gives all participants a “fair deal” 

on their contributions. The measures themselves describe either adequacy 

or equity, but their distribution with respect to earnings level describes 

progressivity. Note however that equity measures cannot accurately assess 

the distributional effects of reform proposals that rely on general revenue 

transfers. Such proposals do not generally specify what kind of future 

taxes or spending cuts will finance the transfers or who will bear the 

related burden; but evaluating progressivity from an equity perspective 

requires that all taxes and benefits be clearly allocated. 

 10U.S. General Accounting Office, Social Security: Distribution of Benefits and Taxes 

Relative to Earnings Level, GAO-04-747 (Washington, D.C.: June 15, 2004). 

Different Distributional 

Measures Reflect Different 

Perspectives 
Page 19 GAO-04-872T 

Estimating future effects on Social Security benefits should reflect the fact 

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

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

illustrate a full range of possible outcomes, we developed hypothetical 

benchmark policy scenarios that would restore solvency over the next 75 

years either by only increasing payroll taxes or by only reducing benefits. 

Our tax-increase-only benchmark simulates “promised benefits,” or those 

benefits defined under current law, while our benefit-reduction-only 

benchmarks simulate “funded benefits,” or those benefits for which 

currently scheduled revenues are projected to be sufficient. The benefit 

reductions are phased in between 2005 and 2035 to strike a balance 

between the size of the incremental reductions each year and the size of 

the ultimate reduction. At our request, Social Security actuaries scored our 

benchmark policies and determined the parameters for each that would 

achieve 75-year solvency. For our benefit reduction scenarios, the 

actuaries determined these parameters assuming that disabled and 

survivor benefits would be reduced on the same basis as retired worker 

and dependent benefits. If disabled and survivor benefits were not reduced 

at all, reductions in other benefits would be deeper than shown in this 

analysis.11

Social Security’s distributional effects reflect program features, such as its 

benefit formula, and demographic patterns among its recipients, such as 

marriage between lower and higher earners. The retired worker benefit 

formula favors lower earners by design, replacing about 50 percent of preretirement earnings at age 65 for an illustrative low earner but only about 

30 percent of pre-retirement earnings for an illustrative high earner.12 (See 

fig. 8.) The disability benefit formula also favors lower earners, and 

disability recipients are disproportionately lower earners. Our simulations 

suggest that for individuals born in 1985, compared with a hypothetical 

program without disability insurance, Social Security’s disability 

 11For more details on the alternative benefit-reduction benchmarks, see appendix I in U.S. 

General Accounting Office, Social Security: Distribution of Benefits and Taxes Relative 

to Earnings Level, GAO-04-747 (Washington, D.C.: June 15, 2004). 

12The annual trustees’ report uses illustrative “scaled earnings” patterns. The values of the 

replacement rates for these scaled earnings patterns at age 65 are virtually identical to the 

ones presented in figure 1. See The Board of Trustees, Federal Old-Age and Survivors 

Insurance and Disability Insurance Trust Funds, The 2004 Annual Report of the Board of 

Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust 

Funds (Washington, D.C.: Mar. 23, 2004). pp. 186-187. 

Benchmark Policy 

Scenarios Illustrate a 

Range of Possible 

Outcomes 

Program’s Distributional 

Effects Reflect Various 

Program Features and 

Demographic Patterns 
Page 20 GAO-04-872T 

provisions increase lifetime Social Security benefits for the bottom fifth of 

earners by 43 percent, compared with 14 percent for the top fifth of 

earners. The extent to which the benefit formula and disability benefits 

favor lower earners may be offset to some degree by demographic 

patterns. Household formation tends to reduce the system’s tilt toward 

lower earners because some of the lower-earning individuals helped by the 

program live in high-income households. For example, many of the lowerearning individuals that the system favors through spouse and survivor 

benefits actually live at some point in higher-income households because 

of marriage. In our simulations, the ratio of benefits received to payroll 

taxes contributed is higher for lower earners than for higher earners, but 

this difference is reduced when we account for household formation. Also, 

differences in mortality rates may reduce rates of return for lower earners, 

as studies show they may not live as long as higher earners and therefore 

would receive benefits for fewer years. 
Page 21 GAO-04-872T 

Figure 8: Social Security Benefit Formula Provides Higher Replacement Rates for 

Lower Earners 

Note: Replacement rates are the annual retired worker benefits at age 65 for workers born in 1985 

divided by the earnings in the previous year. For such workers, the full retirement age will be 67. 

Steady earners have earnings equal to a constant percentage of Social Security’s Average Wage 

Index in every year of their careers. Those percentages are 45, 100, and 160, respectively, for low, 

average, and high earners. Taxable maximum earners have earnings equal to the maximum taxable 

earnings in each year. Replacement rates are simulated under the tax-increase benchmark (promised 

benefits); they would be lower under the proportional benefit-reduction benchmark by a constant 

proportion and would therefore show a similar pattern. See appendix I for more on the benchmark 

policy scenarios. 

Alternative Social Security reform proposals would have different 

distributional effects, reflecting the variety of provisions in them. The 

various provisions include different ways, within the current program 

structure, of reducing certain benefits, enhancing selected benefits, and 

enhancing revenues. The various reform provisions also include creating a 

new system of individual retirement savings accounts with different 

account contribution levels and different ways of adjusting Social Security 

defined benefits to reflect the diversion of Social Security contributions 

into the accounts. Individually and in combination, these provisions would 

affect the distribution of benefits and taxes relative to earnings levels. 

Distributional Effects Vary 

across Reform Proposals 

0

10

20

30

40

50

60

Taxable 

maximum

earner

High

steady

earner

Average

steady

earner

Low

steady

earner

Source: GAO analysis using SSA ANYPIA program.

Percentage replacement rate at age 65

49

30

37

24
Page 22 GAO-04-872T 

For example, Model 2 of the President’s Commission to Strengthen Social 

Security (CSSS) proposes a new system of voluntary individual accounts 

along with a combination of certain benefit reductions for all beneficiaries 

and selected benefit enhancements for selected low earners and survivors. 

One of its provisions would reduce Social Security defined benefits 

proportionally for all workers by modifying the benefit formula. At the 

same time, benefits would be enhanced for certain lower earners and 

surviving spouses, and 4 percentage points of individuals’ payroll taxes (up 

to a $1,000 annual limit13) would be diverted into individual accounts. 

In contrast, a proposal offered by Peter Diamond and Peter Orszag would 

also include a provision to reduce Social Security defined benefits 

proportionally for all workers by modifying the benefit formula. It also has 

provisions to enhance benefits for selected lower earners and surviving 

spouses. However, it does not contain a provision for individual accounts, 

and it does have a variety of provisions for enhancing revenues. The 

Diamond-Orszag proposal also has other benefit reduction and benefit 

enhancement provisions, such as modifying the benefit formula to reduce 

benefits for higher earners only. Another provision would maintain 

disability benefits and benefits for survivors of workers who die before 

retirement in spite of the other benefit reductions. 

Also in contrast to CSSS Model 2, a proposal offered by Peter Ferrara 

provides for a new system of voluntary individual accounts but does not 

contain any provisions to make changes to Social Security defined 

benefits, except for individuals participating in the individual accounts. 

Moreover, it would provide for substantially larger contributions to the 

accounts than would the CSSS Model 2 proposal. Under this provision, 

individual account contributions would be a larger percentage of payroll 

for lower earners than for higher earners. Also, for those who participate 

in the accounts, Social Security defined benefits would be reduced to 

reflect the payroll taxes redirected into the accounts; this account offset 

uses a different formula than does CSSS Model 2. 

To illustrate the distributional effects of CSSS Model 2, we used a 

microsimulation model to estimate benefits under it and under our 

benchmark policy scenarios. We did not examine the distribution of equity 

measures such as benefit-to-tax ratios or rates of return, because the 

 13The limit on account contributions would grow over time at the same rate as wages. 
Page 23 GAO-04-872T 

proposal’s individual account feature requires general revenue transfers.14 

Since account participation is voluntary, we used two simulations to 

examine the effects of the Model 2 provisions, one with universal account 

participation (Model 2-100 percent) and one with no account participation 

(Model 2-0 percent). We also assumed that all account participants would 

invest in the same portfolios; consequently we did not capture any 

distributional effect that might occur if lower earners were to make 

different account participation or investment decisions than higher 

earners.15

According to our simulations, the distribution of benefits under Model 2 

could favor lower earners more than the distribution of benefits under 

either currently promised or currently funded benefits. For example, 

assuming universal account participation, households in the lowest fifth of 

earnings may receive about 14 percent of all lifetime benefits under Model 

2, compared with about 12.5 percent under the current program. (See fig. 

9.) 

 14See U.S. General Accounting Office, Social Security Reform: Analysis of Reform Models 

Developed by the President’s Commission to Strengthen Social Security, GAO-03-310

(Washington, D.C.: Jan. 15, 2003), p. 24. 

15Each participant has portfolio allocation of 50 percent in equities, 30 percent in corporate 

bonds, and 20 percent in U.S. Treasury long-term bonds. All portfolios earn a constant 

4.6 percent real rate of return. For sensitivity analysis, we also simulated scenarios with 

rates of return varying stochastically across individuals and with higher and lower returns 

to equities. Shares of benefits by quintiles of lifetime earnings were very similar under all 

specifications. 
Page 24 GAO-04-872T 

Figure 9: CSSS Model 2 Might Favor Lower Earners More than Benchmarks for 

Individuals Born in 1985 

Note: Earnings fifths are based on the present value of total household lifetime earnings. Household 

analysis is based on per capita benefits, taxes, and earnings. This includes all sample members who 

survive past age 24. It assumes all account participants choose the same portfolio—50 percent 

equities, 30 percent corporate bonds, and 20 percent Treasury bonds. Accounts earn a constant real 

return of 4.6 percent. For sensitivity analysis, we also simulated scenarios with rates of return varying 

stochastically across individuals and over time and scenarios with higher and lower returns to 

equities. Shares of benefits by earning fifths were similar under all specifications. 

It should be noted that while the simulations suggest that the distribution 

of benefits under Model 2 is more progressive than under the benchmarks, 

this does not mean benefit levels are always higher for the bottom fifth 

under Model 2. Progressivity is about how the "pie" is divided up, not 

about how big the pie is. So, while Model 2 may improve the relative 

position of lower earners, it may not improve the adequacy of their 

benefits. (See fig. 10.) According to our simulation, median household 

lifetime benefits for the bottom fifth under Model 2-0 percent would be 3 

percent higher than under the funded benefits scenario but 21 percent 

lower than under the promised benefits scenario. Median household 

0

5

10

15

20

25

30

Model 2-0 percent

Model 2-100 percent

Funded benefits (proportional benefit-reduction benchmark)

Promised benefits (tax-increase benchmark)

Top fifth of 

total earnings

Bottom fifth of

total earnings

Percentage share of all household lifetime benefits

27.4

12.3

26.0

13.8

25.9

14.5

12.6

27.2

Source: GAO analysis using the GEMINI model.
Page 25 GAO-04-872T 

lifetime benefits for the bottom fifth under Model 2-100 percent would be 

26 percent higher than under the funded benefits scenario but 4 percent 

lower than under the promised benefits scenario. 

Figure 10: Median Household Lifetime Benefits under Model 2 and the Benchmarks 

for Individuals Born in 1985 

Note: Earnings fifths are based on the present value of total household lifetime earnings. Household 

analysis is based on per capita benefits, taxes, and earnings. This includes all sample members who 

survive past age 24. It assumes all account participants choose the same portfolio—50 percent 

equities, 30 percent corporate bonds, and 20 percent Treasury bonds. Accounts earn a constant real 

return of 4.6 percent. 

We also simulated each of Model 2’s core features, assuming 100 percent 

participation in the individual accounts, to illustrate the distributional 

effect of each feature. (See fig. 11.) First we simulated a version of Model 

2-100 percent that included the individual accounts and the reductions in 

Social Security defined benefits, but not the $1,000 cap on account 

contributions or the enhanced benefits for low earners and survivors. Next 

we simulated a version that included the defined-benefit reductions and 

0

100

200

300

400

500

Model 2-0 percent

Model 2-100 percent

Funded benefits (benefit-reduction benchmark)

Promised benefits (tax-increase benchmark)

Top fifth of 

total earnings

Bottom fifth of

total earnings

Median household lifetime benefits in 2003 dollars (in thousands)

455

178

368

171

294

136 140

344

Source: GAO analysis using the GEMINI model.
Page 26 GAO-04-872T 

the individual accounts with the $1,000 cap on account contributions. 

Finally, we simulated the complete Model 2-100 percent scenario, which 

included the enhanced benefits to lower earners and survivors. While the 

proposal’s individual accounts and benefit reductions together may favor 

higher earners, this is more than offset by a limit on account contributions 

and the enhanced benefits for low earners and survivors. Again, this 

assumes that all account participants would invest in the same portfolios. 

However, if individuals’ investment decisions varied by earnings level, 

then the distribution of income from the accounts would differ from our 

simulations. 
Page 27 GAO-04-872T 

Figure 11: CSSS Model 2’s Contribution Cap and Enhanced Benefits for Lower 

Earners and Survivors Offset the Distributional Effect of the Accounts and 

Reductions in Social Security Defined Benefits 

Note: Earnings fifths are based on the present value of total household lifetime earnings. Household 

analysis is based on per capita benefits, taxes, and earnings. This includes all sample members who 

survive past age 24 and assumes 100 percent account participation with all account participants 

choosing the same portfolios—50 percent equities, 30 percent corporate bonds, and 20 percent 

Treasury bonds. Accounts earn a constant real return of 4.6 percent. 

It should be emphasized that these simulations are only for individuals 

born in 1985,16 and the distributional impact of Model 2 could be different 

for individuals born in later years. For example, under the proposal, initial 

 16In our modeling, we focused on workers born in 1985 because all prospective program 

changes under all alternative policy scenarios would be almost fully phased in for such 

workers. 

0

5

10

15

20

25

30

35

Full Model 2, including enhanced benefits for low earners and survivors

Accounts, reductions in Social Security defined benefits, and contribution cap

Accounts and reductions in Social Security defined benefits

Funded benefits (proportional benefit-reduction benchmark)

Promised benefits (tax-increase benchmark)

Top fifth of 

total earnings

Bottom fifth of

total earnings

Percentage share of all household lifetime benefits

27.4

12.3

28.8

11.6

26.8

12.6

26.0

13.8

12.6

27.2

Source: GAO analysis using the GEMINI model.
Page 28 GAO-04-872T 

Social Security defined benefits only grow with prices, while initial 

benefits from account balances grow with wages. Since wages generally 

grow faster than prices, Social Security defined benefits will decline as a 

proportion of total benefits, reducing the importance of the progressive 

benefit formula, disability benefits, and the enhanced benefits for low 

earners and survivors. 

It should also be noted that the account feature of Model 2-100 percent 

likely exposes recipients to greater financial risk. Greater exposure to risk 

may not affect the shares of benefits received by the bottom and top fifths 

of earnings.17 However, greater risk may be more problematic for lower 

earners, who likely have fewer resources to fall back on if their accounts 

perform poorly.18

By design, Social Security distributes benefits and contributions across 

workers and their families in a variety of ways. These distributional effects 

illustrate how the program balances the goal of helping ensure adequate 

incomes with the goal of giving all workers a fair deal on their 

contributions. Any changes to Social Security would potentially alter those 

distributional effects and the balance between those goals. Therefore, 

policy makers need to understand how to evaluate distributional effects of 

alternative policies. 

Several key themes inform this understanding. First, it should be noted 

that greater benefit progressivity is not the same thing as greater benefit 

adequacy. Under some reform scenarios, Social Security could distribute 

benefits more progressively than under current law while providing lower, 

less adequate benefits. Secondly, our analysis illustrates that it that is 

possible for some reform provisions that may not favor lower earners to 

be counterbalanced by other, more favorable ones. Finally, benefit 

progressivity is only one of several aspects of balancing adequacy and 

equity. As our framework suggests, besides balancing adequacy and equity, 

a proposal’s effect on the economy and whether it achieves sustainable 

 17We simulated an alternative version of Model 2-100 percent where the return to equities 

varied stochastically across individuals and over time. Shares of benefits by earnings 

quintile were almost identical to the scenario that assumed constant returns to equities. 

18Lower earners may be more risk averse than higher earners and therefore suffer greater 

utility loss from increased risk. 

Conclusion 
Page 29 GAO-04-872T 

solvency should also be considered, as well as how readily it could be 

implemented and explained to the public. 

As we have noted in the past before this committee and elsewhere, a 

comprehensive evaluation is needed that considers a range of effects 

together. Focusing on comprehensive packages of reforms will enable us 

to foster credibility and acceptance. This will help us avoid getting mired 

in the details and losing sight of important interactive effects. It will help 

build the bridges necessary to achieve consensus. 

The fundamental nature of the program’s long-term financing challenge 

means that timely action is needed. I believe it is possible to craft a 

solution that will protect Social Security benefits for the nation’s current 

and near-term retirees, while ensuring that the system will be there for 

future generations. Stated differently, I believe that it is possible to reform 

Social Security in a way that will assure the program’s solvency and 

sustainability while exceeding the expectations of all generations of 

Americans. In this regard, the sooner we act, the greater the opportunity 

to achieve this desirable outcome. It is my hope that we will think about 

the unprecedented challenge facing future generations in our aging 

society. We need to act now before the approaching demographic tidal 

wave makes the imbalances more dramatic and meaningful reform less 

feasible. We at GAO look forward to continuing to work with this 

Committee and the Congress in addressing this and other important issues 

facing our nation. In doing so, we will be true to our core values of 

accountability, integrity, and reliability. 

Mr. Chairman, and members of the Committee, that concludes my 

statement. I’d be happy to answer any questions you may have. 

For information regarding this testimony, please contact Barbara D. 

Bovbjerg, Director, Education, Workforce, and Income Security Issues, at 

(202) 512-7215. Individuals making key contributions to this testimony 

include Ken Stockbridge, Charles Jeszeck, and Gordon Mermin. 

GAO Contact and 

Staff 

Acknowledgments 
Page 30 GAO-04-872T 

Social Security: Distribution of Benefits and Taxes Relative to Earnings 

Level (GAO-04-747, June 15, 2004). 

Social Security Reform: Analysis of a Trust Fund Exhaustion Scenario

(GAO-03-907, July 29, 2003) 

Social Security and Minorities: Earnings, Disability Incidence, and 

Mortality Are Key Factors That Influence Taxes Paid and Benefits 

Received (GAO-03-387, Apr. 23, 2003) 

Social Security: Analysis of Issues and Selected Reform Proposals, 

(GAO-03-376T, Jan. 15, 2003). 

Social Security Reform: Analysis of Reform Models Developed by the 

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

Jan. 15, 2003). 

Social Security: Long-Term Financing Shortfall Drives Need for Reform

(GAO-02-845T, June 19, 2002). 

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

(GAO-02-62, Nov. 30, 2001). 

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

and Beneficiaries (GAO-01-35, Jan. 24, 2001). 

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

Nov. 4, 1999). 

Social Security: Issues in Comparing Rates of Return with Market 

Investments (GAO/HEHS-99-110, Aug. 5, 1999). 

Social Security: Criteria for Evaluating Social Security Reform 

Proposals (GAO/T-HEHS-99-94, Mar. 25, 1999). 

Social Security Financing: Implications of Government Stock Investing 

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

(GAO/AIMD/HEHS-98-74, Apr. 22, 1998). 

Related GAO Products 

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