GAO

United States General Accounting Office

Report to the Ranking Member, 

Subcommittee on Labor, Health and 

Human Services, Education, and Related 

Agencies, Committee on Appropriations, 

U.S. Senate

January 2001 SOCIAL SECURITY 

REFORM

Potential Effects on 

SSA’s Disability 

Programs and 

Beneficiaries

GAO-01-35

Page 1 GAO-01-35 Social Security Reform

Contents

Letter 3

Appendixes Appendix I: The Social Security Reform Proposals and Their

Provisions 40

Appendix II: Alternative Solvency Scenarios and the Social Security 

Simulation Model 42

Appendix III: Comments From the Social Security Administration 50

Tables Table 1: Effect of Reform Proposals on Trust Fund Solvency and

Benefit Income 7

Table 2: Proposals That Maintain the Current Level and Structure of 

Benefits 12

Table 3: Proposals That Affect the Current Level and Structure of

Benefits 13

Table 4: Actuarial Balance of Social Security Trust Funds Under

Current Law and Selected Reform Proposals 16

Table 5: Estimated Change in Current Law Actuarial Balance

for Selected Reform Provisions 20

Table 6: Social Security Reform Provisions 40

Table 7: Individual Account Provisions 41

Table 8: Reductions in Benefits 42

Table 9: Payroll Tax Rates 44

Table 10: Economic and Demographic Intermediate Assumptions 

From the 1999 Trustees Report 45

Figures Figure 1: Lifetime Benefit Income of Low-Earnings Worker and 

Dependents Under Selected Proposals and Alternative

Solvency Scenarios 22

Figure 2: Lifetime Benefit Income of Average-Earnings Worker and 

Dependents Under Selected Proposals and Alternative

Solvency Scenarios 23

Figure 3: Comparison of COLA Changes to Lifetime Insurance

Benefits of Disabled Workers With Alternative Solvency 

Scenarios 26

Figure 4: Comparison of PIA Changes to Lifetime Insurance 

Benefits of Disabled Workers With Alternative Solvency 

Scenarios 27
Contents

Page 2 GAO-01-35 Social Security Reform

Figure 5: Comparison of PIA Changes to Lifetime Insurance 

Benefits With Alternative Solvency Scenarios for Adult

Disabled Child Dependent of Retired Worker 28

Figure 6: Lifetime Benefit Income of Disabled Workers Under IA 

Provisions and Alternative Solvency Scenarios 30

Figure 7: Lifetime Benefit Income of Dependent of Disabled

Worker Under IA Provisions and Alternative Solvency 

Scenarios 31

Figure 8: Lifetime Benefit Income of Adult Disabled Child

Dependent of Retired Worker Under IA Provisions and 

Alternative Solvency Scenarios 32

Figure 9: Net Addition of IA to Current-Law Lifetime Benefit 

Income Under Selected Reform Proposals: Low-Earnings 

Worker Disabled at Various Ages 34

Figure 10: Net Addition of IA to Current-Law Lifetime Benefit 

IncomeUnder Selected Reform Proposals: Average-Earnings 

Worker Disabled at Various Ages 35

Abbreviations

AIME average indexed monthly earnings

COLA cost-of-living adjustment

CPI Consumer Price Index

DI Disability Insurance

IA individual account

NRA normal retirement age

OASI Old-Age and Survivor Insurance

PIA primary insurance amount

SSA Social Security Administration

SSI Supplemental Security Income
Page 3 GAO-01-35 Social Security Reform

United States General Accounting Office

Washington, D.C. 20548 Letr

January 24, 2001

The Honorable Tom Harkin

Ranking Member, Subcommittee on Labor,

Health and Human Services, Education,

and Related Agencies

Committee on Appropriations

United States Senate

Dear Senator Harkin:

Although much has been written about the effects of reform on the 

solvency of the Social Security program and on the benefits of retired 

workers, little attention has been directed to the effects of reform 

proposals on the Social Security Disability Insurance (DI) program or on 

the benefits that disabled beneficiaries and their families receive. Yet, in 

1999, disabled beneficiaries and their families accounted for about 17 

percent of all Social Security beneficiaries. These 7.4 million beneficiaries 

included disabled workers, families of disabled workers, and adult disabled 

children who were dependents of disabled, deceased, or retired workers. 

You asked us to assess the potential effects of Social Security reform 

options on the solvency of the DI trust fund and the benefits disabled 

beneficiaries receive. In this report, we analyze both the potential effects of 

comprehensive Social Security reform proposals on the solvency of the DI 

trust fund and on the benefits disabled beneficiaries receive and the likely 

contribution that individual proposal provisions would make to these 

effects. You also asked us to examine the potential implications of Social 

Security reform for the Supplemental Security Income (SSI) program, 

which provides significant income support for low-income individuals with 

disabilities. 

In response to your request, we analyzed the five Social Security reform 

proposals that we have previously reviewed.1

 These proposals include that 

of President Clinton as well as four of the proposals discussed in the 106th 

Congress: Archer-Shaw, Kolbe-Stenholm (H.R. 1793), Gregg-Kerrey-BreauxGrassley (S. 1383), and Kasich. In these proposals, we identified 11 major

1

Social Security: Evaluating Reform Proposals (GAO/AIMD/HEHS-00-29, Nov. 4, 1999). With 

respect to the President’s proposal, we evaluated the version that was presented in the 

President’s fiscal year 2001 budget on Feb. 7, 2000.
Page 4 GAO-01-35 Social Security Reform

types of provisions and examined their effect on trust fund solvency and DI 

benefits.2

 We compared the benefits under these reform proposals with 

benefits under two alternative current-program scenarios that also achieve 

trust fund solvency: one that would maintain current benefits while 

increasing payroll taxes and another that would maintain current payroll 

tax rates while reducing benefits. 

To analyze the effects of Social Security reform on DI trust fund solvency, 

we used estimates produced by the Social Security Administration’s (SSA) 

Office of the Chief Actuary as well as our estimates using the SSASIM 

policy simulation model.3

 We also used the SSASIM model to examine the 

effects of these reforms on benefits that disabled beneficiaries receive. Our 

estimates using the SSASIM model are based on the intermediate 

assumptions reported in the 1999 Social Security Trustees Report because 

the Office of the Chief Actuary has scored only a few of the proposals we 

studied using the assumptions in the 2000 Social Security Trustees Report.

We analyzed the effects of Social Security reform on the Old-Age and 

Survivors Insurance (OASI) program as well as on the DI program because 

the solvency estimates are generally available for the combined programs 

only and because many disabled beneficiaries receive benefits from the 

OASI program. For example, more than 90 percent of the adult disabled 

children who receive Social Security benefits are dependents of deceased 

or retired workers and therefore receive OASI benefits. Disabled workers 

who have reached retirement age and their dependents receive benefits 

from the OASI program because DI benefits are automatically converted to 

retirement insurance benefits at the normal retirement age (NRA). 

Because little information is available about the earnings levels and work 

history of DI beneficiaries, we assumed the best possible case for disabled 

beneficiaries. Such an assumption would generally provide an upper limit 

to the benefits that most disabled beneficiaries could expect to receive 

under the Social Security reform proposals. We assumed they work fulltime until they receive disability benefits. We also assumed they received 

2

See app. I for information on these provisions. 

3

The SSASIM model, developed by the Policy Simulation Group, Inc., can simulate a variety 

of policy reforms to the Social Security program from incremental changes in the Old-Age 

and Survivors Insurance (OASI) and DI programs to broader structural reforms that would 

introduce an individual account (IA) component to the Social Security system. Additional 

information on the model and the assumptions we made in using it are in app. II.
Page 5 GAO-01-35 Social Security Reform

earnings equal to either the average economywide earnings of men or 45 

percent of the average earnings of men. Following the approach taken in 

the Report of the 1994-96 Advisory Council on Social Security, we chose a 

low administrative cost for the individual account (IA), implicitly assuming 

a centralized system of recordkeeping and a limited number of investment 

options. We assumed that individuals self-annuitized by drawing down the 

balance in the IAs through periodic withdrawals. As a result, the benefit 

income for the disabled beneficiaries whom we studied in this report will 

clearly be greater than that for disabled beneficiaries with intermittent or 

less than full-time employment who pay annuitization costs and relatively 

higher administrative costs on their IAs. 

We conducted our work between September 1999 and November 2000 in 

accordance with generally accepted government auditing standards.

Results in Brief According to estimates of SSA’s Office of the Chief Actuary, the Social 

Security reform proposals that we examined would improve the solvency 

of the combined DI and OASI trust funds. Table 1 shows that the extent of 

the improvement varies across proposals. Most of the individual proposal 

provisions, such as those that call for general revenue transfers or benefit 

reductions, would have a positive effect on the solvency of the DI trust 

fund by increasing revenues and decreasing costs, respectively. Only a few 

provisions, such as those redirecting payroll taxes to IAs, which would 

reduce trust fund revenues, and those establishing a minimum benefit, 

which would increase some benefits and therefore costs, would have a 

negative effect on the DI trust fund. 
Page 6 GAO-01-35 Social Security Reform

With regard to benefits, our analysis shows that three proposals—Kasich, 

Kolbe-Stenholm, and Gregg-Kerrey-Breaux-Grassley—would result in 

reduced benefit income for most of the disabled beneficiaries with the 

selected characteristics that we simulated when compared with a solvency 

scenario that maintains current-law benefits by increasing payroll taxes or 

other sources of revenue.4

 (See table 1.) However, most disabled 

beneficiaries would receive greater benefit income under any of these three 

proposals than under a scenario that would achieve solvency and maintain 

current payroll tax rates by reducing benefits.5

 These proposals distinguish 

between the insurance benefits received from Social Security and the 

income that would be received from the IAs created under these 

proposals.6

 The reform proposals would reduce insurance benefits while 

creating IAs, with the expectation that the income from an IA would largely 

offset reductions in the insurance benefits. In our estimates, the income 

from the IA was not sufficient to compensate for the decline in the 

insurance benefits that disabled beneficiaries would receive. This is 

especially true for the Kasich and the Gregg-Kerrey-Breaux-Grassley 

proposals, which would further reduce the insurance benefit in response to 

the potential income from the IA. Our estimates also indicate that the 

longer a beneficiary works before becoming disabled, the greater the 

income from the IA will be.

4

President Clinton’s proposal maintains current-law benefits and does not include an IA 

provision. The Archer-Shaw proposal differs from the other proposals that contain an IA 

provision in that it guarantees that individuals will receive at least the amount of their 

current-law benefits.

5

Following the approach used in the Report of the 1994-96 Advisory Council on Social 

Security, we adjusted the benefit formula so that only the benefits at the higher levels are 

reduced while the benefits at the lowest levels are unaffected. For additional information, 

see app. II.

6

In this report, we look at two kinds of benefits: the traditional benefit provided by Social 

Security, which we refer to as the insurance benefit, and the income from the IA. We refer to 

the sum of these two benefits as benefit income. The income from the IAs depends on 

assumptions as to rate of return, administrative costs, and so on, which we describe later in 

this letter and in app. II.
Page 7 GAO-01-35 Social Security Reform

Table 1: Effect of Reform Proposals on Trust Fund Solvency and Benefit Income

a

This columns represents actuarial balance as a percentage of taxable payroll. OASDI, Old-Age, 

Survivors, and Disability Insurance, refers to the combined OASI and DI programs.

b

These columns represent percentage change.

c

Proposal does not affect the level and structure of benefits. 

d

Assumes everyone opts for the IA, which is voluntary in this proposal. If no one opts for the IA, the 

actuarial balance is +0.24

Source: Estimates are based on 1999 Social Security Trustees Report.

The Social Security reform proposals we reviewed could increase costs for 

the SSI program. Individuals receiving DI or OASI benefits who have low 

levels of income and assets could supplement their income with benefits 

from the SSI program. The SSI program could be affected in two different 

ways. First, for beneficiaries who already receive SSI benefits, a reduction 

in Social Security benefits resulting from reforms could lead to an increase 

in SSI benefits (up to the legislated maximum) and thus to an increase in 

costs for the SSI program.7

 Second, a reduction in DI and OASI benefits as a 

result of reform would likely make some individuals not currently receiving 

SSI newly eligible for its benefits.

In commenting on this report, SSA noted that we addressed an important 

topic that has until now received little attention. The agency specifically 

highlighted two points in our report as being important for policy makers 

OASDI trust fund

solvencya

Benefit income: average earner who 

first receives DI at age 45b

Proposal

Maintain

benefits Maintain tax rates

Current law −0.07 c c

President Clinton’s −0.80 c c

Kasich +0.00d −15.6 +28.1

Kolbe-Stenholm +0.07 −17.7 +25.0

Archer-Shaw +0.09 c c

Gregg-Kerrey-BreauxGrassley+0.28 − 4.2 +45.3

7

If the individual account accumulations are treated as assets with regard to determining SSI 

eligibility, some low-income individuals may lose SSI benefits. Whether this loss of benefits 

in the case of disabled beneficiaries would occur when they first received benefits or when 

they reached retirement age depends upon the proposal.
Page 8 GAO-01-35 Social Security Reform

considering changes to Social Security: IAs might not fully offset Social 

Security insurance benefit reductions for some beneficiaries, and SSI 

benefits might increase as they compensate for the decline in DI benefits 

resulting from Social Security reform. However, the agency had some 

concerns about our use of a “best case” scenario to estimate the effects of 

policy options and about the assumptions underlying this scenario. SSA 

also expressed concern regarding our focus on lifetime benefits, a measure 

that it believes does not adequately reflect differences in living standards 

across policy options at specific points in time. Finally, it suggested that we 

include a measure reporting on money’s worth or internal rates of return in 

our comparison of costs and benefits of Social Security reform proposals. 

Our use of a “best case” scenario demonstrated that even under the best of 

circumstances, Social Security reform proposals could reduce benefits to 

DI beneficiaries—people who would find it more difficult than most 

nondisabled retirees to replace lost benefits with other sources of income 

such as earnings. We did not examine “worse case” scenarios because the 

“best case” scenario demonstrates that most DI beneficiaries would be 

adversely affected by the reform proposals we analyzed. With respect to 

the agency’s concern with our focus on lifetime benefits, we acknowledge 

that we do not address the issue of variations across plans in living 

standards before retirement age resulting from differences in the 

accessibility of income from the IAs. As for the inclusion of money’s worth 

or internal rate of return measures, we agree that such analysis would be 

useful, but these measures are beyond the scope of this report.

Background Working-age adults with disabilities may obtain cash benefits from a 

number of private and public programs.8

 After the onset of a disabling 

condition, workers needing long-term cash benefits may receive assistance 

from workers’ compensation, private disability insurance, or DI. However, 

in 1996, only 26 percent of private sector employees had long-term 

disability coverage under employer-sponsored private insurance plans.9

Thus, the DI program is an important provider of monthly benefits to 

workers who are no longer able to work because of a severe long-term 

disability.

8

SSA Disability: Return-to-Work Strategies From Other Systems May Improve Federal 

Programs (GAO/HEHS-96-133, July 11, 1996).

9

Private Disability Insurance (GAO/HEHS-00-18R, Nov. 5, 1999).
Page 9 GAO-01-35 Social Security Reform

Most Social Security disabled beneficiaries, including disabled workers and 

their dependents, receive benefits from the DI program. However, adult 

disabled children who are dependents of deceased or retired workers, and 

disabled workers who have reached retirement age and their dependents, 

receive monthly benefits from the OASI program.10 In 1999, about 6.5 

million beneficiaries received DI cash benefits totaling about $51.3 billion, 

while about 38.0 million beneficiaries received OASI cash benefits totaling 

about $334.4 billion.11

Benefits Available Under 

Current Law

Benefits for both OASI and DI beneficiaries are based on the application of 

the Social Security benefit formula to the worker’s average monthly 

lifetime earnings. The resulting monthly benefit is the amount payable to a 

worker who becomes entitled to disability benefits or retires at the NRA. 

Because monthly benefits for DI and OASI beneficiaries are based on the 

same benefit formula, any change in this formula, as has been proposed in 

some Social Security reform plans, could affect benefits disabled workers 

as well as retired workers receive. Both DI and OASI monthly benefits will 

also be affected by other proposed Social Security reform changes, such as 

decreases in the cost-of-living adjustment (COLA). However, only OASI 

monthly benefits are affected by proposed changes in the retirement age.12

Under current law, the age at which an individual is first eligible to receive 

full retirement benefits, or NRA, is gradually increasing from 65 to 66 for 

those who turn 62 in 2005 and to 67 for those who turn 62 in 2022. Benefits 

retired workers take before NRA are subject to an actuarial reduction. 

Benefits taken by workers who postpone retirement and work between 

NRA and age 70 are increased through a delayed retirement credit for each 

month retirement is delayed. The benefit formula is weighted in favor of 

10Disability insurance benefits are automatically converted to retirement insurance benefits 

at the NRA.

11The 6.5 million beneficiaries receiving DI cash benefits do not include adult disabled 

children who are dependents of deceased or retired workers and, therefore, receive benefits 

from the OASI program. Consequently, this number differs from the 7.4 million disabled 

beneficiaries, reported earlier, who do include adult disabled children who are dependents 

of deceased or retired workers. The 38.0 million OASI beneficiaries include adult disabled 

children who are dependents of deceased or retired workers and disabled workers whose 

benefits have been converted to retirement insurance benefits.

12The decrease in OASI benefits as a result of the increase in the retirement age may prompt 

older workers to apply to the DI program in order to receive what would be relatively 

greater disability benefits. 
Page 10 GAO-01-35 Social Security Reform

workers with lower earnings, so that benefits replace a larger proportion of 

their earnings. Benefits are adjusted each year, based on increases in the 

Consumer Price Index (CPI) in order to account for inflation.

Auxiliary benefits are paid to eligible dependents and are 50 percent of the 

Social Security benefit that the disabled or retired worker receives, subject 

to a maximum family limit on benefits. Upon the death of an insured 

worker, the eligible spouse receives 100 percent of the worker’s benefit 

(subject to reduction for age) and the eligible surviving child receives 75 

percent of the benefit.13

Individuals who receive low levels of DI or OASI benefits can supplement 

them with benefits from SSI.14 The SSI program, which was authorized in 

1972 under title XVI of the Social Security Act, is funded through general 

revenues and provides monthly benefits to aged, blind, and disabled 

individuals who have income and resources below specified thresholds. 

The DI and SSI programs use the same criteria and procedures for 

determining disability. However, unlike DI beneficiaries, SSI recipients do 

not need to have a work history to qualify for benefits. The maximum 

federal SSI monthly benefit in 1999 was $500 for an individual. This 

monthly benefit level is reduced, depending on a recipient’s income and 

other sources of support, such as Social Security benefits. In 1999, 36 

percent of SSI recipients also received Social Security benefits from either 

OASI or DI. The average federal monthly benefit in 1999 was $249 for the 

aged, $351 for the blind, and $364 for the disabled. In addition to the federal 

SSI benefits, some states provide supplemental benefits that are intended 

to reflect regional differences in living costs.

Social Security is financed primarily on a pay-as-you-go basis, which means 

that the Social Security payroll taxes that current workers pay are used to 

pay for current benefits. In 1999, there were approximately 3.4 workers for 

every beneficiary, but this number is projected to fall to 2.1 by 2030. 

13Spouses may also be eligible for benefits based on their own work records. In these cases, 

spouses receive their own worker benefits plus the difference between their spouse benefit 

and their own worker benefit. Children younger than 18 are eligible for insurance benefits. 

In addition, children who are full-time elementary or secondary students might receive 

insurance benefits until age 19. Children older than 18 might receive benefits if they are 

suffering a disability that began before age 22.

14An individual might also supplement DI benefits with benefits from private insurance. 

Benefits from private insurance might come from long-term disability insurance or from 

pension plans with disability pension features. 
Page 11 GAO-01-35 Social Security Reform

Because of this change in the ratio of workers to beneficiaries, and other 

factors, the Social Security trust funds will have a projected financial 

shortfall or funding gap of approximately $3 trillion over the next 75 years. 

According to estimates in the 2000 Trustees Report, the OASI trust fund is 

projected to have sufficient funds to fully finance benefits until 2039, while 

the DI trust fund is projected to have sufficient funds to fully finance 

benefits until 2023. After the trust funds are exhausted—that is, after 2039 

for the OASI trust fund and 2023 for the DI trust fund—the annual tax 

revenues of the trust funds are expected to be sufficient to cover only 

about 70 percent of annual expenditures.15

Social Security Reform 

Proposals Address Solvency 

by Affecting the Level and 

Structure of Benefits

In order to address the solvency of the trust funds, a number of Social 

Security reforms have been proposed. We assessed five of these proposals, 

some of which maintain the level of current law benefits and some of which 

reduce and restructure these benefits. Table 6 in appendix I lists the 

provisions in each proposal.

Two of the proposals we studied, President Clinton’s proposal and the 

Archer-Shaw proposal, maintain the current level and structure of benefits. 

(See table 2.) Three of the reform proposals we studied—Kasich, KolbeStenholm, and Gregg-Kerry-Breaux-Grassley—both reduce and restructure 

current benefits. (See table 3.)

15The OASI and DI trust funds, which together make up Social Security, are set up as two 

separate accounts in the U.S. Treasury. However, historically, there has been little real 

significance to this division with respect to the financing of the program since, over the 

years, there have been tax rate reallocations and loans between the two trust funds. The 

assets in the combined OASDI trust funds will be exhausted in 2037, according to 

projections by SSA’s Office of the Chief Actuary as reported in the 2000 Trustees Report.
Page 12 GAO-01-35 Social Security Reform

Table 2: Proposals That Maintain the Current Level and Structure of Benefits

a

The version of President Clinton’s proposal that was presented in his fiscal year 2001 budget on Feb. 

7, 2000.

Proposal Description

President Clinton’sa • Maintains current-law benefits for current and future retirees and 

disability insurance beneficiaries by requiring additional general 

fund transfers to OASDI trust funds in each fiscal year beginning 

in 2011 through 2050. In addition, a portion of these transfers 

would be invested in equities.

Archer-Shaw • Maintains current law benefits for current and future beneficiaries. 

Requires mandatory “add-on” individual accounts financed 

through a refundable tax credit paid from the general fund. The 

contribution to the IA equals 2 percent of taxable payroll. 

Beginning at retirement or disability, the account balance is 

gradually returned to the OASDI trust funds to finance benefits.

• Actual retirement or disability income could be higher, depending 

on the account balance. The benefit amount paid each month is 

either the current law amount or the payout based on the 

annuitized account balance, whichever is higher.
Page 13 GAO-01-35 Social Security Reform

Table 3: Proposals That Affect the Current Level and Structure of Benefits

a

The Kasich proposal does not explicitly refer to DI beneficiaries.

b

Because over time increases in wages have been, and are expected to continue to be, greater than 

increases in prices, indexing the benefit formula to prices rather than to wages would reduce initial 

benefits. Under current law, once the beneficiary receives the benefit, further increases in benefits are 

based on changes in the CPI. These increases in benefits are affected by changes in the COLA.

c

Disabled workers who choose the account option have the additional benefit reduction when they 

receive DI benefits, according to Congressman Kasich’s staff.

d

Current and near retirees are excluded from the reduction in the COLA. NRA increases have no effect 

on benefit levels for those who receive disability benefits up to the age they are eligible for retirement 

benefits. Disabled beneficiaries are exempt from increases in the benefit computation period.

e

The PIA is the monthly amount payable to a retired worker who begins to receive benefits on reaching 

the NRA or to a disabled worker who has never received a retirement benefit reduced for age.

f

The proposal also allows additional voluntary contributions up to $2,000 annually. Lower-income and 

middle-income earners are also eligible for a partial match. These features were not included in our 

analysis.

g

KidSave accounts are established for each child at birth with government contributions financed from 

the general fund; these continue until the child is 5 years old. Half of the KidSave contributions are 

included in calculating the offset when the individual with the KidSave account retires. This feature is 

Proposal Description

Kasicha • Reduces current law benefits by indexing initial benefits to prices rather than average wages, as under 

current law.b

• Restructures benefits by offering voluntary individual “carve-out” accounts with contributions financed by 

redirection of between 1 and 3.5 percent of individuals’ taxable earnings, with a higher percentage 

available to lower-income earners. For workers choosing the account option, an additional benefit 

reduction is made at retirement to offset contributions to their accounts.c

Gregg-Kerrey-BreauxGrassley• Reduces current law benefits by reducing the COLA, increasing the NRA to 67 sooner than under 

current law, and increasing the benefit computation period.d

• Affects current-law benefits of both retired and disabled workers by changing the primary insurance 

amount (PIA) formula to increase the progressivity of this formula.e

 Additional reductions in PIA formula 

factors apply only to retired worker benefits. 

• Restructures benefits by creating a mandatory individual “carve-out” account financed by redirecting 2 

percent of individuals’ taxable earnings.f

• At retirement age, insurance benefits for both retired and disabled workers are reduced or offset by an 

amount equal to the contributions plus interest that would have accrued had these contributions been 

invested at the interest rate earned by the OASDI trust funds.g

• Provides a minimum benefit for newly eligible aged surviving spouses of retired workers.

Kolbe-Stenholm • Reduces current-law benefits by reducing the COLA, increasing the NRA to 67 sooner than under 

current law and indexing it to changes in average life expectancy, and increasing the benefit computation 

period.h

• Reduces benefits for both retired and disabled workers by modifying the PIA formula. Additional 

reductions in benefits because of changes in longevity apply only to retired workers. Requires a report to 

the Congress in 2001 that may recommend similar reductions in DI benefits. Formula changes may 

increase the progressivity of the benefit structure.

• Restructures benefits by creating a mandatory individual “carve-out” account financed by redirection of 2 

percent of individuals’ taxable earnings.i

• Provides a minimum benefit for newly eligible retired and disabled beneficiaries.

• Insurance benefits are not reduced or offset by individual account balances.j
Page 14 GAO-01-35 Social Security Reform

not included in our analysis because the KidSave accounts begin with the cohort born in 2000, 

whereas we analyze the cohorts born in 1986 and earlier.

h

NRA increases have no effect on benefit levels for persons who receive disability benefits up to the 

age when they are eligible for retirement benefits. Disabled beneficiaries are exempt from increases in 

the benefit computation period.

i

The proposal also allows additional voluntary contributions up to $2,000 annually. Lower-income 

earners are also eligible for a partial government match and may use the earned income tax credit to 

contribute. These features were not included in our analysis.

j

The worker may purchase an annuity or request a monthly pay-out. If the monthly pay-out plus Social 

Security benefits guarantees a lifetime income equal to the poverty level, then the balance in excess of 

this requirement may be withdrawn.

The proposals we studied vary in the degree to which they explicitly refer 

to disabled beneficiaries. President Clinton’s proposal refers to maintaining 

current-law benefits for both retired and disabled workers. The ArcherShaw proposal implicitly refers to both disabled and retired workers when 

it states that beneficiaries will be guaranteed at least current-law benefits. 

However, it explicitly refers to disabled workers when it discusses 

distributions from the IAs. Workers can receive distributions from their IAs 

when they become entitled to either DI or OASI benefits. 

The Kasich proposal does not explicitly refer to disabled beneficiaries 

when discussing changes in benefits or the establishment of IAs, although 

disability benefits are affected by the provisions in the Kasich proposal. 

Rather, it emphasizes that the provisions described will not affect the 

benefits of retired workers or those near retirement. The discussion of the 

expected returns to the IAs clearly refers only to retired workers, with their 

longer work history. 

Most of the provisions in the Gregg-Kerrey-Breaux-Grassley and KolbeStenholm proposals explicitly refer to disabled or retired workers. Under 

both proposals, the benefits of disabled workers are affected by one 

reduction in the PIA formula but are exempted from a second reduction. 

Benefits of both disabled and retired workers are affected by reductions in 

the COLA. However, the provision in both proposals that increases the 

benefit computation period amends a clause in the Social Security Act that 

refers only to retired workers. The provision increasing the retirement age 

affects only the benefits of retired workers. Under both proposals, the 

restrictions on IA distributions refer to receipt either at retirement age or at 

the attainment of a particular level of funds in the IA. Under the GreggKerrey-Breaux-Grassley proposal, the insurance benefit is reduced by an 

offset related to the amount of contributions to the IA. DI beneficiaries are 

exempt from this adjustment to the insurance benefit when benefits are 

first received. However, at retirement age, when they are able to gain 
Page 15 GAO-01-35 Social Security Reform

access to the income from their IAs, insurance benefits are reduced by the 

appropriate offset. 

Social Security Reform 

Is Likely to Improve DI 

Trust Fund Solvency

Estimates by SSA’s Office of the Chief Actuary indicate that all the 

proposals would improve the solvency of the combined DI and OASI trust 

funds, with the extent of the improvement varying across proposals. In 

addition, most of the specific provisions in the proposals, such as transfers 

from general funds and reductions in benefit levels, would have a positive 

effect on the solvency of the DI trust fund. However, a provision such as the 

increase in the retirement age would have a negative effect on the DI trust 

fund while at the same time improving the OASI trust fund balance. 

The Reform Proposals 

Differ in Their Effect on 

Solvency

The reform proposals we studied had a range of effects on the trust funds’

solvency as measured by the actuarial balance. The actuarial balance as 

calculated by the Office of the Chief Actuary is the difference between the 

present value of the Social Security program’s revenues and costs over a 75-

year period and is expressed as a percentage of taxable payroll.16 If 

revenues exceed costs, the actuarial balance is positive; if costs exceed 

revenues, the actuarial balance is negative, indicating a deficit. In 1999, 

under current law, the Social Security program faced an actuarial deficit 

equal to 2.07 percent of taxable payroll.17 This figure represents the amount 

of the payroll tax rate increase in 1999 that would establish actuarial 

balance in the Social Security trust funds over the subsequent 75 years. In 

other words, increasing the payroll tax rate from the current 12.4 percent to 

14.47 percent of payroll would establish actuarial balance in the trust 

funds.

The Office of the Chief Actuary provides annual estimates of the actuarial 

balance for the combined OASI and DI trust funds under current law and, 

when requested by the Congress or the executive branch, estimates of the 

16The Social Security program’s revenues include the sum of the trust fund balance at the 

beginning of the period plus the total income during the period. The costs include the outgo 

during the period plus the targeted trust fund level at the end of the period equal to the 

following year’s outgo.

17This is the actuarial deficit as presented in the 1999 Trustees Report, based on the 

intermediate cost assumptions. We used it because the Office of the Chief Actuary scored 

the proposals we analyzed using the assumptions of the 1999 Trustees Report. According to 

the 2000 Trustees Report, the actuarial deficit is 1.89.
Page 16 GAO-01-35 Social Security Reform

actuarial balance under reform proposals.18 The estimates of the actuarial 

balance under current law and each of the reform proposals we studied are 

presented in table 4. The actuaries estimated that the trust funds’ deficit of 

2.07 percent of taxable payroll under current law would either be sharply 

reduced or become a surplus for the combined trust funds under the 

reform proposals we studied. A surplus in the combined trust funds could 

mean a surplus in one trust fund and a deficit in the other. However, a 

reallocation of payroll tax rates between the two funds would be expected 

in this case.

Table 4: Actuarial Balance of Social Security Trust Funds Under Current Law and 

Selected Reform Proposals

a

Under the Kasich proposal, the IA is voluntary. If everyone opts for the IA, the actuarial balance is 0. If 

no one opts for the IA, the actuarial balance is 0.24.

b

Under the Archer-Shaw proposal, the payroll tax rate would be reduced from 12.4 to 9.9 in 2050 and 

8.9 in 2060.

Source: Office of the Chief Actuary, memorandums to the chief actuary on the effects of selected 

Social Security reform proposals. Estimates are based on the 1999 Trustees Report.

The President’s proposal would reduce the actuarial deficit but is not 

expected to eliminate it. This would be achieved through general fund 

transfers every year from 2011 to 2050 and by allowing some limited 

investment in equities, which have a higher rate of return than do the 

government bonds in which the trust funds have traditionally been 

18The Office of the Chief Actuary does not necessarily provide estimates of the actuarial 

balance under the reform proposals separately for the DI and the OASI trust funds. For 

major solvency proposals, the OASDI program is generally considered on a combined basis, 

with the presumption of reallocation of the tax rates as needed.

 OASI and DI trust funds

Current law −2.07%

President’s proposal −0.80

Kasich +0.00/+0.24a

Kolbe-Stenholm +0.07

Archer-Shaw +0.09b

Gregg-Kerrey-Breaux-Grassley +0.28
Page 17 GAO-01-35 Social Security Reform

invested.19 Estimates for two other proposals result in a small surplus for 

the combined trust funds. The Kolbe-Stenholm proposal would generate its 

surplus through benefit cuts and general fund transfers.20 In the ArcherShaw proposal, general fund transfers would finance the contributions to 

the IAs that the proposal would establish. The proceeds from these 

accounts would be transferred to the trust funds when benefits are 

received. The proposal also calls for reducing payroll taxes in response to 

the additional trust fund revenue expected to accrue from the proceeds of 

these IAs. 

The other proposals we examined would result in larger estimated 

actuarial surpluses for the combined trust funds. The Kasich proposal 

would accomplish this by reducing the initial level of insurance benefits 

and then further decreasing insurance benefits by a fixed percentage for 

each year of contribution to an IA, as well as by borrowing from the general 

fund. The Gregg-Kerrey-Breaux-Grassley proposal would achieve its 

surplus through a mix of benefit cuts and revenue transfers that would 

offset the loss of trust fund revenues resulting from the redirection of a 

portion of the payroll taxes to the IAs.

The reform proposals we studied differ in the magnitude of the stipulated 

transfers from general revenue. Transfers are smaller under the KolbeStenholm and Gregg-Kerrey-Breaux-Grassley proposals, which contain a 

number of provisions to achieve solvency by changing benefits or 

revenues. Under the Kolbe-Stenholm proposal, general revenue transfers 

range from 0.03 percent of taxable payroll in 2000 to 0.80 percent of taxable 

payroll in 2060. General revenue transfers under the Gregg-Kerrey-BreauxGrassley proposal range from 0.6 percent of taxable payroll in 2000 to 1.2 

percent of taxable payroll in 2060. General revenue transfers are larger 

under the proposals with fewer alternative provisions for attaining 

solvency. Under the Kasich proposal, for example, the magnitude of the 

transfers ranges from 1.17 percent of taxable payroll in 2000 to 1.57 percent 

of taxable payroll around 2030.21 Under the President’s proposal, transfers 

range from a high of 2.41 percent of taxable payroll to a low of 0.52 percent 

19The general fund means the accounts for receipts not earmarked by law for a specific 

purpose, the proceeds of general borrowing, and the expenditure of this money. Transfers 

between the general fund and the trust funds do not affect the surplus or deficit in the 

government’s unified budget.

20These benefit cuts and revenue transfers would offset the loss of revenue to the trust funds 

that would result from the IAs.
Page 18 GAO-01-35 Social Security Reform

of taxable payroll between 2011 and 2050. Finally, the Archer-Shaw 

proposal calls for a general revenue transfer equal to 2 percent of taxable 

payroll beginning in 2000. 

Most, but Not All, Proposal 

Provisions Would Affect the 

DI Trust Fund Positively

Although most provisions in the proposals we examined potentially have a 

positive effect on the solvency of the DI trust fund, some provisions would 

have a negative effect. The President’s proposal has two provisions—the 

transfer of funds from general revenue to the combined OASI and DI trust 

funds and the investment of a portion of these funds in equities. According 

to the Office of the Chief Actuary, both provisions would be expected to 

have a positive effect on the solvency of the DI trust fund. The Archer-Shaw 

proposal calls for a gradual transfer of the income from the IA balances, 

which are financed from general revenue, to the trust funds. In the case of 

disabled workers, the income from the IA balances would be transferred to 

the DI trust fund. This provision also would have a positive effect on the DI 

trust fund. The Kasich proposal contains three provisions that would have 

a positive effect on DI trust fund solvency: the indexing of benefits to 

prices rather than to wages, which reduces benefits; the reduction in 

benefits for individuals who opt to contribute a portion of their payroll tax 

to an IA; and the borrowing of funds from general revenue.22 The loss of 

payroll tax revenue associated with individuals opting for IAs would 

increase the DI trust fund’s deficit, and the general fund loans are designed 

to compensate for this.23

Both the Kolbe-Stenholm and the Gregg-Kerrey-Breaux-Grassley proposals 

contain multiple provisions that would affect DI trust fund solvency. 

Provisions that reduce the COLA and change the PIA formula so as to 

reduce benefits for disabled workers lower program costs and, therefore, 

improve the actuarial balance for the DI program. However, provisions 

such as the redirection of payroll taxes to IAs and the establishment of a 

minimum benefit have potentially a negative effect on the DI trust fund.

21Under the Kasich proposal, this general revenue transfer is considered a loan that will be 

paid off beginning in 2060.

22Although the Kasich proposal contains a provision describing a loan from general revenue, 

this loan is, in effect, very similar to a general revenue transfer. There would be no principal 

repayment or interest repayment on this loan until 60 years into the future. 

23For the version of the Kasich proposal in which all individuals are assumed to opt for the 

IA, the version we analyze in this report, the Office of the Chief Actuary estimates only the 

effect of the entire proposal, not the effects of the individual provisions.
Page 19 GAO-01-35 Social Security Reform

Redirecting payroll taxes reduces revenues to the trust fund while 

establishing a minimum benefit increases program costs for beneficiaries 

who were receiving benefits below the minimum. Even provisions that 

appear to be focused on retirement benefits can have an effect on the DI 

trust fund. For example, increasing the retirement age also increases the 

age at which disability insurance benefits are converted to retirement 

insurance benefits.24 As a result, disability beneficiaries remain on the DI 

program longer, increasing costs to the DI program.25

We were able to use the SSASIM model to estimate the effects on solvency 

of certain of the provisions in the reform proposals. Our estimates using 

the model are based on the intermediate assumptions reported in the 1999 

Social Security Trustees Report because the SSA’s Office of the Chief 

Actuary used these assumptions to score the Social Security reform 

proposals we analyzed. Table 5 presents our results. Reductions in benefits 

have a positive effect on DI trust fund solvency. The increase in the 

retirement age results in the expected negative effect on solvency of the DI 

trust fund.

24Also, the resulting decrease in OASI benefit levels might cause some individuals to apply 

for DI benefits rather than waiting to retire and apply for OASI benefits, as they would 

otherwise do. If such an increase in applications were to result in an increase in DI 

beneficiaries, there could be an increase in costs to the DI program and a resulting increase 

in the actuarial deficit. According to recent estimates that SSA’s Office of the Chief Actuary 

has made, this effect is relatively small.

25Social Security Reform: Implications of Raising the Retirement Age (GAO/HEHS-99-112, 

Aug. 27, 1999).
Page 20 GAO-01-35 Social Security Reform

Table 5: Estimated Change in Current Law Actuarial Balance for Selected Reform 

Provisions

Source: GAO estimates using the SSASIM model. These estimates are consistent with independent 

estimates produced by the Office of the Chief Actuary. 

Certain Reform 

Proposals Could 

Reduce Benefit Income 

for Disabled 

Beneficiaries

Two reform proposals we studied either maintain current-law benefits—

the President’s proposal—or guarantee that the beneficiary would receive 

at least the amount of current-law benefits—the Archer-Shaw proposal. 

The remaining three reform proposals—Kasich, Kolbe-Stenholm, and 

Gregg-Kerrey-Breaux-Grassley—would affect the levels of insurance 

benefits DI and OASI beneficiaries receive by changing the PIA formula for 

calculating initial benefits, reducing the COLA, raising the retirement age, 

or increasing the number of years of earnings used in computing benefits. 

How a beneficiary’s total benefit income (reduced insurance benefits plus 

IA income) under these three proposals compares with the benefits 

received under a maintain-benefits scenario or a maintain-tax-rates 

scenario depends both on the extent of the decrease in the insurance 

benefits and on the amount of income received from the IA. 

Our maintain-benefits scenario achieves solvency through increased 

payroll taxes while current-law benefits are maintained.26 Our maintain-taxrates scenario achieves solvency through benefit reductions while holding 

current payroll tax rates at today’s levels. These two scenarios represent a 

range of benefit levels, with the maintenance of current-law benefits being 

OASI DI

Actuarial balance

Current law −1.70% −0.38%

Change in actuarial balance

Reduction in COLA (Gregg-Kerrey-Breaux-Grassley) +0.58 +0.06

 Indexing benefits to prices (Kasich) +1.90 +0.40

 Raising retirement age (Gregg-Kerrey-Breaux-Grassley) +0.18 −0.01

26The maintain-benefits scenario could also be funded through transfers from the general 

fund to the trust fund. For our analysis of the effect of Social Security reform on benefits, 

the funding source is not material. However, the source of funding—whether revenue 

transfers or payroll tax increases—will have implications for individuals’ net earnings and 

for the economy as a whole. 
Page 21 GAO-01-35 Social Security Reform

at the upper end and the reduced benefits necessary for the maintenance of 

current payroll taxes being at the lower end. 

We compared the benefit income received under each of the three 

proposals with that received under the maintain-benefits scenario and the 

maintain-tax-rates scenario for each of three beneficiary groups with the 

selected characteristics that we simulated: disabled workers, dependents 

of disabled workers (including spouses, children younger than 18, and 

adult disabled children), and adult disabled children who are dependents of 

retired workers.27 We made the comparisons under each of several 

different assumptions about the year in which the worker was born, the 

worker’s earnings level, and the worker’s age when the worker first 

received DI benefits.28 We chose the ages of initial benefit receipt to reflect 

SSA data indicating that individuals are receiving DI benefits at younger 

ages.29 For the IAs in our analysis, we assumed that individuals would have 

portfolios with a smaller percentage invested in equities as they got older. 

We assumed the return on equities would be a constant, inflation-adjusted 7 

percent per year, which reflects the long-term historical average return on 

equities.

Some Reform Proposals 

Would Reduce Benefit 

Income

According to our estimates, the disabled beneficiaries with the selected 

characteristics we simulated would, in general, receive higher benefits 

under the maintain-benefits scenario than they would under the Kasich, 

Kolbe-Stenholm, or Gregg-Kerrey-Breaux-Grassley proposals. Figures 1 

and 2 present the results for workers as well as their dependents. The 

workers were born in 1986 and have low or average earnings and, in the 

27In the following analysis, we use the present value of all lifetime benefit income received 

by the beneficiary to compare proposals and scenarios. The present value of benefit income 

is the equivalent value, at a point in time, of the entire stream of insurance benefits and IA 

income the individual receives in his or her lifetime. In our analysis, lifetime benefit income 

was discounted using the Treasury bond rate.

28See app. II for a discussion of these assumptions.

29We focus on individuals who begin receiving DI benefits at age 45 for the following 

reasons. The average age of new beneficiaries in 1999 was slightly younger than 50, 

compared with 30 years ago, when the average age was consistently above 50. Further, most 

terminations of benefits result from death or retirement. Thus, beneficiaries are staying in 

the program longer, and it is important to understand how Social Security reform affects 

these younger disabled workers. Additional information on the characteristics of DI 

beneficiaries is in app. II.
Page 22 GAO-01-35 Social Security Reform

case of disabled workers, first receive DI benefits at the age of 45 and never 

work again. 

Figure 1: Lifetime Benefit Income of Low-Earnings Worker and Dependents Under Selected Proposals and Alternative Solvency 

Scenarios

Note: Assumes 1986 birth cohort. Disabled worker receives DI first at age 45 and never works again. 

Adult disabled child benefit is based only on retired worker’s benefit. The alternative solvency 

scenarios are the maintain-benefits scenario, which achieves solvency through increased payroll taxes 

while current-law benefits are maintained, and the maintain-tax-rates scenario, which achieves 

solvency through benefit reductions while maintaining current payroll tax rates.

0

50

100

150

200

250

300

350

400

450

Gregg-Kerrey- Kasich Kolbe-Stenholm Maintain Tax Rates

Breaux-Grassley

Maintain Benefits

Disabled Worker

Disabled Worker Dependent

Adult Disabled Child

Present Value of Benefit Income (Dollars in Thousands)

Proposals/Scenarios
Page 23 GAO-01-35 Social Security Reform

Figure 2: Lifetime Benefit Income of Average-Earnings Worker and Dependents Under Selected Proposals and Alternative 

Solvency Scenarios

Note: Assumes 1986 birth cohort. Disabled worker receives DI first at age 45 and never works again. 

Adult disabled child benefit is based only on retired worker’s benefit. The alternative solvency 

scenarios are the maintain-benefits scenario, which achieves solvency through increased payroll taxes 

while current-law benefits are maintained, and the maintain-tax-rates scenario, which achieves 

solvency through benefit reductions while maintaining current payroll tax rates.

These reform proposals would reduce insurance benefits while providing 

income from the IAs. Under these proposals, it is possible that the IA 

income might compensate for the decline in insurance benefits resulting 

from other provisions. However, this is less likely for disabled-worker 

beneficiaries than for retired-worker beneficiaries because disabled 

workers are likely to have shorter work histories and thus have smaller IA 

balances.30 The reductions in benefits resulting from the decline in the 

COLA and the changes in the PIA formula are so great that the income from 

0

100

200

300

400

500

600

700

Gregg-Kerrey- Kasich Kolbe-Stenholm Maintain Tax Rates

Breaux-Grassley

Maintain Benefits

Present Value of Benefit Income (Dollars in Thousands)

Proposals/Scenarios

Disabled Worker

Disabled Worker Dependent

Adult Disabled Child

30In addition, under the Gregg-Kerrey-Breaux-Grassley and Kolbe-Stenholm proposals, 

disabled workers would in most cases not be able to gain access to the income from their IA 

accounts until they reached retirement age. Therefore, depending on the age when they 

begin receiving DI benefits, they could be receiving reduced insurance benefits for a long 

time before receiving IA income. See table 7 in app. I and accompanying text for a fuller 

discussion of this issue.
Page 24 GAO-01-35 Social Security Reform

the IA would be insufficient to completely compensate for this loss for the 

disabled-worker beneficiaries with the selected characteristics that we 

examined. Disabled workers with low earnings and their dependents would 

receive greater benefit income under the Gregg-Kerrey-Breaux-Grassley 

proposal than under the maintain-benefits solvency scenario. However, this 

higher benefit income is largely the result of changes in the PIA formula 

that increase the progressivity of the benefit structure.31

For the proposals we examined, we included the income from the IA only 

in the benefit income of the disabled or retired worker, not in that of the 

worker’s dependents, since apportioning the IA income among family 

members is an individual matter and would vary by household.32

Consequently, benefit income for dependents of disabled or retired 

workers would be reduced under the Gregg-Kerrey-Breaux-Grassley, 

Kasich, and Kolbe-Stenholm proposals not only because of reductions in 

the insurance benefit but also because it does not include income from 

individual accounts. In addition, the insurance benefits of dependents 

include only the amount received during the years in which the worker on 

whose earnings record the benefits are payable is receiving insurance 

benefits. 

Contrary to the results of our comparisons with the maintain-benefits 

scenario, in our comparison of each of the three proposals with the 

maintain-tax-rates scenario, we found that in most cases the beneficiary 

would receive higher benefit income under the proposals than under the 

scenario. However, dependents of low-earner disabled workers under the 

Kasich proposal would receive benefit income that is less than under the 

maintain-tax-rates scenario. Also, adult disabled children of retired 

workers would receive somewhat lower benefit income under all three 

31Adult disabled children who are dependents of retired workers also benefit from these 

changes in the PIA formula that increase the progressivity of the benefit structure. However, 

adult disabled children are also, as OASI beneficiaries, subject to another PIA provision in 

the proposal that decreases benefits.

32In this report, we do not consider the effect on benefits resulting from the application of 

the maximum family benefit. For further discussion of this issue, see app. II.
Page 25 GAO-01-35 Social Security Reform

proposals in almost all cases.33 These results are presented in figures 1 and 

2.

The benefit income received under the three proposals would generally be 

greater than the benefits received under the maintain-tax-rates solvency 

scenario because the proposals have provisions for achieving solvency, 

such as general revenue transfers, in addition to reducing benefits. As a 

result, the insurance benefits would not have to decline as much as in the 

maintain-tax-rates scenarios. Further, the benefit income workers would 

receive under the proposals includes income from IAs.

Most Proposal Provisions 

Would Reduce Insurance 

Benefits 

We also examined individual provisions within the three proposals to 

assess their contribution to the change in the level of insurance benefits 

received. Reductions in the COLA instituted under the Gregg-KerreyBreaux-Grassley and Kolbe-Stenholm proposals would decrease insurance 

benefits relatively little compared with the maintain-benefits scenario for 

both disabled workers and their beneficiaries and for adult disabled 

children of retired workers.34 Figure 3 presents the estimated effects of the 

decrease in the COLA on workers born in 1986 who first receive disability 

benefits at the age of 45 and never work again. The pattern of change in the 

present value of benefit income for dependents of disabled workers and for 

adult disabled children who are dependents of retired workers is similar to 

that shown in figure 3 for disabled workers.

33Under the Gregg-Kerrey-Breaux-Grassley and Kolbe-Stenholm proposals, the insurance 

benefits of adult disabled children are subject to the same reductions as those of disabled 

beneficiaries as well as to an additional PIA reduction from which disabled beneficiaries are 

exempt. The Kasich proposal adjusts the PIA formula so that benefits at all earnings levels 

are reduced. Under the maintain-tax-rates scenario, we adjust the PIA formula so that the 

benefits at the lowest levels are not reduced; only the benefits at the higher levels are 

reduced. Consequently, the benefits for lower earners would be smaller under the Kasich 

proposal than under the maintain-tax-rates scenario. For a more detailed description of how 

we adjusted the PIA formula, see app. II.

34The difference across proposals in the magnitude of the effect reflects the extent of 

reduction specified—0.33 percentage point in the Kolbe-Stenholm proposal and 0.5 

percentage point in the Gregg-Kerrey-Breaux-Grassley proposal. The effect of a COLA 

reduction is compounded over time. The cumulative effect of a 0.5 percentage point 

reduction over a period of 30 years is 13.5 percent.
Page 26 GAO-01-35 Social Security Reform

Figure 3: Comparison of COLA Changes to Lifetime Insurance Benefits of Disabled Workers With Alternative Solvency 

Scenarios

Note: Assumes disabled worker born in 1986, receives DI first at age 45, and never works again. The 

Kasich proposal is not included because it does not have a COLA provision. The alternative solvency 

scenarios are the maintain-benefits scenario, which achieves solvency through increased payroll taxes 

while current-law benefits are maintained, and the maintain tax-rates scenario, which achieves 

solvency through benefit reductions while maintaining current payroll tax rates.

Changes in the PIA formula, however, generally result in large reductions in 

insurance benefits relative to the maintain-benefits scenario. The one 

exception is a provision of the Gregg-Kerrey-Breaux-Grassley proposal that 

would increase benefits for workers with certain levels of earnings, thereby 

increasing benefits for low earners and decreasing benefits by a relatively 

smaller amount for average earners. Figure 4 displays the effects on 

disabled workers of changes in the benefit calculation formula. The pattern 

in the present value of benefit income for the two other categories of 

beneficiaries is similar to that shown in figure 4 for disabled workers.

0

100

200

300

400

500

600

700

Gregg-Kerry- Kolbe-Stenholm Maintain Tax Rates

Breaux-Grassley

Maintain Benefits

Present Value of Insurance Benefits (Dollars in Thousands)

Proposals/Scenarios

Average Earner

Low Earner
Page 27 GAO-01-35 Social Security Reform

Figure 4: Comparison of PIA Changes to Lifetime Insurance Benefits of Disabled Workers With Alternative Solvency Scenarios 

Note: For PIA changes that affect both disabled and retired workers. Assumes disabled worker born in 

1986, receives DI first at age 45, and never works again. The alternative solvency scenarios are the 

maintain-benefits scenario, which achieves solvency through increased payroll taxes while current-law 

benefits are maintained, and the maintain tax-rates scenario, which achieves solvency through benefit 

reductions while maintaining current payroll tax rates.

The insurance benefits of adult disabled children who are dependents of 

retired workers would also be significantly decreased by an additional 

change in the PIA formula applicable only to OASI benefits under the 

Gregg-Kerrey-Breaux-Grassley and Kolbe-Stenholm proposals. Figure 5 

displays the effects on the insurance benefits of adult disabled children 

resulting from this PIA change.35

0

100

200

300

400

500

600

700

Gregg-Kerrey- Kasich Kolbe-Stenholm Maintain Tax Rates

Breaux-Grassley

Maintain Benefits

Present Value of Insurance Benefits (Dollars in Thousands)

Proposals/Scenarios

Average Earner

Low Earner

35We also analyzed the effect on benefits of increases in the NRA and in the number of years 

of earnings used to compute benefits. These provisions affect only the benefits of retired 

workers and their dependents. The provision increasing the NRA had little effect on benefits 

because the NRA (67) is the same for the 1986 birth cohort under the maintain-benefits 

scenario and the Gregg-Kerrey-Breaux-Grassley proposal and only slightly higher under the 

Kolbe-Stenholm proposal. The provision increasing the number of years in the benefit 

calculation had little effect because we assumed the retired worker was steadily employed 

with no years of low or no earnings. 
Page 28 GAO-01-35 Social Security Reform

Figure 5: Comparison of PIA Changes to Lifetime Insurance Benefits With Alternative Solvency Scenarios for Adult Disabled 

Child Dependent of Retired Worker 

Note: For PIA changes that affect only retired workers. Assumes retired worker born in 1986. Kasich 

proposal does not have PIA changes that affect only retired workers. The alternative solvency 

scenarios are the maintain-benefits scenario, which achieves solvency through increased payroll taxes 

while current-law benefits are maintained, and the maintain tax-rates scenario, which achieves 

solvency through benefit reductions while maintaining current payroll tax rates.

As we stated earlier and as is shown in figure 3, reductions in the COLA 

result in relatively small declines in the level of current-law benefits. 

Consequently, the levels of insurance benefits that would be received under 

this provision would be greater than the benefit income received under the 

maintain-payroll-tax-rates scenario, in which benefits would be reduced to 

levels supportable by current payroll tax rates. Despite the large reductions 

in insurance benefits resulting from the changes in the PIA formula, most 

disabled beneficiaries would be better off under this provision in the 

proposals than under the maintain-tax-rates scenario. The exception 

occurs for all three types of low-earner beneficiaries under the Kasich 

proposal’s change in the PIA formula. This provision in the Kasich proposal 

indexes initial benefits to prices rather than to wages, resulting in a sharp 

decline in benefits. The effects of the PIA changes on the disabled worker 

are shown in figure 4.

0

20

40

60

80

100

120

Gregg-Kerry- Kolbe-Stenholm Maintain Tax Rates

Breaux-Grassley

Maintain Benefits

Present Value of Insurance Benefits (Dollars in Thousands)

Proposals/Scenarios

Average Earner

Low Earner
Page 29 GAO-01-35 Social Security Reform

Provisions for Individual 

Accounts Would Slightly 

Increase Benefit Income for 

Disabled Workers 

According to our estimates, the effect on the disabled worker’s benefit 

income of the IA provision alone is positive under the Gregg-KerreyBreaux-Grassley, Kasich, and Kolbe-Stenholm proposals.36 Benefit income 

would increase the most under the Kolbe-Stenholm proposal because the 

IA income does not reduce insurance benefits. Benefit income under the 

Gregg-Kerrey-Breaux-Grassley proposal would also increase but by less 

because the proposal reduces insurance benefits by an amount that reflects 

the present value of the government contributions to the IA plus the 

interest that would have accrued had these contributions been invested at 

the interest rate earned by the OASDI trust funds.37 The benefit income 

received under the Kasich proposal would also be less than that received 

under the Kolbe-Stenholm proposal because under the Kasich proposal 

insurance benefits would be reduced by a fixed percentage for each year of 

contributions to the IA.38 Figure 6 shows the effect of the IA provision for 

both the low-earning and the average-earning disabled worker.

36Our analysis assumes that the IA balance is used up by the account holder during his or her 

lifetime so that the treatment of the balance at death is not an issue.

37DI beneficiaries are subject to this offset when they gain access to their IA balances, which 

for most DI beneficiaries would occur at retirement age. (See app. I.) Until the beneficiary 

reaches retirement age, his or her benefits are unaffected by the balance in the IA.

38IAs under the Kasich proposal would be voluntary. Our analysis looked at beneficiaries 

who opt for the IA because we were asked to analyze the effects of IA provisions in the 

proposals.
Page 30 GAO-01-35 Social Security Reform

Figure 6: Lifetime Benefit Income of Disabled Workers Under IA Provisions and Alternative Solvency Scenarios

Note: Assumes disabled worker born in 1986, receives DI first at age 45, and never works again. 

Under the Gregg-Kerrey-Breaux-Grassley and Kasich proposals, the insurance benefit is reduced by 

an amount reflecting the contribution to the IA. We assume all IA income is received by the disabled 

worker and not by dependents. The alternative solvency scenarios are the maintain-benefits scenario, 

which achieves solvency through increased payroll taxes while current-law benefits are maintained, 

and the maintain tax-rates scenario, which achieves solvency through benefit reductions while 

maintaining current payroll tax rates.

In our analysis, we assigned the income from the IA to the disabled or 

retired worker, not to the worker’s dependents, because the apportionment 

of the IA income among family members is an individual matter and would 

vary by household. Thus, our estimates reflect the most that the worker 

would receive from the IAs, whereas our estimates for the dependents 

reflect the most that their benefits would be reduced under these 

proposals. Accordingly, for the dependent of the disabled worker and for 

the adult disabled child, the IA will not increase benefit income because we 

assumed that these beneficiaries, unlike the worker, receive no income 

from the IA. Under the Kolbe-Stenholm proposal, there would be no 

reduction in the benefit income of dependents because changes in IA 

income do not affect the level of insurance benefits. However, the Kasich 

proposal would decrease the insurance benefit of the worker by a set 

percentage for each year of contributions to the IA. The Gregg-KerreyBreaux-Grassley proposal would reduce the insurance benefit of the 

0

100

200

300

400

500

600

700

Gregg-Kerrey- Kasich Kolbe-Stenholm Maintain Tax Rates

Breaux-Grassley

Maintain Benefits

Present Value of Benefit Income (Dollars in Thousands)

Proposals/Scenarios

Average Earner

Low Earner
Page 31 GAO-01-35 Social Security Reform

worker by an amount that reflects the present value of the government 

contribution to the IA plus the interest that would have accrued had these 

contributions been invested at the interest rate the OASDI trust funds earn. 

The insurance benefit that the dependent receives is a proportion of what 

the worker receives. Consequently, the insurance benefit that the 

dependent receives would be reduced under our assumption that 

dependents receive no compensating income from the IA under the GreggKerrey-Breaux-Grassley and Kasich proposals. (See figures 7 and 8.)39

Figure 7: Lifetime Benefit Income of Dependent of Disabled Worker Under IA Provisions and Alternative Solvency Scenarios

Note: Assumes disabled worker born in 1986, receives DI first at age 45, and never works again. 

Under the Gregg-Kerrey-Breaux-Grassley and Kasich proposals, the insurance benefit is reduced by 

an amount reflecting the contribution to the IA. We assume all IA income is received by the disabled 

worker and not by dependents. The alternative solvency scenarios are the maintain-benefits scenario, 

which achieves solvency through increased payroll taxes while current-law benefits are maintained, 

and the maintain-tax-rates scenario, which achieves solvency through benefit reductions while 

maintaining current payroll tax rates.

39See app. I for how the IAs differ across proposals. The effect of IAs on lifetime benefit 

income also depends on the legislated characteristics of the IA (for example, how much can 

be invested and in what types of assets) and the assumptions about the return on 

investments, administrative costs, and so on.

0

50

100

150

200

250

300

350

Gregg-Kerrey- Kasich Kolbe-Stenholm Maintain Tax Rates

Breaux-Grassley

Maintain Benefits

Present Value of Benefit Income (Dollars in Thousands)

Proposals/Scenarios

Average Earner

Low Earner
Page 32 GAO-01-35 Social Security Reform

Figure 8: Lifetime Benefit Income of Adult Disabled Child Dependent of Retired Worker Under IA Provisions and Alternative 

Solvency Scenarios

Note: Assumes retired worker born in 1986. Under the Gregg-Kerrey-Breaux-Grassley and Kasich 

proposals, the insurance benefit is reduced by an amount reflecting the contribution to the IA. We 

assume all IA income is received by the retired worker and not by dependents. The alternative 

solvency scenarios are the maintain-benefits scenario, which achieves solvency through increased 

payroll taxes while current-law benefits are maintained, and the maintain tax-rates scenario, which 

achieves solvency through benefit reductions while maintaining current payroll tax rates.

The IA provision would increase benefit income for disabled workers 

compared with the maintain-benefits scenario. Consequently, the benefit 

income of the disabled workers we examined would also be greater than 

the benefits available under the maintain-tax-rates scenario. In our 

analysis, we assigned all the IA income to the disabled or retired worker 

and none to the worker’s dependents. As a result, under the Gregg-KerreyBreaux-Grassley and Kasich proposals, dependents would experience the 

reduction in insurance benefits related to the existence of an IA but would 

not receive any compensating income from the IA, under our assumptions. 

However, even the reduced insurance benefits that dependents would 

receive would be greater than the benefits they would receive under the 

maintain-tax-rates scenario.

0

20

40

60

80

100

120

Gregg-Kerrey- Kasich Kolbe-Stenholm Maintain Tax Rates

Breaux-Grassley

Maintain Benefits

Present Value of Benefit Income (Dollars in Thousands)

Proposals/Scenarios

Average Earner

Low Earner
Page 33 GAO-01-35 Social Security Reform

In the analysis presented so far, we have provided graphs showing the 

effect of the reform proposals on the worker who first receives DI benefits 

at the age of 45 and never works again.40 However, the income from the IA 

is affected by the number of years for which contributions are made to the 

IA and, therefore, by the age at which the worker leaves the labor force and 

begins receiving DI benefits. To see how the income received from the IA 

would vary by age of first receipt of DI benefits, we compared the income 

received from the IA by workers who began receiving DI benefits at 

different ages. Figures 9 and 10 provide the net addition of the IAs to 

benefit income—that is, the addition to benefit income after reductions are 

made in the insurance benefit in response to the income from the IA. 

Figures 9 and 10 indicate that the income received from the IA increases 

with the age of first receipt of DI benefits. The later that DI benefits are 

received, the greater the number of years in the labor force, the number of 

years funds are deposited in the IA, and the number of years the IAs accrue 

compound interest. The addition of IA income to benefit income across 

ages would be greatest under the Kolbe-Stenholm proposal, which would 

not reduce the insurance benefit in response to the income received from 

the IA. The Gregg-Kerrey-Breaux-Grassley proposal would reduce the 

insurance benefit by an amount that reflects the present value of the 

government contributions to the IA plus the interest that would have 

accrued had these contributions been invested at the interest rate earned 

by the OASDI trust funds. The Kasich proposal would reduce the insurance 

benefit by one-third of a percent for each year of participation in the IA. 

40We assumed in our analysis that the worker remains in the labor force until he or she 

begins receiving DI benefits.
Page 34 GAO-01-35 Social Security Reform

Figure 9: Net Addition of IA to Current-Law Lifetime Benefit Income Under Selected Reform Proposals: Low-Earnings Worker 

Disabled at Various Ages

Note: Assumes 1986 birth cohort. Under the Gregg-Kerrey-Breaux-Grassley and Kasich proposals, 

the insurance benefit is reduced by an amount reflecting the contribution to the IA. We assume all IA 

income is received by the disabled worker, not by dependents.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Gregg-Kerrey-Breaux-Grassley Kasich Kolbe-Stenholm

Disabled at 35

Disabled at 45

Disabled at 55

Present Value of Benefit Income (Dollars in Thousands)

Reform Proposals
Page 35 GAO-01-35 Social Security Reform

Figure 10: Net Addition of IA to Current-Law Lifetime Benefit Income Under Selected Reform Proposals: Average-Earnings 

Worker Disabled at Various Ages

Note: Assumes 1986 birth cohort. Under the Gregg-Kerrey-Breaux-Grassley and Kasich proposals, 

the insurance benefit is reduced by an amount reflecting the contribution to the IA. We assume all IA 

income is received by the disabled worker, not by dependents.

Certain Reform 

Proposals Could 

Increase SSI Program 

Costs

Some Social Security reform proposals could increase costs for the SSI 

program. Individuals receiving benefits from both Social Security (DI or 

OASI) and SSI might become eligible for larger SSI benefits if their Social 

Security benefits decrease as a result of reform. In addition, some Social 

Security beneficiaries not currently eligible for SSI might become eligible if 

their Social Security benefits declined as a result of reform. 

As we stated earlier, we estimated that three Social Security reform 

proposals—Gregg-Kerrey-Breaux-Grassley, Kasich, and Kolbe-Stenholm—

would lower Social Security benefit income, which includes income from 

IAs, in most of the cases we studied. For DI and OASI beneficiaries who 

also receive SSI, the decrease in Social Security benefit income would 

lower their unearned income, which means that their SSI benefit would 

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Gregg-Kerrey-Breaux-Grassley Kasich Kolbe-Stenholm

Present Value of Benefit Income (Dollars in Thousands)

Reform Proposals

Disabled at 35

Disabled at 45

Disabled at 55
Page 36 GAO-01-35 Social Security Reform

increase.41 This would have no effect on the number of recipients but 

would increase the cost to the program. For the beneficiaries who receive 

only Social Security and not SSI, the previously mentioned decrease in 

benefit income would lower unearned income, which would make some 

eligible for SSI benefits. This would increase both the number of 

beneficiaries and the cost to the program. However, the full effect on SSI 

would not be felt immediately because most of the individual provisions 

within these proposals are to be phased in over time and in many cases are 

not to be completely in effect until 2020. Given the complexity of the 

interactions between Social Security and SSI and the difficulty of 

projecting SSI caseloads so far into the future, it would be extremely 

difficult to estimate precisely what the effects of reform proposals would 

be on SSI program costs.

Concluding 

Observations

In the cases we studied, our analyses indicate that most disabled 

beneficiaries would receive higher benefits under Social Security reform 

proposals than under a solvency scenario that maintained payroll tax rates 

while reducing benefits. However, most disabled beneficiaries with the 

characteristics we studied would receive lower benefits under reform than 

under a solvency scenario that maintained current-law benefits while 

raising payroll taxes. This reduction in benefits under reform to levels 

below that of current law would occur even though we assumed an optimal 

set of conditions for disabled beneficiaries: full-time work until receipt of 

DI benefits and low administrative costs and no annuitization costs for the 

IAs. Consequently, the typical DI beneficiary could receive lower benefits 

than the DI beneficiaries with the selected characteristics we studied. 

The proposals we studied treat DI beneficiaries similarly to OASI 

beneficiaries. However, the circumstances facing disabled workers differ 

from those facing retired workers. For example, the disabled worker’s 

options for alternative sources of income, especially earnings-related 

income, to augment the reduced benefits are likely to be more limited than 

are those for the retired worker. Further, DI beneficiaries are entering the 

program at younger ages and remaining in the program in most cases until 

death or retirement. Thus, disabled beneficiaries could be subject to these 

41If the individual account accumulations are treated as assets with regard to determining 

SSI eligibility, some low-income individuals may lose SSI benefits. Whether this loss of 

benefits in the case of disabled beneficiaries would occur when they first received benefits 

or when they reached retirement age depends on the proposal.
Page 37 GAO-01-35 Social Security Reform

reductions in benefits for many years. They will also have smaller balances 

in their IAs because of fewer working years in which to make IA 

contributions and accrue compounded interest. In addition, under several 

proposals, disabled beneficiaries cannot gain access to income from 

individual accounts until they reach retirement age. These differences 

between disabled and retired workers suggest that Social Security reform 

proposals should be viewed not only in light of their effects on retired 

workers but also explicitly for their effect on disabled beneficiaries and 

their families.

Agency Comments We provided a draft of this report to SSA. In commenting on this report, the 

agency noted that we addressed an important topic that has until now 

received little attention. Specifically, SSA highlighted two points in our 

report as being important for policy makers considering changes to Social 

Security: that individual accounts might not fully offset Social Security 

insurance benefit reductions for some beneficiaries and that SSI benefits 

might increase as they compensate for the decline in DI benefits resulting 

from Social Security reform. However, the agency had some concerns 

about our use of a “best case” scenario to estimate the effects of policy 

options and about the assumptions underlying this “best case” scenario, 

citing specifically earnings levels, life expectancy, and investment return 

assumptions that SSA thought did not reflect the actual situation of 

disabled beneficiaries. On the basis of these concerns, the agency 

suggested that we give the report balance by adding a “worst case”

scenario. SSA also expressed concern regarding our focus on lifetime 

benefits, a measure that it believes does not adequately reflect living 

standards at specific points in time. Finally, SSA suggested that we include 

a measure reporting on money’s worth or internal rates of return in our 

table 1 that compares costs and benefits of Social Security reform 

proposals. SSA also made a number of technical comments, which we 

incorporated where appropriate.

Our use of a “best case” scenario demonstrated that, even under the best of 

circumstances, Social Security reform proposals would reduce current-law 

benefits to DI beneficiaries—people who would find it more difficult than 

most nondisabled retired workers to replace lost benefits with other 

sources of income such as earnings. We did not examine “worse case”

scenarios because the “best case” scenario demonstrates that most DI 

beneficiaries would be adversely affected by the reform proposals we 

analyzed. While including the “worst case” scenario SSA suggested could 

provide a specific lower limit to a range of possible benefit outcomes, that 
Page 38 GAO-01-35 Social Security Reform

lower limit would be useful only if accompanied by an evaluation of the 

adequacy of that benefit level, which is beyond the scope of this report. 

In building a “best case” scenario, we used the earnings of men because 

they tend to have higher earnings than women do. To examine low-wage 

earners, we simulated workers who earn 45 percent of average earners, 

which is the standard low level of earnings the Office of the Chief Actuary 

uses. Benefits declined at this earnings level as they would for workers 

earning even less. We assumed individuals lived until 79 because almost 

one-third of individuals first receiving DI benefits at age 45 live that long, 

and the number of these individuals is significant enough to warrant study. 

With respect to SSA’s concern about our use of an equity return of 7 

percent, we note that this is a figure currently used in projections, including 

those of the Office of the Chief Actuary. We chose not to adjust for risk 

because there is no one risk-adjusted measure that everyone agrees is the 

best measure, and we believed that our analysis would be more clearly 

understood with the simplifying “best case” assumptions.

With respect to SSA’s concern with our focus on lifetime benefits, we 

acknowledge that we do not address the issue of variations across plans in 

living standards before retirement age resulting from differences in 

account access rules. This is certainly an issue on which future reports 

could usefully focus. As for the inclusion of money’s worth or internal rate 

of return measures, we agree that such analysis would be useful, but these 

measures are beyond the scope of this report. SSA’s written comments are 

printed in appendix III.

We are sending copies of this report to the Commissioner of the Social 

Security Administration and others who are interested. We will also make 

copies available to others on request. If you or your staff have any 

questions concerning this report, please call me on (202) 512-7215. The 
Page 39 GAO-01-35 Social Security Reform

major contributors to this report are Carol Dawn Petersen, Assistant 

Director, (202) 512-7066; Barbara A. Smith, Senior Economist; Michael 

Collins, Economist; and Kim Granger, Economist.

Sincerely,

Barbara D. Bovbjerg, Director

Education, Workforce, and Income Security Team
Page 40 GAO-01-35 Social Security Reform

Appendix I

The Social Security Reform Proposals and Apendxies

Their Provisions ApendxiI

Table 6 lists the provisions in the five proposals we studied.

Table 6: Social Security Reform Provisions 

Note: P = President’s proposal, AS = Archer-Shaw, GKBG = Gregg-Kerrey-Breaux-Grassley (S. 1383), 

KS = Kolbe-Stenholm (H.R. 1793), K = Kasich. 

a

Affects benefits received by disabled beneficiaries, including disabled workers and their dependents 

and disabled dependents of retired workers. 

b

Raising the NRA refers to either accelerating the already scheduled increases in the NRA or 

immediately increasing the age of eligibility for retirement benefits.

c

Although the Kasich proposal contains a provision describing a loan from general revenue, this loan is 

in effect very similar to a general revenue transfer. There is no principal repayment or interest 

repayment until 60 years into the future.

Source: Analysis performed and outlined in the SSA Office of the Chief Actuary memorandums.

Table 7 shows that the access to the IA and the relationship between the IA 

and the insurance benefit vary across the proposals we studied. Under the 

Archer-Shaw and Kasich proposals, individuals can obtain funds from their 

IAs at the age of retirement or when they become eligible for Disability 

Insurance (DI) benefits. Under the Gregg-Kerrey-Breaux-Grassley and 

Kolbe-Stenholm proposals, disabled individuals are able to obtain IA 

income before retirement age only if the funds in the IA are sufficient to 

provide a monthly income that, when added to the insurance benefit, is at 

least equal to 1/12 of the current poverty line. According to the Social 

Security Administration (SSA), this threshold for account access would be 

virtually impossible for workers disabled at a relatively young age to meet 

Provision

Proposal

P AS GKBG KS K

Reduce the cost-of-living adjustment (COLA)a x x

Change the primary insurance amount (PIA) 

formulaa

 x x x

Establish a minimum level of benefitsa x

Raise the normal retirement age (NRA)a,b x x

Increase the benefit computation perioda x x

Introduce individual accounts (IA)a x x x x

Transfer funds explicitly from the general fund x x x x xc

Credit benefit taxation revenue to the trust 

funds

 x x

Maintain coverage of taxable earnings x

Establish a minimum level of spousal benefits x

Establish individual accounts for newborns x
Appendix I

The Social Security Reform Proposals and 

Their Provisions

Page 41 GAO-01-35 Social Security Reform

because they would not have the time to build up an IA. In addition, 

insurance benefits are not affected by the presence of IA income under the 

Archer-Shaw and Kolbe-Stenholm proposals. Under the Gregg-KerreyBreaux-Grassley and Kasich proposals, there are reductions in the 

insurance benefit because of the existence of an IA.

Table 7: Individual Account Provisions

Proposal Beneficiary access to IA income

Adjustment to insurance 

benefit Effect on beneficiaries

Archer-Shaw When individual attains normal or 

early retirement age or becomes 

eligible for DI benefits.

No reduction in insurance 

benefits. Proceeds from IA are 

transferred to Old-Age, 

Survivors, and Disability 

Insurance (OASDI) trust funds.

Beneficiary receives larger of 

current law benefit or monthly 

income from IA. 

Gregg-Kerrey-BreauxGrassleyWhen individual attains normal or 

early retirement age or when funds 

in IA are sufficient to provide 

monthly benefit that, when added to 

insurance benefit, equals or 

exceeds 1/12 of poverty line.

Insurance benefit reduced or 

offset by amount of contribution 

plus interest accrued at rate 

earned by the OASDI trust 

funds.

When IA income is received, 

beneficiary also receives reduced 

insurance benefit.

Kasich When individual attains normal or 

early retirement age or becomes 

eligible for DI benefits.

Insurance benefit reduced by 

1/3 percent for each year 

contributions are made to IA.

At qualifying age, DI beneficiary 

receives both reduced insurance 

benefit and income from IA. IA 

income could make up for 

reduction in insurance benefit.

Kolbe-Stenholm Same as Gregg-Kerrey-BreauxGrassley.None, no offset due to IA. But 

insurance benefit is less than 

current-law benefit because of 

other provisions in bill.

Beneficiary receives income from 

IA in addition to insurance benefit. 

IA income could compensate for 

decline in insurance benefit 

because of other provisions.
Page 42 GAO-01-35 Social Security Reform

Appendix II

Alternative Solvency Scenarios and the Social 

Security Simulation Model ApendxiI

The Calculation of 

Alternative Scenarios

Maintain Tax Rates and 

Decrease Benefits

This scenario maintains current payroll tax rates while reducing Social 

Security benefits to levels supportable by these tax rates. There are many 

ways to reduce benefits, including waiting until the trust funds are 

exhausted and abruptly reducing benefits by the full amount necessary to 

be supported by current payroll taxes. We decided to follow a more gradual 

approach similar to that used in the “MTR (maintain tax rates) Proposal”

presented in the Report of the 1994-96 Advisory Council on Social Security. 

The Council’s proposal reduces the 0.32 and 0.15 PIA formula factors by 0.5 

percent for 1998-2011 and 1.5 percent for 2012-30. The PIA adjustments 

used in this report also reduce the 0.32 and 0.15 formula factors but by 2.0 

percent for 2000-13 and 3.0 percent for 2014-32, which results in the 

percentage reductions in benefits shown in table 8. 

Table 8: Reductions in Benefits

a

The year in which the benefit reduction amount is realized, based on the PIA reductions. For example, 

a woman retiring in 2005 would receive a benefit that is 3.17 percent lower than current law. Because 

the SSASIM model has benefit relative to earnings by gender, reductions are calculated separately for 

men and women. 

These percentage declines in benefits result in trust fund solvency through 

2074 under the 1999 Trustee’s Report intermediate assumptions. We 

assume no behavioral changes in response to the decline in benefits 

because it is not clear how individuals will respond to the decline in 

benefits—whether they will continue to retire at younger ages or will 

postpone retirement to later ages in order to receive larger benefits.

OASI and DI 

Year Women Men

2005a 3.17% 5.88%

2016 8.68 16.07

2022 11.87 21.98

2034 16.74 31.01
Appendix II

Alternative Solvency Scenarios and the 

Social Security Simulation Model

Page 43 GAO-01-35 Social Security Reform

We instituted benefit reductions in the maintain-tax-rates scenario by 

reducing only the 0.15 and the 0.32 brackets of the PIA formula, following 

the approach used by the Advisory Council. (The PIA formula is described 

below.) This is important to take into account when comparing benefits 

under the maintain-tax-rates scenario with benefits for disabled 

beneficiaries under the Social Security reform proposals. Kasich reduces 

all three brackets, the 0.90 bracket as well as the 0.15 and 0.32 brackets. 

These reductions apply to both disabled and retired workers and their 

dependents. This is why benefits for lower earners under Kasich’s PIA 

provision are below those calculated in the maintain-tax-rates scenario. 

The Kolbe-Stenholm proposal, however, reduces only the upper two 

brackets for disabled-worker beneficiaries and does not reduce these 

brackets by as much as the maintain-tax-rates scenario does.1

 Therefore, 

benefits for disabled low earners and their dependents under the KolbeStenholm proposal are greater than benefits under the maintain-tax-rates 

scenario. The Gregg-Kerrey-Breaux-Grassley proposal creates an 

additional bracket and increases the 0.32 bracket to 0.70. This explains the 

increase in benefits for low earners above the benefits received under the 

maintain-benefits scenario. 

The full unreduced monthly benefit amount for worker beneficiaries is 

determined by using the PIA formula. This formula consists of three 

brackets separated by two bend points. In 1999, these bend points were 

$505 and $3,043 for newly eligible beneficiaries. A worker’s PIA is 

calculated as 0.90 of the first $505 of career-average indexed monthly 

earnings (AIME), plus 0.32 of any AIME amount between $505 and $3,043 

and 0.15 of any AIME amount in excess of $3,043.

Maintain Benefits and 

Increase Tax Rates

This scenario maintains current-law benefits while increasing payroll tax 

rates to levels that support those benefits. There are many ways to increase 

payroll tax rates, including waiting until the trust fund is exhausted and 

then abruptly increasing payroll tax rates to levels that would support 

current-law benefits. We follow an approach similar to that used in the “PL 

PAYGO Proposal” presented in the Report of the 1994-96 Advisory Council 

on Social Security in which payroll tax rates are increased more gradually. 

The PL PAYGO option modifies the present law payroll tax rate schedule 

1

Under Kolbe-Stenholm, retired workers face an additional benefit reduction to all three PIA 

factors (0.90, 0.32, and 0.15) of 0.5 percent. These PIA reductions also affect benefits for 

adult disabled children of retired workers.
Appendix II

Alternative Solvency Scenarios and the 

Social Security Simulation Model

Page 44 GAO-01-35 Social Security Reform

from 12.4 percent beginning in 1995 and reaching 17.1 percent in 2060. The 

present law payroll tax rate adjustments used for this report are in table 9.

Table 9: Payroll Tax Rates

a

The year the adjustments are made to payroll taxes in the SSASIM model.

These payroll tax rates result in trust fund solvency through 2074 under the 

1999 Trustees Report intermediate assumptions. Note that 85 percent of the 

OASDI payroll tax rate is assigned to the OASI program, 15 percent to the 

DI program.

The SSASIM Model To assess how the Social Security reform proposals affect the solvency of 

the Social Security trust funds and the level of benefits individuals receive, 

we conducted a variety of simulations using the SSASIM model, developed 

by the Policy Simulation Group. The initial version of the model was 

developed under a series of contracts from SSA as part of the 1994-96 

Advisory Council on Social Security’s activities. The model was 

subsequently enhanced with major support from the American Association 

of Retired Persons, the Employee Benefit Research Institute, and SSA as 

well as other organizations. The model can simulate a variety of policy 

reforms to the Social Security program, from incremental changes in the 

OASI and DI programs to broader structural reforms that would introduce 

an IA component to the Social Security system.

The SSASIM model simulates the dynamic interaction of the labor force, 

the economy, and the Social Security programs and can be used to generate 

aggregate program cost and income estimates as well as estimates for the 

OASI and DI trust funds. Changes in program structure can be analyzed for 

any specified future time periods. Consistent with SSA’s annual projections, 

we explored the effect of such changes on OASI and DI trust fund solvency 

for the 75-year period 1999-2074. The implications of a reform relative to 

Yeara OASDI OASI DI

2000-24 12.4 10.6 1.80

2025-29 15.4 13.12 2.28

2030-49 16.2 13.79 2.41

2050-59 17.1 14.55 2.55

2060-73 18.0 15.31 2.69
Appendix II

Alternative Solvency Scenarios and the 

Social Security Simulation Model

Page 45 GAO-01-35 Social Security Reform

one of the alternative scenarios that achieve solvency are determined by 

comparing the output results from a simulation that assumes the reform 

policy with results from a simulation that assumes one of the two 

alternative scenarios. 

Assumptions Used in the 

Analysis of the Effects of 

the Social Security Reform 

Proposals on Solvency

In our analysis, we made a number of assumptions. With respect to 

population and economic projections, we used the intermediate 

assumptions in the 1999 Annual Report of the Board of Trustees of the 

federal OASI and DI trust funds. We use the assumptions in the 1999 

Trustees Report because the Office of the Chief Actuary used these 

assumptions to score the Social Security reform proposals we analyzed. 

(See table 10.)

Table 10: Economic and Demographic Intermediate Assumptions From the 1999 

Trustees Report 

Note: The intermediate assumptions represent the trustees’ “best estimates” of likely future economic 

and demographic conditions. We used these numbers throughout our analysis.

a

The ultimate value is maintained for the remainder of the 75-year projection period.

b

Number of children per woman.

c

Number of persons per year. 

Assumption

Ultimate

value

Year ultimate

value was attaineda

Annual percentage

Labor force participation

 Women 60.6 2075

 Men 73.8 2075

Unemployment rate 5.5 2009

Inflation rate 3.3 2007

Labor productivity growth 1.3 2008

Growth rate of wages as share of compensation −0.2 2008

Growth rate of hours worked −0.1 2008

Nominal interest rate 6.3 2007

Mortality rate decline 0.6 2023

Annual number

Total fertility rate 1.9b 2023

Net immigration 900,000c 1999
Appendix II

Alternative Solvency Scenarios and the 

Social Security Simulation Model

Page 46 GAO-01-35 Social Security Reform

Assumptions in the Analysis 

of the Effects of the Reform 

Proposals on Individual 

Benefits

We analyzed how the reforms affect individuals born in 1946, 1966, and 

1986 in order to assess the effects of provisions that are phased in over 

time. We analyzed how the reforms affect individuals with average earnings 

and with 45 percent of average earnings to see how the reform provisions 

affect workers at different earnings levels. The model contains information 

on earnings separately for men and women. The user can specify a genderrelated earnings pattern. Our analysis uses the earnings pattern for men. 

These earnings are based on the national average annual earnings of 

covered workers with earnings. Using 1998 data from SSA, we compared 

our choice of earnings levels with the earnings levels of actual new 

beneficiaries. We did so by calculating the DI benefit corresponding to our 

selected earnings levels and comparing these benefit levels with the 

distribution of benefits actual DI beneficiaries received in 1998. We found 

that about 42 percent of all new beneficiaries in 1998 received benefits that 

correspond to earnings that are less than 45 percent of average earnings, 

about 38 percent of new beneficiaries received benefits corresponding to 

earnings that are between 45 percent of average earnings and average 

earnings, and about 20 percent of new beneficiaries received benefits 

corresponding to earnings that are greater than the average level. 

We analyzed how the reforms affected individuals with three different ages 

of first receipt of DI benefits (35, 45, and 55) to compare the experiences of 

people disabled at younger ages with those disabled at older ages. These 

three ages reflect the experiences of individuals with different lengths of 

time in the DI program and with different lengths of time in the labor force. 

According to SSA, the average age of a new male DI beneficiary in 1999 was 

49.6 years, down from 51.2 years in 1980. In 1999, 19.3 percent of men’s new 

benefits were awarded to individuals younger than 40, 24 percent to those 

in their 40s, and 40 percent to those in their 50s.2

 DI benefits for disabled 

workers are terminated mostly because of the death of the beneficiary or 

the attainment of retirement age and conversion of benefits to the OASI 

program; only half of 1 percent of DI beneficiaries leave the program each 

year because of work.3

2

2000 Annual Statistical Supplement to the Social Security Bulletin.

3

2000 Annual Statistical Supplement to the Social Security Bulletin and Work Incentives for 

Blind and Disabled Social Security Beneficiaries (GAO/HEHS unnumbered correspondence, 

Aug. 8, 2000).
Appendix II

Alternative Solvency Scenarios and the 

Social Security Simulation Model

Page 47 GAO-01-35 Social Security Reform

According to SSA data on awards made to DI beneficiaries in 1998, the type 

of disability that new DI beneficiaries claimed is somewhat associated with 

age. In 1998, mental disorders were the most common diagnosis for new DI 

awardees younger than 35, while diseases of the musculoskeletal system 

were the most common diagnosis for those aged 50 and older. For new 

awardees younger than 35, mental disorders accounted for 34 percent 

while diseases of the musculoskeletal system accounted for 11 percent. For 

new DI awardees aged 50 and older, diseases of the musculoskeletal 

system accounted for 27 percent while mental disorders accounted for 

11 percent.4

We assumed that individuals enter the workforce at age 22 and work fulltime until disability or retirement with no years out of the labor force. We 

chose these assumptions because they represent a “best case” for the 

disabled individual. Many disabled individuals are likely to work less than 

full-time and to have periods of time out of the labor force.5

 However, little 

information is available on the wages, earnings histories, and periods of 

nonwork of the disabled. This makes it difficult to choose a “typical”

earnings level and earnings pattern for them. The benefit income for our 

“best case” disabled individuals will clearly be greater than that for 

disabled individuals receiving lower earnings from intermittent and less 

than full-time employment. Our results, therefore, represent a maximum 

level of benefit income that disabled beneficiaries could expect to receive 

under the Social Security reform proposals that we modeled.

We also assumed that the nondisabled workers we simulated retire at age 

67 and that all the individuals we simulated die at age 79. We made these 

assumptions so that in our simulations the retired workers and all disabled 

workers with a given age of first receipt of DI benefits would have the same 

number of years of receiving benefits. Thus, differences in benefit income 

across individuals would be the result of differences in reform proposals 

and not the result of differences in individual characteristics. Because of 

the possibility that actual disabled individuals might have a lower life 

4

See SSA, 1999 Annual Statistical Supplement to the Social Security Bulletin (Washington, 

D.C.: 2000).

5

In an earlier report, we found that an increasing number of new DI applicants need 

supplementary SSI benefits, which suggests that these applicants are less well off and might 

have less extensive and less highly paid work histories than DI applicants had in the past. 

See Social Security: Disability Rolls Keep Growing, While Explanations Remain Elusive

(GAO/HEHS-94-34, Feb. 8, 1994).
Appendix II

Alternative Solvency Scenarios and the 

Social Security Simulation Model

Page 48 GAO-01-35 Social Security Reform

expectancy than we assumed for our simulation, we asked SSA’s Office of 

the Chief Actuary to send us death rates for men who were born in 1986 

and began receiving DI benefits at age 45. We then calculated the 

proportion who would still be alive at ages 46 to 79. According to our 

calculations, 49 percent of these individuals would still be alive at 70, and 

31 percent would still be alive at 79.

We assumed that the benefits workers and their dependents received were 

not affected by the application of the maximum family benefit. The 

maximum family benefit refers to the maximum amount that can be paid on 

a worker’s earnings record. In the case of retired or deceased workers, the 

maximum varies from 150 to 188 percent of the PIA. In the case of disabled 

workers, the maximum family benefit is the smaller of 85 percent of the 

worker’s AIME or 150 percent of the worker’s PIA. The family maximum 

cannot be exceeded, regardless of the number of beneficiaries entitled on 

that earnings record, although any benefit payable to a divorced spouse is 

not included. Whenever the total of the individual monthly benefits payable 

to all the beneficiaries entitled on one earnings record exceeds the 

maximum, each dependent’s or survivor’s benefit is reduced in equal 

proportion to bring the total within the maximum. 

For the analysis of IAs, we assumed that administrative costs are 0.105 

percent of assets. Our estimate of administrative costs is that used in the 

Report of the 1994-96 Advisory Council on Social Security. The Council 

considered an option to create IAs alongside the Social Security system 

with a centralized system of recordkeeping and limited investment choices. 

The estimate of 0.105 percent of assets was a consensus of the Council 

members. We also assumed that individuals do not annuitize but, rather, 

draw down the balance in the IA through periodic withdrawals.6

Consequently, the balance in the account is not reduced by the costs 

associated with purchasing an annuity. We also assumed that individuals 

know how long they are going to live and thus determine the schedule of 

periodic withdrawals so as to use up the entire balance in the IA by the 

time they die. These assumptions result in the largest balance possible in 

the IAs.

6

Very few individuals in the United States purchase life annuities, according to the studies 

we consulted.
Appendix II

Alternative Solvency Scenarios and the 

Social Security Simulation Model

Page 49 GAO-01-35 Social Security Reform

For the Kolbe-Stenholm, Gregg-Kerrey-Breaux-Grassley, and Kasich 

proposals, we used the same assumptions that SSA’s Office of the Chief 

Actuary used in scoring the Kolbe-Stenholm proposal. Following the 

approach taken in the Report of the 1994-96 Advisory Council on Social 

Security, we varied the percentage invested in equities according to age. We 

assumed that persons younger than 40 would invest 55 percent of their 

account in equities, with an average real return of 4.8 percent for the 

portfolio. We assumed that those 40 to 49 would invest 50 percent of their 

account in equities, with an average real return of 4.5 percent. We assumed 

that those 50 to 59 would invest 40 percent of their account in equities, with 

an average real rate of return of 4.1 percent. We assumed that those 60 to 69 

would invest 20 percent of their accounts in equities, with an average real 

return of 3.1 percent. We assumed the portion not invested in equities 

would be invested in Treasury bonds and the return on equities would be a 

constant, inflation-adjusted 7 percent per year, which reflects the long-term 

historical average return on equities. We note that the assumption of a 7 

percent return on equities in the future has been criticized by some as being 

optimistic.7

We did not adjust the rates of return on equities for risk. As we stated in a 

recent report, there are numerous ways to adjust for risk but no clearly 

best way, and there is no one risk-adjusted measure that everyone agrees is 

the correct measure.8

 As a result, the returns on equity that we use are 

likely to be higher than the risk-adjusted returns.

7

See the 1999 Technical Panel on Assumptions and Methods.

8

Social Security: Capital Markets and Educational Issues Associated With Individual 

Accounts (GAO/GGD-99-115, June 28, 1999).
Page 50 GAO-01-35 Social Security Reform

Appendix III

Comments From the Social Security 

Administration ApendxiI
Appendix III

Comments From the Social Security 

Administration

Page 51 GAO-01-35 Social Security Reform
Appendix III

Comments From the Social Security 

Administration

Page 52 GAO-01-35 Social Security Reform

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