Report to the Chairman, Subcommittee

on Social Security, Committee on Ways

and Means, House of Representatives

United States General Accounting Office

GAO

November 2001 SOCIAL SECURITY

Program’s Role in

Helping Ensure

Income Adequacy

GAO-02-62
Page i GAO-02-62 Social Security and Income Adequacy

Letter 1

Results in Brief 3

Background 6

Social Security Has Focused on Reducing Dependency From its

Inception 7

No Single Measure Gives Complete Picture of Income Adequacy 11

Adequacy of Beneficiaries’ Total Income Has Generally Increased

Over Time 14

Income Adequacy in the Future Will Depend on Extent and Nature

of Program Changes 24

Concluding Observations 36

Agency Comments 39

Appendix I Descriptions of Adequacy Measurement Methods 40

Current Poverty Thresholds 46

Experimental Poverty Thresholds 48

Family Budgets 50

Family Expenditures 54

Material Hardship 55

Median Family Income 57

One-Half Median Family Income 57

Per Capita Personal Income 58

Public Assistance 60

Public Opinion 62

Earnings Replacement Rates 64

Appendix II Characteristics of Adequacy Measures Used in Our

Analyses 67

Current Poverty Thresholds 67

Median Family Income and 50 Percent of Median Family Income 70

Public Assistance 71

Earnings Replacement Rates 72

Appendix III Defining Benchmarks for Analysis of Future Benefits 73

Criteria 73

Tax-Increase-Only Benchmark Policies 74

Benefit-Reduction-Only Benchmark Policies 74

Contents
Page ii GAO-02-62 Social Security and Income Adequacy

Appendix IV Description of Approaches Used to Forecast Future

Benefits 80

MINT 80

GEMINI 81

Brief Comparison of the Models 83

Illustrative Workers 84

Appendix V GAO Contacts and Staff Acknowledgments 87

GAO Contacts 87

Acknowledgments 87

Tables

Table 1: Summary of Benchmark Policy Scenarios 26

Table 2: Overview of the Purpose, Construction, and Other

Dimensions of 11 Methods To Measure Income Adequacy 42

Table 3: Summary of Benchmark Policy Scenario Parameters 79

Table 4: Comparison of GEMINI Data to Published Social Security

Data 83

Table 5: Median Annual Social Security Income for Individuals in

2020 for the 1955 Cohort Only by Marital Status: A

Comparison of MINT and GEMINI 84

Table 6: Distribution of Actual Workers Retiring in 1999 by Level,

Relative to PIA Levels for Hypothetical Steady Earnings

Cases Retiring in 1999 86

Figures

Figure 1: Dependence of Elderly on Federal Means-Tested Cash

Benefits Has Declined as More Receive Social Security 15

Figure 2: Poverty Rates for Elderly Have Declined Faster Than for

Other Groups 16

Figure 3: Median Income of the Elderly Has Grown Faster Than the

Poverty Threshold But Not Faster Than the One-Half

Median Income Threshold (Single Person Households

Aged 65 and Older) 17

Figure 4: Historical Social Security Replacement Rates for

Illustrative Workers 19

Figure 5: Share of Elderly Receiving Other Sources of Retirement

Income Has Also Grown 21
Page iii GAO-02-62 Social Security and Income Adequacy

Figure 6: Certain Subgroups of the Elderly More Likely to be in

Poverty (1999) 23

Figure 7: Increasing Retirement Age Diminishes Replacement

Rates Under Current Law 28

Figure 8: Adequacy Outlook Depends on Adequacy Standard Used

(Retired Workers, All Retiring at Age 62, Under TaxIncrease Only Benchmark) 30

Figure 9: Adequacy of Income in Future Depends on Benefit

Reduction Approach (Retired Workers, All Retiring at Age

62) 32

Figure 10: Benefit Reduction Approaches Have Different Effects on

Different Benefit Levels (Retired Workers Born in 1985,

All Retire at Age 62) 34

Figure 11: Effects of Benefit Reductions on Various Groups Reflect

Varying Effects by Income Levels 35

Abbreviations

AIME Average Indexed Monthly Earnings

BLS Bureau of Labor Statistics

CEX Consumer Expenditure Survey

CPS Current Population Survey

GAO General Accounting Office

HEW Health, Education, and Welfare

MBR Master Beneficiary Records

MINT Model of Income in the Near-Term

MTR Maintain Tax Rates

NAS National Academy of Science

NIPA national income and product accounts

OAA Old-Age Assistance

OAI Old-Age Insurance

OASDI Old-Age, Survivors, and Disability Insurance

PIA Primary Insurance Amount

PENSIM Pension Policy Simulation Model

PSG Policy Simulation Group

SSA Social Security Administration

SSI Supplemental Security Income
Page 1 GAO-02-62 Social Security and Income Adequacy

November 30, 2001

The Honorable E. Clay Shaw, Jr.

Chairman

Subcommittee on Social Security

Committee on Ways and Means

House of Representatives

Dear Mr. Chairman:

Before Social Security was enacted in 1935, at least half of those 65 and

older in the United States were financially dependent upon others,

including family members and public assistance.1

 Today, dependency on

public assistance has dropped to a fraction of its depression-era levels,

and poverty rates among the elderly2

 are now lower than for the

population as a whole. At the same time, Social Security has become the

single largest source of retirement income and provides income for over

90 percent of those 65 and older. However, in the future, Social Security’s

role could change. Reductions in promised benefits and/or increases in

program revenues will be needed to restore the long-term solvency and

sustainability of the program. Within the program’s current structure,

possible benefit changes might include changes to the benefit formula or

reductions in cost-of-living increases, among other options; revenue

increases might include increases in payroll taxes or transfers from the

Treasury’s general fund.3

 The various approaches to restoring solvency

and sustainability will have different effects on benefit levels.

To gain a better understanding of how Social Security benefits help ensure

adequate income, you asked us to address: (1) how concern over income

adequacy has shaped the Social Security program; (2) what measures help

to examine income adequacy; (3) how income adequacy has changed over

 1

 S. Rep. No. 74-628 at 4 (1935).

2

 In this report, we use “elderly” to refer to persons aged 65 and older.

3

 Also, some proposals would change the structure of the program to incorporate a system

of individual accounts. Many such proposals would reduce benefits under the current

system and make up for those reductions to some degree with income from the individual

accounts. Individual account proposals also try to increase revenues, in effect, by providing

the potential for higher rates of return on account investments than reserve funds would

earn under the current system.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-02-62 Social Security and Income Adequacy

time, especially for different groups of beneficiaries; and (4) under the

current system, how Social Security benefit levels and adequacy might

change in the future.

To assess how concern over income adequacy has shaped Social Security,

we examined the legislative history, reviewed the applicable literature, and

interviewed key individuals familiar with the program’s history. To identify

measures that help examine income adequacy, we reviewed literature and

interviewed experts. (See app. I and II.) To examine historical adequacy

trends, we analyzed published government data on historical income and

benefits, examined benefits for illustrative workers, and examined

detailed data for the current population. To illustrate the range of potential

future benefit levels under the current system, we developed and used

alternative benchmark policies that achieve 75-year solvency either by

only increasing payroll taxes or by only reducing promised benefits. Our

tax-increase-only benchmark uses a one-time permanent increase in

payroll taxes beginning in 2002, though any policy that achieved solvency

only by increasing taxes would have identical effects on adequacy. Our

benefit-reduction-only benchmarks gradually phase in reductions from

2005 to 2035; the reductions are accomplished by changing the parameters

of the benefit formula in various ways to achieve either proportional or

progressive reductions. (See app. III.) As we agreed, we did not examine

any reforms that would restructure the current system, for example by

creating a new system of individual accounts. Also, we did not report on

any measures of individual equity, which measure the relationship

between contributions and benefits, such as rates of return. Any of our

benchmarks would have effects on individual equity as well as income

adequacy. With our benchmarks, we used two models to simulate benefit

levels for future populations of beneficiaries, using the 2001 Social

Security Trustees’ intermediate assumptions.4

 At our request, the Social

Security Administration’s (SSA) Office of Policy applied our benchmark

policies to its Model of Income in the Near-Term (MINT); and under

contract to us, the Policy Simulation Group applied our benchmark

policies to its GEMINI model. Both models are designed to examine a

representative sample of future beneficiaries. (See app. IV.) We conducted

 4

 For the annual report of the Board of Trustees for the Social Security Trust Funds, SSA

actuaries project future revenues and benefits. For these projections, they use alternative

assumptions regarding economic and demographic trends, including average earnings,

mortality, fertility, and immigration. The intermediate assumptions represent the board’s

best estimate of future trends.
Page 3 GAO-02-62 Social Security and Income Adequacy

our review from March through November 2001 in accordance with

generally accepted government auditing standards.

From Social Security’s inception, one of its fundamental objectives has

been to reduce the extent of dependency on public assistance programs,

and the program’s design has reflected that objective as it has evolved.

Over time, public discussion has included the role that Social Security play

in as helping to ensure adequate incomes for the beneficiary population.

According to our analysis of the program’s history, “adequacy” was never

explicitly defined, although the Congress expected that benefits would

eventually provide more than a minimal subsistence in retirement for fulltime, full-career workers. Benefits were set in a way that focused

especially on replacing some portion of pre-retirement earnings. In 1950,

the first benefit increases were enacted since benefits had first been paid;

government reports had called for increases, partly out of concern that

inflation had eroded the purchasing power of benefits. Then, for more than

20 years, benefits were increased periodically but on an ad hoc basis

reflecting judgments of how high they should be and taking into account

economic and fiscal conditions. In 1972, automatic adjustments were

introduced to reflect increases in the cost of living. Other program changes

expanded the number of people receiving Social Security benefits, such as

gradually increasing coverage to larger portions of the workforce and

extending eligibility to family members and disabled workers. Other

benefit programs such as Supplemental Security Income (SSI), Medicare,

and Medicaid, were instituted that were also intended to help cover costs

of living for the aged and disabled. Also, as House and Senate reports from

1939 noted, individual savings and other resources were also expected to

play a significant role.5

With regard to measuring income adequacy, various measures help

examine different aspects of this concept, but no single measure can

provide a complete picture. Three examples illustrate the variety of

approaches.

• Dependency rates measure what proportion of the population depends on

others for income support, or more specifically on government income

support programs such as SSI. Such rates reflect Social Security’s goal of

reducing dependency on public assistance.

 5

 H.R. Rep. No. 76-728 at 5 (1939); S. Rep. No. 76-734 at 5 (1939).

Results in Brief
Page 4 GAO-02-62 Social Security and Income Adequacy

• Poverty rates measure what proportion of the population have incomes

below the official poverty threshold, which is just one of many adequacy

standards used in similar rate calculations. The poverty threshold provides

a minimal standard of adequacy, but moderate standards have also been

developed over the years for similar rate calculations, such as moderate

family budgets for elderly couples. Each standard reflects a different

outlook on what adequacy means.

• Earnings replacement rates measure the extent to which retirement

income replaces pre-retirement income for particular individuals and

thereby helps them maintain a pre-retirement standard of living. This

measure reflects the way Social Security’s benefit formula is designed to

replace earnings, and financial advisors commonly use it for individual

retirement planning. Still, a very low earner could have a high replacement

rate and still have very low income, while a high earner could have a low

replacement rate and live quite comfortably.

For any of these measures, the meaning of a given value of the measure is

not clear. For example, what value of a dependency or poverty rate is

considered low enough and what replacement rate is considered high

enough are quite subjective. Moreover, all of these types of measures

depend significantly on what types of income are counted, such as beforeor after-tax income or noncash benefits such as Medicare and Medicaid.

As a result, the measures are most useful for making comparisons,

whether over time, across different subpopulations, or across different

policy scenarios.

The adequacy of income for the elderly has increased substantially by

several measures. For example, since 1940, the percentage of the elderly

receiving public income support has fallen from 22 to 9 percent, and since

1959, poverty rates for the elderly have fallen from 35 to 10 percent.

However, the greatest changes occurred in the first 20 to 40 years of the

program. In the last 20 years, the extent of any change depends on the

measure used; change has slowed or even stopped according to some

measures. Coinciding with these changes have been changes in the various

sources of retirement income. Most notably, Social Security is now the

largest single source of retirement income, providing more than 40 percent

of aggregate income to more than 90 percent of elderly households. Also,

coverage under employer pensions has increased, retirement savings have

increased, work patterns of the elderly have changed, and major noncash

benefits have become widely available, such as Medicare. For various

subgroups of beneficiaries that tend to have lower lifetime earnings,

poverty rates have also declined considerably. However, high proportions

of such beneficiary groups continue to have incomes below the poverty
Page 5 GAO-02-62 Social Security and Income Adequacy

threshold. For example, poverty among blacks aged 65 and older has fallen

from over 50 percent to just over 20 percent, but at that level, it remains

more than twice as high as for all the elderly. While the Social Security

benefit formula favors lower lifetime earners, their lower earnings and

work histories nevertheless can leave them with incomes below poverty

when they retire or become disabled.

As our analysis illustrates, the outlook for future Social Security benefit

levels and income adequacy generally will depend on how the program’s

long-term financing imbalance is addressed, as well as on the measures

used. Even without reductions in currently promised benefits, monthly

benefit levels could decrease as the program’s full retirement age

increases under current law, depending on the retirement decisions of

future retirees. Still, in that same case, the outlook varies for different

adequacy measures. For example, using adequacy measures that reflect

wage increases, such as median family incomes, adequacy should not

change markedly from today because the current benefit formula is also

designed to reflect wage increases.6

 In contrast, using measures that

reflect only price increases such as the official poverty threshold,

adequacy would appear to improve considerably if wages increase faster

than prices on average, as the Social Security trustees’ report assumes

they will. In that case, benefits would in turn increase faster on average

than the threshold.7

 Moreover, the outlook would depend on how any

benefit reductions might be made. As our analysis illustrates, benefit

reductions that do more to protect lower earners would increase the risk

of poverty less than ones that do not. In turn, such progressive benefit

reduction approaches would increase the risk of poverty less for

beneficiary groups that tend to have low earnings, such as minorities and

women. Finally, the adequacy of total incomes will depend on what

happens to other sources of income, such as employer-sponsored

pensions, individual savings, employment earnings, SSI, and noncash

benefit programs such as Medicare.

 6

 Some reform proposals would revise the benefit formula to reflect price increases instead

of wage increases.

7

 The outlook would also depend on how workers respond to policy changes. For example,

faced with increased Social Security taxes, workers might save less and have less

retirement income from saved assets as a result.
Page 6 GAO-02-62 Social Security and Income Adequacy

Title II of the Social Security Act, as amended, establishes the Old-Age,

Survivors, and Disability Insurance (OASDI) program, which is generally

known as Social Security. It provides cash benefits to retired and disabled

workers and their dependents and survivors. Workers become eligible

when they have enough years of earnings covered under Social Security;

they and their employers pay payroll taxes on those covered earnings. In

1999, about 96 percent of all U.S. jobs are covered , and over 40 million

people received $386 billion in benefits, which averaged about $800 per

month or $9600 per year. The benefit formula takes into account the

lifetime history of earnings and replaces a higher percentage of earnings

for lower earners than for higher earners.

In contrast, the Supplemental Security Income (SSI) program provides

income support to eligible aged and disabled persons regardless of their

earnings history. Funds for SSI benefits come from general revenues, not

payroll taxes. Persons with income or assets that exceed certain

thresholds are not eligible for SSI. In 2001, the maximum federal SSI

monthly benefit is $531 for an individual and $796 for a couple and is

reduced to reflect receipt of other income, including OASDI benefits. In

December 1999, over 6.5 million people received federally-administered

SSI benefits; of these about 6.3 million received a federal benefit and about

2.4 million received an SSI state supplemental benefit. In December 1999,

the average monthly federal benefit was $342; the average monthly

federally-administered state supplement was $111.

Medicare’s Hospital Insurance benefits are generally provided

automatically and free of premiums to persons aged 65 or older who are

eligible for Social Security or Railroad Retirement benefits. Similarly,

individuals who have been entitled to Social Security or Railroad

Retirement disability benefits for at least 24 months are entitled to such

benefits. In addition, Supplementary Medical Insurance benefits are

available on a voluntary basis with a monthly premium to cover doctors’

services, tests, and a variety of over medical services. In 1999, Medicare

paid a total of $210 billion in benefits and covered nearly 40 million

enrollees. According to current estimates, the Hospital Insurance trust

fund will be exhausted in 2029.

Medicare beneficiaries and others who have low incomes and limited

resources may also receive help from the Medicaid program. In 1998,

Medicaid made $142 billion in payments for medical services for 41 million

recipients, of which about 4 million were aged 65 or older and 6.6 million

were disabled. Average payments were about $10,200 for the aged and

$9,100 for the disabled. Roughly $32 billion was paid for nursing facilities.

Background
Page 7 GAO-02-62 Social Security and Income Adequacy

According to the OASDI Trustees’ 2001 intermediate, or best-estimate,

assumptions, Social Security’s cash flow is expected to turn negative in

2016. In addition, all of the accumulated Treasury obligations held by the

trust funds are expected to be exhausted by 2038. Social Security’s longterm financing shortfall stems primarily from the fact that people are living

longer while having fewer children. As a result, the ratio of workers paying

into the system to beneficiaries has been falling and is projected to decline

from 3.3 today to about 2 by 2030.8

To address the program’s long-term financing shortfall, a variety of

proposals have been offered. In choosing among proposals, we have

suggested that policymakers should consider three basic criteria:

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

the proposal would affect the economy and the federal budget;

• the balance struck between the twin goals of individual equity9 (rates of

return on individual contributions) and income adequacy (level and

certainty of benefits); and

• how readily such changes could be implemented, administered, and

explained to the public.

Moreover, as we have said, reform proposals should be evaluated as

packages that strike a balance among individual reform elements and

important interactive effects. Overall evaluation of each proposal depends

on the weight individual policymakers place on each criterion.10

From its inception, Social Security was intended to help reduce the extent

of dependency on public assistance programs. As it has evolved, the

program’s design has reflected that objective. Over time, that objective has

come to be stated more broadly as helping ensure adequate incomes.

While the Congress has never explicitly defined what constitutes an

adequate level of benefits, it stated as early as 1939 that its objective was

 8

 See Retirement Income: Implications of Demographic Trends for Social Security and

Pension Reform (GAO/HEHS-97-81, July 11, 1997).

9

 For a discussion of individual equity, see Social Security: Issues in Comparing Rates of

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

10 See Social Security: Criteria for Evaluating Reform Proposals (GAO/T-HEHS-99-94,

Mar. 25, 1999) and Social Security: Evaluating Reform Proposals

(GAO/AIMD/HEHS-00-29, Nov. 4, 1999).

Social Security Has

Focused on Reducing

Dependency From its

Inception
Page 8 GAO-02-62 Social Security and Income Adequacy

to “afford more adequate protection.” However, individual savings and

other resources were also expected to play a significant role.

In response to the grave economic problems of the Great Depression,

President Franklin Roosevelt created the Committee on Economic

Security in 1934 to study the economic insecurity that individuals faced

and to make recommendations on how to address it. The committee’s

recommendations became the basis of the Social Security Act of 1935,

which created several programs to meet the needs of different population

groups, including the aged. Two programs specifically addressed the aged

population—Title I’s Old-Age Assistance (OAA) program and Title II’s OldAge Insurance (OAI) program.11 OAA benefits, administered by the states

with both state and federal funds, were intended to provide immediate

cash income for millions of elderly persons without sufficient income for a

decent subsistence. OAI benefits, administered by the federal government

and funded by equal contributions from both employees and employers,

were designed for younger workers to build up their rights to annuities in

old age gradually. In effect, the contributions would purchase insurance to

protect workers against lost wages when they became too old to work.

In debating the creation of OAI, proponents made a variety of arguments

in its favor and mentioned several objectives that it would serve. Of these,

helping reduce dependency on public assistance was arguably the most

fundamental. The Congress was clearly concerned that an increasing

number of people were becoming dependent upon the public for their

well-being; Social Security would eventually provide benefits that workers

and their employers would pay for. Other objectives that were discussed

in the debate included stimulating the economy by providing cash income

that people would spend and opening up jobs for younger workers by

freeing older workers to retire.

Implicitly, the Congress designed Social Security benefits with a focus on

replacing lost wages. The original formula computed benefits as a

percentage of lifetime wages covered under the program in a way that

favored lower earners, reflecting a special concern for their benefit

levels.12 Social Security’s framers had targets in mind for benefit levels, but

 11 In the act, Title I was named “Grants to States for Old-Age Assistance,” and Title II was

named “Federal Old-Age Benefits.”

12 When the formula was changed in the 1939 amendments to replace monthly wages

instead of lifetime wages, the new formula was also progressive.

Social Security Intended to

Insure Against Lost Wages
Page 9 GAO-02-62 Social Security and Income Adequacy

these targets did not appear to be based on any type of scientific research

or data analysis. While the Congress made no assertions concerning

whether the resulting benefits would be adequate, Senate and House

reports stated respectively that under Social Security it would be possible

to provide “more than reasonable subsistence” and “not merely

subsistence but some of the comforts of life.” The House report also noted

that the “benefits provided for workers who have been employed during

substantially all their working life will probably be considerably larger

than any Federal-aided State pensions could be.”

As time passed, the Social Security program grew and evolved. Even

before the first monthly benefits were paid in 1940, the Congress enacted

amendments in 1939 to “afford more adequate protection to more of our

people,” as House and Senate committee reports put it. Changes to benefit

levels, coverage of earnings, and eligibility are especially relevant to the

program’s adequacy goals. In addition, the introduction of new programs

addressed specific needs, such as covering health care costs, promoting

retirement saving, and promoting and protecting employer-sponsored

pensions.

Changes to monthly benefit levels came in different forms at different

times. From 1939 until 1950, there were no changes to the benefit formula,

and benefit levels, after adjusting for inflation, fell as a result.13 The 1948

Trustees’ Report expressed concern that inflation was diminishing the

adequacy of Social Security benefits and presented a chart showing the

decline in inflation-adjusted benefit levels. The 1950 amendments to the

Social Security Act increased benefit levels substantially. Then, until 1972,

periodic amendments made various ad hoc adjustments to benefit levels.

Economic prosperity, along with actuarial methods that often left the

Trust Funds with substantial surpluses, facilitated gradual growth of

Social Security benefit levels through these ad hoc adjustments.

In light of the steady growth of benefit levels, the 1972 amendments

instituted automatic adjustments to constrain the growth of benefits as

well as to ensure that they kept pace with inflation. Parameters of the

 13 Each year’s group of new retirees would generally have higher average wages than the

previous years’ groups (even though the maximum covered earnings level did not change).

Initial benefit levels increased somewhat as a result, but with the tilt in the benefit formula,

a larger and larger portion of those wages were replaced at a lower marginal rate, and on

net, inflation eroded the purchasing power of those initial benefit levels.

Various Program Changes

Have Been Related to

Income Adequacy
Page 10 GAO-02-62 Social Security and Income Adequacy

benefit formula were automatically adjusted to reflect inflation, and the

adjustments affected levels of benefits for both existing and new

beneficiaries. However, wages grew more slowly and prices grew more

quickly in the 1970s than they had historically. As a result, initial benefit

levels grew faster than intended.14 The program’s first benefit reductions in

1977 attempted to correct for those unintended consequences of the 1972

amendments, and the resulting pattern of increasing and then declining

benefit levels has become known as the “notch.”

15 In the process, the

benefit formula was redesigned so that initial benefits would generally

increase with wages for each new group of beneficiaries. As individuals

aged, annual cost-of-living adjustments would then increase benefits to

keep pace with inflation. In effect, the new formula’s design would

generally replace pre-retirement wages for similar individuals at a

consistent rate across age groups. Implicitly, this episode illustrates the

focus of the Congress on replacing wages and also identifies benefit levels

that the Congress considered higher than they intended. The only other

significant benefit reductions came in 1983 when the Congress delayed

cost-of-living adjustments primarily to address short-term financing

problems and gradually increased the retirement age to address long-term

financing problems.16

In addition, a variety of other types of program changes had effects on the

extent to which the program helped ensure income adequacy. As

amendments extended Social Security coverage to more jobs, more

workers would eventually receive benefits. Initially, Social Security only

covered the roughly 60 percent of workers in “commerce and industry”

whose wages could most easily be taxed and tracked. As the program

matured, coverage was gradually extended to new groups of workers,

such as farm workers, domestic workers, self-employed workers, and

 14 This unintended benefit growth occurred because larger and larger portions of slowergrowing average monthly wages were replaced at a higher marginal rate, which was

intended to benefit lower earners but increased with faster-growing prices.

15 See Social Security: GAO’s Analysis of the Notch Issue (GAO/T-HEHS-94-236, Sept. 16,

1994).

16 Increasing the retirement age might not be considered a benefit reduction because

individuals are living longer and therefore collecting benefits for more years. However, for

a person retiring at a given age, benefit levels are reduced because the actuarial reduction

for early retirement is larger. See Social Security Reform: Implications of Raising the

Retirement Age (HEHS-99-112, Aug. 27, 1999). Also, there have been changes that tightened

eligibility standards for disability benefits, but for those who are eligible, benefit levels

were not affected.
Page 11 GAO-02-62 Social Security and Income Adequacy

some federal and state government workers. Today, Social Security covers

about 96 percent of all U.S. jobs .

Moreover, various amendments extended eligibility to more types of

beneficiaries. Under the 1935 act, only some retired workers were to

receive benefits. The 1939 amendments extended benefit eligibility to

wives, widows, children, and dependent parents age 65 and older. The

1956 amendments extended eligibility to disabled workers, and the 1958

amendments extended eligibility to their dependents.17 In addition, the

1956 and 1961 amendments extended eligibility to women and men,

respectively, at age 62 for retired workers, spouses, and widow(er)s,

though worker and spouse benefits taken before the full retirement age

were reduced to take account of the longer period over which they would

be paid.

Outside Social Security, other legislation also addressed income adequacy

in various ways. Other benefit programs were created and changed to help

ensure adequate incomes. In 1965, Medicare and Medicaid were created to

alleviate the historically increasing strains on incomes from paying for

health care. In 1972, Title XVI’s Supplemental Security Income replaced

Title I’s Old-Age Assistance.

Moreover, as both House and Senate reports noted in 1939, “individual

savings and other resources must continue to be the chief reliance for

security.” Over the years, the Congress has enacted legislation to promote

employer-sponsored pensions and make them more secure. The Congress

has also enacted legislation to promote individual retirement savings and

encourage greater work-force participation by the aged and disabled.

Various measures have been developed to examine different aspects of

income adequacy, but no single measure offers a complete picture. A

universally accepted definition of “income adequacy” does not exist;

focusing on a single measure would implicitly endorse the concept of

adequacy it measures while dismissing other concepts. Several examples

of three broad types of measures illustrate the range of relevant measures.

Each measure has characteristics that reflect different outlooks on the

issue, including how it is calculated, how it accounts for different types of

 17 Other types of eligibility expansions included dependent parents, disabled widows, and

divorced spouses.

No Single Measure

Gives Complete

Picture of Income

Adequacy
Page 12 GAO-02-62 Social Security and Income Adequacy

households, how it accounts for geographic variations, and how it is

updated over time. In addition, for any type of measurement, what types

of income are counted presents a key issue.

The first type of measure includes variations of dependency rates.

Dependency rates speak to Social Security’s fundamental objective of

reducing dependence on public assistance programs, such as SSI or state

and local general assistance programs. Some sources have reported

dependency rates over the years that reflect a wide variety of sources of

income support while other sources report rates that only reflect federal

income support programs. For example, as cited by congressional reports,

the dependency rate of over 50 percent of the elderly in the 1930s reflected

dependence on family members and private charities as well as public

assistance. Moreover, public assistance includes a variety of federal, state,

and local programs in addition to OAA and SSI. As a result of the extensive

effort required to identify all sources of support, the most readily available

annual dependency rate data reflects only dependency on OAA and SSI.

Accounting for different types of households, geographic variations, and

changes over time are not critical concerns in calculating the rates

because the rates simply measure whether individuals or households

receive public assistance, wherever they are, and whatever the eligibility

criteria happen to be. However, the issues of geography and eligibility do

raise questions about how to interpret the rates because benefit standards

and eligibility provisions for public assistance programs have varied

considerably by location and over time.

The second type of measure includes rates that express the percentage of

the population that has incomes below a given adequacy standard. For

example, the poverty rate shows the percentage of individuals whose

household income falls below the official poverty thresholds, which

attempt to specify an income that would afford a minimal standard of

living. Different thresholds apply for different types and sizes of

households but are the same for every location in the country. The official

poverty thresholds were originally developed in 1963 and were built upon

a government family food plan. Initially, the thresholds were updated to

reflect the change in the cost of the food plan, but since 1969, they have

been updated annually to reflect changes in the Consumer Price Index

(CPI). In 1969, the Bureau of the Budget established the thresholds as the

official definition of poverty for statistical use in all executive

departments.

The poverty threshold is only one of many adequacy standards that have

been developed over the years. Moreover, various government programs
Page 13 GAO-02-62 Social Security and Income Adequacy

and descriptive statistics use different percentages of the poverty

threshold, for example, 125 or 150 percent of poverty in determining

benefits or eligibility.18 Some standards focus on determining the income

level needed for a moderate subsistence, not merely a minimal one. The

bases of the various standards include government-developed family

budgets, expenditure data, income data, and even public opinion polls.

The various adequacy standards have also used different approaches to

capture household and geographic variations and to reflect changes over

time. A variety of studies have evaluated the poverty threshold and

explored possible changes to it. (See app. II.)

The third type of measure, the replacement rate, speaks to Social

Security’s objective of replacing lost wages, which is implicit in the

program’s benefit formula. In contrast to other types of measures, it

focuses on whether retirement income is sufficient to maintain the

standard of living a given household enjoyed before retirement, not just

meet some socially defined standard of adequacy. Generally, it is

calculated as the ratio of retirement income in the first year of retirement

to household income in the year immediately preceding retirement.19

However, the actual experience of a given household could easily involve

phased-in retirement or situations where one spouse retires while the

other continues to work. Such irregularities present problems in

interpreting replacement rates for actual households. Still, these rates can

be useful for demonstrating the effects of program changes by focusing on

illustrative workers with standardized work experiences. With

replacement rates, geographic variations and updating the measure over

time are not relevant issues because the household’s own experience is

the basis for the measure regardless of location or year.

All of these types of measures depend significantly on what types of

income are counted. Some dependency rates look only at specific sources

of public assistance, while others attempt to reflect all types of public

assistance and some even try to reflect dependency of private charities

and family members. In the case of poverty rates, one criticism has been

 18 See Means-Tested Programs: Determining Financial Eligibility Is Cumbersome and

Can Be Simplified (GAO-02-58, Nov. 2, 2001).

19 SSA typically calculates replacement rates as the ratio of initial Social Security benefits

to pre-retirement covered earnings. However, pension analysts typically calculate

replacement rates as the ratio of total retirement income to total pre-retirement income.

Total retirement income would include sources such as employer-sponsored pensions and

income from saved assets.
Page 14 GAO-02-62 Social Security and Income Adequacy

that before-tax income is compared with thresholds based on after-tax

income. In the case of replacement rates, researchers have noted that the

measures of retirement and pre-retirement incomes should be consistent,

especially with respect to before- or after-tax status. Finally, a wide range

of noncash benefit programs, notably Medicare and Medicaid, also support

the standards of living of their beneficiaries though such benefits are not

always reflected in measures of income adequacy. For example,

replacement rates typically only consider cash income before and after

retirement. Also, noncash benefits are not included as income in

determining poverty status, and the living costs they support are not

explicitly reflected in the poverty threshold against which income is

compared. In particular, considerable debate surrounds how to treat

medical care needs and resources in measuring adequacy.

The adequacy of income for the elderly has generally increased since the

1930s, according to various measures. For example, dependence on public

assistance has fallen, as have poverty rates for the elderly. The largest

changes occurred in the first few decades of the program’s history;

improvements in the past 20 years have slowed or even stopped,

depending on the measure used. At the same time, Social Security has

become the most important source of income for the elderly and disabled.

Savings and other assets, employer-sponsored pensions, and earnings have

also increased as sources of income. Still, relatively high poverty rates

remain for subgroups that typically have low life-time earnings, whether

for old-age or disabled beneficiaries.

The dependency rate for the elderly has fallen from almost 22 percent in

1940 to about 6 percent in 1999, using a rate that only reflects OAA or SSI

benefits20 and does not include dependency on relatives and friends.

Meanwhile, receipt of Social Security benefits among the elderly has

grown significantly from less than 1 percent to over 90 percent. (See fig.

1.) A 1938 Social Security Bulletin reported a dependency rate of 65

percent, which included assistance to those who were totally or partially

dependent on friends and relatives. Among the elderly, OASDI

beneficiaries outnumbered OAA beneficiaries for the first time between

1950 and 1955 and, by 1960, a majority received Social Security benefits.

 20 In 1974, the federally administered Supplemental Security Income (SSI) program

replaced the state run OAA program.

Adequacy of

Beneficiaries’ Total

Income Has Generally

Increased Over Time

Two Measures Show

Increased Income

Adequacy for the Elderly
Page 15 GAO-02-62 Social Security and Income Adequacy

Since 1980, roughly 90 percent of the elderly have received benefits. The

rapid increase in the percentage receiving benefits and the eventual

leveling off illustrates the natural maturing of the Social Security system.

When monthly benefits were first paid in 1940, only those just turning 65

received benefits; older individuals were not eligible. As each year passed,

one additional age group was added to the beneficiary rolls, and more

individuals from the earlier, ineligible age groups died.

Figure 1: Dependence of Elderly on Federal Means-Tested Cash Benefits Has

Declined as More Receive Social Security

Note: Effective in 1974, SSI replaced OAA. SSI is a federal-state income support program for the

needy aged, blind, and disabled, as was OAA for the aged. State and local governments also provide

other forms of public assistance.

Source: Annual Statistical Supplement to the Social Security Bulletin, 2000, SSA.

Poverty rates for the elderly have also declined, from 35 percent in 1959 to

about 10 percent in 1999. (See fig. 2.) Since 1959, the elderly population

has experienced the greatest reduction in poverty rates, compared with

children 18 years and younger and adults aged 18 to 64.21

 21 Near poverty rates, which measure the percentage of the elderly whose income falls

between 100 and 125 percent of the poverty threshold, show another important aspect of

well-being. In 1999, 6 percent of the elderly were near-poor.

9.3

21.7

90.8

0.7 5.8

0

10

20

30

40

50

60

70

80

90

100

1940 1950 1960 1970 1980 1990 1996 1998

Social Security

OAA/SSI with or without OASDI

OAA/SSI Only

Percent of elderly population with income from source
Page 16 GAO-02-62 Social Security and Income Adequacy

Figure 2: Poverty Rates for Elderly Have Declined Faster Than for Other Groups

Note: Data for years indicated by dashed lines were not available but are available for 1959.

Source: U.S. Bureau of the Census.

Examination of dependency and poverty rates for the elderly reveal that

much of the improvements occurred during the early decades of the

program. (See figs. 1 and 2.) The dependency rate declined at a much

faster rate in the early years until about 1965 when declines slowed to a

more level trend. Declines in the poverty rate for the elderly were most

dramatic from 1959 to 1974 (more than 1 percent per year on average) and

have continued since then, but at a slower rate.

Using a different adequacy standard than the official poverty threshold,

adequacy appears to have changed little in recent years, using the

difference between median incomes and two alternative thresholds to

examine adequacy. For example, figure 3 shows the median total income

and median Social Security income for single persons aged 65 and older. It

also shows the official poverty threshold for such persons and one-half

median income for all single person households, which some researchers

have used as an alternative adequacy standard. The figure shows that the

gap between median total income and the poverty threshold consistently

widens over the years shown and widens more than the gap relative to the

one-half median income threshold. Moreover, median Social Security

income is lower than the poverty threshold in 1978 and higher by 1998

Extent of More Recent

Changes Depends on

Measure Used

0

5

10

15

20

25

30

35

40

1959 1964 1969 1974 1979 1984 1989 1994 1999

Adults 65+

Children < 18

Adults 18-64

Percent of population below poverty
Page 17 GAO-02-62 Social Security and Income Adequacy

while it is consistently lower than the one-half median income threshold.22

The primary difference between the two adequacy standards is that the

official poverty threshold is updated annually to reflect inflation while

median income grows at a rate similar to wage growth because wages are

the largest component of family income. Initial Social Security benefits,

and other sources of retirement income as well, also tend to grow at a rate

closer to wages than to prices. Historically, wages have generally grown

faster than prices, especially when their respective rates of change are

averaged over long periods of time.

Figure 3: Median Income of the Elderly Has Grown Faster Than the Poverty

Threshold But Not Faster Than the One-Half Median Income Threshold (Single

Person Households Aged 65 and Older)

Note: The official poverty threshold increases each year to reflect inflation. Median income increases

roughly by the rate of wage growth, which has generally been faster than inflation.

Source: Income of the Population 55 and Older, 1998, 2000 Annual Statistical Supplement, 1999

Money Income in the United States.

 22 We use a single person household for illustration because most elderly households are

single person households. A similar pattern applies for two-person households.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

19781980198219841986198819901992199419961998

Median total

income

One-half median

income

threshold

Median Social

Security income

Poverty

threshold

2001 dollars
Page 18 GAO-02-62 Social Security and Income Adequacy

Over the same period that the income adequacy has increased for the

elderly, Social Security has become the single largest source of retirement

income. As discussed below, program changes have increased the real

value of benefits, and more and more elderly have received benefits as the

program has matured. Other sources of retirement income have also

grown. Periods of economic prosperity have contributed to the growth of

all sources of retirement income.

Social Security’s benefit levels have generally increased over the years.

Replacement rates for illustrative workers with steady lifetime earnings

histories show how changes in the benefit formula have affected benefit

levels because using such workers holds other factors equal that might

also have an effect.23 (See fig. 4.) For example, using illustrative workers

filters out the effects of changes in the covered population or changes in

work and retirement patterns. The declining replacement rates during the

early years reflect that no benefit increases were enacted until 1950; fig. 4

also shows a sharp increase in replacement rates that coincides with the

1950 amendments. From 1950 until the early 1970s, replacement rates

fluctuated noticeably more from year to year than over other periods; this

pattern reflects the ad hoc nature of benefit increases over that period.

The rapid increases in the 1970s and the rapid decline in the early 1980s

reflects the effects of the notch and efforts to correct it.24 The smoother

pattern that appears since that time reflects the automatic indexing of

benefits as enacted in 1977.25 While there have been many changes in the

program for many reasons at different points in time, the replacement

rates experienced by today’s new retirees are notably consistent with the

 23 We used the Social Security Administration’s low, average, and high steady earners as

our illustrative workers. Steady earners have earnings equal to a constant percentage of

Social Security’s Average Wage Index in every year of their careers. Those percentages are

45, 100, and 160 respectively for low, average, and high earners. See appendix IV for

further discussion.

24 As discussed earlier, the 1972 amendments created automatic adjustments to the Social

Security benefit formula, but initial benefit levels grew faster than intended. The 1977

amendments created a new formula and reduced benefits to correct for those unintended

consequences, and the resulting pattern of increasing and then declining benefit levels has

become known as the “notch.”

25 While this replacement rate analysis captures the effects of many program changes, some

of the patterns result from irregularities in the growth rates of wages, which help determine

the earnings histories of the illustrative workers. Such irregularities are primarily

responsible for the dip in the late 1990s, which reflects the unusually high growth in wages

during that period.

Social Security and Other

Types of Retirement

Income Have Grown Over

Time
Page 19 GAO-02-62 Social Security and Income Adequacy

levels that Social Security’s designers envisioned for a fully mature system

over 60 years ago.

Figure 4: Historical Social Security Replacement Rates for Illustrative Workers

Notes: Replacement rates are the annual retired worker benefits at age 65 divided by the earnings in

the previous year. Steady earners have earnings equal to a constant percentage of Social Security’s

Average Wage Index in every year of their careers. Those percentages are 45, 100, and 160,

respectively for low, average, and high earners. Some fluctuations in the graph do not result from

program changes but rather from fluctuations in the growth rate of wages, which helps determine the

earnings histories of the illustrative steady earners.

Source: SSA Office of the Chief Actuary.

At the same time that benefit levels have increased, so has the share of

elderly receiving benefits. This is also true of employer-sponsored

pensions, earnings, and income from saved assets. Like figure 1, figure 5

shows that the percentage of the elderly receiving Social Security benefits

has increased as dependence on public assistance has declined. Figure 5

also shows that Social Security provides income to more elderly

households than any other source of retirement income, although other

sources have also increased in importance. The percentage of the elderly

who receive income from employer pensions increased from 5 percent in

0

10

20

30

40

50

60

70

80

1940 1950 1960 1970 1980 1990 2000

Low Steady

Earner

Average Steady

Earner

High Steady

Earner

Replacement Rate
Page 20 GAO-02-62 Social Security and Income Adequacy

1937 to 43 percent in 1998.26 The percentage receiving income from saved

assets increased from about 15 percent to over 60 percent. The percentage

receiving earned income increased from 1937 to 1962 but dropped from

1962 to 1998. In addition to sources of cash income, noncash benefit

programs that did not exist in the 1930s now play a major role in

supporting the standards of living of Social Security beneficiaries. For

example, Medicare is available to all Social Security beneficiaries aged 65

and older and all disabled beneficiaries after 24 months, among others.

 26 While there have been significant improvements in pension receipt for retired workers,

pensions have failed to reach a significant portion of the elderly. In 1998, 48 percent of

retired persons reported that they had no pension income of their own or from a spouse.

Retired persons without pension income were more likely to be single, female, less

educated, minority, and poor. About 21 percent of retired persons without pension income

had incomes below the federal poverty threshold, compared with 3 percent with pension

income. They were also less likely than retired persons with pension income to have

income from other sources, except SSI and other public assistance programs. For example,

persons without pension income were less likely to have income from assets (51 percent)

than those with pension income (78 percent). See Pension Plans: Characteristics of

Persons in the Labor Force Without Pension Coverage (GAO/HEHS-00-131, Aug. 22, 2000).
Page 21 GAO-02-62 Social Security and Income Adequacy

Figure 5: Share of Elderly Receiving Other Sources of Retirement Income Has Also

Grown

Note: 1962 and 1998 data indicated above represent aged unit income that is either the income of

nonmarried persons or the sum of income within a married couple.

Source: Income of the Aged ChartBook, 1998, “Economic Status of the Aged.” Social Security

Bulletin, March 1938.

In addition to providing some income to nearly all elderly persons, Social

Security is the largest source of income for most. In 1998, Social Security

provided more than 50 percent of total income for 63 percent of aged

beneficiaries, and it was the only source of income for about 18 percent of

aged beneficiaries. Still, other sources of retirement income largely

determine who will have the highest retirement incomes. Elderly

households with the highest levels of income tend to have substantial

income from employer pensions, earnings from employment, and saved

assets, while those with the lowest incomes do not. For example, in 1996,

18 percent of all aged beneficiary units without earnings from employment

were poor as compared with only 2 percent who received earnings.27

 27 See Retirement Income: Implications of Demographic Trends for Social Security and

Pension Reform (GAO/HEHS-97-81, July 11, 1997).

0

69

90

15

54

63

5

18

43

14

36

21

65

14

5

0

10

20

30

40

50

60

70

80

90

100

1937 1962 1998

Social Security Asset income Pensions Earnings Public assistance

Percent of elderly population
Page 22 GAO-02-62 Social Security and Income Adequacy

Income adequacy has also improved substantially for specific subgroups

of beneficiaries, such as the very old (85+ years of age), minorities,

women, singles, widows, and the disabled. However, even with those

improvements, significant levels of poverty remain. This fact largely

reflects that lifetime earnings and access to other sources of retirement

income tend to be lower among such groups. Social Security is a major

component of retirement income for these sub-populations. For example,

in 1998, when we exclude Social Security income from total income, 67

percent of unmarried women aged 85 and over have income that falls

below the poverty line.

As figure 6 shows, poverty rates are higher than average for older age

groups, for women, for minorities, and those living alone. Those

individuals in older age groups are less likely to have pension benefits or

income from saved assets. Women also experience high rates of poverty as

compared to men. Of the 3.2 million aged persons who were poor in 1999,

2.2 million were women. Minorities such as Hispanics and blacks

experience higher levels of poverty than their white counterparts, as do

unmarried women and women living alone.

Subgroups With Lower

Lifetime Earnings Remain

Vulnerable
Page 23 GAO-02-62 Social Security and Income Adequacy

Figure 6: Certain Subgroups of the Elderly More Likely to be in Poverty (1999)

Note: In 1999, the poverty rate for all those aged 65 and older was 10 percent.

Source: Current Population Survey, 2000.

Poverty rates also vary by living situation. In 1999, elderly persons living

alone were more likely to be poor (14 percent of men and 20 percent of

women) than married couple families (6 percent). Of the 1.8 million

elderly poor who lived alone in 1999, about 1.5 million were women. Aged

African-Americans and Hispanics females living alone are most at risk for

living in poverty. In 1999, almost 58 percent of aged Hispanic females

living alone were in poverty, while 44 percent of aged African-American

females were in poverty.

Individuals who fall into more than one group with higher poverty rates

are especially at risk of poverty. For example, in 1998, 56 percent of

unmarried black females aged 85 and older were poor. Over 60 percent of

unmarried Hispanic females aged 75 to 84 were poor. In contrast,

21 percent of white females aged 65 to 74 were poor, and poverty rates for

the male counterparts for each category were either less or there were too

few cases available to make an assessment.

6

21

16

20

14

23

8

20

14

10

9

0 5 10 15 20 25

Married couples

Unmarried women

Unmarried men

Women living alone

Men living alone

Blacks

Whites

Hispanic

Aged 85+

Aged 75-84

Aged 65-74

Percent of elderly households with income below poverty
Page 24 GAO-02-62 Social Security and Income Adequacy

Social Security provides an important source of income for the disabled.

In 1999, disabled workers made up 11 percent of all OASDI beneficiaries.

As with the elderly, Social Security is a major component (38 percent) of

family income for disabled worker families. Also, 48 percent of disabled

worker families get half of their income or more from Social Security,

while 6 percent have no other income. Unlike the elderly, however,

earnings are an equally large source of family income (38 percent) for

disabled worker families.28

At 19 percent, poverty rates are nearly twice as high for the disabled as for

the elderly. Still, like the elderly, poverty rates for disabled workers are

higher for women, minorities, unmarried persons, and those living alone.

Of all disabled beneficiaries, 23 percent of females were poor compared

with 15 percent of men. Fifteen percent of disabled beneficiaries were

white, 31 percent were black, and 26 percent were Hispanic. Only 12

percent of the disabled who lived with relatives lived in poverty, compared

with 35 percent who did not. Ten percent of disabled workers who were

married lived in poverty, compared with 27 percent who were not.

Disabled workers who were widowed, never married or divorced

experienced poverty rates of 30, 25, and 24 percent, respectively.

The outlook for future Social Security benefit levels and thus their effect

on income adequacy generally will depend on how the program’s longterm financing imbalance is addressed, as well as on the measures used.

To illustrate the range of possible outcomes, we developed benchmark

policy scenarios that either only increase taxes or only reduce benefits.

Even without new benefit reductions, our analysis shows that replacement

rates could decrease as the program’s full retirement age gradually

continues to increase under current law, depending on the retirement

decisions of future retirees. However, even with those reductions, our

analysis shows that the adequacy of retirement income would improve

markedly using one adequacy standard but change very little using

another. Future benefit levels will also depend on the extent and nature of

any benefit reductions. More progressive approaches to benefit reductions

would result in greater adequacy for lower-earning beneficiaries. In turn,

adequacy for various subgroups of beneficiaries would depend in turn on

the earnings levels typical of those subgroups. Moreover, the adequacy of

 28 As a source of income, pensions make up only 7 percent of income for disabled worker

families.

Income Adequacy in

the Future Will

Depend on Extent and

Nature of Program

Changes
Page 25 GAO-02-62 Social Security and Income Adequacy

total incomes will depend on how individuals adjust their retirement

planning in reaction to any program changes29 and on what happens to

other sources of cash and noncash income. In particular, Medicare also

faces serious long-term financing problems. However, our analysis does

not reflect interactions with other income sources but focuses on the

effects of changes in Social Security benefits, holding all else equal.

To illustrate a full range of outcomes that might result from alternative

approaches to restoring long-term solvency, we developed hypothetical

benchmark policy scenarios that would restore solvency over the next 75

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

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

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

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

currently scheduled revenues are projected to be sufficient. These

benchmarks used the program’s current benefit structure and the 2001

OASDI Trustees’ intermediate, or best-estimate, assumptions. The benefit

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

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

the ultimate reduction. At our request, SSA actuaries scored our

benchmark policies and determined the parameters for each that would

achieve 75-year solvency. Table 1 summarizes our benchmark policy

scenarios. For our benefit reduction scenarios, the actuaries determined

these parameters assuming that disabled and survivor benefits would be

reduced on the same basis as retired worker and dependent benefits. If

disabled and survivor benefits were not reduced at all, reductions in other

benefits would be deeper than shown in this analysis. (See app. III for

more on our benchmark policy scenarios.)

 29 However, it is difficult to anticipate how individual behavior would change in response to

policy changes, and none of our modeling approaches were equipped to do so. For

example, in response to benefit reductions, workers could increase their retirement

savings, depending on their capacity to do so. On the other hand, in response to payroll tax

increases, workers might decrease retirement saving in the face of lower disposable

incomes. Still, those retirees with the lowest retirement incomes already receive virtually

no income from saved assets. It should also be noted that tax increases would have effects

on both the standard of living enjoyed during working years and on the individual equity of

benefits, or how benefits relate to contributions.

Benchmark Policy

Scenarios Illustrate Range

of Possible Outcomes
Page 26 GAO-02-62 Social Security and Income Adequacy

Table 1: Summary of Benchmark Policy Scenarios

Ultimate new benefit

reductionsa (percent)

Benchmark policy scenario Description Phase-in period Minimum Maximum

Tax-increase-only Increases payroll taxes in 2002 by amount

necessary to achieve 75-year solvency (0.95

percent of payroll each for employees and

employers)b

Immediate 0 0

Proportional benefit reduction Reduces benefit formula factors proportionally

across all earnings levels

2005-2035 24 24

Progressive benefit reduction Reduces benefit formula factors by smaller

proportion for lower earners

2005-2035 11 33

Limited proportional benefit

reduction

Does not reduce benefit formula factor at all for

lowest earners (below first formula bendpoint)

and reduces them proportionally for earnings

above that level

2005-2035; with

smaller reduction in

first 10 years

0 34

a

These benefit reduction amounts do not reflect the implicit reductions resulting from the gradual

increase in the full retirement age that has already been enacted.

b

Any policy scenario that achieves 75-years solvency only by increasing revenues would have the

same effect on the adequacy of future benefits in that promised benefits would not be reduced.

Source: GAO’s analysis.

We then modeled future benefit levels with these benchmarks and

calculated a variety of measures to look at income adequacy. However, we

did not examine any measures of individual equity, such as rates of return,

which any of our benchmark policies would also affect. We examined

adequacy measures for illustrative workers with different steady lifetime

earnings histories, for the entire beneficiary population, and also for

different subgroups. To look at representative samples for the beneficiary

population and subgroups, we used both SSA’s MINT model and the Policy

Simulation Group’s GEMINI model. The MINT model allows us to look at

total retirement income in 2020 across different age groups and races

while the GEMINI model allows us to focus on specific birth cohorts

reaching age 62 in various years, which we selected to look at long-term

trends. As with any such simulation models, these models simulate income

using a combination of historical data from small samples of the

population and a variety of assumptions about future trends.30 At their

best, such models can only provide very rough estimates of future

incomes. Still, they can provide valuable comparisons over time and

 30 While these models use sample data, our report, like others using these models, does not

address the issue of sampling errors. The results of the analysis reflect outcomes for

individuals in the simulated populations and do not attempt to estimate outcomes for an

actual population.
Page 27 GAO-02-62 Social Security and Income Adequacy

across alternative policy scenarios, holding all else equal. Thus, any

analysis should focus on such comparisons rather than on the literal

values of the estimates. (See app. IV for more on our modeling analyses.)

Our tax-increase-only benchmark illustrates that monthly benefit levels

could already decrease as the program’s full retirement age increases

under current law, depending on the retirement decisions of future

retirees. In turn, replacement rates would decrease by the same proportion

because they are defined as the annual benefit amount divided by the last

year of earnings. Figure 7 shows future replacement rates under our taxincrease-only benchmark for a range of illustrative retired workers. The

full retirement age is the age at which full benefits are paid and historically

has been age 65. Under current law, the full retirement age is gradually

increasing, beginning with retirees born in 1938, and will reach 67 for

those born in 1960 or later. For workers who retire at a given age, an

increase in the full retirement age reduces monthly benefits because the

actuarial reduction for early retirement increases. For example, for

workers who will face a full retirement age of 67 and retire early at 65,

monthly benefits will be reduced actuarially by 13.3 percent while their

benefits would not have been reduced at all if the full retirement age had

been kept at 65.31 Moreover, the 13.3 percent reduction applies to such

workers equally at all earnings levels. As a result, increasing the full

retirement age from 65 to 67 implies that replacement rates for illustrative

low earners would decline from 57 to 49 percent while for illustrative high

earners they would decline from 35 to 30 percent.32 Therefore, under such

a proportional reduction, lower earners face a larger percentage-point

reduction than higher earners. Still, the effect of such reductions would be

 31 Compared with earlier retirees, beneficiaries affected by the higher full retirement age

are expected to live longer on average. Therefore, on average, they will collect benefits

longer, and the reduction in their lifetime benefits will not be as high as the reduction in

their monthly benefit amount. Still, the adequacy of income depends on how much people

have to spend on a monthly or annual basis, not on a lifetime basis, because the longer

individuals live, the longer they will need income to cover the costs of living. Nevertheless,

workers will have the ability to avoid the monthly benefit reductions by waiting until their

full retirement age to retire. Such behavioral responses to program changes make it

especially difficult to anticipate future income adequacy, which such responses would

affect directly.

32 We use the illustrative steady earners defined by SSA’s Office of the Chief Actuary; these

steady earners have earnings equal to a constant percentage of average wages in every year

of their careers. Those percentages are 45, 100, and 160, respectively, for low, average, and

high earners. See appendix IV for more on our illustrative steady earner analysis.

Monthly Benefits Could Be

Lower Even Without

Benefit Reductions
Page 28 GAO-02-62 Social Security and Income Adequacy

diminished to the extent that workers choose to retire later than today’s

workers do.

Figure 7: Increasing Retirement Age Diminishes Replacement Rates Under Current

Law

Notes: Replacement rates are the annual retired worker benefits at age 65 divided by the earnings in

the previous year. Steady earners have earnings equal to a constant percentage of Social Security’s

Average Wage Index in every year of their careers. Those percentages are 45, 100, and 160,

respectively, for low, average, and high earners. Taxable Maximum Earners have earnings equal to

the maximum earnings taxable under OASDI in each year. Annual benefits at age 65, and

replacement rates in turn, decline as the full retirement age increases because actuarial reductions

for early retirement become higher as the gap between the actual retirement age and the full

retirement age increases. As shown in figure 7, the slight increases in replacement rates from 2000 to

2005 do not result from any program changes but rather from short-term fluctuations in the growth

rate of wages which helps determine the earnings histories of the illustrative steady earners.

Source: GAO’s analysis using SSA’s ANYPIA program.

While replacement rate analysis suggests that income adequacy will

decline in the future, other ways of assessing adequacy suggest that it will

change little or even improve dramatically. The GEMINI model allows us

to illustrate this point best by showing changes over long periods of time.

Using our tax-increase-only benchmark policy, we calculated the

percentage of retired workers with Social Security benefits that fall below

two different adequacy standards—the official poverty threshold and oneDifferent Measures

Suggest Different Outlooks

0%

10%

20%

30%

40%

50%

60%

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Year earner attains age 65

Low steady

earner

Average steady

earner

High steady

earner

Taxable

maximum earner

Replacement rate at age 65
Page 29 GAO-02-62 Social Security and Income Adequacy

half median income.33 The official poverty threshold is adjusted each year

to reflect inflation. In contrast, our simulation assumes that the one-half

median income threshold will grow at the same rate as Social Security’s

Average Wage Index, since wages are the largest component of family

income. Figure 8 shows that the percentage of retired workers34 with

benefits below the poverty threshold drops dramatically over time while

the percentage with benefits below one-half median income changes very

little. The difference in these percentage measures simply reflects

differences in the assumptions underlying each adequacy standard. Since

initial Social Security benefits are designed to increase with wages, and

wages are assumed to grow faster than prices, benefit levels will grow

faster than an adequacy standard that grows only by prices. In contrast,

benefits will grow at roughly the same rate as a standard that grows by

wages. In a fashion similar to poverty rates, dependency rates would also

decline relatively rapidly because they focus on SSI benefit standards that

increase with prices, not wages.

 33 Using the poverty threshold with the GEMINI model does not allow us to calculate a

simulated “poverty rate” because a poverty rate would reflect total income, not just Social

Security benefits, and our GEMINI analysis only simulated future Social Security benefits

and not total retirement income. In contrast to GEMINI, the MINT model does simulate

total income, but only in the near term. However, the sensitivity of adequacy measures to

the standard used is greater over longer periods of time. Given the various limitations of

both models, the focus should not be on the specific estimates of adequacy measures but

rather the differences between them across types of measures, across beneficiary groups,

and across policy scenarios.

34 Here, we used retired workers for simplicity. Our focus is on illustrating the effect of

using alternative adequacy standards holding everything else equal; our focus is not on the

type of beneficiary. We use age 62 as the retirement age because most retired worker

beneficiaries retire at that age, and our GEMINI analysis required that we use a single

retirement age. Since spouses receive a benefit equal to 50 percent of the retired workers

benefit (unless they are entitled to a higher retired worker benefit on their own earnings

record), the percentage of spouse beneficiaries below each adequacy standard would be

much higher than for retired workers. Moreover, the value of an adequacy standard differs

for different household types, so ideally benefit levels for retired workers, their spouses,

and all other types of beneficiaries would be compared to the standard appropriate for

their household type. However, this more complex analysis is not necessary to illustrate

the point about how the choice of the adequacy standard itself drives the results. The

complexities concerning beneficiary and household type are yet another reason that our

estimates should not be interpreted as poverty rates.
Page 30 GAO-02-62 Social Security and Income Adequacy

Figure 8: Adequacy Outlook Depends on Adequacy Standard Used

(Retired Workers, All Retiring at Age 62, Under Tax-Increase Only Benchmark)

Notes: The rates shown in the graph are not poverty rates because they reflect only Social Security

income, not total income. Also, if we had assumed that all workers retired at a higher age, the

reduction for early retirement would be lower, their Social Security benefits would be higher, and each

of the percentages in this chart would unambiguously be lower. Still, the focus should not be on the

specific values from the simulation but on the difference in the pattern over time between the two

thresholds, which would not be notably different with other retirement age assumptions. The official

poverty threshold increases each year to reflect inflation. We projected future poverty lines using

OASDI Trustees’ intermediate assumptions for inflation. One-half median family income has been

used as an alternative adequacy threshold. It increases each year roughly by the rate of wage

growth. We projected future values of this threshold using the OASDI Trustees’ intermediate

assumptions for the Average Wage Index.

Source: GAO’s analysis using the GEMINI model.

Future benefit levels and income adequacy will also depend considerably

on how any benefit reductions are made. Figure 9 shows that the

percentage of retired workers35 with Social Security benefits below the

official poverty threshold would be greater under a proportional benefit

reduction approach than under a progressive benefit reduction approach.

 35 Here again, we used retired workers for simplicity. In this case, our focus is on the

difference between benefit reduction approaches, holding everything else equal. See

footnote 26.

Effects of Different Benefit

Reduction Approaches

Would Vary By Earnings

Levels

51

22

17

11

62

54 57 57

0

10

20

30

40

50

60

70

1935 (1997) 1955 (2017) 1970 (2032) 1985 (2047)

Birth year (age 62 year)

Poverty threshold One-half median income threshold

Percent of cohort with Social Security benefits below respective threshold
Page 31 GAO-02-62 Social Security and Income Adequacy

The difference between the two approaches grows slightly over time.36 The

proportional benefit-reduction-only benchmark would reduce benefits by

the same proportion for all beneficiaries born in the same year. The

progressive benefit-reduction-only benchmark would reduce benefits by a

smaller proportion for lower earners and a higher proportion for higher

earners. Both benefit reductions benchmark policies would be phased in

gradually from 2005 to 2035. The tax-increase-only (no benefit reduction)

benchmark estimates are shown for reference. Also, the figure shows that

percentage of workers with benefits below the poverty threshold would be

slightly higher in our simulations for those retiring in 2032 rather than

2017. This reflects primarily that the benefit reductions in our benchmarks

are more fully phased in for the 2032 group. The declines in the

percentages from the 2032 to 2047 retirement years largely reflects the

effects of the disparity between growth in wages and prices, as illustrated

earlier; since the benefit reductions are fully phased in by 2035, the last

two age groups experience nearly the same benefit reductions.

 36 In contrast to using the poverty threshold, for our 1970 and 1985 birth cohorts, Social

Security benefits fall below 50 percent of median family incomes for nearly all retired

workers under our proportional benefit-reduction benchmark and for all of them under our

more progressive benefit-reduction benchmarks.
Page 32 GAO-02-62 Social Security and Income Adequacy

Figure 9: Adequacy of Income in Future Depends on Benefit Reduction Approach

(Retired Workers, All Retiring at Age 62)

Notes: The rates shown in the graph are not poverty rates because they reflect only Social Security

income, not total income. For the 1935 birth cohort, which reached age 62 in 1997, 51 percent of our

simulated sample had Social Security benefits below poverty, as shown in figure 8. Also, if we had

assumed that all workers retired at a higher age, the reduction for early retirement would be lower,

their Social Security benefits would be higher, and each of the percentages in this chart would

unambiguously be lower. Still, the focus should not be on the specific values from the simulation but

on the difference in the pattern among the benchmarks, which would not be notably different with

other retirement age assumptions. Under the proportional reduction approach, all beneficiaries in a

given birth year are subject to a benefit reduction that is a constant proportion of their benefits. Under

the progressive reduction, beneficiaries with lower benefits receive a smaller proportional reduction

than those with higher benefits. See appendix III for more details on the alternative benefit reduction

benchmarks.

Source: GAO’s analysis using the GEMINI model.

The differences in adequacy estimates across benefit-reduction scenarios

reflect how different benefit reduction approaches will have different

effects on workers with different earnings. Lower earners have benefits

that are closer to the poverty threshold than higher earners, so a

progressive approach to reducing benefits would decrease the chances

that lower earners’ benefits fall below that threshold. Figure 10 illustrates

how different benefit reduction approaches would produce benefit

29.7

31.8

24.6

28.5 29.5

21.8 22.4

17.5

11.5

0

5

10

15

20

25

30

35

1955 (2017) 1970 (2032) 1985 (2047)

Birth year (age 62 year)

Proportional reduction Progressive reduction Tax-increase only

Percent of cohort with Social Security benefits below poverty
Page 33 GAO-02-62 Social Security and Income Adequacy

reductions that would vary by benefit levels.37 The proportional benefitreduction benchmark results in identical percentage benefit reductions,

while two alternative, progressive benefit-reduction benchmarks would

result in smaller reductions for lower earners and larger reductions for

higher earners. The so-called “limited-proportional” benefit-reduction

benchmark would be even more progressive than the progressive benefitreduction benchmark because a portion of benefits below a certain level

are protected from any reductions while reductions above that level are

proportional. The 1985 birth cohort will be subject to the largest benefit

reductions of the four cohorts we simulated; therefore, it best illustrates

the potential disparity in benefit reductions by benefit level.

 37 In this case, we used retired workers not only for simplicity but also because we

explicitly wanted to examine the distribution of benefit reductions across earnings levels.

Spousal benefits equal 50 percent of the retired worker benefit, therefore including them

would bias the distribution. In any event, the percentage reduction would be the same for a

spouse as for his or her retired worker spouse.
Page 34 GAO-02-62 Social Security and Income Adequacy

Figure 10: Benefit Reduction Approaches Have Different Effects on Different Benefit

Levels (Retired Workers Born in 1985, All Retire at Age 62)

Notes: Quintiles are by benefit levels. Percentage reductions are calculated for beneficiaries closest

to the median of each quintile that appear in each scenario’s sample. For the 1985 birth cohort, all

benefit reductions are fully phased-in under our benchmark scenarios. Under the proportional

reduction approach, all beneficiaries in a given birth year are subject to a benefit reduction that is a

constant proportion of their benefits. Under the progressive reduction, beneficiaries with lower

benefits receive a smaller proportional reduction than those with higher benefits. Under the limited

proportional reduction, a portion of benefits below a certain level are protected from any reductions

while reductions above that level are proportional. See appendix III for more details on the alternative

benefit reduction benchmarks.

Source: GAO’s analysis using the GEMINI model.

The different benefit reduction approaches would have different effects on

various subgroups of beneficiaries because of the differences in the

lifetime earnings levels that are typical of those groups. Women,

minorities, and never married individuals all tend to have lower lifetime

earnings than men, whites, and married beneficiaries, respectively. Figure

11 shows how future poverty rates mirror these patterns. Moreover, it

illustrates again how more progressive benefit-reduction approaches

would result in lower poverty rates for these groups in particular. In this

case, we present our analysis using SSA’s MINT model because it allows

us to examine different races. However, these estimates for the year 2020

reflect benefit reductions that are not fully phased in as well as benefits

for beneficiaries from many birth cohorts who will be subject to various

Effects on Different

Subgroups Reflect Varying

Effects by Earnings Level

24

16

11

24

21

23

24

23

28

24 25

31

24

30

32

0

5

10

15

20

25

30

35

Proportional reduction Progressive reduction Limited proportional

reduction

Lowest quintile Second Third Fourth Highest quintile

Percentage reduction in Social Security benefits
Page 35 GAO-02-62 Social Security and Income Adequacy

levels of the phased-in benefit reductions.38 For later beneficiaries with

fully phased-in benefit reductions, poverty rates could be higher.

Figure 11: Effects of Benefit Reductions on Various Groups Reflect Varying Effects by Income Levels

Notes: We looked at data for 2020 because it provides the most complete data for the elderly

population, given the cohorts represented in the MINT. In the MINT model, total incomes do not

include means-tested benefits, while the official poverty rate does reflect such benefits. In addition,

MINT uses income data from the Survey of Income and Program Participation (SIPP) while official

poverty rates use income data from the Current Population Survey (CPS). According to CPS data for

1999, which accounts for means-tested benefits, 10 percent of the elderly had incomes below the

poverty threshold. According to SSA analysts, poverty rates calculated using SIPP data are generally

lower than those using CPS data. Groups shown are not all the groups for marital status or race;

groups for one characteristic overlap groups for another. Under the proportional reduction approach,

all beneficiaries in a given birth year are subject to a benefit reduction that is a constant proportion of

their benefits. Under the progressive reduction, beneficiaries with lower benefits receive a smaller

proportional reduction than those with higher benefits. Under the limited proportional reduction, a

portion of benefits below a certain level are protected from any reductions. See Appendix III for more

detail on the alternative benefit reduction benchmarks.

Source: GAO’s analysis using SSA’s MINT model.

 38 We looked at data for 2020 because it provides the most complete data for the elderly

population, given the cohorts represented in the MINT.

1.2

17.1

3.2

12.3

10.1

2.9

6.0

1.2

16.5

3.1

11.8

9.7

2.8

5.8

1.1

15.8

3.0

11.1

9.3

2.6

5.6

1.0

15.3

2.7

10.7

8.9

2.5

5.3

0

5

10

15

20

Married Never married White NonHispanicBlack NonHispanicHispanic Male Female

Proportional reduction Progressive reduction Limited proportional reduction Tax-increase-only

Percent of beneficiaries with total incomes below poverty in 2020

Percent of all beneficiaries with total 

incomes below poverty (4.1%)

Marital status Race/Ethnicity Sex
Page 36 GAO-02-62 Social Security and Income Adequacy

Very old beneficiaries are another subgroup that has tended to be at higher

than average risk of poverty. Several factors relating to multiple sources of

income have contributed to this risk, and many of these factors can be

expected to have similar effects in the future. As people get older, they

may spend down their retirement savings, especially as health and longterm-care costs mount up, and they are less likely to work. Also, they are

more likely to be widowed. For a couple receiving one retired worker

benefit and one spouse benefit, the household’s Social Security benefits

would fall by 33 percent when either is widowed. For a couple in which

both spouses receive retired worker benefits on their own earnings

records, household benefits could fall by as much as 50 percent when

either is widowed. In addition, widows might lose employer-sponsored

pension benefits, which would happen if their spouse elected a self-only

annuity instead of a joint-and-survivor annuity.39 Also, while Social

Security benefits increase each year to reflect inflation, not all employersponsored pension benefits do. Of these various factors, all could affect

future retirees, though employer pensions have been changing in design.40

Based on our review, reducing dependency on public assistance appears

to have been the primary objective of the Social Security program. While

many have noted the importance that Social Security plays in helping

ensure adequate incomes for its beneficiaries, the Congress has never

explicitly defined the term “adequacy.” In the end, setting benefit levels to

address the adequacy issue will always be, as it has always been, a policy

decision for the Congress. Still, income adequacy is only one of several

criteria to consider in an overall evaluation of comprehensive Social

 39 The 1984 Retirement Equity Act made the joint-and-survivor benefit the default option for

married workers retiring on an employer-sponsored pension. Under the joint-and-survivor

option, a surviving spouse will continue to receive pension benefits once the pension

beneficiary dies. To waive this option, both the retiring worker and his or her spouse must

sign a waiver form. Prior to this law, waivers from spouses were not required, and few

retiring workers selected the joint-and-survivor option. As a result, many spouses were left

without pension benefits when the retiree died first.

40 Neither our analysis with the MINT model nor with the GEMINI model were well suited

to analyze the outlook for the very old. The very old in the MINT model are beneficiaries

who have already begun their retirements and will not be subject to any of the benefit

reductions in our benchmark policy scenarios. Our GEMINI analysis was not able to

examine other sources of retirement income, which relate to many of the most significant

poverty risks for the very old. Nevertheless, with GEMINI we were able to examine

patterns in Social Security benefits for people in given cohorts as they age through

retirement. See appendix IV.

Concluding

Observations
Page 37 GAO-02-62 Social Security and Income Adequacy

Security reform proposals. 41 Specifically, income adequacy should be

balanced against individual equity, or the extent to which benefits are

proportional to contributions. Other criteria include the extent to which

proposals achieve sustainable solvency, how they would affect the

economy and the federal budget, and how readily changes could be

implemented, administered, and explained to the public.

Current demographic trends confront us with a reality that cannot be

ignored. If people will be living longer, then maintaining today’s levels of

monthly benefits for all beneficiaries would require either more revenues,

from whatever sources, or would require that workers wait longer to

collect them. The other alternative of reducing monthly benefits would

tend to diminish income adequacy for beneficiaries. However, our analysis

shows that more progressive approaches to reducing monthly benefits

would have a smaller effect on poverty rates, for example, than less

progressive approaches. Also, reductions that protect benefits for

survivors, disabled workers, and the very old would help minimize

reductions to income adequacy, though they would place other

beneficiaries at greater risk of poverty.

More broadly, the choices the Congress will make to restore Social

Security’s long-term solvency and sustainability will critically determine

the distributional effects of the program, both within and across

generations. In turn, those distributional effects will determine how well

Social Security continues to help ensure income adequacy across the

population.

As our analysis has also shown, the effects of some reform options parallel

those of benefit reductions made through the benefit formula, and those

parallels provide insights into the distributional effects of those reform

options. For example, if workers were to retire at a given age, an increase

in Social Security’s full retirement age results in a reduction in monthly

benefits; moreover, that benefit reduction would be a proportional, not a

progressive reduction. Another example would be indexing the benefit

formula to prices instead of wages. Such a revision would also be a

proportional reduction, in effect, because all earnings levels would be

treated the same under such an approach. In addition, holding all else

 41 See Social Security: Criteria for Evaluating Reform Proposals (GAO/T-HEHS-99-94,

Mar. 25, 1999) and Social Security: Evaluating Reform Proposals

(GAO/AIMD/HEHS-00-29, Nov. 4, 1999).
Page 38 GAO-02-62 Social Security and Income Adequacy

equal, such an approach would implicitly result in future poverty rates that

would be close to today’s rates instead of falling as they would with the

current benefit formula.

Therefore, in finding ways to restore Social Security’s long-term solvency

and sustainability, the Congress will address a key question, whether

explicitly or implicitly:

What purpose does it want Social Security to serve in the future?

• to minimize the need for means-tested public assistance programs;

• to minimize poverty; using what standard of poverty;

• to replace pre-retirement earnings;

• to maintain a certain standard of living; or

• to preserve purchasing power?

The answer to this question will help identify which measures of income

adequacy are most relevant to examine. It will also help focus how

options for reform should be shaped and evaluated. Our analysis has

illustrated how the future outlook depends on both the measures used and

the shape of reform. While the Congress must ultimately define Social

Security’s purpose, our analysis provides tools that inform its

deliberations.

Still, changes to benefit levels would typically only be part of a larger

reform package, and Social Security is only one part of a much larger

picture. As we have said in the past, reform proposals should be evaluated

as packages that strike a balance among their component parts.

Furthermore, Social Security is only one source of income and only one of

several programs that help support the standard of living of our retired

and disabled populations. All sources of income and all of these programs

should be considered together in confronting the demographic challenges

we face. For example, changes to Social Security could potentially affect

SSI benefits, employer-sponsored pensions, retirement savings, and the

work and retirement patterns of older workers. Such interactions should

actively be considered. Moreover, several programs provide noncash

benefits that also play a major role in sustaining standards of living for

their beneficiaries.

Importantly, examining the adequacy of cash income alone would ignore

the major role of noncash benefits and the needs they help support. This is

especially critical in the case of Medicare beneficiaries. Considering these

important noncash benefits in any adequacy analysis could have a very
Page 39 GAO-02-62 Social Security and Income Adequacy

material effect on both the absolute and relative positions of senior

citizens as compared to other groups of Americans.

We provided a draft of this report to SSA. SSA provided a number of

technical comments, which we have incorporated where appropriate.

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

Security Administration and other interested parties. 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. Key

contributors are listed in appendix V.

Sincerely yours,

Barbara D. Bovbjerg, Director

Education, Workforce, and

Income Security Issues

Agency Comments
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 40 GAO-02-62 Social Security and Income Adequacy

Several methods have been used to measure the level of adequate

income—what it costs to live. We identified 11 methods that have been

used to develop measures against which income from Social Security

benefits might be compared for determining adequacy.1

 These methods

include the current poverty thresholds, experimental poverty thresholds,

family budgets, family expenditures, material hardship, median family

income, one-half median family income, per capita personal income,

public assistance, public opinion, and earnings replacement rates.

These methods vary along a number of dimensions. These include their

purpose, features of their construction, years for which they measure

adequacy, and frequency of publication. In some instances where the

method has been used to develop more than one measure, we selected one

of the measures as an example of the method and used it for the

description of the method.

The methods also vary in whether they are absolute or relative. Absolute

measures are derived from a fixed bundle of goods and services that does

not vary in mix, quantity, or quality regardless of when or where it is

applied. For example, an absolute measure would be one based on a list of

goods and services that are judged to be necessary for a family to meet its

basic needs. The list of goods and services would need to be changed

periodically to reflect changes in living standards over time. In contrast,

relative measures change with current income or consumption.

Measurement experts who have served on various panels to study the

issue have not agreed on which is more appropriate to determine how

much it costs to live. Table 2 provides an overview of the 11 methods with

regard to several dimensions.

 1

 Two of these measures are nonmonetary and therefore cannot be used in direct

comparison with a monetary amount.

Appendix I: Descriptions of Adequacy

Measurement Methods
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 41 GAO-02-62 Social Security and Income Adequacy

Table 2 is followed by a fuller description of each method, with particular

attention to how each is constructed, its uses, and issues that panels and

experts have raised regarding the measure.
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 42 GAO-02-62 Social Security and Income Adequacy

Table 2: Overview of the Purpose, Construction, and Other Dimensions of 11

Methods To Measure Income Adequacy

Measurement method Purpose of measure

Absolute or

relative

measurea

Current poverty thresholds Determine whether persons living in

a family are officially poor.

Absolute

Experimental poverty thresholds Provide reasonable thresholds to

derive poverty statistics.

Relative

Family budgets Estimate what it costs a working

family of four to live.

Absolute

Family expenditures Describe consumer spending and

determine cost-of-living indexes.

Relative

Material hardship Identifies individuals who do not

consume minimal levels of goods and

services.

b

Median family income Estimates the income of the family at

the middle of the income distribution.

Relative
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 43 GAO-02-62 Social Security and Income Adequacy

Construction of measure

Basis of

measurement Family unit

Geographic

unit

Method of

updating

Observation

about the

measure Years of measure

Frequency of

publication

1964 cost of a

food plan for the

family multiplied

by three

By age of family

head, family

size, and

number of

children under

18 years

b

Increased annually

by the Consumer

Price Index (CPI)

(See app. II) 1959 through

present

Annually

Median

expenditures in

specific

categories

adjusted for

other

necessities,

family size, and

cost of housing

By family size

and number of

children under

18 yearsc

41 geographic

areas based on

area and

population size

Median

expenditures in the

specific categories

are re-estimated

Lacks scientific

basis to support

the use of

median level of

expenditures.

1990 to 1997 Initially in

1995; Census

published

additional

years of

thresholds in

1999.

The total costs

of a list of items

associated with

a specific level

of living

Separate

budgets

specified for a

family of four

and a retired

coupled

Urban United

States, 40

metropolitan

areas, and 4

nonmetropolitan

regions

In addition to

revising the lists of

goods and service,

(1) the lists were

periodically

repriced; or (2)

previous costs

increased annually

by the CPI

Expert panel

recommended

methodology be

changed; found

subjective

judgment used in

developing lists

of items.

1946 to 1951, 1959,

and 1966 to 1981

Periodically;

no longer

published

Consumer

expenditures as

reported in a

national survey

By various

family

characteristics

By type of area

(urban and

rural) and 4

regions

Data are collected

quarterly; prior to

1980, data

collected about

every 10 years

Averages may

not represent

expenditures

made by families

with specified

characteristic.

1980 through

present

Annually

Self-assessment

on specific

events, such as

not having

enough to eat

By various

family

characteristics

b b Measure is not in

monetary terms.

1992 and 1995;

Chicago residents in

the mid-1980s

Census

published

reports for

1992 and

1995.

Money income

as reported in a

national survey

By various

family

characteristics

4 regions and

by type of

residence—

inside or

outside

metropolitan

areas

Money income

data are collected

annually

(See app. II) 1947 through

present

Annually
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 44 GAO-02-62 Social Security and Income Adequacy

Measurement method Purpose of measure

Absolute or

relative

measurea

One-half median family income Provides a means for comparative

analysis of poverty status.

Relative

Per capita personal income Presents the nation’s personal

income on a per person basis.

Relative

Public assistance Determines whether a person is

financially dependent.

b

Public opinion Tracks the size of groups of people at

different standards of living.

b

Earnings replacement rates Determine extent that individuals can

maintain pre-retirement standard of

living.

Relative
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 45 GAO-02-62 Social Security and Income Adequacy

Construction of measure

Basis of

measurement Family unit

Geographic

unit

Method of

updating

Observation

about the

measure Years of measure

Frequency of

publication

50 percent of

median family

income as

reported in a

national survey

By various

family

characteristics

b

Money income

data are collected

annually

No standard

method for which

family type or

proportion of

income to use as

adequacy

measure.

b b

Total of various

sources of

personal income

in the nation

divided by the

population of the

nation

b

By nation, state,

region, county,

and

metropolitan

areas

Comprehensive

revisions about

every 5 years;

Includes income

of nonprofit

institutions and

pension plans.

1929 through

present

Monthly at the

national level;

quarterly at the

state level; and

annually at the

county and

metropolitan

area

Participation in a

welfare program

Programs

vary, e.g.,

Supplemental

Security

Income (SSI)

benefit

amounts vary

by family

composition

Programs vary,

e.g., number of

SSI recipients

published

nationally and

by state

Programs vary,

e.g., SSI benefit

levels are

increased annually

by the CPI

Measure is not in

monetary terms

(see app. II).

Programs vary, e.g.,

1974 through

present for SSI

Programs vary,

e.g., number of

SSI recipients

published

quarterly and

annually

Subjective

estimates of

what it costs to

get along in the

community

bb b Wording may be

ambiguous to

respondent.

Selected years from

1946 through 1992

Periodically;

Gallop measure

no longer

collected

Retirement

income relative

to pre-retirement

income

May be

computed for

individuals or

households

but most

meaningful for

households

b b Measure

calculated for

specific individuals

Measure is not a

standard of

adequacy but a

benchmarking

tool.

b

 Measure

determinable for any

year. Estimates for

illustrative workers

available from 1940

b

a

An absolute measure is a fixed bundle of goods and services that does not vary in mix, quantity, or

quality regardless of when or where it is applied. A relative measure changes directly with current

income or consumption.

b

None or not applicable.

c

One of the experts who recommended these thresholds proposed another adjustment for families

headed by a single adult.

d

In 1960 and 1968, the Bureau of Labor Statistics (BLS) published equivalence scales that could be

used to adjust the costs by family composition.

Source: GAO’s analysis of the relevant literature.
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 46 GAO-02-62 Social Security and Income Adequacy

The poverty thresholds are a measure that attempts to specify the

minimum money income that could support an average family of a given

composition at the lowest level of living consistent with a country’s

prevailing standards of living.

The poverty thresholds are an absolute measure whose initial purpose was

to measure year-to-year changes in the number and characteristics of poor

people.

The poverty thresholds, as originally published by the Social Security

Administration (SSA) in 1963, represent a minimal amount of funds a

family needed to rear its children, what the author termed “crude indexes”

of poverty. Later the crude indexes were extended to families without

children. If a family’s total money income is less than the poverty

threshold for that family’s composition, which is based on family size, age

of the family’s head, and number of children under 18 years old, then that

family, and every individual in it, is considered poor.

In 1965, the Office of Economic Opportunity adopted the thresholds for

statistical and program planning purposes. The Bureau of the Budget

established the thresholds as the official definition of poverty for

statistical use in all executive departments in 1969. This definition was

reconfirmed in Statistical Policy Directive No. 14, after the bureau became

the Office of Management and Budget.

Poverty thresholds are used mainly for statistical purposes, such as

estimating the number of Americans in poverty each year.2

 This official

measure of poverty is used to measure the nation’s progress in reducing

the extent of poverty and is used to allocate funds and to identify target

populations for various public assistance programs. Policymakers use

trends in poverty rates—the proportion of persons whose family income is

below the poverty threshold—over time and across population groups to

make judgments about particular policies. Poverty statistics are also used

to evaluate government programs for low-income persons and the effects

of policies on the distribution of income.

 2

 Poverty guidelines, a simplification of the poverty thresholds, are used for administrative

purposes, such as determining financial eligibility for a federal program. Such means-tested

programs include food stamps, low-income home energy assistance, and legal services for

the poor. See Means-Tested Programs: Determining Financial Eligibility Is Cumbersome

and Can Be Simplified (GAO-02-58, Nov. 2, 2001).

Current Poverty

Thresholds

Purpose and Uses
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 47 GAO-02-62 Social Security and Income Adequacy

SSA’s 1963 publication based the poverty thresholds on information from a

1955 food consumption survey and the 1964 costs of a food plan. The

author determined from U.S. Department of Agriculture’s (USDA) 1955

Household Food Consumption Survey that families of three or more

people spent approximately one-third of their after-tax money income on

food. The author then tripled the 1964 costs of USDA’s economy food plan

for various compositions of families. Different procedures were used to

calculate poverty thresholds for two-person families and single

individuals.3

 Separate thresholds were estimated for single individuals and

2-person families headed by an individual 65 years and over, as well as an

individual under 65 years old.4

 There were separate sets of thresholds for

farm and nonfarm families, as well as thresholds by sex of the head of the

family. The thresholds that were based on the sex of the family’s head and

by farm residence were eliminated in 1981.

There is no geographic variation of the poverty thresholds. Although there

were regional costs for the USDA food plan, they were not used to account

for regional variation when the poverty thresholds were developed.5

Two methods have been used to update the original poverty thresholds.

Initially, the change in the cost of USDA’s economy food plan was used to

annually update the poverty thresholds. In 1969, the method of updating

the thresholds was changed to price changes of all items in the Consumer

Price Index (CPI).6

 The poverty thresholds are increased each year by the

 3

 The author used a different multiplier of the food costs for 2-person families and then

calculated the single-person thresholds as 80 percent of the 2-person thresholds.

4

 The term “equivalence scales” is used in reference to an index that is calculated from the

resulting family size and age of head distinctions embedded in the 1963 methodology. In

one such scale, the individual is the base and other family compositions are in relation to it.

For example, a 4-person family’s equivalence scale is 2.01, indicating that it is equivalent to

2 individuals.

5

 Only the poverty guidelines differentiate by geographic area. Separate guideline amounts

are published for the 48 contiguous states and the District of Columbia, Alaska, and Hawaii.

6

 Poverty thresholds for 1959 to 1967 were recalculated on this basis.

Construction of the

Measure
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 48 GAO-02-62 Social Security and Income Adequacy

same percentage as the annual average CPI for all Urban Consumers

(CPI-U).7

 The Census Bureau annually updates and publishes the poverty

thresholds.8

Numerous alternative poverty thresholds have been proposed since the

official adoption of the measure developed in 1963. One such alternative is

the experimental thresholds recommended by a Committee on National

Statistics of the National Academy of Science (NAS) study panel in 1995.9

The NAS poverty threshold is a relative measure whose stated purpose

was “to lead to an initial threshold that is reasonable for purposes of

deriving poverty statistics.”

The NAS poverty thresholds have been solely used for research. Census

published a report in 1999 to provide information for evaluating the

implications of many of the NAS panel’s recommendations for a new

poverty measure. To do so, Census reported how estimated levels of

poverty for 1990 through 1997 differed from official levels as specific

recommendations of the NAS panel are implemented individually and how

estimated trends differed when many recommendations are implemented

simultaneously.

The NAS poverty thresholds represent a dollar amount for basic goods and

services—food, clothing, shelter (including utilities)—and a small

additional amount to allow for other common, everyday needs (e.g.,

household supplies, personal care, and nonwork-related transportation).10

 7

 BLS publishes the CPI-U and the CPI for Urban Wage Earners and Clerical Workers (CPIW). According to BLS, the CPI-U represents about 87 percent of the U.S. population, and

the CPI-W represents about 32 percent of the U.S. population. BLS began publishing the

CPI-U in 1978. Until then, it published only the CPI-W.

8

 For example, see Poverty in the United States: 2000, U.S. Census Bureau, Current

Population Reports: Consumer Income, P60-214, (Washington: 2001).

9

 Constance F. Citro and Robert T. Michael, eds., Measuring Poverty: A New Approach

(Washington: National Academy Press, 1995).

10 To determine a family’s poverty status, the NAS panel recommended that family

resources—the measure that is compared to the thresholds—include money and nearmoney income, minus expenses, such as child care, that divert money away from the basic

goods and services.

Experimental Poverty

Thresholds

Purpose and Uses

Construction of the

Measure
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 49 GAO-02-62 Social Security and Income Adequacy

First, to develop a threshold for a reference family, a specified percentage

of median annual expenditures from the Consumer Expenditure Survey

(CEX) data is used to determine an amount of food, clothing, shelter

expenditures.11 The reference family consists of two adults and two

children. The median annual expenditure amount is next increased by a

modest additional amount to allow for other necessities. An equivalence

scale is then applied to the reference family threshold to adjust for families

of different sizes and composition.

Further adjustments are made to account for geographic differences in the

cost of housing. The NAS panel developed an index of 41 geographic areas

that is presented by area and population size. These index values are

applied to the thresholds to adjust for differences in the cost of housing.

The NAS panel also recommended a method for updating the initial

threshold that would reflect changes in nominal growth in food, clothing,

housing, and shelter expenditures. To do so, 3 years of the most recent

data from the CEX would be used to determine the threshold for the

reference family. The CPI-U would be used to update these expenditure

data to the current period. Then, the procedures as outlined above are

followed to estimate thresholds for families of other sizes by geographic

areas.12

The NAS panel said that its method of updating the thresholds represented

a middle ground between an absolute approach of simply updating the

thresholds for price changes, which ignores changes in living standards

over time, and a relative approach of updating the thresholds for changes

in total consumption.

One of the NAS panel members dissented from the panel because the

major recommendations and conclusions for changing the measurement

of poverty were the “outcome of highly subjective judgments” and were

not based on scientific evidence. In his dissent, the member said that there

was no scientific basis to support the use of food, clothing, and shelter

 11 Actually, the panel did not use a single percentage of the median. It concluded that the

reference family threshold be from 78 to 83 percent of the median expenditures of the basic

goods and services.

12 The NAS panel recommended that the index used to make housing costs adjustments be

updated every 10 years as new decennial census data become available.

Observations About the

Measure
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 50 GAO-02-62 Social Security and Income Adequacy

expenditures upon which to develop the thresholds. He also objected to

using the median level of expenditures of these items rather than the CPI

to update the poverty thresholds; he said to do so would change the

measure from an absolute to a relative measure. He had two other

objections in that the NAS panel did not treat medical care as basic service

and that the panel suggested that the poverty line fell within a range of

values, of which he stated did not have the scientific community’s

consensus.

Family budgets are an income adequacy measure that dates back to the

19th century. The measure described in this appendix is for the city

worker’s family budget,13 whose origins closely relate to the budgets that

the Works Progress Administration constructed in 1935 for a urban family

of four.

The city worker’s family budget represents the estimated cost of a list of

goods and services that the 4-person family would need to live at a

designated level of well-being.14 The level designated in the city worker’s

family budget for 1946 was intended to represent a modest but adequate

standard of living.15 The same level of well-being was used in the interim

city worker’s family budget with 1959 costs. In the mid-1960s, two levels of

well-being were added—lower and higher—and the name of the modest

but adequate level was changed to intermediate. Also, the name of the city

worker’s family budget was changed to family budgets.

The city worker’s family budget was an absolute measure that was used to

determine the adequacy of income—what it costs to live—for a city

worker’s family who was defined as a husband, aged 38 and employed full

 13 See City Worker’s Family Budget for a Moderate Living Standad, Bureau of Labor

Statistics, Bulletin 1570-1 (Washington: 1967). BLS’ first publication of a budget was in 1911

for the measurement of the adequacy of family incomes of textile workers.

14 The elderly couple’s budget was developed by SSA to parallel the city worker’s family

budget.

15 The level designated in SSA’s elderly couple’s budget was intended to represent a modest

but adequate mode of living, which allowed normal participation in the life of the

community in accordance with current American standards. The level was above

subsistence level in that it provided for more than physical needs or what would be

necessary to carry families through a limited period of stringency.

Family Budgets

Purpose and Uses
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 51 GAO-02-62 Social Security and Income Adequacy

time; a wife who did not work outside the home; a boy aged 13; and a girl

aged 8.16

The city worker’s family budgets were used as benchmarks in determining

individual family needs, establishing interarea differences in living costs,

and documenting changes in living standards over time. The budget cost

levels were used by federal, state, and local governments as thresholds for

eligibility in administrative programs. The city worker’s family budgets

were widely used in employment compensation determinations, such as

wage negotiations and geographic wage adjustments. Since the costs of

the budgets were city specific, the budgets were also used to construct

indexes of living costs. These indexes showed interarea variations in living

costs and individuals and financial planners used them to examine

interarea cost-of-living differences. The budgets were also used in private

and public legal actions. Researchers continue to construct family budgets

to examine the adequacy of Social Security benefits,17 as well as the

adequacy of wages paid to single parents. 18

In a number of countries, budget standards are used as reference points in

devising or monitoring income maintenance programs. For example, the

Commonwealth Department of Social Security commissioned the

development of a set of budget standards for Australia. Published in 1998,

the budget standards are expected to inform future Australian

governments in relation to adequacy standards.19

 16 The purpose of SSA’s elderly couple’s budget was to measure the adequacy of income for

a retired couple who was defined as a husband about 65 years of age or over and the wife a

few years, if at all, younger.

17 For example, Joseph White in False Alarm: Why the Greatest Threat to Social Security

and Medicare Is the Campaign to “Save” Them (Baltimore: Johns Hopkins University

Press, 2001), used an abbreviated method to calculate 1996 costs of an elderly couple’s

budget in 14 nonrandom counties. From the budget amounts, he then estimated the

amounts that retired couples would need in Social Security benefits to meet the costs of

the rudimentary budgets that he constructed.

18 Family budgets have been calculated for a single-parent with two children. Wages of the

single parent are then compared to the budget amount to determine if families are provided

adequate compensation to meet their basic needs. For example, see Jared Bernstein,

Chauna Brocht, and Maggie Spade-Aguilar, How Much Is Enough? Basic Family Budgets

for Working Families (Washington: Economic Policy Institute, 2000).

19 Peter Saunders, et al., Development of Indicative Budget Standards for Australia, Social

Policy Research Centre, University of New South Wales, Policy Research Paper No. 74

(Mar. 1998).
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 52 GAO-02-62 Social Security and Income Adequacy

The measure involved the formulation of a budget, listing the items and

their quantities that comprised the level of well-being chosen, the pricing

of these items, and computing the aggregate annual cost of the budget. A

group of experts developed a list of goods and services using scientific

standards of requirements, such as the recommendations of the

Committee on Nutrition of the National Research Council for the food

segment of the budget.20 Where standards had not been developed for the

various segments of the budget, records of family expenditures by 4-

person families were used. These data were studied to determine the level

of purchases in expenditure categories where the families began to

purchase higher quality items in the same expenditure category of items or

started to save their income.

BLS published the costs of the city worker’s family budget for 34 cities for

1946, 1947, 1949, 1950, and 1951. The cost of the interim city worker’s

family budget was published for 20 cities for 1959. The family budgets at

three cost levels were published for 1967 through 1981 (the cost of the

intermediate level was also published for 1966) for urban United States, 40

individual metropolitan areas, and 4 nonmetropolitan regions.21

The early city worker’s family budgets could not be used for families other

than those consisting of a husband, wife, and two young children. In 1960,

BLS published equivalence scales that could be used to adjust the costs by

family composition. BLS updated the equivalence scales in 1968.

The city work’s family budgets are no longer published. With the release of

the 1981 budget costs, BLS terminated the family budgets program

because funding was not available for a revision.

In addition to re-specifying the lists of items in a revision, two methods

were used to update the city worker’s family budget costs. The first

method recollected price data for the individual items on the budget list

and then aggregated those costs for an annual amount. The other method,

which was used to estimate the 1949 through 1951 and the 1969 through

 20 Scientific standards for housing were also used. Provisions of the Medicare program

were used for the medical segment of the retired couple’s budgets.

21 The costs of the elderly couple’s budget were published initially for 8 cities and later for

13 cities. The 1950 costs were published for 34 cities. The 1959 interim retired couple’s

budget was published for 20 cities. The retired couple’s budget costs were published for

urban United States, metropolitan and nonmetropolitan areas, 40 individual metropolitan

areas, and 4 nonmetropolitan regions.

Construction of the

Measure
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 53 GAO-02-62 Social Security and Income Adequacy

1981 costs, was to use the CPI’s component index numbers to update the

costs for the segments of the budgets. 22 Revisions of the budgets occurred

in 1959 and 1966 when the lists of goods and services were re-specified by

experts to account for changes in the modest but adequate standard of

living.

In response to a congressional mandate and in recognition that the family

budgets needed to be improved, in the 1970s, BLS contracted with the

Wisconsin Institute for Research on Poverty to recommend revisions in

the Family Budgets program. In 1980, the Expert Committee on Family

Budget Revisions recommended that the methodology be changed and

that scientific standards no longer be used.23 The committee asserted that a

scientific basis does not exist by which to develop commodity-based lists

for the budgets.

One of the reasons the Expert Committee on Family Budget Revisions

recommended a change in methodology was that it found that large

elements of relativity and subjective judgment entered into the

development of the lists of goods and services, including those for which

scientific standards were used. The committee recommended that actual

overall levels of expenditures be used to measure adequacy. Specifically, it

recommended that median expenditure of two-parent families with two

children be used to develop the “prevailing family standard” budget and

that three other standard budgets be developed as proportions of the

prevailing family standard budget amount.24 In a dissent, a committee

member said that a measure of well-being that uses an average (or

median) of total family expenditures, which is obtained from a consumer

expenditure survey, does not take into consideration the specifics of what

that amount will buy or whether the actual quantities of goods and

services available within the amount are enough to supply what is needed.

 22 The two methods were compared for differences between 1946 and June 1947 elderly

couple’s budget costs. In this comparison the actual costs of the budgets rose less rapidly

than when the budgets were updated with the CPI. However, this finding could not be

applied to periods outside these 2 years.

23 Expert Committee on Family Budget Revisions, New American Family Budget

Standards, Working Paper, Institute for Research on Poverty, University of WisconsinMadison (May 1980).

24 BLS researchers recently implemented the committee’s recommendations with consumer

expenditure data for 1989, 1994, and 1998. See David S. Johnson, John M. Rogers, and

Lucilla Tan, “A Century of Family Budgets in the United States,” Monthly Labor Review,

Vol. 124, No. 5 (May 2001) pp. 28-45.

Observations About the

Measure
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 54 GAO-02-62 Social Security and Income Adequacy

Family expenditures are the averages of consumer purchases that are

recorded in survey data arrayed by family characteristics, such as age of

reference person.

Family expenditures is a relative measure whose purpose is to describe

consumer spending and to determine cost-of-living indexes. The basic

premise is that the living standards of society can be measured with

current consumption expenditure levels and patterns. The early family

expenditure surveys, which were conducted in the late 19th century, were

concerned with the cost of living of the “working man” and his family, that

is the amount of dollars a family needed to live.

Family expenditure data are used by government and private agencies to

study the welfare of particular segments of the population. The data are

used by economic policymakers interested in the effects of policy changes

on various groups.

CEX data are used to estimate aggregate family expenditures. There are

three basic methods to measure family expenditures: current

consumption, used in the CEX before 1980; total expenditures, used in the

CEX since 1980; and current outlays, an alternative measure used to

approximate out-of-pocket expenditures, which is also used in the CEX

since 1980.

Current consumption expenditures method includes the transaction costs

of goods and services, excise and sales taxes, the price of durables (e.g.,

vehicles) at the time when the purchased, and home mortgage interest

payments. It excludes the payment of principal on loans, gifts to persons

outside the family, personal insurance, and retirement and pension

payments.

The total expenditures method is the same as the current consumption

expenditures method, except it includes gifts, personal insurance, and

retirement and pension payments.

The total outlays method differs from total expenditures in that payments

of principal for home mortgages and financed vehicles are included and

the purchase price of vehicles is excluded.

Family Expenditures

Purpose and Uses

Construction of the

Measure
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 55 GAO-02-62 Social Security and Income Adequacy

Data from the continuing CEX have been collected quarterly on an

ongoing basis since 1980. Prior to the continuing CEX, the survey was

conducted periodically about once every 10 or so years. BLS annually

publishes average annual expenditures from the continuing CEX for

consumer units.25 Expenditure data are published by type of area (urban

and rural) and for four regions of residence.26

According to BLS, the published expenditure amounts are averages for

consumer units with specified characteristics, regardless of whether or not

a particular consumer unit purchased an item in the expenditure category

during data collection. Therefore, the average expenditure for an item may

be considerably lower than the average for those who actually purchased

the item. Also, the average may differ from those who purchased the item

as a result of frequency of purchase or the characteristics of the consumer

units that purchased the item. For example, since all consumer units do

not purchase a new vehicle every year, the average expenditure for new

vehicles will be lower than the average for those who actually purchased a

new vehicle because the average expenditure includes those who did not

purchase a new vehicle that year. Even among those who purchase the

item, consumer units may have dissimilar demographic characteristics.

Material hardship measures identify individuals who do not consume

minimal levels of goods and services, such as food, housing, clothing, and

medical care. The material hardship measure presented here is one

developed in the 1980s by Susan Mayer and Christopher Jencks in their

study of Chicago residents.27 This material hardship measure focused on

the following hardships: hunger, cut off of utilities to the home, living in

crowded or dilapidated housing, eviction, inadequate health care, and

unmet needs for dental care.

 25 A consumer unit is the members of a household related by blood, marriage, adoption, or

other legal arrangement; a single person living alone or sharing a household with others but

is financially independent; or two or more persons living together who share some major

expenses.

26 For example, see Consumer Expenditures in 1999, BLS Report 949, (Washington: 2001).

27 Susan E. Mayer and Christopher Jenks, “Poverty and the Distribution of Material

Hardship,” The Journal of Human Resources, Vol. XXIV, (Winter 1989), pp. 88-113.

Observations About the

Measure

Material Hardship
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 56 GAO-02-62 Social Security and Income Adequacy

Material hardship is a measure whose purpose is to provide a means for

policymakers to measure the goal of reducing specific forms of material

hardship.28

Researchers have used material hardship measures to supplement

traditional measures of poverty, such as to provide a nonmonetary

perspective of those who are experiencing economic difficulties. The

measures are used by researchers to create point-in-time estimates of

hardship, describe trends in hardship, identify predictors of hardship, and

develop hardship indicators to evaluate welfare reform.

Respondents are asked to make self-assessments of specific events in their

lives. For example, they are asked if there was a time in the previous year

when they needed food but could not afford to buy it or could not get out

of the home to get food. Generally asked in a yes/no format, these

indicators are reported individually but are then summed into a composite

deprivation index. In some instances, respondents are asked to report the

hardship on the basis of a scale. For example, respondents might be asked

to categorize the food eaten in their household as (1) having enough of the

kinds of food they want, (2) enough but not always the kinds they want,

(3) sometimes not enough to eat, or (4) often not having enough to eat.

Other than periodically conducting the surveys, there is no method to

update the material hardship measure.

Until Census began collecting data from a nationally representative

sample, data had been collected of single mothers in Chicago, Illinois, and

of selective populations in other cities.29

 28 Material hardship measures are neither absolute nor relative. They examine the extent or

lack thereof the consumption of a specific good or service. They do not change with

current income or consumption.

29 Material hardship data are collected in selected nationwide surveys. The Survey of

Income and Program Participation (SIPP) and the National Survey of America’s Families

(NSAF) collect data for multiple indicators of material hardship. Census conducts the SIPP

and the Urban Institute in partnership with Child Trends administers NSAF. Census

published extended measures of well-being from the SIPP for 1992 and 1995. Other data

sources are available for specific material hardship measures. For example, food insecurity

data were collected in the Third National Health and Nutrition Survey, supplements to the

Current Population Survey, and the Longitudinal Study of Aging.

Purpose and Uses

Construction of the

Measure
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 57 GAO-02-62 Social Security and Income Adequacy

Median income is the amount which divides an income distribution into

two equal groups, half having incomes above the median and half having

income below the median. The concept of using the midpoint of the

income distribution as an adequacy measure is that people are social

beings and that full participation within society requires that they “fit in”

with others. Individuals are not able to participate fully in society if their

resources are significantly below the resources of their members of

society, even if they are able to eat and physically survive.

Median family income is a relative measure whose purpose is to estimate

the income of the family at the middle of an income distribution.

Researchers, analysts, and policymakers use median family income to

follow historical trends and annual changes in income. A relative measure,

such as median family income, is used to provide a perspective of an

adequacy measure that keeps up to date with overall economic changes in

the society.

Current Population Survey (CPS) data are used to calculate median family

income. The measure is updated annually through data collection. The

median is based on money income before taxes and does not include the

value of noncash benefits, such as food stamps, Medicare, Medicaid,

public or subsidized housing, and employment-based fringe benefits. The

Census Bureau has annually published median family income since 1947.30

Median family income data are published by various family characteristics.

The data are also presented by four regions of residence and by type of

residence—inside or outside metropolitan areas. The metropolitan areas

are further broken down by over or under 1 million in population and by

inside or outside central cities.

One-half of median family income (see the previous method for

description of median family income) is a relative poverty standard.

 30 For example, see Money Income in the United States: 2000, U.S. Census Bureau,

Current Population Reports: Consumer Income, P60-213, (Washington: 2001).

Median Family

Income

Purpose and Uses

Construction of the

Measure

One-Half Median

Family Income
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 58 GAO-02-62 Social Security and Income Adequacy

One-half median family income is a relative measure that researchers use

to demonstrate the absolute nature of the official poverty thresholds.31

One-half of median income for four-person families is also used in

comparative analyses of poverty across nations.

Researchers use one-half of the value of median family income as the

measure.

No standard method is used to establish the measure of a minimal level of

adequacy with median family income. The most commonly proposed

measure used for poverty determination is 50 percent of the median. The

standard could be implemented in several ways, for example, one-half of

the median for each family size. However, median income by family size is

bell shaped with the peak at the four-person family.

Per capita personal income is the amount of personal income from the U.

S. national income and product accounts (NIPA) that would be available

to each individual if all income received by persons was distributed

equally among all people in the nation.

Per capita personal income is a relative measure whose purpose is to

present a measure of a nation’s personal income on a per person basis.

Government and private decision makers, researchers, and the public at

large who need timely, comprehensive, and reliable estimates use per

capita personal income as a measure of the value of and changes in

average income at the national and regional level. Because per capita

personal income is conceptually and statistically consistent with the

official measure of output (Gross Domestic Product), productivity, and

other key economic indicators, national estimates of per capita personal

income are key inputs to the formulation and monitoring of economic

activity by the Federal Reserve Board and to the preparation of

projections of federal receipts by the Congressional Budget Office.

 31 For example, see Denton R. Vaughan, “Exploring the Use of the Public’s Views to Set

Income Poverty Thresholds and Adjust Them Over Time,” Social Security Bulletin, Vol. 56,

No. 2 (Summer 1993) pp. 22-46.

Purpose and Uses

Construction of the

Measure

Observations About the

Measure

Per Capita Personal

Income

Purpose and Uses
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 59 GAO-02-62 Social Security and Income Adequacy

Regional level estimates, which are consistent with the national estimates,

also are used by state governments for similar purposes and are used in

the allocation of federal funds for key programs.

Per capita personal income data are used as a measure of the economy’s

capacity to pay. For example, the Medicaid funding formula uses state per

capita personal income to provide higher matching percentages for states

that have more limited resources to finance program benefits and more

low-income people to serve.

Personal income is calculated as the sum of incomes received by persons

from production and from transfer payments from government and

business. “Persons” consists of individuals, nonprofit institutions that

primarily serve individuals, private noninsured welfare funds, and private

trust funds.

Wage and salary disbursements, other labor income,32 proprietors’ income,

rental income, dividend income, interest income, and transfer payments to

persons, less personal contributions for social insurance are summed to

calculate personal income. In most cases, only market transactions are

used. In a few cases, nonmarket transactions are used in personal income.

These transactions include home ownership, financial services furnished

without direct payment, and employer contributions for health and life

insurance. The summation of the personal income components is then

divided by the nation’s population to provide per capita personal income.

Population is the total population of the United States, including military

personnel.

Each component of personal income is prepared independently using the

most up-to-date and reliable source data. The Commerce Department’s

Bureau of Economic Analysis prepares the estimates of personal income

and calculates per capita personal income. Per capita personal income

estimates are released monthly at the national level, quarterly at the state

level, and annually at the county and metropolitan area levels. Per capita

 32 Other labor income consists primarily of employer payments to private pension and

profit-sharing plans, publicly administered government employee retirement plans, private

group health and life insurance plans, and privately administered workers’ compensation

plans.

Construction of the

Measure
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 60 GAO-02-62 Social Security and Income Adequacy

personal income is published at both the national and regional—state,

county, and metropolitan area—levels.33

The base of per capita personal income, personal income, is updated on a

regularly scheduled basis, where the schedule of updates are timed to

incorporate newly available and revised source data. Comprehensive

revisions are carried out at about 5-year intervals.34 Population estimates

are revised to reflect the results of the latest decennial census of

population.

The definition of personal income, which is based on the NIPA definition,

is not what one usually equates to family or household income. For

example, it includes income of “persons” as defined for the NIPAs, which

includes income of individuals as well as income of nonprofit institutions

serving individuals and the investment income of pension plans. It

excludes realized capital gains or losses and incomes that reflect transfers

from other individuals, such as alimony or gifts. Although, in general,

incomes are recorded when received, benefit payments from pension

plans are not included when the benefits are actually paid. Instead,

employer contributions to these plans are recorded as income to

employees when the contributions are made and the investment income of

the plans is recorded when earned. Also, although Social Security benefit

payments are included in personal income, total personal income is

reduced by personal contributions to Social Security.

If an individual is dependent upon others for cash assistance, then the

individual has inadequate income. Since data about sources of income

provided by others is difficult to obtain, statistical indicators of such

dependency often resort to administrative data from public assistance

programs. As used in this appendix, the receipt of public assistance is a

measure to denote individuals who meet program eligibility criteria and

 33 For example, see table J.3 Per Capita Personal Income and Disposable Personal Income

and table K.1 Personal Income and Per Capita Personal Income by Metropolitan Area in

Section D of Survey of Current Business.

34 Comprehensive revisions update the NIPAs to portray more accurately the evolving U.S.

economy, to reflect the introduction of new and improved methodologies, and to

incorporate newly available and revised major source data. Revisions are carried back in

time to maintain a consistent time series of data.

Observations About the

Measure

Public Assistance
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 61 GAO-02-62 Social Security and Income Adequacy

have resources below a level that is specified by a state (or federal

government) for its public assistance program.

The dependency on others appears to be the basis on which President

Roosevelt’s Committee on Economic Security made its recommendations

in 1935. Supporting materials prepared for the committee indicate that it

used a “danger line” amount that was used in some of the states for their

old-age public assistance programs. The danger line was an amount ($300

per year) that placed older persons in a dependent class. As an example of

this adequacy measurement method we use the Supplement Security

Income (SSI) program and its predecessor the old-age assistance program.

The federal SSI program was created to provide a positive assurance that

the nation’s aged, blind, and disabled people would no longer have to

subsist on below poverty-level incomes. SSI was conceived as a

guaranteed minimum income for the aged, blind, and disabled. It was to

supplement the Social Security program and to provide for those who

were not covered or minimally covered under Social Security or who had

earned only a minimal entitlement under the program. In 1972, SSI

replaced the federal-state old-age assistance programs in which state

benefit amounts were matched by the federal government up to a specified

monthly amount. Under those programs the states were able to set benefit

amounts and the basis for those amounts was unclear.

The purpose of a measure that examines the receipt of public assistance is

to determine if the person is dependent upon others for his/her economic

well-being.35

In staff reports prepared for the 1934 Committee on Economic Security,

the dependency on others is used as a measure of inadequate income. For

example, Edwin Witte, executive director for the committee, estimated

that 2.7 million of the 6.5 million persons 65 and older were supported by

others, including those who obtained public assistance.

The National Resources Planning Board in 1942 used the receipt of public

assistance to determine whether old-age and survivors benefits that were

 35 Public assistance measures are neither absolute nor relative. They do not involve a list of

necessary goods and services that has been identified by experts or scientific standards,

nor do they change with current income or consumption.

Purpose and Uses
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 62 GAO-02-62 Social Security and Income Adequacy

payable in 1940 were adequate for the needs of the recipients. The board

said that a large volume of supplementation of social insurance benefits by

other forms of aid would lead it to conclude that insurance payments were

not adequate for a considerable proportion of qualified workers.

The measure is simply the number of persons who receive public

assistance. SSA administrative data are used to determine the number of

persons who receive federally administered SSI benefits. The number of

SSI recipients is continually updated with administrative data. SSA

publishes the data quarterly and annually. The data are published for the

United States and by state.36

By the nature of SSI’s benefit structure and eligibility criteria,

administrative data can be used to identify the type of family unit, or lack

of, in which the recipients live. For example, there are different benefit

levels for couples, individuals living alone, recipient living in someone’s

household, or individuals in a Medicaid facility.

Public opinion polls have been used to solicit subjective estimates from

individuals on the amount of income that one needs to live. The concept

underlying a public opinion poll to ascertain a subjective measure of

adequacy is that individuals are able to tell a pollster what the minimum

amount of income (or consumption) is that people need to maintain a

minimally adequate level of living. Subjective measures of adequacy are

grounded in the everyday and necessarily subjective perceptions of typical

individuals as to the material requirements associated with differing levels

of economic well-being. The direct question approach is based on the

assumption that people are the experts on the needs of their families

and/or those living in their communities.

The only relatively consistent series of money amounts corresponding to a

living-standard threshold based on judgment of representative samples of

the public is one developed by the Gallup polling organization.37 The

 36 For example, Annual Statistical Supplement, 1999, to the Social Security Bulletin,

Social Security Administration.

37 The following study, which used the Gallop data, is often cited: Denton R. Vaughan,

“Exploring the Use of the Public’s Views to Set Income Poverty Thresholds and Adjust

Them Over Time,” Social Security Bulletin, Vol. 56, No. 2 (Summer 1993) pp. 22-46.

Construction of the

Measure

Public Opinion
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 63 GAO-02-62 Social Security and Income Adequacy

subjective measure presented here is the “get-along” measure that was

collected by the Gallop Organization.

The purpose of a subjective measure of well-being that has been obtained

through a public opinion poll is to track the size of groups enjoying

different standards of living.38 To do so, the societal views about the

income levels required to support alternative living levels are compared

with average levels of family economic resources.

The primary use of the subjective measure has been to demonstrate the

absolute nature of the official poverty thresholds. For example, the

Committee on National Statistics of the National Academy of Science

study panel and researchers compared trends in the official poverty

threshold, one-half of family median income, and the get-along amount to

document that the official poverty measure is no longer consistent with

the society’s definition of measures of need. Subjective measures have

also been used to produce subjective minimum income thresholds.

The responses to the following question are used as the subjective

measure: “What is the smallest amount of money a family for four

(husband, wife, and two children) needs each week to get along in this

community?” The response when converted into an annual amount is

generally referred to as the “get along” amount. The Gallup Organization

queried samples of adults about the get-along amount 38 times from 1946

through 1992. There was no regular publication of the data.

Although the get-along question was asked in the context of the

respondent’s community, no presentation has been made of geographic

differences among the values reported.

Other than periodically making an inquiry through a poll or survey, there is

no method to update the public opinion measure.

 38 Subjective measures are neither absolute nor relative. They are not lists of goods and

services identified by experts or with scientific standards. Neither do they change with

current income or consumption.

Purpose and Uses

Construction of the

Measure
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 64 GAO-02-62 Social Security and Income Adequacy

As part of a study of subjective assessments of economic well-being,

researchers at the Bureau of Labor Statistics found that respondents have

definite emotional reactions to their financial situations and are willing

and able to discuss them. 39 They also found that the terms used in

subjective questions were ambiguous. In addition, if the respondent was

the designated bill payer, the person’s responses were found to differ from

those in the family who did not pay the bills.

One common measure of retirement income adequacy is the replacement

rate, which represents the income in retirement for a single worker or

household in relation to a measure of pre-retirement earnings, such as

earnings in the year before retirement.

The purpose of the earnings replacement rate is to compare the level of

retirement income with the level of pre-retirement income to help

illustrate the extent to which pre-retirement standards of living can be

sustained in retirement for particular individuals or households. The

replacement rate is a relative measure in that it is relative to an

individual’s or household’s own income, not to some absolute standard of

adequacy.

The earnings replacement rate has been used both with respect to Social

Security and to employer-sponsored pensions. As noted in this report, the

Social Security benefit formula is defined in a way that focuses on

replacing earnings. When calculating replacement rates, SSA typically uses

the ratio of initial Social Security benefits to pre-retirement covered

earnings. A number of researchers have used replacement rates in

analyzing Social Security benefits for many years. Also, an SSA actuarial

note observes that “policymakers are interested in replacement ratios: (1)

as a means of communicating to prospective beneficiaries approximately

how much they can expect to receive from Social Security, relative to their

earnings; and (2) as a means of deciding if and how the Social Security

program should be changed to meet the needs and desires of the

public...”40

 39 This study was not of the Gallup get-along question. It examined four self-assessment

questions that had been used in other research.

40 Joseph A. Applebaum and Joseph F. Faber. “The Concept of Replacement Ratios Under

Social Security.” SSA Actuarial Note No. 96, July 1979.

Observations About the

Measure

Earnings

Replacement Rates

Purpose and Uses
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 65 GAO-02-62 Social Security and Income Adequacy

Replacement rates have also been used with respect to employersponsored pensions and retirement income more broadly, using total

income amounts in the ratio. For example, available data suggest that

typical pension replacement rates for a 30-year career worker have been in

the 20- to 40-percent range across the earnings distribution and that lower

earners have received slightly higher replacement rates than higher

earners.41 More generally, many benefit professionals currently consider a

70 to 80 percent replacement rate as adequate to preserve the preretirement living standard. In contrast, Social Security replacement rates

for workers who retired in 2001 at age 65 with a history of average

earnings had a replacement rate of roughly 40 percent.

Construction of replacement rates raises a variety of methodological

issues, most notably, how retirement income is measured, how preretirement income is measured, how the two are compared, and for whom.

How these issues are addressed depends on the purpose at hand. For

example, in measuring retirement income, some researchers feel that

income in the first year of retirement should be used, rather than trying to

reflect changes in retirement income over time. In measuring preretirement income, some researchers use income in the year immediately

before retirement. In comparing the two, the two measures should be

consistent with one another, for example, with respect to before- or aftertax status. For whom the comparison is made might include specific

individuals or households for their own retirement planning purposes,

illustrative workers such as the steady-earners used in figures 4 and 7 of

this report, or some sample of individuals or households in the population.

If the purpose of the analysis is to isolate the effects of certain program

changes, then the use of illustrative steady earners in which all are

assumed to retire at a given age might be appropriate. In contrast, if the

purpose is to describe the experience of a population, then using a sample

might be appropriate.

The issues of updating and geographic variation are not especially

applicable to the replacement rate by its nature. It is a ratio that is relative

to the earnings of the individuals or households examined, which

themselves change across cohorts.

 41 Olivia S. Mitchell, “New Trends in Pension Benefit and Retirement Provisions,” Working

Paper No. 7381 (Cambridge, Mass.: National Bureau of Economic Research, Oct. 1999).

Construction and Updating

the Measure
Appendix I: Descriptions of Adequacy

Measurement Methods

Page 66 GAO-02-62 Social Security and Income Adequacy

While replacement rates can be useful for some purposes, such as

illustrating the effects of program changes over time, the meaning of a

specific value of a replacement rate is not clear. For example, a very low

earner could have a high replacement rate and still have very low income,

while a high earner could have a low replacement rate and live quite

comfortably. Thus, desired or target replacement rates can vary

significantly by income level and other factors.42 Also, the standard that

pension professionals consider an adequate replacement rate has changed

over the years. While a 50 percent replacement rate might have been

considered adequate in the 1930s, when Social Security was instituted,

many benefit specialists and researchers would apply a higher standard

today.43 Moreover, the actual experience of a given household could easily

involve phased-in retirement or situations where one spouse retires while

the other continues to work. Such irregularities present problems in

interpreting replacement rates for actual households.

 42 See Bruce A. Palmer, “Retirement Income Replacement Ratios: An Update,” Benefits

Quarterly, 2nd Quarter, 1994.

43 See Sylvester J. Schieber, “The Employee Retirement Income Security Act: Motivations,

Provisions, and Implications for Retirement Income Security,” paper presented at “ERISA

After 25 Years: A Framework for Evaluating Pension Reform,” Washington, D.C., Sept. 17,

1999, pp. 8-9.

Observations About the

Measure
Appendix II: Characteristics of Adequacy

Measures Used in Our Analyses

Page 67 GAO-02-62 Social Security and Income Adequacy

We examined the characteristics of the 11 measures, which are described

in appendix I, that might help examine income adequacy. Through this

examination, we determined that each had limitations that precluded

using any single measure by itself for our analyses. Given these limitations,

we selected four measures that would, as a group, be more appropriate

measures for our analyses. These are the current poverty thresholds,

median family income, public assistance, and earnings replacement rates.

Public assistance and earnings replacement rates reflect the concern that

the framers of the Social Security Act had about dependency on others

and a means to support people who no longer worked. The current

poverty thresholds and median family income, respectively, provide a

lower and upper bounds of the congressional expectation for Social

Security to provide more than a minimal subsistence level, which is at a

level above that estimated by the current poverty thresholds.

We decided not to use three measures—family budgets, material hardship,

and per capita personal income—because they were outdated or because

they did not allow us to make the comparisons our analyses required. We

elected not to use the family budgets measure because the database on

which it was constructed was 40 years old and because it was no longer

officially published. We elected not to use the material hardship measure

because it produced a nonmonetary value that could not be compared to

Social Security benefit amounts or income dollar amounts. We chose not

to use per capita personal income because by definition it includes income

other than that held by people, specifically, money income held by

nonprofit institutions and pension plans.

In examining the four measures we used, we determined that each had

limitations that precluded using any single measure by itself. Below, we

document the recognized limitations of each for use in our analyses.

Several limitations have been identified regarding the use of current

poverty thresholds for estimating the number of people who live in

poverty each year. Some of these limitations were identified as a result of

two federally sponsored studies in the 1970s and 1990s. Although these

studies did not assess the thresholds as an adequacy measure, the

limitations they identified shed light on the thresholds’ ability to identify

those whom do not have the resources to meet subsistence or minimal

needs. We also include concerns expressed by the developer of the current

poverty thresholds.

Appendix II: Characteristics of Adequacy

Measures Used in Our Analyses

Current Poverty

Thresholds
Appendix II: Characteristics of Adequacy

Measures Used in Our Analyses

Page 68 GAO-02-62 Social Security and Income Adequacy

A 1976 Department of Health, Education, and Welfare (HEW) mandated

study of poverty measures noted that several limitations stemmed from

the fact that the current thresholds were based on one needs standard—

food—and its costs in relation to other nonfood expenditures. The HEW

study stated that other than food there were no other commonly accepted

standards of need. In addition, it noted that the amount of money a family

spends on food was only an approximation of a family’s food needs. The

report also stated that the multiplier that was applied to the food costs

was a rough measure of nonfood requirements.

According to two federally sponsored studies, some of the limitations of

the current poverty thresholds relate directly to their inability to reflect

changes in living standards. The poverty thresholds are an absolute

measure in which the mix of goods and services the thresholds represent

has not been changed for nearly 40 years and, therefore, are not consistent

with prevailing American standards of living. Although the current poverty

thresholds are updated by price changes as reflected in the Consumer

Price Index (CPI), as indicated in these two studies, the items that are

updated reflect a mid-20th century mix in terms of quality and quantity of

goods and services.

The current poverty thresholds do not reflect how the proportion of

income dedicated to food has changed with rising living standards,

according to a 1995 study panel of Committee on National Statistics of the

National Academy of Science (NAS). A research study illustrates how

living standards based on food rise over time—as the population becomes

more prosperous, on average, it devotes a smaller proportion to food

expenditures and larger proportions to nonfood expenditures. The study

recalculated the poverty thresholds using USDA’s 1965 Household Survey

to determine the portion of family income dedicated to food purchases

and USDA’s 1975 Thrifty Food Plan to approximate the cost of food. The

thresholds re-estimated for 1977 were about 40 percent higher for the 1-

person households and about 20 percent higher for 4-person families. A

recent study estimated that the poverty thresholds for 4-person families

would have been 68 percent higher in 1987 if they had been recalculated

with methodology similar to that used to develop the current poverty

thresholds.

The 1976 HEW study and the 1995 NAS study panel noted that, although

the current poverty thresholds are updated by changes in prices paid by

consumers, they do not change with the standard of living. The 1995 NAS

study panel said that the thresholds do not incorporate changes in total

consumption that include spending on luxuries, as well as necessities, or
Appendix II: Characteristics of Adequacy

Measures Used in Our Analyses

Page 69 GAO-02-62 Social Security and Income Adequacy

declines in the standard of living. The 1976 HEW study noted, however,

that the current poverty thresholds were updated using a relative means—

changes in prices—using the CPI. However, the developer of the current

poverty thresholds voiced concern about updating the thresholds with the

CPI. She noted the uncertainty about the appropriateness of the CPI as a

measure of price changes for the poor. She doubted that one price index

could capture how families at different income levels adjust their spending

to accommodate to price changes. For example, poor families may react to

a 10 percent increase in the price of utilities by reducing expenses in other

essential consumption areas; whereas wealthy families would have more

options and could address the increase in a different manner.

Another limitation of the current poverty thresholds identified by the 1995

NAS study panel is that the thresholds do not account for the fact that

working families pay taxes on their earnings and families on public

assistance do not pay taxes on the cash assistance they receive. According

to the NAS panel, this occurs because the determination of whether or not

a family is poor is based on a comparison of before-tax income with

thresholds based on after-tax income. This comparison ignores the fact

that payment of taxes lowers disposable income. As a result, the

comparison of before-tax income with the current poverty thresholds can

make it appear as if low-income working families are better off than poor

families receiving public assistance. The NAS study panel indicated that

this limitation might affect the manner in which policymakers view the

poverty population. For example, because of the comparison of before-tax

income with an after-tax poverty measure, the adverse effects of tax policy

changes for low-income working families are not captured in the resulting

poverty statistics.

The NAS panel identified another limitation of the current poverty

thresholds in that the value of noncash benefits, such as housing subsidies,

are not included as income in the determination of poverty status.

According to the panel, the extent of poverty among the recipients of such

benefits is overstated and the efficacy of government income-support

measures is understated because the current poverty thresholds do not

take into account the receipt of noncash public benefits.

According to the developer of the current poverty thresholds, the

thresholds are inappropriately applied to all types of families. The

developer stated that a major limitation of the thresholds was the failure to

differentiate between a social minimum appropriate for a worker and his

family and a more stringent standard appropriate for a family dependent
Appendix II: Characteristics of Adequacy

Measures Used in Our Analyses

Page 70 GAO-02-62 Social Security and Income Adequacy

on public assistance. She indicated that the same standard was

inappropriately applied to both types of families.

Furthermore, the developer and the NAS study panel said the current

poverty thresholds inability to address needs that are specific to families

with different living situations was a limitation. The NAS panel stated that

the thresholds do not accurately portray the relative poverty status of

working families with childcare expenses and those without such

expenses. The developer also voiced concern about the tradeoffs that

families make and cited the limitation of the thresholds to address, for

example, how higher expenditures in health care affect other areas of

family living. The NAS panel also said that the thresholds do not

distinguish among the health care needs of different kinds of families or

reflect the role of insurance coverage in reducing families’ medical care

expenditures.

According to the studies, the current poverty thresholds have limitations

in the manner in which they differentiate for family size and do not

account for geographic differences in the cost of living. The NAS panel

questioned the equivalence scale adjustments for family size—especially

thresholds for single persons and those for aged individuals and couples—

because the composition of families and households has changed since the

1960s. Both the 1976 HEW study and the 1995 NAS report state that the

thresholds are limited in that they do not adjust for interarea price

differences and therefore do not incorporate geographic differences in the

cost of living.

Median family income has not been used in any official capacity.

Therefore, only general observations have been documented about its

limitations as an adequacy measure. Limitations are generally expressed in

terms of using 50 percent of family median income as a measure of

poverty status.

According to one researcher in the field, one limitation concerns the

public’s ability to understand the measure’s income base when it is

accustomed to a measure based on basic needs. The researcher noted that

an income-based measure was less closely linked to the basic concept of

minimum adequacy than an absolute measure. In other words, the public

would have difficulty grasping how it could be a measure of adequacy if it

was not linked to one’s basic needs for food, clothing, and shelter.

Median Family

Income and

50 Percent of Median

Family Income
Appendix II: Characteristics of Adequacy

Measures Used in Our Analyses

Page 71 GAO-02-62 Social Security and Income Adequacy

According to the NAS study panel, another limitation is that median family

income changes directly with aggregate income and is difficult for people

to understand its movement when the economy changes. One researcher

said that a relative measure like median family income would fall in real

terms during a recession and that this was less than ideal because the

needs of the poor do not fall similarly. The 1995 NAS study panel also

noted the behavior the measure would demonstrate during recessions and

economic upturns and said it would be hard to explain and justify changes

in the measure that are not simply a reflection of price changes. The

researcher noted that opponents of a relative adequacy measure, such as

median family income, say it presents too much of a moving target for

policy assessment purposes and that it is unreasonable to judge the

effectiveness of antipoverty efforts against such a measure.

Limitations also revolve around how to implement median family income

as an adequacy measure, according to the NAS panel. It noted the

problems in selecting the median family income for a particular family

size. The panel discussed several approaches that have been used to

develop an adequacy measure and limitations of these approaches. For

example, it noted that one approach is to apply an equivalence scale to the

income amounts in order to develop a per capita equivalent income for the

reference family. The panel noted that this approach was sensitive to the

particular equivalence scale that was used. In this report, we used median

family incomes by family size as published by the Census Bureau. For

single individuals we used one-person household median income; for two

persons we used two-person family median income. As noted in Ruggles,

this approach also has its limitations in that median family income has a

bell-shaped distribution peaking at the four-person family size.

Another limitation the NAS panel identified concerned the definition and

sources of income that are used to produce median family income. The

NAS panel noted conceptual problems in using median income as an

adequacy measure because it does not reflect disposable income in the

way it handles taxes, childcare expenses, and other work-related

expenses. The NAS panel also said that median family income does not

include noncash benefits, such as food stamps, but said that is not much of

a problem since families at the median do not generally receive such

benefits.

The receipt of public assistance has not been recently reviewed by a group

of experts as an adequacy measure. Therefore, the limitations identified

for this measure are those applicable to the federal-state old-age

Public Assistance
Appendix II: Characteristics of Adequacy

Measures Used in Our Analyses

Page 72 GAO-02-62 Social Security and Income Adequacy

assistance program. The National Resources Planning Board said, in 1941,

that using the receipt of public assistance as an indicator of whether

Social Security beneficiaries had adequate income had several limitations.

It stated that some of the states, in 1940, were providing a level of living

considerably lower than that provided by Social Security. The board also

reported that some states did not have funds to provide for all of their

needy applicants and chose not to supplement those who received Social

Security benefits.

We used administrative data to report the proportion of the elderly who

received old-age assistance or SSI benefits. We note that some Social

Security beneficiaries who may meet all eligibility criteria may not receive

benefits.

The chief limitation of replacement rates is that the meaning of a specific

value of a replacement rate is not clear. A very low earner could have a

high replacement rate and still have very low income, while a high earner

could have a low replacement rate and live quite comfortably. Also, the

standard that pension professionals consider an adequate replacement

rate has changed over the years. Another important limitation arises in

trying to define replacement rates for actual households. For example, the

actual experience of a given household could easily involve phased-in

retirement or situations where one spouse retires while the other

continues to work.

Earnings

Replacement Rates
Appendix III: Defining Benchmarks for

Analysis of Future Benefits

Page 73 GAO-02-62 Social Security and Income Adequacy

According to current projections of the Social Security trustees for the

next 75 years, revenues will not be adequate to pay full benefits as defined

under current law. Therefore, estimating future Social Security benefits

should reflect that actuarial deficit and account for the fact that some

combination of benefit reductions and revenue increases will be necessary

to restore long-term solvency. To illustrate a full range of possible

outcomes, we developed benchmark policy scenarios that would achieve

75-year solvency either by only increasing payroll taxes or only reducing

benefits. In developing these benchmarks, we identified criteria to use to

guide their design and selection. We also identified key parameters that

could be used to describe and calibrate the policies to achieve 75-year

solvency. We asked SSA’s Office of the Actuary to score the policies and

determine the precise parameter values that would achieve 75-year

solvency in each case. Once we defined and fully specified our benchmark

policies, we used them to estimate the range of potential future benefit

levels using two representative sample microsimulation models as well as

an SSA benefit calculator for illustrative workers. (See app. IV.)

According to our analysis, appropriate benchmark policies should ideally

be evaluated against the following criteria:

1. “Distributional neutrality”: the benchmark should reflect current law

as closely as possible while still restoring solvency. In particular, it

should try to reflect the goals and effects of current law with respect to

redistribution of income. However, there are many possible ways to

interpret what this means, such as

a) producing a distribution of benefit levels with a shape similar to the

distribution under current law (as measured by coefficients of

variation, skewness, kurtosis, etc.);

b) maintaining a proportional level of income transfers in dollars;

c) maintaining proportional replacement rates; and

d) maintaining proportional rates of return.

2. Demarcating upper and lower bounds within which the effects of

alternative proposals would fall. For example, one benchmark would

reflect restoring solvency solely by increasing payroll taxes and

therefore maximizing benefit levels while another would solely reduce

benefits and therefore minimize payroll tax rates.

3. Ability to model: the benchmark should lend itself to being modeled

within the GEMINI and MINT models.

Appendix III: Defining Benchmarks for

Analysis of Future Benefits

Criteria
Appendix III: Defining Benchmarks for

Analysis of Future Benefits

Page 74 GAO-02-62 Social Security and Income Adequacy

4. Plausibility: the benchmark should be politically within reason as an

alternative; otherwise, the benchmark could be perceived as a

strawman.

5. Transparency: the benchmark should be readily explainable to the

reader.

We used only one tax-increase-only benchmark policy scenario because

policies that only increase payroll tax rates have no effect on benefits. Our

tax-increase-only benchmark would raise payroll taxes once and

immediately (in the next calendar year) by the amount of the OASDI

actuarial deficit as a percent of payroll. It results in the smallest ultimate

tax rate of those we considered and spreads the tax burden most evenly

across generations; this is the primary basis for our selection. The later

that taxes are increased, the higher the ultimate tax rate needed to achieve

solvency, and in turn the higher the tax burden on later taxpayers and

lower on earlier taxpayers. We consider this policy to be plausible because

it would involve less than a 1 percentage point increase on employers and

employees each. Still, any policy scenario that achieves 75-years solvency

only by increasing revenues would have the same effect on the adequacy

of future benefits in that promised benefits would not be reduced.

Nevertheless, alternative approaches to increasing revenues could have

very different effects on individual equity.

We developed three benefit-reduction benchmarks for our analysis. For

ease of modeling, all benefit-reduction benchmarks take the form of

reductions in the PIA formula factors; they differ in the relative size of

those reductions across the three factors, which are 90, 32, and 15 percent

under current law. Each benchmark has three dimensions of specification:

scope, phase-in period, and the factor changes themselves.

For our analysis, we want the benefit reductions in our benchmarks to

apply very generally to all types of benefits, including disability and

survivors benefits as well as old-age benefits. Our objective is to find

policies that achieve solvency while reflecting the distributional effects of

the current program as closely as possible. Therefore, it would not be

appropriate to reduce some benefits and not others. If disabled and

survivor benefits were not reduced at all, reductions in other benefits

would be deeper than shown in this analysis.

Tax-Increase-Only

Benchmark Policies

Benefit-ReductionOnly Benchmark

Policies

Scope
Appendix III: Defining Benchmarks for

Analysis of Future Benefits

Page 75 GAO-02-62 Social Security and Income Adequacy

We selected a phase-in period that begins with those reaching age 62 in

2005 and continues for 30 years. We chose this phase-in period to achieve

a balance between two competing objectives: 1) minimizing the size of the

ultimate benefit reduction and 2) minimizing the size of each year’s

incremental reduction to avoid notches and unduly large incremental

reductions. Since later birth cohorts are generally agreed to experience

lower rates of return on their contributions already under current law,

minimizing the size of the ultimate benefit reduction would minimize

further reductions in later cohorts’ rates of return. The smaller each year’s

reduction, the longer it will take for benefit reductions to achieve solvency

and in turn, the deeper the eventual reductions will have to be. However,

the smallest possible ultimate reduction would be achieved by reducing

benefits immediately for all new retirees by over 10 percent; this would

create a huge notch, that is, creating some marked inequities between

beneficiaries close in age to each other.

Our analysis shows that a 30-year phase-in should produce incremental

annual reductions that would be of palatable size and avoid significant

notches. Therefore it would be preferable to longer phase-in periods,

which would require deeper ultimate reductions.

In addition, we feel it is appropriate to delay the first year of the benefit

reductions for a few years because those within a few years of retirement

would not have adequate time to adjust their retirement planning if the

reductions applied immediately. The Maintain Tax Rates (MTR)

benchmark in the 1994-96 Advisory Council Report also provided for a

similar delay.1

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

lifetime earnings records to determine each worker’s Primary Insurance

Amount (PIA), on which the initial benefit and auxiliary benefits are

based. The PIA is the result of two elements—the Average Indexed

Monthly Earnings (AIME) and the benefit formula. The AIME is

determined by taking the lifetime earnings earnings record, indexing it,

and taking the average. To determine the PIA, the AIME is then applied to

a step-like formula, shown here for 2001.

 1

Advisory Council on Social Security. Report of the 1994-1996 Advisory Council on Social

Security, Vols. 1 and 2. Washington, D.C.: Jan. 1997.

Phase-in Period

Defining the PIA Formula

Factor Reductions
Appendix III: Defining Benchmarks for

Analysis of Future Benefits

Page 76 GAO-02-62 Social Security and Income Adequacy

PIA = 90% ! (AIME1 ≤ $561)

+ 32% ! (AIME2

 > $561 and ≤ $3381)

+ 15% ! (AIME3

 > $3381)

where AIMEi is the applicable portion of AIME.

All three of our benefit-reduction benchmarks are variations of changes in

PIA formula factors and all are special cases of the following generalized

form, where Fi

 represents the 3 PIA formula factors, which are 90, 32, and

15 percent under current law.

Fi

t+1 = Fit – (Fi2001 ! x ! weightx) – y ! weighty

where

t = the year of the factor,

x = constant proportional benefit reduction,

y = constant “subtractive” benefit reduction, and

weightx and weighty

 determine the relative effects of x and y and sum to 1.

Our three potential benchmarks can now be described as follows:

Proportional Offset: weightx = 1 and weighty = 0. The value of x is

calculated to achieve 75-year solvency, given the chosen phase-in period

and scope of reductions.

The formula specifies that the proportional reduction is always taken as a

proportion of the base year factor value rather than the prior year. This

maintains a constant rate of benefit reduction from year to year. In

contrast, taking the reduction as a proportion of the prior year’s factor

value implies a decelerating of the benefit reduction over time because the

prior year’s factor gets smaller with each reduction. To achieve the same

level of 75-year solvency, this would require a greater proportional

reduction in earlier years because of the smaller reductions in later years.

The proportional offset hits lower earners especially hard because the

constant x percent of the higher formula factors results in a larger

percentage reduction over that segment of the formula, while the higher
Appendix III: Defining Benchmarks for

Analysis of Future Benefits

Page 77 GAO-02-62 Social Security and Income Adequacy

formula factors apply to the lower earnings segments of the formula. For

example, in a year when the cumulative size of the proportional reduction

has reached 10 percent, the 90 percent factor would then have been

reduced by 9 percentage points, the 32 percent factor by 3.2 percentage

points, and the 15 percent factor by 1.5 percentage points. As a result,

earnings below the first bendpoint would be replaced at 9 percentage

points less than current law, while earnings above the second bendpoint

would be replaced at only 1.5 percentage points less than current law. Still,

the proportional offset is easily described as a constant percentage

reduction of current law benefits for everyone. In the example,

beneficiaries of all earnings levels would have their benefits reduced by

10 percent.

Progressive Offset: weightx = 0 and weighty = 1. The value of y is

calculated to achieve 75-year solvency, given the chosen phase-in period

and scope of reductions.

This offset results in equal percentage point reductions in the formula

factors, by definition, and subjects earnings across all segments of the PIA

formula to the same reduction. Therefore, it avoids hitting lower earners

especially hard as the proportional offset does.

As it happens, this offset produces exactly the same effect as the offset we

used in our 1990 analysis of a partial privatization proposals.2

 In that

analysis, we were charged with finding a benefit reduction that would

leave the redistributive effects of the program unchanged while allowing a

diversion of 2 percentage points of contributions into individual accounts.

We calculated these benefit reductions by computing the Social Security

annuity value of the balance of a hypothetical account that earned interest

on the diverted contributions at the rate of return for each individual’s

cohort as a whole. We demonstrated the distributional neutrality of this

benefit reduction by showing that if all individuals earned exactly the

cohort rate of return on their individual accounts, then their income under

the proposal from Social Security and the new accounts would be exactly

the same as under current law.

The hypothetical account approach to reducing benefits translates into our

PIA factor changes because such a reduction is proportional to the AIME,

 2

Social Security: Analysis of a Proposal to Privatize Trust Fund Reserves.

GAO/HRD-91-22, Dec. 12, 1990.
Appendix III: Defining Benchmarks for

Analysis of Future Benefits

Page 78 GAO-02-62 Social Security and Income Adequacy

not to the PIA. The contributions to a hypothetical account are

proportional to earnings. Therefore, a benefit reduction based on such an

account would also be proportional to earnings; that is

Benefit reduction = y !AIME

Therefore, the new PIA would be

PIAnew =90% ! AIME1

 + 32% ! AIME2 + 15% ! AIME3 - y ! AIMET

Where AIMEi is the applicable portion of AIME and AIMET is the total

AIME. In turn,

PIAnew =(90% - y) ! AIME1

 + (32% - y) ! AIME2 + (15% - y) ! AIME3

Thus, the reduction from a hypothetical account can be translated into a

change in the PIA formula factors.

Because this offset can be described as subtracting a constant amount

from each PIA formula factor, it is reasonably transparent, especially in

comparison to describing it as a hypothetical account offset.

Limited Proportional Offset: Other analyses have addressed the

concern about the effect of the proportional offset on low earners by

modifying that offset to apply only to the 32 and 15 percent formula

factors. The MTR policy in the 1994 to 1996 Advisory Council Report used

this approach, which in turn was based on the Individual Account (IA)

proposal in that report. However, the MTR policy also reflected other

changes in addition to PIA formula changes. Our recent report on

disability and Social Security reform also used this “limited proportional”

approach but using PIA formula changes alone to achieve solvency.3

 In

addition, both the Advisory Council and our analysis favored those closer

to retirement by having a smaller percentage reduction for the first several

years and a reduction that was 1 percentage point higher after those

several years and until the end of the phase in. For simplicity, we apply the

first percentage reduction for the first 10 years of the phase-in.

 3

Advisory Council on Social Security. Report of the 1994-1996 Advisory Council on Social

Security, Vols. 1 and 2. Washington, D.C.: Jan. 1997. Social Security Reform: Potential

Effects on SSA’s Disability Programs and Beneficiaries (GAO-01-35, Jan. 24, 2001).
Appendix III: Defining Benchmarks for

Analysis of Future Benefits

Page 79 GAO-02-62 Social Security and Income Adequacy

Using the generalized form above, this can be expressed as

weightx = 1, weighty = 0

F90

t

 = F90

2001 for all t

Fi

t+1 = Fit – (Fi2001 ! xp ! weightx) – y ! weighty

for i = {32,15},

where xp differs for the first 10 and second 20 years of the phase-in period

and is 1 percentage point higher in the second part than in the first.

Table 3 summarizes the features of our four benchmarks.

Table 3: Summary of Benchmark Policy Scenario Parameters

Annual PIA factor reduction

(percentage point)

Ultimate PIA factor (2035)

(percent)

Benchmark policy

scenario

Phase-in

period

90 percent

factor

32 percent

factor

15 percent

factor

90 percent

factor

32 percent

factor

15 percent

factor

Tax-increase-only 2002 0.00 0.00 0.00 90.00 32.00 15.00

Proportional benefit

reduction

2005-2035 0.71 0.25 0.12 68.10 24.21 11.35

Progressive benefit

reduction

2005-2035 0.32 0.32 0.32 80.11 22.11 5.11

Limited proportional 2005-2014 0.00 0.27 0.13

benefit reduction 2015-2035 0.00 0.59 0.28 90.00 16.95 7.94

Source: GAO’s analysis as scored by SSA actuaries.
Appendix IV: Description of Approaches Used

to Forecast Future Benefits

Page 80 GAO-02-62 Social Security and Income Adequacy

For our analysis of future Social Security benefits, we used two alternative

policy microsimulation models and illustrative worker analysis. We used

the MINT (Modeling Income in the Near Term) model, developed and used

by the Social Security Administration’s Office of Policy, and the GEMINI

model, developed by the Policy Simulation Group. For both models the

developers produced multiple output data sets based on the PIA formula

changes specified by the policy benchmarks.1

 This appendix will briefly

describe the two models and the illustrative worker analysis and illustrate

their different characteristics for analysis of future benefits. While all

methods of analysis were carefully chosen for their unique qualities,

presenting results using three different analytical tools allows for different

perspectives on the uncertainty of the future.

MINT is a detailed microsimulation model developed and used by the

Social Security Administration’s Office of Policy. The MINT model projects

demographic changes, retirement income, and Social Security benefits for

the cohort of persons born between 1926 and 1965. It provides SSA with

the capability to assess the distributional impact of changes to the Social

Security program. The base data sets used in the model are 1990-93 panels

of the Census Bureau’s Survey of Income and Program Participation

(SIPP), matched to Social Security Earnings Records (SER) and Master

Beneficiary Records (MBR). The SERs give earnings histories for the years

1951 to 1998. MINT uses data on the matched files for individuals in the

1931 to 1960 birth cohorts to project their incomes. In some cases,

additional data are used to project income and demographic

characteristics.2

MINT estimates earnings histories for persons in the sample who have not

yet completed their careers. MINT also projects the year of initial receipt

of Social Security benefits and benefit amounts, in addition to the other

sources of retirement income including pensions, asset income, and

earnings of working Social Security beneficiaries. MINT does not estimate

any interactions between changes in Social Security and other income

 1

 See appendix III for more information on the policy benchmark results.

2

 For a complete description of the MINT model and projections see The Urban Institute,

Final Report: Modeling Income in the Near Term - Projections of Retirement Income

Through 2020 for the 1931-1960 Birth Cohorts, 1999, and RAND, Final Report: Near Term

Model Development Part II, 1999

(http://www.ssa.gov/policy/policyareas/evaluation/MINT/UI/).

Appendix IV: Description of Approaches

Used to Forecast Future Benefits

MINT
Appendix IV: Description of Approaches Used

to Forecast Future Benefits

Page 81 GAO-02-62 Social Security and Income Adequacy

sources. For example, assuming no change in consumption during

working years, our tax increase benchmark may overestimate total

retirement income because no provision is made to decrease income from

saved assets that might diminish as higher payroll taxes reduce disposable

income before retirement.

The MINT model has not been well validated against other micro or

macroeconomic projection models. However, SSA analysts note that there

are not many models against which to validate MINT. Moreover, they note

a panel of demographers, economists, and outside experts oversaw the

development of MINT. Additionally, the 1990 to 1993 SIPP data are the

most recent available SIPP data for most income sources other than

earnings. In short, more recent nonearnings income data would be ideal.

Nevertheless, the intention of this report is to present comparisons of

distributions between policy benchmarks. Thus, income-related MINT

point estimates should not be considered as literally as differences

between the policy benchmarks.

Methodologically we chose MINT for this report for

• its capability to project total income and therefore permit analysis of the

adequacy of total income;

• its ability to prospectively assess and model various Social Security

programmatic alternatives;

• its ability to examine a large portion (those age 60 to 89) of the Social

Security population at a point in time;

• its ability to examine various subgroups, notably by race and ethnicity; and

• its use as a policy tool already employed by SSA.

GEMINI3

 is a policy microsimulation model developed by the Policy

Simulation Group (PSG). For our report, PSG produced simulated

samples, sometimes called synthetic samples, of lifetime histories,

including earnings, marriage, disability, death, and Social Security

benefits, for the cohorts born in 1935, 1955, 1970, and 1985. Key

descriptive statistics for each of the four birth cohorts are identified

through a variety of sources. These statistics describe life expectancy,

educational attainment, employment patterns, and marital status at age 60.

Where possible these targets are set to be consistent with the 2001

Trustees’ Report or generally available methodologies from the SSA’s

 3

 For more information on GEMINI go to http://www.polsim.com/GEMINI.html.

GEMINI
Appendix IV: Description of Approaches Used

to Forecast Future Benefits

Page 82 GAO-02-62 Social Security and Income Adequacy

Office of the Chief Actuary. After the calibration targets are determined,

complete life histories for each birth cohort are produced that match the

targets. These life histories are produced by the Pension Policy Simulation

Model (PENSIM), a complementary PSG model integrated with GEMINI.

Once the cohort samples have been generated, each sample is input into

GEMINI, a microsimulation model that has the same Social Security

benefit calculation capabilities as the microsimulation model of SSASIM,

which past GAO reports have used to analyze Social Security reforms.

Each sample is run twice through each of the our benchmark policies and

produces output files that contain detailed information on each member of

the sample, including Social Security benefits for sample individuals and

their spouses. Because GEMINI cannot yet stochastically determine the

age at which a member of the sample applies for benefits, one output file

assumes that the all workers retire at age 62 and the other assumes that

they retire at age 65.

Table 4 shows results for GEMINI compared to the 1998 Annual

Statistical Supplement to the Social Security Bulletin. Average benefits

are high by only 0.9 percent for men and high by only 1.6 percent for

women. However this comparison may suffer from a selectivity problem

caused by the fact that, in the actual data, not everyone eligible to apply

for retired worker benefits does so at age 62. If the propensity to retire

early at age 62 varies by lifetime earnings level, then the fact that only

about sixty percent actually apply at 62 will complicate the comparison

with statistics from the GEMINI simulation, which assumes everyone

applies at age 62. After adjusting for the selectivity problem we find that

benefits are low by 0.4 percent for men and are low by 4.6 percent for

women.
Appendix IV: Description of Approaches Used

to Forecast Future Benefits

Page 83 GAO-02-62 Social Security and Income Adequacy

Table 4: Comparison of GEMINI Data to Published Social Security Data

1935 Birth cohort statistic

GEMINI value

(retiring at

age 62)

Social

Security

Bulletin

(1998)

Gender composition of awardees in percent:

Men 53.4 53.7

Women 46.6 46.3

Average initial monthly benefit of awardees in dollars:

Men 802 795 (805)

Women 517 509 (541)

Note: The GEMINI column represents an output run which assumes everyone born in 1935 retires in

1997 at age 62, for retired-worker and spouse beneficiaries who are dually entitled. The Social

Security Bulletin Annual Statistical Supplement column represents actual data on initial retired-worker

awards for those born in 1935 retiring at age 62 in 1997 from Tables 6.B1 and 6.B2 in the Social

Security Bulletin’s 1998 Annual Statistical Supplement. The number in parenthesis represents the

selectivity-adjusted amount. This amount adjusts the amount to reflect the fact that persons retiring at

age 62 have lower PIAs than the average of the age 62 to 65 population by sex.

Methodologically, we chose GEMINI for this report for

• its ability to examine the effect of Social Security programmatic changes

on a cohort population and

• its ability to project cohorts and examine policy effects well out into the 75

year actuarial period (the year 2050).

The MINT takes real people and projects their behavior out into the future

while GEMINI develops a synthetic sample and validates it to recent data.

While these models were developed separately and take somewhat

different modeling approaches, we can see that actual results compare

somewhat favorably. Table 5 compares median annual Social Security

benefit income for the 1955 cohort by marital status for both models. For

married and divorced individuals, the results compare very favorably as

the MINT results fall within the same range as the GEMINI results. The

results for never married and widowed individuals do not align as nicely,

though they are within 8.9 percent and 9.4 percent, respectively, of the

lower bound of GEMINI benefits. However, the intent of the report is not

to focus on actual values produced by the models, but how values change

across benchmark scenarios.

Brief Comparison of

the Models
Appendix IV: Description of Approaches Used

to Forecast Future Benefits

Page 84 GAO-02-62 Social Security and Income Adequacy

Table 5: Median Annual Social Security Income for Individuals in 2020 for the 1955

Cohort Only by Marital Status: A Comparison of MINT and GEMINI

Median annual Social Security income

GEMINI

Marital Status MINT Retiring at age 62 Retiring at age 65

Marrieda$20,456 $19,281 $20,514

Widowed $13,803 $15,242 $16,948

Never married $11,745 $12,891 $15,950

Divorced $12,597 $12,030 $14,849

a Benefits for married persons in the MINT model are equivalence-adjusted to facilitate comparisons

between nonmarried persons and married persons, whose household income includes income from

both spouses that can vary significantly between them. An equivalence scale is used to adjust

married individuals’ income. MINT’s equivalence scale is the ratio of the 1998 poverty threshold for

households with two persons aged 65 and older divided by the threshold for households with one

person aged 65 and older. The benefits for the couple are then divided by this ratio (1.26) to arrive at

a constructed individual benefit amount. To compare like amounts among married individuals across

models, we also equivalence-adjusted GEMINI median benefits in the same manner.

Note: In the MINT model, workers retire at different ages, while in the GEMINI model, all workers

retire at a fixed age. For this analysis, the marital status definitions are constructed to be consistent

across models. The distribution of marital status (rounded percentages in parenthesis) for the MINT

sample is married (61.3), widowed (18.0), never married (5.0), and divorced (15.8). The distribution of

marital status for the GEMINI samples are married (64.0), widowed (11.2), never married (9.6), and

divorced (15.2).

Source: GAO’s analysis of the MINT and GEMINI models.

For analysis of future replacement rates, we use four illustrative workers.

These illustrative workers are constructed according to the methodology

employed for steady workers by SSA’s Office of the Chief Actuary.

Additionally, our analysis of future steady workers assumes that the

average wage increases according to Alternative II assumptions of the

2001 Trustees Report.

As defined by SSA’s Office of the Chief Actuary, the steady earnings

pattern assumes that the worker is a steady full-time employee with no

interruption in employment. The steady worker begins working in covered

employment at age 22, and the worker’s earnings increase each year at the

same rate as Social Security’s Average Wage Index. For our analysis,

workers are continuously employed between the ages of 22 and 62 (i.e.,

they do not experience a period of disability or die). For the steady

earnings pattern, the following four levels of earnings are used: low

(annual earnings equal to 45 percent of the average wage), average (annual

earnings equal to the average wage), high (annual earnings equal to

Illustrative Workers
Appendix IV: Description of Approaches Used

to Forecast Future Benefits

Page 85 GAO-02-62 Social Security and Income Adequacy

160 percent of the average wage4), and maximum (annual earnings equal to

the OASDI Contribution and Benefit Base). To calculate the worker’s

monthly Social Security benefit, we used SSA’s Office of the Chief

Actuary’s ANYPIA program.5

 Finally, to calculate replacement rates, we

annualized the monthly benefit and divided the result by the worker’s

age 64 earnings.

In actuality, the year-to-year earnings of most workers do not follow

steady earnings patterns. However, illustrative steady workers offer the

advantage of showing programmatic variation by utilizing a consistent

worker profile. More realistic lifetime earnings profiles would be more

significant if timing of payroll contributions are important to the worker,

such as a policy of contributing a portion of payroll taxes to individual

accounts. The most important metric of adequacy for a life time earner is

the workers’ PIA, which can be arrived from any number of different

earnings patterns. Examination of actual workers PIAs to the illustrative

steady worker types shows that women and men are “best represented”

6

by different worker types. Table 6 shows that in 1999 the low earner “best

represents” female workers as 71.7 percent fall closest to that category

and the high earner best represents male workers as 41.1 percent fall

closest to that category.

 4

 For certain historical years (1944-1973), earnings of 160 percent of the Average Wage

Index would exceed the OASDI contribution and benefit base. Any earnings that exceed

this base are thus censored at the base. For all steady workers retiring in 2017 or later, all

earnings for our illustrative workers are below the OASDI contribution and benefit base.

5

 Here again, we used assumptions consistent with the 2001 Trustees’ Report. For more

information about the ANYPIA program, see http://www.ssa.gov/retire2/anypia1.htm.

6

 For purposes of this discussion, an actual worker is "best represented" by a particular

hypothetical worker if that hypothetical worker's PIA is closest to the actual worker's PIA.

As an illustration, table 6 shows that 44.0 percent of actual retirees have a PIA that is closer

to the PIA of the low-earning worker than to any other, and are thus said to be best

represented by the low-earning worker.
Appendix IV: Description of Approaches Used

to Forecast Future Benefits

Page 86 GAO-02-62 Social Security and Income Adequacy

Table 6: Distribution of Actual Workers Retiring in 1999 by Level, Relative to PIA

Levels for Hypothetical Steady Earnings Cases Retiring in 1999

Percent with PIAa

 less than

PIA for hypothetical case

Percent with PIA closest to

PIA for hypothetical caseb

Hypothetical

case Male Female Total Male Female Total

Low 10.0 48.4 27.8 20.0 71.7 44.0

Average 33.9 86.5 58.3 28.5 21.7 25.3

High 75.2 98.6 86.0 41.1 6.2 24.9

Maximum 100.0 100.0 100.0 10.4 0.3 5.7

a

Primary Insurance Amount. The PIA is the full (i.e., unreduced) monthly benefit level, which is

payable to disabled workers and to retired workers who become entitled at normal retirement age

b

May not add to 100 percent due to rounding.

Source: Orlo R. Nichols, Michael D. Clingman, and Milton P. Glanz. “Internal Real Rates of Return

under the OASDI Program for Hypothetical Workers.” SSA Actuarial Note #144, June 2001.

Percentages indicated above reflect the status of workers retiring in 1999.

These percentages would likely be different for workers retiring in earlier

or later years. For instance, the increasing employment rates for women

over the last several decades is expected to result in relatively greater

increases in career-average earnings for women than for men in the future.

Thus, the difference in the distributions of male and female retired

workers by benefit levels is expected to diminish in the future.
Appendix V: GAO Contacts and Staff

Acknowledgments

Page 87 GAO-02-62 Social Security and Income Adequacy

Barbara D. Bovbjerg, (202) 512-7215

Charles A. Jeszeck, (202) 512-7036

In addition to those named above, Ken Stockbridge, Kimberly Granger,

Charles Ford, Brendan Cushing-Daniels, Nila Garces-Osorio, Kim Reniero,

Daniel Schwimer, and Kathleen Scholl made key contributions to this

report.

Appendix V: GAO Contacts and Staff

Acknowledgments

GAO Contacts

Acknowledgments

(130035)

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