GAO

United States General Accounting Office

Report to the Ranking Minority Member, 

Subcommittee on Social Security, 

Committee on Ways and Means, House of 

Representatives

January 2000 SOCIAL SECURITY 

REFORM

Information on the 

Archer-Shaw Proposal

GAO/AIMD/HEHS-00-56

Page 1 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

Contents

Letter 3

Appendixes Appendix I: Criteria for Evaluating Social Security Reform Proposals 22

Appendix II: The Economic Model and Assumptions 24

Appendix III: Comments From the Social Security Administration 28

Related GAO Products 30

Figures Figure 1: Archer-Shaw: Unified Deficits/Surpluses as a Share of GDP 9

Figure 2: Archer-Shaw: Debt Held by the Public as a Share of GDP 10

Figure 3: Composition of Spending as a Share of GDP in 1998 and

Under No Action and Archer-Shaw 11

Figure 4: Social Security Spending as a Share of Total Federal

Revenue in 1998 and Under No Action and Archer-Shaw 12

Figure 5: No Action Model Assumptions 26

Abbreviations

CBO Congressional Budget Office

GDP gross domestic product

OASDI Old Age Survivors and Disability Insurance

SSA Social Security Administration
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Page 3 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

United States General Accounting Office

Washington, D.C. 20548

Comptroller General

of the United States

B-284323 Letr

January 18, 2000

The Honorable Robert T. Matsui

Ranking Minority Member

Subcommittee on Social Security 

Committee on Ways and Means

House of Representatives

Dear Mr. Matsui:

This report responds to your request that we apply our criteria for 

assessing Social Security reform proposals to the proposal outlined by 

Representative Archer, Chairman of the Committee on Ways and Means, 

and Representative Shaw, Chairman of the Subcommittee on Social 

Security, Committee on Ways and Means. In November 1999, we issued a 

report presenting the results of our assessments of several Social Security 

reform proposals, including Archer-Shaw.1

 Our November report used a 

briefing slide format, thereby documenting congressional briefings we 

conducted prior to report issuance, including one to your office. This 

report responds to your request that we provide you with information from 

our briefing and some additional information on the Archer-Shaw proposal 

in the form of a report. Since legislation on the proposal had not yet been 

introduced at the time we did our work, we based our interpretation of the 

proposal in large part on the memorandum provided by the Office of the 

Chief Actuary at the Social Security Administration (SSA) in April 1999 

when it estimated the proposal’s long-range financial effect on the 

program.2

As agreed with your office, our report is based on the analytic framework 

we provided to the Congress last March.3

 That framework consists of three 

basic criteria: 

1

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

2

Memo from the Office of the Chief Actuary dated April 29, 1999. SSA has informed us that 

congressional staff responsible for developing the Archer-Shaw proposal provided all 

specifications cited in the memo.

3

Social Security: Criteria for Evaluating Social Security Reform Proposals

(GAO/T-HEHS-99-94, March 25, 1999).
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Page 4 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

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

it would affect the U.S. economy and the federal budget,

• the balance struck between the twin goals of income adequacy (level 

and certainty of benefits) and individual equity (rates of return on 

individual contributions), and

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

explained to the public.4

In evaluating proposals against the three basic criteria, we used a set of 

detailed questions that help describe potential effects of reform proposals 

on important policy and operational aspects of public concern. (See 

appendix I for the list of questions.) The analysis presented below 

summarizes our results.

The Archer-Shaw 

Proposal

The Archer-Shaw proposal, known as “The Social Security Guarantee 

Plan,” would not reduce current-law benefits, and some workers could 

receive higher benefits under the proposal. The proposal would establish 

an individual account for each eligible worker and use the balances in these 

accounts to help finance benefits. The proposal would also remove the 

limits on how much retirees can earn without having their benefits 

reduced.5

 The proposal as estimated in April 1999 by SSA’s Office of the 

Chief Actuary includes payroll tax reductions in the out-years. 

Congressional staff working on the proposal have informed us that the 

payroll tax reductions are under review.

The Archer-Shaw proposal would establish mandatory individual accounts 

for each eligible worker. To do this, the proposal would provide workers 

covered by Social Security with refundable tax credits from general 

revenues equivalent to 2 percent of their Old Age Survivors and Disability 

Insurance (OASDI) taxable earnings for each calendar year. Accounts 

would be managed by mutual funds, qualified and supervised by a board of 

six individuals appointed by the Social Security Trustees. All account 

4

Social Security Reform: Implementation Issues for Individual Accounts

(GAO/HEHS-99-122, June 18, 1999) and Social Security Reform: Administrative Costs for 

Individual Accounts Depend on System Design (GAO/HEHS-99-131, June 18, 1999).

5

Currently, the “earnings test” requires the withholding of benefits where beneficiaries 

under age 70 have earnings in excess of certain amounts. In 1999, for those aged 62 to 64, 

benefits are reduced by $1 for every $2 of earnings over $9,600; for those aged 65 to 69, 

benefits are reduced by $1 for every $3 of earnings over $15,500.
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balances would be required to be invested in qualified mutual funds 

maintained with a portfolio allocation of 60 percent stock index funds and 

40 percent corporate bonds. Annual administrative expenses would be 

limited to 25 basis points, and withdrawals prior to reaching retirement (or 

disability) would not be permitted.

Upon an individual’s entitlement for retirement or disability benefits, SSA 

would compute the monthly payment that could be provided from a life 

annuity purchased with the holdings in the account. Under the proposal, 

the annuity calculation would reflect the account’s anticipated yield, the 

indexing of annuity payments for price inflation, and the expected payment 

of spouse and survivor benefits. If the computed monthly annuity amount 

exceeded the level of scheduled OASDI benefits under current law, then 

SSA would guarantee payment from the trust funds of the computed 

annuity amount for life. If the computed annuity amount was less than the 

OASDI benefit level, then the OASDI benefit would be payable for life. Each 

month after benefit entitlement, the computed annuity amount would be 

transferred from the account to the OASDI trust funds. 

Under the Archer-Shaw proposal as specified for the Office of the Chief 

Actuary in April 1999, the disposition of a worker’s account balance at 

death depends on several factors. If there are no survivors eligible for 

benefits on the basis of the worker’s earnings and the worker dies before 

receiving benefits, the account balance is transferred to the worker’s estate 

tax free. If there are no eligible survivors and the worker has begun 

receiving benefits, the account balance is transferred to the OASDI trust 

funds. If there are eligible survivors, the account balance is transferred to 

the survivor’s (e.g., spouse’s) account.

The Archer-Shaw proposal as estimated by the SSA’s Office of the Chief 

Actuary assumes a reduction in the OASDI payroll tax rate from 12.4 

percent to 9.9 percent in 2050 and to 8.9 percent in 2060. These reductions 

reflect the specified portfolio allocation and an assumed real asset yield 

(after inflation) of 5.35 percent net of administrative expense. This 

combined yield is based on historical yields for equities and long-term 

corporate bonds.6

6

In discussing the Archer-Shaw proposal, SSA’s Office of the Actuary noted that the assumed 

long-term average real yield for stocks (7 percent) was based on the work of the 1994-96 

Advisory Council, and the assumed real yield on long-term corporate bonds was based on 

the long-term historical premium paid (0.5 percentage point) over long-term Treasury notes. 
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Page 6 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

Scope and 

Methodology

As you requested, we used our long-term economic model in assessing the 

Archer-Shaw proposal against the first criterion, that of financing 

sustainable solvency. Since 1992, we have provided the Congress with a 

long-term perspective by modeling the implications of differing fiscal 

policy paths for the nation’s economy.7

 Although any proposal’s ability to 

achieve and sustain solvency is sensitive to economic and budgetary 

assumptions, using a common framework can facilitate comparisons of 

alternative reform proposals. Our simulation results are presented not as 

forecasts but rather as a useful way to compare the potential outcomes of 

alternative policies within a common economic framework. For Social 

Security and Medicare spending, we use the Trustees’ intermediate 

estimates; in other respects, we generally rely on the Congressional Budget 

Office’s (CBO) fiscal and economic assumptions.

In this report we used our long-term model to simulate the potential fiscal 

and economic impacts of the Archer-Shaw proposal over a 75-year 

projection period. In so doing, we relied on income and cost estimates for 

the proposal prepared by SSA’s Office of the Chief Actuary, which reflect 

payroll tax reductions in 2050 and 2060, and adapted our model as 

appropriate to reflect specific reform proposal provisions. Given our 

reliance on that Office’s estimates in modeling the proposal, the proposal 

descriptions presented in this report are generally based on its description.8

As in our work on other reform proposals, we considered the proposal in 

isolation. That is, we did not include any other proposals made by reform 

sponsors, such as proposed non-Social Security related tax cuts or 

spending increases, that would affect the government’s fiscal position.

7

For more information on GAO’s long-term model, see Budget Issues: Long-Term Fiscal 

Outlook (GAO/T-AIMD/OCE-98-83, February 25, 1998).

8

We supplemented the Actuary’s memo with other material prepared by proposal sponsors 

and discussions with congressional staff.
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Our analysis of the Archer-Shaw proposal included comparison with three 

other fiscal policy paths developed in our earlier work: (1) “No Action,” or 

“Save the Surplus,” which assumes continuation of current-law fiscal 

policies, i.e., preservation of the entire projected unified surplus,

(2) “Eliminate non-Social Security surpluses,” and (3) “Long-term onbudget balance.”9

 The No Action path reflects the assumptions of the CBO’s 

July 1999 baseline, which generally assumed the continuation of thencurrent law fiscal policies. With respect to discretionary spending, the CBO 

assumptions implied that there is no future emergency spending and that 

total actual spending would fall within the existing discretionary caps 

through 2002.10 No Action also uses the Trustees’ intermediate or “best 

estimates” of the program’s income and cost rates, which implicitly assume 

that all promised Social Security benefits will be paid throughout the

75-year simulation period, including after the projected exhaustion of the 

OASDI trust funds in 2034. (Appendix II contains more information on the 

assumptions underlying our long-term model.)

9

“Eliminate non-Social Security surpluses” assumes that unspecified actions (i.e., spending 

increases and/or tax cuts) eliminate all projected on-budget surpluses; these changes from 

current law are then projected through the end of the 75-year simulation period. “Long-term 

on-budget balance” assumes that on-budget surpluses are eliminated but thereafter the onbudget portion of the budget is kept in balance through unspecified actions (i.e., spending 

cuts or revenue increases) throughout the rest of the simulation period. See appendix II for 

further details on the assumptions underlying these paths.

10In December 1999, CBO estimated that discretionary outlays in fiscal year 2000 would 

exceed the discretionary caps by $16.6 billion. CBO also estimated that total fiscal year 2000 

spending would be $31.8 billion higher than its July 1999 baseline estimates. CBO noted that 

its January 2000 baseline estimates were likely to present a more favorable picture in light of 

recent economic trends. See CBO’s Final Sequestration Report for Fiscal Year 2000 and also 

CBO’s The Budget for Fiscal Year 2000: An End-of-Session Summary.
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We used qualitative research to examine how well the proposal balances 

adequacy and equity concerns and provides for reasonable implementation 

and communication of any changes. In so doing, we relied on our issued 

and ongoing body of work on Social Security reform. This work addresses 

various issues raised by reform approaches, including establishing 

individual accounts, raising the retirement age, and the impact of reforms 

on minorities and women.11

Financing Sustainable 

Solvency

This criterion assesses the extent to which the proposal, if adopted, would 

achieve sustainable solvency, including how the proposal would affect the 

federal budget and the economy. Elements considered in this criterion 

include a proposal’s effects on (1) the federal government’s unified surplus 

or deficit in the long term, (2) debt held by the public, (3) solvency of the 

OASDI trust funds, and (4) national saving. Other elements, such as how 

changes would be financed and potential effects on future program 

liabilities, are also considered. 

In examining a proposal’s long-term economic and budgetary effects, we 

compared our simulation results for the proposal with a policy of “No 

Action,” in which the entire surplus would be saved. Compared to this 

reference point, the Archer-Shaw proposal would increase budgetary 

pressure through the middle of the next century, then reduce budgetary 

pressure in the latter years of the 75-year simulation period.

11See Social Security: Individual Accounts as an Element of Long-Term Financing Reform

(GAO/T-HEHS-99-86, March 16, 1999); Social Security Reform: Implications of Private 

Annuities for Individual Accounts (GAO/HEHS-99-160, July 30, 1999); Social Security: Issues 

in Comparing Rates of Return With Market Investments (GAO/HEHS-99-110, August 5, 

1999); Social Security Reform: Implications of Raising the Retirement Age

(GAO/HEHS-99-112, August 27, 1999); Social Security Reform: Implications for Women 

(GAO/T-HEHS-99-52, February 3, 1999); and Social Security and Minorities: Current Benefits 

and Implications of Reform (GAO/T-HEHS-99-60, February 10, 1999). 
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Page 9 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

Figure 1: Archer-Shaw: Unified Deficits/Surpluses as a Share of GDP

*Data end when deficits reach 10 percent of GDP.

Source: GAO’s long-term model.

As shown in figure 1, the proposal compared to the No Action alternative 

reduces projected unified surpluses and increases projected unified 

deficits as a share of gross domestic product (GDP) through 2046. 

Thereafter, due to the estimated increasingly larger amounts being 

transferred from the individual account balances to the OASDI trust funds, 

the Archer-Shaw proposal would decrease unified deficits compared to No 

Action. Beginning around 2030, under the account yield assumptions made 

by the Office of the Chief Actuary, the recapture of funds from the 

individual accounts would begin to exceed the general revenue tax credits 

used to fund the accounts. As shown in our long-term model results 

presented in figure 1, unified deficits under Archer-Shaw emerge in 2023 

and reach 9.7 percent of GDP in 2074; under No Action, unified deficits 

emerge in 2030 and reach 12.7 percent of GDP in 2074. 

Compared to No Action, the Archer-Shaw proposal would increase levels of 

debt held by the public until shortly before the end of the 75-year 

simulation period. The levels of debt shown in figure 2 follow from the 

lower unified surpluses and higher unified deficits under Archer-Shaw than 

under No Action shown in figure 1. 

No action*

Long-term

on-budget balance

Eliminate non-Social

Security surpluses *

Archer-Shaw

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

*Data end when debt reaches 150 percent of GDP.

Source: GAO’s long-term model.

The lower unified surpluses mean less debt reduction than under No 

Action, and the higher unified deficits under Archer-Shaw mean more 

government borrowing and hence greater associated interest expense. 

After 2046, recaptured account balances more than offset the general 

revenue tax credits used to fund the accounts plus this higher interest 

expense, resulting in lower unified deficits compared to No Action. These 

lower deficits under Archer-Shaw slow the build-up of debt so that after 

2067, debt held by the public would be lower than under No Action.

The Archer-Shaw proposal does not raise payroll taxes and does not use 

payroll tax revenue to finance the individual accounts. In effect, it draws on 

general revenues to finance individual accounts through the mechanism of 

a refundable tax credit equal to 2 percent of taxable payroll. In 

congressional testimony, the proposal sponsors stated that the ArcherShaw proposal would use Social Security surpluses over the next 15 years 

to finance the accounts.12 Under the estimates prepared by the Office of the 

Chief Actuary, the transfers from the individual accounts would exceed the 

general revenue credits beginning about 2031.

12Testimony of Representatives Bill Archer and Clay Shaw before the House Budget 

Committee Task Force on Social Security, June 29, 1999.

-50

0

50

100

150

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

Percent of GDP

No action

Long-term

on-budget balance

Eliminate non-Social

Security surpluses *

Archer-Shaw
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Figures 3 and 4 show program cost under No Action and Archer-Shaw as a 

share of the economy and as a share of the federal budget, respectively. 

Figure 3 shows that compared to No Action, the Archer-Shaw proposal has 

little impact on the net government cost of Social Security as a share of 

GDP in 2030 but cuts the net cost of the program roughly in half by 2074. 

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

*All other spending includes offsetting interest receipts in 2030 under no action.

**Net interest is .03 percent in 2030.

Note: Since a tax credit reduces revenue, revenue under Archer-Shaw is net of the tax credit for 

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

Source: GAO’s long-term model.

Figure 4 shows that compared to No Action, the Archer-Shaw proposal 

would begin to lower net Social Security spending slightly as a share of 

federal revenues in 2030. By 2074, net program spending under ArcherShaw would consume about half as much of federal revenues as in No 

Action—or about the same share of federal revenues as today. 

Revenue

Archer-Shaw

0

10

20

30

40

1998 2030** 2050 2074

Social Security Health Net interest All other spending*

No action

0

10

20

30

40

1998 2030 2050 2074

Percent of GDP

Revenue
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Figure 4: Social Security Spending as a Share of Total Federal Revenue in 1998 and 

Under No Action and Archer-Shaw

Note: Since a tax credit reduces revenue, revenue under Archer-Shaw is net of the tax credit for 

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

Source: GAO’s long-term model.

The analyses presented in figures 3 and 4 assume that total federal revenue 

under Archer-Shaw is net of the tax credit for individual accounts, and 

Social Security spending is net of the offset (“recapture”) from the 

individual accounts. This analysis of net government cost follows the 

framework implicit in the estimates provided by SSA’s Office of the Chief 

Actuary.13

13As of the date of this report, no CBO cost estimate for the Archer-Shaw proposal was 

available. 

1998 share

32.4 33.1

39.0

20.8 21.5

23.3

30.1

0

10

20

30

40

1998 2030 2050 2074

Percent of total federal revenue

No action Archer-Shaw
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You asked that we also provide information in this report on alternative 

approaches to analyzing the proposal’s cost. Alternative approaches might 

focus on gross cost—that is, on the levels of total benefits provided. Such a 

measure would indicate the gross cost of the retirement benefits funded 

with resources flowing through the Social Security system. In this analysis, 

the amounts recaptured from the individual account balances would be 

included in total federal revenues, and the cost of the benefits financed by 

those amounts would be included in the gross cost. Under this approach, 

Social Security spending under Archer-Shaw would appear larger as a share 

of GDP than in our analysis of net government cost under the proposal and 

also larger as a share of total federal revenues. Compared to No Action, 

however, Social Security spending under the Archer-Shaw proposal would 

appear approximately the same as a share of GDP and somewhat smaller as 

a share of total federal revenues in the long run.14 An analysis of gross cost 

would not affect our simulation results of long-term fiscal position and debt 

held by the public under Archer-Shaw. 

With regard to national saving, the actual effect of the Archer-Shaw 

proposal is unclear due to uncertainties in predicting the saving behavior of 

private households and individuals. On a national income accounting basis, 

the Archer-Shaw proposal would initially have no net effect. Through the 

tax credit used to create the individual accounts, government saving would 

be reallocated to private saving with no net change in national saving. The 

underlying assets in the economy would be unchanged, as would the total 

income generated by those assets. However, the government would 

ultimately receive a greater portion of the returns because of the recapture 

of the account balances invested in higher-yielding equities. If payroll tax 

reductions were implemented in 2050 and 2060, the net effect would be to 

reduce national saving. 

In a report issued in June 1999, we analyzed the effects on national saving 

of several types of individual accounts as proposed in Social Security 

reform proposals.15 We found that these effects would depend on several 

variables. These would include the financing and structure of such 

accounts, for example, whether funds would come from inside or outside 

the Social Security system and whether withdrawals would be permitted. 

14As noted above, in this analysis total federal revenue would include the transfer amounts.

15See Social Security: Capital Markets and Educational Issues Associated With Individual 

Accounts (GAO/GGD-99-115, June 28, 1999), pp. 30-32.
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Where the funds used to finance the individual accounts come from outside 

the Social Security system, the effect on government savings would depend 

on what would have been done with the surplus or revenue if it had not 

been used to finance individual accounts. 

• If the funds would have been used to pay down debt (as assumed in No 

Action/Save the Unified Surplus), then the direct effect of using funds to 

finance individual accounts would be to reduce government saving and 

increase private saving by the same amount. 

• If the funds would have been used to finance additional government 

consumption spending, then any increase in private saving due to the 

individual accounts would increase national saving.

• If the funds would have been used for a tax cut, then national saving will 

increase if the individual accounts generate more private saving than the 

tax cut.

The actual effect of any reform proposal with individual accounts on 

national saving—including Archer-Shaw—would depend on behavioral 

offsets. For example, if households are forgoing current consumption by 

saving for their retirement, they may reduce these savings in response to a 

potential increase in future retirement benefits from individual accounts. 

There is, however, no expert consensus on how Social Security reform 

proposals would affect the saving behavior of private households and 

businesses.

According to the analysis provided by SSA’s Office of the Chief Actuary, the 

Archer-Shaw proposal would restore 75-year actuarial balance to the 

OASDI trust funds and produce a stable trust fund ratio.16 By the end of the 

projection period, the Office of the Actuary estimated the trust fund ratio to 

be over 200 percent and rising. Under the Actuary’s estimates, the proposal 

would result in a sustainable system with or without reductions in the 

payroll tax rate. Without the payroll tax reduction, the OASDI trust fund 

ratio would be expected to rise to over 10 times annual outgo by the end of 

the long-range period due to the estimated magnitude of the transfers 

flowing from the individual accounts.

16The trust fund ratio is a measure of the adequacy of the trust fund level in the short term. 

The ratio represents the proportion of a year’s outgo that could be paid with the funds 

available at the beginning of the year.
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The analysis prepared by the Office of the Chief Actuary noted, however, 

that the proposal’s effects on trust fund solvency depend greatly on the 

assumed yields of the individual account investments. SSA’s analysis 

assumed an expected real portfolio yield of 5.35 percent, net of 

administrative expense.17 In a sensitivity analysis that assumed yields of

1 percentage point lower than expected and no payroll tax reductions, the 

Office of the Chief Actuary estimated that the OASDI trust funds would be 

exhausted by 2048 and the actuarial balance would be −0.08 percent of 

taxable payroll for the 75-year projection period, compared with −2.07 

under current law. In a second sensitivity analysis that assumed account 

yields of 1 percentage point higher than expected, the Office of the Chief 

Actuary estimated that the payroll tax rate reductions would be larger and 

would start sooner and the actuarial deficit would be eliminated. The 

actuarial balance would be an estimated +0.07 percent of payroll, and the 

trust fund ratio would be stable at about 300 percent at the end of the

75-year period.

Should the assumptions used by the Office of the Chief Actuary about 

future account yields prove overly optimistic and account balances indeed 

fall below what is needed to fund promised benefits, the OASDI trust funds 

would bear the resulting liability. This means that payments could only be 

made from the OASDI trust funds, not the general fund.18 Further, 

descriptions of the proposal do not include a safety valve to control 

program growth or to limit federal liabilities that could result. Some 

descriptions of the proposal, however, could be interpreted to imply a link 

between future payroll tax reductions and the realization of assumed 

account yields. 

17In its November 1999 report to the Social Security Advisory Board, the 1999 Technical 

Panel on Assumptions and Methods recommended that SSA lower its assumptions about 

expected yield for both equities and government securities. Applying the technical panel’s 

recommendations to the Archer-Shaw proposal would lead to a 0.9 percentage point lower 

return on individual accounts than the return used in the estimates made by the Office of the 

Chief Actuary. The Technical Panel is composed of actuaries, economists, and 

demographers appointed by the Social Security Advisory Board to review the assumptions 

and methodology used to project the future financial status of the OASDI trust funds.

18This statement is based on analysis of proposal descriptions, not on the specific wording 

of the legislation, which is not yet available. 
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Balancing Adequacy 

and Equity

This criterion evaluates the balance struck between the twin goals of 

income adequacy and individual equity. Income adequacy refers to the level 

and certainty of benefits provided to retirees, the disabled, dependents, and 

survivors. It is particularly important for low-income workers who are 

most reliant on the program, and may be achieved, in part, through a 

progressive benefit formula. Individual equity refers to rates of return on 

individual contributions. That is, it concerns the relationship between the 

benefit individuals receive and the contributions they have made to the 

Social Security system. Individual equity would be affected by giving 

workers greater choice and control over their contributions, which in turn 

could give them the potential to earn higher rates of return by investing in 

higher yielding assets, though generally by taking on greater investment 

risk at the same time. The current Social Security system makes certain 

trade-offs between the degree of income adequacy and individual equity 

provided by its benefit structure. Redistributive transfers embedded in the 

current system create an implicit “safety net” for workers and their 

families. At the same time, linking benefits to contributions invokes the 

standard of individual equity.

Because the Archer-Shaw proposal makes no changes to the benefit 

structure of the current Social Security system, it would not adversely 

affect income adequacy as compared to current promised benefit levels. 

Specifically, the Archer-Shaw proposal maintains current-law benefits for 

current and future retirees, including low-income workers and others most 

reliant on Social Security.19 It makes no changes to disabled, dependent, or 

survivor benefits and thus, retains the existing safety net. The proposal 

makes no changes from the current Social Security structure in the way 

workers are covered, and it preserves the progressivity of the existing 

system. In addition, it retains the compulsory nature of the current payroll 

tax. According to SSA actuaries, higher earners, especially two-earner 

couples with high earnings levels, would be more likely than lower income 

workers or one-earner couples to receive higher benefits under the 

proposal than under current law.

19If account balances fall below what is needed to fund promised benefits, the OASDI trust 

funds would bear the resulting liability. To address this liability, benefit or revenue 

adjustments could be required.
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Consequently the Archer-Shaw proposal’s individual account structure 

does have implications for individual equity. The proposal could enhance 

individual equity to the extent that it results in higher rates of return on 

workers’ contributions. At the same time, individuals bear no investment 

risk because the proposal guarantees current law benefits. The ArcherShaw proposal would pay current law benefits out of the OASDI trust 

funds, with the trust funds recapturing an amount from the individual 

account to finance those benefits. In the short run, the effect on individual 

equity would be limited, as the SSA actuaries estimate that these transfers 

would almost always take the entire account balances, leaving workers 

with the equivalent of their current law benefit. The Archer-Shaw proposal 

also affects individual equity through its provision to reduce payroll tax 

rates. 20 According to SSA’s projections, future workers would pay lower 

payroll tax rates that would take effect in 2050 and 2060 with no benefit 

reductions. These tax reductions would increase rates of return on 

contributions, enhancing individual equity. 

Individual equity applies not only to comparisons made within a generation 

of workers, but across generations as well. The Archer-Shaw proposal’s 

stable patterns of contributions and benefits could result in fairly level 

rates of return across generations. Benefit levels would be the same as 

under current law over the next 75 years for virtually all workers. The 

amounts credited to an individual’s account are increased immediately by

2 percent, and then remain constant until proposed tax cuts take effect in 

2050 and 2060.21 Future workers benefiting from these tax cuts would then 

receive higher rates of return.22

20As stated earlier, this tax cut provision is under review.

21In a technical sense, contribution rates in the form of higher payroll taxes are not 

increased, as Archer-Shaw relies on a refundable tax credit to finance its individual account 

feature. Under the proposal, Treasury will transfer an aggregate 2 percent of OASDI taxable 

earnings to Social Security for these accounts. However, since SSA then credits the 

individual account of each covered worker with this amount and provides periodic 

information on the performance of those contributions, they can be considered a de facto

increase in workers’ contribution rates.

22By comparison, raising the payroll tax under the current system immediately by 2.15 

percentage points would result in the same actuarial balance as the Archer-Shaw proposal. 

Such a tax increase would also pay current law benefits and result in a constant tax rate 

over the next 75 years. Therefore, these two approaches would have very similar effects on 

generations for the next several decades, though the Archer-Shaw proposal would improve 

rates of return for generations in the distant future.
B-284323

Page 18 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

Increasing workers’ control over contributions and providing greater 

investment choice also potentially enhances individual equity.23 The ArcherShaw proposal would not give individuals as much control over their 

accounts as 401(k) accounts since individuals would not be able to borrow 

or otherwise use these funds for nonretirement purposes prior to death or 

retirement. However, in certain circumstances, workers could bequeath 

their account balances to their heirs. The Archer-Shaw proposal does 

provide investment choices to workers, subject to certain limitations. 

Account investments are constrained to mutual funds with a portfolio 

allocation of 60 percent equities and 40 percent fixed income securities. 

Within this overall constraint, investment choices will be limited largely to 

those bond and equity index funds approved by the proposal’s Social 

Security Guarantee Board.

Implementing and 

Administering Reforms

This criterion evaluates how readily proposed changes could be 

implemented, administered, and explained to the public. Implementation 

and administration issues are important because they have the potential to 

delay—if not derail—reform if they are not considered early enough for 

planning purposes. Moreover, such issues can influence policy choices—

feasibility and cost should be integral factors in ultimate decisions 

regarding the Social Security program. In addition, potential transparency 

and public education needs associated with various proposals should be 

considered. Reforms that are not well understood could face difficulties in 

achieving broad public acceptance and support. 

As reform proposals are developed, two key design elements are often 

overlooked: timing and funding for implementation. The Archer-Shaw 

proposal does not explicitly provide funding for implementation of its 

changes to the Social Security system, nor does it provide a specific time 

frame for implementing those changes. However, the proposal would 

establish a Social Security Guarantee Board, which would have supervisory 

control over funds investment and could be responsible for establishing a 

time frame for implementation.24 The Board’s main role would be to 

23Increased choice and control over investments could also expose individuals to greater 

financial risk and could lead to lower rates of return.

24SSA has expressed concerns about lead time for the Board to get established, including 

time for operational preparation, legislative interpretation, regulation development and 

publication, and systems development.
B-284323

Page 19 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

develop investment policies that provide prudent diversification of 

investments and low administrative costs. The Board also could have a role 

in implementing safeguards against politically motivated investing of the 

accounts.25

The Archer-Shaw proposal estimates that administrative costs for the 

program would not exceed 25 basis points. This estimate may not be 

realistic, especially in the long term. The cost of administering a system 

that includes individual accounts would depend on decisions made about 

who would assume new administrative and recordkeeping responsibilities, 

how much choice or discretion individuals would have in selecting and 

changing their investment options, and how workers would receive their 

benefits when they retire.26 While the Archer-Shaw proposal’s reliance on 

index funds could reduce administrative expenses to some degree, its 

administrative costs would also depend, in large part, on the number of 

index funds ultimately offered to participants. In previous work we 

reported that, in general, administrative costs are higher for more 

decentralized systems and for those offering broader investment choices, 

more customer service options, or both.27 In addition, the estimate of 25 

basis points does not take into account other costs related to the 

establishment of individual accounts, such as the cost to SSA for modifying 

agency software to incorporate changes in payout calculations, the need 

for employee hiring and training, acquisition of equipment and facilities to 

support customer service, and promulgation of new regulations, policies 

and procedures. These categories represent primarily one-time costs.28

Public understanding of both the financing and benefit structures is critical 

to any reform proposal. Public confidence is increased when the financing 

mechanism is readily understood by all, and broad-based support for the 

25While none of the proposals we have evaluated thus far have provided specific information 

about how they would be implemented, the Archer-Shaw proposal includes more detail than 

some others we reviewed. See Social Security: Evaluating Reform Proposals

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

26For more detail on implementation issues, see Social Security Reform: Implementation 

Issues for Individual Accounts (GAO/HEHS-99-122, June 18, 1999).

27For more detail on administrative cost issues see Social Security Reform: Administrative 

Costs for Individual Accounts Depend on System Design (GAO/HEHS-99-131, June 18, 

1999).

28The proposal also does not clearly discuss the treatment of fees and commissions to the 

certified qualified professional asset managers who will manage the accounts.
B-284323

Page 20 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

program is more easily maintained. Various elements of the Archer-Shaw 

proposal may be particularly difficult to explain clearly and simply. 

Participants will need to understand that the tax credit financing structure 

of the proposal does not mean that individuals would actually file for this 

credit on their tax returns. Rather, it would be automatically credited to 

their individual accounts. Similarly, the complex “offset” feature of the 

benefit structure, which reduces Social Security benefits by the amount 

that is accumulated in the individual account, must also be clearly 

explained. Otherwise retirees may expect a larger return than the proposal 

actually provides, potentially creating an “expectations gap.” For example, 

some people may devote a significant amount of time to choosing between 

the different investment options, only to have their choices provide no 

more than an incremental increase in their retirement benefit. Their 

perception could then be that they have received a poor rate of return on 

their individual accounts. To avoid these perception problems an extensive 

education program will be necessary. 

At the same time, investment education will be needed to give individuals 

information about financial planning and general investment strategies, as 

well as the specific choices made available to them and the risks associated 

with each. The need to provide these education programs could place an 

administrative burden, as well as extra costs, on SSA. The Archer-Shaw 

proposal does not directly provide for such a program or the resources 

necessary for SSA or other agencies to conduct such an effort.

Agency Comments and 

Our Evaluation

We requested comments on a draft of this report from SSA. SSA generally 

agreed with GAO’s treatment of the issues. SSA’s comments, which can be 

found in appendix III, reemphasized the point made by the Office of the 

Chief Actuary that the proposal’s success in reaching solvency is sensitive 

to assumptions about future account yields. SSA also provided a number of 

technical comments, which we incorporated as appropriate.

Unless you release the contents of this report earlier, we will not distribute 

it until 30 days from the date of this letter. At that time we will send copies 

of this report to the Honorable Bill Archer, Chairman, and the Honorable 

Charles B. Rangel, Ranking Member, House Ways and Means Committee; 

the Honorable Clay Shaw, Chairman, Subcommittee on Social Security, 

House Ways and Means Committee; other interested congressional 

committees; the Honorable Kenneth S. Apfel, Commissioner of Social 
B-284323

Page 21 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

Security; and the Honorable Lawrence Summers, Secretary of the Treasury. 

Copies will be made available to others upon request. 

If you or your staff have any questions about this report, please contact 

Cynthia M. Fagnoni, Director, Education, Workforce, and Income Security 

Issues, on (202) 512-7215 or Paul L. Posner, Director, Budget Issues, on 

(202) 512-9573.

Sincerely yours,

David M. Walker

Comptroller General

of the United States
Page 22 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

Appendix I

Criteria for Evaluating Social Security Reform 

Proposals ApendxiI

Financing Sustainable 

Solvency

This criterion evaluates the extent to which the proposal achieves 

sustainable solvency, including how the proposal would affect the economy 

and the federal budget.

To what extent does the proposal:

• Reduce future budgetary pressures?

• Reduce debt held by the public?

• Reduce the cost of the Social Security system as a percentage of GDP?

• Reduce the percentage of federal revenues consumed by the Social 

Security system?

• Increase national saving?

• Restore 75-year actuarial balance and create a stable system?

• Raise payroll taxes, draw on general revenues, and/or use Social 

Security trust fund surpluses to finance changes?

• Create contingent liabilities?

• Include “safety valves” to control future program growth?

Balancing Adequacy 

and Equity

This criterion evaluates the balance struck between the twin goals of 

income adequacy (level and certainty of benefits) and individual equity 

(rates of return on individual contributions).

To what extent does the proposal:

• Change current-law benefits for current and future retirees?

• Maintain benefits for low-income workers who are most reliant on 

Social Security?

• Maintain benefits for the disabled, dependents, and survivors?

• Ensure that those who contribute receive benefits?

• Provide higher replacement rates for lower income earners?

• Expand individual choice and control over program contributions?

• Increase returns on investment?

• Improve intergenerational equity?

Implementing and 

Administering Reforms

This criterion evaluates how readily such changes could be implemented, 

administered, and explained to the public.

To what extent does the proposal:
Appendix I

Criteria for Evaluating Social Security 

Reform Proposals

Page 23 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

• Provide reasonable timing and funds for implementation and result in 

reasonable administrative costs?

• Allow the general public to readily understand its financing structure 

and increase public confidence?

• Allow the general public to readily understand the benefit structure and 

avoid expectations gaps?

• Limit the potential for politically motivated investing? 
Page 24 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

Appendix II

The Economic Model and Assumptions ApendxiI

GAO’s long-term economic model has been used since 1992 to assess the 

potential fiscal and economic impacts of alternative policy choices. Based 

on an economic growth model developed by economists at the Federal 

Reserve Bank of New York, the model simulates the interrelationships 

between the budget and the economy over a 75-year projection period. The 

key interaction between the budget and the economy in the model is the 

effect of the unified federal deficit/surplus on the amount of national saving 

available for investment, which influences long-term economic growth. 

The long-term simulations generated by the model illustrate the relative 

fiscal and economic outcomes associated with alternative policy paths and 

thus provide a useful way to compare alternatives within a common 

economic framework. The simulations are not predictions of what would 

actually happen in the future. For example, in reality policymakers likely 

would take action before the occurrence of the negative out-year fiscal and 

economic consequences reflected in some simulated fiscal policy paths. In 

addition, the model reflects the interrelationships between the budget and 

the economy over the long term and does not capture their interaction 

during short-term business cycles. Assumptions underlying the model have 

been chosen to be conservative in recognition of the uncertainties inherent 

in long-term simulations,1

 but variation in these assumptions generally 

would not affect the relative outcomes of the alternative policies being 

compared.

In our November 1999 report, we compared several Social Security reform 

proposals to the following three fiscal policy paths developed as part of 

GAO’s ongoing model work.

• No Action/Save the Surplus assumes no changes in current policies 

and thus results in saving the unified surpluses. This assumption implies 

no emergency spending and actual spending that falls within the 

existing discretionary caps. Thus, unified budget surpluses through 2029 

are used to reduce debt held by the public. Thereafter, unified deficits 

are permitted to emerge. Discretionary spending follows CBO’s 10-year 

projections, which assume compliance with the spending caps through 

2002 and growth with inflation through 2008. Thereafter, we assume 

discretionary spending grows with the economy.

• Eliminate non-Social Security surpluses assumes that permanent 

unspecified policy actions (i.e., spending increases and/or tax cuts) are 

1

For example, interest rates and total factor productivity growth are held constant.
Appendix II

The Economic Model and Assumptions

Page 25 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

taken through 2009 that eliminate the projected on-budget surpluses. 

Thereafter, these unspecified actions are projected through the end of 

the simulation period. On-budget deficits emerge in 2010, followed by 

unified deficits in 2017.

• Long-term on-budget balance assumes that the on-budget surplus is 

eliminated through 2009, as in the previous path. Thereafter, the onbudget portion is kept in balance by actions that cut spending and/or 

raise revenue to prevent on-budget deficits from emerging. This results 

in a unified surplus/deficit equal to the OASDI trust funds’ annual 

surplus/deficit through 2034 and equal to the OASDI annual cash deficit 

thereafter.

All three paths assume payment in full of all currently promised OASDI 

benefits, including after the projected exhaustion of the OASDI trust funds 

in 2034.

Fiscal and economic assumptions underlying the No Action simulation 

generally reflect those of CBO’s July 1999 baseline.2

 As shown in figure 5, 

the model uses the Trustees’ 1999 intermediate estimates for Social 

Security and Medicare spending. 

2

For alternative fiscal policy simulations, certain assumptions are varied, which are noted in 

the discussion of the alternative policy paths. CBO will next update its baseline, including 

technical and economic assumptions, in January 2000.
Appendix II

The Economic Model and Assumptions

Page 26 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

Figure 5: No Action Model Assumptions

Note: In all our work, all CBO budget projections were converted from a fiscal year to a calendar year 

basis. The last year of CBO’s projection period is fiscal year 2009, permitting the calculations of 

calendar year values through 2008.

Some of the assumptions underlying No Action were not fully realized in 

the recently enacted fiscal year 2000 budget,3

 and other assumptions may 

or may not prove realistic over time. For example, discretionary spending 

follows CBO’s July 1999 10-year projections, which assume (1) no 

emergency spending and (2) actual spending that falls within the existing 

discretionary caps through 2002 and then grows with inflation through 

2008. However, CBO reported in December that, including adjustments to 

the discretionary caps for fiscal year 2000 enacted emergency spending, 

discretionary spending enacted for fiscal year 2000 exceeded the caps.

In simulating the Archer-Shaw and other Social Security reform proposals, 

we relied on estimates of OASDI income and cost provided by the Office of 

the Chief Actuary at SSA. The OASDI cost estimates for each proposal 

3

In December 1999, CBO published re-estimates reflecting the effect of enacted budget 

legislation. See CBO’s Final Sequestration Report for Fiscal Year 2000 and also CBO’s The 

Budget for Fiscal Year 2000: An End-of-Session Summary.

Model Inputs Assumptions

Unified surplus/deficit CBO through 2008; GAO simulations thereafter

Social Security spending (OASDI) 1999 Social Security Trustees’ Intermediate

projections

Medicare spending (HI and SMI) 1999 Medicare Trustees’ intermediate projections

Medicaid spending CBO’s projections

Other mandatory spending CBO’s assumed levels through 2008; thereafter,

increases at the rate of economic growth

(i.e., remains constant as a share of GDP)

Discretionary spending CBO through 2008; thereafter, increases at the rate

of economic growth

Receipts CBO’s assumed levels through 2008 ; in subsequent

years, receipts held constant at 21.1% of GDP

(CBO’s projection in 2008)

Saving rate : gross saving of the private sector and

state and local government sector

17.4%

Share of gross national saving that flows abroad 33.3%

Labor: growth in hours worked 1999 Social Security Trustees’ intermediate

projections

Total factor productivity growth 1.1%

Inflation (GDP price index) CBO through 2009; 1.9% thereafter (CBO’s

projection in 2009)

Interest rate (average on the national debt) Average rate implied by CBO’s interest payment

projections through 2008; 5.6% thereafter (CBO’s

implied rate in 2008)
Appendix II

The Economic Model and Assumptions

Page 27 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

reflect all proposed reforms affecting benefits, and the OASDI income 

estimates reflect reforms affecting financing elements. For example, for the 

Archer-Shaw proposal the OASDI cost estimates reflect the estimated 

amounts of transfers from the individual accounts to the OASDI trust 

funds; the OASDI income estimates reflect proposed payroll tax 

reductions. 

As with other reform proposal simulations, on-budget revenue and 

spending in the Archer-Shaw simulation reflect the assumptions underlying 

our base simulation—the “No Action” or “Save the Surplus” path—adjusted 

for reform proposal changes affecting on-budget totals. For example, in 

modeling Archer-Shaw, a reduction was made to federal revenues to reflect 

the refundable tax credit used to finance individual accounts; this 

reduction was also based on data provided by the Office of the Chief 

Actuary. 

We did not audit or validate the projections of CBO or the Social Security 

and Medicare actuaries. We conducted this work from August through 

December 1999 in accordance with generally accepted government 

auditing standards.
Page 28 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

Appendix III

Comments From the Social Security 

Administration ApendxiI
Appendix III

Comments From the Social Security 

Administration

Page 29 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal
Page 30 GAO/AIMD/HEHS-00-56 The Archer-Shaw Proposal

Related GAO Products

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

November 4, 1999).

Social Security Reform: Implications of Raising the Retirement Age

(GAO/HEHS-99-112, August 27, 1999).

Social Security: Issues in Comparing Rates of Return With Market 

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

Social Security: Implications of Private Annuities for Individual Accounts

(GAO/HEHS-99-160, July 30, 1999).

Social Security: Capital Markets and Educational Issues Associated with 

Individual Accounts (GAO/GGD-99-115, June 28, 1999).

Social Security Reform: Administrative Costs for Individual Accounts 

Depend on System Design (GAO/HEHS-99-131, June 18, 1999).

Social Security Reform: Implementation Issues for Individual Accounts

(GAO/HEHS-99-122, June 18, 1999).

Social Security: Criteria for Evaluating Social Security Reform Proposals

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

Social Security: Individual Accounts as an Element of Long-Term Financing 

Reform (GAO/T-HEHS-99-86, March 16, 1999).

Social Security and Surpluses: GAO’s Perspective on the President’s 

Proposals (GAO/T-AIMD/HEHS-99-96, February 23, 1999).

Social Security and Minorities: Current Benefits and Implications for 

Reform (GAO/T-HEHS-99-60, February 10, 1999).

Social Security: What the President’s Proposal Does and Does Not Do

(GAO/T-AIMD/HEHS-99-76, February 9, 1999).

Social Security Reform: Implications for Women (GAO/T-HEHS-99-52, 

February 3, 1999).

Budget Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-98-83, 

February 25, 1998).

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