Report to the Chairman, Senate Special 

Committee on Aging, U.S. Senate 

United States General Accounting Office 

GAO 

January 2003 SOCIAL SECURITY 

REFORM 

Analysis of Reform 

Models Developed by 

the President’s 

Commission to 

Strengthen Social 

Security 

GAO-03-310 
Applying GAO’s criteria to the Commission models highlights key options 

and trade-offs between efforts to achieve sustainable solvency and maintain 

adequate retirement income for current and future beneficiaries. 

For example, the Commission’s Model 2 proposal reduces Social Security’s 

defined benefit from currently scheduled levels through various formula 

changes, provides enhanced benefits for low-wage workers and spousal 

survivors, and adds a voluntary individual account option in exchange for a 

benefit reduction. Model 2 would provide for sustainable solvency and 

reduce the shares of the federal budget and the economy devoted to Social 

Security compared to currently scheduled benefits (tax increase benchmark) 

regardless of how many individuals selected accounts. However, with 

universal account participation, general revenue funding would be needed 

for about 3 decades. 

GAO’s analysis of benefit adequacy and equity issues relating to Model 2 

found that 

· Across cohorts, median monthly benefits for those choosing accounts are 

always higher, despite a benefit offset, than for those who do not; this gap 

grows over time. In addition, benefits assuming universal account 

participation are higher than payment of a defined benefit generally 

corresponding to an amount payable from future Social Security trust fund 

revenues (benefit reduction benchmark). However, benefits received by 

those without accounts fall below the benchmark over time. 

· For the lowest quintile, median monthly benefits with universal 

participation in the accounts tend to be higher than GAO’s benefit reduction 

benchmark, likely due to the enhanced benefit for full-time “minimum wage” 

workers. This pattern becomes more pronounced across the cohorts 

analyzed. 

· Regardless of whether an account is chosen, many people could receive 

monthly benefits under Model 2 that are higher than the benefit reduction 

benchmark. However, a minority could fare worse. Some people could also 

receive a benefit greater than under the tax increase benchmark although a 

majority could fare worse. Benefits for those choosing individual accounts 

will be sensitive to the actual rates of return earned by those accounts. 

Adding individual accounts would require new administrative structures, 

adding complexity and cost. Public education will be key to help 

beneficiaries make sound decisions about account participation, investment 

diversification, and risk. Finally, any Social Security reform proposal must 

also be looked at in the context of both the program and the long-term 

budget outlook. A funding gap exists between promised and funded Social 

Security benefits which, although it will not occur for a number of years, is 

significant and will grow over time. In addition, GAO’s long-term budget 

simulations show, difficult choices will be required to reconcile a large and 

growing gap between projected revenues and spending resulting primarily 

from known demographic trends and rising health care costs. 

SOCIAL SECURITY REFORM 

Analysis of Reform Models Developed by 

the President’s Commission to 

Strengthen Social Security 

www.gao.gov/cgi-bin/getrpt?GAO-03-310.

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact Barbara D. 

Bovbjerg at (202) 512-7215 or 

bovbjergb@gao.gov. 

Highlights of GAO-03-310, a report to the 

Chairman of the Special Committee on 

Aging, U.S. Senate 

January 2003 

Social Security is an important 

social insurance program affecting 

virtually every American family. It 

represents a foundation of the 

nation’s retirement income system 

and provides millions of Americans 

with disability insurance and 

survivors’ benefits. Over the long 

term, as the baby boom generation 

retires, Social Security’s financing 

shortfall presents a major solvency 

and sustainability challenge. 

Numerous reform proposals have 

been put forward in recent years, 

and in December 2001 a 

commission appointed by the 

President presented three possible 

reform models. 

Senator Breaux, Chairman of the 

Senate Special Committee on 

Aging, asked GAO to use its 

analytic framework to evaluate the 

Commission’s models. This 

framework consists of three 

criteria: (1) the extent to which a 

proposal achieves sustainable 

solvency and how it would affect 

the economy and the federal 

budget; (2) the balance struck 

between the twin goals of income 

adequacy and individual equity; and 

(3) how readily such changes could 

be implemented, administered, and 

explained to the public. 
Page i GAO-03-310 Social Security Reform 

Letter 1

Achieving Sustainable Solvency 4

Balancing Adequacy and Equity 6

Implementing and Administering Reforms 7

Concluding Observations 7

Agency Comments and Our Evaluation 8

Appendix I Analysis of Reform Models 12 

Appendix II Comments from the Social Security Administration 100 

Abbreviations 

OASDI Old-Age and Survivors Insurance and Disability Insurance 

PIA primary insurance amount 

SSA Social Security Administration 

Contents 
Page 1 GAO-03-310 Social Security Reform 

January 15, 2003 

The Honorable John Breaux 

Chairman 

Special Committee on Aging 

United States Senate 

Dear Mr. Breaux: 

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

assessing Social Security reform proposals to the reform models 

developed by the President’s Commission to Strengthen Social Security.1

Each of the Commission’s three reform models represents a different 

approach to including a voluntary individual account option to Social 

Security. Model 1 does not restore solvency and accordingly is not 

analyzed in this report. In April 2002, we provided your staff with a 

briefing on our preliminary results for Model 2. This report contains our 

final results, focusing on Model 2, with results for Model 3 presented in 

Appendix I. 

We based our interpretation of the Commission’s reform models in large 

part on the memorandum provided by the Office of the Chief Actuary at 

the Social Security Administration (SSA) dated January 31, 2002, that 

estimated the reform models’ effects on the Social Security program. Our 

interpretation also draws on the Commission’s final report. As agreed with 

your office, our report is based on the analytic framework we have used in 

past work to evaluate Social Security reform proposals.2

 That framework 

consists of three basic criteria: 

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

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

 1

The Commission’s report, Strengthening Social Security and Creating Personal Wealth 

for All Americans was issued on December 21, 2001 (revised March 19, 2002). 

2

See, for example, U.S. General Accounting Office, Social Security: Evaluating Reform 

Proposals, GAO/AIMD/HEHS-00-29 (Washington, D C.: Nov. 4, 1999) and Social Security 

Reform: Information on the Archer-Shaw Proposal, GAO/AIMD/HEHS-00-56 (Washington, 

D.C.: Jan. 18, 2000). 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-03-310 Social Security Reform 

• 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. 

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

detailed questions that help describe potential effects of reform models on 

important policy and operational aspects of public concern. These 

questions are displayed in the report. 

Our analysis of the Commission reform models included comparison with 

three benchmarks:3

• The “benefit reduction benchmark” assumes a gradual reduction in the 

currently scheduled Social Security defined benefit beginning with those 

newly eligible for retirement in 2005. Current tax rates are maintained. 

• The “tax increase benchmark” assumes an increase in the OASDI payroll 

tax beginning in 2002 sufficient to achieve an actuarial balance over the 

75-year period. Currently scheduled benefits are maintained. 

• The “baseline extended” benchmark is a fiscal policy path developed in 

our earlier long-term model work that assumes payment in full of currently 

scheduled Social Security benefits and no other changes in current 

spending or tax policies. 

To show the range of possible outcomes given the voluntary nature of 

individual accounts4

 in the Commission models, we simulated each model 

assuming (1) no participation (0%) in the individual account option and 

(2) universal participation (100%) in the account option. Actual experience 

would likely fall between these bounds but cannot be predicted with any 

degree of certainty. 

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

Commission reform models against the first criterion, that of financing 

 3

From the perspective of analyzing benefit adequacy, the tax increase and baseline 

extended benchmarks are identical because both assume payment in full of scheduled 

Social Security benefits over the 75-year simulation period. 

4

In this report, the term “individual account” is used for the voluntary accounts, consistent 

with published GAO work. The Commission used the term “personal account” in its final 

report. 
Page 3 GAO-03-310 Social Security Reform 

sustainable solvency.5 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 sustainable solvency standard encompasses several 

different ways of looking at the Social Security program’s financing needs. 

While 75-year actuarial balance is generally used in evaluating the longterm financial outlook of the Social Security program and reform 

proposals, it is not sufficient in gauging the program’s solvency after the 

75th year. For example, under the Trustees’ intermediate assumptions, 

each year the 75-year actuarial period changes, and a year with a surplus is 

replaced by a new 75th year that has a significant deficit. As a result, 

changes made to restore trust fund solvency only for the 75-year period 

can result in future actuarial imbalances almost immediately. Reform 

plans that lead to sustainable solvency would be those that consider the 

broader issues of fiscal sustainability and affordability over the long term.6

To examine how the Commission reform models balance adequacy and 

equity concerns, we used the GEMINI model, a dynamic microsimulation 

model for analyzing the lifetime implications of Social Security policies for 

a large sample of people7

 born in the same year. GEMINI can simulate 

different reform features, including individual accounts with an offset, for 

their effects on the level and distribution of benefits.8

 To avoid having the 

extremely high returns of a small portion of participants skew the average, 

we present most of our statistics as medians. To assess benefit adequacy, 

we display median monthly benefit levels for the 1955, 1970, and 1985 birth 

cohorts to enable comparisons over time; initial benefits by earnings 

 5

For this analysis, consistent with SSA’s scoring of the Commission reform models, our 

long-term economic model incorporates the 2001 Trustees’ best, or intermediate, 

assumptions. 

6

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

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

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

consumed by Social Security spending. 

7

The GEMINI cohorts consist of simulated samples of 100,000 individuals, sometimes 

called synthetic samples. These samples were validated against data from the Social 

Security Administration’s Annual Statistical Supplement, the SIPP, the CPS, MINT2, and the 

PSID. 

8

In simulating the individual accounts, we used the same nominal rates of return used by 

SSA’s Office of the Chief Actuary in January 2002, with 6.3 percent for Treasuries, 6.8 

percent for corporate bonds, and 10 percent for equities. 
Page 4 GAO-03-310 Social Security Reform 

quintile, comparing the lowest and highest quintiles; and the effects on the 

distribution of initial benefits within each cohort. 

To examine how the Commission reform models provide for reasonable 

implementation and communication of any changes, we used qualitative 

analysis based on GAO’s 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. 

Models 2 and 3 restore solvency to the Old-Age and Survivors Insurance 

and Disability Insurance (OASDI) Trust Funds through a combination of 

changes in the initial benefit calculation, general revenue transfers, and/or 

benefit offsets for those who choose to participate in the individual 

account option. Model 3 requires an additional contribution equal to 1 

percent of taxable payroll under the voluntary individual account option. 

All models share a common framework for administering individual 

accounts. As agreed with your office, this report focuses on Model 2, with 

results for Model 3 presented in Appendix I. 

The use of our criteria to evaluate approaches to Social Security reform 

highlights the trade-offs that exist between efforts to achieve solvency for 

the OASDI trust funds and efforts to maintain adequate retirement income 

for current and future beneficiaries. The models illustrate some of the 

options and trade-offs that will need to be considered as the nation 

debates how to reform Social Security. 

Our analysis of sustainable solvency under Model 2 showed that 

• As estimated by the actuaries, Model 2, with either universal (Model 2–-

100%) or zero (Model 2—0%) participation in voluntary individual 

accounts, is solvent over the 75-year projection period, and the ratio of 

annual income to benefit payments at the end of the simulation period is 

increasing. However, in Model 2 –100% over three decades of general 

revenue transfers are needed to achieve trust fund solvency. Model 2—0% 

achieves solvency with no general revenue transfers. 

• Model 2-100% would ultimately reduce the budgetary pressures of Social 

Security on the unified budget relative to baseline extended. However, this 

would not begin until the middle of this century. Relative to both GAO’s 

benefit reduction benchmark and tax increase benchmark, unified 

surpluses would be lower and unified deficits higher throughout the 

simulation period under Model 2-100%. Model 2-0% would reduce 

Achieving Sustainable 

Solvency 
Page 5 GAO-03-310 Social Security Reform 

budgetary pressures due to Social Security beginning around 2015 relative 

to baseline extended. This fiscal outlook under Model 2-0% is very similar 

to the fiscal outlook under GAO’s benefit reduction benchmark. 

• Under Model 2-100%, the government’s cash requirement (as a share of 

GDP) to fund the individual accounts and the reduced defined benefit 

would be about 20 percent higher initially than under both the baseline 

extended and tax increase benchmarks. This differential gradually 

narrows until the 2030s, after which less cash would be required under 

model 2-100%. By 2075, Model 2-100% would require about 40 percent less 

cash than the baseline extended and tax increase benchmarks. 

• Viewed from the perspective of the economy, total payments (Social 

Security defined benefits plus benefit from individual accounts) as a share 

of GDP would gradually fall under Model 2-100% relative to the baseline 

extended and tax increase benchmarks. In 2075, the share of the economy 

absorbed by payments to retirees from the Social Security system as a 

whole under Model 2-100% would be roughly 20 percent lower than the 

baseline extended or tax increase benchmark and roughly the same as 

under the benefit reduction benchmark. 

• With regard to national saving, Model 2 increases net national saving on a 

first order basis primarily due to the proposed benefit reductions. The 

individual account provision does not increase national saving on a first 

order basis; the redirection of the payroll taxes to finance the individual 

accounts reduces government saving by the same amount that the 

individual accounts increase private saving. 

Beyond these first order effects, the actual net effect of a proposal on 

national saving is difficult to estimate due to uncertainties in predicting 

changes in future spending and revenue policies of the government as well 

as changes in the saving behavior of private households and individuals. 

For example, the lower surpluses and higher deficits that result from 

redirecting payroll taxes to individual accounts could lead to changes in 

federal fiscal policy that would increase national saving. However, 

households may respond by reducing their other saving in response to the 

creation of individual accounts.9

Model 3 results are presented in Appendix I. Because the benefit 

reductions in Model 3 are smaller than in Model 2, long-term unified 

deficits are larger under Model 3. Model 3 requires an additional 

contribution equal to 1 percent of taxable payroll for those choosing 

individual accounts. Assuming universal account participation in both 

 9

No expert consensus exists on how Social Security reform proposals would affect the 

saving behavior of private households and businesses. 
Page 6 GAO-03-310 Social Security Reform 

models, Model 3 would result in a larger share of the economy being 

absorbed by total benefit payments to retirees—about the same share as 

would be the case under the baseline extended and tax increase 

benchmarks. 

The Commission’s proposals also illustrate the difficulty reform proposals 

face generally in balancing adequacy (level and certainty of benefits) and 

equity (rates of return on individual contributions) considerations. Each of 

the models protects benefits for current and near-term retirees and the 

shift to advance funding could improve intergenerational equity. However, 

under each of the models, some future retirees also could face potentially 

significant benefit reductions in comparison to either the tax increase or 

the benefit reduction benchmarks because primary insurance amount 

(PIA) formula factors that are reduced by real wage growth, uncertainty in 

rates of return earned on accounts, changes in benefit status over time, 

and annuity pricing. 

Our analysis of Model 2 shows that: 

• Median monthly benefits (the Social Security defined benefit plus the 

benefit from the individual account) for those choosing individual 

accounts are always higher, despite a benefit offset, than for those who do 

not choose the account, and this gap grows over time. In addition, median 

monthly benefits under universal participation in the accounts are also 

higher than the median benefits received under the benefit reduction 

benchmark. However, median monthly benefits received by those without 

accounts fall below those provided by the benefit reduction benchmark 

over time. 

• For the lowest quintile of beneficiaries, median monthly benefits with 

universal participation in the accounts tend to be higher than the benefits 

received under the benefit reduction benchmark, likely due to the 

enhanced benefit for full-time “minimum wage” workers. This pattern 

becomes more pronounced over time. 

• Regardless of whether an account is chosen, under Model 2 many people 

could receive monthly benefits that are higher than the benefit reduction 

benchmark. However, a minority could fare worse. Some people could 

also receive a benefit greater than under the tax increase benchmark 

although a majority could fare worse. Monthly benefits for those choosing 

individual accounts will be sensitive to the actual rates of return earned by 

those accounts. 

The cohort results for Model 3 are generally similar to Model 2. However, 

median monthly benefits for those choosing individual accounts are higher 

Balancing Adequacy 

and Equity 
Page 7 GAO-03-310 Social Security Reform 

than the benefit level under the tax increase benchmark for the 1970 and 

1985 cohorts. This result is likely because of Model 3’s feature of a 

mandatory extra 1 percent contribution into the individual accounts for 

those who choose to participate. Further results on Model 3 can be found 

in Appendix I. 

Each of the models would establish a governing board to administer the 

individual accounts, including the choice of available funds and providing 

financial information to individuals. While the Commission had the benefit 

of prior thinking on these issues, many implementation issues remain, 

particularly in ensuring the transparency of the new system and educating 

the public to avoid any gaps in expectations. For example, an education 

program would be necessary to explain the changes in the benefit 

structure, model features like the benefit offset and how accounts would 

be split in the event of divorce. Education and investor information is also 

important as the system expands and increases the range of investment 

selection. Questions about the harmonization of such features with state 

laws regarding divorce and annuities also remain an issue. 

The use of our criteria to evaluate approaches to Social Security reform 

highlights the trade-offs that exist between efforts to achieve sustainable 

solvency and to maintain adequate retirement income for current and 

future beneficiaries. These trade-offs can be described as differences in 

the extent and nature of the risks for individuals and the nation as a whole. 

For example, under certain individual account approaches, including 

those developed by the Commission, some financial risk is shifted to 

individuals and households to the extent that individual account income is 

expected to provide a major source of income in retirement. 

At the same time, the defined benefit under the current Social Security 

system is also uncertain. The primary risk is that a significant funding gap 

exists between currently scheduled and funded benefits which, although it 

will not occur for a number of years, is significant and will grow over time. 

Other risks stem from uncertainty in, for example, future levels of 

productivity growth, real wage growth, and demographics. Congress has 

revised Social Security many times in the past, and future Congresses 

could decide to revise benefits in ways that leave those affected little time 

to adjust. As Congress deliberates approaches to Social Security, the 

national debate also needs to include discussion of the various types of 

risk implicit in each approach and in the timing of reform. 

Implementing and 

Administering 

Reforms 

Concluding 

Observations 
Page 8 GAO-03-310 Social Security Reform 

Public education and information will be key to implementing any changes 

in Social Security and especially so if individuals must make choices that 

affect their future benefits. Since the Commission options were published, 

there has been limited explanatory debate. As Congress and the President 

consider actions to be taken, it will be important as well to consider how 

such actions can be clearly communicated to and understood by the 

American people. 

Finally, any Social Security reform proposal must also be looked at in the 

context of the nation’s overall long-range fiscal imbalances. As our longterm budget simulations show,10 difficult choices will be required of 

policymakers to reconcile a large and growing gap between projected 

revenues and spending resulting primarily from known demographic 

trends and rising health care costs. 

We provided SSA an opportunity to comment on the draft report. The 

agency provided us with written comments, which appear in Appendix II. 

SSA acknowledged the comprehensiveness of our analysis of the 

Commission’s proposals. The agency also concurs with our reform 

criterion of achieving sustainable solvency and with our report’s overall 

observations and conclusions. SSA’s comments and suggestions can be 

grouped into a few general categories. 

GAO Benchmarks and Their Relationship to Sustainable Solvency - The 

agency commends our use of multiple benchmarks with which to compare 

alternative proposals. However, they note that our definition of 

sustainable solvency differs from that used by SSA in assessing trust fund 

financial status. In addition, although they note that our benchmarks are 

solvent over the 75-year projection period commonly used by SSA’s Office 

of the Chief Actuary in its preparation of the annual trustees report, they 

do not achieve sustainable solvency11. SSA expresses a concern that unless 

carefully annotated, the comparisons made in our report could be 

misunderstood. Finally, SSA also suggests the use of several alternative 

 10See, for example, U.S. General Accounting Office, Budget Issues: Long-Term Fiscal 

Challenges, GAO-02-467T (Washington, D. C. : Feb, 27, 2002) and Social Security: LongTerm Financing Shortfall Drives Need for Reform, GAO-02-845T (Washington, D. C.: Jun. 

19, 2002). 

11In response to another agency suggestion, we have also clarified our definition of 

sustainable solvency in the report. 

Agency Comments 

and Our Evaluation 
Page 9 GAO-03-310 Social Security Reform 

benchmarks, of which one would provide additional revenue to pay for 

currently scheduled benefits. 

We agree with SSA that sustainable solvency is an important objective; 

indeed it is one of our key criteria with which we suggest that 

policymakers evaluate alternative reforms. SSA correctly points out that 

GAO’s benchmarks do not achieve sustainable solvency beyond the 75-

year period. We believe our standard is a more encompassing one. SSA’s 

definition relies on analyzing trends in annual balances and trust fund 

ratios near the end of the simulation period. Consequently the definition 

needs to be supplemented, for example, in cases where proposals use 

general revenue transfers or other unspecified sources of revenue that 

automatically rise and fall to maintain annual balance or a certain trust 

fund ratio. In addition, SSA’s definition does not directly consider the 

resources needed to fund individual accounts. Our standard includes other 

measures in an effort to gain a more complete perspective of a proposal’s 

likely effects on the program, the federal budget, and the economy. 

We share SSA’s emphasis on the importance of careful and complete 

annotation. The report explicitly addresses the issue of sustainable 

solvency and states that the comparison benchmarks used, while solvent 

over the 75-year projection period, are not solvent beyond that period. 

Given SSA’s concerns, we have revised our report to clarify our analyses, 

where appropriate, to minimize the potential for misinterpretation or 

misunderstanding. 

Regarding SSA’s suggestion about the use of alternative benchmarks, we 

already use a benchmark that provides additional revenue to pay currently 

scheduled benefits. Our other benchmark maintains current tax rates, 

phasing in benefit reductions over a 30-year period. In our view, the set of 

benchmarks used provide a fair and objective measuring stick with which 

to compare alternative proposals, particularly the many proposals that 

introduce reform elements over a number of years. Both of the 

benchmarks are explicitly fully funded and in their design we worked 

closely with Social Security’s Office of the Chief Actuary to calibrate them 

to ensure their solvency over the 75-year period. 

Additional Analysis – Many of SSA’s comments suggest additional or more 

detailed analyses of some of our findings. For example, SSA suggested 

additional analyses of the characteristics of those beneficiaries who fare 

better or worse under each of the Commission’s models, further 

distributional analyses on groups of beneficiaries who claim benefits at 

ages other than 65 and that we conduct analyses on rates of participation 
Page 10 GAO-03-310 Social Security Reform 

other than the polar cases of 0 percent and 100 percent individual account 

participation. The agency also suggested that substantial analysis on 

implementation and administration issues is necessary, given the 

complexity of administering the commission’s models. Although we tried 

to address most of the critical issues given our limited time and resources, 

we agree with SSA that many of their suggested analyses could provide 

additional useful insights in understanding the distributional implications 

of adopting the Commission’s proposals. 

Distributional Analysis - SSA expressed a number of concerns about the 

SSASIM-GEMINI simulation model that we use to conduct our 

distributional analysis of benefits. One concern addresses future cohorts’ 

benefit levels reported in our draft. In this regard, we were already 

reviewing the level of benefits received by the 1985 cohort and the highest 

quintile of that cohort with outside experts, and our subsequent analysis 

suggests findings that are more consistent with SSA’s observations: we 

have made these changes to the report. 

Some of SSA’s concerns also appear to result from confusion over the 

structure, design and limitations of the SSASIM-GEMINI model. We have 

included some additional documentation in the report that we believe will 

help both the layperson as well as a more technical audience understand 

the model more easily. We note that while ancillary benefits can be 

calculated through the model and are included in our analysis, we utilize 

the model to focus on the individual beneficiary and not the household as 

the unit of analysis. The model also includes marriage and divorce rates 

and their implication for earnings. These marriage and divorce rates and 

other key parameters are expressed by probability rules that drive the 

lifetime dynamics of the synthetic population. These rules are not 

heuristically generated but are validated through a comparison with data 

from the Social Security Administration and the Current Population 

Survey, among others. We also note that in certain of instances, for 

example in specifying the calculation of annuities as well as the 

specification of rates of return used in the modeling, we consulted with 

SSA’s Office of the Chief Actuary in an effort to reflect their projection 

methodology to extent that it was feasible. 

Measures of Debt - SSA notes that unfunded obligations may be 

considered a kind of implicit debt and should be considered in the 

analysis. In analyzing reform plans, however, the key fiscal and economic 

point is the ability of the government and society to afford the 

commitments when they come due. Our analysis addresses this key point 
Page 11 GAO-03-310 Social Security Reform 

by looking at the level and trends over 75 years in deficits, cash needs, and 

GDP consumed by the program. 

Technical Comments – SSA also provided technical and other clarifying 

comments about the minimum benefit provision, our characterization of 

stochastic simulation as well as other minor aspects of the report, which 

we incorporated as appropriate. 

We are sending copies of this report to the Honorable Larry E. Craig, 

Ranking Minority Member, Senate Special Committee on Aging, Senator 

Max S. Baucus, Chairman, Senate Committee on Finance, Senator Charles 

E. Grassley, Ranking Minority Member, Senate Committee on Finance, the 

Honorable William M. Thomas, Chairman, and the Honorable Charles B. 

Rangel, Ranking Minority Member, House Committee on Ways and Means, 

the Honorable E. Clay Shaw, Chairman, and the Honorable Bob Matsui, 

Ranking Minority Member, Subcommittee on Social Security, House 

Committee on Ways and Means, and the Honorable Jo Ann B. Barnhart, 

Commissioner, Social Security Administration. We will also make copies 

available to others on request. In addition, the report is available at no 

charge on GAO’s Web site at http://www.gao.gov. 

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

Barbara D. Bovbjerg, Director, Education, Workforce, and Income 

Security Issues, on (202) 512-7215, or Susan Irving, Director, Strategic 

Issues, on (202) 512-9142. 

David M. Walker 

Comptroller General 

of the United States 
Appendix I: Analysis of Reform Models 

Page 12 GAO-03-310 Social Security Reform 

Appendix I: Analysis of Reform Models 

Analysis of Reform Models 

Developed by the President’s

Commission to 

Strengthen Social Security

January 2003
Appendix I: Analysis of Reform Models 

Page 13 GAO-03-310 Social Security Reform 

Objectives

• Evaluation of reform models put forward by the President’s 

Commission to Strengthen Social Security.

• The evaluation uses the three basic criteria GAO has 

developed that provide policymakers with a framework for 

assessing reform plans:

– Financing Sustainable Solvency

– Balancing Adequacy and Equity in the Benefits Structure

– Implementing and Administering Reforms
Appendix I: Analysis of Reform Models 

Page 14 GAO-03-310 Social Security Reform 

Evaluating Social Security 

Reform Proposals

• Comprehensive proposals can be evaluated against three basic 

criteria.

• Reform proposals should be evaluated as packages that strike a 

balance among individual reform elements and important 

interactive effects.

• Some proposals will fare better or worse than other proposals 

under each criterion.

• Overall evaluation of each proposal depends on the weight 

individual policymakers place on each criterion.
Appendix I: Analysis of Reform Models 

Page 15 GAO-03-310 Social Security Reform 

• No changes to benefits for retirees or near-retirees.

• Dedication of entire Social Security surplus to Social Security.

• No increase in Social Security payroll taxes.

• No government investment of Social Security funds in the stock market.

• Preservation of disability and survivor components.

• Inclusion of individually controlled voluntary individual retirement accounts.

To develop reform plans that strengthen Social Security and increase its 

fiscal sustainability while meeting these principles:

The President’s Charge to the 

Commission to Strengthen Social Security
Appendix I: Analysis of Reform Models 

Page 16 GAO-03-310 Social Security Reform 

Overview of Commission Reform Models 

• The Commission developed three reform models, each of which 

represents a different approach to including a voluntary individual 

account component in Social Security. 

• Model 1 does not change the defined benefit and does not restore

solvency; Models 2 and 3 restore solvency through a combination 

of changes in the initial benefit calculation, general revenue 

transfers, and/or benefit offsets for those who choose to 

participate in the individual account option.

• Account contribution amounts, benefit offset in exchange for 

account participation, and calculation of an individual’s initial 

benefit differ among the three models. 

• All models share a common framework for administering 

accounts. 
Appendix I: Analysis of Reform Models 

Page 17 GAO-03-310 Social Security Reform 

• Voluntary individual accounts in exchange for reduction in Social 

Security defined portion of benefit. This benefit offset is linked to 

account contributions, not actual account balance.

• Governing Board to administer individual accounts structured 

along Thrift Savings Plan (TSP) or Federal Reserve Board 

model.

• Two-tier investment framework:

– Initially, balance must be invested through TSP-like system 

with several fund choices; later, if balance is above a 

threshold, account may be invested in a range of qualified 

private sector funds.

– Annual option to change allocation.

Individual Accounts: 

Framework Common to All Commission Models
Appendix I: Analysis of Reform Models 

Page 18 GAO-03-310 Social Security Reform 

• Account access:

– Account may be left to heirs if owner dies before retirement.

– No withdrawals before retirement (for disabled, before normal 

retirement age).1

– At retirement, conversion to phased withdrawals or annuity. 

Above a specified threshold, balance may be taken as a lump 

sum.

Individual Accounts: 

Framework Common to All Commission Models

1The Commission’s report stated that due to the complex and sensitive issues involved, time did not 

permit the development of specific recommendations for DI. Accordingly, the Commission 

recommended the President address DI through a separate policy process. 
Appendix I: Analysis of Reform Models 

Page 19 GAO-03-310 Social Security Reform 

• Annuities:

– For married workers, joint and two-thirds survivor annuity.1

– Several types of annuities to be made available, including 

inflation-indexed annuities and annuities permitting bequest 

if owner dies before a specified time. 

• Spousal protections:

– Account balance acquired during the marriage divided 

equally at divorce.

– Balances acquired before marriage not shared at time of 

divorce.

1Or alternative arrangement, agreed to by both spouses, consistent with the principle that 

total benefit income will be sufficient to keep both spouses above the poverty line in 

retirement.

Individual Accounts: 

Framework Common to All Commission Models
Appendix I: Analysis of Reform Models 

Page 20 GAO-03-310 Social Security Reform 

GAO’s Methodology

• Financing Sustainable Solvency

– GAO’s long-term economic model was used to help assess the potential 

fiscal and economic impacts of Social Security reform proposals.

– Estimates of reform models’ costs and income are those made by the 

Office of the Chief Actuary, Social Security Administration. 

• Balancing Adequacy and Equity

– The GEMINI model, a dynamic microsimulation model,1 was used to 

analyze the 1955, 1970, and 1985 birth cohorts to enable comparison of 

results over time as reform models are fully implemented.

• Implementing and Administering Reforms

– Qualitative analysis based on GAO’s issued and ongoing body of work on 

Social Security reform was used. 

1 GEMINI is useful for analyzing the lifetime implications of Social Security policies for a large sample of people born in the same year and can 

simulate different reform features, including individual accounts with an offset, for their effects on the level and distribution of benefits. GEMINI was 

used to analyze Models 2 and 3 both with 0 and 100 percent participation in the individual account features of the proposals.
Appendix I: Analysis of Reform Models 

Page 21 GAO-03-310 Social Security Reform 

Benchmarks

GAO’s analysis uses three benchmarks: 

• Benefit reduction maintains current payroll tax rates and assumes a 

gradual reduction in Social Security benefits beginning with those 

reaching age 62 in 2005 and continuing for the next 30 years. 

• Tax increase1 assumes that the combined employer-employee payroll 

tax rate is increased by 0.34 percent for DI and 1.56 percent for OASI 

beginning in 2002 in order to pay scheduled benefits. 

• Baseline extended is a fiscal policy path that assumes payment in full of 

all scheduled Social Security benefits throughout the 75-year period and 

no other changes in current policies. In this analysis, it uses the 2001 

Trustees intermediate economic assumptions, consistent with SSA 

scoring of reform models. 

1The benefit reduction and tax increase benchmarks were developed by GAO with technical input from SSA’s Office 

of the Chief Actuary. Both use the 2001 Trustees intermediate economic assumptions. Both restore 75-year 

actuarial balance to Social Security, but are not solvent beyond this period.
Appendix I: Analysis of Reform Models 

Page 22 GAO-03-310 Social Security Reform 

Benchmarks

• All three benchmarks are used in analyzing sustainable solvency.

From the perspective of sustainable solvency, the baseline extended 

differs from the tax increase benchmark. The tax increase 

benchmark assumes payroll tax financing of all scheduled benefits 

whereas the baseline extended benchmark assumes all scheduled 

benefits will be paid but does not specify any new financing.

• There is no difference between the tax increase and baseline 

extended benchmarks in analyzing benefit levels, since only the 

financing of benefits differs, not the actual benefit levels. Therefore 

only the benefit reduction and tax increase benchmarks are used in 

analyzing benefit adequacy. 

• Benchmarks are to be viewed as illustrative, polar cases or bounds 

for changes within the current system. Other benchmarks could be 

devised with different tax and/or benefit adjustments that would

perform the same function.
Appendix I: Analysis of Reform Models 

Page 23 GAO-03-310 Social Security Reform 

Scope

• Briefing focuses on Model 2, with results for Model 3 presented in 

the appendix.1

• The Commission’s models include a voluntary individual account 

option. In our analysis we looked at the two bounds of possible

outcomes—universal participation (100%) in the account option, 

or no participation (0%). In analyzing benefit levels, we refer to 

these outcomes as “with” and “without” accounts.

1Models 2 and 3 restore Social Security solvency; Model 1 does not and accordingly is not the focus of GAO’s 

analysis.
Appendix I: Analysis of Reform Models 

Page 24 GAO-03-310 Social Security Reform 

Model 2 

• Voluntary individual account contribution of 4 percent of taxable payroll up to 

$1,000 annually in exchange for benefit reduction.1

• For all those age 62 in 2009 or younger, defined benefits reduced from currently 

scheduled by indexing initial benefit to prices rather than wages. 

• Enhanced spousal survival benefit beginning in 2009.

– Increase in widow(er) benefit up to 75 percent of combined spousal benefit 

(up to average benefit levels).

• A new enhanced benefit for full-time “minimum-wage” workers who work more 

than 20 years.2

– Accelerated growth in initial benefits from 2009 to 2018. 

– By 2018, a minimum wage worker with 30 years of program coverage would 

receive an inflation-indexed benefit equal to 120 percent of poverty level. 

• To the extent that there is participation in individual accounts, financing through 

general revenue transfers will be needed. If participation were universal, 

transfers would be needed for about three decades.

1Maximum contribution amount indexed annually to wage growth. Benefit reduction based on 

amount of account contributions compounded at a real interest rate of 2 percent. 

2The minimum wage is the current Fair Labor Standards Act minimum of $5.15 an hour but is 

assumed to grow with the Social Security average wage index.
Appendix I: Analysis of Reform Models 

Page 25 GAO-03-310 Social Security Reform 

Sustainable Solvency

• While achieving solvency for the OASDI Trust Funds is important, the concept of 

sustainable solvency goes beyond 75-year actuarial balance.

• Sustainable solvency includes reforming the Social Security program in such a 

way as to avoid the need to periodically revisit actuarial imbalances of the 

OASDI Trust Funds. For example, a rising or level trust fund ratio at the end of 

the 75-year period can be an indicator of future program solvency. 

• However, trust fund ratios can give an incomplete picture. They do not provide 

information about the effect of program spending on the federal budget or the 

economy. In addition, trust fund ratios can be affected by timing of tax and 

benefit adjustments and use of general revenues. 

• Sustainable solvency also includes assessing the effects of proposed program 

changes on the federal budget and on the economy.

• Reforms that reduce pressures on the federal budget and reduce the size of the 

economy that will be absorbed in the future by the Social Security system can 

lead to sustainable solvency. 
Appendix I: Analysis of Reform Models 

Page 26 GAO-03-310 Social Security Reform 

Financing Sustainable Solvency

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?

This criterion evaluates the extent to which the proposal achieves sustainable 

solvency, including how the proposal would affect the economy and the 

federal budget.
Appendix I: Analysis of Reform Models 

Page 27 GAO-03-310 Social Security Reform 

Model 2 

Financing Sustainable Solvency

Figure 1

• Compared to the baseline extended, Model 2 with universal 

participation (Model 2 - 100%) in the individual accounts (IA) option 

results in larger unified deficits as a share of GDP through the 2040s, 

thereafter unified deficits are progressively lower. 

• Model 2 with no participation (Model 2 - 0%) in IAs results in higher 

unified surpluses and lower unified deficits beginning around 2015 

through the end of the simulation period compared to baseline 

extended. 

• Greater participation in IAs results in lower surpluses/higher deficits 

over the simulation period. 

• Throughout the simulation period, unified surpluses are considerably 

lower and unified deficits are considerably higher under Model 2-100% 

than under the tax increase benchmark and, to a lesser extent, the 

benefit reduction benchmark.

• Through the 2060s, the fiscal outlook under Model 2-0% is quite similar 

to the outlook under the benefit reduction benchmark but compared to 

the tax increase benchmark, unified surpluses are lower and unified 

deficits are higher over the same time frame. 
Appendix I: Analysis of Reform Models 

Page 28 GAO-03-310 Social Security Reform 

-20

-15

-10

-5

0

5

2000 2010 2020 2030 2040 2050 2060 2075

Fiscal year

Percent of GDP

Baseline extended

Benefit reduction

Model 2 - 0%

Model 2 - 100%

Tax increase

Figure 1: Model 2

Unified Surpluses and Deficits as a Share of GDP

Source: GAO analysis.
Appendix I: Analysis of Reform Models 

Page 29 GAO-03-310 Social Security Reform 

Model 2 

Financing Sustainable Solvency

Figure 2

• Compared to the baseline extended, net debt held by the public as a 

share of GDP is higher under Model 2-100% until about 2060; 

thereafter, debt held by the public is lower.

• Under Model 2-0%, net debt held by the public is lower beginning about 

2020 through the end of the simulation period. 

• Greater participation in the IAs results in higher net debt held by the 

public throughout the simulation period.

• Throughout the simulation period, net debt held by the public under 

Model 2-100% is considerably higher than the tax increase benchmark 

and, to a lesser extent, the benefit reduction benchmark. 

• Net debt held by the public under Model 2-0% is slightly higher than 

under the benefit reduction benchmark and much higher than under the 

tax increase benchmark until the end of the simulation period.
Appendix I: Analysis of Reform Models 

Page 30 GAO-03-310 Social Security Reform 

-50

0

50

100

150

200

2000 2010 2020 2030 2040 2050 2060 2075

Fiscal year

Percent of GDP

Baseline extended

Benefit reduction

Model 2 - 0%

Model 2 - 100%

Tax increase

Figure 2: Model 2

Debt Held by the Public as a Share of GDP

Source: GAO analysis.
Appendix I: Analysis of Reform Models 

Page 31 GAO-03-310 Social Security Reform 

Model 2 

Financing Sustainable Solvency

Figure 3:

• The government’s cash requirement includes the amount of cash required to pay defined 

benefits and redirect payroll taxes to individual accounts. Under Model 2-100%, the 

government’s cash requirement would be greater than under both the baseline extended 

and tax increase benchmarks in the near term—by about 20 percent in 2010. Beginning in 

the 2030s, less cash would be required for Model 2-100% than the baseline extended and 

tax increase benchmarks. In 2075, Model 2-100% would require about 40 percent less cash 

than the baseline extended and tax increase benchmarks. 

• The cash requirement for Model 2-0% would be the same or less than the baseline 

extended/tax increase benchmarks throughout the period. In 2075, Model 2-0% would 

require less cash—nearly 40 percent—than both the baseline extended and tax increase 

benchmarks.

• The government’s cash requirement for Model 2 would be greater than the benefit reduction 

benchmark until the 2050s. In 2075, Model 2 cash requirements would be about 20 percent 

lower than the benefit reduction benchmark. 

• In the near term, the greater the individual account participation, the more cash required. 

Over the long term, however, greater individual account participation would reduce the 

government’s cash requirements. 
Appendix I: Analysis of Reform Models 

Page 32 GAO-03-310 Social Security Reform 

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075

Calendar year

Percent of GDP

Baseline extended/Tax increase

Benefit reduction

Model 2, 0 percent

Model 2, 100 percent

Figure 3: Model 2

Government Cash Requirements

Source: GAO analysis of data from the Office of the Chief Actuary, SSA. Benefit amounts shown for the baseline extended and tax 

increase benchmarks are scheduled benefits as estimated by the actuaries. All estimates are based on the Trustees' 2001 intermediate 

assumptions.

Note: Includes cash for defined benefits paid out under the traditional system and redirect of payroll taxes to individual accounts.
Appendix I: Analysis of Reform Models 

Page 33 GAO-03-310 Social Security Reform 

Model 2 

Financing Sustainable Solvency

Figure 4:

• In 2015, total benefit payments (Social Security benefits plus individual account 

disbursements) as a share of GDP under Model 2 would be about the same as 

under the baseline extended or tax increase benchmark and slightly higher than 

the benefit reduction benchmark.

• In 2030, total benefit payments as a share of GDP under model 2 would be 

somewhat (6-8 percent) lower than under the baseline extended and tax 

increase benchmark but somewhat higher (4-5 percent) compared with the 

benefit reduction benchmark.

• In 2075, total benefit payments as a share of GDP under Model 2-100% would 

be about one fifth lower than under the baseline extended or tax increase 

benchmark but somewhat (4 percent) higher than under the benefit reduction 

benchmark. The difference in total benefit payments between Model 2-100% 

and Model 2-0% becomes pronounced over time, with payments under Model 2-

0% more than a third lower than the baseline extended or tax increase 

benchmark by 2075. 
Appendix I: Analysis of Reform Models 

Page 34 GAO-03-310 Social Security Reform 

0%

1%

2%

3%

4%

5%

6%

7%

8%

2000 2015 2030 2050 2075

Calendar year

Percent of GDP

Actual Benefit reduction

Model 2 - 0% Model 2 - 100%

Baseline extended/Tax increase

Figure 4: Model 2

Combined Social Security and Individual 

Account Disbursements as a Share of GDP 

Source: GAO analysis of data from the Office of the Chief Actuary, SSA. Benefit amounts shown for baseline extended and tax increase 

benchmarks are scheduled benefits as estimated by the actuaries. All estimates are based on the Trustees' 2001 intermediate 

assumptions.
Appendix I: Analysis of Reform Models 

Page 35 GAO-03-310 Social Security Reform 

Model 2 

Financing Sustainable Solvency

• Under Model 2, national saving would increase primarily due to the 

improved fiscal position of the government resulting from the proposed 

benefit reductions. The redirection of payroll taxes under the IA option, 

would increase private saving and decrease government saving with no 

net effect on national saving.1

• Model 2 restores 75-year actuarial balance with either no participation or 

universal participation in the IA option. The trust fund ratio would be rising 

at the end of the 75-year period under both Model 2-0% and Model 2-

100%. 

• Model 2-0% requires no additional revenue. IAs are financed as a 

redirection of payroll taxes. General revenue transfers would be used to 

keep the OASDI trust funds solvent under Model 2-100%.

• Model 2 does not create any new contingent liabilities. Individuals bear 

the risk of IA investment performance.

• Model 2 contains no new “safety valves” to control future program growth.

1Analysis limited to first order effects on saving. Effects on saving behavior in response to specific 

reform provisions are not considered given the lack of expert consensus. 
Appendix I: Analysis of Reform Models 

Page 36 GAO-03-310 Social Security Reform 

Balancing Adequacy and Equity

To what extent does the proposal:

• Change scheduled 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?

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).
Appendix I: Analysis of Reform Models 

Page 37 GAO-03-310 Social Security Reform 

Balancing Adequacy and Equity: 

GAO Analysis

• We evaluate the adequacy and equity 

criterion for Model 2 in comparison with GAO 

benchmarks through analyses of

– Median monthly benefits for the 1955, 1970 and 

1985 birth cohorts.

– Median monthly benefits by benefit quintile.

– Distribution of benefits within each cohort.
Appendix I: Analysis of Reform Models 

Page 38 GAO-03-310 Social Security Reform 

Balancing Adequacy and EquitySpecific Provisions Affecting Benefits 

Model 2

• Maintains current benefit structure for current and near retirees.

• Reduces OASDI defined benefits for new retirees, survivors, dependents, and 

disabled workers starting in 2009 by altering the benefit formula.

– Slows growth in benefits by reducing PIA formula factors by real wage 

growth. This essentially increases benefits levels across generations 

according to price growth (absolute terms) rather than wage growth (relative 

terms). 

– For those who participate in the individual accounts, there is a further offset 

based on the hypothetical account accumulation, where contributions 

accrue at a real rate of 2 percent.

• Increases benefits for certain widow(er)s and low-income earners.

• PIA formula factor reductions and the benefit offset disproportionately 

decreases replacement rates. However, minimum benefit guarantees increase 

replacement rates for workers who qualify. Therefore, overall progressivity of 

the system is unclear given these provisions and the uncertainty of market 

returns, the magnitude of participation, and the characteristics of future 

participants.
Appendix I: Analysis of Reform Models 

Page 39 GAO-03-310 Social Security Reform 

Overview of Model 2 Cohort Results 

• Across cohorts, median monthly benefits are higher 

than the benefit reduction benchmark for persons who 

participate in an individual account (see Figure 6).

• However, benefit levels received without accounts fall 

below the benefit reduction benchmark over time. This 

is due to the timing and structure of the benefit 

reductions under both the without accounts scenario 

and the benefit reduction benchmark (see Figure 6). 

• The gap in benefits between the without accounts 

scenario and the tax increase benchmark and with 

accounts scenario grows across cohorts (see Figure 

6).
Appendix I: Analysis of Reform Models 

Page 40 GAO-03-310 Social Security Reform 

Figure 6: Model 2 Cohort Analysis – Median Monthly 

Benefits by Cohort

0

500

1000

1500

2000

2500

3000

1955 1970 1985

Constant 2001 Dollars

Benefit Reduction Benchmark Model 2 without Accounts Model 2 with Accounts Tax Increase Benchmark

Source: GAO’s analysis using the GEMINI model.

Note: Median monthly benefits at age 67 for all beneficiaries. Estimates based on 1955, 1970, and 1985 birth cohorts assuming 

retired workers retire at age 65, uncertain asset returns and inflation, and full annuitization of account balance at retirement age. 

“With accounts” implies all individuals in the cohort participate in the individual accounts. 
Appendix I: Analysis of Reform Models 

Page 41 GAO-03-310 Social Security Reform 

Overview of Model 2 Quintile Analysis: Lowest and 

Highest Quintiles by Cohort

• Median monthly benefits for the 1955 and 1970 cohorts are 

maintained above the benefit reduction benchmark for the 

lowest quintile regardless of participation in individual accounts, 

likely due to the enhanced benefit for full-time “minimum wage”

workers (see Figure 7).

• However, participation in the individual accounts may provide a 

benefit level even higher than the enhanced benefit for the 

lowest quintile since, over time, fewer workers will receive this 

enhanced benefit as wages are assumed to outpace inflation in 

the future.

• Comparing median monthly benefits across cohorts in the lowest 

and highest quintiles indicates that the enhanced benefit for fulltime “minimum wage” workers and individual accounts maintain 

benefits above the tax increase benchmark only for those in the 

lowest quintile in the 1955 and 1985 birth cohorts (see Figures 7 

and 8).
Appendix I: Analysis of Reform Models 

Page 42 GAO-03-310 Social Security Reform 

Figure 7: Model 2 Quintile Analysis – Median Monthly 

Benefits by Cohort for the Lowest Quintile

0

500

1000

1500

2000

2500

3000

1955 1970 1985

Constant 2001 Dollars

Benefit Reduction Benchmark Model 2 without Accounts Model 2 with Accounts Tax Increase Benchmark

Source: GAO’s analysis using the GEMINI model.

Note: Estimates based on the 1955, 1970, and 1985 birth cohorts assuming retired workers retire at age 65, uncertain asset returns and 

inflation, and full annuitization of account balance at retirement age. “With accounts” implies all individuals in the cohort participate 

in the individual accounts. Quintiles are based on the distribution of benefits at age 67 under tax increase benchmark. 
Appendix I: Analysis of Reform Models 

Page 43 GAO-03-310 Social Security Reform 

Figure 8: Model 2 Quintile Analysis – Median Monthly 

Benefits by Cohort for the Highest Quintile

0

500

1000

1500

2000

2500

3000

1955 1970 1985

Constant 2001 Dollars

Benefit Reduction Benchmark Mode l 2 without Accounts M odel 2 with Accounts Tax Increase Benchmark

Source: GAO’s analysis using the GEMINI model.

Note: Estimates based on the 1955, 1970, and 1985 birth cohorts assuming retired workers retire at age 65, uncertain asset returns and 

inflation, and full annuitization of account balance at retirement age. “With accounts” implies all individuals in the cohort participate 

in the individual accounts. Quintiles are based on the distribution of benefits at age 67 under tax increase benchmark. 
Appendix I: Analysis of Reform Models 

Page 44 GAO-03-310 Social Security Reform 

Balancing Adequacy and Equity: Effects of Models 

on Total Distribution of Initial Benefits

• Each model has individuals who “gain” and “lose”. Those who gain are either

– those who participated in a individual account and received a benefit above 

the reduced defined benefit, or

– those whose change in benefits exceed the relevant benchmarks.

• Other factors which may have an effect on benefit outcomes:

– Effect of minimum benefit provision

– Uncertainty (variation) in rates of return earned on accounts1

– Changes in benefit status over time2

– Annuity pricing3

• How people fare under Model 2 is a function of their

– cohort

– quintile

– choice of participation in private account

– risk and rate of return on individual account, and

– benchmark comparison.

1Account yields must be greater than the level specified for the benefit offset to generate larger benefits.

2OASDI eligible beneficiaries such as those who become disabled before retirement age, divorced spouses, or a disabled dependent may be 

especially affected since account availability may be hindered and length of time spent contributing to the account may be reduced.

3Upon annuitization, the price of the annuity, which fluctuates with interest rates, would reduce the monthly benefit amount received from the 

individual account. In general, the higher the annuity price the greater the benefit reduction.
Appendix I: Analysis of Reform Models 

Page 45 GAO-03-310 Social Security Reform 

Model 2 Distributional Analysis: Distributional Effects 

Comparing 100 Percent Participation Against Zero 

Percent Participation

• The risk of participating decreases across cohorts 

when comparing scenarios with accounts and without 

accounts, primarily because of the lengthening of the 

investment horizon. For example, 71 percent of the 

1955 cohort would gain by choosing an individual 

account, as did 83 and 90 percent of the 1970 and 

1985 cohorts (see Figure 9).

• Of those who gained, the median gain was $32 per 

month in 2001 dollars for the 1955 cohort, while the 

median loss was about $11 per month among those 

who did not gain. For the 1970 and 1985 cohorts, the 

median gain was $147 and $397 per month in 2001 

dollars, while the median loss was $33 and $57, 

respectively.
Appendix I: Analysis of Reform Models 

Page 46 GAO-03-310 Social Security Reform 

Figure 9: Model 2 Distributional Analysis – Performance 

of Individual Accounts Under 100 Percent Participation 

Scenario by Cohort

Source: GAO’s analysis using the GEMINI model.

Note: For example, in 1955 if 100 percent of beneficiaries participated in individual accounts, 71 percent did better by choosing the accounts 

and 29 percent would have done better by not choosing the accounts. Estimates based on 1955, 1970, and 1985 birth cohorts assuming retired 

workers retire at age 65, full annuitization of account balance at retirement age. Uncertain asset returns and inflation are also assumed, where 

the mean nominal rates of return used for the individual accounts are 6.3% for Treasuries, 6.8% for corporate bonds, and 10% for equities.

71

83

-29

-17

90

-10

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Percentage of Beneficiaries

Percent of Beneficiaries Who Did Worse by Choosing an Individual Account

Percent of Beneficiaries Who Did Better by Choosing an Individual Account

1955 1970 1985
Appendix I: Analysis of Reform Models 

Page 47 GAO-03-310 Social Security Reform 

Model 2 Distributional Analysis: Distributional 

Effects of Model 2 in Comparison with Benefit 

Reduction Benchmark

• Regardless of whether an account is chosen, a number of 

people fare better when compared to the benefit reduction 

benchmark. This is primarily because the benefit reduction 

benchmark’s PIA formula reductions are initially deeper than 

Model 2 PIA reductions (see Figure 10).

• A majority of persons with accounts fare better than the benefit

reduction benchmark and this majority decreases from 87 to 80 

percent across cohorts. In contrast, the number of people 

without accounts who fare better than the benefit reduction 

benchmark declines from 87 to 15 percent across cohorts. 

• A minority of persons (13 to 20 percent) with accounts fare 

worse than the benefit reduction benchmark, as do 13 to 85 

percent of persons without individual accounts (see figure 10).
Appendix I: Analysis of Reform Models 

Page 48 GAO-03-310 Social Security Reform 

Figure 10: Model 2 Distributional Analysis – Distribution 

of Benefits by Cohort and Account Participation 

Compared to the Benefit Reduction Benchmark

Source: GAO’s analysis using the GEMINI model.

Note: Monthly benefit level at age 67 is compared to the benefit level under the benchmark to determine if individuals are above

or below the benchmark. Estimates based on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at age 65, full 

annuitization of account balance at retirement age. Uncertain asset returns and inflation are also assumed, where the mean nominal 

rates of return used for the individual accounts are 6.3% for Treasuries, 6.8% for corporate bonds, and 10% for equities. “With

accounts” implies all individuals in the cohort participate in the individual accounts.

86 87 80 87

62

15

-38

-13 -20 -14 -13

-85

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1955 1970 1985 1955 1970 1985

Percent of All Benficiaries Below or Above the Benchmark

With Individual Accounts Without Individual Accounts
Appendix I: Analysis of Reform Models 

Page 49 GAO-03-310 Social Security Reform 

Model 2 Distributional Analysis: Distributional Effects 

of Model 2 in Comparison with Tax Increase Benchmark

• Across cohorts:

– A number of people with accounts fare better than the tax 

increase benchmark and this number increases (19 to 40 

percent) across cohorts (see Figure 11).

– A minority of people without accounts fare better than the tax 

increase benchmark and this minority declines over time (9 

to 1 percent).
Appendix I: Analysis of Reform Models 

Page 50 GAO-03-310 Social Security Reform 

Figure 11: Model 2 Distributional Analysis – Distribution 

of Benefits by Cohort and Account Participation 

Compared to the Tax Increase Benchmark

Source: GAO’s analysis using the GEMINI model.

Note: Monthly benefit level at age 67 is compared to the benefit level under the benchmark to determine if individuals are above

or below the benchmark. Estimates based on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at age 65, full 

annuitization of account balance at retirement age. Uncertain asset returns and inflation are also assumed, where the mean 

nominal rates of return used for the individual accounts are 6.3% for Treasuries, 6.8% for corporate bonds, and 10% for equities. 

“With accounts” implies all individuals in the cohort participate in the individual accounts.

19

28

40

9 5 1

-81

-72

-60

-91 -95 -99

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

1955 1970 1985 1955 1970 1985

Percent of All Benficiaries with Benefits Below or Above the Benchmark

With Individual Accounts Without Individual Accounts
Appendix I: Analysis of Reform Models 

Page 51 GAO-03-310 Social Security Reform 

Model 2 Sensitivity Analysis, Varying the Real Rate 

of Return – Account Participation vs. Benchmarks 

by Cohort

• Although varying the rates of return does not alter the findings

substantially for older cohorts, the effects of varying the real rate 

of return by plus or minus 1 percent increases over time.

– Compared to the benefit reduction benchmark, the 1955 cohort has

a ±2% change in its distribution from a ±1% change in the real rate 

of return, whereas the 1985 cohort has about a ±11% change in its 

distribution (see Figure 12).

– Compared to the tax increase benchmark, the 1955 cohort has 

approximately a ±3% change in its distribution from a ±1% change

in the real rate of return, whereas the 1985 cohort has about a ±15% 

change in its distribution (see Figure 13).
Appendix I: Analysis of Reform Models 

Page 52 GAO-03-310 Social Security Reform 

Figure 12: Model 2 Sensitivity Analysis - Distribution of Benefits 

by Cohort Compared to Benefit Reduction Benchmark, Varying 

Real Rates of Return by Plus 1 and Minus 1 Percent

Source: GAO’s analysis using the GEMINI model.

Note: Monthly benefit level at age 67 is compared to the benefit level under the benchmark to determine if individuals are above or 

below the benchmark. Estimates based on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at age 65, full 

annuitization of account balance at retirement age. Uncertain asset returns and inflation are also assumed, where the mean nominal 

rates of return used for the individual accounts are 6.3% for Treasuries, 6.8% for corporate bonds, and 10% for equities.

84 86 88 81 87 91

68

80 89

-32

-19 -16 -11 -20

-9 -14 -12 -13

-6 0%

-4 0%

-2 0%

0%

2 0%

4 0%

6 0%

8 0%

10 0%

Percent of All Beneficiaries Above or Below the Benchmark

1955 Birth Cohort 1970 Birth Cohort 1985 Birth Cohort

-1 +1 -1 +1 -1 +1
Appendix I: Analysis of Reform Models 

Page 53 GAO-03-310 Social Security Reform 

Figure 13: Model 2 Sensitivity Analysis - Distribution of 

Benefits by Cohort Compared to Tax Increase Benchmark, 

Varying Real Rates of Return by Plus 1 and Minus 1 Percent

Source: GAO’s analysis using the GEMINI model.

Note: Monthly benefit level at age 67 is compared to the benefit level under the benchmark to determine if individuals are above

or below the benchmark. Estimates based on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at age 65, full 

annuitization of account balance at retirement age. Uncertain asset returns and inflation are also assumed, where the mean 

nominal rates of return used for the individual accounts are 6.3% for Treasuries, 6.8% for corporate bonds, and 10% for equities.

17 19 22 20 28 37

26

40

55

-81 -78 -72 -63 -60

-45

-83 -80 -74

-100 %

-80 %

-60 %

-40 %

-20 %

0 %

20 %

40 %

60 %

Percent of All Beneficiaries Above or Below the Benchmark

1955 Birth Cohort 1970 Birth Cohort 1985 Birth Cohort -1 -1 +1 +1 +1 -1
Appendix I: Analysis of Reform Models 

Page 54 GAO-03-310 Social Security Reform 

Overview of Model 2 Disabled Worker Quintile Analysis –

Lowest and Highest Quintile by Cohort

• Median monthly benefits are maintained above the benefit reduction 

benchmark for the lowest quintile regardless of participation in individual 

accounts, likely due to the enhanced benefit for full-time “minimum wage”

workers (see Figure 14).

– This enhanced benefit could apply to low-earning disabled workers who 

work most of their career prior to becoming disabled. In our sample the 

average age of disability onset is 55.

• Participation in the individual accounts is also important for disabled 

workers, especially those in the later cohorts and in the upper quintiles (see 

Figures 14 and 15). However, the earlier a disabled worker becomes 

disabled the fewer years they contribute to their account and the smaller is 

their account balance.

• Since disabled workers do not have access to their accounts until 

conversion to retired worker benefits at the normal retirement age (NRA), 

benefit levels before conversion would be in line with benefit levels for those 

without individual accounts.

• Benefit levels for disabled workers may be higher than those of retired 

workers since disabled workers are entitled to benefits at earlier ages, thus 

the reductions in their PIA factors would be smaller. This may create an 

incentive for older workers to apply for disability benefits.
Appendix I: Analysis of Reform Models 

Page 55 GAO-03-310 Social Security Reform 

Figure 14: Model 2 Quintile Analysis – Median 

Monthly Benefits by Cohort for Disabled Workers in 

the Lowest Quintile

0

500

1000

1500

2000

2500

3000

1955 1970 1985

Constant 2001 Dollars

Benefit Reduction Benchmark Mode l 2 without Accounts M odel 2 with Accounts Tax Increase Benchmark

Source: GAO’s analysis using the GEMINI model.

Note: Median monthly benefits at age 67 for disabled workers. Estimates based on 1955, 1970, and 1985 birth cohorts assuming 

uncertain asset returns and inflation, and full annuitization of account balance at retirement age. “With accounts” implies all 

individuals in the cohort participate in the individual accounts. Quintiles are based on the distribution of benefits at age 67 under tax 

increase benchmark.
Appendix I: Analysis of Reform Models 

Page 56 GAO-03-310 Social Security Reform 

Figure 15: Model 2 Quintile Analysis - Median Monthly 

Benefits by Cohort for Disabled Workers in the 

Highest Quintile

0

500

1000

1500

2000

2500

3000

1955 1970 1985

Constant 2001 Dollars

Benefit Reduction Benchmark Mode l 2 without Accounts M odel 2 with Accounts Tax Increase Benchmark

Source: GAO’s analysis using the GEMINI model.

Note: Median monthly benefits at age 67 for disabled workers. Estimates based on 1955, 1970, and 1985 birth cohorts assuming 

uncertain asset returns and inflation, and full annuitization of account balance at retirement age. “With accounts” implies all 

individuals in the cohort participate in the individual accounts. Quintiles are based on the distribution of benefits at age 67 under tax 

increase benchmark.
Appendix I: Analysis of Reform Models 

Page 57 GAO-03-310 Social Security Reform 

Balancing Adequacy and Equity-Overall Equity

Model 2

• Provides workers some investment choice and control, subject to 

certain limitations. This might enable individuals to earn a higher 

rate of return on their contributions with an increased measure of 

risk, primarily that the return expected may not be realized. 

• May improve intergenerational equity through the move to 

advanced funding of Social Security and the inheritance feature 

of individual accounts.

• Make determining the rate of return difficult as the link between 

contributions and benefits becomes unclear due to general 

revenue transfers. Thus, we did not quantitatively assess the 

equity effects of the models. 
Appendix I: Analysis of Reform Models 

Page 58 GAO-03-310 Social Security Reform 

Implementing and Administering 

Reforms

To what extent does the 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 expectation gaps?

• Limit the potential for politically motivated investing?

This criterion evaluates how readily such changes could be 

implemented, administered, and explained to the public.
Appendix I: Analysis of Reform Models 

Page 59 GAO-03-310 Social Security Reform 

Implementing and Administering Reforms

• Funding for the transition from a pay-as-you-go system to a partially 

funded system would be handled by transfers from the General Fund of 

the Treasury and could be repaid when the trust funds experience cash 

flow surpluses.

• An education program will be necessary to explain the changes in the 

benefit structure and to avoid expectation gaps.

– Benefit offset feature, financing structure of the system may be

difficult to explain, which increases the importance of an education 

program.

• An education program will also be necessary to inform OASDI eligible 

workers on making sound investment decisions regarding 

diversification, risk, and participation.

• The Commission did not explicitly address the costs of an education 

program.

• It is unclear how the Commission’s proposed account splitting at

divorce would fit into divorce law.
Appendix I: Analysis of Reform Models 

Page 60 GAO-03-310 Social Security Reform 

Implementing and Administering Reforms

• The proposal establishes a Governing Board to administer 

the individual accounts, which is intended to limit the 

potential for politically motivated investing. The board’s 

duties include the choice of available funds and providing 

financial information to individuals.

• The design of the voluntary individual account feature places 

an additional administrative burden on the SSA. Specifically, 

the hypothetical account, benefit offset, inheritance feature, 

and account splitting at divorce would create additional 

responsibilities for SSA. 

• There is not enough information to estimate administrative 

costs. Such costs are affected by the level of participation in 

the individual accounts. However, the Commission believes 

that individual accounts can be administered at a low cost 

since they envision the system being structured similar to the 

TSP.

• There is not enough information to address how annuities 

and annuity pricing will be handled; therefore, we used the 

same assumptions as the SSA Actuaries and did not 

quantitatively analyze their effect on benefit levels. 
Appendix I: Analysis of Reform Models 

Page 61 GAO-03-310 Social Security Reform 

Appendix I:

Analysis of Model 3 and 

Methodology
Appendix I: Analysis of Reform Models 

Page 62 GAO-03-310 Social Security Reform 

Financing Sustainable Solvency 

Interpreting Long-term Simulations 

• Long-term simulations provide illustrations--not precise forecasts--of the 

relative fiscal and economic outcomes associated with alternative policy 

paths.

• Long-term simulations are useful for comparing the potential outcomes of 

alternative policies within a common economic framework over the long term. 

– Recognizing the inherent uncertainties of long-term simulations, we have 

generally chosen conservative assumptions, such as holding interest 

rates and total factor productivity growth constant. Variations in these 

assumptions generally would not affect the relative outcomes of 

alternative policies.

– The model simulates the interrelationships between the budget and the 

economy over the long term and does not reflect their interaction during 

short-term business cycles.

• Long-term simulations are not predictions of what will happen in the future. 

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.
Appendix I: Analysis of Reform Models 

Page 63 GAO-03-310 Social Security Reform 

Financing Sustainable Solvency 

Social Security Reform Proposals in the Model

• Reform proposal cost and income estimates are from SSA’s Office of 

the Chief Actuary.

– For each proposal, the OASDI cost estimate reflects all proposed

reforms affecting benefits. These include changes in the index used 

to adjust initial benefit levels, benefit reductions meant to offset 

individual accounts, and other proposed changes.

– For each proposal, the OASDI income estimate reflects such 

elements as transfers from the general fund to the trust funds and 

amounts redirected from the payroll tax used to establish individual 

accounts. 
Appendix I: Analysis of Reform Models 

Page 64 GAO-03-310 Social Security Reform 

Fiscal Model Assumption Summary

Model inputs Assumptions 

Social Security spending (OASDI) 2001 Social Security Trustees’ intermediate projections 

Medicare spending (HI and SMI) 2001 Medicare Trustees’ intermediate assumption that per enrollee 

Medicare spending grows with GDP per capita plus 1 percentage point 

Medicaid spending CBO’s July 2002 long-term assumption that per enrollee Medicaid 

spending grows with GDP per capita plus 1 percentage point 

Other mandatory spending CBO’s August 2002 baseline through 2012; thereafter increases at the 

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

Discretionary spending CBO’s August 2002 baseline through 2012, adjusted for the 2001 

Social Security Trustees’ inflation assumptions; thereafter increases at 

the rate of economic growth 

Revenue CBO’s August 2002 baseline through 2012; thereafter remains 

constant at 20.5 percent of GDP (CBO’s projection in 2012) 

Nonfederal saving (percent of GDP): gross saving 

of the private sector and state and local government 

sector 

Increases gradually over the first 10 years to 17.5 percent of GDP (the 

average nonfederal saving rate from 1992-2001) 

Net foreign investment (percent of GDP) Increases (or decreases) from 2002 share of GDP by one-third of any 

increase (or decrease) in gross national saving through 2012; 

thereafter increases (or decreases) from 2012 nominal dollar level by 

one-third of any increase (or decrease) in gross national saving 

Labor: growth in hours worked 2001 Social Security Trustees’ intermediate projections 

Total factor productivity growth Consistent with labor productivity growth in 2001 Social Security 

Trustees’ intermediate projections 

Inflation (GDP price index and CPI) 2001 Social Security Trustees’ intermediate projections 

Interest rate (average on the national debt) CBO’s August 2002 implied real average interest rate through 2011 

adjusted for the 2001 Social Security Trustees’ intermediate inflation 

assumptions; 6.3% thereafter 
Appendix I: Analysis of Reform Models 

Page 65 GAO-03-310 Social Security Reform 

Balancing Adequacy and Equity - Benchmarks

• Initial benefits from both models are compared with several 

benchmarks1:

– The tax increase (maintain benefits) benchmark – increases the 

payroll tax once and immediately by the amount of the OASDI 

actuarial deficit as a percent of payroll so that benefits received 

under the current system can continue to be paid throughout the 

projection period. This spreads the tax burden evenly across 

generations. This can also be accomplished by general revenue 

transfers. For our analysis, we assumed that this would be 

implemented as a tax increase to maintain the relationship 

between contributions and benefits. 

– The benefit reduction (maintain taxes) benchmark reduces the 

formula factors by equal percentage point reductions (by 0.319 

each year for 30 years) for those newly eligible in 2005, 

subjecting earnings across all segments of the PIA formula to 

the same reduction.

• It is expected that Model 3 should, on average, provide higher initial 

benefits than model 2 when compared to the benchmarks due to the

required additional 1% contributions to the individual accounts for 

those who choose to participate.

1For additional information regarding the benchmarks, see U.S. General Accounting Office, Social Security: Program’s Role in 

Helping Ensure Income Adequacy, GAO-02-62 (Washington, D.C.: Nov. 30, 2001).
Appendix I: Analysis of Reform Models 

Page 66 GAO-03-310 Social Security Reform 

Balancing Adequacy and EquityModel Assumptions

• Our unit of analysis for this report is individuals. Depending upon how 

households split account distributions, our results may over/understate 

some individuals’ benefit levels. Since we were interested in the effect that 

reform has on certain birth cohorts, we chose to focus on individuals 

because household composition can vary across birth cohorts.

• Analysis was performed using microsimulation with stochastic elements, 

which included uncertain asset returns, inflation, wage growth, etc. These 

variables varied across time and individuals.

• The nominal mean rates of return used in the model for the individual 

accounts are 6.3% for Treasuries, 6.8% for corporate bonds, and 10% for 

equities. These assumptions are consistent with those used in the SSA 

Actuaries’ scoring.

• All individuals are assumed to annuitize their entire account balance at 

retirement by purchasing a fixed annuity. Our procedure for annuitization is 

consistent with that utilized by the SSA Actuaries. 

• Each individual in each of the cohorts retires at age 65. This can have 

implications for model 3 results since model 3 modifies the actuarial 

reduction and increment factors.

• Since access to accounts for disabled workers occurs at the NRA, benefit 

levels for all beneficiaries are reported at age 67.
Appendix I: Analysis of Reform Models 

Page 67 GAO-03-310 Social Security Reform 

Model 3

• Voluntary individual accounts in exchange for benefit reduction.

– An additional contribution equal to 1 percent of an individual’s

taxable payroll is required to participate, with partial subsidy for 

lower wage workers as a refundable tax credit.

– Account contribution equal to 2.5 percent of payroll tax up to an 

annual maximum of $1,0001 redirected from payroll tax. 

– At retirement, reduction to defined benefit based on the amount of 

account contributions (not including the additional 1 percent 

contribution) compounded at a real interest rate of 2 1⁄2 percent.

1Maximum contribution amount indexed annually to wage growth.
Appendix I: Analysis of Reform Models 

Page 68 GAO-03-310 Social Security Reform 

Model 3

• Changes to defined benefits beginning in 2009:

– Initial benefit reduced from currently scheduled by indexing 

to expected gains in life expectancy.

– Initial benefits for upper income earners reduced: from 2009-

2028, third highest bend point factor gradually reduced from 

15 to 10 percent. 

– Initial benefits reduced for those who retire early and 

increased for those who delay retirement. 
Appendix I: Analysis of Reform Models 

Page 69 GAO-03-310 Social Security Reform 

Model 3

• A new enhanced benefit for full-time minimum wage1 workers with more 

than 20 years of work

– Accelerated growth in initial benefits from 2009-2018. 

– By 2018, a minimum wage worker with 30 years of program 

coverage would receive a benefit equal to 100 percent of poverty 

level; thereafter, benefits would be expected to increase about 0.5 

percent per year faster than growth in the CPI and the poverty level. 

• Enhanced spousal survival benefit

– Increase in widow(er) benefit up to 75 percent of combined spousal 

benefit (up to average benefit levels).

• Additional financing from permanent dedicated revenue sources and 

general revenue transfers. 

1The minimum wage is the current Fair Labor Standards Act minimum of $5.15 an hour but is 

assumed to be grow with the Social Security average wage index.
Appendix I: Analysis of Reform Models 

Page 70 GAO-03-310 Social Security Reform 

Model 3 

Financing Sustainable Solvency

Figure A-1

• Compared to baseline extended, as a share of GDP unified surpluses are 

smaller and unified deficits are larger under Model 3-100% until the 2050s; 

thereafter, unified deficits are smaller. 

• Under Model 3-0%, beginning around 2015, projected unified surpluses 

are higher and projected unified deficits are lower than under baseline 

extended throughout the simulation period.

• Greater participation in IAs results in lower surpluses/higher deficits over 

the simulation period. 

• Throughout the simulation period, unified surpluses are considerably lower 

and unified deficits are considerably higher under Model 3-100% than 

under the tax increase benchmark and, to a lesser extent, the benefit 

reduction benchmark.

• Under Model 3-0%, unified surpluses are lower and unified deficits are 

higher than under the tax increase benchmark throughout the simulation 

period and beginning around 2010, unified surpluses are lower and unified 

deficits are higher than under the benefit reduction benchmark.
Appendix I: Analysis of Reform Models 

Page 71 GAO-03-310 Social Security Reform 

-20

-15

-10

-5

0

5

2000 2010 2020 2030 2040 2050 2060 2075

Fiscal year

Percent of GDP

Baseline extended

Benefit reduction

Model 3 - 0%

Model 3 -100%

Tax increase

Figure A-1: Model 3

Unified Surpluses and Deficits as a Share of GDP

Source: GAO analysis.
Appendix I: Analysis of Reform Models 

Page 72 GAO-03-310 Social Security Reform 

Model 3 

Financing Sustainable Solvency

Figure A-2

• Compared to baseline extended, net debt held by the public as a share 

of GDP is higher under Model 3-100% until about 2060; thereafter, debt 

held by the public is lower. 

• Under Model 3-0% net debt held by the public would be reduced 

compared to the baseline extended beginning about 2015 through the 

end of the simulation period.

• Greater participation in the IAs results in higher net debt held by the 

public throughout the simulation period. 

• Throughout the simulation period, net debt held by the public under 

Model 3-100% is considerably higher than the tax increase benchmark 

and the benefit reduction benchmark.

• Net debt held by the public under Model 3-0% is higher than under the 

benefit reduction benchmark and much higher than under the tax 

increase benchmark through the end of the simulation period.
Appendix I: Analysis of Reform Models 

Page 73 GAO-03-310 Social Security Reform 

-50

0

50

100

150

200

2000 2010 2020 2030 2040 2050 2060 2075

Fiscal year

Percent of GDP

Baseline extended

Benefit reduction

Model 3 - 0%

Model 3 - 100%

Tax increase

Figure A-2: Model 3

Debt held by the Public as a Share of GDP

Source: GAO analysis.
Appendix I: Analysis of Reform Models 

Page 74 GAO-03-310 Social Security Reform 

Model 3 

Financing Sustainable Solvency

Figure A-3:

• The government’s cash requirement includes the amount of cash required to pay defined 

benefits and redirect payroll taxes to individual accounts. Under Model 3-100%, the 

government’s cash requirement would be greater than both the baseline extended and tax 

increase benchmarks in the near term—by more than 15 percent in 2010. Beginning in the 

2030s, less cash would be required for Model 3-100% than the baseline extended and tax 

increase benchmarks. In 2075, Model 3-100% would require about 30 percent less cash 

than the baseline extended and tax increase benchmarks. 

• The cash requirement for Model 3-0% would be slightly greater than both the baseline 

extended and tax increase benchmarks until after 2010. Thereafter, Model 3-0% would 

require less cash than both the baseline extended and tax increase benchmarks; in 2075, 

about 25 percent less cash would be required for Model 3-0%.

• The government’s cash requirement for Model 3 would be greater than the benefit reduction 

benchmark for most of the simulation. In 2075, Model 3-0% would require about the same 

amount of cash as the benefit reduction benchmark and Model 3-100% would require over 5 

percent less cash than the benefit reduction benchmark. 

• In the near term, the greater the individual account participation, the more cash required. 

Over the long term, however, greater individual account participation would reduce the 

government’s cash requirements.
Appendix I: Analysis of Reform Models 

Page 75 GAO-03-310 Social Security Reform 

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075

Calendar year

Percent of GDP

Baseline extended/Tax increase

Benefit reduction

Model 3, 0 percent

Model 3, 100 percent

Figure A-3: Model 3

Government Cash Requirements

Source: GAO analysis of data from the Office of the Chief Actuary, SSA. Benefit amounts shown for baseline extended and tax increase 

benchmarks are scheduled benefits as estimated by the actuaries. All estimates are based on the Trustees' 2001 intermediate 

assumptions.

Note: Includes cash for defined benefits paid out under the traditional system and redirect of payroll taxes to individual accounts.
Appendix I: Analysis of Reform Models 

Page 76 GAO-03-310 Social Security Reform 

Model 3 

Financing Sustainable Solvency

Figure A-4:

• In 2015, total benefit payments (Social Security benefits plus individual account 

disbursements) as a share of GDP under Model 3 would be slightly (1 percent) 

lower than under the baseline extended or tax increase benchmark and about 3 

percent higher than the benefit reduction benchmark.

• In 2030, total benefit payments as a share of GDP under model 3-100% would be 

nearly 4 percent lower than under the baseline extended or tax increase 

benchmark but 8 percent higher compared to the benefit reduction benchmark. 

Under Model 3-0%, benefit payments would be about 7 percent lower than the 

baseline extended or tax increase benchmark but nearly 5 percent higher than the 

benefit reduction benchmark.

• In 2075, total benefit payments as a share of GDP under Model 3-100% would be 

the same as under the baseline extended or tax increase benchmark and nearly 

one-third higher than under the benefit reduction benchmark. By 2075, the 

difference in total benefit payments between Model 3-100% and Model 3-0% 

becomes pronounced with payments under Model 3-0% about the same as the 

benefit reduction benchmark but only three-fourths the level as under Model 3-

100% or the baseline extended or tax increase benchmark.
Appendix I: Analysis of Reform Models 

Page 77 GAO-03-310 Social Security Reform 

0%

1%

2%

3%

4%

5%

6%

7%

8%

2000 2015 2030 2050 2075

Calendar year

Percent of GDP

Actual Benefit reduction

Model 3 - 0% Model 3 - 100%

Baseline extended/Tax increase

Figure A-4: Model 3

Combined Social Security and Individual 

Account Disbursements as a Share of GDP 

Source: GAO analysis of data from the Office of the Chief Actuary, SSA. Benefit amounts shown for baseline extended and tax 

increase benchmarks are scheduled benefits as estimated by the actuaries. All estimates are based on the Trustees' 2001 

intermediate assumptions.
Appendix I: Analysis of Reform Models 

Page 78 GAO-03-310 Social Security Reform 

Model 3 

Financing Sustainable Solvency

• National saving would increase primarily due to the improved fiscal position of the 

government resulting from the proposed benefit reductions. The redirection of payroll 

taxes under the IA option would increase private saving and decrease government 

saving with no net effect on national saving. The required 1 percent additional 

contribution would result in an increase in personal saving, although the progressive 

subsidy would reduce government saving and reduce any net increase in national 

saving.1

• Restores 75-year actuarial balance with either no participation or universal participation 

in the IA option. Trust fund ratio at the end of the 75-year period is declining by about 3 

percent a year under Model 3-0% but rising under Model 3-100% by about 8 percent a 

year. 

• Requires new dedicated revenue from an unspecified source. The IAs are financed as a 

redirect of payroll taxes. In addition to the new dedicated revenue, Model 3-100% 

requires general revenue transfers to keep the OASDI trust fund solvent.

• Does not create any new contingent liability. Individual bears risk of personal account 

investment performance.

• Indexing initial benefits to increases in life expectancy and updating the indexation every 

10 years to reflect actual increases could help guard against unanticipated growth in 

lifetime benefits.

1Analysis limited to first order effects on saving. Effects on saving behavior in response to specific 

reform provisions are not considered given the lack of expert consensus. 
Appendix I: Analysis of Reform Models 

Page 79 GAO-03-310 Social Security Reform 

Balancing Adequacy and EquityDistributional Effect of Specific Provisions

Model 3

• Maintain current benefit structure for current and near retirees.

• Reduces OASDI defined benefits for new retirees, survivors, dependents, 

and disabled workers starting in 2009.

– Benefits are reduced due to indexing initial benefit calculations to 

longevity rather than wages. 

– Gradually reduces the third PIA formula factor. 

– For those who participate in the individual accounts, there is a further 

offset based on the hypothetical account accumulation , where 

contributions accrue at a real rate of 2.5 percent.

– Increases the actuarial reduction for early retirement. 

• Increases benefits for certain beneficiaries: some widow(er)s, low-income 

earners, and increases the delayed retirement credit starting in 2010.

• PIA formula factor reductions and the benefit offset disproportionately 

decreases replacement rates. However, minimum benefit guarantees 

increase replacement rates for workers who qualify. Therefore, overall 

progressivity of the system is unclear given these provisions and the 

uncertainty of market returns, the magnitude of participation, and the 

characteristics of future participants.
Appendix I: Analysis of Reform Models 

Page 80 GAO-03-310 Social Security Reform 

Overview of Model 3 Cohort Results

• Across cohorts, median monthly benefits are higher 

than the benefit reduction benchmark regardless of 

participation in individual accounts (see Figure A-5). 

• The gap in benefits between the without accounts 

scenario and the tax increase benchmark and with 

accounts scenario grows across cohorts (see Figure 

A-5).
Appendix I: Analysis of Reform Models 

Page 81 GAO-03-310 Social Security Reform 

Figure A-5: Model 3 Cohort Analysis – Median 

Monthly Benefits by Cohort

0

500

1000

1500

2000

2500

3000

1955 1970 1985

Constant 2001 Dollars

Benefit Reduction Benchmark Model 3 without Accounts Model 3 with Accounts Tax Increase Be nchmark

Source: GAO’s analysis using the GEMINI model.

Note: Median monthly benefits at age 67 for all beneficiaries. Estimates based on 1955, 1970, and 1985 birth cohorts assuming retired 

workers retire at age 65, uncertain asset returns and inflation, and full annuitization of account balance at retirement age. “With 

accounts” implies all individuals in the cohort participate in the individual accounts. 
Appendix I: Analysis of Reform Models 

Page 82 GAO-03-310 Social Security Reform 

Overview of Model 3 Quintile Analysis: Lowest and 

Highest Quintiles by Cohort

• Median monthly benefits are maintained above the benefit 

reduction benchmark for the lowest quintile regardless of 

participation in individual accounts, likely due to the 

enhanced benefit for full-time “minimum wage” workers (see 

Figure A-6).

• However, participation in the individual accounts may 

provide a benefit level even higher than the enhanced 

benefit for the lowest quintile since, over time, fewer workers 

will receive this enhanced benefit as wages are assumed to 

outpace inflation in the future (see figure A-6).

• Comparing median monthly benefits across cohorts in the 

lowest and highest quintiles indicates that the enhanced 

benefit for full-time “minimum wage” workers and individual 

accounts maintain benefits above the tax increase 

benchmark only for those in the lowest quintile and the later 

cohorts in the highest quintile (see Figures A-6 and A-7).
Appendix I: Analysis of Reform Models 

Page 83 GAO-03-310 Social Security Reform 

Figure A-6: Model 3 Quintile Analysis – Median Monthly 

Benefits by Cohort for the Lowest Quintile

0

500

1000

1500

2000

2500

3000

1955 1970 1985

Constant 2001 Dollars

Benefit Reduction Benchmark Mode l 3 without Accounts M odel 3 with Accounts Tax Increase Benchmark

Source: GAO’s analysis using the GEMINI model.

Note: Estimates based on the 1955, 1970, and 1985 birth cohorts assuming retired workers retire at age 65, uncertain asset returns and 

inflation, and full annuitization of account balance at retirement age. “With accounts” implies all individuals in the cohort participate in 

the individual accounts. Quintiles are based on the distribution of benefits at age 67 under tax increase benchmark. 
Appendix I: Analysis of Reform Models 

Page 84 GAO-03-310 Social Security Reform 

Figure A-7: Model 3 Quintile Analysis – Median 

Monthly Benefits by Cohort for the Highest Quintile

0

500

1000

1500

2000

2500

3000

1955 1970 1985

Constant 2001 Dollars

Benefit Reduction Benchmark Mode l 3 without Accounts M odel 3 with Accounts Tax Increase Benchmark

Source: GAO’s analysis using the GEMINI model.

Note: Estimates based on the 1955, 1970, and 1985 birth cohorts assuming retired workers retire at age 65, uncertain asset returns and 

inflation, and full annuitization of account balance at retirement age. “With accounts” implies all individuals in the cohort participate in 

the individual accounts. Quintiles are based on the distribution of benefits at age 67 under tax increase benchmark. 
Appendix I: Analysis of Reform Models 

Page 85 GAO-03-310 Social Security Reform 

Model 3 Distributional Analysis: Distributional Effects 

Comparing 100 Percent Participation Against Zero 

Percent Participation

• The risk of participating decreases across cohorts 

when comparing scenarios with accounts and without 

accounts, primarily because of the lengthening of the 

investment horizon. For example, 86 percent of the 

1955 cohort would gain by choosing an individual 

account, as did 93 and 95 percent of the 1970 and 

1985 cohorts (see Figure A-8).

• Of those who gained, the median gain was $50 per 

month in 2001 dollars for the 1955 cohort, while the 

median loss was about $4 per month among those 

who did not gain. For the 1970 and 1985 cohorts, the 

median gain was $223 and $540 per month in 2001 

dollars, while the median loss was $25 and $51, 

respectively.
Appendix I: Analysis of Reform Models 

Page 86 GAO-03-310 Social Security Reform 

86 93 95

-14 -7 -5

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Percentage of Beneficiaries

Percent of Beneficiaries Who Did Worse by Choosing an Individual Account

Percent of Beneficiaries Who Did Better by Choosing an Individual Account

1955 1970 1985

Figure A-8: Model 3 Distributional Analysis -

Performance of Individual Accounts Under 100 Percent 

Participation Scenario by Cohort

Source: GAO’s analysis using the GEMINI model.

Note: For example, in 1955 if 100 percent of beneficiaries participated in individual accounts, 86 percent did better by choosing the accounts 

and 14 percent would have done better by not choosing the accounts. Estimates based on 1955, 1970, and 1985 birth cohorts assuming retired 

workers retire at age 65, full annuitization of account balance at retirement age. Uncertain asset returns and inflation are also assumed, where 

the mean nominal rates of return used for the individual accounts are 6.3% for Treasuries, 6.8% for corporate bonds, and 10% for equities.
Appendix I: Analysis of Reform Models 

Page 87 GAO-03-310 Social Security Reform 

Model 3 Distributional Analysis: Distributional 

Effects of Model 3 in Comparison with Benefit 

Reduction Benchmark

• Regardless of whether an account is chosen, a number of people 

fare better when compared to the benefit reduction benchmark. This 

is primarily because the benchmark’s PIA formula reductions are 

initially deeper than Model 3 PIA reductions and the additional 1% 

contribution (see Figure A-9).

• A majority of persons with accounts fare better than the benefit

reduction benchmark and this majority ranges from 95 to 99 percent 

across cohorts. In contrast, the number of people without accounts 

who fare better than the benefit reduction benchmark ranges from 93 

to 97 percent across cohorts. 

• A minority of persons (1 to 5 percent) with accounts fare worse than 

the benefit reduction benchmark, as do 3 to 7 percent of persons

without individual accounts (see figure A-9). 
Appendix I: Analysis of Reform Models 

Page 88 GAO-03-310 Social Security Reform 

95 99 97 93 97 94

-5 -1 -3 -7 -3 -6

-20%

0%

20%

40%

60%

80%

100%

1955 1970 1985 1955 1970 1985

Percent of All Benficiaries with Benefits Below and Above the Benchmark

With Individual Accounts Without Individual Accounts

Source: GAO’s analysis using the GEMINI model.

Note: Monthly benefit level at age 67 is compared to the benefit level under the benchmark to determine if individuals are above or below 

the benchmark. Estimates based on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at age 65, full annuitization of 

account balance at retirement age. Uncertain asset returns and inflation are also assumed, where the mean nominal rates of return used for 

the individual accounts are 6.3% for Treasuries, 6.8% for corporate bonds, and 10% for equities. “With accounts” implies all individuals 

in the cohort participate in the individual accounts.

Figure A-9: Model 3 Distributional Analysis – Distribution 

of Benefits by Cohort and Account Participation 

Compared to the Benefit Reduction Benchmark
Appendix I: Analysis of Reform Models 

Page 89 GAO-03-310 Social Security Reform 

Model 3 Distributional Analysis: Distributional 

Effects of Model 3 in Comparison with Tax 

Increase Benchmark

• Across cohorts:

– Except for the 1955 cohort, a majority of people with 

accounts fare better than the tax increase benchmark and 

this number increases (41 to 67 percent) across cohorts 

(see Figure A-10).

– A minority of people without accounts fare better than the 

tax increase benchmark and this minority declines (9 to 1 

percent) over time (see Figure A-10).
Appendix I: Analysis of Reform Models 

Page 90 GAO-03-310 Social Security Reform 

41

55

67

9 2 1

-45

-33

-91 -98 -99

-59

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

1955 1970 1985 1955 1970 1985

Percent of All Benficiaries with Benefits Below and Above the Benchmark

With Individual Accounts Without Individual Accounts

Figure A-10: Model 3 Distributional Analysis –

Distribution of Benefits by Cohort and Account 

Participation Compared to the Tax Increase Benchmark

Source: GAO’s analysis using the GEMINI model.

Note: Monthly benefit level at age 67 is compared to the benefit level under the benchmark to determine if individuals are above or below 

the benchmark. Estimates based on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at age 65, full annuitization of 

account balance at retirement age. Uncertain asset returns and inflation are also assumed, where the mean nominal rates of return used for 

the individual accounts are 6.3% for Treasuries, 6.8% for corporate bonds, and 10% for equities. “With accounts” implies all individuals 

in the cohort participate in the individual accounts.
Appendix I: Analysis of Reform Models 

Page 91 GAO-03-310 Social Security Reform 

Model 3 Sensitivity Analysis, Varying the Real Rate 

of Return – Account Participation vs. Benchmarks 

by Cohort

• Although varying the rates of return does not alter the 

findings considerably for older cohorts, the effects of 

varying the real rate of return by plus or minus 1 

percent increases over time. The increased volatility is 

likely due to the additional 1% contribution.

– Compared to the benefit reduction benchmark, the 1955 

cohort has about a ±1% change in its distribution, 

whereas the 1985 cohort has about a ±2% change in its 

distribution (see figure A-11).

– Compared to the tax increase benchmark, the 1955 

cohort has approximately a ±5% change in its 

distribution, whereas the 1985 cohort has approximately 

a ±14% change in its distribution (see Figure A-12).
Appendix I: Analysis of Reform Models 

Page 92 GAO-03-310 Social Security Reform 

Figure A-11: Model 3 Sensitivity Analysis - Distribution of Benefits 

by Cohort Compared to Benefit Reduction Benchmark, Varying Real 

Rates of Return by Plus 1 and Minus 1 Percent

Source: GAO’s analysis using the GEMINI model.

Note: Monthly benefit level at age 67 is compared to the benefit level under the benchmark to determine if individuals are above

or below the benchmark. Estimates based on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at age 65, full 

annuitization of account balance at retirement age. Uncertain asset returns and inflation are also assumed, where the mean 

nominal rates of return used for the individual accounts are 6.3% for Treasuries, 6.8% for corporate bonds, and 10% for equities.

95 95 96 98 99 99 95 97 99

-5 -5 -4 -2 -1 -1 -5 -3 -1

-20%

0%

20%

40%

60%

80%

100%

Percent of All Beneficiaries Above or Below the Benchmark

-1 +1

1955 Birth Cohort 1970 Birth Cohort 1985 Birth Cohort

-1 +1 -1 +1
Appendix I: Analysis of Reform Models 

Page 93 GAO-03-310 Social Security Reform 

Figure A-12: Model 3 Sensitivity Analysis - Distribution of 

Benefits by Cohort Compared to Tax Increase Benchmark, 

Varying Real Rates of Return by Plus 1 and Minus 1 Percent

Source: GAO’s analysis using the GEMINI model.

Note: Monthly benefit level at age 67 is compared to the benefit level under the benchmark to determine if individuals are above

or below the benchmark. Estimates based on 1955, 1970, and 1985 birth cohorts assuming retired workers retire at age 65, full 

annuitization of account balance at retirement age. Uncertain asset returns and inflation are also assumed, where the mean 

nominal rates of return used for the individual accounts are 6.3% for Treasuries, 6.8% for corporate bonds, and 10% for equities.

36 41 46 44

55

66

53

67

8 0

-64 -59 -54 -56

-45

-34

-47

-33

-20

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Percent of All Beneficiaries Above or Below the Benchmark

-1 +1 -1 +1 -1 +1

1955 Birth Cohort 1970 Birth Cohort 1985 Birth Cohort
Appendix I: Analysis of Reform Models 

Page 94 GAO-03-310 Social Security Reform 

Overview of Model 3 Disabled Worker Quintile 

Analysis – Lowest and Highest Quintile by Cohort

• Median monthly benefits are maintained above the benefit reduction 

benchmark for the lowest quintile regardless of participation in individual 

accounts likely due to the enhanced benefit for full-time “minimum wage”

workers (see Figure A-13).

– This enhanced benefit could apply to low-earning disabled workers 

who work most of their career prior to becoming disabled. In our

sample the average age of disability onset is 55.

• Participation in the individual accounts is also important for disabled 

workers, especially those in the later cohorts and in the upper quintiles. 

However, the earlier a disabled worker becomes disabled the fewer years 

they contribute to their account and the smaller is their account balance 

(see Figures A-13 and A-14).

• Since disabled workers do not have access to their accounts until 

conversion to retired worker benefits at the NRA, benefit levels before 

conversion would be in line with benefit levels for those without individual 

accounts.

• Benefit levels for disabled workers may be higher than those of retired 

workers since disabled workers are entitled to benefits at earlier ages, 

thus the reductions in their PIA factors would be smaller. This may create 

an incentive for older workers to apply for disability benefits.
Appendix I: Analysis of Reform Models 

Page 95 GAO-03-310 Social Security Reform 

Figure A-13: Model 3 Quintile Analysis – Median 

Monthly Benefits by Cohort for Disabled Workers in 

the Lowest Quintile

0

500

1000

1500

2000

2500

3000

3500

1955 1970 1985

Constant 2001 Dollars

Benefit Reduction Benchmark Mode l 3 without Accounts M odel 3 with Accounts Tax Increase Benchmark

Source: GAO’s analysis using the GEMINI model.

Note: Median monthly benefits at age 67 for disabled workers. Estimates based on 1955, 1970, and 1985 birth cohorts assuming 

uncertain asset returns and inflation, and full annuitization of account balance at retirement age. “With accounts” implies all 

individuals in the cohort participate in the individual accounts. Quintiles are based on the distribution of benefits at age 67 under tax 

increase benchmark.
Appendix I: Analysis of Reform Models 

Page 96 GAO-03-310 Social Security Reform 

Figure A-14: Model 3 Quintile Analysis – Median 

Monthly Benefits by Cohort for Disabled Workers in 

the Highest Quintile

0

500

1000

1500

2000

2500

3000

3500

1955 1970 1985

Constant 2001 Dollars

Benefit Reduction Benchmark Model 3 without Accounts Model 3 with Accounts Tax Increase Benchmark

Source: GAO’s analysis using the GEMINI model. 

Note: Median monthly benefits at age 67 for disabled workers. Estimates based on 1955, 1970, and 1985 birth cohorts assuming 

uncertain asset returns and inflation, and full annuitization of account balance at retirement age. “With accounts” implies all 

individuals in the cohort participate in the individual accounts. Quintiles are based on the distribution of benefits at age 67 under tax 

increase benchmark.
Appendix I: Analysis of Reform Models 

Page 97 GAO-03-310 Social Security Reform 

Balancing Adequacy and Equity-Overall Equity

Model 3

• Provide workers some investment choice and control, subject to 

certain limitations. This might enable individuals to earn a higher 

rate of return on their contributions with an increased measure of 

risk, primarily that the return expected may not be realized. 

• May improve intergenerational equity through the move to 

advanced funding of Social Security and the inheritance feature 

of individual accounts.

• Make determining the rate of return difficult as the link between 

contributions and benefits becomes unclear due to general 

revenue transfers. Thus, we did not quantitatively assess the 

equity effects of the models. 
Appendix I: Analysis of Reform Models 

Page 98 GAO-03-310 Social Security Reform 

Implementing and Administering Reforms

• Funding for the transition from a pay-as-you-go system to a partially 

funded system would be handled by transfers from the General Fund of 

the Treasury and could be repaid when the trust funds experience cash 

flow surpluses.

• An education program will be necessary to explain the changes in the 

benefit structure and to avoid expectation gaps.

– Benefit offset feature, financing structure of the system may be

difficult to explain, which increases the importance of an education 

program.

• An education program will also be necessary to inform OASDI eligible 

workers on making sound investment decisions regarding 

diversification, risk, and participation.

• The Commission did not explicitly address the costs of an education 

program.

• It is unclear how the Commission’s proposed account splitting at divorce 

would fit into divorce law.
Appendix I: Analysis of Reform Models 

Page 99 GAO-03-310 Social Security Reform 

Implementing and Administering Reforms

• The proposal establishes a Governing Board to administer the individual 

accounts, which is intended to limit the potential for politically motivated 

investing. The board’s duties include the choice of available funds and 

providing financial information to individuals.

• The design of the voluntary individual account feature places an

additional administrative burden on the SSA. Specifically, the 

hypothetical account, benefit offset, inheritance feature, and account 

splitting at divorce would create additional responsibilities for SSA. 

• There is not enough information to estimate administrative costs. Such 

costs are affected by the level of participation in the individual accounts. 

However, the Commission believes that individual accounts can be

administered at a low cost since they envision the system being 

structured similar to the TSP.

• There is not enough information to address how annuities and annuity 

pricing will be handled; therefore, we used the same assumptions as 

the SSA Actuaries and did not quantitatively analyze their effect on 

benefit levels. 
Appendix II: Comments from the Social 

Security Administration 

Page 100 GAO-03-310 Social Security Reform 

Appendix II: Comments from the Social 

Security Administration 
Appendix II: Comments from the Social 

Security Administration 

Page 101 GAO-03-310 Social Security Reform 
Appendix II: Comments from the Social 

Security Administration 

Page 102 GAO-03-310 Social Security Reform 
Appendix II: Comments from the Social 

Security Administration 

Page 103 GAO-03-310 Social Security Reform 
Appendix II: Comments from the Social 

Security Administration 

Page 104 GAO-03-310 Social Security Reform 
Appendix II: Comments from the Social 

Security Administration 

Page 105 GAO-03-310 Social Security Reform (130108) 
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