Social Security Reform: Issues for Disability and Dependent Benefits
Published: 2007-10-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Many recent Social Security reform proposals to improve program solvency include elements that would reduce benefits currently scheduled for future recipients. To date, debate has focused primarily on the potential impact on retirees, with less attention to the effects on other Social Security recipients, such as disabled workers and dependents. As these beneficiaries may have fewer alternative sources of income than traditional retirees, there has been interest in considering various options to protect the benefits of disabled workers and certain dependents. This report examines (1) how certain elements of Social Security reform proposals could affect disability and dependent benefits, (2) options for protecting these benefits and how they might affect disabled workers and dependents, and (3) how protecting benefits could affect the Social Security program. To conduct this study, GAO used a microsimulation model to simulate benefits under various reform scenarios. GAO also interviewed experts and reviewed various reform plans, current literature, and GAO's past work.
section_title: What GAO Found
paragraphs: We considered several reform elements that could improve Social Security Trust Fund solvency by reducing the initial benefits received or the growth of individual benefits over time. According to our simulations, these reform elements would reduce median lifetime benefits for disabled workers by up to 27 percent and dependents by up to 30 percent of currently scheduled levels. While the size of the benefit reduction could vary across individuals, it could be substantial for the vast majority of these beneficiaries, depending upon the reform element. Options for protecting the benefits of disabled workers and dependents from the impact of reform elements include, among others, a partial exemption, whereby currently scheduled benefits are maintained until retirement age. For example, while simulations showed that one reform element could decrease median lifetime benefits of disabled workers to about 89 percent of currently scheduled levels, a partial exemption could restore them to about 96 percent. Further, these protections could be more targeted. For example, a larger cost of living adjustment would result in more rapid benefit growth for those disabled workers who receive benefits for a prolonged period of time. Some protections for dependent benefits could be targeted to a single group of dependents, such as widows, while others could affect multiple groups. For example, increasing the maximum benefit a family can receive could protect a wider group of beneficiaries, including children and spouses of disabled workers, and disabled adult children. While it may be desirable to protect the benefits of disabled workers and certain dependents, such protections would come at a cost to Social Security. Protecting benefits could lessen the impact that a reform element would have on solvency. In addition, such protections could create incentives to apply for Disability Insurance, if disability benefits remained stable while retirement benefits were reduced.

section_title: Letter
paragraphs: Social Security forms the foundation of retirement income, providing old  Social Security forms the foundation of retirement income, providing old  age benefits to millions of Americans. However, Social Security is more  age benefits to millions of Americans. However, Social Security is more  than a retirement program; it provides benefits to survivors and other  than a retirement program; it provides benefits to survivors and other  dependents as well as to disabled workers. For all these recipients,  dependents as well as to disabled workers. For all these recipients,  benefits are determined through a common formula. Therefore, the  benefits are determined through a common formula. Therefore, the  prospect of altering the benefit formula to address Social Security’s  prospect of altering the benefit formula to address Social Security’s  financial shortfall would affect all beneficiaries, not just retired workers.  financial shortfall would affect all beneficiaries, not just retired workers.  Moreover, changes to the benefit formula could have a large impact on  Moreover, changes to the benefit formula could have a large impact on  those beneficiaries who are least able to compensate for any reduction in  those beneficiaries who are least able to compensate for any reduction in  benefits. For example, disabled workers may have fewer alternative  benefits. For example, disabled workers may have fewer alternative  sources of income—especially earnings-related income—than do retired  sources of income—especially earnings-related income—than do retired  workers, to offset any planned reduction in benefits. In addition, certain  workers, to offset any planned reduction in benefits. In addition, certain  dependents, such as older widows, may rely more heavily on Social  dependents, such as older widows, may rely more heavily on Social  Security benefits and may not have the means to offset reductions caused  Security benefits and may not have the means to offset reductions caused  by reform. Hence, benefit reductions related to reform could potentially  by reform. Hence, benefit reductions related to reform could potentially  affect the welfare of disabled workers and dependent beneficiaries more  affect the welfare of disabled workers and dependent beneficiaries more  substantially than those of retired workers.  substantially than those of retired workers.
Nonetheless, the debate over Social Security reform has focused primarily  Nonetheless, the debate over Social Security reform has focused primarily  on the effects proposed reforms would have on retirees—with little  on the effects proposed reforms would have on retirees—with little  discussion of how they might affect disabled workers and dependents.  discussion of how they might affect disabled workers and dependents.  Given interest in protecting these beneficiaries, this report discusses  Given interest in protecting these beneficiaries, this report discusses  (1) how certain elements of Social Security reform plans would affect  disability and dependent benefits, (2) some options for protecting these  benefits and how these options might affect disabled workers and  dependents, and (3) how protecting these benefits could affect the Social  Security program itself.
To determine how certain elements of reform would affect disability and  dependent benefits, we first selected reforms by reviewing a number of  reform plans, current literature, and our past work to identify reform  elements that would have an impact on benefits. We then estimated the  percentage of disabled workers and dependents whose benefits would be  affected by certain reform elements by simulating the outcome for a  sample of workers born in 1985, using a microsimulation model. We also  used data from this model to analyze the difference in both median and  total lifetime benefits between currently scheduled benefits and those  under each reform element. Rather than consider the distribution of  benefits across recipients, we show the impact of reform and protections  on median benefits. This approach provides a snapshot of how the reforms  would affect individuals in each target group (disabled workers and  dependents). In addition, when we consider total lifetime benefits, we are  able to examine the extent to which individuals are affected. While  scheduled benefits are not attainable under current funding levels, they  nevertheless provide us with a point of comparison in examining the  impact of various reform elements. To identify options for protecting  disabled worker and dependent benefits, we reviewed the current  literature and our past work and interviewed relevant experts. To  determine how these protections would affect both disability and  dependent benefits, we analyzed the change in median lifetime benefits  given various reform elements and different protections, using the  microsimulation model, as well as some qualitative analysis. Finally, to  determine the impact that protecting benefits could have on the Social  Security program itself, we interviewed relevant experts, reviewed the  literature, and conducted a qualitative analysis of the issues involved.  Throughout our analysis, we assume that the Disability Insurance (DI)  program maintains its current operational structure in terms of disability  determination, although GAO has recommended certain measures that  Social Security should take to modernize the program and its  administration. For more details on our approach to this study and on the  microsimulation model, please see appendix I.
Throughout this report, the term “dependents” refers to those beneficiaries  who receive some or all of their Social Security benefits based on a family  member’s earnings record. Our dependent category includes survivors— such as widow(er)s and surviving children—as well as spouses and  children of both retirees and individuals receiving disability benefits.  Specifically, dependents need not demonstrate financial dependence, but  rather familial relationships such as those listed above. Also, throughout  the report, “disabled worker benefits” refers to the type of benefit that an  individual with disabilities who qualifies for the DI program would receive  based on his or her own earnings record. Further, those individuals who  receive disabled worker benefits are referred to as “disabled workers.”  While we understand the sensitivity associated with this terminology, our  use of this term is consistent with the Social Security Administration’s  terminology and aims to precisely represent such beneficiaries and their  benefits.
We conducted our work between October 2006 and October 2007 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Social Security is one the largest federal programs in the United States,  providing about $546 billion in benefits in 2006 to over 49 million  beneficiaries. Although the majority of Social Security benefits are paid to  retirees, Social Security does much more than provide retirement income.  Social Security Disability Insurance (DI) pays monthly cash benefits to  nearly 7 million workers who, due to a severe long-term disability, can no  longer remain in the workforce. Additionally, Social Security provides  benefits to over 11 million dependents, including payments to widows and  widowers as well as surviving parents and children under Survivors’  Insurance (SI), plus benefits to dependent spouses and children of retired  and disabled workers paid from the Old Age Insurance (or Old Age) and DI  trust funds. Social Security benefits often represent a significant source of  income for their recipients, providing an average of $1,051 a month (as of  July 2007) to retired workers, $995 a month to widows and widowers, and  $979 a month to disabled workers. Although disabled workers and  dependents receive slightly lower average monthly benefits than retired  workers, benefits could be particularly important to these individuals.  These beneficiaries may face considerable hardships; for example, a  disabling condition may make work and other activities of daily living  more difficult. As a result, these beneficiaries may have financial  difficulties planning and preparing for death or disability in the way one  might plan for retirement. Social Security was never intended to provide  an adequate income by itself, but instead serves as an income base on  which to build. In fact, the Social Security program balances the goals of  income adequacy with individual equity, i.e., that lower income  beneficiaries should receive higher benefits relative to wages than higher  income beneficiaries (adequacy), and beneficiaries with higher lifetime  income receive higher benefits in accordance with their income/lifetime  contributions (equity).
subsections: section_title: History and Development of DI and Dependents’ Benefits
paragraphs: Although Social Security had originally been envisioned to include  disability and survivors’ insurance, the 1935 Social Security Act created  only a retirement program. Over the next 40 years, the program expanded  both the size and type of its benefits, introducing benefits for dependents  and disabled workers (fig. 2). The first new type of benefits went to  dependents, as the 1939 amendments offered payments to elderly  dependent wives and widows, as well as dependent children. (Some  husbands and widowers were allowed to receive these same benefits after  1950). Creating these benefits was not only seen as socially desirable, but  also offered additional protections for workers and their families from risk  and spent down surpluses created by the system. Disability Insurance,  which had been recommended by the 1938 and 1948 advisory councils,  was established in 1956 to provide cash benefits to permanently disabled  workers over the age of 50. The DI program was later expanded to include  disabled workers under the age of 50 as well. In 1961, widows benefits  increased from 75 to 85 percent of their deceased spouse’s benefits, and  then to 100 percent in 1972. In addition, eligibility was extended to  divorced spouses as well as to the spouses and children of disabled  workers. Furthermore, benefit levels for retirees, dependents, and  disabled worker beneficiaries grew during this time period. However,  facing solvency crises, legislative efforts to control the size of the Social  Security program were made in the mid 1970s and early 1980s.
In order to maintain trust fund solvency, major changes were enacted to  reduce the growth of Social Security benefit levels from the mid1970s to  the early 1980s. Additionally, a number of legislative changes to the DI and  dependents’ programs eliminated or reduced certain benefits and  tightened the eligibility standards for receiving other benefits. However,  despite ongoing fiscal concerns, eligibility for a few dependents’ and  disability benefits has been expanded since 1975, suggesting an interest in  protecting some vulnerable populations who may rely on Social Security  for a significant portion of their monthly income. Although recent reform  proposals have focused on elements intended to improve solvency, there  continues to be some interest in protecting some or all DI and dependents’  benefits from potential benefit reductions. Figure 3 shows how Old Age,  Survivors, and Disability Insurance (OASDI) has grown financially and in  terms of beneficiaries over time.
section_title: Development of a Single Benefit Formula
paragraphs: Although the 1935 act did not provide for disability and dependents’  benefits, those benefits were later built upon the existing Social Security  structure, and today all benefits continue to be calculated from a common  formula. Dependents’ benefit levels were set as fractions of the benefits  owed to the person upon whom beneficiaries depended. For example,  under the 1939 legislation, a widow would receive 75 percent of her  deceased husband’s benefits, and dependent children or spouses would  receive 50 percent of the retired worker’s benefits. When Congress created  the DI program in 1956, it provided a lower retirement age (50) for those  who were permanently and totally disabled. The same benefit formula  used in computing OASI benefits was adopted for disability benefits  because the original DI program treated disabled workers as being forced  into premature retirement. In 1960, when Congress expanded the DI  program by eliminating the requirement that disabled workers had to be  50 years old, the same benefit formula applied. Because benefit types  shared a common formula, automatic indexing provisions implemented in  1972 and 1977 applied across the board.
The OASDI programs are tightly linked in other ways as well. These  programs are financed through a common mechanism—payroll taxes;  receipts from the payroll tax are deposited into the OASI and DI trust  funds which, like the two programs, are separate but often combined in  discussion and analysis of Social Security’s solvency and sustainability.  Furthermore, beneficiaries can receive multiple types of benefits over  their lifetimes, moving into, out of, and among Social Security programs at  different life stages. When disabled workers reach the full retirement age  (FRA), for example, they begin to receive retirement benefits from the Old  Age program, in place of DI benefits; the common benefit formula keeps  such individuals’ benefit levels stable. In another case, a recent widow(er)  might have her (or his) retirement or spousal benefits replaced with  survivors’ benefits based on the relative earnings of the deceased spouse.  Because parents, children, or spouses may be eligible for dependents’  benefits through the Old Age, Survivors, and Disability Insurance  programs, a person can collect several types of Social Security benefits  over a lifetime, although generally not simultaneously. The many linked  pieces of Social Security could make developing a single, comprehensive  reform package challenging because such a package would need to take  into account all of these pieces.
section_title: Benefits under Current Law
paragraphs: Under current law, Old Age benefits are generally calculated through a  four-step process in which a progressive yet earnings-based formula is  applied to an earnings history, and then updated annually through a cost- of-living adjustment (COLA). For those who receive retirement benefits,  this earnings history is generally based on the 40 years in which credited  earnings were highest, with the 5 lowest-earning years dropped out  (leaving the highest 35 years of indexed earnings to be included in the  initial benefit calculation). Dependents’ benefit levels are determined as a  given percentage of Old Age benefit levels. Eligible children and spouses  can receive up to 50 percent of a worker’s benefit; widow(er)s can be  given up to 100 percent; and surviving parents or children can collect up to  75 percent, subject to a family maximum.
DI benefits are calculated similarly to Old Age benefits, but are generally  based upon a shortened work history. (For more detail on how benefits  are calculated, refer to app. II.) To be eligible for benefits, individuals must  have a specified number of recent work credits under Social Security  when they first become disabled. Individuals must also demonstrate the  inability to engage in substantial gainful activity by reason of a physical or  mental impairment that has lasted or is expected to last for twelve  continuous months or to result in death. If not eligible on medical grounds,  SSA must also consider age, education and past work history.  In  particular, medical eligibility criteria for DI are less stringent for  applicants over the age of 55.
Based on prior work, GAO has designated modernizing federal disability  programs (including the DI program) as a high risk area because of  challenges that continue today. For example, GAO found that federal  disability programs remain grounded in outmoded concepts that equate  medical conditions with work incapacity. While SSA has taken some  actions in response to prior GAO recommendations, GAO continues to  believe that SSA should continue to take a lead role in examining the  fundamental causes of program problems and seek the regulatory and  legislative solutions needed to modernize its programs so that they are  aligned with the current state of science, medicine, technology, and labor  market conditions. Moreover, SSA should continue to develop and  implement strategies to better manage the programs’ accuracy, timeliness,  and consistency of decision making.
Social Security’s Financing  Social Security is currently financed primarily on a pay-as-you-go basis, in  which payroll tax contributions of current workers are used primarily to  pay for current benefits. Since the mid1980s, the Social Security program  has collected more in taxes than it has paid out in benefits. However,  because of the retirement of the baby boomers coupled with increases in  life expectancy, and decreases in the fertility rate, this situation will soon  reverse itself. According to the Social Security Administration’s 2007  intermediate assumptions, annual cash surpluses are predicted to turn  into ever-growing cash deficits beginning in 2017. Absent changes to the  program, these deficits are projected to deplete the Social Security DI trust  fund in 2026 and the OASI trust fund in 2042, leaving the combined system  unable to pay full benefits by 2041. Reductions in benefits, increases in  revenues, or a combination of both will likely be needed to restore long- term solvency. A number of proposals have been made to restore fiscal  solvency to the program, and many include revenue enhancements, benefit  reductions, or structural changes such as the introduction of individual  accounts as a part of Social Security. Because many reforms to the benefit  side of the equation would reduce benefits through changes in the benefit  formula, they could affect DI and dependents’ benefits as well as Old Age  benefits. Unless accompanied by offsets or protections, these reforms  might reduce the income of disabled workers and dependents. This  situation could be challenging for these beneficiaries as they may have  relatively low incomes or higher health care costs and rely heavily on  Social Security income. Many disabled workers and dependents may also  have trouble taking on additional work and accumulating more savings  and, thus, have difficulty preparing for Social Security benefit reductions.
section_title: Certain Benefit- Reducing Reform Elements Could Have a Substantial Impact on Disabled Workers and Dependents
paragraphs: Many reform elements could have a substantial impact on the benefits of  Social Security recipients, including those of disabled workers and  dependents. We considered six such elements that have been included in  reform proposals to improve trust fund solvency. These reform elements  take a variety of forms and would change either the initial benefit  calculation or the growth of individual benefits over time. Our projections  indicated that most of these elements would reduce benefits from  currently scheduled levels for the majority of both disabled workers and  dependents. That is, most would reduce median lifetime benefits for these  beneficiary types—some more substantially than others. Many of these  beneficiaries would also experience a reduction in total lifetime benefits;  the extent of which would depend on the reform element and individual.
subsections: section_title: Benefit-Reducing Reform Elements Take Different Forms
paragraphs: We considered six different reform elements that could help control costs  and improve Social Security solvency by reducing benefits. Five would  change how initial benefits are calculated, and one would limit the growth  of an individual’s benefits over time.
We considered several ways to improve solvency:    Longevity indexing would lower the amount of the initial benefit in  order to reflect projected increases in life expectancy. Such indexing  would maintain relatively comparable levels of lifetime benefits across  birth years by proportionally reducing the replacement factors in the  initial benefit formula.
Price indexing would maintain purchasing power while slowing the  growth of initial benefits. This would be accomplished by indexing  initial benefits to the growth in prices rather than wages, as wages tend  to increase faster than prices.
Progressive price indexing, a form of price indexing, would control  costs while protecting the benefits of those beneficiaries at the lowest  earnings levels (in terms of career average earnings). It would continue  to index initial benefit levels to wages for those below a certain  earnings threshold and employ a graduated combination of price  indexing and wage indexing for those above this threshold.  Increasing the number of years used in the benefit calculation would  also control program costs. For example, initial benefits could be based  on the highest 40, rather than 35, years of indexed earnings. This could  be done either by eliminating the 5 years normally excluded from the  calculation or by increasing the total number of years factored in from  40 to 45 years. In either of these cases, the initial Old Age benefit would  be calculated using the highest 40 years of indexed earnings. (For  more information on these reform elements and how we incorporated  them into our microsimulation model, see app. I.)
Raising the age at which people are eligible for full retirement benefits  could change the amount and/or the timing of initial benefits.  Increasing the full retirement age would improve solvency by generally  increasing the number of years worked, reducing the number of years  benefits are received and increasing revenue to the system through  payroll taxes in the additional years worked. Further, those who retire  early would have their benefits actuarially reduced.
Though it would not generally affect initial benefit amounts, a change  to Social Security’s cost-of-living adjustment (COLA) could also control  costs and improve solvency by limiting the growth of an individual’s  benefits over time. The COLA adjusts benefits to account for inflation  by indexing benefits to price growth annually, using the Consumer  Price Index (CPI). Setting the COLA below the CPI would limit the  nominal growth of an individual’s benefits over time, and as such  those who receive benefits for a prolonged period of time would see  the largest reductions.
section_title: Most of the Social Security Reform Elements We Considered Would Reduce Benefits for Virtually All Beneficiaries
paragraphs: According to our projections for the 1985 cohort, four of the five reform  elements that we analyzed would reduce total lifetime benefits for more  than three-quarters of disabled workers and dependents, relative to  currently scheduled benefits. Table 1 shows the proportions of disabled  workers and dependents affected by each of the reform elements. For  three of the elements—reducing the COLA by one percentage point, price  indexing and progressive price indexing—the percentage of disabled  workers affected is very similar to the percentage of dependents affected.  Moreover, for these three reform elements, more than 99 percent, or  virtually all, disabled workers and dependents would see their benefits  reduced. In contrast, progressive price indexing differs from other reform  elements in its impact: fewer beneficiaries are affected, and the percentage  of disabled workers affected varies from that of dependents. While an  estimated 87 percent of dependents would experience a reduction in  lifetime benefits under progressive price indexing, an estimated 77 percent  of disabled workers would do so.
While the COLA reduction, longevity indexing and price indexing are all  designed in such a way that they affect virtually all beneficiaries, the  COLA, which has a greater impact on solvency than longevity indexing,  affects relatively fewer disabled workers and dependents. This is because  the COLA reduction would first affect benefits one year after the initial  benefit payment was made, whereas both longevity indexing and price  indexing affect the initial benefit amount. Our simulations indicated that  1.11 percent of disabled workers died within the first year of receiving  benefits, while only 0.35 percent of dependents did so. Most such  beneficiaries would not have received a COLA.
section_title: Reform Elements Reduce Median Lifetime Benefits for Disabled Workers and Dependents to Varying Degrees
paragraphs: According to our simulations each of the reform elements we selected  would reduce median lifetime benefits for both disabled workers and  dependents relative to currently scheduled benefits (figs. 4 and 5).  However, our projections also indicated that these reductions would vary  by reform element. Price indexing would have the largest impact on  disabled workers and dependents, reducing median lifetime benefits by  more than 25 percent. Median lifetime benefits would fall from $473,960 to  $343,350 for disabled workers and from $351,910 to $244,745 for  dependents. Progressive price indexing, on the other hand, would create  the smallest reduction in median lifetime benefits, with median lifetime  benefits falling by 7 percent for disabled workers and 8 percent for  dependents.
Additionally, increasing the full retirement age and increasing the number  of computation years would likely reduce median lifetime benefits for  dependents. Since dependent benefits are linked to those of the primary  worker, an increase in the full retirement age could shorten the period of  time over which they both receive benefits. Alternatively, some workers  may decide not to adjust their retirement plans in response to the increase  in the FRA. Those who maintain their original retirement plans, retiring  prior to the new FRA, will also receive reduced benefits relative to current  law. (See app. II for a discussion of how benefits are adjusted for early  retirement.) Thus, under both scenarios, total lifetime benefits would be  reduced, and so, too, would median lifetime benefits. A similar outcome  results from increasing the number of computation years by which initial  benefits are calculated. By increasing the number of computation years, a  worker’s earnings history is expanded to include years of possibly lower  indexed earnings. As a result, total benefits for some retired workers, and  therefore, their dependents, would likely be reduced, as would median  lifetime benefits.
section_title: Disabled and Dependent Beneficiaries Are Not Uniformly Affected by Reform Elements
paragraphs: Our projections suggest that, while lifetime benefits would be reduced for  virtually all disabled workers and dependents, such reductions would not  be uniform across individuals. Figures 6 and 7 compare beneficiaries’ total  lifetime benefit reductions by each reform element, for disabled workers  and dependents, respectively. If the COLA were reduced by one  percentage point, our projections show that approximately 58 percent of  disabled workers experienced lifetime benefit reductions of 10 percent or  less, while about 42 percent of disabled workers experienced lifetime  benefits reduced by 10 to 25 percent. Almost no disabled workers would  see benefits fall by more than 25 percent.
Certain reform elements would create reductions in total lifetime benefits  for the vast majority of disabled workers and dependents. These  reductions may create new hardships for certain beneficiaries, such as  disabled workers, who may not be able to easily replace lost income.  According to our projections, price indexing would result in the greatest  benefit reductions for the largest percentage of beneficiaries, with  decreases in lifetime benefits of between 25 percent and 50 percent for  almost 70 percent of disabled workers and about 90 percent of  dependents. Both price indexing and longevity indexing have a greater  effect on initial benefit amounts the longer the reform is in place. As such,  people who leave the workforce early may experience a smaller reduction  in lifetime benefits than those who leave at full retirement age. For  example, as shown in figures 6 and 7, longevity indexing could reduce  lifetime benefits for about 86 percent of disabled workers and about 96  percent of dependents by 10 to 25 percent.
Progressive price indexing may have a more moderate effect on the  benefits of disabled workers and certain dependents because it is designed  to protect benefit levels for low earners and gradually apply benefit  reductions to beneficiaries with higher earnings. Because of shorter  earnings histories, some disabled workers would be in the low end of the  earnings distribution. Thus, under progressive price indexing, a greater  proportion of disabled workers would be likely to have benefits adjusted  by wage indexing. According to our projections, progressive price  indexing would reduce total lifetime benefits by 5 percent or less for  46 percent of disabled workers and 35 percent of dependents.
section_title: Options Protecting the Benefits of Disabled Workers and Dependents Could Mitigate the Effects of Benefit-Reducing Reform Elements
paragraphs: Various options are available to protect benefits in different ways,  including accelerating the growth of an individual’s benefits, modifying  current constraints on benefit levels, and exempting certain populations  from reforms. Options can also target certain types of beneficiaries. We  analyzed some of these protections and found they could be structured to  mitigate the effects of benefit reductions for varying lengths of time. In  addition, we found that specific options to protect dependent benefits  could be targeted to certain vulnerable beneficiaries, such as widows and  dependent children.
subsections: section_title: Many Options Exist for Protecting Social Security Benefits, Including Full and Partial Exemptions
paragraphs: We found a wide range of options exist for protecting disabled workers  and dependents from benefit-reducing reforms. Table 2 provides a  summary of the options. The protection options may be very specific in  terms of whom they protect and how, or broader in scope. For example,  while two protection options focus specifically on disabled adult children  (DAC), others, such as partial exemptions could apply to any vulnerable  population. In addition to each option having its own strengths and  weaknesses, the options could interact with each other and with the  various reform elements. When implementing a protection option, all of  these factors could influence its impact.
There are several protection options that could be applied to all disabled  workers and dependents. Under a full exemption, beneficiaries would not  be subject to a reform and their benefits would remain unchanged. Under  a partial exemption, beneficiaries would not be subject to a reform until a  certain point in time. For example, disabled workers could be exempt  from benefit changes until they are converted to the Old Age program at  the full retirement age. At this point, their benefit amount would be  recalculated to reflect the reform in proportion to the years they spent  working. In addition, a super COLA could help protect the benefits of  disabled workers and dependents. A super COLA would mitigate some of  the effects of a benefit-reducing reform by annually increasing benefits at  a rate above the consumer price index—which is currently used to index  benefits.
Some protection options could cover all dependents by increasing the  percentage of the worker’s benefit that the dependent receives. (See app.  II for more detail on how dependent benefits are calculated.) For example,  a number of proposals have called for increasing the percentage of the  worker’s benefit that widow(er)s receive. Another option that could  protect the benefits of a wide range of dependents would be to raise the  maximum benefit that families can receive based on one worker’s earnings  record. Other protection options, such as caregiver credits, could focus on  protecting particular groups of dependents. Several reform proposals  have, in fact, called for providing caregiver credits to individuals who  spend time out of the workforce to care for their dependents or to those  with reduced or low earnings while attending to care-giving  responsibilities. Some proposals assign caregivers a specified level of  earnings for each year the caregiver received zero or low earnings  compared to prior years. Other proposals exclude zero-earning care years  from the initial benefit calculation. Another option specific to a certain  type of dependent would be to increase benefits for aged survivors, since  they are more likely to rely on Social Security to stay out of poverty and  could have fewer opportunities, such as returning to work, to respond to  benefit-reducing reforms.
Increasing the early retirement age could offer some protection for  survivors. If the early retirement age were raised—for example, from 62 to  64—then workers who take early retirement would receive actuarially  adjusted benefits for a shorter period of time under the new early  retirement age, and thus their monthly benefits would be relatively higher  than the monthly benefits they would have received if they had retired at  the current early retirement age. Since a dependent’s benefit is linked to  the worker’s initial benefit amount, an increase in the worker’s benefit  would also increase the dependent’s benefit, mitigating some of the  negative effects of other reforms. Similarly, raising the FRA coupled with a  partial exemption from a benefit reduction could offer some additional  protection for disabled worker benefits. With an increase in the FRA,  disabled workers would receive (exempted) DI benefits for a longer  period of time because the age at which their disability benefits are  converted to retiree benefits would rise with the new FRA.
section_title: Some Benefit Protections Could Restore Benefits to Levels near Those Scheduled under Current Law
paragraphs: In general, the reform elements we examined reduce median lifetime  benefits for disabled workers and dependents. Because disabled workers  may not have the financial resources—especially earnings related  income—to adjust to benefit reductions, we explored the interaction of  reform elements and certain options to offset them.
According to our projections, protections from a reduction in the COLA  could restore benefits of disabled workers to levels close to those  scheduled under current law. Reducing the COLA by one percentage point  would result in about a 10 percent decrease in median lifetime benefits for  workers who become disabled before age 60. To offset such a decrease,  they could be partially or fully exempted. With a COLA reduction, a partial  exemption would mean that the Social Security Administration would  increase a disabled worker’s benefits annually as scheduled under current  law (i.e., using the full COLA) until the worker reached the full retirement  age. At that point, the disabled worker’s benefits would grow annually by  the reduced COLA (1 percentage point lower than what it would be under  current law). Our projections showed that a partial exemption as  described above would raise median lifetime benefits from their reduced  levels by 7 percent (up to 96 percent of scheduled levels under current  law). In contrast, a full exemption would allow annual COLA adjustments  in line with current law until death (fig. 8).
In addition to a decrease in the COLA, we analyzed options for protecting  the benefits of disabled workers under three reform elements that have an  impact on the initial benefit amount a disabled worker receives—price  indexing, longevity indexing, and progressive price indexing. There are  several protection options for mitigating the effects of these reform  elements, including full and partial exemptions. In the case of price  indexing initial benefits, we projected that the median lifetime benefits of  disabled workers would be about 75 percent of the median benefits under  current law (fig. 9). A full exemption for disabled workers would raise the  benefits of those disabled workers who exclusively receive DI benefits to  the currently scheduled levels. However, a partial exemption from price  indexing would restore the median lifetime benefit to 89 to 90 percent of  scheduled levels, depending on how the partial exemption is  implemented. One type of partial exemption (Type I) uses price indexing  to calculate the portion of the benefits based on the years a person is out  of the workforce and receiving DI benefits. In contrast, the other type of  partial exemption (Type II) uses wage indexing to cover the same time  period. (For more details, please see app. I.) The difference between the  two partial exemptions becomes more substantial the earlier one becomes  disabled, as the difference between wages and prices increases over time.   While offering some protection from benefit reductions, both types of  partial exemptions involve a recalculation of benefits at the full retirement  age.  This recalculation would result in lower benefits for the DI recipient  and could create a potential problem if that individual relied on the prior  benefit amount and had limited options for replacing the lost income. (See  figs. 10 and 11 for longevity indexing and progressive price indexing,  respectively.)
Another protection option would be to allow disability benefits to grow at  a greater rate than other benefits. For example, disabled workers could be  explicitly included in the scope of the reform, and receive reduced initial  benefits. However, instead of receiving annual increases based on the  current-law COLA, disabled workers could have their benefits increased  by a “super COLA”—one that is set above the Consumer Price Index. In  this case, benefits for the disabled would grow at a faster rate than they  would under current law and could approach or even exceed current law  levels. Variations on the super-COLA could include an “age-indexed super  COLA” which would be greater for those disabled at younger ages. For  those workers who become disabled near the full retirement age the COLA  would be closer to that used for retirees.  These protections could be  particularly beneficial for disabled workers who receive benefits for a  prolonged period of time.
section_title: Protections for Dependent Benefits Could Be Targeted to Certain Vulnerable Beneficiaries, Including Survivors
paragraphs: While protections for disabled workers would generally cover all such  beneficiaries, the options for protecting dependent benefits could be more  targeted to specific dependents and not necessarily applied to the full  range of dependents, which includes spouses, divorcees, widow(er)s, and  child survivors. The circumstances around which a person becomes a  dependent vary greatly, as does the role of Social Security benefits in their  lives. For some, Social Security may be the primary source of support; for  others, it may be only a small proportion of their income.
Protections could target children, who make up about 8 percent of Social  Security beneficiaries, receiving benefits as the survivors or dependents of  disabled or retired workers. Table 3 shows the number of children who  receive benefits in each category and the average monthly benefit for  these children. One way to protect the benefits of children would be to  exempt them from any reform, keeping their benefit calculation tied to  current law. Another way to protect their benefits to some degree would  be to raise the maximum benefit a family could receive on a single  worker’s earnings record.
The majority of experts with whom we spoke told us that increasing the  maximum amount that a family could receive from one worker’s earnings  record could help protect child and other dependent benefits. Such an  increase could help those dependents who are constrained by the family  maximum. A family may have several people receiving benefits based on  one worker’s record. The sum of the family members’ benefits may exceed  the specified maximum, which is calculated as a percentage of the  worker’s benefit amount. Thus, any reform that would result in a decrease  in the primary benefit amount would also result in a decrease in the  amount that each eligible family member would receive and a  corresponding decrease in the total amount a family would receive.
Certain options, including increased allowable benefits for widows or  partial exemptions, could be designed to protect the benefits of  widow(er)s or others who may have fewer resources available to them.  Under current law, widows and widowers can collect 100 percent of their  deceased spouse’s benefits (or their own benefit—whichever is greater);  a “widow’s boost” would allow them to receive up to 75 percent of the  couple’s combined benefits. Widow(er)s may rely on Social Security for a  large percentage of their retirement income, in part because they may live  many years beyond the exhaustion of other financial resources, may find it  difficult to work, or may incur large health expenses that deplete their  other resources.
A reduction in the COLA may be particularly detrimental to the lifetime  benefits of those who live long lives, because the effect of reducing the  COLA is compounded over time. As such, it may be desirable to protect  older widow(er)s—along with other individuals who receive benefits for a  prolonged period of time—from the effect of a COLA reduction. For  example, in our projections for the COLA reduction, we found that for the  group of widows who received some benefits and who died before age 75,  median lifetime benefits would be approximately 93 percent of those  under current law. In contrast for those who lived past age 95, median  lifetime benefits would be only 83 percent of currently scheduled levels.
section_title: Some Protection Options May Create New Costs and Unintended Incentives for the Social Security Program
paragraphs: The options for protecting the benefits of disabled workers and those of  dependents come at a cost to the Social Security program in terms of its  solvency. In addition, some protections options may create incentives for  people to apply to the Disability Insurance program if DI benefits increase  while retirement benefits stay stable. Further, protection options could  provide disincentives for some to return to work.
subsections: section_title: Protecting the Benefits of Disabled Workers and Dependents Would Increase Costs for the Social Security Program
paragraphs: The Social Security reform elements we examined were designed  primarily to improve program solvency. These reform elements would  generally reduce benefits from their currently scheduled but underfunded  levels. While protecting the benefits of disabled workers and dependents  may be socially desirable, such protection would come at some cost to the  Social Security program. In particular, the protections lessen the degree to  which the potential reforms could restore solvency. One could counter  these costs with further benefit reductions to beneficiaries considered less  vulnerable than those recipients whose benefits are specifically protected.  That is, reform packages with certain benefit protections for vulnerable  populations may necessitate further reductions in the benefits of retired  workers or increases in revenues to achieve the intended solvency effect.  In addition to the effects on solvency, some of the protections discussed  may also have administrative costs associated with them.
section_title: Certain Protections May Create Incentives for Individuals to Apply for Disability Benefits
paragraphs: Protecting the benefits of disabled workers may increase the number of  people who apply for disability benefits. This may also be relevant to  certain reform elements. An increase in the full retirement age coupled  with the reduction in benefits for early retirement could motivate some  individuals approaching the early retirement age to apply for disability  benefits, if they believed that they could qualify for the now greater DI  benefits. For example, before a change in the retirement age a worker  who is a year away from the full retirement age, and who would qualify for  DI but is unsure of that outcome, may choose to wait and only receive Old  Age benefits. Once the full retirement age is raised, this worker may  choose to apply for DI, rather than waiting to receive retirement benefits.  The greater the benefit disparity between the two programs, the more  likely it may be that DI applications and enrollment will increase. Thus,  the potential for an increase in DI program costs exists with any reform  elements that decrease the generosity of the Old Age component of OASDI  without a corresponding decrease in that of the DI component.
Under current law, there may already be an incentive for older workers to  apply for DI rather than retire early. Using individual level data from the  simulation model, we analyzed the benefits of two similar individuals  under current law and under price indexing with and without full and  partial exemptions. Both of the simulated individuals had similar lifetime  earnings, close to the median for the simulated 1985 cohort, and both  would have received initial benefits at age 62. However, they differed in  two significant ways: one retired at age 62, while the other was disabled at  age 62, and the retiree had lower lifetime benefits under current law. The  retiree, who died at age 84, had lifetime benefits of about $433,000, while  the disabled worker, who died at age 82, had lifetime benefits of about  $505,000—about 16 percent higher than those of the retired worker.
A full exemption for disabled workers from certain reform elements could  similarly create discrepancies between the two programs, resulting in  incentives to apply for the DI program. Under price indexing, the lifetime  benefits of both individuals would be reduced, but the relative difference  would remain at about 16 percent. However, if disabled workers were fully  exempted from price indexing, the simulated disabled worker’s lifetime  benefits would be back to the initial amount of $505,000, or 72 percent  greater than those of the retired worker. This difference in potential  benefits would likely increase the incentive to apply for the DI program.  Figure 12 and table 4 show the total lifetime benefits and the average  monthly benefits of these two simulated individuals under current law,  price indexing, and with exemptions.
However, partial rather than full exemptions or other protections, such as  an age-indexed super COLA, could provide benefit protections without  substantially increasing the disparity between the programs for people  approaching the early or full retirement ages. Under a partial exemption,  in which the disabled worker would be exempted from the reform until  full retirement age, the added incentive that could be created by a full  exemption would be reduced. Such a partial exemption for the disabled  worker in our example would result in lifetime benefits that are about  33 percent higher than those of the retired worker under price indexing.
section_title: Certain Protections May Affect the Work Decisions of Beneficiaries
paragraphs: The family maximum limits the amount that can be received off of a  worker’s record. This limit is compatible with the incentive for individuals  to work. Changing such a limit could affect beneficiaries’ work decisions.  For example, protecting benefits of dependents by increasing the family  maximum could affect an individual’s work decisions. Under the current  family maximum with a benefit reduction in place, if a person chooses to  work 30 hours a week, an increase in the total amount a family (or  individual dependents) could receive might affect this decision and  decrease the person’s time in the workforce. In such a case, the individual  may find that the increase in the benefits received would allow for fewer  weekly hours of work without a change in total income. In addition,  protections that increase the benefits of disabled workers, such as the  super COLA, can also create disincentives for such beneficiaries to return  to work. As such, some individuals may continue to rely on the DI  program, rather than finding a way to re-enter the workforce.
section_title: Conclusions
paragraphs: Social Security’s financial challenges may result in program modifications  that may include benefit reductions. These benefit reductions will likely  affect all beneficiaries, including vulnerable individuals who may not be  able to adjust to these reductions or who rely on Social Security as their  primary source of income. While protecting the benefits of vulnerable  populations may be desirable, such action does come at a cost. Further  benefit reductions or revenue increases would be needed to achieve  program solvency. These offsets, in turn, may create new financial  vulnerabilities among other beneficiaries who would bear the burden of  these protections.
Few reform proposals consider the impact that benefit reductions would  have on all beneficiary types, instead treating all beneficiaries similarly.  However, some special consideration should be given to the effects of the  reform on the benefits of the most vulnerable, especially when these  individuals are disproportionately affected. If the solution to Social  Security’s financing problems includes benefit reductions, then the equal  treatment of all beneficiaries may need to be reconsidered, and the  complex interactions of benefit reductions, protections, and direct and  indirect costs to the system and to other retirees will need to be weighed  carefully. Benefit protections can be a part of a comprehensive reform  package and the reform debate should consider the design, inclusion, and  implications of such measures to assure income adequacy. Likewise, to the  extent that Social Security aligns the disability program with the current  state of science, medicine, technology, and labor market conditions, such  modernization should also be considered.
section_title: Matter for Congressional Consideration
paragraphs: Accordingly, in light of potential reform, Congress should consider the  potential implications of reform on disability and dependent beneficiaries.  Such a review might usefully be coordinated with any modernization of  the Social Security disability program.
section_title: Agency Comments
paragraphs: We provided a draft of this report to SSA and the Department of the  Treasury, which generally agreed with our findings.  Both provided  technical comments, and SSA also provided general comments, which  appear in appendix III.  We incorporated the comments throughout our  report as appropriate.
In general, SSA concurred with the methodology, overall findings, and  conclusions of the report.  However, SSA felt that the report could benefit  from a more direct comparison of disabled beneficiaries and retired  beneficiaries (and a similar construct for dependents). While such a  comparison could be beneficial and give context to the reform discussion,  this report was premised on the notion that certain beneficiaries would be  less able to offset benefit reductions, rather than a comparison of relative  welfare.
Finally, GAO agrees that one could better assess the degree to which a  reform element or protection option support the program’s goal of  adequacy if benefits were compared to a standard of adequacy; however  such a comparison was beyond the scope of the current study.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution until 30 days after the date of this  letter. At that time, we will send copies of this report to the Social Security  Administration and the Department of the Treasury, as well as other  interested parties. Copies will also be made available to others upon  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov. Please contact me at (202) 512-7215, if you  have any questions about this report. Other major contributors include  Michael Collins, Nagla’a El-Hodiri, Jennifer Gregory, Joe Applebaum,  Melinda Cordero, Mark Goldwein, Meaghan Mann, and Dan Schwimer.
section_title: Appendix I: Methodology
paragraphs: To analyze the effects of individual reform elements and certain  protections from these reforms on Social Security benefit levels for  disabled workers and dependents, we simulated their benefits using the  Policy Simulation Group’s (PSG) microsimulation models. We based our  analysis on projected lifetime benefits for a simulated 1985 birth cohort. In  order to have a point of comparison, we also used the microsimulation  models to simulate Social Security benefits of retirees who receive  benefits on their own record.
subsections: section_title: Description of Social Security Reform Elements
subsections: section_title: Longevity Indexing
paragraphs: To simulate longevity indexing, which links the growth of initial benefits  to changes in life expectancy, we successively modified the PIA formula  replacement factors (90, 32, 15) beginning in 2009, reducing them annually  by multiplying them by 0.995. This specification mimics provision 1 of  Model 3 of the President’s Commission to Strengthen Social Security  (CSSS). The CSSS solvency memorandum notes that the 0.995 successive  reductions “reduces monthly benefit levels by an amount equivalent to  increasing the normal retirement age (NRA) for retired workers by enough  to maintain a constant life expectancy at NRA, for any fixed age of benefit  entitlement.” This provision as specified and scored—using the  intermediate assumptions of the 2001 Trustees’ report—in the CSSS memo  by SSA’s Office of the Chief Actuary would improve the long-range OASDI  actuarial balance (reduce the actuarial deficit) by an estimated  1.17 percent of taxable payroll.
section_title: Price Indexing
paragraphs: We also simulated the effects of price indexing, where initial benefits  would be indexed to the consumer price index (CPI) in order to limit the  growth of benefits. We successively modified the primary insurance  amount (PIA) formula replacement factors (90, 32, and 15) beginning in  2012, reducing them successively by real wage growth in the second prior  year. This specification mimics provision B6 of the August 10, 2005,  memorandum to SSA’s Chief Actuary regarding the provision requested by  the Social Security Advisory Board (SSAB), which is an update of  provision 1 of Model 2 of the CSSS. As noted in the CSSS’s solvency  memorandum from SSA’s Chief Actuary, “his provision would result in  increasing benefit levels for individuals with equivalent lifetime earnings  across generations (relative to the average wage level) at the rate of price  growth (increase in the CPI), rather than at the rate of growth in the  average wage level as in current law.” This provision as specified and  scored by OCACT in the SSAB memo would improve the long-range  OASDI actuarial balance (reduce the actuarial deficit) by an estimated  2.38 percent of taxable payroll.
section_title: Progressive Price Indexing
paragraphs: To simulate the effects of implementing a progressive price index, we  mimicked provision B7 of the August 10, 2005, memorandum to SSA’s  Chief Actuary. We created a new bend point at the 30th percentile of  earnings, beginning in 2012. We maintained current-law benefits for  earners at the 30th percentile and below. We also maintained the lower  two PIA formula replacement factors (90 and 32). We reduced the upper  two PIA formula replacement factors (32 and 15) so that maximum worker  benefits from one generation to the next grew by inflation rather than the  growth in average wages. This provision as specified and scored by  OCACT would improve the long-range OASDI actuarial balance (reduce  the actuarial deficit) by an estimated 1.43 percent of taxable payroll.
section_title: Increase the Number of Computation Years Used in the Initial Benefit Calculation
paragraphs: In our modeling of this reform element, we gradually reduced the number  of drop out years from 5 to 0, thereby extending the number of  computation years from 35 to 40. The number of computation years would  increase to 36 in 2007, 37 in 2008, 38 in 2010, 39 in 2012, and 40 in 2014.  This specification mimics provision B2 of the August 10, 2005  memorandum to SSA’s Chief Actuary. This provision as specified and  scored by OCACT would improve the long-range OASDI actuarial balance  (reduce the actuarial deficit) by an estimated 0.46 percent of taxable  payroll.
section_title: Reduction in the Cost-of- Living Adjustment
paragraphs: We also simulated a reduction in the cost-of-living adjustment (COLA) of  one percentage point, beginning in 2012. This specification mimics  provision A2 of the August 10, 2005, memorandum to SSA’s Chief  Actuary. This provision as specified and scored by OCACT would  improve the long-range OASDI actuarial balance (reduce the actuarial  deficit) by an estimated 1.49 percent of taxable payroll. Some reform  proposals have called for reducing the COLA by about 0.2 percent to 0.4  percent, in response to methodological concerns that the CPI for urban  wage earners and clerical workers, the current CPI measure used to adjust  benefits, overstates inflation. The intent of these proposals is to implement  a COLA that may more accurately reflect inflation.
section_title: Options Modeled to Protect Benefits of Disabled Workers
subsections: section_title: Full Exemption
paragraphs: To simulate the effects of fully exempting disabled workers from the  various reform elements, we modified the simulation to exclude the  benefits of disabled workers from the reform elements. As such, there  would be no recalculation of benefits when the exempted beneficiary  reached full retirement age.
section_title: Partial Exemptions
paragraphs: We defined partial exemptions for disabled workers to mean that their  benefit would be exempted from any simulated reform until the FRA and  then would be recalculated. For the COLA reduction, we simply started  the one percentage point reduction at the FRA for disabled workers.  However, for the reforms that involved a change in the initial benefit  amount (longevity indexing, price indexing, and progressive price  indexing), we simulated the recalculation of benefits at the FRA in two  different ways.
section_title: Partial Exemption Type I— Kolbe-Stenholm
paragraphs: The first partial exemption, which we refer to as Partial Exemption Type I,  followed the Kolbe-Stenholm model of converting benefits at the FRA. The  Kolbe-Stenholm model reduces benefits in proportion to the difference in  the disabled-worker PIA and the retired-worker PIA at the DI-onset age.   This OASI benefit amount would be indexed by the COLA to for the years  between the disability onset age and age 62.
section_title: Partial Exemption Type II—Graham
paragraphs: )
DIC is the promised DI benefit level under current law  YD is the number of years (ages 21 to 62) that the disabled worker received  DI benefits  OASI is the OASI benefit level, calculated by computing the PIA under the  reform using the formula applicable for newly eligible retired workers in  the year the converting worker reached age 62. In this case, earnings from  the years prior to disability would be wage indexed. The disability freeze  years would apply in computing the AIME.
section_title: Data Reliability
paragraphs: To assess the reliability of simulated data from GEMINI, we reviewed  PSG’s published validation checks and examined the data for  reasonableness and consistency.
PSG has published a number of validation checks of its simulated life  histories. For example, simulated life expectancy is compared with  projections from the Social Security Trustees; simulated benefits at age  62 are compared with administrative data from SSA; and simulated  educational attainment, labor force participation rates, and job tenure are  compared with values from the Current Population Survey. We found that  simulated statistics for the life histories were reasonably close to the  validation targets.
section_title: Appendix II: Calculating OASDI Benefits
paragraphs: Social Security offers a variety of types of benefits, and although they are  all based upon the same formula, they are calculated in different ways. The  methods for calculating the different types of benefits are outlined below.
subsections: section_title: Calculating Old-Age Benefits
paragraphs: Old Age benefits are calculated through a four-step process in order to  provide retirees with progressive yet wage-based cash payments (see  fig. 13).
First a worker’s Average Indexed Monthly Earnings (AIME) is calculated  by indexing the worker’s past earnings to changes in average wage levels  over the worker’s lifetime and then averaging them. The AIME formula  considers all years in which a worker earned covered earnings. It then  uses the number of elapsed years from 1950 or attainment of age  21 through the age of 62 (or death) and allows for 5 “drop-out years” so  that the worker’s highest 35 years of covered indexed earnings are used in  the calculation. Once the AIME is determined, a progressive formula is  applied to the AIME to yield a worker’s Primary Insurance Amount (PIA).  In 2007, the PIA formula had the following bend points: 90 percent of the  first $680 of AIME, plus 32 percent of the next $3,420, and 15 percent of  any earnings above that level (fig. 13). For example, the PIA of a worker  whose AIME was $1000, the equivalent of at $12,000 annual salary, would  be the sum of $612 (90 percent of $680) and $102.40 (32 percent of $320),  yielding a total initial monthly benefit of around $715. Similarly, the PIA of  a worker with an $8,000 AIME (the equivalent of a $96,000 annual salary)  would be the sum of $612 (90 percent of $680), $1094.40 (32 percent of  $3420), and $585 (15 percent of $3,900), for a total of just under $2,292.  Because the formula is both wage-based and progressive, the second  worker receives a much higher actual benefit than the first worker  ($2,292 versus $715), but his benefits are a much lower proportion of his  past earnings than the first worker’s benefits (28.6 percent versus  71.4 percent).
If a worker retires at the full retirement age, which is currently between  ages 65 and 66, and legislated to reach 67 in 2027, this PIA represents the  first year’s benefit (although it is adjusted for inflation through a cost-of- living adjustment (COLA)). However, workers can begin receiving reduced  benefits at 62; benefits are progressively larger for each month workers  postpone drawing them, up to age 70. In general, benefits are actuarially  neutral to the Social Security program; that is, the reduction for starting  benefits before full retirement age and the credit for starting after full  retirement age are such that the total value of benefits received over one’s  lifetime is approximately equivalent for the average individual. Those  receiving benefits before the full retirement age will also be subject to an  earnings test. If earned income is above a certain threshold, Social  Security withholds one dollar of benefits for every two dollars of earning  above the threshold. Each year, benefits receive a COLA to keep pace with  inflation.
section_title: Calculating Disability Benefits
paragraphs: Similarly to Old Age benefits, disability benefits are determined by  calculating a worker’s AIME, applying the progressive PIA formula to it,  and then adjusting benefit levels through yearly COLAs (fig. 14).
However, because disabled workers are likely to have shorter work  histories, their benefits calculation relies on fewer years of earnings. In  general, the number of years of earnings used to calculate the AIME is  based on the total number of years between when a worker turns 21 and  when he applies for DI. If this number of years is 25 or more, a worker’s  5 lowest (or zero) earnings years will be dropped from the calculation. The  number of drop-out years gradually declines as a worker applies for  disability earlier in life. If the disabled worker is 60 at the time of  application, for example, 38 years would have elapsed since age 21. He will  receive 5 drop out years, and his AIME will be calculated based upon his  33 highest-earning years. In contrast, if a worker applies for DI at 32, he  would have only had 10 elapsed years since age 21, and only be eligible for  2 drop-out years; his AIME would be calculated based upon his top 8  years. At the full retirement age, disabled workers begin receiving  retirement benefits, instead of disability benefits; however, benefit levels  remain the same and continue to grow through annual COLAs.
section_title: Calculating Benefits for Dependents of Retired and Disabled Workers
paragraphs: Spouses: In addition to being eligible to receive retirement benefits on  their own earnings records as early as age 62, individuals can also  receive dependents’ benefits at age 62, based on their spouse’s benefit  amount or, in some cases, that of an ex-spouse (table 5). These  individuals can collect these benefits regardless of whether their  spouse is concurrently receiving retired or disabled worker benefits. If  collection begins at full retirement age, these individuals are eligible for  either one-half of their spouse’s benefit amount, or the benefits based  on their own earnings record; whichever is greater. As with Old Age  benefits, adjustments are made if these individuals chooses to take  early retirement.
Dependent Children: Dependent children may also qualify for one- half of their retired or disabled parent’s benefit amount. This benefit is  available for disabled adult children who are not working on a regular  basis, children under age 18, or children still in high school and under  age 19.
Like other benefits, dependents’ benefits receive annual COLAs.  Dependent benefits are subject to a family maximum, whereby a family  is limited in the total amount of benefits that can be received from a  single individual’s earnings record. The size of the family maximum is  currently between 150 percent and 188 percent of the primary  beneficiary’s benefit.
section_title: Calculating Survivors’ Benefits
paragraphs: Widow(er)s may be eligible to receive a one-time death benefit of $255. In  addition, widow(er)s, surviving parents, children under the age of 18 (19 if  the child is still in school) and disabled adult children can collect benefits  off of the deceased person’s earnings record. A widow(er) at full  retirement age will receive 100 percent of his or her spouse’s benefits,  unless his or her own benefit is higher. Younger widow(er)s (those  between age 60 and the full retirement age) can receive between 71 and  99 percent of their deceased spouses’ benefits depending on how close  they are to the full retirement age. Furthermore, regardless of age, a  widow(er) with young children, can receive 75 percent of the deceased  spouse’s benefit. Surviving parents and children can also collect up to  75 percent of their deceased family members’ benefits. All of these  benefits receive annual COLA adjustments and are subject to the family  maximum.
section_title: Appendix III: Comments from the Social Security Administration
section_title: Related GAO Products
paragraphs: Retirement Security: Women Face Challenges in Ensuring Financial  Security in Retirement. GAO-08-105.  Washington, D.C.: October 11, 2007.
Retirement Decisions: Federal Policies Offer Mixed Signals about When  to Retire. GAO-07-753. Washington, D.C.: July 11, 2007.
Social Security Reform: Implications of Different Indexing Choice.   GAO-06-804. Washington, D.C.: Sept ember 14, 2006.
Social Security: Societal Changes Add Challenges to Program  Protections. GAO-05-706T. Washington, D.C.: May 17, 2005.
Options for Social Security Reform. GAO-05-649R. Washington, D.C.:   May 6, 2005.
Social Security Reform: Answers to Key Questions. GAO-05-193SP.  Washington, D.C.: May 2, 2005.
Social Security Reform: Early Action Would Be Prudent. GAO-05-397T.  Washington, D.C.: March 9, 2005.
Long Term Fiscal Issues: The Need for Social Security Reform.   GAO-05-318T. Washington, D.C. February 9, 2005.
Social Security: Distribution of Benefits and Taxes Relative to Earnings  Level. GAO-04-747. Washington, D.C.: June 15, 2004.
Social Security: Program’s Role in Helping Ensure Income Adequacy.  GAO-02-62. Washington, D.C.: November 30, 2001.
Social Security Reform: Potential Effects on SSA’s Disability Programs  and Beneficiaries. GAO-01-35. Washington, D.C.: January 24, 2001.
Social Security: Evaluating Reform Proposals. GAO/AIMD/HEHS-00-29.  Washington, D.C.: November 4, 1999.
Social Security Reform: Implications of Raising the Retirement Age.  GAO/HEHS-99-112. Washington, D.C.: August 27, 1999.
Social Security: Issues in Comparing Rates of Return with Market  Investments. GAO/HEHS-99-110. Washington, D.C.: August 5, 1999.
Social Security: Criteria for Evaluating Social Security Reform  Proposals. GA0/T-HEHS-99-94. Washington, D.C.: March 25, 1999.