Social Security and Minorities: Earnings, Disability Incidence, and Mortality Are Key Factors That Influence Taxes Paid and Benefits Received
Published: 2003-04-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Although Social Security's benefit and contribution provisions are neutral with respect to race, ethnicity, and gender, concerns about the experiences of minority groups under Social Security focus on whether they benefit less than whites, particularly because of the shorter life expectancy of blacks. These concerns are related to the concept of equity, or how benefits compare with taxes. To gain a thorough understanding of the experiences of minority populations under Social Security, GAO was asked to examine (1) what socioeconomic and demographic factors influence Social Security taxes paid and benefits received and (2) how different equity measures compare across racial groups. Because of the current system's projected actuarial deficit, to conduct this study, GAO made its calculations using three policy scenarios, each of which achieves 75-year solvency: a payroll tax increase and a progressive and proportional benefit cut. Further, GAO used three measures of equity: lifetime benefit-to-tax ratios, net lifetime benefits, and real internal rates of return. GAO also examined four birth cohorts: 1931-40, 1941-45, 1946-55, and 1956-64.
section_title: What GAO Found
paragraphs: Lifetime earnings, the incidence of disability, and mortality are three key factors that influence the taxes individuals pay into the Social Security system and the benefits they receive. Lifetime earnings factor directly into the Social Security benefit formula, which is designed to replace a larger proportion of pre-retirement-covered earnings for low-income earners than for higher-income earners. Additionally, the probability of being on the Disability Insurance rolls affects the expected value of benefits. People who are disabled start receiving benefits earlier. The third factor, mortality, affects the benefits received relative to taxes paid because it determines the number of years a person will pay taxes and receive benefits. Differences by race in the relationship between taxes paid and benefits received under Social Security are due mainly to differences in lifetime earnings, the incidence of disability, and mortality among the groups. In the aggregate, blacks and Hispanics have higher disability rates and lower lifetime earnings, and thus as a group tend to receive greater benefits relative to taxes than whites. However, whites with low lifetime earnings or high disability rates also receive greater benefits relative to taxes than their higher-income or nondisabled counterparts. Higher benefits relative to taxes paid are associated with lower lifetime earnings and higher disability incidence.

section_title: Letter
paragraphs: In 2002, the Social Security program paid out approximately $454 billion in  retired worker, dependent, survivor, and disability insurance benefits to  about 46.4 million recipients. Protecting against loss of earnings due to  disability, retirement, and death, the social insurance program is an  important source of retirement income security for both minority and  nonminority workers and their families. While approximately 18 percent of  white retirees aged 65 and older rely on Social Security as their only  source of retirement income, about 38 percent of minority retirees aged   65 and older rely on it to the same extent. However, the Social Security  Administration’s (SSA) projections suggest that the trust funds that  finance Old-Age, Survivors, and Disability Insurance (OASDI) will begin  running cash deficits in 2018 and will be exhausted by 2042; thus, the  program in its current form is unsustainable in the long term.
Although Social Security’s benefit and contribution provisions are neutral  with respect to race, ethnicity, and gender, concerns about the  experiences of minority groups under Social Security focus on whether  they benefit less than whites from the Social Security system, particularly  because of their shorter life expectancies. These concerns are related to  the concept of equity, or how benefits compare with taxes. To gain a  thorough understanding of the experiences of minority populations under  Social Security, you asked us to examine (1) what socioeconomic and  demographic factors influence Social Security taxes paid and benefits  received and (2) how different equity measures compare across racial  groups.
Because of the current system’s projected actuarial deficit, we made our  calculations using three policy scenarios, each of which achieves 75-year  solvency—a payroll tax increase and two benefit-reduction only  benchmarks. The benefit-reduction-only benchmarks gradually phase in  reductions from 2005 to 2035; the reductions are accomplished by  changing the parameters of the benefit formula in various ways to achieve  either progressive or proportional reductions. The proportional benefit cut  reduces the benefit formula factors proportionally across all earnings  levels, while the progressive benefit cut reduces the benefit formula  factors by smaller scales for lower earners. To conduct our analyses, we  asked SSA’s Office of Policy to apply the three scenarios to the latest  version of its microsimulation model, Modeling Income in the Near Term  (MINT3). The MINT3 model includes some dependent and survivor  beneficiaries, such as current and divorced spouses, as well as widows,  but does not include child beneficiaries. The model does, however, control  for the exclusion of children. The MINT3 examines four birth cohorts:  1931-40, 1941-45, 1946-55, and 1956-64. In our analysis, we used three  measures of equity—the extent to which returns are commensurate with  contributions: lifetime benefit-to-tax ratios, net lifetime benefits (benefits  minus taxes), and real internal rates of return. For our equity measures,  we use the “shared” concept of benefits and earnings, which incorporates  some spousal taxes and benefits along with those of the individual worker.  For ease of exposition, this report focuses on one birth cohort and one  equity measure: the 1931-40 birth cohort and the lifetime benefit-to-tax  ratio.
We conducted our work between January 2002 and April 2003 in  accordance with generally accepted government auditing standards. A  more detailed discussion of our scope and methodology appears in  appendix I.
subsections: section_title: Background
paragraphs: Title II of the Social Security Act, as amended, establishes the Old-Age,  Survivors, and Disability Insurance program, which is generally known as  Social Security. The program provides cash benefits to retired and  disabled workers and their dependents and survivors. The Congress  designed Social Security benefits, at least implicitly, with a focus on  replacing lost wages. Because the program is financed on a modified pay- as-you-go basis, payroll tax contributions of those currently working are  transferred to current beneficiaries. Current beneficiaries include insured  workers who are entitled to retirement or disability benefits, and their  dependents, as well as survivors of deceased insured workers. The  progressive benefit structure effectively provides greater insurance  protection relative to contributions to earners with lower wages than to  high-wage earners. Workers become eligible when they have enough  quarters of coverage under Social Security, (i.e., quarters of the year with  earnings from which Social Security taxes are deducted); they and their  employers pay payroll taxes on those covered earnings to finance  benefits. In 2002, 153 million people had earnings covered by Social  Security, and 46.4 million people received approximately $454 billion in  OASDI benefits.
Social Security was originally an old-age retirement program. However,  the Social Security Amendments of 1939 added two new categories of  benefits: dependent benefits paid to the spouse and minor children of a  retired worker, and survivor benefits paid to the family after the death of a  covered worker. In calendar year 2002, about 10 million people received  approximately $106 billion in survivor and dependent benefits. Further,  the amount of Old-Age and Survivors Insurance (OASI) benefits paid in  2002 totaled $388 billion for 39 million recipients.
Established in 1956, Social Security Disability Insurance provides monthly  payments to eligible workers with disabilities who are under the normal  retirement age and to their dependents. To be eligible for DI benefits as  an adult, a person must have enough quarters of covered earnings and  must be unable to perform any substantial gainful activity by reason of a  medically determinable physical or mental impairment that is expected to  result in death or that has lasted or can be expected to last for a  continuous period of at least 12 months. As with retired worker benefits,  disability benefits are funded by payroll taxes paid by covered employees  and their employers. In calendar year 2002, about 7.2 million individuals  received approximately $65.6 billion in DI benefits.
Our previous work on Social Security includes research on the effects of  Social Security reform on women, the disability insurance program, the  effects of increasing the retirement age, and adequacy issues associated  with the program. See our related products section for a listing of our  previous work in this area.
Further, analysis by other organizations also has examined the  experiences of minority groups under Social Security. Incorporating both  different earnings and life expectancies of the racial/ethnic groups, some  of the research has focused on the relative importance of Social Security  for minorities. Others have suggested that blacks benefit less than whites  under the current system and that both blacks and Hispanics would  experience higher returns under a system that incorporated individual  accounts.
Following the analysis of Cohen, Steuerle and Carasso, our analysis takes  a broader approach to the measurement of Social Security. We analyze  data on the overall program, OASDI, as well as the component programs,  OASI and DI.
section_title: Certain Key Factors Influence Racial Groups’ Receipt of Social Security Benefits and Payment of Social Security Taxes
paragraphs: A variety of socioeconomic and demographic factors influence the receipt  of Social Security—most significantly, lifetime earnings, the incidence of  disability, and mortality. Lifetime earnings factor directly into the  progressive benefit formula, which replaces a larger proportion of pre- retirement covered earnings for low-income earners than it does for  higher-income earners. Additionally, the probability of being on the  Disability Insurance rolls affects the expected value of benefits. Finally,  mortality determines the number of years an individual will receive  benefits and pay taxes and, therefore, the total benefits received.
One key factor affecting the level of Social Security benefits is earnings.  The calculation of Social Security benefits is designed to replace a larger  proportion of the earnings of lower earners than it does for higher earners.  Thus, the benefit formula is progressive. For example, workers who retire  at the normal retirement age in 2003 with scaled, low lifetime covered  earnings will have benefits that replace approximately 56 percent of their  earnings. Workers with scaled, medium lifetime earnings will have about  42 percent of their earnings replaced, and workers with lifetime earnings  at the maximum taxable level will have approximately 30 percent  replaced.
The probability of becoming disabled also affects the expected value of  Social Security benefits. DI recipients start drawing Social Security earlier  and simultaneously see their tax liability reduced; in general, they will  receive greater benefits in relation to the taxes they pay. DI benefits are  based on the same formula as OASI benefits, so that benefits for low- income workers replace a larger proportion of their earnings. The average  age of disabled workers is approximately 50.
Disability trends will have a significant effect on future Social Security  program costs as the Baby Boom generation ages. The highest rates of  disability incidence within the DI program occur from age 50 to 65.  Because of changing demographics, the number of DI beneficiaries is  expected to more than double over the next 75 years, from the current   7.2 million to more than 16 million.
Finally, mortality rates determine the expected number of years a person  will contribute taxes and receive benefits and, therefore, the amount of  total benefits received. For example, if a nondisabled person dies before  retirement, that individual’s benefit-to-tax ratio is expected to be lower  than the ratio for an individual who lives to receive retirement benefits.  Individuals who die before retirement will no longer make contributions to  the Social Security program. However, they may have dependents who  would benefit from the survivor portion of the program.
section_title: Higher Benefits Relative to Taxes Paid are Associated with Lower Lifetime Earnings and Higher Disability Incidence
paragraphs: Differences by race in the relationship between taxes paid and benefits  received under Social Security are due to differences in lifetime earnings,  the incidence of disability, and mortality between the groups. In the  aggregate, blacks and Hispanics have higher disability rates and lower  lifetime earnings, and thus receive greater benefits relative to taxes than  whites. However, whites with low lifetime earnings and high disability  rates also receive greater benefits relative to taxes than their higher- income and nondisabled counterparts. Because blacks have higher  mortality than whites, their ratio of benefits to taxes may be lower in  comparison, but this depends, in part, on whether they have survivors.  Although blacks die younger than whites, and may receive fewer years of  retirement benefits, they may also leave survivors who receive benefits for  more years than their white counterparts.
subsections: section_title: As a Group, on Average Minorities Accrue Higher Benefits in Relation to the Taxes They Pay
paragraphs: In the aggregate, blacks and Hispanics generally have higher disability  rates and lower lifetime earnings, and thus receive greater benefits relative  to taxes than whites. Figure 1 presents the median lifetime benefit-to-tax  ratio for the 1931-40 birth cohort.
However, these aggregate differences by race are small, for example,  compared to the differences between high and low earners within racial  groups. The aggregate results are affected by other factors that vary by  race, such as lifetime earnings, disability incidence, and mortality.
section_title: Individuals with Low Lifetime Earnings Receive Higher Social Security Benefits Relative to Taxes Than Individuals with High Lifetime Earnings
paragraphs: When examined by earnings quintiles, those in the lowest earnings quintile  experience a higher benefit-to-tax ratio relative to those in the upper  quintiles. This finding is true across all birth cohorts we examined, which  cover people from 1931-64, and the three policy scenarios we examined.  Figure 2 presents OASDI’s lifetime median benefit-to-tax ratios  experienced by individuals in the 1931-40-birth group for different earnings  categories under the payroll-tax increase scenario. Those in the lowest  quintile, regardless of race, have a higher benefit-to-tax ratio than those in  the upper quintiles because the benefit calculation replaces a higher  proportion of their earnings compared with higher earners.
Figure 3 shows that approximately 38 percent of Hispanics are in the  lowest-earnings quintile, while about 35 percent of blacks and 17 percent  of whites are. Moreover, about 9 percent of Hispanics are in the highest- earnings quintile; the corresponding percentages for blacks and whites are  11 percent and 22 percent, respectively. (See fig. 3.) Because minorities  are over-represented in the lowest earnings quintile and under-represented  in the highest quintile, they sometimes have higher benefit-to-tax ratios  than whites.
section_title: Disability Insurance Yields Higher Benefits Relative to Taxes for Individuals Who Are Low Earners Than for Individuals Who Are High Earners
paragraphs: In general, groups who are more likely to be disabled receive greater  OASDI benefits relative to taxes paid than those who are not disabled. As  shown in figure 4, low-income individuals, particularly blacks, achieve  higher benefit-to-tax ratios under OASDI (when the disability program is  included) than under OASI.
This is because in addition to having lower lifetime earnings than whites,  blacks are more likely to be on DI than whites or Hispanics. As shown in  figure 5, blacks make up 10.3 percent of the sample, but 16.9 percent of the  DI beneficiaries, while Hispanics make up about 8.4 percent of the sample,  and 10.1 percent of DI beneficiaries. Whites are the only group to make up  a smaller percent of DI beneficiaries than of the whole sample.
section_title: Mortality Rates of the Different Racial Groups Are Relevant to the Receipt of Social Security Benefits
paragraphs: The relationship between mortality and the ratio of benefits to taxes for an  individual is more complicated than it is for lifetime earnings and the  incidence of disability. In general, mortality rates affect the expected  number of years a person will contribute taxes and receive benefits and,  therefore, the amount of total benefits received. For individuals who die  before they retire, the benefit-to-tax ratio is expected to be lower than for  individuals who live to receive retirement benefits. Mortality rates among  different racial groups suggest that blacks are more likely to die before  receiving a retirement benefit than their Hispanic or white counterparts.  (See fig. 6.) Though blacks make up about 10.3 percent of our sample, over  16 percent of those dying before age 62 are black.
Those not dying, or becoming disabled, before receiving a retirement  benefit continue to make contributions to the program while in covered  employment. Census data show that Hispanics and whites have a greater  life expectancy than blacks, as shown in table 1.
Moreover, because of the differential life expectancies and the  probabilities of survival beyond retirement age, on average, whites and  Hispanics can expect to receive more years of benefits than blacks. (See  table 2.)
While those who live longer have a greater benefit-to-tax ratio, those who  die may leave survivors who would benefit from the survivor portion of  the program.
section_title: Concluding Observations
paragraphs: On the basis of our review, three factors are key in determining the  amount of Social Security benefits received relative to taxes paid—lifetime  earnings, disability incidence, and mortality. Social Security is intended to  insure workers and their families against lost wages due to disability,  retirement, or death, and the benefit structure is designed to afford greater  protection to low earners. In general, minorities benefit more from these  protections because, disproportionately, they are low earners and also  have a greater likelihood of receiving disability benefits. Because of their  lower life expectancies, blacks gain the most advantage from disability or  survivors’ benefits while, due to their higher life expectancies, Hispanics  receive retirement benefits for a longer period and, therefore, receive  higher lifetime benefits. As a group, blacks gain from Social Security’s  progressive benefit formula, the early retirement option, and  comprehensive insurance plans. Hispanics also gain from the progressive  benefit formula, and they have the ability to gain more from Social  Security’s annual cost-of-living adjustment because they live longer.
Given the long-run financial problems facing Social Security, policymakers  are considering a variety of potential reforms to make the system  sustainable. Reforms that do so by tying benefits more directly to  contributions may affect the progressivity of the system and are likely to  disproportionately affect equity for minorities as measured in this report.  Further, disability, survivors’, and dependents’ benefits also could be  affected by any changes to the structure of the program.
The choices the Congress will make to restore Social Security’s long-term  solvency and sustainability could affect the distributional effects of the  program. Thus, if progressivity remains one of the important goals for the  program, the debate over system reforms should consider the extent to  which the specific reforms might alter that progressivity, as it is likely to  have a disproportionate impact on minorities, absent other, mitigating,  changes.
section_title: Agency Comments
paragraphs: We provided a draft of this report to SSA and the Bureau of the Census.  SSA provided technical comments, which we have incorporated where  appropriate.
We are sending copies of this report to SSA and Census. We will also make  copies available to others on request. In addition, the report will be  available at no charge on GAO’s Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact me at  (202) 512-7215. See appendix III for other contacts and staff  acknowledgments.
section_title: Appendix I: Scope and Methodology
paragraphs: This appendix provides more details about our analysis of the taxes paid  and benefits received by minority and nonminority participants in the  Social Security program. To conduct our assessment, we examined three  socioeconomic and demographic factors that are relevant to racial groups’  receipt of Social Security benefits—earnings, the disability incidence rate,  and mortality. Additionally, we used three measures of equity–lifetime  benefit-to-tax ratio, net lifetime benefits, and internal rates of return—to  analyze the relationship between Social Security contributions and  benefits under Old-Age, Survivors and Disability Insurance (OASDI), Old- Age and Survivors Insurance (OASI) and Disability Insurance (DI).  Further, we examined four birth cohorts of Social Security beneficiaries:  individuals born during the Depression, 1931-40; those born during WWII,  1941-45; the early Baby Boomers, 1946-55, and the late Baby Boomers,  1956-64.
We also used three benchmark-policy scenarios that restore the 75-year  actuarial balance of the Social Security system–-a payroll tax increase, a  progressive benefit reduction, and a proportional benefit reduction. These  scenarios were applied to the microsimulation model, Modeling Income in  the Near Term (MINT3) to determine the relationship between taxes paid  and benefits received from the program. Social Security’s Office of the  Chief Actuary has scored the benchmark policy scenarios using the  intermediate assumptions of the 2001 Trustees Report.
subsections: section_title: Equity Measures
paragraphs: The Social Security program addresses the twin goals of individual equity  and social adequacy. Equity refers to how benefits compare with taxes;  adequacy refers to the level and certainty of benefits provided to retirees,  the disabled, dependents, and survivors. Three equity measures are used  to determine how groups compare in terms of the taxes they pay and the  benefits they receive under Social Security. The equity measures we used  were the ratio of lifetime benefits to lifetime taxes, net lifetime benefits,  and real internal rates of return. The ratio of lifetime benefits to lifetime  taxes presents information on the relationship between the value of taxes  paid and the value of benefits received. The ratio compares the interest- adjusted value of lifetime benefits with lifetime taxes. Net lifetime benefits  are benefits minus taxes over the course of an individual’s lifetime; net  lifetime benefits also are interest adjusted. Internal rates of return (IRR)  for Social Security reflect the constant discount rate that equates the  present discounted value of taxes with the present discounted value of  benefits.
section_title: Benchmark Policy Scenarios
paragraphs: According to current projections of the Social Security trustees for the  next 75 years, revenues will not be adequate to pay full benefits as defined  under current law. Therefore, estimating future Social Security benefits  should reflect that actuarial deficit and account for the fact that some  combination of benefit reductions and revenue increases will be necessary  to restore long-term solvency. To illustrate a full range of possible  outcomes, we use previously developed policy scenarios that would  achieve 75-year solvency either by only increasing payroll taxes or by only  reducing benefits. These policies have been scored by the Social Security  Administration’s Office of the Chief Actuary.
subsections: section_title: Tax Increase Only Policy
paragraphs: We use only one tax-increase-only benchmark policy scenario because  policies that only increase payroll tax rates have no effect on benefits. Our  tax-increase-only benchmark raises payroll tax rates immediately (in  2002). We increase OASI and DI taxes separately by the amount of the  actuarial deficit of each fund. It results in the smallest tax rate in 2077 of  those we considered and spreads the tax burden most evenly across  generations; this is the primary basis for our selection. The later that taxes  are increased, the higher the tax rate needed to achieve 75-year solvency,  and in turn the higher the tax burden on later taxpayers and lower on  earlier taxpayers. Alternative approaches to increasing revenues could  have very different effects on individual equity.
section_title: Benefit-Reduction Only Policies
paragraphs: We use two benefit-reduction benchmarks for our analysis. Both benefit- reduction benchmarks take the form of reductions in Social Security’s  Primary Insurance Amount (PIA) formula factors; they differ in the  relative size of those reductions across the three factors, which are   90, 32, and 15 percent under current law. Each benchmark has three  dimensions of specification: scope, phase-in period, and the factor  changes themselves.
When workers retire, become disabled, or die, Social Security uses their  lifetime earnings records to determine each worker’s PIA, on which the  individual’s benefit and any dependent and survivor benefits are based.  PIA is the result of two elements—the Average Indexed Monthly Earnings  (AIME) and the benefit formula. The AIME for a retired worker is  determined by taking the 35 highest earnings years in the lifetime earnings  record, indexing them, and taking the average. The AIME for disabled  workers is based on fewer years of earnings. To determine the PIA, AIME  is then applied to a step-like formula, shown here for 2001.
PIA = 90% * (AIME1 ≤$561)  + 32% * (AIME2 > $561 and ≤$3381)  + 15% * (AIME3 > $3381),  where AIMEi is the applicable portion of AIME.
The PIA is the basic monthly benefit, unless it is further adjusted based on  early and delayed retirement, the spouse’s benefit, and other factors.
section_title: Scope
paragraphs: For our analysis, we want the benefit reductions in our benchmarks to  apply very generally to all types of benefits, including disability and  survivor benefits as well as old-age benefits. Our objective is to find  policies that achieve 75-year solvency while reflecting the distributional  effects of the current program as closely as possible. Therefore, it would  not be appropriate to reduce some benefits and not others. If disabled and  survivor benefits were not reduced at all, reductions in other benefits  would be deeper than shown in this analysis.
section_title: Phase-in Period
paragraphs: We selected a phase-in period that begins with those reaching age 62 in  2005 and continues for 30 years. We chose this phase-in period to achieve  a balance between two competing objectives: minimizing the size of the  ultimate benefit reduction and minimizing the size of each year’s  incremental reduction to avoid notches and unduly large incremental  reductions. Since later birth cohorts are generally agreed to experience  lower rates of return on their contributions already under current law,  minimizing the size of the ultimate benefit reduction would minimize  further reductions in later cohorts’ rates of return. The smaller each year’s  reduction, the longer it will take for benefit reductions to achieve solvency  and in turn, the deeper the eventual reductions will have to be. However,  the smallest possible ultimate reduction would be achieved by reducing  benefits immediately for all new retirees by over 10 percent; this would  create a “notch” however, that is, create some marked inequities between  beneficiaries close to each other in age.
Our analysis shows that a 30-year phase-in should produce incremental  annual reductions that would be of lesser size and thus avoid significant  notches. Therefore, it would be preferable to longer phase-in periods,  which would require deeper ultimate reductions.
In addition, we believe it is appropriate to delay the first year of the benefit  reductions for a few years because those within a few years of retirement  would not have had adequate time to adjust their retirement planning if  the reductions applied immediately. The Maintain Tax Rates (MTR)  benchmark in the 1994-96 Advisory Council Report also provided for a  similar delay.
section_title: Defining the Primary Insurance Amount Formula Factor Reductions
paragraphs: Each of our benefit-reduction benchmarks are variations of changes in PIA  formula factors and all are special cases of the following generalized form,  where Fi represents the 3 PIA formula factors, which are 90, 32, and 15  percent under current law. ) t = the year of the factor,  x = constant proportional benefit reduction,  y = constant “subtractive” benefit reduction, and  weight x and weight y determine the relative effects of x and y and sum to  1.
Our potential benchmarks can now be described as follows:  Proportional Offset: weight x = 1 and weight y = 0. The value of x is  calculated to achieve 75-year solvency, given the chosen phase-in period  and scope of reductions.
The formula specifies that the proportional reduction is always taken as a  proportion of the base-year factor value rather than the prior year. This  maintains a constant rate of benefit reduction from year to year. In  contrast, taking the reduction as a proportion of the prior year’s factor  value implies a decelerating of the benefit reduction over time because the  prior year’s factor gets smaller with each reduction. To achieve the same  level of 75-year solvency, this would require a greater proportional  reduction in earlier years because of the smaller reductions in later years.
The proportional offset hits lower earners especially hard because the  constant x percent of the higher formula factors results in a larger  percentage reduction over that segment of the formula, while the higher  formula factors apply to the lower earnings segments of the formula. For  example, in a year when the cumulative size of the proportional reduction  has reached 10 percent, the 90-percent factor would then have been  reduced by 9 percentage points, the 32-percent factor by 3.2 percentage  points, and the 15-percent factor by 1.5 percentage points. As a result,  earnings below the first bendpoint would be replaced at 9 percentage  points less than current law, while earnings above the second bendpoint  would be replaced at only 1.5 percentage points less than current law. Still,  the proportional offset is easily described as a constant percentage  reduction of current law benefits for everyone. In the example,  beneficiaries of all earnings levels would have their benefits reduced by   10 percent.
Progressive Offset: weight x = 0 and weight y = 1. The value of y is  calculated to achieve 75-year solvency, given the chosen phase-in period  and scope of reductions.
This offset results in equal percentage point reductions in the formula  factors, by definition, and subjects earnings across all segments of the PIA  formula to the same reduction. Therefore, the offset avoids hitting lower  earners especially hard as the proportional offset does.
As it happens, this offset produces exactly the same effect as the offset we  used in our 1990 analysis of a partial privatization proposal. In that  analysis, we were charged with finding a benefit reduction that would  leave the redistributive effects of the program unchanged while allowing a  diversion of 2 percentage points of contributions into individual accounts.  We calculated these benefit reductions by computing the Social Security  annuity value of the balance of a hypothetical account that earned interest  on the diverted contributions at the rate of return for each individual’s  cohort as a whole. We demonstrated the distributional neutrality of this  benefit reduction by showing that if all individuals earned exactly the  cohort rate of return on their individual accounts, then their income under  the proposal from Social Security and the new accounts would be exactly  the same as under current law.
The hypothetical account approach to reducing benefits must be  translated into our PIA factor changes because such a reduction is  proportional to AIME, not to PIA. The contributions to a hypothetical  account are proportional to earnings. Therefore, a benefit reduction based  on such an account would also be proportional to earnings; that is  Benefit reduction = y *AIME  Therefore, the new PIA would be  PIA new =90% * AIME1 + 32% * AIME2 + 15% * AIME3 - y * AIMET  Where AIMEi is the applicable portion of AIME and AIMET is the total  AIME. In turn,  PIA new =(90% - y) * AIME1 + (32% - y) * AIME2 + (15% - y) * AIME3  Thus, the reduction from a hypothetical account can be translated into a  change in the PIA formula factors.
Because this offset can be described as subtracting a constant amount  from each PIA formula factor, it is reasonably transparent, especially in  comparison to describing it as a hypothetical account offset. Table 3  summarizes the features of our policy scenarios.
section_title: Modeling Income in the Near Term
paragraphs: Modeling Income in the Near Term (MINT) is a detailed microsimulation  model developed jointly by the Social Security Administration, the  Brookings Institution, RAND, and the Urban Institute (the version used in this  report, MINT3, was published in June 2002). The base data sets used in the  model are 1990-93 panels of the Census Bureau’s Survey of Income and  Program Participation (SIPP), matched to Social Security Summary  Earnings Records (SER) and Master Beneficiary Records (MBR). The SER  contains earnings histories for the years 1951 to 1999. MINT uses data on  the matched files for individuals in the 1931 to 1965 birth cohorts to  project their incomes. MINT3 projects marital change, Social Security- covered work and earnings, disability, retirement income, and death for a  SIPP subsample. The sample consists of 69,612 SIPP respondents from the  1990-93 surveys who were born between 1931 and 1964. Marriage, divorce,  and re-marriage are projected with hazard models allowing up to nine  marriages, although after retirement, only one re-marriage is allowed.  Marital status is projected for each respondent until death. Work and  earnings are taken from the SER, and earnings are projected from 2000 to  2031. Spouse earnings are also based on the SER. Earnings of missing  spouses are imputed from similar survey respondents, and complete  earnings histories are imputed for respondents who did not report a Social  Security number. The MINT model provides SSA with the capability to  assess the distributional impact of changes to the Social Security program.
MINT projects earnings histories for persons in the sample who have not  yet completed their careers. MINT also projects the year of initial receipt  of Social Security benefits and benefit amounts, in addition to other  sources of retirement income including pensions, asset income, and  earnings of working Social Security beneficiaries.
Methodologically, we chose MINT3 for this report for  its capability to project marital changes, Social Security-covered work and  earnings, disability, retirement, and mortality;  its ability to prospectively assess and model various Social Security  programmatic alternatives;  its ability to examine a large portion of the Social Security population  (those born between 1931 and 1964, in the current analysis); and  its ability to examine various subgroups, notably by race and ethnicity; and  its use as a policy tool already employed by SSA;  While the MINT model provides data that are well-suited to our analysis,  there are some shortcomings of those data as well. First, the model  excludes a number of dependent and survivor beneficiaries in the  projections of benefits that are received on a primary insured worker’s  record. Among the excluded groups are children of disabled, retired, or  deceased workers. In order to correct for this omission, SSA reduced the  OASI and DI tax rates—both historical and prospective—by the  percentage of program expenditures that were paid to those excluded  beneficiaries.
As noted earlier, in our analysis, we use the “shared” measure of OASDI  taxes and benefits. For this measure, during years in which the individual  is unmarried—either as a beneficiary or as a payroll taxpayer—the full  measure of the individual’s taxes paid or benefits received (regardless of  whose earnings those benefits are based upon) is counted. While the  individual is married, the taxes or benefits counted are half of the sum of  the individual’s total payroll taxes or benefits plus the spouse’s total  payroll taxes or benefits.
section_title: The Effects of Mortality
paragraphs: The U.S. Census Bureau, under the Department of Commerce, publishes  population projections for the United States. Mortality assumptions are  represented as life tables for selected calendar years from 1999 to 2100  and are published by age, gender, race, and Hispanic origin. We used the  published 2001 life tables for the non-Hispanic white, non-Hispanic Black,  and Hispanic populations to determine the number of years an individual,  age 20 in 2001, could expect to receive benefits. These tables are located  on the Bureau’s website at:  http://www.census.gov/population/projections/nation/detail/lt99_10.a  Mortality affects the benefits received relative to taxes paid because it  determines the number of years a person will pay taxes and receive  benefits. Furthermore, mortality rates affect individuals’ lifetime earnings  and their incidences of disability. Finally, mortality affects the amount of  benefits paid to survivors of deceased workers.
Incorporating survivors who have a right to benefits on the decedent’s  social security record complicates the impact of mortality on our  measures of social security benefits relative to taxes paid. For example,  dependent children and their surviving parents may begin to receive  survivor benefits. Aged (60 years or older) widows may begin to receive  benefits, or they may experience a change in the amount of benefits they  receive, as well as a change in whether the benefits are based on their own  or their deceased spouses’ earnings.
As noted above, Hispanics generally have the lowest mortality rates and  blacks have the highest. Earlier work using the MINT3 model shows that,  in practice, higher mortality tends to lower our measures of benefits  relative to taxes. Internal rates of return for blacks and Hispanics fall  further than those for whites when examining the effects of incorporating  actual mortality patterns.
section_title: Appendix II: Social Security Equity Measures
paragraphs: For the median lifetime net benefits and the benefit-to-tax ratio,  calculations are made using the 2001 trust fund discount rate, and the  dollar figures reported are in 2000 dollars. The two dominant results that  the following figures reveal are that the lowest income quintile group  always has higher values of the three equity measures than does the  highest income quintile group and that earlier birth cohort groups  generally have higher values than do later birth cohort groups.
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to those named above, the following individuals made  significant contributions to this report: Brendan Cushing-Daniels and  Patrick DiBattista, Education, Workforce, and Income Security Issues;  Joseph Applebaum, Robert Parker, Joan Vogel, and Grant Mallie, Applied  Research and Methods; Jeffrey Baldwin-Bott, International Affairs and  Trade; Richard Burkard and Roger Thomas, General Counsel; and   Lee Cohen, the Social Security Administration.
section_title: Bibliography
paragraphs: Hayward, Mark D., and Melonie Heron. (1999) “Racial Inequality in Active  Life Among Adult Americans,” Demography 36(1): 77-91.
Honig, Majorie. 2000. “Minorities Face Retirement: Worklife Disparities  Repeated?” in Olivia S. McMillan, P. Brett Hammond, and Anna M.  Rappaport, eds. Forecasting Retirement Needs and Retirement Wealth,  Pension Research Council. Philadelphia: University of Pennsylvania Press:  208-234.
Lian, Robert Keng Heong, Emiliano A. Valdez, and Chan Kee Low (2000)  “Actuarial Analysis of Retirement Income Replacement Ratios,” Journal of  Actuarial Practice 8(1-2): 147-176.
Leimer, Dean R., “Simulating the Long-Run Aggregate Economic and  Intergenerational Redistributive Effects of Social Security Policy” (1992)  ORS Working Paper 56, Division of Economic Research.
Leimer, Dean R., “Cohort-Specific Measures of Lifetime Net Social Security  Transfers” (1994) ORS Working Paper 59, Division of Economic Research.
Liebman, Jeffrey B., “Redistribution in the Current U.S. Social Security  System” (2001) National Bureau of Economic Research working paper  8625. http://www.nber.org/papers/w8625.
Nichols, Orlo R., Michael D. Clingman, and Milton P. Glanz (2001) “Internal  Real Rates of Return under the OASDI Program for Hypothetical  Workers,” Social Security Administration, Office of the Chief Actuary  Actuarial Note 144.
Sorlie, Paul D., Eric Backlund, Norman J. Johnson, and Eugene Rogot  (1993) “Mortality by Hispanic Status In the United States,” JAMA 270(20):  2464-2468.
Sorlie, Paul D., Eugene Rogot, and Norman J. Johnson (1992) “Validity of  Demographic Characteristics on the Death Certificate,” Epidemiology  3(2): 181-184.
Sze, Michael, Stephen C. Goss and Jose Gomez de Leon (1998). “Effect of  Aging Population with Declining Mortality on Social Security and NAFTA  Countries,” North American Actuarial Journal 2(4): 83-107.
Urban Institute. Final Report: Modeling Income in the Near Term:  Revised Projections of Retirement Income Through 2020 for the   1931-1960 Birth Cohorts, June 2002.
section_title: Related GAO Products
paragraphs: Social Security: Analysis of Reform Models Developed by the President’s  Commission to Strengthen Social Security. GAO-03-310. Washington,  D.C.: January 15, 2003.
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 Program  and Beneficiaries. GAO-01-35. Washington, D.C.: January 24, 2001.
Social Security: Issues in Comparing Rates of Return with Market  Investments. GAO/HEHS-99-110. Washington, D.C.: August 5, 1999.
Social Security Reform: Implications of Raising the Retirement Age.  GAO/HEHS-99-112. Washington, D.C.: August 27, 1999.
Social Security and Minorities: Current Benefits and Implications of  Reform. GAO/T-HEHS-99-60. Washington, D.C.: February 10, 1999.
Social Security Reform: Different Approaches for Addressing Program  Solvency. GAO/HEHS-98-33. Washington, D.C.: July 22, 1998.
Social Security Reform: Implications for Women’s Retirement Income.  GAO/HEHS-98-42. Washington, D.C.: December 31, 1997.