Social Security Reform: Potential Effects on SSA's Disability Programs and Beneficiaries
Published: 2001-01-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: There has been little analysis of how the various Social Security reform proposals might affect the Social Security Disability Insurance (DI) program. This report assesses the potential impact of these proposals on the solvency of the DI trust fund.
section_title: What GAO Found
paragraphs: GAO found that most disabled beneficiaries would receive higher benefits under the various Social Security reform proposals it reviewed than under a solvency scenario that maintained payroll tax rates while reducing benefits. However, most of the disabled beneficiaries GAO studied would receive lower benefits under three of the reform proposals reviewed than under a solvency scenario that maintained current-law benefits while raising payroll taxes. The proposals GAO studied treat DI beneficiaries similar to Old-Age and Survivor Insurance beneficiaries. However, the circumstances facing disabled workers differ from those facing retired workers. The differences between disabled workers and retired workers suggest that Social Security reform proposals should be viewed not only in light of their effects on retired workers but also explicitly for their effect on disabled beneficiaries and their families.

section_title: Letter
paragraphs: Although much has been written about the effects of reform on the  solvency of the Social Security program and on the benefits of retired  workers, little attention has been directed to the effects of reform  proposals on the Social Security Disability Insurance (DI) program or on  the benefits that disabled beneficiaries and their families receive. Yet, in  1999, disabled beneficiaries and their families accounted for about 17  percent of all Social Security beneficiaries. These 7.4 million beneficiaries  included disabled workers, families of disabled workers, and adult disabled  children who were dependents of disabled, deceased, or retired workers.
You asked us to assess the potential effects of Social Security reform  options on the solvency of the DI trust fund and the benefits disabled  beneficiaries receive. In this report, we analyze both the potential effects of  comprehensive Social Security reform proposals on the solvency of the DI  trust fund and on the benefits disabled beneficiaries receive and the likely  contribution that individual proposal provisions would make to these  effects. You also asked us to examine the potential implications of Social  Security reform for the Supplemental Security Income (SSI) program,  which provides significant income support for low-income individuals with  disabilities.
In response to your request, we analyzed the five Social Security reform  proposals that we have previously reviewed. These proposals include that  of President Clinton as well as four of the proposals discussed in the 106th  Congress: Archer-Shaw, Kolbe-Stenholm (H.R. 1793), Gregg-Kerrey-Breaux- Grassley (S. 1383), and Kasich. In these proposals, we identified 11 major types of provisions and examined their effect on trust fund solvency and DI  benefits. We compared the benefits under these reform proposals with  benefits under two alternative current-program scenarios that also achieve  trust fund solvency: one that would maintain current benefits while  increasing payroll taxes and another that would maintain current payroll  tax rates while reducing benefits.
To analyze the effects of Social Security reform on DI trust fund solvency,  we used estimates produced by the Social Security Administration’s (SSA)  Office of the Chief Actuary as well as our estimates using the SSASIM  policy simulation model. We also used the SSASIM model to examine the  effects of these reforms on benefits that disabled beneficiaries receive. Our  estimates using the SSASIM model are based on the intermediate  assumptions reported in the 1999 Social Security Trustees Report because  the Office of the Chief Actuary has scored only a few of the proposals we  studied using the assumptions in the 2000 Social Security Trustees Report.
We analyzed the effects of Social Security reform on the Old-Age and  Survivors Insurance (OASI) program as well as on the DI program because  the solvency estimates are generally available for the combined programs  only and because many disabled beneficiaries receive benefits from the  OASI program. For example, more than 90 percent of the adult disabled  children who receive Social Security benefits are dependents of deceased  or retired workers and therefore receive OASI benefits. Disabled workers  who have reached retirement age and their dependents receive benefits  from the OASI program because DI benefits are automatically converted to  retirement insurance benefits at the normal retirement age (NRA).
Because little information is available about the earnings levels and work  history of DI beneficiaries, we assumed the best possible case for disabled  beneficiaries. Such an assumption would generally provide an upper limit  to the benefits that most disabled beneficiaries could expect to receive  under the Social Security reform proposals. We assumed they work full- time until they receive disability benefits. We also assumed they received  earnings equal to either the average economywide earnings of men or 45  percent of the average earnings of men. Following the approach taken in  the Report of the 1994-96 Advisory Council on Social Security, we chose a  low administrative cost for the individual account (IA), implicitly assuming  a centralized system of recordkeeping and a limited number of investment  options. We assumed that individuals self-annuitized by drawing down the  balance in the IAs through periodic withdrawals. As a result, the benefit  income for the disabled beneficiaries whom we studied in this report will  clearly be greater than that for disabled beneficiaries with intermittent or  less than full-time employment who pay annuitization costs and relatively  higher administrative costs on their IAs.
We conducted our work between September 1999 and November 2000 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Working-age adults with disabilities may obtain cash benefits from a  number of private and public programs. After the onset of a disabling  condition, workers needing long-term cash benefits may receive assistance  from workers’ compensation, private disability insurance, or DI. However,  in 1996, only 26 percent of private sector employees had long-term  disability coverage under employer-sponsored private insurance plans.  Thus, the DI program is an important provider of monthly benefits to  workers who are no longer able to work because of a severe long-term  disability.
Most Social Security disabled beneficiaries, including disabled workers and  their dependents, receive benefits from the DI program. However, adult  disabled children who are dependents of deceased or retired workers, and  disabled workers who have reached retirement age and their dependents,  receive monthly benefits from the OASI program. In 1999, about 6.5  million beneficiaries received DI cash benefits totaling about $51.3 billion,  while about 38.0 million beneficiaries received OASI cash benefits totaling  about $334.4 billion.
subsections: section_title: Benefits Available Under Current Law
paragraphs: Benefits for both OASI and DI beneficiaries are based on the application of  the Social Security benefit formula to the worker’s average monthly  lifetime earnings. The resulting monthly benefit is the amount payable to a  worker who becomes entitled to disability benefits or retires at the NRA.  Because monthly benefits for DI and OASI beneficiaries are based on the  same benefit formula, any change in this formula, as has been proposed in  some Social Security reform plans, could affect benefits disabled workers  as well as retired workers receive. Both DI and OASI monthly benefits will  also be affected by other proposed Social Security reform changes, such as  decreases in the cost-of-living adjustment (COLA). However, only OASI  monthly benefits are affected by proposed changes in the retirement age.
Under current law, the age at which an individual is first eligible to receive  full retirement benefits, or NRA, is gradually increasing from 65 to 66 for  those who turn 62 in 2005 and to 67 for those who turn 62 in 2022. Benefits  retired workers take before NRA are subject to an actuarial reduction.  Benefits taken by workers who postpone retirement and work between  NRA and age 70 are increased through a delayed retirement credit for each  month retirement is delayed. The benefit formula is weighted in favor of  workers with lower earnings, so that benefits replace a larger proportion of  their earnings. Benefits are adjusted each year, based on increases in the  Consumer Price Index (CPI) in order to account for inflation.
Auxiliary benefits are paid to eligible dependents and are 50 percent of the  Social Security benefit that the disabled or retired worker receives, subject  to a maximum family limit on benefits. Upon the death of an insured  worker, the eligible spouse receives 100 percent of the worker’s benefit  (subject to reduction for age) and the eligible surviving child receives 75  percent of the benefit.
Individuals who receive low levels of DI or OASI benefits can supplement  them with benefits from SSI. The SSI program, which was authorized in  1972 under title XVI of the Social Security Act, is funded through general  revenues and provides monthly benefits to aged, blind, and disabled  individuals who have income and resources below specified thresholds.  The DI and SSI programs use the same criteria and procedures for  determining disability. However, unlike DI beneficiaries, SSI recipients do  not need to have a work history to qualify for benefits. The maximum  federal SSI monthly benefit in 1999 was $500 for an individual. This  monthly benefit level is reduced, depending on a recipient’s income and  other sources of support, such as Social Security benefits. In 1999, 36  percent of SSI recipients also received Social Security benefits from either  OASI or DI. The average federal monthly benefit in 1999 was $249 for the  aged, $351 for the blind, and $364 for the disabled. In addition to the federal  SSI benefits, some states provide supplemental benefits that are intended  to reflect regional differences in living costs.
Social Security is financed primarily on a pay-as-you-go basis, which means  that the Social Security payroll taxes that current workers pay are used to  pay for current benefits. In 1999, there were approximately 3.4 workers for  every beneficiary, but this number is projected to fall to 2.1 by 2030.
Because of this change in the ratio of workers to beneficiaries, and other  factors, the Social Security trust funds will have a projected financial  shortfall or funding gap of approximately $3 trillion over the next 75 years.  According to estimates in the 2000 Trustees Report, the OASI trust fund is  projected to have sufficient funds to fully finance benefits until 2039, while  the DI trust fund is projected to have sufficient funds to fully finance  benefits until 2023. After the trust funds are exhausted—that is, after 2039  for the OASI trust fund and 2023 for the DI trust fund—the annual tax  revenues of the trust funds are expected to be sufficient to cover only  about 70 percent of annual expenditures.
section_title: Social Security Reform Proposals Address Solvency by Affecting the Level and Structure of Benefits
paragraphs: In order to address the solvency of the trust funds, a number of Social  Security reforms have been proposed. We assessed five of these proposals,  some of which maintain the level of current law benefits and some of which  reduce and restructure these benefits. Table 6 in appendix I lists the  provisions in each proposal.
Two of the proposals we studied, President Clinton’s proposal and the  Archer-Shaw proposal, maintain the current level and structure of benefits.  (See table 2.) Three of the reform proposals we studied—Kasich, Kolbe- Stenholm, and Gregg-Kerrey-Breaux-Grassley—both reduce and  restructure current benefits. (See table 3.)
The proposals we studied vary in the degree to which they explicitly refer  to disabled beneficiaries. President Clinton’s proposal refers to maintaining  current-law benefits for both retired and disabled workers. The Archer- Shaw proposal implicitly refers to both disabled and retired workers when  it states that beneficiaries will be guaranteed at least current-law benefits.  However, it explicitly refers to disabled workers when it discusses  distributions from the IAs. Workers can receive distributions from their IAs  when they become entitled to either DI or OASI benefits.
The Kasich proposal does not explicitly refer to disabled beneficiaries  when discussing changes in benefits or the establishment of IAs, although  disability benefits are affected by the provisions in the Kasich proposal.  Rather, it emphasizes that the provisions described will not affect the  benefits of retired workers or those near retirement. The discussion of the  expected returns to the IAs clearly refers only to retired workers, with their  longer work history.
Most of the provisions in the Gregg-Kerrey-Breaux-Grassley and Kolbe- Stenholm proposals explicitly refer to disabled or retired workers. Under  both proposals, the benefits of disabled workers are affected by one  reduction in the PIA formula but are exempted from a second reduction.  Benefits of both disabled and retired workers are affected by reductions in  the COLA. However, the provision in both proposals that increases the  benefit computation period amends a clause in the Social Security Act that  refers only to retired workers. The provision increasing the retirement age  affects only the benefits of retired workers. Under both proposals, the  restrictions on IA distributions refer to receipt either at retirement age or at  the attainment of a particular level of funds in the IA. Under the Gregg- Kerrey-Breaux-Grassley proposal, the insurance benefit is reduced by an  offset related to the amount of contributions to the IA. DI beneficiaries are  exempt from this adjustment to the insurance benefit when benefits are  first received. However, at retirement age, when they are able to gain  access to the income from their IAs, insurance benefits are reduced by the  appropriate offset.
section_title: Social Security Reform Is Likely to Improve DI Trust Fund Solvency
paragraphs: Estimates by SSA’s Office of the Chief Actuary indicate that all the  proposals would improve the solvency of the combined DI and OASI trust  funds, with the extent of the improvement varying across proposals. In  addition, most of the specific provisions in the proposals, such as transfers  from general funds and reductions in benefit levels, would have a positive  effect on the solvency of the DI trust fund. However, a provision such as the  increase in the retirement age would have a negative effect on the DI trust  fund while at the same time improving the OASI trust fund balance.
subsections: section_title: The Reform Proposals Differ in Their Effect on Solvency
paragraphs: The reform proposals we studied had a range of effects on the trust funds’  solvency as measured by the actuarial balance. The actuarial balance as  calculated by the Office of the Chief Actuary is the difference between the  present value of the Social Security program’s revenues and costs over a 75- year period and is expressed as a percentage of taxable payroll. If  revenues exceed costs, the actuarial balance is positive; if costs exceed  revenues, the actuarial balance is negative, indicating a deficit. In 1999,  under current law, the Social Security program faced an actuarial deficit  equal to 2.07 percent of taxable payroll. This figure represents the amount  of the payroll tax rate increase in 1999 that would establish actuarial  balance in the Social Security trust funds over the subsequent 75 years. In  other words, increasing the payroll tax rate from the current 12.4 percent to  14.47 percent of payroll would establish actuarial balance in the trust  funds.
The Office of the Chief Actuary provides annual estimates of the actuarial  balance for the combined OASI and DI trust funds under current law and,  when requested by the Congress or the executive branch, estimates of the  actuarial balance under reform proposals. The estimates of the actuarial  balance under current law and each of the reform proposals we studied are  presented in table 4. The actuaries estimated that the trust funds’ deficit of  2.07 percent of taxable payroll under current law would either be sharply  reduced or become a surplus for the combined trust funds under the  reform proposals we studied. A surplus in the combined trust funds could  mean a surplus in one trust fund and a deficit in the other. However, a  reallocation of payroll tax rates between the two funds would be expected  in this case.
The President’s proposal would reduce the actuarial deficit but is not  expected to eliminate it. This would be achieved through general fund  transfers every year from 2011 to 2050 and by allowing some limited  investment in equities, which have a higher rate of return than do the  government bonds in which the trust funds have traditionally been  invested. Estimates for two other proposals result in a small surplus for  the combined trust funds. The Kolbe-Stenholm proposal would generate its  surplus through benefit cuts and general fund transfers. In the Archer- Shaw proposal, general fund transfers would finance the contributions to  the IAs that the proposal would establish. The proceeds from these  accounts would be transferred to the trust funds when benefits are  received. The proposal also calls for reducing payroll taxes in response to  the additional trust fund revenue expected to accrue from the proceeds of  these IAs.
The other proposals we examined would result in larger estimated  actuarial surpluses for the combined trust funds. The Kasich proposal  would accomplish this by reducing the initial level of insurance benefits  and then further decreasing insurance benefits by a fixed percentage for  each year of contribution to an IA, as well as by borrowing from the general  fund. The Gregg-Kerrey-Breaux-Grassley proposal would achieve its  surplus through a mix of benefit cuts and revenue transfers that would  offset the loss of trust fund revenues resulting from the redirection of a  portion of the payroll taxes to the IAs.
The reform proposals we studied differ in the magnitude of the stipulated  transfers from general revenue. Transfers are smaller under the Kolbe- Stenholm and Gregg-Kerrey-Breaux-Grassley proposals, which contain a  number of provisions to achieve solvency by changing benefits or  revenues. Under the Kolbe-Stenholm proposal, general revenue transfers  range from 0.03 percent of taxable payroll in 2000 to 0.80 percent of taxable  payroll in 2060. General revenue transfers under the Gregg-Kerrey-Breaux- Grassley proposal range from 0.6 percent of taxable payroll in 2000 to 1.2  percent of taxable payroll in 2060. General revenue transfers are larger  under the proposals with fewer alternative provisions for attaining  solvency. Under the Kasich proposal, for example, the magnitude of the  transfers ranges from 1.17 percent of taxable payroll in 2000 to 1.57 percent  of taxable payroll around 2030. Under the President’s proposal, transfers  range from a high of 2.41 percent of taxable payroll to a low of 0.52 percent  of taxable payroll between 2011 and 2050. Finally, the Archer-Shaw  proposal calls for a general revenue transfer equal to 2 percent of taxable  payroll beginning in 2000.
section_title: Most, but Not All, Proposal Provisions Would Affect the DI Trust Fund Positively
paragraphs: Although most provisions in the proposals we examined potentially have a  positive effect on the solvency of the DI trust fund, some provisions would  have a negative effect. The President’s proposal has two provisions—the  transfer of funds from general revenue to the combined OASI and DI trust  funds and the investment of a portion of these funds in equities. According  to the Office of the Chief Actuary, both provisions would be expected to  have a positive effect on the solvency of the DI trust fund. The Archer-Shaw  proposal calls for a gradual transfer of the income from the IA balances,  which are financed from general revenue, to the trust funds. In the case of  disabled workers, the income from the IA balances would be transferred to  the DI trust fund. This provision also would have a positive effect on the DI  trust fund. The Kasich proposal contains three provisions that would have  a positive effect on DI trust fund solvency: the indexing of benefits to  prices rather than to wages, which reduces benefits; the reduction in  benefits for individuals who opt to contribute a portion of their payroll tax  to an IA; and the borrowing of funds from general revenue. The loss of  payroll tax revenue associated with individuals opting for IAs would  increase the DI trust fund’s deficit, and the general fund loans are designed  to compensate for this.
Both the Kolbe-Stenholm and the Gregg-Kerrey-Breaux-Grassley proposals  contain multiple provisions that would affect DI trust fund solvency.  Provisions that reduce the COLA and change the PIA formula so as to  reduce benefits for disabled workers lower program costs and, therefore,  improve the actuarial balance for the DI program. However, provisions  such as the redirection of payroll taxes to IAs and the establishment of a  minimum benefit have potentially a negative effect on the DI trust fund.
Redirecting payroll taxes reduces revenues to the trust fund while  establishing a minimum benefit increases program costs for beneficiaries  who were receiving benefits below the minimum. Even provisions that  appear to be focused on retirement benefits can have an effect on the DI  trust fund. For example, increasing the retirement age also increases the  age at which disability insurance benefits are converted to retirement  insurance benefits. As a result, disability beneficiaries remain on the DI  program longer, increasing costs to the DI program.
We were able to use the SSASIM model to estimate the effects on solvency  of certain of the provisions in the reform proposals. Our estimates using  the model are based on the intermediate assumptions reported in the 1999  Social Security Trustees Report because the SSA’s Office of the Chief  Actuary used these assumptions to score the Social Security reform  proposals we analyzed. Table 5 presents our results. Reductions in benefits  have a positive effect on DI trust fund solvency. The increase in the  retirement age results in the expected negative effect on solvency of the DI  trust fund.
section_title: Certain Reform Proposals Could Reduce Benefit Income for Disabled Beneficiaries
paragraphs: Two reform proposals we studied either maintain current-law benefits— the President’s proposal—or guarantee that the beneficiary would receive  at least the amount of current-law benefits—the Archer-Shaw proposal.  The remaining three reform proposals—Kasich, Kolbe-Stenholm, and  Gregg-Kerrey-Breaux-Grassley—would affect the levels of insurance  benefits DI and OASI beneficiaries receive by changing the PIA formula for  calculating initial benefits, reducing the COLA, raising the retirement age,  or increasing the number of years of earnings used in computing benefits.  How a beneficiary’s total benefit income (reduced insurance benefits plus  IA income) under these three proposals compares with the benefits  received under a maintain-benefits scenario or a maintain-tax-rates  scenario depends both on the extent of the decrease in the insurance  benefits and on the amount of income received from the IA.
Our maintain-benefits scenario achieves solvency through increased  payroll taxes while current-law benefits are maintained. Our maintain-tax- rates scenario achieves solvency through benefit reductions while holding  current payroll tax rates at today’s levels. These two scenarios represent a  range of benefit levels, with the maintenance of current-law benefits being  at the upper end and the reduced benefits necessary for the maintenance of  current payroll taxes being at the lower end.
We compared the benefit income received under each of the three  proposals with that received under the maintain-benefits scenario and the  maintain-tax-rates scenario for each of three beneficiary groups with the  selected characteristics that we simulated: disabled workers, dependents  of disabled workers (including spouses, children younger than 18, and  adult disabled children), and adult disabled children who are dependents of  retired workers. We made the comparisons under each of several  different assumptions about the year in which the worker was born, the  worker’s earnings level, and the worker’s age when the worker first  received DI benefits. We chose the ages of initial benefit receipt to reflect  SSA data indicating that individuals are receiving DI benefits at younger  ages. For the IAs in our analysis, we assumed that individuals would have  portfolios with a smaller percentage invested in equities as they got older.  We assumed the return on equities would be a constant, inflation-adjusted 7  percent per year, which reflects the long-term historical average return on  equities.
subsections: section_title: Some Reform Proposals Would Reduce Benefit Income
paragraphs: According to our estimates, the disabled beneficiaries with the selected  characteristics we simulated would, in general, receive higher benefits  under the maintain-benefits scenario than they would under the Kasich,  Kolbe-Stenholm, or Gregg-Kerrey-Breaux-Grassley proposals. Figures 1  and 2 present the results for workers as well as their dependents. The  workers were born in 1986 and have low or average earnings and, in the  case of disabled workers, first receive DI benefits at the age of 45 and never  work again.
These reform proposals would reduce insurance benefits while providing  income from the IAs. Under these proposals, it is possible that the IA  income might compensate for the decline in insurance benefits resulting  from other provisions. However, this is less likely for disabled-worker  beneficiaries than for retired-worker beneficiaries because disabled  workers are likely to have shorter work histories and thus have smaller IA  balances. The reductions in benefits resulting from the decline in the  COLA and the changes in the PIA formula are so great that the income from  the IA would be insufficient to completely compensate for this loss for the  disabled-worker beneficiaries with the selected characteristics that we  examined. Disabled workers with low earnings and their dependents would  receive greater benefit income under the Gregg-Kerrey-Breaux-Grassley  proposal than under the maintain-benefits solvency scenario. However, this  higher benefit income is largely the result of changes in the PIA formula  that increase the progressivity of the benefit structure.
For the proposals we examined, we included the income from the IA only  in the benefit income of the disabled or retired worker, not in that of the  worker’s dependents, since apportioning the IA income among family  members is an individual matter and would vary by household.  Consequently, benefit income for dependents of disabled or retired  workers would be reduced under the Gregg-Kerrey-Breaux-Grassley,  Kasich, and Kolbe-Stenholm proposals not only because of reductions in  the insurance benefit but also because it does not include income from  individual accounts. In addition, the insurance benefits of dependents  include only the amount received during the years in which the worker on  whose earnings record the benefits are payable is receiving insurance  benefits.
Contrary to the results of our comparisons with the maintain-benefits  scenario, in our comparison of each of the three proposals with the  maintain-tax-rates scenario, we found that in most cases the beneficiary  would receive higher benefit income under the proposals than under the  scenario. However, dependents of low-earner disabled workers under the  Kasich proposal would receive benefit income that is less than under the  maintain-tax-rates scenario. Also, adult disabled children of retired  workers would receive somewhat lower benefit income under all three  proposals in almost all cases. These results are presented in figures 1 and  2.
The benefit income received under the three proposals would generally be  greater than the benefits received under the maintain-tax-rates solvency  scenario because the proposals have provisions for achieving solvency,  such as general revenue transfers, in addition to reducing benefits. As a  result, the insurance benefits would not have to decline as much as in the  maintain-tax-rates scenarios. Further, the benefit income workers would  receive under the proposals includes income from IAs.
section_title: Most Proposal Provisions Would Reduce Insurance Benefits
paragraphs: We also examined individual provisions within the three proposals to  assess their contribution to the change in the level of insurance benefits  received. Reductions in the COLA instituted under the Gregg-Kerrey- Breaux-Grassley and Kolbe-Stenholm proposals would decrease insurance  benefits relatively little compared with the maintain-benefits scenario for  both disabled workers and their beneficiaries and for adult disabled  children of retired workers. Figure 3 presents the estimated effects of the  decrease in the COLA on workers born in 1986 who first receive disability  benefits at the age of 45 and never work again. The pattern of change in the  present value of benefit income for dependents of disabled workers and for  adult disabled children who are dependents of retired workers is similar to  that shown in figure 3 for disabled workers.
Changes in the PIA formula, however, generally result in large reductions in  insurance benefits relative to the maintain-benefits scenario. The one  exception is a provision of the Gregg-Kerrey-Breaux-Grassley proposal that  would increase benefits for workers with certain levels of earnings, thereby  increasing benefits for low earners and decreasing benefits by a relatively  smaller amount for average earners. Figure 4 displays the effects on  disabled workers of changes in the benefit calculation formula. The pattern  in the present value of benefit income for the two other categories of  beneficiaries is similar to that shown in figure 4 for disabled workers.
The insurance benefits of adult disabled children who are dependents of  retired workers would also be significantly decreased by an additional  change in the PIA formula applicable only to OASI benefits under the  Gregg-Kerrey-Breaux-Grassley and Kolbe-Stenholm proposals. Figure 5  displays the effects on the insurance benefits of adult disabled children  resulting from this PIA change.
As we stated earlier and as is shown in figure 3, reductions in the COLA  result in relatively small declines in the level of current-law benefits.  Consequently, the levels of insurance benefits that would be received under  this provision would be greater than the benefit income received under the  maintain-tax-rates scenario, in which benefits would be reduced to levels  supportable by current payroll tax rates. Despite the large reductions in  insurance benefits resulting from the changes in the PIA formula, most  disabled beneficiaries would be better off under this provision in the  proposals than under the maintain-tax-rates scenario. The exception  occurs for all three types of low-earner beneficiaries under the Kasich  proposal’s change in the PIA formula. This provision in the Kasich proposal  indexes initial benefits to prices rather than to wages, resulting in a sharp  decline in benefits. The effects of the PIA changes on the disabled worker  are shown in figure 4.
section_title: Provisions for Individual Accounts Would Slightly Increase Benefit Income for Disabled Workers
paragraphs: According to our estimates, the effect on the disabled worker’s benefit  income of the IA provision alone is positive under the Gregg-Kerrey- Breaux-Grassley, Kasich, and Kolbe-Stenholm proposals. Benefit income  would increase the most under the Kolbe-Stenholm proposal because the  IA income does not reduce insurance benefits. Benefit income under the  Gregg-Kerrey-Breaux-Grassley proposal would also increase but by less  because the proposal reduces insurance benefits by an amount that reflects  the present value of the government contributions to the IA plus the  interest that would have accrued had these contributions been invested at  the interest rate earned by the OASDI trust funds. The benefit income  received under the Kasich proposal would also be less than that received  under the Kolbe-Stenholm proposal because under the Kasich proposal  insurance benefits would be reduced by a fixed percentage for each year of  contributions to the IA. Figure 6 shows the effect of the IA provision for  both the low-earning and the average-earning disabled worker.
In our analysis, we assigned the income from the IA to the disabled or  retired worker, not to the worker’s dependents, because the apportionment  of the IA income among family members is an individual matter and would  vary by household. Thus, our estimates reflect the most that the worker  would receive from the IAs, whereas our estimates for the dependents  reflect the most that their benefits would be reduced under these  proposals. Accordingly, for the dependent of the disabled worker and for  the adult disabled child, the IA will not increase benefit income because we  assumed that these beneficiaries, unlike the worker, receive no income  from the IA. Under the Kolbe-Stenholm proposal, there would be no  reduction in the benefit income of dependents because changes in IA  income do not affect the level of insurance benefits. However, the Kasich  proposal would decrease the insurance benefit of the worker by a set  percentage for each year of contributions to the IA. The Gregg-Kerrey- Breaux-Grassley proposal would reduce the insurance benefit of the  worker by an amount that reflects the present value of the government  contribution to the IA plus the interest that would have accrued had these  contributions been invested at the interest rate the OASDI trust funds earn.  The insurance benefit that the dependent receives is a proportion of what  the worker receives. Consequently, the insurance benefit that the  dependent receives would be reduced under our assumption that  dependents receive no compensating income from the IA under the Gregg- Kerrey-Breaux-Grassley and Kasich proposals. (See figures 7 and 8.)
The IA provision would increase benefit income for disabled workers  compared with the maintain-benefits scenario. Consequently, the benefit  income of the disabled workers we examined would also be greater than  the benefits available under the maintain-tax-rates scenario. In our  analysis, we assigned all the IA income to the disabled or retired worker  and none to the worker’s dependents. As a result, under the Gregg-Kerrey- Breaux-Grassley and Kasich proposals, dependents would experience the  reduction in insurance benefits related to the existence of an IA but would  not receive any compensating income from the IA, under our assumptions.  However, even the reduced insurance benefits that dependents would  receive would be greater than the benefits they would receive under the  maintain-tax-rates scenario.
In the analysis presented so far, we have provided graphs showing the  effect of the reform proposals on the worker who first receives DI benefits  at the age of 45 and never works again. However, the income from the IA  is affected by the number of years for which contributions are made to the  IA and, therefore, by the age at which the worker leaves the labor force and  begins receiving DI benefits. To see how the income received from the IA  would vary by age of first receipt of DI benefits, we compared the income  received from the IA by workers who began receiving DI benefits at  different ages. Figures 9 and 10 provide the net addition of the IAs to  benefit income—that is, the addition to benefit income after reductions are  made in the insurance benefit in response to the income from the IA.  Figures 9 and 10 indicate that the income received from the IA increases  with the age of first receipt of DI benefits. The later that DI benefits are  received, the greater the number of years in the labor force, the number of  years funds are deposited in the IA, and the number of years the IAs accrue  compound interest. The addition of IA income to benefit income across  ages would be greatest under the Kolbe-Stenholm proposal, which would  not reduce the insurance benefit in response to the income received from  the IA. The Gregg-Kerrey-Breaux-Grassley proposal would reduce the  insurance benefit by an amount that reflects the present value of the  government contributions to the IA plus the interest that would have  accrued had these contributions been invested at the interest rate earned  by the OASDI trust funds. The Kasich proposal would reduce the insurance  benefit by one-third of a percent for each year of participation in the IA.
section_title: Certain Reform Proposals Could Increase SSI Program Costs
paragraphs: Some Social Security reform proposals could increase costs for the SSI  program. Individuals receiving benefits from both Social Security (DI or  OASI) and SSI might become eligible for larger SSI benefits if their Social  Security benefits decrease as a result of reform. In addition, some Social  Security beneficiaries not currently eligible for SSI might become eligible if  their Social Security benefits declined as a result of reform.
As we stated earlier, we estimated that three Social Security reform  proposals—Gregg-Kerrey-Breaux-Grassley, Kasich, and Kolbe-Stenholm— would lower Social Security benefit income, which includes income from  IAs, in most of the cases we studied. For DI and OASI beneficiaries who  also receive SSI, the decrease in Social Security benefit income would  lower their unearned income, which means that their SSI benefit would  increase. This would have no effect on the number of recipients but  would increase the cost to the program. For the beneficiaries who receive  only Social Security and not SSI, the previously mentioned decrease in  benefit income would lower unearned income, which would make some  eligible for SSI benefits. This would increase both the number of  beneficiaries and the cost to the program. However, the full effect on SSI  would not be felt immediately because most of the individual provisions  within these proposals are to be phased in over time and in many cases are  not to be completely in effect until 2020. Given the complexity of the  interactions between Social Security and SSI and the difficulty of  projecting SSI caseloads so far into the future, it would be extremely  difficult to estimate precisely what the effects of reform proposals would  be on SSI program costs.
section_title: Concluding Observations
paragraphs: In the cases we studied, our analyses indicate that most disabled  beneficiaries would receive higher benefits under Social Security reform  proposals than under a solvency scenario that maintained payroll tax rates  while reducing benefits. However, most disabled beneficiaries with the  characteristics we studied would receive lower benefits under reform than  under a solvency scenario that maintained current-law benefits while  raising payroll taxes. This reduction in benefits under reform to levels  below that of current law would occur even though we assumed an optimal  set of conditions for disabled beneficiaries: full-time work until receipt of  DI benefits and low administrative costs and no annuitization costs for the  IAs. Consequently, the typical DI beneficiary could receive lower benefits  than the DI beneficiaries with the selected characteristics we studied.
The proposals we studied treat DI beneficiaries similarly to OASI  beneficiaries. However, the circumstances facing disabled workers differ  from those facing retired workers. For example, the disabled worker’s  options for alternative sources of income, especially earnings-related  income, to augment the reduced benefits are likely to be more limited than  are those for the retired worker. Further, DI beneficiaries are entering the  program at younger ages and remaining in the program in most cases until  death or retirement. Thus, disabled beneficiaries could be subject to these  reductions in benefits for many years. They will also have smaller balances  in their IAs because of fewer working years in which to make IA  contributions and accrue compounded interest. In addition, under several  proposals, disabled beneficiaries cannot gain access to income from  individual accounts until they reach retirement age. These differences  between disabled and retired workers suggest that Social Security reform  proposals should be viewed not only in light of their effects on retired  workers but also explicitly for their effect on disabled beneficiaries and  their families.
section_title: Agency Comments
paragraphs: We provided a draft of this report to SSA. In commenting on this report, the  agency noted that we addressed an important topic that has until now  received little attention. Specifically, SSA highlighted two points in our  report as being important for policy makers considering changes to Social  Security: that individual accounts might not fully offset Social Security  insurance benefit reductions for some beneficiaries and that SSI benefits  might increase as they compensate for the decline in DI benefits resulting  from Social Security reform. However, the agency had some concerns  about our use of a “best case” scenario to estimate the effects of policy  options and about the assumptions underlying this “best case” scenario,  citing specifically earnings levels, life expectancy, and investment return  assumptions that SSA thought did not reflect the actual situation of  disabled beneficiaries. On the basis of these concerns, the agency  suggested that we give the report balance by adding a “worst case”  scenario. SSA also expressed concern regarding our focus on lifetime  benefits, a measure that it believes does not adequately reflect living  standards at specific points in time. Finally, SSA suggested that we include  a measure reporting on money’s worth or internal rates of return in our  table 1 that compares costs and benefits of Social Security reform  proposals. SSA also made a number of technical comments, which we  incorporated where appropriate.
Our use of a “best case” scenario demonstrated that, even under the best of  circumstances, Social Security reform proposals would reduce current-law  benefits to DI beneficiaries—people who would find it more difficult than  most nondisabled retired workers to replace lost benefits with other  sources of income such as earnings. We did not examine “worse case”  scenarios because the “best case” scenario demonstrates that most DI  beneficiaries would be adversely affected by the reform proposals we  analyzed. While including the “worst case” scenario SSA suggested could  provide a specific lower limit to a range of possible benefit outcomes, that  lower limit would be useful only if accompanied by an evaluation of the  adequacy of that benefit level, which is beyond the scope of this report.
In building a “best case” scenario, we used the earnings of men because  they tend to have higher earnings than women do. To examine low-wage  earners, we simulated workers who earn 45 percent of average earners,  which is the standard low level of earnings the Office of the Chief Actuary  uses. Benefits declined at this earnings level as they would for workers  earning even less. We assumed individuals lived until 79 because almost  one-third of individuals first receiving DI benefits at age 45 live that long,  and the number of these individuals is significant enough to warrant study.  With respect to SSA’s concern about our use of an equity return of 7  percent, we note that this is a figure currently used in projections, including  those of the Office of the Chief Actuary. We chose not to adjust for risk  because there is no one risk-adjusted measure that everyone agrees is the  best measure, and we believed that our analysis would be more clearly  understood with the simplifying “best case” assumptions.
With respect to SSA’s concern with our focus on lifetime benefits, we  acknowledge that we do not address the issue of variations across plans in  living standards before retirement age resulting from differences in  account access rules. This is certainly an issue on which future reports  could usefully focus. As for the inclusion of money’s worth or internal rate  of return measures, we agree that such analysis would be useful, but these  measures are beyond the scope of this report. SSA’s written comments are  printed in appendix III.
We are sending copies of this report to the Commissioner of the Social  Security Administration and others who are interested. We will also make  copies available to others on request. If you or your staff have any  questions concerning this report, please call me on (202) 512-7215. The  major contributors to this report are Carol Dawn Petersen, Assistant  Director, (202) 512-7066; Barbara A. Smith, Senior Economist; Michael  Collins, Economist; and Kim Granger, Economist.
section_title: The Social Security Reform Proposals and Their Provisions
paragraphs: Table 6 lists the provisions in the five proposals we studied.
Table 7 shows that the access to the IA and the relationship between the IA  and the insurance benefit vary across the proposals we studied. Under the  Archer-Shaw and Kasich proposals, individuals can obtain funds from their  IAs at the age of retirement or when they become eligible for Disability  Insurance (DI) benefits. Under the Gregg-Kerrey-Breaux-Grassley and  Kolbe-Stenholm proposals, disabled individuals are able to obtain IA  income before retirement age only if the funds in the IA are sufficient to  provide a monthly income that, when added to the insurance benefit, is at  least equal to 1/12 of the current poverty line. According to the Social  Security Administration (SSA), this threshold for account access would be  virtually impossible for workers disabled at a relatively young age to meet  because they would not have the time to build up an IA. In addition,  insurance benefits are not affected by the presence of IA income under the  Archer-Shaw and Kolbe-Stenholm proposals. Under the Gregg-Kerrey- Breaux-Grassley and Kasich proposals, there are reductions in the  insurance benefit because of the existence of an IA.
section_title: Alternative Solvency Scenarios and the Social Security Simulation Model
subsections: section_title: The Calculation of Alternative Scenarios
subsections: section_title: Maintain Tax Rates and Decrease Benefits
paragraphs: This scenario maintains current payroll tax rates while reducing Social  Security benefits to levels supportable by these tax rates. There are many  ways to reduce benefits, including waiting until the trust funds are  exhausted and abruptly reducing benefits by the full amount necessary to  be supported by current payroll taxes. We decided to follow a more gradual  approach similar to that used in the “MTR (maintain tax rates) Proposal”  presented in the Report of the 1994-96 Advisory Council on Social Security.  The Council’s proposal reduces the 0.32 and 0.15 PIA formula factors by 0.5  percent for 1998-2011 and 1.5 percent for 2012-30. The PIA adjustments  used in this report also reduce the 0.32 and 0.15 formula factors but by 2.0  percent for 2000-13 and 3.0 percent for 2014-32, which results in the  percentage reductions in benefits shown in table 8.
These percentage declines in benefits result in trust fund solvency through  2074 under the 1999 Trustee’s Report intermediate assumptions. We  assume no behavioral changes in response to the decline in benefits  because it is not clear how individuals will respond to the decline in  benefits—whether they will continue to retire at younger ages or will  postpone retirement to later ages in order to receive larger benefits.
We instituted benefit reductions in the maintain-tax-rates scenario by  reducing only the 0.15 and the 0.32 brackets of the PIA formula, following  the approach used by the Advisory Council. (The PIA formula is described  below.) This is important to take into account when comparing benefits  under the maintain-tax-rates scenario with benefits for disabled  beneficiaries under the Social Security reform proposals. Kasich reduces  all three brackets, the 0.90 bracket as well as the 0.15 and 0.32 brackets.  These reductions apply to both disabled and retired workers and their  dependents. This is why benefits for lower earners under Kasich’s PIA  provision are below those calculated in the maintain-tax-rates scenario.  The Kolbe-Stenholm proposal, however, reduces only the upper two  brackets for disabled-worker beneficiaries and does not reduce these  brackets by as much as the maintain-tax-rates scenario does. Therefore,  benefits for disabled low earners and their dependents under the Kolbe- Stenholm proposal are greater than benefits under the maintain-tax-rates  scenario. The Gregg-Kerrey-Breaux-Grassley proposal creates an  additional bracket and increases the 0.32 bracket to 0.70. This explains the  increase in benefits for low earners above the benefits received under the  maintain-benefits scenario.
The full unreduced monthly benefit amount for worker beneficiaries is  determined by using the PIA formula. This formula consists of three  brackets separated by two bend points. In 1999, these bend points were  $505 and $3,043 for newly eligible beneficiaries. A worker’s PIA is  calculated as 0.90 of the first $505 of career-average indexed monthly  earnings (AIME), plus 0.32 of any AIME amount between $505 and $3,043  and 0.15 of any AIME amount in excess of $3,043.
section_title: Maintain Benefits and Increase Tax Rates
paragraphs: This scenario maintains current-law benefits while increasing payroll tax  rates to levels that support those benefits. There are many ways to increase  payroll tax rates, including waiting until the trust fund is exhausted and  then abruptly increasing payroll tax rates to levels that would support  current-law benefits. We follow an approach similar to that used in the “PL  PAYGO Proposal” presented in the Report of the 1994-96 Advisory Council  on Social Security in which payroll tax rates are increased more gradually.  The PL PAYGO option modifies the present law payroll tax rate schedule  from 12.4 percent beginning in 1995 and reaching 17.1 percent in 2060. The  present law payroll tax rate adjustments used for this report are in table 9.
These payroll tax rates result in trust fund solvency through 2074 under the  1999 Trustees Report intermediate assumptions. Note that 85 percent of the  OASDI payroll tax rate is assigned to the OASI program, 15 percent to the  DI program.
section_title: The SSASIM Model
paragraphs: To assess how the Social Security reform proposals affect the solvency of  the Social Security trust funds and the level of benefits individuals receive,  we conducted a variety of simulations using the SSASIM model, developed  by the Policy Simulation Group. The initial version of the model was  developed under a series of contracts from SSA as part of the 1994-96  Advisory Council on Social Security’s activities. The model was  subsequently enhanced with major support from the American Association  of Retired Persons, the Employee Benefit Research Institute, and SSA as  well as other organizations. The model can simulate a variety of policy  reforms to the Social Security program, from incremental changes in the  OASI and DI programs to broader structural reforms that would introduce  an IA component to the Social Security system.
The SSASIM model simulates the dynamic interaction of the labor force,  the economy, and the Social Security programs and can be used to generate  aggregate program cost and income estimates as well as estimates for the  OASI and DI trust funds. Changes in program structure can be analyzed for  any specified future time periods. Consistent with SSA’s annual projections,  we explored the effect of such changes on OASI and DI trust fund solvency  for the 75-year period 1999-2074. The implications of a reform relative to  one of the alternative scenarios that achieve solvency are determined by  comparing the output results from a simulation that assumes the reform  policy with results from a simulation that assumes one of the two  alternative scenarios.
subsections: section_title: Assumptions Used in the Analysis of the Effects of the Social Security Reform Proposals on Solvency
paragraphs: In our analysis, we made a number of assumptions. With respect to  population and economic projections, we used the intermediate  assumptions in the 1999 Annual Report of the Board of Trustees of the  federal OASI and DI trust funds. We use the assumptions in the 1999  Trustees Report because the Office of the Chief Actuary used these  assumptions to score the Social Security reform proposals we analyzed.  (See table 10.)
section_title: Assumptions in the Analysis of the Effects of the Reform Proposals on Individual Benefits
paragraphs: We analyzed how the reforms affect individuals born in 1946, 1966, and  1986 in order to assess the effects of provisions that are phased in over  time. We analyzed how the reforms affect individuals with average earnings  and with 45 percent of average earnings to see how the reform provisions  affect workers at different earnings levels. The model contains information  on earnings separately for men and women. The user can specify a gender- related earnings pattern. Our analysis uses the earnings pattern for men.  These earnings are based on the national average annual earnings of  covered workers with earnings. Using 1998 data from SSA, we compared  our choice of earnings levels with the earnings levels of actual new  beneficiaries. We did so by calculating the DI benefit corresponding to our  selected earnings levels and comparing these benefit levels with the  distribution of benefits actual DI beneficiaries received in 1998. We found  that about 42 percent of all new beneficiaries in 1998 received benefits that  correspond to earnings that are less than 45 percent of average earnings,  about 38 percent of new beneficiaries received benefits corresponding to  earnings that are between 45 percent of average earnings and average  earnings, and about 20 percent of new beneficiaries received benefits  corresponding to earnings that are greater than the average level.
We analyzed how the reforms affected individuals with three different ages  of first receipt of DI benefits (35, 45, and 55) to compare the experiences of  people disabled at younger ages with those disabled at older ages. These  three ages reflect the experiences of individuals with different lengths of  time in the DI program and with different lengths of time in the labor force.  According to SSA, the average age of a new male DI beneficiary in 1999 was  49.6 years, down from 51.2 years in 1980. In 1999, 19.3 percent of men’s new  benefits were awarded to individuals younger than 40, 24 percent to those  in their 40s, and 40 percent to those in their 50s. DI benefits for disabled  workers are terminated mostly because of the death of the beneficiary or  the attainment of retirement age and conversion of benefits to the OASI  program; only half of 1 percent of DI beneficiaries leave the program each  year because of work.
According to SSA data on awards made to DI beneficiaries in 1998, the type  of disability that new DI beneficiaries claimed is somewhat associated with  age. In 1998, mental disorders were the most common diagnosis for new DI  awardees younger than 35, while diseases of the musculoskeletal system  were the most common diagnosis for those aged 50 and older. For new  awardees younger than 35, mental disorders accounted for 34 percent  while diseases of the musculoskeletal system accounted for 11 percent. For  new DI awardees aged 50 and older, diseases of the musculoskeletal  system accounted for 27 percent while mental disorders accounted for  11 percent.
We assumed that individuals enter the workforce at age 22 and work full- time until disability or retirement with no years out of the labor force. We  chose these assumptions because they represent a “best case” for the  disabled individual. Many disabled individuals are likely to work less than  full-time and to have periods of time out of the labor force. However, little  information is available on the wages, earnings histories, and periods of  nonwork of the disabled. This makes it difficult to choose a “typical”  earnings level and earnings pattern for them. The benefit income for our  “best case” disabled individuals will clearly be greater than that for  disabled individuals receiving lower earnings from intermittent and less  than full-time employment. Our results, therefore, represent a maximum  level of benefit income that disabled beneficiaries could expect to receive  under the Social Security reform proposals that we modeled.
We also assumed that the nondisabled workers we simulated retire at age  67 and that all the individuals we simulated die at age 79. We made these  assumptions so that in our simulations the retired workers and all disabled  workers with a given age of first receipt of DI benefits would have the same  number of years of receiving benefits. Thus, differences in benefit income  across individuals would be the result of differences in reform proposals  and not the result of differences in individual characteristics. Because of  the possibility that actual disabled individuals might have a lower life  expectancy than we assumed for our simulation, we asked SSA’s Office of  the Chief Actuary to send us death rates for men who were born in 1986  and began receiving DI benefits at age 45. We then calculated the  proportion who would still be alive at ages 46 to 79. According to our  calculations, 49 percent of these individuals would still be alive at 70, and  31 percent would still be alive at 79.
We assumed that the benefits workers and their dependents received were  not affected by the application of the maximum family benefit. The  maximum family benefit refers to the maximum amount that can be paid on  a worker’s earnings record. In the case of retired or deceased workers, the  maximum varies from 150 to 188 percent of the PIA. In the case of disabled  workers, the maximum family benefit is the smaller of 85 percent of the  worker’s AIME or 150 percent of the worker’s PIA. The family maximum  cannot be exceeded, regardless of the number of beneficiaries entitled on  that earnings record, although any benefit payable to a divorced spouse is  not included. Whenever the total of the individual monthly benefits payable  to all the beneficiaries entitled on one earnings record exceeds the  maximum, each dependent’s or survivor’s benefit is reduced in equal  proportion to bring the total within the maximum.
For the analysis of IAs, we assumed that administrative costs are 0.105  percent of assets. Our estimate of administrative costs is that used in the  Report of the 1994-96 Advisory Council on Social Security. The Council  considered an option to create IAs alongside the Social Security system  with a centralized system of recordkeeping and limited investment choices.  The estimate of 0.105 percent of assets was a consensus of the Council  members. We also assumed that individuals do not annuitize but, rather,  draw down the balance in the IA through periodic withdrawals.  Consequently, the balance in the account is not reduced by the costs  associated with purchasing an annuity. We also assumed that individuals  know how long they are going to live and thus determine the schedule of  periodic withdrawals so as to use up the entire balance in the IA by the  time they die. These assumptions result in the largest balance possible in  the IAs.
For the Kolbe-Stenholm, Gregg-Kerrey-Breaux-Grassley, and Kasich  proposals, we used the same assumptions that SSA’s Office of the Chief  Actuary used in scoring the Kolbe-Stenholm proposal. Following the  approach taken in the Report of the 1994-96 Advisory Council on Social  Security, we varied the percentage invested in equities according to age. We  assumed that persons younger than 40 would invest 55 percent of their  account in equities, with an average real return of 4.8 percent for the  portfolio. We assumed that those 40 to 49 would invest 50 percent of their  account in equities, with an average real return of 4.5 percent. We assumed  that those 50 to 59 would invest 40 percent of their account in equities, with  an average real rate of return of 4.1 percent. We assumed that those 60 to 69  would invest 20 percent of their accounts in equities, with an average real  return of 3.1 percent. We assumed the portion not invested in equities  would be invested in Treasury bonds and the return on equities would be a  constant, inflation-adjusted 7 percent per year, which reflects the long-term  historical average return on equities. We note that the assumption of a 7  percent return on equities in the future has been criticized by some as being  optimistic.
We did not adjust the rates of return on equities for risk. As we stated in a  recent report, there are numerous ways to adjust for risk but no clearly  best way, and there is no one risk-adjusted measure that everyone agrees is  the correct measure. As a result, the returns on equity that we use are  likely to be higher than the risk-adjusted returns.
section_title: Comments From the Social Security Administration
subsections: section_title: Ordering Information
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