PEBES legislation required SSA to begin sending benefit estimate statements to workers aged 60 and older in fiscal year 1995 and to those turning 60 during each fiscal year from 1996 through 1999; starting in fiscal year 2000, SSA must send the PEBES annually to almost every worker aged 25 and older. However, to better manage the expected workload, SSA officials are sending the PEBES to many workers ahead of schedule. As a result, most workers aged 40 and older--about 65 million--will have received their first statement by the end of 1998. The PEBES was conceived as a means to inform the public about the benefits available under the Old Age and Survivors Insurance (OASI) and the Disability Insurance (DI) programs, which together are commonly known as "Social Security." These programs provide monthly cash benefits to retired and disabled workers and their dependents and survivors. The benefit amounts are based primarily on a worker's earnings. By providing individual workers with a listing of their yearly earnings on record at SSA and estimates of the benefits they may receive, SSA hopes to better ensure that its earnings records are complete and accurate and to assist workers in planning for their financial future. As a result of profound demographic changes--such as the aging of the baby boom generation and increasing life expectancy--Social Security's yearly expenditures are expected to exceed its yearly tax revenue beginning in 2013. Without corrective legislation, the trust funds are expected to be depleted by 2032, leaving insufficient funds to pay the current level of benefits. As a result of the financial problems facing the program, a national debate on how to ensure Social Security's solvency has begun and will likely intensify. Ensuring long-term solvency within the current program structure will require either increasing revenues or reducing expenditures, or some combination of both. This could be achieved through a variety of methods, such as raising the retirement age, reducing inflation adjustments, increasing payroll taxes, and investing trust fund reserves in securities with potentially higher yields than the U.S. Treasury securities currently held by the trust funds. Some options for change, however, would fundamentally alter the program structure by setting up individual retirement savings accounts managed by the government or personal security accounts managed through the private sector. Both of these options would permit investments in potentially higher yielding securities. Proponents of adding rates of return to the PEBES believe these rates would provide individuals with information on the current program and enable them to compare their rate of return for Social Security with rates for other investments. Analysts disagree about whether it is appropriate to use rates of return to evaluate the Social Security program and the options for reform. Furthermore, using rates of return for Social Security presents a number of difficulties. Estimates would be based on a variety of assumptions, such as how long the worker is expected to live after retirement, and other decisions, such as whether to include disability benefits. These uncertainties and how they affect individual rates of return would need to be explained. Also, comparing rates of return for Social Security with rates for private market investments presents a variety of difficulties, such as how to handle transaction costs and the differences in the level of risk, which also need to be accounted for in the comparison. Social Security contributions are mostly used to pay benefits to current beneficiaries and are not deposited in interest-bearing accounts for individual workers. In fact, benefit payments to any given individual are derived from a formula that does not use interest rates or the amount of contributions. Still, the benefits workers will eventually receive reflect a rate of return they implicitly receive on their contributions. This rate of return is equal to the average interest rate workers would have to receive on their contributions in order to pay for all the benefits they will receive from Social Security. As part of the Social Security reform debate, some analysts contend that comparing rates of return for Social Security with rates for the private market will help individuals understand that they could have potentially higher retirement incomes with a new system of individual retirement savings accounts. Moreover, they believe that the new system would produce real additions to national saving. In turn, new saving would generate economic and productivity growth that yields real returns to society and to consumers. They assert that Social Security, in contrast, only transfers income from taxpayers to beneficiaries, detracts from saving and long-term economic growth, and produces no real economic returns. Other analysts, however, contend that the rate of return concept should not be applied to Social Security for various reasons. First, they observe that Social Security is a social insurance program that helps protect workers and retirees against a variety of risks over which they often have little control, such as the performance of the economy and inflation. For example, the Social Security program is designed to help ensure that low-wage earners have adequate income in their retirement. Second, some analysts observe that Social Security simply transfers money from taxpayers to beneficiaries and is not designed to provide returns on contributions. Third, some analysts believe that the full value of the program cannot be determined solely by comparing monetary benefits and contributions. For example, individuals benefit from Social Security in other, more general ways through reductions in poverty and being relieved of providing for their parents and other beneficiaries through some other means. Rate of return estimates will vary according to what contributions and benefits they include. Moreover, actual rates of return for individuals will differ substantially from estimates due to the uncertainty of several factors, such as how long they will live, how much they will earn, and what size families they will have. To be clearly understood, rate of return estimates for Social Security need an explanation of how they are calculated and how uncertain the estimates are. Estimates of rates of return on contributions need to be clear about which benefits are included. For example, Social Security provides benefit payments to many individuals other than retired workers. In 1996, retired workers accounted for 61 percent of all Social Security beneficiaries, and they received 68 percent of the benefits. Other beneficiaries include disabled workers, survivors of deceased workers, and spouses and children of retired and disabled workers. If the calculations include the full range of benefits provided by the Social Security program, rather than retirement benefits alone, then the calculations would also need to include the full range of contributions made for those benefits. Conversely, if the calculations include only the retirement portion of the benefits, then the contributions would need to be reduced accordingly. Social Security contributions are made by employers as well as employees. Currently, both the individual and the employer pay a 6.2 percent tax on covered earnings for OASI and DI combined. Most rate of return estimates prepared by analysts include both the employer and employee shares; however, some analysts believe the employer contributions should not be included. Analysts using both employer and employee contributions argue that employees ultimately pay the employer share because employers pay lower wages than they would if the employer contribution did not exist. Furthermore, estimates that leave out the employer contributions reflect the full benefits but not the full costs of providing those benefits. A number of other issues affect benefits, contributions, or both and would need to be disclosed with the rate of return estimate. For example, Social Security benefits are automatically adjusted for inflation. In addition, even if the disability benefits and corresponding contributions are not included in the return estimates, OASI benefits provided for families of workers who die before retirement should be included. Finally, how much individuals contribute and how much they receive in benefits depend on when they retire and whether they continue to work while receiving benefits; this could be addressed by assuming a standard retirement age. Many factors that would be included in rate of return estimates for Social Security are subject to considerable uncertainty, and these uncertainties mean that the actual rates of return that individuals receive could vary substantially from their estimates. Such factors include how long individuals will live, how much they will earn in the future, whether their contributions will also entitle their spouses or children to benefits, and what changes the Congress may make to contribution and benefit levels. These uncertainties suggest that individual estimates would be very rough and might best be described as a range of rates. The literature examining rates of return almost always discusses them in the context of the reform debate and, therefore, examines average rates for large groups of people with similar characteristics, such as birth year, income level, and gender. Such average group rates can be estimated with a reasonable degree of accuracy and precision, but an individual's actual experience may be dramatically different. Rate of return estimates depend fundamentally on individual earnings histories, which are used to project workers' future earnings, calculate their benefits, and estimate the amount of their contributions. Because rate of return estimates for Social Security rely on projected earnings, they are inherently uncertain. In addition, younger workers' rates of return would be even more uncertain since they have more years for which earnings need to be projected. Under the current program structure, rate of return estimates would also need to reflect additional benefits provided by workers' contributions. Their contributions not only entitle workers to retirement benefits but also entitle their spouses and children to survivor and dependent benefits. However, SSA's records do not include information on whether a worker has a spouse or children unless and until such dependents apply for benefits based on the worker's record. Moreover, neither SSA nor the workers can be certain who will have spouses, children, or survivors who might collect benefits based on the workers' earnings records and how long their dependents will collect these benefits. In addition, in many families, both the husband and wife work and one may be "dually entitled" to benefits based on both workers' records. Individuals are entitled to receive either a benefit based on their own earnings or a benefit equal to 50 percent of the benefit calculated from their spouse's record, whichever is greater. As a result of this benefit option, a dually entitled couple's rate of return on their contributions is generally different than their individual rates. However, SSA has no way to connect a working couple's two individual earnings records until one applies for benefits based on the other's records. While some analysts have sought to compare rate of return estimates for Social Security with rates of return for private market investments--such as stocks, bonds, or savings accounts--these comparisons are not as straightforward as they first appear. Explanations would be needed to understand a number of important factors, including whether the rates of return incorporated the transaction and administrative costs for investments or annuities, the differences in risk associated with Social Security and private investments, and the questions of how to treat the costs of the benefits promised under the current system when switching to any other retirement system. Under typical Social Security privatization proposals, individual retirement savings accounts would offer workers the potential to receive higher rates of return on private investments than their Social Security contributions implicitly receive. However, private investments would entail a variety of transaction and administrative costs of their own, and these would vary depending on the nature of the proposal. For example, stockbrokers charge commissions for making trades, and mutual fund managers are compensated for managing the funds. Reflected in such costs are marketing and advertising expenses incurred as money managers and brokers compete for investors' business. In contrast, SSA does not maintain actual accounts for each individual but rather keeps records of earnings. Administrative costs for Social Security's OASI program are less than 1 percent of annual program revenues. Accurate rate of return comparisons would need to look at the rates after adjusting for expenses. Accurate rate of return comparisons also need to take into account the differences in risk associated with those rates. Over long periods of time, riskier private market investments, such as stocks, on average earn higher rates of return than less risky ones, such as government bonds. The riskier the investment, the greater the variation in possible investment earnings. By the same token, the riskier the investment made with retirement savings, the greater the variation in possible retirement incomes. Finally, if rates of return for Social Security are compared with rates for alternative reform proposals, the comparisons should indicate whether the rates for the alternatives take into account the costs of the benefits promised under the current Social Security program. Any rate of return comparisons should include these transition costs and not be limited to the return on private investments. The PEBES aims to provide information about the complex programs and benefits available through the Social Security program; however, the current statement is already lengthy and difficult to understand. Adding a rate of return, along with the corresponding narrative that would be needed to understand all of the underlying assumptions and uncertainties, would further complicate PEBES' message. In addition, placing rate of return information on the statement would add significantly to SSA's workload, according to SSA officials. Although the PEBES is intended to be a tool for communicating with the public, we raised concerns about the usefulness of the statement in a 1996 report. We reported that although the public feels the statement can be a valuable tool for retirement planning, the current PEBES provides too much information and fails to communicate clearly the information its readers need to understand SSA's current programs and benefits. Comments from SSA's public focus groups, SSA employees, and benefit experts indicate that the statement contains too much information. For example, SSA reported in a 1994 focus group summary that younger workers aged 25 to 35 wanted a more simplified, one-page statement with their estimated benefits and contributions. In addition, SSA telephone representatives said that they believe most people calling in with questions have read only the section of the statement that provides the benefit estimates. Since the PEBES addresses complex programs and issues, explaining these points in straightforward language can be challenging. Although SSA officials told us they attempt to use simple language geared for a seventh-grade reading level, feedback from the public and SSA staff indicates that readers are confused by several important explanations. For example, the public frequently asks about PEBES' explanation of family benefits. Family benefits are difficult to calculate and explain because the amounts are based on information from both spouses' records and SSA does not maintain information that links individuals' records with those of their spouses. In addition, many people ask for clarification on certain terms used in the statement and on how their benefit estimates are calculated. Based on our recommendation, SSA is working on simplifying the PEBES. Agency officials are currently testing four alternative versions of the statement, and they plan to use the redesigned version of the PEBES for the fiscal year 2000 mailings. For rate of return information on the PEBES to be understood, SSA would need to (1) decide how much information to provide and (2) explain it in simple straightforward language--language that could be easily understood by the diverse population of workers slated to receive the statement. SSA would first need to define rate of return and explain that individuals' rates could vary substantially from the estimates. In addition, readers would need to be cautioned that changes in the Social Security program due to long-term financing problems could affect their rates of return. Furthermore, SSA would need to explain the factors included in the calculation and all the underlying assumptions and uncertainties. As discussed previously, these would include the amounts that were used for the worker's future earnings, whether the estimate includes the disability contributions and potential whether employer's contributions were included along with the worker's, the worker's expected retirement age, the worker's life expectancy after retirement, and how the estimate would vary if the worker's spouse or children qualify for benefits on the worker's record. The PEBES currently addresses how the benefit estimates treat some of these factors--future earnings, retirement ages, and family benefits. However, rate of return estimates are even more sensitive to these issues than benefit estimates; therefore, they would require further explanation. For example, the PEBES currently explains that the worker's future earnings are projected to remain the same as the latest earnings on record. A rate of return estimate based on a steady level of earnings would be different from one in which the earnings vary. In addition, since the PEBES provides benefit estimates at three retirement ages, the statement would need to explain which of the three ages was used for the individual's rate of return estimate. Finally, the statement's complicated discussion of family benefits, which explains that the amount of these benefits is dependent on the worker's benefit and the number of people in the family who would receive benefits, would need to be expanded. The explanation would need to indicate whether the individual's rate of return estimate incorporates any family benefits and what effect family benefits would have on the individual's rate of return. Along with the explanations needed for the rate of return itself, PEBES recipients would need to be cautioned regarding the limitations of comparing a rate of return on Social Security with rates for alternative investments. Before making comparisons, recipients would need to know that the rate of return presented on their PEBES may need to be adjusted for other factors. As discussed earlier, these factors would include the difference in administrative costs of the alternative investments, the difference in the level of risk associated with the alternative investments, and how the costs of the benefits promised under the current program are treated. Furthermore, according to SSA, placing rate of return information on the PEBES would add significantly to workloads across the agency. For example, officials stated that they would expect the volume of calls about the rate of return information to dramatically increase their workload. Staff would need training to be prepared to respond to inquiries regarding the individual rates of return as well as how the rates compare with those for other investments. In addition, SSA officials said significantly changing the PEBES would be difficult to do in a timely manner. If individualized rates of return were to be added, SSA would need time to prepare the calculation, develop the explanations that would be needed to accompany the rates, test the new statement, make programming changes, and renegotiate the PEBES printing and mailing contract. Given the disagreement over whether it is appropriate to apply the rate of return concept to the Social Security program and the number of assumptions that must be factored into such an estimate, it would be especially important to fully explain how the rate was calculated and how uncertain the estimate could be. However, it has already been difficult to develop a PEBES that provides readily understandable information on the existing programs and benefits alone. Adding rate of return information could significantly increase the statement's length and undermine SSA's current efforts to shorten and simplify it. Given the detailed explanations that would be needed along with the estimates, adding rate of return information to the PEBES would most likely complicate an already complex statement. We obtained comments on a draft of this report from SSA. SSA agreed with our overall conclusions and said the report reflects the difficulties the agency would face in placing understandable rate of return information on the PEBES. In addition, SSA pointed out that it is working hard to make the information currently provided in the PEBES easy for readers to understand and use and agreed that adding rate of return information would increase the complexity of the statement. Finally, SSA provided technical comments, which we incorporated in this report where appropriate. SSA's general and technical comments are reprinted in appendix II. We are sending copies of this report to the Commissioner of Social Security. Copies will also be made available to others on request. If you or your staff have any questions concerning this report, please call me or Kay E. Brown, Assistant Director, on (202) 512-7125. Other major contributors to this report include R. Elizabeth Jones, Evaluator-in-Charge, and Kenneth C. Stockbridge, Senior Evaluator. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Summary:
Pursuant to a congressional request, GAO reviewed the recent proposal that would require the Social Security Administration (SSA) to place on the Personal Earnings and Benefit Estimate Statements (PEBES) an individualized estimate of the rates of return workers receive on their contributions to the Social Security program, focusing on the: (1) general implications of using a rate of return for social security; and (2) challenges of including this information on the PEBES. GAO noted that: (1) there is substantial disagreement about whether the rate of return concept should be applied to the Social Security program; (2) supporters of such an application point out that a rate of return would provide individuals information about the return they receive on their contributions to the program; (3) however, others contend that it is inappropriate to use rate of return estimates for social security because the program is designed to pursue social insurance goals, such as ensuring that low-wage earners have adequate income in their old age or that dependent survivors are adequately provided for; (4) in addition, calculations for rates of return rely on a number of assumptions that affect the resulting estimates; (5) for individuals, the actual rates of return can vary substantially from the estimates due to various uncertainties, such as a worker's actual retirement age and future earnings; (6) to be clearly understood, the underlying assumptions and their effect on the estimates should be explained in any presentation of rate of return information; (7) furthermore, comparing rate of return estimates for social security with estimates for private investments could be difficult for various reasons; (8) for example, the comparisons would need to indicate whether the estimates for other investments include the transaction and administrative costs and the differences in risk associated with the social security trust funds and private investments; (9) providing rate of return information on the PEBES could further complicate and lengthen an already complex and difficult-to-understand statement; (10) in GAO's previous work, it concluded that the current PEBES is too long and its explanations of social security's complex programs are not easy for the public to understand; and (11) adding rate of return estimates to the PEBES would require detailed explanations about how the calculations were made and what assumptions were used about comparing a rate of return for social security with rates for private investments.