Social Security is one the largest federal programs in the United States, providing about $546 billion in benefits in 2006 to over 49 million beneficiaries. Although the majority of Social Security benefits are paid to retirees, Social Security does much more than provide retirement income. Social Security Disability Insurance (DI) pays monthly cash benefits to nearly 7 million workers who, due to a severe long-term disability, can no longer remain in the workforce. Additionally, Social Security provides benefits to over 11 million dependents, including payments to widows and widowers as well as surviving parents and children under Survivors’ Insurance (SI), plus benefits to dependent spouses and children of retired and disabled workers paid from the Old Age Insurance (or Old Age) and DI trust funds. Social Security benefits often represent a significant source of income for their recipients, providing an average of $1,051 a month (as of July 2007) to retired workers, $995 a month to widows and widowers, and $979 a month to disabled workers. Although disabled workers and dependents receive slightly lower average monthly benefits than retired workers, benefits could be particularly important to these individuals. These beneficiaries may face considerable hardships; for example, a disabling condition may make work and other activities of daily living more difficult. As a result, these beneficiaries may have financial difficulties planning and preparing for death or disability in the way one might plan for retirement. Social Security was never intended to provide an adequate income by itself, but instead serves as an income base on which to build. In fact, the Social Security program balances the goals of income adequacy with individual equity, i.e., that lower income beneficiaries should receive higher benefits relative to wages than higher income beneficiaries (adequacy), and beneficiaries with higher lifetime income receive higher benefits in accordance with their income/lifetime contributions (equity). Although Social Security had originally been envisioned to include disability and survivors’ insurance, the 1935 Social Security Act created only a retirement program. Over the next 40 years, the program expanded both the size and type of its benefits, introducing benefits for dependents and disabled workers (fig. 2). The first new type of benefits went to dependents, as the 1939 amendments offered payments to elderly dependent wives and widows, as well as dependent children. (Some husbands and widowers were allowed to receive these same benefits after 1950). Creating these benefits was not only seen as socially desirable, but also offered additional protections for workers and their families from risk and spent down surpluses created by the system. Disability Insurance, which had been recommended by the 1938 and 1948 advisory councils, was established in 1956 to provide cash benefits to permanently disabled workers over the age of 50. The DI program was later expanded to include disabled workers under the age of 50 as well. In 1961, widows benefits increased from 75 to 85 percent of their deceased spouse’s benefits, and then to 100 percent in 1972. In addition, eligibility was extended to divorced spouses as well as to the spouses and children of disabled workers. Furthermore, benefit levels for retirees, dependents, and disabled worker beneficiaries grew during this time period. However, facing solvency crises, legislative efforts to control the size of the Social Security program were made in the mid 1970s and early 1980s. In order to maintain trust fund solvency, major changes were enacted to reduce the growth of Social Security benefit levels from the mid1970s to the early 1980s. Additionally, a number of legislative changes to the DI and dependents’ programs eliminated or reduced certain benefits and tightened the eligibility standards for receiving other benefits. However, despite ongoing fiscal concerns, eligibility for a few dependents’ and disability benefits has been expanded since 1975, suggesting an interest in protecting some vulnerable populations who may rely on Social Security for a significant portion of their monthly income. Although recent reform proposals have focused on elements intended to improve solvency, there continues to be some interest in protecting some or all DI and dependents’ benefits from potential benefit reductions. Figure 3 shows how Old Age, Survivors, and Disability Insurance (OASDI) has grown financially and in terms of beneficiaries over time. Although the 1935 act did not provide for disability and dependents’ benefits, those benefits were later built upon the existing Social Security structure, and today all benefits continue to be calculated from a common formula. Dependents’ benefit levels were set as fractions of the benefits owed to the person upon whom beneficiaries depended. For example, under the 1939 legislation, a widow would receive 75 percent of her deceased husband’s benefits, and dependent children or spouses would receive 50 percent of the retired worker’s benefits. When Congress created the DI program in 1956, it provided a lower retirement age (50) for those who were permanently and totally disabled. The same benefit formula used in computing OASI benefits was adopted for disability benefits because the original DI program treated disabled workers as being forced into premature retirement. In 1960, when Congress expanded the DI program by eliminating the requirement that disabled workers had to be 50 years old, the same benefit formula applied. Because benefit types shared a common formula, automatic indexing provisions implemented in 1972 and 1977 applied across the board. The OASDI programs are tightly linked in other ways as well. These programs are financed through a common mechanism—payroll taxes; receipts from the payroll tax are deposited into the OASI and DI trust funds which, like the two programs, are separate but often combined in discussion and analysis of Social Security’s solvency and sustainability. Furthermore, beneficiaries can receive multiple types of benefits over their lifetimes, moving into, out of, and among Social Security programs at different life stages. When disabled workers reach the full retirement age (FRA), for example, they begin to receive retirement benefits from the Old Age program, in place of DI benefits; the common benefit formula keeps such individuals’ benefit levels stable. In another case, a recent widow(er) might have her (or his) retirement or spousal benefits replaced with survivors’ benefits based on the relative earnings of the deceased spouse. Because parents, children, or spouses may be eligible for dependents’ benefits through the Old Age, Survivors, and Disability Insurance programs, a person can collect several types of Social Security benefits over a lifetime, although generally not simultaneously. The many linked pieces of Social Security could make developing a single, comprehensive reform package challenging because such a package would need to take into account all of these pieces. Under current law, Old Age benefits are generally calculated through a four-step process in which a progressive yet earnings-based formula is applied to an earnings history, and then updated annually through a cost- of-living adjustment (COLA). For those who receive retirement benefits, this earnings history is generally based on the 40 years in which credited earnings were highest, with the 5 lowest-earning years dropped out (leaving the highest 35 years of indexed earnings to be included in the initial benefit calculation). Dependents’ benefit levels are determined as a given percentage of Old Age benefit levels. Eligible children and spouses can receive up to 50 percent of a worker’s benefit; widow(er)s can be given up to 100 percent; and surviving parents or children can collect up to 75 percent, subject to a family maximum. DI benefits are calculated similarly to Old Age benefits, but are generally based upon a shortened work history. (For more detail on how benefits are calculated, refer to app. II.) To be eligible for benefits, individuals must have a specified number of recent work credits under Social Security when they first become disabled. Individuals must also demonstrate the inability to engage in substantial gainful activity by reason of a physical or mental impairment that has lasted or is expected to last for twelve continuous months or to result in death. If not eligible on medical grounds, SSA must also consider age, education and past work history. In particular, medical eligibility criteria for DI are less stringent for applicants over the age of 55. Based on prior work, GAO has designated modernizing federal disability programs (including the DI program) as a high risk area because of challenges that continue today. For example, GAO found that federal disability programs remain grounded in outmoded concepts that equate medical conditions with work incapacity. While SSA has taken some actions in response to prior GAO recommendations, GAO continues to believe that SSA should continue to take a lead role in examining the fundamental causes of program problems and seek the regulatory and legislative solutions needed to modernize its programs so that they are aligned with the current state of science, medicine, technology, and labor market conditions. Moreover, SSA should continue to develop and implement strategies to better manage the programs’ accuracy, timeliness, and consistency of decision making. Social Security’s Financing Social Security is currently financed primarily on a pay-as-you-go basis, in which payroll tax contributions of current workers are used primarily to pay for current benefits. Since the mid1980s, the Social Security program has collected more in taxes than it has paid out in benefits. However, because of the retirement of the baby boomers coupled with increases in life expectancy, and decreases in the fertility rate, this situation will soon reverse itself. According to the Social Security Administration’s 2007 intermediate assumptions, annual cash surpluses are predicted to turn into ever-growing cash deficits beginning in 2017. Absent changes to the program, these deficits are projected to deplete the Social Security DI trust fund in 2026 and the OASI trust fund in 2042, leaving the combined system unable to pay full benefits by 2041. Reductions in benefits, increases in revenues, or a combination of both will likely be needed to restore long- term solvency. A number of proposals have been made to restore fiscal solvency to the program, and many include revenue enhancements, benefit reductions, or structural changes such as the introduction of individual accounts as a part of Social Security.