June 1, 2011
Long-Term Economic Trends
Projected long-term spending and revenues - June 2011
June 1, 2011
Projected long-term spending and revenues, year by year, under six long-term budget scenarios; economic factors underlying the scenarios.
These spreadsheets reflect CBO's estimates, assumptions, and projections at the time the associated publication was released; that is, the spreadsheets are not continuously updated.
CBO's 2010 Long-Term Projections for Social Security: Additional Information
October 22, 2010
Social Security is the federal government's largest single program. About 54 million people currently receive Social Security benefits. About 69 percent are retired workers, their spouses, and children and another 12 percent are survivors of deceased workers; all of those beneficiaries receive payments through Old-Age and Survivors Insurance (OASI). The other 19 percent are disabled workers or their spouses and children; they receive Disability Insurance (DI) benefits. Social Security's outlays in fiscal year 2010 totaled $706 billion, one-fifth of the federal budget; OASI payments accounted for 82 percent of those outlays and DI payments made up about 18 percent.
Social Security has two primary sources of tax revenues: payroll taxes and income taxes on benefits. In fiscal year 2010, roughly 97 percent of tax revenues dedicated to Social Security were collected from a payroll tax of 12.4 percent that is levied on earnings and split evenly by workers and their employers at 6.2 percent apiece. Self-employed workers pay the entire 12.4 percent tax on earnings themselves. The payroll tax applies only to taxable earnings—earnings up to a maximum annual amount ($106,800 in 2010). Some Social Security benefits also are subject to taxation: In fiscal year 2010, about 3 percent of Social Security's tax revenues came from the income taxes that higher-income beneficiaries paid on their Social Security benefits. Tax revenues credited to the program totaled $670 billion in that year.
Revenues from taxes, along with intragovernmental interest payments, are credited to Social Security's two trust funds—one for OASI and one for DI—and the program's benefits and administrative costs are paid from those funds. Legally, the funds are separate, but they often are described collectively as the OASDI trust funds. In a given year, the sum of receipts to a fund along with the interest that is credited on previous balances, less spending for benefits and administrative costs, constitutes that fund's surplus or deficit.
In calendar year 2010, Social Security's outlays will exceed tax revenues (that is, the trust funds' receipts excluding interest) for the first time since the enactment of the Social Security Amendments of 1983. Over the next few years, the Congressional Budget Office (CBO) projects, the program's tax revenues will be approximately equal to its outlays. However, as more of the baby-boom generation (that is, people born between 1946 and 1964) enters retirement, outlays will increase relative to the size of the economy, whereas tax revenues will remain at an almost constant share of the economy. Starting in 2016, CBO projects, outlays as scheduled under current law will regularly exceed tax revenues.
CBO projects that the DI trust fund will be exhausted in fiscal year 2018 and that the OASI trust fund will be exhausted in 2042. Once a trust fund's balance has fallen to zero and current revenues are insufficient to cover the benefits that are specified in law, a program will be unable to pay full benefits without changes in law. The DI trust fund came close to exhaustion in 1994, but that outcome was prevented by legislation that redirected revenue from the OASI trust fund to the DI trust fund. In part because of that experience, it is a common analytical convention to consider the DI and OASI trust funds as combined. CBO projects that, if legislation to shift resources from the OASI trust fund to the DI trust fund was enacted, the combined OASDI trust funds would be exhausted in 2039.
The amount of Social Security taxes paid by various groups of people differs, as do the benefits that different groups receive. For example, people with higher earnings pay more in Social Security payroll taxes than do lower-earning participants, and they also receive larger benefits (although not proportionately larger). Because of the progressive nature of Social Security's benefit formula, replacement rates—the amount of annual benefits as a percentage of annual lifetime earnings—are lower, on average, for workers who have had higher earnings. As another example, the amount of taxes paid and benefits received will be greater for people in later birth cohorts because they typically will have higher earnings over a lifetime, even after adjusting for inflation, CBO projects. However, replacement rates will be slightly lower, on average, for people in later birth groups because their full retirement age (the age at which they can receive unreduced retirement benefits) will be higher.
About This Analysis
CBO regularly prepares long-term projections of revenues and outlays for the Social Security program. The most recent projections, for the 75 years from 2010 through 2084, were published in Chapter 3 of The Long-Term Budget Outlook (June 2010, revised August 2010). This publication presents additional information about those projections.
The budget projections published in The Long-Term Budget Outlook involved two scenarios: The first, CBO's extended-baseline scenario, adheres closely to current law. For example, that scenario reflects the assumption that the tax cuts enacted in 2001 and 2003 expire as scheduled at the end of 2010. CBO also has developed an alternative fiscal scenario, which incorporates several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. Unless otherwise noted, the projections presented in this analysis are based on the assumptions of the extended-baseline scenario. In that scenario, income taxes, including the income taxes on Social Security benefits that are credited to the trust funds, are higher than they are in the alternative fiscal scenario.
Scheduled and Payable Benefits
CBO prepared two types of benefit projections. Benefits as calculated under the Social Security Act, regardless of the balances in the trust funds, are called scheduled benefits. The Social Security Administration has no legal authority to pay scheduled benefits if their amounts exceed the balances in the trust funds, however. Therefore, if the trust funds became exhausted, payments to current and new beneficiaries would need to be reduced to make the outlays from the funds equal the revenues flowing into the funds. Benefits thus reduced are called payable benefits. In such a case, all receipts to the trust funds would be used and the trust fund balances would remain essentially at zero. When presenting projections of Social Security's finances, CBO generally focuses on scheduled benefits because, by definition, the system would be fully financed if only payable benefits are disbursed.
To quantify the amount of uncertainty in its Social Security projections, CBO created a distribution of outcomes from 500 simulations using its long-term model. In those simulations, the assumed values for most of the key demographic and economic factors that underlie the analysis—for example, fertility and mortality rates, interest rates, and the rate of growth of productivity—were varied on the basis of historical patterns of variation. Several of the exhibits in this publication show the simulations' 80 percent range of uncertainty: That is, in 80 percent of the 500 simulations, the value in question fell within the range shown; in 10 percent of the simulations, the values were above that range; and in 10 percent they were below. Long-term projections are necessarily uncertain, and that uncertainty is illustrated in this publication; nevertheless, the general conclusions of this analysis hold true under a variety of assumptions.
The first part of this publication (Exhibits 1 through 8) examines Social Security's financial status from several vantage points. The fullest perspective is provided by projected streams of annual revenues and outlays. A more succinct analysis is given by measures that summarize the annual streams in a single number. The system's finances are also described by projecting what is called the trust fund ratio, the amount in the trust funds at the beginning of a year in proportion to the outlays in that year.
The Distribution of Benefits
In the second part (Exhibits 9 through 16), CBO examines the program's effects on people by grouping Social Security participants by various characteristics and presenting the average taxes and benefits for those groups. In its analysis, CBO divided people into groups by the decade in which they were born and by the quintile of their lifetime household earnings. For example, one 10-year cohort consists of people born in the 1940s, and the top fifth of earners constitutes the highest earnings quintile. CBO's modeling approach produces estimates for individuals; household status is used only to place people into earnings groups.
In this part of the analysis, benefits are calculated net of income taxes paid on benefits by higher-income recipients and credited to the Social Security trust funds. Median values are estimated for each group: Estimates for half of the people in the group are lower and estimates for half are higher.
Most retired and disabled workers receive Social Security benefits on the basis of their own work history. This publication first presents measures of those benefits that do not include benefits received by dependents or survivors who are entitled on the basis of another person's work history. Then, for a more comprehensive perspective on the distribution of Social Security benefits, this analysis presents measures of the total amount of Social Security payroll taxes that each participant pays over his or her lifetime as well as the total Social Security benefits—including payments received as a worker's dependent or survivors—that each receives over a lifetime.
Changes in CBO's Long-Term Social Security Projections Since 2009
The shortfalls for Social Security that CBO is currently projecting are larger than the shortfalls projected in CBO's Long-Term Projections for Social Security: 2009 Update (August 2009). The 75-year imbalance has increased from 1.3 percent to 1.6 percent of taxable payroll under the extended-baseline scenario and from 1.5 percent to 2.1 percent of taxable payroll under the alternative fiscal scenario. Those differences are attributable to changes both in projected outlays and in projected revenues. The 75-year cost rate—a measure of outlays—is about 2 percent higher under both scenarios because of near-term economic weakness, slightly lower projections of real (inflation-adjusted) growth in wages, and technical changes in modeling methods. The projected 75-year income rate—a measure of Social Security's revenues—is slightly higher than CBO estimated in 2009 under the extended-baseline scenario because income taxes on benefits are projected to be higher as a share of benefits. However, the income rate is about 1 percent lower than in 2009 under the alternative fiscal scenario because income taxes on benefits are projected to equal a smaller share of benefits.
Related CBO Analyses
Further information about Social Security and CBO's projections is available in other CBO publications:
- Various approaches to changing the program are presented in Social Security Policy Options (July 2010).
- The current long-term projections are consistent with the 10-year baseline CBO published in A Preliminary Analysis of the President's Budgetary Proposals for Fiscal Year 2011 (March 2010). (Data in that report and in The Long-Term Budget Outlook are generally presented for fiscal years; this analysis and Social Security Policy Options use calendar-year data.)
- The current projections update those in CBO's Long-Term Projections for Social Security: 2009 Update. Differences in the two sets of projections are the result of newly available programmatic and economic data, updated assumptions about future economic trends, and improvements in models. This current set of projections also incorporates the effects of the health care legislation passed in March 2010.
- The methodology used to develop the projections in this publication is described in CBO's Long-Term Model: An Overview, a background paper published in June 2009.
- Appendix B of The Long-Term Budget Outlook offers an explanation of the values used for the demographic and economic variables underlying the projections. (As was the case for CBO's 2009 projections, the projections in this publication are based on the demographic assumptions of the 2009 report of the Social Security trustees.)
- Numerous other aspects of the program are addressed in various publications available from CBO's Web site.
The Long-Term Budget Outlook
June 30, 2010
This Congressional Budget Office (CBO) report examines the pressures on the federal budget by presenting the agency's projections of federal spending and revenues over the coming decades. Under current laws and policies, an aging population and rapidly rising health care costs will sharply increase federal spending for health care programs and Social Security. Unless revenues increase at a similar pace, such spending will cause federal debt to grow to unsustainable levels. If policymakers are to put the nation on a sustainable budgetary path, they will need to let revenues increase substantially as a percentage of gross domestic product, decrease spending significantly from projected levels, or adopt some combination of those two approaches.
Recently, the federal government has been recording the largest budget deficits, as a share of the economy, since the end of World War II. As a result of those deficits, the amount of federal debt held by the public has surged. At the end of 2008, that debt equaled 40 percent of the nation's annual economic output (as measured by gross domestic product, or GDP), a little above the 40-year average of 36 percent. Since then, large budget deficits have caused debt held by the public to shoot upward; the Congressional Budget Office (CBO) projects that federal debt will reach 62 percent of GDP by the end of this year--the highest percentage since shortly after World War II. The sharp rise in debt stems partly from lower tax revenues and higher federal spending related to the recent severe recession and turmoil in financial markets. However, the growing debt also reflects an imbalance between spending and revenues that predated those economic developments.
As the economy recovers and the policies adopted to counteract the recession and the financial turmoil phase out, budget deficits will probably decline markedly in the next few years. But over the long term, the budget outlook is daunting. The retirement of the baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security, Medicare, and Medicaid. Moreover, per capita spending for health care is likely to continue rising faster than spending per person on other goods and services for many years (although the magnitude of that gap is very uncertain). Without significant changes in government policy, those factors will boost federal outlays sharply relative to GDP in coming decades under any plausible assumptions about future trends in the economy, demographics, and health care costs.
The Outlook for Major Health Care Programs and Social Security
CBO projects that if current laws do not change, federal spending on major mandatory health care programs will grow from roughly 5 percent of GDP today to about 10 percent in 2035 and will continue to increase there-after. Those projections include all of the effects of the recently enacted health care legislation, which is expected to increase federal spending in the next 10 years and for most of the following decade. By 2030, however, that legislation will slightly reduce federal spending for health care if all of its provisions are fully implemented, CBO projects. That reduction in the level of spending in 2030 yields lower projections of health care spending in the longer term--even though, owing to the great uncertainties involved in projecting such spending many decades in the future, enactment of the legislation did not cause CBO to change its estimates of longer-term growth rates for spending on the government's health care programs.
Under current law, spending on Social Security is also projected to rise over time as a share of GDP, albeit much less dramatically. CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2030 and then stabilize at roughly that level.
All told, CBO projects, the aging of the population and the rising cost of health care will cause spending on the major mandatory health care programs and Social Security to grow from roughly 10 percent of GDP today to about 16 percent of GDP 25 years from now if current laws are not changed. (By comparison, spending on all of the federal government's programs and activities, excluding interest payments on debt, has averaged 18.5 percent of GDP over the past 40 years.) To put U.S. fiscal policy on a sustainable path, lawmakers would have to substantially reduce the growth in outlays for those programs relative to the amounts that CBO is projecting--or else match that growth with equivalent declines in other federal spending, corresponding increases in federal revenues, or some combination of the two.
Alternative Long-Term Scenarios
In this report, CBO presents the long-term budget picture under two scenarios that embody different assumptions about future policies governing federal revenues and spending. Budget projections grow increasingly uncertain as they extend farther into the future, so this report focuses largely on the next 25 years. However, because considerable interest exists in the longer-term outlook, figures showing projections through 2080 and associated data are available in Appendix A of the report, and associated data are available on CBO's Web site.
The first long-term budget scenario used in this analysis, the extended-baseline scenario, adheres closely to current law. It incorporates CBO's current estimate of the impact of the recently enacted health care legislation on revenues and mandatory spending. (That estimate is unchanged from the one that CBO and the staff of the Joint Committee on Taxation published in March, when the legislation was being considered.) Under this scenario, the expiration of most of the tax cuts enacted in 2001 and 2003, the growing reach of the alternative minimum tax, and the way in which the tax system interacts with economic growth would result in steadily higher average tax rates. Those rising rates, combined with the tax provisions of the recent health care legislation, would push total revenues to 23 percent of GDP by 2035--much higher than has typically been seen in recent decades--and to larger percentages thereafter. At the same time, government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt--activities such as national defense and a wide variety of domestic programs--would decline to the lowest percentage of GDP since before World War II.
That significant increase in revenues and decrease in the relative importance of other spending would offset much--though not all--of the rise in spending on health care programs and Social Security. As a result, debt would increase from its already high levels relative to GDP, as would the required interest payments on that debt. Federal debt held by the public would grow from an estimated 62 percent of GDP this year to about 80 percent by 2035. Interest payments, which absorb federal resources that could otherwise be used to pay for government services, currently amount to more than 1 percent of GDP; under this scenario, they would rise to 4 percent of GDP (or one-sixth of federal revenues) by 2035.
The budget outlook is much bleaker under the alternative fiscal scenario, which incorporates several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. In this scenario, CBO assumed that Medicare's payment rates for physicians would gradually increase (which would not happen under current law) and that several policies enacted in the recent health care legislation that would restrain growth in health care spending would not continue in effect after 2020. In addition, under the alternative scenario, spending on activities other than the major mandatory health care programs, Social Security, and interest would fall below the average level of the past 40 years relative to GDP, though not as low as under the extended-baseline scenario. More important, CBO assumed for this scenario that most of the provisions of the 2001 and 2003 tax cuts would be extended, that the reach of the alternative minimum tax would be kept close to its historical extent, and that over the longer run, tax law would evolve further so that revenues would remain at about 19 percent of GDP, near their historical average.
Under that combination of policy assumptions, federal debt would grow much more rapidly than under the extended-baseline scenario. With significantly lower revenues and higher outlays, debt would reach 87 percent of GDP by 2020, CBO projects. After that, the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035.
Neither of those scenarios represents a prediction by CBO of what policies will be in effect during the next several decades. The policies adopted in coming years will surely differ from those assumed for the scenarios. (And even if the assumed policies were adopted, their economic and budgetary consequences would certainly differ from those projected in this report.) Nevertheless, these projections, encompassing two very different sets of policy assumptions, provide a clear indication of the serious nature of the fiscal challenge facing the nation.
The Impact of Growing Deficits and Debt
In fact, CBO's projections understate the severity of the long-term budget problem because they do not incorporate the significant negative effects that accumulating substantial amounts of additional federal debt would have on the economy:
- Large budget deficits would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment--which in turn would lower income growth in the United States.
- Growing debt would also reduce lawmakers' ability to respond to economic downturns and other challenges.
- Over time, higher debt would increase the probability of a fiscal crisis in which investors would lose confidence in the government's ability to manage its budget, and the government would be forced to pay much more to borrow money.
Keeping deficits and debt from growing to unsustainable levels would require raising revenues as a percentage of GDP significantly above past levels, reducing outlays sharply relative to CBO's projections, or some combination of those approaches. Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery. However, the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt. Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them.