Social Security is the federal government’s largest single program; outlays in fiscal year 2010 totaled $706 billion, roughly one-fifth of the federal budget. About 54 million people currently receive Social Security benefits. Most are retired workers, their spouses, their children or their survivors, who receive payments through Old-Age and Survivors Insurance (OASI). The remainder are disabled workers or their spouses and children, who receive Disability Insurance (DI) benefits.
Tax revenues credited to the program totaled about $670 billion in fiscal year 2010, almost all from payroll taxes. A very small portion—about 3 percent—comes from income taxes on benefits. 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.
Today CBO released additional information about the long-term projections of the Social Security program’s finances that were included in The Long-Term Budget Outlook (June 2010, revised August 2010) and in Social Security Policy Options (July 2010). The methodology used to develop those projections is described in CBO’s Long-Term Model: An Overview, a background paper published in June 2009.
Today’s publication updates the projections included in CBO’s Long-Term Projections for Social Security: 2009 Update. As we reported in June 2010, the long-term gap between Social Security’s spending and revenues that CBO is currently projecting is larger than the shortfall projected in our August 2009 publication.
The first group of exhibits—exhibits 1 through 8—examines Social Security’s financial status from several vantage points. The second group—exhibits 9 through 16—examines the program’s effects on various categories of Social Security participants in terms of the average taxes and benefits for those groups.
As detailed in the first eight exhibits, CBO projects that:
- Over the next few years, the program’s tax revenues (that is, the trust funds’ receipts excluding interest) will be approximately equal to its outlays. However, starting in 2016, as more of the baby-boom generation enters retirement, outlays as scheduled under current law will regularly exceed tax revenues. As a result, under current law, both trust funds will gradually be depleted.
- The DI trust fund will be exhausted in 2018 and the OASI trust fund will be exhausted in 2042. It is a common analytical convention to consider the DI and OASI trust funds in combination. CBO projects that, if legislation to shift resources from the OASI trust fund to the DI trust fund was enacted, as has been done in the past, the combined trust funds would be exhausted in 2039. However, because of the uncertainty surrounding the various factors that affect the program’s revenues and outlays, that date could vary quite a bit.
- The resources dedicated to financing the program over the next 75 years fall short of the benefits that will be owed to beneficiaries by about 1.6 percent of taxable payroll. In other words, to bring the program into balance over the next 75 years, payroll taxes would have to be increased immediately from 12.4 percent to 14.0 percent and kept at that higher rate, or the benefits specified in law would have to be reduced by an equivalent amount, or some combination of those changes and others would have to be implemented.
As shown in subsequent charts beginning with exhibit 9, 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. 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.
- 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 later birth groups because their full retirement age (the age at which they can receive unreduced retirement benefits) will be higher.
In many of the exhibits throughout the publication, we created a distribution of outcomes to quantify the amount of uncertainty in our Social Security projections. The analysis was based on 500 simulations in which most of the key demographic and economic factors in the analysis vary according to historical patterns. For example, we examined the percentage of simulations in which the trust funds are exhausted by a specific year. In 37 percent of CBO’s simulations, the funds are exhausted before 2035. In 84 percent of the simulations, the trust funds are exhausted by 2050. In 97 percent of the simulations, the trust funds are exhausted by 2084.
The analysis was prepared by Noah Meyerson, Charles Pineles-Mark, Jonathan Schwabish, Michael Simpson, and Julie Topoleski of CBO’s Long-Term Modeling Group under the supervision of Joyce Manchester.