Congressional Budget Office
Director's Blog

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.

This morning CBO released a brief about the Social Security Disability Insurance (DI) program. The DI program pays cash benefits to nonelderly adults (those younger than age 66) who are judged to be unable to perform “substantial” work because of a disability but who have worked in the past; the program also pays benefits to some of those adults’ dependents.

Between 1970 and 2009, the number of people receiving DI benefits more than tripled, from 2.7 million to 9.7 million. At the same time, the average inflation-adjusted cost per person receiving DI benefits rose from about $6,900 to about $12,800 (in 2010 dollars). As a result, inflation-adjusted expenditures for the DI program, including administrative costs, increased nearly sevenfold between 1970 and 2009, climbing from $18 billion to $124 billion (in 2010 dollars). Most DI beneficiaries, after a two-year waiting period, are also eligible for Medicare; the cost of those benefits in fiscal year 2009 totaled about $70 billion.

The jump in participation, which significantly outpaced the increase in the working-age population during that period, is attributable to several changes—in characteristics of that population, in eligibility criteria, and in opportunities for employment. For example, the aging of the workforce and an increase in the number of women working have boosted the number of people receiving DI benefits. Older workers are more likely to suffer from debilitating conditions and are more likely to qualify for DI—and between 1970 and 2009, the share of working-age women who had worked enough to qualify to apply for disability insurance rose from 41 percent to 72 percent.

Developments in federal policy have also contributed to the growing number of DI beneficiaries. Legislation enacted in 1984 eased the medical eligibility requirements, and limited funding has caused backlogs in reviewing cases to determine whether beneficiaries are still eligible for DI benefits. Participation also grows when economic conditions are weak and employment opportunities are scarce, as occurred during and immediately following the recessions in the early 1990s, in 2001, and over the past few years.

Under current law, the DI program is not financially sustainable. The program’s expenditures are drawn from the Disability Insurance Trust Fund, which is financed primarily through a payroll tax of 1.8 percent; the fund had a balance of $204 billion at the end of 2009. CBO projects that by 2015, the number of people receiving DI benefits will increase to 11.4 million and total expenditures will climb to $147 billion (in 2010 dollars). However, tax receipts credited to the DI trust fund will be about 20 percent less than those expenditures, and three years later, in 2018, the trust fund will be exhausted, according to CBO’s estimates. Without legislative action to reduce the DI program’s outlays, increase its dedicated federal revenues, or transfer other federal funds to it, the Social Security Administration will not have the legal authority to pay full DI benefits beyond 2018.

A number of changes could be implemented to address the trust fund’s projected exhaustion. Some would increase revenues dedicated to the program; others would reduce outlays. One approach to reducing expenditures on DI benefits would be to establish policies that would make work a more viable option for people with disabilities. However, little evidence is available on the effectiveness of such policies, and their costs might more than offset any savings from reductions in DI benefits.

This brief was prepared by Molly Dahl and Noah Meyerson of CBO’s Health and Human Resources Division.

Social Security is the federal government’s largest single program, and as the U.S. population grows older in the coming decades, its cost is projected to increase more rapidly than its revenues. That trend, in combination with the rising cost of the government’s health care programs, will lead to sharp increases in government spending relative to the size of the economy, placing the federal budget on a path that is unsustainable over the long term.

Also as a result, under current law, resources dedicated to the Social Security program will become insufficient to pay full benefits in about 30 years, CBO projects. Long-run sustainability for the program could be attained through various combinations of raising taxes and cutting benefits; such changes would also affect the share of Social Security taxes paid and the share of benefits received by various groups of people. In a study released this afternoon, CBO examines a variety of approaches to changing Social Security, updating an earlier work, Menu of Social Security Options, which CBO published in May 2005.

The Outlook for Social Security’s Finances

Social Security provides benefits to retired workers (through Old-Age and Survivors Insurance), to people with disabilities (through the Disability Insurance program), and to their families as well as to some survivors of deceased workers. Those benefits are financed primarily by payroll taxes collected on people’s earnings. (Social Security’s dedicated revenue stream sets it apart from most other federal programs in that the dedicated revenues are credited to trust funds that are used to finance the program’s activities.)

In 2010, for the first time since the enactment of the Social Security Amendments of 1983, Social Security’s annual outlays will exceed its annual tax revenues, CBO projects. If the economy continues to recover from the recent recession, those tax revenues will again exceed outlays, but only for a few years. CBO anticipates that starting in 2016, if current laws remain in place, the program’s annual spending will regularly exceed its tax revenues, and beginning in 2039 the Social Security Administration will not be able to pay the benefits currently specified in law. If revenues were not increased by that point, benefits would need to be cut by about 20 percent to equalize outlays and revenues.
 
A commonly used summary measure of the system’s long-term financial condition is the 75-year actuarial balance—a figure that measures the long-term difference between the resources dedicated to Social Security and the program’s costs under current law. Under current law, 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 0.6 percent of gross domestic product (GDP). In other words, to bring the program into actuarial balance over the 75 years, payroll taxes would have to be increased immediately by 0.6 percent of GDP and kept at that higher rate, or scheduled benefits would have to be reduced by an equivalent amount, or some combination of those changes and others would have to be implemented. For context, in 2010, 0.6 percent of GDP would amount to $90 billion—compared with about $700 billion in Social Security outlays this year.

The actuarial balance averages the smaller deficits that would occur near the beginning of the projection period and the larger ones that would occur near the end. In 2084, outlays would exceed revenues by 1.4 percent of GDP if all the scheduled benefits were paid.

Policy Options

CBO analyzed 30 options that are among those that have been considered by various analysts and policymakers as possible components of proposals to provide long-term financial stability for Social Security. The options follow the convention of not reducing initial benefits for people who are currently older than 55, and all would directly affect outlays for benefits or federal revenues dedicated to Social Security.

The options fall into five categories:

• An increase in the Social Security payroll tax,
• A reduction in people’s initial benefits,
• An increase in benefits for low earners,
• An increase in the full retirement age, and
• A reduction in the cost-of-living adjustments that are applied to continuing benefits.

Some options, such as those that would apply the payroll tax rate to all earnings or those that would index initial benefits to prices, would more than eliminate Social Security’s actuarial deficit; others would have far smaller financial effects.

CBO also analyzed the options’ effects on taxes that would be paid and benefits that would be received by various groups of program participants. For that distributional analysis, we grouped participants by the amount of their lifetime household earnings and by the decade in which they were born. Those distributional effects of the options are measured relative to the outcomes that would result if all scheduled benefits are paid, as well as the outcomes that would occur if benefits had to be reduced upon exhaustion of the trust funds.

Some options, such as an across-the-board increase in the payroll tax rate or a flat reduction in benefits, would affect all participants proportionately, but some options would have disparate effects on people in different earnings groups. For example, some options would primarily affect people with higher lifetime earnings by placing an additional tax on earnings above a threshold or by increasing the progressivity of the Social Security benefit formula.

Many options would affect older and younger generations differently. In particular, the timing of the changes would affect their impact on different generations (as well as the magnitude of the change necessary to bring the system into balance). Some options, such as one that would reduce benefits by a flat 15 percent, would take effect in a single year and would affect all future beneficiaries the same way. Others would be phased in and, initially, would have only small effects. In keeping with CBO’s mandate to provide objective, impartial analysis, this study makes no recommendations.

The study was prepared by Noah Meyerson, Charles Pineles-Mark, and Michael Simpson of CBO’s Health and Human Resources Division.
 

The finances of the two Social Security trust funds—one for Old Age and Survivors Insurance (OASI) and the other for Disability Insurance (DI) —worsened over the past year. The recession caused a drop in revenues from payroll taxes and may have encouraged some people to apply for benefits sooner than they otherwise would have. Further, as expected, more and more members of the baby boom generation have begun to collect benefits. As a result, CBO projects that revenues from payroll taxes credited to the trust funds will be $12 billion lower in 2010 than in 2009, while benefit payments will be $37 billion higher. This year, for the first time since the Social Security reforms of the early 1980s, benefit payments from the trust funds will exceed the trust funds’ receipts from the public (which consist mostly of revenues from payroll taxes and exclude interest on Treasury securities held by the trust funds).

In the next decade, Social Security’s benefit payments will exceed its receipts from the public in most years, according to CBO’s estimates. For 2010, the shortfall of such receipts relative to benefit payments—called a “primary deficit” because it excludes interest—will be $29 billion. The financial health of the trust funds will then improve temporarily as the economy recovers; the primary deficit will shrink every year through 2013, and small primary surpluses will re-emerge in 2014 and 2015. However, a longer-term decline in the trust funds’ financial condition is inevitable under current law, because the retirement of the baby-boom generation will cause benefit payments to increase more than revenues. CBO anticipates that a primary deficit will return in 2016 and that deficit will reach $77 billion in 2020. The OASI trust fund will begin to generate primary deficits in 2018, while the DI trust fund will experience primary deficits throughout the coming decade.

When the trust funds show a primary surplus (that is, their receipts from the public exceed their disbursements), that excess represents cash that is available to finance other government activities without requiring new government borrowing from the public. Similarly, when the trust funds record a primary deficit (that is, receipts from the public are less than their disbursements), that difference is a draw on the government’s cash in that year. Such a shortfall has to be made up by running a surplus in the rest of the federal budget or by additional government borrowing in that year.

Counting interest that will be credited on their accumulated balances of Treasury securities, the two trust funds combined will still show an annual surplus this year, and for a number of years into the future. (Those interest payments are intragovernmental transactions; they do not represent income to the government and thus do not affect the unified budget deficit.) CBO projects that the combined annual surpluses of the two trust funds will rise from $91 billion in 2010, peak at $137 billion in 2015, and then fall to $102 billion by 2020. The OASI trust fund will show surpluses in every year while the DI trust fund will realize deficits in every year of the 2010-2020 period.

The figure below shows the combined surpluses or deficits projected for the trust funds over the coming decade. The top (blue) line shows the surpluses counting interest credited to the funds; the bottom (red) line shows the deficits or surpluses not counting interest.

Total Surplus or Deficit of the Social Security Trust Funds (in billions)

The projected balance in the OASI trust fund continues to grow throughout the 10-year period, while the DI trust fund balance declines each year. CBO now anticipates that the DI trust fund will be exhausted in 2018, with available funds falling $15 billion below projected expenditures in that year. Once balances are exhausted, the DI program would be unable to meet its obligations fully without a change in law. (For the purposes of the budget projections in CBO’s Budget and Economic Outlook, DI benefit payments are projected presuming those benefits are paid in full and on time throughout the 2010-2020 period.) The OASI trust fund had a balance of $2.3 trillion at the end of fiscal year 2009; CBO estimates that the OASI trust fund will continue to maintain a positive balance for more than 30 years.

The balances credited to the trust funds are a measure of the government’s legal authority to pay Social Security benefits, but the resources to redeem government bonds in the trust funds and thereby pay for benefits in some future year will have to be generated from taxes, other government income, or government borrowing in that year.